governance, political economy, institutional development and economic regulation

Posts tagged ‘Public Sector banks’

Bimal Jalan reflects

Jalan book

 

exercises the writer’s privilege to box his reflections between three inflection points. The first is 1980, ostensibly because 1977-79 was the first time the Congress lost power at the Centre. The second is 2000, being the start of a new millennium. And 2014 is the bookend when the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) formed a majority government.
Obscure inflection points
Of these, the choice of the first two years as turning points is not immediately obvious. Conventional wisdom regards 1991 to 2014 as a near continuous development period, barring the fractious interregnum of 1997-99. In the 1980s, it is 1984 that dominates, as the end of an era with the assassination of Indira Gandhi and the beginnings of Rajiv Gandhi’s brief “Camelot” phase. The year 1980 is significant only because Sanjay Gandhi died in an air crash in June and Mrs Gandhi aged visibly. The choice of 2000 is similarly obscure, except for broadly coinciding with the start of Atal Bihari Vajpayee’s NDA government.
Dr Jalan – man for all seasons
But this is mere quibbling. The book is unconstrained by structural rigidities. It provides reflections, spanning Dr Jalan’s seven earlier publications since 1992.  It can’t get better. Dr Jalan was in the Rajya Sabha (2003-2009); the longest serving governor of the Reserve Bank of India (1997-2003) since 1992; finance secretary; secretary banking, chief economic advisor and India’s executive director to the IMF and the World Bank.
Seven key reflections
Readers would choose their own favourite reflections. But this reviewer was intrigued by the following seven.
Low public savings retard investment 
First, Dr Jalan favours the conventional view that the persistent gap between India and the fast-growing economies of Asia during the last four decades of the 20th century is explained by our low levels of investment. For this he squarely blames our ideological decision to invest in public sector industries, which failed to generate savings for future investment and instead bled scarce tax revenue to fund financial losses — a familiar story even today.
Colonial style administration ill equipped for challenges
Second, he red flags the fact that from the 1970s, we did very little to enhance the competence and efficiency of public administration. We still lack the required composition of skills and experience in the public space to provide 21st century results.
High expectation, poor execution
Third, he bemoans the fact that we unfailingly adopt best practice priorities — take the national priority for agricultural growth. But we fail miserably in making supportive policies and rules. We have throttled agriculture by ignoring the interest of the farmer to serve the interest of the consumer. Similarly, we prioritise a progressive fiscal policy. But the revenue from direct taxes stagnates while regressive indirect taxes are buoyant.
Sustained, high growth misaligned with political incentives 
Fourth, Dr Jalan’s term in the Rajya Sabha convinced him that deep political reform is the key to change India. And who could disagree? But some caveats apply. Decentralisation, as flagged by Jalan, is certainly desirable for enhanced effectiveness and public participation. But, it will not, by itself, serve to reduce the size of government. In fact, employee numbers and expenses are likely to increase as scale effects disappear.
Union government muscularity erodes state government autonomy 
In a similar vein, it is true that the Union government tends to erode the federal structure by misusing governors for narrow political ends. But constitutionally, we are a “Union of States with a centrist bias”, per political pundits, and not a federal state. Parliamentary norms and conventions are routinely subverted — a self-goal, since this reduces Parliament’s credibility.
Dysfunctional parliament erodes its own credibility
Dr Jalan cites 2006, when the budget was passed without discussion, illustrating political expediency of the worst kind. But it is open to question whether the existing process for annual Budget presentation and examination remains a productive exercise or has become mere form without substance. The cabinet system of decision-making, underpinned by the principle of collective responsibility, was undeniably subverted during the United Progressive Alliance government, since political power was dispersed beyond the government. But this was poor practice rather than a structural flaw. And it appears to have healed itself after 2014.
Judiciary – safeguarding the constitution 
Fifth, the judiciary, rightly, comes in for high praise, for progressive jurisprudence, safeguarding the principle of separation of powers, and the primacy of the Constitution. But entrenched territoriality in the judicial appointments process remains contentious.
Public sector banks – out of control
Sixth, Dr Jalan recounts, financial reforms after the Narasimham Committee report of 1998 enhanced the resilience of Indian banks. But he leaves the reader begging for more on what went wrong over the last decade to inflate stressed loans to crippling levels. Are not politicised leadership and boards the problem in public banks? And given the stakes, can UPSC selection – as Dr Jalan suggests – really be an effective bulwark? Would not ramping up private shareholding, with the government holding only a “golden share” be a more effective solution? More generally, how effective are the existing prudential norms, for limiting exposure to sector, corporate or currency risk?
Tax reform – only half done?
Seventh, Dr Jalan’s view that it is unnecessary to reopen the constitutional scheme for inter-governmental division of taxes is curious. Tax pundits advocate that GST be extended to alcohol and petroleum.
jalan 2
It is a broad canvas on which reflects, as befits one who has helmed public policy since the 1980s. Readers will look forward to his take on the more recent developments — that is, since 2014.

 

Adapted from the authors Book Review in Business Standard, September 18, 2017 http://www.business-standard.com/article/beyond-business/bimal-jalan-reflects-117091801405_1.html

 

Retribution – the missing R for resolving bad loans

Courtesy Arvind Subramanian, India’s Chief Economic Advisor, the 4R (reform, recognize, recapitalize, resolve) approach to manage the corporate bad loans problem, has captured public imagination. But he soft peddles a fifth R, that of retribution. The big stick must be wielded for reform to be credible.

jail2

Public sector banks – flabby, politicised ATMs providing easy money to elites

Banks are flush with money. But “liquidity” for borrowers, even those who have a “special relationship” with banks, is low. The shadow of stressed loans – missed loan repayments and interest payments- makes the usual, clubby way of doing business suspect. Banks operate on big margins – between interest paid on deposits and interest received on commercial loans – of up to 5 percent, in our cartelized banking architecture, dominated by publicly owned banks. But, despite high margins, public sector bank ratings suffer. The more loans they give, higher is the volume of bad loans.

Bad loans are an outcome of shoddy risk appraisal followed by poor loan account oversight. The ugly habit of kicking the can down the road by rolling over bad loans has been the norm.  On average, only around 26 percent of bad loans and accumulated interest are recovered. Using this metric, banks stand to lose around Rs 9 trillion (6 percent of our GDP) by recognizing and resolving bad loans of around Rs 12 trillion.

If corporate loans were recovered like consumption loans for cars, there would be no problem

Once a loan becomes stressed there is little a bank can do, except to recover as much as it can from the borrower; divert the proceeds to a better borrower and black list the delinquent borrower. But Indian banks rarely operate on this “sunk cost” principle. A long history of covert support to keep diseased loans and borrowers alive, under the guise of retaining jobs, has not helped. The spectacularly unsuccessful, Board of Industrial and Financial Reconstruction was still alive till January 2016. Unfortunately, so were hundreds of companies ripe for corporate euthanasia. We now have a new Insolvency and Bankruptcy Act, January 2016. But its effectiveness remains to be established.

RBI oversight of banks comes up short

Disappointingly, the Reserve Bank of India, instead of taking the bull by the horns and directing banks to start bankruptcy proceedings for bad loans, has taken the soft approach – giving banks time, till the end of 2017, to resolve the stressed loans themselves. Amusingly, to nudge bankers into doing unfamiliar, unpleasant things, extraordinary measures are being taken, to provide them administrative cover, from ex-post facto audit, vigilance and CBI investigations. Clearly, retribution against those bankers, who approved and over saw the dud loans, is not contemplated.

Loan waivers without retribution for the complicit create moral hazard

Economists, including RBI Governor caution against the problem of “moral hazard” that loan waivers create in the context of agricultural loans being written off by state governments. Apparently, forgiveness without retribution, is bad for rural borrowers, but ok for corporate borrowers. Sadly, retribution is sorely needed for commercial borrowers too, who account for 75 percent of the bad loans.

80% model borrowers, 20% delinquent addicts of “easy money”

home

The reality is even more nuanced. The bulk of borrowers, across sectors, are gold standard risks. Despite gross mismanagement of large corporate loans, 83 percent of the bank loans, valued at Rs 63 trillion, are serviced on time by borrowers. Moral hazard affects borrowers selectively in India. This is because retribution is also selective. Access to bank finance for small borrowers is cut off if they become delinquent and recovery proceedings are harsh. For large borrowers and the influential, more favourable terms apply.

Are only babus to be held to account?

handcuffs

Last month, a retired Secretary of the Coal Ministry and two other senior colleagues, were convicted for criminal conspiracy, by a trial court. The charge and the punishment meted out was completely out of proportion to their misdemeanors – less than adequate diligence in discharging their duties. Why this double standard for holding public officials to account? Rs 12 trillion of accumulated stressed loans against annual loan approvals of between Rs 3 to 5 trillion, indicates a deep rooted “conspiracy of silence” within public sector and co-operative banks; their patrons in government and the borrowers themselves.

These stressed loans, whether in industry or in agriculture, must be taken off the books of banks. But the concerned loan sanctioning and account oversight chain, whether present or retired, must be held to account on a standardized, transparent metric to establish active connivance to cheat the bank or lack of adequate diligence. This is the only way to delink quick resolution of the stressed loans from the problem of “moral hazard”.

Blacklist actively negligent founders

Second, deals need to be urgently struck with borrowers to resolve loans without access to the lengthy judicial review process. These can only happen if the big stick of sanctions is available to the negotiators. Founders, actively negligent in servicing loans, should be made to exit management positions, as a precondition for future access to bank finance. Delinquent individuals, who have been given opportunities earlier, to reform, via “greening” or rolling over of loans, should be debarred from access to bank finance.

Hold banks to account for bad loans

The argument against sanctioning bankers is bogus. It is feared bankers will stop taking decisions if sanctioned, thereby freezing the lending cycle. Till two decades ago, bank trade unions, routinely used the threat of striking work, to stop computerization or extract better wages. It was the Supreme Court which defanged them in 2003 by ruling that the right to strike is not absolute, particularly in the case of public services. No need to turn the clock back.

Stringent action against the bureaucracy has not adversely affected the functioning of government. Enshrined bureaucratic safeguards are most often the refuge of the incompetent or the corrupt. Those working transparently, in the public interest, rarely need such support. There is no reason why banks should be different.

Needed an empowered financial sector, “clean up” champion, to wield a long broom

Jaitley grimace

“Moral hazard” in bad loan resolution becomes a problem, only if we do not deal equitably and transparently. Elitist cliques, spanning politics, business and agriculture, must be weaned-off, the vice of bank financed “easy money”. Swift, impartial, standardized resolution of bad loans, with judicious retribution, can drain this vicious whirlpool, which saps national wealth and reeks of inequity.

Adapted from the authors article in TOI Blogs, June 23, 2017 http://blogs.timesofindia.indiatimes.com/opinion-india/retribution-the-missing-r-in-resolving-bad-loans/

 

Well run, PM Modi

modi run

(photo credit: http://www.iosipa.com)

Reposted from the Asian Age May 25. 2015 < http://www.asianage.com/columnists/well-run-modi-690>

Should it worry us that Modi sarkar resembles the Ethiopian Haile Gebrselassie, the greatest long-distance runner ever and not Usain Bolt, the 100-metre thunderbolt from Jamaica?

Not really. The 100-metre dash, whilst spectacular and crowd pulling, is a good tactic for disaster mitigation but disastrous for managing a huge, diversified economy. The marathon analogy suits India better. It is a test of endurance, grit and determination. Outcomes are only visible towards the end of the 42 km race. Those in the lead for the first eight km rarely end up winning.

Other than physical fitness the marathon runner needs a disciplined mind, which restrains the urge to sprint till the last mile whilst maintaining a planned and steady pace all through. Also important is the ability to transcend the near continuous pain and stress, and remain focused on the goal.

Modi sarkar has expectedly followed the epic Bollywood masala — a marathon interspersed with sprints. Citizens have been kept entertained by a blitzkrieg of short-term Bolt spirits to simulate inclusive ascent on a rising elevator of well being, whilst working steadily behind the scenes towards medium-term goals.

The opening of 80 million small bank accounts; the launch of three social protection (pension and insurance) schemes; the attractively packaged, near weekly engagements with foreign governments on their soil and ours; pushing through the border realignment with Bangladesh; the quietening down of tension with China in Arunachal Pradesh; the relatively incident-free border with Pakistan; the warming relationship with Sri Lanka; the race to make India “cough-free” by substituting clean renewables with dirty fossil fuels; the quick response to natural disaster in Nepal and Bihar; the disciplining of the bureaucracy and the Bharatiya Janata Party’s political cadres; effective management of the sensitive relationship between the BJP and its regressive cultural font — the Rashtriya Swayamsevak Sangh; the visible dominance of the Prime Minister’s Office, which had wilted under the previous government; the productive alignments with Didi’s (Mamata Banerjee) government in West Bengal; Mufti Muhammad Sayeed’s People’s Democratic Party in Kashmir; the Telugu Desam Party in Andhra Pradesh; Amma (J. Jayalalithaa) in Tamil Nadu, are all signals of aggressive political outreach.

But behind the scenes, several half-marathons have also been initiated — the blistering pace of tendering and award of infrastructure projects with results expected over the next three years; the quick decisions on defence procurements; the swift auction of coal mines to resolve the fuel supply bottlenecks; the opening up of the defence sector to private investment and management; relaxation of foreign direct investment constraints in insurance — both major sources of good jobs and the quiet continuation of the previous government’s Aadhaar electronic platform as a primary mechanism for verifying identity so necessary for subsidy reform via direct cash transfers.

Prime Minister Narendra Modi has run the first leg of the marathon with exceptional skill. But this was the easy part. The next 16 km till 2017 is what will make or break his chances for re-election in 2019. Five key measures stand out.

First, with two big state-level elections coming up, the BJP will need to marry the compulsion for populism with fiscal rectitude, which has been the leitmotif of the first year of Arun Jaitley as the finance minister of India. Reigning in inflation is a continuous struggle in such circumstances. It is fitting that the Reserve Bank of India continues to focus on managing money supply and interest rates. The ministry of finance will have its hands full substituting for the erstwhile Planning Commission in allocation of funds and enhancing real-time, expenditure management systems and metrics to ensure “value for money” spent. Key indicators to watch will be achievement of the targeted reductions in revenue, current account and fiscal deficits.

Second, introduce a poverty and private jobs creation filter. Share the assessments publicly via a “dashboard” of proposed allocations to make the allocation process more transparent and participative. Direct democracy is of Mr Modi’s signature tune. This is also a great way of self-restraining crony capitalism and populism.

Third, cut loose the railways and the public sector companies and banks from the crippling constraints of ministerial intervention. Corporatise all production and service delivery entities as a first step to reform, followed by administrative autonomy and selective listing of stock. The creeping tendency, reminiscent of the “Indira Gandhi ‘commanding heights’ syndrome”, of falling back on the public sector for getting quick results is unfortunate. The international experience shows that poor investments are the outcome if public funds are plentiful. India cannot afford “bridges to nowhere”, even if they create jobs in the short term. This implies fixing the “broken” public-private partnership (PPP) model, not effectively junking it altogether with the government assuming all the risk, as is being considered currently.

Fourth, trim the flabby Union government. The UK model of agencification and administrative reform, tight budget constraints, monetisation of assets and the levy of user charges, fits the Indian context best. Look for “asymmetric reform”, rather than whole-of-government approaches. The Aadhaar unique ID experiment is a useful example of the benefits of strategic, but narrow reform. The “Namami Gange” Clean Ganga Mission is another example. If “cooperative federalism” is to be more than just an attractive slogan the Union government must be the pied-piper, which the state governments follow.

Fifth, fix the big institutional constraints to rapid development. The last thing we need is a clash of titans — Rajya Sabha versus the government — a replay of the dysfunctionality of the American political architecture; judiciary versus the executive. Are we really keen to tread the Pakistan route? Avoid proxy veto by the Union governors over elected state governments — a throwback to the ugly days of the Emergency in the 1970s. Implement the 74th Amendment (1992), which mandates decentralisation but remains ignored two decades later.

The final 16-km dash in 2018 and 2019 will be easy if the half marathons already initiated are run well, over the next two years. The trick is not to sacrifice public interest in an all-out attempt to win state elections in Bihar and Uttar Pradesh. The question remains: will the BJP’s marathon mind rule or its sprinter’s muscles dominate?

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