Fun day, huh?

In this edition of Better Markets Digest #17, we look at:

- Stock falls by mistake

- Slow loan growth

- Review by SEBI

It wasn’t just Indian markets that fell — the company of the God of Investing itself fell 99% yesterday. Although that was because of a technical glitch at New York Stock Exchange (NYSE) ??

The moment I saw this, a “dumb” question popped into my head: what if I placed a buy order at very low price—let’s say for $250? Will the order go through?

Unfortunately, no!

Free money

Let’s say you start a lending business. The whole purpose of your existence is to lend money to people. So, you make it easy for people to borrow money. You say: you can avail a loan in just 20 seconds! And by the way, you don’t even need to keep any collateral!

What happens?

Well, you lend lots of money. You become the king of the world. But wait, what if the borrowers defaults? Or worse, RBI comes out with some guidelines because this all sounds too risky??

That’s roughly what happened a couple of months back, in November :

“In response to the unprecedented growth in unsecured retail loans and the consequent concerns regarding rising systemic risk, the Reserve Bank of India has increased the risk weights on unsecured consumer loans, including credit cards, by 25 percent for both banks and NBFCs.”

Basically, what RBI said was banks and NBFCs were giving lots of unsecured loans i.e. without any collateral — no gold, no property, no shares, nothing. If someone defaults on these loans, what can a bank do? Nothing really. And, that isn’t a good news for the bank or for the economy. So, to minimize the risk, RBI has increased the risk weightage by 25%.

Let’s say the bank a bank issues a Rs. 10,000 unsecured personal loan to a borrower, the bank had to previously only set aside Rs. 10,000 as a buffer against defaults but because of the rule they will have to now set aside (125%) i.e. Rs. 12,500.

This seems to be working out well. The growth of these unsecured loans seems to have slowed down: from 23% in Nov’23 to 8% in Apr’24 :

“Unsecured loan growth slowed to about 18% in April, from 23% in November 2023, when the central bank made it less attractive for lenders to advance such credit, the latest data published by the Reserve Bank of India (RBI) showed.”

Performance review

SEBI has set up a committee to look at Clearing Corporations (CCs) ownership as well as their financial independence. Before, talking about it let me take a minute to explain what Clearing Corporations are.?

This is how Mohit, my colleague, explained Clearing Corporations to me:

“You work in a company and your boss gives you salary. Now, your boss isn’t the one who gives you the salary directly, it’s likely the HR department. In broader terms, think of the boss here as a stock exchange and the HR dept as a Clearing Corporation.”

Now, coming back to the news: why is SEBI doing this?

See, there are 2 clearing corporation: ICCL and NSCCL. The former owned by BSE and the latter owned by NSE. And, I guess SEBI doesn’t like this and is thinking of increasing the the list of entities that can be shareholders. The other thing, the committee is looking at is the financial health of CCs to see if they have enough financial resources to maintain stability and manage risks effectively.

One interesting chart

VIX jumped 44% today and touched the highest single-day gain in 9 years. I had written about VIX in an earlier edition: .

“VIX is also called the fear index. In a loose sense, it spikes up when there’s uncertainty and trends down when there’s calm in the markets.”?

I guess we all know what the uncertainty was about ??