Verma, Kamath Back Closure Of Inefficient Firms

An effective market mechanism should be put in place which would facilitate the closure of inefficient Indian corporates and financing institutions. This was suggested by the heads of two of India's largest financing entities, M S Verma, chairman, State Bank of India and K V Kamath, managing director, Industrial Credit and Investment Corporation of India Ltd while speaking at a seminar organised by FICCI on `South East Asian Meltdown.

Both the speakers also drew attention to the fact that in the Indian context, strengthening of the financial sector, improving the efficacy of the regulatory set-up, improved management of external liabilities and timely information flows were imperative.

 

Uday Kotak, vice chairman, Kotak Mahindra Finance, said the Indian scenario is not totally different from the South East Asian countries. He said there is an opinion that the financial sector will be okay if it does not lend to real estate. However, Korean lending was to the industry, he pointed out. That apart, he said that domestic institutions were lending to the commodity business like steel where there was excess supply which will hurt the assets of the banking system. Kotak also pointed out that the legal system is so slow that banks are unable to recover their securities, and by the time the case is settled, the assets become junk.

Verma called for reforms in the legal set up and changes in the labour, corporate and debt laws as a lesson that we need to learn from the South East Asian crisis. He stressed upon the need for improving labour productivity. According to Kamath, the two primary factors that lead to debacle in South East Asia was that banks lent to projects that were intrinsically not viable, and they did not lend structured products to their clients. Thus, he said, the expected profits were not generated from the banking system. Citing the Taiwanese experience, Verma said that unviable and inefficient entities should be closed down.

Kamath drew attention to the fact that Indonesia is going through a consolidation in the banking sector, and the number of banks are expected to drop from 240 to around 25. Since the Indonesian banks have been asked to shore up their capital to three trillion rupiah from the existing 50 million rupiah over the next few years, it will strengthen the banking sector, Kamath added. Commenting on the Indian situation, he was of the view that the cause for concern emanated from the domestic financial system rather than from the external front.

Verma said that India's loan non performing asset stands at three per cent of the GDP as against the South East Asian countries which have an NPA ratio of 8 to 15 per cent of its GDP.

SHAUN BROWNES ASSESSMENT*

Impact of S-E Asia turmoil on India

n Period of sustained interest rate volatility.

n Availability of credit will be tight.

n Period of sustained volatility in the currency market.

n Indian exporters will face increased competition while domestic industry will be affected by cheap imports.

n FDI proposals likely to be reviewed by international investors because they are nervous.

Tips for Indian corporates

n Consider borrowing at fixed rates of interest.

n Only corporates with a natural hedge should borrow in foreign currency.

n Companies should stick to core

competencies instead of being highly diversified.

n Companies desirous of raising fresh equity should look at the private equity market.

n Cash rich companies should go looking for good buys in S-E Asia.