An edifying story for the bank in the collapse of Reliance Capital
The crisis of confidence that erupted in India’s shadow banking sector in 2018 made its most publicized victim to date. On Monday evening, the Reserve Bank of India (RBI) announced that it had replaced the board of directors of a financier controlled by Anil Ambani, the younger brother of India’s richest man, appointed a director and would soon dismiss the company in bankruptcy court. . The collapse of Reliance Capital Ltd shows why the RBI remains reluctant to allow large corporate groups to engage in family banking, despite pressure to allow a wave of corporate capital into the sector and kick-start growth credit.
Superficially, it’s the story of two siblings and their dramatic divergence of fortunes. As Reliance Capital was put to the chopping block, Reliance Industries of Mukesh Ambani [remains a powerhouse].
Consider the misery of Anil Ambani. Creditors, including the government, are scrambling to recover the $ 10 billion owed to them by 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 loaned money to RCom against personal guarantees from Ambani. Reliance Naval & Engineering Ltd, which had a contract to build patrol vessels for the Indian Navy, is also bankrupt. Creditors are considering haircuts of 80 to 90 percent, according to a report. Now that Reliance Capital joins its other group companies in the slaughterhouse of bankruptcy, investors will get a clearer assessment of why their business, which was once worth more than $ 3 billion, is most likely headed for full obliteration. of the $ 64 million in shareholder value that still remains. The “serious governance issues,” which RBI says the board has failed to address effectively, must be openly disclosed. This will not improve the bottom line for Reliance Capital shareholders, but it will hopefully prevent similar explosions in the future.
It may also inform the debate on whether large companies can be granted banking licenses. “Our ambition has always been to create a world-class bank,” Anil Ambani said at an annual general meeting of Reliance Capital in 2010, when RBI had just launched a discussion paper on the admission of new lenders. Fortunately, these ambitions have never received the approval of the regulations. Otherwise, India’s central bank today might have been grappling with the much more complicated task of keeping individual bank depositors unharmed.
Not that Reliance Capital’s resolution is going to be fun. With nearly $ 9 billion in assets, according to the financier’s latest annual report, meeting $ 2.9 billion in debt to creditors at the end of October shouldn’t have been so difficult. But for more than two years, various court orders and debt collection tribunals have prevented the company from selling its assets. Creditors who attempted to sell units received numerous expressions of interest. Still, no deal could come to fruition due to the layers of litigation, as noted.
Reliance Capital joins a long list of Indian shadow banks that have collapsed since the sudden collapse of infrastructure financier IL&FS Group in September 2018. Dewan Housing Finance Corp has been sold to Indian billionaire Ajay Piramal. Srei Infrastructure Finance Ltd and Srei Equipment Finance Ltd were acquired by RBI last month and are going to go to bankruptcy court.
Formal bankruptcy is not an option for bankrupt depository institutions, which are resolved by forced marriages. The State Bank of India was convinced to do national service by saving Yes Bank Ltd. While the main corporate lender continues to exist independently, the much smaller Lakshmi Vilas Bank Ltd has been allowed to die, with its depositors being bailed out by Singapore’s DBS Group Holdings Ltd. The scammed Punjab & Maharashtra Cooperative Bank has been swallowed up by a consortium of fintech-financiers, although some of its depositors will not get their money back for 10 years.
RBI has done well not to open the floodgates of the bank to the big industrial houses, as recommended last year an internal task force. It will take supervisory skills far beyond what the regulator can muster to stay on top of “connected lending” between banks and the non-bank business interests of controlling shareholders, especially if they are politically influential.
Anil Ambani’s misadventure is a warning. Reliance Capital’s unpaid creditors are debenture holders. If Ambani had been given the green light to set up a bank, they would have been savings and checking account clients. How many small savers can the RBI ask to wait a decade for their money to return before they lose faith in India’s banking system and jump for Bitcoin and Tether?
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services.
Never miss a story! Stay connected and informed with Mint. Download our app now !!