World shares and the dollar tumbled on Friday (8 August) and oil and gold jumped after US President Barack Obama authorised targeted air strikes in Iraq, raising worries of another drawn-out conflict in the region.US military aircraft conducted an airstrike on Friday against Islamic State artillery used against Kurdish forces defending the city of Erbil, near US personnel, a Pentagon spokesman said.Two F/A-18 aircraft dropped 500-pound laser-guided bombs on a mobile artillery piece near Erbil, Pentagon press secretary Rear Admiral John Kirby said in a statement.He said the Islamic rebels had been using the artillery to shell Kurdish forces defending Erbil where U.S. personnel are located."The decision to strike was made by the US Central Command commander under authorisation granted him by the commander in chief," he said. Fighting also resumed in Gaza between Palestinian militants and Israel and with NATO's calls for Russia to "step back from the brink" of war in Ukraine still ringing in ears of volatile markets."Earlier this week, one Iraqi in the area cried to the world, 'There is no one coming to help'," said Obama, who has been reluctant to go back into Iraq having withdrawn in 2011. "Well, today America is coming to help."Global share markets had already been heading for a second week of straight losses but the latest developments sparked a fresh sell-off. European stocks opened down almost 1 percent after Asian markets had seen similar falls overnight.Read Also: Global Crisis Pulls Sensex Down To 4-week LowRead Also: Obama Oders Targeted Strikes In Iraq"Risk aversion reigns, risk aversion rules," said Kit Juckes, Head of Currency Strategy at Societe Generale in London."The prospect of air strikes in northern Iraq on top of the tensions in Ukraine and Gaza...across the board we have stocks weaker, bonds are stronger, the dollar is weaker and the yen is strongest of all."Obama said in an address that he authorized targeted strikes to protect the besieged Yazidi minority and U.S. personnel in Iraq.U.N. Secretary-General Ban Ki-moon and the United Nations Security Council on Thursday called for the international community to help Iraq's government and people as the country struggles against a sweeping advance by Islamist militants.U.S. crude soared more than a $1 to $98.45 a barrel and Brent rose to $106.39 on the jitters of a fresh conflict in one of the world's big oil producing countries.The dollar fell 0.4 percent to two-week low of 101.68 against the safe-haven yen, the yields on 10-year Treasuries and German Bunds - global investors' tradition go-to assets in times of tension - dropped as low 2.375 and 1.026 percent respectively.Gold, another major safe-haven, hit $1,318.80 an ounce, its highest since July 18, and was last up 0.4 per cent on the day at $1,319.46."It seems only a short time ago that traders were talking corrections, but now it seems only a matter of time before we see technical bear markets" in some markets, IG chief market strategist Chris Weston wrote in a note to clients.(Reuters)
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The Reserve Bank of India's interest rate moves will be guided more by domestic factors than external ones, Governor Raghuram Rajan told analyts in a conference call on Wednesday (6 August), a day after he left rates unchanged, as widely expected.The central bank governor said the RBI does not manage liquidity through foreign exchange markets, and added it could consider increasing the foreign debt limits, should the existing limits fill up.The RBI kept its key policy repo rate unchanged on Tuesday (5 August), and voiced a commitment to bringing down inflation that convinced many analysts that markets will have to wait until next year for the next cut in rates.(Reuters)
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The Reserve Bank of India (RBI) is likely to leave its key interest rate unchanged on August 5 and won't ease policy until early next year on fears food inflation will spike if monsoon rains are below average, according to a Reuters poll.Nearly all the 43 economists surveyed over the past week expect the RBI to leave its key repo rate on hold at 8 per cent.Median forecasts show the rate staying unchanged until the end of this year, before being cut to 7.75 per cent in the first quarter of 2015. Between now and mid-2016, the RBI is expected to cut rates by 75 basis points.Although both wholesale price inflation (WPI) and consumer price inflation (CPI) eased in June, some forecasters warned inadequate rains could lead to higher food inflation.Concerns that India could face its first drought in five years have abated after rainfall increased in mid-July, but the poor start to the monsoon made farmers postpone summer sowing."Even though the headline WPI and CPI have eased over the last few months, and the intensity of monsoon rains has picked up after a weak start, rainfall-related concerns persist as a source of risk for the inflation outlook," said Aditi Nayar, senior economist at ICRA.Three economists expected rates to go up before the end of the year, reflecting those fears.However, growth is slowing and has stayed below 5 per cent in the past two years, well below levels needed to create enough jobs for India's young and expanding workforce.Economists trimmed their growth predictions for the current fiscal year in a Reuters poll last week, despite market expectations that India's first majority government in three decades will quickly bring in reforms and attract more investment.Lack of crucial government reforms, stubbornly high inflation and elevated borrowing costs have weighed on India's economic growth over the past two years and the central bank is struggling to support growth while bringing inflation down to its target.Still only two forecasters predicted that a cut in the repo rate next week to boost economic growth."We believe that reduced monsoon risks, a clear roadmap for fiscal consolidation and moderation in inflation expectations will create a case to begin a rate easing cycle," said Deven R Choksey at KR Choksey.New Finance Minister Arun Jaitley's first budget sought to cap borrowing but left doubts over how the 4.1 per cent fiscal deficit target would be met.The budget also left those who were anticipating radical reforms disappointed, putting the spotlight back on the RBI instead.The RBI is targeting retail inflation of 6 per cent by January 2016. Inflation, measured by the consumer price index, eased to 7.31 per cent year-on-year in June. Some economists say the target is tough and does not give the central bank room to cut rates."The problem is that they have set themselves a very sharp target for inflation reduction and any leeway on that front will be very difficult," said Bhupesh Bameta, economist at Quant Capital."It doesn't give them much room to cut rates at this juncture."(Reuters)
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With the prospect of stiffer sanctions against Russia rattling confidence in Europe, investors will be looking to the United States and China to underpin the global economy.Wednesday's US gross domestic product (GDP) reading and jobs data on Friday will help markets to judge the strength of the economy's rebound and the likely speed of the Federal Reserve's return to more conventional monetary policy. The Fed meets on Tuesday and Wednesday."The U.S.-China story is looking more encouraging," said James Knightley, an economist with ING. "With the European Central Bank's moves, that should allow the euro zone economy to swing upwards but with a good six- to 12-month lag."In Europe, the downing of a Malaysia Airlines airliner over eastern Ukraine has left countries such as Germany with little choice but to change their long-passive stance and impose tougher sanctions on Moscow over the role of pro-Russian separatists.Early this week, European Union ambassadors are expected to meet to finalise sanctions that could include closing EU capital markets to state-owned Russian banks, placing an embargo on arms sales and restricting supply of energy technology.Globally, such sanctions would bite hardest in Europe, where Russia does most trade, compounding economic problems not only for Russia but throughout the region.The International Monetary Fund has already flagged the 'chilling effect' on investment in Russia of sanctions as it pared back its forecast for global economic growth last week.Confidence amongst businesses in Germany, which accounts for more than one quarter of all exports across the European Union, has dipped further since the plane crash."The situation is very dangerous," said Michael Heise, chief economist of Allianz, one of the globe's largest fund investors."An escalation carries large risks for the economy," he said, cautioning in particular of the knock to confidence. "There is a big risk from further sanctions although one has to accept that clear (diplomatic) signals are needed."Bounce-backThe crisis comes at a delicate moment for the 18 countries using the euro, where a fledgling recovery is losing pace. Investors will get a snapshot of the bloc's inflation rate, which has sunk well below the European Central Bank's target, on Thursday.With Britain, one of the stronger European economies, caught up in the push for mutually painful sanctions against Russia, economic growth prospects hinge on the United States and China."We think there is going to be a bounce-back in (U.S.) gross domestic product," said ING's Knightley. The Reuters consensus shows annualised growth picking up to 3 percent in the April-June quarter.Data from Beijing is expected to confirm China's economy picked up in July after government moves to boost lending to business, such as reducing the amount of cash banks must hold in reserve.China's economy grew at 7.5 per cent in the second quarter. But the drags on growth, including a downturn in property prices and high local government debts, are similar to those in Europe.Analysts believe that deeper reforms, such as overhauling giant state companies, will be needed in the long term to keep the economy growing at the pace the authorities want.That keeps the focus on US Federal Reserve and how fast it will run down the stimulus that has pumped cheap money around the world, prompting investors to take increasing risks.The Fed gathers on Tuesday for its two-day meeting but no change of course is expected yet.Earlier this month, Federal Reserve Chair Janet Yellen signalled that she would keep the central bank's purse strings loose until the effects of the financial crisis are "completely gone."But some analysts say the central bank may be forced to take a stricter approach to avoid pumping up market bubbles."People worry that the Fed may raise interest rates earlier than expected," Nie Wen, an analyst with Hwabao Trust in Shanghai, told Reuters. He predicts a rise in interest rates as soon as early next year.Michael Heise of Allianz warns that keeping money too cheap for too long carries a major risk."If the central banks stay too accommodative for too long, you can have a boom ... and it can come to a massive correction."In a reminder of the delicate balance facing financial policymakers, Argentina will seek next week to reach agreement with investors suing the country for full repayment of their bonds.President Cristina's Fernandez's unflinching stance would appear to indicate that the country will go down to the wire. If talks fail, Argentina faces its second default in 12 years. (Reuters)
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Measures such as 8,000 kms of roads, development of airports and ports, ten-year tax holiday benefits to power companies, renewed focus on infrastructure development, fiscal consolidation, decision to implement GST and FDI in defence and insurance, among other smaller proposals, have gone well with market participants.Most brokers and equity analysts, whom BW consulted, hoped market buoyancy to continue, while a good number of them expected market (Sensex) to range between 27000 and 30000 levels over the new few months.“The budget has met our expectations in terms of a long term agenda. Fiscal consolidation is the key focus with the Finance Minister giving a target of a 3 per cent fiscal deficit by FY17. We continue to remain bullish on the markets and maintain our index target of 27,000 by year-end though near term we could see some consolidation due to the monsoons. We recommend buying every dip,” said a Bank of America Merrill Lynch report authored by research head Jyotivardhan Jaipuria and economist Indranil Sengupta.Markets sent out conflicting signals in mid-noon trade as benchmark index – the 30-share Sensex – moved in a wide range of over 800 points. The index touched day’s low of 25,117 and day’s high of 25,920 before ending the day at 25,372 points, down 72 points or 0.2 per cent.“The first voice by the new government clearly indicates growth and fiscal consolidation and that tells we are in a bull run for a long time. The new budget is clearly positive in terms of lower individual taxes, positive for many sectors like Infra, Power, Realty and reviewing subsidy,” said Vinod Nair, research head at Geojit BNP Paribas.While the budget has been low on big-bang announcements, it has touched almost all key sectors. The focus of the finance minister, it appears, is to iron out irritants that hinder business and investment decision-making.“If you had to focus on what areas what were focused on the most, infrastructure and taxation were heavily addressed. From an infrastructure perspective, we can expect defense stocks to do well (L&T has appreciated 3% mid-day), real estate stocks to do well (DLF has appreciated 9% so far through the day), and Power stocks to do well (NTPC has risen 2% so far),” said Raghu Kumar, CEO of RKSV Stock Broking.Analysts expect large and mid-cap companies like HUL, ITC, SBI, ICICI Bank, HDFC, LIC Housing Finance, Max India, GVK, IRB Infra, Maruti, IDFC, L&T, Bata, Jubilant Foodworks, Indiabulls Housing, DLF, Godrej Properties and Unitech to perform well over the next few weeks.“Mid-caps will outperform large caps; domestic plays will outperform exporters. Our overweight sectors include autos, cement, banks, industrials and energy,” the BoAML note said.
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The benchmark BSE Sensex crossed the 26,000-mark for the first time and the NSE Nifty soared to hit yet another high of 7,787.95 in opening trade on Monday (7 July) on the back of strong inflow of foreign funds ahead of the Budget. The BSE 30-share barometer spurted by 137.29 points, or 0.52 per cent, to trade at a lifetime high of 26,099.35 with stocks of infrastructure, IT, power, capital goods, auto and realty sectors, leading the rally. The gauge had gained 138.31 points in the previous session. The NSE Nifty also maintained its record-breaking trend and gathered another 36.35 points, or 0.46 per cent, to hit a new all-time high of 7,787.95 points, surpassing its previous intra-day high of 7,758.00, touched in Friday's trade. Brokers said sentiments remained extremely bullish on continued buying by foreign funds and retail investors on expectations of a growth-oriented Budget that lifted the key indices to new highs. Beginning of earnings season later this week also influenced the trading, they added. Among the 30-Sensex stocks -- L&T, NTPC, Infosys, TCS, Wipro, Tata Power, Hindalco, Tata Steel, Sesa Sterlite, Tata Motors, Bajaj Auto, Hero MotoCorp, SBI, ICICI Bank, Dr Reddy's and Cipla were the major gainers during the initial trade. Among other Asian markets, Hong Kong's Hang Seng gained 0.15 per cent, while Japan's Nikkei fell 0.02 per cent in early trade on Monday. The US markets remained closed on Friday. Technology stocks gain ahead of Infosys Ltd kicking of the April-June earnings season on July 11. Infosys was up 2.2 per cent, while Tata Consultancy Services Ltd gains 2.4 per cent. Sentiment is also supported as investors expect the government's maiden budget, to be to unveiled on Thursday, to target increase in revenue from asset sales while controlling spending. Overseas investors bought Indian shares worth rs 943 crore 158 million) on Friday, provisional exchange data shows.(Agencies)
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The RBI in its monetary policy dated 1 April 2014, announced that as regards foreign direct investment (FDI), it has been decided to withdraw all the existing guidelines relating to valuation in case of any acquisition/sale of shares and accordingly, such transactions will henceforth be based on acceptable market practices. While the operating guidelines in respect of the above have not been notified as yet, the immediate reaction of the foreign investing community to this announcement has been very positive and they have been jubilant at the prospect of free pricing.In this backdrop, it is important to understand the true ramifications of the announcement and what impact it would have on deal activity in India, going forward.FDI in India has been regulated and has been subject to pricing norms. The thumb rule on pricing for foreign investors has been to invest at not less that the prescribed valuation price and to exit at not more than the prescribed valuation price. The principle being to conserve foreign exchange and to protect the Indian promoters from getting a raw deal.Earlier, the valuation methodology prescribed was as per the Controller of Capital Issues (‘CCI’) method. The CCI method provided for an average of net asset value and profit earning capacity value. This method was essentially backward looking and was based on past performance of the company. In 2010, this was changed to valuation as per discounted cash flow (‘DCF’) method. In the above context, what does the RBI announcement mean? Is there going to be absolute free pricing going forward? Ie will foreign investors be permitted to invest at below fair price and exit at a premium to fair price? Or does this just mean that while entry and exit need to be in accordance with the fair price, the valuation methodology will no longer be prescribed by the regulator and will have to be based on accepted market practice?I would concur with the latter interpretation. In my view, the RBI is inclined to give a free hand to the market players to determine the valuation methodology; while having to meet the pricing guidelines. Given that we are still some way from full capital account convertibility, the overall pricing restrictions, to my mind, will continue.Nonetheless, this is a welcome move to give a free hand to investors as regards choice of valuation methodology.While transitioning from the archaic CCI method to DCF was a progressive move, one has to appreciate that DCF may not be the appropriate valuation method in all situations. Choice of an appropriate valuation method depends on the industry and the sector that the company belongs to and the stage at which the company is in its life cycle.No valuation is “right” in any absolute sense. It is appropriate to use several scenarios about the future and even several valuation methods to arrive at the target’s value. Also, it may be more accurate to value the divisions or product lines of a target, than to value the whole company. Also, different valuation methods may be appropriate for different components of a company. It is not prudent to have a “one size fits all” approach as regards valuation. And it is best to leave the choice of valuation methodology to the professional valuers.Clearly, this is a step in the right direction and will boost deal activity in India. It signals less regulatory interference and higher trust and faith in the investors and professional valuers, which is welcome. The investing community is eagerly waiting for the operating guidelines to be released and one hopes that the guidelines have a positive bent. It would be a further boost if RBI can apply the same logic of flexibility in valuation methodology in the case of put and call option as well, instead of tying it down to a regressive ROE based method.Lastly, foreign investors are faced with the pricing issue on multiple fronts – Section 56 tax, transfer pricing, Companies Act, SEBI, exchange control and so on; and there is no consistency qua these myriad set of regulations as regards the valuation methodology. While RBI’s announcement is clearly a welcome move and does address one of the various moving parts of a deal; at some stage, all the regulators need to speak the same language and arrive at a common ground on valuation methodology. To conclude, with this positive announcement, expectation is rife that the trend of liberalization will continue. Further policy reforms are expected as regards dispensing with the lock in and minimum capitalization requirement in real estate as also relaxing some of the sectoral caps that still prevail. Investors are looking for more…..The article is authored by Punit Shah, Co Head of Tax, KPMG in India with inputs from Sheetal Nagle, Director- Tax, KPMG in India
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The Securities Appellate Tribunal on Monday (30 June) upheld a Sebi decision rejecting Reliance Industries Ltd's application to settle alleged violations of norms to check fraudulent and unfair trade practices in the RIL-Reliance Petroleum merger case through a consent mechanism.The tribunal said Reliance's application is not maintainable because the new consent mechanism norms are applicable with retrospective effect. A full bench of the SAT, headed by presiding officer JP Devdhar, said the consent mechanism norms in the Sebi Act were amended with retrospective effect from April 2010.The ruling by the Securities Appellate Tribunal (SAT) marks a victory for the Sebi, which imposed its largest ever fine for an insider trading case on Reliance Petroinvestments Ltd last year over share transactions involving a separate company.Reliance has been contesting a show-cause notice from the Securities & Exchange Board of India (Sebi) in the case since December 2010 and from last year, the regulator's exclusion of the company from the new consent mechanism. The ruling was made by the Securities Appellate Tribunal, an independent quasi-judicial body that rules on appeals against orders passed by Sebi. Its decisions are binding, but can be appealed to the Supreme Court.Sebi had fined Reliance Petroinvestments Ltd Rs 11 crore ($1.83 million) last year, accusing the unit and parent company Reliance Industries of insider trading in a transaction involving a separate company.Pronouncing Reliance Petroinvestments Ltd (RPIL) guilty of violating the insider trading regulations with regard to its dealings in shares of Indian Petrochemicals Corp Ltd (IPCL) in early 2007, Sebi had said that RPIL made profits of over Rs. 3.82 crore through these trades.After taking into account the quantum and nature of the violations, Sebi had decided to impose a penalty of Rs. 11 crore on RPIL, which was listed as one of the promoter entities by IPCL itself in its regulatory filings as on March 31, 2006, the regulator said in its 17-page late night order. Once a subsidiary of Mukesh Ambani-led Reliance Industries Ltd (RIL), IPCL used to be a separately listed entity of the group, but was later merged with RIL and delisted from the stock exchanges.Sebi said in its order that its investigations into charges of insider trading norm violations by RPIL showed that the company was having control over IPCL as "promoter having control over the company with the total shareholding of approximately 46%".Further, RIL was shown as a 'person(s) acting in concert' with RPIL with regard to the shareholding of IPCL, Sebi said.Sebi said it conducted an investigation in the trading of the shares of IPCL during the period from February 22, 2007 to March 08, 2007. In the same case, Sebi had passed another order wherein it dropped the charges of violations of insider trading norms in IPCL shares against Manoj Modi and his wife. Modi is known as a close confidante of RIL chief Mukesh Ambani and held some senior positions at group entities in the past. But, Sebi said that the charges of insider trading violations could not be proved against Modi.Sebi's probe into the matter showed an irregular trading pattern in IPCL shares during the period under review, when two key announcements were made by the company -- one about an interim dividend payment and another regarding the amalgamation of IPCL with RIL.IPCL originally used to be a government-owned entity and was sold to RIL group during a disinvestment exercise.Sebi found that RPIL has violated the Prohibition of Insider Trading norms through its dealings in these shares while being in possession of "unpublished price sensitive information (UPSI) while trading in the scrip of IPCL prior to announcement of declaration of interim dividend and amalgamation of IPCL with RIL"."It is observed from the Investigation Report that RPIL received a dividend of approximately Rs. 1.28 crore and made a notional profit of approximately Rs. 2.54 crore (difference between acquisition cost of IPCL shares and market price of RIL shares on dealing dates based on average price)."Thus, the Noticee made a profit of approximately Rs. 2.83 crore when in possession of UPSI relating to declaration of interim dividend and amalgamation of IPCL with RIL."During the course of its inquiry, Sebi served a Show Cause Notice in January 2011, wherein RPIL and RIL were termed as 'insiders' on the basis of the shareholding patterns submitted by IPCL itself about their promoters and related entities.Besides, Mukesh Ambani was chairman of IPCL, as well as chairman and MD of RIL during the period under review, thus putting both the companies under same management, while RPIL held more than one-third of total voting power of IPCL at that time.Also, RIL held the entire share capital of RPIL through two wholly owned subsidiaries.It was also stated in the show-cause notice that "RPIL was conceived by the management of RIL for the sole purpose of acquiring shares at the time of disinvestment by the Government in favour of RIL."Further, it is observed that during the period June 9, 2006 to February 26, 2007 RPIL has not dealt in the shares of IPCL but all of sudden started buying the shares of IPCL from February 27, 2007, that is just before the major announcement of declaration of the interim dividend and amalgamation of IPCL with RIL," the notice said.In its reply submitted in February 2011, RPIL sought an opportunity of inspection of all documents/information relied upon in the notice and an opportunity for the same was granted to the company by Sebi's Investigating Authority on October 18, 2011. However, the company later claimed that it was not shown all the documents.Later in November, 2011, the company, however, filed for settlement of the case through Sebi's 'consent mechanism'. However, Sebi rejected this plea after due consideration and informed RPIL about the same in November 2012.Sebi said in its order that RPIL did not reply to its show-cause notice in spite of lapse of more than one-and-a-half years, after which it called the company for personal hearing on October 22, 2012, after submit its reply by October 15, 2012.The company, however, sought a short extension of time to submit its reply and for the personal hearing. Later in November 2012, the reply was submitted to Sebi, wherein the company rejected the various charges made against it for violation of insider trading norms.After taking into account the relevant facts and regulations, and the submissions made by the company, Sebi, however, concluded that RPIL had indeed violated the insider trading norms and was liable to be penalised for the same."From the Investigation Report it is noted that RIL holds the entire share capital of RPIL through two of its wholly owned subsidiaries. As per the Annual Report of RIL for the year 2005-06, RPIL is shown as an 'associate companies and joint ventures'," Sebi said.Besides, the purchase of shares of IPCL by RPIL was financed by Reliance Ventures Ltd (RVL) through an interest free loan, Sebi said, while adding that RVL was a wholly owned subsidiary of RIL.Sebi further said that K Sethuraman, group company secretary of RIL, represented on behalf of RPIL before it, wherein it said that the orders for buying IPCL shares were placed by one Ashok C Jain, who is an employee of RIL."It is also pertinent to mention that Sethuraman was the contact person on behalf of RIL for interacting with the legal advisor, valuers, financial advisors, etc., in the matter of merger of IPCL with RIL," Sebi said."Therefore, in view of the above findings, the charge of insider trading against the Noticee (RPIL) as per regulation... stands established," the Sebi order had said. (Agencies)
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'Mehrangir', the iconic bungalow of Homi J Bhabha, father of India's atomic energy programme, in Mumbai was on Wednesday (18 June) sold at an auction for Rs 372 crore, despite demands to turn it into a museum.The highest bidder, whose identity was not disclosed at his request, landed the sprawling property at plush Malabar Hill which went under the hammer at the National Centre for Performing Arts (NCPA), its custodian.The property fetched Rs 115 crore more than the reserve price of Rs 257 crore."As per the request of the winning bidder, the identity will not be disclosed at this stage," NCPA said in a release.The three-storey bungalow with a built-up area of over 15,000 sq ft on a plot measuring 1,593 sq m, offers a beautiful view of the sea.After Bhabha's death in a plane crash 1966, his brother Jamshed, a patron of art and culture, became the custodian of the estate.On Jamshed's death in 2007, the property was transferred to NCPA, an institution he had nurtured.Some employees of the Bhabha Atomic Research Centre (BARC) had recently petitioned the Centre and moved the Bombay High Court against the sale and sought the bungalow to be converted into an atomic energy museum.The high court had on Monday refused to grant a stay against the sale, but posted the matter for hearing on June 23,saying the auction could be revoked, if required.(PTI)
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At its most basic, the banking challenge facing successive governments has not changed in years: how are we to deliver more efficient financial services to a broader spectrum of the population? How can we bring down the cost of capital for industry?The book I had edited, Contemporary Banking in India (published by BW Books), tackles many of these issues. The answer, in the past, has always been to use regulation to force banks into priority sectors, but as a policy it has failed, hobbling the banks, stifling innovation, and delivering mediocre and unsustainable products to the people who need access to financial services the most.We must shift from activist regulation, which tells banks how to do their job, to passive regulation that sets limits to protect consumers, but otherwise allows each financial institution to concentrate on fields where they have a competitive advantage. By being efficient users of capital, the lending rates of banks can come down. Yet, most banks seem to be struggling, being all things to all people, competing in every product category possible, while trying to fulfil their social obligations as corporate citizens.Banks are supposed to be enablers: they provide the lubricant that makes commerce flow, and act as catalysts to convert the savings of ordinary Indians into the capital that powers economic growth. However, our public sector banks (PSB) are hobbled by rising NPAs, while swallowing ever larger chunks of the budget. The UPA government allocated Rs 11,200 crore to PSBs in its interim budget. The RBI estimates that it will take some Rs 5 lakh crore to recapitalise PSBs and prepare them for the more rigorous requirements of Basel III, and the haemorrhage of cash is unlikely to stop there. NPAs are a concern. We need mechanisms to work out bad loans, enabling oxygen to critically ill companies that could recover. We need more asset reconstruction companies. We need to expedite clearances of stalled but viable projects while dealing effectively with wilful defaulters. The debate about privatisation of PSBs is fascinating, but premature. In the long term, privatisation will deliver greater efficiency as its proponents say but, in the short term, there are plenty of fast fixes that can deliver greater efficiency without necessarily taking them out of public ownership. They should be allowed to raise capital as and when needed, as indeed our private sector banks have very successfully demonstrated through equity raisings. If this leads to dilution of the government’s holding, so be it, as this is better than using taxpayer’s money and impacting the fiscal deficit. Some of the other fixes are:A more arm’s-length relationship with the government, and more focus on governance rather than governmentFlexibility in hiring to allow PSBs to compete in the war for talent with their peers among private and foreign banks Consolidation will result in stronger banks, economies of scale, greater global competitiveness, cheaper financial services and retraining of employees for emerging skill setsCutting the statutory liquidity ratio (SLR) — although high SLR and credit reserve ratio lend a measure of stability, they tend to make capital more expensive and hamper banks’ ability to fund India’s renaissance. The government has to stop using PSBs to fund its programmesPriority sector lending is designed to channel funds into areas that are underserved. The aim is noble, but the means flawed. Such forced lending typically disincentivises innovation in the poorest markets by crowding them out of their core markets; it is unsustainable in the long term, and prevents specialist banks and their customers from reaping the benefits of specialisationThere is no doubt that banks have a key role in promoting financial inclusion and reaching out to the rural, underbanked and underserved. However, regulatory coercion is significantly less efficient than allowing the financial system as a whole to find ways of doing it. Forcing banks, though they may not be equipped to provide this service, and extending them when it might not be financially viable to do so, is counterproductive. There is a case here for differentiated models of banks that can specialise in servicing this population while remaining profitable. Differentiated bank licences as mooted by the RBI governor may well be the way forward .The Indian IT sector, after it was liberalised, carved out a strong niche for itself, especially in software services. This sector has also lowered technology costs for Indian banks and greatly levelled the playing field. We need to mine this technological expertise more effectively. All innovation is potentially problematic, but with intelligent regulation that protects customers and prevents systemic risks, it should be embraced. Mobile banking, for example, presents one such opportunity to reach out to the remotest without necessarily investing huge amounts in physical infrastructure or staff.We need larger banks. Our largest business groups are hitting the ceiling of borrowing set by RBI for banks for prudential reasons. We need more banks — some specialised in key areas where there are identified gaps. All the above just needs a demonstration of intent on the part of the government. Narendra Modi needs to create an enabling environment. We have a strong, capable and proven regulator who can then define the boundaries that must not be crossed. Let the rest of the canvas be blank so that Indian banks may find their own way to success. (This story was published in BW | Businessworld Issue Dated 16-06-2014)
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