Will bank recapitalisation fix NPAs? Yes No It is complciated. This will give the banking system time to enhance its credit portfolio

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1 AIBEA s Banking News 7, 8, 9, 10 November, 2017 NEWS BULLETIN FROM ALL INDIA BANK EMPLOYEES ASSOCIATION Will bank recapitalisation fix NPAs? Yes No It is complciated YES ASHVIN PAREKH NOVEMBER 09, 2017 THE HINDU This will give the banking system time to enhance its credit portfolio The move on the part of the government to inject capital of Rs 2.11 lakh crore into public sector banks (PSBs) is commendable and a decisive step. In making this move, there was an implied acceptance that the recovery process set up through the Insolvency and Bankruptcy Code (IBC) reform had not been working at the desired pace. When the Reserve Bank of India asked PSBs to work on the recovery process for 12 large exposures which account for 50% of the total non-performing assets (NPAs) worth Rs 8 lakh crore in the banking system, it was expected that by December 2017, the banks would recover about Rs. 2 lakh crore. But it s already November and we know that recovery is eluding us and the process may take longer. Till then the banking system will starve for capital. Capital needs In addition, the first few resolutions that have taken place so far have suggested that the size of the haircuts the banking system is expected to take will perhaps be much more than the original estimate of about 50% of the exposure amount. This means that there will be additional loss of capital. We are at a stage where the recovery will become more expensive in terms of capital in the banking system. If you take a haircut of 90% then you have to write off additional 40% of the exposure amount, and that would hurt your capital requirement. Therefore, there must have been a view that till the recovery process gathers momentum, more capital would be required. There is also a time dimension associated with this equation. 1

2 The economic value, and therefore the value recovered from borrowers, may perhaps grow after 8-10 quarters. At present, the value at which the resolution happens is sub-optimal. The government s decision to put more capital into the banking system could pay off if the banking system were to hold these assets for this period. Focus on clean-up It is significant that capital is being infused into banks. This could give the banking system a good breathing time to enhance its credit portfolio and restore value out of the NPA accounts. We may have to watch the situation unfolding over the next three years. During this time, the regulator, banks and the government will have to focus on the quality of public sector banking assets, the NPAs and the recovery. There has been a broad-brush approach to the quality assessment. The system will have to conduct more analysis, more evaluation sector-wise in terms of its potential for value restoration and enhancement. They will have to understand which sector is in a position to restore more economic value in six to eight quarters. Some sectors may perhaps take longer. The last thing the economy and the banking system can afford is a further drop in economic value. What may be perceived as a Rs. 8 lakh crore problem today might grow into a much larger amount. The quality of governance will play a significant role in this regard. There has not been any worth-while effort on this unfortunately. There will have to be more reforms to put a higher order of governance in the banking sector. Ensuring performing boards at public-sector banks do become more critical. The last point which is equally important is that as long as the government wants to hold on to 51% equity in PSBs we cannot have periodic injection by way of recap bonds. To fund the economy, the government will have to make a yearly budgetary allocation of the amount of capital required by PSBs. Programmes such as Indradhanush and small budgetary allocations will not work. The PSBs need budgetary allocation of at least Rs 75,000-80,000 crore each year. Ashvin Parekh is Managing Partner of Ashvin Parekh Advisory Services LLP 2

3 NO C.H. VENKATACHALAM When the government provides capital, it is out of savings that people have kept in banks C.H. Venkatachalam The announcement of a stimulus into PSBs has been apparently understood as a bounty for the banks. A euphoria is being projected that the government has been too generous to the banks and is serious about helping them to resolve the bad loans crisis. The quantum of capitalisation announced leads one to believe so. In reality, this will not enable banks to recover the alarmingly huge bad loans which is the main issue confronting them. Stressed assets The total stressed assets, bad loans, and restructured loans in banks are in the region of Rs 15 lakh crore. From AIBEA, we have been demanding the publication of names of defaulters and to declare wilful default as a criminal offence. Successive finance ministers have avoided both these demands. Instead of taking tough action on defaulters, the NDA government came out with a novel scheme to foist insolvency and bankruptcy proceedings on defaulters. This measure is not going to result in the recovery of bad loans. That is why the RBI has asked PSBs to be prepared for a deep haircut, up to 50% of the dues. Recently, on one account, a bank managed to recover just 6% of the total loan amount of Rs 950 crore. On 12 accounts, the dues are Rs 2.5 lakh crore. One can only imagine the additional provisions banks will have to make this year. There are more skeletons in the cupboard. 3

4 Rewarding the defaulter But why this sudden rush to punish corporate culprits? The fact is that this is not a punishment, rather it is a reward. The defaulter promoter can himself bid before the IBC proceedings. Obviously, he is likely to be the highest bidder. So, he will retain his company but will have to shell out less than what he borrowed. This is legal innovation to pay less. But in the bargain, banks will lose huge amounts. One can safely predict that all banks will be running into losses by the end of the current financial year. Last year, while the gross operating profits were Rs 1,58,982 crore, after provisions for bad loans (Rs 1,70,370 crore), the net loss was Rs 11,388 crore. This year, it is bound to be worse. The IBC is only a ploy to extend favours to big corporates to escape from their liability at the cost of the public exchequer.now let us see whether the recap announced by the Finance Minister will help PSBs, labelled as inefficient and incompetent. If banks would have recovered these loans, their interest revenue would have been more, income levels higher, profits high and they would have generated capital internally out of the profit. That door is closed because banks cannot recover loans through the IBC route. Thus, the banks capital gets eroded and the capital adequacy ratio (CAR) becomes adverse. Lending requirements If banks do not have adequate capital, they cannot lend. This would dampen the economy, which is already in the doldrums. If there is an economic crisis, the next elections will be a question mark for the NDA. Hence to bolster the economy, banks have to be advised to give more loans. To give more loans, more capital is essential. That is why the announcement on recapitalisation. In the last three years, banks have written off Rs 1,88,287 crore. We have to bear in mind that when banks lose money or when the government recapitalise PSBs, it is all people s money and out of public savings kept in trust in the banks. People s money should be for people s welfare and not to fund corporate default or to recapitalise the banks to adjust these bad loans. C.H. Venkatachalam is general secretary of the All India Bank Employees Association (AIBEA) 4

5 IT'S COMPLICATED D.K. MITTAL A welcome step, but it is a very temporary solution and only treats symptoms D.K. Mittal The decision by the government to further capitalise public sector banks is a welcome move. But does it really solve the problem of the lack of capital adequacy of public sector banks? Let us examine. Too many infusions It is the fourth time since the mid-eighties that PSBs are being infused with substantial capital due to high NPAs (15-20 %). The Net Present Value (NPV) of capital infused by the government in PSBs would be well over 10 lakh crore. If capital infusion was the solution, why is it happening again and again? As it turns out, it is a very temporary solution and only treats symptoms and not what causes these symptoms. The recurrence is because of two sets of issues: governance and regulatory framework. For improving governance of PSBs, questions like the tenure of senior management have to be addressed. This was the recommendation of the Narasimhan Committee of 1991 and Public Sector Bank chiefs and their managing/executive directors must have a fixed tenure of at least five years. The second issue is the salary structure of senior management. The amount of remuneration they get and the kind of political and economic influence their decisions have are nowhere comparable to what happens elsewhere. To offer 5

6 incentives by way of very good annual bonus based on performance should enable them to take the right decisions. Adopt best practices The third issue would be of professionalisation through lateral entry at the level of general managers and not at the ED/MD level. Fourth, the banking boards need to be manned by professional directors rather than political nominees. Last, accountability needs to be fixed by removing senior management for non-performance. There are a few gaps in the regulatory framework as well. One of them is joint lending. Borrowers borrow from one bank and go to another and borrow money. Banks do not talk to each other. Also, there are issues in getting loans approved for large projects. Borrowers have to run to 20 banks to get a sanction, which is uneconomical, costly and leads to corrupt practices as bank officials seek favours to agree to a proposal. We need to adopt some best practices by creating a framework for funding of projects (over a size) to be undertaken by one bank which downsells it within a period of, say, 90 days, but could breach exposure limits in that period. Another issue is the appointment of statutory auditors. In the best private sector companies, the auditors are shortlisted by promoters and then assessed by the Audit Committee and Board. Also, in case of wrong reporting, these have to be punished by at least prohibiting them to audit any financial entity regulated by the RBI, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority. And last, action must be taken against promoters who have siphoned off funds and transferred them to their personal assets. These assets must be forfeited and the RBI needs to move ahead on that. Quick action plan To fix NPAs, we need, in addition, resolution of the above issues, a quick action plan. First, NPA cases caused by the cyclical nature 6

7 of the sector need to be supported if there are no issues with fund utilisation. For other cases, the right approach would be to do what we did for UTI 64 in Also, we need to deal with NPAs sector by sector like power, roads, steel and so forth. We need to pick NPAs from PSBs of each sector, park them in one place by creating an entity like a SUUTI (specified undertaking of the Unit Trust of India), fund the banks and invite international and national investors to dispose of the assets. In sum, this infusion is a welcome step but there are issues that should have been dealt with first. The good part is that after putting this capital, the government s equity would be close to 70-80% in each PSB. The government could make a huge profit by selling this equity after improving the management of PSBs. D.K. Mittal is a former secretary in the Department of Financial Services WILL A ROBOT TAKE YOUR JOB? A study by Pew Research found that: - Three-quarters of Americans say it is 'somewhat realistic' that robots will eventually perform most jobs - More than half said that fast food workers, insurance claims processors and legal clerks will be mostly replaced by robots - Nearly two-thirds think that most retailers will be fully automated in 20 years - Six per cent of the respondents said that they themselves have either lost a job or seen their hours or incomes cut because of automation - Nearly half of those respondents say that technology has made it harder for them to advance in their careers - Younger workers were the most likely to say that automation had cost them a job or income - Most Americans said they would not ride in a driverless car 7

8 Robots could replace 48,000 Deutsche Bank employees who are too 'errorprone and inefficient', says CEO In 2015, Deutsche Bank announced that it was making 9,000 job cuts John Cryan said many of these would come through using technology He added: 'There's a lot of machine learning and mechanisation that we can do' By Shivali November 2017 It's one of the biggest banks in the world, but it seems that tens of thousands of jobs at Deutsche Bank are at risk of being taken by robots. John Cryan, CEO of Deutsche Bank says that current workers are too 'error-prone' and 'inefficient.' Over the next three years, the firm plans to implement more 'machine learning and mechanisation' in the hopes of keeping up with its rivals. Mr Cryan spoke to the Financial Times about his plans to bring more technology into the company. He said: 'We employ 97,000 people. Most big peers have more like half that number.' In 2015, Deutsche Bank announced that it was making 9,000 job cuts over the next five years, and so far the firm has made about 4,000 of these. Mr Cryan said that the additional cuts would come through using technology to make processes more efficient. He said: 'There we've got the most to gain. 'We're too manual, which can make you error-prone and it makes you inefficient. 'There's a lot of machine learning and mechanisation that we can do.' Mr Cryan added that the proportion of people in front office versus back office was 'out of kilter.' He said: 'Every bank at the moment has a huge and burgeoning department of people who are doing the same stuff. 8

9 'It's not a source of competitive advantage and you're exposed to making your own mistakes.' He did not, however, mention any specific jobs that were at risk of being taken over by automation. Mr Cryan's news comes just a month after a report revealed that 70 per cent of Americans fear that their role will soon be taken by a robot. The survey, by the Pew Research Center, found widespread anxiety about the general impact of technological change. Three-quarters of Americans say it is at least 'somewhat realistic' that robots and computers will eventually perform most of the jobs currently done by people. Roughly the same proportion worry that such an outcome will have negative consequences, such as worsening inequality. JOBS THAT PAY LESS THAN $20 ARE AT RISK OF ROBOT TAKEOVER There is an 83 per cent chance that artificial intelligence will eventually takeover positions that pay low-wages, says White House's Council of Economic Advisors (CEA). A recent report suggests that those who are paid less than $20 an hour will be unemployed and see their jobs filled by robots over the next few years. But for workers who earn more than $20 an hour there is only a 31 per cent chance and those paid double have just a 4 per cent risk. To reach these numbers the CEA's 2016 economic report referred to a 2013 study about the 'automation of jobs performed by Oxford researchers that assigned a risk of automation to 702 different occupations'. Those jobs were then matched to a wage that determines the worker's risk of having their jobs taken over by a robot. 'The median probability of automation was then calculated for three ranges of hourly wage: less than 20 dollars; 20 to 40 dollars; and more than 40 dollars,' reads the report. 9

10 The risk of having your job taken over by a robot, Council of Economic Advisers Chairman Jason Furman told reporters that it 'varies enormously based on what your salary is.' Furman also noted that the threat of robots moving in on low-wage jobs is, 'another example of why those investments in education to make sure that people have skills that complements automation are so important,' referring to programs advocated by President Obama. 'The public expects a number of different jobs and occupations to be replaced by technology in the coming decades, but few think their own job is heading in that direction,' Aaron Smith, associate director at the Pew Research Center, said. More than half of respondents expect that fast food workers, insurance claims processors and legal clerks will be mostly replaced by robots and computers during their lifetimes. Nearly two-thirds think that most retailers will be fully automated in 20 years, with little or no human interaction between customers and employers. AIBEA to hold National Banking Conclave from Nov 19 Hyderabad, Nov 7 (UNI) All India Bank Employees' Association (AIBEA) will hold a two-day first National Banking Conclave ''Bankon Ki Unnatti - Desh Ki Unnatti'' at Mumbai from November 19. AIBEA General Secretary C H Venkatachalam told UNI on Tuesday that at a time when the banks are facing multiple challenges, the conclave will discuss various relevant issues with a view to understand the challenges in proper perspective, answer criticisms and project alternatives for the progress of the banking sector in a positive and healthy direction to enable Banks to play their desired role and ensure a vibrant economy and to build a glorious India. 10

11 He said leading experts and economists will be sharing their valuable views on contemporary issues of concern. Mr Venkatachalam said Central Bank of India Chairman & Managing Director Rajeev Rishi will be the Chief Guest for the Conclave. In the conclave on the first day, there will be a session on Role of PSBs in National Economic Development and Eminent Economist and Former Deputy Chairman, Planning Board, Government of Kerala Dr Prabhat Patnaik will speak on it. Supreme Court Senior Advocate Prashant Bhushan will speak on the Mounting problem of NPA-who is the culprit? and former CMD, Andhra Bank and Catholic Syrian Bank Managing Director CVR Rajenderan will speak on Commercial Banking Vs Social Banking. Mr Venkatachalam said there will be a sessions on Save Banks-Save Economy-Save Nation-Save people, Do we need Strong Banks or big banks? and Eminent Journalist and Founding Editor, People's Archive of Rural India P Sainath will speak in a session on People's money for People's Welfare- Not for Corporate Loot. The AIBEA General Secretary said on the second and final day of the conclave, sessions are organized on who should own the banks?, Agriculture and role of Public Sector Banks, Main streaming India's poor in Banking, Customers-King or Victim?, to be addressed by Padmasri Ms Sucheta Dalal, Managing Editor, Money Life, Mumbai, Are Private Banks more efficient, Agrarian Crisis- how Banks can help. Mr Venkatachalam touching on AIBEA's Conference themes said in the 24th conference held in Mumbai in January 2001 it was on 'Defeat privatisation-defend Public Sector Banks', in 25 th conference held in November 2004 at Hyderabad on 'People's money for people's welfare', in 26 th conference held at Delhi in November 2008 it was on 'Banking for empowerment of people-not for embezzlement by the corporates', in 27th Conference held in Kochi in February 2013 'on make banking a fundamental right' and in 28th Conference held in Chennai in January 2017 'on Declare willful default at criminal offence'. 11

12 AIBEA THIS DAY 7 NOVEMBER th Conference of All India Grameena Bank Employees Association, Sangrur. Com. S D Dhopeshwarkar, D N Trivedi elected President & General secretary State capitals Dharna against Bank mergers, Pension demands ect AIBEA THIS DAY 8 NOVEMBER 1973 Second Bipartite Agreement: other issues settled. AIBEA THIS DAY 9 NOVEMBER 1974 Silver Jubilee of AKBEF: Com. T K V Nair elected as General Secretary Syndicate Bank Union observes strike at Calcutta Branches against anti labour policies of the Management Global Trade Union Day of action observed AIBEA THIS DAY 10 NOVEMBER 1997 MoU on residuary issues of 6 th Bipartite Signed. ALL INDIA BANK EMPLOYEES' ASSOCIATION Central Office: PRABHAT NIVAS Singapore Plaza, 164, Linghi Chetty Street, Chennai Phone: Fax: , e mail ~ chv.aibea@gmail.com Web: 12