The announcement of an infusion of more than Rs 88,000 crore into 20 ailing Indian public sector banks is not exactly breaking news, as it is part of a previously announced package of Rs 211,000 crore to shore up state-run banks creaking under a burden of bad loans estimated in the region of Rs 950,000 crore.
Last week, I had said there seems to be some irrational exuberance in the stock markets with regard to public sector banks on relaxed foreign investment ceilings because there are deeper problems involving entrenched trade unions as well as a pile-up of bad loans that continued as recently as the last quarter. Experts agree that public sector banks need more than a recapitalisation.
So, the question to ask is: Is there an underlying rationale going beyond these obvious developments that justify a stock market rally in which earnings-linked valuations are being questioned on the one hand while banks are still struggling? Add to this the fact that there is no room now for an interest rate cut, and we are left with simple elements of atmospherics such as an IMF forecast that expects India to be the fastest growing major economy in the world or Prime Minister Narendra Modi's statesmanly speech at the World Economic Forum's annual jamboree at Davos in Switzerland.
Answers for those looking for hard data to justify stock market optimism could lie in the way non-performing assets (loans that have stopped yielding interest) are being dealt with. Look beyond the recapitalisation of banks. Clues may lie in parallel developments to shore up struggling borrowers on the one hand and bleeding banks.
My guess, based on ear-to-the-ground signals, is that we are heading for budgetary concessions that may help insolvent companies bounce up with parallel moves to speed up asset reconstruction -- the business of hiving off bad loans into securities to clean up the balance sheets of banks. Banking reforms may be a slower process, but the monkeys of bad loans may be off the back of public sector banks sooner than we think.
A cynical guess: Does the market know something we officially do not know yet?
Days before the Budget, the Reserve Bank of India's (RBI) deputy governor spearheading banking reforms, Viral Acharya, has suggested that India should have a US-style electronic trading platform to sell distressed assets. Logically, this must be already part of pre-Budget conversations between the central bank and the Finance Ministry.
Recent signals from the Securities and Exchange of Board of India (SEBI) also suggest that it is creating an easier regime to trade in distressed assets. Sebi is also easing the regime for real estate investment trusts (REITs) that may indirectly benefit indebted real estate companies -- and thus, the banks they owe money to.
When corporate loans become securities in the form of bonds or shares, the game shifts from RBI to Sebi. It is vital to see the three-way link between North Block, the central bank and the markets regulator to see where the ball is going with regard to bad loans.
Bad loans can actually hide some good stuff -- as in delayed payoffs or turnarounds. That is precisely the reason why leaders in asset reconstruction, such as Edelweiss, are seriously in the game. The flip side is that smart banks will be in no hurry to hive off the loans. The State Bank of India's chairman, Rajnish Kumar, thinks it might be better for banks to fight it out at the National Company Law Tribunal (NCLT) to get back a good chunk of the money owed to them by indebted companies.
Where, then, are we heading?
One smart guess could be that deals will get done when companies have better balance sheets and banks get the right price or mechanism to hive off bad loans. The budget may well see some tax breaks for stressed companies to let them have more cash to shore up operations or accommodate banks.
Industry chamber FICCI has suggested in its pre-budget memorandum to the finance minister that companies under the Insolvency and Bankruptcy Code (IBC) should be given a lighter leash by getting exemptions from the minimum alternate tax. If this or other fiscal measures help such companies and are accompanied by an asset reconstruction mechanism that gets better prices for public sector banks to sell off non-performing assets, we might see a turnaround story that justifies the current optimism in the stock markets.
We may well be heading for a double bill of forward-looking banking reforms on the one hand and a smoother structure for asset reconstruction. To make an elephant like the Indian economy dance, you first have to get those monkeys off its back.
(The author is a senior journalist. He tweets as @madversity)
Updated Date: Jan 25, 2018 13:24 PM