Bad Loans.
This refers to your Edit 'Elementary Watson',Easy Money ,Bad loans (ET dt,28/01/10). The observation that easy money made available by the banks to borrowers to go in for non viable business ventures is also a reason, among other things, for the increase observed in the Gross non-performing assets of banks is hard to digest. On the contrary, Non performing loans generally arise largely on account of high interest rates when banks are tempted to lend ignoring the risks and viability of projects. The present increase in NPAs is largely on account of economic slow down.
NPA s are inevitable in banking business as banks deal in money and with human resources entangled in business and economic activities which are part of fast changing business cycles. The only permanent solution to contain formation of NPAs and minimise the damages that they can cause to all stake holders of banks including borrowers is to have a fund built up within the banks by making the borrowers to contribute based on their performance rating. The banks and if necessary the Regulator and the Government can also contribute towards this fund which will emerge as a cushion to discipline borrowers and at the same time strengthen the banks' balance sheet. The Government can avoid contributing to the capital of banks which they often do.
The problem of NPAs has been there since the evolution of banking and the solution for it has to come from bankers and the borrowers themselves.
Dr.T.V.Gopalakrishnan
This appeared in ET,30/01/10 (edited version)
Friday, January 29, 2010
Monday, January 25, 2010
Budget boost to growth
Budget boost to growth
The Finance Minister has to create an environment where tax
Compliance is easy, avoidance is difficult and evasion is impossible
This year’s annual budget proposed to be presented on 26th Feb, 2010 assumes greater importance than usual as the economy shows signs of recovery and requires further boost to register double digit growth.
The Finance minister faces a formidable challenge as he has to initiate measures to exit the stimulus package liberally introduced in 2007-08 to save the economy from the disaster caused due to international financial crises triggered by sub-mortgage crisis in US financial system and at the same time find new innovative measures to give a stimulus to the economy to perform better in the midst of raising inflationary pressures, ever widening fiscal deficit and expectations and aspirations of people suffering from acute poverty, illiteracy and large scale unemployment. The task is stupendous, but manageable provided he introduces some harsh and simple measures through the budget.
Pending implementation of Direct Tax code proposals, FM can consider simplifying the direct tax administration particularly income tax. The middle class and the rich in the economy have multiplied manifold over a period and it is doubtful whether all are brought under the tax net.
Traders, dealers, brokers, small business people, contractors of different categories and self employed people including professionals earn a lot and may or may not have PAN numbers ,may be filing or may not be filing returns or may be paying or may not be paying income tax or may be paying less tax than what is due.
The FM has to necessarily create an environment where tax compliance is easy, avoidance is difficult and evasion is impossible. The following measures if introduced can create such an environment gradually if not in the immediate future.
Ensure that no individual or family remains without a bank account. Financial inclusion being talked about/ attempted so far has sought to give the poor access to savings and minimum credit facilities, but the real Financial inclusion is to ensure that no one in the economy irrespective of his economic or social status remains without a bank account.
Self employed people including retailers engaged in varieties of activities such as scrap dealers, furniture merchants, contractors vendors ,etc, do not seem to have bank accounts or even if they have one they prefer to deal in cash only. Reluctance to receive cheque or draft in urban/metropolitan centre is very common and many seem to be scared to have the funds credited to bank accounts. The banking habit even among literate and well to do people is not wide- spread.
Dr.T.V.Gopalakrishnan
This appeared in The Hindu-Business Line Dt 26/01/10
The Finance Minister has to create an environment where tax
Compliance is easy, avoidance is difficult and evasion is impossible
This year’s annual budget proposed to be presented on 26th Feb, 2010 assumes greater importance than usual as the economy shows signs of recovery and requires further boost to register double digit growth.
The Finance minister faces a formidable challenge as he has to initiate measures to exit the stimulus package liberally introduced in 2007-08 to save the economy from the disaster caused due to international financial crises triggered by sub-mortgage crisis in US financial system and at the same time find new innovative measures to give a stimulus to the economy to perform better in the midst of raising inflationary pressures, ever widening fiscal deficit and expectations and aspirations of people suffering from acute poverty, illiteracy and large scale unemployment. The task is stupendous, but manageable provided he introduces some harsh and simple measures through the budget.
Pending implementation of Direct Tax code proposals, FM can consider simplifying the direct tax administration particularly income tax. The middle class and the rich in the economy have multiplied manifold over a period and it is doubtful whether all are brought under the tax net.
Traders, dealers, brokers, small business people, contractors of different categories and self employed people including professionals earn a lot and may or may not have PAN numbers ,may be filing or may not be filing returns or may be paying or may not be paying income tax or may be paying less tax than what is due.
The FM has to necessarily create an environment where tax compliance is easy, avoidance is difficult and evasion is impossible. The following measures if introduced can create such an environment gradually if not in the immediate future.
Ensure that no individual or family remains without a bank account. Financial inclusion being talked about/ attempted so far has sought to give the poor access to savings and minimum credit facilities, but the real Financial inclusion is to ensure that no one in the economy irrespective of his economic or social status remains without a bank account.
Self employed people including retailers engaged in varieties of activities such as scrap dealers, furniture merchants, contractors vendors ,etc, do not seem to have bank accounts or even if they have one they prefer to deal in cash only. Reluctance to receive cheque or draft in urban/metropolitan centre is very common and many seem to be scared to have the funds credited to bank accounts. The banking habit even among literate and well to do people is not wide- spread.
Dr.T.V.Gopalakrishnan
This appeared in The Hindu-Business Line Dt 26/01/10
Monday, January 11, 2010
Right Compensation
This refers to your edit "Be pragmatic, SEBI (ET,31/12/09).As rightly indicated,SEBI has to ensure that Perpetrators of Fraud do not go scot free and make money exploting the illiteracy of investors or the system and procedure for IPOs prescribed by SEBI.
It needs to be made compulsory for all companies going for IPOs to keep a minimum margin say 0.05 % out of the subscription money towards The Investor Protection Fund and in case the company does not adhere to the prescibed standards of SEBI , the investors should be compensated. The compensation should not exceed the subscrition money.
Dr.T.V.Gopalakrishnan
(This appeared in ET Dt,2/01/10
This refers to your edit "Be pragmatic, SEBI (ET,31/12/09).As rightly indicated,SEBI has to ensure that Perpetrators of Fraud do not go scot free and make money exploting the illiteracy of investors or the system and procedure for IPOs prescribed by SEBI.
It needs to be made compulsory for all companies going for IPOs to keep a minimum margin say 0.05 % out of the subscription money towards The Investor Protection Fund and in case the company does not adhere to the prescibed standards of SEBI , the investors should be compensated. The compensation should not exceed the subscrition money.
Dr.T.V.Gopalakrishnan
(This appeared in ET Dt,2/01/10
This refers to your edit Mittal's Frustrations (Et,Jan9,2010). The problems investors facing in India have been well brought out and solutions suggested therein .But the mindset and administrative hurdles continue to remain a major stumbling block as the reforms in vogue since 1991 in the economy have not touched the bureaucracy and the land management.
It is high time to have professionals with a pro active mindset to understand issues and arrive at solutions early to attract investments and facilitate fast economic progress. India has vast resources of land, labour and raw materials and entrepreneurs.the best and easy solution to attract huge investments in India and achieve the economic growth targetted at double digits is to have Land Bank both at central and state levels and make it avalable for investors.
Dr.T.V.Gopalakrishnan
(This appeared in ET dt,11/01/10)
It is high time to have professionals with a pro active mindset to understand issues and arrive at solutions early to attract investments and facilitate fast economic progress. India has vast resources of land, labour and raw materials and entrepreneurs.the best and easy solution to attract huge investments in India and achieve the economic growth targetted at double digits is to have Land Bank both at central and state levels and make it avalable for investors.
Dr.T.V.Gopalakrishnan
(This appeared in ET dt,11/01/10)
Monday, December 7, 2009
Fair Request, Bad Loans and Provisions
Fair request, Bad loans and Provisions
Banks’ request to RBI for extending the application of higher provisioning norms in the present circumstances where the credit off take has not picked up, earnings other than interest are marginal, inter mediation cost is high forcing them to continue to charge higher rates of interest on existing loans, recoveries of loans proving difficult due to recessionary conditions etc appears genuine and needs favorable consideration.
However, the solution in respect of continued persistence of non-performing loans in banking books which cannot be eradicated as long as banks deal in money ,with people and the economy the growth of which itself is dependent on variable factors like fast changing political situation, volatile economic environment, social changes and technological advancements. It is high time the banks and the authorities recognize the festering nature of the problem of non performing loans and their impact on banks balance sheets, the economy in general and the financial system in particular and come out with a practical and permanent solution to contain formation of non performing loans to ensure a strong balance sheet for banks and at the same time minimize the adverse impact of such loans on other stake holders of banks. High bad loans, high interest rates,high provisions towards bad loans,high inter mediation costs, generally affect the credit expansion and banks develop a tendency to resort to lazy banking keeping the borrowers at a distance. To encourage lending liberally and attracting the borrowers in large numbers to banking fold,the problem of non performing loans has to be tackled differently and in a manner acceptable to both banks and borrowers alike. Other stake holders also should welcome the approach of banks in minimising the impact of npls in banks' books.
The only workable way to save the banks,all stake holders including the economy from this vexatious issue of non-performing loans is to bind the borrowers with an obligation to bear the burden of non performing loans. Banks also will have to share the burden to some extent basically to involve themselves and be more vigilant in the over all administration of credit portfolio. The suggested approach is creation of a fund named “Precautionary Margin Reserve” by levying a small percentage ranging between 0.10 percent and 0.75 percent on standard advances of the bank based on certain criterion of the quality of conduct of borrowers’ accounts. The Levy should be in the nature of a guarantee fee from all borrowers and should be maintained with banks themselves . Instead of compelling banks to increase the provisions , they can be asked to contribute a small amount towards this precautionary margin Reserve. The Fund over a period will be more than the bad loans formation and the coverage ratio will be much better than the present loan provisions coverage ratio. In terms quality of advances, profitability of banks, strength of balance sheets of banks, benefits derived to all stakeholders including the Government the suggested levy will prove to be a boon and win-win situation. The Fund also can be treated as tier-2 capital thus helping the banks to have better capital adequacy ratio.
Dr T.V.Gopalakrishnan
Banks’ request to RBI for extending the application of higher provisioning norms in the present circumstances where the credit off take has not picked up, earnings other than interest are marginal, inter mediation cost is high forcing them to continue to charge higher rates of interest on existing loans, recoveries of loans proving difficult due to recessionary conditions etc appears genuine and needs favorable consideration.
However, the solution in respect of continued persistence of non-performing loans in banking books which cannot be eradicated as long as banks deal in money ,with people and the economy the growth of which itself is dependent on variable factors like fast changing political situation, volatile economic environment, social changes and technological advancements. It is high time the banks and the authorities recognize the festering nature of the problem of non performing loans and their impact on banks balance sheets, the economy in general and the financial system in particular and come out with a practical and permanent solution to contain formation of non performing loans to ensure a strong balance sheet for banks and at the same time minimize the adverse impact of such loans on other stake holders of banks. High bad loans, high interest rates,high provisions towards bad loans,high inter mediation costs, generally affect the credit expansion and banks develop a tendency to resort to lazy banking keeping the borrowers at a distance. To encourage lending liberally and attracting the borrowers in large numbers to banking fold,the problem of non performing loans has to be tackled differently and in a manner acceptable to both banks and borrowers alike. Other stake holders also should welcome the approach of banks in minimising the impact of npls in banks' books.
The only workable way to save the banks,all stake holders including the economy from this vexatious issue of non-performing loans is to bind the borrowers with an obligation to bear the burden of non performing loans. Banks also will have to share the burden to some extent basically to involve themselves and be more vigilant in the over all administration of credit portfolio. The suggested approach is creation of a fund named “Precautionary Margin Reserve” by levying a small percentage ranging between 0.10 percent and 0.75 percent on standard advances of the bank based on certain criterion of the quality of conduct of borrowers’ accounts. The Levy should be in the nature of a guarantee fee from all borrowers and should be maintained with banks themselves . Instead of compelling banks to increase the provisions , they can be asked to contribute a small amount towards this precautionary margin Reserve. The Fund over a period will be more than the bad loans formation and the coverage ratio will be much better than the present loan provisions coverage ratio. In terms quality of advances, profitability of banks, strength of balance sheets of banks, benefits derived to all stakeholders including the Government the suggested levy will prove to be a boon and win-win situation. The Fund also can be treated as tier-2 capital thus helping the banks to have better capital adequacy ratio.
Dr T.V.Gopalakrishnan
Friday, November 20, 2009
Using Forex Inflows
This refers to your editorial "Do away with PNS" (ET,Nov18). As suggested this is the best opportune time to introduce ban on Participatory Notes(PNs) and minimise the problems connected with the excess overflows of foreign exchange .By doing away with PNs, both captal market and forex market can expect some order apart from having some checks on outflows of illegal funds. The forex inflows are welcome for economy's growth,but this should not be a conduit for exploiting loopholes to indulge in illegal transactions.
Some of the approaches to tackle excess inflows can be introduction of forex inflows stabilisation fund wherein excess funds can be contributed by the forex earners provision of incentives to use liberally forex earnings for acquisition of business opportunities abroad, by discouraging flows coming in a camouflaged manner etc. This is also the time to give a boost to the infrastructure development where imports of capital goods and technology are needed.
Dr T.V.Gopalakrishnan
(This appeared in ET 20/11/09)
Some of the approaches to tackle excess inflows can be introduction of forex inflows stabilisation fund wherein excess funds can be contributed by the forex earners provision of incentives to use liberally forex earnings for acquisition of business opportunities abroad, by discouraging flows coming in a camouflaged manner etc. This is also the time to give a boost to the infrastructure development where imports of capital goods and technology are needed.
Dr T.V.Gopalakrishnan
(This appeared in ET 20/11/09)
Monday, November 16, 2009
Forex Inflows
Time has come to have a new approach to manage forex inflows and put them into optimum use and at the same time insulating the economy from inflationary and other adverse consequences.
It is heartening that the economy attracts foreign funds and the flows continue to be increasing day by day although they also bring some adversaries to the economy in general in the form of inflationary conditions and forex market in particular by way of rupee appreciation with attendant consequences upsetting the calculations of exporters, authorities in managing the exchange rate, sudden upsurge in money supply and liquidity, volatility in capital market and build-up of reserves more than the requirements. While there cannot be any dispute on the need to have foreign funds to support the fast growing economy and manage huge fiscal deficit, the fact remains that absorption of huge foreign funds without causing damage to the well controlled inflation, well managed financial system consisting of various types of markets, institutions and instruments and the international image meticulously developed over a period as a comparatively well managed economy, has been and continues to be a challenge.
The forex reserves which stood at less than $1 billion in 1991 and induced introduction of economic liberalization measures, has crossed $280 billion as at end of September 2009 and continue to accumulate further. The excess inflows experienced in 2007 seem to be back again necessitating to review the measures to contain their impact. The influx of funds by way of FDI and portfolio investments alone have exceeded $22 billion dollars this fiscal and rupee has appreciated around more than 12 % as on date. Exports have not picked up and cannot be expected to improve considerably in the context of less than anticipated economic recovery in advanced nations.
Management of capital flows due to unprecedented heavy injection of liquidity by Federal reserves, European Central Bank and bank of England to tide over the global financial crisis has its own impact on various central banks including India forcing them to build up reserves. Capital flight to India due to interest rate differential, stability in the financial system and general confidence in the ability of our economy to perform better will definitely attract funds and will turn out to be a major concern to policy makers.
Flight of capital and accumulation of reserves add money supply in the system and cause inflation and inflationary expectations. While availability of funds for speculative build of assets and investments has to be curbed and at the same time sufficient liquidity to take care of productive investments, consumption needs, payment and settlement system has to be ensured, the challenges faced by the authorities in finding an equilibrium are something formidable.
In this context the approach to the problem of flow of foreign funds beyond the absorbing capacity of the economy needs a re look and traditional way of handling the situation has to be changed. The conventional system of intervening in forex market by RBI and using sterilization method to negate the effects of intervention have their own macro economic costs.
Taking into consideration the vastness of the country, huge population still living below the poverty line, inadequate availability of physical, social and financial infrastructure, aspirations and ability and availability of people to attain any bench mark levels of growth envisaged despite constraints and expectations of international community that this country can be the super economic power in future, the massive flow of funds should be viewed as a God –given opportunity to perform and deliver. No doubt, the real situation will prove to be slightly abnormal and naturally calls for an abnormal solution.
Apart from the normal measures like encouraging outflows of foreign exchange through travels, remittances, imports of goods particularly those which can mitigate inflationary expectations, other measures to contain inflows through some incentives akin to those offered to attract inflows when the situation demanded during forex crisis during 1990s can be considered. Other solution can be in the form of creating a Foreign Exchange Inflows Stabilisation Fund .
As it is, Reserve Bank intervenes in the forex market and effects purchases and sales of foreign exchange to moderate the exchange rate fluctuations. This necessarily involves injection and absorption of rupees to maintain /soften the liquidity. To neutralize the impact of purchase/sale of foreign exchange and consequent money supply and liquidity in the market, sterilization is done using government securities for sale/purchase. The whole exercise involves a cost to the economy and the exchequer and creates an element of uncertainty and speculation in different markets in the financial system. All these can be to a great extent minimized if surplus of foreign exchange or a portion of it can be transferred to an account styled “Exchange Inflows Stabilisation Fund” without involving rupee exchange. The Account can be maintained at RBI.
Banks, exporters, investors, importers and institutional forex earners etc having excess foreign exchange and do not require them urgently can invest such excesses in this fund for a small compensation and incentive if required. Such a fund if created and encouraged even if at a small cost to the exchequer will obviate the need for immediate conversion of forex into rupees and consequent measures of sterilization.
For the contributors towards this fund, this can facilitate as a deposit account under their command and funds can be utilized as and when the need arises. This fund kept at the disposal of RBI can be utilized by the Government for exclusive development of infrastructure requiring foreign exchange and the present controversy as to whether the Forex Reserves built up by RBI can be utilized by the Government for developmental purpose can be ended with conviction.
Main advantage of such a fund is that it eliminates rupee supply and consequent ripple effects. The Government can consider compensating by way of suitable incentives to those who contribute towards this fund. The compensation can be paid in Indian rupees or foreign exchange. Exchange rate can be protected through hedging as is done at present in forex transactions.
In case the fund accumulates over a period which is bound to be the case, those who require foreign funds can be allowed as they raise External Commercial Borrowings at a specified exchange and interest rate. The funds can be made available exclusively in forex for development of infrastructure by way of import of technology, skilled manpower, materials research and development.
The costs /sacrifice involved to develop, maintain and manage such a fund may prove to be highly beneficial when compared to the present costs and risks involved to maintain financial stability, exchange rate stability, favorable inflationary conditions and the credibility among the international community to continue to attract investments in India. The fact remains that economy needs billions of dollars for various developmental needs particularly heavy physical infrastructure of international standards to sustain and register further growth of GDP. The momentum now attained and the confidence level built-up both at national and international level have to be maintained at any cost to make the economy really a super power. It may call for some innovative approach and perhaps Foreign Exchange Inflows Stabilisation Fund may be the solution.
It is heartening that the economy attracts foreign funds and the flows continue to be increasing day by day although they also bring some adversaries to the economy in general in the form of inflationary conditions and forex market in particular by way of rupee appreciation with attendant consequences upsetting the calculations of exporters, authorities in managing the exchange rate, sudden upsurge in money supply and liquidity, volatility in capital market and build-up of reserves more than the requirements. While there cannot be any dispute on the need to have foreign funds to support the fast growing economy and manage huge fiscal deficit, the fact remains that absorption of huge foreign funds without causing damage to the well controlled inflation, well managed financial system consisting of various types of markets, institutions and instruments and the international image meticulously developed over a period as a comparatively well managed economy, has been and continues to be a challenge.
The forex reserves which stood at less than $1 billion in 1991 and induced introduction of economic liberalization measures, has crossed $280 billion as at end of September 2009 and continue to accumulate further. The excess inflows experienced in 2007 seem to be back again necessitating to review the measures to contain their impact. The influx of funds by way of FDI and portfolio investments alone have exceeded $22 billion dollars this fiscal and rupee has appreciated around more than 12 % as on date. Exports have not picked up and cannot be expected to improve considerably in the context of less than anticipated economic recovery in advanced nations.
Management of capital flows due to unprecedented heavy injection of liquidity by Federal reserves, European Central Bank and bank of England to tide over the global financial crisis has its own impact on various central banks including India forcing them to build up reserves. Capital flight to India due to interest rate differential, stability in the financial system and general confidence in the ability of our economy to perform better will definitely attract funds and will turn out to be a major concern to policy makers.
Flight of capital and accumulation of reserves add money supply in the system and cause inflation and inflationary expectations. While availability of funds for speculative build of assets and investments has to be curbed and at the same time sufficient liquidity to take care of productive investments, consumption needs, payment and settlement system has to be ensured, the challenges faced by the authorities in finding an equilibrium are something formidable.
In this context the approach to the problem of flow of foreign funds beyond the absorbing capacity of the economy needs a re look and traditional way of handling the situation has to be changed. The conventional system of intervening in forex market by RBI and using sterilization method to negate the effects of intervention have their own macro economic costs.
Taking into consideration the vastness of the country, huge population still living below the poverty line, inadequate availability of physical, social and financial infrastructure, aspirations and ability and availability of people to attain any bench mark levels of growth envisaged despite constraints and expectations of international community that this country can be the super economic power in future, the massive flow of funds should be viewed as a God –given opportunity to perform and deliver. No doubt, the real situation will prove to be slightly abnormal and naturally calls for an abnormal solution.
Apart from the normal measures like encouraging outflows of foreign exchange through travels, remittances, imports of goods particularly those which can mitigate inflationary expectations, other measures to contain inflows through some incentives akin to those offered to attract inflows when the situation demanded during forex crisis during 1990s can be considered. Other solution can be in the form of creating a Foreign Exchange Inflows Stabilisation Fund .
As it is, Reserve Bank intervenes in the forex market and effects purchases and sales of foreign exchange to moderate the exchange rate fluctuations. This necessarily involves injection and absorption of rupees to maintain /soften the liquidity. To neutralize the impact of purchase/sale of foreign exchange and consequent money supply and liquidity in the market, sterilization is done using government securities for sale/purchase. The whole exercise involves a cost to the economy and the exchequer and creates an element of uncertainty and speculation in different markets in the financial system. All these can be to a great extent minimized if surplus of foreign exchange or a portion of it can be transferred to an account styled “Exchange Inflows Stabilisation Fund” without involving rupee exchange. The Account can be maintained at RBI.
Banks, exporters, investors, importers and institutional forex earners etc having excess foreign exchange and do not require them urgently can invest such excesses in this fund for a small compensation and incentive if required. Such a fund if created and encouraged even if at a small cost to the exchequer will obviate the need for immediate conversion of forex into rupees and consequent measures of sterilization.
For the contributors towards this fund, this can facilitate as a deposit account under their command and funds can be utilized as and when the need arises. This fund kept at the disposal of RBI can be utilized by the Government for exclusive development of infrastructure requiring foreign exchange and the present controversy as to whether the Forex Reserves built up by RBI can be utilized by the Government for developmental purpose can be ended with conviction.
Main advantage of such a fund is that it eliminates rupee supply and consequent ripple effects. The Government can consider compensating by way of suitable incentives to those who contribute towards this fund. The compensation can be paid in Indian rupees or foreign exchange. Exchange rate can be protected through hedging as is done at present in forex transactions.
In case the fund accumulates over a period which is bound to be the case, those who require foreign funds can be allowed as they raise External Commercial Borrowings at a specified exchange and interest rate. The funds can be made available exclusively in forex for development of infrastructure by way of import of technology, skilled manpower, materials research and development.
The costs /sacrifice involved to develop, maintain and manage such a fund may prove to be highly beneficial when compared to the present costs and risks involved to maintain financial stability, exchange rate stability, favorable inflationary conditions and the credibility among the international community to continue to attract investments in India. The fact remains that economy needs billions of dollars for various developmental needs particularly heavy physical infrastructure of international standards to sustain and register further growth of GDP. The momentum now attained and the confidence level built-up both at national and international level have to be maintained at any cost to make the economy really a super power. It may call for some innovative approach and perhaps Foreign Exchange Inflows Stabilisation Fund may be the solution.
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