The market that is likely to emerge from the rumble of the actions of Raghu Ram Rajan is likely to be very different from what it destroyed. I am a big fan of RR and what he is doing in the banking sector is commendable.

HDFC Group chairman Deepak Parekh has cautioned the government and the Reserve Bank of India that the ongoing clean-up of public sector banks’ balance sheets is to fix the financial rot and not to incapacitate banks as “too much of anesthesia can also result in a patient becoming comatose”.

The passing of the Real Estate bill and the clean up in the RE will lead to another huge blood letting by the banks. Assuming that also goes through, the market capitalisation lost by the PSU banks will be really huge. Blood on the street? God a lot more is like to flow.

The implications of this for corporate India is not going to be easy. Companies like L&T which are big, huge and successful will not have any problem in raising corporate debt from banks, what will happen to smaller companies which want say Rs. 5000 crores? They are likely to find it difficult. Even listed companies do not go to the capital markets for their debt requirements. Remember the ‘convertible bond’ – a culture started by Tata Motors, Reliance, etc.? that product is dead now.

Remember the company fixed deposit? the banking sector killed that product by playing a nice game along with the regulator. So if you leave out the banks and a few companies like Hdfc there is no retail participation in the debt market. The whole ‘corporate lending’ is now with banks and a very small portion being subscribed to by mutual funds and by the life insurance sector. The other big player in the bond market is the Provident fund but they are predominantly in the G Sec space.

So let us take a company like Jindal Steel and Power Limited. The March 2015 audited balance sheet shows debt of about Rs. 26k crores and if the news papers are to be believed it has a current debt figure of Rs. 37k crores. Most of it (about Rs. 34k crores) is from banks. Which means there is a single source (all psu banks think alike) borrowing and if this amount was in jeopardy the company was in jeopardy, and worse, the steel industry and the banking industry were now threatened.

But, it also suggests new requirements for corporate treasurers. This includes the need to invest time in understanding the drivers of a now more diverse set of financing options, so that you can have effective plans for what remains an uncertain world. And it strengthens the case for investing energy to influence the on-going reform programme to enhance the infrastructure of those markets. Clearly there seems to be no choice. Big corporates too have not tried (hard enough lets say) to use working capital needs met by bill discounting, factoring, etc – the easy availability of bank money is the main reason for this mess. Hire Purchase (where you keep the depreciation), Operational lease (where the owner keeps the depreciation), Financial lease (where the rich owner keeps the depreciation) were all killed by the banker who wanted the whole pie to himself.

Now if banks panic (as they already are) what will happen?

Bank lending to corporate India will fall dramatically: Remember the baboo(n) of the Psu bank is under no pressure to ‘earn’ money. He is under pressure not to ‘lose’ money. He will just say NO. He will push everything to a higher level – so the Board is going to say NO to many loans.

Public Sector bond issues will DRAMATICALLY increase: The budget has cleverly shifted a lot of its ‘budgetary support’ cash flow responsibilities and we will find Ntpc, Nhpc, Nhai, REC, Indian Railways etc. now going to the bond market and raising debt capital for themselves.

Private Sector will have no choice but to issue bonds: JSPL may not be the best example, but companies with more than say Rs. 5000 crores may be better off raising some money – maybe 30% of its debt requirement from public issue of bonds and diversifying its lending base. At least you are reducing the concentration risk of one lender. And the amount of outstanding bonds issued by UK private non-financial corporates has increased from around £140 billion in 2007 to over £400 billion today. Much of this issuance has been in euro and dollar, to take advantage of the larger markets these currencies offer – and has so involved greater use of the foreign exchange markets by corporates. We will not be able to buck this trend.

Most of the organized world is on zero or negative interest rates: It is likely to make it easier for good Indian coporates to raise money – internationally and nationally.

Bond markets will be forced to grow, a little nudge is required: stamp duty, bankruptcy law, trustee ship rules, trustee risk…all need some tweaking but we could have some ‘forced’ changes.

The country’s ten leading business houses, including Reliance (Ada) Group, Vedanta (not fair to be clubbed here, they are still cash rich), Essar and Adani, have seen their total debt levels soar by 15 per cent to over Rs 6 lakh crore during the last fiscal while profitability continues to remain under pressure, a research report said on Monday.

Sadly there are not enough big capital market bodies willing or able to raise debentures / bonds for corporate India on good terms. This will have to change. Our banks are not well capitalised and this could lead to unnecessary delay in Industrial revival.

Tough times ahead. RR will not have a choice EXCEPT to develop a good secondary market for bonds.

RH Patil had a dream !!