There were stray incidents of violence at the start of a two-day strike called by trade unions to protest against high prices and policy changes, including foreign investment in supermarkets, that they said could hurt employment.
India’s latest interest rate cut won’t revive growth. The central bank’s quarter-percentage point reduction in the policy rate, to 7.75 percent, is just as futile as the last one almost a year ago.
GDP will pick up when New Delhi curbs its own profligacy and improves the investment climate. The February budget may be the current government’s last chance to do both.
If companies aren’t investing, it isn’t because monetary policy is too tight. With 10.6 percent consumer-price inflation, the base rate for borrowing in 10-year bonds was already negative in real terms before this last rate adjustment. Rather, the government’s quest to fund itself is crowding out the private sector. Banks are forced to buy up government bonds, meaning two-thirds of what households save in a year is reinvested in public debt.
Bottlenecks choking growth are also in need of attention. A debilitating coal shortage is hurting electricity production.
The Reserve Bank should give preference to the non-corporate sector for new bank licences, Prime Minister’s Economic Advisory Council ChairmanC Rangarajan said.
“It is possible for the Reserve Bank to start with initially non-corporate business and find out whether there are suitable applicants and thereafter proceed to look at the other applicants,” he said in an interview.
The RBI is in the process of finalising the guidelines for giving new bank licences after Parliament approved Banking Laws (Amendment) Bill last month.
The central bank, Rangarajan said, “should look at various types of financial institutions that are available currently and decide”.
“…. many of the strong private sector banks today have been at one time or other in the financial system. They can look at it first and look at the other later on,” he said.
An analysis of the results of 360 top manufacturing and services companies, which have announced their July-September quarterly results, showed that a sharp 42% jump in other income, including gains from foreign exchange, boosted their combined net profit by 36% on a yearly basis. For example, net profit of RIL, the most valued company in the country, jumped nearly 92% due to increase in other income on an annual basis.
The analysis by Crisil Research also showed that there was clear stress on asset quality of public sector banks (PSBs). With a 47-basis-point (100 basis points = 1 percentage point) rise in gross non-performing assets (NPAs) on a quarterly basis, this number for PSBs now stands at 3.28%. “This could be attributed to continued stress in sectors like infrastructure, construction, aviation and textiles. In contrast, private sector banks have been able to maintain their asset quality, due to a higher exposure to the retail segment as well as stringent credit appraisal and recovery mechanisms for corporate loans. On an annual basis, gross NPAs of PSBs have risen by an alarming 95 basis points.
Recently, Fitch Ratings—a credit rating agency—said that Indian banks’ gross non-performing loans (NPL) reached 4.2% for the financial year ending March 2013 from 3.75% in 2011-12. The total stressed assets (including restructured assets) in the system is expected to exceed 10% of total loans by the end of the current fiscal. That is not all. The entire banking industry has restructured 4.68% of loans till March. The top five government banks accounted for 39% and 46% of restructured loans and gross non-performing assets (NPAs), respectively, in FY12. The top five government banks reported a year-on-year increase in gross NPAs of 62%.
The NPAs (non-perfomring assets) or bad loans of the public sector banks rose to 1.53 per cent in 2011-12, up from 1.09 per cent in the previous year, said the latest RBI report.
As per the Profile of Banks: 2011-12 released by the RBI, the NPA for India’s largest public sector lender SBI alongwith its associates rose to 1.76 per cent from 1.49 per cent in 2010-11.
SBI’s net NPA rose to 2.22 per cent in the first quarter of the current fiscal from 1.61 per cent a year earlier.
However, private sector banks managed to reduce their NPAs in 2011-12 to 0.46 per cent from 0.56 per cent in 2010-11, it said.
Non-performing assets of old private sector banks increased marginally to 0.58 per cent during the year from 0.53 per cent in the previous fiscal.
Also, foreign sector banks had their NPAs below one per cent at 0.61 per cent, down from 0.67 per cent in 2010-11, RBI said.
RBI, however, has asked the banks to improve their ability to manage stressed assets.
Banks, specifically public sector, have been reporting a higher NPAs in their books because of continued slowdown in the economic activities on the back of rising interest rate regime.
“The banks’ total outstanding exposure to companies for 2G related activities [including licence fees, rollout of 2G services, erection of towers, capital expenditure and other operational expenditures] as on December 2011 stood at about Rs 19,135 crore in respect of public sector banks and about Rs 8,803 crore in respect of private sector banks.
“These include exposures to companies whose licences have been cancelled,” Finance Minister Pranab Mukherjee said in a reply in the Lok Sabha.
Bloomberg’s Tom Keene points us to Robert Feldman’s 2001 work on Japan’s long economic winter. Feldman notes that following a major economic crisis, economies seem to follow a very predictable set of steps: Crisis, Response, Improvement, Complacency, Repeat.
Although written about Japan, it is certainly applicable to both the US (2007-09) and Europe (2011-13). My reinterpretation and updating of Feldman’s Crisis work is as follows:
1. Response: When any crisis reaches a panic stage, authorities will typically react (and overreact) creating an overwhelming response to the crisis. This usually includes lots of cash and some immediate legislative relief.
2. Improvement: This response throw enough money at the problem that symptoms are temporarily relieved. The improvement is not structural, but rather, is driven by a sugar rush of excess liquidity. It feels good but it is not economically nutritious.
3. Complacency: The baling wire, chewing gum and duct tape improvements of the temporary patchwork repair creates a false sense of accomplishment. The improvements feel good, the data improves, markets rally. Thios leads to a sense of complacency amongst all parties (Government, private sector, banks, consumers, etc.)
4. Repeat: With few of the structural problems fixed, the excess liquidity eventually flows to the same sources of the original crisis, setting the stage for the next crisis .
Feldman’s keen observation was that the natural consequences of complacency is an eventual return to crisis. As of 2001, Japan was beginning their fourth CRIC cycle.
Bringing us up to date, the US appears to be deep in the Complacency stage. Things have noticeably improved, but the structural problems underneath remain.
In Europe, we seem to be late in the Response phase, awaiting the early Improvement part of the cycle to kick in.
Unlike Iceland or Sweden. neither the US nor Europe has addressed the fundamental underlying problems. Which simply means that somewhere off int he future, we will enjoy the Repeat phase . . .
Pointing to shortcomings in the quality of bank audits, the Reserve Bank of India (RBI) has said financial statements certified by accountants show lower non-performing assets than is actually the case.
There is a difference between the levels of non-performing assets (NPAs) found during the course of supervisions (by RBI) and those in audited books of banks. Bad loans in certified statements are less, RBI Governor, D Subbarao, said on Saturday.
Seeking an improvement on this front, Subbarao said, “We must identify where the systemic difference is coming from.” He was addressing a conference organised by the Institute of Chartered Accountants of India (ICAI).
Subbarao said accountants who sign bank books were RBI’s “eyes and ears”. He added the regulator expected them to send out early warning signals to assist the regulator in the supervisory process. A true and fair picture must be shown to shareholders, he said.
The economic slowdown and rise in interest costs, owing to a rise of over 250 basis points in lending rates, have exerted pressure on the repayment capacity of retail and corporate borrowers. Gross NPAs of commercial banks rose to Rs 97,922 crore at end of March from Rs 84,698 crore a year ago, according to RBI data.
On the demand to reduce branch audit work, he said relevant branch audits at public sector banks (PSBs) had significantly declined due to core banking facilities and centralised record keeping.
The cost of audit of PSBs was significantly higher than the cost of auditing comparable private sector banks. However, ICAI has been resisted the move, as it would mean a reduction in work. ICAI’s efforts in this regard are ill advised. Accountants should sharpen their skills in concurrent audits, rather than agitate for the retention of work which does not add value, Subbarao said.
The profession had shied away from the responsibility of prevention and early detection of fraud, Subbarao said. The need for such a service exists, and if the profession did not fulfil that need, other agencies which could provide such services would displace auditors and deprive them of a potentially expanding opportunity, he added.
The central bank governor also had a word of caution for accountants on monopoly in areas like signing financial statements, advising them against perpetuating their monopoly status. Accounting professionals were concerned about expanding career opportunities, owing to the institute’s growing membership. The easy way out to expand opportunities would be to agitate for continuation of the monopoly position. However, this would be a mistake, Subbarao said, adding they should identify emerging opportunities and develop skills needed to exploit them.
Finance Ministry expects the gross NPA levels of PSBs to go up substantially in the current fiscal because many restructured accounts of previous years may turn into NPAs this fiscal.
Meanwhile, the gross NPA level of new private sector banks increased to Rs 13,772 crore in end March 2010 from a level of Rs 10,419 crore in end March 2008. The gross NPAs of old private sector banks stood at Rs 3,612 crore in end March 2010, higher than the level of Rs 2,557 crore in end March 2008.
The gross NPA level of PSBs stood at Rs 57,301 crore as of end March 2010, much higher than the level of Rs 39,749 crore in end March 2008.