'Mallya's and Banks

On 2nd March, Vijay Mallya left the country and all hell broke loose. What happened exactly? Why did it happen? Why is there so much fuss about it? What should we know?

What happened?
Vijay Mallya had borrowed over Rs.7000 crore from the banks. But he had left the country without paying a single rupee out of that. In simple terms, banks have been robbed of Rs.7000 crore by a single man.

Why happened?
The source of revenue for the banks is its loans (if they are repaid). So banks try to give as much loan as possible. But before giving loans, they make sure that borrower can repay the loan or if he cannot repay the loan, then he has enough assets(mortgage) from which loan amount can be recovered. For a commonn man, banks have stringent rules for lending the money as well as recovering. But their chief cash cow is big borrowers (businessmen like Mallya) because they borrow more and in turn repay a huge sum as interest. The only caveat here is they don't always have enough mortgage at the time of taking a loan. Banks envisage that his business will ultimately be profitable and banks will get their money back. In fact, banks try to pursue such big borrowers. But what if the business goes into a loss?

This is what happened. Kingfisher Airlines, which was setup in 2003, had been consistently reporting loss since 2009. In 2011, it had already accumulated a debt of around Rs.6500 crore. And still some banks lent money to already bankrupted the company. The worst part is that many of these banks were state-owned banks, where common people invest their earnings with a full trust. In the end, it was crystal clear that Mallya can't pay back the loans and so banks demanded to arrest him. But even before that, Mallya flew out of India.

Why is there so much fuss?
Mallya is one such example. In fact, Indian banks are in bad shapes because of a large number of such bad loans. Governor of RBI has already warned banks to recover these bad loans. If banks can't recover the loans, then it will create a situation similar to the great depression of 2008.

Why bad loans are offered?
We have already discussed the one reason that banks want to earn a profit. Sometimes the business doesn't work out and loans become bad loans. But other reasons are worrisome. Sometimes there is  political pressure on the banks to offer the loan even against their will. Whereas sometimes it is because of corrupt bank officials. Even though bank official know that the loan will turn out to be the bad one, he grants such loan in exchange for the bribe.

What should we know?
From where do banks get money to lend? It is the money we invest in banks to earn small interest on our modest income. So effectively we lend money to these businessmen. In simple terms, Mallya has robbed us of Rs.7000 crore.

Here is a Kingfisher Airlines crisis timeline:
http://www.thehindu.com/business/Industry/kingfisher-airlines-crisis-timeline/article4636635.ece?homepage=true

Struggling China And The World

This year started with a 'Black Monday'. There was a huge dip in a stock exchange index(Sensex as well as NSE). This was accompanied with a depreciation of rupee by 0.47 (which is too much for a day). It is speculated that investors lost a huge sum of rupees 150 billion. In fact, throughout the last year, the world has witnessed multiple Black Mondays. These facts compelled us to discuss the antagonist of this tragedy: Economic Crisis in China.

From 1949 to 1978, China had Soviet-style centrally planned economy. China was experiencing an economic downturn, until the time its new president Deng Xiaoping began the economic reforms. China started economic liberalization in 1978 and moved towards market-oriented mixed economy under one-party rule. Its model was similar to that of Japan and South Korea. Like Japan and S. Korea, for nearly 30 years China has been growing at an average rate of 10%, thrusting its goods across the world. The growth of China was unprecedented in both duration and scale. It became the world's second largest economy by nominal GDP and largest economy by purchasing power parity(PPP) according to IMF. China accounts for 17% of global economic activity. As the second biggest economy in the world, its has the huge impact on global economy. This implies slowing down of China will slow down the world.

The growing streak of the Chinese economy was finally slowed down in 2015. The world was alarmed on 24th August when Shanghai main share index lost 8.49% of its value in a single day. Repercussions were seen in India's stock market as well as stock markets all over the world. As a result, billions of pounds were lost on international stock markets. Even media in China called it 'Black Monday'. It was followed by 'Black Tuesday', losing more than 7% again.

WHAT HAPPENED IN CHINA:
In the 1980s, China established 'special economic zones' to attract foreign investment. This allowed the influx of foreign investments into China helping its industrialization and reformed the export based economy. Growing economy and growing foreign investment kept increasing the stock exchange index. With government controlled media, China encouraged its people to invest in stock market. Many Chinese families borrowed their money to buy shares, hoping that share prices will eventually grow in value. As millions of investors started investing borrowed money into the stock market, share prices were pushed to inflated values. (This is similar to how subprime lending in the USA led to housing bubble in 2007-8)

Chinese government realized that allowing people to buy shares with borrowed money is a bad idea. They put the ban on purchasing shares with borrowed money. In the panic, investors sold off their stocks to pay back the money they had borrowed. Mass selling of shares plunged the share prices to even lower. The equivalent of $3 trillion was lost as a result of the drop in share prices.

WHY IT AFFECTS INDIA AND THE WORLD:
As no external index for China's growth is available (figures published by Government is the only source), their stock market index signifies their economy. When stock index went down, even foreign investors pull out their money creating the situation even worse. The economy is also driven by psychology. When investors fear that market is going down, they pull out their investment and the market really goes down. When the economy of China slows down, investors fear of the global slow down and pull out investment from other countries also. So investors fear that Indian economy will also go down and start selling their shares in Indian stock market. This resulted in the dip in Indian stock exchange index on 'Black Monday and Tuesday'.

Only 1.5% Chinese shares belong to foreigners, but still their stock market crashes are affecting the financial markets in the UK, Europe, and the USA.

WHAT HAPPENED ON 4 JAN 2016:
In 2015, the growth rate of China dropped down to 7.1% from 10% and was surpassed by India with a growth rate of 7.5%. These figures ratified the slowing down of China's economy. In July of 2015, China had imposed a restriction on selling the shares. These restrictions were until the end of 2015. As 2016 started, skeptical share-holders sold out their shares which decreased the stock market index by 7% withing two hours after which transaction was stopped. First Monday of 2016 became the 'Black Monday'. And this, of course, forced Indian stock market index to go down.

Today, economies of all nations are inter-dependent and when one economy starts sinking, it carries the entire world to the bottom.