STCMA – 9th August 2017

Lest I castigate myself later for not documenting this, I am linking a few stories (mostly from Bloomberg) on this topic.

(1) The founder of Credit Acceptance Corporation resigns as Chairman, sells a big chunk of his stock (still retains a large portion) and critics evaluate if the company stock is the next BIG SHORT [Link]

(2) Santander Consumer USA Holdings Inc., which is counted among the biggest subprime auto-loan firms, verified income on just 8% of borrowers on loans it recently bundled into $1 billion of bonds, Moody’s Investors Service said. …Delinquencies on U.S. subprime auto asset-backed securities climbed to a 20-year high in February, exceeding the levels seen in 2009 following the financial crisis, Fitch Ratings warned in a March report. [Link]

(3) This story by Lisa Abramowicz has a chart that shows that securities backed by auto assets have crested the peak of 2006.

(4) The percentage of subprime auto-loan securitizations considered deep subprime has risen to 32.5 percent from 5.1 percent since 2010, Morgan Stanley said….Sixty-day delinquencies for bonds backed by these loans have risen 3 percentage points since 2012, compared with just 0.89 percentage points on all other subprime auto securities, Morgan Stanley’s Vishwanath Tirupattur, James Egan and Jeen Ng said in a report dated March 24. [Link]

Deep subprime borrowers are those with FICO scores of 550 or below.

(4) Depending whose money they’re using, Wells Fargo & Co. and JPMorgan Chase & Co. either love subprime car loans or fear them.

Both banks have grown more reluctant to make new subprime loans using money from their own balance sheets. Wells Fargo tightened its underwriting standards and slashed the volume of all loans it made to car buyers in the first quarter by 29 percent after greater numbers of borrowers fell behind on payments. JPMorgan’s consumer and community banking head Gordon Smith earlier this year said the bank had cut its new lending for subprime auto loans “dramatically.”

At the same time the firms are indirectly funding billions of dollars of the loans by helping companies like Santander Consumer USA Holdings Inc. borrow in the asset-backed securities market, essentially shunting money from bond investors to finance companies. Wall Street banks packaged more loans from finance companies into bonds in the first quarter than the same period last year, and Wells Fargo and JPMorgan remained two of the top underwriters of the securities. [Link]

(5) In May, Santander agreed to pay $26 million to settle allegations brought by Delaware and Massachusetts as part of ongoing investigations into the auto industry’s lending practices. Santander, whose partnership with Chrysler goes by the Chrysler Capital brand name, neither admitted nor denied wrongdoing….Whatever the case, the Santander-Chrysler relationship has opened a rare window into an industrywide race to the bottom that may have lasting consequences. [Link]

(6) Although this story has a deliberate, scary headline, the details are not. Discussing absolute dollar amounts is misleading as the underlying GDP and household networth have grown.

American consumers now collectively have the most outstanding revolving debt — often summarized as credit card debt — in U.S. history, according to a report Monday released by the Federal Reserve. Americans had $1.021 trillion in outstanding revolving credit in June 2017. This beats the previous record in April 2008, when consumers had a collective $1.02 trillion in outstanding credit revolving credit. [Link]

(7) More interesting is this chart. That American household savings rate has not improved but is lower than it was before.

US Household savings rate

Source: WSJ Daily Shot (August 2, 2017)

(8) If one were looking for a sign of market top, probably, this one is a very good candidate:

An $800 million subprime auto bond sale from Westlake Financial Services Inc. last week was priced at some of the highest valuations — as measured by the extra yield the notes offered compared with the benchmark rate — since 2014, the analysts wrote in a note Monday. The portion of the security rated BB, or two steps below investment grade, offered the least additional yield for a deal of its size and rating on record. Demand for the offering was strong enough to increase its size from a planned $700 million. [Link]

(9) NFC Equity to GVA

Equity in non-financial corporations (market value) to their Gross Value Added. We are fast approaching the levels of the 2000 peak. Perhaps, with 2Q data, we would be there already.

(10) Is the savings in corporate pension costs a silver lining at all to the story of stalling and even declining (very slowly, for now) life expectancy in advanced nations?

(11) A friend forwarded this article, ‘Our broken economy in one simple chart’. President Trump is predictably criticised at the end of the article for proposing a tax rate that allegedly worsens the inequality in the US. But, I could not stop wondering then about the worsening of the inequality to such extreme levels even without Trump tax cut and especially during the eight years of an egalitarian President.

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448 million social media comments and other STCMA – 24 June 2017

The retreat of the Renminbi. Quite. The image of the Global Payment Currency rankings is telling. Danish Krone has a bigger share than Renminbi. Strategically sound advice from Shyam Saran not to assume that Renminbi’s onward international march is dead but factually incorrect. Article behind paywall.

Anjana Trivedi of WSJ calls it a ‘The Onion’ Headline. I have to agree.

A very good tweet:

Until China willing allow failures and losses, deleveraging campaign should be taken as seriously as any Democratic congressional campaign [Link]

James Mackintosh tweeted this:

Lovely Deutsche Bank chart of over-optimistic economists’ predictions for 10-year bond yield. Average 12-month forecast error: 60 basis points too high. [Link]

Two great tweets by James Kynge of FT

MSCI’s China A-share choice was between relevance and governance. Like many seduced by China dream, they chose former…. [Link]

…. And will come to regret the lack of the latter [Link]

His articles on the MSCI including China A shares in its index on the China Banking Regulatory Commission asking Chinese banks to reduce their exposure to China’s corporate cowboys (ambitious overseas acquirers) are worth reading. Could be behind paywalls, though.

Chris Balding’s blog post on the both these topics is worth a read too.

It is all about free cashflows in these Chinese corporate cowboys or, more precisely, the lack of it.

Chris Balding tweeted, while commenting on this blog post at PIIE.

“How brutally misleading and worthless a blog post by @PIIE. Look at all the products that aren’t even allowed in so don’t have a tariff rate​” [Link]

I guess we all know where PIIE stands with respect to China.

From the abstract of the forthcoming paper by Gary King of the Harvard University and co-authors:

We estimate that the (Chinese) government fabricates and posts about 448 million social media comments a year. [Link]

After Moody’s, now S&P also threatens a downgrade of China’s sovereign credit rating. Currently, it stands at AA- with a negative outlook.

China’s capital controls put real estate developments in Johor at risk, as most of them bet on the Chinese buyer.

A great article in ‘Australian Financial Review’ on Malcolm Turnbull becoming a China hawk from being a Panda hugger. You must be lucky to catch it. A question that came up in the head is why these leaders have to learn this all by themselves, all over again, when there is so much history and evidence?

The answer, my dear mind, is “They are not stupid. Their incentives are differently aligned and the cost benefit calculus of pursuing those incentives keeps shifting all the time.”

Chinese loans may put Bangladesh in a debt trap.

The economists who wrongly predicted a decline in healthcare costs for American families under Affordable Health Care are still at it, with dire predictions and interpretations of the Republican new Senate Bill. Here is an article from 2013 on how their predictions of declining health care costs turned out.

Avik Roy explains here how the Senate version improves up on the House version of the Health Care bill while keeping health care afforable.

Greg Ip gives the thumbs up to the Trump team banking proposals.

According to Zerohedge,  Israel deployed fighter jets to help prevent a coup in Saudi Arabia on the announcement of succession that replaced the present crown prince with the King’s son. Strange world.

Interesting article on how Jokowi in Indonesia is rebooting his Presidency before the 2019 elections after his ally and ex-Jakarta Governor had been sent to jail for blasphemy against the Koran.

Technology, jobs and societies are my favourite and anxious topics. These two links make me wonder whether we can ever become sensitised to the dangers of what we consider progress and development.

This is a review of Dan Drezner’s book, ‘The Ideas Factory’ by Edward Luce in FT.  These lines explain the problem of jobs and technology linked above:

The optimal talk, particularly for Ted, which serves as an advertising platform for paid speaking, is to focus on what Evgeny Morozov, a critic of Silicon Valley, describes as the “cyber-whig” view of history: the belief that technology is carrying us upwards.

“Find some peculiar global trend — the more arcane, the better,” Drezner quotes Morozov saying. “Draw a straight line connecting it to the world of apps, electric cars and Bay area venture capital . . . Mention robots, Japan and cyber war. Stir well. Serve on multiple platforms.”

How safe are U.S. banks?

Today the banks have about 6 percent tangible equity. That’s how much capital we have now, in the banks, on a tangible capital, loss-absorbing capital basis. If we had another crisis like the last one [6 percent of assets lost], that equity would still be wiped out. So you’re at zero today if we had a similar crisis, not negative 3 percent. That’s not negative, as it was in the last crisis, but it’s still zero.

No, we’re not adequately capitalized. We’re better capitalized. And doubling from a very small number is not a real big hurdle. I think the real hurdle is getting to what is adequate, which I judge as a minimum 10 percent tangible capital, leverage ratio, not risk-weighted.

And when we get there I’ll feel much better about the ability to withstand shock.

Here’s what I mean: If you think about it at today’s current level of tangible equity of 6 percent, [if] you have an individual bank fail, very large bank fail … you’re going to have repercussions across the economy and across other banks. That’s what happened last time.

Now, if you only have 3 or 4, or even 6 percent capital, and you have one major bank fail, every other major bank with only 6 percent tangible equity becomes suspect. Do you have really enough capital? Stakeholders may say that’s no more than the losses that we’re seeing in this one large bank, let’s run on the others, why take a chance? But if you have 10 or 12 percent, and you have a major bank failure, you say, “Well, it’s a failure, but the banks are much more strongly capitalized” and therefore they don’t run. And you don’t create a systemic crisis out of an individual bank crisis. [Link]

Thomas Hoenig, current Vice-Chair of the Federal Deposit Insurance Corporation, is one of the bureaucrats that America has been lucky to have. That excerpt was from his interview with ‘Washington Examiner’. If you have not read his speech in 2012 on tangible equity/tangible assets ratio vs. risk weighted capital, you should.

Complexity should be grounds for suspicion that the system is being gamed.

NPA resolution: the details that matter

Caught up with Andy Mukherjee’s Bloomberg Gadfly columns, as I always do, from time to time. As always again, he has something that is important and that is often overlooked by others. This blog post is dedicated to three of his recent columns surrounding the issue of non-performing assets in the Indian banking system.

As of last month, the National Company Law Tribunal was looking for four judges and 12 technical members, all of whom are required to be at least 50 years old with 10 years of legal or 15 years of accounting practice behind them. Five years spent adjudicating labor disputes is also acceptable.

In a footnote, Andy Mukherjee adds, Hopefully, the 65 vacancies the company law tribunal advertised a month earlier — for court officers to typists — have been filled, and the court’s headquarters in New Delhi has selected its tech support vendor for the phone lines. [Link]

This is par for the course with information efficiency of markets, of course:

At the end of 2015, when concerns over Indian lenders’ balance sheets reigned supreme, ICICI Bank Ltd. had around 214 billion rupees ($3.33 billion) in gross nonperforming assets. The bank announced a 78 percent jump in NPAs for just the first three months of 2016, and shell-shocked investors pushed the stock down almost 10 percent in three days.

That was last May. Fast-forward a year, and investors rewarded ICICI Bank’s freshly revealed bad-loan pile of 425 billion rupees — twice as large as the end-2015 stock — by pushing the shares up as much as 9 percent Thursday. [Link]

This is sad and must count as one of the most important collateral damage of the demonetisation drive. But, the benefits are yet to be counted and, one hopes, that someone is working on making the benefits happen. Or, too fond hopes?

What monoline lenders lack in deposit muscle, they make up for in their superior knowledge of borrowers and risk management. It’s a shame that policy whimsy and cynical politics mean the specialists can’t survive except as part of conventional banks. [Link]

Everything is under control – China linkfest

(Some links could be behind paywalls. Apologies)

China’s history problem: how it’s censoring the past and denying academics access to archives [Link]

Xi Jinping’s political theory system is complete now

China bans religious names for Muslim babies in Xinjiang

Why is this Xinhua edit invoking 1997 and 2008 crises? What is cooking?

China wants independent think-tanks to toe the party line

FT: The decision by Caixin — whose chief editor, Hu Shuli, also has strong relationships with Communist party officials — to publish its exposé suggests that the political winds are shifting against Anbang.

Yes, we should not forget that the media alone could make independent decisions when other elements of the society are not allowed.

WSJ: Screws tighten on risky Chinese insurance

WSJ: “China’s War on Debt Causes Stocks to Drop, Bond Yields to Shoot Up and Defaults to Rise.” I doubt if it is anything more than one of those ‘on-again, off-again’ thing or political hunting season.

Bloomberg: “The system-wide contraction is a result of a flurry of government measures over the past month that included ordering banks to bolster risk controls, stepping up scrutiny of shadow financing and cracking down on malfeasance among senior bureaucrats.”

A very good commentary on many things – on the world of ‘liberal’ media and on China – in one tweet.

Prof. Carl Minzner, Fordham School of Law, has given a speech at the India-China Institute in the New School on May 1 on China after the Reform Era. I requested him for a copy of the speech. He sent me this paper.

The implications of this Bloomberg story are many. Europe has no choice but to swallow a lot of things, if the biggest owner of its ‘Too big to fail’ bank is a Chinese group whose ultimate owner is…

Shandong province’ Zouping County’s Qixing Group is too big to fail for China and China is too big to fail for the world.

China’s credit excess is unlike anything the world has ever seen but, everything is under control

Thou shall fix banks

There is some excitement that the Government of India has acted to address the issue of non-performing assets (bad loans) in the Indian banking system.

I think I have decent material (be warned of link fest) to blog on the Government Ordinance to amend the Banking Regulation Act to insert Sections 35 AA and Sections 35 AB of the Banking Regulation Act.

(1) Here is the PIB announcement:

The promulgation of Banking Regulation (Amendment) Ordinance, 2017 will lead to effective resolution of stressed assets, particularly in consortium or multiple banking arrangements

The Ordinance enables the Union Government to authorize the Reserve Bank of India (RBI) to direct banking companies to resolve specific stressed assets

The promulgation of the Banking Regulation (Amendment) Ordinance, 2017 inserting two new Sections (viz. 35AA and 35AB) after Section 35A of the Banking Regulation Act, 1949 enables the Union Government to authorize the Reserve Bank of India (RBI) to direct banking companies to resolve specific stressed assets by initiating insolvency resolution process, where required. The RBI has also been empowered to issue other directions for resolution, and appoint or approve for appointment, authorities or committees to advise banking companies for stressed asset resolution.

This action of the Union Government will have a direct impact on effective resolution of stressed assets, particularly in consortium or multiple banking arrangements, as the RBI will be empowered to intervene in specific cases of resolution of non-performing assets, to bring them to a definite conclusion.

The Government is committed to expeditious resolution of stressed assets in the banking system. The recent enactment of Insolvency and Bankruptcy Code (IBC), 2016 has opened up new possibilities for time bound resolution of stressed assets. The SARFAESI and Debt Recovery Acts have been amended to facilitate recoveries. A comprehensive approach is being adopted for effective implementation of various schemes for timely resolution of stressed assets. [Link – subject to change]

(2) Deep Advisory Services posts the exact Ordinance notification. There are three typos at least. Please catch them. I hope they were not in the original of the Ordinance itself and that these are errors made by the person who posted it. Otherwise, it is an embarrassment.

The Banking Regulation (Amendment) Ordinance, 2017

Extract of the Notification:

New Delhi, the 4th May, 2017

An Ordinance further to amend the Banking Regulation Act, 1949.

WHEREAS the stressed assets in the banking system have reached unacceptably high levels and urgent measures are required for their resolution;

AND WHEREAS the  Insolvency and Bankruptcy Code, 2016 has been enacted to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets to promote entrepreneurship, availability of credit and balance the interest of all the stakeholders;

AND WHEREAS the provisions of Insolvency and Bankruptcy Code, 2016 can be effectively used for the resolution of stressed assets by empowering the banking regulator to issue directors [Oops!] in specific cases;

AND WHEREAS  Parliament is not in session and the President is satisfied that circumstances exist which render it necessary for him to take immediate action;

NOW, THEREFORE, in exercise of the powers conferred by clause (l) of article 123 of the Constitution , the President is pleased to promulgate the following Ordinance:-

(1) This Ordinance may be called the Banking Regulation (Amendment) Ordinance, 2017.

(2) It shall come into force at once.

In the Banking Regulation Act, 1949, after section 35A, the following sections shall be inserted, namely:-

‘35AA. The Central Government may by order authorise the Reserve Bank to issue directors [Oops!!] to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.

Explanation. – For the purposes of this section, “default” has the same meaning assigned to it in clause (12) of section 3 of the Insolvency and Bankruptcy Code, 2016.

35AB. (1) Without prejudice to the provisions of section 35A, the Reserve Bank may, from time to time, issue directors [Oops!!!] to the banking companies for resolution of stressed assets.

(2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets.’

PRANAB MUKHERJEE,

President. [Link]

It turns out that, indeed, the mistakes were made by the person who posted it. He could have ‘copied and pasted’ from the original. The original gazette notification of the full Ordinance can be found here and it is free of errors. This notification is filed under the Ministry of Law and Justice.

(3) Here is the notification in the Gazette of India. This notification is actually about the Finance Ministry invoking the powers granted the government by Section 35AA of the Banking Regulation Act as per the Ordinance to confer powers on the RBI to direct banking companies…… No typo here.

(4) MINT had this article on the three ways in which the proposed Ordinance was going to make a difference. Not very illuminating. Perhaps, there is more to it than what meets the eye in the innocuously worded Section 35 AB (2) above.

These committees may propose hair cuts? Binding on banks? Will investigative agencies refrain from reading mala fide intentions into such settlements?

(5) On the last question above, this MINT article has a useful pointer:

“There was a proposed amendment to Prevention of Corruption Act introduced in Parliament. Standing committee has already considered it and submitted its report,” said Jaitley.

There you go.  That might be the key.

(6) The article cited in (5) above also raises some other questions:

“So now the government can direct RBI to have a bank sit down and resolve a specific stressed asset. But what next?” asked Anurag Das, managing partner of Rain Tree Capital, a Singapore-based investment manager specializing in distressed and special situations. “The key to a fair price is attracting enough participants. So how do we get real participants to assess and bid in the IBC timeline?”

A regulator deciding in which case insolvency should be filed poses many challenges, said Sumant Batra, insolvency expert and managing partner of law firm Kesar Dass B. & Associates.

“A lender or borrower are in best position to decide whether to commence insolvency or not. RBI will need to appoint experts to scrutinize each case as it cannot be an administrative decision. The best way to encourage banks to resolve stressed assets under the bankruptcy code is to offer them some incentives to file (for) insolvency,” said Batra.

I suppose Mr. Batra’s comment on experts is taken care of by Section 35 AB (2). The question is whether banks agree on the price and proceed to write down the asset, take a hit on profits and the Government of India (GoI) will receive lower dividends and/or inject capital or close down or merge the banks.

All of these remain unaddressed by the Ordinance. May be, the government has a roadmap for all these crucial questions. Or, not.

(7) These comments in a FE article do not help me understand in what way the RBI was disempowered in the past and in what specific way, it is now empowered to deal with the problem:

Though the RBI had powers under the Section 35 A of the Banking Resolution Act 1949, to issue guidelines for the banking companies, but they had not been specific. Section 35 AA and Section 35 AB introduced today in the Act, allows the government to authorise RBI to take specific measures to solve issues.

The situation now is that 50 big cases can be taken up together in a time-bound manner in a particular time frame. Committees which will be set up by the RBI will also help banks to know exactly what to do to resolve the NPA issues. [Link]

May be, the difference lies in ‘guidelines’ vs. ‘directions’ that RBI can now issue to banks. But, was the RBI not empowered earlier to form ‘oversight’ committees to help banks solve the issues of pricing, hair cuts, takeover, restructuring and reorganisation of assets? Were there explicit provisions in law that forbade either the commercial banks or the RBI from doing so, before?

Not rhetorical but inquisitive questions.

(8) This story in the Financial Express merely repeats the RBI notification on the Joint Lenders’ Forum. The useful thing though is that it clarifies that RBI had reduced the threshold for the JLF to move on the matter of NPA resolution. It was 75%. Now, it is lower. Find the RBI notification here.

To facilitate timely decision making, it has been decided that, henceforth, the decisions agreed upon by a minimum of 60 percent (75% before) of creditors by value and 50 percent (60% before) of creditors by number in the JLF would be considered as the basis for deciding the CAP, and will be binding on all lenders, subject to the exit (by substitution) option available in the Framework.

(9) This ‘Edited Excerpts’ of the interview of ET NOW with Abizer Diwanji of Ernst & Young India is not very helpful because there is a disconnect from his answer to Q1 and the second question.

For example, he says:

There is a reasonable justice that comes through from the vigilance providers to make sure that people are not unnecessarily penalised. To take away the moral hazard and put into the RBI’s basket, I do not think is going to help.

But to actually enable banks to take bold decisions will certainly help. So one has to see what the legislation comes up with. If there is only an amendment in 35A, I think that would not go down very well. But if there are amendments to coming to the bankruptcy code, policies which say that there are legitimate consequences that can come about and get PSU banks to move towards the bankruptcy code, I think that legislation would help.

That was my initial reaction. I thought the Ordinance passed the buck to RBI and I was not sure that RBI did not have powers earlier to do some of the things that it is now being specifically empowered to do. I had made this point earlier. May be, the devil is in the details, as I had indicated above (‘guideline’ vs. ‘direction’).

(10) As a layman (not a lawyer, that is), I find Section 35 A of the Banking Regulation Act 1949 sweeping enough:

35A. Power of the Reserve Bank to give directions

(1) Where the Reserve Bank is satisfied that-

(a) in the [public interest]; or
[(aa) in the interest of banking policy; or]

(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or

(c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.

 (2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect. [Link]

The Section 35A and some provisions in it have been inserted in 1956, 1960 and 1968 respectively.  They seem broad enough for RBI to act. IF it has not acted on these, I doubt if it was lack of legal empowerment. May be, it was waiting for the political signal.

In other words, the utility of the Ordinance lies in the political signalling rather than incremental empowerment of RBI, the Banking Regulator.

If so, cliched as it might be, the proof of the pudding of political will to tackle the issue will come in the eating, when certain assets of certain borrowers are auctioned off, equity rights stripped, management changed and bankruptcy initiated – if they happen, that is.

(11) Well, may be, that is a trifle too cynical or narrow or both. As this article in Business Standard points out, the Ordinance is part of the new ‘NPA Framework’. Of course, there is no document that is available for us to examine the elements of this new ‘NPA Framework’. This article provides us glimpses.

Specifically, it says,

There is also an associated implication of the ordinance in the manner that the provisions of the Bankruptcy Code have now been linked to the Banking Regulation Act. Prior to the Union government directing the RBI to initiate the NPA resolution process, the government now has to establish the incidence of a default as defined under the Code. So far, the linkage between the Bankruptcy Code and the Banking Regulation Act was not there and could have come in the way of the central bank taking action against any bank for ignoring a default. [Link]

The statement is speculative in nature. My reading of Section 35 A of the Banking Regulation Act tells me that it is comprehensive enough already and RBI (or, for that matter, any one) could have invoked any law of the land, including the new Bankruptcy Legislation 2016 to expedite matters. So, it might be a case of hesitancy on the part of the regulator not knowing the extent of political will. Perhaps, again, this Ordinance and the new NPA framework is a case of mustering political will.

(12) I doubt if the ‘NPA framework’ or the Ordinance addresses the issues raised below in the ‘Business Standard’ article. May be, not all information is in the public domain yet and they may be released in installments. The Ordinance is the first installment of actions, may be.

The operation of the Bankruptcy Code helped the situation only up to a point. The policy as well as regulatory environment was such that asset reconstruction companies (ARCs) were unable to strike deals on buying sticky loans on which they hoped to make reasonable returns. On the other hand, the bank managements were not bold enough to sell the sticky assets to ARCs at such discounts as would make the deal remunerative.

This called for regulatory reforms that, on the one hand, would have allowed ARCs to be floated by private equity firms that could take the risks and, on the other, would have allowed banks to take the financial hit on such loans in return for a more healthy-looking balance sheet. Since such reforms did not take place, let alone being on the cards, nothing much changed as far as ARCs’ capability of making a dent on stressed banking assets were concerned. [Link]

(13) This article provides more details on the NPA framework:

The new framework to deal with Rs 6 lakh crore worth of toxic assets was approved by the Cabinet on Wednesday. It contains a set of fresh guidelines for public auction of assets by public sector banks (PSBs) for the steel and power sectors, which account for a majority of toxic assets.

Sources told Business Standard that when stressed assets were put on the block, banks would reach out to state-owned companies to buy those up. “Large cash-rich public sector companies will be encouraged to buy the assets being auctioned in their sector by the state-owned banks,” an official said.

Clearly, this is meant to address the political fallout of auctioned assets being sold off cheaply to private interests. To what extent is the sales to public sector companies a good thing, economically, is debatable. In fact, if this process results in a higher public sector share of India’s economic output generation, I wonder if it is really a good thing.

(14) ‘Business Standard’ proceeds to give us more glimpses of the contents of the NPA Framework document.

Besides, the board for financial regulation and supervision will be tightened further.

“The NCLT will be strengthened with additional manpower now that we expect many companies whose balance sheets have turned toxic and are beyond revival to undergo proceedings,” the official said.

The framework also envisages amendments to the Prevention of Corruption Act to exempt commercial decisions by PSBs from scrutiny by investigating agencies. Both the amendments are likely in the monsoon session of Parliament.

The government has asked banks to provide data on their top NPA accounts. It has also sought more information from consortium leaders. [Link]

What are the two amendments referred to above? I can see only one.

(15) There is a useful image in the Business Standard article on the NPA numbers.

(16) This article was dated two hours earlier than this article also both of them provide the same information. The second article, I think, merely updates the information on the Presidential assent.

(17) There is also a short interview with Sanjeev Sanyal, Principal Economic Advisor to Government of India who reiterates that Delhi would not interfere with Mumbai (read GoI/PMO/MoF with RBI).

Conclusion:

What comes through is that there seems to be an incremental political will to let the process of NPA resolution move on. The government has sought to insulate itself from pulls and pressures from delinquent bank borrowers by empowering the RBI to take necessary actions by issuing directions to banks. The RBI had promptly revised the terms of the Joint Lenders’ Forum.

But, as stated more than once in this post, the Government’s resoluteness on resolving the issue will be tested when specific situations emerge.

The situation on attracting bidders for auctioned assets remains unclear. Pricing has to be right. That would open up a different set of issues. I had mentioned them above. They do not seem to have been clarified yet.

However, the Government seems to be ducking the issue or solving the issue cleverly by letting Public Sector Entities bid for the assets. They may be under pressure to bid for the assets at higher prices. In other words, this is a backdoor re-capitalisation of banks by the government through public sector entities. May be, this is the core of the NPA framework and the rest is a nice obfuscation. That is a cynical but not wholly unreasonable view of the package.

The Cabinet has approved a ‘NPA Framework’, which only ‘Business Standard’ seems to have seen.

The issue of amending the ‘Prevention of Corruption Act’ has been flagged much earlier. The government is acting now, it seems. See my article in ‘Swarajya’ published a year ago. It still remains relevant and a useful benchmark to compare this new ‘NPA Framework’ (whatever we have seen of it through ‘Business Standard’ articles).

Clearly, the opportunity to use the crisis to re-organise or restructure Public Sector Banking itself seems to have been passed up. Or, may be not. But, seeing the ‘escape clause’ of auctioning assets off to public sector undertakings, it is possible to guess that the government would not be keen on diluting or abandoning or radically recasting the Public Sector nature of Banking in India. A wasted opportunity.

Perhaps, a strict-to-fair grading for the package is 1.5 cheers and a fair-to-liberal grade for the package is 2.0 cheers.

Why is finance pro-cyclical?

There are many explanations to this. I discuss them in my classes. But, a nice and elegant explanation was offered by Mr. Fabrizio Saccomanni, former Minister of Economy and Finance in Italy at a BIS Special Governors’ Meeting in Manila in February 2015 and I quote:

As I have argued in the past (Saccomanni 2008), although global financial intermediaries operate in a highly competitive environment, they have uniform credit allocation strategies, risk management models and reaction functions to macroeconomic developments and credit events. Thus, competition and uniformity of strategies combine, in periods of financial euphoria, when the search for yield is the dominant factor, to generate underpricing of risk, overestimation of market liquidity, information asymmetries and herd behaviour; in periods of financial panic, when the search for safe assets is predominant, they combine to produce generalised risk aversion, overestimation of counterparty risk and, again, information asymmetries and herd behaviour. [Link]

Nice. I like it. The statements are testable hypotheses. I like it because I have long held the view that competition in the financial services industry is not the same as competition elsewhere in the real world. That does not mean that the optimal number of firms in the banking industry is ONE but that competition requires regulation and ‘leaning against the wind’ norms – countercyclical credit buffers come to mind – to ensure that competition in the banking industry is not welfare-subtracting for the economy.