Tuesday 6 October 2020


The Mudra scheme has raised the NPA specter for Indian PSU Banks once again, with the NPAs rising at an alarming rate. Mudra loan disbursements by state-owned banks rose to Rs 3.82 lakh crore in 2019-20, from Rs 3.05 lakh crore in 2018-19 and Rs 2.12 lakh crore in 2017-18. NPAs as a percentage of total loans rose to 4.92 per cent in 2019-20 from 3.42 per cent in 2017-18.

It was utterly foreseeable during its announcement that this would be the case. What seems to be a populist measure under the garb of supporting micro-scale economic initiatives is a ruinous method to put the financial system under pressure. It does not take any imagination to surmise that this is a method to funnel money without adequate scrutiny to people and accounts by those in power. This is a form of planned leakage of funds where banks are enabled and even pushed to release funds, resulting in anticipated circumvention of any form of checks and balances. These measures go on because it is a win-win for those who participate in the system. The local politicians can get the banks to issue loans to people in their clique, the senior bank officials can do the same, the customers get easy money, and in the end, no one is accountable. Initially, everyone claims success and glory by quoting large disbursement numbers and how they are doing a fantastic job and helping people and the economy. In the aftermath, when large scale NPAs result, the banks blame the pressures from the government to disburse, the government blames the banks and other circumstances all the while building a case for the government to compensate for the losses and remonetise the banks. The system is exploited by politicians and bankers, while the real burden eventually falls on the taxpayers, including the small and micro-businesses that pay taxes. In times of distress like in the current COVID situation, the government has no money to save existing businesses and reimburse taxpayers’ money that is required to save this tax-revenue generating machinery. This is the worst kind of financial and economic governance that will engender long-term dependence, perpetuate exploitative practices and venality. Several apologists see this as the mechanism for distributing money to the grassroots, and a few other countries too use such schemes, but that does not build a real case for this hugely inefficient mechanism for doling out funds.

There is no mechanism to scrutinise such schemes, and there is no system of accountability. Independent agencies need to rate such schemes for its robustness. Currently, most such schemes are put on display for public commenting and at the most subjected to political debate in the parliament, which is clearly partisan and only serves to obfuscate,  with no clarity on the real merits of the case. Also, we need the case to be reviewed by independent experts and make the commentary public.

It is essential to create systems that put the banks out of politicians reach, and the case for a bail-out or compensation should only be done in the rarest of rare cases. Also, when any scheme is announced, it is crucial to anticipate NPAs using a transparent mechanism, and an acceptable threshold of NPAs must be announced to measure the performance and functioning of control mechanisms of the banks.

Any excesses must be investigated through independent forensic audits and institutional penalties must be levied. Additionally, individuals who have indulged in fraudulent, negligent and unethical practices must be weeded out and subjected to appropriate legal action.

There is a much greater need for scrutiny of banking operations through independent mechanisms. The timing of exercising checks is also crucial, instead of only doing post-mortems, random sampling for scrutiny, while disbursements are being made, is an essential check that must be widely used.

RBI has limited powers when it comes to PSU banks as compared to private sector banks, and this creates issues in exercising the right kind of power over them. But the RBI retains the right for issuing audits and must exercise these when the NPAs exceed a specific limit, and there are questionable results. The system of regulatory oversight must be strengthened for PSU banks. Even if the RBI does not have the right to penalise board members of PSU banks, they can investigate and issue reports and recommendations for actions. They must exercise these in greater measure.

The independence of the RBI from the government is meant actually to create this arm’s length relationship, but we know that the RBI too is not entirely free from the government’s influence. Right from the recruitment of RBI governors, who are appointed after the proposal made by the Financial Sector Regulatory Appointments Search Committee (FSRASC), headed by the Cabinet Secretary, to their dismissals, to attempts to get more government representation on the RBI board the government continually tries to influence the RBI. While everyone accepts that the RBI’s autonomy is an essential and accepted governance requirement and must be maintained at all costs, in practice, there is a constant tussle and meddling.

While some suggest privatisation as the solution, the reality is that private banks are driven by the sole motive of profit and have their own ways of exploiting the customer base and loopholes through off-balance sheet liabilities and other fraud mechanisms. So frankly, there is no substitute for robust regulatory and oversight frameworks that are free from conflict of interest and impermeable to government interference. Unless we really think and institute mechanisms with rigour the powerful will continue to exploit the system for their gains and the system will continue to work through nefarious means.

Monday 7 September 2020

Do Not Merely Protect Large Institutions - Financial Support Must Be Reconsidered to Save the Soul of the Economy - The Small Entrepreneurs

The SBI chairman, Rajnish Kumar, spoke today about excess liquidity with banks and stated that the bank had doubled its deposits with RBI. It is a shame that at the same time consumers and businesses are being forced to pay loans when they can ill-afford it. The loan restructuring is already being spoken of for people who have large ticket loans, which again makes borrowers in the most vulnerable segments carry on without any support to ensure they carry-on.

Additionally, banks are only interested in pushing more loans to these people who are already struggling with paying the existing loans, how can they be comfortable in taking more loans given the uncertainty and the risks.

The loan moratoriums were the only partial relief activity that the government indeed undertook to help those struggling in the pandemic. I call it partial because with interest still accruing, it eventually extracts its cost from the borrowers. It would have made sense to provide moratorium and interest rate relief to borrowers below a certain threshold of borrowing at least, as the banks are not going to invest time in restructuring their loans, causing consternation and grief for these people in dealing with the institutional establishments that have come to rule over them.

Individuals with home loans, auto loans, educational loans, credit card loans, insurance premiums and other financial burdens, below a certain threshold should have been granted interest-free moratoriums or even some waiver reliefs. MSMEs and Farmers with loans should have been given some real relief instead of merely the option to load up on more credit. Direct transfers to small farmers have been done to some extent, but one must factor in that the quantum of transfer is more related to personal consumption and not for livelihood sustenance support.

Detractors may still talk about maintaining a culture of responsibility and accountability and not provide free money. But the fact to be noted is that the avenues of sustainable employment are under threat and any measure without the prospect of burdening these enterprises further, must be availed because at the heart of entrepreneurship is initiative, which has been taken at considerable risk by most small entrepreneurs. To sustain the culture of initiative and effort this cohort of pioneers must be supported at the time of an unprecedented crisis.

One must also factor in that the interest rate on deposits have reduced and investments are not bearing returns for people who could have relied on these to make up for shortfalls in business or employment income. A spate of suicides due to financial difficulties are as tragic as they are also avoidable.

As a society, we must take responsibility by taking risks ourselves. Also, if the government and banks are worried about the relief being misused by undeserving people, it must be known that saving livelihoods must take priority above anything else barring saving lives and hopefully, these are no longer in conflict but aligned objectives. This is what we were debating at the time of lockdown, but now that we have chosen to move ahead by saving livelihoods, we have suddenly prioritised protecting ourselves from unworthy gains by a few, over protecting livelihoods and lives. Why has this additional criterion become more important than protecting lives and livelihood? I believe that the decision-makers must bring clarity to their decision making by clarifying their priorities, which must be to protect vulnerable people and those who contribute to keep the wheels of socio-economic sustainability turning, those who are in between access to employment with big business and those who rely on daily welfare measures of the state, the precious middle, the spirit and the soul of the economy. I hope decision-makers will reconsider their financial support measures, or we run the risk of creating a society of people who will be defined by inertia, indolence and selfishness, over risk-taking, effort and initiative. You will impact the future and while history may or may not judge these events, it will leave an indelible imprint for a significant time to come and the responsibility lies on us in this defining moment of these epochal times.

Sunday 29 March 2020

Ten Points for the Indian Government to Consider While Implementing Lockdowns for Corona Virus Outbreak (COVID19)

The Indian response to the Corona Virus Outbreak has drawn many reactions and has resulted in a number of sub-optimalities. The idea of this blog is not to criticise what has already happened, in this unparalleled time of crisis. This is merely an expression of what hopefully is being considered and worked into the plans going forward. We have already seen issues of breakdown in compliance, support for people and communities especially those most economically vulnerable and shortages of necessary supplies for those at the forefront of the response. Not everything is wrong or right, but we must only look to raise the bar and support the response in our crucial fight against COVID19. What has already happened must only be analysed to improve future efforts and not to ascribe blame or indulge in issues that detract and distract from the most vital matters at hand. 

4 days into the lockdown, the Interstate Bus Terminus in Delhi,
overwhelmed by crowds (mostly poor migrant labour) ignoring social distancing norms,
seeking transportation to get home. 

There are various dimensions in which the challenge has to be tackled, while the financial and economic side is one, the medical services and cure research aspect is another. There are the safety and security aspects and then there are the social and psychological impacts that we need to deal with. There is what we do as the challenge grows and then what we do to normalise once it begins to subside. The goal of this particular blog is to highlight a few points which seem urgent given the heart-rending issues surfacing due to the lockdown that common people are facing. 

So here are ten points we hope the government is going to pay heed to in light of the lockdown.
Law enforcement punishing those ignoring
the call for lockdown and venturing out. 
1)        In light of the travails of poor migrants and other stranded people, brief all those implementing the lockdown that they are dealing with humans who are fearful, anxious, worried and possibly desperate. To add to that, most are protecting themselves and their family, probably on an empty stomach and little hope that someone is looking out for them. These people have been on their own forever. It is foolhardy for anyone to expect them to start believing that the world has suddenly begun to prioritise and work in their best interests now.
People walking carrying their belongings across states hoping to get home,
some prepared to walk for hundreds of miles to get home. 

All that many of them are trying to do is merely survive. They are just trying to get back home to their loved ones or find food and shelter. Their movements, as a result, may cause worries to some others. Still, the least they deserve is compassion and understanding if you are unable to offer them anything more. This must be considered while the law enforcement agencies and planners carry out their work. Read a news18 report on migrant workers plight here.

 2)        Organise food and essentials in a planned manner. It is vital to ensure that all areas are covered, and that requires a massive logistical and communication exercise. This requires local police and perhaps even community support. This is an extensive and urgent campaign that need to be put in place. It is also essential that people know where the reliable and safe places are, to get food from. Often, well-meaning people do take the initiative that fizzles out in time or may overlook essential safety aspects. This is in no way undermining their effort and God bless them. Still, the administration must do over and above, something that is systemic and sustainable. Enrolling people who are volunteering into the arrangements may be a win-win and may be planned but addressing various critical aspects of it such as safety and continuity. Quality assurance plan must support safety at food preparation and distribution points. 

Report of a husband carrying his wife
who was immobilised due to a medical condition
3)        Transport is essential and must be planned. No matter what there will be emergencies of various kinds and people will need to travel. There must be a mechanism for people, especially poor people, to make essential commutes. A safety check must be made for the mode of travel. Read tragic news of a migrant worker here.

4)        Many issues around supply are coming to the fore. Not only is there an issue of availability, but there is also the issue of overcharging for essential commodities. A nationwide helpline must be made available for people to report overcharging issues. Exploiting vulnerabilities for profit at this stage must be dealt with zero tolerance. 

5)        There must be a way to get people tested in an organised fashion and this must be communicated to them in each locality. A campaign must start for the same. At this time, a line of communication must be made active to all community representatives, including those with RWAs (Resident Welfare Associations) or in poorer (unorganised) communities where such groups may not exist. Emergency communication systems and their nodes (hierarchy) must be identified not just to disseminate information but gather local intelligence. MLAs, Councillors and local Police Stations are not good enough to be the last mile communicators.

6)        Clear distribution channels and points must be identified. These must communicated to locals for provision of essential protective gear such as masks, gloves, etc. 

7)        Delivery mechanisms must be allowed to function. Food delivery is still on, but other e-tailers that are also are members who can provide delivery support are shut down. In fact, in such a situation, delivery networks must be strengthened and reinforced. Communication must go out in each community to make people aware of such mechanisms of delivery, and they must be encouraged to use these and not venture out on their own.

8)        Each locality must know their nearest healthcare facility that is equipped to handle the medical requirements and where people from each neighbourhood should go. This will keep people from overwhelming select facilities and distribute the load, helping not just hospitals and testing facilities, but also the people by ensuring they don’t find themselves in avoidable long queues and unnecessarily travelling long distances.

9)        A production plan for essential equipment and gear that may be in short supply I would believe is already in play. We must have scalable and responsive production plans, along with storage and distribution. Any potential bottleneck must be identified and undone. Lockdowns must factor in need for production and distribution of these items.

10)        One must ensure that law and order, military forces should not be put under undue risk. They must be used only where their specialised capabilities are critical.  The option to mobilise trained personnel from other avenues, medical support volunteers including doctors and other medical staff under training, private security personnel, and many other sources must be exercised to meet human resources requirements. Such sources must be identified and kept on call for emergencies at all times. Risking a spread among armed forces can multiply other risks resulting in undue distractions and open battles on other critical fronts.

We really don't know what times like these can eventually result into. Our only hope is that we learn, and live up to the expectations one can have of a considerate, competent and a wise society. The next few blogs of mine will focus on various aspects of this crisis and what we can learn from it. I will express thoughts on what we  may need to do hereafter to evolve and progress.