15 Nov 2011

Has the Debt Tsunami reached India's shores?

I don't believe the Kingfisher Airline saga is as mundane as it is made out to be - because the real pandora's box is not at the airline but at the Indian banking sector, especially the country's largest bank - and biggest lender - the State Bank of India (SBI).

SBI has an exposure of Rs 1,400 crore to Kingfisher Airlines. But that's not the point...

In September 2011, the credit rating agency, Standard & Poor's (S&P) downgraded SBI, and on 9 Nov, Moody's downgraded the entire Indian banking system from “stable” to “negative”, citing the likely deterioration in asset quality.

SBI's Chairman Pratip Chaudhuri had said at the time, “Perhaps they [rating agencies] are stung by experience elsewhere. But otherwise I feel Indian banks are well-regulated. We don't deal in exotic products. Also, the amount of leveraging is low, we do 12-14 times while the best of European banks leverage up to 20 times.”

What is hidden, but implicit, in his statement is that any event that destroys even as little as 1/14th of the assets of an Indian bank will actually wipeout the bank's entire capital base! Because that's what 'leverage' means in finance. One hundred rupees of your deposit in SBI can be 'leveraged' to give out a loan 12 to 14 times that amount to some disfunctional crony corporate client.

Moreover, SBI has been getting into bed illicitly quite regularly with corporate clients lately. An article in Businessline on June 9 notes that SBI has overshot the exposure limits fixed by the RBI while lending to three corporate clients - Reliance Industries, Indian Oil Corporation and BHEL... and exceess overshot the RBI's limit by around Rs2,000 crores on several occasions.

RBI's credit limit is 15 per cent of a bank's capital for single borrowers, and 40 per cent for groups. So how close to a financial abyss is the State Bank of India in reality?

In Europe, greedy bankers, leveraged their capital 20 times (and more), made bad corporate 'investments', whereupon the host nation stepped in to bail them out in the name of saving deposiors' savings. But what it meant was that corporate losses and bankers' bad bets both end up as the national (soverign) debt to be paid by taxing citizens - living and yet-to-be-born!

The Government of India WILL have to allow Foreign Direct Investment (FDI) into the aviation sector in order to save not Kingfisher - but SBI! Because if SBI tumbles, the GoI may be forced to essentially print money in order bail the bank out, both fuelling monetary inflation and perhaps a soverign debt ratings downgrade. Higher inflation will force the RBI to push interest rates up, making it more costly for industries to borrow, causing the economy to slow down further, forcing workforce lay-offs, causing economic hardship... And - well, the kind of social unrest that Europe and the US are witnessing.

With over one-fifth of humanity within our borders, India will just that have to multiply - ok, let's call it, 'leverage' - the unrest by one billion!

But what really shows how obnoxious SBI's actions really is, is the contrast of its 'accommodative' attitude to corporate borrowers with the way they have dealt with individual customers. I'd posted before about SBI's predatory lending practices with hapless customers. I'll conclude with the same words that I concluded that post...

Before I leave, I have a question for ALL bankers: Just how much profit is enough? Seriously, will there ever be a time that you will pull your usurous fangs from the throat of humanity?

Just remember, Mr Banker, that one day when his hungry children are in bed, Mr Humanity will step out of his home holding a torch in one hand and a pitchfork in the other. And in the streets, he may not be alone.

You remember that - and that alone.

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