Banks in India:Towards A Cleaner Tomorrow
![]()
The 25th most powerful woman in the world is highly stressed these days but still happy as her bank collected a massive deposit amounting to over Rs one lakh crore in last 10 days. She has another reason to be happy as stock of the country’s largest nationalised bank has gone up by 10 per cent in less than a fortnight since demonetisation was announced by the Prime Minister on November 8 night. Chairman of State Bank of India (SBI), Arundhati Bhattacharya in her early sixties believes the demonetisation move by the government will benefit the banks immensely even though at this time banks are working over-time in a chaotic scenario.
Her counterpart in United Bank of India (UBI), Pawan Kumar Bajaj also has a reason to smile after months of sleepless nights while working on the NPA menace and bringing the black numbers down. While Bhattacharya says her bank will handle demonetisation efficiently and so far has been doing so, Bajaj claims demonetisation process actually had kicked off way back in 2014. “A series of events since August 2014 actually led to this demonetisation. First the government pushed the banks to give bank accounts to all unbanked till then, and thereafter, ATM and debit cards were handed over even to accountholders with zero balance accounts,” Bajaj explains. Bhattacharya says, ”things will turn better by end of November and as we are flooded with deposits, obviously the rates will fall from here.”
While the banks including the private ones initiated the process to clean their books by handling NPAs in a stern manner last two years under stricter guidelines and norms placed by Reserve Bank of India (RBI), the banks also needed a good amount of funds from the government to start gaining health and gradually become healthier. The process of demonetisation, now, has definitely brought in flush of funds for all the banks. From here, things must go right for each of them and it is understood, banks irrespective of their sizes now have geared up to work harder and come up with better, stronger balance-sheets, may be just a couple of quarters from now. The Prime Minister had announced demonetisation on November 8 night and by November 23, banks are sitting on Rs 5.12 trillion worth cash funds. No other scheme launched by any government ever could have helped the ailing banks to garner so much of funds within such a short period of time. The after effect was felt even in their stock prices and we are talking about the public sector banks. Between November 9 and November 18, stock prices of Union Bank of India jumped by 21.38 per cent. For Bank of Baroda and Bank of India, the jump was as high as 18.6 per cent and 11.4 per cent.
While SBI and Canara Bank witnessed their stocks going up by over 10 per cent during those ten days. However, private banks’ stocks witnessed a dip as IndusInd stocks had fallen during the same period by 9.24 per cent, ICICI had fallen by 6.6 per cent while HDFC, Yes Bank, Asix Bank and Kotak Mahindra Bank stocks had fallen somewhere between 3 to 4 per cent. Just before November 8, bank stocks were not much loved by retail investors—they were rather focussing on stocks which could be positively impacted post GST roll out. The dark horses, read banks in India, suddenly turned favourite of the investors and while other stocks have been hardly witnessing buy even in sharp dips, people are not only queueing outside banks to exchange, deposit or withdraw their money, but also waiting to pick up bank stocks at a lucrative price at this time.
So the big question here is: where will the banks proceed from here. Let’s have a look at few other things happening in and around this sector, in addition to the demonetisation effect helping the banks to bounce back at this juncture.
[PAGE BREAK]
Importantly, banks are also going to gain much through treasury income due to huge idle fund lying with him post demonetisation. This in turn, obviously, going to strengthen the bottomline of the banks also. Also there will be a sizeable increase in the sizes of their balance-sheets due to huge increase in CASA operations. Even during the days before demonetisation, Q2 results of some of the private banks substantially showed decline in their gross NPAs due the ongoing Operation NPA Menace. Looking at the present scenario, we can now safely say banks are indeed good bets for retail investors even in a falling market condition.
Arundhati Bhattacharya says, “We believe demonetisation is absolutely disinflationary. Now there will not be any unaccounted money chasing goods. For every purchase, there will be accounted money.” She also said deposits rate were bound to fall as so much cash had now reached the banks. “SBI has seen huge inflow of deposits, but demand for credit has slowed down. Therefore, lending rate too will fall but it may take sometime,” she added explaining the present condition. She also indicated demonetisation efforts by the Centre would eventually strengthen the banks and those will be in better health in future.
So how will be the future of India’s banks here onward: Executive Director of Central Bank of India, R C Lodha says, “Whatever mitigating factors we are introducing to curb the NPAs, these measures may be required to be changed with changes in government’s policies. Therefore, bankers can not claim that they have cleaned up their balance-sheets.” But the present scenario is looking brighter than ever. “As far as financial inclusion is concerned, this demonetisation exercise will give it a further boost in the days to come. The fringes which are still uncovered by a bank branch or a Bank Mitra will now come within the banking fold post demonetisation. People will become more adept at using cards, cheques and products such as mobile banking and net banking which have not been so frequently used by rural India so far,” said Pawan Kumar Bajaj, in an exclusive interview to DSIJ.
[PAGE BREAK]
All said and heard, let us look into few factors here.
Impact of Demonetisation on Banking Sector
The banking system is experiencing tremendous flow of cash which would further increase CASA ratio in short run. The government’s move towards a cashless economy will boost savings in financial assets. Meanwhile, any sharp infusion of deposits and relatively limited avenues to lend, the credit deposit ratio for banks would become unfavourable, and thus impact margins.
In case of a spike in capital adequacy, it would be positive for margins. Let us take a case as higher rise in deposits, the immediate avenue to deploy would be G-Secs, and this could create a temporary downward glitch in bond yields. Thus, some of banks could see bonanza gains on treasury.
Bank’s Q2FY17 Earnings
As far the latest quarterly results are considered, numbers proved a mixed bag with retail-focused private banks reporting decent numbers and corporate lenders below par results on asset quality concerns.
The banking sector remained under pressure due to a variety of reasons like high amount of bad loans, higher provisioning for future defaults and tepid loan growth. This was clearly visible from the financial results declared by lenders for Q2FY17. However, retail-focused banks continued to report steady numbers. Business of banks has been low and originated more from the retail segment and less from industry and services. This reflected in their financial numbers.
We have analysed about 40 banks including public as well as private listed banks. Indian banking sector’s total income increased by 5.27 per cent to Rs 3,01,066 crore in Q2FY17 as compared to previous quarter. The industry’s interest earned rose by 0.76 per cent to Rs 2,44,112 crore in Q2FY17 on quarterly basis. Indian banks observed net interest margin of 3.15 per cent in Q2FY17 as against 2.85 per cent in Q1FY17. Its total expenditure increased by 8.7 per cent to Rs 67,733 crore in Q2FY17 as compared to previous quarter. Banking sector’s operating profit also rose by 15.76 per cent to Rs 69,753 crore in Q2FY17 on quarter-on quarter basis. The industry’s net profit boosted by 38.81 per cent to Rs 10,563 crore in Q2FY17 as compared to previous quarter.
Comparing earnings on a yearly basis, Indian banks’ top line increased by 8.45 per cent as compared to same period in previous fiscal year. Its interest earned also rose by 1.03 per cent on yearly basis. Indian banks observed net interest margin of 3.15 per cent in Q2FY17 against 2.94 per cent in Q2FY16. The banks’ operating profit witnessed a growth of 23.53 per cent to Rs 69,753 crore in Q2FY17 as compared to same period in previous financial year. However, its bottom-line reduced by 44.49 per cent to Rs 10,563 crore in Q2FY17 on yearly basis due to sharp increment by 97.31 per cent in provisions and contingencies expenses.
On asset quality front, banks are still possessing problem of raising stressed assets. The stretched problem for banks will be concern going forward. Indian banks’ Gross NPA stood at 8.68 per cent in Q2FY17 against 7.99 per cent in Q1FY17. The industry’s Net NPA stood at 5.43 per cent in Q2FY17 while 4.97 per cent in Q1FY17.
[PAGE BREAK]
NPA issues
There are several measures which have been undertaken on the part of the government and RBI for solving massive bad loans situation of the Indian banking industry. Still there is a massive gap between private and public sector banks regards to the non-performing assets.
Private sector banks’ gross non-performing asset stood at 3.21 per cent while net non-performing assets remained at 1.5 per cent in Q2FY17. The public-sector banks’ gross non-performing assets at 9.55 per cent and net non-performing assets at 6.09 per cent in Q2FY17.
Given the scale of the bad loan problem, bankers are likely to remain extremely cautious in granting new loans and approving new projects over the next few quarters. This means that a broad-based revival in India’s investment cycle is unlikely to happen anytime soon.
On the same time, banks are focusing on very large borrowers. There are a lot of small and medium sized borrowers who may have problems because of the black money crackdown. The demonetisation drive could have a second-tier stress level being created which may be harmful for the PSU banking pack. Banks have already restructured lot of loans over the last couple of years which were earlier nowhere close to being resolved.
Banking financial outlook for H2FY17
Indian banks, especially the state-owned ones, could see better Q3FY17 results because of demonetization. A sharp increase in low-cost current and savings account deposits, as well as improved treasury profits due to falling interest rates, could lead to better results for banks in the H2FY17.
Banks will gain a lot of CASA (current and savings account) deposits coming at a huge spread to them. They will be paying an interest of 2 to 3 per cent on these deposits and then will be deploying them at 6 to 7 per cent. This gives them a spread of 3-4 per cent on a huge sum of deposits over a long period. It will also improve liquidity, which will bring down interest rates. When interest rates come down, banks will make treasury gains on the total investment book.
Public sector banks may be the biggest beneficiaries of the demonetisation drive as there has been a huge inflow which is being witnessed in Jan Dhan accounts. As per to CLSA there might be 20 to 25 per cent of PSBs profitability in Q3FY17 could be because monetisation. Meanwhile, there may be cases where stressed assets may fall because of demonetisation which will spark bottom-line in second half of current financial year.
The fact that most state-owned banks declared losses in the third quarter last year, consequent to the asset quality review initiated by the Reserve Bank of India (RBI), would add to the base effect.
RBI’s move post-demonetisation
Demonetisation move have made things difficult for the small borrowers who are now unable to repay their loan instalments on time. RBI, however, has revised its NPA recognition time for banks, non-banks and increased about 60 days to recognise the loan account as substandard if they fail to get the dues payable between November 1, 2016 and December 31, 2016.
Conclusion
Demonetisation is a generation’s memorable experience and is going to be one of the defining economic events of our times. Its impact will be felt by every Indian in some or the other manner. Demonetisation technically is a liquidity shock; a sudden stop in terms of currency availability. It is not a big disaster like global banking sector crisis of 2007. Investor should not worry on short term selling reaction of capital markets. Long-term investors should not be panicked and take hasty decisions. Indian banking sector is having tremendous potential going forward. One can see demonetisation move to act as a major trigger for the industry to grow in the long run. Demonetisation will bring informal sectors of the economy under the banking umbrella which will be a game changer from both the banking as well as the economic points of view.
[PAGE BREAK]
If you are a retail investor:
At this point of time, the real impact of demonetisation is yet to be ascertained giving the magnitude of the tasks in the hands of all the commercial banks operating in the country. There will certainly be short to medium term impact on financial numbers of the banks. However, clarity would only emerge when the banking system in the country normalises to pre-demonetisation era. Meanwhile, volatility will also continue to dampen investors’ sentiments.
Given the knee-jerk reaction by the capital markets, banking stocks are also facing the heat of demonetisation as large institutional players are continuing to move money out of the country.
As the biggest beneficiaries of the government’s bold move will be the banks which are currently facing the investors’ ire but in the hind sight, it gives immense opportunity for the sector when it is considered from a long term perspective.
After correction of 1000 odd points, the valuation of the entire capital market is now at discounting levels. The bank Nifty is trading at three months low. Investors should bang on strong fundamental banks for future gains.
Haresh Mehta of First Global says, “Overall, it is a great time to buy good quality stocks which have become victims of demonetisation. What I have learned from my past experience of 13yrs in trading is that panic selling in market is always a good time to buy. Let this sell-off drama continue for a while. Delivery based selling is something that one should worry about. My advice to long term investors is that they shouldn’t sell their investment in a panicky situation.”
[PAGE BREAK]
Talking to DSIJ, he adds, ”Let the dust get settled down. Markets generally recover from these types of falls quite speedily, and I am pretty much sure that we will see much faster recovery this time round. If you see only demonetisation effect, public sector banks are trading at very low valuations and earnings to improve for upcoming couple of quarters. On risk reward basis, public sector banks are trading at discounting levels and which will ease out bad loans for short period. Contrary to the private sector banks, PSBs will get benefited through demonetisation and continue to post stable numbers with cleaner balance sheets.
S Ranganathan, Head of Research in LKP Securities believes, “While the pain is near term for a quarter, stock market investors should use this period to accumulate good companies during this period for long term gains. They must understand that $215bn of currency being demonetised is truly transformational in nature as savings would get formalised into equities as opposed to physical assets like property and gold.”
In DSIJ, we believe, for betting banking stocks for investment point of view, one should wait for attractive valuations. Once chaos be settled and routine to gets normalised level, the sentiment of the investors must improve on capital markets. One should buy valuable and strong banks on dips. After all, at least for this sector, ‘acche din aagaye.’
THE BASICS
The share prices of the banks have been slightly improving from the struggling situation. The Bankex index increased by 14.39 per cent and over-performed BSE Sensex’s returns by 1.96 per cent from the beginning of the current financial year. As per valuation point of view, banking sector is trading at discounts as index has corrected in short run and trading at levels of July 2016. The PE multiple of Bankex is 24.96x times and PB multiple of 1.91x times. The Bankex index has given dividend yield of 0.96 per cent.
[PAGE BREAK]
Watch out the sea change in the way banking is done in India
Entrepreneur, bureaucrat and politician—the man who brought Aadhar in the life of billions of Indians making things simpler for them, Nandan Nilekani in this exclusive article for DSIJ shares his thoughts on the Indian banking sector in the days to come.
Indian banking is at the cusp of a paradigm shift when it comes to the future. There are as many as 12 trends which will shape the future of banking in the country. First would be the way we transact on a daily basis. Currently there are high value transactions which are really low in volume but high in cost. Transaction in today’s times take place through various modes namely, cheque, ECS, IMPS, card payments and also mobile wallets. If we see the average transaction sizes payment made through cheque is Rs. 75000, ECS Rs 7500, IMPS Rs 8000, card payment ranging from Rs 3000 to 1200, whereas transaction made through wallet platform is at Rs 300 and 500. In the recent years, we have seen a trend emerging where electronic clearing has surpassed paper clearing by a big amount. Electronic clearing (ECS, NACH, IMPS, etc.) is growing at 50 per cent per year.
There has also been a trend noticed where IMPS volumes are recorded higher than debit cards in the last 12 quarters. In the times ahead, the move will certainly be from High Value Low Volume transactions to Low Value High Volume transactions and this will be accompanied by lower transactions costs, and will align market forces (customer acquisition) with social purposes (inclusion).
Credentials when it comes to customer authentication will move from ‘proprietary’ (card+ pin both managed by bank) to ‘public’ (mobile phone+ Aadhaar authentication) as phones will replace the card as an authentication factor.
Just like mobile number portability where a customer can change his/her telecom service provider without changing the number, we will see bank account portability, which gives customer more flexibility as there is no switching cost involved. Deposits can be moved easily, and it will be possible to switch one’s loan with a click. As and when customers are easily able to switch loans there would be more churn seen in the books of existing lenders.
Lending rates would see a transformational change as lending would gradually move from uniform lending rates to individual pricing of risk. This would be made possible by use of technology in the financial inclusion system. Lending changing from uniform lending rates to individual pricing of risk will be based on digital footprints. As every individual transaction of a person is conducted through banking channels it would leave behind footprints or records with the lenders. With data from credit bureau being enhanced with data from social media, mobile, web, and other sources that have more data points than a thin credit report, it will give lenders a whole lot of consented data regarding every individual customer which would help banks and financial institution in making better credit offers. Credit will move from secured lending against assets to lending against flows which leads to a better risk assessment of customers, based on a complete picture of the business.
Business would change from fee income to data based income. Today banks to a large amount rely on fee income. New financial players will go to transactions for free, using the data generated to add value to their operations.
In recent years, the PSU banks have seen declining market share. PSU banks are losing share on the lines of which we saw in both the government owned telecom and airline business where government companies lost their dominance. PSU Banks market share has declined in the last 15 years from 80.2% in 2000 to 63.2 % currently. On the other hand market share of private banks has seen a healthy rate of growth over the years as they make up combined 32.1% up from mere 12.3%, 15 years back. Private lenders have a healthy CAGR of 23% compared to that of 17% of PSU banks. Market capitalisation is also reflective of this, as top four private banks market cap is twice that of all the public-sector banks including country’s largest bank SBI. Shrinking public sector market share is de-facto privatisation, government is losing opportunity to make billions of dollars of market capitalisation.
[PAGE BREAK]
The biggest disruption caused would be in merchant transaction models. Current merchant model (including cards, POS, high interest on unpaid balance, MDR for merchants, limited outlets) will be completely disrupted. Cards will go as with mobile payments, smartphones will replace POS and card. Universal Payment Interface (UPI)will be the tipping point. New customers/merchant bundles will be created and customised service will be provided.
Transaction fees will tend downwards to zero. Informal supply of credit will decline rapidly in the days ahead. Demonetisation will only accelerate the trend.
The thrust to move towards a cashless economy has the potential to bring sea change in the way banking is done currently. Cashless implications on the economy would be enormous. Bank branches which are cash collection centres, become less valuable as current account balances of merchants will decline. Cash withdrawal would be thing of the past as the smartphone becomes the bank. Self-service would be the norm. Going cashless would also mean formalisation of the economy as benefit and convenience of being in the formal system will outweigh the alternative.
Bank assets in terms of branches and ATMs, will be replaced by new assets - phone, platforms, data, algorithms etc. which would become an important metric in studying a bank. In terms of revenue, with more coming under the formal economy, tax collection would witness a huge surge.
Convergence of interest rates would happen. Currently interest rates are different in both formal and informal sector of our economy. Today, interest rate may wary from some 9 per cent annually for some loans to 5 per cent a day from a money lender. Easier access to formal credit will eliminate the informal' systems leading to massive economic efficiencies.
Jan Dhan- Aadhaar- Mobile (JAM) has all the ingredients to be a game changer for the country’s economy activities and financial inclusion goals. Pradhan Mantri Jan Dhan Yojana i.e banking for all opened 22.6 crore bank accounts in record time bringing people under the banking umbrella for the first time. Aadhaar platform with over a billion people under its ambit aims to be a one stop destination for various authentication need for financial inclusion. Aadhaar will create a ubiquitous Digital Identity Infrastructure for a digital desh. Aadhaar system can authenticate 100 million transactions per day on a real-time basis. Complementing the bank account and Aadhaar authentication is smartphones whose adoption has witnessed a phenomenal rise in the country. The banking regulator, RBI has played a pivotal role in accelerating the process of granting banking licenses to the new players in the fray. In 49 years, only 14 new bank license had been granted compared to RBI granted 21 new banking licenses in last 2 years. As recent as August 2016, RBI came up with On Tap Banking licenses which means continuous process of granting approvals for banking license therefore ushering in a new era of differentiated banking.
[PAGE BREAK]
The Indian stack- built on JAM has expanded over last 7 years. We clearly see the progress from Aadhaar authentication, Aadhar eKYC in 2010 and 2012 to eSign, Digilocker, UPI in the year 2015 & 2016 respectively. Adoption of JAM has also seen a great amount of shift in past years. Indian stack appears to be a disruptive force as it allows innovation, no more physical presence required, cuts on boarding and transaction costs etc.
India will be data rich country in the upcoming future. Adoption of smartphones in the country has led to ever increasing internet penetration with more than 331 million users. Now both are taking the country towards the goal of Digital India. India will go from data poor to data rich nation in 5 years. Data would flow in from varied platforms and sources like social-media, commerce, payment, paperless and digital identity. All the generated data can be used in lending decisions. Hence stronger underwriting, will be this with less likelihood for loan default. Data can also be used to track flows digitally thus providing traceability which will help in quickly identifying fraud and taking early action.
Banks in future would act as a new age digital platform which would provide financial transactions like customer profile, ledger, personal finance, wealth management etc. In terms of financial products, it would primarily be owned or via partners. Transactions leave digital footprint which can be of immense information to financial institutions. Every transaction gives the platform more data about the customer, allowing him to be served better. This will increase stickiness, and avoid churn.
Banks would compete among themselves therefore leading to bank account churn. Banks would offer alternate savings products which would be analysed based on individuals’ digital footprints. Alternate savings product are gamified products, goal oriented savings and hybrid products. Alternate lending models would also come into the fray as to fill the massive credit gap currently in the financial system.
In today’s time a small borrower face a lot of hardships as customers with the lowest default rates must pay the highest interest on borrowed capital. Alternate lending will grow as it would be backed by surge in alternate FinTech lenders. Alternate lenders are playing on dramatically lower costs like lower cost on loan servicing, collections, origination and underwriting etc. New entrants in the lending space are both consumer and business facing. These startup lenders are bridging the gap between the lender and borrower by a click of a button. New age lenders will help in the growth of lending in the next 10 years which is estimated to see 5x growth.
UPI (Unified Payment Interface) is a step close towards achieving a less cash and more digital society with many banks on the platform to provide uninterrupted round the clock 24*7 and 365 days services to the customers. Services like Payments can be initiated by payer or payee, with no need to disclose account information, and with real-time validation of the account and balance. Every one with a bank account can send money to any bank account in the country with real time posting, funds not bring locked, and immediate notification of payments made.
Disruption is waiting to happen which gives immense opportunity for all the incumbent players plus at the same time can also be profitable for new age companies operating in financial sector space. As the Credit Sussie report on banking technology has said, there is a 600 billion dollar market capitalisation opportunity waiting to be harnessed!
[PAGE BREAK]
"Don't write off the banks, payment banks will take long time to score scale"
Shankar Sharma claims he has never been a bear but someone who shares the honest picture of the equity markets with the retail and institutional investors. Though his earlier predictions on doomsday did not gel well with Indian investors, FirstGlobal's first face, Shankar Sharma believes Indians by and large are not dishonest and in the post-demonetisation days, government should not indulge in 'tax-terrorism.' In an interview with Joydeep R Ray, he suggests investors for now can keep some money in FDs and small-cap funds asking them not to keep money in large-caps for now as those will be bleeding for sometime.
Q1. Demonetisation is the latest buzzword in the country and fall is the buzzword for Dalal Street at this time. Do you think the apparent crackdown on 'black money,' will lead to significant curb in the volume of trade and thus redefining the benchmarks of the markets? If yes, then what should be the expected range that Nifty/Sensex may move around few weeks/months from now?
It is now very clear that there is large scale damage to economic activity post demonetisation. Given this, it is very likely Indian stock markets remain weak relative to global peers.
Q2. According to latest data released by NSDL, CDSL, India has 2.66 crore active DEMAT accounts. We have learnt in the post demonetisation days, government through its various agencies have started scanning a large number of DEMAT accounts allegedly being run by dummies and having huge transaction volumes. Do you think such operations will affect genuine retail investors and they will prefer to stay away from the markets for sometime from now?
I am very concerned about this new, retail level tax terrorism. Moves like these always have the effect of dampening sentiment and scaring people. Its not that people by and large are dishonest. Its simply that nobody likes inquiries done by Indian Tax authorities since they always result in harassment and payoffs. That is the Real fear.
Q3. Loads of talks happening on payment banks being the future and typical banks being the past soon. So where do the banks in India go from here--just lending agencies? Will it lead to quality lending then and less NPAs?
Payment banks will take a long time to reach scale and size and it's premature to write off banks.
Q4. Markets are not showing signs of improvement in last one week since November 9. What will be your words to the retail investors? Should there be buying at every dip, or should they be away from the markets for now?
Investors should focus only on small caps and avoid large caps. Large caps are in for a rough ride because of a variety of factors. IT, Pharma because of their global issues. Consumer and banks banks because of domestic issues. Stay away from NBFCs also.
Q5. Then where do we keep our money--if equity scares us, gold prices have shot up, real estate prices expected to fall, land is not plenty. Where do a simple retail investor go from here?
Its a very difficult situation. All investments are hurting. Best to remain in FDs and some small caps funds
Q6. Lastly, how do you rate this latest step taken by the government. Will it really lead to end of black money menace or the hoarders will be further creative and it will be business as usual in few months from now?
I think the intended consequences of wiping out black money, remain to be seen. The unintended consequences ie massive disruption to economic activity, is real. Clear and present. And that's worrisome
[PAGE BREAK]
"Why do people in India need even a Rs 100 note," Anil Bokil
At his nondescript office in Pune's Kothrud area, Anil Bokil was having his late lunch munching a few biscuits while awaiting his yet another round of hot tea coming from a neighbourhood tea-stall. The man behind ArthaKranti Pratisthan, a Latur based organisation working towards a better India, is still grounded even after Prime Minister, Narendra Modi have heard him a number of times on his proposal towards scrapping high denomination notes before announcing his government's decision using live television on November 8 night. People in the knowhow believe Bokil's ideas on 'demonetisation' had an impact on the PM leading to scrapping of Rs 1000 and Rs 500 notes. Yes, in his late fifties, the man admits of his spells of discussion with Modi since 2013 on this subject. While exclusively interacting with Arshad Hippargi on a Saturday afternoon, Bokil does not own the term 'demontisation,' but calls it 'compression of currencies.' Excerpts:
Where does India head from here, post demonetisation?
I would not draw any perception or will not speculate about the future, but certainly it is going to be a smooth change. At large, people are responding positively on the move. Because of its young population India has enormous scope for progress and will basically move in that direction.
You had also suggested to the PM to scrap Rs 100 denomination notes. Don’t you think it would have created more chaos had it been implemented?
We had never advised anybody. Ours is an independent proposal and it has been in the public domain since last 16 years. Yes, PM Modi showed interest in our proposal, which is in the public interest. It is ArthaKranti’s proposal for everyone’s betterment. Not a single person in our society is going to get harmed due to our proposal. If anybody gets harmed due to the proposal, we’ll withdraw it. Everyone who operates within legal framework will benefit. Apart from this, once the influence of cash (black money) vanishes from the system, our elections and policies will be free.
Your proposal is a research paper you have been pursuing since long and a very small part has been implemented by the government. What is the next big move you think the Centre must implement?
People have now started visiting our website. ArthaKranti is a proposal, it is a complete capsule. Now we are pursuing and people may come forward and their demand will be to remove taxation completely. High taxation only leads to generation of black money and tax evasion is nothing but black money. Once taxation is removed, there will be enough transparency in transactions there will be no chance to create black money. This is what ArthaKranti is asking for. Arthakranti is made by Indians, for Indians. You can criticize our proposal, you show us a loophole or a fault and we will correct it.
We have seen previous government had tried demonetization. However, that demonetisation did not have much impact. Your comments?
Morarji Desai had taken a step in 1978 but between that demonetisation and today’s demonetization there is a paradigm shift. Both the demonization cannot be compared as the value of Rs 1000 note was different then and the value when PM Narendra Modi demonetized Rs 500 and Rs 1000 notes is quite different.
Markets post demonetisation are confused and have fallen considerably. How do you look at this situation? Is demonetisation not favourable for the capital markets?
Things are changing from cash economy to digital economy. I believe the move is in favour of the capital markets. The markets work differently and have a legal framework. I believe capital markets are going to get benefitted in a bigger way. Now the capital flow in the business will increase which will in turn increase the supply chain and that will boost employment. The pace of development will be faster as our country is youth-centric which I believe will accelerate the pace. India is a dynamic country and the pace from here will depend on our youth.
Post demonetization, how do you think the government should have handled the currency situation to avoid this mess-up?
This is just a temporary reaction. Any uncertainty creates turmoil and uneasiness. That is a natural reaction that is going to last for a few days and will subside soon. The government is also putting in its best efforts. Now you can get cash on petrol pumps as well. It is a small thing as it is a bloodless revolution. We spent our entire life standing in lines for some or other purpose. We don’t feel any uneasiness in standing in a line but your generation may feel so.
[PAGE BREAK]
Golden opportunity to seize, if govt act fast enough
In this authored article exclusively for DSIJ, Chairman of IIFL Group, Nirmal Jain talks about the pros and cons of the demonetisation move. He believes time is the essence.
What India is going through in the past two weeks has no parallel. The demonetisation exercise undertaken by Prime Minister Narendra Modi has impacted almost every Indian at different levels. The country is divided on how demonetisation would help eradicating black money and get the economy back on its track. While, nobody has sympathy for corrupt politicians or officials who have huge piles of cash, all of us have feelings for a truck driver who is not able to buy his meal or a worker waiting in queue for hours to discover bank branch has run out of cash. What government wants is to control use of black money or cash on which income tax has not been paid and not use of cash itself. Why should then a father willing to withdraw cash from tax paid money for daughter’s wedding suffer? There are many poll bound state governments who may exacerbate these inconveniences and try to derail the GST roll out plan. The government is working so hard on it and India needs it so badly. It will be a pity if anything delays GST.
Many expect a significant consumption or growth slow-down in the short term. If that happens that would be the most significant casualty as growth deceleration will have an impact on employment and income levels of vast majority of the country. About four-fifth of Indian working population is engaged with micro, small enterprises and informal sector.
Despite the difficulties to be fair to the government, we must accept their intent is just and move is courageous. However, the inconvenience to common man and fear of consumption slowing down are real risks. A country, with millions of traders, dhabaas, hawkers without POS (point of sale) machine for credit cards or any other electronic payments or so millions of Jan-Dhan account holders who have never actually used their bank or cards, is shell shocked. At the same time, nobody can say that there was urgent need to address bludgeoning black money, fake currency and money being available for terror and drugs.
Smaller measures are increasing availability of physical cash quickly and remove or relax considerably cash withdrawal limits from ATM to say at least Rs 20,000 and remove limits for withdrawal from banks. For long term, government and RBI should incentivise use of banking system and wallets like PayTM by removing all charges, increasing limits, driving penetration of electronic payments and educating the masses.
The bigger issue however is to ensure that economy’s growth momentum does not slow down. The prosperity engine which just started chugging along, should not be choked. While estimates vary, government’s tax revenue will swell with this. There is also a major windfall likely, as Rs 14 lac crores currency in circulation which is liability on RBI’s balance sheet, will shrink hugely as entire currency will not come back for remonetisation. While we need funds for infrastructure, a part of this windfall must go back to common man now. The government must act swiftly and reduce indirect taxes on all consumption items across the board, including cars, two wheelers and cement. The government has to suffer revenue loss only for four months till GST is rolled out. As post April 1, 2017; new GST rates in any case, will prevail. In 2008, when country was faced with Asian crisis and demand slowdown, across the board cuts in indirect taxes did help the economy recover fast and almost unscathed. Such bold moves will change sentiment of entire Indian business and consumers.
Also for direct taxes, the Finance Minister in the first budget announced a roadmap to reduce direct taxes to 25% but ended up increasing the same in the second budget. Whether surcharge or any other reason, the honest tax payer was unpleasantly surprised.
Now that government has confidence of having reined the monster of black money, it must proactively reward and incentivise honest tax payers. The vast majority of population in number do not have black money. The government should not wait for the actual gains and results as that could be too late. If Modi and Jaitley can act quickly to pass on the gains of surgical strikes on black money to those with white money, by tax cuts, we will see people smiling even in the queues at bank branches or outside dry ATMs. The economic growth will not face slowdown and may actually accelerate. Naysayers will be silenced.
[PAGE BREAK]
UPI will be a game changer for a cashless economy
In an interview with Abhijeet Gosavi, R C Lodha, ED of Central Bank of India explains the evolvinf faces of the bank in the country in these days of lesscash economy being talked widely. Excerpts:
How important is the contribution of banking sector to the economic growth of the country?
Banks have always enjoyed an important position in the country’s economy. In fact, they are backbone of the economy. They play a decisive role in the development of agriculture, industry, trade and services. They act not only as the custodians of the country’s money but also as financial resources of the country, which are necessary for the economic development of a nation.
Indian economy is agro-based and rural-oriented. The commercial banks transformed from class banking to mass banking and initiated many programmes for development of rural India. Banks have also formulated programmes for development of industries, infrastructure, capital markets, international business and development of new entrepreneurs as a part of economic development.
How successful are banks in curbing the NPA mess?
Wherever there is business, we have to make provisions for NPAs. We cannot call it as NPA mess, but we can call it as NPA management. Banks are in money business, where money is part of many correlated activities, which is also effected by internal and external factors. As a banker, we are putting our efforts towards managing the NPAs as three Rs – Rectify, Restructure and Recover.
The NPA management is done through various measures as mentioned here under:-
- Watch-list/Special Mention Category
- Willful Defaulters
Curative Management:
- One-time settlement schemes.
- Lok Adalats.
- Debt Recovery Tribunals (DRTs).
- Securitization and SARFAESI Act.
- Asset Reconstruction Company (ARC).
- Corporate Debt Restructuring (CDR).
- Restructuring of corporate viable debts through recently introduced scheme by RBI, i.e. S4A etc.
- Circulation of Information of Defaulters.
- Recovery action against large NPAs.
- Credit Information Bureau.
- The recently passed Insolvency and Bankruptcy Act would enable the bank to take leverage of the provisions for expeditious resolution of NPAs.
- CRILIC
- Declaration of non-cooperative borrowers.
The performance in reduction of NPAs largely depends on improvement in position of some sectors of the economy.
Should we expect banks to have cleaner Balance Sheet by the end of this fiscal?
In banking, where we are dealing in many areas including credit, no bank can claim to have cleaned its balance sheet 100 per cent. The banking business is dynamic, where things change with the changes in internal/external environment. Whatever mitigating factors we are introducing to curb the NPAs, these measures may be required to be changed with changes in government’s policies. Therefore, bankers cannot claim that they have cleaned up their Balance Sheets.
The Indian economy is going towards a cashless economy. Are the banks ready for a paradigm shift in banking or have they already factored this change?
The Union finance minister in his budget speech talked about the idea of making India a cashless society with the aim of curbing black money. Recently, the Indian government notified demonetization of big denomination notes of Rs 500 and Rs 1000, which is a part of the initiative for a cashless economy. Also, the government has been channelizing its subsidies and other fund payments through banks.
Aadhar number is also given to every person and it is linked to their bank accounts to ensure end use of the government subsidy and funds. To promote cashless banking, banks have started UPI, net banking, mobile banking, RTGS/NEFT, electronic clearing payment systems, IMPS, credit and debit cards, etc.
The UPI is going to be a game changer towards cashless economy and banks have factored this change.
Rural banking is still a challenge. Will mobile wallets become popular among rural customers?
The nationalization of banks in 1969 transformed the Indian banking scenario. Banking services expanded across the length and breadth of the country. Nationalized banks’ thrust on opening rural branches helped rural people access banking services.
Bank automation enabled banks to offer many new banking products and services and many value-added services such as ATMs, plastic cards, internet banking, etc. Advancements in communication technology helped in computerizing branches in rural areas and setting up ATMs.
With the introduction of Prime Minister Jan Dhan Yojana and the option of zero balance account, the rural population is coming into the banking fold and gradually becoming habituated to banking. The two lakh Bank Mitras and BCs operating in rural areas are serving rural customers. The Government of India has started many initiatives where payment can be made through mobile wallets, viz. for buying ration material, CKCC, MUDRA Cards, Artisan Cards, etc.
Rural banking is still a challenge on account of illiteracy, connectivity, infrastructure, high cost of operations and poverty. On account of literacy barrier, use of mobile wallets may have to wait for some more time.
[PAGE BREAK]
“While our NPA at 16.26% is enough to snatch my sleep, we all taken it as a challenge”
Pawan Kumar Bajaj, Managing Editor & CEO of United Bank of India in this exclusive interview with Dalal Street Investment Journal, says consolidation of PSBs should not be targeted only to address the NPA menace. Excerpts:
How do you look at consolidation of public sector banks? How will it benefit the smaller public sector banks in future?
Consolidation would be a positive development in the long run and consolidation along with higher capital needs and governance reforms would position the banking system better to support a higher growth and further economic liberalization. The Indian banking industry is highly fragmented with 48 domestic banks, with no single bank capable of participating in a consortium of global magnitude.
Moreover, consolidation of banks in the NPA-stricken Indian banking sector appears to make imminent sense. The idea goes way back to 1991, when India was faced with forex crisis and the Narasimham Committee recommended a three-tier banking structure by establishment of three large banks with global presence. In the last Budget speech, the Finance Minister had mentioned about consolidation of PSBs. The idea becomes more acceptable if we consider that despite being the 7th largest economy, no Indian bank is on the list of top 50 large banks in terms of asset size. SBI’s proposal to merge with itself five of its subsidiaries and Bharatiya Mahila Bank makes a strong case for consolidation, which will actually push the combined entity up to the league of top 50 global banks. How the merger plans of SBI progress would largely determine the path for the next phase of reform.
The consolidation of banks would bring about synergies in business and treasury operations, branch rationalisation, access to cheaper fund, diversification of risks, capacity augmentation and achieving economy of scale leading to optimisation of costs.
While advocating for merger, I must also flag-off some of my concerns. Firstly, the threshold size has to be determined relatively accurately so that we do not create behemoths ‘too big to fail’. Secondly, we should have a vision as to how we want our banking industry to evolve over five to ten years from now and not see consolidation as a short term measure to fix NPA or capital problems. Lastly, and most importantly, the issues such as ethnic allegiance, sentiments and morale of employees ad HR level adjustments must be addressed to the satisfaction of all stakeholders without which consolidation would remain a mirage perpetually.
As far as smaller banks are concerned, they are likely to be benefitted by more efficient management of capital and some legroom for raising more capital. They will be able to explore new geographies and participate in large credit proposals which they are not able to till now due to their size.
[PAGE BREAK]
How will the bankruptcy code and S4A ease banking system from increasing NPAs?
The S4A envisages bifurcation of the entire debt of a stressed corporate borrower into sustainable and unsustainable portions; while sustainable portion (Part A) shall continue to be serviced/repaid as per existing repayment schedule, the unsustainable portion (Part B) shall be converted into equity/redeemable cumulative optionally convertible preference shares and/or into optionally convertible debentures. If a stressed account is classified as Standard on the date of invocation of the Scheme and it is implemented within 90 days from that date, both Part A and Part B will continue to remain Standard. If the account is NPA on date of decision, both Part A and Part B will continue to be NPA, but if Part A performs satisfactorily for one year, both parts will be upgraded as Performing Assets.
Thus, the Scheme, if duly implemented within prescribed timeframe, will help prevent downgradation of standard stressed assets as also will provide scope of upgradation of non-performing assets after one year having effect of reducing NPA level in short to medium term horizon. But, the glitches are – the scheme is applicable only where aggregate exposure is more than Rs 500 crore, i.e. for large corporates only; and only if the unit is operational, i.e. projects under implementation are excluded; and on the basis of future cash flow, so at the current level, the sustainable portion works out to at least 50% of the existing funded liabilities. Therefore, the scheme will have limited applicability. Further, to keep the account Standard as per the Scheme, the banks will have to make provision higher of 40% for Part B or 20% of aggregate of Part A & B, which means while further slippage is prevented, banks’ profitability will be stressed by higher provisions. The upside for the lenders has been considered primarily through equity/quasi-equity, if the borrowing entity turns around. This is a long-term proposition. As such the scheme is sparingly invoked so far, and some more time needs to be given to understand its long term effect on the lenders as well as the borrowers.
The Code offers a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals other than financial firms. The vision here is to encourage entrepreneurship and innovation. The government is proposing a separate framework for bankruptcy resolution in failing banks and financial sector entities. The Code allows creditors to assess the viability of a debtor as a business decision and agree upon a plan for its revival or a speedy liquidation. The Code creates a new institutional framework, consisting of a regulator, insolvency professionals, information utilities and adjudicatory mechanisms, that will facilitate a formal and time-bound insolvency resolution process and liquidation. Presently, recovering money from a defaulted corporate borrower is a nightmare for banks since it takes years for Debt Recovery Tribunals to finish litigations. By the time the whole process gets over, there is nothing left for banks to recover as the value of underlying security evaporates. The new law promises a change in this scenario by overhauling the laws regulating insolvency amidst a surge of bad loans. The law enables banks to push for resolution/recovery of the money from a troubled company within a period of 180 days, with a grace period of 90 days.
If the resolution process does not happen even then, the company will go for liquidation automatically. There may be significant infrastructure constraints at the moment, including dearth of insolvency professionals. However we are hopeful that upon stabilization, the law will be of great help to resolve issues pertaining to the speedy winding up of insolvent companies, lowering NPAs and redeployment of capital productively.
After the recent demonetisation move by the government, can you throw some light on the pace of financial inclusion in the near term?
A series of events since August 2014 actually led to this demonetization. First, the government pushed the banks to give bank accounts to all unbanked till then, and thereafter, ATM and debit cards were handed over even to accountholders with zero balance accounts. Then a social security net was provided by introducing insurance schemes. The banks were then strengthened by doses of capital, and finally, the demonetization. I feel the government was moving towards demonetization in a well-planned, well-calibrated manner. Whether the fall-back options are adequate or whether government should have given more time or not are issues of debate. The moot point is that the financial inclusion and demonetization are integral parts of the same package.
Indians do have a tendency to save, as compared to their global counterparts. The habit is more endemic to the rural population than urban. They are so far accustomed to having all their savings in cash, more often than not, in higher denomination currencies which they are now forced to bring into the banking system. This is not black money, yet this was so far outside the system and now it is coming into it.
[PAGE BREAK]
In the last two years, thanks to the initiatives of the government to divide the whole country into sub-service areas (SSA) with about 50 households and to assign each SSA to a particular bank, Indian banking system has reached to the remotest corner of the country, either through brick and mortar branches or through banking correspondents popularly known as Bank Mitras. Over this period, these Bank Mitras have been trained, certified and equipped with micro ATMs with biometric authentication, empowered to give loans by forming Joint Liability Groups (JLG), involved in recovery and have virtually transformed themselves into a mirror reflection of a rural bank branch. The villagers can deposit up to Rs 49,999 (in non-KYC accounts), any amount where e-KYC is done, withdraw up to Rs 24,000 per week, even get their statements and exchange the currencies which no longer are legal tenders by approaching these Bank Mitras. Let me tell you, in United Bank we have 4,300 Bank Mitras who are covering even places like interiors of Manipur, Meghalaya. Our JLG portfolio has already crossed Rs 100 crore with zero NPA.
So, as far as financial inclusion is concerned, this demonetization exercise will give it a further boost in the days to come. The fringes which are still uncovered by a bank branch or a Bank Mitra will now come within the banking fold post demonetization. People will become more adept at using cards, cheques and products such as mobile banking and net banking which have not been so frequently used by rural India so far.
Yes, there will be some short term agonies. For example, the government has been pushing the banks to go all-out in giving MUDRA loans. The beneficiaries of MUDRA loans are small units, cottage industries, traders whose business is primarily built on cash-centric models. So their activities are likely to come under a temporary halt as they are experiencing stress in meeting their daily liabilities. But, over a period of time, their business model will adapt to the overall economic model and gradually fall in line. As banks, we might see some recovery issues in the segment, but that will be for a very short period.
Lastly, can you throw some light on your recent Q2 numbers and how are you heading toward a better and cleaner slate in terms of cleansing the NPA burden?
If you have seen our Sept ’16 quarter presentation, we had gross NPAs of about Rs 11,100 crore and restructured assets of another Rs 6000 crore out of an advance book of Rs 68,500-odd crore. Our gross NPAs were 16.26%. While these numbers are good enough to take away any CEO’s sleep for the rest of the year, the positive part is that the entire bank has taken this as a challenge to rectify the situation as early as possible. We are in a somewhat advantageous position compared to the others as we were the first to start the cleaning up process back in 2013 and we are almost through with it. We have so far taken all possible measures to recover from stressed assets – starting from liberalized OTS scheme, naming and shaming tainted promoters in newspapers with photographs, declaring willful defaulters – we were the first to declare Kingfisher as such, to invoking SARFAESIA, sale of assets to the ARCs, sale of collateral pledged to sending recovery teams to the borrowers’ premises, silent protest, silent procession, etc. To arrest slippages, we have strengthened monitoring and follow-up.
Now, I myself and my Executive Director monitor the large corporate accounts under stress religiously on a weekly basis, twice a week our General Managers and the concerned department follows up for the next series of stressed accounts by value, and respective regions follow up with smaller borrowers on a continuous basis. Whichever account demands whatever treatment, we are ready to mete it out. I am hopeful that with the efforts going into the whole exercise, the improvements will be evident earlier than we anticipate.
Loan repayment cycle to be impacted
To tide over the temporary liquidity crisis due to demonetisation, Muthoot Finance is encouraging online gold loans, direct credit to customers’ accounts and loading prepaid cards for disbursement of loans. The company is also accepting payments through Webpay, Muthoot App, RTGS/NEFT/IMPS facilities, cheques and drafts, says George Alexander Muthoot, MD, Muthoot Finance
What will be the impact of demonetisation of 500 and 1000 rupee notes on the NBFC sector?
The NBFC’s major target group is low and middle income groups. The current demonetization has impacted; particularly, the loan disbursement and recovery.
How is Muthoot Finance changing its policies to align itself to the new measures being taken by the government?
The company is encouraging online gold loan, direct credit to customers account, loading to prepaid cards for disbursement of loans. For repayments, we are accepting payments through Webpay, Muthoot App, RTGS/NEFT/IMPS facility. We are also accepting cheques and drafts.
Do you see asset quality concerns arising in current and upcoming quarters for the company and sector as a whole?
Since major portion of the customers pay in cash, we expect the repayment of instalments and principal may get delayed to some extent.
How material will be the impact on loan repayment cycle?
In the short term, we anticipate the loan repayment cycle to be impacted. However, the situation will return to normalcy once the higher denomination notes are back in circulation.
Do you see stricter measures being taken on gold and silver loans? What will be the impact on your company in the near term?
Our company’s policy is to only finance household used gold ornaments. Once money circulation improves and utilization withdrawal from banks is lifted, business will be back to normal.
Can you throw some light on percentage of cash and non-cash transactions in the company?
Since the average ticket size of our loans is Rs 40,000, most of our business is done in cash transactions. However, as mentioned earlier, we have various digital initiatives in place that can aid customers at this juncture.
[PAGE BREAK]
“A big move converting cash predominant economy to cash less”
Bipin Preet Singh, Founder CEO & director, Mobikwik Wallet is a happy man these days as demonetisation and subsequent cash crunch has opened up a massive business opportunity for his company among other payment banks, mobile wallets. He explains here why it is a time to celebrate in Mobikwik.
1. What are your views on the demonetisation move by the Government? How will it help in making India a cash less economy?
I think conceptually this is a great move. Many people are complaining also but I don’t think it is wrong. I think when people are trying to find out different ways to convert black to white this means that there is a strong impact. Overall from the circulation point of view it was 86 per cent, which is too high for a country like India, if you look at the per capita income. Which means that a lot of the cash was with very few people. I think this is the right move. As those people, might not have been paying taxes. But the unfortunate part is that may be the country was not fully prepared, and India being a very big country you can expect some hiccups. I think everyone is also just looking at it from a black money point of view. But there is one structural change which will happen that has been talked about but has not been promptly addressed. This move will have a major impact in converting a cash predominant economy to a cash less economy. Not in 50 days, but say in a year or two years when more than 50 % of Indians start using cash less mechanism, it will change the economy or cater to the very different parts of the economy in terms of what we do because this will certainly have 500-600 million consumers who understand digital payment method or electronic payment methods. But the reality is that there are a lot of poor people who have to face inconvenience, but I guess better sense will prevail over the next 2-3 months.
Also, what happens to the massive population in rural India where penetration of internet is poor and so is mobile telephony--how innovative companies like yours should now be able to tap the rural population?
We have so far mostly focussed on the smartphone population, which is rural also, but most of them are urban and semi-urban. In rural areas also it’s not that people are not graduating to the next level. May be they don’t have smartphones today and may get smartphones in years to come but they still have feature phones. Now this will spur the demand for people to even use those phones to start doing transactions. I think you may see some rural focussed schemes from some big corporates with big pockets to start financing phones in a big way. We are seeing innovations like the one with Jio where data is practically free. If this continues for long this itself will change the way people transact. More than 600 million people already have bank accounts now with Jan Dhan accounts. From our point of view, we are just trying to make it simpler, make services available in different languages and as soon as possible make it available to feature phones too.
4. Digital payment platforms have seen a huge surge in transactions as well as downloads in the last few days. Do you see this trend to continue?
I thing this trend will accelerate. For the first week and 10 days I was thinking that people who do not know digital and electronic payment would have a tough time. But the reality of this country is that today you cannot survive without cash. Card network and bank infrastructure is not ready to handle the volume that is being generated today. So, I think this is going to be a very long term trend and also in the minds of the customers and merchants cash has lost some credibility. When a consumer habit is affected by something like this, it is a permanent scar which I think doesn’t go easily, especially on the merchant side because he has to face the brunt.
“But the government going slow on willfull defaulters”
A member of Lok Sabha and also Standing Committee of the Parliament, Mohammad Salim talks about the pros and cons of Narendra Modi-led NDA government’s demonetisation move in this exclusive interview to DSIJ.
What are your thoughts on the demonetisation move by the government?
It’s not a total demonetisation, it’s a withdrawal of currency notes of denomination of 500 and 1000 notes and that also with some windows. Secondly, the declared aim to be fulfilled is neither enough nor essential. So, it is not targeted. Between the declared aim and efforts there is a big mis-match.
So, in principal you support the move but you are not happy by the way it is being carried out?
I do not support the move. I said it is not targeted. That means the declared aim is okay i.e. government’s fight against black-money, corruption and this terrorist funding and fake currency. But was this one ‘NO’ really necessary, because you know how black money operates. Committees after committees, even the CBDT committee in 2012 on how to tackle black money has supported and has given a detailed note on how to tackle. But the government is not addressing that, even though the same government came to power on this promise. However, the issue was not high currency notes, but the black money stashed abroad that needs to be brought back, which the government is not bringing back.
Moreover the corruption issue, this chit fund issue, ponzi scheme and then big corporates’ corruption related issues. Even these wilful defaulters are not being targeted; the government is going slow on them and instead is asking the common man to submit their note. The cost benefit analysis has a big impact on the economy, mainly on the informal sector, un-organised sector and rural economy, where cash currency is the sole mode of transactions. The grocery, vegetables, fish market and small transport sector are all bearing the brunt. As far as your terrorist accounts worldwide are concerned, people are getting adversely affected and are struggling. But this currency notes demonetisation has not affected terrorist organisations, because they transact money not with cash but with some other parallel economy and other instruments like narcotics, small arms trade, smuggling and then foreign currency. That’s why all the terrorists who are encountered, killed, who are neutralised have not been caught with huge cash. Kasab’s bag did not have 500 and 1000 denomination notes.
They come with other things. Thirdly, black economy survives in certain sectors of the economy, so it should have been targeted specifically.
So as the government has already gone ahead with the move, what steps now can be taken so the problem that the public is facing is reduced?
See we are not asking for rollback because it has already been announced and is being executed. But it should be planned and better executed. So now also it could be better executed. No adhocism. There should be some firm policy and programme placed otherwise it will be trust deficit. People would go by the rumours. And then you know there is a limit to the currency notes you are going to pump in. So, government should plan accordingly across days, weeks, months and sectors, because the corruption is in thousands of crores; and not in thousands and hundreds. So, the small markets, vegetable markets, rickshaw wallas are being asked to come and deposit Rs 4000 or Rs 3000; the day to day earning people, daily wage earners, weekly wage earners for them how much can they deposit, then you can catch hold of them if they deposit more than Rs 10,000. So, sector wise and small business they should be specific.
Thirdly, you cannot fight black money and terrorism and fake currency without taking people into consideration. No war is waged and won which is anti-people. So here you put the entire population into crisis instead of putting the real culprit under the scanner. Real culprits are not being targeted.
[PAGE BREAK]
“Selective leak is a malafide campaign against our government in the Centre”
Gopal Krishna Agrawal, national spokesperson of BJP on economic affairs in this interview to DSIJ talks about the politics of economics on the wake of demonetisation move by the BJP-led NDA government in the Centre.
1. The demonetisation move by the Prime Minister has so far led to mixed reactions. While urban population is happy with the Operation Black Money, rural Indians have been facing acute cash crunch and even deaths are being reported from across the country. Do you think it has been a gamble which may even go wrong, thus politically affecting BJP?
The whole country wanted government to fight corruption and eliminate black money from circulation, this was the mandate on which our government came to power. Therefore we are Walking the Talk. If you go deeply into demonetisation you will understand that it is pro-poor. In the long term it is the common man who will benefit the most and will have much greater participation in the economic development of the country. This benefit at present was restricted to few who were in power and were part of corrupt circles.
2. Is this step taken keeping in mind ensuing elections in few states including Uttar Pradesh where BJP might not have done well even after playing upon surgical strike on Pakistan soil through media? Do you think the surgical strike on black money will finally help your party in the coming elections?
An exercise of this magnitude takes long time for preparations. Therefore short-term gain cannot form part of its strategy. Lot of stake has been put on this far reaching decision of the Prime Minister, and therefore this can never have been taken keeping state elections in mind. If you do good work for the benefit of the nation and the common men, you are bound to win hearts. We are fulfilling the aspirations of the citizens of our country, and working for the national security without any pulls and pressures of vested interest. We are bound to sweep state elections, but that’s not the only goal that we pursue.
3. There have been allegations of selective leak against Modi and his government enabling his 'near and dear ones' to deposit their old notes in the banks just before the demonetisation announcements were made using news television. How much truth is in it? Why so much political opposition is being faced by Operation Black Money?
The question in itself has a basic fallacy; there is no restriction on anybody to deposit any quantum of money in his bank accounts whether before or after announcement. Only he will have to justify the source, if the source is justified there is no need to worry. Therefore even the so called ‘near and dear one’ is bound by this law. Whether he deposits before or after the announcement does not matter. At one point of time Mr. Rahul Gandhi says that even the ministers of NDA government were not taken into confidence. Therefore this is a false and mala fide accusation without any substance. The success of this whole operation is based on secrecy and that has been maintained.
The opposition to this operation by political parties is because firstly, they have amassed lot of black money over the past years, and their very existence depended on black money. Secondly, they are worried about the wide spread support this operation is receiving in spite of all the hardship being faced by the common men. The biggest beneficiary of this whole exercise will be common men, economy and national security. This will help in creating infrastructure, building robust financial system and help in wiping out corruption.
[PAGE BREAK]
The future is branch less banking—hold onto your android
Yogesh Supekar did not stand in any of the queues leading to his bank or even ATM in these days of cash crunch. He believes, payment banks and mobile wallets are now for sure the future. Why and how--a fan of Nandan Nilekani, he explains here:
Much before the ‘demonetisation’ move coming from the country’s Prime Minister, renowned economist, Lord Meghnad Desai had told this publication that Indian banking sector would head towards a massive reform and payment banks would take over the retail segment of it. In that interview, six months back, the London School of Economics (LSE) professor also had predicted how companies like PayTM would lead the country’s banking sector in near future and today, it has come to a reality, come November 8 night. “The PSU banks and major private banks will turn into borrowers and their footprint in retail banking will be minimal. It will be much of a lesscash economy where mobile wallets, payment banks will have much say,” Desai had commented then. That time little we knew another fellow Gujarati will take the first major step towards making Desai’s comments true.
In India the ever increasing penetration of smartphones and internet on mobiles is something that could well be the game changer not only for the banking industry but for the overall economy.
What has happened recently is that the payment space has witnessed several non-banking financial institutions offering payment services and solutions. One of the interesting fact which explains the potential for payment banks is that the increasingly customers are becoming more tech-savvy and the demand for one touch payment solution, which is instantaneous is on rise. The demanding customers have created this huge market called digital payment system in India and to the country’s benefit the regulators in the form of Reserve Bank of India (RBI) have supported the digital payment wholeheartedly, so far.
All put together there is an exponential growth in the digital payment system in India. Due to the demonetisation move by the current government, there is huge surge in the number of transactions done via payment banks like PayTM etc. The recent decision to scrap of Rs 500 notes and Rs 1000 notes may have simply changed the tide of fortune in favour of the payment banks at least in the short run. However, there are certain challenges that the payment banks need to overcome if at all they want to be seen as serious contenders viz., habit with Indians to use cash, the complexity of digital payment instrument and limited reach are some of the areas which will keep the payment bank busy in search of solution. For mass trials the complexity of digital payment systems and limited adoptions need to be addressed at the earliest. We can see that the payment banks to grow do have some significant hurdles.
But will they change the way Indian banking sector operates now—Siddharth Purohit of Angel Broking says, “So the earlier thought that payment banks are going to be a challenge for existing banks doesn’t really hold ground. However, it is very much true that there is still a vacuum between the commercial banks and customers and that can be filled by the payment banks. But only the technologically advanced entities and telecom players are likely to remain as serious players in the payment banks segment, while for others it really may not make sense to be in the business due to lack of scalability. In the longer run, however, payment banks are likely to be a complementary to the existing commercial banks and it is not going to be disruptive for the sector. In the near term, we don’t expect payment banks to change the structure of the banking systems in India and its operations in the near term may be a kind of non-event for the existing banks.”
On the opportunity side it does look visible that convenience is the most important aspect for payment banks and payment services providers for continual usage of the services. Great amount of deals, discounts and cash backs could be the way forward to entice more consumers to spend digitally.
Payment bank licenses are issued strategically to different players from various industries and corporate entities which ideally should ensure maximum people coming on board using the payment banks services. Point in case is the telecom companies (Bharti Airtel) which have been issued payment bank licenses with a much larger customer base than traditional banks.
Payment banks for sure will be competing with the banks for deposits. Payment banks as of now can accept deposits up to one lacs only and this will for sure act as a competing force for the traditional banks. Chances that the deposit rates of the payment banks being higher than the deposit rates of the traditional banks is low and hence depositors may still prefer traditional banks over payment banks when it comes to earning higher interest rates. However, people may prefer depositing amount in payment bank only for value added services or customer service which the traditional banks are not able to deliver. Questions have also been raised on the very feasibility of the business model of the payment banks and whether they can be profitable at all.
Those banks which can get maximum consumers on board on digital platform are the ones which might grow market share profitably. Private banks like HDFC Bank and Kotak Mahindra Bank are amongst the leaders in terms of digitisation and have a strategy in place to encash the digitisation wave about to be unfolded in India. Amongst the PSU banks in India, SBI is the clear winner which has managed to get maximum of its customers on board on digital platform.
Conclusion
Payment banks, essentially an Indian innovation , came into existence as a response to the problems of financial inclusion. Indian economy has for years struggled on financial inclusion front. Having a compelling value proposition, access to large customer base, conducive infrastructure, supportive regulation and leveraging next-gen technology will be the most crucial aspects deciding the future and profitability of the payments banks in India.
struggled on financial inclusion front. Having a compelling value proposition, access to large customer base, conducive infrastructure, supportive regulation and leveraging next-gen technology will be the most crucial aspects deciding the future and profitability of the payments banks in India.
With payment banks expected to grow along with the digitisation drive in India, the traditional banking can be expected to take a hit, no doubt. However the impact will be known only once the Indian consumer’s adaptability to the new way of transacting is tested to the fullest. The well managed and digital friendly banks with unique marketing strategies may gain at the expense of other banks who do not innovate. Investors now on, along with the fundamentals of the bank need to also study the digitisation effort taken by the bank and how successful Investors now on, along with the fundamentals of the bank need to also study the digitisation effort taken by the bank and how successful it emerges in the digitisation space.