Managing economic crisis

STRATEGIC CORPORATE FINANCE - Managing under Economic Crises: Dr. J. R. Varma and Dr. V. Raghunathan; Vision Books Pvt. Ltd., 36-C, Connaught Place, New Delhi-110001. Rs. 495.

ECONOMIC CRISIS, more specifically financial crisis, is not an uncommon phenomenon in the economic history of the world. But every time it occurs, it attracts the attention of financial experts. The recent event is the East Asian financial meltdown, popularly known as ``Asian crisis''. It has attracted the attention of economic experts all over the world. A number of articles were published in financial magazines and also a good number of books were written on the same subject. The postmortem analysis of the events are meant for the economic experts and finance managers to learn lessons for the future. But the fundamental truth is that financial crisis is bound to occur periodically. It can never be averted. What the managers can do at best is rehabilitation after the devastation and that is the only lesson they can learn.

The book under review is based on extensive study undertaken by the authors. The focus is on the impact of the crisis on the corporates. It does not cover the action, inaction, success or failure of the national governments and the world bodies, although the book deals with corporates, which are doing well or at least, reasonably well, but badly mauled by country's failure in the economic front.

The book covers six cases, one bank, one finance company, one securities firm and three manufacturing companies. They are from different countries - Thailand, Indonesia, South Korea and Malaysia. Some of the common features are that they are all established companies, prudent and efficient in management practices, generally conservative with reasonably sound financial practices. In all these cases, the national governments were over-ambitious and also over-dependent on export trade. The officials and politicians were corrupt.

When we go deep into the cause and effect of the problem, it squarely rests on the shoulders of the corporates. The entire corporate sector in these countries, impelled by economic boom, overstretched their position. All of them resorted to overtrading and when things got out of control, tempted to resort to speculation of various sorts to retrieve the situation. The chaos created by majority of the corporates, weak and greedy, engulf the good ones into the vortex inexorably, abetted by corrupt officials and laxity in administration. This is exactly what happened in all the six cases. The weakness noticed in individual companies would not have caused the disaster but for the overwhelming problem in the entire corporate sector and the nation. No one therefore, felt capable or confident of bailing out a good company which is drowning. This usually results in inviting the foreign investment.

Although there is nothing wrong in such investments, it is strange that such things have happened only after a crisis.

All the six cases have been carefully chosen and each one focusses on particular aspects of the crisis. In the case of Bank NISP, the problem is not with the bank but with the rigid rules of the regulator. Phatra Thanakit is a finance company which by itself would have managed the difficult situation but for the panic reaction of the regulator and the government.

Fortunately, in both the cases, foreign funds saved the situation. In case of ``Siam'', ``Dawoo'' and ``Aokim'', which are manufacturing companies, foreign funding or takeover did not happen, rather they tried to recover what they had already lent.

The common features noticed in all the cases are rapid expansion, too much diversification, resulting in overstretching of financial and managerial resources. In a way, it can be termed as ``over-trading'', a phenomenon which will always land the companies in deep trouble. In the case of S. K. Securities, it was the failure to assess the risk in the derivative trade, more particularly, the option trade.

History is replete with a number of cases where the bank and the companies ended in insolvency on account of mishandling derivative transactions.

The book is a product of a commendable work by the authors. Each case is supported by detailed background data and also trainer's note for administering the case. The book will be of great help to the academicians and financial executives.

S. ARUNAJATESAN

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