Banking News dated 12th November 2018

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Banking News: November 12, 2018


Boosting growth: Arun Jaitley says  strengthening banks immediate priority

Boosting growth: Arun Jaitley says
strengthening banks immediate priority

The Financial Express
Published on November 12, 2018

Jaitley’s statement comes ahead of a much-watched RBI board meet on November 19, where the RBI top management and the government are likely to take divergent positions on a host of issues.

New Delhi, November 11: Finance Minister Arun Jaitley on Sunday stressed the need to enhance the lending capacity of banks so that the sectors that are in dire need of credit, including the MSMEs, get support and the NBFCs’ liquidity position improves.

Addressing a gathering on the occasion of the 100th anniversary of the Union Bank of India via videoconferencing, he said the immediate target of his ministry was to strengthen the banking system, which is necessary to accelerate the economic growth. The minister added that the steps taken by the government to minimise the non-performing assets were bearing fruits.

Jaitley’s statement comes ahead of a much-watched RBI board meet on November 19, where the central bank’s top management and the government are likely to take divergent positions on a host of issues, such as whether to tweak the prompt corrective action framework for weak banks as proposed by the ministry to enable them to lend to the needy sectors.

On Friday, economic affairs secretary SC Garg said the government and RBI were in a discussion to ‘fix’ the RBI’s capital framework. The RBI brass is known have opposed the government’s move to ask for higher amounts from the central bank’s contingency fund; they don’t see the need for any major reformulation of the current system of the RBI transferring only its realised profits each year to the government as dividend.

As FE reported earlier, the finance ministry is set to expedite the issue of recapitalisation bonds worth around `45,000 crore to public sector banks (PSBs) to shore up their capital base and enable them to support growth at a time when the lending ability of NBFCs has been severely impaired by a liquidity crunch. The next round of bond allocation could be finalised by early December.

The regulator and the government would assess capital requirements of various PSBs once they declare their September quarter results.

Already, recap bonds worth close to Rs 20,000 crore have been issued to a clutch of PSBs, including fraud-hit Punjab National Bank (PNB), this fiscal. Almost all the 21 PSBs, especially the 11 banks that are under the central bank’s prompt corrective action (PCA) framework, have sought capital from the government to boost lending and meet regulatory requirement.


RBI vs Govt: Discussion around invoking Section 7
unfortunate, says Ex RBI Deputy Governor

The Press Trust of India
Published on November 11, 2018

Section 7 of the RBI Act gives powers to the government to issue directions to the Reserve Bank governor on issues of public interest.

Mumbai, November 11 (PTI): Amid the debate surrounding Reserve Bank’s autonomy and the government’s alleged intervention in its functioning, former RBI Deputy Governor R Gandhi believes it is just difference of opinion.

He also termed the entire discussions around invoking Section 7 of the RBI Act as unfortunate.

In an interview to PTI’s Hindi service Bhasha, Gandhi, who was the Deputy Governor of the central bank between 2014 and 2017, said there is nothing new in such a debate.

Section 7 of the RBI Act gives special powers to the government to issue directions to the Reserve Bank governor on issues of public interest.

The former deputy governor said: “Such a situation will not arise if the government and RBI engage in talks at regular intervals. The ongoing debate is an indication that there have been some problems in this process. If there are talks, all issues will be resolved”.

Regarding transfer of surplus reserves to the exchequer, Gandhi observed that the central bank, after completing its annual audit, gives due share to the government.

The Reserve Bank of India (RBI) has massive Rs 9.59 lakh crore reserves and the government, if reports are to be believed, wants the central bank to part with a third of that fund — an issue which along with easing of norms for weak banks and raising liquidity has brought the two at loggerheads in recent weeks.

“Governments look at many issues with a short-sighted vision whereas the RBI has to take into account the mid and long-term picture. Therefore, disagreements may arise on an issue due to the difference of viewpoints or according priority to a particular sector. Difference of opinion is a sign of healthy environment. Decision on contentious issues are always good, if taken after intense debate and discussions.

“Having different points of view is a sign of a healthy situation. Decisions taken after debate and discussion are generally good. Therefore, I do not consider the ongoing debate as wrong,” Gandhi said.

He further said that four years earlier, then RBI Governor Raghuram Rajan had suggested that a formula or model should form the basis for fund transfer to the government. But at that time, the Centre was not prepared to accept it.

Gandhi said that today the government is demanding the same.

“I feel the RBI will also agree to this (formula for capital framework with RBI). However, there should be discussion on the elements and principles of the proposed formula. Once it is framed, the RBI will abide by it,” he added.

Asked about RBI relaxing norms for the banking system, Gandhi said this does not mean that whatever the government demands should be accepted. The RBI has to consider views of all stake-holders and take a decision for the overall well-being of the economy.

He also said it is not necessary that all issues will be resolved in the RBI’s board meeting on November 19. Some issues may be taken up at a later date for amicable solution.

Besides, Gandhi said the recent depreciation in the value of the rupee was not a cause of worry, and India’s economy rests on sound fundamentals.


RBI vs Govt: Surplus, liquidity issues likely to rock
Reserve Bank’s November 19 board meeting

The Press Trust of India
Published on November 11, 2018

According to sources, the board meetings are pre-decided and the agenda is also circulated much in advance. However, board members can raise off-agenda items in the meeting.

New Delhi, November 11 (PTI): The RBI’s board meeting on November 19 is expected to be a stormy affair in the backdrop of the ongoing tussle between the government and the central bank, sources said, adding that some members are likely to raise issues concerning capital framework, management of surplus and liquidity measures for MSMEs.

Tensions between the RBI and the government have recently escalated, with the Finance Ministry initiating discussion under the never-used-before Section 7 of the RBI Act which empowers the government to issue directions to the RBI Governor.

RBI Deputy Governor Viral Acharya had in a speech last month talked about the independence of the central bank, arguing that any compromise could be “potentially catastrophic” for the economy.

According to sources, the board meetings are pre-decided and the agenda is also circulated much in advance. However, board members can raise off-agenda items in the meeting.

Sources said the government nominee directors and a few independent directors could raise the issue of interim dividend along with the capital framework of RBI.

However, any change in the central bank’s economic capital framework can be carried out only after making amendments to the RBI Act, 1934.

Other issues which could be raised include alignment of capital adequacy norms with those in advanced countries and some relaxation in the Prompt Corrective Action framework, sources said, adding more measures to enhance lending to MSMEs and NBFCs may also be discussed.

The RBI is following conservative capital adequacy norms which are stricter than those in advanced economies, leading to banks keeping more risk capital reserve against loans.

The government is of the view that if the RBI aligns it with the global average, it would free up bank capital which can be used for increased lending to productive sectors, sources said.

Earlier this month, Reserve Bank Deputy Governor N S Vishwanathan dismissed calls for lowering capital adequacy norms for the lenders and matching them with global levels.

The capital requirements are high for domestic lenders because of higher defaults/bad loans, Vishwanathan explained, and warned that lowering capital norms merely for aligning them with global standards will create “make believe” strong banks.

With regard to capital framework, the government last Friday said it was discussing an “appropriate” size of capital reserves that the central bank must maintain as it denied seeking a massive capital transfer from the Reserve Bank.

The Reserve Bank of India (RBI) has a massive Rs 9.59 lakh crore in reserves and the government reportedly wants the central bank to part with a third of that amount.

Economic Affairs Secretary Subhash Chandra Garg had said that the government was not in any dire needs of funds and that there was no proposal to ask the RBI to transfer Rs 3.6 lakh crore.

The government, he said, is on track to meet the fiscal deficit target of 3.3 per cent of GDP for the financial year 2018-19.

“There is no proposal to ask RBI to transfer (Rs) 3.6 or (Rs) 1 lakh crore, as speculated,” he had tweeted. “Government’s FD (fiscal deficit) in FY 2013-14 was 5.1%. From 2014-15 onwards, Government has succeeded in bringing it down substantially. We will end the FY 2018-19 with FD of 3.3%. Government has actually foregone (Rs) 70,000 crore of budgeted market borrowing this year.”

Garg further said the only proposal “under discussion is to fix an appropriate economic capital framework of RBI”.

According to experts, the ‘economic capital framework’ includes transfer of surplus reserves to the exchequer.

Former Chief Economic Adviser Arvind Subramanian had in the Economic Survey 2016-17 said the RBI was already exceptionally highly capitalised and nearly Rs 4 lakh crore of its capital transfer to the government can be used for recapitalising the banks and/or recapitalising a Public Sector Asset Rehabilitation Agency.

However, this proposal never saw the light of the day.

Meanwhile, Former Union finance minister P Chidambaram Sunday asked the Centre what was its “tearing hurry” to “fix” the capital framework of the RBI when the ruling dispensation had just four months to complete its term.

“The NDA government has competed 4 years and 6 months of its term. It has effectively 4 months left. What is the tearing hurry to ‘fix’ the capital framework of RBI?” he tweeted.


RBI vs Govt: Govt had accepted
RBI’s new PCA rules, show papers

Shayan Ghosh
The Mint
Published on November 12, 2018

The finance ministry’s department of financial services had in a letter dated 3 March 2017 conveyed its acceptance and approval of the new RBI PCA framework

Mumbai, November 11: Not only was the union finance ministry aware of changes to the Reserve Bank of India’s (RBI’s) prompt corrective action (PCA) rules, it had accepted them as well, show communications between the government and the central bank. In a letter dated 3 March 2017, more than a month before RBI put the new rules in place, the finance ministry’s department of financial services (DFS) conveyed its acceptance and approval of the revised PCA framework.

Mint has seen a copy of the letter.

Referring to an earlier RBI communication dated 16 September 2016, DFS had said that they “broadly agree with the provisions of the revised prompt corrective action (PCA)”.

The ministry suggested some safeguards as well. In the same letter, the government said if the central bank observes that a bank’s Common Equity Tier 1 (CET1) ratio falls owing to a sudden spurt in provisioning, the new PCA guidelines should be able to take that into account.

CET1 is a key performance metric, breaching of which leads to restrictions under PCA. Others include asset quality and return on assets.

A person aware of these exchanges between the regulator and the government said RBI made the change suggested by the ministry before notifying it on 13 April 2017.

There have been recent media reports that RBI did not consult the government on PCA guidelines. Mint reported on 31 October that though PCA had become a source of discord between RBI and the government, it was framed after extensive consultations.

An email sent to an RBI spokesperson seeking comments was unanswered at the time of publishing this story.

The RBI PCA framework was introduced in December 2002 as a structured early-intervention mechanism along the lines of the US Federal Deposit Insurance Corp.’s PCA framework. Subsequently, in 2017, the framework was reviewed based on the recommendations of the working group of the Financial Stability and Development Council on Resolution Regimes for Financial Institutions in India and the Financial Sector Legislative Reforms Commission.

In a speech on 12 October, RBI deputy governor Viral Acharya defended the new PCA rules, calling it the required medicine to prevent further haemorrhaging of bank balance sheets. He had added that in spite of their worse capitalization and stressed assets ratio compared to other banks, PCA banks had credit growth that was as strong as that of other banks up until 2014. However, since the asset quality review exercise and the imposition of PCA, the year-on-year growth in advances for PCA banks has declined from over 10% in 2014 to below zero by 2016 and remained in the contraction zone since, he had added.

Under PCA, banks are mandated to cut lending to corporates and focus on reducing concentration of loans to certain sectors. They are also restricted from opening new branches and paying dividends. Currently, 11 public sector banks and one private sector bank are under PCA.

The ministry and the central bank are at loggerheads over a clutch of issues including relaxation of PCA norms, special liquidity window for non-banking financial companies, RBI’s 12 February circular on defaulters and transfer of more of RBI’s surplus to the government. While the war of words between the government and RBI is on for over two weeks now, a meeting of RBI’s central board on 19 November is expected to be stormy, with government nominees expected to take up these issues.

On 9 November, Subhash Chandra Garg, secretary of the department of economic affairs, had tweeted that discussions are underway with RBI to decide the appropriate economic capital framework of the central bank.


RBI vs Government: The 18 wise men
tasked with supervision of the Mint Street

The Press Trust of India
Published on November 11, 2018

Mumbai, November 11 (PTI):  As an unprecedented fight plays out between the RBI and the government, it is the central bank's 18 board members who are being keenly watched for their next course of action — they are not only central bankers and government officials but also business leaders, economists and activists.

The is scheduled to meet next on November 19 amid an ongoing tussle with the government on multiple fronts.

Going by the public utterances of the RBI and government officials so far, the contentious issues are how to manage the huge surplus the RBI has accumulated, how should it deal with errant lenders and borrowers amid a persisting bad loan crisis and what could be the 'public interest' for the government to dictate directions so that it is not seen as an attack on the central bank's autonomy.

As per the RBI website, its central board currently has 18 members, though the provision is that it can go up to 21.  The members include Governor Urjit Patel and his four deputies as 'full-time official directors', while the rest 13 have been nominated by the government, including two Finance Ministry officials — economic affairs secretary Subhash Chandra Garg and financial services secretary Rajiv Kumar.

There are also Swadeshi ideologue Swaminathan Gurumurthy and cooperative banker Satish Marathe, nominated by the government as "part-time non-official directors".  The entire board is appointed by the government under the RBI Act, which mandates the central board with "general superintendence and direction of the Reserve Bank's affairs".

The government can nominate 10 'non-official' directors from various fields and two government officials. The four non-official directors are one each from the four regional boards of the RBI. Besides Patel, the four official directors are N S Vishwanathan and Viral Acharya, both of whom have gone public with their direct or indirect criticism of any attempt to undermine the RBI's autonomy, as also B P Kanungo and M K Jain.

Patel became Governor in September 2016 after serving as Deputy Governor since January 2013. Previously, he had served at the International Monetary Fund (IMF) and was also on deputation from the IMF to the RBI during 1996-1997. He was a Consultant to the Ministry of Finance from 1998 to 2001 and has a PhD in economics from Yale University, an M Phil from University of Oxford and a BSc from the University of London.

Acharya is a New York University Professor of Economics, while Kanungo and Vishwanathan are career central bankers. Jain was appointed as a Deputy Governor in June 2018 and previously headed IDBI Bank and Indian Bank, among other professional banking roles.

The business leaders on the RBI board include Tata group chief Natarajan Chandrasekaran, former Mahindra group veteran Bharat Narotam Doshi, Teamlease Services co-founder Manish Sabharwal and Sun Pharma chief Dilip Shanghvi.

The other members are Sudhir Mankad (retired IAS officer whose last assignment was as Gujarat government's Chief Secretary), Ashok Gulati (agricultural economist), Prasanna Mohanty (ex-IAS officer and economist), Sachin Chaturvedi of Delhi-based think-tank Research and Information System for Developing Countries (RIS) and Revathy Iyer (a former Deputy Comptroller and Auditor General).

In the past also, the RBI's board has had several business leaders such as Ratan Tata, Kumar Mangalam Birla, NR Narayana Murthy, Azim Premji, G M Rao, Y C Deveshwar and K P Singh. Recently, the tenure of board member Nachiket Mor, who had previously been an executive director at ICICI Bank, was cut short -- nearly a year after he was re-nominated by the government in August 2017 for a second term of four years.

The central board members in the past also included Kiran S Karnik, Y H Malegam, Ela Bhatt, V Rajeev Gowda, Suresh Tendulkar and Suresh Neotia. The RBI was established on April 1, 1935 and the appointment and tenure of the board members are governed by Section 8 of the RBI Act.

It is Section 7, which has been in news lately, that provides that the "Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest".

"Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank," Section 7 further says.

It also provides that "save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in his behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank".

Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the government of India. The RBI is mandated "to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage".

It is also required "to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth."


Notes Ban, GST Held Back India's
Economic Growth: Raghuram Rajan

The Press Trust of India
Published on November 10, 2018

Washington, November 10 (PTI): Demonetisation and the Goods and Services Tax (GST) are the two major headwinds that held back India's economic growth last year, former RBI Governor Raghuram Rajan has said, asserting that the current seven per cent growth rate is not enough to meet the country's needs.

Addressing an audience at the University of California in Berkley on Friday, Mr Rajan said for four years-- 2012 to 2016 -- India was growing at a faster pace before it was hit by two major headwinds.

"The two successive shocks of demonetisation and the GST had a serious impact on growth in India. Growth has fallen off interestingly at a time when growth in the global economy has been peaking up," he said delivering the second Bhattacharya Lectureship on the Future of India.

A growth rate of seven per cent per year for 25 years is "very very strong" growth, but in some sense, this has become the new Hindu rate of growth, which earlier used to be three-and-a-half per cent, Mr Rajan said.

"The reality is that seven is not enough for the kind of people coming into the labour market and we need jobs for them, so, we need more and cannot be satisfied at this level," he said.

Observing that India is sensitive to global growth, he said India has become a much more open economy, and if the world grows, it also grows more.

"What happened in 2017 is that even as the world picked up, India went down. That reflects the fact that these blows (demonetisation and GST) have really really been hard blows...Because of these headwinds we have been held back," he said.

While India's growth is picking up again, there is the issue of oil prices, the economist noted referring to the huge reliance of India on import of oil for its energy needs.

With the oil prices going up, Mr Rajan said things are going to be little tougher for the Indian economy, even though the country is recovering from the headwinds of demonetisation and initial hurdles in the implementation of the GST.

Commenting on the rising Non-Performing Assets (NPA), he said the best thing to do in such a situation is to "clean up".

It is essential to "deal up with the bad stuff", so that with clean balance sheets, banks can be put back on the track. "It has taken India far long to clean up the banks, partly because the system did not had instruments to deal with bad debts," Mr Rajan said.

The bankruptcy code, he asserted, cannot be the only way to clean up the banks. It is the only one element of the larger cleanup plan, he said and called for a multi-prong approach to address the challenge of NPAs in India.

India, he asserted, is capable of a strong growth. As such the seven per cent growth is now being taken granted. "If we go below seven per cent, then we must be doing something wrong," he said adding that that is the base on which India has to grow at least for next 10-15 years. India, he said, needs to create one million jobs a month for the people joining the labour force.

The country today is facing three major bottlenecks. One is the torn infrastructure, he said, observing that construction is the one industry that drives the economy in early stages. "Infrastructure creates growth," he said. Second, short term target should be to clean up the power sector and to make sure that the electricity produced actually goes to the people who want the power, he said.

Cleaning up the banks is the third major bottleneck in India's growth, he said.  Part of the problem in India is that there is an excessive centralisation of power in the political decision making, he said.

"India can't work from the centre. India works when you have many people taking up the burden. And today the central government is excessively centralised," Mr Rajan said.

An example of this is the quantum of decisions that requires the ascent of the Prime Minister's Office, he said, amidst mounting tension between the Reserve Bank and the finance ministry.

The RBI led by Governor Urjit Patel and the government have not been on the same page on different issues for some months now. The disagreements came out in open when RBI Deputy Governor Viral Acharya in a hard-hitting speech said failure to defend the central bank's independence would "incur the wrath of the financial markets".


Bank and its critics

The Indian Express
Published on November 10, 2018

RBI has a more coherent case on capital base, performance and autonomy than its critics. Central banks need to be adequately capitalised in order to perform their core functions which include being the lender of last resort for the banking system.

Recent weeks have seen a bewildering explosion of commentary on the RBI by a disparate group including named and unnamed government sources, members of policy advisory groups, academics and others. The issues revolve around the capital base, performance and autonomy of the RBI.

Is the RBI’s capital base too large? Central banks need to be adequately capitalised in order to perform their core functions which include being the lender of last resort for the banking system. As per the latest available figures, total RBI capital is around 27 per cent of its total assets. This, as some observers have pointed out, is more than in most central banks in the world.

The problem with this conclusion is the composition of the RBI capital base. Only a third of RBI capital is actually contingency funds that can be deployed when needed. The remaining two-thirds of its capital is primarily revaluation funds. This is an accounting entry which rises and falls as the value of the assets of the RBI rises and falls. Thus, over the past quarter, the depreciation of the rupee has led to an increase in the rupee value of RBI dollar assets by almost Rs 1.6 trillion. But this is accounting income, not earned income. If one had reported the RBI balance sheet in dollars, then there would have been no change on either side of the balance sheet at all.

The deployable capital base of the RBI is just about 7 per cent of total assets. This makes the RBI one of the most under-capitalised central banks in the world. Commentators (including the Government of India’s Economic Survey of 2016) who focus on the overall rupee size of the RBI capital base as opposed to its deployable capital base are either deliberately misleading or are just dilettante economists. This brings us to the issue of RBI performance. The recent uproar has been over two overlapping concerns — the Prompt Corrective Action (PCA) norms and the liquidity management of the RBI since the IL&FS crisis broke in September 2018.

The PCA norms were introduced as a way of getting scheduled commercial banks to begin a prompt recognition and clean-up of their asset base before they acquired any new risky assets. This came on the back of a continued worsening of the balance sheets of a number of banks, especially public sector banks, with rising non-performing assets (NPAs).

Have the PCA norms worked? A simple examination of credit growth in the Indian economy this year would suggest that the measures most certainly have worked. Credit has been consistently growing at double digit rates since December 2017, including in September 2018 when it grew at 12.4 per cent (yoy). Crucially, this turnaround in credit growth has come after the low single digit rates of the last couple of years. Greater lending is being undertaken by better capitalised banks that have weaker incentives to ever-green their stressed assets. The claim that the PCA norms have failed is thus an argument based not on facts but rather on political expediency and corporate rent-seeking.

Banks are supposed to allocate the saving of households towards borrowers who are able to offer the highest returns at the lowest risk. When banks don’t undertake due diligence, taxpayers are left holding the bill while credit gets rationed for everyone. Hence, regulators devise measures to ensure that the lending process does not get compromised. PCA norms are one such measure. Throwing mud at the RBI for forcing under-capitalised banks to stop lending until they clean up is akin to throwing stones at a rehabilitation centre for forcing an alcoholic to sober up.

The other criticism of the RBI is with regards to its post-IL&FS liquidity management, especially for NBFCs. The available evidence certainly doesn’t suggest an ongoing liquidity crisis. NBFCs had typically been funding their investments with debt and bank loans with an increasing reliance on shorter and shorter commercial paper (CP) over the past year.

The first place that a big squeeze in liquidity would show up is in commercial paper rates. After adjusting for the monetary policy tightening cycle, the supposed liquidity crunch in the NBFC segment finds no supporting evidence in the CP rates which have only moved to the extent that the policy rates have moved (with some lag). There is no sustained independent effect of the IL&FS crisis on market rates. Pointing at the fall in new CP issuance in September 2018 is an attempt at drawing systemic conclusions from one data point. CP issues are a volatile series. Their growth rates (yoy) were negative in February, March and April of 2018 as well! There is certainly no evidence of any aggregate liquidity crunch.

This brings us to the question of RBI independence. A sovereign government finances itself from two sources: Taxes on its citizens and printing of money. The taxes go directly to the government while revenues from money printing accrue to the central bank. Governments face various political constraints that may induce them to take actions that create economic uncertainty. One way for citizens to exercise control over the government is to hand over part of the revenues to the central bank and make it institutionally independent of the government. Arguing, as some have, that independence is earned through performance gets this backwards. Central bank performance depends on independence, not the other way around.

The writer is director, Centre for Advanced Financial Research and Learning (promoted by RBI) and professor, University of British Columbia


Urjit Patel is rigid & uncommunicative
but India can’t afford his resignation

T N Ninan
The Business Standard
Published on November 12, 2018

Past RBI governors too have been rigid, but willing to engage.

The general drift of published commentary since the spat between the government and the Reserve Bank of India (RBI) became public has been as follows: A showdown should be avoided, and both sides should pull back; the government has a point on the need for more liquidity in the system; drawing on RBI reserves to keep the fiscal situation under control is not a good idea; finally, after having packed the RBI’s central board with political fellow-travellers, to now ask such a board to take decisions so far left to the management is best avoided. The board can provide oversight and guidance, but on technical matters the decision must be that of the professional management. In broad terms, the commentariat has come down on the side of the RBI while asking it to be more flexible and more open to discussion and persuasion.

There is another view: The RBI has excess reserves, which it should hand over to the government, to which the reserves belong. The central bank’s management has not been subjected to proper accountability, despite obvious failures, and therefore the RBI’s central board needs to play a more active role. And, it has its finger in too many pies and should focus on its core functions, leaving the rest to other market regulators or the government. Precedents from other countries have been cited for and against these positions.

The calls for the two sides to pull back and relax is the most sensible advice that can be given, but may not be easy for a couple of reasons. First, the pressures in the economy are real. Second, the broader debate on the proper role and functions of the RBI has been going on for some years and has to be resolved because it surfaces every now and then, as now with the payments system. There is a third factor that in all honesty has to be recognised, namely the personality of the present governor, who is seen as not just rigid but also uncommunicative. Past governors too have been rigid, but willing to engage. And yet, especially after the manner in which the last governor left (admittedly, at the end of his term), the government is reluctant to pull the trigger prematurely on this one.

Hence the government’s push to get issues discussed threadbare in the next board meeting. At the same time, if one were to judge by the tone and tenor of recent speeches by two deputy governors, there is a hardening of positions in the RBI’s top echelons. If the board forces the management’s hand on all the key issues, it should be prepared for resignations by the governor and the key deputy governor, Viral Acharya. That can only have negative consequences all around.

Bear in mind that the government is yet to fund a suitable candidate for the post of chief economic advisor. To look for a new governor and one more top-flight economist to serve as deputy governor, in an atmosphere of conflict, will probably mean planting an officer from the Indian Administrative Service as governor, on the assumption that he will do the government’s bidding. Given the criticism from influential quarters about filling senior economist positions with candidates from abroad, the search for suitable candidates will be an ask, though internal promotion could offer a solution.

The best answer in such situations is some tactical give-and-take. The board should advise in favour of more liquidity in the system, while appointing a committee to go into the technical issue of whether the RBI has surplus reserves that can be handed over. The government should use its own resources to give money to the under-capitalised banks that it owns. And Governor Urjit Patel on his part would be well advised to recall how Manmohan Singh as governor in the early 1980s was opposed to giving a branch licence to a dodgy foreign bank. When the government insisted and threatened to take bank licensing away from the RBI, Dr Singh (who had submitted his resignation on the issue) chose to back off rather than allow institutional damage to be done. Dr Patel faces a similar situation today.

TN Ninan is chairman of Business Standard Private Limited


India’s shadow banks fear
 credit crunch will deepen

Simon Mundy
The Financial Times, London
Published on November 12, 2018

Mumbai, November 11: The skyline of Mumbai’s fashionable Worli district has in recent years become increasingly cluttered with partially built luxury apartment blocks, promoted with huge roadside billboards.

Such developments in Mumbai and greater Delhi were financed largely with loans from India’s fast-growing non-bank financial companies (NBFCs), which in turn funded much of that lending through short-term bonds.

Now, a sudden liquidity squeeze in the debt market is prompting concerns about a serious hit to economic growth – and there are growing fears that distress in the high-end property sector, which has suffered stark shortfalls in demand, could trigger a crisis.

“If the NBFCs continue to face liquidity problems, they may need to recall some of these loans,” said Sanjeev Prasad, co-head of Kotak Institutional Equities. “And the developers don't have the cash to repay the money immediately. They are sitting on a huge pile of semi-completed projects.”

The problems for Indian shadow banks began in earnest in September after the first in a series of missed loan repayments from entities within IL&FS, a large unlisted infrastructure and finance group. This brought a crunch in the short-term corporate debt market – a key funding source for NBFCs, with IL&FS among the largest issuers.

Over the past two years, India’s relatively small corporate debt market enjoyed a surge of investment from debt-focused mutual funds, which have faced a huge wave of redemptions since the IL&FS defaults. Assets under management at Indian money market funds fell by 35 per cent in September, with net outflows of Rs 2.1 trillion ($28.8 billion).

The squeeze in the debt market is a major blow to the NBFCs, with bonds and commercial paper accounting for about 60 per cent of their total borrowings at the end of March, according to Moody’s.

Within Mumbai’s financial sector, concern is strongest for non-bank lenders that have extensive exposure to real estate developers. With Indian banks, hamstrung by bad corporate loans, showing little appetite for real estate lending in recent years, non-banks enthusiastically filled the breach. Their total outstanding loans to real estate developers stand at about Rs 2 trillion, Mr Prasad estimates – a nearly threefold increase in three years.

But the developers were hit by disappointing demand for their high-end projects – in part, analysts say, because of government measures such as the shock demonetisation of larger banknotes, which made it far harder to launder money through real estate investments.

Overly extravagant property designs also played a role, said Anuj Puri, founder of property consultancy Anarock. “Many of these developers built very large apartments that really became unaffordable,” he said.

As developers struggled to service their loans, some shadow banks came to each other’s aid by refinancing the loans, said Saurabh Mukherjea, founder of Marcellus Investment Managers. “It was a case of pass the parcel – and now the music has stopped,” he said.

While NBFC loans to real estate developers amount to less than a tenth of the sector’s total assets, they are heavily concentrated in a few relatively large, high-profile companies. Shares in Dewan Housing Finance, for example, have fallen by 65 per cent since the start of September.

There could be more serious problems for those highly exposed to developers now struggling to service their loans, which cannot be covered by cash flow from apartment sales. “I'm not convinced that this is entirely a liquidity problem. I think there is also a solvency problem brewing somewhere,” said Kotak’s Mr Prasad.

The pressure on the NBFCs will intensify in November and December, when they will need to pay out about Rs 1.6 trillion on debt held by mutual funds, according to Kotak Securities.

NBFCs have already stepped up their pace of asset sales, turning to the huge government-controlled banks from which they have aggressively taken market share in housing and consumer lending. State Bank of India, the country’s largest lender, last month said it would buy up to Rs 300 billion of loans from NBFCs in the next six months.

The RBI has taken steps to encourage banks’ support for NBFCs, on November 2 announcing that they would be allowed to provide partial guarantees for bonds issued by NBFCs. It has also taken measures to boost liquidity, including a government bond-buying programme worth Rs 560 billion over the past two months.

Such measures, however, have fallen far short of satisfying the government, which is pushing the central bank to pursue bolder measures. The pressure has prompted a thinly veiled public protest from one of the RBI’s deputy governors, and speculation that governor Urjit Patel could resign after its next board meeting on November 19.

Whatever the outcome of the current crisis, the momentum of the NBFCs has taken a severe blow, says Prabodh Agarwal, chief financial officer of IIFL, one of the largest companies in the sector.

“Against the 35-40 per cent loan growth we were looking at, that will be down to 10-15 per cent for the next two quarters,” Mr Agarwal said. “There is a sense of cautiousness, and growth will slow down considerably.”

Even stronger NBFCs have been forced to dramatically scale back their growth targets, he added – a blow to economic momentum, with the banking sector showing little sign of picking up the slack.


With due respect, Finance Minister

Arun Kumar
The Indian Express
Published on November 12, 2018

There has been only a marginal increase in the direct tax to GDP ratio after demonetisation. And the economy didn’t need to suffer for digitisation.

The government did not celebrate the second anniversary of demonetisation, one of its biggest policy initiatives. It has celebrated the anniversary of all other big policies. Why the diffidence?

The finance minister did come out with a statement listing the achievements of demonetisation. But his statement must be seen in light of the Minutes of the RBI Board Meeting on November 8, 2016, that recommended demonetisation. The Board had made it clear that demonetisation was not the way to tackle black money or counterfeit currency. Thus, two of the main objectives that were emphasised in the PM’s announcement on demonetisation were undermined the very day the policy was announced. No wonder, soon after it became clear the money was flooding into the banks, the government started talking of a cashless economy. And then it started talking about a less cash economy, digitisation and formalisation of the informal economy. It was said that these deposits would create a paper trail and black money generation would become difficult.

Initially, there was a spurt in the use of electronic means of transactions but this pace could not be sustained as more currency became available. The country had anyhow been slowly moving toward a less cash economy prior to demonetisation and this has continued. It was said that the government would restrict currency in circulation to less than what existed on November 7, 2016. But now the currency in circulation is about 10 per cent more than the Rs18 lakh crore that existed prior to demonetisation. To be fair, it is less than what it would have been if the increase in currency in circulation had continued at the pace prior to demonetisation.

The FM has cited three achievements of demonetisation. First, an increase in digital transactions. Second, expansion in the tax base with more people paying taxes. Third, the creation of paper trails that will make it difficult to generate black incomes in the future. Interestingly, echoing the RBI Board, he said confiscation of currency was not an objective of demonetisation.

The line earlier was that black money, held in the form of high denomination notes, would not return to banks since that would create paper trails. The then Attorney General had told the Supreme Court that Rs 3 to 4 lakh crore would not return to the banks. Soon it became clear that all the money would come back since those holding black money had worked out ways of converting their old notes to new notes. The government then started saying that was good since now the people who had deposited large sums of money could be investigated.

Government issued about 18 lakh notices to those who had deposited more than Rs 5 lakh into their bank accounts. However, there is a misperception that equates cash with black money. Cash is needed by businesses as working capital and households keep cash in hand for transactions and as a precaution against contingency. So, a petrol station may have deposited Rs 20 crore in the demonetisation period of 50 days, based on its daily collections. This is not black money. Most of those who deposited large sums of cash would have worked out how to show the deposits as cash in hand in their balance sheet. So, it would be difficult for the tax department to prove that the money deposited was black. Finally, data shows that the department does not have the capacity to audit so many accounts, in addition to the usual audits it conducts.

Yes, the number of returns being filed and tax being collected has increased. But, the direct tax to GDP ratio has hardly increased compared to the pre-demonetisation period. The black economy is more than 60 per cent of the GDP and even if 10 per cent of it had come into the tax net, it would have yielded 2 per cent of the GDP as additional tax collection. This has not happened.

It is well-known that 67 per cent of those in the tax net file either nil return or very low returns. The effective number of taxpayers has always been low in India. Even in the case of GST, the FM is on record saying that 5 per cent of those under GST pay 95 per cent of the tax. Further, he has lamented that even though 1.1 crore have registered under GST, only about 67 per cent pay tax.

The spurt in filing of returns is partly due to the fine being imposed from this year for late filing. So, many more have filed returns in time. Earlier many waited till March 31 to file returns. The numbers have also increased because of the increase in salaries after the implementation of the Seventh Pay Commission report. However, most of the increase will be in the category of those who have just entered the tax net. So, the increase in tax collection will not be much. The increase in the number of those who filed tax returns is a result of other factors, and only marginally due to demonetisation.

Increased digitisation could have been achieved without causing pain to the economy. Nigeria has a low cash GDP ratio but a big black economy. Japan has a high cash GDP ratio but a small black economy. So, digitisation does not necessarily check black income generation.

Finally, formalisation does not help reduce the black economy since the informal sector hardly generates any black incomes. Most incomes in this sector are way below the taxable limit which is rather high in India at three times the per capita income— with concessions and deductions it can be five times the per capital income.

The writer is Malcolm Adisesiah Chair Professor, Institute of Social Sciences and Author of Demonetisation and the Black Economy


End Illness By Fiat or By Treatment?

Editorial: The Economic Times
Published on November 12, 2018

Four public sector banks are expected to emerge from the prompt corrective action (PCA) framework, based on their improved financial performance, this paper reported on November 9. It is proof that PCA, which involves taking remedial steps to nurse banks back to health, is effective.

This should persuade the government to abandon its demand that the Reserve Bank of India abandon PCA and allow even banks that have been crippled by bad loans to resume lending. The government’s trespass on to the regulatory turf will seriously undermine market confidence.

Stringent regulation is necessary, given that PCA banks are a part of the interconnected payments and credit system and pose a threat to the entire financial sector, if not set right. Ego clashes must not thwart what is good for these banks.

The PCA framework is meant to curtail further losses and prevent erosion of capital to bring in stability in these banks. It places restrictions on dividend distribution, branch expansion and directors’ compensation, besides mandating banks to set aside more capital against bad loans.

The intent to reduce the scope of discretion and lower the risks on banks’ balance sheets is sound. “Like Odysseus, bank regulators tie themselves to the mast to evade the voices of the forbearance sirens,” RBI deputy governor Viral Acharya said at a lecture in IIT Mumbai last month.

His study suggests that the loss-absorption capacity of PCA banks is on the mend. However, there is some distance to go in their catch up to healthy levels. This, in turn, calls for giving RBI the full freedom to exercise its regulatory powers.

The government earns full credit for bringing in the Insolvency and Bankruptcy Code, which is playing a major role in resolving bad loans and persuading promoters to pay off their dues to banks, for fear of losing control of their cash cows.

Augmentation of bank capital will further improve their lending capacity, and bring weak banks out of PCA. The way to end the PCA regime is to strengthen the banks’ financials, both through resolution of bad loans and infusion of fresh capital.


Out of my mind: Beware of friends

Meghnad Desai
The Indian Express
Published on November 11, 2018

Even the destruction of the Babri Masjid happened 26 years ago. What is the urgency now? When the Supreme Court scheduled the hearing in January next year rather than November, why did this storm erupt?

The Duke of Wellington remarked at Waterloo about his mercenary troops that whatever effect they had on his enemies, they frightened him. Narendra Modi may have similar thoughts about the cacophony of voices seeking to build the Ram Mandir in Ayodhya without waiting for the Supreme Court to hear and decide on the long-running case. All of a sudden, the most urgent task for the nation seems to be to build a temple rather than worry about jobs, inflation, growth, farmer distress or even terrorism. The worst aspect of this movement is that it represents core supporters of the BJP, its Parivar members. If care is not taken, they may get their way.

Why are they in such a hurry? The case has been with the courts for decades. The debate about the site goes back five hundred years. Even the destruction of the Babri Masjid happened 26 years ago. What is the urgency now? When the Supreme Court scheduled the hearing in January next year rather than November, why did this storm erupt?

The only answer this leads to is that these core supporters have given up any hope of Modi winning again. The next few months before the general election seem to them the last chance of getting the temple built. Once elections take place, they fear defeat. This can be the only explanation of the demand for bypassing Parliament and promulgating an ordinance. Yogi Adityanath has even implied that regardless of the legal situation, temple-building should commence as all the materials are ready at hand. When the Masjid was demolished by the Parivar associates, Kalyan Singh, the then BJP chief minister, promised to enforce law and order but never intended to. It may quite be that the current Chief Minister may repeat that policy and, while lawbreakers build the temple, the UP government would stand by. Then, if the government is dismissed, he can run again as the Man who built the Mandir. After all, the law is being defied in Sabarimala with tacit support of the RSS and studied indifference by the Centre.

The only problem with this idea is that, if there was any doubt, this would definitely lead to Modi losing his majority. He was elected not as a temple enthusiast nor as a Hindu fundamentalist, whatever his private views. He was elected because he offered an inclusive policy of development. Until he re-formulated BJP strategy and made it more modern, relevant to people’s lives and inclusive, the core vote of the BJP yielded at most 183 seats in 1999. The extra 100 seats Modi won in 2014 came from the middle ground —middle-class and the young urban India which is not passionate about this or that mandir. For them economic prosperity matters as, for the poorer sections, the health policy embodied in the PMJAY is more important.

Lawbreaking in defiance of the Supreme Court will alienate middle India. The core vote is always going to be there. To win a majority a party has to go beyond the core. Narendra Modi has his hands full fighting opposition parties in the five state elections. Passing an ordinance and then dealing with the nationwide protests it will lead to, will be a distraction. The election will become a referendum on lawlessness. Result would be loss of single- party majority.

Meghnad Desai is a prominent economist. He is also a British parliamentarian sitting in the House of Lords. He has written over 25 books, over 200 articles in learned journals and hundreds of newspaper columns in UK and India.

Source: Internet news papers and anupsen articles


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