Download August - sibstc

JNANA VARDHINI
SIBSTC MONTHLY NEWSLETTER -COVERING
CONTEMPORARY BANKING RELATED TOPICS
5TH ANNIVERSARY ISSUE
AUGUST – 2015
SOUTHERN INDIA BANKS’ STAFF
TRAINING COLLEGE
No.9, Shankara Math Road, Shankarapuram,
BANGALORE-560 004
Website: www.sibstc.edu.in
Email:
[email protected]
[email protected]
Phone Nos: Principal (D): 080-26670574
Office: Telefax: 080-26670591 / 594
1
STRONG SUSTAINABLE GROWTH FOR THE INDIAN
ECONOMY
(Speech by RBI Governor, Reserve Bank of India at FIBAC, August 24, 2015)
GIST
India live in an increasingly uncertain world. Seven years after the financial crisis,
advanced economies are still growing slowly, while a number of emerging economies are
experiencing difficulty as the old export-led growth model flounders. In this environment,
there is both challenge and opportunity. Challenge because the world will not provide the
strong and supportive growth environment we had in the last decade, opportunity because
global capital is looking for investment opportunities.
“Make in India, Largely for India”. To implement the Prime Minister’s vision of
producing in India at a time when trade across the world is falling, India has to strengthen
the domestic market so as to absorb much of the increased production until the global
market recovers. This means India has to increase domestic demand, while avoiding the
booms and busts that typically plague such efforts by emerging markets.
Challenges in the Current Macroeconomic Environment
India has come a long way since the difficulties in 2012-13 as a result of actions taken by
the Government and regulators. Growth is stronger, the current account deficit has
narrowed significantly, the fiscal deficit is on a consolidation path, and inflation has
halved. However, three areas are still “work in progress” from RBI’s perspective. First,
economic growth is still below levels that the country is capable of. Second, while
consumer price inflation has moderated, inflation expectations amongst the public are
still high, creating a gap between the real rates that savers expect and the rates
corporations think they pay. Third, stressed assets in the financial system continue to be
high, which holds back growth and new lending, even while dampening bank incentives
to cut base rates.
The short term macroeconomic priorities of the Reserve Bank are therefore clear:


Help growth by bringing down inflation in line with the proposed glide path, thus
creating room for monetary easing; and
Work with the Government and banks on speeding up the resolution of distressed
projects and cleaning up bank balance sheets.
Inflation and Growth
Despite India’s known antipathy towards inflation, India has experienced an average of
more than 9 percent inflation between 2006 and 2013. With commodity prices declining
and astute food management by the Government, part of the work is done, without India
having to undergo the kind of extreme demand compression that was seen in the Volcker
disinflation.
2
Stressed Assets and Speedy Resolution
In dealing with stressed bank assets, RBI has been focused on getting the underlying real
project back on track. There are a number of impediments here. The stigma as well as the
provisioning (and the associated fall in profitability) attached to a loan being labeled
“non-performing” makes banks eager to avoid the label. In some cases, they ignore the
reality that existing loans will have to be written down significantly because of the
changed circumstances since they were sanctioned (which includes extensive delays, cost
overruns, and over optimistic demand projections). The Debt Recovery Tribunal system
has not been speedy, which also emboldens uncooperative promoters and keeps them
from accepting their share of the losses.
Regulatory forbearance, where RBI makes it easy for banks to “extend and pretend”, is
not a solution. Since no other stake-holder – such as the promoter, tariff authorities, tax
authorities, etc. -- contributes to resolution, the real project limps along becoming
increasingly unviable. Meanwhile, analysts grow increasingly suspicious of bank balance
sheets and the growing volume of “restructured” assets. Also, some large promoters take
advantage of banker fears about assets turning non-performing to extract unwarranted
concessions, without any sacrifice in the value of their stake. Regulatory forbearance
therefore ensures that problems grow until the size of the provisioning required to deal
with the problem properly becomes alarmingly large – which then prompts calls for yet
more forbearance. Forbearance is also a disservice to the bank’s owners (which may
include the Government) who, instead of being faced with a small problem early and
being given the opportunity to apply corrective action, are faced with large problems
suddenly when they cannot be pushed into the future any more.
One example of the difficulties stemming from forbearance is the plight of state power
distribution companies (DISCOMS). In 2012, a number of states signed up to a financial
restructuring plan (FRP) with banks and the central government, based on which the RBI
permitted restructured loans to DISCOMS to be treated as standard. Unfortunately, three
years later, states have not undertaken many of the actions promised under the FRP,
perhaps because the urgency to act was not there so long as banks continued financing
losses. Meanwhile, debt has built up further, and the cost of power, including line losses
and interest costs, is mounting inordinately. The central government and the RBI are
taking the lessons of recent experience into account as they discuss remedial action with
the states.
To deal both with project paralysis as well as the unfair distribution of losses, RBI ended
the forbearance accorded to restructured loans. Henceforth, restructured loans will be
classified as non-performing loans. However, RBI has made it easier to recognize and
deal with distressed projects. In other words, while ending forbearance, we have
introduced flexibility for those who recognize and deal with stressed assets.
First, RBI has created a database of loans over Rs. 50 million (the CRILC database), and
has required banks and NBFCs to report regularly on the status of the loans. Early
identification of distressed projects offers the best opportunity to put them back on track.
3
So if a loan is identified as more than 60 days overdue, all lenders to the borrower have to
come together in a Joint Lenders’ Forum (JLF) to see how the underlying problems can
be fixed. The JLF has to follow strict timelines, failing which the project loans’
classification will be downgraded. On the other hand, if the timelines are met, the
deterioration in loan classification is halted. Furthermore, by bringing the banks and
NBFCs into one forum, RBI has made it easier for the promoter and the creditors to reach
a consensus on actions, even while making it harder for the promoter to play one creditor
off against another.
Second, to deal with genuine problems of poor structuring, it has allowed bankers to
stretch repayment profiles for performing loans to infrastructure and the core sector (the
so-called “5/25” rule), provided the project has reached commercial take-off, has a
genuinely long commercial life, and the value of the NPV of loans is maintained. RBI is
undertaking periodic examination of randomly selected “5/25” deals to ensure they are
facilitating genuine adjustment rather than becoming a back-door means of postponing
principal payments indefinitely. Also, in cases of restructuring, RBI and SEBI have
together allowed banks to write in clauses that allow banks to convert loans to equity in
case the project gets stressed again. Not only will such Strategic Debt Restructuring give
creditors some upside in return for reducing the project’s debt, it can also give them the
control needed to redeploy the asset (say with a more effective promoter).
RBI has discussed the experience with the JLF with banks, and RBI will shortly
announce some measures that should improve their functioning. The move by the
Government to recapitalize banks is welcome, as is the proposal to reward bankers based
on progress in cleaning up balance sheets and generating healthy growth. The innovative
proposal to create a fund with majority private ownership and minority Government
participation to lubricate the process of resolution could be very helpful. RBI and
Government are also discussing ways to revitalize Asset Reconstruction Companies so
that they can play a greater role in resolving distress. The Finance Minister spoke last
week about accelerating the working of Debt Recovery Tribunals through the use of
information technology, an idea whose time has certainly come.
Given the state of the world economy, firms in some industries are in deep real distress.
Some firms can survive with a little help from the Government, but others are unviable.
Too much help to unviable firms can also cause distress to spread to healthy firms. In this
regard, the country needs rapid progress in the coming year on the creation of the
institutions necessary for resolution such as the new Bankruptcy Code and the Company
Law Tribunals that will administer it as well as the Financial Resolution Authority (for
resolving financial institution distress). On-going government efforts in this regard will
pay rich dividends.
Conclusion:
RBI’s focus on the challenges in ensuring sustainable growth should not detract from the
tremendous progress India has made. There is much to be optimistic about, including the
massive investments that are starting in infrastructure, the tremendous sweep of
4
information technology across every facet of Indian life, and the radical changes that are
taking place in the financial sector. The Indian economy is full of possibilities, even as
much of the world is mired in pessimism. Indeed, RBI has been arguing that the fragility
of the world economy is precisely because it has focused on quick fixes rather than deep
reform.
At the same time, India should not delude itself into thinking that the work is done, or
postpone hard choices to a seemingly easier tomorrow. The question for us as a society is
whether we have the discipline to do what is necessary at a time when global conditions
are propitious – commodity prices look like they will stay low for a time, helping the
fight against inflation, and there is plenty of money around the world and at home,
looking for investments, including in distressed assets, that can help us clean bank and
corporate balance sheets. As India strives to regain its place in the ranks of prosperous
nations, we must remember that what set poor nations apart from the rich is not people or
resources or even luck but good governance, which comes from strong frameworks and
strong institutions. A summary explanation of the economic problems of the recent past is
that they arose because India outgrew its institutions. A summary of the Government and
the Reserve Bank’s measures to restore sustainable growth is that we are building the
necessary institutions.
CHINESE CURRENCY DE VALUATION – IMPACT ON
INDIA
China, the 2nd largest economy in the world next to USA devalued its currency Yuan
Renminbi on Tuesday the 11th August 2015 by about 2% against the U.S. dollar.
Chinese authorities have said that the change would help drive the currency toward more
market-driven movements. Beijing hopes that by weakening its currency, the move will
help align it more closely with market forces—a step toward reform—while helping to
bolster growth by giving domestic exporters an edge in global markets. The authorities
have said that the currency devaluation is not designed to prop up China’s economy, but
rather a move to bring the RMB’s value in line with market forces.
China’s Central Bank said that yuan’s depreciation was a way to make the country’s
financial system more market-oriented. The bank said market spot prices would now
determine the daily position, implying that the central bank would step in less to
influence it. Over the past few months the yuan-dollar spot price had been lower than the
exchange rate, and it became clear the central bank was supporting a stronger yuan.
Many economists across the globe have offered different reasons for the devaluation of
Chinese currency. Some of the reasons quoted by them are furnished hereunder:


To keep its economy on an even keel, keeping growth and employment high.
To make renminbi, an internationally acceptable currency like USD, Euro, JPY so as
to help promote the country’s diplomatic goals and solidifying the country’s
centrality to the global economy.
5










Devaluing its currency to help exports. After all, its economy is struggling to hit the
government 7% growth target.
Chinese people, worried about the economy and seeking investment opportunities
abroad, have been pulling money out of the country. That exodus has held down the
yuan's value. But because the yuan was tied to a rising U.S. dollar, it remained at high
levels. By devaluing the yuan, the Chinese government was catching up to the market,
not trying to counteract it.
Beijing may be desperately trying to boost its economy. A cheaper yuan gives
Chinese exporters a price advantage in foreign markets. And they need help: Exports
dropped a steep 8.3 per cent in July year over year.
The surprise devaluation suggests that something is spooking the Chinese government.
Perhaps the Chinese economy is decelerating even faster than anyone realizes.
Already, the IMF is forecasting 6.8 per cent economic growth in China this year, the
slowest rate since 1990. Signs of trouble are accumulating. On Wednesday, for
instance, China reported that auto sales sank 6.6 per cent in July.
Investors are also worried about how a weaker yuan will affect exporters in other
countries.
For the most part, China actually wanted its currency to steadily rise, for political
reasons and to keep capital from flowing out of China. China’s domestic and
international goals align with a stronger yuan.
The answer to why China’s government devalued its currency Tuesday probably has
more to do with the dynamics of global currency markets than a sudden urge to help
Chinese exporters make their goods cheaper on the world market.
The yuan is strongly related to the dollar because China still manages the exchange
rate within a range against the dollar. When the U.S. dollar rises rapidly against world
currencies, like it has in the past year to pull almost even with the euro, the yuan also
rises against China’s trading partners’ currencies.
China has twin goals for exchange rates. On the domestic front, it wants to help
exporters with a cheaper currency, but it also wants to maintain a strong currency to
prevent capital outflows that may weaken the country’s economy further. On the
international side, China wants to avoid a trade war with the U.S., which it would
have if it severely weakened the currency. It also wants to boost international use of
the yuan for political purposes, as China asserts itself more strongly around the world.
The country’s recent campaign to have the yuan join the IMF reserve currency is one
example of China desiring a strong currency. In the end, these multiple goals again
promote a slightly stronger currency.
Most developed countries, including the United States, allow the market to set the
value of their currency. US policies can affect the value of the dollar indirectly, of
course, but day-to-day fluctuations in the dollar's value are determined by supply and
demand for dollars, not by the US government. China has taken a different approach.
Until 2005, the government kept its currency pegged to the dollar, with the central
bank buying or selling currency as necessary to ensure that one dollar was worth
around 8.2 yuan. Since 2005, the currency has been pegged to a basket of currencies,
and the exchange rate has changed over time, but China still actively manages the
currency's value on a day-to-day basis. For much of the past decade, China faced
accusations that it was using its control over the currency to make Chinese exports
6
artificially cheap. Especially in the years after the 2008 financial crisis, US critics
accused China of using control over its currency to give Chinese companies an unfair
advantage over US companies. But things have changed. Over the past five years, the
US economy has been getting stronger, pushing up the value of the US dollar.
Meanwhile, the Chinese economy has been getting weaker. The result: The Chinese
government no longer needs to intervene in the market to get a cheaper yuan — and
the export boost that comes with it. It simply needs to relax its control over the
currency and let market forces push its value down. In the long run, China hopes to
emulate developed economies with fully flexible exchange rates. That's an essential
precondition if the yuan is ever to challenge the dollar as the world's reserve currency.
IMPACT OF CHINESE DE VALUATION OF CURRENCY ON
INDIA
[
The Indian rupee sank to a two-year low of 64.95 per dollar on 19th August; domestic
stock markets also come under selling pressure.
Industry body ASSOCHAM said yuan's devaluation could lead to a full-fledged
"currency war". For India, the devaluation in the yuan will prove to be a "triple whammy"
as rupee volatility will increase, exports will come under pressure and there will be
dumping of Chinese goods in India, it added.
Here's how the Yuan Devaluation may impact India:



Rupee volatility: The sharp fall in the rupee has already rattled stock markets, which
fell for a fourth straight session today. If the rupee continues to fall sharply, imports
will become costlier, stoking inflation. This will force the RBI to hold on to high
interest rates, which will hamper the ongoing economic recovery. Since India runs a
trade deficit (imports are more than exports), chances are the current account deficit
will also rise, which will further pressure the rupee. Falling rupee is bad for those
companies that have dollar-denominated loans and also for foreign flows because
stock market returns become unattractive.
Pressure on Exports: In normal course, falling rupee would have aided domestic
exports, which have contracted for seven straight months until June 2015. However,
analysts are betting against a rise in domestic exports because of a global slowdown.
The fact that China and India compete for several export items such as textiles, gems
and jewellery, etc. will also go against domestic exporters, analysts say. "The large
overlap between Indian and China in markets and also products highlights the threat
Indian exporters face from China," said DK Pant, chief economist of India Ratings
and Research. The economic slowdown in China - which is among the top five
countries for Indian exports - is another negative for Indian exporters, analysts say.
Dumping of Chinese goods: There's fear that the sharp devaluation in yuan will help
China dump goods into the Indian market, which will impact domestic manufacturers.
The fear is already playing out on the Dalal Street with tyre stocks and steel makers
falling sharply over the last two days.
7
Terming devaluation of currencies as a “worrisome trend”, RBI Governor on Thursday
(20th August) said China’s move to devalue its currency and to protect its stock markets
raise questions about the ‘true strength’ of the world’s second largest economy. “I think
more generally across the globe, because of a weak demand, we’ve seen significant
efforts to depreciate currency, you can call it monetary policy or direct exchange rate
intervention. That’s a worrisome trend. Moves like these, where countries devalue
currencies due to low demand, can lead to a “free for all” at the global stage, said RBI
Governor.
RBI Governor, who is credited to have seen the global financial crisis of 2007-08 coming,
said that rupee has been among the more stable currencies the world over, although it has
also depreciated a bit. “We have also seen certain sectors where a strong currency has
hurt us,” he said, while citing the example of cement sector where production has fallen
despite a high domestic demand. He pointed out that the dip is due to the slowdown in
exports as there is slower demand overseas.
On the way ahead, he said, “We do not have much to worry if the level of Chinese
currency depreciation stays at current level, but more such moves can result in troubles
including “tit for tat” actions by other nations. “If Chinese depreciation holds at current
level, it’s not something we need to be overly concerned about. If it is the beginning of
longer term depreciation, certainly the actions don’t suggest so far. But if it is part of
process of gaining competitive advantage, it has to be worrisome across the world. You
could have tit for tat actions,” he said. “We will have to wait and watch the situation,” he
added.
INDIA HEALTHIER THAN CHINA – REASONS
(Economic Times 22.08.2015)
China’s economy is slowing sharply, creating a risk for the global economy. Its debt is
282% of GDP and this is one of the main problems. Years of state driven investments
have created excess capacity in several sectors. India is far better healthier for the
following reasons:
1. GDP Growth Trends: Chinese economy is slowing and India’s economy is gathering
China
2014
7.4%
2015
6.8%
2016
6.3%
India
7.3%
7.5%
7.5%
Source: IMF Forecast
2. Excess Chinese Investment in the past: China‘s investment is 46% of GDP as
against 31.6% by India. Therefore, China has very little room for further stimulus through
public investment. India can absorb trillions of dollars in infrastructure.
8
3. China’s working population is falling: China’s working population and the average
age is drastically falling whereas India’s working population is steeply increasing. The
declining in the age profile of the working population will drive up the labor cost of
China and thus eroding its price competitiveness.
4. Domestic Consumption is low in China: Domestic consumption in China is 49.6%
of GDP whereas India has 70.4% of GDP. Higher domestic consumption provides
cushion to India’s economy.
5. China’s Debt level has risen to alarming levels: Between 2007 to 2014, China’s
debt has risen to 101% whereas India has increased by 5% during this period. This gives
more headroom to take on debt to accelerate growth and development.
6. Excess capacity in China: Demand is not growing, so excess capacity is a worry for
China. In the case of India, demand growth will take care of excess capacity.
7. Bursting of property bubble in China: Property prices in China is steeply falling on
account of excess supply. Declining prices will create more stress and dent the economy
further. India has no such worry.
8. Deflation could create bigger problems in China: China is facing deflation on
account of lower demand and excess supply. Infact, India is trying to control inflation and
could soon be in a position to cut rates to stimulate economy.
10 REASONS TO BE OPTIMISTIC ABOUT INDIAN
ECONOMY
(Times of India 26.08.2015)
1. GDP Growth: India is considered a bright spot in global economy and estimated to
grow at 8% during 2015-16.
2. Improving Industrial output: Up by 3.8% in June 2015 compared to 2.5% in May.
3. Healthier Government Finances: Improved Tax collection led by indirect tax growth
of 37.6% during April –July. Lower subsidy bill due to falling oil prices and expected
savings around Rs 1 lakh.
4. Inflation under control: Both retail and wholesale inflation is on contraction mode
for the ninth straight month.
5. Better than expected monsoon rains: Deficit is around 11% but distribution is
encouraging.
6. Lower Trade Deficit: Due to fall in import bill for crude oil and gold.
7. Manageable current Account Deficit: At 1.3% of GDP in 2014-15 compared to
1.7% in 2013-14.
8. Forex Reserves: At a record of USD 355 billion
9
9. Increase in investment: Signs of investment are seen
10. Healthy Demand: In consumer sectors.
PRESSURE POINTS:
1. Sluggish credit growth: Non food credit off-take slowed down to 8.4% in June 2015
compared to 13% in June 2014.
2. High NPAs: Estimated at around 5.7% of gross assets
3. Falling Exports: Declined 10.3% in July, eighth straight month on decline
4. Stressed Balance sheets: Several companies, particularly infrastructure firms have
stressed balance sheets.
5. Falling Rupee: May impact FII inflows
CROWD FUNDING IN INDIA
What is Crowd funding?
Crowd funding is the practice of funding a project or venture by raising monetary
contributions from a large number of people, typically via the internet.
Crowd funding is a form of alternative finance, which has emerged outside of the
traditional financial system.
Crowd funding is solicitation of funds (small amount) from multiple investors through a
web-based platform or social networking site for a specific project, business venture or
social cause.
Crowd sourced funding is a means of raising money for a creative project (for instance,
music, film, book publication), a benevolent or public-interest cause (for instance, a
community based social or co-operative initiative) or a business venture, through small
financial contributions from persons who may number in the hundreds or thousands.
Those contributions are sought through an online crowd-funding platform, while the offer
may also be promoted through social media.
The crowd funding model is fueled by three types of actors: 1. the project initiator who
proposes the idea and/or project to be funded; 2. individuals or groups who support the
idea; and 3. a moderating organization (the "platform") that brings the parties together to
launch the idea.
10
Types of Crowd-Funding
As per IOSCO Staff Working Paper - Crowd-funding: An Infant Industry Growing Fast,
2014 ('IOSCO Paper'), Crowd-funding can be divided into four categories:
1. Donation Crowd funding Donation crowd funding denotes solicitation of funds for
social, artistic, philanthropic or other purpose, and not in exchange for anything of
tangible value.
2. Reward Crowd funding: Reward crowd funding refers to solicitation of funds,
wherein investors receive some existing or future tangible reward (such as an existing or
future consumer product or a membership rewards scheme) as consideration
3. Peer-to-Peer lending: In Peer-to-Peer lending, an online platform matches lenders /
investors with borrowers / issuers in order to provide unsecured loans and the interest rate
is set by the platform. Some Peer-to-Peer platforms arrange loans between individuals,
while other platforms pool funds which are then lent to small and medium-sized
businesses.
4. Equity Based Crowd funding In Equity Based Crowd funding, in consideration of
funds solicited from investors, Equity Shares of the Company are issued. Refers to fund
raising by a business, particularly early-stage funding, through offering equity interests in
the business to investors online. Businesses seeking to raise capital through this mode
typically advertise online through a crowd funding platform website, which serves as an
intermediary between investors and the start-up companies
Benefits of Crowd funding
Crowd funding provides a much needed new mode of financing for start-ups and SME
sector and increases flows of credit to SMEs and other users in the real economy.
Financial crisis (2008) resulted in failure of number of Banks and, consequently the Basel
III Capital adequacy norms have been made applicable to Banks. As a result, Banks have
become increasingly constrained in their ability to lend money to the ventures or start-ups
which may have high risk element. Hence, there is a need for funding for SME through
alternative sources. SMEs are able to raise funds at lower cost of capital without
undergoing through rigorous procedures in this mode. Crowd funding provides new
investment avenue and provides a new product for portfolio diversification of Investors.
It increases competition in a space traditionally dominated by a few providers (providing
finance to Start-ups and SMEs). The operators of a crowd funding platform may engage
in vetting or due diligence of projects to be included on their website, to maintain the
reputation of the website.
Risks of Crowd funding
Substitution of Institutional Risk by Retail Risk: Presently, the risk in financing Startups and SMEs is borne by the Venture Capital Funds (VCFs) and Private Equity (PE)
11
Investors. In crowd funding, these entities solicit investments in smaller sums from large
number of investors. Hence, the risk taking by VCF / PE (informed investors) is
substituted with retail investors, whose risk tolerance level may be very low. Retail
investors may not be able to understand the risk in these investments and will be unable
to bear the loss of investments. This may be more dangerous, considering the fact that
investments in SMEs and Start-up may involve high risk and low liquidity and are
generally treated as aggressive and long term investments. VCF / PE Investors will be
able to negotiate a better pricing and some influence on management, which would be
absent in the Crowd funding Route, where smaller contributions are sought from multiple
investors. Uninformed and unsophisticated investors (retail investors) may act with a
'herd mentality'.
Risk of default: There is no or less recourse to the investors against the issuer, in case of
default or fraud. Funds are not directly solicited by the issuer and issuer also does not
come out with any offer document. Funds are solicited by the platform and such platform
may or may not conduct proper due diligence of the issuer. If a platform is being
temporarily shut down, or closed permanently, no recourse is available to the investors.
There is no collateral (even in case of peer to peer lending), as in case of Corporate
Bonds. Further, in peer to peer lending, there are no investor protection by way of a
compensation scheme to cover defaults like deposit guarantee schemes for bank deposits.
Public funding is sought on the basis of future possibilities as against the clear evidence
of a viable existing business model, which is needed under the existing regulations.
Investments in companies without viable business model increase the risk of failure and
loss to equity investors. The risk of failure is further increased by the fact that the funding
is potentially by participants who do not have the skills and experience needed to assess
the risk before investing / lending, as compared to the VCF / PE Investors, banks or other
financial institutions who provides funds under the traditional business model.
Risk of Fraud: There is possibility of genuine websites being used by fraudsters
claiming to be promoters of projects or of false websites being established, simply to
defraud the investors or to entice individuals to provide credit card details etc. Thus, there
is a risk of misuse as well as cyber-security and / or identity theft.
Central role of the Internet: Crowd funding platform is an internet based market place
for issuers to sell their own securities to raise capital. Thus the central role of the Internet
and its wide reach would increase the number of persons potentially affected, which can
be significantly greater than the traditional means of fundraising. Younger investors may
get influenced simply because of its link to social media and the Internet. Funds could be
raised from investors residing at various countries without complying with requirement
of local laws of various jurisdictions
Systemic Risk: Due to the "individual" nature of crowd funding, there is a possibility
that investors may not practice good diversification principles. There may be no
secondary market in which investors can sell their investments and exit and hence, there
is a risk of illiquidity. There is also possibility of Money laundering. These platforms
could expose other financial sectors to the risk of default, as occurred during the sub-
12
prime mortgage crisis. If the rapid growth rate in peer-to-peer lending continues, these
risks could become systemic. There are Cross-border implications, if the funds are
solicited through internet, as there are disparities in Contract Act or securities law
application in different jurisdictions
Information Asymmetry There is high chance of information asymmetry associated
with these platforms, where one party invests / trades based on some information which
is unknown to other set of investors. Since there is lack of hard information, there is too
much reliance on soft information based on the social networking platforms in this model,
which increases the risks. There is no monitoring of these platforms, as to which account
the money goes. There is lack of transparency and reporting obligations on issuers
including with respect to the use of funds raised. There is possibility of omission of
information and misinformation providing distorted view of the issuer or the actual
investment, which may result in over-estimation of the actual return. This may induce the
investors to invest in a product that would not align with their risk tolerance.
SEBI APPROACH PAPER ON CROWD FUNDING
SEBI proposed Crowd funding regulations in June 2014. But the thinking within SEBI is
that introducing (such) norms would be premature, as no other jurisdiction has a
regulated crowd funding market, said one source.
RBI Governor’s view on Crowd Funding:
RBI Governor while speaking in the “State Bank of India’s Banking and Economic
Conclave” at Mumbai on Thursday the 20th August 2015 raised a red flag on crowd
funding of new ventures which is catching up in India, which has led to investors
throwing caution to winds. He said that “one of my worries about crowd funding is
when it works, it is good, but when you have to recover, who recovers and how does it
happen, especially in an environment where enforcement is difficult”. He further said
that
“the style of funding is associated with normal human tendency where when the
gains are attractive, investors are happy, bur blame lax regulations when the bets turn
sour”.
13
INDRADHANUSH -PLAN FOR REVAMP OF PUBLIC
SECTOR BANKS
The Finance Minister on 14.11.2015 released Indradhanush the revamp plan of public
sector banks.
Background:
The Public Sector Banks (PSBs) play a vital role in India’s economy. In the past few
years, because of a variety of legacy issues including the delay caused in various
approvals as well as land acquisition etc., and also because of low global and domestic
demand, many large projects have stalled. Public Sector Banks which have got
predominant share of infrastructure financing have been sorely affected. It has resulted in
lower profitability for PSBs, mainly due to provisioning for the restructured projects as
well as for gross NPAs.
Therefore, the Government has put in place a comprehensive framework for improving
PSBs. The Government has launched a seven pronged plan-- Indradhanush--to revamp
functioning of public sector banks.
The seven elements include Appointments, Bank Board of Bureau, Capitalization,
De-stressing, Empowerment, Framework of Accountability and Governance
reforms.
1. Appointments:
The Government decided to separate the post of Chairman and Managing Director by
prescribing that in the subsequent vacancies to be filled up the CEO will get the
designation of MD & CEO and there would be another person who would be appointed
as non-Executive Chairman of PSBs. This approach is based on global best practices and
as per the guidelines in the Companies Act to ensure appropriate checks and balances.
The selection process for both these positions has been transparent and meritocratic. The
entire process of selection for MD & CEO is revamped.
2. Bank Board Bureau:
The announcement of the Bank Board Bureau (BBB) was made by Hon’ble Finance
Minister in his Budget Speech for the year 2015-16. The BBB will be a body of eminent
professionals and officials, which will replace the Appointments Board for appointment
of Whole-time Directors as well as non-Executive Chairman of PSBs. They will also
constantly engage with the Board of Directors of all the PSBs to formulate appropriate
strategies for their growth and development.
The BBB will start functioning from the 1st April, 2016
14
3. Capitalization:
As of now, the PSBs are adequately capitalized and meeting all the Basel III and RBI
norms. However, the Government of India wants to adequately capitalize all the banks to
keep a safe buffer over and above the minimum norms of Basel III. Therefore, the
Government estimated the capital requirement in the next three years till FY 2019.
Excluding the internal profit generation which is going to be available to PSBs (based on
the estimate of average profit of the last three years), the capital requirement of extra
capital for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore.
This estimate is based on credit growth rate of 12% for the current year and 12 to 15%
for the next three years depending on the size of the bank and their growth ability. The
Government is presuming that the emphasis on PSBs financing will reduce over the years
by development of vibrant corporate debt market and by greater participation of Private
Sector Banks. Out of the total requirement, the Government of India proposes to make
available Rs.70, 000 crores out of budgetary allocations for four years. The Government
expects that the banks with improved productivity will be able to raise the remaining
Rs. 1, 10,000 crore from the market.
4. De-stressing PSBs:
The infrastructure sector and core sector have been the major recipient of PSBs’ funding
during the past decades. But due to several factors, projects are increasingly stalled
/stressed thus leading to NPA burden on banks. In a recent review, problems causing
stress in the power, steel and road sectors were examined. It was observed that the major
reasons affecting these projects were delay in obtaining permits / approvals from various
governmental and regulatory agencies, and land acquisition, delaying Commercial
Operation Date (COD); lack of availability of fuel, both coal and gas; cancellation of coal
blocks; closure of Iron Ore mines affecting project viability; lack of transmission
capacity; limited off-take of power by DISCOMs given their reducing purchasing
capacity; funding gap faced by limited capacity of promoters, their exposure given the
high leverage ratio; inability of banks to restructure projects even when found viable due
to regulatory constraints. In case of steel sector the prevailing market conditions, viz.
global over-capacity coupled with reduction in demand led to substantial reduction in
global prices, and softening in domestic prices added to the woes. A meeting was held on
28th April, 2015 at Mumbai first with all the banks and concerned Ministries to
understand the problems for each sector. Subsequently, meetings were held with project
promoters of steel, power and road sectors at various levels to understand further the pain
points of each and every sector. Various actions are proposed to address this issue with
all seriousness.
Strengthening Risk Control measures and NPA Disclosures
Besides the recovery efforts under the DRT & SARFAESI mechanism the following
additional steps have been taken to address the issue of NPAs:
i. RBI has released guidelines for “Early Recognition of Financial Distress, Prompt Steps
for Resolution and Fair Recovery for Lenders: Framework for Revitalizing Distressed
15
Assets in the Economy” suggesting various steps for quicker recognition and resolution
of stressed assets:
ii. Creation of a Central Repository of Information on Large Credits (CRILC) by RBI to
collect, store, and disseminate credit data to banks on credit exposures of Rs. 5 crore and
above.
iii. Formation of Joint Lenders Forum (JLF), Corrective Action Plan (CAP), and sale of
assets. The Framework outlines formation of JLF and corrective action plan that will
incentivise early identification of problem cases, timely restructuring of accounts which
are considered to be viable, and taking prompt steps by banks for recovery or sale of
unviable accounts
iv. Flexible Structuring of Loan Term Project Loans to Infrastructure and Core Industries
v. Long term financing for infrastructure has been a major constraint in encouraging
larger private sector participation in this sector. On the asset side, banks will be
encouraged to extend long term loans to infrastructure sector with flexible structuring to
absorb potential adverse contingencies, (also known as the 5/25 structure).
vi. Wilful Default/Non-Cooperative Borrowers:
RBI has now come out with new category of borrower called Non- Cooperative borrower.
A non-cooperative borrower is a borrower who does not provide information on its
finances to the banks. Banks will have to do higher provisioning if they give fresh loan to
such a borrower.
Fresh exposure to a borrower reported as non-cooperative will necessitate higher
provisioning. Banks/FIs are required to make higher provisioning as applicable to
substandard assets in respect of new loans sanctioned to such borrowers as also new loans
sanctioned to any other company that has on its board of directors any of the whole time
directors/promoters of a non-cooperative borrowing company or any firm in which such a
non-cooperative borrower is in charge of management of the affairs.
vii. Asset Reconstruction Companies:
Taking further steps in the area, RBI has tightened the norms for Asset Reconstruction
Companies (ARCs), where the minimum investment in Security Receipts should be 15%
which was earlier 5%. This step will increase the cash stake of ARCs in the assets
purchased by them. Further, by having more cash up front, the banks will have better
incentive to clean their balance sheet.
viii. Establishment of six New DRTs:
Government has decided to establish six new Debt Recovery Tribunals (DRT) (at
Chandigarh, Bengaluru, Ernakulum, Dehradun, Siliguri, Hyderabad) to speed up the
recovery of bad loans of the banking sector.
5. Empowerment:
There will be no interference from Government and Banks are encouraged to take their
decision independently keeping the commercial interest of the organization in mind. The
Government intends to provide greater flexibility in hiring manpower to Banks. The
16
Government is committed to provide required professionals as NoDs to the Board so that
well-informed and well-discussed decisions are taken
6. Framework of Accountability:
The present system for the measurement of bank’s performance was a system called SoI
–Statement of Intent. There are two changes in this:
(i) A new framework of Key Performance Indicators (KPIs)to be measured for
performance of PSBs is being announced.
(ii). The measurement of qualitative criteria which includes strategic initiatives taken to
improve asset quality, efforts made to conserve capital, HR initiatives and improvement
in external credit rating. The quantum of performance bonus is also proposed to be
revised shortly to make it more attractive including ESOPs for top management of PSBs
(iii). Streamlining vigilance process for quick action for major frauds including
connivance of staff within a timeframe of six months. Department of Financial Services
(DFS) has directed PSBs to make CVO as the nodal officer for fraud exceeding
Rs 50 crore.
7. Governance Reforms:
The process of governance reforms started with “Gyan Sangam”-a conclave of PSBs and
FIs organized at the beginning of 2015 in Pune There was focus group discussion on six
different topics which resulted in specific decisions on optimizing capital, digitizing
processes, strengthening risk management, improving managerial performance and
financial inclusion. Also, at this conclave, Hon’ble Prime Minister made a significant
promise to the bankers that there would be no interference from any Government
functionary in the matter of their commercial decisions. This promise of Hon’ble Prime
Minister was immediately translated into a circular issued to all banks assuring them of
“no interference policy”, but at the same time asking them to have robust grievance
redressal mechanism for borrowers, depositors as well as staff. The Gyan Sangam
recommendations included strengthening of risk management practices. Each bank
agreed to nominate a senior officer as Chief Risk Officer of the bank. A special training
programme for Chief Risk Officers was recently organized by Centre for Advanced
Financial Research and Learning (CAFRAL).The Government has been constantly
engaging with the Banks through review meeting and sessions for strategic reviews etc.
The focus is on improving HR management practices and removing barriers so that the
Banks can share and work together on common resources. Various steps have been taken
to empower Bank’s Boards. Continuing with this year’s Gyan Sangam, next
Gyan Sangam will be held between 14-16.01.2016 to discuss strategy with top level
officials. Further, scheme of ESOPs for top management is under formulation. Other
strategic initiatives such as consolidation etc. need to be discussed. The Indradhanush
framework for transforming the PSBs represents the most comprehensive reform effort
undertaken since banking nationalization in the year 1970. Our PSBs are now ready to
compete and flourish in a fast-evolving financial services landscape.
17
RBI POLICY RATES (28.08.2015)
Bank Rate
SLR
CRR
Repo
Reverse Repo
Marginal Standing Facility Rate
18
8.25 %
21.50%
4%
7.25%
6.25%
8.25%