TBS, NPA problem

Genesis: 3 R, SDR, I&B Code

3 Stage S4A, 2016
SARFAESI…

PARA-Bad Windfall 4R4D

Bank Profit
itnaa Hindi kaun taiyaar kartaa hai? When even SDR
def. is wrong!
Public Sector Asset Rehabilitation Agency
(PARA) or “Bad bank”
SARFAESI, ARC AQR &
DRT • 5% solved in
SMA
• chocked 2 years

JLF SDR
• No • 2 case S4A
consensus solved

!4C I&B Code

• Court, CBI, • Baby-stage
CVC, CAG
This Alphabetical soup has failed
to treat NPA disease. कु छ यूनिक करना मंगता
है.....
31st Dec 2016: Total NPA in SCB: 9.6 lakh
crores

NPA Total
10 firms 4 lakh cr.

50 firms 20 k cr.
Total: 60 Total 4.20 L.cr
firms NPA
4.20 / 9.6 L.cr
= 40% of NPA
 Post-BREXIT, 4.2 lakh in bank
Trumpism, fall of + ECB, Bond etc.
rupee, “BoP crisis”.. = total 7.5 lakh
Sleeping volcano if crore
not resolved.
Only 60 firms we’ve to fix. Solving NPA

Joint lenders forum: no

consensus among banks to
write off large amount due
to 1) !4C 2) public Why PARA
displeasure.
= decentralized effort
useless.
Central agency required:
hence PARA- this model
has been successful in
East Asian economies.
 PARA purchases the “Bad
loans”
But only from PSB, not
PVB
PAR
A
Grant debt reduction /EMI
extension
• ‘Political favoritism’ ; hence
PARA should not be >49% Govt
ownership like GSTN.
• And Manned by professionals,
need political willingness
Convert debt to equity
• PARA absorb the loss by selling
Equity shares..
Debt • Shareholders will be hurt
(Shares
(NPA) [dilution]
)
• If SHUT down-> unemployment
 Top 60 firms:
~4 lakh cr NPA
Even if PARA were PARA-> share
to absorb 25% loss issues
Issue new G-sec
= 1 lakh cr [govt max 49%]
(Debt) = fiscal
required. but who’ll buy
deficit 
Who will give? when ‘dividend’
in unlikely!? 

RBI's capital OR,

PAR Disinvestment ‘windfall gain’
from PSB/PSU from
A demonetization
Since PARA is to
absorb the bad
loans of PSB…so
who’ll finance this
loss?
Demonetization= Windfall Profit for RBI? OR
NOT??
British India: RBI Act 1934

Sir Osborne
Smith
1st1stJanuary
April
1949:1935 RBI All
private shares
transferred to
GoI under RBI
Rs. 100 (face Value) x 5 lakh = Rs. 5
transfer of
cr capital
ownership act
  2200 𝑤𝑖𝑡h 𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡
=4.4 % 100 ‘48
500000𝑡𝑜𝑡𝑎𝑙 𝑠h𝑎𝑟𝑒𝑠
%to pay
So, RBI has
dividend to
Government from its
Money Supply

Asset Liability
M0: reserve
money
High powered
money

Asset Liability
Reserve Currency
: 10 Deposit: with
Loan: 90 100 public

M1: Currency with Public +

Demand Deposits
 RBI’s Balance sheet

Asset Liability
Gold Bankers deposit to
RBI
Foreign Exchange
Reserve
Govt's deposit to RBI
Govt Securities >dividend
I n t e re s t -
Currency in
Loans to Banks circulation, [+bank,
(Repo, MSF.. public]
M0 or Reserve
Money orWhat
Highif
some of
powered money
the
currency
 Demonetiz
Exchanging Notes @RBI: ation
old Rs 500 and Rs 1,000 notes are no Specified
longer RBI's liability from 31/12/16. Bank Notes
But union can give grace period to (Cessation of
deposit these notes to RBI. (e.g. NRI) Liabilities)
with proof. Ordinance,
RBI to credit notes in KYC bank 2016
account. 30/12/16
False claims punishment: Rs.50k OR
5x the claim value whichever higher.
Ceiling on holding old notes
Max. 10 notes for individual
Max. 25 notes for research /
numismatics
Others
2017: allowed
Budget session - by courtBank
Specified / RBI.
Notes ( Cessation of Liabilities ) Bill,
Else punishment: 2017 to replace this ordinance
Rs 10,000, OR 5x
the value of notesDemonatization:
whichever higher.impact, positive, negative…later
on
RBI’s Balance sheet: special bank notes (SBN)-
500, 1000

Asset Liability
SBN
notes in
circulatio
SBN: total 100 cr.
IFn 100 Black
cr.
40 cr.
40%
doesn’t money
return “destroye
d”
 Basic accounting equation: technically
incorrect ofcourse

 
𝐴𝑠𝑠𝑒𝑡𝑠= 𝑁𝑒𝑡 𝐶𝑎𝑝𝑖𝑡𝑎𝑙+𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 +𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Rs.110 Rs.100
Rs.5 cr Rs.5 cr
cr cr
 Basic accounting equation: technically
incorrect ofcourse

 
𝐴𝑠𝑠𝑒𝑡𝑠= 𝑁𝑒𝑡 𝐶𝑎𝑝𝑖𝑡𝑎𝑙+𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 +𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Rs.110 Rs.5 Rs.100
Rs.5 cr
cr cr cr
Rs.110 Rs.5 Rs.5 cr Rs.60
cr cr +Rs.40 cr
cr
g e r
Lar d to
i d e n t
di v e n
e rn m
G o v
Counter argument : it’s not ‘windfall profit” for
RBI because

Exchanging old notes,

printing new notes…
KHARCHAA..say 1 cr.
 
𝐴𝑠𝑠𝑒𝑡𝑠= 𝑁𝑒𝑡 𝐶𝑎𝑝𝑖𝑡𝑎𝑙+𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 +𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Rs.110 Rs.5 nahi Rs.100
Rs.5 cr 4 cr
cr cr
Rs.110 4 +3cr=7 Rs.97
Rs.5 cr -5= 2 cr.
cr Windfall is
O
on
p
l
u
y
r
7
chase cr
M
cr.=> O > ease
G-se c =
,
liquidity n”
tio
onetiza
News one week after demonetization of 8th
November 2016

SBN: total 15
IFlakh cr.
40%
6 lakh
doesn
cr.
’t
return
1978’s
demonetization =
25% banned currency
did not return.
News after two months!!

SBN: total 15
lakh Rs.54,0
cr.
00 cr
3.6%
black
didn’t
money
return
destroy
ed
+ cost of printing and
transporting new
currency = >16,000
crs +OMO
 There is a speculation about special
dividend to be paid by RBI owing to
extinguished liabilities after
demonetisation. What is your stance on
this demand?

The withdrawal of legal tender status does

not extinguish anything from RBI’s balance
sheet. There is no question of special
dividend. (Dec. 8, 2016)
Public BASEL-III PARA to
Debt fiscal UBI recapitaliz absorb
deficit▼ ation NPA
if not windfall profit, then use excess capital
1991 RBI already has..
RBI’s Trumpis
Forex Capital m,
BoP
Reserve as strong
crisis
cushion dollar
Already giving
10k crore for
Indra-
The tiger
dhanush! 
 For
Mains
answe
r
writing
 For
Mains
answe
r
writing
 TBS, NPA problem

Genesis: 3 "R“, SDR, I&B Code

3 Stage S4A 2016

PARA-Bad Windfall 4R4D

Bank Profit
5/25, I&B
SDR, Code
S4A “Moral 2016
Hazard”: even
if fix NPA, then
bankers will
start
CARELESS
Lending!!
 Governance structure of PSB?

Managi
Chairm Operati
Political ng
an on
elemen Director
Profit-
ts, Board of Directors >Divide
Agenda nd

PSB:
Shareholders
 RBI’s own PJ Nayak Committee (2014)

Managi
Chairm Operati
ng
an on RBI 2016, Jul.
Director
Profit- • Investors
Board of Directors >Divide may shy
nd away due to
PSB “subsidiary holding
company
co”.
Banking Investment structure.
Company (BIC) as • Then BASEL-
holding co. III
recapitalizat
ion difficult
Now this is done in PSBs as well, + private professionals can
apply

Bifurcation of
CMD post
1. Chairman alag
2. MD(CEO) alag

PROFIT

Board of Directors

DIVIDEND
SHARE-HOLDERS
Indradhanush: Key Performance Indicators (KPIs): 4 sections
100 marks

Performance bonus to MD & CEO linked to

this score
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
 Structure: Bank board bureau (WEF
Article 1/4/2016)
148 (4):
CAG not eligible
for further office
Chairman • Vinod Rai (former CAG)
under Union/State
2 years
term

Government ????

3 • 1. Anil K Khandelwal (Ex-BoB)

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

3 Ex- • 1. Financial services secretary

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

• 1. RBI governor
Search • 2. secretary, financial services

Committee • 3. secretary, Department of Personnel and

Training.
 GSM2: BBB functions

Search • Heads of PSB (MD & CEO)

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 27 PSB=> 10
Financial • Raise capital and help recover
Reform from NPA
• To improve governance at PSB
Accounta
bility
• Link between the government
and banks
 Banking sector Reforms: Narsimhan-III ?
+SURVEY: 4R AND
4D

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

Committee Pune-2015, Jan 2015-Aug, II
2014 BBB Dept. Financial Gurgaon-2016
BIC, BBB • FinMin services CMD Bank
Appointments- Consolidation
BMB
• RBI, bifur.
Bank Board Bureau
Regulator (BBB) Asso.Banks
s Capitalization
(70kcr) IDBI
• PSB
Narsimhan I &
II
• Insurance Empowerment
, FI Framework of
Accountability
Governance Reforms
Twin Balance Sheet Syndrome –how to fix?

Survey-2015 Survey-2014
(4R) (4D)
• Recognition
• Resolution • Disinter
• Recapitalize • Differentiat
• Reform e
• Diversify
• Deregulate
 I’m Arvind Subramanian of
English fiction

UPSC got into habit of asking

“Contemporary” topics that are ~1.5-2
years old (WEF Prelim-2016)
“BES17”
I’m Chetan Bhagat of Economic
series
surveys Compress,
consolidate old
…same themes
repeated in
material
3 surveys that Arvind
Update with
has written new
developmen
NPA: 1st survey: “NPA
renegotiation ts
commission”,
3rd survey “PARA-
Bad Bank”
FAST Revision
Tax, Labour, Subsidy
reform, So, Now
observe….
Economic Survey-2015: “4R” Economic Survey2014: “4D”

Recognition Disinter "Digup

• of bad loans via asset graves"
• SARFAESI-DRT empower
quality review (AQR)
• Independent
renegotiation Commission
(PARA?)
Resolution Differentiate among
• via ALPHABETICAL soup PSB
• Profit Maker PSB:
• 5/25, SDR, S4A, JLF,
capitalize for BASEL-III
SARFAESI... • Loss Maker PSB: Merge,
Privatization
Recapitalization Diversify
• for BASEL-III norms • More number, variety of
Banks
• Government, Market, RBI • SFB, PB…now Wholesale
should give Bank [will learn in
classification lecture]
REFORMs Deregulate
• Governance & • Lower SLR, [yes 22%-
>20.5%]
Administration of PSB • Promote C-Bond so they
• We saw in earlier slides borrow less from Banks.
 But how exactly to “WRITE” in mains?

2015 (=2014’s
survey)
• V1c5: Only page 88 (4d
2016 (=2015’s
reforms)
survey)
• V1c1 box 1.6
2017 (=2016’s survey)
• V1c4 (TBS): intro, conclusion ,
PARA bad bank
Survey
2015
4D
English
Survey
2015
4D
Hindi
Survey
2016
4R
English
 Survey
2016
4R
Hindi

Survey
2017
Self study
v1C4
(TBS)
Box.1
(PARA)
Old material is “Demonetized” and
“Decontentized”
 TBS, NPA problem

Genesis: 3 R, SDR, I&B Code

3 Stage S4A, 2016
SARFAESI…

PARA-Bad Windfall 4R4D

Bank Profit
 BES171: Banking, Finance & Insurance

Money Digital Monetary

Evolution Payment Policy

BASEL, NPA, Evolution & Finance,

TBS, Bad Classification Insurance &
Economy: 6 pillars + theory + current + BES17 (pre cum
Mains)

1.Banking 2.Budget 3.BoP

• V1:c3,4 • V1:c2,3,5,6,9,11(GST) • V1c:5
,12,13
Banking|Finance|insurance|
inclusion

4.Sectors 5.Infra 6.HRD

• V1c:7,11(Agri) • v1c:12, 14; • V1c:10
Budget^Rail