Banking News Dated 25 September 2017

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Banking News: September 25, 2017

State Bank of India Launches Management Institute in Kolkata

State Bank of India Launches
Management Institute in Kolkata

The Business Line
Published on September 25, 2017

At present, SBI has six training institutes across the country.

Kolkata, September 23: The country's largest lender, State Bank of India unveiled its sixth apex management training facility in Kolkata today. Named as State Bank Institute of Management (SBIM), the facility was launched by SBI chairman Arundhati Bhattacharya, a statement by the bank said.

Speaking at the occasion Mrs Bhattacharya said that "SBIM has been established with the primary objective to build an institution of global standards that is an epitome of excellence in banking & finance, with focus on high-calibre action-based research and critical capacity building. The focus of the Institute will be to provide training, education, mobilize intellectual resource materials to drive result-oriented research, knowledge management and talent spotting."

At present, of the five such institutes run by the bank, three are in Hyderabad and one each in Gurgaon and Indore. SBI's training infrastructure in terms of facilities, content, programmes, trainers etc. is the largest in the Indian Banking space.

SBIM will cater to needs of leadership amongst bankers and go beyond just strategy and soft skills, SBI said at the inauguration. SBIM will combine training and development needs such as banking, management strategy and soft skills. Other areas of focus would be advanced levels of research in credit, investment banking, and treasury

SBI's State Bank Staff College in Hyderabad provides training to the bank's officials to the rank of chief managers and above. State Bank Academy in Gurgaon provides training to the bank's officials up to the rank of senior managers.

Another similar centre has been set up in Indore which is meant for imparting training to trainees and probationary officers of SBI.

Similarly, the Hyderabad-based State Bank Institute of Information and Communication Management imparts training in information technology while State Bank Institute of Rural Development, which is also located in Hyderabad provides training to the bank's field officers and branch managers, Press Trust of India said.

Telecom sector under stress:
Arundhati Bhattacharya

The Economic Times
Published on September 24, 2017

Kolkata, September 23 (PTI) The country’s largest lender State Bank of India (SBI) today reiterated that the telecom sector was under stress and the bank was doing extra provisioning for this.

SBI chairman Arundhati in Bhattacharya said, “The telecom sector is undergoing a lot of stress and the bank is extra provisioning due to this.”  She said this when asked whether TRAI’s decision to reduce the IUC charges would affect incumbent operators like Vodafone, Airtel and Idea which were already feeling the heat of Reliance Jio’s disruptive move.

On the bank’s NPA outlook for rest of the fiscal, Bhattacharya said, “We have probably reached the bottom. Slippages are under control although new sectors like telecom were showing stress”.

Bhattacharya, who inaugurated the State Bank Institute of Management at New Town area here said, said the merger of the associate banks with itself was a deep structural reform. “Results will come over a period of time. We will deliver the in the next three to four quarters as promised.

Regarding outlook of the economy post demonetisation and GST, Bhattacharya said the government would have to do some ‘heavy-lifting’ like infrastructure development.

On the institute, she said, it would impart training in banking and finance of highest standards. The institute would not restrict entry for non-SBI people and was open to all banking finance professionals, she said. Bhattacharya said this initiative would help the bank in retaining leadership position in the banking industry.

In future, the institute might also house an innovation lab to help start-ups, she said. The institute would accommodate 240 students and is fully residential. Admission for seats would start from middle management level professionals, she said.

Banking sector’s credit demand to get boost from
government projects: Arundhati Bhattacharya

The Financial Express
Published on September 25, 2017'

The banking industry is poised for a recovery in the credit demand as it stands to gain from the slew of projects like the bullet train announced by the government, State Bank of India chairperson Arundhati Bhattacharya said here on Saturday.

Kolkata, September 24 (IANS): The banking industry is poised for a recovery in the credit demand as it stands to gain from the slew of projects like the bullet train announced by the government, State Bank of India chairperson Arundhati Bhattacharya said here on Saturday. She said the government was playing its role in giving a boost to the credit and investment cycle by announcing the projects.

“The government has to do a little bit of heavy-lifting and this is already happening. We just saw the declaration of bullet trains and various other corridors which were expected to come up, those plans are now getting off the table and detailed out,” Bhattacharya told the media after launching the State Bank Institute of Management (SBIM) here.

“There are signs of increase in amount of tenders on roads and railways. Sectors like petroleum, fertiliser and power transmission also have new projects,” she said. The chief of the country’s largest lender said the banks stood to gain as these projects would need debt for their implementation. She said procedural issues including preparation of the detailed project reports take time and so the benefits from the projects would be reflected in the books of the bank in due course.

Bhattacharya said though incidents of fresh credit slippages have marked a downtrend, some areas like telecom were displaying signs of stress. About the SBIM, she said that with state of the art facilities and research-based learning as foundation, it would focus on providing training, education and mobilise intellectual resource materials to drive result. It will also undertake cutting edge research in the areas of banking and finance.

'None of 21 PSBs has any officer/employee representative on banks’ board anymore'

Vinson Kurian
The Business Line
Published on September 23, 2017

Thiruvananthapuram, September 22:  None of the 21 public sector banks in the country can claim to feature a representative of officers or employees on its board any more.

This is because the last of the latter’s tribe have ended their terms and stepped out of the boards on September 18, RTI enquiries reveal.

‘Laws demand it’

As per Banking Companies (Acquisition and Transfer of Undertakings) Act 1970, Sec 9 (e), ‘one director from among the employees of the corresponding new bank who are workmen under clause (6) of Sec 2 of Industrial Disputes Act, 1947 to be nominated by the Central Government in such manner as may be specified in the scheme made under this section.’

Sec 9(f) says that ‘one director from among employees of the corresponding new bank who are not workmen under clause (s) of section 2 of Industrial Disputes Act 1947 to be nominated by the Central Government after consultation with the Reserve Bank.’

A similar provision has been made in the SBI Act under Section 19 (ca) and (cb), says DT Franco, general secretary, All India Bank Officers’ Confederation (AIBOC).

Practice stopped with

According to him, the practice of appointments seem to have been stopped though recommendations have been sent by banks to the government as per the procedure laid down in the scheme.

By September 18, 2017 the term of the last employee directors on the boards of Bank of Baroda and Dena Bank had ended. This has been one of the contentious issues highlighted in the strikes and agitations conducted by the United Forum of Bank Unions.

It is unfortunate that the government which talks about transparency should have rendered opaque the bank boards which take crucial decisions, Franco said

‘Feigns ignorance’

“When we met the Finance Minister on September 15, he responded in a manner as if he was unaware. He merely directed us to Rajiv Kumar, Secretary, Department of Financial Services.

“We appraised Kumar about the position. But so far nothing has moved since the decisions have to be taken by the Appointments Committee,” Franco said.

The Reserve Bank has chosen to be silent in the matter, it seems. Nor has the Securities and Exchange Board of India has not taken any steps.

AIBOC demanded that the government proceed to immediately ‘fulfil the obligation and clear files pending with it for years now.’

FinMin wants RBI to lower rates,
boost domestic demand

Surabhi, The Business Line
Published on September 25, 2017

Manufacturing sector lagging due to
Demonetisation, GST and a rising rupee, finds analysis

New Delhi, September 24: Ahead of the monetary policy review by the Reserve Bank of India early next month, the Finance Ministry is hoping for a further cut in key rates to boost domestic demand.

“Inflation has picked up in the last one month but all the analyses we had done was based factoring in a rise in inflation. The medium-term inflation target is kept at 4 per cent,” a Finance Ministry source said.

The comments come ahead of the bi-monthly monetary policy review on October 3 and 4. To spur growth, the Monetary Policy Committee, at its last review in August, had reduced the repo rate by 0.25 per cent to 6 per cent.

Downward risk warning:
v         The economy grew at a three-year low of 5.7 per cent in the first quarter of the fiscal year and the second volume of the Economic Survey has warned of a downward risk to its earlier forecast of 6.75 to 7.5 per cent GDP growth for 2017-18.
v         To spur growth, the Monetary Policy Committee, at its last review in August, had reduced the repo rate by 0.25 per cent to 6 per cent

But since then, official data have pointed to a pick up in prices, with retail inflation at a five-month high of 3.36 per cent in August while wholesale inflation was at a four-month peak of 3.24 per cent.

The government is hoping that with growth slowing down, an easier monetary policy along with more measures will boost the economy. “The response has to be across the board with interest rates, exchange rate and creating more demand,” said the source.

Internal review

An internal review has shown that the manufacturing sector continues to lag due to the impact of demonetisation, rollout of GST and appreciation of the rupee.

“A number of manufacturing sectors have been affected over the last two to three quarters. This is also corroborated by the substantial increase in manufacturing imports,” said the source.

Last week, Finance Minister Arun Jaitley had conducted two rounds of meetings to take stock of the economic situation and had discussions with Commerce and Industry Minister Suresh Prabhu and Railway and Coal Minister Piyush Goyal along with senior officials.

Sources said the government is looking into all the issues that have arisen and will respond adequately when needed.

Banking professionals lack skills to face
new challenges: Arundhati Bhattacharya

Sumit Moitra
The Daily News & Analysis
Published on September 25, 2017

Mumbai, September 24:  At a time when banking sector is passing through a rapid paradigm shift, country's bank sector is finding itself woefully handicapped.

Banking professionals are today lacking in most of the skills needed to face the new banking challenges, indicated Arundhati Bhattacharya, chairman of State Bank of India, country's biggest bank, and one among world's Top 30.

There is little or no training being given on critical areas like ethics, understanding of risk and models needed to predict risk and many areas where technology is replacing humans.

"Above all there are soft skills as at the end of the day we are dealing with people and not machines on a shop floor. Not only that, we are dealing with one of the most sensitive areas of people's lives, their money. This is a very big area which we need to develop," she said in one of her last public appearances before her scheduled retirement on October 6.

The statement from the head of SBI comes at a time when small start-ups are offering more innovating banking solutions.

The foremost requirement for the new SBI is understanding of risks and compliance with new regulations like Insolvency and Bankruptcy Code or ever evolving NPA provisioning norms.

"Better understanding of risk and models that we use to predict risk is an area which is not very well taught or understood even today. We need much better knowledge of risk. Secondly, regulations are changing very quickly, and so compliance is becoming a matter of great importance. If you are not able to understand the nuances of regulations and not able to comply you expose yourself to a lot of risks," she said while inaugurating the State Bank Institute of Management.

The institute, at the upcoming city of Rajarhat near Kolkata, wouldn't be churning out probationary officers but future banking leaders.

"People who are going to be leaders of tomorrow in the industry are people who have to have proper kind of management knowledge. Just banking knowledge is not enough to provide leadership to the industry," she said pointing out that the word banking was consciously avoided in the name of the institute.

"Third is hugeness of the amount of technology we are using today, not only in areas like dealings in securities at a time when we are finding algorithms replacing dealers. Lot of analytics is being used to analyse who are the customers who can be offered certain types of products, to decide whether these products are the right fit at right prices."

As banks evolve from entities giving out loans to evolved organisations doing unheard of activities like replacing slothful management, there is need to understand ethics.

"What would be the ethics of doing things is an area where there is no overt training being given. Last but not least is governance standards. How do you ensure that you are taking care of every stakeholder and not only of a few stakeholders? "There are lots of areas today that I feel are not sufficiently covered in general management sphere. We, being the leader of the industry, need to show the way."

As for the financial health of SBI, Bhattacharya gave a mixed signal.

"We have reached the end of the cycle (for NPAs) and slippages would come down. There are also new sectors like telecom that are showing signs of stress but it doesn't mean the kind of the stress we saw in the past two years would continue this year as well. Things will definitely improve."

SBI Life IPO oversubscribed 3.58 times,
allotment to be on September 27

The Times of India
Published on September 25, 2017

Mumbai, September 24: SBI Life Insurance Co Ltd's initial public offering (IPO) to raise Rs 8,400 crore ($1.3 billion) was oversubscribed 3.58 times on the last day of bidding on September 22. The allotment notification may be announced on September 27.
The SBI Life IPO is one of the biggest IPOs in seven years. As per Thomson Reuters data, companies have raised $4.4 billion from IPO sales since the beginning of this year, surpassing last year's $4 billion fund-raising amount.

SBI Life is the second life insurance company after ICICI Prudential Life Insurance Co. Ltd to list on the market. The company saw bids for about 29.5 million shares, or 3.56 times the 8.8 million shares on offer, as the data from stock exchange showed.

Anchor investors such as Canada Pension Plan Investment Board and Singapore state investor GIC have already committed to subscribe to 22.26 billion rupees worth of shares.

In SBI Life's IPO, its two main shareholders State Bank of India and BNP Paribas Cardif are selling 8 percent and 4 percent stake, respectively.

Three more insurance companies - HDFC Standard Life Insurance Co Ltd, state-run GIC Re, and New India Assurance Co Ltd - have also filed for IPOs, with an expectation to raise a combined more than $4 billion fund.

With so many IPOs to be launched, some analysts expect IPO sales this year to exceed $8.5 billion of 2010.

How to stop rating shopping?

Tamal Bandyopadhyay, The Mint
Published on September 25, 2017

Monitoring the compensation and targets of CEOs of credit rating agencies and introducing a code of conduct for ‘rating advisers’ can help Sebi stop the practice of rating shopping

Beginning 1 October, listed companies will have to disclose defaults on loan repayments within one working day. They will have to keep the stock exchanges informed in case they have defaulted in payment of interest on loans taken from any financial intermediary as well as external commercial borrowings, and instalments for any other debt instrument with micro details such as the date of default, name of the bank/financial institution, the amount of default and also their debt exposure to the particular financial intermediary. They are also required to keep the credit rating agencies concerned in the loop.

Therefore, more work for the rating agencies. I’m not sure what a rater will do if the corporate entity involved doesn’t want to disclose the information. The Securities and Exchange Board of India (Sebi) had announced this in August.

While the idea behind this particular directive is to bring loan defaulters out of the closet, India’s capital market regulator has been taking a close look at the rating agencies for quite some time now. A series of directives culminating in a consultation paper to review the regulatory framework of the credit rating agencies is testimony to this.

Sebi has proposed capping one credit rating agency’s equity holding in another—direct or indirect—at 10%. The acquirer must also refrain from having any representation on the board of the other rater in which it is buying a stake. This is in response to the latest development on the rating turf in India.

In the last week of June, Crisil Ltd, a Standard and Poor’s associate company, bought 2.62 million shares of Care Ratings Ltd or an 8.9% stake for Rs435.26 crore in a block deal from Canara Bank. I highlighted the issue in my 7 August column ‘What next Crisil?’

The proposed norm is applicable to all entities except for broad-based domestic financial institutions. The acquisition of shares or voting rights in a credit rating agency, which could result in a change of control, will require Sebi’s prior approval.

The consultation paper has pointed out, and rightly so, that “significant crossholdings may give rise to conflict of interest wherein the independence of such a CRA (credit rating agency) to function may get affected in terms of rating process followed, instruments having dual ratings from these CRAs.”

The other significant suggestion is increasing the minimum net worth for a credit rating agency from Rs5 crore to Rs50 crore, citing their systemic importance. The existing rating agencies will get three years to fulfil this requirement. The three large rating agencies in India—Crisil, Care Ratings and Icra Ltd— roughly account for 85% of the rating business.

The rest is shared by India Ratings and Research Pvt. Ltd, Brickwork Ratings India Pvt. Ltd, Smera Ratings Ltd and the newest entrant, Infomerics Valuation and Rating Pvt. Ltd. Both Smera and Infomerics would need to ramp up their capital base.

More than a year back, Sebi started taking a close look at the world of Indian raters. In November 2016, it had asked the rating agencies to disclose how they rate a company, the rating history and responsibilities of their analysts. Besides, it had also directed the respective rating committees of the agencies to explain if there was a sudden downgrade of rating of a company and asked the raters to continue with the rating process through the instrument’s life, even if the issuer is not cooperating.

By asking the raters to reveal the ratings that were not accepted by a corporate entity, Sebi wanted to crack down on rating shopping or the practice of an issuer choosing the rating agency that will either assign the highest rating or that has the most lax criteria for achieving a desired rating. The raters were asked to disclose the name of the borrowing company, the size of the loan or bond issue and the rating assigned to it.

Between 1 January (when the new norm came into force) and June, around 650 listed and unlisted companies did not accept the credit ratings assigned to them by the four rating agencies—Crisil, Care, Icra and India Ratings. There have been many instances of a sharp downgrade of debt instruments in the recent past even as the agencies involved are different.

For instance, Amtek Auto Ltd’s Rs9,000 crore debt was downgraded from ‘AA’ to ’D’ in four months. Reliance Communications Ltd’s debt this year was downgraded to the default grade in an even shorter time.

There could be many reasons why a rater fails—ranging from unforeseeable events that impact the business of the rated company to non-disclosure or selective disclosure of information, incompetence or the lack of predictive ability of rating models, and rating agencies assigning better rating compared to competition to acquire clients.

At times, rating agencies delay in acting for fear of backlash; they also avoid a public display of multi-notch downgrades and hence suspend or withdraw the rating. The industry and the regulators should address these issues through a systematic process and not ad hoc measures. Since the consultation paper will be open for public comments till 29 September, I am tempted to put forward a few suggestions.

The biggest ill that plagues the industry is assigning a liberal rating to acquire clients.

Globally, India is the only country with seven rating agencies and Sebi must look at the competitive aspects of the industry. Already, the growth in bank loan rating—which is at least one-third of the Rs1,200 crore rating industry—is slowing down and the bond market is still shallow, even though the larger raters are chasing unrealistic margins and growth targets. How much competition can it afford? Unrealistic targets and some of the prevalent market practices could lead to misselling, rating promises and rating-linked pricing.

One way of preventing this could be monitoring the compensation and targets of the CEOs and top management of raters. Sebi can also introduce a code of conduct for ‘rating advisers’. The flip side of making the unacceptable ratings by the corporate entities public is business opportunities for so-called rating advisers or agents. Such agents promise better ratings at a commission and get it done by certain raters with whom they enjoy a cosy relationship.

A credit bureau can be entrusted with the responsibility of default recognition. Sebi can also explore the possibility of a mandatory rotation of rating agencies by the debt issuers, say every three or five years. If corporations are required to change their auditors every three years under the Companies Act, why can’t Sebi suggest a similar course for the debt issuers? Of course, all seven raters may not be entitled to get this business; Sebi can always lay down the norms (in terms of track record, number of ratings issued, and so on) for a rating agency to be eligible to get business following the mandatory rotation system.

Finally, the regulator must also assess the predictive ability of the current rating models followed by the agencies. Most rating agencies in India take it for granted that rating should remain a high-margin business and there is no need to invest in high-tech modelling, which is now possible due to the availability of exotic new technology. Both governance and the rating model of some of the agencies are suspect. Let’s call a spade a spade.

Unified regulator for GIFT City on the cards

Rajesh Bhayani
The Business Standard
Published on September 24, 2017

RBI also recommends full-fledged arbitration centre

Mumbai, September 24:  The Union finance ministry is finalising norms for a unified regulator for the International Financial Services Centre (IFSC) situated at GIFT City in Gandhinagar, Gujarat, which has clocked $7 billion of business in banking, insurance, and capital markets so far.

The move is expected to provide a further push to the IFSC. The Reserve Bank of India (RBI) had written a detailed note to the finance ministry to consider one common regulator for banking, insurance, and capital markets with all powers to issue approvals required for doing business in the IFSC.

The finance ministry has taken the RBI’s proposal for a unified regulator seriously because of the high potential of the IFSC.

The central bank had also said some of the successful Asian IFSCs such as Hong Kong, Dubai, and Singapore had one regulator for all decision-making, which should be the model applied in India. The proposed name for the regulator is the GIFT Financial Sector Regulatory Authority.

The task force consists of senior officials from different ministries.

The move follows concerns that domestic regulators would consider the domestic implications of the IFSC rules, which ideally should not be the case because the IFSC operated like a foreign country in Indian territory.

The need for a unified regulator was felt recently when the Securities and Exchange Board of India (Sebi) had to approach the finance ministry over allowing foreign portfolio investors (FPIs) to operate in commodity derivatives in the IFSC. FPIs are not allowed in the domestic commodity derivatives market.

Sources said the finance ministry had approved the proposal for allowing FPIs in IFSC. However, the decision-making would have been quicker had there been an independent unified regulator at Gift IFSC. The RBI could face similar challenges as well.

Nishith Desai, founder, Nishith Desai Associates, a global legal advisory firm, said, “There is a need to have a unified regulator for making the GIFT IFSC successful. It should be free to prepare regulations that can create an ecosystem suitable for global investors.” Desai also said such a regulator should have a global mindset and be able to understand business for quick regulation and faster implementations of proposals.

According to the Global Financial Centres Index (GFCI) developed by two leading think tanks, the Z/Yen Group in London and the China Development Institute in Shenzhen, India’s Gift IFSC figures 10th among international financial centres that have huge potential to grow. Shanghai and Singapore are among the top three, but GIFT IFSC is above New York, Seoul and Luxembourg.

The proposal’s actual implementation may take time as it may have to cross some layers and legal amendments are needed. However, if implemented, business could multiply manifold in a short span of time.

The RBI has also recommended that if decisions on a unified regulator and a full-fledged arbitration centre are delayed, GIFT IFSC will remain a real estate project.

“A unified regulator should also be empowered to take all decisions without any pre-determined parameters, including tax-related issues, with a single-minded focus to attract high-quality players. Its decisions shall follow an open and transparent system and approvals can be non-precedential. There is a need to attract a few showcase investors in each area,” Desai said.

Another proposal of the RBI that is being discussed by the task force is to make the arbitration centre function like a full-fledged one. GIFT IFSC has an agreement with the Singapore International Arbitration Centre (SIAC) and at present only case hearing is conducted locally while case management and passing of awards takes place in Singapore. There are some legal issues which can be addressed if awards are also passed in GIFT IFSC and made enforceable in India under the Indian arbitration law and can also be applicable to overseas investors in GIFT IFSC, which would be similar to the awards issued by SIAC.

“GIFT IFSC can be the ideal venue for conduct of arbitration. There is a need for clarity from the government on how awards passed in GIFT IFSC can be enforced in India and/or in foreign countries in view of the New York Convention,” Desai said.

What’s ailing Indian economy and how to fix it?
Proper diagnosis a must before any booster dose

Rajesh Mahapatra
The Hindustan Times
Published on September 24, 2017

Besides weak demand and lack of easy finance, the fear of policy uncertainties has discouraged private investment. It is time the government committed itself to policy stability.

No medicine can cure a patient if the diagnosis of the ailment is flawed. Indeed, sometimes, it might aggravate the patient’s condition.

The logic is no different when it comes to fixing the health of an economy.

For the past few weeks, the slowdown of the Indian economy has made headlines, forcing the government to consider a revival plan. According to news reports, ministries have been asked to identify sector-specific issues and suggest remedies. Finance minister Arun Jaitley has said we will hear more on this soon.

The growth of the broader economy, as we all know, has slowed to a four-year low because of weakening consumption demand and a near stalling of investment. Much of this deterioration in the recent quarters has been blamed on demonetisation and the bumpy rollout of the goods and services tax, but it is important to ask what made the economy so vulnerable to these twin disruptions. Because, therein lie the answers to a sustainable recovery from the current economic morass.

Index of Industrial Production for the past five years, 2012-13 to 2016-17
Manufacturing Subgroups
Weight in Index of Industrial Production (IIP)
Index value
Annual growth (CAGR)
2012-132013-142014-152015-162016-17Over last 5 yearsOver last 2 years
Food products
Wood, wood products (excl furniture)
Other non-metallic mineral products
Electrical equipment
Machinery and equipment
Tobacco products
Fabricated metal products, except machinery and equipment
Printing and reproduction of recorded media
Paper and paper products
Leather and related products
Chemicals and chemical products
Coke and refined petroleum products
Motor vehicles, trailers and semi-trailers
Other transport equipment
Rubber and plastics products
Basic metals
Computer, electronic and optical products
Wearing apparel
Pharmaceuticals, medicinal chemical and botanical products
Source: Index of Industrial Production, www.data.gov.in
(In red are the sectors that have fared worst, while those in
green are the only three sectors showing double-digit growth)

A scrutiny of the Index of Industrial Production for the past five years, 2012-13 to 2016-17, reveals how the present government might have failed to rectify structural weaknesses in some key sectors that it inherited from the previous regime. Over these five years, only three of the 23 sub-groups in manufacturing grew at a double-digit pace annually, while growth either decelerated or stayed sluggish in as many as 16 sub-groups that included such key, jobs-generating sectors as basic metals, machinery and equipment, electronics and automobiles. Three sectors, including manufactured food and wood products, contracted.

For most sectors, the data shows, that the decline began in the terminal years of the UPA government and worsened over the past three years of the NDA rule. In fact, the number of sub-groups that contracted or saw no growth rose to seven in the last three years. From slackening demand in the export market and rising costs of inputs and finance to lingering policy hurdles, the reasons for underperformance vary from sector to sector.

Pushing the Reserve Bank of India to reduce interest rates or the government trying to spend its way out of trouble can at best bring temporary relief to these ailing segments of the economy. But a lasting solution will require a combination of carefully designed short term and long-term policy interventions that will ease demand constraint and resolve supply-side bottlenecks.

For the longer term, the banking system has to square its books; the government will have to spend a lot more on infrastructure, education and health; policymakers must recognise that the distress is far worse in rural India; and above all, it will be important that the country has a stable socio-political climate.

Data shows the ruling party’s political beliefs might have hurt the economy in ways more than one. The state of the leather export industry is a case in point as production at tanneries in Uttar Pradesh fell by almost half in the wake of the campaign against cow slaughter and growing incidents of cow vigilantism.

That said, the game could be won or lost over what the government does in the short term.

It must move quickly to assuage the pain from GST – especially the small and medium enterprises that drive generation of jobs and exports, but have not been cared for. A way has to be found to ease credit flow to this sector.

Also, the government and regulators must stay vigilant over the recent surge in the stock market that belies the state of the real economy and risks wealth destruction, especially of the middle class investor, should the bubble burst.

But the most critical short term imperative is to restore confidence among businesses, which have increasingly grown wary of policy surprises and shocks.

Besides, weak demand and lack of easy finance, the fear of policy uncertainties has discouraged private investment. It is time the government committed itself to policy stability.

(Rajesh Mahapatra is the chief content officer, Hindustan Times)

Who’s lending to Indian businesses?

Aarati Krishnan, The Hindu
Published on September 25, 2017

Banks’ share in new credit fell in FY17, as corporate
 bond issuances rose 56% and NBFCs lent more

Chennai, September 24: With the banks busy chipping away at their mountain of bad loans and operating on precarious levels of capital, who will fund the credit needs of Indian businesses? Reserve Bank of India’s recently released annual report for 2016-17 shows that many new sources of finance are springing up. Domestic businesses are increasingly turning to the bond markets, Non-Banking Finance Companies (NBFCs) and foreign direct investors to meet their funding needs.

RBI’s compilation on the ‘Flow of financial resources to the commercial sector’ shows that FY17 marked a watershed year for Indian banks’ share in commercial credit.

In the four years ended FY17, domestic businesses soaked up between ₹12.8 lakh crore and ₹15.1 lakh crore, per year in credit funding. Until FY16, the banking system met 50% or more of this requirement.

But in FY17, banks’ share in new credit slumped to 35%, while non-bank sources met 65% of the financing requirement. Non-bank sources lent as much as ₹9.25 lakh crore to businesses, dwarfing bank credit flow of ₹5.02 lakh crore. So, who are these non-bank lenders to enterprises and how are they funding themselves?

Bond market buoyancy

For years, market players in India have bemoaned the underdeveloped state of the domestic bond market. But the bond market has seen a remarkable pickup in the last three years.

In FY17, public issues and private placements of corporate bonds (including commercial paper) raised ₹3.16 lakh crore for firms, a 56% jump from the ₹2.03 lakh crore in FY16. This took care of 22% of the total funding requirements of commercial enterprises.

This number has almost doubled from ₹1.65 lakh crore in FY14. This data only includes the bonds directly floated by commercial enterprises, and not the money raised by finance companies for on-lending.

What has prompted this sudden takeoff? On the borrowing side, firms have taken to bond issues to source more of their requirements because bond markets have transmitted the recent fall in interest rates much more quickly and effectively than banks. In the last couple of years, it has been much cheaper for high-quality corporate borrowers to tap bond markets.

On the lending side, retail savings flooding into mutual funds, insurance firms and pension funds have helped stoke the domestic institutional investors’ demand for bonds.

These trends, taken with active efforts by the RBI, suggest that bond markets may continue to remain a leading source of credit to businesses, offering stiff competition to banks. The only caveat is that the bond market route is more accessible to large enterprises with good credit ratings, than SMEs or borrowers with low ratings.

NBFC scale-up

Non Banking Finance Companies (NBFCs) have emerged as key financiers to businesses, especially MSMEs. RBI data shows that in FY17, NBFCs and housing finance companies extended ₹2.59 lakh crore in credit to commercial enterprises, meeting 18% of their total credit needs. NBFC lending jumped 28% over FY16.

For long, it was a sore point with entrepreneurs that the large corporate borrowers ended up cornering the lion’s share of bank credit, with lending procedures effectively keeping out Micro Small and Medium Enterprises. In the last three years though, wholesale NBFCs have aggressively stepped into the breach. Leveraging their deep regional reach, closer relationships with customers and alternative credit appraisal systems, NBFCs have driven a manifold expansion in loans against property and unsecured business loans to MSMEs.

‘NBFCs gain share’

A Crisil study in November 2016 noted that NBFCs had gained a 3 percentage point share of overall credit pie from banks in the last three years as a result of their mortgage and MSME lending push, and would continue to gain share over the next three years. Housing finance NBFCs have emerged as a major source of funds for real estate developers too, with financial institutions such as LIC, SIDBI, National Housing Bank and NABARD playing a complimentary role in funding other businesses.

Two factors have helped NBFCs expand their lending activities at the cost of banks — their comfortable capital adequacy ratios and their ability to borrow at lower costs due to falling interest rates. In the last couple of years, NBFCs have been even more aggressive than corporates in tapping the bond markets for capital. They have also augmented their resources by borrowing from banks and institutional investors through securitisation deals. Lately though, there is worry the sluggish property market will force NBFCs to tread more cautiously on loans against property.

While domestic non-bank sources such as bond markets and NBFCs have met about 46% of the total credit needs of businesses in FY17, foreign sources have chipped in with about 19% (₹2.75 lakh crore).

Here, the good news is that rather than External Commercial Borrowings or short-term credit, it is the more durable FDI money that is meeting this need.

While it heartening to see these alternative sources filling in for bank credit, it is essential to recognise that these cannot completely substitute for bank lending. In April-June 2017 for instance, bank credit flow to the commercial sector actually shrank by ₹1.92 lakh crore. Despite non-bank sources pumping in ₹1.65 lakh crore, the aggregate flow of finance to business contracted by ₹27,300 crore.

The other useful takeaway from the analysis is that one can no longer assume a one-to-one correlation between bank credit growth and the GDP growth numbers. To really measure credit expansion in the economy, we need data on both bank and non-bank lending. To extend this logic further, if bank credit growth slumps to a 20-year low as it did in March this year, it needn’t necessarily spell doom for the economy.

Banks need a stiff dose of competition

Jaideep Iyer
The Business Line
Published on September 25, 2017

Public sector banks lack the flexibility to respond to challenges
posed by NBFCs, CPs and bonds. Divestment could act as a tonic

Recent discussions on the banking sector have centred broadly around three themes: monetary transmission, asset quality in the banking system and consolidation of PSU banks.

Quixotic approach

In some ways, the three are inter-related. Let’s start with monetary transmission. Before talking about effective/ineffective transmission, let’s try and understand the RBI’s, and possibly the Government’s, concerns. Simply put, less than satisfactory monetary transmission means that reduction in policy rates have apparently not percolated down to the ultimate borrowers in full measure.

Now, it is reasonably evident that the RBI, over the last couple of years, has been extremely cautious on inflation and therefore, arguably has been reticent in aggressively cutting rates. At the same, the RBI has been vocally uncomfortable with the pace of monetary transmission.

One can safely argue that what matters for inflation and inflation expectations is not the policy rate/repo rate, but the rate at which borrowers and lenders transact. Assuming that the RBI’s concerns on ineffective monetary transmission are true, they should ironically be rather pleased from an inflation impact standpoint. Why should the RBI then be concerned with poor transmission when their monetary stance itself is at best neutral?

Let us now look at monetary transmission. It is clear that transmission is far more effective in capital markets. CP rates and fresh bond issuances reflect new the interest environment instantaneously. Base rates and to some extent MCLRs are stickier.

A typical bank illustratively would have, on the liabilities side of the balance sheet, approximately 10 per cent as equity (non-interest rate sensitive), 5 per cent tier I / II (non-interest rate sensitive, given long-term fixed rate bonds), 5 per cent medium/long-term borrowings including infrastructure bonds (non-interest rate sensitive, given long term fixed rate bonds), 25 per cent CASA (arguably non-interest rate sensitive, other than the recent savings account rate cut by a few banks), and 55 per cent term deposits (interest rate sensitive with average tenor of say, 1 year). Effectively therefore a reduction in interest rates impacts approximately 55 per cent of the bank’s liabilities and, more importantly, over a one-year period. The rest of the liabilities re-price over much longer tenor.

On the other hand, on the asset side, floating rate loans contribute approximately 50-60 per cent of the assets, the other 40-50 per cent being investments (including mandatory SLR and CRR), corporate bonds/other fixed rate investments and some proportion of fixed rate loan book (largely non-mortgage retail). While, at macro level, the balance sheet appears broadly matched — 50-60 per cent being floating on either side of the balance sheet, the challenge is that fixed deposits take a year to re-price, whereas a cut in benchmark rate (MCLR/base rate) is instantaneous on the entire floating rate loan book, resulting in margin compression for the bank in the short term.

Understanding MCLR

Ironically, given that capital market instruments are not subject to base rate/MCLR regulations, the issuances of CP/ bonds reflect the current interest rates as banks are able to buy/subscribe new deposits reflecting extant interest rates, making transmission instantaneous.

The fundamental challenge here is that there is no true floating rate liability structure for banks. One can argue that banks themselves will have to develop the floating rate deposit product, but customer response, given the complexity and uncertainty for the depositor, has been at best lukewarm. In an environment where the banking system is fighting multiple battles — asset quality, weak growth, challenges on transition to Ind AS accounting practice, rapid digitisation leading to new competition from non-bank players, vulnerabilities in the legacy IT systems — creating a mindset for floating rate deposits hardly appears to be a priority.

In this context, it is clear that MCLRs have largely come down in line with policy rates. Some data indicate that while MCLR has indeed tracked policy rates (especially post demonetisation), as liquidity has been abundant, average lending rates have not yet reflected the fall in MCLR rates. This is simply because MCLR reset happens over a period of time depending on the benchmark MCLR used for sanctioning the loans.

Before jumping to the conclusion that this is a flaw in the structure as the benefit of lower interest rates is significantly lagging, the benefit will be to the borrower when the interest cycle turns. In fact, given that MCLR benchmarks vary from one month to one year, unlike base rate, banks are in a better situation to cut MCLRs, as not the entire book resets immediately. The stakeholders must therefore wait for few more months before concluding on the effectiveness of transmission on eventual lending rates.

Banks’ compulsions

Further, common sense would tell us that the best way to ensure competitive lending rates would be through competitive dynamics. One can easily argue that the Indian banking space is already crowded with many public, private and foreign banks. In an environment of single digit credit growth, ideally competition should play its role to bring down interest rates to the end borrowers; then what is at play here?

Clearly, lending rates in general will reflect the lender’s perceived risk profile of the borrower. It is reasonable to argue that the risk perception from a lender’s standpoint has been higher over the last couple of years. This also impacts the lending rate at a macro level though not necessarily at a product level/customer level.

Further, at a time when reported asset quality has sharply deteriorated, banks naturally don’t seem to be in a hurry to cut lending rates. Ideally, cut in lending rates should be driven by competitive dynamics and not through regulatory pressure. How does one then explain then, that when banking sector credit growth in the system is down to single digits amidst tough competition from NBFCs, and disintermediation through capital market issuances, banks don’t seem to be in a hurry to cut rates and grab market share? Most PSBs have significantly elevated asset quality challenges. Given the lack of capital support, undifferentiated business models and inflexible labour practices, ability and intent to grow are absent.

The Government’s strategy of starving inefficient PSBs for capital is laudable, but political courage is required to hasten the process, possibly reduce the shareholding below 26 per cent in select banks, unshackling them from the rigidities of government ownership and, most importantly, recognising that these are independent entities answerable to broader stakeholders, and not only to the Government. Consolidation of state-owned banks with no attempt to address the root issues is possibly just kicking the can down the road.

With decentralised currencies around, RBI's plans
for a new fiat currency may not find many takers

Kangkan Acharyya, The Firstpost Online
Published on September 22, 2017

New Delhi, September 22: Until the Reserve Bank of India declares transaction of unregulated crypto currencies illegal, its move to launch a fiat digital currency is unlikely to gain popularity, say experts. They argue that the advantages of anonymity and that of speculative trading which non-fiat crypto-currencies provide the user, cannot be offered by the proposed legal currency and hence is likely to remain a second choice for many.

The Indian Express reported last week quoting RBI executive director Sudrashan Sen that an internal group is exploring the possibility of a fiat cryptocurrency which can be issued by the central bank. On the other hand he also expressed that the RBI is not comfortable with non-fiat cryptocurrencies like bitcoin.

The RBI's decision to explore possibilities of cryptocurrency comes at a time when the People’s Republic of China has banned circulation of cryptocurrency within its territory after uncovering of major investment scams. Scams in three China-based companies namely Fanya Metal Exchange, Ezubao and Shanxinhui have reportedly led the China government to impose the ban on cryptocurrency.

For starters, cryptocurrency is a form of digital money which is not tendered by any authority, but are generated by some companies to facilitate global transaction.

They are also called non-fiat digital currencies or decentralised currencies.

“Cryptocurrencies are basically software generated codes which have no physical presence. They are bartered for real currency in the cryptocurrency market,” Siddhartha Dalmia, an expert in digital technology said to Firstpost.

The value of cryptocurrencies are decided by users keeping in mind of their demand and supply and are honoured in its market accordingly.

Pankaj Tomar, an expert in cryptocurrency said such is the acceptability for cryptocurrencies in some countries that they have also set up ATMs to encash ‘Bitcoin’, a cryptocurrency. “I myself have come across a ‘Bitcoin’ ATM in the United States,” he says.

Supreme Court advocate and a legal expert in financial crimes Vijay Pal Dalmiya said that these currencies can be used to transact money worldwide, without being traced by investigating agencies.

Explaining the technology used for such clandestine transactions, Siddharth Dalmia said, “The transactions of cryptocurrency are done through block chain technology which enables anonymity of buyers and sellers. It is very difficult to trace these transactions.”

Anonymity of transactions is the reason why there are demands to ban them or at least regulate them, as they may cause threat to the economy by facilitating a parallel one or may or to national integrity by supporting illicit arms and ammunition purchase.
Dalmia also doubts that decentralised currencies are used for clandestine investment purposes too, on account of which, the price of the prime decentralized currency bitcoin soar during that span of time.

“In fact the rise in bitcoin prices helped black money hoarders who invested money in the cryptocurrency during the initial days after demonetisation to increase their wealth many times by the end of the period,” he said.

In January 2017, bitcoin price surpassed the $1,000 (Rs 68,000) mark, hitting its highest level since 2013 with a rise of nearly 30 percent in its value since the Prime Minister announced the demonetisation scheme on 8 November, a report in India Today said.

On May 13 this year India along with many other countries faced Wannacry ransomware attack where computers were encrypted by a group hackers and asked ransom to be paid in bitcoins.

A bitcoin is sold at Rs 248,544.73 today. In India Zebpay, Unocon and Bitxoxo are three companies which facilitate sale and purchase of bitcoin through apps.

Litecoin (LTC), Ethereum (ETH), Zcash (ZEC), Dash, Ripple (XRP) and Monero (XMR) are some of the other varieties of cryptocurrencies. A cryptocurrency originated in India named ‘Sikka’ is also in circulation..

In India, cryptocurrencies are not yet explicitly declared illegal. The RBI has time to time warned that anyone buying or selling it is doing at it’s own risk.

RBI's move on fiat digital currency is seen as one to combat non-fiat currencies. But experts fear that the new digital currency is neither going to gain much popularity nor will be able to combat non-fiat digital currency.

According to Dalmia, if the Indian government launches own cryptocurrency, it will be like any other negotiable instrument like cheques, drafts or travelers cheque and hence will not have any impact on the cryptocurrency market.

“The non-fiat currency provides the user with the opportunity to maintain anonymity of his transaction, which a fiat currency cannot offer. So there is no reason why would anyone switch completely to fiat currency when the option of non-fiat currency is available,” he said.

In such a situation, the new fiat currency which is likely to be named ‘Laxmi’ is likely to remain the second option and of use limited only to safer transaction.

Cryptocurrencies are also instruments of investments. Due to the volatile nature of cryptocurrency market these non-fiat currencies provide the opportunity to users.

CNBCreported on 5 August that the price of bitcoin has tripled in just a span of one year.

“No fiat currency can provide such an opportunity of increasing wealth in such a short span of time.For their value is attributed by the central bank and not by demand and supply as is the case of unregulated currency,” Dalmia adds.

“It is difficult to assume that merely launching a fiat currency would result in mass-scale transfer of funds from non-fiat one,” he said.

He also said that for any new digital currency to pick up momentum by exploiting the demand in India, declaring the non-fiat ones illegal is a must.

In July, Dalmia filed a public interest litigation in the Supreme Court demanding ban in circulation of virtual currencies. He argued that these currencies might be used by insurgent groups to purchase arms and black money hoarders to hide cash.

In response to his case, the RBI said that a multi-disciplinary committee is looking into the matter and it would act according to the suggestions of the committee.

How electric cars can create the
biggest disruption since iPhone

The Financial Express
Published on September 23, 2017

September 22 (Bloomberg):  It’s 10 years since Apple Inc. unleashed a surge of innovation that upended the mobile phone industry. Electric cars, with a little help from ride-hailing and self-driving technology, could be about to pull the same trick on Big Oil.

The rise of Tesla Inc. and its rivals could be turbo charged by complementary services from Uber Technologies Inc. and Alphabet Inc.’s Waymo unit, just as the iPhone rode the app economy and fast mobile internet to decimate mobile phone giants like Nokia Oyj. The culmination of these technologies— autonomous electric cars available on demand— could transform how people travel and confound predictions that battery-powered vehicles will have a limited impact on oil demand in the coming decades.

“Electric cars on their own may not add up to much,” David Eyton, head of technology at London-based oil giant BP Plc, said in an interview. “But when you add in car sharing, ride pooling, the numbers can get significantly greater.” Most forecasters see the shift away from oil in transport as an incremental process guided by slow improvements in the cost and capacity of batteries and progressive tightening of emissions standards. But big economic shifts are rarely that straightforward, said Tim Harford, the economist behind a book and BBC radio series on historic innovations that disrupted the economy.

Systemic Change

“These things are a lot more complicated,” he said. Rather than electric motors gradually replacing internal combustion engines within the existing model, there’s probably going to be “some degree of systemic change.” That’s what happened ten years ago. The iPhone didn’t just offer people a new way to make phone calls; it created an entirely new economy for multibillion-dollar companies like Angry Birds maker Rovio Entertainment Oy or WhatsApp Inc. The fundamental nature of the mobile phone business changed and incumbents like Nokia and BlackBerry Ltd. were replaced by Apple and makers of Android handsets like Samsung Electronics Co. Ltd.

Today, as Elon Musk’s Tesla and established automakers like General Motors Co. are striving to make their electric cars desirable consumer products, companies like Uber and Lyft Inc. are turning transport into an on-demand service and Waymo is testing fully autonomous vehicles on the streets of California and Arizona. Combine all three, for example through an Alphabet investment in Lyft, and you have a new model of transport as a service that would be a cheap compelling alternative to traditional car ownership, according to RethinkX, a think tank that analyzes technology-driven disruption.

One key advantage of electric cars is the lack of mechanical complexity, which makes them more suitable for the heavy use allowed by driverless technology, Francesco Starace, chief executive officer of Enel SpA, Italy’s largest utility, said in an interview. After disassembling General Motors’s Chevrolet Bolt, UBS Group AG concluded it required almost no maintenance, with the electric motor having just three moving parts compared with 133 in a four-cylinder internal combustion engine.

“Competitiveness very much depends on the utilization of the car,” Laszlo Varro, chief economist at the International Energy Agency, said in an interview. The average Uber vehicle covers a third more distance than the typical middle-class family car in Europe, amplifying the benefit of lower running costs to the point that “the oil price at which it makes sense to switch to electric is $30 per barrel lower,” he said.

Uber on Steroids

The total cost of ownership of electric and oil-fuelled vehicles will reach parity in 2020 for shared-mobility fleets, five years earlier than for individually-owned vehicles, according to Bloomberg New Energy Finance. Already in London, Uber plans for its UberX service to be hybrid or fully electric by the end of 2019. Its rival Lyft aims to provide at least 1 billion rides a year in autonomous electric vehicles by 2025, saying they can be used much more efficiently than gasoline-powered cars. This combination would be “the Uber model on steroids,” Steven Martin, chief digital officer and vice president of General Electric Co.’s Energy Connections unit, said in an interview. “Once you have complete autonomous operation of a vehicle, then my desire to own one is going to go down and I’ll be more willing to sign up to a subscription service.”

Autonomous Hurdles

The transition to fully autonomous fleets may not match the speed of the smartphone revolution because of the many regulatory, legal, ethical and behavioral hurdles. Self-driving technology should become available in the 2020s, but won’t be widely adopted until 2030, BNEF says. Even so, the shift to electric cars could displace about 8 million barrels a day of oil demand by 2040, more than the 7 million barrels a day Saudi Arabia exports today, the London-based researcher says. That could have a significant impact on oil prices—a drop of 1.7 million barrels a day in global consumption during the 2008-2009 financial crisis caused prices to slump from $146 a barrel to $36.

That doesn’t mean oil giants like BP or Exxon Mobil Corp. are heading for an inevitable Nokia-style downfall. While transport fuels account for the majority of their sales, they also have huge businesses turning crude into chemicals used for everything from plastics to fertilizer. They also pump large volumes of natural gas and generate renewable energy, both of which could benefit from increased electricity demand.

Even if electric vehicles do grow as rapidly as BNEF forecasts, the world currently consumes 95 million barrels a day and other sources of demand will keep growing, said Spencer Dale, BP’s chief economist. The London-based energy giant expects battery-powered cars to reduce oil demand by just 1 million barrels a day by 2035, while also acknowledging the potential for a much larger impact if the industry has an iPhone moment.

The sheer breadth of the potential disruption makes it hard to predict what will happen. When Steve Jobs unveiled the iPhone, few people anticipated that it meant trouble for makers of everything from cameras to chewing gum. “The smartphone and its apps made new business models possible,” said Tony Seba, a Stanford University economist and one of the founders of RethinkX. “The mix of sharing, electric and driverless cars could disrupt everything from parking to insurance, oil demand and retail.”

Source: Internet News papers and Anupsen articles


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