The vibrancy in the bond market is exciting: Rujan Panjwani

He talks about present macro economic environment, the bankruptcy code, other reforms

Is the macro economic scenario as grim as some of the date indicates and as many economists, observers and columnists would have us believe? Are things as bleak as the political climate in Delhi would indicate? Is the vibrancy in the bond markets a reflection of the state of the economy? Will the long term ameliorative impact of reforms like GST and the bankruptcy code outweigh the short-term disruption? Will the recent bank recapitalization help spur growth?

Rujan Panjwani, executive director, Edelweiss group – which runs the biggest asset reconstruction company in the country - spoke to Anjuli Bhargava on the present macro economic environment, the bankruptcy code, other reforms undertaken by the government and the vibrancy he sees in the bond markets. Excerpts from an interview :

How do you see the macro economic situation for India at present?
 

There are two parts to the macro economic situation. One is what is imposed on us by the world and one is of our own doing. 

From a world perspective, the environment is still quite favourable to India due to continuing soft crude and gold prices – two of our largest imports.  With some pick-up in economic growth in US & Europe, our exports should also benefit.

On the domestic front, there are significant policy changes that have already happened : GST, bankruptcy code and the real estate regulation bill are some of them. These are all structural reforms that will have a significant impact over the next few decades although there may be some short-term volatility and disruption.

Let’s start with the bankruptcy code : what is its likely long term impact?
 

I think India was one of the only large economies that had no organized way of dealing with what is a normal business phenomenon. Bankruptcy happens every once in a while and if there is no orderly way of managing it, creditors and various other stakeholders suffer.

Employees, vendors, banks, financial institutions, other lenders and finally equity holders – all need a structure to recover their money and resolve or revive the business to whatever extent possible, and until now there hasn’t been an effective one.

So how would an episode like Kingfisher airlines have played out if we had the bankruptcy code in place like it is now?
 

The National Company Law Tribunal (NCLT) process would have allowed a more orderly liquidation and also potential change of ownership (assuming that there were willing buyers of the company). That way, the company would have been survived and maybe even revived, though the promoter would have been out, thereby safeguarding the interests of employees and other stakeholders.

Typically what one sees is that the promoters siphon money out of the country and show the company as bankrupt but the promoters are left richer. Will the new code stop this from happening?
 

In cases where there are significant hard assets in the company, the bankruptcy code and NCLT process ensures that these are in safe hands of the court appointed IRP (Interim Resolution Professional).

But in many cases, there are situations where the projects may not have taken off for a variety of reasons. Take the example of any power project; they were set up green-field five or six years ago and they may not have taken off as they couldn’t get the required inputs (like coal or gas) or the land required. This led to time and cost escalation in the projects. 

Hypothetically speaking, a project that was to cost Rs 1000 crore would end up at Rs 2000 crore (with accrued interest and higher input costs than budgeted) at which point the project becomes unviable. It has to be financially restructured. The restructuring has to be an orderly process. If the restructuring fails, it has to go into liquidation as there is asset value in that : there is plant and machinery, land and a whole host of other assets that cannot be siphoned out. Those who are invested in the project need to be dealt with in a fair and timely manner. If it’s not timely, the project cost balloons.

Where did large infrastructure companies like GVK, GMR and Lanco go wrong and what will happen to the massive debts on their balance sheets?
 

Without going into specific names, some of these companies will sell their assets (like GVK sold Bangalore airport or GMR sold its assets in Maldives) or the balance sheet will be restructured. Many of the companies will go through the NCLT process and some will even see a change in management.

With the RBI clamping down on banks to recognise stressed assets, and the bankruptcy code being given teeth, we expect a significant change in the way these situations play out in the future.

One area that we are excited about is the vibrancy that we are seeing in the bonds markets. What has happened is that banks have been crippled due to the extent of stressed assets, so their ability to lend has been limited. If we look at the last year, almost 50 per cent of the lending has happened through the bond markets and 50% from the banking system. This has traditionally been 80-20 in favour of the banking system. 

Ideally, banks should not be doing too much of project finance, especially long term projects like infrastructure. Banks balance sheets are geared more to working capital kind of finance than long gestation projects. These should be financed – as they are the world over – by provident funds, pension funds, insurance companies and long term bond markets. These have long-term liabilities and these types of long term assets are a good match.

Till now, that hasn’t happened in India as insurance funds in India have not been very large and they have been limited by regulation on what they can or cannot invest in. We are however starting to see some changes in this too.

How are the banks going to deal with the stressed assets in the system?
 

If the total stressed assets in the country are Rs 10 lakh crore, this requires anywhere between Rs.1.5 to 5 lakh crore from asset reconstruction companies and distressed assets funds from the private sector. This quantum of funds is not available with the private sector currently so there is a huge opportunity for some of the stressed asset funds from overseas to step in and invest. In my estimate, committed so far will be approximately US $ 5 billion. Indian asset reconstruction companies can put in maybe another few billion. So there is a huge gap out there which is an opportunity for a lot of foreign funds to come in.

But why weren’t these foreign funds coming in earlier?
 

Because there was no bankruptcy code. This single change has led to this ripple effect. If you buy debt, you have to have a mechanism to resolve it. If you don’t have a mechanism to resolve it, why would you buy a stressed asset ? Even if you are buying it at a discount, you still have to see some value in it. To release that value, you need a mechanism that works. This we have now.

What is your view on demonetisation?
 

Demonetisation was a good attempt at shaking up the mind set in the country although there were hiccups/issues at an execution level.

But the second derivative impact has been a big push at digitization and the use of digital money. The government may not have started out with it but it is an unintended consequence and a highly positive one. 

This along with GST I think will bring a lot of the informal economy into the formal one. Add to this Jan-Dhan, Aadhar and the mobile triumvirate and you are bringing a lot of people who were out of the any net into the more formal regulated net. 

As I see it, the burden of taking the country ahead should not fall only on all those who want to pay or those who don’t have a choice (the salaried) but all those who can and should contribute.

What about the impact of GST at the macro level?
 

It was a nightmare to move goods from one state to another. It was like living in 20 plus different countries the way goods moved in India.  Plus we had a multitude of taxes and departments to deal with – sales tax, VAT, excise, octroi etc. all of this gets streamlined into one levy – GST, thereby reducing frictional costs and bringing efficiency. Our estimate is that it should add - in a steady state - 1% on an annual basis to GDP growth.

What is your view on the recently announced bank recapitalisation scheme?
 

The recent bank recapitalization announcement will go a long way in allowing banks to recognize these bad assets and provide for them without worrying about precipitously low capital levels any more. This is a very big step forward and will help banks to clean up past issues as well as focus on fresh credit disbursements. Along with the plan to spend on road infrastructure through highway creation, we feel this will kick start the economy and spur growth.