tag:blogger.com,1999:blog-85414745292417192062024-03-14T10:38:57.464+05:30Ila Patnaik's BlogUnknownnoreply@blogger.comBlogger110125tag:blogger.com,1999:blog-8541474529241719206.post-31475771751544515052019-02-07T10:15:00.002+05:302019-02-07T10:15:46.569+05:30Identifying farmers<div dir="ltr" style="text-align: left;" trbidi="on">
<a href="https://theprint.in/opinion/indias-woeful-land-records-will-have-trouble-identifying-a-farmer-eligible-for-rs-500-month/188360/">India’s woeful land records will have trouble identifying farmers eligible for Rs 500/month</a>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-21899224176565618302019-02-04T12:02:00.001+05:302019-02-04T12:02:12.729+05:30Govt didn’t defend past sins<div dir="ltr" style="text-align: left;" trbidi="on">
<a href="https://theprint.in/opinion/modi-danced-the-fine-line-his-budget-wasnt-anti-rich-his-govt-didnt-defend-past-sins/186627/">Modi danced the fine line – his budget wasn’t anti-rich & his govt didn’t defend past sins</a>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-41146063437717781772019-01-31T13:38:00.002+05:302019-01-31T13:38:24.884+05:30Basic income for poor<div dir="ltr" style="text-align: left;" trbidi="on">
<a href="https://theprint.in/opinion/basic-income-for-poor-demands-subsidy-cuts-a-step-govts-in-india-are-unlikely-to-take/185311/">Basic income for poor demands subsidy cuts, a step govts in India are unlikely to take</a>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-52448434340617281072019-01-29T12:49:00.001+05:302019-01-29T12:49:14.867+05:30Tax incentives<div dir="ltr" style="text-align: left;" trbidi="on">
<a href="https://theprint.in/opinion/how-tax-incentives-influence-household-financial-saving-in-india/184252/">How tax incentives influence household financial saving in India</a>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-16112760808853399812019-01-29T11:10:00.001+05:302019-01-29T11:10:14.729+05:30Draconian Essential Commodities Act <div dir="ltr" style="text-align: left;" trbidi="on">
<a href="https://theprint.in/opinion/draconian-essential-commodities-act-needs-to-go-if-india-wants-to-raise-farm-incomes/183006/">Draconian Essential Commodities Act needs to go if India wants to raise farm incomes</a>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-62592611290708104532019-01-24T14:39:00.002+05:302019-01-24T14:39:51.190+05:30Why RBI must cut interest rates<div dir="ltr" style="text-align: left;" trbidi="on">
<a href="https://theprint.in/opinion/why-rbi-must-cut-interest-rates-in-its-next-monetary-policy-panel-meet/181818/">Why RBI must cut interest rates in its next monetary policy panel meet</a>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-33392053235924349132019-01-23T13:55:00.004+05:302019-01-23T13:55:51.929+05:30Inequality reports<div dir="ltr" style="text-align: left;" trbidi="on">
<a href="https://theprint.in/opinion/inequality-reports-like-oxfam-end-up-hurting-india-poor-with-their-poor-methodology/181357/">Inequality reports like Oxfam’s end up hurting India’s poor with their poor methodology</a>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-5063629806498486172019-01-16T11:31:00.001+05:302019-01-16T11:31:22.089+05:30MUDRA scheme<div dir="ltr" style="text-align: left;" trbidi="on">
<a href="https://theprint.in/opinion/mudra-scheme-what-the-government-failed-to-do-for-small-businesses/178165/">MUDRA scheme: What the Modi government failed to do for small businesses</a>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-5389946794834883342019-01-14T13:56:00.003+05:302019-01-14T13:56:52.400+05:30Bankruptcy code<div dir="ltr" style="text-align: left;" trbidi="on">
<a href="https://theprint.in/opinion/bankruptcy-code-is-a-new-deal-between-the-state-and-businesses-in-india/176267/">Bankruptcy code is a new deal between the state and businesses in India</a>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-9396551356246587372019-01-04T10:40:00.000+05:302019-01-04T11:01:39.452+05:30RBI reserves<div dir="ltr" style="text-align: left;" trbidi="on">
<a href="https://theprint.in/opinion/rbis-global-standing-can-improve-if-its-reserves-are-not-sitting-idle/171956/">Modi govt is right: RBI’s idle, excess reserve can reduce public debt & improve India’s rating</a>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-35348622044734321622019-01-04T10:38:00.004+05:302019-01-04T10:38:31.950+05:30Five major challenges<div dir="ltr" style="text-align: left;" trbidi="on">
<a href="https://theprint.in/opinion/five-major-challenges-that-shook-indias-economy-in-2018/170648/">Five major challenges that shook India’s economy in 2018</a>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-38600812599786012292019-01-04T10:37:00.002+05:302019-01-04T10:37:35.219+05:30Higher MSPs<div dir="ltr" style="text-align: left;" trbidi="on">
<a href="https://theprint.in/opinion/why-higher-msps-dont-really-help-the-indian-farmer-in-the-long-run/168062/">Why higher MSPs don’t really help the Indian farmer in the long run</a>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-78891670031138095752019-01-04T10:36:00.001+05:302019-01-04T10:36:19.092+05:30RBI has a delicate task<div dir="ltr" style="text-align: left;" trbidi="on">
<a href="https://theprint.in/opinion/shaktikanta-das-rbi-has-a-delicate-task-balance-govts-fiscal-targets-its-autonomy/165875/">Shaktikanta Das’ RBI has a delicate task – balance govt’s fiscal targets & its autonomy</a>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-33940611719119821652019-01-04T10:33:00.001+05:302019-01-04T10:33:45.042+05:30Reform RBI<div dir="ltr" style="text-align: left;" trbidi="on">
<a href="https://theprint.in/opinion/narendra-modi-government-now-has-a-great-opportunity-to-reform-rbi/162994/">Narendra Modi government now has a great opportunity to reform RBI</a>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-5732420722249426152018-12-13T14:35:00.001+05:302018-12-13T14:35:55.988+05:30Why #RBIvsGovt is a viral storm in a tea cup<div dir="ltr" style="text-align: left;" trbidi="on">
<p><i>
<a href="https://www.livemint.com/Industry/1MnENk1pL5EfuaVvuWvS0I/RBI-vs-Government-India-liquidity-crisis-Arun-Jaitley-Urjit.html" >livemint</a></i>, 1st November 2018</p>
<p><em>The Reserve Bank of India (RBI) remains one of the most unreformed central banks in the world. The present rift with the government over India's liquidity crisis could be a turning point</em></p>
<p><b>New Delhi:</b> Central bank deputy governor <a href="https://www.livemint.com/Politics/Eo6cxTslpmvbkBQwNCciwJ/RBI-deputy-governor-calls-for-effective-independence.html">Viral Acharya's speech on the issues between the Reserve Bank of India (RBI) and the government</a> has brought the rift between the two into public domain more visibly than perhaps ever before. One reason for the fissures seems to be that in the board meeting of the RBI there was a debate on some items listed on the agenda. There are reported to be differences of opinion between the independent directors and the management of the RBI on these items.</p>
<p>At first blush this seems rather strange because it is the job of the board of a regulator to discuss regulations. Regulations require board approvals. That such approvals should be given after a detailed cost benefit analysis of each regulation is to be expected. It should be quite normal, for example, to discuss what impact these regulations would have for the health of the banks and the economy, for small and big firms, for consumers and other stakeholders. It should be equally normal to have differences in opinion on such complex issues.</p>
<p>Why then did a discussion in the board turn into such a public storm? It seems that in the normal course of affairs the RBI board did not hold discussions on agenda items and merely approved what the management brought to it. Regulations were made by the Central Committee of the Board (CCB) to which the board had delegated all its functions. This meant that CCB could take decisions on any of the matters that the board should have deliberated upon. It resulted in a subset of the board, with largely RBI management, getting practically all the powers of the board.</p>
<p>This is unlike most boards which delegate specific functions to sub-committees of the board. The board would rarely question the decisions of the CCB. A normal healthy tension that should exist between the management and the board did not exist. A question arising from Acharya's speech is whether a discussion by board members in the RBI board constitutes interference in the job of the RBI and reduces its independence?</p>
<p>For its part, until now, the government did not pay adequate attention to the functioning of the RBI board. A healthy functioning board with discussions and debates on important issues and a more accountable RBI should have been the norm. Debates in board meetings should not have kicked off storms.</p><p>The government's overall commitment to financial sector reform was also weak when it rolled back bills like the Public Debt Management Agency (PDMA) and Financial Resolution and Deposit Insurance (FRDI).</p>
<p>In 2015, when new guidelines for regulation making processes by regulatory boards were accepted by all members of the <a href="https://www.livemint.com/Politics/Gyc1NfZgBDk78LPM1S2HJK/FSDC-discusses-NBFC-liquidity-issues-RBI-assures-adequate-f.html">Financial Stability and Development Council</a>, these were not followed by some regulators. But there was no serious follow up by government. Now, at this stage, after publicly airing differences between the management and other board members, if the government uses <a href="https://www.livemint.com/Industry/fzKfeJ9KliesX4oQ4LEkdJ/The-history-of-the-contentious-RBI-Act-Section-7.html">Section 7 of The Reserve Bank of India Act, 1934</a>, to give directions to the RBI on regulations, it is not a step towards improving the functioning of RBI governance. It would be a step backward in the reform process.</p>
<h3>A matter of reserves</h3>
<p>Another question in the speech is that of RBI reserves and its transfer to government. Acharya’s speech begins with how a transfer of excess reserves from a central bank to government can be catastrophic, as was in the case of Argentina. The RBI Act requires RBI to create a Reserve Fund of ?5 crore. In addition, RBI board can make regulations governing the manner and form in which the balance-sheet of the Bank shall be drawn up. But this requires the previous sanction of the central government.</p>
<p>In the past under Section 47 of the RBI Act, the RBI board created discretionary operational reserves and revaluation accounts to account for fluctuations on its assets side and unforeseeable expenses. For the year ending June 2018, RBI’s reserves, at Rs. 9.63 trillion, constituted 28% of its total assets (See box for details). This is higher than almost all central banks in the world.</p>
<p>A central bank is not a normal bank. It is not a commercial bank—so it bears negligible credit risk. As a consequence, there is no clear framework, as there is for commercial banks, on the reserves or equity capital required to be held by a central bank. It is not correct to use the Basel framework to compute the equity capital required in a central bank. In fact, as former chief economist of the IMF, Prof Olivier Blanchard, has emphasised, it's perfectly feasible for a central bank to run on negative equity capital. A central bank could have negative values of Rs.equity capital' and this does not induce any stress.</p>
<p>The reserves with RBI have been created by the RBI board. However, these funds were not created with the prior permission of the central government, as required by the law. Further, the RBI board has not made rules about how much should go into each reserve. In its 2015 Annual Report it said that it would come up with a framework for equity capital, but has not done that so far. As noted before, the present RBI Act requires only one Reserve Fund of ?5 crore.</p>
<p>The board should discuss if it wishes to achieve compliance with the law and what should be done with the remaining reserves. In principle, this money should have been paid to government in the years the profit was generated as is done elsewhere by most central banks. Today the discussion must involve the pros and cons of transferring it to government or holding it back. If it is transferred, then the inflationary or other effects must be discussed. If it is held back or more is to be accumulated, then the board should put in place a framework and set of rules about each of the funds.
<h3>Protecting the fort</h3>
<p>A third issue raised by Acharya is that governments have a short term view while central banks have a longer term view. But is this always true? Let us look at the case of RBI reform. Based on difficulties in the financial sector, a reading of India's archaic laws and learning lessons from the global financial crisis, the Financial Sector Legislative Reforms Commission (FSLRC) highlighted the need for reform. In its report submitted in 2013, it recommended changes in India's financial sector laws to provide the rapidly growing Indian economy a new financial regulatory architecture.</p>
<p>The Commission based its work on a number of RBI and government committee reports which had recommended changes, but it was the first to propose legal changes in the form of the Indian Financial Code. It sought to modernize governance and make regulators more independent as well as more accountable. For example, it proposed to do away with the government’s power to give directions, while it sought to make boards of regulators more accountable and transparent with agenda and minutes of board meetings to be public, and with boards having the responsibility of approving all regulations after due process.</p>
<p>The government's attempts at reform following the FSLRC report over the last 5 years have, in general, been opposed by the RBI. The exception, also mentioned in Acharya’s speech, was FSLRC’s proposal for making RBI an inflation targeting central bank. Media reported RBI as opposing the larger number of external members proposed by FSLRC, as it would undermine its independence. The government compromised. Even when three external and three internal members were to constitute the committee, the new law gave the RBI governor a casting vote. This tilted the balance in favour of RBI.</p>
<p>On other reform, including governance reform, reform of the regulation making process, appeals on RBI orders, etc RBI consistently opposed reforms. Then RBI governor Raghuram Rajan's speech titled, <i>Financial Sector Legislative Reforms Committee Report (FSLRC) - what to do and when?</i> famously argued "If it ain't broke, don't fix it".</p>
<p>It seems that as the economy grew rapidly, RBI’s capacity to evolve and reform did not keep pace. RBI failed to recognize that if we wait to fix things when they get broken, then the short term solutions that need to be provided are rarely optimal. Long term reform can only be undertaken when there is no crisis. If the board members are discussing short term solutions to the credit crunch for small firms, the RBI management cannot absolve itself of the responsibility for the situation coming to this point. There is little doubt that the proposal to let weak banks lend more is a risky one, but there is also little doubt that poor supervision by RBI management failed to arrest the slide early on.</p>
<h3>Lending blame game</h3>
<p><a href="https://www.livemint.com/Money/VSodCnfdh5p47h6Nf0BF6K/Bank-aversion-to-NBFCs-fuelled-Indias-liquidity-crisis.html">Why is India’s banking sector not lending to small companies?</a> RBI has been an important stumbling block in the attempt to develop deep and liquid bond markets. It has kept a stronghold over the government bond market, which is an integral part of the bond market, by allowing limited participation in its market infrastructure—the exchange (NDS-OM) and the depository (SGL). While most major central banks in the world stopped trying to manage government debt after being given an inflation target, RBI protected its turf and forced the government to withdraw the bill that proposed to reform the bond market. This created a financial system in which large firms with better ratings and collateral accessed the banking sector at the cost of small firms.</p>
<p>At the same time, even though RBI was independent and free to give out commercial bank licences, it only gave out two bank licences in more than a decade. This failed to create a competitive environment where banks were competing to give loans to small firms. For its part, no government over the last 15 years addressed the issue of the lack of competition in the banking sector either.</p>
<p>The DG's speech is peppered with the usual fear mongering and buzz words RBI often uses whenever there is an attempt at RBI reform-"hyper-inflation", "full-blown crisis", "asset-price crashes", "financial crisis", "sudden-stops", "collapse", "unchecked financial fragility" and so on. Needless to say, many a country has undertaken central bank reforms without leading to a crisis. In India, fear mongering has often resulted in governments backing off on the question of reform. As a consequence RBI remains one of the most unreformed central banks in the world.</p>
<p>The present rift is a turning point. If the government uses this opportunity to improve governance, initiate changes in laws and regulations that strengthen India’s financial regulatory architecture, it would be a move in the right direction. If it merely asserts its powers by giving directions or imposing its will by other means, it could well turn into a catastrophe as predicted by Acharya.</p>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-10457844266790331262018-12-12T14:52:00.003+05:302018-12-12T14:52:44.565+05:30It's broke, fix it<div dir="ltr" style="text-align: left;" trbidi="on">
<p><i>
<a href="https://indianexpress.com/article/opinion/columns/tax-payers-infrastructure-leasing-and-financial-service-bankruptcy-lehman-brothers-5367210/" >Indian Express</a></i>, 21st September 2018</p>
<p><em>The IL&FS trouble exposes the weakness in financial regulatory architecture. Reforms are called for</em></p>
<p>A large infrastructure finance company, Infrastructure Leasing and Financial Services (IL&FS), is in trouble. Some of its subsidiaries defaulted on their debt. As a consequence, it was sharply downgraded recently. We do not really know the system-wide implications of an IL&FS default. If tax-payer money is used to save IL&FS, it would be another drain on the Union Budget, already burdened by mismanagement and regulatory failures in the banking sector.</p>
<p>This situation need not have arisen had we put in place institutions that monitor and regulate systemic risks such as a systemic-risk regulator and a resolution corporation. There were attempts at many levels to put such laws and institutions in place. Laws were proposed, Budget announcements made and task forces created. Turf wars, and the misplaced view that India was saved from the crisis and therefore needs no reform managed to scuttle the proposed reform. A famous financial regulator's stance on the proposed reforms was "If it ain't broke, don't fix it!"</p>
<p>The most important lesson from the bankruptcy of Lehman Brothers was that the failure of one company can create a risk to the financial system as a whole. Such "systemic risk" needs to be monitored. If a firm is large, it is considered "too big too fail". Even if it is not too big, but so deeply integrated with the business of other firms in the financial sector, it may be "too networked to fail". In either case, such firms and their real-time networks need to be monitored. To understand how to respond to trouble in such a firm, the regulator must at all times know who will get hit if this firm fails, by how much, and what will be the consequences of such a failure. At all times there needs to be a full picture of their assets and liabilities. These firms can be put under enhanced supervision.</p>
<p>To ensure financial stability, this job needs to be given to an agency with powers to monitor risk-cutting across sectors. In this instance, IL&FS is a non-bank financial company regulated by the RBI. But the RBI does not have all the information required to understand risk to other financial firms arising from its debt of Rs one lakh crore. It may know about bank loans to the conglomerate. But pension funds, provident funds, mutual funds and insurance companies hold the debt of IL&FS subsidiaries. Since the RBI does not regulate them, it will not have the full picture.</p>
<p>A similar situation arose post-Lehman when AIG, an insurance company, witnessed distress. No one knew who would not be paid if AIG defaulted. This led to the understanding that today's financial markets do not lend themselves to only sectoral regulation. The ripple effects of financial shocks can be felt across sectors and all those need to be known before we decide how to handle a possible default.</p>
<p>The Financial Sector Legislative Reform Commission, when submitting its report in 2012, drawing upon lessons from the crisis, and analysing the present legal framework in Indian financial regulation, had recommended legislative and architectural reforms. This included a body that would monitor systemic risk. The Financial Data and Management Centre would have the legal powers to collect all regulatory data along with sectoral regulators. The 2016-17 Budget announced the setting up of such a data centre and consequently a draft bill was proposed. However, turf issues of financial regulators ensured that this important initiative did not see the light of day. Unfortunately, if there is trouble, these regulators will go scot-free while the government will have to bear the consequences.</p>
<p>Another equally important lesson from the global financial crisis was that in such times financial firms, both bank and non-bank, need to have an orderly mechanism for their resolution so that they can be sold as living firms with minimum cost to the economy and the taxpayer.</p>
<p>The proposed resolution corporation, to be set up through the Financial Resolution and Deposit Insurance Act, would have been watching the company, examined whether it is systemically important, asked it to prepare a living will if needed, and then stepped in before the firm defaulted. So today, if reforms based on lessons from the global financial crisis had been allowed, there would be an orderly mechanism for a resolution of a financial firm. The push back from various quarters opposing the FRDI bill led the bill to be withdrawn. Today the options are limited. The firm can be forced sold. But to whom? LIC, which is already buying up all the carcasses in the financial sector? Or IL&FS can be taken through IBC. This would mean its subsidiary firms that are non-financial firms could be sold one by one through the bankruptcy process. None of these are easy or fast solutions.</p>
<p>In the absence of a good legal framework to resolve a complex financial firm, a temporary solution involving a crack team and a war room to address the problem might be the best option. Hopefully, it will be able to manage the situation without paying a big cost. The IL&FS trouble exposes the weakness in India’s financial regulatory architecture. This episode should increase the urgency with which the required reforms are brought back on the table.</p>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-50333009191975963012018-12-12T14:50:00.002+05:302018-12-12T14:50:55.676+05:30Reimagining financial reforms in India, 10 years after Great Recession<div dir="ltr" style="text-align: left;" trbidi="on">
<p><i>
<a href="https://www.livemint.com/Money/ZmtUj0U9aALwzNy33BpR6J/Great-Recession-2008-financial-crisis-Lehman-Brothers-RBI-In.html" >livemint</a></i>, 17th September 2018</p>
<p><em>Ten years after the 2008 financial crisis, more, not less, financial sector reform is urgently needed in India</em></p>
<p>Until Lehman Brothers filed for bankruptcy on 15 September 2008, home loans going bad in some pockets of the US seemed like a small problem for the world. It was a local issue unlikely to cause a problem even for the US economy. If a bank gave a loan to a household who could not pay it back, it was going to be a problem for the individual household, not even particularly for the bank. It was assumed that the bank would be able to absorb small losses.</p>
<p>Banking regulators did not worry too much even if a bank had a lot of such loans on their books. Governments did not look to see if a large number of banks had a lot of such loans on their books. No one really worried that non-bank financial institutions were also buying up some of these mortgage backed securities.</p>
<h3>Consumer protection</h3>
<p>With the bankruptcy of Lehman Brothers and the unfolding of the Global Financial Crisis (GFC), it came to be understood that mis-selling of financial products to consumers can create risks to the entire financial system. By banks giving loans for nearly the entire value of the house being purchased, assuming that when house prices rise, the loan could be repaid, they created a risk. When lots of banks gave lots of such loans, they created a risk for the banking sector. And, when they created derivative products of these loans that were bought and sold to many other financial institutions, both in the US and globally, they created risks for the global financial system.</p>
<p>The entire edifice was based on the assumption that house prices could not fall. Once house prices started falling, home loans started going bad. Foreclosure under the US law, or simply handing over the keys of the mortgaged house to the bank and walking away was the most rational step for borrowers to take. As banks’ books started going bad and they sold their sub-prime loans to other parts of the financial system, the problem became widespread.</p>
<p>Among the biggest lessons from the GFC for financial regulation was that consumer protection must lie at the heart of financial sector regulation. Consumer protection goes beyond the concept of consumer complaint and redress. It is about not being allowed to sell loans that the consumer may not be able to pay back. The consumer may not even understand what is being sold to her. It is the job of the adviser to advise the consumer so that she is not sold such a product. It is not enough to get consumers to sign off on small print disclosure statements that they do not read.</p>
<p>A financial product, unlike a cup of coffee, is not something we consume when we pay for it. What we receive by buying a financial product is a promise by a financial firm to pay us sometime in the future. In bank deposits, it is a promise to pay back the principle and the interest in the future. In insurance, it is about the promise to pay under certain states of nature. In pensions, it is a promise to invest your money well and pay you the principle and returns when you retire. Under annuity, it is a promise to pay you regularly in return for your one-time payment, or purchase of the annuity.</p>
<p>Now, what happens if this promise is not fulfilled by the firm? First, there may be sheer fraud. Second, the firm may go bankrupt. Third, the entire financial system may collapse. The job of regulation is to minimize the risk of all of these. Note, it has to minimize the risk, not completely eliminate it. So it has to allow firms to sell financial products, not ban them, and still find ways to protect consumer’s interests.</p>
<p>Often only the financial firm understands how the money it has raised from its customers is being invested. It may put it in very risky assets in the hope of getting high returns. Managers who get paid bonuses based on high returns may choose risky assets. The regulators job is to reduce the risk of failure of the firm, of the system as a whole, and of the obligation for the taxpayer to pay for such failure. Given the complexity of finance, the way a financial adviser often gets a commission to sell a financial product, be it a loan or an insurance policy, or a savings product, there is ample scope for mis-selling.</p><h3>Systemic Risk</h3>
<p>Post Lehman, it was understood that when mis-selling is done on a large scale, it can lead to the risk of failure of financial institutions and the financial system as a whole. The regulation of institutions, or micro-prudential regulation, which was the old job of regulators, and looked at whether a bank was taking on too many risks and could fail, was not adequate. There had to be a systemic view of the financial system as a whole.</p>
<p>Systemic risk could arise from two sources. If too many banks had the same kind of risks, say the risk of failing if house prices fell, the system as a whole could have a crisis. Even if only some banks failed, but were “too big to fail”, so big that they could pull down the financial system as a whole, then there would be a crisis.</p>
<p>Before GFC, the boundaries of financial regulation were more limited. Subsequently, it was understood that a Bear Sterns was “too networked to fail”, but since it was not a bank, it was not similarly regulated. AIG, an insurance company and not a bank, had assets and liabilities that no one even knew about because it was not regulated under a resolution framework. So far hedge funds had been left more or less to themselves as their investors were rich and well educated and did not need to be “protected” as the poor did.</p>
<p>But now it was understood that hedge funds had big positions that could impact the financial system as a whole. If the system as a whole could collapse due to the activities of some firms and if taxpayer money had to be used, then these boundaries needed to be expanded beyond the hitherto regulated entities to those who had so far been unregulated. New tools of regulation: macro-prudential tools were created. New powers were given to regulators. They were now to look for where was the risk being concentrated. Bigger financial institutions saw greater scrutiny.</p>
<p>The post-GFC period saw a major re-haul of the financial sector laws and regulatory architecture. The Dodd-Frank Act in the US, a new regulatory architecture in the UK in the form of “twin-peaks model’’ towards furthering prudential regulation and conduct regulation of market participants are some examples. South Africa has been the most recent addition to the list of countries that have overhauled their financial sector regulation in the aftermath of the global financial crisis.</p>
<p>By then financial regulators in Britain, Australia and many other countries had already moved away from sectoral models of regulation—such as separate banking regulators, insurance regulators, pensions regulator and so on—to regulators who looked at the different businesses and arms of a financial company that could involve banking, insurance, derivatives etc. These now also started setting up systemic risk regulators, or macro-prudential regulators, and gave them new powers. In some cases these were placed inside central banks such as the Financial Policy Committee in the UK, and in some cases in a council of regulators such as in Australia.</p>
<p>In the US, the Treasury had to put in billions of dollars of taxpayer money to bail out some of the biggest banks which could not be allowed to fail. Small banks were allowed to fail as the FDIC (the Federal Deposit Insurance Corp.) undertook an orderly resolution process. After the crisis more than 30 countries enacted laws for bankruptcy for financial firms and set up resolution corporations.</p>
<h3>Lessons for India</h3>
<p>The Indian financial system was much less developed compared to the sophisticated ones that witnessed the crisis. It was at the other end of the spectrum, where instead of worrying about sophisticated derivatives products being traded, most derivative products have restrictions, or are banned, and the bulk of the population has no access to bank loans. The Reserve Bank of India, in some speeches after the crisis, claimed that the world should learn lessons from Indian regulators because we weathered the crisis well and were protected because of our policies.</p><p>However, beyond the rhetoric, there were few takers for banning financial products and services in the manner that Indian financial sector regulators had done. While the IMF advocated that only permanent capital controls like those in India and China could protect countries from capital surges and capital flight, countries that did impose controls after the GFC imposed only temporary controls.</p>
<p>One lesson from the crisis was that each regulator looking at risks in her sector was unable to see risks arising across the financial sector as a whole. To address the issue of financial stability the government of India created a non-statutory council of regulators, the Financial Stability and Development Council (FSDC). This body was expected to review the system as a whole.</p>
<p>However, no new macro-prudential tools were created and the body was not given any legal power. For example, it decided that regulation making by financial sector regulators must follow a better and more formal regulation making process that involved board decisions about regulations, the need for them to be clearly outlined, taking feedback from stakeholders, responding to the feedback. This process was outlined in a manual, a handbook for regulation making. But not all regulators changed their ways. The FSDC lacked legal powers. </p>
<p>A number of expert committee reports that looked into the problems being faced by Indian finance recommended changes in regulations and the regulatory architecture. However, these could not be implemented under the present legislative framework. For example, to create a framework for bankruptcy of firms required the Indian Bankruptcy Code to be enacted. Similarly, to enable changes in the way financial regulations are made, the Financial Sector Legislative Reforms Commission (FSLRC), set up by the Government of India, proposed the Indian Financial Code-a blueprint of a comprehensive law to create a reformed financial regulatory framework.</p>
<p>Though the Indian Financial Code was not tabled in Parliament as a single piece of legislation, many elements of the law were implemented. These included the merger of the commodities regulator (Forwards Market Commission) with the securities market regulator (Sebi), the shift of regulation of non-debt capital flows from RBI to the Ministry of Finance and the setting up of an inflation targeting regime and a Monetary Policy Committee of the RBI.</p>
<p>Two more bills were tabled in Parliament and later withdrawn. The first aimed at developing a deep and liquid bond market in India. It was to enable setting up of a Public Debt Management Agency and unification of debt market with the securities market infrastructure and regulatory framework. The second aimed at created a legal framework for orderly resolution of failing financial firms, where there exists a vacuum in India today. The act was to enable the setting up of a resolution framework for financial firms and a Resolution Corporation. Today, without a framework for bankruptcy and orderly resolution for financial firms, India faces the risk that if a large private sector bank goes bankrupt, there is no legal way of dealing with it other than to force a public sector bank or insurance company like the Life Insurance Company to buy it out. This is a bad solution as it could weaken the firm buying the failing bank.</p>
<p>The Indian solution has been to treat the lesson from the crisis as going even more slowly on financial sector liberalization than it had in the past, rather than to allow financial sector products and services to be sold and to regulate them better. However, to serve the growing needs of the economy for debt, equity, payment systems, and innovations in financial products and services require that regulatory reform is undertaken with much greater speed.</p>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-2790242180055389222018-12-12T14:49:00.000+05:302018-12-12T14:49:14.284+05:30The rupee is falling and India should let it<div dir="ltr" style="text-align: left;" trbidi="on">
<p><i>
<a href="https://www.livemint.com/Opinion/JYuq1ydWukpeV6qnITXMvK/Opinion--The-rupee-is-falling-and-India-should-let-it.html" >livemint</a></i>, 10th September 2018</p>
<p><em>The Reserve Bank of India's stated policy is to reduce volatility, rather than target a specific level for the currency. Should the RBI intervene to strengthen the rupee?</em></p>
<p>The Indian rupee has been sliding against the US dollar in recent days as emerging markets come under pressure. That's made the currency one of Asia's worst performers, losing 12% this year. The rupee's latest moves have sparked a debate in India. The Reserve Bank of India's stated policy is to reduce volatility, rather than target a specific level for the currency. Should the RBI intervene to strengthen the rupee? If so, what precisely should it do and what would the impact be?</p>
<p>A number of factors are pressuring officials to act - not least among them, that the rupee has become both a badge of national pride and a tool of political brinkmanship. But so far the government and the RBI have been unruffled by the fear-mongering. They shouldn’t lose their nerve.</p>
<p>Some of the loudest complaints have come from companies fretting about the likely impact currency depreciation will have on corporate balance sheets. Those who bet RBI would step in when faced with depreciation pressure borrowed heavily in international markets. Yet India's currency-derivative markets, with many restrictions and limited liquidity, make hedging quite expensive, so these companies are now exposed.</p>
<p>Another pressure point is the price of oil, which quickly becomes a matter of unhappiness among the middle class. India imports about 80% of its petroleum needs, a factor only complicated by the country's exorbitant domestic taxes on fuel-almost 100% on petrol and 60% to 70% on diesel. This means that when the rupee depreciates, the exchange rate pass through to fuel prices and, as a result, the rest of the economy, is high.</p>
<p>The RBI does have a number of instruments it can use to support the currency. The most obvious is to intervene in foreign exchange markets by selling dollars: the central bank has more than $400 billion in reserves at its disposal. Alternatively, it could raise interest rates, a move justified by the currency weakness, higher oil prices and the latest above-target inflation data. Third, it could raise dollars by borrowing from non-resident Indians, which has become a go-to in times of currency stress.</p>
<p>The RBI has used these instruments in the past—and the results haven’t been pretty. The central bank moved to prevent rupee depreciation in May 2013, after then US Federal Reserve chairman Ben Bernanke’s taper talk. Intervention continued through September, as pressure continued to mount on emerging market currencies. The result? The rupee fared worse than all other emerging market currencies.</p>
<p>Every move-from tightening liquidity and raising interest rates to discussion of non-resident borrowing and restrictions on derivatives was interpreted as a panic reaction that only confirmed the rupee was under pressure. Foreigners felt it was better to take money out of India sooner rather than later, and the fall of the rupee became a self-fulfilling prophecy. Currency and derivatives markets, money and credit markets, and high costs of borrowing all hurt the economy in subsequent months.</p>
<p>In the years that followed, RBI continued to manage the rupee carefully. It mostly achieved this by reducing the size of the rupee-dollar derivatives market, which made its intervention more effective, and then buying rupees forward.</p>
<p>To some extent, the approach worked: currency volatility settled. While the real exchange rate of the rupee appreciated, the currency didn’t weaken in line with India’s higher inflation. Yet some could argue this merely set the stage for the current rout, which can be seen more as an overdue recalibration than a flash in the pan.</p>
<p>To be sure, there are some segments of the economy that gain from rupee depreciation. A weaker currency helps export growth, which has been weak in recent years. Companies-many of which are small and labour-intensive-have struggled with the transition to a goods and services tax, and several have had a hard time getting credit. A weaker rupee would also offset competition of cheap imports from countries like China, which could give domestic industries a much-needed boost.</p>
<p>The RBI and India's government, at present, are calm. This is a strong posture that must withstand the daily news, media pressure, lobbying and political taunting. In 2016, RBI had been given a new mandate to meet its inflation target and maintain growth. Defending the currency at all costs isn't part of the brief. This latest weakness will test its resolve.</p>
<p>This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.</p>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-50252590580319002102018-12-12T14:47:00.001+05:302018-12-12T14:47:27.415+05:30How Parliament can reform its ailing public sector banks<div dir="ltr" style="text-align: left;" trbidi="on">
<p><i>
<a href="https://economictimes.indiatimes.com/industry/banking/finance/banking/how-parliament-can-reform-its-ailing-public-sector-banks/articleshow/65098199.cms" >The Economic Times</a></i>, 24th July 2018</p>
<p>India needs a strategy to get the government out of banking. Non-performing loans among state-owned banks -- a legacy of India’s socialist past which account for nearly 70 percent of deposits -- have crossed 5 percent of GDP. The central bank has restricted lending at 11 of them and forced one, IDBI Bank Ltd., to sell itself to the government-owned Life Insurance Corporation of India.</p>
<p>State banks have repeatedly been a burden on the exchequer and will almost certainly continue to be so. The great need is to increase the number and size of private banks, which have performed better than their public-sector counterparts. Unfortunately, the government just abandoned the one policy that would have eased such a transition.</p>
<p>Earlier this month, according to reports, the administration of Prime Minister Narendra Modi decided to withdraw the <a href="https://economictimes.indiatimes.com/topic/Financial-Resolution-and-Deposit-Insurance-bill" target="_blank">Financial Resolution and Deposit Insurance bill</a> from parliament. The bill was meant to address the biggest hurdle in dealing with failing banks: There’s no way to sell them off.</p>
<p>The current legal framework only allows struggling banks to be merged or liquidated. While the banking regulator, the Reserve Bank of India, has in the past forced healthier banks to swallow up weaker ones, there are very few state banks strong enough now to take on such a burden. The only other option is to sell off each loan or asset one by one, which can take as long as 10 years.</p>
<p>With no other options, the government has been recapitalizing <a href="https://economictimes.indiatimes.com/topic/loss-making-banks" target="_blank">loss-making banks</a> -- essentially pouring taxpayer money down the drain (including into Punjab National Bank, which lost nearly $2 billion in a corruption scandal). Selling off IDBI only puts the bank’s problems onto the balance sheet of LIC, one of India’s biggest insurance companies.The <a href="https://economictimes.indiatimes.com/topic/FRDI-bill" target="_blank">FRDI bill</a> would have done two critical things. Most directly, it would have created a mechanism to sell a bank as a living entity to another bank. A Resolution Corporation, similar to the Federal Deposit Insurance Corporation in the U.S., would have been created to take over failing banks and either run them temporarily, sell them, infuse equity or, as a last resort, liquidate them.</p>
<p>Second, once such a framework was in place, the <a href="https://economictimes.indiatimes.com/markets/rbi" target="_blank">RBI</a> would have had much greater flexibility to give out licenses for more private banks. The central bank has hesitated thus far to increase their number, despite repeatedly promising to do so, because there was no easy way to deal with the new banks if they ran into trouble. The FRDI bill would have made the prospect of creating new banks much less risky.</p>
<p>Politics doomed the bill. One clause gave the proposed Resolution Corporation the option of “bailing in” troubled banks -- using uninsured depositor money to infuse equity into the bank if a buyer couldn’t be found. The optics, at a time when many state banks look like they’re on the verge of failure, were terrible. Worse, most Indians didn’t realize that their deposits were only insured up to 100,000 rupees (less than $1,500). Pensioners worried they might be stripped of their life savings.These problems could easily have been fixed. The “bail in” clause could have been scrapped, and insurance limits raised. If the insurance were raised to $20,000, virtually all depositors would be covered.</p>
<p>Abandoning the bill entirely, by contrast, will have far-reaching effects. Unless India can find a way to shrink the state banking sector, it'll be hard if not impossible to revive lending and investment. Small enterprises in particular are desperate for bank finance.</p>
<p>The Modi government may be right that “big bang” reforms -- liberalizing land and labor markets, for instance -- are too politically difficult. But it’s done a good job thus far implementing smaller changes that can have a big impact, such as the Bankruptcy Code passed last year that does for companies what the FRDI bill would have done for banks. If India can't even manage these less-striking reforms, the chances of boosting growth into the double-digit range are remote.</p>
<p>And there's a scarier prospect as well. The share of deposits in private banks have increased in the last two years from a quarter to a third of the total. Under current conditions, it's not clear what the government and RBI would do if a big private bank failed. There are no public-sector banks healthy enough to buy out a big bank. There's no fiscal space to infuse equity, as public banks are already bleeding the government's coffers.</p>
<p>A high-profile liquidation could possibly trigger a contagion. Many countries set up resolution regimes after the global financial crisis, understanding the grave impact of a banking failure on the real economy. India may soon come to regret not doing so as well.</p>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-41590901811404791662018-07-23T11:35:00.000+05:302018-07-23T11:35:11.083+05:30India Shortchanges Its Banks<div dir="ltr" style="text-align: left;" trbidi="on">
<p><i>
<a href="https://www.bloomberg.com/amp/view/articles/2018-07-22/india-shortchanges-its-banks" >Bloomberg</a></i>, 22nd July 2018</p>
<p><em>Politics and fear-mongering have doomed a key reform.</em></p>
<p>India needs a strategy to get the government out of banking. Non-performing loans among state-owned banks -- a legacy of India's socialist past which account for nearly 70 percent of deposits -- have crossed 5 percent of GDP. The central bank has <a href="https://indianexpress.com/article/business/banking-and-finance/checking-npas-11-public-sector-banks-now-on-rbi-watchlist-small-firms-face-credit-crunch-5129389/" itemprop="StoryLink" itemscope="itemscope" target="_blank" rel="nofollow noopener"><meta content="WebLink" itemprop="type">restricted lending</a> at 11 of them and forced one, IDBI Bank Ltd., to sell itself to the government-owned Life Insurance Corporation of India.</p>
<p>State banks have repeatedly been a burden on the exchequer and will almost certainly continue to be so. The great need is to increase the number and size of private banks, which have performed better than their public-sector counterparts. Unfortunately, the government just abandoned the one policy that would have eased such a transition.</p>
<p>Earlier this month, according to reports, the administration of Prime Minister Narendra Modi decided to withdraw the <a href="https://www.thehindu.com/business/Economy/all-you-need-to-know-about-indias-npa-crisis-and-the-frdi-bill/article21379531.ece" itemprop="StoryLink" itemscope="itemscope" target="_blank" rel="nofollow noopener"><meta content="WebLink" itemprop="type">Financial Resolution and Deposit Insurance bill</a> from parliament. The bill was meant to address the biggest hurdle in dealing with failing banks: There's no way to sell them off.</p>
<p>The current legal framework only allows struggling banks to be merged or liquidated. While the banking regulator, the Reserve Bank of India, has in the past forced healthier banks to swallow up weaker ones, there are very few state banks strong enough now to take on such a burden. The only other option is to sell off each loan or asset one by one, which can take as long as 10 years.</p>
<p>With no other options, the government has been <a href="https://www.bloombergquint.com/business/2018/01/24/government-will-infuse-another-rs-80000-crore-in-banks-this-year" itemprop="StoryLink" itemscope="itemscope" target="_blank" rel="nofollow noopener"><meta content="WebLink" itemprop="type">recapitalizing</a> loss-making banks -- essentially pouring taxpayer money down the drain (including into Punjab National Bank, which lost nearly $2 billion in a corruption scandal). Selling off IDBI only puts the bank's problems onto the balance sheet of LIC, one of India's biggest insurance companies.</p>
<p>The FRDI bill would have done two critical things. Most directly, it would have created a mechanism to sell a bank as a living entity to another bank. A Resolution Corporation, similar to the Federal Deposit Insurance Corporation in the U.S., would have been created to take over failing banks and either run them temporarily, sell them, infuse equity or, as a last resort, liquidate them.</p>
<p>Second, once such a framework was in place, the RBI would have had much greater flexibility to give out licenses for more private banks. The central bank has hesitated thus far to increase their number, despite repeatedly promising to do so, because there was no easy way to deal with the new banks if they ran into trouble. The FRDI bill would have made the prospect of creating new banks much less risky.</p>
<p>Politics doomed the bill. One clause gave the proposed Resolution Corporation the option of "<a href="https://timesofindia.indiatimes.com/business/india-business/bail-in-clause-govt-to-drop-frdi-bill-to-calm-depositors/articleshow/65047997.cms" itemprop="StoryLink" itemscope="itemscope" target="_blank" rel="nofollow noopener"><meta content="WebLink" itemprop="type">bailing in</a>" troubled banks -- using uninsured depositor money to infuse equity into the bank if a buyer couldn't be found. The optics, at a time when many state banks look like they're on the verge of failure, were terrible. Worse, most Indians didn't realize that their deposits were only insured up to 100,000 rupees (less than $1,500). Pensioners worried they might be stripped of their life savings.</p>
<p>These problems could easily have been fixed. The "bail in" clause could have been scrapped, and insurance limits raised. If the insurance were <a href="https://economictimes.indiatimes.com/news/economy/policy/frdi-deposit-insurance-may-need-to-rise-up-to-rs-15-lakh-to-cover-at-least-90-of-fds/articleshow/62343336.cms" itemprop="StoryLink" itemscope="itemscope" target="_blank" rel="nofollow noopener"><meta content="WebLink" itemprop="type">raised to $20,000</a>, virtually all depositors would be covered.</p>
<p>Abandoning the bill entirely, by contrast, will have far-reaching effects. Unless India can find a way to shrink the state banking sector, it'll be hard if not impossible to revive lending and investment. Small enterprises in particular are desperate for bank finance.</p>
<p>The Modi government may be right that "big bang" reforms -- liberalizing land and labor markets, for instance -- are too politically difficult. But it's done a good job thus far implementing smaller changes that can have a big impact, such as the <a href="https://www.bloomberg.com/news/articles/2018-07-09/bankruptcy-law-is-kick-indian-firms-needed-to-pay-up-sahoo-says" itemprop="StoryLink" itemscope="itemscope" target="_blank"><meta content="PBMYO86KLVR8" itemprop="suid"> <meta content="StoryLink" itemprop="type">Bankruptcy Code</a> passed last year that does for companies what the FRDI bill would have done for banks. If India can't even manage these less-striking reforms, the chances of boosting growth into the double-digit range are remote.</p>
<p>And there's a scarier prospect as well. The <a href="https://economictimes.indiatimes.com/industry/banking/finance/banking/private-banks-share-in-advances-to-hit-38-40-by-fy20-icra/articleshow/60781136.cms" itemprop="StoryLink" itemscope="itemscope" target="_blank" rel="nofollow noopener"><meta content="WebLink" itemprop="type">share of deposits</a> in private banks have increased in the last two years from a quarter to a third of the total. Under current conditions, it's not clear what the government and RBI would do if a big private bank failed. There are no public-sector banks healthy enough to buy out a big bank. There's no fiscal space to infuse equity, as public banks are already bleeding the government's coffers.</p>
<p>A high-profile liquidation could possibly trigger a contagion. Many countries set up resolution regimes after the global financial crisis, understanding the grave impact of a banking failure on the real economy. India may soon come to regret not doing so as well.</p>
<br /></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-85444025447106372902018-06-26T11:56:00.004+05:302018-06-26T11:56:37.301+05:30Going on a hike<div dir="ltr" style="text-align: left;" trbidi="on">
<p><i>
<a href="https://indianexpress.com/article/opinion/columns/rbi-policy-rate-monetary-policy-committee-5214846/" >Indian Express</a></i>, 13th June 2018</p>
<p><em>Rate increase by RBI highlights conflict between its role as banking regulator and government’s debt manager.</em></p>
<p>In its most recent meeting, the Monetary Policy Committee (MPC) of the RBI raised the policy interest rate for the first time since it was constituted. The MPC expects inflation to be higher than its target of 4 per cent and the statement released by the committee indicates that interest rates may be raised again during the year if necessary.<br />
The prime reason for the rate hike appears to be the increase in the Indian crude oil basket. The monetary policy statement does not point to an increase in the fiscal deficit as one of the risks for why it sees higher inflation, or needs to raise rates. On the fisc, the RBI monetary policy statement says that "the adherence to budgetary targets, which seems to be the case so far, will ease upside risks to the inflation outlook".</p>
<p>Many people have been asking whether the pain of rising in global crude oil prices will be made more palatable in India by a reduction in excise duty by the government. The indication from the RBI is that this will not be the case. If crude oil prices are expected to feed into domestic inflation, while the RBI expects the government to adhere to fiscal targets, it evidently does not expect the fiscal deficit to rise. Hence, it seems that the MPC expects that there will be no excise cut by the Central government. This belief is consistent with the statement by Niti Aayog Vice Chairman Rajiv Kumar, who recently said that since states impose ad valorem duties on fuel, they should cut those, thus indicating that the Centre may not cut excise on fuel.</p>
<p>If the government were to cut excise duty, it would have to borrow more. Government of India bonds, through which the government borrows, have seen increasing yields in recent months. Not only does this mean higher borrowing costs at present, but there also seems to be an unwillingness to hold more Government of India bonds by banks.<br />
Many consumers may be disappointed by the lack of excise duty cuts on petrol and diesel as fuel forms a serious proportion of average household expenditure. However, at the moment, with jitters in the bond markets, at home and abroad, fiscal prudence may be the best bet to avoid not just further inflationary pressures that the RBI refers to, but also the risk of a more serious crisis in financial markets. The ability of the government to borrow at reasonable rates depends on the size of the borrowing programme, depth of the bond market and external financial conditions in both emerging markets and advanced economies, among other factors.</p>
<p>In recent weeks, bond markets in emerging markets have been jittery as the prospect of a US rate hike has increased. In addition, the brewing exchange rate and debt crisis in some emerging economies, the possibility of default by Italy, have led to fears of a bigger meltdown in global financial markets. In these circumstances, bond markets in emerging countries have seen an outflow of capital. Foreign investors have pulled out of Indian bonds as well. The Indian financial regulatory regime allows only a limited amount in government of India bonds to be held by foreigners. At present, the limit is not fully utilised. Sixty-eight per cent of the limit was utilised as of May 31, or out of a total available limit of USD 48 billion, USD 32.8 billion was utilised. If foreign investors sell Indian bonds, it puts downward pressure on the rupee. Though data is not available for the most recent period, as it is released with a two-month lag, the data for change in reserves suggests that the RBI has been selling reserves to defend the rupee.</p>
<p>The domestic bond market in India has been witnessing high volatility this year. More than 40 per cent of central government bonds in India are held by banks. When banks hold long dated government bonds, they run interest rate risk. In other words, if interest rates go up, bond prices go down, and banks have to show a loss on their books. A couple of times in the past, the RBI has allowed banks to not “mark to market” their losses, or book them, in the quarter in which the losses are made. However, a speech by RBI Deputy Governor Viral Acharya in January suggested that banks need to learn to manage this risk. Many read this as implying that the interest rate cycle may turn and bond prices may go down, and lost the appetite to hold more government bonds.</p>
<p>To some extent, the RBI already has a captive buyer in banks as they are required to hold a fifth of their assets in government securities under the Statutory Liquidity Ratio requirements. However, once these limits are reached, and banks don’t wish to buy more bonds, the job of the RBI as the debt manager of the government becomes more difficult. It can do “moral suasion”, which is basically telling public sector banks to buy more government bonds. But that is harder after telling banks that they need to manage interest rate risk. In other words, if the government stays with current borrowing targets, the RBI’s job is still not easy. If the government strays from the announced path by excise duty cuts, it could be raising the probability of a crisis in the bond and currency markets.</p>
<p>The most recent decision by the MPC brings out the conflict between the RBI as an inflation targeting central bank, and the RBI as the debt manager of the government whose job it is to keep the cost of government borrowing low. As an inflation targeter, the MPC raised rates, even though that may raise the cost of government borrowing further. This episode also brings out the conflict between the RBI’s role as banking regulator and the government’s debt manager. Because the RBI wants banks to be safe, Acharya asked them to manage their interest rate risk, even though it made it more difficult for the RBI to sell government bonds. It is not surprising that almost all developed economies have seen their central banks hand over the role of public debt management to an independent debt manager, a reform that is taking painfully long in India. Hopefully, for the RBI, the government may stick to its deficit targets despite the pressures of a pre-election year, and not make its job as debt manager even more difficult.</p>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-55330282060919413792018-06-26T11:54:00.002+05:302018-06-26T11:54:46.423+05:30Is India Creating Jobs or Not?<div dir="ltr" style="text-align: left;" trbidi="on">
<p><i>
<a href="https://www.bloomberg.com/view/articles/2018-05-17/debate-over-jobs-in-india-misses-the-point" >Bloomberg</a></i>, 18th May 2018</p>
<p><em>That’s the wrong question to ask.</em></p>
<p>In recent months, a sharp debate has broken out over whether India is or isn’t creating new jobs. Supporters of the government cite studies, such as those based on Employees Provident Fund data, that show rising job growth. Critics point to household surveys that show jobs <a href="http://indianexpress.com/article/opinion/columns/pm-narendra-modi-india-job-growth-unemployment-rate-economy-demonetisation-bjp-5157708/" target="_blank" rel="nofollow noopener">being shed</a> in the past year, after the government shocked the economy by suddenly withdrawing most cash from circulation and then introducing a complex goods-and-services tax.</p>
<p>Who's right? Both are - and both are missing the point.</p>
<p>Jobs data in India is notoriously bad and contradictory. The five-year <a href="https://data.gov.in/dataset-group-name/national-sample-survey" target="_blank" rel="nofollow noopener">National Sample Survey</a> doesn't tell us about last year, and the Annual Survey of Industries <a href="http://www.csoisw.gov.in/cms/En/1023-annual-survey-of-industries.aspx" target="_blank" rel="nofollow noopener">data</a> doesn't capture new industries or services. Given different definitions of employment and different sources of data - many of which are marred by flaws - simply agreeing on how to measure job growth in India is a well-nigh impossible task.</p>
<p>Broad jobs numbers in India aren't especially revealing in any case. Employment rates and rates of participation in the labor force vary significantly between males and females, with India having one of the <a href="http://www.csoisw.gov.in/cms/En/1023-annual-survey-of-industries.aspx" target="_blank" rel="nofollow noopener">lowest proportions</a> of working women (28 percent) in the world. The old and the young similarly have low participation rates.</p><p>Meanwhile, data from household surveys suggests that men between the ages of 25 and 55 have no choice but to work; unemployment is a luxury they cannot afford. Almost all males participate in the labor force (79 percent). India thus boasts a very low <a href="https://tradingeconomics.com/india/unemployment-rate" target="_blank" rel="nofollow noopener">unemployment rate</a> of between 3 to 4 percent.</p>
<p>Yet, anecdotally, many Indians feel they can’t get the jobs they want. The image of <a href="http://www.bbc.com/news/world-asia-india-43551719" target="_blank" rel="nofollow noopener">thousands of applicants</a> lining up to apply for a low-level government vacancy - which offers benefits and job security - has come to symbolize the desperation of the typical worker.</p><p>Any headline jobs numbers thus need to be examined more closely. Pessimists are right when they argue that demonetization and GST caused <a href="https://www.wsj.com/articles/indias-demonetization-debacle-1481851086" target="_blank" rel="nofollow noopener">waves of layoffs</a> in the informal sector, which employs the bulk of Indian workers. Many were fired in the months after demonetization, when employers didn't have the cash to pay them.</p>
<p>This shows up in the household survey data, which records a decline in labor-force participation rates in the past year. There's no point in denying the fact, as some government partisans have tried to do by citing signs of employment growth elsewhere.</p>
<p>At the same time, the optimists are right to argue that formal jobs are being created in India. This also makes sense, given the introduction of GST. The new tax is self-reinforcing: Now, when a manufacturer who pays the tax buys inputs for his products, he's better off buying from companies that are also in the tax net, so that he can get a corresponding credit for his purchases. As a consequence, the system favors GST payers.</p>
<p>Over time, this will shrink the size of India's informal sector and increase the number of formal-sector jobs. Many small firms - plagued by thin margins and low productivity - won't be able to pay the average GST of 12 percent and will have to shut down. In the long run, as more and more companies enter the tax net, production is expected to shift away from such firms almost completely.</p>
<p>This is good news: Companies in the formal sector are subject to inspections and labor laws, and their employees enjoy greater job safety and benefits. The more jobs created there, the better.</p>
<p>The question both critics and supporters of the government should be asking is how to speed up this process. Some state governments have attempted to relax labor laws and the central government has recently sought to liberalize contract labor. Progress is being made on increasing occupational safety and maternity benefits.</p>
<p>But the Industrial Disputes Act, which makes it difficult to shut down factories, remains in place. No doubt upcoming elections will make it even harder to usher in visibly unpopular reforms.</p>
<p>This shouldn't matter too much. In fact, companies already do have the flexibility to hire more workers, as the increase in formal-sector jobs would indicate. Reforms such as a new <a href="https://www.bloomberg.com/view/articles/2017-11-28/india-s-government-is-getting-one-big-reform-right" target="_blank">bankruptcy code</a> should help. While it’s undergoing some birth pangs, the code should pave the way to freeing up capital and entrepreneurship that is stuck in unproductive uses and allow it to be reallocated efficiently.</p>
<p>The focus should be on similar measures that make it easier for companies in the formal sector to invest and expand - and thus to absorb the workers being shed by informal businesses. The process is likely to be slow and painful. But there are no short cuts - and, at least, the right kinds of jobs are finally being created.</p>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-1054109116020182942018-04-09T14:55:00.000+05:302018-04-09T14:55:25.749+05:30When the supervisor slept<div dir="ltr" style="text-align: left;" trbidi="on">
<p><i>
<a href="http://indianexpress.com/article/opinion/columns/videocon-icici-deal-pnb-scam-chanda-kochhar-nirav-modi-bank-loan-frauds-finance-5129215/" >Indian Express</a></i>, 9th April 2018</p>
<p><em>PNB, ICICI could have averted malpractices if banking system had a mechanism that sounded timely red alerts.</em></p>
<p>The matter pertaining to the ICICI Bank’s CEO <a href="http://indianexpress.com/article/who-is/who-is-chanda-kochhar-5115639/">Chanda Kochhar</a> goes beyond the question of propriety. It follows close on the heels of the Punjab National Bank-<a href="http://indianexpress.com/article/who-is/who-is-nirav-modi-punjab-national-bank-fraud-case-5064606/">Nirav Modi</a> fraud case. While the first case occurred in a government-owned bank, the second incident brought focus onto a private bank. In both cases, investigative agencies like the CBI and the ED have stepped in. The common missing factor is the bank supervisor.</p>
<p>Banking is a non-transparent business. Depositors do not know how their money is being invested. Loans are normally given on the basis of the bank management’s judgement. The management assesses the health of a company and its business plans and on the basis of that, decides whether to give the company a loan or not. Bank depositors, the ones whose money is being lent out, do not have information about the company. Regulation and supervision of banks have the objective of protecting bank consumers, reducing the risk of bank failure and limiting the systemic risk arising from the bank’s operations to the financial system as a whole. The supervisor examines the books of a bank with these objectives in mind. The supervisor is not, and should not be, involved in each loan decision. However, the principles based on which loans are given, the integrity of the management, the bank’s audit system, its IT systems and its risk assessment models do come under the bank regulator’s purview.</p>
<p>Speed is critical in ensuring that regulation meets its objectives. The pertinent question is: Does the supervisor catch loans getting stressed and becoming non-performing in time for the top managers or the board to be held responsible for their incompetence or complicity?</p>
<p>Evidence does not seem to suggest that banking supervision in India has, so far, been timely. In an earlier article (‘Extend and pretend,’ IE, October 31, 2017), I argued that the RBI has failed to spot stressed assets in time and created a huge burden for the tax payer. The banking supervisor had allowed banks to hide bad news and permitted them to continue ever-greening loans; this led to rising NPAs. In December 2017, gross NPAs in the Indian banking sector stood at Rs 8.4 lakh crore. This crisis alone brought a recapitalisation bill of Rs 2.11 trillion to the taxpayer. The NPA figures and the recapitalisation needed are likely to grow.</p>
<p>The PNB-Nirav Modi case and the ICICI conflict of interest case suggest further weaknesses in bank supervision. The PNB fraud will cost more than Rs 14,000 crore. If the lack of integration between the CBS (Core Banking Solution) and SWIFT (Society for Worldwide Interbank Financial Telecommunication) allowed PNB officials to cheat, there could be more such such cases hiding in other banks.</p>
<p>The ICICI case revolves around a loan given to Videocon from whose promoter an immediate family member of Kochhar may have benefited. The CEO was part of the committee that made the decision to give the loan. The loan was one in which there could have been a possible conflict of interest. It subsequently turned into a non-performing one. This does raise questions about the people involved and their ethics. But the episode also shows in poor light the systems which are meant to ensure that possible conflicts of interest are brought to the attention of the banking supervisor.</p>
<p>An important element of the story is the speed with which a malpractice is caught by the banking supervisors. Again, there is a parallel between the ICICI and the PNB case. In the PNB (and other public sector banks) there was a lack of integration between the CBS and the SWIFT system through which money was transferred abroad for Nirav Modi. The bank supervisor appeared to have been inadequately apprised of the magnitude of the damage that this lacuna could bring upon the bank. It did not promptly see the problem when it occurred and that allowed the beneficiaries to milk the system for many years before they were brought to book. In the ICICI case, recognition of the Videocon loan as a bad asset took a long time. Both cases appear to have festered for many years before the CBI or the ED stepped in. What steps did the RBI take in the two years since the allegations were made?</p>
<p>In the ICICI case, the bank involved is designated by the RBI as a Systemically Important Bank. This means that if the bank gets into trouble, the entire financial system of the country could be jeopardised. This also means that this bank would have received heightened supervision by the banking regulator. Risk-based supervision implies that the RBI has a special framework for Systemically Important Banks and supervisors watch the bank more carefully. In many jurisdictions, dedicated supervisory teams are assigned to each systemically important financial firm.</p>
<p>The common thread in these cases is banking regulation and supervision. One key question is whether the oversight system for regulation and supervision of banks is adequate. Does the supervisor have red alerts going of when there are possible conflicts of interest? Is there a risk-based system of supervision in place? This is similar to the PNB fraud where the question was: Does the supervisor have red alerts going of for banks where the Core Banking and the SWIFT systems do not talk to each other? The RBI knew that this created risks and officials spoke about it in seminars, but what matters is whether banks in which there is no integration face greater supervisory scrutiny?</p>
<p>The immediate effect of the ICICI case will be to put an end to the demand for privatisation of public sector banks. That is not a bad outcome because to see the problem of the bad performance of Indian banks as one related only to public ownership of banks is a partial view. While ownership is a very important reason for the ills of Indian banking, the lack of adequate regulation and supervision are equally important. We first need to develop our regulatory and supervisory capability before privatising public sector banks or unleashing a large number of small banks onto the system.</p>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-78026916153233321932018-02-19T09:27:00.001+05:302018-02-19T09:27:19.828+05:30Lessons from a fraud<div dir="ltr" style="text-align: left;" trbidi="on">
<p><i>
<a href="http://indianexpress.com/article/opinion/columns/lessons-from-a-fraud-punjab-national-bank-nirav-modi-scandal-5066965/" >Indian Express</a></i>, 17th February 2018</p><p><em>PNB scandal points to unreformed financial sector, failure of risk management and auditing systems</em></p>
<p>The Punjab National Bank-<a href="http://indianexpress.com/article/who-is/who-is-nirav-modi-punjab-national-bank-fraud-case-5064606/">Nirav Modi</a> scandal has, once again, given rise to questions about public sector banking in India. The mixing of the business of banking with government is fraught with difficulties. Public ownership effectively reduces the RBI’s powers to punish managements and boards of banks when they fail to perform their key role of managing risk. Rules of hiring and salary, political pressures, lack of accountability and the implicit sovereign guarantee of PSBs create the wrong incentives.</p>
<p>While the blame-game is on for l’affaire Nirav Modi, India needs to address fundamental questions about ownership of banks and the difficulties it creates. This is not surprising given the public support for PSU banks. Public sector ownership comes with an implicit sovereign guarantee.</p>
<p>For instance, depositor angst about the Financial Resolution and Deposit Insurance (FRDI) bill has been mainly because it has brought into the public debate the fact that all deposits are not guaranteed. Most depositors are not aware of the Rs 1 lakh limit of deposit insurance. The realisation that deposits above one lakh may not be safe if a bank fails, even if the bank is owned by government, is creating huge discomfort. Whether a bank is involved in fraud, as allegedly in the case of the PNB, or whether it has made bad judgements about business loans, depositors have been looking towards public ownership rather than the competence of the bank management for keeping their savings safe.</p>
<p>Given that there are few avenues for safe financial savings, this is to be expected. On the one hand, India forces banks to hold government bonds through the Statutory Liquidity Ratio. On the other, it does not allow households to lend to the government through small savings schemes like the Public Provident Fund and National Savings Schemes beyond income tax rebates. Nor can households purchase risk-free government bonds through the stock market. Households which have low-risk appetite go through the public sector banking system to find avenues for their financial savings. The lack of other instruments in the financial sector, therefore, creates political pressure for public ownership of banks.</p>
<p>The PNB-Nirav Modi fraud highlights the failure of operational risk management and auditing systems. Regardless of whether it was inefficiency or fraud, what is the accountability of the management and the board of the bank? If the PNB was privately owned, would the impact of such a fraud have been only on the two officials arrested or directly involved?</p>
<p>It is reported that the RBI has asked the PNB to pay other banks who gave credit based on the PNB’s guarantee. If the PNB pays up and suffers losses, would it be the taxpayer who will fill in for these losses through further re-capitalisation of the bank?</p>
<p>How many times in the past have taxpayers paid the PNB and other public sector banks that were falling short? CAG Report No. 28 of 2017 titled “Performance Audit Union Government Recapitalisation of Public Sector Banks” says that GOI, as the majority shareholder, has infused capital of Rs 1,18,724 crore from 2008-09 to 2016-17 in PSBs for meeting their capital adequacy requirements. The government has announced that it is infusing another Rs 2.11 lakh crore into PSU banks. At the same time, bad loans in the banking sector are above 10 per cent of outstanding loans. According to the RBI’s Financial Stability Report, while NPAs are rising for both public and private sector banks, those for public sector banks could rise to as much as 14.6 per cent by March 2018.</p>
<p>What is the way forward? The answer may not lie in the over-simplified solution that public sector banks should be privatised. That would be part of the solution, but along with that, other reforms are needed.</p>
<p>First, there is a need to address the requirements of a large and increasing number of investors who should get greater access to mechanisms to lend to government. This may not even mean lower returns. Considering that today the government 10-year bond yield at above 7 per cent is higher than the fixed deposit rate offered by most banks, some could choose to invest in bonds directly through the stock market. This needs a reform of the bonds market.</p>
<p>Second, small savings schemes should be reformed. Direct lending to small savings schemes can be expanded beyond the tax rebate caps. Interest rates can be linked to government bond yields. Third, to address concerns about private banks the deposit insurance cap could be raised; Rs 5 lakh would cover 98 per cent deposits.</p>
<p>Fourth, if the government decides that PSBs should offer risk-free deposits above the cap on deposit insurance they should be allowed to invest only in government bonds, or, do “narrow banking”. Then the implicit sovereign guarantee could effectively turn into explicit sovereign guarantee. The business of giving loans, making decisions, figuring out risk management systems, hiring competent staff, provisioning for bad loans, creating mechanisms for accountability and punishing management when systems fail can be left to private banks. Today the taxpayer pays when PSBs fail to perform these functions properly. Narrow banking by PSBs can take this burden away from the taxpayer.</p>
<p>The reforms of 1991 changed the way business works in India. They allowed the private sector to set up production and import without needing licences. They fundamentally took government out of the role of determining how and what should be produced. However, what they failed to do was to take the government out of the role of financing production and trade. By maintaining a largely bank dominated financial system and keeping it public sector dominated, India tried to run a market economy on one leg. The other leg, of finance, that should have supported the market economy, has been dragging the economy down. More than 25 years after liberalisation, finance is increasingly emerging as the binding constraint which emphasises the pressing need for fundamental reform.</p>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8541474529241719206.post-55989998922364102992018-02-08T12:45:00.000+05:302018-02-08T12:45:03.383+05:30Union budget: Not as expansionary as it seems<div dir="ltr" style="text-align: left;" trbidi="on">
<p><i>
<a href="http://www.livemint.com/Politics/DW0gyweusuBwsHygJeyigO/Union-budget-Not-as-expansionary-as-it-seems.html" >livemint</a></i>, 6th February 2018</p><p><em>Big announcements notwithstanding, the fine print suggests that fiscal deficit targets are likely to be met</em></p>
<p>The Union budget has raised concerns about macroeconomic stability, as reflected in some key budget announcements. An examination of the fine print suggests that while there may be some upside risks to inflation, fiscal deficit targets look likely to be met.</p><p>First, the full cost of the health protection scheme that promises Rs5 lakh per household per year appears to be more than what has been budgeted. Second, oil prices may rise while budget estimates seem to assume a scenario of benign oil prices and this may have fiscal implications. Third, the government has announced a 50% increase in minimum support prices (MSP) for the coming kharif crop that could lead to a higher deficit. In addition, the corporate tax rate for small enterprises has been cut to 25%.</p><p>On the first count, rolling out an all-India health insurance scheme is a challenging task. State capacity to deliver is limited. From the private sector side, good quality tertiary healthcare is still not available all across the country as would be required for this scheme. The supply response of the private sector to the incentives created by this scheme may take some time to realize. </p><p>In addition, regulatory capacity of, one, the health sector to regulate the private providers, and, two, the health insurance sector to make sure fraud does not become rampant will take time to develop.</p><p>Further, states need to come on board as well for this scheme. Many of them already have their own insurance schemes and will need to replace old schemes. The transition from old to new schemes may require time. This may mean that the new scheme will have limited expenditure in the current year. The allocation of only Rs2,000 crore suggests that this may indeed be the expectation of the government as well. This may mean that the impact on the deficit of the health insurance scheme may be limited.</p><p>Oil prices have been rising in recent days. This could put an upward pressure on fuel prices. When global oil prices were falling, the decline in price was not passed on to the consumer as the government increased excise duties. It remains to be seen whether the government will try to keep the price of oil stable. If oil prices rise, would excise be cut to cushion the consumer from the price rise? If so, how would this impact excise collections? </p><p>Further, the impact of the oil price hike on fertilizer subsidy will be another issue to contend with. The oil price hike would also mean a larger import bill and a higher current account deficit. This could possibly put downward pressure on the rupee.</p><p>In the past, it has been seen that increase in MSP has led to food inflation. Another channel through which the impact of the MSP hike could be inflationary is through a larger fiscal deficit. There are two possible models through which higher MSP is paid to farmers. One is via actual procurement of foodgrains by the Food Corporation of India (FCI) from farmers, which pays MSP to farmers. </p><p>However, given that the capacity of FCI to procure all the foodgrains listed across the country is limited, the alternative is to directly pay farmers the difference between market price and MSP. Anecdotal evidence suggests that the scheme benefits traders. In places where this scheme has been tried, it has been found that the difference goes to a large extent into the hands of traders who pay farmers low prices and collude with them to pass on the additional payment to them. </p><p>This could mean a big payout by the government but not an equal increase in the income of farmers. If “leakage” arising from this flaw in the scheme could be limited, the deficit could remain under control</p><p>In the budget speech of March 2015, the finance minister had promised to bring down the corporate tax rate to 25% over a period of four years. This promise was made on the grounds that the regime of corporate taxes in India needed to be rationalized, exemptions to be removed, and tax rates to be brought down to globally competitive levels. By the end of four years, the corporate tax rate has been cut only for smaller enterprises, which account for roughly less than 10% of corporate tax payments. The remaining corporates will still pay higher taxes. </p><p>One reason for not going ahead with the reform has been the difficulties in removing exemptions. If the finance minister had gone ahead with reducing the corporate tax rate for all enterprises without removing exemptions, collections would have suffered. While it is a pity that the reform has not been attempted, the effect of the rate cut on the deficit would be limited since only a small share of tax collections will be affected.</p><p>One clear impact of the budget will be higher personal income tax collections on account of the long-term capital gains tax, dividend distribution tax for mutual funds and the increase in education cess. As the GST (goods and services tax) regime is simplified, we may also see a pickup in GST collections.</p><p>What does all this mean for inflationary expectations and monetary policy? </p><p>Over the past one year, the monetary policy committee (MPC) has repeatedly raised concerns about the fiscal deficit. Whenever rates have not been cut despite inflation being around or even below the target of 4%, the MPC has pointed to fiscal slippages and possible higher borrowing due to the Seventh Pay Commission, and higher house rent allowance. Though the MPC may have concerns about the fiscal deficit, if the limited capacity of the government’s delivery mechanisms is taken into account, the MPC should not be overly concerned. This can create space for an accommodative stance of monetary policy. </p>
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Unknownnoreply@blogger.com1