The stock market is on an overdrive; the govt should cash in: Mint, 27th July 2021

 https://www.livemint.com/opinion/online-views/the-current-stock-market-craze-should-not-be-wasted-11627318495074.html

The Learning Curve | Book Review – Skill It, Kill It: Up Your Game by Ronnie Screwvala; Financial Express 25th July 2021

 Skill It, Kill It, as the title suggests, is a book that tells you how to use your skills to further your career and do well in life. But Screwvala has a twist here, as he talks of soft skills that are needed to mould your career. This is an interesting take because rarely do we think seriously about this issue. Often, we like to be known as being the best in running a business or starting a new venture or being a wiz in trading. But are we good in these finer skills, which actually give us an edge?

This is what Screwvala explores based on his experiences. The book is a good read, and you must ask yourself the questions that he poses in every chapter. Do you follow the rules or are you like others? This matters, as we can differentiate ourselves following these soft skills tips. Like when he tells us that you should never interrupt a person who is talking—which we often do as we think we know what the person wants to say—as we could be missing out on a lot.

Another intuitive example given is of an interview, where the interviewer asks at the end if one has any questions. We tend to go prepared with the queries, but the ones who stand out are those who question the content of the interview, which shows their involvement.

It is these skills that he puts in this book which make it interesting. Being from the media, he evidently has panache in putting across ideas. He quotes several leaders in the book, including Sanjeev Mehta, Harsh Goenka, Kiran Mazumdar Shaw, Amitabh Kant, etc. They have their own takes on these skills and give several examples of their lives.

One skill that stands out is communication. This is very important in business life, and both written and verbal skills need to be honed. Being to the point and not pushing it too much while speaking is important, given that the other person needs to know what we are driving at. Some leaders are very good when executing, but are not able to communicate with their teams and, hence, are not successes with people, which finally matters the most. He guides as to how we should communicate in groups, whether it is a small team or a townhall. Telling stories is important to keep people engaged as everyone likes to hear a good relevant tale. Personal experiences help a lot here to drive home the point.

Screwvala admits quite frankly that he was not a great success in academics, but was determined to succeed and never took reverses negatively. Losing money when he held his first rock concert actually egged him on to take on more ventures, and his experiences with TV channels, which we are all familiar with, are resounding success stories. He has little tales to tell us why successful people do not whine all the time and uses Shah Rukh Khan’s example. While shooting for Swades, he went through a lot of physical discomfort shooting in a village. Ask yourself how often do we keep cribbing in our offices, instead of focusing on our careers. That’s how we miss several opportunities with negativity.

He uses Vijay Shekhar Sharma’s example of a non-metro person who has achieved as much as his urbane counterparts just through hard work and dedication to one’s life goal. The message is that we don’t have to be English-speaking and convent- or public school-educated to excel. Often, employers prefer a non-urban candidate with all other things being equal as it is believed that a person who has struggled with disadvantages will turn out to be a more effective worker.

Another interesting issue he tackles is work-life balance. This is something which comes up regularly when we do a self-assessment. Here, his take is that you need to ask yourself if doing what you do charges you or drains you. The answer is there then for one to pick. If work really excites you, one will never feel that there is something amiss, while if it sucks, then it will. This makes a lot of sense, and one should ideally not be counting hours on what one is doing as long as one enjoys it.

Yes, life is changing and unless one is in a public-sector job, one can’t be sure of certainty. In this world, one has to continuously reskill and adapt to the changes and, hence, learning is a continuous process. This is what we have to do, and it is really up to us. Those who get left out are the ones who have not been able to learn. We can look for mentors to guide us, but have to ensure that they do not become crutches.

This is a very readable book that you can identify with. It is based on first-hand experiences and there are no references, which at times can get odious. This is straight from the heart and should be read to identify self-weaknesses and correct them. You don’t find this in any course in school or college, and this book guides you well.

Skill It, Kill It: Up Your Game

Ronnie Screwvala
Penguin Random House
Pp 165, Rs 299

Baby steps forward in divestment process: Hindu Business LIne: 21st July 2021

 

With Department of Public Enterprises under Finance Ministry, decision-making will improve — provided the roadmap is clear

Shifting the Department of Public Enterprises to the Finance Ministry is logical which should be a win-win for the government. The Department for Investment and Disinvestment (DIPAM) is already under the Finance Ministry which makes transferring the DPE under this umbrella more effective.

One of the Finance Ministry’s big plans is to monetise assets of the PSEs and a prerequisite for this is the quality of the asset. The Finance Ministry can now have better coordinate with DIPAM and DPE. When there is a bureaucratic set-up with several Ministries and different echelons of power, the rules must be adhered to.

The disinvestment and asset monetisation plans are premised on leveraging the PSEs and making them more attractive for potential buyers (disinvestment) and investors (monetisation). The starting point has to be changing the way they work so that the loss-making units are able to turn around. The Finance Minister had already announced in the Atmanirbhar package last year that PSEs would be categorised and dealt with accordingly for disinvestment and this move is probably one of the first steps that will be taken.

Simultaneously, the Ministry has to find answers to several questions that have come in the way of carrying out a successful disinvestment programme.

Five top issues

There are basically five issues here. First, the basic issue of ideology has to be addressed; whether or not the government is willing to let go of the enterprise. As long as there is vacillation, the programme will remain stuck. It does look like that for some of the PSEs the government is firm which is encouraging.

Second, when dealing with loss making PSEs, it needs to be evaluated whether they should continue to operate or close down. Often, they cannot be closed because of labour issues. Selling such unviable units is difficult as there would not be any buyers for them, so either all the staff should be paid off or they must be absorbed into other units.

As these are PSEs, layoffs should not be the option. But taking a decision is important because it can then fit with the asset monetisation plan of the government. The longer the sick units are persisted with, the greater will be the erosion in their intrinsic at the time of monetisation.

Third, the debt of enterprises has to be addressed. Air India is the most glaring case where the debt can be a deterrent for a prospective buyer (around ₹38,000 crore in March 2020). Ideally the debt should be taken over by a government SPV and serviced and repaid through the Budget. Otherwise getting a buyer to take it over would be a challenge.

Fourth, it remains to be seen if the new set up allows bold decisions to be taken relating to sale of the company if market conditions are not good. Currently, markets are doing well, and the valuations will be competitive. But this may not always be the case. An approved policy has to be in place which should be implemented or else waiting for the right price can prolong the process.

Fifth, under no circumstance should PSUs be made to cross-hold in others as a compromise. Insurance companies and oil companies are the ones which are normally made to do so. Their surpluses anyway go to the government and there is no need for such indirect transfers. This concept has vitiated the entire process where the receipts increase but the entity remains with the government.

Asset monetisation

The second prong of the government is the asset monetisation plan. Here it must be made clear that the benefit from the sale of a PSE asset or government entity would not accrue to the Budget unless it is a government department which owns property and leases it. Therefore, roads owned by the NHAI when sold in any which way would mean income accruing to the company, and not the government.

Asset monetisation can be looked at in the form of sale or lease of land and sale of projects that are either ongoing or in the process of being completed. The former is a direct transaction where land or building owned by the PSE is sold or leased out to an outside party which provides a stream of income. This is a long haul as under the present conditions there may not be too much demand given that the pandemic has led to the WFH culture which obviates the need for space expansion for most companies. Hopefully here again it should not be other PSEs shifting their operations to the locations of the targeted PSE.

Road projects

The monetisation of road projects is however a potential revenue earner. A toll road which is profitable can be sold through the infrastructure investment trust route (InvITs). Here a mutual fund kind of structure buys these projects and sells the units to investors that will include a retail segment too. The gains can be had on the returns as well as appreciation in the value of the units.

Power Grid Corporation has launched such a scheme. Intuitively, a wide cross section of such assets can be monetised like power lines, railways stations, roads, etc.

A similar model can be followed for lease of land where land parcels or these lease rights are combined by the trust (REITs) and sold as units to investors through securities thus spreading the investor base.

The irony here is that theory says that the government should be in sectors which involve high investments as the private sector interest is limited. The corollary is that the government should move away from commercial activity like metals, engineering, chemicals, etc.

But the system of disinvestment and monetisation is counter to this theory because it has become easier to get something from infrastructure while it is hard to sell commercial activity due to legacy issues which have been handed down the ages.

Making independent directors truly independent: Financial Express 20th July 2021

 Making independent directors truly independent

By: Madan Sabnavis | 

July 20, 2021 5:00 AM

A ratings-based algorithm that recommends potential independent directors to companies can help

The problem is that, very often, there is incentive to control the board, especially when the company is promoter-driven or the management (specifically, the CEO) is ‘larger than life’.

The issue of independent directors (ID) always comes up for discussion, since Sebi is working tirelessly to improve the quality of governance in the corporate sector. IDs have a very important role, being independent and not guided by the wishes of either the promoter or management. Sebi’s recent directives of getting three-fourths of shareholders to approve ID candidature and have IDs make up two-thirds of the NRC and AC membership are steps in this direction.

The problem is that, very often, there is incentive to control the board, especially when the company is promoter-driven or the management (specifically, the CEO) is ‘larger than life’. Therefore, the issue is not seen only in the promoter-driven company, where the ‘part owner’ assumes full ownership by virtue of starting the enterprise. IDs appointed are often not allowed to really express their views, and if they do have contrarian opinions, they are likely to be replaced. Whenever we hear of IDs resigning for personal reasons from such companies, it is usually a euphemism for not being wanted.

A widely-held public limited company has thousands of shareholders and several institutions which never really meet. Hence, while all the rules say that the AGM should ratify appointments of IDs, the actual attendance is too low to make a difference. This is where the institutional shareholders can be managed by the management (including promoter). The individuals actually don’t matter and those who turn up for the meetings can be outnumbered in case of any protest. Institutions often don’t like to get involved with the running of the company as they are passive investors and can easily be convinced to vote or desist from voting. If the institution is a PSU, the job becomes easier because the lobbying happens directly in New Delhi. Therefore, the entire scenario is quite well staged if these decisions have to get shareholder support.

There is also the issue of how competent the IDs are. Most candidates have perfect credentials having worked in the corporate sector or academia or the bureaucracy. Do they know about the business (often, they could be on multiple boards, companies ranging from banking to machine tools to chemicals)? Often, it has been seen that people in power, on retirement, join companies as IDs; this begs question on good corporate governance as some could be involved in symbiotic dealings in the past.

These issues can be addressed, but we need to think differently. First, to test whether an individual is a good fit for the job, there needs to be some sort of rating or grading for all aspirants. Taking exams, which is the norm now, partly helps. But a rating can be a good signal. It would cover both competence and suitability. SEBI can approve the criteria used. The performance of the ID on other boards will be a part of this exercise. To start, there can be disclosures in annual reports about IDs’ participation, quite like how there is tabulation of the number of questions asked by MPs in Parliament.

However, this rating becomes an integral part of an algorithm that is run when deciding on IDs for a company. It will consider various aspects of the company: size, product, age, ownership, etc. As the complexity increases, the selection becomes more rigorous. This completely rules out the case of powerful management or promoters getting in their own people on the board. Any company looking for an ID makes an application, and the algo would throw up some names that can then be put before the NRC of the company, provided the candidate is agreeable to the company.

Hence, only the short-listed candidates would be independently decided. The advantage is that once the ID joins the board, there is no way the person can be pressurised as the term is fixed. It also opens the doors for providing better remuneration, which has to be part of the package for them to show effective interest.

Retail G-Secs are cool but who wants them anyway? Mint, 16th July 2021

 https://www.livemint.com/opinion/online-views/gsecs-could-attract-more-shrugs-than-retail-investors-11626364291344.html

What 4 years of GST has taught us: Mint 7th JUly 2021

 https://www.livemint.com/opinion/online-views/what-four-years-of-gst-have-taught-us-about-this-tax-regime-11625587888545.html

FX reserves strong enough to absorb shocks: BuisnesslIne 28th June 2021

 

But the RBI, in its urge to maximise returns, should not invest the forex reserves in risky market instruments

India today has above $600 billion in forex reserves which is an all-time high number. How good is it really? In terms of hierarchy, India now has the 4th or 5th highest reserves, competing closely with Russia (China, Japan and Switzerland have higher assets). It would take time for India to cross the $1 trillion mark and hence we would be 4th as of today with Russia slightly lower but having the advantage of oil which can push it higher in future. But $600 billion is a very healthy number.

How should these reserves be benchmarked against? The normal metric used is the number of months of imports that are covered. Here the Indian metric is quite impressive at 18 months going by FY21 imports of $392 billion ($32.6 billion per month. As FY21 was unusual, if the same is reckoned over FY20 when imports were $ 474 billion, the cover would be 15 months. The highest imports reckoned by India was in FY19 where the cover would be 14 months.

India has historically had a favourable import-cover ratio with the number being less than 10 between FY11 and FY15 and again in FY19. Therefore, import cover is not important.

Another metric that can be used is the forex reserves to external debt ratio. This is important because at times countries build forex reserves by seeking recourse to large external borrowings — the ECBs. As money is cheaper in the West, companies borrow quite aggressively in the market. This can be sticky in case the levels are high.

On this metric, the forex reserves look less exciting as the multiple was as high as 1.07 in FY10 but has been less than one since then and was at 0.76 in FY19 and rose to 0.85 in FY20. (While FY21 data is not yet available, it looks like that it will cross one again this year as outstanding debt was $563 billion in December 2021 and ECBs were less attractive this year).

But debt should not be a problem as normally the repayments are staggered and with borrowings continuing, there will be inflows countering the same. In the last 10 years, the highest net outflows were in FY17 at (-) $7.6 billion. Therefore, such a threat is not really likely.

The other component that can be a problem is FPIs, as FDIs are always positive and the former is considered to be fickle. In FY16, they were (-) $3.5 billion and hence quite low. Therefore, again it looks unlikely that this can be a major concern in terms of a run on the forex reserves.

Current account deficit

The last factor that can cause concern for the central bank is the trade deficit and hence the current account deficit. Here it will be useful to see if the reserves have fallen sharply in any year. Data from 2001 onwards suggest that there were four years when forex reserves declined. The highest was $58 billion in FY09 and $12.5 billion in FY19.

In FY12 and FY13 there were declines of $10.4 billion and $1.7 billion respectively. During these two decades, there were pre-emptive steps taken by the RBI like the swap facility in 2013.

All this data show that our forex reserves are very strong at over $600 billion and there is really no fear of a severe shock. Even a $100 billion decline can be absorbed quite easily. This is why there is the opening of a discussion on the RBI investing in instruments that give higher yields.

Presently, the structure of our foreign currency reserves is quite well defined. Over time the share of securities has increased from around 50 per cent in 2010 to close to 73 per cent in 2020. Share of deposits with other central banks and BIS has almost halved to around 25 per cent in 2020. Deposits in overseas branches of commercial banks has ranged between 5-7 per cent.

The securities part has caught the attention of economists who argue that the yield can be increased by investing in private bonds. As long as the West pursues QE (quantitative easing), the yields will remain depressed, and the RBI Annual Report shows that the average return came down from 2.65 per cent in FY20 to 2.10 per cent in FY21.

As of June 11, the forex reserves of $608 billion had foreign currency assets of $563 billion or ₹41.14 lakh crore. Intuitively, a 100 bps (basis point) additional return would be around ₹41,000 crore. Such a gain will be useful for the government as the sum is added to the surplus of the RBI, which moves to the Budget.

Safety first

The fundamental question now is whether the central bank should be involved in treasury operations? There is a risk involved and the RBI has been exhorting companies to hedge their forex risk. In that case, logically, the RBI has to get into hedging the same if it invests in corporate bonds. Central banks don’t have business acumen, though admittedly hiring professionals from the market can fill this lacuna.

The job of a central bank is to ensure safety of the financial system and it cannot be seen taking risk in the market merely because returns are higher. Just think of a situation where the RBI invests in bonds issued by blue chips like Google or Facebook and there are litigations somewhere in the world which affect their yields.

This can have a ratchet effect in Indian markets once it is known that the RBI’s investment valuation has changed. Therefore, central banks as a rule should not be taking any risk. Even the securities that are invested in are in the AAA rated sovereigns and not the lower rated ones which could give higher returns.

No doubt our forex reserves are strong and there is no threat of a shock that can cause disruptions. That said, the RBI should be conservative in their deployment and not take any risk to maximise returns.

Book Review — How to Make the World Add Up: Ten Rules for Thinking Differently About Numbers by Tim Harford: Financial Express 4th July 2021

The months since the pandemic began have been a puzzle when interpreting various data on Covid, be it tests, infections, deaths, vaccine efficacy and side effects and so on. Media reports spin a new story everyday, which often evokes the fear element. That is the problem with data and interpretation. Mood swings can be driven by how we see such data that generally works on the negativity instinct. Therefore, you need to “step back and enjoy the view”. This is one of the 10 rules put forward by Tim Harford in another entertaining book on how to look at data or the caution to be exercised when interpreting it.

Presentation of data is not just tricky but also dangerous in some countries, as Harford shows us. In Tanzania criticising official data is a criminal offence. Graciela Bevacqua of Argentina was asked to show low inflation in 2007 and non-compliance meant getting the sack. In 2010 Andreas Georgiou of Greece was forced to show a lower fiscal deficit and when he came up with a number of 15.4%, he was removed from the statistics department. Another principle of Harford here is that “don’t take statistical bedrock for granted”. We in India will feel closer to this rule as all the data on employment, revision in methodology of calculating GDP and so on has ignited similar debate.

The problem with statistics is that it can prove anything. Early on it was found that countries that had high population also had large number of storks and hence the two were linked with causality. Then this was dismissed as being nonsense. The same negative argument was used to say that merely because a large number of smokers were detected with cancer, it did not prove anything. The tobacco lobby now had a strong argument on their side!

It is with these stories and examples that Harford takes us through the pitfalls of drawing conclusions based on data. At times we feel emotionally strong toward something and are plagued by the ‘ostrich effect’. Can one think of the most common example? Yes, it is the stock market. When markets boom, we refuse to believe that there is anything amiss in Covid times and find some rationalisation for the new highs, as experts tell us things will get even better. It is hence quite weird that an entire market can be interpreted in this manner as we are seeing today, to the extent that everyone believes these movements and it becomes self-fulfilling.

Often, we have surveys or experiments that are carried out and then generalised, and this holds for several trials of medical or even electronic products. Or for that matter even unemployment surveys, which are sample-based and then blown up to explain the universe. As evidently the samples cannot be more than half per cent of the population, we need to ask the question “what if someone is left out from this exercise”. This, according to the author, is important as often it is the entire female population that could be left out from the survey or experiment, which is normally the case with any such trials. The same can hold for children or the differently-abled and responses tend to be skewed. While we need not reject the findings, they may not be taken at face value.

Another rule that Harford puts across is: misinformation can be beautiful. This we can see when we look at company or government presentations when charts are shown in a selective manner and worded carefully to show facts without disclosing the truth. Using the right scales and pictures and focusing on a few achievements, the message conveyed can be very different from the true state of the country or company.

Even computers and algorithms can be misleading and there have been cases in the USA where they have supposedly scored over clinical research in terms of predicting the spread of influenza. By using Google to track the number of hits which search for pharmacies or information on the flu, programmes have been able to predict the spread of disease in specific locations. Fascinating as it may sound, these algos have limitation in the sense of not being able to read the mind through such tracking. Hence there have also been instances of false reporting, as a search may be out of curiosity rather than being afflicted by the disease, as has been the case with the Covid pandemic.

At a personal level he warns us to keep an open mind and not be dogmatic on our views on data movements. Here he gives the example of the genius economist, Irving Fisher, who made a lot of money predicting future events but refused to change his view as the Depression set in and lost his entire wealth and became a big debtor! This was the result of being dogmatic in views.

It is true that we live in a world where there is a plethora of data that is being thrown at us to show that things are really great. The language and data point to show that the Indian economy is recovering from the pandemic is not very different from what we saw in the USA before the presidential elections. This is where Harford’s 10 rules can help us sieve the cloud of noise and see the true picture.

That’s why he ends the book by saying that we have to constantly remain curious because often “we think we know which we don’t” and this frailty is used by the purveyor of information to drive home the messages that may not be right.

How to Make the World Add Up: Ten Rules for Thinking Differently About Numbers
Tim Harford
Hachette
Pp 338, Rs 699

The economics of loan guarantees; Financial Express 2nd July 2021

 

The economics of loan guarantees

By: Madan Sabnavis | 

July 02, 2021 5:00 AM

The Centre’s credit guarantee scheme pushes down the interest rates on savings as also PSBs’ interest income

Now, guarantees have been going out of fashion in line with FRBM, and states are being told to lower these when supporting state PSUs.

The concept of credit guarantee by the government, on loans given by commercial banks, is as close as it can get for a link to be established between the sovereign and private borrower. As borrowers tend to be small—SMEs or tourist guides or MFIs—it is a unique way of supporting flow of funds. This has been actively followed by the government as part of Covid relief, and opens the doors for more such inclusions as these are blanket guarantees.

How does the economics of this look? The government spends nothing on such loans as it is a contingent liability. The Centre offered Rs 3 lakh crore last year and another Rs 2.6 lakh crore this year (total Rs 5.6 lakh crore). As of FY20, the latest for which data is available, total outstanding guarantees of the Centre were Rs 4.7 lakh crore, with incremental guarantees being Rs 20,000 crore. This was before Covid. Now the amount will be more than double. Outstanding debt as of FY22 would be Rs 136 lakh crore, which means that these new guarantees will be around 4% of total. But this will be a fiscally neutral position and will have an impact only if there are defaults and the government has to step in.Now, guarantees have been going out of fashion in line with FRBM, and states are being told to lower these when supporting state PSUs. This is why we had the UDAY scheme for discoms where states were asked to transfer such debt on to their books rather than shield through this curtain. The pandemic has led to a U-turn when it comes to off-balance-sheet items. The Centre had, in the FY22 Budget, sought to get more transparent with FCI transfers by including the amount in the Budget. But, these unusual circumstances have justified such an action. The government, however, needs to put in place a rule on guarantees so that they don’t become a habit.

The other important thing about guarantees is that there is a cost involved on the commercial side. The government has fixed the ceiling interest rate on all these loans, which can range from 7.95% to 9.25% (SMEs). This is below the market rate that can be 4-5% higher for MSMEs. This is good for the borrower, but what about the bank? If Rs 5.6 lakh crore is being disbursed at a rate of 5% lower than normal rate, the loss of income for banks would be around Rs 28,000 crore. This is one of the reasons why banks continue to pay lower interest rates on deposits as there are too many compulsions imposed as part of the government’s social/welfare policy.

Ideally, this should have been done as an interest rate subvention, which is the case with farm loans. But, here, it appears the government saves Rs 28,000 crore on the revenue account, which gets reflected in lower interest income for banks for a period of at least three years until the amount is repaid. This is a big burden to PSBs which are just about getting up.

What about repayments? Most of these loans have/are being given for three years (plus moratorium), which means that the quality of the asset will be standard until such time they come for final repayment. It will be interesting to see how the mechanism works because, with an average NPA ratio of 10% in this segment in the past, there could be progressive claims from the government on interest and principal payment. The fact is that if a tourist operator or an MSME is unable to operate, there is no wherewithal to support repayment schedules.

The missing link is the appetite for funds and the willingness to lend. Banks will still cherrypick customers, while borrowers won’t overleverage merely because there are cheaper funds with a guarantee. The economy has to turn first before this becomes attractive. Loan guarantees, on their own, may not be able to provide momentum for this growth.

Did assembly polls fuel the spread of the pandemic? Free Press Journal 2nd July 2021

 There were elections held in four states and a Union Territory while in Uttar Pradesh, panchayat polls were held in the same period. At that point, none of the parties cared much about safety and rallies were held, as they would have been in pre-Covid years. However, once the results were out, there was a battle cry for lockdowns. Such schizophrenic behaviour is not unusual in India

When the assembly elections were held in April it did appear quite ludicrous, as rallies led to people flouting social distancing norms. There were elections in four states and a Union Territory while in Uttar Pradesh, panchayat polls were held in the same period. At that point, none of the political parties cared much about safety and rallies were held, as would have been the case in pre-Covid years. However, once the results were out and the new governments were in place, there was a battle cry for lockdowns and people were not allowed to move out. Such schizophrenic behaviour is not unusual in India.

This was also the time when the Kumbh Mela was in progress in Uttarakhand. When the rallies were on, politicians argued that the virus would not spread because of such gatherings, as Maharashtra and Karnataka were two states which had the highest caseloads, despite not having held any election rallies. As over nine weeks have passed since the results were announced, it would be interesting to see how the caseload has moved over time.

Timeline of cases

Three points of time have been chosen – April 9, May 2 and June 23. Some interesting facts follow from the data on aggregate caseloads. Maharashtra has the highest caseload, accounting for nearly 25 per cent of the total of 130 lakh cases in April. By June, the total number of cases increased to 300 lakh but Maharashtra’s share came down to 20 per cent.

The states that were poll-bound could be looked at next. The four states - Tamil Nadu, Kerala, Assam and West Bengal showed a decline in April while the numbers for the Union Territory of Puducherry remained constant in May. However, post-results, the caseload increased in all five regions, strengthening the link to the violation of social distancing norms during elections.

The same was seen for Uttarakhand too, with the number of infections increasing and the share going up at a gentle pace. Karnataka and Andhra Pradesh had also witnessed an increased share as the second wave was quite widespread. But Gujarat, MP and Bihar witnessed a decline in share in the post-May period.

The exception was Maharashtra, where the share came down in both the periods. But then it could be argued that the virus originated in this state and then spread to the others and hence the damage was done in April itself. In the case of Uttar Pradesh and Delhi, April was an unfavourable month, but post-May, there was a decline in their respective shares. In fact, post-May 2, the three southern states had a share of almost 12 per cent each in incremental infections, just lower than that of Maharashtra, which was at 12.6 per cent.

Infections up in poll-bound states

Hence, infections increased in election states, though some non-election states also witnessed such setbacks. If growth rates are reckoned over May 2, then poll-bound states and Union Territory fare badly, with Tamil Nadu, Puducherry and Assam, all having above 90 per cent increase. Uttarakhand, West Bengal and Kerala witnessed growth of 75-80 per cent while it was less than 30 per cent for Delhi and Maharashtra and slightly higher than 30 per cent for UP.

The other interesting thing about state performance can be gauged by the death rate. This is quite disturbing, as the average for the country is 1.3 per cent, but states like Maharashtra and Uttarakhand have a ratio of 2.1 per cent. The highest is logged by Punjab with 2.7 per cent, even though the total number of cases was relatively lower, at 5.93 lakhs. This reflects both the severity of the disease as well as the state health structures.

Robust health systems

In this context, Kerala has done extremely well, as with the second highest caseload, the death rate was just 0.4 per cent, which redounds to the credit of the health system. The states of Andhra Pradesh, Telangana, Rajasthan and Odisha have all registered death rates of less than 1 per cent. Once again, Andhra Pradesh had a high caseload but managed to control deaths, which is creditable. Tamil Nadu, West Bengal and Karnataka have a death rate of 1.2-1.3 per cent while that for Delhi is high, at 1.7 per cent.

To conclude, it could be said that the elections did cause an increase in caseloads even while some non-elections states also witnessed an increase. Some states, especially in the south, have robust health systems, which helped mitigate the impact of the pandemic as revealed by the lower death rates.

RBI's Financial Stability Report: A bag of surprises: Busienss Standard 1st July 2021

 Reserve Bank of India's Financial Stability Report is an eagerly awaited report to gauge the health of the banking system in particular and the likely stress situation. The readings from the report are encouraging just like the downward movement of the Covid curve in the country. Contrary to all expectations of NPAs increasing due to the pandemic, the report reveals that they were pretty much under control at 7.5% in March 2021. This should come as a relief to the market as earlier conjectures were in the region of 12-15%.

The other encouraging revelation is that the stress tests indicate that under normal conditions the NPA ratio will increase to 9.8% by March 2022 while the two stress scenarios could push it to 10.4% and 11.2%, respectively. But the stress scenarios look very unlikely as they involve GDP growth slumping to 6.5% or less than 1%. Therefore, one can be confident of the quality of assets being firm even though a flag has been raised by the RBI on the migration in SMA quality. Significantly, in terms of restructured assets, the ratio is just 0.9%, which is low and surprising. Surprising because it was felt that the one-time restructuring exercise that was adopted would have led to several companies exercising this option, which is not the case.

Credit should go to the RBI and banks for managing the situation. The plan of giving moratorium during tough times and rolling back the same has helped to keep things under check. The same holds for classification of NPAs where we are back to normal. Banks too have not gone overboard in lending despite all the schemes, which has actually made NPA ratios in all sectors, except retail, to decline. The slippage ratio which is NPAs on incremental loans is low at 2.5% which gives credit to the banks. Similarly, the coverage ratio at 68.9% has also ensured that banks were progressive here, which has maintained sanity against any future shocks. In a way it can be said to be a true team effort in containing the situation. The lessons of the past has definitely helped banks to be more cautious.

The sectors of concern for NPAs- CGEM (construction, gems and jewelry, engineering and mining) have over 15% ratio while metals, infra, power, textiles, food etc. are in double digits. Chemicals and auto have done well with 5-7% range. Retail is minor concern even though the ratio is low at 2.1% as it should not become a part of the ‘culture’ of not repaying. Hopefully, this is temporary as last year was tough for individuals who were out of jobs and income to service their debt.

An interesting aspect pointed out in the report is that the RBI has actually ensured that the investment valuation did not cause disruption for banks. Normally when there are large investments made in a market where the government borrowed Rs 12.8 trillion, yields should have gone up thus pushing prices down. However, by carefully managing the yield curve with various operations like GSAP and OMOs, banks have been protected against a valuation decline. This is also indicative of the fact that in 2021-22, the picture will be replicated as the yields have been kept down, which means that banks can be comfortable with the investment portfolio.

Last, even the profit ratios look good with NIM at 3.3% and return on assets too in the positive territory. One thing that stands out is that the cost of funds was 4.7% while yield on assets was 7.6% - quite clearly the deposit holder bore the brunt as 2.9% spread looks high by any standard.