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Ltd shows that despite the industry facing enormous pressure to allow a wave of corporate capital and restart credit growth, the Reserve Bank of India has been reluctant to allow large business groups into mom-and-pop banking. Why is it? Even without access to insured deposits, financiers’ ability to make losses is deadly.
More superficially, it is the story of two siblings and the dramatic divergence of their fates. As Reliance Capital was being sent to the chopping block, Mukesh Ambani’s Reliance Industries Ltd was in the news for different reasons.
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Economic Times reported That the Indian tycoon was considering an unsolicited bid for Britain’s biggest phone company. Reliance said the article was “completely speculative”.
However, Anil Ambani’s grief could not be more real than this. Creditors, including the government, are scrambling to recover 758 billion rupees ($10 billion) owed by his Reliance Communications Ltd, which shut down its mobile service four years ago. Last year, the 62-year-old former billionaire was ordered by a London judge to pay more than $700 million to a trio of Chinese banks that had given money to RCom against personal guarantees by Ambani. Reliance Naval and Engineering Limited, which had a contract to build patrol ships for the Indian Navy, is also insolvent. Creditors are seeing 80%-90% of haircuts, BloombergQuint reported in September.
Now that Reliance Capital has joined its group’s other businesses in the bankrupt abattoir, investors will get a clearer assessment of how their firm, which was once valued at over $3 billion, is expected to be full of $64 million in shareholder value. Most likely to be eliminated. still is. “Serious governance concerns”, which the Reserve Bank of India says the board has failed to address effectively, need to come out in the open. This will not improve the outcome for Reliance Capital shareholders, but it is expected to prevent similar setbacks in the future.
It will also inform the debate on whether big business houses can be trusted with banking licenses. “Our ambition has always been to build a world-class bank,” Anil Ambani said at Reliance Capital’s Annual General Meeting in 2010. reserve Bank of India A discussion paper was just released on allowing some new lenders in the system. Fortunately, those ambitions never got a regulatory blessing. Otherwise, the RBI today would be facing the more difficult task of making individual depositors whole.
Not that Reliance Capital’s resolve is going to be easy. With nearly $9 billion in assets, it shouldn’t have been so difficult to meet $2.9 billion in liabilities for creditors at the end of October, according to the financier’s latest annual report. But for more than two years now, various orders from courts and debt recovery tribunals have barred the company from disposing of the assets. Creditors who tried to sell the units received multiple expressions of interest. Still, layers of litigation could not lead to a deal, as Business Standard reported earlier this month.
Reliance Capital has joined a long list of Indian shadow banks since the sudden collapse of infrastructure financier IL&FS Group in September 2018. Dewan Housing Finance Corp. sold to Indian billionaire Ajay Piramal. Srei Infrastructure Finance Ltd. and Srei Equipment Finance Ltd. were taken over by RBI last month and will be put through the insolvency tribunal.
Formal bankruptcy is not an option for unsuccessful deposit-taking institutions, which are being resolved through shotgun marriage. State Bank of India was inspired to do national service by saving Yes Bank Ltd. While the major corporate lender exists independently, the much smaller Lakshmi Vilas Bank Ltd was allowed to die, with its depositors bailed out by Singapore’s DBS Group Holdings Ltd. , The scam-tainted Punjab and Maharashtra Co-operative Bank has been swallowed up by a fintech-financier consortium, though some of its depositors will get their money only in 10 years.
The RBI has done well not to succumb to the temptation to open banking doors to big industrial houses, as recommended by an internal working group last year. Keeping on top of “connected lending” between non-bank business interests controlling banks and shareholders would require far more supervisory skills than an Indian regulator, especially if they are politically influential.
Anil Ambani’s misadventure is a cautionary tale. The unpaid creditors of Reliance Capital are the debenture holders. Had Ambani been allowed to set up his own world-class bank, he would have been a savings and current account customer. How many small savers can the RBI tell small savers to wait a decade for their money back before they lose faith in the Indian banking system – and jump to bitcoin and Tether?