The Great Indian Bank Robbery

From the good old days of elections of ‘NaMo’ being elected, we have transitioned to witness the ‘NiMo’ fiasco. Recently, Nirav Modi pulled off  ‘the great indian bank robbery’. The Punjab National Bank discovered a fraud worth Rs 11,400 crores triggered by a red flag raised by one of the employees of Gitanjali Gems Inc.

In this blog, I am going to touch upon on the following broad topics:

  • Terminologies (LoUs)
  • How the actual process should have been
  • What aspects of the process were missing
  • Security & audit compromises
  • My take on the liability pending

What’s a LoU (Letter of Undertaking) ?

Let’s say you are a customer of an Indian bank and you require a short-term credit in a foreign country to import something. You can approach the foreign exchange department of your bank and ask for a LoU. In return, the bank would ask you for a collateral or a guarantee, which could be in the form of fixed deposits or other assets. This could even be 100% or even more of the credit sought, depending on your relationship with the bank. If your bank is convinced, it will issue an LoU, which when given to an overseas branch of another Indian bank would result in release of the amount in foreign currency. This amount does not come in to your account directly; it goes to a specific bank account of your banker back home. It is called Nostro account. You can then decide in whose favour the payment needs to be done.

How does the actual process happen?

Here’s the flow diagram of how the customer & bank interact and make the transaction successfully. Steps 1 to 10 will explain how the customer approaches the overseas and seller and the banks come into picture.


What aspects of the process were missing?

  • Step 4 – PNB never asked for any collateral to be provided before initiating the LoUs. To further explain, to provide a 12000 crore of credit, PNB did not ask for any fixed deposits or land or any form of guarantee which provides a comfort to open up the line of credit
  • The immediate approving credit offer failed to check/report the breach of insufficient collateral in multiple ways

Security & audit compromises:

  • SWIFT (LoU issuing system) is not integrated with CBS (Core Banking system). Core banking system is basically an interface via which each and every transaction should be ideally passing. However, SWIFT was not integrated and such transactions were missed.
  • Each employee of the bank is required to be transferred after 3 years as per RBI norms, whereas the two junior officials were not transferred for 5 good years
  • Internal & external auditors failing to capture the non-compliance
  • Process to track if the payment was made to the intended sellers was not confirmed or checked
  • LoUs or bank guarantees are not supposed to extended for more than 90 days (for diamond industry) as per the RBI guidelines. In this case, the credit was provided for 1 years which was way higher than the guidelines

My take on the contingent liabilities:

Gitanjali Gems (Nirav Modi) was a registered customer primarily for PNB. However, in order to cater their customer, PNB sought LoUs from other banks. Nevertheless, since the it was PNB’s customer, it would be PNB’s liability to make good of the payable of the other associated banks. 

On a broader note, despite if the liability is shared or borne by PNB completely, the event has added significantly in the write-offs of the balance sheets of the banks and will in turn affect the bottom line (profit) adversely. The event has come in times when the banking sector is under immense profit margin stress.

Thank you 🙂

Diverse views are welcome!


Demonetization – NDA’s Smart Move Towards Dismantling The Parallel Economy

On the 9th of Nov, 2016, the NDA Govt came out with an announcement of the discontinuation of the Rs 500 and 1000 currency notes. The news created great discomfort and unrest amongst the people. The move was in the wake of increasing black money and counterfeit notes in circulation. The topic is of immense interest since this move is going to impact the several sectors of the economy and the way policy decisions are approached. I would like to bring out the overall meaning of the parallel economy, the causes, the key commodities which lead to the creation of the parallel economy, the cost that RBI will have to bear because of the decision and further a set of comments on the cost-benefit analysis of the decision from a central bank perspective in this blog. In addition to the above, I would also like to bring out the effects of the Govt’s decision on the near future RBI Monetary policies in the context of the rate and the liquidity, the likely near-term effects on the stock markets, liquidity management of the banks, the effects on real estate, MFIs etc. Let us look at the overall situation and a quick impact analysis on the same.

The parallel economy has been a critical pain point for the NDA Govt to function smoothly. A Parallel economy, based on the black money or unaccounted money, is a big menace to the Indian economy. It is also a cause of big loss in the tax revenues for the government. The Indian economy has grown by 30% in the last 5 years whereas the high value denominated notes have gone up by around 90%. This essentially indicates that the transactions which take place are largely in cash and are unaccounted for and that eventually leads to a creation of a parallel economy and all such transactions do not contribute to the net GDP thus creating hindrances to the growth rate. In order to take a stance against this, the NDA Govt decided to discontinue the old currency notes and replace them with new so that the parallel economy transactions reduce significantly or might come to a stand still in a bit.

Key cause of Parallel economy creation:

  1. Tax Evasion
  2. Cash transaction in trade and services
  3. Corruption
  4. Equity market manipulations
  5. Real Estate etc

Key Investment Avenues for such lump sum cash:

  1. Gold
  2. Informal lending/deposit market
  3. Real Estate


Effects on the Monetary Policy:

The Reserve Bank of India may have to change the policy course amidst removal of high value notes as the huge accretion in deposits will increase the overall liquidity in the system. In this situation, the RBI might have to sell out bonds to suck the additional liquidity in the system. The high liquidity in the system shall lead to cheaper loans thus boosting inorganic growth. RBI may want to minimize such impact if any. The additional CASA deposits shall lead to low rate deposits thus leading to cheaper lending with a lagging effect of about 2 quarters.

Sectoral Effects on the Economy:

  1. Real Estate – With lower interest rates in the near future and a liquidity crunch in the real estate sector, home prices might come down by about 20-25% in the medium term.
  2. E Commerce – Reduction in cash transactions has already forced amazon and flipkart to discontinue their cash on delivery services thus impacting their reach and business in terms of the overall sales.
  3. Infrastructure – The sector might face immediate heat since most of the payments to the labourers are made in cash
  4. Agriculture – Agri might face immense negative impacts since the trade largely is carried out on cash basis including the purchase of seeds and fertilizers. However, the impact will be short-lived.
  5. Housing Finance Companies – Sector finance companies shall have opportunities for higher demand amidst lower home prices. However, it might face the heat in terms of the overall credit quality where the lending has been largely for low-income groups.
  6. Banking – Banks/NBFCs shall be benefitted since a large sum of low-cost deposits in the form of CASA accounts shall be accumulated. However, liquidity management and efficient operations shall continue to pose challenges to the banking institution at least till December.

Market Outlook:

The markets shall continue to be volatile in the short-term and significantly jittery in the medium term. The markets are yet to price in the effects of the sudden decision but we can the markets to neutralize by the end of the month. However, the long-term outlook shall be bullish as far the demonetization impacts are concerns. Ultimately, the markets will take their own course based on the likeliness of the future events. Nifty should rise back to the 8500 levels by November end is the majority consensus so far.

Cost Benefit of De-monetization (RBI Perspective):

Total Cost of Printing Vs Demonetization Benefit Comparison

What the above numbers mean is that the cost for RBI to print new notes shall be close to Rs 62 Billion. The Govt, on the other hand, has targeted to demonetize around 170 Billion. Assuming 100% success, the Govt shall be demonetizing close to 170 billion which is as good as three times the cost the Reserve Bank shall bear to make a smooth transition. It largely is a benefittin trade-off for the Govt as well as the RBI.

The decision of the NDA Govt is one of the most prominent moves of the decade towards making India a better country in terms of growth and transparency . However, the approach of the Govt in handling this chaotic situation smartly will drive the near future results. The Reserve Bank on the other hand, will have to make sure they keep mopping up the additional liquidity in the system and intervene when required to ensure the financial stability of the system. India has clearly welcomed this decision as far as the reactions all over are to be considered. It will be challenging to see the handling of the outcomes that evolve from the decision taken. Hopefully, this should be the fresh start towards making India a more transparent, efficient and the fastest growing emerging economy. If not complete eradication, this will definitely reduce the overall impact of the parallel economy and transfer the reduction as a contribution to the real economy growth rate. I hope as citizen, we will make an effort to ensure the new notes being printed are not soiled by writing on them or keeping them in unhygenic conditions as it adds huge cost to the Govt and the Reserve Bank.

I would love to know the diverse views of the readers as well. Thank you. :).



Wrong Move?

The US Fed, in its last policy meet for the year, held on 15th and 16th of Dec, decided to break it’s near zero interest rate trends. The US Federal Reserve on 16th Dec, 2015 decided to raise its interest rates for the first time after the sub-prime crisis era. Although, the hike was anticipated much earlier in the year, lack of strong data in terms of unemployment rates and inflation was a hindrance. Ultimately, on the basis of fairly strong data, the Fed has decided to step on the gas. The question is” was this a wrong move”? In this blog, I will focus on the data considered by thr Feds for a policy action, inflation targeting, rationale behind the rate hike decision, why is the hike unconventional and the history of the impact of such unconventional measures. To conclude, I would provide an insight on the policy modes of the major economies, the likely impacts on the US economy, global growth and the financial markets worldwide.

The Federal Reserve, in its final policy for the year, increased the interest rates by 25 bps from 0%-0.25% to 0.25%-0.50%. Fed was focusing on the data from the past 5 years to understand the feasibility of a rate hike. For the readers, it is important to know that a rate hike will start taming inflation and choke the growth in the medium term. Feds have been closely tracking two critical indicators namely, unemployment rate and the retail inflation numbers. Feds had their targets for unemployment rate to drop below the 5% levels while inflation rates to touch 2% trending northwards. The growth rate so far has been on the lower side, but as every other developing and developed economy, the US is has a focused inflation targeting.

Here’s a graph to explain the readers briefly the interest rates and inflation trend:

Fullscreen capture 12232015 122333 PM.bmp
Interest Rate Trend 2005-2015
Fullscreen capture 12232015 123056 PM.bmp
Inflation Trend 2005-2015
Fullscreen capture 12232015 125258 PM
Feds Target Line Not Crossed

The rationale of the US Fed behind the rate hike was a fairly upward trending inflation and lower unemployment rates. The above images show that, despite not achieving the inflation target and the unemployment rate benchmarks, the Fed increased its interest rates in a non conventional manner. The tone of the policy statement indicated that they are expecting the inflation figures to rise further and the unemployment rate to continue its downward trend as shown in the graph. Inflation is rising but the average figures for the year 2015 is 0.5%. It is unlikely that the figures will rise up to the 2% levels  in the near future due to lack of domestic demand in the US.  On the other hand, a rate hike will choke the growth as well as tame inflation, which will beat the purpose of the rate hike  in the first place. Secondly, the Fed said they expect the unemployment rate to inch downwards from here on. But here’s what has happened from 1971 till date to the unemployment rates whenever the interest rates have been change. Unemployment is directly related to the movement of the interest rates. The below graph and the movements suggest that even the intent of bringing the unemployment rate down is not achieved with a rate hike. Its a challenge from here on how the Feds are going to contain the effects or if I may say the ill-effects of the decision.

Whenever interest rate has increased, the Un-employment rate has increased as well and vice versa

Lets take a look at the history of the effects of unconventional policy actions. European central bank raised the rates twice in 2011, killing a nascent recovery and plunging the euro zone into a double-dip recession that it is still struggling to overcome. In between the years 2004-06, Feds steady quarter point increase in the rates (which was an attempt to avoid the bubble creation), was not enough to stop the implosion of the housing bubble in 2008. In the above mentioned scenarios, the problem was either the central banks acted too slow or too fast, whereas it would have been prudent to take appropriate actions. 

With growth still sputtering in Europe, the ECB has been embracing the tools used by the Feds years ago to revive the economy i.e Quantitative Easing. ECB has kept its rates to near zero levels to try and revive the economic conditions with QE, although the revival might take a little more time than expected. Whereas in Asia, PBOC (People’s Bank of China) is also on a easing mode. Similarly Japan is keeping its interest rates at rock bottom levels to encourage growth. India as well has joined them by reducing its interest rates by almost 125 bps from Jan 2015. With the globe on easing mode, it is going to difficult for the US to justify its tightening with the global growth being already quiet subdued. The growth rates for the US in the first half of 2017 are expected to be on the lower side because of the tightening. US also has been a reasonable contributor to the global growth, and with this tightening we can expect a much lower share from the US and consequently lower global growth. The USD as well is expected to harden against the rest of the currencies hurting the exports and thus undermining the trade balance. Markets all over the globe are expected to reap fairly low returns as compared to last year in the medium term. To sum up, with its unconventional policy actions of a hike when the rest of the economies easing to spur growth, the Fed has increased the probability of a further slowdown in the US. If there is no inflation, the growth cannot happen or if I may say if there is no growth, there might not be any rise in the inflation. Currently, US does not have either in place (Insufficient growth to drive inflation and insufficient inflation to drive growth). But, on the brighter side, with US, China, Europe and Japan on a slow lane, India might be the star performer in the coming year with highest growth rate in the emerging economies as well as the world. But, with winter session wiping out without the GST passage, the path on the fast lane does not seem to be easy. However, the prospects for India are significantly good from here on with an expectation of the reforms rolling out in the budget session.

Thank you.



The Wobbly “Wagen”

The Volkswagen group has been in the news lately for its emission scandal. In sept, VW(Volkswagen) was accused of understating the emission numbers and approving the emission tests with the help of a software. It is not the first time that a car making company is facing such accusations. Prior to this there have been recalls by various car makers such as Ford(2012), General Motors(2013), Ford(2013), Maruti Suzuki (2014), General Motors(2014), Honda (2015) etc. So what makes VW a special case? The Emission Defeat Device. Volkswagen, has surpassed the emission test with a completely different approach that has started questioning the corporate governance in the group as well. In “The Wobbly Wagen”, we will discuss about what exactly had VW put in place and how its works, the effects of the scandal so far, the implications in terms of corporate governance, share prices and the way forward for VW group.

In September, the Environmental Protection Agency (EPA) found that many VW cars being sold in the US had a “defeat device” – or software – in diesel engines that could detect when they were being tested, changing the performance accordingly to improve results. The company has also been accused by the EPA of modifying software on the diesel engines fitted to some Porsche and Audi as well as VW models. The defeat software thus made things easy and ugly at the same time for VW. The image below will give a brief idea on how the defeat software works and its interesting!


Emission Defeat Device
        Emission Defeat Device

VW accepted those accusations stating that the software existed in the engines. The effects after the acceptance have been immense on the reputation, credibility and revenue of the world’s largest car maker. VW was forced to call back its cars in the US and the UK amidst the information going public. What started in the US has spread to a number of countries. The UK, Italy, France, South Korea, Canada and, of course, Germany, have opened investigations. Throughout the world, regulators and environmental groups are questioning the legitimacy of VW’s emissions testing. VW has started the recall of  8.5 million cars in Europe, including 2.4 million in Germany and 1.2 million in the UK, and 500,000 in the US as a result of the emissions scandal.


Over the past decade and more, car makers have poured a fortune into the production of diesel vehicles – with the support of many governments – believing that they are better for the environment. Diesel cars were just getting popular in the world economy. With this scandal, predominantly being found in diesel cars, the sales of such cars might be difficult in the coming future for any car maker. While on the reputation front, VW has dented its reputation in majority of the economies and the losses for which cannot be hedged. Looking at the financials, with VW recalling millions of cars worldwide from early next year, it has set aside €6.7bn to cover costs. That has resulted in the company posting its first quarterly loss for 15 years of €2.5bn in late October. But that’s unlikely to be the end of the financial impact. The EPA (US) has the power to fine a company up to $37,500 for each vehicle that breaches standards – a maximum fine of about $18bn. The entire situation has also led to the resignation of their long lasted CEO since he lost support of the key shareholders.


Corporate governance, the upcoming risk management measure, has yet another time being questioned with the VW scandal news. In 2014, in the US, regulators had  raised concerns about VW emissions levels, but these were dismissed by the company as “technical issues” and “unexpected” real-world conditions. If executives and managers willfully misled officials (or their own VW superiors) its difficult to say that the company had stringent corporate governance. On the other hand, UK Trade body has also failed in upgrading their emission tests in the recent past. The tests at present fail to embrace the new testing technologies and more realistic on-road conditions.

The VW share prices on the other hand, have reduced by almost 30-35% in the past month. The downfall although, does not seem to recover anytime soon looking at the current conditions.


The way forward for VW seems to be a bumpy ride in most of the economies. The issues of corporate governance need to be addressed to avoid any further worsening of the reputation. The financial impact although is going to take at least a year to recover. In this instance, it’s an open case. And when you’re caught with your hand in the cookie jar to that extent, you really have no choice but to take ownership of it and do all you can to minimize the damage.

Thank you. 🙂

The Glencore Glitch

World economy has been facing a global slowdown since the start of 2014. Majority of the economies, leaving out a few emerging economies, have so far bottomed out in terms of their GDP growth numbers in the recent quarters. The most significant signs of the global meltdown are the recent fall in global commodity prices amidst subdued global demand and peak volatility in energy prices. The fall in the commodity prices has been beneficial for countries who are net importers of these commodities but have severely dented a few Oil producing nations and oil marketing companies. We witnessed, Saudi, Yemen, Russia, and other OPEC nations selling off oil at prices as low as $44/barrel leading to tensed economic conditions. But there were few companies and countries which were probably ignored because of their strong reputation. One of them is Glencore Plc. In this blog, we will talk about Glencore, its business dynamics and the glitch that might cause a serious threat to the global economy.

Before we proceed, let me brief the readers about the background of the company. Glencore Plc (Glencore), the Global Energy Commodity Resource, a multinational giant in commodity trading and mining. It is probably the largest company in Switzerland and the world’s largest commodity trading company. It facilitates trades of various commodities such as zinc, copper, grains, oil etc.


Going back to 2013, we witnessed the global oil prices started tumbling from $110 / barrel to an average price of $50 / barrel. Similarly, the copper prices also started tumbling in the recent year with the fear of weak demand and oversupply amidst Chinese slowdown. The above image show the trading share of Glencore. The image given below give a brief idea on how the revenues share is dependent on these tumbling commodities.

gglencore sector division

Is anything fundamentally wrong with Glencore? Was it considered a debt burdened company before although having the same levels of debt?  The answer is no. It is a levered bet on not only china but on the fate of copper and oil prices in the near future. Lets focus on what has happened in the recent past. With the falling commodity prices since the last 18 months, amidst China slowdown, Glencore has been a counter-party with China in Chinese Copper Financing Deals. The Chinese traders have been using copper as a tool for carry trade by creating artificial demand. The following image will give a brief idea of carry trade on copper.


Precisely, China is creating 70% of the demand artificially by selling off copper and taking positions in futures market to buy it back after 13 months. On paper the demand is definitely existing but it might happen that the same contracts are rolled over. This might make Glencore’s position weak since the contracts are existent but the actual cash flows might be deferred for a longer period. With this fear, two rating agencies namely Moody’s and S&P downgraded Glencore’s rating to BBB with a negative outlook. The BBB rating with a negative outlook is just a notch above the non investment grade rating. The results have dented its share prices in the past few months. As a corrective action on the entire situation, it announced a dramatic recapitalization plan, one which would see it not only scramble to raise $10 billion in capital through an equity offering, asset sale and capex cut, but become the first major copper supplier of scale to cut production and indirectly benefiting its biggest competitors. Apart from the copper, various other commodities and major currencies have witnessed turmoil and it is unlikely that Glencore will be decoupled from the effects of the same.  Here’s a snapshot of Effect on EBIT vs Sensitivity of Various parameters.

Glencore EBIT Sensitivity

To sum up, with the commodity prices heading southwards it seems difficult for Glencore to recover. Although, they are trying to raise fresh capital and reduce their debt with the same, it is unlikely that they can control the external events predominantly related to the Chinese economy. In the midst of the events stated above, questions are being raised about the solvency of Glencore. What if Glencore fails to sustain the further fall in commodity prices? Well, since Glencore is not just a miner but probably the world’s largest commodity trading desk, and a key commodity counter-party, especially in Chinese carry trade deals, the answer is probably simple – Glencore might turn out to be a Lehman Brothers, only this time in the commodity space. 

Thank you. 🙂

Dashing Denmark – A Case of Extraordinary Monetary Easing

An unusual way of monetary easing has become a favorite solution of most central bankers in the recent past. Lets take a look at the meaning of the word monetary easing before we discuss on those lines. Monetary Easing can be defined as an “Action by a central bank to reduce interest rates and boost money supply as a means to stimulate economic activity”. Precisely putting it, the actions taken by the RBI in the past few bi monthly meetings can be referred to as monetary easing.However, monetary easing can be bifurcated further into the ordinary(rate cut) based on macro economic indicators and the other being the unusual monetary easing used in adverse situations to get the economy moving. Few examples of unusual monetary easing can be US Quantitative Easing, Japan’s QE(Quantivative Easing) to revive their deflationary scenario and the most recent one being the ECB (European Central Bank) starting the Euro QE to revive its economy which will continue at least till Sept 2015.The move by the US Fed, ECB and Bank of Japan seems to be very similar and been done for very similar reasons but what they missed was the currencies they were dealing with were completely distinct, in value terms.

The best way of easing the monetary policy can be a rate cut. It was most certainly ruled out since Japan, US(0.25%) and Euro zone(0.05%) were all witnessing near zero interest rates from a long time. The measures taken by the above mentioned central banks were thus in the form of printing and putting in more cash in the system to revive the economy since all of them were out of options. But Denmark, decided not to go for QE at the time of slowdown ( although interest were near zero) but instead go for further rate cuts, making it an extraordinary monetary easing scenario.


This move created a problem in the economy instead of boosting growth. So what exactly did the Danish central bank do ? In January, looking at the economic slowdown, the Danish central bank decided to cut rates( which were already hovering near 0%). The central bank, instead of going for a QE, went in for 4 consecutive rate cuts since January thus leading to an interest rate of -0.75% which ultimately brought the bank deposit rates into the negative rate zone. On the other hand, the Govt of Denmark was paying the corporate companies an interest of 1% for advanced tax payments and prepaid tax payments if any. This made the bank deposits less attractive as compared to the tax payments. Companies usually enlist legions of lawyers and even move headquarters to minimize tax payments. In Denmark, they could be better off overpaying them. The companies started holding immense amount of money with the tax authorities since they were paying 1% on their advance payments. This started costing the Govt as well as leading to dilution of transmission effects of the monetary policy. The banks on the other hand were charging their corporate customers to hold cash in banks. This has led to a disastrous situation where the money is being moved out of the real economy which is supposed to be the other way round.

It created high costs for bank because of the low-interest rates in terms of lending business. The loan became cheap and the prices of the real estate started shooting up. All this can be related to the Gold monetization happening in India. If we are struggling to get the already existing gold reserves to the banking system, just imagine what can be the condition if money moving out of real economy is to be brought back in. Customers or general public on the other hand in Denmark are facing what people in India holding gold jewelry have been facing. A person holds gold with the bank on which they wont pay interest but instead take locker charges from them for keeping those safe. In the same context, Denmark citizens are facing similar problems on the cash side of it which is making them move away from the bank deposits. The customers are feeling like the following images in Denmark:



Entire situation has created immense problems for Denmark including the revival, the rising real estate prices, banks taking a hit on their profits and money moving out of the real economy. Although Denmark Govt has taken charge of the situation and are trying to come up with various legislations to make sure the economy can be insulated from these unexpected effects of monetary easing.

To sum up, such actions if continued by various central bankers, will result into tremendous decline in the global growth rate. The economic slowdown in the world, where the world economy is growing by mere 3-4%, is because of the attempt of the monetary policy to be made in such a way that it affects the world instead of having effects. Dr Rajan in his recent press conference gave an immensely important statement,

 ” The world economy can grow in a sustained manner only if the monetary policy of each country is designed with a view of facilitating trade in the entire world economy rather than with a mindset of affecting the various economies because of the mere reason of inter-dependencies”

The conclusion being that each country is different in its various aspects of the economy, which should be respected and the Central bank should work in tandem with the policies of the Central Govt and vice versa. Every Central Banker and the Govt should take lessons from this event that none of the two institutions can run without appropriate guidance from each other. Denmark was a case of non accommodative policy execution more than an extraordinary monetary easing. 

Thank you 🙂