#
Before you listen to this episode of The Scene and the Unseen, I have a recommendation for
#
Do check out Pulliya Baazi, hosted by Saurabh Chandra and Pranay Kottaswane, two really
#
good friends of mine, kick-ass podcast in Hindi.
#
Some economic policies have such drastic effects that it's fair to categorize them as crimes
#
Narendra Modi's demonetization was one such bad policy.
#
And I've had multiple episodes on The Scene and the Unseen where I've laid that bare.
#
Some of Indira Gandhi's policies kept millions in poverty for decades longer than they should
#
And I would have considered her a monster, even if the emergency had never happened.
#
Why do voters tolerate this?
#
Well, the chief reason for this is what public choice economists call rational ignorance.
#
These economic matters are complicated and take a lot of time to understand.
#
Now most voters know that no election is won by just one vote.
#
So their single vote probably won't make a difference anyway.
#
This being the case, why put in the hard work to understand complex economic issues?
#
This ignorance is perfectly rational.
#
So who do we blame for the state of our nation if we can't even blame ourselves?
#
Welcome to The Scene and the Unseen, our weekly podcast on economics, politics and behavioral
#
Please welcome your host, Amit Bhatma.
#
Welcome to The Scene and the Unseen.
#
In this week's episode, we are going to be talking about infrastructure, leasing and
#
financial services, also known as IL&FS, which is surely the most ungainly acronym ever.
#
Cribs apart, IL&FS is a very interesting company because it is not a public sector unit, nor
#
is it quite private sector.
#
The same bad incentives that apply to government-owned companies apply to IL&FS.
#
And while there is taxpayers' money involved, it is in indirect, insidious ways.
#
More than anything, the failure of IL&FS exposes fundamental faults in our system of government
#
and in our financial systems.
#
My guests today to talk about this are Vivek Kaul and Ashutosh Dattar.
#
Vivek is perhaps India's best-known economic journalist, and his specialty is simplifying
#
the complexities of economics and finance for the common layman.
#
He is also the author of the much-acclaimed Easy Money trilogy out now on HarperCollins.
#
Ashutosh is a Thane-based economist I've come to admire recently for his depth of thinking,
#
and he's been writing regularly for the site I edit, Pragathi, at thinkpragathi.com.
#
Before I begin my conversation with them though, a quick commercial break.
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Vivek, Ashutosh, welcome to the Seen Indian Scene.
#
Ashutosh, let me start by asking you that before we even get into what ILNFS is, and
#
to be honest, I didn't know what it was until this whole crisis broke.
#
Can you tell me a little bit about what are NBFCs, like ILNFS is basically a non-banking
#
What are these and why are they required?
#
So technically speaking, any company which is not a bank, but has half of its assets
#
in financial assets, which could be shares, debentures, bonds, whatever, and half of its
#
income that comes from financial sort of interest or dividend becomes an NBFC and requires RBI
#
licensing permission to operate.
#
And so that effectively covers your mortgage companies like HDFC, covers your insurance
#
companies, mutual funds, stock exchanges, mortgage guarantee companies, as well as things
#
Even in a company which is formed just to invest in shares without any public deposit
#
technically becomes an NBFC.
#
So anything which does invest in financial assets and has financial income principally,
#
but is not a bank becomes an NBFC.
#
So that's a definition of it.
#
Now one of the points that you'd made earlier in our conversation before this was that NBFCs
#
like ILNFS essentially also indicate that there's a problem with the regulatory environment
#
in the sense that banks are over-regulated.
#
That is why in some cases companies like this become necessary and then there are spin-off
#
consequences of that and so on and so forth.
#
Can you elaborate a bit on that?
#
So banking in India is very highly regulated and sort of considered to be the case because
#
banks take deposits from public and hence as an investor protection, depositor protection
#
modes, the restrictions on how many branches a bank can open, where it can invest, how
#
much it should lend, what categories, how should it recognize income, what is the capital
#
that it should have and so on and that sort of reduces the flexibility and innovation
#
And as a tool to offset some of that, a category of lending institution which are primarily
#
into lending, not so much into deposits, although many of them take deposits, but primarily
#
into lending is a class of companies called as NBFCs were created.
#
So NBFCs effectively do all kinds of lending that a bank does, it's just that they're
#
not subject to as tighter regulation as banks are and that gives them dynamism.
#
So we've seen a number of NBFCs increase in the last few years because that is not
#
the case with banks and that also has some consequences because of lesser regulation
#
like what we're seeing with iron interest.
#
So essentially what happens is that one of the function of banks because banks are too
#
regulated to perform it in innovative ways is then farmed off and done by NBFCs which
#
are not as regulated as that.
#
Yes, and sort of the irony of it is that many banks themselves have their own NBFCs.
#
So sort of that's the regulatory arbitrage that you get into that.
#
What's regulatory arbitrage?
#
It's like if you make a comparison with the United States and you look at what happened
#
before the financial crisis of 2008, so a lot of these home loans which were being given
#
out were subprime loans and these were not banks, you know, per se which were sort of
#
going, banks were giving subprime loans, but there were other companies and other financial
#
Fannie and Freddie and so on.
#
No, Fannie is a different thing altogether.
#
There were these home mortgage companies and they were essentially, you know, what is referred
#
So they do everything that a bank does, but the regulations governing them are, you know,
#
So they can do stuff which a bank cannot.
#
You know, if you look at the US, a lot of the, you know, financial institutions which
#
got into trouble were basically not really banks, I mean, you know, the Lehman Brothers
#
So if you also look at banks which got into trouble, you know, banks like Citigroup, it
#
was because of lending that they carried out through the shadow banking institutions.
#
So is it the case that banks are over-regulated or NBFCs are under-regulated?
#
What is the problem here?
#
I think the problem is that banks are over-regulated and to give you one example of how the arbitrage
#
works, a bank is required to open 25% of its branches in rural unbanked areas.
#
Now that if I'm a bank that restricts my flexibility, so I have a 100% subsidiary which is an NBFC
#
and I can carry out lending activities in that without subject to those regulations.
#
So in a sense, I'm trying to form a subsidiary to escape some of the tighter regulations
#
that the RBI has imposed on me and as a sort of via media, but that has cost because sort
#
of essentially you are trying to deal with friction.
#
And also then NBFCs, when banks open an NBFC, it seems to be a kind of legalized jogar to
#
get away from a regulatory environment.
#
But I think Vivek, isn't the, you are also sort of making the point that it is also true
#
that NBFCs are under-regulated.
#
Is that what you're saying?
#
I mean, to some extent, yes, so I'll give you a very simple example.
#
And this is not really so much about regulation, but as to how regulators operate.
#
So take a look at RBI, Reserve Bank of India, which essentially regulates banks in India.
#
Now every week, every month, every 15 days, RBI releases some data pertaining to banks.
#
And if you look at that data, you know, it is very detailed.
#
I mean, there is still scope for improvement, but the amount of data that RBI releases on
#
Now take the example of housing finance companies, which are NBFCs and which are regulated by
#
the National Housing Bank, which is a hundred percent subsidiary of the RBI.
#
Try getting data on, you know, housing finance companies, agglomerated data.
#
You can obviously get, you know, data for HDFC or, you know, Tata, home finance and
#
But agglomerated data for housing finance companies is simply not available.
#
The data that you get is two to three years old.
#
So how do you track as to what is happening in that sector at an agglomerated level?
#
So the issue is also, so what this tells us is that at some level, the National Housing
#
Bank is also not really, you know, up to the mark as RBI is.
#
And you know, when we talk about regulation, we obviously think about government regulation,
#
but the most effective and really the only legit form of regulation, and in my opinion
#
is the regulation that customers do and that stakeholders do, and it comes from them.
#
And as you're pointing out, Vivek, to do that, they need information and enough scrutiny.
#
And in this case, what is happening is that that scrutiny isn't there because the data
#
I'll just sort of take a detour, and this is something that the Business India magazine
#
And it's very interesting because, you know, what they say here is, every time Business
#
India approached the institution, which is ILNFS, for a story, it was thwarted by the
#
then chairman, Ravi Parthasarathy.
#
His talk reply was, we are not a listed company, we're not obliged to talk to anyone, and they're
#
not accountable to anyone but our shareholders.
#
So the point, and those shareholders include government institutions like LIC, so they're
#
accountable to us in a sense.
#
See, it is because, see, and then, you know, the contradiction is if you go to the ILNFS
#
website, and it's stated there that ILNFS as a systematically important, okay, systematically
#
important non-deposit accepting core investment company registered with the RBI currently
#
lends and invests in ILNFS group companies, but the point is, if you're systematically
#
important, you need to be open to scrutiny.
#
Yeah, and especially if there is taxpayers money which is invested in you, which is certainly
#
heavily the case with ILFS even before this Ludicrous bailout, then there has to be accountability
#
But you know, before I get into ILFS and all that, I'd like you guys to demystify banking
#
How does a bank operate?
#
You know, what are you lending?
#
If I'm saying this because a lot of our listeners may not exactly know how the banking system
#
works to begin with, and then what are the pressures on it?
#
And then what are the incentives that banks operate under?
#
So can you demystify that for me?
#
So in a nutshell, what a bank essentially does, it starts off with some amount of capital
#
that its shareholders put into it, and based on that capital, it takes deposits from people
#
like you and me, and then lends the consolidated money to people who need credit.
#
And because banks typically will have much higher leverage ratio than a normal manufacturing
#
company, banks are inherently subject to higher regulation, not just in India, subject to
#
higher regulation globally.
#
So what will happen typically is that if the shareholders of a bank put in 100 rupees of
#
their capital, a bank might have 900 rupees of deposits.
#
So in a sense, the balance sheet size is-
#
It can be much more than that.
#
It can be much more in case of-
#
In banks, if you look at globally, typically the capital tends to be around 5% of the liabilities.
#
So if you look at the leverage, it would be at least around 20 times.
#
And we're not talking about the capital adequacy ratio here, because that we go into a different
#
domain because for a lot of lending, you don't need to have capital against you.
#
So what you're basically saying is that if depositors to a bank who are depositing their
#
money deposits, say, five rupees with the bank, the bank can then add a leverage ratio
#
So if a bank starts with 100 rupees of money from its shareholder, it will have something
#
like sort of 1900 rupees of deposits.
#
So the total sum that it has to lend becomes 2000 rupees, but as the owned money that the
#
bank that has is only 100 rupees.
#
So the assets can be 2000 rupees, but the equity is only 100 rupees.
#
And when you sort of go back to say a manufacturing firm or a telecom firm, typically or a cement
#
company, people say two is two and debt equity is sort of the standard.
#
So 100 rupees of owned funds, 200 rupees of borrowings.
#
And here we are talking about 20x.
#
So basically if there's 100 rupees of their own capital and 1900 of depositors' capitals
#
and let's say then they lend 1800 out and depositors take their money away and they're
#
left only with 100, that's when you have a crisis.
#
That's when you have a crisis.
#
So the assumption in banking essentially is that depositors will not come in mass to demand
#
That's the fractional reserve banking as we call it.
#
And it rests on a very thin assumption that everyone will not demand their money at the
#
And that assumption gets tested during times of stress, like with ILFS, that if nobody
#
is willing to roll over their liabilities and people ask that, please repay my money,
#
then how do you raise money on the asset side to pay back to people from whom you've borrowed?
#
So now let's say an NBFC which only does loans and doesn't take deposits, they only have
#
So are they lending only that?
#
They will borrow money from mutual funds, from insurance companies, from other banks.
#
So banks are an important source of lending, source of funds to the NBFCs.
#
So about 40-45% of the borrowings of NBFCs come from banks.
#
So in a sense, banks take deposits from people like you and me, lend to NBFCs, NBFCs online
#
lend it to people for mortgages, for cars, or for SME, for working capital, et cetera.
#
And money that we put in mutual funds, other than in equities, part of it again flows back
#
So in a sense, the difference that is used in common parlance is that NBFCs are wholesale
#
funded because the people who give them loans are bulk institutions, whereas banks are generally
#
treated funded where the ticket size might be 1,50,000, et cetera, whereas in case of
#
NBFCs, the ticket size tends to be 100 crores, 500 crores, et cetera.
#
So that's the difference.
#
But they also have loans, but they will have slightly lower leverage ratio because they
#
have higher capital requirement.
#
And how are the incentives different for them?
#
As in any private company, let's say any company operates under incentives, which if they don't
#
give a certain return to their shareholders, they're in trouble, they're accountable.
#
If they're a public company, their stock price goes down if their balance sheet isn't good.
#
So in a private company, for example, the way the incentives work is that you have to
#
satisfy those requirements and the incentives are by and large good.
#
In a public sector company, those don't matter because the employees are not held accountable.
#
It's taxpayers' money, you know, the taxpayer will bail you out, so which is why you have,
#
you know, public sector companies are run much worse than private sector companies.
#
But just in terms of the difference in general between banks and NBFCs, forgetting the private
#
public aspect of it because banks are much more regulated, are there differences in the
#
incentives at play which affect how they operate?
#
No, the incentives would roughly be the same, same.
#
So the management gets compensated based on either the stock price or the profits that
#
the company reports and the employees sort of would have their companies would have their
#
But the question of who's holding them accountable would depend on whether the ownership pattern,
#
whether it's private or public or...
#
Yes, so you have public sector NBFCs which haven't done as well as and sort of which
#
sort of mirror the state that the public sector banks have and you have private sector NBFCs
#
which is also, I mean even in banks you have mixed, I mean you have corporate banks which
#
are in trouble and you have some NBFCs which are in trouble and some NBFCs which are doing
#
So it's essentially a mixed bag.
#
But in general, what holds true in banking that public sector banks are doing worse off
#
than private sector banks would hold true in NBFCs also.
#
So Vivek, tell me about ILNFS then, what is it, what kind of NBFC is it and...
#
So as I said, you know, it's a systematically important non-deposit accepting core investment
#
company and it basically lends and invests in its group companies.
#
Is it a private company or a public company?
#
It's not listed, but in the sense, is it private sector or...
#
It's quasi government to the extent that 25% is owned by LIC, then you have State Bank
#
of India with around 6.9% or 7%, Central Bank of India also owns.
#
So roughly around 40% of ILNFS is owned by, you know, government institutions.
#
But then it's not, I don't think it's a, you cannot call it a out and out government company.
#
You can call it a quasi government company.
#
I don't think it's an out and out...
#
In the sense, it's not owned by the company, but these public sector institutions are major
#
investors in it as are private...
#
Yeah, I mean, the second largest owner is a Japanese company, Oryx Corporation.
#
HDFC has a large amount of stake and very, very interestingly, the third largest shareholder
#
in ILNFS are its employees.
#
Which is something that's not very well known.
#
So basically what that means is that as the company has grown, ESOPs have been a major
#
incentive which have, you know, which has been offered to their employees.
#
So yeah, so it's basically a, you know, it's a conduit which sort of, you know, raises
#
money and invests in its subsidiaries.
#
If it's not publicly listed, how do the ESOPs work?
#
So I wouldn't know exactly what the structure is.
#
Like they get dividends on their shares or something.
#
No, but what some companies do, for example, is that they will have a sort of a periodic
#
valuation done of their shares and employees can exercise based on that.
#
Some companies have a fixed multiple of profits to which the share prices are pegged.
#
So it becomes a notional sort of an ESOP.
#
So there are structures which work around the problem of, you know, in the hope that
#
one day they'll get listed in a user market valuation that on an average NBFC trade at
#
whatever 10 times earnings or five times book value and you sort of apply the same multiple
#
So something of that sort would be the interesting thing is that three of their subsidiaries
#
ILNFS itself is not listed, but ILNFS engineering and construction, which used to be formerly
#
MyTas, the opposite of, you know, Satyam, the real estate.
#
They were owned by Ramalinga Raju basically and these guys took over after that thing
#
And ILNFS transportation networks and ILNFS financial services.
#
So the company basically has around 169 group companies which operate in a wide variety
#
of businesses and which is why, you know, someone, I think Andy Mukherjee had a piece
#
where he called ILNFS a Hydra headed monster and you know, the funny thing is the government
#
has superseded the old board and gotten in a new board and this new board has to come
#
up with a proposal, you know, by the end of this month.
#
But you know, I mean, how will these guys figure out, you know, what 169 group companies
#
have been up to in such a short period of time and there isn't enough publicly available
#
information about all these companies and you know, what they really do.
#
And the Samar Srivastava wrote a piece for Forbes where he quoted a fund manager as saying
#
that this is a debt ponzi scheme.
#
It's a debt ponzi scheme.
#
So basically what Samar wrote was that, you know, ILNFS itself raises money and then it
#
invests in equity in its group companies and on the basis of that equity, the group companies
#
So which is, you know, visible if you look at ILNFS's balance sheet, the leverage,
#
you know, the debt is to equity ratio has essentially gone up from around 7.7 in 2013-14
#
to around 16.8 in 2017-18.
#
So you know, which basically means that the debt has grown at a much faster pace than
#
So at some level, it also means that, you know, they've been raising new debt to pay
#
off old debt, which is why, you know, which is why the fund manager says that it's a debt
#
And you know, part of what could be making that happen is that from my understanding
#
of it, if you can elaborate on that, is that they're taking short-term debt for long-term
#
investments because they do a lot of infrastructure investment within 20 years to be off.
#
So I think the bigger problem with ILNFS more than that, I think, as you mentioned, is that
#
there isn't enough information available in public.
#
So the things that ILNFS does are things that a lot of other companies do.
#
There are large companies which do contracting, own assets, have a financing subsidiary, which
#
So there are companies which do that, but most of them are listed.
#
So in a sense, every quarter, they're subject to scrutiny.
#
What has been your cashflow?
#
What project that you took there?
#
You had a, there were delays.
#
That scrutiny is something that ILNFS was not subject to.
#
And that scrutiny itself changes the incentives.
#
You're less likely to behave in a proper way when there is...
#
So if you look at, you know, I was just looking at the annual report yesterday, when I read
#
out names of a few companies, so which will itself tell you as to the wide variety of
#
businesses they are in.
#
So there is one company called Noida Toll Bridge Company.
#
Then there is one called ILNFS Solar Power, ILNFS Energy.
#
Then there is something called North Karnataka Expressway, Hazaribagh Ranchi Expressway, Muradabad
#
So obviously, you know, a lot of it is infrastructure based, but a lot of it is not infrastructure
#
And you know, infrastructure based also, they are into a wide variety of things.
#
So they maintain these expressways, they run toll companies.
#
They also are into what is known as, you know, BOT built own transfer contracts.
#
So they're just into so many things that it's, you know, and given the fact that very little
#
information is publicly available.
#
So you start wondering as to, you know, what exactly will this new board be able to achieve?
#
Now if you look at Satyam, you know, when Satyam was taken over by the government, it
#
was an easy decision because okay, fine, you know, this is ultimately Satyam was an information
#
They had, you know, Ramalinga Raju had some, you know, he was punting on real estate as
#
So it was inherently a simple decision to sell off Satyam to the Mahindras.
#
And the problem was solved and then the Mahindras sorted out, you know, the problems would have
#
Now in this case, given that you have so many of these companies, it will be very, very
#
difficult, you know, if to sort of sell them off one by one.
#
And even if you want to sell them off, you know, a lot of these companies where some
#
information is available, do not really have a business model anymore.
#
So if you look at this Noida toll bridge company, it doesn't collect any toll.
#
Its business model was to collect toll, but then the court ruled against it.
#
So now they don't collect any toll.
#
Now if you look at solar power and energy companies, renewable energy is not in a great
#
So similarly they have these, you know, problems all over.
#
You will run into the problem of speed, which will compromise on value.
#
And then you have the incentives of the new board in place.
#
Just to sort of take a step back, I'm trying to figure this out.
#
Is this kind of structure normal where ILFS has all these subsidiary companies?
#
So what it seems to me as a layman is that every time they have a project, like say building
#
a toll bridge in Noida, they'll form a subsidiary for that and they'll lend to that subsidiary
#
or invest to that subsidy taking loans themselves.
#
So they themselves are just like a managing company of a whole bunch of subsidiaries who
#
all then operate in silos and who are all, except the publicly listed ones you mentioned,
#
equally unaccountable because ILFS itself is unaccountable.
#
So in infrastructure, you generally see that every individual project becomes a separate
#
subsidiary, SPV as they call it.
#
So in a sense, that particular financing and business model is not unheard of.
#
You will see pretty much everybody...
#
Why is it necessary though?
#
Because you minimize the risk of that project and sort of don't disclose the other parts
#
of the business to that.
#
So that is not what I mean.
#
What is unique for ILFS is that the parent company is so non-transparent.
#
So what happened is that in two years back, SEBI mandated that every company which has
#
listed debt instruments should also disclose half yearly financial statements.
#
So ILFS does disclose that.
#
So every half a year, so we have the last four or five times, half yearly September
#
and March statements, but those are not at a group level.
#
So the debt that you will see on that is just 10 or 15,000 crores, which is like not even
#
20% of the group level.
#
And it's just a sort of a one page summary statement, which doesn't give you anything.
#
So in a sense, there was an acknowledgement on the part of regulators that there is a
#
problem here that you have big companies which are not listed and they have systemic issues
#
if there is some, and so information should be available, but the solution that they've
#
come up with is sort of half hearted and half big solution.
#
We'll come to the solution later, but I just wanted to make another point here.
#
See, you know, while, I mean, and I'm really not an expert on this and so I'm sort of,
#
you know, guessing an answer here and I'd like you to correct me if I'm wrong.
#
So basically, you know, from, I was doing a little digging yesterday and what I realized
#
was that while, you know, the idea of spinning off a company might be fairly common in infrastructure,
#
but IL&FS whenever it sort of spun off a company, the total amount of equity that it invested
#
in that company was very, very low.
#
So they had very little, you know, at the cost of saying skin in the game, you know.
#
So if you look at, you know, the biggest company is the, is IL&FS transportation networks
#
It has a, it has assets of around 47,000 crore, which is like around, I would say around 40%
#
of the overall assets of IL&FS.
#
Now it had the company has, you know, even though the assets are at 47,000 crore, the
#
equity is just 328 crores.
#
So it's, it's, you know, the obviously the amount of leverage that they're playing around
#
with is very, very high.
#
Even in this other company, which is Mitas, formerly Mitas, that equity is now a negative
#
139 crore, whereas the debt is close to 2100 crore.
#
What does that mean when you say that equity is negative?
#
Equity is negative essentially means they've made losses over the years and their entire
#
capital and retained profits has been wiped off.
#
So now they're basically bankrupt.
#
There's only upside for them if things turn around, but there's no downside because they
#
don't have any more of their own money that's invested.
#
So upside, but no downside.
#
So I just want to go back to that accountability question.
#
Now, yeah, of course you want regulators to kind of do something, but is the core problem
#
here also the ownership, like for example, if the three of us own a company, right?
#
Who will keep it accountable?
#
No matter what the regulations in place might be, even if there are no regulations in place,
#
so three of us will keep it accountable by demanding regular statements because our interests
#
Now ILFS is owned partly by these public sector companies and you'd imagine those stakeholders
#
would keep them accountable as any stakeholder should.
#
So is that part of the problem?
#
It's a classic case of a principal agent problem, so which you can explain to our readers.
#
I mean a principal agent problem is if I hire you to do something, there's an information
#
asymmetry and how do I know you're actually doing it and blah, blah, but that's a kind
#
of a different problem.
#
I think this is a bigger problem across all sort of in terms of the corporate structure
#
So the way regulators approach financial companies is that we don't want a dominant shareholder.
#
We want diversified shareholding because a dominant shareholder might sort of make undue
#
use of the company for its advantage and so what you get is a dispersed shareholding and
#
no sort of dominant shareholder and the CEO effectively becomes the one who runs the company.
#
And to get around the problem that he shouldn't run away with the company, what you have is
#
something called as independent directors.
#
Every bank and every company now has at least 50% independent directors.
#
But by saying that you are independent, you don't become independent.
#
So I think the issue and that sort of it's a big issue sort of globally itself is how
#
do you generate independence in mind, not just on paper, through incentives or contracts?
#
So you might appoint me as an independent director on your company.
#
You say, okay, let's buy this company.
#
I might just sign off on that even if you are.
#
How do you ensure that I remain an independent and think not of our friendship, but in the
#
interest of the companies through contracts, through, I mean, I can be independent, but
#
law cannot based on my, how I might be.
#
See, it's like, you know, when once the new board took over, the directors were a part
#
of the old board, sort of wrote to the new board saying that, you know, we are all there
#
to help you and, and, and there were comments, you know, one of the directors even said that,
#
you know, I'll NFS has had a huge asset liability mismatch over the years and it's all well
#
If it's well known, why wasn't anything done about it?
#
Simply because the, the man who ran the company, you know, ran it like his own feed dumps.
#
And curiously, he quit in July on health reasons.
#
Well, we'll take a quick commercial break here.
#
And after we come back, get back to the subject, which really boils my blood.
#
Why the hell are we rescuing these people out?
#
It's another great week on IVM podcast.
#
If you're not following us on social media, please do your IVM podcast on Twitter, Facebook
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Also, please remember to tell a friend about podcasting.
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We really want you to spread the word.
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You are our biggest ambassadors.
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This week on Cyrus says we have creative director and producer Joel Pereira.
#
Joel talks about working across platforms like TV, print and digital on simplified this
#
Chuck Naran and Tricke do an episode on China and its relationship with India and other
#
neighboring countries on the scene and the unseen.
#
Amit Varma decodes the IL and FS crisis, India's banking system and regulatory regime
#
with journalist Vivek call and economist Ashutosh Dattar.
#
This week on Shunyuan, Sheila Dutty and I talked to Sanket Shah about in video and the
#
amazing journey that they've had over there.
#
On Geek Fruit, Jishnu and Tejas embark on a heartache fiesta of Will Smith's entire
#
career and give the definitive ranking of all his movies.
#
On the kinetic living podcast, course where we spoke to Ashton doctor was a habit course.
#
Listen to this episode to find out his interesting insights on eating fruits.
#
And with that, let's go on with your shows.
#
Welcome back to the scene in the unseen.
#
I'm sitting with Vivek call and Ashutosh Dattar who are helping me make sense of IL and FS,
#
which is an NBFC who have got taxpayers into a deep amount of SHIT.
#
So Vivek, so what's the solution to that the government has come up with for ILFS?
#
A day before the new board took over, I think the old board met and cleared a rights issue
#
of 4,500 crores, which three of the investors, LIC, SBI and OREX corporation were supposed
#
Now, obviously now with the new board taking over that, I don't think, you know, is on
#
But then, you know, the question is again, I mean, you know, we should at least ask as
#
to why should, you know, what makes my blood boil even before, you know, LIC and SBI rescuing
#
IL and FS is the fact that why does LIC, which is essentially an investment company, I mean,
#
there is very little insurance, you know, that it sells.
#
It's essentially an investment company and why should LIC have a 25% stake in any company?
#
I mean, you know, one of the first things that they teach you when you sort of start
#
learning anything about investing is to not have all your eggs in one basket.
#
You know, a mutual fund in India cannot own more than 10% of any company.
#
So why should LIC be allowed to own 25% of a company?
#
I mean, that's, it's bizarre.
#
So obviously, now that you own 25% of a company, the logical thing is that you have to rescue
#
the company because otherwise, you know, whatever you've already invested in it sort of goes
#
And even if you invoke the sunk cost fallacy, this is too much of a sunk cost, 25% of.
#
So, you know, the other thing is State Bank of India, you know, which has around 7% stake
#
in IL and FS made losses of close to 7,000 crore last year on its own.
#
So why is a loss making bank trying to rescue, you know, another systematically important
#
No, you know, as far as systematically important financial institutions go, I don't think there
#
is, you know, a more systematically important financial institution in India than the State
#
Nothing is more systematically important than.
#
So why is SBI, you know, being forced into even, you know, more deep shit?
#
So I mean, if you look at these things, you know, the kind of questions that crop up are,
#
you know, I mean, they really make your blood boil.
#
And just elaborate a bit on to just kind of again, take another digression shift from
#
IL and FS, how many times we have to say that to LIC, which you've written a couple
#
of really good pieces on.
#
And if I might quote from one of them quote, if LIC keeps picking up all the rubbish that
#
is lying around one day, it will have to be rescued as well.
#
The question is, who will rescue the rescuer, stop quote.
#
And obviously, you mean that as a rhetorical question, but the answer is we will, we the
#
No, I mean, see, the point is whether it's easy to say that the taxpayer will rescue,
#
but it's not so straightforward, you know, LIC is huge.
#
And if you look at a bank like IDBI, which is not a very big bank, if, you know, I think
#
LIC is investing 10, 12,000 crores in that bank.
#
Now, essentially, you know, a bank like IDBI needs that kind of money.
#
If one day, you know, if things are not right with LIC, because LIC is another huge black
#
Nobody really knows what is happening inside that organization.
#
If you look at publicly available information, it is presented in such, you know, terms that
#
it's very difficult to make out what is happening inside the organization.
#
Even though they declare, you know, information every three months.
#
But if you go to that particular page on the LIC website and try to put things together,
#
it's next to impossible, unless, you know, you work within LIC and you understand the
#
dynamics of how the organization operates.
#
So, yeah, I mean, it's bizarre that, you know, and you know, one thing that people don't
#
get is that LIC money is not taxpayer money.
#
It's money that the policyholders have given LIC to manage.
#
Now, ultimately, those policyholders may also be taxpayers, but that's a different thing
#
So, the only aim of LIC should be to sort of manage that money properly.
#
LIC is also not a, you know, it's not an asset reconstruction company or, you know, a vulture
#
fund or, you know, a distressed asset management fund.
#
You know, you have all these fancy terms.
#
It doesn't have expertise in those areas.
#
So, it should not, you know, a lot of people make this argument, oh, but they're buying
#
these assets cheap, you know, when they bought IDBI.
#
But that is not what LIC is supposed to do.
#
They are supposed to sort of manage your money in the most, you know, risk free way possible.
#
And normally, you know, for any private insurance company, you have, you know, policyholders
#
and your responsibility is to those policyholders.
#
That's all your incentives.
#
But in the case of LIC is complicated because it's a public, it's a government company
#
and they have to do all these other things.
#
So, you'll have like, you know, if the government does not meet its fiscal deficit target this
#
year, so then they'll, you know, come up with, they'll sell shares in all these public sector
#
companies which no one else will want and then LIC will come in and LIC will sort of
#
But then till, you know, and this is not been, it's not like it's been happening, you know,
#
only in the last four years.
#
It's been happening forever.
#
You know, anything of this sort in LIC comes to the rescue.
#
And I'm going to stroke your ego a bit more by quoting from another piece you wrote, where
#
Of course, the average LIC policyholder is financially illiterate.
#
I mean, why else would you hand over your hard earned money to LIC?
#
And given that he is not aware of all that is happening right now.
#
Hence, I guess it's only fair that he has been taken for a ride.
#
If you are not bothered about your money, why do you expect someone else to be?
#
And your conclusion here is that the smart thing for anyone to do is stop buying LIC
#
Yes, I mean, you know, because one, you don't know what is inside that black box.
#
Two, you don't know how your money will be used.
#
And see, if you, so I'll give you a very simple example.
#
Now, LIC has stakes in all the 20 public sector banks and it owns one public sector bank.
#
So there are 21 public sector banks, it has stakes in 20 and it owns one.
#
Now, you know, public sector banks are going through, you know, very bad phase right now
#
and nobody really knows where all that will end.
#
And LIC as a major owner of almost all these banks is already suffering and will probably
#
suffer more in the years to come.
#
So, you know, there is a gentleman called KC Chakraborty who used to be the deputy governor
#
of RBI and before that he was the CEO of Punjab National Bank.
#
And he, you know, in an interview sometime back said that, you know, the bad loans of
#
Indian banks are 20 lakh crore, okay.
#
And the declared bad loans as of now and as of March 31st, 2018 were around 10.35 lakh
#
So, you know, we still don't know where all this will end.
#
So LIC anyway as a major owner of these banks is in a huge mess.
#
On top of that, you know, if you start getting it to rescue all these, you know, iron offices
#
of the world, I mean, you're really taking the policy holder for a one big ride and policy
#
holder, poor guy, I mean, you know, he spends more time figuring out which mobile phone
#
he wants to buy, but he is just happy handing over money to, you know, any LIC agent who
#
pops over, you know, to be invested because LIC is government.
#
But you know, you should remember that, you know, government also has limited resources.
#
I mean, government did not come to rescue everyone who got screwed in with the unit
#
I mean, they did come up with a rescue plan, but it was a limited rescue plan.
#
So, all these factors have to be kept in mind.
#
So, let me turn to you, Ashutosh, with a question of principle, which is should such company
#
I mean, like you were saying before this, that this is a classic case as 2008 was, for
#
example, of profits being privatized, but losses being socialized.
#
You know that if a company makes profit, they enjoy the benefits of that.
#
But the moment they go down, oh, then the government jumps in taxpayer money or public
#
sector money is put into that.
#
And that creates what economists call moral hazard.
#
They change the incentives of the game because in future also, that means that companies
#
can afford to invest unwisely and behave badly, knowing that the upside is unlimited.
#
But the downside is none because they'll be bailed out.
#
And I think what you're seeing in financial markets is essentially this bogey being raised
#
that Alan F.S. is OK, but this will have repercussions on the entire financial system.
#
We've already seen share prices of some NBFCs fall 40, 50, 60 percent that this will create
#
And I have some sympathy to that view that there is a risk to that.
#
But even if you compare it to 2008, in 2008, many of the top 10 financial institutions
#
in the U.S. were in trouble.
#
We are currently nowhere near that threshold being built.
#
None of our banks are in trouble.
#
None of the large NBFCs are in trouble.
#
None of the large insurance companies are in trouble.
#
So even if one were to say that we have staring at a 2008 kind of a scenario and that it
#
requires a bailout, we are nowhere close to that threshold being reached.
#
So I think as of now, at least, there is absolutely no question of why an Nile N.F.S. or any of
#
the NBFCs which didn't do their asset liability management in place and are currently struggling
#
In the last five years, they enjoyed benefits of low interest rates where they could borrow
#
short term and report fantastic profits.
#
And now that the tide has turned and sort of you have to take it on the chain.
#
Were those low interest rates a problem to begin with?
#
I think the problem was that people assume that, I mean, and this happens in every cycle,
#
people assume that low interest rates will continue forever.
#
So people don't assume that things are cyclical and eventually sort of, I mean, as they say
#
in financial markets, the safest statement to say is this too shall pass, but nobody
#
So, you know, this is a very interesting, I mean, I just remembered a line which John
#
Galbraith wrote in one of his books.
#
He says that in America, and I'm paraphrasing here because I don't remember the exact line.
#
He said in America, the only socialism is the socialism for the rich.
#
So, you know, the same logic applies to financial markets.
#
You know, when things are going well, you know, you'll have all these bankers and, you
#
know, industrialists and everyone talking about free markets and, you know, the benefits
#
But the moment the tide turns, you know, everyone wants to sort of run back to the government.
#
Because again, you know, reading this piece in Business India and they have these, you
#
know, all these, you know, so-called experts who keep getting quoted in these magazine
#
I love the way you say so-called experts because you're also an expert.
#
But I don't get quoted in magazine articles.
#
So we shall change that.
#
So no, I'm what I'm what I'm trying to say here is so I'll just read out a few quotes
#
here and I'll not name the guy because it's not fair on that person because everyone else
#
in the market is also saying the same thing.
#
The government should move fast.
#
It's a company specific problem and should not be seen as an industry problem.
#
So he's basically contradicting himself here.
#
You know, one he's saying it's not a big problem, but the government should move fast, right?
#
Because if the government moves fast, then it's easy, you know, the private sector does
#
not have to sit together and solve the problem.
#
Okay, there's another guy who says I'm hopeful about the government taking a keen interest
#
and moving fast to take necessary steps to avoid further pain in the system.
#
You know, the point is unless there is pain in the system at certain points of time, the
#
system will never get cleaned up.
#
You know, the classic example here is there is a comparison that's made between California
#
and, you know, Baja California, which is a state in Mexico.
#
So in California, forest fires, essentially, what they do the policy is that every fire
#
in a forest has to be stopped.
#
Okay, even the smallest fire.
#
So what that does is that California does not have small fires.
#
What it has is big fires.
#
Okay, now compare that to Baja California where you let these small fires burn.
#
Okay, what that does is, you know, all this dry shrub and everything that has accumulated
#
So they don't have big fires.
#
So if you were to use the technology for, you know, financial system or capitalism,
#
you need these periodic small crises to make sure that there is no bigger crisis.
#
That's a brilliant analogy.
#
And this is sort of the anti-fragile concept that Taleb talks about.
#
And I think where it sort of goes back to is that if you don't inflict losses today,
#
it sets up more risk-taking behavior down the line and sets you up for a bigger crisis
#
later on because everybody assumes there is a put option by the government.
#
This kind of shit gives capitalism a bad name.
#
It's one of the fundamental tenets of capitalism that if someone fails, let them fail.
#
It's a lesson for everybody else and it changes the incentives down the line.
#
But here what happens is if you keep rescuing these big boys, you create moral hazard.
#
Everybody feels, you know, all the other big boys say, hey, we are too big to fail.
#
We will continue to behave badly.
#
We will do whatever the hell.
#
Government will come to our rescue.
#
And this doesn't allow market discipline to work.
#
I mean, the reason why nobody paid attention to Ireland F.S. financials is because people
#
thought it will not go bankrupt.
#
Ultimately, the government will come.
#
But the moment people feel that if somebody is going to go bankrupt and there will be
#
no bailout, then before putting my money, I better keep a close eye on what this company
#
So in a sense, it is important for me to play discipline to believe that there is no backstop
#
So it's sort of, it's wonderful for the entire system to be a bit more sort of become a bit
#
more conservative and discovers that you should let companies fail.
#
So supposing the government does that, supposing tomorrow, no, no, no, I'm building a thought
#
So supposing tomorrow, Modiji's office calls Vivek and says, hey, come and advise us.
#
And he says, hey, do nothing about Ireland F.S.
#
God, I have to keep saying that.
#
Ireland F.S. then and he says, OK, do nothing.
#
And they say, OK, we won't do anything.
#
How would that scenario normally play out?
#
Can I make an analogy here?
#
So so basically, you know, someone did some research in football and they realized that
#
if the goalkeeper stands straight, when a penalty shot is being taken, instead of jumping
#
left or jumping right, he has a 30 percent chance of stopping the goal, which is a pretty
#
The point is, the goalkeepers also understand this, they're not like exactly idiots, but
#
they still jump left or right.
#
Because, you know, there's a 30 percent chance.
#
You know, imagine you're standing in, you know, at the center and the ball goes towards
#
your left or your right and you don't jump.
#
What is the impression that gets you're not trying?
#
He's not doing anything.
#
So do nothing is never, you know, even though it's it's a great thing to talk about, it
#
never really happens because I mean, and this was something that Dr. Vaivi Reddy, who was
#
the governor of the RBI, told me once and I sort of had gone to interview him and he
#
said, beta, do nothing is never a strategy, you have to do something, you have to be seen
#
And which is where this do nothing thing goes for a toss.
#
We don't have to sort of go that way.
#
I mean, for example, when companies currently go into stress, we have a bankruptcy court,
#
bankruptcy regime to take them to bankruptcy, they need certain hand holding during that
#
process, somebody else takes over, runs it sort of such an ICU sort of process.
#
And we had a similar concept for that called as the FRDI bill, which is supposed to do
#
that for financial firms.
#
But that bill never got passed because the bogey that was created was that it had a clause
#
that depositors money would be converted into equity at some stage of point.
#
But that bill essentially provided a framework wherein financial companies which get into
#
distress the way to resolve that by taking them into ICU and either selling of them in
#
pieces or liquidating them or that.
#
And this was this year, this bill was supposed to be passed this year.
#
So in a sense, if we had done that, if our politicians had thought clearly and thought
#
of what the big picture was, we would have had legal framework through which to take
#
ILNFS, there would have been no government money involved, and they would have been down
#
So that law gives 12 months timeframe in which to get the company out of distress and would
#
have had a proper way of solving that problem.
#
But because our politics is so muddled, we now have no legal way and hence we have to
#
go through this supervising the board, new board and all of that.
#
And essentially, we don't know what the…
#
The new board, what will the poor guys do, I mean, Uday Kotech already has a day job,
#
I mean, he has a huge bank to manage and why did he take this up?
#
I mean, see, after I guess, you know, after a point of time, everyone in the Indian financial
#
services business wants to be like Deepak Parekh, you know, you are not just an institution
#
You are an institution.
#
You are an institution.
#
You are not just an institution builder is what I'm saying.
#
You also want to sort of, you know, see, be seen doing something for the country.
#
Yeah, you want to sort of protect yourself as something like that.
#
So he has a day job, right?
#
And also the fact that all these directors are new, so they really don't have any insider
#
information, they really don't know what was happening there.
#
So I'm not really sure as to, you know, this 30-day, I think by 31st, they have to submit
#
something to the National Company Law Tribunal.
#
I mean, what will they do in 30 days?
#
They wouldn't even know the names of all the…
#
What are the options open to them?
#
Like, I think Andy Bloomberg, if I'm not mistaken, Andy Mukherjee in his Bloomberg
#
column basically spoke about not putting any taxpayer money in, but hiving off some
#
What will happen is, see, that's not so straightforward.
#
You know, Andy works out of Hong Kong.
#
I hope Andy is listening to this.
#
Honestly, I mean, I love what he writes.
#
He's an amazing columnist.
#
So see, he said, you know, you should sell the engineering and construction company,
#
which was formerly Mitas.
#
Now, the problem is, you know, the moment you start doing that, you will obviously not…
#
it will be a distress sale.
#
Now, a distress sale in India is not so straightforward because some politician will catch on to it
#
and then there will be some controversy, you know, spun around it.
#
So I mean, if you look at what has been happening to banks and, you know, the companies that
#
they are trying to sell or only, you know, this…
#
I think Tata have bought motion steel and that's about it.
#
And then there are, you know, nothing else has really…
#
So big deals have moved so far.
#
So what you're really saying is that this is not about the economy, it's about the
#
And you can't just say that this should be done, that should be done.
#
You got to see what is likely to happen because even politicians have incentives.
#
And even the directors who are now in place who have incentives because they are bankers,
#
some of them, they are connected to financial companies and somebody would have to take
#
And there are some of these bureaucrats.
#
At the end of the day, somebody will have to take write-downs now.
#
Who will take write-downs?
#
How much of the write-downs will be taken?
#
And you see, the thing is now that, you know, people are getting into sort of getting more
#
and more information out.
#
So I read this piece which said that around 15,000 crores will have to be written off.
#
Now, I mean, and this is just, you know, when people have started looking at a very, you
#
know, not in a very detailed way.
#
So once, you know, people are able to get into the books and everything, I mean, you
#
really don't know what is actually there.
#
Even if there are gold-plated assets out there, for example…
#
Gold-plated assets is something that, you know, Sushit, what is a gold-plated asset?
#
So gold-plated asset is basically something which is not worth the price that is essentially,
#
you know, there on the balance sheet.
#
So it's like something might, you know, you might show something to be priced at a
#
thousand crores while it might be worth only around 500 crores or anything like that.
#
So let's move on for a moment from the narrow issue of ILNFS so that it's the last time
#
And Ashutosh, let me then put to you a broader question about leaving for the moment political
#
imperatives out of the way in the political economy aside for the moment, we'll come
#
to that after we speak about this.
#
But if there was to be structural reform of the banking sector or of the financial sector
#
to prevent such problems in future, what kind of structural reforms would you look at?
#
For example, when we were discussing this earlier, you sent me a fairly detailed mail
#
and you know, one of the questions that you posed is, should there be so much credit outside
#
Should there be this regulatory arbitrage?
#
You know, is reducing some of the restrictions on banks and allowing easy entry and exit
#
in case of banks and having banks as a sole lending institution a better policy?
#
So I think the philosophical question that I ask is if I'm a bank and I want to give
#
a hundred rupee loan, I shouldn't be able to ask myself, should I give it on my books
#
or my hundred percent subsidiary NBFC?
#
So those sort of questions which essentially I am picking and choosing which regulatory
#
environment to choose shouldn't be there.
#
So a one single rupee loan shouldn't have two different implications in terms of regulation
#
based on what legal entity is giving that loan.
#
So I think we should start with this thing that the regulatory environment should be
#
a function of what risk we are building in and that risk cannot be a function of what
#
is the legal status of you, of whether you are an NBFC or a bank or a company or an individual.
#
So we should start by that.
#
I think the other issue is whether we should have so much of restrictions on banking in
#
the first place and should we have one single kind of banking which we currently have?
#
So every bank in India does pretty much the same thing.
#
Should we encourage people to come with innovative structure?
#
Should there be a bank which says, I don't want to raise deposits, I only want to give
#
Should there be allow banks which say that I only want to take deposits, but I don't
#
really want to give loans?
#
That's not really my core strength.
#
Should there be banks which say that I only want to facilitate payments or I only want
#
to run a credit card business?
#
And currently laws do not allow that.
#
Every bank has to give 40% of its loans to what is called as priority sector, 20% of
#
their branches should be in unbanked to rural areas.
#
So essentially you have only just one single business model and that is what it is to this
#
regulatory arbitrage with NBFCs.
#
So when Raghuram Ramjhan came in in 2013, the first press conference he said, he said we'll
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We are sort of five years down the line and we don't have on tap banking.
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What is on tap banking?
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So anybody can come and apply for a banking license and they will get that license.
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We only had a few banks being licensed in 2013, 14, sort of that first wave and post
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that we've not had a single one.
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So it's like, you know, one day RBI wakes up and says, okay, now we'll give bank licenses.
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So on tap would mean that I wake up any morning and I feel okay.
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I am now in a position where I should be able to get an RBI license.
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And then you are accountable by the market.
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And the second, I think the issue that you can...
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I just wanted to make one point.
#
So, you know, he was basically talking about the fact that how, you know, there need to
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be different banks doing different kinds of things.
#
Now, this is something I really, you know, formally believe in.
#
And if you look at the current banking crisis, you know, the one learning that, you know,
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that has stayed with me is that, you know, all these public sector banks, at least the
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smaller ones, I mean, you leave out the top five, you leave out, you know, SBI, Bank of
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Baroda, Punjab National Bank, Canara Bank, but all these small banks, you know, the Dena
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banks and the bank of Maharashtra's of the world and the Indian overseas banks, they
#
should borrow money and they should stick to retail lending.
#
I don't think, you know, they do not have the expertise to sort of carry, do project
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That should be, you know, totally taken out of the equation because, you know, one is
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And what will happen there is that, you know, all these politically motivated lending, I
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mean, the moment you can only do retail lending, the politically motivated lending will go
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And we've spoken about this in a previous episode on defaults and stuff.
#
And so the other thing that it links to is that the system would be far better if we
#
had a large number of small banks, whereas our focus today is on getting big institutions.
#
We are merging banks together rather than saying, okay, this particular bank is doing
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Let's just close it down.
#
If you had a small type banking, you would have a lot of small players, you would have
#
a lot of a large number of different banks is what contributes in any industry.
#
If you had differentiated producers, that is what leads to consumer welfare.
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Not just a large number of monolithic players.
#
They don't add to consumer value beyond the point.
#
I mean, just Pepsi and Coke don't add to value, but a Pepsi versus a Tropicana, for example,
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adds to consumer value because you have choice, because you're different.
#
I think we forget that.
#
And we have all banks just doing the same thing.
#
Same kind of credit card, same kind of deposit product, same kind of loans.
#
There is just no differentiation.
#
And the reason for this is regulation.
#
This is the regulation.
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It's sort of there is no flexibility that banks are allowed to.
#
So I can't do something different.
#
So now getting to the question of the political economy on this, what are the interest groups
#
that argue in favor of the status quo that prevent these changes from coming about?
#
I mean, the big banks themselves.
#
So the big banks are powerful interest groups who want to maintain the status quo, want
#
to maintain their market shares.
#
I think the irony in India is that if you look at the big private sector banks, they
#
somehow dominate every facet of financial services.
#
They have the largest asset management companies, they have the largest insurance company.
#
So in a sense, they have become oligopolies in themselves.
#
And this is something that runs across all financial services.
#
It's not just in banking.
#
It is there in mutual funds.
#
It is there in insurance.
#
It is there in pretty much every facet of financial services that under the garb of
#
investor protection or consumer protection, you essentially reduce barriers to entry.
#
And this speaks to what I sometimes say that free markets don't mean public sector bad,
#
What happens and what we can see happening here as well is that the top players in the
#
private sector will always want to protect their turf and will be hand in glove with
#
the government to use state power, to have regulations of this sort, which prevent a
#
level playing field, which prevent easy entry and competition.
#
And therefore these are actually not free markets.
#
Even the private players in this are not supporters of free markets and are acting contrary to
#
Which is understandable.
#
I mean, they are being rational.
#
It's the job of the regulator to say that I hear you, but this is not in the interest
#
of the larger society or what I am tasked with.
#
And so I'm not going to agree with what your resolution is.
#
But then there's a vicious circle that if the regulator is a government, the government
#
have their own incentives at play.
#
For example, who is going to fund us in the next elections?
#
How do we get back to power?
#
And then that eventually there's a interplay between money and power and we are caught
#
But more than that, I mean, if you look at it, the statutory liquidity ratio, I think
#
it's still 20% or 19 and a half, whatever.
#
So almost by law, one fifth of the deposits that get collected need to be invested in
#
So it is in the government's interest to have one kind of banking because you have all this
#
money coming in and when all this money gets invested in government bonds, obviously interest
#
rates are going to be low.
#
And the government is viewing might want higher interest rates on our deposits, but the government
#
loves low interest rates.
#
So that is, it's not just political funding.
#
I mean, it just goes back to the core of how the banking is structured in India.
#
So I've taken a lot of your time and gained a lot of insight from this episode.
#
Let me end by asking both of you again, a hypothetical and a difficult question that
#
what is in your minds, if let's say that you are in 2028, what is the best case scenario
#
that has happened in these 10 years in terms of the financial system?
#
And what is the worst case scenario?
#
How bad can things get?
#
And if there is any hope, where does that hope come from?
#
No, I mean, I don't think everything will go wrong.
#
I mean, ultimately, you know, things have a way of sort of sorting themselves out.
#
But in the worst case scenario, as you know, Dr. Casey Chakraborty said, you know, bad
#
loans of banks will be at a level of 20 lakh crores.
#
That indeed is a lot of money.
#
Having said that, there are still, I mean, if you look at some of the private banks,
#
I mean, banks like HDFC and Kotak, which are still pretty reasonably run.
#
So, you know, people, depositors always have an option of sort of banking with these banks.
#
And also, you know, as Ashutosh said, I mean, we need more small banks.
#
I mean, once you increase competition, it obviously, you know, means more value for
#
And it also means that, you know, if one of the small banks sort of goes bust, you will
#
be able to limit the damage.
#
I mean, take like, you know, I'm just sort of coming, you know, this is just a hypothetical
#
example here that let's say a bank just decides to do a credit card.
#
So if they have expertise in that area, what will happen over a period of time is that
#
they will obviously, one is that they'll offer a slightly higher rate of interest to the
#
And two, because they have, you know, expertise in that area and because the defaults are
#
probably slightly lower than the overall market, they will also charge a slightly lower rate
#
of interest to their creditors.
#
So the point is, unless, you know, you sort of allow banks to innovate a little and experiment
#
with a few business models and obviously, I mean, you know, and let them fail when they
#
But to the extent that, you know, depositor's money is not wiped out because you cannot
#
be experimenting at the cost of, you know, so that sort of mentality needs to seep in.
#
But then, you know, one example, I grew up in a small suburb outside Bombay, sort of
#
this was in the mid 1990s, there were no private sector banks, there were only public sector
#
banks and we had a couple of cooperative banks and they would remain open from 7.30 in the
#
morning till 11 o'clock and then open again from 5.30 to 7.30.
#
So the staff might go back home or what I'm not privy to, but you land at the train station
#
because that's how most people commute and the branch is closed by.
#
You can do your banking business, go back home.
#
Whereas most government offices, government banks, for example, were run from nine till
#
two or so when most people who travel to Bombay cannot access the banking system.
#
So that sort of innovation is something that only can come when you are not in that same
#
structured bureaucratic sort of mindset and this is a wonderful consumer.
#
They would go to every shopkeeper and collect deposits when BSU banks would just sit and
#
sort of expect that some people will come and give you money.
#
Which is what Sahara also did by the way.
#
So it's not so straightforward.
#
No, but I agree with him because if you remember in the probably 20, 30 years back, people
#
used to have multiple bank accounts.
#
I mean, in fact, some of my older relatives still have 10 accounts in public sector banks
#
and so this is essentially a holdover of an era where you had to ensure that you had access
#
to your funds on almost all days of the week and at different points of time.
#
So there is one bank which is open on Saturday.
#
So you sort of have an account there.
#
There is one which sort of opens at 11 and closes at 3.30.
#
So people did all these machinations and then they opened accounts at different.
#
But now you don't because you have an ATM.
#
So now answer the second part of my question.
#
What's your source of hope for whatever best case scenario can possibly happen?
#
I think my source of hope is the fact that RBI despite all its problems is actually decently
#
run in comparison to other government institutions in the country and up until now, we've had
#
decent governors and even though they might have got there because the government wanted
#
them to, but once they are there, they usually let's say 7.5 to 8 out of 10 times tend to
#
So if that continues and if that position itself is not compromised, I have hope.
#
So my hope and worry essentially stem from the same thing, which is the mess that PSU
#
I mean, there are two paths that we can take from here.
#
One is that we do nothing and PSU banks continue to shrink gradually, but their costs don't
#
There's a big labor force.
#
The cycle will turn at some point of time.
#
There will be good days, which will come, a good day will come for some time at least.
#
That profitability will improve.
#
And then again, a downturn come, which will be worse possibly than what we have currently.
#
That's the stage in which we do nothing.
#
Government will give 10,000 crore, 15,000 crore capital every year that is needed.
#
They will sort of just survive, muddle around and sort of that and the sort of flamboyant
#
and the better and private sector banks will continue to grow at their expense.
#
The upside case is that we actually use this opportunity to reform our public sector banks,
#
either make them do things which they are good at and prevent them from doing things
#
that they are not good at, which is like say project loans or some of those things.
#
And we put in place a structure whereby political interference is minimized.
#
And in that sense, public sector banks are at least able to hold on to some of the areas.
#
I mean, to be fair, even now, there is an amount of trust that people have in keeping
#
deposits with public sector banks, which some private sector banks are able to but not all
#
I much rather put my money in an SBI rather than most other private sector banks for a
#
lot of people in the interior parts.
#
Can you leverage that strength that they have, prevent some of their bleeding on the asset
#
side and at least they are able to generate a very minimum minimum return of capital that
#
they are not feeding off taxpayer money because the next downturn might be worse than what
#
Vivek and Ashutosh, thanks a lot for coming on the show and giving me so much insight.
#
I learned a lot today, not only about ILNFS, but also about NBFCs and the banking sector
#
If you enjoyed listening to the show, you can follow Vivek on Twitter at call underscore
#
You can also head on over to Amazon and buy his Easy Money Trilogy.
#
You can follow Ashutosh at A Dattar and you can read his pieces on Pragati at thinkpragati.com.
#
You can follow me at Amit Verma, A-M-I-T-V-A-R-M-A and you can browse past episodes of the Scene
#
in the Unseen at sceneunseen.in or thinkpragati.com.
#
Thank you for listening.
#
Kuch bhi ho sakta hai yaar.
#
Mohan Joshi hated wearing topis.
#
He felt suffocated in them.
#
Topi pahante hi usse school ki yaad aati thi.
#
Where of course he had no choice but to wear a topi.
#
But jis din pass out hua, ussi din usne apne topi ka bonfire bana diya.
#
And since then, he'd never worn a cap or a hat na kadakti dhoop mein and not even to
#
But from Monday 26th February, Mohan Joshi had to wear a topi all the time.
#
Because if he didn't, everyone around him knew exactly wo kya soch raha tha.
#
They knew that he was wondering how the girl in the yellow churidar would look pina kapde
#
They knew when he was calling the boss a sadela tomato.
#
Re bhai, yeh hi toh story hai.
#
Aur yeh story aap hi ne mujhe diya by giving me the starting word.
#
Yeh hi toh hai, the Croc's Tales.
#
Kids aapke, kahani aapke liye.
#
Catch the stories on Monday and Thursday on the IVM website, app and anywhere you get
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Yes, I am Sonu, hello, pleased to make your meeting, I am a super reality celebrity aur
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duniya ke koi bhi problem nahi hai, jo celebrity solve nahi kar sakte, toh main aapke sore
#
problems ka halization and solvization kar dunga.
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Toh jiha sochye mat, zaroon suniye, sunlogy, sollogy, har budwar, that is venus day.
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Please like us, share us, commentize, agar aapke paas koi bhi problems hai, Sonu ko bataye,
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Sonu saare problem solve kar sakta hai, isi tarah toh main super celebrity bana hoon.
