INSUBCONTINENT EXCLUSIVE:
India's finance industry is letting a good crisis go to waste by not learning from it.The sudden $12.8 billion bankruptcy of infrastructure
lender ILFS Group, currently sequestered under a government-blessed, out-of-court process, underscores India's lack of preparedness to
handle a big shift in lending in recent years - away from banks.Before I illustrate that challenge with a little story about a banking
tycoon's fundraising, a little background:Over the last several years, the state-run Indian banks' capital constraints have seen them cede
Nothing wrong there except that shadow lenders are the riskiest of trapeze artists: They have to perform without the ropes of deposit
insurance and the safety nets of central-bank liquidity - two things banks take for granted
One fall could be a showstopper.When the ILFS show did stop, risk management was nowhere to be found; fiduciary responsibilities were
Mutual funds that had been lapping up commercial paper and non-convertible debentures issued by shadow lenders, as well as the rating
companies pocketing fees by blindly certifying their safety, sleepwalked into the crisis
And though both are being prodded by regulators to wake up, neither is displaying any zeal of its own.After ILFS blew up, the funding market
froze, and the credit industry cried mommy, begging the central bank to act as the lender of the last resort
The Reserve Bank of India's refusal to do so added to its brewing tensions with the government
Amid this mess, the least the mutual funds and the rating companies could have done was to signal a change in their own behavior.Now let me
tell you what they're up to instead
is a private-sector lender, controlled by co-founder Rana Kapoor
The bank annoyed the RBI with its egregious misreporting of nonperforming assets
In September, the RBI rejected Yes Bank's proposal to let Kapoor continue as chief executive officer
A new CEO has to be found by January
Meanwhile, there's a stampede among board members to leave
the vehicles under which Kapoor's family holds its Yes Bank stake
Morgan Credits offers the Kapoor family a neat way to monetize its shares without pledging them
To raise money, Morgan issued zero-coupon, nonconvertible debentures maturing in 2021, and it promised that the borrowed amount plus accrued
interest will always be less than half of the market value of its holdings in Yes Bank
A good margin of safety for mom-and-pop investors while they earn some interest from a rich bankerReliance Mutual Fund certainly thinks so
doing such bilateral deals
As much as 3.27 percent of Yes Bank stake is with Yes Capital India Pvt., another of Kapoor's vehicles
The family has monetized that stake, too, by issuing 6.3 billion rupees in zero-coupon notes
Most (if not all) of that is once again held by one fund: Franklin Templeton.But things haven't gone according to plan
The RBI swung its regulatory bat, and the debt ceiling for Morgan Credits was breached
At current prices, 3.04 percent of Yes is valued at less than two times the money the mutual fund has lent to Morgan
As the bank's shares swooned, the Kapoor family fulfilled its promise to bring in liquid funds to make up the shortfall.However, why let
cash lie idle in a loan-servicing account So, to allow this fund infusion to be reversed, a new version of the covenant was drummed up
The debt limit still holds, though now it would be busted only when the debt and accrued interest exceed half of Morgan's 3.04 percent plus
the 4.33 percent Kapoor owns in his own name
Satisfied by the legal strength of Kapoor's personal guarantee, Care Ratings Ltd
reaffirmed the notes' rating at A minus on Nov
19.One can understand why the family may not want to keep bringing fresh cash into Morgan, especially if it means selling Yes Bank stock
Doing so would only add to market panic
Kapoor took to Twitter in September to take a dig at the other co-promoter who had sold some shares
"Diamonds are forever," he quipped.Yet retail investors probably have no idea they're the ones financing Kapoor's diamonds, on the basis of
debt covenants as fluffy as cotton candy
These are essentially unsecured loans to private investment companies, not suitable for mutual funds
Should fund managers use the cover of high credit ratings to mask the fact that no market exists for them whatsoever That two months after
the ILFS debacle India's financial industry should still be so unresponsive to risk-reward and fiduciary duties makes one wonder if these
wild-swinging acrobats even deserve a safety net.(Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial
He previously was a columnist for Reuters Breakingviews
He has also worked for the Straits Times, ET NOW and Bloomberg News.)Disclaimer: The opinions expressed within this article are the personal
The facts and opinions appearing in the article do not reflect the views of TheIndianSubcontinent and TheIndianSubcontinent does not assume
any responsibility or liability for the same.
