Podcast 12th February 2016
Hi I am Arjun Parthasarathy speaking and this podcast is on “Bank NPA’s – Man Made Disaster or Market Made Disaster?”
Its not only domestic banks, European banks too are reeling under threat of bad loans given to energy companies. Prices of bank stocks both in India and Europe have collapsed over the last few months on worries of loan losses. Domestic banks are busy cleaning up their balance sheets under the direction of the RBI while European banks are struggling with potentially disastrous loan losses, litigation on various practices that have defrauded clients and stringent government actions.
Who is to blame for the banking sector woes? Is it the banks or is it the government (in the case of India where majority of banks are state run) or is it the markets? Markets tend to overreact to both good and bad news and in the current case, markets are reacting negatively to the bad loans issues facing banks. Banks, especially European banks have for long used the markets to their favour and in today’s case, banks are facing the brunt of the market wrath. Blaming markets for banking sector woes does not cut ice with stakeholders.
Bad loans have largely come about due to weak economic conditions that have affected the performance of economy dependent sectors such as infrastructure. Crash in oil and commodity prices too have hurt the performance of commodity producers. Sectors such as telecom have seen huge debt piled up due to purchase of spectrum and spending on telecom infrastructure. To some extent, bad loans are due to weakness in both domestic and global economy.
Banks by nature are supposed to manage credit risk and huge exposure to economy dependent sectors is a clear case of failure to manage credit risk. Assuming that economy will continue to do well at all points of time and commodity prices will always stay high is naïve especially given the perception that bankers are smarter than others in identifying risks.
Domestic banks also face the issue of government interference. The government being the owner of the banks, ask the banks to promote economic growth and lend to infrastructure and agricultural sectors where bad loans are rampant.
The bad loan issue of domestic banks is both due to banks failure to manage credit risk and due to government ownership while bad loan issue of European banks is purely the banks doing and management has to take responsibility for the destruction of shareholder wealth.
In all this banking sector disaster, there are many well run banks that are standing tall. Hence its not as if all banks are hit by economic woes.
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