‘Reliance’ Between Modi And The Ambanis: What It All Means

Posted by Muhammed Shaffi in Business and Economy, Politics
February 13, 2017

Yes, it is a known fact that Modi, the current Prime Minister of India, is a good friend and well-wisher of many business houses – prominent among them being Reliance and the Adanis. There is nothing wrong with the act, given that industrial development and economic growth will give dividends not just to investors, but to the common man as well, indirectly, if one goes by the trickle-down theory.

But with each passing day, the people of the country are being forced to believe that there lies more than we have heard and seen so far, in their ‘made-for-each-other’ relationship.

The much awaited new-year-eve address to the nation by the Prime Minister evoked negative responses even among his biggest fans. The admiration that these fans had was not merely because of political inclinations, but more because of his ‘liberal, pro-development’ economic policies. This admiration turned into negative responses because contrary to what they were expecting, there was no mention of any of the economic figures or statistics reflecting on the benefits of the much hyped demonetisation exercise that he undertook.

However, there were some announcements in his speech on the evening of December 31, 2016. One notable mention was that of the government extending its credit guarantees for Micro, Small and Medium Enterprises (MSMEs) from ₹1 crore to ₹2 crore. There was one more thing that he added subtly – from now on, loans given by Non Banking Financial Companies (NBFCs) to MSMEs would also be covered by this scheme.

So what? It is a good step, isn’t it?  But it does not seem so innocent an announcement as it’s made out to be.

Before going to that, let’s quickly rewind back to another major decision taken by the Modi government a few months back, amidst the country-wide chaos and protests. While protests and movements highlighting atrocities against Dalits, government intrusions into the academic sphere and the communal and hatred-inducing speeches and public addresses by BJP leaders were rocking the country, the government undertook the major Rafale deal.

The fact that it was quite a ‘fatal deal’, as far as the cost to the exchequer is considered, has already been discussed a lot. However, all these discussions got lost amidst the high volume social media campaigns on nationalism and patriotism by the BJP and its followers in the wake of cross-border intrusions by Pakistan forces. But another aspect of the deal was the great ‘Make in India’ element, that was brought in along with the strange decision to entrust Reliance Defence to undertake the deal as a joint venture with the French aerospace giant, Dassault Aviation. It is to be remembered that it was only very recently, as late as October 2016, that the joint venture was even formed and announced. This enterprise was undertaken when Reliance Defence was under a debt of ₹6,800 crore, against its market capitalisation of ₹4,895 crore, and an interest liability of ₹347 crore a year, as of May 2016. Even then, they got the 7.87 billion euro contract for 36 Rafale jets. A friend in need is a friend indeed, isn’t it?

Modi and Anil Ambani

Let’s come back to the ‘MSME guarantee’ announcement by Modi, which was specifically meant to extend the guarantee to those loans granted by NBFCs. It was in August 2013, when Anil Ambani, while addressing the shareholders of Reliance Capital, expressed his hope of getting a banking licence for ‘Reliance Bank’, with the wish that it would help lower Reliance Capital’s debt to one-fourth of its value back then (reducing the consolidated debt from ₹20,000 crore to ₹5,000 crore) and would be listed as a separate entity with an IPO after three years. But his dreams could not take off because in August 2016, just a month before Reserve Bank of India Governor Raghuram Rajan stepped down, the RBI rejected its application to start new bank. And on September 4, 2016, we saw Urjit Patel becoming the new RBI Governor – who was, by the by, a former President (Business Development) of Reliance Industries from 1997 to 2006. If ‘conflict of interest’ remains a term reserved just for academic discussions, we will soon find changes in RBI norms – and the Reliance Bank may become a reality sooner or later.

Now, how is this related to the new announcement? Even though Reliance Bank did not materialise, and may have to wait a few more years before the RBI norms change, Reliance Capital still continues to function as an NBFC, having been registered as a Non Banking Financial Company, for many years. Therefore, with the new government-guarantee in place, Reliance Capital NBFC will be the largest beneficiary, with a large market for loan demands from MSMEs being available now.

Micro, Small and Medium Enterprise segments offer higher yields, allowing NBFCs to earn superior profit margins, which they can leverage to grow even faster. It should be mentioned that according to the House of Debt report, Reliance Group’s gross debt had increased 4.8 times between the Financial Year (FY) 2006-07 and FY 2014-15, with the debt reaching ₹1.25 trillion – making it the group with the highest outstanding debt in India. When the Prime Minister reiterated in his new-year-eve speech- “Banks should give loans, we take guarantee“, it was not just a push from the supply side (of loans), but indeed a greater pull from the demand side as well – generating more business, revenue and profit for NBFCs like Reliance Capital.

After all, “You do not require an invitation to make profits“, as Dhirubani Ambani had once said. However, in all these games, the biggest loser will be the government-owned banks, and it is just a matter of time before NBFCs become larger than most state-owned banks. With the Reliance-SBI payment bank already in place, which is bound to bring in great prospects for the group, along with an unprecedented push for cash-less economy by the government – it is indeed ‘acche din‘ for the Ambani brothers, if not for their sisters as well!


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