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Is our RBI Governor Raghuram Rajan trying to sell Public Sector Banks?

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A very genuine fear raised by noted columnist Gurumurthy...With so much of protection available to Banks why should Rajan fear for the NPA's ...No Capital Account Convertibility, Banks are state owned with a cap of 20% FDI..There is hardly any chance of collapse..We had much higher NPA's than the expected 6.6%.


Is Selling PSBs to Foreigners Rajan's Agenda?


By S Gurumurthy
Published: 20th February 2016 06:00 AM



If news reports are to be believed, the Finance Ministry seems to be caving in to the RBI strategy to sell Public Sector Banks and is raising the limits of FDI in banks to 49% — thus virtually paving the way for handing the PSBs, which are at the heart of the national economy, to global financial interests. If the RBI Governor succeeds, it will be a disaster for India.
PSBs, the core
An obvious truth, but, that hardly figures in public discourse, is that Indian financial economy is bank-driven — more precisely, it is Public Sector Bank (PSB) centric. Economic thinkers and policy makers seem to regard the PSBs as a problem, rather than as the most valuable financial asset of Indian economy. It is undeniable that banking in India almost means PSBs, which hold 80% of the deposits of commercial banks. As the Indian economic establishment looks at only the Anglo-Saxon economies, which are market-driven — read equity market — they do not seem to be conscious that the world’s most efficient economy, Germany, too is largely bank-led. Yet another equally efficient economy, Japan, is also equally dominantly bank-led. In both Germany and Japan, unlike in the US or England, stock markets do not have primacy — either to mobilise capital or to distribute it.
Look at India’s financial structure. Nine-tenths of Indian savings is in safe investment models. More than half of it in banks. The deposits in PSBs amount to over 50% of the GDP. Besides mobilising four-fifths of deposits, PSBs are involved in building financial architecture for formalising the economy on a phenomenal scale, which the private banks cannot even think of. For example, PSBs have opened some 78% of the 20.7 crore accounts under the Prime Minister’s Jan Dhan Yojana (PMJDY).
With Regional Rural Banks accounting for 19% of the PMJDY accounts, private banks contributed just 3% of the accounts. The PSBs’ share of Mudra loans for micro businesses is 60%. Even though bank deposits yield just half as the stocks do, 40% of the Indian household savings move into banks. The celebrated stock market, which offers double the return as the banks, hardly attracts 2% of the nation’s savings. While the public prefer to put their savings in banks, they seem to have enduring trust in PSBs. The Indian economy is not just bank-led, it is PSBs-led. Yet, there is not a word about what good work the PSBs do or about their successes in the economic discourse.
Worse, the PSBs which are at the heart of the national economy are ceaselessly trivialised, derided and demeaned in the nation’s economic discourse. Their failings are highlighted and their merits suppressed. The dislike for PSBs appears more ideological — and less logical. The main objection to the PSBs is that they are state-owned.
The ideology is that if the PSB ownership is turned private, they will become efficient — because efficient market theory abhors public ownership. It needs no seer to say that the private global banks regarded as the biggest and the best in US had all but declared bankruptcy in 2008. They had to be rescued by government. Private ownership, while it may promote efficiency, does not assure solvency. In fact, their super efficiency itself led to bankruptcy.
Global banking complexity
Recently (Feb 16, 2016), Bloomberg wrote a chilling analytical story titled, “The European Banks face a frightening future”. They are all celebrated global banks — Royal Bank of Scotland, Barclays, UBS, Credit Suisse, Deutsche Bank, UniCredit and Standard Chartered.
But they had laid off close to 75,000 employees since 2008. In 2008, the experts said that the crisis happened because of lack of regulation. According to Bloomberg, now the banks say that, “regulation has made the world more dangerous”. The chairman of the Eurogroup, made up of Euro area’s finance ministers, countered, “Don’t say we have over regulated the banks” adding that it is the opposite, as what is impeding economic recovery are “the effects of a financial crisis” which was “not caused by over regulation”.
The truth is that the banking industry in the West has become complex. The truth again is that they are struggling over how to become simple again! Say Bloomberg analysts: “In the end, the banking industry troubles can be traced to one thing — the cost of complexity. From the moment the banks went global in the late 1990s, skeptics decried these behemoths are too big to manage, let alone too big to fail. But the institutions thrived on the very creation of complexity in their products and in the markets.”
Former Deutsche Bank CEO Josef Achermann said, “There’s once again a flight to simplicity. That is what the regulators are demanding… The unbundling of banking services is undoubtedly complicated and perhaps even fraught with unseen dangers. And it is really all about getting back to basics.” There is a message for India in the Bloomberg report. What is the problem of these banks? They are not banks as the Indian economy or people or law understand. Indian law defines banking as “accepting for the purpose of lending or investment of deposits of money from the public”. This is simple banking. If these global giants, who had complicated the idea of banking and messed up themselves, their and world economy, bought out the PSBs, would they manage them better? Or mess them up as they have messed up themselves?
Sledge hammer approach
The RBI is applying the Basel banking norms developed for the complex banking business of the West on the Indian banking system which is simple but highly regulated. Applying Western banking norms for provisioning for Non-Performing Assets (NPAs) in Indian banks is to apply the rules of the rogue Western game of Rugby for the simple local game of Kabaddi. One simple differential is sufficient to show how inappropriate are the provisioning rules of Western banking to Indian banks. The provisioning rules are intended to ensure that depositors and investors are protected.
The Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) together absorb and protect 27.5% of bank deposits. Actually, Indian banks’ investment is almost close to 30% in government securities. Therefore, over 35% of the bank deposits are protected by government securities. Nowhere in the world such actual security cover is available to depositors. Again, the Indian banks protect and de-risk themselves by personal guarantees and collaterals. None of these realities are reckoned by the RBI in devising its “sledge hammer approach”, as a leading banker described Raghuram Rajan’s fiat to banks — particularly PSBs — to provide for stressed assets or get lost.
RBI looks to West
What is the extent of NPAs which is making the RBI governor restless? A report in the Forbes magazine (Feb 16, 2016) says, quoting Credit Suisse, that the NPA levels of Indian banks would move to 6.6% by March. The Indian banks have reported much higher NPA levels in the past. NPAs remained around 8-9% from 2003 to 2011. Thereafter, it began declining — to 6.5% in 2012, 4.5% in 2013 and 4.9% in 2014. When the economy was doing very well between 2003 and 2011, the NPA levels have been far higher.
The sledge hammer approach should have been adopted then, when the banks and the economy could well have absorbed it. Nations pass through such phases. The NPAs in Japanese banks ranged from 8% to 9% in the 1990s till 2001 and it was 7.5% in 2002 (BIS paper No 46 May 2009) and only thereafter, it began to fall. Despite the NPAs exceeding a $ trillion, the Bank of Japan did not take the sledge hammer in hand, like Rajan is doing.
The Japanese banks, which were all private, were not writing off bad loans because of inadequate capital — like the PSBs. Yet, the banks were not compelled to provide for bad loans, because that would have caused imminent crisis of confidence in the banking system. The government stepped in to support the banks with public funds to the extent of 30 trillion yen. Whenever private banks face crisis, the government becomes the ultimate saviour. This was true of the Japanese banking crisis of 1990s and of the US financial crisis of 2008. When the State steps in, confidence gets restored in private banking. That is not the case here. There are three critical differentials which are the protective walls of the Indian financial system and Indian economy.
First, there is no capital account convertibility which will expose Indian banking to global finance. Next, India has rightly not opened the banking system to foreign investment. Third, PSBs are state-owned. These three basic facts ensure that PSBs face no imminent threat. Threat to banks from NPAs is imminent when they are privately owned; they are open to foreign ownership and the currency is full convertible. Disregarding the basic strengths of the PSBs, Rajan appears to turn a prudential issue into a banking crisis. Would Rajan have taken the sledge hammer if the PSBs were privately owned? He would never have because that would have set off a banking crisis. Is he then doing it only because the PSBs are state-owned banks?
Design to sell PSBs to foreigners?
The RBI’s NPA policy appears to be more the outcome of an ideological accountant’s mindset than the product of a practical banker’s wisdom. When the world over, central banks are buying stressed assets and junk bonds held by banks to de-stress the banks and make them carry on their business, Rajan is doing precisely the opposite. He is coercing the banks to provide for NPAs, when he knows that they do not have the surplus to absorb the loss.
It means the banks will need to be recapitalised to the extent of losses. Here Rajan goes one step further and virtually makes it impossible for the government to recapitalise. He is morally coercing the government to meet the fiscal targets. That is not his domain. That is the sovereign business and Parliament’s function. He knows that if the government were to cut fiscal deficit, it cannot recapitalise the PSBs. Is he then compelling the government to privatise the PSBs? That is, forcing the government to sell them to foreign banks as the scale of capital needed to buy the PSBs is not available with private corporates in India.
If news reports are to be believed, the finance ministry seems to be caving in to the RBI strategy to sell PSBs and is raising the limits of FDI into banks to 49% — thus virtually paving the way for handing the PSBs to global financial interests. If Rajan succeeds, it will be a disaster for India. But it is bound to do good for Rajan, as the world of free market will idolise him for privatising and globalising the hardcore of Indian financial system — the PSBs. His CV will become the most sought after when he retires in the coming winter. Why then should he bother about what happens to India? But surely, the Modi government should be bothered about India. Isn’t it?
The author is a well-known commentator on economic and political affairs.

http://linkis.com/newindianexpress.com/IGTjb
 
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RBI Governor Raguram Rajan and the Department of Banking Operations and Development in RBI,
have no powers on their own to privatize PSUs / sell PSUs to FDIs.
The role of RBI ..as regulator of banks would not empower them to take any major policy decisions on their own.

Only Finance Minister and the Banking Divisions, Ministry of Finance, Govt. of India, could……….after passing the necessary bill in Parliament and enacting it , act in this direction of privatizing the PSUs / selling the PSUs to FDIs…as the case may be.

Mr. S.Gurumurthy and Indian Express who with all their soft corner for BJP, have been soft pedalling in their media, are well aware of these fact.

Perhaps they don’t want comment upon Arun Jaitley or Modi directly, chose to hit at Raguram Rajan .
 
RBI Governor Raguram Rajan and the Department of Banking Operations and Development in RBI,
have no powers on their own to privatize PSUs / sell PSUs to FDIs.
The role of RBI ..as regulator of banks would not empower them to take any major policy decisions on their own.

Only Finance Minister and the Banking Divisions, Ministry of Finance, Govt. of India, could……….after passing the necessary bill in Parliament and enacting it , act in this direction of privatizing the PSUs / selling the PSUs to FDIs…as the case may be.

Mr. S.Gurumurthy and Indian Express who with all their soft corner for BJP, have been soft pedalling in their media, are well aware of these fact.

Perhaps they don’t want comment upon Arun Jaitley or Modi directly, chose to hit at Raguram Rajan .

By selling the better managed PSBs to foreign investors or investor groups, Modi Sarkar can get a very large inflow of foreign exchange. Side by side, RBI governor will also get himself rid of the problem of sick (but not actually admitted) PSBs. Two mangoes with one stone!

The third mango, tentative, is a lucrative assignment to Rajan after his term gets over!
 
They may be willing to sell, but is anybody willing to buy?

There are a lot of FIIs there ,to buy any thing in India.

Some Indians are also capable of buying but they could not show the source.
Let the Modi & co really come out with the proposal to sell the "made in India Banks" before establishing the "make in India" projects.
Selling does not mean selling in Toto; only reducing Govts. stake in PSU banks less than 50%.
 
So far we have not had a Banking led crisis similar to the US melt down of financial institutions in 2008...Now with this foreign funding we do not know what is in store for us...Let us oppose FII investment without batting an eyelid
 
So far we have not had a Banking led crisis similar to the US melt down of financial institutions in 2008...Now with this foreign funding we do not know what is in store for us...Let us oppose FII investment without batting an eyelid

The problems faced by Indian Banks, are the mounting NPAs.
It is mainly because of two factors.

1. The outstanding in the loan account of Govt. sponsored schemes and priority sector advances.In this area banks incur a over all loss of around 30 %. Balance could be made good by insurance cover.

2. The major chunk of NPAs which cause concern to the banks are from large Industries. These Industries often packet the influential people of the party in power. They are wilful defaulters also.

e.g. Vijay Mallayya who shows head and tail to many political parties and have also won the soft corner of the FM on account of his IPL connections.

If the Govt., irrespective of the party in power, is strict and straight forward and pave a way in extending its

support in taking over the assets of these companies and attaching the personal assets of the Directors of the

companies..............................then the position of Indian PSU Banks would be Rosy in their book of accounts.


The position of the majority of PSU Banks are not that much weak as inferred by some innocent members.

For example, one of the Banks having its Chennai Main Branch in Rajaji Street (Ist line Beach). The book value of that palatial building is just Rs 1/- (Rupee one .....100 paise only). So also is the case of their own Buildings in many places....value underwritten a thousand times . This is all part of secret reserve.

Many of the intrigue matters could not be discussed thread bare in this forum.
 
We are stuck on no growth path leading to more NPAs in banks due to distressed projects in various sectors like metals , mines,and long gestation govt projects

RBI has been targetting inflation and govt has fiscal deficit reduction as objective.

These measures would have been excellent in years of global growth about a decade back . Now a stimulus and spending is required by govt which is not possible with

fiscal deficit control. If the govt spends it on infra projects , results will come after a year or so . If it spends on subsidies for food or MNREGA, there are hardly any

returns. Revenue collection has hardly grown and govt debts are multiplying. So it is a grim economic picture.

So there is no money even to recapitalise banks to a large extent.

What is getting ear marked for recapitalisation is around 57000 cr which is not large enough.

Perhaps there is no alternative to dilute the stake to some extent if not to 51%.
 
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The problems faced by Indian Banks, are the mounting NPAs.

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Many of the intrigue matters could not be discussed thread bare in this forum.

I don't think that there are intriguing factors which can't be discussed in the Forum. Priority sector and small loans do not even constitute any significant share of the total NPAs. What actually is happening is that, because of (thanks to, that is) our Indian system of running accounts like cash credit and overdraft, instead of the simple, straightforward and honest loan accounts, most large borrowers are able to have permanent (i.e., never repayable) borrowings from banks and it has become the headache of the bank officials and management to somehow hide all these permanent bad debts and also the periodical interest on such borrowings which are seldom paid out of the borrowers' own resources.

Vijay Mallya is only an unlucky exception; there are hundreds, if not tens of thousands of "fortunate" borrowers.

A few pieces of real estate like Beach Road building will not even be sufficient for 0.000001% of the real bad debts which the bank has.

Thus, most of our banks — both public and private sector ones — are financially not in the pink of health.
 
Sangomji is quite right. I doubt FIIs would buy entities which are just shells for NPAs. Unlike GOI, the FIIs don't run charities.
 
I don't think that there are intriguing factors which can't be discussed in the Forum................................
A few pieces of real estate like Beach Road building will not even be sufficient for 0.000001% of the real bad debts which the bank has.

Thus, most of our banks — both public and private sector ones — are financially not in the pink of health.

If, the news / points / data /truths / ….which are all already published / come out in the media ………………………could be analyzed and discussed.

In case of the details in any matter…. which are yet to be made public… the genuine apprehension of a person even if it happened to be a truth / tit bits of vital news & information and truths, about the financial activities of individuals and companies / some data / details etc…. that all one could have come across /have access to ….in life / in one’s experience / official carrier………….. are all have some intriguing factors.

Which of them all shall be divulged and discussed and which all shall not be ……….that too in an unknown forum with unknown individuals who are all just engaged to cherish/ relish / take pleasure in chewing / discussing matters of importance.
In my view, I can have my own limitations in discussing certain things without attracting the unwarranted legal consequences either to me or to the moderator.
 
Sangomji is quite right. I doubt FIIs would buy entities which are just shells for NPAs. Unlike GOI, the FIIs don't run charities.
In India you can never say never.
It might be conduit for bribe, If you buy this shell you get to buy a profitable entity at a discount. Then the NPA shell will be sold.
But you are right no one in their right mind would buy NPA.
 
FIIs don't run charities; but Govt of India have to.

Banks were nationalised during the period Indra Gandhi, only with some social objective.

All policies are conceived as good; but executed in worst.

The poor get the benefit of a few thousands; Thousands of ...many such Mallayyas benefit in billions.

How? Only because of corruptive politicians.

In India dishonesty is the best policy !!
 
Selling will be a sell-out to foreigners and looting of the common indian.
Instead professional management with performance-linked benefits/promotions is to be introduced in all the PSBs.
Today, once any amar, akbar and antony gets into these PSBs, they put up their feet on desk and relax till retirement.
 
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