Tag: Jayant Sinha | Vivek Kaul

12 July, 2016

EVERYBODY LOVES A GOOD STORY…

Last week, prime minister Narendra Modi, expanded the Union Cabinet, and 19 new ministers were inducted into it.

The swearing in of the new ministers happened at 11AM in the morning and did not hold any surprises. But a late evening announcement spelling out the change in ministries of existing ministers, had its share of surprises.

Smriti Irani, the youngest cabinet minister in the present Cabinet, was moved from Human Resources Development to Textiles. Jayant Sinha, the minister of state for finance was moved to the Civil Aviation ministry. Both these moves were surprises and were a step down for the ministers.

But it took the social media no time to come up with explanations for these moves and give a positive spin to the entire thing.

So, Irani, apparently had been moved to the textiles ministry because she could have a big role to play in the 2017 Uttar Pradesh elections. While people suggested that Sinha was basically paying for the outbursts of his father, former finance minister, Yashwant Sinha, against the Modi government. Some others suggested that his wife is an investor and there is a conflict of interest.

There are multiple issues that come up here. If people were so sure that Irani being moved from a high profile ministry to a low-profile one, why didn’t they talk about it earlier? If they knew that this was a possibility, they could have at least speculated about it, before the decision was made.

Coming up with explanations after something has happened is an excellent example of hindsight bias. As Jason Zweig writes in The Devil’s Financial Dictionary: “Hindsight bias [is] the mechanism in the human mind that makes surprises vanish. Once you learn what did happen, your mind tricks you into believing that you always knew that it would happen.”

Psychologist Daniel Kahneman explains the phenomenon through the example of a football match. As he writes in Thinking, Fast and Slow: “Imagine yourself before a football game between two teams that have the same record of wins and losses. Now the game is over, and one team trashed the other. In your revised model of the world, the winning team is much stronger than the loser, and your view of the past as well as of the future has been altered by the new perception.”

An excellent example of this is all the explanatory articles that were published after Iceland recently beat England in the Euro Cup football tournament.

The reason this happens is that the human mind wants explanations for surprises. And if there are no explanations it comes up with explanations. As Duncan J Watts writes in Everything is Obvious—Once You Know the Answer: “Whenever something interesting, dramatic, or terrible happens—Hush Puppies become popular again, a book by an unknown author becomes an international best seller, the housing bubble bursts, or terrorists crash plans into the World Trade Center—we instinctively look for explanations.”

This is precisely what happened when Irani and Sinha were demoted. In Sinha’s case, that his wife is an investor has always been known. So that leads to the question why was he moved now? If the reason was conflict of interest, that was true from the day he became minister.

Hence, things that appear to us explanations are basically just stories that we tell ourselves and others, in order to come up with an explanation. As Watts writes: “The result is that what appear to us to be causal explanations are in fact just stories—description of what happened that tell us little, if anything, about the mechanisms at work. Nevertheless, because these stories have the form of causal explanations, we treat them as if they have predictive power.” This is clearly not the case.

Nevertheless, at the end of the day, everybody loves a good story, especially when one does not know the real reason behind why something happened. And that is precisely what happened in the aftermath of Irani and Sinha being demoted from high profile ministries to non-descript ones.

The column originally appeared in the Bangalore Mirror on July 12, 2016

4 April, 2016

The Moral Hazard of Settling with Vijay Mallya

I’m gonna make him an offer he can’t refuse. Okay? I want you to leave it all to me. Go on, go back to the party. – Don Corleone in The Godfather

Vijay Mallya has made an offer to banks to settle the Rs 9,091 crore that he owes them. He has promised to pay Rs 4000 crore by September 2016. He has also promised to pay Rs 2,000 crore if wins a case against a company, which allegedly supplied defective engines to the now defunct Kingfisher Airlines.

Has Mallya made an offer which the banks should not refuse? Many analysts and experts seem to be of the opinion that banks should take on this offer and in the process limit their losses. Parag Jariwala, vice-president at Religare Capital Markets told the Mint newspaper that “Mallya’s settlement offer to banks is not too bad…The actual loss if banks accept Mallya’s proposal will be just 7% on principal.”

Over the last couple of days many people on Twitter have told me that “something is better than nothing’’ and given this banks should accept Mallya’s proposal and limit their losses. Honestly, this is a very simplistic way of looking at things. It would have perhaps made some sense if Mallya was the only or perhaps one of the few defaulters in town. But that is not the case.

Mallya owes Indian banks around Rs 9,091 crore. This is a very small amount when we look at the total amount of money owed by various corporates to Indian banks. The minister of state for finance Jayant Sinha shared some interesting data in a written reply to a question in the Lok Sabha, on March 11, 2016.

The accompanying table shows us how big the problem of banks’ lending to corporates actually is.

Rs. in Crore
Corporate Lending
Year	Gross Advances	Gross NPAs	GNPA Ratio
2012-13	31,11,761	1,00,118	3.22
2013-14	34,06,025	1,54,955	4.55
2014-15	36,15,133	1,93,123	5.34
2015-16 (till Dec. 15)	38,41,836	2,60,653	6.78

The gross non-performing ratio has more than doubled between 2012-2013 and December 15, 2015. It has jumped from 3.22% to 6.78%. The gross non-performing ratio is essentially obtained by dividing gross non-performing assets by gross advances or total loans given by the banks, in this case to corporates.
And how do we define gross non-performing assets? As the per the Reserve Bank of India: “An asset…becomes non performing when it ceases to generate income for the bank.” When the corporate borrower stops paying interest and repaying the principal on a loan (a loan is an asset for a bank), the bank typically allows for a grace period of 90 days. After this grace period is over, the bank categorises the loans as a non-performing asset and starts setting aside money (or making provisions) for it. The total sum of such loans forms the gross-non-performing assets or bad loans.

If we look at total bad loans of Rs 2,60,653 crore, Mallya’s loans of Rs 9,091 crore form only 3.5% of the total bad loans. If the banks decide to settle with Mallya, they will end up setting a precedent. Then other defaulters will also want to settle and not pay up what they owe to the banks. Do they banks really want to end up in such a situation?

While settling with Mallya may not hurt banks financially much, the same cannot be said of a scenario where they were to start settling the Rs 2,60,553 crore corporate bad loans in total.

Also, any such settlement will build in “moral hazard” into the financial system. And what is moral hazard? As Mohamed A El-Erian writes in The Only Game in Town: “[It] is the inclination to take more risk because of the perceived backing of an effective and decisive insurance mechanism.”

If the banks start settling with corporates what is the signal that they are sending to the future corporate borrowers? That it is okay to take on a lot of risk with the money that they borrow from the bank or simply siphon it off. And if things go wrong, they can always settle with the bank for a lower amount.

Hence, it is very important that such a wrong precedent is not set.

On a different note, Mallya’s offer raises several other questions. If he is in a position to pay Rs 4,000 crore to banks why did he leave the country? Or why did he not pay the salaries of the employees of Kingfisher Airlines and leave them in a lurch?

Or does all this tell us that the former king of good times is simply buying time? On that your guess is as good as mine.

The column originally appeared in the Vivek Kaul Diary on April 4, 2016

22 March, 2016

Vijay Mallya Is Just A Small Part Of The Big Banking Problem

If media coverage were to be a reflection of the scale of any problem, then it can safely be said that Vijay Mallya has all alone been responsible for the crisis in the Indian banking sector.

But that is clearly not the case.

Mallya owes Indian banks around Rs 9,000 crore. This is a very small amount when we look at the total amount of money owed by various corporates to Indian banks. The minister of state for finance Jayant Sinha shared some interesting data in a written reply to a question in the Lok Sabha, on March 11, 2016.

The accompanying table shows us how big the problem of banks’ lending to corporates actually is.

Rs. in Crore
Corporate Lending
Year	Gross Advances	Gross NPAs	GNPA Ratio
2012-13	31,11,761	1,00,118	3.22
2013-14	34,06,025	1,54,955	4.55
2014-15	36,15,133	1,93,123	5.34
2015-16 (till Dec. 15)	38,41,836	2,60,653	6.78

And how do we define gross non-performing assets? As the per the Reserve Bank of India: “An asset…becomes non performing when it ceases to generate income for the bank.” When the corporate borrower stops paying interest and repaying the principal on a loan(a loan is an asset for a bank), the bank typically allows for a grace period of 90 days. After this grace period is over, the bank categorises the loans as a non-performing asset and starts setting aside money (or making provisions) for it. The total sum of such loans forms the gross-non-performing assets.

It is worth remembering here that a loan being categorised as a gross non-performing asset does not mean that all is lost for the bank when it comes to that particular loan. The bank can recover money from the asset that has been offered as a collateral against the loan. Of course this is not as straightforward as it sounds.

In Mallya’s case, he has also given personal guarantees to banks while taking loans for Kingfisher Airlines. Mallya owes around Rs 9000 crore to banks. This is a very small amount if one compares it to the gross-non-performing assets of corporate lending carried out by banks.

As on December 15, 2015, it was at Rs 2,60,653 crore. Mallya’s Rs 9,000 crore works out to around 3.5% of the total corporate gross non-performing assets. The percentage would be even more lower if we compare it to the total gross non-performing assets.

Also, Credit Suisse in a report released in October 2015 identifies some of the biggest corporates who are having a tough time repaying the money they have borrowed from banks. The Credit Suisse analysts (Ashish Gupta, Kush Shah and Prashant Kumar): “Going through the annual reports available for ‘House of Debt’ companies, we find instances where auditors have highlighted that the company has been in default for a period of up to 360 days. According to their auditors report, eight of the ten ‘House of Debt’ groups were in default last year. Total debt with these companies in default was at US$53 billion (~48% of total debt with the groups) of which US$37 billion were reported to be in default for 0-90 days by the auditors.”

The corporates which form the House of Debt group are as follows—Adani Group, Essar Group, GVK group, GMR group, Jaypee Group, JSW Group, Lanco Group, Reliance ADAG, Vedanta Group and Videocon Group.

Hence, the point is that the mess in the Indian banking sector is substantially bigger than just Vijay Mallya. It’s just that Mallya with his flashy lifestyle has become the poster boy for these corporates who have borrowed from banks and are now not in a position to repay.

The finance minister Arun Jaitley has been very vociferous about Mallya and has said: “The facts are very clear: Every government agency will take strong action against him. Banks will go all out to recover every single penny.”

Indeed, that is great. Nevertheless, the question is why just Mallya? What about the other corporates who have borrowed from banks and are now not repaying their loans? They owe the banks close to Rs 2,51,000 crore. Mallya owes just Rs 9,000 crore.

Why is the same aggression missing when it comes to the other borrowers?

The nation wants to know.

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

The column originally appeared on Swarajya Mag on March 22, 2016

18 March, 2016

When Oil Price Falls, Excise Duty Goes Up. When It Rises, Petrol/Diesel Prices Go Up.

Petrol and diesel prices have gone up. This time the prices were increased by the oil marketing companies(OMCs).

The Indian Oil Corporation (IOC), one of the OMCs, said in a press release that it has decided to “increase in Retail Selling Price of Petrol by Rs. 3.07/litre at Delhi (including State levies) with corresponding price revision in other States.”

At the same time, it has decided to increase the “Retail Selling Price of Diesel by Rs. 1.90/litre at Delhi (including State levies) with corresponding price revision in other States.” The increase came in effect from the midnight of March 16-March 17, 2016.

The price of oil has been going up over the last few weeks. As on February 11, 2016 the price of the Indian barrel of crude oil was at $26.95 per barrel. Between then and March 16, the price of the Indian basket of crude oil has gone up by 34% to $36.10 per barrel.

In rupee terms also the increase in prices has been more or less similar. The price of one barrel of crude oil has one up by around 32.7% to Rs 2431.94.

This increase in price has forced the oil marketing companies to increase the price of petrol and diesel. As the IOC said in its press release: “The current level of international product prices of Petrol & Diesel and INR-USD exchange rate warrant increase in price of Petrol and Diesel, the impact of which is being passed on to the consumers with this price revision.”

In any other market this would have been a fair deal. If the price of the input goes up (i.e. oil in this case), the price of the output (i.e. petrol and diesel in this case) goes up as well. But the Indian oil products market is anything but fair.

When the price of oil was falling, the central government and the state governments captured the major portion of the fall, by increasing taxes which are built into the price of petrol and diesel. Since November 2015, the central government has increased the excise duty on petrol and diesel, five times.

This basically means that when the oil price falls, the governments capture the major part of the benefit. But when they go up, the consumer has to pay for it. How is this fair in any way? Also, what happens if oil prices continue to go up, will the entire increase in price be continued to be passed on to the consumers? If the government did not pass on the total fall in oil prices to the consumer, it is only fair that it doesn’t pass on the entire increase as well.

The point being that the consumer has to pay both ways, when the prices come down and when they are going up.

One logic offered by those who like to defend the government on anything and everything, is that the money coming in through the increase in excise duty on petrol and diesel, is being used for farmers. This conclusion possibly comes from the tone of the finance minister Arun Jaitley’s budget speech. But is this true?

Economist Ashok Gulati exposes this sleight of hand by the government in a column in The Indian Express. As he points: “The allocation for the Department of Agriculture, Cooperation and Farmers’ Welfare (DoA), is raised from the revised estimate (RE) of Rs 15,809 crore in FY16 to a budgeted estimate (BE) of Rs 35,983 crore for FY17, a whopping increase of 127 per cent! This would make anyone jump and conclude what a wonderful stroke the finance minister has played for farmers. But hold on. There’s a catch. Much of the increase (Rs 15,000 crore) is due to interest subsidy on short-term credit. Earlier, this subsidy was Rs 13,000 crore and was shown under the Department of Financial Services. Now, it’s transferred to the DoA.”

So where is the money raised through the increase in excise duties and the money saved because of a fall in oil prices essentially going? Jayant Sinha, the minister of state in the finance ministry, recently explained this in a written reply to a question in Lok Sabha.

Details of Subsidies (Rs. in crore)

Subsidy	2012-13	2013-14	2014-15	2015-16 RE
Food	85000	92000	117671	139419
Fertilizer	65613	67339	71076	72438
Petroleum	96880	85378	60269	30000
Other	9586	9915	9242	15944
Total	257079	254632	258258	257801
RE=Revised Estimates

Source: http://pib.nic.in/newsite/PrintRelease.aspx?relid=137493

Take a look at the above table. The petroleum subsidy has fallen from Rs 96,880 crore in 2012-2013 to Rs 30,000 crore in 2015-2016. The OMCs currently suffer under-recoveries every time they sell kerosene and domestic cooking gas. In March 2016, the under-recovery on kerosene stood at Rs 6.58 per litre. The government compensates the OMCs for these under-recoveries and this shows up under the petroleum subsidy head.

Despite the fall in petroleum subsidies, the total subsidy bill of the government has barely changed. It has slightly increased from Rs 2,57,079 crore in 2012-2013 to Rs 2,57,801 crore in 2015-2016.

What the table shows clearly is that the fall in petroleum subsidies has been more or less been made up for by an increase in food subsidies. The food subsidy bill of the government has jumped from Rs 85,000 crore to Rs 1,39,419 crore.

As I have discussed in previous columns, the food subsidy regime in India is very leaky. A major portion of the rice, wheat and sugar which are distributed through it, are siphoned off, by the owners of the fair price shops through which the distribution takes place. The government is trying to plug this leak by ensuring that in the days to come, the subsidy is paid directly into the bank account of the targeted beneficiaries.

As Sinha said: “In cash transfer, the benefit is transferred in the beneficiary’s account, preferably Aadhaar seeded. Presently, LPG subsidy is transferred directly in to the bank accounts of beneficiaries. Food subsidy in cash is disbursed in wo Union Territories viz, Puducherry and Chandigarh, directly in beneficiaries’ bank accounts, in kind, after biometric authentication, in 70000 fair price shops at present.”

The government also has plans to pay out fertilizer subsidy directly during the next financial year in a few districts across the country on a pilot basis. This is a good move and I sincerely hope that the government meets more and more success on this front. The subsidies will reach the intended beneficiaries and will benefit the Indian economy in the process.

The column originally appeared on Vivek Kaul’s Diary on March 18, 2016

7 March, 2016

In The Public Sector Bank Crisis, Govt Needs To Do A Lot More Than Just Blame Bankers

The Times of India reported on Saturday that Jayant Sinha, the minister of state for finance, had indicated to public sector bank chiefs that they were wasting public funds. Sinha said this at an offsite for public sector bankers organised at Gurgaon.

The Economic Survey for 2015-2016 points out that between 2009 and September 30, 2015, the government had infused Rs 1.02 lakh crore of capital. It is this money that Sinha was perhaps referring to.

The government is the main owner of 27 public sector banks. If it has chosen to invest more than Rs 1 lakh crore in these banks over the last seven years, then as the owner of these banks, it has chosen to waste public money.

There is no point in trying to pass on the buck to the chiefs of public sector banks. Of course, it needs to be pointed out here that, the government in this case means both the Manmohan Singh government that governed until May 2014 and the Narendra Modi government which has been in power since then.

The current budget has made an allocation of Rs 25,000 crore for further capital infusion into these banks. As the finance minister Arun Jaitley said in the budget speech: “If additional capital is required by these Banks, we will find the resources for doing so. We stand solidly behind these Banks.” This was Jaitley’s way of saying that the government will do whatever it takes to keep these banks going.

This builds in a tremendous amount of moral hazard into the entire system. Economist Alan Blinder writing in After the Music Stopped says that the “central idea behind moral hazard is that people who are well insured against some risk are less likely to take pains (and incur costs) to avoid it.”

Hence, if the government keeps infusing capital into public sector banks and keeps rescuing them when they are in trouble, there is no real incentive on part of public sector banks to run a responsible, viable and a profitable business. This is moral hazard at play. It is not surprising that as of the end of December 2015, the gross non-performing assets of listed public sector banks stood at Rs 3.9 lakh crore.

The government is keen to hold on to these banks. As the Economic Survey pointed out: “The return on assets for most banks is currently less than one third of the norm of 1 per cent that is considered reasonable. Many, though not all, of the less profitable banks are those with smaller levels of employment.” Despite this, the government remains obsessed with the idea of owning 27 public sector banks.

There has been no effort made to sell out of these banks or even shut them down. The total employment in public sector banks currently stands at around 87,000 employees. Given this, shutting down some of the smaller banks which are in trouble, is not going to much of a difference, at least on the employment as well as the lending front. Further, no effort has been made to privatise them either.

The state that some of these banks are in right now, there is no way the government is going to get a decent valuation while selling them. Nevertheless, the chances of these banks being turned around by private management are higher than if they are continued to run as they currently are. In such a scenario the minority stake that the government will continue to hold in these banks will be worth much more than the current majority stake is. The point being that the government needs to stop looking at these banks as “family silver”.

Also, by trying to run 27 public sector banks, the government has spread itself too thin. As Kaushik Basu, current chief economist of World Bank and former chief economic adviser to the ministry of finance, writes in An Economist in the Real World: “One mistake early Indian policymakers made was to try to micromanage the economy. While it is true that the government needs to attend to a range of policies, from shipping to the quality of education in villages to managing the nation’s international economic relations, it is imperative to realize that it is not feasible for the government to attend all the varied and layered needs of society with equal diligence.”

As Basu further adds: “An intelligent government recognizes that no matter what kind of society it aims to build, it is hopeless to try to deliver it all by itself.” The point being it is a hopeless idea continuing to own and run 27 public sector banks. There are more important things that the government needs to be concentrating on.

The government’s big plan to solve the mess in public sector banks is to get banks to merge. As the finance minister Jaitley said over the weekend: “The bankers’ themselves have supported the proposal of consolidation of banks in order to have strong banks rather than having numerically large number of banks.”

In the past mergers have happened when a bank has been in trouble. In this scenario, a weak bank has been merged with a strong bank. The New Bank of India was merged with the Punjab National Bank. The Global Trust Bank was merged with Oriental Bank of Commerce. The strong banks had to go through several years of pain to accommodate the weak banks.

The trouble now is that almost all public sector banks are in trouble, though of varying degrees. Hence, any merger would be effective if excess employees are fired, unviable branches shutdown and assets sold. Is the government willing to do this?

The way the Modi government has gone up until now, the answer is no. In this scenario the government will essentially end up merging two banks with small problems and end up creating one bank with a bigger problem. And that will mean basically postponing the problem, not solving it.

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

The column was originally published on Huffington Post India on March 7, 2016