Distortions of markets by state-owned banks

In every country where they exist, state-owned banks run up massive amounts of bad loans, often politically motivated, that eventually end up the responsibility of the taxpayers. In certain countries there is an even more insidious effect. They distort depositor behaviour sending money where is should never be

Many commentators and economists feel that state-owned banks are wonderful things. After all they do have tremendous advantages when a government is trying to manage an economy. Still in every country where they exist, state-owned banks tend to get out of hand and run up massive amounts of bad loans, often politically motivated, that eventually end up the responsibility of the taxpayers. In certain countries there is an even more insidious effect. They distort depositor behaviour sending money where is should never be.
One supposed benefit of state-owned banks is that they are not subject to the fears that haunt normal bankers. In times of financial stress, when most banks stop lending even to each other, state-owned banks can be counted upon to splurge and help stimulate the economy. This is exactly what happened in China. In 2009, the government ordered its state-owned banks to triple the amount of loans. This splurge went on in 2010 and 2011 when new loans were double the average amount of lending prior to the Great Recession.
It is not just China. In the US, mortgage lenders Fannie Mae and Freddie Mac back nearly half of all outstanding US home loans. Fannie Mae owns or guarantees nearly $2.8 trillion of home loans and is the largest provider of mortgage credit in the US. They are also expensive. So far it has received $116 billion from the US Treasury to make up for loses as a result of bad loans.
In India the central bank, the Reserve Bank of India (RBI), has raised interest rates to tame inflation. The result is a slowing economy and more bad loans. Predictably these bad loans have fallen disproportionately on the state-owned banks who take in about three quarters of deposits. While the three largest private banks, ICICI, HDFC and Axis, posted good results and bad loans actually dropped, the state-owned banks had a different experience. The largest, the State Bank of India (SBI), saw its bad loans rise by 140% and it was forced to set aside $610 million to cover the problem.
Bad loans at private sector banks are beginning to accelerate. Last summer Brazil’s biggest lender, Itaú Unibanco predicted that the default-rate forecast for 2011 would be 4.5%. Their most recent forecast was a default rate of 5%. Public sector banks in Brazil have been pumping money into the Brazilian economy at five times the loans made by private sector banks. One would assume that their bad loans would at least be proportional most likely much higher.
Despite these alarming numbers and precipitous drops in the stock of the private sector banks in India and Brazil, investors and economists do not seem to be worried about China. On the contrary, they look at an increase in bad loans as good news. Their analysis goes something like this. Even though bad loans at the Chinese banks are predicted to rise by 40%, the Chinese simply roll the bad loans over. The Chinese have been doing this since the 1999 recession when they created bad banks like Cinda, whose bad loan bonds were extended another 10 years.
Since deposit rates are capped by the government at about 3 percentage points below lending rates, the state-owned banks have guaranteed profits.  In theory, the state banks in China are a monopoly, so depositors are supposed to accept low deposit rates. The low rates act as a sort of tax on consumers. They allow Chinese banks to earn massive profits, which can cover the bad loans. So despite the slowing of the economy Chinese banks shares in Hong Kong have increased 50% since last October. Investors are positive that if things really get bad, the government will step in with its magic money wand and make all things better.
But there is one thing that neither the Chinese government nor investors have counted on—the market. Unlike some other investors, depositors in China are acting rationally. Like their cousins in developed countries, they are chasing higher yields by investing in riskier assets and the market in China is providing these assets.
In China depositors are purchasing a growing array of “wealth management products”. They are also stashing money in the huge unregulated shadow banking system. The state banks are haemorrhaging deposits. Last September the “big four” state banks lost Rmb 420 billion ($66.6 billion) worth of deposits, four times their lending. The shadow banking system has been estimated at over 5% of GDP (gross domestic product), but there is no accurate information.
By distorting the incentives, the state banking system has sent money outside the regulated system to a place where statistics do not exist. While regular state banks might be able to avoid a crash, the shadow banking system cannot. When that crash occurs, there won’t be any warning.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected])


Life Exclusive
Kirkuk to Baghdad: Mission accomplished!

Having got the site engineer in Kirkuk accept the consignment of pipes and withdraw her ‘rejection’ note, the journey back to Baghdad had to be completed without any breaks. The 12th part of a series describing the unknown triumphs and travails of doing international business in Asia in the seventies and eighties

We felt happy that after considering our detailed explanations the site engineer expressed her willingness to accept the consignment and withdraw her ‘rejection’ note that caused us to come for discussions in the first place. After all, she also admitted that broken pipes would leak and such damage could have been caused at any time, in loading to unloading, and even during shipment time. A certain negligible percentage of breakage should not condemn the whole shipment.
With all these matters sorted out, we began our journey in right earnest; it would take a few hours, but, hopefully, by midnight, we should be able to reach Baghdad, provided there were no major military crisis.
In fact, our return journey was just as peaceful as the onward journey; the highways were deserted and occasionally we saw some military vehicles moving about. Only at a couple of places our vehicle was stopped for inspection; the men in uniform were kind and hospitable, offering us tea and giving us the directions to reach Baghdad safely.
We stopped for a break and moved on; about four or five hours later, I cannot really recall how long it took, but we safely entered the outskirts of the city. We had to stop at several check posts before we were allowed to reach our hotel.

Abbas was half asleep; we relaxed for a while, helped ourselves for a drink or two, ate the leftover khubbas with some cheese, and went to sleep. We planned to leave by about ten in the morning, so that, safely we could reach Basra by night, including a brief stop-over, if possible, at Nasriya.

In the next morning newspapers, we saw a lot of stories about the progress the defence forces were making; there was hardly any information about the death and destruction this senseless war was causing; neither was there any data about the casualties in the area.
We tried to get through to our hotel in Basra; lines were unclear and he told us to come a day later, as no room was available. Stephen felt this to be some kind of a message for us not to come, for some reason. He decided that we stay for a day more in Baghdad.
There was nothing to do; it was not a holiday trip when conditions were totally unpredictable.  All that we did was to walk on the road, parallel to the Saadoon Street, which ran along the Tigris river.  In the past, when I had visited Baghdad several times before, I always stayed at the Ambassador on the banks of this river. Across the river, one could see some nice government buildings and guest houses, including the bridge. In less than an hour we returned back to the hotel and spend the day, for complete rest and taking stock of the situation.
We packed our bags and left rather early; except for greatly damaged roads and destroyed military vehicles, and the army movement, we hardly noticed anything else.  Civilian traffic was fear and far between.  On the way, we were able to pick up some fresh dates, both raw and ripened, and were joined by other vehicles, which were now joining the traffic, as we proceeded towards Basra.
Our stop-over at Nasriya was short; in fact our host advised us to move on and try to be in Kuwait by night fall. We enjoyed their hospitality and cautiously drove to the outskirts of Basra; here the military presence was visible and vehicular traffic under check and control. There was not much of gun fire, but we could sense the seriousness of the situation by the grim faces of personnel on the move.

At our hotel, the receptionist advised us that as the traffic had slowed down a bit it may be a better idea for us to proceed to Kuwait instead of taking a chance for overnight stay, though the room was available. As our major job was completed in Kirkuk, Stephen was determined to push through and reach home by night. We left the hotel immediately.
The exit formalities at Iraqi border did not take long and nobody even checked our luggage. The no man’s land was crawling with vehicles; mostly foreigners were trying to get entry permits to Kuwait.
Stephen took a little longer this time to get our passports stamped with entry permits to Kuwait, and we completed our customs formalities without much delay. I do not recall how long it took, but by about 10.00pm or so, we reached home safely.
Once we were in Kuwaiti territory, Stephen stopped at a roadside shop for some soft drinks and rest; alerted his wife about our arrival plans and requested her to get some nice food for starving folks from Iraq!
We thanked the Lord for His kind mercies. After a relaxing shower, we sat down, enjoyed our meal with the rest of the family before we hit the sack. We were tired, but our minds were running ahead, as to when we may get our seats to fly back to Dubai.  

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts. From being the advisor to exporters, he took over the mantle of a trader, travelled far and wide, and switched over to setting up garment factories and then worked in the US. He can be contacted at [email protected].)

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Public Interest Exclusive
Corruption in the selection of mid-size 4x4 vehicles for the Indian Army

Selection and purchase of motor vehicles for the armed forces has to be done in an open and transparent process. Not necessarily from only the one who has had a monopoly since Independence—and has not done much to upgrade their 4x4 either

General VK Singh has well and truly thrown an angry wet cat into a room full of Delhi’s best, and the grapevine as well as the jungle drums are abuzz with savage verbal exchanges of the sort that would can overshadow the Jeep scandal of the sixties. The chief of Army Staff has revealed that he had been offered a bribe of Rs14 crore by a lobbyist on behalf of a well-known and existing supplier of vehicles to the Indian Army. There is almost no doubt on the identity of the manufacturer involved, or the vehicle offered and rejected.
Corruption in the armed forces is nothing new. If anything, the scale has gone up, and so has the brazenness. Across all levels, whether it is using service vehicles for private use, or taking land meant for army usage and converting it into golf courses or apartment blocks maintained through funds meant for other purposes, or even the way officers and their wives are spotted in full uniform and plumage at airports to welcome their seniors or others—it is no longer only about dipping into regimental mess funds or fiddling with the rations.
Nor does it, apparently, have to do with which government was or is in power. Nor, also, is corruption anymore about being discreet. It is all out there in the open. Even the armed forces drivers on duty in Khan Market talk openly about such things—you just have to hang around the car repair shops there to listen in.
Take, for example, the case of the IAS couple, Tinoo and Arvind Joshi. Mr Joshi's tenure in the ministry of defence during the NDA government and the purchase decisions made by him then in his capacity of joint secretary are the talk of the town. Some of the results were found in his possession during the income tax raids in Bhopal and elsewhere. That one is well-known.
Here’s another one that is not so well-known—the supply of fresh meat “on the hoof” during the IPKF activities. A friend who was on a ship providing support services then recalls how they would typically receive about 10% of the animals manifested—because the supply officers and audits would calculate the total cubics of the single deck holds without realising that you simply can not carry live animals stacked on top of each other. That one is still doing the rounds of the agencies.
Then, moving on from the army and the navy, the scandal in 2006 of fuel adulteration at Pune’s Lohegaon air base—from where the high-end Sukhoi Mk-IIs operate was simply hushed up—and never heard of again. But that does not mean that fuel, adulteration or misuse, is not part of the whole corruption scenario in the armed forces. Yes, we will keep hearing of engine failures and crashes therein.
Likewise, in what is probably the crux of the current matter, is the way that sub-standard 4WD vehicles are sought to be foisted onto the Indian Army from a particular manufacturer. A rebuilt 4WD, tentatively named after an implement used to chop wood with, is sought to be sold to the army at a price of about Rs15 lakh when the civilian version of the same is sold at about slightly less than half the price. Talk to serving or recently retired armed forces officers, or ride by trains past army positions, and you will see backyards full of rotting vehicles of this brand, suffering for lack of spare parts or being cannibalised.
Here it is very interesting to analyse the current position with smaller 4WD vehicles used by the Indian Army. On one side, you have the petrol-driven Maruti Gypsy, which appears to be giving good service, for the role it has to play. On the mid-range side, the Ashok Leyland Stallion and the Tata LPTA 715 seem to serve the purpose in the 2.5-tonne to 5-tonne payload range, and then there are the bigger ones.
But it is the space between the Maruti Gypsy and the Ashok Leyland Stallion that remains in a haze, and this is where the current controversy seems to be centred, and rightly so. This used to be occupied by the now defunct Nissan Jonga of the fifties vintage and the various models on offer from Mahindra & Mahindra. To some extent, you also see Tata Sumo 4x4 vehicles, but not as many.
Regardless of which manufacturer it is that General VK Singh refers to, fact remains, without compromising national security, there needs to be some transparency in some matters pertaining to the armed forces in India, especially in matters like vehicle selection. There is nothing secret about these 4x4 vehicles, they are also used for private and civilian government customers, and their technical specifications as well as performance parameters are up there in public domain.
As a motoring journalist, it is my submission that selection and purchase of motor vehicles for the armed forces, barring the highly specialised ones, be done in an open and transparent process. If that is one good thing that comes out of this whole episode, then the nation will be served that much better.
After all, for a price of Rs15 lakh (without taxes, since these are for the armed forces) our soldiers can pick and choose from pretty much any decent brand and model of 4WD on offer by other manufacturers, too. Not necessarily from only the one who has had a monopoly since Independence—and has not done much to upgrade their 4x4 either.

(Veeresh Malik had a long career in the Merchant Navy, which he left in 1983. He has qualifications in ship-broking and chartering, loves to travel, and has been in print and electronic media for over two decades. After starting and selling a couple of companies, is now back to his first love—writing.)



Vikram Singh

1 year ago

The trashiness of Mahindra vehicles is visually apparent to a layman anywhere in the world (except probably an Indian) & this disgusting manufacturer is allowed to bribe the defence establishment thereby compromising the security of our country.What could be more shameful than this? I have seen on a personal level the criminal negligence with which Mahindra vehicles are made when the steering wheel in a brand new Mahindra XUV became unconnected from the rest of the system making it unsteerable.The driver was able to stop the car before it rolled down the gorge.


5 years ago

amother investigtive article by DNA.



In Reply to deepak 5 years ago

Dear Deepak, thank you for the link.

And then, ofcourse, buried in an inside page:-


Vinay Isloorkar

5 years ago


Ho hum! The treasure hunt reveals Mahindra Axe!

Vinay Isloorkar

5 years ago


Beats me. Why isnt anyone belling the cat and naming the brand?



In Reply to Vinay Isloorkar 5 years ago

Dear Vinay Isloorkar,

Thank you for writing in.

I think this article pretty much spells it out?

Best regards//VM

Vinay Isloorkar

In Reply to malq 5 years ago


Tatra? Mahindra Axe?
Tatra or Mahindra Axe?
Tatra and Mahindra Axe?
Tatra and Mahindra Axe and..... ?
Tatra and mahindra Axe and .... and ......?

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