BackOpinion | Pandemic pandemonium & policies - measured by moratorium and Moody's
A lender and borrower have a commercial arrangement, sealed by contracts. Contracts do not allow escaping from obligations without the agreement of the other party linked to it
PremiumMoratorium: A temporary stopping of an activity, especially by official agreement
Interest moratorium: Temporary pause of interest payments due
Pandemonium: A state of great noise and confusion
Policies: A plan of action agreed or chosen by a government
Pandemic: A disease that spreads over a whole country or the whole world
The topic of interest calculation and its levy, which is a commercial function and the very basis of existence of lending entities, has evoked much interest in the past many months. A moratorium by definition means “to pause" and not to cancel. Thus, interest moratorium does not mean the activity, which is “interest payable on the outstanding principal amount", will be waived off but that it would be deferred.
A lender and borrower have a commercial arrangement, sealed by contracts. Contracts do not permit escape from obligations without the consent of the other parties linked to the contract.
For a lender to give reprieve to the borrower comes at the risk of the former’s survival. For a lender to give interest waiver could imply that it has free money floating around and / or that it will get a similar reprieve from its sources of funding or else it would lead to asset-liability mismatch.
A case in point: A bank also “borrows" when customers invest into its fixed deposit schemes. The bank then uses the monies to give loans at higher interest rate and the differential is called “gross spreads". If the bank is forced to waive off interest charged to its borrowers, can or would it also be allowed to waive interest it owes to its fixed deposit holders ?
“Act of God"
God: The supreme or ultimate reality. Or, a being or object that is worshipped as having more than natural attributes and powers.
Those who believe in God are aware that it is intangible, cannot be seen or heard in ways of the mortals. And more importantly cannot be made party to any legal proceedings or asked for an opinion. In that regard, reasoning a global event as “Act of God" affects both believers and atheists.
It is but natural that governments are expected to pitch in during a crisis, especially if it is an unprecedented scale as the current pandemic. The sovereign also has a larger role of balancing the multiple hats it wears and to constantly prioritise over various conflicts of interest that these create:
* primarily being a political figure (as we are a democracy)
* regulator of policies that govern the economic-existence, economic-destiny & commercial-viability of the nation,
* “Boss" of all regulators
* Biggest borrower in domestic debt markets
* industry-player-competitor (as owner of multiple banks, other lending entities and many more enterprises across industrial sectors)
Because the sovereign owns stake in banks, it is a stakeholder in the overall system and any decision that could have an implication on minority shareholders must be factored in. Also for competing banks, the regime must have fairness of regulatory policy.
Capitalist markets cannot operate smoothly and grow well with socialist policies governing them. At the same time, governments have the moral responsibility of working to uplift weaker sections of the community and not just the economy.
It will be interesting to see the outcome of the top court’s decision in the interest moratorium case. After all, the code of conduct is in place for the upcoming state elections, and remains to be seen how this is viewed by the voting public and the courts?
Of course any loan or interest waiver or the sovereign reimbursing the lenders of any component o loans will come under the scanner of global rating agencies. Any outgo of monies from the treasury will strain government finances to that extent.
Meanwhile, those sectors that fail to get relief, caught between the Kamath committee recommendations and the K(c)reditors intent to finance them, will continue to struggle until they get relief or default, or sell-out as stressed companies or etc.
While it’s good to help consumers who are economically challenged, the well-off and the rich do not deserve preaching to.
Some of sectors have been struggling for many quarters before the pandemic struck. While policies can help in “cleansing of the bad actors", it must also have to address the need for reviving those sectors.
As the various schemes of the fiscal stimulus package give relief, they will also have some hits & misses. It is foolhardy to expect every policy or a stimulus will be a success. In crisis like these, it is absolutely fine to experiment. And so should we, until we see relief ahead, which depends on the vaccine availability and the vacations that we want government staff to use up.
The four Ms to be Watched :
* Moody’s: The rating of the sovereign and outlook will be crucial and as such they will parse government action over the next few months. Market volatility, investors sentiment will fluctuate, and global flight of capital and wealth segregation likely.
* Moods: The consumer and investor sentiment has suffered wild swings thanks to the lockdowns and varied exit plans and will continue to hurt markets for some more time.
* Markets (equities & debt): Daily surges and weekly dips should not mean much but “fundamentals" are critical.
* M&A: Bankers dealing with this aspect are more than busy. M&A activities will increase as Indian businesses seek more capital or reduce their leveraged positions. Many businesses could change hands. Strong companies with robust balance sheets will survive and increase their market share, even as their competitors disappear from the race.
S(l)aying it with Statistics
Consumer sentiment remains under pressure. There are many who have lost their jobs. Add to it a number of entrepreneurs - of big, medium, small & micro business - whose revenues have become fraction of what they were at the beginning of this calendar year, if not near zero. Yet, there is a general feeling that the economy is on the mend.
Statistics can show a good average. But if a person has 100 apples and three have none, the narrative cannot be that each has 25 apples to eat and all is well. Statisticians hence have other tools than mean, median and mode!
In this cause, it is also time to reassess statistical tools and methodologies that we follow for data gathering and interpretation, and that the government uses for decision making. With modern tools and the robust digital framework of JAM trinity, there is a lot that can be done to bring data interpretation closer to reality. So until then, let us remember the famous line by an anonymous late-19th century author: “Lies, damned lies, and statistics".
The line dividing those are, indeed, very thin and risky!
(The author is an independent markets commentator. Views expressed are his personal.)
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