In the late 19th century, John Pierpont Morgan attained legendary status by presiding over the restructuring and consolidation of the American railroads, steel and electrical equipment industries. As financier to these businesses, he forced mergers among them as a means to eliminate cut-throat competition and restore viability of operations. When some railroad promoters objected to this banker control of their lines, Morgan famously retorted, “Your roads! Your roads belong to my clients (i.e. depositors)”.
Something similar seems to be underway here as well, with bankers beginning to assume more-than-usual interest in the distressed businesses they have lent money to. The Centre’s recently approved financial restructuring plan for State power distribution companies or Discoms was prompted no less by lender concerns. Roughly three-fourths of the Rs 2.5 lakh crore accumulated losses of these utilities have been funded by banks and financial institutions. The scheme envisages rescheduling of the Discoms’ outstanding short-term liabilities, conditional upon their implementing reforms leading to improved operational performance and debt servicing capacity. Moreover, the State-level monitoring committees to oversee adherence to the mandatory conditions are to have significant banker representation. One could likewise cite the example of Kingfisher Airlines, where it is only mounting lender pressure that has forced the promoter to agree to offloading stakes in his profitable and more prized spirits business. In the old days, the banks would have simply written off loans in default as non-performing assets. But today, the 17-bank consortium, having a combined exposure of Rs 7,000 crore-plus in the troubled airline, wants the promoter to reportedly pledge even other group company brands (including Kingfisher beer) in addition to his luxury villa in Goa.
This newfound lender activism has partly to do with the changed regulatory norms and tightened provisioning requirements that make loan restructuring or write-offs more difficult. Any debt restructuring package now entails some ‘sacrifice’ by the promoters, which includes bringing in additional equity or offering personal guarantees. But apart from these, there is also the aspect of moral repugnance, arising from the flamboyant lifestyles and high connections flaunted by promoters of many ventures that have collapsed in recent times: The prospect of these worthies getting away, even while farmers struggling to discharge small debts are led to committing suicide, is something that the public is loath to condone. Either way, banks turning more aggressive and taking greater interest in the management or even reorganisation of borrowers’ businesses is a welcome trend. The Indian banking industry, in fact, can play a catalytic role in bringing about much-needed consolidation in sectors such as telecom and aviation. These are industries that, having gone through a period of predatory pricing tending to competitive destruction, are now ripe for an orderly restructuring of the sort J.P. Morgan directed at a crucial stage of America’s industrialisation. The lender activism that Indian industry is now witness to, is way short of ‘Morganism’. But it is a start.