RBI: Looking beyond the shock

live Mint 30 Mar 14
It might be worthwhile to allow banks to give loans to entities such as vulture funds who are interested in the acquisition of financially troubled firms

From Tuesday the Reserve Bank of India’s (RBI) new system of identifying and monitoring stressed assets of the banking sector will come into operation. It is a much stricter regime that has been designed to identify and monitor incipient stress before matters get out of hand.

Banks will, from now on, classify accounts as special mention accounts (SMA), within which there will be three sub-categories. The first category is where there is principal or interest payment overdue for more than 30 days but the account is showing early signs of incipient stress in the form of delay in submission of a stock statement, devolvement of letters of credit or frequent recourse to overdraft. This category is more in the nature of an advance warning system.

The second class is SMA-1, where the principal or interest payment has been overdue for 31-60 days and the third one is SMA-2, where the principal or interest payment has been overdue for 61-90 days. Till now the banks have been following a simple 90 day cut-off norm for classification of non-performing assets (NPAs).

Further, if an account is SMA-2 for any lender, it will result in the formation of a joint lenders’ forum and formulation of a corrective action plan (CAP).

The first implication of the new regime will be a formal quantification of the stressed assets of the banking sector. Until now, what is in the public domain is that the NPAs of the banking sector are in the range of about Rs.3 trillion, which is about 4.5% of the total advances.

If the existing restructured accounts of around Rs.5 trillion are added to the NPAs, the magnitude of the total infected assets touches Rs.8 trillion. This is about 12% to 13% of the total advances.

Given the fact that the mortality of the restructured accounts—slipping of restructured accounts into the NPA category—is not only as high at 33% but has been increasing, the expected impairment of assets in the near future will be high. Anecdotal evidence suggests that the stressed accounts of the SMA-2 type are in the range of Rs.4.5 to Rs.5 trillion. This means the extent of poor asset quality for the banking sector at the aggregate level is around Rs.12.5 toRs.13 trillion. This is more than 20% of total outstanding credit.

This level, extent and spread of the problem, especially across mid-sized companies, is bound to threaten the stability of the financial sector. It is now a triad of stress: within the overall economic stress, there are overleveraged companies struggling to meet their servicing liabilities, and banks with asset quality issues causing capital concerns. Most public sector banks are now near the lower threshold of regulatory capital adequacy requirements.

With higher asset impairment comes a higher provisioning and consumption of capital, which will adversely impact lending and consequently the NPA to the total lending ratio. This is shrinking the system’s ability of to deal with distress both in terms of instruments as well as standards.

While the system of identification of stressed assets has been changed dramatically, the resolution system has not been altered correspondingly. The framework continues to be built on the three Rs: rectification, restructuring and refinancing.

The structural pressures that will drive the banks towards resolution of stress are twofold.

First, the opportunity cost of locked up capital in NPAs is very high for banks—a deterrent to further funding and concessions. These circumstances will force the banks to resolve, deleverage and clean up their balance sheets to meet new regulatory capital norms.

RBI is creating incentives for the sale of stressed assets. However, what has not being adequately recognized is that there isn’t a developed market for stressed assets.

Second, the fact of growth global secondary markets, falling asset prices and constrained liquidity will result in banks looking to trade distressed loans with well-capitalized buyers rather than pursue more traditional workout strategies. It is this that RBI needs to facilitate.

Now that the focus has moved away from NPA resolution to stress management, the policy must focus on creating an enabling environment for mergers and acquisitions (M&As). So far, the only resolution available was for stressed assets through the asset reconstruction companies’ route or direct monetization of the securities.

In the new scheme of things, M&As have to be the linchpin of the stressed assets resolution strategy. To an extent this has been provided for by allowing specialized entities to carry out leveraged buyouts of stressed companies.

This needs to be widened as a strategy to encourage a move from public debt markets to private debt, quasi-equity and private equity markets. It might be worthwhile to allow banks, even if for a short period, to give loans to entities such as vulture funds who are interested in the acquisition of financially troubled companies.

Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice.

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If you can dream it, you can achieve it. –Zig Ziglar

K R Kamat front-runner for RBI Deputy Governor post

   


BL ; PTI  30 Mar 2014

Raghuram Rajan headed search panel has zeroed in on a successor to RBI Deputy Governor K C Chakrabarty and PNB Chairman K R Kamath is believed to be top in the reckoning.

Besides RBI Governor Rajan, Financial Services Secretary Rajiv Takru and other expert members had on last Friday interviewed CMDs of nine public sector banks here, an official privy to the selection process told PTI.

The panel called those chiefs who have been heading a bank for more than one year. Kamath, being the senior most among the nine bankers, is the front-runner for the post, the official added.

The vacancy would arise as Chakrabarty has requested to be relieved on April 25, slightly earlier than his scheduled term ending on June 30.

The Reserve Bank has four Deputy Governors — two from within the organisation, one economist and one banker.

PNB Chairman and Managing Director K R Kamath is the senior most among all the nine bankers with an experience of about six years.

The panel will now recommend the name to the Government for approval and the Appointments Committee of the Cabinet, headed by the Prime Minister, will take a final view on the recommendation, the official said.

Others who have thrown their hats into the ring for the RBI Deputy Governor’s post are the CMDs of Bank of Baroda (S C Mundra), UCO Bank (Arun Kaul), Bank of India (V R Iyer), Oriental Bank of Commerce (S C Bansal), Indian Bank (T M Bhasin), Dena Bank (Ashwani Kumar), Indian Overseas Bank (M Narendra) and Canara Bank (R K Dubey).

An RBI Deputy Governor can be appointed for five years or till the age of 62, whichever is earlier. To be eligible for the post, a candidate needs to be less than 60 years old.

After Chakrabarty’s exit there will be two vacancies for Deputy Governors in RBI. The Government is yet to find a replacement for Anand Sinha who retired in January.

(This article was published on March 30, 2014)

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Karnataka Bank promotes five AGMs as DGMs

 

BL 28 MAR 14

Karnataka Bank has promoted five of its AGMs (Assistant General Managers) as DGMs (Deputy General Managers).

The new DGMs are: Nirmal Kumar Kechappa Hegde, Manjunatha Bhat BK, Gokuldas Pai, Ananthapadmanabha B, and Suresh K.

Nirmal Kumar Kechappa Hegde started his career as an officer in the bank in 1987. He has been working in the bank’s credit department at the head office since May 2012.

Manjunatha Bhat BK also started his career in the bank as an officer in 1987. He has been heading the bank's Mysore region as AGM since 2011.

Gokuldas Pai started his career in the bank as an officer in 1990. He has been heading the bank’s Kolkata region since 2011.

Ananthapadmanabha B started his career in the bank as Manager in 1995. He has been heading the IT department at the head office since 2011.

Suresh K started his career in the bank as an officer in 1990. He has been heading the bank’s international division in Mumbai since 2011.

(This article was published on March 28, 2014)

Doing business in India is basically a pain - Wrld Bank

  BL Amar Babu 27 March 2014

The World Bank says doing business in India is basically a pain. The World Economic Forum agrees

It is not a matter of great pride that India, a country of a billion plus people, which aspires to be an economic superpower, ranks in the bottom 30 per cent of global economies when it comes to ease of doing business for small and medium size enterprises.

In the latest (11th) annual edition of the World Bank study, Doing Business 2014, the rank has slipped a further three positions from an already lowly 131 last year to 134 this year.

India sits among the bottom 10 per cent of countries when it comes to the ease of starting a business — ranking 179 out of 189. It takes, on an average, 27 days and the completion of 12 procedures to start a business in India. Even its South Asian neighbours — not exactly economic superpowers — fare better on this count. The regional average is 16.4 days and seven procedures.

As a progressive country we need to show better numbers than the regional average.

Why it matters

There is a strong co-relation between the rankings of the World Bank report, which measures ease of doing business, and the ranking of the World Economic Forum’s Global Competitiveness Report (GCR) 2013-14, which measures the competitiveness of economies. As many as 10 countries are common in the top 20 in both lists. And no, they have no other commonality: be it region, size, or type of government. So clearly, it directly affects the competitiveness of an economy.

But it is not just about empirical evidence. Two of the factors that the GCR takes into account are what it calls goods market efficiency and labour market efficiency. Both these factors affect doing business smoothly. “The best possible environment for the exchange of goods”, notes the report, “requires a minimum of government intervention that impedes business activity”.

India occupies the 60th position among 148 countries in the GCR 2013-14, have slipped down 15 places since 2006. Yet, 60th doesn’t look as bad as 134th, as in the Doing Business report. That is because theGCR takes into account market size as one parameter, where it is a no-brainer that India scores — being at Number 3 globally. It also does fairly well in financial market development — another testimony to the positive impact of a pragmatic regulator, the Reserve Bank of India. India does comparatively well in business sophistication and innovation, things that have nothing to do with regulations.

And where does India falter? Well, it ranks 85 in goods market efficiency and 99 in labour market efficiency — exactly the two factors that measure ease of doing business directly!

In fact, all the problematic factors identified by the GCR when it comes to “doing business” are to do with regulation, governance and policy, such as inadequate supply of infrastructure, an inefficient government bureaucracy, corruption, policy restrictions and policy instability.

Interestingly, it was in response to the 2012 version of Doing Business that the government decided to act. It set up the Committee for Reforming the Regulatory Environment for Doing Business in India, under the chairmanship of former SEBI chairman, M Damodaran.

The committee submitted its report in September 2013, with twenty specific recommendations. Unlike other such taskforces and committees, the Damodaran Committee chose to downplay the role of incentives and focused more on systemic changes, mostly to do with creating a better regulatory architecture and enhancing the efficacy of the regulatory process. The committee also stressed the need to put special emphasis on micro, small and medium enterprises (MSME) and advocated single window mechanisms for all regulatory clearances.

Among its core observations were the needs to tackle the complexity arising out of regulatory disparity between states and the Centre and leverage IT to enhance effectiveness. The Manufacturers’ Association for Information Technology (MAIT) is in complete agreement with both these observations. We believe that working at a state level is absolutely necessary to remove regulatory bottlenecks.

Challenges and opportunities

India’s engineering design capability is proven. The design of a portable ECG machine by GE that became a worldwide hit or a small tractor by John Deere is now part of global engineering folklore. Carlos Ghosn, arguably the most respected automotive industry business leader, has been raving about the frugal engineering capability of India. In high-tech and semiconductors, there is no global company worth its name which does not design products in India.

This led many to hope that India, which had missed the first manufacturing wave, would see the ushering in of a new design-led manufacturing era. In electronics specifically, the government even announced incentives to attract electronic system design and manufacturing investments to the country.

Yet, if large investments have not come, it is because of the operational challenges at the ground level.

MAIT recognises this and has taken several initiatives to address this issue. We conducted a successful workshop in Bangalore on operational excellence in manufacturing, where several Karnataka government officials and IT industry executives jointly deliberated on the steps to remove roadblocks. We plan to replicate the workshop model in other states.

As rightly pointed out in the Global Competitiveness Report, goods market efficiency dealing with taxation and supply chain, and labour market efficiency are extremely important for doing business in a country and contribute to its overall competitiveness.

The four key areas to focus on in the short- to medium-term are customs and logistics issues, taxation issues such as delay in implementation of GST, labour reforms and environment-related issues.

Given its growing local market, large workforce and proven engineering capability, nothing can stop India becoming a major player in the “new manufacturing” era, especially in hi-tech industries, provided we address the operational bottlenecks right now.

The writer is the president of MAIT

Sharing of bank a/c details: India threatens legal action against Switzerland

BS Reporter  |  New Delhi  March 28, 2014 Last Updated at 00:57 IST

Says may declare Switzerland a non-cooperative jurisdiction

In what might lead to a diplomatic row between India and Switzerland, Finance Minister P Chidambaram has sent a strongly-worded communication to his Swiss counterpart, threatening action under domestic laws against that country over its reluctance to share information on 500 Indians who are alleged to have stashed money in HSBC’s Geneva branch.

According to officials, an action under the I-T Act could mean declaring Switzerland a non-cooperative nation — a move similar to what India earlier did with Cyprus. It becomes financially cumbersome for Indians to make transactions with citizens of a nation declared non-cooperative.

“In the event of continued denial of access to vital information, which Switzerland is obliged to provide under the DTAC (Double Taxation Avoidance Convention), India may be constrained to actively consider the options available under our domestic laws,” Chidambaram said in his letter dated March 13 to Swiss Finance Minister Eveline Widmer Schlumpf.

The Section 94A India had inserted in the Income-Tax Act in 2011 empowers it to notify a country non-cooperative (in technical jargon, a notified jurisdictional area), if there is lack of effective exchange of information. If a country is notified as non-cooperative, it affects transactions entered into by assessees in India with citizens of that country. For example, any payment made to a person of that country will attract a withholding tax of 30 per cent.

Also, if a sum is received from a person in that country, the onus is on the assessee to satisfactorily explain the source of such money in the hands of such persons, otherwise it is treated as the assessee’s income. Also, no deduction in respect of any payment made to any financial institution in that country is allowed unless the assessee furnishes an authorisation allowing for seeking relevant information from the said financial institution.

India had invoked this provision against Cyprus and relented only after the European nation agreed to exchange information and amend tax treaty with India.

However, officials concede, unlike Cyprus, Switzerland is a big country and there might be difficulties in declaring it non-cooperative. Switzerland’s GDP stood at $360 billion (on purchasing power parity) in 2012, while Cyprus had just over $23 billion.

Chidambaram said Switzerland had not honoured the terms of DTAC between the two nations under which information about Indians with accounts in Swiss banks had been sought by tax authorities.

“Switzerland’s refusal to provide information to India and other countries on the grounds that the source of the information requested is based on ‘stolen data’ means that, in practice, Switzerland still believes in bank secrecy and is, therefore, not in tune with the modern era,” he said in the letter.

When contacted, an official at the Switzerland Embassy in New Delhi refused to comment immediately.

Syed Akbaruddin, the spokesperson for the external affairs ministry, said: “We will definitely not go against the finance  ministry. Governnment means one entity.”

India wants Switzerland to provide information on bank accounts held by Indians that were part of an HSBC bank list made available to India by the French government. French authorities had provided a list of over 500 Indian citizens who allegedly held HSBC accounts in Geneva.FIRM STANCE
Excerpts of Chidambaram’s letter to his Swiss counterpart

* “You’d appreciate that, such a situation, where there is no effective exchange of information between India and Switzerland despite a clear legal obligation of Switzerland under the DTAC, is a matter of grave concern for India”

* “The Swiss govt had proposed revision of the domestic law for providing information under the tax treaties... which would have enabled Switzerland to provide information to India in the HSBC cases... However, it is learnt the proposed revision did not take place due to strong political opposition in Switzerland”

* “Switzerland's refusal to provide information in serious cases of tax evasion in India is a sensitive matter in India too.”

* “If information continues to be denied to India under DTAC, the Government of India will be constrained to take a position at the global forum that Switzerland still does not comply with the standards of transparency and that the required legal and regulatory framework is still not in place in Switzerland... India may also have to raise the issue at fora such as G-20”
The data were called stolen by Swiss authorities because a French employee of HSBC Geneva had obtained the information through unauthorised means before it landed with the French government in 2008-09. India had made its request to Switzerland for details in 562 cases.

Chidambaram’s letter said: “You would appreciate that, such a situation, where there is no effective exchange of information between India and Switzerland despite clear legal obligation of Switzerland under DTAC is a matter of grave concern for India.”

He requested that country to reconsider its move, saying India was seriously concerned that some taxpayers might have parked substantial unaccounted money and assets abroad.

Chidambaram also threatened to raise the issue of non-coopearation by Switzerland at international fora like G-20 and the global forum of the Organisation of Economic Cooperation and Development (OECD).

Akbaruddin confirmed this could be the next step. “We will see when we can take it up.”

The issue has become more important in the country as corruption has been one of the Opposition parties’ biggest election plank against the ruling Congress party. Also, the Supreme Court had on Wednesday pulled up the Centre for its failure in bringing back black money stashed abroad.