#Stock market fall is an effect and not a cause! What happens when there is too much of excitement and attention to one sector/industry/company/ business idea? everybody starts appreciating, following, taking extra effort to get into the scheme of things etc.. untill there is a there is a peak and BOOM! And a sharp slope slides down n BUST! and a parallel line leveling the fields and world moves on towards a new exciting subject. In financial market or the larger context of economy, it is extremely evident.
Strangely we all keep looking back at history all the time, yet fail to gauge the impending risks. Time and again it repeats itself, we all educated investors close our eyes and follow whatever the markets leads us to.
In the world history of economic crisis, since 13th century, 2/3rd of the crisis started at bank failures or debt crisis, barring a few which were due to trade deficits, industrial revolutions and a few wars. The amazing fact remains that though there were so many debt driven crisis in last 8 centuries, we just don’t stop repeating ourselves.
Yes we do try. By creating central banks, but, sovereign debts fail too. We have credit rating agencies, then happens the SUBPRIME CRISIS.
Then come more regulations, more tightening by the central banks! Banks seem to become victims of these regulations and the business targets and margins as well. Then the greed takes over bankers race to aggresive lending to stretch the balance sheets.
The recent developments in the Indian Banking sector is alarming, a little better than what it was two years back though. Two important parameters of performance is leaving the especially the PSU banks high and dry! would they survive?
1. The Basel III norms – a very difficult set of guidelines set by the central bank on capital adequacy to brace for crisis, is an extreme stressful for banks. Banks of India have been issuing the Perpetual Bonds to meet tier I capitalas per Basel norms. coupon rrates of few bonds have been as high as 11%. With no maturity dates ateacher on thad a bones, could easily become a excess burden of interest payout as interest rate continues to fall.
2. Greed of bankers to inflate the balance sheets – Mounting NPAs caused by disbursing loans to less credit worthy entities is showing signs of failures, unending restructure and failure to get adequate risk cover through collateral.
Thanks to the watchdogs of Indian financial sector, it may not just do a Boom n bust and averted a crisis just in time! but an area to trade carefully. just a thought!