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Banking News: September 6, 2018
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New ARC may take a load of power NPAs
The
Business Line
Published
on September 6, 2018
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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 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
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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
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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
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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
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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
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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
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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
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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
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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.
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Source: Internet Newspaper and anupsen articles
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