NPAs and Provisions

T.V.Gopalakrishnan (mumbai)
26 Apr, 2011 08:38 AMThe problem of NPAs exists as long as banks deal with money and people. As it is, there is erosion of values and ethics in the system. Corruption and fraud have become part and parcel of business deals. In thi background, prudence demands that there should be a built in mechanism to contain the problem of NPAs involving individual borrowers and making them accountable. General provision and specific provision towards NPAs only affect the other stake holders of banks other than bad borrowers,of banks and such there should be a mechanism to penalise the defaulting borrowers on an ongoing basis for which the creation of Precautionary Margin Reserve Fund taking a small levy from bad borrowers based on their conduct of transactions with the banks is the only permanent solution for the perrennial problem of NPAs. Will the authorities care for such solution?.

Appeared in Economic Times e-paper-http://economictimes.indiatimes.com/usrmailcomment.cms?msid=8086930&usrmail=gopalakrishnan.tv@gmail.com&mailon_commented=1

Leader for the top IMF post

Leader for the top IMF post.

This refers to your editorial' Picking leaders for the top IMF post (April,20, 2011). As rightly highlighted, merit not gegraphy should be the criteria to identify the right candidate to occupy the top IMF post. The world economic scenario is changing fast and some of the developing economies have been emerging as leaders capable of giving direction to the world economy, The role of IMF has to be proactive and it shouuld ensure that all economies perform well and generate the strength to withstand future shocks.
The financial crisis of 2008 has shattered many economies and the recovery cannot be stated to be evenly spread or well shared. The person who fills up the top post in IMF should be a visionary and view the problems of all economies whether developed or developing alike and find solution acceptable to all without jeoparadising the interest of any of the IMF members. The approach of the IMF should be to ensure that no economy sufffers from poverty, unemployment, illiteracy and lack of development. The balance of payment crisis, trade barriers, exchange rate adjustments, movement of funds between different economies etc need to be closely monitored by the IMF and the members have to extend full cooperation to IMF to ensure that the problems if any in any economy should not unduly affect other economies. This is possible only if the top person of the IMF views the whole world as one economy and gets the support from all the different economies.

This letter was sent to Financial Times

Hazare's fight only Last Resort

This refers to your strongly worded edit ' Hazare hazard' ( April 6,2011). It is a pity to note that Business standard has not found favour with the rationale behind Hazare's fasting for introduction of the Lok Pal Bill which has been a long standing demand in the interest of the welfare of the people in a free democratic society.

The country is facing scam after scam and many make money at the cost of the poor masses and it is unjust and unfair on the part of Business Standard to find fault with the move adopted by Sri Anna hazare supported by people from all walks of life. He has resorted to this extreme step as no visible, acceptable and convincing solution is put forth from the authorities for decades. His demand is only to have the draft bill prepared in association with people who care for public welfare along with elected representatives who seem to ignore the issue of corruption for self intererst. This is the crux of the matter and the initiatives so far taken if any to root out corruption from public life have not been convincing or convinced the masses. Pointing out some technicalities and objecting to the movement initiated by Sri Anna hazare is the least expected from a media like Business Standard. The need of the hour is to have a lasting solution for ever increasing corruption and the means adopted by Sri Anna Hazare with massive support for that would fully justify the ends. Mr Hazare's health is a concern for all the masses behind him and their prayers are for hiim.

An edited version of this has come in todays Business Standard.

Dr T.V.Gopalakrishnan.

Plugging Tax Evasion

Chase Dirty Money:
This refers to your edit Chase Dirty Money (ET,24 Feb, 2010). It is obvious that using information technology, tax evasion can be easily plugged.Apart from that Sharing of information among relevant government departments, insistence of PAN numbers for all monetary transactions above a cut off limit and minimising tax component in all major transactions will go a long way in creating an environment to make evasion impossible.

Similarly the sources of black money generation can also be brought under the Income Tax scanner by making use of tools like compulsory incorporation of PAN CARD details in cheques, credit cards, drafts , cash receipt etc. The Income Tax return should also have a provision to clearly indicate the assets and liabilities of citizens.The objective of IT returns should be to minimise black money and maximise revenue collection.

T.V.Gopalakrishnan
(This appeared in ET dated 28/02/10)


T.V.Gopalakrishnan

How about an ethics policy in the Budget?

T.V. Gopalakrishnan

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Can the Finance Minister think of introducing ethics in business transactions through the Budget 2011-12?

India has a sound Constitution, strong democratic principles, well-recognised demographic dividend, abundant natural resources, internationally recognised and well-sought after information technology, and an enviable culture, heritage and civilisation. With all these favourable factors, it discards the opportunity to reach the top of the world because of the greed, corruption, malpractices, lack of commitment and accountability from a few who matter. The series of scams reported every now and then only smack of disrespect and disregard for the laws of the country, and its image and reputation. It is a shame that things go from bad to worse, and there is no sign of improvement. This needs to be seriously dealt with, and it should be possible to a great extent through simple rules with strict enforcement. Here are a few suggestions for Mr Pranab Mukherjee as he prepares to unveil his Budget in a fortnight.

Business Ethics and Corporate Tax

Tax evasion and tax avoidance have been an open secret. These need to be plugged through checks and balances by way of practically enforceable rules and regulations. Adherence to tax rules and laws of the country in general, corporate governance principles, sensitivity to corporate social responsibility, compliance with financial market regulations and provisions of the Companies Act, satisfactory conduct of bank transactions and discipline followed as a borrower, and so on, should be assessed, rated and made public. Concessions, reliefs and special benefits, if any, from Government and authorities that are to be granted to corporates/firms/others, should have a bearing on this assessment. Excise and Customs duties payable and paid should reflect in the profit-and-loss account of companies, and should be independently verifiable by tax authorities, accountants and auditors. The board of directors should separately certify that all tax dues have been paid. There can be a thumb-rule to verify the levies payable/paid in relation to production, sales, imports and exports. Any violation/non-compliance should attract punishment and the financial regulator should be notified. Corporate governance and accountability to the Government and shareholders have to be made transparent through balance sheets. Once in a while shareholders' assessment of the company's response to investors also needs to be independently assessed through surveys. These steps may appear cumbersome, but need to be considered for implementation with the aid of information technology.

I-Tax of Individuals

There is a feeling that the tax and number of tax payers are insignificant and do not compare well with the wealth created, economic growth achieved in the past few years, jobs created both in India and abroad, transactions taking place — particularly in real estate, gold and commodities market.

In the absence of tax compliance, ways have to be thought of that link the transactions with income tax compliance. Banking inclusion at the initiative of tax authorities is the only solution to bring under the tax-net traders, skilled and semi-skilled professionals, service providers, etc. Bank accounts should be made obligatory for all. The simplest way is to insist on PAN number for all transactions above a limit and compulsory payment through cheques and plastic cards. Payment by cash is very common — particularly for buying gold and jewellery, land, furnishing of houses, etc. Tracking transactions using IT will go a long way in improving tax compliance and revenue collection both for the State Governments and Central Government. It will also facilitate for providing unique identity cards for a large segment of population. Tax returns should also reflect movement of assets and liabilities yearly. As it is, there is no way to know assets owned by an individual easily.

Tax on Dividend, bonus shares and stock-option issues

Canons of taxation demand that broader shoulders should carry heavier weight. Instead of periodically increasing prices of petroleum products, the Government can introduce levies on dividend payments beyond a cut-off, say Rs 5 lakh and above. Likewise, levies on bonus shares and stock-option issues can be made, and these funds can be used to meet the demands of oil companies. Increase in oil prices has a chain effect, and all items become costlier. It may not be judicious to leave the oil prices to market forces, for some more years of regulation may be required till the economy matures, and inflationary expectations and conditions stabilise. Pricing of commodities, levying of taxes, etc., which affect mass-consumption items directly through inflation, need to be carefully considered. Revenue mobilisation is easy by taxing such items, but it hurts the masses, incurs the wrath of the public and leads to unpleasant consequences. As rightly said, “Once a nation begins to think, it is impossible to stop it.” That is what we are witnessing now on account of the 2G scam and spiralling prices all around.

black money

The most painful thing is the prevalence of black money particularly in real estate, charities, etc. Innovative ways have to be introduced through Budget provisions to prevent such practices. Middle-class people are the worst affected, as they are compelled to bribe to realise their dream of acquiring houses. Morale and confidence in the system evaporate. This is not good for the society and the economy in the long run. The easiest way to solve this issue is to have a tie up among all parties to the transaction through IT and see that cash element is kept to the minimum. Black money in real estate transactions has to be eliminated gradually. Monitoring of real-estate deals can bring a lot of relief to people and the economy.

As it is, agricultural income is exempt from tax. However, there is nothing wrong if farmers with large holdings are made to file returns beyond a cut-off at least. This will at least pave the way for an assessment of wealth created in the economy and improvement in distribution of fertilisers and other essential items meant for poor farmers. Income-tax payers should be taken out of the public-distribution system wherever possible.
This appeared in The Business Line dated 14/02/11.

Case for a National Gold Bank

India owns over 18,000 tons of above ground gold stocks worth approximately $800 billion and representing at least 11 per cent of global stock, according to World Gold Council.(WGC). estimates.

This is equivalent to nearly half an ounce of gold ownership per capita, a figure which is significantly below consumption in Western markets, representing scope for additional future growth, says a WGC research paper entitled 'India: Heart of Gold'.

Gold Demand

In 2009, total Indian gold demand reached $19 billion, or Rs 974 00 crore, which accounts for 15 per cent of the global gold market, according to WGC.

While Indian consumers continue to stock gold despite rising prices, when it comes to total gold reserves in the country, India ranks 11th in the world with 557.7 tons of gold. Above the ground gold stocks is different from the total gold reserves.

Over the past ten years, the value of gold demand in India has increased at an average rate of 13 per cent per year, outpacing the country's real GDP, inflation and population growth by six per cent, eight per cent and 12 per cent respectively.

The country currently has one of the highest saving rates in the world, estimated at around 30 per cent of total income, of which 10 per cent is already invested in gold.

Storing surplus gold

In this backdrop, the setting up of a National Gold Bank (NGB) assumes importance and needs to be seriously considered. Such a Bank if set up can gradually pave way to have stock of surplus gold in the economy in one place.

Over a period, the Bank can have a say in controlling the volatility of gold prices in domestic market in particular and can also act as a regulator of bullion market which is fast expanding and having international linkages.

The Bank can engage in the purchase and sale of gold and act as a trustee/pledgee for banks/institutions having gold surplus and also keep gold for safe custody or raise funds against gold to meet their liquidity constraints.

As it is, the rate of growth of deposits of commercial banks has been on the decline for the past few months and the investments in gold and real assets have been on the increase.

Generally Indians have a weakness for gold and the demand for gold is price insensitive as per the experience. It is all the more so, when the real rate of interest on deposit has been negative or insignificant compared to the rise in gold price

The banking system has been facing the liquidity problem off and on and rising of funds from the market poses series of difficulties. Funds are becoming a major constraint to develop infrastructure badly needed by the economy to grow and sustain growth. It is time for banks to find alternate sources of funds to continue to be vibrant in business and providing the well needed support system for the economic growth. One of the means to attract deposits is to encash the idle gold lying in the economy. In this context, the revival of the gold deposit scheme introduced in 1999 has to be seriously considered. As per the World Gold Council, India’s annual gold consumption Is around 800 tons per year and the reserves of gold could be in the order of 25000 ---30000 tons.

Gold as Deposit

The banks should be encouraged to accept gold as deposits and create fixed deposits linked to gold keeping very good margin. To start with, for instance, for pure gold worth Rs 50,000, the banks can create a fixed deposit for Rs 25,000 for a minimum period of three years and give an interest rate of say 3 or 4 percent per year. The investor earns interest rate on the idle gold while securing his holdings the same time it is safer under the custody of the bank.

For the banks, they get gold as deposits and they should be in a position to raise funds against the security of gold. The borrowing power of the banks increases in the market and they will have required resources to expand their credit portfolio.

The banks should be given exemption from SLR for these deposits against the gold as there is no additional liquidity created and the liabilities are fully backed by the gold they possesses. However, the borrowings that these banks subsequently make against the gold can attract SLR and the advances they create can attract usual capital adequacy norms.

Advantages

The advantages of setting up a National Gold Bank are very many. The Bank can make bulk purchases from the open market including international market and act as a store house of gold for banks and institutions. The banks and institutions holding gold can sell the same to the National Gold Bank or raise funds by pledging the gold. This will bring down banks' borrowings from the Reserve Bank. The National Gold Bank can have a refinance arrangement with the Reserve Bank till such time it stabilizes its operations. Money market operations can be better regulated as the black money component gradually come down if the gold held in the country is brought under regulated market.

Over a period when the Gold Bank’s operations get fully stabilized, the influence of gold in the market becomes somewhat predictable and circulation of hard cash and black money gets reduced, then framing of monetary policy and transmission of signals to financial markets by the Reserve Bank will prove to be easy.

For the banks, such an arrangement provides opportunities to expand their business in terms of deposits, borrowings and loans.

For the economy, benefits out of the Gold Bank are tremendous. The idle gold turns into cash to expand economic activities particularly the infrastructure and the gold and financial markets widen. It facilitates to minimize generation of black money in a way as the gold becomes a declared asset with the banks.

Once a large quantum of gold comes under the custody of the Gold Bank, the Governments fiscal policy and fiscal deficit can hope to have a totally different scenario than what is today. The image of the economy in the International market will improve It will be a win- win situation for banks, investors, the economy, and the Government.

T.V.Gopalakrishnan

(Views are Personal)

(This appeared in Business Line dt 24/01/11)

Monetary Policy and vegetable Prices

This refers to your edit Dr Subbarao's desperation (business Line, January 19). As rightly pointed out, it would be an extreme act of faith to link vegetable prices -which are driving up the inflation rate -to monetary policy. The present atmosphere in the economy does not warrant any drastic monetary policy which can upset the growth trajectory. The measures can be in the form of controlling speculative advances in the rural semi urban and urban branches where hoarding and speculative activities with bank funds are suspect. Some specific higher margin requiremwnts and higher interest rates on advances against some food items and intensive supervision of these advances by the controlling offices can take care of these temporary spurt in prices. Banks should also be encouraged to step up advances to augment production of vegetables and commododities which influence food prices. Incentives to ease transporttation of vegetables and improve storage facilities through bank finance can also be thought of. There is also a need to spread the message of monetary policy among the various officials at ground level which itself will act as a measure to prevent wrong financing and encourage anti social activities. Dr.T.V.Gopalakrishnan