Tuesday 18 December 2018

Justice O. Chinnappa Reddy's 1987 Judgment Quoting a Letter Written by a Red Indian Chief of Seattle in 1854 on the Importance of Environment and Wildlife - VRK100 - 18Dec2018


Justice O. Chinnappa Reddy's 1987 Judgment Quoting a Letter  Written by a Red Indian Chief of Seattle in 1854 on the Importance of Environment and Wildlife


In a landmark Supreme Court of India judgment on 11th of February 1987 of a bench inclusive of Justice V. Khalid, Justice O. Chinnappa Reddy starts the judgment in the case of Sachidananda Pandey vs State Of West Bengal & Others (Civil Appeal No. 378 of 1987) with the following words:





JUDGMENT: CIVIL APPELLATE JURISDICTION: Justice O. Chinnappa Reddy:

A hundred and thirty-two years ago, in 1854, 'the wise Indian Chief of Seattle' replied to the offer of 'the great White Chief in Washington' to buy their land. The reply is profound- It is beautiful. It is timeless. It contains the wisdom of the ages. It is the first ever and the most understanding statement on environment. It is worth quoting. To abridge it or to quote extracts from it is to destroy its beauty. You cannot scratch a painting and not diminish its beauty. We will quote the whole of it*: 


"How can you buy or sell the sky, the warmth of the land? The idea is strange to us.

"If we do not own the freshness of the air and the sparkle of the water, how can you buy them?

"Every part of the earth is sacred to my people. Every shining pine needle, every sandy shore, every mist in the dark woods, every clearing and humming insect is holy in the memory and experience of my people. The Sap which courses through the trees carries the memories of the red man.

"The white man's dead forget the country of their birth when they go to walk among the stars. Our dead never forget this beautiful earth, for it is the mother of the red man. We are part of the earth and it is part of us. The perfumed flowers are our sisters; the horse, the great eagle, these are our brothers. The rockly crests, the juices in the meadows, the body heat of the pony, and man--all belong to the same family.

"So, when the Great Chief in Washington sends word that he wishes to buy our land, he asks much of us. The Great Chief sends word he will reserve us a place so that we can live comfortably to ourselves. He will be our father and we will be his children. So we will consider your offer to buy our land. But it will not be easy. For this land is sacred to us.

"This shining water moves in the streams and rivers is not just water but the blood of our ancestors. If we sell you land, you must remember that it is sacred, and you must teach your children that it is sacred and that each ghostly reflection in the clear water of the lakes tells of events and memories in the life of my people. The water's murmur is the voice of my father's father.

"The rivers are our brothers, they quench our thirst. The rivers carry our canoes, and food our children. If we sell you our land, you must remember, and teach your children, that the rivers are our brothers, and yours and you must henceforth give the kindness you would give any brother.

"We know that the white man does not understand our ways. One portion of, land is the same to him as the next, for he is a stranger who comes in the night and takes from the land whatever he needs. The earth is not his brother but his enemy, and when he has conquered it, he moves on. He leaves his fathers' graves behind, and he does not care.

"He kidnaps the earth from his children. His father's grave and his children's birth-right are forgotten. He treats his mother, the earth, and his brother, the sky, as things to be bought, plundered, sold like sheep or bright beads. His appetite will devour the earth and leave behind only a desert.

"I do not know. Our ways are different from your ways. The sight of your cities pains the eyes of the red man. But perhaps it is because the red man is a savage and does not understand.

"There is no quite place in the white man's cities. No place to hear the unfurling of leaves in spring or the rustle of an in- sect's wings. But perhaps it is because I am a savage and do not understand. The clatter only seems to insult the ears. And what is there to life if a man cannot hear the lonely cry of the whippoorwill or the arguments of the frogs around a pond at night? I am a red man and do not understand. The Indian prefers the soft sound of the wind darting over the face of a pond, and the small of the wind itself, cleansed by a mid-day rain, or scented with the pinon pine.

"The air is precious to the red man, for all things share the same breath--the beast, the tree, the man, they all share the same breath. The white man does not seem to notice the air he breathes. Like a man dying for many days, he is numb to the stench. But if we sell you our land, you must remember that the air is precious to us, that the air shares its spirit with all the life it supports. The wind that gave our grandfather his first breath also receives the last sigh. And if we sell you our land, you must keep it apart and sacred as a place where even the white man can go to taste the wind that is sweetened by the meadows flowers.

"So we will consider your offer to buy our land. If we decide to accept, I will make one condition. The White man must treat the beasts of this land as his brothers.

"I am a savage and I do not understand any other way. I have seen a thousand rotting buffaloes on the prairie, left by the white man who shot them from a passing train. I am a savage and I do not understand how the smoking iron horse can be more important than the buffalo that we kill only to stay alive.

"What is man without the beasts? If all the beasts were gone, man would die from a great loneliness of spirit. For whatever happens to the beasts soon happens to man. All things are connected.

"You must teach your children that the ground beneath their feet is the ashes of our grandfathers. So that they will respect the land. Tell your children that the earth is rich with the lives of our kin. Teach your children what we have taught our children, that the earth if sun mother. Whatever befalls the earth befalls the sons of the earth. If men spit upon the ground, they spit upon themselves.

"This we know: The earth does not belong to man; man belongs to the earth. This we know: All things are connected--like the blood which unites one family. All things are connected.

"Whatever befalls the earth befalls the sons of the earth. Man did not weave to web of life: he is merely a strand in it. Whatever he does to the web he does to himself.

"Even the white man, whose God walks and talks with him as friend to friend, cannot be exempt from the common destiny. We may be brothers after all. We shall see. One thing we know, which the white man may one day discover--our God is the same God. You may think now that you own Him as you wish to own our land; but you cannot. He is the God of man, and His compassion is equal for the red man and the white. This earth is precious to Him, and to harm the earth is to heap contempt on its Creator. The white too shall pass; perhaps sooner than all other tribes. Contaminate your bed and you will one night suffocate in your own waste.

"But in your perishing you will shine brightly, fired by the strength of the God who brought you to this land and for some special purpose gave you dominion over this land and over the red man. That destiny is a mystery to us, for we do not understand when the wild buffalo are all slaughtered, the wild horses are tamed, the secret corners of the forest heavy with scent of many man and the view of the ripe hills blotted by talking wires. Where is the thicket? Gone. Where is the eagle? Gone. The end of living and the beginning of survival."

*Reproduced verbatim from Pariyavaran Vol. I No. 1, June 1984.

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Reference: The above is a small extract from the Supreme Court of India Judgment dated 11Feb1987: weblink


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Disclosure:  I've vested interested in Indian stocks. It's safe to assume I've interest in the stocks discussed, if any.

Disclaimer: The brief analysis provided here is only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. He blogs at:





Sunday 28 October 2018

Speech of Viral Acharya, Deputy Governor, RBI on October 26, 2018 - On Independence of Central Banks

Speech of Viral Acharya, Deputy Governor, RBI on October 26, 2018 - On Independence of Central Banks




On the Importance of Independent Regulatory Institutions - The Case of the Central Bank

Speech By Dr Viral V Acharya, Deputy Governor, Reserve Bank of India - October 26, 2018 - Delivered as the A.D.Shroff Memorial Lecture, Mumbai. 



To read the above speech as a PDF document, click here.

Embed web link in blog mock

Disclosure:  I've vested interested in Indian stocks. It's safe to assume I've interest in the stocks discussed. 


Disclaimer: The brief analysis provided here is only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. He blogs at:

Sunday 25 February 2018

Understanding Credit Concentration Risk-VRK100-23Feb2018


Understanding Credit Concentration Risk

In a series of tweets on 23rd and 24th of February 2018, I have expressed my opinion on credit concentration risk faced by Indian banks with some data points. Please go through the points. 



0/ CREDIT CONCENTRATION RISK IN BANKS: In their normal lending and borrowing activities, banks are exposed to a variety of risks. One such risk is credit concentration risk.

1/ As a prudent measure, banks should avoid too much credit exposure to a single company, a single group of companies, a single geography or a single sector. Other parametres to avoid credit concentration risk include credit rating, country or product-specific exposures.

2/ Diversification of a bank's loan portfolio among many borrowers , economic sectors and different geographies is a desirable goal for banks. In times of economic downturn, a well-diversified credit portfolio will keep a bank in good stead.

3/ However, in pursuit of growth, banks often over stretch themselves and increase their exposure to a single borrower or a group of companies under the same management. Any downward trend in the prospects for the company or the group may put the bank in jeopardy.

4/ We have witnessed how banks in India had exposed themselves to this credit concentration risk in sectors such as iron/steel, infrastructure, telecom, construction, power, capital goods and others.

5/ With a view to limiting concentration risk, the Reserve Bank of India more than two decades ago prescribed maximum limits on banks’ exposure to a single borrower and a group of borrowers. Since then,  these norms have undergone several changes.

6/ As per RBI norms, a bank's credit exposure (both fund-based and non-fund-based credit limits) to an individual borrower must not exceed 15 percent of the bank's capital funds. Capital funds are Tier 1 and Tier 2 capital, after adjustments as per RBI's capital adequacy norms.

7/ For infrastructure companies, banks can raise the exposure by 5 percent to 20 percent for a single borrower. In addition, a bank's credit exposure to a group of companies under the same management must not exceed 40 percent of the bank's capital funds.

8/ In the case of infrastructure companies, the credit exposure may be increased by 10 percent to 50 percent for a borrower group. 

9/ The exposure limit for a single borrower is 25 percent of capital funds for oil companies that were issued oil bonds by the government of India. Exposures to public sector undertakings are exempted from group exposure limits.

10/ Exposure comprises credit exposure (funded and non-funded) and investment exposure (including underwriting and similar commitments). Non-fund based exposures are calculated at 100 percent including those under forex forward contracts and other derivatives.

11/ As prescribed by the RBI, banks have to set internal limits of exposure to specific sectors, subject to periodic review by the banks. For example, ICICI Bank fixed a ceiling of 15 percent on their credit exposure to any one industry (other than retail loans).


12/ After the bad experience with overexposure to certain industries and groups, banks now want to control the credit concentration risk by taking various steps. Banks now focus more on a diversified portfolio of retail lending and  reduce their exposure to a single company or a group.

13/ In addition, banks now intend to lower their exposure to low-credit rated companies, sell their loans at a discount, monitor loan portfolios proactively and some are approaching the newly-formed insolvency regime for resolution of sticky loans.

14/ Why do banks in India pursue retail lending so feverishly in recent years? Is over-exposing themselves to a single sector prudent for banks? What assumptions do banks make while increasing their retail loans?

15/ With the benefit of hindsight one could say banks have made mistakes in the past boom credit cycle by over lending to infrastructure, power and steel sectors and to certain groups of companies. Now, they are doing a course correction.

16/ They have been increasing their retail loans and decreasing corporate loans. The biggest attraction of retail lending for banks is the lower risk weight (RW) of 75 percent for a well-diversified loan portfolio (in banking parlance, this is called 'regulatory loan portfolio').

17/ Retail loans include mortgage loans, two-wheeler loans, car loans, small business loans and commercial vehicle loans. But individual housing loans attract a risk weight of 35 to 50 percent, depending on loan-to-value ratio and loan size.

18/ Personal and credit card loans are basically unsecured, which means they are not backed by any collateral / asset. Due to their unsecured nature, those loans attract a risk weight of 125 percent, as stipulated by the Reserve Bank of India.

19/ In comparison to risk weight of 75 percent for retail loans, corporate loans attract risk weights ranging from 20 percent (for AAA-rated firms) to 150 percent (for a company with below investment grade).

20/ Other reasons banks are chasing retail loans lately include: lower NPAs in retail loans versus corporate loans; retail loans offer strong growth due to under-penetration, better demographics in India, urbanization; and more data from credit bureaus such as CIBIL.

21/ But retail lending is no panacea, if you go by the past experience in the mid-2000s. ICICI Bank had trouble with retail loans and credit card lending in 2006-2007 period. To sum up, banks need to maintain a fine balance between retail and corporate lending.

22/ As per RBI guidelines, banks have to maintain a minimum total capital of 10.875 percent (including capital conservation buffer of 1.875 percent) as a percentage of their risk-weighted assets (RWAs) for the current financial year ending 31 March 2018.

23/ Suppose a bank has a retail loan portfolio of Rs 100 crore. With capital adequacy ratio (CAR) of 10.875 percent and risk weight of 75 percent, the bank has to maintain a capital of Rs 8.16 crore (=100 x 0.10875 x 0.75) for this Rs 100 crore-loan.

24/ Now, let us come back to credit concentration risk. How do we assess whether a bank is exposed to credit concentration risk? One measure is to check banks' total exposure to twenty largest borrowers. Data from a sample of ten banks: Please see the exhibit --> 



25/ From the above exhibit, we can see SBI, Canara Bank, HDFC Bank and ICICI Bank have reduced their exposure to top 20 borrowers between 2016 and 2017; whereas PNB, BoB and Axis Bank have increased their exposure in the same period.

26/ One could glean banks' financial statements to find out their exposure to different sectors of the economy. Data from RBI reveal banks' over exposure to industry sector and other sub-sectors of the industry. Please check the exhibit below --> 



27/ From the above exhibit, it is obvious that stressed assets (gross NPAs plus restructured standard assets) in industry are 23.9 percent of total advances to industry as of September 2017, and they rose from 19.3 percent in March 2016.

28/ Among the sub-sectors of industry, the most vulnerable to stressed assets are sub-sectors such as, infrastructure, basic metals, engineering and textiles. Please check the exhibit below -->



29/ The above exhibit shows stressed assets ratio in infrastructure sub-sector is 19.6 percent (Sep.2017) versus 16.7 percent (Mar.2016). And total credit to infrastructure is 34.1 percent (Sep.2017) of total credit to industry, indicating concentration risk.

30/ The story is similar in other sub-sectors such as steel / metal, engineering, textiles and food processing as shown in the above exhibit. This is how credit concentration risk has impacted the profitability and the very survival of some banks.

31/ However, if the Indian economy undergoes an upturn in the coming years, we could see improvement in the prospects of these vulnerable sectors and the concomitant boost in the profitability of banks that got exposed to such loans.


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The above is a reproduction of a Tweet thread I made on my handle @vrk100 on 23 February 2018 >

Disclosure:  I've vested interested in Indian stocks. It's safe to assume I've interest in the stocks discussed. 

Disclaimer: The brief analysis provided here is only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. He blogs at: