Banks Have Been Playing Their Own Version of Pokemon Go - The 5 Minute WrapUp by Equitymaster
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Banks Have Been Playing Their Own Version of Pokemon Go

Jul 25, 2016
In this issue:
» Reform in labour laws crucial for job creation
» Consolidation plans in oil & gas sector
» Market roundup
» ...and more!
00:00
Madhu Gupta, Research analyst

Pokemon Go is all the rage.

For those wondering what the buzz is all about, this is a new mobile game that integrates reality and the digital world.

Through the clever use of mapping technologies, players are sent on real-life wild goose chases to hunt for digital Pokemons.

The gaming concept is no doubt interesting. But it also carries the risk of people losing track of the real world and endangering life and limb.

Public sector banks (PSBs) have been playing a similar game for quite some time. The name of the game is 'Strategic Debt Restructuring (SDR)'. And rather than elusive digital creatures, the banks have been hunting for closure to their huge pile of stressed loans.

Stressed loans comprise 14.5% of PSB loan books. SDR allows banks to convert the bad loans into equity and gain control over the company's finances for 18 months. During this period, banks can turnaround the company by bringing in a new management and then sell the holdings to recover dues.

Since June 2015, banks converted more than Rs 1 trillion worth of loans to 22 companies into majority stakes.

SDR may seem a panacea. But it turns out finding a buyer for the troubled business is difficult.

For starters, banks are struggling to run - let alone turn around - businesses they have no experience running. We're talking about companies as diverse as Mumbai-based retailer Provogue, a seller of perfumes and jeans, to iron and steel company Monnet Ispat and Energy.

Further, the banks are skeptical to take the rein of these companies directly without clarity on the associated risks and liabilities. A lack of experienced professionals to help run them only adds to their woes.

So banks are finding it difficult to find buyers for these distressed companies. And failure to do so within 18 months mean provisioning and further drag on the bank's fledgling finances.

There is a still greater risk in the SDR game. As per the International Monetary Fund, these schemes can backfire, allowing debt-laden 'zombie' companies to stay afloat and create conflicts of interest for bankers.

Therefore, SDR is fraught with risks even as the chance of redemption is slim. PSBs, rather than focusing on lending - which would have saved them from piling bad debts in the first place - are diving into the untested waters of SDR.

Vivek Kaul recently shed some light on the reasons for the NPA crisis:

  • The loans given to the top 100 borrowers among the large borrowers constitute 27.9% of all loans given to large borrowers. As on September 30, 2015, the bad loans of the top 100 borrowers among large borrowers amounted to around 3.4% of bad loans of all large borrowers. By March 31, 2016, this had jumped to 22.3% of bad loans of all large borrowers.

    What does this tell us? It tells us very clearly that banks were treating their largest borrowers with kids gloves and not recognising their bad loans as bad loans. This could have possibly been done by restructuring their loans.

Do you think SDR will actually help banks recover from the NPA crisis? Let us know your comments or share your views in the Equitymaster Club.

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02:31 Chart of the day

A well-developed job market is crucial for India's growth if it wants to capitalise on its demographic dividend. But sadly, there is still a lot that needs to be done. In an earlier article, we discussed that while skilled jobs were certainly essential, it did not mean that the growth of unskilled jobs should be totally ignored.

The other point is that there needs to be consistent job growth in the organised sector as well. According to an article in Livemint, the lack of growth in the organised sector can be attributed to restrictive labour laws. As a result, to prevent hassles, companies prefer to employ contract workers. Indeed, data from the Annual Survey of Industries shows that 13.5% of workers in the manufacturing sector were engaged through contractors in 1991-92. By 2011-12, this had increased to 34.7%.

Because of this, most Indians then rely on informal jobs to supplement incomes. United Nations has termed many of these informal jobs as 'vulnerable' employment. These aren't proper jobs at all and more often than not are ill-paid. The problem is that the proportion of such vulnerable employment is quite high in India as the chart below shows. Clearly, not much progress seems to have been made in the last decade.

Indeed, if India wants to get the pace of job growth going, the focus will have to be on bringing about sweeping reforms. And one of those is going for a major overhaul in labour laws.

India Needs Progress on Job Development


03:44

In the oil and gas sector, the government is looking to put an ambitious plan into place. As per an article in the Economic Times, it is set to start consultations to merge 13 state oil companies to create a giant corporation. The idea is that the creation of such a giant firm will catapult India into a much bigger league the likes of which include Chevron, Rosneft, British Petroleum to name a few.

ONGC, one of the largest companies in India, leads the pack. The others include Indian Oil Corporation, BPCL, HPCL, GAIL, Mangalore Refinery and Petrochemicals, Chennai Petroleum, and Oil India among others.

India imports around 70% of the oil that it consumes. Thus, the country is susceptible to the volatile movement in oil prices and its impact on the country's trade balances. One way that the country is trying to build more energy security is by securing stakes in oil assets abroad. ONGC's overseas subsidiary, ONGC Videsh, has certainly been on the forefront for this. Thus, the idea is that the creation of a big Indian energy conglomerate will give it more muscle in picking bigger stakes in overseas oil assets.

The ambition is really big. The question is whether the government will be able to bring about an effective merger of all these companies. Then there is the big challenge of efficiently running such an organisation. How will such a move impact jobs of these state firms especially since laying off people in government jobs is not as easy as that in the private sector. A lot of thought will have to go into all these issues before the government decides to put this ambitious plan into action.

04:45

While the Indian stock began the day's proceedings on a weak note, buying activity intensified in the later hours and pushed the indices firmly into the positive. The BSE Sensex was trading higher by 133 points at the time of writing. Gains were largely seen in oil & gas, banking, and consumer durables stocks. The BSE Midcap and the BSE Smallcap also notched gains and were trading up by 1% each at the time of writing.

04:56 Today's investing mantra

"A pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street -- a community in which quality control is not prized -- will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Madhu Gupta (Research Analyst) and Radhika Pandit (Research Analyst).

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2 Responses to "Banks Have Been Playing Their Own Version of Pokemon Go"

Bharat rajyaguru

Jul 26, 2016

This is good scheme. Provided a good management team & financers are involved. Team should work to gather with old entrepreneurs only

Banks has to monitor day to day all financially transactions. No pile off money. All money should be used for the industries only

New enterprisers preferable of near by sector . Like chemical. Engeening, plastics, etc

Thanks
Bharat

Like 

Muthuswamy N

Jul 25, 2016

This ( SDR) wont work. First of all we should plug the loopholes in lending as a proactive measure to stop future bad loans. Where are these steps?
Secondly SDR's help only postpone the disaster and make it more in size! This is just an escape route for banks that have committed the crime. Secondly this is a short term measure that neither cures the disease of the past nor prevents the future disease. Unless we know how and where the money went, how do you rectify the mess? Also banks are ill-equipped to turnover a company from loss making to profit making: They simply do not have the skill with them.

Banks should hand over these companies to consultancy firms with accountability for turn around once they accept a company for turn around after an initial study. And banks should listen to these consultants in disbursing further funds ( for working capital requirements) to these companies. Banks also should pay these consultancy firms that bring the companies to lige.

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