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India’s Banking Zombies Pose A Problem

India’s state banks are beginning to resemble the walking dead. Of 21 government-controlled lenders, eleven face growth restrictions and the same amount will soon be without a boss. Some chief executives have been arrested, while others face corruption investigations. New Delhi may be letting these entities run deep into the ground as part of tacit plan to privatise by stealth. The real thing would be less embarrassing and more efficient.

State lenders account for about 70 percent of total bank assets, in a system choked by $150 billion of bad loans. There are a handful of large names, led by the $35 billion State Bank of India, that trade at book value and can still raise capital from the market. Beneath those are smaller banks with crippling bad loans and returns so ghastly that the Reserve Bank of India has imposed strict curbs. To make matters worse, many of the deeply troubled banks are also headless. Three lenders have been without chief executives since the end of December, including Dena Bank which has gross dud loans amounting to 22 percent of its total and is no longer allowed to offer customers new advances or hire staff.

Other institutions have lame duck bosses. Bank of Maharashtra Chief Executive Ravindra Marathe was arrested last week, accused of misusing his authority to make improper loans to a property developer. Last month, Allahabad Bank stripped Usha Ananthasubramanian of her responsibilities as chief after she was named in a probe at her previous employer, Punjab National Bank, which revealed a nearly $2 billion fraud in February. In total, eleven state banks will soon be without CEOs, author and consulting editor at Mint newspaper Tamal Bandyopadhyay reckons.

Part of the problem is the failure of New Delhi’s efforts to professionalise banks. In 2015, the government recruited P.S. Jayakumar, an ex-Citibank man, to run the $4.5 billion Bank of Baroda. The experiment turned out to be a one-off. His term is due to end this year, and local media tip him to return to the private sector to lead the $19 billion Axis Bank . In the current climate of heightened scrutiny – with even innocuous missteps potentially attracting political heat years later – state banks are unlikely to attract outside talent. That’s especially true with an unusual number of top jobs coming up for grabs in the much better-paid private space in the coming months and years.

One theory for the shambles is that the government is quietly trying to smother weaker banks by restricting their growth. New Delhi has no obvious use for entities that can’t lend and are unable to support economic growth. Politicians have made no secret of their desire for fewer, larger, lenders but the idea of merging weak banks with those doing only slightly better seems increasingly inadequate, as more entities run into trouble.

Letting weaker banks rot would be industry privatisation of a sort, allowing healthier private lenders like the $80 billion HDFC Bank grow faster by meeting demand for credit. New Delhi remains averse to the genuine article. More than two years ago, Finance Minister Arun Jaitley said the government would consider giving up control of IDBI Bank but failed to find a buyer. Local media say the government is now trying to offload shares to the state-run behemoth Life Insurance Corporation of India, essentially getting taxpayers to fund a bailout. But LIC can’t rescue all the banks.

Real privatisation would be controversial, but less messy. One reason India has struggled to find buyers for banks is the regulator’s reluctance to allow tycoons to own large chunks of lenders. Asia’s richest banker, Uday Kotak, for example, must reduce his near-30 percent stake in the $37 billion Kotak Mahindra Bank to 15 percent by 2020. Waiving that rule might help to flush out new potential owners. India could then offload weaker banks to large storied corporate names with experience in finance, inviting the likes of Bajaj, Birla, Mahindra and Tata to turn them around.

Prime Minister Narendra Modi’s government has shown it does have an appetite for state sales through its efforts to sell IDBI and Air India, the national carrier. Though both processes ultimately failed, it suggests the broader idea of flogging assets could be revisited if his Bharatiya Janata Party can win another majority in the general election due to be held by May 2019. Until then, banking zombies will roam.

One-Day Rule: Defaults Jump, Hit Rs 1.2 Lakh Crore

More than 4,000 borrowers with outstanding loans of Rs 1.2 lakh crore have defaulted under the Reserve Bank of India’s (RBI) one-day default norms as on April 30. An RBI circular of February 12 required banks to classify borrowers as defaulters if their repayments are late even by a day. These relate to exposures of Rs 5 crore or more and would not be bad loans; they would be classified as Special Mention Accounts (SMAs). However, if payments are not regularised within 90 days, they would turn bad and be added the existing `10.2 lakh crore pool of non-performing assets.

Responding to a right to information query, the RBI noted 4,210 borrowers were classified as defaulters under the one-day default norm. The central bank added that 2,810 borrowers had been late on repayments on April 1, 2018, and they owed banks Rs 1.18 lakh crore.

Meanwhile, data released by the RBI in its financial stability report (FSR) showed a 277% jump in SMA-0 loans — where repayments have been delayed between 1 and 30 days — between March 2017 and March 2018.

The power sector accounted for at least Rs 70,000 crore of system-wide stressed loans. According to a report on stressed /non-performing assets in the electricity sector tabled in Parliament by the Standing Committee on Energy on March 7, 2018, 34 power projects with a capacity of 40,130 MW are stressed.

Last month, a senior State Bank of India (SBI) executive had observed lower-rated borrowers account for a large chunk of one-day defaults at the bank. According to him several small companies and lower-rated borrowers have missed interest payments in April. “The bigger and better-rated companies have stronger cash flows than the smaller firms and we have not seen major deadline misses from them,” he said, adding that the new circular has made borrowers more disciplined.

In February, the RBI had asked banks, either singly or jointly, to initiate a resolution plan as soon as a corporate default is spotted. In other words, banks have several options to revive the defaulting companies but these must be exercised within 180 days.

Going by the new framework for resolution of stressed accounts, the fate of a defaulting entity will be sealed within 465 days.

If lenders are not able to work out a solution to revive a company within 180 days, the account must be referred to the National Company Law Tribunal and the case would be decided under the Insolvency and Bankruptcy Code.


HC Admits PLEA Challenging GST On Sale Of Land

Real estate developers have moved the Bombay High Court challenging a goods and services tax (GST) notification that seeks to bring sale of land under the GST ambit. The high court has issued notices to the central government, the Maharashtra government and the GST Council in this matter.

In January, the GST Council issued a notification saying the GST would be payable by both the land owner and developer entering into a joint development agreement (JDA). JDAs are a common feature in the real estate sector. These pacts detail the transfer of land from owners to developer in lieu of units or flats in the constructed property.

Experts say it was possible to avail of tax credit, but it would be difficult to set off such credit since tax is paid at the time of conveyance deed – as mandated in the notification – which is towards the end of the project. This has led to concerns that tax costs on construction projects will increase.

The petition was filed by Nashik-based developer Shweta Infrastructure & Housing challenging levy of the GST on landowners in such transactions. The petition contended that the GST notification went beyond the scope of the GST Act, under which no GST is payable on sale of land or building.

“Due to levy of GST on procurement of land, it became difficult for us to finalise the consideration with land owners. Given the scenario, we had to approach the high court,” Sujoy Gupta, CMD of Shweta Infrastructure & Housing, said. The petition also pointed out that the essence of a JDA was transfer of land title by the land owner in lieu of constructed flats and the practice was mandated by real estate laws.

“The service tax regime recognised transfer of land and construction as two distinct activities under a JDA. However, this GST notification seeks to levy tax on land owners. The GST notification is ultra vires the CGST Act, which excludes sale of land and building from its ambit under Schedule III,” Rashmi Deshpande, associate partner at Khaitan & Co, said.

India No Longer Poor People’s Country, 44 Indians Pulled Out Of Poverty Every Minute, Says Study

In a good news, India no longer is home to largest number of poor people in the world as this unwanted position has been taken over by Nigeria. In early 2018, the African nation overtook India as the land of world’s largest number of poor. “At the end of May 2018, our trajectories suggest that Nigeria had about 87 million people in extreme poverty, compared with India’s 73 million. What is more, extreme poverty in Nigeria is growing by six people every minute, while poverty in India continues to fall,” The study published in the ‘Future Development’ blog of Brookings said.

The study also said that India could further drop to 3 in rankings later this year, with the Democratic Republic of the Congo taking the number 2 spot. The study defines extreme poverty as living on less than $1.9 a day.

However, the study also said that not enough is being done in the poor countries of Africa to reduce poverty. “As we fall further behind the target pace, the task of ending extreme poverty by 2030 is becoming inexorably harder because we are running out of time. We should celebrate our achievements, but increasingly sound the alarm that not enough is being done, especially in Africa,” study said.

India is among emerging economies in the South Asia where strong per capita growth rates are expected to help bring down poverty, World Bank said in its June edition of Global Economic Prospects: The Turning of the Tide? As per latest available data, one in every five Indians was poor in 2011 despite making remarkable progress in reducing absolute poverty since the 2000s.

The per capita net national income of India in the financial year 2016-17 stood at Rs 1,03,870, witnessing a growth of over 10.3%. India’s initial poverty reduction was driven by robust economic growth, increase in rural wages and an increase in non-farm activity especially construction sector.

The World Bank projected that countries with the largest number of poor are expected to grow at a “somewhat faster clip in 2018-20. Renewed progress on poverty reduction will require a “sustained acceleration” in per capita income growth, the World Bank noted. “Structural reforms that increase productivity and support export diversification would be critical to these efforts,” it said.

With Persistent Decline In Poverty, India Is No Longer Nation Having Largest Number Of Poor People In The World

With a persistent decline in poverty, India is no longer a nation having the largest number of poor people in the world, says a study published by US-based think tank Brookings. The study, titled ‘The start of a new poverty narrative’ and published in the Brookings’ blog, is authored by Homi Kharas, Kristofer Hamel and Martin Hofer.

According to the study, Nigeria has already overtaken India as the country with the largest number of extreme poor in early 2018, and the Democratic Republic of the Congo could soon take over the number 2 spot. “At the end of May 2018, our trajectories suggest that Nigeria had about 87 million people in extreme poverty, compared with India’s 73 million.

“What is more, extreme poverty in Nigeria is growing by six people every minute, while poverty in India continues to fall,” said the study. It further pointed out that by the end of 2018 in Africa as a whole, there will probably be about 3.2 million more people living in extreme poverty than at present.

Noting that about 725 million people were in extreme poverty at the beginning of 2016, the report said, “we needed to reduce poverty by 1.5 people every second to achieve the goal and yet we have been moving at a pace of only 1.1 people per second”. “As we fall further behind the target pace, the task of ending extreme poverty by 2030 is becoming inexorably harder because we are running out of time,” it added.

The UN-sponsored Sustainable Development Goals aim to eliminate global poverty by 2030. Commenting on the study, Economic Advisory Council to the Prime Minister (EAC-PM) member Shamika Ravi said that India has achieved a rapid decline in extreme poverty through high development spending and high growth.

The study has cited data from World Poverty Clock and new projections on country economic growth from the International Monetary Funds’ World Economic Outlook. These form the basic building blocks for poverty trajectories computed for 188 countries and territories, developed and developing, across the world.

One Year Of GST: Outgoing CEA Arvind Subramanian Says 28% Rate Must Go; This Is What Can Be Done Instead

Doing away with the highest 28 percent tax slab is what the government must aim to further simplify the GST framework. In addition, ensuring a uniform rate of cess is also necessary to make the indirect tax regime more comprehensible, outgoing Chief Economic Advisor Subramanian said . “I think the 28 per cent rate has to go. The cesses may have to remain, but there should be just one rate on cesses… Today, we have GST rates of zero, 3 per cent (for gold), 5 percent, 12 per cent, 18 per cent and 28 per cent. We need to rationalise but I think at the first instance the 28 percent should go,” Advisor Subramanian said.

The cesses may stay but there is no need to have multiple GST rates, he added. “I am saying that in an ideal system the 28 per cent rate has to go. The cesses may have to be there because we are going to have higher rates for some products but there shouldn’t be multiple rates even here. In my report, we had called for one 18 per cent rate and then 40 per cent rate. Cesses are a different way of implementing the 40 per cent rate,” he said when asked about if cesses should be removed.

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