Banking News dated 24th September 2018

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Banking News: September 24, 2018


Banking reforms: Why BOB, Dena Bank and  Vijaya Bank merger will have a little effect

Banking reforms: Why BOB, Dena Bank and
Vijaya Bank merger will have a little effect

Madan Sabnavis
The Financial Express
Published on September 24, 2018

When the policy is to retain the headcount, accommodating
them in a smaller set of branches will not be possible.

The merger of BOB with Vijaya Bank and Dena Bank is quite singular for different reasons. Firstly, for the first time, we will be witnessing a merger of three PSBs (which is different from the one involving SBI and its associates) which can be a precursor to other such moves. Secondly, the three banks involved consist of two strong (one big and one small) and one PCA bank. Thirdly, the motivation for such a move, though ideological in scope, is an attempt to resuscitate a relatively weaker bank with two healthier ones. Fourthly, while two banks criss-cross one another in geographical space, the third becomes strategically significant being based in the south. Fifthly, the merger comes at a time when all PSBs are walking the thin edge negative profits. Thus, this move hints at a modicum of desperation. And, above all, there is no talk of synergies, which is normally the term used when mergers are spoken of.

Bank of Baroda is the third largest PSB while Vijaya is 17th largest in the hierarchy of 21 banks. Dena Bank is an even lower 20th. In 2017-18, Vijaya Bank was one of the very few banks which posted positive net profit. The merger of these PSBs is an exercise in statistics as it would mean the summation of numerators and denominators. Intuitively, when such additions are made, the stronger entity becomes weaker, while the weaker ones become stronger. By strategically picking up two stronger banks in this merger exercise, this frailty is partially addressed.

When judging the strength and resilience of banks, typically the CAMELS approach is used. This can also be done in this context. Capital cannot really increase as it will be the sum of the individual banks’ capital, but this will be higher when merged together and will give a feeling of a stronger bank. Can the combined entity lend more? To the extent that the PCA bank cannot do so now, the combined entity can expand on the loan book. But, for the banking system as a whole, things cannot change as the capital remains unchanged.

Asset quality ratio will become less satisfactory for the banks which have lower ratios in their individual capacity, though the combined number will look better for the weaker bank. However, the quantum of GNPA cannot change and will still have to be addressed. Therefore, again, for the PSBs as a whole, the number will not change. This will not obviate the need to go in for resolution processes for the weaker bank. Management policy will undergo a change provided the three banks have a variance in terms of governance. But if all banks are run in a similar manner as the ownership is the same, then this may not matter.

Earnings of the three banks are at different levels and the combined entity will still have the same numbers unless there are drastic steps taken to rationalise costs, which is the only element that can be lowered. Quite clearly, the merger activity will be looking closely at the possibilities here. Liquidity for the merged entity would depend on the existing balance sheets as would the sensitivity (the S part of CAMELS) of market forces. Here, the integration into the model of the best run bank amongst the three would prevail.

The question that can be posed then is that do such mergers only push problems below the carpet, as the fundamental challenges are not being addressed through this statistical combination. Mergers are not the panacea in the context of PSBs where the character does not change. Selection of CMDs is still the government’s prerogative, and even today, banks have to take orders from above. A few months back, a government official had warned PSB managers to meet all of the SME lending targets or else get disqualified for annual increments. It can only be expected that banks will hurry to meet such targets and compromise on quality that can lead to adverse selection. Therefore, if such governance issues are not addressed, merging two or three public sector banks may not change the architecture.

At the operational level, three challenges exist that can either enhance or diminish the possibility of the success of such a merger. The first is the integration of technology platforms and cultures of these organisations. While, often all PSBs are painted with the same brush, this may not be the case, and over the last two decades, the culture has changed in the positive direction for most banks. But there could still be differences which have to be addressed.

Secondly, the way one goes along aligning the distribution of professionals in the merged bank will be interesting. It has been stated upfront that no jobs will be lost. If this is the case, there cannot be any reduction in employee cost, which, for the PSB group, is around 58% of intermediation cost. Further, the multiple posts that exist in the three banks will have to be reconciled as there can be only one head of risk, treasury, credit, HR, etc. As issues on seniority are structured and important in a public sector set-up, ensuring that there is harmony would be a challenge. In case of corporate mergers, normally the acquiring company would continue to hold the important positions, while the merged entity settles for the secondary positions if they are to be retained.

The third challenge relates to the issue concerning rationalisation of physical infrastructure which is also linked with the headcount and existing hierarchy. All bank mergers will lead to multiplicity of branches and ATMs that will have to be reviewed. There would be redundancies of the same in the combined entity. When the policy is to retain the headcount, accommodating them in a smaller set of branches will not be possible. This will probably be the biggest challenge for the merged bank.

There are evidently some positive expectations from mergers of PSBs as it has been on the talking agenda for long. However, one cannot expect alchemy in such a set up when the superstructures do not change. While mergers have been spoken of in the context of having large banks with larger lending capacity, in the present circumstances, it appears to be more of a compromise solution of showing a lesser number of banks with better statistical numbers. The belief here is that, unless there is a change in the operating structures, mergers will only be symbolic and may not deliver the desired results in the long run. Counter intuitively, if we are willing to change the way in which public sector institutions function by giving them autonomy along with accountability, we may not require such mergers.
The author is a Chief economist, CARE Ratings


RBI shows resolve to chart its own course

Jayanta Roy Chowdhury
The Telegraph
Published on September 24, 2018

The RBI, criticised for its failure to stop demonetisation,
is slowly standing up to political and corporate pressure

New Delhi, September 23: The Reserve Bank of India, criticised for its failure to stop demonetisation, is slowly standing up to political and corporate pressures to lay new laws on banking and protect its turf as a regulator.

From ending the tenure of bank CEOs who wrongly reported bad loans and resisting the government’s bid to take away its powers in settling bank payments to deciding how to deal with lenders going sick — the apex bank is making its presence felt strongly.

Last week, the central bank showed its resolve to end the complacency over shoddy lending by banks when it decided to end Rana Kapoor’s tenure as the chief executive of Yes Bank, one of India’s largest private sector banks.

Kapoor had founded Yes Bank in 2004. He has been asked to step down by January next year.

Earlier, the RBI had asked Axis Bank to reconsider its decision to grant a fourth term to its managing director and CEO Shikha Sharma. The bank has chosen Amitabh Chaudhry of HDFC Standard Life Insurance to replace Sharma.

Bad loan decisions

The tough decisions follow the RBI’s orders last year to banks to come clean on the difference between the bad loans reported in their results and as assessed in central bank reviews. Yes Bank later reported a discrepancy of more than 300 per cent, one of the highest in the industry, while Axis reported a 26 per cent difference.

The RBI also had to intervene in the affairs of ICICI Bank whose CEO Chanda Kochhar is facing probes on loans given by the bank after a whistle-blower had alleged conflict of interest in the manner in which the loans were given. Kochhar is currently on leave from the bank.

Earlier this year, the RBI stood up to intense pressure from both the government and corporate circles to dilute a key circular it brought out in February 2018 on bad loans. Besides doing away with the traditional restructuring schemes, the RBI specified norms that require banks to classify a loan as non-performing even if there is a single day’s delay in repayment.

This month, the regulator opened up a front against the finance ministry by disagreeing with it vehemently over its proposal to set up an independent Payments Regulatory Board of India, which many fear is designed to strip the RBI of its powers.

Settlement regulator

The setting up of the board has been suggested as part of a draft Payment and Settlement System Bill 2018 by a committee, headed by economic affairs secretary Subhash Chandra Garg. While opposing the move, the RBI has pointed out that central banks all over the world enjoyed the power of supervision over payment transfers and settlements by banks as this was essential to ensure smooth and orderly banking.

The committee’s report comes after the RBI demanded that it be given more powers to control PSU banks in the wake of the Nirav Modi scam, which saw state-run lender Punjab National Bank losing around Rs 14,000 crore through a fraudulent settlement.

RBI governor Urjit Patel had told a parliamentary standing committee of finance in June that the central bank had “inadequate” control over state-run banks, flagging the issue of dual control over PSU banks by the government, on the one hand, and the RBI on the other.

Analysts said there was significant operational control exercised by the finance ministry, often bypassing bank boards and the RBI.

Last year, the RBI and the Centre were at loggerheads over moves to curb the central bank’s powers of determining how to deal with a bank which went bust. The now-withdrawn Financial Resolution and Deposit Insurance Bill had suggested setting up a “resolution corporation” with representatives from the RBI, Sebi and the insurance regulator, which would determine the financial health of a bank and recommend remedial measures for those on the verge of going bust.


Reserve Bank of India to seek changes
in pension regulations for RBI retirees

Shayan Ghosh, The Mint
Published on September 22, 2018

RBI will recommend the inclusion of a clause in the pension regulations that allows the RBI pensioners to receive updated pensions at par with govt retirees, says a person privy of the matter

Mumbai, September 21: The Reserve Bank of India (RBI) is preparing a list of recommendations to be sent to the Union government seeking amendments to RBI Pension Regulations, said two people aware of the development.

While RBI retirees used to receive pension in line with central government employees, the scheme was withdrawn by the government in 2008. The unions of the central bank had recently called for a mass casual leave protest, which was withdrawn after a letter from the government to RBI asking for recommendations on changes required.

One of the persons cited above said the central bank will recommend the inclusion of a clause in the pension regulations that allows RBI pensioners to receive updated pensions at par with government retirees. “Apart from the updation clause, RBI will also have to specify at what intervals the pension should be updated,” the person said. An email sent to RBI remained unanswered till press time.

On 8 August, before the RBI’s central board meeting, the unions submitted a representation to the members of the board. Following the meeting, Urjit Patel, governor, RBI, wrote to the finance ministry on 9 August requesting resolution of pension-related issues. On 31 August, the finance ministry responded that RBI should send proposals for changes in RBI Pension Regulations.

The union said in a statement on 3 September that the government’s letter is a departure from the past when in its letter of 24 February it negated their demand on grounds of “expenses and contagion effect”. According to another statement from the RBI union on 28 August, as central government improved pension periodically with every pay revision through pay commissions, the RBI pension was brought in alignment with the pay scale of 1997-2002 covering pensioners up to October 2002.

It said that while central government pensions are borne by the exchequer, RBI pensions come from its pension corpus fund, which now stands at ?16,000 crore. It is to be noted that the RBI has paid ?2.65 trillion in dividend to the government in the last five financial years FY2014-18.

Meanwhile, in a report on 4 August, the Committee on Subordinate Legislation of the 16th Lok Sabha said the autonomy and independence of RBI is imperative and integral part of any central bank of a nation which should not be compromised at any cost, especially, in matters relating to the service conditions of the employees like recruitment, pay and pension.

The central bank had notified RBI Pension Regulations in 1990, laying down the eligibility criteria and general conditions pertaining to pension of RBI employees after their retirement. Prior to that, the retirement benefit available to RBI employees were through the Central Provident Fund (CPF).

This pension scheme of 1990 was made applicable to all the employees of the RBI including those who were in the service of RBI as on 1 January, 1986 but retired later on with the condition that they had to surrender their CPF payment along with 6% interest. Also all such employees joining the bank after 1 November, 1990 were to be governed by the RBI Pension Regulations only, as the scheme of CPF was not to be made applicable to them. At the same time, the existing employees of RBI were given the option to continue under the earlier CPF Scheme instead of the RBI Pension Scheme of 1990.


Cabinet appoints 10 MDs & CEOs at
state-owned banks - 5 are from SBI

The Business Standard
Published on September 20, 2018

The move to appoint five deputy managing directors from SBI is being seen as the government's effort to tap into the talent from the country's largest lender to help other banks

New Delhi, September 19 (PTI): Mrutyunjay Mahapatra and Padmaja Chundru are among five deputy managing directors in State Bank of India who have been appointed as managing director and chief executive officer of Syndicate Bank and Indian Bank respectively, according to an official order issued on Wednesday.

They are among 10 MDs and CEOs of state-owned banks whose appointments were approved by the Appointments Committee of the Cabinet headed by Prime Minister Narendra Modi. Mahapatra and Chundru will have tenure till the date of their superannuation, i.e. May 31, 2020 and August 31, 2021, respectively, the order issued by the Personnel Ministry said.

Three other Dy MDs of SBI-- Pallav Mohapatra, J Packirisamy and Karnam Shekhar  have also been appointed as MD and CEO of Central Bank of India, Andhra Bank and Dena Bank, respectively. They all will have tenure till the date of their superannuation. Mohapatra and Packirisamy's tenure will last till February 28, 2021. Shekhar will be the MD and CEO of Dena Bank till June 30, 2020.

The move to appoint five deputy managing directors from SBI is being seen as the government's effort to tap into the talent from the country's largest lender to help other banks grappling with high non-performing assets, officials said.

Besides these five bankers, S S Mallikarjuna Rao has been appointed MD and CEO of Allahabad Bank initially for a period of three years. Rao's tenure will be extendable up to the date of his superannuation, i.e. January 31, 2022, the order said. He is the Executive Director of Syndicate Bank.

A S Rajeev, Executive Director of Indian Bank, has been named MD and CEO of Bank of Maharashtra for an initial period of three years and extendable up to two years after "review of his performance", it said. Atul Kumar Goel and S Harisnakar have been appointed MD and CEO in UCO Bank and Punjab & Sind Bank respectively. Goel is ED, Union Bank of India, and Harisankar is the Executive Director of Allahabad Bank. Ashok Kumar Pradhan will be MD and CEO of United Bank of India. He is at present the ED of the same bank.

Their appointments come more than two months after they were recommended by the Banks Board Bureau, an advisory body formed by the government for top level appointments in the banks. The BBB had recommended 14 bankers, including six deputy managing directors of SBI for appointment. Of the six, all except C V Nageswarhave been appointed as MD and CEO of different state-owned banks, according to a statement issued by it on June 30.


Debt market crisis leads to
contagion effect on equity markets

Beena Parmar
The Moneycontrol News
Published on September 22, 2018

After the defaults by IL&FS in the past month,
liquidity crisis fears are gripping the debt market

Mumbai, September 22: At a time when the debt market is still reeling from the defaults made by the Infrastructure Leasing and Financial Services (IL&FS), the equity markets paid the price on September 21.

After the defaults by IL&FS in the past month, liquidity crisis fears are gripping the debt market.

According to sources, there are concerns being raised of a contagion impact of further defaults in case of more cash worries in the market, especially when the yields on bonds are rising (bond prices are lower when yields rise). However, there is no certainty of the same.

Market participants also suggested that some investors are exiting mutual funds and hence the fund houses are trying to build liquidity by reducing their exposures in their bond holdings.

On September 21, the BSE-benchmark Sensex and Nifty had a roller-coaster ride starting with Yes Bank, which fell to as low as 34 percent and moving on to mortgage lenders — Dewan Housing Finance Ltd (DHFL, fell 60 percent) and Indiabulls Housing Finance (35 percent).

Also Read: Cash crunch fears, risky exposures to debt market hurt financial stocks

A DBS note explained that when a bond buyer comes to the market, banks seldom take them up and warehouse them. Instead, they strive to pass on the risk to another buyer, availability and appetite of whom can be highly variable.

Yes Bank ended 29 percent lower on the back of its CEO and MD Rana Kapoor's tenure being cut short to four months. The board is set to meet on September 25 to decide on the action plan ahead.

The Yes Bank crash was followed by a significant fall in other stocks as well. At day's end, shares of DHFL and Indiabulls recovered to close at 42 percent and 8 percent lower.

Both DHFL and Indiabulls Housing Finance blamed rumours of distress selling of DHFL bonds, which were held by DSP Mutual Fund. The selling led to panic among investors, sparking concerns of liquidity crisis over likely further defaults in the bond market, especially after IL&FS had been unable to make repayments on two of its bond maturities.

Even though the equity benchmark Sensex opened on  a strong footing, after around 1 pm, it plunged to sharpest levels by 1,500 points (3 percent from the day’s high), its biggest swing in four years.

Sector-wise, the realty sector declined by 3.5 percent, banking 3.1 percent and finance 2.5 percent while the healthcare, power, auto and IT sector were weaker by over a percent.

"A further rise in volatility is likely given the macro outlook, but would likely be exaggerated by the market structure... Non-banking financial sector has taken on some chunks of risk-taking activities from banks," said Taimur Baig, chief economist, and Radhika Rao, economist, DBS Bank, in the note.

The DBS note also warned that post-crisis regulatory environment may have made banks safer, but not the entire financial system.

The Reserve Bank of India (RBI) has asked banks, especially smaller ones under prompt corrective action (PCA) framework, to limit and diversify their loan exposures to risky portfolios such as large infrastructure, construction, power and similar stressed sectors given the rise of bad loans.

However, worries about exposures of mutual funds, pension funds and insurance firms among other financial services are yet to be ascertained and may need to be watched.


The Great Indian Bank Merger
is Triage, Not Reform

Subir Roy, The Wire
Published on September 19, 2018

The entity that will be created after the amalgamation will not be in any better position to compete for large projects than Bank of Baroda would have been on its own.

The government’s decision to amalgamate three public sector banks (Bank of Baroda, Vijaya Bank and Dena Bank) is a band-aid exercise that seeks to keep one step ahead of the crisis and should not be seen as in any way seeking to improve the basic health of public sector banks.

The secretary of the financial services department which oversees the government-owned banks has claimed that this will “improve operational efficiency and customer service”. It is not at all clear how this will happen.

More revealing is his following assertion that “capital support to the new entity will be ensured”. This implies that the government would have found it difficult to restore the capital adequacy ratio of all 11 banks which have been placed under “prompt corrective action” (PCA) that has rendered them comatose, unable to undertake fresh lending.

If all the banks under PAC had to receive enough capital infusion from the government to restore their capital adequacy ratio, then finance minister Arun Jaitley would not be able to stand by his assertion to the prime minister that the fiscal deficit will be kept within declared bounds.

Importantly, what is not admitted is that if you merge a weak bank with a strong bank then you save the weak bank but also render weaker the other bank which would have remained stronger had it been left to fend for itself. This is, in fact, what is likely to happen to Bank of Baroda. Most recently it had staged an improvement over its earlier performance. Post the amalgamation, this recovery process is likely to get stalled.

The finance minister has reassured public sector bank employees by saying that the government wishes to save all the banks under PAC, adding that “nobody will have to worry.” More explicitly, “no employee will face adverse service conditions as a consequence of the amalgamation,” according to one news report.

But officials of the erstwhile associate banks of the State Bank of India are upset over the change in their career prospects as a result of the merger. They see themselves as second-class citizens vis-à-vis those of SBI proper and their promotion prospects hampered.

The critical issue before the Indian economy is that with its public sector banks, which account for over two-thirds of the banking sector, being severely impaired by their bad loans overload, the supply of fresh loans to enable high growth will be stanched. Jaitley had something specific to offer on this: “This amalgamated entity will increase banking operations.”

But one critical issue has to be addressed before bank lending to the corporate sector recovers its regular momentum. Senior bank managers are currently traumatised by the actions against some of them by the vigilance and investigative authorities pursuing cases of perceived fraud. A process of confidence building among the officials is needed and this is in its nature a time-consuming exercise.

The main reason why the merger is a stop-gap exercise is that it does not address the basic issues as to why bad loans came to be in such proportions. The project appraisal practices and capabilities in the public sector banks are inadequate so that large long-term loans to infrastructure projects get sanctioned with inadequate scrutiny, particularly when the herd mentality overtakes bankers during periods of irrational exuberance as happened in the run-up to the financial crisis of 2008.

If this is a psychological reality that cannot be avoided, banks’ insurance policy lies in detecting emerging ill health and erosion of promoter’ equity in projects as soon as it happens. There can be no compromise in this and for this, the quality of bank management has to improve substantially.

Additionally and crucially, a more professional set of managers has to be able to perform without interference from the political class and bureaucracy. In India, not only do powerful promoters pull political strings without hesitation, top managers sometimes owe their positions to lobbying on their behalf by powerful promoter groups. Such a manager can hardly move against promoters promptly when the need arises.

The solution to this systemic malady afflicting the public sector banks is obvious and globally regarded, academic and former Reserve Bank of India governor, Raghuram Rajan, has, in his note to the estimates committee of parliament spelt it out clearly: “improve governance of public sector banks and distance them from the government” and “delegate appointments entirely to an entity like the Banks Board Bureau.”

The NDA government understood this well and early in its life set up the bureau under the leadership of former comptroller and auditor general Vinod Rai. Rajan’s note does not say this but most unfortunately, having set the bureau in the first place, the government chose to ignore its detailed advice and Rai has now departed.

There is a deeper theoretical reason why merging smaller public sector banks to create a few big ones is not the answer. This is because, in the financial sector, big is no longer beautiful after the global financial crisis. One reason is that once an institution gets very big, systemically it becomes too big to be allowed to fail and so has to be rescued in case of need. Besides, size offers no intrinsic advantage.

The entity that will be created post the amalgamation of the three banks will not be in any better position to compete for large projects than Bank of Baroda would have been on its own. Large loans are often syndicated and all that a lead banker has to do is get its project appraisal right.

Additionally, in India, knowing the local business scene and having historical and organic roots in it is indispensable in lending to small and medium enterprises which are the real engine of growth. For example, if the former State Bank of Travancore knew its historical territory better than any other bank, then it should have been allowed to do its own thing and not get lost in a faceless large bureaucracy like the State Bank of India.

Public sector banks should be merged not mindlessly to create a few bigger banks and make life fiscally easier for the government but on intrinsic business merit as when a business considers it necessary to add a geography or an industry to its portmanteau.

Subir Roy is a senior journalist and the author of Made in India: A study of emerging competitiveness (Tata Mcgraw Hill, 2005) and Ujjivan: Transforming With Technology (OUP, 2018).


Government now considering merger
of PNB, OBC, Andhra Bank: Report

The Moneycontrol News
Published on September 20, 2018

The development comes days after the decision of merging three public sector lenders -- Bank of Baroda, Dena Bank and Vijaya Bank

New Delhi, September 20: After deciding to merge Bank of Baroda (BoB), Vijaya Bank and Dena Bank, the government is likely to announce the merger of three other banks before the end of the year, according to a report by DNA Money.

The three public sector banks (PSBs) are likely to be Punjab National Bank (PNB), Oriental Bank of Commerce (OBC) and Andhra Bank, the report suggests. "Government is analysing the merger of PNB, OBC and Andhra Bank, as it wants few large banks in the country," a source was quoted as saying.

The government is reportedly holding talks with banking officials to examine the feasibility of such a merger and will likely announce the move before December 31.

On September 17, the central government announced the proposal to merge three public sector lenders -- BoB, Dena Bank and Vijaya Bank.
The cabinet is likely to approve a scheme of amalgamation of Dena Bank, Vijaya Bank and BoB next week, the report adds.

The three state-run banks would work on strict timeline and necessary regulatory process is expected to be over by the end of 2018-19, they said, adding that the merged entity should be operational from April 1, 2019.


Small Savings Rates Hiked:
PPF & NSC to give 8%, senior citizens to get 8.7%

Preeti Motiani
The Economic Times
Published on September 21, 2018

New Delhi, September 20: The government has hiked interest rates of various small savings schemes for the third quarter (October 1 to December 31) by up to 40 bps. These schemes include the Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), National Savings Certificate (NSC), and post office time deposits.

This is a welcome relief for fixed income investors as rates have remained unchanged for the previous two quarters. Added to that, the government had reduced the interest rates on these schemes in January -March 2018, quarter.

According to a circular issued by the Finance Ministry on September 19, the interest rates of various small saving schemes have been hiked by between 30 basis points and 40 basis points. (One percentage point is equivalent to 100 basis points.)

The one year, two-year and three-year time deposit interest rates have been hiked by 30 basis points. Rates for other schemes such as the five-year time deposit, Sukanya Samriddhi Scheme and PPF have been increased by 40 basis points. After the hike, PPF and NSC will earn 8 percent, the Sukanya Samriddhi Scheme will fetch 8.5 percent, and the Senior Citizens' Savings Scheme will get you 8.7 percent.

Interest rates on small savings scheme
for quarter ending December 31, 2018
Rate of Interest
w.r.t 01.07.2018 to
Rate of Interest
w.r.t 01.10.2018 to

Savings Deposit
1 year Time Deposit
2 year Time Deposit
3 year Time Deposit
5 year Time Deposit
5 year Recurring Deposit
5 year Senior Citizen Savings Scheme
and Paid
5 year Monthly Income Account
and Paid
5 year National Savings Certificate
Public Provident Fund Scheme
Kisan Vikas Patra
7.30 (will mature in 118 months)
7.70 (will mature in 112 months)
Sukanya SamriddhiAccount Scheme
Source: Finance ministry website

However, interest rate on the post office savings account balance has been kept unchanged at 4 per cent.

The expectation of a hike in interest rates was building up for quite some time because the government has benchmarked these schemes to the yields of government bonds of the same maturity. The interest rates on these schemes are calculated by adding a mark-up to the average of the government yield in the preceding quarter.

The formula was given by the Shyamala Gopinath Committee to determine the interest rates of the schemes. The committee had suggested that the interest rates of different schemes should be 25 - 100 basis points higher than the yields of the government bonds of similar maturity.

The country's central bank, Reserve Bank of India (RBI) has also hiked the repo rate cumulatively by 50 basis points in its last two bi-monthly monetary policies announced in June and August 2018.


State Bank of India raises
$650 million in maiden green bond sale

The Press Trust of India
Published on September 19, 2018

The 5-year bond is priced at the US treasury plus 165 basis points, while from for British investors the rate will be 3 Libor plus 151 bps

Mumbai, September 19 (PTI):  The nation's largest lender State Bank of India raised the first tranche of $650 million through a maiden green bond offering, which is part of its planned $3 billion in such funds for onward lending to green projects.

The five-year dollar money is priced at the US treasury plus 165 basis points, while from for a British investor the coupon will be 3 Libor plus 151 bps. "SBI has successfully priced our maiden green bonds, a five-year money for $650 million at T+ 165 bps, corresponding to 3L + 151 bps approximately," a merchant banking source official told PTI.

The money is raised through the bank's London branch, the source added. With this issue SBI will become compliant with the global standards as prescribed by the Climate Bonds Initiative, a global not-for-profit investor-focused organisation.

According to Bank of America-Merrill Lynch, the domestic green bond market has a $125-billion opportunity by 2025. It expects around $32 billion of such bonds being sold over the next five years. Over the past two years, domestic companies have raised $6 billion in green bond sales, led by Exim Bank, Yes Bank, Axis Bank and green power player Renew Power.

It can be noted that mid-sized private sector lender Yes Bank was the first domestic bank to raise Rs 1,000 crore in green bond in 2015, followed by CLP India for Rs 600 crore for its wind portfolio. Hero Future Energies raised Rs 300 crore, and Axis Bank had raised $500 million.

SBI had last year said it had an internal approval to raise around $3 billion in green bonds to finance green projects that do not emit toxic elements in accordance with the bank's green bond framework. International rating agency Fitch has assigned the proposed senior unsecured debt an expected rating of BBB-.

The banking behemoth has reportedly appointed seven investment bankers the sale, including SBI Cap, Citi, and Bank of America among others, according to market sources. Of late globally, green bonds have become popular, with sustainability emerging as the key metrics in deciding both financing commitments as well as the fate of several development projects.

Green bond offerings have hit a record $155 billion in 2017, according to industry reports and in the first half it has already touched $80 billion, with around $15 billion sold in June alone. The government has set an ambitious target of building 175 gw of renewable energy capacity by 2022, up from just over 30 gw now, involving $200 billion in funding.


SBI branch shuts down at
Yavatmal district of Maharashtra

Shishir Arya
The Times of India
Published on September 23, 2018

Nagpur, September 22: State Bank of India (SBI) staffers in Patanbori village of farm crisis-ridden Yavatmal district are on an indefinite strike alleging misbehaviour by Kishore Tiwari, the chairman of Vasantrao Naik Shetkari Swavalamban Mission (VNSSM) which is the state government think-tank on agrarian distress. The post carries the rank of minister of state.

The SBI branch, which is the only nationalized bank in the village and is located close to the Telangana border, has been locked out since the last three days. Nearly 45 villages are linked to the branch.

A visit by Tiwari to assess the crop loan disbursal by the bank took an ugly turn. The Yavatmal Zilla Parishad president Ganajan Bejankiwar had organized a meet with over 300 farmers at the bank where Tiwari also turned up. The bank has over 200 pending loan cases.

In his official complaint to the deputy general manager in Nagpur, branch manager Ramakant Sharan said that Tiwari abused him in front of the villagers who resorted to clapping.

“Tiwari inquired the caste of a woman who complained of not having got a loan. On realising her caste, he asked the officials to file a complaint of harassing a scheduled caste woman,” Sharan wrote in his letter. Sharan went on to add that every day he comes across farmers who threaten to poison themselves “if their work is not done”.

The matter has been taken up by SBI Officers’ Association (SBIOA) which has backed Sharan. Since 2006, bankers inYavatmal have been facing such threats either from farmers or local leaders. “This is the third time in over a year that the staffers in Patanbori branch have been heckled,” said the association deputy general secretary P K Chakravarti who is garnering support from other banks to go on strike in the district.

Not denying what happened on that day, Tiwari said he got agitated when he learnt that a crop loan meeting was being held in September. “The farming season is at an advanced stage now. The farmers were complaining about the difficulties faced by them,” he said.
Tiwari alleges that a pregnant woman had to visit the bank five times to get her papers cleared. A senior citizen also faced similar problems. “The locals tell me that the branch manager is very arrogant,” he said.

Sharan said that the paper work for loan could not be completed earlier because of lack of manpower. “The bank has two officers and four staffers. There is a footfall of nearly 700 persons each day. Over 200 cases of loans are pending and the matter has been taken up with the regional office. Delay in processing of loan waiver cases by state government has also slowed down the fresh lending,” he said.


For Bankers, it is now a very difficult time,
to work with dignity and self-esteem

Dear friends,
Please read the undernoted item carefully and realise again how Bankers are now being treated.
Anup Sen,
-      (Moderator, Banking News)

A letter written by a Branch Manager of State Bank of India
 to the Deputy General Manager of the Zonal Office, SBI

The Deputy General Manager
Nagpur Zone-II                                                       Date:19/08/2018

Dear Sir,

State Minister Shri Kishore Tiwari.

With reference to the captioned subject I have to state that I Ramakant Sharan PF-6779336I have been transferred in this branch on 21/07/2018. The branch has total staff strength of 8 consisting of 2 officers 4 award staff and 2 messengers. Almost 45 villages are attached to this branch and average daily footfall is almost 600 to 700.

Since my taking charge of this branch as a BM we are sanctioning and disbursing crop loan with our full efficiency. Since almost 45 branches are linked to this branch we have received a large number of KCC cases and there are almost 200 to 250 cases are still pending. The same has been conveyed to RBO and RBO has taken almost 100 cases to process at their end.

On 19/08/2018, when I reached Branch at 9.30 am I found that a PANDAL (TENT) has been installed in front of my branch. When I asked about this from the local people they informed me that the state minister Shri Kishore Tiwari and Zila Parishad President Shri Gajanan Bejankiwar are coming. However, I had not received any information regarding this from any authority.

Subsequently I took picture of that tent from my Mobile and posted it in TEAM YAVATMAL WhatsApp group at 10.30am. Subsequently my Regional head called me and told me that I would be there in the meeting.

In the meeting Mr. Kishore Tiwari called me and publicly harassed me in front of the local people and our Regional head.

Some of his remarks were as under:
1. ये ब्रांच मैनेजर एकदम नालायक hai
2. यह ब्रांच मैनेजर एक नंबर का गधा है
3. इसे बिहार में जगह नहीं मिला इसलिए यहां भेज दिया गया है पता नहीं कहाँ कहाँ से बिहारी जाते हैं
4. संभल जाओ नहीं तो कानून को हाथ में लेते हुए मुझे देर नहीं लगेगा
5. Shukra manao ki main minister hun nahi to main tumhepata chala deta ki main kya chij हूँ

While he was calling me these nicknames the people were clapping and the irony is that that all these things were happening in front of our AGM/Regional head and he had not spoken a single word to Mr. Tiwari that why he was addressing me like that but I must appreciate my RM Shri Jayant Ghodkhande that he had promised Mr. Tiwari that he would be completing the entire KCC sanction/disbursement within next 8 days.

One lady was complaining that her KCC loan has not been sanctioned then Mr. Mr. Tiwari asks her caste fortunately that lady belongs to schedule caste and the minister directed the SDM to lodge a complaint against me for the harassment of a women that too from a schedule cast.

Sir, with reference to all these prefixes with which I have been addressed today I have to state that I have never been insulted in my life like I have been insulted today. It would be better for me kill myself than to bear all these taunts with which I have never been addressed before.

Sir, with my folded hands I want to ask you a simple question what does it means "संभल जाओ नहीं तो कानून को हाथ में लेते हुए मुझे देर नहीं लगेगा"

It’s nothing but a threat to my life sir. I have joined this Esteemed organization not only to earn money but to some respect and do social service. If this is the situation where my character has been mob lynched that too in front of my higher authority and that higher authority is not in a position to utter a single word in favour of his subordinate then it is very painful for me to say that It is better for me to part away myself with this organization.

Please don’t be mistaken sir that I am doing all these in frustration of today's incidence. But the fact is that almost every day I found one or two customers who threatens me that they would poisoned themselves.

Further, I have to state that It is not possible for me to work in that branch even for a single day where I have been publicly threatened that "संभल जाओ नहीं तो कानून को हाथ में लेते हुए मुझे देर नहीं लगेगा it’s nothing but a mob lynching that why it’s my humble request to kindly send someone in place of me to take charge of that branch.

Yours faithfully

Ramakant Sharan
Branch Manager
SBI Patanbori

On September 7, 2018, Ramakant Sharan, the Branch
Manager has submitted his resignation letter to the Bank.


Will a New Round of Forced
Public Sector Bank Mergers Work?

T R Bhat, The Wire
Published on September 20, 2018

While the circumstances are different, India
has had an unfavourable history in this regard.

The announcement by the finance minister that Bank of Baroda (BoB), Vijaya Bank and Dena Bank will be merged to form the third biggest bank in the country once again exposes the government’s temptation to take major decisions without adequate study of its implications on the financial system and making it vulnerable to greater risks.

The government has said that the three-way merger of a weak Dena Bank and strong BoB and Vijaya Bank will be the right step in the ongoing process of reforms. It is also claimed that the merged entity will be strong and competitive and will reap the economies of scale. Is the government chasing a mirage?

Ever since the Narasimhan Committee I (1991), the issue of consolidation of public sector banks (PSBs) has been a subject of intense debate. The very crux of the argument for consolidation of banks is the claimed advantages of size like economies of operation and ability to face competition. The past experience in India does not, however, strengthen this perception of gain.

In the post-nationalisation era, the first merger of PSBs was that of New Bank of India (NBI) with Punjab National Bank (PNB) in September 1993. That was prompted by the government’s desire to bail out a tottering NBI which had an accumulated loss of Rs 450 crore against its capital of Rs 186 crore. An efficient PNB took a couple of years to come out of the after-effects of a forced merger.

Similarly, the merger of privately owned Global Trust Bank, then a new star of financial liberalisation, with state owned Oriental Bank of Commerce in 2004, seriously affected the earnings of OBC.

In the first round of its restructuring, two associates of State Bank of India – State Bank of Saurashtra and State Bank of Indore – were merged with SBI in 2008 and 2009 respectively.

In the latest round completed in March 2017, the remaining five associate banks were merged with the mega SBI. Did these mergers bring a sea change in SBI’s fortunes? There are no satisfactory answers.

On the contrary, reports have regularly appeared about the problems of customers of erstwhile associate banks (e-ABs) who had to pay higher service charges and who felt alienated in a new work culture. The staff of e-ABs also had issues regarding the SBI’s proposal to recover certain compensation paid to them for the overtime work they had to do during the demonetisation era. The SBI itself has not been in the pink of health after the two mergers.

The government’s claim of higher efficiency due to economies of scale is presumptive in the wake of experience both in India and abroad. The global financial crisis of 2007-08 had undisputedly established that when institutions are too big, regulatory intervention would get diluted resulting in the imperative of state monitored bailouts at the tax-payers’ cost. Learning from that experience, the US Federal Reserve revisited its role and emerged as a “regulatory institution with more authority and power. This had made the banks do better there”.

In contrast, the Reserve Bank Governor is on record that he has no power to regulate the ailing PSBs. In dealing with the largest private lender, ICICI Bank which is currently under public scrutiny for all the wrong reasons, the RBI’s role was not edifying.  If RBI cannot regulate smaller PSBs can it monitor megabanks?

The government’s decision is apparently without informed consultation with the stakeholders like the top managements of the banks themselves and their employees. Boards are now asked to approve a government-sponsored scheme. 

Vinod Rai, before demitting his office as chairman of the Bank Boards Bureau in March 2018, had made a pertinent suggestion in his compendium of recommendations (CoR) sent to the finance ministry. He had underlined the need to engage with various stakeholders and offered BBB’s advice to the government to ensure that PSB consolidation is least disruptive, so as to minimise the reliance on the tax payers and to maximise the outcomes for all.

The current decision, as the FM declared, was taken by a panel of three ministers, Piyush Goel, Nirmala Sitharaman and Jaitley himself. They could hardly be considered either stakeholders or experts.

Apart from the issues related to absence of informed deliberation for such a far reaching decision what are the other issues which invite questions of its efficacy? They do not need an expert to understand. Bank of Baroda and Dena Bank originated in the western state of Gujarat. For historical reasons, their branches in that state are quite large and overlapping. There will have to be merger of contiguous branches not only in that state but in other parts of western India which can affect the customers of the branches that lose their identity. There will obviously be staff surplus requiring relocation or enforced retirement.

The merger of Vijaya Bank with BoB will pose a different set of problems related to cultural shock. Vijaya Bank, started in 1938 in Mangaluru, Karnataka, had a work culture intertwined with the local milieu. Although after its nationalisation in 1980 it grew into a national bank, its roots continued to grow with same bonding. When an enforced merger takes place both the staff and its large clientele will face problems of a lost identity.

There are more pressing issues which have now gone to the back burner. The worrisome issue of the NPAs appears to have been allowed to abate on its own. There are also the unfinished five agenda of reforms unveiled under the package Indradhanush in August 2015.

On Bank Boards Bureau, Vinod Rai’s CoR stands as a testimony for government’s unwillingness to act in time. De-stressing of assets is caught up in the web of blame game on under whose regime assets got stressed and who hobnobbed with tycoons. Bank managements are yet to be empowered as evident from the after-effects of the Prompt Corrective Action regime where even loans to the small borrowers and MSME are facing the axe. Accountability at the top level has got stuck in the quagmire of legal wrangles. A system is yet to be framed. And least forward movement has taken place in the matter of governance reforms, a key reform in the Indradhanush package.

In sum, what is the time frame by which the ailing PSBs will regain their health, how does the government plan to achieve this and finally, what are the institutional safeguards to insulate them from recurring vulnerabilities like the ones suffered in the recent years?

In 2011, former RBI governor Y.V. Reddy had said: “There is a global consensus that banks that are too big to fail are sources of serious risk to financial stability.”

In planning to build another mega bank through mergers of heterogeneous entities without seriously attempting to reform governance issues the government is embarking on a risky venture which can make the PSBs more vulnerable than they already are.

T R Bhat was joint general secretary of All India Bank Officers’ Confederation from 1995 to 2009. His book, Reforming the Indian Public Sector Banks-the Lessons and the Challenges, was released in April 2018.


Does fixed-term hiring really spur job growth?

K R Shyam Sundar
The Financial Express
Published on September 24, 2018

Lower employment tenure and fluctuating employees attract less or no human capital investment, which can have adverse outcomes, such as accidents as well as poor re-employability.

The National Democratic Alliance (NDA) came into power in 2014 promising, among other things, 2 crore jobs a year. There have been debates on the empirical realities concerning employment generation, if not outright criticisms. Employers have consistently argued that restrictive labour laws is one of the primary reasons for poor growth of jobs. So, employers demand flexible labour laws and justify the same in the name of employment generation and economic growth. The central government and several state governments (irrespective of party/parties in power) have bought the aforementioned flexibility reform argument hook, line and sinker. Allowing the employers to hire employees on a fixed-term basis is one of the significant flexibility measures that the central government has taken, which has been a cause of tremendous industrial unrest.

The Bharatiya Mazdoor Sangh (BMS) is against reforms in general and fixed-term employment (FTE) in particular. There is also a debate over the claims of pro-government academics that 22.1 million jobs, on net, were generated between 2013 and 2017, which outshines the 11 million jobs created during the United Progressive Alliance (UPA) regime during 2004-05 to 2011-12. While the debate on the extent of employment growth focuses merely on numbers, trade unions have been concerned with the “quality” of jobs as well.

The central government had earlier notified FTE for the apparel manufacturing sector (in October 2016), and in December 2017 FTE was extended to the leather and footwear sectors. Later, on March 16, 2018, the ministry of labour and employment notified extension of FTE to all the industries.

The important clauses governing FTE are as follows: Employers are forbidden from converting the existing permanent posts into FTE. Hours of work, wages, allowances and other benefits shall not be less than those of permanent workers, and all statutory benefits available to permanent workers will be extended to FTE workers on a pro rata basis, notwithstanding the fact that these workers may not fulfil the eligibility period of employment. However, the employer need not serve termination notice or provide retrenchment compensation as the contracted tenure of employment expires. Temporary workers, probationers or badli(substitute) workers can be terminated at will. The government considers FTE option as a “win-win” for both workers and employers—a win for workers because FTE is superior to contract labour employment as wages and benefits are on a par with those of permanent workers; and a win for employers because they get the much-demanded flexible labour without the aid of middlemen. The government, eventually, is the winner as it can boast of growth in jobs.

Employers are surely not happy with FTE for several reasons. FTE is costlier than contract labour as parity of wage and benefits, etc, raises the cost to company. Employers resort to contract labour mainly because they can then transfer monitoring costs and headaches associated with it, such as disciplinary action and costs of management of social security compliances, to the contractors. In the case of FTE, these have to be managed by employers themselves. When employers have been enjoying de jure flexibility, why de facto flexibility, which is costly? So, FTE clearly is not an attractive option.

Trade unions are agitated due to several reasons. FTE has been introduced through an executive order and not through Parliament, which means that the Parliamentary process has been sidelined. Further, having ratified the Tripartite Consultation (International Labour Standards) Convention, 1976, the government is duty-bound to consult trade unions before effecting labour law reforms, but it did not do so, hence it is violating the said International Labour Organisation (ILO) Convention. More importantly, they contend that FTE legalises the “concept” of flexible labour. Lower employment tenure and fluctuating employees attract less or no human capital investment, which can have adverse outcomes, such as accidents, poor re-employability, etc. They apprehend that the option of FTE is more likely to encourage cost-conscious employers to resort to it more often, and hence the share of permanent workers will steeply decline in the future.

The more serious issue with FTE in India is that lawmakers did not apply their mind while drafting regulations concerning FTE. FTE regulations generally stipulate three aspects, viz. material and objective reasons for resorting to FTE, maximum number of successive FTEs, and cumulative duration of successive FTEs.

Objective and material conditions for the FTE option include replacement of workers on long leave (for example, maternity leave) or not available (due to litigating against their dismissals), seasonal activity of business, exceptional rise in business, etc. Many countries stipulate minimum and maximum periods of FTE, cap the number of successive renewals, and determine the cumulative duration of successive FTEs. China has even tougher regulation on FTEs. If any employee works for one year without a written contract, such a worker will be deemed to be enjoying open-ended contract. In India, in 2011-12, as many as 79% of non-agricultural wage workers had no written contract, which is an anomaly that has not so far raised concerns on the part of the policy-makers. Further, after two successive renewals subject to certain conditions, the employee concerned will enjoy open-ended contract. Some even prescribe the proportion of FTEs in total employment (for example, Norway limits it to 15% or one employee in enterprises employing less than 14 people). The FTE regulations in India do not carry any of these safeguards for workers. Apart from other contentions of trade unions, this is a bad law.

It has to be remembered that the previous NDA government had introduced FTE in 2003, and owing to trade union protests it was removed by the UPA government in 2007. What will happen this time?

K R Shyam Sundar, Professor, HRM Area, XLRI-
Xavier School of Management, Jamshedpur


Why does the value of Indian rupee fall?

Shreeprakash Sharma
The Hans India
Published on September 22, 2018

Over the past a few weeks the value of Indian rupee has been plummeting to an all-time low against the US dollar. Falling of the Indian currency rupee on the day to the level of as nadir as that of 73 vis-a-vis the US Dollar is a burning question on everybody’s mind and there is a big brouhaha and fear about it among the common masses and the policy makers alike. Because consistently falling value of rupee means less purchasing power in the hands of the people as well as the government.

Pablo Picasso once had said, “I would like to live as a poor with lot of money.” In fact, falling purchasing power of rupee is a very weird situation which goes on making the nation financially weaker and weaker and people poorer and poorer. It has also its adverse effect on the prospects of international trade and foreign currency reserves.

That is why the whole nation is overwhelmingly occupied with the concerns of wide socio-familial and politico-economic repercussions of the consistent fall in the value of the rupee which common masses are bound to bear the brunt of.

Ever wondered why the value of rupee slides down so frequently against the American dollar? The depreciation of the Indian rupees to the newer level every day over a couple of months has brought the entire nation to the brink of a huge financial crisis and sullied global image.

In fact, the modus operandi of the determination of value of the Indian Rupee with respect to the US dollar is no way different from the day-to-day experience of witnessing the fluctuations in the prices of various consumer goods and grocery items which we purchase from the neighbouring grocery shops and vegetable market. With the more supply of onion, for example, on some day, its price falls down while with the fall in the supply of onion the common masses are helpless to purchase it at increased price.

How is the exchange rate is determined?

The exchange rate is called as the rate at which the currency of a country is purchased and sold for the currency of a particular foreign country. For example, the rate at which Indian rupee is exchanged for the US dollar is called as the exchange rate of the Indian rupee with that of the US dollar. This rate of exchange of the rupee against the US dollar is determined by the demand and supply of the US dollar in our country.

It is worth knowing that the US dollar is primarily demanded by importers and the Foreign Institutional Investors (FIIs). The US dollar is also demanded for the Foreign Direct Investment (FDI). Foreign Institutional Investors (FIIs) put their money in the stock market of the domestic market while Foreign Direct Investment (FDI) is the capital which is invested in the companies of the domestic country.

The supply or earning of dollar comes mainly from the exports of goods and service and the inflow of remittances by the Non-Resident Indians (NRIs). That is why when the importers demand more of the dollars for the international payments than their supply, the rupee weakens vis-à-vis dollar. Consequently, the value of Indian rupee falls down against the US Dollar (US$).

On the contrary, with the fall in the demand for dollars, which is again driven by myriad factors, the value of rupees appreciates and that of dollars decreases. No doubt, besides the fundamental theory of market forces of demand and supply which is also called as the price mechanism, there are more other factors like those of social-political, diplomatic and foreign policies of a country which play substantial role in the determination of the value of Indian rupees against US Dollars -

Price of crude oil

With the fast development and trajectory of high rate of growth of the Indian economy, the demand for petrol and petroleum products has been consistently rising and as a result we require importing more of crude oil annually from various foreign countries. Oil is the second largest fuel after coal. India imports close to 70 per cent of its oil requirements from more than 8 countries. The rest 30 per cent of oil is met through domestic production.

Saudi Arabia and Iran top the list of the countries from where we import most of the crude oil. The prominent oil companies of India require approximately 330 million dollars every day for the import of crude oil and gas and this figure very strikingly shows how much dollars we require every month to purchase it from the various oil producing countries of the world. Thus, increase in the demand for the dollar leads to its appreciation and decrease in the value of the Indian rupees.

Current Account Deficit (CAD)

The current account shows the records of exports and imports of both the material goods and services of a country with the rest of the world. Export and import of goods are totally different from the export and import of services. While goods are tangible and called as merchandise or visible trade, and of which records are available at the ports. Services are non-tangible and called as invisible trade the records of which are not available at the ports.

In fact, the current account deficit is the difference between the visible and invisible exports and visible and invisible imports of a nation with the rest of the world. Shipping, banking, insurance, investment and compensation of employees are main items which make the parts of services that are exported and imported by a nation with the foreign countries.

When our receipts are less than the payments which we make for the purchase of both the goods and services we face the deficit in our current account. As per the latest data, India’s current account deficit has increased to 15.8 billion US $ or 2.4 percent of the GDP. The drastic decrease in the exports has added fuel to troubled waters. They say that unnecessary delay in the clearance and approval of various development proposals too has aggravated the situation and we face the problem of dollar crunch. Consequently, we are forced to spend from the foreign exchange reserves for making the payments for all the imports.

What makes the current account deficit more distressing is the ever-increasing import bill of oil and gold. The heavy purchase of gold and crude oil puts heavy pressure on the foreign exchange reserves and finally our current account deficit goes on worsening. That is why there is unprecedented rise in the demand for the dollars which results in the appreciation of its value and finally the value of rupee weakens.

Withdrawal by investors

In the recent past, numerous development projects that were to be started in the country have been withdrawn by the foreign investors due to problems like uncertain delays in the approval of proposals and bottlenecks in the acquisition of land. So many such other projects which could not be approved by the government of India were withdrawn and due to which demand for the dollar abruptly went up.

In case of approvals of these proposals, India would have received huge investments. Consequently, the demand for the Indian rupee and its values would have substantially increased. Because when any foreign company invests in India it needs rupees in exchange of US Dollar for the various transactions in the country.

Increasing import bill of India

In the post reformed milieu of the Indian economy, the import bill has been consistently rising every year. The share of gold import is one of the important factors. The huge rush for gold, brought about by the preference of the people to invest in it, has further worsened and weakened the Indian rupees against the US dollars.

According to the latest survey, the gold import alone makes the 10 per cent of India’s import bill. This is really a surprising fact that 141 tons of gold were imported in April 2013 which increased to 162 tons in the month of May this year. The import of gold has increased to 750 tons in the current year of 2018. This consistent increase in the demand for gold means a rise in the demand for more US dollars in comparison with the rupees. That is why the value of the US dollar appreciates and that of the Indian rupees goes down.

Slump in the Indian economy

In the recent years the overall production in all the three sectors of the Indian economy - primary, secondary and tertiary has recorded very poor growth and consequently the production in them has substantially gone down.

Investors from the foreign countries do not find India a country of lucrative businesses. Decrease in the export, brought about by fall in the production in agriculture, manufacturing and mining, leads to decrease in the earning of dollars. This finally ends up increasing the demand for dollars and raising its value against the Indian currency.

Problem in the equity market

In the critical condition of consistent fall in the value of rupee against the dollar investors prefer to deposit their money in the safe havens of US treasuries, Swiss franc, gold and so on to avoid losses to their investments. This alarming situation of shifting of investment from India to other destinations leads to redeeming of their investments from the country, and consequently the demand for the dollar goes up which brings down the values of rupee.

Increasing fiscal deficit

Generally fiscal deficit shows the dependence of a country on the foreign debt to match the expenses which exceed the revenues of the government. It is the estimated borrowing by the government to meet the increased expenditures in a year. For this the government borrows from the international financial institutions like World Bank and the International Monetary Fund. It is often expressed as the percentage of the GDP.

It shows the excess of expenditure over the government receipts other than borrowings. Greater fiscal deficit means greater borrowings. For the payment of all these foreign debts along with interest accrued to them, we require dollars and this ends up raising the value of dollar vis-à-vis the Indian rupee.

Measures to stop the fall of rupee

The economic phenomenon of a weak rupee is a very big challenge for the Indian economy because it badly affects the economic condition of both the people and the nation. Imports become dearer and that is why the prices of essential commodities increase manifolds. Standard of living of the people falls down. And the nation gets entrapped in a debt trap. The government of India and the Reserve Bank of India (RBI) are responsible for solving the problem of weakness of rupee.

What we urgently require to restrain the rupee from the further sliding is to bring down the imports of the goods and services. More imports simply mean more requirements of the dollars. It means more demand for the dollar and which finally weakens the value of the Indian rupee.

Production in all the sectors needs to be increased. The boost in the production would help us on two fronts. First, we do not need to import more to meet the additional growing demand for the goods and services and secondly, our exports too would get a boost. This would help us in earning the much-needed dollars from the exports to the various countries in the world.

Bringing down the demand for petrol and petroleum products can too play a vital role in strengthening the rupee against dollar because in that condition we would be left with more of dollars which we otherwise spend for their import every year.

So, the fluctuations in the value of Indian rupee are more the matter of our life style and social status than anything else. It is also more the matter of the economic health of the country than the fluctuations in the prices of crude oil in the international market. Anyhow, the mechanism of ups and downs in the value of the Indian rupee is matter of sheer economics which needs to be read between the lines.

Shreeprakash Sharma - The author is Principal,
Jawahar Navodaya Vidyalaya, Dinthar Veng, Mamit

 Source: Internet Newspapers and anupsen articles


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