Biggest Stock Market Crashes in India: Stock Market crashes symbolize times of wealth destruction and pain to investors. They also symbolize times of opportunity and resilience to few. A stock market crash is when a market index faces a rapid and unanticipated severe drop in a day or a few days of trading. Today we look at some of the worst single-day falls that affected the Sensex over the history of Bombay Stock Exchange(BSE).
10 Biggest Stock Market Crashes in India
The table below shows the biggest single-day falls faced by the Sensex.
What Caused the Biggest Stock Market Crashes in India?
The first COVID-19 case in India was traced on January 30th, 2020. The following weeks involved what seemed like just a COVID-19 panic. This was based on the effects the companies globally would face with the worlds leading manufacturer China busy battling the virus.
February saw a silver lining for the Indian economy as an oil feud between Russia and OPEC resulted in a global crash in oil prices to $30 per barrel. This was over a dispute over the steps to be taken to face the demand slump. However, the benefits of the price slash were not relayed to the end consumers. The prices still are still set to those before the crash. The benefit of the reduced price still remains with the government.
March 6th saw Yes Bank at the brink of failure adding to the woes of COVID-19. This was due to the bad loans resulting in high NPAs with the bank eventually requiring government intervention. This further gave a clearer picture of the ailing banking sector. The markets saw a 1,000 point loss on March 4th and March 6th. Lockdowns imposed around Europe and ‘Emergency’ declared in the US saw Foreign institutional investors fleeing the Indian markets to invest in stable developed countries. As the COVID-19 cases kept worsening in India the markets entered a bearish slump.
On 23rd March the markets fell by a record of 13.15%. This was the largest fall in Indian market history. The lockdown which followed did not bring any relief to the stock markets. As of April, the markets had reached depths wiping out earnings from the last three years.
The 2008 financial crisis was known as the biggest disaster after The Great Depression. The financial crisis was caused by the bubble created by the housing market in the US. It trashed not only the ‘American Dream’ but also rippled on throughout the world killing many Indian Dreams too. The Ripple effect saw the market fall a number of times in 2008. The year 2008-09 had seen the Indian markets fall by over 50% from its high.
Harshad Mehta was known as “The Sunny Deol of the Indian Stock Market”, “ The Big Bull”, and eventually was the eponym to his scam. Harshad Mehta was a broker known for his lush luxurious lifestyle. He took advantage of the regulations which barred banks from investing in the stock markets in the 1980s and 1990s.
(The Big Bull, loosely based on Harshad Mehta’ life and financial crimes is under production and will star Abhishek Bachchan )
Harshad Mehta took capital from banks and invested them into the stock markets promising banks a high return. Mehta would invest in selected securities and the huge investments made on behalf of the banks would hike up the demand for those shares. He would then sell the proceeds passing a portion of the profit to banks. The stock markets crashed the day he sold off his holdings in the market due to the over-inflated stocks.
Indian stock market crashes to date were caused due to a variety of reasons like change of ruling parties, actions taken by the government (demonetization), ripple effect of international market crashes and now even pandemics. These crashes may seem like a picture of the riskiness and volatility of the Indian markets, however, they can also be viewed as a testament to the tougher times they have recovered from. Today the Indian Markets face bigger challenges and only time can tell how they cope with the forever changing environment of 2020.
Should Stock Markets Close Over Coronavirus Epidemic?: A walk down memory lane, India just lost their second wicket as Sachin walks back after 6.1 overs. This moment from the 2011 World Cup final has been etched in our memories. With the two important pillars gone lets hypothetically imagine someone decides to call it quits and shuts the TV off. What new levels to your anxiety would you discover? Similar is the anxiety-driven plight of an investor on hearing the news of market closure in tough times.
( The Sensex Index showing a 34.22% fall from Jan 17th to Apr 03)
The stock markets, however, face stakes a million times higher. Ever since the Sensex summited at 41945.37 points on 17th January, it has fallen a total of 34.22%. The Sensex broke the max single-day fall a number of times, losing over 13% in a day ( on March 23rd) and ended at 27590.95 points as of 3rd April. After the government took additional measures by imposing a lockdown to fight Coronavirus, the ANMI ( Asociation of National Exchange Members) requested the SEBI to close the stock market.
This request was made due to the difficulty faced by employees of member partners to commute to work amidst the lockdown. The request also included that the markets should be shut till the depository and broking services are declared essential by the government. We can also see #bandkarobazaar trending on twitter but this was supported mainly to avoid further fall of the market.
Today we look at the historical market closures, reasons supporting a market shutdown and also why such an action may be detrimental.
Historical Stock Market Closures
Dating back to the 19th century the stock markets have been shut a few times around the world over dreadful occasions. The most infamous of these market closures being the 9/11 crash in the US, where the market was closed for a week.
HongKong had halted its trading in wake of The Black Monday crash in 1987 and Greece closed its markets for five weeks in 2015 during the economic crisis. Moreover, the stock exchanges have been forced to shut down a number of times during natural calamities too.
Nonetheless, there also have been periods of extreme difficulty such as The Great Depression of 1929, World war 2, and even the 2008 crisis of our time where the market remained open.
Should Stock Markets Close Over Coronavirus Epidemic?
Argument for closure of the market
One of the major reasons for the call towards the closure of markets has been to reduce the volatility of markets and panic selling. A closure of the markets will give investors a few days to catch their breath and reevaluate their positions instead of blindly following the market sentiments due to the COVID-19 pandemic.
— Why closure is required in the Current Scenario?
In the wake of the COVID-19 pandemic, social distancing has become a necessity. This would prove challenging for stock market employees and the employees of dependant services to risk their lives by venturing out to work. This may further escalate to the market being crippled if they are infected.
Argument against the closure of the stock market.
— Investor confidence at risk
One of the major reasons against the closure of markets is that a market closure will further erode all investor confidence in a particular country. This will be caused due to the lack of transparency and data available to investors during the closure. In a time of crisis where investors are already panicking, a closure will only intensify their anxiety. This will increase the possibility of them selling out of the markets.
— Lack of liquidity
The effect the closure will have on the liquidity needs of individuals will also be severe. This is due to the fact that a number of individuals depend on trading for their daily income. Apart from this, investors depend on the stock market for liquidity. In a country like India, which is already troubled by the 21-day lockdown, the closure of stock markets will further intensify the liquidity issues. This is because a number of individuals have already lost their regular income by means of unemployment or pay-cuts. The stock market shutdown would further hurt them as converting their investments could have helped them through these difficult times.
Other Stock Market Closures around the world
The Philippines Exchange shut on March 17th following the lockdown imposed by President Duterte. The Sri Lankan markets also followed suit. The Philippine stock exchange, however, suffered severe losses once it opened up two days after the closure. The opening day slashed 13.34%.
We also take a look at the Chinese stock market which was one of the worst-performing stock markets in the world before the crisis. During the crisis, however, the SSE Composite Index fell only 10%. This was despite them being the epicenter of the pandemic, whereas markets around the world shed a quarter of their earnings.
The COVID-19 hit China at a different time in comparison to the rest of the world. The markets closed on January 23rd (also due to the Chinese new year when china was still battling COVID-19) at 2976 points and opened on February 3rd falling to 2746 points. During this period china had anticipated the effects and infused $173 billion into the markets but still suffered the loss.
However, the Chinese markets cannot be set as an example as only 4% of their market amounts to foreign capital. The rest remaining in the hands of the Chinese government, directly or Indirectly. Also, China is not known to release adverse data into the public eye. They have been accused of manipulating the actual figures of COVID-19 cases. They were also accused of suppressing the outbreak which then lead to a wider spread.
In this article, we tried to answer should stock markets close over coronavirus epidemic. In short, it could be assumed that investors around the world may forgive closures due to the COVID-19 outbreak. This, however, does not offer enough validation in support of the closure. Thanks to technology and additional support in the form of ‘Work From Home’ continuity can be ensured.
In addition, the stock exchange can take notes from the BCP plans of RBI. The individuals critical to the RBI continuity were moved to a secure location. Here, everyone involved including the support staff (hotel etc.) were quarantined. They will even be working with hazmat suits, maintaining social distancing with a backup team too. Hopefully, the show keeps going and market closures do not add to the woes of 2020.
21 Day Lockdown (COVID-19): Due to the outbreak of coronavirus, last week, the world witnessed the largest democratic lockdown of 21 days as announced by PM Narendra Modi on March 24th, 2020. As we enjoy the privileges at our homes for social distancing and take measures to avoid Coronavirus, a greater portion of Indian population struggles to take measures to ensure their survival. Today we take a look at the cost of such a lockdown and the possible future we are looking at.
There have been many views regarding the lockdown including the one put forward by Dr. Deepak Natrajan. He took estimates based on comparison with the cases in China and the respective death rate and after periodically adjusting for one year. Later, he arrived at the conclusion that the maximum of 25000-30000 estimated deaths in India due to COVID-19. This was done to bring up the comparison of the cost of the Lockdown.
Whether this 21-day lockdown would result in smashing the economy where a hundred thousand may lose their jobs is still a point of discussion. However, most economists are estimating this pandemic resulting in many more being affected by starvation in a country already facing poverty and malnutrition.
Dr. Deepak Natrajan went on to explain how the estimated deaths due to COVID-19 are a blip in comparison to the deaths caused in a year. The deaths in India currently stands at ten lacs per year. This also sheds a light on the dilemma faced by the government over imposition a lockdown. However, it didn’t mean that he encouraged the government to do nothing but instead opt for a different route which involved aggressive testing.
Immediate effects due to the 21-day lockdown
This was the first problem noticed after the lockdown was announced as people immediately resorted to the hoarding of commodities. It was done to cover the next 21 days as it was unclear from the PM address over availability of essentials and the lockdown was mistaken as a curfew.
As always, hoarding causes problems of availability. The reduced commodity results in businesses trying to benefit from the added demand by hiking up the prices which further alleviates the problem. This further reduces the purchasing power of large sections of the economy for commodity at higher prices.
– Exodus of Daily Wage Workers
The 21-day lockdown eliminated all job opportunities available to the daily wage workers and other workers in the unorganized sector. Their situation got worse with no savings to fall back on and added hostility from the landlords who viewed them as a COVID-19 threat. This inability to pay rent also lead to the exodus where workers started their journey home hundreds of kilometers away on foot.
( Migrant Workers trying to find a way out in Delhi)
Although they were further portrayed by the media as an addition to the existing problem, this was the only way out for these bread earners to escape the problems caused by the 21-day lockdown. They started this march to avail government relief in the form of deposits in Jan Dhan saving accounts and foodgrains available to their families in their hometowns. Moreover, any attention given by the state government arrived only after the exodus had already begun.
Announced Relief Packages
A relief package of 22 billion was announced by the finance minister 36 hours after the lockdown. It involved 50 Lac insurance coverage to the healthcare workers, a move in the right direction. However, there were a few schemes part of the relief that raised a few eyebrows.
– Increased wages – MGNREGA
The Finance minister announced increased MGNREGA wage by Rs.20 to Rs. 202 per day effective from April 1st. The wage increase is said to provide additional benefits to the workers. The logic to announce this as part of the relief is hard to understand as during a 21-day lockdown the work provided through MGNREGA is non-existent. The benefit of can only be availed after April 14th provided it is not too late. Moreover, the Finance Minister added that the workers will have a benefit of Rs 2000. However, this will only be available considering that that MGNREGA worker is employed for 100 days in a year.
The added benefit also seems to be unsuitable as the weighted average for the 2019-2020 record is already Rs.221 in the MGNREGA scheme. The unweighted average in major states is Rs.226 per day. The additional benefit on a closer look does not offer any relief to daily wage workers during a lockdown and also depends on the availability of work after the lockdown. The period after this 21-day lockdown is stated by many economists as a period of recession. This is arrived at after taking into consideration of the rise in unemployment as one of its factors.
– Food and Cash in hands of people.
The Finance Minister announced that Rs 2,000 will be deposited into the Jan Dhan Yojana Accounts of Farmers. Further, Rs. 1,000 will also be deposited into the Jan Dhan Accounts of pensioners, widows and the disabled. The Government is also to provide 5 kg of rice and 1 kg of pulses in addition to the existing amount received for the next three months.
In 2017 the Pradhan Mantri Jan Dhan Yojana saw the women ownership of bank accounts rise from 43% to 77%. This indicated that most of the accounts in the PMJDY were those of the spouses of the workers in the cities. To benefit from the relief provided, the individuals will have to travel back home which adds to the exodus.
(Pronab Sen-Chairman of the Standing Committee on Economic Statistics.)
Apart from this, the government also announced a hike on the withdrawal limit of EPFO to transfer cash into the hands of unemployed individuals. The Finance Minister also announced that the center will pay the PF requirements of both the employee and the employer for 90% of the employees (for the firms with less than 100 employees of salaries less than Rs.15000).
– Moratorium on Loans
The RBI allowed lending institutions to offer a moratorium to borrowers on repayment of all loans for 3 months. The banks that have approved this includes Punjab National Bank, Union Bank of India, Bank of Baroda, Canara Bank, IDBI, State Bank of India (SBI), Indian Bank & Central Bank of India.
This move will reduce the burden on the individuals and also provide them the purchasing power for necessities.
– Reduction of Rates
The RBI cut the repo rate and the reserve repo rate by 75 bps and 90 bps. The repo rate now stands at 4.4% and 4% respectively. This will result in a fall in interest on deposits and make loans cheaper. This is aimed to increase the spending and hopefully stimulate the economy. However, this was also done to ensure the enterprises that are affected by the pandemic can get back on their feet and avail cheaper loans.
If we take a step back from this very welcome rate cut and consider the state of the baking sector and their struggles with NPA’s, Non-Performing Assets (as in Yes Bank), it is hard to foresee banks lending to businesses that have been financially weakened due to the pandemic. Any loans given out would be a leap of faith and RBI must ensure that the benefit from rate cuts is transferred from the banks.
Lockdowns around the globe
Countries like Italy, Spain, and France have implemented a national quarantine. The total count of cases in Italy and Spain are currently over 100,000 and France over 50,000. The United States, having the most number of cases (over 210,000) has still not imposed a nationwide lockdown taking a different pill than that taken by India. The US has primarily focussed only on hotspots and 24 states have asked their residents to shelter at home.
China, which only a few months ago was one of the hotspots for Corona, imposed a lockdown but only in the hotspots i.e. Wuhan and Hubai (60 million people) which could also be one of the reasons why the stock market in China was not as badly hit as that of other regions. (Also read: Coronavirus Impact on Global Indexes (2020) – US, Europe & More)
However, these countries have followed aggressive testing measures. India, on the other hand, has one of the worst testing rates in the world with only around 43,000 tests conducted so far. This was despite having the capacity to conduct 12,000 tests per day. So far there have been 2000 confirmed cases in India. Countries like Korea have used rampant testing measures like ‘Drive-Thru Coronavirus testing centers’ to flatten the curve to total cases. This has enabled them to catch up with the spread and quarantine effectively.
The relief package announced by the US is at 2 trillion dollars to fight the coronavirus. A comparison of the $22 billion relief package in India would be unfair. When the relief packages are compared to the respective GDP’s, it showed that $2 Trillion is roughly 10% of the US GDP. Other countries like Canada, Singapore have roughly invested around 5% of their GDP’s. However, India has rolled out a package of just 0.8% of its GDP to fight coronavirus outbreak.
This comes after former Finance Minister P. Chidambaram mentioning in his ten-point plan of action that a minimum relief package of Rs 5-6 Lac Crore was required. Despite that, he didn’t see an economic recovery on the horizon and also termed the COVID-19 lockdown as the biggest crisis the country has faced. Even after the migration crisis post-independence, every famine since independence, the tsunami of 2004, the 2008 financial crash are all put together. This further puts doubt on the capabilities of the relief package.
Is the Indian economy headed towards a recession?
The IMF has already stated that the situation worldwide is worse than the crisis of 2009. They also mentioned that we have already entered a recession and a possibility that the global GDP will shrink by $2.3 trillion. So far 80 countries have already asked for the emergency fund from the IMF. Kristalina Ivanova Georgieva said there is a possibility that $2.5 trillion will be topped for the financial needs of emerging markets.
Subash Chandra Garg, the former Finance Secretary, and former Economic Affairs Secretary has stated that the Indian growth will likely be negative next year unless the government takes measures to prevent it. He also commented that the two-thirds of the economy has been severely hit and the GDP after the lockdown will be reduced by 5-6%. Economist Arun Kumar has also gone ahead to say that the current situation is worse than those faced during a war.
The GDP does not represent all the sections of the society accurately as those with high incomes though few pull the average towards rearer ends. Hence in a situation with a possible negative GDP in the coming quarter will mean that those in the lower-income sections are devastated.
— Extended Lockdown?
Despite having the worlds largest lockdown, researchers from the Cambridge university released a paper that suggests adding length to the lockdown to properly contain the virus. The paper suggested a three phase lockdown (21 days – 5 days rest – 28 days – 5 days rest – 18 days) or a continuous 49-day lockdown for the Indian region. Based on the observations of the current lockdown, the economy is operating at -50% of the GDP as per Arun Kumar. In addition to the effect on daily wage and unorganized sector workers, India cannot afford another extended lockdown without much more serious consequences.
There is a need to ramp up the testing done in India to catch up with the curve and hopefully flatten it. This is a necessity because the current scenario has exposed the cracks in the Indian infrastructure and its ability to cope with a crisis. India has one doctor per 10,000 people in comparison to 41 in Italy and 71 in South Korea.
— Inadequate relief measures
The current policies aimed at the poor in the form of increased income offer is just a mirage of actual help. A lot more has to be done to ease the suffering due to the lockdown t0 the poor. Any success in the relief package or hopefully a stronger revised relief package will require involvement and coordination with the state governments. The current exodus of workers could have been prevented if state governments were kept in the loop. The lockdown too would have been better implemented. Hoarding and police brutality are attributed to the lack of communication and direction from the government.
Subash Garg mentioned how over the last 70 years of our history there are no measures taken specifically to save and push businesses. The government has to roll out new policies to ensure this, especially in the current situation. Else these businesses will find it hard to start again. The severe times of 1990-91 bought forward reforms. Similarly to stimulate the economy, revised relief packages and new reforms are in need. It is already certain that the Corona Recession of 2020 (hopefully not depression) will replace all comparisons in the future that were earlier made with the 2009 crisis.
Indian Stock Market Crash in 2020: After making a peak of 42,273.87 points in Feb 2020, Sensex crashed over -38% by 23 March 2020 to 25,638.90 points. We are currently witnessing one of the fastest crashes in stock market history, even worse than the 2008 market crash as quoted by many leading market analysts. In this article, we are going to discuss the reason behind this stock market crash in 2020.
Here you’ll find everything that you want to learn regarding the Indian stock market crash in 2020. We’ll look into leading causes, facts, effects and what do economists have to say about the crisis. However, before we start the article, let’s first understand what exactly is a stock market crash so that everyone is on the same page. Let’s get started.
What is a stock market crash?
A stock market crash is when a market index faces a rapid and unanticipated severe drop in a day or a few days of trading. A double-digit percentage drop over a few days in the market index generally constitutes a stock market crash. A stock market crash may be caused due to economic bubbles, wars, large corporation hacks, changes in federal laws & regulations and natural disasters. They are generally followed by panic selling and can lead to bear markets, recessions and even depressions.
There have been a few measures to stop a crash. One being large entities purchasing massive quantities of stocks in order to curb panic selling. Trading halts have also been introduced but both these measures have not been proved to be actually effective in pausing a crash.
(The stock market crash of 1924 was one of the most unfortunate crashes where the Dow Jones Index lost 23% in two days and eventually led to ‘The Great Depression’.)
Do Stock Market crashes lead to Recession?
A stock market crash reduces the investors’ confidence in the economy and as the falling shares slowly wipe out investor wealth. Investors resort to selling off their holding at minimal costs. Due to lack of confidence investors also refuse to partake in the purchase of shares.
With the diminished wealth of investors and the valuations of companies dropping, it makes harder for companies to raise capital and secure debt. Companies in bad financial shape lead to layoffs resulting in a fall in demand in the economy. As the decline continues the economy contracts resulting in a recession. A stock market crash does not necessarily result in recession but a recession always results in a stock market crash.
The period between 17th January 2020 to 27th March 2020 saw the SENSEX lose 12,129.75 points. Multiple events were involved which led to a negative impact on the market.
The presentation of the Union Budget on 1st February 2020 coupled with the coronavirus panic led to the SENSEX falling by 2%. Later, WHO classified Coronavirus as a potential pandemic on February 28th, 2020 which led to both the Nifty and the Sensex ending with the worst weekly fall since 2009.
This was further followed by the shares of Yes Bank falling on March 6th due to bad loans and one of the worst NPA in the country. One of the founders of Yes Bank was also arrested on corruption charges. The fall after Yes Bank coupled with the effects of Coronavirus in Europe and the US resulted in the markets touching 35,636 points. (Read More: The Unravelling of Yes Bank – Fiasco Explained)
On 12th March the Sensex fell by 8.18% as a result of WHO declaring corona a pandemic. As the pandemic further spread and the number of cases in India worsened the stock Market plunged 13.5% on March 23rd. Besides, a countrywide lockdown of 21 days was announced by Prime Minister Narendra Modi starting from midnight March 24th. The lockdown was a necessity to curb the spread but it was the last thing the Indian economy required in its efforts to make a recovery.
A recession is typically described as 2 consecutive quarters of negative growth. However, a few more factors are also in play.
The NBER ( National Bureau of Economic Research) defines a recession as “ a significant decline in economic activity spread across the country lasting more than a few months visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
With several predictions by notable economists indicating India having a negative GDP, the lockdown has further intensified all the other factors possibly directing the economy towards a recession due to lack of income to major portions of the sector, with tourism industry already facing unemployment, the other industries will definitely face the heat. The lockdown also guarantees a drop in production and a drop in wholesale retail and sales.
What has the Government done so far?
All efforts by the government began after the lockdown was announced. The Finance Minister Nirmala Sitharaman announced a financial relief package of Rs 170,000 crores. The package included hugely appreciated Rs 50 Lac insurance cover to every individual in the health sector. The finance minister also announced 5kg of wheat and 1kg of pulses in addition to the existing scheme to over 80 crore individuals.
This too was appreciated as the 21-day lockdown would rid the daily wage workers of any source of income. The withdrawal limit of the EPFO was hiked. This was done to transfer cash into the hands of individuals. This would also provide support to unemployed workers.
In addition, the Finance Minister also announced that the center will pay the Provident Fund requirements on behalf of both the employer and also the employee for 90% of the employees. This will further reduce the burden on small businesses as it is targeted towards firms with less than 100 employees and those that have salaries less than Rs 15,000.
(RBI Governor Shaktikanta Das in talks with the Finance Minister Nirmala Sitharaman)
The RBI announced a moratorium on EMI for the next 3 months and also cut the Repo rate by 0.75% to 4.4%. The Moratorium on EMI’s will reduce the burden on individuals.
The repo rate, on the other hand, will make it cheaper for individuals to avail loans, however, deposits will receive reduced interest. This is aimed at increasing cash in the hand of an individual resulting in an increased demand which in turn may lead to stimulating the economy.
What do economists have to say about the crisis?
— Raghuram Rajan
(Raghuram Rajan- Former RBI Governor)
Former governor of the RBI, Raghuram Rajan, known for predicting the 2008 financial crisis and recession in 2005, said in an interview that the most important requirement right now is to prioritize targets such as fulfilling supplies and physical resource requirements of the healthcare sector followed by reaching out to the poor and only then should the question of reduction of taxes and temporary income support should come into the picture.
On questioned about the impact coronavirus may have on the global economy he answered that due to the unprecedented situation we should first look into the Chinese economy and observe the relaxation placed in China and the response COVID-19 has to it and accordingly take an action depending on if the virus spread begins again after the relaxation.
This would mean that the lockdown would be required to be implemented for longer periods. He also said in the interview that it may be a little too early to predict if the COVID-19 pandemic will lead us towards depression. In addition, he further added that with a recession almost certainly on the cards we still can focus on avoiding a depression based on measures taken
— P. Chidambaram
( P. Chidambaram – Former Finance Minister)
The former finance minister advocated the lockdown but mentioned that a lockdown alone was not sufficient. He mentioned that a relief package of 5-6 Lac Rupees is the absolute minimum which is required. He also provided a 10 point action plan which included the direction of cash and food towards the urban poor, assurance that the employer will be reimbursed for any wages paid during the lockdown and also proposed cuts on the GST.
On being questioned about future economic recovery he answered saying that there is no economic recovery on the horizon. Although the growth for the last quarter stood at 4.7% due to corona as per global economic loss prediction of 2% percent the same may be applied to the Indian markets.
He also added that the situation the country is put in now is worse than the migration crisis post-independence, famines to date, the tsunami of 2004 and even bigger than the 2008 financial crash and in fact even bigger than all of them put together.
— Jayati Ghosh
(Jayati Ghosh – Indian Economist)
Jayati Ghost one of India’s foremost economists and also a Professor at JNU, Jayati Ghosh, took a much more critical stance to highlight the magnitude of the problem the lockdown will create.
According to Jayati Ghosh in a country like India, a lockdown of more than a week will have severe disruptions. The damage done by the lockdown is already greater than the damage caused by demonetization due to which the economy has still not recovered. A massive shock such as this will have a negative multiplier effect and will continue to permeate.
She added that lockdown which has already disrupted the demand within the economy, with the supply chain broken down will force farmers to get rid of their stock as they will not be able to sell their produce and any bulk buying or hoarding engaged in the consumer end will only lead to shortages in the economy.
On being asked on what effect this will have on the GDP she made it clear that she has reservations already of the GDP figures being fudged and are actually lower than that reported by the government due to which we may see negative GDP in the coming quarters.
Prime Minister Narendra Modi announced that if the nation does not impose the lockdown, the country and our families will be set back by 21 years.
After taking a closer look which makes it clear that a lot more has to be done before it further devastates the country if poorly implemented and makes one wonder that if so, by how many years is the economy going to fall behind due to the lockdown. The government has to have a plan in place instead of abrupt decisions followed by a plan that may fall in line with such decisions. This is required to keep the economy from falling into a depression at all costs.
While looking into the Indian stock market crash in 2020, we should also not forget that it took the Dow Jones Index almost 25 years to recover from the crash that had led to The Great Depression. The financial package announced which currently makes up 0.8% of the GDP does not even reach the bare minimum set by former Finance Minister P. Chidambaram at 5 lac to 6 lac crore, let alone be compared to Western countries where they are set at 5- 15% of the GDP. The government still has to roll out policies swiftly to make the necessary yet draconian lockdown a success.
Coronavirus impact on Global Indexes (2020) – US, Europe, Russia, India & More: India, currently in stage II of the novel coronavirus with over 500 cases reported throughout the country. This has resulted in an entire country imposing a lockdown. The center is still caught up in its efforts to make the gravity of the situation heard with the PM himself addressing the nation. The PM also had requested the nation to take part in a self-imposed curfew along with a noteworthy attempt at a show of admiration for all the essential services.
Indians today are going through a phase never experienced before at any of the earlier outbreaks. However, this turbulent phase has not only been limited to our personal lives but also as investors we are breaking into bearish conditions. These conditions were not foreseen at the initial stages of the outbreak.
With the Sensex falling over 36.54% since January 31st we take a look at how some other notable indexes around the world have fared against COVID-19 and also look into the respective government responses in such economies. The table below shows how the following global Indexes have performed since January 31:
% Change: Jan 31 - March 23, 2020
Quick Start: What is an Index?
Indices are used as a benchmark to measure performance. An index consists of major companies listed in the stock exchange which are measured together to arrive at a value representative of the entire market over a period of time. The stocks involved are weighted based on the capitalization of the respective company.
Country-based indexes track how the national stock exchange is performing. The NIFTY in India consists of the top 50 stocks listed in the NSE. The Sensex in India is representative of the top 30 stocks listed in the BSE. Further, an index is also a market sentiment indicator.
Coronavirus impact on Global Indexes
— Coronavirus effect on Russian Markets (RTS – 41.74%)
The Russian Trading System (RTS) Index faced an overall drop of 41.74% since January 31st. However, the problems faced by the RTS were not limited to the coronavirus panic but also due to the oil price crash. The crash was caused due to the Russian fallout with OPEC. This had a critical effect on the Russian economy due to its main export being oil.
Coronavirus affected the market once it further spread through the European region. This further led to the Foreign Investors engaging in panic selling. Russian Sberbank which declared a $3.2 billion in profit still suffered a fall of 5% in its stock price.
CEBR a leading economic consultancy from the UK forecasted the Russian economy to sink by 4% in 2020. The forecast also included little expectation of a short term rebound. Although the central bank remains uncertain about rate cuts, Russia will create a $4 billion anti-crisis fund to protect its economy from the coronavirus shock.
— Coronavirus against the Brazilian market (BOVESPA – 41.04%)
It may seem surprising to find a South American country to have a market hit as hard as the BOVESPA Index. The BOVESPA Index suffers a 41.04% market fall even though it is not considered a hotspot for coronavirus. This was because of the dependence of Brazilian exports on the Chinese markets.
In 2018, almost 25% of Brazilian exports and almost half of the commodity exports were directed towards China. These suffered a hit during the demand slump China faced due to the outbreak. This added to the roadblocks created by their business-minded President Jair Bolsonaro over the development of the Amazon Rainforest. This has led to investors avoiding the Brazilian market particularly after his unfavorable stance towards the environment after the Amazon fires.
The outbreak indirectly led to foreign investors further exiting the market in the crisis. The Brazilian market faces a situation where it fails to attract dip buyers as well. Furthermore, even the 30 billion package unveiled by the government has been criticized over its failure too adequately apprehend the magnitude of the problem.
— Coronavirus against European Markets
The problems in Europe can be attributed to most of the countries considering Corona an East Asian issue. Europe is currently a hotspot for the COVID-19 with Italy, Spain, Germany, and France being hit the worst. All of their markets fell at around 30% with further lockdowns imposed. The stock markets in Europe were further impacted after Trump announced a ban of all flights headed from Europe to the US.
( The famous painting ‘Mona Lisa’ by Italian artist Leonardo Da Vinci depicted with a medical mask over the coronavirus outbreak)
France also threatened to close its borders to the UK over its inadequate action taken towards containment of the virus. Over 6,000 people are suffering from the virus in the UK. The turmoil in Europe was further intensified with the German Chancellor Angela Merkel going into quarantine after one of her doctors was tested positive for coronavirus.
The European Central Bank is expected to cut interest rates into the negative territory. The Central Bank is to also extend long term loans to banks in an attempt to provide relief to Italy and the other European countries where coronavirus has a devastating effect.
Employment, Healthcare, Bonuses for Emergency Services and loans to Small and Medium businesses
Companies hit by Corona in addition to relaxed tax norms
Loans to Businesses, in addition, to pay to workers who lost jobs.
To fight Corona Epidemic
Small and Medium Businesses
Health services and Loan guarantee to Businesses
Britain’s Financial Conduct Authority has also directed companies to not release preliminary financial statements for at least another two weeks due to coronavirus.
— Coronavirus against the US Markets ( Dow Jones – 32.14%)
The US also suffered from the ignorance and underestimation of the virus. The virus has currently affected over 45,000 people in the US. Stock markets in the US were initially affected due to the crude oil price crash. This was due to the high marginal cost of production prevalent in the US which stands at 40$ per barrel whereas the barrel prices were slashed to around 30$ per barrel.
This was followed by the coronavirus panic and Trump travel ban against 26 European countries further impacting the Airline Industry. The number of coronavirus cases has exploded in the US since then.
(The ‘V-J Day in Times Square – New York’ iconic photograph depicted with medical masks over Coronavirus)
Measures taken by the US government include unemployment benefits, sick leave benefits, free coronavirus treatment including food and medical aid to people affected. Also, $50 billion has been announced as an immediate relief for the airline industry and $50 billion in further secured loans to other parts of the economy.
Congress is also further negotiating a 1 Trillion dollar rescue plan along with sharp rate cuts by the Federal Reserve. These measures have also led to corporations postponing layoffs in return for a big bailout.
— Coronavirus against the Indian Markets (Sensex – 36.20%)
With the Sensex falling 26.54% since January 31st and the Nifty 50 falling 31.85% in the last 30 days. Trouble began with the crude oil price fall which would have been welcome in any other situation as India relies heavily on import of crude oil. Any benefits due to the price fall were put to a halt due to the effects of coronavirus on the airline and tourism industry and eventual lockdowns which resulted in a drop in demand. With the officially reported cases within the country touching 500, the question remains if the healthcare infrastructure can bear the burden of an increase in cases.
The RBI announced that it will conduct an open market purchase of bonds worth up to Rs 15,000 crore besides announcing a fresh round of fund infusion from variable-rate repos. With the cases in India increasing the government has called for lockdown in multiple states which will further affect the volatility of the market.
However, the RBI has also created a unique Business Contingency Plan(BCP) by setting up a team of 90 process critical members from the RBI of which only half will work at any given time whereas the remaining half will wait on stand-by, 60 key personnel from their external vendors and 69 additional support staff, all to work in a War Room during the outbreak. A facility has been hired where the 219 members will be hosted.
Precautions are taken to an extent where all personnel will also be donning hazmat suits. This also includes the support staff involved in maintenance, security, kitchen, front desk, and the administration. The BCP also involves maintaining isolation and social distancing of the 219 members.
In addition to the actions taken by the RBI, the state governments are also resorting to providing financial relief to those affected by the respective lockdowns imposed.
— Coronavirus against the Chinese Markets ( SSE Composite Index – 3.15%)
The Chinese Shanghai Composite Index (SSE) has fallen 0.04% since 3rd February. These figures would not form a fair comparison as the epidemic hit China first in December, whereas all the other regions faced the pandemic in the other European countries increasing in February and March itself.
However, even when the fall is measured since December the net impact on the Chinese market lies at 4.53%. Then how is it possible that of all the countries China has one of the least impacted stock markets even after being the worst-hit place by a coronavirus and also being the point of origination.
The Chinese government imposed stringent lockdowns and also suffered a 10% fall between 22 January to 3rd February. This was followed by the central bank announcing that it would inject $174 billion worth of liquidity into the market through reverse repo operations in addition to rate cuts.
The Chinese policymakers found ways to reach vulnerable households of Social Security Fees, Utility bills and provided them with other immediate requirements during the lockdown. Also, the most important economic effect against the virus would be the aggressive stand taken by the authorities by doing everything necessary particularly by ramping up its healthcare needs, stringent lockdowns which gave a brighter outlook in terms of economic prospects as life slowly resumes in China.
However, Goldmann has forecasted that the Chinese economy instead of growing by 2.5% will contract by 9% in 2020.
The Road Ahead
(The Bullish Markets enjoyed previously by investors have come to a full stop. Interestingly stocks of gaming companies like Ubisoft are expected to be on the rise after lockdown and quarantine measures taken by the governments worldwide)
Lockdowns are now becoming a necessity. Rate cuts and infusion of cash into the economy seem to be the only way out to protect economies from the COVID-19 quicksand. However, we have currently seen countries that are facing coronavirus in the 3rd stage generally have a stronger infrastructure and better healthcare facilities but are still not able to cope.
Nations with a poorer infrastructure will face an impossible task if the spread of the virus spirals out of control. This calls for aggressive measures to the taken to prevent the spread of the virus in these countries until a suitable vaccine is officially declared by the WHO.
Pertaining to the current scenario banks like JP Morgan have forecasted a coronavirus driven recession that will rock the US and Europe by July. Deutsche Bank has also warned that based on current trends we could be facing a severe global recession over time.
Duopolies in Indian Market:Visa vs MasterCard, Boeing vs Airbus, Coke vs Pepsi, Netflix vs Amazon prime, etc are some of the companies that have already been etched most notable duopolies throughout the world. Be it a boon or a bane, these mega-corporations cannot be named individually without mentioning the other. Such has been the tale of Duopolies, their fierce competition, and respectful cooperation eventually forming an interdependence where each has scaled summits.
(Rivalry noticed through Advertisements)
(Pepsi responded to the above-attempted sale of Coke’s secret ingredients by notifying Coka-Cola)
In this article, we further look at Duopolies that have shaped and extended their segments, particularly in the Indian markets.
Duopolies in Indian Market
— Zomato vs. Swiggy – Food tech
A decade ago Dominoes and their ’30 minutes or free’ scheme stood for food delivery in India. However, the real credit has to be given to Zomato and Swiggy for the development of the Food tech industry in India. They have now formed an integral part of our lives and also sets the perfect example of a duopoly in the Indian context in the food tech/delivery industry.
Zomato was founded in 2008 initially as a website that provided information on restaurants, access to their menus, the ability to view and provide reviews. However, they eventually ventured into the food delivery segment. On the other hand, Swiggy was set up as a food delivery platform from the beginning in 2014. Both competitors have used a strategic discounting model to attract and keep customers. Moreover, advertisements through social media have played a significant role in their growth and competition.
Strategies used by Zomato
Each of these corporations has strategically acquired other new entrants to enhance their growth to gain an upper hand. This was also done to use them as a doorway into new markets. Zomato has made 12 acquisitions which include companies throughout the globe. The acquisitions are involved in restaurant search service, table reservation, restaurant management platforms, logistic tech startups, food delivery startups with their most notable recent acquisition being UberEats. Zomato has also acquired companies involved in drone technology focusing on the possibility of a future with drone-based food delivery.
Strategies used by Swiggy
Swiggy also has made notable acquisitions like 48 east, Scootsy logistics and also invested in Fingerlix- a ready to eat food brand. They also enhanced its customer base by easing the payment systems for working customers by partnering with Sodexo. In addition, Swiggy has also partnered with Indifi technologies, a financing program for partner restaurants.
The strategies used by Zomato and Swiggy show how the food tech duopoly in India has competed using the technique of an acquisition. As mentioned earlier, this was also used as a medium to enter new markets and build on the structure already set up by the company taken over.
But when the pages are flipped over it also shows the difficulty a startup could face when competing with companies having greater control over the market. This is because they have already built resources over the years and are ready to burn through cash even after going through losses. They will eventually have to give in to the offer placed by either of the duopolies as it would be an uphill battle to compete with strategic discounting employed by either of the companies.
The ride-hailing segment in India is dominated by Ola and Uber. Uber a globally recognized corporation known for its ride-hailing service in 785 metro cities worldwide. They entered the Indian market in 2013 and currently boasts 14 million rides a week in India. Ola, on the other hand, had a three-year head start and currently boasts a reach of over 250 cities with 28 million weekly bookings.
Strategies used by Ola vs Uber
Ola and Uber too have used the strategies of acquisition and investment. Uber acquired Kareem particularly known for its service in the middle east and Ola has invested in VOGO to further its reach in the two-wheeler ride-hailing segment. Both Uber and Ola have competed aggressively in all road transport segments ( inc. two-wheeler, three-wheeler).
They have also entered other segments namely the food tech industry with Uber initiating UberEats and Ola acquiring Foodpanda. Uber has also extended its service to other means of transport through UberAir which uses VTOL aircraft in the US and also UberBoat in Mumbai at the jetty from Gateway of India to Alibaug. In addition, they are particularly keen on developing self-driving cars to be introduced in the ride-hailing segment.
However, in the case of Ola and Uber, we also see another side of the duopoly segment. Ola had been earlier accused of attempting to eliminate competition by lowering prices. This makes it impossible for new entrants to survive and then hiking prices when convenient.
Besides, both Ola and Uber have been accused of overcharging in situations where the same ride is charged different amounts based on the day, time, profile, history, rating of both the rider and the driver. This was opposed as both attempt to show a front of transparency to attract customers to their reasonable pricing. The same surge in pricing would not be acceptable when applied by local players.
They have also been accused of baiting riders with discounts and bonuses and then hiking fares without passing the gain from the price hike to the drivers. One of the main reasons that Uber and Ola have been in controversy is the fact the drivers are not considered employees of these corporations. They are instead considered as ‘contractors’ as this allows them to skirt legal obligations mandated towards employees.
If we look into the strategies used by Uber at a global stage to remain market heads they would seem to be straight out of a conspiracy novel. Uber to compete with Lyft in new York had formed a street team to gather information on Lyft’s expansion plans and lure their drivers into Uber. In 2014, 177 employees of Uber were accused to have intentionally ordering and canceling 5560 rides.
Uber also has been criticized for the development and implementation of the software tool ‘Greyball’ which was used to gather user data from their phones and avoid giving rides to law enforcement officers and those involved in sting operations. Uber also used the Ripley a panic button 24 times at the times of raids. Ripley would shut off and change the passwords of the staff computers when initiated. The controversy with Uber gets worse as they have been accused of implementing ‘God View’ a function used to track journalists and politicians.
When it comes to E-commerce the duopoly Flipkart and Amazon are said to have a combined market share of over 90% in the Indian market. Flipkart was founded in India in the year 2007 whereas Amazon had been launched in India in the year 2012.
Strategies used by Flipkart and Amazon
In comparison, the homegrown company ‘Flipkart’ has been a market leader even when facing Amazon. Flipkart being an Indian company has used this to its advantage by spreading its reach even to rural areas whereas Amazon had initially limited itself only to metro cities. Almost 45% of Flipkart’s sales currently come from smaller towns and cities giving them an edge over Amazon in India. Amazon, on the other hand, has targeted metro cities which formed 65% of its sales.
Flipkart too as noticed in the earlier examples has used similar strategies of acquisition ( Myntra, Jabong, PhonePe, and eBay). Amazon, on the other hand, has relied less on acquisition and more on forming partnership with local logistic companies to bolster business.
The entry of Walmart into India through the purchase of Flipkart gives an insight of means used by MNCs to enter new markets. This was also used by Zomato and Uber in the previous examples.
Disrupting a Duopoly
The duopoly held by MasterCard and Visa in the international payment segment was disrupted by the introduction of RuPay in India. After noticing multiple examples of new entrants not being able to compete with already set Duopolies eventually leading them to being acquired, the question arises on how RuPay was able to achieve this in India.
RuPay belonging to the domestic payment system was set up in India in the year 2005 by the Board of payment and Settlement systems by the Reserve Bank of India. The RuPay card was introduced in 2012. As the processing of the transaction in RuPay is within India they are lower than that of MasterCard and Visa. This is because the processing in MasterCard and Visa take place abroad resulting in a higher processing fee along with their higher fee structure.
The rise of RuPay can also be attributed to Prime Minister Narendra Modi who had publicly endorsed it. One of Modi’s schemes namely the PM Jan Dhan Yojana helped RuPay contend with global players. Here, financial services, bank accounts, and a RuPay card were made available to most of the rural population free of cost.
Government support, Deep Pockets and a focus on the local problems that MNCs overlook seem to have worked for RuPay to become the top player in India. However, this led to the government facing a lot of backlash on the global stage with Visa and MasterCard crying foul and alleging that Modi used patriotism which they viewed as a way of protectionism against them.
After considering three of the most notable duopolies in India we can note that for the successful functioning of a company a certain degree of cooperation is required to maximize the profits. With both companies acting as a check on each other the greatest benefit reaches the consumer.
Example – strategic discounting used by Zomato and Swiggy. These benefits are not available in a monopoly. It is also important for the government to maintain stringent checks to avoid the formation of cartels. The best comparison can be seen in Uber. The management has been termed as a ‘ Group of Thugs’ in the US ( where it has a market share of over 65%) due to its unethical practices. In India however due to a stronghold by its competitor Ola it has had to forego its ‘win at all costs’ attitude which was also later forgone in its operation in the US.
Another disadvantage a duopoly may have is on the stakeholders in the operating region, particularly its employees. All the companies taken as an example burn through cash without achieving profitability for a considerable period of time. This is done to survive the competition and eliminate new entrants. Failure of any of the companies will result in mass layoffs. Even if they enter a position of being acquired, employees that may increase duplication of jobs will not be hired.
Acquiring a major market share does not then limit the competition in the Duopoly to each other. In the future, we will see many new entrants ready with deep pockets to take on these duopolies.
Amazon seems to be keen to make an entry into the food-tech segment. Also the Mukesh Ambani backed Jiomart has just made an entry into the eCommerce platform offering attractive incentives to users like savings of Rs. 3,000 on pre-registration.
The telecom sector, on the other hand, seems to be headed towards a duopoly with the supreme court taking a strong stand against Vodafone-Idea which owes the government $3.9 billion in dues interest and penalties. In the coming years, India will see Duopolies entering other segments and at the same time disrupt those that are currently in play.
Indian Markets Weekly Wrapup: As investors searched desperately for sightings of a leeway from the slumping market, last Thursday provided a worse off trajectory with WHO declaring coronavirus a pandemic. This led to the chokehold on various industries being tightened as it seemed to have contributed to the perfect two-punch combo to knock the Indian markets into a bearish slump.
Investors watched on as 11 lakh crore worth of wealth vanished with Sensex crashing by 2929.26 points. It was accompanied by the Bank Nifty falling 2951.45 points along with Nifty 50 which continued slipping further with a 950.40 points loss as Foreign Portfolio Investors sold off their holdings in the Indian markets. All closing at a two year low on Thursday.
The Wreckage through the week
The Indian market has already been suffering from the jabs from the economic slowdown, with added political tremors felt throughout the country due to riots, followed by the Yes Bank fiasco. Here we look at some other major events throughout the week.
— The Oil price hook
Last week, the crude oil prices were slashed to $30 a barrel. The cause was rooted in the Russian refusal to corroborate with Saudi Arabia in their plans to increase the crude oil output due to supply chain disruptions caused by the coronavirus scare. The scare had resulted in a worldwide demand slump.
This news only added to the Monday Blues in the US where the marginal cost of production touches $40 per barrel. Also globally, as this was the biggest drop in crude oil prices since the Gulf War.
However, this came as a relief to the Indian markets. Being the third-largest oil importer even a dollar drop per barrel would eventually result in an annual reduction in the import bill by Rs 10,700 crores. The benefits are still doubted due to the impact of the falling rupee against the dollar which currently stands at over Rs 74.
The novel coronavirus outbreak had a devastating impact on any industry based in China or majorly dependant on China. By March 2020, the novel virus spread out to 119 countries. This was followed by the existing panic being materialized which already had investors all around the world bracing themselves for further impact on the market.
On Wednesday 11th, March 2020 with cases touching over 118,000, World Health Organisation (WHO) declared COVID-19 a pandemic. This was followed by a bloodbath the following day which wiped out most of the bullish movement achieved by the Sensex and the Nifty in the last two years confirming investments in India to be locked in a bearish state. This also led to a global turmoil with Dow Jones(US) posting a 10% fall, its largest loss in history and the FTSE ( London) losing 11%.
Indian Stock hits after Coronavirus being declared a Pandemic
The following notable stocks touched their lowest in 52 weeks on 12th, March 2020:
Reliance Industries (RIL)
Tata Consultancy Services (TCS)
Notable Industry-wise effects
— Corona vs Healthcare Industry
Other significant effects are also to be faced by the Healthcare industry in India as over 90% of the medical supply is sourced from China. Supply disruptions are already faced in sourcing Active Pharmaceutical Ingredients(APV) from China which are used in the manufacturing of antiretrovirals used in the treatment of HIV. These are crucial as they are also currently being tested on patients infected with COVID-19.
— Corona vs. Airline and Tourism Industry
With WHO declaring coronavirus a pandemic, countries affected entered a lockdown. US banned travel from Europe and travel has been discouraged by the government.
This has led to the airline industry being affected by IndiGo airlines announcing an expected fall in the quarterly earnings after noticing a 15-20% fall in their bookings on a day to day basis. The shares of Indigo fell over 12% while Spicejet fell by nearly 20%. An even more severe impact expected in the tourism industry.
— Corona vs. Agriculture Industry
The effects of COVID-19 are now being experienced even in the agriculture industry due to its dependency on pesticides. The raw materials required are imported from China. The imports range from 40%- 90% depending on the chemicals required. If the current scenario persists this will eventually affect the food industry due to a reduction in the availability of pesticides which has already been plagued by rumors on a variety of foods that may aid the spread of the virus.
— Corona vs. Sports
Any action taken specifically to prevent the spread of the COVID-19 is laudable, but we can still note and relate to the impact that has been on entertainment and sports.
With multiple sporting leagues being canceled or played with closed doors the 13th edition of IPL has been suspended till April 15th. Estimated losses touching Rs.10,000 crores if canceled.
Effect of Coronavirus on Sectoral Indices
Last week, every Indian sectoral indices faced major losses (with only BSE Telecom facing a loss at 1.35%). All the remaining sectoral indices facing losses from 7.5% to 16.03%
Biggest Losers – Nifty Indexes
Outlook by End of the Week
With Friday, 13 March 2020, came the silver lining where market movements of Thursday were not repeated. Due to the effects of COVID-19 bearish markets were realized which were also noticed during the outbreak of SARS in 2003, Bird Flu in 2004, Ebola in 2014, and Zika in 2016. Here we can learn that the markets have always recovered into bullish positions and eventually performed better than ever.
Indians have already witnessed several decisions taken by the government that have led to being financial disasters, resulting in the eventual economic slowdown in the recent past. However, when the future of India is considered, there is little that can be done by a government in such market scenarios where it is trying to make up for the lead already gained by an outbreak.
Best option being to direct its focus on the root causes which involve the prevention of the virus spread and finding a cure before its too late. We have already learned from the effects on China and Italy where such outbreaks entering a lockdown phase result in graver consequences on the economy.
The Unravelling of Yes Bank:With news of Yes Bank shares tumbling with over 85% downfall (since 1st July 2019 till 6th March 2020) and founders accused of money laundering, it made Yes Bank hard to be recognized as the same bank that once attracted so many retail and veteran investors. Even big players such as Rakesh Jhunjhunwala made investments of over one crore in Yes Bank shares in the past.
In this post, we are going to cover the Yes Bank fiasco story in order to understand what exactly went wrong with Yes Bank. We are going to discuss how this stock (that was once the darling of the investing community) turned out to be one of the worst wealth destructors in recent years.
Yes Bank History
(Rana Kapoor: Co-founder, Yes Bank)
Incorporated in 2004, Yes Bank was founded by Rana Kapoor who headed the bank till 2018. His other co-founder – Ashok Kapur suffered demise during the 26/11 attacks in Mumbai which eventually led to an internal feud between his next of kin and Rana Kapoor.
Despite all these, Yes Bank also withstood many obstacles including the demonetization cash crunch which eventually worked out in their favor. It helped them rising up to become one of the digital transaction leaders having over 1,000 branches, 1,800 ATMs and over 1,8000 employees throughout the country by 2019.
What led to Yes Bank losing +85% in market value?
On 5 March 2020, the Reserve Bank of India (RBI) announced taking control of Yes Bank in an attempt to avoid the collapse of the bank. Although the stock crash may come as a surprise to many, there seem to evidently be many red flags placed by Yes Bank on the road to this date – 5th March 2020.
— Bad Investments
This began with Global financial services firm UBS flagging serious concerns in 2015 over the loans given out by the bank which included debt-ridden Cafe Coffee Day, DHFL, Anil Ambani led Reliance and also currently bankrupt and grounded airline Jet Airways.
— Manipulated NPA
Due to multiple bad loans Yes Bank started gaining undue attention from the RBI over their Non-Performing Assets (NPA). This was because Yes Bank was avoiding recognition of these bad loans as NPA, but instead resorting to providing these borrowers with extended new loans or having their existing loans restructured. This led to a wrong portrayal of NPA’s that shows the percentage of total loans or advances that are in default or in arrears.
Anyways, it was promptly caught by the RBI in 2015, 2016 and also in 2017 which involved the RBI directing Yes bank along with several other banks to report transparently. The stressed loans given out by Yes Bank stood at Rs 50,396 crores as of September 2019.
— Founders Dumping stock
In January 2019 Yes Bank announced that Rana Kapoor would step down from his CEO position due to restrictions placed by the RBI over the extension of his tenure. This was also followed by Kapoor along with other investors dumping their stake from Yes Bank in November 2019 which also led to a severe fall in the stock prices.
This came as a surprise as Kapoor’s earlier twitter handle claimed otherwise.
Within a month of Ravneet Gill taking over as head of Yes Bank on March 2019, Moody’s estimated their NPA to stand at 8% (which is an extremely high rate). This gave the picture that eight percent of all loans given out by Yes bank were Bad loans and hence they also downgraded them.
The gravity of the situation was realized when the rating was compared to that of countries like the United Kingdom, Australia and Canada having an NPA of less than 1% followed by countries like China, Germany, Japan and the USA having an NPA of less than 2%.
(Ravneet Gill, Former CEO)
Due to multiple factors that involved bad investments, manipulation of the balance sheet, dumping of holdings by the founders and a high NPA eventually led to the RBI imposing a moratorium on the bank on March 5th, 2020, due to which individuals were allowed an aggregate withdrawal of only Rs.50,000 till April 3rd, 2020 initially.
This action was taken by the RBI to avoid a situation of a bank run where all the depositors demand their deposits be withdrawn in full, particularly in cases where the stakeholders have lost their trust in their bank (a scenario of which Yes Bank has become a prime example).
The ailing banking sector in India which has relied on government intervention time and again has held State Bank of India (SBI) the Indian government bank to step up for the rescue of Yes Bank. SBI announced that it will purchase ownership of 49% with a Rs 7250 crore investment. Along with this, HDFC and ICICI are investing Rs.1000 crore each, Axis Bank investing 600 crores, Kotak Mahindra Bank investing 500 crores, Bandhan Bank investing 300 crores forming the dream team along with Jhunjhunwala, Damani and Azim Premji Foundation altogether making up an investment of over 12000 crores.
The SBI rescue does not only aim at providing financial relief to Yes Bank but also aims at avoiding any further panic among the depositors of Yes Bank and possibly avoid a bank run. Steps were further taken with the initial moratorium which was capped with a withdrawal limit of Rs.50,000 till April 3rd will now be lifted on March 18th at 6 p.m.
SBI has also appointed Prashant Kumar as the new CEO who had earlier worked in SBI and has an experience of over 30 years in the Banking sector. The SBI is also to nominate two officers as directors in the additional new board with RBI to appoint more directors if necessary.
(Prashant Kumar, Newly Appointed CEO)
Ravneet Gill who had earlier helped Deutsche Bank achieve one of the lowest NPA as the CEO failed to steer Yes Bank away from the course set by Rana Kapoor. The former CEO and founder currently face allegations over his involvement in money laundering and corruption but the dream bailout team has somehow managed to shine a light at the end of the tunnel.
While the government plays the blame game with the opposition, we should take into consideration that the rising NPA involves multiple Indian banks having NPA’s higher than that reported by Yes Bank. As reported by CARE Ratings, it has put India in a ranking bracket which includes countries infamously known as PIIGS ( Portugal, Ireland, Italy, Greece, and Spain) who have faced severe debt crises in the recent past.
Moreover, with the economic slowdown already faced by India along with the recent Coronavirus scare and Oil price crash, the road doesn’t look bright for the government to take on added responsibilities of rescuing private banks.