ponderings & pennings

More than two years back in one of my routine morning travels in Mumbai local towards my office I read a detailed review about the book Confessions of Economic Hitman by John Perkins.

At that time, I thought that the author and the reviewer were unnecessarily being too paranoid on things that seemed to be too imaginary to be true. I could not believe that a man could wield an influence so strong to topple governments, bring big businesses to dust or for that matter cause upheavals in economic conditions of a country and at the same time maintain a profile in obscurity. Though I knew about George Soros but then he was always in the picture for the world to see.

But during the last two sessions on Country Environments and Multination Strategy I have come to realize that the book may not entirely be work of paranoia and that it is indeed true that such economic hitmen exist who play in trillions of dollars (maybe now they have shifted their interest to euros with weakening dollar). That these hitmen are well connected to the most exalted organizations of our times is no more a surprise.

While watching the video of Commanding Heights, a book by Daniel Yergin, during today’s session, it was very strange feeling to come to know of the effects that the Asian Crisis of 90s had on the common folks in countries like Thailand, Malaysia and S Korea. It gave an impression that there were underlying sinister designs in the flow of FII funds across the world and how a veil of money was fastened onto the eyes of the government officials of these countries. Hindsight though 20/20 forces us to mock at how context, strategy and policy was ignored by the respective national heroes. But then when sudden riches shower a country, no one looks for the reasons! And the work of the economic hitmen becomes so clear that one is left with both an awe and anger for them.

Though the countries have to a large extent come out of the crisis but the ground still speaks of the shocks that people of the countries had to face and carry some bitter reminiscences of the times.

A post on little bit of history calls for a video song from history…

Today’s Business Line carries a report that banks in India are preparing to hike discounts to their PLRs.

This is being done in order to stimulate credit offtake in the peak season. Now as per me this contradicts what we learn in risk management.

The spread (premium if positive and discount if negative) represents the perceived risk in any asset. The spread changes only when the risk perception changes. This spread is on some base number. In this case the asset is the loan to companies and the base is the PLR. The PLR represents the rate at which any bank would lend to its best customer and the spread on it represents the risk perception that any company has in view of the bank and this risk is in comparison to the bank’s "best company". A higher risk will get positive spread (premium) and a lower risk will get negative spread (discount).

Now when the banks say that they will change the discount (or premium) they imply that the riskiness of the companies (customers) has changed; in this case it seems the riskiness has reduced as they are talking of hiking the discounts. The contradcition is that this is not the reason that they are stating.

The reason is to stimulate the credit offtake. For this I believe the way is to change (decrease here) the base i.e. PLR. The spread should be changed only when the risk factor changes.

Another flaw in this is that this stimulation for credit offtake will then be limited to companies that are already enjoying a discount. If the credit offtake has to be increased then it should be across the table. Or is it that the banks fear some kind of sub-prime crisis in India?

Here is another of my favs: