NPA crisis will improve the credit market: Rashesh Shah, Edelweiss Group
Rashesh Shah and his wife Vidya share their views on NPA crisis, governance issues and parenting.
Recently, Edelweiss forayed into stressed assets business. Some call it risky.
Rashesh Shah (RS): We have got into stressed assets management business with (the North American fund) CDPQ. There is a market for high-yield stressed credit assets where people can take a slightly higher risk for higher returns. This is a new market that is developing. But it is important to keep the stressed assets business, which is more complicated, outside the banking operations. That’s why we have a privately funded vehicle with qualified investors like CDPQ.
Entrepreneurs need not be risk takers but should be good risk managers and ideally take calculated risks. My theory is that you should only take risks that you can manage and not get greedy when you see this buffet of opportunities. The ability to step back and let go is important.
Some say you have made aggressive bets and spread yourself too thin. Would you agree?
RS: Our business has grown well with a high growth rate. People assume that if we are growing fast we must have taken risks. We have raised capital and have sufficient money.
Our gearing ratio (the proportion of a company’s borrowed funds to its equity) is 4:2, one of the lowest in the industry. Unlike others, we have to be extra careful since we don’t come with the backing of a corporate house.
The only constraint I see is the people. I believe that you should take risks you can afford. We will take financial risks till the time we can manage. We will never take compliance and governance risks. We are okay on operational risks with our 4:2 gearing. In fact, we can go up to 5:5.
India Inc is reeling from an NPA crisis. How bad is the situation?
RS: This is good for developing India’s credit market.
In India, promoters have always had an upper hand — above banks and creditors. For the first time, they are worried. So far, credit mostly went to large business groups. Even as India emerges as a global startup hub, very few get access to credit though equity is more easily available.
India today has an efficient equity market. Right from Harshad Mehta to Ketan Parekh, every crisis has reformed it and made it better. Now the credit market too should transform. Earlier the fight was for resources like government licence, land and access to credit etc as this helped businesses create entry barrier on the supply side.
I hope this crisis will improve the credit market so that only those who are creditworthy get loan. This will unclog the credit chain and shift the fight from supply to demand side. Understanding customers will become critical. Incumbency advantage will come down. Established business houses had a lot of advantages. Now, fight will be a lot about serving customers well.
Slowly and steadily, our economy is becoming a lot more meritocratic.
Do you have a view on the economic slowdown? How difficult is it?
RS: Foreigners seem to be more optimistic about India than Indians. I think they take a dispassionate view. Indians are more pessimistic. You don’t see your own kid growing. Outsiders see it.
If I look back at my journey in the last 22 years or 88 quarters, quarter-on-quarter India has always been a volatile, unstable and uncertain market. Between 1989 and 1994, we saw crisis after crisis — the Gulf war, Rajiv Gandhi’s assassination, 1991 crisis, Babri Masjid demolition and many more. But look at this — in 1989, the BSE Sensex was at 600. In 1994, it was at 4,600 points.
India is complex and heterogeneous. It is stable, very stable in the long term. In the last 24 years, the BFSI sector has grown at 17% per annum.
Corporate governance issues are making headlines again. Is India Inc introspecting?
RS: I do think there is a need to introspect. It is important for India to devise and evolve value systems. We have raised the bar but not that much. I think if we don’t, it will anyway be imposed.
Some changes are self-induced and some externally induced. For example, Harshad Mehta and Ketan Parekh crises brought in self-induced changes in the equity market. The Insolvency and Bankruptcy Code happened because of the NPA crisis. Crisis leads us to rethink.
Our credit system is now moving from people-based system to risk-based system. Think about this. Nobody was (objectively) assessing the risk with IL&FS. Nobody thought Vijay Mallya could default. Credit risks are slowly shifting from implicit assumptions to explicit assumptions. India needs to improve itself on contract enforcement. Sanctity of contract will be the new way of doing business.
As FICCI president, what was it like to deal with the Modi government? Are industry bodies relevant today?
RS: During my one-year stint, we met the prime minister thrice. He was very clear about government priorities and the areas he would like the industry to focus on. That helped.
Industry bodies remain relevant. Just that the one-way communication channel is now two-way. The government listens and consults them. As the complexity of decision making has risen, industry bodies must play the role of a think tank. Everything has a trade-off, and the government doesn’t want policy decisions to have unintended consequences. For example, in many international trade agreements, we realised we have given away more than we needed to. The government expects industry to help fully understand the third and fourth order of policy impact. They need to help resolve internal conflicts while crafting policies. Steel import tariff is a good example. FICCI and CII both have consumers of imported steel versus producers of steel.
As FICCI president, you get a good bird’seye view. I learnt a lot about MSMEs. One of the biggest things that went wrong was that liquidity became tight. You can’t expect MSMEs to formalise, push them for compliance and then starve them of liquidity. All of it came together, making things very difficult. We have attempted big structural changes in the last four years.
Does Delhi function very differently from Mumbai?
RS: Delhi has a much larger impact on the economy than we realise. We, from Mumbai’s financial sector, are fairly insulated from politics, with no exposure to government thinking and policymaking in Delhi. For the first time, as FICCI president, I got a deeper understanding of the trade-offs that are to be made. What it means when you ask for Rs 30,000-40,000 crore capitalisation — it could take away crucial money from maternal and child healthcare.
If power is the currency in Delhi, money is the currency in Mumbai. Delhi’s business culture is a lot more complex and nuanced. Who is saying what, where and what they really mean are layered. People have a very good feel for power and truly invest in relationships. I learnt a lot about Delhi’s relationship culture.
Mumbai is less complex, more businessoriented where people have a very good feel for money.
Over the last three decades, how have you evolved as an entrepreneur?
RS: An entrepreneur must periodically reinvent himself. Unlearn and learn things to keep growing. He must evolve from being project-driven in the beginning to processdriven later. This is where many entrepreneurs struggle. The other area where they slip is in getting impatient. If you have a long-term view, patience comes automatically.
In the beginning, startups are fire-fighting all the time and need to do that well. But they must start thinking long term fast. If you are fire-fighting all the time then something is wrong.
One of the fallacies is the idea that an entrepreneur can and should be able to handle everything. They should learn to let go and empower. But before they delegate, they must put in a process of delegation like MIS and dashboards to make it work well.
As a leader, what have you learnt about managing time?
RS: Most entrepreneurs spend time on important and urgent matters. They have to learn to spend more time on what is important but not urgent like hiring, processes, coaching and mentoring. Spending time on urgent issues gives a lot of adrenaline rush.
In contrast, reviews, coaching, mentoring feel like boring administrative work. But for an entrepreneur, time management must move from quadrant 1 (crisis and emergencies) to quadrant 2 (prevention, planning and improvement).
For four years, I tracked how I spent time to achieve it. Today I spend 75% of my time in quadrant 2. Whatever I do has no impact on this year’s earnings but has an impact on the long term.
1996-2000 Foundation of Edelweiss as an investment bank
2000-04 Expands into capital markets and broking business
2004-08 Sets up corporate credit business; IPO in 2007
2008-12 Builds retail platform like retail mortgage; forays into life insurance and wealth management
2012-19 Focuses on scaling up existing businesses; moves into stressed asset business with the North American fund CDPQ
You have two kids (Neel, 23, and Avanti, 18). What have you learnt about parenting?
RS: We live in an uncertain world. Are our kids learning to become independent? That’s something we focus on. Kids need to fail and learn to bounce back. They must struggle and try new things. As parents, we constantly try to expose them to new things. We try to make sure they don’t become too comfortable.
My son is in the US. We talk on the phone over the weekends. I am in New York at least thrice a year. And he comes home thrice when we spend time together as a family. We make sure we take a few holidays every year.
Half-empty is the natural, parental instinct. As parents, we must tell our kids how great they are as often as we can. Potential anxiety forces us to give them constant feedback on their shortcomings instead of telling them what their strengths are. The tendency as parent is to over-involve and over-manage. Give them room. They will evolve in their own way.
Married for 30 years, how has your relationship evolved?
RS: In a 30-year relationship, if you don’t grow, then you degrow. If you are at an even keel, it means you are degrowing. The idea is to have enough common interests and enough independent interests. Vidya goes to Jaipur Literature Festival every year. She enjoys doing yoga. There are times she goes alone to music shows.
Vidya Shah (VS): Children can’t be the only common interest. He is the one who works hard to find common interests. Rashesh has this desire to do new things, constantly challenge himself. He learnt swimming, meditation and running.
Books are our shared interest. But even that has evolved. Earlier every book he read I also read and vice versa. But now Rashesh reads a lot more non-fiction. I read fiction a lot, including Elena Ferrante. By the way, at IIM-Ahmedabad, where we met, we first bonded over Somerset Maugham.
Dinner is one meal we normally have together. We don’t socialise much and lean on each other a lot. We have common friends but also others with whom we hang out.
We watch a lot of shows together. Detective series on Netflix, especially the British ones like Happy Valley and River, are what we watch together.
In the financially comfortable world that you move in, how difficult is it to stay grounded?
RS: When we were growing up, it was a life full of constraints. Getting hold of a book was a big thing. We travelled second class in trains and buses.
Our kids have been born in an era of abundance. Today it can be easy to live in a bubble. But we don’t need to be khadoos about it. Teaching them value systems is important. And they learn from you and catch dissonance very quickly. So, you must live by example, set clear-cut values and teach gratitude as a parent.
VS: EdelGive is one way to stay grounded. It gives you exposure to different things. Having a very diverse set of friends too helps.
We both are into exercise, yoga and gym. We accidentally got introduced to the world of marathons. We are now part of a social group that is big on running. When you run with friends, it’s even better and more fun. People from very diverse backgrounds like doctors, lawyers and architects are part of the group. This opens new windows, showing you the travails and joys of new areas.