Bank frauds continue to rattle India—the latest being a Rs 515 crore case from Kolkata—but, there are chances that the Insolvency and Bankruptcy Code (IBC), pushed by the ruling coalition, could bring some cheer to the beleaguered NDA.
Added to this is the recent news of the economy getting back in gear—India’s gross domestic product grew the fastest in past five quarters, by 7.2 per cent in the third quarter of 2017-18. In short, there are enough indications that the economy might be recovering from the blows of GST and demonetisation of high value banknotes. The gross fixed capital formation—a metric measuring investment—also saw a rise of 12 per cent, manufacturing grew at 8.1 per cent, (the same as this quarter in the previous year), agriculture grew at 4.1 per cent (compared to 2.7 per cent in the previous quarter) while construction grew by 6.8 per cent, up from 2.8 per cent in the previous quarter.
Analysts attribute these robust numbers to the base effect given the slowdown due to demonetisation and GST, as well as high government spending. “These are very encouraging numbers for India’s economy,” says economist P.N. Vijay.
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But what is interesting is that the NDA is all set to collect its first political and economic payoff from its bold decision to push the IBC, sending bad loans worth thousands of crores for a quick settlement. Reports filtering out of the finance ministry show how some excellent performance by bankruptcy courts has started showing very positive results. Settlements, claim BJP insiders, are now happening fast despite efforts by the debt-laden companies to slow down the process.
“There is a serious and qualitative change in the fight against crony capitalism in India,” says BJP spokesman Narendra Taneja. According to him, a perfect combination of good assets and a favourable turn in the commodity cycle is helping the banks resolve the cases, mostly involving steel, power and cement companies.
So, let's get down to some cases.
Tata Steel, which had once burnt its fingers by an over-the-top bid for Corus around the time when global steel cycle was almost coming to a halt, is back in the news by bidding hard for Bhushan Steel and Bhushan Power and Steel. Now, look at the price the Tatas have offered—a whopping Rs 59,000 crore. It has bid Rs 35,000 crore plus 12 per cent for Bhushan Steel—Rs 5,000 crore higher than the next highest bidder—and Rs 24,500 crore for Bhushan Power and Steel (Rs 17,000 crore in cash to lenders, and the rest as cash infusion into the company). Again, there exists a hefty gap between the Tatas and the next bidder.
Now, this is good news for the Tatas, the NDA and the economy. Bhushan Steel has an accumulated debt of Rs 50,000 crore. If Tatas take it for Rs 35,000 crore, there will be a 30 per cent haircut for the lenders, way, way above what they may already have provided for in their balance sheets. In short, their balance sheets will get a boost once the bid goes through. Now, let's evaluate the case of Bhushan Power; the haircut could be higher because the banks owe more than Rs 48,000 crore. But in the current situation, it is much better than what was earlier expected. Look at the assets of Bhushan Steel. It has a five million tonne alloy steel unit, and Bhushan Power and Steel a 3.2 million tonne one, plus a 700 mw power plant. And remember there is one more bid from the UK-based Liberty House. Liberty reportedly missed the deadline for bids, but banks have the option to reopen the bids in case the Tatas down sweeten their offers.
However, all deals are not generating excitement. The one that is generating a lot of heat is Essar Steel that went bankrupt. The company will get delayed bids since both Numetal—in which the Ruias also have a small stake—and Arcelor Mittal have been classified ineligible to bid under the amended IBC laws that bars businessmen with existing investments in defaulting companies from participating in IBC processes. Essar Steel, it is now said, will get a good bid by the fall.
Consider the case of Binani Cement that has got bids for a little over Rs 6,300 crore from Dalmia Bharat and Ultratech despite Binani’s claim that it's worth Rs 17,300 crore (including mining rights). But, the bankruptcy officers are adamant that they would go with what is being offered upfront rather waiting for promoters trying to delay the deal claiming low rates. That means the sale will go through and some cash will be generated, which is good news for everyone.
And then, there is Uttam Galva, another steel company that is now in bankruptcy proceedings. The company, claim government officials, could soon be listed for divestment.
“If the sales go through, the banks will have loads of cash—nearly Rs 100,000 crore—in hand,” says Vijay, indicating that the process could very well be listed as the first major success for the Narendra Modi government on bad loans, the process a great profit-and-loss account relief at a time of serious financial crisis.
This is not all. Complementing NDA’s efforts, the Reserve Bank of India (RBI) is pushing financial literacy, which, in turn, lends sustainability to the inclusion process. The RBI wants some dependable yardstick to quantify progress on financial inclusion, like CRISIL Inclusix, India’s first financial inclusion index.
The index’s readings for fiscal 2016—data is available for the latest period—show financial inclusion has improved significantly in India, with the all-India score rising to 58.0 in fiscal 2016, compared with 50.1 in fiscal 2013. CRISIL Inclusix said in a report that the score could have been higher at 62.2 if it had excluded the effect of rebasing of the index and inclusion of insurance data. It said the federal bank’s continued focus on unbanked regions and the Pradhan Mantri Jan Dhan Yojana made a difference.
The report offered some numbers as well. An estimated 600 million deposit accounts were opened between fiscals 2013 and 2016, the figure twice the number between 2010 and 2013. Nearly one third of the total figure was due to Jan Dhan. On the credit side, a 31.7 million increase was reflected in new credit or loan (banks and micro-finance) accounts in the two years up to fiscal 2016, the highest since fiscal 2013. The report said micro-finance institutions contributed significantly to the financially under-penetrated regions. And then, the Digital India initiative, payments banks and small finance banks pushed the reach of formal financial services to economically disadvantaged regions in the eastern and north-eastern parts of India. The credit penetration index of these two regions is up an average nine points compared with six points at the all-India level.
The NDA, it seems, has picked up enough brownie points to argue against bank frauds and runaway billionaires in the forthcoming session of Parliament.