Vijay Kumar Gaba

 If I must choose one word to define the current global situation, it will indubitably be “tumultuous”. There is commotion, agitation, emotional outbursts, upheaval, chaos, distraughtness, indecision and haphazardness in almost all spheres of life – be it economics, finance, governance, politics, or geopolitics. As the trust deficit deepens and widens further, the leaderships are dissipating fast.

USA and UK which have provided political leadership to the world in most of the past hundred years, no longer enjoy wide acceptability. In fact both the countries are struggling to manage even their own internal conflicts. The trends elsewhere also suggest that people are choosing perceptibly stronger and decisive leaders to lead in these tough times. Some examples are Brazil, Israel, Sweden, Italy, and China.

Geopolitically, the hegemony of NATO is facing serious challenges from the new alliance of Russia, China, and North Korea, who have not shown much respect for the extant global order. The largest energy supplier to the world, OPEC also appears inclined to move away from the present system of petrodollars and dominance of western developed economies.

Despite the pandemic; severely inclement weather conditions prevailing for the past couple of years over the most parts of the world (especially the developed world) and extremely painful energy crisis in Europe; the global leaders gathered in Sharm-el-Sheikh (Egypt) for COP27 conference are least likely to come to an equitable and effective agreement over climate change.

The global markets are in turmoil. The illusion of stability created by central bankers of developed economies post the global financial crisis is fading fast. Most of the money printed by the central bankers to keep the wheel of markets moving has been used to fuel prices of financial assets and boost bank reserves. Very little went into building new productive capacities. The unscrupulous politicians were happy to unleash a regime of blunderous fiscal profligacy using the abundant and cheap money.

The deceptive wealth effect created by artificially inflated asset prices, especially financial assets, has been crushed by the shortages of food, energy, and workers unwilling to work etc. The business models built on “dreams” are crashing down. The stock prices manipulated through leveraged buybacks using zero interest borrowings are correcting to their realistic valuations. The gullible investors who ran ahead of time and mistook crypto (a medium of exchange) for valuable assets are also facing a reality check. They are also realizing that all NFTs may not be as valuable as a work of Picasso.

As things stand today, we may soon find ourselves standing at the same crossroad where we stood in autumn of 2008. The markets may implode. The inflated asset prices may burst. The headlines might again be dominated by scary jargon like PIGS. Many Lehman-like castles may come crashing down. Globalization may take several steps back, before a new world order emerges.

Many may find these thoughts unnecessarily provocative and scandalous. There could be strong arguments in favor of India as an oasis of stability and growth amidst all this global chaos. But I am not a great admirer of Ms. TINA. I shall not live under any illusion of the Indian economy and markets escaping a global Tsunami; though I am confident that India shall survive it and soon get back on her feet. The key however is to “survive”.

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After almost a decade the Indian financial sector seems to be out of troubled waters. Almost all significant banks are beyond solvency concerns and set to progress in the path of growth. The asset quality has shown steady improvement for most banks despite Covid disruptions. The loan growth has improved from historic lows seen in the past few years. Earning growth is strongly aided by healthy recovery from the bad accounts.

Moreover, the loan books of most tier 1 and Tier 2 banks are tested for stress and provisions are adequate to meet most foreseen adversities. These institutions have come a long way from the first announcement of Dirty Dozen (the largest 12 non performing accounts) in the summer of 2017. Eight of the notified 12 accounts have been resolved with more than 50% recovery. Resolution is under progress for two accounts and the other two are under liquidation. As of the end of FY22, no major potential stressed account has been reported that can materially alter the current status of any bank. The credit cost from hereon will mostly be under control with some defaults in the normal course of business.

The best part is that the rather stringent provisioning and disclosure norms have significantly enhanced the credibility of the books of banks. The capital adequacy is positive for aggressive lending. Obviously the outlook for Indian banks is bright and buoyant.

Most of the non-bank lenders (NBFCs) are also back on the path of steady growth. The asset liability mismatch (ALM) and asset quality concerns have been mostly addressed by almost all meaningful NBFCs. Many weaker players have been eliminated from the market. For the survivors, the business is brisk and profitable.

Obviously, for the investors in the financial sector better times lie ahead, even if the consensus overweight on the financial sector might slow down the trajectory of gains a little.

Notwithstanding the air of optimism all around, the sky may not be all blue and bright. There are scattered clouds that do not look menacing as of this morning; but certainly warrant a watch.

I shall be in particular watching some conglomerates that are growing too fast (both organically and inorganically) and are considerably leveraged. In some cases the leverage appears supported by the balance sheet that might have been engineered to look healthy but not necessarily backed by tangible assets. The cash generation is poor; thus the servicing capability could be severely impaired if the things do not go as per the plan, raising the spectre of dirty dozen all over again.

The number of systemically important (too big to fail) financial institutions is also growing steadily. The regulator (RBI) is keeping a closer vigil on these institutions. Additional regulatory provisions have also been prescribed for these. Nonetheless, in case of a global contagion like dotcom (2001-2001) or global financial crisis (2008-2009) the probability of a “big tree collapsing” in India is now certainly not zero.

From the business viewpoint, I hope that while aiming to achieve global size and economies of scale, the Indian managements would have learned key lessons from the decline of global conglomerates like General Electric and General Motors and demise of Lehman and Merrill Lynch etc.