By Mala Jay
It’s always nice to have someone from the outside to give good counsel and issue timely warnings. Especially if, like Raghuram Rajan, the outsider is actually an insider who knows the system inside-out.
The advice and warnings are all the more valuable in times of crisis, confusion and chaos – which is a fair description of the state of affairs right now in the banking sector, the monetary sector, financial sector and indeed in almost all sectors of the Indian economy.
Strange things are happening and nobody in the Modi government seems to know why, how or even what.
For instance, a private sector bank, which has been growing unbelievably fast, has been pulled up by the Reserve Bank – for growing too fast. The RBI has ordered the chairman of the bank to hand over charge to someone else by January 2019.
The profits of the bank, Yes Bank, have been more than 40 per cent year after year, its assets, advances and deposits doubling every year, and the price of its shares in the stock market has soared by 4,000 per cent in the last decade.
A success story? Yes and no. Being a corporate-focused bank, what has puzzled banking circles is how its asset quality can appear so high at a time when the corporate sector is still struggling to come out of the slowdown.
As for the Reserve Bank, it has concluded that it is too good to be true. In the RBI’s opinion, technically speaking there is ‘divergence in asset quality’, meaning that non-performing assets are probably more than what is being shown on the balance sheet. So it has refused to extend the tenure of the Yes Bank founder-chairman, Rana Kapoor, beyond January 2019.
Similar strange things are happening in the stock market. A brash young market player put it bluntly: “It’s crazy out there. Things are happening that can’t be happening”. A gray-haired financial pundit, using more politically-correct language, said: “Some curious trends are being witnessed. India is supposed to be the fastest-growing economy in the world but investments are not picking up fast enough. Companies are not growing but their stock prices are reaching record highs”.
Another observer has noted thus: Sensex and Nifty have experienced sharp fluctuations in the recent past. There has been a sudden fall of even up to 500 points in a single day but a quick recovery within 24 hours. In the process market capitalisation to the extent of lakhs of crores has been wiped out in a matter of hours, followed by a strong rise. In the midst of all the mayhem, there are a few scrips that remain bullish all the time instead of being affected by the bearish attacks.
The last time Indian stock markets hit rock bottom was in October 2008 at the time of the global financial meltdown. But over the last 10 years it has rallied by over 400 percent. Even though the economy was stagnant, the stock markets were booming. This was probably because a combination of stock market speculation by finance capital and middle class savings getting channelized into investment in equity shares and mutual funds.
The speculation was such that some little-known scrips gave incredible returns of even up to 10,000 per cent. A characteristic feature of this speculation was that the shares of companies almost unheard of among ordinary small investors were extremely popular among a select group of very big players.
A few examples of above 10,000% returns are: Symphony Ltd., Easy Bite Eatables, Safari Industries (India) Ltd., Avanti Feeds Ltd., Astral Poly Technik Ltd., Ajanta Pharma Ltd., Bharat Rasayan Ltd., Opala RG Ltd., and Vinayati Organics Ltd. This is not to imply that these companies do not deserve the support they have got from mega investors but merely to point to the phenomenon of contrasting patterns.
Here is a recent headline from a financial news website: “Investors lose 272 trillion in two days of market fall”.
At the same time, there was a report that Goldman Sachs has called time on the world-beating surge in Indian stocks. It said: “India’s equity market looks less favorable amid a) elevated valuations, b) a potential slowdown in economic growth and c) upcoming elections”.
Stock markets apart, the real focus is on the overall state of the economy – particularly the banking sector. Here is what former RBI Governor Raghuram Rajan said in his written note to the chairman of the Estimates Committee of parliament: “Over-optimistic bankers, slowdown in government decision-making process and moderation in economic growth are the main causes of mounting bad loans”.
His diagnosis was that during both the UPA and the subsequent NDA governments, a variety of governance problems slowed down government decision-making. As a result, project cost overruns escalated for stalled projects and they became increasingly unable to service debt. Government decision-making has not picked up sufficient pace to date even in the last four years of NDA rule.
“It is at such times that banks make mistakes. They extrapolate past growth and performance to the future. So, they are willing to accept higher leverage in projects, and less promoter equity. Indeed, sometimes banks sign up to lend based on project reports by the promoter’s investment bank, without doing due diligence on their own,” he said.
Citing an example, he said, “one promoter told me about how he was pursued by banks waving cheque books, asking him to name the amount he wanted”.
In Raghuram Rajan’s opinion: “This is the historic phenomenon of irrational exuberance, which is common across countries at such a phase in the cycle”. He added: “Unfortunately, the years of strong growth were followed by a slowdown. Strong demand projections for various projects were shown to be increasingly unrealistic as domestic demand slowed down”.
Regarding corruption being at the root of the NPA problem, the frank assessment is that manipulation by powerful vested interests is undoubtedly a factor – but it is hard to tell whether the present situation is because of corruption alone or also because of hype and over-exuberance or just plain incompetence and poor governance. (IPA Service)
The picture is taken from the Internet.
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