How does the depreciating rupee affect one’s personal savings and finances? A new book explains it

This article was first published in the Scroll. 

https://scroll.in/article/1093589/how-does-the-depreciating-rupee-affect-ones-personal-savings-and-finances-a-new-book-explains-it

An excerpt from ‘The Economy Is Personal: How Big Economic Forces Shape Your Money – And What You Can Do About It’

Have you ever heard someone say, “The rupee is falling against the dollar”? It might sound like financial jargon, but it actually has a very real impact on your day-to-day expenses – even if you’re not travelling abroad. Let’s break it down.

Every country has its own currency. When countries trade with each other, they need to convert their currency into the other’s. So, for example, if India wants to buy something from the US – like crude oil, electronics or machinery – it has to pay in US dollars, not rupees.

Today, 1 US dollar = Rs 75. But next month, 1 US dollar = Rs 80.

This means the rupee has weakened, depreciated or lost value compared to the dollar. Earlier, India needed Rs 75 to buy something worth $1. Now, it needs more rupees, that is, Rs 80, to buy the same thing. That extra Rs 5 has to come from somewhere – and that “somewhere” is your wallet.

So, when the rupee weakens, imports become more expensive, because we need more rupees to buy the same goods from abroad. And since India imports many essential items, like fuel, cooking oil, smartphones, and electronics, those prices go up for everyone. This increase in prices contributes to overall inflation.

Think of it like shopping at a store where the price tag is in dollars. If your rupees are worth less each week, you’ll have to spend more to buy the same things.

That’s why economists and policymakers closely watch the exchange rate. A weak rupee can make imported goods expensive, and that, in turn, can raise prices across the economy – even for things made in India, because transport and input costs can go up.

Why does a falling rupee make your grocery bill heavier?

Because when imported goods and transport get pricier, those costs ripple through the entire supply chain. When the rupee drops, even your shampoo bottle, bus ticket or smartphone can feel the pinch.

So … What does the exchange rate have to do with the price of milk? If fuel prices rise due to a weaker rupee, transport costs go up and, suddenly, your morning milk costs Rs 2 more.

Inflation refers to the rate at which the prices of goods and services rise over time. In India, this is most commonly measured using the consumer price index (CPI). It is a statistical measure that captures the average change in prices of a fixed basket of items, such as food, fuel, clothing, housing and healthcare, that households typically consume. The base year, currently 2012, is assigned a CPI value of 100. All subsequent values show how much prices have risen since that year.

CPI in 2024: 190. CPI in 2025: 194

This means that prices in 2025 were 94% higher than in 2012. But to find inflation for one year, we look at the rate of change between the two years.

So, inflation is 2.11%, even though the CPI level is 194. The CPI tells us prices are almost double what they were in 2012, but the year-on-year increase is what we refer to when we say that inflation is 2.11%.

The Ministry of Statistics and Programme Implementation (MoSPI) publishes CPI data every month. The RBI monitors it closely to make interest rate decisions. If CPI rises sharply, even due to something like a tomato price spike, it can prompt the RBI to raise interest rates, which affects loans, EMIs, savings returns and overall economic activity.

Can everyday consumers affect global inflation?

Absolutely. When millions of people suddenly start spending more (like after the Covid-19 lockdowns), businesses struggle to keep up with demand. As we saw earlier, this pushes prices higher and is known as ‘demand-pull inflation’. For example, when Americans began “revenge spending” in 2021, global supply chains couldn’t catch up, which drove up the prices of electronics, furniture, fuel and even shipping containers. What you buy, how much and when – these choices affect the entire economy.

Now let’s bring this back to your wallet. Where does Rs 10,000 go in five years?

Similarly, suppose you save Rs 5,000 every month for ten years in a savings account that earns 3% interest. By the end of ten years, you’ll have saved about Rs 7 lakhs. Sounds like a decent amount, right?

But now imagine inflation has averaged 6% during that time. To buy the same things you could have bought with Rs 7 lakhs ten years ago, you would now need over ₹9 lakhs.

So even though your savings have grown in number, their real value has shrunk. That’s the silent, invisible power of inflation – it eats into your future, rupee by rupee.

And this affects your dreams:

The house you planned to buy: Now out of reach.

The college education you thought you’d covered: Now costs double.

The retirement you hoped would be peaceful: Suddenly feels uncertain.

This is why just saving isn’t enough. You need to make your money grow faster than inflation, and that means you’ll need to invest. But every investment carries uncertainty. Risk isn’t something to fear; it’s something to understand.

Credit card is not for impromptu Bali trips. Use it to invest in yourself

This article was first published in the Print, June 16, 2026; https://theprint.in/pageturner/credit-card-bali-trips-invest/2961457/

Credit can be a powerful bridge between today’s desires and tomorrow’s means, but it must be used with care. At its core, credit means borrowing now and agreeing to repay later, with an additional cost known as interest. Lenders—banks or fintech platforms—charge an annual percentage rate (APR) to compensate for the risk of non-repayment and forgo the opportunity to deploy those funds elsewhere.

In a healthy economy, credit fuels growth. Students use education loans to gain skills, businesses tap working-capital lines to bridge seasonal cash-flow gaps, families stretch EMIs over decades to buy homes. However, when credit is misused, debt piled on high-interest credit cards or personal loans, the same tool that creates opportunities can turn into a persistent burden.

Credit-card APRs often exceed 25–30% annually, turning unpaid balances into a mounting liability. Suppose you have a ₹2,00,000 credit card balance at 30% APR. Let’s see what happens if you are not able to pay the full amount on the due date. Let’s assume the minimum payment is 2% of the opening balance. Therefore, you pay ₹4,000.

After paying the minimum, the remaining amount accrues monthly interest. The remaining amount, or the new principal will be: ₹2,00,000 – ₹4,000 = ₹1,96,000 Now let’s add one month’s interest: ₹196,000 × (1+0.025) = ₹200,900. So, after one month, despite paying ₹4,000, you still owe ₹200,900, an increase of ₹900 due to interest. If you again pay only the 2% minimum on the new balance, the process repeats. Thus, it barely reduces the principal and can let your balance and total interest rise over time.

Pro Tip: Before you swipe your card, remember: if you can’t pay your balance in full each month, high‐APR debt can quietly grow even while you’re making payments. Always run these numbers first. You’ll often find it makes more sense to borrow less or choose a lower‐cost alternative. Responsible credit use hinges on three pillars: understanding costs, maintaining discipline and aligning borrowing with your long-term goals.

First, know your APR and repayment terms. A loan or card that seems attractive on an ad may carry hidden fees such as late-payment penalties, annual charges or high default rates, that transform convenience into a trap. Second, treat credit like a knife: indispensable in skilled hands, dangerous when misused. Always ask, ‘Can I repay this in full by the due date?’ If not, reconsider the purchase or seek a lower-cost alternative. Third, use credit to invest in yourself or essential assets—a degree, a home or a temporary shortfall—rather than funding fleeting indulgences, like an impromptu trip to Bali.

Credit scores, summaries of your repayment history and utilisation of credit, determine not only your access to credit but also the rates you pay. Consistently paying on time and keeping utilisation low builds a strong score, unlocking cheaper loans and premium card benefits in the future. Macroeconomic forces shape credit availability and cost.

When central banks lower policy rates to spur growth, borrowing costs fall, making mortgages, car loans and even credit card interest more affordable. Conversely, in times of rising inflation, central banks may hike rates, EMIs on floating-rate loans climb and credit card charges mirror the market tightening.

Economic downturns can trigger stricter lending criteria, as banks guard against rising defaults. Across the globe, credit cultures differ. In the US, credit card penetration is high, and APRs can soar above 20%, yet rewards programmes entice responsible users. In Germany, consumers favour debit and cash, shunning high-interest cards.

In India, soaring education and housing costs have fuelled rapid growth in personal and home loans, even as credit card adoption remains nascent. Understanding your country’s credit norms helps you benchmark your own borrowing habits.

War Chests and Emergency Funds: Why Households Must Think Like Institutions

This article was first published in the Economic Times, April 30, 2026

Periods of geopolitical tension have a way of reminding us how little control we really have. The ongoing conflict in the Middle East, involving Iran, the United States and Israel, is not just a distant headline. It has implications for oil prices, inflation, interest rates and financial markets across the world. For households, these shifts translate into something far more immediate: uncertainty in income, expenses and financial security.

In such moments, one principle becomes particularly relevant. Just as nations and institutions prepare for shocks, households must do the same.

Think Like Institutions: Build a War Chest- In my work with family offices, one idea I emphasise consistently is the importance of maintaining a “war chest”, a portion of wealth set aside in safe and liquid assets. This is not capital meant for growth or return optimisation. It is capital meant for survival, stability and optionality. It ensures that when disruption hits, decisions are not driven by panic.

The same logic applies, perhaps even more urgently, at the level of individual households. Financial resilience is not built in the middle of a crisis. It is built before one.

Your Emergency Fund Is Your First Line of Defence- At the level of the household, the equivalent of a war chest is an emergency fund. Its role is simple but critical. It protects your life when your income cannot.

It absorbs the shock, allows you to maintain continuity, meet obligations, and most importantly, think clearly about your next steps. The triggers may vary, a macroeconomic slowdown, job loss, health emergency, or a broader systemic event such as a pandemic or financial crisis. What unites these is their unpredictability and their ability to disrupt cash flows.

How Much Is Enough Depends on Your Reality- There is no single number that works for everyone, but there is a guiding principle. At a minimum, three to six months of essential expenses such as rent, food, utilities, healthcare and loan repayments should be non-negotiable. For those in volatile industries, with variable income streams, or with significant dependents, a longer buffer of twelve to twenty-four months is prudent.

This is where risk is often underestimated. Income is treated as stable until it is not. Entire sectors can slow down simultaneously. Hiring freezes, delayed payments and business contractions tend to cluster in times of stress.

The real question is simple: how long can you sustain yourself if your income stops tomorrow?

Safety and Liquidity Matter More Than Returns- Equally important is where this fund is held. An emergency fund is not an investment strategy. It is a protection strategy. The purpose of this capital is not to grow, but to be available when needed, without loss of value. In periods of stress, liquidity becomes more valuable than return.

Funds locked in real estate, equities, or long-term instruments defeat this purpose. Instead, this reserve should be held in low-risk, highly liquid options such as savings accounts, liquid mutual funds, or short-duration deposits.

There is also a behavioural dimension. Without a buffer, households are forced into unfavourable choices, selling long-term investments at the wrong time, taking on expensive debt, or cutting back on essential spending. With a buffer, decisions become measured rather than reactive. Time, in a crisis, is an asset. Liquidity buys that time.

Conclusion

The current global environment is a reminder that volatility is not an exception. It is a recurring feature of economic life. While we cannot control geopolitical events or macroeconomic cycles, we can control how prepared we are for them.

A war chest does not eliminate uncertainty. But it ensures that uncertainty does not dictate your choices. Because when disruption arrives, as it inevitably will, the difference is not in the event itself. It is in how prepared you are to face it.

Pledging of Shares by Promoters of Family Firms in India: Regulatory Concerns and Recommendations

This article was first published in the The Prime Directory 2023, Prime Database Group, September 2023. Co-aurthors: with Ray, Sougata & Ramachandran, Kavil; https://www.primedatabase.com/article/2023/Article-Nupur_Pavan_Bang.pdf 

Introduction

The practice of pledging of shares has existed in the Indian financial system for a long time. However, it gained significant disrepute during the Satyam Corporate Governance scandal in 2009. Since then, the Securities and Exchange Board of India (SEBI) mandated the promoter shareholders of firms to declare their pledging activities to the stock exchanges within seven days.

Regulatory bodies such as SEBI and RBI have continually highlighted their concerns around pledging. As pledging-induced corporate governance scandals have seen stock prices plummet, investors too have called for pledging to be curtailed via the introduction of stringent regulations. Academics and corporate governance experts have associated share pledging with several detrimental firm-level outcomes. Some of these concerns are highlighted below.

Concerns

Health of the financial system: In India, financial institutions have seen a considerable rise in their exposure to debt backed by pledged shares in the past decade. Often, the asset cover set by lending institutions may be too small to cover the price risk associated with shares as collateral. Where pledging loans are non-recourse (i.e., the borrower is not personally liable for the loan apart from the provision of collateral), there is a possibility of the lender not recovering the principal amount in the event of a sudden downturn in the stock price and loan default.

Loss of control of the firm for controlling shareholders: In the hunt for wealth diversification and legacy building, controlling shareholders may be tempted to over-pledge their shares with a lack of provisions to repay the loan or answer margin calls. There have been numerous instances where margin calls have led to controlling shareholders losing control of the firm. These disruptions result in a significant loss in market capitalization of the firm and raise considerable doubt over its future.

Underinvestment in innovation and risk-aversion: While innovation is a strategic driver of long-term growth and firm value, investment in innovation is much riskier than the firm’s business-as-usual activities. Post pledging, there may be a strong incentive for the promoters to underinvest in R&D activities to reduce the possibility of future margin calls.

Impact on accounting practices: To reduce the risk of a decline in the firm’s share price and subsequent margin calls, promoters may attempt to falsely present a positive picture of the firm. Consequently, firms where controlling shareholders pledge shares have a higher propensity to indulge in inferior accounting practices such as earnings management and choose lower-quality auditors to continue earnings management and navigate through the regulatory requirement of a financial audit.

Decline in Firm Value: Following a share pledge by a controlling shareholder, increased risk-aversion and a rise in the firm’s equity risk is likely to contribute to a decline in firm value in the longer term. Thus, while insiders pledging shares receive benefits in the form of a loan, outsiders must face a decline in firm value with no associated upsides, if the loan amount is not used for the same firm and with a judicious strategic plan.

Theoretically, there is a divergence in risks and rewards of the promoters who pledge their shares and other shareholders of a firm. This may act as an incentive for the promoters to pledge their shares despite all the concerns mentioned above. In the next section, the authors enumerate a few recommendations for the regulators that should help minimize the negative impact of pledging, while retaining the tool to access funds when in need.

Recommendations

Awareness and information dissemination: Despite concerns from all quarters over the negative implications of pledging, SEBI has indicated that it does not intend to prohibit the pledging of shares. SEBI believes that it should be the right of the owner of equity to decide the best possible way of utilizing it. Hence, given its positioning as a relatively accessible form of financing for shareholders, pledging of shares is expected to remain in the financial markets as a popular form of raising capital. Moving forward, it is critical for the regulators to create awareness and disseminate information about pledging of shares to all key stakeholders (including minority shareholders and financial institutions).

Integration and standardization: As of now, the disclosures on pledging by promoters to SEBI and the information available to RBI regarding the lending by financial institutions are not integrated. Both the regulators should jointly seek information from the promoters and disseminate the information in a consolidated manner to the investors. In addition, rules surrounding adequate cover for share pledges (and provision of the maintenance margin) must be standardized and ensured that they are implemented across all financial institutions uniformly.

End-use of pledging capital: SEBI has been considerably proactive in monitoring the pledging of shares and introducing stricter regulations around the same. We feel that these are steps in the correct direction. However, disclosure of the reasons for pledging must be mandated against all share pledges irrespective of the size of the pledge to further protect the interest of the minority shareholders. SEBI must actively mandate the precise destination of the funds obtained through pledging, as several promoters provide vague reasons for pledging in the disclosure reports. 

Control and cash flows: In an ideal scenario, the associated risks, returns and control should be homogenous across the firm’s shareholders. That is, the promotors, institutional investors and the retail investors should receive returns (in the form of capital gains and dividends), face risks and exercise control in accordance with the size of their shareholding in the firm. However, pledging may alter this homogeneity associated with stock ownership. While the shares are used as a collateral to raise funds, the promoters continue to enjoy all cash flows associated with those shares as well as their control and voting rights. In a way, this incentivizes the promoter to pledge their shares since there is no immediate negative consequence of doing so.

While, in a situation where the firm is close to default or needs immediate cash, the promoters might have no choice but to use pledging as a tool to access immediate capital, the promoters should have a plan to pay back the loan to the financial institution. Checks and balances are required to ensure that due to asymmetry of information, the promoters do not “cash out” of firms in distress leaving the financial institutions (lenders) and other shareholders to take the fall. A negative spiral in the stock price will most significantly impact the minority shareholders and leave the lenders with a collateral that may not cover the value of the loan extended. Such divergence can be checked by the SEBI by bringing in clauses such as deferred dividend payments until the shares are pledged or suspending the voting rights in proportion to the extent of shares pledged.

Guidance to the board: The role of the board of directors is critical in the event the promoters pledge their shares due to its far-reaching implications. The Ministry of Corporate Affairs may stress of the benefits of an empowered board of directors. It may also lay out the responsibilities of the board if a promoter wants to pledge its shares. The directors must caution the promoters from over pledging and should shield the firm from the promoters if they try to manage the margin calls by taking hasty or short-term view decisions in the firm. In addition, the board of directors should also evaluate if pledging is indeed the best option for the firm. Independent directors to be more vigilant and check that decision making at firm level is not impacted. In addition, they should be made more accountable for lack of carrying out their fiduciary duties.

Guidance to promoters: The Companies Act should also detail the expectations from the promoters when deciding to raise capital via pledging, viz. the promoters should be cognizant of the risks that this form of financing carries, the promoters should be reasonably confident of the cash-flow generation abilities of the investments made by them in the future. Overtly wishful and hopeful thinking by promoters without due diligence has indeed impacted many business barons in making over-optimistic bets. Also, the impact of variations in stock price of the firm observed in the short-term on the pledging contract should be manageable. The promoter should also have a contingency plan to answer margin calls made to the firm and they should disclose it to SEBI.

Compliance: Disclosure by the promoters and the companies should be monitored stringently with strict action for delays and non-compliance. For a better governed and efficient running of the market, there must not be any slip between the cup and the lip.

Conclusion

When we study individual cases of pledging of shares, we find that in conjunction with bad business decisions, pledging has had dire consequences for the promoters and other stakeholders. Such companies are many. They include Satyam, Future Group, and Zee Entertainment. However, there are also companies that have created long-term wealth for all shareholders by using pledging as a strategic tool to raise funds for expansion and growth. Examples include Apollo Hospitals and Granules Pharmaceuticals.

Therefore, all cases of pledging of shares should not be painted with the same stroke of negative. Rather, responsible pledging should be promoted, with appropriate checks and balances, transparent motivations to pledge, and a plan to revoke the pledge.

Why the Rs 4.6 lakh crore pledged promoter shares matter for India Inc.,?

This article was first published in the Financial Express, on November 14, 2022, Co-author: Sougata Ray; https://www.financialexpress.com/industry/pledged-shares-valued-at-rs-4-6-trillion-the-good-and-the-bad/2812080/

Gautam Adani, hailed as the richest Asian and the third richest person in the world in October 2022, acquired 63.15% stake in Ambuja Cements and 56.69% in ACC in September 2022. Part of the acquisition was funded through pledging the entire acquired stake in both the companies, worth $13 billion. It once again highlights the popularity and importance of pledging as a financing tool for the Indian family business owners who usually have the dominant or controlling stakes in the companies.

Pledging at a varied degree is quite widely prevalent around the world. However, in countries where diversified ownership is more common, such as the United States, pledging is generally done by owners, directors, and executives to hedge and diversify their personal wealth or to meet personal needs. However, in India, pledging by family promoters often serves as a mechanism to generate financial capital for the firm or other affiliate firms belonging to the same business group. 

Promoters of almost a quarter of all companies listed on the National Stock Exchange (NSE) of India have pledged their shares to some degree. The average being a staggering 44 percent of the holdings of promoters in these companies. In the last quarter of financial year 2022 (January-March 2022), the value of shares pledged by promoters of NSE listed companies stood at Rs 4.6 Trillion. In a country like India, where more than 90% of the listed firms are family firms and concentrated shareholding is the norm, the exposure of investors and financial institutions to pledging can result in a systemic risk. It may not be so in many other countries where diversified firm is more of a norm when compared to concentrated ownership.

During the last couple of years, there have been many instances where promoters have lost ownership control in well-known large family firms. Of course, this outcome happened due to a combination of over-ambitious or bad decisions. But in many of them, the promoters had pledged their shares to financial institutions and when the share prices started to fall, the institutions sold the pledged shares in the open market. This resulted in the promoters losing ownership in their family firms. The situation was exacerbated due to the pandemic when the share prices of most companies took a hit. 

Just like the mark-to-market concept in the case of financial derivatives, when the share prices fall and the asset cover falls below a predetermined value, the financial institution raises a margin call to the pledging shareholder. Consequently, the shareholder is required to either top-up the loan with more shares or pay off a portion of the loan’s principal to increase the existing asset cover back to the pre-determined value. If the shareholder answers the margin call in the stipulated time, they will continue to own the shares. If the shareholder is unable to answer the margin call, the financial institution has the right to sell the shares in the market. The news of a margin call is generally perceived negatively by investors and the sale of a block of shares of a company in the open market accentuates the negative sentiment associated with the stock. Investors may indulge in panic selling of the stock. The increased supply of shares puts downward pressure on the stock price, thereby warranting further sale of shares by the lending financial institutions. 

In research conducted by the Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business, the authors found increased crash risk, lower return on assets, increase risk aversion, and negative investor reaction to the news of pledging. We observe that the potential loss of ownership control faced by many firms that have pledged their shares is overwhelming and would have significant impact on the promoting families and the other stakeholders of those companies if the promoters were to lose the pledged shares due to an unforeseen circumstance.

However, we also find many instances of family business promoters that have effectively used pledging as a tool to finance strategic initiatives for expansion, new venture creation, acquisition, etc., and to buy back shares in their own firms. Such promoters have not only used pledging for growth, liquidity, market performance, and ownership consolidation, but also reduced pledging thereafter in a systematic way. Examples include firms such as Asian Paints, Apollo Hospitals, and Granules India. Therefore, pledging per se is not bad – it is a legitimate, legal, and effective tool to raise funds by the promoters. When access to capital is limited either due to tight liquidity in the overall economy or stretched bank limits and high debt-equity ratio of the firm, the environment may not be conducive to raise equity or the promoters may not want to dilute their stake, in all these situations, pledging comes in handy.

Pledging has been around for decades in India. However, its impact has become more accentuated now due to the VUCA world that we live in. Awareness about its possible negative consequences has also gone up. It is amply clear that the promoters need to be prudent and strategic in using pledging as a financing tool. A decision to pledge must be associated with a clear plan for usage of funds, returns from them, and a path to de-pledge the shares. The promoters should avoid getting into a trap of excessive pledging, being overconfident about the prospects of the firm and under preparing and underestimating the external risks. The family business leaders taking the decision to pledge the shares must consult the family members and keep them updated. The funds from pledging should be used responsibly, with immense accountability and transparency. The Board and particularly the independent directors have an important role to play in this regard. Timely disclosures and effective communication will help calm the nerves of the other investors. Financial institutions should closely monitor the pledging situation in a firm, as well as that of the companies affiliated with the same business group, when deciding to buy, hold or sell their investments in a firm.

SHARE PLEDGING AND ITS CONSEQUENCES: A STUDY OF INDIAN FIRMS

“Policy makers and investors need to take a more balanced and contextual view on share pledging by family promoters rather than castigating the phenomenon.”

A research study, authored by Dr. Nupur Pavan Bang, Professor Sougata Ray, Nandil Bhatia and Professor Kavil Ramachandran of the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business (ISB), highlights the prevalence of share pledging in the Indian context and the possible implications that pledging may present for stakeholders, especially in family firms.

Using data for 1,492 firms listed on the National Stock Exchange of India from 2009 to 2019, the study finds a decline in firm value, higher crash risk and underinvestment in innovation by firms where promoters of family firms pledge their shares. The study also shows how some firms have utilized share pledging by family promoters as a tool to raise capital for strategic projects and create value for the stakeholders.

The various scandals, loss of control of the firm by family promoters, regulatory responses and warnings led to the common perception that all share pledges by promoters are bad. Existing empirical research around pledging of shares is sparse and does not account for the heterogeneity among the possible use-cases of capital obtained from pledging of shares. The study calls for more nuanced studies on pledging to explore this anomaly contextually and to avoid painting all cases with the same brush.

Co-author, Professor Sougata Ray explains that “the commonly peddled negative narrative on pledging often dissuades fact based, informed, balanced, and nuanced debates on its utility, causes and consequences, backed by rigorous research in spite of its ubiquity in India and many other economies of the world. Along with large sample data driven research, there is a need for case study based research on pledging in order to understand the variations of the same.”

The study was released in a webinar in the presence of Dr. Satyanayana Chava, Founder and CEO, Laurus Labs; Professor Prasanna Tantri, Executive Director, Centre for Analytical Finance, ISB; the authors of the study; and industry stakeholders. It has important implications for investors, regulators, board of directors, and even family members. Pledging of shares, coupled with bad decision-making and/or over ambitious growth plans, resulted in complete destruction of family wealth in many family firms. There is need to create awareness and build stronger family governance processes that would put checks and balances with regards to excessive pledging.

Speaking at the webinar, Dr. Nupur Pavan Bang said, “The study provides a clarion call for acknowledging that pledging is an important tool to access financial capital for family promoters. It is a legitimate way to raise entrepreneurial financing amongst family businesses and a source of fund to turnaround the family firm if it is in trouble. Policy makers and investors need to take a more balanced and contextual view on share pledging by family promoters rather than castigating the phenomenon.”

The study lists important implications for stakeholders of family firms, such as, promoters, family members of the promoting family, investors, the firm’s board of directors, and the regulators. A few of them include:

-        Over-optimistic investment plans and over-pledging of shares by the promoters, without pre-planned repayment strategies, are likely to lead to a crisis later.

-        Investors must keep a track of their portfolio and regularly evaluate if the controlling shareholders of the firms in which they have invested have pledged their shares.

-        Board of directors of firms must caution controlling shareholders from over pledging their stakes and should shield the firm from such shareholders if they try to manage the margin calls by taking hasty or short-term view decisions in the firm.

-        The study also has insights for the regulators such as the RBI and SEBI to take more balanced view of pledging when making policies.

-        Further, there is need to create awareness and build stronger family governance processes that would put checks and balances with regards to excessive pledging.

NPAs are everybody's problem

This book review was first published in Business Standard on July 10, 2020; https://www.business-standard.com/article/beyond-business/npas-are-everybody-s-problem-120071000014_1.html

Vivek Kaul's Bad Money: Inside the NPA Mess and How it Threatens the Indian Banking System provides the answer and I am wiser years after having taken the loan

Book: Bad Money: Inside the NPA Mess and How it Threatens the Indian Banking System

Author: Vivek Kaul

Price: Rs599/-

Pages: 339

Publisher: Harper Business, an imprint of HarperCollins Publishers

When I was a fearless in twenties something, sometimes broke, research scholar, I went ahead and bought an under construction flat. I took on a home loan that covered 85% of the cost of the flat and a personal loan that covered the remaining 15% that was used for the down payment. After paying the EMIs, I would have barely enough to pay my share of the rent of a 500sft apartment shared by 3 or sometimes 4 friends and eat three square meals a day. I had started walking longer distances instead of taking autos, I stopped going to the Café Coffee Day and for shopping, unless for essentials. I sold the apartment soon enough at double the price.

In the recent years, whenever I have taken a loan, bogged down by the paper work, my thoughts always go back to those days and I always wonder how did someone like me, with no guarantors, on a stipend (not even a salary) and no credit history ended up getting the loans back then?

Vivek Kaul’s “Bad Money: Inside the NPA Mess and How it Threatens the Indian Banking System” provides the answer and I am wiser years after having taken the loans. Those were the years, 2005-06, when the bad loans rate was below 5 percent and hence the banks had “decided to go easy on their lending” and the growth rate of lending was highest around this time.

Last year, a friend lost her job and defaulted on the EMIs of her car loan and after the fifth month of default, two employees of the bank came and took her car away. She asked me, “How is it that Vijay Mallya and Nirav Modi get away but people like us can’t?” I had jokingly replied, “well you could get away too if you absconded to another country with the car.” Last week, I asked her to read Kaul’s book in which he lucidly explains why ‘If you owe your bank a hundred pounds, you have a problem. But if you owe your bank a million pounds, it has,’ as John Maynard Keynes had remarked and modified by the Economist [magazine] as “If you owe your bank a billion pounds everybody has a problem.” She read the book and called to thank me for suggesting it.

As evident from the above examples, Kaul’s book, if read with the attention it deserves, helps everyone, not just the economics and finance students and practitioners, to understand how developments in the banking sector and the various cycles of lending, NPAs and regulations have implications for everyone. The decisions taken over time slowly and steadily weave an invisible mesh of mess that gets noticed only when someone like a Mallya or a (Nirav) Modi gets trapped in that web and catches the imagination of the nation. How does this mesh get woven? That is what Kaul traces and explains in his book.

“Bad Money” is a focused saga of the banking system in India that includes the creation and evolution of the public sector banks, nationalization and privatization, regulations by the Reserve Bank of India such as the Insolvency and Bankruptcy Code, 2016 and how the politics too played out along the way. It goes back and forth like a “Tarantino movie”, as Kaul puts it, goes into the back stories, the sub-plots and the numbers that substantiate the stories.

The problem with the book lies in its strengths. The book is focused and hence it may not seem appealing to readers who look for more broad-based books on the economy and the financial system. However, once they pick up the book, they will find that it does take an overall view of the financial system while keeping the banking system at the centre. The book also throws a lot of numbers and graphs at the readers that may act as speed breakers, in an otherwise fast paced book, while reading though they make the book more authentic in its analysis.

The book is a one stop shop for anyone looking for references on the Indian banking system. One can only marvel at the number of books, monographs, articles, and documents from various websites that have been referred to. Anyone researching related topics need not look elsewhere and may be able to add only a “delta approaching zero” to what Kaul has written. This book organises the messy material and presents the “long and short” of it in a readable, understandable and relatable manner.

The Impact of the Coronavirus on Investment Decisions

This article was first published by the Global Association of Risk Professionals, Risk Intelligence, on June 19, 2020; Co-author: Anisha Sircar; https://www.garp.org/#!/risk-intelligence/market/investment-management/a1Z1W000005VYeIUAW

As the world heads toward a global recession, with plunging equity markets and countries facing severe economic downturns, there are uncertainties and strong beliefs that have practically divided the world into the optimists and the pessimists. There are those, for example, who make rash, seemingly opportunistic investment decisions, and those who are more measured in their financial approach. Those who unwittingly indulge in herd behavior, and those who are less prone to such external influences.

What's more, there are those who are extremely cautious, favoring extended lockdowns and total isolation, versus those who have a more “que sera, sera” approach to COVID-19, supporting getting back to normal as early as possible.

It's easy for one group to feel that the other group is being unreasonable. The pandemic's unprecedented impact on our lives, both in the short and the long run, makes people highly susceptible to making decisions they would have otherwise avoided.

In this article, we reflect upon the financial and investment decisions being made by people in the backdrop of the pandemic, and the dichotomy facing risk managers and investors. What are the obstacles standing in the way of investors making rational decisions and avoiding unnecessary risks in a time of crisis?

Bias

When analysts, policymakers, “experts,” and/or news reports offer statements and opinions, it's sometimes assumed that they know what they are talking about. However, people find opinions credible as long as it confirms their own thoughts or anxieties, or as long as they seem like “educated” or even consensus-based guesses. This can involve a range of biases, from herding behavior, to action biases, to confirmation biases.

When COVID-19 hit markets, it resulted in phenomena such as dwindling risk appetite and investor interest and declines in the perceived values of stocks. That led to dramatic drops in stock prices, wiping out any potential investor gains.

Herding behavior is tricky with respect to risk appetite and investing. It drives markets toward excesses during market upturns and nose-dives during downturns. It's why stock indices in India, the U.S. and Europe plunged, especially between mid-February and mid-March this year, and why circuit-breakers were triggered several times in recent months.

In India, the major indices lost 40% in just two months. While it might be natural to get carried away with all the noise and the herd, turbulent times like these call for more reflection, rather than panic selling. Investors in countries like India have been used to more euphoric highs over the last few years, and the losses on investments therefore now seem particularly painful.

Markets in India spiraled almost immediately into a “bull phase” in a fortnight, recovering 20% from the bottom. However, it's important to keep in mind that, by and large, market indices have rebounded and hit new highs after every previous global financial crash. So, despite the noise, this may be the time for anxious decisions to hit pause.

Shortsightedness

In 1995, Shlomo Benartz and Richard Thaler conducted a study titled, “Myopic Loss Aversion and the Equity Premium Puzzle.” The researchers asked: How much will the equilibrium equity premium fall if the evaluation period (of a portfolio) increased? In other words, is checking and re-checking your portfolio beneficial or detrimental to how well it does?

Their research found that more frequent checkers show considerably lower portfolio performance over time. “In a sense,” they concluded, “5.1% is the price of excessive vigilance.” Long-term profits can be found where there is courage to move away from the crowd — and think long-term.

On the other hand, there are those who did bottom hunting when the markets crashed and are now raking in the moola.

In essence, investors who hit the pause button (the que sera, sera group) felt that those who were rebalancing their portfolios were being myopic; on the other hand, those who were actively trying to buy and sell thought that the other group was simply being “stupid.”

However, in the end, every investment decision needs to incorporate the risk appetites and the risk-taking capability of people. Someone may have a higher risk appetite – but if the capability to absorb a huge loss is low, then wait-and-watch is perhaps a better approach than investing in uncertain times.

Overconfidence

Psychologist Daniel Crosby believes that uncertainty often leads to two kinds of behaviors —compensatory over-confidence or worst-case scenario thinking, neither of which results in smart financial choices.

While the volatility in markets during the pandemic may be partly attributed to panic, investor overreaction (which led to excessive trade volume) was certainly another cause. This is reflected in how markets have periodically surged because of overconfidence about the worst of the virus having passed.

Shortly after these surges, indices are found plunging back down again. The phenomenon is also reflected in how “experts” have been making a variety of assertions in the recent weeks, guaranteeing that investors will be spared the pain that others may be experiencing.

Overconfident people, write researchers Mao Zhang and Yi-Ming Wang, “may perceive themselves more favorably than others perceive them, or they may perceive themselves more favorably than they perceive others. (…) It is common for most people to rank themselves as better than the median.” Moreover, they note that it's also “common” for men to trade more excessively than women, and for individual investors to show more confidence than institutional investors.

This plays a significant role in market volatilities, because overconfident investors are usually quick to buy on margin ahead of a stock market crash. In the run-up to the Great Depression, the “Roaring Twenties” saw a lot of overconfidence, and several investors used large margin positions to leverage their beliefs. But this caused an asset bubble, and when the depression hit, they lost everything they owned. Indeed, they even owed large sums of money, ultimately leading to banks having to declare bankruptcy — and everybody losing.

The takeaway? Avoid overconfidence: think long and hard before buying on margin in uncertain times if you don't have the appetite to stomach a huge loss.

Faulty Forecasts

“Experts” have made an array of predictions, ranging from global economic agencies projecting India's potential economic recovery to analysts saying the global economy will bounce back in the next financial year. These forecasts assume that central banks will cooperate and offer a way out, and that currently spooked investors will react to the rescue and re-enter the market. But as we have seen in the past, people can just as easily do the exact opposite, crisis or not.

In a pandemic, the seemingly opposite behaviors of people get amplified. Everything starts to seem black and white to people, but markets and behaviors actually remain grey and complex, interacting with each other in intricate ways.

Parting Thoughts

Turbulence and downturns have causes relating to behavioral and psychological factors that are difficult to control and explain. But what's certain is that not allowing investment decisions to be fueled by emotions and biases is a wise course of action. Now more than ever, people need to get back to the basics: minimize costs, be COVID-19-cautious, and resist the urge to time markets — and the virus.

Who Will Act on Income Inequality?

Because of its far-reaching consequences, governments must be involved

This article was first published in GARP, Risk Intelligence on June 28, 2019. Co-author: Sai Nitya Bodavala; https://www.garp.org/#!/risk-intelligence/all/all/a1Z1W00000551qTUAQ

In his victory speech on May 23, 2019, India's newly re-elected prime minister, Narendra Modi, said that “from now on, India will only have two castes: the poor and those that want to remove poverty.”

Historically, the Indian government focused policymaking on alleviating the social inequality cemented by caste differences. The primary focus was bridging the gap between the upper and lower castes through financial and educational parity, like reservations in educational institutions and government jobs. Of late, however, there has been a shift to targeting policies to inequalities presented by income.

India began to face issues of heightened inequality post-1991, when economic reforms and liberalization were initiated, ending the license-quota regime, following a balance of payments crisis. Pre-reform, the public sector ensured that resources were diverted to those geographic areas that required them, and thereby leveled the playing field. After the private sector entered the playing field, however, things changed. The private sector focused on cutting costs and profit-making. Businesses moved to more developed areas where access to resources was easier and cheaper. This led to regional income inequality.

During its last tenure, the National Democratic Alliance (NDA) government, led by Modi, targeted income inequality with a bill that aims to introduce a 10% reservation in jobs and educational institutions for those belonging to the “economically backward” sections of the general category. Economically backward is defined as families receiving less than Rs. 800,000 of income per annum and possessing fewer than five acres of land, in addition to other measures based on residence.

In the recently held elections, the Congress party's manifesto also incorporated an element that aimed to do the same. It proposed the Nyuntam Aay Yojana (NYAY) scheme, according to which 50 million of the poorest families in India would receive Rs. 72,000 a year. It was assumed that each family has at least five members, meaning that 250 million people would benefit – if the Congress party had come to power and implemented scheme.

UBI and Wealth Taxes

India is not alone in moving toward policies that aim to reduce income inequality. Andrew Yang, a candidate for the Democratic presidential nomination in the United States, has based his campaign on the idea of Universal Basic Income, which guarantees to each adult a certain amount of money per month. Yang proposes to pay for UBI through a value added tax (VAT) and the revenue from the envisaged increase in productivity from receiving an unconditional cash transfer.

Billionaire philanthropist Eli Broad, writing in the New York Times, said, “Our country must do something bigger and more radical [than steps such as raising the minimum wage and building affordable housing], starting with the most unfair area of federal policy: our tax code. It's time to start talking seriously about a wealth tax . . .

“Don't get me wrong: I am not advocating an end to the capitalist system that's yielded some of the greatest gains in prosperity and innovation in human history. I simply believe it's time for those of us with great wealth to commit to reducing income inequality, starting with the demand to be taxed at a higher rate than everyone else.”

If governments are attempting to curb income inequality, it is only right to explore why.

The Bigger Picture

The Gini coefficient is used to measure income inequality. On the scale of 0 to 100, 0 is perfect income equality, with everyone receiving an equal amount. At 100, there is perfect inequality, with one person receiveng all income.

Studies have found that low levels of income inequality may actually be beneficial for the economy.

Income inequality denies educational and culturally stimulating opportunities for children from low-income households. This deprivation keeps them from obtaining relevant skills that the job market requires, making them less employable. They end up being paid low wages.

The wealthy, meanwhile, produce with the intention of earning profits. If the masses cannot afford to buy what is produced, the wealthy suffer losses, leading to their inability to reinvest, and making the economy worse off. Income inequality at a level below 27 on the scale allows for entrepreneurs to invest more into their businesses, thereby allowing for greater economic growth. On the other hand, a high level of inequality has a snowball effect, with negative repercussions for all.

A 2015 study by the Organisation for Economic and Cooperation and Development (OECD) found that between 1990 and 2010, the rising income and wealth inequality in the U.S. “knocked about five percentage points off cumulative GDP per capita over that period.” It is thereby a misconception that income inequality is an issue only of those in the low-income bracket. It affects the economy as a whole.

Crime

A paper by Nobel Prize-winning economist Gary Becker, “Crime and Punishment: An Economic Approach,” posited that wherever there exists a large gap between the poor and the rich, there is bound to be higher crime. OECD's 2013 How's Life report also noted that “socio-economic inequality seems to play a central role in the occurrence of criminal victimization as disadvantaged people are more likely to perpetrate and to be victims of crimes.”

Those in the lower-income bracket become vulnerable in that they are unable to access the resources that are abundantly available to those with money. This vulnerability manifests in two ways: they may either take to crime in order to meet their needs, or become victims of criminal activity because they do not have the means to protect themselves.

According to Martin Daly, professor emeritus of psychology and neuroscience at McMaster University, inequality predicts homicide rates “better than any other variable.”

Health

In countries where the burden of paying for health care rests with individuals, an unforeseen expense can spell disaster for a low-income household. This could lead to compromises being made on the safety assured by an established medical practice that is expensive, in favor of one that is cheaper.

Aside from the issue of affordability, a 2017 World Health Organization and OECD report shows that in countries where the income gap between the 10th and the 90th percentile of the populace is very wide have higher rates of infant mortality.

Mental health also suffers as a consequence of inequality. It was found that with an increase of 0.2 of a country's Gini coefficient, there were eight more incidences of schizophrenia per 100,000 people.

Caste

According to the 2018 World Inequality Report by the World Inequality Lab at the Paris School of Economics, the top 10% in India control 55% of India's total wealth. In light of this undeniable problem, we may not, however, conclude that caste can no longer be a basis for identifying inequality. Caste has been and continues to be a basis for discrimination and ill-treatment in India. The ill-effects of negative discrimination based on caste and those of income inequality are similar. The effects include being denied social mobility, occupational mobility and access to basic resources.

The intrinsic link between income inequality and the caste hierarchy can be seen in the table.

	Scheduled Caste	Scheduled Tribe	Other Backward Castes	Forward Caste (Brahmin)	Forward Caste (Non-Brahmin)	Muslim	Average
Annual Consumption of households in Rupees	89,356	75,216	104,099	167,013	164,633	105,538	113,222

Source: The Economic Times

It is evident that those who belong to the backward classes spend (consumption as a proxy for income here) far less than those belonging to the forward caste categories, as well as the average. It is also interesting to note that religious minorities such as Muslims also earn less than the average.

There exists a simplistic notion that taxing the rich and handing money to the poor is an effective solution for income inequality. It is erroneous. Income inequality is a result of problems and prejudices that are far more deeply rooted, such as the torment inflicted by the caste system. Both must be tackled simultaneously, since continued discrimination based on caste will only impede progress made on the income equality front. 

Lack of Reliable Data

Most studies in India, such as those of the National Sample Survey Office (NSSO), focus on consumption or wealth rather than on income. Official estimates of inequality present a picture that doesn't seem alarming, while other surveys, like those of the India Human Development Survey (IHDS), present a high number.

To add to the confusion, People's Research on India's Economy (PRICE) found that the number may be lower than what the IHDS suggested. The different methods by which studies gather data on income are bound to suggest varying figures for inequality. Some studies rely on tax filings, some on survey data and others on national statistics. The paucity of accurate data implies that the policies implemented may not yield optimal results.

Conclusion

Income inequality is today's reality. Considering how important parity is for the development of the country, the issue must be continuously addressed in order to be mitigated.

In the past, the Indian government has dealt with income inequality by providing employment opportunities and direct benefits, while private players have managed to contribute to the shrinking of this chasm through corporate social responsibility (CSR) activities. The evidence suggests however, that the government schemes could be better implemented and thought out.

The NDA government showed intent to overcome this issue in their previous tenure, and Modi's speech has inspired confidence that they intend to carry out their promises in the next five years. All that is left now is for them to act decisively and show lasting results, because although the private sector has a role to play, the ultimate responsibility of dealing with income inequality must lie with the government.