India's survival of the fittest

India is in a Darwinian mode, where it is called ‘Survival of the fittest’.

How is India in a Darwinian mode?

      1)      Consolidation:

Sector after sector, more and more consolidation is happening and this is happening more of mortality, less of combinations.

Like Airline sector, last many years Kingfisher, Deccan, Sahara, Jet go out of businesses and the fitter players have survived and prospered.

Like Telecom sector, there use to be 13 players, excluding BSNL, MTNL, now down to 3.

Like Wind Energy supply sector, there use to be 19 players, now down to 3 only. This is the speed of consolidation.

This wave of consolidation playing out to two additional sectors, Real-estate and Finance.

      2)      Cleaning system and Governance:

 Clean business and high governance, is the way forward and present.

      3)      IBC: 

      Essar Steel judgement, by the Supreme Court and the efforts made by the Govt. to transition, significantly improve IBC process, is truly path breaking.

Governance, better business practices and the ability of the system to ensure that if a business is not doing well, to find a resolution or mortality quickly, is the name of the day. Therefore, the new resolution framework that came out of IBC is a major developments in our jurisprudence and law. It will enable us to move quicker and make lenders possible to go out and lend, knowing that if things go wrong, there is an Exit mechanism.

      4)      Financial sector: 

      Applying IBC process to NBFC is a right step. Because when you have lenders across Banks, Mutual Funds, Insurance, and different segments and you do not have a mechanism through which you can find a common resolution platform. This was challenging, therefore IBC.

      Approach to policy: Today, the policies are far more open and not bound by the dogmas of the past. This is a positive step and bring in significant change, in our financial sector.

What next?

Biggest challenges in finance, is Indian saver is traditionally risk averse. Prefers gold and prefers relatively risk-free financial assets. Fixed Deposits, Insurance policies, Debt Funds. But only in recent time, there is some move towards risk capital, which is Equity.

Time is ripe in moving domestic savings to domestic risk capital with Cheques and Balances.

Now, for this we need to change our mind set.

In 1992, had a security scam. Post that, a more stringent policy developed, equities became a bad word. Many committees setup like, Janaki Raman Committee, JPC and a huge noise in parliament. Result, a tighter regulation came up. Banks cannot lend against Capital Market instruments more than Rs.20 lakh. It was in 1992 and still applied.

Avoiding risk is not the answer, managing risk is the answer. So, a revisit or relook at this figure or totally scrap this regulation, given the time period. So, if we want to move from risk-free assets to risk capital, this regulation needs a revisit.

One question to ask, on the one hand we’re opening more and more avenues of entry of banks. We’ve got new policy which is on top licensing policy for banks, announced a policy for small finance banks, a number of new banks are coming in. Now, we should be thinking of exit policy.

Exit policy for Private Sector banks. In Public Sector banks, consolidation is happening and will happen and number of Public Sector banks came down to 12 banks. Next what?

6 out of 12 (SBI with its subsidiaries, Bank of Baroda etc.) – core Public Sector banks (post-merger)

3 out of 6 – move them through raising capital in the market. Let the ownership go below 50%. Then what about deposits of these 3 banks, who had a comfort of Govt. protection? Govt. may think of a time period of 3 years.

3 out of 3 – Public Private Partnership

Bond markets:

Major changes required.

·         There was a problem, bond markets did not had deep pools of capital. But now we’ve, Pension industry developed, Life Insurance industry developed. So there is deep pool of savings available.

·         Standardization of Bond terms- Maturities, Cash Flows.

·         Activating the Repo market

1.       Issues like, if a bank sold a bond in the Repo market, the funds, the bank get is subject to reserves like CRR and SLR.

2.       SEBI has to revisit Mutual Funds participation in Repo market. (Mutual Funds not allowed currently)

·         A buyer of Repo, buys it from another company, how do you ensure that the bankruptcy removed from that company, or an IBC removed from that company.