Money lessons from Uber

When it comes to technology I am a slow adopter. I got an email account only after most of my friends already had one. I started using Facebook and Twitter after these two social media websites had already taken off big time. Further, its been less than a year since I got a smart phone and given that I have only recently started using the app-based Uber taxi service.

For those who have used Uber will know that the company primarily offers three levels of taxi service. Its most basic service is uberGO. This is followed by uberX in the mid-range and UberBLACK in the top-range.

Further, the company does not take cash payments. In order to use Uber, you first need to create a wallet account with Paytm, transfer money into it from a bank account and then link it to the Uber app on your smart phone. The cost of the travel is deducted against the money in the Paytm account.

After using the Uber service, you don’t pay paper money or cash to the company. As mentioned earlier, the payment is deducted directly from the Paytm account. Hence, in that sense the situation is similar to when you buy something using a credit card or debit card.

And this is where things get interesting. Research shows that when people use their credit/debit cards they are likely to end up spending more in comparison to when they use cash, simply because there is no pain of purchase, as is the case when using cash.

Gary Belsky and Thomas Gilovich explain this phenomenon beautifully in Why Smart People Make Big Money Mistakes and How to Correct Them: “Credit card dollars are cheapened because there is seemingly no loss at the moment at the purchase, at least on a visceral level. Think of it this way: If you have $100 cash in your pocket and you pay $50 for a toaster, you experience the purchase as cutting your pocket money in half. If you charge that toaster though, you don’t experience the same loss of buying power that your wallet of $50 brings.”

The same stands true about using a debit card as well or for that matter a wallet account like Paytm, to purchase things. “In fact, the money we charge on plastic is devalued because it seems as if we’re not actually spending anything when we use cards. Sort of like Monopoly money,” the authors add.

Hence, as people don’t feel the pain of spending money, they are likely to spend more. “You may be surprised to learn that…you not only increase your chances of spending to begin with, you also increase the likelihood that you will pay more when you spend than you would if you were paying cash,”Belky and Gilovich write.

So how is all this linked to Uber? The area that I live in central Mumbai, uberGo, which works out cheaper than even a kaali-peeli taxi and is air-conditioned, is not so easy to get. On days I don’t find an uberGo I end up using an uberX which is more expensive than a kaali-peeli. And on a couple of occasions I have also ended up using UberBLACK, which is significantly more expensive than a kaali-peeli taxi.

The reason for this is straight forward. Since I don’t have to pay Uber in cash, I don’t feel the pain of paying and end up using a service which is more expensive than a kaali-peeli. In fact, since I am paying using a smartphone the pain of payment is even lower than when using a credit or a debit card, given that payment through a smart phone using a wallet is one more step removed from cash than a credit or a debit card.

This also explains why almost every e-commerce site wants you to shop using an app and not from their website. Since you may pay using a smartphone through a mobile wallet account, there is chance that you will end up spending more money.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at

The column originally appeared in the Bangalore Mirror on June 17, 2015 

Huge debt: The real reason why Indian corporates are not doing well

In a column that appeared on Firspost last week, we had shared a chart which showed that profits of Indian corporates as a proportion of the gross domestic product(GDP), have been falling. As can be seen from the accompanying chart, corporate profits as a percentage of GDP have fallen from 7.1 percent of the GDP in 2007-2008 to around 4.3 percent of the GDP in 2014-2015. That is indeed a huge fall.

Why has this happened? The answer perhaps lies in the following table. The table has been made using data from 433 companies which are a part of the BSE-500 stock market index. It does not include banks and financial services companies. The net sales of these 433 companies accounted for 83.3 percent of the total net sales of close to 3,400 listed manufacturing and services companies excluding banks and financial services companies. Hence, the sample is a fair representation of the Indian corporate space.Chart2

Take a look at the total debt column. As of the end of 31 March 2005, the total debt of the Indian corporates had stood at around Rs 3,49,296 crore. By 31 March 2014, this debt had shot up by 8.1 times to Rs 28,43,155 crore. In comparison the total amount of equity or the money that the owners of these companies put into their respective businesses, had gone up by just five times to Rs 25,83,606 crore.
This meant that the debt of the Indian firms went up at a much faster pace than their equity, and in the process managed to push up the debt to equity ratio from 0.68 to 1.10.

Further, the excessive borrowing did not translate into sales. The sales during the period March 2005 and March 2014, went up by around 5.1 times. The profit on the other hand went up just 3.2 times.

Hence, to summarize, an 8.1 times increase in debt, led to a 5.1 times increase in sales and 3.2 times in net profit. What this clearly tells us is that as Indian corporates took on more and more debt, the new debt wasn’t as productive as the older debt that had been taken on.

And this finally started to reflect in the net profit margin of Indian corporates. As can be seen from the table, the net profit margin (net profit divided by net sales) fell from 10.51 percent in 2004-2005 to 6.55 percent in 2013-2014. This is primarily because a greater amount of profit over the years was used to repay the debt as well as pay interest on it and in the process pulled down net profit margins of Indian companies.

How do things look in 2014-2015(the financial year ending 31 March 2015)? For the last financial year we have results of around 384 companies and not the entire sample as was the case in earlier years.Chart3

In 2014-2015, the net profit margin is down further to 5.95 percent. Though the debt to equity ratio seems to have improved to 0.89. Whether this trend sustains once all the results of the sample come in, remains to be seen.

The conclusion that can be drawn from this data is that Indian companies loaded up on debt between 2004 and 2011, when times were good. During this period the net profit margin varied between 9-11 percent, except in 2008-2009 when it was 7.44 percent. Nevertheless, 2008-2009 was the year when the current financial crisis started and could be discounted as a bad year.

All the debt accumulated between 2004 and 2011 is now coming back to haunt India Inc. And we haven’t seen the last of this.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Data support from Kishor Kadam.

The column originally appeared on Firstpost on June 16, 2015 

Two charts that clearly tell you why the Indian economy is not in good shape

On 29 May 2015, the Ministry of Statistics and Programme Implementation (Mospi) released figures for gross domestic product (GDP) growth last year. The GDP is a measure of the size of an economy. According to this data, the Indian GDP grew by 7.3 percent during 2014-15.

This perky number is the result of a new method of calculating GDP. In January 2015, Mospi, using this new method of projecting growth, had projected a growth of 7.4 percent for 2014-15. Before this number came out, the growth projected by the RBI was at 5.5 percent. The GDP growth finally came in at 7.3 percent.

Not many people believe this higher number given that real economic data like car sales, bank lending, exports, and corporate profits have all been pretty dull. And GDP ultimately is a theoretical construct unlike the real data.

In fact, RBI Governor Raghuram Rajan, in the interaction he had with the media after presenting the monetary policy on 2 June, said: “In the eyes of the rest of the world, it is a discrepancy why we feel the need for rate cuts when the economy is growing at 7.5 percent. Most economies growing at 7-7.5 percent are just going gang-busters and the issue there would be to restrain rather than accelerate growth.”

The answer lies in the fact that there is something not quite right about the GDP growth number. As Rajan put it: “We still have very weak investment. Corporate results, even after adjusting for slow inflation, have been quite weak, suggesting that demand is yet to pick up strongly…Even with the 7.5 percent growth number, there is some discussion of how much that includes special factors in the last quarter, including excise taxes and subsidies. When you subtract that, the growth in the last quarter does not look as strong.”

In fact, Rajan’s argument can be taken further by looking at the accompanying chart 1.


This chart essentially maps the nominal GDP growth as per the old method as well as the new method. Nominal GDP is essentially GDP growth which has not been adjusted for inflation. The blue curve shows GDP growth using the old method whereas the red curve shows GDP growth as per the new method. The data for the GDP growth as per the new method is available only for the last few years.

While, there may be a lot of debate around the validity of the new method of calculating GDP, what it clearly shows is that nominal GDP growth has been falling for a while. In fact, the red and the blue curves almost go hand in hand over the last few years.

As Anindya Banerjee of Kotak Securities puts it: “Though the real GDP growth has created quite a bit of controversy, it’s the nominal growth picture which has immense information value. There is continuity between the old series and the new series and they together are pointing towards the weak state of the economy.”

Now take a look at chart 2 which shows corporate profits expressed as a proportion of GDP. In the last financial year they stood at 4.3 percent of the GDP, which was a 10-year low.


As Banerjee, who brought these charts to my notice, puts it: “Nominal GDP, which portrays both real growth as well as inflation in the economy, has a strong correlation with the taxes that government earns, the earnings of corporates and hence the price multiples that the equity markets enjoy. A decadal low in the nominal GDP is in line with the decadal low witnessed in corporate profit growth or share of corporate profits in GDP. Corporate profits as a share of GDP is at lowest level seen at least since FY04, at 4.3 percent.”

These two charts clearly tell us that the Indian economy is not in a good shape, despite wherever the real GDP growth number might be. It will be difficult for the government to spend its way out of trouble simply because it won’t earn enough taxes to do that. If it wants to spend more and pump prime the economy then it will have to borrow more and in the process compromise on fiscal discipline. The government borrowing more will also push up interest rates and that will have its own share of repercussions.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on The Daily Reckoning on June 9, 2015 

Why are more than 10 million homes vacant in India?


Dear Reader,

If you ever go to New Delhi, try taking a drive through the sub-city of Dwarka and you will see miles and miles of built homes with nobody living in them. You can see a similar sight in large parts of the National Capital Region (NCR) around New Delhi.
In fact, Anshuman Magazine, chairman and managing director of CBRE South Asia Pvt. Ltd., in a recent article pointed out that “around 12 million completed houses” are “lying vacant across urban India”.
A similar point is made by Akhilesh Tilotia in his book
The Making of India—Gamechanging Transitions, where he states that India has more homes than households. As he writes: “India’s households increased by 60 million to 247 million from 187 million between 2001-2011. Reflecting India’s higher ‘physical’ savings, the number of houses went up by 81 million to 331 million from 250 million. The urban increases is telling: 38 million new houses for 24 million new households.”
And despite this, there is a huge shortage of housing in urban India. As the latest Economic Survey, a document which is released every year a day before the annual budget of the government of India, points out: “At present urban housing shortage is 18.8 million units [i.e. homes].”
So what is happening here? Many of these homes have been bought as investments by people who have “extra” money to invest. A substantial portion (no one knows how much) of this is black money on which taxes haven’t been paid. Hence, homes have been bought but nobody is living in them.
Further, the dynamics of real estate sector in India have so evolved that builders like catering only to the richer segment of the population. Also, the price levels have now gone even beyond this section of the population.
But the shortage in housing is at the lower income levels. “95.6 per cent [of housing shortage] is in economically weaker sections (EWS) / low income group (LIG) segments,” the Economic Survey points out. Tilotia points out that: “70% of the urban housing shortage arises from the bottom four deciles of households whose ability to pay is severely constrained.” He estimates that unmet needs in India are at price points of Rs 0.5-Rs 1 million. The real estate companies due to various reasons are not interested in satisfying this unmet demand.
A recent research report by real estate rating and research firm Liases Foras points out that the average price of a home in the Mumbai Metropolitan Region, as of March 31, 2015, was Rs 1.3 crore. The numbers for Bangalore and Delhi are Rs 86 lakh and Rs 74 lakh respectively. Given these high prices, it is not surprising that the housing demands of a large segment of population are going largely unmet.
Hence, it is not surprising that as per the 2011 Census, 13.7 million households in cities live in slums. The number of people living in these slums is around 65 million and forms around 17.4% of the urban population. As per the Census, Visakhapatnam with 44.1% of its population living in slums comes right at the top. Mumbai, with 41.3% of the population living in slums comes in third. Kolkata with 31.9% of its population living in slums is eight on the list.
Further, the number of people living in urban slums may be understated. This is primarily because the 2011 Census was carried out only in what are known as statutory towns. These are towns which have some sort of an elected local body.
A Times of India newsreport points out that India has a total of 7935 towns. Of this 4041 are statutory towns. The remaining do not have an elected local body. Nevertheless, they fulfil the criteria of being urban, and the Census classifies them as census towns. The census towns were not considered for counting slums. These towns have a total population of more than 5 crore and substantial part of that population is living in slums.
Further, other estimates put the slum population living in Indian cities at a much higher level. A
2012 newsreport quotes S. Parasuraman, director of the Tata Institute of Social Sciences in Mumbai as saying: “Nearly 60 percent of Mumbai’s slum population lives in 8 percent of land.” The Census number as mentioned earlier is at 41.3%. These differences apart, what this clearly tells us is that with so many people living in slums, India has a huge urban housing shortage.
So what is the way out of this? The government needs to start doing something about it sooner rather than later. Maybe it can learn a thing or two from the South Korean government, which in the late 1980s built around 2 million homes of which around 0.9 million were built around the capital city of Seoul, as Tilotia points out.
In order to do this, the government will have to first and foremost sort out the mess that currently surrounds the process of land acquisition. Further, these homes will have to be built on the periphery of cities, backed up by a good transportation system, so that people can travel to work. The outdated floor space index laws controlled by real estate lobbies (which are often fronts for politicians) will need a thorough re-look. These laws essentially deal with how much area can be built-up, given the size of the plot on which a building is being built. So, if the FSI allowed is 2, then on a plot of 1000 square metres, the building being built can’t have a built-up area of more than 2000 square metres.
If all this is not done there will be more trouble ahead, as more and more of Indian population moves to Indian cities, in the years to come. As the Economic Survey points out: “Nearly 30 per cent of the country’s population lives in cities and urban areas and this figure is projected to reach 50 per cent in 2030.”
What this means is that if affordable housing doesn’t become the order of the day, the slumification of India will continue. And that is not a happy thought.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column was originally published on on May 21, 2015 

Why economic growth cannot be taken be for granted


Mrs. Lintott: Now. How do you define history Mr. Rudge?
Rudge: Can I speak freely, Miss? Without being hit?
Mrs. Lintott: I will protect you.
Rudge: How do I define history? It’s just one fuckin’ thing after another.

Alan Bennett, The History Boys

Economists these days do not give much importance to economic history. As Cambridge University economist Ha-Joon Chang writes in
Economics—The User’s Guide: “Many people consider economic history [emphasis in the original], or the history of how our economies have evolved, especially pointless. Do we really need to know what happened two, three centuries ago.”
Nevertheless, a good understanding of economic history is necessary to ensure that we don’t take things for granted. Take the case of economic growth. In the times that we live in we take rapid economic growth for granted. But for much of humankind that wasn’t the case. As best-selling author and economist Tim Harford put it in a column “Economic growth is a modern invention: 20th-century growth rates were far higher than those in the 19th century, and pre-1750 growth rates were almost imperceptible by modern standards.”
Chang makes this point in his book. Between 1000AD and 1500AD, per capita income, or the income per person, grew by 0.12% per year in Western Europe. What this means is that the average income in 1500 was only 82% higher than that in 1000. “To put it into perspective, this is a growth that China, growing at 11 per cent a year, experienced in just six years between 2002 and 2008. This means that, in terms of material progress, one year in China today is equivalent to eighty-three years in medieval Western Europe,” writes Chang.
Further, at 0.12% Western Europe was growing at a very fast pace in comparison to other parts of the world. Asia and Eastern Europe during the same period grew at 0.04% per year. Hence, by 1500 the per capital income in these parts of the world would have been 22% higher than that in 1000.
Things did not improve in the centuries to come. Between 1500 and 1820, the per capita income in Western Europe averaged at 0.14% per year, which wasn’t very different from 0.12% per year, earlier. Some countries like Great Britain and Netherlands which were busy building a global empire and had also got a central bank going, grew a little faster at 0.27% and 0.28% respectively. So by modern standards the world was in a depression between 1000AD and 1820AD.
Things improved over the next 50 years. Between 1820 and 1870, the per capita income for Western Europe grew by 1% per year, which was significantly higher than anything the world had seen earlier.
One reason for this turbo-charged growth was the start of the industrial revolution. In the years leading to 1820 many new production technologies were invented. “In the emergence of these new production technologies, a key driver was the desire to increase output in order to be able to sell more and thus make more profit,” writes Chang.
Along with this, the evolution of banks and the financial system also helped. “With the spread of market transactions, banks evolved to facilitate them. Emergence of investment projects requiring capital beyond the wealth of even the richest individuals prompted the invention of the
corporation, or limited liability company, and thus the stock market,” writes Chang. And this helped enterprises raise the money required to start a business, something which is at the heart of capitalism.
After 1870, the production technologies kept improving. The economist Robert Gordon divides invention and discoveries into three eras. The second era came between 1870 and 1900 and according to him had the maximum impact on the economy in particular and the society in general.
As he writes in a research paper titled 
Is US Economic Growth Over? Faltering Innovation Confronts the Six Headwinds “Electric light and a workable internal combustion engine were invented in a three-month period in late 1879…The telephone, phonograph, and motion pictures were all invented in the 1880s. The benefits…included subsidiary and complementary inventions, from elevators, electric machinery and consumer appliances; to the motorcar, truck, and airplane; to highways, suburbs, and supermarkets; to sewers to carry the wastewater away,” writes Gordon.
Based on Gordon’s research paper, Martin Wolf wrote in the Financial Times: “Motor power replaced animal power, across the board, removing animal waste from the roads and revolutionising speed. Running water replaced the manual hauling of water and domestic waste. Oil and gas replaced the hauling of coal and wood. Electric lights replaced candles. Electric appliances revolutionised communications, entertainment and, above all, domestic labour. Society industrialised and urbanised. Life expectancy soared.”
In fact, Gordon makes an interesting observation regarding this increase in productivity by comparing motor power to a horse. As he writes: “Motor power replaced animal power. To maintain a horse every year cost approximately the same as buying a horse. Imagine today that for your $30,000 car you had to spend $30,000 every year on fuel and repairs. That’s an interesting measure of how much efficiency was gained from replacing the horses.”
And all these inventions drove economic growth. As Bill Bonner told me in an interview I did with him a few years back: “Trains were invented 200 years ago. Automobiles were invented 100 years ago. Aeroplanes came on the scene soon after. Electricity – fired by coal, oil…and later, atomic power – made a big change too. But all the major breakthroughs date back to a century or more. Even atomic power was pioneered a half century ago. Since then, improvements have been incremental…with diminishing rates of return from innovations.”
These game changing inventions are now a thing of the past. Harford explained this to me through a couple of brilliant examples when I interviewed him for The Economic Times a few years back. As he told me: “The 747 was a plane that was developed in the late 1960s. The expectation of aviation experts is that the Boeing 747 will still be flying in the 2030s and 2040s and that gives it a nearly 100 year life span for its design. That is pretty remarkable if you compare what was flying in 1930s, the propeller aeroplanes. In the 1920s they didn’t think that it was possible for planes to fly at over 200 miles an hour. There was this tremendous progress and then it seems to have slowed down.”
The same seems to be true for medicines. “Look at medicine, look at drugs, antibiotics. Tremendous progress was made in antibiotics after 1945. But since 1980 it really slowed down. We haven’t had any major classes of antibiotics and people started to worry about antibiotic resistance. They wouldn’t be worried about antibiotic resistance if we thought we could create new antibiotics at will,” Harford added.
So the basic point is that growth of economic productivity has petered out over the last few decades because game changing inventions are a thing of the past. These game changing inventions changed the Western countries (i.e. the US and Europe) and helped them rise at a much faster rate than rest of the world. But that might have very well been a fluke of history.
Nevertheless, what these game changing inventions did was that they led to the assumption that economic growth will continue forever. But will that turn out to be the case? As Gordon wrote in his research paper: “Economic growth has been regarded as a continuous process that will persist forever. But there was virtually no economic growth before 1750, suggesting that the rapid progress made over the past 250 years could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate.”
And this might very well come out to be true. The core of Gordon’s argument is that modern inventions are less impressive than those that happened more than 100 years back. “Attention in the past decade has focused not on labor-saving innovation, but rather on a  succession of entertainment and communication devices that do the same things as we could do before, but now in smaller and more convenient packages. The iPod replaced the CD Walkman; the smartphone replaced the garden-variety “dumb” cellphone with functions that in part replaced desktop and laptop computers; and the iPad provided further competition with traditional personal computers. These innovations were enthusiastically adopted, but they provided new opportunities for consumption on the job and in leisure hours rather than a continuation of the historical tradition of replacing human labor with machines,” writes Gordon.
And that isn’t happening anymore.

The column originally appeared on The Daily Reckoning on May 14, 2015

Mr Rahul Gandhi, what about jijaji Robert Vadra and his closeness to DLF?

rahul gandhi
Rahul Gandhi seems to have taken a liking to calling the Narendra Modi government a “
suit boot ki sarkar”. He made that jibe again in the Parliament yesterday where he said: “This government is anti-farmer, anti-poor. This is a suit-book ki sarkar.”
Rahul, as he did in the past, was trying to suggest that the Modi government was essentially batting for the corporates and not for the farmers of this country. But what the Gandhi family scion is forgetting in the process is that only a few years back India’s largest listed real estate company DLF was batting for his brother-in-law Robert Vadra.
Let’s recount what happened in the case of DLF and Vadra. DLF gave a Vadra and advance of Rs 50 crore for more than three years, and this advance was the money used by Vadra to go on a land buying spree in Rajasthan as well as Haryana, with more than a little support from the respective Congress governments in both these states. As we shall see Vadra had very little of his own money in the business and without the money from DLF he wouldn’t have been able to do anything. What does Rahul Gandhi have to say about this link?
In October 2012, the Daily News and Analysis(DNA) reported that between July 2009 and August 2011, Vadra bought at least 20 plots of land with an area of more than 770 hectares in Bikaner district in Rajasthan. In fact Vadra was willing to pay Rs 65,000 per hectare of land when the going rate was not more than Rs 30,000 a hectare
The Gandhi family son-in-law made these purchases through companies which included Real Earth Estates Pvt Ltd, North India IT Park Pvt Ltd, and Skylight Realty Pvt Ltd. As the DNA report pointed out: “A clutch of investors, including Vadra, apparently privy to information on upcoming industrial projects in the vicinity,
reaped huge profits with land values appreciating by up to 40 times since 2009 [the italics are mine]…These companies together invested Rs2.85 crore in barren land here during this period.”
So, Vadra bought land being privy to information that ensured that the value of the land would go up many times in the days to come. And he made a killing in the process. Vadra bought land through his companies just before a memorandum of understanding was signed between the Rajasthan government and private firm for a “Rs45,000-crore project to manufacture silicon chips for the telecom industry.”
Vadra was essentially trading on insider information, which wouldn’t have been difficult to get given that a Congress government led by Ashok Gehlot was in power in the state.
The interesting bit here is how Vadra went about financing the purchase of land. The money for it came essentially came from DLF. One of the Vadra companies which bought land in Rajasthan was Real Earth Estates Private Ltd. The company had an issued capital of Rs 10 lakh as on March 31, 2010.
Nevertheless, as on March 31, 2010, the company had 10 plots of lands listed under fixed assets. These plots were worth were bought for Rs 7.09 crore. Of these three plots were in Bikaner in Rajasthan and had been bought for Rs 1.16 crore. How did a company with an issued capital of Rs 10 lakh manage to buy land which cost Rs 7.09 crore in total?
This is where things get even more interesting. The balance sheet of Real Earth Estates as on March 31, 2010, shows that it had an unsecured loan of Rs 5 crore from DLF. An unsecured loan is a loan in which the lender does not take any 
collateral against the loan and relies on the borrower’s promise to return the loan. Why was DLF being so generous to Vadra? Can Rahul Gandhi give us an answer for that?
Real Earth Estates also had borrowed another Rs 2 crore from Sky Light Hospitality Private Ltd, another Vadra company. The total loan amounted to Real Earth Estates amounted to Rs 7 crore. And this money was used to buy 10 plots of land, of which three plots were in Bikaner.
Where did Sky Light Hospitality get the money to give Real Earth Estates a loan of Rs 2 crore? As on March 31, 2010, Sky Light Hospitality had an issued capital of Rs 5 lakh. How did a company with an issued capital of Rs 5 lakh, manage to give a loan of Rs 2 crore, which was 40 times more.
Enter DLF—the company had given Vadra’s Sky Light Hospitality an advance of Rs 50 crore. When the controversy first broke out DLF had said in a statement: “Skylight Hospitality Pvt Ltd approached us in FY 2008-09(i.e. the period between April 1, 2008 and March 31, 2009) to sell a piece of land measuring approximately 3.5 acres…DLF agreed to buy the said plot, given its licensing status and its attractiveness as a business proposition for a total consideration of Rs 58 crores. As per normal commercial practice, the possession of the said plot was taken over by DLF in FY 2008-09 itself and a total sum of Rs 50 crores given as advance in instalments against the purchase consideration.”
The first instalment of the Rs 50 crore advance that DLF gave Vadra was paid on June 3, 2008. An October 2012 report in The Hindu points out that “ the 3.531- acre plot…M/s Sky Light Hospitality,…[was] sold to DLF Universal Ltd on September 18, 2012.”
Hence, the Rs 50 crore advance stayed with Vadra’s Sky Light Hospitality for more than three years.
An advance unlike a loan is made interest free for a short period of time. Further, Vadra had access to a part of the Rs 50 crore advance for more than four years, given that the first instalment was paid by DLF in June 2008 and even though the sale was registered only in September 2012.
DLF in its statement tried telling us that this was par for the course. But how many other such advances did the company make. As The Financial Express wrote in an October 2012 editorial: “DLF has not been able to cite other instances of where interest-free advances have been given, and over such long periods of time.”
So clearly DLF had a soft corner for Robert Vadra, who is the son-in-law of Sonia Gandhi and the brother-in-law of Rahul Gandhi, the president and the vice-president of the Congress party. The Congress led UPA government was in power between 2004 and 2014.
This Rs 50 crore was at the heart of Vadra’s operation and was used by him to buy land as well as flats. Rs 2 crore out of this Rs 50 crore available with Sky Light Hospitality was used to give a loan to Real Earth Estates Private Ltd. Effectively DLF gave money amounting to Rs 7 crore to Real Earth Estates Private Ltd to buy land. Of this Rs 1.16 crore was used to buy land in Bikaner.
What does Rahul Gandhi have to say about this? Now that he has accused the Modi government of being a “suit-boot ki sarkar” and being close to corporates, he could possibly explain this closeness of his brother-in-law Robert with a corporate? After all, Caesar’s wife must be above suspicion.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on May 13, 2015

While corporates continue to screw banks, the small guy is paying up

One of the themes that I have explored since I started writing for
The Daily Reckoning last year, is the bad state of banks in India. And the way things are right now it doesn’t seem like the situation is going to improve on this front any time soon.
In a research note titled
For banks, no respite from bad loans this year released yesterday, Crisil Research estimates that gross non performing assets or bad loans of banks will touch Rs 4,00,000 crore during the course of this year. This will mean an increase of Rs 60,000 crore. More precisely, the bad loans of banks will increase to 4.5% of the total advances of banks, from 4.3% currently.
What is worrying is that 40% of the loans restructured during 2011-2014 have become bad loans. A restructured loans is
where the borrower has been allowed easier terms to repay the loan (which also entails some loss for the bank) by increasing the tenure of the loan or lowering the interest rate. If 40% of restructured loans have gone bad, it is safe to say that the banks have been essentially restructuring loans in order to postpone recognizing them as bad loans.
Crisil Research also points out that
the weak assets of banks are are expected to stay high at 6 per cent of advances or Rs 5,30,000 crore. The public sector banks which are essentially in major trouble with their weak assets forming around 7% of their advances. For the private sector the number is around 2.9% of their advances.
In fact, Jayant Sinha, the minister of state for finance
in a written reply told the Rajya Sabha yesterday, that around 23% of the projects to which public sector banks had given loans worth Rs 54,056.75 crore in 2014-2015, have turned into non performing assets. He told the Upper House of Parliament that 17 out of the 74 projects to which public sector banks had given loans had turned bad.
Further, some year end results of public sector banks reaffirm the bad state that they are in. Take the case of Punjab National Bank. As of March 31, 2015, its stressed assets ratio increased to 16.2%. It was at 15.4% at the end of December 2014.
The stressed asset ratio is the sum of gross non performing assets(or bad loans) plus restructured loans divided by the total assets held by the Indian banking system. The borrower has either stopped to repay this loan or the loan has been restructured, where the borrower has been allowed easier terms to repay the loan by increasing the tenure of the loan or lowering the interest rate.
In Punjab National Bank’s case of every Rs 100 of loan given out by the bank, Rs 16.2 has either gone bad or has been restructured. How does the situation look on the whole? S S Mundra, deputy governor of the Reserve Bank of India gave an indication of this in a recent speech. He pointed out that the stressed assets ratio of banks in India as a whole stood at 10.9%. This meant that for every Rs 100 given out as a loan, Rs 10.9 has either gone bad or has been restructured.
As Mundra pointed out: “The level of distress is not uniform across the bank groups and is more pronounced in respect of public sector banks…The stressed assets ratio[of public sector banks] stood at 13.2%, which is nearly 230 bps[one basis point is one hundredth of a percentage] more than that for the system.” The stressed assets ratio of public sector banks as on March 31, 2014, was at 11.7%. The overall stressed assets ratio of banks was at 9.8%.
This is clear indicator that the banking sector in general and the public sector banks in particular continue to remain in a mess. In fact, the bad loans of most public sector banks which have declared results up till now, have gone up. This is primarily because the exposure of public sector banks to “vulnerable sectors is expected to remain high, just the way it was in 2014-15”. The vulnerable sectors include
infrastructure, mining, aviation, steel, textile etc.
What this means is that corporates who had taken on loans from banks have been unable to repay and are now in the process of defaulting on loans or renegotiating the terms. That was the bad news. Now some good news.
newsreport in the Daily News and Analysis points out that the defaults by small borrowers have fallen. The newsreport points out that data from the Credit Information Bureau (India),  the country’s leading credit information company, shows that as on December 31, 2014, the defaults on home loans dropped to 0.5% of total advances of banks. It was at 1.06% of advances at the end of 2010.
A similar trend has been seen when it comes to personal loans as well. Defaults have fallen to 1.01% of advances from 2.65% earlier. In case of unsecured loans (like credit cards) the defaults have fallen to 1.19% of advances from 3.27% earlier.
While, the corporates have been on a defaulting spree, the individuals who take on various kinds of loans have been repaying them at a much better rate than they were in the past.
To conclude, the bigger learning here is that the small guy in this country continues to do his job well, tries to earn an honest living, repay his loans on time, and so on. The big guy, on the other hand, is out screwing the others including the banking system.

(The column originally appeared in The Daily Reckoning on May 13, 2015)