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Podcast: The Stubborn Cost of Capital in India (Episode 3)



The startup crowd, from Flipkart to Swiggy to Paytm, are all owned by funds from China, Japan or the US. And now, other large companies too are seeing increasing foreign ownership – from an ICICI Bank to HDFC to even the now beleagured Jet Airways by Etihad. Liquor brands in India also – McDowell/United Spirits is now owned by Diageo, Kingfisher beer by Heineken, and so on. The large standout is still Reliance Industries, but by and large, foreign investors find India a lot more attractive than Indians do, it seems.

Why is that?

Shray Chandra and Deepak Shenoy explore the space – high interest rates have raised the cost of capital in India, to a point where it’s actually hurting business growth. After all, if you can get “safe” returns that are 5% more than inflation, why would you bother taking risks?

Deepak discusses a key aspect as well – easing up debt flows from outside India simply because the cost of capital outside India is much much lower. That, and so much more, at The Capitalmind Podcast.

Why is inflation so low but other interest rates so high?
– Headline inflation prints at 2%
– Core inflation (Non food, non fuel) rates are higher at nearly 5% but this is unambiguously trending lower
– Interest rates high because of fear of inflation, fear of NPAs
– This results in the Cost of Capital for the Indian entrepreneur being very high

What does a high cost of capital do?
– Price at which I can sell goods trends up at say inflation of 2%
– Cost of components also trends up with inflation of 2%
– But the cost of capital (working capital) is 8%
– Return of equity could be in single digits
– Why not just invest in low risk debt (8%) instead of taking the effort of running a business?
– High cost of capital hurts current businesses and prevents new businesses from being formed
– If risk free rates are this much higher than inflation, as a saver my capital keeps growing in real terms without taking on risk
– If risk free rate are closer to inflation, people have to take risks with say equity or investing in a business
–  Swiggy, Ola etc. have been beneficiaries or easy money in the US
– India seems at odds with Brazil and Russia on the real interest rates

Why do we pay so much for money?
– Fear of inflation
– RBI feels the inflation drops are transient and not structural
– Horrible interest rate transmission in India. RBI lends to banks. Banks lend to customers. Banks won’t pass on interest rate reductions.
– Banks claim fixed deposits keep their costs high, but have an OIS route to swap out fixed deposits into floating liabilities
– Banks has 30-40% CASA (current and savings accounts) where their borrowing rates are much lower (0% for current and 4% for savings)
– Banks are the primarily lenders for everyone – including NBFCs
– NBFC are back to borrowing from banks (instead of commercial paper) because of the ILFS crisis aftermath
– Government post office deposit rates are high (8.5%) which is competition for banks
– When banks cut rates on RBI urging in 2013, but government schemes (PPF, NPS, Savings schemes) remained at high interest rates and took in massive inflows at the expense of banks
– Biggest government budget item (70% larger than defence) is interest payments on bonds issued.

Why else would the government keep interest rates high?
– Helps savers, retired folk etc.
– But should we hold growth hostage to this?
– Young entrepreneur suffers because they can’t borrow @ 7,8 – 12%
– Far more people dependent on credit than savings
– Business loan (18%) could be more expensive than a personal loan (16%)

How else does this manifest in the real world?
– Hurts Indian entrepreneurs
– Indian companies can’t bid on assets because of high cost of capital
– Road assets are bid on by say foreign investors because of their lower costs of capital and returns are still respectable despite currency risk from inflation
– Rupee since 2000 has fallen 3.5-4% p.a which was the same as the inflation differential, it just happens every few years instead of regularly
– The inflation differential is now much lower at 1% with US
– Significant real return for anyone who can borrow abroad and bring to India
– Indian companies borrowing abroad used to be required to hedge
– Indian investor would rather hold a fixed deposit in a bank than a project like a road
– High interest rates can cause projects to become NPAs in the first place
– Hurts job creation, new entrepreneurship
– People from abroad see opportunity, Indians would rather put funds in fixed deposits or maybe even abroad

Any pitch to the powers that be?
– Government would like to protect savers, perhaps could be achieved with special senior citizen rates like we’ve already started
– RBI – are you data based or not? If the data goes the other way don’t make up reasons to keep rates high. Focus on the data and respond to it
– SME credit is a problem, big companies that could deleverage can take advantage of the current situation but SMES are struggling
– RBI created TREDS for factoring invoices but this hasn’t been popularised.
– Companies now have to take 25% of incremental borrowings from the bond market which could be lower interest rate than banks. Example: Reliance can borrow at 6.5%.
– RBI and SEBI can reduce restrictions on foreign investors investing  at low rates. Let credit in India flow from abroad
– As an entrepreneur, rather take a cheaper loan than give up equity for cheap

Parting note for listeners and customers
– Long term fixed income returns will fall
– Long term bonds will benefit more from a reduction in rates
– Companies that have deleveraged over the past few years and Companies on the brink (say can pay interest rates but not principal right now) will benefit as well.


Shray: Hi everyone. Welcome to episode three of the Capital Mind show. We have an absolutely fascinating discussion with Deepak Shenoy, for all of you here today. And here’s the premise. We started looking at some of the most interesting and successful startups in India, and we found an unnerving thread of foreign ownership running through all of them. Now here are the biggest names. Flipkart is now completely, or mostly owned, by a U.S. company. Ola is mostly owned by Japanese firms. Paytm, well that’s China. And Swiggy, it’s kind of all over the place, but it’s all over China and Japan. We then wanted to see if this trend stops at, I don’t know, unlisted private companies. And unfortunately, that’s not the case. Let’s look at two of our biggest banks, HDFC Bank and ICICI Bank. They’re both majority foreign owned. HDFC Bank’s promoter, HDFC, it too, it’s majority foreign-owned.

And even though the newspapers can’t make up their mind, it seems Jet Airways may soon be part of a Middle East company. So in order to figure out what’s going on over here, we brought in Deepak, and we have a few questions for him. So, hi Deepak. Welcome for this show. And here’s my first question. Look, inflation recently printed at 2%. That’s a number that we expect to see in say, the U.S., or Western Europe, and countries like that. But when you look at our fixed deposits, our risk free rates, or just heck, the rates on loans, those still sound like very Indian numbers. So what’s going on here? Why is inflation so low, and why is everything else so high?

Deepak: Hi Shray, good evening. This has been, you know, it’s a very fascinating part of where macroeconomics seems to break away from our reality. Inflation’s 2% because, you know, a significant amount of our inflation is food, and fuel. So our transportation costs, and food costs of just surviving, eating, is what drives most of the inflation and pricing in the country. And those have been falling significantly. We’ve seen inflation rates of, negative inflation rates, really. A deflation in a way, for food. And that’s brought prices down. So non-food, non-fuel rates are relatively high at 5.37%, but that’s, again, something called core inflation, when you remove food and fuel. And when you look at core inflation, you don’t look at its absolute number, you look at its trend. Has it been trending up? Has it been trending down? The trend up stopped somewhere in October or November 2018, and now we’ve been seeing a trend downwards. And so, if you look at all parts of inflation, it’s down.

Interest rates continue to be high because we’ve had a fear of inflation. A fear of inflation coming back, because we’ve had instances of very high inflation in the last decade. We’ve also had a fear of NPAs. And some of that is not really justified, because if you think about it, if you have high interest rates, of course people can’t pay them back, you know? So we will … we’ll come to about how this impacts inflation. How our changes in inflation and interest rates impacts businesses. But the cost of capital for an Indian entrepreneur, for an Indian borrower is extremely high. And it’s … because the inflation is at 2%, and interest rates are above 7%/8%. The risk-free interest rate, what the … what RBA offers already, 6.5. A fixed deposit from a bank gives you 7.5 to eight. The cost of capital, therefore for an entrepreneur, is now even higher than that. And that does really, really bad things to businesses.

Shray: Could you talk a bit more, what does a high cost of capital like this do? I mean you just started on it.

Deepak: So, here’s an interesting part about, you know, where capital is. Capital’s a key input to businesses, right? So if you have low inflation, that means my output, the price at which I can sell my goods, inflates only at 2%. My inputs also inflate only at 2%, so I’m okay with that. But what about the cost of the money that I have to borrow to buy those inputs before I can convert them to output, and sell them outside? That’s growing at 8%. So my problem is, my cost, my working capital is extremely high. It’s crunching my margins to a point where my return on my equity has started to fall to substantially lower numbers, sometimes low single digits. To the point where I look at this and say, as an entrepreneur, “Dude, why do I have run this business? Why don’t I just shut it down, take the money, and put it in a bank, and I get 8%-8.5%? That’s better than me actually running this business, because I’m just feeding the banks. The banks are earning more out of the business than I am.”

And that’s, unfortunate because, the cost of capital is now crunching business potential. It’s crunching labor. It’s killing current businesses, because they look at that switch saying, “I don’t want to run this business anymore. I don’t want to expand my business, because I’d rather keep the money in a bank account, and so on.” But also kills new upcoming businesses. Why would you bother investing in a business, creating jobs, taking a risk, when your risk-free return is relatively high. If I can get 8%. Think about a person who is, who’s comfortable putting say 40 times his expenses, or 30 times his expenses, in a fixed deposit and earning interest out of it. Typically, if I put three lakh rupees, and I have to spend 10,000. You know, I’m making now seven or 8% on that three lakh, which is 24-25,000 rupees.

Whereas my spend is only at 10,000. It inflates at 2%. Chances are, I will never take any risks, because I could just sit with that three lakhs, and live for an extremely long period of time at 2% inflation, and never have to dip, or find my capital not protected. I would see an increasing amount of capital every year. Whereas, if my interest rates were at 4%, and inflation was at 2%. Not even, our inflation rate was at two or three and a half. What would happen is, over time, inflation will eat into my fixed returns, so that my corpus starts to fall, and therefore, I will have to take corrective action earlier and say, “Listen, this is not going to work out for me in the long run, so I have to take some risks.”

I will then invest in a business that will take risk. Whether it’s equity investments in the stock market. Whether it is investing in a business that we give me a higher return than the risk-free return. Either one prompts me to take risk. I cannot take risk if, and I will not take risk if my risk-free return is way, way higher. Now, there are differing views on this. In the U.S. for instance, investment has always been popular. People have always invested. And most of the things you talked about, Swiggy, and Paytm, and Ola, and all of them have received money as a benefit … they’ve been a beneficiary of the easy money policy in the U.S. Which have printed way too much money. That money’s flowed out, and not just in U.S. tech startups, but also in Indian startups. They have been a beneficiary of that cheap money. Whereas the Indian doesn’t have any extra money to invest, because he’s looking at this and saying, “My risk-free return is very high.” Whereas it was 0% or 0.1% in the U.S. It was negative in Europe. We’re sitting with 8% minimum cost of capital for any entrepreneur, and everybody else is beyond that.

So you really have no reason why your high cost of capital will help you. In the long run it will only hurt you, because … We pay a substantially amount higher than a lot of other businesses, in comparison with inflation. We just check. Brazil has very high inflationary rate, it pays 6.5%. Russia has 5% inflation, it pays 7.75%. so the differential between its inflation rate and its interest rate is a much smaller number. We’re sitting at 5%, so you know that is where … or four and half percent, at least. So that is where I think the differential is, and that’s why it hurts us.

Shray: Okay, fair enough. But why do we pay so much for money then?

Deepak: So our biggest problem has been a fear of inflation. RBI has at many times said that it’s concerned, not because inflation is printing low, but because they feel that the trajectory of inflation will be higher at some point later. They feel the inflation drop is not what they call ‘structural’. They feel it is transient, which means it’s temporary. You can’t be transient for two years. You had inflation dropping for a substantial amounts of time, and now after some time, when it continues to dip, it goes into negative territory, you’ve got to stop making that argument and say, “Listen, we’ve structurally changed.” What has changed? Food, for instance. Things have changed in the last four or five years. You’ve changed the whole water supply arrangements. You’ve increased the power arrangement to farmers. You increase irrigation. What happens? More farmers farm, there’s a lot more food produced. You talk about tomatoes being sold at 10 paisa, not onions being sold at 200 rupees. That’s because there are way too many people growing tomatoes. We just had onions earlier. The distribution mechanism was horrible. Today, onions are much more easily available, because anybody can grow them, and anybody and everybody does.

So every price of food will only come down because more people are getting into this, and more people are making food. And, you know, a small country like Netherlands produces a substantial amount of the vegetables used in Europe. So why would India, which is mostly farming outside of the cities, not have enough food? Because, since everybody’s producing food, yields are increasing. So if inflation is going to remain constant, fuel, America has discovered so much oil now that there’s an upper limit because as soon as prices start going up, people started digging more wells, shale oil wells in the U.S., and that balances prices over time. So, you’re going to see oil stabilize or reduce. We’re talking about China, converting almost all of his public infrastructure into electric cars. That brings down petrol and diesel demand by a substantial amount. So why would inflation come in fuel and food in the near future, or even in the medium-term for India? So if that isn’t there, the fear of inflation is unfounded. The drop in inflation is structural. That is not a great argument.

Second one, is we have a horrible transmission structure. Which means, you’re assuming that RBI gives you an interest rate, but it doesn’t give you an interest rate. It gives it to the banks. The banks borrow from RBI, and then are supposed to lend that around a little spread from that. The banks, however, say, “We don’t give a damn. We’re not going to reduce rates.” When RBA reduces its rates, why? They make a ton of excuses. They’ll tell you that, “Oh, we have fixed deposits that are very high.” Wrong again. There’s something called the Overnight Index Swap and OIS market that exists. Where you could say, “I have a deposit, fixed deposit, at 8%. Can you take that 8% and give me something that’s floating. Floating according to … Maybe something that’s linked to an RBI, something that’s linked to something else.” It’s called the Mumbai Overnight Rate. So there’s something called MIBOR. Like LIBOR is. And MIBOR is a better version of the LIBOR, in the sense it isn’t as fraudulently done as anything else. But, you’ve got MIBOR-linked OIS, which allows banks to swap their fixed inputs to a floating rate input. So what you’ve done, if you’ve taking an MIS, is converted your … NYS … is converted your overnight, or your fixed deposit, or floating deposit. If you have a floating deposit, when rates fall, you get the advantage of that flow, and therefore can reduce your costs, and therefore you have no excuse to say, “I have fixed deposits, and therefore I can’t give you loan.”

Second, banks have about 30-40% CASA. CASA is current account, saving account. They don’t pay anything on current accounts. They pay 4% on saving accounts. So that is another reason why you shouldn’t believe banks when they tell you their fixed deposits are constraints, because a large amount of the money they hold is in the form of non-fixed deposits, current or savings deposits. And, this horrible transmission situation gets worse, because now banks are the primary lenders to literally everything, including say NBFCs.

Shray: Oh, like the Bajaj Finance and all of that?

Deepak:  Yes, because they used to borrow through mutual funds in the CP market, which is the commercial paper market, or the non-convertible debenture in CD markets. Because of a crisis that happened with ILFS, that market froze up a little, and they’ve gone back to borrowing from banks. And banks, again, are not transmitting lower interest rates to the NBFCs. Therefore, you are double whammy. Saying, “If I could borrow from a bank, I would have gotten a lower rate.” Answer, “No, we’re not cutting our rates.” I could borrow from an NBFC, which could could otherwise be competition to bank and lower rates. The answer is “No,” because the NBFC is getting its money from banks now. You’ve got a multiple set of reasons why now cost of capital is high.

Last thing is that the government keeps saying they want to reduce rates. The post office deposit rates, a rate where the government borrows directly from the public, is still at 8.5%. How can you reduce lending rates in the economy, if you keep your own rate at which people can borrow from, lend to you, at a very high number. At 8.5%. You’ve got to reduce that. Last time, when the government, when the RBI was pushing banks to cut rates, bank did cut rates, the government kept its post office deposit rate stagnant. These are called small savings schemes. NSC, PPF, and so on.

These rates, you know, people invest a certain amount of money. If, call it ‘X’, and when banks are to cut rates below the rates at which the government had in the PPF, people double their investment in PPF and in other small savings schemes. So you can’t have a government that says, “I want you to cut interest rates,” When you actually have your own departments offering very high rates, and the government is obviously the safest place in India to invest in rupees. Therefore, you got to cut that rate before you move forward. Remember also, the government’s highest bill. More than-

Shray: Even defense, I guess?

Deepak: 70% more than the defense expenditure, is interest payments. Which means if we were to reduce rates, it’s our deficit that will come down in the future. Because the single biggest ticket item in our deficit, is interest payments. So, all of this add together, just make money, just extremely expensive.

Shray: Just tackling that point about those government fixed deposit rates, is there any other reason why the government may be tempted to keep this rate, that rate, high? I mean, who is it helping, and whom does it hurt?

Deepak: So at this point, the reason it helps, the reason they keep it high, is because they say there are a few people that are saving money, that kept their money in fixed deposits. They are earning interest from it, and they’re living off of that interest. And therefore, we have to, you know, keep interest rates high. But I say, “No, why?” Your inflation is anyway low. It’s not like I’ve managed to control the increase in your costs, so you should give me a benefit by me keeping a lower interest rate.

And, for the sake of the few that are saving, I will put an entire country hostage? Are you going to not create new businesses because they find the cost of capital too much? Are you also going to say that, “I’m going to … I would rather have the old people who are living on pensions,” which is a very small proportion of people in India, continue to thrive at 5% real rates. They make 5% more than inflation. But the young entrepreneur, the people who are coming into the economy, suffer because they don’t have any other option, because they can’t borrow at the seven, eight, nine, maybe 12%, from the organized economy. The unorganized is anyway crazy, because the unorganized borrow at a 200% per year, and then they make returns of equity of 600%. The formal economies where you have 16% return on equity, that’s where the numbers are.

Shray: No, that’s an interesting point. It’s not just say an old pensioner you’re looking out for, at the expense of just a young entrepreneur. It’s the whole sector of people. They’re far more people dependent on credit than there are on savings. I guess that’s the point.

Deepak: India’s a very credit run economy, and most economies are. It’s just that, you don’t think of it that way. We’ve now started to create more mechanisms for now people to borrow. We’ve had loans being given. You know, earlier just be given for housing. Housing was the cheapest. But any other loan or business loan is considered, “Oh, this guy’s taking risk. Let’s increase the interest rate for him.” You try a personal loan for yourself. It’s 16%. A businessman with a actual business plan pays 18. So, you as an individual, can borrow off of your, you know, just by the virtue of having a credit card, somebody will offer you 15 to 16% loans on interest. But go as a business, and they will offer you loans, but at 18, or 17 or 18%. So it’s almost that bad.

Shray: Okay. Outside of just say, the world of finance. How else does this manifest in the real world?

Deepak: So the high capital costs are obviously … There is the big problem, which is that we hurt Indian entrepreneurs. Indian entrepreneurs can’t bid for for assets, because their cost of capital is quite high. Let me give you an example. We’ve talked about public companies being owned by a large amount of this being owned by non-Indian entrepreneurs, because the cost of capital is relatively low.

Shray:  And those startups also.

Deepak: And the startups. And startups awfully benefit from the low cost of capital available abroad in the first place. But look also at, let’s say a road asset in India. You get road assets where people tell you NHAI is the payer. They’re going to pay you over 20-25 years. You’ve got an entrepreneur in India who says, “Listen, I would like to build this road, but I have to borrow at a high cost today. And I’ll borrow at 10%, 11%, and I’ll make 16%. And I know I’ll be happy.” But then what happens,  There’s a foreign fund, say Temasek in Singapore, or Abu Dhabi Investment Authority in the Middle East. They look at their cost of capital at 3% and say, “You know what? You’ve got something at 16%. Why don’t I buy this project off of you, and you make half of the thing as a profit?” So you make a 50% profit on it. What that does, is it reduces the cost of, or reduces the return on investment off the buyer, from 16% to maybe 12 or 11%. No Indian entrepreneur can bid, no Indian investor can bid at 12%, because they’re looking at the cost of capital and saying, “Listen, I can get risk-frees 8% or 9%. Why would I bother for a few percentage points more? Maybe 1% or 2% more. Take the risk of actually a road asset. Whereas the Abu Dhabi Investment Authority is saying, “Listen, my cost of capital is three. I can invest at 11 or 12.” And, earlier there used to be this fear of inflation. You know, the interest, the exchange rate-

Shray: Yeah, the exchange raters, because the rupee did do some interesting stuff last year.

Deepak: Yeah. So, you know, if you look at it from a long-term perspective, we’ve analyzed data from 2000, which is when we have validate data, ideally. So, if you look at the difference between how a rupee has fallen, an average of say three and a half to 4% a year, this was the exact differential between the average inflation between India and the U.S. during this time.

Shray: That sounds like out to one of my textbooks. So that does sound about right, yeah.

Deepak: When inflation between two countries is X, then the currency depreciates by that X, but not usually on the same year. It will happen bunched. So you will have five years of stability, and in one year of 20%, no? So the problem now is the differential between Indian inflation and U.S. inflation is possibly now short of 1%. The difference in interest rates between the U.S. and India should also effectively be at some point 1 or 2%, let’s say. Which means if you can borrow at 3% in the U.S., you should be able to equivalently borrow at 5% in India. But you don’t, you get eight, nine, 10% in India. So you have a significant real return for anyone who can borrow abroad, and bring it back to India. The Indian entrepreneur, until this year could not borrow abroad easily. Because they said, “You have to hedge whatever you borrow.” If you hedge what do you borrow, your borrowing at Indian costs, because the hedge cost is five or 6% a year. So why would you do it? Since you can’t, the Abu Dhabi Investment Authority comes in, the other investors come in and say, “Listen, if you go to India and get us this, we don’t even have to … Even if you didn’t hedge the risk of the currency, our net returns will be significantly positive.” Which turned out to be so. Even in the last two years. Even when the rupee fell from 62 to 64, to the 72-73 levels, because the 10% fall has happened over five years. So it’s effectively just 2% a year. So, for a person’s who’s lent to India for five years, and made 8%, now for them, the real return is still 6%. Which is still a significantly higher number than anybody else has seen, in the U.S. itself. So, you’ve got this cost of capital coming in and hurting the Indian investor, who would rather own a fixed deposit in a bank, rather than actual yielding, productive asset. A long-term productive asset, like a road, which can give you a 12% return on capital for 30 years. We’ve had our own, there are road projects that are being bought. There are funds we hear that are being built to just buy distressed assets in India. They turned distressed assets because the cost of capital is too high, and of course a lot of stonewalling and government intervention and all that stuff. But apart from that, those projects are in trouble today because they can’t make their interest payments. They can’t make their interest payments partly because interest rates are too high. And when they can’t do that, they sell those projects at a distressed value. They sound like distressed values to us and we’ll look at it and say, “At least the banks will recover something.” But the answer really is, it’s the high interest rates that pushed them off the bridge. If not all of them, at least some of them. That means if you brought interest rates down, some of these projects would actually be viable. I’m not saying all of them will, but some of them will. And the banks may not necessarily have to take a hit, and may actually recover the money over a longer period of time. The banks don’t have the time, because interest rates are high.

Their cost of capital and opportunity is depleting. They’d rather take 50 rupees now, then wait for a hundred rupees in five years. So this incongruence is  how the cost of capital manifests in the real world. It hurts Indian entrepreneurs. It also creates a high capital cost and makes people not invest in new businesses. And therefore, you know, hurts job creation, hurts new entrepreneurship. And effectively you will find that increasingly people from abroad look at India with a much different view and saying, “There’s so much opportunity here, why aren’t you investing?” And we are looking at this and saying, “No, no. We’d rather put up money in a fixed deposit instead.” Or abroad, we look abroad instead of our investments. That’s what it is.

Shray: Okay. So now just trying to round out the discussion, let’s say that you got a chance to have an audience with say, the powers that be. And make some impassionate case to them, suggesting some ideas or recommendations on how to maybe change the situation. Who would you like to meet and what would be your pitch to them?

Deepak: No … there was some point when I thought that it would be the finance ministry that makes these proclamations, or the RBI. Both of them, I think if you get both of them sitting on the same table and actually talking to each other, they would actually be both in agreement that high cost of capital actually is hurting us. But they will give you different reasons why the high cost of capital should exist. The government will say, “We can’t ignore the savers.” I say, yes, well that’s fine. You do something special for people who are above 60. You already do that. You already offer higher interest rates for people who are above 60, but cut rates for anyone who’s below, substantially. You don’t need to offer your high interest rates continuously for those people. Second, the RBI itself should start looking at this and saying, “Listen, either you are going to be data-based, or you’re not.

Don’t keep telling us you’re going to base your decisions on data, and when the data shows that inflation is low, you make up some other reason for not cutting rates. That is just nonsense. You have to have one strategy, and rates are not written in stone. If inflation comes back, you can raise them. There is no problem in your doing that, when you do it. So just sticking to a philosophy that says, “Have a look at data, and when the data tells me that something is wrong, I am going to actually address it. I’m not going to make up arguments.” I can always make up an argument of why inflation will rise in 2023. Because, you know, Excel can prove anything nowadays. But you, you know, Excel also not invented here, but still … So you have to then provide these opportunities. The government’s trying a little bit, I think. You know, whether it was this government, or the previous government, they always wanted to give credit. But now suddenly you hear the impassioned pleas for SME credit.

As small and medium business credit is in trouble. And there’s a good reason why it’s in trouble. Because you’ve basically marginalized the small guy. You made the big guys, who have deleveraged their loans over the last few years, because they had the size to do so, you made them more productive. But the small entrepreneur who needs credit, is simply not finding at the rate that it would make his business profitable.

So my concept will be, focus on the data, attack the data, attack loss of growth, eagerly with interest rates and with opening barriers. Whether you’re the government or the RBI. The RBI has a long way to go. They’ve created [inaudible 00:27:03] that’s fantastic. Something called the threads. Where a person who’s lending, who’s giving money to a government company … Sorry, not giving money, but giving services to or goods to, a government company, has a receivable invoice, can take that invoice and get a loan off of it from a bank.

To the bank, it’s actually a loan to the big government company. It’s not a loan to the small guy, and therefore the rates for those loans are substantially lower. Where do you hear about this? Almost nowhere. The government has mentioned this twice in budget speeches, but there’s no popularity in pushing people to register, take advantage, force the government companies to actually go onto treads, and be on it at all times. We’re seeing some movement, but not enough. I think the powers that be need to say, “We need to get this done.” And change the policy of interest rates. Whether it’s the government lending directly … or sorry, borrowing directly. Or whether it’s the RBI creating a system where other people can borrow at a lower cost.

Shray: Now that you mentioned, there is a rule coming into effect, right? Where companies might have to go and take more of their borrowing, not from banks, but from say, the bond market going forward. Do you think that might help?

Deepak: That will actually. The companies’ incremental borrowings now, 25% of them, the large companies at least, will have to come from bond markets. Bond markets can price your loan substantially lower. Reliance today borrows at 6.75 for a short-term. Nobody, other than the government, can borrow at 6.75 for the short term. And no bank will give you a lower at 6.75, but Reliance is able to, because there’s a bond market that can price the loan at a lot lower than any bank is willing to lend. If corporates now are able to access the bond markets more. This should be, I don’t know why they are not. But, again, you’re got to put a gun to their head. Like the government has. And if the … because they also have these problems with relationship with banks because, “Oh, if I borrowed from a bond market, will my banker get unhappy?” And therefore-

Shray: Oh, they face the same problems we do?

Deepak: So it seems like, that part is … So, you know, making it a rule removes that. You can go to the bank and say, “Listen, I have to borrow from the bond market. Why don’t you buy my bond instead, and therefore lend to me at a much lower rate than I could otherwise have gotten.” So this will actually … this implementation will force companies to move there, will increase investments. And I hope RBI and SEBI will reduce the access, the restrictions they have on investors buying into Indian bonds, especially foreign investors. Because to me, I would rather have a foreign investor loan me money at a low rate, than to buy equity in me. Because at least I can pay back the loan, and be rid of the influence. Equity is forever, right? So, I don’t say that foreign investors are bad. It’s just that, for me as an alternative, I would rather take a cheaper loan, than I would from parting in equity. And every part of the ecosystem benefits from it.

But we need those rules to change. Those rules haven’t changed for a long time. RBI has made so many piecemeal arguments about, “Oh, you can buy, but you can’t buy more than three years, less than one year. If you have more, you have to tell me. You have to put your hands around your ears and do chicken about five times…” Because that’s the kind of rules they keep setting up. And that’s not conducive for long-term. And also they have to, if they want credit in India to flow, they’ve actually got to let it flow from abroad, the way that equity has flowed from abroad. So there’s no reason why we should be afraid. This requires more changes, like you got to make the rupee convertible, and all that stuff. But, come on? It’s been … We’re in 2019, we should have been … We are convertible for whatever practical aspect you can think about. We’re just not convertible by the name of … You know, it’s like, two people being married and having kids, and living through age, and just not having a marriage certificate that mattered for all practical purposes.

Shray: All right. Now since this is the Captain Mind Podcast, let’s just end with a parting note maybe for our listeners or our customers. How do they play this? This angle on high capital costs of capital.

Deepak: Yes, I mean, I think this is great, because if you believe in what we just talked about, and if you’re totally pessimistic though, you would say, “Okay, you know what? Inflation is going to come back, and we’re going to see rising rates again so forget about it.” But if you’re optimistic about the future, and you’re looking at this even a little bit in the way of saying, “Listen, this can’t survive. We can’t be a three trillion dollar nation, and still continue to have substantial amounts of the money stuck in interest rates that are way too high. And that we will grow, and our inflation rate will continue to reduce.” Interest rates have got to fall. Which means, you can participate. You can make money on it, but first you have to accept that, in the long-term, your fixed income returns will fall.

Shray: Okay.

Deepak: What you thought of as 8% will become 5%. What you thought of as inflation of 6%, 7% in certain things will fall to 2%, 3%. You have to think of the next 10-15 years. There is some items that will always keep inflating. Children’s education, and all that stuff, but wherever there is enough demand and supply, rates will fall. Inflation rates will fall to 2%. Your demand of your money working for you for risk-free rates will have to come down. The second part is, you can profit from it in the short-term. When interest rates fall, what makes money? The bonds that currently pay a high interest rate will make a lot more money than, you know, bonds you buy tomorrow. So, what you want to do, you can buy government, the safest bonds in India, the government bonds, so you can buy those, and who wait and bet on those directly, or use them indirectly through buying mutual funds that buy these bonds. Because you are always sure the mutual fund owns them.

That’s the one thing that you have to do. You could also consider a tertiary effect. Companies that have done well, despite … and deleveraged themselves in the last three or four years. Look three years ago, look to their debt ratios now. Some of them are one-fourth or one-fifth the amount of debt today, than what they had about three or four years back. If you see a substantial deleverage, and if you see that the company is now poised to make growth happen, but isn’t because interest rates are too high. When interest rates fall, the first thing that the banks will do is approach them and say, “Guys, here’s money at a cheaper rate. Go in and build up your new projects. That happens, and perhaps elections is one barrier to it, but post that, we might see some of that come into place, and lower interest rates. So you’re going to see a push towards these companies growing and building on bigger and better things.

The companies are extremely over leveraged, maybe may die, but the companies that are on the brink, the edge which says, “I just want to make my interest payments. I don’t have enough money left for principal payments.” When interest rates fall, they will not only be able to make the interest payments, they will also be able to pay down principal. They also benefit. The companies with a little bit of debt, or with manageable debt, are the ones that will benefit most from a rising cycle. It is not the company with no debt that will survive. I mean, they will probably thrive as well, but the biggest beneficiaries will be companies with marginal leverage. That’s also where you can participate, put in your money, and hope to make above average investment returns in the next … as the cycle progresses.

Shray: Above average investment returns. That’s a nice way to end the podcast. So, thanks Deepak, and thanks everyone for listening. We’ve worked pretty hard, and now have the podcast out on pretty much everything out there. We’re even on Spotify. And if you have any feedback or ideas, just email us at and otherwise see you next time. Thanks.

Do let us know your feedback, at @deepakshenoy on twitter, or at podcast [at]


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