Author
Raghu Mohan is an award-winning senior journalist with 22 years of experience. He has worked for BW Businessworld since December 2006, and is currently its Deputy Editor. His area of expertise is banking – commercial, investment, and the regulatory. Previous stints include those at The Financial Express and Business India.
The Narendra Modi’s government’s Pradhan Mantri Jan-Dhan Yojana (PMJDY) has been a resounding success. Aimed to boost financial inclusion, it made it to the Guinness Book of World Records in a short span — about five months after its launch in August 2014. The idea behind is to open bank accounts to get the unbanked in to the formal banking system – to pave the way for the government's ambitious plan to transfer annual subsidy of around Rs 51,029 crore directly to account holders and also plug leakages. Deposits of Rs 21,000 crore have been opened under the PMJDY, the Finance Ministry said on Wednesday. The good news is that zero-balance accounts under the scheme have reduced to 46.93 per cent to July 2015 from 76 per cent from September 2014. That’s a big positive as one of the criticisms was that there was hardly any monies in these accounts – that it was merely a statistical entry. On Tuesdsay, North Block said officials from the Ministry of Petroleum, Ministry of Rural Development also join in to sort out the issues with banks with regard to Direct Benefit Transfer ( DBT) schemes implemented by them.
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RBI’s new scheme to reign in errant promoters is solid on paper, but it may not work in the real world in its current avatarBy Raghu MohanA few in India Inc., have long lived by the unique worldview: it’s against my principle to pay interest on the loan I took, and against my interest to repay the principal. It has worked really well as a way of life, but Mint Road decided to play the party-pooper; it took away the punch bowl on 8 June. Banks can now go in for Strategic Debt Restructuring (SDR). Simply put, if push comes to shove, they can band together, convert a funny firm’s loans to equity and kick the promoter out.The idea’s a cracker — after all, what hurts more than a bad hangover is that you have to foot the bill for the party as well.Banks’ gross bad-loan mountain is about $100 billion. While you can pin a large part of the blame for the mess on policy paralysis and wobbly business cycles, just about every other senior banker in town will tell you (off the record) that some borrowers do play truant. And will readily agree with the 16th century French writer Francois Rabelais’s pithy observation that “debts and lies are generally mixed together”.Rabelais was truly ahead of his times; is SDR ‘alive’ to ours? Says Muzammil Patel, senior director at Deloitte (India), “The proposition could work where there is a genuine interest from both the borrower and lender to regularise cash flows from the underlying asset. It’s a positive step for lenders as it allows them to potentially have a say in the working of the business and control over its associated cash flows”. When Patel refers to the “potential”, it only tells you that a lot many lenders had little say in such matters; and that they have now got a vuvuzela.The buzz over SDR is, therefore, understandable. It neatly ties in the business-link between non-performing assets (NPA), asset reconstruction companies (ARC), the aggressive posture adopted by Mint Road and North Block on errant corporate managements, a comprehensive Bankruptcy Act (on the anvil), and centralised pricing guidelines on foreign investments. Since 2007, deals worth nearly $62 billion — all above $300 million (see Cleaning Up The Act) — have taken place as a result of companies seeking to improve their balance sheets. So, common sense has it that SDR will only make this pile grow bigger.Siby Antony, managing director and CEO at Edelweiss ARC, feels that the new power to convert part of a loan into equity is another way for lenders to resolve the case in the event of a failed restructuring. “It can definitely open up M&A opportunities with the possibility of transfer of controlling interest to a potential acquirer,” he says. Ananth Venkat, regional head, Corporate & Institutional Clients for south-Asia, Standard Chartered Bank, feels: “It has the potential to add to M&As; at least 20 per cent of the $100 billion (gross non-performing assets) we have.”Can You Find Money In The Dustbin?Just 48 hours after Mint Road’s viagra for banks hit the shelves, a pink daily reported that IDFC had removed KVK Energy as promoter from SV Power; that it had roped in Aryan Coal Beneficiation India (ACB). Did IDFC really do what other lenders can only dream about — overturning a promoter? BW|Businessworld reached out to IDFC which explained it as follows.SV Power (SVPL), a special purpose vehicle of the KVK Group, had set up a 63 megawatt coal-washery reject-based thermal power-plant and a 2.5-MTPA (metric tonne per annum) captive-coal washery in the Korba district of Chhattisgarh (back then Madhya Pradesh). The plant was commissioned in June 2011, but operated at a very low capacity. This was due to numerous adverse conditions such as high cost of rejects, logistical challenges, non-availability of coal linkage and evacuation line, and low-merchant-tariff realisation.“IDFC had engaged with the KVK Group and after detailed discussions, it was jointly agreed that sale of SVPL to a strategic buyer would be the best course of action so as to ensure that the project is recapitalised and continues to be viable. KVK Group, thereafter, voluntarily mandated IDFC Capital for sale of SVPL to a strategic buyer,” said IDFC.ACB was identified as a suitable buyer, considering the fact that it has substantial experience in operating coal-beneficiation and reject-based power plants in Korba. The transaction concluded in March 2015, pursuant to which ACB took over the management control of the company. And here is the best line from IDFC: “The transaction was executed with full cooperation provided by the KVK Group and lenders, and at no point of time was the asset seized and security invoked by the lenders.”What it tells you is that no Mint Road pill or mantra — as on date — can help a lender to “force” an Indian promoter to cede control of a firm; its pure fantasy to think so. But at a time when the political narrative is about a white-knight on a horse, any fairy tale is par for the (race) course!Venkat at StanChart concedes, “Very few loans have a clause that provides for the conversion of debt into equity as was the case during the time of developmental financial institutions.” BW has learnt that the banking fraternity is now in a huddle as to how to incorporate such a clause at the corporate debt restructuring (CDR) level. Patel from Deloitte says, “It would be fair to expect that lenders would want to incorporate a clause for debt conversion to equity at the point of restructuring. One would also expect that new loan contracts will start incorporating this clause.”Even if bankers can fit in this part of the jigsaw puzzle into the CDR, their brows will still be furrowed. Says Munish Dayal, partner, Barings Private Equity (India): “These covenants were anyway put in as a deterrent. So that promoters behaved. It’s an altogether different situation when it is given effect to.”What’s unsaid here is that a promoter (even if bankers or the world thinks otherwise) can haul lenders to the courts for existing dud-loans ahead of CDR talks. In which case, it can only mean a further fall or an outright erosion in the value of the business; or it turns into junk. It may still attract buyers who may see junk as “strategic”, but that’s not what SDR is about in the first place.While Patel looks at the brighter side — “Certain stressed assets have already seen consolidation even before these guidelines. These guidelines provide a more considered approach to consolidation after constructive engagement with lenders” — Antony is sceptical: “I have doubts about the workability of the scheme.”He cites three reasons: whether management change is practical in the Indian context; accessibility of data for due diligence by a potential acquirer (without which no new management will come forward to takeover); and, how much by way of sacrifice will lenders take to hand over control to a new management. “One other dimension is that lenders will be foregoing their charge on assets in the process of conversion into equity. So in the event of enforcement of assets as a last resort, secured loan would have been reduced to the extent of conversion,” explains Antony.Bankers Are Just That: Bankers….The entire SDR is premised on the fact that banks can convert debt into equity; overturn a promoter; get in a new one; unlock value and laugh all the way to the bank. What’s missed in the SDR debate is that “vast tracts” of business work on a perverse logic.State-run banks continue to dish out loans to state electricity boards (SEBs) despite their poor financials as they know they will get paid somehow. This even as they charge SEBs higher interest rates which makes them an even bigger “basket case”. Is it any wonder that the Reserve Bank of India’s Financial Stability Report (FSR-June 2015) says that state-run banks will have to provide Rs 53,000 crore to a slippage in the quality of loans to the power sector? And how is SDR going to work in such cases? There is no empirical evidence that errant behaviour is restricted to the private sector!The trouble does not end here. “It’s one thing to get to financially restructure the balance-sheet of a company. It’s not the same as running a business. It will be sometime before you get in a new promoter after having taken control of a company. Are bankers going to run it during that period?” asks Dayal at Barings. DEBT TO EQUITY: THE CONVERSION PRICEMarket value (for listed companies): Average of closing prices during the ten trading days preceding the ‘reference date’. Reference date is Joint Lenders Forum’s decision to undertake SDRBreak-up value: Book value per share (without considering ‘revaluation reserves’, if any) adjusted for cash flows and financials after the earlier restructuring. The balance sheet should not be more than a year old in which case the break value shall be Rs 1What’s being said here is that a new set of players will have to walk in. As Raja Lahiri, partner, Grant Thornton (India), explains: “Restructuring and turn-around experts would potentially be required to assist bankers (commercial) here to achieve financial turnaround of the company and also facilitate M&As. Globally, banks along with private equity funds have led several successful turnaround situations and Indian banks can surely adopt some of the global best practices (of course, keeping Indian conditions in mind) to achieve maximum success in these restructuring situations.”For now, Rabelais still rules! raghu@businessworld.in@tabonyou(This story was published in BW | Businessworld Issue Dated 24-08-2015)
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You can expect a slew of deals going ahead – as state-run banks seek to jettison what’s non-core to their business. And there are no “ifs” and “buts” here as North Block too wants it that way, says Raghu Mohan In the 90s – in the first blush of liberalisation – state-run banks set up arms to tap into just about every other sub-sector in financial services – for insurance, capital markets, broking, and factoring. Many of these entities just chased the fashion of the day. Some came to hold stakes in stock exchanges by virtue of them being seen as “institution builders”. That’s how the State Bank of India came to hold a tad above 10 per cent in the National Stock Exchange; IDBI Bank (from its days as a development financial institution) five per cent; and so too the now almost defunct IFCI with six per cent. The immediate trigger for the sale of non-core assets by state-run banks is the realisation that the Centre will be hard pressed to infuse funds into state-run banks – now that a distinction has been made between the “better” and worse off in this category. The estimated additional capital requirements on account of Basel-3 which kicks in from fiscal 2019 is put at Rs 5 lakh crore -- of which non-equity capital will be Rs 3, 25 lakh crore, while equity capital will be Rs 1, 75 lakh crore. In his first Budget speech of July 2014, finance minister, Arun Jaitely, put it at Rs 2, 40 lakh crore. The exact amount depends on a range of factors: credit growth, its quality, dud-loan provisioning, and the technicalities under Basel-3. In a recent report, Jefferies’ analysts Nilanjan Karfa and Anurag Mantry noted that “government capital allocation will also factor in and come with specific riders on what banks can generate through sale of non-core assets. This further accentuates the deleveraging that banks will undergo as a part of their balance sheet repositioning… We agree that not everything can or will be sold, but the need to unlock value from the non-core assets has never been higher than it is today”. The sale of non-core assets by state-run banks basically takes a leaf out of a global trend. For instance, Barclays has set up a “Bank non-core” or BNC to house such assets to eventually sell them off. Others like Citigroup, RBS and Credit Suisse have adopted a like strategy. In India, the sale of non-core business lines has been executed largely by foreign banks as their parents revisited strategy back home. Such “cherry-picking” can range from the simple: HDFC’s Rs 60-crore buyout of Gruh Finance, the housing finance arm of Gujarat Ambuja Cement, more than a decade ago, to the complex: HSBC’s move to knit RBS retail and branch licences. It can be geographical: StanChart’s buyout of ANZ Grindlays Bank’s India and West Asia operations for $1.3 billion in 2000. Or of a vertical: ABN Amro’s decision to buy BankAm’s Asian retail book for $200 million in 1999 after its merger with NationsBank. It’s a case of different folks, different strokes. If you are hard-pressed on outreach as a foreign bank, you go for an embedded local non-bank player to secure your retail ambitions. Seven years ago, HSBC picked up 73.21 per cent in IL&FS Investsmart, a retail brokerage house for $241 million, 43.85 per cent from E-Trade Mauritius, and 29.36 per cent from Infrastructure Leasing and Financial Services (IL&FS).Basel-III will now see state-run banks get onto the bandwagon now – as sellers to raise capital.
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Basel-III calls for tonnes of capital to fuel state-run banks, but not all of it can come from the Centre given the state of fisc. While a few good ones will be able to tap the bourses, many will not as the valuations are poor. The time for tough decisions is now By Raghu MohanOn 4 October 2011, Moody’s downgraded State Bank of India’s (SBI) credit rating to ‘D+’ from ‘C-’. Its tier-1 capital adequacy ratio had slipped to 7.6 per cent as North Block dithered over an Rs 23,000-crore rights issue to prop it above 9 per cent. Beatrice Woo, vice-president and senior credit officer of Moody’s, justified the action. Her ominous words: “A bank’s ability to freely access the capital markets is an important rating criterion globally. A lower rating is warranted, especially as these circumstances are likely to recur.” It took four months (till February 2012) for the Centre to pump in Rs 7,900 crore through a preferential allotment of shares. And Woo’s words are back to haunt us.Basel-III capital norms set in from fiscal 2019; it’s to ensure that banks don’t take on excessive debt and play on short-term funds. Born in the crucible of the global financial meltdown of 2008 (and mooted in 2010), it tunnels into capital, leverage, funding and liquidity. It does not replace Basel-I and -II (which stress on the level of loss reserves that banks need to hold), but works alongside. Indian banks will need tonnes of capital.On 5 June 2013, Reserve Bank of India’s (RBI) then governor, Duvvari Subbarao, estimated additional capital requirement at Rs 5 lakh crore, “of which non-equity capital will be Rs 3.25 lakh crore, while equity capital will be Rs 1.75 lakh crore”. In his first Budget speech of July 2014, Union finance minister Arun Jaitely put it at Rs 2.40 lakh crore. The exact amount depends on a range of factors: credit growth, its quality, dud-loan provisioning, and the technicalities under Basel-III. That’s why Fitch Ratings’ $200 billion (85 per cent to be guzzled by state-run banks) looks out of whack. As Saswata Guha, its director, says: “It’s dynamic. Capital needs will increase progressively from fiscal 2016. CET1 (core equity capital) and AT1 (additional tier-1 capital) are likely to account for close to 90 per cent of requirements; 60 per cent (of the same) will arise between fiscals 2015 and 2018.” You hear whispers that the $100 billion in gross dud-loans is on the lower side; it could be a good 30 per cent more. If true, more capital will be pulled in.Union minister of state for finance Jayant Sinha sought to allay concerns, and told Businessworld|BW about the comprehensive package to strengthen these banks. “It includes governance reform, strengthening management, operating autonomy free from any political interference, better risk management and technology capabilities; and sufficient capital to meet all regulatory standards and fully support growth of the Indian economy.”Adds Sinha: “We have undertaken a thorough review of capital requirements for all state-run banks till 2019, and believe that we will be able to provide the necessary support to each to meet all RBI capital adequacy norms.” It is to be given over the next few years in tranches based on regulatory requirements, operating performance and NPA management. “In addition, each state-run bank is exploring a variety of capital raising measures, including equity issuance, disposal of non-core assets and improvements to capital productivity,” says Sinha. It’s a tectonic shift — the first serious attempt to marry capital to productivity. It raises the stakes for the Narendra Modi dispensation in New Delhi.What’s At Stake Here?State-run banks account for 76 per cent of our banking assets; given the state of the fisc, it’s anybody’s guess how the Centre will continue to hold 51 per cent in these banks and bring in its share of capital. “They have limited recourse to core equity in the short-term, and have to rely on the government. Declining profitability has hurt internal capital generation; low valuations have virtually precluded access to equity markets and increased their dependence on state support for capital,” adds Guha. Says Anil Agrawal, head of Research (Banks, ex-Japan) at Morgan Stanley: “State-run banks have trailed private banks and trade at 0.4–1x book. Given the lack of capital at most of these banks, the slide in fundamentals — and hence, the stock prices — could accelerate. He feels the longer the delay, “the tougher it will be to get these banks out of their morass. India needs to aggressively capitalise these banks and restore some semblance of confidence in their balance sheets.”Jaitely is on record that only the better among state-run banks will get capital; former RBI governor C. Rangarajan tells BW: “If the fisc supports, let capital be given to all of them; if not, some of them.” That’s fair enough. Capital should go to its productive best.But there will be a vacuum in lending to the extent that many of the weaker state-run banks will “withdraw” — if there is no capital, they can’t lend in the way they did so far. “It (capital) is like fuel in a car’s tank. It will decide how far you will go,” says Romesh Sobti, managing director & CEO of IndusInd Bank. And private and foreign banks can’t step in and fill up the gap. On his part, Rangarajan says: “If state-run banks grow at a slower rate, what’s the issue? When I licensed new private banks in 1993, they had zero share. They will grow as we go along.” It took private banks two decades to notch up a 20 per cent market share; they may ramp up faster, but in the interim, there will be a fallout. You can kiss goodbye to aspirations of an 8 per cent-plus growth in GDP given its link to growth in bank credit; the trade-off in ‘selective capitalisation’ is huge.There is a link between credit growth and GDP even if it’s not predictable like the Periodic Law. Typically, credit growth is 1.3 times that of GDP growth. “I have assumed 5 per cent inflation (all along) with real GDP rising gradually to reach 9.5 per cent in the terminal year (2019). Based on this, banks will need incremental capital of Rs 5.4 lakh crore-6 lakh crore for four years; the state-run would need Rs 4 lakh crore-4.5 lakh crore or about Rs 1 lakh crore per annum,” says Madan Sabnavis, chief economist at Care Ratings. The cumulative net-profit of these banks in the last two years was around Rs 35,000 crore to Rs 37,000 crore; it gets sucked into reserves. So they will need an additional Rs 60,000 crore through tier-2 bonds or fresh capital. “Even if these assumptions (on GDP) do not hold, and we move at 14 per cent growth in credit for this four-year period, they will need Rs 3 lakh crore-3.3 lakh crore; here too, they will require capitalisation support from the Centre,” adds Sabnavis. You have another catch: the new GDP data is contested; and if you go by what’s going on at state-run banks that account for the lion’s share of credit, you will find all the more reason to do so. “Systemic loan growth at 9.7 per cent was the lowest over the past decade. The net non-performing assets ratio rose to 4.6 per cent of total assets (4.1 per cent in fiscal 2014), though the bulk of it was accounted for by restructured loans. Consequently, the broader stressed-assets ratio (which includes ‘performing restructured loans’) spiked to 11.1 per cent (from 10 per cent),” explains Guha. Starting fiscal 2016, all such loans will be treated as dud; it will impact capitalisation even as capital buffers have slipped. “Indian banks’ reported tier-1 capital ratio improved to 9.7 per cent (from 9.3 per cent), but the gap between private and state-run banks’ tier-1 ratios widened to 440 basis points,” says Guha. In effect, as state-run banks squirm over capital, private banks will walk away with more business (and investors will hand over the latter more money).Damned If You Do, Damned If You Don’tSome give Jaitely credit. “His assertion,” says Pawan Agrawal, chief analytical officer at Crisil Ratings, “is highly nuanced. Nowhere has he said funds will be given to only select banks. What you have is a distinction between ‘growth capital’ for some, and a regulatory requirement for others under Basel-III. That is we will have two ‘categories’ of state-run banks — some will lend and grow; others will mend and grow.” In effect, ‘narrow banking’ — which is strictly don’t go for mindless growth and mess up again; park your deposits largely in government securities — a thought first articulated by economist S. S. Tarapore as deputy governor of RBI in the mid-90s. Agrawal prefers the usage ‘slower banking’, but concedes: “Credit growth is sluggish now, but a year down the line, if and when the economy fires, it remains to be seen who will supply credit.” It can lead to credit rationing as banks opt for safer havens to lend (as capital quotes at a premium) even though some like Vishwavir Ahuja, managing director & CEO of RBL, who breathed the rarefied air of India Inc. as Bank of America’s boss, qualifies: “But then such havens are not there anymore; there are credit concerns across the board.”“Why do you say all state-run banks should not get capital? You see, 75 per cent of my branches are in the East and north-East. Who is to service this part of the country?” asks P. Srinivasan, managing director & CEO of United Bank of India. North Block’s prescription is seen as tough for the times we live in — it was to take the average of return on assets and return on equity (RoE) of each state-run bank, and based on the above average, banks were to get funds. “Even if all state-run banks were to perform well, many will not get funds as some will be below the average, though it may be higher,” points out Srinivasan. That’s why North Block has gone back to the drawing board to figure out as to how to square the math.The idea of poorly capitalised banks floating around does not appeal to Mint Road; Anand Sinha, deputy governor, made a reference (12 August 2011) to the ‘valuation aspect’: “There is a line of argument that Basel-III may make raising of capital costlier or difficult for banks due to lower RoE, rendering it unattractive for investors. This, in my view, is not entirely correct because investors will eventually recognise that well-capitalised banks are less risky and hence,will be willing to settle for a lower RoE. Nevertheless, the pressure on RoE should bring about a greater sense of urgency among banks to improve their efficiency by increasing productivity.”Should fund infusion follow house-keeping? Tarapore is blunt: “If it is a desideratum that all have to be capitalised… Well, there is no divine right that all state-run banks can continue to lend and lose money. Not all are of the same standard, but continue to grow at more or less the same rates.”And the empirical tells us that recapitalisation in the ’90s saw good money being thrown after bad — the audited books of these banks misled. That’s because the recapitalisation funds were invested by state-run banks in specially issued bonds at a coupon rate of 10 per cent; or what was doled out by the Centre came back to it — it was a book-entry. And these banks showed the ‘interest’ earned as part of their net-profit. Mint Rood ‘netted’ it out to reflect the true state of affairs. Let’s take 1996-97 and 1997-98 (when it was first made public in the Report on Trend and Progress of Banking in India), when 19 state-run banks showed a cumulative net profit of Rs 1,445.12 crore and Rs 2,567.29 crore, but the moment you adjusted it for the ‘interest’ earned on these bonds, the figures read as Rs 609.37 crore and Rs 1,580.66 crore! When you ask Tarapore if these banks were to vacate the space as a result of the ‘Darwinism’ he advocates: who’s to step in and fuel India Inc? “Physician heal thyself first. You are a sick doctor and you say ‘I want to save my patients’. You first take care of yourself.”You Can’t Have It Both WaysA way out of the fund crunch is dilution of the Centre’s stake to under 51 per cent, but bank unions have their own ideas.Says Vishwas Utagi, vice-president, All India Bank Employees Association: “Basel-III, lack of funds, the selective pick-up of state-run banks (for recapitalisation) is aimed to privatise them eventually. That’s where we are headed. But don’t expect us to just roll over.”He points to the two-day ‘Gyan Sangam’ held on 2 and 3 January in Pune this year attended by Modi, Jaitley and RBI governor Raghuram Rajan. Jaitely mentioned the intent to bring down the stake to 52 per cent over the next few years; it will fetch Rs 90,000 crore (in the 24 state-run banks with a headroom). The idea of a Bank Investment Company (BIC) was mooted under North Block’s nose to ‘house’ shares of these banks to raise capital, a model in vogue in Singapore and the UK. Utagi sounds conspiratorial: “They want to set up a BIC, transfer shares into it and sell it (cut stake to under 51 per cent). These banks are also to be brought under the Company Law Board (CLB) soon.” He hopes to forge consensus across the political spectrum against privatisation. “The foundation for much of what the BJP is trying to do was done by P. Chidambaram, like the move to bring banks under the CLB. But in the changed political map, the Congress may align with the Left.”He takes a dig at Rajan: “He’s bright, but doesn’t understand the Indian context.” Rajan, in a closed-door interaction with bankers at the Centre for Advanced Financial Research and Learning (on 2 February 2015), had said: “An issue generating a lot of interest is state-run banks’ need of capital. I think banks and government ownership in banks can be structured in a way that sufficient capital can be raised without tapping into government coffers.”The underlying message being not all state-run banks can be part of the race. Says Tarapore: “The RBI has floated the idea of differentiated bank licenses. You specialise in one area or the other. If that’s indeed the way forward, why should weaker state-run banks be all things to all comers?” Srinivasan agrees: “That’s one way of looking at it.” What is unsaid here is you can’t expect state-run banks to do financial inclusion, open millions of accounts under Jan Dhan Yojana, do all kinds of dharma and still, you will not capitalise all of them as you did in the past. SBI’s chairperson Arundhati Bhattacharya feels differential voting rights (DVRs) will attract strategic investors who do not want management control, but look to reasonably big investments. “It will offer both retail and institutional investors a variation, especially for those who may not be as particular about voting rights, but may see economic value in the form of higher discount offer that may be made; also for incremental dividend and capital gains. It provides a good mechanism for capital augmentation without impinging on the voting rights of the Centre; this is beneficial for both.”The M. Narasimham Committee-2’s (1998) report on banking reforms was prophetic: “Given the dynamic context in which banks are operating, further capital enhancement would be necessary for the larger Indian banks. Against the background of the need for fiscal consolidation and given the many demands on the budget for investment funds in areas like infrastructure and social services, it cannot be argued that subscription to the equity of state-run banks to meet their enhanced needs for capital should command priority.” It was suggested that the government cut its stake in these banks to 33 per cent. Is it time to revisit the proposal? Says Sabnavis: “We need to understand that if these banks are where they are, it’s because of government’s intervention. Even today, it can’t fill up CMD’s positions. They (the Centre) want to sit on their boards with nominees, but do not want to capitalise them. Then who will?” From within the establishment, sane voices have been for a reduction in the Centre’s stake in banks. In 2011, Montek Singh Ahluwalia, then deputy chairman of the Planning Commission, reacted to the OECD’s Second India Economic Survey: “These banks with reduced government holding should no longer be governed by social objectives. Employees should have the same status as those in private banks. The corporate governance norms, too, have to be improved so that directors and chief executives are appointed by shareholders, and not the government,” said Ahluwalia. It’s a very sensitive issue; few want to go on record. BW reached out to Y.V. Reddy, former governor of RBI, on the subject. He says: “We should not continue this conversation.” But in the winter of 2013 (BW 25 February: ‘Reforms should centre on the people of India’), when the question was put to Reddy by this writer: “Given the need to have more inclusive banking and the state of the fisc, how does one account for the capital needed, especially for state-run banks? Is there a case for the Centre to divest stake to under 51 per cent, yet retain the ‘public sector’ nature by way of a Golden share in these banks?” Reddy’s response was: “You are absolutely right. But if you recall, there was a proposal to reduce the stake in state-run banks to 33 per cent. Even when you reduced the Centre’s stake to 51 per cent from 100, governance has been predominantly public sector in nature. So technically, it is possible to reduce stake to 33 per cent and maintain the same character. These are established under special legal enactments, but in principle, you are right. It is like a Golden share, but the jurisdiction of Golden shareholder, namely, government is restricted to material changes in the governance or spheres of activity. Public sector character is more than that of mere Golden share and the former is feasible in India through legal changes even if the government shareholding is reduced.”Bhattacharya says the concept of a ‘Golden share’ has not yet come. “This may be for two reasons. First, a narrower-legalistic definition of it is needed and second, the Centre has not yet opted for the route for management control. Once state-run banks reach threshold limits of shareholding, the idea may gather some leverage.” However, as per Section-11 of SBI Act, no shareholder (other than the Centre) is entitled to exercise voting rights in respect of any stake held in excess of 10 per cent of the issued capital. Whichever way you look at it, for Jaitely and North Block, it’s trade-off time; the bullet has to be bitten. raghu@businessworld.in, @tabonyouWth inputs from Suman Jha(This story was published in BW | Businessworld Issue Dated 10-08-2015)
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Aweek after Union finance minister Arun Jaitley inaugurated a seminar in Mumbai on agrarian distress, there came a strike call from a clutch of banks which were set up to service rural India. Nearly 1.25 lakh employees and officers of 56 Regional Rural Banks (RRBs) spread over 20,000 bank branches want to stop the banks’ privatisation, and have threatened a two-day strike during the upcoming Monsoon Session of Parliament.Set up under an ordinance promulgated (26th September 1975) and followed by the RRB Act (1976), the aim was to develop the rural economy and create a supplementary channel to the co-operative structure to enlarge institutional credit for the rural and agriculture sector. The Centre, state governments and state-run banks (they sponsor RRBs) hold stakes in the proportion of 50: 15: 35 in these entities.The United Forum of RRBs has called for a strike — the dates have not yet been fixed — as it fears privatisation. The trigger: an amendment to the RRB Act during the budget session envisages dilution of the Centre’s equity, which will handed over to private capital. The unions believe that if privatisation of RRBs is allowed, then rural India, which is to a great extent monitored through these 56 RRBs, will be jeopardised with what they consider is the “unscrupulous entry of privative capital”.According to the National Bank for Agriculture and Rural Development (Nabard), 63 RRBs (out of 64 RRBs) earned a profit before tax of Rs 3,281 crore at end-March 2013 as against Rs 2,549 the previous year. Eleven RRBs continued to have accumulated losses of Rs 1,012 crore, compared to Rs 1,333 crore on account of 22 RRBs the year before. And net non-performing assets went up to 3.40 per cent (2.98 per cent). Since then, the RRB count has come down to 56.What’s skewed the picture is that the unions also want wages and pension at par with employees and officers of state-run banks. The trouble is that the RRBs’ cost structure and profitability are not akin to that of commercial state-run banks which have many streams of income. Worse, even though state-run banks are sponsors of RRBs, they compete with these very banks.An indefinite strike call is also on the cards to coincide with the winter session of Parliament, but, for now, the strategy is to reach out to all members of Parliament and sensitise them that their constituencies will be hit badly. It is a move that the BJP-led NDA can ill afford to ignore given the opposition’s drumbeats over its “suited-booted” nature and preoccupations.Incidentally, the seminar that Jaitley attended in Mumbai was organised by Nabard and about `Mitigating Agrarian Distress and Enhancing Farm Incomes’. — Raghu Mohan(This story was published in BW | Businessworld Issue Dated 10-08-2015)
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The State Bank of India’s (SBI) move to seek the Centre’s nod to offer three per cent of its profits to its staffers may sound the death knell for the four-decade old Bilateral Wage Settlements. Wages and terms of service in state-run banks have been based on uniformity from the days of The First Bipartite Wage Settlement (October 1966). This “collective bargaining” between unions and the Indian Banks’ Association (IBA) -- a club of predominantly state-run banks – has led to the comical: these bankers fix wages and then crib about poor pay. In a highly competitive banking market, pay is key to get talent in. The P J Nayak Committee to Review Governance of Boards of Banks in India, made mention of the gap between state-run bank bosses and their peers in banks with a different colour of capital. In 2012-13, the average CEO compensation was as follows: For new private sector banks, Rs 3.21 crore (in addition to stock options, whose monetary value is dependent on the bank's stock price); for old private sector banks, Rs 78.63 lakh; and for state-run banks, Rs 18.66 lakh. “It is unsustainable for such differentials to continue without a major adverse impact on the recruitment and retention of talented managers in state-run banks”, said the report. Junk One Size Fits AllBank unions may say that Bilateral Wage Settlement is fair; does not discriminate between staffers of different state-run banks. Well, all these banks are not of the same standard nor are their financials. In fact uniform wages have acted as a drain on several of the weak state-run banks. In February this year, the United Forum of Bank Unions wailed that IBA “is not giving any cognisance to the difficulties that are faced by the employees on account of high rate of inflation, which has eroded the salaries of the employees to a great extent and the wage increases considered in other similar public sector undertakings despite their low profits”. It added that bank employees, workmen and officers, have been performing well despite severe stress due to substantial increase in workload in the banks on account of opening of many branches under financial inclusion and so on despite inadequate staff strength. That bank employees never lagged behind in the successful implementation of all government-sponsored programmes, schemes, including the recently implemented Prime Minister’s Jan Dhan Yojna”. Well, ironically, unions clamour for higher pay can only be met by differentiated pay-checks. That’s why bank managements did not indulge unions earlier this year when wage talks were on. Nobody moved despite UBFU’s call for a four-day bank strike from the 25th to 28th February; or threat of an indefinite strike from 16th March onwards. Talent CrunchA K Khandelwal, former boss Bank of Baroda, as chairman the Committee on HR Issues of State-run Banks (June 2010), told us of the mess in store: “Over the next five years, 80 per cent of general managers, 65 per cent of deputy general managers and 58 per cent of assistant general managers will be retiring. The pool of experienced executives cannot be replaced merely through promotions.” The Bipartite Wage Settlement process is premised on a crude idea of standardisation. It is fleshed out in Nayak’s report. A great deal of centrally coordinated standardisation (such as in recruitment, employee compensation, technology absorption and vigilance enforcement) could lower costs for banks, and it is argued that the Government is best positioned to provide such coordination. “What the argument misses is that if banks are not to be viewed as utilities, they must be viewed as commercial businesses, the essence of which is differentiation with a view to asserting competitive advantage. Commercial businesses need to work on a whole matrix of talented employee recruitment and incentives, in order to compete successfully in the market place”. It went on to observe that standardisation imposed by the Government is inimical to attaining such differentiation and competitive advantage. Private banks, in contrast, have been free to innovate on all aspects of their business, subject to regulatory constraints. “By imposing a plethora of standardised requirements upon its banks (state-run), without achieving economies of scale, the Government has contributed to their homogenisation and has thereby handed over competitive advantage to the private sector banks. The need to exploit economies of scope (the gains from which could at best be marginal) thus has pernicious unintended consequences”, said the report. One big advantage of a “horses for courses” (differential pay) approach is that corruption can be curbed to a great extent if it also wedded with a strong `Whistle-blower” policy. In private banks, the top brass is suitably incentivised through stock-options – to that extent hanky-panky is on the lower side. If the bank does not perform well, the stock options erode. Treating everybody as equal is the greatest injustice in this world!
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Come to think of it. North Block wants to curb black money; it’s mooted a set of initiatives to boost plastic payments – it’s for tax breaks if you transact through debit and credit cards. And contrary to what some trade bodies will tell you, it’s all for a tax rebate for merchants if at least 50 per cent of the transactions is through electronic means; or alternatively, a 1-2 per cent reduction in value-added tax. What’s the idea behind all this? Black money has to be, and can be curbed. You get to have an audit trail of transactions; the Centre can use plastic and e-transactions to ensure welfare schemes reach the audience they are targeted at; and plug leakages. And when you mine such data over a period of time, banks, retailers and the taxman can laugh all the way to the bank – for the right reasons. What’s Sauce For The Goose…It’s almost a decade since the Reserve Bank of India (RBI) introduced its Know-Your-Customer (KYC). The essence of KYC is that a bank should know you: Who are you? What are you? Why do you do what you do? As a customer that is. Of course, in the process, it did put in a few conditions wherein it became difficult to open a bank account. That was corrected ahead of the launch of the Pradhan Mantri Jan Dhan Yojana. What you can’t get away from (even if it was not overtly stated) is that Mint Road wanted some very clever amongst us to change their way of life, and not continue to laugh all the way to the bank by doing what they were doing – that is by being clever. Look at the tamasha that’s on in New Delhi. An otherwise sensible voice describes a transaction as a commercial one between two private individuals; what’s the government got to do with all this? It’s not so simple. It does not follow that just because a transaction is conducted or settled in private or that it was routed through banking channels, it’s above board. To better flesh out this point, let’s flashback to the RBI’s mastercircular dated 1 July, 2014 (KYC/Anti-Money Laundering Standards/Combating of Financing of Terrorism/Obligation of Banks under Prevention of Money Laundering Act (2002) Read this paragraph on politically exposed persons (PEPs); it may be long, but is worth a read. It says “banks should gather sufficient information on any person, customer of this category intending to establish a relationship and check all information available on the person in public domain. Banks should verify the identity of the person and seek information about the sources of funds before accepting PEP as a customer. The decision to open an account for PEP should be taken at a senior level which should be clearly spelt out in Customer Acceptance Policy. Banks should also subject such accounts to enhanced monitoring on an ongoing basis. The above norms may also be applied to the accounts of family members or close relatives of PEPs and accounts where the PEP is the ultimate beneficial owner. In the event of an existing customer or the beneficial owner of an existing account, subsequently becoming PEP, banks should obtain senior management approval to continue the business relationship and subject the account to the Customer Due Diligence measures as applicable to the customers of PEP category including enhanced monitoring on an ongoing basis”. Now let’s go back to the latest set of plastic initiatives. Just about every other payment is sought to be audited now – with the enhanced use of plastic and e-transactions (please see below) What’s On The Cards?At present, there is a Merchant Discount Rate (MDR) of 0.75% on debit-card transactions up to Rs 2,000 and 1% on all transactions above Rs 2000. The possibility of reduction in the MDR and the rationalisation of the distribution of the MDR across different stakeholders will be examined.The existing inter-change fee on debit and credit-card transactions are not uniform and need to be standardised and or rationalised to encourage both issuing and acquiring banks to establish and utilise acceptance infrastructureTax benefits could be provided to merchants for accepting electronic payments. Example: an appropriate tax rebate can be extended to a merchant if at least say 50% value of the transactions is through electronic means. Alternatively, 1-2% reduction in value added tax could be considered on all electronic transactions by the merchants Tax benefits in terms of income-tax rebates to be considered to consumers for paying a certain proportion of their expenditure through electronic means The authentication requirements for different classes of transactions could be re-examined based on the risk profile and safety requirements Consider a levy of a nominal cash-handling charge on transactions greater than a specified level Mandating settling of high value transactions of, say, more than Rs 1 lakh, only by electronic means At present, banks have to report the aggregate of all payments made by a credit cardholder as one transaction, if such an amount is Rs 2 lakh in a year. To facilitate high value transactions, the ceiling of Rs 2 lakh could be increased to say Rs 5 lakh or more All this is well and good. But what about funding of political parties?! Just look at the transparency guidelines issued by the Election Commission of India (1 October, 2014). It noted that “Concerns have been expressed in various quarters that money power is disturbing the level playing field and vitiating the purity of elections”. Okay, “we all know that” you may say. Read this too. If the expenditure incurred by political parties exceeds Rs 20,000, then payment should be made by cheque, draft and not by cash unless there is a lack of banking facility or towards payment of party functionaries. And that while providing lumpsum amounts to candidates for campaigning during elections, political parties shall not exceed the ceiling prescribed for expenditure by the candidate and that the payment should be made only through crossed cheque, draft or bank transfer. If the ECI is for transparency, why is North Block mum on the matter in the new payments’ architecture it has imagined for you and I? Tailpiece: Read the RBI circular on 15 January, 2015 on ‘Foreign Donor Agencies placed in Prior Permission Category’. (It’s on RBI.org.in). Of course, it’s another story!
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Not a fortnight passes by without a snippet -- at least -- on how a bank was left red-faced as cash was fed into its automated teller machine (ATM). That is some Danny Ocean walked away rich. It can only get worse. It’s well over two years since cash logistics firms (CLF) – the ones who load cash into ATMs, take it from toll-posts to banks or in general, move cash about town – raised red-flags over the security aspect of the game. That gun licenses are hard to come by. The matter was taken up with the Reserve Bank of India which said that gun licences came under the purview of the Home Ministry. The deadlock continues. "Its nobody's concern, but our's! The media goes to town with a robbery story. But do you know what we go through everyday", asks the CEO of a CLF. Trouble started when three states -- Maharashtra, Andhra Pradesh and Karnataka – clamped down on gun licenses. That too in an industry where they were hard to come by in the first instance. Now roughly 4,000 weapons are needed to run daily operations of CLFs. Under the terms of contract terms, CLFs have to provide armed guards or they will not be able to get insurance cover for the cash and valuables they move about. It’s not good news as the boom in retail (banking and sundry retailing) means you have much more cash to sort, replenish and carry around. It is estimated to be an Rs 1,500-crore industry: about 10,000 cash vans ply on roads; employs close to 50,000 and expected to grow at 50 per cent annually. It’s an industry where numbers are hard to come by; it’s also secretive by nature. The big four in the business — CMS, Brinks, SIS-Prosegur and Writers — share 80 per cent of the market between them and, on an average, cart over Rs 20,000 crore in cash daily. Which means, in a year, it is a whopping Rs 73 lakh crore. Add all CLFs and it is Rs 91.25 lakh crore. This was the math two years ago; insiders say that amount would now top closer to Rs 100 lakh crore. That’s because the installed ATM base is now at 1,93,000; it is lower than what the London-based Retail Banking Research’s (RBR) projection of 2,25,000 for 2014. RBR — a strategic research and consulting firm in retail banking, automation and payment systems — reports are the gold standard in this line of business. The ATM rollout may have slowed down, but you can’t get away from the fact that about 50,000 new units are deployed every year (this includes replacements of old machines and installations at new sites as well). And that means more cash on the road needs to be guarded. With the curb on guns, that can prove to big headache for CLFs. But if you are in the Danny Ocean mould, it’s a great chance to move in and make a killing!
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The proposal to give tax benefits for transactions on plastic – credit and debit cards – as also on e-transactions will not only help curb the black-money component in the economy, but also give a fillip to growth. It basically follows in the footsteps of what South Korea did; it allowed 20 per cent of credit card expenditure to be deducted from a person’s taxable income. This, in turn, gave a boost to usage of plastic at outlets as the scheme also had tax benefits for sellers. This all-round cheer helped add a good one-and-half-per cent to South Korea’s GDP. The latest Mint Road Monthly Bulletin shows we have 575 million pieces of plastic (553 million debit- and 21 million credit-cards), but just over a million PoS terminals. We have one of the lowest set-up of PoS terminals (per million) in the world at 693. Brazil has 32,995; both China and Russia have around 4,000. Only about three per cent of transactions are non-cash. Now while banks’ can do little about the fact that many want it that way, it’s got larger implications. “Ninety six per cent of consumer payments is in cash with millions of retailers across the country preferring cash payments to avoid traceability and paying taxes, which is not surprising given only 35 million of the over 1 billion Indians pay taxes,” says T.R. Ramachandran, group country manager (India and south-Asia) for Visa. It adds to cash-handling charges: Mint Road’s Annual Report (2013-14; it’s the latest) puts it at Rs 3,200 crore (Rs 2,800 crore). The Centre’s proposal comes at a time when the payment architecture of the country is set for a change – the emergence of payment banks (yet to be licensed), new-age payment players like a Paypal with telcos too waiting in the wings, and the fact that some among the last mentioned lot are keen to get into the card acceptance infrastructure space (read Reliance Jio). Of course, the tax break on credit card purchases in South Korea also led to an increase in indebtedness. And that’s why in 2014, the tax law was revised to increase the tax benefit of debit card transactions. Be as it may, the point is that the idea to incentivise you and I on plastic spends is a reason to smile.
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