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Thursday, June 04, 2020

Signals from a bankruptcy

The Bhushan case is a brick in the wall of a new corporate meritocracy where rule of law matters.

Written by Manish Sabharwal | Updated: May 25, 2018 12:01:17 am
Bankruptcy is an important ingredient in fixing our Rs 10 lakh crore bad loans. (File)

A Taliban prisoner once told an American soldier: “You have the watches, but we have the time.” His quip was not different from what defaulting entrepreneurs like Bhushan Steel have told bankers for decades: Do what you want or can but I’m not going anywhere. The bankruptcy sale of Bhushan to Tata Steel this month and the repayment of Rs 83,000 crore in overdue loans by 2,100 companies since the November restrictions on defaulter promoters bidding in bankruptcy represent the beginning of the end of the junoon or madness in banking (loans went from Rs 26 lakh crore in 2008 to Rs 64 lakh crore in 2014) and entrepreneurship (Bhushan Steel had more debt than our central government allocation to primary education).

Bankruptcy is an important ingredient in fixing our Rs 10 lakh crore bad loans, but we shouldn’t rest till we have a self-healing system with zero tolerance in bad loan revealing, recognising and resolving. Everything is detail once we resolve to stop stealing from our grandchildren.

Bhushan has big implications. Large corporate banking in India hasn’t been banking for a long time; in situ loan restructuring never wrote equity down to zero, defaulting management was lent more money rather than forced out, and equity was smaller than needed because project finance cash flow assumptions bordered on fiction. But bank deposit growth from Rs 4,543 crore at nationalisation in 1969 to Rs 121 lakh crore today means government finances can’t underwrite goofy lending. Entrepreneurship changed after 1991 but big lending continued to need government connections or contracts, companies often borrowed or stole their equity, and corporate governance was immature or compromised. The Bhushan bankruptcy represents another brick in the wall of a new corporate meritocracy where the rule of law matters, more equity is raised, and a market for corporate control is born.

Bhushan was an important battle but the war is far from won. Pressure by banks and defaulters continues relentlessly for regulatory forbearance; dilute the one-day rule in the February 12 circular, dilute provisioning for companies in IBC, don’t extend the mandatory IBC filing to beyond a default of Rs 100 crore, don’t move to expected loss accounting, and grant a special dispensation to specific sectors like power, textiles, etc. The last one is a slippery slope; why choose one sector over the other? From my labour market vantage, power plants that create 100 jobs for every Rs 1,000 crore investment are hardly superior to hospitality that creates 10 jobs for each Rs 1 lakh investment.

Nobody has enough information about the past and future of a financial distress situation but policymakers showing regulatory forbearance fell for what psychologists call the “illusion of explanatory depth”; they deluded themselves that they understood the world far better than they did. Consequently, good people and good organisations let a 2 lakh crore bad loan problem 10 years ago become five times larger today. We must now take the long view and shift from fire-fighting to a building safety code. Maybe move nationalised banks to an independent holding company that can provide a strong voice of capital, effective governance and a new human capital thought world (postings, promotions, transfers, training and specialisation).

Incompetence or laziness is not illegal, but we need sharper accountability for bank boards, board members, auditors, executives, shareholders, regulators, and supervisors. Maybe merge some banks while simultaneously encouraging competition by selling some and licensing more. Maybe even consider differentiated and risk adjusted premiums for deposit insurance. Most importantly, acknowledge that the “tone-from-the-top” on bad loans which created an enforcement “conflict of conviction” is ending but needs persistence. A modern banking system with zero tolerance can’t co-exist with case-by-case regulatory flakiness and forbearance.

Bankruptcy is an important piece of India’s reform plan across the three big areas of monetary policy, fiscal policy and structural change. Monetary policy is now set by a fiercely independent committee. Fiscal policy has been disciplined. And structural change that raises productivity — formalisation, financialisation, urbanisation, industrialisation and human capital — is accelerating because GST, demonetisation, RERA, digitisation, benami bill, FDI liberalisation, university autonomy, apprenticeship reform, and much else are starting to reinforce each other. India’s problem isn’t jobs but formal jobs. Results are real with the millions of formal jobs being added notwithstanding our poverty industry’s unwillingness to accept that our unemployment rate is not a fudge, informality is the slavery of the 21st century, and the source of new formal jobs is irrelevant (new formal enterprises, enforcement, amnesty, thresholds, rediscovered morality etc).

Bhushan’s bankruptcy — an important ibtida or beginning in bending the arc of history towards economic justice — needed political courage and many selfless, honest and competent public servants at the RBI, Department of Financial Services and Economic Affairs, Ministry of Company Affairs, IBBI, and NCLT. Their rewards lie in the duas (prayers) of our grandchildren for a banking system that doesn’t confiscate public money desperately needed in healthcare and education.

These people understand that the gap between India’s economic reality and its aspiration is not a lie but a disappointment that can narrow with sound banking and swift bankruptcy. In fact, after 71 years of vested interests colluding with policymakers in positioning their narrow self-interest as national interest, these bankruptcy reforms seem almost unbelievable. Mahatma Gandhi once said, “When I despair, I remind myself that all through history the way of truth has always won. There have been tyrants, and for a time they can seem invincible, but in the end, they always fall. Think of it. Always”. As always, the Mahatma was right.

The writer is with Teamlease Services

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