Bad loans cannot be dismissed as legacy issue; better attend to it

Indian Finance Minister Arun Jaitley , reviewed, November 23, the level of non-performing assets or bad loans of the state-owned banks which account for over 70 per cent of the Indian banking business.

                                      North Block housing FM office  

After the meeting , he tweeted that the level of bad loans of the  Indian banks is “unacceptable”. At his press conference,  the Finance Ministry beat boys and girls were rather careful in crafting questions even when they wanted to ask some real tough ones. Having been a beat boy myself in different ministries, I know their problems. Simply put, if they act “too smart” either in asking questions or in writing story, they would not get one.  The editor is  not going to listen. He/she would like those on the beats to be “cultivating “ ministers and secretaries and not offending them. Anyways, let me not distract and return to the basic issue of bad loans.

This meeting of the FM with the banks was quite well publicized through the official tweets and agency reports.  Some market analysts and TV anchors were discussing whether any major announcement could be expected. Well, bankers had a review meeting with PM Modi some months ago following which “Indradhanush” (Rainbow) package was announced . That had . included recapitalization of Rs 70,000 crore in four years, giving autonomy to banks and political leaders keeping off. It is a different thing that given the gravity of the problem, much more capital infusion is required in the banks where majority stake is held by the government.  

So, in any case, you cannot expect packages every time the FM reviews functioning of the banks owned by the government. In a rather dismissive way, Jaitley talked about generalities like the Bankruptcy bill in the pipeline and how it would help the defaulters exit from the messy companies promoted by them. The sector specific problems in steel and power were also discussed and I am sure, bankers would or rather should have given their real take on the issue.

The FM is right when he says that some of the problems are legacies being attended to by this government.  This government of PM Modi is now about 18-month old and I am sure, the FM would not like to leave this legacy for the next government whoever forms it. So, the best way is to attend to the problem as it exists today and not always blame the legacy. After all, it is because of this legacy issue that Mr Modi swept the elections and the Congress punished. Sure, the country would  not like to be left with at least this kind of a legacy.    

Global firm CLSA has estimated that about 15 per cent of advances by the Indian banks are under stress. Now that is huge and surely, not sustainable and as Jaitley says “unacceptable”. Assuming that some such estimates would have exaggerated the figure, let us take the  RBI figures. It  had put this stressed assets (NPA plus restructured assets) at 11.05 per cent of gross advances as in  March,2015.

According to CLSA, the Indian government is not giving the kind of urgency which is required to address the issue. On the face of it, that may appear so and who knows CLSA may be right. But what gives me hope is a report in Business Standard how Vijay Mallaya , the poster boy of yester years, is trying to work out a deal with the banks to pay them back Rs 7,000 crore . The change of heart in Mallaya, who is believed to be ‘ willful defaulter’ ( legally or otherwise), has come about after Central Bureau of Investigation started  building  pressure on him and his firms including the grounded Kingfisher Airlines.

Maybe, what Finance Ministry and RBI cannot do, CBI can do it, at least with the willful defaulters and there are plenty of them. 

      

Pic courtesy: GOI

RBI Governor Rajan on GST, ease of doing business, macro picture, exchange rate and tolerance debate

In a TV programme (NDTV), RBI Governor Raghuram Rajan, one of the most well respected central bankers in the world,  made certain observations about Indian economy including  a sharp fall in exports, inflation, public sector investment , slow private investment, exchange rate and political discourse affecting economic agenda.

On the exchange rate: Governor Rajan is not much bothered about Indian rupee losing exchange rate competitiveness vis-à-vis currencies of some of the competing emerging markets. There is no point seeing depreciation of the domestic currency and then importing inflation. In the end , it plays out. So, he does not favour any effort by the central bank to devalue rupee.

On macro picture: There is a pick up in public investment in road building and hope that the same would pick up in the railways. Private firms in certain sectors  are witnessing slow investment as they reel under heavy debt. One thing that has to be kept in mind is deficient Monsoon rains which have led to subdued rural demand.

Still in certain  sectors like  automobile, there are signs of revival (the latest sales volume saw  22 per cent  annual increase).  In the banking, certain structural reforms like grant of licence to new banks like Bandhan Bank, IDFC Bank and payment banks would trigger economic activity and generate jobs.

On ease of doing business: “RBI is working on some of the things we can fix directly. We are truly convinced we need to have business environment easier”.

E-commerce and start-ups: It is an ideal opportunity for India where because of high cost of  land and commercial estate, the brick and mortar is becoming an expensive.

On much delayed Goods and Services Tax (GST): While the government is  trying hard, passage of GST Bill by Parliament would send a strong signal in the world and “ buy us enormous protection against any volatility”.  

India launching gold schemes for investors with an eye on checking imports

With an objective to check import of gold, the Indian government is launching four gold related investment schemes with different features.Indian society is obsessed with gold. No wonder India is the world's largest consumer of the yellow metal. The schemes will open on November 5, 2015

Gold Monetisation Scheme (GMS), 2015

The GMS will replace the existing Gold Deposit Scheme, 1999. However, the deposits outstanding under the Gold Deposit Scheme will be allowed to run till maturity unless the depositors prematurely withdraw them.

 Resident Indians (Individuals, HUF, Trusts including Mutual Funds/Exchange Traded Funds registered under SEBI (Mutual Fund) Regulations and Companies) can make deposits under the scheme. The minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30 grams of gold of 995 fineness. There is no maximum limit for deposit under the scheme.

 The gold will be accepted at the Collection and Purity Testing Centres (CPTC) certified by Bureau of Indian Standards (BIS) and notified by the Central Government under the Scheme. The deposit certificates will be issued by banks in equivalence of 995 fineness of gold. The principal and interest of the deposit under the scheme will be denominated in gold. The designated banks will accept gold deposits under the Short Term (1-3 years) Bank Deposit (STBD) as well as Medium (5-7 years) and Long (12-15 years) Term Government Deposit Schemes. While the former will be accepted by banks on their own account, the latter will be on behalf of the Government of India. There will be provision for premature withdrawal subject to a minimum lock-in period and penalty to be determined by individual banks.

Interest on deposits under the scheme will start accruing from the date of conversion of gold deposited into tradable gold bars after refinement or 30 days after the receipt of gold at the CPTC or the bank’s designated branch, as the case may be and whichever is earlier. During the period from the date of receipt of gold by the CPTC or the designated branch, as the case may be, to the date on which interest starts accruing in the deposit, the gold accepted by the CPTC or the designated branch of the bank shall be treated as an item in safe custody held by the designated bank.

The Short Term Bank Deposits will attract applicable Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). However, the stock of gold held by the banks will count towards the general SLR requirement. The opening of Gold Deposit Accounts will be subject to the same rules with regard to customer identification as are applicable to any other deposit account.

The designated banks may sell or lend the gold accepted under STBD to MMTC for minting India Gold Coins (IGC) and to jewellers, or sell it to other designated banks participating in GMS. The gold deposited under MLTGD will be auctioned by MMTC or any other agency authorised by the Central Government and the sale proceeds credited to the Central Government’s account with the Reserve Bank of India. The entities participating in the auction may include the Reserve Bank, MMTC, banks and any other entities notified by the Central Government. Banks may utilise the gold purchased in the auction for purposes indicated above. Designated banks should put in place a suitable risk management mechanism, including appropriate limits, to manage the risk arising from gold price movements in respect of their net exposure to gold. For this purpose, they have been allowed to access the international exchanges, London Bullion Market Association or make use of over-the-counter contracts to hedge exposures to bullion prices subject to the guidelines issued by the Reserve Bank.

Complaints against designated banks regarding any discrepancy in issuance of receipts and deposit certificates, redemption of deposits, payment of interest will be handled first by the bank’s grievance redress process and then by the Reserve Bank’s Banking Ombudsman.

Sovereign Gold Bond Scheme

The Reserve Bank of India, in consultation with Government of India, has decided to issue Sovereign Gold Bonds. Applications for the bond will be accepted from November 05, 2015 to November 20, 2015. The Bonds will be issued on November 26, 2015. The Bonds will be sold through banks and designated post offices as may be notified. The borrowing through issuance of the Bond will form part of market borrowing programme of the Government of India.

Sovereign Gold Bond will be issued by Reserve Bank India on behalf of the Government of India. The Bonds will be restricted for sale to resident Indian entities including individuals, HUFs, trusts, Universities, charitable institutions. The Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram. The tenor of the Bond will be for a period of 8 years with exit option from 5th year to be exercised on the interest payment dates. Minimum permissible investment will be 2 units (i.e. 2 grams of gold).The maximum amount subscribed by an entity will not be more than 500 grams per person per fiscal year (April-March). A self-declaration to this effect will be obtained.

In case of joint holding, the investment limit of 500 grams will be applied to the first applicant only. The Bonds will be issued in tranches. Each tranche will be kept open for a period to be notified. The issuance date will also be specified in the notification. Price of Bond will be fixed in Indian Rupees on the basis of the previous week’s (Monday–Friday) simple average of closing price of gold of  999 purity published by the India Bullion and Jewellers Association Ltd. (IBJA).  Payment for the Bonds will be through electronic funds transfer/cash payment/ cheque/ demand draft. The investors will be issued a Stock/Holding Certificate.

 The Bonds are eligible for conversion into de-mat form. The redemption price will be in Indian Rupees based on previous week’s (Monday-Friday) simple average of closing price of gold of 999 purity published by IBJA. Bonds will be sold through banks and designated Post Offices, as may be notified, either directly or through agents. The investors will be compensated at a fixed rate of 2.75 per cent per annum payable semi-annually on the initial value of investment.

Bonds can be used as collateral for loans. The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time. Know-your-customer (KYC) norms will be the same as that for purchase of physical gold. KYC documents such as Voter ID, Aadhaar Card/PAN or TAN /Passport will be required. The interest on Gold Bonds shall be taxable as per the provision of Income Tax Act, 1961 (43 of 1961) and the capital gains tax shall also remain same as in the case of physical gold. Bonds will be tradable on exchanges/NDS-OM from a date to be notified by RBI. The Bonds will be eligible for Statutory Liquidity Ratio(SLR). Commission for distribution shall be paid at the rate of 1% of the subscription amount.

Gold Coin/Bullion Scheme

The Indian gold coin is a part of the Gold Monetisation Programme. The coin will be the first  ever national gold coin and will have the National Emblem of Ashok Chakra engraved  on one side . Initially the coins will be available in denominations of 5 and 10 grams. A 20 gram bar/bullion will also be available. Initially, 15,000 coins of 5gm, 20,000 coins of 10 gm and 3,750 Gold bullions will be made available through MMTC outlets. The Indian Gold coin is unique in many aspects and will carry advanced anti-counterfeit features and tamper proof packaging that will aid easy re-cycling.

The Indian Cold coin will be of 24 karat purity & 999 fineness. All coins will be hallmarked as per the BIS standards. These coins will be distributed through designated & recognised MMTC outlets.

Pic courtesy: MMTC

Cut in small saving rates would mean robbing Peter to pay Paul

India’s # gross  domestic saving has declined from 33.9 per cent of the # GDP in  2011-12 to 30.6 per cent in 2013-14, as per the latest data of the Finance Ministry on its web site. It would have come down further in subsequent years.

So, the# savings have been coming down, for sure. Contrary to an impression widely generated, it is not the bank  #lending which is a primary source of it. #Investment , but the national savings which fund the investment.

But look at the narratives: Small savings rate must come down so that #banks are enabled to reduce their #deposit rates for ultimately helping the borrowers at the cost of depositors, who do  not have as strong a lobby as those in the EMI group. That is why, whenever, there is a change in the interest rates, the  # headlines  would scream    - whether EMI on auto or home loans would be affected or not.  

This time around, as he cut the policy rate by 50 basis points on September 29,  # RBI Governor #Raghuram Rajan said  he would work with the government to reduce the interest rates on #small savings on#  National Saving Certificates, #  PPF  and other post office schemes . The government, which in turn, had been nudging the RBI to cut the rates, felt obliged to reciprocate and Economic Affairs Secretary #Shaktikanta Das promised to get the issue examined….His boss, #FM Arun Jaitely too wants it that way.

So, the banks, government and the RBI all want the small saving rates to come down without bothering whether the main source of investment –savings would decline or not. They feel , there is a fit case for transfer of resources from one section of the society, there are tens of  crores of Indians who are small savers so that the industry and infrastructure could be financed at cheap rates , to the other who are consumers of passenger cars, high end mobile phones , investors in housing etc…..The government feels that way economic activity could be revived.

The small saving rate is about 8.5 per cent almost equal to the #FDs in the banks. The justification for cutting the rate would be that the #CPI inflation has come down and would further be brought down far exceeding the RBI targets of six per cent for January , by a few basis points.

But at the same time, Governor Rajan expressed concern over rising prices of health and education, the two important expenditure heads for the middle class, the back bone of the savings basket.

What government wants to do is to # Rob Peter (small savers) to pay Paul( high end consumers and industrialists)…..Will it work?