Banking News dated 25th September 2018

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Banking News: September 25, 2018


Cross-Selling by Banks:  Commission on cross-selling of Insurance  Business should not be paid to Employees

Cross-Selling by Banks:
Commission on cross-selling of Insurance
Business should not be paid to Employees

Vinson Kurian
The Business Line
Published on September 25, 2018

Thiruvananthapuram, September 24: The Department of Financial Services, Ministry of Finance, has advised the heads of banks that the commission on cross-selling business should be paid to the bank, and not the employees.

Such commission should be treated as an income for the bank, a circular from the Department and addressed to the Chairman, State Bank of India, and MD & CEOs all public sector banks, has said.

Advice from CVC

The letter flags the topic of 'public sector banks' engagement in cross-selling of insurance business on the basis of an advice from the Central Vigilance Commission (CVC).

The department was told to examine the consequences of cross-selling on bank's own functioning and devise/draw up suitable guidelines to guard against 'faulty policies' being followed by 'certain banks.'

CVC had alerted the department to instances of cross-selling of products of insurance companies in which the officer concerned often takes resort to 'unethical acts' in order to achieve the target.

It was on perusal of the matter that the department came round to the view that the commission on cross-selling business should not be paid to the bank employees.

"They are full-time employees and are paid fixed salaries. Commission on this business should be paid to the bank and should be its income," it said and requested banks to evolve suitable instructions/guidelines in the matter.

Staff union 'happy'

The All-India State Bank of India Staff Federation said it had passed a resolution that the commission earned by award staff from cross-selling should be deposited in the profit of the bank.

The resolution was passed on April 20 during an executive committee meeting held in Kerala, according to A Raghavan, General Secretary, State Banks' Staff Union, Kerala Circle, and Member of the Central Committee, National Confederation of Bank Employees.

"We are happy about the Centre taking cognisance of the matter and issuing a notification dated 10 September 2018, to the chairmen of all public sector banks," Raghavan said.

Banks moving away from conventional banking and focussing on cross-selling has been detrimental to its interests and against development banking role it has been playing all along.

"There is a need for a national debate on various financial sector reforms and we hope the Centre will come forward to invite United Forum of Bank Unions, the umbrella organisation of nine unions in the banking sector, for a dialogue," Raghavan said.


BNP Paribas Cardif to reduce
stake in SBI Life insurance

The Business Standard
Published on September 25, 2018

New Delhi, September 24 (PTI): BNP Paribas Cardif, the joint venture partner in SBI Life Insurance, Monday said it may consider reducing its stake in the company to ensure compliance with minimum public shareholding requirement in accordance with applicable law.

As per the law, a company should have minimum public float of 25 per cent. "BNP Paribas Cardif has also confirmed that it is yet to make any firm decisions regarding the size, timing or nature of such potential reduction in their shareholding of the company," SBI Life said in a filing to stock exchanges.

SBI Life was 74:26 joint venture between India's largest lender State Bank of India (SBI) and BNP Paribas Cardif (BNPPC) -- the insurance holding company of France.

Following the initial public offer last year, 12 per stake stake was sold to public. As a result, SBI sold 8 per cent stake and BNP Paribas reduced it by 4 per cent. SBI and BNP Paribas ended up with 62.1 per cent and 22 per cent stake, respectively, in the firm after the IPO.


SBI duped of Rs One Crore, several farmers
left to face the music: Check what happened

The Zee-Business News
Published on September 24, 2018

A jeweller in Haryana has managed to double cross the Dhand branch of State bank of India in Haryana and flee with Rs 1 crore

New Delhi, September 24: A jeweller in Haryana has managed to double cross the Dhand branch of State bank of India (SBI) in Haryana and flee with Rs 1 crore. Not just the bank, around 25-26 farmers of the area were also fooled by the man identified as Vijay, Hindi Daily Dainik Bhaskar reported today.

The jeweller first gave the farmers counterfeit gold and asked them to apply for Gold loan. Later, the bank got the counterfeit gold verified by the same jeweller who told the bank that they were original. When the farmers got the loan, the jeweller took all the money from them and give them little interest, the report said.

The jeweller is now absconding with Rs 1 crore, while the farmers are named as borrowers in the official record. When the bank failed to recover money, it got the gold checked and found them to be counterfeit.

One of the victim farmers told the Hindi daily that Vijay had approached them and managed to convince them to get the loan on his gold. The accused also told the farmers that if he failed to pay the interest on the loan, only his gold will be seized. The farmer doesn't have any certificate showing the gold was not counterfeit, nor do any other victims have.

Another victim said he had taken the loan in 2016 but the jeweller never paid back anything.

Taking a Loan or Mortgaging Gold?

For those who do not know, be aware of the fact that whenever someone approaches them to use their IDs (Aadhaar, PAN, others), they should say no, or else they will be held liable for any loss the bank suffers.


Another fraud escapes like Nirav Modi!
Nitin Sandesara flees to Nigeria without
 paying Rs 5,000 crore to the banks

The Business Today
Published on September 24, 2018

The loans were sanctioned by a consortium of banks like Andhra Bank, UCO Bank, State Bank of India, Allahabad Bank and Bank of India. ED has attached assets worth over Rs 4,700 crore of the company

New Delhi, September 24: Nitin Sandesara, the prime accused behind a Rs 5000-crore bank fraud and money laundering case, seems to have given the Indian authorities a slip once again. The owner of Gujarat-based Sterling Biotech, who had reportedly been arrested in Dubai last month, is no longer in the UAE.

Top sources in the Central Bureau of Investigation (CBI) and Enforcement Directorate (ED) told The Times of India that Sandesara and his family members, including brother Chetan Sandesara and sister-in-law Diptiben Sandesara, are believed to be hiding in Nigeria. They added that India has not signed any extradition treaty or a Mutual Legal Assistance Treaty with Nigeria, so bringing them back home would be difficult.

"There were reports that Nitin Sandesara was detained by UAE authorities in Dubai in the second week of August. It was incorrect information. He was never detained in Dubai. He and other family members probably left for Nigeria much before that," an officer told the daily. It is not known if the Sandesaras travelled to Nigeria on Indian passports or that of some other country.

Nonetheless, in a clear attempt to cover all bases, the investigation agencies are reportedly planning to send a request to UAE authorities asking them to "provisionally arrest" the Sandesaras if they are seen there. Meanwhile, efforts are on to get Interpol red corner notices issued against the accused.

The ED had registered a money laundering case against Sterling Biotech and its promoters, the Sandesara brothers, last October, taking cognisance of a CBI FIR on charges of alleged corruption. The family has been absconding ever since. In addition, the investigative agencies booked the Vadodara-based pharmaceutical firm's directors including Dipti, Rajbhushan Omprakash Dixit, Vilas Joshi, chartered accountant Hemant Hathi, former Andhra Bank director Anup Garg and some unidentified persons for cheating banks of Rs 5,000 crore.

The probe agencies have alleged that the accused, on the "basis of false and fabricated" documents, had fraudulently obtained credit facilities from various banks, which subsequently turned into non-performing assets (NPAs).

"The loans were sanctioned by a consortium of banks like the Andhra Bank, the UCO Bank, the State Bank of India, the Allahabad Bank and the Bank of India," said the ED, adding, "Till date, the banks have declared as fraud, various outstanding loan accounts in respect of various companies of Sterling Group including Sterling Biotech Ltd, Sterling Port Ltd, PMT Machines Ltd, Sterling SEZ and Infrastructure Ltd and Sterling Oil Resources Ltd."

The agency further alleged that the siphoned off loan funds were used to purchase a "fleet of luxury cars", jewellery, "buy properties in the names of various companies", purchase shares of Sterling Biotech Ltd and Sterling International Enterprises Ltd to fuel market speculation, and "project a healthy picture of the companies".

In June, the ED attached assets worth over Rs 4,700 crore of the company - the attachment amount was the second highest so far this year after the Nirav Modi-PNB fraud case. The agency has also already arrested Dixit, Garg and Delhi-based businessman Gagan Dhawan, who had allegedly helped the accused directors. However, according to the officials, bringing the Sandesaras back to India to face criminal proceedings was important as they had diverted huge amounts of money abroad.

According to the filed chargesheets, the Sandesaras set up more than 300 shell or benami companies in India and abroad, which were allegedly used to "divert and mis-utilise loan funds". They controlled their shell firms through dummy directors, who were/are employees of various companies of the Sterling group. Bogus sales and purchases were shown between the benami companies and the Sterling group firms to divert loans and inflate their turnover, which in turn was leveraged to obtain more bank loans.

Officials added that the modus operandi of the Sandesaras involved manipulating balance sheets, inflating turnover and insider shares trading.


FM to hold the annual review meeting of
PSBs on Tuesday to review performance

Somesh Jha
The Business Standard
Published on September 25, 2018

New Delhi, September 24: Finance minister Arun Jaitley will hold the annual review meeting with chief executives and the top management of public sector banks (PSBs) on Tuesday. This is the first meeting that the government is holding with public sector bankers, following its announcement to merge Bank of Baroda, Dena Bank and Vijaya Bank to create the country's third largest bank after State Bank of India and HDFC Bank.

The day-long meeting is set to review the measures taken by PSBs to recover bad loans, financial performance in the present financial year, reform measures and financial inclusion. The Finance Minister is expected to deliver his opening remarks, which will be followed up by review of PSBs.

The bankers will hold discussions with Ministry of Electronics and Information Technology, Ministry of Rural Development, Ministry of Ministry of Micro, Small and Medium Enterprises (MSME) and Ministry of Housing and Urban Affairs officials. The bankers will particularly discuss steps to boost MSME and housing loans and discuss digitisation initiatives with these ministries.

The Banks Board Bureau (BBB) will also hold an interaction with public sector bankers and discuss a leadership development programme in a bid to prepare future leaders in top positions in state-owned banks. The government's discussions with bankers will also revolve around the capital needs of PSBs in the coming quarters.

As a part of the Rs 2.11-trillion capital infusion programme announced last year, the government will infuse Rs 650 billion in this financial year. The government had infused around Rs 900 billion in PSBs last financial year. As per an analysis done by ICRA, the Tier-I capital ratio of 11 PSBs stood at 7.5 per cent, as against the minimum regulatory requirement of 7 per cent indicating the limited ability of PSBs to absorb further losses.

"ICRA estimates the PSBs to require capital of Rs 1.2-1.8 trillion during FY2019, if the banks were to meet regulatory capital ratios including capital conservation buffers (CCBs)," Anil Gupta, Vice President, Financial Sector Ratings, ICRA has said. In its submission to a Parliamentary panel recently, the Indian Banks' Association (IBA) said it wants the government to do a "realistic assessment" of capital required by public sector banks (PSBs) as the lenders have posted losses due to a surge in bad loans even after a Rs 2.1 trillion recapitalisation package was announced by the Centre last year.

So far, in the present financial year, the government has infused around Rs 136 billion in six PSBs, including Punjab National Bank, Andhra Bank and Allahabad Bank, mainly on account of maintaining their minimum capital requirement at the time of paying interest towards bond holders of Additional Tier 1 (AT-1) bonds. In the first quarter of this financial year, PSBs recovered non-performing assets (NPAs) worth Rs 365 billion - almost half of the amount recovered in previous financial year (Rs 745 billion).

The net losses of PSBs reduced 73 percent in the first quarter to Rs 166 billion compared to Rs 627 billion the previous quarter. The provision coverage ratio (PCR) of PSBs stood at 63.8 percent in the first quarter of this financial year, 6.3 percentage points higher than a PCR of 57.5 per cent in 2014-15, a year before the RBI initiated its asset quality review. The PCR refers to the proportion of bad assets that has been provided for. Earlier, this year, the finance ministry had met 11 PSBs under the Reserve Bank of India's prompt corrective action (PCA) and sought an action plan to come out of the framework.


'Currency in circulation slows down since May'

The Business Line
Published on September 25, 2018

Decline is not just seasonal, finds report

Mumbai, September 24 (PTI): The currency in circulation (CiC), which increased exponentially after the note ban in November 2016 under which as many as 99.9 per cent of banned notes returned to the system, has seen some slowdown in expansion since May this year likely due to higher fuel prices and Reserve Bank of India’s intervention in forex market, says a report.

Currency in circulation increased from Rs 9 trillion in January 2017 to Rs 19.5 trillion as of September 14 this year. But since the beginning of May 2018, the same has been in the range of Rs 19-19.6 trillion, says the report. “One possible reason can be people may be cutting back discretionary spending with the recent spurt in fuel prices, mostly in rural areas,” says SBI Research in a report Monday.

The other factor could be to the extent RBI selling dollars directly from its foreign exchange reserves to designated dealers/banks thereby withdrawing rupee resources in return, thus reducing currency in circulation, it said. The report, however, said such intervention, since taking place between banks, should not have major impact on systemic liquidity.

The third reason, though insignificant, could also be RBI replacing soiled notes, it added.

The decline in CiC is a seasonal phenomenon but this time it seems the decline is more than just seasonal and has continued beyond August, it noted. The Reserve Bank’s weekly data for the last 10 years shows a pattern in CiC decline in the last fortnight of every July, which is partly explained by the low cash demand from the agriculture sector.

The demand for currency increases after the monsoons as the harvesting begins in October followed by Rabi sowing, eventually giving rise to cash requirement. The festive season also brings along its natural demand, which gets accentuated with buying of gold, automobiles, increasing the demand for currency, the report added.


Yavatmal: Kishore Tiwari for
 probe against SBI staffers

The Times of India: Nagpur News
Published on September 25, 2018

Yavatmal (Maharashtra), September 24:  Kishore Tiwari, chairman of Vasantrao Naik Shetkari Swavalamban Mission (VNSSM), has demanded a thorough magisterial probe into allegations levelled against staffers of State Bank of India and its branches across Vidarbha and Marathwada.

SBI’s decision to pull down shutters of its Patanbori branch in Yavatmal district following alleged abuse of branch manager Ramakant Sharan by Tiwari has caused inconvenience to hundreds of customers.

According to Tiwari, SBI’s Patanbori branch is the only banking institution for over 100 villages in the vicinity. Tiwari said sitting ZP Member Gajanan Bejangiwar had invited him at the bank for a meeting of farmers who alleged harassment by Sharan.

“In fact, I tried to pacify the agitating farmers including pregnant women and senior citizens. It is true I uttered some words against the arrogant branch manager,” he said and added how can the local authority lock down the bank for remarks made by me to support needy farmers?

Meanwhile, it is learnt that Sharan has tendered his resignation to the authorities but the reason for his decision is yet not clear. The resignation is yet to be accepted.

According to Assistant General Manager of SBI Jayantrao Godkhande, he had promised the agitating farmers in Patanbori of resolving their issues in seven days. “Thereafter they dispersed peacefully,” he said.

“However, SBI Officers’ Association took serious note of remarks made by Tiwari and decided to go on indefinite strike to protest interference in day-to-day functioning of the bank by local politicians,” said Godkhande.


India’s near-Lehman moment

Mythili Bhusnurmath
The Times of India
Published on September 25, 2018

The crisis at IL&FS must be used to
address fault lines in the financial sector

 The coincidence is uncanny. Almost to the day 10 years ago, when trouble surfaced at iconic US investment bank Lehman Bros, leading to its bankruptcy on September 15, 2008, India had its own near-Lehman moment. One of our largest infrastructure finance companies, Infrastructure Leasing and Financial Services (IL&FS), a “systemically important core investment company” registered with the Reserve Bank of India (RBI), began to implode. At first slowly and now, more rapidly!

Starting with a default on its Rs 1,000 crore bond repayment to Sidbi (Small Industries Development Bank of India), IL&FS and its non-banking finance subsidiaries have begun to renege on one repayment after another. By Friday last, fears that mounting troubles in the IL&FS group might be symptomatic of larger problems in the non-banking finance company (NBFC) space and, in turn, pose a serious threat to financial stability saw markets plunge more than 1,100 points intra-day.

The unstated fear was that thanks to its inter-linkages with the financial system IL&FS, like Lehman before it, may drag the entire financial system and the larger macro-economy down with it.

For now the storm seems to have abated. Latest reports speak of Orix Corporation, the diversified Japanese financial services company and one of the largest shareholders in IL&FS, being willing to up its stake; of government and RBI pitching in to help with speedy sale of IL&FS assets. But these are only band-aid solutions that cannot, and will not, last. We need to look deeper and address the cause, rather than the symptom, of the disease.

“Never waste a crisis,” said Rahm Emanuel, former US President Barack Obama’s Chief of Staff. Sound advice! The crisis at IL&FS has exposed a number of fault lines. To begin with, the ills of the financial sector go much beyond the much-maligned public sector banks. It is the familiar story of failure on multiple fronts: the regulator Reserve Bank of India (RBI), credit rating agencies who downgraded IL&FS much too late, auditors, and most importantly, the board of IL&FS.

Take these one by one. IL&FS is a ‘Core Investment Company’, a holding company, whose operations are restricted to investments in group companies. It is registered with RBI as ‘systemically important’, that is its financial health has ramifications for the financial system and the economy. Given that one of the biggest learnings of the 2008 crisis is of the dangers posed by shadow banks like IL&FS, one would have expected RBI to keep a close eye on IL&FS, particularly in view of its excessive leverage. But, sadly, it failed to do so!

If RBI bears the main responsibility for the unfolding events at IL&FS, it is not the only one. Rating agencies have, again, been caught sleeping on the watch. Ratings have been rapidly downgraded; in many cases after the event.

The problem goes deeper. Rating agencies are technically under the Securities and Exchange Board of India (Sebi); but are not subject to close regulatory oversight. Worse, under the current rating model, fees are paid by the rated entities. There is, thus, a huge incentive to give generous ratings for fear of losing business. Until we address this basic flaw in the rating model, ratings must be taken for what they are worth: very little!

Company auditors are no less culpable. The annual accounts of IL&FS and its close to 200 subsidiaries were audited by some of the biggest names in the profession. Yet none thought it fit to red flag the growing dependence on short term debt and the excessively high leverage.

The biggest opprobrium must, however, be reserved for the board of IL&FS. As with Satyam Computers and more recently ICICI Bank, IL&FS had a star-studded board. Yet Ravi Parthasarathy, CEO from 1989 till July 2018, seems to have run the company like his fiefdom. Not only were no questions asked, so it would seem, he was handsomely rewarded for presiding over the virtual destruction of IL&FS. According to the latest annual report, his last annual pay was close to Rs 25 crore – 141 times the median salary of the IL&FS employee.

Each of these entities, RBI, rating agencies, auditors and the board, must share the blame and take corrective measures. But there is a larger factor at play that must be factored in while considering any kind of rescue package: the inherent flaw in the extant model of infrastructure financing. This makes any short-term solution akin to kicking the can down the road. Infra projects have long gestation periods. They require long term funding that neither banks nor NBFCs can provide.

Moreover, issues related to land acquisition, environmental clearance, policy flip-flop, political interference and rapidly changing external dynamics make infrastructure financing particularly risky. Cost and time overruns are inevitable. Unless we address these we will not be able to ring-fence either banks or NBFCs from the risk associated with financing infrastructure. Look no further than to the erstwhile IDBI, ICICI and IDFC that were initially set up as term-lending institutions and then had to be converted into banks to save them from going down under.

It is imperative that before we consider any solution, especially bailout with taxpayer money, RBI must make an informed assessment of IL&FS’s inter-connectedness (and, hence, risk of systemic failure). Remember, any solution will prove short lived unless we address fault lines all around, including underlying risks in infra financing.


Mega bank mergers and the future of reforms

M S Sriram, The Mint
Published on September 24, 2018

For a while it seemed Modi government had a reforms plan
for the banking system. But now it is left with mere optics

Bengaluru: When the Modi government took charge in 2014, it was set to prove its admirers right, and the sceptics wrong, on banking reforms. The then Governor of the Reserve Bank of India (RBI), Raghuram Rajan, was halfway through his tenure and had independently started the clean-up of the banking system by taking action wherever the remit of the RBI worked.

When it came to matters beyond the RBI’s powers, Rajan worked with the government. The clean-up of balance sheets; recognition of non-performing assets; taking pro-active steps in default cases and strategic structuring of stressed assets were some of his initiatives. Rajan had also taken the initiative to set up the PJ Nayak Committee, which looked into the governance of public sector banks. The committee had drawn up a road map that was contemporary and relevant. The report was submitted just after the new government came in.

Good beginning

One of the earliest large initiatives by the Modi government was the Prime Minister’s Jan Dhan Yojana, an ambitious financial inclusion plan rolled out through the public sector banks. Before completing a year in office, the government had called in all chiefs of the public sector banks to a two-day Gyan Sangam in Pune. By August 2015, there was even more hope in the minds of the admirers. The role of the chairman and managing director was split to have a non-executive chair, as suggested by the Nayak Committee. The government announced that they would look at hiring professionals laterally (from outside the public sector banking system) at least for five large banks. Why, the government actually appointed managing directors from the private sector for two large banks.

In February 2016 the government announced the setting up of the Banks Board Bureau (BBB) headed by Vinod Rai, the former Comptroller and Auditor General of India. This was followed up with another Gyan Sangam in Gurgram where another round of strategizing was done. The reform of the banking system was well on track.

Back to Rajan. In April 2014, two new private sector banks were licenced. Rajan was putting the recommendations of the Nachiket Mor Committee into action by putting up documents on the future structure of banking in India, inviting applications for new type of banks. By September 2015 there were announcements that RBI had given an in-principle licence to 11 payments banks and ten small finance banks—thereby initiating a significant change in the balance between privately-owned banks and the state-owned banks. He was also changing the space for inclusive finance by encouraging private banks to do business profitably while not removing focus on the requirements of the priority sector (including agriculture and micro and small enterprises sector). There were structural and market friendly responses to each of these issues that needed to be addressed.

The only aspect that did not sound quite like reform was the PMJDY programme, which was rolled out without business considerations, on a whim, with implementation and saturation as the focus. But that was also seen positively as an agenda towards greater inclusion, as an investment in the architecture for technology enabled direct benefit transfers which would also help the banking system.

So far, the largest sectoral beneficiary of the new government looked like the banking and financial services. It also appeared that we were well on the way to implement the recommendations of the Narasimham Committee (the first committee on financial sector set up in 1991 and the second on the banking system set up in 1998) that had suggested consolidation of banking system, withdrawal of the government and a vibrant private sector banking operating in the market place.

We already had private sector participation, we were on the road to professionalize the boards and they would hopefully lead the process of consolidation. The independent non-executive chairmen on the banks were reputed individuals and they would take charge of the governance function. While there were some issues about the sequencing of events— like the setting up of the BBB could have preceded the first appointments from the private sector—things appeared to be moving in a certain direction.

Three roadblocks

And then, three unrelated events happened. Jayant Sinha, the then Minister of State for Finance who was spearheading the reform in the banking sector, was moved to the Ministry of Civil Aviation in July 2016; Raghuram Rajan’s term as Governor ended in September 2016; and Prime Minister Narendra Modi announced the withdrawal of legal tender status for 86% of currency in circulation in November 2016. These three events took the foot off from the reform pedal.

The banking system had to play a pivotal role in the logistics of demonetization and remonetisation. All the operational and strategic focus was on getting a new equilibrium of cash in circulation; digital architecture; cash logistics and dealing with the birth of two new denominations (₹2,000 and ₹200) and the withdrawal of one denomination—₹1,000.

The banking system at this stage was under operational stress. This was followed up by the build-up of performance stress which started up in the aggressive recognition of non-performing assets—a process started under the leadership of Rajan and perused aggressively by his successor Urjit Patel. Possibly this is where the Modi government started losing the banking plot.

Dissecting the mega merger

We need to examine the current announcement of the government to merge Bank of Baroda, Vijaya Bank and Dena Bank in a continuing context of taking ad-hoc decisions without due consultation and value addition. While this high-profile decision has hit the news, do remember the government has also taken a decision to merge several Regional Rural Banks under the Phase III consolidation. This brings their overall numbers from 56 to 38. Both these decisions have been taken without due process, due diligence and with little regard to the governance processes. Therefore, there is little wonder that the markets have reacted negatively to the decision.

The approach of the government has been to tuck a weak Dena Bank with a relatively strong Bank of Baroda (BoB) and offer a lollipop of Vijaya Bank as a sweetener. At the end of it we have a relatively weaker structure. BoB declared losses in two of the last three years, but was able to absorb these because of its comfortable capital position. It has just finished a process of clean up of all known NPAs and undertaken significant re-engineering of its portfolio mix and business practices.

Vijaya Bank was one of the very few banks that continued to turn in profits when bank after public sector bank hit the red. There may be synergy in the BoB-Vijaya Bank merger, as the broad employee productivity is comparable even though the branch productivity of BoB (owing to its international footprint) is significantly higher. Vijaya Bank has 52% of its branches in the southern region while BoB has only 10% of its branches in South, thereby giving the amalgamated entity a better footprint.

But what does Dena Bank bring to the table? It adds branches in Gujarat, where BoB already has a very significant presence and then adds footprint in Maharashtra, another stronghold of BoB.

On its own, BoB is stronger in the Central Region (which covers Uttar Pradesh) and Northern Region (which covers Rajasthan). Dena Bank also adds three years of losses, a business that is not growing, and a clutter of branches in areas where BoB is already present. No person who would do a due diligence for a merger or an amalgamation would consider this to be a great buy on just these top line parameters.

Let us examine the large mergers that have happened elsewhere—ICICI Bank picked up Bank of Madura several years ago—and got a rural footprint, a footprint in the southern region and a ready priority sector portfolio that was relatively profitable. Kotak Mahindra Bank picked up ING Vysya bank recently and got a footprint and business in the southern states. While in both these cases the cultural differences were deep, they were able to manage business without value destruction. In the current instance Dena Bank being a part of this triad just does not make any sense.

In conclusion

We need to ask, who are taking these whimsical decisions under the garb of reform? If one was looking at structural reforms, the process should have continued from 2016 through now using the larger intellectual argument of the Narasimham Committee. The committee advocated 3-4 large banks but with government being a minority shareholder. The PJ Nayak committee made fundamental recommendations of bringing these banks under the Companies Act by repealing the Bank Nationalisation Act and professionalizing governance by creating a distance between the bank and the ministry. This was sought to be done through the BBB.

Whether disinvestment should precede reforms or coincide with reforms is a moot question. Given the current scenario, it is clear that reform should happen first before value is unlocked in disinvestment. Professionalisation can happen without necessarily moving towards privatization. That aspect was proved by Modi himself when power sector reforms were undertaken in Gujarat during his tenure. Unfortunately, we cannot credit his government at the centre of adequately addressing the reform process and getting the sequence right.

The BBB led by Vinod Rai had a series of recommendations for the government on how the reform process could be phased. The document put out by the first BBB as they demitted office is telling as it showcases eager intent on one side and the stonewalling by the ministry. There were ideas for reform, they were articulated by BBB. However, the work of the BBB was falling on deaf ears—which had turned deaf in the din of demonetization and a flawed roll out of GST. As the NPA monster keeps raising its head to push the banking system into deeper and deeper crisis, the government has yet again diverted its attention.

We are moving from asking hard questions on reforms to the cosmetics of announcements that the government has packaged as reforms. In this instance the government has not only got the sequence wrong, they have got the timing and the combination wrong.

Now each of these three banks will go through a charade of putting this proposal through their boards. We will find back ended justifications that lead to the front-loaded decision. We will continue to pay lip service to corporate governance; inform the stock exchanges and destroy the value of the minority shareholders. But who cares? There is little time left and some optics of reform come in handy.

(Sriram works with the Centre for Public Policy,
Indian Institute of Management Bangalore.)


RBI to Supreme Court of India:
“Do not interfere in our decision”

Nadja Eriksson
The Coinnounce Online
Published on September 23, 2018

New Delhi, September 23: The Reserve Bank of India (RBI) has recorded an oath with the nation’s supreme court in light of one of the petitions against its crypto banking ban. The central bank allegedly contends that it has acted inside its capacity and that none of the petitioners have demonstrated sensible grounds for the supreme court to intercede.

No Sensible Grounds

Last week, the Supreme Court of India was booked to hear the majority of the petitions against the crypto banking ban by the nation’s central bank, the Reserve Bank of India. Be that as it may, the case was put off the second week in succession from the first hearing date of Sept. 11. As indicated by industry members, the court is currently planned to hear the case on Sept. 25.

Because of a petition recorded by the Internet and Mobile Association of India (IAMAI), the central bank documented a testimony with the supreme court on Sept. 8, Inc42 provided details regarding Sept. 21. “Inc42 has the duplicate of the petition documented by IAMAI and also the reaction recorded by RBI on September 8, 2018.” In its affirmation, the central bank contends that the IAMAI petition, alongside different petitions testing its ban, “isn’t viable either in law or on actualities and, consequently, subject to be rejected all things considered,” the distribution noted.

Since the RBI issued its April 6 circular banning banks from giving administrations to crypto organizations, various petitions have been documented against the ban. They assert that the central bank’s activity “disregards Articles 19 (1) (g) and 14 of the Indian Constitution,” which “will prompt the conclusion” of influenced firms, the news outlet clarified. Be that as it may, the RBI point by point in its affirmation: "The impugned circular and the impugned statement neither violate the right to equality guaranteed under Article 14 or the right to trade and business guaranteed under Article 19 of the Constitution…The petitioner cannot seek to exercise the extraordinary jurisdiction of this Hon’ble Court to avail a right which they do not have."

RBI’s reaction additionally peruses, “There is no statutory right, significantly less an encroached one, accessible to the petitioner to open and keep up bank records to exchange, put or arrangement in virtual currencies.” furthermore, the central bank asserts that IAMAI and others “haven’t got any sensible or valid ground for impedance by this court.”

RBI Safeguards its Circular

The central bank contends that its April 6 circular is in accordance with its three past explanations in regards to cryptocurrencies – one of every 2013 and two out of 2017. Calling the circular a fundamental advance, the RBI guarantees that cryptocurrencies are related with different dangers, for example, absence of client insurance, high unpredictability, weakness of wallets and trade houses to digital assaults, tax evasion, and so on,” the news outlet passed on.

“Not at all like a money which is characterized as something that can be a medium of trade, a store of significant worth and a unit of record,” the central bank attested that cryptocurrencies, “given their unpredictability, absence of inherent esteem and low selection, fulfil none of these criteria.” Accentuating that “Their esteem is only gotten from the gatherings to a transaction willing to pay a specific sum” for them, the RBI kept up: "The impugned circular and the impugned statement have been issued in a manner that is consistent with the powers conferred on the RBI by the law and the same are legal and valid."


Fear psychosis:
Amit Shah’s anti-Bangladeshi pitch won’t
help domestic politics or foreign policy

Editorial: The Times of India
Published on September 25, 2018

BJP won the 2014 general elections on the back of a positive message of hope and inclusive development. And, in the run up to 2019 general elections, Prime Minister Narendra Modi’s dedication of the Ayushman Bharat scheme to the nation, and statement that the health cover scheme transcends caste or community, is also along these lines.

However, BJP president Amit Shah, who has characterised migrants as “infiltrators” who are “termites”, has struck a contrary note by invoking a politics of fear and paranoia.

Shah asserted, extraordinarily, that several crore “infiltrators” have entered the country and that after winning the 2019 polls BJP would identify each and every one of them. Shah’s repeated statements around this theme suggest that BJP plans to make the ‘illegal Bangladeshi’ the Enemy No.1 and whip up passions around this issue.

Shah’s negative tactic elicits comparison with Trump’s characterisation of Mexicans as “rapists” in the US.

If the idea here is to appeal to the “base” of BJP’s electoral support, then it’s worth noting that Trump’s current popularity is declining and a strategy of appealing only to the “base” is yielding diminishing returns. The core vote alone won’t be enough for BJP in 2019.

Besides, Shah’s tirade against illegal infiltrators risks being exposed as a gimmick and ruining relations with Bangladesh. Although there’s no proof that crores of illegal Bangladeshis reside in India, even if one takes Shah’s statements at face value there is still the question of what is to be done with these people.

India isn’t China in that they can’t all be herded into vast detention camps – it does have a democratic Constitution. Nor does Bangladesh recognise large scale migration to India after 1972; it is hardly likely to take back anyone India chooses to deport. These are stubborn realities that cannot be conjured away.

In fact, Shah’s termite comment has already attracted Dhaka’s ire with the latter describing it as an unfortunate remark. Bangladesh is perhaps the only country in the neighbourhood today that has excellent relations with India. Credit for this goes to the Awami League dispensation in Dhaka. But if BJP continues with its anti-Bangladeshi tirade it will harm the Awami League at upcoming polls in Bangladesh and put the future of India-Bangladesh ties in doubt.

A witch hunt for enemies “within” is not going to help either domestic politics or foreign policy. Its outcome can only be a self-goal for BJP.

This piece appeared as an editorial opinion
in the print edition of The Times of India.


Lessons from the slide of the Rupee

R K Pattnaik
The Business Line
Published on September 25, 2018

Recent measures by the government will help in the short term.
For the long term, greenfield FDI and non-oil exports are vital.

Our external sector was said to be resilient. We were cruising along when, quite suddenly, the tide turned. The slide in the value of the rupee, the rising current account deficit, a substantial net capital outflow, persistent rise in crude prices, the pressure of rising protectionism in world trade, the firming up of the US growth rate and appreciation of the US dollar against major currencies have brought us a host of troubles — all interlinked and collectively leading to storm-like conditions that have resulted in India’s external sector becoming more vulnerable and less resilient.

Now the government is seized of the issue. We already have a slew of measures, including non-monetary measures like restrictions on non-essential imports (like finished electronics, certain textiles, automobiles, high-end consumer products), removing of the 5 per cent withholding tax on masala bonds, removal of the foreign portfolio investor exposure limits in corporate bonds and a freer ECB regime. The measures taken together are expected to garner $8-10 billion.

But how effective will the measures be? Essentially, the measures are of two types: restriction on imports; and encouragement of debt inflows. Import restrictions are fine as tools for crisis management but they go against the spirit of reform. Further, measures like the relaxation on “masala” bonds and ECBs amount to a quick fix just to postpone the problem. We are inviting more debt, making it easier for the debt to flow in but this carries the potential of a vicious cycle of debt servicing, higher external borrowing and higher external debt. That the external sector has been under stress is evident from the latest balance of payments (BoP) data for the period April-June 2018. The burgeoning current account deficit ($15.8 billion or 2.4 per cent of GDP) could not be financed in a non–disruptive manner as the net capital inflows were not adequate.

Capital outflows

The net inflows stood at $5.3 billion but we had a substantial net capital outflow — to the tune of (-) $8.1 billion — in the case of portfolio investments. This resulted in a depletion of $11.3 billion of the foreign exchange reserves (on a BoP basis) as against an accretion of $11.4 billion in Q1 of 2017-18. The reversal is, therefore, dramatic.

In aggregate, the outflows from the outstanding forex reserves over end-March 2018 till date (September 7, 2018) were $25.26 billion, which included a net sale of $6.18 billion and $1.87 billion by the RBI in June and July, respectively, for which data are available.

These sales clearly could not contain the volatility in the fall of rupee, given the force and quantum of the dollar exodus. The depreciation of the rupee during the financial year so far is around 9 per cent when the rupee moved in the range of 64.92 and 72.75 against the US dollar.

Another important aspect is the movement in India’s external vulnerability indicators, which include the ratio of forex reserves to total debt, short-term debt (residual maturity) to forex reserves, the net international investment position, and forex reserves cover to imports.

To the extent the forex reserves had declined around $25 billion over end-March 2018, assuming that other items such as external debt, import bills, and short-term debt remained at end–March 2018 levels, there could be substantial deterioration in the external sector vulnerability indicators.

The three important contributing factors for the weak rupee are: a higher oil import bill, an increase of 53.55 per cent during April-August 2018, resulting in a higher trade deficit and higher CAD; substantial outflow in the foreign portfolio segment and strengthening of the US economy in terms of higher economic growth; and increase in the Federal fund rate, making investments in the US more attractive vis-a-vis India.

Crude shock

While the external sector outlook could be guided by the global crude oil prices and hike in interest rates in advanced economies, particularly the US, coupled with the impact of trade wars resulting from increasing protectionism, it is imperative for the Indian economy to look beyond.

This means strengthening the non-oil exports. Over the years, India’s exports relative to GDP has been persistently declining. Also, income elasticity of demand for India’s export has remained stagnant and, therefore, the share of India’s export remained constant at 1.7 per cent in the world export.

In addition, as reported by the RBI in its Annual Report 2017-18, there has been “protracted stagnation in competitiveness.” Another important factor is the movement in the Real Effective Exchange Rate (REER).

At a conceptual level, increase in the REER index reflects diminishing competitiveness. Going by the trends in the movement of REER, which is showing persistently a rise in the Index, it is recognised that the rupee has been overvalued and is “associated with diminishing external competitiveness”.

However, as the RBI annual report has observed, the rise in REER in India is lower than in many economies, which include China, the Philippines, the UAE, Singapore, Thailand and Saudi Arabia. However, these economies are not seeing such a crash in their currency value as India because they do not suffer from a high CAD.

Thus, the recent measures announced by the authorities may provide some short-term relief but the sustainable solution to the problem is encouraging greenfield FDI and non-oil exports such as iron and steel, non-ferrous metal, and automobiles. Efforts should also be made to further strengthen exports of marine products and chemicals. What is important in this regard is to enhance quality-control measures.

The trend of the direction of exports is required to be shifted towards the Middle East and North Africa, apart from the US, China and the EU.

This is the long haul, and this requires clear policies and prioritisation at our end. Unfortunately, the issue is handled only when we see a fall and a crisis is presented. Good work is to be done even when the rupee holds strong, which it was a few years ago. That is the lost opportunity.

The writer, a former central banker, is a faculty member at SPJIMR

Source: Internet Newspaper and anupsen articles


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