Tag: loans | Vivek Kaul

3 April, 2018

India’s Banking is Getting Privatised Without the Govt

Indian_ten_rupee_coin_(2008_Reverse)
“Should public sector banks be privatised?” is a question that is being thoroughly debated these days. Arguments have been offered from both sides.

Those against the idea of public sector banks being privatised like to say that private sector banks also make bad lending decisions and end up with bad loans. Of course, that is true. In the business of banking, some loans are bound to go bad. A bad loan is essentially a loan on which the repayment has not been made for 90 days or more.

Nevertheless, the more important point is what proportion of the loans have gone bad. As of March 31, 2017, the total bad loans of public sector banks stood at Rs 6,41,057 crore. In comparison, the total bad loans of private sector banks stood at Rs 73,842 crore.
Hence, the bad loans of private sector banks amounted to around 11.5% of bad loans of public sector banks. But just looking at bad loans in isolation isn’t really the correct way.
We also need to look at the total advances or loans of these banks.

As of March 31, 2017, the total advances of public sector banks stood at Rs 55,57,232 crore. The total advances of private sector banks stood at Rs 22,19,563 crore, or around 40% of advances of public sector banks.

If the private sector banks were doing as badly as public sector banks on the bad loans front, there bad loans should also have been around 40% of the total bad loans of public sector banks. But that as we saw is clearly not the case. The bad loans of private sector banks are at 11.5% of the bad loans of public sector banks.

This basically means that the private sector banks operate much more efficiently than public sector banks. Hence, the argument that public sector banks should not be privatised because private sector banks also accumulate bad loans, doesn’t really hold.

But that isn’t the major point that I wanted to make in this column. What people who suggest that public sector banks should not be privatised do not realise is that the banking sector in India is getting privatised on its own, even though the government continues to own 21 public sector banks. Take a look at Table 1.

Table 1:

Total advances As on March 31	Public Sector Banks	Private Sector Banks	Ratio (Total advances by private sector banks to total advances by public sector banks) (in %)
2012	38,77,307.31	9,66,402.95	24.92%
2013	44,72,844.65	11,43,248.58	25.56%
2014	51,01,053.95	13,42,934.61	26.33%
2015	54,76,249.54	15,84,311.86	28.93%
2016	55,93,576.78	19,39,339.43	34.67%
2017	55,57,231.63	22,19,563.01	39.94%

Source: Author calculations based on data from Indian Banks’ Association

Now what does Table 1 tell us? As on March 31, 2012, the total advances of private sector banks were around a fourth of the total advances of public sector banks. By March 31, 2017, this ratio had increased to 40%.

This basically means that as public sector banks go slow on lending because of their bad loans, the total loans given out by private sector banks are growing at a much faster pace. Hence, as far as the overall banking sector is concerned, it is getting privatised, irrespective of what the experts and the government think about privatising public sector banks.

In fact, the situation is not very different from other sectors which the government has opened up for private companies over the years. Take a look at what happened to the airlines sector. Air India and Indian Airlines (before they were merged) had 100% of the market (along with Vayudoot, another government owned entity). Now Air India (in which the erstwhile Indian Airlines has been merged) has 13.8% of the market share. This has benefitted the consumers tremendously.

Similar stories of privatisation, without the government privatising public sector enterprises, have played out in the telecom and pharmaceutical sectors, respectively, and even in education, to some extent.

The telecom sector had two players BSNL and MTNL. Over the years, the market share of these two government owned companies, has come down dramatically, while the government continues to own them.

Over the years, various ministers have referred to public sector enterprises as family jewels. The trouble is that in sector after sector, these family jewels have lost their lustre and a tremendous amount of value has been destroyed.

Along similar lines, public sector banks have reached a stage where it will be difficult to find buyers for many of these banks, even if the government makes a decision to privatize them (which in the first place seems very difficult).

The 1997 Committee on Banking Sector Reforms (better known as the second Narasimham Committee) had recommended that the government reduce its holdings in PSBs to 33 per cent and, in the process, give increased autonomy to these banks. The Committee had also recommended no further recapitalisation of public sector banks by the government. But that is not how things have eventually turned out.

And more than two decades later, now we have reached a stage where most of the public sector banks are as dead as a dodo.

The column was originally published on Firstpost on April 2, 2018.

22 June, 2016

An Open Letter from an Indian Crony Capitalist

(This is a spoof)

Dear Indian Citizen,

Kem cho?

Kaamon Achish? Maja ma?

Hope all is well with you.

I am very happy these days. You know with that Rajan guy deciding to go back to Chicago. Good he is going back there.

I to wanted to open a champagne bottle to celebrate. But these children of mine always want this red wine shine.

And I to am still wondering, why would anyone in their right mind, comeback to India from the United States? Okay, maybe Chicago is very cold. My deekro tells me, they call it the windy city. It’s very cold up there it seems.

But then why stay on the East Coast? He could easily move to the West Coast. California. This Rajan guy. Very sunny, I am told. Just like Mumbai it is.

You know, when he was appointed as the RBI Governor, I got my kudi to buy all his books from this Amazon. Or was it Flipkart? I don’t remember. Been a long time since I went to the Strand Book Stall, you see.

So, this Rajan guy has written just two books, it seems. What men, been in the United States for nearly three decades and written just two books? Look at our very own Chetan. He has written so many more books than Rajan while holding a proper banking job at the same time, for a very long time.

And Rajan could write only two, with a teaching job?

So, one book of his is called, Saving Capitalism from the Capitalists. I started the book with great interest, after all I am also capitalist. But all the economic theory-weory got to me finally. And he just kept talking about Mexico. Our Chetan is so much better. North-South love story he wrote. What fun it was.

Didn’t Rajan also marry a North Indian? Why didn’t he write about that then and call it I too Had a Love Story? There is enough trouble in life anyway. Why write about such heavy stuff? And that is why I like watching this Tarak Mehta ka Oolta Chashma.

Oh talking of Mexico. Have you seen this latest Hindi film called Udta Punjab? In that, they compare Mexico to Punjab. Guess the director must have got the idea after reading Rajan’s book.

Anyway. I am meandering and meandering. Let me get to the point. In this Saving Capitalism from the Capitalists book Rajan writes: “Throughout its history, the free market system has been held back, not so much by its own economic deficiencies as Marxists would have it, but because of its reliance on political goodwill for its infrastructure. The threat primarily comes from…incumbents, those who already have an established position in the marketplace…The identity of the most dangerous incumbents depends on the country and the time period, but the part has been played at various times by the landed aristocracy, the owners and managers of large corporations, their financiers, and organised labour.”

First time I read this, I didn’t understand only what Rajan was saying. I read this paragraph over and over again and got worried. Then my son-in-law told me, Rajan is only economist. Economists talk only theory. They don’t do it in practical.

But I had this feeling that this guy meant business. He will practice his theory and try and clean up India’s banking system, I had a feeling. Why? I don’t know. I think Kejriwal came in my dream and told me this. And I was right about it.

You see, I had taken this huge loan from a public sector bank in 2008. Those were good days. Everything was looking good.

Indian economy was growing at a fast pace. And like any good capitalist I assumed that the economy will continue to do well and interest rates will continue to remain low.

But all that changed. Over the last four years I have been having difficulty in repaying the loan. No money only.

You see my problem. I have so much loan to repay. Rs 50,000 crore. On that I am paying interest of 12% i.e. Rs 6,000 crore a year. I am having difficulty in repaying interest. How will I ever repay the principal?

And interest is so high. If it was 8%, I would be paying only Rs 4,000 crore a year. Now I am paying Rs 6,000 crore. Rs 2,000 crore more. “Profit main ghato ho gayo!”

Shouldn’t the government help me also? Shouldn’t the interest rates come down? But this Rajan guy did not want to help me only. Kept interest rates high. On top of that he encouraged banks to come after our assets. And that too public sector banks? Imagine!

You know, this is not the first time I have over-borrowed. I did that in the late 1990s also. But somehow I managed to come out unscathed…he he…The taxpayers had to pick up the tab.

And that is only fair no. There are so many taxpayers and so few capitalists who have over-borrowed. No individual taxpayer will feel the pain of having bailed out the capitalists.

But this Rajan guy said no. He insisted on capitalists like me repaying. Selling our assets and repaying.

Imagine? In India? What is the world coming to?

So good only he is not taking a second-term. Going back to the United States.

And it’s time to celebrate. “Kuch murga shurga khaate hain. Peg-sheg lagate hain!”

Oh and you Dear Citizen. Thank you in advance. If you do pick the tab. Ghabrao nahi, there will be no pain. It will be like a painless injection on your bum.

And imagine I have borrowed Rs 50,000 crore. If you don’t rescue me, the bank I have borrowed from will go bust. And you will lose your money!

Remember what did that John Maynard Keynes say? “If you owe your bank a hundred pounds, you have a problem. But if you owe your bank a million pounds, it has.”

Do you know the modern version of that? As The Economist magazine put it: “If you owe your bank a billion pounds everybody has a problem.”

Dear Citizen, I am your problem!

Yours truly,
An Indian Crony Capitalist

Postscript: Rajan has written Saving Capitalism from the Capitalists with Luigi Zingales. His other book is Fault Lines.

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

1 April, 2016

Deposit Growth at a 53-Year Low: Are Banks in a Position to Cut Interest Rates?

The Reserve Bank of India’s first monetary policy statement for the financial year 2016-2017 is scheduled to be released on April 5, 2016. Given this, it is not surprising that demands for a cut in the repo rate are being made. Repo rate is the rate at which RBI lends to banks and acts as a sort of a benchmark for the short and medium term interest rates in the economy.

Economists and analysts expect the Reserve Bank of India(RBI) will to cut the repo rate by 25 to 50 basis points. With this cut, it is hoped that banks will cut their lending rates as well. As banks cut the interest rates on their loans, people will borrow and spend more. As people borrow and spend more, by buying more cars, more homes, more consumer durables and more two-wheelers, companies will benefit.

This will help economic growth. Low interest rates will also help companies which have huge debts to service. In short, this is Economics 101.

The trouble is that this Economics 101 works with the assumption that if the RBI cuts the repo rate, banks will cut their lending rates as well at the same pace. The question is will this happen? The past experience shows that the direct correlation between RBI cutting the repo rate and banks passing on that cut at the same rate in the form of lower lending rates, is rather weak.

As Crisil Research had pointed out in a report released in February 2015: “Lending rates show upward flexibility during monetary tightening but downward rigidity during easing. Between 2002 and 2004, while the policy rate declined by 200 basis points, lending rates dropped by just 90-100 basis points. Conversely, in 2011-12, when the policy rate rose by 170 basis points, lending rates surged 150 basis points.”

The RBI governor Raghuram Rajan had made a similar point in December 2015 when he had said: “Since the rate reduction cycle that commenced in January [2015], less than half of the cumulative policy repo rate reduction of 125 basis points has been transmitted by banks. The median base lending rate has declined only by 60 basis points.”

The point being that when the repo rate goes up, the banks are fast to pass on the hike to the end consumers, in the form of higher lending rates. But the vice versa does not seem to be true. Why is that? A simple answer is greed or the need to make more money. Further, the trouble this time around is that public sector banks are staring at a huge amount of corporate bad loans.

In order to handle this, banks are hoping to make a greater profit by cutting their deposit rates, but not cutting their lending rates at the same rate. Nevertheless, this is just a part of the problem.

Latest data released by the RBI shows that deposit growth has slowed down tremendously. Deposit growth in 2015-2016 (actually between March 20, 2015 and March 18, 2016) came in at 9.9%. The Mint newspaper reports that this is the lowest since 1962-1963. Back then, the growth in deposits had stood at 6.5%.

I couldn’t independently verify this. Nevertheless, RBI’s Handbook of Indian Statistics has data for deposits with scheduled commercial banks from 1976-1977. This data clearly shows that the deposit growth in 2015-2016 has been the slowest in all these years. At 9.9% it is even slower than the deposit growth in 2014-2015, which was at 10.7%.

The deposit growth during 2011-2012, 2012-2013 and 2013-2014 had stood at 11.75%, 14% and 14.29% respectively.

So what does this mean? Banks make loans from deposits which they are able to raise. And if the deposit growth is almost at an all-time low, their ability to cut interest rates on their loans, will be limited. If banks cut deposit rates any further, the deposit growth will fall further and this will hurt their ability to give out loans.

There is another data point that needs to be looked at here—the incremental credit deposit ratio. This ratio is obtained by dividing the total loans given out by banks in the last one year by the total deposits raised by banks during the same period.

The incremental credit deposit ratio as on March 4, 2016, (the credit data as on March 18, 2016, is still not available), stood at 83.5%. This means that for every Rs 100 raised by banks as deposits, they lent out Rs 83.5.

It needs to be mentioned here that for every Rs 100 banks raise as deposits, they need to maintain Rs 4 with the RBI as a cash reserve ratio(CRR). Further, they need to invest Rs 21.5 into government bonds in order to maintain the statutory liquidity ratio(SLR). This leaves banks with Rs 74.5 to lend out of every Rs 100 that they raise as deposits.

The fact is that they have lent Rs 83.5 during the last one year. This has been possible because of the fact that the incremental credit deposit ratio between March 2014 and March 2015 had been at 68.7%. The low number gave banks scope to lend more in 2015-2016.

The point is that if the loan growth does pick up a little more from here, the incremental credit deposit ratio is likely to get worse in the days to come. If we take this possibility into account, banks will have a tough time cutting down their deposit rates any further. And that being the case, the chances of lending rates being cut further are limited.

But this is something that those demanding interest rate cuts all the time, are not in a position to understand.

The column originally appeared in Vivek Kaul’s Diary on April 1, 2016

10 March, 2016

माल्या को पकड़ना मुश्किल ही नही…नामुम्किन भी है

A WhatsApp forward I received today morning went something like this: “Mallya ka intezar to 17 bank kar rahe hain…Mallya ko pakadna mushkil hi nahi namumkin bhi hai.” The forward was obviously a play on the dialogue that Amitabh Bachchan made famous in his 1978 movie Don.

Meanwhile Vijay Mallya who owes seventeen Indian banks Rs 9,000 crore(or Rs 7000 crore depending on which newsreport you want to believe) seems to have left the country. The attorney general Mukul Rohatgi told this to the Supreme Court today. Mallya left the country on March 2, 2016, the day the banks moved the Debt Recovery Tribunal(DRT) against him.

The banks had approached the DRT in order to stop the severance payment of $75 million (or a little over Rs 500 crore) that Diageo Plc was supposed to make to Mallya, in lieu of him stepping down as Chairman of United Spirits Ltd. Mallya has also entered into a five-year non-compete clause with Diageo. This payment is supposed to be made over a period of five years.

The DRT directed Diageo not to make any payments to Mallya until the case is disposed of. It has set the next hearing date for March 28, 2016. A report in The Times of India seems to suggest that Mallya may have already been paid $40 million out of the $75 million that he had been promised.

The newspaper quotes the fine print of the agreement that Mallia inked with Diageo on February 25, last month: “Diageo will pay $40 million of this amount immediately with the balance being payable in equal instalments over five years. Diageo’s payment obligations are subject to Mallya’s ongoing compliance with the terms of the agreement.”

The question is why are the banks going after Mallya? In India, the banks going after a corporate defaulter is something unheard of. But this time they seem to have the blessings of the RBI governor Raghuram Rajan.

Also, typically when banks lend a big amount, they lend it against a collateral. The idea is that if the borrower defaults, the banks can sell the collateral and recover their money.

So why are the banks going after Mallya instead of just selling the collateral and recovering their money? This is precisely the question that Justice Kurian asked the Attorney General in the Supreme Court today. “How did you give these loans. Was there no secured assets on these loans?” he asked.

It turns out that the banks had lent against the brand value of Kingfisher Airlines, which at that point of time was worth some thousand crores. After the airline shut down the value of the brand crashed, and the banks ended up with nothing. “We had some assets (as security) for the loans advanced,” Rohatgi said.

The Indian Express cites the 2012-2013 annual report of Kingfisher Airlines and writes that the Kingfisher Airlines brand was worth $550 million. The airline’s brand had been valued by the consultancy firm Grant Thorton. Further, it had been registered separately from the Kingfisher beer brand.

The newspaper further quotes CBI sources as saying: “Lending on the brand value of Kingfisher Airlines is a major concern. We have questioned the banks. It is basically an intangible asset. We are digging into the issue.”

A report in The Hindustan Times points out that IDBI Bank lent Rs 900 crore to Kingfisher Airlines against its brand in 2012-2013. By this time, the airline had already started making losses.

The question that crops up here is that do banks normally lend such a huge amount of money against the brand value of a company, which is clearly an intangible asset. Further, do banks lend money against an intangible asset, to a company which is making losses?

Another important point that needs to be made here is that an intangible asset like a brand normally tends to be overvalued. It is precisely because of this reason companies cannot have the value of their brands on their balance sheets unless they have bought it from someone else.

Given this, why lend so much money against a brand? Interestingly, the Kingfisher Airlines brand name was pledged to 14 lenders. As a report in The Indian Express points out: “The airlines brand name was pledged to 14 lenders, including State Bank of India (SBI), IDBI Bank, Punjab National Bank, Bank of India and Bank of Baroda under a debt recast agreement in which loans valuing Rs 6,500 crore were restructured and converted into equity.”

There is a lot of talk in the media about how could banks lend such a huge amount of money against the Kingfisher Airlines brand. The answer is very simple. The lending happened during the go go years of Indian banking when crony capitalists close to the government of the day, got loans way beyond their repayment capacity. Mallya is not the only such businessman, there are many more.

This explains why the Congress party which is quick to seize-in on any issue which would embarrass the government has been quiet on this issue, up until now. And how about the Bhartiya Janata Party, which is the governing party? The party had supported Mallya’s election to the Rajya Sabha in 2010.

Mallya in his defence wrote an open letter to the media a few days back. In this letter he said: “In fact, banks have NPAs of Rs 11 trillion and have borrowers who owe much more than the amount allegedly owed by Kingfisher Airlines to the banks—a fact never alluded to or widely reported by the media as in my case…None of these large borrowers (whose debt is significantly more than Kingfisher Airlines debt) have been declared wilful defaulters, but unfortunately, United Breweries Holdings and I have been declared wilful defaulters by certain banks on technical grounds. I have legally challenged these declarations.”

This is true. As of December 2015, the total gross non-performing assets(NPAs) of the Indian banking system stood at Rs 3.9 lakh crore. The loans Mallya and his companies have defaulted on form a small part of the total NPAs of the banking system. But that doesn’t mean Mallya should be allowed to get away with it.

In fact, if the government wants the other bid defaulters to pay up, it is very important that it ensures that Mallya is made to pay up. The way things go with Mallya will act as a benchmark for the other big defaulters.

The trouble with Mallya is that he has a very flashy lifestyle. And it is very evident that he continues to flaunt his money despite having defaulted on the loans. As Raghuram Rajan, governor of RBI recently, put it: “If you are in trouble you should show that you care by cutting down your expenses and not flaunting more spending in public.”

Further, the employees of Kingfisher Airlines continue to remain unpaid. Also, the fact that Mallya gobbled up their provident fund payments as well, did not do any good to his image.

The point being that if Mallya had had a less flashy lifestyle like some other big defaulters have, the banks would have probably not gone after him. There wouldn’t have been a public outcry and all the hungama in the media, either.

To conclude, Mallya’s fall is an excellent example of a businessmen going beyond his core area and ending up in huge trouble. Mallya ran a successful liquor business until he thought up of running an airline. And that is precisely where all his troubles started.

Airlines continue to remain a difficult business to run. Only if, Mallya had happened to read what legendary investor Warren Buffett had to say on airlines: “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.”

But then Mallya was busy…with his IPL team…with his Formula One team…with his Kingfisher models…with his calendar…

When making a calendar becomes as important as running multiple businesses…guess this is how it ends!

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

The column appeared originally on Huffington Post India on March 9, 2016