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Banking News Dated 6th September 2018

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Banking News: September 6, 2018


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Banks may face 60% haircut on  power loans of Rs 1.80 Lakh Crore


Banks may face 60% haircut on
power loans of Rs 1.80 Lakh Crore

Joel Rebello
The Economic Times
Published on September 6, 2018


Mumbai, September 5: Banks may have to take a haircut of as much as 60% from the close to Rs 1.8 lakh crore of loans to the power sector after the Allahabad High Court denied power companies interim relief from Reserve Bank of India’s tightened NPA regulations, further impacting banking profitability, US-based brokerage Jefferies has stated in a note.


“The extent of power sector stress at the systemic level is well known. But the concern lies in the dearth of possible solutions to resolve these stressed assets. This, coupled with the urgency of lenders to find bidders, will lead to low realisation value and high haircuts for banks,” it said.

The brokerage classified 34 stressed thermal power plants identified by the ministry of power based on non-availability of fuel supply agreements, absence of long-term PPAs (power purchase agreements), cost overrun, contractual disputes and weak financial strength of distribution companies (DISCOMs).

Of these 34 stressed plants, it estimates that around 10 (total loans of Rs 39,400 crore) have already been referred to NCLT, and another eight (loans of Rs 36,500 crore) are set to be taken to NCLT.

There are some other power sector assets which are expected to be resolved outside the NCLT, totalling loans of Rs 67,000 crore while seven assets with total loans of Rs 33,500 crore.

“Of the 34 stressed thermal power assets identified by the ministry, 20 have PPAs (have been) signed for less than 50% of their capacity. A pilot scheme to secure 2.5 GW of PPA in 2018 for stressed assets received a tepid response (takers were for only 1.9GW) because of restrictive pricing clauses. At present, coal linkages are only allowed for long- and medium-term PPAs. Thus, most of the power plants don’t have adequate fuel supply arrangements, leaving them with no alternative than to go for costly e-auction,” Jefferies said.

Demand revival in the steel sector has led to an improvement in recovery for companies from the sector. However, the long-standing issues in the power sector make the chances of recovery dim. Also, though banks have mostly recognised their losses on loans to this sector, the lack of any recovery in sight means credit costs will remain elevated, Jefferies said.


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New ARC may take a load of power NPAs

The Business Line
Published on September 6, 2018


Lenders can move stressed power assets
from NCLT to Pariwartan scheme

New Delhi, September 5: Lenders weighed down by exposure to stressed assets in the power sector may soon find relief. An asset restructuring company (ARC) under the Power Asset Revival through the Warehousing and Rehabilitation (Pariwartan) scheme is to be incorporated by October.

The ARC will allow lenders to park stressed power assets facing liquidation proceedings under the National Company Law Tribunal (NCLT) route.

A decision to incorporate the ARC was taken at a meeting of the Power Minister with lenders here on Wednesday. An official present at the meeting said: “REC (Rural Electrification Corporation Ltd) made a presentation on the Pariwartan scheme before the lenders to address the issue of stressed assets.

The transformer
·       Pariwartan to be registered with the RBI as an ARC
·       It can bail out stressed power assets for 4-5 years
·       The assets will continue to be listed as NPAs in the lenders’ books
·       They will be auctioned once demand is visible

The scheme is for projects that do not have power-purchase or fuel supply agreements— some are commissioned, while some are likely to be commissioned. The scheme is meant to bail out these projects for four-five years.”

The process:

“Pariwartan needs to be registered with the RBI as an ARC,” explained the official. “Once registered, lenders will be allowed to take out stressed assets from the liquidation route under NCLT and bring them under the asset reconstruction route. The ARC will be registered in three-four weeks.”

“The ARC will comprise borrowers, power PSUs and banks, and NTPC will also be a partner. They may hold stakes in the ARC and conduct operations and maintenance (O&M),” he added.

Pariwartan is one of many solutions proposed to rescue Rs. 1.74-lakh-crore power sector assets facing liquidation, since they failed to service debt beyond 180 days. According to the proposal, once a stressed asset is identified, it will be transferred to the PariwartanARC at net book value (NBV), for which the latter will issue a warehousing receipt. The asset will continue to be listed as an NPA in the lenders’ books, which will make a provision as per the RBI’s norms for ARCs.

The asset will be managed by a professional O&M agency, preferably NTPC. The Centre will support coal supply. This will ensure value preservation of the asset and cash flow to the ARC, with a potential for full or partial debt servicing.

The asset will be auctioned once demand becomes visible. However, no asset will be held by the Pariwartan ARC for more than 60 months, the proposal noted.


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Essar Steel lender may sell loan to ARC
in a bid to save debt-hit company

Abhijit Lele
The Business Standard
Published on September 6, 2018


Two bidders for the steel company, Numetal and ArcelorMittal
India, are engaged in a prolonged court battle for the asset

Mumbai, September 5: Lenders of Essar Steel, which has bad debts to the tune of nearly Rs 500 billion, are planning to offload some of the loans to an asset reconstruction company (ARC), as they face pressure to improve the status of their loan books before the end of the second quarter (Q2) of the current financial year (2018-19 or FY19).

Two bidders for the steel company, Numetal and ArcelorMittal India, are engaged in a prolonged court battle for the asset, prompting lenders to mull such an action. Bankers said Essar Steel was a non-performing asset (NPA) for many quarters. Banks had made provisions in line with regulatory norms (over 60 per cent of the total debt).

Given the deal values for sale of steel assets under the National Company Law Tribunal process, the ARC offer — 70 per cent of the total debt — looked reasonable. If lenders are able to sale their loans to the ARC this month, it will reduce their NPA volume substantially. Money from the sale proceeds could be deployed for lending in the coming quarters, a senior public sector bank executive said.

“With slow credit growth, the interest income is also subdued,” said a banker. “We have a huge obligation to make provisions for bad loans. If bond yields harden further, the provision for erosion in value of bond may go up.” Major lenders to Essar Steel are State Bank of India, ICICI Bank, Bank of India, IDBI Bank, and Punjab National Bank. Some lenders have already sold a part of their loans to Essar Steel earlier.


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Jan Dhan Yojana: Government
doubles overdraft limit to Rs 10,000

The Financial Express
Published on September 6, 2018


The government Wednesday decided to make the Pradhan Mantri Jan Dhan Yojana (PMJDY) an open-ended scheme and added more incentives to encourage people to open bank accounts.

New Delhi, September 5 (PTI): The government Wednesday decided to make the Pradhan Mantri Jan Dhan Yojana (PMJDY) an open-ended scheme and added more incentives to encourage people to open bank accounts. Briefing reporters about the cabinet decision, Finance Minister Arun Jaitley said as the scheme has been a “runway success”, the government has decided to make it an open-ended scheme, meaning that it will continue indefinitely.

The PMJDY was launched in August 2014 for a period of four years as a national mission for financial inclusion to ensure access of financial services like bank accounts, insurance and pensions to the masses. To make the scheme more attractive, the government has decided to double the overdraft facility from Rs 5,000 to Rs 10,000, the minister said.

He further said that 32.41 crore accounts have been opened under the scheme and as much Rs 81,200 crore has been deposited in them so far. Jaitley said 53 per cent of the PMJDY account holders are women, while 83 per cent of the accounts are seeded with Aadhaar.


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Rupee slips to a new low;
touches 71.79 to a US Dollar

The Indo Asian News Service
Published on September 5, 2018


Mumbai, September 5 (IANS): The rupee plunged to a fresh record low of 71.79 to a dollar during the morning trade session on Wednesday.

Around 11.40 a.m. the rupee traded at 71.76 to a dollar before it touched 71.79 -- the lowest ever mark -- against the greenback. The rupee had earlier touched 71.75 to a dollar around 10.40 a.m. on Wednesday.

The Indian rupee opened the day's trade at the Inter-Bank Foreign Exchange Market at 71.44-45 to a dollar from its previous close of 71.58 to a greenback.

According to Anindya Banerjee, Deputy Vice President for Currency and Interest Rates with Kotak Securities, the weakness in the country's equity and bond markets led to the rupee's fall.


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SBI MF appoints Ashwani Bhatia as new MD

The Business Line
Published on September 6, 2018


Mumbai, September 5:  The SBI Mutual Fund has appointed Ashwani Bhatia as MD & CEO of its asset management company SBI Funds Management. He will take over the reins from Anuradha Rao who will return to SBI as the Deputy Managing Director.

Before joining SBI MF, Bhatia was in charge of revamping the entire credit structure and processes of the SBI. He has also been associated with SBI Capital Markets as President & COO and Whole Time Director.

A BSc and MBA graduate, his career with SBI started as a Probationary Officer in 1985. Over his tenure of 33 years with the SBI, Bhatia has traversed through various functions and assignments possessing rich experience in various facets of commercial banking such as forex and treasury, retail credit and liability and SME/Corporate Credit.

Bhatia said it is a huge responsibility to oversee SBI MF’s future growth and work continuously towards offering best-in-class products and services to investors through a process-driven approach, which is high on transparency, convenience and value-creation.


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RBI's rate panel member Ravindra Dholakia
questions 8.2% economic growth in Q1

The Business Standard
Published on September 6, 2018


Higher manufacturing growth rate gives "rise to serious
doubts about the veracity of new estimates", said Dholakia

Mumbai, September 5 (Bloomberg): India probably overestimated manufacturing output while calculating economic growth that topped 8 per cent in the June quarter, according to a member of the central bank’s rate-setting panel.

The new gross domestic product series has mostly replaced the Annual Survey of Industries with corporate financial data for estimating manufacturing value added, according to an article Ravindra Dholakia, a member of the Monetary Policy Committee, co-authored with R Nagaraj and Manish Pandya in the latest edition of the Economic and Political Weekly. This has resulted in its higher share in GDP and a faster growth rate compared to the older series, they said.

Statistics ministry data on Friday showed manufacturing sector expanded 13.5 per cent in the three months to June, driving the broader economic growth by 8.2 per cent — the fastest pace for any major economy. Finance Minister Arun Jaitley attributed the economy’s performance to the government’s reforms and fiscal prudence amid uncertainty spawned by the trade spat between the US and China.

“Does the new series represent a fuller description of the manufacturing value added, or is it an overestimation?” the authors wrote.

Higher manufacturing growth rate gives “rise to serious doubts about the veracity of new estimates” and is at “variance with other macroeconomic correlates,” wrote Dholakia, an external member on the monetary policy committee and a management professor.

The Reserve Bank of India has maintained its full-year growth forecast at 7.4 percent, while flagging risks from high oil prices and trade tensions turning into a currency war. The central bank increased policy rates twice since June to curb inflationary pressures.

Dholakia has been advocating lower interest rates to support growth and was the only member to oppose a rate increase at the August meeting.


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India Shoots the Wrong General
 in Lost War on Cash

Andy Mukherjee
The Bloomberg Opinion
Published on September 4, 2018


Mumbai, September 4 (Bloomberg): When there’s no trick left to defend a spectacularly failed experiment, blame Raghuram Rajan.

If India’s top policy think tank is to be believed, the reason economic growth faltered last year, reaching 5.6 percent in the June quarter after 7.6 percent nine months earlier, had nothing to do with the November 2016 ban on 86 percent of the country’s cash.

The decline had been in the making since early 2016 because, under Rajan’s governorship of the Reserve Bank of India, the central bank devised “mechanisms to identify stressed and non-performing assets, which is why the banks stopped giving credit to industries,” Rajiv Kumar, vice chairman of state-controlled NITI Aayog, said on Monday.

Kumar’s premise seems to be that had Rajan not forced banks to make a clean breast of their bad loans, they wouldn’t have faced a capital shortfall. What Kumar called the greatest deleveraging of commercial bank credit in India’s history could thus have been avoided.

The political compulsion to defend demonetization is understandable. Recent central-bank data showed that 99.3 percent of the currency made worthless was eventually returned to banks. To the extent one of the stated goals of the exercise was to immobilize so-called black money – wealth that dare not join the formal banking system because it’s ill-gotten – the draconian experiment came a cropper.

The opposition Congress Party, meanwhile, had always claimed that the ill-conceived move, as well as causing immense direct hardship, also cratered the economy. With general elections due next year, officials therefore have to  help the government deal with the charge that it sacrificed two percentage points of economic growth for … nothing. 

Hence the impulse to shift the blame to Rajan.

Leave aside the problematic idea implicit in Kumar’s argument that it’s somehow wrong for a banking regulator to make banks tell the truth. Focus instead on his factual claim about corporate deleveraging.

It happens that during the quarter that ended in September 2016, which is when Rajan abruptly left the RBI after one term, commercial credit by Indian banks expanded by 10.8 percent, the fastest growth in more than two years. The next quarter, after Prime Minister Narendra Modi outlawed most of India’s cash, credit growth slowed to 4 percent. After a dead-cat bounce it stayed depressed for most of last year.

Kumar could well have argued that India’s new GDP data are too unreliable to conclude that demonetization did cause a two-point slowdown. It would have been impossible to prove him wrong. But if deleveraging is his story, then banks’ pulling back the supply of credit doesn’t wash. It’s more plausible that demand for credit slowed last year after the note ban – followed quickly by a botched goods and services tax – disrupted supply chains, hitting small businesses and exporters especially hard.

As for the charge that Rajan pushed India into an abyss of deleveraging, some state-run banks may have become zombies, but the market hasn’t stood still.

Specialist lenders like AU Small Finance Bank Ltd., which received licenses under a category started by Rajan, are taking over retail credit. They’re packaging and selling loans to state-run lenders, which still have large branch networks and deposits. Securitization markets wobbled last year after micro-finance loan portfolios were hit by demonetization. But with cash coming back into the economy, transactions doubled in the June quarter.

Even if the Modi government never admits that its war on cash was an all-round disaster, to use Rajan as a scapegoat is more than a little silly.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews.


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Are MSMEs hampered by
Insolvency and Bankruptcy code?

Abir Roy
The Financial Express
Published on September 6, 2018


There is a need for a reality check on the entire process.

New Delhi, September 5: The Insolvency and Bankruptcy Code (IBC) is in its second year of operation; it has, at best, been a roller-coaster ride where the application of the said law has opened loads of issues that have been noted and acted upon by the Insolvency and Bankruptcy Board of India (IBBI) and/or the government.

One of the issues that has not yet caught the attention of the government or the IBBI is the treatment of MSMEs under the resolution plan. As the law currently stands, there is no difference that has been accorded to MSMEs and other operational creditors, and as such, these operational creditors are only guaranteed the liquidation value. In some resolution plans that have been approved by National Company Law Tribunals (NCLTs) across India, the liquidation value of the company is nil and, hence, nil amount is guaranteed to such operational creditors, including MSMEs.

It’s precarious situation for MSMEs for two vital reasons: (1) It is an important sector since it provides huge employment to the country at large and, one may argue, is the backbone of the economy; and (2) there is an effective legal regime that has been promulgated to consider the interest of MSMEs, i.e. the Micro, Small & Medium Enterprises Development (MSMED) Act, wherein MSMEs are guaranteed principal amount along with interest for delayed payment of more than 45 days from the delivery of goods or services, at three times bank rate (nearly 19%). It’s a guaranteed amount under the Act, which is totally abrogated by a resolution plan, wherein only liquidation value is guaranteed.

Now, let us step back and see why such a broad protection was given to MSMEs under the Act. The Supreme Court and various High Courts have noted that legislature wanted to accord special protection to MSMEs since there is a lack of working capital. Thus, a non obstante clause was incorporated in the MSMED Act to ensure that principal and interest are statutorily protected to MSMEs even if there is something inconsistent with other laws; this aspect has, time and again, been given the stamp of approval by constitutional courts. The problem now arises when an insolvency process is initiated against the buyer under the IBC, there is a moratorium that is imposed, and no actions can be instituted under the MSMED Act. Even the pending proceedings against the corporate debtor are stayed. Further, orders that may have been passed under the MSMED Act against the buyer (who is the corporate debtor) cannot be executed. Additionally, MSMEs have no role to play since they are not even on the committee of creditors, so there is complete opaqueness in the way their interests are taken care of, if at all.

During the insolvency process, MSMEs must file their claims with the interim resolution professional (IRP) or resolution professional (RP) and, thereafter, it is the sole prerogative of the IRP/RP to accept, reject or modify the liability. After the resolution process is over, these SMEs may have to take a massive haircut at the end, wherein they may not even receive the principal amount, leave alone the interest that is statutorily given under the MSMED Act. Due to their payments not coming on time, these SMEs have issues with respect to operations since they lack working capital. Further, due to lack of monies, they are unable to pay to their own suppliers from whom they had acquired goods, thus exposing them too declared insolvent.

The problem is severe and may be epidemic in times to come, unless steps are taken to stem the tide. One of the ways the author feels it can be done is: Section 30(2)(e) of the IBC provides that the resolution plan so adopted must be in conformity with the law for the time being in force. There was a discussion on this clause in a report by the Insolvency Law Committee, wherein it was noted the resolution plan must be in compliance with the Real Estate (Regulation and Development) Act, since it is a law for time being in force. The same logic would apply to the MSMED Act. Further, similar to RERA, the MSMED Act contains clause for delayed actions/payments. It is to be noted herein that the MSMED Act has a non obstante clause and, hence, a resolution plan cannot abrogate the rights that accrue to an MSME under the MSMED Act.

It is argued that even the IBC has a non obstante clause; that being said, the IBC only provides for a waterfall in case of liquidation wherein resolution plan is essentially a private document that must stand the scrutiny of law. It may be advisable to think that since the MSMED Act is a special statute, so if resolution plan does not provide for repayment of admitted debt of MSMEs in full, then such a plan is non est in law. This is one of the ways in which interest of MSMEs can be safeguarded from the law, which can be described as for the financial creditors, by the financial creditors and of the financial creditors.


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Defend demonetisation,
but at least sound credible

Renu Kohli
The Financial Express
Published on September 5, 2018


It is difficult to conclude, as some have done, that demo either raised tax-buoyancy more than other measures, or even lowered cash-intensity.

With RBI publishing its final figure—99.3%—for cancelled cash that was returned to the banks, the government’s primary target of demonetisation to nullify black money has obviously come a cropper. What’s interesting is the remaining 0.7% of the de-legalised notes needn’t necessarily be black—a large chunk of this could be small amounts remaining stuck with millions of NRIs, Nepal and Bhutan residents and other foreign nationals. Thus, almost 100% of the cancelled currency turned out to be white!

No one knows for sure how much black money was hoarded in cash: The government reportedly told the Supreme Court this could be about `4-5 trillion, while some economists believed it could be `2-3 trillion. But even by the most conservative estimate of `1.5 trillion, a spectacularly large amount of currency changed colour, much to the discomfort of the government. Hoarders turned out to be smarter, acted fast to exploit systemic loopholes, were supported by an army of middlemen, backed by lawyers and accountants, and possibly collusive banks that opened their back-doors to them! The government certainly did not think through multiple routes that hoarders could exploit, failed to plug these gaps fast enough, and perhaps lacked imagination to outmanoeuvre opponents when a game theoretic situation emerged.

Failing to stop the black money in hoarders’ pockets, the government changed tack by labelling large deposits in bank accounts as “suspicious”, subject to scrutiny and heavy penalty through a new Taxation Laws (Second Amendment) Bill, 2016, and also introduced a voluntary disclosure scheme Pradhan Mantri Garib Kalyan Yojana, 2016 (PMGKY) mid-way. There were expectations these two instruments could attract nearly Rs 1-1.5 trillion to the exchequer. But the outcome turned out even worse for all it collected was a paltry Rs 4,900 crore. Surely, the hoarders covered their tracks well and had the confidence to come out clean! To simply let it pass by terming these as ‘ingenious act of black money holders’ does not pass muster.

Who are these depositors? We know the tax department has been trailing 18 lakh such depositors for over a year now, but not sure if this will yield any significant dividend. But the government surely used these trails to turn the spin—that demonetisation enabled a large increase in direct tax compliance and revenue buoyancy. This appeared pure desperation to find an escape route; any tax research expert would tell you how difficult it is to isolate factors leading to higher compliance. And, in this instance, there could be many: apart from trend factors such as better tax administration, electronic trailing of expenses, reducing tax rate to 5% in the lower bracket, the government introduced more lethal instruments such as linking bank accounts and PAN card to Aadhaar and also rolled out the GST. Even without demonetisation, the last two undoubtedly had huge potential for more transparent business transactions and income accrued thereby. In fact, Financial Express research estimates that GST-linked contribution to direct taxes’ compliance could be much larger than that of demonetisation.

But the moot question is did higher tax compliance increase tax revenues sharply? The accompanying graphic clearly illustrates the 5.84% direct tax-GDP ratio in 2017-18 was way below the 6.3% peak achieved in 2007-08. Nor is it significantly higher than the preceding ten-year average of 5.72%. Merely adding lakhs of new tax returnees does not serve any purpose if they do not contribute significantly to tax collections.

Some would argue that personal income tax buoyancy (see graphic) at 2.47 in 2016-17 was far higher than the 0.9 average in the previous eight years, but what would explain the quite sharp fall to 1.2 in 2017-18 when compliance should have improved even further? Corporate tax buoyancy, in contrast, improved in 2017-18 as GST unfolded. Notably, data for the first quarter (April-June, 2018) reported by the Controller General of Accounts (CGA) show that personal income tax buoyancy further declined to 0.93, while that of corporate income tax had turned negative.

It is amply clear that tax buoyancy is too volatile an indicator to make a case. The fact that, historically, the economy witnessed much better tax buoyancy—between 2002-03 and 2007-08—even without any structural interventions like demonetisation, GST and Aadhaar, conforms to apprehensions of desperation in stretching meek data points to claim success!

Beyond the critical failure to tame black money, the Centre had moved the goal-post to another objective: achieving a less cash-dependent economy, encouraging citizens to move to more digital transactions. Although laudable, the objective to bring in transparency and savings from printing currency depended upon behavioural changes in consumers and greater formalisation of activities. Though the government never advocated any particular level of currency-to-GDP ratio, it hoped the shock of demonetisation would leave some imprint upon consumers’ minds to store less cash; some economists even suggested the one-time increase in deposits after demonetisation would stay in the banking system for much longer, thus reducing interest rates and thereby supporting investment and growth.

But despite the government’s best efforts to promote digital transaction and advancing the GST rollout , cash returned to the public at a much faster pace than anyone anticipated. The accompanying graphic shows long-term trend in currency-GDP as well as absolute stocks. After reaching 10.9% this March, the currency-GDP ratio has been an average 48 basis points lower than the historical 10.78% to which the ratio reverts seasonally. Here, too, there is an attempt to spin estimates to claim some degree of success as much as a labouring to substantiate more formalisation and job creation! For one needs to be careful if the rise in currency holdings of household financial savings are any indication of behavioural change—currency demand could accelerate as cash-dependent segments such as the informal sector recover from damages caused by demonetisation, housing sales come out of the doldrums and demand for gold & jewellery returns. And, we haven’t even flagged the other two objectives espoused by the government to demonetise—reduce counterfeit notes and choking terrorist funding!

Demonetisation was an extraordinary experiment in economic policy making that raised social, political and ethical questions. But from a purely macroeconomic perspective, the interplay of demonetisation in relation to its targets and objectives is fascinating if only because of its novelty. For such an experiment, where a single policy instrument is deployed as a one-shot, unanticipated shock to attain multiple targets is quite unique to macroeconomic policy manuals, the more so because of its possible structural implications. Having spectacularly failed to meet any of its multiple objectives, it is now left to history to document if spins that demonetisation’s advocates offer as an afterthought have any substance for future governments to take note of.

Source: Internet Newspaper and anupsen articles

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