Sunday, November 9, 2014

Fast Tracking Financial inclusion

Fast Tracking Financial Inclusion: Jan-Dhan Yojana

Jan-Dhan has been announced from the ramparts of Red Fort on August 15, 2014 and quickly made inroads into the field on no-holds barred approach the first ever, since the announcement of Financial Inclusion by Y. V. Reddy, the former Governor, RBI in 2005. The Committee on Financial Inclusion under the Chairmanship of Dr Rangarajan said: ‘Financial Inclusion is no longer an option, but a necessity.’ NABARD Report in 2008 gave a working definition later: “Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost.” Had the Banks implemented the Differential Rate of Interest Scheme[1] (still in the RBI statutes) been implemented by the banks, monitored and regulated by the RBI, the Prime Minister Modi would not have had the good luck of taking this lame duck of financial inclusion under the new garb with such gusto. The credit limit for the Jan-Dhan scheme second dose is incidentally the same as the revised DRI limit of Rs.15,000 in 2010. What R.K. Hazare proposed in 1970s has been disposed by M.V. Nair in 2012.

Now a different story is being unfolded. The questions that remain are: have the banks boldly put forward the risk profile of the portfolio in all its ramifications with over six important players – banks, business correspondents and their agents; NGOs, SHGs, MFIs and the technology players in the game of financial inclusion? The same staff –quantitatively and qualitatively that could not open no-frill and GCC accounts for nearly a decade beyond 7.3cr had opened  a hopping 1.3crore accounts on just one day, the 28th August. The Chairpersons of the Banks were on their toes and liberally posed for photographs with the political leaders to be in the media glare on par with the euphoria that we had seen in the glorious initial days of IRDP until Rajiv Gandhi told that only 16 paise of the IRDP rupee only reached the intended population. Several procedural issues and implementation issues have been for once put in the cupboards of the top executives of the Banks. But it is necessary to discuss them sooner than later.

Regulator -driven financial inclusion effort made only marginal impact during the period 2002-2011. Financial inclusion was full of sound and fury during the effective years of its efforts - 2005 to 2011. The reason would appear to be that the initiative is strongly driven by the central bank and hypocritically led by the Government. The constituent banks, most in the public sector, continue to make an apology of the effort in financial literacy and financial inclusion indulging in numbers to make believe that they are now serious about it. Again, with the Prime Minister making a strong pitch for financial inclusion drive, would it make a difference to the banks? It is not with pessimism that I allude into the past but to draw lessons for rectifying the approaches in the beginning of the massive drive.

The National Pilot Project of Financial Inclusion of 2006 had a few similarities and also had a few success stories like those in ‘Neravy’ village in Karaikal Region of Union Territory of Puducherry through the Indian Bank branch at Karaikal. (Remember, this is the constituency of the former Finance Minister, Chidambaram)

Salient Features of the National Pilot Project for Financial Inclusion (2006):


v  To cover the entire population of Union Territory for opening zero or low balance account.

v  To sanction overdraft to all eligible persons for consumption needs.

v  To sanction General Credit Card (GCC)/Kisan Credit Cards (KCC) for economic activities.

v  75% of the population has to be brought under overdraft /KCC/GCC

Opening of SB accounts - All the eligible willing individuals of age group 18 to 70 are allowed to open savings bank account. Simplified KYC norms and documentation may be followed. Bank branches have to ensure that entire population of the allotted areas are covered without any omission.

Sanction of Overdraft - Overdraft has to be sanctioned to all eligible needy persons. The OD may be a minimum of Rs.500/- extending up to a maximum of Rs.5000/-  per person. The rate of interest is around Prime Lending Rate (PLR).

Issue of General Credit Card - General Credit cards are supposed to be issued to traders, self-employed persons and others apart from individuals having Kisan Credit Cards. A maximum limit of Rs.2.00 lacs is allowed based on the activity and its feasibility / viability of the proposed project.

Line of Credit to SHGs - General Line of Credit may be provided to the Self Help groups having a good track record. This enabled reduction of transaction cost as well as providing flexibility in the credit delivery system.

Insurance products - All the account holders are covered by various Insurance products to provide social security.

 IT connectivity

The Indian Banks Association has also constituted technology committees in order to formulate uniform open standards for the technologies at play so as to ensure interoperability between banks and other service providers for the benefit of the customers. Presently, the lack of common technical standards has impaired the pace of ICT deployment and has led to vendor dependence for technology components. This has made the solutions deployed by even a particular bank for financial inclusion, solution- provider specific, thus not allowing the bank customer the ability to interoperate across all outlets of the same bank.

Technology up gradation such as implementation of core banking solution is an important initiative taken by banks for taking the project to rural and interior areas. This should be accelerated in order to implement the project within the time frame. Since BSNL is now expanding the connectivity in rural areas, the implementation of Financial Inclusion is subject to availability of the connectivity.

Federal Bank Ltd., though in private sector, has a successful model in Financial Inclusion that carried the financial literacy, financial education, dedicated team of business correspondents and business facilitators, biometric facilitated credit card for availing credit in addition to specially designed village branches to steam up the effort. This model in private sector is cost-effective and delivery intensive.

A word about Mor Committee Report would be in order at least for the academic content. It is not long ago that the RBI appointed Nachiket Mor Committee to suggest ways to accelerate the Financial Inclusion efforts of banks. It produced a report that had two voices of dissent from the members and these are from Bank of India and Axis Bank Ltd. The Mor committee pitched for a radically new approach to recognize the singularity of purpose, but plurality of approaches. While the past policy interventions have been in the nature of incremental and cumulative achievements, the Mor committee seems to adopt the residual and saturation approach. While this aggressive approach is welcome, the committee does seem to underestimate the task involved in covering the residue of uncovered population.

The approach of the Mor committee is to look at the larger structure available for delivery of financial services, the supporting systems needed and the legal and regulatory framework under which such a system could operate. The approach is neutral to institutional forms. The committee also seeks to externalize all the costs of delivery. It advocates interoperability at the last mile. The interoperability is not only about the access to banking services at a touch point that is 15 minutes away by walk, but also about other financial services. These services are to be delivered ethically without any mis-selling through a concept of suitability. While it has been a challenge to open plain vanilla accounts and get the direct benefit transfers for these customers rolling out, the task of offering a product that passes the suitability criteria is daunting indeed. Clearly the costs of these products as per the tone of the committee report are to be borne by the customer.

The next cost in this rather complex world pertains to the client protection framework. The Mor committee at the base level advocates informed consent and transparency. Let us take the informed consent aspect. All microfinance institutions, including the ones in Andhra Pradesh, always took informed consent of the borrowers, through a public recital of an oath and through reciting the terms and conditions of the loans. Ultimately when the crisis hit the roof, the biggest allegation was about client protection. This concern remains with the Jan-Dhan no less.

The cost of implementation has been undermined by none other than the aggressive advocate of financial inclusion during the last seven years, K.C. Chakraborthy, the former Dy. Governor of the RBI when he told Latha Venkatesh of CNBC-TV18 reported in Money Control on the 4th September ( that for banks to incur Rs.18000cr in this gigantic effort in the next four years cannot be a big issue. Banks would be gainers in the long run. Several CEOs may be hiding their anguish in the exposed smiles.

Even before the RBI could realise that the suggested action requires a practical approach, the present government jumped at the Modi-stroke, notwithstanding the deep concern of the RBI once again over inclusive banking in preference to incremental banking.

It is obvious that with a fortnight of effort that such large clientele in Jan-Dhan could not have reached the banks’ multiple windows without non-banker intermediation. IBT reports that as on October 22, 2014, 64.7million accounts with savings of Rs.48135.9million have been opened by the banks. On average, 115,000 accounts are getting opened every day! The energetic retired bankers, the village opinion leaders (an euphemism for local politician), friends and relatives, and the existing and prospective BCs as well as their agents, insurance agents, mobile operators who have good connections with the local banks could all have been roped in to help the KYC form filled. But behind the counter, it is only the bank staff that has to open two accounts – one SB and one overdraft account of Rs.5000 for each account holder with all the photographs and signatures/LTIs with witnesses for biometric application on Rupay cards, captured.

Intermediation of a host of persons did occur. After six months of savings bank account opening, if all these persons are granted the overdraft facility and such facility has no relationship whatsoever with either livelihood creation or enhancing the existing livelihood opportunities there are two possibilities. One, the borrower spends as he wishes; two, an agent or the intermediary gets the access to these persons with a bait that he would fulfil the overdraft conditions in due course once the major amount of this OD is passed on to him. Even if 50 percent of these accounts are directed in this gaming process, it would be a hopping Rs.200bn reckoning the numbers of Jan-Dhan accounts thus far. There is scope for ‘ponzi’ schemes waiting to operate!! Now they would move to villages from the cities.

If, on the other hand, there are no leakages and if there are no intermediaries other than banks and all the people secure the livelihoods on sustainable basis, the prospects of growth in terms of financial assets are immense.

The scheme also tells us that each account is insured simultaneously. No warrantee conditions are either announced or on display. Bank linked insurance schemes actually did not have a good track record. There is little evidence to show how many claims have been there against either the credit cards or the savings bank account holders allegedly covered by the insurance thus far.

Suggestions for making the effort effective in terms of cost and delivery:

Ø  Make the Primary Cooperative Credit Societies the major partners not through a BC model but making them part of the mainstream banking with the required investment in technology to enable them part of payment and settlement systems of the RBI and improving governance through immediate legal changes suggested in the 97th Constitution Amendment Act on a Mission mode;

Ø  Make the Urban Cooperative Banks also as much a part;

Ø  Take the MFIs and NBFCs registered with the RBI also as partners;

Ø  All Commercial Banks, private, public and foreign also take on this effort on village adoption mode;

Ø  Widely display the scheme on the media in all vernacular channels, all the terms and conditions of opening and operating the accounts – both savings and credit – through a specific time slot for financial literacy and education for an hour;

Ø  Widely announce the fine print of Insurance cover;

Ø  Incentivise staff engaged in this massive effort at the end of an year after evaluating the intended processes and results appropriately;

Ø  Each SLBC should devote half a day for reviewing the efforts as a separate item on the agenda.

Each bank’s internal review mechanisms and transparency coupled with regulatory impact assessment at half-yearly intervals by external agencies would go a long way in stabilising the scheme of such magnitude. India needs inclusive growth more than ever now, as the country will be under corporate seize in its global economic agenda and the Modi master stroke could not have waited any more. But all the players in the field have to play their role consciously well.

Published in Business Advisor, Vol IX, Part 3, November 10, 2014.





[1] Yerram Raju B, DRI Scheme Needs a Second Look: Eastern Economist, May 15, 1971 pp1230-34

Monday, August 18, 2014

Politician promises and Regulator disposes

Politician promises and Regulator disposes

There is an old adage that a farmer is born in debt, lives in debt and dies in debt. No farmer has liquidity when he wants cash in hand, for it lies either in land or stock. Farmer is today a part of the rule book, both with Governments and the financial institutions and the regulator.

AP and Telangana both the States, after formation, did not lose a minute in negotiating with the RBI the way forward to realising their hasty loan waiver promises. The States tried to bargain hard for restructuring the loans till they could find resources to fully credit the promised waiver amount into farmers’ loan accounts. The logic for waiver could be disputable but the request for restructuring on the sovereign guarantee has less reason to be faulted. This cannot be dubbed away as ’crony socialism’ – the meaning of which the creator of the phrase alone has much to explain.

The history of farm loan waivers – a sad one—politically motivated could have been resisted by the regulator even during the years 1990 and 2008. When the commercial banks were writing off loans of various other sectors but failed to respond to the farmers’ requests even amidst a do-or-die situation, the governments took law into their hands and claimed equity in debt treatment. In a political economy, howsoever puritan the economists are, the will of the politician prevails, particularly in democracy.
RBI after dilly-dallying for two months amidst hope and despair, decided to allow rescheduling of farm loans selectively in both the States.

Corporate Debt Restructuring for large corporate borrowers – the GMR, the GVK, LANCO, Deccan Chronicle, etc., earning profits and bidding for huge projects leaves one in doubt whether the greening banks’ books of accounts on a continuing basis unabashedly had tacit approval of the RBI. Why the farmers who face one calamity or the other year after year should be denied the loan restructuring facility even against the guarantee of State Governments on a different platter?

Existing guidelines on farm loan restructuring and rescheduling framed in the year 1974 (this author was a member of AFC-IBA Mission that framed these guidelines under the Chairmanship of P.F. Gutta) require fresh look by the regulator. The guidelines in those days did not distinguish one calamity from another. For example, cyclones would damage the soils with salinity while floods destroy the standing crops and even seed beds for that season. The effect of cyclone lasts for three to four years for normalcy to restore while in the year following floods due to silt accumulation, bumper crops would occur. Drought is a different ballgame altogether. Even the soil moisture would not be there for crops to be raised after continuous years of drought. Holocausts cause different types of losses to the crops. Further when those guidelines were framed there were no insurance mechanisms.

Crop insurance schemes even now are highly inadequate in content and delivery to take care of these varieties of losses, and require a comprehensive treatment. Post-harvest losses due to the natural calamities after their occurrence are more menacing than what the crop-cutting experiments indicate as crop prospects that determine what the district administration should declare under annewari.

The farmers also seek the whole marketing system to be revamped by modifying the provisions of the APMC Act 2005. Enabling the farmers to raise good crops in good season and creating capabilities to repay their obligations as respectable citizens is imperative. Financial inclusion for equity and financial discipline for stability are imperative for sustainable economic growth.

Due to the governments at the centre and states waiving partially the interest, in spite of budgetary announcements of crop loan targets, the crop loans of small and marginal farmers were mostly roll-overs while the incremental credit went in favour of large borrowers, contract farming, and urban farmers, if we were to go by the RBI published data. Therefore, in almost all the farmer-meets, there is a clamour from farmers that banks are weary of granting loans to them to the extent required for multiple activities and storage of crops and that the State Governments should enjoin upon the lending system to grant crop and other loans to them without delay and to the extent required at 4% interest rate suggested by Swaminathan Committee in 2007.

Even the most recent Round Table of farmers of both the States held under the joint auspices of FRSF and COKO (July 2014) favoured adequate and timely loans in preference to loan waivers. It is time to look at the RIDF that provided a window of opportunity to the commercial banks to make over their shortfall in priority sector – agriculture- lending targets and the Agricultural Debt Committee ( R. Radhakrishna: 2007)’s recommendation needs consideration.

Further, the senior citizens among small and marginal farmers and leaseholders having nothing to fall back upon in their old age, should be considered for old age pension of Rs.2000 per month.

May be it is time that the Parliament consider passing a law against any loan write-off announcement other than the loan provider with the sole exception of situations of natural calamities declared as such on the floor of the house. A special fund should take care of such write-off exercise with contribution from the State exchequer, Central Government, NABARD, and all the lending institutions in the proportion in which they lend to that particular sector.

In fine, I would suggest that the RBI would do well to examine the issues of farm lending portfolio more succinctly and create robust environment for safety, security and sustainability of farm credit. It is desirable to consider farm family as a unit for lending to enable cross-holding of risks from a variety of on-farm and off-farm activities that the farmers pursue so that in-built insurance mechanisms also come their way.

Sunday, July 13, 2014

SMEs in Union Budget 2014-15 – Implementation Challenges

This path-breaking Union Budget providing discontinuing continuity on several fronts has concretized all the promises in the BJP manifesto unfolding the vision of the Modi Government. Its allocations reflect pragmatism in that some projects got funds for Detailed Project Reports while others of long term nature that can only make a beginning got symbolic outlays.

Manufacturing sector that is just showing signs of revival with its growth rate touching 4.7% in May 2014 reversing the negative trend of growth till the end of March 2014 got a shot in the arm. Of particular relevance is the attention paid to the MSME sector.
This highly heterogeneous MSME sector in terms of the size of the enterprises, location, variety of products and services, people employed, coverage of social sector, and leveraging information, communication and technology (ICT) in running their enterprises holds nearly 3olakh units employ around 500lakh persons. 98 percent of them are in micro and small categories going by the definition of the MSME Development Act 2006. They have always reflected growth rates ranging from 8 to 11 percent far higher than their elder cousins. While INR 10crore investment in large enterprise provides one job or less, INR one crore in MSMEs provide on average 4 persons. They are also providing on-the-job skills and tolerate attrition rates multiple times the large enterprises while contributing to 40 percent of exports in manufacturing sector.
Most of them are in debt markets and are unable to access equity despite the SME Exchange in position.

The three key issues facing the sector; lack of finance, need for support for technology /skills and innovation and need for exit option get due attention. While the schemes are well intentioned, the implementation at the State level will be critical and would require State Governments to overhaul their machinery to take full benefits from these measures. Succinctly put, Arun Jaitly announced the following for the MSMEs:
1. Fund of Funds with a corpus of INR 10,000crore for providing equity through venture capital funds, quasi-equity, soft loans and other risk capital will facilitate startup companies.

2. Initial sum of INR 100crore for “Startup Village Entrepreneurship Programme” for encouraging rural youth to take up local entrepreneurship programmes. Read with the support for producer companies, this is a big shot in the arm.

3. Corpus of INR 200crore to be set up to establish Technology Centre Network. Successful execution of all these promises will give a significant boost for entrepreneurs and SME’s and facilitate the promotion and development and enhancing the economic growth of the country.

4. Promised to develop an entrepreneur-friendly legal bankruptcy framework for SMEs that will enable easy exit.

5. To incentivize small entrepreneurs in the manufacturing sector, the government has also proposed to provide investment allowance at the rate of 15 percent to a manufacturing company that invests more than INR 25crores in any year in new plant and machinery for investments up to 2016-17.

6. Definition of SMEs would be modified.

7. A nationwide “District level Incubation and Accelerator Programme” to be taken up for incubation of new ideas and necessary support for accelerating entrepreneurship.

However, once an entrepreneur sets up a unit in the sector, it is well nigh impossible for him/her to exit under the existing rules. The MSME Development Act 2006 has not been able to create a window for safe exit. It is this context that makes the announcement on exit policy and bankruptcy law greet with lot of enthusiasm. This measure will eventually distance them from the endemic sickness.

Some of these proposals like MSME tool rooms and innovation centres that are already present in most large cities unless implemented enterprise friendly, would bring wrinkles on the already sweating brow. Similarly entrepreneurship development programmes conducted by all State Governments and EDIs and MSME DIs, are not able to generate proposals/projects that are bankable. Finance still holds the key.

However, MSME sector faces all its problems at the State and sub-State levels where actual implementation mechanism rests. The District Industries Centers save exceptions like Tamil Nadu and to some degree in Karnataka, Gujarat and Maharashtra, are a window of harassment and the single window scheme for securing all clearances have multiple doors and windows. The archaic DICs have to be converted into District Facilitation Centers in the first place if good governance has to touch this recognized distressed sector.

The other implementation block is delayed release of announced subsidies both from the Central and State Governments. Third, State Government machinery needs to be trained for the magnitude of work expected from them and also their knowledge levels/ familiarity with technology, bankability of schemes etc has to significantly improve. Here, the ministry of MSME can play an important role to ensure that the State Governments are ready to implement budget proposals.

RBI in its guidelines provided for collateral free credit to these MSMEs up to Rs.10lakhs although the Credit Guarantee Fund Trust for MSEs provided for such access up to Rs.100lakhs. It is a different issue that banks follow neither save very few exceptions going by less than lakh of lucky MSEs securing collateral free credit.

RBI has also advised the Banks to display the facilities available to the MSME sector including the guarantee thresholds in the banking hall and there is clear breach on this count with no regulatory action. There is no mandatory percentage of priority sector credit to flow to this sector. The credit issues and rules and regulations are expected to be examined by a Committee and the three month speedy delivery of its Report would hopefully be followed up with equally speed implementation mechanisms. Budget certainly made the MSMEs smile this time as environment for enhancing their competitiveness improves significantly.

Saturday, June 14, 2014

Emerging Economies, Free Trade and Poverty

Poverty alleviation has been on the global agenda for the last seven and half decades. The World Bank, Asian Development Bank, United Nations, several developing nations and Developed Nations have made it as an important agenda. But the US, Japan, Germany and even China that registered consistent high growth during the last two decades could not be free of the poor. Asian Development Bank that has been spending billions on the agenda of poverty alleviation has poverty dancing right in front of its huge mansion in Manila. It could not show case even a small nation rid of poverty. Poverty can at best be reduced and not eliminated – this is one lesson that the economic history teaches us.
All the conferences on poverty alleviation throughout the World are held in Five Star or Seven Star Hotels and in Air-conditioned Conference Halls for hours and days together. Intellectuals gather to discuss their poverty and other’s poverty. Goals in one name or other and common agenda across the nations – e.g., Millennium Development Goals – are discussed and settled. Several researchers, bureaucrats, government and non-government organizations, donor institutions etc., decide to spend billions of dollars on the agenda. So much is the scope for employment provided by the poor across the world. Poor are the biggest employers in the world. Interest keeps renewing on poverty alleviation agenda – and now with focus on emerging economies and free trade. This paper is divided into two parts: part 1, dealing with free trade and emerging economies and Part 2, dealing with poverty with specific reference to India.
Part 1: Free Trade and Emerging Economies
A word or two about free trade becomes imminent to relate to the poverty alleviation agenda. The IMF and the World Bank have preached long the structural transformation followed by liberalization of trade and export-driven agenda. They prescribe cutbacks, “liberalization” of the economy and resource extraction/export-oriented open markets as part of their structural adjustment programmes. Privatization accompanied by reduced protection to domestic industries, currency devaluation to keep the dollar in its prime trading position, increased interest rates, elimination of subsidies particularly those that offer guarantees to the poor, food security measures, are some of the glaring measures and these would precisely ensure that the emerging economies inviting such adjustment programmes depend upon them continuously and the poverty that actually gets accentuated in the process, is kept high on the economic debates.
One analyst succinctly puts it: “The impact of these preconditions on poorer countries can be devastating. Factors such as the following lead to further misery for the developing nations and keep them dependent on developed nations:
• Poor countries must export more in order to raise enough money to pay off their debts in a timely manner.
• Because there are so many nations being asked or forced into the global market place—before they are economically and socially stable and ready—and told to concentrate on similar cash crops and commodities as others, the situation resembles a large-scale price war.
• Then, the resources from the poorer regions become even cheaper, which favors consumers in the West.”
The other effects are that capital flows become more volatile and the bottom of the pyramid, gets wide leading to social unrest.
“In the worst cases, capital flight can lead to economic collapse, such as we saw in the Asian/global financial crises of 1997/98/99, or in Mexico, Brazil, and many other places. During and after a crisis, the mainstream media and free trade economists lay the blame on emerging markets and their governments’ restrictive or inefficient policies, crony capitalism, etc., which is a cruel irony.”
Developed countries grew rich by selling capital intensive products at high price and buying labour-intensive products at low price. This imbalance of trade increases the gap between the rich and the poor. A country’s ability to purchase imported goods declines when the purchasing power of a country’s exports declines. Emerging economies would not be able to fund the sustainable development programmes without incurring huge fiscal deficit. These deficits are calculated in relation to the Gross Domestic Product – a measure that fails to reckon many products and processes that happen in the economy. A case in instance: In India, all the deals in scrap and waste are on cash and carry basis running to millions of rupees and they do not get into the national accounts. There are many other such items in the services sector as well – the services of many doctors, lawyers and the unrecorded sales in jewelery shops .
Most developing economies depend on primary commodities as their main source of revenue and these account for about half of their export revenues and such primary commodities are very few in numbers.
These concerns are not new.
Political economist Adam Smith in his magnum opus ‘Wealth of nations’- dubbed as a Treatise on Capitalism was highly critical of the mercantilist practices of the wealthy nations, while he recognized the value of local industry and the impact of imported manufactured products on local industries:
“Though the encouragement of exportation and the discouragement of importation are the two great engines by which the mercantile system proposes to enrich every country, yet with regard to some particular commodities it seems to follow an opposite plan: to discourage exportation and to encourage importation. Its ultimate object, however, it pretends, is always the same, to enrich the country by the advantageous balance of trade. It discourages the exportation of the materials of manufacture, and of the instruments of trade, in order to give our own workmen an advantage, and to enable them to undersell those of other nations in all foreign markets; and by restraining, in this manner, the exportation of a few commodities of no great price, it proposes to occasion a much greater and more valuable exportation of others. It encourages the importation of the materials of manufacture in order that our own people may be enabled to work them up more cheaply, and thereby prevent a greater and more valuable importation of the manufactured commodities.” (Emphasis Added) We notice therefore that the free markets are preached while mercantilist interventions in markets are practiced.
In April 2001, Greg Palast conducted an interview with Joseph Stiglitz which was published in the British newspaper Observer and Guardian.
The World Bank talks of “assistance strategies” for every poor nation using careful country by country investigations. However, as reported in the article, “according to insider Stiglitz, the Bank’s ‘investigation’ involves little more than close inspection of five-star hotels. It concludes with a meeting with a begging finance minister, who is handed a ‘restructuring agreement’ pre-drafted for ‘voluntary’ signature.”
Stiglitz then tells Palast that after each nation’s economy is analyzed, the World Bank “hands every minister the same four-step program” (emphasis added), described in the article as follows:
1. Privatization: the programme is endorsed as it provides scope for corrupt politicians to sell the State silver on a platter and transfer at least 10 percent of the ill-gotten money to undisclosed Swiss bank accounts. Stiglitz asserts that the Us government knew about it at least in one such case: in the 1995 Russian sell-off: “‘The US Treasury view was this was great as we wanted Yeltsin re-elected. We don’t care if it’s a corrupt election.’” (Emphasis added)
2. Liberalization of Capital Markets: Stiglitz describes the disastrous capital flows that can ruin economies as being ‘predictable’, and says that ‘when the outflow of capital happens, to seduce speculators into returning a nation’s own capital funds, the IMF demands these nations raise interest rates to unsustainable levels of 30-70 percent.
3. Market-based pricing: This Stiglitz calls, “the IMPF riot.” We have seen the consequences in India: safe drinking water is either priced or bottled and sold post liberalization. Prior to 1990 we had no mineral water bottles as the only safe drinking water in India.
4. Free Trade: This is a version dominated by the World Trade Organization and the World Bank. Stiglitz likens this to the opium wars. US and Europe created barriers to sales of farm products in Asia, Latin America and Africa while barricading their own markets against the Third World Agriculture. They talk about rule-based global mechanisms and the media always feels shy of asking what these rules are and who framed them, when? They are “devised in secrecy and driven by an absolutist (absurd) ideology. Parentheses mine.
Commenting on Doha WTO Conference in November 2001, Raj Patel gave a harsher description of the structural adjustments and trade related policies as ‘weapons of mass destruction.’
I would not like to sound so cynical and harsh for the reason that these free trade policies have come to bear on the manufacturing sector certain product and packaging standards, environmentally friendly policies and emergence of a robust services sector that gave fillip to new generation employment as also increase in wages and salaries that pushed the unwinding of traditional labour markets.
How do we build the poor as building bricks for growth of the economy? Most of the poor are categorized as unorganized sector as they do not have a common articulation of the problems. Everyone else speaks for them, thinks for them and acts for them. In the process, their assets do not get cognizance and they also get most often undervalued. The low collateral value gets them nowhere with the lending institutions. They become prey for MFIs who charge highest risk price for the money lent. The modern western economic model is ill-suited for developing countries: be it Thailand, Indonesia, Philippines, Bangladesh, Pakistan or India.
The heart of the problem is that most people cannot access capital due to the under-developed legal system, particularly in terms of property rights. It is good to look at history: The Anglo-Saxon world of the 19th Century when pioneers in North America needed to legitimize their land they had grabbed and businesses they had set up. Similarly, during the same period, European nations used legal means to shelter themselves from the negative effects of globalization, a process that led to their eventual integration. Although Latin America has gone through trade liberalization and economic reforms the majority of its people remain poor. The dead capital of the poor generates less wealth because it lacks least legitimacy. When Ganges or Brahmaputra floods the villages and dismember them, the poor in the villages do not get habitation where they were earlier staying. Altogether new villages with the same name spring up. But the poor would have no titles to either their house property or farmsteads. It is the rich and powerful, the politician and the bureaucrat nexus that assigns ownership to land for the losers in the bargain. The property rights of the poor become severe casualty. Same is the case with many tribal farmers. In the bottom-up process, if the poor are involved in development initiatives, capital of a new order gets built up. Several government designed projects to help the poor have shown up only poor results.
Part2: Poverty in Indian Context
There will always be some gravitational forces that would contribute to reduction of poverty as a natural phenomenon. How much of it effort intensive and how much is gravitational needs to be established through detailed micro studies and there are quite a few. . Then why so many trumpets blow around it?
Under the guiding principles of IMF, Africa’s income dropped by 23% in a single year.
Coming to India, six decades ago poverty rate was put at 47% of the population. By 2011-12 it came down to 30%. The nearly 350mn poor equals population of Africa. The whole world is eying Indian markets because of the growing emergence of the middle class population. The recently released International Comparison Program (ICP) data have provided an independent, international validation of the poverty line fixed by the Suresh Tendulkar committee, which is being reviewed by the C. Rangarajan committee for a likely revision. A summary of the ICP Report confirms the poverty line at Rs.30.2 per capita per day or Rs.906 per capita per month (2011-12 on PPP at Rs.15.1 in 2011 to $1).
The ICP is a worldwide statistical operation involving 199 countries and agencies such as the World Bank. It produces internationally comparable price and volume measures for the Gross Domestic Product (GDP) of countries. It had ranked India’s GDP behind only that of the U.S. and China. But in terms of per capita GDP, India was ranked 129th.”
Ministries of Rural Development, Agriculture, Social Welfare, PDS etc have introduced over 150 schemes targeting the poor and spent billions of rupees in the direction of poverty alleviation. Subsidies and Grants, soft loans and even distribution of assets adorned the wage employment, self-employment, rural infrastructure, social security and food security schemes. The expenditure in administering these schemes has been around 30-40 percent of the budget outlays year after year. The claims of reduction of poverty across the States are varied. Most Advanced States have the bottom of the pyramid growing.
Requirements of the poor have vastly changed. It is not belly hunger. It is information hunger that has overtaken the persons. From scavenger earning a daily wage of no less than Rs.50 to a daily wage earner under Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) holds at least one mobile if not two. He finds the money for the chip and regular updates and even pays Rs.30 for a favourite tune on his mobile. But he/she is not prepared to spend for healthy food and safe drinking water or health insurance. The tastes in villages have also vastly changed. Those using soap nuts for head bath in villages today use a small shampoo sachet costing Rs.2 to serve for wife and husband once a week. Primordial needs have vastly changed. These changes should be recognized while drafting schemes for the poor.
The Human Development Index measured in terms of high literacy rates, low infant mortality rates, low school drop-out rates, availability of safe drinking water, good health and hygiene in terms of easy accessibility of medical and paramedical services has been high in certain low growth States and vice versa in high growth States. The traditionally poverty-stricken States characterized as Bihar, Madhya Pradesh, Odisha, Rajasthan and Uttar Pradesh have even after bifurcation into smaller States and economic development are still showing up high poverty rates. Each Scheme floated by the Government – State or Centre – has grown to be an empire ruled by self-centered politicians. The scheme is implemented independent of other schemes. Schemes like Rajiv Awas Yojana, Rajiv Grameen Vidudikaran Yojana, Provision of Latrines, Sanitation scheme do not get delivered to the same beneficiary although the target group of each scheme is the same poor.
Financial Inclusion – a major initiative with commercial banks in the forefront since 2005 – moved only a shade better in 2012 according to Inclusix – an index developed by CRISIL. Branch penetration, deposit and credit penetration have been brought under one metric in Inclusix. This index clocked 42.8 on a scale of 100. But the disparities stare at us: Southern States accounted for 58% of the credit accounts. The bottom 52% of districts has merely 2% of bank branches. The Bank Correspondents (BCs) have a long way to go in taking the poor closer to the Banks’ door steps. There are unresolved issues between the BCs and Banks. The instrument is not robust enough to go near the goals of financial inclusion. Commercial banks proved that their pie does not lie in these efforts and they preferred to go slow. The Mor Committee recommendations tended to be more academic.
But are we desperate? Certainly not. Every problem has solution if we search for the solution in the area of the problem. Centralised schemes and existing delivery instruments have to be modified. While the poor live in rural areas and urban slums the schemes and resources originate from the Central Government and State Governments. But the very identification of the poor – visible in villages – have to be identified in villages and the lists of such persons should be displayed with their requirements – housing, safe drinking water, sanitation, education, electricity, health and insurance duly tabulated. Against these requirements the concerned officers should mention when and how these needs would be met and the government releases would be reaching their bank accounts. Against each name the bank account number has also to be mentioned. Various existing Schemes should all be combined into no more than twenty schemes and should be directed at the remedying poverty irrespective of caste or creed. The Budget for such schemes should be released timely online to the Villages for implementation within a month after the approval of the budget by the Parliament/Legislature. If the identified poor does not have a bank account, the nearest BC/Bank branch shall open a savings bank account and a Rupiya Card with a limit of Rs.50000 shall be issued within a fortnight after the list is cleared by the Gram Panchayat.
At the Village level social audit of each such scheme should be done once in 3months by an independent agency. The Audit results shall be thereafter put on the website of the State Government as is done for some schemes even now. There must be a Lok Pal type agency recognized as equivalent to a quasi judicial body to enquire into the errands of the officials for the release of grants or subsidies or loans under various announced government schemes and punishment awarded at the village level within one month and no enquiry into the lapses should take beyond two weeks. Lok Pals’ verdict should be made beyond appeal when alone justice will be delivered fast. Necessary legal jurisprudence should be put in place. It is possible to distance poverty but certainly not possible to eliminate it. Efforts and sincerity should not be found wanting.
I will conclude by saying that It would do well for the UN to have not fifteen MDGs but take to just two or three; provide resource required to achieve them; monitor their achievement once in every three months; render the technical support required, if need be. Such goals according to me would be provision of safe drinking water; universal primary education; and protecting women’s property rights. Further, ‘Financial inclusion has still to travel miles and miles more to see the smiles on the faces of the poor!’ Regional imbalances would take time to set right. But economics is often driven by politics.
India, at the moment, is jubilant. The new Government under Narendra Modi with an agenda of development and good governance has just assumed charge with hopes riding high. His ride on such massive mandate not making him complacent should ere long push the economy to reduced poverty and increased dispersed wealth as opposed to the built-up of billionaires in Parliament and State Legislatures that was generated by the IMF-World Bank driven strategies leading to highest limits of tolerance to corruption and inefficiency. In fact the population of rich in the country has been estimated to be the population of UK.
This is no time for war and this message has gone round well with SAARC on the very second day of the new Government when Modi and his few ministers met with the SAARC chiefs on economic agenda. Hopefully, the emerging model of India’s development would be watched keenly by the emerging economies in reducing poverty.
Presidential Address to both the sessions of the new Parliament mentions it all:
“Poverty has no religion, hunger has no creed and despair has no geography. The greatest challenge is to end the curse of poverty in India. My government will not be satisfied with mere ‘poverty alleviation’ and commits itself to the elimination of poverty”.

Text of the talk delivered at the International Conference on Free Trade - Opportunities and Challenges held at the IICT by Andhra Mahila Sabha, Hyderabad on the 13th June 2014.

Appetite for Profit: The pathway for profit.

This fiscal, the whole nation started off with a bang. Election euphoria ended with the grand announcement of single largest party in majority ascending to power after a gap of over two decades. A cultural transformation started off with Narendra Modi bowing before the Parliamentary stairs in reverence. Then there was historical swearing in of the Prime Minister, the first ever in independent India with all the invited SARC countries representing their nations for that ceremony. Minimum government and maximum governance, bringing down inflation, policy stability and clean government are all promises held out. All the Secretaries to the Government have been asked to make a presentation to the Prime Minister the status of various projects, in case of delays causes for the delays, when and how they are likely to be completed and for such closure what plan of action is with them and what supports are needed. To me, it looked as though a new tough CEO is assuming charge of GoI Inc. The risks at the moment would appear to have been addressed up front: first, a change in the culture; second, outlook and third, outspokenness and fourth, firm on implementation agenda. Objectives would be set; strategies would be discussed by the various ministries; tracking and tracing mechanism would be put in place; stress tests would be applied; and accountability and visibility with real time monitors and reports would follow eventually. The PMO website appeared within minutes of the swearing in ceremony beamed by all the TV channels. The whole world watched the biggest democracy in full strength determined to change the destiny of India into a formidable political and economic power. Why am I starting my paper with all this known stuff? The reason: a weak financial sector and strong economy can hardly co-exist; and the biggest deficits of all, the TRUST DEFICIT is fast eroding.
Indian economy has clocked just 4.5-4.6 percent growth during 2013-14 with the projection of 6 percent for the next fiscal. IMF and the World Bank predicted a GDP growth of 3.2 percent in the current fiscal. The shadow of recession is still on. The quantitative easing impacting the emerging economies is bound to affect adversely. The solace is that even QE is receding if we were to go by the latest reports. Morgan Stanley in its latest assessment stresses the imperative of growth of healthy banking sector as a precondition for growth of the economy:
India can clock a growth of over 6.75 percent over the next ten years, meaning a $5trillion economy by 2025 if financial services can be an integral contributor, says Morgan Stanley.

"However, to fix the banking system and therefore to give economic growth the greatest chance of success, the new government will need to use that mandate to act decisively in the next few months and years. These are not going to be easy steps, but with the right policy choices from the government and prudent financial management from the banks, earnings growth averaging in the high teens is possible," the report says.
Still, there are concerns and concerns; Basel III demands on liquidity, stability and capital in the backdrop of not so encouraging enterprise risk culture among the corporate entities and SMEs and the banks still riding on short term resources’ basket to finance long term assets like infrastructure and housing, the rising NPA curve just to highlight the most essentials. Strange but true: for a month since the 15th General Elections were announced, markets were on ascendency. Sentiments prevailed over sensitivities. “Corporate boards and senior leaders face unprecedented challenges, including geopolitical threats, new laws, and increasing shareholder demands. To meet these challenges, organisations must successfully manage risk – including strategic risk, process-level risk, and regulatory risk.”

Two reports of Deepak Kurup published in the Hindu on May 26, 2014 caught my eye. Mr Sachin Bansal, of the Flipkart acquiring the e-tailer for $330mn is all about the risk appetite and the way he worked for it. His appetite does not end: he is eyeing at Alibaba Group of China. Most Indian entrepreneurs are ‘focused and not obsessed, with eliminating risks.’ And as long as you do this, you will remain yet another small company. What made Sachin Bansal big? “Taking big decisions with little information at hand” made all the difference. Similarly, grew at a pace that surprised competition. Kunal Bahl, the CEO of the Company attributes the six-time growth of the company in the twelve month period that preceded, to the ’zero inventory model’ while e-commerce in India grew at 88 percent correspondingly (according to ASSOCHAM). The pure market place strategy is not regulator driven. According to him, “ a pure market place is not a regulatory structure. It is a philosophy that you want to offer equal opportunity to any business that wants to supply locally and sell nationally.” …”Market is ahead of us and not behind us.” He concludes his interview telling that technology, scale, size and ambition and the kind of growth trajectory are all driven by the Board.
Backed by FIIs, the rupee started on its ride although the forex balances are yet to gain that comfort level. Complacence has no place. The new Finance Minister made no bones while talking shop to the public sector banks on the rise in NPAs and the need to contain them. National Asset Management Company to silo the NPAs may be a beginning but does not really take off the risks nor would it create new appetite. Radical out of the box thinking may be necessary to move to profit curve on risk map.
Banking basically is about people – whether customers, clients or staff. Money spills through these three categories with systems connecting them. Products are created to take money and give money.
Risk perceptions underwent a thorough change with the onset of recession in 2008 and its shadow is still hanging. While Banks in India and emerging economies in general have embraced the precautions set against the west-led recession in the financial sector, they did not indulge in the luxuries that enveloped those developed nations. The known unknowns – credit risk, and the unknown unknowns – market risk, are on the increase despite technology inroads reflected in core banking solutions, centralized processing platforms, video conferencing with clients, improved risk ‘governance’ claims on the part of banks and financing institutions. It is well known that financial sector is a haven of risk. Further to the acceptance and introduction of Basel Committee norms, risk management departments have been set up. RBI issued detailed guidelines. General Managers/Executive Directors have been kept in charge of the Risk Management Departments in Head Office. Risk Management Committees are part of the Board Management. But, ask any employee of the Branch of a Bank about Risk Management: you will still get a stock reply: “Oh! Risk Management is looked after by the Head Office. We submit whatever returns are required in this regard.” Here and there, some younger generation is attempting to pursue professional certification courses in risk management from IIBF, PRMIA or GARP. All the globally placed banks have moved to Advanced Approach to Risk management under Basel II and claim to be ready for Basel III. Yet, bulging NPAs, increasing cyber frauds, interest rate risks, forex risks, inflation risks, and retarding economic growth have been causes of great worry in 2011-14.
It is important that every employee in a bank understands that he is working in an institution that is exposed to risk everywhere. He or she has to be conscious that his or her neighbor is also a potential risk to the same degree as provider of a kinetic energy. In several branches of the banks or insurance companies, transfers take place periodically. Even within the branch, staff would keep changing the desks. Such shifts and transfers have potential to expose the lapses and reduce risks in the organization. If any employee does not apply for leave for a full year, he needs to be keenly watched for transactions handled by him and his personal accounts. Every employee’s personal accounts would need scrutiny to make sure that there are no abnormal credits or debits in his or her account. All these acts of vigilance contribute to developing risk culture.
Therefore, superior risk management demands that organizations must embrace risk culture in the first place. In a typical risk culture, people will do right things when risk policies and controls are in place. In good risk culture, people will do right things even when risk policies and controls are not in place. In a bad risk culture, people will not do right things regardless of risk policies and controls.
How do we foster risk culture? It can be done by encouraging open discussion on key risk areas identified by different business heads among their own teams and across the teams. It is not enough if the risk culture is promoted within the four walls of the financing institution. It also calls for encouraging Enterprise Risk Management in the client bases. The FI-client interface on ERM platform makes lot of sense for risky businesses churning profits at both ends on a win-win platform.
One would still ask: how do we ensure that risks turn healthier to result in profits? The first step is to understand risk/return in normal and abnormal markets. Second, profiling risk in all its facets and dimensions. Third, the banks should have clarity and deep understanding of the authorities and escalation processes. The whole objective should be not to eliminate risk but to manage it. “Our purpose should be not to eliminate risk, but to manage it, which we must do if want to prosper.” Madeleine Albright, Former US Secretary of State said. Banks must switch from defense-selling to offence-selling business strategies. Mere cost reduction through head count reduction may turn out to be counterproductive. Instead, focusing on customers to achieve competitive advantage with cloud computing and high tech tools could help optimizing returns. In January 2014, Sarah Todd a KPMG study put out in American Banking Journal highlighted this aspect.
Even according to BIS quarterly assessments, Indian financial sector gets good rating on compliance – regulatory compliance. Compliance is more a make-believe effort than intrinsic to integration with business growth. Every Bank has a Risk Management Department with a General Manager or even a Chief General Manager in charge, whose basic responsibility is to ensure compliance. Whether each product of the bank, in deposits or credit bears the stamp of risk analysis and review, is left to the concerned department. This simply brings us to the discussion of governance, risk and compliance as integral aspects of organizational enablement and empowerment in the risk assessment for product for earning profit.
GRC mapping deals with relationships between risks, controls, policies, requirements, assets, processes and other objects. Compliance basically deals not just with regulatory compliance but with corporate compliance, environmental compliance and social responsibility. Analysis of vast information is necessary for business decision makers, auditors, regulators and board of directors. This analysis in a way should track material risks, quantify risk costs and impacts. It also emphasizes the necessity to streamline documentation and process automation with a flexible risk framework. The Chief Risk Officer should in a way drive accountability and visibility with real-time monitors and reports in a non-threatening fashion.
Technology risks have been overwhelming and the discussion of operational risk mapping centering round people moved to technology with increase in cyber security dilemmas. The clients and the institutions dealing with those clients, payment and settlement platforms, private, public and civil institutions have all become digital. Security has become the choke point of business innovation. Large institutions lack facts and processes to make effective decisions on cyber security. Security controls actually reduce frontline productivity by slowing employees’ ability to share information.

The critical question: how does an institution generate risk appetite under such circumstances to generate profit? The seven tenets of McKinsey come in handy:
1. Provide information assets based on business risks;
2. Provide differentiated protection based on importance of assets;
3. Deeply integrate security into the technology environment to drive scalability;
4. Deploy active defenses to uncover attacks proactively;
5. Test continuously to improve incident response;
6. Enlist frontline personnel to help them understand the value of information assets and
7. Integrate cyber resistance into enterprise-wide risk management and governance process.
Adopting a granular approach would help. It is therefore necessary that the banks’ risk departments are helped to construct an assessment tool that assigned ratings to each component of the risk management process, starting with risk culture down to data quality and everything in between.
However, institutional reforms and governance reforms hold the key for creating the right appetite for risk. As long as Government of India, who acts both as owner and regulator calls the shots as to what the business the banks should do and how they should do – and this constitutes over 80 percent of total banking industry – profits thin down. Efficiency takes toll. P.J. Nayak committee Report on Governance reforms provides a road map for ushering in banking reforms to ensure growth with profit. Hopefully, the Government and the RBI would ere long take decisions in this regard.
*Text of the Address at the TACtics Conference of Tata Consultancy Services, Pune on 13.06.2014.

Saturday, May 31, 2014

The New Governments and the Loan Waiver

The New Governments and the Loan Waivers
B. Yerram Raju & M.L. Kanta Rao
Competitive populism compelled Rahul Gandhi while canvassing for the Congress party announced that he would write off up to Rs.2lakhs all individual farm loans. So did KCR, the CM-designate of the upcoming Telangana promised waiver of crop loans up to Rs.1lakh per farmer.
Seemandhra farmers are in a mood to rejoice: Voter bait won’t be voter wait – Chandrababu Naidu promises to sign the crop loan waiver for farmers as the first file as CM of Seemandhra (it would be however nice to christen the new State as Telugu Nadu). in Navyandhra and Nava Bharat where from now on people would be counting on the election promises of the winning parties, there will be no compromise on the promise. The NDA that met in Delhi on the eve of electing the leader of the BJP parliamentary party Viz., Narendra Modi, declared unequivocally that the poll promises would be realised and all the partners of NDA promised full support for the same.
Many sensible question both possibilities and extent of loan waiver for farmers. First, farmers’ loan waiver was introduced in 1990 with a waiver of Rs.10000cr for the small and marginal farmers. It was revealed that the beneficiaries were not the intended group but the large and medium farmers and also some non-farmers. The second time such waiver announcement came was in 2008 under the UPA regime, just before the 2009 General Elections – Rs.70000cr. Andhra Pradesh has its share of the “irregularities” committed in the implementation of the Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS), 2008. The Comptroller and Auditor General, in his report submitted to Parliament on Tuesday on ADWDRS, found that, among other things, one private Scheduled Commercial Bank (name not mentioned) received reimbursement for loans which were extended to Micro Finance Institutions (MFIs) in five states, including Andhra Pradesh. The amount reimbursed was Rs 164.6 crore (for all the five states). In AP, the total number of farmers who benefited from the scheme was 77, 55,227 and the total loan waiver and relief given to them was Rs 11,353.75 crore. All over India, the total amount waived was Rs 52,000 crore and the number of beneficiaries were 3.45 crore. As regards benefiting the MFIs, we should first know how much our share is in the Rs 164 crore that was paid to the bank towards loans advanced to the MFIs. We are yet going into details,” the then Union Finance Minister said. Doubts linger whether all the waivers would get into the right accounts. This requires integrity of data from the banks and promptness in disbursal of the waiver from the government, easily verifiable by the State Government authorities before actually releasing the waiver amount.
‘Reserve Bank of India has issued a circular in pursuance of the budget announcement made by the Finance Minister relating to the Interest subvention Scheme 2013-14, Interest subvention 2% p.a. will be made available to Public Sector Banks (PSBs) and Private Sector Scheduled Commercial Banks (in respect of loans given by their rural and semi-urban branches) on their own funds used for short-term crop loans up to Rs.3.00 lakhs per farmer provided the lending institutions make available short term credit at the ground level at 7% per annum to farmers.’
Interest subvention will not be available once the waiver is announced by the State Government and therefore, to that extent the State Government will have to bear this additional burden as well. It will be hazardous for the GoI to provide for loan waiver of AP as other States would not hesitate for raising similar demand. The existing fiscal position of the GOI can ill afford this luxury.
So far, loan write-offs or waivers occurred whenever there were natural calamities like floods, cyclones, severe drought or at the banks’ discretion in case of severe social calamities of some affected families of farmers either by reschedulement, one-time settlement or even full waiver. But the present situation is different. It is a promise made by a leader of stature and farmers believed and voted for him. The promise has to hold and ways have to be found to uphold the promise.
Farmers continue to be in distress not because of just burden of institutional loans against which the waiver is now promised but on account of huge private debt at usurious rates of interest with no credible documentation. What is now promised is waiver of crop loans by the upcoming Naidu government. First, the data: The outstanding crop loan amount in thirteen districts of seemandhra State covering around 23lakh accounts is to the tune of Rs.56838.23cr of which leaseholders numbering to 1.44lakhs had loan outstanding of Rs. 305.99cr. The actual amount overdue from the farmers in 22.56lakh accounts is Rs.20,288cr. It is most likely that the figures would have included gold loans given and classified as crop loans and these can be deleted from the claims for write-off.
Government of AP announced zero interest for kharif 2012 and the banks are not supposed to collect interest for Kharif 2012 for all crop loans up to Rs.1lakh per farmer. The interest subsidy will be calculated oon the crop loan from the date of disbursement to the date of actual repayment by the farmers up to the due date fixed by the banks whichever is earlier, up to a maximum period of one year. NPAs classified (that is loans overdue for payment beyond two crop seasons as per RBI instructions) in agricultural segment up to 30th September 2013 total to Rs.3329cr covering 5.16lakh farmers.
In so far as SHG groups are concerned, 14.70lakh members owe to the banks an amount of Rs.21245cr as on 30.09.2013,
If the CM would like to avail the interest subvention available for banks in case of promptly repaid loans with a cap of 7% then he has to seek approval for waiver of entire loan outstanding from Government of India bargaining for this subvention to be made available to the State Government as part of the write-off proposal. Second option is that he has to provide for entire outstanding crop loan amount of Rs.56838.23cr in the budget 2014-15. Appropriate revenue has to be raised from floating bonds to the tune of the entire waiver with a ten year tenor – whether they are zero coupon bonds or carry 8-9 percent interest per annum with a cap of 3years on redemption – is a matter for finalisation.
In any case, the FRBM norm has to be waived for at least two years to go to the market for raising these resources. Both waiver of crop loans of all banks and PACS/DCCBs and the SHG loans also require clearance from the RBI and Government of India. However, such waivers in good times perpetrate indiscipline among borrowers though in bad times like natural calamities prove the much needed relief.
Source for the data is from the 182nd SLBC meeting Review in January 2014.
Published in the New Indian Express dated 30th May 2014.

Wednesday, May 21, 2014

The Winner and the Vanquished

The Winner and the Vanquished

Decidedly the World’s greatest democracy has just finished its biggest General Elections – the fifteenth in a row. It attracted lot of attention of the western media – the Economist, the Financial Times, The Guardian, The New York Times just to name a few. Money, liquor and raining promises like never before greeted the electorate. It was however the last NDA alliance – the TDP-BJP combine with an emotional entrant into the political confabulations that has been greeted with enthusiasm from some and contempt by several. Narendra Modi the first ever PM designate to bow to the Parliament stairs before his entry, demonstrated cultural excellence unparalleled setting the tone for virtuous move forward.

The nation tired of the scam-ridden Congress is yearning for change – a change for freshness in thinking, approach and direction. The youth has upped its antenna against corruption. AAP has made the other political parties rethink on their future, even if it had failed to realize its dream of demonstrating an agenda that people longed to have. Enthusiasm could not translate into action due to immaturity. Now that the battle is over, it is time to think of a solid agenda. But what would it be?

The first obviously is governance; a clean-up of the bureaucracy; rebuilding trust in the administration and quick delivery. The policy paralysis would end. The World Bank ranked India in their ‘Doing Business’ Survey (October 2013) under various parameters that should help the new Government in pitching their goalposts indicated in column 3 of the following table. Delivery instruments have to be strengthened with transparency and accountability writ large on them. Economic reforms of a new genre and financial sector reforms preserving the autonomy of RBI are imminent.
Parameter Rank out of 189 Nations Ideal Goal Post in the next five years
Starting a Business 179 25
Ease of Doing Business 134 25
Property Registration 82 25
Trading across borders 132 35
Dealing with Construction permits 182 25
Enforcing Contracts 186 25
Getting Electricity 111 15
Tax Compliance 158 20
Resolving Insolvency 121 15
Access to Credit 28 15

Farm sector suffering neglect thus far falls next in line. In the immediate short term the loan write-off promised by the NDA partners could be in order but in the long term it would prove disaster.

The farmer is groaning under excessive private debt at high rates of interest and this has to change. Institutional credit has to improve – one, in the areas of neglect thus far, namely, the rain-fed farming zone; preventing irrational use of groundwater; introduction of new technologies with ease and speed; improving soil nutrition; rationalising input supplies to prevent spurious seed and pesticides spoiling the farmers’ investments; promoting research and innovation with appropriate incentives; most importantly, the market intervention to provide the right compensation when the market fails the farmer. The existing disaster management and insurance mechanisms are far too inadequate and need thorough revamping. Farmer Associations have to be involved in the new think tank groups sans their political affiliations for such exercise. The Rural Cooperative Credit Structure has to be brought back to health with investments in technology at PACS level and improving governance through depoliticization.
In order that employment target of 10lakhs per annum is realised, it is important that the structural transformation of the rural economy should evolve without migration of labour to the urban areas. Each District should have a Rural Industrial Estate. The Industrial plots should be 1000-2000 sq.yds with water, power and drainage facilities fully provided. Since land prices have soared to unaffordable prices, such plots should be made available to the rural entrepreneurs on leasehold basis for ten years renewable for another ten years or outright sale in easy instalments with alienable leasehold rights in favour of financial institutions in order to access credit easily. These Rural Industrial Estates should have within a radial distance of 5km multi-storeyed residential complexes under PPP mode. There should be tripartite agreement between the owners of the rural industrial enterprises and the builders and workers for allotment of flats on lease basis for workers so that recovering rent would not pose problems. These RIEs would have testing laboratories, quality certification and packaging units, labelling and branding facilities within the easy reach of enterprises and they would be linked to the logistics hubs in the nearby urban and metro centres. Goods carriers and tempo operators would also be drawn from the rural work force.

Enactment of Bankruptcy Law and Exit policy do not brook any delay.

Critical Infrastructure being power, water and transport – road, rail, sea and air – has to be brought in with heavy infusion of capital from specific development finance institutions with participation from World Bank, ADB and the like. The commercial banks mobilising short term resources cannot afford the luxury of lending for long term projects if we were to go by their experience thus far and keep their hopes on government for refurbishing capital.

Urban and metro centres will have the logistic facilities and market facilitation centres for providing easy access to both domestic and international markets. The growth of service sector can peak to 60 percent and manufacturing sector can reach 25 percent in the next five years. The farm sector would retain its share of 15 percent. This facilitates the growth of the economy at a sustained rate of 9-10 percent within five years. If these happen people would be the winners and the vanquished without mending their ways would have to sigh in despair.