Random Reflections - 14                                                                                                      28.09.2017 

Why Govt wants to liquidate Financial Institutions ? 

Under the FRDI bill 2017, a “Resolution Corporation” would be established with only government nominees on its board; the board would have sweeping powers to order amalgamation, merger, liquidation and acquisition of any bank, including the SBI and other nationalised banks, regional rural banks, co-operative banks and payment banks, any insurance company including the LIC and other nationalised general insurance companies and any non-banking financial institution if, in its opinion and judgement, the concerned institution (bank or insurance company) has got “imminent” or “critical” risk to viability. The Corporation will also be authorised to hand over any such institution to another entity – public or private. The Corporation has been authorised to order discontinuation of service of the employees and officers and/or transfer of their employment and/or reduction of their remuneration upon such “Resolution”, i.e. amalgamation and/or merger and/or liquidation and/or transfer of ownership. The bill has the following draconian provisions:

Amendment to all Acts related to the Financial Sector

FRDI envisages forthwith closure of the “Deposit Insurance and Credit Guarantee Corporation” (DICGC) established in 1961, which has so far been an insurance cover for the savings of the depositors; under the FRDI, deposits upto a maximum of Rupees One Lakh only will be returned to each depositor and that too in instalments as per convenience and discretion of the “Resolution Corporation” to be established.

Ø  A Corporate body called ‘Financial Resolution Corporation(FRC)’ will be formed.

Ø  DICGC will be merged with the FRC.

Ø  A Board will be established with

o   a Chairperson,

o   4 members - one each from Finance Ministry, RBI, SEBI, IRDA, PFRDA,

o   3 whole time members appointed by Govt. &

o   2 Independent members appointed by Govt.

Ø  The Govt. will have power to remove all of them and they are considered Independent!

In recent years, the unholy nexus between the unscrupulous corporate houses, top stratums of banks and a section of political bosses have successfully raised the level of NPAs by alarming proportions; the rate of growth of NPAs has increased several folds after the present NDA government assumed power at the centre in 2014. Of the total NPA portfolios of PSBs as at present, 88.4 per cent is the creation of the large corporate borrowers with the loan exposure of or above Rs 5 crores each;  of which, 25 per cent is accounted for by  12 large borrowers.

The present government at the centre has no political will to recover the NPAs from the defaulting corporates; instead, it is more interested to accommodate and patronise the defaulters through various measures like loan-restructuring, assets-reconstruction, insolvency and Bankruptcy codes and even write offs and outright loan-waiver and thereby it attempts to show the performance of the PSBs in poor light and then liquidate them through the new bill.

The draconian nature of the bill and its impact on the safety and security of people’s deposits as also that on the emoluments and the very job security of the employees and officers is apparent and manifest on the face of it; but the most dangerous consequence is that it will take out the issue of existence or liquidation of a PSB from the domain of public debate and leave it to the whims of bureaucratic dictates.  Let us discuss the serious issues on the Bill which is brought into create a Super Power than even CBI or Parliament. My comments on the bill are;

1.   Unconstitutional :

Any Act brought to the Parliament should be within the frame work of the Constitution. 

The preamble of the constitution talks about:

JUSTICE, social, economic and political;

EQUALITY of status and of opportunity;

And above all sovereignty

The proposed bill is discriminating between the depositor and the borrower, through its provisions of “Bail in”.  The depositor whose money is given as loan to the borrower is likely to lose his share of deposit in case of a Bail in, whereas the borrower who availed the loan is likely to go scot free.  Thus the Bail in concept is a double whammy.  In Cyprus the depositors lost almost 50% of their savings when a “bail in” was implemented by the resolution corporation which is similar to that of the FRDIC proposed in this Bill.  [A ‘bailout’ is where the Govt or the Central Bank of the country comes to the rescue whereas in “Bail in” the depositors money kept as deposit will be converted into Equity- thus the burden will be shifted to the poor depositor]

Constitution in Sec 13(2) says

“The State shall not make any law which takes away or abridges the rights conferred by this Part and any law made in contravention of this clause shall, to the extent of the contravention, be void.”

Here the Bill is taking away the rights of the depositor to get back what he deposited in full trust that his money is safe in a Public Sector Bank as it is backed by the sovereign guarantee of the country.

Similarly the proposed bill is also in contravention of Sec  14 under “Right to Equality”.

“The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India”, .  The bill is denying the rights of the depositor who would have deposited more than what is provided under the Deposit Insurance.  

The Constitution under Right to Constitutional Remedies provided under Sec 32 (4) says

“The right guaranteed by this article shall not be suspended except as otherwise provided for by this Constitution”. But this Bill has a provision under Sec 65 as well as Sec 133 prohibiting Constitutional remedies by specifically saying that no proceedings for liquidation of a service provider shall be entertained by any Court or Tribunal other than the Tribunal in accordance with the provisions of this Act (i.e. National Company Law Tribunal – NCLT).  Sec 133 says “Unless otherwise provided in this Act, no court or other tribunal shall have jurisdiction to entertain or adjudicate upon any matter which the Corporation, the appropriate regulator, the Tribunal or the Appellate Tribunal is empowered to decide or determine under this Act and no court or tribunal shall grant any injunction in respect of any actions proposed or reverse any such action”

Thus the proposed Bill is unconstitutional and void abinitio.    

2. No Liquidation of Banks should be thought of.

Any Act passed in the Parliament which is the Supreme Law making authority of the country should create confidence in the minds of the people.  In our country more than 80% of the depositors are classified as household depositors with small savings which they keep in the Bank with the absolute trust that the Govt will ensure repayment of the same.  The trust in the Public Sector Banks is more because of the sovereign guarantee.  But this Bill has brought in SBI as well as Public sector Banks under its ambit and has provided a clause for liquidation of these banks.  This will create insecurity among the depositors.  Everyone should recall that inspite of the US financial crisis 2008 which spread to Europe and most part of the world there was no run on Indian Banks because of this trust.  If this trust is broken it can lead to turmoil even in case of a small crisis in financial sector.  People will not like to keep them their savings in the banks as they may loose them in case of liquidation. Hence this Bill should be withdrawn to repose confidence of the depositors in the financial system of the country. 

3. Do Not Follow Western Model

This bill has been brought in based on the decision of the G7 countries which created a Financial Stability Board in the aftermath of the financial crisis 2008-09.  The Financial Stability Board proposed “Key Attributes” for Financial Resolution which was adapted by the G20 Heads of States in November 2011 as  new International standards for resolution regimes.  The Bill is absolutely adopted  on the basis of the key tributes, with copy and paste verbatim from the 2014 version of the, “Key Attributes” Document. 

First of all we should understand that these key attributes are not mandatory and many of the G20 countries including US have not adopted the same verbatim.  Though many countries have created resolution mechanism they are not the same.  In some countries the Resolution Corporation is under the umbrella of the Central Bank.  In some other countries the strategically important Banks have been asked to prepare their own resolution plan which is only under progress.  Hence we don’t have to follow the Western Model.

4. Uniqueness of Indian Banking System

We cannot compare the Public Sector Banks in India with the Banks of the west.  In United States between 2008 & 2012, 465 Banks failed during the financial melt down because they were totally private and many of them very small and some of them very big because they were not in the Government Sector.  Some were doing only specific areas of business like “Mortgage Banks”.  In our country after 1969, no Bank has failed.  Even the Private Sector Banks like Global Trust Bank were taken over by Public Sector Banks as the Reserve Bank of India already has powers for a resolution mechanism in case of mismanagement of Banks in the country.  We have RBI Act, Banking Regulations Act, Banking Acquisition and Transfer Act, SBI Act which are exhaustive and all the protections needed for the depositor are available in our country. 

5. We have a Robust Resolution Mechanism

The Financial Resolution and Deposit Insurance Bill, 2017 says “A Bill to provide for the resolution of certain categories of financial service providers in distress; the deposit insurance to consumers of certain categories of financial services; designation of systemically important financial institutions; and establishment of a Resolution Corporation for protection of consumers of specified service providers and of public funds for ensuring the stability and resilience of the financial system and for matters connected therewith or incidental thereto”

In our country, there is already a resolution mechanism for all the financial service providers which is available with the Reserve Bank of India.  In addition we have also brought in an insolvency and bankruptcy code.  We have also created a National Company Law Tribunal .  Hence there is no need for a new resolution mechanism. 

Similarly there is separate Insurance Regulatory and Development Agency (IRDA) for the Insurance Sector.  RRBs and Co-operative Banks have their own mechanism. 

In addition Deposit Insurance And Credit Guarantee Corporation which is a wholly owned subsidiary of the Reserve Bank of  India is functioning very effectively.  In fact since its inception, DICGC had to pay only 50.3 Billion Rupees whereas it has 701.5 Billion Rupees as deposit insurance fund as on march 2017.  It also has Rupees 716322 Million as investments.  As on March 2017, the balance in Deposit Insurance Fund is 645578.48 million and the balance in Credit Guarantee Fund is Rs.730027.64 million. Except Co-operative Banks no other banks have required claim from DICGC. This clearly shows that the depositors are safe in our country and there is no need for another resolution mechanism to provide deposit insurance to consumers. 

Already the Govt has a mechanism for designation of systematically important financial institutions. (SIFIs)  SBI, ICICI and HDFC Bank have been declared as SIFIs .  Hence there is no need for another body to identify SIFIs.

Finally there is absolutely no need for resolution corporation for protection of consumers as we have very good resolution mechanism in our country which is totally different from other countries in G20 and we have 21 Public Sector Banks, 56 RRBs, public owned Life Insurance corporation of India and General Insurance Corporation. The present bill will only shatter the faith the people of this country have on these institutions.  We don’t have to blindly follow what the west does, because our country has a unique financial system which is an envy of others and we should not take any step which will create a fear psychology among the citizens of this country. 

6. Absolute Power Corrupts absolutely

What is proposed in this Bill is creation of a Supreme Authority which will be more powerful than Reserve Bank of India, Central Vigilance Commission and even Central Bureau of Investigation.  Such an authority which will be under the Finance Ministry as the Ministry has powers to appoint the Chairperson and most of the members of the Resolution Corporation will be dangerous as independence of this authority will be subject to  the political party in power. 

7. Privatisation Route through FRDI

State Bank of India Act has a provision that SBI can never be liquidated.  Whereas this Bill proposes to amend various Acts including SBI Act and create a provision for liquidation of SBI, Public Sector Banks, RRBs and Co-operative Banks which is a dangerous step.  No Bank in our country can be liquidated.  So they will be only handing over of these banks to the Private Sector.  It is because of the mismanagement by the Private sector, Banks were Nationalised.  After Nationalisation Banks have done a major role in development of the economy.  Even now for the growth recovery of the economy, Banks have to play a key role. At this crucial juncture the passage of this Bill will only lead to further deterioration of the economy.

8. Proper Study not done

The Committee headed by Mr. Ajay Tyagi, Additional Secretary, Dept of Economic Affairs has only copied from the recommendations of the Financial stability Board and has not gone into the assessment of the Indian Financial Sector in toto. Hence the recommendations are not practical and not suitable for our country. 

9. Do not tamper with LIC & GIC

Life Insurance Corporation of India which was started with just Rs.5 crores investment by the Govt of India, today has grown as a great institution with excellent track record of honouring the Insurance policies and the LIC contributes to the annual budget of the country a huge sum.  LIC also is a share holder in most of the Banks and Financial institutions as per the directives of the Govt.  To even to talk about liquidation of LIC is a crime against the people of the country who have great faith in LIC. 

10. Want more Banks and not closure of Banks

Our country is still under banked when we compare with other developing and developed nations.  Hence we require more banks and more branches.  This resolution Corporation is going to only destroy what has been built over a period of more than 5 decades. 

Hence we have to campaign against the bill seeking support of the common masses.    

D.T. Franco

ngcfranco@gmail.com

Random Reflections – 13                                                                           24.08.2017

                       

 Merger of Public Sector Banks. For whose Benefit?

It is quite alarming that Govt is very adamant in his attitude of privatizing / merging / consolidating the Public sector Banks at any cost despite the thunderous protest of 10 lakhs Bank Employees during the Nationwide Bank’s strike held on 22/08/2017.

It is a matter of concern that the Union Cabinet approved the alternative mechanism to implement the crisis. Under this strategy, the proposals received from banks for in-principle approval to formulate schemes of amalgamation shall be placed before the Alternative Mechanism(AM).The decision will be based on commercial consideration by the boards of the banks involved. We now understand the Government tactics of non appointing workmen/Officer directors in the Board for nearly 3 years.  They want to pass the merger resolution without any protest in the boards. 

In the case of SBI, the Chairman herself had stated in press that merger was not needed but within 6 months she was asked to seek approval of the Board. In few Associate Banks Independent Directors opposed but their voice was ignored.  Today the PSB Boards are puppets of the GOI.  The Finance Minister reviews Banks almost on a monthly basis and gives instructions.  So he is equally responsible for the NPA which is increasing every year. 

 All the reasons explained for the merger  are unjustified as detailed below: 

1.   “To create strong and competitive banks that can absorb shocks and have the capacity to raise resources without depending on the State-Exchequer”.

Ø  The Govt’s intention is very clear. The Govt. wants to privatise some PSBs. The Government received all the profits earned by the PSBs when the economy was good in all the periods. Due to economic slowdown, the banks faced crisis especially in handling Non Performing Advances. Further 86.5% of total defaults relates to Corporate clients only which are mostly favoured by the Government only.  In the name of hair-cuts, Government now wants to benefit the defaulting Corporates favourably. RBI Governor recently told “It is clear that state run banks will need to take haircuts on the current exposure under any resolution plan within or outside the IBC”.  In the case of 12 A/cs referred to NCLT, the RBI has already asked the Banks to create 50% provision this year and 50% provision next year.  This means that Govt. is really not for entire recovery of such defaults. This indicates the double standard policy of the Govt.

The Government wants all the social banking  done by Public Sector Banks at their own cost (ex: Jandhan accounts ) whereas PSBs are expected to compete with Private Banks/ Foreign Banks under profitability. The Govt has forgotten social goals, the preamble of the constitution and is moving towards private monopolies. People will stand up and question soon.

2.   “Mergers and consolidation will help in faster resolution of bad loans of public sector banks”

Ø   In the past two years, the total provisions made by all the PSBs as a percentage to hard earned gross profit increased to 113.21%(more than the gross profit) in March 2016(it was at 72.94% in March 2015) and still overlapping at 106.44% in 2016-17 first time in the history of Banking. It is a pathetic situation that almost 99% of the above provisions constitute NPA provisions only. In other words, around 25% of total NPAs are kept under provisions for NPAs during 2016-17 for entire PSBs as a whole. Further, the quantum of willful defaults in the case of all PSBs  increased to Rs.92,376 cr in March 2017 compared to Rs.76,685 cr in March 2016 with a share of 13.5% to total gross NPAs compared to 14.2% in the same corresponding period. The Government wants all the provisions held with PSBs to be enjoyed by the willful defaulters and other Corporate clients, and only on this motive, the Government favours mergers and consolidation of PSBs. On such mergers, the merged bank will have larger provisions so as to easily offset the willful defaults. (Example Recent merger of SBI Associates and Mahila Bank proved that provisions increased alarmingly at the time of merger. In fact, the provisions for NPAs increased to the huge   level of Rs.27565 Crores for the Associate Banks during the merger process whereas the actual provision for Associate Banks in 2015-16 was only at Rs. 8127 Crores. The increase at  239.18% is unbelievable and it is compulsorily made during the merger).

3.    “PSBs will benefit from operational and functional synergies, resulting in better efficiencies.” according to CRISIL ratings.

Ø  On recent SBI merger, the cost to  income ratio (efficiency ratio) increased to 58.31% in March 2017 compared to 49.27% in March 2016 for the SBI group as a whole. The growth in operating profit declined to 8.66% in March 2017 compared to 12.05% in March 2016 in the case of SBI associates alone during merger.

It is said that there is no plan to launch Voluntary Retirement Scheme (VRS) in SBI after merger and no employees have been laid off on account of merger. But, it is a matter of fact that 3569 staff of Associate Banks had opted for VRS before merger mainly due to fear of merger impact.  Because of this, reduction in productivity as well as efficiency has affected the sustained growth in business as well as profitability.  The Associate Banks alone showed a negative credit growth at 15.64% in 2016-17 compared to 3.17% in 2015-16.  Similarly the growth in deposits has come down to 8.68% in March 2017 compared to 10.14% in March 2016.  The rating agencies in general talk much about the government policies and agricultural development and economic growth. But they don’t have the mechanism to arrive at the weightage for awarding ratings under achievement of social banking and priority sector lendings in their rating format.  Many CRISIL rated companies are Non Performing Assets now.  

      4. “Merger of Associate Banks and Mahila Bank with SBI is a successful plan”.

Ø  A brief analysis on recent consolidation of SBI associate banks & Bharatia Mahila bank with prime SBI indicates that there are possible manipulations in the accounting procedure and it is believed that the performance of the associate banks are underestimated mainly by showing higher NPAs and thereby keeping higher provisions apart from abnormal increase in wage provisions.  

It is observed that the growth in gross NPAs during 2016-17 was greatly reduced by the entire Public Sector Banks, in general.  The growth in NPAs was at 29.26%  in 2016-17 for all the 11 Turn Around Banks compared to last year level of 93.83%.  Similarly the increase in Net NPAs was also minimal at 20.95% in 2016-17 compared to 92.22% in 2015-16.  This was also being the position for the entire PSBs average at 26.91%  compared to last year level of 93.91%.

 Excluding NPAs of Associates of SBI, the increase in gross NPA for the system was only at 19.97%.  This being the case,  how could the Associate Banks gross NPA alone increase at  164.72% when compared to last year level of 50.41%.  As per the annual report recently published by SBI for 2016-17 in page no.219, the following table illustrates the above.                                                                                                                       ( Rs. In crores)

Details	2015-16	2016-17	Growth %
Gross NPA for SBI Group	123416	179167	45.17
Gross NPA for SBI Standalone	98173	112343	14.43
Gross NPA for Associates	25243	66824	164.72
Gross NPA for PSBs	539950	685257	26.91

 It appears that abnormal adjustments would have been made in finalizing the NPA position of Associate Banks alone. Due to this, the overall gross NPA ratio of Associate Banks as a whole was given a lethal blow of showing gross NPA Ratio at 20.19% compared to last year level of 6.55%.As such, the provisions for NPAs increased to a huge   level of Rs.27565 Crores for the Associate Banks alone whereas the comparable provision for Associate Banks in 2015-16 was only at Rs. 8127 Crores. The increase at  239.18% is unbelievable.

In general, when there is an increase in gross NPAs, there would be a fall in Net Interest Income (NII) growth.  During the year 2016-17, the entire PSBs registered an average growth in NII was lower at 4.19% due to higher NPAs observed in the system. As a matter of fact, 10 PSBs have showed negative growth and almost all other banks showed a growth of less than 10%. But in the case of Associate Banks as a whole, the NII growth was observed significant at 27.42% and ranked first among all the PSBs in the particular parameter.

Further, the staff cost for associate banks have been vouched more at Rs.9202 Cr  in 2016-17 compared to Rs.5901 Cr in 2015-16 with an abnormal increase of 55.92% i.e,over by Rs.3301 Cr against a system average of 8% only. 

As such we can conclude that the Associate Banks are merged on a compulsory and committed  basis despite their reasonably  good performance.  A false and unhealthy show of their performance is seen. Since larger provisions are made unreasonably, this could be easily reversed in the subsequent quarters of current year or in the next year and  the post merged SBI can exhibit higher profit in the coming period as against a poor show of Rs. 391Cr loss during 2016-17.

  It appears the provisional adjustments and NPA classification is done on a committed/pressure basis which needs reclassification and re-audit especially by a Government Audit. All this has been done  so as to justify the Government that the merger plan is a successful process so as to continue for other banks also.  Further,  without projecting a P&L plan for the proposed merger, the process has been made.  The actual merger cost would be alarming and it is yet to be derived.    We have to wait for 2 years to see the real impact.

    5.  “Let some Public Sector Banks die, Consolidation should be done keeping  in     

    mind the interest of minority share holders: Former RBI Governor Mr.Subbarao”.

Ø  The entire Balance Sheet Capital of all PSBs forms only a very low of 0.25 % of total PSB deposits for all the last 3 years. The total reserves and Surplus also constitutes less than 7% of total deposits for all the last 3 years. But in contrast, the capital investors in PSBs (with the very low share capital% to that of public deposits enjoy more benefits /more importance/more accommodation with the share price index and more dominance  with the common law of governing rules than the deprived and ordinary public deposit holders.

Ø  The public sector banks are doing more social banking than that of commercial ones especially more in the recent periods. The timely and significant work done by the employees of PSBs towards implementation of Demonetization and the exemplary achievement   made towards opening of Jandhan accounts may be quoted.

Ø  This may be correlated with the recent advice given by a Parliamentary panel on the Indian Railways on 09.08.2017, suggesting that the Govt. should not run the Railways as a business centre. The Steering committee also recommends for Govt. funding to many “socially desirable projects”.

Ø  As long as the PSBs are earning profits they are bound to pass the profits earned every year to the Govt. Hence, it is the duty of the Govt. to support and help the PSBs whenever they are in crisis. Here, the concept of weak banks and strong banks should not be devised on the basis of capital structure and net profit earned over a limited period of time.

   6.  “Consolidation among PSBs assumes significance as most of them are grappling 

          with huge levels of non-performing assets, slow credit off take and resultant 

          pressures on capital adequacy.”

Ø  The Govt. has to agree with the reasonable performance of all PSBs in 2016-17 which has far improved than in 2015-16 despite the constraints faced with demonetization impact and the Capital inadequacy added with stringent provisioning norms on the accumulated NPAs. It is a matter of fact that for the entire PSBs as a whole, the operating efficiency improved significantly expressed in terms of operating profit growth at 18.67% in 2016-17(11 turnaround banks at 15.71%,9 Other PSBs at 24.73% and SBI group at 15.81%) compared to a negative growth of 1.82% in 2015-16. Even the deterioration of Return on assets is minimized by 8 to 9 basis points during the period 2016-17 though ended negative at 0.11% for the PSBs as a whole. The global banking trends also observed a weak credit growth reflected in low return on assets  due to the huge burden of stressed assets, banks in Russia and India witnessed significant declines in RoAs. The RoA of Chinese banks too declined sharply. Various factors are responsible for worsening asset quality in these countries, e.g., sector specific problems in case of India, economic weakness in case of Brazil and Russia and excessive corporate leverage in case of China. Deteriorating asset quality of banks adversely affects the lending capacity of banks, reduces their profitability, erodes their bank capital and can pose challenge to these economies. It is a matter of concern that why the Govt.is more reluctant in issuing needy capital to the banks in time despite the many economists view, recommendations of certain committee reports, suggestions by some reputed rating agencies and system followed in many global economies. As such, raising equity from non-banking companies and mobilizing capital from market should not be insisted on the Public Sector Banks for the sake of diluting Government capital. It is obvious that the credit growth is sluggish mainly due to stringent norms imposed on credit front as well as the capital norms by the Regulators apart from the Govt’s. attitude of reluctance towards capital infusion.

The All India Bank Officers Confederation has submitted Turnaround Plans to 11 Banks and shown how it is possible to turn them around.  The Govt insisted on a tripartite agreement which has been agreed and signed.  As per the agreement a High Power Committee of Management and Association / Unions will review the progress every month.  Not a single bank has done it so far.  So the Govt is cheating the staff as well as the masses.  Concession continue for favourite Corporates.  The move towards merger is nothing but a step towards handing over some of this Banks, if not all to the Corporates.  People of the country will understand for whose benefit these mergers are proposed and they will  join together to save the Banks and save the economy.

D.T. Franco

ngcfranco@gmail.com