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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%