"Our duty is to believe
that for which we have sufficient evidence, and to suspend our judgment when we
have not."
—John Lubbock (British,
1834-1913)
Word for the day
Puckish (Adj)
Mischievous; impish.
Malice towards none
The massive forest fire in
Uttrakhand proves three things:
(a) Nero still does not care
if Rome is burning.
(b) Our disaster management
has not improved much after 2013 Uttrakhand floods.
(c) Environment is not a
priority for anyone, till it becomes a prime time news.
First random thought this morning
BJP has nominated Subramaniam Swamy to the Rajya Sabha, like a cat
amongst pigeons. He seems to be taking the principal opposition Congress Party
head on since the day one.
BJP might score some quixotic points here. But is it only about
BJP and Congress or the people of this country also matter to someone?
Some random thoughts
In past couple of years, the non-performing loans (NPLs) of Indian
banks have been a matter of deep concern. The subject has been a subject of
intense debate amongst all market participants, regulators and other government
authorities.
The debate has recently assumed a socio-political character after
Mr. Vijay Mallya decided to leave the country without settling his debts. With
this morality has become the primary issue in the debate. The points like
"Risk", "Business Cycle", "Collaterals",
"Force Majeure", "Process of Law" and "Intent to
repay" etc., have taken a back seat.
Lenders are suffering for both (a) poor judgment of credit risk
and (b) fraudulent diversion of funds by borrowers
Consequently, there is an environment of fear amongst borrowers
who are going through a rough patch in their respective business cycles,
prospective borrowers, and the credit managers of banks.
It is common knowledge that political pressures and social
concerns have been an integral part of the lending mechanism of various public
sector banks. They have thus not been observing very high standards insofar as
the credit evaluation and risk assessment is concerned. Corruption and
connivance with unscrupulous promoters has also not been uncommon.
But it also worth noting that NPL problem has been quite
pronounced in case of banks like ICICI, AXIS, Federal. Even foreign banks like
Standard Chartered, CITI and ING Vysaya have also suffered hugely on this
count.
In my view, the debate needs to divert from the issue of morality
to focus on the issue of rebuilding a sound financial system.
The suggestions like creation of a bad bank, naming and shaming
all creditors in default, banks taking over businesses on TMS (take over -
manage - sell) basis etc. are good to discuss over a cup of coffee, but may not
be practical and/or sustainable.
In my view, banks, government (as majority owner of PSBs) and
regulator need to take a holistic view of the situation, rather than just fire
fighting.
As a first step, an independent assessment may be carried out of
all bank loans to identify what loans have been used in building real
capacities (roads, power plants, houses, shops, offices, bridges, etc.) and
what loans have just been expensed in paying usual business expenses and
interest. Different approaches may be required for managing risk in these two
types of credit. As against a standard provisioning, a differentiated
provisioning may be needed for a power producer and an e-commerce market place.
By enforcing mindless asset sales, banks may actually be
exacerbating the NPL situation further. For example, one of the largest
borrower is reportedly selling all his cash generating assets to pay about 50%
of his loans. He would no cash flows to service the balance 50%.
These are some random thoughts. I will try to add more sense to
these soon.
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