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in

Economics Club
ARTICLE SERIES – 6

Sept 8 – Sept 14 (2019)

 Economics Club
Student loan: the next bubble?
Student debts have risen from $506 B in ‘08 to $1.6 T in ‘19, a 216% increase. Many argue that student debt could be the
next bubble. First, let’s see what a bubble is. It’s a mass runaway delusion about the value of a commodity relative to its
actual worth. It happens when a product or company has a compelling narrative around it without any backing of data.
By that metric, student debts fit the bill. People have misconceptions of the value of higher education & average
expectations of salary are 23% higher than the actual average. There is strong narrative that only route to upward mobility
& respectability is college degree. So, in that case, when can it burst- when college becomes financially unreasonable that
only cash-rich starts going or when government loses the ability to collect?
The problem here is, in case of a bubble to burst, there is a quick unwinding of the debt/stocks & economic factors
underlying it. It can happen with housing crisis or auto loans (repossession & selling assets at a loss). The underlying
collateral in student loans is future earnings. As long as there is earning potential, the ability to quickly unwind it is limited.
Student loan debt bankruptcy is possible but rare. Instead government has mechanisms like the delay of payments or
income-based payment plans that eventually discharge debts in longer spans.
So, the net effect of the student loan crisis might not be a bubble burst, but it will be a slow drag on the economy. 43
million (13% of US population), mostly millennials have student debts. Average tuition costs have increased by 213 % in
the last 30 years, but wages have increased only by 16%. Millennials have started spending less, delaying buying cars,
houses. House ownership by age 30 has declined continuously for last 6 years even in a period of economic growth.
When most of Europe, Japan haven’t been able to push inflation & the US has struggled to reach its inflation target of 2%,
it’s imperative not to introduce another factor that reduces consumer spending. It’s necessary that some regulatory
reforms in the student loan space take place and there is a check on the rise in the costs of education.

Dheeraj Kumar MBA1

 Economics Club
Privatization of PSBs correct answer to ills of Banking sector?
In 1969, the Indian government nationalized 14 large commercial banks with the objective of providing services to the
needy across the country; however excessive state-control has resulted in market inefficiencies and poor lending
decisions by the banks. So, is it time to privatize banks & let market forces prove their efficiency in the allocation of
credit?
Privatization comes under the Reform category of 4Rs in the banking sector - Recognition, Resolution, Recapitalization,
and Reform. The sector is currently saddled with bad loans to the tune of 8 lakh crore as on March 2019. Other
problems such as little accountability of the board of directors and their complacent attitude, improper risk management
strategies, excessive infrastructural and corporate lending, bureaucratic restrictions, and undue political interference
strengthens the case for privatization. People in favor of it opine that reducing state control and political influence in
business decisions will reduce corruption, increase accountability of directors to shareholders, improve decision making,
and hence drive up the profitability.
However, privatization is not a panacea of the ills of the banking sector unless accompanied by reforms in banking
regulations. Even private banks need to be regulated. Firstly, without strengthening regulatory control and improving
governance, undue exposure to risk cannot be controlled. Secondly, it is unclear that how will change in ownership from
government to private hands breed competition and increase efficiency when the total number of players still remain
constant? Thirdly, PSBs have been instrumental in promoting government’s development policies – from rural and
priority lending to infrastructure development.
Though it might be too early to give a final verdict, there does exist a space for discussion around privatization, and the
debate needs to take varied perspective into account.

Kartik Singhal MBA1

 Economics Club
Merger of PSBs
After the merger of Dena Bank & Vijaya Bank with Bank of Baroda, the centre came up with a mega plan to merge 10
more Public Sector Banks (PSBs) into 4 entities. After this exercise India will have a total of 12 Public Sector Banks, 20
odd private banks & 35 foreign banks compared to China’s 136 & Philippine’s 99 large & mid-sized banks.
Banks being Merged Business Value Rank
Punjab National Bank + Oriental Bank of Commerce + United Bank Rs. 17.95 trillion 2nd Largest
Canara Bank + Syndicate Bank Rs. 15.2 trillion 4th Largest
Union Bank + Andhra Bank + Corporation Bank Rs. 14.59 trillion 5th Largest
Indian Bank + Allahabad Bank Rs. 8.08 trillion 8th Largest

The rationale given by the Finance Minister was that the previous merger of Vijaya & Dena Bank with Bank of Baroda
have been successful with a Current & Savings Accounts (CASA) growth of 6.9%, Retail loan growth of 20.5% &
profitability of D710 crores in the June quarter. The merger is aimed at reducing the gross NPAs so that the larger entities
can lend more freely & provide impetus to the slowing economy. The loss-making banks can now be better regulated and
can be brought back to profit-making ways due to their merger with larger banks. It’s also based on the rationale that
Bigger banks can absorb more shocks, leverage economies of scale & need lesser support in terms of recapitalization by
the exchequer.
But all this is just one side of the coin. The metrics used for the merger are not consistent. For example, Andhra and
Corporation banks reduced their NPAs 28.72% whereas Union Bank, the bank they are being merged into could reduce
its NPAs by only 10.31%. So essentially, more efficient entities are being merged into a less efficient entity. Also, these
regional banks like Andhra, Vijaya, Syndicate, and Corporation Bank have a rich culture and located in regions with rising
incomes which could have given them an opportunity to turn their fortunes around. With this exercise India is creating a
cohort of Too Big to Fail Banks which is against the recent experience. We have to wait & see how this will work out in the
future.
Pillarisetti Bhargav MBA1