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Thursday, August 27, 2015

Bank Reforms Can't Be Shots in The Dark: Rajan

Rate cut hopes can wait as RBI annual report says inflation still at upper limits

Raghuram Rajan | Photo: Kamlesh Pednekar
Reserve Bank of India (RBI) has warned that the slow pace of reform in the banking sector will lead to greater risk.

“Reforms cannot be shots in the dark, subjecting the economy to great uncertainty and risk,” RBI Governor Raghuram Rajan wrote in the overview of the central bank’s annual report for 2014-15, released on Thursday.

He also wrote: “Wherever possible, we have to move steadily but firmly, ever expanding the scope of reforms, while always limiting the uncertainty they create.

“The Chinese term ‘Crossing the river by feeling the stones’… is an appropriate metaphor to guide our own reforms.”

The governor stressed the need to put reforms of the banking sector, reeling under asset quality pressure, on the fast track.

Stressed assets — gross non-performing assets and restructured advances — in the banking segment were above 11 per cent of their total advances as on March end.

“The current stress in the banking system suggests that the real economy will not wait for the banking system, and a slow pace of reform could lead to greater, rather than lower, risk residing in the banking system,” Rajan wrote.

The government has recently announced some reforms in the banking sector such as setting up of a Bank Boards Bureau for appointments and splitting of the chairman and managing director’s post.

While welcoming the move of the government to allocate higher capital to public sector banks than what was budgeted, Rajan said the central bank will look forward to the legislation of the bankruptcy code and the Financial Resolution Authority for addressing the distress of financial institution.

The central bank also dashed hopes of any steep interest rate reduction in the future as it feels inflation will inch up to the upper band of its comfort zone.

While retail inflation — the central bank’s main gauge for price increase — dipped to a record low in July, it is expected to increase from September, as a favourable base wanes.

“Inflation projections for January 2016 are still at the upper limits of the RBI’s inflation objective,” he said. The annual report pointed out that household inflation expectation returned to double digits in the June quarter.

The central bank has targeted six per cent inflation for January.

“Inflation developments will warrant a close and continuous monitoring as part of the overall disinflation strategy that required inflation to be brought down to five per cent by January 2017,” the RBI governor said.

On economic growth, the central bank said it was still below what the country is capable of but the outlook for growth is improving gradually.

Indications from the first four months of the current financial year show RBI’s baseline projection of output growth of 7.6 per cent for FY16, up from 7.2 per cent in the previous financial year, in on track.


Balance sheet
  • RBI balance sheet expanded 10.1% in FY15 on rising foreign currency assets
  • Transfers Rs 1,000 crore to reserves for infusing capital in NHB1
Monetary policy
  • Modern monetary policy frameworks focus on price stability
  • Heavy dependence of banks on retail deposits hurts monetary transmission
  • Base rates are sticky and impeding monetary policy transmission
  • Banks unwilling to cut base rates
  • Benefit from debt management agency is small as govt on fiscal consolidation path
Asset quality
  • Judicial process tends to hamper the ability of creditors to collect their dues
  • Some large promoters take advantage of a bank's fear of an asset turning into a NPA
Human resource
  • Public sector banks’ efforts to get talent hampered as they are not able to pay enough
  • Public sector banks’ public interest activities not fully compensated
  • Govt payments should route through Jan Dhan accounts; remunerate banks appropriately
Digital & customer service
  • Average value of mobile transaction beats credit, debit card
  • Reviewing if banking ombudsman system should be extended to other institutions

 Reference -

Wednesday, August 26, 2015

Govt May Pare Stakes in Some Banks to 33%

Boards bureau & investment company steps toward privatisation, says official

The government is considering a proposal to privatise some state-owned banks in phases, according to official sources.

A proposal for setting up a holding company two years down the line will be the first step in this direction. The Bank Investment Company, which will replace the proposed Bank Boards Bureau, may pare its stakes in public sector banks to 33 per cent. "Privatisation is definitely on the agenda, else we would not have talked about the Bank Investment Company," said an official who did not want to be named.

The setting up of the Bank Investment Company will require repealing the Bank Nationalisation Acts of 1970 and 1980, the SBI Act and the SBI (Subsidiary Banks) Act. Besides, the public sector banks will need to be incorporated under the Companies' Act. (ROAD TO PRIVATISATION)

"The Bank Investment Company will require legislative changes. We will still control the Bank Investment Company, but it need not control 51 per cent in public sector banks. Rather it could control 33 per cent," the official said.

Finance Minister Arun Jaitley announced a seven-pronged strategy called Indradhanush two weeks ago to improve the performance of public sector banks.

The bureau will be an interim mechanism till the Bank Investment Company comes into being. It will be functional from April 1, 2016, essentially selecting heads of public sector banks and help them develop strategies to raise capital.

A holding company structure for public sector banks was mooted by former finance minister Pranab Mukherjee in 2012 to address their capital needs.

"The Bank Boards Bureau is the interim measure and after a couple of years, we will probably go for it (the Bank Investment Company)," said Hasmukh Adhia, secretary, department of financial services.

Recommendations by former Reserve Bank of India governor M Narasimham in 1998 were accepted by Yashwant Sinha, the finance minister in then National Democratic Alliance (NDA) government. But these failed because of intense political opposition.

The recommendations said lowering the minimum government holding to 33 per cent in public sector banks would allow them to meet minimum capital requirements. The P J Nayak committee also recommended last year the government cut its stake in public sector banks to below 50 per cent.

"It is a staged way of going about privatisation. That is how you have to build support," said the official. "It is not going to be easy to have it passed by the Rajya Sabha, where it will be resisted by the Left and the Congress."

The reduction in the government shareholding below 50 per cent will free public sector banks from oversight by the Central Vigilance Commission, the Right to Information Act, and constraints on employee compensation.

Experts, too, feel the government has enough elbow room to divest in banks. "There is ample headroom for the government to dilute equity in PSBs and still retain ownership. However, the important thing is to improve capacity of management to take decisions, and provide continuity of leadership," said Shinjini Kumar, leader, banking and capital markets, PricewaterhouseCoopers.

Reference -

Markets, rupee bounce back from Black Monday

Risk Appetite Returns After China Slashes Interest Rates

Indian stocks and the rupee bounced back on Tuesday, reflecting positive investor sentiment in other Asian and European markets, from their biggest single-day loss in six-and-a-half years.

On Monday, the Indian markets lost $100 billion (Rs 7 lakh crore) and global equities worth $2.7 trillion were wiped out, following a sharp drop in Chinese equities and fears over a slowdown in the global economic growth engine.

But on Tuesday, the BSE Sensex ended 290.82 points, or 1.13 per cent, higher at 26,032.38, while the broad-based Nifty rose 71.7 points, or 0.92 per cent, to 7,880.7. The rupee appreciated 0.8 per cent to 66.1 a dollar compared to its previous close of 66.65.

ALSO READ: Worried about falling market, weakening rupee? Here's what you can do

After the Indian markets closed on Tuesday, People’s Bank of China — the country’s central bank — announced plans to cut its one-year lending rate and infuse long-term liquidity. The announcement boosted European equities and US futures indices — the pan-European Stoxx 600 rose over four per cent and Dow Jones traded over three per cent higher, indicating another potentially positive session for Indian equities on Wednesday.

“Fundamentally, nothing has changed in the Indian markets from where we were a few weeks ago, and the long-term growth opportunity remains intact,” said Kaku Nakhate, president and country head, Bank of America Merrill Lynch.

“Markets may be near-term choppy, ahead of the Fed announcement, but in the long term India will be a winner.”

ALSO READ: How does a falling rupee affect you?

On Tuesday, the benchmark Sensex swung wildly in an 826-point range, during which it fell to its one-year low of 25,298. Short covering and bargain hunting led to a sharp recovery in several counters, said experts. The broader market sentiment, however, was mixed, with nearly one share declining for every advancing on the BSE.

Worryingly, the heavy selling by overseas investors seen over the last few days continued unabated. Foreign investors sold shares worth over Rs 2,000 crore, extending their sell-off to nearly Rs 10,000 crore in the past one week. Reserve Bank of India (RBI) once again tried to allay concerns over the slide in the markets and the rupee, saying that these were repercussions from the global events, but India was on the right path.

ALSO READ: 5 reasons why the Sensex tanked 1,624 points on Monday

“I would believe that in the medium to long term, we are on the right path. The reform agenda is progressing in the right direction. Having said that, we are at a stage where we cannot be disconnected from the global events,” said RBI Deputy Governor S S Mundra, on the sidelines of a FICCI-IBA banking seminar. On Monday, RBI Governor Raghuram Rajan had assured the Street that the central bank will have no hesitation in using foreign exchange reserves to reduce volatility.

Outgoing Finance Secretary Rajiv Mehrishi said markets would not always the best indicators of economic health. “The decline in our markets decline on Monday was in line with most of the developing economies. India has relatively less to worry because our macro-fundamentals are in place. Inflation is under control, decline in commodity prices helps us since we are a net exporter, and our current account deficit is very much under control. For India, this may be an opportunity to build on its strengths further.” 2

Domestic investors were once again strong buyers on Tuesday, purchasing shares worth nearly Rs 2,000 crore. On Monday, domestic institutions had pumped in over Rs 4,000 crore into the market.

Mutual fund managers said they had received robust investor flows into their equity schemes in the last two days.

Vedanta gained nearly eight per cent — the most among Sensex 30 stocks, followed by Tata Motors, which rallied 6.3 per cent and Coal India, which gained 5.2 per cent. Indian Oil, in which the government sold shares worth Rs 9,300 crore on Monday, gained 4.4 per cent.

Reference -

Tuesday, August 25, 2015

Odisha Will Offer to Sell Iron ORE to Posco for Steel Project

State willing to reserve mine if SAIL, Posco enter a joint venture for Paradip project

The Odisha government will at a meeting on Tuesday ask Posco to buy iron ore at market prices from Odisha Mining Corporation for its $12-billion steel project in the state.

The Cabinet secretary, mines secretary and the Odisha chief secretary and mines secretary will meet Posco executives in New Delhi to discuss issues that have been holding up the project for 10 years.

After protracted agitation over land acquisition and delays in environment and forest clearances, uncertainty over allotment of captive iron ore mines has again put the project on the back burner.

The enactment of the Mines and Minerals Development and Regulation Act in January quashed Posco’s hopes of being accorded captive iron ore mines on preference. The law requires all mines to be auctioned.

“As the Centre has said Posco is not eligible for a mining lease on a preferential basis, we will offer them long-term iron ore linkage through Odisha Mining Corporation,” said a senior government official.

He, however, ruled out the possibility of the Centre making an exception for Posco, as requested by the state government. Such action would lead to demand for similar concessions from other steel makers, he added.

Odisha has another plan if Posco says no to buying iron ore from Odisha Mining Corporation. It may ask Posco to enter into a joint venture with a public sector steel company such as Steel Authority of India (SAIL) for the project. In that case, an iron ore mine can be reserved for the project.

Posco had signed an agreement with SAIL in 2011 for setting up a three-million tonne steel plant in Bokaro, but it did not materialise because both sides wanted majority stake in the venture.

Posco will need 13 million tonnes of iron ore a year to feed the eight-million-tonne steel plant it plans to set up in the first phase near Paradip. The Odisha government had suggested granting Posco a prospecting licence for the Khandadhar mines, but before the Centre could approve it, the new law came into force. “There is confusion whether Posco will set up the Odisha project. A clear picture might emerge tomorrow after the meeting,” said R P Panda, an industry analyst.

 Reference -

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