5 years since the crisis, have banks really improved? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

5 years since the crisis, have banks really improved? 

A  A  A
In this issue:
» India came close to seeking loan from IMF
» Japan reports a record high current account gap
» Investments dwindle in the infrastructure space
» Indian FMCG companies are feeling the heat
» ...and more!

The global financial crisis was a product of unscrupulous practices of various banks and financial institutions. So badly were they affected that most had to go with a begging bowl to the government to bail them out. And these were not small banks. These were big banks; banks that were deemed 'too big to fail'.

The repercussions of the crisis for the banking sector were immense as shockwaves were felt not only by banks in the US but across many countries across the globe. More noises emerged on how there is a need for stricter regulation for banks and breaking up big banks into smaller, manageable entities. There were also talks of keeping a close check on the bonuses pocketed by bankers. The overall idea was the need to have a stronger banking system that would be able to withstand any more shocks in the future.

It has been five years since the crisis. Can we say that the objectives outlined by governments with regards to the banking system have been achieved? Not really. According to economist Joseph Stiglitz, even after 5 years there are many issues that still need to be addressed. Banks that are considered 'too big to fail' continue to exist. Shadow banking continues to be a menace and has not been effectively brought under the regulatory framework. Indeed, one of the biggest headaches has been that the regulatory structure as such is very complex. And so banks have been able to take advantage of the same. No headway seems to have been made in simplifying the structure. Effectively, a status quo in the banking system in both the US and Europe means that no lessons have been learnt from the 2008 crisis.

This means that should there be another shock of huge proportions in the future, the banking system will once again be at the receiving end. US and Europe could do well to take this issue seriously and come up with ways of restructuring and realigning its banking system. Because chances are that banks may not be able to come out from a second big shock. And considering that economies in both these regions are still stick in a rut, the overall repercussions are bound to be massive.

In fact we believe that banks not just in the West but also in China and India have not taken any learning from the mistakes of the past. China's shadow banks and India's NPA burdened PSU banks are as vulnerable to economic crisis as their counterparts in the West.

Do you think that there is a big change in the way banks are managed post the 2008 financial crisis? Let us know your comments or share your views in the Equitymaster Club.

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01:36  Chart of the day
India's index of industrial production for November 2013 left a lot to be desired as it contracted sharply by 2.1%. This was considered to be the lowest in 6 months and highlights that the Indian economy is not out of the woods yet. The reason for the contraction was attributed to the poor performance of the manufacturing sector and lower output of consumer goods, particularly white goods. This coupled with the fact that retail inflation has also slightly reduced has raised hopes of the RBI going in for a rate cut. Whether the central bank will be in a mood to relent remains to be seen. Meanwhile, India's peer China showed why it is the manufacturing powerhouse in the world as industrial production in the country grew faster than the rest of the pack.

Industrial production in India contracts sharply

The exchange rate of Rs 100 to a dollar! Sounds quite scary, isn't it? With the rupee nicely perched at around the 60 odd mark to the dollar, its devaluation to Rs 100 looks absurd indeed. However, if India's petroleum secretary is to be believed, what seems absurd now was very close to becoming a reality some time back. So, how did we manage to avoid a near total disaster? No, it's certainly not due to the foresight of our policymakers. We instead owe this gratitude to the US shale gas revolution. You see, had there not been a surge of production from the US, international oil prices could have gone much higher. And since we import most of our crude requirements, our economy would have been in total disarray. As a matter of fact, we came pretty close to seeking a loan from IMF, argues the petroleum secretary.

This is not the first time we've been made to realize how alarming our near total dependence on imported crude really is. However, it seems like we've not learnt any lessons at all. Retail prices are still regulated and there's still huge subsidy given on petroleum products. Unless we bring the subsidies down and unless proper policies are put in place to incentivise oil exploration within India's shores, the Rs 100 per dollar rate could come back to haunt us. Worse still, our luck may not bail us out every single time.

India is not the only economy to have borne the brunt of currency depreciation in recent times. India's rising energy cost and weak rupee problems are strikingly similar to that of Japan. As per Bloomberg, the shutdown of nuclear power plants has made Japan's current account deficit problem more acute. Japan's imported energy demand has shot up. This coupled with weakness of the Yen has led to the economy reporting a record high current account gap. Even as the Japanese central bank tries to boost the economy by printing money, nothing seems to be effecting a revival. To add to that, Japan's debt burden is more than twice the size of the economy. Hence, the economy's financial condition is indeed precarious. As per economists, Japan may even need foreign funding to service the debt. Yet another reminder that accommodative monetary policies alone cannot help in economic recovery!

Investment in infrastructure is critical for sustainable long term growth. But the same has been dwindling due to policy deadlocks and environmental issues. The performance during the first year of 12th five year plan (FY13-FY17) is a reflection of that. Apart from water supply, sanitation and irrigation which saw an increase in investment, most sectors witnessed a fall on YoY basis. Politically sensitive sectors like roads and oil & gas suffered the most.

Dwindling investments have been a matter of grave concern as it inhibits growth. No wonder that the GDP growth touched a decade low of 5% in FY13. However, it is the government itself which is to be blamed for the current dearth in investments. It is not that private sector is unwilling to make infrastructure investments for the lack of necessary skills or liquidity. In fact, red tapism, policy deadlocks, land acquisition issues and delayed environmental clearances have hurt the sentiments in the private sector. Hence, they are unwilling to invest. Further, most projects are stuck mid-way for want of clearances. This has stretched the balance sheet of most companies. As a result, banks have become circumspect to lend them. This has created a liquidity problem in the system. If this situation prevails for long, we may well see GDP growth falter further from here on.

There is no doubt that most of the Indian FMCG companies have high quality traits. Strong brands; steady dividend payouts; good growth prospects; healthy balance sheets; low (or negative) working capital requirements; above average return ratios, to just name a few of many. It is due to these that the sector's stocks usually trade at higher valuations as compared others. Ever since the financial crisis hit the markets, FMCG stocks have been in demand. In the process, they have become absurdly expensive. This just suggests that people are expecting strong growth levels. Or that they are just willing to hold on to such companies during times of uncertainties.

But, if leading business dailies are to be believed, such companies may find it difficult to live up to expectations in the short term. With the Indian economy slowing down and high inflation eating into the discretionary spending capacity of its people, there are expectations of a slowdown in demand. Also, with input costs increasing (especially in cases of imports raw materials) as well as increasing competition, passing on prices is not very easy. While companies have been aiming to boost revenues from smaller cities and towns, the economics of the same may not be similar to that of the urban centres. What can investors do in such times? Well... nothing much, we believe. Be patient for such stocks to become a bit more reasonable in terms of valuations.

In the meanwhile, Indian stock markets are trading weak as selling activity has intensified across index heavyweights. At the time of writing, the benchmark BSE Sensex was down by 85 points (0.4%). Oil & Gas and Pharma stocks were trading strong, while Metals and Banking stocks were trading weak. Asian stock markets were trading mixed. While Indonesia (up 3%) and China (1%) found favour, Japan (down 3%) and Hong Kong (0.4%) were at the receiving end.

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5 Responses to "5 years since the crisis, have banks really improved?"

Biraja Shankar Hota

Jan 18, 2014

No.Not at all. Public Sector(PS) banks have gone from worse to worst.Why the NPA of PS banks is rising is anybody's guess.There is more politicking in banks than in politics. When the govt. is weak,corporate houses, not the govt., have become masters of the banks. All the political parties are getting ready for the last one year for the coming election in May/June,2014; and this has become the most dangerous period of economic deceleration as well as mismanagement of banking affairs.



Jan 17, 2014

Banking reforms, energy, etc. the list goes on for the Indians were our great democratic government has failed to make any meaningful policy decisions. Our banking is mostly controlled by Government and what is the issue in bringing meaningful reforms. The only reform which the Government thinks is privatization. When one goes through various things happening are we right in complaining against our politicians instead we should be looking into the affairs of various big corporates who are creating various self interest lobbies scuttling various measures to bring order into the economy.



Jan 15, 2014

The fact that crude prices would hit the century mark WAS PREDICTED IN 1973. There was an energy policy committee. It recommended that use of Crude and its products be kept under control, by using INDIGENOUS COAL against IMPORTED CRUDE.
Had action been taken on this we would not have come to this pass PLEASE REMEMBER MR. MOILY'S WORDS. OIL IMPORT LOBBY IS STRONGER THAN THE OIL MINISTER. It would appear that we are only shedding crocodile tears.
There was a Transport Policy Committee in 1981(?) It also envisaged shifting away from dependence on imported crude; and to use indigenous crude prudently. Its main recommendations were i. Expand the railnetwork; it is 6 times more energy efficient than roadways. Use indigenous coal to produce electricity and use electric trains. Electrify tracks at 1000 route kilometers per year. We ignored this. In 1981 China was far behind India in Railnetwork and electrified network(practically nil) Today they are miles ahead of us in both. IN INDIA WE TALK - IN CHINA THEY ACT. There is a story of a farmer who slept when the fieldshad to be ploughed, seeds sown, saplings transplanted, and plants watered. At harvest time he went to the empty fields where there was nothing to harvest. Our Petroleum consumption story and as a consequence import burden story are identical WILL WE EVER ACT IN INDIA OR ONLY TALK?

Like (2)

Dr.Shital Prasaf Thskur

Jan 15, 2014

I am much impressed from Articles of the Equity Madter.I admirsl its Foundr andCEO. sri R.Goyele for enlightening the investers and peoplle at large.

Like (1)


Jan 14, 2014

Big ticket loans are avaled on the premise they are too big to fall and local branch managers neither can visit them leave alone aspiring to recover and the powers be are happy with the arrangement. The panacea of Indian banks is these loans and god alone knows if at all any recovery will be effected till such time the poor incometax payer woes will never end. The systemic man made rot just cannot be wished away too.

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