NPAs loom large: spare the tax payer

During the recent meeting the Secretary, Financial Services had with the public sector bank chiefs anguished concern surfaced over the looming NPAs. As the owner of PSBs GOI is naturally upset since it has to refurbish the capital from its budgetary resources for the shortfall in capital. If the PSBs fail, it will be a sovereign risk. Can we look at the areas and causes for the rise in NPAs to the extent the RBI data has thrown up in its Report on Trend and Progress of Banking in India 2012?

PSB NPA data reveals that the actual amount of NPAs is equal at Rs.563bn for both the priority sector and non-priority sector credit dispensation. While accretion of further NPAs in priority sector is prevented by reducing the credit flow to such category, in respect of non-priority sectors, corporate debt restructuring has been liberally resorted to, to convert non-standard assets to standard assets. This is what made the regulator think of introducing 5% additional provisioning for the restructured assets classified as standard assets. That most Banks did not achieve the priority sector credit allocations stands in evidence for this reasoning. NPAs of 2012 compared to 2011 in agriculture moved up marginally by 0.2 percent while for the micro and small enterprises it declined from 17.6% to 14.9%. Correspondingly, the NPAs in non-priority sectors increased from 48.2% to 53.1%.

During the last ten years these banks moved to credit risk assessment of non-priority sector to technology platforms and due diligence of enterprises and directors is more by the data they have been able to secure and not by proper enquiry. Credit origination has gone more by macro analysis of the industry than by prudential micro analysis.

Public sector undertakings, real estate sector lending, infrastructure lending to airlines like the Kingfisher, roads and power sector take the blame. The origination process is through videoconferencing and group review of the credit parameters. Larger the credit faster it flowed. A more discerning analysis reveals that the export oriented manufacturing industries sharing approximately 8-10 percent of the credit to manufacturing sector are actually under the guaranteed mechanisms of ECGC and therefore, their migration from the standard to NPA would take more time than the normal. On the other hand, credit to the commercial real estate, tourism (tourist traffic increased during the last three years going by the increased occupancy in the star hotels), Hotels and restaurants, NBFCs are not impacted by the global economic forces. The asset value deterioration is more a result of faulty credit origination than global impacts to which recourse is invariably taken when accountability for rise in NPAs is sought. Fall in growth rate of the economy and inflation are the visitors to the rationale. Systemic risk and provisioning norms also join the blame game.

Despite introduction of risk management practices under the Basel regime, why the Banks are moving on the ascending graph of NPAs? This is because such risk management is viewed as the responsibility of CROs than of the risk assessers. It is the lack of proper risk appetite and risk culture across the organization that is responsible. Risk management is viewed more as regulatory compulsion than as an essential ingredient of their micro operations. Enterprise risk management is yet to sink in the banks. Learning processes in acquiring risk culture are also at very rudimentary stage. The officials feel overburdened with work on the system and seem to have no time for learning! A few of the corporate head offices earlier used to send periodical industry briefs to their officers. With the introduction of sectoral information flowing through the various networks and private researchers, banks’ CEOs expect that their officers should get better informed than ever on macro and micro prudential sectoral and industry appraisal. Somehow this seemed to have taken a backseat bowing to rigorous timelines for sanction more than for the rigour in monitoring credit flow.

Even if 50% of priority sector credit that constitutes 37-38 percent of the ANBC or off-balance sheet asset exposure this would be far less than the 50% of the balance credit portfolio. The concerns of the Ministry may be justified from this angle. But what is required for growth of the economy is the increase in credit to GDP ratio that is dependent on risk appetite. The other aspect requiring attention is the involvement of the Government in refurbishing capital whenever shortfall arises. As long as the CRAR is far above the required 9% is it necessary to refurbish the capital? Second, is it not prudent to shed some share in capital when the market is responding well to investments in banks than meeting out of the tax-payers’ money? It is time that the Government gives a re-look at the recommendations of Narasimham Committee I and II in this direction. Governance has scope to improve when this happens with a diversified Board taking more accountability.

*The author is an economist and Regional Director, Professional Risk Management Association, Hyderabad. Contact: yerramr@gmail.com

Budget 2013-14 the tough lines

Budget 2013: Bold initiatives needed in a tough year ahead.

In the political context of the nation, it is difficult to expect the Budget 2013 would either be path breaking or reformist. General Elections are due in 2014 and the 2014 Budget would therefore be vote-on-account budget. The current budget is in the backdrop of low growth continuously for two years both in agriculture and manufacturing with no early hope of revival, unabated inflation albeit marginal fluctuations and rising current account deficit- the highest so far at 5.2%. Fiscal Budgetary Management has already been put on the backburner. RBI has put out a report on State Finances this month that dries up any further hope on States coming to the rescue of the Centre in containing the fiscal cliff we are nearing. FM started his discussions with the stakeholders to see where he can gain the corners.

One of the fundamental principles of taxation is: at the higher levels of income, the tax has to be progressive and at the lower level, regressive. The Direct Tax code kept this in view. It is not unlikely that as the system matures and cash economy gets lessened, the tax rates would be further rationalized from the existing three slabs of 10, 20 and 30 percent of the taxable income. All exemptions shall be withdrawn. But at the moment there seems to be remote possibility for any further rationalization of rates.

The recent hike in fuel and gas prices and the rationalization of related subsidies as also the rise in rail passenger fares leave no hope of inflation coming down. Monetary policy of the RBI towards the fag end of this month may at best make marginal changes bowing to pressures of the stakeholders and the government. Leaving to itself the RBI should prefer to keep the rates unchanged. Hence the fiscal measures are the only remedy.

Incentives for investments should come from the growth rather than through the exemptions and fiscal management. The measures to ensure growth need not necessarily come from patting the rich and an open invitation to the dollar economy to take over India. In the context of our poor rank in the league of nations at 97 out of 131 in the Economic Freedom Index, it is time to revisit the perverse incentives in health and education sectors and reverse them. If the FM tackles health and education sectors and increases investments to ensure good health, safe drinking water, universal free education up to class X, growth will emerge as a natural process due to enhanced people’s ability to work hard, save a good pie for productive consumption and healthy recycling of the economy.

My suggestion would be: let each corporate hospital provide 20% of every type of health service to the poor, women, and senior citizens on the basis of Aadhar and all such cost incurred by the Corporate should be qualified for exemption of tax. Similarly, all educational institutions that admit 20% of the students belonging to the poor for providing learning and learning tools, again on the basis of Aadhar information, not on the basis of caste or creed shall be also similarly exempt from tax. Universal education would be a goal nearer to achievement in the process.

In fact, I would venture to suggest that the best way to reduce imbalance and ensure growth is through increasing the share transaction tax from the current level of just 0.15% to 0.35% at both the ends of the transaction. There will be a hue and cry immediately after such increase but the dust would settle down eventually. The philosophy behind is that the buyer sells for a future gain and the seller sells for avoiding immediate loss (a loss of expected surplus). In a way both are gainers. The tax is paid out of only the surplus. The tax is not going to be regressive just because it is done at both ends of the transaction. The tax collection expenses is almost nil as the de-mat account generates the tax payable, deducts at source and immediately it gets into the Government Treasury. There is no tax collector or tax inspector here. The tax income so collected is available to the Government immediately for investment in either social expenditure like the pensions payable to the widows, physically handicapped and the like or for meeting the natural calamities immediately after their occurrence. Actually, to this extent even the corporate tax structure can be rationalized from the subsequent years. This would help the Fiscal Responsibility Budget Management significantly.

Budget 2013-14 Suggestions

Dr Rangarajan's  proposal to put a surcharge on the higher income brackets progressively is a worthy suggestion at the right time; this can be at the threshold of Rs.10lakhs-20lakhs: 3%; >Rs.20lakhs-30lakhs: 5%; >Rs.30lakhs: 10%.

Another progressive measure could be raising the share transaction tax above the threshold level of transactions, say above Rs.2lakhs where the small investor gets incentive to invest and the large investor pays to the exchequer a STT of 1% instead of the present nominal STT. The third measure to reduce fiscal burden would be doing away with the Parliamentarians and legislators getting Rs.5crores to spend in their constituencies through the Constituency Development Fund as most of such spending has been ill-spent as revealed by a number of studies. The fourth area could be to reduce the personal security provided to the legislators only for the Z category. The fifth area could be taxing the Parliamentarians and legislators for non-attendance and for the non-participation in the various standing committees of the Government. These would certainly reduce the fiscal burden of the Government.

The other most important area where subsidies have to be re-engineered is farm sector: Restrict subsidies to the small and marginal farmers so far as input subsidies are concerned. Provide a market stabilisation fund and extend support whenever the prices for farm products fall below the cost of production plus a minimum profit for the farmer. The recommendations of CACP could hold good for this purpose.

Bullock cart to Small car - growth story does not end here

Bullock cart to small car – growth story does not end here.

India’s bullock cart moved to motor cycle and small car economy. Most grooms in rural villages, tribal villages not excluded, demand motor cycle as part of the wedding gift from the in-laws. If this is a sign of growth, we did grow. Yet the farmers’ are committing suicides and still fight on the streets for their produce to reach markets and after reaching, for a fair price. All the predictions of rating agencies at the beginning of the year, CRISIL, CARE etc., that the economy would grow to 6percent in the least has been belied. That the economy would grow only by around 5.3-5.4 percent during the current fiscal remains a hard reality.

India’s economic growth is inextricably linked to growth in farm sector that constitutes around 14percent of GDP. This has slowed down to around 2.5percent. Manufacturing sector driven by poor farm supplies and global recession did not move up beyond 8.2 percent in the third quarter of this fiscal. Services sector that constitutes 56-58 percent is largely dependent on overseas markets that moved sluggishly throughout the year. We have to be content with 5.3 percent growth in the overall GDP in the third quarter, lower by four notches from the previous quarter.

Unabated inflation with no signs of easing in the next quarter has only exacerbated the weaknesses in the economy. Monetary authority could not accede to the demand for interest rate reduction to speed up credit for the lagging manufacturing and construction sectors.

Volatile capital markets, growing current account deficit at 4.3% of GDP and a budget deficit of 6%, dashed the hopes of revival of the economy, notwithstanding the ‘so called reform regeneration’ that was initiated amidst roaring corruption scandals and large scale bureaucratic inefficiency.

The policy paralysis hitting till the second quarter though relieved, action paralysis could not be overcome. The New Year has to less to cheer about with the weak law and order, reflected in the most concerned and agitating crowds forcing their way to the Rashtrapati Bhavan. 

Speaking of good governance is akin to smelling jasmine in fish and fowl market. There is brazen violation of the Constitution by even the UPA ruled State like Andhra Pradesh. The 97^th Constitution Amendment Act 2012 dealing with Cooperative legal reforms and governance statutorily seeks a State Election Authority to conduct elections to cooperatives and the States are to carry out all the amendments required before February 14, 2013. The State that has been postponing elections to cooperatives for the last two years announced them hurriedly to have the last laugh on their subversive methods of winning the elections. The New Act would not allow non-active members to cast their vote. The ruling party is afraid of losing hold on the cooperative societies that hitherto formed the bedrock of State politics.

A Model Cooperative Liberal Act drafted by a well-meaning NGO and circulated to all the States did not even merit acknowledgement, demonstrating the indifference of States to correcting misgovernance and mismanagement, the two evils that prevented the growth of cooperatives, through the Constitution Amendment Act 2012.

The FM hopes that the Banking Regulation Act Amendments would pave the way for the foreign banks to open branches in India and that they would also contribute to financial inclusion while the Indian banks find branches to be expensive outfits and financial inclusion turning up as a ritual.

Cash subsidy linked to Aadhar trumpeted as ‘pure magic’ touching a fringe by the end of the fiscal 2013 in the experimental districts in the country would not take much time to be a cropper with the backing instrument yet to demonstrate its efficiency in content and delivery.

We have not been able to diversify our export markets significantly away from the US and Europe still fighting with recession woes. The sustained market is domestic market where the middle class is surging ahead fighting against odds. Youth continues to be the hope of the nation. These two green patches should leave some hope for revival. Nobel Lauriat Joseph Stiglitz sounded caution on growth model pursued by India with export markets as destination. On the other hand,  he wanted the rulers to concentrate on domestic markets and enhancing employment and enterprise promotion to drive the consumer spending.

A redirection of expenditures on education and health and continuous and responsible monitoring of investments in these two areas for prompt execution and conscious institution building efforts with the help of civil society organizations, sans foreign donations, could pave the way of quicker growth in 2013 and the small car economy gets the speed on smooth roads.

*The Author is an economist and Regional Director, Professional Risk Managers’ International Association, Hyderabad.

The Despair and the Hope 2013

The year ends on a note of despair. 

The NDA approved Twelfth Plan with a revised pragmatic growth of 8% for the plan period. From Kaushik Basu to Assocham predictions for growth of the economy this fiscal stay put at no more than 6%. European markets continue to destabilize global situation with less hope of revival than the US markets, where the fiscal cliff is addressed legislatively and affirmative action.

RBI is more pragmatic and makes it range bound 5-6 percent. All the Ministries involved in infrastructure development are bit by scandals galore and cases of corruption engulfing them. Welfare ministries have excess expenditure and ill-directed subsidies. Fiscal deficit has reached unsustainable levels. Public sector disinvestment takes a beating.

Poverty measured by the number of mobile users and the increase in the self-help groups though has declined; its definition from the altars of power created flutter and remains unresolved. No State can claim reliable statistics on the poor.

The so-called reverse of policy paralysis is caught in action paralysis at the end with the wasted days more than the functioning days of the Parliament.

For fifteen days, youth all over the country, are driven to streets with the most heinous rape incidents demanding legislative and judicial actions to remedy the gender crime.

RBI in its latest Financial Stability Report rings alarm bells. The non-performing assets of the public sector banks that occupy 80% of the country’s financial space are proving to be a perpetual worry in the backdrop of even extended start date for Basel III capital norms to come in from 1^st April 2013 instead of 1^st January 2013. Current Account deficit at 4.5% is at unsustainable levels.

Federal relationship has put the tax reforms on the edge. The Direct Tax reforms and the introduction of GST are in imbroglio.

Cash transfer scheme slated for 40 districts initially halved by the target date as the back-ended AADHAR has thrown up many data inconsistencies and corrections even in the districts that issued the ID cards to all the citizens. The schemes linked to PDS and gas distribution consuming more subsidies had to be put on hold for introduction till April 2013. Verification and validation of Aadhar card data is proving tough. Banks’ and Post Offices’ preparedness to introduce the scheme leaves much to be desired.

Inflation is still on the rise and measures to arrest gold imports to respond to demand pressures announced as though it is a New Year gift from the Finance Minister would hardly contribute to stabilization of the volatile commodity markets. Supply side issues have been addressed inadequately.

Both Health and Education sectors are bogged down with insufficient budget allocations and inefficient administration in most States.

States’ respect for the Constitution is on the wane demonstrated by the unresponsiveness to the only progressive legislation of the UPA Government in 2012- the 97^th Constitution Amendment Act 2012 that targeted correction to mis-governance and mismanagement of the Cooperatives, the fourth economic pillar of the country.

Still the ethos of India built largely on optimism hopes for turning the tide in favour of value-driven growth and equity.

The basis of my hope is that the Federal Relations are under review by the veteran past Bank Regulator and a former civil servant, Dr Y.V.Reddy. second, the tough measures suggested by the RBI for arresting the concentration risk from NBFCs dealing with gold-based financial products, and the revised pricing mechanisms for fixing the gas and energy prices suggested by Dr Rangarajan in his latest Report awaiting clearance from the Governement. SEBI has already moved in for more reforms in the capital markets.

  I would certainly join the chorus of hopefuls at the beginning of 2013.

Cooperative Governance

Cooperative Governance

The Constitution 97^th Amendment Act 2012, one of the very progressive legislations of the UPA Government aims to correct misgovernance of cooperative societies in the country among other important provisions at a time when speaking of good governance is akin to smelling  jasmine in fish and fowl market. The Act itself specified that the States shall amend their respective cooperative Acts before February 14, 2013, one year from the date of notification of the Act in line with the provisions of this Act. If the States do not amend their Acts as above, the 97^th Amendment Act shall govern the State Cooperatives.

Article 19(4) defined Cooperative Society as one that is promoted, managed and controlled by members. This would mean that the control of the Cooperative Societies to whatever extent it rested with the Registrar of the Cooperative Societies shall be unconstitutional. All such provisions in the existing Acts shall be removed from the modified Acts.

 It also specified in section 243ZO that such member to participate in elections should be actively availing the services of the Society and should be attending its meetings with certain regularity. This called for defining the Active Member in the new Act of the States.

This Act under article 243ZK also specified that the States shall also set up a State Election Authority to conduct elections to the Cooperative Societies in the State and these should be conducted once in every five years. If the State Government so chooses, it can entrust the responsibility to the State Election Commission, but with specific mention in the newly amended Cooperative Act. It has also mentioned that such elections should be conducted in a manner that the new Board should assume charge immediately after the first Board concludes its term. There are around six lakh cooperatives in the country with estimated 23million members. It has become a habit with the States conducting such elections irrespective of party in power to go in for enrollment of members just before elections as anybody paying a small share capital of ten rupees can become a member. To prevent such malpractice the Act in section, 243ZO specifies the eligibility of members who can participate in voting.

The Act clearly defines Board as the ‘Board of Directors or the Governing Body of the Society, or whatever name called, to which the direction and control of the management of the affairs of a society is entrusted to.’ There is brazen violation of the Constitution by even the UPA ruled State like Andhra Pradesh. The 97^th Constitution Amendment Act 2012 dealing with Cooperative legal reforms and governance statutorily seeks a State Election Authority to conduct elections to cooperatives and the States are to carry out all the amendments required before February 14, 2013. The State that has been postponing elections to cooperatives for the last two years announced them hurriedly to have the last laugh on their subversive methods of winning the elections. The New Act would not allow non-active members to cast their vote. The ruling party is afraid of losing hold on the cooperative societies that hitherto formed the bedrock of State politics. States like Tamil Nadu and Karnataka issued ordinances repeating the Central Act that were returned promptly.

The Board shall have maximum 21 members and provided for reservation of SC/ST and women not exceeding three provided the Society base itself does not have such constituency. General Body has been given supreme authority thus conferring autonomy in the Society. The rights of members have also been defined along with the information the society should provide to the members and the regulator. The Board shall have three independent professional directors but would not have voting rights. These directors should submit to the General Body their statement of assets and liabilities and shall not be defaulters to the society in terms of their obligations.

No Board can be superseded by the Government for more than six months with the exception of cooperative banks where the supersession can be for one year under the direction of the RBI.

Governance of cooperatives through this Act provides for better participation in its management and control and has prospect of superior governance over the existing Companies, where the shareholders of the Company have to understand the company only from their half-yearly and annual reports. Cooperatives as body corporate managed and controlled by members could compete on their own terms effectively with other forms of business organizations.

Edited form appeared in http://www.scribd.com/doc/117937064/Business-Advisor-December-25-2012

Warna Cooperative Stores that Indian Walmart should learn from

Cooperatives originally set up on the basis of people’s needs should have retained their character as people’s organization. But in course of time, governments of the developing economies started encouraging them with legal and financial supports. Such support eventually left the feeling that they are government organizations. In fact, they are forms of private sector organizations that are member-driven, member-centric economic enterprises. The sad part is that these cooperative organizations over the years acquired social and political dimensions detrimental to the interests of members. They are today seen in every sector of the economy: from seed to food, milk to silk, production and consumption to distribution, labour to services, thrift and savings to credit. Thanks to great cooperators like Vaikunt Mehta, Kurien, LC Jain and the like, a few in the dairy, fertilizer sectors have built brand images on par with the high-end corporate sector. Although Janata Super Bazars vanished because of government intervention, there are several consumer stores like the Triplicate Urban Cooperative Stores, several employee consumer stores, TTD cooperative consumer stores etc. still functioning but their reach has been constricted because self-centered and rent-seeking managements and governance. In these days of FDI in retail and multi-brand, revisit to some of the successful retail stores in cooperative sector, should open the eyes of both Government and the large number of FDI articulators.

Warna Bazar in Warnanagar is one consumer stores that should be visited. Well, here is the story of the stores I visited a few years back. A recent presentation at the International Conference (Nov2012) on Cooperatives held by the Reserve Bank at the College of Agricultural Banking astounded me as much as it would for anybody who would listen to it.

Warna Bazar is like a Walmart stores in cooperative sector. Warana Bazar was initially started in the year 1979 with a motto of supplying quality goods at reasonable prices to the consumers at large. It is the first consumer co-op. store in rural India. During a period of last 33 years the stores has proved to be a successful model for consumers’ co-op. movement in the country as well as Women Empowerment. It encouraged women in the households of the Warna Sugar Factory command area to produce condiments and consumables according to certain standards in which these women have been trained. They have been trained in packing and labeling. Consumer loyalty has been built over the years with the members’ active part in running the stores. Most of the employees are children of the members of the stores. This stores was the first stores that started with the motto of self-help. This self-help effort made the stores sell the goods at a price that the consumers find attractive.

There were no CCT cameras in the stores. The members keep the vigil when required. They introduced computer billing a decade ago.

•               No. of Women share holders – 7909

•               No. of Women associated share holders – 11333

•               No. of Women in the Board – 11

•               Chairperson – Mrs. Shobhatai V. Kore (M. A.)

•               Out of 610 staff, Women staff is 190

                            (60 women are from economically weaker sections)

•               Dependant women % on Warana Bazar is 35% .

Chart one indicates that their sales grew from Rs.2omn in 1979 to Rs.1320mn in 2011-12 with a net income of Rs.90mn after distributing dividend to its members. The secret of loyalty is the loyalty bonus of 28% they distribute annually to the members and associate members every year. They give value for the buy to every consumer. The story of Warna Bazar tells everyone that success of cooperatives hold a great future for India if the cooperatives embrace member-participation, member-governance, members sharing the gains of their hardship and above all transparency, accountability and good leadership.

This has been published in the digital magazine: Business Advisor Vol 3 (3) 2012 Editor: D.Murali

Direct Cash Transfers

Direct Cash Transfers – Aadhar based is an excellent initiative at the most premature moment. First, Aadhar has not been issued to all the 100 percent citizens even in the 51 villages in the 18 States on experimental basis where the scheme is proposed to be introduced from 1^st January 2013. In one village in Anantapur District, with the film producer Rajmouli’s photograph as well another person with wrong address was issued. In the same district another card was issued with a fake name and fake address in the name a fruit and bazaar were issued with a photograph too!! There are galore of spelling mistakes either in surname or the name itself. Corrections to these would not get initiated by the authorities concerned. A complaint to customer care of Aadhar gets a stereotyped reply that it would be attended in 48hours. After 48hours you get a reply that does not address the issue at all for the central complaints department either does not have the operating agency details or even if it has, does not care to refer the complaint for redress. When the educated themselves do not get proper response to their complaints to expect that the poor would get attention on such complaints is asking for the moon. 

Adding to this the Banks are intermediaries in the whole effort. Several banks have everyday new issues with Banking Correspondents and there are leakages that they are grappling with to resolve. Not all financial inclusion accounts even in the designated villages were opened with Aadhar ID as base of KYC. Now they will ask each account holder to give fresh KYC form with Aadhar card fascimile. Aadhar will have discrepancies with those that are already having accounts. The Banks confirmed that they have followed the KYC and the auditors/Inspectors have confirmed.Some are already receiving their MNREGA wages or pensions through this KYC. Now which would they count for accepting credits? Unless the Aadhar card ID is fully integrated with the Bank accounts and the persons holding accounts under Financial Inclusion eligible to receive the 29 categories of subsidies confirm, the whole process would be in a limbo and these cannot certainly be resolved in these inaugural villages of fifty one. God save the poor - any way he is still saving them!

Game changer:

Yes; it is a game changer for the politician eager to grab votes from the poor in some fashion or the other. The game changes but the poor would for sure remain poor for the politician will have the untainted access to the purse of the poor in a straight cash deal.