Friday, April 22, 2016

Merger Of Banks And Privatisation Of Banks


Dear friends,

An atmosphere is created in the financial sector that the Merger of the Banks and the Privatisation in the Banking Industry is imminent and all the stake holders are only waiting for the date of formal announcement.

It has to be accepted by all the stake holders and particularly the work force that, though it is highly organised and structured, failed to register its protest loudly.

The primary stake holder and the major beneficiary of public sector – the Indian Public- maintain cool, as if it is an issue to be fought by the employees of the Industry.

In this background, the Government has accelerated its pace towards the process of privatisation which was initiated exactly 25 years back.

Yes friends,

The privatisation move was launched in ’90 and the well oiled Government machinery through the other Institutions like RBI and IBA, strategically has been executing relentlessly with all amount of patience throughout which has reached the climax now.

Many committee reports in the name of experts were released during this long drawn process, which has been slowly injected as an anesthetiser to cause an insensitivity among the stake holders.

Let us list out the various steps employed over a period of 25 years to transfer the huge public sector assets in the hands of private sector.

A big publicity and propaganda was unleashed during 90s on the Government’s inclination towards privatisation and attempts were made to influence the public towards privatisation.

Government holding was reduced in the Banking sector and the Nationalised Banks had to shift their status from “ WHOLLY OWNED BY GOI to GOI UNDERTAKING” which resulted in an inclusion of a set of directors in the Board under the category “ SHARE HOLDER’S DIRECTORS”.

Shares were allotted to employees too under preferential quota and financial assistance also was extended to them in order to silence them.

Term lending and mutual fund institutions like ICICI, IDBI and UTI became commercial Banks through reverse merger process.

Private Banks were introduced so as to create a competition with the PSBs but also to create a scene to compare the products of the private banks with the PSB products.

Experienced employees who were the committed & involved members of the organised trade unions were encouraged to go out in the name of SVRS.

Embargo was employed in recruitment in the banking sector from 2000 onwards despite the PSBs were increasing their business and presence exponentially.

Banking functions were linked to the capital in the guise of implementing Basel norms.
New accounting standards were introduced which brought a new nomenclature NPA and provisioning norms were introduced.

Using the two strings NPA and PROVISIONING NORMS, the declaration of the net profit by PSBs were controlled.

After blocking the rich capital possessed by the PSBs towards manufactured NPA, business of the PSBs were restricted in the name of inadequacy in capital.

Illogical and illegal decision of “non infusion of capital” to the under performing Banks was announced.

Governance struc
ture of the PSBs were changed by nominating the non executive Chairman and by appointing MD & CEO from the private sector.

PSBs were instructed to consolidate the bad debts in the name of STRATEGIC DEBT RESTRUCTURING and in the process banks were discouraged to initiate even the normal recovery process. Besides, the banks were encouraged to extend additional funds to such corporates whose liability was restructured to show performing assets.

Suddenly initiated the process of Asset Quality Review by the RBI which is totally against the functional autonomy being now enjoyed by the PSBs, and arm twisted the performing banks to declare loss by making huge provisions towards such accumulated bad debts.

Openly declared through Gyan sangam the division of banks as Acquirer and target banks based on their assets.

Share prices of the PSBs were reduced to rock bottom and announced to dilute the Govt. holding to 52% - an orchestrated drama to hand over the public sector to the private hands at cheap price.

It is a well drafted drama enacted by the Government over a period of 25 years excellently stage managed by the controllers of the Banking Industry and also with the special appearance of committees in the name of Industry experts..

I was wondering where and who wrote the script till I came across a research study by the scholars of of Malaysian university whose report is reproduced below.

They have listed the various steps initiated by the Britain during their successful execution of privatisation by Madam Margaret Thatcher.

You will be able to understand the similarity, when compare the highlighted portion of both the parts


Ali Abusalah Elmabrok Mohammed 1,*, Ng Kim Soon2, Abdalla Ab Sinusi Saiah3 & Abdul Talib Bin Bon4
Faculty of Technology Management, Business and Entrepreneurship
University Tun Hussein Onn Malaysia, 86400 Parit Raja, Batu Pahat, Johor, Malaysia
Tel: 60-127682709 E-mail:


From all the accumulated experience of privatization, new results have been added to the outcome of international experiences in this area, as these experiences are worthy of study so as to avoid the negative aspects and follow the positive aspects in the implementation of future privatization projects , but the majority of findings suggest the
importance of taking the circumstances and the local variables of economic, social, political and legal into account when preparing the strategies of privatization and their implementations, as there are inferred global indications which show that the experiences of privatization cannot transfer its entirety from one country to another, and this paper focused on a number of international experiences in the privatization program for the countries that differ in its economic, and vary in the variables of political and social REO , in the periods of the privatization program, with particular reference to the Egyptian experience.


There have been many terms in recent times to express the process of converting some production units (at the national level), the scope of the public sector to the scope of the private sector, notably the privatization and privatisation, expropriation and other public. But it is more common in these terms of use is privatization, a term used in this study, and has appeared numerous definitions of privatization, some say that it's as a transfer of ownership of the project from the public sector to the private sector. In another definition refers to privatization "convert public property to the private sector, the management or rent, or share or buying and selling in what follows the State , in the various sectors of economic activity or area of public services." In the last definition is seen "as a process of transfer of ownership and operational management of the state-owned enterprises to the private sector, either in part or in full, and the private sector can be either institutions or businessmen or foreign companies.

In another definition refers to privatization "transfer of ownership of public facilities to other parties that you manage, in accordance with the principles of the private business sector, indicates that the definition of three to privatisation is to increase the efficiency of the management and operation of public projects by relying on market mechanisms and arrangements to get rid of bureaucracy.

Experience of privatisation in Britain: 

Characterised by the British experience in successful privatisation, since it began with the Conservative government led by Margaret Thatcher, that the reasons for success had gathered, namely, at the first beginnings in this area, so are actually the pilot experiences in terms of the configuration of legislative, political and economic relations with the reforms in the market securities and tax structure, then the inclusion of privatisation of all sectors of national economy of goods and services, which focus on the promotional efforts:

• Use of media campaigns and advertising-intensive sectors, each addressed to the target market (people - investors - employees - managers - official bodies - political leaders and society); in order to convince them and encourage them to the feasibility of privatisation.

• Take-out in the method of privatisation, in order to give opportunity to the efforts of public relations, publishing, media and personal selling, advertising and publicity Impact to occur.  

• Focus on the quality of the product in the issues of privatization, since the focus is on winning institutions in each sector, to be converted typically, to be an example to the rest of similar institutions.  

• Focus on the attraction and strategic partnership for investors and citizens, managers and employees, and founders of companies, to expand the ownership base, as follows: 

1. Encourage the State of the founders in the first place to buy a share of the state of the stock or part of it.  

2. Encourage managers and employees by giving them priority in buying shares, or give them shares compared to their share in the profits or reducing their eighth stock, or give them an incentive to buy, or give talented employees free shares for being with primary responsibility for the continuation of their giving to the company, develop and duplicate (giving clear advantages for employees).  

3. Encourage investors to buy shares by giving them full information and truthful shows in the trend of the real opportunities for profitability in the companies offered for sale.  

4. Reduce the value of the shares or instalment price or to give priority to requests from small contribution. 

5. Restrictions on foreign investors in the privatisation process, by demanding enrolment in the register of foreign shareholders in the State, and not to increase the share of foreign investors for 15% of the total shares of the company, with no foreign participation in the Board of Directors. 

• Keep the government paced specially called golden share in the privatised company, which is entitled to attend the General Assembly, voting, and the appointment of a representative of business in the Governing Council, and also have the right to object in cases of emergency on some decisions, and this gives a reliable picture of the citizen because the companies privatised operating state in order to monitor the public interest, without prejudice to the rights of deliberate investors and shareholders.  

• Change managers in the public institutions in the state, opponents of the privatisation or either transfer them to alternative employment in the privatised institutions or to resolve these institutions, they lose their jobs.

• Supervised by the Minister of Finance on all privatisation processes in collaboration with relevant ministries, devise and approve guidelines for privatization, and the details of the technical operations, leaving the work of specialists from banks and financial intermediaries, lawyers and accounting firms, which widens the circle of strategic partnership in the privatization. 

• Political support for the ruling party and the government and ministries of privatisation reflect the strength of the supportive influence of the direction of privatisation.
So, our Government has executed the long drawn agenda of Privatisation through Mergers and Acquisitions which would demoralise the work force and who would ultimately succumb to be placed in the hands Private.

Let us wake up,

An awareness campaign must be launched to awake the public too, as primarily, the privatisation will have negative impact on the fellow country men and Country’s economy.
Let us effectively communicate to the Indian public that the privatisation of Banking sector is an anti – national move which would drive the rural economy back to the primitive.
Every individual officer must take it as a mission not only as a bank officer, but also an individual interested in our Mother India’s wealth and welfare.

Thanking you,

 RBI Governor Raghuram Rajan has said the issue of bad loans gets “loaded with a lot of morality” and it is necessary to keep criminal liability separate to put stressed assets back on track.

It is not a point whether defaulters are good people or bad people , whether the company is big or small, whether is popular or unpopular etc.

Questions are asked whether non-performing assets (NPAs or bad loans) were a concern for him given that some “big names and big companies” are linked to the problem.
The Reserve Bank Governor made it crytal clear that  the NPA clean-up is simply about whether the loan is “performing or not performing.

There may be good reasons or bad reasons behind a Non -performing asset.It may have become non-performing simply because someone had terrible luck or somebody else’s fault. Sometimes licences are cancelled , sometimes approvals are given to company by statutory bodies in time, sometime one of partners or directors do not perform or commits blunder , commit fraud or sometime divert the fund of the firm for self use or for different use and so on. There may be all sorts of reasons why companies get into trouble.

MR. Rajan said clearly , "if companies get into trouble, the loan becomes a non-performing asset and “we very much want these assets to be back on track,”

It is a completely separate issue of who to blame and whether there is criminal liability involved in a NPA account or with some defaulting firm. In a fraction of the cases there may be criminal liability involved. That should be separated from the whole issue of putting the assets back on track.

Asset is not a criminal.  Asset can produce value and can function. Asset should be allowed to produce value even while there is a separate case going on if there was criminal activity involved.

Rajan emphasised that the government has said very clearly it will not interfere in the process of granting loans and “I think that is a very important development. The next stage has been on trying to improve the administrative structure in the banks.”

Rajan said the last part of the stabilisation agenda has been to clean up the stressed assets in the banking sector in order to ensure banks have the room to lend again.

Rajan has said it clearly and without any ambiguity that we want to have our banks get their money back. For that we need a proper bankruptcy system, a court system that functions in finite time and we didn’t have that in the past.

He expressed hope that “there is a reasonable chance” that the bankruptcy code bill will be passed soon and that it will ensure a fully functioning system.

Under bankruptcy code banks and borrowers  can renegotiate outside of bankruptcy. Newly framed bankruptcy code keeps you from getting away with too much either on the banking side or the promoter side.

Number of frauds in banks has been rising quarter after after, year after year. Many cases of frauds are not even reported to RBI or reported with inordinate delay. RBI has said clearl that banks have to make provision for the entire amount of a loan in transactions where fraud has been detected in a period not exceeding four quarters.

Sometimes banks feel that  if huge provisions are done in a quarter it may adversel affect the finacial report of the bank and are afraid of erosion in image of the bank and its stock value.  To smoothen the effect of such provisioning on quarterly profit and loss, banks have the option to make the provisions over a period, not exceeding four quarters, commencing from the quarter in which the fraud has been detected.

RBI said that the banks have to make suitable disclosures with regard to the number of frauds reported, the amount involved in such frauds and the quantum of provision made during the year. This tight and hard instruction will in the long run change the dirty culture of bank officials who in order to save their employees from criminal actions conceal cases of fraud. It is important to say here that the culture of hiding evil acts of an employee who commit fruad like crime lead to escalation in volume and value of such frauds.

Banks must scrupulously adhere to the extant guidelines on classification and reporting of frauds. It is in overall interest of the bank and the country as a whole.

Corporate debt worth $178 billion at default risk: BNP Paribas
A whopping 16.1 per cent or USD 178 billion worth of corporate credit in India is at risk of default, making the domestic banking system the worst in Asia in terms of bad loans.

According to the report by French financial services major BNP Paribas, of the total bank credit of USD 1,109 billion in the country, corporate debt worth USD 178 billion, 16.1 per cent of the total bank credit, stands the risk of default.

India is followed by Indonesia and China with 7.2 per cent and 6.6 per cent of respective total bank credit at the risk of default.

While in Indonesia, USD 22 billion of its total bank credit of USD 305 billion is at potential risk of default, China stares at USD 1,050 billion of potential bad loans. The Chinese banking system is worth USD 15,884 billion.

The brokerage did not specify the time-frame of the report which is based on an analysis of 738 listed companies in Asia which have a combined gross debt of USD 1.7 trillion.

"Mounting corporate debt is one of the biggest problems for Asian economies," the report said.

"Our country-wise analysis highlights the following percentages of bank loans at risk:

6.6 per cent in China,

16.1 per cent in India,

5.8 per cent in Korea,

2.4 per cent in Thailand and

7.2 per cent in Indonesia,"

As per BNP Paribas, policymakers in every country are trying to tackle the debt problem in different ways. "Chinas solution seems to be a debt-to-equity swap. This was tried in China in the late 1990s," .

"The present instance, however, could be different...the government may not assume a significant part of the debt, as it did in the last instance," .

Indias approach is more direct as the "Reserve Banks asset quality review is forcing banks to acknowledge and write off stressed assets leading to severe short-term pain, particularly for PSU banks, but also potential long-term gain once bad loans are fully recognised,"

Vinod Rai On Public Sector Banks

I have great respect for learned and capable person Sri Vinod Rai who was CAG head a few years ago and who unearthed many high value scams and helped the country in exposing the evil works of the then ruling party.

Now he is given the responsibility to head Bank Board Bureau (BBB) and suggest ways and means to contain bad debts, get rid of capital shortage in PSU banks, ways to merge and consolidate PSU banks and also suggest good names for the post of chief of PSU banks.
Problems faced by Banks are not new . Burden of stressed assets is too heavy to sustain .

NPA is not creation of a few months or of few years but it is even older than a decade in many cases. Banks were caught in inflating profit five to six to seven years ago when it was detected that in order to inflate profits, banks did not even make adequate provision even for terminal benefits like pension payable to bank staff on their retirement. Culture of manipulation and fabrication is well established and deep rooted.

I have however full faith in Sri Vinod Rai and I am confident that with his wisdom and experience he will help banks in coming out of crisis and in improving intrinsic vslue and health of banks with the active cooperation of Central government.

Sri Vinod Rai is right in saying that all defaulters of bank loans are not willful defaulter. But I would like to say that all defaulters are also not due to acceptable reasons like global recession or domestic slowdown or due to natural calamities. Rather I may say here that more than three fourth of total Non-Performing Assets (declared and hidden both) are willful defaulters or due to malicious intention of bankers, politicians and borrowers.

Point is here how to discriminate avoidable default from unavoidable default. Important point is how to stop corruption in lending, how to stop political exploitation of banks and how to stop ill-motivated, wrongful and malicious culture of writing off of loans and sacrifice of considerably huge amount of good money in the name of One Time Settlement with bad borrowers in the name of cleaning balance sheet.

It will not be an exaggeration to say here that majority of written off loans and major portion of sacrificed amount of good money are only to give relief to erring banking officials and protect them from penal action, to cover up ill-motivated politicians who build pressure on bankers and to save borrowers from harassment in courts .

It will not be inappropriate to say that during last two to three decades, it has become habit or rather you may say, it has become the culture of bankers to give credit to good or bad borrowers to serve self-interest, to earn illegal gifts in cash or in kind, to achieve imposed target, to please higher bosses, to win the blessings of bosses and finally to get quicker promotion, to get choice posting and to become wealthier.

Same gang of corrupt officers apply their evil mind when the loan become Non-Performing Assets (NPA) and it is they who hide bad accounts financed by them or by their fellow colleagues for a few years on some plea or the other and finally either write off the loan or sacrifice a major portion of dues in One Time Settlement (OTS) . This happens with majority of NPA accounts; it may be small value or high value NPA.

Small borrowers are freed from repayment in the name of poverty or failure of business of small borrowers and high value borrowers are given relief in the name of economic recession or global slowdown or failure of project due to government fault, non-clearance of statutory requirement or project cost escalation or some other imaginary untrue reasons.

Staff accountability is not fixed in majority of cases to save erring officials or to help dirty politicians. Exercise of fixing of staff accountability in case of NPA accounts has become a ritual and hence a stereo type format is filled up and kept in record. Erring top officials of the bank use to get political patronage for their evil works and junior bank officers similarly get patronage from higher level bank officials.

Evil culture in sanction of credit and in writing off of loans or in OTS has got wide spread acceptance at all levels of officials and in all government department including Ministries.
Employees who do not fall in line with whims and fancies of higher bosses and bosses who do not feel in line with whims and fancies of powerful politicians are posted at critical places and always rejected in promotion processes.

Interview in promotion processes is such a tool which empowers interview takers to select or reject officer in promotion process strictly in arbitrary and non-transparent manner. As a result of this ill-treatment to good employees by higher bosses, majority of good employees have made a habit of discarding promotion processes on false excuse of family or health ground.

Senior and experienced loyal officers do not take part in promotion processes taking place in banks and on the other hand juniors who are expert in flattery and bribery apply for promotion and they get four or five promotions in 10 years. This has created an environment where juniors are king over seniors and experienced officer or workman staff.

Now you may well imagine what type of environment is prevailing in banking industry from top to bottom and what type of work culture and loyalty or flattery culture has been created during last three decades of liberalization and how freedom given to top officials of banks in the name of reforms have been misused.

Here it is proper to say that Bank Boards Bureau (BBB) has been set up last year by present government to suggest names for top posts of the bank and to suggest ways to contain bad loans. I would like to say that BBB may appoint a good person as Chief of a bank but cannot change the intention of politicians who play a big role in making a bank sick and in spoiling work culture or loan culture or repayment culture in banking industry specially Public Sector banks (PSU). Neither can it change the culture at field level which has been polluted by Chief executives of the bank during last two to three decades.

It is heard several times that political masters during rule of Congress Party or UPA or their Yesman officials in Finance Department used to earn lacs and crores of rupees in making an officer of bank as ED or CMD of a bank. I do not know whether it is true or false, but the action of such officials tell about their character. It is they who vitiated and polluted promotion culture during last three decades in the name of merit oriented promotion. Then, it is these top officials who come through corrupt ways and by using dirty means did the same injustice when they got the power to decide fate of their subordinates.

Culture of bribery and flattery for getting promotion is deep rooted in PSU banks at all levels as it is prevalent in other government departments.

As such Vinod Rai and BBB just by changing ED or CMD cannot change the decades old culture and attitude of politicians as also that of Bank officers who in general are equally corrupt and addicted to evil culture and dirty practices injected in their mind by their evil bosses. He cannot change the minds of trade union leaders who instead of protecting the interest of their members become agents of top bosses of the bank.

Here it is proper to say that in seventies, say up to 1980, bank employees used to get promotion strictly as per their seniority. During that period there used to be better loyalty and devotion to their banks compared to what it is today in the name of merit oriented promotion processes and recruitment processes . Now employees think it is safer to loyal to bosses than to be loyal to the institute they belong to.

During that period top officials of banks used to make excuse that they are helpless and they have to give promotion to all in order of seniority. When growth of banks used to below targeted level, they in order to cover up their poor performance or in order to conceal their evil works used to make excuse that they are constrained to handover sensitive work to inefficient persons. They used to make frequent requests to Ministry of Finance to give them power to make merit oriented promotion and recruitment policy overtaking Control of Trade Union Leaders.

When they got freedom to pick employees for promotion based on merit, they started picking up only flatterers and yes-man and fully damaged the fundamentals of Human Resource of PSU banks. In India, power and absolute power is the root of all corruption. Powerful officers in general do not give value to performance, but give value to flattery and bribery, to caste and community and finally to give value to recommendation or VIP or amount of bribe they get in lieu of favour they do to an officer or a borrower or a vendor.

Sri Vinod Rai said: "Banking system has seen considerable stressed assets (accretion) in recent years.... however, not all loan defaults are wilful and not all lending activity can be branded as corrupt practice or criminal misconduct. It is this precaution that we will have to take not to create a larger scare in the sector."

Former CAG and Chairman of Bank Board Bureau Sri Vinod Rai says that all defaulters are not willful defaulters and that the cacophony of uninformed voices should not impact decision making process of bank executives. He says that the Banking sector has seen considerable stress in recent years, but we should not allow the cacophony of uninformed voices to debilitate the decision making capability of bank executives.

It is true that media men and common men sometimes create disproportionately bigger nuisance in some small matters. But it is also true that CAG reports on 2G, CWC or other scam could have been unnoticed and reports could have been thrown in dustbin or could have been modified by another auditor team to obtain better and favourable report if media remained silent on the issue so big as involving fraudulent dealings worth more than thousands and lacs of crores of rupees. Similarly it is only when media men created hue and cry on Mallya issue that various agencies became so much serious on recovery of loan from bank loan defaulters like Mr. Mallya. Otherwise I remember banks could not get success even in tagging the account of Kingfisher Mallya with tag of ‘willful defaulters’. Cases have been languishing in court of law for last four to five years and court is yet to decide whether Mallya is willful defaulter or not.

Similarly loss caused by PSU banks by way of fraud , bad debts, write off and OTS during last few years is not less than sum total of losses occurred in all big scams unearthed by intelligent CAG head Sri Vinod Rai during UPA rule. I would like to say here that majority of hidden or declared defaulters are willful defaulters and sum involved is not less than ten lac crore. If any individual or any authority like (CBI or CBC or BBB) takes initiative to make scrutiny of each account of any branch of any bank, it will understand depth and intensity of evil culture prevalent in PSU banks and it will also understand the volume of stressed assets still concealed in shining balance sheets of each bank.

Similarly if any agency peeps into recruitment and promotion processes which took place during last three decades in a PSU bank, it will surely understand the depth of sickness , the quality of dirty human resource practices in banks , evil culture of politicians and evil culture of officials of other departments who are directly or indirectly associated with credit processes , with recruitment and promotion processes and with processes related to buying of other services through various vendors.

Vinod Rai says that over estimation of defaults or punishment to dirty bank officials or punishment to dirty politicians, will adversely affect the lending culture. He says that bank officers will stop taking decisions and credit growth will be slowed down which will finally badly impact GDP growth. This logic is similar to excuses made by some fundamentalists and ill-motivated politicians who talk of danger to Islam when police officials arrests terrorists or supporters of terrorism. It is always said that Islam is in danger and it is alleged by self-declared leaders of Muslim community that Muslims are willfully and strategically harassed by the government in power. If a Hindu terrorist or Dalit criminal is punished for their evil acts, people will blame police and the government and claim that Government is Anti-Hindu or Anti-Dalit.

As a matter of fact, many times government do not take action against real criminals in fear of political repercussion or Government do not want to punish criminal in fear of erosion in vote bank. And government in general put blame on bureaucracy for non –action and in turn government officials blame politicians for their interference. Both ways criminals get acquitted.

The consequence of this ill-motivated and emotional attack on administrative officers that law enforcing agencies are now afraid of taking action against Muslim or dalit or woman criminals .This culture send wrong message in the minds of law abiding citizens and they say openly that the government is made of criminals , run by criminals for the benefit of criminals .

There are many states in the country or you may say in most of the states, police do not lodge First Information Report (FIR) when a victim approaches to lodge a complaint against a criminal. There exists good relation between crime doers and police officials. Law abiding citizens are afraid of police torture and criminals get full support from police officials. This culture of not putting crime in record register is prevalent in all police stations in the country. This dirty culture is deep rooted in most of police thanas and the state governments claim that law and order situation of their state is very good.

In this way, the state government does not need to punish criminals and they feel easy to extort money from criminals in lieu of exonerating them or politicians use them to take revenge from their rivals. Police officials give unjustified treatments to victims and feel proud in telling people how crime graph has been contained and controlled by their leadership whereas the bitter truth is that criminal activities has been rising day by day in every state.

Similarly every public sector bank is sick of bad assets. In my assessment none of PSU bank is strong and every bank will prove to be weak if honest assessment is done. Only the difference is some of Chiefs of banks are clever in not reporting bad assets as bad assets whereas on the other hand Chiefs of some banks are honest enough to say spade a spade. Government of India says that some of weak banks are to be merged with stronger banks to make banks more effective and productive. I think they are wondering in dreamland if Ministers and government officials or RBI officials think that some banks whose balance sheet appears to be shining are really strong from top to bottom.

In fact, the culture of bad lending and ill-motivated write off and OTS with bad borrowers is prevalent equally in all PSU banks. And this habit is injected in the blood of past politicians. Bad lending and poor recovery of loans has become a normal and accepted practice in all banks .

In fact borrower willfully do not repay the dues in time in anticipation of write off of loan (small borrowers ) or in anticipation of some discount when they go for negotiated settlement with bankers under OTS.

Quality of lending is not important as volume of lending is important for bankers, regulators and ruling party. Similarly for employees, interest of the bank is not important as it is important to take care of interest of higher bosses.

This is why, so called strong banks like PNB, BOB, BOI, SBI, UBI , Canara Bank have all faced either losses or sharp erosion in their profits. Volume of bad assets in each bank is enormous and has reached a dangerous level. Honourable Sri Vinod Rai will face Himalayan Task in containing stressed assets and in transforming and reforming sick banks in Public sector.

Sri Vinod Rai may succeed in getting figure on NPA reduced in declared balance sheet but he may not get same success in stopping slippages from standard to NPA category. It is hard nut to crack if he thinks to modify the culture of bad lending in coming years, modify culture of hiding bad loans on false excuses and then stop the culture of writing off bad loans and sacrificing of bank's money in OTS giving false and unacceptable excuses.

When some students fail due to poor performance in examination, politicians use to say that students are discouraged and school's name is tarnished when large numbers of students are declared fail. They say that teachers will be demotivated and in future, educated persons will not like to accept the job of teaching. They say that if students are declared fail, they will stop study and sit in home or indulge in crime. Some ministers used to say that failing a student forces him or her to discard study or commit suicide or there is possibility of student attracted towards criminal activities. Perhaps this is why that past government decided not to declare any student fail upto 12th standard.

In modern era, every school management has become very much clever that they give more than 75% marks to more than 95% of students. They conduct easy and objective type question based examinations and help students in passing examination by fair or unfair means. In olden days, students had to study hard for securing even 60% marks. Students getting a score of 60% and above used to be more brilliant and intelligent. Now a days, even students scoring more than 95% marks are rejected in various All India competitive examinations taking place for higher education or for job.

Similarly management of PSU banks is very much clever; they do not like to put any bad advance in NPA category. If any officer has to declare a bad account as NPA, he has to seek verbal concurrence from higher officials. Even auditors and inspecting officials do not have courage or will to say bad account as bad. Keeping boss happy and in good mood and/ to earn costly gifts is the target of Chartered Accountants who are empowered to certify the good health of a branch or a bank.

Vinod Rai should not be astonished to know that every branch is victim of bribe based lending and wrongful concealment culture for hiding bad loan and saving provisions to get quick promotion and to win the blessings of top bosses. He will soon understand that majority of officers in banks are loyal to their bosses and not to the organization they serve and the bank from where they earn their bread and butter. Officers engaged in loan processing earn more from illegal means than from salary in legal way.

Vinod Rai is right in saying that all lending cannot be termed as criminal and cannot be tagged as done with malicious intention. It is true. But it is also true that major chunk of lending is based on bribe and or based on recommendation of some higher officials or some powerful politicians. Some of our ruling politicians think that if erring officials are punished, employees in general will avoid taking risk. This logic is not acceptable on any ground.

I would like to mention here speed of recovery has geared up in almost all banks only by announcement by Prime Minister Mr. Narndra Modi , Finance Minister Mr. Arun Jaitley and RBI Governor Mr. Raghuram Rajan that every pie will be recovered from willful defaulters of bank loans. This simple message has activated and accelerated recovery at all level. In the past, Ministers used to be pro-defaulters and against those who used to abide by laws, rules and guidelines.

Lacs of accidents take place in the country every day. Many accidents take place due to rash driving, due to stunt driving, due to driving after drinking wine, due to immature driving, due to poor traffic control mechanism. There are many genuine instances where police actions are needed to take punitive actions against persons who are found to be involved in faulty driving or when traffic rules are violated or when roads are not properly and timely repaired or due to mismanagement of law enforcing agencies or deficiency in laws and guidelines or loopholes in execution of policies and so on.

But if some of clever politicians plead that if police take action against erring drivers, people will stop driving and stop using vehicles, it is their mental bankruptcy and lack of understanding of ground reality why number of accidents are increasing day by day. Crime and corruption, fraud and manipulation, cheating and beating get escalated when they are left unpunished.

Vinod Rai says "Banking activity has become very complex... To transform the present challenges into opportunities for advancement and improvement of our banking capability, we need to innovate on compensation packages for public sector banking executives,"

Vinod Rai may be right in saying that he will think on raising package of executives of PSU banks to make it at par with that of private banks. Vinod Rai is however in wrong impression that executives will not indulge in corrupt activities and become truly loyal to their organization if their package is raised. If it is so, then why should junior employees who process the loan proposal not expect hike in their pay.

Moreover, I would like to mention here that average pay of PSU bank employees is almost same as that of private banks. It is only mismanagement of Human resource and wrongful deployment of Human Resource that PSU banks are having huge load of bad debts and suffering continuous erosion in their profitability whereas on the other hand private banks are booking higher and higher profit and lower and lower under the same economic environment.

I therefore feel that the government is in wrong impression if it thinks that by raising package of executives of PSU banks, they will be able to transform and reform the health and productivity of banks.

If package is so much important, I would like to say here that in seventies and eighties, it used to be said that teaching in government run schools and colleges is very poor only because teaching staff are poorly paid in government schools compared to that in private schools.

Since 1981, Government has given huge jump in salary packages of teaching staff in government schools and colleges and their pay is now many times more than their counter parts in private schools and colleges.

Still, none of parents want their children to be admitted in government schools and colleges and they strive hard to put their child in private reputed schools even if they have to pay higher tuition fee and pay considerably good amount of donations. Because they know very well that standard of teaching in government schools is more often than of worst quality. Teachers in government schools do not bother for study of students even though their package is multiplied many times. They want that students opt for private tuition and coaching classes and they can earn lacs of rupees through such acts in addition to regular salary they get from the government.

Similarly none of the guardians and care takers like their family members patients to be admitted in Government run hospitals for treatment. People in general want that in case of sickness , they are treated in private nursing homes even if they have to pay charges many more times than what they are needed to pay at government hospitals for treatment.

Because they know very well that patient will not come back alive if he is admitted in government hospitals. Poorest of poor also try best to be treated in private hospitals. The reason is known to all and it is no more a secret. Though government doctors get handsome salary, they focus more on private practice than their duty in hospitals.

Politicians during last seven decades have looted this country and looted common men on all matters. They divide people on caste or communal ground, they fight based on region or religion, they provoke emotions for vote bank and cause riots, they cry for reservation for some group or the other, but they never try to perform for the real benefit of common men who voted them to power.

Similarly banks have been used by politicians for enriching their vote banks only. Mr. Janardahan Pujari of Congress Party used to cry for Loan Mela and Mr. Devi Lal , V. P. Singh and Mr. Chidambram like politicians propagated and promoted loan waiver culture. They in general use banks to support their followers, their families and friends and to empower their political prospect in election. Unfortunately none of them could ensure permanent victory for them.

News in Newspaper is as follows

The chief of the newly established Banks Board Bureau (BBB) stressed the need for prudence in commercial banking on Wednesday, but held out reassurances that no witchhunt is intended against legitimate lending.

“Caution and prudence in banking activity can hardly be overemphasized,” BBB chairman Vinod Rai said in his speech at the convocation of the National Institute of Bank Management in Pune.

“However, not all loan defaults are wilful and not all lending activity, even if it is to salvage such stressed accounts, can be branded as corrupt practice or criminal misconduct,” Rai, former Comptroller and Auditor General of India, said.

Rajan has also said that not all defaulters should be tarred with the same brush.Mr Jaitley also said banks must be allowed to resolve stressed loans without fear.

Monday, April 18, 2016

Indian Economy Is Growing To Become Number One In The World

Discussion Held on   Naxatra TV on 18th April 2016 On Position of Indian Economy- It Is  Brighter Now Under Modi Regime, Even IMF and World Bank Have Accepted that India's Economy Is Moving in Right Direction. There is Considerable Rise in FDI, Fall in Inflation, Rise IN IIP data by 2% in the month of Fab 2016  , Cut In Repo Rate and Lowering Of Interest Rate By Banks.

And above all , a message has been sent to all defaulters , either tax defaulters or bank loan defaulters , by PM and FM as also by RBI Governor that all posssible legal action will be taken to punish such defaulters and in recovery of  all dues.

A positive environment created by current government for real industrialisation. Prime inister Mr. Narendra Modi has helped a lot in building better image  of the country in international community  and added a lot in India's trustworthiness in world community. This is why India has become top destination for FDI ( Foreign Direct Investment ) overtaking even in China and USA.

These Are Some Of Positive Features which will in due course of time pay dividends to all Indians.  India will no doubt occupy number one position in the world community.

On the other hand  Rise In Bad Debts In PSU banks Is a Matter of concern. Similarly negativity in some section of Media and some section of Indian politics are mattter of concern for the country.

Attitude of Opponents of current government may be anti-Modi,anti-BJP or anti -RSS but they should extend full support in building of nation, in security of nation and in maintaining unity and integrity of the country.

There should be unanimity in all matters which leads to development of the country and which is pro-common men and which are urel pro-growth. Political culture, social peace,mutual respect  and work culture are four pillars which can provide strong support to India's stability and power.

Success of a government in democratic set up depends largely of cooperation among all political parties and is possible only with the cooperation of all citizens of the country. Inclusive politics and inclusive economics are essential feature  for getting success and for achieving the goal of  good governance.

I took part in discussion along with Mr. R K Singh , A Business Man In Auto Sector and Who possesses Good Knowledge In Automobile Industry.

Watch Video On Live Programme On Naxatra TV

For Other Live Programe Visit My Facebook Page And Watch Video Clips ---Click Here

Friday, April 15, 2016

Unified Payment Interface

The curious case of rising currency in circulation-Live Mint
Rising currency in circulation along with slowing deposit growth is worsening the liquidity crunch .

The rate at which currency in circulation is increasing in the Indian economy is moving up. The rate at which deposits in the banking sector are growing is moving down.

Together, these two factors are worsening liquidity conditions in the banking sector, putting banks and the Reserve Bank of India (RBI) in a spot.

While the latter is more easily explainable, the former is confounding many in banking circles. Here’s what the data shows.

Currency in circulation, a reflection of the cash in use, has risen by 15.4% in 2015-16 (data for the last week of the year is yet to come).

In FY15, the growth in currency in circulation was lower at 10.7%.

The higher growth this year appears to run counter to most factors that typically drive currency in circulation.

The key among these factors are higher inflation (which necessitates more spending)

or higher transactions in sectors like retail and real estate (where there may be chunky payments in cash).

There are other factors like elections, which also lead to temporary spikes.

The reason FY16’s jump in circulation is puzzling is because inflation has not moved up compared to last year and transactions in sectors like real estate, by all accounts, have been down for most of the year. While state elections, such as in Bihar, may explain a temporary spike, they don’t explain why it has persisted.

The weekly growth rate since the start of FY16 was between 9% and 11% till November. It was only in mid-November that growth in currency in circulation jumped to about 14%, and since then it has remained at 12-15%.

So what’s going on?

There is no clear answer but there are a few theories, some backed by data, some not.

Is rise in currency in circulation because of state polls or higher growth?

This time around, the currency surge is on the higher side, compared with historical data, which is unusual because economic growth is weak and inflation is low

Currency in circulation has increased 15.5% in the month of March, the highest year-on-year increase in a month since May 2011, ahead of state elections in Assam, Kerala, Tamil Nadu, West Bengal and Puducherry.

RBI Governor Mr. Rajan said, “Around election time, cash with the public does increase; you can guess as to reasons why; we also guess. And you see some not just in the state which is going for elections but also the neighbouring states. So, there is something there, we need to understand it better, but it is about Rs.50,000 to Rs.60,000 crore more than we anticipated at this time of the year.”

This time around, the currency surge is on the higher side, compared with historical data, which is unusual because economic growth is weak and inflation is low.

“The sharp spike in currency circulation is unusual, especially as nominal GDP (gross domestic product) growth remains in single digit.

Elections are not new to India and the spike cannot be solely attributed to it. We need to watch out the trend,” said Anubhuti Sahay, head, South Asia economic research (India), Standard Chartered.

Note that currency with the public also moved up last November, when we had the Bihar elections.

There were minor spikes during the state elections in Delhi and Jharkhand and Jammu and Kashmir last year.

But also note that the growth in currency with the public went down at the time of the state elections in Haryana and Maharashtra last year.

The chart shows there have been several instances where state elections did not lead to a spike in currency with the public.

What is the impact of higher currency in circulation?

If currency leakage remains high, it will make the process of liquidity management more challenging and can necessitate more open market operations to infuse liquidity.

More currency with the public could also be one of the reasons for low deposit growth.Ltd.

The divergence between deposit growth and currency in circulation has happened only thrice before in the last two decades—in the second half of fiscal 1999, FY04, and in FY11. These were periods when economic momentum started to revive, begging the question that Credit Suisse poses in its note dated 4 April—is the rise in currency with the public an indication that economic momentum is picking up again?

This is what Raghuram Rajan said in his post-policy conference call with researchers and analysts: “I doubt that there is a structural change in the economy which suddenly requires more currency. So, at least till I see the data, till the data persuades me otherwise, I think this is temporary rather than permanent.”

Why is currency in circulation in India rising?

There were flurry of articles towards end of India’s financial year on this murky term – currency in circulation. All these were looking at possible reasons for sharp rise of currency in circulation.

The question is why should anyone care?

Well, one sees this circulation rising in times of high inflation as people need more money to settle transactions. But with declining inflation, one should not see a rise in the currency numbers.

First what is this Currency in circulation?

This is basically all the paper notes we carry in our pockets. This along with rupee coins and small coins with RBI form currency in circulation. Rupee coins and small coins in the balance sheet of the Reserve Bank of India include ten-rupee coins issued since October 1969, two rupee-coins issued since November 1982 and five rupee coins issued since November 1985.

Next, what is the problem?

See this table:

As we can see currency in circulation has increased by nearly 48% year on year in 2015-16 and 34% in 2014-15. The growth in 2014-15 was also on account of a deceleration in currency growth previous year by 11%.

This is large growth especially when we look at falling inflation numbers. :

The recent increase in currency with the public is confounding economists, as by the numbers it seems the citizenry is hoarding cash in a falling inflation climate. At a time when a majority of Indian households hold a bank account, after the Pradhan Mantri Jan Dhan Yojana, the preference to keep cash handy could be a strong indication of a booming consumer sector but that largely is not the case. Generally, cash in circulation should increase when prices are on the rise at a faster clip and should fall with a slowing of inflation.

“However, with inflation on the decline and under control… the question is whether such a high currency demand basically reflects uncertainty about the prospects of the economy,”

Currency in circulation at the end of 2015-16 on Thursday had risen 15.7 per cent to Rs 2,26,630 crore from Rs 145,080 crore a year before, a rise of Rs 82,000 crore. The growth was 11.2 per cent a year before.
Yet, Consumer Price Index-based inflation was 5.18 per cent in February, down from 5.69 per cent in January. The Reserve Bank of India’s own target is to contain inflation below four per cent in the medium term, which economists say is achievable.

Any increase in currency in circulation points to a leak in the banking system, as otherwise cash gets deposited with the bank, which goes for investment. Currency in circulation does rise during the festive season around October but by the end of the financial year, the situation normalises. This time it hasn’t happened and nobody is sure why.  
First, all this talk of low inflation is plain non-sense.  There are two inflation numbers – one tracked by policymakers & analysts and another faced by people. The latter is always some 4-5% higher than official estimates.

Second, lower inflation does not mean prices have declined. All it means is rate of growth has become lower compared to last year. SO if inflation was 10% last year and 5% this year, it means prices are continuing to rise. They are actually higher than last year prices. But both policymakers and media misguide people most of the time suggesting lower inflation means lower prices. People have to pay even a higher amount for their basket of goods. If one adds unofficial inflation to the official figure, it implies people will continue to need more cash to settle their transactions.

Third, all kinds of reasons have been given like elections, changing behaviour due to ATMs and so on. No one has looked at source of the problem. Currency in circulation does not rise on its own. It is basically an outcome of central bank policy. In this case, it is the continuous boosting of forex reserves which has led to rise in this currency in circulation.

Let me explain.

Currency in circulation are liabilities of the central bank balance sheet. On assets we have government securities and foreign securities as the main assets of a central bank. In a central bank balance sheet there are many non-monetary liabilities (like reserves, profits etc) which form part of liabilities and present a misleading picture. So, we have something called reserve money which subtracts these non-monetary liabilities from the liabilities to present a truer picture. This reserve money is also called as base money or high powered money in textbooks. See this primer for more  details prepared by your truly ages ago.

Simplifying things further, the remodeled balance sheet has liabilities as components and assets as sources. This helps one understand things directly.  There are other components and sources as well, but we just include these three as they constitute most part of the balance sheet nowadays.

Hence, source of rise/decline in currency is mainly these two sources – one’s own govt securities or foreign govt securities. Call it a sin of an emerging market central bank but it prefers to have more of foreign govt securities in their balance sheet which is also called as forex reserve. Whereas the developed world central banks mostly have their own govt securities in their balance sheet as we have also seen in QE etc by these banks.

So whatever source central bank chooses to push, it shows in currency in circulation. It is nothing but simple accountany – assets = liabilities.

In India’s case as forex reserves have risen in last few years sharply, so has currency in circulation. The share of Indian govt securities has been declining as can be seen from this table:
Growth number (year on year)
Currency in circulationG-secForeign Assets
So, currency in circulation is not the cause but actually an outcome of a central bank policy. This is the first step in any analysis looking at rise in currency in circulation. It is first an accounting entry which we then use to draw economic inferences.

In earlier times, this accounting variable could be used to draw economic inferences as things were relatively controlled by central bank. There was a reason why we had something called money supply targeting where money supply was the tweaking variable. Soon, central banks relaised they had little control over this given financial innovations and flow of money across borders. So they stopped targeting money and moved to interest rates. In famous words of a central banker (from Canada I think) ” We didn’t leave money, it left us”.

Hence, it might not be right to just draw inferences from this number alone. It could be a lot more complicated and we need more data to understand currency usage in India. The currency numbers are not in line with broad reality, tells you the same thing as well..

Why Bank Deposit Growth Slowed To Lowest In 53 Years-NDTV

Total bank deposit grew by 9.9 per cent in the fortnight ended March 18, 2016, marking the weakest growth in 53 years. The fall in bank deposits is surprising because it comes at a time when real interest rate (interest rate minus inflation) continues to be high.

Typically, higher real interest rate gives investors more incentive to park their money in banks to earn inflation-beating return.

According to research by State Bank of India (SBI), deposit growth may be falling because of higher spending by people. Higher real rate in the economy is because of falling inflation and this may be forcing people to spend more, its research says.

Another possible reason for decline in deposits could be increasing outward flow of money from the country, the report said. The Reserve Bank had last year doubled the amount to $2,50,000 that Indian residents can spend overseas per year.

"The outward remittance under Liberalised Remittance Scheme has seen a huge jump as soon as the limits were revised. From $106 million in May 2015, the remittances reached $449 million in Feb 2016, a jump of 324 per cent,"
Another possible reason "could be increased money circulation in the system. That leakage is also leading to a fall in bank deposits," 

RBI chief Raghuram Rajan recently said that cash in people's hands is more by up to Rs 60,000 crore at present.

Mr Ghosh said that the "fall in deposit growth is a matter of concern and needs to be addressed head-on. Otherwise when the credit growth picks up, banks may be in a fix to address the asset liability mismatch."