Tag: Indianomics

Here’s what experts have to say on the disconnect between GDP growth and corporate earnings

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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For the sixth year in a row, earnings growth for most of the Nifty companies are in single digits. This even as government and economists expect gross domestic product (GDP) growth to come in at a strong 7.4 percent this year compared to 6.7 percent last year. The earnings growth are not in sync with the growth in GDP.

Data from global asset management company Schroders suggests that this asynchronous growth is a global phenomenon. Both developed and emerging markets (EMs) are reporting a major disconnect in earnings growth and in GDP growth over the last 10 years. While the Indian economy grew at an average rate of 7 percent, earnings per share saw a contraction of half a percent in the last ten years.

Leading brokerage firm CLSA in a note said it had cut its earnings estimates by 5.5 percent for the year to just 10.5 percent, though it maintained robust expectations of 26 percent for the next fiscal (ending March, 2020).

Soumya Kanti Ghosh, group CEA, SBI; Dhananjay Sinha, HD – economist and strategist at Emkay Global Financial Services and Saurabh Mukherjea, founder of Marcellus Investment Managers discussed the disconnect between growth in the real economy and corporate earnings.

Gosh said not only there is disconnect between earning and GDP growth there is also a difference in GDP growth and the employment/unemployment numbers also.

“The countries which are showing higher GDP growth are actually showing an increase in the unemployment numbers. So in the last couple of years, a lot of these changes have broken down,” said Ghosh.

Sinha said there are two aspects to this indifference. “I think there is a sort of a cyclical relationship between GDP growth and the earnings growth of companies. If you look at the average during a slowdown, the profit growth is much lesser than the GDP growth and the elasticity – if you look at it over the last 8-10 years – is roughly about 0.3,” Sinha said.

Mukherjee said the chances are high that the GDP growth will slowdown over the next three-five quarters for two reasons.

“One is that the cost of capital clearly is heading north globally whether it is because of Fed rate hike or because of the non-banking financial companies (NBFCs) challenges in our country. Second is the fiscal deficit,” Mukherjee said.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Using MSP as the only mode to intervene on crop prices won’t work, say experts

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The fall in food prices means that 9 crops are currently below the minimum support price. For some crops the prices are about 6-7 percent below MSP but for about 5 others crops, the selling price is more than 20 percent below the MSP and in some areas even 50 percent. While this is good for urban poor and rural landless labour, this has led to rural distress, especially among farmers.

Dr Ashok Gulati, former chairman of the Agricultural Prices Commission and Dr Himanshu, associate professor at Jawaharlal Nehru University (JNU) spoke at length about why MSP policy has not worked and what are the ways to solve the rural distress.

Q: Straight away to the data that we have 9 crops including pulses and the cereals are ruling at nearly 20-30 percent below minimum support prices (MSP) clearly states are not able to implement the policy, your thoughts?

Gulati: That is very clear that governments cannot swim away against the forces of demand and supply for too long and in so many commodities there are market fundamentals of demand and supply that operate and the basic rules of MSP is that it has to be a little below the market equilibrium price with a view that when you bring the produce to the market the market should not crash. Now if you announce a price which is way above the market equilibrium price then everything will come to you so you should be ready to procure. Now you don’t have an apparatus at present, the system is not in place, the money that will be required to procure literally everything of all pulses, of oilseeds and what not it is not in Rs 10,000-15,000 crore. You need Rs 100,000 crore to do that. You look at wheat and rice and where the food subsidy bills are and you cannot do even wheat and rice in 5-6 states beyond that market prices of paddy are 20 percent below MSP. So, when you are starting a new thing in pulses or oilseeds you should have a much better plan and that requires at least 2-3 years of building up a system of procurement, stocking and then releasing. Where do you release, what is the system in place in which you will be releasing.

Also MSP has to be dovetailed with the trade policy. I think the problem that we are harvesting today actually lies in when we had a bumper crop last year and we were still importing for the last two years massive imports of pulses so there are accumulated results in the system. We were very slow in looking at what the trade policy is and there was no connection of MSP policy with the trade policy. I think it is a very poor functioning at the policy level number one. Number two announcing as a political master stroke but you don’t have a system in place on the ground to give a support this will boomerang because farmers are concerned not with announcements but with what they are actually getting and now you take shelter, there is high moisture content therefore we will not provide – why don’t you fix up dryers in the market. That is what the investment is needed in the markets. All the APMC markets must compulsorily have an infrastructure including the dryers right there. So, I think it is all just basic dishonesty I would say in the system.

Q: Dryers fixing in the markets I don’t think anybody as thought through so much, is this a lack of so much administrative bandwidth or is it a lack of money?

Gulati: I would say it is poor policy, you cannot have an MSP just based on cost. Prices are determined by demand and supply. So, we must understand how pricing is to be done in the country, so first thing is there is bankruptcy of policy thought. It is a poor policy to start with. Number two you don’t have an apparatus to give a support to that. Number three you don’t have the money to do at that scale that is needed if you want to do it. All the three big failures.

Q: You said that dovetail minimum support price with the with the trade policy, how are global food prices now? Is there a scope for raising tariffs now?

Gulati: At present we already have pretty high tariffs. So we have to wait. The situation is the crude prices were low, international prices of all agri commodities were low. There is some turning around in international prices that will happen now because the crude prices have gone up so the energy cost in agriculture will go up, the transportation cost will go up. So, we hope in the next 3-6 months the international prices will take some rebound whether it is sugar or whether it is milk, or whether it is field crops. There would be some improvement.

Then in the Indian case because the rupee is also going down by 12-13 percent there would be an impact that the import parity prices will go up in rupee terms. So, I hope that in the next 3-6 months prices will take a left. How much? We have to still see, commodity by commodity how much is the excess stock in the economy at present.

Q: So you are expecting a rise in domestic food prices?

Gulati: Yes of course there would be some improvement.

Q: Let me proceed with this food prices trend that you are noticing, the standout feature of consumer price inflation (CPI) is the severe food disinflation. You are saying that is a going to end?

Gulati: I don’t think so. So, all the estimation that has been done I think you had the best so far. The future may not be that rosy as far as CPI is concerned in the next six months.

Q: So we are in for a rise in CPI that is interesting, you mean prices are going to harden?

Gulati: Yes.

Q: Statewide are you seeing any improvement, we heard about Madhya Pradesh Bhavantar Bhugtan Yojana doing very well so are at least some states doing good procurement?

Gulati: I would say politically because I consider this announcement of MSP as a cost A2 +FL, 50 percent on top of that. More a political announcement. They will do some procurement in the states where elections are going to be maybe Rajasthan, maybe Madhya Pradesh or maybe in Chhattisgarh. All other states, you look at where the prices are. If prices are 5 percent below MSP I would still give great credit to government. But there are 30-40 percent, even 50 percent below MSP. It is an utter failure of the policy and announcement.

Q: Two years ago when I interviewed you on the same topic of procurement you said that MSP works only for two crops in 5 states, is it still the same numbers, no improvement?

Gulati: In the 5 states that I say, in wheat and rice, in fact during the last 5-7 Madhya Pradesh and Chhattisgarh have improved their system but only for wheat and rice they have a system in place but for other crops and now you want to do it for 23 crops across India, government will become ‘baniye ki dukan’ – that is why I say bankruptcy in terms of policy thought. This is not the way to go. You will mess up the system. So please beware. You want to help the farmer, we are all with you but give directly through the income support.

Q: This income support for farmers is do doable? Are the logistic in place to reach, first of all to identify the right farmers and then reach them some amount of revenue?

Gulati: Yes. I mean India is fortunate today that that the IT giant, IT expertise of this country has to be used for the masses. The topend must give service to the bottomend and at a very low transaction cost with all the intermediaries taken off because this is where the corruption takes place. So you can directly put the money in their accounts and once you do, how much is land on per hectare basis – Telangana has gone ahead with that. Why cannot the center do it? What is loan waiver thing? What you are doing is crude income support and disturbing the credit markets.

Q: Dr. Gulati has practically decimated the minimum support price policy as something that was just an announcement and actually no implementation at all. Would you agree that this is just turning out to be a gimmick and government after government is getting away with it? How so?

Himanshu: I think Dr. Gulati is right in one sense that the MSP policy has not been followed by implementation and unless you follow it with implementation, it’s just a sheet of paper, it’s just a scrap of paper and that you can put into the dustbin but that doesn’t mean that one has to getaway further from the MSP system. We currently are in a system where the minimum support prices are essential because food prices for the last three months particularly have been in a negative territory, if you are looking at the WPI. So there is something that needs to be done.

Where I do agree with him is that the MSP is not the only instrument through which you can help the farmers and the reason for that is that the crisis is not just a price collapse which is happening because of international factors or other factors. It is a much deeper crisis of decline in demand, collapse of demand in the rural areas and it requires a multitude of efforts in terms of raising prices. You can see the same thing happening in terms real wages; those are also coming down. So there is a deeper crisis where MSP can, for some time, help you to arrest the price decline but it is not something which is going to help you in the long run dealing with all the kind of problems that we are dealing with rural areas.

Q: The point that Dr. Gulati was making, if you missed it, is that the infrastructure is lacking and therefore, MSP turns out to be meaningless except rice and wheat and there it is also becoming counterproductive because you are producing something which is already abundant.

Himanshu: The whole idea of minimum support price is to have government intervene when the prices are coming down. What has happened over the year is that the minimum support price has also become the procurement price. They are two distinct concepts and there are completely different instruments that are to be used in different times. However, what the government has been doing over the years is using the MSP as the only price intervention that it has in its arsenal – that is not going to work. So you do not have to do it for every crop but for some crops, and in those years when the prices are coming down is when it should be used – that amount of money is being spent, and we are spending almost Rs 160,000-170,000 crore as part of food subsidy but it is not going to the right people, it is not going to the right crops, it is not going to the right farmers and right states where it should actually go but in terms of success of MSP, it did help in stabilizing prices, it did help in making prices available but we need to have a better view of how to use the MSP system. It’s not that we are not spending money; we are spending good amount of money on food subsidy system.

Q: Let me expand this conversation – the country today has an inflation targeting system. Is that fundamentally creating a rural distress? How do you solve both? Inflation control is a good policy but at the same time how do we tackle rural distress that may emanate because of food disinflation?

Himanshu: I think there is a larger political economy issue that we are dealing with and that is why the food inflation issue also becomes part of this whole inflation management. It’s something that now been talked about by many other people that we are looking at the inflation targeting using only the instrument of monetary policy, is not something which is a right way of looking at inflation targeting. A large part of the food inflation is not something which can only be dealt by the instruments which are available as part of the RBI or the monetary policy. There are structural issues and those also need to be captured in that. However, the larger political issue is definitely there that large burden of cost of stabilizing the inflation target is on the farmers, on the rural economy whether in terms of the cut in subsidies or artificially keeping prices low in the rural economy. You need to find a balance between these two and that balance can only be achieved by having a proper view of what the agriculture sector means to you. It cannot simply be that they should be sacrificed for achieving stability in inflation targeting system without understanding how it is creating inflation in the first place.

Q: Agricultural distress is because we have 800 million people and a little more than half the population dependent on farm incomes and what are producing – about 250 million tonne. The United States is probably producing much more than this with 3 percent of the population dependent. So the problem is it not rural unemployment?

Himanshu: One has to look at the whole issue in perspective, in the sense 600 million people didn’t come one day; we are inherited with largely agrarian economy and the process of structural transformation should have accompanied an economy which is growing at 6-8 percent or 10 percent is something that we didn’t follow and that is why you see the output share of agriculture has gone down dramatically but the employment share hasn’t gone down. You cannot wish away them and there is something which is a reality; I mean all the countries over a period of time did start 50-60 percent of the population in agriculture and then over a period of time shifted to the situation where there are 3 or 4 percent of the population in the agricultural sector. We have not done that but we need to achieve that but that cannot be achieved by simply lifting people out of agriculture and putting in non-agriculture.

Where I disagree with you that this crisis is not just of agriculture; in normal cases what would have happened is that the non-agriculture sector which is substantial now, which is roughly 50 percent of people are employed and it does account for a larger share of the income coming from rural areas would do well.

Now we are in a situation where the non-agriculture sector in the rural has also collapsed and it is certainly linked to the agricultural performance but it is the overall collapse of the rural economy and that is something which is putting pressure on agriculture as well as non-agriculture and that’s why I mentioned about demand crisis. If non-agriculture sector was doing well, the construction was doing, manufacturing was doing well, and there would have been an automatic demand rise in the rural areas and that would have pushed up wages that would have pushed up farm prices. So in a sense we cannot neglect the other part which is almost as important as the agriculture sector, which is the crop sector that we are more bothered about.

Q: I suppose this was exacerbated by demonetization, this non-agriculture rural sector as well, what would your prescription be to ensure that the non-agri rural sector is rendered robust?

Himanshu: Obviously, demonetization did create and there are several other factors. I mean continuous neglect for the last 10 years that we can think of, where the rural areas were neglected in different ways. Demonetization was maybe a final cushion blow which basically created the problem where we are finding it difficult to come out of it. I would say that the problem has been recognized since November 2013 when wages started going negative that is time we should have realized that there is something wrong with the rural economy. If you want to revive it today that is why agriculture and MSP can only be one and very small part of it in terms of revival of the agrarian economy. You need to put more money in the rural areas, you need to create more demand in the rural areas.

Q: Is MGNREGS, it themed to be an employment guarantee scheme is that one way to help rural distress?

Himanshu: It is one way of raising the rural demand but also various other forms of, I mean money that can be spent. We are talking about a situation in the last four years where even the investment in agriculture, the real investment in agriculture has gone down by 3.50 percent, so we are talking about that situation. So this is a situation that we are talking about so the government is not spending on the rural development expenditure but also not spending on the basic investment in agriculture. So, all that Ashok Gulati was talking about in terms of creating rural infrastructure, marketing infrastructure we are talking about a situation where it has gone down in real terms. The credit growth to agriculture has dramatically collapsed. So, we need all of these efforts simultaneously to put up the rural economy back on track.

It is not just one instrument that we are talking about, it needs a multi multitude. I am just emphasizing it that probably all of this together needs to be done at a same time to make sure that the rural economy is becoming driver again.

Q: Finally what about the solution that Dr. Gulati spoke in the end and you may have heard him, basic income to all farmers. Is that really doable? Can we even identify, put a filter, identify who are poor and reach it. I guess the way to reach it is available but how do you identify poor?

Himanshu: Where I agree with him is the spirit of it which is that rural incomes need to be increased and rural demand has to be increased. That is the whole idea of doing this kind of a basic income transfer without distortion of unnecessary interventions in the market which essentially is at least the government is not intervening, but it should. But I think the problem is very different. You are talking about some 700-800 billion people here compared to say 2-3 million people in the western countries. So, the whole size that we are talking about is a much larger size of intervention that we can even imagine of doing it.

Last time we did a calculation and even if we wanted to do it only for say for example people in the agriculture sector or people below a certain threshold of income, it would cost anywhere between Rs 15-20 lakh crore, so you will be almost like nothing to spend and the entire government budget will be – that is the minimum. Even if you give then by at level of poverty line so that is something which is out of the picture. But what is important here is to recognize is that there are also fundamentally different problems which will come up which is that we have an economy which is where almost like 15-20 percent are sharecroppers. They don’t hold any land but they are working on agricultural sector. They are landless agriculture labourers, they are also depended on agriculture.

There are people who are absolute landlords who might be holding land but  are not involved in agriculture. So, again when you go into the implementation issues you realize that this is more of an utopian solution than actually dealing with any reality that can help solve the problem.

What we need to do is to use the existing instruments rather than talk about something which is completely un-implementable and has absolutely no idea how is it going to work out and divert the issue into something else. So, that is where the spirit is fine, that incomes have to be raised, farmers need to be supported, but we have not yet exhausted all the instruments that are currently available to us. The real problem is that not that the government is not aware of it. It is just that it doesn’t have the will power, it doesn’t want to implement, and it doesn’t want to spend an instrument it already has. So we should go slow on this. Look at all these other options of doing it rather than simply suggesting something which is grand but ultimately will turn into some different problems.

Also Watch: Experts discuss why MSP policy has not worked and what are the ways to solve the rural distress

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

RBI eases bank lending limits to NBFCs: Here is what experts have to say

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) on Friday eased lending norms related to certain non-banking finance companies (NBFCs) as liquidity concerns in the sector persist and markets continue to question the viability of some of the firms following the IL&FS debacle.

The central bank  said it would allow banks to allocate up to 15 percent of their lending to NBFCs that do not finance infrastructure projects, up from an earlier limit of 10 percent. The move is effective up to December 31, RBI said in a statement.

The relaxation in lending norms by RBI follows worries over tightening credit lines to NBFCs after a series of defaults at India’s Infrastructure Leasing & Financial Services Ltd (IL&FS), spooked markets and led to a major sell-off in the stocks of many NBFCs.

Earlier this month, the Indian government stepped in to take control of IL&FS saying it feared its collapse would cause “catastrophic” damage to the financial markets and the economy.

CNBC-TV18 caught up with G Padmanabhan, non-executive chairman, Bank of India and former ED, RBI, Lakshmi Iyer, CIO – Debt at Kotak Mahindra AMC, Samir Jasuja, co-founder, Propequity.

The step of increasing liquidity, in principle is that the right thing to do?

Padmanabhan: In such a situation, I think in principle all that the central bank can do is to signal. I do not think the RBI can work out to the last pie, what is the liquidity shortage and provide that kind of liquidity. I do not think any central bank would do that.

So the central bank’s stand is a signal saying that we are ready to stand by in case there is a problem and what is perhaps a limited issue, let us not blow it out of proportion. So the backstop is here. I think that is the important signal that RBI has given today. To my mind, it is a very important step.

As someone who has watched this from the mutual fund end and the trepidation that you guys had to pick up housing finance companies (HFC) paper or NBFC paper, has some part of that fear gone because RBI is allowing the banks to give more liquidity?

Iyer: I think the fear factor was anyways receding specifically post the monetary policy decision of status quo and rupee liquidity coming back to the system in a staggered manner getting accentuated by open market operations (OMO). Now with this announcement today, I think the extent of fear is only further reducing.

Definitely we need to wait and watch how banks exactly execute this thing because what we hear is that it is not going to happen overnight, some of them also want to take their board approvals, etc… but for that I think it is definitely a good measure which will certainly a step in the positive direction — though the lending might still be selective from the mutual fund fraternity.

The calculation is that you can release money from high quality government securities to the extent of 0.5 percent of total deposits. The simple math would be around Rs 50,000 crore. Do you think banks will be willing to lend so much or even half that much to NBFCs?

Padmanabhan: Honestly I think they will be much more selective in today picking up the people to whom they have to lend. They will obviously do a much closer scrutiny to make sure that the kind of problems that is hitting the sector today, does not get on to their books. However, having said that, I think the important fact is there are limited kind of issues that is there and today we can pick up companies which probably have much better books and which is not getting sort of pulled into the problems because there is a general negative sentiment all around.

I would say in one word what this could achieve, maybe the banks could be more forgiving than the capital market. So probably that would make sure that the liquidity situation stabilises a little more because if it is a question of a complete stoppage of your rollover possibilities, then what if the limited problem could burgeon into a much bigger issue. That is what the central bank is trying to address.

I just wanted to point other data. If you looked at the RBIs data on sectoral composition of bank loans, I was looking at it over the past 18 months when the initiative shifted to NBFCs. Bank lending to NBFCs was Rs 3.9 lakh crore in April of 2017. April of 2018 it has risen to Rs 4.96 lakh crore; that is a rise of 26 percent. However, when I looked at the August number, it was Rs 4.8 lakh crore. It had fallen by about Rs 10,000-20,000 crore. Was there a realisation among the banking sector that they were already overexposed in April and therefore do you think they will pick this signal?

Padmanabhan: There are two issues. I think at least for a bank like mine, we were constrained in our lending because of our prompt corrective action (PCA) and all. So although we were looking at the sector as a possibility, there were certain constraints. However, I think over a period of time it is also a fact that particularly for short-term lending, these companies had moved away and moved more into the capital market.

Now, in retrospect, having spent 3.5 decades in the central bank, I would not say that they have to look at each of this company very closely, but their boards should have been extremely conscious about what is the kind of asset-liability mismatch (ALM) that is getting built up over a period of time.

It is that in this business I think the ALM is something which is there but the important point that needs to be ensured is that is it sustainable and particularly when the market is turning, the sentiment in the market is turning, is it something which could become an issue. I think that is probably where we were sort of catching up rather than being ahead of the market.

To come to the other side, what has been the reaction of the bond market itself? You spoke of the many positives that the RBI has done, the fact that it did not hike rates, that it has announced proactively a fairly giant OMO in the face of an exchange rate problem and thirdly the measures announced in terms of releasing more space, first that LCR cut and now a little more of liquidity coverage getting reduced. That is a bunch of steps, are you buying any NBFC paper?

Iyer: Two parts to your question. We are buying NBFC paper but we are buying very selectively. We are not buying in mass and we have been buying ever since around the policy.

What about housing finance companies?

Iyer: We are buying housing finance companies and NBFCs both but largely in the up to three-month segment. We are not going beyond the three-month segment because we ourselves do not have clarity on how our liability will behave which is largely our investors.

Second is how did the market react. The market initially started off on a positive note. In the morning, the bid offer spreads were about 5-10 basis points lower, but as we saw the equity markets gain momentum and gain steam and a lot of corrective stocks in red today, largely the NBFCs and HFCs, the market broadly ended flattish, maybe marginally about a 1-2 basis point higher. So muted reaction, less activity, started off on a fairly euphoric note today.

Would you step up your purchases of NBFC commercial paper (CP), and more importantly housing finance commercial paper or would you wait for the first securitisation tranche?

Iyer: We have been hearing a lot that a lot of HFCs are looking to securitise, etc. We need to get something more tangible to see to be able to meaningfully step up purchases from the current levels.

So to answer your question, I do not think at this point in time we will step up purchases. It will be a little bit of a wait and watch mode to see how this sell down actually materialises for us to gain more confidence.

How did you react to this sudden downgrade by Brickwork of one real estate company and the pell-mell it has caused both on Wednesday and on Friday in housing finance stocks? Has that raised the fear that we do not know who are the final borrowers of housing finance companies?

Iyer: The surveillance level obviously has shot up manifold after this announcement of the news that we read. However, the good news is that if you scan through some of these lending’s in detail, you realise that these are very excessively collateralised assets and lending’s done at the SPV level. So, the reason for panic or fear to spread across is very limited to my mind.

I do not have much data on the extent of developer loans that NBFCs are exposed to. There is some data which Credit Suisse has given us, they have done a bottom up aggregation of exposures from 25 largest firms, which account for 70 percent of the total loans in the system and they say that the NBFC exposure has risen by 55 percent from March 2016. If you took from year ago levels, the NBFC exposure to the real estate space has risen by 30 percent. Now if this money does not come are you going to see too many real estate companies get into trouble?

Jasuja: The problem really started in the real sector about three years ago and they were very well bailed out by the likes of Piramal and Indiabulls Finance when they went out and funded developers against large land banks that were licenced, that they owned and the situation got resolved for the time being.

At this point in time, if the NBFCs stop lending to the developers, that problem will probably restart again in a big way. The total loan in my mind to the developers who could be distressed, which do not have annuity income at all would be roughly around Rs 50,000 crore upwards. That is my sense of what the NBFCs would have lent in total to these developers.

There was a lot of re-financing happening of these developers from one NBFC to the other and I think it should continue for a while otherwise you will see some more distress and some more Supertech’s come out. We have known of Supertech being in financial problems for the last two years.

Are you likely to see more companies find it difficult to pay up their interest?

Jasuja: That is a high probability right now because sales of real estate has picked up but it has picked up in the ready side of the market, the under-construction side is still suffering quite a big deal. There is a high probability that in the coming few months you could have some more defaults like Supertech, especially in the north region.

Banks have shown interest in securitised paper and SBI made a big announcement that it will treble but look at where the problem is, as Jasuja says, it is actually in the developer loans. When banks look at securitised paper will they want to look only at home loans and not developer loans, will they cherry pick?

Padmanabhan: They could. At least in the case of my bank, since we are consciously moving into retail, one of the things that we are looking at as a priority is the home loans. I am not sure that the developer loans are going to take a complete drying up but it will be more cherry picked.

You would think any bank will pick up the developer loans? There is a problem in terms of prompt corrective action banks where capital is scarce and therefore you are nudged to pick up safe loans which require less risk weight and for the private sector banks there is a liquidity issue. The loan deposit ratio is running between 95 and 105 according to some numbers.

Padmanabhan: That is where this LCR and all is going to help. If you ask me, it is going to help more the private sector banks because the credit deposit ratio that they run is much higher than the public sector banks.

Many of them have lost their CEOs, do you think they will be risk averse?

Padmanabhan: I do not think so. The business cannot stop because the CEO is getting changed. There will be a re-orientation but my gut feeling is that the developer loan is it going to completely dry up? I do not think so but it will be much more selective and cherry picked.

If you can give us a little more graphic explanation or detailing of the kind of money needed? Is there a number to the amount of incomplete projects, any number to the exposure of these incomplete projects to NBFCs and therefore how much trouble we should expect?

Jasuja: There are two parts to this, we had come out with a report earlier where we had said that $50 billion of real estate is probably not going to get constructed very soon. There are projects that have been delayed for a very long time and those projects have been funded also by some of the NBFCs and some of the banks as well, if you keep that out, fresh real estate development that is under-construction would be another about $75 billion which is in progress at various stages in the top 15 cities.

A large part of it is coming through the retail housing finance loans but at least 20-25 percent of that would be coming to the developer through the NBFC developer loan segment which could coming through the banks or from the housing finance companies.

$75 billion would be something like Rs 5 lakh crore number you are looking at.

Jasuja: That is the overall construction in progress in the residential sector as we speak right now in the top 15 cities.

And 25 percent of that was coming from NBFCs?

Jasuja: Yes in form of developer loans.

With this kind of a picture and reasonable amount of granularity that you are getting, how many of the debt funds will be willing to re-finance housing finance companies?

Iyer: In housing finance companies 75-80 percent is mortgaging including some self-employed LAPs and maybe 20-25 percent is developer financing book. I do not deny that there is a little bit of caution which is right now impending in that particular segment but if you look at the 75 percent of the book, it is a fairly decent book.

Having said that I would reiterate that there is a reason to be selective about the NBFC or HFCs that you will lend to, it will not be en masse lending which used to be a case till a while back. That is where mutual funds will exercise caution including people like us who would want to wait and watch it out irrespective of what one were to guide due to an outcome. So, I think it would be a very selective game that we need to do.

That is what is the crux of the problem, the RBI has perhaps bought time by showing its indication and willingness to give liquidity. However, this is not the final solution. As Samir Jasuja points out, there is a genuine problem of money that will not be available because the NBFCs do not have the money and banks will be wary of lending to them since they are already coming out of a fairly deep NPA cycle. In the past, for instance in the US and even in other counties, when did the threat about banks having a big hole go away. When the Fed did a stress test in May 2009 and said that of these 19 banks so many of them are kosher, I think 11 are kosher and the other require this much amount of capital. Do you think something as drastic as an AQR needs to be done by the RBI on systemically important HFCS and NBFCs?

Padmanabhan: I think the overall supervision over the NBFCs and HFCs, whether we like it or not, definitely will go up as a result of all these problems that they are facing.

In particular, the NHB has not had a chairman and if RBI has to extend a helping hand to HFCs, why would it do it if it did not have supervisory control? I am going drastic over here, I am asking you if housing finance regulation, NHB may have a developmental role, but housing finance regulation should come to the RBI and they need to do an AQR, is that the way forward?

Padmanabhan: It has to be; as long as the supervisory powers are with a single regulator, to the extent possible, it becomes possible to see across the system because there are interlinkages rather than seeing this system in the segment and ultimately you miss the elephant; that generally happens.

However, having said that, I think clearly one thing of course which I do not entirely go along with what you are saying, is I think the way in which an institution has to function and has to go forward, need not entirely depend upon whether the chairman is there or not. I think this is an issue, I think there are several experts who are already there and this has to be taken forward.

So I think what got missed was when this change happened, as I said earlier, the move away to the capital markets, the kind of issues that it could bring about once the sentiment changes, I think in retrospect all of us missed and that something which I think has to get corrected whether it is through a stricter ALM or any other means. Again that is something which needs to be put in place after a considerable amount of discussion because the kind of issues the NBFCs faces are different from what the banks face. So it is just not borrowing the bank model on to the NBFCs.

Having said that, it is also important to make sure that today when there is an issue, the issue does not get bigger than what it is. So while AQR may be necessary, then you can talk about it to several other entities also.

So when this AQR has to be done is something that we need to decide. However, somewhere there must be better information to the regulators, whether it is a single regulator or multiple regulator, has to what exactly are the kind of risks that are being run and it has become critical in today’s world because it is an interconnected world.

With inputs fro Reuters.

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Indianomics: Have started the process of digitising, says Bank of Baroda’s Chairman Ravi Venkatesan

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Bank of Baroda has started the process of digitising and  from September  the bank branches will be paperless, said Ravi Venkatesan, chairman of the bank.

“If you are a new customer walking into our bank and you want to open an account, it is now less than 10 minutes you walk out with your account activated and your debit card,” he said

Managing directors of PSU banks need to be given five-year tenures, Ravi Venkatesan, in an exclusive interview with CNBC-TV18, said that the boards of public sector banks need to be empowered to fix governance in these banks.

Edited Excerpts:

Q: What have you done for Bank of Baroda? What do you think you have accomplished?

What we have accomplished is something that time will tell. We have started many things but they are still very much a work in progress and frankly, it is something others should say rather than me. I will perhaps talk about what it is we have tried to do. I started and in the very first week, there was this big issue which was called the Ashok Vihar scam.

It was a money laundering scam where people had exploited our bank and at that time PS Jayakumar had not joined, there was only one ED on board and that was the start of the adventure. Pretty soon Jayakumar came and what we decided is, there a whole host of legacy issues – NPAs, frauds and all bunch of stuff. Then there are a whole set of other issues which going forward are even more important – how do you prevent these things from happening again because they seem to happen with some regularity? How do you create a bank which is able to compete with State Bank of India and with the best of the private sector? How do you catch up on technology so that you don’t get disrupted by the fintech companies etc? We felt that the obsession with stressed assets shouldn’t distract us from this agenda and frankly I have been more focused on these issues.

So, one of the first things we started to do is rethink the architecture of the bank. We said if you look at a contemporary bank anywhere in the world, they have got what is called a frontend-backend architecture.

So your branches that serve customers but all the transaction processing is done in the backend. We said this is obviously happening for some good sound reasons. So we said we will migrate to that and we created a whole shared services subsidiary and took every process from account opening to loan processing, trade finance transactions, digitised them and put them in that subsidiary and this is still a work in progress.

However, it is going to be probably the single most lasting change when it is accomplished.

Q: I particularly had great expectations and I would assume a lot of people, investors from your combination because you come from Microsoft, you come from Infosys, you have come with a lot of technology experience and you came exactly at a time when fintech took over banking. So how much of that fintech could you incorporate in Bank of Baroda?

First we should talk about tech and fintech as a subset of that. When you talk about tech, as I said we started by digitising and centralising processes, we have taken all the paper-based systems and automated them, by October that should be complete. So, you go into a Bank of Baroda branch from September there shouldn’t be any paper. We have implemented tab banking. So if you are a new customer walking into our bank and you want to open an account, it is now less than 10 minutes with Aadhaar and you walk out with your account activated and your debit card.

You can dream about fintech but if you don’t have the core technology platform that is contemporary it is a problem. So we had to upgrade our core banking system which coincidentally was from Infosys and that proved to be a non-trivial transition, we upgraded our mobile banking, internet banking, we have implemented 40 enterprise applications, just enormous amount of work.

On fintech, in particular, we decided this is culturally very different, it requires a different mindset and we have to partner with fintechs and not compete with them. So, we set up fintech vertical and now we have 25 partnerships which are delivering even at Bank of Baroda’s scale a significant amount of business.

You can do all this but technology moves pretty fast. So in two years, you are obsolete again. How do you prevent it from happening? We have created an IT subsidiary and brought in Accenture and IBM as our partners to make sure that this bank stays contemporary.

Q: Have you been able to restrict the number of windows through which frauds can happen because that is the big problem that we are suddenly faced with, with the Punjab National Bank fraud. From your and PS Jayakumar’s experience could you identify the windows through which these seep in?

A: It is a great question particularly in a bank which has a larger surface area, that is a big deal. BoB is India’s most international bank, we have some 70 million plus customers and now you have got all these devices which are also accessing the bank, so it is a great question.

Our approach has rested on three things, one is, of course, centralising, automating and putting them in a shared service centre and separating responsibility. The second thing we have done was to set up a dedicated fraud risk management unit which reports into a third ED who doesn’t have any of the businesses and they are using technology to be able to continuously detect frauds more quickly etc.

The digitisation of the bank is actually the most interesting thing because it is throwing up a huge amount of transaction data and you can completely change the audit process. Today the audit process happens after the fact, it is incredibly manual, it happens in a decentralised way in the branches. Now what you can do is, be preventive, use analytics and you can do it in real time. So, all this thing reduces, probably will never eliminate, the possibility of fraud.

Q: Would you say that now chances of this kind of a fraud – Punjab National Bank fraud passed through so many fingers – it slipped through internal auditor, it slipped through the external auditor, it slipped through bank’s elementary things like change of personnel at a regular level, as well it passed a lot of external tests as well, would you say that in Bank of Baroda, such a thing is now less likely?

A: Yes less likely, one of the things I am expected to do is chair the high-value fraud committee of the bank’s board. I come from a manufacturing background, way before Microsoft, I spent 16 years of building engines and in manufacturing what you do is every time there is a defect, you don’t just fix the defect, you go back and look at the system that produced the defect and make the changes. So we have tried to bring that mindset into each of the frauds. What is the fraud? What is the modus operandi and have we gone back and fixed the system so that this modus operandi is defeated? I think we have moved the needle.

Q: No one can perhaps say never again?

A: Yes but knock on wood, we have made considerable progress.

Q: So you would be able to by August 13, put down a set of standard operating procedures (SOPs) that can be employed in other banks as well?

A: Exactly, I think the whole point of running experiments like BoB is to see what worked, see what didn’t work and why and try and replicate that in the system and I hope wise people do that.

Q: What is your sense is this an experiment worth repeating -getting two private sector people at the highest level, would you say it is a successful experiment?

A: First of all, what the government has decided to do and is a good thing is separate the role of chairman and managing director across the board and that is so sensible.

Now, what you do about the managing directors because there are now several Chairmen who are not very dissimilar to me. I think the crucial role is of the CEO of the bank. I don’t want to say that you should only go to the private sector, I think there is plenty of good talent inside as well.

The crucial issue is to pick the best possible people for the job and give them enough time – three years is not enough time. We (the whole banking system) think CEOs need to have five years to see things through because it is ‘the’ crucial issue.

If you look at why does the State Bank of India so significantly outperform the rest, a lot of it has to do with the fact that they operate under a separate Act, which allows them to grow their own talent – their CMD, their joint-MDs they all come from within and therefore they are able to create a coherent culture, they are able to see through strategic change and transformation which can take five years and seven years.

I think that is an incredibly important thing and I would hope that the government can find a way to replicate this not just at BoB but others as well.

Whether this can be done with government majority ownership is a big question.

The government was mooting the idea of consolidating public sector banks. There was the talk of merging BoB with IDBI Bank, OBC, and Central Bank. Your thoughts?

These were speculative statements. I am unaware of the latest thinking within the government, but from a purely BoB perspective, a merger at this time particularly with a weak bank would not be prudent. In fact, uncertainty about this is one of the factors that is depressing the stock price which indicates that shareholders are also not in favour of a merger.

However as a banking system, India needs fewer, better capitalised and better run PSU banks so consolidation is probably inevitable. But the sequence of events matters. It would be best to start by addressing the fundamental governance and talent framework first, then hive off the bad loans into one or more ARCs, recapitalise and finally merge a few banks.

In other words, consolidation must be part of a broader strategy to fix the banking system- it is not a strategy or panacea in itself.  My sense is that fortunately the idea that merging two weak banks to create a strong one has faded and good sense will prevail.

You referred to the Nayak Committee report. This report urged the government to bring down its stake below 50 percent. Now the biggest private sector bank is also facing regulatory scrutiny. Your thoughts on privatisation as an answer to the PSU banking problems.

Privatisation does not guarantee good governance. However, there are three crucial facts. First, PSU banks have been steadily losing market share to private sector banks and collective share will likely dip below 60 percent in just a few years; margins and operating profits have also been declining.

In other words, they are not competitive. Second, the latest Financial Stability Report from RBI shows that 85 percent of the frauds happened in PSU banks even though they account for 65 percent of the sector. Therefore, they are systematically more accident-prone.

Finally, unlike private banks, PSU banks have had to repeatedly be bailed out by the taxpayer.  These things are happening not by accident but by design because the system of governance and talent management is ineffective. If the government will not reform these, the decline will accelerate.

The Nayak Committee report suggested a thoughtful glide path of reforms which would eventually lead to at least some banks being privatised. What is happening now is privatisation by default rather than by intent as PSU banks hemorrhage market share and capital.

The answer is not to abandon banking to the private sector as we’ve done with healthcare and education; that would be a huge mistake. For the foreseeable future, India will need a few well run PSU banks like SBI.

What is needed is to think through the banking architecture that India will need and develop a strategy to get there. Perhaps this will happen if the next election returns a government with a clear majority.

Q: If you are asked to stay on for another term, will you?

A: Actually, there was an informal request that I do but unfortunately I have made a commitment to start my next adventure in September, and so much as I would like to see things through, it will fall to someone else.

Q: Can you tell us what the next venture is?

A: Not yet.

Q: So that is for the next interview?

A: Yes, never waste an opportunity to talk again.

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Indianomics: PSU banks must be more vigilant about credit, says Bimal Jalan

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Over the past three weeks several public sector and private sector banks have announced their Q4 results. It expected that there will be an increase in NPAs after the Reserve Bank of India’s (RBIs) strict circular in February.

NPAs have gone up across the board, but for private sector banks whose numbers have been declared so far, the gross NPA’s have risen from 3.8% as of  December 31 to 4.39% as of March 31.

For the public sector banks, it stood at 13% as of end December and already it is at 16.5% with a few more banks yet to announce numbers.

CNBC-TV18 caught up with M Damodaran Former Chairman of Sebi and Bimal Jalan former RBI governor to understand whether the country should start accelerating steps to restructure and correct the public sector baking system.

Edited Excerpts:

Would you recognise that now we are in a situation which is dire and we have to think of surgical or accelerated steps to correct the public sector banks?

Damodaran: It is all about diagnosis, prescription, and treatment. Have we diagnosed the problem correctly? The wrong way to look at it is to bundle all of this together and say public sector banks have a problem. The problems are different in each of the banks. Some banks are lacking in skill sets and credit appraisal is poor, let us admit that.

Some banks are suffering because of indecision at some level, some have had lack of continuity at top levels, some have had no one at the top level for a long time and that is not the fault of the public sector bank.

So to derive the problem statement from ownership is not right. You got to find a bank specific solution, you got to task the board among others. In all of this, the board cannot be either interested or uninterested spectators while the game is going on.

I think it is important to recognise that you must have a strong board. The guys that are not performing, show them the door, reconstitute the board, and tell them to quickly come up with a bank specific solution for this.

There are several reasons why you have numbers as large as this. Take infrastructure, there has been lending to infrastructure by the banks, there has been mismatch in terms of the terms for which you raise money and the kind of commitments that you have in the infrastructure space. Why did that happen? Clearly they were not dying to get into infrastructure, but for some reason they got in.

Some of the private sector banks which are reporting smaller numbers are not in the infrastructure space. Even given all the problems of the infrastructure, if they went in with open eyes knowing what they were getting into, fine. Then you had court orders, which suddenly made some of these sectors millstones around the neck of the economy and the banks will suffer in the process.

If you have well intentioned sweeping orders, I am not doubting that, but it tends to impact on the lending institutions and that is something they could not have foreseen.

Then the empowerment. Do the chiefs of public sector banks see themselves as empowered? I am not sure they do because everything seems to be coming from Delhi by way of instructions. That is not the way ownership should function. I believe that these problems can be fixed, but they must be fixed in a bank specific manner by an empowered board that is reconstituted on the basis of what they bring to the table.

Since you have already gone through three banks, United Bank, UCO Bank, and Indian Bank, you know the small banks. The small ones United Bank, UCO Bank, Indian Overseas Bank (IOB), Dena Bank, what would your recommendation be for this set of banks?

Damodaran: Dena Bank has had problems for several years. They have barely kept the heads above water; for even in good times they have not been one of your bright shining examples of banking.

If you look at Indian Bank, clearly from where it was, it was completely written off. I know mine was a minority voice which said that we can fix this bank and a lot of people said it is best to shut shop and setup another bank. That has come around.

Take IOB, it is a classic example. During the worst of times or shortly thereafter, it was leaderless for a long period. I am told the Banks Boards Bureau (BBB) recommended names, but nobody got appointed. Now if you just allow it to be leaderless, clearly that is a problem.

You look at what the sectors are to which these banks are exposed and then you can look at this.

For example, United Bank of India has always had a problem that it is a successor of banks that were located in what is now Bangladesh. Huge exposure to tea gardens, priority sector, all of that, no large accounts. Therefore, it was not a very happy situation for a bank to be in and yet they managed for a while. Now you cannot run these by remote control from wherever you are sitting. Why tar everyone with a same brush and they are public sector, therefore, they are bad.

Even if we avoid the blame game, still what is the solution? Obviously United Bank of India cannot survive as it is. Do you think we have to experiment with privatising, selling some, or selling one bank?  

Damodaran: The answer is not privatisation. We have seen and I do not want to take names, we know what is happening in the private sector banks. I think there is enough evidence that whoever is dealing with them is mollycoddling them and they are not being treated in the same strict manner as some of the public sector banks are whether these are banks or executives, no issues of conflict of interest and I have gone public on this.

If there were something like that in a public sector bank, you would have thrown the book at them. You clearly are not doing that just yet, we see no evidence.

However, to come to your point, the answer is not privatisation. What did we do in IDBI? You are talking about 16-18%. I led IDBI at a time or I got into IDBI at a time when the NPAs where close to 30% and even then one of the big four said this is an understatement, it should be closer to 40% odd. We carved out a stressed asset stabilisation fund.

You cannot find solution to this within the conventional methods. Now, if you can draw a line and say these are the assets which are my problem assets, I will keep them somewhere. I will continue to lend, shrinking a banks book, making it a narrow bank is a bigger problem. Getting into narrow banking, the bank raises deposits, it invests in securities, it will not lend, it is not going to get the bank anywhere certainly.

What you need to do is, take out that portion which can perform, which still has a large amount of standard assets. Deal with NPA separately from outside your normal banking space. Do not apply interest to that. Part of these numbers, these are interest on interest applications and compounding is – if it works for you, it is great, if it doesn’t work for you, it is terrible. Then find solutions on an asset by asset basis.

There are assets here where the problems are cyclical where these will turnaround if you just maintain them over a period of time. However, when they are on your books, they will go from sub-standard to doubtful to loss, you will need to make huge provisions and then you cannot take them off your books.

Specific solutions which can be found outside the books on a bank specific manner and continuity of leadership at the top. Select good people, give them five years. You change a person to Indian Bank allegedly because he did not do well in IDBI and then you punish Indian Bank by getting its performing managing director who did well for three years into IDBI and within a week you say IDBI is under Prompt Corrective Action (PCA) then why did you bring him then, to do what?

What you are speaking about, taking out some bad assets and freezing their interest rate or substituting it with bonds is one way to go ahead. Would you say the power sector is in that space now because with Reserve Bank of India (RBIs) new rule of abolishing CDR and SDR, about Rs 1.82 lakh crore of power loans will go to the NCLT, you think that is right to be treated in the way you are saying?

Damodaran: The point with the power sector again is I would look at it asset by asset. There are some where the plant has been completed, the fuel is not available, and so it is not performing.

20,000 megawatt are those plants which do not have a power purchase agreement (PPA).

Damodaran: You do not have fuel in some cases, the plant is ready. Now these are at the end of the day whoever owns it, these are national assets. All of these came up at a time when you were hugely deficient in power.

Today we can live without these, it does not matter, and focus rightly on renewable energy, I am not saying that, but it does not mean you pretend these assets do not exist, physical assets, forget assets on your book. So why is it that you cannot use some other instrumentality? Can NTPC manage this if it is a management problem? If it is a fuel problem can you find – there is fuel available in the world.

Of course, it comes at a price, but is that a smaller price to pay compared to allowing a plant to be just mothballed because it does not have fuel and hoping one day things will change? It does not work like that. Some assets definitely can be dealt with if you dig deep and figure out what needs to be done. Now who will do this, this cannot be your insolvency professional because this task is different.

This is the government job.

Damodaran: Not even the government. If the government creates enabling environment and tells people who are involved in this industry saying okay we are giving you this problem, find out. I have always believed that if you take all the chambers of commerce and industry — CII, FICCI, ASSOCHAM — the wealth of intellectual capital that resides there and the ideas, their ability to create solutions is huge. Task some of them with finding solutions to this.

We have to admit talent is not coming to public sector banks anymore, perhaps the stoppage started in 1991 when private sector started burgeoning. Our bright young engineering and IIT graduates preferred either IT industry or preferred the private sector, but clearly the march of new talent into public sector banks has dried up. Therefore, from a personal angle, do we need fewer banks because the lower echelons get very well paid and the upper echelons get poorly paid compared to private sector, not just banking. So is there a big rethink needed? First of all fewer banks so that the available talent is better used?

Damodaran: The fewer banks problem should have been addressed some years ago when government had some banks that were 100% government owned and some banks that were partially government owned, majority government owned. Now that you have public shareholders in all these banks, there will be obviously some kind of resistance to mergers. We have not seen a merger taking place in this.

But cannot they be forcibly demerged? If they were forcibly nationalised overnight at the whim of a prime minister, we have a powerful prime minister with a very big mandate, cannot there be legislatively?

Damodaran: Then identify those which are not viable. There are some which no matter what you do will not, they have been always performing somewhere on the border and they have gone down. The solution is different for them as for the others. It is like in the financial sector.

What do you do for the bottom of the pyramid?

Damodaran: For the bottom of the pyramid do you think there will be people who will buy that?

For the branch network they will not?

Damodaran: They could buy, you could get retail accounts. Lots of things command a price in the market, whether that is a worthwhile price and will the shareholders be willing to go with that or would you want to shore up the operations there, fatten the calf before dealing with it separately.

I think as you mentioned, people is important. Let me say, I am a great believer in the proposition that public sector banks have huge talent. Have you looked at that talent? The selection processes for top positions have been sub-optimal. If you had actually looked for merit, these are the banks which have provided leadership to most of the private sector banks, and you are saying they are doing well, so where did they come from? The same stock.

I am referring to the more later periods, after Indian private sector.

Damodaran: It is the way you go and find people. I am great believer in the fact that the board of directors should be strengthened and told these are we think your problems, you take a look at it, find out what your problems are, come up with solution, any number of good people who should be roped into board positions. Are they on the board? I do not know.

What do you think is the immediate step the government needs to take with these 11 banks or with some of the very weak ones which under the prompt corrective action are not even allowed to expand branches? Is the first step to infuse more capital in these banks?

Jalan: Yes, and that I think the government has already probably decided to infuse capital and to recapitalise public sector banks. We must remember that public sector banks are the ones which have given lot of priority sector lending to small medium enterprises and are extended into rural areas and so on. So, for the banking structure to function collectively for all our people, it is of essence to have the public sector banks being revived. The government is taking the steps and the banks have also now started prompt corrective action. In the prompt corrective action the whole idea is to try and see that they can reduce their NPAs within a time bound period.

However what we have to take into account and I think we should permit that, that let us not reduce the credit advances by banks to zero as it were or to very low amount. What we need to do at the same time is that the vigilance system of the banks over the borrowers, guidance as well as scrutiny of their viability has to be strengthened and the government as well as the public sector banks individually are taking action to do so.

The situation is certainly painful, situation is certainly bad and has gone for a long time. This is the other point which we should keep in mind that why has it gone on for so long?

We have to admit that there is a structural problem with some of the public sector banks. The NPAs of private banks who have practically lend to the same economy are as of March standing at 4.39%, while that of PSU banks that have announced so far, the NPAs stand at 16% plus. Surely there is a structural problem here.

Jalan: This essentially has to do with the governance system, unless you hold the board responsible and accountable for scrutiny, for making sure that these NPAs are not taking place rather than the government or directly the ministry or something. The ministry can certainly monitor it. It is not that all private sector banks are doing very well. The essential part that you are saying is that the average NPA for private sector banks are lower.

You have to ask yourself the question that, why is it that it is lower? The essential part is the governance system – Board should be appointed, board should have independent directors and so on and so forth and much of that has already been done. However, there has to be decentralisation of execution vis-à-vis policy making.

For policy, government must make policy that public sector banks should  provide rural employment, should have priority areas and have infrastructure which the private sector banks won’t finance because it is long term, the rates of return are lower and so on and so forth. So, the policy the government announces, but the governance part it is essence that we ensure that the public sector banks are governed.

All of us as citizens we can expect our government to monitor performance and if it is not functioning take action within the next 6 months and not after 3 years.

You alluded to board independence, but recently three independent board members were named in an FIR for a loan that has gone bad and they have since resigned arguing, how would they know about the due diligence done on each loan? If we pursue in this, good people may not even want to be independent directors in public sector banks?

Jalan: You can tackle that, that is not a difficult issue over time. If you just take a stroke and you say that I will hit you, then nobody would want to be hit.

However, if you prescribe the norms to be abided by and it does not mean that banks should not lend, otherwise what is the point of having a bank. The whole system whereby the appraisal of bank is made every six months or every one year by the board of directors, that should be done to make sure the minimum prescribed norms of evaluation, norms for making sure that lending by banks has conformed to the guidelines which have been setup by the bank boards and so on and so forth.

It does mean that you should not give priority sector lending or small sector lending so on and so forth as it is important for the country. However, based on the policy announced by the government, there should be monitoring of performance of the bank every six months by the board of directors.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow