Consolidation of Banks is no cure to the Ills

James Crabtree of the FT reporting on the predicament of the then PM Singh commented in March 2012 that Indian Banking was at the brink and needed heavy capital infusion to catch up with Basel III requirements and clean up to measure up to the requirements of economic growth to revive to beyond 7%.

The position worsened ever since. Gyan Sangam (Intellectual Confluence), the second after the formation of the present government that discussed the revamp of the banks a couple of days back at Gurgaon, Delhi have not offered any better wisdom than loud whispers of consolidation of banks. Is consolidation of banks the right solution?

Budget 2016 Transformational Budget

Karl Marx once said speaking of the goals of economic satisfaction: ‘each according to his needs’ (communists achieved it); ‘each according to his ability’ (capitalists achieved it) -- extend this to each according to his greed (modern economies surpassed). Democracy means great expectations and the FM has to meet these expectations in the most unenviable challenging environment.

The stunning defeat in the States’ elections during the year made the FM look at Rural India, agriculture, irrigation and infrastructure in this budget as key to regain its political prominence. Noses ground to the soil made different voices allocating more than 8% of the budget 16-17 to agriculture, rural development and irrigation. The Economic Survey forebode it to a degree.

Economic Survey 2016 read between the lines indicates that the economy would travel in uncertain growth territory due to weak growth of world output (around 3%), declining commodity markets, turbulent financial markets, and volatile exchange rates. The current expectation of 7-7.75% growth during the current year and 8% in the succeeding years is the hopeful. Agriculture sector constituting around 15% of GDP at current prices having 60% of population dependent on it just ended with 1.1%; manufacturing with Make-in-India push surged to 9.5% and services in spite of start-up and digital India efforts slackened to 10.1%.  Unless manufacturing start-ups attract angel funds in a big way it would be difficult to show a double digit growth in the sector as the credit markets are weak.

Pre-Budget 2016 last strokes

Budget Run Up – The Last Strokes

The long wish list of the budget 2016-17 in the double-digit growth pitched economy has GST implementation as the top agenda and implementation of recommendations of Justice Eswar Committee on tax reforms as the second top item.

Farm sector and rural development find a big surge in the budget run up news columns. Declining credit is a cause for worry in these sectors as the banks hit by NPAs and loan write-off are in no mood to oblige the farmers. Agriculture infrastructure targeting market yard digitisation and revamp calls for a big ticket from the challenging budget 2016.  A separate budget for agriculture would have made lot of sense but the government has no such plans. Still hopes ride high in this sector.

Make-in-India requires a big manufacturing push and this is possible mostly with the MSME  sector that has so far drawn little attention.

MSME  Ministry recently redefined the eligibility criteria whereby the aggregate value of the Plant and machinery under the same ownership located anywhere will be reckoned to classifying as MSME, providing for vertical growth. This will correct the distorted subsidy regime engendered by horizontal growth.

MSMEs Cry for Attention

Start-Ups in MSMEs, particularly in manufacturing can now look for vertical growth instead of horizontal growth with the MSME Ministry revising the definition of plant and machinery to include all such equipment owned by the same owner(s) across the districts and country to be reckoned for classification of MSME under the MSME Development Act 2006. In the long run this redefinition would do lot good to the sector. The sector may witness in the short term more NPAs.

Big Data Helps Banks but should help customers too

http://www.moneylife.in/article/big-data-help-banks-but-benefits-should-be-passed-on-to-customers-as-well/45304.html

Banks collect and use client data for better targeting. They should also reduce operational costs by using technology and pass on the benefit to customers

I recall what Greg Baxter, global head of digital strategy at Citigroup mentioned almost a year back (reported in Financial Times on 1 February 2015) that big data is a big opportunity, making a big difference in how the banks serve their customers in future. Financial health barometer can be read by every customer, not just how much balance one has in the account as much as how much the money is likely to be overdrawn every month.

MSMEs in the eye of the storm

MSMEs are in the eye of the storm with NPAs reaching 5.90 percent as of March 2015 even though the net accretion to the portfolio has gone down from 12.3% in 2014 in terms of number of accounts to 10.1% with a corresponding decline in amount outstanding from 23.9% to 13.6%. The industry NPA level was 5.47 although at the systemic level both industry and MSMEs represent 4.7%.  Only 7.9% constitute MSME advances to the total advances. (Financial Stability Report No.11, July 2015)

Risk appetite for the MSMEs is very low among banks and their adherence to the guidelines of both the RBI and GoI to identify sickness at incipient stage and introduce corrective action plans is highly suspect. There is reluctance among banks for either restructuring or revival of even viable advances. Their credit origination has also no less to blame. Monitoring and supervision are hit hard by lack of adequate field staff leaving most accounts for arm chair surveillance.

A Year 2015 that could be Better looking for the Best 2016

http://indiamicrofinance.com/year-2015-in-retrospect-2016.html

Reminiscing into the past to move fast on the promises for a bright future is the usual year end exercise. Many soothsayers lend their voices. The year 2015 is just about to close. Not many are jubilant. Farmers in a couple of southern States and Punjab and elsewhere committed suicides in penury, groaning under heavy private debt.

Parliament had two wash-out sessions, courtesy, the Congress, save just nine Bills passed by both the Houses. All the major reforms, particularly the GST the game changer, are on back burner.

Nature’ fury brought a major metropolis to ruble. El Nino caused havoc in several States turning the cool weather of the year into hot climate. Discussions on Climate changes, Environment, containing terrorism carried an imprint of Indian view making history. PM Modi with his birthday greetings to his counterpart in Pakistan on the 25th December, created waves in international relations although moving on rocks in India.

Expenditure on Defense and Police modernization has increased. Yet civic protection is on thin edge. More chain snatchings, more ATM thefts, and money-on-call crimes, gold smuggling surfaced. Most of the states have been galvanizing to digitization to tame the corruption. Not a single economic offence barring the decade-odd Satyam scam has put the culprits behind the bars and not a rupee of black money has been brought back from Switzerland to India. Cyber crimes continue to show their ugly face robbing the institutions and individuals’ wallets.

States are competing for ‘ease of doing businesses’ more through policy tweaking. Implementation issues and gearing the grassroots administration remain formidable. Hikes in pay and slides in rights make labour moving to roads.

Micro and small enterprises are still fighting for their space in credit markets and their contribution in manufacturing Make in India sector is full of tears. Although Bankruptcy Act gave hope to the India Inc there is still no exit route for the MSEs. Decade after winding up the unit, it receives a claim for payment of EPF where as Sec.14 of the BIFR Act provides relief for the corporate units.

Laws leave more for interpretation than for a conclusive ruling. Speed of justice is yet to roll out. The silver lining is that the Judiciary has been able to gear up the administration to timely action responding to PILs – food security for the poor in situations of drought, asserting the domain of Right to Information Act in certain restricted areas and the like.

Inflation has been tamed. Indices maneuvered to project higher growth thanks to a statistical model. The alert finance regulator reasserted his commitment to growth – reduced interest rates. But amidst rising NPAs credit markets are tepid. Volatility of capital markets amidst global concerns continued and the initial surge of investments has become timid.

Fed Rate hike as expected made its beginning as if the recession unwound. Yuan became the recognized third largest international currency. Amidst stable exchange reserves RBI is confident of holding the rupee range bound. Banks are at their wits-end to raise capital to meet the demonic Basel III norms by April 2017.

Debt and Disaster

Disasters may be frequenting the coastal regions. But not like the one that we saw in Chennai till yesterday, in the recent history. It may take months for the city to recover from the shock and may need billions of rupees for recovering the lost infrastructure and assets. This signifies that no disaster will be like its predecessors and they manage us and not us managing them.

The estimate for the insurance sector outflow for the rescue has been put at a measly Rs.500cr.  It may have excluded the assets insured in the financial sector. Several industries, export-oriented auto components industry, leather industry, several MSMEs alone have assets worth around Rs.2lakh crores in and around Chennai, the marooned metro for a century.

SpiceJet becomes SourJet

A Travelogue

Jetting off to Tirupati ?

‘Air India’ – Not liking to be in the air

Feels homely on the land;

‘SpiceJet’ – ‘seating’ – sorry;

Mistakenly spelt – ‘cheating’;

‘Checking in’ – you are checked out;

Baggage – gaming in numbers;

‘Free meal’ – Damn it you paid for it;

‘Bag out first’ – Pay up first;

‘Enjoy extra leg space’; keep your legs short;

Long legs? Choose the first two rows;

Just it costs you only five hundred bucks!!

‘Smiles’ Miles apart for, they are spicy;

Crew, Arrogance is their virtue;

‘Convenience’ – a dream;

‘Comfort’ – whose is it any way?

Merry ride? Nay, a dreary ride;

SpiceJet  joining the Sourjet league!

Any way the stocks are fully subscribed.

 * SG 1042 27.11.2015 - Tirupati to Hyderabad 

Economics of Education

Volume XIII Part 4 November 25, 2015 Business Advisor

Economics of Education

B. Yerram Raju

National Education Policy is scheduled for release shortly. The fears of FDI in education are looming large. Already the privatization of education during the last two decades has eroded the values and loaded the backs of children with loads of books. Lower middle class bemoan that qualitative education is unaffordable.

Several private schools even at kindergarten charge a lakh of rupees for admitting a child. The non-public ‘public schools’ charge the fees much above. At the high school and college levels per candidate fees is touching the roof. And there is no guarantee for quality delivery of inputs. Most have teachers less than deserving qualifications.

Government schools and colleges have poor infrastructure and poorer delivery mechanisms. Had all the civil servants, elected representatives chosen to send their wards to the government schools, their plight would be not what they are: with no toilets, no power, no play grounds, and in several of them even no teachers!! Yet, the threat of transfer or other punishments to teachers make them adopt unholy means to assure pass for all their wards.

Banks have no time for customer

What you get instead are hidden costs for supposedly myriad services, most of which don’t seem to exist.

One leading new generation private bank does not disburse cash other than through ATM/debit card withdrawals. Yet it charges Rs.1,000 annually for issue of the debit card, on top of keeping the minimum average balance of Rs.10,000 for a basic savings bank account for a customer.

Why choose such a bank? Because other banks, though with lower minimum balance requirements, are worse when it comes to customer service.

I credited a couple of cheques to my pension account with the SBI drawn on another local PSB branch on November 6. While one of the instruments for Rs.10,000 got credited on the same day, the other for Rs.70,000 was credited only six days later after relentless pursuit. A complaint email gets the standard response: “This is a system generated response. Your complaint takes 48 hours to respond. Please do not reply.”

Capital Infusion in PSBs – Need and the Deed

Capitalization of Public Sector Banks has been incorporated as one of the seven items in ‘Indra Dhanush’, dubbed as part of Banking Sector Reforms.  Before addressing the issue of such capitalization it is important to understand some of the historical developments in banking globally and the way different countries responded to addressing the issue of refurbishing capital in the banks.

As part of the global financial system, Reserve Bank of India made us to believe that banks in India have to fall in line with capital adequacy norms under Basel regulations. Even prior to the embrace of capital regulations of Basel India had CRR and SLR as regulatory instruments to safeguarding the financial stability of banks. 70 percent of the Banks’ assets in India are in the public sector.

A Consensual Agenda for Labour Reforms

‘Creating an ambience where both workers and managements understand their rights and duties is no tall order’.

The Centre is engaged in serious discussions with trade unions over the new labour code, with a view to improving the ease of doing business. But missing from the debate is the issue of the obligations of workers. During the 1960s and 1970s, workers’ education, aided by the government, provided them with the opportunity to know their rights. But the whole campaign was on rights and not obligations. Once rights are conferred on any group, and they become binding, it becomes difficult to reduce or deprive such rights.

Mergers and Acquisitions among Indian Banking?

Banking Sector Reforms Committee in 1998 itself suggested consolidation of banks –the SBI and Associates into a big state-owned bank and five or six such big banks through consolidation of other PSBs, mergers of private banks and even FIs with NBFCs. There were noises of consolidation in the UPA-1 government too. And now, the Working Group on mergers and acquisitions set up by the Union Ministry of Finance again called for a similar action.  The major issues relating to capital, assets and human resources need to be looked at from the points of view of growth, financial stability and global experiences. Chairman SBI Arundhati Bhattacharya recently strongly fielded the arguments for large scale consolidation. Is the Indian financial system ripe for the call?

Ending Debt Cycle Suicides in Telangana

http://www.thehindubusinessline.com/opinion/ending-the-debtsuicide-cycle-in-telangana/article7671053.ece

The State government can take a leaf out of Kerala’s book and enact a law against usury

Recently, the Telangana Agricultural Advisory Forum, consisting of a few university professors and scientists, deliberated on the causes and consequences of the drought and farmer ‘suicides’ in the State. The unofficial number of suicides attributed to farm families is 1,152.

An inquiry into some of the recent suicides reveals an interesting picture. The farmers were not indebted to cooperative credit societies or commercial banks. The case of a farmer in Nalgonda district is typical. He took on lease ten acres of land, dug five bore wells — none of which hit water — incurring huge private debt in the process. On top of this, he cultivated cotton. The crop failed without water, and the debts pushed him to suicide.

Loan Melas Land Again

file:///C:/Users/dell/Desktop/Business%20Advisor%20-%20September%2010,%202015%20-%20Contributor%20copy.pdf

‘Disasters never come singly but in bundles’. This seems to be the position of PSBs in this country at the moment. They are already in the melting pot of nearly Rs. 6lakh crores. Loan melas seem to have come back with a bang – the Mudra Loan melas. It was mid 1970s that Pujari the then Congress Minister started with the loan melas having seen that this is the greatest opportunity to get crowds at no expense of either the party or the government.

It all started when one of the then enthusiastic regional managers of a public sector bank organized such mela at Anantapur in Andhra Pradesh. The Minister was given an elephant ride with the buglers financed under the DRI scheme walking in front to reach the big maidan for distributing agricultural loans, if I recall right in the year 1979. He could see huge crowds in the ground waiting for his honour to arrive. He was amazed for he knew what it meant: loans and votes without the party having to spend for a single vote. Having tasted the meat would the tiger leave it? He ordered such melas throughout the country.  After the banking sector reforms such melas became history. Several of us thought that those dark days would not revisit the financial sector.

Our Decrepit Debt Recovery System

A consolidation of laws and legal processes is called for at the earliest

India’s debt recovery apparatus is an alarming mess. Consider this: we have four Acts, two sets of tribunals, ₹2 trillion worth of debt recovery tribunal (DRT) cases and ₹6 trillion in NPAs. These NPAs are a subject of labyrinthine discussions, appraisals and reappraisals – carried out by the RBI, Finance Ministry and even TV channels. None of all this seems to be getting us anywhere.

To get a fix on the debt problem, we need to understand the tangle of laws dealing with it and the system of courts and tribunals responsible for the implementation of these laws. The four Acts in question are: Sick Industrial Companies Act, 1985 (Act 1 of 1986), Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFA), 1993, The SICA Repeal Act, 2003, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act (Sarfaesi), 2002.

Apart from Debt Recovery Tribunals we also have the National Company Law Tribunal under Companies Act (Second Amendment) 2002 to settle BIFR cases.

NPAs - the perpetrators go scot free

If the RBI and MoF representatives on the Boards of Banks had prevented approvals of some corporate loans and brought collective wisdom to do due diligence, NPAs would not have reached the current unsustaining levels. Otherwise, how could one explain the debacle like that of King Fisher sanctioned on the basis of Brand as collateral thousands of crores on the instance of the then Chairman of the SBI. And this Chairman goes scot free royal. The successors have to cool their heels. 

It is important that the regulators get out of Boards of PSBs. Government of India, as owner, would do well to provide equity and discipline by sending more qualified representatives on the PSB boards and not the persons who are trying to learn the alphabets of banking. By being in the MoF for donkey years does not make one an expert in banking and finance!!

This is my response to Mrs Usha Thorat's article on the subject in Live Mint dated 15th july 2015.

Limited Liability Partnership no good for banks

Last six months have been harrowing for a few SMEs who registered as Limited Liability Partnerships with the hope that they would sail more comfortably in their financials with equity and debt in good balance. But all of them faced the wall when they approached the financing banks for working capital loan. They advised these entrepreneurs to convert into private limited companies or partnership companies where the liability is not limited.

You can find the edited version of the article in the Hindu Business Line of 17th July.

No liability this: http://www.thehindubusinessline.com/opinion/columns/no-liability-this/article7430264.ece