Digital weddings or what I call the Malvika syndrome

facebook-logoWedding hashtags derived from the names of the couple getting married, are the in thing these days. In the recent past, almost every wedding I have attended on Facebook, has had a hashtag attached to it.

And this is how they work. If I were to marry a woman called Mala, then the wedding hashtag could possibly be #MalvikaKiShaadi (or #MalvikaWedding), where Mal comes from Mala, Vi from Vivek and Ka from Kaul. Or it could also be #VimalKiShaadi, where Vi comes from Vivek and Mal from Mala. Yes, I know it sounds very corny, but I hope you get the drift, dear reader.

And what use do these hashtags do? People attending the wedding can share the photographs they click at the wedding on Facebook by using this hashtag. If they want to write something about their experience at the wedding, they can use the hashtag as well.

How does this help? Anyone who wants to check out all the photos of the wedding, just needs to click on this hashtag and can get to see all the photographs clicked by different people at one place. It is a sort of a meta-album of the wedding.

And if the couple has the kind of friends who are also in the habit of making Facebook posts, you can also get to read stuff about how beautiful the bride looked in her saree or lehanga, and the groom in his bandhgalla, how great the food and the music was, how beautiful the women looked in their sarees, and so on.

The interesting thing is that the wedding hashtag is essentially another extension of digital photography. If photographs hadn’t gone digital, there is no way it would work.

In fact, digital photography almost did not take off. As Mark Johnson writes in Seizing the White Space – Business Model Innovation for Growth and Renewal “In 1975, Kodak engineer, Steve Sasson invented the first camera, which captured low-resolution black-and-white images and transferred them to a TV. Perhaps fatally, he dubbed it “filmless photography” when he demonstrated the device for various leaders at the company.”

Sasson was told “that’s cute – but don’t tell anyone about it.” The reason for this was very straightforward. Kodak at that point of time was the largest producer of photo film in the world. And there was no way it was letting filmless photography destroy that market.

Nevertheless, over the years other companies like Cannon got into digital photography and the market went from strength to strength. Now we have reached a stage where almost no one uses the photo film, except possibly a few enthusiasts.

One impact of photos going digital has been that almost everyone has turned into a photographer. You don’t need a fancy camera to click photographs. A smartphone with a camera would do just fine. Digital photography has made photography democratic and inexpensive. Also, unlike earlier when only a limited number of photographs could be taken, there are no such limitations anymore.

But this has also meant that with a surfeit of photos coming along, they are not as precious as they used to be. This is a point that crime fiction writer Peter May writes about in his new thriller Coffin Road. As he writes: “Shooting on film had meant that there were fewer photographs taken, which had made them more precious, and it was nice to have an album to sit and flick through. Pictures you could touch, almost as if touching the people themselves, a divine connection with a happier past.”

Yes, the digital album somehow does not have the same touch and feel of a physical album, which one could turn page by page. Further, digital pictures tend to get lost as well, as we change smartphones, personal computers, tablets and laptops. Devices crash. Backups are not always taken.

The larger point being that change is not always for better. Does that mean we should go back to film photography? Of course not.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared in the Bangalore Mirror on January 25, 2016

Mr Jaitley, India can’t Shoulder Global Growth as China Slows Down

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010
Being rhetorical is a part and parcel of being a politician. Or you run the risk of being called Maun Mohan Singh. Nobody perhaps understands this any better than the finance minister Arun Jaitley, who is more or less the official spokesperson for the Narendra Modi government.

Jaitley recently said in London that India can shoulder some of the global growth contribution previously made by China. As The Hindu Business Line reports: “India can shoulder some of the global growth contribution previously made by the Chinese economy, Finance Minister Arun Jaitley said in London, ahead of his trip to Davos. The world was now looking for additional “shoulders to rest global growth on,” and India would be part of it he said, acknowledging the “serious challenges” faced by the global economy.”

India’s growth rate, despite challenges is, among the major economies, the highest in the world,” Jaitley added.

The comment came after the Chinese economic growth fell to a 25-year low of 6.9% in 2015. In fact, the Chinese economic growth for the period October to December 2015 was at 6.8%. In 2014, the economic growth had stood at 7.3%. The Chinese economic growth has collapsed from the peak of 14.2% it had reached in 2007.

This slow Chinese growth led Jaitley to quip that India can shoulder some of the global growth contribution previously made by China. But how much sense does this statement make? Or was it just rhetoric on Jaitley’s part, as is often the case?

Let’s try and use some numbers here to understand.

Data from the World Bank shows that in 2014, the Chinese gross domestic product (GDP at market prices (constant 2005 US$)) was at $ 5.27 trillion. An economic growth of 6.9% in 2015 means that China added around $364 billion to its GDP and the world GDP as well.

India is now the fastest growing major economy in the world. During the period July to September 2015, the economic growth stood at 7.4%. Let’s assume that the country grows at this rate in 2015, given that the economic growth number for 2015 for India hasn’t come out as yet.

In 2014, the Indian GDP (at market prices (constant 2005 US$)) was at $1.6 trillion. The Chinese GDP was at $1.54 trillion in 2001, close to where the Indian GDP is now. The country has grown at a rate of 9.9% per year between 2001 and 2014. This tells us very clearly as to how fast India needs to grow if it has to reach where China is now.

Getting back to India. The Indian GDP in 2014 was $1.6 trillion. If India grew by 7.4% in 2015, it would mean adding $118 billion to its GDP, which is around one-third of what China has added, growing at a slightly slower rate of economic growth.

The basic point being that given that the Chinese economy is so much bigger than the Indian economy, even if it grows at a slightly slower rate than India’s, will contribute significantly more to the global economy. Or to put it a little more mathematically, China is growing of a much bigger base.

If India had to contribute as much as China (i.e. $364 billion) to the global economy it would have to grow by 22.7%. If India had to contribute even half as much as China it would have to grow at 11.4%. In times like these that is not possible. And that tells us why India can’t shoulder even a part of the global growth because of China slowing down. Also, as China slows down, India will slow down as well to some extent. We can’t be totally disconnected from a slowing global economy.

Hence, what these numbers clearly tell us is that Jaitley was doing what he does best—being rhetorical. That isn’t surprising given that before becoming a full-time politician he was a full-time lawyer.

The irony is that the Indian economic growth number suddenly started to look up after we moved to a new method to calculate the GDP in early 2015. As I keep mentioning GDP is a theoretical construct. The various ‘real’ economic numbers make it very difficult to believe that the economic growth is possibly greater than 7%.

In fact, as Bank of America-Merrill Lynch has pointed out, the economic growth during the period July to September 2015, as per the old method of calculating the GDP would have been 5.2% and not 7.4% as it has been as per the new method. Even for the period April to June 2015, the economy grew by 5% as per the old method, instead around 7% as per the new method.

This is not to say that the Chinese economic data is sacrosanct. As economist Eswar Prasad told the Wall Street Journal reacting to China’s 6.9% economic growth in 2015: “China’s reported growth rate for 2015 raises many questions rather than providing full reassurance about the economy’s true growth momentum.”

In fact, hedge fund manager Martin Taylor of Nevsky Capital summarised the situation very well when he said: “Currently stated Chinese real GDP growth is 7.1% and India’s is 7.4%. Both are substantially over stated. This obfuscation and distortion of data, whether deliberate or inadvertent, makes it increasingly difficult to forecast macro and hence micro as well, for an ever growing share of our investment universe.” Taylor’s comment was made before the latest

Chinese economic growth number came out and summarises the situation best.

The column originally appeared in Vivek Kaul’s diary on January 25, 2016

Is Your Banker with You or with Corporates?

RBI-Logo_8What is the purpose of a bank? Any bank?

It is to match lenders with borrowers.

It is to take the savings of people (i.e. deposits) by offering a certain rate of interest and then lend it out at a higher rate of interest, and in the process make a reasonable profit.

Is that all there is to it? No.

The bank also has to ensure that the deposits that it lends out are fully repaid. This means carrying out a proper “due diligence” of the borrower, before lending money.
It also means lending only to those people it expects will repay.

It also means not lending to people and companies who are already in trouble.

It ‘basically’ means not putting the depositor’s savings at risk.

These are the basic tenets of banking, which the Indian banks, in particular banks owned and run by the government, have broken over the past few years, and continue to do so.

Take the case of the 5/25 scheme which banks have been using in order to restructure loans which borrowers have had trouble repaying. What is the 5/25 scheme? There are many physical infrastructure projects which have long gestation periods of up to 25 years. The trouble is that companies which have borrowed money to build such projects need to repay the principal amount of the loan in a period of around five years.

And this creates a problem simply because in a short period of five years, physical infrastructure projects like roads do not start to throw up money which can be used to repay the loan that has been taken on.

In this scenario defaults start to happen even though the project continues to remain economically viable. It’s just that a period of five years is too short a time for the project to start throwing up money which the corporate can use to repay the loan that it has taken on. Having said that, such a loan could perhaps be easily repaid over a period of 25 years.

The Reserve Bank of India has allowed banks to restructure such loans by allowing corporates to delay making principal repayments of the loan. In some cases, interest repayments have also been delayed.

As Suresh Ganapathy and Sameer Bhise of Macquarie Research write in a recent research note titled Apocalypse Now: “RBI has allowed that going forward, banks can restructure loans such that they can finance the projects for 5 years and at the time of structuring the contract, stipulate an explicit condition that at the end of 5 years, loans will be rolled forward for the next 20 years and define milestone payments at the end of every subsequent 5-year period.”

A loan restructured under the 5/25 scheme is not treated as a bad loan. Further, only loans of Rs 500 crore or more can be restructured under this scheme.

All this sounds good on paper. The trouble is this rule is being used by banks to postpone the recognition of bad loans. Take the case of Essar Steel. As Ganapathy and Bhise write: “For example, in case of Essar Steel—an account that HDFC Bank already classifies as a non performing loan and on which the bank has already taken 40% provision—other banks have instead refinanced their loan. According to the terms agreed by the consortium of bankers led by State Bank of India, Essar Steel needs to pay just about 9% of the principal loan in the initial 7 years, and the remaining 91% will be due for refinancing at end-2022.”

What does this tell us? HDFC Bank probably the best managed bank in the country has classified Essar Steel as a bad loan. Other banks led by State Bank of India have refinanced the loan. Refinancing essentially means giving a new loan so that the older loan can be repaid, and a new loan can be started on better terms for the borrower.

The question is why are banks refinancing a loan to a company in the steel sector, which is currently in a mess and is unlikely to recover any time soon. The prospects of the sector remain largely subdued over the next five years.

Also, what explains HDFC Bank categorising the loan as a bad loan, and other banks giving Essar Steel a fresh loan? It is not surprising that HDFC Bank as on March 31, 2015, had a net non-performing assets ratio (one representation of bad loans) of 0.20% of its total advances. In case of State Bank of India the number had stood at 2.12%. This is a clear case of what the RBI governor Raghuram Rajan had called “extend and pretend” that all is well.

Now let’s take the case of Bhushan Steel. Loans of the company amounting to Rs 40,000 crore were restructured under the 5:25 scheme in February 2015. As Parag Jariwala and Vikesh Mehta of Religaire Institutional Research write in a research note titled SDR: A band-aid for a bullet wound: “Under 5:25, Bhushan Steel’s loan repayments have been postponed for the first four years and thereafter are to be made in a staggered manner in the next 21 years. Management stated that the company may face small repayments of Rs 500 crore per annum which in all probability will be funded by the current set of banks.”

Between 2015 and 2019, Bhushan Steel need not make principal repayments on the loans worth Rs 40,000 crore. Over and above this, it is not in a position to repay even the small repayments of around Rs 500 crore per year. The banks will give it new loans so that it can pay these dues. Jariwala and Mehta point out that the company can generate only up to Rs 200 crore of free cash flow during the course of this financial year. Hence, it is not in a position to repay Rs 500 crore. The company also has interest dues of close to Rs 4,000 crore during the course of this year.

The question is if a company is not in a position to repay Rs 500 crore currently, will it really get around to being able to repay Rs 40,000 crore over a period of time?

In fact, the loans given to many big business groups are being restructured under the 5:25 scheme. As Ganpathy and Bhise point out: “As the table below shows, several cases are now being considered for 5:25 refinancing, which also explains why some of these large groups are not currently classified as non-performing loans. Close to 1.7% of system loans are under consideration or already being implemented for 5:25 refinancing. Another issue is that banks may have lent fresh loans to these groups to cover interest payments on older loans.”

What does this mean? It means that the banks will be able to further delay recognising bad loans as bad loans for the next few years. As Zariwala and Mehta write: “Banks are likely to restructure such accounts through SDR/5:25, which would delay non-performing assets recognition as well as increase the likely losses due to additional funding.”
To conclude, it is safe to say that the banks are clearly with companies and not with depositors whose hard-earned money they have lent.

The column originally appeared on Vivek Kaul’s Diary on January 22, 2016


When It Comes to Bad Loans of Banks, Nothing is as It Seems

One of the issues that I have been regularly writing about is the bad state of banks in India. The tragedy is that their state continues to get worse as time progresses.

As on September 30, 2015, the bad loans of the banking system amounted to 5.1% of the total loans given by banks. The number was at 4.6% as on March 31, 2015. This is a huge jump of 50 basis points in a short period of just six months. One basis point is one hundredth of a percentage.

The trouble is that even the bad loans number of 5.1% of total loans, may not be the right number. This is primarily because over the years the Indian banks, in particular public sector banks, seem to have mastered the art of not recognising a bad loan as a bad loan. They have turned the practice of kicking the can down the road, to an art form.

Banks have used various methods to delay the recognition of bad loans and this has made balance sheets of banks more opaque. As Suresh Ganapathy and Sameer Bhise of Macquarie Research write in a recent research note titled Apocalypse Now: “The biggest problem that we now have with the Indian banking industry is that various regulatory forbearance techniques like restructuring (for under-construction infra and long term projects), 5:25 refinancing, SDR (strategic debt restructuring), NPL sales to ARCs (asset reconstruction companies) etc., are making the balance sheets of banks more opaque.

Forbearance essentially means “holding back”. In the context of banking it means that the bank gives more time/better terms to the borrower to repay the loan, among other things. This could mean extending the term of the loan, lowering the interest or even postponing the repayment of the principal of the loan for a few years. Such loans are also referred to as restructured loans.

These options were supposed to be used sparingly. Nevertheless, banks in general and public sector banks in particular have massively abused these options over the years, in order to postpone the recognition of bad loans.

The bad loans of public sector banks stand at 6.2% of total loans, as on September 30, 2015. The restructured loans on the other hand stand at 7.9% of total loans. For the system as a whole, the number stands at 6%, which is higher than total bad loans, which stand at 5.1% of total loans.

The trouble is that many of the loans which were restructured in the years gone by have been defaulted on. As mentioned earlier one of the popular methods of restructuring a loan is to give the borrower a moratorium of few years on the repayment of the principal amount of the loan. The idea is that in that period the company will manage to set its business right and be in a position to start repaying the loan.

But that hasn’t happened. The restructured loans have been turning into bad loans. Ganpathy and Bhise of Macquarie Research estimate that the failure rate of restructured loans has jumped from 24% to 41%, over the last two years. “Many of these loans have come out of their principal moratorium and started defaulting,” the analysts point out.

What such a large default rate clearly tells us is that many of these loans should not have been restructured in the first place. As a November 2014 editorial in the Mint newspaper points out: “The decision to restructure a loan was supposed to be a technical one, taking into account the viability of the borrower. But in case of government banks, the decision to restructure has often been influenced by political considerations, and has depended on the clout of the concerned promoters.” The restructured loans now being defaulted on would have been restructured before the Narendra Modi government came to power in May 2014.

The situation is likely to get worse given that around half of the restructured loans were restructured over the last two years. Hence, companies have a moratorium on principal repayments for a period of two years. Once they start coming out of this moratorium, the loan defaults will go up.

Over and above this many companies continue to remain highly leveraged, that is they have significantly more debt on their books in comparison to their equity. In fact, as the Financial Stability Report released by the Reserve Bank of India(RBI) in December 2015 points out: “The proportion of companies among the leveraged companies with debt equity ratio of >=3 (termed as ‘highly leveraged’ companies) increased from 13.6 per cent in September 2014 to 15.3 per cent in September 2015, while the share of debt of these companies in the total debt increased from 22.9 to 24.9 per cent.”

This has happened because banks have lent more money to companies which are already in trouble and not in a position to repay their loans. As Parag Jariwala and Vikesh Mehta of Religaire Institutional Research write in a research note titled SDR: A band-aid for a bullet wound: “Bank funding to stressed corporates has gone up in the last 2-3 years and most of it is towards funding additional working capital requirement, loss funding and interest accruals (not paid). This will translate into large and bulky credit cost for banks if these accounts slip into non-performing assets [bad loans].

Also, there is the problem of large borrowers. As Jariwala and Mehta point out: “The RBI’s analysis shows that stressed assets [bad loans + restructured assets] as a proportion of total loans to large corporates have gone up from 13.8% in Mar’15 to 15.5% in Sep’15.”

Further, what is worrying is that banks are still to recognise many of these loans as bad loans. As Ganpathy and Bhise point out: “The issue is that some of these large corporate groups have already been downgraded to default by rating agencies. Since banks have a 90-day window to classify as non-performing loans plus have other regulatory forbearance techniques like restructuring (still can be done for underconstruction projects) and 5:25 refinancing, these assets are not being shown as non-performing loans on the books.”

The analysts estimate that large borrowers form around 11-12% of total bank loans and roughly 15% of these loans are likely to turn into bad loans over the years.

Once these factors are taken into account, Ganpathy and Bhise feel that “potentially 16-18% of the loans will attract higher provisions and/or see write-offs over the next 3-4 years.” This means nearly one-sixth of bank loans can still go bad. And that is a huge number.

Hence, when it comes to bank loans, nothing is as it seems.

Stay tuned!

The column originally appeared in the Vivek Kaul Diary on January 21, 2016

Brandwashed: The Age of Shopping

credit card

We live in the age of shopping. And shopping ultimately creates economic growth. It is simply not enough for businesses to produce goods and services; consumers need to buy them as well. If consumers go slow on buying things, businesses don’t do well and this has an impact on economic growth.

As Yuval Noah Harari writes in Sapiens—A Brief History of Mankind: “It’s not enough just to produce. Somebody must also buy the products, or industrialists and investors alike will go bust. To prevent this catastrophe and to make sure that people will always buy whatever new stuff industry produces, a new kind of ethic appeared: consumerism.”

And how do you define consumerism? As Harari writes: “Consumerism sees the consumption of ever more products and services as a positive thing. It encourages people to treat themselves, spoil themselves and kill themselves slowly by overconsumption.”

One way in which consumerism has been pushed through into the society is through what Vance Packard called the ‘obsolescence of desirability’ in his 1960 book The Waste Makers. This was essentially marketing which was “designed to wear out a product in the owner’s mind”.

As Satyajit Das writes in his new book The Age of Stagnation: “New technologies were promoted as superior or modern, creating demand. Gramophone records were replaced successively by cassette tapes, CDs, MP3s, and digital media such as iTunes and live streaming…Although it made minimal difference to their enjoyment, people owned the same music in several different media, together with associated paraphernalia, creating a peculiar form of economic activity.”

This is an example I can relate to. I started buying cassettes in late eighties, then moved to CDs in the mid noughties and finally bought the same songs in the digital form. Now I simply listen to music on YouTube.

A similar obsolescence of desirability is visible when it comes to mobile phones. New phones give a lot of meaning to the lives of people and among the youth it’s a matter of huge pride to own the latest expensive smart phone, even if it means buying on EMIs. I have seen people give up on fully functional smart phones just because the latest version of the same or another smartphone, has hit the market.

This has been possible because of the easy availability of loans and credit cards. As Das writes: “Credit cards, which allowed individuals to buy now and pay-later, took the waiting out of wanting.”

Another way through which consumerism and buying more have been promoted is through the promotion of disposable items. As Das writes: “Re-use gave way to disposability in baby nappies, paper napkins and towels, and plastic and Styrofoam cups, bottles and containers. Kimberly-Clark promoted disposable Kleenex as a replacement for germ-filled handkerchiefs that apparently threatened public health. In a world of abundance, prolonging the useful life of products to save money was now unfashionable.”

This is something that Harari refers to as well. As he writes: “Manufacturers deliberately design short-term goods and invent new and unnecessary models of perfectly satisfactory products that we must purchase in order stay ‘in’.”

Then there are also cases of new products that try to cash in on human fear. A very good example of this is the hand sanitiser. As Martin Lindstrom writes in Brandwashed: “The idea of an unseen, potentially fatal contagion has driven us into nothing short of an antibacterial mania.”

Businesses have captured on this mania and turned it into a money making proposition. As Lindstrom put to me in an interview: “The companies have done an extraordinary job in building their brands on the back of the fear created by those global viruses – indicating that we’ll be safe using these brands…The ironic side of the story however is that the life expectancy in Japan is decreasing for the first time in history – why – because the country simply has become too clean – the Japanese have weakened their immune system as a result of overuse of hand sanitising products.”

And that is something worth thinking about.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in Bangalore Mirror on January 20, 2016