Top Dalal Street voice says India Inc unbankable, investors must be discreet
Amid ballooning bad loans of banks, credit scams and scandals around nepotism in loan advances, a top Dalal Street voice says Indian companies have never been a profitable proposition to bank with.
Lending to corporates in India has never been a profitable activity. It was not so 20 years ago or 10 years ago, it is not so now. Whether the private sector banks do it or public sector banks do it, nobody really makes money by lending to corporates, says Saurabh Mukherjea, Chief Executive Officer, Ambit Capital.
Indias 39 listed banks have over the years amassed huge non-performing assets, which stood at Rs 8,86,074 crore at the end of December quarter. Nineteen of these banks had gross NPAs (as percentage of total loans) in excess of 10 per cent.
In recent times, top PSU lender PNB has got embroiled in a Rs 14,000 crore loan fraud involving a diamond merchant, while top private lender ICICI Bank has been dogged by a controversy over alleged nepotism at the top in advancing large advances to a corporate group.
Banking regulator RBI this past fortnight made private lender Axis Bank reduce a four-year term extension given to its CEO to one year in view of the banks poor performance and deteriorating asset quality.
There is a big structural issue here, says Mukherjea, known for not mincing words when it comes to markets.
If we are really going to move forward as a country, we need to figure out whether the bankruptcy regime can deliver justice for creditors. Lending money to large companies and not getting it back cannot be the basis for building a large free market economy, he said.
In recent years, Indian lenders have been shunning the corporate sector and instead trying to swell their retail books, trying to build steady books.
Stock investors, too, have been favouring consumer lenders over their commercial-focused peers in view of the surge in bad loans.
The annual credit requirement of domestic businesses is estimated at around Rs 18 lakh crore. Until FY16, the banking system used to meet more than half of this credit requirement, but that share has come down steadily over the past two years.
Reserve Bank of Indias annual report for 2016-17 showed banks share in new corporate credit slumped to 35 per cent, while non-bank sources met 65 per cent. As banks tighten their purse strings, India Inc is increasingly turning to the bond market, non-banking finance companies (NBFCs) and foreign direct investors to raise funds.
Indias bond market is nascent, but in recent times regulators and the government have tried to make it more robust. The share of bond markets contribution to the overall fund raising has picked up significantly in last three years.
In FY17, India Inc raised Rs 3.16 lakh crore through public issues and private placements of corporate bonds (including commercial paper), marking a 56 per cent jump and making up 22 per cent of the total corporate credit requirement.
Mukherjea says cleaning up the banking system hinges a lot on the bankruptcy code. “Can it give creditors a better regime via which they can get their money back? The NPA issues that we are still contending with are four-five years old.”
As more and more loan default cases tumble out of the closet, the jury is still out on whether the NPA crisis has hit its peak.
“I do not think we have maxed out on NPAs. They will keep rising through most of FY19,” says Mukherjea.
Mukherjeas boss at Ambit Capital, Ashok Wadhwa, recently made a call to fellow financial intermediaries, saying “We carry a very important responsibility to make sure that we give capital in the hands of people who will allocate it responsibly. If we do a thorough exercise and assist people who allocate capital responsibly, a large part of the fraud will go away. Those who commit fraud leave a track behind. Nobody starts committing fraud overnight.”
Mukherjea insists corporate credit quality has to improve.
He also regretted that while most of these large banks are owned by institutional investors, the latter have not been proactive in bringing about changes in management quality.
Investors have punished banking stocks harshly in recent times and they have fallen to levels where some analysts tend to see value buying opportunity.
But Mukherjea says the time has not come to load up on them, especially those banks with a heavy corporate loan books, whether public or private.
He also called for a change in attitude among investors, who would be very discreet about investing only in those companies where the managements are top quality, governance standards are high, accounts are believable.