An Insider’s View of the Real Problems of PSBs
It has been raining memoirs by governors of the Reserve Bank of India (RBI) in the past year or two. Three immediate predecessors of RBI governor Urjit Patel have published books in quick succession, each skirting the big elephant in the room—the gigantic bad debts of public sector banks (PSBs), estimated at anywhere between Rs8 lakh crore (officially) and Rs20 lakh crore (according to a former RBI deputy governor Dr KC Chakrabarty). 
 
The spate of banking scams, including Nirav Modi-Gitanjali Gems, Rotomac and others, have exposed the ease with which the PSBs were swindled; these had also turned the spotlight on the need for change, with a chorus of voices in government insisting that privatisation is the answer. 
 
Simultaneously, the government is forcing a sale of companies whose promoters are the biggest wilful defaulters—each in excess of a stupendous Rs25,000 crore. 
 
Then there is the controversy over ICICI Bank’s CEO, Chanda Kochhar, and Axis Bank’s Shikha Sharma, where RBI has turned down the Bank’s proposal to appoint her for another term. 
 
All this has brought back into focus some core issues like whether bank nationalisation has served any purpose; the impact of economic reforms on banks; the role of the central bank and the finance ministry; and the contribution of the political class in bringing PSBs to such a sorry mess. 
 
Reforming the Indian Public Sector Banks: The Lessons and the Challenges, which was released on 9th April in Delhi, is an extremely important book that throws light on all these issues with a unique perspective. 
 
The author, TR Bhat’s, is a refreshingly different voice from the usual policy wonks, bureaucrats and academics who have usually had a hard stand in support of nationalisation or for privatisation, depending on their ideological perspective. 
 
Even DN Ghosh’s memoir gave us only a ringside view of bank nationalisation without commenting on how it has eventually turned out. 
 
Bhat’s is a dispassionate, insider’s assessment of how government policies affected PSBs ignoring their failures and shortcomings, including worryingly high incidents of fraud and corruption at PSBs. Bhat has led the Corporation Bank Officers’ Organisation (CBOO) with distinction and has served as an officer director on its board. More importantly, he pioneered whistle-blowing by the Corporation Bank’s Union to safeguard the Bank from rapacious chairmen colluding with industrialists to dole out loans to already defaulting companies. 
 
As an investigative journalist, I have personal knowledge of how the Union has worked to protect the Bank’s interests. The present state of the Bank’s finances only reflects how the system eventually defeated their efforts. 
 
The book is a must-read for members of this government and its advisors whose public statements display a worrying intention to ram through global cookie-cutter solutions without investing the time and effort to find specific remedies to a uniquely Indian economic environment and savings culture. 
 
The attempt to pass the Financial Resolution and Deposit Insurance Bill and the demand for bank privatisation (which has been slightly muted since the surfacing of issues at Axis Bank and ICICI Bank) are just two examples. 
 
Bhat covers four issues: a) nationalised banks have acted as shock-absorbers for the economy, by taking over failed private banks after every major scam; b) nationalised banks have been exploited by every government for its political agenda, while never putting in place proper human resource policies and investing in training and skill development; c) every crisis led to the formation of a committee which painstakingly identified issues and offered solutions which were ignored (of special significance is the report of the independent commission headed by SP Shukla and backed by bank unions); d) failure of supervision by RBI was responsible for most of the scams as well as protecting large defaulters by refusing to name and shame them almost until the bankruptcy proceedings began. 
 
Bhat also analyses the problem of the government as the owner of PSBs on five fronts—appointment of top executives, the appointment of directors to their boards, the working of the board, the internal working of the banks and failure to fix accountability.
 
Interestingly, the book contains a sharp rebuttal to governor Urjit Patel’s claim that RBI has no powers over PSBs, although it was already in print when Dr Patel made his startling claims at a speech in March 2018. It outlines four ways in which RBI engages with banks. Some interesting nuggets that provide a timely recollection in today’s turmoil are:
 
Bad debts have been papered over, for decades, by RBI and the government and economic liberalisation provided only a temporary palliative by allowing banks to increase capital by going public and make them profitable for a short interval. 
 
The scandal of loan write-offs ends up protecting wilful defaulters by wiping the slate clean. Bhat writes that after the loans were written off, the same industrialists would be granted fresh loans in other names. Such write-offs increased even as ‘loan overdues were surging’, he says. Interestingly, this government has falsely defended in Parliament the Rs2.4 lakh crore loan write-off between April 2014 and September 2017, claiming that it was a tax-saving device to clean up bank balance sheets and did not let off the borrowers. Dr Chakrabarty, has called such write-offs the biggest scandal of the century. It is important for us to remember that we, the people, have paid for these write-offs though regular bailouts and re-capitalisation of PSBs by the exchequer. 
 
There is a lack of accountability of the PSB chiefs and the absence of any yardstick to evaluate their performance. The worst that has happened to PSB chairmen is that they have been asked to leave. Many such appointments have been political. There has been a failure of internal and external audits, lack of action on  RBI’s own inspection reports.
 
The forced-mergers of failed private banks with PSBs have allowed RBI to avoid accountability for its failed supervision over the decades. Most of us recall the merger of Global Trust Bank with Oriental Bank of Commerce (which hurt the latter’s performance for two to three years), but forget other mergers of that time such as Nedungadi Bank with Punjab National Bank and Benares State Bank with Bank of Baroda. 
 
How a taskforce of the Confederation of Indian Industry (CII) had suggested the closure of three banks that had turned sick—Indian Bank, United Commercial Bank and United Bank of India. It led to a sharp reaction from trade unions that exposed how the banks’ losses were almost entirely due to defaults by CII members. The move was abandoned and the banks even turned around for a while. Indian Bank is by far the best PSB now.
 
The book stops just short of the current turmoil in banks as they struggle to deal with new provisioning norms and bankruptcy proceedings as well as frequent government diktats that force banks off track (as in the pressure of demonetisation, opening Jan Dhan accounts, taking responsibility of Aadhaar enrolment, etc) from their core banking functions. 
 
However, the sweep of issues covered right from nationalisation to the present day allows us to understand exactly why the present debate on bank privatisation or what to do with PSBs, will not resolve the problem. At the very least, 3/4th of the newly constituted Bank Board Bureau will have a lot to learn from the 300-odd pages of this important book.
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COMMENTS

Mahesh S Bhatt

1 year ago

Bigger the animal harder the taming wilder is gets more damages he does collatrally Mahesh Bhatt

Ramesh Poapt

1 year ago

2018 will be the last year of samdra manthan!?

Balakrishnan S

1 year ago

Indian bank the best PSB!!!

A Guide for Novice Investors
This is not a new book. It was published way back in 2004 by the fund rating company Morningstar. It has just been reissued jointly by Macmillan and Wiley as an Indian edition, given the huge popularity it enjoys. It is a classic which appeals to those interested in understanding ‘moats’ that protect businesses from competition and lead to long-term value creation. Every budding analyst, I come across, claims that he has read this book to become a better investor. So, what are these five rules? 
 
1. Do Your Homework: This refers to the framework of investment knowledge required to analyse a business. This essentially includes knowledge of finance and investment accounting. Chapters 4-7 explain how to analyse companies. 
 
2. Find Economic Moats: This is the most important part of the book. Dorsey suggests looking at quantitative factors like free cash flows, net margins and return on equity and return on assets, as a first step. The second step would be to try to find qualitative factors behind the numbers that create the moat, such as brands, technology, switching costs or low cost of operations. 
 
3. Have a Margin of Safety: Even the world’s most wonderful business is a poor investment if purchased for too high a price. The book takes the reader through all the conventional measures of market valuation such as prices to sales, earnings and book value, earnings yield and price to earnings growth, etc. It ends with a little known measure—cash return—which is free cash flow to enterprise value and measures how efficiently the business is using its capital. A whole chapter is devoted to intrinsic value by the discounted cash flow method which, unfortunately, is of no practical utility.  
 
4. Hold for the Long Haul: This is obvious, especially in the US, where taxes and trading costs can eat into a large part of your profits.
 
5. Know When To Sell: Dorsey promises to explain this later but I could not find any elaboration on this. I find this a most callous and egregious slip-up. He has several pages devoted to when not to sell which does not really help much. 
 
After having explained these five points, about halfway through the book, Dorsey takes the readers through how to analyse two real companies. He picks up Advanced Micro Devices, a tech company, and Biomet, a maker of medical devices. This chapter gives readers a chance to put on an analyst’s cap. All this is in the first part of the book which also includes mistakes to avoid, how to spot financial fakery, a 10-minute test of an investment idea which will help you quickly reject stocks that are not worth researching, while filtering investment-worthy opportunities that demand further research.
 
There is a second part of the book which is a guided tour of individual sectors. This section is quite unique. Most books on investing show no awareness that each sector is different and may demand a different set of tools for analysis. 
 
The sectors covered in this book are: healthcare, consumer services, business services, banks, asset management and insurance, software, hardware, media, telecom, consumer goods, industrial materials, energy and utilities. Dorsey explains how companies make money in each of these sectors and how moats get created. Of course, these are all US-centric factors; nevertheless, it helps to develop the right analytical approach. The Five Rules for Successful Stock Investing is a great book for beginners and a good refresher to leaf through every once in a while, even for seasoned professionals. 
 
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Ramesh Poapt

1 year ago

easy to read, but too though to implement!

What Do You Have To Lose?
As everyone by now knows, Nassim Nicholas Taleb is a Lebanese–American essayist, scholar, statistician, former trader and risk analyst whose books Fooled by Randomness, Black Swan, Anti-fragile have dealt with problems of randomness, probability and uncertainty. The Sunday Times has rated Black Swan as one of the 12 most influential books since World War II. Taleb now serves as a professor at several universities, including as distinguished professor of risk engineering at the New York University’s Tandon School of Engineering. 
 
Taleb is back with another book on a theme that is close to his heart and which he has been expounding for the past few years in his articles and Twitter comments: skin in the game (SITG). The idea is simple. If you grab the upside (of your actions or decisions), you should get the downside too. His argument is that the chances of informed action and prediction can be improved if we better comprehend the multiple causes of ignorance when dealing with everything from health, safety politics, sports, etc. One of the causes of ignorance is that, in an opaque system fraught with uncertainty, there is an opportunity for one set of players to hide risk: to benefit from the upside when things go well but not pay for the downside (Black Swan events) when one’s luck runs out. 
 
Taleb has made a natural progression from randomness to extreme events to, now, what he calls hidden asymmetries. Economic literature focuses on incentives as encouragement or deterrent, but not on disincentives that should eliminate from the system incompetent and nefarious risk-takers who inflict harm. An unskilled forecaster, who, if shielded from financially harmful consequences of his wrong forecasts, would continue to contribute to the build-up of risks in the system. But if he is under a disincentive to do so—the forecaster pays for his wrong forecasts—he would, eventually, be removed from forecasting. This disincentive is simply skin in the game.
 
You can have as good a risk management system as you want, but nothing can be better than an inherent and internal system of risk control exercised by the participants, knowing that they have to pay for it. 
 
This idea is old as the hills. Taleb, who was born in what he archaically calls Levant—a collection of cities on the eastern Mediterranean seaboard. The Levant is a short distance away from the principal centres of several older civilisations—Sumerian, Babylonian, Ottoman, Persian, Greek and Roman and Taleb, proud of this lineage, has always drawn his anecdotes and inspiration from these ‘ancients’. In this book, too, he assembles a lot of historical evidence to show that the ancients were fully aware of this incentive to hide risks and implemented very simple but potent heuristics or rules of thumb. 
 
About 3,800 years ago, Hammurabi’s code specified that if a builder builds a house and the house collapses and causes the death of the owner of the house, that builder shall be put to death—the best risk management rule ever. What the ancients understood very well was that the builder would always know more about the risks than the buyer, and can hide sources of fragility and improve his profitability by cutting corners. The foundation is the best place to hide such things. The builder can also fool the inspector, for the person hiding risk has a large informational advantage over the one who has to find it. Taleb also notes that Hammurabi’s law is not necessarily literal: damages can be ‘converted’ into monetary compensation. 
 
Over the centuries, the idea of SITG has appeared in many forms. The rule under Lex Talionis is “An eye for an eye, a tooth for a tooth.” The 15th Law of Holiness and Justice is “Love your neighbour as yourself.“ Isocrates, a Greek rhetorician, and Hillel the Elder, a famous Jewish religious leader and scholar, have both said: “Do not do unto others what you would not have them do unto you.” Philosopher Immanuel Kant’s Formula of the Universal Law is: “act only in accordance with that maxim through which you can at the same time will that it become a universal.” 
 
What are the modern-day applications of SITG? The best place to apply this is on policy-makers and politicians (though it is unclear who would apply it, since law and policies are framed by them.) One of the most important points Taleb makes is that this idea is not ‘scalable’. You cannot have the players in the national government with SITG; and it is far from international organisations. It is in the small, local, personal and decentralised systems where SITG works best because participants are, typically, kept in check by feelings of shame on harming others with their mistakes. In a large, national, multi-national, anonymous and centralised system, the sources of error are not so visible and pinpointing accountability is not easy. When it fails, everybody except the culprit ends up paying for it, leading to national and international measures of indebtedness against future generations or ‘austerity’ imposed—again by large global organisation run by those without SITG such as World Bank and International Monetary Fund. This naturally means that Taleb is dead against ‘big governments’. 
 
 
After policy-makers come corporate managers, especially the finance people—the ‘agents of capitalism’—for whom Taleb has special scorn. The manager who loses money does not return his bonus, forget about sharing the losses. Taleb has never concealed his hatred for economists, quantitative modellers and policy wonks. These people have no disincentive and are never penalised for their errors. So long as they please the journal editors, or produce cosmetically sound ‘scientific’ papers, their work is fine. So, we end up using models, such as portfolio theory and similar methods, without any remote empirical or mathematical reason. The solution is to prevent economists from teaching practitioners, simply because they have no mechanism to exit the system, in the event of causing risks that harm others. Again, this brings us to decentralisation by a system where policy is decided at a local level by smaller units and, hence, there’s no need for economists. 
 
Then come the predictors, who rarely pay for their predictions while their precise quantification encourages people to take more risks. The solution is to ask—and only take into account—what the predictor has done (what he has in his portfolio, if he is a stock-adviser), or is committed to doing in the future. Finally, to deal with warmongers, Taleb approvingly quotes Ralph Nader, an American activist who fought many battles for the consumer, and to whom Taleb dedicates the book. Nader has proposed that those who vote in favour of war should subject themselves (or their own kin) to the draft. Beyond all ‘isms’ and theories of how institutions should be run, what we really want is accountability for decision-makers who influence our lives. And that is what SITG suggests. But there are huge practical problems in trying to apply this approach in real life. Who will write out the rules of SITG? Wouldn’t human beings, being what they are, find exactly the same way to game the system to save their skin? 
 
Most importantly, Taleb’s strong, combative, haughty and thin-skinned personality comes through in every page. When he is not delving into SITG theory, he is either mocking someone (academics like Steven Pinker, Thomas Piketty and Nobel Laureate Richard Thaler, journalists, bureaucrats, social science departments, corporate managers, Monsanto and other GMO companies, large corporations, and so on) or praising himself. The number of people, disciplines and institutions that he thinks are charlatans and fools, is astoundingly vast and his rudeness breathtaking.
 
This book is nowhere in the same league as Fooled by Randomness and Black Swan. There are sweeping generalisations also (for example, about the change in public mood in UK, India and the US) that just don’t ring true. All that’s a pity because the core SITG idea is relevant, though with limited applicability. 
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COMMENTS

KARAN GARG

1 year ago

Fooled by Randomness and Black Swan , do we have reviews for these books ?

KARAN GARG

1 year ago

thanks for the review! gets the msg cross to us !

Prasanna -

1 year ago

Another blockbuster from the author of Black Swan.

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