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Revisiting the core ideas of CCFS

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The Report of the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (CCFS) was submitted to the Reserve Bank of India (RBI) in January this year. In the eight months that have passed, the RBI has accepted a number of the report’s recommendations including publishing of draft guidelines on licencing of payments banks, extending the right to suitability to customers of financial services, relaxation of Know Your Customer (KYC) norms, and restoring permission of ND-NBFCs to act as BCs of a bank, among others. These steps, in sum, represent the renewed vigour and focus on the financial inclusion and financial deepening agenda in the country. As we see progress on individual recommendations, however, it is important to keep in mind some of the larger themes and directional shifts that the report had recommended and to view each recommendation within the context of these.

The starting point for the report, in many ways, was to take stock of the previous and existing efforts on financial inclusion in the country. Over the years, India has seen many big ideas on financial inclusion; from cooperative banks, nationalisation of banks, self-help groups, and regional rural banks to business correspondents, India has moved from one big idea to another in addressing the country’s financial inclusion puzzle. In examining these programs, the CCFS recognised that the key, common weakness of previous efforts on financial inclusion was their over-reliance on the one big idea as the key to financial inclusion. In this light, the recommendations of the CCFS mark a significant break from the trend of “magic-bullet” solutions. The report recognises that in a country as large and diverse as India, a reliance on any single approach to solve problems is bound to fail. While acknowledging that the country will need to constantly explore new ideas, learn from new technology and successful strategies of other nations, the report argues that the best regulatory strategy is not be to push the design of the financial system towards one central approach. Rather, the CCFS proceeds to define a clear set of vision statements and establish core design principles that would enable multiple institutional frameworks and models, new and old alike, to thrive or wither away, based on their inherent strengths and weaknesses. (Page 5, Preface, Report of the CCFS)

Design Principles

Keeping in with this strategy, the report presented a set of four principles that should guide the evolution of the financial system design in India – Stability, Transparency, Neutrality, and Responsibility. To elaborate, the principle of Stability argues that any approach that seeks to achieve the goals of financial inclusion and deepening must be evaluated based on its impact on overall systemic risk and stability and at no cost should the stability of the system be compromised. A well-functioning financial system must also mandate participants to build completely transparent balance sheets that are made visible in a high-frequency manner, accurately reflecting both the current status and the impact of stress situations on this status. Furthermore, the treatment of each participant in the financial system must be strictly neutral and entirely determined by the role it is expected to perform in the system and not its specific institutional character. Lastly, the financial system must maintain the principle that the provider is responsible for sale of suitable financial services to customers and ensure that providers are incentivised to make every effort to offer customers only welfare-enhancing products and not offer those that are not.

In articulating these design principles, the report argues that any institutional model for the delivery of financial services should be encouraged as long as it passes the litmus test of adhering to these principles.

Let a hundred flowers bloom

At its core, then, the CCFS recommends an approach that moves away from an exclusive focus on any one model of financial inclusion and financial deepening to an approach where new and specialised entrants are permitted and multiple models and partnerships are allowed to emerge between these specialised entities. The recommendation on allowing NBFCs and now, payments banks to act as BCs of banks, perhaps, best represents fruitful partnerships among specialists. Thus, instead of focussing only on generalist institutions that are required to deliver on all functions of finance, the report recommends developing a vertically differentiated banking structure, in which banks specialise in one or more of three functions- payments, credit delivery and retail deposit taking. The Committee, thus, recommended the licensing of new categories of specialised banks including Payments Banks and Wholesale Banks.

As the report mentions, India already has the elements for success in place – a wide range of institutional types, well-developed financial markets, a good regulatory framework, and large scale and high quality authentication and transaction platforms. The cause of financial inclusion and financial deepening would be better served if we could allow institutions to leverage on this and evolve naturally, in multiple directions.

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  1. Stability and neutrality are conflicting principles. While the banking system by its very structure favours exclusion, Mobile phone connectivity favours inclusion. In that case regulators cannot and should not stay neutral. The push towards digital e-wallets for settling small transactions should be self-evident. This will keep e-money outside the banking system, having the effect of contracting money supply. This has to be strived for in the interest of inclusion. To understand we have to go back to basis [basics] of banking:

  2. The committee (CCFS) was tasked with producing actionable policy initiatives to foster financial inclusion. It has succeeded in furthering the agenda of three private foundations representing the interests of global elites.

    “The foundations have, since their founding at the beginning of the 20th century, been the central institutions in constructing consensus among elites, and creating consent to power. They are, in short, the engines of social engineering: both for elite circles specifically, and society as a whole, more generally. As Professor of Education Robert F. Arnove wrote in his book Philanthropy and Cultural Imperialism:

    Foundations like Carnegie, Rockefeller, and Ford have a corrosive influence on a democratic society; they represent relatively unregulated and unaccountable concentrations of power and wealth which buy talent, promote causes, and, in effect, establish an agenda of what merits society’s attention. They serve as “cooling-out” agencies, delaying and preventing more radical, structural change. They help maintain an economic and political order, international in scope, which benefits the ruling-class interests of philanthropists and philanthropoids – a system which… has worked against the interests of minorities, the working class, and Third World peoples.

    The major philanthropic foundations created by America’s ‘robber baron’ industrialists and bankers were established not to benefit mankind, as was their stated purpose, but to benefit the bankers and industrialist elites in order to engage in social engineering. Through these foundations, elites have come to shape the processes, ideas and institutions of education, thus ensuring their continued hegemony over society through the production and control of knowledge. ”

    The four design principles enunciated by the committee serve to ensure that India’s central bank does not rock the rickety boat that is the global financial system. The four principles can be collapsed to just one – stability. And therein lies the success of the directing foundations.

    What the committee failed to examine was what causes exclusion. A deeper search would have laid bare, it is the structure of banking and the structure of corporations.

    The three factors contributing to exclusion are 1.Debt 2.Interest 3. Limited liability.

    “Central banking functions not on “investment” of capital, but on the expansion and creation of money and debt, which is lent at interest, thus serving as the source of income for the central banking system. This cannot be called productive capital, for its purpose and intent is not to produce a new commodity, there is no labour power or means of production involved, and new money is not produced from the sale of such a new commodity, but rather profit is extracted from interest on the original money. This, for the sake of argument, can be called the Circuit of Debt:

    M –> L –> I –> M1 –> LID –> DB
    M = Money
    L = Loan
    I = Interest
    M1 = New Money
    LID = new money Loaned to debtor to pay Interest on Debt
    DB = debtor falls into Debt Bondage; owned by creditor ”

    And why should ‘payments’ and ‘deposit taking’ be banking functions at all? In the interest of inclusion it is advisable to parcel these out exclusively to mobile service providers and NBFCs respectively. That places a cap on systemic risk providing your much needed stability.

    But go a step further. Why stability?

    Would providing destabilising forces their play keep a check on systemic risk?


    1. Economists discount the future value of a resource by a rate of interest to arrive at an equivalent present value of that resource. The present value of a future sum is the amount of money that, if invested today at today’s interest rate, would grow to equal that future sum at the specified future date.

      In its simplest terms, if I can cut down and sell a grove of redwood trees today for $100,000 and put that money in the bank at 10% interest, compounded annually, I would have $161,051 in the bank after five years. If market research showed that by waiting five years to cut down and sell the same redwood grove, the price I got for the wood would only be $125,000, it is economically rational that I cut the trees now.

      Money may not grow on trees,

      but it can grow faster than trees.

      The ruling passion of the age is to convert wealth into debt in order to derive a permanent future income from it – to convert wealth that perishes into debt that endures, debt that does not rot, costs nothing to maintain, and brings in
      perennial interest. Although debt can follow the law of compound interest, the real energy revenue from future sunshine, the real future income against which the debt is a lien, cannot grow at compound interest for long. The idea that people can live off the interest of their mutual indebtedness is just another perpetual motion scheme.

      “What is obviously impossible for the community – for everyone to live on interest – should also be forbidden to individuals, as a principle of fairness. If it is not forbidden, or at least limited in some way, then at some point the growing liens of debt holders on the limited revenue will become greater than the future producers of that revenue will be willing or able to support, and conflict will result. – Herman Daly

      “A modern corporation is generally defined as a private entity (as opposed to something that is held by the state) which is owned by a set of stockholders; thus it is private property though likely to be owned by a large number of stockholders. Two, it is a joint stock company, that is different from a proprietorship company, and it is owned through a large set of shareholders – its stocks are traded in the stock market; thus the ownership is in a sense social in nature. Three it is a limited liability company and thus the legal responsibility of the owners in the case of insolvency is only to the extent of capital invested in the firm. Four, it is a legal entity in its own right under the law; thus a corporation has person-like rights and certain obligations too under the law. Lastly, the ownership and management are separated and often quite distinct from each other; though owners are represented on the board of directors yet they often have only limited say in various operational and sometimes even in policy matters. It is possible that some strategic shareholders have disproportionate say in running a corporation, and this is the current reality. The essential feature of the corporation is that they are the characteristic organizational form of capitalist enterprise under monopoly capitalism.”

      In his book ‘The Post-Corporate World: Life after Capitalism’ David C. Korten concludes; “the publicly traded, limited liability corporation is a pathological organizational form that must join the monarchy as an extinct institutional species.”

      Why limited liability is such a misused original enablement I will take up next.

      1. Limited liability was the evolutionary response of the finance industry to funding the needs of manufacture around the time of the Industrial revolution that required capital in much larger aggregates than mercantile trade, by limiting its risk. This innovation has outlived its use due to much misuse.

        “On the more positive side, the corporate charter is a social invention created originally to aggregate financial resources in the service of a public purpose. On the negative side, it allows one or more individuals to leverage massive economic and political resources behind narrowly focused private agendas (that run counter to the public good) while protecting themselves from legal liability for the public consequences”, says David C. Korten, author of When Corporations Rule the World.

        The malady as we have noted is, ‘limited liability’ that was originally the means of aggregating capital but has come to be grossly abused. It is also a corporation being a ‘legal entity’ in its own right as David Korten points out.

        Let us examine briefly, how the provision of limited liability is abused through the instrument of debt. In the words of David Korten again:

        A special breed of extractive investor, the corporate raider, specializes in preying on established corporations. The raider identifies a company traded on public stock exchange that has a “breakup” value in excess of the current market price of its shares.
        Often the raider is looking specifically for companies with reserves and long -term assets that can be sold off and that have costs that can be externalized onto the community.
        Often the receptacle corporation is financed almost entirely with debt and has little or no equity… The “new” company now has considerable additional debt. To pay off that debt, the new management may draw down its cash reserves and pension funds, sell off profitable units for quick cash returns, and bargain down wages, move production facilities abroad, strip natural resource holdings, and cut back maintenance and research expenditures to increase short term gains – generally at the expense of long term viability.
        Once the debt is paid down and the company is reporting rapid growth in annual profits, the firm may be sold back to the public through a stock offering at a significant premium. The raider congratulates himself or herself for “increasing economic efficiency” and “adding value” to the economy and seeks another target… the leveraged buyout, a form of economic cannibalism.”

        The fact that interest payments are tax deductible helps make all this possible. Since operating profits that would have been taxable are turned into deductible interest payments, the public subsidizes the cannibalizing of the nation’s productive corporate assets… “During the 1950s, American corporations paid out paid out $4 in taxes for every $1 in interest. During the 1980s, the increase in debt financing reversed the ratio, with corporations paying out $3 in interest for every $1 in taxes… Whereas corporations paid 39 percent of all taxes collected in the United States in the 1950s, they paid only 17 percent in the 1980s. The share paid by individuals rose from 61 percent to 83 percent. Many corporations even collected refunds on taxes paid in the years before a takeover.”

        Debt additionally brings increased cost to the consumer to the extent interest is a factor of ‘cost’ in the particular industry.

        How do limited liability and debt combine to subvert the public good?

        Let us examine the Indian Banking Experience modeled on the dominant mode prevailing in the west. This from a news report:

        Corporate robbery of banks carries a fashionable name tag called ‘non-performing asset’. It refers to loans that have gone sour and are not recoverable. Banks simply write them off… big-time corporate bank robbers go scot-free although several of them are even known to be habitual loan defaulters.”

        In the RBI deputy governor’s own admission, ‘Wrong appraisal is leading to diversions, leading to over- leverage, leading to fraud, leading to NPAs…they are all inter-related.’

        Entrepreneurs living off the fruit of merger and acquisition rather than genuine production make it messier. It is up to Indian banks to contribute a far more rewarding model of enterprise.

        1. As regards corporations being legal entities on their own:

          An extract
          from chapter IV of the book by David C. Korten:

          Much of America’s history has been shaped by a
          long and continuing struggle for sovereignty between people and corporations.
          Corporate interests have figured prominently in how the United States has defined
          its national interests. Even as its economic power declined compared with that
          of Japan and Europe, the United States remained the dominant player in shaping
          international institutions such as the United Nations, the International
          Monetary Fund, the World Bank, and the World Trade Organization. As we shall see in following chapters,
          corporate interests have figured prominently in how the United States has
          defined its national interest in relation to these and other global
          institutions. Thus the history of
          corporate power in the United States is more than purely national
          significance. America was born of
          revolution against the abusive power of the British kings and the chartered
          corporations used by the crown to maintain control over colonial economies.

          The English Parliament, which during the seventeenth
          and eighteenth centuries was made up of wealthy landowners, merchants, and
          manufacturers, passed many laws intended to protect and extend their private
          monopoly interests. One set of laws, for
          example, required that all goods imported to the colonies from Europe or Asia
          first pass through England. Similarly, specified products exported from the colonies also
          had to be sent first to England. The Navigation Acts required that all goods shipped to or from
          the colonies be carried on English or colonial ships manned by English or
          colonial crews. Furthermore, although they had the necessary raw
          materials, the colonists were forbidden to produce their own caps, hats, and
          woolen and iron goods. Raw materials were shipped from the colonies to
          England for manufacture, and the finished products were returned to the

          These practices were strongly condemned by
          Adam Smith in The Wealth of Nations. Smith saw corporations, much as he saw governments, as
          instruments for suppressing the beneficial competitive forces of the
          market. His condemnation of
          corporations was uncompromising. He specifically mentioned them twelve times in his classic
          thesis, and not once did he attribute any favourable quality to them. Typical is his observation that: “It is to prevent this production of
          price, and consequently of wages and profit, by restraining that free
          competition which would most certainly occasion if, that all corporations, and
          the greater part of corporation law, have been established”.

          It is noteworthy the publication of The Wealth
          of Nations and the signing of the U.S. Declaration of independence both
          occurred in 1776. Each was, in its way,
          a revolutionary manifesto challenging the abusive control of markets to capture
          unearned profits and inhibit t local enterprise. Smith and the American colonists shared a deep
          suspicion of both state and corporate power. The U.S. Constitution instituted
          the separation of governmental powers to create a system of checks and balances
          that was carefully crafted to limit opportunities for the abuse of state
          power. It makes no mention of
          corporations, which suggests that those who framed it did not foresee or intend
          that corporations would have a consequential role in the affairs of the new

          The Corporations that were chartered were kept
          under watchful citizen and governmental control. The power to issue corporate charters was
          retained by the individual state rather than being given to the federal
          government so that it would remain as close as possible to citizen
          control. Many provisions were
          included in corporate charters and related laws that limited use of the
          corporate vehicle to amass excessive personal power. The early chapters were limited to a fixed
          number of years and required that the corporation be dissolved if the charter
          were not renewed. Generally, the
          corporate charter set limits on the corporation’s borrowing, ownership of land,
          and sometimes even its profits. Members of the corporation were liable in
          their personal capacities for all debts incurred by the corporation during
          their period of membership. Large and small investors had equal voting rights, and
          interlocking directorates were outlawed. Furthermore, a corporation was
          limited to conducing only those business activities specifically authorized in
          its charter. Charters only those
          business activities specifically authorized in its charter. Charters often included revocation
          clauses. State legislators
          maintained the sovereign right to withdraw the charter of any corporation that
          in their judgment failed to serve the public interest, and they kept close
          watch on corporate affairs. By 1800, only some 200 corporate charters had been granted by
          the states.

          In the nineteenth century an active legal
          struggle emerged between corporations and civil society regards the right of
          the people, through their state governments, to revoke or amend corporate
          charters. Action by state
          legislators to amend, revoke, or simply fail to renew corporate charters was
          fairly common throughout the first half of the century. However, this right came under attack in 1819
          when New Hamsphire attempted to revoke the charter issued by Dartmouth College
          by Kind George III before U.S. independence. The Supreme Court overruled the revocation on
          the ground that the charter contained no reservation or revocation clause.

          Outraged citizens, who saw this decision as an
          attack on state sovereignty, insisted that a distinction be made between a
          corporation and the property rights of an individual. They argued that corporations were created not
          by birth but by the pleasure of state legislatures to serve a public
          good. Corporations were
          therefore public, not private, bodies, and elected state legislators thereby
          had an absolute legal right to amend or repeal their charters at will. The public outcry led to a significant
          strengthening of the legal powers of the states to oversee corporate affairs.

          As late as 1855, in Dodge v. Woolsey the
          Supreme Court affirmed that the constitution confers no inalienable rights on a
          corporation, ruling that the people of the states have not released their power
          over the artificial bodies which originate under the legislation of their
          representatives… Combinations of classes in society united by the bond of a
          corporate spirit unquestionably desire limitations upon the sovereignty of the
          people. But the framers of the Constitution were imbued with no desire to call
          into existence such combinations.

        2. Then there are buybacks!

          Buying back shares is so in vogue that 80 percent of the S&P 500 did it over the past year, according to Kiplinger. Among the more aggressive have been Boeing, Caterpillar, Cisco, 3M, Microsoft, Safeway and Travelers, who all bought back more than 10 percent of their shares, reports Zero Hedge, the widely followed investor Web site. Apple alone has announced it would spend $130 billion to repurchase shares. Last week, Ford joined the parade with an $18 billion buyback.

          It would be one thing if most of these stock buybacks were paid for out of the trillions of dollars in cash now sitting on corporate balance sheets. But as it happens, most of them have been paid for by near-record levels of corporate borrowing. Of the $3.4 trillion in additional debt taken on by nonfinancial corporations
          since 2009, nearly 87 percent has been sent off to shareholders in the form of dividends and stock buybacks, according to Paradarch Advisors.

          The poster child of the corporate sector for this leveraged buyout is IBM, which in the first quarter bought back more than $8 billion of its own stock, almost all of it paid for by borrowing. By reducing the number of outstanding shares, IBM has been able to maintain its earnings per share and prop up its stock price even as sales and operating profits fall.

          The result: What was once the bluest of blue-chip companies now has a debt-to-equity ratio that is the highest in its history. As Zero Hedge put it, IBM has embarked on a strategy to “postpone the day of income statement reckoning by unleashing record amounts of debt on what was once upon a time a
          pristine balance sheet.”

          More significantly, IBM since 2102 has invested four times as much in stock buybacks as it has on the capital expenditures needed to grow its business over the long term.

          And in that it is not alone. Last year, the companies of the S&P 500 spent 30 percent more on stock buybacks and dividends than on capital expenditures. It’s simply the latest proof that in the boardrooms and executive suites of corporate America, financial engineering has long since overtaken the more
          productive kind.

          In March, Larry Fink, chairman of BlackRock, which manages $4.3 trillion of other people’s money, wrote the chief executives of 800 of the world’s largest corporations to tell them of his concern that they were investing too little in future growth.

          “Too many companies have cut capital expenditure and even
          increased debt to boost dividends and increase share buybacks,” wrote Fink, adding that when done for the wrong reason, such tactics “jeopardize a company’s ability to generate sustainable long-term returns.” About a dozen executives wrote back privately to praise Fink, but the public response to the
          widely reported letter was akin to a deafening silence.

          One “wrong” reason for doing buybacks would be to benefit top
          executives whose incentive pay is pegged to the share price or earnings per share. That’s surely going on, but it’s even worse than that, as Nejat Seyhun, a finance professor at the University of Michigan, has discovered.

          Seyhun calculates an index of bullish or bearish sentiment among corporate insiders based on whether they are buying or selling more of their company’s stock. And over the years, he’s noticed a pattern: When companies are most aggressive in buying back their stock on the open market with shareholders’ money, company insiders are most aggressive in selling shares
          from their own portfolios.

          Self-dealing by corporate insiders, however, is only part of this story. The Federal Reserve has also played a big role in the buyout bonanza. Over the past five years, the Fed has pumped $3 trillion into the financial system, much of which remained there rather than making its way into the real economy. That’s made it easy for companies to use cheap borrowed money to buy back their stock, or that of other companies.Seyhun
          and a colleague are now trying to calculate this correlation over time. But what he can report is that his gauge of insider sentiment is now more “bearish” than at any time in the past 25 years, after falling steadily for more than two years.

          At a more fundamental level, however, the buyback and merger mania is driven by the siren call to “maximize shareholder value” that now dominates corporate decision-making. It is the rationale for stock buybacks, dividend increases and all the me-too mergers. It explains the lackluster pace of capital investment and the refusal to share record profits with front-line employees who haven’t had a raise in years. And it drives the fetish for tax
          avoidance that now, in the minds of executives, “requires” companies to move headquarters to low-tax jurisdictions and “requires” them to keep trillions of dollars in untaxed profits overseas.

          What’s missing from the current recovery, in short, is all the
          money that corporate America has frittered away on financial game-playing — money that could have been used to invest in equipment and products, to put extra money in the pockets of consumers, to provide the tax money government needs to invest in basic infrastructure and research and the education of the next generation of workers. A trillion here, a trillion there, and pretty soon you’re talking about real money.

          1. Now take a look at this story:


            It appears here is a victim of excessive debt. The interest outgo is not sustainable. The unit apparently has enough orders on hand. It had to cancel contracts worth 1000 crore. What it does not have is enough owned funds. More borrowing will merely
            exasperate the situation. A previous debt recast did not help.

            And this opinion column of a National daily early this year:

            What does this list stand for? Reliance ADA Group, Vedanta
            Resources, Essar Group, Adani Group, Jaypee Group, JSW Group, GMR Group, Lanco Group, Videocon Group and GVK Group.

            A list of India’s biggest, most successful, corporates? Going by
            the size of their balance-sheets, their market share in the sectors they operate in, the value of their stock in the markets, the kind of access they enjoy in the corridors of power and the clout they wield with the system, this would be a popular guess. This would also be a correct conclusion to reach on all the above factors.
            But there is another, less talked about characteristic these
            companies share — they are also among the most indebted of Indian corporates, with a combined cumulative debt of Rs 6,31,024.70 crore — over $100 billion, according to a widely discussed research report by Credit Suisse.

            Redlining on debt

            The report offers some devastating insights into the kind of
            problems these companies — India’s biggest and supposedly brightest — face as a result of reckless borrowing.
            “Debt levels at these groups have risen by 15 per cent year-on-year, even as profitability continues to be under pressure.
            The largest increases have been at groups such as GVK, Lanco and ADA where the gross debt levels are up 24 per cent Y-o-Y. For most of these corporate groups, the debt increase even outpaced capex (capital expenditure)”,the report pointed out.

            The Credit Suisse report also brought out some worrying
            developments. Almost half (23 of 50) of the top 50 companies, by size of their debt, couldn’t pay interest on their loans in seven or more quarters in the past two years. Thirty eight companies reported net losses. And with a handful of exceptions, their current earnings were not enough to meet even interest
            repayments, leave alone repay the capital. The result has been a dramatic surge in ‘restructuring’ of bad debts by banks, desperate to prevent their star assets from being declared as bad loans.

            In the past two years alone, Indian banks — mostly
            government-owned banks, but also the large private sector banks and multinational banks — have ‘restructured’ over Rs 2 lakh crore of loans, which would have otherwise gone into default category.
            While agriculture loans, loans to small and medium enterprises and politically directed loan waivers have been largely blamed for the troubles the banks are facing, the reality is different.

            More than 70 per cent of the restructured loans are accounted for by loans to the private sector. And a dominant share of this is accounted for by the biggest players in the business.

            Stimulus to borrow

            There is more bad news. With investments falling, and the domestic banking system unable to lend further — because a lot of its money is already locked up in previous bad loans — the demand for ‘stimulus’ packages grew shriller from India Inc.
            An obliging government promptly provided this stimulus by way of allowing corporates to borrow yet more money abroad.

            Estimates put the share of foreign currency denominated corporate debt at over $225 billion — and more than half of this is unhedged, which means that a depreciating rupee has already added around 12-15 per cent to this when the time comes for repayment.
            This, the borrowers are clearly not in a position to do. This
            would mean that Indian lenders will have to take a haircut of monumental proportions, if the situation is to be prevented from deteriorating into the kind of systemic collapse one saw in some of the smaller Western nations after the 2008 meltdown.

            The Government will eventually have to foot the bill for this, by
            way of further capital infusion into the weakened balance-sheets of the banks it owns. Between 2010-11 and 2013-14 (which still has three months to go), the UPA-II regime has forked out Rs 58,643 crore by way of additional capital infusion into state-owned banks. Add the special funds released during the crisis
            in 2009-10 and the total tops Rs 60,000 crore.
            This is an enormous amount of money, money which could — and should — have been spent on creating tangible infrastructure, productive assets and in improving the quality of life of ordinary citizens. Instead, it is likely to vanish down the black hole of un-repayable corporate debt. That is because every rupee put into a bank’s capital base translates into Rs 10 of additional debt. Debt, which the numbers clearly show, the corporate sector is unlikely to pay back, unless lenders take more punishment.

            Stressed out

            This is what has set the alarm bells ringing at the Reserve Bank
            of India, which has to deal with the mess in the case of a banking system collapse. In its Financial Stability Report released this week, it pointed out the reasons to worry.
            For starters, the ‘stressed advances’ — bad loans to you and me — have shot up to 10.2 per cent of total loans as of September this year, up from the already high 9.2 per cent at the start of the financial year.
            It also says the largest contribution to stressed advances come
            from public sector banks and that ‘medium and large’ industries contributed more towards this. Just five sectors — steel, textiles, aviation, mining and infrastructure — accounted for more than half the stressed assets of the banking system.

            This concentration — and the widespread exposure across banks to various troubled borrowers, given exposure norms (a bank’s exposure to a single borrower can go up to 25 per cent of the bank’s total capital, while its group exposure limit can go up to 55 per cent of the bank’s total capital) — means that the collapse of even one large player could have a devastating impact on the system.

            According to scenario analysis done by the RBI, the failure of a
            single large corporate group can end up wiping out half the capital of the entire banking system, when 60 per cent of the money is not recoverable.
            The figure is higher if the loss default ratio is higher. If you
            think this scenario is unlikely, think Kingfisher or Deccan Chronicle — and then take a close look at the balance-sheets of India’s biggest corporates.
            2013 was a great year for India Inc. A combination of slowing
            economic growth and a floundering and politically beleaguered government desperate to salvage its second stint in power meant that India Inc could occupy the moral high ground, lambasting the government for its ‘governance deficit’
            and ‘policy logjam’, while not so discreetly bullying the administration — and by extension, government-owned banks — into extending yet more concessions and ever more loans without a murmur.

            India Inc has been strident in its criticism of the Government’s
            ‘fiscal profligacy’ and panned the government’s social sector hand-outs as being counter-productive.
            Turns out it is far more profligate than the government is — and
            gets far more dole than the poor ever did.


  3. Once you recognize that money is just a social construct, a credit, an IOU, then first of all what is to stop people from generating it endlessly? And how do you prevent the poor from falling into debt traps and becoming effectively enslaved to the rich?

    Since antiquity the worst-case scenario that everyone felt would lead to total social breakdown was a major debt crisis; ordinary people would become so indebted to the top one or two percent of the population that they would start selling family members into slavery, or eventually, even themselves.

    Well, what happened this time around? Instead of creating some sort of overarching institution to protect debtors, they create these grandiose, world-scale institutions like the IMF or S&P to protect creditors. They essentially
    declare (in defiance of all traditional economic logic) that no debtor should
    ever be allowed to default. Needless to say the result is catastrophic. We are
    experiencing something that to me, at least, looks exactly like what the
    ancients were most afraid of: a population of debtors skating at the edge of

  4. Here is an illustration of how phony money is perceived as the future driver of global economy.


    Some six months ago, (This article was published on June 27, 2013)
    Bain & Company, the leading global business consulting firm, came out with a report titled A World Awash In Money (November 14, 2012), which studied the relation between financial economy and real economy in the last two decades. As for its credentials, Bain, ranked first among global consulting firms, claims that its clients have outperformed the market by four times.

    Bain’s report ‘discovers’ that the rate of growth of world output of goods and services has seen an extended slowdown over recent decades, and yet the volume of global financial assets has expanded rapidly. Bain adds that the relationship between financial economy and underlying real economy has reached “a decisive turning point”.

    The report said that by 2010, global capital had swollen to some $600 trillion, tripling over the past two decades, against which the real economy stood at $210 trillion — almost one-third of the financial economy. And today, the total financial assets of $600 trillion (with largely matching financial debts) are nearly 10 times the value of the global output of all goods and services (the global GDP) of $63 trillion. Bain concludes that for the balance of the decade 2010-20, markets will be awash with monies — read phony monies.

    It says that the fundamental forces that inflated the global financial balance sheet since the 1980s, that is, financial innovation, high-speed computing and reliance on leverage, are still active. The total global capital, Bain report says, will expand from $600 trillion, by half again, to $900 trillion by 2020 (at 2010 prices and exchange rates).

    More than any other factor on the horizon, Bain says, the self-generating momentum for capital (read ‘phony capital’) to expand — and the sheer size the financial sector has attained — will influence the shape and tempo of global economic growth going forward.

    The Bain study builds the Global Capital Pyramid pictorially, where the financial sector stands on top with the real economy at the bottom. The pyramid shows that “total financial assets”, which stood at $600 trillion in 2010, will expand by $300 trillion in ten years to $900 trillion in 2020. In the same period “financial holdings” will increase by $165 trillion, from $335 trillion to $500 trillion. What Bain calls as “financial assets” is gross financial assets. The debts on the other side which is out of the radar is in itself a huge topic.


    Now, back to the main story. What, according to Bain, is total financial assets and financial holdings? Total “financial assets” ($900 trillion) which is the sum total of ‘financial assets of the financial sector and non-financial sector’ includes direct “financial holdings” ($500 trillion) of the non-financial sector, namely, households, corporations and governments and other direct owners. As against the rise of financial economy by $165 trillion by 2020, the real economy (or the underlying ‘Asset Base’) will rise by $90 trillion, from $210 trillion to $300 trillion.

    The Asset Base (or real economy) represents the “accumulated tangible and intangible assets of all sectors”, namely, the sum of all factories, farms, infrastructure, intellectual property and the like — and everything that might appear as non-financial asset on a balance sheet”.

    Thus, against the total underlying Asset Base of $300 trillion (in 2020) at the lower end of the Pyramid, the financial economy at the top will swell to $900 trillion by 2020. The two sub-sets of the asset base of the economy are Total GDP, at the middle of the real economy in the Pyramid, and Annual Economic Savings last at the bottom. The Total world GDP will grow from $63 trillion to $90 trillion, that is by $27 trillion and the Annual Economic Savings will grow from $15 trillion to $23 trillion, that is by $8 trillion.

    Total GDP is the annual total real output of good and services. The annual economic savings is “the annual economic output not immediately consumed”, which is “derived from gross world savings (the sum of gross national savings at the country level) that “represents the underlying free GDP available for investments” and “does not include depreciation as some of these amounts needs to be reinvested to maintain a constant asset base”.

    See how the ratio works. The real assets of the economy grow by $90 trillion against the financial savings of $8 trillion — showing a leverage of more than 10 times. Against the additional equity of $8 trillion generated during 2010-20, the additional monies/debts self-generated by the financial system will be $82 trillion. The apparent prosperity ($900 trillion) is three times the real asset base ($300 trillion) and ten times the real growth ($90 trillion).

    The disproportionate growth of the financial economy over the underlying real economy is what led to the 2008 crisis. And Bain’s report makes it clear this will not only not abate, but continue and intensify. The report says that it has turned the world of capital upside down. Not just that. This has turned monetary economics upside down.

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