At last, banking policy makers have realised the damage that bad debts have wrecked to the Public Sector Banks. Recently, a Senior Rbi official lamented that Corporate Debt Restructuring (CDR) for loans is 'going out of control' gone out of hand though they were under control till March 2011. The official pointed out that banks restructured accounts touched a massive Rs.3.25 Lakh Crores (approximately US$50 billion) - nearly Rs.2.7 lakh crores is through CDR. Belatedly, RBI has warned about the problem of over-indebtedness and directed the banks to make larger provisions. Other senior RBI officials have pointed out that more than 12% of the banking system's advances have turned bad, restructured twice or written off on technical definition. The official blamed this on poor credit appraisal systems. What was not mentioned is that the problem of Bad Loans is primarily grounded in cronyism - a phenomenon that grew exponentially over the past decade.
Since at least January 2012, this blog has drawn attention to this problem with what was frowned by a few readers as boringly monotonous. We Drew Attention to the problems in different segments of the economy, especially the government and the corporate sector. Another facet of the economy that we drew attention to is the eerie similarities to 1996-98 period: the only difference is that the present size of the economy is much larger and by corollary, so are the problems. An overview of the causes for the growth may serve as a good entry point. We argue that the Boom was caused largely by government spending, assuming debts and remittances. Each of these triggered a jump in land values, which only fueled the boom.
Thought debatable, we may assume that the foundations for the boom were in the changes that took place between 2002-05. The good monsoons in 2004 and increased spending by the government triggered the boom. The total bank credit (on 19 March 2004) was Rs.7,64,383 crores. By 1 November 2013, total non food credit grew to about Rs.55,588,600 crores. In 2004 worker remittances from overseas into India were estimated at US$23 billion. By 2012, this had risen to about US$69 billion. The impact of such large Money flows into the country can easily understood. Most of it went into chasing few assets including those in the stock markets.
As more money flooded into the stock market and other commodity markets, a process that was underway in other parts of the globe, there was increased importance to a 'valuation model' - where capital appreciation was more important than incomes that could be earned through investment in the companies. Valuations improved with the perceived ability to Collect Rents through squatting. Squatting on resources meant higher valuations, which in turn could lead to companies being sold without investing any capital (other than for grabbing the resource). The only places where such money could be raised was by raiding the banks through crony connections) that would enable an improvement in the valuations - a cause for many scams. The hurry to corner resources spread to the 'older' parts of the economy (coal, power, hydro, roads, etc) and to the 'newer' parts (telecom spectrum, digital gateways in the banking system, payment systems, etc). The ability to collect rents and easy money led to a rush to garner resources, thereby increasing the need to deploy larger sums of money to corner the resource.
This brings to forefront the road ahead for the regulators. Identifying and accepting the nature of the problem is the easy part. Dealing with it is more difficult simply because they will have to overcome vested interests. Unless, these vested interests, most of which are intertwined with the rulers, are overcome policy tweaking may be too little, too late.
As more money flooded into the stock market and other commodity markets, a process that was underway in other parts of the globe, there was increased importance to a 'valuation model' - where capital appreciation was more important than incomes that could be earned through investment in the companies. Valuations improved with the perceived ability to Collect Rents through squatting. Squatting on resources meant higher valuations, which in turn could lead to companies being sold without investing any capital (other than for grabbing the resource). The only places where such money could be raised was by raiding the banks through crony connections) that would enable an improvement in the valuations - a cause for many scams. The hurry to corner resources spread to the 'older' parts of the economy (coal, power, hydro, roads, etc) and to the 'newer' parts (telecom spectrum, digital gateways in the banking system, payment systems, etc). The ability to collect rents and easy money led to a rush to garner resources, thereby increasing the need to deploy larger sums of money to corner the resource.
This brings to forefront the road ahead for the regulators. Identifying and accepting the nature of the problem is the easy part. Dealing with it is more difficult simply because they will have to overcome vested interests. Unless, these vested interests, most of which are intertwined with the rulers, are overcome policy tweaking may be too little, too late.
If history, a guide, expect a big bail out for the indebted crony elite, which passes off as genuine businesses.
