Banking, Uncategorized

Demonetisation Success

There is a strong narrative being pushed, by those who want to discredit Demonetisation, that funds that has been deposited into bank accounts is all “white” money. This is not true. What matters, and how the distinction needs to be made between black and white, is to determine whether funds – held either in cash or in bank accounts – has been declared for tax purposes. What this means is that any amount – whether held in cash or deposited in your bank account – can be and is “white” money provided the funds have been declared in your tax return.

Based on analysis of data at their disposal, tax authorities have raised queries with more than 18 lakh bank account holders to explain the source of the funds deposited into bank account during the remonetisation period. The amount so detected reportedly runs upto some Rs 3.5 lakh crores. Till a satisfactory clarification is received by tax authorities, such amounts are being treated as unexplained black money. ]

There is also the claim by many who should know better is that only a minuscule amount of counterfeit notes have been detected and therefore there is very little or no fake notes. There has been a standard procedure in place for years that enjoins upon a bank branch to report any fake note tendered by a customer should be reported to the police. The police will conduct an enquiry to determine from where and how the fake notes came to be held by the customer. In practice, branches avoid getting their reliable customers into trouble by just returning the notes to the customer asking them to destroy them. The point is that fake notes in circulation do not come into banks, and to therefor claim on that basis that fake currency notes do not exist is wrong.

Tax authorities and the finance ministry are also aware that staff at several bank branches colluded with some well-heeled customers to fraudulently exchange their 500/1000 rupee notes using dormant accounts and shell company accounts. Jan Dhan accounts have also been extensively used to launder money. Ongoing investigations in this regard would certainly throw up anomalies.

Banking, Uncategorized

Bad loans in banks

Banks, particularly PSBs, seem to be in the news for several wrong reasons, including bad loans, restrictions on lending, reluctance to lend and so on. Most PSB Chairpersons also seem to have gone into hibernation with no real attempts being made by any of them to change this narrative.

It is not as if bad loans in banks have suddenly come up. What matters is how the situation is handled by the banks, RBI and the borrowers. The bankruptcy and insolvency code is now being held up as the ideal solution, with the result that is fast becoming the only solution instead of it being the very last.

Raghuram Rajan should probably be remembered as among the most disruptive Governors of Reserve Bank of India (RBI). Riding roughshod like a cowboy, issuing g ultimatums to banks, has not helped the situation at all. All it achieved, at least in the short run, is that banks ended up with red splashed all over their balance sheets. Meanwhile Rajan merrily went on making one political statement after another making him a darling of Page 3 celebrity bimbos. The sort of dire consequences being bandied about if his tenure was not extended have all turned out to be so much nonsense.

Any viable solution to the acute problem of how the bad loans are to be recovered need a coordinated effort by the Government, RBI, banks and borrowers. If there are more than 2-3 borrowers in the same industry facing a problem is servicing their debt, it means that industry association should be called in to address common problem. Not every debt is because of fraud or misappropriation, there could well be issues that the government should take up and solve. Simply filing for bankruptcy is not the solution.

First of all, the whining by PSB Chairmen should be stopped. If any of them can’t take the heat, they would do well to quit. Pandering to their paranoia should be avoided at all costs. Let each of them take ownership of the bad debts in their respective banks and offer solutions. The government should facilitate interaction being banks so that it becomes a group effort. There has to be a clear distinction between longer term infrastructure loans and short and medium term loans and working capital loans. The problems in each such category need different approaches. RBI should be involved to help banks arrive at solutions. Simply threatening banks serves no purpose.

Every PSB Board has continuously had representatives of the Finance Ministry. What were they doing all this time to fulfil their primary responsibility? If some borrowers were favoured, why did they not raise red flags? All the larger bad loans were sanctioned and disbursed at least 4-5 years ago.

The Finance Ministry now needs to get their act together. If needed, retired bank officials can be recruited on 2-3 years contract, to focus entirely on loan recovery.

Banking, Uncategorized

Role of Development Finance Institutions

Financing of long gestation projects is very different from short and medium term lending that a commercial bank is best suited for and each calls for very different skill sets to manage and operate. This was the logic behind India setting up development finance institutions (DFIs) like Industrial Credit & investment Corporation of India (ICICI), Industrial Development Bank of India (IDBI) and Industrial Finance Corporation of India (IFCI). Each of them had well-defined and slightly different goals and each of them targeted a different clientele.

When in 1994 and soon after, ICICI and IDBI both promoted commercial banks, they kept the distinction between project financing and commercial banking separate. The ICICI Bank and IDBI Bank both recruited and staffed themselves with experienced commercial bankers, with a lot of hard core banking background, and they both succeeded in establishing themselves.

With different profiles and skills needed for each of these organisations, it became logical to recruit Engineer MBAs in DFIs as they seemed to have the required skills to appraise long gestation, large capital projects and monitor lending to such projects effectively. The commercial banks however needed those with entirely different skillsets – graduates and post-graduates in commerce or similar backgrounds who could be recruited and trained.

ICICI and IDBI meanwhile continued their project financing activity but they were facing tremendous pressure – political and otherwise – to keep lending to manufacturing and infrastructure projects which were facing problems. Asset provisioning norms were far more lax at that time, and taking advantage of that, DFIs went on lending to projects that were in trouble under the mistaken hope that they could be revived. For sure, some projects were revived and did well, many others did not.

ICICI and IDBI were also facing scarcity of resources as repayments were not coming in on time. ICICI had been permitted to float tax-savings bonds on which interest they paid was almost equal to that paid by commercial banks on their term deposits. Commercial banks on the other hand, had access to low cost demand deposits. Discussions were therefore floated to merge the two DFIs and their respective commercial banks. This per se would not have been a problem if, after the merger, the basic difference between project finance and its management, was kept separate from commercial short and meium term lending. Also it was necessary to keep the skill sets separate and maintain that distinction in the merged entities. This did not happen in practice.

Once the mergers actually happened, the MBAs who came from the DFI with a larger asset base were placed in positions of authority over the experienced commercial bankers and began to interfere in their domain. This obviously led to severe HR issues and the experienced bankers started to leave their organisations and look for other opportunities. The MBAs obviously had no clue as to how a commercial bank was to be run and tried to implement processes and ways of doing business more attuned to project financing leading to complete confusion.

Meanwhile with the distinction between project lending by DFIs and commercial lending by banks no longer there, other commercial banks also started to get requests from their clients for project lending, something they were not really competent to properly appraise and monitor. With the freeze on hiring, and inability to pay market related salaries, PSBs were constrained from recruiting the right staff who may have better been capable of appraising larger projects In a holistic way.

The blurring of roles made a mess of the asset quality of both the newly merged ICICI Bank and IDBI Bank, as well as the larger PSBs. The experienced commercial bankers who were first recruited into ICICI Bank when it was first set up, and formed the bedrock of its successful foray into commercial banking, started to get side-lined, and quit in droves through sheer disgust. The few who remained were treated as people of no consequence and obviously felt no compulsion to contribute much more than just what they needed to survive. IDBI Bank, being in the public-sector, treated their experienced bankers far better, and therefore they are in a much better position in terms of banking talent, although they have other problems like corruption and below par efficiency to contend with.

If this situation is to be rectified, there is an urgent need to go back to the original position of maintaining a separation between project lending and commercial banking. While a de-merger of the erstwhile DFIs in not an option, what can be done is to reinstate separate divisions in IDBI Bank and ICICI Bank which will focus on their role as project financing specialists. The PSBs and the rest of ICICI/IDBI Banks can then go back to what they do best, that is commercial banking.

The bad loans relating to project lending should also be assigned to the project finance divisions to manage. This includes bad loans related to project lending by PSBs. It is time to recognise that each bad loan needs to be looked at separately and distinctly, if any serious attempt is to be made to recover then. Setting up a general bad bank will not solve the problem, and it is good to see that this proposal seems to be no longer on the table.

Banking, Uncategorized

Bank Lending & Corruption

There was reportedly a recent meeting of public sector bank heads in Delhi with the Finance Minister. The meeting was ostensibly to discuss something related to bad debts, but the emphasis of the discussion, as per press reports, was on the “fear” of bank heads pursuant to the action initiated by CBI against a few officials of one bank. It is extremely surprising that some of the generally well considered, efficient, competent chairpersons of banks were vocal about such irrational fears. It is also interesting that a similar fear was not expressed as vocally when the Chairman of another bank was arrested on corruption charges some months back. There is no evidence to suggest that there is any witch-hunt on against bank boards or officials.

India needs growth and banks play a very vital role in this. Any commercial decision carries with it a reasonable risk of it going wrong. Similarly some decisions might well turn out to be turning points for both the banks and their borrowers. What matters is whether decisions are taken with a clear conscience and with integrity, taking all known risks at that point of time into consideration. The Bank Board Bureau (BBB) under the ex-CAG Mr. Vinod Rai is not there to oversee every bank lending decision and to have bank bosses take a stand that every decision of theirs with respect to lending should be approved, prior to disbursement, by the BBB is nothing short of weird.

There is supposedly a freeze on lending by banks because bank chairpersons and officials are wary of taking decisions. These people have been put in their positions at high salaries to do a job which means they put the funds at their disposal to the best possible use, which includes lending to good borrowers. If they are going to offer lame excuses and avoid their responsibilities, what justification is there for them to occupy those high positions? They would better serve the organisation by quitting and allowing someone else who is willing to do the job they are supp0osed to do to do it.

The hype about increasing bad debts does not help anybody. Certainly there is a problem that needs to be tackled. In this investigative agencies also do have a role. Wrongdoing, if any, whether of corruption or of undue influence, needs to be identified and taken to its logical conclusion, as per the laws in force. This in no way implies, or should be taken to mean, that there will be unreasonable action again bank officials. Only where justified, the agencies and courts will and should do what they are expected to do.

Any Chartered Accountant or Project Consultant worth his or her name can come up with a glossy and attractive project report for almost any project with rosy projections and supposedly attractive returns. It is upto savvy investors and knowledgeable and experienced bankers to separate the wheat from the chaff, and take up the proposals that look good to them. In this there is ofcourse no guarantee that every decision will turn out to be correct, but as long as the bankers can show that they took all reasonable precautions, neither investigative agencies nor courts should commonly find fault.

Bank debts turn bad or doubtful due to various reasons internal or external to the particular enterprise. That there has been political pressure in the past to lend to a particular borrower is hardly a secret particularly given that bank board appointments have largely been influenced by political considerations. Similarly, there has been corruption within the bank too. However, not all decisions have been unduly influenced and many top bank officials have maintained their integrity despite such pressures. This is indeed creditable and needs to be appreciated.

Many infrastructure projects were stalled due to land acquisition and other external issues, and the companies which borrowed for such projects have been unable to repay. The government has made quite a lot of progress in sorting out some of these issues and this process is ongoing. This will in turn start to show up as marked improvements in the bad debts position. However, it is a fairly long process and will take time. Banks will therefore continue to be saddled with such loans remaining doubtful of recovery in the immediate future. This may well constrain those banks from lending too much more. However, to take a stand that banks will not lend till all these issues are sorted out is clearly self-defeating and it is time the government steps in to rectify this position, improve sentiment and ensure that viable projects, which are vital for the country continue to get the funds they need at the right time.

Banking, Uncategorized

ATMs and Demonetisation

With the Reserve Bank of India (RBI) restoring currency notes supply to banks to around 80-85% of pre-demonetisation levels, most if not all ATMs should have their normal supply of cash.  Agencies handling ATM replenishment have also by and large confirmed normal levels. Yet many ATMs still show inadequate levels, and where available, dispense only Rs. 2,000 notes. This obviously means people are withdrawing more than they need and many are hoarding notes of small denomination notes as a panic reaction to the previous temporary shortage.

Senior citizens are by nature wary about using debit or credit cards, ATMs or any other online modes of payment. They also hold a certain level of currency at home to meet unforeseen medical and other emergencies. However, they did this even prior to demonetisation so all they did is to deposit the banned notes they had with them and withdraw almost the same level of new notes. Overall this would not affect the stock of currency at ATMs.

What has therefore altered at least for the time being is behaviour of younger bank customers. For no apparent reason, many are reacting in panic and hoarding currency particularly in smaller denominations. Given that many have now started to rely almost entirely on cards and online payments, the demand for currency should by now have gone down considerably. This is also what the RBI has planned for, and therefore if withdrawal from ATMs remains more than needed, other customers, who as a result have to return empty-handed, get affected badly.

Prior to demonetisation, most smaller retail outlets like grocers, vegetable and fruit vendors, gas agencies, smaller hospital, pharmacies, laundries and many others dealt almost entirely in cash. After banks and the government introduced several alternatives, many of them have since shifted to accepting, wherever possible, cashless payments. However some others adamantly refuse to do this. Habitually most retail outlets, small and some larger ones too, rely on cash transactions to hide their actual turnover enabling them to pay less in taxes and levies like sales tax, VAT etc. Many customers have also become accustomed to getting better deals and more discounts if they agree not to insist on bills.  Retailers also tend to get better deals from their suppliers if they too deal in cash and do not insist on tax invoices. It is a cosy arrangement in which well-placed bribes to tax and excise officials get them to look the other way. The government ends up losing much needed revenue and they have been trying in various ways to get people to change their habits. Introducing cashless modes of payment is a step in that direction and it is heartening that some retailers and customer, both have fallen in line.

However we are still a long way off from reaching levels of compliance considered normal in advanced economies. Not that people in such advanced countries are doing this very voluntarily, there are just more checks and balances in their system because of more data being collected and analysed. In India too, data analysis is fast catching up. During the demonetisation exercise, many holders of unaccounted banned currencies resorted to several underhand methods to convert their ill-gotten gains. Aided actively by a set of corrupt bank officials, they used fake IDs, fake/shell company bank accounts, dormant accounts etc. to exchange their currency notes. They also got their employees, associates and hired help to put funds into their accounts and then withdraw new notes. These abnormal withdrawals are another reason for shortage of currency in ATMs. Government and RBI are well aware of these methods and with enhanced data analytical tools at their disposal tax authorities have gone after the black money holders as well as rotten bank officials. This is an ongoing process which will take some time as more than 18 lakh accounts are reportedly being investigated. For sure, many of these account-holders will have legitimate explanations, and these accounts will naturally be eliminated from the list in due course. However is widely expected that many others will be caught. In fact banks have taken action to suspend some officials already.

No one suggests that the steps taken so far will stop black money. While some black money holders will be caught in the ongoing process, many others will go free. The practice of bribery has not stopped and will continue at least for the present. Political spending all in black money has to be tackled and that in itself is a mammoth task. However a serious beginning has been made, and the anger in some quarters at steps taken so far does show that it has made quite a significant impact.

Banking, Uncategorized

Banks and Demonetisation

The recent demonetisation period from November 11. 2016 to December 30, 2016 prescribed for exchange/deposit of the now banned Rs. 500/1000 notes has clearly exposed the extent for everyone to see the rot and greed in some banking officials. Given this, it is shocking to read that the Ministry of Finance has put out a figure of just Rs. 71.5 crores as the amount wherein bank officials have colluded to fraudulently exchange these banned notes. This is obviously a grossly underestimated figure.

As we are now aware, bank officials have used various methods to assist black money hoarders to exchange their ill-gotten gains and sabotage the good intentions of the government –

  • Accounts which have not been operated for a year or more were identified by crooked branch officials and these accounts were allowed to be used by black money holders to deposit their hoard of banned notes withdrawing new notes to replace that.
  • In the initial days when multiple exchanges of Rs. 4,000 worth of banned notes were allowed, bank officials facilitated photocopies being taken of already submitted photo IDs, without the knowledge of the original ID holder. These photocopies were then put together and used for facilitating bulk exchange of black money.
  • Jan Dhan accounts were allowed to be misused to deposit amounts over Rs. 50,000 without any KYC stipulations, often without the knowledge of the account holders. These accounts were used to deposit black money banned notes and withdrawal of new notes.
  • Multiple new accounts using the same set of identity documents were facilitated to be opened at branches and these accounts were used to launder black money.

These are just some ways by which the system was misused in collusion with bank branch officials, and even a few RBI officials. Apart from this black money hoarders have also made use of their employees and even random persons who were ready to help them by standing in line for a commission.

All of these methods were widely written about in the press and in social media and banks should have taken note of them and initiated remedial measures as the misuse was happening. Quite obviously RBI was aware given some measures they introduce to stop multiple attempts at exchange and so on.

Banks on their own should have by now come up with what they have done to detect wrongdoing and the action taken. If they haven’t it is either that they are lethargic and uninterested in properly supporting the governments steps to curb black money or they are aiding or protecting their customer and staff, in the bargain facilitating a build-up of black funds again.

Every bank, including cooperative banks, is not fully computerised and has a central database. It is quite easy to get their IT department to run queries on the database to identify not just the accounts and identities that have been misused but also to trace out the particular branch officials who put through the transaction. Based on this information the banks should have already taken action against erring officials. If they have not done this, it is now upto the RBI and Finance Ministry to push them into doing this. A clean up of the banking system is long overdue and the demonetisation exercise gives the government a great opportunity to do this

I am not suggesting that all that is rotten in banks and the banking system will suddenly come to the fore and be eliminated, but a significant part of the rot can be corrected if the government acts quickly now.

Banking, Uncategorized

India at Davos

So India is no longer the flavour of the season in Davos. Is that a surprise at all? Why hold only the government responsible even if they do take the major blame. Companies have hardly acquitted themselves well and the judiciary has also contributed its share of irrationalism.

Take the SC decision where 122 telecom licences were cancelled one fine day in one fell swoop. This decision was one of the worst exercises of judicial dictatorship in recent memory.  Certainly there seems to have been corruption in the grant of these licences, and both the bribe giver and the bribe taker need to be taken to task. However, foreign investment into these companies came only after the licences were granted. For sure, the companies put in the funds after the licences were awarded. The cancellation of the licences badly affected the credibility of India as a stable investment destination.

The 2G losses were arrived at by CAG based on the very high premiums these companies paid  Are we going back to the heady days of Indian socialism where the Controller of Capital Issues decided what premium a company inviting investment can charge? If high premiums are a criteria or wrongdoing, then every single investment into the e-commerce sector would be suspect.

Cancellation of these licences where nothing was started, and no further investment had been made would perhaps have been justified, but to disrupt entirely companies which had already started operation, which included companies like Loop Mobile which already had ongoing operations, or those companies which has already made heavy capital investment was ridiculous to say the least. What the court should have done is to direct the government to auction these licences and reallot them fairly. Whichever company won the licences could then have taken over the investments made and assets created by the earlier allotted companies which would have gone a long way in assuaging the concerns of the foreign collaborators.

Banks have bad debts, and they have accumulated to very high levels. There are many reasons for this. Some of it, like in the case of Vijay Mallya is corruption. Other loans have become stuck because infrastructure projects has been held up mainly because of land acquisition issues. Some loans have become stuck because of diversion of funds. Real estate project loans are stuck because markets are down. So it is not just one reason and each loan needs to be handled accordingly. Making a huge noise about it is self-defeating. It does not make any sense to make statements which bring down the entire credibility of the banking system and all the borrowing companies.