Credit Suisse

UBS and Swiss National Bank Agree to Credit Suisse Takeover

Swiss Banking giant UBS has agreed to buy embattled lender Credit Suisse, Switzerland’s central bank announced. This follows weekend talks trying to agree to a rescue before trading opened on Monday.

The Swiss National Bank said at a press conference in Bern on Sunday evening that UBS would be taking over embattled lender Credit Suisse.

The deal will see UBS acquire Credit Suisse for 3 billion Swiss francs ($3.23 billion).

Swiss President Alain Berset said that the Swiss Federal Council welcomed the takeover as it was the “best solution” to restore and strengthen market confidence in Credit Suisse and the Swiss financial center.

It was not immediately clear whether the rescue would calm investor concerns about the banking sector more generally.

How are markets reacting?

As they had hoped, Swiss authorities reached an accord just in time for the first stock markets in Australia, New Zealand and Asia to open for Monday trading in the coming hours, when the first indications might appear.

The US Federal Reserve and other central banks also sought Sunday to ease fears through a coordinated effort to increase liquidity in the banking sector. The British, Canadian, Swiss and EU central banks are reportedly involved iin the effort to step up access to dollars in so-called swap line operations.

Early Monday, Hong Kong’s monetary authorities said Credit Suisse opened as usual and the local banking sector’s exposure is “insignificant.” Shares however did drop across Asia on opening as markets retreated slightly.

What more do we know?

Government and banking officials had been locked in urgent talks to rescue the embattled lender, which was given a $54 billion (€50 billion) lifeline by the country’s central bank this week.

Swiss Finance Minister Karin Keller-Sutter said at the press conference that the government in Bern had agreed to provide guarantees of up to 9 billion Swiss francs to underwrite the takeover. But Keller-Sutter said these guarantees would apply only to a “very specific portfolio, which UBS is now taking over.”

She also said that the guarantees would only start to apply if UBS’s losses connected to the takeover exceeded 5 billion francs.

Merger builds on ‘best skills available’ — UBS chair

Chair of UBS Colm Kelleher repeatedly referred to the deal as either an “integration” or “transaction.”

Kelleher said the merger would “enhance the combined organization’s ability to serve our clients and deepen our best-in-class capabilities.”

However, he also sought to reassure those outside the banking sector that UBS would reduce the amount of risk Credit Suisse is exposed to, and that it recognized the need to keep capital available amid the war in Ukraine and unusually high inflation.

“We are also aware of the need to support the broader Swiss economy and our clients at a time when macroeconomic uncertainty makes business conditions challenging and unpredictable,” Kelleher said, before moving on to his goal of downsizing Credit Suisse’s investment banking activities.

“Let me be very specific on this: UBS intends to downsize Credit Suisse’s investment banking businesses and align it with our conservative risk culture. It is intended that the combined investment banking businesses will over time account for no more than 20% of the group’s risk-weighted assets.”

Deal worth less than half of shares’ face value

Earlier there were reports, including from The Financial Times, that UBS had offered to buy the bank for up to 1 billion Swiss francs, and then later 2 billion Swiss francs, but Credit Suisse had reportedly pushed back against these offers,

In the 3 billion franc deal, UBS will pay 0.76 Swiss francs (around $0.82 or €0.77) per Credit Suisse share, well below the closing price of 1.86 francs on Friday. That would make the bank’s value by market capitalisation around $7 billion, while as recently as a year ago Credit Suisse was valued at roughly $25 billion by shareholders.

But UBS is also assuming liability for 5 billion francs in losses before government support would kick in, according to the Swiss finance minister.

UBS and Credit Suisse said the deal was not subject to shareholder approval, suggesting the Swiss government waived this requirement in this case.

This article was originally published on DW.

Falling Stocks in Europe and US Stoke Banking Crisis Fears

Shares in global investment bank Credit Suisse fell sharply on Wednesday sending shares plunging in other European banks and global markets.

A record drop in shares at Swiss banking giant Credit Suisse on Wednesday has fanned fears of a possible banking crisis.

US-listed shares at the global investment bank plummeted by more than a quarter after the bank’s largest shareholder – the Saudi National Bank – said it would not inject more cash into the bank.

After Credit Suisse had appealed to the Swiss National Bank for a public show of support, it secured a $54 billion lifeline.

At the close of trade in Europe on Wednesday, Credit Suisse’s stock price was down 24%, having recovered slightly from its lowest ebb during the day. It was trading at around €1.84 — compared to almost €3 per share last week and more than €7.50 per share late last March.

European and US markets react

Stocks fell in Europe and on Wall Street on Wednesday amid worries about the strength of banks on either side of the Atlantic.

Germany’s DAX had lost 3.32% at the close of trade in Europe
The FTSE 100 in London fell 3.80%.
France’s CAC 40 dropped 3.68%
European STOXX 600 index (aggregating 600 of the core companies across the continent) shed almost 3%
The STOXX Banks index of 21 leading European lenders sagged 8.4%, showing the sector under the most pressure
The S&P 500 was down 0.69% at the close of trade
The Dow Jones Industrial Average was down 0.87%
The Nasdaq composite finished at 0.05% in the green
All major cryptocurrency platforms were also deep in the red for the day; Bitcoin was the most stable, but still down 1.3%

Aftermath of Silicon Valley Bank collapse

The volatility comes after last week’s sudden collapse of Silicon Valley Bank in the US which forced authorities to intervene to prevent the spread of market disturbances.

Multi-national investment firm BlackRock’s Chief Executive, Laurence Fink, warned on Wednesday that the US regional banking sector was at risk, and predicted continued high inflation and rate increases.

Europe’s bank index has seen more than €120 billion ($127 billion) of value by market capitalization wiped out since March 8.

Germany’s financial supervisory authority (BaFin) has moved to allay fears and said the German banking system appeared robust and capable of absorbing higher interest rates.

“Our main focus is currently on some smaller banks with little surplus capital and increased interest rate risks – we are closely monitoring these institutions,” a BaFin spokesperson said in a statement.

The European Central Bank looks poised to hike interest rates again on Thursday in a bid to tackle high inflation.

Reuters news agency cited a spokesperson from the US treasury as saying that officials are “monitoring” the problems surrounding Credit Suisse and that they have “been in touch with global counterparts.”

Swiss National Bank will offer liquidity ‘if necessary’

The Swiss National Bank (SNB) and the Swiss Financial Market Supervisory Authority (FINMA) said in a statement that “the problems of certain banks in the USA do not pose a direct risk of contagion for the Swiss financial markets,” and pointed to “the strict capital and liquidity requirements” which applied to Swiss financial institutions.

The SNB said Credit Suisse met the capital and liquidity requirements imposed on what it called “systemically important banks” and said, “If necessary, the SNB will provide CS with liquidity.”

This article was originally published on DW.

Why Returns Generated by Family Run Companies Outdoes Non-Family Ones

Wipro, Reliance Industries (RIL), Dr Reddys Laboratories, HCL Technologies, Cipla, and Divis Laboratories are the six Indian firms that feature prominently in top-ranked companies.

New Delhi: The return generated by family-owned businesses have been higher than the non-family owned ones since 2006, finds a study from Credit Suisse.

Using its proprietary ‘Family 1000’ database of over 1,000 publicly listed family or founder-owned companies, the Credit Suisse analysis suggests that since 2006, the overall ‘Family 1000’ universe has outperformed non-family-owned companies by an annual average of 370 basis points (bps).

The research house classifies a family-owned company where either the founder/family owns at least 20% of the company’s share capital or where the founder/family controls at least 20% of the company’s voting rights.

“Reasons for this include superior revenue growth and cash flow returns. Family-owned companies offer safety in periods of market stress – during the first six months of this year, they outperformed non-family-owned companies by 300 bps,” the Credit Suisse report said.

Family-owned companies, the Credit Suisse findings suggest, tend to be more profitable. Since 2006, revenue growth generated by such companies has been over 200 bps higher than that of non-family-owned companies for both smaller and larger companies. That apart, they, on average, tend to have slightly better ESG scores than non-family-owned companies.

Fig.1 The table reflects the returns of family-owned companies vs. non-family owned companies.

Even COVID-19 has not dented their spirit even though 80% of family-owned businesses saying that they have been negatively impacted by the pandemic.

Despite the impact on revenue growth this year, family-owned companies surveyed viewed COVID-19 as slightly less of a concern to their firm’s prospects with 21% of such companies saying the pandemic had either not had a significant impact on their business or had even been a net positive.

“Family-owned companies have also resorted less to furloughing their staff than non-family-owned companies (46% versus 55%),” the Credit Suisse report said.

Indian firms score high

Among regions, performance has been strongest for family-owned companies in Europe (470bps) and Asia (over 500bps) per annum since 2006. North America, on the other hand, family-owned companies showed a more moderate outperformance of around 260 bps per annum.

The report covered 12 markets in APAC, including Japan, which continue to dominate and represent a 51% share of the universe, with a total of 540 companies and a market capitalisation of over $5.56 trillion.

Fig. 2 The table presents the top-ranked companies in the USA, Europe and Asia.

The universe includes 111 Indian family-owned companies, with a total market capitalisation of $922.7 billion. Wipro, Reliance Industries (RIL), Dr Reddys Laboratories, HCL Technologies, Cipla, and Divis Laboratories are the six Indian firms that feature prominently in the top-ranked companies in the Asia ex-Japan region.

“Family-owned companies, including those from India in our proprietary database, continue to show signs of outperformance in growth and profitability as well as resilience to the ongoing COVID-19 pandemic,” said Mihir J. (Mickey) Doshi, Managing Director and Country CEO of Credit Suisse, India.

By arrangement with Business Standard.

How Reliance Industries Built and Is Now Cutting Down Its House of Debt

Mukesh Ambani wants to leave a fresh start for the next generation, although it will take quite a bit of work.

As the country’s largest company by market capitalisation, it wouldn’t be far-fetched to state that Mukesh Ambani-owned Reliance Industries Limited (RIL) has become a cornerstone of the Indian economy.

Ambani’s seven-year investment spree from 2012 to 2019, largely fuelled by his telecom gamble, single-handedly boosted the rise in private investment. As Credit Suisse noted in October 2016, Reliance by itself contributed nearly 15% of the $117 billion in investment that was made by India’s top 1,250 publicly traded companies in 2015. This analysis included capex by the Indian Railways and state-owned electricity boards as well.

For decades now, RIL has held a commanding industry position, a situation that only changed once it started expanding into the telecom and retail businesses.

Until 2012, RIL was debt-free on a net basis, but since then it has witnessed a 438% increase in its gross debt. As Reliance Industries ended FY’19 with net debt of Rs 1,54,478 crore, chairman Mukesh Ambani has been trying to assuage investor concerns over the group’s rising debt levels.

In August 2019, he declared that RIL would be a zero-net-debt company in 18 months, announcing a number of asset sale plans, prompting analysts to call it everything from a ‘debt-diet’ plan to Reliance’s ‘great deleveraging’.

How did Reliance Industries get to that position though and why did it reach the point where it demanded critical attention?

The company has an accumulated gross debt of more than Rs 2.87 lakh crore, as it expanded rapidly into the consumer-focused businesses of retail, telecom and e-commerce over the past few years besides majorly upgrading the core refining and petrochemicals businesses. The rising debt level of Reliance demands critical attention as there has also been a consistent decline in revenue from oil, gas and petrochemical business.

Investments in acquisitions is another cause for the huge debt pile of Rs 2.87 lakh crore at the end of 2018-19. Over the past 24 months, RIL has acquired stakes in about 20 start-ups and in half-a-dozen small firms. The acquisitions have become a necessity, especially after Jio was launched. RIL’s target is to create a bouquet of digital products, which can counter the likes of Google, Amazon and Netflix. RIL has Rs 1.33 lakh crore cash in hand and, as noted above, a net debt of Rs 1.54 lakh crore.

RIL’s total liabilities, as disclosed in its annual report, include debt, higher crude payables, customer advances, capital expenditure creditors and spectrum payouts. For 2018-19, RIL’s finance cost had more than doubled to Rs 16,495 crore from Rs 8,052 crore in the previous year. In its annual report, the company also states that the increase was primarily on account of commencement of its digital services business, petrochemical projects at Jamnagar and higher loan balances.

Mukesh Ambani at the launch of Reliance Jio. Photo: PTI/Files

Credit Suisse Downgrades RIL share rating

In August 2019, global brokerage Credit Suisse red-flagged RIL’s total financial liabilities, pegging it at $65 billion (Rs 4.6 lakh crore). It downgraded RIL’s stock from ‘neutral’ to ‘underperform’ and slashed its target price from Rs 1,395 apiece to Rs 995 citing high liabilities, lower refining and petrochemical margins, and slow enterprise rollout and Jio’s weak average revenue per user in the first quarter of FY20. RIL shares had taken a hit after Credit Suisse downgraded the share rating.

The brokerage’s downgrading of RIL was also because the conglomerate has been free cash flow (FCF) negative for six years. As RIL’s liabilities have dramatically gone up to $65 billion in FY19 from $19 billion in FY15, Credit Suisse predicted in its August 2019 report that the negative FCF trend is likely to continue in FY20-21 too, just as it has been for the last six years, given the margin pressure in refining and petrochemical.

Also Read: Reliance Formally Announces 20% Stake Sale in Oil-To-Chemicals Business to Saudi Aramco

It also forecast that the petrochemical segment will continue to be under some pressure because of the large capacity additions in China, Middle and Africa. These pressures will not ease off in the next 12-18 months due to continued large capacity refinery projects like Al Zour in Kuwait, Aramco’s Jazan in Saudia Arabia, Sinopec’s project in Zhanjiang and others. Credit Suisse has also expressed worry that ethylene, the primary petrochemical feedstock produced by RIL will not ease from its current ‘low spread’ status anytime soon. Nearly 62% of the ethylene is converted into polyethylene, the demand for which has been muted due to the US-China trade issues.

Optimistic plans for the Future of RIL

Keeping this negative report and addressing investor concerns, Mukesh Ambani, chairman of RIL made several optimistic pronouncements about the future of the company at its 42nd annual general meeting (AGM) in Mumbai on August 12, 2019. Primarily, he focused on the plan to sell a 20% stake in its oil and petrochemicals business to Saudi Aramco for an enterprise value of $75 billion or around Rs 5.3 lakh crore. Saudi Aramco will also supply 500,000 barrels per day of crude oil on a long-term basis to RIL’s Jamnagar refinery. The 20% stake sale is likely to fetch RIL $15 billion or around Rs 1 lakh crore.

Within days of Ambani’s speech, Credit Suisse upgraded its rating on Reliance Industries to ‘neutral’ while raising the price target from Rs 1,028 to Rs 1,210. It apparently factored in the stronger balance sheet with debt reduction of $22 billion till FY21, and low capex intensity guidance and higher Jio valuation. The shareholders have been told by Mukesh Ambani that hitting zero net debt will come with higher dividends, bonus issues and other goodies “at a more accelerated pace than any time in our history.” However, this may be overly optimistic, as with deepening economic slowdown investors may struggle to reinvest the cash returned by Reliance.

Declining refining margins

For RIL, the major concern stems from the recent underperformance of its refining business. Hit by volatile crude prices and trade wars, RIL’s refining margins have consistently been declining for the past seven quarters. The refining margin (Gross Refining Margin or GRM) of RIL has fallen to $8.2 a barrel in Q4FY19, registering a slip for the sixth straight quarter. In this situation, RIL’s talks about selling 25% of its stake to Saudi Aramco fits in. In 2011, when production had depleted, RIL had sold 30% of its hydrocarbon assets to British giant BP Plc for $7 billion (Rs 51,000 crore).

RIL’s crude sourcing strategy has negatively impacted its petrochemical business, with very high crude payable days at 121 days. This is because RIL has historically bought oil from Iran and Venezuela, which have come under US sanctions

The new deal would help RIL secure its supplies while Aramco gets to enter a new market like India, even as the US cuts down its dependence on Saudi Arabia for oil. After the announcement of this deal, RIL’s stock rose by nearly 46%. Although Aramco has had plans for over a year now to set up a refinery in Maharashtra’s Ratnagiri in a tie-up with Indian PSU refiners, the project is yet to take off. There are concerns about how and whether Saudi Aramco will stay committed to the mega Ratnagiri refinery project, while simultaneously showing interest in Reliance Industries’ refining and petrochemicals business.

The new deal would help RIL secure its supplies while Aramco gets to enter a new market like India. Photo: Reuters

In a move to hinder RIL’s deal to sell 20% stake (worth $15 billion) to Saudi Aramco, the government has filed a petition with the Delhi high court. The government’s attempt to block the RIL-Aramco deal is ostensibly in view of pending dues estimated at $3.5 billion, with respect to Panna-Mukta and Tapti oil and gas fields (PMT) production-sharing contracts (PSCs), but the fact remains that the strategic sale of Reliance’s 20% stake is a crucial concern for the GoI.

Meanwhile, the PMT case is another roadblock that RIL will have to deal with. An international arbitration tribunal issued a partial award in October 2016 in the dispute between the Government of India (GoI), BG Exploration & Production India (BG) and RIL regarding the Panna-Mukta and Tapti PSCs. Pending the determination of all issues before it, appropriately, it did not award any monetary sums. RIL maintains that except as quantified by the tribunal, no amount can be said to be payable at this stage.

There are further indications that Reliance’s proposed deal with Aramco, which is intended to reduce its massive debt and ensure assured supply of crude oil to its refineries, is now unlikely to be concretised by the end of this financial year. “It will not be a deal which will get done by March,” RIL’s joint chief financial officer V. Srikanth stated during RIL’s quarterly results announcement recently.

Earlier, a legal respite awarded to RIL in August 2018 by the international arbitration tribunal, in the dispute with state-owned Oil and Natural Gas Corp’s (ONGC) may also be short lived as the government intends to challenge the arbitration tribunal’s decision. In November 2016, the oil ministry had filed a $1.4 billion demand on the RIL-BP-Niko (UK-based BP Plc &Canada’s Niko Resources) consortium for allegedly unfair practices and pilferage of 18 billion cubic metres of gas from two ONGC’s gas blocks in the Krishna-Godavari (KG) basin in the Bay of Bengal. RIL’s troubles don’t end there. The government is reportedly also pressing the company to cough up $174.9 million of additional profit petroleum after certain costs were disallowed after the output from the KG-D6 block was lower than the target. Profit petroleum refers to profits from gas production after recovering costs that are available for sharing between the contractors and the government. Significantly, disallowing cost recovery will result in the government’s profit share rising. The cost recovery issue is reportedly being arbitrated separately.

Reliance Industries and JM Financial Asset Reconstruction Company have received conditional approval by the National Company Law Tribunal to acquire Alok Industries for Rs 5,050 crore under the newly-instituted Insolvency and Bankruptcy Code. However, Mukesh Ambani’s plan to buy out Alok Industries at a fire-sale price is unable to reach a breakthrough in its negotiations with the State Bank of India (SBI), HDFC Bank and ICICI Bank to fund the acquisition.

If Mukesh Ambani’s proposed plans are to work out, RIL is looking at a bonanza of investments in the coming financial year. It is hoping to raise money from global investment in its telecom assets. It was announced that Canada’s Brookfield Infrastructure Partners L.P. and affiliates will invest Rs 25,215 crore in its telecom tower assets. It has also announced a 51% stake in the fuel retailing joint venture with British oil major BP Plc to launch 5,500 retail outlets in five years. The partnership will also market aviation turbine fuel to cater to India’s growing aviation industry. RIL will earn Rs 7,000 crore from the deal.

It is also considering financial investors in consumer businesses, Jio and Reliance Retail, which are the potential jewels of his new industries. If Ambani finds deep-pocketed partners for general retail, as well as for telecom, reaching his goal will be simple enough. Banks, however, may rue the end of Reliance’s debt-fueled expansion if loan syndication deals are only for refinancing and not new money.

Reliance Trends, a subsidiary of Reliance Retail. Photo: Reuters

With decreasing assets efficiency, the company should concentrate on assets efficiently in the future to generate more profits, with control over expenses. RIL must rectify its cash availability to meet its immediate requirements.

RIL is the only conglomerate which managed to achieve involvement in all the industries it was able to diversify into through its sequence of expansion. In both its textiles as well as petrochemicals phase, the Reliance group secured for itself a larger share in the expansion of its chosen areas as compared to most other participating enterprises. And in each venture it undertook, Reliance acquired a dominant position despite being a later entrant.

So, when a company that is known for expanding and establishing businesses goes for such significant assets’ dilution, especially of its flagship businesses, it is indeed noteworthy and disconcerting. As a keystone of the Indian economy, the success or failure of Reliance Industries reflects on the corporate atmosphere of the nation, especially at a time when overall business sentiment is not at its best.

Vaishali Basu has worked as a consultant with the National Security Council Secretariat (NSCS) for several years. She is, at present, associated with the think tank Policy Perspectives Foundation.

India’s Shadow Banking Scare Could Derail Its Robust Growth Story

Shadow banks have played an outsized role in lending growth in India in the last two years, and the sector’s loan books are currently saddled with about $150 billion of stressed assets.

Mumbai: Manzoor Ahmad lost his job as an electrician and is struggling to make ends meet after a crucial road tunnel project shut down in Srinagar, the summer capital of Jammu and Kashmir state in the north.

Construction of the Z-Morh tunnel came to a halt two months ago after Infrastructure Leasing & Financial Services (IL&FS), one of India‘s top infrastructure funding companies which was helping build the project, stopped paying contractors in the face of a severe cash crunch.

“I have no work since work on the project was stopped in July,” said Ahmad, 34, who was earning about 30,000 rupees ($413) a month.

Hundreds of other people working on the project are also out of a job because of non-payments by IL&FS. The company has also defaulted on its debt obligations, roiling Indian markets and sparking worries of a credit crunch in the shadow financing sector.

The company’s defaults have highlighted the risk of a sharp growth slowdown in the world’s fastest growing major economy, as lenders pare their exposure to the shadow banking space, or what are called non-banking finance companies (NBFCs) in India.

Shadow banks have played an outsized role in lending growth in India in the last two years, and the sector’s loan books have grown at more than double the pace of Indian banks, that are currently saddled with about $150 billion of stressed assets.

“Raising money will become increasingly difficult for NBFCs and that will push up the cost of borrowing for these companies and projects will slow down eventually, leading to a broader slowdown in the economy than is currently priced in,” said Ashish Vaidya, executive director and head of trading at DBS Bank in Mumbai.

A fall in economic growth would be a blow to Prime Minister Narendra Modi and the ruling Bharatiya Janata Party, which is already under pressure from protests over rising fuel costs, as they prepare for key state elections in late 2018 and a national election due to be held by next May.

Rising Rates

The stress is evident in short-term interest rates as the Reserve Bank of India‘s dollar sales to stem the rupee’s fall have sucked up rupee liquidity and raised borrowing costs.

One-year commercial paper has risen by 80 basis points to 9.30% since August and the one-year sovereign treasury bill rate is up 60 bps to 7.73%, while the one-year overnight indexed swap rate is at 7.50%, indicating markets are pricing in a 100 basis points hike in the RBI’s key repo rate going forward.

The RBI has raised its policy rate by 50 basis points this year to 6.50% and most analysts expect it to raise rates for a third time next week to stem inflationary pressure due to the sharp fall in the rupee.

There are already signs that financing is suffering, and that could hit capital spending.

State-run Power Finance Co, Rural Electrification Corp and North Eastern Electric Power Corp have all scrapped debt issuance plans this month as interest rates have surged.

Higher rates and more risk-aversion among finance companies – especially when combined with rising fuel prices – could also undermine consumer spending with items such as gold jewellery already being hit in the second quarter.

While India posted robust 8.2% growth in the April-June quarter driven by a strong consumption demand, it could see growth drop below the RBI’s projected 7.2% rate for the fiscal year ending next March as credit conditions tighten, say analysts.

“NBFCs have been a much higher percentage of system credit growth over the last few years, so a slowdown will hurt macro growth and specifically consumption,” UBS warned in a note on Tuesday.

In the Shadows

The NBFCs’ loan books grew 21.2% in the fiscal year ended March 2018. In comparison, bank loans grew 10.3% over the same period.

Such rapid growth for the shadow banking sector is fraught with risk, say analysts, especially as many have raised funds via short-term commercial paper that needs to be rolled over.

According to a Credit Suisse note on Monday, 41% of borrowings of NBFCs are maturing in the next six months and “any liquidity pressures will only add to the refinancing risk of these instruments.”

Credit Suisse analyst Ashish Gupta said that mutual funds now owned an estimated 60% of the overall NBFC commercial paper issuance, which could exacerbate pains as redemption pressures at funds could cause yields of NBFC debt to spike further.

To contain ripple effects and ensure financial stability, the RBI may have to open a separate lending window for mutual funds through banks to ease any cash pressures, according to a finance ministry official.

While the RBI assured markets on Thursday of providing durable liquidity, traders were concerned over the extent to which the liquidity deficit could go up to unless the central bank conducted frequent open market bond purchases.

Bond dealers expect the liquidity deficit – the extent to which banks need to borrow from the central bank to fund their own lending – to rise to as much as 3 trillion rupees by March from 1.5 trillion rupees right now, pushing rates higher.

“The RBI should try to cool down interest rates by proactively managing liquidity conditions,” said the head of a debt mutual fund who asked not to be identified because of the sensitivity of the comment. “Unless this anomaly is corrected investors will keep panicking and purging NBFC holdings.”

(Reuters)

Switzerland’s Biggest Political Party Threatens to Derail India’s Plan to Get Black Money Data

The Swiss People’s Party has said that India and ten other countries are “too corrupt” and that it will get enough support in the country’s parliament to halt the tax information exchange process.

The Swiss People’s Party has said that India and ten other countries are “too corrupt” and that it will get enough support in the country’s parliament to halt the Indo-Swiss tax information exchange process.

The automatic exchange of tax information treaty has been touted by the Modi government as a major victory against Swiss bank secrecy. Credit: Reuters

Paris: Switzerland’s right-wing and biggest political party has said that “corrupt and authoritarian countries” should not be given access to tax data, in a move that could threaten the country’s automatic information exchange (AIE) treaty with India and ten other nations.

In late 2016, India and Switzerland signed a data-sharing treaty that would have Swiss authorities collect bank data and send it to Indian tax authorities and vice versa. The automatic exchange of tax information was hailed in India as a victory for the Modi government and has been seen globally as an important step in fighting tax evasion and money laundering.

Last week, however, the right-wing Swiss People’s Party (SVP) released a list of “corrupt countries” that includes India, Argentina, Brazil, China, Russia, Saudi Arabia, Indonesia, Colombia, Mexico, South Africa and the United Arab Emirates.

“We do not want an automatic exchange of bank data with corrupt and unfree states,” said the SVP president, Albert Rösti. Also present at the same press conference was the party’s national councillor, Thomas Matter, who happens to be the owner of a private bank himself. The party claims sharing data with such countries would enable corrupt tax officials to misuse it to threaten and extort clients in collusion with mafia-like structures.

The SVP appears to have used the corruption index of Transparency International and the Democracy Index of the Freedom House Human Rights Organization as indices. “These countries are either highly corrupt or half-dictatorships”, wrote Swiss newspaper Tages-Anzieger.

The SVP claims it will get majority support in Parliament to bring the AIE process to a halt. The Economic Commission of the Deputy Chamber is likely to discuss the AIE in the days to come. The committee consists of 25 members. Eight belong to the right-wing SVP. And, as a handful of political commentators are saying, chances are that the Democratic Christians and Liberal-Radicals will also back the SVP.

Corrupt versus corrupt

According to Julius Baer whistle-blower, Rudolf Elmer, this list includes countries that hold most of the assets within Swiss banks. “Both India and Switzerland will be more than happy that nothing will be revealed,” says Elmer. “There is a lot of talk but no one is ready to walk the talk. It’s the man in the street who gets cheated at the end of the day.”

The process set out by the global standard is supposed to take off next year. Switzerland would have to start collecting bank data and send it to tax authorities of countries with whom it has signed the treaty. The Swiss Federal council had cleared automatic information exchange with 38 countries starting 2018 and another 44 countries the following year.

Switzerland and India signed a joint declaration on November 22, 2016, for the automatic exchange of information on a reciprocal basis. Both countries said they intended to start collecting data in 2018 and to exchange it from 2019 onwards.

“There could eventually be a compromise’” says Bruno Gurtner, a Swiss economist and co-founder of Tax Justice Network. “Maybe they’ll have a kind of special investigation for certain countries before delivering data or blocking automatic information exchange”. Russia, China and Saudi Arabia stand a higher risk than India, Argentina and Brazil, according to Gurtner. The Swiss are likely to be mindful of their export ties with some countries. Whatever the decision, it is likely to be confirmed by the plenum at a later stage.

The countries exchanging information have to guarantee that the data is used solely for tax purposes and is kept confidential. The Swiss government has been under tremendous pressure to ease rules for cases of stolen data as well.

It’s no longer a secret that Switzerland has earned the reputation of being a major “sponsor” of corruption around the world. The Swiss right wing pointing fingers at countries like India for being corrupt is a bit like the pot calling the kettle black. Ironically, this accusation is used to justify depriving these “corrupt countries” of information that could actually help them combat corruption.

Haggling over stolen data

On July 5 2017, the Swiss Federal Administrative court declared that Swiss tax authorities will have to help India with HSBC data related to two Indian clients.

The clients had made an appeal that the information on their accounts should not be shared. It was overruled. The court’s decision says India’s request can be entertained, as long the “principle of good faith is not breached”. The two Indian clients are not named in the judgement. They are likely to be among the Indians named in the public gazette notifications issued online by the Swiss Federal Tax Administration in 2015. This included former Congress minister Preneet Kaur, her son Raninder Singh and industrialist Yash Birla.

The French, who shared the HBSC data with India in the first place, had promised in their negotiations with Switzerland that they would not use HSBC whistle-blower Herve Falciani’s data in AIE requests. India, however, never made such promises. So the court concluded that India hadn’t violated the principle of good faith.

Since India got this information “passively” from the French and not directly from Falciani, the court deems it fit that Switzerland provide assistance. Of course, under certain conditions, the Swiss Federal Supreme court could overrule the decision.

This specific ruling seems rather unprecedented. With strict banking secrecy laws, sharing information based on stolen data is a highly contentious matter in Switzerland.

When Falciani offered help to India in 2015, he didn’t give the data directly to Indian authorities despite the offer of a cash reward. “To avoid the legal trap, it’s in the best interest of administrations to share data with each other” he told The Wire. “I encouraged India to do the same. We have channels that allow investigators to proceed correctly.”

Only very recently (April 2017), the Swiss Supreme Court declined assistance to French authorities regarding the same HSBC data on grounds that they got it from Falciani. However, Falciani explains why the data French authorities have, cannot be considered “stolen”. Immediately after Falciani fled from Geneva to France, Swiss authorities requested the French to seize his data and return it to them.

At the time this data was seized, Falciani had already made a first move towards the French and offered it to them for free. But the fact that the data was found in an official raid makes it admissible in court even if banking secrecy laws disallow use of stolen data. This was something the Swiss unwittingly facilitated. The French did “return” a copy of the data to Switzerland but kept the original as evidence.

Later, France shared bits of Falciani’s data with about 30 countries. Most of them say they are keen to sign an AIE treaty with Switzerland to get more info. If a higher court does not overrule this decision on India, all countries receiving leaked data “passively” should be able to force the Swiss to cooperate.

Regarding the Swiss right wings refusal to engage with certain “corrupt” countries, Falciani says the real problem lies elsewhere. “The real focus is not the due diligence related to public administrations but the failure to set due diligence standards related to banks’ clients.”

Building pressure on Switzerland

“If there really was proper exchange between the countries, there would be no need for any data to be leaked,” says Falciani. “I never shared the data with any country directly but always through channels that respected legal procedures. The rest is political wrangling that aims at distorting the interpretation of the law.”

In August 2016, Elmer revealed that his data had Indian names. A year has lapsed since but the Modi government doesn’t seem to show any interest in investigating this further.

Elmer argues that the data he leaked from Cayman Islands cannot be considered stolen since he was Julius Baer’s compliance officer. According to Elmer one cannot ‘steal’ data one is responsible for. Besides, the Swiss cannot extend their banking secrecy jurisdiction extra-territorially.

Elmer says India can still easily request information from the Swiss High court that gave a verdict in his case. Court documents confirm it has the data. If not, Indian authorities could work with German Tax Authorities in Düsseldorf, Nordrhein-Westfalen, because they have made a copy of the data and investigated the data as well.

The Federal council, Switzerland’s highest executive authority had initiated consultation proceedings on the revision of tax laws in 2015. These were aimed at easing Swiss practices with regard to stolen data. “Partner countries find Switzerland’s current practice too restrictive… the most pertinent illustration is the case of India (HSBC list)”, the Federal council acknowledged in a statement.

In order to pass the OECD peer review, Switzerland has had to convince G-20 nations that it had a genuine intention to change its ways. But the domestic scenario shows that Swiss opinion is deeply divided over the matter.

By its own admission, the Federal council believes, “(The) widespread distribution of the data stolen from HSBC has shed new light on the subject. This disclosure had an additional dimension that made Switzerland’s refusal to cooperate even more difficult to justify, as Switzerland could be perceived to be protecting criminals for the simple reason that they were on a list of stolen data.”

The decisions of the different Swiss courts are ambivalent. Even though the Swiss government says it wants to comply with global standard, the process remains blocked as the powerful players of the Swiss financial industry see this as a real threat.

Whistle-blower Elmer says, “The Swiss financial industry and particularly the private sector would loose so much dubious business or to be blunt- profit. That is simply the truth and the driving force behind all the retaliation against truth tellers”

The AIE standard itself is seen by experts as riddled with loopholes (the US is not even a signatory). The most effective solutions are often the simplest to implement (unlike the multinational AIE). However, it’s still seen as a first major, concerted global move to tackle the problem of tax evasion and money laundering. Political leaders around the world no longer feel they can afford to be seen as taking no action.

When It Comes to Wall Street, Preet Bharara Is No Hero

Preet Bharara may be acclaimed for his pursuit of political corruption, but he was much less aggressive when it came to confronting Wall Street’s misdeeds.

Preet Bharara, the US attorney recently fired by Donald Trump. Credit: Reuters

After his election in 1968, President Richard Nixon asked Robert Morgenthau, the US attorney for the Southern District of New York (SDNY), to resign. Morgenthau refused to leave voluntarily, saying it degraded the office to treat it as a patronage position.

Nixon’s move precipitated a political crisis. The president named a replacement. Powerful politicians lined up to support Morgenthau. Morgenthau had taken on mobsters and power brokers. He had repeatedly prosecuted Roy Cohn, the sleazy New York lawyer who had been Senator Joe McCarthy’s right-hand man. (One of Cohn’s clients and protégés was a young New York City real estate developer named Donald Trump). When Cohn complained that Morgenthau had a vendetta against him, Morgenthau replied, “A man is not immune from prosecution merely because a United States attorney happens not to like him.”

Morgenthau carried that confrontational attitude to the world of business. He pioneered the Southern District’s approach to corporate crime. When his prosecutors took on corporate fraud, they did not reach settlements that called for fines, the current fashion these days. They filed criminal charges against the executives responsible.

Before Morgenthau, the Department of Justice focused on two-bit corporate misdeeds – Ponzi schemes and boiler-room operations. Morgenthau changed that. His prosecutors went after CEOs and their enablers – the accountants and lawyers who abetted the frauds or looked the other way. “How do you justify prosecuting a 19-year-old who sells drugs on a street corner when you say it’s too complicated to go after the people who move the money?” he once asked.

Morgenthau’s years as a US attorney were followed by political success. He was elected New York County district attorney in 1974, the first of seven consecutive terms for that office.

There are parallels between Morgenthau, and Preet Bharara, the US attorney for the Southern District who was fired by President Trump.

Like Morgenthau, the 48-year-old Bharara leaves the office of US Attorney for the Southern District celebrated for taking on corrupt and powerful politicians. Bharara prosecuted two of the infamous “three men in a room” who ran New York state: Sheldon Silver, the Democratic speaker of the assembly, and Dean Skelos, the Republican Senate majority leader.

He won convictions of a startling array of local politicians, carrying on the work of the Moreland Commission, an ethics inquiry created and then dismissed by New York’s governor Andrew Cuomo. (Recently, Bharara cryptically tweeted that “I know what the Moreland Commission must have felt like,” a suggestion that he was fired as he was pursuing cases pointed at Trump or his allies.)

But the record shows that Bharara was much less aggressive when it came to confronting Wall Street’s misdeeds.

President Barack Obama appointed Bharara in 2009, amid the wreckage of the worst financial crisis since the Great Depression. He inherited ongoing investigations into the collapse, including a probe against Lehman Brothers.

He also inherited something he and his young charges found more alluring: insider-trading cases against hedge fund managers. His office focused obsessively on those. At one point, the Southern District racked up a record of 85-0 in those cases. (Appeals courts would later throw out two prominent convictions, infuriating him and dealing blows to several other cases.)

Hedge funds are safer targets. The firms aren’t enmeshed in the global financial markets in the way that giant banks are. Insider trading cases are relatively easy to win and don’t address systemic abuses that helped bring down the financial system.

Even there his record was more mixed than is popularly understood. As Sheelah Kolhatkar demonstrates in her propulsive and riveting Black Edge, when it came to bringing his biggest whale to justice, Steve Cohen of SAC Capital, the Southern District blinked. They did not charge him, only securing a guilty plea from his firm.

Present and former prosecutors say Bharara did not give much emphasis to investigations arising from the financial meltdown, an approach shared by his boss, former Attorney General Eric Holder. Justice Department insiders say many of those inquiries withered not because they were unpromising, but because they had little support.

Bharara missed an opportunity by not bringing any significant criminal charges against individuals in the wake of the collapses of Lehman, investment bank Merrill Lynch, the insurer AIG, the mortgage securities and collateralised debt obligation businesses, or the myriad public misrepresentations from bank CEOs about their finances.

Bharara and senior officials in Washington argue that there were no criminal cases to file after the 2008 crisis. But the US attorney’s office in Manhattan did pursue significant civil cases against the banks for their mortgage activities, cases that had to prove misconduct by the “preponderance of the evidence.” And the Department of Justice did win guilty pleas from the banks themselves, an indication that prosecutors might have been able to charge individuals for their part in crimes their institutions had acknowledged. Academics who studied those years, including Columbia’s Tomasz Piskorski and James Witkin and University of Chicago’s Amit Seru found widespread patterns of fraud in the mortgage business.

The exception makes this failure all the more puzzling. As I detailed in 2014, Bharara’s office brought one case for misconduct during the financial crisis – against a mid-level banker. Prosecutors charged Kareem Serageldin of Credit Suisse with overseeing traders who knowingly misrepresented the value of mortgage securities. Serageldin pleaded guilty and went to prison.

Serageldin’s colleagues in the industry and others familiar with Credit Suisse found it hard to believe that he was the only person involved in that particular fraud.

Bharara’s reluctance to pursue senior executives was seen in other investigations of big banks. His office wrested a $1.7 billion fine from JPMorgan Chase over its complicity in the Bernie Madoff Ponzi scheme, but it brought no charges against individual bankers.

One odd aspect of his tenure was the Southern District’s willingness to defer to other jurisdictions when it came to Wall Street cases.

Historically, the SDNY has been the leading enforcers of securities laws, nicknamed the “sovereign district” for its propensity to grab corporate fraud cases from elsewhere on the flimsiest of jurisdictional pretexts. Under Bharara, the Southern District let other US attorneys claim investigations into residential mortgage-backed securities, the instruments at the heart of the financial crisis. Those other offices were not nearly as versed in complex financial cases as their colleagues in Manhattan. In addition, Bharara’s office ceded post-financial crisis investigations into foreign exchange and global interest rate manipulation to prosecutors working from the Justice Department’s headquarters.

Like Morgenthau, Bharara was a prominent figure in the New York landscape, given to well-orchestrated press conferences and memorable sound bites. Like Morgenthau, he did not leave office quietly, even though the president has a longstanding right to name his own US attorneys. And like Morgenthau, he may try to parlay his martyrdom into elective office.

But if he runs on his record of convictions, as prosecutors often do, voters might want to consider as well the list of possible targets he never pursued.

Half of World’s Wealth, in the Pockets of Just Eight Men

The gap between the very rich and poor is far greater than just a year ago, an Oxfam study has revealed.

The world’s eight richest men (L-R clockwise) Micheal Bloomberg, Larry Ellison, Mark Zuckerberg, Jeff Bezos, Bill Gates, Amancio Ortega, Warren Buffet and Carlos Slim Helu. Credit: official websites/Twitter

Rome: Just eight men own the same wealth as the 3.6 billion people who make up the poorest half of humanity, according to a major new report by an international confederation of 19 organisations working in more than 90 countries.

Oxfam International’s report, ‘An economy for the 99%’, which was released on January 16, shows that the gap between rich and poor is “far greater than had been feared”.

“The richest are accumulating wealth at such an astonishing rate that the world could see its first trillionaire in just 25 years. To put this figure in perspective – you would need to spend $1 million every day for 2738 years to spend $1 trillion”.

The report details how big business and the super-rich are fuelling the inequality crisis by dodging taxes, driving down wages and using their power to influence politics.

“New and better data on the distribution of global wealth – particularly in India and China – indicates that the poorest half of the world has less wealth than had been previously thought.”

Had this new data been available last year, the report adds, it would have shown that nine billionaires owned the same wealth as the poorest half of the planet, and not 62, as Oxfam calculated at the time.

Obscene!

On this, Winnie Byanyima, executive director of Oxfam International, said:

“It is obscene for so much wealth to be held in the hands of so few when 1 in 10 people survive on less than $2 a day. Inequality is trapping hundreds of millions in poverty; it is fracturing our societies and undermining democracy.

“Across the world, people are being left behind. Their wages are stagnating yet corporate bosses take home million dollar bonuses; their health and education services are cut while corporations and the super-rich dodge their taxes; their voices are ignored as governments sing to the tune of big business and a wealthy elite.”

Oxfam’s report shows “how our broken economies are funnelling wealth to a rich elite at the expense of the poorest in society, the majority of who are women.”

Tax dodging

The eight richest.

Oxfam’s report also tackles the critical issue of tax dodging.

Corporate tax dodging, it informs, costs poor countries at least $100 billion every year.

“This is enough money to provide an education for the 124 million children who aren’t in school and fund healthcare interventions that could prevent the deaths of at least six million children every year.”

The report outlines how the super-rich use a network of tax havens to avoid paying their fair share of tax and an army of wealth managers to secure returns on their investments that would not be available to ordinary savers.

Contrary to popular belief, many of the super-rich are not ‘self-made’. Oxfam analysis shows over half the world’s billionaires either inherited their wealth or accumulated it through industries, which are prone to corruption and cronyism.

It also demonstrates how big business and the super-rich use their money and connections to ensure government policy works for them.
A Human Economy?

“Governments are not helpless in the face of technological change and market forces. If politicians stop obsessing with GDP [gross domestic product], and focus on delivering for all their citizens and not just a wealthy few, a better future is possible for everyone.”

Oxfam’s blueprint for a more human economy includes a series of measures that should be adopted by governments to end the extreme concentration of wealth to end poverty.

These include increasing taxes on both wealth and high incomes to ensure a more level playing field, and to generate funds needed to invest in healthcare, education and job creation; to work together to ensure workers are paid a decent wage; and to put a stop to tax dodging and the race to the bottom on corporate tax.

These steps also include supporting companies that benefit their workers and society rather than just their shareholders.

As well, governments should ensure economies work for women, and must help to dismantle the barriers to women’s economic progress such as access to education and the unfair burden of unpaid care work.

Does anybody care?

Here, a key question arises: national governments, the UN, the EU, and major civil society and human rights organisations, all know about the on-going, obscene inequality. How come that nothing effective has been done do far to prevent it or at least reduce it?

On this, Anna Ratcliff, Oxfam’s International’s media officer, inequality and “Even It Up Campaign,” comments to IPS that “tackling inequality properly will mean breaking with the economic model we have been following for thirty years.”

“It will also mean taking on and overcoming the powerful interests of the super-rich and corporations who are benefiting from the status quo. So it is not surprising that despite global outcry at the inequality crisis, very little has changed.”

Nevertheless, says Ratcliff, some governments are bucking the trend, and managing to reduce inequality, listening to the demands of the majority not the minority.

Asked for specific examples, Ratcliff says that some governments, like Namibia’s, have managed to decrease inequality by taxing the rich more and spending it on things such as free secondary education that help reduce the gap between rich and poor.

“These countries show that another world is possible, if we can reject this broken economic model and stop the undue influence of the rich.”

Eight Men Own as Much Wealth as Half the World, Oxfam Study Reveals

Presenting its findings on the dawn of the Davos summit, Oxfam says the gap between the very rich and poor is far greater than just a year ago and unless tackled, public anger will continue to grow and lead to more seismic political changes.

Presenting its findings on the dawn of the Davos summit, Oxfam says the gap between the very rich and poor is far greater than just a year ago and unless tackled, public anger will continue to grow and lead to more seismic political changes.

FILE - In this Tuesday, Dec. 13, 2016 file photo, Bill Gates arrives to Trump Tower in New York. The eight individuals who own as much as half of the rest of the planet are all men, and have largely made their fortunes in technology. Gates co-founded Microsoft in the mid-70s, growing it into the world’s biggest software company and helping to make computers a household item. (AP Photo/Seth Wenig, file)

Bill Gates arrives to Trump Tower in New York. Credit: AP Photo/Seth Wenig/File

Davos, Switzerland: The gap between the super-rich and the poorest half of the global population is starker than previously thought, with just eight men, from Bill Gates to Michael Bloomberg, owning as much wealth as 3.6 billion people, according to an analysis by Oxfam released Monday.

Presenting its findings on the dawn of the annual gathering of the global political and business elites in the Swiss ski resort of Davos, anti-poverty organisation Oxfam says the gap between the very rich and poor is far greater than just a year ago. It’s urging leaders to do more than pay lip-service to the problem.

If not, it warns, public anger against this kind of inequality will continue to grow and lead to more seismic political changes akin to last year’s election of Donald Trump as US president and UK’s vote to leave the EU.

“It is obscene for so much wealth to be held in the hands of so few when one in ten people survive on less than $2 a day,” said Winnie Byanyima, executive director of Oxfam International, who will be attending the meeting in Davos. “Inequality is trapping hundreds of millions in poverty; it is fracturing our societies and undermining democracy.”

The same report a year earlier said that the richest 62 people on the planet owned as much wealth as the bottom half of the population. However, Oxfam has revised that figure down to eight following new information gathered by Swiss bank Credit Suisse.

Oxfam used Forbes’ billionaires list that was last published in March to make its headline claim. According to the Forbes list, Microsoft founder Gates is the richest individual with a net worth of $75 billion. The others, in order of ranking, are Amancio Ortega, the Spanish founder of fashion house Inditex, financier Warren Buffett, Mexican business magnate Carlos Slim Helu, Amazon boss Jeff Bezos, Facebook creator Mark Zuckerberg, Oracle’s Larry Ellison and Bloomberg, the former mayor of New York.

Oxfam outlined measures that it hopes will be enacted to help reduce the inequality.

They include higher taxes on wealth and income to ensure a more level playing field and to fund investments in public services and jobs, greater cooperation among governments on ensuring workers are paid decently and the rich don’t dodge their taxes. And business leaders should commit to paying their fair share of taxes and a living wage to employees.

Max Lawson, Oxfam’s policy adviser, urged billionaires to “do the right thing,” and to do “what Bill Gates has called on them to do, which is pay their taxes.”

The ability of the rich to avoid paying their fair share of taxes was vividly exposed last year in the so-called “Panama Papers,” a leaked trove of data that revealed details on offshore accounts that helped individuals shelter their wealth.

“We have a situation where billionaires are paying less tax often than their cleaner or their secretary,” Lawson told The Associated Press. “That’s crazy.”

It’s because of this kind of inequality that trust in institutions has fallen sharply since the global financial crisis of 2008, according to Edelman, one of the world’s biggest marketing firms.

In its own pre-Davos survey of more than 33,000 people across 28 markets, Edelman found the largest-ever drop in trust across government, business, media and even non-governmental organisations. CEO credibility is at an all-time low and government leaders are the least trusted group, according to the survey.

The firm’s 2017 Trust Barometer found that 53% of respondents believe the current system has failed them in that it is unfair and offers few hopes for the future, with only 15% believing it is working. That belief was evident for both the general population and those with college education.

“The implications of the global trust crisis are deep and wide-ranging,” said Richard Edelman, the firm’s president and CEO. “It began with the Great Recession of 2008, but like the second and third waves of a tsunami, globalisation and technological change have further weakened people’s trust in global institutions. The consequence is virulent populism and nationalism as the mass population has taken control away from the elites.”

Edelman highlighted how “the emergence of a media echo chamber” that reinforces personal beliefs while shutting out opposing views has magnified this “cycle of distrust.” According to the survey, search engines are trusted more as an information tool than traditional news editors, 59 to 41%.

“People now view media as part of the elite,” said Edelman. “The result is a proclivity for self-referential media and reliance on peers. The lack of trust in media has also given rise to the fake news phenomenon and politicians speaking directly to the masses.”

Edelman said business may be best-placed to help improve trust. Companies need to be transparent and honest with their employees about the changes taking place in the work-place, improve skills and pay fairly, he said.

The online survey was conducted between October 13 and November 16, 2016.

(AP)

Are Crony Capitalists Still Laughing All the Way to the Bank?

Finance Minister Arun Jaitley made a counter argument that India’s economy is far more resilient today than it was in 2008. He probably knows, not many in Davos would have agreed with him.

Finance Minister Arun Jaitley, made a counter argument that India’s economy is far more resilient today than it was in 2008. He probably knows, not many in Davos would have agreed with him.

Finance Minister Arun Jaitley talks during a session at the Annual Meeting 2015 of the World Economic Forum in Davos. Credit: worldeconomicforum/Flickr, CC-BY-NC-SA 2.0

RBI Governor Raghuram Rajan has issued renewed warnings from Davos that the bad loans in the banking sector could spin out of control if action is not taken with a sense of urgency. If anything the problem of bad loans in the banking system is worsening as the economy runs the risk of getting caught in a new global deflationary cycle in 2016. Rajan was unusually forthright in Davos and suggested that just a handful of businesses have borrowed massive amounts from banks and are actually choking credit to the rest of the economy because of their inability to pay back the loans. In an obvious reference to Vijay Mallya of the Kingfisher Group, the RBI Governor said big defaulters who have not paid back bank loans must refrain from holding expensive birthday bashes. Mallya had recently organised his 60th birthday bash with great pomp in a super deluxe hotel in Goa. His company has been formally declared a debt defaulter by the State Bank of India.

Mallya’s default is only the tip of the iceberg. There are bigger corporate groups, with immense political clout, who are also in default but they have technically avoided being declared defaulter through what is called “ever-greening” of loans. Ever-greening essentially involves making fresh borrowing from banks to simply pay interest. By doing so, the corporates, which don’t have enough cash to even pay interest, avoid being officially declared defaulters and the banks too develop a vested interest in showing that the loan hadn’t gone bad in their balance sheets by offering these companies fresh loans which immediately come back as interest payment. It is a mere book entry, really. As per the RBI norms, a corporate default
in interest payment beyond two quarters requires the concerned bank to make provisions — setting aside funds as cover for a full default in the future — which is charged to current profits. Indeed, if strict provisions for interest default were to be made by banks, they may end up showing huge losses. Consequently, banks also have a vested interest in ever-greening loan accounts. By doing so, banks and corporates merely postpone the problem of loans gone bad.

By a rough estimate, the 10 top indebted business groups – they are well-known names who have thrived in both the UPA and NDA regimes – have about Rs.7.3 lakh crore of loans in their books and are struggling to meet their interest payment obligations. Most of these companies are heavily invested in infrastructure sectors such a power, roads and telecom or in the commodities like steel where world prices have collapsed.

Governor Rajan sent out fresh warnings recently about the deepening crises in the financial sector, especially in public sector banks, because the stock market has begun to read the real rot within, even if banks are trying to hide it. For instance, the share prices of public sector banks have collapsed to such an extent that they have begun to quote below their book value. The book value of a company is simply the real net worth (equity capital plus reserves accumulated over the years) as shown in the balance sheet. In the case of the public sector banks the share prices are so low that they have fallen even below the book value, clearly suggesting that the net worth mentioned in the balance sheet is overstated. This had happened to some of the large American banks after the 2008 global financial crisis. Before massive Fed Reserve bailouts arrived, the stock prices of US banks too had fallen well below their book value.

Worse, the market capitalisation of 40 plus Indian PSU banks put together has fallen to about Rs. 2.4 lakh crore which is less than the market value of just one private sector bank,HDFC! Such has been the destruction of the market value of PSU banks. So the stock market is clearly signalling that the rot in PSU banks is much deeper than what has been disclosed so far. This prompted Raghuram Rajan last month to up the ante and force the banks to make full disclosure and provision for bad loans where interest is not paid for over two quarters. Rajan has emphasised in the past that India’s crony capitalists ( read big business groups that actively fund elections) never seem to pay for the bad decisions they make and practice virtually “risk free capitalism”.

Recently, a reputed research firm Credit Suisse gave alarming data for 10 severely indebted groups in the infrastructure and commodities sectors which are facing the brunt of the current deflationary storm originating mainly from China. The aggregate gross debt in the books of these corporate groups – Essar, Reliance ADAG, GMR, GVK, Adani, Lanco, Videocon, Vedanta, Jaypee – is of the order of Rs.7.3 lakh crore. Of this, Credit Suisse estimates that about Rs.3 lakh crore of loans are severely stressed! Private credit rating agencies have assigned these severely stressed loans near default status. But banks are nowhere close to recognising them as non-performing assets. It is largely these stressed loans that Rajan is talking about when he tells banks to be bold and make full provisions for loans where interest payment has all but stopped. Overall, about 15% to 20% of all outstanding bank credit of about Rs.65 lakh crore is considered to be suffering various levels of stress.

Politically, Rajan has touched a raw nerve and both PM Narendra Modi and finance minister Arun Jaitley will be tested on this count in the months ahead. How PM Narendra Modi and FM Arun Jaitley deal with large quanta of stressed loans in these big corporate groups is being closely watched by the opposition parties. The other day, a BJP spokesperson admitted on CNBC Awaaz channel that it is a challenge for the government to distinguish loans which are going bad because of genuine business failure from the ones which have elements of wrong doing in them. Many of the corporate groups listed by the Credit Suisse are known to have got entangled in scams during the UPA regime and are also notorious for their crony capitalist links. Any relief to them will open Prime Minister Narendra Modi to fresh charges of treating big business with kid gloves. Indeed, this is the biggest challenge the NDA economic managers face.

The nature of the deepening crisis in the banking sector was brought out by Uday Kotak, Chairman of Kotak Mahindra bank, who minced no words in Davos last week by stating upfront that banks can no longer afford to just wait for the global commodity prices to recover in the hope that their loans turn good from bad. Uday Kotak supported Rajan’s assertion that banks must quickly disclose the magnitude of bad loans in their balance sheets by March 31.

Significantly, Kotak argued that prominent Indian businesses today don’t have the confidence to deal with a further slowdown in 2016. These businesses were full of confidence in 2008 when the world was hit by a recession. Back then, both big corporate groups and banks had good balance sheets. The difference today, according to Kotak, is that businesses are highly leveraged on debt and the flip side of it is banks are sitting on huge non-performing assets.

Finance Minister Arun Jaitley made a counter argument that India’s economy is far more resilient today than it was in 2008. Jaitley probably knows, not many in Davos would have agreed with him.