Sunday, January 24, 2021

Indian banking poised for revival in 2021

Indian banking has weathered the pandemic storm of 2020 and is poised for a revival in 2021. The improved outlook is reflected in the rally in banking stocks. All right, the stock market may be experiencing a bit of a bubble. But the fundamentals tell the same story. The bad loan problem has been largely dealt with- through aggressive provisioning and through recapitalisation of banks.

The RBI's Financial Stability Report of January 2021 has some gloomy projections based on stress tests it has carried out. The RBI's stress tests show that, in a baseline scenario, bad loans could rise from 7.5 per cent in September 2020 to 13.5 per cent in September 2021. In an adverse scenario, bad loans could rise to 14.8 per cent for scheduled commercial banks as a whole. For public sector banks (PSBs), the scenario could be worse.

The RBI qualifies these estimates with caveats:

By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.” The RBI also introduced a caveat in its stress test for ban

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Copyright © BloombergQuint

 By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions. It is emphasised that model outcomes do not amount to forecasts.

....considering the uncertainty regarding the unfolding economic outlook, and the extent to which regulatory dispensation under restructuring is utilised, the projected ratios are susceptible to change in a nonlinear fashion.

In other words, with loan restructuring and other forms of forbearance, the  bad loan ratios may not be that bad. 

I am willing to bet they won't be. I have seen the estimates of market analysts. Some of them estimate bad loans at about half the level of 13.5 per cent indicated by the RBI's base line scenario. Many bankers felt at the height of the pandemic that bad loans could rise by up to 50 per cent over the previous year. A 50 per cent rise over 7.5 per cent amounts to around 11 per cent. That was before we learnt that the Indian economy is recovering faster than thought and that very firms have opted for loan restructuring.

I notice that KV Kamath is also inclined to an optimistic view

Kamath said one should overreact and talk about bank capitalisation and cleanup, which he believes has already been done.

Hand-holding might be required, but that is completely different from cleanup. Recapitalisation of banks (by the government) has been done, and nothing has been broken, because banks have been prudent and continue to make provisions. Having said that, had a large number of corporate restructuring happened, there would have been noise in the market. There is no noise in the market.

In a recent article in BS, I set forth the reasons I think 2021 will be a year of recovery for Indian banking:

  • GDP growth of 10 per centin 2021-22 will translate into credit growth of 15 per cent. This will boost bank bottom lines
  • Thanks to increased provisioning, NPAs were down to 2.8 per cent in March 2020. 
  • We will be about ten years into the banking crisis in 2020-21. That's a long enough time to emerge from the crisis given that the typical banking crisis, according to Reinhart and Rogoff, lasts eight years

I also argue that the impending improvement in banking, including at PSBs, means that the recipes for banking revival given so far - a bad bank, a Bank Investment Company, wholesale privatisation- are not meaningful. 

It makes more sense to recapitalise PSBs, wait for an improvement in valuations and attempt strategic sales in two or three PSBs as an experiment. Wholesale privatisation and a fall in government shareholding below 50 per cent will jolt depositor and investor confidence in Indian banking at a time when the outlook appears promising.

By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.”

Read more at:
Copyright © BloombergQuint
By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.” The RBI also introduced a caveat in its stress test for ban

Read more at:
Copyright © BloombergQuint
By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.”

Read more at:
Copyright © BloombergQuint


By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.”

Read more at:
Copyright © BloombergQuint
By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.”

Read more at:
Copyright © BloombergQuint

Friday, January 22, 2021

Management "lessons" from Brisbane test

 This may sound cliched but cliches are often true and worth repeating. So, here are some management "lessons" from India's great win at Brisbane.

It is said that India won the Brisbane test despite the absence of  many stalwarts- Kohli, Shami, Jadeja, Ashwin, Bumrah, Yadav, Rahul. A badly depleted side managed to pull off a fantastic victory. It's worth asking: was it despite their absence or because of it?

Stars don't have to go all out. They don't have that much to lose if they don't play well. Not so with debutants or novices such as Siraj, Natarajan, Sundar. They have to go all out, make the most of an opportunity. They have so much at stake. 

Stars don't easily make good team players- and this is not with reference to our senior cricketers, it's  a general statement. And yet performance is more  about team performance than about stars.Team performance is more than the aggregation of solo effort- cooperation, collaboration, mutual support, give and take, all these matter.

Above all, nobody is indispensable. It may appear that, sans the stars, an organisation will be nowhere. However, there is always talent that can be found and the collective team effort can compensate for lack of individual greatness. Indeed, the test of an organisation is whether it can perform once a star or stars have departed.

In light of the above, I see merit in the suggestion, gathering steam, that Ajinkya Rahane should be retained as captain for tests:

Rahane collected the Border-Gavaskar Trophy, held it aloft, called his team-mates, handed over the trophy to T Natarajan and left the scene. On ABC Grandstand radio commentary, legendary former Australia captain Ian Chappell was impressed.

“That’s Rahane for you. When the BCCI will hang a picture of this at its office, the captain will be missing from the group photo. His team mates love him and respect him. They are playing for him,” Chappell said.

I think I would have really considered keeping @ajinkyarahane88 as Captain for @BCCI !!! Allowing @imVkohli to be the Batsman only would make India even more dangerous & Rahane has an incredible presence & tactical nous about him,” former England captain Michael Vaughan wrote on Twitter.

The team leader does not have to be the best player in the team. He has to be a competent player who can get the best out of his team- by motivating them, by involving them in decision-making, maintaining good relationships. Rahane appears to meet these requirements in ample measure. Besides, Kohli may be able to focus more on his batting, as Vaughan points out.

It's interesting that while many people warm to the idea, they seem to think the selectors will find it difficult to put it to it Kohli, given that he's a superstar. There, you have the familiar Board of directors syndrome- the board not wanting to annoy a star CEO. Let the selectors make bold to try. They must know that the principles of managing for the long run are behind them.

Sunday, January 10, 2021

Trump baiters need to chill

 I wasn't impressed at all by the coverage of the events in Washington last week.

The mobs storming into Capitol Hill last week were a disturbing sight. But this was hardly an armed insurrection or a coup d'etat. President Trump believes the election was stolen- and he has made no secret of it. His followers and admirers think likewise. A large number of them decided to vent their feelings last week. 

Sorry, but that doesn't amount to an insurrection nor was it President Trump inciting violence. And the calls to restrain Trump from using the nuclear option were really over the top. What's happening is that the liberal media and the Washington establishment are desperate to see Trump off. They have wanted badly that he should concede defeat. They are miffed at the legal challenges he has mounted. Never mind that all that President Trump has do so far falls within the ambit of the law.

So when a large mob- estimated at anywhere upwards of 200,000- showed its support to Trump, the anti- Trump brigade seem to lose perspective and we had shrill hysteria from politicians and the mainstream media, with social media such as Twitter jumping into the fray.

It was refreshing to read this article in Russia Today that asked Trump-baiters to tone down the rhetoric:

A coup attempt, an insurrection, sedition – whatever wonderfully evocative term you care to reach for – is not some strange-looking dude with a painted face and horns on his head posing for the cameras inside the Capitol's hallowed halls.

It's not an incredibly dim, grey-haired bloke sitting in the House leader's office chair and scrawling notes. It's not a bunch of not-very-bright people tearing through the corridors of power with Confederate flags and MAGA hats stealing a laptop or two.

That's not a coup d'etat, it's a much smaller thing – it's called ‘crap security’.

An armed insurrection is a leader pointing his army at the Capitol, and tanks driving up the steps and smashing through the doors. Rifle-wielding troops following up in its wake. 

A coup d'etat would be Donald Trump pulling on his military fatigues and taking to the airwaves, sitting at the Resolute Desk and solemnly declaring he had taken absolute control for the good of the nation.

If the president was imposing martial law, then all these screaming people would have a point.

But he isn't. And that's not what happened. It simply is not what's happening now, nor is it going to happen in the final ten days of Trump's term.

.....There was no American coup. It's hyperbole and four years of pent-up fury and score settling. The folk shouting the loudest simply despise The Donald the most, and they don't much like his supporters either. They do fear them, though, because there are loads of them and these people – for some reason – adore their president. Biden, Pelosi et al will simply never get their heads around “why?” 

It doesn't matter. Trump is over.

Tuesday, January 05, 2021

How big a setback is the new UK covid strain?

The new UK strain of  Covid -19 is not to be lightly dismissed- that's the message from the nationwide lockdown imposed in the UK. 

The UK strain is said to be 50-70% more transmissible than the earlier one. It's not more lethal or less amenable to treatment but the sheer rise in numbers also means a potential rise in hospital cases and fatalities.

The new strain and the rising incidence of cases- often, 50,000 a day in the UK- will derail the hoped for recovery in 2021. We don't yet know how much. Since fiscal and monetary policies were stretched quite a bit in response to the earlier outbreak, it's not clear what policy options will be available to deal with the new threat. 

The British response shows that a stringent lockdown is still considered the best way to limit the spread despite numerous assertions to the contrary. FT's Science Writer Anjana Ahuja writes:

If 2020 taught us anything it is that countries can never act too early and that postponing the inevitable leads to protracted agony. A recent Imperial College London analysis suggests that locking down one week earlier in the first spring wave would have cut UK deaths from around 37,000 to about 16,000.

Taiwan, Vietnam and New Zealand demonstrate that early, aggressive intervention delivers a healthy population able to participate in a healthy economy. Treading a middle way between public health and the economy, as the UK has tried to do since March, is a half-measure that protected neither. It is like trying to keep a motorway open after a pile-up and hoping drivers can swerve to avoid the debris, rather than shutting the road and clearing it so traffic can flow normally. Further collisions simply produce more debris and casualties.

That is a fitting answer to those who claim that India's lockdown in March last year was too harsh.

In another article, fund manager Mohamed El Erian spells out the implications for the global economy of the new strain:

Inevitably the new strain will amplify the dispersion in economic performance around the world. Europe is experiencing further disruptions to the movement of people and goods and accelerating the fall into a double-dip recession. So it is probable that we will see previously unthinkable differences in the growth rates of big economies. This may well include as much as a 20 percentage point annualised difference between the most stressed G7 economies and China according to my calculations. Even within the G7, growth dispersion will be at exceptionally high levels. 

Once again, an already excessive level of inequality in many countries will worsen. The burden of the mutated virus environment is suffered disproportionately by the disadvantaged segments of society. 

Once again, the wealthy are likely to benefit if central banks feel compelled yet again to inject liquidity into markets. Once again, large companies with access to capital markets will benefit at the expense of smaller ones who rely on banks and local lenders.

Friday, December 18, 2020

Privatising Indian banks isn’t easy

 The government promises us a big privatisation initiative. It’s not clear whether this includes the transfer of public sector banks to private control. It may mean just dilution of government stakes in PSBs below 50 per cent.

A proper case for PSB privatisation hasn’t been made. In a recent article    in EPW, I make three points:

i.It isn’t true that PSBs have consistently underperformed private banks. The sharp divergence in performance is post 2010 and is the result of PSBs taking a large exposure to infrastructure and related sectors as part of the government mandate. 

ii.  Dropping government stake below 50 per cent is okay provided government continues to be an active investor. Leaving it to institutional investors to manage PSBs is risky as we are yet to develop a culture of professional managers accountable to institutional investors

iii.Valuation will prove tricky and selling PSBs at today’s distressed prices will evoke accusations of a scam that could paralyse PSBs and the government.

Better now to focus on improving PSB performance under the framework of government ownership. There is a marked improvement of late and we may expect more.

Wednesday, December 16, 2020

India's economic recovery vindicates government's approach

S&P is the latest forecaster to revise its growth projections for India upwards. It expects FY 21 growth to come in at minus 7.7 per cent compared to minus 9 per cent earlier.
India (is) learning to live with the virus, even though the pandemic is far from defeated. Reported cases have fallen by more than half from peak levels, to about 40,000 per day. The feared resurgence following the recent holiday season has yet to materialize. People are moving around much more, with Google data suggesting mobility in retail locations is 25%-30% below pre-covid levels in recent months. This compares with over 70% below normal in the quarter through June 2020,
The crucial point is that the loss of output potential has been less than feared and consumer demand is also coming back. Many economists had thought that the collapse of demand would result in a large loss of output potential as firms closed and people lost their jobs. They wanted a strong fiscal stimulus that would keep firms and jobs alive. 

The government seems to have reckoned that the solvency of firms was not such a big issue and that liquidity support to tide over the lockdown period would suffice.It has to be said that the government reckoned correctly. As a result, we have a fiscal deficit that is not so large as to warrant a sovereign rating downgrade. 

The learest indication that liquidty support has served the purpose is that loan moratorium and loan restructuring requessts from borrowers have been way below what most analiysts and bankers had expected. As a result, we can be reasonably confident now that the banking sector can ride out the covid crisis. It is the prospect of an early and strong economic recovery and a resilient banking sector that explains the surge in bank stock prices in recent weeks. If the present trends continue,the government deserves credit for a calibrated response to the covid shock. 

More in my BS column, Covid shock: India got its response right. 


Covid shock: India got its response right 

The economic recovery thus far has vindicated the government’s approach to minimising the impact of the pandemic Did the government get its handling of the pandemic right? That is the question many will have on their minds as the Indian economy recovers from what was touted as the “worst crisis of the century”. 

There are two parts to the question. One, was the government right to enforce a nation-wide lockdown last March? Two, having imposed the lockdown, did it take the right steps to minimise the damage to the economy? 

The definitive answer to the first part may not be known for a long time. Almost everything about the virus is up for debate at the moment. Is it transmitted mostly through close personal contact? Does social distancing by law help? Is masking of any great use? Are the tests for the virus reliable? Will vaccines prove effective enough and without significant side effects? What answer you get to these questions depends on which scientists you ask or what research papers you choose to believe.

 The Indian government opted for a complete lockdown last March. It judged that the priority was to limit the spread of the virus until adequate capacity was created in the healthcare system. Armchair commentators are free to contend that the health outcomes would not have been different sans a stringent lockdown. They may say that livelihoods should have got a higher priority than they did. However, most people would agree that no government could have taken the risks involved in such an approach last March. 

It is the answer to the second part that is more contentious. In the initial months of the pandemic, there was a chorus of demands for an extra-strong fiscal response. Former chief economic adviser Arvind Subramanian and economist Devesh Kapur exhorted the government to spend an extra 5 per cent of gross domestic product (GDP). Former Reserve Bank of India governor Raghuram Rajan was of the view that India’s fiscal stimulus was inadequate and the strategy of conserving the fiscal stimulus for a later date was self-defeating. Nobel laureate Abhijit Banerjee urged the government to emulate advanced economies that had resorted to a bigger stimulus. Leading economists based in India echoed these views. 

The Indian government chose not to be guided by this barrage of advice. It has preferred to limit the additional fiscal stimulus for the year in the range of 2-2.5 per cent of GDP. One can discern the considerations that influenced this approach. One, the best way to contain the impact of the pandemic on the economy was to end the full lockdown at the earliest. Two, India’s fiscal position was already difficult. A substantial expansion in the fiscal deficit would have implications for the sovereign rating and for an early return to fiscal consolidation post the pandemic. 

Three, with economic activity on hold, the weakest firms would go to the wall but the majority could survive with enough liquidity support. Four, increasing aggregate demand at a time when supply was severely constrained would not help — cash transfers would be saved, not spent, and spending on infrastructure would remain on paper. Five, a large fiscal stimulus would make it difficult for the RBI to contain inflation within the upper limit of 6 per cent. The RBI’s latest inflation forecast shows that we are perilously close to having an inflation rate of over 6 per cent in three successive quarters, which would be a breach of the RBI’s mandate. Six, domestic and foreign investors could be reassured about the long-term economic outlook by announcing major reforms. 

Events thus far have vindicated the government’s approach. All indicators point to a faster revival in growth than forecast earlier. The contraction in FY 2020-21 Q2 GDP has been lower than expected. The RBI expects growth to turn positive in Q3 itself. It is the banking sector that provides the best proof of the resilience of the Indian economy. Following the lockdown, the RBI announced a three-month moratorium on the servicing of term loans last March. This was extended by another three months up to end August. 

When the moratorium period ended, the RBI announced a policy on restructuring of loans. Pundits saw the moratorium and the loan restructuring as leading up to another mountain of bad loans in the future. The RBI’s Financial Stability Report (July 2020) projected an increase in the ratio of non-performing loans to total loans from 8.5 per cent on March 2020 to 12.5-14.7 per cent by March 2021. 

The outcomes in respect of both, the moratorium and loan restructuring, have taken bankers by surprise. Investment bank Jefferies estimates that moratorium loans accounted for only 31 per cent of all loans in Phase I and 18 per cent in Phase 2. If the prospects were as gloomy as they were made out to be, why did more firms not opt for loan moratorium? Perhaps the gloom was exaggerated by firms and pundits alike? 

Banks expect restructured loans to be 2-3 per cent of the loan bank, way below the 5-6 per cent they had expected when the scheme was announced. Retail borrowers and small and medium enterprises have opted for loan restructuring but not many large firms. Bankers are astonished that even in the hotel sector, which is among the worst hit, not many firms have asked for loan restructuring.

 Analysts say that large firms wish to avoid the stigma that goes with restructured loans. Restructuring is perceived as default by rating agencies and would make it difficult for firms to access the international markets. Some of the better-rated firms are able to access funds at low rates through the commercial paper market and are using these to service their loans. 

These may be a part of the answer. But they cannot explain how so many firms expect to get by without restructuring in the face of a huge shock. The explanation must be that the shock is not as great as feared. In not opting for loan restructuring, firms are signalling that we are over the hump. CRISIL now expects the non-performing loans to total loans ratio to be 11-11.5 per cent, which is below the lower range of the RBI forecast. 

If further proof of the resilience of the Indian economy were needed, look at the inflows of foreign capital. In April-September 2020-21, Foreign Institutional Investor (FII) inflows were $8 billion, compared to $7.2 billion in the same period in the previous year. About half the FII inflows in November are reported to have gone into the banking sector. (Business Standard, December 8). It’s a sure sign that FIIs see the banking sector and the economy reviving strongly. Gross FDI inflows were $40 billion and $36 billion, respectively in the two periods. The pandemic has done little to dampen foreign investor confidence in the Indian economy. 

The government kept its nerve in the face of a massive shock. It chose not to resort to a massive fiscal stimulus. It focused instead of providing liquidity support and easing restrictions on movement in stages. Give credit where it is due. The government got its policy response to the pandemic right.

Tuesday, December 08, 2020

Prime Minister Chandra Shekhar

 Chandra Shekhar served as PM for seven months between November 1990 to June 1991. He split from the Janata Party and formed the Janata Party (Socialist) as he was never reconciled to V P Singh as PM. His party comprising 64 MPs was propped up by the Congress party headed by Rajiv Gandhi. Rajiv toppled him when he found that Chandra Shekhar would not accommodate his wishes beyond a point and also because he was afraid that Chandra Shekhar, an ex- Congressman with friends across political parties, might win over people from the Congress.

Many people see him as a rank opportunist, a man who had no qualms about sinking the Janata Party in order to satisfy his ambition to become PM. They overlook the fact that Chandra Shekhar did not occupy any government office until he became PM, a remarkable achievement, especially given the fact that Narendra Modi's becoming PM straight after having been CM - and without any experience at the Centre- is today thought remarkable.

Roderick Matthews has produced a sympathetic biography, Chandra Shekhar and the six months that saved India. The title may appear melodramatic but Chandra Shekhar did take the crucial decision to borrow against gold in order to prevent a default on India's external obligations. (It wasn't sale of gold, as many think- India pledged gold to the Union Bank of Switzerland and then to the Bank of England and took foreign currency loans against gold. ). Matthews also makes the point that Chandra Shekhar had to deal with separatist crises in Kashmir, Punjab and Assam  and was successful in putting a lid on the latter two. 

Chandra Shekhar was a member of the Praja Socialist Party (PSP) which had split from the Congress and included the likes of Acharya Narendra Dev, Ashoka Mehta, Jayaprakash Narayan and Rammanohar Lohia. Later, the PSP split, with Lohia and a few other leaders walking out of it. Ashoka Mehta led some of his followers back into the Congress. Chandra Shekhar was one of them. He was noted for his rebellious streak and earned the title of 'Young Turk'. He refused several ministerial offers while in the Congress. It's a measure of his independence that Indira Gandhi chose to throw him in jail during the Emergency.

There's no question that Chandra Shekhar was a man of great talent. He was a gifted speaker- he speech at a Saarc summit when he was PM was made extempore. He once spoke on agricultural policy for one and a half hours without a piece of paper in hand. As PM, he impressed bureaucrats with his capacity for hard work, courtesy, decisiveness, preference for consultation and persuasion in  all matters and his enormous respect for institutions. The BBC called him India's greatest PM since Nehru!

Matthews tells us that Chandra Shekhar  was very clear that the Ayodhya dispute could be resolved only through negotiations and that it wasn't a matter that could be resolved by the courts. According to Matthews, Chandra Shekhar was close to clinching a solution. This involved the Muslims surrendering the disuted site to the Hindus while being compensated with land elsewhere in Ayodhya and a promise that no other temple issue would be re-opened. This is a remarkable disclosure considering that that is how the issue has finally been settled.

Chandra Shekhar laid no claim to be a saint or even being free from corruption. He was frank enough to accept that the the political machine is greased by tainted money and that if he wanted to be in politics, he had to live with the fact. In politics, such frankness is not appreciated. You need to be a hypocrite. Chandra Shekhar's image was badly dented by his open association with a coal Mafia don in Bihar and with godman Chandra Swami.

Matthews book provides plenty of background on the crucial political and economic issues in Chandra Shekhar's time. However, he has little to document by way of Chandra Shekhar's concrete achievements, given that his subject had little opportunity to demonstrate his remarkable talents. 

This biography is a useful reminder that India does not lack political talent. Those who rise to the top in Indian politics have the leadership and administrative qualities needed to steer the country. People fret about our corrupt and bungling politicians. Matthews book drives home the point that the nation is safe in their hands.