"The man who has done his level best... is a success, even
though the world may write him down a failure."
—B. C. Forbes (Scottish Journalist, 1880-1954)
Word for the day
Consent (v)
To permit, approve, or agree.
First thought this morning
The salvaging of erstwhile Satyam Computer is a classical case
study in successful government intervention in corporate affairs. The
intervention was swift, bold and effective. The troubled company was not only
salvaged, its future growth was also ensured. Jobs of all 50 thousands
employees were saved.
US government has also been doing similar interventions. More
particularly, in the wake of global financial crisis, US administration acted
swiftly and salvaged some large corporations like Merril Lynch, General
Electric, General Motors, AIG, CITI, Fannie Mae, Freddie Mac savings a large
number of jobs and resources. In hindsight, most of the companies bailed out
under US TARP program turned out to be profitable. As per data available till
February 2019, against the total TARP (Troubled Asset Relief program) bailout
disbursement of US$632bn to 980 entities, a total of US$739bn have already been
returned through repayments, dividend and interest resulting in a net profit of
US$107bn or a return of 1.54% CAGR for the government, which is not too bad
considering the near zero rate environment in US for most part of last one
decade. Still an amount of US$242bn is outstanding to be recovered from 322
entities. Implying two third of the TARP recipients have successfully exited
TARP. (See
details)
On fails to understand, why the past successful experience have
not been used in salvaging big businesses like IL&FS and Jet Airways,
especially when a large number of jobs are at stake and the underlying business
still makes sense.
If market rumors are to be believed, we may see some more large
sized business going the Jet way, especially in financial services space.
For those who are jittery about the prospects of a third front
government, it may be a pertinent to note that at the time of Satyam salvation,
the decision maker was a minister in UPA government from Lalu Prasad Yadav's
RJD party. TARP was implemented by a businessman from Texas (POTUS George Bush
Jr), not particularly known for sophistication, suaveness or oratory skills.
Chart of the day
Learn from history, don't repeat it
I mentioned in my notes earlier this month (see here and here),
that India may be standing at the threshold of an industrial revolution of its
own. If the present trend continues, we may soon see the share of manufacturing
in the national income rising materially.
The fear is that the current trend may reverse abruptly, just
like it did in mid 1990s, and we may revert to lower 5-6% growth orbit. At this
point in time I strongly disagree with this rather pessimistic and deeply
prejudiced opinion. Nonetheless, I find it relevant to study more about the
history of industrial development in India to find the fault lines that may
still exit to derail the growth of manufacturing sector in India.
One interesting this that I noted was the role of three main
development financial institutions (ICICI, IDBI and IFCI) in creating a
foundation for Indian manufacturing sector as well as the financial services
infrastructure. Institutions like NSE, NSDL, SHCIL, CARE, EXIM Bank, SIDBI,
SCICI, CRISIL, HDFC, TDICI, TFCI etc., were promoted by these institutions.
All the three institutions suffered huge NPAs in the 1990s due
to a variety of reasons, especially capacity creation in commodities like
steel, fertilizer, textile becoming unviable.
Narasimham Committee on Financial Sector Reforms noted that in a
market driven economy, the sustenance of DFIs may not be viable, since these
institutions may be raising funds at current market rates and lending to
businesses with long gestation and often high risk of failure, therefore
incurring high credit cost. These institutions cannot function as pure
commercial entities unless adequately supported by the government. Accordingly,
the Committee recommended DFIs should be converted either to a bank or a NBFC
and should be subject to full rigour of RBI regulations as applicable to
respective categories. Further, no DFI should be established in future without
the Central Government support. Accordingly, both ICICI and IDBI were converted
into commercial banks, and IFCI was converted into an NBFC.
Another reason for doing away with these DFIs was the feeling
that since the banking system has acquired the skills in managing risks in
extending finance to different sectors of the economy including the long-term
finance and capital market, providing larger significant resources to the
corporate sector, the need for the DFIs as an exclusive provider of the
development finance has diminished.
In past 15yrs, since end of IDBI, a new category of
infrastructure finance companies (specialized NFBCs) and government supported
DFI like India Infrastructure Finance Company (IIFCL) have emerged. But the
current NPA cycle has impacted almost all banks and most NBFCs. The impact on
banks and some NBFCs is as bad as it was in case of DFIs, if not more.
I feel that we need to study the evolution of financial sector
in India in depth. Drawing lessons from the present and previous NPS cycles and
assimilating the emerging financing needs, a new paradigm needs to be evolved
in the financial sector. At present there is no specialized institution for
manufacturing sector financing and funding of digital economy.
My understanding so far suggests that we do need highly
specialized development financial institution for manufacturing, infrastructure
and digital sectors. These institutions must be supported adequately by the
government, but managed professionally. Leaving this space entirely to
commercial banks and NBFCs may not be appropriate. That is if we really care
about history and believe that historical mistakes are for learning and not for
repeating.
To begin with large commercial banks like ICICI, HDFC, AXIS and
SBI may partner with the government to promote a Manufacturing Finance and
Credit Institution (MFCI) to meet long term funding needs of manufacturing
units competing with global peers.
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