The curious case of rising currency in circulation-Live Mint
Rising currency in circulation along with slowing deposit growth is worsening the liquidity crunch .
Together, these two factors are worsening liquidity conditions in the banking sector, putting banks and the Reserve Bank of India (RBI) in a spot.
While the latter is more easily explainable, the former is confounding many in banking circles. Here’s what the data shows.
Currency in circulation, a reflection of the cash in use, has risen by 15.4% in 2015-16 (data for the last week of the year is yet to come).
In FY15, the growth in currency in circulation was lower at 10.7%.
The higher growth this year appears to run counter to most factors that typically drive currency in circulation.
The key among these factors are higher inflation (which necessitates more spending)
or higher transactions in sectors like retail and real estate (where there may be chunky payments in cash).
There are other factors like elections, which also lead to temporary spikes.
The reason FY16’s jump in circulation is puzzling is because inflation has not moved up compared to last year and transactions in sectors like real estate, by all accounts, have been down for most of the year. While state elections, such as in Bihar, may explain a temporary spike, they don’t explain why it has persisted.
The weekly growth rate since the start of FY16 was between 9% and 11% till November. It was only in mid-November that growth in currency in circulation jumped to about 14%, and since then it has remained at 12-15%.
So what’s going on?
There is no clear answer but there are a few theories, some backed by data, some not.
Is rise in currency in circulation because of state polls or higher growth?
This time around, the currency surge is on the higher side, compared with historical data, which is unusual because economic growth is weak and inflation is low
Currency in circulation has increased 15.5% in the month of March, the highest year-on-year increase in a month since May 2011, ahead of state elections in Assam, Kerala, Tamil Nadu, West Bengal and Puducherry.
RBI Governor Mr. Rajan said, “Around election time, cash with the public does increase; you can guess as to reasons why; we also guess. And you see some not just in the state which is going for elections but also the neighbouring states. So, there is something there, we need to understand it better, but it is about Rs.50,000 to Rs.60,000 crore more than we anticipated at this time of the year.”
This time around, the currency surge is on the higher side, compared with historical data, which is unusual because economic growth is weak and inflation is low.
“The sharp spike in currency circulation is unusual, especially as nominal GDP (gross domestic product) growth remains in single digit.
Elections are not new to India and the spike cannot be solely attributed to it. We need to watch out the trend,” said Anubhuti Sahay, head, South Asia economic research (India), Standard Chartered.
Note that currency with the public also moved up last November, when we had the Bihar elections.
There were minor spikes during the state elections in Delhi and Jharkhand and Jammu and Kashmir last year.
But also note that the growth in currency with the public went down at the time of the state elections in Haryana and Maharashtra last year.
The chart shows there have been several instances where state elections did not lead to a spike in currency with the public.
What is the impact of higher currency in circulation?
If currency leakage remains high, it will make the process of liquidity management more challenging and can necessitate more open market operations to infuse liquidity.
More currency with the public could also be one of the reasons for low deposit growth.Ltd.
The divergence between deposit growth and currency in circulation has happened only thrice before in the last two decades—in the second half of fiscal 1999, FY04, and in FY11. These were periods when economic momentum started to revive, begging the question that Credit Suisse poses in its note dated 4 April—is the rise in currency with the public an indication that economic momentum is picking up again?
This is what Raghuram Rajan said in his post-policy conference call with researchers and analysts: “I doubt that there is a structural change in the economy which suddenly requires more currency. So, at least till I see the data, till the data persuades me otherwise, I think this is temporary rather than permanent.”
Why is currency in circulation in India rising?
There were flurry of articles towards end of India’s financial year on this murky term – currency in circulation. All these were looking at possible reasons for sharp rise of currency in circulation.
The question is why should anyone care?
Well, one sees this circulation rising in times of high inflation as people need more money to settle transactions. But with declining inflation, one should not see a rise in the currency numbers.
First what is this Currency in circulation?
This is basically all the paper notes we carry in our pockets. This along with rupee coins and small coins with RBI form currency in circulation. Rupee coins and small coins in the balance sheet of the Reserve Bank of India include ten-rupee coins issued since October 1969, two rupee-coins issued since November 1982 and five rupee coins issued since November 1985.
Next, what is the problem?
See this table:
As we can see currency in circulation has increased by nearly 48% year on year in 2015-16 and 34% in 2014-15. The growth in 2014-15 was also on account of a deceleration in currency growth previous year by 11%.
This is large growth especially when we look at falling inflation numbers. :
“However, with inflation on the decline and under control… the question is whether such a high currency demand basically reflects uncertainty about the prospects of the economy,”
Currency in circulation at the end of 2015-16 on Thursday had risen 15.7 per cent to Rs 2,26,630 crore from Rs 145,080 crore a year before, a rise of Rs 82,000 crore. The growth was 11.2 per cent a year before.
Yet, Consumer Price Index-based inflation was 5.18 per cent in February, down from 5.69 per cent in January. The Reserve Bank of India’s own target is to contain inflation below four per cent in the medium term, which economists say is achievable.
Second, lower inflation does not mean prices have declined. All it means is rate of growth has become lower compared to last year. SO if inflation was 10% last year and 5% this year, it means prices are continuing to rise. They are actually higher than last year prices. But both policymakers and media misguide people most of the time suggesting lower inflation means lower prices. People have to pay even a higher amount for their basket of goods. If one adds unofficial inflation to the official figure, it implies people will continue to need more cash to settle their transactions.
Third, all kinds of reasons have been given like elections, changing behaviour due to ATMs and so on. No one has looked at source of the problem. Currency in circulation does not rise on its own. It is basically an outcome of central bank policy. In this case, it is the continuous boosting of forex reserves which has led to rise in this currency in circulation.
Let me explain.
Currency in circulation are liabilities of the central bank balance sheet. On assets we have government securities and foreign securities as the main assets of a central bank. In a central bank balance sheet there are many non-monetary liabilities (like reserves, profits etc) which form part of liabilities and present a misleading picture. So, we have something called reserve money which subtracts these non-monetary liabilities from the liabilities to present a truer picture. This reserve money is also called as base money or high powered money in textbooks. See this primer for more details prepared by your truly ages ago.
Simplifying things further, the remodeled balance sheet has liabilities as components and assets as sources. This helps one understand things directly. There are other components and sources as well, but we just include these three as they constitute most part of the balance sheet nowadays.
Hence, source of rise/decline in currency is mainly these two sources – one’s own govt securities or foreign govt securities. Call it a sin of an emerging market central bank but it prefers to have more of foreign govt securities in their balance sheet which is also called as forex reserve. Whereas the developed world central banks mostly have their own govt securities in their balance sheet as we have also seen in QE etc by these banks.
So whatever source central bank chooses to push, it shows in currency in circulation. It is nothing but simple accountany – assets = liabilities.
In India’s case as forex reserves have risen in last few years sharply, so has currency in circulation. The share of Indian govt securities has been declining as can be seen from this table:
So, currency in circulation is not the cause but actually an outcome of a central bank policy. This is the first step in any analysis looking at rise in currency in circulation. It is first an accounting entry which we then use to draw economic inferences.
In earlier times, this accounting variable could be used to draw economic inferences as things were relatively controlled by central bank. There was a reason why we had something called money supply targeting where money supply was the tweaking variable. Soon, central banks relaised they had little control over this given financial innovations and flow of money across borders. So they stopped targeting money and moved to interest rates. In famous words of a central banker (from Canada I think) ” We didn’t leave money, it left us”.
Hence, it might not be right to just draw inferences from this number alone. It could be a lot more complicated and we need more data to understand currency usage in India. The currency numbers are not in line with broad reality, tells you the same thing as well..
Why Bank Deposit Growth Slowed To Lowest In 53 Years-NDTV
Total bank deposit grew by 9.9 per cent in the fortnight ended March 18, 2016, marking the weakest growth in 53 years. The fall in bank deposits is surprising because it comes at a time when real interest rate (interest rate minus inflation) continues to be high.
Typically, higher real interest rate gives investors more incentive to park their money in banks to earn inflation-beating return.
According to research by State Bank of India (SBI), deposit growth may be falling because of higher spending by people. Higher real rate in the economy is because of falling inflation and this may be forcing people to spend more, its research says.
Another possible reason for decline in deposits could be increasing outward flow of money from the country, the report said. The Reserve Bank had last year doubled the amount to $2,50,000 that Indian residents can spend overseas per year.
"The outward remittance under Liberalised Remittance Scheme has seen a huge jump as soon as the limits were revised. From $106 million in May 2015, the remittances reached $449 million in Feb 2016, a jump of 324 per cent," Another possible reason "could be increased money circulation in the system. That leakage is also leading to a fall in bank deposits,"
RBI chief Raghuram Rajan recently said that cash in people's hands is more by up to Rs 60,000 crore at present.
Mr Ghosh said that the "fall in deposit growth is a matter of concern and needs to be addressed head-on. Otherwise when the credit growth picks up, banks may be in a fix to address the asset liability mismatch."
At a macro level, one explanation could be a pick-up in urban consumption demand. While urban demand has been stronger than rural demand through the year, there is anecdotal evidence that urban demand may have strengthened further in recent months. The question is why should anyone care?
Well, one sees this circulation rising in times of high inflation as people need more money to settle transactions. But with declining inflation, one should not see a rise in the currency numbers.
First what is this Currency in circulation?
This is basically all the paper notes we carry in our pockets. This along with rupee coins and small coins with RBI form currency in circulation. Rupee coins and small coins in the balance sheet of the Reserve Bank of India include ten-rupee coins issued since October 1969, two rupee-coins issued since November 1982 and five rupee coins issued since November 1985.
Next, what is the problem?
See this table:
As we can see currency in circulation has increased by nearly 48% year on year in 2015-16 and 34% in 2014-15. The growth in 2014-15 was also on account of a deceleration in currency growth previous year by 11%.
This is large growth especially when we look at falling inflation numbers. :
The recent increase in currency with the public is confounding economists, as by the numbers it seems the citizenry is hoarding cash in a falling inflation climate. At a time when a majority of Indian households hold a bank account, after the Pradhan Mantri Jan Dhan Yojana, the preference to keep cash handy could be a strong indication of a booming consumer sector but that largely is not the case. Generally, cash in circulation should increase when prices are on the rise at a faster clip and should fall with a slowing of inflation.
Currency in circulation at the end of 2015-16 on Thursday had risen 15.7 per cent to Rs 2,26,630 crore from Rs 145,080 crore a year before, a rise of Rs 82,000 crore. The growth was 11.2 per cent a year before.
Yet, Consumer Price Index-based inflation was 5.18 per cent in February, down from 5.69 per cent in January. The Reserve Bank of India’s own target is to contain inflation below four per cent in the medium term, which economists say is achievable.
Any increase in currency in circulation points to a leak in the banking system, as otherwise cash gets deposited with the bank, which goes for investment. Currency in circulation does rise during the festive season around October but by the end of the financial year, the situation normalises. This time it hasn’t happened and nobody is sure why.
First, all this talk of low inflation is plain non-sense. There are two inflation numbers – one tracked by policymakers & analysts and another faced by people. The latter is always some 4-5% higher than official estimates.Second, lower inflation does not mean prices have declined. All it means is rate of growth has become lower compared to last year. SO if inflation was 10% last year and 5% this year, it means prices are continuing to rise. They are actually higher than last year prices. But both policymakers and media misguide people most of the time suggesting lower inflation means lower prices. People have to pay even a higher amount for their basket of goods. If one adds unofficial inflation to the official figure, it implies people will continue to need more cash to settle their transactions.
Third, all kinds of reasons have been given like elections, changing behaviour due to ATMs and so on. No one has looked at source of the problem. Currency in circulation does not rise on its own. It is basically an outcome of central bank policy. In this case, it is the continuous boosting of forex reserves which has led to rise in this currency in circulation.
Let me explain.
Currency in circulation are liabilities of the central bank balance sheet. On assets we have government securities and foreign securities as the main assets of a central bank. In a central bank balance sheet there are many non-monetary liabilities (like reserves, profits etc) which form part of liabilities and present a misleading picture. So, we have something called reserve money which subtracts these non-monetary liabilities from the liabilities to present a truer picture. This reserve money is also called as base money or high powered money in textbooks. See this primer for more details prepared by your truly ages ago.
Simplifying things further, the remodeled balance sheet has liabilities as components and assets as sources. This helps one understand things directly. There are other components and sources as well, but we just include these three as they constitute most part of the balance sheet nowadays.
Hence, source of rise/decline in currency is mainly these two sources – one’s own govt securities or foreign govt securities. Call it a sin of an emerging market central bank but it prefers to have more of foreign govt securities in their balance sheet which is also called as forex reserve. Whereas the developed world central banks mostly have their own govt securities in their balance sheet as we have also seen in QE etc by these banks.
So whatever source central bank chooses to push, it shows in currency in circulation. It is nothing but simple accountany – assets = liabilities.
In India’s case as forex reserves have risen in last few years sharply, so has currency in circulation. The share of Indian govt securities has been declining as can be seen from this table:
| Growth number (year on year) | |||
| Currency in circulation | G-sec | Foreign Assets | |
| Mar-16 | 15.7 | 13.1 | 11.5 |
| Feb-16 | 13.7 | 2.7 | 14.3 |
| Jan-16 | 12.7 | -9.4 | 16.5 |
| Dec-15 | 13.0 | -22.5 | 15.4 |
| Nov-15 | 13.5 | -19.2 | 20.1 |
| Oct-15 | 10.9 | -22.0 | 19.5 |
| Sep-15 | 11.8 | -20.2 | 20.4 |
| Aug-15 | 10.4 | -12.4 | 20.7 |
| Jul-15 | 9.6 | -7.1 | 16.8 |
| Jun-15 | 10.2 | -33.1 | 20.2 |
| May-15 | 10.7 | -36.8 | 22.6 |
| Apr-15 | 11.2 | -32.2 | 16.3 |
| Mar-15 | 11.2 | -44.3 | 17.8 |
| Feb-15 | 10.7 | -35.7 | 15.7 |
| Jan-15 | 10.5 | -29.1 | 13.0 |
| Dec-14 | 9.6 | -19.0 | 11.5 |
| Nov-14 | 8.5 | -15.4 | 8.8 |
| Oct-14 | 9.2 | -20.1 | 12.6 |
| Sep-14 | 11.0 | -21.5 | 13.7 |
| Aug-14 | 11.2 | -19.4 | 7.2 |
| Jul-14 | 11.8 | -21.2 | 17.9 |
| Jun-14 | 11.6 | -2.1 | 12.7 |
| May-14 | 11.2 | 3.8 | 14.3 |
| Apr-14 | 9.5 | 1.6 | 18.1 |
| Mar-14 | 9.1 | 7.8 | 15.6 |
In earlier times, this accounting variable could be used to draw economic inferences as things were relatively controlled by central bank. There was a reason why we had something called money supply targeting where money supply was the tweaking variable. Soon, central banks relaised they had little control over this given financial innovations and flow of money across borders. So they stopped targeting money and moved to interest rates. In famous words of a central banker (from Canada I think) ” We didn’t leave money, it left us”.
Hence, it might not be right to just draw inferences from this number alone. It could be a lot more complicated and we need more data to understand currency usage in India. The currency numbers are not in line with broad reality, tells you the same thing as well..
Why Bank Deposit Growth Slowed To Lowest In 53 Years-NDTV
Total bank deposit grew by 9.9 per cent in the fortnight ended March 18, 2016, marking the weakest growth in 53 years. The fall in bank deposits is surprising because it comes at a time when real interest rate (interest rate minus inflation) continues to be high.
Typically, higher real interest rate gives investors more incentive to park their money in banks to earn inflation-beating return.
According to research by State Bank of India (SBI), deposit growth may be falling because of higher spending by people. Higher real rate in the economy is because of falling inflation and this may be forcing people to spend more, its research says.
Another possible reason for decline in deposits could be increasing outward flow of money from the country, the report said. The Reserve Bank had last year doubled the amount to $2,50,000 that Indian residents can spend overseas per year.
"The outward remittance under Liberalised Remittance Scheme has seen a huge jump as soon as the limits were revised. From $106 million in May 2015, the remittances reached $449 million in Feb 2016, a jump of 324 per cent," Another possible reason "could be increased money circulation in the system. That leakage is also leading to a fall in bank deposits,"
RBI chief Raghuram Rajan recently said that cash in people's hands is more by up to Rs 60,000 crore at present.
Mr Ghosh said that the "fall in deposit growth is a matter of concern and needs to be addressed head-on. Otherwise when the credit growth picks up, banks may be in a fix to address the asset liability mismatch."
.
This anecdotal evidence may point to more spending in urban areas in recent months, which, if done in cash, could explain some of the increase in circulation.
What gives this theory credence is timing. Retailers speak of a pick-up in demand during festive and post-festive months, which coincides with the increase in growth rate of currency in circulation.
A second data point that ties in to the increase in currency in circulation is the pick-up in ATM withdrawals.
Saugata Bhattacharya, chief economist at Axis Bank Ltd, highlighted that ATM withdrawals between April 2015 and January 2016, were at Rs.21 trillion compared to Rs.18 trillion in the same period the previous year and Rs.20 trillion in FY14.
Could this be a behavioural change driven by higher ATM charges making people draw more cash at once, he asks.
There are other possible factors playing out in rural areas, but none seem statistically significant. For instance, direct benefit transfers may be putting out more cash. Also, given the pressure on rural incomes, some have asked whether people are borrowing more from informal channels or liquidating gold holdings. But a dip-stick survey of three people who work in rural areas and in rural lending didn’t reveal anything that would lead us to believe that these areas are contributing to the rise in currency in circulation.
All of this matters because the increase in circulation is being cited as a key reason for the liquidity tightness in the banking sector. The other reason for the liquidity crunch is weak deposit growth. This may be more easily explainable as deposits may be flowing towards other avenues such as equity as suggested by strong inflows into equity mutual funds through most of this year.
The net result is tight liquidity, which bankers believe RBI must address. In an interview to Mint, Hitendra Dave, head of global banking and markets at HSBC India, said this increase in currency in circulation was a key reason for liquidity tightness.
“Currency in circulation last March was Rs.14.8 trillion. Now it is more than Rs.16.7 trillion. The difference is about Rs.2 trillion. Assuming that the liquidity conditions have to be maintained at the same level as last year, at least that Rs.2 trillion has to be injected as primary liquidity,” said Dave, adding that the liquidity injections have been far below that.
So, will RBI yield to pressure from banks and ease liquidity through a cut in the cash reserve ratio. Bankers and economists are hopeful and say RBI is sympathetic to the issue. But they may choose to wait until a review of the liquidity framework—which the central bank is currently in the midst of—is completed.
Now even RBI Governor has praised performance of Mr. Narendra Modi , Prime Minister of India and BJP led government. Rajan told that India is poised for a "leap in production" and the government's emphasis on infrastructure creation is bearing results .
I hope Modi haters will now tag even Rajan with 'Modi Bhakt'. Modi haters do not have anything to genuinely criticize and hence they tag everyone with word 'Modi Bhakt' whoever hails Modi or priases any action taken by Modi government.
Some of Modi haters, specially media men were making a false propaganda that Jaitley and Modi are not happy with Rajan, some of them spread a news that Rajan may be removed and some of them spread rumours that Jaitley will be replaced by Parekar. All of them have been proved wrong .
All these rumour- mongers and Modi haters will now understand that all the three, Modi,Jaitley and Rajan are on same platform, on how to grow, on how to clean the system and how to improve system and procedures. They are trying their best to change culture of Indian politicians and beaureocrats
There may be different opinion on any issue but there is no difference of mind and heart among three stalwarts.
I hope people will always try to make them aware of reality and beware of such rumour mongers and blind Modi -haters who are bent upon putting hurdles in growth of the country and who are bent upon maligning image of Modi and bent upon tarnishing image of the country.
Opponents of Mr. Modi are not allowing discussion on any important bill and wasting time of Parliament only on non-issues. Such opponents are real enemy of growth and development.
I take this opportunity to condemn even editorial group of Times of India and economic times which more often than ridicule and blindly criticize Modi.
I condemn promoters of NDTV, ABP news, News24 like TV channels too who are spoiling Indian environment for the sake of their ego and for their TRP. They are more busy in carrying out debates on Kanhaiya and Rohit Vermula . They do not have time to give time for debates on issues related to growth and development.
Country will grow fastly under leadership of Modi if media men stop their mis-information campaign against Modi.
Journalism is good only if it is unbiased and positive.
Unfortunately in our country journalists give more weightage and coverage to persons like Kanhaiya, Umar Khalid, Rohit Vermula, Digvijay Singh, Sakchi maharaj , Owessi. Kejriwal and not good persons like Narendra Modi, Parikar, Piyush Goyal, Suresh Prabhu who are performing excellently well.
In democracy , eevery elected representative is given period of five years to prove his ability and to work for the pleasure of common men. Kejriwal is given time for serving Delhi people , Mamta for West bengal, Raman For Chhatishgarh and so on. Let them work and finally it wil be voters of that area who will decide their fate. Similarly Mr. Modi has ben elected for entire India, if all opponents support him in performing good work, I think India will become number one in the world very soon.
Let us learn to work together , learn to respect each other and give them an opportunity to perform.
RBI Governor Raghuram Rajan hails government, says India on cusp of a revolution-Economic times -10th April 2016
I hope Modi haters will now tag even Rajan with 'Modi Bhakt'. Modi haters do not have anything to genuinely criticize and hence they tag everyone with word 'Modi Bhakt' whoever hails Modi or priases any action taken by Modi government.
Some of Modi haters, specially media men were making a false propaganda that Jaitley and Modi are not happy with Rajan, some of them spread a news that Rajan may be removed and some of them spread rumours that Jaitley will be replaced by Parekar. All of them have been proved wrong .
All these rumour- mongers and Modi haters will now understand that all the three, Modi,Jaitley and Rajan are on same platform, on how to grow, on how to clean the system and how to improve system and procedures. They are trying their best to change culture of Indian politicians and beaureocrats
There may be different opinion on any issue but there is no difference of mind and heart among three stalwarts.
I hope people will always try to make them aware of reality and beware of such rumour mongers and blind Modi -haters who are bent upon putting hurdles in growth of the country and who are bent upon maligning image of Modi and bent upon tarnishing image of the country.
Opponents of Mr. Modi are not allowing discussion on any important bill and wasting time of Parliament only on non-issues. Such opponents are real enemy of growth and development.
I take this opportunity to condemn even editorial group of Times of India and economic times which more often than ridicule and blindly criticize Modi.
I condemn promoters of NDTV, ABP news, News24 like TV channels too who are spoiling Indian environment for the sake of their ego and for their TRP. They are more busy in carrying out debates on Kanhaiya and Rohit Vermula . They do not have time to give time for debates on issues related to growth and development.
Country will grow fastly under leadership of Modi if media men stop their mis-information campaign against Modi.
Journalism is good only if it is unbiased and positive.
Unfortunately in our country journalists give more weightage and coverage to persons like Kanhaiya, Umar Khalid, Rohit Vermula, Digvijay Singh, Sakchi maharaj , Owessi. Kejriwal and not good persons like Narendra Modi, Parikar, Piyush Goyal, Suresh Prabhu who are performing excellently well.
In democracy , eevery elected representative is given period of five years to prove his ability and to work for the pleasure of common men. Kejriwal is given time for serving Delhi people , Mamta for West bengal, Raman For Chhatishgarh and so on. Let them work and finally it wil be voters of that area who will decide their fate. Similarly Mr. Modi has ben elected for entire India, if all opponents support him in performing good work, I think India will become number one in the world very soon.
Let us learn to work together , learn to respect each other and give them an opportunity to perform.
RBI Governor Raghuram Rajan hails government, says India on cusp of a revolution-Economic times -10th April 2016
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http://economictimes.indiatimes.com/articleshow/51726568.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
Reserve Bank of India (RBI) governor Raghuram Rajan said India is poised for a "leap in production" and the government's emphasis on infrastructure creation is bearing results.
We are on verge of revolution, says RBI Guv Raghuram Rajan-Financial Express
Seeking to guard investor returns from excessive exchange rate movements, RBI Governor Raghuram Rajan today said a move towards an inflation target of 4 per cent will help contain the currency market volatility.
'Dangerous' to question legitimacy of self-made wealth: Rajan-Business Standard-10th April 2016
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Amid a furore over leaked 'Panama Papers' showing Indians with alleged offshore tax haven holdings, RBI Governor Raghuram Rajan today warned against a "dangerous" trend of questions being raised about legitimacy of even the 'entrepreneurial wealth of self-made people'.
Stating that the debate on illegitimacy of wealth has varied from crony capitalism and the illegal acts of bankers to that about passive and inherited wealth, Rajan said, "Now increasingly there is a talk about whether entrepreneurial wealth is illegitimate, whether self-made people should have what they have and whether that's something a fair game.
"I think this is dangerous. And the fact that there are occasions when people are found to be hiding their wealth as in the Panama allegations, essentially contributes to this process of de-legitimisation," he added.
The so-called 'Panama Papers', presumably leaked documents of a Panamanian law firm detailing offshore tax-haven entities set up by people from across the world including Indians, have triggered a worldwide debate and probes have been announced in several countries, including in India.
Window Dressing In Banks -Danendra Jain
dkj
Auditors and inspectors are appointed by RBI to audit accounts of every big branch and submit report on various parameters including window dressing in their final report . But unfortunately , these auditors as usual are also greed of gifts and free hospitality and hence when they are given warm welcome , they turn blind eye on all evil acts of branches . They are also bothered of getting exorbitant audit fee without actually doing job equivalent to fee they receive for auditing. It is they who certify the correctness of classification of assts and cacluation of profits even though there are many lapses,manipulations manipulations, deficiencies and shortcomings in accounting of the branch.
Stating that the debate on illegitimacy of wealth has varied from crony capitalism and the illegal acts of bankers to that about passive and inherited wealth, Rajan said, "Now increasingly there is a talk about whether entrepreneurial wealth is illegitimate, whether self-made people should have what they have and whether that's something a fair game.
"I think this is dangerous. And the fact that there are occasions when people are found to be hiding their wealth as in the Panama allegations, essentially contributes to this process of de-legitimisation," he added.
The so-called 'Panama Papers', presumably leaked documents of a Panamanian law firm detailing offshore tax-haven entities set up by people from across the world including Indians, have triggered a worldwide debate and probes have been announced in several countries, including in India.
Window Dressing In Banks -Danendra Jain
dkj
It is lack of understanding of media men that they have concluded that bankers are refraining from window dressing. Persons who are associated with bank know it very well that it is the cuture of bankers to use window dressing to achieve the set target and to misgude their mentor ministers.Bankers increase deposits, advances, and profit by window dressing and reduce Non Performing assets by using tools of restructure and evergreening of loan. This culture is deep rooted and bankers cannot sleep without using tools of window drssing to inflate their business artificially and get promoted.
Every year Government of India and RBI issue guidelines to Chiefs of banks to refrain from window dressing and every year bankers use window dressing in clear defiance of guidelines .Neither Government is intersted to ensure compliance of its guidelines, nor are the bankers afraid of non-compliance . This is why figure of total business rises abnormally in the month of March every year and fall down sharply in the month of April. It will be proved this year too as soon as figure of first fornight of April is compard with that of last dayy of March 2016. Basically it happens so in every quarter of the year but not to large extent , only to a small extent.
Auditors and inspectors are appointed by RBI to audit accounts of every big branch and submit report on various parameters including window dressing in their final report . But unfortunately , these auditors as usual are also greed of gifts and free hospitality and hence when they are given warm welcome , they turn blind eye on all evil acts of branches . They are also bothered of getting exorbitant audit fee without actually doing job equivalent to fee they receive for auditing. It is they who certify the correctness of classification of assts and cacluation of profits even though there are many lapses,manipulations manipulations, deficiencies and shortcomings in accounting of the branch.
Banks stay away from Window Dressing to Grow Their books -DNA 04.02.2016
The credit growth figures released by the Reserve Bank of India (RBI) on Wednesday showed that the credit growth for Indian banks during the fortnight ending March 18 showed a slight rise of just Rs 29,140 crore to Rs 72,77,650 crore, with most of the growth coming from the retail sector, and a tepid growth in the corporate book.
This fiscal-end, banks have refrained from taking one-day deposit or one-day credit as they shift their focus from balance-sheet expansion to the management of bad debt.
While the non-performing assets (NPAs) are expected to be high, banks are expected to reap huge treasury gains as they will be able to write back depreciation on the investments and also book profits with the yields on the government securities falling by 0.30% in the quarter. According to the estimates by rating agency Icra, gross NPAs is likely to increase from Rs 4.5 lakh crore (6% as on December 31, 2015) to increase to Rs 4.8-5.3 lakh crore by March 2016.
While the non-performing assets (NPAs) are expected to be high, banks are expected to reap huge treasury gains as they will be able to write back depreciation on the investments and also book profits with the yields on the government securities falling by 0.30% in the quarter. According to the estimates by rating agency Icra, gross NPAs is likely to increase from Rs 4.5 lakh crore (6% as on December 31, 2015) to increase to Rs 4.8-5.3 lakh crore by March 2016.
Government to tighten screws on banks' "window dressing" of accounts -4th June 2015
The government is set to overhaul annual targets for public sector banks this month, ending a focus on size that has long encouraged banks to inflate their loans and deposits at the year-end to hit growth objectives.
Banking and government sources said the new targets, to be discussed at meetings with top state bank officials this month, would focus on efficiency, with objectives set around return on assets, or return on equity, and controlling bad debts.
The shift, the government hopes, will also put a stop to widespread "window dressing" of state banks' financial accounts at the end of the fiscal year, the time at which the health of their balance sheets is officially assessed.
Banking and government sources said the new targets, to be discussed at meetings with top state bank officials this month, would focus on efficiency, with objectives set around return on assets, or return on equity, and controlling bad debts.
The shift, the government hopes, will also put a stop to widespread "window dressing" of state banks' financial accounts at the end of the fiscal year, the time at which the health of their balance sheets is officially assessed.
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Window Dressing in Public Sector Banks -15th June 2015 by Danendra Jain
An Appeal to Government of India on Window Dressing
From time to time RBI and Government of India have asked and advised public sector banks to refrain from window dressing in deposits and advances. Still bank officials indulge in window dressing every quarter and this has been happening for decades. Window dressing is nothing but artificial inflating of business and reduction of stressed assets.
Bank officials inflate deposits in the last week of quarter or year and the same comes down in the first week of next quarter or year . Similarly they inflate figures of advances in the last week and get appreciation and awards from their bosses and from Ministers. This results in undue award to non performers and unjustified punishment to real performers.
Similarly on the front of bad assets and stressed assets, bankers hide bad assets by using the tools of rephrasing, restructuring and through evergreening of loan processes . Due to this timely action is not initiated against defaulters and during this time , defaulters disposes off the assets and then pray for compromise settlement or write off of the dues. In this way Recovery from defaulters is adversely affected.
Ultimately it is the government of India which has to suffer. It is taxpayers money which is infused in bank to protect them from falling due to mismanagement of bank officials or due to exploitation of banks by politicians. I add politicians because it is they who have been misusing banks for political advantages during each government in some way or the other. It is politicians who have damaged the banking culture.by their ill motivated advices and by suggesting writing off of loan for political gain.
Will you act against who have indulged in window dressing in the quarter ended June 15 despite your instruction not to do so in the same month?
It is important to say here that GOI can make real plan based on real figures only and similarly bank can recover bad money only if they take timely action.
Lastly I may add here that banking is a service industry and one cannot judge the performance of any individual based on figures. There are several Branch Heads or Bank heads who achieve the targeted figure somehow or the other but the customers of the branch and bank are not happy with the service extended .It may be these achievers who have added major portion of bad assets in their bank.
Here I would like to give an illustration TO substantiate my views. Suppose I am Branch Manager of a branch or Chief of a bank. I indulge in bribe based lending and achieve the advance well in advance. Then I use a little part of the ill earned money to buy deposits from government departments and public sector undertakings who have surplus funds and who can keep bulk deposits in my branch or in may bank, I can achieve and surpass even the target set for deposits. In this way I will be considered as good performer by my bosses, I will earn cash incentive and get quicker promotions. On the contrary those who have lagged behind the target or who have contributed lesser business by good means and by extending best services to customers may be rejected in cash incentives and in career.
But in the long run, advance made by me may become bad assets and cause huge loss to bank and force bank to arrange for larger capital. Customers may be dissatisfied with services extended from my branch because I focused on only few high value customers and neglected common men .Growth achieved may not be long lasting and stable. On the contrary , a person who did quality lending and who focused on retail business did the best for the health of the bank .His advances may remain standard healthy for years and decades. Bank may earn consistent income from such quality lending .
Future of bank depends not on figures but on quality of service it extends. Good culture is more important than good figures a bank achieves. Respect and recognition of real good performers can only help in giving permanent growth and consistent profit to a bank or a branch. Similarly wrong lending to achieve the target may give some temporary relief to political masters for temporary period but in the long run even persons like Devi Lal , V P Singh, Janardhan Pujari or Chidambram who promoted Loan Mela or Loan waivers used for for vote gain were rejected in election by voters. IN the same way bank officials who resort to evil means to achieve the target are trapped in corrupt dealing sooner or later or punished by almighty GOD in later part of life.
A Student who passed the examinations of his life by using unfair means may not necessarily get success in real life. A person may get job by using unfair means may be rejected by employer in short period. A bank may book inflated profit and book higher growth in business by using window dressing and by concealing stressed assets but sooner or the later the bank is exposed and subjected to hard medicine and surgical operation to survive or merged with some other bank . Unfair means in any sphere of life has bad outcome . There is no substitute to truth and real growth .
Stressed assets or Non Performing Assets in Banks are like tumour in body of a person. If the Doctor considers it as insignificant in early stage or do not diagnose it , it my grow and if the same is not removed by medicine or by surgical operation in initial stage it may turn into cancerous disease and cause huge loss leading to ultimate death of the patient. Similarly a person in intoxication of wine acts like lion and start driving his car in high speed and without control. If the power attained by wine is considered as good it may result in fatal accident. In the same way growth attained by window dressing is unreal power and unreal growth and result in accident in future.
From time to time RBI and Government of India have asked and advised public sector banks to refrain from window dressing in deposits and advances. Still bank officials indulge in window dressing every quarter and this has been happening for decades. Window dressing is nothing but artificial inflating of business and reduction of stressed assets.
Bank officials inflate deposits in the last week of quarter or year and the same comes down in the first week of next quarter or year . Similarly they inflate figures of advances in the last week and get appreciation and awards from their bosses and from Ministers. This results in undue award to non performers and unjustified punishment to real performers.
Similarly on the front of bad assets and stressed assets, bankers hide bad assets by using the tools of rephrasing, restructuring and through evergreening of loan processes . Due to this timely action is not initiated against defaulters and during this time , defaulters disposes off the assets and then pray for compromise settlement or write off of the dues. In this way Recovery from defaulters is adversely affected.
Ultimately it is the government of India which has to suffer. It is taxpayers money which is infused in bank to protect them from falling due to mismanagement of bank officials or due to exploitation of banks by politicians. I add politicians because it is they who have been misusing banks for political advantages during each government in some way or the other. It is politicians who have damaged the banking culture.by their ill motivated advices and by suggesting writing off of loan for political gain.
Will you act against who have indulged in window dressing in the quarter ended June 15 despite your instruction not to do so in the same month?
It is important to say here that GOI can make real plan based on real figures only and similarly bank can recover bad money only if they take timely action.
Lastly I may add here that banking is a service industry and one cannot judge the performance of any individual based on figures. There are several Branch Heads or Bank heads who achieve the targeted figure somehow or the other but the customers of the branch and bank are not happy with the service extended .It may be these achievers who have added major portion of bad assets in their bank.
Here I would like to give an illustration TO substantiate my views. Suppose I am Branch Manager of a branch or Chief of a bank. I indulge in bribe based lending and achieve the advance well in advance. Then I use a little part of the ill earned money to buy deposits from government departments and public sector undertakings who have surplus funds and who can keep bulk deposits in my branch or in may bank, I can achieve and surpass even the target set for deposits. In this way I will be considered as good performer by my bosses, I will earn cash incentive and get quicker promotions. On the contrary those who have lagged behind the target or who have contributed lesser business by good means and by extending best services to customers may be rejected in cash incentives and in career.
But in the long run, advance made by me may become bad assets and cause huge loss to bank and force bank to arrange for larger capital. Customers may be dissatisfied with services extended from my branch because I focused on only few high value customers and neglected common men .Growth achieved may not be long lasting and stable. On the contrary , a person who did quality lending and who focused on retail business did the best for the health of the bank .His advances may remain standard healthy for years and decades. Bank may earn consistent income from such quality lending .
Future of bank depends not on figures but on quality of service it extends. Good culture is more important than good figures a bank achieves. Respect and recognition of real good performers can only help in giving permanent growth and consistent profit to a bank or a branch. Similarly wrong lending to achieve the target may give some temporary relief to political masters for temporary period but in the long run even persons like Devi Lal , V P Singh, Janardhan Pujari or Chidambram who promoted Loan Mela or Loan waivers used for for vote gain were rejected in election by voters. IN the same way bank officials who resort to evil means to achieve the target are trapped in corrupt dealing sooner or later or punished by almighty GOD in later part of life.
A Student who passed the examinations of his life by using unfair means may not necessarily get success in real life. A person may get job by using unfair means may be rejected by employer in short period. A bank may book inflated profit and book higher growth in business by using window dressing and by concealing stressed assets but sooner or the later the bank is exposed and subjected to hard medicine and surgical operation to survive or merged with some other bank . Unfair means in any sphere of life has bad outcome . There is no substitute to truth and real growth .
Stressed assets or Non Performing Assets in Banks are like tumour in body of a person. If the Doctor considers it as insignificant in early stage or do not diagnose it , it my grow and if the same is not removed by medicine or by surgical operation in initial stage it may turn into cancerous disease and cause huge loss leading to ultimate death of the patient. Similarly a person in intoxication of wine acts like lion and start driving his car in high speed and without control. If the power attained by wine is considered as good it may result in fatal accident. In the same way growth attained by window dressing is unreal power and unreal growth and result in accident in future.
Also read following blog
How Indian banks' big NPA problem evolved over years-First Post
By Dinesh Unnikrishnan and Kishor Kadam
The writing was on the wall; just that no one wanted to acknowledge it. The bad loan crisis that has gripped India’s Rs 95 trillion banking sector didn’t happen overnight.
For years, Indian lenders, especially state-run banks, were engaged in volume game to balloon their balance sheets and appease their promoter (the government). That has been so ever since nationalisation of these banks happened in two stages (beginning 1969). Governments often treated these banks as their extended arms and used them for populist measures.
There used to be competition among sarkari banks to flag their total business number on front-pages of national newspapers but very little attention was paid to the quality of assets. Every outgoing chairman passed the buck to his successor.
“That was a time (2011-2013) when everyone rushed to give money to corporations, no matter what the credit perception was. Everyone expected a miraculous pick-up in the economy,” recalled a former banker with a nationalised bank who now works as a consultant.
Firstpost takes a look at how the NPA picture of India’s government-owned banks have evolved so far:
From Rs 53,917 crore, Indian banks gross non-performing assets (GNPAs) in September 2008 (just before the 2008 global financial crisis broke out following the collapse of Lehman Brothers), the bad loans have now grown to Rs 3,41,641 crore in September 2015. In other words, the total GNPAs of banks, as a percentage of the total loans, has grown from 2.11 per cent to 5.08 percent.
Surprisingly, in the pre-crisis period, private banks topped the list of banks with highest NPAs (see the chart). A quick look at the top ten NPA scorers in September 2008 shows ICICI Bank at the top.
This was followed by small and medium-sized private sector banks such as Karnataka Bank, Lakshmi Vilas Bank, Kotak Mahindra and IndusInd Bank. Among the few sarkari banks that figure in the list are Central Bank, Uco Bank and Syndicate Bank.
By March 2009, a few months before the Congress-led UPA II assumed power, the scene began changing gradually. More state-run banks began appearing in the picture. The country’s largest lender by assets, State Bank of India (SBI) and Indian Overseas Bank found place in the list of top NPA scorers. Still private sector lenders figured prominently in the list with ICICI and DCB Bank leading the pack. To be sure, there is no direct link between the ascension of UPA-II and the increase in the NPA picture, but this is when the state-run banks began feeling the heat of NPAs.
Things had worsened to a great extent by March 2014, incidentally, months before the Narendra Modi government assumed power at the Centre with a landslide victory over the Congress-led UPA government. The bad loan troubles of government banks began to hit hard despite the best efforts by banks to cover up possible NPA stock to restructured loan category. The list now dominated mostly public sector banks, with eight out of ten banks being government owned.
Twenty months into the Modi government rule, it wouldn’t be an exaggeration to say that state-run banks are on the verge of a crisis due to their high NPAs, which constitute over 90 percent of the total bad loans of the industry. Many of them have reported losses on account of huge NPAs in the December quarter, surprising analysts. Investors are dumping shares of these banks while there is a sense of uncertainty prevailing on the extent of troubles in the banking sector.
Nine out of 10 most stressed banks in the sector are government banks. The RBI has given a deadline of March 2017 for all banks to clean up their balance sheets, which also require these lenders to set aside huge chunk of capital in the form of provisions. RBI governor Raghuram Rajan has given a clear message to banks to deal with the NPA problem upfront, instead of postponing it and worsening it.
But, there is also huge capital implication on these banks on account of high NPAs too. Banks need to set aside money (known as provisions) to cover their bad loans. The onus to keep government banks stay afloat lies with the government, which is the owner of these banks that control 70 per cent of the banking industry assets. Experts have opined that the government’s promised capital infusion in these banks is inadequate.
Finance minister, Arun Jaitley, has to work out ways to solutions the issue in long term. For now, all eyes are on the Union budget for a roadmap.
This is the highest level of bad loans the bank has recorded in at least 11 years. High bad loans result in high provisioning, the money every bank need to set aside to cover their future losses, which more than doubled for PNB to Rs 3,776 crore in the third quarter ended December 2015 from Rs 1, 468 crore in the year-ago quarter.
As result, the net profit of the bank plunged 93.4 per cent to Rs 51 crore in the third quarter, compared with Rs 775 crore in the corresponding period in the last year. This is arguably one of the worst quarterly results of PNB in recent years.
Analysts have expressed worry over the numbers. "PNB has come out with a very disappointing set of results for the quarter. Though results were expected to be bad however, the quantum of rise in gross NPAs has surprised us," Vaibhav Agrawal, vice president, reserach, at Angel Broking Ltd said. "We don’t expect asset quality to stabilise any time soon for the bank," Agrawal said.
The PNB numbers are just an indication of the larger stress the banking system is facing currently. Even large private sector banks, such as ICICI Bank, have felt the pain of rising stress in the banking system. ICICI Bank registered a sharp increase in its gross NPAs to 4.72 per cent of total loans in the third quarter as compared with 3.77 per cent in the preceding quarter and the 3.40 per cent in the year-ago quarter.
Here again, the bank had to set aside higher chunk of money to cover provisions on the bad loans, which put pressure on its bottom line. The story of other large banks, especially public-sector banks, which will announce their numbes, may not be too different.
The NPAs on bank balance sheets didn’t happen overnight. There is a mix of factors including laxity in apprising creditworthiness of a borrower for years on end, government’s directed lending through state-run banks and using state-run banks for the roll out of government’s populist schemes. What we see today is a result of all this.
As Firstpost pointed out in a recent article, it wouldn’t be an exaggeration if one says that India’s state-run banks are on the verge of a crisis. Over 90 per cent of the total bad loans of Indian banks (currently stands over Rs 3,00,000 crore) is on the balance sheets of these entities. Their restructured loan portfolio would be nearly double this amount, if one goes by industry estimates. These two categories together, termed as stressed assets, would make up around 11-12 per cent of the total bank loans given.
Also, there is a risk of existing restructure loans turning bad if economy doesn’t do well as expected. Many loans, especially in infrastructure sector, which bank conveniently pushed to the restructured basket to avoid turning bad loans, might return to haunt in that case. This is one reason why RBI governor, Raghuram Rajan, stipulated a deadline of March, 2017 for banks to clean up their bad loans and state the problem today and do not postpone for tomorrow.
Though the Reserve Bank of India (RBI) and the finance ministry have consistently maintained that bad loans in Indian banking system is not at an alarming level, the stress that is emerging from bank balance sheets, especially that of state-run banks, is indeed a serious problem for finance minister, Arun Jaitley, considering its multiple implications on requirement of capital and banks’ ability to further lend that is critical for economic growth.
In turn, this would make allocation of capital to state-run banks a complex process for Jaitley, who has so far allocated Rs 70,000 crore for state-run banks and has asked them to find funds from the market for about Rs 1.1 lakh crore. The consensus estimate of capital these banks would require in the year to 2019 is at least R s2.4 lakh crore when the Basel-III norms will take effect. Also, the capital requirement can change if bad loans shoot up beyond estimates. For every Rs1 00 loan, banks need to set aside Rs 15 if the loan turns bad.
The government, which owns majority stake in these banks, will have to work out ways to face this ‘capital’ shock in the years ahead or, at least, let these banks go private and fend for themselves. One thing is sure. Managing the sarkari banks is going to be a much more difficult affair for Jaitley—one more headache for the lawyer-turned-politician as he prepares to unveil the Union budget for 2016-17.
By Dinesh Unnikrishnan and Kishor Kadam
The writing was on the wall; just that no one wanted to acknowledge it. The bad loan crisis that has gripped India’s Rs 95 trillion banking sector didn’t happen overnight.
For years, Indian lenders, especially state-run banks, were engaged in volume game to balloon their balance sheets and appease their promoter (the government). That has been so ever since nationalisation of these banks happened in two stages (beginning 1969). Governments often treated these banks as their extended arms and used them for populist measures.
There used to be competition among sarkari banks to flag their total business number on front-pages of national newspapers but very little attention was paid to the quality of assets. Every outgoing chairman passed the buck to his successor.
“That was a time (2011-2013) when everyone rushed to give money to corporations, no matter what the credit perception was. Everyone expected a miraculous pick-up in the economy,” recalled a former banker with a nationalised bank who now works as a consultant.
Firstpost takes a look at how the NPA picture of India’s government-owned banks have evolved so far:
From Rs 53,917 crore, Indian banks gross non-performing assets (GNPAs) in September 2008 (just before the 2008 global financial crisis broke out following the collapse of Lehman Brothers), the bad loans have now grown to Rs 3,41,641 crore in September 2015. In other words, the total GNPAs of banks, as a percentage of the total loans, has grown from 2.11 per cent to 5.08 percent.
Surprisingly, in the pre-crisis period, private banks topped the list of banks with highest NPAs (see the chart). A quick look at the top ten NPA scorers in September 2008 shows ICICI Bank at the top.
This was followed by small and medium-sized private sector banks such as Karnataka Bank, Lakshmi Vilas Bank, Kotak Mahindra and IndusInd Bank. Among the few sarkari banks that figure in the list are Central Bank, Uco Bank and Syndicate Bank.
By March 2009, a few months before the Congress-led UPA II assumed power, the scene began changing gradually. More state-run banks began appearing in the picture. The country’s largest lender by assets, State Bank of India (SBI) and Indian Overseas Bank found place in the list of top NPA scorers. Still private sector lenders figured prominently in the list with ICICI and DCB Bank leading the pack. To be sure, there is no direct link between the ascension of UPA-II and the increase in the NPA picture, but this is when the state-run banks began feeling the heat of NPAs.
Things had worsened to a great extent by March 2014, incidentally, months before the Narendra Modi government assumed power at the Centre with a landslide victory over the Congress-led UPA government. The bad loan troubles of government banks began to hit hard despite the best efforts by banks to cover up possible NPA stock to restructured loan category. The list now dominated mostly public sector banks, with eight out of ten banks being government owned.
Twenty months into the Modi government rule, it wouldn’t be an exaggeration to say that state-run banks are on the verge of a crisis due to their high NPAs, which constitute over 90 percent of the total bad loans of the industry. Many of them have reported losses on account of huge NPAs in the December quarter, surprising analysts. Investors are dumping shares of these banks while there is a sense of uncertainty prevailing on the extent of troubles in the banking sector.
Nine out of 10 most stressed banks in the sector are government banks. The RBI has given a deadline of March 2017 for all banks to clean up their balance sheets, which also require these lenders to set aside huge chunk of capital in the form of provisions. RBI governor Raghuram Rajan has given a clear message to banks to deal with the NPA problem upfront, instead of postponing it and worsening it.
But, there is also huge capital implication on these banks on account of high NPAs too. Banks need to set aside money (known as provisions) to cover their bad loans. The onus to keep government banks stay afloat lies with the government, which is the owner of these banks that control 70 per cent of the banking industry assets. Experts have opined that the government’s promised capital infusion in these banks is inadequate.
Finance minister, Arun Jaitley, has to work out ways to solutions the issue in long term. For now, all eyes are on the Union budget for a roadmap.
At 11-year high, Punjab National Bank's bad loans indicate heightening crisis in banking
Punjab National Bank (PNB), India’s second largest state-run bank, logged gross non-performing assets (NPAs) of 8.47 per cent for the December-quarter. Bad loans are loans where recovery is overdue more than 90 days.This is the highest level of bad loans the bank has recorded in at least 11 years. High bad loans result in high provisioning, the money every bank need to set aside to cover their future losses, which more than doubled for PNB to Rs 3,776 crore in the third quarter ended December 2015 from Rs 1, 468 crore in the year-ago quarter.
As result, the net profit of the bank plunged 93.4 per cent to Rs 51 crore in the third quarter, compared with Rs 775 crore in the corresponding period in the last year. This is arguably one of the worst quarterly results of PNB in recent years.
Analysts have expressed worry over the numbers. "PNB has come out with a very disappointing set of results for the quarter. Though results were expected to be bad however, the quantum of rise in gross NPAs has surprised us," Vaibhav Agrawal, vice president, reserach, at Angel Broking Ltd said. "We don’t expect asset quality to stabilise any time soon for the bank," Agrawal said.
The PNB numbers are just an indication of the larger stress the banking system is facing currently. Even large private sector banks, such as ICICI Bank, have felt the pain of rising stress in the banking system. ICICI Bank registered a sharp increase in its gross NPAs to 4.72 per cent of total loans in the third quarter as compared with 3.77 per cent in the preceding quarter and the 3.40 per cent in the year-ago quarter.
Here again, the bank had to set aside higher chunk of money to cover provisions on the bad loans, which put pressure on its bottom line. The story of other large banks, especially public-sector banks, which will announce their numbes, may not be too different.
The NPAs on bank balance sheets didn’t happen overnight. There is a mix of factors including laxity in apprising creditworthiness of a borrower for years on end, government’s directed lending through state-run banks and using state-run banks for the roll out of government’s populist schemes. What we see today is a result of all this.
As Firstpost pointed out in a recent article, it wouldn’t be an exaggeration if one says that India’s state-run banks are on the verge of a crisis. Over 90 per cent of the total bad loans of Indian banks (currently stands over Rs 3,00,000 crore) is on the balance sheets of these entities. Their restructured loan portfolio would be nearly double this amount, if one goes by industry estimates. These two categories together, termed as stressed assets, would make up around 11-12 per cent of the total bank loans given.
Also, there is a risk of existing restructure loans turning bad if economy doesn’t do well as expected. Many loans, especially in infrastructure sector, which bank conveniently pushed to the restructured basket to avoid turning bad loans, might return to haunt in that case. This is one reason why RBI governor, Raghuram Rajan, stipulated a deadline of March, 2017 for banks to clean up their bad loans and state the problem today and do not postpone for tomorrow.
Though the Reserve Bank of India (RBI) and the finance ministry have consistently maintained that bad loans in Indian banking system is not at an alarming level, the stress that is emerging from bank balance sheets, especially that of state-run banks, is indeed a serious problem for finance minister, Arun Jaitley, considering its multiple implications on requirement of capital and banks’ ability to further lend that is critical for economic growth.
In turn, this would make allocation of capital to state-run banks a complex process for Jaitley, who has so far allocated Rs 70,000 crore for state-run banks and has asked them to find funds from the market for about Rs 1.1 lakh crore. The consensus estimate of capital these banks would require in the year to 2019 is at least R s2.4 lakh crore when the Basel-III norms will take effect. Also, the capital requirement can change if bad loans shoot up beyond estimates. For every Rs1 00 loan, banks need to set aside Rs 15 if the loan turns bad.
The government, which owns majority stake in these banks, will have to work out ways to face this ‘capital’ shock in the years ahead or, at least, let these banks go private and fend for themselves. One thing is sure. Managing the sarkari banks is going to be a much more difficult affair for Jaitley—one more headache for the lawyer-turned-politician as he prepares to unveil the Union budget for 2016-17.
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