The Connectere brings forward the mind’s eye and panoramic view of the young writing enthusiasts on various topics

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choi-gate

CHOI-GATE

Each one of us acknowledges that politics is full of drama. If someone makes the brave decision of entering this insanely erratic and terrifying space, then you know they’ll experience their fair share of developing dirty secrets, scandals, corruptive tendencies and whatnot. Such is the impression which we the common people have about the field of politics and to be fair, it’s not our fault. The lack of trustworthiness the public places in politicians is all thanks to the general opportunism, hollowness and vileness observed in their words and actions. One such incident which brought to light these exact things within the political sphere of South Korea happened some years ago. This disturbing yet eye-opening incident, also popularly known as “Choi-gate”, illuminated the ever-increasing uncomfortable proximity between business and politics which strongly characterizes South Korea. That’s enough suspense, let’s unpack what really happened.

RBI

Asset Quality Review Policy of RBI

The sine qua non for achieving growth and inflation-the two main objectives of monetary policy formulation in a bank dominated financial economy, is a robust monetary policy transmission framework that transmits its impulses through the banking system. As signaled, effective monetary policy transmission is largely dependent upon sound health of the banks’. Healthy banks with low default risks accelerate monetary policy transmission by amplifying the effect of changes in money market interest rates (short-term policy) on lending interest rates, by changing their lending standards and their use of non-price measures while sanctioning loans. These banks are better able to pass on interest rate changes of the RBI symmetrically on its deposits and loans as compared to banks with a high level of prospective or realized non-performing assets (NPAs) who tend to push up the lending rates and their net interest margins (difference between the net income generated by banks and the amount of interest paid out to their lenders) on account of building up provisions by loading credit risk premium on its performing loans.

Regulatory forbearance; Propulsion to Asset Quality Review

The Reserve Bank of India, in the aftermath of the global financial crises of 2008, relaxed norms for restructuring assets, allowing companies to recoup from the funding imbalance and repay their debts. However, these companies classified troubled assets as standard assets rather than non-performing assets, hence eliminating the need to create provisions, those non-performing loans would attract. This allowed the banks to not set aside provisions for such loans with the expectation that once the economy turns around, the borrower’s fortunes shall improve along with improvement in the quality of the asset in the bank’s books.

RBI believed that banks were simply postponing their bad loan recognitions under the forbearance regime. Banks on the other end insisted on delaying their bad loan recognition and not calling their loans bad even after 3 years of non-payment of loan. This erratic behavior of banks caused colossal amounts of apprehensions on the investors’ part.

This regulatory forbearance regime was sought to end in 2015 when RBI pointed out that the classification of the restructured assets was not in line with the international best practices and that the total restructured assets in the economy have significantly outgrown total non-performing assets. In an attempt to ensure that banks across the nation took steps to clean their balance sheets and are adequately capitalized, RBI worked with the senior national supervisors and unfolded the Asset Quality Review (AQR).

AQR – causing stir in the banks’ balance sheets

Owing to the rising NPAs within the banking systems, often regarded as the leading financial sector problem, RBI set in motion, as a part of its routine annual financial inspection (AFI- annual inspection of banks’ books by RBI), a special inspection of sample of loans to ensure that the asset classifications are in line with the loan repayments and that the banks have made adequate provisions. This special inspection was called asset quality review. AQR is essentially an endeavor to value the asset to ascertain the credit risk associated with it; assessing the value of the asset in books of the lender, evaluating the collateral provided by the borrower and his repayment capacity in order to compute the value of the loan closest to its perceived value and determine whether a provision is to be made or it should be written off from the books.

A Bloomberg Quint study comparing the results of 42 listed banks reported in the December 2016 quarter with the results reported in the September 2015 quarter (i.e. before AQR was conducted), revealed that the bad loans nearly doubled from ₹3.4 lakh crores to ₹ 7 lakh crores., just how much the banks were hiding! According the study, the gross NPA of private sector banks increased from ₹33,634 crores in September 2015 to ₹ 80,409 crores. The bad loan pile of public sector banks which stood at ₹3.06 lakh crores in September 2015, swelled to ₹6.2 lakh crores in December 2016.  Clearly, both public and private sector banks were guilty of hiding the true quality of their balance sheets!

The aftermath

Data source- Centre for Monitoring Indian Economy

 Post RBIs clampdown on bank defaults in 2016, the share of public sector banks in overall lending decreased at a rapid pace from 71.6% in 2015 to 57.1% in December 2019, while the private sector banks took away the majority of the share that public sector banks lost. During the same period, the share of private sector banks in total outstanding loans in the economy nearly doubled from 17.4% to 35%. The profits of public sector banks were severely affected as compared to the private sector banks. Between March 2015 and March 2020, the former grew by just 4.1% per year as compared to the latter which grew by 20.1% per year.

However, the private sector banks seem to be lagging behind since December 2019. Their share in over all lending is said to have decreased by 60 basis points to 34.4% while an increase of same amount has been observed in public sector banks’ share which climbed to 51.7%. Economists believe that this stark reversal is due to recapitalization of public sector banks by the government, AQR and prompt corrective actions taken by the RBI.

But wait, what about NBFCs?

Is the Indian economy nearing its completion of bad loans’ recognition? Not at all! Almost a year ago, in august 2019, the current RBI governor Shaktikanta Das denied any plans of conducting asset quality review of non banking financial companies (NBFCs). Even after the financial pressure over several quarters due to the dramatic default by Mumbai based Infrastructure Leasing & Financial Services (IL&FS, that began the liquidity squeeze causing a downward cycle in the economy, and severe mismatch in the books of other NBFCs facing credit squeeze, RBI resorted to closely monitoring them and their interconnectedness with banks while recommending  NBFCs with a size of over Rs 5,000 crores to appoint functionally independent chief risk officers with clearly specified role and responsibilities in a bid to bring in professional risk management system.

The Future

Businesses, supply chains and individual incomes have been severely affected by the nationwide lockdown to contain the spread of Coronavirus. The recent measure- extension of 90 day moratorium on recognition of impaired loans to 180 days along with severe relaxations in the bank lending limits, announced by the RBI puts the banks with already weekend balance sheets at a greater risk. According to the Fitch Ratings, a leading credit rating provider, Indian banks are looking at significant asset challenges for the next two years despite the regulatory measures.

Impaired bank loan recognition will be stretched longer. As more and more relaxation in lending norms is provided by the RBI, lower earnings along with the risk of solvency and balance sheet risks heightens for banks-specially public sector banks that have a greater share of loan books under moratorium as compared to private sector banks. Strong capital support to the banks from the state governments is critical along with gaining control over the rising cases of Coronavirus patients to reverse the currently tepid consumer demand, so as to gain momentum on India’s economic revival.

This article has been written by Neha Haldia, a 3rd year student of Bcom (H) at SRCC.

Collectivist

Collectivist vs Individualist

All of us in this world live in a society. Society plays its part in shaping us, our choices, our mindset and our future, to an extent. In this society, each one of us plays two parts, one, as each one of us, individually (individualist) and two, as a society at large, collectively (collectivist). While it might be said that the former is a subset of the latter, it is true as well that the latter is hugely affected by the former. It is how it influences the buying decisions of all of us consumers in the market.

Individualism stresses the goals and the rights of all of us as a separate entity, as an individual. Driven by personal gains and rewards, an individualist person sets his/her own goals, may prefer working with autonomy as compared to working in a team and values personal independence.

Climate change

Two C’s of destruction: Capitalism and Climate change

The world has 7 years, 101 days, 17 hours, 29 minutes and 22 seconds to prevent its carbon budget from being depleted. This is the warning which the new Climate Clock designed by artists Gan Golan and Andrew Boyd has given out to the world. It’s no news to anybody out there that the Earth is crumbling from the exorbitant pressures put over its resources from the activities of Man and that the end of the world as we know it might not be as far as we think it is, all due to climate change.

With more than 180 countries coming together under the Paris Agreement to pledge that with stringent regulations and policies, their claims of striving to stop the global temperatures from rising by 1.5-degree celsius and successfully preventing the human species from being victims of mass wildfires, droughts, extreme heat waves, ocean acidification and all the other things you could imagine seem good on paper, however, I think it’s time to admit there’s a much bigger problem here.

Religion

Unseen link between religion and economy

According to a study, if India discards religious beliefs that perpetuate caste and gender inequalities, it could more than double its per capita gross domestic product (GDP) growth of the last 60 years in half the time. In his book “An Inquiry into the Nations and Causes of the Wealth of Nations”, Adam Smith applies his laissez-faire philosophy (leaving things to take their own course without any interference) to several aspects of religion. He says that religious beliefs and activities are rational choices. People respond to religious costs and beliefs in a predictable and observable manner. They decide the degree to which they participate and choose to believe in a religion.

Hindsight bias

What is Hindsight Bias?

How many times you have used the phrase “I knew this would happen”? Let’s say that you are watching a match and you bet that your favorite cricket team is going to win here match. Now here two scenarios are possible- first, where your favorite team wins, you are likely going to be cheery about and it and say “I knew they would win!”; Other situation could be where your team loses, your reaction will likely be “the opposition balling was too strong, I saw this coming”, implying that you knew that this was going to happen because there were signs. Though, in reality, you did not have any control or knowledge on what was going to happen, you tell you already knew. Well, you have been tricked by your brain to only recall the memories which make you feel that you are aware of what is going to happen. This in psychology is called a “hindsight bias”.

Overconfidence Bias

What is overconfidence bias?

The study of behavioural finance has proved that psychological influences and biases affect the behaviour of investors. Behavioural finance explains how investors think and the repercussions of their decisions on the market. In this article, we shall be looking into one such behaviour bias of investors- the overconfidence bias.

Overconfidence bias is exactly what it sounds like. The investor tends to hold an egoistic and sometimes even misleading sense of assessment of his/her skill set. It could be a false appeal of their skills and intellect. One of the main talents of an investor is to understand how the market is functioning and which areas are facing fluctuations. Sometimes, a few good predictions can lead to analysts thinking highly of themselves and considering themselves better than the average investor. Overconfidence bias is seen not only in investors but also in other areas of life like sports, driving, and almost everything related to being an expert on a subject.

Mental Accounting

What is Mental Accounting Bias?

Do you remember getting loads of cash on your birthday from relatives along with cards from your friends? The majority of us, I assume, used to rush out to the mall the very next day and spend it on an item that we wanted to purchase for a long time, but never wanted to spend so much money on that item. People may severely judge how you spend your ‘job income’, but no one bothers how you spent your one-time ‘birthday pay off’. Before diving deep into what is mental accounting, let’s study some examples.

In the above example, the reality is that this birthday money is in no way different than your regular job income, or investment returns, perhaps. If your house loan installment needs to be paid, there’s no logic in thinking that ‘why do I use my birthday money in paying it?’.

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