Banking News dated 22nd November 2018

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Banking News: November 22, 2018


New safety rules may close 50% of ATMs  by March 2019: Industry association

New safety rules may close 50% of ATMs
by March 2019: Industry association

Nikhat Hetavkar & Raghu Mohan
The Business Standard
Published on November 22, 2018

Regulatory changes are making it unviable
to operate ATMs, says industry body
Mumbai, November 21: New compliance costs and the low interchange fee of Rs 15 a transaction could force closure of approximately 1,00,000 off-site and a little over 15,000 white-label automated teller machines (ATMs), or 50 per cent of the installed base of 2,38,000 units, the Confederation of ATM Industry (CATMi) has warned.

Pain Points
·       1,30,000 of the existing 2,38,000 ATMs across the country may be forced to close down
·       Millions of beneficiaries under PMJDY could be impacted
·       The industry might witness considerable job losses
·       IBA says new capital norms for cash-in-transit firms will push up security costs by 30-40% or Rs 6-10 per transaction

The industry lobby group said this was the fallout of additional costs brought about by the recent regulatory guidelines for hardware and software upgrades, mandates on cash management standards, and the cassette-swap method of loading cash, which the industry could not afford.

It said a large number of ATMs in non-urban locations might be shut down, affecting beneficiaries under the Pradhan Mantri Jan Dhan Yojana who withdraw subsidies in the form of cash through ATMs.

“New regulatory requirements have come in, so ATMs need to be upgraded. We have basically two types of ATMs — one being our own machines, which we will be upgrading, and the second type, which belongs to vendor. The bank is talking to vendors and trying to find a solution,” said P K Gupta, Managing Director (Retail & Digital Banking) SBI.

The Indian Banks’ Association had requested the RBI to relax norms or extend the deadline for cash management, but it remained firm on its original mandates, a spokesperson for a private bank said.

Even as the ATM industry was still reeling from the effects of demonetisation, the additional compliance requirements by the central bank called for a huge cost outlay.

“The service providers do not have the financial means to meet such massive costs and may be forced to shut down these ATMs, unless banks step in to bear the load of the additional cost of compliances,” CATMi said, adding that additional compliance requirements were not factored into their contracts with banks.

“We have had individual discussions with banks but I believe that regulatory intervention is necessary to make banks bear the costs.

We also made recommendations to the RBI,” said Himanshu Pujara, regional managing director, Asia-Pacific, Euronet Services India. He added that no conclusion was likely from these talks before February when the new mandate kicks in.

The tussle is between ATM players and banks as to who would bear the additional costs. The ATM industry argues banks should bear the cost while the latter point to the strain if all costs are to be absorbed by them, especially in the light of lower interest income and pressures on other income.

Earlier this year, the IBA sought relaxation on the time-frame to meet the conditions like a net worth of Rs 1 billion by cash-in-transit (CIT) firms, new transport and security parameters. It pointed out the stringent standards had the potential to disrupt the functioning of ATMs.

ATM players say that ATM numbers have been stagnant post-demonetisation, even as the number of bank accounts and debit cards rose exponentially during the same period. The number of ATMs have dropped by 1,156 units over the past year and stood at 2,20,000 as of June 2018.


Nearly 40% of lending to MSMEs
is through informal channels

The Business Line
Published on November 22, 2018

Small enterprises continue to grapple with
traditional banking challenges, finds report

Mumbai, November 21: Micro, small and medium enterprises (MSMEs) still find access to formal credit a challenge with nearly 40 per cent of lending happening through informal sources, according to a new report by the Omidyar Network and BCG.

The report titled ‘Credit disrupted: Digital MSME lending in India’ estimated that in 2018, the total MSME credit demand will be Rs. 45 lakh crore, of which Rs. 25 lakh crore will be met through formal channels with the borrowing done in the entity’s or proprietor’s name. However, as much as Rs. 20 lakh crore is seen as the unmet credit demand which is financed through informal channels.

“Roughly 40 per cent of MSME lending is done through the informal sector, where interest rates are at least twice as high as in the formal market,” it said, adding that an additional 25 per cent of MSME borrowing is invisible and is through personal proprietor loans.

“We found that urban and rural MSMEs are quite similar in their borrowing behaviour, with nearly identical rates of informal borrowing and bank account registration,” it further said. The findings come at a time when the government is working on special schemes to boost lending to the sector, including a special package announced by Prime Minister Narendra Modi earlier this month to help improve access to credit.

“MSMEs in India continue to struggle with traditional banking challenges that, if addressed by digital lenders, could accelerate both formalisation and digitisation among businesses in this sector,” said the report.

The main challenge

According to the MSMEs surveyed, the challenges faced in access to formal credit included long processing times, lack of transparency in timelines and insufficient loan sizes. “These pain points are substantial enough to compel many MSMEs to continue to seek out informal sources, often at much higher interest rates,” it added.

But, with growing formalisation of the sector due to demonetisation and the introduction of the Goods and Services Tax, maturing ‘India Stack’, along with growing API-based data availability and increasing receptivity, the report said that there is great potential for digital lending. Digital lending to the sector can increase by 10 to 15 times to touch Rs. 6-7 lakh crore in annual disbursements by 2023. At present, 99 per cent of formal MSME lending is through incumbent banks and NBFCs and most of it is non-digital.

“We could actually see a real opportunity for digital lending to MSMEs. You can do this business at 30- 40 basis points lower than the traditional way of lending to the sector. Not only can one do better quality business with more data, it can also be done in a more efficient manner at a far lower cost,” Roopa Kudva, Partner and Managing Director, Omidyar Network, told BusinessLine.

The report has recommended that digital lenders align themselves with the needs of MSMEs through measures like leveraging supply chain ecosystems and e-commerce platforms and embracing next-generation data analytics.

Significantly, it has suggested revamping the government loan refinancing programmes through SIDBI and MUDRA to include newly-established digital lenders and focus on small, new-to-finance MSMEs. “The current programmes do not serve the riskiest, new-to credit MSMEs segment where support is most needed,” it said.

The report surveyed 1,500 MSME owners with annual business revenue between Rs. 3 lakh and Rs. 75 crore, held discussions with over 80 MSME owners and interviewed more than 60 digital lenders, intermediaries, ecosystem partners, and other subject-matter experts.


A welcome win for the RBI

Radhika Merwin
The Business Line
Published on November 22, 2018

Retaining the capital adequacy norm is a key positive. On PCA,
the RBI would do well to not dilute the framework too much

The long-winded RBI board meeting that ended on a fairly cordial note, has the RBI’s winning stamp all over it. Sure, on the face of it, both the Centre and the RBI seemed to have found common ground on contentious issues — setting of an expert committee to examine the Economic Capital Framework of the RBI; the Board for Financial Supervision of the RBI looking into banks’ PCA (prompt corrective action) framework; and yes, the much-awaited respite on capital norms.

But in each of these outcomes, the subtle but clear message is this: the central bank gets to call the shots on important policy matters and justifiably so. Take the case of the RBI’s capital.

Most reports suggest that the panel will only deliberate on future earnings and not the much-debated Rs. 9 lakh crore of reserves in the RBI’s coffers, which the Centre has been trying to lay claim on. Of course, it is still early days to say in whose favour the balance tilts, as the composition of the committee and its scope are unclear.

But it is the issue of banks’ capital norms and PCA framework that deserved a quick and conclusive verdict, which appears to have been delivered. The RBI, by retaining the 9 per cent capital adequacy requirement for Indian banks — higher than the Basel mandated 8 per cent — has firmly gotten this prickly issue out of the way. Given that public sector banks (PSBs) are still inadequately provided for stressed assets, cutting down the capital requirement would have been catastrophic.

Capital norms

An April 2017 RBI paper on risk-weighting under Basel framework has well-argued the need for higher capital adequacy norms for Indian banks. It found that Indian credit rating agencies’ cumulative default rates (CDRs) and the resultant notional risk-weights were higher than the risk-weights currently prescribed by Basel. This implied that banks ran the risk of being under-capitalised as the risk-weights laid down by Basel (which has more or less been adopted by the RBI) may not reflect the true default risk in loans of Indian banks — a point reiterated recently by Deputy Governor Vishwanathan. Hence by mandating a higher capital ratio for Indian banks, the RBI hopes to mitigate the risk of under-capitalisation.

In any case, given the pace at which PSBs have been guzzling capital over the past two to three years, the need for a stringent capital norm is a no-brainer. Even after the Centre announced its mind-boggling Rs. 88,000 crore of recap last year, many PSBs have been hardly meeting their capital requirement.

Between September 2017 and March 2018 quarters, Tier I capital ratios for weaker PSBs (placed under PCA) have fallen sharply. This despite a near 8 per cent fall in risk-weighted assets during this period — the lowering of risk profile should have eased up banks’ capital.

The state of affairs as of September 2018 is more dismal. Nearly half of the PSBs do not meet the current total capital requirement (including capital conservation buffer or CCB). Even if the RBI did lower the 9 per cent requirement to 8 per cent, about seven banks would still fail to meet the requirement.

By standing firm on the capital adequacy norms and only tinkering at the margin — extending the timeline to meet the last tranche of CCB — the RBI has sent out strong signals that there will be no compromise on prudential norms.

February circular stays

There is no going back on the February directive on stressed assets either. Despite widespread clamour for leeway for stressed power sector accounts, there was no mention of it in the board meeting.

The restructuring scheme under way for stressed assets of MSMEs appears an extension of the existing relief for banks having exposure to MSME borrowers (up to Rs. 25 crore) wherein they continue to classify such accounts as standard where dues between September 2017 and December 2018 were paid not later than 180 days (as against the usual 90-day norm).

With this benefit to be withdrawn from January 2019, the RBI appears to have agreed to consider a scheme for hard-hit MSMEs — ‘subject to conditions necessary for ensuring financial stability’. The RBI would do well to pay heed to its caveat and take a cautious look at the sector. But as far as its diktat for large accounts goes, the RBI appears to have had its way and rightly so. After all, the skeletons that kept tumbling out of banks’ restructured accounts had to be flushed out.

PCA agenda

One of the most vigorous debates recently has been around the RBI’s PCA norms. The Centre has been maintaining that the more stringent NPA and capital threshold levels brought in last year have led to a large number of PSBs falling under PCA, crimping credit growth.

There are basically two issues here: One, while it is true that PCA norms in India are more onerous than elsewhere, they are not entirely rule-based as some would argue.

As per banks’ FY17 net NPA, capital and profitability metrics, 16 or 17 PSBs should have fallen under PCA, based on the RBI’s stated thresholds alone. But only 11 banks were placed under PCA, suggesting that the RBI has reviewed the matter on a case-to-case basis. Two, the PCA framework has been in operation since December 2002. Since then, net NPA and profitability (return on asset) have been a criteria under PCA.

Hence demands by the Centre to do away with these thresholds as they are not in sync with global practices may not hold much water, as they have been in existence for over 15 years now.

So what will the the RBI do? Will it ease up on the thresholds? Based on FY18 financials, 17 PSBs can fall under PCA based on net NPA threshold alone and nine on ROA alone (negative for two consecutive years). Even if one were to revert to the old threshold levels of net NPA and ROA (prior to 2017), about half of the PSBs could be under PCA on net NPA alone and nearly all on ROAs alone. Hence lowering the thresholds may not make much of difference, given that the financials of PSBs have deteriorated sharply in recent years.

The PCA framework will be reviewed by the RBI’s BFS, as put out in the board meeting. The focus is likely to be on getting banks out of the PCA, possibly some leeway in the ROA criteria — reducing two consecutive years of positive earnings to one for pulling banks out of PCA.

But given that FY18 was a washout and nearly half the PSBs have reported loss in the September quarter, how much of a difference this would make is anybody’s guess.

The RBI would do well to not entirely dilute the prudential norms and hold its ground. After all the Centre’s myopic view on each of the above issues is intended to serve one purpose alone — wade through the election year with a tidy fisc record. The RBI’s relief on the CCB component of capital will ease up about Rs. 14,000 crore for the Centre by way of recap plan.

Another Rs. 15,000-20,000-crore respite, with some tinkering on PCA and other norms, would do the trick. It is another matter that none of these would resolve the festering issues in the banking sector — reviving credit growth being the most critical.


Don’t wash your dirty linen in public

Richa Mishra
The Business Line
Published on November 22, 2018

When differences are aired in the open, as in the
recent Centre-RBI spat, employee morale is hit

Be it the Reserve Bank of India or the Central Bureau of Investigation or any other regulatory or investigating authority, when they clash with the government in public, the ripple effect is bound to be felt down the ladder, playing havoc with employee morale within an organisation.

The RBI versus Finance Ministry clash hit a new low when Deputy Governor Viral Acharya gave an explosive speech, followed by rumours about RBI governor Urjit Patel’s possible resignation. Though Patel has maintained a stoic silence, a debate has yet again started on autonomy and accountability, and how far is too far for the government to intervene. Especially as the consultation process around the dreaded Section 7 of the RBI Act, which gives the government the power to give directions to the central bank, was invoked. Lost in all these are the employee issues.

“Though we are not directly impacted it does have its implications — like, recruitments may not happen, pension and other employee benefits may take a side step,” says a member of the All India Reserve Bank Employees Association (AIRBEA).

So why are we suddenly seeing so many clashes at the top? Especially when the powers that be have had a say in the filling of these posts? Is it personality or turf war?

“I think it is mostly a case of trust deficit or confidence crisis. At times, individuals occupying the position also matter. There could be personality conflict that can lead to such circumstances. Whatever be the cause, there is always a way to resolve the differences, most of the time built into the system,” says RV Verma, former whole-time member (Finance) of the Pension Fund Regulatory and Development Authority (PFRDA) and former CMD, National Housing Bank, the regulator for housing finance companies. However, Aashish Chandorkar, a public policy commentator, feels that it is not always personality-driven. “This is an election year. The government has its own asks. The reticence of Urjit Patel clashes with the demands of Finance Ministry and perhaps creates a personal effect.”

Former RBI governor Bimal Jalan says, “Each one (regulator and the government) has a well-defined role to play.” Difference in views, if any, should not be debated in public but sorted out across the table.

D Swarup, former pension fund regulator, the man responsible for ushering in Indian pension reforms, and setting up the system when PFRDA was still awaiting its statutory powers, also says “the sovereign and regulator have a distinct role to play. Checks and balances should be there without the operational functions of the regulator being compromised.”

As an official with capital market regulator SEBI points out, each of these regulators has come through Acts of Parliament that clearly spell out the objectives. But problems happen when the government thinks these regulators are attached offices or subsidiary departments.

Big Brother attitude?

Former Chairman of IRDA, Hari Narayan, no stranger to controversies — his clash with SEBI was famous — believes that if the government desires a certain course of action, it should issue a direction on the matter, and not expect an independent authority to implement oral instructions which the authority holds undesirable. “Further, an authority's freedom to hold a contrary view ought not to be undermined,” he says.

“Accountability and independence go hand in hand,” reasons Chandorkar. Referring to the RBI imbroglio, he says, “Ultimately, sovereign structure is non-negotiable, at the same time, the government has to let RBI be. This is achieved only via coordination and both sides acting in the spirit of the structure, not just the word.” He suggests a formal codification of issues.

“RBI Act has only a general guideline on separation of power. But there are no specific numbers. For example, what is the right level of RBI reserves and how should it be split between revaluation and contingency funds? This is only a matter of perception, there is no codification. In such a case, any differences of opinion between government and the central bank can be construed as attack on bank independence. A formal definition and codification can be very helpful,” he says. “Dialogue is the only way out — the RBI should ease on areas like liquidity, NBFC funding, and payment regulations… Government, on the other hand, should ensure that there are no resignations from the RBI,” says Chandorkar.

This is echoed by the central bank’s employee association. In fact, no sooner had RBI Deputy Governor spoken his mind on October 26 than AIRBEA was quick with its statement.

Defending Acharya’s outburst, AIRBEA said that it was waiting to happen due to long simmering discontent. “…there is an intrinsic schism and this is not regime specific. One remembers the well-known duel between the then Finance Minister P Chidambaram and former RBI Governor D Subba Rao, when the latter commented in his parting speech that Chidambaram had been so angry with RBI that he preferred to ‘walk alone without RBI’, but he (Chidambaram) would definitely think, ‘Thank God the Reserve Bank Exists,” AIRBEA had stated. “..Let the two talk and sort out the issues instead of government trying to ride roughshod over the RBI…”.

No comparisons

What about the CBI or Comptroller & Auditor General? These are agencies often said to be under government control. A former CBI Director says it is not correct to draw a parallel between CBI and RBI. “In the case of CBI, the rules are laid out very clearly, the organisation has to perform its duty of doing investigation, not necessarily take policy decisions. If the officer follows the rule book, then there is no issue. But again, it varies from person to person,” he says. For example, if it wants to, the CAG, without influencing the audit process, can delay the tabling of the report. Similarly, the CBI can delay the investigation.

Clashes between agencies or discord within are all inevitable and have happened in the past. But these should be sorted internally and not aired in public.


Where do RBI’s surplus funds come from?

The Times of India
Published on November 21, 2018

New Delhi, November 20: RBI’s board this week decided to set up an expert committee to examine its ‘Economic Capital Framework’. The committee is expected to break down RBI’s balance sheet to decide if its reserves are consistent with its needs.

What is the size of the RBI’s balance sheet?

In 2017-18, the size of RBI’s balance sheet was Rs 36.2 lakh crore. Its balance sheet, however, is unlike that of a company. The currency notes it prints make up more than half its liabilities. Another big share, 26%, represents its reserves. These are invested mainly in foreign and Indian government securities (essentially promissory notes bearing an interest rate against which these governments borrow) and gold. holds a little over 566 tons of gold, which along with its forex assets make up almost 77% of its assets. Sometimes, the finance ministry and RBI disagree on what level of reserves RBI must hold to be consistent with its operations.

Where do the RBI’s reserves come from?

Reserves with RBI are not all of the same kind. In the current debate there are two which are relevant: The Currency & Gold Revaluation Account (CGRA) makes up the biggest share — it was Rs 6.9 lakh crore in 2017-18. This represents the value of the gold and foreign currency that RBI holds on behalf of India. Simply put, variations in this represent the changing market value of these assets. Thus, the RBI notionally gains or loses on this count according to market movements. For example, last year the CGRA increased by 30.5% largely because of the depreciation of the rupee against the US and due to an increase in the price of gold.

The Contingency Fund (CF) is a specific provision meant for meeting unexpected contingencies that arise from RBI’s and exchange rate operations. In both cases, RBI intervenes in the relevant markets to adjust liquidity or prevent large fluctuations in currency value. The CF in 2017-18 was Rs 2.32 lakh crore, or 6.4% of assets. The CGRA and CF put together constituted 26% of assets (and because in a balance sheet assets and liabilities must by definition match, also the same proportion of its liabilities)

What is the RBI’s surplus?

This represents the amount RBI transfers to the government. There are two unique features about RBI’s financial statements. It is not required to pay income tax and has to transfer to the government the surplus left over after meeting its needs. RBI’s income comes mainly through interest on the securities it holds and in 2017-18 the largest component of expenditure was a provision of about Rs 14,200 crore it made to the contingency fund.

Obviously, the larger the provision made to CF, the lower the surplus. Beginning 2013- 14, RBI didn’t make a provision to CF for three successive years as a technical committee felt its “buffers” were more than enough. In the last two years, however, RBI has made provisions to CF. The adequacy of the current level of CF is one of the key issues likely to be debated extensively by the expert committee.


Board meeting marks shift in balance
of power between RBI and government

Surojit Gupta and Mayur Shetty
The Times of India
Published on November 21, 2018

New Delhi, November 20: Even as the outcome of Monday’s marathon
Reserve Bank of India meeting is being parsed for who gained or lost how much, beyond the noise surrounding immediate concerns such as providing relief for weak banks and small businesses, what is of greater long-term interest is the signal – of a fundamental shift in the balance of power from Mint Street to North Block in this historically delicate and nuanced relationship.

It appears, at least on the evidence of the meeting, that the central bank will henceforth need to be more empathetic to the concerns and suggestions of the board. The external directors - currently numbering 13, including two government nominees – seemed poised to exercise overt influence over the regulatory decisions of the governor and his deputies (there are four at present).

 Does this mean the central bank will now be board-run? Given that outside board members are chosen by government and are generally thought to be more sensitive to the eco-political concerns of New Delhi, will this impinge on the RBI’s autonomy?

Conversations that TOI has had with former governors, bureaucrats, policymakers and politicians suggest that the central bank has indeed lost ground to the government.  

Asked if he thought there has been a “fundamental shift” in the decision-making process, a former RBI governor said, “Yes.”

“Earlier it was essentially between the governor and the government. What has happened is that the board has come into the picture, it is active now. And it has started taking instructions from the Centre. In that sense, there is an interjection. Past boards included people like A P J Abdul Kalam and U R Rao who represented society in large and they only guided. The governance structure remains the same but the relationship has now changed,” he said.

When asked if the setting up of a committee to examine the RBI’s capital framework implies that the central bank is now board-driven, another former governor said: “It appears that its autonomy has been diluted as it is the RBI that used to set up the committees.” But in response to whether the overall autonomy of RBI has taken a knock, he said: “I hope not.”

A senior government functionary did not mince words when he told TOI that the RBI management’s exclusive remit will now be limited to . On other policy matters, “government has acquired primacy and this is how things were always supposed to be in a democracy,” he said.

“Right from the days of Nehru, there has been clarity that the agenda-setting prerogative, so far as policy matters are concerned, rests with government. This flows from the very spirit of parliamentary democracy and popular accountability”, he said, adding that “natural order has been restored”.

“There were tensions in the past as it is natural for some to acquire grandiose notions of autonomy. But faced with resistance in the recent past, others chose to walk away. We as a majority government are conscious of our mandate, and therefore decided to stay put and made it clear to them that you have to walk with us,” a senior government functionary told TOI.

There is a view that the Urjit Patel-led RBI, due to its “stubbornness” and reluctance to communicate and engage with the government and take on board its concerns on the economy, has instead of protecting central bank autonomy contributed to its erosion. The final straw, according to just about everyone, was deputy governor Viral Acharya’s provocative public speech on the dangers of undermining central bank independence.

Broadly speaking, the RBI wears two hats – it sets monetary policy, and it regulates the banking sector. As far as the general public is concerned, the central bank’s most important function is to fix key interest rates, which impact EMIs on home and consumer loans. Since the constitution of the with three representatives each from RBI and government (the governor has the casting vote in the event of a tie), the central bank has lost the absolute power it had till 2016 to decide on rates.

That the government has now also established itself as the more equal of the two on the regulatory side is evident from the manner in which the RBI yielded on a number of issues at Monday’s meeting. It was under the “board’s advice”, said RBI’s post-meeting statement, that the central bank agreed to offer a restructuring scheme for small businesses. Another concession that the government extracted was the easing of capital norms to help release more funds for lending.

It was the government’s frustration over the RBI’s refusal to engage with it on these and other key issues that forced it to consider invoking Section 7 of the RBI Act for the first time in the 83-year-old history of the central bank, top North Block officials had told TOI when it broke the story on October 31.

While the ‘nuclear option’ has so far not been exercised, it hangs like Delhi’s over the RBI – although indications are that the government believes the need for it has passed, at least for the time being.

But it does intend to formally consolidate on the implicit gains of November 19 by seeking a bigger board role in the central bank’s governance structure at RBI’s next board meeting on December 14.


RBI reserves:
Revaluation gain not to be considered

George Mathew
The Indian Express
Published on November 21, 2018

The considered view is that the gains recorded because of revaluation or owing to changes in the price of securities are notional and it would be prudent not to transfer funds from this reserve.

Mumbai, November 20: One of the contentious issues in the conflict between the government and the RBI was the size of the central bank’s reserves which at Rs 9.6 lakh crore was reckoned as excessive by the government. A debate on whether a large chunk of that hoard in the form of the revaluation reserves may well be closed for now with the RBI central board making it clear that these reserves cannot be paid out, according to sources.

Of the RBI’s total reserves of Rs 9.6 lakh crore, the currency and gold revaluation reserves alone account for Rs 6.9 lakh crore. The other components of the reserves include the contingency fund — Rs 2.31 lakh crore, the asset development fund of Rs 22,811 crore, the investment revaluation account of Rs 13,285 crore and foreign exchange forward contracts valuation account at Rs 3,282 crore. The considered view is that the gains recorded because of revaluation or owing to changes in the price of securities are notional and it would be prudent not to transfer funds from this reserve.

What this could spell is that the potential surplus which the government — the sole shareholder of the RBI can expect the central bank to transfer to it in the future would be far more modest.

The RBI board on Monday decided to set up an expert committee to examine the central bank’s Economic Capital Framework (ECF) — or the capital which is needed to protect RBI against future losses — which was adopted last year. The view of some of the directors was that the RBI is holding excess reserves and that the government should receive a larger share of the surplus or dividend. The counter view, according to sources, was that a distinction has to be made between stock and flows in the bank’s balance sheet. That’s because the RBI holds a large stock of foreign securities against its forex reserves and taking into gains which are notional or not accounting for its role as a lender of last resort or in its role in ensuring financial stability is not fully factored in these, the sources said.

They said that the economic capital framework and the issue of transferring a surplus to the government may take time to be addressed and the board may prefer to have a committee to provide direction on these two issues and also on governance. While the government had earlier indicated that the RBI has Rs 3.6 lakh crore as “excess capital” in its reserves and wanted the RBI to transfer more money to it as part of the surplus, this claim would have to be drastically reduced in the wake of the decision not to consider the revaluation gain.

According to analysts, the committee will have to address the question of excess ‘reserves’ which is subjective with varying opinions on optimal levels of ‘reserves’, and the degree of conservatism of the central bank. While the RBI necessarily needs to be conservative, another argument is that a central bank can always print money to provide support in an adverse situation and hence does not require excess ‘reserves’.

Meanwhile, the RBI Board’s decision to extend the timeline for implementation of the last tranche of capital conservation buffer (CCB) under Basel capital regulations is likely to reduce the burden of public sector banks this fiscal by Rs 35,000 crore.

Government nominees and an independent director were arguing for 8 per cent capital for banks in line with the Basel recommendations. The RBI Board, while deciding to retain the capital adequacy requirement at 9 per cent, on Monday agreed to extend the transition period for implementing the last tranche of 0.625 per cent under the Capital Conservation Buffer (CCB) by one year — up to March 31, 2020.

“This will provide some breathing space to capital-starved PSBs,” said Krishnan Sitaraman, Senior Director, CRISIL Ratings. “As per our earlier estimates, they needed Rs 1.2 lakh crore over the next five months up to March 2019 to meet Tier 1 capital stipulated under Basel III norms. Now they would need only Rs 85,000 crore on implementation of deferral of the last tranche of CCB.”

CCB is the capital buffer that banks have to accumulate in normal times to be used for offsetting losses during periods of stress. It was introduced after the 2008 global financial crisis to improve the ability of banks to withstand adverse economic conditions.

“The impact of the measures announced is likely to be some temporary relief, at best, for public sector banks. There are six public banks that are currently under and three public banks that are outside the PCA (prompt recovery action) framework which are below the minimum threshold requirements (post the relaxation),” said an analyst.

“We have been assuming that any capital shortfall would be funded by the government in the past and hence, this move would have a positive impact for minority shareholders as the book value/ share erosion would now be pushed forward by a year to FY2020,” Kotak Securities said in a report. PCA framework appears to be achieving its key objectives of rehabilitating banks that are under severe stress. “SME lending has been an area of risk, especially for public banks and we are still unsure of the risk-reward framework even if temporary relief is provided,” Kotak said.

“After considerable discussion and debate on these issues by the government and other experts, the RBI Board has addressed some of the critical issues. While the two committees will have to come out with workable solutions, the other two measures relating to MSMEs and capital adequacy will be helpful for the SME sector as well as the banking system. The weaker banks will gain from the capital adequacy relaxation for sure. In a way these two measures will also help the liquidity situation as banks will be able to lend more while restructuring stressed loans of SMEs. They would however have to have their due diligence processes in place when conducting this restructuring exercise to ensure that it is done in a prudential manner,” Care Ratings said.


RBI Board meeting cordial, with
little sign of tension with Centre

Surabhi & K Ram Kumar
The Business Line
Published on November 21, 2018

Mumbai, November 20: The Reserve Bank of India’s marathon Central Board meeting on Monday witnessed members burying the hatchet and taking up the agenda at hand in a business-like manner.

The meeting is understood to have been a much calmer affair than the tension and flare-ups seen in the days preceding it.

Expectations that some maverick board members may ratchet up the differences between the government and the RBI on issues such as increased flow of credit to micro, small and medium enterprises (MSMEs), transfer of surplus from the RBI to the government, opening a separate liquidity window for non-banking financial companies, and relaxing the prompt corrective action (PCA) framework on 11 public sector banks, did not come true.

“The meeting was very cordial. There was no bickering or any sort of ill-will. Everybody is on the same page. Nobody wants to keep banks under PCA. Nobody wants liquidity crisis….,” said a person clued in to the developments at the meeting.

“No one wanted it to be controversial…There was discussion on the RBI’s capital framework and need for improved lending to sectors,” said another person familiar with the development.

The government nominees on the board as well as those from the RBI are understood to have stuck to the business at hand while most independent directors on the board also spoke on issues relating to lending and credit.

According to another source, there was no talk or even indication of the issue of invoking Section 7 of the RBI Act and there was give and take from both sides to reach a middle ground.

“It was business as usual,” he said.

Details made public

The RBI also ensured that all decisions were made public through a press release soon after the meeting ended.

Decisions by the board, such as setting up a committee to review the economic capital framework (ECF), are likely to be implemented over the next fortnight. Other issues which could not be discussed have been rolled over to the next meeting in December.

The 18-member Central Board of Directors of the RBI includes RBI Governor Urjit Patel and Deputy Governors Viral Acharya, N S Vishwanathan, B P Kanungo and Mahesh Kumar Jain as well as government nominee directors Economic Affairs Secretary Subhash Chandra Garg and Financial Services Secretary Rajiv Kumar. Independent Directors to the board include Tata Sons Chairman N Chandrasekharan and S Gurumurthy.

Acharya in a public lecture on October 26, had spoken on the independence of the RBI, which brought out the apex bank’s differences with the Finance Ministry.


Government push came from political need

The Times of India
Published on November 21, 2018

New Delhi, November 20: The weight the Modi government brought to its faceoff with the RBI seems to have ensured that the Centre’s political and economic prerogatives prevailed, and in the process reset the balance in favour of North Block.

The government managed to get its case on increasing liquidity by softening lending norms and easing credit for small and medium enterprises past autonomy arguments by ensuring that the RBI board considers policy measures that could have a significant bearing on its political fortunes in 2019.

For weeks, even before RBI deputy governor lit the fuse with his speech warning of the consequences of the central bank’s autonomy being breached, concern had been rising in government over a lending crunch despite an uptick in growth and rising consumption. The autonomy argument, the government believed, was misplaced if it did not take into account the woes of and small businesses. “The government has been committed to cleaning bank balance sheets, but this cannot be done by throttling credit flows or being inflexible,” said a source.

The case for the central bank, however, had to be dealt with politically, with the main opposition Congress making the RBI another example of an “institution under siege” and claiming that the central bank’s independence was being subverted.

The government’s response was to insist that policy measures be taken to a conclusion. It made it amply clear that further stalling will mean that the government and RBI governor would not be able to work together any longer, pushing a strained relationship to a break point.

In the event, the central bank brass read the straws in the wind, discussions on Monday proceeded in a business-like manner and ended with several decisions that addressed the most urgent issues flagged by the Centre. In its assessment, economic policy objectives had been met without further escalation of hostilities and any overt breach of RBI’s autonomy.


RBI’s relief on capital will benefit only a few PSBs

Radhika Merwin
The Business Line
Published on November 21, 2018

Offers no big fillip to lending; leeway, however, lowers
Centre’s capital infusion burden by Rs. 14,000 crore

By retaining the much-debated higher capital requirement of 9 per cent for banks and only tinkering with the capital conservation buffer (CCB), the RBI has handed little respite to capital-crunched public sector banks. This is because, nearly half the PSU banks are struggling to meet the minimum common equity Tier I (CET 1) plus CCB requirement as of September 2018.

Hence, the respite on CCB will only benefit very few banks that currently maintain CCB higher than the mandated requirement of 1.875 per cent. While a back-of-the-envelope calculation suggests that the move has eased the Centre’s pockets by about Rs. 14,000 crore, it is unlikely to offer a huge boost to lending by way of freeing up capital for PSU banks. For most private banks though, that maintain more than the mandated capital requirement, the leeway on CCB will offer some cushion.

Regulatory requirement

The RBI has prescribed that banks are required to maintain a minimum total capital of 9 per cent (CRAR) of total risk weighted assets (RWAs). Within this, banks have to maintain a minimum Tier-1 CRAR (essentially bank’s own equity) of 7 per cent with a minimum CET 1 of 5.5 per cent (the bare minimum capital under CRAR). As per Basel III guidelines, in addition to the minimum CRAR of 9 per cent, banks are also required to maintain a CCB, that moves up 0.625 per cent every year from March 2016 to March 2019. This implies that banks need to maintain CCB level of 1.875 per cent as on March 31, 2018, and 2.5 per cent as on March 31, 2019.

The RBI has extended the timeline to meet this last leg of the CCB requirement — another 0.625 per cent by March 2019. While on the face of it, this may seem to free up notable amount of capital for banks, in reality the RBI’s respite on CCB only tinkers on the margins.

Little respite

CCB is essentially to ensure that banks build up capital buffers during normal times, (that is, outside periods of stress) which can be drawn down when losses are incurred during a stressed period. But given that most PSU banks have been under stress, they have either not been able to maintain the CCB or are having CCB less than the already required level of 1.875 per cent.

For instance, IOB in its September disclosure of Basel III requirements states that the bank is under stress, and hence, was not able to maintain the CCB as stipulated by the RBI. Bank of Maharashtra, as per its June disclosures, has a CCB of 1.064 per cent (lower than the 1.875 per cent requirement as of March 2018).

While not all banks disclose amounts specific to CCB, a look at CET 1 levels of banks against the mandated level (including CCB), suggests that nearly half of the PSU banks do not meet the regulatory requirement as of September 2018. Hence, the RBI’s leeway on CCB will benefit only a few banks (namely SBI, Vijaya Bank and Indian Bank) that have CET 1 well above the mandated requirement.

Therefore, at an aggregate level, the RBI’s move is likely to offer no big boost to lending, though well-capitalised private sector banks can see some respite.

Centre gains

The RBI’s move, however, has eased the pressure on the Centre by way of capital infusion. Earlier, with the CCB mandate of 2.5 per cent by March 2019, the Centre would have had to cough up an additional Rs. 36,000-odd crore for this by way of capital infusion (based on CET levels as of September 2018). This burden now reduces by about Rs. 14,000 crores, offering much-needed respite to the Centre’s fisc.


RBI Stands Its Ground Against Centre, but the
Big Business Elephant Still Hasn’t Left the Room

M K Venu, The Wire
Published on November 20, 2018

How should the banking system deal with close to Rs 4 lakh crore of either bad loans or near-default loans run up by just ten big industrial houses in major infrastructure sectors?

A gratuitous leak from the Ministry of Finance on the front page of a well-regarded English newspaper says that the Centre saved the day by preventing RBI governor Urjit Patel from resigning during the central bank’s board meeting on Monday.

This is akin to taking credit for not going for the nuclear option, which in any case would have been self-destructive, resulting in a pyrrhic victory for the Modi government.

Of course, the Centre is all powerful and can do anything it wants. But the exercise of real power lies in using it sparingly or not using it at all. The Modi regime is yet to learn this subtle art.

Therefore, it wants to take credit for not using the nuclear option – in this case, Section 7 of the RBI Act – in its tussle with the central bank.

In reality, this is what happened over the last few months. The Modi government needlessly upped the ante by issuing letters for consultation under Section 7, a tactic not used since independence. Governments in the past have held extensive consultations with the central bank and resolved issues without using Section 7. This is exactly what happened in the marathon, nine-hour board meeting on Monday in which all issues were discussed, some resolved and others put off for discussion in another board meeting to be held on December 14.

In a way, the RBI has also stood its ground. With the help of hard data and analysis, the central bank managed to convince the Centre and other directors that they should not press for certain issues which have no merit at this juncture. The most contentious matter – the use of Section 7 to force the RBI to part with a large portion of its contingency reserves – is already off the table for immediate action. This happened a week ahead of the RBI Board meeting. The prime minister discussed this issue personally with Urjit Patel, who might have explained the pros and cons of the move in simple Gujarati. This might have helped in clearing the utter confusion on this score created by the likes of S. Gurumurthy, who can be credited with creating a lot of noise but little substance on the issue. The truth is that Modi saw the merit of distancing himself from the chartered accountant’s perspective.

So, an expert committee will now look at how much reserves the RBI should hold in the future.

The RBI for its part broadly stuck to its existing framework of striking a balance between the need for maintaining the integrity of the financial system even while helping with additional liquidity wherever needed, based on hard data and analysis. The central bank did not agree to a broad-based opening of liquidity window for the non-banking finance sector. Of course, it will intervene whenever needed because by now it is established that there is no system-wide liquidity problem in the non-banking financial company sector.

The RBI will further discuss relaxation of the prompt corrective action (PCA) framework by some banks whose non-performing asset (NPA) situation might have improved after bankruptcy proceedings have enabled the sale of companies which had run up big bad loans. Over 10 banks cannot lend today under the PCA norms because their NPAs are over 10% of their total credit, and consequently their equity capital has eroded. The prudential logic of RBI is these banks can start lending only if they are adequately recapitalised by the government. Some new formula on this is being worked out.

There is a larger structural issue though which the RBI board must discuss in its next meeting. One would particularly like to hear S. Gurumurthy’ s views on it. He had suggested some months ago that the big business in India must be helped and aided by banks. Of course, the more widely-held view is banks have so far been helping and aiding only the big business houses at the cost of SMEs, who got battered by demonetisation.

But how should the banking system deal with close to Rs 4 lakh crore of either bad loans or near-default loans run up by just ten big industrial houses in major infrastructure sectors? This is the elephant in the room.

If nearly 40% of total potential NPAs are concentrated in some ten big business houses, banks cannot start lending without fixing this first. This appears obvious, but instead the government is seeking a different set of favourable rules for the big business with large overdue loans. Just look at the way the State Bank of India, as a key lender, is endorsing a fresh revival package for the power sector companies many of whom, as per the RBI circular of February 12, 2018, should have gone to the National Company Law Tribunal for liquidation or a change of ownership.

But this is not happening, as the Supreme Court has asked the electricity regulator and other stakeholders to consider another revival package, with the condition that if higher tariffs are passed onto the common man, consumer forums will be free to move the courts. And we all know how much staying-power consumer bodies have in their judicial battles with big business.

I am surprised though that the Modi regime is aiding this process in an election year. In fact, some cabinet ministers in the government are openly denouncing a circular the RBI put out in February 2018, which gave a six-month deadline to large businesses to either pay back their loans or go in for bankruptcy proceedings. This circular was hailed by everyone as reformist and much-needed strong action by the RBI precisely because such action was not taken under the earlier UPA regime. But as we approach general elections, the Modi government seems to be wavering on the RBI circular. The Supreme Court seems to have inadvertently helped the bigger promoters by staying the new rules for now.

The RBI circular is also a major trigger for the current face-off between the Centre and central bank, as it hurts big business by holding them accountable.

For instance, the power sector itself has taken loans of close to Rs 3 lakh crore. With so much money locked up in just one sector and in just half a dozen companies, how can banks release funds for small and medium businesses?

This is a serious structural issue – concentration of large bank funds in just a dozen business houses. How can these funds be unlocked? The RBI board will have to discuss this, which means that the assault of big business on the central bank is far from over.


Reserve Bank ‘Rating’ key in decision over reserves

Sugata Ghosh
The Economic Times
Published on November 21, 2018

Mumbai, November 20: The optimum capital of the Reserve Bank of India (RBI) — probably, the most contentious debate in the Centre versus central bank story — hinges on a simple question: should RBI’s perceived ‘rating’ be higher than India’s credit rating? This is expected to be the key issue that the proposed committee to be constituted to look into RBI’s economic capital framework would have to address.

In the course of Monday’s marathon board meeting, RBI officials, in their presentation, said that the monetary authority should have a top rating, while the government nominees in the board asked if this was at all necessary — and simultaneously, raised the question whether the central bank, which is owned by the government, can technically have a rating that is above the sovereign’s.

While some of the central banks are rated, there is no rating for RBI. However, RBI’s balance sheet is considered in arriving at India’s sovereign rating.

How the differences are sorted out would determine the slice of RBI’s profits that would go into strengthening the central bank’s contingency reserves and the balance that could be distributed every year to the government as dividend.

India’s sovereign rating stands at the lowest investment grade according to S&P, the world’s largest rating agency, and a grade above the lowest investment grade as per Moody’s. RBI believes that since India has no reserve currency and has to fund its current account deficit, the central bank’s balance sheet should be robust enough to attract the top rating.

In its presentation, RBI officials spoke about the reserves necessary to counter macroeconomic and currency instability that India could be exposed to in the event of situations like 1991, 1997, 2008 and 2013. “While the government believes that this is an extreme position as many large central banks don’t have such top ratings and stick to guidelines on reserve creation, RBI is of the view that India is different. Also, it wants to keep reserves for Black Swan events,” a person familiar with the discussion told ET.

Of RBI’s Rs 9 lakh-odd crore reserves, about Rs 2.3 lakh crore is ‘contingency reserves’ — which cannot be touched — while most of the balance amount is on account of currency and gold revaluation. Revaluation reserves are unrealised gain and can only be realised through sale and conversion into rupees — an exercise that many believe may not be easily feasible. The committee could thus focus on the extent to which RBI should maintain reserves, which in turn would indicate the amount that has to be added to the contingency fund before declaring dividend to the government.

“The immediate objective of Monday’s board meeting was to calm nerves, buy time, and hold back provocative demands -even though the government may be quietly happy that the primacy of the RBI board has been somewhat established as for the first time operational issues like Basel capital norms, credit to MSME sector, and prompt corrective action on banks were discussed in an RBI board meeting. But there are unresolved issues which have to be looked into.

For instance, liquidity could emerge as an important factor in the coming weeks. It could lead to demand for a cut in the cash reserve ratio (the slice of customer deposit banks have to maintain as cash with the RBI). The government is considering more refinance from national housing bank to HFCs. Also, RBI may have to carry out more aggressive open market operations to pump in money.

As things stand, there is a significant difference in the way RBI measures liquidity and the way the government views it. While RBI looks at liquidity in a theoretical context, the finance ministry takes a more empirical view on liquidity,” said another person.


The war within the CBI threatens to diminish
the credibility of many institutions

Pratap Bhanu Mehta
The Financial Express
Published on November 22, 2018

The crisis within the CBI is not simply a civil war within the CBI. It is a deep crisis of the Indian state that at one stroke destroys whatever shards of credibility it had left. This whole saga has the makings of an ominous tragedy. Not a single institution comes out looking good. The culpability for this mess has directly reached the door of the prime minister. It is truly astonishing that the political establishment does not even feel the need to publicly respond on a major crisis of its making. With the latest round of allegations — and they are only allegations at the moment — the national security establishment is now also going to be dragged into the muck.

Every aspect of this train of events is shocking. The spectacle comes to public attention because the top two officers of the CBI accuse each other of serious corruption. Whatever the truth of the charges, it is clear that every single check and balance within the system had broken down. The appointments process is clearly broken. Let’s for a moment, grant Rakesh Asthana the presumption of innocence. But common sense tells us that a government directly intervening to appoint a person to a senior and powerful position, with an integrity cloud hanging over their conduct, against the objections of other senior leadership within the organisation, looks extraordinarily bad. In senior leadership positions, the criteria is not simply that the candidate has not been convicted. It has to be someone who commands unimpeachable credibility.

The matter is brought to the attention of the Supreme Court. The logic of what the Court will subject to scrutiny and what it will let pass is as mysterious as God’s propensity to inflict suffering. It has no compunction directly intervening in an ongoing defence deal. But it did not bat an eyelid when its own directives to secure the independence of the CBI were being flouted. Indeed what this muck has exposed is the Court’s utter naiveté when it comes to the CBI. It has not secured its independence, as much as it has further empowered an organisation that has always been the handmaiden of political power. The Court’s modus operandi is opaque. Either this is a public trial or this is not. The Court is not some parliamentary select committee that can receive state secrets under sealed covers, giving selective access to some interested parties and not to others. The argument that the Court is trying to protect the credibility of the CBI is laughably besides the point. Is it really the Court’s business to shore up the credibility of another organ of the state, or is it to determine guilt or innocence? It is touching to see the Court batting more for the CBI’s credibility than the CBI itself.

Frankly, what the Supreme Court is doing seems more like an act of institutional powerplay on its part rather than something that conforms to canons of law or justice. It compounds its naiveté over the CBI with its naiveté over the CVC. Barely two weeks to submit a report? From an organisation about which one capable civil servant once quipped, “I know the organisation is vigilant. What it is vigilant about no one can tell.” Another eminent justice is appointed to look into the matter. The relationship between the CVC’s findings and the terms of reference of the honourable justice’s mandate are not clear. Does the Court trust the regular process of the state like the CVC? If it does, why do we need a judge? If it doesn’t, why do we need the CVC? Or will it trust the CVC if the judge conducting the inquiry and the CVC agree? But who will it trust if they disagree? The Supreme Court is trying to do the right thing. But there is no institutional logic to what it is doing.

Then comes the CBI itself: An institutional debacle of Shakespearean proportions, where you don’t know whether to laugh or to cry. The CBI is in a Catch 22 situation. Either the CBI has a lot of corrupt and guilty people. We now know because other CBI officers are saying so. Or if it does not, and this is merely a turf war as some are alleging, then the CBI has a lot of people who make other CBI officers look corrupt and guilty. Either way, the CBI’s credibility is doomed. And either way the citizens are left in the lurch. They are stuck with a corrupt organisation or an organisation that frames people. It is so touching to see CBI officers claiming to be victims or being framed by their fellow officers. If CBI officers don’t feel safe with their colleagues, imagine what it means for ordinary citizens?

Now another CBI officer has alleged that the National Security Advisor (NSA) directly interfered with the investigation. Allegations of this nature should be treated with all due caution; they can easily be used to derail honest men. I have no view on the Ajit Doval allegations. But even Doval should recognise that the government has created a mess of its own making. If mere allegations by CBI officers should not be enough to cast doubt on the integrity of high officials, why was the CBI director transferred summarily, without due process? Should the same yardstick be deployed for the NSA? After all, in this case, the CBI officer is prepared to go on record in the Court.

But there is an even deeper danger. As Shekhar Gupta pointed out in The Print on October 13, this government has brought about a tectonic shift in the relationship between the NSA and the rest of government. It has securitised all aspects of government by giving the NSA powers to summon practically anyone and side-lined conventional political and bureaucratic mechanisms that at least kept up the pretence of wider political and civil service accountability of the security state. So, the stakes in the office of the NSA become even higher. Even apart from the current allegations, the empowering of the NSA should be a matter of concern. But with these lines blurred, should Doval be held to the same yardstick by the prime minister that he wanted to hold Alok Verma to, and that he refused to hold Asthana to prior to his appointment? The stench of arbitrariness is now inescapable. But don’t worry: Indian institutions are resilient. We will learn to hold our noses against this stench even tighter.

The writer is vice-chancellor of Ashoka University. He was earlier president, Centre Policy Research, New Delhi, one of India's top think tanks. Before he started engaging with contemporary affairs, he taught political theory at Harvard, and briefly at JNU.


Solved! The productivity mystery

Brian Caplen
The Banker Magazine
Published on November 20, 2018

The challenges banks face with regulation and legacy IT systems hold lessons for the wider economy, writes Brian Caplen.

Great minds have been pondering the productivity mystery. Why, in a time of rapid technological change, is productivity stagnant in many advanced economies?

The UK has particular problems related in part to the tendency of firms to hire cheaply from an EU migrant pool (which may disappear post-Brexit) rather than invest in new equipment.

But two other reasons — less often cited and especially pertinent to banks — help to explain this so-called mystery.

The first is regulation and compliance. Banks can be forgiven for thinking that theirs is the only industry suffering from regulation overload given the slew of regulation since the financial crisis.

But all industries are engaged in a massive regulatory push across areas ranging from data protection to employment law to health and safety. These require not only additional resources to implement but also take out management and employee time filling in spreadsheets in order to comply. Many of these new regulations have noble objectives but they are a direct hit to productivity.

Then there are control systems run on legacy IT that also eat into productivity. These typically involve purchasing and invoice systems that require numerous steps to complete and ask for multiple lines of information. All very nice for the data collectors but they use up lots of staff time. Banks again are in the frontline as they are often running these off legacy and cumbersome IT systems.

The US administration is currently under fire for revisiting regulation and loosening it where appropriate. In fact, a thorough cost-benefit analysis of regulation and compliance across sectors could produce better outcomes, consume fewer resources and help solve the productivity puzzle.

Brian Caplen is the editor of The Banker Magazine.


The Speaking Tree
Why we need secular ethics beyond religion

Dalai Lama
The Times of India
Published on November 21, 2018

Clearly, something is seriously lacking in the way we humans are going about things.  But what is it that we lack?  The fundamental problem is that at every level, we are giving too much attention to the external, material aspects of life while neglecting moral ethics and inner values.

By inner values I mean the qualities that we all appreciate in others, and toward which we all have a natural instinct, bequeathed by our biological nature as animals that survive and thrive only in an environment of concern, affection, and warm-heartedness – or in a single word, compassion. 

The essence of compassion is a desire to alleviate the suffering of others and to promote their wellbeing.  This is the spiritual principle from which all other positive inner values emerge.  We all appreciate in others qualities of kindness, patience, tolerance, forgiveness, and generosity, and in the same way we are all averse to displays of greed, malice, hatred, and bigotry.  So actively promoting the positive inner qualities of the human heart that arise from our core disposition toward compassion, and learning to combat our more destructive propensities, will be appreciated by all.  And the first beneficiaries of such a strengthening of our inner values will, no doubt, be ourselves….

Certainly, religion has helped millions of people in the past, helps millions today, and will continue to help millions in the future.  But for all its benefits in offering moral guidance and meaning in life, in today’s secular world, religion alone is no longer adequate as a basis for ethics.  One reason for this is that many people in the world no longer follow any particular religion. 

Another reason is that, as the peoples of the world become ever more closely interconnected in an age of globalisation and in multicultural societies, ethics based on any one religion would only appeal to some of us….  In the past, when peoples lived in relative isolation from one another – as we Tibetans lived quite happily for many centuries behind our wall of mountains – the fact that groups pursued their own religiously based approaches to ethics posed no difficulties. 

Today, however, any religion-based answer to the problem of our neglect of inner values can never be universal, and so will be inadequate.  What we need today is an approach to ethics that makes no recourse to religion and can be equally acceptable to those with faith and those without: a secular ethics.

This statement may seem strange coming from someone who from a very early age has lived as a monk in robes.  Yet I see no contradiction here.  My faith enjoins me to strive for the welfare and benefit of all sentient beings, and reaching out beyond my own tradition, to those of other religions and those of none, is entirely in keeping with this.

I am confident that it is both possible and worthwhile to attempt a new secular approach to universal ethics.  My confidence comes from my conviction that all of us, all human beings, are basically inclined or disposed toward what we perceive to be good. Whatever we do, we do because we think it will be of some benefit.  At the same time, we all appreciate the kindness of others.  We are all, by nature, oriented toward the basic human values of love and compassion.  We all prefer the love of others to their hatred.  We all prefer others’ generosity to their meanness. … I believe the time has come to find a way of thinking about spirituality and ethics that is beyond religion.

Extract from ‘Beyond Religion,’ HarperCollins.

Source: Internet Newspapers and anupsen articles


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