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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Citigroup Inc's consumer bank has been ordered to pay $700 million in relief to borrowers for illegal credit card practices, the U.S. Consumer Financial Protection Bureau said. The CFPB, set up under the 2010 Dodd-Frank Act aimed at reforming Wall Street, has been cracking down in recent years on credit card companies offering payment protection, credit score tracking and other add-on products. Citi will also pay civil penalties of $35 million each to the consumer finance watchdog and the Office of the Comptroller of the Currency. The settlement is the CFPB's tenth such case, Director Richard Cordray said in a statement on Tuesday. "They (the CFPB) are just marching through the industry," FBR & Co financial policy analyst Edward Mills told Reuters. "The CFPB loves to have big numbers like this, especially when the largest percentage of the fine goes back to customers because there's a lot of (political) push-back about the cost of the CFPB and the way they're funded." Other major U.S. banks under that have been fined over credit card misconduct include JPMorgan Chase & Co and Bank of America Corp. Fine DetailsTuesday's settlement is about 1 percent of the bank's estimated revenue for 2015, according to Thomson Reuters StarMine. "Citi is fully reserved to pay costs associated with the agreements," the bank said in a statement. As of May 21, Citi had paid out over $17 billion in fines and settlements since the financial crisis. The CFPB said that about 7 million customer accounts were affected by Citibank's "deceptive marketing" practices, which included misrepresenting costs and fees and charging customers for services they did not receive. A Citibank unit also "deceptively" charged nearly 1.8 million consumer accounts often unnecessary same-day payment fees while collecting payments, the CFPB said. Citi said it had been issuing refunds and had stopped selling products that were part of its agreements with the regulators, including credit monitoring and debt protection products. Capital One Financial Corp, American Express Co and Discover Financial Services are among other card issuers that have been fined by the CFPB since 2012. Citi shares were up 0.5 percent at $59.13 in late afternoon trading on the New York Stock Exchange. (Reuters)
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HDFC Bank Ltd, India's second-biggest private sector lender by assets, reported a smaller-than-expected increase in first-quarter profit due to higher provisions for bad loans. Indian banks have been hobbled by a surge in bad loans in the past three years as slower economic expansion hurt the ability of companies to service debt. The bulk of the industry's $49 billion bad loans sit with the dominant state-run banks, but private-sector lenders like HDFC Bank are also expected to see an increase in sour assets as they expand their market share, at a time when government banks are pulling back. Mumbai-based HDFC Bank said net profit rose 20.7 percent to 26.96 billion rupees ($423 million) for its fiscal first quarter to June 30, from 22.33 billion rupees reported a year earlier. Analysts on average had expected a net profit of 27.39 billion rupees, according to data compiled by Thomson Reuters. Gross non-performing loans as a percentage of total loans rose to 0.95 percent from 0.93 percent in the March quarter, although they were lower than the 1.07 percent reported in the year-ago quarter. Provisions for bad loans rose 30 percent from a year earlier, to 5.58 billion rupees. Manish Ostwal, a banking analyst with Mumbai brokerage Nirmal Bang, said the rise in HDFC Bank's bad loans was "acceptable" given the current environment. He said he did not expect bad loans to rise much further in the coming quarters at HDFC Bank, which typically does not have a big exposure to project finance -- hit by sectors like infrastructure -- and is more focussed on retail customers. Net interest income for the quarter grew 23.5 percent to 63.89 billion rupees as loans grew an average of nearly 26 percent, HDFC Bank said. Non-interest revenue including fees and commissions grew a faster 33 percent. Shares in HDFC Bank, which is India's most-valuable lender with a market capitalisation of about $44 billion, were down 0.3 percent by 0656 GMT in a Mumbai market that was little changed. The stock has so far this year gained more than 16 percent, outperforming the Bank Nifty and the benchmark Nifty. (Reuters)
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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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Officials from the world's largest emerging nations launched the New Development Bank (NDB) on Tuesday, the second of two new policy banks heavily backed by Beijing that are being pitched as alternatives to existing institutions such as the World Bank. Also known as the BRICS bank, it follows soon after the establishment of the China-led Asian Investment Infrastructure Bank (AIIB). The new bank will fund infrastructure and development projects in BRICS countries - Brazil, Russia, India, China and South Africa. The ceremony on Tuesday concludes a lengthy wait since the NDB was first proposed in 2012. Disagreements over the bank's funding, management and headquarters had slowed its launch. "Our objective is not to challenge the existing system as it is but to improve and complement the system in our own way," NDB President Kundapur Vaman Kamath said. He added that after a meeting with the AIIB in Beijing, the NDB had decided to set up a "hotline" with the AIIB to discuss issues, and to forge closer ties between "new institutions coming together with a completely different approach." The ceremony, held in Shanghai where the NDB's headquarters are located, was relatively low-key in comparison to a June signing of the articles of agreement for the AIIB in Beijing, which was attended by delegates from 57 countries and President Xi Jinping. The bank's launch comes two weeks after a BRICS summit hosted by Russian President Vladimir Putin. Russia views the NDB and a BRICS currency reserve pool as an alternative to the US-dominated international financial institutions. The NDB has initial capital of $50 billion, which will be expanded to $100 billion within the next couple of years. Kamath, a former executive with India's largest private bank ICICI Bank, said earlier this month that the NDB plans to issue its first loans in April next year. China has pledged to contribute $41 billion to the NDB, giving it the largest share of voting rights at 39.5 percent. Brazil, India and Russia will each contribute $18 billion, while South Africa will contribute $5 billion.
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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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Beijing may have averted a crisis in its stock markets with heavy-handed intervention, but the world's biggest corporate debt pile - $16.1 trillion and rising - is a much greater threat to its slowing economy and will not be so easily managed. Corporate China's debts, at 160 percent of GDP, are twice that of the United States, having sharply deteriorated in the past five years, a Thomson Reuters study of over 1,400 companies shows. And the debt mountain is set to climb 77 percent to $28.8 trillion over the next five years, credit rating agency Standard & Poor's estimates. Beijing's policy interventions affecting corporate credit have so far been mostly designed to address a different goal - supporting economic growth, which is set to fall to a 25-year low this year. It has cut interest rates four times since November, reduced the level of reserves banks must hold and removed limits on how much of their deposits they can lend. Though it wants more of that credit going to smaller companies and innovative areas of the economy, such measures are blunt instruments. "When the credit taps are opened, risks rise that the money is going to 'problematic' companies or entities," said Louis Kuijs, RBS chief economist for Greater China. China's banks made 1.28 trillion yuan ($206 billion) in new loans in June, well up on May's 900.8 billion yuan. The effect of policy easing has been to reduce short-term interest costs, so lending for stock speculation has boomed, but there is little evidence loans are being used for profitable investment in the real economy, where long-term borrowing costs remain high, and banks are reluctant to take risks. Manufacturers' debts are increasingly dwarfing their profits. The Thomson Reuters study found that in 2010, materials companies' debts were 2.8 times their core profit. At end-2014 they were 5.3 times. For energy companies, indebtedness has risen from 1.1 to 4.4 times core profit. For industrials, from 2.5 to 4.2. Low ReturnsGao Hong, investor relationship principal at railway equipment maker Jinxi Axle Co, which has seen its debt-to-core profit multiple triple to 10.25 between 2010 and 2014, said the company struggled to find profitable capital projects to invest in, so put money into short-term bank products that guaranteed returns. "The risk for these (capital) programmes is so high and the rate of return so low that we have to make the best decision for our investors (by) purchasing bank products. Last year, we made profits thanks to the sale of CNR shares," said Gao. Much of the new lending is going to China's notoriously inefficient state-owned enterprises (SOEs) as part of the government's fiscal stimulus. “They are lending more to fund infrastructure projects, and some may be done by SOEs where leverage is increasing as a result," said Tao Wang, UBS head of China research. "Prices are declining and revenue is slowing, and in this environment you cannot force too quick a deleverage – that would lead to a hard landing," said Wang. S&P expects China's companies to account for 40 percent of the world's new corporate lending in the period through 2019. But quantity is not the only problem. Getting credit to the most efficient companies, where it has the most impact on the economy, would be easier if inefficient companies were allowed to fail, so markets can price debt effectively. Policymakers have said they want market mechanisms to play a bigger role in credit pricing, but in practice have baulked at the consequences, effectively bailing out companies in trouble, as it did last year when state-backed Shanghai Chaori Solar Energy Science and Technology Co Ltd defaulted on a bond coupon payment. Rapid debt growth, opacity of risk and pricing and very high debt to GDP are a hazardous combination, Standard & Poor's says. It took an unprecedented series of measures to arrest the plunge in China's stock markets, which are worth just over $8 trillion and are a minority pursuit for the relatively wealthy. Tackling corporate debt might make that seem like child's play. "Managing the debt market is probably more dangerous than the stock market because the scale of the debt market is bigger, and without any high-profile default, the moral hazard is a significant issue," said David Cui, BofA Merrill Lynch analyst. (Reuters)
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Barclays Plc plans to cut more than 30,000 jobs within two years after firing Chief Executive Antony Jenkins this month, The Times reported on Sunday. This redundancy program, which could reduce the bank's global workforce below 100,000 by 2017 end, is considered as the only way to address the bank's chronic underperformance and double its share price, the newspaper said, citing senior sources. These job cuts are likely to affect staff at middle and back office operations, where largest savings are achieved, the Times said. The paper said that a potential candidate, who would replace Jenkins, is expected to axe jobs much faster and more deeply than the ousted boss. Barclays deputy chairman Michael Rake joined payments processing firm Worldpay as its new chairman in mid-July. Barclays could not be reached immediately for comments outside regular business hours. (Reuters)
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International banks and most insurers are likely to steer clear of dealing with Iran for some time, fearing they could face more fines from U.S. regulators despite this week's nuclear deal between world powers and Tehran. With almost 80 million people and annual output of some $400 billion, Iran will be the biggest economy to rejoin the global trading and financial system since Russia emerged from the ruins of the Soviet Union over two decades ago. But while Iran is trying to come in from the cold, many of the sanctions imposed over its nuclear programme are likely to stay for months and those that are lifted can be rapidly restored if the deal falters. U.S. and European banking restrictions, for example, will be lifted only when the International Atomic Energy Agency has verified that Iran is keeping to its side of the bargain. The layers of sanctions also include U.S. anti-money laundering legislation, and any breaches could lead to banks being cut off from the U.S. dollar clearing system. "There’s a real hesitancy for the right reasons," said Washington lawyer D.E. Wilson, former acting general counsel at the U.S. Treasury, whose Office of Foreign Assets Control (OFAC) enforces the legislation. "The banks don’t want to get into trouble." There are tentative signs of a financial thaw. In one of the first steps to normalise trade between Britain and Tehran, the UK's export credit agency told Reuters on Thursday it was planning to review Iran's creditworthiness. But Germany's largest bank by assets, Deutsche Bank, said it would consider doing business in Iran only when sanctions disappear. "Deutsche Bank will continue to adhere to all U.S. and EU sanctions against Iran," it said in a statement. "The bank closely monitors the implementation of the nuclear agreement and related sanctions and will reconsider its position if sanctions are lifted in areas of relevance to the bank." Deutsche has yet to reach a settlement with U.S. officials over suspicions that it may have breached sanctions in dealings with Iran. The bank has already paid about 9 billion euros ($9.8 billion) in U.S. and European settlements and fines in the past three years, and faces more U.S. penalties in the Iran case. Germany's second biggest lender Commerzbank declined to comment. In March, Commerzbank agreed to pay U.S. authorities $1.45 billion after it joined the ranks of European banks to acknowledge moving funds through the U.S. financial system for countries such as Iran and Sudan. British banks will also be cautious given past experiences, industry sources said. They are generally pulling out of business likely to stir controversy and slimming their international operations in response to recent scandals. HSBC was fined $1.9 billion in 2012 by U.S. regulators for violations including doing business with Iran, while Standard Chartered paid $667 million in 2012 for violating U.S. sanctions and a further $300 million after more compliance shortcomings were uncovered. "Global banks are unlikely to rush in until the ground rules are clearly laid out by the U.S," an executive at a major bank based outside the United States. U.S. banking groups JPMorgan Chase & Co and Citigroup declined to comment. Lenders further afield are also playing safe. "Some banks that can operate lawfully beyond the reach of the OFAC sanctions have chosen as a matter of bank policy not to engage in any Iran dealings ... The juice isn’t worth the squeeze," said Les Carnegie, who specialises in international trade and national security matters at law firm Latham & Watkins. Global transaction services organisation SWIFT said on Tuesday current European Union sanctions remained in place which included "measures prohibiting companies such as SWIFT from providing specialised financial messaging services to EU-sanctioned Iranian banks". First StepsStill, parts of Britain's financial services industry - which includes the Lloyd's of London insurance market - will be vying for business in Iran. Government department UK Export Finance (UKEF), which provides banking and insurance guarantees to support British exporters, said on Thursday it would initiate "a review of Iran to assess creditworthiness, in light of the new agreement, and the expected positive effect on the Iranian economy". However, it added that Iran had to clear arrears with UKEF "to a large degree" before full cover could be restored. Nigel Kushner, a director with the British Iranian Chamber of Commerce association, said trade prospects would depend on Iran complying with a "multitude of obligations". "The reality is that there will be no tangible change in the EU or U.S. sanctions regime for at least six to nine months at best," said Kushner, a London-based sanctions lawyer. Industry sources said that while some insurers were gearing up for a resumption of business, they were unlikely to make any moves yet. Helen Dalziel, senior market services executive at the International Underwriting Association, said the British Treasury had issued a notice to insurers saying its previous guidance remained in place. "They’re not recommending trade with Iran at present," she said. "Essentially, nothing's changed for our members and won’t change for several months, we believe." Insurer Allianz said it would adjust its business "if and when the steps specified in the political agreement have been implemented". A similar message was given by CityUK, a trade association working to promote UK financial services overseas. "Our focus will be on the need for a clear and consistent policy on sanctions and their operation," said Gary Campkin of CityUK. Under interim accords reached between Iran and world powers, Iran was allowed to secure insurance cover to transport oil cargoes - Tehran's main revenue earner - for approved business. The interim agreement was renewed on a six-month basis and most ship insurers - known as P&I clubs - remained wary of entering into contracts. The International Group of P&I clubs, whose members provide liability cover to 95 percent of the world's tanker fleet, said it was difficult to say when EU and U.S. legislation would be repealed or rolled back. "In the meantime clubs should advise members with an interest in trading to Iran to proceed with extreme caution and continue to seek independent advice before committing to trade contracts," it said in a note this week. (Reuters)
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India has simplified rules for foreign investment in companies by clubbing together different categories, Finance Minister Arun Jaitley said on Thursday (16 July), effectively giving equal treatment to global capital entering Asia's third largest economy.The move, flagged by Jaitley in his budget in February, will make it easier for banks like Yes Bank and Axis Bank to raise capital up to a foreign ownership limit of 74 percent, say analysts."One of the most important decisions in relation to the investment is the introduction of composite caps for simplification of foreign direct investments," Jaitley told reporters after a cabinet meeting.Jaitley said foreign direct investment, foreign portfolio investment and investments by non-resident Indians would be "clubbed together under a composite cap".Banking stocks rose after the announcement. Axis Bank shares rose nearly 5 percent, while Yes Bank gained 3.6 per cent in a Mumbai market that was up 0.8 per cent.Previously, foreign capital had been subject to varying restrictions - a legacy of India's socialist past and its lingering reluctance to allow capital to move freely across its borders.The Department of Industrial Policy and Promotion (DIPP), part of the Commerce Ministry, proposed simplifying the investment rules after Prime Minister Narendra Modi won an election last year by pledging to boost investment and jobs.For banks, the shift will lead to an increase in their effective free float - or the number of shares that can be easily traded. That in turn would lead to an increase in their weighting in benchmark indexes tracked by many fund investors.India has also allowed 100 percent investment in pharmaceuticals and railway infrastructure under a so-called automatic route that does not require official approvals.Sectoral foreign investment caps have been raised in the insurance and defence sectors to 49 percent. No major deals have yet been announced, however, reflecting a lack of clarity over how India treats different types of capital.(Reuters)
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