The Sensex is flirting the 30,000 level, and the
feeling that all is well seems to have made its way
back into the Indian psyche. But is all really well? We
don't think so.

In this report, we highlight three crisis scenarios
that India could face in 2017. The tragedy is that
there aren't really any solutions in sight and the
media is as usual not talking about it.

But we at Equitymaster do not believe in holding back, at least not from
our readers and prospective readers.

So, like we have done in the past, we are calling a spade a spade and
pointing out three crisis scenarios that India could face and you, dear
reader, need to be aware of.

Happy Reading!
Vivek Kaul

India in Crisis 2017 | 2

India in Crisis 2017


Will the Great Indian Real Estate Bubble Finally Burst? It's for the Modi Govt to Decide
Unsold Homes at a 10-year High, who are we Building These Homes for? 12
Of Rahul Bajaj and India's So Called Demographic Dividend 18
What the Media Did Not Tell You About India’s High Unemployment Rate 21
Of Public Sector Banks, Narendra Modi and Suit, Boot Waali Sarkar 27
Why India has Sick Companies But No Sick Promoters 37
Disclaimer 43

3 | India in Crisis 2017

Will the Great Indian Real Estate
Bubble Finally Burst? It's for the
Modi Govt to Decide
- By Vivek Kaul

In a surprise late evening move yesterday, prime minister Narendra Modi told
the nation in a TV address, that come midnight, Rs 500 and Rs 1,000 notes will no
longer be legal tender.

As I explained in a column published earlier today, one reason for doing this is
to tackle the menace of fake notes. The second reason for doing this is to tackle
black money.

As I mentioned in the earlier column, the move seems to be inspired from the
American dollar as well as the British pound. In the United States, the highest
denomination bank note is $100. When it comes to the United Kingdom, the
highest denomination bank note issued by the Bank of England is £ 50. In the
United States as well as the United Kingdom, the highest denomination note is
essentially 50 times the smallest denomination note of one dollar or one pound.

In India, up until now the highest denomination note was Rs. 1,000 and this
was 1,000 times the smallest denomination note of Re 1, issued by the ministry of
finance. When a currency has notes of higher denomination, it is easier to launder
money i.e. store black money, as it takes less space and weighs less as well.

As Ritika Mankar Mukherjee and Sumit Shekhar of Ambit Capital wrote in a
recent research note: "For instance, the weight of Rs 1 crore in the form of hard cash
rises from 12kgs to 100kgs if the denomination of the sum is changed from 1,000-Rupee
notes to 100-Rupee notes."

Also, Rs 500 and Rs 1,000 form the bulk of the total amount currency notes in
the Indian financial system. As per the Reserve Bank of India, the total amount of

Will the Great Indian Real Estate Bubble Finally Burst? It's for the Modi Govt to Decide | 4

The Rs 500 notes amounted to Rs 7. at least that is the feeling that currently prevails. it is expected that the real estate companies and builders will have to cut prices. This is the logic being offered by experts who are forecasting a fall in real estate 5 | Will the Great Indian Real Estate Bubble Finally Burst? It's for the Modi Govt to Decide .000 no longer being legal tender. This basically means that anyone who has black money stored in the form of currency notes is more than likely to have it in the form of Rs 500 and Rs 1. And if the money being deposited is black money then questions are likely to be asked by the income tax department. at least not in a direct way. Either this is black money being used or it is white money being converted into black. that the Modi government's crackdown on black money is likely to lead to real estate prices coming down significantly. anyone who has these notes." Given this. must go deposit this money in a bank account or in a post office account. As Mukherjee and Shekhar write: "Given that 48% and 39% of the total value of currency in India is in the form of Rs 500 and Rs 1000 notes respectively. One repercussion of this move that is being widely talked about is that it will lead to a fall in real estate prices. With the cash component becoming difficult to pay.000 amounted to Rs 14. it will become difficult to make the black component of the payment using currency notes.3 lakh crore. Further. Hence. A significant part of the payment is made in cash. real estate throughout the length and breadth of India is bought using black money. The logic is that with Rs 500 and Rs 1. Experts are of the view. the government plans to launch new Rs 500 and Rs 2. Typically. Black money is basically money which has been earned and on which taxes have not been paid.000 notes.paper notes in circulation in 2015-2016 amounted to Rs 16.000 notes amounted to Rs 6. It will not be so straightforward to exchange the old Rs 500 and Rs 1.000 notes. discontinuing usage of either of these notes can increase the physical costs and risks of holding black money significantly.000 notes with these new notes.9 lakh crore whereas Rs 1. that is unlikely to happen.4 lakh crore.2 lakh crore or a little over 86 per cent. Of this. the high denomination notes of Rs 500 and Rs 1.

prices. Will the Great Indian Real Estate Bubble Finally Burst? It's for the Modi Govt to Decide | 6 .The effects will be far-reaching and immediate. told Mint: "We have just witnessed a tremendous step towards increased transparency in the Indian real estate industry.. So. depends on how the government reacts to the situation. Allow me to explain. This is something I had written in the last edition of The Vivek Kaul Letter.. Real estate prices fell across large parts of the world. it would be easy for me to say that prices will crash." How do I see the situation? Given that I have been bearish on real estate for as long as I have been. The current financial crisis that the world is dealing with. as Anuj Puri. president of the Estate Agents Association of India told The Economic Times: "Property markets will see around 30% correction in prices. But India beat the trend. but it is worth repeating here. and shake up the sector in no uncertain way. But the past data (whatever limited data we have on real estate) doesn't suggest the same." Property prices in tier II and tier III cities will fall more because the black component while buying a home is higher in these cities. Further. tier II and III cities will be worst affected." Rajiv Talwar. As Yashwant Dalal. The question is why did this happen. essentially started once the investment bank Lehman Brothers declared bankruptcy in mid-September 2008. was a little more direct than Puri when he told The Economic Times: "There is bound to be a downward pressure on prices of everything including real estate. Apart from big property markets. but whether they will crash or not. CEO of DLF. my feeling is that real estate prices will fall... Why did real estate prices in India not crash? How did India manage to beat a global trend? The answer lies in Figure 1. chairman and country head. JLL India.

It is safe to say that this was a bank-sponsored 7 | Will the Great Indian Real Estate Bubble Finally Burst? It's for the Modi Govt to Decide . Crore) www. real estate companies in India were also under a lot of pressure. 26.8 per cent. This. which make and sell homes.765 crore. that soon came to a stop. To attract buyers. in the period following the start of the financial crisis in late 2008 and early 2009. Look at Figure 1. At the same time the buyers had simply disappeared from the market. builders did start to cut prices. Loans had to be repaid. formed close to 47 per cent of the total lending carried out by banks during the month. During the period of just one month. lending to commercial real estate by banks.equitymaster. Hence. plots the total loans given by banks to commercial real estate. In the aftermath of the financial crisis.364 crore or 15.380 crore. 12. There is a huge jump in lending between January 2009 and February 2009. In January 2009. At the end of February 2009. 90. Figure 1: Bank lending to commercial real estate (in Rs. This was a huge anomaly. Nevertheless. 78. when the total lending by banks (non-food credit) between January 2009 and February 2009 went up by Rs. the total bank lending to commercial real estate stood at Source: Reserve Bank of India and the Center of Monitoring Indian Economy The Figure 1. the total bank lending to commercial real estate stood at Rs.401 crore. essentially. builders or real estate companies. lending to real estate went up by Rs.

to be able to earn enough money to repay the bank loans that they had taken on. And India's real estate bubble would have ended in 2009. If these fresh loans hadn't come through then the real estate companies would have had to cut home prices. Look at Figure 2. in June 2011. Figure 2: Growth in lending to commercial real estate (in %) www. So. All other data points have been plotted in a similar way. it just went up vertically. stood at 23. If this bailout had not been carried out real estate companies would have had to cut prices majorly to sell homes. The Indian banks managed to avoid this scenario by lending fresh money to real estate companies. Zoom! Will the Great Indian Real Estate Bubble Finally Burst? It's for the Modi Govt to Decide | 8 .equitymaster. It basically plots the growth in bank lending to commercial real estate over the years.2 per cent. The fresh loans were used by the real estate companies to repay their old Source: Reserve Bank of India It is clear from Figure 2 that the growth in bank lending to real estate companies simply exploded in the aftermath of the financial crisis. Chances are they would have defaulted on some of these loans as well. This means that the growth in bank lending to real estate companies between June 2010 and June 2011.2 per cent. so as to be able to sell homes and earn enough money to repay those loans. the growth rate was at 23.bailout of the real estate sector. In fact.

the law of demand does not work in the real estate market. This is what happened post 2009 in India. that the growth in bank lending to real estate companies goes through some sort of a cycle. people buy less of that thing. why the real estate prices in India did not fall in the aftermath of the financial crisis. In a normal market.equitymaster. as prices go up. perpetual reasons like black money finding its way into real estate. more and more people enter the market (as is the case with the stock market as well). One of the real estate indices that one can look at is the Reserve Bank of India (RBI)House Price Index. In fact. Further. were also there. In the real estate market. Further. Figure 3: Real estate returns (in %) Source: Reserve Bank of India What is clear from Figure 3 is that the annual real estate returns have come down over the years. And this explains. Rising real estate prices brought the buyers back into the market and the real estate bubble got a new lease of life. it is clear from Figure 2. since June 2011.year returns in real estate per the RBI House Price Index. when prices go up. It shows one. Look at Figure 3. this also tells us why India beat the global trend of falling real estate prices. Are these lending cycles linked to the rate of increase of real estate prices? The trouble is that there is very little data available on real estate prices in India. Of course. Now what happens when we plot Figure 2 and Figure 3 9 | Will the Great Indian Real Estate Bubble Finally Burst? It's for the Modi Govt to DecideDecide .

This stems from the fact that the ill-gotten wealth of politicians is largely invested in real estate and they work towards protecting its value. so that they don't have to cut their prices.equitymaster. This keeps the real estate bubble going. The second possible reason is that the government (I don't mean just the current government here but any government) does not want real estate prices to fall. lending from banks to real estate companies starts to pick up. As of August 2016. Figure 4: Comparison www. There are two possible reasons for this. One is that banks do not want real estate prices to fall. Look at Figure 4. the mapping isn't exactly one to one. This is because they feel that if real estate prices fall.e. the rate of growth in real estate prices starts to fall) Source: Reserve Bank of India The Figure 4 shows that every time the real estate prices start to correct (i. the real estate companies won't be able to repay their loans. How is all this relevant in the current context? Real estate prices will start falling for sure. Of course. Given this banks give fresh loans to real estate companies. Also. The trouble is that this is also likely to lead to default of bank loans from real estate companies. But there is a clear correlation. real estate builders are major financiers of political parties at local and state levels. the total lending carried out by banks Will the Great Indian Real Estate Bubble Finally Burst? It's for the Modi Govt to Decide | 10 .

In this scenario. is actually in the hands of the Modi government. it is worth pointing out here that public sector banks are currently in a mess because of corporates defaulting on loans. If home loan borrowers also start to default. All I can say with confidence right now is: Watch this space. with one million individuals entering the workforce every month. as they have done in the past. I must say this that if the Modi government does allow real estate prices to come down dramatically.81. This will allow many people who cannot currently buy homes to buy homes. which is currently more or less dead. It will also lead to a multiplier effect in industries which directly depend on real estate for their demand. 11 | Will the Great Indian Real Estate Bubble Finally Burst? It's for the Modi Govt to Decide . Higher demand will lead to the creation of many low-skilled and unskilled jobs. that whether real estate prices will crash. it is safe to say. Also. If banks do give fresh loans to real estate companies. Will they be able to take on real estate companies defaulting on their loans as well? What will the government do in this situation? To conclude. it will improve the affordability of real estate companies stood at Rs 1.700 crore. then the real estate prices may not fall by as much as they are currently expected to. Also. then there will be a bigger problem. which the country badly needs. your guess is as good as mine. Nevertheless. will banks come to the rescue of real estate companies again? Will public sector banks be forced to give fresh loans to real estate companies? On these questions. I don't have clear cut answers to these questions. lower prices will spur demand.

” In terms of number of homes. who are we Building These Homes for? | 12 . The question is. If all that is being built was being bought. Despite this huge inventory. went up by 17. this means that people continue to buy homes. are people buying these new homes that are being built? The straightforward answer seems to be that they are not buying as much as is being produced. unsold stock stood at 1. It’s just that they are not buying up as much as or what the builders are currently building. Nevertheless. Hence. according to a survey by real estate consultancy Liases Foras. at all. who are we Building These Homes for? . for a period of one-year ending July 22.2 per cent. As the news report pointed out: “For the entire industry. Unsold Homes at a 10-year High. new launches continue to happen. This can be concluded from the fact that the overall inventory of the real estate industry has been going up and is now at a ten-year high. 2016. Not a day goes by without one newspaper or another having a full page advertisement from a real estate company. by the real estate companies. announcing a new project.2 billion sq ft at the end of the April-June 2016 quarter. various news reports suggest that around 7 lakh homes are unsold across the eight biggest cities in India.By Vivek Kaul A news report in the Business Standard newspaper recently pointed out that the inventory of unsold homes in India is now at a ten-year high. As per the latest sectoral deployment of credit data released by the Reserve Bank of India(RBI). it would be a stretch to say that homes are not being bought and sold. as is the case. Having said that the number of these launches has definitely come down than in comparison to the past. And this has led Unsold Homes at a 10-year High. the total outstanding housing loans. the total inventory would have been falling and not going up.

1 per cent of the total homes.9 per cent. It so happens that India has a huge number of vacant homes. the vacant homes formed 6. to 2. who are we Building These Homes for? . Looking at the past trend. the number of vacant homes increased by a whopping 56 per cent or 89 lakh. Out of this 1. the number of vacant homes should be over 3 crore.47 crore the total unsold inventory of homes reaching a ten-year high. 2016. These are homes that have been built and bought. India had 2.1 per cent whereas urban areas saw a jump of 71. It is safe to say that since 2011. Arjun Kumar makes this point in a research paper titled India’s Residential Rental Housing published in the Economic and Political Weekly dated June 11. 13 | Unsold Homes at a 10-year High. but are currently lying unoccupied. the vacant homes formed 10. currently. Between 2001 and 2011. In rural areas.11 crore homes were in urban areas.47 crore vacant homes (or vacant census houses as they are called).36 crore homes were in rural areas and 1. Source: istockphoto So what are people buying then? The housing loan data from the RBI clearly shows that they are buying homes. The rural areas saw a jump of 45. In urban areas.2 per cent of the total homes. the number of unoccupied homes would have gone up further. As per the 2011 census.

In the process. where the hope was they would earn higher returns. physical condition. While no information is available on the characteristics of vacant homes. saw a huge price rise. reasons for non-occupancy. was particularly high in the second half of the decade between 2001 and 2011. The inflation continued to remain high up to 2013-2014.6 per cent. As far as predominant material of the roof of the home is concerned. In fact. it isn’t surprising that many people buy a home only to keep it locked and don’t give it out on rent. The inflation between 2006-2007 and 2010-2011 was at close to 9 per cent. The trouble is that we only know that around 2. in order to beat the inflation people moved their savings into real estate. tenure. And so the cycle works. This penchant for investing in real estate also ensured that the decade between 2001 and 2011. these vacant houses are physically unutilised and could be used to meet a large part of housing needs [emphasis is mine].” Nevertheless. nearly 29. as measured by the consumer price index. It also leads to a further generation of black money. Real estate is a very good conduit for investing black money. This meant more and more people bought homes as an investment and then kept them locked. we can make some educated guesses here. such as size. went up dramatically. was not available. many homes were bought and then kept locked. One reason for the jump in vacant homes could be the fact that the inflation. the census does give information regarding homes on an overall basis.47 crore homes (or actually may be more than 3 crore homes now) are vacant and nothing beyond that. Given the bad shape of our rental laws.1 Unsold Homes at a 10-year High. Nonetheless. who are we Building These Homes for? | 14 . and so on. And this price rise attracted more investors. the total amount of black money in the Indian financial system. the rate of inflation between 2008- 2009 and 2010-2011 was even higher at 10. The humungous increase in the number of vacant homes is also a reflection of the fact that between 2001 and 2011. As Kumar writes: “Information on the characteristics of these vacant houses. use. which finds its way into real estate again. Hence.

there are many homes that have been bought as an investment over the years. as total homes do. Further. and hence. Further. And given that many of these homes have barely given any return.per cent of homes have a concrete roof. The point being that no investor (real estate or otherwise) can hold on for eternity. At the same time. if an apartment is inhabited other amenities in the area also tend to come up faster. We assume that the vacant homes also follow the same distribution of different kind of roofs as well as access to drinking water and latrines. are likely to follow the same distribution as total homes. These homes are also available in the market right now. are of a similar kind to the nearly seven lakh homes that are currently unsold in the large cities. would it meet some part of India’s housing needs? 15 | Unsold Homes at a 10-year High. Over and above this inventory. 23. are a big number in itself.9 per cent of homes have GI/metal/ asbestos sheets as roofs. Further. 0. One reason for this could be the fact that these homes are a part of better localities. they are as competitively priced as the new homes being built. given that they were made earlier. this also explains why the inventory of real estate companies is at a ten-year high. This is a reasonable assumption to make given that the total number of vacant homes form around 7. It’s always nicer to live in an apartment in which some people are already living.9 per cent have the latrine facility available within the premises. The homes lying unsold primarily cater to the middle class and the upper middle class.5 per cent of the total number of homes. 43. it also leads to the question that if these unoccupied homes were available for housing. who are we Building These Homes for? . What this tells us is that a significant portion of the homes that are vacant as per the census. if not better. 15. And a significant portion of the vacant homes as per the census do the same as well.1 per cent have grass/thatch/bamboo/wood/mud roofs and so on.5 per cent of homes have access to drinking water and 46. 8. It is also safe to say that many of these vacant homes are the ones being currently bought and that explains why the housing loan growth of banks continues to be robust.1 per cent have tiles as a roof.6 per cent have plastic/polythene sheets as roofs and 15.6 per cent of the homes have a stone roof.

and are contributing significantly to the economy of cities by being a source of affordable labour supply for production both in the formal and informal sectors of the economy but are a reflection of the exclusionary socio-economic policies and planning in the country. While. and Chennai live in slum settlements. if the landlords owning these homes were to firmly decide to sell them. rental yields would crash further.” If these vacant homes were to be available for rent.5 per cent of the population of Mumbai.6 per cent of the total slum population resides in cities with over one-million population. This would definitely help solve some of India’s housing problems. but some people living in slums would definitely be able to move up. Unsold Homes at a 10-year High. Kolkata. It is worth pointing out here that a lot of people living in slums may have their own homes in their villages. Further. this wouldn’t mean the end of slums. who are we Building These Homes for? | 16 .” Another high rise emerges. As the 12th Five Year Plan document points out: “41. As the Five Year Plan document points out: “Data shows 55 per cent of slum dwellers have been living in them for over 15 years and another 12 per cent between 10-15 years. establishing that slums are an integral part of the phenomenon of urbanization. Delhi. There is clearly no doubt about that. but are living on rent in a city slum. given that Indians like owning their homes rather than renting them. Informal settlements occupy one-third of the large city spaces: 34. Source: istockphoto this time in between a slum Over and above this. making rents even more affordable (not that they are not affordable right now). home prices would come down significantly. many people spend a major part of their lifetime living in slums.

with the unsold inventory at a ten-year high. The sooner that happens the better it is for all of us. helping them move up in life. is still strong. Of course. the real estate companies can continue to crib for lower interest rates. who are we Building These Homes for? . At the current pace of absorption. Long story short—the real estate sector is going to continue to remain in a mess in the time to come. It would also allow those living in rental accommodations to buy better quality homes of their choice. given that the belief that real estate gives terrific returns. India had 2. Meanwhile. a lot of capital is locked up. But what this doesn’t take into account is the fact that as per 2011 census. it will take nearly three years for this inventory to clear. though not as strong as it used to be. This would make better quality housing available to people. Also. this is just a pipe dream. It’s only hope is a fall in price. But that ain’t going to help anyone.47 crore unoccupied homes. The Business Standard estimates that the total capital locked up is at a whopping Rs 6 lakh crore. 17 | Unsold Homes at a 10-year High.

the jobs need to be in the unskilled and the low-skilled space. This is referred to as the demographic dividend.By Vivek Kaul One of the things that I have recently been asked more than a few times is that why isn't anyone else talking about the demographic dividend point that I have been making in the recent past. This faster economic growth helps pull out more and more people out of poverty. if a bulk of these people need to find employment. If this demographic dividend needs to be cashed in on. At a certain point of time. Also. there need to be jobs for these people. This means that there are more people who can earn and spend than those who need to be taken care of. countries reach a stage where their working population grows much faster than their overall population. the economy grows at a much faster pace than it has in the past. And this has Of Rahul Bajaj and India's So Called Demographic Dividend | 18 . An important assumption in the demographic dividend is that people who enter the workforce and are actually looking for jobs. More than 54 per cent of the country's population is under 25 years of age. When the people entering the workforce get jobs and save and spend money. are enough jobs being generated for the million Indians entering the workforce every month? The answer is no. are able to find jobs. This is the basic point I have been making over the last few months. The question is. In the Indian case.2 crore individuals are entering the workforce every year. This trend typically lasts for two to three decades. The basic argument is rather straightforward. This will continue to be trend over the next couple of decades. around one million individuals are entering the workforce every month. Of Rahul Bajaj and India's So Called Demographic Dividend . This means around 1.

Further. Over and above this. And given that unemployment rarely makes for news unlike a lot of other economic indicators like inflation. as to why others are not talking about it. fiscal deficit and so on. is it important enough? Or is it something which one cranky guy seems to have gotten into his head. most of us deem something to be important only if more than a few people are talking about it. Or whether others are also talking about the same thing. Making that distinction is important. And given that the question is. Also. The question is why are others not talking about the risk to India's demographic dividend? For the English language media. While. in India. Either they become a part of the agricultural workforce where the disguised unemployment is very high. we do not have a good regular measure for unemployment. index of industrial production. The way the human brain works.led to the question. nobody really stays unemployed. This phenomenon of seeking external validation is clearly visible in the stock market. it is a question of us and them. one consequence that has already started to playout is the land-owning upper castes in various parts of the country are now demanding reservations in government jobs. And this is where external validation comes in. It is not going to have consequences overnight. People who are not finding jobs are not the ones who read the English language press. it seems I am the only one rattling on and on about an issue. it took me a while to understand why people are asking the question. the demographic dividend not working out is a long-term trend. 19 | Of Rahul Bajaj and India's So Called Demographic Dividend . People do find a way of doing something. That's how human psychology works and I really cannot do much about. I have no control over why others are not talking about what I am talking about. In this case. Having said that. And most people get totally disillusioned about investing in the stock market once the market has bottomed out. Or they become what economists Abhijit Banerjee and Eshter Duflo call reluctant entrepreneurs. Most retail money comes in when the markets are at their peak.

I agree with everything else that Bajaj has written. Hence.5 per cent per year. for several years. I recently came across someone who talked about what I have been talking about. but often negative.5% for several years. wrote this in the 2015-2016 annual report of Bajaj Auto: "Each year. there is no reason for us to assume that we will grow at 8-8. the percentage increase in employment for a percentage growth in value added) are not only less than unity. Of Rahul Bajaj and India's So Called Demographic Dividend | 20 . How then can we expect to employ the majority of our youth even when we attain higher growth? And what will this do to inequality and social tensions? I don't have ready answers. Matters worsen if you juxtapose significantly greater skill and multi-tasking needs of the future with the inadequate educational and technical abilities of many who are entering the labour force . consistently.5 per cent. while there is no doubt that we as a country can increase our GDP growth initially to 8% per annum and then hit a steady-state of around 8. for several years. Unfortunately. Industrialist Rahul Bajaj. colleges and technical and vocational training institutions. there is no reason for us to assume that we will grow at 8-8. As he further writes: "Indeed. consistently." I don't really buy the fact that India will be able to grow at a steady rate of 8-8. Nevertheless. I am concerned. Nevertheless. Very few countries have been able to grow at a rate of six per cent or more for a long period of time." All I can say to conclude this is that like Bajaj I am very concerned. I guess these are the reasons why others are not talking about this trend.5 per cent. But as a nationalist in his seventh decade.5 per cent per year. everything seems to suggest that employment will not rise at anywhere close to that rate of growth.thanks to years of neglect of our schools. all recent data across most manufacturing and service sector activities show that employment elasticities (namely. Hence. India is producing an extra 12 million young people of an age that makes them ready for the nation's workforce. I don't really buy the fact that India will be able to grow at a steady rate of 8-8. Very few countries have been able to grow at a rate of six per cent or more for a long period of time.

It’s still raining in Mumbai and the killer October heat and humidity is yet to hit the city. this happens now and then when some big surveys are carried out. large sections of the media reported that unemployment in India during 2015-2016 was at a five year high of 5 per cent. The Press Trust 21 | What the Media Did Not Tell You About India’s High Unemployment Rate . a regular unemployment figure is released every month. released the Report on Fifth Annual Employment – Unemployment Survey. In India. the neighbours haven’t yet woken up or maybe they have and are generally quiet for once. (herein referred to as Report) Using this Report. hence. recently the Labour Bureau based out of Chandigarh. It is one of those rare surreal days in Mumbai which leads me to question if everything is really the way it seems.By Vivek Kaul I am writing this on an early Wednesday morning. The road in front of the building has been dug up for close to a year. What the Media Did Not Tell You About India’s High Unemployment Rate . All in all. Bangla songs composed by the legendary Salil Chowdhury playing in the background are getting seamlessly intertwined with the chirping of birds outside. Indian economic agencies do not measure the rate of unemployment on a regular basis. Take the case of the way media went about reporting the rate of unemployment last week. there is no traffic on it. Like in the United States. one area where everything is not the way it seems is the Indian media and the way it reports on economic issues. a peaceful morning in a big city before the humdrum of daily life takes over. Given that it’s early in the morning. While this is a philosophical question which will perhaps take this lifetime to answer. First and foremost. Hence.

of India in a newsreport said: “The figures could be an alarm bell for the Bharatiya Janata Party (BJP)-ruled government at the Centre. With that distinction out of the way.7% (2012-13). even if it is at a five year high? I shall get around to explaining both of these statements in the remaining part of this letter. Labour Bureau did not bring out any such report for 2014-15. For how long does one need to be unemployed to be counted as unemployed? And this is where things get interesting. but a lot better than in comparison to 2009-2010. Let’s consider the rate of unemployment reported when the previous survey was carried out by the Labour Bureau. For a labour market to have flexibility. how worried should we be about India’s so-called high rate of unemployment? We should be very worried. should a country be bothered about a 5 per cent rate of unemployment. and the rate of unemployment then was 4.3% (2009-10). What the media did not tell us in the newsreports is how unemployment is defined as. Some skillsets which were in demand will get outdated and so on. Also. a rate of unemployment of 5 per cent is not high at all. Allow me to explain. it is important to understand that at any point of time there will be some unemployment in any economy. People will be in between jobs.” So things are a little worse in comparison to 2011-2012. it is. Some companies might have shut down rendering people unemployed. some unemployment is necessary. 4. The last survey was carried out in 2013- 2014. 3. Further. Some people might have got fired. Some business could be seasonal. even if the unemployment is at a five-year high? As the Press Trust of India points out: “Unemployment rate was 4. What the Media Did Not Tell You About India’s High Unemployment Rate | 22 . But isn’t that a contradiction to what I have said up until now? Yes. Once these factors are kept in mind. Given this.9% in 2013-14.9 per cent.8% (2011-12) and 9.” The Times of India said: “It shows a continuation of a distressing job situation”. there has barely been any jump in the rate of unemployment between then and now. What these statements clearly tell us is that the media was right and wrong at the same time. A labour market which has 100 per cent employment will make it difficult for employers to hire people and for people to find new jobs. So should that get us worried.

” Hence.” Hence.8 per cent for women. The rate was 4 per cent for males and 8. but still might be considered to be employed. under this method. Under this method “a person who has worked even for 30 days or more in any economic activity during the reference period of last twelve months is considered as employed under this approach.7 per cent of the workforce was unemployed. The Labour Bureau essentially measures unemployment using two methods: The first method is called the Usual Principal Status (UPS) Approach. “the major time spent by a person (183 days or more) is used to determine whether the person is in the labour force or out of labour force. 23 | What the Media Did Not Tell You About India’s High Unemployment Rate . As per this approach. an individual may not have had a job for 11 months during the course of a year and might still be considered employed. The second method is called the Usual Principal and Subsidiary Status (UPSS) Approach. What does this mean? It means that an individual may have been unemployed close to half the year. As per this method the rate of unemployment was 5 per cent. Table 1 Source: Report on Fifth Annual Employment – Unemployment Survey. anyone who has a job for 183 days or more during the course of the year and is considered employed. In this approach. only 3. which gives us a much clearer picture. Take a look at Table 1. The rate was 3 per cent for men and 5.7 per cent for females. What this clearly tells us is that the definition of unemployment is fairly broad and given that just looking at the rate of unemployment will not give us the clear picture. These were the numbers that were highlighted in the media.

1 per cent. What does the table tell us? Only 60. In rural areas this figure was at 52. Another factor that was not highlighted in the media is that India is a land of reluctant entrepreneurs (a term coined by economists Abhijit Banerjee and Esther Duflo).2 per cent. this where the big worry for India is.7 per cent. Indeed.6 per cent of the individuals who were available for work all through the year. this is the real thing that the media reports should have talked about. The figure in case of urban India was 82. Why do I say that? Look at Table 2. It explains why people migrate from rural areas to urban areas. As per the last survey. In rural areas this figure was at 53. the situation on this front is more or less same. Other than the wages being higher. were able to get work all through the year. the chances of getting regular work are higher in urban areas. But then unemployment at a five year high was a simplistic and a sexier headline that they led with. Table 2 Source: Report on Fifth Annual Employment – Unemployment Survey. since the last survey was carried out in 2013-2014. Further. This basically means that half of rural India cannot find work for all 12 months of the year. That a huge portion of the population is not able to find work all through the year.5 per cent of individuals who were available for work all through the year had been able to find work all through the year. The figures or more less similar to the figures as per the latest survey. In fact. 60. What the Media Did Not Tell You About India’s High Unemployment Rate | 24 .

Take the case of the self-employed. That is basically rubbish.The Search for Prosperity: “The vast majority of owners are not ‘capitalists in waiting’ but people who would gladly switch into decent employment if it were available. Take a look at Table 4.” Why is that? Take a look at Table 3. it doesn’t take rocket science to figure out that if jobs are available. Close to half of the workforce is self-employed. In comparison close to 93 per cent of the salaried and those on wages are able to find work all through the 25 | What the Media Did Not Tell You About India’s High Unemployment Rate . There is another reason for this. As economist Vijay Joshi writes in India’s Long Road . Hence. Table 3 Source: Report on Fifth Annual Employment – Unemployment Survey. More than two-fifths of the self-employed make only up to Rs 5. Some commentators have romanticised this in the past and said that India is a land of entrepreneurs. many of India’s reluctant entrepreneurs would take them on. What does Table 3 tell us? It tells us that the regular wage/salaried class of workers make the maximum money.7 per cent. What does the table tell us? It tells us very clearly that around 63 per cent of the self-employed are able to find regular work. In case of the salaried this is much lower at 18.000 per month.

Table 4 Source: Report on Fourth Annual Employment – Unemployment Survey. the situation is even worse.year. The moral of the story is that simplistic and sexy headlines don’t always give a correct picture. And these are India’s main individuals entering the workforce won’t be able to find regular work. In case of casual workers. with only around 42 per cent being able to find work all through the year. This is a clear conclusion that we can draw from the figures highlighted earlier. What the Media Did Not Tell You About India’s High Unemployment Rate | 26 . Now this is nowhere as straightforward as saying that unemployment is at a five-year high.

The data points which make up for Figure 1. Boot Waali Sarkar . It’s just that other than the repo rate. I have developed this habit of reading the Economic Survey in some detail. In the Economic Survey of 2016-2017. Over the last few years. we will look at the mess that prevails in the Indian public sector banks and why no workable solution is in sight. Narendra Modi and Suit. help us arrive at very important conclusions. And given that I read a lot of documents authored by the Indian government for a living.By Vivek Kaul In today’s edition of the Letter. was supposed to appear. Hence. I forgot that the Economic Survey and the annual budget of the government were due. I can safely say that this is by far the best document authored by the government. Over and above ideas. the other data points. Of Public Sector Banks. While making that promise last week. One reason why I like reading through the Survey is because it discusses some economic ideas in detail. there is a chapter which goes into great detail on the merits and demerits of the concept of Universal Basic Income. In this Special Edition of the Letter. one comes across some good data on the Indian economy. Narendra Modi and Suit. are not publicly available on a regular basis. the second part of our exclusive interview with former Federal Reserve Chairman Alan Greenspan. The last time I came across these data points was when the previous RBI Governor Raghuram Rajan. 27 | Of Public Sector Banks. during the course of this week. which is very difficult to find otherwise. Boot Waali Sarkar . the average term deposit rate and the average base rate. referred to them in a monetary policy statement. we will get back to the Greenspan interview next week. a topic which is very hot right now in India. Take a look at Figure 1 (on the next page).

Narendra Modi and Let’s analyse Figure 1 in some detail. The term deposit rate is essentially the interest rate that a bank pays on its fixed deposits. Boot Waali Sarkar | 28 .istockphoto.e. 2016-2017 Of Public Sector Banks. Base Lending Rate and Term Deposit Rate (Per cent) Source: Economic Survey. Figure 1: Repo. Source: DavorLovincic/ www. The base rate is essentially the interest rate below which a bank cannot lend i. the interest rate at which a bank lends to its best customer.

the term deposit rate has fallen much more and at a far greater speed than the base rate. The gap between the average base rate and the average term deposit rates has increased considerably between January 2014 and December 2016. When the bank manages to increase the gap between the lending rate and the borrowing rate. It has gone up considerably over the last few years (as can be seen from Figure 2). the term deposit rate has moved from around 8. This is something that becomes clear by looking at Figure 1 carefully. The question is why is this happening? Between January 2014 and September 2016. Figure 2: Gross Non-Performing Assets Ratio (per cent of Gross Advances) Source: Economic Survey. its profit goes up. Or at least.5 per cent. the base rate has also fallen. the gross non-performing assets ratio of public sector banks stood at close to 12 per cent. Since January 2014. its profit from the loans that are still being repaid goes up. the term deposit rate of banks or the interest rate at which they borrow money from you and I. On the other hand. A loan is an asset for a bank. The base rate has barely moved from 10 per cent to around 9. The technical term for bad loans is gross non- performing assets ratio. Boot Waali Sarkar . the bad loans of public sector banks have gone up considerably. At the same time. Narendra Modi and Suit. has fallen.5 per cent and is now below 7 per cent. Nevertheless. 2016-2017 29 | Of Public Sector Banks. As of end September 2016.

to whom the money had been lent.” What does this mean? It means that the lack of earnings from those defaulting on their loans are being compensated from individuals who invest in fixed deposits as well as borrowers who continue to repay their loans on time. from 1. as can be seen from Figure 3. As the Economic Survey puts it: “The increase in margins means that performing borrowers and depositors are effectively being taxed in order to subsidise the non-performing borrowers. In fact. Narendra Modi and Suit. but weren’t getting any interest from a considerable portion of those. As the Economic Survey points out: “By December 2016 the gap between the average term deposit rate and the average base rate had grown to 2. 2016-2017 Of Public Sector Banks. Hence.” So. the borrowers have stopped paying interest on Rs 12. Figure 3: NPA Ratios: Selected Countries (Per cent of Gross Loans) Source: Economic Survey.6 percentage points in January 2015. Boot Waali Sarkar | 30 . the base rate and in the process. would have also come down at a much faster rate. the bad loans of Indian banks are now one of the highest in the world. basically the good buys are paying for the bad guys. A bad loans ratio of 12 per cent basically means. that for every Rs 100 loaned out by the banks. If the loan defaults hadn’t happened. the rate of lending. In order to compensate for this. the banks essentially cut the interest rates on their deposits more than they cut the interest rate on their loans.7 percentage points. the banks were paying interest to those they had borrowed from. They have tried to compensate for the lack of earnings from the non-performing part of their portfolio by widening their interest margins.

A lot of lending was also carried out to crony capitalists close to the politicians who governed the country at that point of time. What portion of the total loans have these stressed firms taken on? Take a look at Figure 4. while their companies are bleeding. when the Indian economy was doing well and this led to some indiscriminate lending to the corporates. during a given period. And now these corporates are no longer in a position to repay the loans they had taken on. Some of them got their calculations wrong and some of them simply padded up the costs of the project and siphoned off a major portion of the bank loan they had taken on to finance the project. This basically means that the operating profit (earnings before interest and taxes) of these firms is lower than the interest that they need to pay on their outstanding debt. 2016-2017 31 | Of Public Sector Banks. Many corporates to which banks lent money now have an interest coverage ratio of less than one. These companies are referred to as stressed companies. Boot Waali Sarkar . Narendra Modi and Suit. Figure 4: Share of Debt Owed by Stressed Companies Source: Economic Survey. Hence. So. these companies are simply not earning enough to pay the interest on the loans they had taken on. many industrialists personally aren’t. How did we reach this stage? The bad loans problem can be traced back to mid-2000s.

” In fact. it has allocated only Rs 10. need more and more capital. As bad loans accumulate. This basically means that the companies have reached a Ponzi stage of finance and need more and more debt to continue to remain in operation.000 crore each to the banking system. the operating profit of these companies held steady at around Rs 25. but there are several estimates going around. On an average these companies owe Rs 20. since selling off assets provides immediate revenues but leaves firms with less income to service their debts in the future. even within stressed companies (i. Estimates made by the Committee to Review Governance of the Boards of Banks in India (better known as the PJ Of Public Sector Banks. How much is anybody’s guess. But this has sufficed mainly to buy them time. The stressed companies with an interest coverage ratio of less than one. in particular the public sector banks. where their operations are simply not viable at current power rates. Since then. companies have tried to “square the circle” by selling off some of their assets.000 crore.000 crore for recapitalising public sector banks. Some analysts have been of the view that the allocation should have been more than Rs 10. Narendra Modi and Suit. For 2017-208.000 crore apiece.000 crore. A mere 50 companies account for 71 per cent of the loans owed by the stressed companies. It is these companies which are essentially holding Indian banks back. banks.000 crore. making payment of interest on outstanding loans more and more difficult. for the next financial year. Over and above this. For 2016-2017. Between 2012 and mid-2015. This becomes clear from Figure 5 (on the next page) which shows the total debt of the top 10 stressed corporates groups and how it has gone up over the last decade. Many these stressed companies operate in the power sector. the government had allocated Rs 25. companies with an interest coverage ratio of less than one) the problem is concentrated among a few borrowers. owe a little more than 40 per cent of the loans given out by Indian banks. “in some cases. it had fallen to Rs 15. Boot Waali Sarkar | 32 . it has fallen and by September 2016. in order to continue to operate. The top 10 companies on an average owe Rs 40.e. The question is how much more? And this is where things get very tricky.000 crore per quarter.

000 crore”. on the other hand. in a research paper titled ‘State intervention in banking: the relative health of Indian public 33 | Of Public Sector Banks. Of the Rs 1. Figure 5: Debt of Top Ten Stressed Corporate Groups (Rs billion)* Source: Economic Survey.10. The Committee further said that “assuming that the Government puts in 60 per cent (though it will be challenging to raise the remaining 40 per cent from the capital markets). as a major owner of these banks. Another estimate made by Viral Acharya. This estimate was made as a part of the Indradhanush reforms that the government unveiled in order to revamp the public sector banks.87 lakh crores of tier-I capital”. of the Stern School of Business.80. The government hopes that the “improvements in capital productivity will enable PSBs to raise the remaining Rs 1. “PSBs would need Rs 5.000 crore. the Government would need to invest over Rs 3.1 Even though the government’s estimate is much less than that of the Nayak Committee’s estimate. plans to invest Rs 70.5 lakh crores”. and consists of its disclosed reserves as well as its equity capital.000 crore from the market”.Nayak Committee) suggests that. 2016-2017 Tier-I capital is the core capital of the bank. estimates that “the requirement of extra capital for the next four years up to FY 2019 is likely to be about Rs 1. The government. Boot Waali Sarkar . and Krishnamurthy V Subramanian. it is not a small number by any stretch of the imagination. between January 2014 and March 2018. Narendra Modi and Suit. of the Indian School of Business. the government.000 crore between 2015-2016 and 2018-2019.80.

12. The professors come up with three scenarios. What remain are the good banks and then can continue to operate in the way they deem it to be fit. So. At least. banks would need Rs 6.” This doesn’t leave much hope for a good bank-bad bank strategy given that like an asset reconstruction company.300 crore of capital.97. Boot Waali Sarkar | 34 . This has been tried in Western countries in the past (United States and Sweden to name two) and has worked. banks would need Rs 5. requiring ARCs to pay a greater proportion of the purchase price up-front in cash. so they are only willing to purchase loans at low prices. In the less prudent scenario. which then goes about recovering the loans from the borrowers and in the process. As the Economic Survey puts it: “Asset reconstruction companies have found it difficult to resolve the assets they have purchased. Then.400 crore of capital. Like in case of bad banks. banks have been unwilling to sell them loans on a large scale. what is the way out of this mess? The Economic Survey recommends the good bank-bad bank strategy. that is the way it is supposed to work theoretically. In the least prudent scenario. they feel that the public sector banks would require around Rs 9.300 crore of capital. The trouble here is that something like this has been tried and it hasn’t worked. In what they call the extremely prudent scenario.53. The government clearly does not have this kind of money. The trouble is that given the slow pace at which the Indian legal system works.2 The point is that a lot of money is going to be needed to recapitalise public sector banks in the years. It essentially involves moving all the bad loans to one big bank and in the process cleaning up the banks.sector and private sector banks’ suggests higher numbers. in 2014 the fee structure of the ARCs was modified. the bad bank will also have to go about Of Public Sector Banks. As a result. makes a profit. the asset reconstruction companies haven’t really been able to recover assets from defaulters at a fast pace. sales have slowed to a trickle: only about 5 percent of total NPAs at book value were sold over 2014-15 and 2015-16. Narendra Modi and Suit. Since then. to come. a bank sells its bad loans to an asset reconstruction company. Banks have tried to sell their bad loans to asset reconstruction companies.

Narendra Modi and Suit. Boot Waali Sarkar . about 33 of the top 100 stressed debtors would need debt reductions of less than 50 percent. and that would need a lot of money. the governments will have to recapitalise the banks in this approach. It will basically tell big business that it makes sense to borrow a lot of money from the public sector banks. But the biggest difficulty with this approach is that the it would allow the opposition parties. to revive the suit. this is also because of the fact that the industry is also not in a mood to borrow. against the Modi government. and rightly so. And I think prime minister Narendra Modi wouldn’t want anything like that to happen. One impact of this mess has been the fact that banks are not lending to business and industry. Between December 2015 and December 2016. So where does that leave us? As is clear by now. The disadvantage is the moral hazard it would create. when Lehman Brothers.3 per cent.” With a portion of the loans written off. bank lending to industry has contracted by 4. given that he is already facing a tough time with the demonetisation self-goal. the public-sector banking system in India is in a big mess. the government will come to your rescue. Also. And there isn’t much hope there. Another way to resolve the logjam is to let the banks take a haircut on the debt that they owe to these stressed borrowers. They can start from a clean slate. the banks can start lending again to corporates. and no less than 57 would need reductions of 75 percent or more. given the mess their 35 | Of Public Sector Banks. Also. These industrialists have access to the best legal minds in the country and are also known to be close to politicians across the political spectrum. went bust. As the Economic Survey points out: “Based on the data for the year ending September 2016. The government clearly does not have that kind of money. That’s the big advantage of this approach.go about recovering bad loans from defaulters. 10 would need reductions of 51-75 percent. it is worth noting here that the recovery will have to be carried out from some of the biggest Indian industrialists and not the pan shop across the road. the fourth largest investment bank on Wall Street. if you cannot repay it. And the solutions that are available would involve the government spending a lot of money. And in the end. Of course. Something similar happened when Wall Street banks were bailed out in the aftermath of the financial crisis which started in September 2008. boot waali sarkar jibe.

To conclude. 2016 Of Public Sector Banks. we will continue to follow this story. Allen Lane. if India has to continue growing at greater than 7 per cent per year. in the time to come. 2. Even if it continues to own the top five or six banks. If we are around. The Rise and Fall of Nations—Ten Rules of Change in Post-Crisis World. NYU Stern School of Business. V Acharya and KV Subramanian. that should be fine. try selling it and see if it works.balance sheets are in. These banks can be used to a large extent to run the social agenda of the government. let’s see how this plays out in the years to come. If it does. As Ruchir Sharma writes in The Rise and Fall of Nations: “Spend a lot of time in the field and it is all too easy to find evidence that the state is not a competent banker. 2015. R Sharma. But the advantage in favour of the government is that it owns more than 20 banks and it can start small with one of the smaller banks. Narendra Modi and Suit. this will not be easy by any stretch of imagination. Project Report.”3 Of course. There is no reason that the government needs to run more than 20 banks. ------------------------------------------------------- 1. State intervention in banking: The relative health of Indian public sector and private sector banks. then it can gradually try moving towards the medium sized banks. Indradhanush Press Release. Boot Waali Sarkar | 36 . But this issue must be sorted out. I think the only way to sort out this mess is for the government to gradually get out of banking and let the private sector settle the mess. 3.

com 37 | Why India has Sick Companies But No Sick Promoters . banks and regulators make the concessions that are necessary to keep it alive. The firm and its many workers. And if the enterprise regains health. he is contrite and desperate to show that the lender should continue to trust him with management of the enterprise. The reason is obvious. the then governor of the Reserve Bank of India (RBI). banks should be happy they got some of their money back! No wonder government ministers worry about a country where we have many sick companies but no ‘sick’ promoters [emphasis added]. said in a speech: “… [Across] much of the globe. Source: selensergen/www. when a large borrower defaults. I discuss this very important issue which rarely gets discussed in the pink press. as well as past bank loans. the promoter retains all the up-side. Raghuram Rajan. In this edition of the Letter.… The promoter threatens to run the enterprise into the ground unless the government. are the hostages in this game of chicken. Why India has Sick Companies But No Sick Promoters . too many large borrowers insist on their divine right to stay in control despite their unwillingness to put in new money. forgetting the help he got from the government or the banks – after all.istockphoto. In India. which basically says that India only has sick companies.By Vivek Kaul In November 2014. The pink press is financed by businessmen who advertise and not the readers who read it. it does not have sick promoters.” Please pay attention to the italicized part in the last paragraph.

2016. But it does have a chart that I have reproduced as Figure 2.) The top 100 large borrowers accounted for 22.5 per cent of the loans.” (GNPAs = gross non-performing assets. As the Financial Stability Report of June 2016 points out: “[The] top 100 large borrowers (in terms of outstanding funded amounts) accounted for 27. Take a look at Figure 1. There was a sharp increase in the share of [the] GNPAs of [the] top 100 large borrowers in [the] GNPAs of all large borrowers from 3. The Reserve Bank of India categorises large borrowers as borrowers with an outstanding loan amount of Rs 5 crore or more.4 per cent in September 2015 to 22. even though they had taken on only 56. The Financial Stability Report for December 2016 does not give detailed data for large borrowers.3 per cent in March 2016.3 per cent of the bad loans of all large borrowers. Such borrowers are largely businessmen and industrialists.9 per cent of credit to all large borrowers…. It is interesting to see how things look for the largest of the large borrowers. Figure 1: Source: RBI Financial Stability Report December 2016 As of September 30. or bad loans in common parlance. Why India has Sick Companies But No Sick Promoters | 38 . the large borrowers were responsible for more than 88 per cent of bad loans of banks.

A restructured loan essentially implies that the borrower has been given a moratorium during which he does not have to repay the principal amount.. setting aside money for it). They were basically restructuring these assets in order to avoid recognising them as bad loans. In some other cases. Figure 2: Source: Financial Stability Report December 2016 It is clear from Figure 2 that top 100 large borrowers form around 22-23 per cent of all bad loans of scheduled commercial banks though they form only around 15 per cent of the total loans given by these banks. the tenure of the loan has been increased. The other interesting thing is that between March 2015 and September 2016.e. In some cases even the interest need not be paid. it has to start provisioning for it (i. 39 | Why India has Sick Companies But No Sick Promoters . What this tells us is that banks were earlier kicking the can down the road by not recognising the bad loans of the largest borrowers as bad loans. the total amount of bad loans of top 100 large borrowers as a portion of the total amount of bad loans of banks has gone up dramatically. The restructuring game has now stopped and the banks have been forced to recognise bad loans as bad loans. The moment a bank recognises a bad loan. This is prudent accounting.

it can set the losses against the prudential provisions it has made.” For the period between 2012 and 2014. who are primarily large borrowers (read businessmen and industrialists with political contacts). the bank can write back provisioning to profits. *Data taken from a report in The Indian Express (Available at: http://indianexpress. And how are banks doing on this front? The recently released RBI Report on Trend and Progress of Banking in India in 2015-2016. If the losses do not materialise. It is accompanied by provisioning. said in a February 2016 speech: “If the bank wants to pretend that everything is all right with the loan. the bank does not have to suddenly declare a big loss. Only once the RBI cracked down on the banks and forced them to recognise bad loans. As the then RBI Governor. the next step in the process is to recover these bad loans from defaulters. Thus the bank balance sheet then represents a true and fair picture of the bank’s health. Take a look at Table ing-and-finance/non-performing-assets-bad-loan-recovery-by-banks-only-gets-worse-in-four-years-4456317/) Why India has Sick Companies But No Sick Promoters | 40 . did not reflect the financial mess that they were in. Once the banks have been forced to recognise bad loans as bad loans. as a bank balance sheet is meant to. the balance sheet of Indian banks. which ensures the bank sets aside a buffer to absorb likely losses. Table 1: Source: Report on Trend and Progress of Banking in India in 2015-2016 and The Indian Express. Loan classification is merely good accounting…. the true financial picture came forward. provides the answers. it can only apply bandaids – for any more drastic action would require NPA classification. in particular public sector banks. If the losses do materialise. Raghuram Rajan.

Compare this to the fact that public sector banks made up for around 70. Given that large borrowers and very large borrowers (the top 100 of the large borrowers) form a bulk of the bad loans. In 2014-2015. What all this tells us is that the public-sector banks are not able to do a good job of recovering the bad loans from those who have defaulted. It basically explains as Rajan said why India has sick companies but no sick promoters. 2016.8 per cent of the total loans given by the scheduled commercial banks as on March 31.3 per cent.3 per cent of the loans being recovered. loans from public sector banks made up for 91. The rate of recovery has fallen from 22 per cent to 10. This isn’t surprising given that public sector banks make up for bulk of the bad loans. it means that crony capitalists are still getting away with it. Table 2: Source: Report on Trend and Progress of Banking in India in 2015-2016 The recovery rate of public sector banks on the whole is similar to that of the scheduled commercial banks as a whole. What Table 1 clearly tells us is that the rate of recovery of loans by banks has fallen over the last four years. Even after defaulting on bank loans. Indian business promoters continue to live a lavish lifestyle. it is easy to conclude that the banks aren’t able to go about recovering bad loans from these borrowers.4 per cent. As Rajan had put it in a speech: “The reason so many projects are in trouble today 41 | Why India has Sick Companies But No Sick Promoters . this figure fell to 86. which are at the heart of the bad loans mess? Take a look at Table 2. A low recovery rate essentially means multiple things. How do things look in case of public sector banks. First and foremost. In 2015- 2016.

Secondly. this once again shows why the business of the government should not be business. This means that the government will have to keep pumping money into these banks to keep them going. so there really is no cushion when bad times hit. Why India has Sick Companies But No Sick Promoters | 42 . And thirdly.” The money that a promoter siphons off from the bank he borrows from. and most importantly. And some promoters find ways to take out the equity as soon as the project gets because they were structured up front with too little equity. sometimes borrowed by the promoter from elsewhere. public sector banks will continue to lose money. with very low recovery rates. helps him continue living a lavish lifestyle after defaulting on the loans.

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