Thread by @marginalideas

Book 29 – Bad Money – Inside the NPA Mess and How It Threatens the Indian Banking System

A fantastic read on what’s wrong with the Indian public sector banks–Think the part where @kaul_vivek explains how well Axis has done after being just an investment for the govt. instead....

...of an enterprise to run captures the overall essence of the book.

Two sets of people it is a must read for – Traders and People working in these PSBs! Traders because they will understand how PSBs as a whole group operates. And for people working in PSBs so that..

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...they understand that while some people might be working well, as a whole, it’s doing a very, very poor job. Pains me to say because I was once an officer with the SBI!

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The book starts with why Vijay Mallya or Nirav Modi, who, despite being the poster boy of NPA mess, are actually smaller fish in the bigger pond – People like Brij Bhushan Singal, Ruia Brothers (Shahi & Rabi) have defrauded PSB of money more than Rs. 50,000 Cr- 5-6x...

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..that of Mallya. Jiwarijika’s of Alok Industries have defrauded banks for more than Rs.23,000 Cr. There is a whole chapter dedicated to this and it is a must read.

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Another key point is that the simplistic explanation which the media loves to give – is mostly nonsense. For eg – There is a whole lot of issues between RBI reducing repo rates and loan rates getting reduced. Supply demand for one, Deposit rates for other!

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There are some chapters on the birth of public sector banks, SBI and how the banks got nationalized in 1969 and then again in 1990s. It takes up from there and describes the retail banking crisis of 1990s led by Loan Melas and indiscriminate lending in huge groups where..

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...any sort of credit appraisals was impossible. Default rates were at 70% and more.

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The start of PSB as retail banks, providing only working capital loans is well documented. There is some discussion on DFIs (such as IDBI and ICICI) which were set up only for industrial lending and their gradual decline and movement of industrial finance is a treat to read.

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Another key reading for me was how the stock market scams by Harshad Mehta, Ketan Parekh and others led to increase in bank savings and basically we have never recovered from the same–Investments in equity remains low till date! The attached pic says everything!

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Banks lending to industry (More so PSB) have increased to ~24% of GDP in 2015 from ~10.5% in 2001 and much lower earlier. Even in Industry, the lending to Steel, Infrastructure, Power, Textile have increased at break-neck speed! This is where the lack of specialization..

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...by PSB bank managers come into picture – They kept giving loans to the industries which were seeing difficult times. It is as if they had zero idea about what’s going on in the industry. Steel, Power and Infra is a big example here.

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The more worrying part is– Lending to infrastructure (&its various subsegments) increased to ~55% of lending to industry by 2010 compared to ~16% in 2001.

Economic growth, which was the best in India’s history, made everyone believe that those growth will continue forever.

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This led to inability of players to pay back due to a mix of factors–Economic downturn, INR depr & delay in projects leading to their abandonment. In fact, the value of abandoned projects reached a high of Rs 8,20,127 Cr in 2017-18.

It was less than Rs.3 Lk Cr in 2010-11

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The inefficiencies of bank management are thoroughly explained in various chapters. Not to say that there is no crony capitalism or no political interference, but this aspect should not be forgotten. Also, there is no accountability–Look at what happened to Chanda Kochhar..

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..at ICICI compared to what happened to the MD/CEO of Punjab National Bank, even though the fraud was 5x larger here.

This needs to change. And change fast. Babus at PSBs need to be held accountable for their deeds. Fast.

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There is a lot of Ostrich syndrome going around with both the govt. and the PSB bank management which Rajan tried to correct and succeeded for some time. The book is a fantastic resource to understand how the IBC, the PCA framework and other resolution framework work...

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...in the country and how the current govt. with the Mr. Shaktikanta Das has essentially reverted the good work done by Rajan .

The current govt. has basically again started kicking the can down the road. All progress reversed here.

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There is a reason NPAs have started coming down since 2019-20. And the reason is simple – PSBs have simply stopped recognising it. The way it was pre-Rajan. The can is becoming full of worms again!

Like I said, all progress reversed here.

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Money spent on recapitalization in last 2-3 years is staggering–Rs. 2,96, 000 Cr compared to planned Rs.20,000 Cr!
Basically, the taxpayers have paid big for the misdemeanors of the Govt.,PSB bank officials and crony capitalists. In that order. It is not going away anytime

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There is an interesting chapter on the small saving schemes of the govt. and how higher deposits there have led to increase in amount available to these schemes. And since 2017, the govt. has actually used these NSSF schemes to fund deficits of FCI, NHAI and others....

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basically managing the fiscal deficits and taking them off govt.’s balance sheet and putting it into NSSF’s! The scam is amazing!

The effective fiscal deficit has been ~8.5% for last 2 years while the Junta is being led to believe it’s 3-3.5%! This was really eye opening

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There is a good explanation of the concept of “Privatization by Malign Neglect”–This has happened in telecom (BSNL), in airlines (Air India) & is now playing out in the banking sector. Private sector has gained significant grounds in both deposits and advances while PSBs..

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..are letting the private sector eat their share away. Given how PSBs are operating, there is no other way it will end except slow death of the PSB and multiple rounds of recapitalization – It’s the child that the parent will keep feeding!

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The book talks about why tariffs don’t solve anything (Consumer is fucked basically, while inefficient industrialists make hay), state of the Power sector, Coal India, Discoms and the pathetic way they operate.

Good read on the overall state of Power and Steel sector.

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Discussion on PSB merger and why they won’t make sense unless people are fired is a good one. People don’t get this though. Neither do the politicians – Kicking the can down the road is the biggest issue! No one wants to deal with this.

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Small chapter on PMC and other co-operative bank and the plight of depositors. Learning – Don’t put all your eggs in one basket, even if the basket is owned by the govt. and comes with sovereign guarantee. Access to money when needed is as important as safety.

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We have let many a crisis go waste and we are doing the same now in the current scheme of things. @kaul_vivek explains many a measures to correct the PSB disease, all revolve around reducing the role of govt. as a passive investor, having one regulatory authority..

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for ALL Banks, incentivizing the PSB managers the right way through ESOPs and clawbacks – Carrot & Stick.

I can’t’ possibly summarize the book here really. Go read it if you want to understand how banking works in India.

Get the book here - amzn.to/2OXjNzV

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The sector and the country need some red pills – The same has been prescribed since decades. The question is – Who will take it?

Get the book here - amzn.to/39yD5VL

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