Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

© Prof. Jayanth R. Varma
jrvarma@iima.ac.in

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Thu, 30 Nov 2017

Large asset auctions: Russian versus East Asian models

In the context of the large asset auctions that are expected to happen in India as part of the new bankruptcy code for delinquent borrowers, I think it would be instructive to look at the lessons that can be learned from how such auctions were organized elsewhere in the world. Two episodes that come to my mind are:

  1. The large privatizations that happened in Russia after the collapse of the Soviet Union

  2. The massive sale of assets that happened in East Asia particularly Korea and Thailand after the Asian crisis.

Both of these were large operations carried out fairly quickly in a quite challenging environment. There was a huge amount of uncertainty about the true value of the assets, but that is unavoidable in situations like this. But the two episodes differed in many critical respects. All in all, most people would agree that the Russian auctions were a disaster. First they allow a bunch of oligarchs to acquire businesses very cheap because of inadequate competition. Second, the privatizations (at least ex post) have very little perceived legitimacy, and this vitiates Russian democracy even today. The East Asians (partly because of IMF pressure) were much more transparent about the process, and also opened up the sales to foreign bidders in a big way (amending the laws in some cases). This was not politically very pleasant, but was probably the only way to generate enough competitive bidding in an environment where most domestic players were liquidity constrained, and the banking system was ill equipped to support leveraged bidders.

Posted at 18:36 on Thu, 30 Nov 2017     View/Post Comments (0)     permanent link


Mon, 20 Nov 2017

The Indian retail credit boom

In the last 3-4 years, in the face of collapsing corporate credit demand and rising defaults in corporate loans (dating back to the days of a booming economy), the Indian banking system has been focused on growing the retail loan portfolio. Non bank finance companies have also been doing the same. For public sector bankers worried about investigations into suspected corrupt lending, retail lending has another big advantage from a career point of view. Since retail credit decisions are based on computer algorithms, there is much less risk of corruption allegations against individual staff members (and computers cannot be sent to jail).

Two questions arise at this point:

  1. Has this retail credit boom progressed beyond the point of prudent lending? Anecdotal evidence suggests that at least for some lenders, the answer is yes. Since nobody wants to admit that they are lending imprudently, I prefer to ask market participants what CIBIL score cutoffs their competitors are using. During the last couple of years, I have heard this number fall from 650-700 to 600 and recently to 550.

  2. How much of an impact would job losses in telecom and software services have on delinquencies in retail loans? It is too early to say, but clearly the impact would be non trivial.

I would think that the ongoing public sector bank recapitalization needs to keep this in mind. And perhaps at least some private sector lenders might want to think of a pre-emptive recapitalization.

Posted at 18:21 on Mon, 20 Nov 2017     View/Post Comments (0)     permanent link