Dear Modi Ji, Note Ban Scheme is a Clever Ploy to Bail Out Banks

The Modi government has convinced us that the demonetisation scheme is for ‘national interest’. But is it?

Dear Modi ji,

I think the entire episode of demonetisation of legal tender is a carefully-crafted disguise. Let me try and elaborate, starting with a few assumptions.

I do not think the current government is run by fools. You have had brilliant careers in politics where you can gauge public opinion. You were completely aware that a move like this would be a logistical nightmare, as India simply does not possess the infrastructure necessary to carry out an operation of this magnitude.

Do the arithmetic; take into account the number of banks, ATMs, post offices and the population. Calculate the ratio. If that does not suffice, find out the number of villages, remote branches and a little more googling should convince one of these undeniable facts.

Then why take such a high risk with impending elections where public opinion could sway?

‘It’s Not About Black Money Or Elections’

Is it just to fortify a claim of bringing back black money when the government actually is riding the wave of cross border surgical strikes?

Why take the risk of irking the poor, the middle class and a section of the rich, who are getting affected by this? Effectively, a large chunk of your electoral base. Is the BJP trying to divert attention from other burning issues?

No, not possible because the chief agenda of the winter session was to discuss the GST slabs; not a request for, suspension of business as it has come to pass with a seemingly united opposition. Then why? The answer is simple – it’s not about black money or elections. May be my letter could offer some answers.

One day before Lehmann Brothers had declared bankruptcy, the CITI Group had an NPA of 0.67%. CITI Group had to be bailed out, which is considered to be one of the largest bailouts in US history.

The SBI, our biggest moneylender, had a gross NPA of 6.94% for the 1st quarter FY 2016-17, just a thought. However, one cannot look at SBI in isolation as was the case during the sub-prime crisis. Not only CITI Group, many other financial institutions had to be bailed out by the government, aka public money.

So, let’s take a look at how the Indian banks shaped up in the last five quarters in terms of Gross NPA. I have taken the three largest PSU banks and the largest private sector lender.

The Great Indian Banking Credit System Flaw

The combined Gross NPAs stand at a whopping Rs 2.37 lakh crore with SBI coming in with Rs 1.05 lakh crore and 7.14% as Gross NPA.

The graph shows an upward trend with an uncanny similarity for all the banks in question and this started after the RBI had asked the banks to clean up their balance-sheets.

The trend is frightful, as this indicates a flaw in the Indian Banking Credit system. However, this might just be the tip of the iceberg. I say this, as PSU banks wrote off Rs 1.14 lakh crore in bad loans between FY 2012-15. The RBI estimates the amount of stressed assets is around Rs 7 lakh crore. This is about 50% of the money sucked out from the system after demonetisation was announced on 8 November.

How did we get here?

It is public knowledge that even with diminishing demands in the real estate market, prices are still holding firm.

Over the last five years, the overall exposure of the scheduled commercial banks to the real estate sector has grown by almost 90% from Rs 5.8 lakh crore in 2010 to Rs 10.94 lakh crore in 2014. This is a cartel market and the builders simply cannot afford to lower prices; they need to stay afloat.

Even a few months back, the bankers had approached the government to set up a regulator for the real estate market. Strange, given the amount of growth in exposure and our inane belief in our sound fundamentals that has been echoed over and over again during the sub-prime crisis.

So what happens now, are we looking at the crisis like this? Infusion of capital (Rs 70,000 crore over the next four years) for PSU banks was announced – once again public money. This money seems trivial as compared to the larger NPA problem at hand either written off, sold to asset management companies or even partially recovered (unlikely). Could it be possible?

The Clever Modi Masterstroke

Currency is a liability to the RBI. By demonetising, the RBI is reducing its liability as it curbs money supply, improves its books and promises of a significantly-larger dividend payout to the government.

Somehow, a point has gone amiss. In an effort to curb liquidity in the market, the RBI decided to recalibrate ATMs and not maintain similar dimension for the new notes. Cart before the horse.

Also, it must be noted that a lot has already been written about the growing deposits in banks. For instance, Rs 11,000 crore in two days compared to an earlier Rs 8,000 crore in two weeks. A sum of Rs 32,000 crore so far for ICICI Bank and an estimated of Rs five trillion in low-cost deposits for the banks.

I think PSU banks were failing and were on the verge of a collapse.

Imagine the nightmare then if SBI had closed down its shutter or, even worse, the government coming out and admitting that they need to bail out one of their own. The country would be in complete disarray and economic chaos.

This would be contrary to the agenda of development, upon which everything had been staked. Instead, coming up with a more ingenious scheme was necessary.

Raise the money from the market. That is us. Convince it’s for the national interest, cook the books and ensure “the development”, win the Uttar Pradesh election.

Masterstroke, Modiji.

Regards,

Anirban Saha.

(The author is an IT professional. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)