Banking News dated 19th November 2018

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Banking News: November 19, 2018


SBI moves RBI for alternative options to  paperless account opening via Aadhaar on YONO

SBI moves RBI for alternative options to
paperless account opening via Aadhaar on YONO

The Press Trust of India
Published on November 18, 2018

Mumbai, November 18 (PTI): As State Bank of India’s one-stop solution platform ‘YONO’ for accessing all the banking services digitally remains suspended following the Supreme Court’s order on Aadhaar, the bank has sought clarity from the RBI for an alternative solution, a top official said.

The Supreme Court order on September 26 said it was not mandatory to link the 12-digit unique identification number Aadhaar for opening or availing banking services, among others.

Since then, SBI has disabled the facility of opening a paperless bank account through ‘You Only Need One’ (YONO) temporarily. Customers are required to visit a branch to open an account.

“As of now the e-KYC is not being permitted, so we want some clarification from the RBI. We have discussed this with the regulator. So, after the clarification comes, then we can start (doing e-KYC through Aadhaar),” the official told PTI.

The digital platform ‘YONO’, launched in November 2017, offers all financial services and lifestyle products and services of the bank including opening an account without visiting a bank branch.

Customers could transfer funds, avail of pre-approved personal loan sans any paperwork and get overdraft facility against fixed deposits.

Before the SC order on Aadhaar, the unique identification number was made mandatory for a host of services including banking and telephony and became a one-point solution to complete the know your customer requirement at an affordable cost.


RBI Vs Government: It’s D-Day!

Vrishti Beniwal & Anirban Nag
The Bloomberg News
Published on November 19, 2018

An Accountant Stirs Debate as India's Central Bank Board Meets

Mumbai, November 19 (Bloomberg):  India’s monetary policy makers and government officials will meet Monday in a board meeting that promises to be anything but its usual dull affair.

Locked in a power struggle over how much capital the central bank needs and how tough its lending rules should be, a trained accountant parachuted into the Reserve Bank of India’s board by the government in August may be key to whether a compromise can be found or whether the already public spat turns even uglier.

Swaminathan Gurumurthy, a chartered accountant turned newspaper columnist, has set the tempo by chiding the monetary authority for being too tough in its efforts to rid banks of bad debts and arguing the case for lower reserves -- a step that would give the government more cash ahead of an election year.

The central bank -- led by Governor Urjit Patel -- has pushed back against the moves, keen to burnish its inflation-targeting credentials and clean up one of the world’s worst bad-debt piles. Patel’s deputy took the spat public in late October in a fiery speech in defence of central bank independence.

For a nation that relies on imported capital to fund investment, failure to reach middle ground threatens to erode investor confidence in the world’s fastest-growing major economy. Those elevated stakes are making Monday’s meeting in Mumbai a must-watch affair for India market watchers.

Gurumurthy, who is associated with the economic wing of Rashtriya Swayamsevak Sangh -- the ideological parent of Modi’s Bharatiya Janata Party -- and is a champion of small-traders who are BJP’s key voting bloc, was chosen by the government to push easier access to credit for micro and medium-sized enterprises. Lending to the sector has suffered after the RBI tightened norms for state-run banks saddled with bad debts.

The central bank, which is also the banking regulator, may be open to easing tight money conditions in the banking sector by injecting cash through open market purchases of bonds. But it’s unlikely to part with its reserves as some of these are notional, and may resist relaxing capital buffers for banks.

The government can still have its way with the RBI by invoking a rule that hasn’t been used in the central bank’s 83-year history. The finance ministry last month sought Patel’s views on the issues of contention by citing Section 7 (1) of the Reserve Bank of India Act.

Advisory Role

The RBI’s board is only meant to advise and guide and not decide on policy issues, people familiar with the matter said. But Gurumurthy and the government nominees Subhash Chandra Garg and Rajiv Kumar have been vocal about bank supervision, flow of credit to industry and easier financial conditions for India to overcome a crisis in its shadow banking sector.

An activist board has not been taken too kindly by the RBI. While the first clause of Section 7 confers powers to the government to give directions, the third part indicates that the governor shares power with the board, the people said, adding that the powers of the governor are reiterated in another section of the RBI Act.

C. Rangarajan, a former governor of the central bank, said in an interview with CNBC-TV18 television that Article 7 should never have been used, and both the government and the RBI should be accommodating.

The government is separately seeking more powers to supervise the central bank, a departure from the board’s current role as an advisory body, people with knowledge of the matter said.

“Having Gurumurthy on the RBI board has complicated the situation,” said Mohan Guruswamy, a former finance ministry official and chairman of the Centre for Policy Alternatives in New Delhi, who has known Gurumurthy for years. “He wants banks to give money to non-bank finance companies, which are already in a mess. He’s an RBI director. It’s not his grandfather’s money.”


The Points of Friction between RBI and
Government Ahead of Crucial Board Meet

The Bloomberg-Quint News
Published on November 17, 2018

Mumbai, November 17: The central board of the Reserve Bank of India will meet on Nov.19 amid a public battle over a host of issues ranging from banking regulation to the central bank’s own balance sheet.

The issues, which were presumably brewing behind closed doors, came out into the open when Reserve Bank of India Deputy Governor Viral Acharya highlighted them in a speech focused on central bank independence.

BloombergQuint, through a series of articles, explains some of the underlying issues on which the RBI and the government have differing views.

The Central Bank’s Balance Sheet

The debate over the appropriate level of capital on the central bank’s balance sheet is an old one. The issue was raked up by former Chief Economic Adviser Arvind Subramanian, who argued the Indian central bank is overcapitalised.

The RBI has countered this all along and believes that its reserves need to be strong to enable it to counter any risks that may emerge in the economy. Former RBI Deputy Governor Rakesh Mohan argued that at about 20 percent of GDP, the size of the RBI balance sheet has not changed much over the years.

The government, however, feels the RBI uses too conservative a methodology to arrive at the requisite level of reserves. It thinks the RBI is sitting on excess capital of Rs 3.6 lakh crore.

Easing Prompt Corrective Action Framework

Prompt corrective action as a tool to prevent weak banks from getting weaker has existed for some time now. Its implementation, though, was whimsical. So, in April 2017, the Reserve Bank of India issued a revised set of benchmarks, with an attempt to move towards a more rule-based framework.

At the time the framework was implemented, the government didn’t raise objections. However, it now feels that it’s hurting the flow of credit in the economy. The RBI, in a speech by Deputy Governor Viral Acharya, argued that it is important to persist with the framework. “Any slackening of the approach in the midst of required course of action is an all-too-familiar and ultimately harmful habit that we must eschew,” Acharya had said in a speech at IIT Bombay on Oct. 12.

The health of these banks remains weak, supporting the need for continuing with the corrective action, showed a recent BloombergQuint analysis. Read that analysis here: PCA Banks Report Nearly Rs 70,000 Crore In Losses Over Last Five Quarters.

Diluting Basel Norms and Stressed Asset Framework

The government is also seeking a dilution of the Basel-III norms for India. Government representatives argue that India has prescribed capital norms that are tougher than many other countries.

The government wants the RBI to bring down capital to risk (weighted) assets ratio to 8 percent, in line with Basel III norms, from 9 percent currently. This could help banks save Rs 55,000 crore in capital. The RBI has argued these stronger capital norms are essential to ensure that strength of Indian bank balance sheets is real. “The real strength will come from recognising weaknesses in the balance sheet and making provisions for them rather than pretending to believe that the balance sheet is strong,” Deputy Governor NS Vishwanathan said at a recent lecture.

In the same vein, the government wants the RBI’s new stressed asset framework, issued in a circular on Feb.12, diluted. In particular, the government wants power assets left out of the ambit of this framework.

Tackling NBFC, SME Concerns

Another set of contentious issues pertain to the extent of the RBI’s response to the conditions being faced by non-bank financial companies. The RBI has responded by ensuring that the system is supplied with adequate liquidity. But some in the government argue that more direct intervention may be needed.

NBFCs, over the past few years, have gained more market share in the credit markets. The fear is that if these lenders slow down, credit flow to the economy would be hurt. In particular, there are concerns over small and medium enterprises, which have been hurt by both demonetisation and goods and services tax. Will the credit squeeze hurt them further?

Analysts agree that the RBI can ease liquidity further but most say that the regulator should stay away from any sort of bailout.

Talk To Each Other!

Veteran government and central bank officials feel that differences between the RBI and the Finance Ministry are nothing new. What appears to have changed is the extent of communication between the two entities. This break-down in communication is unhealthy and must be corrected, said a number of former RBI and government officials BloombergQuint spoke to. If back-channel discussions do not help ease tensions between the two sides, matters will need to be resolved at the level of the central board.


Clashes likely as RBI board meets today

The Business Line
Published on November 19, 2018

But two sides may seek common ground
on issues related to economic growth

Mumbai, November 18: The crucial meeting of the Reserve Bank of India’s board of directors on Monday is expected to be a stormy affair, but is likely to push for an agreement on key issues that have caused a rift between the central bank and the Finance Ministry.

While there could be some agreements aimed at improving credit flow, the board members could make conciliatory moves on issues related to economic growth and financial stability.

In the last fortnight or so, government nominees and representatives on the RBI’s central board have publicly aired views that the central bank should relax the stringent prompt corrective action norms for public sector banks (PSBs) so that they can step up lending, open a special liquidity window for NBFCs, ensure enhanced credit flow to micro, small and medium enterprises (MSMEs), and relax capital adequacy norms for banks, among others.

PCA framework

The government is worried that growth is getting affected, as 11 PSBs have curbed their lending activities due to them being put under the PCA framework by the RBI on account of high non-performing assets and negative return on assets.

Further, there is a fear that due to liquidity issues facing them after the IL&FS imbroglio, non-banking finance companies may shy away from lending to micro, small and medium enterprises, which are recovering from the impact of demonetisation and implementation of the Goods & Services Tax.

“It is likely that the RBI will make concessions so that some of the PCA-affected public sector banks can get back to the business of lending, including to MSMEs, from the next quarter.

“However, opening a separate liquidity window is unlikely as better-rated NBFCs are able to tap both banks and bond markets for their funding requirements, albeit at higher interest rates. They, in turn, can lend to MSMEs. The situation facing NBFCs now is not as dire as it was during the global financial crisis (2008-09),” said a top banker.

On the issue of the government wanting to dip into the central bank’s reserves to either recapitalise state-owned banks or bridge the fiscal deficit, the RBI is against this demand as it could undermine financial stability. The board may agree on setting up a committee to formulate an appropriate economic capital framework for the central bank.

Capital prescription

Industry experts believe the RBI may examine the feasibility of doing away with the one-size-fits-all approach to capital prescription for banks.

While banks with a global presence will need to maintain higher capital in keeping with Basel-III prescriptions, they feel those with only a domestic presence could do with lower capital requirements.

Monday’s meeting will be a key test on how much autonomy the Centre is willing to give to the RBI. There is speculation that RBI Governor Urjit Patel could step down if the government nominees on the board push hard.

The Centre has ensured that it has enough voices on the RBI’s board. In August, S Gurumurthy and Satish Marathe, both close to the BJP, were named to the board. Last month, Nachiket Mor, who was seen to be close to the RBI, was removed.

Of the 18 board members, nine are close to the government, four are from a business background, and the other five are Patel and his four deputy governors.


"Govt wants to 'capture' RBI
to control its Rs 9-trn reserves"

The Press Trust of India
Published on November 18, 2018

In a series of tweets, the former finance minister also claimed that the government and RBI was heading towards a "confrontation" in the Monday's board meeting of the bank

New Delhi, November 18 (PTI): Ahead of RBI Board meeting, Congress leader P Chidambaram Sunday alleged that the central government was determined to "capture" the bank to gain control over its Rs 9 trillion reserves.

In a series of tweets, the former finance minister also claimed that the government and the Reserve Bank of India (RBI) was heading towards a "confrontation" in the Monday's board meeting of the bank.

"Government is determined to 'capture' RBI in order to gain control over the reserves. The other so-called disagreements are only a smokescreen (sic)," he said on microblogging site Twitter.

Chidambaram said, "Nowhere in the world is the central bank a board-managed company. To suggest that private business persons will direct the governor is a preposterous idea."

"November 19 will be a day of reckoning for central bank independence and the Indian economy," he tweeted.

The RBI has a massive Rs 9.59 trillion 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 the recent weeks.

The government on November 9 had said it was discussing an "appropriate" size of capital reserves that the central bank must maintain but denied seeking a massive capital transfer from the RBI.

Economic Affairs Secretary Subhash Chandra Garg had also clarified that the government wasn't in any dire needs of funds and that there was no proposal to ask the RBI to transfer Rs 3.6 trillion.

"There is no proposal to ask RBI to transfer Rs 3.6 or Rs 1 trillion, as speculated," he had said.

"The government's FD (fiscal deficit) in FY 2013-14 was 5.1%. From 2014-15 onwards, the government has succeeded in bringing it down substantially. We will end the FY 2018-19 with FD of 3.3%. The government has actually foregone Rs 70,000 crore of budgeted market borrowing this year."

Garg 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.


‘RBI governor Urjit Patel’s resignation
will be catastrophic’

The Mint
Published on November 19, 2018

Former RBI board member Indira Rajaraman hopes that both the government and the central bank will exercise restraint at the RBI board meeting today

New Delhi, November 18: Resignations of the Reserve Bank of India (RBI) governor and one of the deputy governors over the ongoing confrontation will be catastrophic, Indira Rajaraman, a former RBI board member and a noted economist said.

In an interview, Rajaraman stressed the need for RBI to be more transparent in its functioning while urging both the central bank and the government to show restraint and respect each other’s point of view at the board meeting on Monday. She also highlighted how independent directors on RBI board are becoming more aware of their role and responsibilities. She also stressed the need for central bank to not slip into Latin liturgy where RBI thinks that the public cannot comprehend or understand its actions. Edited excerpts:

You have said that RBI should not fall for the Latin liturgy syndrome. Are you hinting at reforms?

Latin was used in the church to impart a sense of profundity in what was being done which common people couldn’t understand and still went along with it.

I think in a lot of what RBI does, there is this sense—I am not attributing it to the present governor—an institutional sense that there are things that have to be done in public interest which the public cannot quite comprehend. That has to go. I think there has to be a sense that the public can understand if they are made to understand.

Are you saying that the public is more aware now?

The questions that North Block is raising exhibit a fairly nuanced understanding of a number of issues. Let’s say the 12 issues that were raised by the government in the three letters to RBI. I was quite surprised at the depth of understanding in North Block of the various issues and in particular on the reserves issue. I think it was time the question was asked and RBI was made to defend its particular level of reserves.

Mr. Malegam, who is considered a high priest on the reserves issue as he has been on the board for so many years and has chaired a couple of committees on it, has said that under Article 58 of the RBI Act, there is no provision for transfer of reserves to the government. I do not agree with him there.

Yes; of course, in Article 58, there is no explicit provision for transfer of reserves, but then again, there is no provision that reserves must not be transferred. There are a lot of things unsaid in the legislation and for the government to have identified that hole and to say that there is possibility of transfer and tell us why you cannot transfer. And even mentioning the ₹3.6 trillion—I don’t know from where they got that number. But anyways, it exhibits some calculation of what is possible.

There is no question that the whole thing is motivated by the present fiscal crisis in the government. (Finance minister) Jaitley is saying that he will hold on to 3.3%. I don’t see how that can happen. This comes from desperation but there is no doubt that there is keener delving in the North Block into the functioning of RBI.

In addition, there have been many regulatory lapses during the last year which have led to a sense among the ministry of finance and educated watchers that the regulatory plumbing needs to be overhauled.

In a sense, you are saying that the government has opened up RBI to a public debate probably for the first time.

During my four years on the RBI board between 2011 and 2015, it was a very cordial period in the functioning of the RBI. I was the most vocal person on the board. I pointed out a number of things to the board that they weren’t aware of.

For instance, the RBI annual report is a submission of the board of RBI to the ministry of finance and not of the RBI management to the ministry of finance as was the general impression.

The annual report used to be placed in the draft form for a 15-minute examination by the board before it was pulled away for finalization. I used to speak up and tell my board members that this is going from us and we should read this. In the four years, I was probably the only one who insisted on a draft and having a video link with RBI in Mumbai with my comments on every page of the draft.

I am sure I was considered a nuisance but I took my responsibilities seriously as a board member of RBI and wanted that the annual report should be accurate portrayal of RBI’s functioning.

The board for a long time was not aware of its powers. In a certain sense, this confrontation has brought to the fore the role of the board, its powers and responsibilities and made the management more aware that they are accountable.

Otherwise, things that they did were considered to be a black box out of which things emerged. But people did not really think that they have the right to look inside the black box.

The central bank feels that the black box is necessary in some cases, especially with corporates on the board of the central bank who may get directly impacted by the central bank’s decisions. For instance, the 12 February circular impacted most industrialists.

There are industrialists on the board…There are people with special interests and so on. It should still be possible for the management of the RBI to say this is what we are doing. If it impacts you negatively, it impacts someone else positively. On balance, taking everything into consideration, we have decided this is what we want to do. The response to special interests on the board cannot be non-engagement. There has to be engagement. The special interests have to feel free to express their opinion and their interest. And RBI can say that we appreciate your point of view, but there were other considerations in play.

RBI has to engage as its actions impinge on everyone in the country. There has to be more transparency and more willingness to talk to people who do not understand the intricacies but are still in need of an explanation.

How did RBI look at independent directors on the board so far?

The relationship was extremely cordial. There was mutual respect but it was all done in a non-intrusive kind of way. There may be here and there an instance of someone raising a valid issue and the management will say we will look into that and refer it to a committee. There was never a confrontation in the sense of an independent director or a board member pointing out a lacunae or deficiency in the functioning of RBI.

In the years leading up to 2013, there was a lot of forbearance in the banking regulator’s approach to long maturity infrastructure loans and they were given ability to roll over loans. On regulatory forbearance, I and other members of the board did raise issues. The NPA (non-performing asset) problem was not nearly as bad as it is today but still these were taken on board.

In May 2013, it was announced that such loans, even if they are restructured once, will be classified as NPAs. But a two-year leeway was given and it was implemented from May 2015.

So, expression of concern by independent directors was taken on board. They were not batted away. RBI management never said that these were immaterial or insignificant. But they were accommodated at a slow pace.

What we have today in the confrontation is independent directors demanding greater immediacy in response. I am raising this issue and I want you to respond to this now.

What is the cause for the immediacy now?

I don’t think it is very profitable to look into the motivation behind why ministry of finance is acting like it is. It is definitely coming from a very tight fiscal situation. And of course, in the case of NBFCs (non-banking financial companies), there is a worry about the liquidity situation. And a concern that RBI is not sufficiently responsive.

I don’t think they are just motivated by the fiscal concern. There is the liquidity concern also which could be termed as in the public interest.

The important thing is that RBI has to look into each issue on its merit.

For instance, on the liquidity issue, the government asking for a calculation of the liquidity squeeze, or asking why does the central bank think that liquidity is adequate; I think the ministry of finance is perfectly justified in it.

And if there are members on the board who have the technical skills to take up the matter and contest RBI’s claims, I think they should go ahead and say that.

I think that would make the board a more meaningful body than it has historically been. Especially, at this stage when we are facing a tight liquidity crisis which could become a systemic crisis. It is a financial stability issue. Financial stability, even with prioritization of price stability, is a primary concern of RBI.

On the reserves issue, it is a fiscal drive. There are three categories of reserves. There is an asset development reserve which is like a depreciation reserve. There is a valuation reserve, which is the largest component, and consists of gains from revaluation of gold and foreign exchange reserves.

Revaluation reserves is just a balance sheet balancing entry and as it stands, it is unrealized. But the minute it is realized, it can be transferred. It is not that it is unrealizable, it just hasn’t been realized so far. Contingency is for unforeseen eventualities. But in principle, contingency reserves can be subjected to an examination to the volatility in various variables.

It is like an insurance provision and like any insurance, it is amenable to actuarial calculations.

All of this should have been readily available in some department of RBI. Even if someone comes from the outside and challenges the RBI on its reserves, RBI should be able to defend itself. RBI should welcome challenges and answer questions on the reserves.

How independent can independent directors be in a board meeting? Will they side with the government or will they take an impartial view?

Independent directors at my time were indeed very independent. There were academicians, bankers and had no political party affiliations. We all functioned independently. But that situation can change if the government appoints an independent director who is known to have a particular objective in mind. An independent director may be known to have an allegiance to some way of thinking.

All of us are appointed by the government. Other than the examination of whether you have paid their taxes, no other check is done. We don’t know if the government of the day has had a conversation with the independent director on the stance they want to take.

I am not aware at all in my time that the independent directors thought that they owed any special allegiance to the government because they appointed them. But the whole environment was completely different. We had received no instructions whatsoever.

There is a political question here as well. How to contain the damage if the governor and the deputy governor (Viral Acharya) resign? What would you advise the government to ensure that the resignations do not happen?

I don’t know what is the government’s strategy in going into this meeting. I think the resignation of these two people will be really catastrophic. What it would do is to convey to the whole world that there is political turbulence in India impacting the central bank which is a defender of financial stability and there will be an outflow of capital.

I think the strategy for the government while going into the meeting should be to say to the RBI senior management that we are not your enemies. We are your friends. We want you to stay in. We want to present to the world that we can resolve our differences. We do want you to explain to us your thinking and we will only ask relevant questions. We will not heckle you. It should not be done in a hostile way where you don’t question the formula but the motivation behind it.

What RBI must not do in this confrontation is to be dismissive of any issue brought before it. They should never say that this is beyond your understanding.

For the government, they have to go with the determination to prevent the resignation of the governor.

Suppose the worst case does happen and there is outflow of capital. We are the fag end of this government’s tenure. What are the public policy options available?

I don’t want to even think about it. It will be so disastrous. There has to be a head of RBI who has to take the decision like how to stem the capital outflow. Unless the government has a name of someone who can immediately take over, I see disaster.

Your stand has been that RBI is the custodian of reserves and there is certain autonomy attached to it.

Absolutely there is. But at the same time, the sovereign is supreme. But the sovereign, in its right as the supreme authority, has the right to ask the custodian what their assessment is of the optimal level of reserves. RBI has to be able to convince the sovereign that this is the level of reserves that I think should be maintained. On top of that, the sovereign will find it very difficult to fire the custodian. The custodian also cannot remove itself from questions.

Due diligence is performed at the time of appointment of RBI governor. If you are firing this person, then that means that you haven’t exercised due diligence at the time of his appointment. You are admitting your mistake.

Do you think government’s argument to get the RBI aligned to its way of looking at public interest might have taken a beating with demonetization?

Yes; absolutely. Demonetization was a difficult time. According to the RBI Act, decision to withdraw notes in circulation has to be taken by the board of RBI and communicated to the government whereas in this case the decision was taken by the government and communicated to the board couple of hours before the decision was actually announced. In fact, that was a serious violation of RBI law and it happened. No one has challenged it. That was the period when RBI willingly went along with the government, willingly suspended its disbelief even if it had any disbelief. Then there were a lot of processes to demonetization which were completely beyond anyone’s comprehension. It was most amazingly, badly handled demonetization even as a process, forget about the decision itself. ATMs had to be reconfigured, that is the utter disaster that it became. It is possible that what we had today is a sort of collateral damage of that. Now RBI might be getting forced to correct its own reputation. So, is it a demonetization hangover?

Let’s call it collateral damage from that. They want to be seen to be amenable to everything that the government suggests. There are many things the government could have done but unfortunately it has found expression not in an issue-specific manner. Instead of condemning the regulator in a broad-brush kind of manner, very specific questions could have been asked about responses to circulars, supervisory college meetings etc, which did not happen.

You have seen RBI from within, but we know very little about it from outside. So, what is it that makes this institution unique in India?

What is very admiration-worthy of the RBI, especially given our cultural context, is that institutionally, even though they have hierarchies like all institutions have, in a meeting, the junior-most research assistant can disagree with the senior-most official present, as long as he or she can justify his stand. This is the most inclusive thing about RBI. In fact, the senior-most people will turn to the junior-most people and say you are fresh from college; tell me what you think is right. They can stand up and tell their senior-most official, ‘I don’t think that is the right way to go’. But equally impressive thing is once a decision is taken, which of course is taken by the senior person, they all fall in line. They don’t go out of the building and say this crazy decision went against my conviction. That is very impressive. There is respect for professional and technical capabilities of all kinds. For example, on adequacy of reserves, it is most likely that a very junior person in the institution has been assigned this job. The second thing is that it has an incredibly good environment for women. I have never been to an institution where women are respected as much as in RBI. I am really a great admirer of this institution. I will really weep if the RBI were to be destroyed as an institution though I have been very critical of its regulatory lapses. It’s such a bulwark of our country. I just hope it comes through this crisis OK, but I hope they come out of it with the recognition that banking regulation and supervision and non-bank regulation and supervision all needs to be tackled.


Unorthodox approach to resolving NPAs

Ajay Shankar
The Business Line
Published on November 19, 2018

Creating equity funds to take over distressed firms would
improve banks’ recoveries, and turn around projects as well

The scale of bank NPAs and the pipeline of cases moving for insolvency proceedings is staggering. At one end, there is a sense of genuine progress. Indian capitalism is undergoing a qualitative transformation for the better. The cosy nexus between bankers and promoters with no real penalties for non- performance and bad loans is finally coming to an end.

Banks are taking severe haircuts. Promoters are losing control of their companies for the first time. Governance of banks would improve. Companies, after sale through the insolvency process, would have new owners and healthy balance sheets. Others would undergo liquidation, something which has been overdue in India.

At the other end, there is considerable anxiety. Instead of a modest flow of insolvency cases, there is a deluge. Resolution of cases is getting delayed well beyond the stipulated time. The bigger worry is the rising magnitude of losses for the banks. With such heavy write-offs, would the Indian banking system be left with the ability to lend with confidence after due diligence and assessment of risk?

If not, the Indian economy may be in for a more prolonged period of relative stagnation. There are enough examples in economic history of a banking system shock in a country leading to a prolonged periods of tepid economic performance. The hard reality is that there are still no signs of real recovery of private investment in India.

The bankruptcy process assumes normal times, with only some firms becoming insolvent — and enough healthy firms in the market to bid competitively to take over these firms at fair market valuations, with the banks absorbing losses accordingly. The banks would themselves be healthy enough to take such losses in their stride.

But these are not normal times. There are only a few corporates in India with healthy balance sheets and the appetite for take overs. Given the global economic uncertainties and India’s own economic difficulties, there may not be too many foreign entities wanting to bid competitively and take over bankrupt firms and that too at fair valuations.

Further, the sudden greater concentration of economic power in a few large corporates in India, or, large scale take over of Indian firms by foreign entities would not be a desirable outcome.

What would be worse is a poor bidding response leading to write-offs by banks becoming much larger than fair valuations would warrant. In case of no bids and just asset sales, the write-offs would be even larger. These seem realistic scenarios now. The real issue, therefore, is whether this is unavoidable, or, whether anything can be done to minimise bank losses.

Power sector issues

A major share of bad loans is in the power sector. This is one sector where write-offs need not be large. Electricity is an undifferentiated commodity whose demand in India would keep rising over the coming decades. Power plants have a useful life of over 40 years. Conceptually, the write-offs required are not large: the interest burden due to project completion delays, which could be due to financial difficulties of the promoter, or, uncertainties regarding coal supply, and some additional interest burden for the next few years till electricity demand picks up sufficiently.

In some cases, promoters may have gold plated projects and diverted funds and these would naturally need larger write-offs. But sale through the insolvency process is likely to result in very large write-offs, way above what is reasonable. Fortunately, the need for a holistic sectoral solution has been recognised by government and a committee has been set up for this purpose.

One feasible way forward would be to have equity funds which could take over troubled projects at a fair value and then have them completed and run by professional board-managed companies. Banks would also get better valuations and their need for capital infusion from government would decline.

The difficult challenge would be to create such funds. This would need creative leadership from the government, which would have to get public financial institutions to create such funds. Some incentives, such as full tax exemption for initial investment and no tax on capital gains up to seven years, would help in the mobilisation of money from the market, including from retail investors. Such funds should start giving reasonable returns within five years from power projects as electricity demand would have risen sufficiently by then, if not earlier.

This rationale also applies to sick real estate projects. Most developers have assets in land which cannot be monetised now due to the slump in the market. They do not have the resources to complete ongoing projects. Here, the distress of those who have booked apartments is acute.

A role for equity funds

Confiscating assets of directors, or, sending a promoter to prison are punitive measures — but these do not provide a solution. Take over by equity funds at fair market value of incomplete projects and land assets of the developers would provide a solution. The funds could be mandated to complete projects and hand over completed units to those who had booked and made payments through new professional management.

In a few years demand for housing would pick up and the land taken over would get converted into profitable income streams with fresh construction. In other sectors too, such equity funds by being in the market for bidding would help banks get a fair value and keep their write-offs down to reasonable levels.

These equity funds would also usher in the other overdue critical transformation in the Indian economy of having a growing number of professionally-run, board-managed companies in addition to promoter family-controlled firms. The few professional Board managed companies such as HDFC, L&T and ITC are outstanding success stories. India could do with many more such firms. These are difficult times which need out-of-the-box thinking and unorthodox solutions.

The writer is Distinguished Fellow,
TERI, and former Secretary, DIPP


A landmark decision

The Business Line
Published on November 19, 2018

The NCLAT ruling in the Binani Cement case has
set an important precedent for future IBC cases

The long drawn battle between Dalmia Bharat group’s Rajputana Properties and the Aditya Birla Group-led UltraTech Cement, to acquire Binani Cement made significant headway recently, with the National Company Law Appellate Tribunal (NCLAT) approving UltraTech’s bid for the debt-laden company. At the heart of the dispute has been UltraTech’s presumably late, but higher bid of Rs. 7,950 crore that came in after the committee of creditors (CoC) had approved Dalmia Bharat’s lower bid of Rs. 6,930 crore. This had raised niggling concerns on the sanctity of the IBC process, as late bids could lead to endless negotiations and a losing bidder, as it appeared then, could undesirably strike a cosy deal outside the IBC system. But interestingly the 44-page NCLAT order has shed a different light on the crux of the issue. According to the findings of the adjudicating authority, the CoC had, in fact, ignored the revised bid by UltraTech submitted much before the approval of Dalmia’s plan, thereby failing to realise the intended purpose of resolution — one of maximisation of value for all stakeholders. The NCLAT also found that the CoC had failed to safeguard the interest of all stakeholders even while approving the resolution plan of Dalmia Bharat. By noting that a lesser percentage of claim was given to a certain set of similar creditors, the NCLAT found Dalmia Bharat’s resolution plan ‘discriminatory’ against some operational and financial creditors.

The landmark decision by NCLAT, aside from clarifying key issues in the Binani Cement case, has set a precedent for future cases under IBC, by re-iterating key aspects of the Code. For instance, the NCLAT has re-affirmed that the insolvency process must seek to extract maximum value from resolution of stressed assets and ensure that interests of operational creditors (who are not part of CoC) are also well served. The NCLAT’s emphasis that an insolvency application once filed cannot be withdrawn at a later date merely because the promoter of the financially stressed company has offered to pay all outstanding dues, will have an important bearing on the ongoing Essar Steel case.

That said, the NCLAT ruling that has held Dalmia’s plan as ‘discriminatory’ has opened up a Pandora’s box on the grounds on which the Appellate Authority can reject a resolution plan. But the larger issue of disputes and interventions delaying the IBC process remains. While it is imperative that adjudicating authorities settle points of law and ensure that interests of all stakeholders are safeguarded, it is also vital that cases are resolved quickly.

According to IBBI data up to September 2018, of the 1,198 cases under insolvency, only 52 have seen approval of resolution plan. While Dalmia has moved the Supreme Court against the NCLAT order, avoiding excessive delay is essential to maintaining the sanctity of the Code.


CIC again asks PMO, RBI to
disclose wilful defaulters’ list

The Press Trust of India
Published on November 18, 2018

New Delhi, November 18 (PTI): Severely admonishing the RBI and the PMO, the Central Information Commission has again directed them to disclose the list of wilful defaulters and Raghuram Rajan’s letter on bad loans.

In an exhaustive 66-page order, the panel pulled up the Prime Minister’s Office for not complying with its directive to disclose the letter from former RBI Governor Rajan on bad loans.

Information Commissioner Sridhar Acharyulu said, “If there is any objection based on any exception, the PMO should have pleaded such provision and justify their denial.”

He said the PMO refused to comply with the direction of disclosure of action on Rajan’s letter on “grounds which are not legal, which is unfortunate”. Acharyulu was hearing the plea of one Sandeep Singh who had sought details of bank loan defaulters.

The commission had earlier issued a show cause notice to RBI Governor Urijit Patel for “dishonouring” a Supreme Court judgment and CIC directive on disclosure of the list of wilful defaulters.

The PMO has a “moral, constitutional and political duty” to tell the citizens of India as to who are the defaulters and what action has been taken to recover the huge loans advanced to them by banks, from out of taxpayer’s money, he said.

The commissioner said several categories of information were declared by the RBI as not disclosable as part of their ‘disclosure policy’ and the RBI calls the exceptional clauses under the RTI Act as ‘enabling’ provisions.

“It is against the RTI Act, the collective intention of Parliament, affront to democracy, reflecting disrespect to the Supreme Court’s directions in RBI v Jayantilal N Mistry case. The RBI has a strong legal team with experienced legal experts and meritorious graduates from National Law Schools, yet has audacity to openly defy RTI Act, CIC directions and judgment of the Supreme Court,” he said.

He said as per law, in each RTI request, the CPIO and First Appealing Authorty (FAA) of the RBI need to justify the denial under exceptions prescribed under sections 8 and 9 of the RTI Act. “But any public authority cannot declare that it will never give such information as declared by the RBI. Exceptional provisions under the RTI Act cannot straight away enable a public authority to deny in advance,” he said.

Acharyulu said in spite of the Supreme Court’s direction that Section 22 of the RTI Act will override the RBI Act and other Acts, the RBI again quoted those Acts and declared that it would not give information. “The RBI has totally ignored the provisions of the RTI Act,” he said.

This non-disclosure in the name of ‘disclosure’ policy is also in contradiction of various office memorandum and guidelines issued by the Department of Personnel and Training under the RTI Act, he said.

“If the RBI does not respect the SC orders and denies the citizens right to information, it will result in perpetuation of financial regime of secrecy that is potential enough to facilitate financial frauds and allow fraudulent rich and influential business persons to flee the country, as witnessed in recent times,” Acharyulu said.

He again directed the PMO to disclose the names of the defaulters, action taken for recovery of loans in response to Rajan’s letter and the policy, if any, about recovery from defaulters including high-profile ones.

Acharyulu also urged parliamentary committees such as Public Accounts Committee, Committee on Finance and Committee on Estimates to deliberate the issues raised in this case as they are also seized of such matters.

“The commission directs the office of this CIC to present the copy of this order to concerned officers of Parliament who are responsible for placing such papers before respective committees within one week from the date of issue of this order,” he said.

He rejected the submission of the representative from the PMO who had informed the CIC that the RTI application in this particular case had been filed by the applicant with the Directorate General of Employment and Training (DGEAT) and no copy of the said RTI was received in the PMO from either the applicant or on transfer from any other public authority.

Acharyulu said, “The PMO contended that as the original RTI application, first and second appeals were not filed with the PMO, the direction to provide information was not maintainable and hence the compliance question does not arise.”

“The commission cannot agree with this kind of attempt to deny the substantive part of information access by unreasonable procedural interpretations without any legal basis. There is no provision in the RTI Act that prevents the Information Commission from directing any public authority to provide information if that is possibly available with them,” he said.

He said information pertaining the identities of loan defaulters and action taken against them is an issue of larger public interest. “The stand taken by the PMO in this case will not serve any public interest, and compel the citizen to start his effort ab initio, by filing an RTI request with PMO, treating as a separate unconnected public authority and reach the ultimate level at the CIC or up to the Supreme Court, if the government prefers to litigate with the citizen and ultimately it has to give that information.

“This was not the intention of Parliament in passing the RTI Act, 2005 that aimed at creating a practical regime and not procedural tangles to delay and deny the access to public information,” he said.


Petrol prices cut by Rs 7.48 per litre in one month

The Financial Express
Published on November 19, 2018

New Delhi, November 18: The oil marketing companies (OMCs) continued to cut prices of petrol and diesel on reduction on rates of the crude oil globally. The petrol was selling at Rs 76.52 per litre in Delhi down from Rs 76.71 from a day earlier. The diesel prices were at Rs 71.39 in the national capital, a cut of 17 paise from Sunday. In Mumbai, the petrol was at Rs 82.04 per litre while diesel was at Rs 74.79.

In Chennai petrol and diesel are available at Rs 76.52 per litre and Rs 71.39 per litre, respectively. The rates of petrol in Kolkata are Rs 75.05 per litre and rates of diesel are Rs 69.73  per litre today.

On Sunday, the petrol prices were cut by 20 paise a litre and diesel by 18 paise, the 29th straight daily reduction in rates eroding the massive price hike in petrol witnessed in two months since mid-August. The fuel rates are on a downward trajectory since October 18.

Crude oil prices

The oil prices surged nearly 1 percent on Monday as traders expected top exporter Saudi Arabia to push producer club OPEC to cut supply towards year-end. Despite that, market sentiment remains weak on signs of a demand slowdown amid deep trade disputes between the world’s two biggest economies, the United States and China.

Front-month Brent crude oil futures were at $67.29 per barrel at 0259 GMT, up 53 cents, or 0.8 percent, from their last close, Reuters reported. US West Texas Intermediate (WTI) crude futures, were up 71 cents, or 1.3 percent, at $57.17 per barrel.


A plan for all seasons

The Business Line
Published on November 19, 2018

From ‘The Bombay Plan: Blueprint for Economic
Resurgence’, by Sanjaya Baru and Meghnad Desai

“Nowhere in the developing world, in no colonized nation, is there a parallel to the Bombay Plan. Native business leaders were seeking their place in the sun, battling colonial rule from Asia to Africa, from Latin America to Eastern Europe. The inter-war years of the twentieth century witnessed many anti-colonial and anti-imperialist movements. Nationalism was on the rise and was a pervasive sentiment. Patriotic leaders and nation builders were dreaming of a new era of self-reliant economic development. India was not the only country battling for freedom. Yet, it was in India that a group of business leaders, among the most successful business leaders of their time, came together to write a manifesto for development that had no parallels...

The Bombay Plan was one such effort. Indian business leaders showed remarkable understanding of the necessary role of the government in promoting industrial development in a postcolonial situation. More importantly, they understood the importance of public investment in health, education and social development and looked for ways to fund it. In purely Marxian terms, the Bombay Plan could be described as a manifesto of ‘State Capitalism’. It was a manifesto of a social class that signalled its evolution from being a ‘class in itself’ to becoming a ‘class for itself’.

State capitalist manifesto

What made the ‘Bombay Plan’ unique in the decolonizing world of the mid-twentieth century was the fact that it was a document written by business leaders but with a focus on national development — both economic and social. It was not a set of demands made by businessmen to a government. It was not merely a statement on industrial policy. It was not a pre-budget memorandum. It was a national plan for long-term economic and social development sought by the leadership of indigenous business in their own interest as well as in the national interest.

The Bombay Plan was written against the background of ongoing discussions on post-war economic policy, including the discussions at the NPC. There was a Gandhian Plan written by the Mahatma’s more dogmatic disciples, there was Jayaprakash Narayan’s Sarvodaya Plan, and radical humanist MN Roy’s Peoples’ Plan. Each document presented a perspective on the kind of economic and social policies that independent India ought to pursue.

What set the Bombay Plan apart from all other contemporary exercises was its focus on specifics. In opting to look at numbers and fiscal implications of their proposals, the Bombay Plan went beyond the largely political manifestos of the day, written by Congressmen, communists, Gandhians and an assortment of nationalist groups.

There is one more feature of the Bombay Plan that set it apart from other contending vision statements of the times. Here was a document being written by India’s biggest business leaders seeking policies for rapid industrialization and yet it devoted considerable space to a discussion of the foundational role of public investment in education and public health as well as the importance of a progressive tax policy that would address distributional concerns even as the focus remained on rapid enhancement of production. ‘The ultimate objective of any planning’, asserted the authors, ‘should be to increase the volume of India’s economic production.’ Yet, they admitted that this search for growth in output must ensure that enough is provided in terms of food, clothing, housing and healthcare for all. The Plan explained what it defined as the ‘the minimum requirements of human life.’

These pertained to nutrition, literacy, sanitation and housing. The detailed discussion of the requirements of education and public health was way ahead of its time. An important criticism of economic policymaking in the late 1980s and early 1990s has been the overemphasis on economic growth and relative neglect of social and human development.

Clearly, the Bombay Plan authors were more mindful of the distributional dimensions to growth than India’s more recent policy planners. Not surprisingly, therefore, and also reflecting the dominant liberal thinking of the mid-twentieth century, the Bombay Plan authors declared, ‘A planned economy must aim at raising the national income to such a level that after meeting the minimum requirements every individual would be left with enough resources for enjoyment of life and for cultural activities.’...

Finally, the authors of the Bombay Plan were keen that decolonization should facilitate the integration of a subcontinental market, thereby creating the economic space for the consolidation and growth of a nascent, indigenous capitalist class. In the very opening paragraph of the document the authors state, ‘The maintenance of the economic unity of India being, in our view, an essential condition of any economic planning we have assumed for the purpose of our Plan that the future government of India will be constituted on a federal basis and that the jurisdiction of the central government in economic matters will extend over the whole of India.’

It took seven decades after that for a nationwide Goods and Services Tax (GST) to be finally introduced, integrating the home Market. The significance of the Bombay Plan does not derive only from its uniqueness as a manifesto of a nascent capitalist class in a post-colonial developing economy, nor merely from the breadth of policy vision of its authors, but from the fact that it became the basis for national economic policy after India attained independence, sidelining all the other contending visions, namely, the Gandhian Plan, the Peoples’ Plan and so on. The first Five Year Plan and the second Five Year Plan were constructed on the policy foundations offered by the Bombay Plan.”

Extracted from the essay ‘Business, Government And Politics: From
Plan To Plea’ by Sanjaya Baru. With permission from Rupa Publications

Source: Internet Newspapers and anupsen articles


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