Economy for Competitive Exams

1.Banking 2.Budget 3.BoP

Finance

4.Sectors 5.Infra 6.HRD

+ Microeconomics (NCERT Class12)

 Economy Lecture Series-2016= Theory + Survey Vol (1&2) + Budget
+ Selected Current /contemporary issues & reports

Before Lecture: After Lecture

Go through Past year’s theory videos Go through survey chapters
youtube.com/user/TheMrunalPatel

+ English Newspaper, IYB, NCERT (10,11,12); Google

 In February 2016

Past Future
Observations Suggestions
(Vol2) (Vol1)

Past Data Future Plan

• Tax collection & • 1st April 2016
Expenditure • 31st March 2017
V2C1: State of the Economy: an overview Survey-2015
•Key figures on GDP, Employment, BoP etc.+Overview of Chap. 2-9 Volume-2
V2C2: Public Finance
“Past”
•Revenue & devolution increased, subsidies declined, 7thPC-OROP pressure, 9 Chapters
V2C3: Monetary Management and Financial Intermediation
•Credit growth down, monetary policy not transmitting, new schemes on
Gold, Pension, insurance

V2C4: External Sector

•Obs. on various components of BoP; CAD down, exports down

V2C5: Prices, Agriculture and Food Management

•inflation down, El-Nino drought=agro down; recover after La-Nina
V2C6: Industrial, Corporate, and Infrastructure Survey-2015
Performance Volume-2
•Obs. on make in India, Startup & labour reforms done, Smart cities etc.
“Past”
V2C7: Services Sector 9 Chapters
•Gives lot of jobs & FDI, obs. on individual sectors

V2C8: Climate Change and Sustainable Development

•Energy production
•Need truckload of $$ for Paris, SDG

V2C9: Social Infra., Employment and Human Development

•Schools still bogus; list of labour reforms done; poverty-HDI data
improve service delivery, use DBT
 Theory +Survey Vol.2

1.Banking Finance 2.Budget 3.BoP

•V2C3-Monetary mgmt+FI •V2C2-Pub.Fin •V2C4-External sector

4.Sectors 5.Infra 6.HRD

•V2C5-Price,Agri.. •V2C8-Paris Summit, Energy •V2C9-Social infra.
•V2C6,7- sectors

Ch.1=Spread throughout
 In February 2016

Past Future
Observations Suggestions
(Vol2) (Vol1)

Past Data Future Plan

• Tax collection & • 1st April 2016
Expenditure • 31st March 2017
V1C1:-Economic Outlook, Prospects, and Policy Challenges Survey-2015
•Twin Balance sheet & other Macro GDP problems & Suggestions
•Overview of Ch.2 to 11 Volume-1
“Future Suggestion”
11 Chapters
V1C2:-The Chakravyuha Challenge of the Indian Economy
•firms can start but can't exit
•Reforms=Release capital tiedup in bad firms

V1C3:-Spreading Jam across India's Economy

•JAM-DBT good for Fertilizer sale but not good for Kerosene/Food;
•Explore BAPU-POS instead

V1C4:-Agriculture: More from Less

•Impact of El-Nino-La-Nina (ch1); Micro-irrigation, extension services
•fix MSP to promote pulse cult.; One National Agri. Market
V1C5:-Mother and Child
Survey-2015
• Need Early life intervention; Stop open defecation Volume-1
• Weak Infant=low cognitive= can't Clear CSAT/CAT “Future Suggestion”
11 Chapters
V1C6:-Bounties for the Well-Off
• Middle & rich benefiting ~1 Lakh cr.
• fix LPG (10 cylinder), PPF-tax, small saving, railways etc.

V1C7:-Fiscal Capacity for the 21st Century

• Democracy Contract=Voting+Tax
• Improve service delivery; Increase tax collection

V1C8:-Preferential Trade Agreements

• yes FTA helped India but helped partners "more"
• Threat of Mega regional agreements
V1C9:-The Fertiliser Sector
Survey-2015
• Nuisance of urea subsidy, JV with cheap gas-nations, Volume-1
• allow more companies to import
• DBT, PoS with "cap" on bags “Future Suggestion”
11 Chapters

V1C10:-Structural Changes in India's Labour Markets

• labour reforms for formal sector jobs
• garment industry should relocate to smaller towns
• even low-tech mfg promote

V1C11:-Powering "One India"

• One market in Power
• Charge more $$ from Middle Class & Rich
Theory +Survey Vol.2 + Vol.1
1.Banking Finance
•V1C1- Twin Balancesheet
•V2C3-Monetary mgmt+FI
•V2C1- chakravyuh challange
2.Budget-Fiscal Policy
•V2C2-Pub.Fin
•V1C3-JAM Across India
•V1C6-bounties
•V1C7-Fiscal Capacity

3.BoP 4.Sectors of Economy

•V2C4-External sector •V2C5-Price,Agri..
•V1C8-PTA •V2C6,7- sectors
•V1C4-Agri ; V1C9-Fertilizer
•V1C2-Chakravyuha; V1C10-
Labour

5.Infra 6.HRD
•V2C8-Paris Summit, Energy •V2C9-Social infra.
•V1C11-Powering 1 India •V1C5-mother-child

Ch.1=Spread throughout
 Survey
Introduction & Boxes- state Should Read
Download:
conclusion data for indiabudget.nic.in/

(Mains/Essay) interview

Definitions & Hindi Edition if

Formulas below giving Mains in
charts/tables Guj/Hindi
 In February 2016

Past Future
Observations Suggestions
(Vol2) (Vol1)

Past Data Future Plan

• Tax collection & • 1st April 2016
Expenditure • 31st March 2017
 Budget 2016-17
B1. Financial B2. Fiscal B3. Tax Reforms B4. Ease of Doing
Sector Reforms Discipline Business

B5. Agro: 2x B6. Rural infra- B7. Infrastructure B8. Social Sector
farmer income employment & healthcare

9 Pillars to
B9. Education, Transform India
Skills, Jobs
Theory +Economic Survey Vol.2 + Vol.1 + Budget 2016
1.Banking Finance 2.Budget-Fiscal Policy
•V1C1- Twin Balancesheet •V2C2-Pub.Fin; V1C3-JAM
•V2C3-Monetary mgmt+FI •V1C6-bounties; V1C7-Fiscal
•V2C1- Chakravyuh challenge Cap
•B1. Financial Sector Reforms •B2. Fiscal Discipline
•B3. Tax Reforms; B4. Ease of

3.BoP 4.Sectors of Economy

•V2C4-External sector •V2C5-Price,Agri.; V2C6,7
•V1C8-PTA •V1C4-Agri ; V1C9-Fertilizer
•V1C2-Chakravy; V1C10-
Labour
•B5. Agro: 2x farmer income

5.Infra 6.HRD
•V2C8-Paris Summit, Energy •V2C9-Social infra.
•V1C11-Powering 1 India •V1C5-mother-child
•B6. Rural infra- •B8. Social Sector &
employment healthcare
•B7. Infrastructure •B9. Education, Skills, Jobs

+Survey Ch.1s Spread throughout; SDG-Goal esp. @#4,5,6; HDI Report@6

 Banking Sector Theory already covered in L1/P2 to P9
Evolution of Money
• Barter system: features, pros and cons
• Money: primary functions and derivative functions- Divisibility and
fungibility
• commodity money, metallic money- features, pros and cons
• Paper money- two types: Gold standard vs. paper standard
• Indian rupee- paper standard system: coins vs currency
• Fiat money: meaning, examples, limitations
• Bank money- meaning, examples, benefits
• Virtual Money: Bitcoins & other crypto currencies
Monetary policy of India
• What are Financial Intermediaries?
• Monetary Policy: meaning & role in combating inflation and deflation
• Dear Money policy vs Cheap Money policy
• Measures of money supply: M0, M1, M2, M3, M4
• Quantitative Tools of Monetary Policy: CRR, SLR, OMO, Bank Rate,
repo rate, reverse repo
• Liquidity adjustment facility (LAF); MSF (Marginal standing facility)
• Qualitative tools of Monetary policy: Consumer credit control, Margin
requirements, LTV, Credit Rationing, PSL, Moral suasion, direct action
• Limitations of monetary policy
Evolution of Banking Sector in India
•Banking sector under British Raj.
•Distribution of Banking clusters in pre-independent India
•Birth of RBI and SBI
•Bank nationalization in Post Independent India: purpose,
process, shortcomings.
•Banking sector reform: Narsimhan Committees-I and II.
•Private Commercial Bank Licenses: Stage 1, 2 and 3.
•Small Banks, Payment Banks
Financial inclusion
•Financial Inclusion: meaning and benefits.
•Financial inclusion schemes since independence
•Priority Sector lending norms in India- its features,
penalties- RIFD, SEDF funds.
•Pradhan Mantri Jan Dhan Yojana: salient features &
criticism
•Rupay card & payment gateways
•Kisan Vikas Patra and small savings schemes
 Banking Sector: What’s New?

NPA, TBS, 4R4D, BASEL, MP Incomplete

Indradhanush, BBB Transmission, MCLR etc.

PSL-framework, Certi. Differential Banks

Watch L1/P2 to P9
before going further
 V1c2: Chakravyuh Challenge

Ability to enter but not exit, as in

1. Mahabharat war
2. Post-LPG Indian Economy
 Inefficient firms should shutdown so factors of production
can flow towards efficient firms

Asset is not criminal-

should be allowed to
produce income even if
promoters were involved
in criminal activity.

Why is this not happening?

Ans. In Lecture Pill#4: Sectors of Economy
 chakravyuh
Stalemate helps the rich & influential
Govt. perceived as favoring Corporates Consequence #1
and willful defaulters Political cost
 chakravyuh
Revenue lost: both Direct & Indirect
Explicit subsidies (Bailouts of Air India) Consequence #2
Implicit: Loans from PSBs (Agri, Textile) Fiscal cost
End Result: fiscal deficit (L4/P3)
 chakravyuh
Fiscal deficit => Public Expenditure NOT
towards infra., social sector, HRD
=>Dem.Div? Consequence #3
Economic cost
New foreign investment…x
Customers deprived of better Goods &
Services; competition ▼
Factors of production not employed
efficiently = GDP ▼; NPA ▲ = Twin
Balancesheet problem
 ES15-V1c1: Twin Balance Sheet Problem
Understanding
this chaste Hindi
is a bigger
“Chunauti”

Public Sector Banks Large Corporates

 Q3-2015: Financial statements of PSBs (Rs.Crore)
1500 1115
1000 =Oct, Nov, Dec.
500
51
0
-500 BoB Dena Allahabad PNB SBI
-1000 -662.85 -486.14
-1500
#EPICFAIL in 62%▼
-2000
-2500 History of Indian
Banking Industry
-3000 93% less profit then earlier
-3500 year’s same quarter (Oct-Dec)
-3342
-4000
BoB Dena Allahabad PNB SBI
From Bank’s Point of view
Liabilities NDTL
•Demand Deposit CRR
•Time Deposit SLR

Assets 40%
•Loans PSL
 Classification of Bank’s assets

Std. Asset NPA Substd. Doubtful Loss

• >90 Days: • NPA+12 months/> • Substandard+12 • When Bank, RBI,

Principal / Interest months/> Auditor says
overdue • Little /No salvage
• Agri: crop season

Early detection of Stress?

“Special Mention Accounts” SMA Meaning
Classification
Components
RBI framework: Special Mention Accounts (WEF 2014)

•RBI’s Central Repository of Info.on

Large Credits (CRILC)
Who?
•Banks + SI-NBFC-D
•Loans of 5 Cr./>
•SMA-0 >30 days If SMA-2 reported for Rs.100 cr
•SMA-1: >31-60 days Joint Lender’s group frame
Classification Corrective Action Plan (CAP)
•SMA-2: >61-90 To prevent SMA from becoming NPA
•NPA: >90
RBI “3R” Framework for Revitalising Distressed Assets

RECTIFICATION RESTRUCTURING RECOVERY

• No change in tenure, • Ease tenure, interest(%) • SARFAESI Act
interest(%)
 RBI Framework #1: Rectification
Give addl. Loan if required, but
Debt (Creditors)
no “ever-greening”
•Bonds/Debentures/Loan
•Must pay interest, principal irrespective of profit / loss No change loan in
•First claim during liquidation term/interest

Capital
Equity (Owners/ Proprietors) Find addl. investors
•Partnership, IPO-Shares, VCF, Angel Investor if possible
•Dividend if profit
•Last claim during liquidation
 RBI Framework #2: Restructuring
Debt (Creditors) Change tenure/interest%
•Bonds/Debentures/Loans
•Must pay interest, principal irrespective of profit / loss
•First claim during liquidation

Strategic debt restructuring (SDR)

but must selloff in 18 months Capital
Equity (Owners/ Proprietors) Client is not
•Partnership, IPO-Shares, VCF, Angel Investor willful defaulter/
•Dividend if profit Non-cooperative borrower
•Last claim during liquidation Did not divert funds/mischief
RBI “3R” Framework for Revitalising Distressed Assets

1-RECTIFICATION 2-RESTRUCTURING 3-RECOVERY

• No change in tenure, • Ease tenure, interest(%) • SARFAESI Act
interest(%)
 SARFAESI Act Recovery- only Banks and Housing finance-NBFC can do
Full form: Securitisation and
Reconstruction of Financial Assets and
Enforcement of Security Interest

Only secured / mortgage loans

Not agri loans
Attach assets without court order
Bank can: auction/sale/change
BoD-management

Get stay order from DRT

Fee: 12k to 1.5L
Further appeal to DRAT
Banks can’t hold attached assets for >7 years But must deposit 50% loan
Can be sold off to ARC amount first
But too much backlog in DRTs
 Done- 6 new DRT @ at Chandigarh,
Bengaluru, Ernakulum, Dehradun, Budget 2016
Siliguri, Hyderabad (under
Indradhanush plan to revamp PSBs)
 Will amend SARFAESI to strengthen
DRT; computerization of record
 IT benefits for ARC companies
 Insolvency and Bankruptcy Code 2015
for faster resolution NPA / Bankruptcy?
 Insolvency and Bankruptcy Code, 2015

What if there was an arbitration /

Lok-Adalat “outside” this box?
 Insolvency and Bankruptcy Code, 2015
False info., diverting
assets, defrauding
lenders: fine+/Jail

Insolvency resolution process under a

Bill pending in Can seek
“professional adjudicator” to takesover
parliament the assets, finish within 180 days forgiveness upto
specific loan amt.
 IBC-2015: Appeal structure?

For individual,
For companies Partnership firms
NCLT Goto DRT
 I&B Code- new statutory body to oversee

Insolvency & Bankruptcy board of India

10 members; Union+RBI

Info.utilities for I&B Fund

DBM & exchange
 Already introduced I&B code 2015
(Dec.) Budget 2016

 Will introduce Code on Resolution of

Financial firms – for bankruptcy in
Bank, Insurance, FI entities
 1+2= comprehensive Resolution
mechanism

Bankruptcy
1) What are the major changes brought in
the Arbitration and Conciliation Act,
1996 through rencet Ordinance? How Bankruptcy
far will it improve India’s dispute
resolution mechanism? (GSM2-2015) & Resolution
2) Discuss the significance of I&B Code
2015 to fill up the systemic vacuum
exists that exists regarding bankruptcy
situations in Indian firms.
3) OR Chakravyuh / Twin Balance sheet
problem fodder.
4) I&B Code updates on PRS-Link
 Q3-2015: Financial statements of PSBs (Rs.Crore)
1500 1115
1000 =Oct, Nov, Dec.
500
51
0
-500 BoB Dena Allahabad PNB SBI
-1000 -662.85 -486.14
-1500
#EPICFAIL in 62%▼
-2000
-2500 History of Indian
Banking Industry
-3000 93% less profit then earlier
-3500 year’s same quarter (Oct-Dec)
-3342
-4000
BoB Dena Allahabad PNB SBI
 Why suddenly losses/less profits?

•Sum of all loans where principal or

Gross NPA
Interest overdue for >90 days
•Banks have to set aside certain
(-)
amount as “internal-insurance’ against
Provisioning
- Many other technical components,
Gross NPA
that I’ve ignored here
Net NPA •Gross NPA Minus Provisioning

RBI increased the provisioning requirement = Profits gone to fill it

 Side note
PSB loan ~Rs.55k crore/annum to FCI.
FCI=> states for procuring rice and Punjab food
wheat. grain issue
But Punjab warehouses didn't have
enough stocks during inspection.
RBI ordered banks to keep 15% aside for
provisioning
Banks stop lending to Punjab Govt.
So far we learned?
So far we learned?
 ES15-V1c1: Twin Balance Sheet Problem
NPA+provisioning
+ ▼credit growth
+ ▼deposit growth
+double financial
repression

Coming soon in
future lectures

Public Sector Banks Large Corporates

 Top five NPA contributors (61%)

TEXTILES MINING STEEL INFRASTRUCTURE AVIATION

•Competition from SE- •SC cancelled coal •China crash (ML5/P4) •Overleveraged before •Policies related to ATF
Asia mines, ban on iron-ore •Cheaper imports subprime (2007); PPP fuel & foreign flights,
•Low demand, value mining (L7/P3) flooded renog. Not done predatory pricing
addition •delay in regulatory •Govt can impose tariff •SC/Regulatory issues •61% of loans stressed
permits protection beyond a •Land acquisition
level for (1)WTO •24% of loans stressed
(2)Downstream
Upstream Balance sheet
•Coal shortage & regulatory
issues
•Rail-road connectivity Power plants
between mines and power
plant

Downstream
•Discoms: debt problems
(more in Infra-lecture)
 Large Corporate houses: finance problems
Debt (Creditors) Banks not giving addl. Loans, giving
high leverage ratios of cos.
•Bonds/Debentures/Loan
•Must pay interest, principal irrespective of profit / loss
•First claim during liquidation

Capital
Equity (Owners/ Proprietors)
•Partnership, IPO-Shares, VCF, Angel Investor
•Dividend if profit Cos. Delaying
• China, Global slowdown, low demand=>
•Last claim during liquidation future expansion
• 50% of cos who issued IPOs in 2015,
trading below issue price plans
• If FPO issued, won’t fetch much Rs.
 ES15-V1c1: Twin Balance Sheet Problem
NPA+provisioning Not repaying
+ ▼credit growth Not borrowing
+ ▼deposit growth Not expanding
+double financial Not good for GDP
repression and jobs

Public Sector Banks Large Corporates

A&R / C&C
 Banking Sector: What’s New?

NPA, TBS, 4R4D, BASEL, MP Incomplete

Indradhanush, BBB Transmission, MCLR etc.

PSL-framework, Certi. Differential Banks

Theory Watch L1/P2 to P9
before going further
Twin Balance Sheet Syndrome –how to fix?

Survey-2015 (4R) Survey-2014 (4D)

•Recognition •Disinter
•Resolution •Differentiate
•Recapitalize •Diversify
•Reform •Deregulate
1-Recognition 4 “R” + 4 “D”
•Banks must value their assets close to true How to fix Twin
value (complex formula of Gross/Net NPA, Balance Sheet
provisioning) Syndrome
2-Resolution
•Stressed assets: selloff / rehabilitate Std. SMA
•Disinter (digup graves) :
•Better bankruptcy code (yes I&B Bill’15)
NPA Substandard
•empowered DRTs that catch big fishes (yes,
Budget-2016)
•Independent renegotiation commission to Doubtful Loss
fix big/difficult cases (?)
 In February 2016

Past Future
Observations Suggestions
(Vol2) (Vol1)

Past Data Future Plan

• Tax collection & • 1st April 2016
Expenditure • 31st March 2017
Twin Balance Sheet Syndrome –how to fix?

Survey-2015 (4R) Survey-2014 (4D)

•Recognition •Disinter
•Resolution •Differentiate
•Recapitalize •Diversify
•Reform •Deregulate
BASEL Banking Accords- to prevent global financial Collapse
Bank of Internatl.
Settlement (owned by
60 Central Banks)
Committee on banking
supervision- @Basel,
Switzerland
BASEL I: 1988
BASEL II: 2004
BASEL III: 2011
 Concept #1: Percentages

9 10.8
??
9% 9%
100 120

9+__
9%
120
From Bank’s Point of view
Liabilities NDTL
•Demand Deposit CRR
•Time Deposit SLR

Assets 40%
•Loans PSL
 Suppose a bank is started

Debt NDTL:
Capital 200 Cr
9 Cr. (-) CRR,SLR,
Equity Op.Expenditure

150 Cr
But these assets Circulated in
carry risk loans= “ASSET”
 Formula wrong, just for illustration
Loan Asset Risk weight
G-Sec 10%
Home Loan 20% RWA
120 Cr.
Crop Loans 50%
SMA 60%
 BASEL: Min. Capital to Risk weighed Assets Ratio 9%

RBI: 7% of RWA must List not

be in Tier1 Tier1 exhaustive
Tier2

•Common shares •Debt (Bonds)

•Preferential shares •Hybrid instruments
(L2/P1)

Capital
Capital T1+T2
9% CRAR
RWA: 120cr
 Recapitalization of PSB by 31st March 2019
Govt: 70kCr
(IndraDhanush)

PSB have 9+ ___

+ Capital
Market __?
10.8 needed By purchasing preferential shares; In phased manner,
first priority to large & good performing PSBs

Capital: ___?
9% CRAR for BASEL-III
RWA: 120 LCr
 Recapitalization: addl. 1.8 lakh cr. by 31/03/2019
Govt employees’ 7th PC award- 50% of increased salary
Debt (Creditors) be given in form of bonds “Capitalization Bonds”;
•Bonds/Debentures/Loan optional for pensioners & lower staff
•Must pay interest, principal irrespective of profit / loss
•First claim during liquidation

Addl. Capital
1.8 lakh cr.
70kcr Preferential shares 1.10 Lakh cr.
Equity (Owners/ Proprietors) to govt. (Indradhanush) remains
•Partnership, IPO-Shares, VCF, Angel Investor
•Dividend if profit
•Last claim during liquidation
PSB can issue FPO, but govt. shareholding
must remain >50% (Except IDBI)
 Twin Balance sheet Problem: Public sector Banks
Govt: 70kCr
(IndraDhanush)

3. Existing Shares
PSB have 9+ ___ selling below book
+ Capital value in Market
4. 50% of IPOs from
10.8 Lcr. Market __? 2015 selling below
By 31st March 2019 issue price

Capital: ___? Bogus PSBs

9% CRAR for BASEL-III 1. NPA since 2010
2. try to ▼ credit
RWA: 120 LCr flow to
▼denominator
 CRAR in SCB in recent times
14
13 12.7
12

10
9
8
Hints the deterioration of Asset quality
6

4 This is the “minimum”

acceptable limit
2

2015-March 2015-Sept BASEL-III

2015-March 2015-Sept BASEL-III
 BASEL-III seeks to …..
(a) develop national strategies for biological diversity
UPSC Pre-2015
(c) reduce the GHG emissions but places a heavier burden
on developed countries
(d) transfer technology from developed Countries to poor
countries to replace chlorofluorocarbons in refrigeration
(b) improve banking sector's ability to deal with financial
and economic stress and improve risk management [and
insult aspirant’s intelligence by asking this question]

1. Skip 2. Attempt 3. Mark n Review

 DFI
Before
Narsimhan-II
1998
1948, GoI

Chronology MCQ
asked in prelim

Watch to L1/P9
Classification
 DFI
After
Narsimhan-II
1998
• IFCI Govt. owned
• ND: non-deposit
taking
• SI: asset >500cr.

2015
Future plan, As per Monetary policy 2016 April.
 NPA
Quantity wise majority of NPA comes
from large borrowers. Need DFI?
DFI capable of giving long term project
loans
but Narsimhan-II: DFIs like ICICI, IDBI
became commercial banks.
Although Germany, Japan, China and
Brazil still have DFIs
 1964: Industrial Development Bank of
India (IDBI) - a developmental financial Budget 2016
institution [DFI] under RBI
 1998: Narsimhan-II: no DFI
 IDBI=> IDBI Bank ltd. (Govt 80%)
 Budget 2016: may ▼ Shareholding to
<50% in IDBI Bank ltd.
 International Finance Corporation (of
IDBI
W.B.) keen to invest in IDBI Transformation
 Govt Owned Stakes in Axis
Transforming IDBI like Axis Life Insurance Corporation of India 14.99

Unit Trust of India 11.98

General Insurance Corporation of India 1.75

Public New India Assurance Company 1.13
31%

Privat
e
69%
Twin Balance Sheet Syndrome –how to fix?

Survey-2015 (4R) Survey-2014 (4D)

•Recognition •Disinter
•Resolution •Differentiate
•Recapitalize •Diversify
•Reform •Deregulate
 4 “R” + 4 “D”
How to fix Twin
Balance Sheet
Syndrome
3-Recapitalize for Basel-III

Std. SMA

•Via Govt + Market + Even RBI should provide

•+Differentiate: among PSB, & infuse capital NPA Substandard
on performance (yes, IDBI- <50%)
Doubtful Loss
 In February 2016

Past Future
Observations Suggestions
(Vol2) (Vol1)

Past Data Future Plan

• Tax collection & • 1st April 2016
Expenditure • 31st March 2017
 4 “R” + 4 “D”
3-Recapitalize for Basel-III
How to fix Twin
•Via Govt + Market + Even RBI should provide Balance Sheet
•+Differentiate: among PSB, & infuse capital Syndrome
on performance (yes, IDBI <50%)

4-Reform- so problem don’t comeback Std. SMA

•+Diversify:
•more # & More types of Banks [RBI planning NPA Substandard
Custodian & Wholesale banks..but DFI?]
•+Deregulate: ▼SLR; ▼ but tweak PSL,
Doubtful Loss
promote corporate bond market
Twin Balance Sheet Syndrome –how to fix?

Survey-2015 (4R) Survey-2014 (4D)

•Recognition •Deregulate
•Recap •Differentiate
•Resolution •Diversify
•Reform •Disinter
 PSBs have wrote off 1.14 LC bad
Sidetopic-Loan write-off
debts in 3 years-Indian Express
Write-off= Bank’s taxable
income ▼=corporate tax ▼
+balance sheet cleanup @HQ
Doesn’t erase the “right to
recover”. (“Loan Waiver”)
When recovered- $ added into
balance sheet & taxes are paid.
Both RBI & IT Act allow this.
 criticism
Once written off, banks not keen to
recover it.
Why write-off
Less money to lend: interest rates won’t is bad then?
go down.
If recapitalization = tax payers $$
diverted into non-productive, non-plan
Expenditure.
NPA in PSB= 4 lakh crores (2016,
Feb)
Stressed
Stressed Assets = NPA + Loans Assets
written off
Stressed assets= 8 l cr / 69 l.cr
total outstanding loans.
Mock Q: Meaning
Classification
A) SA> NPA Components

R) SA=NPA+Written off
रट्टा मारो ज िंदाबाद!
 NPA
SC asks list of defaulters 500Cr/+;
criticized RBI for oversight
SC & RBI on
RBI: Names in sealed envelop Defaulters
Can’t disclose names Unless willful
defaulter.
Every defaulter is not willful defaulter
Separate Morality
•Loan can become bad loan out of bad luck, regulatory from NPA - Rajan
clearance, partners' betrayal, time and cost overruns
•Only in Fraction of cases- criminality involved.
•Entrepreneurial wealth is not sinful. But each should have
opportunity.

Economy will “Chill” if….

•If entrepreneur is not willful defaulter, yet tarnishing his

image=> market won’t support next project
•Entrepreneurs shy away from risk
•Banks hesitate in giving loans Ex-CAG & Present BBB Chairman
Vinod Rai said similar
•=GDP, Job creation stagnated
Today’s Session: Banking

NPA, TBS, BASEL, 4R, MP Incomplete

Indradhanush, BBB Transmission, MCLR etc.

PSL-framework, Certi. Differential Banks

Watch L1/P2 to P9
before going further
So far we learned?
So far we learned?
So far we learned?
 Banking sector Reforms: Narsimhan-III ?

RBI’s P.J.Nayak Committee Gyan Sangam-I Indradhanush Gyan Sangam-II

2014 Pune-2015, Jan 2015-Aug, Gurgaon-2016
BIC, BBB BBB Dept. Financial services Bank Consolidation

Appointments- CMD bifur.

Bank Board Bureau
Capitalization Now Gurugram
De-stressing PSBs
Pandav gave this village
as “guru-dakshina” to
Empowerment
Narsimhan I & II Dronacharya
Framework of Accountability
Self study: L1/P7
Governance Reforms
 Banking Sector Reforms: Narsimhan-III

Bifurcation of
NPA: 4R4D BIC
CMD Post

Bank
BBB Misc.
consolidation
 Government transfers its shares of Public sector banks,
to this “Core Investment Company”

Banking Investment Company (BIC)

Holding company

RBI’s
Government no longer P.J.Nayak
Controls their Committee
Board of Directors
=higher efficiency 2014
=higher profits
All these Sarkaari banks become “Subsidiary Companies” of BIC

Current Status? 2015,Dec: Govt. says we’ll do

 Bifurcation of CMD post

PROFIT

Board of Directors
DIVIDEND
SHARE-HOLDERS
 BEFORE

PROFIT

Board of Directors
DIVIDEND
SHARE-HOLDERS
 After:
Indradhanush
Bifurcation
P.S.Jayakumar (earlier in NBFC) + Private
MD & CEO professional
can apply
Ravi Venkatesan
(Infosys indp. director)
PROFIT
Non-XO Chairman
Board of Directors
DIVIDEND
SHARE-HOLDERS
But who will select PSB Bankers in professional manner?
BBB recommended by
2014: P J Nayak
Committee
2015: Gyan Sangam
(Pune)
2015: Budget
2016, April:
Operational
2 years term Structure: Bank board bureau (WEF 1/4/2016)
Article 148 (4): CAG not eligible for
Chairman • Vinod Rai (former CAG) further office under Union/State
Government ????

• 1. Anil K Khandelwal (Ex-BoB)

3 Members: • 2. HN Sinor (Ex-ICICI)
• 3. Rupa Kudwa (EX-CRISIL)

• 1. Financial services secretary

3 Ex-officio • 2. Dy. Gov. RBI
• 3. secretary public enterprises

Search • 1. RBI governor

• 2. secretary, financial services
Committee • 3. secretary, Department of Personnel and Training.
 BBB functions
•Heads of PSB (MD & CEO)
Search and
•Non-Executive Chairman
select:
•Whole time directors
•Help create a holding company (BIC, PJ Nayak)
Org. Reform •Help in Bank Consolidation/M&A: from
present 22 PSB + 5 SBI Associate Banks=27
PSB=> 10
Financial
•Raise capital and help recover from NPA
Reform
•To improve governance at PSB
Accountability
•Link between the government and banks
 Banking Sector Reforms: Narsimhan-III

Bifurcation of
NPA: 4R4D BIC
CMD Post

Bank
BBB Misc.
consolidation
Why Bank consolidation? Rise of Pvt Commercial Banks in India (Ref: L1/P7)

1991 1993 1998

• Narsimhan-I • 6 + 4 closed= 10 • Narsimhan-II

2001 2013
• Kotak • Bandhan
• Yes Bank • IDFC
Telecom and civil aviation: Did not Why reform?
privatize BSNL/Air India, but
allowed private entry= competition= Competition
Success missing?
Same strategy in Banking: 3
rounds of licensing
LPG-reforms: pvt. sector led
growth, but majority finance not
from pvt = “competition missing”
“Too big to fail” mentality among
PSBs, we’ll be recapitalized
 Reforms
1. Gyan Sangam-II
(Gurgaon/Gurugram-2016): Bank Bank
consolidation consolidation
2. Government to setup expert panel
3. SBI, BoB, PNB, Canara as anchor
banks. Smaller banks to be
merged in them.
1. Earlier State Bank of Saurashtra Reforms
(2008) and Indore (2010) were Bank
merged with SBI consolidation
2. Consolidation: geographical &
technological synergies; ▼ NPA;
▼ recapitalize
3. Anti:-
1. big PSBs unwilling to absorb
weaker banks.
2. SBI: merger will improve
nothing
 SBI owns ~75% to 100% in each of these banks
1913: Mysore 1917: Patiyala 1941: Hyderabad
• Maharaja of Mysore on • Maharaja Bhupinder Singh • Nizam Mir Osman Ali Khan; Also
M.Vishweshwariah (Bharat issued Osmania Sicca
Ratna) Committee • ‘48: Operation Polo.
• SBI owns 90% shares
• 73% falls in Q3-2015

40s: Bikaner & Jaipur 1945: Travancore MERGED

• 43: Jaipur; 44: Bikaner => 63: • Diwan of Travancore, Kerala • 2008: Saurashtra
merged • 2010: Indore
 MD, Hyderabad
MD, Bik | Jai
MD, Travancore
MD, Mysore
SBI Chairman
MD, Patiyala
Even if I merge, group’s
balancesheet will not go up.
MD, core Banking
Hence not in priority but
someday we’ll.
MD, National Banking
MD, Compliance & Risk
-Arundhati Bhattacharya (2015)
 Banking Sector Reforms: Narsimhan-III

Bifurcation of
NPA: 4R4D BIC
CMD Post

Bank
BBB Misc.
consolidation
 Indra-dhanush
1. Non-interference by Government
in bank operations. Empowerment
Accountability
2. Grievances Redressal Mechanism governance reforms
for customers and Staff
3. Gyan Sangam conclave for PSB,
FI, Government
Indradhanush: Key Performance Indicators (KPIs): 4 sections 100 marks

Performance bonus to MD & CEO linked to this score

So far we covered
 Banking sector Reforms: Narsimhan-III ?

RBI’s P.J.Nayak Committee Gyan Sangam-I Indradhanush Gyan Sangam-II

2014 Pune-2015, Jan 2015-Aug, Gurgaon-2016
BIC, BBB BBB Dept. Financial services Bank Consolidation

Appointments- CMD bifur.

Bank Board Bureau
Capitalization
De-stressing PSBs
Empowerment
Narsimhan I & II Framework of Accountability
Self study: L1/P7 Governance Reforms
Today’s Session: Banking

NPA, TBS, BASEL, 4R, MP Incomplete

Indradhanush, BBB… Transmission, MCLR etc.

PSL-framework, Certi. Differential Banks

Watch L1/P2 to P9
before going further
 For best results..

After Today’s Lecture Before next lecture ; go through past

V1C1- Twin Balancesheet theory videos: L1/P2 to P9
V2C1- chakravyuh challenge youtube.com/user/TheMrunalPatel

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