Archive for February 7th, 2014

How Minsky explains much of the woes of Indian banking sector…

February 7, 2014

It is a pity that a paper which has Minsky’s ideas written all over it, does not have even one reference of the man. In simple terms, Minsky said much of financial troubles brew in good times. Booms are not just a win win and usually troubles follow later:

Minsky proposed theories linking financial market fragility, in the normal life cycle of an economy, with speculativeinvestment bubbles endogenous to financial markets. Minsky claimed that in prosperous times, when corporate cash flowrises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies that can afford loans, and the economysubsequently contracts. 

This slow movement of the financial system from stability to fragility, followed by crisis, is something for which Minsky is best known, and the phrase “Minsky moment” refers to this aspect of Minsky’s academe ic work.

So, this paper by by RBI’s Shashidhar M. Lokare shows how the same thing has been happening in India:

In a bank-based economy, sound health of the banking system is an imperative for efficient financial intermediation in the context of overall development and financial stability. The Indian banking sector has witnessed significant transformation over time and although it weathered the worst consequences of the global financial turmoil, it had to traverse through a challenging macroeconomic environment during the post-crisis period. The asset quality of Indian banks has come under intense pressure and growing scrutiny in the recent times. Against this backdrop, this paper undertakes a critical and empirical analysis to understand the macro-financial linkages and the micro-level sources underlying the asset quality deterioration. This analysis has been carried out using disaggregated time series quarterly data from 2001 to 2013.

The paper finds evidence of pro-cyclicality in the Indian context as reflected in past credit boom-bust episodes as well as economic and interest rate cycles. According to the paper, anaemic external macroeconomic situation that prevailed post-crisis, high inflation and dwindling asset prices have eroded the debt servicing capacity of the borrowers and have also contributed to the asset quality problems. Sectoral analysis across bank groups demonstrates rising incidence of loan defaults in infrastructure, particularly power, retail, SSIs and agriculture. Going forward, there is a likelihood of asset quality coming under greater strain, given the weakening economic backdrop and global headwinds, having important bearing on the soundness of banks and macro financial stability.

The paper shows how fragility was building in the banking system in 2003-08 and excesses were being created. As the cycle slowed, banking troubles have grown..

Without using fancy techniques, the author  a nice pictorial analysis to show how banking troubles have increased in recent times. Given the troubles, one does not see any major stress in banking stocks…

 

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The watchdog that did not (and rarely) barks: business/financial journalism

February 7, 2014

Dean Starkman, a journalist and currently editor at the Columbia Journalism Review has written this interesting book called- The Watchdog That Didn’t Bark: The Financial Crisis and the Disappearance of Investigative Journalism.

Hamza Shaban at New Yorker Review reflects on the book (HT: MR Blog):

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Understanding how and why NSSF data comes into government accounts?

February 7, 2014

One of the bigger problems with Indian data is its different classification/format in different sources. So in one source, a set of  data could be printed into one format and in other source the same data can be classified differently.

One such case is funding of fiscal deficit. The Union budget presents the funding of fiscal deficit in its capital receipts budget. But this table is very different from the table given in CGA’s monthly data (scroll lower).

Within Sources of funding the fiscal deficit in CGA accounts, there is always this confusion between two categories:

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Why Afghanistan economic policy failed to deliver?

February 7, 2014

Graciana del Castillo former Prof at Columbia Univ writes this nice piece on why things went wrong in Afghanistan.

The reasons are similar as seen in most such cases – imposition of developed country framework on an underdeveloped and war torn economy:

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