Friday, January 15, 2016

RBI- In need to act efficiently, effectively and pragmatically

RBI has been among the best regulators in the world, managing the financial markets and various other important aspects of the Indian economy with a visionary, practical, positive and dynamic approach during more than last 5 decades. In recent past, it has been observed that the basic values and virtues built by RBI are being pierced, one after another. A recent informal directive (advisory) to all the public sector and private sector banks, to downgrade, more than 150 top borrowers as Non-Performing Assets and to make retrospective provisioning is one such example. The NPA provisioning norms have been one of the tightest regulations in the world. In terms of the latest directive, exposure of the banks in three categories is proposed to be downgraded, based on asset quality review. The exposure of Indian banking sector to such accounts is estimated in the range of Rs 1.5 lakh crore to about Rs 2 lakh crore, which will be about 3% of the total credit exposure of the banking sector.The real concern of RBI about asset quality has to be addressed in stages. The impact will be more than serious on fund based and non-fund based exposures as well as working of the industry.
Regulations are to ensure fair play and cannot be a burden. No regulation should hurt or kill the genuine business activity.


The global economy including China, Europe and all major economies have been facing steep challenges. The Indian Economy has passed through a fairly tough time during about last 5 years and more specifically in last 3 years. Almost all the major borrowing sectors had been suffering due to policy bottleneck. The credit off take has reduced very sharply. The fresh investments have not been forth coming except in limited sectors like e-commerce. IIP index is showing a negative growth. Some of the prominent sectors impacted by slow down, for example:

Power Sector- no further disbursement in spite of financial closure for many years. No additional sanctions or disbursements for new projects. Recent initiatives of government are in right direction.

Roads and Highway Sector- NHAI has recently come out with suitable solutions for recommencement of construction, in most of the projects which were standstill for more than 3 years.

Real-estate and Infrastructure are creating new records of downfall in prices and substantial negative growth. Housing sector has specially suffered.

Commodities- International and National commodity prices, in most of the cases, are ruling at their last 10 year low thereby impacting steel industry, construction, and other commodity based sectors. The Chinese, European and American markets are leading the commodity prices free fall.


The Government of India has taken major steps and policy initiatives to revive the economy, in spite of, international economic challenges. The Finance Minister has committed to the nation that no retrospective amendments or regulations are brought in. In case the advisory of RBI is accepted, including retrospective provisioning, without taking corrective action, including special dispensation for certain specific ailing sectors, the following implications may arise out of retrospective provisioning at such a large magnitude:

  • Declared financials of these banks for earlier years will be proven wrong.
  • Given the magnitude, the very credibility of the Indian banking sector, Statutory auditors and RBI itself will be questionable, having serious economic ramifications, including all sovereign credit rating of India.
  • Capital adequacy and share prices including valuations thereof will be negatively impacted. The Indian public as well as investors will feel cheated and will lose confidence even in the financial markets impeding future investments in debt- equity of the banks.
  • International branches of the banks will face closure or substantial reduction in their business due to lack of necessary capital adequacy, negative outlook and further potential asset quality risk. In fact, RBI itself is responsible for the current changing scenario:
  • RBI permitted, in spite of repeated opposition by ICAI, appointments of branch auditors as well as central statutory auditors of the banks to be made by banks management itself. The number of branches subject to audit reduced dramatically, thereby reducing financial discipline and control by independently appointed auditors.
  • Strategically sidelining Chartered Accountant directors by a series of negative initiatives including restricting their numbers, maximum 6 year limit on Board removing experienced Directors from banking system, restricting their number and role in credit monitoring.
  • Permitting banks to continue to charge extremely high interest rates, including gross spread of 4% to 6%, as compared to international practice of 0.25% to 0.75%.
  • Very stiff norms on international investments over regulations in P Note, External Commercial Borrowing and restricting M3 and availability of credit at reasonable terms and basis.
  • Direct interference into day to day management of banks, especially public sector banks, including appointment of CMDs (resulting in very poor selection) and substantial delay,
  • Appointment of consultants to select CMD, having no understanding of Indian financial markets.
  • Recent interference in the setting up of proposed Banks Board Bureau (BBB)  RBI has made Open-disclosure of confidential, vulnerable issues now public ally in a series of structured disclosures rather than confidential and effectively managing the problems of Indian borrowers. This has embarrassed Industry as well  as current Indian Government.  The Indian businesses are competing with international companies borrowing at the rate of 3% to 4 % (LIBOR of US $ is 0.13%), while bearing 12% - 18% interest payment to the banking sector and 15% - 36% interest to Non Banking Finance Companies and unorganized financial market.
Certain Solutions to be examined

  • Special nursing programmes for each suffering economic sector.
  • A special debt restructuring scheme for various sectors which need nursing, rather than trying to kill the industry and businesses by downgrades. The schemes could be positively planned similar to UDAY brought out for power sector (DISCOM) by the Government.
  • The government may empower banks to take over all major economic powers from the existing management, in carefully selected cases.The day to day management can continue as it is, while CFO and other observers are to be appointed by banks to ensure financial discipline.
  • A part of the debt of the industry can be converted into equity or optionally / mandatory fully convertible bonds (with a sell back option) to have the upside of the well performing units.
  • The interest burden of the industry, business, services sector as well as real estate and infrastructure need to be curtailed down substantially with ease of credit off take.
  • The penal interest, interest on interest and interest charged over and above the base rate can be waived partly or fully in a judicious manner.
  • The Government may consider to permit one time settlement scheme with payment of principal and simple interest within 3 months by the industry from any source, without any tax implication and complete immunity from PMLRA and similar other legal provisions.
  • SME sector will need special scheme for their revival. The credit availability has to improve and too much dependence on collateral is impacting reasonable growth.
  • The interest rate spread for the banking sector to be brought down in the range of 1% to 2% with effective interest rate between 7% to 10 % to industry and businesses.
  • Professionalize the management with detailed internal and statutory audit and independent auditors. The aforesaid analysis may look highly critical to certain quarters for which an open debate is needed to address all issues on a war-footing basis.

We cannot allow certain hidden hands to forge a conspiracy against our Great Nation and specially banking sector being the backbone of our economy.


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