Notes to Myself


Good Read

Larry Ellison USC Commencement Speech | USC Commencement 2016

I have learnt so much from so many different people. They have influenced me and shaped my thoughts in many ways. Some of these people I like from Business/Management domain are:

  • Charlie Munger
  • Warren Buffett
  • Steve Jobs
  • Jeff Bezos
  • Henry Ford
  • Elon Musk
  • Rajiv Bajaj
  • Ajay Piramal

One person I have not followed much is Larry Ellison. I first noticed him when I read his quote which I blogged in 2007. I haven’t following him much since then. But I recently came across his commencement speech at USC and liked it a lot.

Check if you like it too. By the way he was 73 years old at the time of this address!


Good Read: On Remittances

If you follow the Economics of emerging countries you would know that remittances from other countries back to the home country is a significant contributor in the development of that country!

India has a huge population and equally huge number of migrants to various countries. There are regional pockets and affiliations based on decades of history of migrating to specific nations. For example, a lot of Gujaratis have migrated to Africa (remember Mahatma Gandhi?). Kerala continues to send thousands of people to the Middle-East. Tamil Nadu does the same for South-East Asia. Punjabis have made Canada as their second home! (And we, the Marathi community, are still reluctant to migrate to other parts of India…)


I came across an interesting article in the Times of India (yes, that rotten thing called newspaper). Here it is:


  • Remittances to India from abroad rose in 2017 and touched $69 billion
  • Outflows of remittances from India too continued to rise reaching $5.7 billion, according to a World Bank report
  • The data shows that Indians constitute the world’s largest diaspora population, making it the largest source of labour for world market

NEW DELHI: Remittances to India from abroad rose in 2017 after declining for two consecutive years and touched $69 billion, still a little short of the $70.4 billion reached in 2014. Outflows of remittances from India too continued to rise reaching $5.7 billion, according to a World Bank report.

The 9.9% increase in remittance inflows in 2017 was enough to ensure that India comfortably retained its long held position of the largest destination of remittances from international migrants, according to the Bank’s report titled ‘Migration and Remittance Outlook’, released late on Monday.

Of the $5.7 billion sent home by foreigners working in India, Bangladesh alone accounted for over $4 billion or about 71%.

The data also shows that Indians constitute the world’s largest diaspora population, making it the largest source of labour for the world market.


In 2017, there were 16.4 million Indians living abroad. Mexico and Russia had 11.9 million and 11 million people respectively working in foreign countries. China has the fourth largest overseas population at slightly over 10 million.

Although Bangladesh and Pakistan too have significant migrant populations, this doesn’t get reflected in their remittance receipts. Legal international migration is often seen as a rather costly economic investment and hence only relatively well-off sections of any country’s population are able to afford it.

The increase in income levels in China and India and the ever increasing presence of the expat community in the Western world helps augment migration from these countries to the West. China received $64 billion from its overseas citizens.

This was the world’s second highest and the two Asian neighbours accounted for more than one-fifth of the global remittances inflows. They were followed by the Philippines, Mexico and France.

Of the 131 countries from where India received remittances, UAE contributed the highest, $13.8 billion or about 20% of India’s total receipts.
The West Asian country was followed by the US, Saudi Arabia, Qatar and UK. There were 12 countries from which India received in excess of $1 billion each. Among them, six are in West Asia, the region accounting for 55.6% of India’s total remittance receipts.

Other than Bangladesh, Nepal and Sri Lanka received 17.9% and 9.1% respectively of remittances flowing out from India. Thus, these three neighbours got about 98% of remittances from India. India was the largest source of remittances to Bangladesh, accounting for about 30% of its total overseas remittances

This article reminded me of a wonderful TED Talk on Remittances. You may also like it:


Good Read: How Long Is A Quarter? 6 Months If You Are This Indian “Startup”

I came across a couple of interesting articles on Reliance Jio (Mukesh Ambani’s $38 billion “start-up”) suggesting that the accounting practices (just like a lot of other things at the Ambani Group) could be dubious. I want to write something on valuation and Indian equity markets since a long time…meanwhile do read this article.

Ambani’s Mobile Startup Packs 6-Month Sales Into a Quarter

It is not clear if it is accounting fraud or just “massaging the numbers” within the permissible accounting rules. But this definitely calls for a closer look at the Reliance Industries performance.

Good Read: Making the Jump from Millionaire to Billionaire, and How Long That Takes

Here is an intereting Infographic: Making the Jump from Millionaire to Billionaire, and How Long That Takes


Some very good insights based on this…will write some other day.

Good Read: How a blind artist is challenging our understanding of colour

A friend of mine shared this very interesting article today:

How a blind artist is challenging our understanding of colour


I have thought about this and discussed this with friends several times before in various context. And here are my thoughts on this:

The question that still remains is:

Does the painter understand colors through his own perception? Or has he memorised them (as he mentioned at one point). Likening Red with Hot is good…but was that his own discovery or was it told to him? If it was told then he has accepted established world view of colors.

A study showed that blue color evokes friendship, socializing. Hence logos of FB, Twitter, Linkedin, WordPress, Telegram, Dropbox, Naukri, Paytm, Outlook, Google Duo and so many other Social Media Apps have Blue as prominent shade.

Now this is (or could be) induced expression (Cultivated by constant hammering of this association Blue = Friendly) or is it really there? Difficult to tell even for a person with vision. At best, it is statistical conclusion (which can be conditioned).

For example, association of saffron and renunciation/sacrifice/detachment would be natural for those who know about Hinduism and Buddhism…but does it come naturally to others? Do we know what is “saffron” equivalent for Zulu or Eskimo or some other tribes and civilizations (if they have such association)?

So my Question is: If such associations of color and emotions were told to the painter and he memorized them then what does it show – beyond the obvious that he has memorized and imbibed the color understanding of person who told him about it. And if he has developed that understanding by himself then it opens up far too many questions/ possibilities. My hunch is that it is the former…

National Pi Day 2018

Today is National Pi Day (March 14th or 3/14). I had written a blog post on National Pi Day in 2009 which you can read here (the blog post was imported from my old blog and there seems to be some loss of content or distortion of metadata). I joined Twitter on 13th March 2009, just a day before the 2009 National Pi Day when I wrote that blog post. So I was hardly conversant with Twitter and hadn’t checked Pi Day messages. In fact Twitter itself was new at that time, so I doubt if there was much content around Pi Day.

Anyways, since then I have been following National Pi Day messages on Twitter every year and also on other social media.

So this year I thought of posting a collection of few interesting messages related to “Pi”.

Prof.  Arthur Benjamin is a well known Maths professor who has combined Mathematics and Magic through his program Mathemagic. All mathematicians find “Pi” intriguing and they like to explore various aspects of Pi. Prof. Arthur has composed a nice song on Pi which I recently saw on Youtube. Here is the song:


Matt Parker is another Math enthusiast who has several interesting videos on Mathametics on Youtube channel Numberphile. As we know Pi is an irrational number. It doesn’t end and goes on and on. As of now researchers have found out up to 2.7 trillion digits of Pi. That is 2,000,000,000,000,000th digit of Pi!

Coming back to Mike Parker…he printed first million digits of Pi and laid down along a mile strip on airport! He also discussed interesting points about Pi. Here is the video:

A comment on this video summarized the exercise pretty well. It said “Completely unnecessary, but absolutely awesome!!

Here are some interesting messages on Pi and Pi Day.

Pi looks as “PIE” in mirror

Humorous take on Pi – the “irrational number”

Today’s Google Doodle and message on Twitter handle of Google India. There was speculation on what the text message means. One possibility could be the next Android version (version P) could be named “Pi”

Unfortunately today’s Pi Day began with the sad news of demise of great theoretical physicist Dr. Stephen Hawking. Interestingly enough Pi Day also happens to be birthday of another great theoretical physicist, Dr Albert Einstein (or as a funny tweet called him, [mc^2-instein] ). And many people on twitter talked about this coincidence.

Then as usual, there were several offers celebrating Pi Day and offering things for $3.14


Here is a funny dialog between the “imaginary” number “i” and “irrational” number “pi”

And lastly, here is a funny cartoon on Pi being the lonely number 🙂

Humor for #PiDay Pi Day.

Question: “What did the palindrome and math lover say when she was offered cake?” Answer: “I prefer pi.”

Indian genius mathematician Srinivas Ramanujan had special affinity for Ramanujan. Lot of his equations involved “Pi” in very elegant and artistic manner. Here are a couple of examples:


I have few more resources on magnificent “Pi”, but will save it for the next year…till then Happy Pi Day!


Good Read: Definition of A Bank

Brilliant Definition Of A Bank…

A bank is a broker between the middle class and the rich. The only place where the two meet is in a bank. The middle class brings the money, through saving, and the rich takes it, through borrowing. A middle class person saves the money because they have more money than their thinking capacity. So they keep the money in the bank so they can go and think what to do with the money they saved.

On the other side, the rich people come to pick that money, through borrowing, because they have more ideas than the money they have. On a practical side, please show me one billionaire who got rich through saving and I will show you a million Indians who have money saved in the banks and are still renting the houses that the Millionaires and billionaires build through the middle class people’s savings which the rich borrowed from a bank.

Source: WhatsApp Forward

Good Read: Why Financial Statements Don’t Work for Digital Companies

Here is a very good article written by Vijay Govindarajan, Shivaram Rajgopal and Anup Srivastava published on Harvard Business Review Blog.

Why Financial Statements Don’t Work for Digital Companies

Some of you may not be able to access the link, so I am reproducing the article here with due credits:


On February 13, 2018, the New York Times reported that Uber is planning an IPO. Uber’s value is estimated between $48 and $70 billion, despite reporting losses over the last two years. Twitter reported a loss of $79 million before its IPO, yet it commanded a valuation of $24 billion on its IPO date in 2013. For the next four years, it continued to report losses. Similarly, Microsoft paid $26 billion for loss-making LinkedIn in 2016, and Facebook paid $19 billion for WhatsApp in 2014 when it had no revenues or profits. In contrast, industrial giant GE’s stock price has declined by 44% over the last year, as news emerged about its first losses in last 50 years.

Why do investors react negatively to financial statement losses for an industrial firm but disregard such losses for a digital firm?

In the 2016 book The End of Accounting, NYU Stern Professor Baruch Lev claimed that over the last 100 years or so, financial reports have become less useful in capital market decisions. Recent research lets us make an even bolder claim: accounting earnings are practically irrelevant for digital companies. Our current financial accounting model cannot capture the principle value creator for digital companies: increasing return to scale on intangible investments.

This becomes clear when you look at a company’s two most important financial statements: the balance sheet and the income statement. For an industrial company dealing with physical assets and goods, the balance sheet presents a reasonable picture of productive assets and the income statement provides a reasonable approximation of expenses required to create shareholder value. But these statements have little salience for a digital company.

Let’s first look at the balance sheet. Assets reported on a balance sheet have to be physical in nature, have to be owned by the company, and be within the company’s confines. However, digital companies often have assets that are intangible in nature, and many have ecosystems that extend beyond the company’s boundaries. Consider Amazon’s Buttons and Alexa powered Echo, Uber’s cars, and Airbnb’s residential properties, for example. Many digital companies have no physical products and have no inventory to report. Therefore, the balance sheets of physical and digital companies present entirely different pictures. Contrast Walmart’s $160 billion of hard assets for its $300 billion valuation against Facebook’s $9 billion dollars of hard assetsfor its $500 billion valuation.

The building blocks for a digital company are research and development, brands, organizational strategy, peer and supplier networks, customer and social relationships, computerized data and software, and human capital. The economic purpose of these intangible investments is no different from that of an industrial company’s factories and buildings. Yet, for the digital company, investments in its building blocks are not capitalized as assets; they are treated as expenses in calculation of profits. So the more a digital company invests in building its future, the higher its reported losses. Investors thus have no choice but to disregard earnings in their investment decisions.

Our research has found that intangible investments have surpassed property, plant, and equipment as the main avenue of capital creation for U.S. companies – which further suggests that the balance sheets has become an artifact of regulatory compliance, with little or no utility to investors. The balance sheet has also become less useful for banks’ lending decisions because banks rely on asset coverage to calculate their security. Curiously, companies are allowed to report purchased brands and intangibles as assets on balance sheet, creating distortions between earnings and assets of digital companies that rely on organic growth versus acquisitions.

As digital companies become more prominent in the economy, and physical companies become more digital in their operations, income statements too become less meaningful in investors’ decisions. In another study, we show that earnings explains only 2.4% of variation in stock returns for a 21st century company — which means that almost 98% of the variation in companies’ annual stock returns are not explained by their annual earnings. Earnings also seem to matter less for CEO pay: companies are reducing profits-based cash bonuses and shifting toward stock-basedCEO compensation, partly to keep opportunistic managers from cutting back on valuable investments as a way to report higher profits.

The current financial accounting model fails today’s companies in yet another respect. In a previous HBR article, we argued that, in contrast to physical assets that depreciate with use, intangible assets might enhance with use. Consider Facebook: its value increases as more people use its product because the benefits accrue to an existing user with the arrival of each new user. Its value growth is powered by the network in place, not by increments of operating costs. Therefore the most important aim for digital companies is to achieve market leadership, create network effects, and command a “winner-take-all” profit structure. Facebook’s gross margin of 76% on its 2017 revenues of $46.5 billion illustrates this reaping of rewards — every additional dollar of revenue creates almost equivalent value for shareholders. (You can contrast this to Twitter’s and Yelp’s 2017 revenues of $2.4 billion and $0.8 billion, respectively, as both companies have yet to reach the winner-take-all profit stage.)

Yet there is no place in financial accounting for the concept of network effects, or the increase in the value of a resource with its use. This actually implies negative depreciation expense in accounting parlance. So the fundamental idea behind the success of digital companies (the increasing returns to scale) goes against a basic tenet of financial accounting (assets depreciate with use).

It’s important to note that companies like professional services firms are also built on intangible assets like human capital. But accounting challenges for modern, digital companies are more severe, as they have increasing returns to scale on their idea-based platforms. For example, Google can service billions more clients with the same office just by adding to its server capacity. But for an audit firm to drastically increase clients, it would likely need more manpower and office space. Furthermore, costs of services for professional services firms, mainly wages, are matched to current revenues. So their income statements accurately reflect surplus created in that period, similar to industrial companies. But for digital companies, the bulk of the cost of building an idea-based platform is reported as an expense in its initial years, when they have little revenue. In later years, when they actually earn revenues on an established platform, they have fewer expenses to report. In both phases, the calculation of earnings does not reflect the true costs of revenues.

This brings us to another question: If earnings are so meaningless, then why do investors react positively to rumors concerning a digital company turning profitable? For example, when Twitter reported its first profits, its share prices jumped 20%. The same thing happened to Yelp. One plausible reason could be that this news has an important signaling effect – that the company might have crossed its initial investment phase, that it might now break even, or that it might catapult into a trajectory where it can reap winner-takes-all rewards. This conjecture challenges our overall argument that earnings have no information; another challenge could be that initial losses of digital firms convey risks involved in purchasing their stocks.

As balance sheets increasingly fail to reflect the value of the company’s resources and the income statements increasingly fail to capture the value created by the company, CEOs are now wondering what to do. They often ask us: What does preparing and auditing accrual-based financial statements achieve? Wouldn’t digital companies be better off by simply reporting a summary of their cash transactions? What can digital companies do to enhance the informativeness of their financial statements?

The answers are not yet clear. It is unlikely that accounting standards will change in the near future to allow digital companies to capitalize their intangible investments. (And even if digital firms capitalized their intangibles, the recalculated profits or assets would come nowhere close to justifying their current market values.) But there are things companies can do to convey their real worth to investors. Our work has found that investors look for certain cues about the success of a company’s business model, such as acquisition of major customers, introduction of new products and services, technology, marketing, and distribution alliances, new subscriber counts, revenue per subscriber numbers, customer dropouts, and geographical distribution of customers. Companies can disclose these items in the Management discussion and analysis section of their annual report. (For example, see Item 7 of Facebook’s annual report.)

Any significant, value-relevant development must be immediately disclosed rather than waiting for the annual report. We have demonstrated in other research that disclosures on network advantages, such as web traffic and strategic alliances, are considered highly value-relevant by investors. When combined with these nonfinancial indicators, financial performance measures become more value relevant. In addition, companies can provide detailed information on intangible investments made by the company – even if that information is not vetted by the auditors – by reporting these investments in three categories: customer relationship and marketing, information technology and databases, and talent acquisition and training.

To summarize all this, as firms become more digital and spend more on intangible investments, and as digital companies come to represent the new face of corporate America, they will also have to dramatically alter the manner and ways by which they convey their value to outside investors.



Understanding The Punjab National Bank /Nirav Modi Scam

Understanding The PNB Scam!!!

What actually happened in PNB scam? Let’s start from the concept.

First, The Concept

Let’s understand how things work.

Some importer, let’s call him Nirav Modi or NM, wants to import pearls or diamonds and then sell them. The purchase requires money, so NM approaches a bank, say Punjab National Bank (PNB).

PNB says look, I’ll give you a loan but it will be like at 10%.

NM thinks hard and says, no, that’s too much. Wait, why don’t I take a foreign currency loan instead, after all I’m buying in dollars? Much lower interest rates no? I can get at LIBOR+2% and LIBOR is like 1.5% so I’ll have the money at 3.5%!

But who will give NM a foreign currency loan? A bank abroad? They don’t know NM. They don’t have any history of NM, so why will they give him money?

SO NM goes to PNB and says, boss, you’re my banker, so please help some foreign bank give me some money to buy diamonds. Say that you will guarantee my loan by giving me a “Letter of Undertaking” (LOU).

PNB now should be saying look, if you want me to give Rs. 100 cr. guarantee, you give me stuff worth 110 cr. at least. As collateral.

But PNB, for some strange reason, doesn’t ask for collateral. More on that later.

So now the foreign bank is ready to lend NM the money. Because PNB will guarantee it. And the foreign bank trusts PNB. Why does it trust PNB?

Because PNB sends a message on SWIFT – the banking message service – that PNB guarantees Rs. 100 cr. of money for 180 days for Mr. NM at an interest rate of, say, LIBOR + 2%. It’s like a message – written in stone, effectively – that says PNB will pay if NM doesn’t pay.

In fact the foreign bank trusts only PNB. So it gives the money to PNBs account with it, called by PNB as a “Nostro” – the account that PNB maintains with banks abroad, where the other bank will send money meant for PNB customers.

PNB’s nostro account gets the money.

PNB then gives NM the money from the Nostro account, usually paid off to whoever NM is buying his diamonds from. This payment is to someone outside India usually, to fund a purchase of diamonds or whatever.

Note this carefully: The other bank gives money to PNB’s Nostro account. Not to NM. They don’t care about NM. They only know that PNB has given a guarantee on the SWIFT channel.

Note: the other bank is nowadays mostly the foreign branches of Indian banks. Because the phoren banks have realized something sinister – that PNB’s guarantee is a strange beast that isn’t backed with much, but we’ll come to that

The foreign bank couldn’t care less about whether NM was buying diamonds or bitcoin – to them, PNB would pay back even if NM’s bitcoin wallet got stolen.

Why does PNB give a guarantee? Fees. Each year, a bank may charge upto 2% to give the LoU.

So What Happens When It’s Time To Pay Back?

NM has to get the pearls in India, sell them, receive the money and pay PNB. On the due date written on the LoU.

Then PNB will pay back the foreign bank saying okay, we got the customer’s money so we’re giving it back to you. With interest etc.

That’s what is supposed to happen. But in reality, things went a little berserk, it seems.

The Reality: A Bit of a Ponzi

NM might not pay back at all. NM might use the money to speculate in the markets. Or do something else.

What if NM in the above example simply didn’t have the money to pay back? Instead, he asks a PNB official to open ANOTHER LoU. For the amount owed plus interest. So if we had the first LoU at $10 million the second one is $11 million to cover the interest on the first.

The money from the second LoU is used to repay the first. It’s just rolling over of credit. Over and over. Standard definition of a ponzi scheme.

This can easily balloon into a larger amount, so large that it’s too much. In effect many such arrangements have turned into semi-ponzi schemes, with one LoU being opened to repay another and so on.

Which is what is likely to have happened.

We don’t know the details, but it looks like:

Nirav Modi took loans from foreign branches of Indian banks through an LoU issued by PNB

This was done through a SWIFT based LoU issued through a rogue employee (or many of them) at PNB

The orders never showed up in the core banking system for monitoring

LoUs were rolled over all the way since 2011, and possibly increased over time too.

The rogue official retired in 2017, and the replacement refused to roll over the LoU which came due in Jan 2018 because he couldn’t find the past transactions in the system

No rollover means a default, since there was no money to pay. So PNB quickly files an FIR saying oh goodness we have lost 280 cr. on the Jan LoUs

Then someone said, “Abeyaar, is there more of these not-in-system LoUs? Someone check no?”

Then someone checked.

Oh gawd. 11,400 crores.

That’s a lot of crores.

Everyone in the bank panicked.

Why couldn’t Nirav Modi just pay it back? He must have the original money no?

Because if it was ever intended to be paid back, the rollovers wouldn’t have been required. At some point, things got so out of hand that rollovers were required in order to stay current.

Typically this would not be a problem. If PNB had done things right, they would have had collateral worth the amount of guarantee, and they would have sold that collateral and paid the foreign bank.

But, and here’s the real issue: PNB didn’t have any collateral.

Why did PNB give a guarantee without collateral?

If you and I go for a loan to a bank, they’ll ask us for income proof, and collateral. Only small tiny personal loans and credit card loans come backed without collateral. For something of the order of 11,000 cr. you would think they would ask for collateral.

Especially after the scene with Mallya where loans to Kingfisher were given on nearly no collateral (though even there they had a house and some promoter shares pledged)

Why did PNB give this guarantee then? It’s typical – banks give guarantees for more the amount you give as collateral. Because business relationships etc. And then:

Because nearly every bank is doing it.

The loan was not a “fund based limit”. In a fund based limit like a term loan, the bank pays out money. In non-fund-based limits, the bank will only pay if someone else defaults or an event happens – like a Bank Guarantee or an LC or an LoU.

Meaning, PNB assumed that the foreign bank was giving a loan directly to Nirav Modi and that PNB needed to pay only in case Nirav Modi defaulted. So in the eyes of PNB it was always an “non-fund-based” loan.

But this is how a significant part of import financing works. They all rollover credit, and they all use LoUs for much higher than they can offer as collateral.

From my sources, the scale is huge. For every Rs. 100 that a bank has collateral, they will easily provide LOUs for upto 6x the amount. This is a real problem – that most public sector banks do not keep much collateral against non-fund-based limits given to importing customers.

So even if a bank has collateral, it’s nowhere near enough. And then, such unfunded liabilities are not even reported to RBI!

Basel Reporting: No Disclosure

PNB has “unfunded” exposure of 11,000 cr. they say. But they don’t even reveal it in their latest Basel III disclosure:

The funded exposure to “Gems and Jewellery” is shown at 1860 cr.

Unfunded to the same sector: 842 cr.

This doesn’t even add up. So, in effect, PNB didn’t reveal that it was funding massive quantities of “unfunded, contingent exposure”. They will of course pretend that they didn’t know, because the transactions weren’t in the core banking system.

Did Employees Hide it? Was PNB Responsible or was it a fraud?

Can employees be responsible? Could they have hidden the credit and the rolling over of LoUs? But honestly, how does a 11,000 cr. credit pass muster without top management realizing it?

Think of it – your nostro account with these other banks keeps getting big credits that add up to 11,000 cr. Will you not reconcile it in the accounting? The “why is this money even here?” question should have been asked by someone who audits accounts, one thinks?

And the SWIFT messages. It’s a specific kind of message. Why wouldn’t PNB audit the SWIFT trail? Reconcile it with the core banking system? How many more such skeletons will tumble if they do?

Their excuses are

Data wasn’t entered into the core banking system. (Of course, otherwise you would have had to report it)

LOUs weren’t authorized. (Hard to believe, because the amounts are very large. Surely someone on the top would know?)

The SWIFT system was illegally used. (Again, hard to believe that a bank like PNB would not audit its SWIFT messages regularly. Or its auditors. Or RBI.)

On the face of it, it looks like the ex-employee is being used as a scapegoat. It’s likely that a lot of people were in on this thing. And that it generated massive, fat fees for PNB all these years.

Fees wise: Imagine 11,000 cr. worth LoUs being renewed each year – that’s upto Rs. 200 cr. in fees that was all hitting PNB’s top line. You could bribe an employee to maybe give you a small increase – say 10-20 cr. but when you hit numbers like 11,000 cr. this is surely something the top management would know.

What’s the Scale of this scam?

While PNB reported it as a 11,000 cr. scam, they filed an FIR with the CBI for only Rs. 280 cr. This has probably expanded since then but even if the total outstanding is as much as that, there’s a good chance that the actual loss amount will be lesser.

All of it will be borne by PNB right now. Whether someone abused their SWIFT usage is not relevant, if PNB’s SWIFT message said they will pay, they have to pay if there is a default.

But think about the fallout. The problem was that some liabilities were not in the system. There could be more such LoUs. From the same branch or others. Other banks could have such LoUs too. It’s trivial to start looking – and we know that Nirav Modi will not be an isolated case.

Also, the issue was that the limits had no collateral behind them. If all banks are told to verify their non-fund-based limits and demand collateral against them (say at least 25%) then the scale would be absolutely massive. It’s not like this is happening only with Nirav Modi or Choksi. A very large number of importers of commodities have been doing this, and rotating credit. A change in regulation here can change the game dramatically for every other bank (and import account) in the system.

The simple point: this particular transaction will result in a lower loss than 11,000 cr. for PNB. Because of recoveries and such. But if RBI asks all banks to pull up collateral on such lending and stop such practices, the scale is many times larger.

What about the PNB stock?

It’s fallen 17%. But note that it already has 60,000 cr. of gross NPAs. Another 11,000 cr. will hurt it but not kill it. It won’t die – the government will take it over. Shareholders might suffer, but come on as a shareholder of a public sector bank you’re used to suffering.

The problem really is: There is never just one cockroach. When you go deeper, you are likely to find more dirty, dark secrets, and none of them will be any good.

PNB is gonna hurt for a while, but so are others who will find their books similarly tarnished once they investigate.

Will This Bring The Market Down?

Have you been living under a rock? Nothing will ever bring the market down, nowadays.

But the one thing that does bring markets down is the outflow of liquidity. What if so much of the “ponzi” credit – essentially money that was rolled over very month – is being invested directly, or indirectly, into stocks? If RBI tightens up, liquidity will pull money out of stocks, and that will hurt.

Of course, this hurts the fiscal deficit since PNB has to be rescued. So bond yields are up to 7.6% and therefore we’d avoid any long term funds or bonds. Short term it will have to be.

But overall, we wouldn’t worry too much. Just react, don’t predict. What would you do if stocks fell? Better to answer that than to say they will, or they will not.

(And no, not buying PNB)

Our View: Fix it.

This is the Indian public sector banking system. Fix it.

How can you have transactions on SWIFT outside CBS? Fix it.

Why would you not reconcile the nostro accounts? Suspend the auditors. Fire top management. Fix it.

Closing the door behind Modi, who’s already left the country, is probably useless. If you find fraud, invoke their personal guarantees, and file cases to attach their personal properties. After that, file in NCLT to make these companies insolvent. Take the hit, and try to recover.

Find out more such instances where collateral cover is too low. Find out if the LoUs or LCs are just getting rolled over or is the customer actually paying back through the Indian current account. And if not, demand more collateral to avoid further spread of the ponzi.

But this is quite unlikely to happen because the banking system is going to take massive hits now, and we’re going to have to deal with the fallout of really horrible systems. It’s amazing that our banks have been this lax, but they have been allowed to; with no bankers being investigated, the rot inside the banks has been ignored and instead, industrialists have been the target of outrage. It’s time to look at banks as malicious players too, and to fix that rot.

Note: Based on WhatsApp forward and publicly available information. Attributed to Deepak Shenoy, but I have not verified.

Create a free website or blog at

Up ↑