Banking News Dated 18th September 20118

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Banking News: September 18, 2018


Consolidation: Government to merge  Dena Bank, Bank of Baroda and Vijaya Bank

Consolidation: Government to merge
Dena Bank, Bank of Baroda and Vijaya Bank

The Financial Express
Published on September 18, 2018

Combined entity to be the country’s third-largest lender,
other two strong enough to absorb Dena’s PCA shock.

New Delhi, September 17: An inter-ministerial panel headed by finance minister Arun Jaitley on Monday asked state-run Bank of Baroda (BoB), Vijaya Bank and Dena Bank to consider amalgamation to create the country’s third-largest lender.

The decision comes as a relief for Dena Bank, which is one of the 11 stressed public-sectors banks (PSBs) on the central bank’s watch list and which also faces restrictions on lending until it fixes its poor finances.

The government expects the two relatively strong banks — BoB and Vijaya Bank — will easily absorb potential shock of amalgamating with a weak one.

The latest move is part of the government’s efforts as part of its banking sector reforms to create a few but strong banks with much larger balance sheets to support the rising appetite for credit of the fast-growing economy and enable optimum utilisation of resources.

The merged entity has a combined business of Rs 14.8 lakh crore, deposits of Rs 8.4 lakh crore, gross advances of Rs 6.4 lakh crore, and 85,675 employees, based on the position as on June 30. The boards of these three banks are expected to meet in the next two weeks to consider the proposal and work out modalities.

BoB managing director PS Jayakumar said the amalgamation process may take four to six months to complete, although no time frame has been fixed for it. Dena Bank MD Sankara Narayanan told a TV channel that the merged entity will be offered growth capital beyond what is required to meet regulatory needs.

Jaitley said the successful experience of merging State Bank of India (SBI) with five of its subsidiary banks and Bharatiya MahilaBank prompted the government to explore the latest proposal in consultations with the Reserve Bank of India (RBI).

Explaining the context of the proposed amalgamation, Jaitley said many state-run banks were in a fragile condition due to excessive, “adventurous” lending in the past (2008-14) and consequent ballooning of stressed assets with them.

This also impaired their lending ability to support economic growth.

The NDA government, through an unprecedented Rs 2.11-lakh-crore infusion over two years through FY19 that was announced last year, sought to capitalise PSBs to meet regulatory capital requirements and also support lending. “This amalgamated entity will increase banking operations,” Jaitley added.

The merger will not cause any job loss in any of these banks and, as was in case of SBI, no employee of the three banks would have service conditions that are adverse to their present one, he added.

The government currently owns majority stakes in 21 lenders, which account for over two-thirds of the country’s banking assets. But they also account for an overwhelmingly large share in total non-performing assets (NPAs) in banking.

Some analysts feel that the merger might hurt the regional character of Vijaya Bank. It is also not clear what name the combined entity will retain.

Financial services secretary Rajiv Kumar said the merger will help improve operational efficiency and customer services. The amalgamated bank will be a strong competitive lender with economies of scale and will have synergies for network, low-cost deposits and subsidiaries.

While the employees’ interest will be protected, brand equity will be preserved, Kumar added. Capital support to the merged entity of Dena Bank, Vijaya Bank and BoB would be ensured, he said.

Analysts said the level and management of stressed assets would be an important characteristic of the commercial considerations for these banks as they weigh merger. Complementarities and financial burden, mainly stressed assets, were among the commercial considerations for the amalgamation of PSBs and there was no one-size-fits-all approach to such mergers, an official source told FE.

Synergies of business portfolios, human resources, systems, reach and cultural fit will be key factors in the merger consideration. The amalgamation is aimed at creating a few strong banks that could cater for the massive credit requirements of the growing economy, and cutting costs as well as dependence on the government for capital infusion in the longer term. In the short and the medium terms, however, the government has made it clear that it would infuse capital, if required.

The panel, formally called alternative mechanism, mirrors a similar system adopted for strategic divestment of government assets, where a group of ministers, headed by Jaitley, has been monitoring the progress. The setting up of this panel was aimed at expediting the process of consolidation, without the requirement of Cabinet approval at every stage.

The merger announcement came even as PSBs recovered Rs 36,551 crore in the June quarter from bad loans, almost half of the entire 2017-18. Their operating profits rose 11.5% quarter-on-quarter and losses dropped 73.5%, in a sign that the worst is behind, said Kumar. The 11 of 21 PSBs that are under the prompt corrective action could be out of it this fiscal, he had said recently.

The RBI in its latest financial stability report said the increase in bad loans is estimated to be the highest for PSBs. In the base case, the banking regulator expects the gross NPA ratio for state-owned banks to rise to 16.3% by March 2019 from 15.6% in March 2018. In the worst-case scenario, the bad loan ratio could go up to 17.3%.


Bank Unions oppose proposal
to amalgamate three lenders

The Business Line
Published on September 18, 2018

Say the merger of Bank of Baroda, Dena Bank and Vijaya
Bank will not solve the issue of NPAs in the banking system

Mumbai, September 17:  Bank unions say they will oppose the proposed amalgamation between Bank of Baroda, Dena Bank and Vijaya Bank, claiming the move is anti-people and will not help solve the bad loan problem facing the banking system.

Bad loan recovery:

Given that recovery from bad loans is the need of the hour, the unions’ contention is that it will take a back seat once amalgamation between the three public sector banks is initiated as their top brass will be bogged down with the administrative nitty-gritties of consolidation.

Further, since Bank of Baroda (BoB) and Dena Bank, which is under the RBI’s so-called prompt corrective action framework (PCA) due to its huge bad loans and weak financial ratios, have a large network of branches in Gujarat, the fear is that there could be massive rationalisation of branches in the State.

Recalling the disastrous consequences of the first amalgamation in the public sector banking space, the leaders said when New Bank of India – which was a weak public sector bank – was merged with Punjab National Bank in the mid-80s, the latter took a long time to return to black.

The same was the case when the erstwhile Global Trust Bank (a private sector bank) was merged with Oriental Bank of Commerce (a public sector bank) in 2004.

“This (proposed amalgamation) move will not address public sector banks’ present problem of non-performing assets. At a time when we need more branches and financial inclusion, the amalgamation will lead to closure of branches, which is not good for the development of the country and is anti-people,” said CH Venkatachalam, General Secretary, All India Bank Employees’ Association.

In this regard, Venkatachalam pointed out that State Bank of India’s bad loan woes got exacerbated after it acquired five associate banks.

S Nagarajan, General Secretary, All India Bank Officers’ Association, said the argument that mergers will help tackle bad loans does not hold water. While it may make sense to amalgamate Vijaya Bank and Bank of Baroda as both banks have relatively strong financials, including Dena Bank in the consolidation exercise is fraught with pitfalls, he added.

A senior banker said that with the amalgamation announcement, the government may be moving a step closer to implementing the Narasimham Committee recommendation on structural reforms.

Protest planned:

All India Bank Officers’ Confederation General Secretary DT Franco said bank employees and officers, under the aegis of the United Forum of Bank Unions (UFBU), the umbrella body of nine trade unions in the banking sector, will be holding demonstrations in all State Capitals on Tuesday to oppose the amalgamation move. UFBU will also take a call soon on going on strike.


NPA provisions for banks may stay
elevated till FY2019-20, says report

The Press Trust of India
Published on September 17, 2018

Banks are witnessing a spurt in asset quality stress in the non-corporate segment and the overall loan loss provisions for lenders are expected to stay elevated till the fiscal year 2019-20, a report said.

Mumbai, September 17 (PTI): Banks are witnessing a spurt in asset quality stress in the non-corporate segment and the overall loan loss provisions for lenders are expected to stay elevated till fiscal year 2019-20, a report said. The outlook on private sector banks, along with SBI and Bank of Baroda among the state-run ones is stable, while all the other state-run banks carry a negative outlook, India Ratings said in its mid-year outlook on banks Monday.

Banks will continue with credit costs or provisions of up to 3 percent for both the ongoing fiscal as well as the one after, according to the rating agency. It attributed the higher credit costs to aging of NPAs (non-performing assets) recognised earlier since the asset quality review of FY16, accelerated provisioning and slippages especially from non-corporate accounts.

In what can be a worrying sign, the agency said it has observed a spurt in asset quality stress building up in the non-corporate loans, even as the same in the corporate segment has plateaued. It said there has been an increase in the share of smaller corporates, and small and medium-sized enterprises and personal/retail loans in the special mention accounts (SMAs) pool in FY18 over FY17.

The share of loans under Rs 5 crore in SMA1 accounts, or those cases where there has been no loan repayment for 31-60 days, has increased to 40 percent at the end of FY18 from 29 percent the year-ago, the report said, while the same for SMA2 where loans have not been serviced for 61-90 days has been to 68 percent as against 12 percent earlier.

Even as the asset quality troubles continue, there are rising headwinds for credit availability, according to India Ratings. “The prevailing stressed financial conditions could intensify credit tightening unless liquidity of financing channels is at least partially reinvigorated,” it said. The agency said adverse interest rate conditions, increasing risk aversion by state-run banks which leaves 35 percent of the banking system unable to serve the lower-rated borrowers, volatile external environment and lack of alternatives for financing are “critical” to corporate credit quality in FY19.

Bank exposures of nearly Rs 4 lakh crore can be impacted by the absence of favourable liquidity/market conditions and refinancing pressures, which will give the large non-bank players private banks to up their market share, it said. With the tightening in rates, some of the financing done by corporates through the bond markets can shift back to the banks which will help increase corporate books for well-capitalized banks and also jack-up their earnings, it added. On the stress from corporate loans, it said the total corporate assets under stress has stayed between 20 percent and 21 percent of the overall bank credit for the two years to FY18.


Prashant Kumar takes charge as
Chief Financial Officer (CFO) of SBI

The Business Standard
Published on September 18, 2018

Mumbai, September 17: The State Bank of India (SBI) has announced Prashant Kumar as the Chief Financial Officer (CFO).

A Science graduate and a Law graduate from Delhi University, Kumar joined the bank in the year 1983, as Probationary Officer and since then he has held various important portfolios in Bank.

As DMD (HR) & CDO he was spearheading the largest Human Resources Department of the Banking Industry consisting of a workforce of more than two lakh seventy thousand employees and the largest training infrastructure in the country in the Banking system.

In his long service in the Bank, he has had opportunity to work in various areas of banking such as Retail Operations, Human Resources and Strategic Training. He also worked as Chief General Manager, Kolkata circle and General Manager in Mumbai Circle.


Efforts by vested interests to stall IBC process should not be allowed: Rajnish Kumar, SBI

Manju A B
The Daily News & Analysis
Published on September 17, 2018

Mumbai, September 17: Insolvency and Bankruptcy Code (IBC) 2016 is a big tool that lenders are banking on to discipline delinquent borrowers. Rajnish Kumar, chairman, State Bank of India (SBI), tells Manju AB that he expects some more amendments to come into the law so that the debate around existing promoters being kept out of the bidding process is settled. As he completes the first year in the corner office, Kumar is hopeful that the problem of non-performing assets (NPAs) is being tackled in a systematic manner and the bank is ready for growth and profitability.

Former Reserve Bank of India (RBI) governor Raghuram Rajan, in a report to the parliamentary committee, said that the present NPA pile is also due to the irrational exuberance of bankers in 2006-2008, among other things. How would you counter it?

Rajnish Kumar, Chairman, SBI: Yes, it was a period when there was extreme optimism. Credit growth in one particular financial year was as high as 25%. Whenever there is a huge credit expansion, there is a danger of NPA formation. There are bound to be slippages. Take the power sector, for example. When it was opened up, a lot of private promoters came in. Earlier, the experience was good; so, everyone thought it was an annuity-type steady return - a 16% internal rate of return is assured. Lenders took the bait. When it failed to materialise, problems erupted. But the fact is that 75,000 mega-watts of capacity got added during this time.

Why were banks taking a risk by letting a consumer durables company, for instance, get into oil, telecom and real estate?

Rajnish Kumar, Chairman, SBI: Post 2008, there was a conscious decision in the G20 that there should be a stimulus for the economies of the respective countries. All banks were sitting on surplus liquidity and chasing assets. That is where the whole problem started.

So surplus liquidity was the problem?

Rajnish Kumar, Chairman, SBI: When there is surplus liquidity in the system and a visible opportunity in front of bankers, they seize the opportunity to lend without realising where this could lead to. The underwriting capabilities need to improve. Banks should have the capability to assess the risk and build the capability to spot the risk at every stage of the loan. Large projects need a lot of analysis by technical and experienced experts.

Is it difficult to separate exuberance, incompetence and corruption among bankers?

Rajnish Kumar, Chairman, SBI: This again is an overstated fact about corruption. In any system of this size, there may be a few black sheep. But there is no systematic corruption in banking in my view. In large project loans, there are 20 to 30 banks and bankers involved. To think they could be corrupt is inconceivable.

It is generally said when the loan size is Rs 5 lakh, it is the headache of the customer. But when the loan ticket is Rs 50,000 crore, then it is the headache of the bank.

Rajnish Kumar, Chairman, SBI: The fact is that for any large project, the capital is coming from the banks. The promoter equity is meagre. In many cases, 100% financing is coming from the banks. Over-leveraging has been a problem. Earlier, everything was against the lenders. But after the introduction of the IBC, this is changing. Deleveraging is happening. With the IBC, there is a fear that the business may be lost. Bankers today have a tool to punish the borrower.

Isn't it too early to get excited about the IBC?

Rajnish Kumar, Chairman, SBI: The effort by some vested interests to stall the process at every stage should not be allowed. For the CoC (committee of creditors) to come out with a resolution in 180 days is a tight period, but reasonable. The US bankruptcy laws also give the same time frame. Whatever steps that the banks and the adjudicating authority can take, are being addressed. In large cases, there is a clear visible change in management. When it comes to smaller cases, the possibility of gaming the system is more. But more amendments to the IBC are needed. We are expecting more judicial pronouncements to happen to settle the debate around 29A (existing promoters or related parties to them not being allowed to bid). In the case of Essar Steel, the Supreme Court has taken note of the fact that there is a delay. So maybe, there will be some pronouncements from the court on the need for speedier resolutions to preserve the value of the asset so that things move fast.

How would you then rate the IBC?

Rajnish Kumar, Chairman, SBI: It is needed. It is one of the most significant reforms as far as the country is concerned. We have to make it successful and remove whatever roadblocks are there. The government is also very conscious of this. The NCLT (National Company Law Tribunal) courts will be augmented, the number of courts will be increased and the infrastructure beefed up. Most of the dispute has been around 29A and the bidding process. The air will get cleared with more judicial pronouncements. An efficient insolvency will bring in efficiency.

What is the amount of loans that SBI has in the NCLT?

Rajnish Kumar, Chairman, SBI: In the first two lists sent by RBI for resolution under IBC, we have Rs 78,000 crore. But the total we would have is about Rs 90,000 crore of loans under various stages of resolution under the IBC. The recovery rate is about 35-40% on an average. The earlier we refer these cases to the NCLT, the faster the resolution.

So NPA management is under control now. But is there any sector which is still a worry?

Rajnish Kumar, Chairman, SBI: EPC (engineering, procurement and construction) is the next big challenge for us. There are a lot of problematic companies, and they are all non-fund-based exposures. There are problems of disputed claims. Banks have given guarantees to EPC companies so it does not reflect on our books. This is one segment where the recovery is still poor. Many EPC companies have gone into trouble. But we are changing our lending methods to EPC companies, particularly those that are not stressed. EPC is an important segment of economic activity; we need to support it for development of infrastructure and also for generating employment. But the way EPC companies are being handled, it is undergoing a complete change.

SBI is also keen on growing its corporate book this year. How do you plan this?

Rajnish Kumar, Chairman, SBI: Larger credit, honestly, is only for highly rated companies. We are seeing good growth in the housing sector. Cement is seeing encouraging growth. The steel sector is turning around. Aviation is a difficult sector worldwide. We expect to register a 10% credit growth, which is realistic.

When is SBI going to start reporting profits?

Rajnish Kumar, Chairman, SBI: Maybe in the second quarter of this fiscal, ending this month. The profits are dependent on two variables. First, is the bond yields; we thought it would be at 7.90%, but it has now gone up by 0.20%. But it is a notional loss. The other is the decision on Essar Steel. If the resolution for this large account comes this month, SBI will be able to report profits no matter at what levels the yields are trading at. We have over Rs 50,000 crore of sanctioned but not disbursed amount lying with the bank. This will be gradually channelized.


Bank officials may be included
in charge sheet against Mallya

The Press Trust of India
Published on September 17, 2018

Both, serving and retired senior officials of the banks including the State Bank of India who had handled Kingfisher Airlines loans may be named as accused in the charge sheet

Mumbai, September 17 (PTI): Many senior bank officials, who had dealt with loans given to liquor baron Vijay Mallya’s Kingfisher Airlines may be named as accused in a Central Bureau of Investigation (CBI) charge sheet, which is likely to be filed within a month, sources said.

This would be the first charge sheet in the case pertaining to loans of over Rs 6,000 crore given to Kingfisher by a consortium of 17 banks led by State Bank of India, which alone had an exposure of Rs 1,600 crore.

The agency has already filed a charge sheet against Mallya last year in connection with a separate case related to Rs 900 crore pending loan given by IDBI Bank in which senior officials of the bank were allegedly involved. The CBI had registered two cases against Mallya related to the IDBI loans in 2015 and consortium loan in 2016.

Refusing to give names of the officials, the sources said the first phase of probe into loans given by a consortium of banks is almost complete and the charge sheet may be filed within a month while keeping the investigation open.

Both, serving and retired senior officials of the banks including the State Bank of India who had handled Kingfisher Airlines loans may be named as accused in the charge sheet as the agency has gathered enough evidence against them on misuse of official position, they said.

The top brass of erstwhile Kingfisher airlines including Mallya, its CFO A Raghunathan and other former senior executives will also be named as accused in the case, they said. They said the agency is also looking into the role of Finance Ministry officials, who could have influenced the decision of the bankers but their role is still be evaluated.

During the probe, the agency has gathered enough evidence to show that Mallya allegedly diverted the loan funds from the purpose for which they were given, they said. The agency in its FIR has alleged that State Bank of India and its consortium banks had advanced various credit facilities to Kingfisher Airlines Limited during the period between 2005 and 2010, they said.

During 2009-10, the company failed to meet its repayment commitments to the bank from which it had availed the credit facilities and Kingfisher Airlines did not keep its account with the consortium banks regular which became NPA, the FIR states. The consortium banks, therefore, recalled the credit facilities and also invoked corporate guarantee of UBHL and personal guarantee of Mallya, it alleged.


Banks step up asset sale to ARCs
as insolvency process gets delayed

Beena Parmar
The Moneycontrol News
Published on September 17, 2018

The sale process also comes after the Supreme Court, last week, asked banks to not proceed with the insolvency process for assets in the power, shipping, textile and sugar sectors

Mumbai, September 17:  With a delay in bankruptcy proceedings increasing costs, banks have intensified efforts to sell non-performing loans to asset reconstruction companies (ARCs).

Top lenders including State Bank of India (SBI), Punjab National Bank (PNB), Bank of India and Bank of Baroda are aggressively pushing to sell assets stuck in bankruptcy courts. There have been delays in the resolution of a large number of cases at various National Company Law Tribunals (NCLTs) forcing banks to increase provisions, and losing out on interest income. Once the bankruptcy application is admitted at any NCLT, creditors have to forgo the interest accruals.

“We are going for fire sale now, almost Rs 10,000 crore is up on sale. We will also look at putting up Rs 1,500 crore of Essar Steel. Price discovery is over, so it would not be wise to wait now. We are ready to sell whatever we get on a cash-basis. As the process can get delayed and we do not even get an interest on it,” said a senior executive at one of the banks. Another senior public sector banker said, “We ought to start making recoveries to boost our profits. Banks cannot be sitting on NPAs (non-performing assets) and wait for the insolvency process as it keeps getting delayed.”

The sale process also comes after the Supreme Court asked banks to not proceed with the insolvency process for assets in the power, shipping, textile and sugar sectors. In the first quarter of 2018-19, the state-owned banks cumulatively made a total recovery of Rs 36,551 crore, almost half of the entire 2017-18. As a large share of this recovery was contributed by the sale of Bhushan Steel under insolvency, and because the rest of the resolution processes are stuck, banks are worried about the recoveries going forward.

Banks are also bleeding with heavy losses in their quarterly financial results, though an improvement was seen in the first quarter of 2018-19. Losses declined from Rs 62,682 crore in Q4 2017-18 stood, to Rs 16,617 crore in the April to June period.  SBI has now put up Essar Steel’s exposure of Rs 12,000 crore on sale after it withdrew last week. Apart from that, Rohit Ferro Tech (Rs 1,320 crore), Indian Steel Corporation (Rs 929 crore) Bilt Graphic Paper Products (Rs 270 crore), Jai Balaji Industries (Rs 859 crore) and Sona Alloys (Rs 649 crore) among others, are up for sale to ARCs, according to a notice on its website.

Most of the offers are on at least 50 percent cash basis and these accounts are either facing insolvency or are in the process of being admitted under the Insolvency and Bankruptcy Code (IBC). In June, Bank of Baroda had moved to sell its Rs 1,200-crore exposure in Essar Steel to Hong Kong-based loan and bond trading firm SC Lowy. It is now planning to sell its exposure of about Rs 300-400 crore to Bhushan Power. Punjab National Bank has put nearly two dozen non-performing accounts (NPAs) on sale to recover over Rs 1,320 crore.

Since September 12, Bank of India has put on sale its NPAs including exposures to Essar Steel, Bhushan Power and Alok Industries, amounting to Rs 10,000 crore. All three accounts, part of the Reserve Bank of India’s (RBI) first list of 12 large NPAs to be referred to the insolvency courts, remain unresolved over a year since the list was issued amid several rounds of litigation. So far, of the 12 cases, resolutions have reached a final closure only in the cases of Bhushan Steel, Electrosteel Steels and Monnet Ispat & Energy.

Essar Steel tangle

Currently, Essar Steel has attracted bids that are almost 90 percent of the loan amount. The bids are led by ArcelorMittal, which has offered Rs 42,000 crore. The company is now fighting a case in the Supreme Court on its eligibility aspect. The asset has undergone several rounds of litigations since last year in August when it was filed in the NCLT. A senior official from Bank of India said this delay for Essar Steel is worrisome as the liquidation date is approaching on October 11. Indian Overseas Bank had earlier sold its Rs 1,600 crore-loan exposure in Essar Steel to Edelweiss Asset Reconstruction company.

As on September 10, Edelweiss ARC accounted for Rs 14,666 crore of the Rs 49,394-crore worth claims of all Essar Steel’s financial creditors put together. “Yes, the offers on sale by banks have substantially increased. Most bankers are apprehensive about the way the resolution process is progressing. They are also under pressure to clean up their books. Yet, it remains to be seen how much will be sold by them as the pricing mismatch still remains,” said the chairman of an ARC.


Govt proposals fail to calm markets;
Rupee, Stocks continue slide

Gopika Gopakumar, Ami ShahRavindra & N Sonavane
The Mint
Published on September 18, 2018

Mumbai, September 17: The rupee continued its downward spiral on Monday, brushing off finance minister Arun Jaitley’s package of measures to restore confidence in the currency as traders judged them as inadequate to arrest the decline. In the absence of steps that will provide immediate support, the government’s efforts failed to prop up the battered currency.

The rupee weakened 0.9% to 72.51 a dollar from its previous close of 71.86. The currency opened at 72.49 a dollar on Monday and touched a low of 72.69 in intra-day trading, despite the government’s five-point plan, which was announced on Friday, to boost capital inflows and shrink the widening current account deficit.

Friday’s announcement included steps to support the currency, relaxing overseas borrowing restrictions on manufacturers, a review of hedging requirements on foreign currency borrowings by infrastructure companies, removal of withholding tax on masala bonds (rupee-denominated bonds sold overseas) and easing the cap that limits foreign investment in corporate bonds. To address concerns over an expanding current account deficit, the government also announced steps to cut down non-essential imports.

Given the build-up of expectations about the weekend meeting, the policy response probably disappointed market participants, said a Nomura Global markets research note to clients. “The government’s announcement measures are not short-term measures, which could have an immediate impact on the rupee. There needs to be a significant change in sentiment,” said the treasury officer of a state-run bank.

According to Moses Harding John, a former chief executive of India and East Africa at SBM Holdings and currency expert, the initial disappointment of not getting a big-bang reform announcement pushed the rupee to 72.69 per dollar in Monday’s trade. “It will take time till the sentiment improves. Interest rate actions should be enough to bring order in the market,” he said. “Big-bang measures will accelerate foreign outflows. So, a neutral mode will be a better way. No action or a big-bang action will only add to volatility and the current cautious mode will emerge as prudent and sensible stance over short to medium term.”

The 10-year bond yield closed at 8.098%, from its previous close of 8.127%. Bond yields and prices move in opposite directions. The Reserve Bank of India’s announcement to conduct open-market operations of ₹10,000 crore on 19 September helped improve market sentiment.

Stocks were further beaten down as Goldman Sachs, over the weekend, changed its investment view on Indian equities from overweight to market-weight. The downgrade came on the back of stretched valuations, macro-economic concerns, a slow-down in domestic institutional inflows and political uncertainty due to impending general elections. BSE’s benchmark 30-share Sensex shed 505.13 points, or 1.33%, to close at 37,585.51, while National Stock Exchange’s 50-share Nifty dropped 1.19% to close at 11,377.75. “The decline (in equity markets) today is more to do with the currency behaviour and the resultant withdrawal. Weak Asian peers also impacted the sentiment,” said Deven Choksey, group managing director, KR Choksey Investment Managers Pvt.Ltd.

“The government measures announced on Friday are well-intended, but can only give results over next one year, and fail to provide immediate relief. We need measures that can provide immediate relief,” Choksey said. “The equity market will continue to be volatile as long as currency continues its downward trajectory,” he added. Foreign institutional investors (FIIs) have been net sellers of Indian shares for five of the first eight sessions to 12 September, selling a net of $187.63 million in the period. Domestic institutional investors have been buyers of Indian shares since the start of September to Friday, pumping in a net of Rs. 2,284.39 crore in the period.

Only three sectoral indices managed to close higher on Monday. BSE Finance index and BSE Energy index fell the most, down 1.44% and 1.30% respectively. Energy conglomerate Reliance Industries Ltd and financials contributed the most to the decline in the Sensex. Reliance Industries fell 2.12%. Mortgage lender Housing Development Finance Corp. Ltd dropped 2.47% while private lender HDFC Bank fell 1.81%.


Is 72 the right level of rupee vs dollar? It seems so

Tamal Bandyopadhyay
The Mint
Published on September 17, 2018

A greater attention to shrinking India’s current account deficit and fiscal health will do the trick for rupee. And the onus for this is on the government, not RBI

On 10 August, the rupee closed at 68.85 to a dollar. On 13 August, in the first 15 minutes after the foreign exchange market opened following the weekend, the rupee was trading at 68.45 on Clearing Corp. of India Ltd’s forex dealing platform. No one realized the rupee had fallen to 69.45! The rates were corrected later with the “big figure” changed to 69.

Similarly, on 14 September, in the beginning of trading hours, there was a freak trade at an exchange rate of 72.69 to a dollar when the rupee was actually valued at 71.70.

These are not “fat fingers” errors caused by pressing the wrong key of the computer while trading. They are “big figure” errors. When the currency market turns highly volatile, dealers often omit the big figure while giving quotes, presuming that it does not need to be specified.

The implied volatility—a measure of the market-expected future volatility of a currency exchange rate from now until the maturity date—of USD/INR for one-year tenure has risen to 7.12 currently, from a range of 5.5-6.5 in the past one year. Is it too high? In 2014, when the National Democratic Alliance government took over, the implied volatility was 11 and, in 2013, when the rupee was on a free fall, it was 13.

The lowest point that the rupee reached in the latest round is 72.91. Between 31 March, when the rupee closed at 64.97, and 14 September (71.85), the local currency has depreciated 10.59%. In 2013, the rupee lost almost 28% between 30 April and 28 August, if we take the lowest levels in intraday trading.

The market listened to Prime Minister Narendra Modi. The currency reversed the trend on the news of Modi considering measures to arrest its fall. While the Reserve Bank of India (RBI) has kept quiet, economy affairs secretary Subhash Chandra Garg has been doing all the talking. Let’s hear him out.

On 29 June (when the rupee hit an intraday low of 69.09), Garg said the government has adequate forex reserves and can opt for another tranche of foreign currency non-resident deposits. On 14 August (a day after the currency lost 110 paise), he attributed the fall to “external factors”, and reportedly said there is nothing to worry about and even a 80-level is not a “serious thing” as long as the depreciation is in line with other currencies (the rupee crashed to record low of 70.09 on that day).

Later, Garg tweeted on the “mischievous attribution” of a statement to him in connection with the fall of the rupee. He disagreed with the “reporter’s hypothetical statement that rupee may fall to 80”. On 18 August, Garg expected the rupee to stabilize at 68-69 a dollar; and on 29 August, after it closed at 70.59, Garg said at the current level, the currency is fairly stable, maintaining the same view—“between 68 and 70 is where rupee will mostly remain”.

On 10 September, when the rupee crossed 72 to a dollar, Garg reiterated the right level of “68-70” and did not “expect it to go beyond”. Stating 72 to a dollar as “perhaps an outer limit or beyond the reasonable outer limit”, he issued a veiled threat to speculators: “Those who are trying to take advantage of this contagion feeling in emerging markets may come to grief later”.

Finally, on 12 September, Garg said the government and RBI would do everything to ensure the rupee does not slide to unreasonable levels. RBI, which historically steps in not to protect the value of the rupee but iron out the volatility in the currency market, intensified intervention after the rupee crossed 70 and turned aggressive when the local currency threatened to breach the 73-mark. Its forex reserves dropped from $426 billion on 13 April to $399.3 billion on 7 September.

Clearly, it seems 72 is the level we are looking for the rupee even though it has not been a soft landing. On the so-called real effective exchange rate, or REER, basis, the rupee was overvalued some 14.5% (on 36 currency export and trade weight basis) and 22.7% (on six currency trade weigh basis) in August.

On most macroeconomic parameters, India is now better placed than 2013. The speculators in the non-deliverable forwards, or NDF, market is also not as active as they were in 2013, pulling down the rupee. The difference between offshore and onshore forward markets, which was 75 to 100 paise in 2013, is now in the 15-30 paise range. Most analysts are baying for another NRI bond issue, but there is no need to go for this as money does not come free. Greater attention to shrinking the current account deficit and fiscal health will do the trick. And the onus for this is on the government, not the inflation-targeter central bank.


All you wanted to know about...
Pradhan Mantri Annadata Aay
SanraksHan Abhiyan (PM-AASHA)

Rajalakshmi Nirmal
The Business Line
Published on September 18, 2018

Last week, the Centre launched a new scheme, Pradhan Mantri Annadata Aay SanraksHan Abhiyan, intended to shore up the prices that farmers get for their produce. The move follows increasing farmer unrest across the country as prices of many key agricultural commodities have fallen below their MSP (minimum support price). The three different components of the scheme, it is said, will cover gaps in the procurement and compensation mechanism for crops and help boost farmers’ income.

What is it?

The AASHA scheme has three components, and these will complement the existing schemes of the Department of Food and Public Distribution for procurement of paddy, wheat and other cereals and coarse grains where procurement is at MSP now. The first part is the Price Support Scheme (PSS). Here, physical procurement of pulses, oilseeds and copra will be done by Central Nodal Agencies. Besides NAFED, Food Cooperation of India will also take up procurement of crops under PSS. The expenditure and losses due to procurement will be borne by the Centre.

The second leg is the Price Deficiency Payment Scheme (PDPS). Under this, the Centre proposes to cover all oilseeds and pay the farmer directly into his bank account the difference between the MSP and his actual selling/modal price. Farmers who sell their crops in recognised mandis within the notified period can benefit from it.

The third part is the pilot of Private Procurement & Stockist Scheme (PPSS). In the case of oilseeds, States will have the option to roll out PPSSs in select districts where a private player can procure crops at MSP when market prices drop below MSP. The private player will then be compensated through a service charge that will be up to a maximum of 15 per cent of the MSP of the crop.

Why is it important?

Recently, the Centre announced a hike in MSPs for several Kharif crops. It said that it will pay farmers the cost of production (as determined by CACP) plus a 50 per cent ‘profit’ while procuring farm produce. But not many farmer groups were happy. Except for paddy, wheat, and select cash crops where there is direct procurement by the industry, government-driven procurement is almost nil in crops such as oilseeds, with the result that the MSPs remain only on paper.

The AASHA scheme tries to address the gaps in the MSP system and give better returns to farmers. It also promises to plug the holes in the procurement system through PDP. If effectively implemented, the scheme will result in savings for the Centre. In the current physical procurement, government agencies end up stock-piling foodgrains, incurring storage costs and significant wastage and leakages as well.

Why should I care?

Your own food security depends on whether farming remains a remunerative activity for the future. The Centre’s age-old procurement and MSP system needs a relook because of its many shortcomings. Research by NITI Aayog and other research outfits has shown that the reach of the current MSP procurement system is very poor both in terms of geography and the crops covered.

Despite thousands of crores of public money being spent in MSP operations every year, the farm crisis continues. If implemented well, the new system may help revive the rural economy by assuring better income to farmers. Unlike the current system where farmers repeatedly go for the few crops, such as paddy, wheat and sugarcane, where MSP is effective, the new scheme may ensure crop diversification and reduce the stress on soil and water.

The bottom-line

Hope AASHA doesn’t slip up on implementation and doesn’t turn into NIRAASHA.


Performing moderately

S Y Quraishi
The Indian Express
Published on September 15, 2018

A new state of democracy report records a significant dip in India’s record on civil liberties, personal integrity and security, freedom of association, media integrity, gender equality

Today, the world celebrates the 11th International Day of Democracy in pursuance of a UN resolution. This is an appropriate occasion to have a look at the state of democracy in South Asia, especially India.

The world saw a huge wave of democratisation after World War II. The newly-liberated states in Latin America, Africa and Asia adopted democratic forms of government after centuries of colonial subjugation. Today more people live under various forms of democracy than ever before. More than 120 of the 192 countries in the world have some form of democracy — only 11 parliamentary democracies existed in 1941. This indicates the appeal of democratic ideas and systems.

South Asia is home to 3 per cent of the world’s area and 21 per cent of the world’s population. It’s significant that 50 per cent of the world’s population living under some form of democratic rule resides in this region. Despite the democratic upsurge, there are significant challenges like poverty, inequality, gender injustice, nepotism and corruption. Elected despots and authoritarian leaders are weakening democracies across the world. Political experts have argued that democratic values are on the decline, especially in the West.

The International Institute for Democracy and Electoral Assistance (IDEA), an inter-country organisation, tried to evaluate the state of democracy in the world in the light of such worrying claims. The Global State of Democracy Index (GSoD) looks at the trends in democratisation from 1975 to 2017. With the help of a set of 98 indicators, IDEA aims to study the factors which threaten democracy throughout the world and those that make it strong and resilient. The study covers a variety of important indicators such as representative government, fundamental rights, checks on the government, impartial administration and participatory engagement. These have many sub indicators for an in-depth indices-based analysis.

When it comes to representative government, India and Sri Lanka have maintained relatively high scores. Afghanistan, Bangladesh, Nepal and Pakistan have had periods of non-elected regimes. The general trend in South Asia in this respect has, however, been positive.

With respect to ensuring fundamental rights, the region’s score matches that of Asia Pacific but it is slightly below the global average. At the country level, Afghanistan and Nepal have seen the most improvement. Sri Lanka and Pakistan saw a slight decline in the 1970s and 1980s. India’s score has been stable since the late 1970s. However, a decline has been observed since 2015.

South Asia shows a steady improvement on the yardstick that measures gender equality with Nepal standing out. India’s score was better than the world average till 2003 but there has been a dip in the country’s performance on the gender equality yardstick since then.

When it comes to checks on government, South Asia has shown a steady increase from 1975 to 1994. Afghanistan, Nepal and Pakistan have shown the most improvement. Bangladesh, India and Sri Lanka have remained relatively stable with scores in line with the global average.

In the yardstick on impartial administration, South Asia follows both the regional and global trends with no significant change, except in Nepal, which has seen a significant improvement. However, the “absence of corruption” sub-indicators within the “impartial administration” category shows a worrying tendency in South Asia. The region has the lowest scores in the world despite a slight improvement between 2012 and 2015.

A robust civil society is essential for deliberative decision making. Civil society participation has increased in India by leaps and bounds between 1978 and 2012 after which it declined drastically to fall below the average of Asia Pacific and that of the World. In 2017, it was the lowest since 1975.

In 2017, the gap between the Indian score and the world average in the yardstick that measures “personal integrity and security” was the widest since 1977. This is worrying. In the past 10 years, South Asia’s scores for electoral participation are in line with the global average but slightly below the Asia Pacific average. Recently, there has been a decrease in voter participation in Bangladesh but a slight increase in India and Sri Lanka.

One of the major challenges to democracy is people losing faith in it. There are many reasons for such disillusionment, including corruption, nepotism and unemployment. This often leads to people disengaging with key public policy issues which, in turn, makes those in power less accountable. Other factors, in contrast, contribute to the popularity of democracies. These include transparency in political processes, accountability of elected representatives, basic freedoms for all citizens, equal rights for women and minorities and high rates of voter participation.

The GSoD report analyses India’s performance on all the above-mentioned indicators and shows that the country has done moderately well. On yardsticks such as elected government, effective parliament and impartial administration, the country’s scores hover around the world average but in the last decade, there has been a significant dip in the country’s record on civil liberties, personal integrity and security, freedom of association, media integrity, gender equality and basic welfare.

In fact, India’s performance on the yardstick to measure media integrity was better than the global and South Asian average between 1994 and 2012. However, the country’s score has fallen below the global and Asia-Pacific average in 2017. Given that a free and fair media is crucial to a meaningful democracy, this is a worrying tendency.

The Election Commission has played an important role in conducting free and fair elections in the country. The Commission’s Systematic Voters Education for Electoral Participation Programme role has been crucial in this respect. An independent judiciary is another reason for the resilience of democracy in India. The apex court has given judgments that keep a check on the government and ensure a transparent and accountable system.

Democracy does not merely mean voting rights for people, it means empowering people by granting them equality. It also means the creation of mechanisms to resolve differences through dialogue and with mutual respect and understanding.

India does have the highest rating among South Asian democracies. But its performances on several yardsticks makes it a flawed democracy. If we want the largest democracy to count among the world’s greatest, there must be serious introspection among all stakeholders.

The writer is former Chief Election Commissioner of India. He has been a member of Board of Advisors for the Institute for Democracy and Electoral Assistance (IDEA) since 2012.

Source: Internet Newspapers and anupsen articles


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