Surge pricing in railways is Suresh Prabhu's deliberate self-goal

Union railways minister Suresh Prabhu’s latest move of “surge pricing fare system” is a gambit to reduce finance minister Arun Jaitley’s pain, who looks all set to soon adopt country’s messy public transport behemoth. If everything goes by the plan, the 93-year old Rail Budget would cease to exist from the next financial year i.e. FY […]Read More »

Why Vajpayee stands taller than Rao, Manmohan and Modi put together

In India, privatising a public sector company is perhaps a bigger challenge than contesting an electoral battle or even conducting a nuclear test. Don’t see it as an incongruous claim. This may well be a credible reality if one looks at the 25-year-long history of India’s economic liberalisation. In two-and-a-half decades of economic reforms, despite […]Read More »

Modi's war on black money is a let-down, amnesty schemes cheat honest taxpayers

If one pays his or her taxes honestly and does not expect any favours from the government, he or she has every right to show angst over this never-ending business of amnesties to tax swindlers. Prime Minister Narendra Modi repudiated history when he, during his last Mann Ki Baat, reminded people of the September 30 […]Read More »

Special Category for Andhra will remain elusive

In February 2016, Prime Minister Narendra Modi had assured the Andhra Pradesh Chief Minister Chandrababu Naidu that he would consider conferring the special category status to his state. Apart from this privilege, Naidu has been demanding a special package for the residuary state of Andhra Pradesh after it was carved out from the erstwhile composite […]Read More »

India needs a water-sensitive food trade policy

If one lists the nations most suited to produce wheat, sugarcane, cotton and soybean, China and Egypt will definitely stand atop on historical, geographical and climatic counts. World’s largest river Nile flows in Egypt which every year collects fertile soil from different countries in Africa and deposits it in its delta. On the other side […]Read More »

Modi sarkar and telcos have both hung up on the consumers

Do you get full signal on your mobile? Is your data speed fast enough? Have mobile companies started compensating you for call drops? If your answers are a resounding “no” (naturally, they would!) then, more than the government, we ourselves are responsible. We Indians, afflicted with a strange kind of amnesia, tend to forget the […]Read More »

Modi's foreign trips can wait. Indian trade needs emergency landing

Howsoever spectacular Prime Minister Narendra Modi’s diplomatic campaign might have been, the fact remains the void in the trade diplomacy has grown faster than ever. If the government’s own Economic Survey is to be believed, India’s foreign trade has gained momentum over the last decade with a flurry of free and preferential trade agreements signed […]Read More »

Modi sarkar should bet on services for dream growth

If one observes the samurais of growth driving the GDP rate above seven per cent, one wouldn’t find them in the swanky corporate offices of Mumbai and Delhi, but in the markets close to one’s home. These growth warriors make our lives easier by running eateries, repairing shops and providing dozens of similar services and […]Read More »

Don’t make India a circus of cartels and monopolies

Facebook’s Free Basics trial was so legendary that one Ganesh could double the yield from his fields with the knowledge FB-patented internet facilitated. While, advertisements are notorious for making lofty claims, this one goes beyond limit. Considering the state of agriculture in India, this can’t even be an exception let alone a norm. As it […]Read More »

Let’s fix the system instead of opting out

Allahabad High Court passed an interesting order last month, directing the Chief Secretary of Uttar Pradesh to ensure that from the academic year beginning 2016, children of all officials serving with the government, including judiciary, local bodies and representatives of people, must send their children to study only in government primary schools, failing which the […]Read More »

That is retrograde, Mr Jaitley

An important step in clearing our institutional financial system of the cobwebs it has gathered over the years has now been reversed, with Mr. Arun Jaitley announcing deferment of his plan to set up an independent public debt management authority, which he had promised in the budget presented earlier this year. Till now, Reserve Bank […]Read More »

Coalgate Revisited

  The auction of 33 of the 204 coal mines, whose allocations were cancelled by the Sup¬re¬me Court, has just been completed. The auction has brought the government a ‘windfall gain’ of Rs 2.07 lakh crore for 19 operational blocks and 13 about-to-open blocks which were put under the hammer, against Rs 1.86 lakh crore […]Read More »

Will Federalism at Work Let Populism Thrive ?

The just released recommendations of the Fourteenth Finance Commission’s will have far- reaching consequences for the states of the Indian Union, with 42 percent of the central divisible pool of resources now going to them, as compared to the existing 32 percent provided by the Thirteenth Finance Commission. In terms of resources now available to […]Read More »

Scary Banking: A Tale of Rotten Credits and High Interest Rates

1. For every rupee that banks in India have lent in the nine months to December 2013, 13 paise has turned bad  – RBI data
2.   Stressed assets among PSU banks have reached alarming proportions of approximately 112% of equity – PWC (May 2014)
3.    The cost of cleaning up banks’ balance sheets could be as high as 4 per cent of GDP — slightly larger, in relative terms, than Wall Street’s bail-out. – The Economist
4.    As much as half of the stressed loans in the system falls in category of credit, promoters have siphoned off for personal use – Ambit Research

Jagdish Verma (42), a professional, still frets about how he had missed last cycle (2002 to 2007) of cheaper home loans. That was the best ever time period to buy a house in India. Seven years on, although his income has gone up but real-estate prices have skyrocketed beyond his means. He is impatiently waiting for the time when a sub-10% home loan rate will be a reality again. Anil Gupta (50), an entrepreneur, is worried that he will have to cut down the size of expansion project for his midsize engineering company if cost of credit doesn’t come down in near future. Since energy and other costs are rising and margins are under pressure, low-cost credit is the only hope for him to go ahead with investments in full throttle.

As Indian economy is wriggling hard to bottom out from the five years old deep recession and consumers are rejuvenating dreams of better living, India’s banking is hit by a double whammy. Public sector banks, majority owner of nation’s banking services, are gripped by crisis of rotten credit and decaying credibility. While a time bomb of whopping Rs 5.91 trillion of rotten credit is ticking inside the banking system, recent revelations of bribe for credit, evergreening of stressed assets and corporate-banker nexus have made nation’s top banks highly scary. At a time when proactive and aggressive banking was needed at the most, hounding CBI sleuths, cronies-laden governing boards and nose-diving profits have become the signposts of Indian banking. India’s last phase of high economic growth (2003-2007) had been fuelled by low cost credit, a universal prerequisite for the possible economic upturn. However, with a massive pile of bad loans and perennial capital famine, Indian banking industry is just not able to reduce the interest rates on loans, mandatory for the revival of investment and consumer spending.

Surviving on Prayer
Public sector banks are sending chill down the spines of India-bullish global investors and rating agencies. CBI’s crackdown on Syndicate Bank for bribe to enhance credit limit and preliminary enquiry against IDBI Bank for sanctioning a loan to debt-laden Kingfisher Airlines have revealed the grotesque face of corporate-bankers nexus. While, a sharp 26.8 percent fall in total net profit of all public sector banks (PSBs) for the fiscal ended March 2014 over the previous year has made things worse for the industry.

Banks loans are usually classified as either performing or non-performing by the yardstick of their servicing by the borrowers. Gross NPAs of the Public sector banks for March 2014 stood at Rs 2.43 trillion, up 34.41% from Rs 1.8 trillion a year ago. Bad debt problem has worsened after a new portfolio of loans labeled as “restructured” came into being. In 2008, RBI permitted the use of an intermediate category of restructured loans under relaxed terms in order to give some breathing space to borrowers against the global recession. Indian firms have misused this temporary window and piled up Rs 76,479 crores restructured assets (RA) with the banks. That is how the stressed assets (GNPA+RA) reached Rs 5.91 trillion i.e. 10.2% of total bank credit. Fitch Ratings expects stressed assets to reach 14 percent of loans by March 2015. While Ambit Capital report points out that weak provision (building up reserves against potential loss) coverage ratios may add woes as banks will need to make even higher provisions on the restructured assets from 2015-16.

Lending to black holes
NPA accounts with banking industries can be classified into three categories: a) genuine cases hit by economic slowdown b) diversion of funds by promoters to other ventures, impacted by slowdown c) Promoters siphoning off funds for personal use. The money lent to the third category of NPAs, clearly, is money lost with no assets backing it. A research report from Ambit capital states that this segment probably accounts for as much as half of the stressed loans in the system.

The list of top defaulters to the Indian banks has remained a closely guarded secret among Indian banking industries as bankers hardly share inside tales alluding to banking secrecy laws. The All India Bank Employees Association (AIBEA), the largest union in the banking sector, has revealed the secret list of the country’s top 406 loan defaulters in May, 2014. This is the only major list of top defaulters owing a whopping Rs 70,300 crore to public sector banks.  Vijay Mallya’s Kingfisher Airlines  is topping the list with a bad loan of Rs 2,673 crore. Others creditors who owe  more than Rs 1,000 crore debt  include Winsome Diamond & Jewellery Co. (Rs.2,660 crore) Electrotherm India (Rs.2,211crore), Zoom Developers Pvt. Ltd. (Rs.1,810 crore), Strerling Bio Tech (Rs.1,732 crore), S. Kumars Nationwide (Rs.1,692 crore), Surya Vinayak Industries (Rs.1,446 crore), Corporate Ispat Alloys (Rs.1,360 crore), Forever Precious Jewellery & Diamonds (Rs.1,254 crore), Sterling Oil Resources (Rs.1,197 crore) and Varun Industries (Rs.1,129 crore). This revelation has forced the government and bankers to take a note of top defaulters, although a comprehensive and authenticated list of defaulting accounts is still under wraps.
Willful defaulters are another tough nut to crack due to vacuum of a strong legal framework. Although, RBI and SEBI are toughening norms for ‘non-cooperative defaulters’ and bankers are getting proactive against them, to boot. Even though a large number of cases are stuck in the legal system, bankers feel that the newly strengthened Debt Recovery Tribunals are going to provide some relief.

Every high growth phase leaves behind the trail of bad loans. The credit growth in Indian banking sector during 2002-08 was in excess of 22%. Slackening of economic growth has resulted in lower credit demand as well as rise of stressed assets in banking industry. As per the RBI data, majority of stressed assets are in the infrastructure segment including power, telecom, textile, iron and steel. Industry is in favor of RBI’s likely move to cap large scale borrowings to a single group to avoid big defaults.  This is likely to put a check on easy loans for inconsequential companies under prominent flagships.

Crony bankers
India’s public sector banks have highly dismal record of corporate governance. As demand for cleansing of PSB boards from political cronies is on the rise, the government is working on fresh guidelines for senior-level appointments. This may include splitting of CMD post and inclusion of independent directors in the boards of public sector banks. Though the present government has been slow to fill up top echelons of PSU banks but they have been more cautious and seems to be working in this direction so far.

Former SBI chief Bhatt feels this move will not cut ice as long as a complete overhaul of selection process does not take place. “If you were to look at the appointment of Board Directors differently, or to split the post of the CMD, it would serve no purpose if the selection criteria and the selection process are not changed simultaneously”, he said. RBI has preferred to stay quiet in the debate of murky Bank Board appointments. But questions are likely to knock their door as well. “Board-level appointments are made after RBI’s approval. The selection committee for appointment of chairmen and managing directors (of PSBs) and executive directors is headed by the RBI governor. RBI is also responsible for top appointments”, a senior banker lamented on condition of anonymity.

Double whammy

Banking crises have emerged at a time when industry and consumers are looking for softer interest rate and quick credit. Piles of stressed assets and acute capital crunch will not allow banks to reduce interest rate effectively.  Moreover, it would be highly difficult to kick start investment cycle with debt laden corporate balance sheets. As infrastructure is now a stressed sector for banks, financing to core infra projects is likely to remain slow and tardy. Bank’s hunt for willful defaulters and enforcement agencies chasing erring bankers may prove a dampener to investment revival.

Big Bang Reforms !
The report of the committee headed by former Axis bank CEO Mr. P J Nayak has initiated a fresh debate on banking reforms with its radical recommendations. It says banks should be incorporated under companies’ act with a total repeal of all acts related to the government’s governance functions regarding PSU banks. This report suggests constitution of a holding company (Holdco) to take all the rights and holdings of PSU banks under its command to divest them later. In order to attract the professional CEO and staff, government will have to incentivize them on the market rate, thus making banking boards free from political cronyism.

However, analysts are a bit skeptical. “PJ Nayak Committee recommendations, if implemented, could be one of the radical reforms in Indian banking space. However, we do not expect it to pass in current form given underlying challenges and diverse involvement of stakeholders, said Nilesh Parikh, Associate Director and Banking Analyst Edelweiss Securities. Saurabh Mukherjea, CEO-Institutional Equities, Ambit Capital, points out, “Other than the rottenness of the banks, which the NDA cannot be blamed for, the real issue today is that NDA is mystifying inability to provide clarity on how the banking sector woes will be fixed. Absent such a plan, GDP growth in FY 16 will struggle to reach 6%.”

PSU banks require massive capital infusion by the government (which owns 63% of PSBs) to meet global norms of healthy banking. The P J Nayak Committee estimates that after taking into account the impairment for stressed assets and growth requirements, PSU banks will need capital support of US$40-100bn over FY15-19. This is 2.1-5.4% of India’s FY14 GDP. It is just impossible for government to fund this need from deficit loaded central budget.

If analyst could be believed, Public sector banks are at the precipice of second major debt write-off in last 10 years. Government may go for temporary measures such as creating a bad bank, (American TARP model) to buy stressed assets of the banks or it can ask PSU banks to take a haircut and a subsequent privatization of PSBs. But, it would be an invitation to a bigger crisis in near future.

Cost-effective and easy credit is the bottomline of economic growth and consumer spending. Providing banking services to un-banked population has the potential to add on it. This requires an efficient, robust and transparent banking, while government seems to be satisfied at the moment with cosmetic restructure of banking boards or a plain vanilla divestment.



Why banks' bad loan mess has become murkier now

The murky bad loan mess in the Indian banking system has turned murkier. While the efforts to recover public sector banks’ non-performing assets (NPAs), worth Rs 10 lakh crore, are yet to yield tangible results, the government seems alarmingly divided on the genesis of the NPA problem. Are bad loans in banks the result of an […]Read More »

Modi government's last full Budget will be dull!

There is absolutely nothing to be excited about as the Narendra Modi government prepares itself to present its last full Budget. Budget 2018, will in fact, usher in an era of listless budgets in the country. This statement may sound strange given the hoopla surrounding the Budget presentation on February 1. Given the fact that […]Read More »

Modi government has got carried away by its make-believe growth data

  Economic growth isn’t achieved merely by change of governments, or by a series of electoral victories. Although governments keep making tall claims and paint rosy pictures in front of public, they themselves don’t let it get to their head as they know growth results only when a host of factors fire in tandem. However, […]Read More »

4 disastrous effects of demonetisation that Modi ignored

In spite of several inefficiencies, fortunately, India never witnessed a bank-run or monetary crisis parallel to the scale in Europe or America. However, the chaos and long queues that engulfed banks across India now perfectly mirror the plight the Greeks faced last year, albeit for different reasons. Demonetisation is a rudimentary monetary instrument of the […]Read More »

Modi's historic move against black money brings chaos now, gains later

While Prime Minister Narendra Modi’s unprecedented move to temporary demonetise Rs 500 and Rs 1,000 notes is expected to bring in a host of positives, it will also set off major administrative and logistical challenges at the outset, not to mention the plight of common people. The government and Reserve Bank of India (RBI) will […]Read More »

Diwali or not, India can't boycott Chinese goods

Last fortnight, close on the heels of the rise of firecracker nationalism against Chinese goods on social media, Reserve Bank of India (RBI) was busy making adjustments for yuan’s entry into India’s foreign exchange reserves. Not only RBI, most of the global central bankers too had to alter metrics of their forex reserves after yuan’s […]Read More »

Despite $10 billion in tax net, Modi sarkar's amnesty is a colossal failure

Despite the long history of failed tax amnesty schemes, the Narendra Modi government tried its luck with tax pardons, but to no avail. Howsoever pliable the statistics might be, the fact remains that declarations of Rs 65,250 crore under the black money disclosure scheme could attract just a moderate success for the NDA government. However, […]Read More »

Modi must walk the talk on GST

Even if one doesn’t buy everything that Prime Minister Narendra Modi claimed in his Parliament speech on Goods and Services Tax (GST), one should acknowledge that this is one of the most crucial structural indirect tax reforms in the last 25 years of liberalisation. This may not effectively clamp down on inspector raj, or turn […]Read More »

GST Bill an example of half-baked and vague reform

Contrary to the euphoria and costlier-cheaper headlines, the Constitution (122nd Amendment) Bill 2014 doesn’t spell out even the outline of the GST that India is expected to get in the future. The passing of the GST Bill is just the beginning of a tedious political and operational voyage that should ultimately result in the implementation […]Read More »

Raghuram Rajan, darling of Dalal Street, ‘devil’ for Delhi Durbar

  Sometimes words speak louder than actions. If nowhere, then at least in India. RBI chief Raghuram Rajan has fallen victim to his own candid words (read speeches) on issues of political import. However, his legacy doesn’t lie in his articulations as a blunt economist but as a top-class, innovative and professional central banker. And here […]Read More »

5.80 lakh crore in bad loans: Let's pray for India's bleeding banks

The Rs 13 lakh-crore pile of bad loans of India’s public sector banks now amounts to more than the GDP of countries like New Zealand, Kenya, Oman and Uruguay. A new IMF report states Indian banks are in a poor state compared to the notoriously messy banking of China.The financial results of major public sector […]Read More »

Modi government has actually worked hard to deliver on black money

  After facing severe criticism for its lofty electoral promises on bringing black money to India, Modi sarkar appears to have stuck its neck out on dealing with the issue. The Modi-led government, running past the two-year mark in office, has taken some calculated risks to go ahead on curbing black money. To promote transparency, the government […]Read More »

How India's wealthy are milking billions off subsidy

Do you think the politics of subsidy is only confined around lower and middle economic classes? If yes, then you would wonder how subsidies worth rupees one crore go into the pockets of the rich every year, and that too via merely seven products and services. The subsidy bill may notch up if one takes […]Read More »

India’s three-tiered economy needs bottoms-up approach

Has finance minister Arun Jaitley got it right? If one looks at the economy at hand, the answer would possibly be “Yes”. India is now a three-speed economy.  Double-digit growth is confined to a section that comprises sectors such as e-commerce, travel and stock markets and accounts for 30 per cent of the GDP. Another […]Read More »

India’s Trade Gloom

  Not many years have ended with gloomier prospects for Indian trade. The gloom is not just because of the contraction in exports for 12 months in a row. It is also because India’s role and participation in global trade is becoming increasingly insignificant. The insignificance was evident from the approach to the Nairobi Ministerial. […]Read More »

Budget 2016: Modernising rural economy must be Modi's mission

Last fortnight, when Prime Minister Narendra Modi mentioned crop insurance in his Maan ki Baat programme, people well aware of the state of agriculture justifiably grew anxious. This was not because government’s efforts do not inspire or encourage, but because in spite of three crop failures, Indian politicians are still handling farming with a mindset […]Read More »

Can India finally see a Modi Budget in 2016?

When existing steel companies are already reeling under distress owing to falling demand, why is the Union government going to establish new steel companies in the public sector? What is the need for forming new banks (monetary banks) to provide loans to small companies when several financial institutions of the government are already doing this? […]Read More »

How many more taxes do we need to pay?

Public memory is usually short but the memory of taxation is even shorter. Benchmark brent crude might have tested an unprecedented low of $37 per barrel, but domestic petrol and diesel prices are still ruling higher thanks to heavy taxes. If only the debate on goods and services tax (GST) revolved around explaining this dichotomy, […]Read More »

Is weak rupee still a national shame for PM?

Whether India draws an economic advantage from the ongoing global turbulence or not, a substantial political advantage can definitely be churned out at the moment. It is time for our leaders to rid themselves of their unfounded misconception on the exchange value of the domestic currency, that is, the rupee. In India, the BJP and […]Read More »

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