Euromoney, April 2018
Reserve Bank of India (RBI) governor Urjit Patel took to the stage at Gujarat National Law University on March 14 to make a simple request…
“From the RBI’s standpoint, legislative changes… that make our banking regulatory powers fully ownership neutral – not piecemeal, but fully – is a minimum requirement,” he said.
(That wasn’t all he said. He also used the magnificent phrase “a tonne of honking” to describe critics. But that, while euphonious, was less important.)
Patel made this request a month after news broke of a potentially $2 billion fraud against Punjab National Bank (PNB), in which two jewellery groups are accused of colluding with PNB employees to secure credit from other lenders using faked guarantees.
He was also responding to government criticism of the RBI’s supervision of public-sector banks in the light of the scandal.
So what did he mean about powers being “ownership neutral”?
Well, this is the heart of the irksome business of reforming India’s 21 state-run banks and their eye-watering Rs8.25 trillion ($127 billion) of bad loans, a sweeping half-century-long affliction of which the PNB fraud is simply a symptom.
He means, for example, that the RBI can remove private-sector banks’ directors or management but not those of public-sector banks – they’re appointed by the government. It can force a merger or trigger the liquidation of a private-sector bank but not a public-sector one. The RBI has limited legal authority, Patel says, to hold public-sector boards accountable on strategic direction, risk profile, assessment of management and compensation.
“Legal reforms are thus highly desirable to empower the RBI to fully exercise the same responsibilities for PSBs [public-sector banks] as now apply to private banks, and to ensure a level playing field in supervisory enforcement,” he said.
Should he get his way? Yes, yes and yes again.
If India is serious about public-sector bank reform – and it has to be, because they are debt-laden, stricken with dodgy assets, not lending and contributing little to the economy – then the Reserve Bank must be given the tools to do what needs to be done.
In October, the government announced Rs2.11 trillion of bank recapitalization measures for public-sector banks over the next two years; a move widely admired and partly responsible for a national ratings upgrade from Moody’s.
It makes little sense to have done so without empowering the RBI to make sure the money is deployed wisely by banks that have a sustainable future.
This is not to say that such powers would have caught the fraud at PNB, but it might have stopped it happening in the first place. Had PNB had up-to-date software, its rogue employees would have found it harder to build up the obligations they did without anyone noticing.
Greater oversight can’t possibly hurt in a sector that clearly needs help.
There was an interesting subplot to the $6.74 billion bond deal for ChemChina in March, the biggest corporate bond in Asia this year.
It is the fact that it fared so much better than the aborted $7 billion bond deal in September for its Syngenta subsidiary, the subject of a protracted and somewhat iconic takeover that took most of 2016 and 2017 to conclude.
What does this tell us? It’s nothing new that a parent gets a better reception for a bond than a subsidiary. But it has been widely acknowledged for some time that the assets ChemChina has bought – Pirelli being another – are better businesses than the parent itself.
Basically, it would be fair to say that the ChemChina takeover torpedoed Syngenta’s fund-raising credibility in September.
Syngenta’s debt rating had fallen from A to triple-B minus through the merger, but that was only part of the problem.
The investor base the Swiss company would normally go to just wasn’t comfortable with the parent and its debt (and debt cover).
There were other reasons too – concern about litigation over genetically modified corn was one – but the new owner was clearly an issue.
So why does ChemChina itself do any better?
Well, nobody knows if ChemChina is committed to Syngenta’s credit rating, but everyone assumes the Chinese state is committed to ChemChina.
ChemChina doesn’t have to be regarded as well-run to be regarded as safe. Strangely, there is a feeling that in an opaque Chinese state-owned enterprise, you know what you’re getting.