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How to give the economy some animal spirit

By Tamal Bandyopadhyay
November 20, 2019 14:50 IST
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Fix India's real estate sector. Fix India's public sector banks, advises Tamal Bandyopadhyay.
Illustration: Dominic Xavier/


This is an apocryphal story narrated by Rabindranath Tagore in one of his poems.

One day King Hobuchandra told his minister Gobuchandra that his feet should not get dirty when he stepped on the ground.

Millions of brooms were purchased to ensure a dust-free kingdom, but the whole state, the king's palace, and even the sun, got covered by the dust raked up by the brooms.

A sick king started coughing.

The water from the lakes and ponds was used liberally to settle the dust.

The kingdom was flooded and, much to the king's annoyance, the dust turned into mud.

When this experiment failed, it was decided to cover the earth by leather.

Millions of sheep and goats were slaughtered, but their hide was not enough to do the trick.

Finally, an old cobbler walked into the royal court seeking an audience with the king.

Sitting at the king's feet, the cobbler stitched a pair of simple leather sandals.

Now the king could roam around on the dusty roads; his feet would not get dirty again.

The government recently announced a plan to set up a Rs 25,000 crore alternative investment fund (AIF) to revive stalled housing projects.

The State Bank of India and Life Insurance Corporation of India will chip in with Rs 15,000 crore and the rest will come from the government.

The AIF will help in the completion of housing projects in the affordable and middle income categories, financing them.

Even those projects that have defaulted in debt repayment and even dragged into the insolvency court will get funds if they are not facing liquidation.

Finally, the government has identified the cause of distress and distrust in the banking and finance space and the slowing economy.

While there is no end to the debate on whether the economic downturn is structural or cyclical or even both, the villain of the piece is the tattered real estate sector.

According to real estate services company Anarock Property Consultants, Rs 6.64 trillion worth of projects are stalled across India.

Its latest report says the top seven Indian cities have at least 1.9 million under-construction homes.

Of this, about 576,000 units, launched in 2013 or before, are stuck at various stages of non-completion and the rest have been launched between 2014 and now.

A senior banker who closely tracks the sector pegs the value of stalled real estate projects at Rs 7 trillion and says at least 1.5 million ready homes have no takers.

When the cracks started surfacing in the edifice of India's fast growing NBFC (non-banking finance companies) sector, the first impression was they were suffering from asset-liability mismatches for financing a substantial part of their long-term assets by rolling over short-term liabilities in the form of commercial papers.

I had called it a Northern Rock moment for Indian banking.

But I was mistaken.

The NBFCs, particularly those that were heavily into wholesale funding, also have problems with the quality of assets (because of the comatose real estate market).

They smartly passed the parcel to the banking sector.

What we have been witnessing now is a Lehman moment, in slow motion.

There is plenty of liquidity in the system, but the banks don't trust most NBFCs and are not willing to fund them for fear of losing money.

This, in turn, is hurting the economy badly as in the past few years, it was the NBFCs that were driving growth, financing millions in different segments, fuelling demand, while bad assets-laden banks were either restrained from lending by the Reserve Bank of India or didn't have the risk appetite to lend.

Let me attempt to play the cobbler, an unwanted entry into the king's royal court, and suggest a solution to the problem that has been plaguing Indian banking and, in turn, the economy.

An AIF is a good idea, but it is too small an amount to make a difference.

Going by the reports of various sector analysts, at best it can fund 16% of the stalled projects, assuming they are already half done.

Then there are the legal complexities of insolvency proceedings and uncertainties on the return this fund can generate.

The best way to tackle the problem is a one-time restructuring of the banks and the NBFCs's exposure to the real estate sector.

It's easier said than done.

While the NBFCs have direct exposure to the sector, the banks have both direct and indirect (through the NBFCs) exposures.

Besides, there cannot be a blanket forbearance to all such loans, but crafted with skill this can offer a big relief to the financial sector.

Taking forward the cobbler analogy, this will cover one foot of the king.

For the other foot, we need to create a much larger AIF to rescue troubled banks and NBFCs on the lines of the National Investment and Infrastructure Fund (NIIF), India's first sovereign wealth fund.

The government can own 26% in it and the rest can come from global investors.

It must be run by a professional manager with vast experience in investment and commercial banking -- someone who can attract investors and spot troubled banks and NBFCs that need capital infusion desperately.

The NIIF, along with two other investors, has recently committed Rs 7,614 crore investment to the GVK group which has developed Mumbai airport and is developing a few others.

It is making this investment on stiff terms that are not easy for GVK to stomach, but does it have any choice?

Similarly, some of the NBFCs and banks have no choice but to raise capital at any cost.

A banking licence in India is a precious commodity.

The fund can invest on its own terms, rescue the troubled financial intermediaries, and make tonnes of money.

America's Troubled Asset Relief Program is a good model to emulate.

Buy toxic assets and equity from NBFCs and banks at a throwaway price, strengthen the financial sector, make money and bring back the animal spirit in the economy.

Historically, the government has infused trillions of rupees into public sector banks with very little or no return on capital.

Once the capital comes from others, there is no pressure on the government's fiscal health even as the RBI can draw comfort from the fact that the fund's ownership will improve governance in banks. The regulator can also have its representative on the board of the fund.

Tamal Bandyopadhyay, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd.

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