'I don't understand why a bank should be owned by the government.'
'You can create a bad bank and move all the bad assets there and clean-up the balance sheet.'
'There are plenty of opportunities in India'
Henry Kravis, co-founder of global private equity firm Kohlberg Kravis Roberts & Co (KKR), thinks India should go for a bad bank to deal with bad assets in banks. In an interaction with journalists in Delhi, he says there are plenty of opportunities in India. He was joined by India CEO Sanjay Nayar. Excerpts:
You have invested $8 billion, or 6 per cent of your global assets under management (AUM) of $132 billion, in India. Since you are bullish on India, how do you see that increasing?
Kravis (left): We are very high on India. I come here once a year, sometimes thrice. We believe there are real opportunities here. We have invested $8 billion in India since 2009 - $4 billion in private equity and $4 billion through credit and real estate financing.
We have developed an NBFC (non-banking financial company) business and we are setting up an asset reconstruction facility. I met some great mid-size companies recently, and was impressed with what they are doing. But they all said the same thing: I can grow faster if I get the capital.
Nayar: Private equity is a core business for us but the drift is changing. We are no longer just looking for the $70-80-million deals. Focus is on corporate finance-driven and bigger deals.
You will see many more transformational deals, M&As, consolidation. There is a shift on the NBFC side as well. It is no longer a six-man department with a quarter-billion capital; we are going to serve a much wider market now.
Many, including KKR, have talked about creating some kind of fund or structure to manage bad debts. What progress do you see on that front?
Nayar: We have been talking about it for some time. The first output has been the bankruptcy code. The large issue really is will banks be able sell the bad assets at a fair market price? I don't mean selling the asset at replacement cost or at 8 per cent discount.
There are other issues, like banks should not get hauled up. I think the government needs to figure out a way to give confidence, take the write-offs, and somehow figure out a structure. They also need to figure out a way to fill the equity gap.
Will India be served well with a bad bank?
Kravis: Yes. I come from a market perspective. I don't understand why a bank should be owned by the government. There could be historical reasons or the social need of serving certain low-income consumers, and I get that.
One of the reason I am told they don't want to take these write-downs or sell the assets is that you have to replenish them with equity capital, and the government doesn't have the capital. Which means you have to go to the private sector. That would mean your stake could go below 51 per cent. My view is, so what?
There are regulations you can put in. You can create a bad bank and move all the bad assets there and clean-up the balance sheet. You can raise equity capital and the private sector will give you money, as you can keep the bad loans away.
If you don't clean up, at least get some government guarantees. I can tell you the sooner it is done, the better it is. The longer you wait, the problems only get worse.
On US economy, President Trump and the global economy
Kravis: The US right now has a lot of enthusiasm and a lot of hope and prayers with our new President, and with that will come disappointments and opportunities. A number of companies in the US are now saying ‘we won’t go to Mexico, China and build a plant; we will do it in the States’.
The big issue facing the government is will they be able to complete tax reforms. You will see some kind of reduction in corporate tax. What will make a huge difference is a middle-income tax cut.
If he can cut capital gains, you can spur investment, spur the economy, more than anything else. Infrastructure is the last piece. The President really wants to push more public-private partnerships on infrastructure. But it’s not the federal government that makes these decisions; all decisions are made locally.
On Europe, China, India and the global economy
Europe is performing better than we thought, but you got two wildcards coming up - elections in Germany and France. If there are no surprises, then Europe will continue to move along.
China has lot of issues, enormous debt to GDP. There is too much capacity, too much money in the system. Is it going to collapse? No. But not sure if growth will continue at the level it has.
We are very bullish on India. We are full-speed ahead as far as wanting to put additional capital. KKR now is setup in such a way that we are a solutions provider to companies where we can invest up and down the capital structure. We used to provide private equity capital.
Today, we can invest in senior bank loans, long-term senior debts, subordinated debt, high-yield, mezzanine, preferred stock and common stock and growth capital in minority positions. That’s perfect here, which is a narrow credit market with the banks being the primary lender.
When PM Modi came to the US, I told him I’m surprised there was really no bankruptcy law here and then I was more surprised how fast they were able to get that through. And it’s a pretty good law, from what the lawyers tell me.
Illustration: Uttam Ghosh/Rediff.com
Photographs: Henry Kravis (Reuters) and Sanjay Nayar (Getty Images).