BES171: Banking, Finance & Insurance

Money Evolution Digital Payment Monetary Policy

Incl. MP1_FY18

BASEL, NPA, TBS, Evolution & Finance, Insurance

Bad Bank-PARA Classification of FI & Fin.
 CRAR (9%) CCCB
recapitalization Counter cyclic
capital buffer?

BASEL-III Norms

+ RBIs PCA framework

against Weak Banks

Basel, Switzerland
 In the beginning

Assets Liability
CRR & SLR: 25 cr. Capital:100 cr

Loans: 75 cr. NDTL: 100 cr.

Suppose loans turn NPA, and deposits stop coming..?

Assets Liability
CRR & SLR: 25 cr. Capital:100 cr

NPA: 75 cr. NDTL: 100 cr.

Give me my
money back!!!
Suppose loans turn NPA & new deposits stop coming.

Assets Liability
CRR & SLR: 25 cr. Capital:100 cr

NPA: 75 cr. NDTL: 100 cr.

Rs. 25 cr paid
Rs. 75 cr. pending
 Suppose loans turn NPA
Therefore banks
BASEL Norms for Capital
need adequate
to risk weighed asset
capital base
ratio

Assets Liability
CRR & SLR: 25 cr. Capital:25 cr

NPA: 75 cr. NDTL: 100 cr.

Rs. 25 cr from CRR, SLR

Rs. 75 Cr. From capital
 Bank of International Settlement (owned by 60 Central Banks)
Committee on banking supervision- @Basel, Switzerland

BASEL I: BASEL II: BASEL III:

1988 2004 2011
 Formula wrong, just for illustration

Asset Amt (Cr.) Liabilities

SLR & CRR 25 Time
Home Loan 10 Demand
PSL (agri, etc.) 40 Other
NPA 25 Total 100 cr.
Total 100
 Formula wrong, just for illustration

Asset Amt (Cr.) Risk Wt

SLR & CRR 25 52%
Home Loan 10 110%
PSL (agri etc.) 40 120%
NPA 25 192%
Total 100 RWA:
 Formula wrong, just for illustration

Total
Asset Amt (Cr.) Risk Wt
(Amt * Wt)
SLR & CRR 25 52% 13
Home Loan 10 110% 11
PSL 40 120% 48
SMA/NPA 25 192% 48
Total 100 RWA: 120
For BASEL-III: capital to risk weighed asset ratio must be 9%
banks need
adequate
Assets Liability capital base

Risk weighted Min. Capital:

assets: 120 Cr. ? Cr.

NDTL: whatever
BASEL norms: capital to risk weighed asset ratio must be 9%
Capital 9
CRAR 9%
RWA 100
10.8
Capital ??
CRAR 9%
RWA 120

PSB: Capital 9+ __=10.8

CRAR 9%
RWA 120
BASEL norms: capital to risk weighed asset ratio must be 9%
Capital 9
CRAR 9%
RWA 100
10.8
Capital ??
CRAR 9%
RWA 120
Hint: 120 x 0.09

PSB: Capital 9+ __=10.8

CRAR 9%
RWA 120
BASEL norms: capital to risk weighed asset ratio must be 9%
Capital 9
PSBs require CRAR 9%
1.8 lakh crore RWA 100
addl. Capital to
10.8
Capital ??
comply with
BASEL-III CRAR 9%
RWA 120

PSB: Capital 9+ __=10.8

CRAR 9%
RWA 120
For BASEL-III: capital to risk weighed asset ratio must be 9%
All PSBs, collectively
require 1.8 lakh crore

Assets Liability
Risk weighted assets: Min. Capital: 10.8 lakh
120 lakh Cr. Cr. by 2019, 31st March

NDTL: whatever
BASEL-III Recapitalization of PSB by 2019, 31st March
Govt: 70kCr
(IndraDhanush,
depending on
performance)

PSB have 9+ ___ + Capital

Market 1.1
10.8 needed Lcr.
Capital: ___?
9% CRAR for BASEL-III
RWA: 120 LCr
 Public Sector Banks

10k crore for recapitalization,

Addl. May be given if required in
Indradhanush roadmap.
Demonetization windfall profit

Although FRBM Panel (NK Singh) says this is insufficient. But that
Committee report well see in second pillar (Public finance)
 Recapitalization: addl. 1.8 lakh cr. by 31/03/2019
Govt employees 7th PC award- 50% of increased salary
be given in form of bonds Capitalization Bonds;
optional for pensioners & lower staff

Debt (Creditors)
Equity (Owners/ Proprietors)
Bonds/Debentures/Loan
Must pay interest,
Addl. Capital 1.8 lakh cr.
Partnership, IPO-Shares,
principal irrespective of VCF, Angel Investor
profit / loss
Dividend if profit
First claim during
liquidation Last claim during
liquidation
70kcr Preferential shares
to govt. (Indradhanush)

1.10 Lakh cr.

PSB can issue FPO, but govt. shareholding must
remains
remain >50% (Except IDBI). Problem: due to
NPA, bank share prices down
 BASEL: Min. Capital to Risk weighed Assets Ratio 9%

RBI: 7% of RWA must be in Tier1

List not
Tier1 exhaustive Tier2

Common shares Debt (Bonds)

Preferential Hybrid
shares instruments
Capital
Capital T1+T2
9% CRAR
RWA:
BASEL-iii compliance on CRAR?

Until now, under

BASEL-I but..

SCB: 9%
BASEL III: AIFI Banks
2011 1/1/18 31/03/19

SFB & PB
15%
 BASEL-III seeks to ..

A. Develop national strategies for biological

diversity
UPSC Pre-2015

B. reduce the GHG emissions but places a heavier

burden on developed countries
C. transfer technology from developed Countries
to poor countries to replace
chlorofluorocarbons in refrigeration
D. improve banking sector's ability to deal with
financial and economic stress and improve risk
management Though UPSC asking such Pedestrian questions, I taught in
detail because next topics (NPA, farmer debt waiver, PARA
etc.), will require finer understanding of BASEL
1. Skip 2. Attempt 3. Mark n Review
 CRAR (9%) CCCB
recapitalization Counter cyclic
capital buffer?

BASEL-III Norms

+ RBIs PCA framework

against Weak Banks

Basel, Switzerland
 Countercyclical capital buffer norms (CCCB)

2017, April
2015, April No need as
of now.
2009-11 Norms
BASEL-
CCCB, CRAR
 So, better create a buffer
in boom, to use in bust

Boom: excess lending:

subprime crisis, TBS

Bust: shortage of
funds
 BASEL: Min. Capital to Risk weighed Assets Ratio 9%

But we dont need it for the moment, said

0%-2.5% of RWA CCCB Dr. Patel = 1) next year no boom 2) may
as common shares be banks not capable since even
struggling with CRAR compliance!
But RBI must notify 4
quarters ahead Tier1 Tier2

Common shares Debt (Bonds)

Preferential Hybrid
shares instruments
Capital
Capital T1+T2
9% CRAR
RWA:
 Under the BASEL-III norms, RBI can make
rules for:
UPSC Prelim Mock Question

A. Capital to risk weighted

assets ratio (CRAR)
B. Countercyclical Capital
Buffer (CCCB)
C. Both A and B
D. Neither A nor B
1. Skip 2. Attempt 3. Mark n Review
 CRAR (9%) CCCB
recapitalization Counter cyclic
capital buffer?

BASEL-III Norms

+ RBIs PCA framework

against Weak Banks

Basel, Switzerland
 Prompt Corrective Action framework (PCA)

2017, April
2002 Further tightened
RBI Gov Bimal Jalan
 Prompt Corrective Action framework (PCA)

Parameter #1 #2 #3
Restriction on Directors
NPA salaries, Dividend distribution
BASEL
Capital Restriction on
branch expansion
Profitability

Forced MERGER or shutting down

Leverage
of weak banks (discretionary)
 More details:
https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10921
 PCA
applicable
on whom?

All SCB
except
RRB
Monetary Policy: Tools Where should
I put PCA
Quantitative/Gen./Indirect framework?
Reserve Ratios (CRR, SLR)
OMO & MSS
Rates: Bank, MSF, LAF [Repo, RR]
+review of last one years policies

Qualitative: Selective, Direct

Selective Credit Control (SCC), PSL: Credit
Rationing, Subsidy [fiscal policy]
Consumer Credit control / EMI
Margin / LTV
Moral Suasion
Under Banking regulation Act 1949..
Direct Action
PCA framework
NEXT: Economic Survey Ch4: Festering TBS, NPA problem

Genesis: 3 R, SDR, S4A I&B Code

3 Stage 2016

PARA-Bad Bank Windfall Profit Moral Hazard

4R4D
 BES171: Banking, Finance & Insurance

Money Evolution Digital Payment Monetary Policy

BASEL, NPA, TBS, Evolution & Finance, Insurance

Bad Bank-PARA Classification of FI & Fin.
Last years survey

This years survey + budget17 also mentioned

NPA problem
Insolvency-
bankruptcy code
Indradhanush etc.
 Im Arvind Subramanian of English fiction

UPSC got into habit of asking Contemporary topics that

are ~1.5-2 years old (WEF Prelim-2016)

BES17 series
Im Chetan Bhagat of Economic surveys
Compress, consolidate
old material
same themes repeated in
3 surveys that Arvind has
written Update with new
developments
NPA: 1st survey: NPA
renegotiation commission,
3rd survey PARA- Bad Bank
FAST Revision
Tax, Labour, Subsidy reform, As much as I hate teaching old
things again, theyve to be
taught again.
Total NPA in SCB: Rs.9.6 lakh crores (31/12/2016)
Mug up this number

PVB;
3,58 PSB

Twin
PSB; Balance
Sheet
6,06 Problem
Large Corporates
 Among BRICS,
India has
highest NPA
after Russia
NPA Control
. PSB:
- 11th Jingping 12%
 TBS, NPA problem

Genesis: 3 "R", SDR, I&B Code

3 Stage S4A 2016

PARA-Bad Bank Windfall Profit Moral Hazard

Money to Open 4R4D
Bad bank
 Twin Balance sheet & NPA problem: 3 stages

Fall in Demand
During NPA,TBS
Boom GFC, Policy
Paralysis
Surge in Debt Servicing
Borrowing Problem
1. Mid-2000s: all growing @9-10% Stage:1
2. India Corporates thought its LPG-
impact, now well get twin-digit
growth like China for years! Surge in
borrowing
3. Hence heavy investment esp. in infra
projects, real estate, highway,
powerplants.bidding & investment
4. Overleverage, high debt to equity.
39% Investment to GDP ratio

33%
PRE-CRISIS 2015

!
1. Global financial crisis: international demand Stage:2
; local demand (IT, aviation), textile
competition from East Asia
2. To boost demand: Price wars in aviation, Fall in Demand
telecom: bleeding balance sheets. GFC, Scams,
3. Fiscal stimulus: excise duty break on Policy Paralysis
automobile; parallel Aviation fuel tax
4. Rupee weakened: from Rs.40/$ to Rs.70/$
[good for export, but bad for ECB & foreign
debt repayment.]
5. 2G, coal & CWG scam: Judicial activism,
policy paralysis. Mines-railways-Power
companies; PPP unable to break-even costs
due to tariff control.
6. double digit inflation: demand , RBI raises
policy rate-> Lending rates ; difficult to
get new loans.
? ?
1. 40% of corporate loans are IC1 Stage:3
companies [Interest coverage ratio
less than 1] Debt
2. IC1 = co. not generating enough servicing
revenue to even repay loan interest! problems
3. Ever greening of loans: new loans to
payoff interest on old loans.
4. Companies tried to selloff assets but
not getting proper price.

!
 12%
PSB

9.1%
All banks

H1
=first half

FY16
=2015-16
1. High NPA: economy collapse: East TBS
Asia (1998), US & UK (2008), but not
in India, even after TBS (2010).
Survey says
2. Weve still managed to get decent Indias case is
growth rate. No bank runs coz.. unique!!

3. Majority NPA concentrated @PSB, so

depositors & investors are not fleeing
due to sovereign backing.
4. Retail loans are not NPA.
5. Infra loans: excess capacity- fall in
production but not collapse.
 India-China Growth Model responsible for TBS?

Generous bank loans to corporates,

hoping GDP, employment = 3 stages
Phoenix scenario Containment
% Rapid growth-> cash scenario
flow corrected, NPA paid In absolute terms of
off GDP, NPA will shrink and
Will fade away from
public debate.
But we should not get complacent : because banks over-cautious
in lending: hurts growth and demographic dividend.
NPA+TBS=>Banks became very cautious in lending
Not hurt
Agri-loans: due to PSL
rules
Home loans: good
record in Non-NPA

Less Hurt
Corporates: can approach
capital market, issue new
bond, debentures

Most hurt
MSME: cant approach capital market.
MUDRA but problems of SPREAD*
{will learn in classification lecture}
Job-loss, dem dividend, exports
 Bank has to increase the SPREAD (profit margin) when

Asset Liability

Borrower Spread Depositor

10% 7%
2015: 1.6% People not
corporates not
depositing
repaying regularly 2016: 2.7% sufficiently

And still return on assets (RoA) < 1.5!!

Banks across
world have
1.5% ROA
Punjab National Bank:

...

1300 Rising NPA, falling

profitslower
dividends
Investors expect large
dividend, buying 480
smaller banks
100 72
Face Value 2010 2013 2016
207
Q4-2015 Q3-2016
-5370
BASEL-III Recapitalization of PSB by 2019, 31st March

Govt: 70kCr
(IndraDhanush)
Based on performance &
profitability..so PNB
PSB have 9+ ___ + Capital
Market __?
10.8 needed Lukewarm response
Excess preferential shares without
voting power: profit spent on dividends,
Capital: ___? FPO Shares future expansion hurt.
9% CRAR for
RWA: 120 LCr BASEL-III
Demand higher interest else lukewarm
response
Bonds Profitability further declines

similar reason when flipkart & other startup valuation ; future expansion will be hurt
 Twin Balance Sheet Problem and its consequences

Public Sector Banks Large Corporates

W h a t i s N PA ? W h a t h a v e w e d o n e t o f i x i t ?
 TBS, NPA problem

Genesis: 3 "R", SDR, I&B Code

3 Stage S4A 2016

PARA-Bad Bank Windfall Profit Moral Hazard

Money to Open 4R4D
Bad bank
 Classification of Banks assets
Gross NPA
MINUS Provisioning
=NET NPA

Std.
NPA Substd. Doubtful Loss
Asset
90 Days: NPA+12 Substandard+ When Bank,
Principal / months/> 12 months/> RBI, Auditor
Interest says
overdue Little /No
Agri: crop salvage value
season
Early detection of Stress?
Special Mention Meaning
Accounts SMA Classification
Components
RBIs repository: Banks + NBFC with loans >5 cr.
If principal / interest not paid
SMA-0: 1-30 days
SMA-1: 31-60 days
SMA-2: 61-90 days
Multiple lenders reporting
SMA for single company
Joint Lenders Forum (JLF)
Corrective action plan with
majority voting
Not working because of 4C
+ Media
<hence decentralized
Decision Making useless>
we need a single BAD
BANK, says Survey
 RBI 3R Framework for Revitalizing Distressed Assets

RECTIFICATION: RESTRUCTURING: RECOVERY

No change in Ease tenure, SARFAESI Act

02
EMI, Interest Interest(%),
Insolvency &
ownership Bankruptcy
change Code 16
1. [2015] AQR: Asset Quality Review of 3R framework
borrower, then .
2. Give additional Loan or find new
investors in project #1: Rectification
3. But, No change in tenure, interest(%)
of the old loan
1. [2014] 5/25 for Infra loans: tenure 3R framework
extended to 25 years, interest
reviewed each 5 years.
2. [2015] SDR: strategic debt #2: Restructuring
restructuring: Debt (Loan) -> Equity
(Shares) & sell them to highest
bidder-> = change in ownership.
3. [2016] S4A: Scheme for Sustainable
Structuring of Stressed Assets: only
unsustainable portion converted to
equity (Preferential Shares) & sold
off. No change in ownership.
 Strategic Debt restructuring

SDR: Need permission of existing shareholders; hence cases not solved much. This
decentralized approach not working, so we need a single BAD BANK (PARA), says Survey
Proof of idiotic Hindi translation (Survey v1 ch.4), many instances in
other chapters as well..
English: Debt (Loan) Equity (Shares)

English Page 103

Hindi: Equity (Shares) Debt (Loan)!!

Hindi Page 104

if official survey (Hindi), has such mistakes, imagine the level of Hindi COACHING
material. So always prefer to use English resources for success.
 Scheme for Sustainable
Structuring of Stressed Assets

S4A: No Need for permission of existing shareholders

 Because even after restructuring. Unable to revive-> NPA
Plus, fear of 4C [Court, CAG , CVC, CBI] + Media & PR

Hence we need a
single BAD BANK
(PARA) for faster
resolution of NPA

FY16=
ending on H1= first half
31/3/16 of financial
year
 RBI 3R Framework for Revitalizing Distressed Assets

RECTIFICATION: RESTRUCTURING: RECOVERY

No change in Ease tenure, SARFAESI Act

EMI, Interest Interest(%), Insolvency &
Bankruptcy
ownership Code 2016
 Narsimhan-I: Banking sector Reforms (1991)
Securitization and Reconstruction of
Financial Assets and Enforcement of
Security Interest Act (full form for
bank exams)
Insolvency
DEBT Recovery
tribunal 93
Sarfaesi02 Bankruptcy
Code16
Narsimhan-II
1998
 SARFAESI Act Recovery- only Banks and Housing finance-NBFC

Not agri loans

Only secured / mortgage loans
Attach assets without court order
Bank can: auction/sale/change BoD-
management

Get stay order from

DRT
Further appeal to DRAT
Banks cant hold attached assets for >7 Fee: 12k to 1.5L
But must deposit
years. But, can be sold off to ARC.
CRITICISM: ~5% cases solved in last 2 years
50% of loan dues
Hence we need BAD Bank (PARA) first
But too much backlog in DRTs & ARC unable to solve many cases
 TBS, NPA problem

Genesis: 3 "R", SDR, I&B Code

3 Stage S4A 2016

PARA-Bad Bank Windfall Profit 4R4D

 Insolvency and Bankruptcy Code, 2016

What if there was an arbitration

outside this box?
 Adjudicator will workout REPAYMENT Plan

Insolvency
professional (IP)

5/25, Change tenure, Find new

SDR/S4A interest investors
 If 75% creditors dont approve the REPAYMENT plan

Insolvency professional (IP)

Preferential > ordinary shareholder

 IBC-2016: Appeal structure?

For individual,
For companies Partnership firms
NCLT Goto DRT
GSM2: Insolvency & Bankruptcy board of India (1+9=10)

Law

MS Sahoo RBI: 1 nominated 3 Ex-Officio Finance

Chairman
Government corporate

5 nominated Min. 3 full time

Selection Committee u/CabSecy

All Term: 5 years, or 65 age
All Reappointmentyes
 GSM2: (Statutory body) functions of IBBI
Insolvency & Bankruptcy board of India
10 members; Union+RBI

Monitoring and guidelines

Info.utilities for I&B Fund

DBM & exchange

Insolvency professional (IP)

Have to register with IPA
 RBI 3R Framework for Revitalizing Distressed Assets

RECTIFICATION: RESTRUCTURING: RECOVERY

No change in Ease tenure, SARFAESI Act

02
EMI, Interest Interest(%),
Insolvency &
ownership Bankruptcy
change Code 16
 3R, SARFAESI, I&B studied but what about

Farm Debt
loans waiver

Loan write Willful

off Defaulters
 SARFAESI Act: Recovery not applicable on Agri loans!

Not agri loans

Only secured / mortgage loans
Attach assets without court order
Bank can: auction/sale/change
BoD-management

Get stay order from

DRT
Banks cant hold attached assets for >7 Further appeal to DRAT
Fee: 12k to 1.5L
years. But, can be sold off to ARC. But must deposit
CRITICISM: ~5% cases solved in last 2 years 50% loan amount
first
1. For tractor loans given before 2011, Agri loans
Sept. and Upto Rs.25 lakh pending
2. Classified as doubtful / Loss cases Haircut, One time
on SBI. = Total 6k cr. Worth tractor Settlement OTS
loans. [farmer has to pay
part of the dues]
3. One time settlement: Haircut of 40%
[means you pay only 60% of the dues
st
back.] Upto 31 march 2017
4. Branch manager has power, 'tick box
approach', non-discretionary.
5. Earlier similar done to SME [20%
haircut] & Educational loans.
Recovered 800 cr.
Because something is
better than nothing.
1. In loan waiver- Government gives G-sec Agri loan
with long maturity to settle farm dues:
just like RIDF- bank will get the amount
back, but slowly. Debt waiver
2. While for short term it improves balance = borrowers dont
sheet of Bank. have to repay the
3. But, will affect the culture of dues.
"REPAYMENT". SMA/NPA will rise,
Difficult to comply with BASEL-III
(because RWA will ).
4. 2014: SBI opposed loan waiver in AP &
Telangana.
5. 2017: UP & Punjab 10% of SBI's farm
loans. UP alone 13k crores. Hence
opposed.
no, this will create
bad habit.
Paan ki dukaan expressions: Urjit Patel
and Arundhati Bhattacharya ars anti-
farmer, first let off Mallya with so much
loans but wont do it for farmers.
And similarly, avoid paan ki dukan expressions on demonetization
Short term challenges and long term benefits

Black Money Corruption Counterfeiting

NPA: raise bank deposit,

lower interest rates, old Destroying oppositions
Terror Finance loans can be settled, or wealth before UP
new loans to revive Election
project

Paan ki dukaan expressions

 3R, SARFAESI, I&B studied but what about

Farm Debt
loans, waiver

Loan write Willful

off Defaulters
 Balance sheet

Loan write-off Assets Liabilities

+balance sheet cleanup @HQ
Write-off= Banks taxable
income =corporation tax
Doesnt erase the right to
recover. (Loan Waiver)
When recovered- $ added into
Anti: executives will become lax in
recovering. moral hazard
balance sheet & taxes are
paid.
Both RBI & IT Acts allow this.
Stressed assets = NPAs + Written
off + Restructured loans [SDR,
S4A..]
Stressed Assets

A) SA> NPA
R) SA=NPA+Written off+restructured

Meaning
Classification
Components

!
 NPA
Willful defaulter: ability to repay, but not
repaying.
SC asks list of defaulters 500Cr/+ SC & RBI on
publish their names; Defaulters
RBI: Names in sealed envelop
Cant disclose names Unless willful
defaulter (=has capacity to repay, but
not repaying).
State bank of India act 1955: section 44
: Confidentiality of clients. Have to
amend act.
 Rajan, Vinod Rai: NPA and morality are not same.
Name them and shame them
Every defaulter is not willful defaulter
unless willful defaulter
Loan can become bad loan out of bad luck,
regulatory clearance, partners' betrayal, time and
cost overruns
Only in Fraction of cases- criminality involved.
Entrepreneurial wealth is not sinful. But each should
have opportunity.

Economy will Chill if.

If entrepreneur is not willful defaulter, yet tarnishing

his image=> market wont support next project
Entrepreneurs shy away from risk
Banks hesitate in giving loans
=GDP, Job creation stagnated
 TBS, NPA problem: NEXT LECTURE.

Genesis: 3 "R", SDR, I&B Code

3 Stage S4A 2016

PARA-Bad Bank Windfall Profit Moral Hazard

Money to Open 4R4D
Bad bank
 TBS, NPA problem

Genesis: 3 R, SDR, S4A, I&B Code

3 Stage SARFAESI 2016

PARA-Bad Bank Windfall Profit 4R4D

itnaa Hindi kaun taiyaar kartaa hai? When even SDR def. is wrong!
Public Sector Asset Rehabilitation Agency (PARA) or Bad bank

SARFAESI, DRT ARC

chocked 5% solved in 2 AQR & SMA
years

JLF SDR
No consensus 2 case solved S4A

!4C I&B Code

Court, CBI, CVC, Baby-stage
CAG

This Alphabetical soup has failed to treat NPA

disease. .....
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 firms Total 4.20 L.cr NPA

4.20 / 9.6 L.cr =

40% of NPA
Post-BREXIT, Trumpism, fall of 4.2 lakh in bank
rupee, BoP crisis.. Sleeping + ECB, Bond etc.
volcano if not resolved. = total 7.5 lakh crore
Only 60 firms weve to fix. Solving NPA

Joint lenders forum: no

consensus among banks to
write off large amount due to Why PARA
1) !4C 2) public 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
PARA
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 shares..
Shareholders will be hurt [dilution]
Equity If SHUT down-> unemployment [political
Debt (NPA)
(Shares) willingness]
 Top 60 firms:
~4 lakh cr NPA
Even if PARA were to
absorb 25% loss
= 1 lakh cr required.
Who will give?

PARA

Since PARA is to absorb the

bad loans of PSBso
wholl finance this loss?
Demonetization= Windfall Profit for RBI? OR NOT??
British India: RBI Act 1934

Sir Osborne Smith

1st April 1935
1st January 1949:
RBI All private shares
transferred to GoI
under RBI transfer of
Rs. 100 (face Value) x 5 lakh = Rs. 5 cr capital
ownership act 48
2200
= . %
00000 100%
So, RBI has to pay dividend to
Government from its profit
Money Supply

Asset Liability

M0: reserve money

High powered money

Asset Liability
Reserve: 10 Currency
Deposit: with public
Loan: 90 100
M1: Currency with Public + Demand Deposits
 RBIs Balance sheet

Asset Liability
Gold Bankers deposit to RBI
Foreign Exchange Reserve

Interest->dividend
Govt's deposit to RBI
Govt Securities
Currency in circulation,
Loans to Banks (Repo, MSF.. [+bank, public]

M0 or Reserve Money or
High powered
Whatmoney
if some of
the currency
withdrawn?
 Exchanging Notes @RBI: Demonetization
old Rs 500 and Rs 1,000 notes are no longer RBI's
liability from 31/12/16. Specified Bank
But union can give grace period to deposit these Notes (Cessation
notes to RBI. (e.g. NRI) with proof. of Liabilities)
RBI to credit notes in KYC bank account. Ordinance, 2016
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 allowed by court / RBI.
Else punishment: Rs 10,000, OR 5x the value of
notes whichever higher.
2017: Budget session - Specified Bank Notes ( Cessation of Liabilities ) Bill, 2017 to replace this ordinance

Demonatization: impact, positive, negativelater on

RBIs Balance sheet: special bank notes (SBN)-500, 1000

Asset Liability
SBN notes
in circulation
100
SBN: totalcr.
100 cr.
IF 40% 40 cr. Black
doesnt money
return destroyed
 Basic accounting equation: technically incorrect ofcourse

= + +
Rs.110 cr Rs.5 cr Rs.5 cr Rs.100 cr
 Basic accounting equation: technically incorrect ofcourse

= + +
Rs.110 cr Rs.5 cr Rs.5 cr Rs.100 cr

Rs.110 cr Rs.5 cr Rs.5 cr Rs.60 cr

+Rs.40 cr
 Counter argument : its not windfall profit for RBI because

Exchanging old notes, printing

new notesKHARCHAA..say 1 cr.

= + +
Rs.110 cr Rs.5 cr Rs.5 nahi 4 cr Rs.100 cr

Rs.110 cr Rs.5 cr 4 +3cr=7 cr. Rs.97 cr

News one week after demonetization of 8th November 2016

SBN: total 15 lakh cr.

IF 40%
6 lakh
doesnt
cr.
return

1978s demonetization = 25%

banned currency did not return.
News after two months!!

SBN: total 15 lakh cr.

Rs.54,000
3.6%
cr black
didnt
money
return
destroyed

+ 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 RBIs balance sheet. There is no question of
special dividend. (Dec. 8, 2016)
Public Debt BASEL-III PARA to absorb
UBI
fiscal deficit recapitalization NPA
if not windfall profit, then use excess capital RBI already has..
1991 BoP Forex RBIs Capital Trumpism,
crisis Reserve as cushion strong dollar
Already giving 10k
crore for Indra-
The tiger dhanush!

 For
Mains
answer
writing
 For
Mains
answer
writing
 TBS, NPA problem

Genesis: 3 "R, SDR, S4A I&B Code

3 Stage 2016

PARA-Bad Bank Windfall Profit 4R4D

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

Managing
Chairman Operation
Director
Political
elements, Profit-
Board of Directors
Agenda >Dividend

PSB: Shareholders
 RBIs own PJ Nayak Committee (2014)

Managing
Chairman Operation
Director

Profit- RBI 2016, Jul.

Board of Directors
>Dividend
Investors may
shy away due to
PSB subsidiary co. holding company
Banking Investment Company structure.
(BIC) as holding co. Then BASEL-III
recapitalization
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 1/4/2016)
Article 148 (4): CAG not
eligible for further office
Chairman Vinod Rai (former CAG) under Union/State
2 years term

Government ????

1. Anil K Khandelwal (Ex-BoB)

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

1. Financial services secretary

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

Search 1. RBI governor

2. secretary, financial services
Committee 3. secretary, Department of Personnel and Training.
 GSM2: BBB functions

Heads of PSB (MD & CEO)

Search and
Non-Executive Chairman
select:
Whole time directors
Help create a holding company (BIC, PJ
Nayak)
Org. Reform
Help in Bank Consolidation/M&A: from
present 27 PSB=> 10
Financial
Raise capital and help recover from NPA
Reform
To improve governance at PSB
Accountability
Link between the government and banks
 Banking sector Reforms: Narsimhan-III ?
+SURVEY: 4R AND 4D

RBIs P.J.Nayak Gyan Sangam-I Indradhanush Gyan Sangam-II

Committee Pune-2015, Jan 2015-Aug, Gurgaon-2016
2014 BBB Dept. Financial Bank Consolidation
BIC, BBB services
Appointments- CMD bifur. BMB
FinMin
RBI, Bank Board Bureau (BBB) Asso.Banks
Regulators Capitalization (70kcr) IDBI
PSB
Narsimhan I & II Insurance, FI Empowerment

Framework of Accountability

Governance Reforms
 Twin Balance Sheet Syndrome how to fix?

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

Recognition
Resolution Disinter
Recapitalize Differentiate
Reform Diversify
Deregulate
 Im Arvind Subramanian of English fiction

UPSC got into habit of asking Contemporary topics that

are ~1.5-2 years old (WEF Prelim-2016)

BES17 series
Im Chetan Bhagat of Economic surveys
Compress, consolidate
old material
same themes repeated in
3 surveys that Arvind has
written Update with new
developments
NPA: 1st survey: NPA
renegotiation 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 graves"

SARFAESI-DRT empower
of bad loans via asset quality review
Independent renegotiation
(AQR) Commission (PARA?)

Resolution Differentiate among PSB

via ALPHABETICAL soup Profit Maker PSB: capitalize for
BASEL-III
5/25, SDR, S4A, JLF, SARFAESI... Loss Maker PSB: Merge, Privatization

Recapitalization Diversify
for BASEL-III norms More number, variety of Banks
SFB, PBnow Wholesale Bank [will
Government, Market, RBI should give learn in classification lecture]

REFORMs Deregulate
Governance & Administration of PSB Lower SLR, [yes 22%->20.5%]
Promote C-Bond so they borrow less
We saw in earlier slides from Banks. [Tri-Party Repo, etc.]
 But how exactly to WRITE in mains?

2015 (=2014s survey)

V1c5: Only page 88 (4d reforms)

2016 (=2015s survey)

V1c1 box 1.6

2017 (=2016s 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, S4A, I&B Code

3 Stage SARFAESI 2016

PARA-Bad Bank Windfall Profit 4R4D

 BES171: Banking, Finance & Insurance

Money Evolution Digital Payment Monetary Policy

BASEL, NPA, TBS, Evolution & Finance, Insurance

Bad Bank-PARA Classification of FI & Fin. Inclusion
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),12,13 V1c:5

Banking|Finance|insurance|inclusion

4.Sectors 5.Infra 6.HRD

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