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.
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