Rolling The Real Winner

The Compass

The Securities and Exchange Board of India (Sebi) may not have succeeded in taking a final decision on whether to put margins institutions or not, but the winner was undoubtedly rolling settlements.

First, it was the paper in the markets and then the payment infrastructure to blame and now it is badla, which is leading to a delay in bringing in rolling settlements across the market.

Sebi has informally been pressing institutions to trade more and more in rolling settlements. Institutions were, however, opposing the move on the grounds that this would not be fair and would bring down the liquidity for them. The same point was put forward on Thursday as well.

Sebi, however, which is finding itself a little on the back-foot owing to the recent high volatility sweeping across the markets, was forced to adopt a tough stand. Earlier this week, for the first time Sebi actually publicly said that it is planning to bring institutions within the ambit of rolling settlements. Three days later it told the institutions that they had either pay margins or trade only in rolling mode.

As the margins would be much lower in the rolling format, institutions would in any case have little option but to move to rolling settlements. Once they move to this, one will automatically see others following. This is the way it had happened in demat trading.

Institutions' plea that they should be exempt from margins as they do not trade actively and do only delivery-based business is no longer valid as it has been proved (and institutions even admitted on Thursday) that they trade as actively as any investor courtesy better trading and settlement infrastructure available now, and hence they impact prices. In fact, they impact prices much more as retail investors typically follow institutions.

Debt placements

A Prime Database report says debt placements have jumped 32 per cent in the first nine months of the year to Rs 36,307 crore. For the whole of last year, debt placements amounted to Rs 41,286 crore. This would, at first sight, suggest buoyancy in corporate demand for credit.

Closer inspection, however, reveals the bulk of the corporate debt has been raised by state level corporations; indeed private sector debt mobilisation is only Rs 9,163 crore, and of banks and financial institutions is another 9,023 crore. The low corporate mobilisation is surprising, especially because interest rates in the non-bank sectors are significantly lower than the bank's lending rates.

Seen against the 17 per cent growth in non-food credit in the banking system, it is obvious that there is no significant disintermediation happening in the system. Rather, the total corporate demand for funds seems to be low. This applies both to working capital funds (bank credit) and long term funds (debt and assistance from financial institutions).

There are two reasons for this. Firstly, most corporates undertook financial restructuring in the very first phase of their corporate restructuring. As a result, not only did they fine-tune their credit cycles, they also tightened inventory norms and other holding costs. The demand for working capital funds, therefore, is much leaner. Bankers say the growth in credit reflects additional demand from new capacities or those who are in expansion phase. But existing capacities have, as a rule, cut back on credit drawals.

As one banker noted, the momentum of restructuring is such that banks are now pushing cash management products, knowing fully well that their credit offtake will be affected. The second reason is that despite the so-called lower rates in the non-bank markets, funds are not really available to anyone rated less than triple-A. To that extent, it is a very selective market. State corporations escape this scrutiny because they are backed by state government guarantees.

Jalan's shocker

RBI governor Bimal Jalan has been quoted as saying he has no objection to making the list of willful defaulters public. Currently, the RBI publishes an annual list of all suit-filed accounts, where the amount at stake is more than Rs 1 crore. But since there are part of court records, and thereby public information, there is no great breakthrough there.

In doing so, Jalan seems to be thinking in line with the central vigilance commissioner, N Vittal's views. Vittal put a list of 91 IAS and IPS officials on the CVC's website last month and undeterred by the controversy of misplaced identities, followed it up by a list of 77 IRS officials this week. But the RBI, as also the banks, have a legal requirement to keep the accounts of their clients confidential, till such time as it is proved that the underlying activity was anti-national in nature. Indeed, confidentiality of client information is the cornerstone of banking.

Hedged in by old bankruptcy laws, and the tardy pace of debt recovery, banks are straining at the leashes to bring errant corporates to book. Making their names public was one of the suggestions. Among the more radical suggestions is the one on disenfranchising defaulters, and making them ineligible for public office.

Clearly, Jalan seems to be on a sticky wicket. Getting a written consent from the borrower_at the time of disbursal itself_to make accounts public in case of default is not on much use either. Borrowers are known to allege that the consent was taken under duress, and therefore bad in law. Jalan's only way forward_as also of the banking system_is to push for a radical revamp in the debt recovery acts. Especially, laws which allow immed-iate attachment and sale of property without intervention of courts.