Banking News dated 13th November 2018

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Banking News: November 13, 2018


Urjit Patel met Narendra Modi on 9 November  amid face-off between RBI and finance ministry

Urjit Patel met Narendra Modi on 9 November
amid face-off between RBI and finance ministry

The Press Trust of India
Published on November 12, 2018

New Delhi, November 12 (PTI): Reserve Bank of India (RBI) Governor Urjit Patel is believed to have met Prime Minister Narendra Modi last week in a bid to work out a solution on contentious issues that have been flash point between the central bank and the government during the last few weeks.

Sources said Patel was in the national capital on Friday and met senior officials in the Prime Minister's Office (PMO). The meetings, which some said also included with the prime minister, came amid a face-off between the central bank and the finance ministry over issues ranging from appropriate size of reserves that RBI must maintain to ease of lending norms to step up growth in an election year.

Sources said there are indications that the RBI may create a special dispensation for lending to small and medium enterprises, but it was not immediately clear if an agreement has been worked out to ease liquidity situation for non-banking finance companies (NBFCs) and the RBI parting with its substantial part of its surplus.

Tensions between the RBI and the government have escalated recently, 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 in October talked about the independence of the central bank, arguing that any compromise could be "potentially catastrophic" for the economy.

Last week, Economic Affairs Secretary Subhash Chandra Garg had said the government was not in any dire need of funds and that there was no proposal to ask the RBI to transfer Rs 3.6 lakh crore. He further said the only proposal "under discussion is to fix appropriate economic capital framework of RBI".

Economic capital framework refers to the risk capital required by the central bank while taking into account different risks. The RBI has a massive Rs 9.59 lakh crore reserves. Patel's meetings at the PMO came days before the RBI's crucial board meeting on 19 November during which contentious issues are likely to come up for discussion.

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.


PM Narendra Modi met RBI Chief for
"First-Hand Account" Amid Rift: Sources

Sunil Prabhu,
The ND-TV News
Published on November 13, 2018

One of the key reasons of the friction is the government's demand that the Reserve Bank of India ease lending restrictions on banks that have piled up bad debts.

New Delhi, November 13: Prime Minister Narendra Modi and Reserve Bank Governor (RBI) Urjit Patel reportedly met last week in the middle of an unprecedented face-off between the government and the central bank on a range of issues including autonomy. The meeting took place on Friday, news agency PTI reported.

Next Monday, the RBI board is expected to meet for what Congress leader and former finance minister P Chidambaram has called "a day of reckoning".

"The Prime Minister wanted to have a first-hand account and explain to him his government's perspective and that his government is answerable to the people," sources told NDTV on the meeting.

Reports suggest that the RBI is considering a loan restructuring package for small and medium-sized businesses, as well as reviewing lending curbs on some banks. The RBI has barred 11 state-run banks from lending.

The government is seen to have been ramping up pressure on the regulator in recent weeks to relax lending curbs and hand over surplus reserves. The Congress has alleged that the government, facing huge fiscal deficit in an election year, had demanded Rs. 1 lakh crore from the reserves of the central bank.

When the Governor refused, the government took the "extraordinary, unprecedented step of invoking Section 7 of the RBI Act," alleged Mr Chidambaram. The November 19 meeting might be aimed at forcing the Governor's hand through the RBI board, which is packed with the government's men, he said. If that happens, the Governor may give in or resign, Mr Chidambaram said.

Section 7 gives the government the power to consult and give instructions to the central bank chief in the name of public interest.
Differences over interest rates are also a factor. While the RBI believes it should have sole responsibility of raising or lowering key interest rates to keep inflation in check, the government has expressed displeasure over the RBI increasing interest rates when it wants them lowered to boost spending.


Classic and Maestro Debit Cards: Daily Cash withdrawal limit reduced to prevent frauds: SBI MD

The Business Standard
Published on November 13, 2018

Mumbai, November 12 (ANI): P K Gupta, Managing Director (Retail & Digital Banking) State Bank of India (SBI), on Monday said that the step to reduce the per day cash withdrawal limit for all Classic and Maestro Debit Cards holders to Rs 20,000 has been taken for fraud prevention.

"We have taken this step for fraud prevention. A customer who wants to withdraw an amount higher than Rs 20,000 can take a card with a higher limit from the bank," Gupta said. Last month, SBI had reduced the per day cash withdrawal limit for all Classic and Maestro Debit Cards holders from Rs 40,000 to Rs 20,000.

"Daily cash withdrawal limit for Classic and Maestro Debit cards reduced from Rs 40,000 to Rs 20,000 per day with effect from October 31, 2018. If you require higher daily cash withdrawal limit, please apply for a higher card variant," read a statement from the bank. The decision was taken reportedly by the bank to curb increasing instances of ATM frauds.


RBI crisis: India is moving fast
and breaking the wrong things

Andy Mukherjee
The Bloomberg News
Published on November 12, 2018

Undermining the central bank in the name of the public interest, just when the institution finally has some capacity to serve the public, would be a real shame.

India’s government and the central bank have had disagreements, but the relationship has never looked so irretrievably broken as it does now.

Before the global financial crisis, the finance ministry saw the Reserve Bank of India as an incompetent regulator, one that managed the state-dominated banking industry by keeping it puny and primitive.

In that view, Indian lenders didn’t know how to model risks, and a conservative central bank wasn’t letting them use credit derivatives to manage them. Pressure from Finance Minister P Chidambaram to open up the banking industry to foreign competition almost led to the resignation of then RBI Governor YV Reddy. The spat, which never became public, was soon overshadowed by the 2008 meltdown, when the central bank won global praise for its mistrust of high finance.

That reputation was in tatters by the time of the 2013 taper tantrum, when India was hit by massive capital outflows. Appointing the former International Monetary Fund Chief Economist Raghuram Rajan as governor helped stabilise asset prices and mend the central bank’s reputation. But a change of government in 2014, followed by an acceptance of Rajan’s old recommendation to narrow the RBI’s policy remit to the single-minded pursuit of an inflation target, revived the campaign to chip away at the institution’s authority in other matters.

Rajan strongly opposed the idea of handing supervision of the government securities market to the stock-market regulator. He also resisted subjecting the central bank’s regulatory decisions to an appellate authority. Had he failed to do so, his successor Urjit Patel’s bank cleanup drive – which has included lending restrictions on 11 state-run lenders and the ouster of CEOs at a couple of non-state banks – would have been bogged down in an appeals process.

Building pressure

Not that Patel got a free pass. When stranded power companies challenged the central bank’s February order that banks take defaulted firms to the bankruptcy tribunal, a court asked the government to consider using Section 7 of the RBI Act to start a dialogue with the monetary authority. That article, which has never been triggered, says the government may (in the public interest) give directions to the central bank after consulting with it.

Emboldened by the court order, government officials began writing letters seeking Patel’s views on everything from nonperforming power-sector assets to lending restrictions on state-run banks and a liquidity squeeze following the bankruptcy of a systemically important infrastructure lender. They didn’t invoke Section 7, but to build pressure on the governor, they cited it anyway.

This overreach has led to a delicate moment in the institution’s 83-year history. In a speech about what happens when politicians toy with central-bank independence, RBI Deputy Governor Viral Acharya brought up Argentina in 2010. That annoyed the finance ministry. Just as in the Latin American example, New Delhi is bullying the central bank to transfer some of its resources to the government.

One way to recapitalise banks would be to prune the RBI’s balance sheet by $60 billion, and use the capital freed up in process, the government’s chief economic adviser suggested in early 2017. I wrote at the time that this wouldn’t sit well with investors: There were serious questions about the RBI’s independence following an ill-conceived demonetisation adventure just a few months earlier.

What I didn’t realise then was that the bigger consequence of demonetisation was to make voodoo economics chic. Although outlawing of 86% of India’s currency failed to yield a fiscal bonanza, media reports suggest the government still believes the central bank has $50 billion in excess capital.

Fourteen years ago, when New Delhi wanted to take $5 billion a year for three years from the RBI’s foreign-exchange reserves for infrastructure, there was a lively debate, but nobody demanded the ouster of the central bank’s boss. It seems that policy-making in India, as elsewhere, has caught the Silicon Valley bug of moving fast and breaking things. There’s now open speculation that Patel may resign at an RBI board meeting Nov. 19.

The curmudgeonly RBI needs to do more to protect consumers and foster competition. But its reputation for honesty is a major asset in a country rife with corruption. And if $200 billion in bad loans keeps old doubts about the central bank’s competence alive, now at least it has the tools – such as a modern bankruptcy law – to act boldly. Why atrophy those newly acquired muscles? If inflation targeting succeeds in anchoring price expectations, the economy could operate with a permanently lower cost of capital.

For the avowedly pro-business government of Prime Minister Narendra Modi to lose sight of the benefits of such a shift (including a freer capital account) and lunge for the trite socialism of a state-directed credit binge is regressive.

Undermining the RBI in the name of the public interest, just when the institution finally has some capacity to serve the public, would be a real shame.


MSME outreach

Mohan R Lavi
The Business Line
Published on November 13, 2018

The government’s new loan portal falls short

One of the unstated objectives for introducing GST in India was to get as many business entities as possible into the tax net. Due to a very loose definition of service in the erstwhile regime, a good portion of service providers were not sure whether the tax would apply to them or not.

Under the Central Excise regime, entities with a turnover up to Rs. 150 lakh did not have to get into the nitty-gritty of the concept of manufacture, valuing the goods they manufactured and paying excise duty, as they enjoyed an exemption through Notification No 8/2003. All these enterprises had to come into the GST regime due to the threshold limit being fixed at Rs. 20 lakh.

In a clear attempt to incentivise entities to register under GST, the CGST Act also had a Section 9(4) which mandated that in case GST-registered entities purchased from non-GST entities, they would need to pay the applicable GST on the reverse charge mechanism. Later, a Notification was issued to provide an exemption of Rs. 5,000 per day for such purchases. Due to issues in implementing and following this provision, it was stopped in October 2017 and has been deferred till September 2019.

MSME outreach

Recently, the Prime Minister launched a support and outreach programme for micro, small and medium enterprises (MSMEs) sector which revolves around 12 key initiatives on five key aspects that the sector needed — access to credit, access to market, technology upgradation, ease of doing business, and a sense of security for employees. The support and outreach programme commenced with a bang — the launch of a portal that promises 59-minute in-principle loan to enable easy access to credit for MSMEs for loans up to Rs. 1 crore. In a clever move, it was clarified that the link to the loan portal will be made available through the GST portal. It was followed by an announcement of a 2 per cent interest subvention for all GST-registered MSMEs, on fresh or incremental loans. For exporters who receive loans in the pre-shipment and post-shipment period, there would be an increase in interest rebate from 3 per cent to 5 per cent.

The government has attempted to get MSME entities onto the GST bandwagon by providing them assistance where they most need it — financing. Since getting a loan from a bank these days is a rarity, MSMEs need new sources of financing and the government has opened a window for them. Yet, MSMEs may not get very excited about the 59 minute loan facility — they will certainly want to know the interest they would have to pay after the subvention. As financing costs can hurt the profit and loss account of MSMEs, these entities would be prepared to wait for 59 days to get a loan at a lower rate if available. The government may have missed a trick in not announcing a special interest rate for these loans instead of a subvention.

With a composition scheme in place and a proposed system of requiring enterprises with turnover up to Rs. 5 crore to file only quarterly returns, MSMEs need not worry too much about compliance costs under GST. Non-MSME enterprises would be worried about how the moody GST portal will behave after it has a financing window.

MSMEs would now need to do a SWOT analysis of getting onto the GST regime vis-à-vis their need for financing. Step by step, the government seems to be getting them into a GST chakravyuha from which all exits are gradually being closed.


The Reserve Bank is not ‘overcapitalised’

Himadri Bhattacharya
The Business Line
Published on November 13, 2018

Its contingency fund, at 6 per cent of its total assets, is not adequate to cover for interest rate, exchange rate and credit risk

Over the last few years, there have been demands for the use of the RBI’s internal reserves for fiscal purposes, like recapitalisation of PSBs and higher dividend payments to the government. The previous RBI Governor was fairly dismissive of this idea. It appears that the present leadership of the RBI is again facing some pressure in this regard, if the unprecedented interim dividend payment of Rs. 100 billion in 2017-18 is anything to go by. The basic premise of the government is that the RBI holds capital (share capital, free reserves and valuation reserves) much in excess of what is needed, and hence the government is justified in laying a claim on the free reserves. This claim is, however, contestable.

Complex issue

What quantum of economic capital is adequate for a central bank (CB) in the present era of fiat money is not easy to determine. These issues have been the subject of a good deal of debate and research over the last two decades, especially after it became known in the late 1990s that the Bank of Japan hesitated to take appropriate and timely monetary policy measures to address the country’s acute deflationary situation obtaining then, because of its concern about their likely consequences on its balance sheet.

At the heart of the issue is: what constitutes appropriate back up against the monetary liabilities from the point of view of macro-financial stability? Two distinct back-up systems exist: One, the tax-based system, in which the central bank’s balance sheet does not have much relevance and the present and future tax revenues of the government provide the ultimate support to the monetary liabilities of the RBI.

Two, the reserve-based system, in which the central bank’s balance sheet strength and internal reserves provide support for the monetary liabilities. One important operational difference between the two is that central banks of the latter category do not undertake quasi-fiscal activities and have aversion toward credit risk. Most central banks occupy intermediate positions between the two types, but the RBI is closer to the second, particularly in its evolution in the post-reform period.

The RBI’s statute does not permit buying of securities both in India and and abroad which are not issued/guaranteed/supported by the sovereign. Beginning in 1993-94, when the RBI began building its forex reserves after the BoP crisis of 1990-91, its composition of assets has undergone a major structural shift in that foreign assets (including gold) now are significantly higher than domestic assets. The former’s share in total assets, which was about 50 per cent in 2000, rose to about 80 per cent in 2018. Among other contributory factors, this transformation of the backing for RBI’s monetary liability has certainly been a reason for the decline in structural inflation in India from close to double digits in 1990s to 4-5 per cent now.

But the preponderance of foreign assets comes with a price: higher risk with lower return vis-à-vis domestic assets, necessitating higher capital. Further, there exists an extra layer of risk associated with foreign assets since their composition is not entirely a result of the RBI’s monetary policy operations: RBI buys US dollars through domestic forex market interventions, but maintains a roughly 50:50 currency and asset composition in US dollars and in other major currencies in its foreign currency assets (FCA). The RBI does this not as a monetary authority but as a financial institution with its particular risk-return strategy for portfolio management of foreign currency assets.

Nevertheless, the strategy entails higher risk, the chief manifestation of which is the valuation change of foreign currency assets from time to time. The conclusion here is the RBI needs to maintain significant capital to cover all the currency, interest and credit risks that it faces, not counting operational risk and the risks due to its domestic liquidity operations, lender-of-the-last-resort function, expected support to DICGC, various types of legal risks and any quasi-fiscal operation that it could be asked to undertake.

Augmenting internal reserves

The RBI’s free reserves comprise its reserve fund, asset development fund and contingency fund (CF), the last one providing the overwhelming bulk and being the first cushion for absorbing general loss. It was almost entirely exhausted in 1993-94 as a result of the exchange rate guarantee that the RBI provided to FCNRA deposits introduced in early 1980s. Largely as a consequence of this experience, the RBI felt the need to adopt a policy in 1997 to build its CF, in terms of which a target 12 per cent for the ratio of CF to its total assets was set. Subsequently in 2004, a detailed review exercise in this regard was undertaken but its recommendations were not accepted and the status quo ante was maintained. The CF was subsequently built up, reaching a high of 10.9 per cent of total assets in 2008-09.

Currently, this ratio is much lower. It stands at a little over 6 per cent and shows a declining trend. The CF in relation to total assets at little over 6 per cent is much lower than the target and is declining. This is worrying and can have adverse implications for macro-financial stability. The large balance in the currency and gold valuation account of Rs. 6,916.41 billion as on June 30, 2018 provides little comfort, since this balance is available only for absorption of currency and gold valuation losses. The importance of the CF can be gauged from the fact that in 2017-18 alone, valuation loss of Rs. 168.74 billion in foreign securities portfolio was charged to the CF.

Way forward

The RBI should adopt a policy framework to determine dividend payable to the government each year, after assessing CF adequacy vis-à-vis an identified set of risks, following a rich methodology. This should be supplemented by an analysis of the RBI’s earnings under the following categories:

·       Seigniorage: Earnings on investing the counterparts of monetary liability (reserve money), which as on June 30, 2018 was about 69 per cent of total assets. This is the expected core dividend, net of proportionate share of operational expenses and valuation deficits, if any.

·       Counterpart of capital: Earnings on investing capital.

·       Counterpart of other liabilities: Earnings on other liability items.

·       Currency risk: Valuation change of FCA, which needs to be recognised separately in the books of accounts.

The earnings of the last three categories should be used to consolidate the CF and also to smooth dividend payments. Among other benefits, this approach will incentivise the RBI to follow appropriate policies for portfolio management of FCAs.

The writer is a former central banker and consultant to the IMF.


The government should respect the RBI’s stand

Shruti Rajagopalan
The Mint
Published on November 13, 2018

It is not legal autonomy, but functional autonomy and common sense that require the government to respect the RBI’s stand

The Reserve Bank of India (RBI) and the finance ministry are once again in conflict, this time over the reserves of the central bank. This is not their first confrontation, nor will it be the last. There is little doubt that the RBI is not an independent central bank. Economists and historians have pointed out time and again that the RBI was a creation of the politics of its time, heavily influenced by events in England. So, the question to evaluate today is not really one of complete or partial independence; but that given the RBI is not legally an independent central bank, what are the lines that the ministry of finance, the RBI board, and the RBI leadership should draw, and then never cross?

Adam Smith, the father of modern economics, made famous the idea of division of labour and specialization in markets. In Book V of The Wealth of Nations, he extended some of these ideas to the separation of powers in government. Smith argued that there are two reasons why we need a separation of power—the first is functional, and the second is to create checks and balances.

Functionally, there is much division of labour and specialization required in governance. Different departments of government engage in different tasks, which require specialized knowledge, and one department cannot easily substitute for another. This is even more true for authorities with specific mandates such as election commissions, auditors and, of course, the central bank. There is a reason that once the government appoints its “chosen candidate” it generally defers to his judgement and decisions. The governor and his team simply know more about maintaining monetary stability.

The minutes from the RBI board meeting just prior to the demonetization announcement sheds some light on how the government may have control and decision rights, but lacks the functional knowledge. A fundamental misunderstanding between real rates of economic growth and nominal rates of currency growth was one major gaffe by the government. Also, the consequences of banning 86% of the value of currency on the circulation of money were not considered. The prime minister claims to know the will of the people, but the decision of how many notes must circulate, and in what denomination, to make easy change in an economy, is utterly unknown to him. He has no specialized knowledge in this matter. The RBI, given the time, would know the number of ₹100 and ₹50 notes required to ensure that circulation is not affected by demonetizing large denominations. Our prime minister, who decided that no experts needed to be consulted, almost led the Indian economy off the cliff.

In the most recent squabble, the government feels the need to tap into the RBI reserves. Who is more likely to understand two issues—the best current use of those reserves and the consequences of leaving the RBI short of those reserves? It is quite clear that on both counts the RBI has the requisite functional and specialized knowledge. On the other side, the relevant individuals to take the same decision are the prime minister and finance minister who are likely illiterate of macro-economics.

Adam Smith also forwarded a second, much better-known reason for the separation of powers—to avoid concentration of power in the executive and provide checks and balances to democratically elected governments. While the government suggests that the lack of legal autonomy makes the RBI a subordinate to the finance ministry, both convention and common sense seem to suggest otherwise. The RBI is supposed to maintain monetary stability—and very often that can be achieved only by keeping a check on the government. This mandate for the RBI is a statutory creation, enforced by elected governments. And this leads the RBI to sometimes be in conflict with the wishes of the government, in order to fulfil its statutory mandate.

In conflicts with every institution, especially those not democratically elected, governments typically reference their mandate as the “will of the people” and then move on to quash the checks placed by other institutions, which are mostly just going about fulfilling their mandate. The RBI is not simply the banker for the government. Nor is the RBI the parent of an errant child, looking the other way when the child overspends. It serves the whole country and has responsibilities beyond writing cheques to the government.

A third reason to err on the RBI’s side is to reflect on the role it plays. The RBI is also bound by the will of the people that did not elect a particular government. The democratically elected government only received about 35% of the actual vote share (or mandate) of the 60% of the eligible voters who voted. Even though the current ruling party got the most votes, its constituents don’t comprehensively represent the interests of all Indians. This is why democratically elected governments who facing pressure to spend and announce programmes to benefit their constituents just prior to elections should be constrained. Even more importantly, the RBI, given its mandate of monetary stability, also represents the interests of the yet-to-be-born Indians—those Indians who will foot the bill tomorrow for today’s follies. Oddly, it is at such times when non-democratically elected officials actually preserve the long-term interests of the country.

Publicly fought spats between important institutions have both costs and benefits, and the latest RBI-finance ministry squabble shines the light on those trade-offs. It is not legal autonomy, but functional autonomy and common sense that require the government to respect the RBI’s stand.

Shruti Rajagopalan is an assistant professor of economics at Purchase College, State University of New York, and a fellow at the Classical Liberal Institute, New York University School of Law.


Retail race

Editorial: The Business Line
Published on November 12, 2018

Unsecured loans are necessary for the economy,
but they can expose banks to sudden risks

It is not altogether surprising that Indian banks, after burning their fingers on project loans to some of the largest industrial groups, should turn to borrowers at the other end of the spectrum to drive their growth. A BusinessLine analysis shows that unsecured credit card debt and personal loans have become the fastest growing segments for banks in the last three years, expanding at a 30-31 per cent annually while system credit has increased at just 8-9 per cent. While unsecured retail loans are certainly not at alarming levels yet, making up less than 8 per cent of outstanding bank credit, their scorching growth rates do warrant attention from bank risk managers and the regulator. Indian banks have had a bitter experience with indiscriminate retail lending during the previous boom. In the event of defaults, such loans offer negligible prospects for recovery.

This shift in bank lending has no doubt served a felt need for the economy. In recent years, private consumption has been the key engine of India’s growth with private capex in the doldrums. Given that India is still a lower middle-income country, retail access to credit is imperative to sustain the consumption juggernaut. Banks too are keen to push unsecured loans because they allow them to showcase strong credit growth while earning a return on assets as high as 3-4 per cent. There has been a quantum improvement in the quality of data backing credit card and personal lending in this economic cycle, compared to the previous one which went bust in 2008-09. With the advent of credit bureaus, data repositories on credit history and social media analytics, lenders today have the wherewithal to put their retail borrowers under a microscope to extend loans only to prime ones. But with multiple lenders — universal banks, small finance banks, NBFCs and microfinance institutions — now chasing the same retail segment, the question really is if cut-throat competition will force a dilution of credit standards, lead to poor risk pricing and trigger a race to the bottom.

To ensure that they do not end up with the short end of the stick in this rat race, public sector banks may need to beef up the pace of technology adoption and build capacity in alternative credit scoring and data analytics. Acquiring retail exposures indirectly through securitisation or assignment deals with NBFCs or small finance banks is another option. Traditionally, such niche lenders have managed low credit costs by concentrating in areas where they have last-mile reach, hiring local staff and leveraging on local communities to ensure good credit behaviour. But they have still proved vulnerable to liquidity risks and exogenous shocks, suffering a sharp spike in defaults during the economic downturn and the note ban months. Banks must thus be conservative with their exposure limits to unsecured retail loans, no matter how attractive their growth rates or yields may seem right now.

Source: Internet news papers and anupsen articles


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