What do you think- Is Money Bad?
Read the excerpts from the financial thriller book of the year- Bad Money by Vivek Kaul
Over the last decade, Indian banks in general and the government-owned public sector ones, in particular, have gradually got themselves into a big mess. Their bad loans, or loans that haven’t been repaid for ninety days or more, crossed Rs 10 lakh crore as of 31 March 2018.
To put it in perspective, this figure is approximately seven times the value of farm loan waivers given by all state governments in India put together. And this became the bad money of the Indian financial system. Why were the corporates unable to return these loans? Was it because they had no intention of doing so? Who were the biggest defaulters of them all? Are Vijay Mallya and Nirav Modi just the tip of the iceberg? How much money has the government spent trying to rescue these banks? How are the private sector banks gradually taking over Indian banking? Is your money in public sector banks safe? How are you paying for this in different ways? And what are the solutions to deal with this?
In Bad Money, Vivek Kaul answers these and many more questions, peeling layer after layer of the NPA (non-performing assets) problem. He goes back to the history of Indian banking, providing a long, deep, and hard look at the overall Indian economy. The result is a gripping financial thriller that is a must for understanding a crisis that threatens our banking system and economy.1
Undoubtedly, this is one of the best unputdownable thrillers, this blog is a highlight to some of the key excerpts/ concepts given in the book.
Minsky Hypothesis
Hyman Minsky, an economist had developed a hypothesis of financial instability. He argued that financial crises are endemic in capitalism because periods of economic prosperity encouraged borrowers and lenders to be progressively reckless. The book proves the hypothesis in a simple 3 position model:
Hedge Position: Expected income is sufficient to make all the payments as they become due, including both interest & principal
Speculative Position: Expected income is sufficient to make the interest payment, but the principal must be rolled over. Here, banks take measures like providing refinancing loans, lower the interest rate or increase the tenure to aid the company.
Ponzi Position: Expected income is insufficient and the company needs to borrow a new loan to repay even the interest amount of the previous loan. If this cycle stops then the borrower has no option but to default
Ponzi's Position hit the PSBs badly!
Series Of Regulations
A series of regulations and measures have been taken up by RBI when PSBs were getting badly hit by Bad Loan Rate(%).
Few regulations didn't work as expected and were overtime scrapped post the launch of IBC 2016.
Now, Time will tell how good this law is for the PSBs!
The parallel of PSBs with Discoms
To keep the PSB afloat, RBI kept infusing capital, forced few banks to merge to lower the Bad Loan rate level which led to a number game.
Balance Sheet figures looked satisfactory while the real condition was worsening. Banks were refraining to lend but were forced to lend by the government
Evergreening of loans added to the plight as interest payments were made by the borrowers only from the newly refinanced loans they take (Ponzi position). This is more like deferring the NPA recognition
Distressed Power Sector
The government rolled out UDAY Scheme to curb this distress by offloading 75% of the debt of respective Discoms to the State govt. But the impact was short term as real root causes weren't addressed, only the financial troubles were passed onto Power Producers & Government
Both PSBs & Discoms are sailing in the same boat; financial troubles are addressed superficially with no focus on real root causes!
Behavioral Biases
Few biases and thought processes have been detailed which played a role in defining the mentality and seriousness towards this theme:
Ostrich Syndrome: Behavior of ignoring the problem thinking it will be resolved on its own. In Behavioral Finance, it's like an attempt made by the investor to ignore negative financial information
Regulatory Forbearance: The regulator is not exercising his right to put the insolvent bank out of business. Banks "Held Back" from exercising their legal rights
No Free Lunch: It is an expression that describes the cost of decision-making and consumption. The ideas appearing free always has a cost attached to them, especially in economics
Let us know, what do you think about the book now? Planning to pick a copy soon? Drop your feedback and suggestions about the books we should cover in the comments section below :)
Description About the book is taken from https://vivekkaul.com/books/bad-money/