Banking News Dated 14 September 2017

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Banking News: September 14, 2017
RBI Explores Possibility of Government-Backed Cryptocurrency

RBI Explores Possibility of
Government-Backed Cryptocurrency

Vishwanath Nair
The Bloomberg News
Published on September 13, 2017

Mumbai, September 13 (Bloomberg): The central bank is studying the feasibility of a government-backed digital currency even as peer-to-peer virtual currencies like bitcoin remain unregulated in the country.

An internal group is exploring the possibility of a fiat cryptocurrency that can be issued by the central bank, said Sudarshan Sen, executive director at the Reserve Bank of India. The banking regulator is not comfortable with non-fiat cryptocurrencies like bitcoin, he said

Bitcoin is the most popular digital currency. Others include litecoin, peercoin, namecoin, ether and primecoin. These are mostly used for peer-to-peer transfers and are accepted in a few countries as payments.

Regulators globally are not comfortable with them.

The RBI has been wary of cryptocurrencies with senior officials often saying that it is prone to misuse. The banking regulator told a parliamentary panel that they are “susceptible to misuse” by terrorists and fraudsters alike for laundering money, newswire PTI reported on September 4.

In a notification on its website in February, the RBI had said that it has not authorised or licensed any company to operate in cryptocurrency. “As such, any user, holder, investor, trader, etc. dealing with virtual currencies will be doing so at their own risk,” the regulator had said.

Reserve Bank of India looking into
 cryptocurrencies, as legal tender

The Reuters
Published on September 13, 2017

Mumbai, September 13 (Reuters):  The Reserve Bank of India (RBI) has a group looking into cryptocurrencies as legal tender, a senior official said on Wednesday, but emphasised the central bank’s discomfort with Bitcoin which has recently come under intense global regulatory scrutiny. “Fiat will be when the Reserve Bank, for example, starts issuing digital currency which you can carry in cyberspace, you don’t have physical currency in your pocket,” Sudarshan Sen, an RBI executive director, said at a FinTech conference in Mumbai.

“As regards non-fiat cryptocurrencies, I think, we are not comfortable with them,” Sen added. The central bank had not previously disclosed its plans on cryptocurrencies and Sen did not provide any details on where discussions on the issue stand. It was unclear whether the group at the RBI plan to issue a recommendation on cryptocurrencies to the government, or if the review is at an early or advanced stage.

Bitcoin is a digital currency that enables individuals to transfer value to each other and pay for goods and services by-passing banks and the mainstream financial system. Bitcoin slid 6.6 percent on Friday, after reports that China was about to shut down local crypto-currency exchanges.

On Tuesday, Britain’s Financial Conduct Authority (FCA) warned that initial coin offerings (ICOs), the practice of creating and selling digital currencies to finance start-up projects, are “very high risk” and speculative.
Jamie Dimon, chief executive of JPMorgan Chase & Co, also came out strongly against Bitcoin this week dubbing it a “fraud”, and adding that it will blow up. The virtual currency, not backed by any government, has more than quadrupled in value since December to more than $4,100.

Note from the Moderator:
In my opinion, if Cryptocurrencies are introduced as ‘Legal-Tender’ by RBI, over a period of time, the Currency Notes in circulation will be driven out. Will it make the Banking Business obsolete and redundant in future? 

SBI to create data lake for on-the-go analytics,
says Mrutyunjay Mahapatra, DMD & CIO

Shritama Bose
The Financial Express
Published on September 14, 2017

Mumbai, September 14:  State Bank of India (SBI) is going beyond the practice of data warehousing to create a data lake, which will offer on-the-go analytics to bank executives, deputy managing director and chief information officer Mrutyunjay Mahapatra tells Shritama Bose. The lender has placed an order for six lakh fingerprint readers for biometric authentication at point-of-sale (PoS) terminals, he added. Edited excerpts:

Tell us about the data lake SBI is working on.

Mrutyunjay Mahapatra, DMD & CIO, SBI: What we have found is that the existing system of data warehousing, which deals with internal structured data, is not adequate to meet requirements of the emerging nature of projects. We found that there is a lot of data inside the organisation which is in unstructured format in the form of, say, video recordings, MIS which is not integrated with CBS (core banking system), customer letters, minutes of meetings and so on. Additionally, there are a large number of entities outside the organisation having data relevant to the bank, such as CIBIL, the Registrar of Companies and insurance companies which are doing key man insurance for the borrower.

We have decided that we must go into an area where we have a data lake concept. With data warehouse, which is a more rigorous kind of regime, it can work side-by-side and complement functions of data lake and giving us a new technology to process on an ongoing basis. Today, we require almost on-the-go analytics, which is not possible with the data warehouse.

So will this be a cloud-based system?

Mrutyunjay Mahapatra, DMD & CIO, SBI: It could be public cloud-based, or we have the biggest private cloud in the BFSI (banking, financial services and insurance) sector in all of Asia. It is called Meghdoot. We’ll try to deploy that or we will move to the public cloud. By that time, we hope the misgivings related to public cloud will be gone.

With large databases that many of our financial institutions are working on, how well prepared are we for attacks such as the one on Hitachi last year and Equifax recently?

Mrutyunjay Mahapatra, DMD & CIO, SBI: The preparation is in two parts. One, preventing incidents, and two, reacting when they strike. Do we have the war-room procedure to get the systems up and running so that customer data is not compromised and there is no loss to the system? On both these fronts, SBI has been doing a lot of work. We have now a security operation centre which is quite advanced.

We have the ability to quarantine traffic from rogue countries, from locations which are known to be originators of rogue traffic. We are also deploying technology so that hacker traffic can be killed before it can do any harm. The second thing we are doing is to ask ethical hackers to hack our system within a controlled environment. Most importantly, when an incident happens, there is a reporting mechanism and there are multiple agencies we have to report to. There is work being done to have a unified reporting mechanism.

To what extent is the biometric infrastructure in the system ready for things for Aadhaar-based banking?

Mrutyunjay Mahapatra, DMD & CIO, SBI: Recently, we have placed an order for 6,00,000 machines for capturing fingerprints at point-of-sale machines. Another important touch point is the ATM machines. They currently do not have the capability to capture fingerprints for transactions. That will require some expenditure, but if Aadhaar seeding happens, I think we should be able to do it. We are one of the first adopters of Aadhaar Pay and we are ready for it.

SBI arm plans independent unit
for insolvency resolution

K Ram Kumar
The Business Line
Published on September 14, 2017

As head of many consortia, top bank wants to
ring-fence investment banking, advisory services

Mumbai, September 13:  As the leader of several lending consortia, State Bank of India, through its investment banking arm SBI Capital Markets, is looking at setting up a unit to house insolvency resolution professionals (IRPs), who will take charge of the problem accounts to ensure that a turnaround or liquidation happens in an orderly manner.

The move comes in the wake of bank consortia proceeding against some 60 large accounts under the Insolvency and Bankruptcy Code (IBC) to recover loans of about Rs. 4 lakh crore.

Varsha Purandare, MD and CEO, SBICAP, said that forming a subsidiary to undertake activities relating to corporate insolvency resolution is being considered to avoid any conflict of interest with the investment banking and advisory services.

Currently, SBICAP has five wholly-owned subsidiaries— SBICAP Securities, SBICAP Ventures, SBICAP (UK), SBICAP (Singapore), and SBICAP Trustee Company.

The IBC enjoins upon the IRP, who is appointed by the adjudicating authority (the National Company Law Tribunal), to preserve and protect the assets of the corporate debtor.

Role of IRPs

The IRP has to take immediate custody and control of all the assets of the corporate debtor, represent and act on its behalf with third parties, raise interim finance subject to the approval of the committee of creditors, maintain an updated list of claims, invite prospective lenders, investors, and any other persons to put forward resolution plans, and present all resolution plans to the committee of creditors.

India’s largest bank is seeking to leverage the syndication capabilities it has developed to arrange project and corporate finance and earn fee income.

The bank is also seeking to increase its advisory business with respect to mergers and acquisitions, infrastructure projects, and securitisation.

SBI eyes more listings after
life arm offer nets Rs 5,400 crore

The Times of India
Published on September 14, 2017

Mumbai, September 13: SBI is looking at listing more of its subsidiaries soon. The move may involve an initial public offer (IPO) for its credit card, mutual fund or investment banking arm. This was disclosed by the bank's chairman Arundhati Bhattacharya while announcing the Rs 8,400-crore offer for sale (OFS) of shares in its life insurance arm.

"This public issue from SBI group comes after a gap of more than 24 years. The next one will not take that long," said Bhattacharya. When asked whether the bank would divest stake in its non-life subsidiary SBI General through an IPO, Bhattacharya said that the company would look at a more mature business and the non-life company was only seven years old.

SBI, which will realise up to Rs 5,400 crore from the OFS, will get a much-needed boost to its capital base.

Together with its partner BNP Paribas, SBI has invested Rs 1,000 crore in the company since its launch in 2002. Justifying the premium, SBI Life MD & CEO Arijit Basu said that the private life insurer was the market leader in premium income and had the highest agent productivity and lowest cost ratio.

The public offering of SBI Life's shares is the first billion-dollar IPO from India since 2010. The issue will open on September 20 and close on September 22 and shares will be listed from October 3.

A spate of insurance equity offerings is set to hit the Indian capital markets in 2017. ICICI Lombard General Insurance's IPO will debut on Friday with the company looking to raise up to Rs 5,700 crore. The promoters of HDFC Standard Life Insurance will also be selling their shares through an IPO in coming weeks. Public sector insurers General Insurance Corporation of India (GIC Re) and non-life insurer New India Assurance, are also finalising their plans to launch an IPO.

Pure protection plans are most profitable products
for us now, says Arijit Basu, MD & CEO, SBI-Life

The Financial Express
Published on September 14, 2017

Mumbai, September 13: Currently pure protection plans are the most profitable products for SBI Life Insurance, says Arijit Basu, MD and CEO at SBI Life Insurance Company Limited in an interview with FE. Excerpts:

How do you explain the surge in valuation from Rs 46,000 crore in December 2016 to around Rs 70,000 crore now for SBI Life Insurance?

Arijit Basu, MD & CEO, SBI-Life: There are two or three factors for arriving at this valuation. Firstly, the deal which was done in December 2016 was done at the embedded value of March 2016 which was Rs 12,999 crore and it was multiple of around 3.5 times. But now we have embedded value of March 2017 which is at Rs 16,538 crore, which directly results in a 32% increase. Apart from that, markets have also started understanding life insurance better as they have seen the performance and track record of ICICI Prudential Life Insurance over the last one year and have given them certain value to the business they are doing. So markets are seeing what is ICICI Prudential Life’s parameters across various areas and what are SBI Life’s position. So, if certain value is ascribed to the ICICI Prudential’s business, they have ascribed different value to us. Also, markets value the likelihood of future growth, where they look at the franchise and potential, so I think broadly above factors are the broad reasons for our valuations.

So what will be the shareholding pattern post IPO, and does BNP Paribas Cardif plan to increase or decrease its stake going forward?

Arijit Basu, MD & CEO, SBI-Life: Currently, State Bank of India (SBI) holds 70.1% in SBI Life, while BNP Paribas Cardif has a 26% stake and the remaining 3.9% is owned by KKR and Temasek Holdings. So, now 12% is being offloaded and after the IPO, SBI and BNP Paribas Cardif will hold 62.1% and 22% respectively. BNP Paribas Cardif has said that it remains committed to the company and therefore holds a certain minimum share. So broadly this time also they are reducing their stake proportion to the SBI, so we also anticipate that it will be in proportion to what SBI does in future.

What are the key reasons to hit the IPO at this point of time?

Arijit Basu, MD & CEO, SBI-Life: Initial public offering (IPO) requires long preparations and two years ago I had said that, we will come out the IPO of SBI Life in 2017-18 and that is precisely what we have done. So we have never deviated from our plan to list in FY18, somebody else went to market before us — that is fine as it must be as per their plan. I would also say that IPO was always in the plan after we reached 10-12 years of operations because unless one has certain value or volume you can’t offer to the investors significantly, so once we reached a certain value and volume we decided to come out, but everything was also part of the process. Also market timing plays the role in coming out the with the IPO.

What are your most profitable products as of now? Will margins go up for SBI Life going forward?

Arijit Basu, MD & CEO, SBI-Life: Currently, most profitable products are pure protection plans, which are term plans where there is no return of premiums-they are highest profitable products for us. New business margins in pure protection is around 50%, traditional participating products has margins of around 13%,while unit linked insurance plans (ULIPs) has lowest margins at 10%. Margins depend on two or three things, if protection products goes up than margin also goes up. Other factors include persistency, costs and mortality rates. So if we are able to have more protection business margins will go up, if our persistency improves further our margins goes up and if mortality experience becomes better we grow. So it all depends on how this all factors plays out.

Savings Bank Interest Rates fall: How households
are affected by loss and lenders gain

Madan Sabnavis
The Financial Express
Published on September 14, 2017

An interesting development in the banking sector that has not provoked much discussion is the lowering of savings bank interest rate by 50 bps by a number of banks. It was spearheaded by SBI; and quite expectedly, other banks have followed. Most banks that were offering 4% interest on these deposits would now pay only 3.5%. Those which were offering 5-6% have also brought down their rates by a similar amount.

This action was contrary to the action taken by banks in 2011— even while RBI deregulated interest rate on savings deposits in October 2011, the response of some banks was to increase rather than decrease it. In fact, the rate had gone up to 7% for some banks above a minimum threshold of deposit level. Now, for the first time, banks have lowered the rate. Such an act has several interesting implications.

The first is that when one bank does take such action, others follow. There has always been an oligopolistic approach towards interest rates in the country even after deregulation, as all banks normally end up working in unison as the invisible hand guides them. There could be differences in interest rates offered on different tenures of bank deposits, but such decisions are guided more by their respective requirements of funds to match asset tenures. This holds especially for public sector banks (PSBs), where it may be difficult to distinguish the interest rates offered on deposits.

Second, households appear to be very sticky when dealing with banks. When some private banks offered a rate of 200-300 bps higher on savings deposits, there was no migration from the existing banks to those offering higher rates. This means that households are ‘lazy’ and do not readily react to incentives on the deposits side. A reason could be that there is a long-term association with a bank branch, which makes them reluctant to swap deposits across banks when rates offered are different. In addition, the process of shifting over is cumbersome as it involves opening new accounts with all the compliances in place. Banks are hence able to exploit this frailty of consumer behaviour as individuals are not rational here. Interestingly, for consumer goods, people tend to be very discerning about price, but when it comes to bank deposits, they really do not care much. Even service quality often does not matter, as once any bank becomes a habit, nothing else matters.

Third, banks on the whole can save considerable amount of money by continuously lowering the rate. As almost 25% of deposits are in these accounts, 50 bps cut in rates would save around Rs 12,500 crore if done across all banks. If they further reduce rates by another 50bps, then the total savings go up by Rs 25,000 crore, which will help to strengthen their profit and loss (P&L) account. As an extension, this can be used for making provisions on NPAs and clean up their balance sheets faster. Customers really don’t have a viable choice, or choose not to change over banks, just like they are indifferent when banks charge for virtually every normal banking service like cheque books and ATMs beyond a threshold. Here too, there is little differentiation across banks in terms of price.

Fourth, a logical question to pose to banks is that if, on their own volition, they have successfully lowered the savings bank rate with other things being constant, they could also do the same on term deposits and not wait for RBI to lower policy rates. As an extension, this can be stretched to the lending side too. It is significant that banks have been lamenting that RBI has been intransigent in its stance on monetary policy and, therefore, as a corollary, are not in a position to lower rates. Industry, too, has been dissatisfied when RBI does not lower interest rates every two months. By unilaterally lowering rates on savings deposits, banks have actually acted independently. This, in a way, is good, as they have taken a decision jointly to go by their instinct, albeit inadvertently.

It should be remembered that the repo rate enters the formula for calculating the base rate or the Marginal Cost of funds-based Lending Rate (MCLR) purely on the basis of the quantum borrowed or lent through these windows. For every Rs 1 lakh crore of funds in the repo or reverse repo reservoir—including daily and term instruments—the rate involved for 50 bps is just `500 crore, which is minuscule as the total interest income of all banks in 2015-16 was about `10 lakh crore. The amount is not really significant and, therefore, logically, banks should be able to take whatever action they feel is appropriate rather than wait for RBI to lower rates.

Fifth, at an ideological level, such decisions also have an impact on the efficacy of monetary policy. As long as banks respond to the repo rate change, which is what RBI calls the transmission mechanism, monetary policy will be effective. If banks continue to act on their own and independent of the RBI policy direction, then monetary policy impact becomes weaker and, at the theoretical limit, will cease to matter (which is unlikely as banks would never exceed the thresholds).

Globally, the rate paid on similar accounts is much lower and would not be more than 20-25% of the fixed deposit rate with a tenure of one year. Based on this norm, the savings bank interest rate could be lowered further, which will be good for banks, though not so good for customers. If a fixed deposit gives a yield of 6.5-7%, then at 3.5% the savings bank rate is still 50% of the former. Individuals would need to consider investing in very short-term liquid options of mutual funds if the amounts are large, as there is significant flexibility here, with withdrawals being possible with a lag of a day. Account holders could also try using the term deposit route with a sweep-in facility to ensure that only a minimum amount is kept in this account and the balance earns a higher rate. Customers have to re-evaluate their options and change their mindsets to optimise their returns.

Interestingly, post office savings accounts offers 4% without any limit and hence could become attractive, provided savers are flexible. In the past, banks have pointed out that they have not been in a position to lower deposit rates as post office savings and small savings offered higher rates. Quite clearly, it appears, they are out of this syndrome.

Improving Financial Safety with Blockchain

Debanjan Chatterjee
The Moneylife Online
Published on September 12, 2017

In October 2013, the FBI (Federal Bureau of Investigation) bust the first modern market, SilkRoute. The website had sold stolen credit cards, weapons, drugs and other illegal products. In May 2017, the hacker group ‘Shadow Brokers’ unleashed the WannaCry ransomware, infecting computers across 150 countries. In July 2017, the online black-market, AlphaBay, was shut down by law enforcement. What was common to the three crime rings? Usage of Bitcoin as the mode of transaction. Consequently, Bitcoins have entered popular consciousness as a facilitator of criminal activities.

Bitcoin is a crypto-/digital currency that is built on blockchain technology. Blockchain is a public ledger that tracks and conducts all transactions in a decentralised fashion. The Center for a New American Security (CNAS) stated, in a May2017 report, that terror groups are not yet using digital currencies in large scale, because traditional means of transferring value such as cash, pre-paid cards and hawala are continuing to serve the funding needs satisfactorily.

Similarly, recent findings of the British think tank, RUSI (Royal United Services Institute), do not show a strong link of crypto-currency with organised terrorism. People familiar with the evolution of financial crime landscape are sure to view this as an anomaly because, typically, criminals are among the first ones to adapt and leverage new technology. To illustrate, as the Internet grew in visibility, the menace of cybercrime multiplied manifold. Blockchain is, often, referred to as ‘the greatest invention since Internet’. Hence, now might be good time to examine the repercussions blockchain technology can have on financial crime risk.

The unique feature of crypto-currency that attracts criminals is the ease of transferring value across entities/international borders without being regulated by banks. This is a stark change from fiat money, which has to pass through bank-enabled channels (such as SWIFT), and, hence, is susceptible to detection. So there may be clandestine exchanges helping crooks transact in such currency.

In India, there is uncertainty about the legality of crypto-currency. The Reserve Bank of India (RBI) has set up a committee to examine it. Consequently, current investments carry the risk of being declared illegal. Also, there is always the additional risk of getting hacked.

Riding on the wave of interest in such currencies, there has been an uptick in phishing attacks, deceiving people into sharing confidential information. Also, Ponzi schemes have mushroomed, luring hapless investors with the promise of phenomenal returns. As the debate on the criminal implications of crypto-currency rages on, a consensus seems to be emerging on the potential of the underlying blockchain technology to deter and detect crime.

Most crypto-currencies offer pseudo (and not complete) anonymity. On the one hand, it might be difficult to map individuals to their blockchain wallets. But, on the other hand, since each transaction is broadcast on the blockchain, the entire deposit/withdrawal activity of each and every blockchain wallet is public information. Consequently, for a prospective money-launderer, the entire process will be publicly transmitted and recorded for posterity in a form that is immune to forgery. Intuitively, this can act as a deterrent to using Bitcoins for criminal purposes, provided blockchains are continuously scanned by crime fighting entities.

Currently, there are security firms that leverage attributes such as transaction patterns, IP addresses and information from Internet service-providers to help authorities manage financial crime risk on the blockchain. But, on the other hand, criminals can avail services of a ‘crypto-currency tumbler’, to confuse the trail back to the funds’ original source. Some websites, like ShapeShift.io, help users convert one digital currency into another, thereby potentially aiding currency layering. But the crucial point is, all of the above automatically gets recorded on the blockchain; hence, it is quite easy for a forensic agency to get accurate data.

However, it must be mentioned that there are specific crypto-currencies (notably, Zcash and Monero) which offer a greater level of anonymity than Bitcoin. Interestingly, in May 2017, the shadow brokers switched to Zcash as the preferred means of payment, for their monthly supply of hacking resources.

A point worth noting is that blockchain transactions are irreversible. In traditional banking, merchants can be charged back if banks detect fraud charges. If a criminal uses a fraud credit card to buy digital currency on any exchange, the owner of the exchange has to bear the loss since the bank would reverse the payment made to the merchant (exchange), but the merchant cannot initiate a reversal of the blockchain transaction. Moving on, let us focus on the potential of blockchain technology to systematically curb financial crime risk.

Currently, most financial organisations individually employ data science to detect fraud charges. However, there is a lack of sharing of intelligence across banks, due to fear of confidential data leakage. Private, distributed ledgers can help in this regard. Consortiums with in-built transparency controls, where access levels of participating banks are coded (and monitored), along with foolproof audit trail of how the data is being used, can help bridge the trust gap. Fraud detection models of the future, built on such humungous data, would naturally be more adept in recognising crime patterns. In February 2017, State Bank of India announced Bankchain, an initiative to share information between banks on blockchain.

The second generation of blockchains has moved towards a new type of application called ‘smart contract’. These are user-defined programs which contain rules that govern transactions. To illustrate, in blockchain networks such as Ethereum, credit card issuers, acquirers and merchants can all come together and place in production a multitude of predictive analytics algorithms that would approve a transaction in real-time only if certain risk-control parameters are satisfied.

Similarly, to curb risk of money laundering, there is a potential for regulatory bodies to be party to every transaction. Banks could still perform know your customer (KYC) checks while onboarding customers. But when transactions are generated, the regulator and the bank can jointly analyse them from multiple perspectives and decide whether or not to raise a red flag.

Crypto-currencies have emerged as facilitators in some pockets of the criminal world. However, key features of the blockchain, such as transparency and trust protocols, can go a long way in deterring and detecting financial crime. Some believe that the current encryption techniques driving blockchain technologies would become obsolete in a world with affordable quantum computing. In such a future, criminals might try to create counterfeit blocks. That is a whole new story arc — one that moves to the next level of the cat-and-mouse game perennially played between criminals and custodians.

(Debanjan Chatterjee is an alumni of the Delhi School of Economics and has been part of fraud analytics team of a multinational bank for the past decade.)

An elusive recovery:
Explaining the economic slowdown

Prashanth Perumal J, The Hindu
Published on September 14, 2017

September 14: Reasons behind growth slowdown and possible remedies.

What do the latest numbers say about the economy?

Growth in industrial output, according to the Index of Industrial Production released by the Central Statistics Office on Tuesday, has slumped to 1.2% in July as against a much higher rate of 4.5% recorded during the same month last year. July’s industrial output growth is still higher than the growth rate of -0.2% witnessed in June. Retail price inflation, as measured by the Consumer Price Index, rose to a five-month high of 3.36% in August as compared to 2.36% in July. These numbers follow the slowdown reported earlier this month in the growth of gross domestic product (GDP) during the first quarter of 2017-18.

What has caused the growth slowdown?

The implementation of the goods and services tax (GST) has caused significant uncertainty among businesses about the tax rates and other rules to be followed under the new tax regime. This has led to a drop in business activity across the value chain, which in turn is reflected in the lacklustre industrial output numbers. In addition, the economy has been contracting for the last five consecutive quarters, starting well before the implementation of GST or the demonetisation of high-value rupee notes in November last year, before growth in the latest quarter hit a three-year low. Many have attributed this to the drought in private investment which has lasted for years now. The current slowdown is thus very likely the result of both short-term disturbances caused by GST as well as other secular influences.

What is the likely policy response?

The slump in economic growth in recent years has led to increasing pressure on the Reserve Bank of India to provide a boost to the economy by cutting interest rates aggressively. The underlying belief is that printing money can grow the economy. The rise in retail inflation in August, however, probably rules out any form of aggressive monetary stimulus by the RBI in its next policy meeting due to be held in October. Even so, at least some part of the lost growth may be recovered over the next few quarters as the economy adapts to GST and other related short-term disturbances. A sustained recovery that puts India on the high-growth trajectory for years, as recommended by former RBI Governor Raghuram Rajan, however, may be possible only after the government implements structural reforms in the labour and land market.

India’s Growth Slowdown:
A Passing Phase Or A New Normal?

The Bloomberg News
Published on September 13, 2017

Mumbai, September 13:  Data which showed that India’s GDP growth has fallen to a fourteen-quarter low has sparked a debate about the underlying strength (or the lack of it) in the economy. At a very basic level, the data tells us that private investment in the economy remains absent, consumption has taken a hit perhaps due to temporary factors like demonetisation, and government spending could slow due to stretched finances.

But these numbers don’t seem to tell the full story. Economists are linking the slowdown to factors like a decline in flow of credit to the commercial sector; they are also linking it to export slowdown and substitution of local manufacturing with cheaper imports. In addition, intangibles that remain up for debate include whether the shift to a formal economy has disrupted supply chains and eventually demand.

BloombergQuint brought together Sajjid Chinoy, chief economist at JPMorgan India, Praveen Chakravarty, visiting senior fellow at the IDFC Institute and Ajit Ranade, chief economist of the Aditya Birla Group to debate India’s growth slowdown.

The Export Link

All three economists agreed that the slowdown in exports is a factor that is adding to the slowdown in GDP growth. Data compiled by JPMorgan’s Chinoy showed that high GDP growth of 8.8 percent in the 2003-08 period had been accompanied by double-digit export growth. In contrast, exports have grown at a mere 3.1 percent between 2013-17, which explains part of the weakness in overall GDP growth. This, according to Chinoy is one factor behind the slowdown in growth, which began even before one-time shocks like demonetisation.

'A sector of the economy which is 20 percent of the economy has experienced a slowdown of 15 percentage points. The import content of exports is about 25 percent. So, if I do the math, that alone shaves off 200 basis points from headline GDP growth. So the movement from 9 percent (growth) to 7 percent (growth) is explained by one factor – exports' says Sajjid Chinoy, Chief India Economist, JP Morgan

Demonetisation Disruption

While exports have slowed, imports (excluding gold and oil) have risen suggesting that Indian firms are losing business due to both lower outbound shipments and substitution of domestic orders with cheaper goods from abroad.

One reason for this, suggests Chinoy, could be the disruption in supply chains in the aftermath of demonetisation. The currency exchange program which took away 86 percent of the currency in circulation hit transactions temporarily but also impacted those who may not have been able to survive the loss of business.

“There is more and more evidence now that supply chains have been disrupted and there are permanent output losses. That is showing up in lower activity at home and higher imports from abroad,” said Chinoy while adding that net exports, shaved off 260 basis point from growth in the first quarter of the current year. Imports which were contracting before demonetisation have seen a surge in the quarters since, Chinoy pointed out.

Export Hit To Manufacturing

Ranade of Aditya Birla Group argued that slower exports and higher imports are impacting the manufacturing sector, which remains sluggish. Goods exports are highly correlated with manufacturing, said Ranade while adding that poor performance on the export front has translated into weakness in manufacturing.

The manufacturing sector grew at 1.2 percent in the first quarter of the current year.

Ranade blames the strong rupee for the weakness in exports. Chakravarty, while acknowledging that global growth may be a more dominant factor in export growth, questioned whether a relatively overvalued currency could have led to loss of market share in export segments such as textiles.

'I definitely think that exchange rate is a very important factor which impacts not just exports but non-export related industry too' says Ajit Ranade, Chief Economist, Aditya Birla Group

Slowing Credit Flow To The Economy

While the export slowdown has added to pressure points in the economy, the lack of private investment remains the biggest challenge. Private investment, as measured by gross fixed capital formation, as a percent of GDP, has fallen to 27.5 percent from over 30 percent a few years ago.

Low capacity utilisation continues to be blamed for the lack of fresh investment but Chakravarty points to the close correlation between nominal GDP growth and the flow of credit to the commercial sector. The flow of credit to commercial sector has been declining, shows RBI data compiled by Chakravarty. Given that, the slowdown in nominal GDP growth should come as no surprise, he said.

'The argument being that credit will spur output. So using credit as the lead indicator, a one-year phased correlation works out to be 91 percent' says Praveen Chakravarty, Visiting Senior Fellow, IDFC Institute

A single word describes this phenomenon, said Chinoy. “Deleveraging.” The process of deleveraging involves credit growth slowing more than nominal GDP growth, he explained.

India is facing what is being termed as a twin-balancesheet problem which refers to highly leveraged corporate balancesheets and, in turn, highly stressed bank balancesheets. Stressed loans, including restructured loans, on the books of Indian banks have risen to 12 percent of total loans, according to a presentation made by Reserve Bank of India Deputy Governor Viral Acharya on September 7. While the RBI and the government have been working to resolve bad assets, particularly through the new Insolvency Law, the process is a slow and grinding one.

This could continue to weigh on the economy, said all three economists.

No Easy Answers

With weak exports and the twin-balancesheet problem identified as two key trouble spots for the economy, BloombergQuint asked all three economists for their policy prescription, if any, to reverse the slowdown.

Ranade pointed to the currency as one area that needs focus. When asked what more the RBI can do about the currency against the backdrop of strong inflows, which have almost entirely been mopped up by the central bank, Ranade said that there are no easy answers but the issue warrants greater attention.

Chakravarty said that it is important to revive flow of credit to industry and added that perhaps policy makers could look at issues related to access to credit. “I’m not ready to give up on private investment just yet and wait for animal spirits to kick in,” he said. Chakravarty added that a signal, perhaps in the form of higher recapitalisation amount of Indian banks, could help.

According to Chinoy what will help most is “doubling down” on the asset resolution process. “This is an unpopular answer because this means that growth could get weaker before it gets stronger,” said Chinoy.

Source: Internet News papers and Anupsen articles


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