An Indian sub-prime crisis in the making?

An Indian sub-prime crisis in the making?

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Rohit Azad
Visiting Scholar at the New School for Social Research and Columbia University and Teacher at JNU.
FEBRUARY 05, 2017

https://cdn0.desidime.com/attachments/photos/457589/medium/3955025debt.jpg?1486621461

The share of debt of firms with failing financial health has been going up every year since 2011, leading to mounting NPAs

The Indian corporate sector is grappling with a severe bad debt crisis, and as a result, the banks (public sector banks) are increasingly getting saddled with non-performing assets. Calling it India’s sub-prime crisis might be an exaggeration but I would just like to add ‘not yet’! Moreover in conditions such as these, with the global economic crisis in the background, it’s better to be cautious rather than looking back at the data when it’s all over. This might also help policymakers to take regulatory steps in time to control the contagion before it spreads in the banking system in a big way.

Let’s look at the extent of the bad corporate debt. There are two statistics for a corporate house, which need to be looked at to understand the nature of the debt crisis. One is the amount of bank loans taken in a particular year and the other is whether the firms were financially healthy enough to take the loan in the first place.

Healthy vs ponzi firms
The latter is measured by whether they made enough profits in a particular period to even cover for the interest payments accrued on past debts. As we all know, any loan you take has two parts when the repayment starts: the principal (total loan amount) and the interest accrued on it. For a firm to be financially healthy, just as a family taking a loan, it should make enough profits to cover for both (in financial terms, these are called hedged firms). On the other hand, an unhealthy firm is one which does not even cover its interest payments (the ponzi firm). That the latter should not be given more loans is a no-brainer as that is a sure-shot recipe for disaster. At the heart of the U.S. sub-prime crisis was the fact that loans were dished out increasingly to ponzi households. That’s where the similarity lies. What was true for the household sector could be true for the corporate sector in India.

https://cdn0.desidime.com/attachments/photos/457590/medium/3955025Loans.JPG?1486621465
Most of the burden of bad loans since 2011 has been borne by public sector banks as opposed to the foreign banks or privately-owned ones

In financial jargon, the health of a firm is measured by what is called the Interest Coverage Ratio (henceforth ICR). It is a ratio of net profits to interest payments due on past debt. It being less than 1 is a danger sign for the lender because it means that the firm is not even making enough profits to pay for its past interest payment commitments let alone the principal amount.

We cover the period between 2011 and 2015 during which this process unfolded in India. We look first at a larger sample of corporate firms with consistent coverage available for these (and some other relevant variables) in the datasets available.

ICR, best metric?
One might doubt whether ICR is the best measure of financial health especially for companies which take longer to generate profits resulting from time lags that assets take to build. In anticipation of this criticism, I present three other variables to present a comprehensive picture of the current corporate debt crisis but interested readers can just look at the ICR to draw their conclusions.

The three other measures are: profitability i.e. whether the firms were making positive post-tax profits; ratio of current assets to current liabilities to measure what part of the liabilities they can pay off if they were to sell their assets; debt to equity (own capital) ratio to measure how much have they stuck their own neck out compared to other people’s money in the risky adventure they are undertaking. The well-accepted thresholds for these measures are 0, 0.5 and 5 i.e. firms which are making negative profits, can honour at least half their liabilities by selling off the assets, while debt is five times as large as own capital respectively. The accompanying Figure 1 presents the share in the debt of such firms in the total sample debt with these individual characteristics over the years 2011-2015.

https://cdn0.desidime.com/attachments/photos/457592/medium/39550251486621466_3.JPG?1486621467
Corporate borrowings have risen year-on-year, despite declines in ICRs (<1 in some cases) and high debt-equity ratios, signalling disproportinately high loan burdens

It can be seen from the figure that the share of debt of firms with failing financial health has been going up since 2011. The dotted line represents how the share of bad debt has increased in those firms which could not even honour their interest commitments to the lenders and it has increased significantly since 2012. These are the ponzi firms we discussed above.

Let us now look at something more specific with respect to some big sharks in this respect. We take a sample of four corporations out of the top 10 corporations (in terms of borrowing) identified by the Credit Suisse 2012 report on the House of Debt and follow their trajectory for the same time period as above. Instead of looking at the stock of debt, we focus now on new borrowings during these years because it is possible to argue that if you are not in a position to pay in full the interest accrued, then on that account alone the debt can keep piling up.

What is significant here is that most of these firms were able to not only extract fresh borrowing from the banks but actually increase it even as their status continued to be ponzi! It is for this reason that I call it a potential sub-prime crisis building up.

It can be seen from the Figure 3 that other than Vedanta Ltd., all companies have had at least two years of being in a ponzi state (ICR<1) and yet their borrowings, for most, have increased every year. Let me draw an analogy here. It shows that with increasing diabetic problems in a patient (ICR falling), doctors (banks) are injecting more of sugar (loans) to the body of the patient! Very high debt-equity ratios in the table also corroborates their bad health condition.

Bank NPAs
So far we have seen the story from the culprits’ side. Let us briefly look at the problem from the side of the banks, which has got a lot of media attention especially since the then governor, Mr. Raghuram Rajan flagged this issue initially. As can be seen from Figure 2, most of the burden of bad loans since 2011 has been borne by public sector banks as opposed to the foreign banks or privately-owned banks. The share of stressed loans, which is the sum of non-performing loans and restructured loans, as a percentage of total advances made has been skyrocketing for public sector banks.

In conclusion, while the banks have knowingly put themselves in the current position, the real culprits are the big borrowers and promoters who are not paying up as promised and the government, instead of being strict on the defaulters, is expecting the central bank to inject liquidity into the banking system to write off these bad loans. It would be travesty of justice if this were allowed to be done. It would just give a fillip to the habitual defaulters to default with impunity since the central bank will always be made to come in as the lender of last resort.

http://www.thehindu.com/business/Economy/An-Ind...

45 Comments  |  
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Socrates wrote:

@DealSeeker @cybertechie @raghupro @ranjithsai01 @raven_kira @A2Zdeals
Any comments?

Growth begets risk. Sometimes, it pays off. Many a times, it doesn’t.

@A2Zdeals Considering the current global economic scenario, I don’t think it’s wise to be this bullish. What do you think?

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Another Goldman-Lehman style fiasco?

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Remember reading in some blog that Demonization exercise was taken up to increase the banks reserve base due to continuously increasing NPAs to avert a crash by taking some more breathing time to fix the ‘Kolkata firms’ (benami or Ponzi firms) in near term with increased digital push for better traceability.

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DealSeeker wrote:

Growth begets risk. Sometimes, it pays off. Many a times, it doesn’t.

@A2Zdeals Considering the current global economic scenario, I don’t think it’s wise to be this bullish. What do you think?

Few facts :

Indian equity markets were up ~4% in January 2017 (considering better than expected corporate results)

Performance of global equity markets was mixed with emerging markets including India outperforming the developed markets
https://cdn0.desidime.com/attachments/photos/457627/medium/3955305mu_table1.gif?1486628845

FII’s as usual selling Indian equities whereas Inflows in domestic Equity mutual funds continue to rise

Any volatility in Indian equities induced by global events at a time when the Indian economy is improving on nearly all parameters will be a good opportunity for investors

There is no rate cut & stance of RBI is changed from accomodative to neutral thereby limiting future rate cuts also
Liquidity is strongly positive post demonetisation
CPI is falling since 2014

There are various other factors impacting India story

So I look for more positives

PS : In reference to above analysis, there are many things not going correct & market watchdog / regulators putting their best efforts to nab. Certainly strict political will only can help make things better

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@A2Zdeals So being bullish is good in the short term, eh?

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DealSeeker wrote:

Growth begets risk. Sometimes, it pays off. Many a times, it doesn’t.

https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif
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DealSeeker wrote:

@A2Zdeals So being bullish is good in the short term, eh?

medium to long term
short term is like buying TC cards & expecting activation for online transaction in week’s time https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif

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Socrates wrote:
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https://cdn3.desidime.com/assets/textile-editor/icon_lol.gif


Let’s not get philosophical or holistic when it comes to finances, bro. The world has moved to printing money (or rather adding trailing zeroes on a computer screen) on a whim. You can either keep up or be left behind under the old way of doing things (gold standard, etc.).

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@DealSeeker @A2Zdeals

The topic is about the possible crisis in Indian economy. You guys talk about short term, long term investments. https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif

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Socrates wrote:

@DealSeeker @A2Zdeals

The topic is about the possible crisis in Indian economy. You guys talk about short term, long term investments. https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif

What you missed is that investment landscape = economic outlook.

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Socrates wrote:

@DealSeeker @A2Zdeals

The topic is about the possible crisis in Indian economy. You guys talk about short term, long term investments. https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif

CRISIS comes for Earnings Growth too
Below are values of SENSEX & every few years SENSEX doubled. One may cite many reasons for indices growing but eventually earnings & business soundness is must for a company to grow.

Year Value Times
1979 118.76
1982 235.83 1.99
1988 666.26 2.83
1991 1,908.85 2.87
2002 3,377.28 1.77
2004 6,602.69 1.96
2006 13,786.91 2.09
2014 27,499.42 1.99

@DealSeeker
basis for me being bullish is above

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DealSeeker wrote:
https://cdn3.desidime.com/assets/textile-editor/icon_lol.gif


Let’s not get philosophical or holistic when it comes to finances, bro. The world has moved to printing money (or rather adding trailing zeroes on a computer screen) on a whim. You can either keep up or be left behind under the old way of doing things (gold standard, etc.).

Whatever! In the end, we can never do without good food, clothing, shelter, education and health care. If a system does not take this basic reality into account, it is bound to fail miserably. We cannot eat pieces of paper and computer chips, and survive. https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif

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Socrates wrote:

@DealSeeker @A2Zdeals

The topic is about the possible crisis in Indian economy. You guys talk about short term, long term investments. https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif

Paisa to sabko banana h na
Every Opportunity weather its going up or down Paisa banana chaiye

Can short nifty 2 https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif
at these lvl

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@A2Zdeals 2008 missing from the above picture. https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif

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DealSeeker wrote:

@A2Zdeals 2008 missing from the above picture. https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif

you know why https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif
outliers are always there & we have to live with it

PS : as a layman i can just say sometimes we don’t like lemon (read lehman) https://cdn3.desidime.com/assets/textile-editor/icon_wink.gif

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Socrates wrote:

Whatever! In the end, we can never do without good food, clothing, shelter, education and health care. If a system does not take this basic reality into account, it is bound to fail miserably. We cannot eat pieces of paper and computer chips, and survive. https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif

Have you ever read about technological singularity? Read up. Many revolutionary changes are coming our way faster than most people are cognizant of. All of the fundamentals that you “think” are fundamentals are going to change. And this will happen in our lifetimes. https://cdn2.desidime.com/assets/textile-editor/icon_wink.gif

CC @blackmail

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DealSeeker wrote:

Have you ever read about technological singularity? Read up. Many revolutionary changes are coming our way faster than most people are cognizant of. All of the fundamentals that you “think” are fundamentals are going to change. And this will happen in our lifetimes. https://cdn2.desidime.com/assets/textile-editor/icon_wink.gif

CC @blackmail

That depends on how we define intelligence or consciousness. What we usually refer to as consciousness is only its content. It’s the efficient manipulation of this content that we usually call intelligence. But how do we know that this is all that exists? Artificial intelligence can any time become better than humans in terms of intelligence but it will forever remain limited to the efficient manipulation/modification of the contents of consciousness. One may assert/deny pure consciousness in theory. But those individuals in history whose systems were flushed of the content present a different story of existence/reality.

The books of J Krishnamurti are highly recommended in this regard. https://cdn2.desidime.com/assets/textile-editor/icon_wink.gif

CC @Stupendous Man

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Socrates wrote:

That depends on how we define intelligence or consciousness. What we usually refer to as consciousness is only its content. It’s the efficient manipulation of this content that we usually call intelligence. But how do we know that this is all that exists? Artificial intelligence can any time become better than humans in terms of intelligence but it will forever remain limited to the efficient manipulation/modification of the contents of consciousness. One may assert/deny pure consciousness in theory. But those individuals in history whose systems were flushed of the content present a different story of existence/reality.

The books of J Krishnamurti are highly recommended in this regard. https://cdn2.desidime.com/assets/textile-editor/icon_wink.gif

CC @Stupendous Man

I hardly understand half of economic jargons mentioned here. So I would steer clear of the topic. But talking in general, yes as you stated in your previous comment without putting up a robust structure in place to cater the basic necessities we can’t go forward, technology and computers are to aid human intelligence they can’t replace one.

Secondly, when we adopt a new system to curb one drawback we open a new one(deliberately or not). So can we say that we have moved forward?

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StupendousMan wrote:

I hardly understand half of economic jargons mentioned here. So I would steer clear of the topic. But talking in general, yes as you stated in your previous comment without putting up a robust structure in place to cater the basic necessities we can’t go forward, technology and computers are to aid human intelligence they can’t replace one.

Secondly, when we adopt a new system to curb one drawback we open a new one(deliberately or not). So can we say that we have moved forward?

+1

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saymyname wrote:

+1

See I have got a ‘Critic’ badge so have to criticise everything to prove it’s worth. https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif

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StupendousMan wrote:

See I have got a ‘Critic’ badge so have to criticise everything to prove it’s worth. https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif

That badge is for your historical performance ie Puraane paap https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif
Now do something for which we can hope you to get some more badges, being Indian thrift should not end https://cdn2.desidime.com/assets/textile-editor/icon_wink.gif

Already Maga show has happened & sunny deol has become Govinda https://cdn3.desidime.com/assets/textile-editor/icon_lol.gif

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A2Zdeals wrote:

That badge is for your historical performance ie Puraane paap https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif
Now do something for which we can hope you to get some more badges, being Indian thrift should not end https://cdn2.desidime.com/assets/textile-editor/icon_wink.gif

Already Maga show has happened & sunny deol has become Govinda https://cdn3.desidime.com/assets/textile-editor/icon_lol.gif

Nakaara dimer badge dedo mujhe koi.. Everybody is flaunting their badges https://cdn2.desidime.com/assets/textile-editor/icon_cry.gif

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Socrates wrote:

That depends on how we define intelligence or consciousness. What we usually refer to as consciousness is only its content. It’s the efficient manipulation of this content that we usually call intelligence. But how do we know that this is all that exists? Artificial intelligence can any time become better than humans in terms of intelligence but it will forever remain limited to the efficient manipulation/modification of the contents of consciousness. One may assert/deny pure consciousness in theory. But those individuals in history whose systems were flushed of the content present a different story of existence/reality.

The books of J Krishnamurti are highly recommended in this regard. https://cdn2.desidime.com/assets/textile-editor/icon_wink.gif

CC @Stupendous Man

Even after 2 month sabbatical you are entertainer https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif #MeBeggingBadge https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif

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saymyname wrote:

Even after 2 month sabbatical you are entertainer https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif #MeBeggingBadge https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif

Magus bro ne bahut threads ki dhajjiya udaai hai off topic discussions se
Ab to he has to bear notifications also that someone is creating ruckus in his topic https://cdn3.desidime.com/assets/textile-editor/icon_lol.gif


Yahan log deals, cashback etc ki chinta me hai aur woh doom day ki tayyari kar raha hai


Desh ki saari chinta isi aadmi ko hai
Jeene ke hai chaar din
Do din tc gc from SC kharidne me nikal gaye
Baki 2 activate karne me
Use karne ke liye bache hi nahi din https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif

Dual survival cody lundin 2
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This is far away from my imagination. Can’t understand these things at all. I am shocked how people understand this thing. https://cdn2.desidime.com/assets/textile-editor/icon_rolleyes.gif

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Socrates wrote:

That depends on how we define intelligence or consciousness. What we usually refer to as consciousness is only its content. It’s the efficient manipulation of this content that we usually call intelligence. But how do we know that this is all that exists? Artificial intelligence can any time become better than humans in terms of intelligence but it will forever remain limited to the efficient manipulation/modification of the contents of consciousness. One may assert/deny pure consciousness in theory. But those individuals in history whose systems were flushed of the content present a different story of existence/reality.

The books of J Krishnamurti are highly recommended in this regard. https://cdn2.desidime.com/assets/textile-editor/icon_wink.gif

CC @Stupendous Man

Thinking within a box, are we?

What defines consciousness?

Before you respond to the above question, read the following to understand the context behind that question. http://www.kurzweilai.net/the-problem-of-ai-con...

Do not mistake the term “technological singularity” for the now ubiquitous term AI. Please read up and educate yourself on the difference.

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StupendousMan wrote:

I hardly understand half of economic jargons mentioned here. So I would steer clear of the topic. But talking in general, yes as you stated in your previous comment without putting up a robust structure in place to cater the basic necessities we can’t go forward, technology and computers are to aid human intelligence they can’t replace one.

Secondly, when we adopt a new system to curb one drawback we open a new one(deliberately or not). So can we say that we have moved forward?

Economic jargon! This is one of the most layman articles I’ve read on economics. https://cdn1.desidime.com/assets/textile-editor/icon_eek.gif
It just talks about how our public sector banks have been offering loans to big companies which are incapable of repaying them, again and again. The central bank will be made to take care of the bad debts in the end. Finally, the common man will be the one facing the aftermath. Simple enough! https://cdn2.desidime.com/assets/textile-editor/icon_toungueout.gif

About your second point, I hope @DealSeeker is better equipped to respond since he brought in the concepts of “growth” and “singularity”. https://cdn2.desidime.com/assets/textile-editor/icon_wink.gif

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DealSeeker wrote:

Thinking within a box, are we?

What defines consciousness?

Before you respond to the above question, read the following to understand the context behind that question. http://www.kurzweilai.net/the-problem-of-ai-con...

Do not mistake the term “technological singularity” for the now ubiquitous term AI. Please read up and educate yourself on the difference.

See, almost all definitions of consciousness are based on the idea that consciousness is an emergent property of a complex system. Human consciousness is based on the complexity of human brain. Likewise, AI consciousness is based on the level of complexity the machine has. Technological singularity, in my understanding, says that there will be a day when a highly complex machine will achieve a level of intelligence surpassing all human intelligence, because of a trigger which will enable it to self-upgrade. Hope I got it right.

Now, what if someone says, man has, all along, been defining consciousness/intelligence only based on its content/function but it’s all wrong? How are we going to go about it? The only tool we have is this content but he says this is not enough to “understand” what he says. We are all in a fix then, right?

CC @Stupendous Man

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