Banking Sector Reforms

May, 16, 2019

[op-ed snap] IBC hits and misses

CONTEXT

Even as the time taken for resolution under the Insolvency and Bankruptcy Code (IBC) continues to exceed the outer limit prescribed under the law, the process is yielding better outcomes in a shorter time frame as compared to the erstwhile regime.

Background

  • In FY19, financial institutions recovered close to Rs 70,000 crore through resolution under the IBC, estimates rating agency Crisil.
  • This works out to a recovery rate of 43 per cent.
  • In comparison, recoveries under the preceding regime through various channels — debt recovery tribunals, securitisation and reconstruction of financial assets, and enforcement of the securities interest act (SARFAESI) and Lok Adalats — stood at Rs 35,000 crore in FY18.

Cause of concerns

  • The time taken for successful resolution continues to exceed that envisaged in the law.
  • Under the law, the insolvency resolution process is to be completed in 180 days, which can be extended by another 90 days to a maximum of 270 days. But, of the 1,143 cases that are currently outstanding under the IBC, 362 cases or 32 per cent are pending for more than 270 days.
  • In a few of the big ticket cases, the resolution process has exceeded 400 days.

Reasons For delay

  • Part of the delay in resolution can be attributed to the absence of buyers, differences between members of the committee of creditors, as well as legal challenges mounted by existing promoters not willing to let go of their companies.
  • Then, there are issues of institutional capacity which need to be addressed.

Conclusion

  • However, despite these delays, Crisil estimates that it takes around 324 days for cases to be resolved under the IBC — in comparison, as per the World Bank’s Doing Business Report 2019, it took 4.3 years under the earlier regime.
  • In the months after the IBC kicked in, operational creditors had taken the lead in initiating the corporate insolvency resolution process (CIRPs) against errant debtors.
  • But thereafter, financial institutions stepped up.
  • In fact, in the quarter ended March 2019, the number of CIRPs initiated by financial creditors exceeded those initiated by operational creditors. But it is difficult to say whether this trend will continue after the Supreme Court ruling on the RBI’s February 12 circular.
  • The quashing of the circular has opened the door for banks to tackle the issue of bad loans outside the IBC process, a route they might prefer.
Apr, 04, 2019

[op-ed snap]Serious setback

CONTEXT

The Supreme Court order quashing a circular issued by the RBI on the resolution of bad loans is a setback to the evolving process for debt resolution.

Impact of this order

  • The voiding of the February 12, 2018 circular could slow down and complicate the resolution process for loans aggregating to as much as ₹3.80 lakh crore across 70 large borrowers, according to data from the ratings agency ICRA.

Need for the circular

1.Recognising defaults by Banks

    • The circular had forced banks to recognise defaults by large borrowers with dues of over ₹2,000 crore within a day after an instalment fell due.
    • And if not resolved within six months after that, they had no choice but to refer these accounts for resolution under the Insolvency and Bankruptcy Code.

2. Increasing share of  Bad loans

  • Mounting bad loans, which crossed 10% of all advances at that point
  • The failure of existing schemes such as corporate debt restructuring, stressed asset resolution and the Scheme for Sustainable Structuring of Stressed Assets (S4A) to make a dent in resolving them formed the backdrop to this directive.

3. Breaking nexus

  • The circular was aimed at breaking the nexus between banks and defaulters, both of whom were content to evergreen loans under available schemes.

4. Introducing Credit Discipline

  • It introduced a certain credit discipline — banks had to recognise defaults immediately and attempt resolution within a six-month timeframe, while borrowers risked being dragged into the insolvency process and losing control of their enterprises if they did not regularise their accounts.
  • RBI data prove the circular had begun to impact resolution positively.

Impact on Current banking situation due to order

  • It is this credit discipline that risks being compromised now.
  • It is not surprising that international ratings agency Moody’s has termed the development as “credit negative” for banks.

Faults with circular

  • It is true that the circular failed to take into account the peculiarities of specific industries or borrowers and came up with a one-size-fits-all approach.
  • It is also true that not all borrowers were deliberate defaulters, and sectors such as power were laid low by externalities beyond the control of borrowers.
  • The RBI could have addressed these concerns when banks and borrowers from these sectors brought these issues to its notice.
  • By taking a hard line and refusing to heed representations, the RBI may only have harmed its own well-intentioned move.

Way forward

  • it is now important for the central bank to ensure that the discipline in the system does not slacken.
  • The bond market does not allow any leeway to borrowers in repayment, and there is no reason why bank loans should be any different.
  • The RBI should study the judgment closely, and quickly reframe its guidelines so that they are within the framework of the powers available to it under the law.
  • Else, the good work done in debt resolution in the last one year will be undone.

 

Apr, 01, 2019

[op-ed snap] Setting limits

Note4students

Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: RBI functioning, reserves of RBI, Basel norms, BIS

Mains level: The tussle between RBI & the government and the need for its early resolution for sending correct signals in the economy.


NEWS

CONTEXT

The former governor of the RBI, Raghuram Rajan, has reignited the debate on the autonomy or independence of the country’s central bank by suggesting that it was perhaps an opportune time to set statutory limits to protect the term of the governor.

Background

  • The former RBI chief’s remarks appear to have been framed in the context of the exit late last year of Urjit Patel, well before the end of his term, after a spat with the government, as well as his own uneasy relationship during his three-year tenure.
  • He said that imposing checks on the government’s powers was important to secure operational independence and to put an end to constant interference by the sovereign, to achieve the broader objective of price and financial stability.

Need for autonomy

  • Some of his predecessors, too, have in the past pitched for a secure five-year term for the RBI Governor,
  • Arguing that a full service central bank — like the one India has — with a mandate not just for monetary policy but also oversight of the financial sector, besides currency management and payments and settlements, needs to be autonomous.

The conflict between the government and central bank regarding policy measures

  • The bank and government have differed often over how to achieve its goals
    1. Especially on interest rate management
    2. The approach to resolving the issue of bad loans.
  • It is not unusual to see such differences globally — like in the US.
  • Where President, Donald Trump, unhappy with the US Federal Reserve’s stance on interest rates, has issued threats to the world’s most powerful central bank chairman, Jerome Powell.

Reasons and nature of conflicts

  • These conflicts are naturally given
    1. The shorter political horizon of elected governments
    2. The need for central banks to take a non-political medium-term approach to achieve price or financial stability.
  • The 2008 financial crisis further
    1. Underlined the importance of macro-economic stability.t
    2. And that the policies for achieving it are inter-linked.s
    3. Signalling the importance of having a strong central bank free of political compulsions.

Ways to ensure autonomy

1. Making it accountable to parliament

  • One institutional response to ensure that and to shield the central bank from growing political assaults is to make it directly accountable to the Parliament without being dependent on funding,
  • like the way the US Fed derives its powers from the Congress.

2.Ensuring accountability

  • But that statutory protection to the RBI and its chief must be accompanied by an accountability mechanism.
  • Simply put, there is merit in central bank independence — not unbridled — as there are macro economic gains which would accrue besides boosting policy credibility.

Conclusion

  • Ultimately, as the first Indian governor of the RBI, CD Deshmukh, said seven decades ago, it is not the constitution of the institution that matters, but the spirit in which the partnership between the ministry of finance and the bank is worked.
  • The success of the partnership will, in the final analysis, depend on the manner in which the government asks to be served and provides opportunities accordingly.
  • It is the display of such a spirit by any government that will be critical to the future of India’s public institutions, including the RBI.
Feb, 27, 2019

Banks may set repo rate as benchmark for lending

Note4students

Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: MCLR, Repo Rate

Mains level: Role of RBI & various functions performed by it.


News

  • Most commercial banks in India are likely to select RBI’s repo rate as the external benchmark to decide their lending rates, from April 1.
  • The repo rate is the key policy rate of the Reserve Bank of India (RBI).

Deciding lending rates

  • Banks had four options from which to choose the external benchmark: the repo rate, the 91-day Treasury bill, the 182-day T-bill or any other benchmark interest rate produced by the Financial Benchmarks India Private Ltd (FBIL).
  • A few other banks confirmed that the repo rate is the ideal candidate for the external benchmark. At present, the repo rate is 6.25%.
  • The marginal cost of fund based lending rate (MCLR) is currently the benchmark for all loan rates.
  • Banks typically add a spread to the MCLR while pricing loans for homes and automobiles.

Why repo?

  • The RBI has mandated that the spread over the benchmark rate to be decided by banks at the inception of the loan should remain unchanged through the life of the loan.
  • It should remain unchanged unless the borrower’s credit assessment undergoes a substantial change and as agreed upon in the loan contract.
  • If the lending rates are linked to the repo rate, any change in the repo rate will immediately impact the home and auto loan rates, since RBI has mandated the spread to remain fixed over the life of the loan.

Benefits of Repo Rate

  • It will make the system more transparent since every borrower will know the fixed interest rate and the spread value decided by the bank.
  • It will help borrowers compare loans in a better way from different banks.
  • Under the new system, a bank is required to adopt a uniform external benchmark within a loan category so that there is transparency, standardisation and ease of understanding for the borrowers.
  • This would mean that same bank cannot adopt multiple benchmarks within a loan category.

Back2Basics

Repo Rate

  • Technically, Repo stands for ‘Repurchasing Option’.
  • It refers to the rate at which commercial banks borrow money from the RBI in case of shortage of funds. It is one of the main tools of RBI to keep inflation under control.
  • When we borrow money from the bank, they charge an interest on the principal. Basically, it is cost of credit.
  • Similarly, banks too can borrow money from RBI during cash crunch on which they must pay pay interest to the Central Bank. This interest rate is repo rate.

MCLR

  • Marginal Cost of Funds based Lending Rate (MCLR) is the minimum interest rate, below which a bank is not permitted to lend. RBI can give authorization for the same in exceptional cases.
  • MCLR replaced the earlier base rate system to determine the lending rates for commercial banks.
  • RBI implemented it on 1 April 2016 to determine rates of interests for loans.
  • It is an internal reference rate for banks to decide what interest they can levy on loans.
  • For this, they take into account the additional or incremental cost of arranging additional rupee for a prospective buyer.
Feb, 25, 2019

[op-ed snap] Safety nets

Note4students

Mains Paper 2: Polity | Parliament & State Legislatures – structure, functioning, conduct of business, powers & privileges & issues arising out of these

From UPSC perspective, the following things are important:

Prelims level: Banning of Unregulated Deposit SchemesOrdinance

Mains level: Illicit deposit schemes spreading across the country and measures to curb them.


NEWS

CONTEXT

There have been recent events of chit fund frauds leading to savings of low-income Indian households have traditionally remained unprotected.

 Banning of Unregulated Deposit Schemes Ordinance

  • It bars all deposit schemes in the country that are not officially registered with the government from either seeking or accepting deposits from customers.
  • The ordinance will help in the creation of a central repository of all deposit schemes under operation, thus making it easier for the Centre to regulate their activities and prevent fraud from being committed against ordinary people.
  • The ordinance allows for compensation to be offered to victims through the liquidation of the assets of those offering illegal deposit schemes.

Need for banning unregulated deposits

  • Popular deposit schemes such as chit funds and gold schemes, which as part of the huge shadow banking system usually do not come under the purview of government regulators, have served as important instruments of saving for people in the unorganised sector.
  • These unregulated schemes have also been misused by some miscreants to swindle the money of depositors with the promise of unbelievably high returns in a short period of time.
  • The Saradha chit fund scam in West Bengal is just one example of such a heinous financial crime against depositors.
  • An ordinance reflects a timely recognition of the need for greater legal protection to be offered for those depositors with inadequate financial literacy.

Effective Implementation Of Ordinance

  • Policymakers will have to make sure that the bureaucrats responsible for the on-ground implementation of the ordinance are keen on protecting the savings of low-income households.
  • There must also be checks against persons in power misusing the new rules to derecognise genuine deposit schemes that offer useful financial services to customers in the unorganised sector.
  • In fact, in the past, there have been several cases of politicians acting in cahoots with the operators of fraudulent deposit schemes to fleece depositors of their hard-earned money.

Conclusion

Another potential risk involved when the government, as in this case, takes it upon itself to guarantee the legitimacy of various deposit schemes is that it dissuades depositors from conducting the necessary due diligence before choosing to deposit their money. The passing of tough laws may thus be the easiest of battles in the larger war against illicit deposit schemes.

Feb, 23, 2019

[op-ed snap] Why India needs to set up a public credit registry

Note4students

Mains Paper 3: Economic Development| Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of Public credit registry (PCR).

Mains level:  Issues and challenges in the establishment of a public credit registry (PCR) and benefits arising from the same.

NEWS

CONTEXT

In its most recent policy statement, the monetary policy committee of the Reserve Bank of India (RBI) reduced the repurchase rate from 6.5% to 6.25%, mainly on account of low headline inflation and threats to domestic growth from global trade and geopolitical tensions.

Observations regarding current economic situation

  • One, the present level of growth owes itself primarily to public spending in infrastructure. Both private consumption and investment remain bleak.
  • Second, even though bank credit and overall financial flows remain robust, they are not broad-based. In other words, credit flows are focused on a few large enterprises even as a significant proportion of individuals and businesses remains out of the credit market.
  • Gross bank credit to micro and small enterprises reduced by 0.9% year-on-year in December. The micro, small and medium enterprises (MSME) sector employs approximately 111 million people in 63 million units across the country, contributing 31.6% to gross value added and 49.86% to the country’s exports.

Challenges in Reviving Growth

  • In order to revive private investment and consumption, there is a need to ensure greater credit disbursement to MSMEs.
  • But credit institutions face unique challenges. One, the credit market is characterized by information asymmetry, a situation where one party possesses more information about the transaction than others.
  • Borrowers have disproportionately more information about their financial situation and ability to repay the loan than the lenders.
  • There is also the problem of adverse selection, where safe borrowers are priced out of the credit market owing to their lack of credit history.
  • These market failures have partly been responsible for the inefficient allocation of credit in the economy, resulting in a rise in bad loans and sluggish economic growth.

Problems With current credit information system

  • At present, the credit information market in India, though mature, is highly fragmented.
    • Within the central bank, for instance, the Central Repository of Information on Large Credits (CRILC) provides timely information on credit deterioration of large loan accounts—those greater than 5 crore.
    • CRILC played a crucial role in the asset-quality review process initiated by RBI in 2015, which helped identify significant divergences in bad loans recognized by several commercial banks in their annual reports.
    • There are also four private credit information companies, which offer value-added services such as analytics and scoring to lenders and borrowers.
    • But these lack full and timely coverage, despite RBI mandating all its regulated entities to submit credit information to them.

Benefits of Public Credit Registry in reviving  growth

  •  A public credit registry (PCR), which would act as a central repository of information on credit data of individuals and businesses.
  • A public credit registry wouldn’t be constrained by any minimum threshold in loan requirement and would also collate comprehensive information—not just on bank credit, but also loans from non-banking financial companies, debentures, bonds, external commercial borrowings, utility payments and so forth—to provide a holistic picture of the borrower’s credit history.
  • Inclusion of ancillary information such as overdue utility payments, or overdue tax payments’ data from tax authorities, would help reduce the due diligence costs of lenders and foster financial inclusion by bringing into the fold all those who were previously left out of the credit market.
  • An added benefit would be the disintegration of information monopoly of some lenders.
  • A PCR will enable sharing of credit information mandated by law, fostering transparency and encouraging competition.
  • It will also enable efficient price discovery as the public availability of comprehensive credit information of the borrower will help lenders distinguish good ones from the bad.
  • The information architecture of the PCR must be consent-based, in compliance with the data protection laws of the country to prevent data abuse.

Way Forward

  • The Insolvency and Bankruptcy Code, though far from perfect, has started the process of unlocking the dead capital of bankrupt firms.
  • These funds will then flow back into the economy through credit.
  • The next logical step now is the establishment of a PCR.
  • This will not only ensure higher disbursement of credit to the MSME sector, thereby boosting employment and growth, but also help contain non-performing assets as lenders get access to better quality of information for their credit decisions.

 

 

Jan, 23, 2019

[op-ed snap] Legislating payments out of RBI’s excess capital could compromise its independence

Note4students

Mains Paper 3: Economic Development | Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of RBI’s equity holding capacity.

Mains level: The news-card analyses the issue that how much equity the Reserve Bank of India (RBI) should hold, in a brief manner.


Context

  • A committee is examining the issue that how much equity the Reserve Bank of India (RBI) should hold.

Many dimensions to the issue

The issue under examination has many dimensions such as:

  • How should the RBI’s equity level be computed?
  • What should be the structure of the RBI’s assets?
  • Should the RBI pay the government any excess equity holdings as a special one-time payment?

About RBI’s equity

  • The RBI’s current equity holding is around 27 per cent of its total assets.
  • This overall equity level can be divided into four categories: Paid-up capital, contingency capital, revaluation capital and asset development fund.
  • The two largest components of these are contingency capital (6.6 per cent) and revaluation capital (around 20 per cent).
  • The revaluation capital is an accounting entry that offsets changes in the rupee value of the foreign assets and gold holdings of the RBI due to changes in the exchange rate of the rupee and changes in the dollar price of gold, respectively.

Issue

  • The total equity of 27 per cent has attracted a lot of attention lately.
  • Arguments have been made that this is too high, especially when compared with other countries.
  • There are views that the RBI should transfer a part of this “excess” capital to the government as a one-time payment.

Method to calculate this apparent excess: VaR analysis

  • One way of judging whether or not this level of equity holding is excessive is to use a metric that is typically applied to commercial banks.
  • Under this method, one computes the fraction of the value of the banks’ assets that are at risk due to fluctuations in the market value of the asset. This is known as VaR analysis.
  • This approach tries to look at the worst “x” per cent changes in the asset value of the bank during the sample period and estimates the associated size of the fall in asset value.
  • If the bank has capital greater than this value then one can say it has enough capital to withstand negative shocks in 1-x per cent of cases.
  • The higher x is, the greater is the safety level that the bank has.
  • Thus, if the chosen x is 1 per cent then the bank has enough capital to absorb 99 per cent of the shocks that typically hit the system.

Study shows RBI’s current core equity level needs to be more than doubled

  • In a recent study, it was shown that the RBI would require a 30 per cent overall equity to asset ratio to cover 95 per cent of all shocks it faces.
  • Thus, its overall equity level has to be raised from the current 27 per cent level.
  • If, instead, one only focuses on non-exchange rate-related shocks, then the core equity to asset ratio needed by the RBI to cover 95 per cent of all such shocks is around 17 per cent.
  • That implies that the RBI’s current core equity level of 6.6 per cent needs to be more than doubled.

Central Bank cannot be treated like a Commercial bank

  • When the equity of a commercial bank becomes negative, they are bankrupt and their shareholders typically demand liquidation.
  • However, the central bank of a country is not a commercial bank.
  • Its owner is usually the government, which certainly will not demand liquidation of the central bank in the event its equity turns negative.
  • Indeed, there do exist central banks with negative equity.
  • What is crucial for a central bank is the level of its assets and the riskiness of the portfolio it chooses in terms of its term structure and currency composition.
  • In the event of an emergency, the central bank would need assets to fight it.
  • So, a VaR analysis of the asset portfolio of the central bank is a worthwhile exercise but only for determining its riskiness relative to the country’s risk appetite.

Central bank should hold equity rather than paying it out to the government

There are two important reasons for it:

(a) Builds fiscal credibility of the country

  • Putting a part of the country’s assets in a protected entity like the central bank builds fiscal credibility of the country as long as the central bank is viewed by markets as being independent of the government.
  • This can improve the country’s international credit rating.
  • It also gives the central bank greater credibility in committing to perform its emergency functions without worrying about the fiscal contingencies of the government.

(b)  Mandating payments from the Central bank: a policy moral hazard

  • Mandating payments from the capital of the central bank creates a policy moral hazard.
  • For example, a cut in the policy rate raises the value of government securities that the central bank holds.
  • If the resultant rise in the central bank’s equity sparks a payment to the government then there would be greater spending and inflationary pressure in the economy.
  • Anticipating this, the central bank would be tempted to not lower rates as much.
  • A similar argument operates with exchange rate depreciation.
  • More generally, legislating payments out of the central bank’s excess capital will tend to compromise its operational independence in achieving its policy mandate.

Way Forward

  • In light of the above, an advisable route for the committee currently looking into the RBI’s capital structure is to recommend a formal agreement between the government and the RBI with the agreement stipulating:
  1. a target band for the equity level of the RBI based VaR computations;
  2. the time frame within which the RBI needs to bring its capital level back within the band every time the bounds of the band are breached, and
  3. explicitly prohibit any payments to the government that is based on the equity level of the RBI.
Dec, 24, 2018

[op-ed snap] Capital idea? on banks recapitalisation plan

Note4students

Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: PCA framework

Mains level: Government initiatives for improving the state of banks


Context

Capital infusion in banks by the government

  1. The Centre has sought Parliament’s approval to infuse an additional ₹41,000 crore into public sector banks that are starved of precious capital to remain afloat
  2. Along with another ₹42,000 crore that is already budgeted for infusion, this tranche will take the total planned funds infusion into banks this year to ₹83,000 crore
  3. Adding the outlays since 2015-16 — when the exercise to enable PSBs to clean up their balance sheets by fully providing for and absorbing losses on bad loans began — the estimated aggregate capital infusion would come to over Rs 3 lakh crore

Motive behind the exercise

  1. The government’s claim is that recapitalisation will allow PSBs — especially those with large non-performing assets and facing lending restrictions under the Reserve Bank of India’s (RBI) so-called prompt corrective action — to resume normal banking operations, boosting credit growth necessary for overall economic revival
  2. As many as 11 public sector banks have been stopped from lending freely by the RBI under the PCA framework due to their poor financial health

Actual reforms required

  1. The roots of the bad loan crisis lay in these banks not being allowed to function as autonomous and board-managed entities
  2. By not linking recapitalisation to reform — which can happen only with the government’s stake falling to below 50 per cent and transferring even this to a separate holding company that would secure the former’s financial interests — the danger is of the seeds of the next crisis is being sown through imprudent lending
  3. It is important that the additional capital is not wasted on banks that have not shown any improvement but rather used to support the weak ones that are on the recovery path

Way forward

  1. There are enough headaches for banks to handle in the form of the waiver of agriculture loans and the rising share of loans to small businesses, which are risky
  2. While the idea of infusing more money into banks is not bad per se, given that they are grappling with inadequate capital, a lot depends on how and to which banks this money is distributed
  3. This is where the government has to exercise prudence and caution

With inputs from the article: Seeds of a crisis

Dec, 20, 2018

[op-ed snap] India’s shadow-bank risks put even China in the shade

Note4students

Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Shadow lending and its role in maintaining balance in the economy


Context

Shadow lending

  1. “Shadow lending” is a useful catch-all for firms and financial instruments that, just like banks, turn shorter-term liabilities into longer-term assets
  2. But unlike banks, they don’t have access to liquidity from the central bank. They borrow wholesale
  3. When they take deposits, customers don’t enjoy the protection of deposit insurance
  4. In those two key respects, India’s non-bank finance firms fit the International Monetary Fund’s description of shadow banking

How does shadow lending work?

  1. The universe of more than 11,000 Indian shadow lenders draws its sustenance from formal banks, as well as from companies and individuals looking to deploy short-term surpluses
  2. As yield-seeking capital comes into mutual funds, their managers buy commercial paper issued by operating finance companies (OpCo) as well as subscribe to bonds issued by the finance firms’ holding companies (HoldCo)
  3. The OpCo lends to home buyers, small businesses, and students as well as property developers, while the HoldCo brings in the funds borrowed from mutual funds as equity in OpCo
  4. The minimum capital requirement of 15% of risk-weighted assets is easily met even as shadow lenders’ balance sheets expand by 20% or more

Role of shadow lending in the Indian economy

  1. The shadow lenders, pumping out 30% of all new credit over the past three years, are the reason why the Indian economy isn’t withering for lack of finance, despite a serious banking crisis
  2. 11 out of 21 state-run banks are languishing in a regulatory prison and the central bank wants them to boost their depleted equity before they can meaningfully expand their loan books again
  3. Small businesses are using loans against a property to meet their working capital needs
  4. Traders are getting finance by pledging warehouse receipts

Comparison with China

  1. At 14 % of GDP, India’s shadow-banking universe is much smaller than the 70% ratio in China
  2. While Beijing has successfully shrunk the industry from 87% of GDP at the end of 2016 a drop of 17 percentage points—India can’t afford the non-bank lenders to stumble even accidentally
  3. If they retreat, capital-constrained local banks won’t be able to take up the slack
  4. Nor will an indebted Indian government be able to offset a resulting economic slowdown

Way forward

  1. China’s shadow banking may be a lot bigger than India’s, but India’s is already too big to fail
  2. India’s financing arrangements are far more rudimentary than the opaque Wall Street world of asset-backed commercial paper; structured investment vehicles; subprime residential mortgage-backed securities; and collateralized debt obligations
Dec, 07, 2018

[op-ed snap] Building a framework for RBI surplus transfers

Note4students

Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: Role of RBI & various functions performed by it

Mains level: Issue of transfer of surplus reserves and various factors associated with it


Context

Tussle for RBI reserves

  1. Reserve Bank of India (RBI) governor has reiterated before a parliamentary panel the central bank’s well-known position that its reserves are “for periods of stress and not for meeting normal needs”
  2. A committee is set to go into the issue of an “economic capital framework” (ECF), or the reserves that the RBI must hold
  3. The RBI leadership and the government (along with the RBI board members with voting rights) are having entirely opposite views on this issue

International Norms vis a vis RBI

  1. The Bank of Japan transfers its surplus at 5%, Greece at 8%, and Turkey at 12%
  2. In the US, federal reserve banks, which were established by the Congress as the operating arms of the nation’s central banking system, are required by law to transfer net earnings to the US Treasury after providing for all necessary expenses of the reserve banks, legally required dividend payments, and maintaining a limited balance in a surplus fund
  3. In the case of the RBI, in effect, the entire surplus is transferred to the government after making provisions for two funds—Contingency Fund (CF) and Asset Development Funds (ADF)
  4. Though the RBI has a target of 12% (ratio of CF and ADF to total assets), it has not been able to maintain this and currently the ratio is about 7%

What should be the committee’s approach?

  1. The committee is required to design a framework for economic capital rather than a fixed or rigid formula for surplus transfer
  2. This framework should recognise that the roots of the autonomy of the central bank lie in it having the freedom to manage its balance sheet, not only in good times when it transfers a surplus but equally in times when it may incur losses
  3. This makes a case for a contingency fund that helps hedge the risk that is ever present, particularly when the balance sheet is exposed to the market

Issues being faced by RBI wrt reserves

  • There are cases of huge surplus (maintained with RBI as a deposit) or recourse to higher Ways and Means Advances (WMA)
  1. WMA and Overdraft (OD) have been accumulated over a prolonged period and makes them virtually a new form of borrowing, violating the very idea of providing respite from temporary cash mismatches
  2. Poor cash management of the government has adverse implications for liquidity management and debt management by the RBI
  3. Apart from this, it impacts the asset and liability of the RBI balance sheet and subsequently the RBI income and expenditure and consequently the profit and loss account
  4. The surplus transfer framework needs to recognize the dynamic and sometimes wayward cash management of the government
  • Another issue is the interim transfer of dividend to the government amounting to ₹10,000 crore during 2017-18 without the accounts being audited and before the finalisation of the profit and loss account
  1. One is not sure whether it is from gross income or from accumulated funds in CF and ADF
  2. There is no doubt that the government is the owner of the RBI and has all claims on the surplus funds, but how could the funds be transferred even before the annual accounts are finalised?
  3. The public does not know whether the RBI files quarterly or half-yearly audited accounts
  4. Both the government and the RBI are public institutions handling public policy and such practices are against the principles of transparency and integrity

Measures required

  1. The cash and debt management committee of the government and the RBI, which meets periodically, should look into the WMA requirements during the quarter and manage the cash flow in a non-disruptive manner
  2. If this exercise is followed in its true spirit, there will be no need for interim dividends, which are an attack on the very idea of a balance sheet
  3. The committee on ECF should look into the macroeconomic implication and financial market implication of such withdrawals from the accumulated funds for CF and ADF and also Currency and Gold Revaluation Accounts
  4. Any reduction in the liability side of the RBI by a possible withdrawal needs equivalent adjustment on the assets side. This monetary operation has to be transparent
  5. Any off-market operation has the colour of non-transparency and will raise questions on the integrity of the central bank
  6. It may be mentioned that the reduction in the asset side by selling these assets in the market will have an impact on the liquidity (both rupee and dollar) and thus on monetary management

Way forward

  1. The issue of surplus transfer takes into its sweep not just accounts but the entire gamut of issues related to a transparent monetary and fiscal interface
  2. This should be handled effectively keeping all such factors in mind
Nov, 22, 2018

[op-ed snap] The RBI concedes a vital principle

Note4students

Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: RBI functioning, reserves of RBI, Basel norms, BIS

Mains level: The tussle between RBI & the government and the need for its early resolution for sending correct signals in the economy


Context

Recent RBI board meeting

  1. The government and some of the current nominee directors on the RBI board have contended that all policy decisions must be deliberated by the board
  2.  The outcomes of the meeting suggest that the RBI has conceded this vital principle
  3. This augurs well for the relationship between the government and the RBI management hereafter. Indeed, it may well constitute a paradigm shift in the functioning of the RBI

The significance of the meeting

  1. Every one of the four decisions taken, including three decisions related to regulation, was ascribed to the board
  2. The note also mentions that the constitution of a committee to examine the economic capital framework of the RBI, which was one of the decisions taken, will be jointly determined by the RBI and the Government of India
  3. These announcements constitute a significant departure from what has appeared to be the position of the RBI thus far: policy decisions, especially those relating to regulation, are the exclusive province of RBI management
  4. Any departure from this position amounts to an infringement of the RBI’s autonomy

Relationship between RBI board & the management not defined

  1. The precise relationship between the RBI board and the RBI management is something of a grey area
  2. Various experts have made the point that the RBI Act vests all powers in the board and, concurrently, it vests those very powers in the RBI Governor
  3. Whether the board can issue directions to the RBI Governor in the event of a difference of opinion between the two is not clear

Arguments for the involvement of RBI board

  1. The RBI board has played an advisory role in the past and should continue to do so
  2. Corporate boards too play an advisory role for the most part even though they enjoy full powers in the running of the corporation but they tend to leave most decisions to management
  3. However, corporate boards do step in and play a more active role where management is found wanting
  4. The RBI board must play a largely advisory role
  5. The RBI management may or may not accept the inputs of the board. But the board must have its say
  6. This is elementary corporate governance

Debate regarding RBI reserves

  1. How much capital the RBI needs has been hotly contested in recent years
  2. The government’s position is that the RBI’s reserves are in excess of reserves typically held by central banks elsewhere
  3. Some commentators have described the government’s position as an attempt to ‘raid the reserves’ of the RBI to fund its fiscal deficit
  4. This is a crude mischaracterization of the position
  5. Reducing reserves enables the government to spend — but not by stealing the RBI’s cash

How do reducing reserves favour the government?

  1. The RBI’s reserves fall into two categories: revaluation reserves (which have mostly to do with the change in the rupee value of the RBI’s holdings of gold and foreign currencies) and contingent reserves (which represent plough back of a portion of the surplus earned by the RBI every year, the remaining portion being transferred to government as dividend)
  2. Contingent reserves are intended for risks related to the RBI’s balance sheet
  3. Let us suppose that these should not be touched. Revaluation reserves are an accounting entry
  4. The RBI can reduce some of the revaluation reserves on the liability side and extinguish an equivalent value of government securities on the asset side
  5. The latter step would lower the stock of debt owed by the government
  6. This would provide headroom for the government to raise debt for meeting its future expenditure (including recapitalisation of public sector banks)

Ensuring credit flow

  1. The other outcomes at the RBI board meeting have to do with increasing the flow of bank credit and easing the problems of borrowers, especially small and medium enterprises (SMEs)
  2. Banks are subject to capital adequacy requirements — that is, they have to hold a minimum of capital against every rupee of loans they make
  3. The RBI’s requirement of capital adequacy is one percentage point higher than that of the internationally accepted Basel norms laid down by the Bank for International Settlements
  4. The government would like to align Indian banks’ requirements with the Basel norms as that would reduce the demands for capital made on it by public sector banks (PSBs)
  5. The RBI did not yield on this point at the recent meeting
  6. However, it has agreed to defer an increase in the capital requirement of banks of 0.625% under another head by one year

Easing PCA framework

  1. The RBI has also agreed to consider the government’s suggestion for easing the norms for Prompt Corrective Action (PCA) for banks
  2. The PCA imposes restrictions of various kinds on banks, including restrictions on lending for the weakest banks
  3. The idea is that banks that are very weak should not create problems for themselves by making more loans
  4. They should focus on getting their balance sheet right by reducing costs, selling some of their non-core assets and the like
  5. A PCA regime has significant negative externalities
  6. If many banks face lending restrictions for a prolonged period, it could create serious problems for the economy
  7. Large corporates could get into distress because of their linkages with distressed SMEs
  8. So can the healthier banks that are exposed to these corporates
  9. A relaxation in PCA norms, by translating into higher credit flows, could relieve stress in the broader economy

NBFC capital requirements

  1. The strident demand to enhance flows to non-banking financial companies (NBFCs), which was heard ahead of the meeting, finds no mention in the press note
  2. It appears that the difficulties in rolling over NBFC debt that followed the collapse of Infrastructure Leasing and Financial Services (IL&FS), a leading NBFC, have abated somewhat
  3. Evidently, the RBI was able to make a persuasive case on this point at the meeting

Way forward

  1. As a public institution whose actions have enormous welfare implications, the RBI management cannot rule by fiat
  2. Its actions must flow from a consultative process
  3. It must explain and justify its actions
  4. It must be seen to be accountable
  5. The RBI board could be an important mechanism for ensuring that these conditions are met
Nov, 12, 2018

[op-ed snap] Time for the government to reassess its position

Note4students

Mains Paper 3: Economy | Indian Economy Issues relating to planning

From the UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Unjustified borrowing demand of government from RBI and its implications


Context

Government’s demand for capital from RBI

  1. The government and the Reserve Bank of India (RBI) have not been able to find a middle ground to resolve outstanding issues
  2. One of the contentious issues is that of the central bank’s reserves
  3. The government believes that the RBI is holding excess reserves and a part should be transferred to it
  4. However, the RBI is of the view that it needs reserves to attain its policy objectives

Urgency behind reforms questionable

  1. If the government believes that RBI is holding excess reserves, or is looking at its capital more conservatively, what explains the urgency to “fix” it?
  2. The issue can be amicably settled by constituting an expert committee
  3. Such a committee would be in a better position to look into the matter in detail and recommend the appropriate level of capital for the central bank and, if necessary, also suggest ways to transfer reserves to the government
  4. This will make the process more transparent and financial markets will be in a better position to understand the issue

Risk of fiscal slippage

  1. The fiscal deficit reached 95.3% of the full year target in the first six months of the financial year
  2. Therefore, it is possible that because of lower than expected indirect tax collection, the government might have to cut capital expenditure, which will affect growth
  3. It would want to avoid this in an election year
  4. This is also the main reason why it is aggressively pushing for a relaxation in the prompt corrective action framework and improving liquidity in the non-banking financial space
  5. A large transfer by RBI will, at best, optically improve the fiscal position and give some room to the government to increase spending in an election year
  6. But any reduction in the size of the RBI balance sheet will affect the flow of dividend in the future

RBI’s role as seat belt

  1. Former RBI governor Raghuram Rajan has explained what RBI does with the analogy of a seat belt
  2. The driver—in this case, the government—has the option of not putting on the seatbelt, but in case of an accident, the damage could be severe
  3. The government undoubtedly needs such a safety measure, as the road ahead for the Indian economy is likely to be bumpy
  4. Financial condition in global markets will continue to tighten and growth is likely to soften
  5. With volatility in global crude prices and the uncertainty of domestic elections, policy reliability in one quarter will provide some comfort to financial markets
  6. Continued confrontation, or pushing the central bank too far on regulatory issues, will affect investor confidence in financial markets and the ensuing uncertainty will impact growth

Way forward

  1. A one-time transfer from the RBI will not structurally improve fiscal dynamics and is unlikely to impress investors or rating agencies
  2. On the contrary, it will be seen as an erosion of RBI’s operational autonomy and affect capital flows in the medium to long run
  3. The government and the RBI board would do well to carefully examine the longer-term cost of their decisions
Nov, 12, 2018

[op-ed snap] A nuanced understanding of the NBFC sector

Note4students

Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Issues related to NBFC sector & why its functioning is important for economy


Context

NBFC sector in crisis

  1. Events revolving around the multi-notch downgrade of Infrastructure Leasing and Financial Services (IL&FS) last month have caused a liquidity squeeze for the entire non-banking financial company (NBFC) sector
  2. Risk aversion in debt markets has heightened to an extent that the market has lost its ability to make a distinction across NBFCs, bracketing all of them in the same risk category, irrespective of the underlying nature of their assets and liabilities

Is the whole NBFC sector at risk?

  1. The reality is that the sector is very heterogeneous and constitutes different types of companies with different business models addressing very different underlying borrower segments
  2. The differences in business models and the diverse target segments of NBFCs are stark
  3. This nuance needs to be seen, understood and acknowledged for markets to resume normalcy

Types of NBFCs

  1. NBFCs can broadly be divided into three segments—asset financing, personal loans and business loans
  2. The predominant asset financing NBFCs are commercial vehicle financiers
  3. The remaining NBFCs provide a range of personal and business loans with widely varying business models
  4. Housing finance companies (HFCs), which provide housing loans, can be considered as specialized NBFCs that have a separate regulator
  5. Within these broad classifications, there are further differentiation based on the borrower segment the NBFCs target

Risk aversion for NBFCs

  • Asset-liability mismatch (ALM)
  1. Short-term funding is being used to finance long-term assets
  2. The asset side duration for these businesses is very short ranging from eight to eighteen months
  3. On the liabilities side, the duration either mirrors the asset side, or is longer, and generally ranges from one to two years
  4. Thus, the small- to mid-sized NBFCs run a positive ALM mismatch
  5. This is further aided by low leverage and high capital adequacy
  • Refinancing or rollover of short-term capital market borrowings
  1. This concern is linked to the ALM issue discussed above as smooth rollover of shorter duration liabilities when assets are of longer duration is key for business continuity
  2. Commercial paper funding (of up to 90 days) for NBFCs from mutual funds has increased from ₹50,000 crore in March 2016 to ₹1.2 trillion in September 2018
  3. Recently mutual funds have withdrawn from the market for NBFC paper
  4. This has led to heightened refinancing risk for those who are dependent on such funding
  5. It is estimated that NBFC and HFC debt of about ₹2.5 trillion is due for roll-over in the next six months
  • Asset quality
  1. This primarily pertains to NBFC exposure to the real estate sector—either as builder funding or loan against property (LAP)
  2. Builder funding is non-existent in the loan book of NBFCs
  3. In the case of LAP portfolio of affordable housing financiers or small business loan financiers, the asset quality continues to be above par as the sourcing of these loans has been outside the ultra-competitive urban LAP market
  4. The property underlying the LAP loans is typically self-occupied and not purchased for investment purposes

Measures required

  1. For NBFCs with sound fundamentals that are caught in the current situation, a short-term squeeze on funding can be managed by curtailing growth

Way forward

  1. Over the years, NBFCs have played an important role in providing growth capital to various sectors of the economy
  2. What is required is a concerted effort across stakeholders to prevent a market contagion that can cut off the critical supply of capital to the grassroots of the nation
Nov, 08, 2018

Is RBI really being strict with banks under PCA?

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: PCA, Minimum Capital Requirement

Mains level: NPA problem and solution


News

Criticisms over PCA

  1. Reserve Bank of India is accused of being too stringent in applying the prompt corrective action (PCA) framework for banks.
  2. This has hurt the flow of credit to the economy.

Restrictions on Lending

  1. PCA has been imposed on 11 state-run banks, which did not meet RBI’s specified thresholds on either capital adequacy, asset quality or profitability.
  2. The idea behind this is that banks preserve capital and regain their health, which means that lending takes a hit.

Reality Check

  1. Analysis shows that far from being too stringent, the central bank has shown forbearance with some of the banks that are not already under PCA.
  2. At least four more banks need to be censured for not meeting the central bank’s specified risk thresholds, if RBI follows a strict rule-based approach.
  3. These are Andhra Bank, Canara Bank, Punjab National Bank (PNB) and Union Bank of India.
  4. Each of these has breached the maximum permissible levels of 6% for net non-performing advances as a percentage of total advances.
  5. RBI rules state that PCA can be imposed if any one of the risk thresholds for capital, asset quality, profitability or leverage is breached.
  6. However these banks met the minimum capital requirements needed to avoid PCA.

Norms are Conservative

  1. While recognition of NPAs has improved in the Indian banking system, provisioning norms are still conservative.
  2. In jurisdictions where only capital ratios are considered in the PCA framework, NPA provisioning norms are more stringent.
  3. Perhaps RBI’s forbearance has to do with an expectation that the government will recapitalize these banks, so that provisioning for their NPAs do not drag their capital down to low levels.

Back2Basics

Capital adequacy ratio(CAR)

  1. Capital Adequacy Ratio (CAR) is also known as Capital to Risk (Weighted) Assets Ratio (CRAR), is the ratio of a bank’s capital to its risk
  2. National regulators track a bank’s CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements.
  3. It is a measure of a bank’s capital
  4. It is expressed as a percentage of a bank’s risk weighted credit exposures.
  5. This ratio is used to protect depositors and promote stability and efficiency of financial systems around the world
  6. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors
Oct, 26, 2018

[op-ed snap] Is it time to introduce wholesale banks in India?

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: NBFCs, Wholesale banking, Financial Stability Report

Mains level: The problem of funding faced by NBFCs and the need of introducing wholesale banking concept in India


Context

NBFCs facing problems

  1. In the last few weeks, Indian non-banking financial companies (NBFCs), especially housing finance companies, have witnessed a fall in valuations and rising bond yields
  2. Liquidity for NBFCs has also significantly contracted across the board
  3. Yields on AAA-rated commercial papers (CPs) of NBFCs have risen from less than 7.5% in the beginning of September to almost 8.3% now, an increase of 80 basis points

Root of problem

  1. The liability profile of large, non-deposit taking NBFCs significantly comprises wholesale funding, with debentures accounting for nearly half of it
  2. This is not a problem in itself, but for certain types of NBFCs, such as housing finance and infrastructure financing companies, asset-liability mismatches can be severe, especially given the near-absence of markets for long-tenure paper, and payments on short-term borrowings come up sooner than repayments from loans originated
  3. This, coupled with the illiquidity in corporate bond markets, makes NBFCs particularly vulnerable to market reactions, unlike banks, which has access to both retail deposits and the liquidity facility of the Reserve Bank of India (RBI)

Better performance on NBFCs as compared to banks

  1. The banking sector is struggling to grow their lending book under the weight of persistent non-performing assets (NPAs), and NBFCs are beginning to meet the consequent unmet demand for credit across a variety of sectors and ensuring continuing credit flows to the real economy
  2. NBFCs have been maintaining low net NPA ratios of 3.5% unlike their banking sector counterparts, where net NPAs continue to remain stubbornly high at 6.1% (RBI Financial Stability Report, June 2018)
  3. NBFCs have been found to be relatively more resilient to stress applied for credit risk and  even under severe stress conditions, continued to remain stable, buoyed by high economic capital levels hovering above 20% against a regulatory requirement of 15%

Funding problem of NBFCs

  1. NBFCs have been able to complement the credit intermediation by banks by serving regions, sectors and customer segments that banks have either been unable or unwilling to serve profitably
  2. But, these entities are particularly vulnerable to wholesale funding constraints in the form of high and volatile borrowing costs even when there is no concomitant deterioration in asset quality

Demand for providing LOLR facilities to NBFCs

  1. There have been some calls for providing the RBI’s lender of last resort (LOLR) facilities to NBFCs
  2. But merely providing LOLR facilities to NBFCs, such as the liquidity adjustment facility and the marginal standing facility, would lead to behaviour consistent with moral hazard
  3. This is because, without demand liabilities, a LOLR disincentivises efficient liquidity management
  4. This also creates inconsistency in regulatory treatment between banks and NBFCs, which unlike banks, do not have restrictions like statutory liquidity ratio

Solution: Wholesale Banks

  1. It is worth bringing back to the table and considering wholesale bank licensing for India
  2. This idea was first floated by the RBI Committee for Comprehensive Financial Services for Small Businesses and Low Income Households in 2014
  3. The committee envisaged these licensees to be like universal banks on their asset side with freedoms to originate a variety of assets, but with important differences for their liabilities side
  4. Without permissions to access retail deposits, liabilities would comprise wholesale demand deposits (of minimum ₹5 crore, which is large enough to keep retail depositors at bay, but small enough to ensure a diversified depositor base) and other wholesale funding instruments
  5. This obviates the need to apply micro-prudential tools, which are needed when public retail deposits are accessed

Types of wholesale banks

  1. The committee identified two categories within the wholesale banks, namely wholesale consumer banks and wholesale investment banks, which differed from each other in the nature of assets originated
  2. While the former would originate retail loans, the latter would originate infrastructure and/or corporate loans
  3. The limited construct of the wholesale investment bank was later taken up by the RBI and put forward in the form of the wholesale lending and term financing (WLTF) banks, in its discussion paper in April 2017

Way forward

  1. The regulator would do well to revive the wholesale bank idea and provide a pathway for some of the larger and better-run NBFCs to transform into wholesale banks with a cleaner design of wholesale demand liabilities supported with LOLR and business strategy driven choice of lending book
  2. Such a transition would ensure that these important institutions now have a more permanent and stable way of dealing with their funding problems
Sep, 26, 2018

[op-ed snap] PSSA 2018: A step towards separating banking, payments

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Payment and Settlement Systems Act (PSSA), 2007

Mains level: Draft PSSA 2018 and how it will affect banking as well as the new wave of payments banks


Context

Amendments to PSSA 

  1. The inter-ministerial committee set up to finalize the amendments to the Payment and Settlement Systems Act (PSSA), 2007, has submitted its report
  2. When PSSA was passed by Parliament in December 2007, it initiated the first phase of recognizing payments from banking or classic banking

Difference between classic banking and payments

  1. Classic banking is “accepting, for the purpose of lending and investment, of deposit of money from individuals or legal entities”
  2. Bank’s earnings would directly depend on how they are able to reduce cost of deposit through current account savings account and are able to lend at higher rates with a decision on security/risk taken for such lending
  3. Apart from the interest income, banks would impose different kinds of fees for providing loan products, as an additional revenue stream
  4. Payments, on the other hand, are the transfer of monetary value from a person/legal entity to another person/legal entity for either consideration towards goods and services rendered or just transfer of money

Recommendation of PSSA 2018 draft amendment

  1. It is a step towards separating banking and payments
  2. It recommends setting up a separate seven-member Payments Regulatory Board (PRB)
  3. It will be chaired by a person appointed by the government in consultation with Reserve Bank of India (RBI)
  4. There will be one deputy chairman nominated by the central board of RBI, two members appointed by the central board of RBI, one officer nominated by the government and two whole-time members
  5. The proposed Bill recognizes RBI’s role in the context of monetary policy in making regulations for existing or new payments systems/enhancements/amendments
  6. It also provides for test systems or regulatory sandbox for a period of six months for a legal entity to apply and launch the test system/innovation
Sep, 19, 2018

[op-ed snap] Banking on mergers

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: The strategy behind bank consolidation and its pros and cons


Context

Bank consolidation

  1. The Union government has proposed the merger of three public sector banks — Bank of Baroda, Dena Bank and Vijaya Bank
  2. This merger will create an amalgamated entity that will become the country’s third-largest lender
  3. The merger is part of the government’s efforts to consolidate the banking industry with an eye on overcoming the bad loan crisis
  4. The current merger comes after the government let State Bank of India’s associate banks merge with their parent last year and the Life Insurance Corporation of India take over the troubled IDBI Bank this year

Impact of forced mergers

  1. Forced mergers such as the current one make little business sense for the stronger banks as the weaker banks tend to be a drag on their operations
  2. They are also unlikely to solve the bad loan crisis that has gripped the banking system as a whole
  3. From a corporate governance perspective, however, the merger sends out rather poor signals
  4. Here a dominant shareholder in the form of the government is dictating critical moves that impact the minority shareholders, who are left with no say in the matter
  5. The move to merge banks is understandable, but shareholders should have been consulted

Managing mergers

  1. There are too many public sector banks in India and thus consolidation is a good idea in principle
  2. It needs to be ensured that the merger fallout is managed prudently
  3. Identifying synergies and exploiting scale efficiencies will be crucial

Way Forward

  1. Asking healthy banks to take over weak banks appears to be the strategy to handle the bad loans crisis
  2. It is important to ensure that such mergers do not end up creating an entity that is weaker than the original pre-merger strong bank
Sep, 18, 2018

[pib] Government initiated consolidation – amalgamated entity to be India’s third largest bank

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: MSME Udyamimitra

Mains level: The newscard discusses potential advantages of merger of the banks.


News

Context

  1. The Alternative Mechanism comprising of its Chairperson, the Union Finance Minister decided that Bank of Baroda, Vijaya Bank and Dena Bank may consider their consolidation.
  2. It will be the First-ever three-way consolidation of banks in India, with a combined business of Rs. 14.82 lakh crore, making it India’s Third Largest Bank.

Impact of the Merger

  1. It will help create a strong globally competitive bank with economies of scale and enable realization of wide-ranging synergies.
  2. Leveraging of networks, low-cost deposits and subsidiaries of the three banks has the potential for substantial rise in customer base, market reach, operational efficiency, wider products and services, and improved access for customers.
  3. Some of the strengths of the envisaged amalgamated entity are—
  • Provision Coverage Ratio (PCR) at 67.5% is well above Public Sector Banks (PSBs) average (63.7%), and steadily increasing
  • Net NPA ratio at 5.71% significantly better than PSB average (12.13%), and declining further
  • Gross NPAs for the combined entity have started declining (decline of Rs. 1,048 crore in Q1)
  • Cost to income ratio of the combined entity at 48.94% better than the PSB average of 53.92%
  • Capital Adequacy Ratio (CRAR) at 12.25% is significantly above the regulatory norm of 10.875%, and stronger amalgamated bank will be better positioned to tap capital markets

Combined range of Services

  1. Dena Bank’s strength in MSME will further augment the strength of the other two to position the amalgamated bank for being an MSME Udyamimitra
  2. Larger distribution network will reduce operating and distribution costs with benefits for the amalgamated bank, its customers and their subsidiaries
  3. Global network strength of Bank of Baroda will be leveraged to enable customers of Dena Bank and Vijaya Bank to have global access.
Sep, 14, 2018

[op-ed snap] How Basel III plugged regulatory loopholes

Note4students

Mains Paper 3: Environment | Conservation, environmental pollution and degradation, environmental impact assessment

From UPSC perspective, the following things are important:

Prelims level: Basel II, Basel III

Mains level: Need for financial regulation via various mechanisms


Context

Regulatory mechanism for financial institutions

  1. There is a vast gulf between academic discourse on the financial regulation and actual practice
  2. The regulatory architecture for depository institutions proved ineffective in the global financial crisis
  3. The crisis originated in non-deposit taking financial institutions, it spread to the regulated deposit accepting entities with remarkable agility

Basel II proved ineffective

  1. Basel-II, the international accord for banking regulation that was formalized just before the onset of the crisis, was an important improvement over its earlier version in many ways
  2. But, it gave excessive discretion to financial institutions for computing crucial parameters like risk weights
  3. These parameters are important inputs in the computation of risk-weighted assets (RWAs), which in turn determined the level of required capital buffers
  4. In this, banks had a skewed incentive to underestimate their risk weights by using complex models
  5. Additionally, divergent methodologies used to compute risk weights meant that there was enormous variability in reported numbers, making any meaningful comparison across banks virtually impossible
  6. The risk weight for the mortgage, the very instrument that precipitated the crisis, was reduced

Improvements in Basel III

  • It has mandated a higher capital adequacy ratio to absorb potential losses originating in both trading and banking books, including additional capital conservation buffers
  1.  The idea is that once this buffer is depleted, regulators should be worried
  2. The financial institution must build its reserves before it is allowed to distribute its profits by way of dividends, share buybacks and employee bonuses
  • It has taken steps to reduce the variability of the risk-weighted assets by constraining the discretion of banks
  1. For many asset classes, use of more sophisticated and complex models (so-called “advanced approach”) is disallowed
  2. Moreover, many crucial parameters used to calculate risk weights
  • The realization that financial institutions can build leverage while apparently complying with capital adequacy norms has led to the adoption of new risk metrics such as leverage ratio which is insensitive to precise risk weights
  1. In many cases, banks built up excessive leverage while apparently maintaining strong risk-based capital ratios
  2. At the height of the crisis, financial markets forced the banking sector to reduce its leverage in a manner that amplified downward pressures on asset prices
  3. This deleveraging process exacerbated the feedback loop between losses, falling bank capital and shrinking credit availability
  • The need for an integrated and enterprise-level risk management approach is emphasized
  1. Besides the capital requirement and new liquidity/ leverage ratios, Basel-III envisages forward-looking supervisory control that includes periodic stress testing
  2. It is hoped that these measures, together with mandatory disclosure requirements and associated market discipline, will reduce the frequency and severity of financial crises

Way Forward

  1. It would be too early to claim that the final word on banking regulation has been written
  2. Still, Basel-III has plugged many loopholes and reduced the likelihood of such cataclysmic events taking place in future
Sep, 05, 2018

Reserve Bank tightens Ombudsman Scheme

Note4students

Mains Paper 2: Governance | Important aspects of governance, transparency and accountability, e-governance- applications, models, successes, limitations, and potential

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: Need for Banking Ombudsman 


News

Strengthening Grievance Redressal Mechanism

  1. The RBI has tightened the banking ombudsman scheme with the objective to strengthen the grievance redressal mechanism for customers.
  2. It has asked all commercial banks having 10 or more banking outlets to have an independent internal ombudsman (IO) to review customer complaints that are either partly or fully rejected by the banks.
  3. The IO shall examine customer complaints which are in the nature of deficiency in service on the part of the bank, that are partly or wholly rejected by the bank.
  4. The instructions are not applicable for Regional Rural Banks sponsored by commercial banks.
  5. As banks should internally escalate complaints that are not fully redressed to their respective IOs before conveying the final decision to the complainant, customers need not approach the IO directly.

Fixed term

  1. According to bankers, the Internal Ombudsman Scheme of 2018 mandates banks to grant a fixed term of three to five years, which cannot be renewed, to the IO.
  2. The IO can be removed only with prior approval from RBI.
  3. The remuneration would have to be decided by the customer sub-committee of the board and not by any individual.
  4. RBI has said that the Ombudsman Scheme of 2018 covers appointment/tenure, roles and responsibilities, procedural guidelines and oversight mechanism for the IO.
  5. The implementation of IO Scheme 2018 will be monitored by the bank’s internal audit mechanism apart from regulatory oversight by RBI.

Back2Basics

Banking Ombudsman Scheme

  1. Banking Ombudsman Scheme is a mechanism created by the RBI to address the complaints raised by bank customers.
  2. It is run by the RBI directly to ensure customer protection in the banking industry.
  3. The scheme was introduced under Section 35 A of the Banking Regulation Act, 1949 by RBI with effect from 1995. The present Ombudsman scheme was introduced in 2006.
  4. The Banking Ombudsman is a senior official appointed by the Reserve Bank of India.
  5. He has the responsibility to redress customer complaints against deficiency in certain banking services.
  6. All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks are covered under the Scheme.
  7. The Banking Ombudsman can receive and consider any complaint relating to a number of deficiencies related to banking operations including internet banking.
Sep, 03, 2018

Why is a Public Credit Registry important?

Note4students

Mains Paper 3: Economy | Inclusive growth & issues arising from it

From UPSC perspective, the following things are important:

Prelims level: PCR, Deosthalee Committee Report

Mains level: Read the attached story


News

What is PCR?

  1. A public credit registry is an information repository that collects all loan information of individuals and corporate borrowers.
  2. It helps banks distinguish between a bad and a good borrower and accordingly offer attractive interest rates to good borrowers and higher interest rates to bad borrowers.

How will it impact?

  1. PCR will address issues such as information asymmetry, improve access to credit and strengthen the credit culture among consumers.
  2. It can also address the bad loan problem staring at banks, as corporate debtors will not be able to borrow across banks without disclosing existing debt.
  3. A PCR may also help raise India’s rank in the global ease of doing business index.
  4. Setting up the PCR will help improve India’s rankings in the World Bank’s ease of doing business index.

Panel’s proposals

  1. The move is based on the recommendations of a committee, headed by Y.M. Deosthalee.
  2. The committee has suggested the registry should capture all loan information and borrowers be able to access their own history.
  3. Data is to be made available to stakeholders such as banks, on a need-to-know basis. Data privacy will be protected.

Why PCR is necessary?

  1. Credit information is now available across multiple systems in bits and pieces and not in one window.
  2. Data on borrowings from banks, non-banking financial companies, corporate bonds or debentures from the market, external commercial borrowings (ECBs), foreign currency convertible bonds (FCCBs), masala bonds, and inter-corporate borrowings are not available in one data repository.
  3. PCR will help capture all relevant information about a borrower, across different borrowing products in one place.
  4. It can flag early warnings on asset quality by tracking performance on other credits.

PCR in other countries

  1. PCR in other countries now include other transactional data such as payments to utilities like power and telecom for retail consumers and trade credit data for businesses.
  2. Regularity in making payments to utilities and trade creditors provides an indication of the credit quality of such customers.

Innovation in lending

  1. Access to credit information, including debt details and repayment history would drive innovation in lending.
  2. For example, currently most banks focus on large companies for loans and consequently the micro, small and medium enterprises are left with limited options for borrowing.
  3. With satisfactory payment history and validated debt details made available, it will increase the credit availability to micro, small and medium enterprises along with deepening of the financial markets.
  4. This will support the policy of financial inclusion.
Aug, 30, 2018

[pib] Cabinet approves Revised Cost Estimate for setting up of India Post Payments Bank

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Particulars of the IPPB, payments banks, etc.

Mains level: Extending banking services through all possible mechanisms is the need of hour and IPPB serves best example for this.


News

Context

The Union Cabinet has given its approval for revision of the project outlay for setting up of India Post Payments Bank (IPPB) from Rs. 800 crore to Rs. 1,435 crore.

India Post Payment Bank Project

  1. The IPPB is aimed to provide modes of payments/financial services through its technology enabled solutions which will be distributed by the post employees/last mile agents transforming them from mail deliverer to harbinger of financial services.
  2. The IPPB shall pay incentive/commission to the last mile agents ( Postal Staff and Gramin Dak Sewaks) directly in their accounts for providing IPPB services so as to motivate them to promote IPP8 digital services to the customers.
  3. A part of commission to be paid by IPPB to Department of Posts will be used for increasing the wherewithal of Post office

Details of the Project

  1. IPPB services shall be available at 650 IPPB branches and 3250 Access Points from 1st September 2018 and in all 1.55 lakh post offices (Access Points) by December 2018.
  2. The project will generate new employment opportunity for about 3500 skilled banking professionals and other entities engaged in propagating financial literacy across the country.
  3. The objective of the project is to build the most accessible, affordable and trusted bank for the common man; spearhead the financial inclusion agenda by removing the barriers for the unbanked and reduce the opportunity cost for the under banked populace through assisted doorstep banking.
  4. The project will supplement Government’s vision of “less cash” economy and at the same time promote both economic growth and financial inclusion.
  5. The robust IT architecture of IPPB has been built taking into consideration bank grade performance, fraud and risk mitigation standards and in line with the best practices from payments & banking domain.
Aug, 20, 2018

Banks set to come out of PCA framework this year

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: PCA

Mains level: NPA problem and solution


News

New PCA framework under process

  1. RBI has placed eleven public sector banks – Dena Bank, Central Bank of India, Bank of Maharashtra, UCO Bank, IDBI Bank, Oriental Bank of Commerce, Indian Overseas Bank, Corporation Bank, Bank of India, Allahabad Bank and United Bank of India under the PCA framework.
  2. Of these, two banks – Dena Bank and Allahabad Bank – are facing restriction on expansion of business.
  3. Various measures taken by the government including implementation of the Insolvency and Bankruptcy Code (IBC) has yielded good results in terms of reining bad loans and increasing recovery.
  4. The framework is not intended to constrain the performance of normal operations of the banks for the general public.

Progress over NPAs

  1. Banks have made recovery of Rs 36,551 crore during the first quarter registering a 49 per cent growth over the last financial year.
  2. The NPAs are also decreasing and credit growth is simultaneously taking place.
  3. Hence the resolve of government is extremely clear that every stakeholder has to be responsible.
  4. Capital infusion has revitalized some PSBs whereas some don’t need it.

Back2Basics

Prompt Corrective Action (PCA)

  1. RBI has issued a policy action guideline (first in May 2014 and revised effective from April 1, 2017) in the form of PCA framework if a commercial bank’s financial condition worsens below a mark.
  2. The PCA framework specifies the trigger points or the level in which the RBI will intervene with corrective action. This trigger points are expressed in terms of parameters for the banks.
  3. The parameters that invite corrective action from the central bank are:
  • Capital to Risk weighted Asset Ratio (CRAR)
  • Net Non-Performing Assets (NPA) and
  • Return on Assets (RoA)
  • Leverage ratio
  1. When these parameters reach the set trigger points for a bank (like CRAR of 9%, 6%, 3% and Net NPAs between 10 to 15% ) the RBI will initiate certain structured and discretionary actions for the bank.
  2. As per the revised framework by the RBI capital, asset quality and profitability continue to be the key areas for monitoring. Along with this, leverage of banks also will be monitored.
  3. The some of the structured and discretionary actions that could be taken by the Reserve Bank are: recapitalization, restrictions on borrowing from inter-bank market to steps to merge/amalgamate/liquidate the bank or impose moratorium on the bank if its CRAR does not improve beyond etc.).
  4. The PCA framework is applicable only to commercial banks and not extended to co-operative banks, non-banking financial companies (NBFCs) and FMIs.
Jul, 19, 2018

Govt decides to withdraw contentious FRDI bill

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Bail-in, bail-out

Mains level: Focus on issues related to the ‘Bail in’ clause of the Bill


News

FRDI Bill

  1. The government has decided to withdraw the contentious Financial Resolution and Deposit Insurance Bill 2017, or FRDI Bill to avoid controversial legislation ahead of the 2019 general election.
  2. It was tabled in the Lok Sabha in August, following which it was referred to the joint parliamentary committee. The panel is due to submit its report on the last day of the ongoing monsoon session.
  3. The bill aims to limit the fallout of the failure of institutions such as banks, insurance companies, non-banking financial companies, pension funds and stock exchanges.
  4. However, some of its provisions have been termed anti-people and anti-poor by the opposition parties who have pointed out that people’s money will be used to bail out banks that make bad lending decisions through a corresponding reduction in the claims of depositors.

What is ‘Bail in’ clause?

  1. A bail-in is rescuing a financial institution on the brink of failure by making its creditors and depositors take a loss on their holdings.
  2. A bail-in is the opposite of a bail-out, which involves the rescue of a financial institution by external parties, typically governments using taxpayer’s money.

Ambiguity over ‘bail-in’

  1. The bill has been criticized for some of its controversial provisions, including a “bail-in” clause, which suggests that depositor money could be used by failing financial institutions to stay afloat.
  2. The lack of clarity over protecting existing levels of deposit insurance for smaller deposits also led to a lot of criticism.
  3. At present, deposit insurance is available for all deposits of up to ₹1 lakh but there was no clarity on whether it will be continued in the bill.
  4. The decision to withdraw the bill comes as a surprise because the government has been vociferously defending the provisions of the bill by pointing out that the bail-in clause will not adversely impact depositors.
  5. The government had maintained that the implicit sovereign guarantee for state-run banks remains unaffected.
Jun, 26, 2018

[op-ed snap] Does India need a financial policy committee?

 Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: London Inter-bank Offered Rate (Libor), Financial Policy Committee, Banking Regulation Act (1949), Financial stability and development council (FSDC),

Mains level: Risks associated with the banking sector in India and need for specialized committees to separate banking and finance roles


Context

Diversified banking problems

  1. Varied kinds of banking and finance problems seem to be spreading around the world
  2. There has been London Inter-bank Offered Rate (Libor) fraud, Bank of Italy officials are grappling with non-performing assets problems in their economy
  3. India’s central bank governor has highlighted that the Reserve Bank of India (RBI) needs more powers to regulate ailing public sector banks

The idea of Financial Policy Committee (FPC)

  1. What is the FPC? It’s mandate was to look at the financial sector in a holistic manner and assess macroprudential risks
  2. It was instituted in the UK in the wake of 2008 financial crisis
  3. FPC is a 12-member committee with diverse representation from the Bank of England, Financial Conduct Authority, private sector and academia
  4. The committee meets four times a year and releases its flagship financial stability report twice in those meetings
  5. Just like India’s monetary policy committee sets interest rates, the FPC sets the countercyclical capital buffer rate, which basically tweaks the capital requirements for banks
  6. If the FPC sees that risks could be high in the future, it asks banks to increase its capital ratio
  7. It also analyses debt of households and firms and takes suitable measures

Institutional measures in India

  1. India already has some institutional arrangements that require reporting on the financial sector
  2. The Banking Regulation Act (1949) mandates that the RBI release an annual report, “Trend And Progress Of Banking In India”
  3. The RBI also started the “Report On Currency And Finance”, which was not mandatory but nevertheless gave us an overview of developments in the financial sector
  4. In its monetary policy decisions, the RBI also releases a document on regulation developments, which contains proposed changes in banking regulations
  5. The government established a financial stability and development council (FSDC) to bring greater coordination among financial market regulators
  6. In 2010, the RBI also started releasing its biannual “Financial Stability Report” (FSR), which has become the flagship report

Will these measures suffice?

  1. Given how financial markets and activities have become increasingly interconnected, they might not
  2. It is only a matter of time before problems in Indian financial markets start to resemble those in the West
  3. India is poised to have its own sub-prime moment in the near future

What can be done?

  1. The alternative is to appoint a new FPC and reallocate the finance-related decisions, responsibilities and publications to it
  2. The MPC can focus on macroeconomics and interest rates
  3. FPC and MPC would have common members like the RBI governor and deputy governors but FPC would have more specialists in the domain of finance

Way Forward

  1. Finance has become heavily specialized and interconnected in recent years and warrants attention from specialists
  2. We may not be able to prevent a future financial crisis but can at least try mitigating its damaging effects
  3. FPC could be one of the ways to achieve this
May, 04, 2018

[op-ed snap] Time to do away with priority lending norms

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Priority sector landing(PSL)

Mains level: The newscard comprehensively discusses some of the main issues related to the priority sector lending(PSL) norms of the RBI.


News

Context

  1. The RBI has recently tightened priority sector lending (PSL) norms for foreign banks in India

New norms

  1. Foreign banks with more than 20 branches in India will now be required to extend a portion of their loans to small and marginal farmers as well as micro enterprises from fiscal year 2018-19
    (as per the respective sub-sectoral targets)
  2. Those with less than 20 branches will also need to fulfil the overall PSL norms of 40% of adjusted net bank credit (ANBC) in a phased manner by 2020

Reaction from foreign banks

  1. Foreign banks have cited their lack of knowledge, and fear of stressed assets, as reasons for their reluctance to lend to these sectors

The International Monetary Fund (IMF) on priority sector loan targets

  1. The impact of priority sector loan targets on banks’ credit risk management strategies in India has been commented upon by the IMF
  2. In a recent report, the IMF has advised the RBI to review its PSL policy to allow for greater flexibility in meeting targets
  3. It also suggests a gradual reduction in PSL as a means to move funds into “more productive activities”,
  4. and greater participation of the private sector in capitalizing public sector banks, together with full capitalization

“Trend And Progress Of Banking In India” reports: RBI

  1. According to the report, public sector banks have been continuously underperforming on the total priority sector target of 40% since 2012,
  2. while private sector banks have continuously lent more than the mandatory target of 40%, except for two years
  3. Foreign banks also outperformed their mandated target of 32% throughout the decade till 2015-16, as well as the higher targets required later
  4. However, all banks have defaulted on their sub-sectoral targets, especially that of 18% for agriculture, in most years

Is priority sector lending responsible for the NPA’s?

  1. Public sector banks had a large proportion of NPAs among their priority sector loans (50%) in 2012, a figure that had come down to 24.1% in 2017
  2. Non-priority sector loans contributed to 82% of NPAs in the case of private sector banks in 2017, against the 18% of NPAs in the case of priority sector loans
  3. Foreign banks had a comparable figure for NPAs within their non-priority loans
  4. Thus, priority sector lending may not be responsible for compromising banks’ credit risk minimization strategies, or risk accumulation
  5. Yet, most bankers seem reluctant to lend to the priority sectors

Main issue with the priority sector lendings

  1. The problem with priority sector loans is the lack of understanding of the sub-sectoral target groups, especially agriculture and the small and medium sector
  2. A foreign bank, desirous of opening a bank branch in some remote area to service agricultural borrowers, neither understands its borrower, nor is clearly aware of the legal provisions to recover stressed assets
    Risk in agricultural sector
  3. Further, given the vagaries of the monsoon that agriculture is susceptible to and the undiversified risk portfolios in such rural areas, the credit risks for such banks from such PSL would be extremely high
    Risk in MSME sector
  4. The same would be the case for PSL to the micro, small and medium enterprise (MSME) sector
  5. The sector, with its unorganized operations and lack of proper accounting records and financial statements, poses higher costs and greater risks in credit disbursement

What should be done?

  1. Banks should be allowed to choose the category they wish to lend to
  2. Foreign banks may then choose to lend in the form of export credit (which was a sub-sectoral target for foreign banks prior to 2012, and was later removed), rather than to agriculture
  3. Similarly, private sector banks may choose to lend housing credit in urban areas, rather than being forced to lend agricultural finance

Back2basics

Priority Sector Lending

  1. Priority Sector Lending is an important role given by the Reserve Bank of India (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections
  2. This is essentially meant for an all round development of the economy as opposed to focusing only on the financial sector
Apr, 24, 2018

[op-ed snap] An alternative to privatization of public sector banks

Note4studens

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Read the attached story

Mains level: There is an important debate going on among banking experts and the government on ‘Privatization of Public Sector Banks’. And the government is seriously considering this option, due to the current issues created in the banking industry mainly due to the lending irregularities. The newscard suggests a solution to solve the lending issue of the PSBs.


News

Context

  1. The troubles of the banking sector, and public sector banks (PSBs) in particular, are well known
  2. Reform proposals have focused largely on ownership and have issued strident calls for privatization
  3. Even if there was political support for the idea of privatization of banks, there are a few important challenges

People have confidence in India’s Public Sector Banking Services

  1.  The total current account and savings account (CASA) base of PSBs in India was Rs30.2 trillion (including State Bank of India, or SBI) and Rs 18.9 trillion (excluding SBI) in 2017
  2. Given the low deposit rates offered by banks in India relative to the risk-free rate, these deposits represent tremendous value in terms of a profitability cushion
  3. By and large, this reflects the confidence of customers in the implicit government support to these entities
  4. The core strength of PSBs is the deposit franchise
  5. Their branch network in far-flung areas means that they are the preferred choice of the mass-market customer, rural customers, and, often, retired individuals

What is the main issue?

  1. The real issue happens on the lending side
  2. This occurs due to a few reasons
    (1) mandated lending through various schemes, in addition to priority sector lending targets
    (2) the poor risk management competencies of banks, particularly vis-à-vis managing the concentration risks of specific sectors and business groups
    (3) lack of specialized underwriting skills, given that customers tend to range from large firms and farmers to small businesses and mortgages
  3. The math here is straightforward—the risk-adjusted return from the lending activity of the bank erodes all the value created by the deposit-taking activity

What should be done on the lending side?: The suggested model

  1. On the lending side, rather than PSBs directly originating credits through branches and hoping for the best,
  2. they would assemble a portfolio of credits that are originated by specialist institutions (non-bank finance companies and small finance banks)
  3. Assembling this portfolio of loans can be done through a variety of ways,
    such as direct purchases of their loans, and by investing in securitized assets representing underlying loans originated by these specialist institutions
  4. This also implies a clearer role for these specialist institutions and their contributions to extending credit in an efficient manner
    This is not a new idea
  5. Glimpses of this model can be seen in the priority sector lending certificates market and the micro-loan securitization market where specialists trade assets with non-specialists in a markets framework
    The idea will increase the ratings of the book asset of the PSBs
  6. The implementation of this idea would ensure a more efficient approach to capital, while, importantly, preserving the deposit franchise of PSBs
  7. This is because under this model, the PSB asset book would be highly rated owing to the high levels of diversification and granularity in underlying loans

The right way to implement this model

  1. Portfolio-level guidelines would need to be specified,
  2. The model would be subjected to high-quality risk reporting requirements that would be made possible by the availability of accurate and complete data
    (along business lines, legal entity type, asset type, industry, region and other groupings)
    that permit identifying and reporting risk exposures, concentrations and emerging risks
Apr, 22, 2018

[pib] Fugitive Economic Offenders Ordinance, 2018

Note4Students

From UPSC perspective, the following things are important:

Prelims level: Fugitive Economic Offenders Ordinance, 2018

Mains level: Measures taken by the government to reduce instances of frauds


News:

  • The President of India has given his assent to the Union Cabinet’s decision to promulgate the Fugitive Economic Offenders Ordinance, 2018
  • Fugitive Economic Offenders Ordinance, 2018 (“the Ordinance”) lays down the measures to empower Indian authorities to attach and confiscate proceeds of crime associated with economic offenders and the properties of the economic offenders.
  • This will deter economic offenders from evading the process of Indian law by remaining outside the jurisdiction of Indian courts.    

The Fugitive Economic Offenders Ordinance, 2018, inter alia provides for–

  • Making an application before the Special Court for a declaration that an individual is a fugitive economic offender;
  • Attachment of the property of a fugitive economic offender and proceeds of crime;
  • Issue of a notice by the Special Court to the individual alleged to be a fugitive economic offender;
  • Confiscation of the property of an individual declared as a fugitive economic offender or even the proceeds of crime;
  • Disentitlement of the fugitive economic offender from defending any civil claim; and
  • Appointment of an Administrator to manage and dispose of the confiscated property under the Act.

Major impact:

  • It is expected that a special forum to be created for expeditious confiscation of the proceeds of crime, in India or abroad, would coerce the fugitive to return to India to submit to the jurisdiction of Courts in India to face the law in respect of scheduled offences.    
  • Since the proposed law would utilise the existing infrastructure of the Special Courts constituted under the Prevention of Money-laundering Act, 2002 and the threshold of scheduled offence is high at Rs. 100 crores or more, no additional expenditure is expected on the enactment of the Bill.   
Apr, 11, 2018

[op-ed snap] The risks from the unending banking mess

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Book value, M. Narasimham committee, second Narasimham committee and Raghuram Rajan committee, etc.

Mains level: Important points disucussed in the newscard, related to the present issues of the Indian Banking System.


News

Little trust of investors on Indian Banks

  1. Nineteen Indian banks are being traded at large discounts to their book value in the stock market
  2. This essentially means that investors have little trust in the published accounts of these lenders
  3. The Reserve Bank of India (RBI) does not seem to have much confidence in many of the weakest banks either
  4. Eleven of them have in effect been told to stop giving fresh loans

Depositors still have faith in Indian banks

  1. The only stakeholders who have maintained their confidence in the Indian banking system till now have been depositors
  2. They have thankfully held their nerve despite the daily flow of negative information about the banks they put their life savings in
  3. One reason is the public view that there is an implicit sovereign guarantee to back banks

Earlier attempts to tackle the issues related to Banking System

  1. here have been three previous attempts—the report of the first committee headed by M. Narasimham in 1991, the report of the second Narasimham committee in 1998 and the report of the committee headed by Raghuram Rajan in 2009
  2. It is now time for a fourth attempt

There are some important issues that need to be addressed

FIRST: Issue of ownership

  1. The ongoing problems at ICICI Bank and Axis Bank show that private sector banks are not immune from the problems of bad lending, but have generally done better than public sector banks when it comes to asset quality
  2. The case for a banking system with more private sector participation continues to be a strong one

SECOND: There needs to be more clarity on the structure of Indian banking

  1. It is time to look at a more diverse banking structure,
  2. that have access to  project analysis capabilities to assess large infrastructure projects of the type that are now creating havoc in bank balance sheets

THIRD: Role for bond markets

  1. Policymakers need to decide what role bond markets will play in the Indian financial system
  2. It is worth asking whether the bond markets would have been as ready to accommodate over-leveraged companies, compared to the enthusiasm shown by bankers to either evergreen or restructure loans

The way foreword

  1. The harsh fact is that no country with a broken banking system can hope to grow rapidly, in effect compromising the battle against poverty
  2. That is the real cost of inefficient banking
  3. This is the time to look ahead to a new policy framework

Back2basics

Book Value

  1. Book value of an asset is the value at which the asset is carried on a balance sheet and calculated by taking the cost of an asset minus the accumulated depreciation
  2. Book value is also the net asset value of a company, calculated as total assets minus intangible assets (patents, goodwill) and liabilities
  3. For the initial outlay of an investment, book value may be net or gross of expenses such as trading costs, sales taxes, service charges and so on
Apr, 03, 2018

RBI lets banks spread out provisioning for bond market losses over 4 quarters

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: RBI, provisioning, government bond, investment fluctuation reserve, Mark-to-market (MTM) provisioning

Mains level: Issues related to Indian banking sector


News

More provisioning allowed

  1. The Reserve Bank of India (RBI) has allowed banks to spread out the provisioning to cover losses on their government bond portfolio across four quarters
  2. This will give a relief for lenders who would have otherwise faced an immediate hit to their bond portfolio due to rising yields
  3. The RBI has also directed banks to create an investment fluctuation reserve to build up an ammunition against rising yields

MTM provisioning

  1. Mark-to-market (MTM) provisioning is available for the quarters ending December 2017 and March 2018
  2. Banks using such an option will have to make the disclosure in their notes to accounts of the quarterly results
  3. The disclosure should contain details such as how much provisioning is done and the balance that is required to be done

Why such move?

  1. Banks have to revalue their bond portfolio at the end of every quarter
  2. In case the value of the securities is lower than the market rate, they are mandated to keep aside funds as MTM provisioning
  3. The bond portfolio is divided into three categories, namely—available for sale (AFS), held for trading (HFT), and held to maturity (HTM)
  4. HTM is the only category where quarterly MTM provisioning is not applicable

Back2Basics

Provisioning

  1. When a loan is not being repaid, the Bank has to reconstitute this money from its other sources like Profit
  2. Setting aside of money from Profits to compensate a probable loss caused on lending a loan is called Provisioning
  3. Provisioning is done to cover the risk
  4. There are various percentages of Provisioning to the value of loan based on the duration the account has been out of order
  5. If an account stays non-performing for a prolonged period of time, the account is eventually written off and the account is closed
  6. The amount set aside as the provisioned money is used to close the account
Mar, 15, 2018

[op-ed snap] Why bank privatization may not be the answer

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: The newscard discusses both advantages and problems related to privatisation of banks. After the recent PNB fraud case, the privatisation of PSBs is a hot topic of discussion among experts.


News

Call for privatization of the Public Sector Banks

  1. The nearly $2 billion fraud at the Punjab National Bank (PNB) last month has renewed calls for privatization of state-owned banks

Why are experts asking for Privatization?

  1. According to experts, it would make for more prudent decisionmaking, increase accountability to shareholders, reduce complacency in management, improve profitability and end political influence in business decisions
  2. These points are discussed below:

FIRST: Importance of Operational Control

  1. The alleged fraudulent transactions at PNB reflect very bad operational controls, poor risk management and regulatory failure
  2. Privatization, without strengthening regulatory controls and improving governance, won’t prevent fraud, or curtail undue exposure to risk

SECOND: The government will always come to the bank’s rescue

  1. It has been argued that state control encourages management complacency
  2. as managers are secure in the knowledge the government will always come to the bank’s rescue if it is in trouble
  3. But is ownership the sole criteria for government intervention?
  4. Governments have in the past bailed out banks that were considered “too big to fail”, regardless of ownership, to prevent a systemic collapse
  5. Arguably privatization in some instances led to privatizing profits and socializing losses

THIRD: Privatization makes management more accountable to markets

  1. But the point is that, these state-backed banks are already subject to stock-market discipline—including corporate disclosures and regular audited financial reports

FOURTH: It would foster increased competition

  1. Yet again, it is unclear how a change in ownership from government to private hands would increase competition if the number of participants in the industry remain the same
  2. Fewer but stronger banks could, however, provide more effective competition than a large number of weak banks

FIFTH: The strongest case in support of privatization

  1. The strongest case is that state-backed banks are hobbled by bureaucratic restrictions and undue political interference, making the sector susceptible to elite capture
  2. Indeed, it has been said that India’s mounting bad debt problem may be partly a reflection of crony capitalism
  3. Political considerations may have forced the hand of bankers to extend credit to several powerful business houses who have since defaulted

SIXTH: State-owned banks have a social objective

  1. It must be remembered that state-owned banks in developing countries have an important social objective—to meet the needs of the most vulnerable sections of the economy
  2. Though both state and private sector banks are required to lend 40% of their loanable funds, at a concessional rate, to the priority sector,
  3. the main burden of the government’s development policies(from rural lending to infrastructure development) falls on state-run banks given that they are dominant players in India’s banking system

The way forward

  1. Public or private ownership, both can be equally good or equally bad
  2. It is the institutional factors that determine managerial success
  3. The boards of state-backed banks should be independent of political influence
  4. The clean-up of bank balance sheets and the overhaul of India’s archaic insolvency law are steps in the right direction
Mar, 14, 2018

RBI bans letters of undertaking for seeking overseas loans

Image source

Note4students

Mains Paper 3: Economy | Investment model

From UPSC perspective, the following things are important:

Prelims level: LoUs, LoC, bank guarantees, London Interbank Offered Rate

Mains level: Banking frauds and measures to curb them


News

Issuing of LoU and LoC banned

  1. The Reserve Bank of India (RBI) has barred banks from issuing letters of undertaking (LoUs)
  2. RBI also barred lenders from issuing letters of comfort (LoC) as trade credit for importing goods into India with immediate effect

Effects of the move

  1. The move may deal a blow to trade financing in India and raise credit costs for importers
  2. It will also put companies that have received credit based on LoUs in a spot, as they have to now repay their borrowings since there will no rollover of existing LoUs

Importance of these instruments

  1. Importers prefer taking loans based on LoUs as they are denominated in foreign currency and are cheaper
  2. A letter of credit is used to establish the creditworthiness of the buyer in the purchase of goods
  3. The interest of buyers’ credit is linked to London Interbank Offered Rate

Alternate measures

  1. Lenders will have to look at alternative instruments like bank guarantees

Back2Basics

London Interbank Offered Rate

  1. LIBOR or ICE LIBOR is a benchmark rate, which some of the world’s leading banks charge each other for short-term loans
  2. It serves as the first step to calculating interest rates on various loans throughout the world
  3. LIBOR is administered by the ICE Benchmark Administration (IBA), and is based on five currencies: U.S. dollar (USD), Euro (EUR), pound sterling (GBP), Japanese yen (JPY), and Swiss franc (CHF)
  4. There are a total of 35 different LIBOR rates each business day
  5. The most commonly quoted rate is the three-month U.S. dollar rate (usually referred to as the “current LIBOR rate”)
Mar, 13, 2018

[op-ed snap] Bank frauds and the HR factor in PSU banks

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: EASE

Mains level: The newscard discusses the importance of the HR in Banks. It also discusses a strategy to solve the vulnerable condition of Indian Banks.


News

Human resource (HR) failure: One of the main reasons behind Bank Frauds

  1. Human resource (HR) department in bans failed in implementing measures for “preventive vigilance”
  2. So much so that the central vigilance commissioner has had to step in and order the transfer of all officers who have exceeded three years and clerks, five years, in the same position and office

An opportune time to have another look at the Enhanced Access and Service Excellence (EASE)

  1. It was proposed last year by the department of financial services (DFS)
  2. This outlines the duties and responsibilities of public sector banks for their healthy growth
  3. It recognizes that banking is intrinsically human-centric despite the increasing invasion of machines

Helping the Banks bounce back will require focusing on a 4R policy:
(1) Recruitment:

  1. The current practice of common recruitment by an outside agency needs to be shunned
  2. Instead, every PSU bank needs to recruit depending on its specific requirements
  3. Banks, being “special”, need specialized talent, as observed globally
  4. Banking has become increasingly knowledge and information intensiv
  5. Now, PSU banks need a wide spectrum of specialists in the policy and operation cycle, encompassing all activities, rather than jacks of all trades

(2) Remuneration:

  1. As per RBI data, the compound annual growth rate of per employee wages and salaries, which was 13.7% from 2004-05 to 2010-11, decelerated to 6.4% from 2010-11 to 2016-17
  2. However, the more crucial point is the current “different banks same pay” practice based on five-yearly bipartite settlements with unions
  3. This has built-in perverse incentives
  4. It undermines enterprise not only among the workers of the underperforming banks but also the well-performing ones, thus doubly jeopardizing systemic efficiency and flouting economic principles and logic
  5. Therefore, instead of collective bargaining, the salaries of PSU bank employees need to be linked to the respective bank’s “ability to pay” with components of variable pay

(3) Reskilling:

  1. In any profession, skilling/reskilling is the most valuable link in the entire HR chain of recruitment to retirement
  2. For this, the 2014 RBI suggests the importance of both internal and specialized certification-based external training programmes, coupled with appropriate placement policies in banks, to bridge the talent deficit
  3. The report needs to be implemented without delay

(4) Research

  1. Banking must be recognized as a knowledge-based industry, like information technology, where decisions necessitate constant research and development
  2. In general, the research quotient in PSU banks’ decision-making process is minimal.
  3. Only a few large banks have research units—which are, by and large, devoted to macroeconomic studies
  4. PSU bank leadership must embrace the knowledge and learning ecosystem

The way forward

  1. HR capabilities have a strong correlation with business results
  2. In PSU banks, the time has come to move on from episodic HR initiatives to connecting HR to the mainstream corporate strategy and transformation agendas
Mar, 08, 2018

[op-ed snap] The fight to the finish against banking frauds

Image Source

Note4students

Mains Paper 2: Governance | Important aspects of governance, transparency and accountability, e-governance- applications, models, successes, limitations, and potential

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: The three important issues discussed in the newscard. It is one of the most important newscards on the recent Banking Frauds issue.


News

Data on Banking Frauds(Source: RTI)

  1. RBI data shows that public sector banks (PSBs) reported 8,670 cases of “loan fraud” involving Rs61,260 crore over the last five financial years up to March 2017
  2. The amount will go up significantly once the recent frauds are added
  3. But after the recent issuance of a new framework for the resolution of stressed assets by the RBI, the government is working on reducing the possibility of bank frauds

Positive steps done by the government against the recent crisis(related to Banking frauds)

  1. The government has done well by not letting this crisis go to waste. For instance, it has asked PSBs to inspect all bad loan accounts above Rs50 crore
  2. It has also given them 15 days to address technological and operational risks
  3. It has also directed PSBs to rationalize overseas operations and proposed a new law against fugitive economic offenders
  4. This will give the government the power to confiscate the assets of a fugitive offender, both in India and abroad
  5. It has also decided to set up a regulatory body for auditors
  6. The RBI too has formed an expert committee to look into rising instances of fraud

Three broad issues in this fight against bank frauds
FIRST: Government should avoid over-regulating or overburdening the banking system

  1. Inspecting all bad loan accounts in excess of Rs50 crore, for instance, could result in excessive fear among bankers
    (as at some point investigative agencies will also get involved)
  2. This could affect the flow of credit in the economy
  3. Action by investigative agencies in some of the cases related to non-performing accounts in recent years is said to have affected bank lending
  4. Therefore, it is important that bankers are protected adequately and are able to take commercial decisions

SECOND: Laws by themselves don’t act as a deterrent(Indian Experience)

  1. The government will need to build investigatory and judicial capabilities so that cases are decided in a reasonable time frame
  2. Only time-bound closure of cases will deter fraudsters
  3. India will also need to build institutional capabilities to be able to negotiate with foreign authorities in order to bring back fugitives and prosecute them under Indian laws

THIRD:  PSBs need urgent governance reforms

  1. The fraud is the consequence of a complete collapse of governance
  2. Governance in PSBs needs an overhaul and government interference in appointments should be minimized
  3. In this context, the P.J. Nayak committee (2014) rightly noted: “Government officers and regulators may not possess the skills to appoint the top management of commercial banks”
  4. Therefore, the government needs to revisit the way appointments are made in PSBs, starting with the board

The way forward

  1. The shock of frauds and subsequent regulatory action can affect the flow and cost of credit in the short run
  2. Indian banks will emerge stronger after the short-term pain of cleansing the system
Mar, 05, 2018

Banks Board Bureau may be revamped

Note4students

Mains Paper 2: Polity | Statutory, regulatory & various quasi-judicial bodies.

From UPSC perspective, the following things are important:

Prelims level: Banks Board Bureau, FSRASC

Mains level: Deteriorating condition of PSBs and reform measures


News

Revamping BBB

  1. The government is looking to revamp the Banks Board Bureau (BBB)
  2. It may select a successor for the incumbent chairman Vinod Rai if he is not available further
  3. If the government decides to replace Rai, it may search for a candidate through the Financial Sector Regulatory Appointments Search Committee (FSRASC)

Background

  1. The Banks Board Bureau, which started to function in April 2016, was set up for a period of two years
  2. It was initially given the mandate to recommend candidates for the top post in state-run banks and financial institutions
  3. Later, its role was expanded to help banks in developing strategies and capital raising plans

Expanding its ambit

  1. The BBB is looking to appoint a knowledge partner to help it design, implement and institutionalize a flagship leadership development strategy for PSBs
  2. It will also appoint an advisory firm to help it assess the leadership competencies and potential capabilities of personages appearing in the process for appointment as whole-time directors of PSBs

Back2Basics

Banks Board Bureau

  1. Banks Board Bureau is an autonomous body of Union Government of India
  2. It is tasked to improve the governance of Public Sector Banks, recommend selection of chiefs of government-owned banks and financial institutions and to help banks in developing strategies and capital raising plans
  3. It will have three ex-officio members and three expert members in addition to Chairman
  4. Financial services secretary, deputy governor of the Reserve Bank of India and secretary- public enterprises are BBB’s ex-officio members
Mar, 03, 2018

FinMin releases road map to rationalize PSU banks’ foreign operations

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: What are LoUs?

Mains level: Government is taking necessary steps to counters frauds in Banking Sectors. This step is one many steps undertaken by the government.


News

Road map for Banks’ foreign operations

  1. The finance ministry has released a road map for consolidation of the overseas operations of state-run banks
  2. All existing 216 operations of state-run banks in other countries will be examined to check for possible consolidation
  3. The rationalization of overseas branches is aimed towards “cost efficiencies and synergies in overseas markets”

How will it be done?

  1. The rationalization in foreign operations will be through a mixture of closure of overseas branches, subsidiaries, representative offices and remittance centres
  2. And through consolidation of joint ventures where more than one bank is a shareholder
  3. Banks have been asked to close non-viable operations for cost efficiencies
  4. Banks have also been asked to consolidate equity holdings in joint ventures where more than one state-run bank is a stakeholder

Why this step?

  1. The government is examining lapses in systems followed by overseas branches while giving loans to group firms of Nirav Modi and Mehul Choksi against letters of undertaking (LoUs) fraudulently issued by some PNB officials

Back2basics

What are Letter of Undertakings (LoUs)?

  1. An LoU is an assurance given by one bank to another to meet a liability on behalf of a customer. The LoU is akin to a letter of credit or a guarantee
  2. LoUs are used in international banking transactions. An LoU is issued for overseas import remittances and involves four parties — an issuing bank, a receiving bank, an importer and a beneficiary entity overseas
  3. According to norms, the term of an LoU is 180 days, and can be rolled over once for six months. Since LoUs are a form of lending, they are typically backed by security
Mar, 03, 2018

[op-ed snap] To fix the rot in public sector banks, start with the boards

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: The newscard discusses the conflicts between Government’s role as a owner(of PSBs) versus the entity responsible for financial stability(in the country). It also suggests some solutions to counter Banking frauds(as happened in the PNB recently).


News

Question of “privatization of public sector banks”

  1. The recent fraud in the PNB  has reopened the debate on privatization of public sector banks
  2. That debate will take years to resolve as multiple stakeholders are involved
  3. But this debate should not distract from the more immediate problem

What should be done immediately? 

  1. The discussion should be around the separation of ownership and professional management
  2. It should be about ways to strengthen the board and management of public sector banks and build capacity to address risks(related to frauds)

Loan Management: The first thing needs to be addressed

  1. Apart from supporting financial inclusion projects and government bond-buying mandate, PSU bankers often have to extend loans(against their wish) because of pressure from bureaucrats and ministers
  2. That is a credit risk, and the first thing that needs to addressed

Appointment issues: Public Sector Banks and Private Banks

  1. State-owned banks are regulated in a different way from private banks
  2. The roles of their boards also are different
  3. Key executive appointments in PSU banks are recommended by the Bank Board Bureau and then approved by the appointment committee of the cabinet
  4. The board of a public sector bank doesn’t have the power to fire the CEO for poor performance or failure in oversight
  5. If such a fraud had occurred in a private sector bank, the central bank would be well within its powers to remove the board
  6. But in a PSU bank, the power rests with the government itself
  7. While the board may ensure the government’s bidding is done, it is powerless to give directions to management and hold it accountable
    What should be done?
  8. Boards should be free to set their own vision and mission
  9. They should be free to hire and fire top executives, and roll out human resource management, governance and compensation strategies as they see fit

The way forwad

  1. The PNB fraud is a call to action for the government to do the right thing and ensure that the scope for such frauds is minimised forever
  2. This is also about the government having to resolve the conflicts between its role as a owner versus the entity responsible for financial stability
Feb, 26, 2018

[op-ed snap] Can banking recover?

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

The following things are important from the UPSC perspective:

Prelims Level: The LoU

Mains Level: Need of privatisation of banks, reasons behind the recent frauds in Indian Banks, possible solutions, etc.


News

Pressure on the Indian Banking System

  1. The Indian banking system is under the pressure of growing NPAs which will touch nearly Rs. 10 lakh crore by March this year
  2. This does not include the Rs. 6 lakh crore already written-off
  3. Recent cases of banking frauds are making the system more vulnerable

These failures has occurred at many levels

  1. It is now clear that the recently revealed scams are fundamentally and overwhelmingly a failure of regulation
  2. At the level of the bank, it is impossible to believe that only a handful of employees have been implicated. Senior management and auditors did not track these problematic transactions for years
  3. The RBI did not monitor banks properly and created opacity with new financial instruments
  4. The Finance Ministry failed in its oversight and regulation
  5. And successive Central governments, including the present one, did and have not done anything to address the obvious problems that were festering, and made them even worse

What are the letter of undertaking (LoU)?

  1. The PNB scam relied on the existence of an unusual financial instrument, the LoU
  2. This is a bank guarantee that enables a bank’s customer to raise short-term credit from another Indian bank’s foreign branch
  3. It has to be another Indian bank, because the LoU as a form of underwriting other borrowing does not exist in other countries and is not even recognised by foreign banks
  4. It was created by the RBI as an additional incentive to importers who could then avail of cheaper credit abroad, even though import credits already exist

Is Privatisation of banks a solution?

  1. Many analysts within and outside government have responded to these scams by pointing the finger at public sector banks, claiming that they are more vulnerable to influence peddling and crony capitalism
  2. The current mess has also become an excuse to demand the privatisation of state-held banks
  3. But the key issue is one of poor regulation, and not ownership
  4. Poorly regulated private banks are even more prone to scams and failure as the financial sector is rife with information asymmetries and market imperfections
  5. Private profit orientation generates incentives for managements to exploit loopholes in the rules and engage in risky behaviour
    Example of Foreign banks
  6. The U.S. and European bank behaviour leading to the great financial crisis of 2008-09 show
  7. The bailouts they then require tend to be even more expensive for the public exchequer because bank runs have to be prevented

 Why has banking regulation in India failed to this extent?

  1. More significantly, this government(like the previous one) has created incentives for all banks to privilege large high-profile corporate borrowers and be relatively lax on their repayment in the mistaken belief that this would encourage sustained income growth
  2. This context makes it easy for some players to game the system
Feb, 22, 2018

[op-ed snap] How banking frauds can be nipped in the bud

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Corporate governance, RBI, Blockchain technology

Mains level: Banking frauds and measures to reduce their incidence


Context

Frauds in banking system

  1. The Nirav Modi case has once again cast the spotlight on the dark corners of the Indian banking universe
  2. The information available till now suggests that there was a failure at different levels—internal controls, corporate governance and weak regulatory capabilities

Ideas that could prevent such frauds in future

  1. Internal controls in a bank
  • This is the basic line of defense
  • Most banking regulation across the world works on this principle
  • A good technology system should make it impossible—or at least extremely difficult—for individual employees to bypass controls
  • Bank boards and especially the audit committees must have clear responsibilities

2.  Banks can also set up a special fraud monitoring agency

  • It may include officials specially trained to detect incipient frauds
  • Banks can also choose to appoint one member of the board to oversee fraud risk management

3. The role of third parties should be examined with a tough eye

  • Chartered accountants, auditors, and advocates who figure in bank frauds should be dealt with strictly
  • The regulator should revisit the role of auditors both in the case of borrowers and lenders

4. Banking regulators need to be a backstop

  • The Reserve Bank of India (RBI) has said it had earlier warned banks about frauds
  • The Indian central bank will have to build capabilities, both in terms of designing rules and making sure that they are effectively implemented

5. The government should actively pursue the idea of privatizing public sector banks (PSBs)

  • Public sector banks have always been marred by poor governance
  • It is reflected in their stock market valuations
  • High levels of non-performing assets and the recent fraud are consequences of inept governance
  • The required reforms will go the distance only when banks are free of political and bureaucratic control

6. Use of blockchain technology

  • Blockchain technology could be used to make banking transactions more transparent
  • This would mean that every link in the chain can be scrutinized publicly
  • This also won’t affect privacy as borrowers disclose a lot of information in public statements, while mutual funds provide detailed disclosures about their bond portfolios

Way forward

  1. India needs a safe and efficient banking system to service the needs of a growing economy
  2. The government and RBI would do well to use the current opportunity to strengthen the banking system
Feb, 20, 2018

Bank bureau stares at uncertain future

Image source

Note4students

Mains Paper 2: Polity | Statutory, regulatory & various quasi-judicial bodies

From UPSC perspective, the following things are important:

Prelims level: Banks Board Bureau, Indradanush programme, PJ Nayak committee

Mains level: Reform measures in banking sector and their successes


News

Term expiration near

  1. The Banks Board Bureau (BBB) is facing an uncertain future with the tenure of its members coming to an end on March 31, 2018
  2. The government is yet to communicate if the terms will be extended or a new board will be formed

Banks Board Bureau

  1. The BBB was set up under the government’s Indradanush programme to reform public sector banks
  2. It started operations in April 2016
  3. BBB has representatives from government and RBI apart from independent banking professionals
  4. The BBB was conceived by the PJ Nayak committee and was seen as a step taken towards reforming the boards of public sector banks
  5. The committee, in its report, had recommended that the government should distance itself from the appointment process of top management and board members of PSBs

Success of BBB

  1. The BBB was only involved in shortlisting and interviewing candidates
  2. The final appointment was always made by the government
  3. There were instances of delays in appointment by the government despite the BBB recommending it
Jan, 29, 2018

[op-ed snap] Banking on good faith

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Read the attached stories

Mains level:  Complement this newscard with some of our previous newscards on the same issue, [op-ed snap] Reforms needed to back bank recapitalisation and [op- ed snap] A bold step in bank reform


News

Recapitalization plan

  1. About Rs. 1 lakh crore is expected to be pumped into India’s 21 public sector banks by March, which the Centre hopes will enable them to extend fresh credit lines worth over Rs. 5 lakh crore to spur economic activity

PCA (prompt corrective action)

  1. The Reserve Bank of India has placed, a significant part of the recapitalization plan, under the prompt corrective action, or PCA, framework
  2. The RBI deploys the PCA to monitor the operation of weaker banks more closely to encourage them to conserve capital and avoid risks
  3. For these entities, this capital(provided under the plan) offers a fresh lease of life as it will help meet regulatory requirements under the Basel-III regime
  4. Also, it cushions them to an extent from possible haircuts on stressed loans that are going through the insolvency resolution process

Government’s view on the Financial Resolution and Deposit Insurance legislation

  1. While announcing this package, the government has described each of the banks as “an article of faith”
  2. Its assertion that no public sector bank will fail and that depositors’ money will remain safe
  3. It diminish allay customers’ worry about the safety of their savings under the proposed Financial Resolution and Deposit Insurance legislation

Is there any future plan?

  1. More structural reforms may well be on the anvil(open for discussion) in the second half of this recap plan, which the RBI had described
  2. Yet, the absence of any reference to consolidation through mergers is glaring
  3. Moreover, the government has repeatedly ruled out privatisation of these banks, the only one where it intended to offload its majority stake
Jan, 27, 2018

Cut loans to firms, focus on retail: Govt to smaller banks

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: NPA

Mains level: Banking reforms


News

Redirecting focus

  1. The government has directed small public sector banks (PSBs) to cut their corporate loan exposure to 25 percent of their risk-weighted assets over the medium term
  2. And to focus more on retail lending
  3. This strategy is being followed to shrink the size of relatively weaker banks over the next two years

Why curtailing corporate loans?

  1. Corporate loans have been mainly responsible for the build-up of stressed assets in the banking system
  2. Retail loans such as housing, vehicle and car loans typically exhibit low level of non-performing assets

Bank boards to approve reform plan 

  1. The government has asked the bank boards to approve each bank’s plans to implement the PSB reforms agenda and monitor it quarterly
  2. The government has announced a set of measures to keep close watch on the asset quality of the banks, including “specialized monitoring” by agencies for corporate loans of more than Rs 250 crore
  3. A total of around Rs 1 lakh crore will be infused in the PSBs by March-end
Jan, 25, 2018

Rs 1,00,000 crore boost: Centre infuses cash, unveils reforms map for public banks

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Recapitalization bonds, Prompt Corrective Action, Annual EASE index survey

Mains level: Restructuring of PSBs


News

Reforms roadmap for public sector banks

  1. The government has announced details of how Rs 80,000 crore of funds raised through recapitalization bonds will be allocated to 20 PSBs by March-end
  2. A total of around Rs 1 lakh crore will be infused in the PSBs by March-end
  3. Twenty PSBs will be getting the amount from government
  4. These include 11 weak and 9 strong banks

PSBs under RBI’s Prompt Corrective Action 

  1. The eleven weak banks are currently under the RBI’s Prompt Corrective Action (PCA)
  2. PCA kicks in when banks breach regulatory norms on issues such as minimum capital, amount of non-performing assets and return on assets
  3. The central bank enforces these guidelines to ensure that banks do not go bust and follow prompt measures to put their house in order

Keeping a watch on banks asset quality

  1. The government announced a set of measures to keep a close watch on the asset quality of the banks
  2. These include “specialized monitoring” by agencies for corporate loans of more than Rs 250 crore
  3. Banks have been asked to ring-fence cash flows of corporate borrowers, to ensure that their earnings are not diverted for other purposes
  4. The government has also mandated each of the PSBs to have a stressed assets management vertical and monetize their non-core assets such as real estate to boost their capital adequacy

Annual EASE index survey

  1. An independent agency will conduct an Annual EASE (Enhanced Access & Service Excellence) Index Survey of banks
  2. This will be to ensure that banks comply with the reforms parameters
  3. As per the EASE plan, the government wants to ensure that there is a banking facility within 5 km of every village in the country
Jan, 22, 2018

[op-ed snap] Long live India Post Payments Bank

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Particulars of the IPPB, payments banks, etc.

Mains level: The newscard briefly discusses the issues related to the IPPB. Payment banks have very important role in providing banking services to the vulnerable, poor, etc.  sections of the society.


News

How has India Post Payments Bank (IPPB) been doing?

  1. IPPB has a customer base of a few thousands and its deposit kitty is less than Rs1 crore
  2. Important issue: IPPB started operations with a borrowed information technology (IT) platform from Punjab National Bank (PNB)
  3. How will a bank with very different objectives move ahead on the IT platform of a conventional universal bank?
  4. A large number of bankers coming on board from PNB on deputation hasn’t helped the cause either
    (Note: After using the PNB technology platform at the initial stage, IPPB is now looking for its own platform)

What is the primary objective of setting up payments banks ?

  1. RBI in its guidelines says “the objectives of setting up of payments banks will be to further financial inclusion by providing
    (i) small savings accounts and
    (ii) payments/remittance services
  2. to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users”

Some important conditions on the payment banks

  1. IPPB, like all other payment banks (and small finance banks), is required to maintain 15% minimum capital adequacy ratio and also the cash reserve ratio,
  2. Or the mandatory deposits with RBI on which it does not earn any interest (currently, it is 4% of deposits)
  3. A payments bank needs to invest 100% of its demand deposits (it cannot take fixed deposits and recurring deposits) in government securities and deposits of scheduled commercial banks in the ratio of 3:1

How will a payments bank make money?

  1. It cannot make money from deposits as the return typically is less than the cost of deposits
  2. It can make money from payments transactions only if it has a robust, secured and comprehensive technology platform that enables clients and service providers to come together and transact at an extremely competitive cost
  3. Not possible in current situation, for the IPPB

Is Department of Post affecting the working of the IPPB?

  1. IPPB’s dependence on DoP is understood to be continuing even after the bank will be fully operational
  2. For example, the connectivity of the bank for all its operations will be through the existing DoP network
  3. One can only hope that the technology shortcomings of DoP do not get replicated in the bank
  4. If the government aims to achieve deeper banking inclusion, it would be wise to let the board of IPPB and its top management decide on its strategy
  5. Piggy-backing DoP will create an inefficient animal always looking for the indulgent patronage of its parent—far removed from India’s digital banking dream

Back2basics

Financial Inclusion in India: Need and future; PMJDY; Payment Banks and Small Banks

Jan, 22, 2018

RBI, govt may give banks more time to switch to IndAS

Note4students

Mains Paper 3: Economy | Issues relating to planning

From UPSC perspective, the following things are important:

Prelims level: IndAS, GAAP standards, Banking Regulation Act, Companies Act, International Financial Reporting Standards, IRDA, National Advisory Committee on Accounting Standards

Mains level: Status of banks in India and way forward


News

New accounting standards for banks likely to be postponed

  1. The government and the Reserve Bank of India (RBI) may postpone the implementation of new accounting standards for banks
  2. This might be due to the legislative changes and additional capital requirements the process would entail

Indian Accounting Standards (IndAS)

  1. Banks and non-banking financial companies are due to switch to Indian Accounting Standards (IndAS) from 1 April 2018
  2. They currently follow Indian generally accepted accounting principles (GAAP) standards
  3. Other corporate entities started complying with IndAS with effect from 1 April 2016

Legislative hurdle

  1. The implementation of IndAS for public sector banks requires an amendment to the Banking Regulation Act
  2. The schedule in BR Act relating to financial statement disclosures needs to be changed to the IndAS format
  3. Due to a delay in amending the BR Act, RBI is yet to issue operational guidelines for the implementation of the new accounting standards

Banking regulation

  1. Section 29 of the BR Act deals with the accounts and balance sheets of public sector banks
  2. Private sector banks are covered by the Companies Act, which is based on the new accounting standards

NPAs might rise

  1. The transition to IndAS is expected to see a significant jump in bad-loan provisions
  2. Under the current rules, banks set aside money to cover loans that have turned bad
  3. Under IndAS, they must make provisions after assessing the expected loss from the time a loan is originated rather than waiting for a trigger event

International standards being followed

  1. These norms are in line with international norms, the International Financial Reporting Standards
  2. These were designed to avoid credit shocks like those seen in the aftermath of the global financial crisis in 2008

RBI may delay implementation like IRDA

  1. The Insurance Regulatory and Development Authority of India (IRDA), which had earlier decided to implement IndAS from 2018-19, has decided to defer it by two years
  2. It is likely that RBI will follow the Irda path and defer the implementation of IndAS starting FY20-21

National Advisory Committee on Accounting Standards (NACAS)

  1. RBI had agreed with the National Advisory Committee on Accounting Standards (NACAS) that banks would switch to IndAS by April 2018
  2. NACAS advises the government on the formulation and laying down of the accounting policy and standards for adoption by firms
Jan, 15, 2018

[op-ed snap] Money in the bank, or for it?

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Bail-in and Bail-out clause given in the FRDI bill(read attached stories)

Mains level: It is a hot topic of discussion these days, due to the infamous ‘bail-in’ clause. Read this newscard with the attached newscards, for a comprehensive view on the issue.


News

What are the issues regarding The Financial Resolution and Deposit Insurance Bill 2017 (FRDI Bill)?

  1. Most experts want major clauses changed or dropped
  2. Some even argued for a rethink on the Bill itself
  3. No one talked about the one provision in the FRDI Bill: the infamous ‘bail-in’ clause
  4. It has caused alarm and despondency amongst millions of bank depositors, mostly India’s much-neglected poor, and the middle class
  5. [op-ed snap] Time to go to FRDI Bill’s roots

Why is this ‘bail in’ clause infamous?

  1. This is the clause that empowers the Resolution Corporation to either cancel, alter or modify the liability owed by a service provider
  2. The Corporation will be created to handle cases of bank failure if the Bill becomes law
  3. It will simply put, one’s money in the bank (whether in a savings account or in a fixed deposit) is a liability owed by the ‘service provider’, i.e., the bank
  4. If the bank is going bankrupt, the Resolution Corporation is empowered to either use your deposit money to shore up the bank’s finances and make you suffer the losses, or convert your deposit into bonds or equity

Government’s view on the bill

  1. According to the government, the Bill provides “enhanced protection” for depositors
  2. This includes a clause which says that no depositor will receive less than what he/she would have got if the bank had been liquidated and its assets distributed among creditors
  3. Further, your deposit can be cancelled or converted only if you have agreed to do so in the contract governing such debt

Is the Deposit Insurance and Credit and Guarantee Corporation (DICGC) a solution?

  1. The Deposit Insurance and Credit and Guarantee Corporation (DICGC), an RBI arm, insures deposits only up to Rs. 1 lakh — a sum unchanged since 1993
  2. Less than a third of the deposits with banks (by value) are covered by insurance
  3. The government and the RBI point out that the global average is 20-30% of deposits in the system (which India meets)
  4. But what they don’t tell you is that the quantum of cover is among the lowest in the world
  5. In the U.S., deposits up to $250,000 are covered
  6. Even Brazil offers coverage of over $75,000, while in India, this is a measly $1,500
  7. Furthermore, 85% of deposits are higher than the cover limit of Rs. 1 lakh
  8. So, if banks do fail, an overwhelming majority of depositors will suffer massive losses
  9. Therefore, the amount of insurance cover should be increased substantially, to at least half the average value of deposits

The way forward

  1. Forcing higher insurance premiums on banks will only worsen their already precarious situation
  2. But the alternative — of doing nothing, or letting a loosely worded FRDI Bill with no clear-cut provisions will only make the situation much worse
Jan, 10, 2018

Bank recapitalization: The mockery of MoUs and statements of intent

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Department of financial services, Statements of intent (SoI), Memorandum of understanding (MoU)

Mains level: Management of Public sector banks


News

Sets of tools used ensuring “efficiency” in management of PSBs

  1. For ensuring “efficiency” in management of PSBs, two sets of tools were used by the administrative department, the department of financial services (DFS)
  2. These were: the statements of intent (SoI) and memorandum of understanding (MoU)
  3. Both were supposed to play a critical role in monitoring capital infusion in PSBs

Statements of intent (SoI) system

  1. The mechanism of SoI on annual goals to monitor the performance of PSBs was introduced on the directions of the finance ministry in June 2005
  2. A set of performance parameters was defined and targets were set for PSBs against these parameters
  3. There were 44 SoI parameters which were to be monitored by DFS
  4. The SOIs were also used to incentivize top management of PSBs when the SoI targets were achieved
  5. The SoI parameters were used as an instrument for efficient management of PSBs and not for ensuring either capital conservation or capital efficiency
  6. The SoI became a routine annual management tool on paper with little or no relevance to the process of capital infusion

Memorandum of understanding (MoU) system

  1. In February-March 2012, DFS introduced the system of MoU with PSBs
  2. This was to ensure that PSBs lay down a firm plan for long-term business development and performance enhancement, and relate the same to their capital requirement
  3. The MoU, signed by the PSBs and DFS, consists of a set of agreed targets that the PSBs are expected to achieve, which would form the basis for future capital infusion by the government
  4. The aim of the MoU was to achieve optimum utilization of scarce capital funds, with PSBs focusing on improving their efficiency simultaneously with the infusion of capital

Lax implementation

  1. Both these tools were not used the way they were supposed to
  2. DFS as well as PSBs did a lax implementation and made them survive only on paper
Jan, 06, 2018

[op-ed snap] Three paradigms of banking regulation

Note4banks

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: The newscard discusses evolution of banking regulations. And also talks about there importance from India’s point of view.


News

History of control over Banks

  1. Banks are among the most regulated businesses
  2. Ever since the inception of banking as a business in the medieval period, the state has exercised some form of control
  3. While banks have been regulated since their inception, the approach to regulation has followed an evolutionary path where we can discern different paradigms
  4. The Money paradigm, the Intermediation paradigm, and the emerging Marketplace paradigm(as described by the writer)

The Money paradigm

  1. It views banks essentially as monetary institutions whose primary role is to “create” money
  2. When banks are seen primarily as issuers of money, issuing loans is incidental
  3. The approach to bank regulation focuses on the role they play in the creation and use of money, and on controlling the price of money i.e interest rates
    Transformation from money paradigm to intermediation paradigm
  4. Central banks had became more powerful in the 20th century, with a monopoly in issuance of money which transformed note issuance of banks into deposits
  5. Post World War II, under the Bretton Woods system, the gold standard was abandoned and central banks started issuing “fiat” money, making the money role much less important
  6. The intermediation role became more prominent and progressively became the focus of regulation

The Intermediation paradigm

  1. I this, the role of banks is to use loans with deposits as “raw material”
  2. The Banking Regulation Act of 1949, defines banking as an activity of “accepting for the purpose of lending or investing, deposit of money from public”, thus indicating the primacy of the Intermediation paradigm
  3. The most prominent example of the Intermediation paradigm is the Basel regime that has at its core capital regulation based on risk-weighted assets

Issues with the above two paradigms

  1. These two traditional paradigms of bank regulation sit somewhat uncomfortably with each other
  2. The Money paradigm results in some form of administered interest rates, which will invariably result in mispricing of risk a
  3. And, hence, misallocation of capital by banks due to artificially and somewhat arbitrarily determined cost of funds
  4. The Intermediation paradigm, on the other hand, will mostly result in capital regulation with unregulated deposit pricing, which will invariably dampen monetary transmission
  5. As a result, the banking channel is quite poor in transmitting monetary policy, as we witness in India

The Marketplace paradigm

  1. The banking system can be viewed as a marketplace for funds where banks act as market makers
  2. Regulating market making is primarily about regulating the liquidity provided by the market maker
  3. In the more developed financial systems, there is a clear evolution of the regulatory approach from the Money to the Marketplace paradigm, reflecting the underlying evolution in the role and functioning of banks

The Marketplace paradigm in India

  1. As the financial markets develop in India and bank balance sheets have more tradable securities and loans, this paradigm will become more relevant

The way forward

  1. A comprehensive approach should carefully balance these three paradigms. Banks are a collection of several businesses and activities
  2. For specific businesses or activities, one of the three paradigms may be more relevant
  3. Especially for a developing country like India, the regulating banks(through the above discussed paradigms) is an important component of the management of the overall economy
Dec, 30, 2017

Govt. injects funds into 6 public banks

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: PCA and CAR

Mains level: Importance of the CAR and steps taken by Government for saving the given banks.


News

Releasing of equity capital 

  1. The Centre has released the much-required equity capital to six stressed public sector banks (PSBs)
  2. Why: as some of these lenders were on the verge of breaching minimum capital norms on December 31, 2017

Particulars of the step taken by the government

  1. The PSBs are Bank of India (Rs. 2,257 crore), Central Bank of India (Rs. 323 crore), Dena Bank (Rs. 243 crore), IDBI Bank (Rs. 2,729 crore), Bank of Maharashtra (Rs. 650 crore) and UCO Bank (Rs. 1,375 crore)
  2. These lenders would be asked to improve on parameters such as bad loans and recovery to which effect a communication would be sent shortly
  3. All these banks are saddled with huge non-performing assets and are under the prompt corrective action (PCA) framework of the RBI, which means certain operations of these banks have been curtailed by the regulator

What is the minimum regulatory capital requirement?

  1. Banks are mandated to maintain minimum 9% capital adequacy ratio (CAR) plus a capital conservation buffer of 2.5%

Back2basics

Capital adequacy ratio(CAR)

  1. Capital Adequacy Ratio (CAR) is also known as Capital to Risk (Weighted) Assets Ratio (CRAR), is the ratio of a bank’s capital to its risk
  2. National regulators track a bank’s CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements.
  3. It is a measure of a bank’s capital
  4. It is expressed as a percentage of a bank’s risk weighted credit exposures.
  5. This ratio is used to protect depositors and promote stability and efficiency of financial systems around the world
  6. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors
Dec, 21, 2017

[op-ed snap] Another tool of resolution

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Particulars of the Bill

Mains level: The article clears confusion on the ‘Bail in’ clause. Very important. Complement it with our other newscards on the same issue.


News

Why we need a special law to deal with the demise of a bank?

  1. The reason we need bank resolutions and also a special law to deal with the demise of a bank is simply because banks are special
  2. They have become a repository of public faith in the financial system
  3. So long as consumers have unrestricted access to deposits, their faith in the banking system is maintained

The Financial Resolution and Deposit Insurance Bill

  1. It is an attempt to make the system more credible, less chaotic, and systematic in times when credibility is at risk, by treating banks differently from regular corporations
    (as mentioned above)
    The issue of ‘Bail in’ clause
  2. The Bill brings in a system of risk-based monitoring of financial institutions
  3. At the stage of ‘critical’ risk to viability, when the proposed Resolution Corporation takes the decision to use a particular method of resolution which includes the tool of a ‘bail-in’
  4. It is the Corporation that takes all decisions, and not the bank
  5. A bare reading of the relevant provisions of the Bill shows that the Resolution Corporation can use this tool only in consultation with the regulator
  6. It is an exaggeration to suggest that the Reserve Bank of India (RBI), along with the Resolution Corporation, will ‘bail-in’ depositor’s money to recapitalise the bank
  7. Especially when the Bill is designed to take away power from the failed financial institution at the stage of failure

‘Bail in’ clause: Safeguards in the law

  1. The Bill makes it explicitly clear that only such liabilities may be cancelled where the liability/instrument contains a bail-in provision
  2. It makes it abundantly clear that the Resolution Corporation will specify the liabilities to be bailed in
  3. Creditors/depositors will need to consent in advance to have their liabilities bailed-in
  4. Even when liabilities are being bailed in, the Bill makes it incumbent upon the Resolution Corporation to follow the prescribed route
  5. Lastly, the Bill gives aggrieved persons a right to be compensated by the Resolution Corporation
    (if any of the safeguards have not been followed during a bail-in or in the conduct of any other resolution action)

The way forward

  1. When the rest of the world is finding ways to make its financial system more robust, we seem to be continuing with public discourse using incomplete information
  2. The Bill simply adds another tool of resolution without taking away from the government’s implicit guarantee to depositors
Nov, 23, 2017

[op-ed snap] The potential of smart contracts in banking

Image source

Note4students

Mains Paper 3: Science & Technology- developments & their applications & effects in everyday life

From UPSC perspective, the following things are important:

Prelims level: Bankchain, blockchain, bitcoin, Smart contracts

Mains level: Use of Digital technology for easing banking and other services


Context

Technology underpinning bitcoin—blockchain—is gaining mainstream acceptance

  1. Bankchain is a consortium of 27 banks (22 of them are Indian) of which the State Bank of India (SBI) was the first Indian member
  2. It is working to devise blockchain-based solutions for banking and, along with the SBI, planning to launch a beta program to use smart contracts next month

About Blockchain and bitcoin

  1. In late 2008, an unknown person (or group) named Satoshi Nakamoto created a crypto-currency, bitcoin
  2. Its novelty consists in the fact that its operations are authorized without any trusted third-party carrying out administrative or security tasks
  3. This minimizes the transaction fees eventually weighing on users and considerably reducing the time for processing the operations
  4. Centralized networks rely on one or more trusted bodies (for example, banks) to keep a detailed record of transactions and update users’ balance
  5. Bitcoin, on the other hand, decentralizes the administrative activity and lets “miners” process the transactions carried out in the system
  6. The transparency, accessibility and stability of the transactions’ record are ensured by the public broadcasting of the operations throughout the nodes of the network (the computers running the software)
  7. And their subsequent addition to a shared database containing the complete transaction history for any given bitcoin
  8. This shared ledger is called the “blockchain”, i.e the sequence of all the verified “blocks” of transactions, recorded chronologically—timestamped—one after the other

Use of Blockchain in Smart contracts

  1. Just as bitcoin uses the blockchain to maintain a ledger of a crypto-currency, the blockchain can be used to keep track of the ownership of any asset or data that can be digitized and represented by computer code
  2. Once the asset is on blockchain, users can compose smart contracts that contain the terms of the agreement, and automatically execute them once certain predetermined conditions are satisfied
  3. They roughly follow the scheme of an “if-then” function
  4. For example, if the smart contract relates to the acquisition of an intellectual property right licence, Party A creates a smart contract to which the licence X is permanently attached, programming that X is to be released upon certain conditions Y, and launches it into a blockchain
  5. Whenever Party B wishes to obtain the information/licence, they transfer consideration Y to the protocol
  6. Automatically, the smart contract algorithm releases X to party B and delivers Y to Party A, eliminating delays and room for non-compliance
  7. Once the obligation is fulfilled on the one side (Y), the computer protocol autonomously performs the other side of the agreement (X)

Disadvantages of traditional contracts and how smart contracts can help

  1. Traditional contracts are always subject to a degree of uncertainty with respect to their final outcome
  2. Smart contracts leave no room for voluntary breaches of the agreement
  3. By entrusting the network with the performance of the agreed terms, they reduce the likelihood of expensive and time-consuming disputes

Why are banks reluctant to Blockchain?

  1. Smart contracts on a decentralized, “permission-less” blockchain like bitcoin don’t allow any meddling by third parties
  2. This is because in a permission-less system, any computer can join as a node to run the code and amending the leger will require access to all the nodes
  3. Banks are uncomfortable with losing control of the system and they prefer “permissioned” blockchains like Bankchain
  4. Bankchain restricts the access to nodes to other banks, while individual customers can join as users after complying with know your customer (KYC) norms
  5. Pre-selected nodes allow banks to intervene between transactions, providing the ‘emergency entry’ into the system whenever interventions are deemed appropriate

Potential of Smart contracts

  1. Currently each bank carries out its own KYC process.
  2. This can be done by one bank and securely uploaded on the blockchain, thereafter shared with the other banks once the trigger is generated by the customer
  3. Smart contracts can automatically release insurance payments for verifiable claims like delayed flights, motor accidents or death
  4. This would involve bringing authorized third parties like hospitals and garages to join a single platform with insurers and the insured, and bring process efficiencies
  5. Most securities have settlement delays of two days or longer that can be brought down to minutes, which will also reduce working capital requirements for collateral
  6. Other applications include crowdfunding for small businesses, enabling the trading of tokenized equity shares and settlement of syndicated loans between banks

Threats involved

  1. While permissioned blockchains bring many benefits of a decentralized network, they compromise on the promise of immutability by limiting the nodes in the system
  2. The unlimited nodes in bitcoin make it tamperproof while pre-selected nodes in a permissioned blockchain allow authorities to intervene between transactions and expose the points of vulnerability
  3. It is quite unsure that banks can provide the same level of data integrity that is guaranteed by permission-less blockchains like bitcoin
Nov, 13, 2017

More capital will push PSBs to up MSME credit: Arun Jaitley

Image source

Note4Students

Mains Paper 3 | Indian Economy and issues relating to planning, mobilization of resources, growth

Prelims level: FDI, Bank Recapitalization, MSME

Mains level: The news card highlights the need for increasing private investments in the economy and the steps taken by the government for the same.


News

Pumping Third Engine to propel growth and create jobs

  1. Amid declining credit to micro and small enterprises, the finance minister said more capital for public sector banks will prompt them to increase credit flow to MSMEs
  2. This will ensure that “third engine” of private investment is fired up to propel growth and create jobs
  3. While there has been a significant increase in public investment and FDI inflows, but the private investment a key growth engine has continued to lag

Why increase Credit flow to MSMEs

  1. This is because the sector creating jobs and giving the boost to the economy has no access to international finance or bond market
  2. Last year’s Demonetisation decision has especially affected the MSMEs

Steps Taken by the Government

  1. Last month, the government had unveiled a mega capital infusion worth Rs 2.11-lakh crore two-year roadmap to strengthen PSBs, which includes recapitalization bonds, budgetary support, and equity dilution
  2. The government has decided to put in more capital through bonds and banks’ equity expansion and therefore, it is the country which is virtually going to pay to keep the banking system in good health
  3. The government also ensured noninterference in commercial transactions
  4. A robust public sector banking system is desired so that ability to support growth itself increases

The Statistics

  1. Latest data from the Reserve Bank of India shows that credit to micro and small industry contracted at 3.4 percent in the financial year so far while for medium sector industry the credit contraction was at the rate of 5.7 percent
  2. Non-performing assets of PSBs have increased to Rs 7.33 lakh croreas of June 2017, from Rs 2.78 lakh crore in March 2015
  3. In the last three-and-a-half years, the government pumped in more than Rs 51,000 crore capital in PSU banks.
Nov, 09, 2017

Rs 2.11-lakh crore recapitalisation plan: To help fund bank cash infusion, Government looks to tap RBI’s reserves

Note4students

Mains Paper 3: Indian Economy and issues relating to planning, mobilization of resources, growth.

Prelims: RBI, Bank Recapitalization, FOREX.

Mains level: The news card talks about the government’s move to consider partial financing of bank recapitalization through RBI. It also talks about the Economic Survey recommendations regarding the same.


News

Context

  1. The government is weighing the option of getting the Reserve Bank of India (RBI) to part-finance the capital infusion plan for public sector banks and has initiated discussions with the central bank to deploy a portion of its foreign exchange or other reserves for this purpose.
  2. The discussions are at a “nascent stage” and depending on the response of the RBI, the Finance Ministry will work on creating a mechanism for capital infusion that is in consonance with fiscal responsibility regulations.
  3. The government last month announced plans to inject Rs 2.11 lakh crore of equity in PSU banks — Rs 1.35 lakh crore through recapitalisation bonds, Rs 18,000 crore from budgetary resources and Rs 58,000 crore to be raised by banks from the market.
  4. The government will stick to the timeline of capital infusion announced earlier and a significant portion of the equity can be injected in a couple of months.

Foreign exchange Reserves and Bank Recapitalization

  1. With foreign exchange reserves crossing $400 billion, there is a view within the government that a portion can be used for capitalising banks without adversely affecting the country’s import cover and macro-economic stability.
  2. As of September 22, the RBI’s foreign exchange reserves were $402. 24 billion.
  3. The forex reserves comprised foreign currency assets of $377.751 billion, gold of $20.69 billion, special drawing rights of $1.51 billion and reserve tranche position of $2.29 billion with the International Monetary Fund.
  4. In 2007, the RBI had approved a proposal to invest up to $5 billion out of its forex reserves to fund a wholly-owned UK-based subsidiary of the India Infrastructure Finance Company Ltd (IIFCL).
  5. The IIFCL subsidiary used these funds to lend to Indian companies executing infrastructure projects in India, or to co-finance their external commercial borrowings for such projects for expenditure outside India for infrastructure projects.

Economic Survey Recommendations

  1. Earlier this year, the Economic Survey 2016-17 had suggested that the government use a part of the extra capital available with the RBI to capitalise banks.
  2. Even at current levels, the RBI is already exceptionally highly capitalised. In fact, it is one of the most highly capitalised central banks in the world. So, it would seem to be more productive to redeploy some of this capital in other ways.
  3. It could be used in several good ways:
  • For recapitalising the banks and/or recapitalising a Public Sector Asset Rehabilitation Agency (PARA);
  • And, for extinguishing debt to demonstrate that the government is serious about a strong public sector fiscal position.

Why there is a need for the creation of SPV ?

  1. The government may need to create a special purpose vehicle to use resources from the RBI.
  2. This is because the FRBM (Fiscal Responsibility and Budget Management) Act does not allow the government to borrow from the RBI.
  3. But routing resources through the SPV should be in conformity with the law.

The Government’s Approach

  1. The government plans to adopt a differential and selective approach for capital infusion in the public sector banks.
  2. While strong banks will get greater capital, weak banks may have to either shrink in size or not grow from the current position.
  3. Of the total 22 PSU banks, as many as eight PSU banks currently have gross non-performing assets (GNPAs) above 15 per cent and 14 banks have GNPA of more than 12 per cent.
  4. The government had earlier hoped to reap significant windfall gains from the decision to withdraw Rs 500 and Rs 1,000 n
  5. The amount of currency that was not be deposited with the banks could have been a gain to the Centre after extinguishing the RBI’s liability which could have been used to capitalise PSU banks.
  6. But with over 99 per cent of the demonetised currency coming into the banks, the government took the recapitalisation bonds route to fund the banks.
Oct, 31, 2017

[op-ed snap] Capital infusion: Prepping strong banks to acquire the weak

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

The following things are important from UPSC perspective:

Prelims Level: Not Much

Mains level: Complement this article with our previous newscards on the recapitalisation of the banks. It will give you a comprehensive view. Very important for the Mains paper.


News

Context

  1. The article talks about the plan of recapitalization and how it will get implemented

The government’s plan of recapitalization

  1. The mega recapitalisation of state-owned banks will begin with the Centre infusing greater capital in larger and stronger lenders
  2. And thus preparing them to take over smaller and weaker banks
  3. According to Finance Ministry officials, stronger PSBs helped by capital support, will be better equipped to consolidate weaker banks
  4. Contrary to expectations of consolidation taking a backseat post the announcement of capital infusion
  5. The government will strengthen the larger banks while at the same time priming them for taking over weaker ones

What will be the approach for recapitalisation of banks?

  1. Government officials have indicated the Centre’s plan to adopt a differential and selective approach for infusion
  2. While strong banks will get greater capital, weak banks may have to either shrink in size or not grow from the current position
  3. Banks that are well capitalised will be able to better absorb the weak banks through consolidation

Recent steps taken by the government for expediting consolidation of banks

  1. In order to expedite consolidation, the Cabinet had approved a framework for consolidation among PSBs, including a proposal to set up an Alternative Mechanism
  2. As per the consolidation framework, merger decisions should originate from the banks and these should be based on commercial decisions
  3. The proposals received from banks for in-principle approval to formulate schemes of amalgamation shall be placed before the Alternative Mechanism
  4. And after in-principle approval, the banks will take steps in accordance with the SEBI requirements

The way forward

  1. Resolution of bad loans, recapitalisation of banks and consolidation have to work alongside other reforms for creating a banking system
  2. Bad loan resolution helps the government in realistically estimating the capital requirements of the banks. It will help in cleaning up of the balance sheets
  3. Cleaning up of the balance sheets and injection of capital will mean that banks have the wherewithal to absorb any transitory shocks that may arise from merger of the weak banks
Oct, 30, 2017

[op-ed snap] India needs a new banking policy framework

Image source

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy & their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: 1991 reforms, Narasimham committee, Raghuram Rajan committee, international capital adequacy standards, fiscal deficit

Mains level: Present status of banking in India and need for banking reforms


Context

Bold move by government

  1. The government has decided to spend big money to clean up the banks it owns
  2. This is despite the obvious risks of moral hazard that bank bailouts across the world have inevitably faced

What happened in the recent past

Three important policy documents laid the groundwork for banking reforms since the 1991 reforms

  1. The report of the first Narasimham committee set up in 1991
  2. The report of the second Narasimham committee set up in 1998
  3. The report of the Raghuram Rajan committee that was released in 2009

Changes that have happened over the years

  1. Indian banks now have to meet international capital adequacy standards
  2. A smaller portion of their deposits has to be handed over to fund the fiscal deficit
  3. Interest rates are determined by the market
  4. Branch expansion policies are more liberal
  5. New private sector banks offer competition to the public sectors banks

Banking policy issues that the government needs to deal with

  1. The need for public sector bank autonomy
  • India needs to now shift the needle from autonomy towards privatization
  • Banking is the only important sector of the economy in which the private sector is dwarfed by the public sector
  • The share of public sector companies has fallen sharply in most sectors such as airlines

2. India should move towards a three-tier banking structure

  • The first Narasimham committee had said that India should move towards a three-tier banking structure
  • Four large lenders were to be developed as global banks, 10 banks were to become nationwide universal banks and local banks would concentrate on specific regions
  • The ongoing debates about bank consolidation and differentiated licensing require a framework rather than the current ad hoc statements

3. The weakest banks cannot be shut down at once

  • This move could cause a disruption
  • There is a strong case to convert at least some of them into narrow banks that use all their deposit money to buy government bonds
  • They could in effect become large payments banks rather than the more traditional financial intermediaries

4. India needs to move towards a new financial structure

  • In this system, large companies get mostly funded by the bond markets while smaller firms depend more heavily on banks for their finance
  • The problem is that the corporate bond market is still illiquid, with most bonds held to maturity by a narrow set of investors

Lessons of the global financing crisis

  1. No country has figured out how to maintain financial stability
  2. Credit booms have inevitably left bad loans in their wake
  3. Bank-led financial systems such as Japan have been in trouble
  4. So have financial systems such as the US where the bond markets are more important

What do unstable financial systems lead to?

  1. Unstable financial systems hurt economic growth and job creation in the long run
  2. The fiscal costs of bailouts can also be staggering

What should be the next step?

  1. The next step should be a clear roadmap for future financial policy before India stumbles into its next banking mess
  2. The Indian political leadership needs to get a sense of what financial structure it desires—and then get experts to advise it on how to achieve it that goal
Oct, 27, 2017

[op- ed snap] A bold step in bank reform

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Recapitalisation of banks is hot topic of discussion these day. It is one of the most important steps taken by the government to counter credit problem in banks. Complement this newscard with our other newscards on the same topic.


News

Contex

  1. The article is about the recently announced plan of the government to recapitalise Public Sector Banks

Government’s plan to counter low growth rate

  1. With India’s economic growth falling in the last couple of years, the government has been casting about for ways to strengthen the economy
  2. The government have realised that a simpler, more effective remedy is at hand: recapitalising public sector banks (PSBs) and enhancing the flow of credit
  3. The proposal to recapitalise PSBs to the extent of Rs. 2.11 trillion (Rs. 2.11 lakh crore) is a much needed step
  4. It is, perhaps, the most effective way to provide a much-needed fiscal stimulus to the economy and revive growth

How Bank capital affects loan growth?

  1. When loans go bad and turn into non-performing assets (NPAs), banks have to make provisions for potential losses
  2. This tends to erode bank capital and put the brakes on loan growth
  3. That is precisely the situation PSBs have been facing since 2012-13

Level of stressed advances in the PSBs

  1. Stressed advances’ (which represent non-performing loans as well as restructured loans) have risen from a little over 10% in 2012-13 to 15% in 2016-17
  2. This has caused capital adequacy at PSBs to fall
  3. Average capital at PSBs has fallen from over 13% in 2011-12 to 12.2% in 2016-17
  4. The minimum capital required is 10.5%
  5. Inadequate capital at PSBs has taken its toll on the flow of credit
  6. Growth in credit has fallen below double digits over the last three years

Is poor demand behind this low credit growth?

  1. According to some experts, the deceleration in credit growth to poor demand
  2. They say that corporates have excessive debt and are in no position to finance any investment
  3. This may be true of large corporates
  4. However, it is not true of enterprises in general
  5. One study, which covered over 4,000 companies, showed that the debt to equity ratio fell below 0.8 (which is a low level of debt) in 2008-09 and remained low until 2012-13
  6. Moreover, demand for investment finance may have decelerated but demand for working capital remains strong
  7. If anything, the introduction of GST has increased small business demand for working capital
  8. Low growth in credit is confined to PSBs

Earlier stand of the government on the issue of stressed assets

  1. In 2014, market estimates had placed the requirement of government capital at a minimum of Rs. 2 lakh crore over a four-year period
  2. In 2015, under the Indradhanush Plan, the government chose to commit a mere Rs. 70,000 crore over the period.
  3. The dominant view in government at the time seemed to be that PSBs had messed up in a big way, so putting more capital into them was simply ‘money down the drain’
  4. Their role needed to be shrunk through consolidation or by selling strategic stakes to private investors
  5. This is a mistaken view
  6. The bad loan problem at PSBs is not entirely the result of mismanagement
  7. There have certainly been cases of malfeasance and poor appraisal of credit
  8. However, as the Economic Survey of 2016-17 made clear, these are not responsible for the bulk of the NPA problem
  9. The problem is overwhelmingly the result of factors extraneous to management

Fiscal impact of the recapitalisation package

  1. Analysts worry about the fiscal impact of the recapitalisation package
  2. International norms allow borrowings for bank recapitalisation not to be counted towards the fiscal deficit
  3. The proposed recapitalisation bonds are likely to add to the fiscal deficit’
  4. The government should not worry unduly about missing the fiscal deficit target of 3.2% of GDP
  5. The markets will understand that the fiscal stimulus is well spent

Other bank crisis around the world

  1. The International Monetary Fund has documented 140 episodes of banking crises in 115 economies in the world in the period 1970-2011
  2. The median cost of bank recapitalisation in these crises was 6.8% of GDP
  3. India’s cost of recapitalisation over a 20-year period is less than 1% of the average GDP during this period
Oct, 26, 2017

Bank funding will be liquidity-neutral

Note4students

Mains Paper 3: Indian Economy

The following things are important from UPSC perspective:

Prelims: Recapitalisation

Mains: This article gives points regarding why recapitalization is desirable and how it will bring market discipline in public recapitalization programme.


News

Context

  1. The Centre’s move to infuse Rs. 2.11 lakh crore capital into public sector banks through recapitalisation bonds and budgetary support is a welcome step, according to Governor, Reserve Bank of India.
  2. He also said that the recapitalisation bonds will be liquidity-neutral for the government except for interest payment.
  3. The banks will be recapitalised over a period of two years through recapitalisation bonds and budgetary provision.
  4. According to him a well-capitalised banking system was a pre-requisite for stable economic growth and this package to restore the health of the banking system was a monumental step forward in safeguarding the country’s economic future.

Why recapitalsisation is desirable?

  1. By deploying recapitalisation bonds, it will front-load capital injections while staggering the attendant fiscal implications over a period of time.
  2. The move will involve participation of private shareholders of public sector banks by requiring that parts of the capital needs be met by market funding.
  3. The healthier banks could get the capital first which will prompt others to also address the balance sheet issues.

Impact

  1. It will allow for a calibrated approach whereby banks that have better addressed their balance sheet issues and are in a position to use fresh capital injection for immediate credit creation can be given priority while others shape up to be in a similar position.
  2. This provides for a good way of bringing some market discipline into a public recapitalisation programme compared to the past recapitalisation programmes.
  3. It is for the first time in the last decade that there was a real chance that all the policy pieces of the jigsaw puzzle will be in place for a comprehensive and coherent, rather than piece-meal, strategy to address the banking sector challenges.
  4. It bodes us well that this step has been taken in a time of sound macroeconomic conditions for the economy on other fronts.
Oct, 26, 2017

[op-ed snap] Reforms needed to back bank recapitalisation

Image Source

Note4students

Mains Paper 3: Economy | Indian Economy Issues relating to planning

The following things are important from UPSC perspective:

Prelims Level: Not Much

Mains Level: This plan of government is very necessary for countering the rising NPA problems in the Indian Banking Sector. Complement this article with one of our previous newscard on the same topic, Click here


News

Context

  1. The article talks about the recent announcement of a plan of government that will infuse Rs 2.11 lakh crore into Banks

Bold step by the government

  1. The government has done well to commit itself to a bold programme to provide additional capital to public sector banks
  2. The Rs2.11 trillion recapitalisation plan—Rs0.76 trillion of equity from the government and financial markets and another Rs1.35 trillion through recapitalisation bonds, should be adequate for the next two years

Estimation by the CRISIL

  1. It has estimated that public sector banks will need about Rs1.4-1.7 trillion of additional capital by March 2019 to meet the international Basel III requirements

Three important issues that need to be dealt with
First

  1. The challenge will be to ensure that the improper lending to influential industrial groups that took place on both sides of the global financial crisis is not repeated
  2. Giving banks extra capital was only one of the seven grand themes of the Indradhanush programme announced in 2015
  3. The reform of the Indian banking sector—and especially the privatization of banks—should be the next step

Second

  1. Banks will not take adequate precautions when they are lending when they know that the government will step in to help if the loans turn sour
  2. The government should be selective about which banks get the additional capital on offer
  3. A statement by RBI governor suggests that the banks which have worked harder to deal with their problem loans will get priority in access to fresh capital
  4. Such market discipline is needed

Third

  1. The government needs to decide what proportion of the fresh capital will go for provisions against existing bad loans and how much is to be allocated for new loans
  2. That may not seem a crying matter right now, given the weak demand for loans
  3. But it is possible that companies will seek to borrow after a few quarters if the investment cycle does indeed turn in fiscal year 2019

Nature of the recapitalisation bonds

  1. The exact nature of recapitalisation bonds is not yet clear
  2. But it is possible that the government will keep them out of the budget to avoid expansion in the fiscal deficit
  3. Even if recapitalisation bonds are kept out of the budget, they will still add to the government’s debt stock and increase the interest liability
  4. According to estimates, interest payments could go up by about Rs9,000 crore
  5. It is also possible that international investors and rating agencies will look at deficit numbers after taking these bonds into account
  6. Although resorting to recapitalisation bonds is not a desired outcome, it is perhaps the best that the government could have done in the given circumstances
  7. It is important to note that India is predominantly a bank-financed economy and would find it difficult to grow at a higher rate without the necessary support from the banking system

The way forward

  1. The government should back bank recapitalisation with reforms in the financial sector—and in public sector banks in particular
  2. The fact that recapitalisation bonds can be used for capital infusion should not become an alternative for better governance
Oct, 25, 2017

Government unveils Rs 2.11 lakh crore plan to strengthen PSU banks

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

The following things are important from UPSC perspective:

Prelims Level: Not Much

Mains Level: NPA issue is very crucial for Indian Economy. It is one of the biggest step taken by the government to solve this problem.


News

Roadmap for strengthening Banking Sector

  1. The government has announced a Rs 2.11 lakh crore two-year road map for strengthening NPA-hit public sector banks
  2. It includes re-capitalisation bonds, budgetary support, and equity dilution
  3. The capital infusion will be accompanied by reforms to enable the state-owned banks to play major role in the financial system and give a strong push to the job-creating MSME sector

Particulars of the programme

  1. The programme entails mobilisation of capital to the tune of about Rs 2,11,000 crore over the next two years, with maximum allocation in the current year
  2. These allocations will be through budgetary provisions of Rs 18,139 crore, and recapitalisation bonds to the tune of Rs 1.35 lakh crore

How will the balance be raised?

  1. The balance will be raised by banks from the market by diluting government equity
  2. The government’s equity dilution will help banks to raise about Rs 58,000 crore
  3. The government equity, as per the current policy, can come down to 52 per cent in state-owned banks

Rising level of NPA

  1. NPAs of banks have increased from Rs 2.78 lakh crore in March 2015 to a staggering Rs 7.33 lakh crore as on June 2017

Plan for MSMEs

  1. MSMEs will be handheld by extending support through compulsory TReDS (Trade Receivables electronic Discount System) registration by major PSUs within next 90 days, for shortening the cash cycle
  2. TReDS is an institutional setup for flow of finance to micro, small and medium enterprises (MSMEs) through multiple financiers at a competitive rate
Oct, 21, 2017

Govt permits banks to sell more small savings schemes

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: National Savings Certificate (NSC), Public Provident Fund, Kisan Vikas Patra-2014, Sukanya Samriddhi Account, Senior Citizen Savings Scheme-2004

Mains level: Impact of increased money with banks due to investment in savings schemes on economy


News

Banks can now sell most of the small savings schemes

  1. In order to encourage savings, the government has allowed banks, including top three private sector lenders, to accept deposits under various small savings schemes like National Savings Certificate (NSC), recurring deposits and monthly income plan
  2. Until now, most of the small savings schemes were sold through post offices

Schemes now accessible through banks

  1. According to a recent government notification, banks can also sell National Savings Time Deposit Scheme 1981, National Savings (Monthly Income Account) Scheme 1987, National Savings Recurring Deposit Scheme 1981 and NSC VIII issue
  2. So far, these banks were allowed to receive subscription under Public Provident Fund, Kisan Vikas Patra-2014, Sukanya Samriddhi Account, Senior Citizen Savings Scheme-2004

Interest rates decided on quarterly basis

  1. On the basis of the decision of the government, interest rates for small savings schemes are to be notified on a quarterly basis since April 1, 2016
  2. These schemes have a higher interest rate than that offered by banks on normal savings account
  3. Increased outlets for selling small savings scheme would result in higher mobilization under the scheme
Oct, 16, 2017

Money-go-round is neat way to fix Indian banks

source

Note4students

Mains Paper 3: Government Budgeting, Indian Economy and issues relating to planning, mobilization of resources, growth and development, employment.

 

From UPSC perspective, the following things are important:

Prelims level: Basel norms, Recapitalisation bonds

Mains level: Recapitalisation of banks


News

Context-

  1. The article bats for recapitalisation of public sector with a financial instrument called as the recapitalisation bonds.

 

What are recapitalisation bonds?

Here the government borrows from the banks by issuing them bonds, and then uses the proceeds to bail the lenders out.
Need for recapitalisation bonds-

  1. According to Fitch Ratings, local banks need as much as $65 billion by 2019 to meet Basel III standards. With valuations below book value for most state banks, the government could raise barely $6 billion by reducing its stake in around 20 lenders.
  2. Also, government does not have much cash to deploy in direct injections, since it is already stretched to meet a 2% fiscal-deficit target.

 

Benefits of recapitalisation bonds-

  1. This looks attractive because banks are flush with deposits, giving them firepower to lend, but credit demand is weak.
  2. Over time, government can potentially settle the debt by selling the bank equity it acquires using the bond proceeds.
  3. According to Credit Suisse, under some accounting standards this fix would not add to the fiscal deficit — though it would do under India’s current norms. Perhaps those might be changed.

 


 Back2basics

  1. History and Working of recapitalisation bonds: In the early nineties, nationalised banks in India saw a severe erosion in their profitability and capital base. This prompted the government to issue recapitalisation bonds. It simply borrowed from the banks themselves to meet their capital requirements! To do this, it issued several tranches of special non-marketable securities to the nationalised banks. The banks subscribed to these bonds in the normal course of their business. The cash thus raised was used by the government to infuse fresh ‘equity’ into the beleaguered banks. Initially issued for a specified period, these bonds were later converted into marketable securities or into perpetual bonds, by mutual agreement between the banks and the Centre. While the government was merely postponing its obligations through these bonds, this move did not result in undue fiscal burden over the long term, as the Centre earned both dividends and market returns on bank shares.
  2. Basel norms: Baselguidelines refer to broad supervisory standards formulated by this group of central banks – called the Basel Committee on Banking Supervision (BCBS). The set of agreement by the BCBS, which mainly focuses on risks to banks and the financial system are called Basel

 

Oct, 07, 2017

First, Fix the Banks

Note4students

Mains Paper 3: Government Budgeting, Indian Economy and issues relating to planning, mobilization of resources, growth and development, employment.

 

From UPSC perspective, the following things are important:

Prelims level: Tier 1 Capital in banks, Fiscal stimulus

Mains level:Steps to revive economy, Recapitalisation of banks

 

 


News

Context-

  1. The article bats for selective recapitalisation of public sector banks in order to ease financing and revive the economy.

 

Background-

  1. The economy has seen growth spiralling downwards for the last six quarters consecutively.
  2. And as some experts suggest, due to poor design and implementation of GST the growth might further fall in the next two quarters.
  3. Some have suggested initiating a fiscal stimulus in order to revive demand and consequently the economy. However, fiscal stimulus will not address the root cause of the problem i.e. shrinking credit disbursement by the banks.

Main reason for deceleration of growth is
The massive tightening of credit disbursement by the banks.

 

Why have the banks reduced credit disbursement?

  1. The Indian Public Sector Banks comprising 21 “nationalised banks” and six of the State Bank of India group, account for almost 70 per cent of the assets and liabilities of the system.
  2. Post global financial crisis of 2008, government initiated fiscal stimulus and at that time banks were also keen to lend (sometimes with inadequate evaluation). This is the time when big projects were undertaken in the power, ports and housing sectors. However, the coal and spectrum scandals withthe policy paralysis experienced at the top leadership led to squeeze in debt disbursement by the banks. From a growth of around 15 per cent four years ago, Public Sector Banks (PSB) advances grew by just 3 per cent in 2015-16.
  3. As of December 2016, gross NPAs for the 27 PSBs were Rs 6,47,800 crore, or 88 per cent of the total NPAs recorded across all banks.
  4. Today for the PSBs as a whole, gross NPAs are greater than their tier-1 capital (the one that really counts).
  5. Another major reason for downfall in credit disbursement is the provisioning for bad loans done on account of the Asset Quality Review by the Reserve Bank of India.

 

Solution

  1. The RBI has done the right things: Tightened income recognition and provisioning and forced banks to book losses on their balance sheet.
  2. The banks have also done the right things of going after major defaulters and initiating better bankruptcy resolution.

What should the government do?

  1. It should initiate selective recapitalisation of better banks so that these banks can get back to lending.
  2. In order to avoid the ‘’moral hazard’’ government can recover this cost by raising capital directly from the market by divesting some shares from these banks. This will strengthen the stressed balance sheets of the banks and give them a breathing space to re-start credit disbursement.

 


Back2basics

  1. NPA: Read in detail here.
  2. Tier 1 Capital: This includes common shares, preferential shares and all the assets which are highly liquid and can be used to ward off any sudden crisis.
  3. Fiscal Stimulus: Increasing government spending on infrastructure etc in order to lift investor sentiment, increase money supply in the market and increase demand in the economy.
  4. Moral hazard: The government believes that if it recapitalises the banks then it might cause a moral hazard. Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. It arises when both the parties have incomplete information about each other.
  5. Asset Quality Review: The RBI periodically conducts review of the asset qualities of banks. However, in 2015-16 it clubbed the procedure for two quarters and reviewed them collectively. This review is conducted to make sure banks are provisioning sufficient amount for bad loans.
Oct, 03, 2017

Extra capital into PSBs: Recapitalisation bonds being considered

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Read the attached story.

Mains level: Important step to counter issues of loss making PSBs. It will definitely help solve the problems related to the NPAs.


News

Recapitalisation bonds

  1. The government is discussing infusion of an additional capital in public sector banks (PSBs)
  2. How and why: By issuing recapitalisation bonds, to provide capital(to PSBs) without disturbing the fiscal deficit figures
  3. Government’s plan: Discussions are underway to raise capital support by another Rs 20,000-25,000 crore for the PSBs
  4. This addition will be in addition of the Rs 10,000 crore provided in the current financial year’s Budget for PSBs’ capitalisation
  5. The extra capital is expected to be generated through sale of non-core assets of the banks and equity infusion by the government via the recapitalisation bonds
  6. With enough liquidity in the banking system post-demonetisation, lenders are expected to buy these bonds
  7. And the money so raised can be used to provide capital to government banks

Particulars of the proposed bonds

  1. The annual interest on these bonds and the principal on redemption will be paid by the Central government
  2. And the funds so raised are to be used to capitalise the PSBs
Sep, 04, 2017

Banks’ cuppa to brew with mergers

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: The step shows keenness of Government. The government wants to expedite the merger process.


News

Issues with Bank Merger

  1. Various governments has highlighted the need for large-sized banks to fund the huge infrastructure requirements of the country as well as compete with global lenders
  2. But a serious question arises: ‘Which chief executive will propose to merge his bank with another and lose his job?’

Seriousness of the current government

  1. Present government has no intention to make it ‘voluntary’ for the board of a bank to decide on a merger
  2. It is evident from the fact that government has wrote letters to banks to kick start the process of mergers and get their respective boards’ approval
  3. This may be the first time in recent history that an official communication has been made by the government to the banks asking them to act on mergers

Alternative Mechanism

  1. The government has also set up an ‘Alternative Mechanism’
  2. It would comprise a ministerial group, to oversee proposals for mergers among banks
  3. A framework had been conceived in which a bank’s board would first clear the decision to merge
  4. And then send the proposal to the ‘Alternative Mechanism’ for its in-principle approval
  5. After the in-principle approval comes through, the bank will take steps in accordance with law and SEBI’s requirements
  6. The final scheme will be notified by the government in consultation with the Reserve Bank of India (RBI)

No need of CCI permission, now

  1. Some hurdles have been removed to expedite the process
  2. For example, approval requirement from the Competition Commission of India(CCI) has been done away with

Post Merger Issues

  1. The merger would create a lot of complexities in terms of branch rationalisation and reduction in human resources productivity for the merged entity
  2. At present, we’ve an example of the merger of SBI with associate banks
  3. Bhartiya Mahila Bank; post merger, the merged entity fundamentals have weakened significantly
  4. Also, after its merger, SBI has seen NPAs rising significantly, from Rs. 1.01 lakh crore (6.94%) to Rs. 1.88 lakh crore (9.97%)
Sep, 02, 2017

Centre tells PSBs to begin merger process ‘immediately’

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: The step shows keenness of Government. The government wants to expedite the merger process.


News

Directions from the Central Government

  1. The Centre has send an official letter to public sector banks asking them to start the merger process immediately
  2. The government had also started preparing the ground to remove certain hurdles for consolidation, such as doing away with the approval from Competition Commission
  3. This is the first time in recent history that an official communication had come from the government to the banks asking them to start the merger process

Objective of the Government

  1. While giving the direction , the government cited the Narasimham committee report
  2. And highlighted the need for large-sized bank that could fund the huge infrastructure need of the country

Framework for the Merger Process

  1. The Centre has provided a broad framework to the banks to take the merger exercise forward
  2. According to the framework, once the board approves the merger plan, it has to be sent to the ‘alternative mechanism’(approved by the Union Cabinet, recently)
Aug, 28, 2017

[op-ed snap] No silver bullet

Image result for Bank merger

Image source

Note4students

Mains Paper 3: Economy | Mobilization of resources

Once you are done reading this op-ed, you will be able to attempt the below.

“Mergers of state-owned banks are not the whole solution. Balance-sheets must be strengthened, governance improved.” Critically examine

From UPSC perspective, the following things are important:

Prelims level:  Not much

Mains level: Bank consolidation -Challenges


News

Context

  • Government has announced that a ministerial panel headed by the finance minister will oversee mergers among state-owned banks

Aim?

  • To create strong banks and that the merger proposals will have to come from the boards of these banks and decisions will be taken purely on commercial grounds

Why such a move?

  1. Bad loans as a ratio of total loans are already close to 10 per cent and the ratio could worsen given the current economic conditions
  2. To address twin balance-sheet problem
  3. The so-called Alternative Mechanism to oversee mergers of PSU banks could be seen as an attempt to skirt the challenge of infusing capital for banks which the government controls or divesting some of these weak banks.
  4. The RBI’s latest Financial Stability Report shows that the gross bad loan ratio of PSU banks could be as high as 14.2 per cent by March 2018 if there is no economic rebound.

Bank consolidation-Challenges?

  1. The global experience shown that they are bound to fail if they don’t meet the test of efficiency, synergy and cultural fit.
  2. Results show a deterioration in earnings of State Bank of India, after the merger of its associate banks with the parent.
  3. It is still not sure whether this planned consolidation will lead to rationalisation, both at the branch level and in terms of staff, and a more efficient banking system.
  4. Pursuing the mergers of these banks without strengthening their balance-sheets and raising governance standards poses the risk of compounding the problems being faced by these lenders.
Aug, 24, 2017

New mechanism to spur PSB mergers

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: It is a step taken by government to counter rising NPA problems in banks. This step also have some other objectives.


News

Step for quicker consolidation among public sector banks

  1. The Cabinet has approved ‘in-principle’ the constitution of an alternative mechanism that will oversee the proposals for mergers among banks
  2. According to the government, the decision to create strong and competitive banks will be solely based on commercial considerations
  3. And such decisions must start from the boards of the banks

Why this step?

  1. Because most of the banks are facing with huge levels of NPAs, slow credit offtake and resultant pressures on capital adequacy
  2. Stronger public sector banks will help meet the credit needs of a growing economy, absorb shocks and give them the capacity to raise resources 
Aug, 11, 2017

Amended Banking Regulation Bill gets elders’ nod

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Particulars of the Bill

Mains level: Banks are facing huge NPA problem in India. This will help Banks to counter issues related to NPA.


News

Nod from Rajya Sabha

  1. The Rajya Sabha has passed the Banking Regulation (Amendment) Bill
  2. This Bill empowers the RBI to issue instructions to the banks to act against major defaulters
  3. It  will replace the Banking Regulation (Amendment) Ordinance, 2017

Why this Amendment?

  1. According to the Finance Minster, the capacity of banks to lend money to small creditors is being impacted, the growth is impacted
Aug, 08, 2017

ATM expansion slows due to note ban

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Different types of ATMs

Mains level: Article gives shows bad effects of demonetisation on banking industry, as ATMs are important for financial inclusion.


News

Expansion of ATMs

  1. Cash crunch following demonetisation, have led to commercial banks cutting down on the number of automated teller machines (ATMs) 
  2. According to Reserve Bank of India (RBI), there were 98,092 off-site ATMs in June 2017 against 99,989 in the same month last year
  3. However, on-site (located within a branch) ATMs rose to 110,385 from 101,346 in the same period
  4. According to bankers, demonetisation was one of the factors that impacted ATM expansion
Jul, 31, 2017

What is NHB Residex?

Image Source

Note4students

It is a prelims specific article.

From the UPSC perspective, the following things are important:

Prelims Level: Particulars of the NHB and NHB Residex.


News

NHB Residex from the National Housing Bank

  1. It is a set of benchmarks that aims to track housing price indicators across Indian cities
  2. It is designed by a technical advisory committee comprising Government representatives, lenders and property market player

Two sets of indices

  1. The NHB Residex currently offers two sets of quarterly Housing Price Indices (HPIs) across the cities it tracks

Back2basoics

National Housing Bank (NHB)

  1. It is a wholly owned subsidiary of Reserve Bank of India (RBI), was set up on 9 July 1988 under the National Housing Bank Act, 1987
  2. NHB is an apex financial institution for housing
  3. NHB has been established with an objective to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support incidental to such institutions and for matters connected therewith.
  4. NHB registers, regulates and supervises Housing Finance Company (HFCs), keeps surveillance through On-site & Off-site Mechanisms and co-ordinates with other Regulators.
May, 01, 2017

Centre for more PSB mergers

  • Fresh from the successful merger of five associates with the State Bank of India, the government is looking to
    consolidate more public banks going forward, with an aim to create only a few lenders of global size and scale.
  • The Finance Ministry will soon undertake a broad study on further consolidation and look at various options for merger among the remaining 21 public sector banks.
  • There are factors like regional balance, geographical reach, financial burden and smooth human resource
    transition that have to be looked into while taking a merger decision.
  • The merger process will get a boost with the likely improvement in the NPA (non-performing asset)
    situation over the next two quarters.
  • The merger proposals in the banking sector would require clearance from the Competition Commission of
    India.
Sep, 12, 2016

Finmin revises criteria for recapitalisation of PSU banks

  1. Change: PSU banks looking forward to the next round of capital infusion will need to fulfil a new set of criteria, including credit recovery
  2. Conditions: The second tranche of capital allocation for the current fiscal would be based on cost of operations as well as recovery and quality of credit on the basis of risk weighted assets
  3. Background: Govt in July had announced the first round of capital infusion of Rs.22,915 crore for 13 banks
  4. The first tranche was announced with the objective to enhance their lending operations and enable them to raise more money from the market
Sep, 08, 2016

India not ready to privatise public sector banks: Arun Jaitley

  1. Finance Minister: India has not reached the point where it can consider selling majority stakes in the public sector banks that control seven tenths of assets in the financial system
  2. Also, public or political opinion has not converged to the point where we can think of privatisation in the banking sector
  3. Govt is consolidating some of the public sector banks to strengthen them, but does not plan to reduce the state’s share below a threshold of 52%
Aug, 12, 2016

Banks should identify key areas for certification of staff: RBI committee

  1. News: A Reserve Bank of India (RBI) committee has recommended that banks should identify specialised areas for certification of staff manning key responsibilities
  2. To begin with, banks should make acquiring of a certificate course mandatory for areas like treasury operations, risk management, accounting, audit function and credit management
  3. Background: RBI had constituted a Committee on Capacity Building in July 2014, under the chairmanship of former executive director, G Gopalakrishna
  4. Objective: Implementing non-legislative recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), relating to capacity building at banks and non-banks, streamlining training intervention
  5. Also, suggesting changes thereto in view of ever increasing challenges in the banking and non-banking sector
Jul, 20, 2016

Centre injects money into public sector banks

  1. News: In a bid to boost credit growth in the economy, the Centre announced a sum of Rs 22,915 crore for recapitalisation of 13 public sector banks
  2. Union Budget: Proposed allocation of Rs 25,000 crore infusion in FY 2017, in line with the Indradhanush
  3. The remaining amount will be released later according to performance which would depend on efficiency improvements, growth in both credit and deposits, and reduction in the cost of operations
  4. The banks’ lending capacities are restricted by poor asset quality and weak capitalisation
  5. The infusions required in the current year were calculated from the Compound Annual Growth Rate (CAGR) of credit growth for the last 5 years and the banks’ projections of credit growth
Jun, 14, 2016

State-owned banks widen reach quicker than private lenders

  1. Context: Recent data released by the Reserve Bank of India comparing private and public sector banks
  2. Public sector banks have increased their presence across the country in terms of ATMs and points of sale devices, far faster than private sector banks have
  3. ATMs & POS: There were 142,500 PSB ATMs as of March 2016, which amounts to 72% of the total number of ATMs in the country
  4. The issuance of credit cards and the share in credit card transactions are two areas where the private sector outshines the public sector
  5. There are 27 public sector banks and 19 private sector banks in operation currently
Apr, 26, 2016

RBI to ease registration process for NBFCs

  1. Context: RBI to simplify the registration process for NBFCs
  2. The new application forms will be simpler and the number of documents required to be submitted will be reduced
  3. The entire process could be made online for ease, speed and transparency
  4. NBFC sector cannot be on a par with the banking sector and the step is meant to ‘harmonise, not equalise’
  5. Why? Totally exempting small NBFCs from regulations may not be feasible from the customer service point of view
Mar, 31, 2016

RBI eases ECB norms for infra space

  1. Context: RBI allowed all companies engaged in the infrastructure sector to raise ECBs with a minimum maturity of five years
  2. NBFC: These also include the non-banking finance companies (NBFC) regulated by RBI
  3. Condition: The borrowings have to be fully hedged
  4. Limit: The individual limit of borrowing under the automatic route is $750 million
  5. NBFCs engaged in the infrastructure space were earlier allowed to raise ECB funding, but there were certain limitations
Mar, 11, 2016

Govt, RBI move in step on banking sector

  1. Context: Govt & RBI are working together on long-overdue purging of stressed assets
  2. Both are chipping in to ensure that a capital cushion is available to banks as they go through clean-up
  3. Neither of them are sympathetic towards defaulting entities or banks that are hurting because of clean-up
  4. Political interferences in the loan approval process, an alleged reason for bad loan mess, have stopped
  5. The intensive asset quality review conducted by RBI was also aimed at clean up of balance sheets
Mar, 08, 2016

Six or more anchor banks likely to lead consolidation

  1. Context: Recently, Gyan Sangam’ bankers’ retreat held at Gurgaon, discussed the idea of bank consolidation
  2. News: Govt. will identify 6 to 10 PSBs which will drive the consolidation process among the state-owned banks
  3. The govt will set up an expert panel for the consolidation process
  4. Reason: The health of PSU banks deteriorated sharply after RBI conducted an Asset Quality Review
  5. Parameter: Merger between the banks will be based on geographical and technological synergies, human resources and business profile

 

 

Feb, 29, 2016

Learn about Bank Board Bureau

  1. Background: PJ Nayak committee was formed to review the governance of Board of Banks in India
  2. The committee recommended bureau as an interim step till the govt. hands over key governance roles to Bank Investment Company
  3. Composition: The bureau will have 3 ex-officio members and 3 expert members, in addition to the Chairman
Feb, 29, 2016

Centre’s nod for Bank Board Bureau(BBB)

  1. News: PM approved the setting up of the Bank Board Bureau with former Comptroller and Auditor-General of India Vinod Rai as its first Chairman
  2. Tenure: 2 years
  3. Why BBB? To improve the governance of public sector banks(PSBs), as part of the 7-point Indradhanush
  4. NPAs of PSBs are estimated at almost Rs. 4 lakh crore, and they need to raise capital of Rs. 2.4 lakh crore by 2018 to conform to Basel-III capital requirement norms
  5. Bureau’s Mandate: To play a critical role in reforming the troubled public sector banks
  6. By recommending appointments to leadership positions and boards in those banks and advise them on ways to raise funds and how to go ahead with mergers and acquisitions
Feb, 25, 2016

Increase capital infusion in PSU banks, says Moody’s

  1. News: According to Moody’s, the govt should increase its proposed capital infusion in PSBs because of a surge in bad loans
  2. Reason: The credit profile of public sector banks will further worsen, if necessary steps are not taken
  3. Proposal: In 2015, the govt had proposed Rs.70,000 crore capital infusion over 4 years
  4. Criticism: Moody’s estimates that the 11 PSBs external capital requirements will be Rs.1.45 lakh crore for the four fiscal years
Feb, 15, 2016

Government to lower stake in PSU banks to 51%

  1. Context: 9 state-owned banks have reported a combined loss of Rs 11,251 crore
  2. Background: PJ Nayak Committee report on banking reforms
  3. The news: The govt is going to announce a series of major banking reforms, including lowering its stake in state-owned banks to 51%
  4. Reason: The political govt needs to maintain arm’s-length distance from these banks and allow them to have more professionalised bank boards
  5. Importance: Public sector banks have played an important role in financial inclusion
Dec, 24, 2015

Central bank calls for review of PSU banks’ dividend policy

  1. According to a RBI report, the dividend policy of public sector banks must be reviewed.
  2. PSBs pay hefty dividend to the shareholders irrespective of the quality of the balance sheet.
  3. The govt. is the majority shareholder in all the PSBs and it uses the dividend from its banks to meet its fiscal deficit target.
  4. As per Indradhanush reforms, PSBs are expected to work as ‘private’ entities in terms of their business strategies, operations, controls and financial target.
Dec, 23, 2015

NBFCs’ sector-specific expertise drives sustained increase in market share

  1. The recent CII report on NBFCs shows that they have steadily eaten into retail banks’ share of credit in the Indian market over the last decade.
  2. NBFCs have taken large share in sectors such as home loans and commercial vehicle loans, due to their sector-specific expertise.
  3. NBFCs command 90% of the used commercial vehicle market, 80% of the loan against property market, and 70% of the consumer durables market.
  4. The NBFCs share of overall credit grew from 10% in 2004-05 to 13% in 2014-15.
  5. NBFCs are attractive to first-time buyers who value a strong relationship with the official from the lending agency.
Dec, 17, 2015

Don’t cover up banks’ wrong acts, SC tells RBI

The Supreme Court held that RBI should not cover up the acts of banks and financial establishments indulging in “disreputable business practices”.

  1. RBI cannot withhold information on defaulters and other issues covered under the RTI Act.
  2. It is the responsibility of the RBI to take strict action against those banks.
  3. Earlier, CIC had directed RBI to furnish the information sought by applicants under the RTI Act.
Nov, 26, 2015

From non-performing to performing

A well-functioning insolvency resolution framework is fundamental for dealing with business failures

What’s new in IBC draft?

  • The ministry of finance recently released the draft Insolvency and Bankruptcy Code (IBC), proposed by the Bankruptcy Law Reforms Committee.
  • An effective insolvency resolution process is one tool, among others, for banks and other creditors to address low recovery rates.

What’s the issue of Banks in India?

  • Banks in India face acute problems of asset quality.
  • Perceiving that laws did not sufficiently empower secured creditors to activate recovery by seizing security.

How does single comprehensive law empowers the system, with the proposed IBC?

  • It empowers all creditors — secured, unsecured, financial and operational to trigger resolution.
  • It enables the resolution process to start at the earliest sign of financial distress.
  • It provides a single forum overseeing all insolvency and liquidation proceedings.
  • It replaces existing management during insolvency proceedings while keeping the enterprise as a going concern.

The way forward

  • The proposed framework strengthens creditors, without discrimination and it will prevent new loans from getting added to existing stock of NPAs.
  • It will aid development of alternative debt securities, spread the risk of corporate failure across larger sets of creditors.
  • It lead to the double benefit of lower systemic risk and deeper debt finance for a rapidly growing economy of entrepreneurs.
Oct, 20, 2015

World recognises India’s strong standing amid global economic turmoil

From economic point of view, today, world is looking up to India not only with sense of hope but also satisfaction.

  1. PM announced that a series of banking sector reforms were in the pipeline that would boost growth in rural areas.
  2. Efforts are being made to make banking premises-less, paperless and eventually currency-less, thereby curbing black money menace.
  3. The govt. has plans to infuse Rs.70,000 crore in the PSBs in the next few years to help them deal with the distressed assets issue.
  4. The global rating agency S&P has retained the sovereign credit rating for India at ‘BBB-’ with stable outlook.
Sep, 17, 2015

RBI's steps to create small banks

  1. RBI, has selected 10 financial institutions to set up separate small banks to lend to small businesses and farmers, who typically struggle to get funding from traditional lenders.
  2. Private-equity backed Ujjivan Financial Services Pvt Ltd and Janalakshmi Financial Services Pvt Ltd were among institutions.
  3. More than 100 million people in the country work at small businesses but only about 4 percent of small businesses have access to institutional finance.
  4. The winners will in future be able to become fully fledged banks depending on their performance and if they comply with rules for banks.
Sep, 03, 2015

What prompted RBI to classify some banks as systemically important?

  1. In November 2011, the Basel Committee on Banking Supervision (BCBS) came out with a framework for identifying Global Systemically Important Banks (G-SIBs) and the magnitude of additional loss absorbency capital requirements applicable to these G-SIBs.
  2. The BCBS further required all member countries to have a regulatory framework to deal with Domestic Systemically Important Banks (D-SIBs).

Implications?

  • Supervisory scrutiny will be more strict for them
  • Concentration risks will have to be taken more seriously in doing business
  • Strategic business shift to meet higher standards
Sep, 01, 2015

RBI declares SBI, ICICI Bank systemically important banks

  1. RBI has declared SBI and ICICI banks as Domestic Systemically Important Banks (D-SIBs).
  2. D-SIBs are perceived as banks which are equivalent of too-big-to-fall in other countries.
  3. D-SIB category banks need to set aside more capital per loan than their peers to prevent a contagion effect, in case of financial crisis.
  4. The D-SIB framework requires the RBI to disclose the names of banks designated as D-SIBs every year in August, starting from August 2015.
  5. This is in-line to directions of Basel Committee on Banking Supervision, to all member countries to have a regulatory framework to deal with SIBs.
Aug, 28, 2015

RBI asks Govt to speed up reforms in banking system

  1. RBI warned govt. that any delay in reform of the banking system would lead to greater risk in the economy.
  2. He emphasized the need to increase efficiency through greater entry and competition.
  3. He stressed on the need for more govt. participation in the country’s financial markets to increase their size, depth, and liquidity.
  4. Govt. can create supporting frameworks that improve transparency, contract enforcement, and protections for market participants against abusive practices.
  5. For a country as big and populous as India, reforms cannot be shots in the dark, subjecting the economy to great uncertainty and risk.
Jun, 17, 2015

Bandhan gets final approval for banking licence from RBI

  1. On April 2, 2014, RBI had granted an in-principle approval to Bandhan and IDFC to set up a bank.
  2. As a bank, Bandhan plans to focus on retail clients and will not focus on corporate clients for lending.
  3. In early 2014, an RBI committee headed by Bimal Jalan submitted its report on the criteria, business plans and corporate governance practices of applicants applying for New Bank Licenses.
Apr, 12, 2015

Banking sector to undergo sea change in two years: Rajan

  1. We might have a whole new set of institutions, payment banks, small finance banks, possibly a postal bank.
  2. Rajan also said the central bank was looking at allowing full capital account convertibility in a few years.
  3. Full capital convertibility means a foreign investor can repatriate his money into his own local currency at will, which is not allowed in the country now.
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