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Banking News dated 3rd October 2018

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Banking News: October 3, 2018


Rupee hits new low of 73.34,  plunges 43 paise against USD

Rupee hits new low of 73.34,
plunges 43 paise against USD

The Financial Express
Published on October 3, 2018

The domestic currency dropped 43 paise to
 73.34 against the US dollar in the early trade

Mumbai, October 3: The Indian rupee Wednesday crashed below the 73 mark against the dollar for the first time ever on strong demand for the American currency from importers amid rising global oil prices and unabated capital outflows.

At the Interbank Foreign Exchange (forex) market, the domestic currency dropped 43 paise to 73.34 against the US dollar in the early trade. The rupee opened lower at 73.26 and weakened further to quote at 73.34 a dollar against its previous closing of 72.91 Monday.

Foreign institutional investors (FIIs) sold shares net worth a net of Rs 1,842 crore Monday, provisional data showed. Investors remained concerned over sustained foreign capital outflows and soaring crude oil prices that crossed the USD 85 per barrel. The rupee Monday tumbled 43 paise to end at a two-week low of 72.91 against the US dollar on steady capital outflows.

Forex dealers said besides strong demand for the American currency from importers, concerns of fears of rising fiscal deficit and capital outflows mainly weighed on the domestic currency. Forex market remained closed Tuesday on account of Gandhi Jayanti. Meanwhile, the BSE benchmark Sensex dropped by 137.62 points, or 0.38 per cent, to 36,388.52 in opening trade Wednesday.


SBI increases MCLR by
5 basis points across loan tenures

Shaikh Zoaib Saleem
The Mint
Published on October 3, 2018

Borrowers will have to pay a higher interest rate
on their home loans taken from State Bank of India

Mumbai, October 2: Ahead of the Reserve Bank of India’s (RBI) bi-monthly monetary policy review later this week, the State Bank of India has increased the marginal cost of funds-based lending rate (MCLR) by 5 basis points, effective 1 October, across various tenures.

RBI has raised the benchmark repo rate by 50 bps in total in the past two policy meetings, and another hike is being widely expected in its 5 October announcement.

Typically, home loans are pegged to one-year MCLR. This is the fourth time in calendar year 2018 that SBI has increased one-year MCLR, which has gone up from 7.95% at the beginning of 2018 to 8.50% now, an increase of 55 bps. One bps is one-hundredth of a percentage point.

While new borrowers will have to pay a higher interest rate on their home loans, existing home loan borrowers may continue paying the same rate until the reset clause kicks in. Every loan has a reset clause, which specifies the period after which the prevailing interest rate can be changed.

What is MCLR?

Till 31 March 2016, all floating rate loans were benchmarked with base rate, which was the lowest rate at which a bank could lend. However, there were concerns that when the overall interest rates were going down, the reduction was not getting passed on to the consumers adequately. Hence, a new and more transparent system was brought in.

From 1 April 2016, all new floating rate loans, like home and car loans, are linked to MCLR. This rate is based on four components—marginal cost of funds, negative carry on account of cash reserve ratio, operating costs and tenor premium.

MCLR is linked to actual deposit rates. Hence, when deposit rates rise, it indicates the banks are likely to hike MCLR and lending rates are set to go up. When deposit rates go down, the MCLR also goes down subsequently. The way MCLR is calculated, it is more sensitive to RBI policy rate changes and hence transmission is faster.

MCLR is the minimum rate at which commercial banks can lend. Most banks charge a spread to most customers over MCLR, based on the credit and risk profile of the customer and the type of loan that the person is availing. To attract good customers, some banks have also started offering loans at MCLR to customers with a good credit score.

Base rate vs MCLR

If you have taken a loan before April 2016 from a bank, which would be a loan based on base rate, you have the option to move from base rate to MCLR. With effect from 1 October, SBI has also increased its base rate from 8.95% to 9%.

Just like MCLR-based loans, base rate-based loans too charge a spread over the base rate. So while the base rate is higher than MCLR, you need to ascertain the effective rate after the switch in comparison to what you are paying at present. You will also need to take into account the conversion fee to move from base rate to MCLR. While it can be negotiated, banks usually charge 50 bps of the outstanding amount or a flat fee as conversion fee.

If the difference in the interest rate on older base-rate based loan and the effective rate after switching to MCLR is significant, say over 25 bps, and you have many years of repayment ahead, you might want to make the switch. However, if the difference in the two effective rates is marginal or you have a short repayment time left, you might not want to switch.

If you are a new borrower, shop around to see which lender is offering the best interest rates. If you have a good credit score, you could negotiate and get a rate as low as MCLR itself, particularly for home loans.


Govt raises loan limit for
MSMEs to over Rs. 1 crore

The Business Line
Published on October 3, 2018

Mumbai, October 2: The government has enhanced the loan limit for micro, small and medium entrepreneurs to over Rs. 1 crore under the Prime Minister Employment Generation programme.

Giriraj Singh, Minister, Micro, Small and Medium Enterprises, said the government was lending between Rs. 25 lakh and Rs. 1 crore to successful entrepreneurs at 15 per cent interest subsidy but such entrepreneurs can now apply for loan over and above the limit.

Inaugurating the Khadi Fest 2018 in Mumbai, he dedicated an online portal for entrepreneurs to seek financial assistance and emphasised on the government’s aim to generate employment in rural India.

Khadi and Village Industries Commission turnover last fiscal was up 34 per cent at Rs. 2,508 crore largely led by innovative initiatives taken by the government to promote khadi clothes and household articles.

KVIC has set sales target of Rs. 3,200 crore for this fiscal.It had organised 50 exhibition on the occasion of Gandhi Jayanti and plans to conduct 150 exhibition globally in the next two months.

Vinai Kumar Saxena, Chairman, KVIC, said the sales growth which was about 6.8 per cent between 2004 and 2014 revived sharply to register an average growth of 133 per cent at present.


IL&FS board revamp: Govt is cleaning up
 financial institutions, says SBI Chairman

The Moneycontrol News
Published on October 2, 2018

The National Company Law Tribunal approved the takeover
of IL&FS board by government nominees on October 1

Mumbai, October 2: It is not just the streets of India that are getting cleaner under the government's Swachh Bharat Abhiyan (Clean India Mission). A similar 'clean up act' in financial institutions is also being witnessed, said State Bank of India Chairman Rajnish Kumar, referring to the takeover of IL&FS' board.

Speaking to reporters on the side-lines of a Swachh Bharat event in Mumbai on October 2, Kumar said once the 'clean up' in the financial sector is complete, the health of the banking, financial services and insurance (BFSI) sector will improve.

Referring to the government's action relating to the debt-hit Infrastructure Leasing & Financial Services (IL&FS), he said, "The government is on an aggressive drive of cleaning up the country's financial institutions. This will led to a healthy financial sector."

SBI owns 6.42 percent equity in crisis-stricken IL&FS.

The SBI Chairman was also asked about the reduction in ATM cash withdrawal limit to Rs 20,000 a day from Rs 40,000 from October 31. Kumar said almost 99 percent customers have a much lower cash withdrawal pattern and that a cut in the limit will help curb potential frauds.

IL&FS debt crisis

The first signs of trouble in the IL&FS group emerged in June when it defaulted on inter-corporate deposits and commercial papers (borrowings) worth about Rs 450 crore. Over the next 2-3 months, three rating agencies downgraded its long term ratings.

IL&FS, which has missed more than five debt payments since August, has filed an application with the National Company Law Tribunal (NCLT). The company sought some ‘accommodations’ from NCLT for itself and 40 group units under the Companies Act.

Among the group companies, its financial services arm IL&FS Financial Services also defaulted on interest payment on commercial papers four times in September. It also defaulted on seven debt repayments between September 12 and 27, the financial services arm of IL&FS informed the stock exchange.

IL&FS group has over Rs 91,000 crore in debt.

Takeover of the board

NCLT approved the takeover of IL&FS board by government nominees on October 3, saying mismanagement at the crisis-ridden financier makes it a fit case for superseding of the board under Article 241 of the Companies Act.

A new six-member board led by veteran banker Uday Kotak will take charge of the company. The other members are former SEBI chief GN Vajpai, ICICI Bank Chairman GC Chaturvedi, Tech Mahindra's Vineet Nayyar, and former bureaucrats Malini Shankar and Nand Kishore.


Can the Centre’s white knights rescue IL&FS?

Palak Shah
The Business Line
Published on October 3, 2018

The new board members lack sufficient
experience in the infra space, say experts

Mumbai, October 2: While the Centre has stepped in to supersede the board of beleaguered Infrastructure Leasing and Finance Company (IL&FS), the industry heavyweights tasked with turning around the company themselves come with some legacy issues.

While all the six individuals are big names who have built reputations in their respective fields, shareholder advisory groups, corporate governance advocacy groups, and top former regulatory officials have raised some questions about their suitability for the job.

On the recommendation of the Ministry of Corporate Affairs, the NCLT’s Mumbai Bench on Monday approved the induction of six directors — Uday Kotak, MD & CEO, Kotak Mahindra Bank; Vineet Nayyar, IAS (Retd.) and former Vice-Chairman of Tech Mahindra; GN Bajpai, former Chairman of SEBI and Life Insurance Corporation of India; GC Chaturvedi, Non-Executive Chairperson, ICICI Bank; Malini Shankar, IAS; and Shri Nand Kishore, IA&AS (Retd) — on the reconstituted Board.

Why they’re not perfect

Uday Kotak of Kotak Mahindra Bank has himself run into trouble after the Reserve Bank of India rejected Kotak Bank’s method of diluting its promoter shareholding by allotting preferential shares. The RBI had mandated that the bank lower the promoter holding to less than 20 per cent by December, and 15 per cent by March 2020. There were questions raised on whether issuing preferential shares was the right way to do it.

Similarly, Bajpai has been on the boards of Kingfisher and Dhanlaxmi, both of which saw their financials slip from bad to worse.

“IL&FS is not a simple bailout candidate. It should be liquidated and its lenders should take a haircut similar to other public sector banks that are doing so for lending with closed eyes. For this, IL&FS board should have a few people with good background in the infra space to handle the crises and instil market confidence,” said Anil Singhvi, governance expert and IiAS founder.

Nayyar of Tech Mahindra is now close to 80 years old. In the past, various corporate governance experts have recommended retirement of people aged over 70 or 75 years. There have been instances where shareholder advisory groups have written to company boards to oust board members over 75 years.

“IL&FS needs some serious firefighting. Nayyar is over 80 years in age and Bajpai over 75. Reports from corporate governance experts have often recommended retirement of people aged over 70 or 75 years. Bajpai is still affiliated with nearly a dozen companies and IL&FS will require a full-time expert,” said a former regulatory official on condition of anonymity.

Lack of experience

There is a view that apart from knowledge on the working of NBFCs, the IL&FS crises cannot be handled by people without real experience in the infra space.

“IL&FS will require negotiating with regulators and it will be interesting to see how this board will handle this. GC Chaturvedi, who was recently appointed as Non-Executive Chairperson of ICICI Bank, already has enough on his plate on the Chanda Kochhar issue. In such a scenario, the new board will fall short in building market confidence,” said a Mumbai-based senior lawyer, who declined to be quoted.

IL&FS saw an increase in its debt levels in the past few months. The situation worsened in the last two months with both the parent company and its subsidiaries defaulting on a number of repayment obligations.

IL&FS has over Rs. 16,500 crore of standalone debt and Rs. 91,000 crore of consolidated debt, with banks and insurance companies having the largest exposure.


Troubles at NBFCs may help banks
claw back lost share in corporate lending

The Financial Express
Published on October 3, 2018

Mumbai, October 2 (PTI): The deepening crisis in the non-baking finance companies’ space may help commercial banks re-emerge as a primary source of lending for companies, as the former fight for survival under more regulatory glare, says a report. The “genesis” of the crisis at non-banking finance companies (NBFCs) like infra lender IL&FS is the rapid pace of rise in their share in financial intermediation since 2014, when commercial banks began battling NPAs, notes Singaporean brokerage DBS in a report.

“In FY19, we see a likelihood that the share of domestic banks will re-emerge as a primary source of funding to the commercial sector, over bond markets and non-bank entities,” it says. Banks will achieve this despite as many as 11 state-run lenders are under the prompt corrective action initiated by the Reserve Bank which comes with curbs in lending, it says.

This will be possible because of rising markets-based borrowing costs, tighter liquidity conditions and the efforts undertaken to resolve asset quality issues, as per the report. In FY17, the share of bank funding to the commercial sector dropped to 34 per cent from 55 in the previous year and has come back to 50 per cent in FY18, it said.

The non-banking finance companies thrived on ample support from global funds and lighter regulations, but they are likely to face greater scrutiny now. They rely heavily on the wholesale markets for their borrowings which have seen a rise in yields, the report stated.

The note also says the excess borrowing over the past few years has also increased their leverage ratios which will limit the extent of support they can give to the commercial sector. For commercial banks, the note says NPAs are likely to peak by March helped by the introduction of bankruptcy laws and write-offs, but resolution of the dud assets will take a longer time.


A Pandora’s box may have just been opened

The Business Line
Published on October 3, 2018

From dependence on govt projects to delayed payments, IL&FS crisis represents what the infra industry is going through

Mumbai, October 2: The IL&FS saga has opened up a Pandora’s box of issues that the infrastructure sector has been struggling with for years, and could cause greater harm in the days to come.

While the IL&FS case per se may be one-off, there are issues that all the industry players, irrespective of their financial strength and credit profile, are facing.

Infrastructure developers are now becoming increasingly vocal about their exposure to projects financed by the government or its agencies. “I know of at least two large infrastructure players, besides IL&FS, that have almost stopped bidding for projects after they have burnt their hands with the government not being able to release awarded payments or solve disputes, causing enormous delays,” an industry insider who did not wish to be named told BusinessLine.

Slow arbitration

Another industry player pointed out that the arbitration processes take four-five years. Even after being awarded, the payments do not flow to the developers despite a special instruction on this released by the NITI Aayog in 2016. “The payments have to be released against bank guarantees, but getting those from the lenders have become difficult,” the person added. “The same goes for bank guarantees required to bid for new projects. It becomes a challenge for EPC (engineering, procurement and construction) companies that eventually become unable to keep their order inflows at healthy levels.”

“Much of the stress in the sector is because the government payment track record needs to be improved,” noted Suneet K Maheshwari, founder and Managing Partner at Udvik Infrastructure Advisors and ex-MD of L&T Infra Finance. “Secondly, we have not developed a quick way of disposing of differences and problems.”

He added that apart from IL&FS, which claims to have Rs. 16,000 crore stuck with government agencies, several large developers face similar challenges. “Delays cost businesses working capital shortages, liquidity problems and consequent defaults. Thus their investment appetite is impacted till they fully recover,” he said.

Experts believe infrastructure financing will continue to be a challenge for years to come, with most of the spending coming from the exchequer.

Bank lending for infrastructure projects has been muted for several years now, with the last two fiscals seeing negative credit growth, according to Crisil. Post the IL&FS crises, even alternative routes such as NBFS funding or bond markets could be a problem for infrastructure developers with a history of large borrowings.

“Lenders have been very choosy when it comes to project financing or even debt refinancing for infrastructure companies. However, companies without a history of raising debt are in a better position,” said an industry player who did not wished to be quoted.

Shailesh Pathak, CEO of L&T Infrastructure Development Projects Ltd, believes infrastructure finance needs recalibration. The project construction should be financed by the government while operating assets should be sold to long-term, ‘patient’ capital so that the proceeds may be recycled into fresh construction, he suggests.

Capital recycling

Industry experts say the government has been looking to identify capital recycling models for infrastructure segments beyond roads — it has already come up with the toll-operate-transfer (TOT) model, wherein it leases completed and operational assets to long-term investors. The first TOT auction, won by Macquarie, fetched the government Rs. 9,681 crore.

Going further, experts note, sectors like power, capital goods, water and waste treatment are unlikely to see any significant growth in lending.

On the other hand, roads and power transmission and, up to some extent, renewable power, are considered safer by the banks.


Policy rate has no relevance at
this point, guidance is the key

Tamal Bandyopadhyay
The Mint
Published on October 1, 2018

To arrest the current account deficit,
we need to encourage domestic savings

The yield on 364-day treasury Bill now is 7.73% and that of 91-day is 7.18%. Short-term money market instruments, such as commercial paper and certificate of deposits, are more expensive—in the secondary market, they are trading at way above 8%.

Clearly, India’s 6.5% policy rate has become irrelevant. The one-year overnight indexed swap, a derivative gauge where investors exchange fixed rates for floating payments, is pricing in two rate hikes by December.

Will Reserve Bank of India (RBI) go for yet another rate hike—third in a row since August—when its monetary policy committee (MPC) concludes its meeting on 5 October? It could, even though there is a bit of turmoil in the money market with some of the non-banking financial companies (NBFCs) which have been growing phenomenally over the past few years are liquidity-starved and mutual funds are facing redemption pressures.

India’s retail inflation dropped to a 10-month low 3.69% in August and most analysts are convinced that it could be around 4.5% or slightly less by March 2019. So, what’s the hurry for a rate hike? After all, in the August policy, RBI raised the retail inflation projection marginally from 4.7% to 4.8% in the second half of current fiscal year and 5% in the first of next fiscal year 2020, with risks “evenly balanced”.

Rising crude prices and a depreciating local currency will have an adverse impact on inflation and a central bank’s job is to manage the inflation expectations. This is why it could go for a hike, even though the decision may not be endorsed by all six members of MPC.

If it had front-loaded the rate hike to dampen inflationary expectations in August, this hike will be buying insurance cover against a rising inflation next fiscal year. RBI has been reiterating in every policy statement that its objective is to achieve 4% retail inflation on a durable basis.

The rupee, the worst performer among Asian currencies, has lost around 6% against the dollar since the August policy; so far this year, it has weakened 11.33%. The currency did threaten to breach the 73 level to a dollar level but a series of steps by the government, including raising import duties on 19 non-essential items such as refrigerators, air conditioners, jewellery, diamonds and jet fuel, among others, and RBI’s dollar sale has arrested the fall. The currency has now been trading in a broad range of 72.40-70.90 a dollar.

By taking measures to make imports costlier, the government is trying to curb the expansion in current account deficit. The deficit widened to a four-quarter high 2.4% of gross domestic product in April-June quarter from 1.9% in January-March, on account of a higher trade deficit. Also, to arrest the current account deficit, we need to encourage domestic savings as otherwise, foreign funds will continue to bridge the gap between domestic savings and investments. A hike in rate will encourage savings. Foreign investors have sold $1.92 billion and $9.42 billion in equity and debt markets, respectively, since January.

Managing current account deficit and sticking to the path of fiscal consolidation are keys to contain inflation and currency depreciation.

A hike in rate and tighter monetary policy does not necessarily prevent RBI from ensuring appropriate liquidity to iron out the glitches in the financial system, triggered by mutual funds selling their debt to meet redemption pressures and certain over-leveraged NBFCs finding difficult to raise money from the market.

The central bank bought securities to generate Rs.10,000 crore through open market operations (OMO) last week, the fourth such OMO during the current financial year. It can continue to do so. Besides, it has also eased norms for banks to maintain the liquidity coverage ratio.

If the turmoil continues, it can also open a liquidity window for mutual funds, something which it had done in 2008. Since RBI cannot take credit risks, it can ask the banks to offer money to the mutual funds against collaterals and to that extent banks can be allowed to bring down their mandatory bond holding, subject to a limit.

Going beyond these measures, a cut in banks’ cash reserve ratio or CRR—the money that commercial banks keep with RBI—to generate liquidity will confuse the market, if it is accompanied by a rate hike.

Frankly, all three possibilities are real—a quarter percentage point rate hike, a half a percentage point rate hike or even no hike (and let the impact of post two hikes sink in). The market will be surprised—not shocked—if RBI goes for a half a percentage point rate hike or chooses to maintain status quo. And, of course, status quo will mean the current situation in the domestic market cannot be taken lightly.

More than the rate action, RBI’s guidance will hold the key. It has hiked the policy rate at two successive MPC meetings, citing future uncertainties, and kept the neutral stance unchanged. It’s time to tell the market little more or change the stance if it wants to preserve the relevance of the policy rate.


Women rule financial world! IMF, World Bank,
OECD all have female chief economists now

The Financial Express
Published on October 3, 2018

Mumbai, October 2: Guess, who rule the financial world? With the appointment of Kolkata-born Indian-American economist Gita Gopinath as the first female Chief Economist of International Monetary Fund (IMF), women are the big bosses now. It is not just IMF which has named a female as its chief economist. In April, the World Bank Group also appointed Pinelopi Koujianou, Elihu Professor of Economics at Yale University, as the chief economist. Later in June, Laurence Boone, then chief economist at insurer AXA and a former adviser to President Francois Hollande, was appointed as the chief economist at Organisation for Economic Co-operation and Development (OECD).

Hence, with the appointment of Gopinath (who is a US citizen and an Overseas Citizen of India) as chief economist at IMF, women now hold key positions in three esteemed establishments in the world.

Gopinath received her doctorate in economics in 2001 from Princeton University. She earned a BA degree from the University of Delhi and MA from both the Delhi School of Economics and the University of Washington. Gopinath, who first made headlines a few years ago after she became the third woman to be a tenured full professor at Harvard, is the first woman and second Indian after former the Reserve Bank of India governor Raghuram Rajan to hold the prestigious position at IMF.

Gita Gopinath is the John Zwaanstra Professor of International Studies and of Economics at Harvard University and before coming to Harvard, she was an assistant professor of economics at the University of Chicago’s Graduate School of Business, according to the information available on Harvard University’s website.


What ails the Indian economy? How India
can address its biggest economic problem

Nirvikar Singh
The Financial Express
Published on October 3, 2018

In my last column, I argued that a falling rupee is not a major economic problem for India, and neither is a widening current account deficit. Of course, a freefall in the rupee or a massive current account deficit would be more serious. But in any case, they would both still be symptoms of other, underlying issues. I also previously argued that Indian policy needs to focus on long-run growth. As long as short-run fluctuations are not so large or rapid that they are disruptive, then macroeconomic policy should not get derailed by focusing on short-run symptoms.

If we think about the sources of economic growth, then investment is a fundamental variable, whether in people, knowledge bases, institutional capacity or, most obviously, physical capital. The efficiency of the process whereby savings are generated and channelled into productive investment is at the heart of successful and sustained economic growth. This is so obvious that it is easy to take it for granted, but focusing on this point draws attention to India’s biggest economic problem.

Over the more than two decades of reform, India has made considerable progress in removing unnecessary and inefficient controls on international and domestic trade and investment. It has slowly improved the functioning of its tax system, management of public finances, and monetary policy. These all still have room for improvement, but India’s biggest economic problem is in the efficient allocation of capital. Bad loans in the banking sector have been one symptom of this problem.

The latest example is the crisis at Infrastructure Leasing and Financial Services (IL&FS), which has defaulted on some of its debt obligations. What these cases have in common is long-term lending for large projects, which are subject to high risks, because of their scale and their length of gestation. In the case of bank loans, Pronab Sen has argued convincingly (in Ideas for India) that banks were pushed by government in the direction of longer-term loans for fixed capital investment, and away (at least in relative terms) from working capital and household loans, but without the development of the needed internal expertise required for assessing the most challenging type of lending.

Writing about the IL&FS fiasco, which unfolded with remarkable speed, Ila Patnaik (in the Indian Express) has noted the failure of India’s government to create a regulatory framework that would be sufficiently comprehensive to detect incipient problems in systemically important firms such as IL&FS. But there are other contributors as well, to this mess. Clearly, poor corporate governance is a major culprit. This includes financial intermediaries such as banks and non-bank financial companies, but also the firms that do the borrowing. There can always be mistakes in making investment decisions, or unforeseen circumstances that make an ex ante sound decision into a loser. But in India’s case, there also seems to be a too-common problem of skimming funds, whether by business borrowers or politicians who also want their cut. Sometimes the two groups overlap.

So India’s biggest economic problem is incompetence and malfeasance in the allocation of capital. As the economy has liberalised, and the financial sums at stake have grown dramatically, the problem has mushroomed. There are several fixes needed for this problem, and all of them have to be attended to, because the financial system will only be as strong as its weakest link.

Pronab Sen has suggested that Indian banks be given more freedom to tap bond markets for funding longer-term loans. This will allow markets to send better price signals about bank portfolios. Indeed, there is a desperate need for a corporate bond market in India that will allow firms to borrow more directly from savers. And this does not stop at long-term borrowing—working capital and other short-term borrowing can also benefit from new market platforms.

As financial markets are broadened and deepened, the demands on regulators increase, and India needs to step up here as well. India’s financial system regulatory architecture also needs to be broadened and deepened. This involves not just external oversight by regulators, but insistence on strong corporate governance, with greater disclosure and transparency. Auditors and rating agencies also need to step up and do their jobs better. The government can help this along by raising and enforcing standards for these private sector monitoring institutions, as well as encouraging greater competition in these arenas.

At India’s stage of economic and institutional development, kleptocracy in the private and public sector, which is most lucrative for large-scale, long-term investments, is the country’s biggest economic problem.

No country is able to eradicate this problem completely, but those that can contain the problem are the ones that grow the most sustainably. The problem is politically more difficult to solve than improving fiscal policy or monetary policy, and many countries never deal with it adequately. The first step is identifying the problem and prioritising it.

The second step has to be many (a hundred?) small steps of opening financial markets, building regulatory and monitoring institutions, and increasing competition. Short-term fluctuations in the exchange rate, or blips in the current account deficit are a diversion from the important and difficult task of improving the allocation of long-run capital.

Source: Internet Newspapers and anupsen articles


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