RBI to transfer Rs. 52,679-cr surplus profit to Govt

 

BL 11 Aug 2014

The Reserve Bank will transfer to the Centre its surplus profit of Rs. 52,679 crore, about 60 per cent more than the amount given last year.

“The Central Board of Directors of the Reserve Bank of India...approved the transfer of surplus amounting to Rs. 526.79 billion for the year ended June 30, 2014 to the Government of India,” the central bank said in a statement, adding that the transfer will take place today.

Last year, the RBI had transferred its Rs. 33,010-crore surplus profit to the Centre.

The amount will provide some help to the government, which proposes to bring down the fiscal deficit to 4.1 per cent of GDP this fiscal from 4.5 per cent last year.

The Reserve Bank follows the July-June accounting year.

Ghost in the Cash Machine

Arun Kumar  Aug 11 2014 : The Economic Times (Bangalore)   The Syndicate Bank incident demands a transparent loan -clearance mechanism in place Is the bribery charge against the Syndicate Bank chairman  and managing director Sudhir Kumar Jain a trailer of what's  in store for perceived standard operating procedure at state -owned banks that are vulnerable to pressure from political  bosses? Or is it a one-off incident? Investment revival in the Indian economy in the short run rides  on the answer to that question. If Jain's arrest leads to a  freeze in lending or loan-restructuring decisions across banks,  projects will remain stalled.Which first-generation promoter in  India has deep-enough  pockets to bring in the equity needed for any large project?  It is common practice to mobilise the promoter's equity contribution also from the loan raised from the bank for the project by inflating the project cost. If the promoters are honest, the gold-plating is 30%. A project actually worth ` . 100 crore would be implemented for ` . 130 crore and banks give a`. 90-crore loan from which the promoters take out ` . 40 crore to bring the amount back as their equity contribution. And this is probably the bestcase scenario. In some cases, this gold plating goes up 50%. And bankers are kept in the loop, obviously for a consideration. Or, at the behest of political masters, across party lines. Such projects are unviable from day one. But the promoters  and bankers work together to defer the impending problem  by delaying the completion of the project to reap two gains.  A company is allowed to capitalise the interest during the construction  period, which means interest payment is part of the project cost.  After commissioning, the project needs to generate enough resources to meet interest obligations, which is often difficult. The longer the period of implementation, the easier it is to take  out the money from the project and convert it as equity. It also  helps in justifying the rise in project cost that further helps the nexus. Once you reach closer to commissioning and the interest meter is  about to start ticking, such promoters start another project. This helps the bank to give a new loan that is diverted to repay the old loan. The cycle continues and the promoters become  bigger and bigger till they become a systemic, multi-billion-dollar  problem. And the bankers involved, having already made crores,  gracefully retire, passing on the headache to the next boss. Why Top-Down Clearance?The majority of Indian banks have a top-down approach to loan  clearance, justified on the grounds of speed and improving market  share. In case a branch manager does not approve the loan, promoters go directly to zonal or regional managers. In case they are reluctant, they go to the general manager, executive director or the chairman-managing director. And every superior justifies the decision on the ground of business  growth but without any transparency or accountability . No wonder  Percy Mistry , who chaired a government panel on financial sector  reforms, chose to call Indian public sector bankers “zombie bankers“. Ban Intermediaries While the Narendra Modi government has banned the entry of corporate lobbyists and liaison agents, financial intermediaries and  chartered accountants facilitating loans flourish in the banking system. “They use their contacts in the corridors of power to raise loans at cheap rates and take a commission of just 2%,“  according to a mid-sized member of the corporate world. What is the role of intermediaries in getting loans from a bank?  Why do bank officials interact with them? Is athird-party structure  used to legalise bribes in the name of commissions? Why not make  the system more transparent for the purpose of internal records? These days, such meetings between bankers and would-be borrowers  could be recorded at an insignificant cost. And everybody should be warned that the proceedings will be on record. Committee Structure Let loan decisions come through a strengthened decision-making pro cess with a committee structure at branch, zonal and headquarter  levels. And everyone should be empowered to give his or her rationale  for supporting or opposing any financing proposal in a time-bound manner. Senior officials are entitled to overrule the decisions of their subordinates.  But they should record detailed justifications. Banks must monitor the implementation of a project regularly and the  end-use of funds. Why not make the branch manager or zonal officer ensure that the money disbursed goes into stated purposes and is not left at the mercy of the promoters? And someone should be held accountable for this before any fresh disbursal of loan is made. Most importantly , there should be a complete ban on executing projects through an in-house company , unless a discount  to third-party executions at an arm's length can be  demonstrated. Finally , let promoters pony up the committed  equity contribution upfront or provide a detailed mechanism  for the purpose, such as how they will raise the equity for  each project and what their backup plan would be in case of any eventuality .  

when she talks, bank shudder

Binyamin Applebaum  ET 11 Aug 14

Bankers are nearly unanimous on the subject of Anat R Admati, the Stanford finance professor and persistent industry gadfly: Her ideas are wildly impractical, bad for the American economy and not to be taken seriously. But after years of quixotic advocacy, Admati is reaching some very prominent ears. 

Last month, President Obama invited her and five other economists to a private lunch to discuss their ideas. She left him with a copy of The Bankers' New Clothes: What's Wrong With Banking and What to Do About It, a 2013 book she co-authored. 

A few weeks later, she testified for the first time before the Senate Banking Committee. And, in a recent speech, Stanley Fischer, vice chairman of the Federal Reserve, praised her "vigorous campaign." 

Admati's simple message is that the government is overlooking the best way to strengthen the financial system. Regulators, she says, need to worry less about what banks do with their money, and more about where the money comes from. 

Admati argues that banks are taking larger risks than other kinds of companies because they use other people's money, and the results are that they keep crashing the economy. Her solution is to make banks behave more like other companies by forcing them to reduce sharply their reliance on borrowed money. That would likely make the banking industry more stodgy and less profitable — reducing the economic risks, the executive bonuses and, for shareholders, both the risks and the profits. 

SPEED LIMITS 

"My comparison is to speed limits," Admati said in an interview near the Stanford campus. "Basically what we have here is the market has decided nobody else should be driving faster than 70 miles an hour and these are the biggest trucks with the most explosive cargo and they are driving at almost 100 miles an hour." 

In his speech, Fischer said Admati's arguments made sense in principle. "At one level, the story on capital and liquidity ratios is very simple: From the viewpoint of the stability of the financial system, more of each is better," he said. But the United States, he said, was constrained by practicality. 

If other countries aren't willing to impose stricter capital requirements on their own banks — and they don't appear to be — then unilateral increases would hurt the American banking industry and the broader economy. 

Andrew Metrick, a Yale finance professor, said that such rules could also push activity into the less regulated corners of the domestic financial system. He compared the situation to a pair of parallel highways, echoing Admati's metaphor. "If you lower the speed limit on one highway, you'll have fewer accidents on that highway," he said. "But the other road will just get more crowded."

 


'SOMETHING IS VERY WRONG' 

Before the financial crisis in 2008, Admati spent most of her time working with complicated financial models. She had never paid much attention to banking or to public policy. But as the crisis unfolded, she began reading and talking with colleagues — "like a doctor from another field of medicine visiting the emergency room," she said — and grew increasingly disconcerted by what she learned. 

Even after the crisis, banks continue to rely on debt financing far more than other kinds of corporations. Admati said she started asking one question repeatedly: Why were banks behaving so differently? Four years later, she says she's still waiting to hear a good answer. 

Admati decided to enter the public square because she felt that academics and policymakers weren't listening. The Bankers' New Clothes, which she wrote with Martin Hellwig, an economics professor at the University of Bonn, proved a turning point in her campaign. But the first step was much smaller. She was not sure how to reach a popular audience, so in 2010 she enrolled in a programme that teaches prominent women to write opinion articles. 

Her first, published in The Financial Times in the fall of 2010, was a letter co-signed by 19 other academics that criticised an international agreement on minimum bank capital standards as "far from sufficient to protect the system from recurring crises." Banking is the only industry subject to systematic capital regulation. 

Borrowing by most companies is effectively regulated by the caution of lenders. But the largest lenders to banks are depositors, who generally have no reason to be cautious because federal deposit insurance guarantees repayment of up to $250,000 even if the bank fails. This means the government, which takes the risk, must also impose the discipline. 

In the decades before the financial crisis, banks gradually convinced regulators to reduce capital requirements to very low levels. In the aftermath, banks acknowledged that some increases were necessary — they had just needed enormous bailouts, after all — but they fought to minimise those increases. 

The day after Admati's article ran, the same paper ran one by Vikram S Pandit, then the chief executive of Citigroup, arguing that the proposed standards were excessive. "The last thing the global economy needs is another economic dampener," Pandit wrote. 

ADD A DIGIT 

A 2010 analysis funded by the Clearing House Association, a trade group, concluded that an increase of 10 percentage points in capital requirements would raise interest rates by 0.25 to 0.45 percentage points. This, in the view of Admati, is a small price to pay for fewer crises. 

She notes that debt is cheaper than equity largely because of government subsidies — not just deposit insurance but also tax deductions for interest payments on other kinds of debt — so more equity would basically transfer costs from taxpayers to banks. 

Even in the short term, she says, the economic impact may well be positive. Admati says large banks should be required to raise at least 30 per cent of their funding in the form of equity, about six times more than the current average for the largest American banks. This would not affect the ability of banks to accept deposits; it would not even affect their borrowing from other sources. 

Instead, she says, banks should be required to suspend dividend payments, thus increasing their equity by retaining their profits, until they are sufficiently capitalized. She freely concedes that there is no particular science behind her 30 per cent equity figure. The point, she says, is that 5 per cent is the wrong ballpark. The proper baseline, in her view, is what the market imposes on other kinds of companies.

IDBI :CBI registers preliminary enquiry to look into the bank’s decision to sanction Rs950 crore to Kingfisher Airlines

Live Mint 11 Aug 14

 Shares of IDBI Bank Ltd fell as much as 5.5% after the Central Bureau of Investigation (CBI) registered a preliminary enquiry against the state-owned lender and grounded airline Kingfisher Airlines Ltd, with the intention to look into the bank’s decision to sanction Rs.950 crore to the airline at a time when it had a negative net worth and negative credit rating.

Shares of Kingfisher Airlines fell over 5%.

The enquiry comes a week after CBI arrested S.K. Jain, chairman and managing director of Syndicate Bank Ltd for allegedly taking a bribe of Rs.50 lakh for increasing the credit limit of two companies in violation of banking rules. It also arrested Ved Prakash Agarwal, chairman and managing director of Prakash Industries Ltd, which has interests in mining and steel, and Neeraj Singal, vice-chairman of Bhushan Steel Ltd, in the bribery case.

The shares of Bhushan Steel Ltd fell 10% to Rs.197.45. The stock has fallen 50% in the last one week, while Syndicate Bank stock fell 10.58% during the same period.

Recent moves by the CBI against IDBI Bank and the chairman of Syndicate Bank are likely signs of the government getting tough on bad loans in the banking system—as much a reflection of the rot in Indian banking as it is of the economic slowdown and policy paralysis that delayed projects, Mint reported on Monday.

There could be more such action by enforcement and investigative agencies and the banks could get more aggressive in dealing with the sour loans on their books, the Mint report added.

Is Raghuram Rajan being an alarmist by predicting a global markets crash?

FP 11 Aug 2014

RBI governor,  Raghuram Rajan has spoken out once more against competitive monetary policy easing by central banks, especially by the Fed and ECB. In an interview with London based ‘Central Banking Journal’ he commented on potential global markets crash on the back of competitive central bank easing.

In May 2014 in Japan he expressed worries about withdrawal of easing by central banks and its effects on emerging economies.

Rajan had predicted a financial markets crash in 2005 on signs of excessive leverage on mortgage backed securities and the crash happened in 2008, from which the world is still recovering. Will he be right the second time in predicting a global markets collapse?

For markets to collapse there should be bubbles about to burst. Let us see where are the bubbles in the world at present. One definitive sign of bubble is the record lows of junk bond spreads in US and Europe. The junk bond market is a $2 trillion market and at record low spreads, there is a good chance of spreads backing up sharply causing huge losses to investors who have pumped in money into the market over the last few years.

Collapse of junk bond spreads would also affect equities as lower cost of credit for issuers usually feeds into equity valuations. Dow, S&P 500 and Dax have come off by over 3% and 8% from record highs seen in July 2014 and could fall further if the junk bond market collapses.

Chart 1 below show fall in junk bond spreads in US

Benchmark US High yield

Chart 2 show fall in junk bond spreads in Eurozone

The question is, will a rise in junk bond spreads feed itself into a global market collapse? The answer is no and the reason is that there are no other bubbles built in other markets. Emerging currencies are trading at depreciated levels against the USD and this by itself is a sign that markets have been cautious on carry trades despite record low rates maintained by the Fed and ECB.

Table 1 shows the returns of emerging currencies against the USD since 2008

Currency data since 2008

The INR is down over 50% against the USD since 2008 and with India’s macros improving, the currency is resilient enough to withstand any temporary shocks caused by volatility in global markets.

The other reason for a low contagion risk of rise in junk bond spreads on global markets is that the Fed and ECB can always pump in more liquidity if required into the markets. The Fed is winding down its asset purchase program that has come off from $ 85 billion a month to $25 billion a month since December 2013. ECB has actually seen its balance sheet fall as banks are repaying LTRO (Long Term Refinancing Operations) funds. Banks have repaid half of the $1.4 trillion taken in LTRO in December 2011 and February 2012 as they have found no avenues for deployment of the funds.

Other bubbles seen in global markets are largely in real estate, in UK, China and India. These bubbles have not come about on global central bank easing.

Is Dr Rajan being an alarmist when calling for global markets crash?

The writer is the founder Investors are Idiots.com and INRBONDS.com.