The Economic Times daily newspaper is available online now.

    Ritesh Jain’s what I read this week: Benz, Banjara & helicopter money

    Synopsis

    Hirabai Fakira Rathod, a Banjara Adivasi near Aurangabad was talked into buying a new vehicle in 2010 when many banks were on a ‘tractor loan’ spree.

    By Ritesh Jain

    Hey there!
    Image article boday
    The IMF projections surely raised a few questions over the growth vibes in the domestic economy, and even though S&P has come up with some rosy projections, we need a good reality check there. Meanwhile, the bond market continued to create a buzz as were the talks of helicopter money and stock valuations.

    But first, something to get your grey cells working on a systemic issue.
    1. The Benz & the Banjara

    P Sainath, founder editor of People's Archive of Rural India, said in an article published in www.ruralindiaonline.org, wrote a very insightful story about an enterprising lady near Aurangabad, which sheds some light on the whole skewed way banks lend to us and then go after recovering loans.

    Hirabai Fakira Rathod, a Banjara Adivasi near Aurangabad was talked into buying a new vehicle in 2010 when many banks were on a ‘tractor loan’ spree. A loan agent talked her into believing how easy it was for her to get the loan and the local branch of a state-owned bank processed the loan swiftly.

    “The idea was, we could use it ourselves and also earn a bit more deploying it on other farms,” she says. She was given a loan of Rs 5,75,000 for a tractor worth Rs 6,35,000 to be repayable over seven years – at an interest rate of 15.9 per cent. Hirabai went broke after paying back well over Rs 7.5 lakh until March this year. At that point, the bank offered her a ‘one-time settlement’ (OTS) of Rs 1.25 lakh, which she paid by borrowing more money from relatives.
    The banks were on a tractor loan spree to meet their priority sector lending quota. Apart from the Hirabais who made a settlement, there were several who have paid back large amounts but have not managed an OTS. And many others, who could repay nothing.
    About time Hirabai got her loan at 15.9 per cent, a greater lending spree was on in Aurangabad town just 65 km away. The ‘Aurangabad group’, the city’s rich bought 150 Mercedes Benz cars on a single day in October 2010 many of these financed by state-owned banks at just 7 per cent effective interest rate.
    Many loans like that one Hirabai took have doubled in value and not a single rupee has been repaid, but they continue to remain standard assets on the banks’ books although the loan will, most likely, not be repaid. The Benz brotherhood has also seen defaults.
    True, the tractor is a productive instrument, unlike a luxury car. At Rs 64,330, Marathwada still has the lowest per capita income of any region in Maharashtra. That’s about 40 per cent lower than the rest of the state.
    Meanwhile, a new bankruptcy crisis could be in the making, this time involving excavators which are increasingly used in states like Maharashtra where governments are happy to deploy more machinery and less manual labour. A lot of people are going to lose a lot of money and go bankrupt.

    2. Are we really growing?

    Nomura’s heat-map of high-frequency data shows that consumption and non-financial services remain the primary growth drivers. Private investments and financial services are yet to recover, but external demand has edged up from very low levels. Consumption and transport services remain the primary engines of the ongoing growth recovery. However, even here there are some signs of moderation. Diesel consumption, cellular subscriptions, railway passenger traffic and airline freight have all slowed at the margin in Q2 of 2016.

    Meanwhile, investments and financial services have yet to show any signs of recovery, mirroring stressed bank balance sheets, slow corporate deleveraging and ample spare capacity in the manufacturing sector.

    Even public sector investments have yet to gain traction, tracking significantly below last year’s levels on a three-month moving average basis. Indeed, only one in five of Nomura’s indicators accelerated in May (compared with April), down from three in four at the end of Q1.

    There are, however, two positive signs:

    1) Sales of two-wheelers picked up in Q2 partly due to wedding season effects and partly boosted by higher demand for scooters in urban areas;

    2) External demand (visitor arrivals, export volumes) is showing signs of improvement, although Brexit risks are a clear downside risk to this trend

    Nomura expects good monsoons, pay hikes, higher public capex and easier liquidity to support growth, but as these impulses are back-ended. Nomura expects repo rates to remain on hold at the 9 August policy. Beyond that, a 25bp repo rate cut to 6.25% in Q4 can be expected, due to a rising risk of a more neutral-to-dovish central bank governor.

    3. The Age of No Returns We are living in extraordinary times. And judging from my inbox, there are a lot of outstanding questions. In the last 3 years, if we were bombarded with the term QE, be prepared to hear more about “helicopter money” in the near future. The last couple of years have been a roller coaster ride.
    First came the zero interest rate policy (ZIRP). That spooked everyone – how can one not earn interest on his/her money loaned to a financial institution? Before we could digest ZIRP, we were already facing negative interest rate policy (NIRP) – as a lender, you needed to pay the bank interest on your deposit with the bank/government bonds! What?
    Traditional central bank and government economic policy making is no longer working – they have begun to think louder that helicopter money is the only solution. It’s not a long-term solution, but rather a desperate attempt to revive the economy but bear in mind that we are also living in extraordinary times!
    Helicopter money in today’s context is about central banks directly injecting cash into the economy by spending on infrastructure projects etc and putting more money in the hands of public. The biggest beneficiaries will be government agencies and public.

    Matthew Sigel of CLSA broadly defines it as “an expansionary fiscal policy financed by a permanent increase in the money stock. There is no tapering”. More specifically, helicopter money requires a legislature, a finance ministry & a central bank to explicitly cooperate to jointly announce: A tax cut, rebate, or the building of new bridges or aircraft carriers… financed by incremental government borrowing.

    The Bank of Japan’s negative-rate policy and gargantuan bond-buying operation will now continue full force and may even grow. The irony is that the government is producing only about half the quantity of bonds the Bank of Japan wants to buy. BOJ is going to have to do something differently.
    The question is, what? Perhaps Japan could authorize the BOJ to issue very-low-interest perpetual bonds to take on a significant portion of the Japanese debt. Other option is to actually experiment with helicopter drop of money into individual pockets. On a related note, while we might be living in an age of little or no returns, the 40yr Japanese treasury gave a cool 60% capital return last year. Talking about extraordinary times!

    4. Bond Market: Beware of junkyard dogs – John Mauldin newsletter High yield bonds are already in “extreme overvaluation” territory and credit spreads have reduced drastically. High yield mutual funds are witnessing all time high inflows. VIX Index, the so called ‘fear gauge’, which depicts the perceived risk of owning stocks and has traditionally moved in tandem with junk bonds, is at a multi-month low.

    All is well? Probably not. PE ratio of the S&P 500 is at the highest level since at least 2006. However, these valuations rely on continued low interest rates. Investors are no longer demanding a premium level of compensation for owning high yield energy issuers vis-à-vis their non-energy counterparts even though energy prices are expected to rebound in future. Despite the defaults that continue to emanate from the oil patch, the performance of high yield bonds has completely divorced itself from that of still-depressed crude prices. Investors are no longer demanding a premium level of compensation for owning high yield energy issuers vis-à-vis their non-energy brethren.
    High yield is definitely starting to look frothy. Let’s get this straight. Covenant protections are at their weakest level in recorded history. Investors’ collective interests are as vulnerable as they’ve ever been.
    Global corporate default count, as in companies unable to make coupon payments, is at the highest level since 2009. Defaults are going through the roof and investors are flocking to the high yield market in record numbers!

    (Ritesh Jain is the CIO of Tata Asset Management. Views expressed in this weekly column are personal in nature and do not represent those of Tata AMC or ETMarkets.com. It should not be construed as an investment advice. Any action taken by the reader or recipient on the basis of the information contained herein is reader's/recipient's responsibility alone.)



    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more


    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
    The Economic Times

    Stories you might be interested in