Rs 9 lakh crore danger to the Indian economy

Dec 19, 2011

In this issue:
» Govt to cash in on the US$ 26 bn cash pile of the PSUs
» Rupee fall would hurt FIIs
» What if gold crashes?
»  "We are headed for 1930s style depression": IMF
» ...and more!
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A leading daily carried the headline that the cash strapped Kingfisher Airlines has grounded 15 of its planes. The company has been suffering severe cash crisis in recent times. This has the bankers who have their money tied up in the airlines, sweating over the fears that their loans may be in trouble. Troubles for the banking sector are not just exclusively from the airlines sector. Sectors like telecom, power and real estate have caused nightmares as well. Even sectors like metals have come under pressure due to the subdued international trends in their prices and demand.

As per the Reserve Bank Of India (RBI), the banks have nearly Rs 900,000 crores tied up in risky sectors that include these sectors. The sectors have seen their earnings come under pressure due to higher costs of input as well as increasing interest rates. As a result, risk associated with the loans to the companies in these sectors has been increasing. The risk is evident in the fact that the bad loans of the Indian banks have gone up nearly 33% in the quarter ended September 2011.

More and more banks are increasing their provisioning as well as reporting higher NPAs (non performing assets) in recent times. As per RBI, the total loan portfolio of the banks is heavily inclined towards the risky sectors. Nearly one fifth of the total loan portfolio of banks consists of loans to risky sectors.

It is not that all the risky assets would end up becoming nonperforming assets (NPAs). But these loans have increased the riskiness of Indian banks, particularly the public sector banks. The increased risk would call for increase in capital for these banks. This in turn would mean the government would have to provide for the additional capital requirements in its budget which would further worsen India's burgeoning fiscal deficit. This would deepen the existing negative sentiment in the country.

To add to this, the banks themselves would prefer to become stricter when it comes to scrutinizing and granting new loans. This in turn would further worsen the country's economic situation as more and more sectors which rely on credit to fuel expansion plans would see funds drying up. This would further worsen the slowdown that has already gripped out economy.

Do you think Indian banks are headed for a crisis on account of loans to risky sectors? Share your comments with us or post your views on our our Facebook page / Google+ page.

 Chart of the day
Time and again we have referred to the perils of fuel subsidy in India. Fuel subsidies have been a heavy burden on our fiscal deficit. As a result, it is a big question that haunts us all as to who are the main beneficiaries of this subsidy. Initially fuels like diesel, kerosene, LPG (Liquefied Petroleum Gas), etc were subsidized to help the common man. Diesel in particular has been kept within the net of subsidy as it is the main fuel for the transport system. As a result, the government feared that if prices were to mirror international prices, then it would lead to higher inflation particularly for food items. It would therefore be interesting to note that diesel is not just being utilized by the transport system but also by the industries in the country. Instead of using furnace oil as fuel in the plans, Indian industries prefer to use diesel due to its lower cost of purchase. As shown in today's chart of the day, the cost per tonne for diesel (adjusted for the calorific value) is lower than that of furnace oil in most states. Diesel is not the only exception where subsidized fuel is being used for commercial use. Even other fuels like kerosene and LPG have found their way to help commercial profits rather than helping the common man for whom this huge subsidy is being borne.

Data source: Business Standard
* adjusted for calorific value

Improving one's liquidity from existing assets rather than resorting to debt can be considered a prudent way of managing finances. Struggling with lower tax collection and rising subsidy burden, the government cannot be blamed if it is eyeing to liquidate some assets. But things would be different altogether if the assets were wholly owned. The Rs 1.4 trillion of cash in the books of the top 10 PSUs in the country are unfortunately not the assets that the government can call entirely its own. Hence reports of the government, being the single largest owner in these, staking claim to the cash, by demanding special dividends or share buyback seem in bad taste. No denying that minority shareholders too will benefit from the dividend payouts and buyback. But considering the need for cash to grow and sustain a solid balance sheet during difficult times, the PSU may end up compromising on shareholder value creation. Their long term growth prospects may get hurt if the government continues milking these assets. The government being the management group running some of the largest and most profitable companies in the country needs to take some lessons in capital allocation.

There is a notion among retail investors that foreign institutional investors (FIIs), the most influential investors on the bourses, are usually the ones of who amass a significant chunk of the stock market gains. We don't know how true this is, but one thing is certain- 2011 has been a disastrous year for FIIs in Indian stock markets. Let us elaborate how. Suppose an FII invested US$ 1,000 in Indian stocks at the beginning of 2011. That would have been worth Rs 44,000 then. But given that the rupee has depreciated by about 20% since then, the FII's investment would now be worth only US$ 800 (when the rupee is converted at current forex rates); that is assuming that the stock price hasn't moved at all. So add to that the decline in stock prices and you will realise how badly FIIs have burnt their fingers in the Indian markets. According to the movement in the BSE Dollex index which is the US currency equivalent of the Sensex, the average loss for FIIs has been about 36% so far. Not surprisingly, the FIIs have been net sellers to the tune of Rs 20 bn in the year so far.

Superstars like Akshay Kumar don't come cheap. Which is why if a firm manages to rope in celebs like him, it must be raining profits at the firm. Who would have thought a few years back that a casting coup of this kind will be pulled off by a firm that specialises in giving out loans against gold. Yet the unthinkable happened. Mr Kumar these days has become a regular feature on TV, courtesy the ad of a leading gold financing firm. While the firm would have hoped for the alliance to continue, events in the past few days have certainly asked questions about the sustainability of the business model of the firm. The world price of gold has crashed from over US$ 1,800 per ounce to under US$ 1,590 per ounce. Thus, with the yellow metal working as collateral for gold financing firms, there is a real risk that these firms may end up recovering less money from the collateral than they have lent out. Over the next few days then they would be more desperate to stare at the price chart of gold rather than try and find out the number of eyeballs their ad campaign is gathering.

We are two weeks away from welcoming the New Year 2012. You may be thinking of parties and celebrations with friends and family. However, stock markets across the world are not joining in the festivities. Even before the New Year has started, we have received another doomsday prediction. "There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating." These ominous words were uttered last week by International Monetary Fund (IMF) chief Christine Lagarde. The world is on the brink of a 1930s type depression and there is no escape. Europe is facing further rating downgrades. France is especially vulnerable to the same. Plus, the European Central Bank also isn't doing enough to help end the crisis. Policymakers across the world need to understand this and take decisive action. With further gloom on the horizon, 2012 doesn't bring much to look forward to just yet.

In the meanwhile, the Indian stock markets continued to languish in the red. At the time of writing, the BSE Sensex was down by 216 points (1.4%). Stocks in the realty space were witnessing maximum losses. However, stocks in the FMCG and energy sectors were witnessing buying interest. Barring Malaysia, other stock markets in Asia closed on a weak note as well with indices in Korea and Taiwan leading the losses.

 Today's Investing Mantra
"If a business does well, the stock eventually follows." - Warren Buffett

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11 Responses to "Rs 9 lakh crore danger to the Indian economy"

Sankara Narayanan

May 13, 2013

The politico-bureaucratic-business axis has its say in the utilization of the available finances with the Banks. It is now well-known that the diversion of funds even from the PSU Banks are under the threads of powerful lobby - the ministerial one and other influential lots. The hidden agenda behind all these economic diversions are imaginable and if those factors become as REALITIES, the Indian economy is destined to be threatened with the burden of more than the above figure.

The present Central Government has only one thing in common : IT HAS TO RETAIN POWER AT ANY COST - EVEN AT THE COST OF THE NATION. Who cares for the Nation? Who cares for the welfare of her ordinary citizen?

The Government of course cares for its own corrupt leaders - the sitting and ex-ministers, their families and a few selected business magnets.

Until the voters are taking the responsibility on their own shoulders, the LOOT OF INDIA BY ALL MEANS WILL CONTINUE. Still all of us will say " MERA BHARAT MAHAAN".

Thanks to the miss-governance by the "all-powerful elected and co-opted leaders in the system"


Pankesh Sethi

Dec 21, 2011

I agree with the fact about bad health of Indian banks. Its going to affect Indian economy as a whole. Investors confidence is already on low side regarding India, NPA's are
going to be pain for Indian government. It doesn't stop here, further steps like food security bill will sunk Indian economy in a deep hole.



Dec 19, 2011

Hello Sir,
Having already given the complete particulars on functioning of banks, still what is there to comment.
This bad debt & provisioning are not only today`s activity these are there for decades, all our political ruler`s greed on remaining in the power for ever.They may even gain death less life & continue to wreck the whole earth!!!



Dec 19, 2011

The problem with the NPAs is the susceptibility for misuse of this for political interests. This will make the quantum of NPAs with PSU Banks an indeterminate amount. This would be the real risk. A definitive transparent NPAa could be handled by the competent professional bankers if the political interference is eliminated.Unless the problem is identified and crystallised in real terms there is no point talking of solutions.


D Banik

Dec 19, 2011

I believe interested investor loves to obtain opportunity to get stock select at a concessional price. However, they might be busy in various activities & may not have time to see your advertisement regularly. I think you should allow more time for availing this benefit.



Dec 19, 2011

it is the otherway round,i.e.
"If a stock does well, the business eventually follows."


J Thomas

Dec 19, 2011

It's wrong to say that petrol and diesel are subsidised in India. Diesel costs the same as international prices while petrol is much costlier. Only kerosene is subsidised.
The government revels in taxing and subsidising at the same time. High taxes on petroleum and its products are followed by 'subsidies.' What hypocracy !



Dec 19, 2011

Yes ,Indian banking sytem is in danger.Entire Indian economy works in cutting concept , for example if you need a road contract then you may need to pay politician 20% of contract money as commision and 10% of contract amount for government servants as office expenses.

Who knows the same way PSU top brasses might have worked , 20% cutting then loan is sanctioned.

if this is a case then sure PSU banks are in Trouble.



Dec 19, 2011

Not to worry about down fall. Times are changing very quick.uro and doller big player are spoileimg the indian market.So wait and watch.



Dec 19, 2011

I 150% agree with the comments on all the topics covered today.
Heavy Cash Assets with PSUs-

Govt of India should, at the earliest reduce its state in all these units and make them really Public Owned.

Gold Loan Companies-
I shudder to think about the risk being carried by thse companies-most of them Kerala based.
At the same time, I also feel happy that Banks,especially Public Sector Banks are seeking about 50% margin for the loans and increase the loan /gm at reasonable intervals,after assessing the immediate term risk.

Diesel Pricing-

India is a country not blessed with abundant quantity of Petroleum produces and is mostly dependent upon imports for its growth.

At least now, Govt of India should encourage states with Wind and Solar Energy resources to go in for massive expansion and make these renewable resources at least 20-25% of total requirement by 2020 if not earlier.

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