Tag: raghuram rajan

Why did RBI deny banking licences to corporates again?, BFSI News, ET BFSI

Banking & Finance

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The Reserve Bank of India has disappointed big corporates that are looking to enter the banking sector, as it kept in abeyance the proposal of its internal working group to allow large industrial houses in the sector.

RBI said it had accepted 21 recommendations with some modifications of the 33 proposed by the committee in November last year. The most contentious proposal by the five-member panel was to allow large corporate houses as promoters of banks after amendments to the Banking Regulation Act. Experts pointed that RBI would face challenges in supervising non-financial sector entities, and supervisory resources could be further strained.

Former RBI governor Raghuram Rajan and deputy governor Viral Acharya were foremost among the experts who had opposed the proposed move last year.

“The history of such connected lending is invariably disastrous – how can the bank make good loans when it is owned by the borrower? Even an independent regulator, with all the information in the world, finds it difficult to be in every nook and corner of the financial system to stop poor lending,” they said in a joint article. In August 2011, the then RBI Governor D. Subbarao said in one of his speeches, “by far the biggest apprehension is about self-dealing — that companies will use the bank as a private pool of readily available funds.”

The argument against

While corporates can bring in capital, business experience and managerial competence, the biggest risk of allowing industrial houses to promote banks is the conflict of interest. A bank is an intermediary which channels public deposits to borrowers. It was not easy for supervisors to prevent or detect self-dealing or connected lending as banks could hide connected party or related party lending behind complex company structures and subsidiaries or through lending to suppliers of promoters and their group companies. RBI also has had an unsatisfactory record in its role as the banking supervisor. Recent governance failures in private banks can be traced to a lack of independence within the board.

The current status

Individuals and companies, directly or indirectly connected with large industrial houses, can participate in the equity of a new private sector bank up to 10 per cent but without controlling interest in the bank. Such shareholders are not allowed to have any Director on the board of the bank on account of shareholder agreements or otherwise, according to the RBI Guidelines for ‘on tap’ Licensing of Universal Banks in the Private Sector issued in August 2016. A group with assets of Rs 5,000 crore or more with the non-financial business of the group accounting for 40 per cent or more in terms of total assets or in terms of gross income, will be treated as a large industrial house, the RBI said.

Tech disruption

The real transformation in banking is coming from tech companies. A core function of traditional banking, payments, has already been disrupted by fintech. Now, Big Tech is pushing the envelope in financial intermediation. Data is central to the digital economy. It’s given Big Tech an opening, leading to the so-called DNA (data-network-activities feedback loop) advantage. Navigating the risks here is the emerging regulatory challenge. In this situation, there’s no pressing need to add another risk in terms of allowing industrial houses to promote banks.



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Only a handful of cryptocurrencies that exist today likely to survive: Raghuram Rajan

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Out of the 6,000-odd cryptocurrencies currently in existence, only a few are likely to survive, according to the former RBI Governor Raghuram Rajan.

Rajan, in a recent interview with CNBC TV-18 said that only one or two, or at most, only a handful of the cryptocurrencies that exist today would survive in the future.

“If things have value only because they will be pricier down the line, that’s a bubble,” Rajan said.

The former RBI governor compared the current mania in cryptocurrencies to the tulip mania in the Netherlands in the 17th century.

Also Read: Explainer: Digital currency vs cryptos – how are they different?

He added that the issue was that most cryptocurrencies did not have permanent value. Additionally, some of them would survive to facilitate payments, especially cross border payments.

“In the US, crypto is a $2.5 trillion problem that nobody really wants to regulate,” he said.

According to Rajan, part of the problem was the lack of understanding of the space and how to regulate it, among regulators.

He added that the government can examine these crypto entities more closely when they get too big to make sure that there isn’t fraud.

Rajan’s remark come as the bill to ban all private cryptocurrencies and facilitate introduction of the Central Bank Digital Currency (CBDC) topped the government’s busy agenda for the Winter Session of Parliament.

Also read: Exchanges on tenterhooks as they await details of proposed cryptocurrencies Bill

Top cryptocurrencies including Bitcoin, Ethereum, USDT, Shiba Inu, Dogecoin, Sandbox among others crashed overnight on Indian crypto exchanges on Wednesday as investors panicked following the government’s plans on the bill seeking to prohibit private cryptocurrencies while allowing certain exceptions to promote the underlying technology.

Additionally, the former RBI Governor said that the government must focus on the underlying blockchain technology, letting it flourish adding that blockchain ways of transacting were much cheaper, especially across borders.

There has been a fair share of regulatory concerns when it comes to cryptocurrencies.

However, despite regulatory uncertainty and the Reserve Bank of India’s (RBI) concerns, India now has close to 400 cryptocurrency-based start-ups offering various services to the crypto ecosystem.

According to data sourced by BusinessLine from Tracxn, there are 380 crypto start-ups and 12 Non-fungible Tokens-based (NFT) start-ups currently operating in the country, as per previous reports.

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Raghuram Rajan, BFSI News, ET BFSI

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The onus of promoting sustainable investments should lie with governments and not central banks, which already have significant other policy commitments, said Raghuram Rajan, former Reserve Bank of India governor.

Central banks should steer clear of politically-driven unlegislated areas such as “green” investments, as their mandates of providing financial and monetary stability are already quite wide, Rajan told the Reuters Global Markets Forum on Wednesday.

“Asking the central bank to say you should buy only green bonds, not brown bonds, etc., is asking the central bank to impose its own views on something which is primarily a fiscal matter,” he said.

Rajan, who earlier served as chief economist for the International Monetary Fund, said central banks should instead turn their focus to the financial stability of these green investments and other threats such as crypto currencies and cyber security.

Crypto currencies have a “potential future,” particularly well-regulated stablecoins, Rajan said, but it wasn’t clear what fundamentals were backing their valuations other than a “heady environment,” with easy monetary policy fuelling all asset prices.

Cryptos won’t be “your last resort” in a doomsday scenario, he said. “I would be much more confident about the value of these cryptos once they find proper use cases,” such as an effective means of payment, especially in cross-border transactions.

ON TRACK
Rajan, who is professor of finance at the University of Chicago Booth School of Business, did not expect markets to react in a 2013-style “taper tantrum” as the U.S. Federal Reserve unveils its plan to withdraw stimulus, which he said was unlikely to happen at Jackson Hole on Friday.

“Ideally, the Fed would like to observe as long as possible, (and) … make sure that the economy is well on track towards growth, he said. “Of course, the problem is the Delta variant, plus whatever variants are lurking in the background.”

He expected inflationary pressures in the United States to be transitory, but said prices may remain elevated for longer than expected due to strong wages, unavailability of workers, and additional fiscal stimulus measures.

“Firms are feeling confident enough to pass through price increase … they don’t do that until they think that these higher prices are to stay,” Rajan said.

Referring to India, Rajan said inflation there could rise in the short term as pent-up demand takes hold, resulting in supply-side bottlenecks, but demand will fall over the medium-term due to stressed households and economic scarring from the pandemic.

Central banks in many emerging countries are being proactive and raising interest rates, Rajan said.

“Now, obviously, the RBI (Reserve Bank of India) is watching the data and it will make the decision when it when it has to make it.”



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Raghuram Rajan, BFSI News, ET BFSI

Banking & Finance

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NEW DELHI: The term ‘Quantitative Easing’ became widely known in financial markets during the last Global Financial Crisis of 2008. Former RBI governor Raghuram Rajan, who famously predicted that particular collapse, has recently warned about the risks associated with excessive largesse from central banks.

In a recent article, Rajan flagged the potential pain that global financial markets might see when central banks turn off the easy money tap.

The world over, government debt is rising exponentially and more worryingly, an increasing amount of the debt maturity profile is skewed through issuance of longer-dated securities.

Political dispensations typically look past long-term debt, as the exigencies of democratic politics may ensure that a successive administration has to bear the burden of earlier borrowings.

“…What if interest rates start moving up as inflation takes hold? If government debt is around 125% of GDP, every percentage point increase in interest rates would translate into a 1.25 percentage point increase in the annual fiscal deficit as a share of GDP,” the RBI ex-governor wrote.

SHORT-TERM EXPOSURE
Rajan specifically warned about the risks that economies are exposing themselves to on account of the inevitability of interest rate hikes.

“When the central bank hoovers up five-year government debt from the market in its monthly bond-buying program, it finances those purchases by borrowing overnight reserves from commercial banks on which it pays interest… QE thus drives a continuous shortening of effective government debt maturity and a corresponding increase in (consolidated) government and central bank exposure to rising interest rates,” he wrote.

LESSON FOR INDIA?
India’s public debt profile worsened significantly well before the pandemic. Government debt, which till three years back used to be confined to Rs 6 lakh crore on a gross basis, has risen by around 80% over the last 2-3 years.

This financial year, the government has announced a gross borrowing programme of Rs 12.06 lakh crore. When interest rates rise, as they must at some point, the shock to banks’ profit margins could be huge after this degree of exposure.

In recent chats with ETMarkets.com, some leading economists have flagged the issues emanating from such elevated levels of public indebtedness.

“Scenarios where debt-to-GDP becomes a problem can always emerge, especially if nominal GDP growth is not close to double digits. However, as of now, our baseline view is that general government debt-to-GDP is close to 88-90%, but it is unlikely to become a concern for the rating agencies, because we expect a gradual downward trend after two to three years,” Standard Chartered Bank’s head of economic research Anubhuti Sahay said.

“… with public debt at close to 90% of GDP, fiscal headroom to deal with another wave is now further compromised. And then, there is not a whole lot that additional monetary accommodation can achieve,” ANZ Bank’s Chief Economist for South East Asia and India Sanjay Mathur said.

Raghuram Rajan perhaps reserved the most hard-hitting part of his recent note for the last paragraph.

“As for the US, not only is the outstanding government debt much shorter in maturity than that of the UK, the Fed already owns one-quarter of it,” he wrote.



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Raghuram Rajan says privatisation is a blunder; Rajnish Kumar cites failures in private banks, BFSI News, ET BFSI

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As the government speeds up on privatisation of public sector entities, industry mavens are not sure about the move. Former RBI chairman Raghuram Rajan spoke against privatisation while Rajnish Kumar former chairman of SBI has said that there are failures in private banks as well.

The government has made it clear that it doesn’t want to have more than five entities in any business. That’s a strategic decision that the government has taken recently. But the government has been talking about reducing its stake in PSBs for a long time. It merged 10 PSBs into 4. There are many recommendations for the government to reduce its stake in banks to only 51%. The idea is this will give enough funds to the government and the banks will also become more professionalised. But while the government is thinking of divesting its stake, Raghuram Rajan believes that it has not benefited the developed countries like the US.

“Time has come to recognise the crucial sectors of the country to be preserved. The Indian government is trying hard to sell the public sector banks to corporate hands which is a grave concern for an economy like India. Time is to understand Privatization is a blunder,” Raghuram Rajan, former Governor RBI and IMF Chief Economist, tweeted.

Rajan was replying to US President Joe Biden’s tweet on the divestment of government companies.

The developed countries like the US too are finding it difficult to create jobs after disinvesting heavily. Biden tweeted about his focus on creating government jobs.

“After decades of disinvestment, our roads, bridges, and water systems are crumbling. We must pass the American Jobs Plan. Together, we will rebuild our country’s infrastructure and create millions of good-paying union jobs in the process,”

This is not the first time Rajan made his viewpoint clear on privatisation. In an interview with PTI in March, he said, “I think it would be a colossal mistake to sell the banks to industrial houses. It will also be politically infeasible to sell any decent-sized bank to foreign banks,”

Bank employees’ associations and federations are already opposing the bank privatisation decision and held the 3-4 day strike very recently.

In an interaction with ETBFSI, Rajnish Kumar, former Chairman of SBI presented a different view to this discussion. He said if the government’s agenda is to bring governance then the government should change the ownership. “If the government wants to improve only the governance they can shift the ownership of the PSBs to RBI. And the issue would have been resolved. RBI would become the sole regulator and banks would achieve similar results,” said Kumar.

He also added, “The major issue is how long should the government capitalise the PSBs. And the government’s policy is also that it doesn’t want more than four entities in non-strategic sectors. There can be a question whether private banks perform better? But there is not an easy answer to this because there are failures in private banks as well.”



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Raghuram Rajan moots global credit incentive fund to reduce carbon emissions, BFSI News, ET BFSI

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Former RBI governor Raghuram Rajan has mooted a global carbon incentive to balance national-level priorities with global needs of protecting the environment.

Mooting a gl0boal credit incentive fund, Rajan said every country that emits more than the global average of around five tons per capita would pay annually into the fund, with the amount calculated by multiplying the excess emissions per capita by the population and the GCI. If the GCI started at $10 per ton, the US would pay around $36 billion, and Saudi Arabia would pay $4.6 billion.

Meanwhile, countries below the global per capita average would receive a commensurate payout (Uganda, for example, would receive around $2.1 billion), he wrote. “This way, every country would face an effective loss of $10 per capita for every additional ton that it emits per capita, regardless of whether it started at a high, low, or average level, he said.

Fairness problem

The GCI also would address the fairness problem as the low emitters, which are often the poorest countries and the ones most vulnerable to climatic changes they did not cause, would receive a payment with which they could help their people adapt. “If the GCI is raised over time, the collective sums paid out would approach the $100 billion per year that rich countries promised to poor countries at COP15 in 2009. That would far exceed the meagre sums that have been made available thus far. Better still, the GCI would assign responsibility for payments in a feasible way, because big emitters typically are in the best position to pay,” Rajan wrote in a column.

Moreover, the GCI would not snuff out domestic experimentation. “Instead of levying a politically unpopular carbon tax, one country might impose prohibitive regulations on coal, another might tax energy inputs, and a third might incentivize renewables. Each one charts its own course, while the GCI supplements whatever moral incentives are already driving action at the country level,” Rajan wrote.

The problem

The least costly way to reduce global emissions would be to give every country similar incentives. While India should not keep building more dirty coal plants as it grows, Europe should be closing down the plants it already has. But each country will want to reduce emissions in its own way – some through taxation, others through regulation. The question, then, is how to balance national-level priorities with global needs so that we can save the one world we have.



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Raghuram Rajan’s formula has led to over 50% recovery for ARCs, BFSI News, ET BFSI

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The recovery rate of asset reconstruction companies (ARCs) has been over 50% in the last five years since Raghuram Rajan brought in the ’15:85 structure’ for acquiring non-performing assets from banks.

“From FY16 onwards, recovery has been more than 50% in ARCs, which is much much better than even an IBC. In IBC resolution everyone talks of resolved cases, but 75% cases of IBC are going into liquidation, recovering less than 10 % of loans” says Siby Antony, chairman, ARC Association of India.

In FY2015 Raghuram Rajan brought in the 15:85 structure, under which the cash component ARCs would have to pay to a bank was raised to 15% while the rest was security receipts, from the earlier 5:95 split.

The 5:95 split

“The 5:95 (5% cash and rest SR) split was a very skewed structure in favour of ARCs. It was a blind game ARCs could play,” says Antony.

Under 5:95 structure, ARCs could earn a positive net return just on the basis of management fees, without any value addition by securitisation or asset reconstruction.

The increase of cash proportion to 15% pushed the ARCs to raise their returns through securitisation and asset reconstruction.

The 15:85 structure

“15:85 is an excellent structure. Unless the ARC recovers 130% of the acquisition value, it will not make its return. Even at 100%, ARC will make loss because the management fee of 1-2% doesn’t make any ARR for ARC. Recovery should be over 130% so that 100% of security rights will be redeemed,” Antony said.

Provisioning killed the goose

However, in September 2016, the Reserve Bank of India introduced new regulatory guidelines regarding provisioning. From April 2018 banks have to sell at 90% cash and 10% SRs. If a bank holds more than 10% SR, it had to continue provisioning for the loan which is not even on their books.

“So there was no incentive for them to transfer to ARCs. Now no banks transfer on 15:85 and all deals are on cash,” says Antony.

Cash deals

At such high levels of cash, the market becomes unviable for all but a few. Some ARCs such as Edelweiss, JM Financial that have raised money from Alternative Investment Funds (AIFs) do transactions on a cash basis, but other ARCs have deployed whatever capital they had, and now have none.

The holdings of such AIFs which have the capital to invest in newly-issued security receipts have risen sharply. These funds hunt for viable assets. Vulture funds and AIFs look for 25% plus returns while the ARCs look at 18-20%



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