India is well placed to upstage China on the global platform with the banking industry at a “Cinderella” moment that provides scope for expanding loans to deleveraged corporates, he said.
“Indian banks are losing big time to international banks,” Kotak said. “As a banker, with adequate margin, I would have been very comfortable to lend against the security of Ambuja Cements and ACC shares,” he said, referring to Adani’s buyout of the companies from Holcim. “But in this case, foreign banks have lent the money. It had to be an offshore transaction because no bidder in India could get money from Indian banks.”
Reserve Bank of India (RBI) rules restrict Indian banks from lending to companies for takeovers. The Indian central bank always viewed lending against shares as a risky activity because a sudden collapse in stock prices could leave banks holding worthless paper. They can lend only up to Rs 20 lakh, a rule that was set after the so-called Harshad Mehta scam of 1992.
Kotak, who was tasked with the recovery of money from the nation’s biggest bankruptcy in 2018 – the blow-up of Infrastructure Leasing & Financial Services – said the insolvency code is fine in principle. But signs of meagre recoveries from the insolvencies of conglomerates and non-banking finance companies (NBFCs) such as Reliance Capital and Srei call for a review, apart from a public interest board for large defaults.
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“I am not saying we need to junk the IBC (Insolvency and Bankruptcy Code) option,” said Kotak. “There has to be a policy think on this. We have to figure out that for large national assets, we must think about the public interest route. The objective of the public interest board is to optimise value for stakeholders, which we have demonstrated in IL&FS. And IBC may not be the only route. It needs to be relooked at even for NBFC resolutions.”
India’s investment cycle has to return and the entrepreneurial spirit has to blossom, he said. Initial public offering (IPO) hype and excessive valuations in the secondary market can’t be taken for granted as gravity can’t be defied.
India with its economic foundations is a strategic play for global investors. But it could be losing out in the short term as the battered valuations of Chinese stocks make them a short-term option.
“One positive thing is, on a strategic basis, people are concerned about long-term China,” said Kotak. “On a strategic basis, India should get higher percentage allocations. But on a tactical basis, a trader might say I would have a quick hit and run in China. Tactically, traders may take a short-term view, which could be different. And I think this is a game you need to watch closer every one to three months before taking a one-year view at this stage.”