Democracy in the Dark Pool

In the present socio-political setup, an army of mislead unintelligent people have been created to attack all legitimate examinations of establishment with whataboutery and illogical allegations of anti-nationalism with a sole purpose of preventing the right questions from reaching the right people. If a question is intelligent or fortunate enough to walk past this army, there is a second line of defence throwing question templates like – ‘It’s easy to criticize a government but what are you doing as a citizen?’ or ‘You are pointing all the problems that are there but what solution do you offer?’. To answer those questions, as a citizen we decided to chose a mister as our leader and equipped him with all the bureaucracy, teams of experts, authority over ministries, cabinets, treasuries, and gave him access to all the required infrastructure and resources to solve all the problems that are there. But then, considering how rigorous scrutiny and accusations the questions like ‘who is answerable for the incompetency of government we manifested our trust into?’ has to go through, these lines of defences surprisingly are proving to be beneficial for the mister. I’ll however, dare to ask few questions hoping that a nationalist and citizen of higher order will either let this pass to the right people or protect the right people with right answers.

The world is facing the Coronavirus (COVID – 19) pandemic and the Government feels that they are running short of funds and hence asking people for donations. Not that donating what one has in excess is a bad idea, but let us also not forget to look beyond the emotional cloud our psyches are blinded by. Moreover, charity is a voluntary undertaking but when Government cuts dearness allowances of all tax payers in the name of ‘need of the hour’, it becomes pertinent to ask what share of hit are they taking?

What happens when you run short of funds? Do you ask for donations? No. You borrow! You borrow when you experience a liquidity crunch which essentially mean, that you are taking a hit of interest on yourself because it was your responsibility to manage your funds which somehow didn’t go according to plan. In an event of your liquidity shortfall arising out of some unforeseen circumstances, your rich brother may bail you out but that’s discretionary. You simply cannot go to a bank and withdraw money from his account. Sadly, in the current scenario, we are the rich brothers and the Government has the unencounterable power to go to a bank and withdraw funds from our accounts.

Needless to say, the second line of defence of the mister will ask what solution do I offer. To their surprise, I have a solution to offer. To their disappointment, the mister already knows it but chose not to exercise and instead, circulated invitation for donating in his Prime Minister National Relief Fund account. The PMNRF in itself leaves room for a lot of legitimate queries which I’ll come to later, but first let’s talk about the solution which if exercised, will not be getting exercised for the first time in history and I am sure the kind of teams of experts our mister is surrounded with, he knows.

The obvious way-out of the problem is, instead of asking for grants and withdrawing funds from rich brother’s accounts, borrow! This borrowing not only will help in stockpiling the required funds but if designed efficiently will ease out the stresses on the Banks.

To understand this, one must understand how a Government borrows, and how Banks are stressed due to this pandemic.

An ideal amateur understanding of Bank’s business algorithm is that it takes funds from people who have excess of it (deposits) and offers to ones who need it (loans). The interest on loans are obviously higher than the interest on deposits for a Bank to garner profit. But in reality, the equation is not that linear. Banks do not sit with funds that they have accumulated as deposits, while waiting for a borrower to show up. They hate idle money, so they invest it, just like you and me. However, while investing, the Banks are required to comply with certain restrictions imposed by Central Bank (RBI, in Indian context).

The Central Bank which monitors all the other Banks in the country, requires the Banks to be mandatorily liquid at all times. Being liquid essentially means possessing assets that are either cash or are easily convertible into cash. For example, a person owing gold worth Rs. 50,00,000 is more liquid than a person owing a BMW worth Rs.60,00,000. So, obviously a Bank will never invest in BMW cars but can invest in equity stocks or corporate bonds of BMW company which can be easily sold off at exchanges thereby making it fairly liquid. Without getting into details of financial ratios of liquidity that a Bank is required to maintain, in a reasonably simpler terms, a Bank needs to calculate the total outflows of funds that it is expecting in the next 30 days, and to meet these demands it must have liquid assets of equal amount or more as on the date of calculations. As a matter of fact, just like equities and bonds, there are various financial instruments where Banks (and other institutions) can invest depending upon their risk appetite because each of the financial instruments has a fair share of risk associated with it. The riskier an instrument is, the less liquid is its’ asset quality. Similarly, the more stable, and risk-free a company is, the more liquid their corporate bonds are considered.

Evaluating how stable a company is, or the amount of risk that an investor will be exposed to while investing in the company, is the responsibility of rating agencies. For simplicity, a company rated ‘A’ by a rating agency possess less risk from an investor’s point of view than a company rated ‘B’ by the same agency. Depending upon such classifications of companies based on their ratings, liquidity weightage of their corporate bonds varies too. For example, if a Bank has invested in corporate bonds of a ‘B’ rated company (because it was giving higher coupon rate), the guidelines may restrict the Bank to assign that asset a liquidity weightage of only 75%, which translates into, that on every investment of Rs.100 into those bonds, Bank will assume that in a stressed scenario, if it sells those bonds, it’ll only receive Rs.75.

Avoiding the risk of intimidating readers by financial jargons and complex calculations, here is a hypothetical case study to understand the liquidity-stress the Banks are subjected to in this pandemic, in its’ most simplified form. Suppose on a given sunny day, a Bank has calculated that in the next 30 days, the expected outflows of funds from the Bank is Rs.100, which means on the same sunny day, the Bank should have a liquid asset of Rs.100 or more. The Bank is quite conservative in its’ approach and hence has maintained a liquid asset of Rs.150 to have a safety buffer of Rs.50. But suddenly a virus arrived and scared the hell out of everybody and forced to shut down factories, manufacturing, services, and what not. The companies in which the Bank had invested into through their corporate bonds are suddenly finding themselves out of business and facing a huge loss. This offends the rating agencies and they downgrade the ratings of the companies that are facing losses, from A to B. Because the companies are now downgraded, the liquidity weightages associated with their corporate bonds go down too and hence the Bank which had a liquid asset of Rs.150 on that sunny day, is now having a liquid asset of say Rs.110. If the ratings of the companies the Bank has invested into, go one notch down further, the liquid assets of the Bank will go below Rs.100, hence making the Bank insolvent on account of its’ incapability to meet its’ obligations of outflows. The Bank, hence, at a liquid asset of Rs.110 is in a lot of stress.

Having said all, if anybody is wondering what corporate bonds (or bonds, in general) are, and how do they differ from equities, – bonds are financial instruments that are issued by companies to borrow funds. Unlike equities, the investor does not own a share of the company by investing in bonds, but only grants a loan to that company at a specified coupon rate as a return on the investment. For any institution, Government bonds are considered to be the most liquid form of investment because the risk associated with a Government bond is negligible (yes, Government too issues bonds when it needs fund). For a Government bond (also called Sovereign Bond) to fail, the country has to fail, and it is less likely for a Bank to not fail before its’ country. Hence, for a Bank, a Sovereign bond is 100% liquid.

How simple the equation looks now! Banks need high quality liquid assets for coming out of stress, and Government needs funds for fighting the pandemic. How wonderful it would have been if Government instead of pickpocketing rich brothers would have simply borrowed the funds from Banks by issuing Sovereign bonds and at the same time would have brought Banks out of stress, meanwhile keeping the donation still a voluntary undertaking! But why to borrow money which is to be repaid when you can simply access the rich brother’s account? Why not to chip in financial jargons which no one will understand, to explain why Government can’t borrow and how it will widen the deficit which no one will question as to why it is not syncing in line with the 5 trillion economy’s promise? Or in fact, why to give any explanation at all when there are two lines of defences to slaughter all the questions that examines competency of the Government?

Invite donations and cut the DA! Easy-peasy!

PMNRF is the allocated relief fund where contributions are accumulated for rendering immediate relief to families of those killed in natural calamities. But somehow, based on some logics, Government decided that the ongoing pandemic doesn’t qualify as natural calamity, and set up a new fund called PM CARES to call for donations. There were recent debates on why a new fund has been created when PMNRF was already in place to which I don’t want to comment because that would mean, one among the two is better. Which is not the case. They are dark pools!

It is interesting to note that PMNRF is audited by Sarc & Associates, an audit firm based in Delhi. Yes, that’s right. It is not CAG, it’s Sarc & Associates. A spokesperson of the mister said, that we wanted an independent auditor to audit PMNRF account.

Let’s do this again!

It is interesting to note that PMNRF is audited by Sarc & Associates, an audit firm based in Delhi. Yes, that’s right. It is not Deloitte, it is not KPMG, it’s Sarc & Associates.

It is interesting to note that LinkedIn page of Sarc & Associates boasts how India is going to be a 5 trillion-dollar economy by FY 2024-25. There, in fact, are a lot of interesting things to note about Sarc & Associates. Sunil Kumar Gupta, the founder of Sarc & Associates has interesting achievements to talk about. Or if I can put it this way –

Government – Hey Sunil! There is an interesting show we are starting on Zee Business, that promotes Prime Minister’s Mudra Yojna. Would you like to be part of it? Hey Sunil! Would you like to accompany Ms. Pratibha Patil in the business delegations to Seychelles and South Africa to discuss bilateral issues between the two nations? Hey Sunil! Would you like to be a part of delegation from ICA of India to Vienna? Hey Sunil! Also, can you please audit this PMNRF account and see if things are in order.

To the list of interesting things to note, PM CARES is although not assigned an auditor as of now, but Government has given a clarity that it won’t be CAG but an ”independent auditor” who can be once again presumed to be Sarc & Associates considering that along with boasting about a 5 trillion-dollar economy, its’ LinkedIn page is also encouraging citizens of India to donate in PM CARES.

I’d dearly hope, and would still like to believe that Sarc & Associates are ethical, Government’s efforts are in the right direction, their strategies might have a legitimate sagacity and rationality. I am open to all the possibilities but only until arguments are not countered with noises, questions are not silenced with whataboutism, concerns are not slaughtered with allegations, and the faith that we have vested in our Government is not shattered by arrogance.

Until then, I have reasons to believe, that everything that happens beyond public appearances and articulatory oratories, happens in the dark pool. And the lines of defences must understand which side they must face while raising fingers, because it’s about time when we’ll be losing our democracy in the dark pool.