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Lack of demand: Slowing nominal growth, high real rates, and global uncertainties have
subdued credit growth
Limitation of supply: Asset quality issues/provisioning have added to the woes by
constraining capital adequacy
My recommendation
Steps:
Form three bank consortiums. The consortiums can be by way of SPVs instead of legal
mergers
The consortiums should be formed like CDOs i.e., after considering risk profiles of the banks
in each consortium, and combining stronger balance sheets with weaker balance sheets,
credit profiles etc. in such a way that the overall of risk of the group is minimized
Each of these three consortiums should issue 15 year maturity debt for say US$25bn (final
size can be decided later). While this is a significant number (5% of current external debt, 1%
of GDP, 6% of forex reserves), it is a number that as per some estimates will provide for 65%
NPL coverage, and a double digit credit growth. The consortium can distribute the bonds
among themselves as pre-agreed between them
Designate these bonds as Tier I capital. This designation should stay for the first 8 years,
allowing banks to bolster their capital adequacy and power growth. These bonds can be
converted to tier II or even ordinary borrowings in a staggered manner over the balance life
of the instruments
The bonds should be freely tradable. While they should be guaranteed by the Government
of India, the primary responsibility for paying them off at the end of 15 years will lie with the
banks. In fact since they will be trading, the Bank consortiums can take advantage of any
short term mispricing to retire some of the bonds early
These bonds solve both issues, i.e. bolstering liquidity in the Indian economy, and doing it via
banks. The Tier 1 designation will ensure that bank’s capital constraints are loosened.