Tag Archives: banks

So What Really Is Good Advice?



Podcast Transcript


The markets are hitting new highs. But my advisor says, “Think long term”. I asked him if we need to book some profits. He says  “Do nothing, just let the investments stay.”

Friends, keep bringing up these conversations more frequently these days.

The problem with giving advice in the best of times is that it may actually alter the financial well being of advisors. Actually, it can destroy the advisor’s incomes if what is good for you is actually done.

So there is a tendency to actually give you advice which is innately conflicted. The advisors interests and yours tend to be in deep conflict. Ironically, as your investments start to perform to their peak potential, this conflict only worsens.

The most simple thing to do is to sell and go away. But, the advisor won’t tell you to do that. Instead, he would most likely make you sit and watch your portfolio fall. The advise every advisor fails to give you at the right time is the very advise that every investor would have most badly needed.

Selling and going away is just one way. It is not the only way to do it. There are better and smarter alternatives. But before we judge the smarter options, let us understand what not selling out at the right time would mean to you and your advisor.

So what is the advise likely to turn out for both parties?


Here is my best case argument.

The best case verdict is Good for the Advisor. And not all that bad for you.

The worst case is obvious. Good for the advisor. Very bad for you.


If you invested on good advice and were early to the tech boom of  2000 or the infra boom of 2008, and the advisor simply failed to make you sell when your profits were swollen and peaking, you fell under the worst case scenario.

Valuations will always be the markers. The markers must drive decisions. When the markers warn you, you have got to sell.

The long-term can wait. The immediate response is to advise you to safety. Remember, the long-term has never been as good for tech or infra since 2000 or 2008. I am sensing a similar mood in two spaces in the current market. The marquee private banks and financials is an obvious one. The not so obvious space in the midcap space. The valuations have long been running above the long-term sell markers.

This is the only thing both advisors and investors must respect. MARKERS don’t lie,  especially valuation markers. I am convinced good advice must walk you out of extremely overvalued parts of the market. If not, you will be a spectator during the bad times.

And it is not as if there are no alternatives. There are plenty of alternatives good advice can offer. If an advisor says there is no alternative to owning extremely expensive equities, then it possibly is just one of the two – lethargy or ignorance. The worst case is, that it can be both. Surely as an investor, you can’t afford to let your future be affected by both.

This is a time when we need to call our investing to sensible action. Good advice needs to call those actions of you. If it is dormant or passive, you need to question whether that is actually good for you. If you fail to question such advice, you will sow the seed of serious regret.

Good advice is simple. Investments which are seen as worth holding now must be GOOD FOR YOU. GOOD FOR THE ADVISOR.

Sadly, a whole lot of such investments which looked so in 2014, actually don’t look good for you anymore. So you need to know what good advice is and actively seek it out. Mediocrity can hurt all the good work you did in the past few years.

Recapitalization of Public Sector Banks

The Premise

The Indian Banking system has been trying to resolve its crisis of bad loans. In particular, public sector banks (PSB) have been struggling with their NPAs (non-performing assets).

There have been ongoing efforts since 2015 to address this issue. The RBI mandated Asset Quality Reviews (AQRs) that brought more transparency in determining the quality of loans. Following this, banks were expected to create provisions for their bad loans. Additionally, amendments to the Insolvency & Bankruptcy Code (IBC) and the intervention of the NCLT (National Company Law Tribunal) has sped up the loan recovery process.

However, banks remain stressed and have been unable to boost their interest inflows and grow. A healthy banking system is necessary for a healthy economy.


A Vicious Cycle

Banks are trapped in a vicious cycle. The NPA crisis rose from incorrect capital allocation. When a borrower defaults, the bank’s capital ratios take a hit. Subsequently, banks become fearful of taking on new loans because a default will worsen their position. By refusing additional capital, the ratios decline further adding more stress to balance sheets. On the other hand, writing off NPAs puts off new investors thereby reducing capital inflows.





One of the ways to get out of this mess is to infuse capital into banks. The government’s proposition to recapitalize banks with Rs. 211,000 Crores doubles up as a reform initiative. Capital will be allocated based on merit, prioritizing banks who have polished their balance sheets by cleaning up their NPAs. This initiative forces banks to take real losses by auctioning off collateral, seizing assets, and absorbing losses. Thus, the idea is not to bail out banks, but to help better capital ratios and raise fresh capital. This will be structured using recapitalization bonds.





The Way Forward

Now, banks must become responsible with their capital allocation. The recapitalization bonds will have to be earned. The capital infusion will enhance the balance sheets and spur growth. Simultaneously capital allocation will improve by giving banks liquidity to lend without having to compromise on the quality of borrowers. The economy as a whole will benefit from government spending through these PSBs. The fittest banks will survive. We may even see consolidation and mergers in the PSB space, resulting in healthy, stable, large, public sector banks.

Basel III Tier 2 Capital

Basel III Tier 2 Capital

Following from the capital adequacy requirements under the Basel III accord, banks’ capital was split into tier 1 and tier 2 capital. Tier 1 forms the bank’s core capital, while Tier 2 forms its supplementary capital. The instruments under Tier 2 capital are riskier as it is difficult to assess their quality and they are harder to liquidate. However, the purpose of tier 1 and tier 2 capital is to ensure that banks can absorb losses (if any) and continue functioning under periods of financial duress.


Tier 2 Capital:

In India, tier 2 capital consists of reserves and hybrid securities. Reserves are capital provisions that a bank makes. Hybrid securities carry features of both debt and equity instruments and may further be classified into upper (perpetual instruments) and lower capital (dated instruments).

General Provisions & Loss Reserves:
This reserve is created as a hedge against any unidentified losses.

Revaluation Reserves:
A revaluation reserve is created by reassessing the value of an asset. The idea is to update the value of an asset from its historic cost to its current value. For instance, a bank may have one of its properties revalued to reflect appreciation in real estate.

Perpetual Instruments
Primarily this consists of perpetual cumulative preference shares (PCPS). Like AT1 instruments, these securities have no maturity. A cumulative instrument is one where payments if missed, are accrued and paid when finances permit.

Dated Securities
Dated securities are those that have a maturity. Tier 2 Capital instruments are redeemable and may be cumulative or non-cumulative preference shares (RCPS or RNCPS). These instruments have a minimum tenor of 5 years.

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