It is common knowledge that the Reserve Bank of India (RBI) quietly and deliberately allowed State Bank of India (SBI) to offer an irrevocable and unconditional guarantee to the Rs4,200 crore bond issue of Tata Motors and then shut the door before these guarantees proliferated into a huge financial hazard. I say deliberately, because SBI structured the guarantee, even when Shyamala Gopinath, RBI’s deputy governor, was on its board and had, according to media reports, objected to the bond issue. The logic to ban such guarantees is simple—the public sector bank earns only a small fee, while it is exposed to a huge risk. Although Tata Motors itself may be less risky, the stampede of promoters seeking the same quasi-sovereign guarantees through nationalised banks would have ultimately needed a bailout at the taxpayers’ expense. In fact, now that the US has shown its willingness to bail out fat-bonus-earning bankers, the malaise is bound to reach India too. Especially since government bailouts, at the cost of the ordinary person are now recognised as the fastest cure for manmade and greed-led financial disasters.
That is probably why SBI is at the forefront in lobbying for RBI to permit banks to guarantee bonds again. S Vishvanathan, CEO and MD of SBI Capital Markets, was recently arguing for credit enhancement on corporate bonds through guarantees. Speaking at a seminar, he said, “I know that recently there were some problems with banks guaranteeing corporate bonds. But if the regulator allows banks to guarantee the bonds for the first two-three years, it can particularly help infrastructure companies to raise funds.” Madhvi Puri-Buch of ICICI Securities argued for separate pricing of the issuers’ risk and the guarantors’ risk. Well, the US has shown us that this is all theory. Ultimately, decisions are dictated by bonus considerations and not fair distribution of risk. Also, consider this: It is the big steel companies, including Essar and the Jindals, who are setting up infrastructure projects today and will probably want guarantees. Worse, Ispat Industries, run by the Mittal brothers, was brazen enough to squander its first bailout, despite a mega boom in commodity prices and has recently availed a second bailout. The second corporate debt restructuring was led by IDBI Bank. The RBI has earned international accolades for safeguarding India from the financial crisis; let us hope the good sense continues.