One Less Than Yesterday

Bankers are usually a worried species. They live to carry out three basic functions. First one is to raise resources or funds. They are hence first worried about mobilising deposits. Worries generally end when the required goal is accomplished. Not with bankers. Having mobilised funds from those who have surplus, bankers cannot keep the funds idle. They are required to pay interest to their depositors. Hence they have to deploy the funds and earn even more than what they pay their depositors. They have two main routes available for this. Lend the funds to those who need them or invest the funds somewhere. Great! What is the problem in this? There may be difficulty to find people with surplus funds to deposit. But there is no difficulty in finding people who need money! Why worry about it then? 

The real issue is the greed of the depositors. They are not content with merely receiving interest. They also want their original funds to be returned, may be after sometime. This is the source of all evil, as far as the bankers are concerned. In order to meet this requirement, of having to return the depositors money due to their greed, bankers have to carefully choose those who are willing to take money not only at higher interest rates, but also promptly return it as and when due. 

Anyone who has dealt with a child knows how difficult this is. You can easily give a toy to a child. But you cannot take it back from it. Sometimes you may be able to take the toy back, but it is usually by giving another toy which is more attractive. You can recover an old loan by giving a new bigger loan. But bankers cannot always do this for various reasons, though they also use this tactic sometimes, especially with big and influential borrowers. Thus, bankers are now worried for the second time. Worried about finding the right borrowers.

They often find the right borrowers. At least, that is what they believe. But misfortune is something that relentlessly chases these bankers. Someone who was considered as an excellent prospect before lending, starts playing truant the moment loan is disbursed. All difficulties in the world befall on them, as soon as they take the loan. This is at least what they tell the bankers. Very successful businesses start failing. The very healthy promoter falls sick suddenly. There is fire, flood or famine. If not, there is labour unrest or power disruptions.  Some reason or the other. Now the poor banker is worried for the third time. He is worried about recovering the money given away as loan. 

When a borrowing unit becomes sick, banker reaches a Catch-22 situation. What is a Catch-22 situation? The best way to explain this is with a suitable example, as it is with most of the things. There is a boy, considered to be at an age good for getting married. This is the age considered as good by others. (Even a very old man considers himself good for marriage. That is not acceptable to others). But he is behaving somewhat abnormally. Many consider him of unsound mind, but his family members do not agree. Wise men advise the near ones of the boy to get him married and then he would become alright. (This must be true because the converse is almost always true). They are indeed very wise men. They have a suitable girl in their own family, but are not foolish to be generous. Parents of the boy try hard to get the boy married. All girls say that they are prepared to marry him as soon as he becomes alright. (Let us escape for the time-being, is what they really mean). The boy never gets married. He will never become alright. It is Catch-22 situation indeed. 

Let us get back to the worried bankers. They have already given a loan. It is to be recovered. Sometimes it is possible to recover a bad loan by giving some more loans. Someone is drowning. He is given a long rope. Give him another rope or tie another rope to the end of existing one you are holding. He may be able to get out of water. Or, he may drown with both the ropes. So, you are going to lose a second rope. This is called "throwing good money after bad money". Bankers have given a fancy name to this type of loans. They are called "Nursing Loans" or "Rehabilitation Loans". Banks also have huge establishments for this purpose. They are called "Rehabilitation Division". Success rate for such loans is very good. One out of every ten such loans usually gets recovered. Of course, sometimes the tenth may also fail. One can never predict the future, you know. 

When should a banker decide to throw in the extra rope or let the first one go and treat the matter as closed? There is a scientific basis and method to decide this. Banker conducts what is called as a "Viability Study". "Can I recover the earlier loan as well as the new loan, in a given reasonable time?", he checks during a viability study. If the answer is "yes", he gives a fresh loan. If the answer is "No". he feels losing money in first loan is better. Of course, there are many variables. By changing some assumptions in the variables, "Yes" can become "No" and "No" can become "Yes".  It is a question of finding the desired answer by using appropriate assumptions. Yes, you guessed it right!

Now we come to the most crucial part of the story. Having given a fresh loan to "nurse the unit", what are the essentials of nursing? There are of course many conditions. But the most important condition is the one known as "One Less Than Yesterday". What that does it really mean? It simply means that the "total loan dues of the borrower today must be at least one Rupee (or Dollar or whatever currency it is) less than the dues at the end of the previous day". This will ensure the psychological satisfaction for the banker that he is not throwing good money after bad money. No, Not again. 

*****

We talked about "Nursing" above. When bankers can nurse, why not nurses bank upon the banker's idea? They indeed do this, and have been doing for a long long time. One doesn't know whether the Doctors told the Nurses or Nurses told the Doctors. But it is practiced and often mentioned by both. The rule of "One Less Than Yesterday". 

Most people fall sick sometime or other in their lives. The only exemption is those who are always sick. When they are sick, they are put on a "Nursing Plan". This is always true in case of patients who undergo a "Procedure or Surgery" or some such similar sounding thing. There are many conditions and stipulations. There are "Dos and Don'ts". There are medications. There are therapies, exercises, and so on. But the most important one is of "Reduction in Weight".  If you want a modern name, you can call it "Weight Management".

The most deceptive item for a patient is "Weight". This one item literally and physically weighs on the patient. He can hide pain and keep smiling broadly. He can hide discomfort and yet look most comfortable. He can lie unhesitatingly while answering questions asked of him. But he simply cannot hide weight. The rule told to him is the same as the one followed by the bankers as discussed above. "One less than yesterday". May be a ounce, or even a gram. But one less than yesterday. One KG or Pound less than yesterday is not possible unless patient conducts a surgery on himself and cuts off a part of his body. But at least one gram less than yesterday. That is the requirement. 

The manufacturers of weighing scales also play truant on the patients. The ones they buy for use at home always show the correct weight. But when they go to the hospital or clinic half an hour later, the weighing scale there shows three KG or ten Pounds more! It also looks like hospitals and clinics place their strictest staff to manage weighing scales. Once I saw a patient's encounter with such a staff member. She was quite lean among the many patients present there. At least, that is what she considered herself to be. She tried to remove her footwear and sweater before getting on the weighing scale. The supervising nurse admonished her. "Don't do it. You are supposed to show your normal weight that you carry around!".

*****

While bankers and patients struggle with the "One less than yesterday" rule, there is one and only one who is able to follow this rule very strictly. He does not miss the rule even once. Not even for one living thing. Person or animal, that is. 

That is the Supreme Lord.

He follows this rule very methodically and unfailingly. Each sunset makes it very clear. "It is always one day less than yesterday". The remaining life span, that is, for all of them. 

Loan Melas, Loan Waivers and TBTF

These are the days of "Acronyms" and SMS language. The extensive use of acronyms that was monopolized by Advertising and Marketing industries has now firmly engulfed Banking as well. Acronyms used to have only letters earlier, but now numerals are also added up. There was "Brexit" as a subject of worldwide debate and we had our own "Rexit" following it strongly. The press endlessly debated half a dozen names as the most likely next Governor of RBI. Then suddenly another two names have surfaced and there were articles in the pink press approving one of them as a perfect substitute. Final word has not been heard yet. Everyone is appointing their own choice as Governor except the one with real authority to do so. Reserve Bank of India has come out with S4A scheme which is acronym for "Scheme for Sustainable structuring of Stressed Assets". It is a clear admission that the structuring or restructuring of stressed assets attempted earlier were often found to be unsustainable! Hence there is a need for a scheme of sustainable structuring of such assets now. We believe in learning from our mistakes. Not committing mistakes means blocking chances of new learning. Hence we continue to commit mistakes, even if they are the same ones, again and again. 

In a way, it is not proper to say that numerals have made entry in acronyms only now. The earlier generation knows that there was one Y2K, which was "Year 2000". Y2K was used to signify the trouble brewing when all computer programs and systems were expected to crash as the dates shifted from year 1999 to 2000, on 1st January 2000. Many steps were taken to prevent the problem. Those were the days when computerization had not reached today's levels; yet it created a huge scare. It was like the "Skylab" falling on our heads from up above the sky. For those who do not know about "Skylab", it was a Space Station launched by USA that orbited the earth from 1973 to 1979. It finally fell in the areas of Westren Australia, southeast of the city of Perth, with almost no damage and resulting in a fine of an amount of 400 Australian Dollars (!) on NASA for throwing debris in the area.

There are new acronyms in banking now. The one that attracts immediate attention is TBTF.  TBTF simply means "Too Big To Fail". It was originally considered as an economic theory which underlined the systemic risks that followed the failure of large corporations. After the meltdown of markets in 2007-08, economies world over are worried over the risks to the financial system that may arise due to failure of large banks and financial institutions. As it happens with any other theory, this theory has its proponents and opponents. Paul Krugman, who won the Nobel Prize for economics in 2008, led the proponents whereas the former Chairman of the Federal Reserve, Alan Greenspan led the opponents of the theory. It may be noted that Alan Greenspan was chairman of the FED for 20 years continuously from 1987 to 2006 without any Grexit problem! Proponents of TBTF theory are of the view that large institutions are to be protected against their failure by giving all support to them. Not doing so would result in chain reaction and the damage does not confine to their exit alone. It would damage the entire system. Opponents of TBTF theory like Greenspan have held that any support to the too big to fail institutions will only result in their deliberately taking high-risk-high-return positions, safe in their status as TBTF. Support is definitely going to come, they would assume. Opponents of the theory strongly advocate that it is advisable to deliberately break down such too big to fail institutions into smaller ones.  

On 31st August last year, RBI identified two Indian Banks as "Systemically important" in our own version of TBTF. SBI and ICICI bank have been marked for closer supervision and higher Capital Adequacy requirements on this account. The recent steps initiated for absorbing the subsidiaries of SBI with the parent is to be viewed in this background. In the urge to create big universal banks in the country to compete with the bigger ones in the globe, we are creating a bigger TBTF bank. This is happening when a considerable section of economists are advising deliberately splitting large banks into smaller ones to prevent systemic risks their failure may bring in. Once this is done, there is going to be a further disappearance of many banks in the country which have their own history, culture, importance and identity.

RBI's revised guidelines for classification of NPAs and cleaning of balance sheets of banks brought in a plethora of loss making banks. It was as if there was a competition about declaring losses. Banks with unblemished profitability records too showed record losses, shaking the confidence of the general public. Though one more year was available for cleaning, at the end of the financial year 2015-16, we were assured that many balance sheets have been fully cleaned and things will only look up now. Bank shares reached record lows. Their prices have recovered by 30 to 50 percent within the last three to four months, even when there are indications that cleaning is to go a long way. There is no logic in either these valuations going down or going up. At least in their going up sharply when cleaning process is still far away.

What is the root cause for this NPA problem? Many factors are blamed for the present mess. It is not that the malady has set in overnight. What we are reaping now it is not a short term crop, but a plantation crop. Lending and soundness of the banks revolve on two basic tenets; following lending discipline and honoring the repayment requirement. The seeds were sown when these two basic pillars were damaged systematically. Principles of commercial lending have been continuously sacrificed at the altar of political expediency and popular appeal. Loan melas brought in extraneous considerations while lending. Loan waivers brought in dilution of honoring repayment obligations. It is always true that there has to be some consideration while lending to desired groups to bring social equality. But that cannot be at the cost of lending discipline. Similarly, there have to be cases of relief to the debt ridden sections of the society. But that cannot also be a wholesale let-off and has be to be on case to case basis. Relief is to be given to the identified needy ones and funds for that should go directly to them for discharging debt obligations. Blanket loan waiver schemes have ensured that borrowers always look for the next loan waiver scheme. We are now reaping the fruits of these twin plantation crops. These trees are going to be around for long. Their roots have gone deep inside the banking grounds. 

An article by Shri J Mulraj in Business Line two days ago has coined two more acronyms - TBTR and TFTE. TBTR is for Too Big to Rein-in and TFTE for Too Foolish To Explain to Central Banks. It refers to the various efforts made by Central Banks all over the world to boost consumption and investment. The article points out that investment banks which are too big to fail have devised increasingly complex and deadly derivative products which are growing every day. The fact that 2008 crisis was basically due to securitized mortgage loans and collaterized debt obligations, which too were derivative products, appears to have been forgotten. Central Banks are printing more money to bring in feel good factor and make stock markets and other markets start looking up. The idea is to induce higher spending. It mentions that Bank of Japan is now among the top 10 shareholders of 90% of Japan's largest companies. Investors are buying bonds from market using borrowed money and making a profit by selling it to the central bank, which continues to buy these bonds. A large European bank alone has an exposure of 49 trillion dollars of derivative trades. The opinion is that these policies of central banks will cause the next crisis. These are too complex issues for many of us to understand. But the time bomb appears to be ticking.

It is not that we should keep looking for the next crisis and feel depressed now itself. Financial world has seen many crisis in the past and come out of them after a new equilibrium has been reached. It is to be remembered that there is a limit to getting returns on investments. Fantastic returns for some always means that there are fanatical loss for some others. Greed often overtakes wiser counsel. A control on such greed is what is required today.

Historians say that the easiest way to destabilize a country is to corrupt its language. Once the language is spoilt, hurting the land's identity and culture becomes easy. In the same vein, destroying the financial system is easy if its lending systems and repayment integrity is damaged. What is required now is neither consolidation of banks nor their fragmentation. Restoring the integrity of lending process and bringing back the culture of encouraging prompt repayment is the need of the hour in our country. Exemptions can be there, but these must be the basic rule. These are the pillars on which the future of the financial system are to be restored.