A breakthrough in banking reforms

 

RBI must implement its internal report allowing industrial houses to own banks, with checks

The Internal Working Group (IWG) constituted by Reserve Bank of India (RBI) to review ownership guidelines and governance structures in respect to private sector banks has submitted its report. The report is grounded, logical, clear, consistent, and does not fudge or pass up on issues that require coordination outside of RBI’s ambit. It has the courage to explore and challenge continuing holy cows and demonstrate one attribute in its recommendations, what former Securities and Exchange Board of India chairman M Damodaran once called, the least common of the senses, common sense, in abundance.

Let’s evaluate what it has suggested and its logic.

One, IWG has suggested that RBI regulations need to be consistent and the same for all players, irrespective of their licensing date. They have suggested that there is need for harmonisation of various licensing guidelines, relaxations made at any point of time are available to all players, and any tightening in rules also apply to all players in a non-disruptive manner. It has further gone on to aver that the holding by a promoter should have a clear and consistent definition, which does not get changed by separate RBI circulars. It has suggested the use of “paid up voting equity share capital” (equity henceforth) as the right metric. All these recommendations should be obvious and be a basic tenet of providing a level-playing field in the banking sector.

Two, IWG has also made some substantive recommendations on licensing policy. They suggest that promoters of banks be allowed to hold 26% equity stake in steady state or after 15 years. This is against the existing norm of 15%. Promoter holding at the start of the bank should be a minimum of 40% of the equity for the first five years. Our experience with old private sector banks illustrates that boards, where equity ownership is diversified, can take control of a bank and start to direct its operations in a less than optimal manner — Catholic Syrian Bank and Lakshmi Vilas Bank are good examples of this. In fact, 12 old private banks are laggards in respect to technology and risk systems and have not grown their share from 4% of the assets of the system.

Interestingly, our current norms permit foreign ownership, mostly by foreign institutional investors (FII), up to 74% and believe these FIIs are better owners than a promoter, who has invested capital to start and build a bank. Thus, allowing promoters with more skin in the game 26% holding seems to be a smart move. Similarly, the recommendation on a higher minimum initial capital of ₹1,000 crore makes eminent sense as it ensures only serious entities enter the space.

Three, after a careful international review, IWG has recommended a sympathetic review of whether industrial houses should be allowed to own banks if they meet the fit and proper criterion. It has asked RBI to address any outstanding issues or concerns in respect to connected lending and put safeguards in the Act to ensure this, so that applications from industrial houses for bank licences may be considered on the basis of a fit and proper criterion.

Four, it has forcefully recommended that RBI seriously consider Non-Bank Finance Companies (NBFCs) with assets of greater than ₹50,000 crore, and in operation for over 10 years, to be allowed to be converted to banks, whether or not they are owned by industrial houses. RBI has always been comfortable allowing NBFCs to be owned by industrial houses but has struggled to get comfortable in allowing them bank licences. I have never been able to understand the underlying logic of allowing industrial houses NBFC ownership but preventing them from owning banks. It presumes that industrial houses will find it easier to default on an Indian depositor over a public sector bank (from where they currently get most of their funds). To prefer NBFCs, dependent on wholesale funds and subject to asset liability mismatches, over banks with a stable liability base, has been a strange continuing preference of the regulator that IWG has challenged. In fact, I have always argued that large NBFCs should forcibly be converted into banks or be forced to acquire old private banks to mitigate systemic risk in the sector.

Five, IWG has also made a host of sensible suggestions in respect to creating a consistent regulatory regime in India. After an objective assessment of the extant regulations, it has suggested that all banks should be held by a Non-Operating Financial Holding Companies (NOFHC) but that this should not be enforced till there is a tax-neutral status to move from one structure to the other. The group has then made sensible suggestions on a set of outstanding issues in respect of pledging bank shares, issuing ADR/GDR, maximum share holdings by non-promoters, ownership norms around joint ventures and alliances. It has also recommended that banks carry out any activity that is permissible in the bank, within the bank and not in a separate subsidiary.

The IWG report comes not a day late. The report goes a long way in addressing lacunae built up over the years and will advance India’s journey to a $5 trillion economy by reigniting the banking sector. RBI should move quickly to act on these recommendations.

Janmejaya Sinha is Chairman, BCG India

Source: Hindustan Times, 25/11/20

Greek tragedy

Some volatility is inevitable. But the fallout from the crisis seems containable.

Talks between Greece and its three creditors, the European Central Bank, the International Monetary Fund and the 18 other eurozone countries, on the terms for extending Greece’s bailout programme beyond June 30, broke down over the weekend. On Saturday, Greek Prime Minister Alexis Tsipras announced a referendum, scheduled for July 5, on the troika’s terms — changes in pension and taxation structures, etc — but the country’s creditors have refused to extend the bailout till then. However, Greece, which cannot access capital markets and has been relying on money from the troika to pay its debts and bills, needs to repay the IMF 1.6 billion euros on Tuesday, or fall into default. Now, with a run on the country’s banks gaining momentum and the ECB capping the emergency funds available to them, the government has decreed that all banks down their shutters and ATM withdrawals be capped at 60 euros per day. Eventually, if Greece has to print its own money to pay salaries and pensions, it would have to leave the monetary union. But Greece doesn’t seem to be a Lehman, and the threat of contagion to the eurozone and the world seems limited.

For one, most Greek debt — about 80 per cent — is owed to “official” lenders; it isn’t held by the public or financial firms at large. Further, it’s vanilla debt, not an alphabet soup of collateralised derivatives that had, in 2008, seeped into practically every corner of the global financial system. Back then, no one knew who was holding how much toxic debt, but this time, the chances of a domino effect getting set off by a Greek collapse are few. The eurozone, too, is better armoured to deal with a crisis — its banks are better capitalised and a large bailout fund has been established. Even though the 10-year government bond yields of Portugal, Spain and Italy, for instance, spiked sharply on Monday — volatility is inevitable — Germany, the eurozone’s heavy lifter, has indicated that it will “do everything to prevent every possible threat of contagion”.

There are lessons to be learnt for India: Be cautious on foreign debt, which can reverse quickly. In 2013, when there was a near run on the rupee, it was because foreign portfolio investors had dumped government debt and moved on to greener pastures. The Greece story calls for caution on external commercial borrowings and short-term portfolio debt. It underlines that it pays to be prudent.

Dec 22 2014 : The Times of India (Delhi)

Average household debt in cities up 7 times in 10 years

Subodh Varma





22% Of Urban Families Have Loans To Repay

Nearly a third of rural households and a quarter of urban ones are in debt, says a report released this week. This is understandable with the spread of credit facilities. But the scale of indebtedness revealed is astonishing: between 2002 and 2012, the average amount owed by each family has jumped seven times in cities and more than four times in rural areas.About 22% of urban households were in debt and the average debt per family was Rs 84,625, up from Rs 11,771 in 2002. In the rural areas, 31% of households were in debt compared to 27% in 2002 -their average debt had increased from Rs 7,539 to Rs 32,522. The survey , carried out by the National Sample Survey Organization (NSSO), studied assets and debt across India through two visits to more than one lakh households in 2013. Such surveys are done by the NSSO every 10 years.
Average debt is computed by dividing the total debt by total population, which includes households that have no debt.A better picture of the scale of indebtedness is seen if the total debt is distributed only over the indebted households: then the average debt increases to Rs1,03,457 in rural areas and Rs 3,78,238 in urban areas. The survey also estimat ed that average value of assets among rural households was about Rs 10 lakh while in urban areas it was nearly Rs 23 lakh.
The definition of assets used this time round was changed from that of previous surveys. Consumer durables, bullion and jewellery were not counted as assets. Also, prices of land and building were taken from normative guideline values rather than as reported by the informant.Hence, asset values reported in this survey are not comparable to previous ones. What is striking in asset ownership is the extreme inequality between rich and poor.While the average value of assets owned by the richest 10% of the urban population was Rs 14.6 crore, the poorest 10% owned assets worth just Rs 291 -virtually nothing. In rural areas too, similar inequality is visible. The average asset value of the richest segment was Rs 5.7 crore compared to Rs 2,507 for the poorest.
Expectedly , wide variation is seen in asset ownership depending upon vocation. In rural areas, cultivators owned assets valued on an average at Rs 29 lakh while non-cultivators had assets worth about Rs 7 lakh. Similarly , in urban areas, self-employed families had assets worth as much as Rs 51 lakh compared to about Rs 20 lakh worth of assets owned by wage or salary earners.
The enormous contribution of real estate prices to the explosion in asset values is clearly seen in the fact that in rural areas, 73% of the value of assets was derived from land and 21% from buildings.In urban areas, while 47% of asset value was from land, 45% was from buildings.
In urban areas, 82% of debt is incurred to finance housing, education, marriages etc and only 18% is for business purposes, showing that the urban housing boom has been driven by debt. In rural areas, 40% of loans were taken for business.Interestingly , shares and debentures made up an insignificant part in both rural and urban areas for most. Just 0.07% of asset value of rural households and 0.17% among urban ones derived from shares etc.

SBI to offer credit cards with education loans

India’s largest bank, State Bank of India (SBI), is offering credit cards to students who avail of education loans with them. The move is to gauge the students’ cradit history and keep bad loans down.

SBI hopes that the credit card useage will give it a glimpse into the user’s spending habits, thus giving it a clue about the borrower’s spending habits. This, in turn, will help it identify potential bad loans.

SBI Chairperson Arundhati Bhattacharya said, “We were having a lot of non-performing assets (NPAs) in education loans. So, now we have created a credit card along with the education loans.”

The credit card has a credit limit of Rs 5,000, guaranteed by the parent.

“Now what happens is the child starts using the credit card. He learns to use the credit card and repay the loan. And also, through the credit card we remain connected with him,” said Bhattacharya.

She pointed out that earlier once the bank gave the education loan it was no longer in the scene and the student forgot all about the bank. “But if there is a credit card, there is a monthly bill, so we remain connected with that person,” said the SBI chief.

And even when the student-borrower completes his education and takes up a job, the bank hopes that he/she will continue to use the card. “So, we can continue to track him. And in the meanwhile, he is building up a credit history which will enable use to give credit once he goes into a job,” said Bhattacharya.

As at June-end 2014, SBI had an education loan portfolio of Rs 14,945 crore, up 7.21 per cent year-on-year.

- See more at: http://digitallearning.eletsonline.com/2014/09/sbi-to-offer-credit-cards-with-education-loans/#sthash.BPxPZ8D1.dpuf

Sep 02 2014 : The Times of India (Delhi)

Never allow short-term data to mask long-term prospects

R Raja





We all believe that we remain logical and rational while making any decision. What we don't realize is that, as human beings, we are all prone to stumble into mental pitfalls.Ben Graham, the father of value investing, proclaimed, “The investor's chief problem, and even his worst enemy, is likely to be himself.“ If that is not true, how can we explain that passive investing in equities has given double-digit returns over the long term but is still considered risky . So it's said, “The fear of equity has done more damage than equity itself.“The emotional reactions to investing in equity often diverge from cognitive assessments of the risks of such investments. Markets have done well, but investors have not done well. Emotions are designed to trump logic. We do not realize that we are affected by many heuristic biases. What is a heuristic?
Heuristics are like back-ofthe-envelope calculations that sometimes come close to providing the right answer. But, such mental short cuts and rules of the thumb may tend to be off-target as the heuristics used are imperfect.
In this and the next two editions, we will take up 13 (today, we take the first one) of the common biases that we come across and which impact our decisionm a k ing ability when deciding on financial investments: 1) I know better coz I know more: This results from over optimism and over confidence. The great obstacle to discovery is not ignorance but it is the illusion of knowledge. The simple truth is that more information is not necessarily better information. What you do with information matters more than how much of it you have. The classic example is a retail investor getting pounds of data regarding the performance of mutual funds. If one does not know how to read and interpret the data, it is of no use to himher.
The following illustration drives home this point.
Richard Thaler studied the behaviour of MBA students managing the endowment portfolio of a small college and investing it in a simulated financial market: The market consists of two mutual funds A and B and you must allocate among them. Before the game begins, however, you have to choose how often you would like to receive feedback and have the chance to change your allocation every month, every year or every five years. The groups were given infor mation and were allowed to use that as often as possible. Thaler's group tested whether this intuitive answer is right by randomly assigning them to receive feedback at varied intervals.
At the end of 25 years of simulation, subjects who only got performance information once every five years earned more than twice as much as those who got monthly feedback. So how could having sixty times as many pieces of information and opportunities to adjust their portfolios have caused the monthly-feedback investors to do worse than the fiveyear ones?
The answer lies partly in the nature of the two funds the investors had to choose from. The first fund was a fund investing in bonds with low average rate of return but was fairly safe. The second was a stock fund. It had a much higher rate of return but also a much higher variance, so it lost money in about 40% of the months.
In the long run, the best returns resulted from investing all of the money in the stock fund, since the higher return made up for the losses. Over a oneor five-year period, the occasional monthly losses in the stock fund were cancelled out by gains, so the stock fund rarely had a losing year and never had a losing five-year stretch. In the monthly condition, when subjects saw losses in the stock fund, they tended to shift their money to the safer bond fund, thereby hurting their long-term performance.
At the end of the experiment, the subjects in the fiveyear condition had 66% of their money in the stock fund, compared with only 40% for the subjects in the monthly condition. Subjects who got monthly feedback got a lot of information but it was short-term information that was not representative of the true, long-term pattern of performance for the two funds. The shortterm information created an illusion of knowledge -a knowledge that the stock fund was too risky.
So more information may have led to less understanding. People who got the most feedback about the shortterm risks were least likely to acquire the knowledge of the long-term returns.
This is the first of a three-part article on human emotions that influence how we invest. The writer is with a leading domestic fund house

Mahila Bank to Get More Capital if Needed, says PC

OUR BUREAU | AGENCIES NEW DELHI

Finance minister P Chidambaram on Wednesday assured India’s first all-women bank, Bharatiya Mahila Bank (BMB), of full capitalisation support. “If they (BMB) want (more capital)...I can make promise both on my behalf and on behalf of my successor,” he told reporters after the bank’s board meeting here on Wednesday. When asked who his successor could be (in the new government), the finance minister said, “I could be my own successor.” Chidambaram exuded confidence that the first allwomen bank will play a key role in promoting financial inclusion and improving the status of women in the country. Government has already provided . 1,000 crore seed money to the bank, which started operations in November last year. The bank with 23 branches has opened about 17,000 accounts having deposits of about . 87 crore. Chidambaram said the work of the bank has, so far, been satisfactory and asked Bharatiya Mahila Bank to harness technology and innovation for expanding its reach. The bank plans to open 57 new branches in the current fiscal, he said. “I have no doubt they will achieve their target...they have now found place both in Jammu and Srinagar. Branches will be opened there,” he said. Referring to education loans, he said the bank offers concessional loans to girl students that is 1% less than the prevailing interest rate. The bank is in the process of tying up with a large number of educational institutions to encourage girl students to take up higher education. Meanwhile, the bank launched a recurring deposit scheme for girls, from day one to 13 years of age. It may be noted that the RBI has allowed a 10-year child to open an account.

Finance minister P Chidambaram and Bharatiya Mahila Bank CMD Usha Ananthasubramanian during a press conference at the bank’s corporate office in New Delhi, on Wednesday 

Source:  http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Source=Page&Skin=ETNEW&BaseHref=ETM/2014/05/08&EntityId=Ar01703&AppName=1&ViewMode=HTML