Monday, February 19, 2018

Indian Banks: Broken Windows and Musical Chairs

It is easier to summarise what is right with Indian banks than to detail what is wrong . Tragically, nothing seems to be right. SBI, BOB, PNB, Allahabad Bank, IOB, etc., all of them seem to be neck-deep in mismanagement and consequent ill-effects.

SBI has started reporting quarterly loss. BOB has closed its branch in South Africa. PNB has been forced to go to town regarding its incapacity to comply with basic banking requirements. Allahabad Bank is a participant in all big bad loans. IOB is in perennial penury. Banks not named here are perhaps waiting for an opportune time to disclose their distress.

When the entire system is rotten, neither RBI nor the Finance Ministry can escape their responsibility. We do not have a responsible and reasonable opposition party that can pin  down the government for its lapses and facilitate remedial steps. In essence, the entire banking system is broken.

According to the theory of Broken Windows, if even a single window is broken in a house, over time,  vandalism can be expected. If all windows are broken?

Frauds are committed over a long period of time as in the case of Nirav Modi. Instead of rounding up all perpetrators, we catch only those who are at the wheel when the fraud becomes public. In this game of musical chairs, the borrowers are able to fly the coop because they are informed in advance as to when the music will stop.

It has become the norm for every bank whose mismanagement is exposed,  just to brazen it out till another bank gets into limelight for its recklessness. It is a never-ending saga of managerial delinquency and competitive chicanery.

Thursday, February 15, 2018

Ponzi scheme in loan frauds

Normally, Ponzi schemes happen in mobilisation of deposits. Sometimes, banks evergreen their loan accounts by sanctioning higher amounts to defaulting borrowers. PNB has now raced far ahead of other banks in running a Ponzi in fraudulent loan accounts.

The Ponzi is supposed to have started in the year 2011 and the balloon burst in 2018. For seven long years, unauthorised SWIFT messages emanated from the Brady House, Mumbai Fort branch of PNB. Each message guaranteed higher amount of buyer's credit than the previous message. This bank was the topper among all Indian banks in reporting total quantum of frauds in 2017. But, in the number of frauds, it is not even in the first five. The bank and its employees really think big!

PNB is the only bank in India where the Chairman and Managing Director have the same name, Sunil Mehta. This coincidence, of course, means nothing. But these days, the bank's SWIFT messages also mean nothing. They are unauthorised.

PNB has spawned a few innovations. Loan applicants have the option to ask for loans via CBS or CBS-sidestepped loans. In grand old days, banks used to boast that they had secret Reserves and therefore, their financial position was stronger than what was suggested by their Balance Sheet. Now, PNB has come up with secret loans!

P.Chidambaram keeps saying that credit offtake is poor indicating that GDP is stagnant. He is wrong. He has not taken into account secret loans.

Yesterday I was getting introduced to a stranger. When I told him that I had worked in PNB, he withdrew hastily.

Sunday, February 11, 2018

Economic Survey

Economic Survey for 2017-18 was presented in the parliament  in the last week of January. The Budget was presented later on Feb 1st. Economic Survey is prepared by the Chief Economic Adviser to the government whereas the Budget is prepared by the Finance Minister.

Economic Survey is an academic paper that reveals the state of the economy. The Budget is an unashamedly political document. Normally copies of both are made available in all major cities within a couple of days of presentation.

Though the copies of the Budget were made available this year within 2 days, copies of Economic Survey are yet to find their way in major cities. Is there more to this than what meets the eye?

Saturday, February 10, 2018

Banking crisis

Crisis in Indian banking seems to be all-pervasive. The largest bank, SBI, has reported loss during the third quarter.

During the quarter ended Dec 31st, the bank has incurred loss after tax to the extent of Rs.2,416 crore. Loss before tax is Rs.7,121 crore. This means SBI has secured tax refund or credit for Rs.4,705 crore during this quarter. But for this, the position would have attracted more adverse attention.

In the nine months ended Dec 31st, loss before tax is Rs.8,751 crore. In other words, SBI has made losses in previous quarters also. SBI Chairman says we have reached the end of NPA cycle. One hopes that his judgment is correct.

There is another disturbing development. GOI has advised banks to repay the Additional Tier 1 capital even if it is not due for repayment. This move is apparently because some banks have accumulated losses mandating non-payment of interest on perpetual bonds. This will lead to sovereign embarrassment unless prevented. The sum and substance of this is that banks have funds, but not profits. This is potentially a Ponzi situation.

Saturday, February 03, 2018

BJP and Congress, thick as thieves

When a law is violated and a court of law confirms violation, we expect the guilty to be punished. Unfortunately, if the guilty party happens to be political entities, the government would rather amend the law and that too retrospectively, and even twice if required,  to ensure that the accused are not punished.

This is what has happened in an FCRA violation case. Please read the following report from The Hindu:

"The Union government has proposed to amend the repealed Foreign Contribution Regulation Act (FCRA), 1976, retrospectively, a move that will benefit the ruling Bharatiya Janata Party and the Congress held guilty by the Delhi High Court for receiving foreign funds from two subsidiaries of Vedanta, a U.K.-based company.
The Representation of the People Act and the FCRA bar political parties from receiving foreign funds.
In 2016, the government amended the FCRA through the Finance Bill route, allowing foreign-origin companies to finance non-governmental organisations and clearing the way for donations to political parties by changing the definition of “foreign companies”.
The amendment, though done retrospectively, only made valid the foreign donations received after 2010, the year when the 1976 Act was amended.
The retrospective amendment did not apply to donations prior to 2010.
Retrospective effect
In a move to extend relief to the two parties, the government has again proposed an amendment through the Finance Bill, 2018. It says, “Clause 217 of the Bill seeks to amend Section 236 of the Finance Act, 2016 which relates to amendment to sub-clause (vi) of clause (j) of sub-section (1) of Section 2 of the Foreign Contribution (Regulation) Act, 2010 …. effect from the 5th August, 1976 the date of commencement of the FCRA, 1976, which was repealed and re-enacted as the FCRA, 2010.”
The Hindu reported on May 10, 2017 that the Home Ministry had sought the Attorney-General’s opinion to amend the repealed Act.
Original provision
The original provision in the FCRA, which declared that any company with over 50% FDI was a foreign entity, was inconsistent with the view of the Finance and the Commerce Ministries, which treated companies based in India and having Indian directors and employees as Indian subsidiaries.
The Supreme Court in November 2017 issued notice to the Centre on a plea by the Association for Democratic Reforms, a political watchdog, that challenged the amendment through the Finance Bill route.
It was on the organisation’s plea that the Delhi High Court asked the Home Ministry to initiate action against the two political parties. The offence attracted imprisonment of five years or fine or both to persons who assisted political parties to receive funds."

BJP and Congress may be adversaries in the electoral arena. But, in protecting their common interest, they are thick as thieves. The parliament will shamelessly approve this amendment cleverly hidden in the Finance Bill accompanying the Budget.

Friday, February 02, 2018

IOB's controversial proposal (contd.)

This is in continuation of the post dated January 9th.

The EGM was held as scheduled on January 30th. Out of nine directors, only four made their appearance. These four included three whole-time directors. It was surprising that nominees of RBI, Government, shareholders and chartered accountants were too busy to attend. Perhaps they preferred to keep away when a controversial, sinister and path-breaking step violative of corporate governance was under discussion.

It was comforting to note that a preponderant majority of shareholders was vocally against the move though the bank packaged it, perhaps misleadingly, as a facilitator for earlier declaration of dividend. These shareholders deserve to be complimented for prioritising strict adherence to law over early payment of dividend. The few shareholders who supported the proposal are, as you would have guessed, former employees of the bank.

There was an audio-visual presentation stressing that the proposal only amounted to right-sizing the Balance Sheet. It is difficult to come across a more blatantly false interpretation of a financial statement. It was sought to be argued that the proposal would make the statements truer and fairer. What a terrible concoction of untruth and deception ! This is nothing but outlandish and unlawful window-dressing.

Why is IOB doing this? The objective is not clear. It cannot be as innocent as wanting to favour the shareholders with a quicker dividend. A bank with such a motive would not have played ducks and drakes with its credit portfolio and created this predicament in the first place.

RBI circular dated February 2, 2017 regarding Basel III Capital Regulations makes it difficult for banks with huge accumulated loss to pay interest on some kinds of bonds issued by the bank. In case a bank defaults on payment of interest, there will be disastrous consequences. It is not known if IOB is in such a crisis. It would be fitting if IOB discloses the real motive for the proposal which of course has been approved with the blessings of GOI and LIC. It is likely that GOI is viewing this as a test case to watch reactions of the public to such ingenious interpretation of corporate governance.

Thursday, February 01, 2018


The Budget for 2018-19 presented today is both unrealistic and disappointing, at least in parts.

The Finance Minister has said,

"59. We will launch a flagship National Health Protection Scheme to
cover over 10 crore poor and vulnerable families (approximately 50
crore beneficiaries) providing coverage upto 5 lakh rupees per family per
year for secondary and tertiary care hospitalization. This will be the
world’s largest government funded health care programme. Adequate
funds will be provided for smooth implementation of this programme."

How much has been provided for this welcome scheme? Hardly Rs.4,000 crore as mentioned by a Finance Ministry spokesman. If every family claims the entire amount, the amount needed will be Rs.50 lakh crore. If only 10% claim is there, it will be Rs.5 lakh crore. Compare this figure with the total budgeted expenditure of Rs.24.42 lakh crore. This is a good scheme. But funding will be a herculean task. The claims will be routed through public sector insurance companies. This is a recipe for an insurance company to go bankrupt. It is interesting to note that the budget also says three public sector insurance companies will be amalgamated ! The challenge will be to implement this scheme successfully. There is no doubt that the underprivileged deserve such a scheme

The budget is disappointing because even revenue deficits are ballooning. Ideally and as per FRBM Act, there should be no revenue deficit. But what is happening? The budgeted revenue deficit for 2017-18 was 1.9% of GDP. According to Revised Estimates, it is 2.6% It is projected at 2.2% for 2018-19. This is shameful. Revenue Deficit crudely means that GOI is borrowing money to pay, say, salaries to employees. This is not budgeting. This is reckless spending.