Friday, December 20, 2019

It's the financial sector, stupid

Any strategy for recovery must focus resolutely on the financial sector. It's the NBFC crisis on top of a banking crisis that explains the state of the economy.

Negotiating one's way out of a financial crisis is a tall order. It cannot happen with a snap of the fingers. And, sorry, it has  little to do with "structural reforms". Deleveraging of corporates and resolution of NPAs takes its own time even in economies with private banking systems and well developed markets for stressed assets. In a public sector dominated system in which asset reconstruction companies haven't taken off and resolution of bankruptcy is still in its early stages,  recovery will take longer. Perhaps 2021-22 is when we expect growth to return to 7 per cent.

In the meantime, there are some positive signs in the financial sector. The resolution of Essar Steel has finally happened and bankers are due to get back around Rs 42,000 crore. And bank-led resolution has received a boost with banks taking a hair-cut of 52 per cent and SBI leading an effort to provide fresh loans to the company.

More in my article, Green Shoots in the Financial Sector?

Monday, December 09, 2019

Letting IL&FS fail was a policy blunder

(I return to my blog after more than 18 months. Several preoccupations, both personal and professional, kept me away from it. I hope to be regular hereafter. -TTR)

In September 2018, IL&FS failed. The consequences for the economy have been serious. It's not quite a Lehman moment in that we have not had a recession . But it's Lehman-like in the blow it has dealt to growth. The deceleration in growth - from 7 per cent prior to IL&FS failing to below 5 per cent in the last quarter- coincides exactly with the collapse. I am convinced that the IL&FS failure is the primary factor in the deceleration- never mind the babble about the lack of "structural reforms" holding up growth.

As in the case of Lehman, I believe policy-makers did not quite grasp the enormity of the impact the failure of IL&FS could have. Also, as with Lehman, they were wary of bailing out an allegedly tainted private entity at the cost of the tax payer.

There's a problem that is rather peculiar to our polity.Wherever there is a failure or loss, the media promptly raises the war-cry of 'scam'. That sends the government into a deep freeze. We saw this played out in the case of IL&FS. Whether there was a scam at IL&FS needs to be investigated by due process. But the perception that had been a scam should not have come in the way of a rescue- that was a decision to have been taken solely on the basis of the potential costs to the economy of a collapse.

It does appear that the failure on the part of IL&FS shareholders to infuse capital to deal with liquidity issues that had arisen contributed to the failure of the firm. Whatever the mismanagement at IL&FS, timely infusion of liquidity may well have averted the collapse

More in my BS column, IL&FS was  a Lehman-like moment.


Tuesday, May 15, 2018

Banks have a fundamental cultural problem

Not a week passes by without some bank in being embroiled in some violation or scam. This happens in many economies and it happens to well-known banks as well as obscure banks. Banks seem prone to mischief. Their mischief often creates huge problems for the economy at large. How we do address banks' propensity to land in trouble. See my article today Banking's toxic culture.

Wednesday, May 02, 2018

Are simultaneous polls for centre and the states a good idea?

Don't miss the terrific two part article on the subject by former RBI Governor Y V Reddy (for once wielding his pen on a political subject). The first part's here and the second part here.

What are some of the arguments made for simultaneous polls. Here's a partial list:

i. The model code of conduct comes in the way of government enacting policies at election time and results in policy paralysis

ii. It's costly to have separate polls

iii. Economic growth suffers because of frequent elections


Reddy demolishes every one of these. If the model code of conduct is a problem, let's modify it suitably. Let governments go ahead and announce polls at election time but let the EC have a panel of independent experts pronounce on these for the benefit of the public.

Costly? Reddy shows that the government expenditure on elections is trivial..

Economic growth has had little to do with frequency of elections or rule by a government by a majority or a coalition government.

So why are the major political parties pushing for it? Data indicates simultaneous polls may work to the advantage of national parties and to the detriment of regional parties.

Simultaneous elections seems intuitively appealing. They provide stability for five years. But this could well come at the cost of greater accountability. It's not enough if the electorate expresses itself once in five years. Periodic voting in states provides valuable feedback to the government at the centre. Reddy quotes B R Ambedkar as saying that responsibility must be preferred to stability. He thinks simultaneous elections could spell the opposte: stability prevailing over responsibility.

Reddy points out that our greatest achievement is making the federal system work. The present proposal could undermine that achievement.


Monday, April 09, 2018

Quote of the day

US defense secretary James Mattis greets newly appointed National Security Advisor John Bolton with the words, "“I’ve heard that you’re actually the devil incarnate and I wanted to meet you.”

Bolton is a hawk on security matters- he favours a strike on North Korea and regime change in Iran. Mattis (known during his days in the army as "Mad dog Mattis") has been a sober influence in the Trump regime.  How Trump will manage two remains a mystery.

Monday, April 02, 2018

RBI direction to Axis Bank?

The ET report that the RBI has advised the board of Axis Bank to reconsider the three-year appointment it had given to its MD Shikha Sharma has created quite a buzz.The report suggests that the RBI would like the board to limit her re-appointment to one year during which period the board could look for a successor.

It's not unusual for the RBI to give directions to private bank boards but this typically happens where the banks are in deep trouble or there is grave misdemeanour. Axis Bank has had its share of NPA woes but it cannot, at this point, be said to fall in either category- unless the RBI has information that is not yet in the  public domain.

Axis Bank's performance has come in for scathing criticism. For instance, Bloomberg columnist Andy Mukherjee wrote in October 2017:

Sharma, who came to the bank as CEO in 2009, has overseen shareholder returns of 252%, less than the country’s Bankex index at 270%. On her watch, $250 million of bad loans has swelled to more than $4 billion, even as total assets merely tripled. Now, after the September quarter, annualized credit costs have ballooned to 3.16%. That includes a 1.42 percentage point bump due to the $250 million provision management had to make after the central bank caught its lie. As for that full-year credit-cost guidance, which the CFO was planning to lower in July, it’s now been raised to between 2.2% and 2.6%.

In 2017, when her term was renewed for a further three years from 2018 onwards (when it was due to expire), Sharma had already served as MD for eight years. Extending her term until 2021 would have meant that she would serve as MD for 12 years. That's too long for the CEO of a bank and it must happen only in the rarest cases. You need extraordinary performance to justify something like that. Otherwise, a ten-year term is the most one can think for a CEO in banking (or, perhaps, a CEO in any sector).

Sharma's performance, as we have seen, was quite ordinary. The RBI must, in its annual financial inspection, ask the Axis Bank board to explain what criteria it used for Sharma's appointment for yet another term. Was it the absence of an obvious successor? If so, it represents a failure on the part of the Board. It does not help matters that rumours have been swirling around that the Deputy MD of Axis Bank and the head of its Corporate Banking have tendered their resignations. If true, Sharma will have to leave in a year's time (going by the ET report) and there's no successor in sight.

So much for governance in private sector banks.

Tuesday, March 20, 2018

Paralysis in banking?

The political backlash to the PNB scam is taking its toll on public sector banks (PSBs). The resolution framework proposed by RBI is likely to make matters worse- most default cases will head almost by, well, default, to the NCLT. PSBs are being denied the capital they need and they are likely to be in a state of limbo while private sector banks steal market share from them.

This is happening because policy makers want this outcome. They want to shrink the role of PSBs and increase that of private sector banks. If the present government is returned to power in 2019, it will move to amend the Banking Regulation Act so that the government's share in PSBs can fall below 51%, thus paving the way for privatisation of at least some PSBs. Until then, however, the Indian economy will pay a price for PSBs being frozen where they are.

More in my BS column, The spectre of banking paralysis.