Month: January 2021

On Advice

I don’t know why I am writing this. I guess, I need to get it out of my system. So, at the end of it if you are still wondering why, apologies in advance.

In the last eight to nine months, there has been a massive increase in the number of people writing to me, seeking advice on different issues.

Recently, someone wrote to me, wanting to know, if doing a five-year integrated MBA from one of the IIMs, was a good option, if one did not get admission into an IIT that is. My answer was, I don’t know.

He persisted and asked, if spending Rs 30 lakh on an integrated five-year MBA from one of the IIMs, was really worth it? My answer was, I don’t know.

He persisted and asked, if getting a degree in business or economics made a difference if one wanted to become an entrepreneur. My answer again was, I don’t know.

He then thanked me for my suggestions.

Another gentleman had a degree in science and wanted to know if there was any course/internship/job that would help him learn finance. My answer was, I don’t know.

Over the months, I have got many such questions where people seek career advice from me. And honestly, I don’t know why they do this. I am not a career counsellor. My corporate career lasted all of five weeks.

And before that I more or less made a mess out of my education. My formal education is a BSc in Maths and Computer Science followed by an MBA in Information Systems. I lost interest in the MBA around half way through it, but didn’t have the guts to drop out, thinking of all the money that had been spent and the problems it would create for my parents.

So, I persisted and ended up getting a degree which has been largely useless since then. The only thing that I learnt in my MBA and which I still put to good use is how to calculate the internal rate of return on any investment. But one didn’t have to do an MBA just to learn that.

I have spent nearly two decades in trying to make up for this mistake, by making myself learn economics, personal finance and some part of the Income Tax Act, bit by bit, in an extremely unstructured way. (This also explains why I find it very difficult to answer questions like, which are the books I should read to learn economics).

All this unstructured learning could also happen because I lead a slightly unconventional life. I am single. I stay in a studio apartment. And I don’t spend much money on travelling.

Hence, I have been able to dedicate a lot of time to unstructured learning. This is not a formula that would work for most people, especially those who have EMIs to pay, and given that I don’t recommend it to anyone.

Also, the larger point here is, that I have a good understanding of things over a fairly limited area. I understand some fifth standard Maths and some part of India’s economy. I can tell you how to manage your money, on most days, but there are a few limitations to that as well. And that’s about it.

Beyond this, my knowledge is generally useless. I know a few things about Hindi cinema and its music, especially from the late 1980s to the mid 1990s. Like this morning I was discussing with someone, on how a famous Hindi film song of the mid 1970s composed by Laxmikant-Pyarelal, has a tune similar to a famous Sabri Brothers qawwali. But then I really don’t know who copied whom.

I can also give you a lot of gyan on modern crime fiction, especially Scandinavian crime fiction and in particular, the genre of the police procedural. Like I can tell you why the last book in Henning Mankell’s Kurt Wallander series just didn’t make much sense and it was written by a writer who was extremely bored by then. But then what use will this be to you?

Of course, I have written five books in the last decade and these books have sold reasonably well and put me in the public domain. I have appeared on TV (I don’t know why but this is equated to being successful in India. The day I first appeared on TV, one of my aunts just went over the moon. This was after nearly eight years of writing almost every day, first for a newspaper and then freelancing for websites, newspapers and magazines). I have lectured all across India. I have spoken across India’s best business schools.

So, there has been some limited success in my life. But then that does not mean that I have answers to all the questions. Let me give you an example.

A few years back a cousin who wanted to a PhD wanted me to tell her if she should do major in marketing or in economics. Now given that I have no experience of doing a PhD from an American university, I was in no position to answer the question. And I told her so. But she persisted and so I answered.

I told her that she should do a PhD in economics, given that if she had to spend five years on studying something, it rather be something important. Coming from me that should have been hardly surprising. The logic being, what was the point in studying marketing for five years and learning how to sell more things to more people.

Now this is not to say that marketing is just that, it clearly isn’t. It is a very important subject, which can make a lot of difference across various facets of life and it’s not just about selling more things to more people. But then that is the way I was thinking at that point of time, in trying to answer a question, I wasn’t qualified enough to do.

Thankfully, she did not listen to me, and chose to do a PhD in marketing.

The point being it is very important in life who you seek advice from. Wrong advice can prove to be very costly.

There is another dimension to advice, it is a very individual thing.

Around a decade back, an uncle of mine was after me to buy a house in Delhi. Delhi home prices in 2010 were at their peak and anything half decent in the city would have cost Rs 1.5-2 crore. I clearly did not have the capacity to take on a home loan that could have funded a home at that price and I told him so.

He persisted. If not Delhi, look at something in Greater Noida. I didn’t, for the simple reason, I had no plans of living in and around Delhi at that point of time (nor do I currently).

Now ten years later was this a good decision? Yes, if you consider the fact that so many projects in Greater Noida were never completed. The builders took the money and disappeared. Also, I continue living in Mumbai.

And no, if you consider the fact, that I still don’t own a home to live in.

At the end of the day, what advice one seeks and one takes, is a very individual thing.

Anyway, that was the rant. Now let me give you some advice on advice.

1)  If you have to ask, ask pointed questions. Don’t ask stuff like, how do I learn finance? First figure out what does the word finance mean to you.

2) I think, the first point needs to be stated again. Ask pointed questions. Don’t ask stuff like, should I invest in bitcoins? The answer from my end will always be, I don’t know. Simply because I don’t know how you perceive risk, what kind of money you are in a position to lose and what is your current understanding of bitcoins (or any other investment avenue for that matter).

This is not to say that if you were to ask a question like this, people won’t give you an answer. Many people will. But come what may that would be wrong advice.

3) Before asking a question, please think, whether the person you are putting the question to, has the capability to answer that question. Just because he has seen some success in some aspect of life, doesn’t mean he has the answers to everything. Like a few months back, someone asked me, which laptop should I buy. I mean, thoda to dimag lagao yaar.

4) Don’t ask philosophical questions related to your career. You might get an answer but that answer will be wrong. This reminds me of a question someone asked me around a year back. How do I make decisions in my 20s that I don’t regret in my 40s? I almost fell laughing from the chair I was sitting on. Almost all decisions I made in my 20s, I regret in my 40s, expect for the fact that I started reading seriously only in my mid 20s and which is why there is a lot to catch up on.

5) Just because you and I have been brought up writing exams where every question has an answer, doesn’t mean life operates like that. Every question doesn’t have an answer, even though most people will happily give you one. If you are the kind who believes in the fact that every question has an answer then please seek out LinkedIn influencers, you are made for each other.

6) Oh, and finally, please Google. You will be surprised!

Bonus point: Don’t expect me to make a decision for you, simply because you are asking a question.

The Rs 20 Lakh Crore Bad Loans Problem of Indian Banks Hasn’t Gone Away

On December 29, 2020, the Reserve Bank of India (RBI) released the Report on Trend and Progress of Banking in India.

Like every year, the report is a treasure trove of information, especially for people like me who like to closely track the aggregate banking scene in India.

Sadly, most of this important information barely made it to the mainstream media, this, despite the fact that the health of the country’s banking sector impacts almost all of us. (This is one reason why I need your continued support).

Among other things, the report discusses the issue of the bad loans of banks in great detail. Bad loans are largely loans which haven’t been repaid for a period of 90 days or more. They are also referred to as non-performing assets or NPAs.

Let’s take a look at this issue pointwise.

1) The total bad loans of banks (public sector banks, private banks, foreign banks and small finance banks) as of March 31, 2020 stood at around Rs 8,99,802 crore. This is the lowest since 2017-18. The following chart plots the bad loans of banks over the years.

Source: Reserve Bank of India.

Despite this fall, the Indian banking sector on a whole continues to remain in a mess. We shall look at the reasons in this piece.

2) The total amount of loans written off by banks has steadily been going up over the years. In 2019-20 it peaked at Rs 2,37,876 crore. The following chart lists out the loans written off by banks over the years.

Source: Reserve Bank of India.

Basically, loans which have been bad loans for four years (that is, for one year as a ‘substandard asset’ and for three years as a ‘doubtful asset’) can be dropped from the balance sheet of banks by way of a write-off. In that sense, a write-off is an accounting practise.

Of course, before doing this, a 100 per cent provision needs to be made for a bad loan which is being written-off. This means a bank needs to set aside enough money over four years in order to meet the losses on account of a bad loan.

Also, this does not mean that a bank has to wait for four years before it can write-off a loan. If it feels that a particular loan is unrecoverable, it can be written off before four years.

So, does that mean that once a loan is written off it’s gone forever and is no longer recoverable? In India things work a little differently. In fact, almost all the bad loans written off are technical write-offs.

The RBI defines technical write-offs as bad loans which have been written off at the head office level of the bank, but remain as bad loans on the books of branches and, hence, recovery efforts continue at the branch level. If a bad loan which was technically written off is partly or fully recovered, the amount is declared as the other income of the bank. Having said that, the rate of recovery of loans written-off over the years, has been abysmal at best.

Now getting back to the issue at hand. The bad loans of banks as of March 31, 2020, have come down to some extent due to write-offs. As the Report on Trend and Progress of Banking in India points out: “The reduction in NPAs during the year was largely driven by write-offs.” Interestingly, the RBI offers the same reason for bad loans coming down in the years before 2019-20 as well.

Let’s try examining the above logic in a little more detail. The bad loans or NPAs of banks as of April 1, 2019, stood at Rs 9,15,355 crore. During the course of 2019-20, banks wrote off loans worth Rs 2,37,876 crore. Nevertheless, as of March 31, 2020, the bad loans of banks had come down to Rs 8,99,803 crore.

If we subtract the loans written off during 2019-20 from the overall bad loans of banks as of April 1, 2019, the bad loans as of March 31, 2020, should have stood at Rs 6,77,479 crore (Rs 9,15,355 crore minus Rs 2,37,876 crore). But as we see they are actually at Rs 8,99,802 crore.

What has happened here? What accounts for the significant difference? Banks have accumulated fresh bad loans during the course of the year. The net fresh bad loans (fresh bad loans accumulated during the year minus reduction in bad loans) during 2019-20 stood at Rs 2,22,323 crore. Once this added to Rs 6,77,479 crore, we get Rs 8,99,802 crore, or the bad loans as of March 31, 2020.

The point to be noted here is that banks on the whole have accumulated fresh bad loans of more than Rs 2 lakh crore during 2019-20. This is a reason to worry. It tells us that the bad loans problem of Indian banks hasn’t really gone anywhere. It is alive and kicking, unlike what many bankers, economists, India equity strategists and journalists, have been trying to tell us. Many borrowers continue to default on their loans.

The net fresh bad loans accumulated in 2018-19 had stood at Rs 1,34,738 crore. This tells us that there was a huge jump in the accumulation of fresh bad loans in 2019-20. The current financial year will see a further accumulation of bad loans due to the covid-pandemic.

3) In a February 2017 interview to Dinesh Unnikrishnan of Firstpost, Dr KC Chakrabarty, a former deputy governor of the RBI and a veteran public sector banker, had put the bad loans number of Indian banks at Rs 20 lakh crore.

As he had said:

“I’ll put the figure around Rs 20 lakh crore…One should include all troubled loans including reported bad loans, restructured assets, written off loans and bad loans that are not yet recognised.”

The trouble was not many people took Chakrabarty seriously at that point of time. Nevertheless, the Rs 20 lakh crore number doesn’t seem far-fetched at all. As mentioned earlier, the bad loans number as of March 31, 2020, stood at Rs 8,99,802 crore.

Between 2014-15 and 2019-20, the total bad loans written off by banks was Rs 8,77,856 crore. We are taking this particular time period simply because in mid 2015 the RBI launched an asset quality review and forced banks to recognise bad loans as bad loans. Up until then the banks had been using various tricks to kick the bad loans can down the road.

If we add, the bad loans as of March 2020 to bad loans written off between 2014-15 and 2019-20, we get Rs 17,77,658 crore. What does this number represent? It represents the total bad loans, the Indian banks have managed to accumulate between 2014-15 and 2019-20. And it is very close to the Rs 20 lakh crore number suggested by Chakrabarty.

Of course, this calculation does not take into account the loans which are bad loans but have not yet been recognised as bad loans. Former RBI Governor Urjit Patel in his book Overdraft—Saving the Indian Saver writes:

“In February 2020, ‘living dead’ borrowers in the commercial real-estate sector – under a familiar guise (‘a ghost from the past’, if you will) viz., ad hoc ‘restructuring’ – have been given a lifeline. It is estimated that over one-third of loans to builders are under moratorium.”

Professor Ananth Narayan of the S. P. Jain Institute of Management and Research, writing in the Mint in June 2020, said: “Banking NPA recognition remains incomplete… For a while now, RBI has allowed banks to postpone NPA recognition for some of the over Rs 8 lakh crore of MSME, MUDRA and commercial real estate loans.” The situation could only have worsened post the spread of the covid-pandemic.

If we take this into account, the bad loans of Indian banks over the last five years have amounted to much more than Rs 20 lakh crore. In that sense, Dr Chakrabarty has had the last laugh. As Chakrabarty had said in the Firstpost interview: “Unless this portion is recognised first, there will be no solution to the bad loan problem.”

Or to put it simply, how do you solve a problem without recognising that it exists.

2021 – The Chinese Problem in Your Personal Finance

Dear Reader, before you start thinking that I have click-baited you one more time, let me assure you that’s not true. Your personal finances in 2021 will actually face a Chinese problem.

But before we go into this, let’s first understand a few aspects about the Chinese saving habit over the years. Let’s look at this pointwise.

1) As is well known, the Chinese physical infrastructure over the years was funded through massive domestic savings being invested in bank deposits. As Charles Goodhart and Manoj Pradhan write in The Great Demographic Reversal: “Interest rates were set well below the rate of growth and the rate of inflation. While the economy grew on average by around 10% over 1990–2010, the inflation-adjusted deposit rate over the same period averaged −3.3% (for a 1.4% average for the nominal deposit rate versus an average annual inflation rate of 4.75%).”

Hence, the rate of interest rate was lower than the prevailing rate of inflation, for a period of two decades. If one were to state this in a simple way, the low interest rates acted effectively as a tax on Chinese households.

2) This tax did not matter much because the savings were channelised into investments. This created economic growth and the average income of a Chinese kept going up, year on year. Hence, while the interest being earned on the accumulated wealth was low, the regular yearly income kept going up.

3) Low interest rates led to an interesting behaviour at the household level. As Goodhart and Pradhan point out, there was “a negative correlation between urban savings and the decline in real deposit rates.” “When banks fail to protect household savings, households tend to save more, not less, in order to achieve a ‘target’, whether that is for education or the purchase of a home.”
Basically, given the negative real rate of interest on bank deposits, where inflation was higher than the interest rate, Chinese households saved more money in bank deposits in order to achieve their targeted savings. Options of investing in other avenues were extremely limited.

Now the question is how does all this apply to your personal finance in India in 2021. Allow me to explain pointwise.

1) Interest rates on bank fixed deposits have collapsed. The interest offered on fixed deposits of more than one year, currently stands at around 5.5% on an average. This when the rate of inflation as measured by the consumer price index in November 2020 stood at 6.93%. Hence, the real rate of interest is in negative territory. If after tax the rate of return on fixed deposits is taken into account, the gap gets even bigger.

2) The major reason for this collapse in interest rates has been a collapse in bank lending. Given that banks, on the whole, have barely given out fresh loans since March, they possibly couldn’t keep paying a high rate of interest on deposits. Hence, the crash in interest rates. But what has added to this is the Reserve Bank of India (RBI) policy of flooding the financial system with money, in order to drive down interest rates further. The excess money in the financial system, which the banks deposit with the RBI, stood at Rs 6.25 lakh crore as of December 31, 2020.

3) From the indications that the RBI has given, this excess liquidity in the financial system is likely to continue. The idea is to help ease the burden on current loans of corporates. In a year the tax collections have collapsed this also helps the government to borrow at extremely low interest rates. At the same time, the hope is at lower interest rates corporates will borrow and expand. But that is not happening. Data from the Centre for Monitoring Indian Economy shows that announcements of new investment projects in terms of value fell by 88.3% during the period October to December 2020. Investment projects completed were down by 74%. So, the corporates aren’t in the mood to borrow and expand.

There are a couple of reasons for this. Many corporates continue to remain over-leveraged. Still others don’t have enough confidence in India’s economic future, irrespective of what they say in the public domain. As they say, the proof of the pudding is in the eating.

4) What does all this have to do with personal finance? What happened in China is happening in India as well. The bank savings have gone up dramatically during 2020. Between March 27 and December 18, they were up by Rs 9.15 lakh crore. In comparison, the increase during similar periods in 2019 and 2018, had stood at Rs 4.35 lakh crore and Rs 3.90 lakh crore, respectively. Of course, all this increase in saving is not just because of low interest rates. Some of it is because of fewer opportunities to spend money in 2020. Some of it is because of the general uncertainty that prevails. Some of it is because of jobs losses and the fear of job losses. And some of it is because Indians, like the Chinese, are saving more, in order to achieve the savings target for the education of their children or their weddings, or for the purchase of a home.

5) This has repercussions. With people saving more and with banks being unable to lend that money, interest rates have come down. And people saving more in response to the lower interest rates, means extended lower interest rates. This is not good news for savers. It is also not good news for consumption. If people are saving more, they are clearly spending lesser. This is the paradox of thrift or saving. When an individual saves more, it makes sense for him or her at an individual level. When the society as a whole saves much more than it was, it hurts the economy simply because one man’s spending is another man’s income. Over a period of time, this leads to job losses, more paradox of thrift and further job losses.

At the risk of sounding very cliched, there is no free lunch in economics. The RBI’s policy of flooding the financial system with money in order to help the corporates and the government, is basically hurting individual savers, consumption and the overall economy. The savers are paying for this lunch. And unlike the corporates, the savers have no unified voice. The government, obviously, is the government.

While, there is no denying that with lending not happening bank deposit rates had to fall, but the RBI policy of driving them down further, is something that is hurting the economy.

6) So, where does that leave the Indian saver? Some individual savers are betting on the stock market. But the price to earnings ratio of the Nifty 50 index as of January 1, stood at 38.55, an all-time high level. If you have the heart to invest in stocks at such a level, best of luck to you. Some others are betting on bitcoin, which has given a return of more than 75% in dollar terms, in the last one month.

Also, unlike the Chinese, the prospects of an increase in the yearly income of an average Indian, over the next years, at best remain subdued. Hence, the humble Indian fixed depositor, who liked to fill it, shut it and forget about it, so that he could concentrate on many other issues that his or her life keeps throwing up, clearly has a problem in 2021.

To conclude, all of you who write to me asking for a safe way of investing so that you can earn a 10% yearly return, well, sorry to disappoint you, no such way exists. At least not in 2021. Of course, there are always Ponzi schemes to invest in, some fraudulent, and some not so fraudulent.

The choice is yours to make.

PS: Wishing all my readers a very Happy New Year. Hope 2021 is much better than 2020 was for each one of you.