Courtesy: Newsclick.in

The post This Merger is Another Step Towards Bank Privatisation: Thomas Franco appeared first on SabrangIndia.

Saying that the share of inactive accounts in India is 48 percent, “the highest in the world and about twice the average of 25 percent for developing economies”, the World Bank seeks to blame Modi’s policies for this. Titled “The Global Findex Database 2017: Measuring Financial Inclusion and the Fin-tech Revolution”, the survey report says, “Part of the explanation might be India’s Jan Dhan Yojana scheme, developed by the government to increase account ownership.”

Authored by Demirgüç-Kunt, Asli, Leora Klapper, Dorothe Singer, Saniya Ansar, and Jake Hess, further referring to the Jan Dhan scheme, the report states, “Launched in August 2014, the programme had brought an additional 310 million Indians into the formal banking system by March 2018”, but laments many of them “might not yet have had an opportunity to use their new account.”
 

 

As against India’s 48 percent inactive accounts, as observed over the last 12 months, the report states, “In Afghanistan, Nepal and Sri Lanka about a third of account owners have an inactive account, while in Bangladesh 21 percent do. And Pakistan has a rate of just 13 percent, though it also has a low rate of account ownership compared with other economies in the region.” It adds, “In high-income economies only 4 percent of account owners have an inactive account.”

The World Bank’s triennial Global Findex report, as the study is identified alternatively, it is based on a survey of more than 150,000 representative individuals, claiming to provide a bird’s-eye view of patterns and regularities in data pertaining to finance and financial inclusion – such as saving behavior, use of mobile money, and preferred modes of sending and receiving remittances – in 140 economies.

Pointing towards the existence of gender gap in inactive accounts, the report says, “In developing economies female account owners are on average 5 percentage points more likely than male account owners to have an inactive account. In India, however, this gender gap is about twice as large: while 54 percent of women with an account reported having made no deposit or withdrawal in the past year, only 43 percent of men with an account did so.”
 

 

The report also points out that in developing economies “76 percent of adults with an inactive account have a mobile phone, including 66 percent in India”, though adding, “This represents an opportunity for expanding the use of accounts through digital technology.”

According to the report, “Indeed, having an account does not necessarily imply that people save at all. Globally, 42 percent of account owners reported not having saved any money in the past year. In high-income economies 26 percent of account owners reported not having saved any money. And in Brazil, India, Russia, and Turkey — all economies where about 70 percent or more of adults have an account — about 60 percent reported not saving at all.”

Courtesy: https://www.counterview.net/

The post World Bank: India’s 48% bank accounts inactive, thanks to Modi’s Jan Dhan, twice that of developing countries appeared first on SabrangIndia.

The post Loans Worth Rs 2.72 Lakh Crore Written Off by Modi Sarkar appeared first on SabrangIndia.

Image Courtesy: The Hindu

The Bill has faced opposition from various quarters, namely bank unions, individuals, financial analysts and so on. An online petition initiated by Mumbai resident Shilpa Sree, against the FRDI bill got more than 40,000 signatures merely hours after it was started.

The Bill aims to establish a Resolution Corporation that will monitor financial firms, anticipate risk of failure, take corrective action and resolve those. The financial firms may be classified in several categories based on the risk of failure 1. Low, 2. Moderate, 3. Material, 4.Imminent, 5.Critical. Depending on the status of the financial firm, the Resolution Corporation may take over the management of the firm using methods such as (i) merger or acquisition, (ii) transferring the assets, liabilities and management to a temporary firm, or (iii) liquidation.

A contested definition in the bill is of the ‘bail-in’ provision which, analysts apprehend, will put the depositors’ money in the banks at the risk and drive the economy towards a crisis worse than demonetization.

The bail-in clause is meant to rescue financial institutions at the brink of failure by making its creditors and depositors take a loss on their holdings. Hence, it is apprehended that the bill, if passed in its current form, will allow critically ill banks to restructure their liability (letting go of bad loans etc.) which includes depositors’ money. As per the bill, a bail-in will be triggered in consultation with the appropriate regulator, like RBI in case of banks and if the Resolution Corporation is satisfied that a bank needs capital to absorb losses. This clause excludes insured deposits, which, under existing rules, means a sum of up to Re. 1 lakh with interest would be protected. The rest of the amount could be converted into securities like stocks of the bank.
 
The bill also has provisions in which the Resolution Corporation may terminate the current management structure of ailing institutions, implying that the regular employees may lose jobs, a reason why the bill has faced severe opposition from bank unions.
 
Further, measures to ensure accountability and grievance redressal mechanisms are almost missing. The banks were earlier under Bank Regulations Act, but through FRDI they will be brought under the purview of a Company Law Tribunal which comes under the Companies Act. This is unwarranted as it gives all powers in case of likelihood of liquidation to the Tribunal.
 
The government response to the public angst is that of complete denial, where they have refused to admit that the depositors’ money may be in danger and secondly the introduction of a legal institution that can, by and large protect the interests of both, the institution and the depositors. Instead the finance minister Arun Jaitley tweeted “The Financial Resolution and Deposit Insurance Bill, 2017 is pending before the Standing Committee. The objective of the government is to fully protect the interest of the financial institutions and depositors.”.

However, how the government is planning to “fully protect the interest of the financial depositors” is unclear. Instead a press release issued today by the Ministry of Finance, GOI seems only to make claims in the air about how Indian banks have adequate capital and how it is depositor friendly. The government will need to come up with more concrete measures especially in terms of legal protection of the financial institutions and depositors’ money.
 

Related Reads:
A Year After Demonetisation: Small Retailers Report Further Losses But Support BJP
Currency In Circulation 91% Of Pre-Demonetisation Value; Digital Payments Up But Fluctuating
 

The post How does the FRDI impact us? appeared first on SabrangIndia.

Interview with Ch. Venkatachalam
Interviewed by Bodapati Srujana

C. H. Venkatachalam, General Secretary of All India Bank Employees’ Association (AIBEA), speaks to Newsclick on the reason why bank unions called for a strike on the August 22. The government’s gradual move towards privatising the banking sector is one of the reasons for calling the strike, he said and also demanded the government should provide the required capital to the public sector banks. It is a mistaken notion to think that public sector banks are a drain on the exchequer. These banks have to give back huge funds to the government in the form of dividend payments and income tax payments.

Courtesy: Newsclick.in

The post Bank Unions Call for All India Strike on 22nd August appeared first on SabrangIndia.

 
In the decade to 2016, non-priority sector bad loans rose more than 22-fold (2166%) from when they were valued at Rs 18,300 crore in 2006. During the same period, the sector’s share in public sector banks’ NPAs rose from 44.2% to 76.7%. This growth was particularly pronounced after 2011–12-fold (1110%) in five years.
 
Public sector banks’ bad loans in the priority sector–which includes loans for agriculture, micro and small enterprises (MSMEs), small-scale industries, education, affordable housing and renewable energy–also grew during the same period, but slower. These grew five times (465.8%) from Rs 22,200 crore in 2006 to Rs 1.25 lakh crore in 2016, although their share in the total NPAs of public sector banks shrank by more than 55% (thanks to the growth of non-priority sector NPAs).
 

Source: Reserve Bank of India
 
Agriculture-related bad loans, valued at Rs 48,467 crore, comprise the third largest NPAs, after corporate NPAs (Rs 3.16 lakh crore) and MSME NPAs (Rs 74,051 crore), according to this 2016 Lok Sabha reply.
 
“For non-priority loans, NPAs result when business models go wrong. They are normally linked to sectors rather than individuals–which is the case of farm loans, where the monsoon plays an important role,” Madan Sabnavis, chief economist of Credit Analysis & Research Ltd, a ratings agency, told IndiaSpend. “An economic downturn increases chances of NPAs as companies cannot service their debt. When there is no malafide intent or managerial incompetence, it is mainly such external conditions that lead to corporate NPAs. For farm loans it is more straight-forward and linked to monsoon,” Sabnavis said.
 
RBI officials refused to comment for this story.

 
85% jump in write-offs as NPAs eat into banks’ lending capacity
 

Source: Reserve Bank of India
 
As of March 2016, 7.5% of all lending in India–by public, private and foreign banks, to both priority and non-priority sectors–amounting to Rs 6.1 lakh crore had become non-performing assets. This is more than twice the union budget for defense at Rs 2.6 lakh crore in 2017-18, which received the highest allocation among all central ministries this year.
 
This is the highest recorded gross NPA ratio in the last 10 years, RBI data show. Prior to 2014, the ratio typically remained below 4%.
 
Such high NPA ratios limit banks’ ability to lend money to productive sectors.
 
An asset quality review introduced in April 2015, through which the RBI forced banks to finally recognize their stressed assets as NPAs and record them as such on their balance sheets, was the key reason why NPA ratios apparently rose from 2014-15 onwards.
 
The review unearthed numerous cases of loan “restructuring”–giving the borrower some concessions to avoid a default–and dressing up of account books. Over a decade, NPA write-offs jumped 85% from Rs 8,799 crore in 2006 to Rs 59,547 crore in 2016, according to this 2016 Lok Sabha reply.
 
The trend is significant, a former senior RBI official told IndiaSpend. “All provisions against write-offs eat into the capital of the bank, reducing its capacity to lend. The sharp slowdown in credit growth over the past couple of years is significantly attributable to banks’ unwillingness to take on any further risk of write-offs, which would reduce their capital even further,” the official wrote in an email, requesting not to be named. From a policy perspective, he explained, to sustain nominal GDP growth of 12-13 per cent, credit should grow at least at that rate, if not faster. (Nominal GDP is estimated at current prices, not taking inflation into account, while real GDP is estimated at constant prices after accounting for inflation.)
 
This is evident from the waning stream of credit advances to both priority and non-priority sectors in recent years. While the volume of credit has risen in absolute terms, its year-on-year growth has slowed, RBI data show. Growth of lending in both sectors slowed by more than 35% — from 19.3% in 2013 to 12.4% in 2016 in the priority sector, and 11.2% in 2013 to 7% in 2016 in the non-priority sector.

Source: Reserve Bank of India
 
“If [bank] capital is being eroded by loan losses, infusions are needed, either from the government or from the market. Neither is looking feasible at the moment. So, sooner or later, slow credit growth will impede GDP growth,” the former RBI official said.

 
Commercial banks’ aggressive long-term lending caused the NPA problem
 
Most of the experts IndiaSpend spoke to for this story agreed that much of the NPA problem arose when commercial banks lent aggressively, for long durations, to the non-priority sector in the early 2000s, when the economy reached a growth rate of over 9% in 2005-06, 2006-07 and 2007-08.
 
“About half the NPAs in the system are in the infrastructure sectors. A substantial portion of the remaining are in sectors such as steel, which have been subject to various business shocks. These are mostly loans for capital expenditure and are long term,” the former RBI official told IndiaSpend. “Priority sector loans, on the other hand–crop loans, for example–are more often short-term loans for working capital purposes,” he explained.
 
The global economic slowdown of 2008 ushered in a prolonged period of uncertainty in India as elsewhere. Exports fell, some mining projects faced regulatory bans, sectors such as power and iron and steel faced difficulty getting permits, raw material prices fluctuated and infrastructure projects faced power shortages. All these factors, coming on top of aggressive past lending by banks, caused NPAs to swell, Finance Minister Arun Jaitley told the Lok Sabha in 2016.
 
During the early 2000s, when banking reforms were gathering pace, development finance institutions (DFIs) such as IDBI, ICICI and IFCI began to lose ground. DFIs had been created to provide medium- to long-term credit for industrial projects, and supplement commercial banks’ offering of short-term credit for working capital.
 
Initially, the government made low-cost capital available for DFIs, but withdrew subsidized funding in the early 1990s, leaving DFIs to rely on capital markets to raise funds. Further, a significant chunk of their loans to projects in the steel, textiles and basic chemicals sectors, among others, began to experience delays and cost escalations, turning loans into NPAs, as this Hindu Business Line report from January 2002 explains.
 
When DFIs consequently hiked their lending rates, they became uncompetitive against commercial banks that were now rapidly increasing their long-term portfolios as post-liberalization reforms had opened up the banking sector to private and foreign players.
 
“Since 2002 commercial banks started lending more long-term loans compared to earlier when the bulk of their lending was short-term–working capital and trade credits,” Pronab Sen, country director for the India programme of the International Growth Centre, a New Delhi-based think-tank, told IndiaSpend. “In 2002, short-term credit accounted for 73% of bank loans–this is down to 45% now.”
 
As of March 2016, medium- and long-term loans had touched almost 50% of total loan portfolio, according to this Hindu Business Line report from April 2017.

 
Share of corporate bad loans rose 67% after 2010-11
 
The share of non-priority NPAs in public banks rose from less than half in 2011 (45.9%) to greater than 3/4th (76.7%) of total NPAs in 2016. Meanwhile, the share of priority sector NPAs shrank by more than 55% (thanks to the growth of non-priority sector NPAs) from 53.8% in 2011 to 23.3% in 2016.
 

Source: Reserve Bank of India
 
Infrastructure lending is also implicated as a major culprit in this Economic & Political Weekly (EPW) report from March 2017, which says banks tried to push these loans in an attempt to stymie the effects of the 2008 global economic crisis.
 
As the regulator, the RBI relaxed income-recognition norms and allowed banks to restructure firms’ loans instead of allowing these to turn into NPAs. “This made it easier for already over-leveraged [or financially over-burdened] companies to borrow more,” the EPW report said. Between 2010 and 2012, the borrowing capacity of these companies further grew while their underlying financial situation worsened. By 2011, the Indian economy officially entered into a recession as demand started to slow down.
 
“From the dramatic growth years of the 2003-08 period, real GDP growth rate during 2011-13 slowed down to 6%. New projects failed to take off due to the lack of government approvals and projects that had received credit during the credit boom period got stalled owing to the general slowing down of the economy. The problem was especially acute in the infrastructure sector. This led to a fresh wave of NPAs, especially in sectors such as infrastructure, steel, metals, textiles, etc,” the EPW report said.

 
In 2016, fraud NPAs accounted for 7.15% of all NPAs
 
Commercial banks had enhanced lending for long-gestation projects even as they had little expertise or experience in assessing such projects’ creditworthiness.
 
As a result, data showed that 7.15% of total gross NPAs as on March 2016 constituted fraud, as Finance Minister Arun Jaitley admitted in a reply to the Lok Sabha in 2016.
 
“This is even an greater worry [than the growth of NPAs or write-offs] because it directly reflects that risk assessment is not strong and it’s not the external environment but lacunae in the systems that has led to this,” Sabnavis of the credit rating agency said.

 
Since 2013, recovery of bad loans has dropped 53%
 
While NPAs and write-offs have leaped ahead unchecked, bad loan recovery has failed to keep pace. Since 2013, NPA recoveries have halved from 22% in 2013 to 10.3% in 2016, RBI data show. Recovery dropped from 18.4% in 2014 to 12.4% in 2016.
 
The government has advised banks to act against guarantors of defaulting borrowers under relevant sections of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, and other laws such as the Indian Contract Act, 1872,and Recovery of Debts due to Banks and Financial Institutions Act, 1993, etc., Jaitley said in his 2016 Lok Sabha response.
 
Of the 4.6 million cases referred to various recovery channels, RBI data show, 95.7% were referred to the alternative dispute resolution forums of Lok Adalats; 3.7% for prosecution under the SARFAESI Act, 2002, which allows banks and other financial institutions to auction properties to recover loans; and 0.5% to Debt Recovery Tribunals (DRTs), which work expressly to recover banks’ and other financial institutions’ debts.
 
While the number of cases referred to these channels has risen over four-fold since 2013, actual recovery has dropped by nearly half (44%) since 2015, data show.

Bad loan recovery under the SARFAESI Act–which accounted for the most money recovered–witnessed the biggest decline, of 40% between 2015 and 2016. Though loan recovery through Lok Adalats and DRTs picked up in 2016, the loans recovered in 2016 are still lower in value than the recovery in 2013.
 
In 2015-16, banks recovered Rs 22,800 crore of NPAs, lower than the amount recovered in 2013-14 (Rs 23,300), RBI data show.
 
Corporate NPAs v. farm loans waivers
 
Besides recovering NPAs through these channels, Jaitley also said the government and the RBI have undertaken measures such as setting up a joint lenders’ forum, a strategic debt restructuring scheme and a scheme for strategic structuring of stressed assets to resolve bad loans.
 
However, these measures appear to undo the work of the RBI’s asset quality review undertaken in 2015. Debt restructuring merely helps banks brush NPAs under the carpet, experts told IndiaSpend.
 
“Treating them [non-priority NPAs] as restructured assets where you increase the repayment periods and lower the interest rates delayed the inevitable. They should’ve been recognized earlier itself,” said Sabnavis. “‘This evergreening’ of stressed assets–giving a new loan to pay off the earlier loan–is common practice. The RBI is trying to prevent this from happening,” Sen from the India programme of the International Growth Centre told IndiaSpend.
 
Although the government appears eager to give non-priority sector corporate borrowers some leeway in repayment, it is quite likely to give into loan waiver demands, as IndiaSpend reported on June 15, 2017.
 
While corporates have assets to use as collateral for more borrowings, farmers–85% of whom are small and marginal–are too poor to qualify for more loans. Further, experts reason, the central government bears the responsibility for NPA resolution and state governments for loan waivers.
 
“Farm loans do have special features such as a six-month servicing period compared to three months for other sectors and in the case of natural disasters the loans are rolled over for a period of upto three years,” Sen told IndiaSpend.
 
But these are not blanket provisions, he explains in this report published in Mint on June 23, 2017. The measures are only applicable to farmers of officially designated ‘affected districts.’ The provision was already invoked in 2014 and 2015 in Maharashtra when the region witnessed drought, alleviating distress somewhat.
 
“The year 2016-17 is different. There was no drought or any other natural calamity. The farmers’ problems are almost entirely the outcome of demonetization… practically all farmers have suffered, and there has been no rolling over of their loans. As a consequence, farmers across the country have to either agitate or face the prospect of default,” Sen wrote. “While waivers absolve the farmer of all liability, defaults entail serious consequences such as loss of collateral, if any, and loss of access to future bank loans.”
 
Last week, after reporting a spike in its own NPAs “due to farm loan waivers,” HDFC Bank warned that lenders may discontinue fresh loans to the agriculture sector, The Economic Times reported on July 28, 2017.
 
“Banks are likely to see increase in NPAs in the agriculture sector and a general worsening of credit culture… Loan waivers are likely to also impact the supply of credit as fresh lending to the agriculture sector could dry up,” the bank’s economists said in a note.
 
To be sure, waivers come with the imminent possibility of ‘errors of inclusion’–even those farmers who do not need a waiver get it–making it an expensive prospect for the state exchequer, as the HDFC economists pointed out in their note.
 
However, defaulting on farm loans exposes the sector that employs 56% of India’s workforce to a heavy penalty. It may force the most distressed and the most vulnerable out of access to formal credit and possibly out of farming as well, Sen told IndiaSpend.
 
So should lenders waive farm loans? Or should they “restructure” non-priority sector NPAs? “The main consideration here is [that] a lot of the non-priority NPAs are large and valued customers of the banks, who also have considerable political clout,” Sen told IndiaSpend.
 

  (Saldanha is an assistant editor with IndiaSpend.)

Courtesy: India Spend
 

The post India’s Non Farm-loan Debts Could Settle All Distressed Farm Loans appeared first on SabrangIndia.