FINANCIAL STABILITY REPORT: ENDING 2015 WITH A HIGH NOTE

Financial stability report was presented by RBI on 23^rd December 2015. The major issue discussed by the media was with respect to dividend policy followed by the PSU banks. The other major highlights went unreported. The financial stability report is a confirmation of the improved macro-economic conditions and lower domestic risks present in our economy. The central bank accepts the fact that despite improved macro economic fundamentals, domestic demand remains weak and the government faces stiff challenge of going for higher public investment with stringent fiscal consolidation.

The major part of the report focuses on financial system and its major constituent, Indian banking sector. The banking sector has been facing increased risks due to deteriorating asset quality, lower soundness and sluggish profitability. Gross non performing assets ratio increased between March and September 2015, whereas restructured standard assets ratio declined. Without getting into numbers, PSU banks lagged behind its private sector peers with respect to asset quality, profitability and capitalization. The central bank also assessed NBFCs, insurance and pension sector and Indian capital markets which kept pace with the changing global scenario by creating special platform for start-ups. RBI has also recognized the role of domestic institutional investors especially mutual funds for being a stability factor against volatile foreign portfolio investment flows.

The systematic survey conducted by RBI indicated that global risks continued to be perceived as major risks facing our financial system compared to domestic macro economic risks which have receded over the last one year. Thus the Financial stability report concluded that India’s financial system remains stable and resilient with strong macro-economic fundamentals against global uncertainty and its inherent risks. 

INDIAN BANKING SECTOR: STAR REFORMER OF 2015

Now that we are way past US FED rate hike and ECB quantitative easing, we can now look at our own domestic economy and major reforms undertaken in 2015. Being an emerging market, our economic outlook is so much dominated by inflows and outflows of FDI & FIIs, that we have forgotten our own financial gangotari, our rural unbanked population. The Pradhan Mantri Jan Dhan Yojana (PJDY) has accumulated, approx Rs. 26000 crore as on November 2015 by opening 19 crore bank accounts within one year. This feat would have been impossible without vast penetrating network of our PSU banks. Even though we feel that our PSU banks are there in every nook and corner of this country, 40% of our population is still unbanked. Thus, the Indian banking sector especially PSU banks needed a structural overhauling to tune in with volatile global scenario.

The year 2015 started well for the banking sector with ‘Gyan Sangam’ in January where the bankers (PSU) along with government laid out both short term and long term goals for strengthening the Indian banking sector. This was followed by the 7 point ‘INDRADHANUSH’, program launched by the government on 14^th August 2015. Though the banks had been long asking for empowerment, higher capitalization and removing bottlenecks for de-stressing assets, the major breakthrough was splitting of CMD & MD posts and bank board bureau for monitoring the performance of the PSU banks. Licenses for small and payment banks completed the picture and thus fulfilling the financial inclusion agenda of the government.

PSU banks have under-performed in the stock market in 2015, due to lower profit margins, NIMs and falling ROAs compared to their private sector peers. But in the long run, PSB banks will not only outperform but will tether the whole financial system together making the Indian economy even more resilient and dynamic.   

WINTER SESSION OF INDIAN PARLIAMENT: SINE DIE

The recently concluded winter session was pretty productive compared to the previous monsoon session. This winter session had altogether 20 sittings with over 60 hours, of which 47 hours were used to discuss and argue petty issues. Lok sabha passed 13 bills whereas Rajya sabha passed nine. The major bills passed included Negotiable Instruments bill, Waterways bill, Scheduled Castes and Scheduled Tribes bill, Juvenile bill, Arbitration and Conciliation Bill, Atomic Energy bill to name a few. The last three days were the most productive with Rajya Sabha passing six bills that to without discussion.  

With GST stalled and Bankruptcy bill referred to joint committee of both the houses, reform agenda of the government remains unfulfilled. Passing of GST bill would improve ease of doing business in India and propel our GDP by 1-1.5% whereas Bankruptcy code would improve stability of our banking sector.But who cares?

Even though US FED has indicated further interest rate tightening in 2016, global economy would still be flush with capital to be deployed in investment destinations providing transparent investor friendly laws along with stable returns. Foreign direct capital was $16.60 bn in April to September 2015 compared to $14.70 bn in the same period previous year. There was a modest increase of 13% YOY. If FDI flow has to be enhanced all political parties need to rise above petty politics. Next general election would be in 2018, just two and a half years to go and as witnessed in 2013, the level of intolerance among Indian electorate is growing. 

BANKRUPTCY BILL : BOON  FOR THE BANKING SECTOR

Kingfisher airlines would be the best example for making anyone understand, why bankruptcy bill needs to be passed. It took two years for the creditors to get hold of company’s prime property, Kingfisher house, for recovering a debt of $1.5 bn. This shows the strength of our current bankruptcy law and the urgent need for reforming it. Our banks have been victims of such financial irregularities as law always gave benefit of doubt to the debtors affecting the financial health of the banking sector and of the economy as a whole.

Bankruptcy bill introduced by the government addresses the issue of fast recovery and ease of doing business for the creditors which get stuck by willful defaulters. Time frame of 180 days has been specified for completing the insolvency process and can be extended by 90 days in certain cases. Thus fast track resolution of bankruptcy issues will allow failed business to windup and freeing up of capital which can be used in other productive assets.

The insolvency process can be started by financial or operational creditor or the corporate itself on the default of debt by filing proceeding with the National Company Law Board. Committee of creditors comprising all financial creditors of the debtor would be set up. The committee needs to come to a consensus with 75% vote for restructuring, if not company will be liquidated. Apart from getting it through parliament, government also needs to put the required infrastructure for implementation of the bankruptcy bill to improve India’s ranking currently 136 in the ease of doing business index. 

NEXT INDIAN CASH COW FOR THE US

The new H-1B and L-1B visa rules are going to cost around $ 200 mn every year to the Indian IT industry. America, being the most liberalized country has shown how protectionism has to be implemented at the expense of the rest of the world. Instead of whimpering, we should also implement swachh bharat cess on services offered by MNCs. But we won’t do that. Our slogan has always been ‘Bhai Bhai’ for everyone and never ‘Eye for an Eye’. In the current scenario hard core professionalism should take over our world renowned ethical values. 

Now that H-1B visa issue is a done deal, we should be worried about the next target and be ready for it. No prizes for guessing. It is going to be Indian pharma industry which accounts 30% in volume and 10% in value of the $ 80 bn US generic pharma industry. 

WHAT WOULD BE OPEC’S  NEXT MOVE?

So, the game is still on. Now its OPEC’s turn to make the next move. US Senate has lifted the 40 year old crude oil export ban to re-energize its domestic oil market. As a result there is more glut or in other words a highly satiated global oil market. Refined oil was already being exported from US, but now like any other oil producing country, US is going to export crude oil to the world. Though chances of oil prices crossing $60 or $70 have become thinner, US oil producers will benefit as now WTI price will not fall below their cost of production. Thus US shale oil producers are trying their best to improve margins. What is to be seen next is how OPEC is going to defend its market share globally. For oil importing countries like India, Make Hay Till the Sun Shines.

SENATE PASSES SPENDING BILL : LEARNING OPPORTUNITY FOR US

BSE Sensex closed 284 points lower and its counterpart Nifty 50 fell 1.05% yesterday, don’t worry there is no vendetta here. Bank Nifty fell 0.88% because of new base rate guidelines announced by RBI, IT sector fell as HIB visas became more expensive, energy and commodity stocks declined due to OPEC and china slowdown, and of course our own GDP revision, the list can go on and on ……

Though the global sentiment is negative because of so many obvious reasons, is any body lamenting here. What did the senate do? They are fast putting their house in order. Their economy is improving, currency is strong, employment levels are high and of course they have politicians ready to put their work before their grievances. Last night, senate has passed $1.3 trillion spending bill to fund the government till next September. Perhaps, US Congress could be coaxed to organize a workshop for our parliamentarians to explain them how to do business, pass bills, negotiate and strike deals fulfilling each others agenda and not stalling work for the betterment of the country.

Right now, they only have three days left before winter session closes on 23^rd December and so many bills to pass, if only we could expand time as per work. As for workshops, may be before next elections.