Merger of weak banks with strong has its downside. Is it worth the pain? Raghu Mohan explores It’s an idea which has been spoken about in the past, and finance minister Arun Jaitely has thrown up the same again -- that the Centre is not averse to merging weaker state-run banks with stronger ones. On Wednesday (9 September), Jaitely said that while steps to shore up the financial strength of state-run banks has been done through capitalisation, “After this (measures) if there is a fragile bank, we are looking at consolidation with stronger banks. So it's not that banks don't get a priority. In fact, after inheriting the banks in a fragile situation, we are systematically trying to address each of these problems”. The reference is to concerns that the weaker among state-run banks may be too fragile to continue to do business in the emerging landscape – that’s even after the steps taken to capitalise them and re-engineer their innards with the “Indradhanush” initiative. The Triggers NowThe number one headache for Jaitely and team is the mess as ariticulated S S Mundra, Deputy Governor-RBI (Indian Banking Sector: Emerging Challenges and Way Forward; 5th May 2015). That while the banking system is adequately capitalised, he saw challenges on the horizon (for some of banks). For the system as a whole, capital adequacy has steadily declined; as at end-March 2015, it stood at 12.70 per cent from 13.01 per cent a year earlier. “Our concerns are larger in respect of state-run banks where it has declined further to 11.24 per cent from 11.40 per cent over the last year”, he said. He went on to add that even the best performing state-run banks have been hesitant to tap the markets to raise their capital levels; that it would be difficult for the weaker to raise resources from the market. “There is a constraint on the owners insofar as meeting the capital needs of these banks and hence, the underperforming banks are faced with the challenge of looking at newer ways of meeting their capital needs. A singular emphasis on profitability ratios (based on RoA and RoE) perhaps fails to capture other aspects of performance of banks and could perhaps encourage a short term profitability-oriented view by bank management”. Mundra made it clear that he did wish to get into the merits of this approach, “but from a regulatory stand point, we feel that some of these poorly managed banks could slide below the minimum regulatory threshold of capital if they don’t get their acts together soon enough.. The need of the hour for all banks, and more specifically, in respect of state-run banks, is that capital must be conserved and utilised as efficiently as possible”, Mundra explained. And given the state of fisc, Jaitely will do well to conserve the Centre’s wallet too; but as to whether it should be done by merging the weak with the strong is a moot point. But let us step back and look at the historical to get a grip on what we are on. Blast From The PastFrom the early days of reforms, banking sector consolidation has been detailed in various reports – M Narasimham Committee -I (1991), S H Khan Committee (1997), M Narasimham Committee-II (1998), S S Tarapore Committee on Fuller Capital Account Convertibility (2006), Raghuram G. Rajan Committee (2009) and the Committee on Financial Sector Assessment (CFSA-2009; chairman Rakesh Mohan who was deputy governor-Reserve Bank of India). In his inaugural address on the annual day of the Competition Commission of India on May 20th 2013, P Chidambaram as finance minister alluded, inter alia, to the need for restructuring of banks through mergers. To quote “ ... some banks, including some public sector banks among the 26 public sector banks that we have, may be better off merging. The need for two or three world-size banks in an economy that is poised to become one among the five largest in the world is rather obvious”. What should not be missed is Chidambaram’s reasoning for this: that we need globally competitive large banks; it was not to “bailout” weak banks! Since 1961 till date, there have been as many as 81 bank mergers out here of which 47 took place before the first phase of nationalisation in July 1969. Out of the remaining 34 mergers, in 26 cases, private sector banks were merged with state-run banks; and in the remaining eight cases, both the banks were private sector banks. The spate of mergers before and immediately after nationalisation is not relevant to the times we live. Let’s come to the post-reform period -- there have been 31 bank mergers. And mergers prior to 1999, (under Section 45 of the Banking Regulation Act, 1949) – and this is the most critical period -- were primarily resorted to in response to the weak financials of the banks being merged. Of this lot, the merger of Global Trust Bank with Oriental Bank of Commerce must find particular mention – that of a basket case new-generation private bank being merged with a state-run bank or of tax payers paying for private loot! Whatever be the colour of capital, the bottomline is there is no reason for a good bank pay to for the sins of a rotten apple. In the post-1999 period, however, business sense led to voluntary mergers between healthy banks under Section 44A of the Act. The merger of New Bank of India with Punjab National Bank (way back in 1993); and the acquisition of State Bank of Saurashtra (2008) and State Bank of Indore (2010) by the State Bank of India are the only instances of consolidation among state-run banks. All involved pain. Bank Mergers The Pros: • Larger banks may be more efficient and profitable than smaller ones and generate economies of scale and scope. Furthermore, the reorganisation of the merged bank can have a positive impact on its managerial efficiency. The efficiency gains may lead to lower cost of providing services and higher quality as the range of products and services provided by larger banks is supposedly wider than what is offered by smaller banks. Experience in some countries indicates cost efficiency could improve if more efficient banks acquire less efficient ones.• Consolidation may facilitate geographical diversification and penetration towards new markets. *• Big banks are usually expected to create standardised mass-market financial products. The merging banks may try and extend marketing reach and enhance their customer-base.• The common criticism against consolidation is that it will have an adverse effect on supply of credit to small businesses, particularly, those which depend on bank credit, as consolidated big banks would deviate from practising relationship banking. But, there is recent evidence that reduced credit supply by the consolidating banks could be offset by increased credit supply by other incumbent banks in the same local market.• The transaction costs and risks associated with financing of small businesses may be high for small banks. Large and consolidated banks can mitigate the costs better and penetrate through lending into these sectors.• One of the arguments cited against consolidation is that it may result in rationalization of branch network and retrenchment of staff. However, rationalisation may lead to closure of branches in over banked centers and opening of new branches in under banked centers where staff can be redeployed. And the Cons:• It can result in neglect of local needs leading to reduction in credit supply to some category of borrowers, particularly small firms. The consolidated bank may rather cater to big ticket business, in the process adversely affecting financial inclusion.• Not all customers are treated in the same way by the big banks. There is empirical evidence that one consequence of the merger wave in US banking in 1990s has been that loan approvals for racial minorities and low income applicants have fallen and the extent of this decline was more severe for large banks.• The consolidating institutions are found to shift their portfolios towards higher risk-return investment.• Consolidation could also result in less competition through structure-conductperformance-hypothesis giving fewer choices to the customer and arbitrary pricing of products.• Empirical evidence suggests that financial consolidation led to higher concentration in countries such as US and Japan, though they continue to have much more competitive banking systems as compared with other countries. However, in several other countries, the process of consolidation led to decline in banking concentration, reflecting increase in competition. Source: RBI Discussion Paper on Banking Structure in India -- The Way Forward (2013). Prepared by the Department of Banking Operations and Development; and Department of Economic Policy and Research. A working group set up by Indian Banks’ Association (IBA;2004) “Consolidation in Indian Banking System: Legal, Regulatory and Other Issues” was of the view that it made sense to bring all banks under the Companies Act so as to ensure that legal dispensation for mergers in banking sector is akin to that of corporate mergers. But it never made a case for a merger between weak and the strong. It can take down both!
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Raghu Mohan says if anything, banks must be complimented for practicing the art of “lazy banking” In early January this year, Prime Minister Narendra Modi made a call to end "lazy banking" on the last day of the bankers' retreat, 'Gyan Sangam'; he asked banks to play a proactive role to help the common man. Noble as these intentions are, for the better part of the year banks were more worried as to when and how much capital would come in from the Centre by way of capital infusion ahead of Basel-III which kicks in from fiscal 2019 -- we are talking about state-run banks which account for 76 per cent of the banking industry’s assets. In August (eight months after Gyan Sangam), we finally got a roadmap on the numbers. That state-run banks -- over a four-year period -- would need Rs 1.80 lakh crore in capital. Of this, these banks would have to tap the bourses to raise Rs 1.10 lakh crore. Financial Services Secretary Hasmukh Adhia said these estimates were based on credit growth rate of 12 per cent for the current year, and 12-15 per cent for next three years which will depend on the size of the bank. The Centre’s share will be Rs 70,000 crore over this period -- of this Rs 25,000 crore each will be infused in 2015-16 and 2016-17 and Rs 10,000 crore each in 2017-18 and 2018-19. Raghu MohanThis assurance is good, but there’s nothing to suggest that more capital will not be sucked in. In the six months since the Gyan Sangam, what’s happened is that the bad-loan situation has worsened. Mint Road’s Financial Stability Report (June 2015) observed that while risks to the banking sector had moderated marginally since September 2014, concerns remain over the continued weakness in asset quality indicated by the rising trend in bank’s stressed advances ratio. Gross non-performing assets (NPA) went up to 4.6 per cent from 4.5 per cent between September 2014 and March 2015. So too restructured standard assets to 11.1 per cent (10.7 per cent). State-run banks recorded the highest level of stressed assets at 13.5 per cent of total advances as of March 2015. You can take relief that the net NPAs of banks remained unchanged at 2.5 per cent during September 2014 and March 2015. The FSR was of the view that the current deterioration may continue for few more quarters; that falling profit margins and debt repayment capabilities of India Inc., add to these concerns though the overall leverage level in Indian economy is comfortable when compared to other jurisdictions. That pain is to going to be around for some time is once again highlighted by Ernst & Young’s (Fraud Investigation & Dispute Services) report on `’Unmasking India’s NPA issues – can the banking sector overcome this phase?’ The report (released today: 8th September) is based on the responses received from over 110 respondents during the period November 2014–March 2015. The principal respondents were bankers from state-run, private, foreign and co-operative banks; they were drawn from vigilance, credit, operations, legal, compliance, asset recovery, audit, and finance departments. And this is what it said. · 72% said that the borrowers are misusing the restructuring norms · Around 86% of the respondents stated that existing monitoring procedures such as internal audits and concurrent audits alone were not enough to verify adequate functioning of the NPA mechanism. This highlighted the need to strengthen internal processes and controls for early detection of issues. · 91% respondents stated that forensic audit must be made mandatory to ascertain the intent of the borrower and further 54% respondents that this would help in weeding out ‘wilful defaulters’ from genuine borrowers and thereby reduce recovery costs/efforts · 44% stated the impact on provisioning or performance of the bank branch is one of the key reasons that are preventing banks from reporting borrowers as ‘wilful defaulters’ · Only 15% of the respondents seemed optimistic and think that NPA numbers will be curbed due to regulatory changes and increase supervision by the Reserve Bank of India (RBI). The RBI recent circular ordering all banks to ensure vigilance during the pre-and-post sanction due diligence processes is expected to prove a step in the right direction. · 86% respondents stressed on the need for an effective mechanism to identify hidden NPAs. Additionally, around 56% stated that used of data analytics and technology can be an efficient enabler to identify any red flags or early warning signals. · 68% of the respondents said that developing internal skill sets on credit assessment/ evaluation are necessary The point here is all of the above information comes from the deep recess of banks – the great watering hole at which all of India Inc., drinks from. What more information do the authorities need? Finance Minister, Arun Jaitley knows only too well what the issues are. On August 21 this year, he made reference to the all-out efforts launched to correct the current "unacceptable" level of bad loans in state-run banks. “NPAs, which have reached to the present level are unacceptable. They reached this level partly because of indiscretion, partly because of inaction, partly because of challenges in some sectors of the economy, which were evident through the high NPA in these sectors," he said. On today’s meet, Arundhati Bhattacharya, chairperson of the State Bank of India said: “we have suggested to the Government to revive stalled projects and make investment climate more conducive and business friendly. We understand that Government is keen on improving conditions for doing business and making efforts in that direction.” You can’t expect the head of a state-run bank to say more than that, but how are to do this when banks’ are not able to lend without a proper policy on NPAs or specific business areas?As for “lazy banking”, look no further than the Reserve Bank of India (RBI) to know why it is so. Despite Mint Road’s slash of the statutory liquidity ratio (SLR) — the percentage of deposits that banks have to invest in government securities (G-Secs) – over time to 21.3 per cent from 23 per cent, banks continue to hold around 28 per cent (by way of SLR). In its Annual Report for 2014-15, Mint Road explains the reasons for the excess holding of SLR by banks: “… the buffer providing access to collateralised borrowings from the wholesale funding market and the Reserve Bank. Maintaining excess SLR securities also helped banks to weather the impact of the current slow phase of the economic cycle on their balance sheets and earnings”. Simply put what it means is that banks held excess by way of SLR – that is, they chose to invest higher amounts in G-Secs — as they could pledge them to raise funds from the money markets; and that at a time of dip in bank’s asset quality, such investments stood them in good stead. If anything, banks must be complimented for practicing this art of “lazy banking” (!). It’s better to do so than lend more monies after bad, and then twiddle your thumb in private despair when it does not return home. The pow-wow today between the prime minister and industrialists, bankers and economists make for great optics; and may help sooth frayed nerves – but the remedial has to be done on the ground.
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By Raj LiberhanThe Finance Minister is now worried that the Non Performing Assets of the state run banks have reached 'unacceptable levels'. It is not unusual for Finance Ministers to be worried given that our financial architecture is rather fragile. As the guardian of the nation's strained treasury, he must have sleepless nights. His predecessors have been worried too, but besides exhorting the bankers to clean up their appraisal abilities and obtain substantive collaterals before sanctioning loans, very little action gets taken to compel the state run banks to run on prudential norms. An extra dose of recapitalization has also been promised, something like Rs 70,000 crore over the next four years to help the banks to get the needed muscle to leverage more funds for their business as well as get close to the capital adequacy norms. The NPA affliction also extends to the public financial institutions whether owned by the Central or state governments but that is another story.To get an idea of the size of the non-performing assets, it has been stated by the Reserve Bank of India that these are 5.2 per cent of the total advances at the end of March, this year, up by nearly a percent over the previous year. In percentage terms, the figures do not seem alarming but translated into numerals, the NPAs stand at a whopping Rs 3.07 lakh crores!! This level of non-performing assets are ascribed to 'partly because of indiscretion and partly because of inaction..' This pronunciation should lead us to actually quantify NPAs amounts due to indiscretion, amounts due to foolishness, amounts due to stupidities and perhaps amounts due to political pressure. Sadly no such statistics are maintained, either by the Finance Ministry or its associate banks. At the very least it can be safely assumed that these bad debts are the result of poor and misguided investment decisions.Banks, public or private, are in the business of money to make money. It is a simple and a complex business. They invite deposits and pay a rate of interest, attractive enough for the depositor as the interest earned adds to his income. To pay the promised interest, the bank has to lend this amount to an entrepreneur at a rate of interest that will cover the amount to be paid to the depositor and meet the costs of doing business by the bank. The bank also hopes to glean a certain amount of profit on the transaction to satisfy its promoters and investors. The bank being a trustee of the depositor's money, has to ensure that when it lends to a borrower, the credentials of the borrower measure up to essentially one standard: his ability to pay back the amount borrowed with interest. To secure this end, the bank will insist that the borrower produces a collateral, or a guarantor in the shape of an owned asset which is at least equal in value or a human being with amounts of deposit in the bank which can be pledged as a surety. This works well when the amounts of borrowing are small.But bankers would not be bankers if they did not play in the big league. How do you lend to businesses which need thousands of crores to put up a power project or an infrastructure project or an airlines venture? It is the prospect of big incomes from these lendings that the profits and gains for the banks really accrue. So you have financial and technical wizards to appraise the costings and the revenue streams and the tenure in which the project goes functional. If the latter two features are compatible with the tenure of the borrowings, it makes for a good case for the bank to make the loans. At least that is the theory of lending. Lend and be happy.What actually happens is that the costing of the project is over padded intelligently, the revenue stream is brighter than reality and the time frame is off by 30-50 percent of the stated time lines. We now have a well-made recipe for default on the loan installments. And when it does happen, as it will for sure, our bankers then have a programmed response by instantly proposing to 'restructure the loan' which in plain language means that the time to pay back the loan gets extended. A de facto default of loan repayment becomes a functioning asset once again just by pressing the extend button. This is not the only rescue initiative that the bank undertakes. Invariably, the costs of the project have escalated, which is true of 100 percent cases in our country, so they provide further loans to meet the escalation of costs. The bank is happy as it can recognize legitimately the loan income and the favoured borrower is happy as he has found the fountain of eternal wealth in his hands. Extend and be happy.Money is a complex business for sure. But the banking trade has to function within the frame of prudence. Unscramble the complexity and we discover that money does not tolerate mismanagement at the fundamental level. If the NPAs are being ascribed to 'indiscretions' then clearly there has been mismanagement, at the very least. Criminality is not very far from an act of indiscretion particularly when the act has the consequence of a loss of multiples of thousands of crores. The primary duty of the lender is to assess the credibility and creditworthiness of the borrower. It has to be followed up with a severe evaluation of the project costs and the time frame for completion and the hazards to completion. No appraisal can be complete unless the borrower's equity is estimated to show a serious involvement of his own skin in the project for which funds are being sought. Invariably, the costs of the project are padded up to take care of inflation, escalation in prices of inputs and likely time overruns. The skill of the lender lies in getting a fair idea of the padding intended to cover likely escalation in costs and not to help siphon the promoter's equity which is the case all the time in our country. The subtly nuanced 'indiscretions' in reality, are the deliberate oversight of the risks and a willing acceptance of the generously projected revenues by the funding institution.The list of indiscretions in lending by the public banks is long and varied. Some of the significant reasons are the burden on the banks because of the compulsion to give credit to fulfill social sector needs. Given that this would only be a small drop, the bulk of the credit is attributable to downright bad investment decisions in real estate, power sector, infrastructure sectors with long gestation periods, lendings with no planned exits at appropriate tenures and credit under political pressure are the real culprits. Failure to recall loans at the first sign of trouble and reluctance to encash collaterals and replace promoters, are all illness symptoms that became terminal. Nonetheless, we have not seen any bank management being held to account. Only an occasional reprimand or a stern reference to the NPAs at a public function is considered good and sufficient corrective and then it is business as usual till the next alarm bell rings. This belief is engendered by the ability to pretend that all loans get ultimately paid back, sooner or later, a belief that has no basis in fact. The fiction of comfort is created by the euphemism called restructuring of corporate debt, at best a normal banking practice. Yes, then display transparency and show the restructured debt as a distinct item on the balance sheet. Otherwise, pretend and be happy that you have revived a patent loan default.All bubbles are evolutionary. They build up slowly till they go burst as all bubbles must. The banker's skill and the warning systems he installs are meant to recognize the first signs and insulate his portfolio from disaster. The regulators have to be awake all the time too and pull the stops before the bank goes overboard. Re-capitalisation is like a heavy dose of steroids, funded by the taxpayer to revive the strength of the public sector banks, failing which they will go under. After all, this capitalization and recapitalization story is a familiar script for most state undertakings. And that is a cause for mental seizures, which is a trifle beyond being merely worried. In caution should banks trust for the world of finance functions only on ethics and sound arithmetic, and never on speculation. A punter places his bets on presumed logic, while a good banker must hedge his bets against all risks. Finance Ministers have to believe that as well.The author is Director, India Habitat Centre
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Non-performing Assets' issue in Indian banking is set to be worsen in coming years, according to banking survey by EY consulting.To assess the reasons and challenges behind these mounting bad loans, EY Fraud Investigation & Dispute Services released a survey report titled, ’Unmasking India’s NPA issues – can the banking sector overcome this phase?’ In line with its aim to uncover the elements which contributed to this issue, 87% of the respondents stated that diversion of funds to unrelated business through fraudulent means is one of the root causes for the NPA crisis.Furthermore, around 72% have claimed that the crisis is set to worsen before it becomes better. The survey respondents also indicated that lapses in the initial borrower pre-sanction process and inefficiencies in the post-disbursement monitoring process have played a key role in the NPA predicament.Arpinder Singh, Partner and National Leader, Fraud Investigation & Dispute Services, said that, “The Indian banking industry has been facing a challenging situation in the form of the NPA crisis. We have seen that an often overlooked, but integral aspect is lapses in integrity by the borrowers or by gaps in the initial sanctioning process undertaken by financial institutions. With the Reserve Bank of India’s recent circular on the framework for dealing with loan frauds, the role of forensic audits will become even more critical as it would enable identifying the intent of decision makers, thereby addressing the stress in the sector.”Some of the key highlights of the survey are:72% said that the borrowers are misusing the restructuring normsAround 86% of the respondents stated that existing monitoring procedures such as internal audits and concurrent audits alone were not enough to verify adequate functioning of the NPA mechanism. This highlighted the need to strengthen internal processes and controls for early detection of issues.91% respondents stated that forensic audit must be made mandatory to ascertain the intent of the borrower and further 54% respondents that this would help in weeding out ‘wilful defaulters’ from genuine borrowers and thereby reduce recovery costs/efforts44% stated the impact on provisioning or performance of the bank branch is one of the key reasons that are preventing banks from reporting borrowers as ‘wilful defaulters’Only 15% of the respondents seemed optimistic and think that NPA numbers will be curbed due to regulatory changes and increase supervision by the Reserve Bank of India (RBI). The RBI recent circular ordering all banks to ensure vigilance during the pre-and-post sanction due diligence processes is expected to prove a step in the right direction.86% respondents stressed on the need for an effective mechanism to identify hidden NPAs. Additionally, around 56% stated that used of data analytics and technology can be an efficient enabler to identify any red flags or early warning signals.68% of the respondents said that developing internal skill sets on credit assessment/evaluation are necessary(BW Online Bureau)
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Designating just two banks could be credit negative for other banks, according to Moody's. Sumit Sharma reports The Reserve Bank of India’s (RBI) move to designate just two banks, the State Bank of India (SBI) and ICICI Bank as domestically systemically important bank (D-SIB) is described by Moody’s Investor Services as credit negative for banks in India. "The RBI’s implementation of its D-SIB framework appears less stringent than that of other jurisdictions, which appears to be related to the capital stress that banks in India are currently experiencing,’’ said Moody’s analysts Rebaca Tan and Srikanth Vadlamani. The RBI on August 31 designated SBI and ICICI Bank as the only two D-SIB, a status that also requires them to make an additional provision of 0.6 percent and 0.2 percent by April 1, 2019. India’s D-SIB framework is less rigorous than those of other jurisdictions and with only two banks in India designated as D-SIBs, the country has the least number of D-SIBs among those that have implemented the framework, says Moody’s. Also, RBI’s timeline for complying with the capital surcharges is longer, despite the presence of the less stringent capital requirements, it said. Canada and Australia require compliance by 2016, and in Singapore, locally incorporated banks have had to comply with the higher capital requirements since June 2011. In July 2014 RBI explained that problems faced by certain large and highly interconnected financial institutions hampered the orderly functioning of the financial system, which in turn, negatively impacted the real economy. The cost of public sector intervention and consequential increase in moral hazard require that future regulatory policies should aim at reducing the probability of failure of D-SIB and the impact of their failure. Indicators that RBI said would be used for assessment are size, interconnectedness, substitutability and complexity. Based on the sample of banks chosen for computation of their systemic importance, a relative composite systemic importance score of the banks will be computed, it then said. RBI in July 2014 expected four to six banks to be designated as D-SIBs. Banks designated as D-SIBs would be subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks they pose to the financial system. Moody’s expects ICICI Bank to be able to easily meet the required increased capital. Yet, it expects State Bank of India to reply on a combination of government capital injections, raising of external capital to meet the additional capital required. Singapore had as many as seven SIBs, with Hong Kong five, Canada six and Australia four banks. Compared with other countries, the smallest SIB in India had 5 percent of the market share, compared with three percent for Singapore and Hong Kong, five percent for Canada and 16 percent for Australia. Australia and Canada would need banks to get the additional capital requirement by January 2016, while Singapore and Hong Kong by January 2019 and India April 1, 2019.
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Sri Lanka's central bank has received $1.1 billion from the Reserve Bank of India (RBI) under the currency swap agreement between the two reserve banks. Consequent to the signing of a special currency swap agreement for $1.1 billion by the Central Bank of Sri Lanka (CBSL) with the RBI on 17 July 2015, the CBSL has received $1.1 billion, a statement said. This is in addition to the $400 million received in April 2015, the bank added. With the enhanced level of official reserves, the CBSL expects that the exchange rate would stabilise in line with sound macro economic fundamentals and movements of other currencies of major trading partners . In a related development, the central bank has allowed the rupee to float from Friday by not quoting a specific rate in the market. The Sri Lankan rupee exchange rate had eased to 134.75 rupees to the US dollar on Thursday. The central bank will allow the market to decide the exchange rate by not guiding with a specific rate. The bank will intervene if the levels are too high Analysts say the rupee had fallen 2.7 per cent so far this year due to increased imports.
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The Reserve Bank of India has hired a former Nomura algorithmic trader, officials said, taking a rare step to recruit externally as it seeks expertise needed to make India’s financial markets deeper and more responsive to monetary policy moves. Since taking the helm in late 2013, RBI Governor Raghuram Rajan has set out to bring fresh ideas to the conservative institution and has eyed recruiting more specialists from outside, but they have been few and far between. In late 2014, Rajan, who has lamented a dearth of capable economists in India, brought in former IMF economist Prachi Mishra to bolster economic research. Senior officers at the central bank typically rise through the ranks having joined at a junior level. Some are seconded to foreign central banks to gather more specialist experience. The new hire, Gangadhar Darbha, joined as a consultant at the start of this month, officials with direct knowledge said. The description for his job, given in an advertisement posted by the RBI, said it carried responsibility for developing and improving derivatives markets and examining currency futures, interest rate futures and offshore non deliverable markets. “The RBI strongly believes such new markets, new products will help in monetary policy transmission,” said one official with knowledge of the RBI’s thinking. A second official hailed the benefits of hiring externally. “Product development requires exposure to and experience in the global market. Such external hires will help add value to the RBI,” the official said. Rajan has a keen interest in market products. Under him, the RBI took external feedback last year to revise rules governing bond futures trading, and make the market succeed at the third attempt. While futures have been well received, markets for other products like credit default swaps remain difficult. According to officials, Rajan wants to bring more consultants into a central bank, where hiring outsiders, even on short-term contracts, is still fairly rare. S.S. Mundra, the RBI’s deputy governor in charge of human resources, said the move to bring in outside expertise was not entirely new and remained limited. “Occasionally, we have been doing it. It is just an extension of that policy,” Mundra said. Darbha declined to comment on his appointment. (Reuters)
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China's new international development bank will offer loans with fewer strings attached than the World Bank, sources said, as Beijing seeks to change the unwritten rules of global development finance. The Asian Infrastructure Investment Bank (AIIB) will require projects to be legally transparent and protect social and environmental interests, but will not ask borrowers to privatise or deregulate businesses for loans, four sources with knowledge of the matter said. By not insisting on some free market economic policies recommended by the World Bank, the AIIB is likely to avoid criticism levelled against its rivals, who some say impose unreasonable demands on borrowers. It could also help Beijing stamp its mark on a bank regarded by some in the government as a political as much as an economic project, and reflects scepticism in China about the virtues of free market policies advocated in the West. "Privatisation will not become a conditionality for loans," said a source familiar with internal AIIB discussions, but who declined to be named because he is not authorised to speak publicly on the matter. "Deregulation is also not likely to be a condition," he added. "The AIIB will follow the local conditions of each country. It will not force others to do this and do that from the outside." The AIIB was not available to comment for this article. A reduced focus on the free market could give the AIIB greater freedom to run projects, said a banker at a development bank who declined to be named. For example, development banks that finance a water treatment plant may require the price of treated water to be raised to recoup costs, even if local conditions are not conducive to higher prices. The AIIB, on the other hand, could avoid hiking prices and rely instead on other sources of financing, such as government subsidies, to defray costs, he said. The bank, to which some 50 countries have signed up to join, also aims to have a simpler internal review and risk assessment system for projects compared with its peers to hold down costs and cut red tape, sources said. For one, the AIIB is not expected to delay some project approvals by months to allow all parties to do due diligence, a practice in place at other development banks, said a source familiar with the matter. The bank will also minimise expenditure by having only a handful of field offices and a staff strength of between 500 and 600, about a sixth of the size of the Asian Development Bank (ADB) and 5 percent of the World Bank, he said. At Least Break EvenA successful AIIB that sets itself apart from the World Bank would be a diplomatic triumph for China, which opposes a global financial order it says is dominated by the United States and under-represented by developing nations. Criticism of international development lending is not new, said Susan Engel, a professor at Australia's University of Wollongong who has studied the impact on the World Bank of free market ideas often referred to as the Washington Consensus. "It's a religion - this commitment to the involvement of the private sector even in sectors where, in fact, their involvement is shown to do harm," Engel said of the U.S.-based lender. In its infancy, two sources said the AIIB, with authorised capital of $100 billion, would concentrate on securing its credit rating, implying a more cautious approach. This means it will run like an investment bank, funding only commercially sound projects, working on public-private partnerships where feasible, and charging market interest rates that are likely to be higher than those charged by its peers. "Jin has pitched it as a bank that needs to at least break even," a source familiar with internal AIIB discussions said in reference to Jin Liqun, a former Chinese deputy finance minister and AIIB's first president. But down the road, the AIIB could offer concessionary loans and go beyond building ports and funding water, energy and transportation deals to financing policy projects such as health and education, three sources said. It may also expand its remit to fund projects in Africa, where countries have lobbied the lender to work in their region, a source said. To meet its year-end deadline of starting operations, the AIIB has hired a team of former ADB and World Bank bankers, and is drafting its operations manual by revising the ADB and World Bank versions, three sources say. Although the ADB and the World Bank downplay any rivalry between them and the AIIB, bankers say the AIIB's advent has prompted the two banks to review how they work, to the benefit of borrowers. "The World Bank and the other development banks have become more risk-averse over time," said David Dollar, a former director of World Bank China who has advised Beijing on the AIIB. "That tends to be make them slow and bureaucratic." (Reuters)
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