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From the Editor’s desk Welcome aboard reader! We wish to take a second to say hello and welcome you to our community of Finance and Business savvy readers. The banking sector has seen a major turmoil in terms of its asset and debt financing. There is the issue of NPAs to deal with, Govermnment and RBI tussle, the impending impact of trade wars, a new budget and more. At this transformational time we are happy to present this edition of InFINeeti which touches upon many topics which have become issues of late from the world of Bonds, to RBI autonomy, to Venezuela’s growing inflation.
HAPPY READING!
Special thanks to the following for their photographs: Photo by Dmitry Moraine on Unsplash Photo by Ameen Fahmy on Unsplash Photo by Chris Li on Unsplash Photo by Kunj Parekh on Unsplash Photo by Sharon McCutcheon on Unsplash Photo by Ehud Neuhaus on Unsplash Photo by Shea Rouda on Unsplash Photo by Andrew Neel on Unsplash Photo by Jake Givens on Unsplash Photo by Adriana Velásquez on Unsplash
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FOREWORD
Dear Readers, Greetings from InFINeeti….. I am happy to present before you the new edition of InFINeeti launched along with our Leadership Conclave. This edition is placed before you at a crucial juncture. The banking sector has come under great scrutiny specially after severe auditing revealed the NPAs that the banks have to deal with. Autonomy of the RBI is under question and for the first time in history has the question of amending acts to curb its decisions by a government been raised. Economies are looking to AI for their economic and financial decisions, and we see stark changes in economic status of many a country in the last 10 years... What is the impact of such a tussle? What is India’s position on AI in its policy making? How is the US-Mexico wall justified? Is there a good side to Government control over banks and RBI? What is the state of Venezuela now and where is it headed?
Dr. K Rangarajan Center head IIFT Kolkata
Sorry, I am raising more questions…. Never mind. This InFINeeti edition in your hands, is trying to analyse some of these questions and provide interesting insights...
Prof. K. Rangarajan is an Accredited Management Teacher (AMT conferred by AIMA) and is a member of several professional bodies including AIMM (Australia). He is also amongst the Board Of Directors of The State Trading Corporation of India Limited (STC). His expertise includes Business Strategy and Strategic Planning.
I hope you enjoy reading this year’s edition... Wishing all students a glorious year ahead!
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SUMMARY 6
RBI V/S GoI
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From Economic Ascension to Hyper-Inflation Venezuela’s #10 Year Challenge
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Sovereign Wealth Fund
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Artificial Intelligence in the Indian public sector
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$5 billion wall - Is Mexico worth it? If not, where ?
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R.B.I. vs The Goverment : A second take
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The Whooping problem of NPAs in Indian Banking
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Would there be a recession in 2020? Probably...
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IL&FS fiasco explained
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Crisis in the Banking sector
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RBI Under the lens of Facts and the Law
InFINeeti Magazine Indian Institute of Foreign Trade
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Did You Know? Vivaan’18 IIFT’s Business Summit had more than 3 lakhs in cash awards?! Next time don’t miss out, nor let your juniors do!! INFINEETI
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FEATURED
RBI V/S GoI INDIAN FINANCES AND ECONOMICS
Background: RBI Governor Urjit Patel resigned!! The news broke out one afternoon and became viral. Veterans in the industry prognosticated it weeks before it happened as the two most important policy makers of the country, Central bank and the Government of India were at constant loggerheads from quite some time. This acrimonious relationship between them went on record in a speech delivered at A.D. Shroff Memorial Lecture by RBI Deputy Governor Viral Acharya wherein he was vaguely castigating the central government for their indulgence in the decision making of the central bank which is hurting the autonomy of RBI. It was after this speech that this tussle exacerbated and ministers, secretary of economic affairs and independent directors of RBI were seen taking a jibe at each other. Rumours said that government will invoke Section 7 of the RBI Act, 1934 which empowers the government to issue directions to the RBI, which the central bank is bound to follow. This was something unprecedented considering the fact that this con-
troversial section has never been contemplated hitherto. There were instances in the past when the central bank’s head was unhappy with the Finance Minister but never did any speculation of government invoking Section 7 emerge. WHY THIS HAPPENED? What led to the RBI’s 24th governor resignation? There were a whole lot of issues between the two policy setters summarized under the following points, 1. First was the transfer of surplus reserves from RBI’s kitty to the government. The economic capital framework (ECF) that governs the RBI surplus transfer has been a sore point between the government and the RBI in recent months. RBI has total reserves of 9.6 Lac Crores which largely falls under the Currency and Gold Revaluation Account (6.92 Lac Crores) and remaining Contingency Funds (2.32 Lac Crores). Every year, RBI pay dividends to the government after
The global standards suggests that central banks around the world holds 13-14% of their assets as reserves while RBI holds 31-32%. After the meeting on 19th November, both parties agreed to form an Economic Capital Framework Committee led by ex-RBI Governor
Prateek Sharma, TAPMI
Dixit Sambyal TAPMI
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meeting all its expenses and whatever is left after meeting expenses and paying dividends is RBI’s earning. The contentious issue here was how much the RBI should pay to the government as the dividend? In the fiscal year 2018, RBI paid Rs.50,000 Crore as dividend to the government which is 63% more than the previous year but still the government wanted 3.6 Lac Crores from RBI to spend on welfare schemes and to recapitalize public sector banks to pull them out of PCA norms and resume fresh lending. Many said that government wanted more dividend to finance their fiscal deficit considering it’s an election year and they can finance the populist measures and freebies to attract votes in the general elections.
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Bimal Jalan to investigate this ma- was decided that the matter will be tic) investors in the form of capital tter. examined by the Board for Finan- outflows which are detrimental for the capital markets. Thankfully, the Ex-RBI governor Raghuram Ra- cial Supervision of RBI. jan once said, if excess reserves of 4. Next issue was regarding board news of Vijay Mallya’s extradition RBI are transferred to the centre, appointment. It started when the came on the same day which helit would lead to a rating downgra- government of the day cut short the ped in avoiding the stock indices to de of India’s sovereign credit rating tenure of the RBI’s executive direc- plunge further. which eventually will lead to increased cost of borrowing. India’s rating is Baa2 by Moody’s which barely cuts an investment grade economy. Besides, these reserves are earmarked for contingencies and a huge reduction in this amount could increase the risk of economy to downside risk of increased market fluctuations. 2. The second issue was lowering minimum capital requirements for the commercial banks. Government wanted RBI to keep capital adequacy ratio (capital to risk weighted assets ratio, CRAR) to be line with the internationally accepted Basel-3 norms set by Bank for International Settlements which is 8%. However, as per RBI guidelines, Indian scheduled commercial banks are required to maintain a CAR of 9% while public sector banks to maintain a CAR of 12%. The implication of this is, banks are constrained to maintain these requirements and thus the credit flow squeezes.
tor Nachiket Mor after complaints by RSS-affiliated Swadeshi Jagran Manch (SJM) and before that government appointed the controversial SJM convenor S Gurumurthy to the RBI board. Nachiket Mor was one of the most vocal critics of the government’s move to seek higher dividend and used to be the favourites of Raghuram Rajan, firing him just a year after an extension in his tenure fuelled controversy.
5. Another issue was regarding the special window to provide liquidity to NBFCs after the liquidity crunch in the economy post ILFS fiasco. The government wanted RBI to provide funds to these cash strapped NBFCs ahead of the festival season after banks have stopped lending to these companies. According to this special refinancing window, RBI may have to provide liquidity to all the companies approaching it for funds and RBI feared its misuse by these companies. Thus, RBI said that according to their research, there is enough liquidity in the system and thus, no need for any such window. Instead, RBI went for open 3. The third issue is of relaxing the market operations and purchased Prompt Corrective Actions (PCA) bonds to provide liquidity in the framework imposed by RBI on 11 market. public sector banks and 1 private bank. These norms are imposed All these issues were cropping up when the CRAR ratio, Net NPA over the time which formed a buband Return on Assets of a bank ble that got bust couple of months falls below the predefined levels. back and a repercussion to that Banks under PCA face restrictions was, the governor resigned for the on lending and branch expansion. first time in the history of indepenGovernment asked RBI to ease the- dent India and which is per se a blot se norms for the banking sector to on the central bank’s image and on revive but RBI was reluctant. After the country as a whole. Incidents the meeting on 19th November, it like these sends across a wrong signal to the foreign (and even domesINFINEETI
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Opinions: In our sense, RBI should be given a fair share of autonomy for them to work properly in determining the course of monetary policies. This is because, governments in all the countries (including India) have a myopic view of the economy. Going by the government’s viewpoint, government will use short term liquidity improvement tactics to spur growth so that they can boast this growth percentage in their tenure for them to return to the helm of affairs in the next election. This will also backfire, as it will lead to inflation in the economy via an increase in nominal interest rates and will ultimately decrease potential growth and reduce the investor’s confidence in the economy. Also, detrimental for the capital markets. An interesting analogy was given by the Viral Acharya that government is playing T-20 cricket whereas the central bank is playing a Test match where it had to win every session and also focus on survival. Already the banking sector was in news for all the bad reasons: NPA levels crossing 10 Lac Crores, 11 banks under PCA framework, fugitive offenders fleeing the country, IL&FS fiasco. Even on the macroeconomic front we witnessed currency depreciation, crude oil prices at $85 a barrel, inflation at 4.79% at one time, trade war on full throttle. Even crisis in the judiciary at the beginning of year, current turmoil in CBI and what not. In totality, neither the domestic environment was conducive nor the international. So, our point is, in the present
crisis, one must expect the central bank and the government to work in coherence, if not then the least they can do is, speak in coherence. Instead of expressing their grievances in media and let the entire universe know about it, they can discuss these issues in a meeting over a cup of tea. But, unfortunately, that did not happen and both the policy makers were seen as enemies in the public domain setting a wrong example.
rates. Also, happened in the UK in 2016. Even in India, there has been three instances of such conflict on interests in the past. But, the timing this time can’t get any worse taken the above mentioned turbulences into account.
This feud between a country’s central bank and the central government is not confined to India only. Currently, this conflict of interest can be witnessed in many other countries like in the US where Donald Trump is openly denigrating the US Federal Reserve chairman Jerome Powell for raising interest rates despite stable economy. Turkey is also facing a similar threat, there the president Erdogan is forcing the central bank to cut interest INFINEETI
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From Economic Ascension to Hyper-Inflation Venezuela’s #10 Year Challenge The Background
over-production.
Venezuela is a small country at the northern-most tip of Latin America, with neighbours such as Columbia, Guyana and Brazil. Its population is 32 million (which is equal to the population of Delhi and Bengaluru combined). It was 1922 when the first oil well was found in Venezuela post which, things have never been the same for this nation. Within ten years of finding oil Venezuela became its largest exporter in the world. Till this date, being one of the most oil rich countries in the world, Venezuela relies very heavily on oil for its income. Nearly, 95% of its hard currency is earned through exporting oil. It enjoyed its oil dominance for good three decades till 1960’s when there was a huge dip in the oil prices. Subsequently, the OPEC was formed and this cartel pledged to regulate oil prices by controlling its supply across the globe. In 1970’s the Arab OPEC countries got caught up in Arab Israeli war and cut supplies to US and other nations. As a result, this distant South American nation reaped benefits of this situation because of a surge in oil prices and increased demand from its neighbours. During 1980’s Venezuela’s incomes quadrupled before oil hitting another glut due to
This was an economic slowdown period globally due to which oil prices suffered and so did growth; until the turn of the millennium when oil prices started to rise again and the world witnessed an era of dot com. Venezuela stood the test of time, till early 2000s, but loosely till 2013 when it’s President Hugo Chavez died. Mayank Jaiswal, Venezuela by now had invested NMIMS heavily into abundant social welfare schemes as a part of its late The nation has seen continuous rePresident’s populist agenda to re- cessions and has faced steady and main in power. heavy inflation. The current estimated inflation rate in this struggling The Problem nation is more than 13,000% and Owing to a series of bad econo- it’s said that prices of commodities mic decisions and strong depen- over here are doubling every 26 dence on a single sector, oil, which days! This phenomena is generally due to global market forces was known as Hyperinflation. very unpredictable, Venezuela could never see a long term eco- The Indicators nomic stability. At the stem of this Let us look at the following few misery were political, social as economic indicators that will allow well as economic reasons but the us to get a better perspective on overwhelming factor was the vo- how the economy of Venezuela has latile prices of oil. lived through soaring inflation and Venezuela was running into a fluctuating incomes. We consider a huge Current Account Deficit span of 10 years, to reflect on the (CAD) due to overspending in its same. welfare schemes, it also didn’t diversify its income generating sec- a) Gross Domestic Product: tors due to which agriculture and manufacturing took a major hit. The aforementioned president INFINEETI
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The nation has seen continuous recessions and has faced steady and heavy inflation. The current estimated inflation rate in this struggling nation is more than 13,000% and it’s said that prices of commodities over here are doubling every 26 days! Hugo Chavez was ruling Venezuela in 2008. His policies were indeed effective as the brought in growth and reduced economic disparity increased the CAD. 2008 GDP: 500 Billion USD whereas, 2018 GDP: 320 Billion USD. #10years which show a total decline of close to 35%. This fall in GDP is closely due to declining oil prices and meagre contribution of other sectors in the economy. The graph shows a considerable 5% Year on year real GDP growth rate in 2008. But the economic crisis which originated from the US, shook the entire world. Venezuelan economy regained momentum as the markets started to recover owing to demand from countries like India and China. 2008 growth: 5% 2018 growth: -15% #10years which show the poor economic growth status of this nation. b) Inflation: While the average inflation rate in India is 3-4%
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YoY, the inflation rate in Venezuela in 2008 was 31.40% and this won’t seem bad at all when we get to know that the current inflation rates in this country are above 13,000% The reason being disastrous economic policies by current president Nicolas Maduro. When the government ran out of money to repay its debts, it started printing money. This excessive printing led to the Venezuelan Bolivar losing its value in the markets due to excess supply and thus, finally resulting in the hyperinflation. c) Unemployment: Employment rates were considerably less in this oil exporting nation and it also had poverty in control. Mostly this rate consisted of structural unemployment. We can decipher that there is a definite direct co-relation in inflation and unemployment rates here in Venezuela, as rising inflation has resulted in rise in people losing jobs. 2008 Unemployment: 8% 2018 Unemployment: 34% The Situation 2018 is over and the troubles of Venezuela show no signs of ending. Its currency Bolivar grows weaker each day, its people stay hungry and live in dire poverty. Violent crimes and homicides don’t seem to abate. Its people are millionaires (currency’s value loss due to hyperinflation) but are devoid of basic commodities and healthcare. Turn towards its capital, and you’ll find people adopting the barter system to trade, meat in exchange of milk. There is a mass exodus from the country, and it is estimated that over 2 million people have fled the country
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in search of better living. The Solution Burdened with enormous debt, low incomes and falling institutions, the Venezuelan president is all set to propose his new reforms. There are mainly 3 course of actions he intends to take: a) Introduction of a new currency: Prices are so high that denominations run into millions for essential commodities. There is a proposal to slash five 0’s from the current Bolivar and make it into a new Sovereign Bolivar. If this is done, an item costing 100,000 Bolivar would become worth just 1 Sovereign Bolivar. b) Peg the currency to its oil backed digital currency: In 2018 Venezuelan government presented economy with a digital currency (Block-chain technology) called ‘Petro’ which is backed by its oil as oil is the only true resource the nation has. The president aims to peg the Bolivar with Petro, however economists do believe it’s a futile attempt. c) Tax and wage reforms: To hike the minimum wages by more than 3000% and levy high corporate taxes and increase the highly subsidised oil prices in an attempt to negate unemployment and poverty. The Opinion a) A Sovereign Bolivar seems redundant because removing zeros from the old would only make it easier to carry the currency not improve its intrinsic value. The Bolivar needs to find its own true value in the market. Because restructuring of the currency will not curb the inflation which has occurred due to over-printing of money thus, flooding the supply of it. The real answer in order to stop the inflation lies in the Philip Curve (1958).
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The classic textbook example of causation and correlation, Philip’s curve explains the fact that during times of high inflation there are lower unemployment levels. If prices are stabilised, and inflation can be brought to halt, then the economy can do well. In the long run some rate of inflation can occur with a non- accelerating-inflation rate of unemployment (NAIRU). For the short run however, the rate of unemployment has to be brought down so that there is income in the hands of people. The most vital step thus, to eradicate hyperinflation is to encourage manufacturing other goods and promote SMEs that would generate employment which shall provide people with more disposable income. Employment generation would lead to increase in demand of goods which will in-turn encourage production, thus completing a whole cycle. It is imperative to note that focus needs to be shifted from just oil production to agriculture and secondary sectors rapidly. With this there should be tightening of the monetary policy as well, the need of the hour is to bring back the excessive floating money into the banks again and regulate it. \ b) The digital currency’s effectiveness too is highly questionable as the blockchain currencies are not gaining the amount of acceptance as it was speculated. The Bitcoin for example touched an all-time high of $13,000 back in December’17 but since then has been constantly falling. The markets don’t seem to be very excited about the digital currencies as of now, thus ‘Petro’ too might not be the anchor this drifting economy is looking for. c) Tax and wage reforms will benefit no one if the dismantled institutions are not re-built. Again, increasing the minimum wages by 3000% will effectively be similar to removing the zeroes in the currency. No tangible effect shall be reflected unless
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other sectors pick up. The government currently is not able to afford the imports, which can be dealt with by becoming self-sufficient in producing at least essential commodities like crops, meat and milk. Subsequently, Venezuela can try to hedge its oil exports by the virtue of futures or forwards and sell it at safely hedged prices to counties that are in dire need of oil, examples can be emerging markets such as India. d) Last suggestion would be to adopt the US Dollar as the official currency and flush out the decaying Bolivar in its entirety. This process is called as official currency substitution and is seen in economies after a major economic crisis. Its neighbours like El-Salvador and Ecuador adopted the USD as their official currency thus, shielding them from negative effects of exchange rates in the markets now. The main benefit of doing this is to reduce the transactional costs of trade as there is a difference of exchange rates while buying and selling dollars which in net terms results in losses to the party asking for a conversion. Venezuela after official currency substitution will increase confidence among international investors, thus, attracting foreign direct investments (FDIs) and foreign institutional investments (FIIs) because after all this nation has one of the world’s largest oil reserves. This would eventually lead to a reduction of risk premiums, thereby reducing interest rates. Reduced interest rates always promote external investments. Venezuela by doing so, would make it easier for its economy to integrate with the world economy and come out of the crisis it is in. The only downside is that by doing so, Venezuelan government would lose its power and authority to print and regulate its own money. A sacrifice that the current socio-imperialist president would not be willing to make very easily.
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FINANCE
Sovereign Wealth Fund
Manukrishnan, IIFT K
A Sovereign Wealth Fund (SWF) is an investment fund controlled by the government. It may invest in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds. Practically, we only consider those funds that invest partly or wholly in foreign assets as SWFs. Therefore, India’s sovereign fund, The National Investment and Infrastructure Fund (NIIF), cannot be called an SWF since its objective is to invest in infrastructure in India. The term ‘Sovereign Wealth Fund’ is relatively new, and was coined only in the beginning of the 21st century. Therefore, the lines are still blurred regarding the differences between Central Bank Reserve Funds, Stabilization Funds, Sovereign Wealth Funds and the wealth generated by state owned companies. As a rule of thumb, we tend to categorize funds that hold equities and risky assets as SWFs, but certain SWFs like Chile’s Economic Stabilization Fund and Russia’s Reserve Fund hold highly liquid, safe instruments similar to Central Banks. On the other hand, Central Banks of certain countries like Switzerland tend to hold equities and risky assets but are not categorized
as SWFs.
ADIA is sourced primarily from Abu Dhabi’s large oil reserves.
Generally, those countries that run huge budget surpluses and current account surpluses tend to have SWFs. The source of thus surplus wealth may be commodities (for eg. Finland and Saudi Arabia use their SWFs to diversify their risk since they run huge surpluses from export of oil), or trade surpluses (eg. China). The Norwegian Government Pension Fund Global is the largest SWF globally, with managed assets amounting to over 1 trillion U.S. dollars. It was established in 1990 to invest surplus revenues of the Norwegian petroleum sector. It owns more than 1% of global stocks and shares, making it the owner of over 1% of nearly every listed company in the world. The second largest SWF is the China Investment Corporation (CIC), the sovereign wealth fund of the People’s Republic of China, that invests on a long-term basis in public and private assets to diversify the
Sovereign Wealth Fund vs Foreign exchange reserves A key decision that confronts a country running surpluses is on whether to keep those surpluses as Foreign exchange reserves to manage currency risk or to keep them as SWF to aggressively pursue higher returns and safeguard some of the proceeds for the future. Countries’ demand for foreign reserves dramatically increased after the Asian financial crisis of 1997. However, having accumulated sizeable warchests of forex reserves over the years, the inefficiency of piling more reserves is being called into question. China, for instance, initially hoarded forex to keep exchange rate artificially low. Then the reserves swelled to 4 trillion dollars. There was a clamor for these funds to be used to benefit the public, and therefore they started an SWF. China still holds more than 3 trillion dollars of Forex reserves. If the Chinese government had decided that only a part of this needs to be managed as traditional foreign reserves then SAFE could mutate into by far the world’s largest SWF, with more than three times the size of the Norwegian SWF.
(PHOTO)
country’s foreign exchange holdings. Third in the list is The Abu Dhabi Investment Authority, a government-owned investment organization that manages the sovereign wealth fund for Abu Dhabi, United Arab Emirates. The huge amount of wealth managed by the How SWFs can help tackle the ‘Dutch Disease’ INFINEETI
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The term Dutch Disease is attributed to situations where countries face large inflows of foreign currency, typically due to a natural resources boom. Such inflows then cause real exchange rate appreciations that cause decline in other sectors of the economy. By saving part of the income and investing it abroad, SWFs can tackle this problem by ensuring that the net inflow of foreign currency will be smaller. Hence, the real exchange rate will appreciate less. The SWF can also provide resources that can be invested in education, infrastructure and innovation, thus increasing the labor productivity across the different sectors of the economy. Overall, Sovereign Wealth Funds can ensure sustainability of the benefits of the boom over time and guarantee the welfare of future generations once resources are exhausted. Venezuela provides the perfect example of a country that has suffered due to reckless short term spending during a boom ins-
tead of saving for the future. Should India start a Sovereign Wealth Fund? Even though India has been running Current Account Deficits for several years and owe significant amounts as Foreign exchange debt, the debate has arisen occasionally on whether India should start a SWF. This debate has arisen perhaps due to a misconception regarding India’s apparently huge forex reserves, close to 400 billion dollars. These, however, are not idle piles of cash we are sitting on. Most of our reserves are essentially borrowed money - like non-resident deposits, or loans raised by government and private sector companies. In fact, they actually represent liabilities that have to be repaid at some time in future. Our reserves are thus not really reserves, but temporarily parked capital inflows. Running an SWF with our forex reserves would be akin to investing in risky assets with borrowed money – a gamble a
country like India cannot afford. Global redistribution of wealth A close look at the distribution of Sovereign Wealth Fund assets by region conforms to a general geopolitical trend observed in recent years – the redistribution of wealth away from the western world to the east and developing countries. Just as with OPEC in the 1970s, Japan in the 80s and 90s and China in recent years, the accumulation of wealth away from the west has ruffled the feathers of the western powers. Dubai got a rude awakening in 2005 when a government owned company bought P&O (a shipping and logistics company) and tried to take charge of its port operations in the US. A huge outcry was raised over the perceived compromise of US port security, and eventually, P&O’s American operations were sold to American International Group’s asset management division, Global Investment Group for an undisclosed sum. SWFs represent a large and growing portion of the global economy. The size and potential impact that these funds could have on international trade have led to considerable opposition, and the criticism has mounted after controversial investments in the United States and Europe. Following the mortgage crisis of 2006-2008, sovereign wealth funds helped rescue struggling Western banks CitiGroup, Merrill Lynch, UBS, and Morgan Stanley. This led critics to worry that foreign nations were gaining too much control over domestic financial institutions and that these nations could use that control for political reasons. In the United States and Europe, many financial and political leaders
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have stressed the importance of monitoring and possibly regulating sovereign wealth funds, claiming that they pose a threat to national security. The lack of transparency of SWFs has fueled this controversy. The United States addressed this concern by passing the Foreign Investment and National Security Act of 2007, which established greater scrutiny when a foreign government or government-owned entity attempts to purchase a U.S. asset. The use of golden shares is one other potential way to block foreign acquisitions.
Where these funds are being channeled is also a matter of great interest and importance. If directed to developing / underdeveloped countries or deployed for environment friendly causes, they could prove a huge boon to the modern economy. On the other hand, these funds in the wrong hands may lead to the deployment of debt trap diplomacy, funding terrorism and drug abuse etc. The story of SWFs is just beginning – it will be fascinating to watch its effects unfold on the geopolitics of the 21st century.
To address these concerns some of the world’s main SWFs come together in a summit in Chile on 2-3 September 2008, under the leadership of the IMF, and formed a temporary International Working Group of Sovereign Wealth Funds. This working group then drafted the 24 ‘Santiago Principles’, to set out a common global set of international standards regarding transparency, independence, and accountability in the way that SWFs operate. A new organization, the International Forum of Sovereign Wealth Funds (IFSWF) was then set up to maintain the new standards going forward and represent them in international policy debates. Conclusion With the value of the Assets of Global Sovereign Wealth Funds about to reach 8 trillion dollars, the critical role they play in the global economy of tomorrow is undisputed. Alongside such other global trends as protectionism and mass surveillance, the rise of SWFs signals the increasing role of the governments in managing wealth, creating industrial policy and managing the economy.
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ECONOMY
Artificial Intelligence in the Indian public sector
Executive Summary
Indian government’s think tank NITI Aayog has geared itself to create a roadmap for National Artificial Intelligence program. In the Union Budget for the financial year 2018-2019, the Indian government has allocated $480 million to fifth generation technology startups like artificial intelligence (AI), machine learning (ML), Internet of Things (IoT), 3D printing and blockchain. The emergence of technologies like AI can go a long way in automation of tasks and revamping various sector. AI is a new dimension to existing technologies, which needs to be harnessed to better the decision-making process, where humans and computers can work together to take faster and better decisions. Roadmap for National Artificial Intelligence program • Finance Minister Arun Jaitley in his budget speech said, “Technologies such as machine learning, artificial intelligence and others are the technologies of the future and Niti Aayog will establish a national
programme to conduct research academia and industry officials. and development in these areas.” • Jaitley also announced that • The government has formed a the government will be investing high-level committee headed by extensively in research, training Niti Aayog vice-chairman Rajiv and skill development in robotics, Kumar to lay out a road map for artificial intelligence, and big data, India’s research and development among others. on AI and its applications. The panel will be a mix of government, • The Indian government has INFINEETI
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allocated $480 million to fifth generation technology startups in Creating a Smart Public Sector – the Union Budget 2018. Driven by AI (Once trained, it won’t retire at the age of 65- it’s scalable • Financial allocation under the and replicable) Atal Innovation Mission will be Government has unprecedented used to fund the programme on a amount of data, augmented by nationwide scale. the data-deluge from the Aadhaar network. AI could help improve What does this mean in the the existing design and delivery industry/market? of essential government services. Some of the direct applications of • The announcement has given AI in the public sector are: impetus to the tech start-ups working on these new technologies. Evaluating the credit risk of financial Not only it will encourage the institutions- Since the government entrepreneurs to come up with is saddled with the issues of NPA’s innovative solutions in the AI space and bad loans, identifying credit but will also increase the financing risk of financial institutions through opportunities for them. AI will go a long way in eliminating this issue. • The existing companies would also be encouraged to start Automating interaction: Making investing in AI based technologies government chatbots for citizenthrough research, mini-projects government interactions to help to gain understanding about this citizens consume digital public new technology so that once this services. Some examples of technology is embraced by the chatbots in various countries are markets, they are not caught GovBot in Germany, Alex by the unawares. Australian Tax Office and Chip by the City Hall of Los Angeles. • Penetration of AI in India, being a labor-intensive market, would Enhancing efficiency by predicting mean loss of jobs, at least in the demand – This would make it short term. There are concerns easier for officials to make informed that automating jobs would render decisions and responsive services many jobs obsolete, however, it when the demands are forecasted. would open up new higher paying jobs. Some jobs would disappear Using AI in Indian Postal Service but better, higher paying new jobs for handwriting recognition to sort will be created. letters/parcels by PIN codes saving man hours for higher order tasks. • Announcement by the government itself to invest in such NITI Aayog laid out major plans to technology is seen as a step to transform India under its Mission revamp the public sector. We will called New India 2022. Let us identify some areas in the public analyse the areas where AI can sector that can be revamped be incorporated to catalyse the through this new technology. transformations. Health Sector: AI can be used Some direct applications of AI in in health sector for prediction of public sector optimal location for setting up INFINEETI
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healthcare units and hospitals by government, based on population and geographical analysis. There are cases where AI is better than doctors to diagnose diseases. It can help in diagnostics and prescribe personalized treatments. It can predict the safety and efficacy of new pharmaceuticals. Corruption Free India: It can be attained through e-Governance, AI can enable early detection of unusual financial risk and automation in financial systems can reduces opportunities for malicious behaviour, such as market manipulation, fraud, and anomalous trading. Banking Sector- AI can be used to classify risks in the loan disbursement to minimize NPA’s, bad debts; fixing interest rates using AI software which takes factors such as inflation trends, monetary supply etc. Agricultural Transformation by AI to achieve the following desired outcomes: • Double Farmers’ income by 2022 • De-risk farmers Opinion Problems with AI in India • Hardly any new Indian tech companies are research oriented whereas AI based companies must be research oriented. Between 2014 and 2017, AI startups in India raised less than $100 million from venture capitalists. • The Chinese government spends 2% of its GDP on research while India’s marks a dismal 0.6%.
• There is also a severe dearth of data, which hinders research. Data is the preliminary requirement to test the AI and machine learning applications. Better the quality and quantity of data, better is the output of the application. • And finally, even those who do set up AI-based ventures struggle to find the right talent and skills. In India, AI has only just begun to make its way into classrooms, and a lack of qualified professors is not helping at all. Where should the government invest? Invest in the promotion of R&D: Currently, major AI related work is driven by private sectors. Development of AI requires research teams to identify the areas to automate, propose solutions and then, developing the AI software. Ensuring education and training for jobs of the future: Governments have to invest heavily in high quality education. Governments also have to assume the responsibility of re-training workers, so that they can find a place in the world embracing new technologies.
Priyank Jain, IIFT D
Recent Developments in India after the announcement Chinese telecom and technology major Huawei has announced in July 2018 that it is aggressively pushing Artificial Intelligence in India as it place to customize its AI capabilities for the Indian users. The company has also created a team in India which is dedicated to R&D in the AI domain. Prime Minister Modi inaugurated India’s first research institute for Artificial Intelligence, called Wadhwani AI in Mumbai in February 2018. It is an independent not-forprofit research institute dedicated solely to the cause of applying AI for social good, to improve the lives of people. Prime Minister Modi while inaugurating said, “Wadhwani AI is a prime example of how the public sector and the private sector can come together with good intentions to build a world-class institute, aimed at benefiting the poor.
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Avi Godha , IIFT D
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The Team MBA ka Tadka marke
Shubham Srivastava Outgoing Editor-in-Chief Placed at ICICI bank
Siddharth Gupta Outgoing Senior Editor Placed @ Amazon
Abhinav Pant Senior Editor Intern @ Bharti Airtel
W Vikas Rao Outgoing Senior Editor Placed @ ABGFRL
Shikha Jha Senior Editor Intern @ GPL
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Sidhartha Rana Outgoing Senior Editor Placed @ SJPMC
Vinit Vikash Senior Editor Intern @ MotherDairy
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POLICY
$5 billion wall - Is Mexico worth it? If not, where?
Anneka Cardoza, IIFT D
Sai Prasanna, IIFT D
“A WALL is a WALL,” was tweeted by the President of the United States of America, Donald Trump on 31st January, 2019. This tweet was indicative of the campaign promise he had made when he had first announced his candidacy. Since then, ‘Build The Wall’ has become a popular slogan among his fan base as well as with some Republicans. They want this wall to be built on the southern border of the country in order to keep the Mexicans as well as other Latin/South Americans from entering the country illegal. Stories of caravans arriving with illegal immigrants as well as gangs such as MS 13 are being propagated by the media supporting the far right. Given Mr. Trump’s experience in real estate, this wall has gained momentum among his voter base, however there are many obstacles in his way.
Since the Americans have to pay for the wall, President Trump insisted that the spending bill to fund the government should include the $5.7 billion to fund his controversial border wall. However, the Mid-Term Elections saw the House change colours from red to blue, with the Democrats being voted in with a thumping majority. The Republicans still control the Senate. However, with the Democrats in charge of the House, efforts to push a bill supporting the wall was at a standstill. The President refused to sign a bill which excluded the border funding and therefore the government came to a halt. The government shutdown was the longest in history. It extended over 5 weeks which resulted in loss of salary paid to federal workers as well as a halt in many government services.
There are varying accounts about the actual cost of building the wall with it ranging from the conservative estimates of $12 billion to $22 billion. There have also been debates about the type of wall and the material to be used while building it. During his campaign Trump had promised that Mexico would pay for the wall. This was met with shock and disbelief from the Mexican government and they have firmly refused to even consider this. The US government then proposed that the wall would be paid by Mexico indirectly through the concession received by them through the new United States-Mexico-Canada (USMCA) Agreement. However, White House Press Secretary Huckabee-Sanders did not quantify the actual amounts that Mexico would contribute towards the wall during a press conference. Therefore, majority, if not all, of the expense will fall on the average American tax payer.
Since the Americans have to pay for the wall, President Trump insisted that the spending bill to fund the government should include the
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$5.7 billion to fund his controversial border wall. However, the Mid-Term Elections saw the House change colours from red to blue, with the Democrats being voted in with a thumping majority. The Republicans still control the Senate. However, with the Democrats in charge of the House, efforts to push a bill supporting the wall was at a standstill. The President refused to sign a bill which excluded the border funding and therefore the government came to a halt. The government shutdown was the longest in history. It extended over 5 weeks which resulted in loss of salary paid to federal workers as well as a halt in many government services. border. They found that the wall had a negative impact on US citizens. For a 548 miles of border fence, $2.3 billion was spent on it. This covered partially one third of the US-Mexico Border. The wall only reduced illegal migration by 0.6% (83,000 people). Howe-
ver, the cost to build the wall was paid by the American taxpayer. The researchers ran simulations wherein the cost of trade between the countries were lowered, thereby improving the wages in Mexico. This could theoretically lead to lesser immigration and better welfare in both countries. Even though the wall is a medieval device, its roots can be traced to prehistoric times. Apart from the Great Wall of China, there has also been the Hadrian’s Wall which was built by the Romans in Britain to keep the savage tribes away in AD 122. Since then, there has been great advancements in technology which will be more cost efficient when compared to actually constructing a physical barrier. The US Mexico border has many geographical terrain issues as well. The Rio Grande River flows between the two countries. Constructing a wall would hamper the free flow of this river which would violate the 1970 boundary treaty. There are also around 18 federally protected species living in areas near the proposed border wall along with 39 federally endangered species whose habitat would be threatened by its construction. Opinion With the rising trend of protectionism, more countries have resorted to closing its borders and adopting an anti-immigrant stance. However, we feel that it is rather ironic to see the current fear mongering and anti-immigrant sentiments spread in a country founded by immigrants and home to the Statute of Liberty. Instead of building a wall, we advise that the country should focus on modern technologies such as drones to monitor the border. The country can use the money it wants to invest in a wall to further invest in screening and other tests not INFINEETI
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only at the border but at various checkpoints such as airports. We would also propose amendments to the USMCA agreement. More economic concessions given to Mexico will lead to a rise in wages and welfare in that country, thus people will be less likely to illegally cross the border. Both countries will benefit economically and socially from this in the long run. It is always better to build bridges rather than walls.
“
If two people always agree, one of them is redundant” this quote by Ben Bernanke, former chair of the Federal Reserve is apt in highlighting that there has rarely been a time in history when the Government and an independent central bank have been in absolute agreement of each other’s policies. Sure, there have been instances in the past when the Government and the RBI were at loggerheads but never have the differences been aired out in such a public and hostile manner and not to ignore the fact that never in the bank’s 83year old history has it ever come down to the government looking to invoke Section 7 of the RBI Act. There are a number of reasons why the situation got so out of hand.
R.B.I. vs The Goverment : A second take
There are points on both sides that deserve merit and points that can be debated back and forth. The Government is not entirely wrong to demand that small and medium enterprises be given more credit opportunities but let’s not forget that it was the combined effect of demonetisation and GST implementation that has left the SMEs in the state they are right now. Similarly, the RBI is not wrong when it says that payments regulation should be under its umbrella since payments and settlements are essentially extensions of currency and also because no other institution yet exists that can handle the payments system as effectively as the RBI does. Another point of contention is the fiasco with Punjab National Bank involving Nirav Modi, the Government blamed RBI for neglecting the banks and letting the situation get so dire, The RBI retaliated by saying that it has limited control when it comes to public banks, it does not have the authority to regulate boards, change management of public banks the way it can with private banks. When it comes to maintaining the amount of reserves that the RBI does one can argue that they not only serve to address contingencies but also in some way strengthen the market’s confidence in the central bank. Also, the government’s demand to increase the dividend payout by RBI comes at a questionable time. With elections just around the corner it is obvious for anyone to assume that these are government’s last-minute attempts to reduce its fiscal deficit and allow it a freer hand with election goodies like higher MSPs. INFINEETI
Coming to the Prompt Corrective Action framework, 70 percent government ownership of the banking system and the fact that the weakest banks are also government owned is reason enough for the government to pressurize the RBI into easing the restrictions of the framework. Things remaining status quo it would mean that a cash strapped government would have to shell out more for the recapitalisation packages. The RBI on its part has effectively dealt with past crisis like the Asian financial crisis of 1997 and the financial crisis of 2008. But the high inflationary 24
Public Sector Banks NPA Ratio (In %) Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank IDBI Bank Limited Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank State Bank of India
sets, which majorly consist of: Revaluation fund and Contingency reserves. The government has asked RBI to hand over part of its excess reserves so that government can meet its budgetary and fiscal target. In its meeting on November 19th, the central board of RBI decided to constitute a committee of experts to examine an economic capital framework (ECF), whose membership and terms of reference was decided jointly determined by the government and the RBI. ECF is expected to determine the appropriate levels of reserve the central bank should hold.
13.22 15.49 19.05 10.58 18.08 15.92 19.56 24 6.4 22.74 16.95 10.95 12.88 11.8
period of 2013 and the recent bad loan build up have come to haunt the central bank. The resignation of the RBI governor coming soon after the public spat between the government and the RBI has been linked even though the reports state that the cause of resignation was personal and not a professional one. The controversy between central banks and governments is because of their nature: one institution wanting excess liquidity to ensure growth and the other to regulate that liquidity to control inflation. RBI is unhappy with government appointment to its board as well as removal of members. But as quoted by Raghuram Rajan, former RBI governor in one of the interviews –” You have to know why the other guy is doing what he is doing and ultimately at the end of the day you have to part maybe not as friends but having respect for each other’s territory. It’s when you encroach each other’s territory that it becomes problematic”, the two parties should respect each other’s turf and prevent any kind of acrimony. In February 2018, RBI issued a circular under which a default rule had been put wherein banks should treat a company as a defaulter even if it misses repayment by a single day. Government of India opposed this rule, arguing that such a rule can render many companies as defaulters and hurt entrepreneurship.
On this issue, Raghuram Rajan said: “We are a country which has a BAA rating and if the country went out to borrow in international capital markets for some emergency it would have to pay at BAA rating rates. Having the RBI as a separately capitalized entity which has a AAA rating gives you a vehicle which can actually make promises in international markets that are credible.” If the government wants to retain its pro-business image in a time of depreciating rupee, increasing fiscal deficit, and amidst fiascos like IL&FS the last thing it would want is another public spat with the central bank. Even if the RBI agrees to the government’s demands the problems that plague the economy will continue to do so unless strict measures are implemented keeping the politics aside. Rather than argue about whose policies will prevail they should work to figure out how to make the institutions work better for the economy and plug in the gaps. The Government and the RBI must together figure out a way to communicate and resolve the differences in the way they function without comprising each other’s autonomy. For an emerging economy like India, it is imperative that the two most important institutions of the nation be seen on the same page.
Government wants higher dividend pay-out from RBI and asked it to review its dividend and capital conservation rules. On the other hand, RBI says that it needs its reserves for economic growth. Shagun, IIFT D
For the year ending June 2018, RBI’s reserves, at ₹ 9.63 trillion, constituted 28% of its total as-
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Ayesha, IIFT D
FINANCE
The Whooping problem of NPAs in Indian Banking
Shivangi Bahuguna, SIBM
Rahul Kulkarni, SIBM
A nonperforming asset (NPA) in simplest of the terms refers to any asset which stops giving returns to its investors for a specified period of time. In majority of the cases, debt is classified as nonperforming when loan payments have not been made for a period of 90 days. An asset takes form of the Non Performing Assets or the bad assets when the money or assets provided by banks to companies as loans isn’t paid by borrowers.
highest NPAs. The gravity of the situation could be realized when we see India occupying the second highest ratio of NPAs among the major economies of the world. The graph shown is representative of the same. A few of the transactions that led the banking system into this situation are as follows: • Mr. SK Jain, ex-CMD of Syndicate Bank was arrested for accepting bribes from Bhushan Steel to increase their credit limit. Bhushan Steel had a Rs 40000 crore loan and has since been declared bankrupt. His alleged collusion with the Bhushan Steel to increase the credit limit painted a bleak picture of the public sector lending situation in India. It was a clear violation of the laid down procedure of the banks. He was also associated with Prakash Industries for a similar kind of corruption charges to enhance the credit limit by violating the laid down procedure of the concerned bank.
The whooping problem of the surging NPAs in Indian Banking sector came to the frontline with the govt. going ahead with the financial audit of the same. It is surprising to see that India which had emerged unscathed from the 2008 global crises and ranked among the countries with lowest NPA’s, has now become one of the most vulnerable countries amongst the G-20 countries with respect to the NPAs. As per the parliamentary committee report, Indian banks’ gross nonperforming assets (NPAs) have grown from Rs 8.86 lakh crore as on 31 December 2017 to Rs 10.25 lakh crore as on 31 March 2018. The figure roughly translates to around • Under the light of such cases, 11.8 percent of the total loans githe Ministry of Finance, in the ven by the banking industry. Even year 2014, ordered the forensic after huge amount of writeoffs and audit of two PSU banks- Orienprovisioning the NPA’s are increatal Bank of Commerce and sing year after year. If we take a look Dena Bank. The primary intenat the breakup of NPA, 26.19% of tion was to expose the financial the NPA amount is less than 1 croirregularities in the functioning res, 6.13% of the NPA is between 1 of the banks. crore and 5 crore and a large portion of 67.66% of NPA is above 5 • A benami company called Bencrore. The further break-up of the gal India Global Infra availed Rs NPAs shows the bad loans of public 139 crore loan from UCO Bank sector banks (PSBs) alone stands by forging documents. After at Rs 1.19 lakh crore (or 15.4 perUCO Bank’s forensic audit was cent), up from Rs 8.97 lakh crore in ordered, its market capitalizathe March 2018 quarter. In fact, as tion eroded by Rs. 3500 Cr. in a per the rating agency CARE, as of single day. June 2017, State Bank of India led the list of scheduled banks with the • Kingfisher Airlines availed a INFINEETI
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loan of around Rs 6500 crore. Since the company failed, UBI declared Kingfisher Airlines as a wilful defaulter. As per the guidelines issued by the RBI, a wilful defaulter is the one who doesn’t meet repayment obligations despite having the capacity to do so or the one who does diversion of funds for purposes other than those stated.
Will they ever take off?
To keep check on the surging bad loans in the banking system, government has enacted various acts, to say- FEMA, PCA, SDR, S4CA or the IBC. The problem with the existing legislations in place is their inefficiency in tackling NPAs. For example under Prompt Corrective Action banks can take over the control of management of the defaulting firm, but it is easier said than done. There are various problems a bank faces while taking control of the firm’s management. The banks face difficulty in getting required approval from SEBI as per the Company’s Act besides lacking the right acumen regarding the operations of the firm.
Moreover such a transfer requires huge amount of capital infusion. Banks would still face the shortage of capital of Rs. 2,71,000 crores. Even after provision of 65% of capital by government to meet Basel 3 norms, the new problem faced would be the diversification of shares. Government aims to dilute its shares in the PSB but after such provisioning it would own 90% equity in PSBs. Since the banking crisis began, RBI has introduced the mentioned guidelines to strengthen the banking system: • A board approved loan recovery policy. • A centralised information sharing mechanism by all banks to disseminate loans of above Rs 5 crore. • A Master Circular on frauds was released to educate employees on the process to deal with financial frauds. • The existing mechanisms in place for resolution of NPAs proceeding to liquidation in case of inefficient recovery.
To keep check on the piling NPAs, the govt. had also proposed the idea of bad bank. To ease the balance sheet of PSBs and giving them the space to continue with the funding of new development projects , the former Chief Economic Adviser, Arvind Subramanian came up with the concept of a National ARC or a bad bank which will take all the stressed loans. However, the idea of bad bank appears more like transferring of problems from one bank to another without actually resolving it. Besides, the government as well doesn’t find the idea of an asset reconstruction company (ARC) very compelling . It’s not keen on diverting more of taxpayers’ money in this manner.
What in reality is required is a robust 360 degree mechanism which can keep rising NPAs in check, from an early recognition of defaults, to an efficient recovery mechanism to reducing the new NPAs by adhering to the above mentioned norms. Opinions on the whopping problem of NPAs in India: We understand that Indian banking sector is suffering because of poor accounting standards, bad loans, banking frauds and slack supervisions. Rising NPAs pose a huge threat to the economy. Banks are the custodian of money and if theINFINEETI
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re are cracks in the banking sector, the reflection is observed in the entire economy. The need of the hour is to take the cases of misappropriation of funds happening in the banks very seriously. Banks need to do away with the relaxed lending norms, especially to the big corporate houses. Rather the analysis of the financials and their credit ratings should be taken into full consideration before going ahead with the sanctioning of the loans. The poor lending decisions by banks give rise to bad loans which then had to be written off. This is a further burden on taxpayer who is already pressed down by today’s time of sluggish market growth and uncertainty in the global market. Banks should develop suitable recovery programs for assessing and classifying the over dues, monitoring accounts and keeping regular contact with borrowers. Banks can as well circulate a list of defaulters as caution list for other banks and strictly follow it to tackle the loopholes of loan disbursements. Moreover, banks should try to reduce their dependency on interest based income and plan towards diversifying into fee based services. There should be an emphasis on improving the corporate governance practices .To keep such bad practices in check we suggest that effective legal system should be in place with a provision of punishments in place which induces fear and acts like a deterrent to the defaulters. Even though the issue of bad loans in Indian Banking System is a huge mammoth, India needs to step up its resolution process complemented by a holistic and stringent supervisory mechanism to curb the irregularities and corruption that has crept up into the system. INFINEETI
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FINANCE
Would there be a recession in 2020? Probably...
Vrishabha, IIM Kashipur
It has been a decade since the last recession and the US economy has enjoyed near to the longest period of expansion in this decade. Today, US is growing at around 3% rate and the unemployment is at a record low. This is leading to rising wage rates and inflation. For these obvious reasons, the central bank is rising interest rates. This would help it avoid excessive debts in the nation and to have a cushion to decrease interest rates during the next downturn.
All this doesn’t mean the experts are good for nothing, they do see some things and analyse them. Now that federal reserve is rising interest rates despite the Trump’s request to not to, Morgan Stanley has long ago predicted an inverted yield curve by 2019 mid. And more than often inverted yield curve is an indication of a recession in the near future. Inverted yield curve means long term interest rates are lower than short term interest rates because of lack of confidence in the The longest period of growth pe- economy in the near future. riod doesn’t mean the economy will cease or the growth would stop. This doesn’t mean, Federal ReserBecause expansions don’t cease, ve’s decision of rising interest rathey either get massaared or they tes would be the only reason for fade away due to fragilities. The the next recession. It can’t be the entity responsible would be the one only proponant, there would be a who brought it up, in this case, it is lot of people involved in the failuFed Reserve and the fragilities are re with a lot of spectators. Think of falling equity prices, weakness in it as a combination of the Red Vithe housing sector, the downturn per’s murder by the Mountain and in major European countries, un- the Red wedding in the Game of certain US exports, trade wars, the Thrones. Just like climate change, government shutdown, and many we know it is happening but we do others. nothing about it. Mainly because of the politics that surrounds the ecoThe economies neither grow fore- nomy, or perhaps one may argue ver in a straight line graph nor in an politics is the driver of the economy. exponential manner. They follow So what might be the probable a cycle like a sinusoidal wave with reasons for the probable downrespect to time. What has gone turn that would probably happen up would come down and what is in 2020? down today would go up. But unlike with seasons or the phases of the 1. The modest fiscal drag would moon or the tides in the ocean, in pull down the growth below 2% this case nobody can predict the which is now around 3%. timings of the business cycle. Here the economists or the practitioners 2. The central bank would again don’t have a single theory to pre- increase interest rates because of dict why the economy would die the rising inflation in the US and or rise. But they do have multiple across other economies. theories and each one contradicts the others to offset each other sin- 3. The trade war with important ce none of them are fully backed by economies like China, Europe, Medata. Hence neither the timing nor xico, Canada would certainly slow the reasons of the recession can be down the pace of the growth. fully predicted. INFINEETI
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4. US population is rising and it needs immigrants to maintain its economy but the tighter immigration policies by Trump would mean mismanagement of the economy and that would make the economy head south 5. Populist policies and protectionism in the US and across the globe would create political instability between nations. All of these with several other political and social turmoil make us feel these are four horsemen of the apocalypse. They indicate, Death, Famine, War, and Conquest. But the data suggest otherwise, the world is happening to be better every day in all aspects.
enough tools. What it has done so far is tax cuts even for the ones who were not in need and spending agreements. This indicates that although the recession might be a growth recession and not the actual negative growth, because of the lack of the tools available to fight it, it might be severe. What could possibly be done is to the precautionary measures at the individual level, reverse the trend of de-globalization by negotiation and discussion with global leaders, leverage the available technology, use the data to identify the sectors, geographies, directions of the slowdown and arrest it.
Specially for the emerging economies like India and China. These countries are more exposed to global economy now. The last time when the recession hit US in 2008, India was enjoying almost double digits growth rates. That is not the case now. Indian currency has been volatile in nature from past few months and the text book method of rising interest rates to appreciate the currency is not just enough.
The government is not ready for any kind of financial crisis that may happen in the near future, the fiscal policies were stimulus in nature To be precise, individuals should: and the fiscal deficit targets were • Save the savings for the retire- repeatedly missed by the Indian ment or layoff that might happen government. • Get out of debts that are already there Consumer demand in developed • Upgrade or update the skillsets economies would be low and hento be employable ce exports from India would de• Build a wide and strong network crease. The impact will be again in • Have the portfolio in order wi- three ways, reduced exports would thout being the victim of emotions impact employment, it will further or the market sentiments widen the trade gap and pressure on exchange rate and intervention Companies would harness the data leads to suck out liquidity and presand technology they have, invest in sure the interest rates. AI and automation to replace some workers and change the pattern of The financial market would also job creation. All of these would defi- be bearish in nature because of ne a new face for the economy but the reduced off shore flows and lilet’s hope that would be brighter mited domestic demand because than what is today. There is always of the liquidity pressure. It would light at the end of the tunnel. be a huge responsibility of the RBI to maintain liquidity in the market Opinion amidst all these challenges.
And the probable recession is a growth recession, that means the economy is still growing but the slowdown in the pace would make us feel it is a recession. After listing these reasons and other probable reasons, one might say the recession is coming (just like the winter is coming. It happens because there is a scarcity of labor force, there is difficulty in negotiating wages so the businesses would ease out hiring and bank hikes rates. Does that mean the recession is bad or the recession should never come? We don’t know. But the longer it takes these events to happen, the longer the recession would be. Remember the sinusoidal wave, the longer it goes up or stays up, proportionately so does it Effect on India: at the bottom. Now that we have seen the When it happens, Federal Reserve #10yearschallenge trending on might cut the rates 3-4 times by social media, it would be a great some points in a traditional manner challenge for the governments of but that might not be sufficient. The the nations and the central banks economy needs fiscal measures too this time if recession hits US in but the government doesn’t have 2020. INFINEETI
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But on the positive note, there are few services India provides to the world like cheap labour force, IT services and few important natural resources, these will be life saver for India during its tough times. And people in India are usually afraid to have loans in their baggage, hence crisis will not affect such people.
Given the dependence on foreign capital flow and off-shore consumer demand for the India’s growth, it cannot get away completely from the negative impact if there is global financial crisis but it could quickly focus on alternative remedial measures to limit damage and look in-wards to sustain growth!
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About IL&FS FINANCE . BANKING
IL&FS fiasco explained
Khemraj, IIFT D
Ankit, IIFT D
IL&FS stands for Infrastructure Leasing & Financial Services Limited. The company was founded in 1987 by three banks HDFC,UTI and Central bank of India to provide loans and funds to infrastructure projects. Later on as the company grew and needed more funds, it was open to large investors. Currently the major shareholders in the company are LIC(25.03%), Japan’s Orix Corp(23%), Abu Dhabi Investment authority (12.56%) and some minor investments part from HDFC,SBI and Central bank of India. IL&FS works in an area of infrastructure project development and Financing. As of 2018 IL&FS has more than 160+ group companies in the form of direct subsidiaries ,indirect subsidiaries, Joint ventures and investment companies. The crises explained The company’s finances worked on taking loans in short term while its revenue were coming from long term. Because of which it piled up too much debt in short term while revenues from its investment did not match its debt obligations in short term leading to Liquidity crunch. The company had debt obligation of $500 million in second half of 2018 while it had only $27 million in its reserves to repay. This shortfall caused the company to default on its payments of Commercial paper(CP) which was its major source of funding. What worsened the condition was slowdown in infrastructure sector. The bulk of company’s revenues were stuck in disputes over contractual agreements. These factors led the company in a vicious cycle where it had to borrow to service its obligations which led to increase cost of borrowing. Because of deuteraINFINEETI
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ting asset quality which company faced less revenue and more interest to service. Rating agencies like CARE took a note on this and rated Rs 270 billion of debt as junk which further sparked fear in investment circle. Rating agencies like ICRA, India ratings, CARE downgrade IL&FS and its subsidiaries rating from high investment grade (AA plus ,A1 plus) to junk status. Rating of AA plus is required to raise funds through CP. The company also postponed a $350 million bond issuance in March 2018 because of high interest required by investors. And because parent company was the major source of funding for subsidiaries, they also faced the heat of downgrade adding more fuel to the fire. One important question that one might asked is: Did the company had any risk management professionals? To answer this question, the company indeed had risk a management committee, however they didn’t even met once during the last three years! Impact of the crises The immediate impact of IL&FS fiasco was that the problems in shadow banking or NBFCs were out in open and investors became wary of investing in them. Subsequently cost of borrowing increased which further led to impact on manufacturing and infrastructure sector. Shareholders at IL&FS which includes mutual fund houses wary of their investment being locked up in case of bankruptcy. Mutual funds were the major money providers for NBFC’s because they invest via debt and CP which are high rated. They faced high capital outflows on the fear of IL&FS scenario. Majority of them showed negative growth during the period. SEBI has also come with norms for liquid mutual funds following the liquidity squeeze at ailing companies. INFINEETI
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Impact on Mutual fund industry Mutual Funds had a collective exposure of roughly Rs 2500 crore to IL&FS of which 1300 Cr were in short duration fund and Rs 400 crore in liquid fund. Due to downgrade in ratings mutual funds will have to write of half of these investments held across various schemes. Such a large write down led to negative return in many of these investment and may lead to panic in investors who consider these funds as a lucrative alternate to savings accounts. This seriously questions the prescribed guidelines on valuation of these firms and also the credibility of internal ratings of the asset management companies who could not foresee it even with the huge amount of debt on the balance sheet of IL&FS. What’s next? One important element in this fiasco was the role of rating agencies which are monopolistic, non-transparent and have ill-criteria’s to rate a company or asset class. Their rapid degradation of IL&FS rating had an negative effect on whole NBFC’s leading to loss in investors perception even in companies that were rather well diversified. An important thing to note is that these rating agencies although having such a high credibility among investors, has zero accountability whatsoever when an issue like this is concerned. SEBI has tighten disclosure norms for credit rating agencies and has even setup a probe to find how the three major rating agencies failed to identify the junk debt earlier. Credit rating agencies heavily relies on past data and bloated results often fails to identify ground realities which was the same concern during the financial crises of 2008. Government has also
appointed a committee headed by zed loans and boost India’s ease of instrument or entity even when they seasoned banker Uday Kotak to doing business ranks. are rated high(safe), it thought gosolve the debt problem at IL&FS. vernment a lesson to have uniform credit registry and the good/bad Importance of PCR Final overview role credit rating agencies can play, it thought lenders especially banks, Apart from raising concerns over Well to look from pure financial the importance of risk analysis in the ratings criteria of credit rating perspective IL&FS incident is not real time. All in all every mistake, agencies, another major issue hi- really a loss unless the company to- every blunders teaches us some ghlighted was the a-symmetry of tally defaults and went to bankrup- important lessons and this fiasco data regarding the credit histories tcy. It is just what is term as mark- was one among them ! of borrowers. Such information -to-market losses. The company till then was available in bits and still has lot of infrastructure assets “Great losses are great pieces with different entities like in the form of completed and unlessons� banks, credit institutions etc which dergoing projects. The company is - Amit Kalantri resulted in huge gap in evaluating yet to receive income from some credit worthiness of buyers. The so- completed projects which are stuck lution to this problem is Public Cre- due to legal cases regarding condit Registry or PCR in short. PCR is tractual terms. Even government basically a repository of loan infor- of India has to pay close to 16000 mation of individuals and corpora- crores to IL&FS. However IL&FS tes borrowers at one place which fiasco was yet another example can be accessed to check the cre- of ill-management of finances by dit worthiness of borrowers. Such the banking & investment sector repository will not only help in iden- and the weakness of our system to tifying good or bad borrower but identify such rotten apples. IL&FS will also help in raising red flags to incident was a very good lesson to institutions which are likely to de- everyone who was involved in it. It fault or in bad shape. Such classifi- thought mutual funds a lesson to cation will help banks give customi- not expose itself heavily on single
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FINANCE
Crisis in the Banking sector
Kshitij Bansal IIFT K
The major catalyst for any country’s economy is the banking sector. It is the major source of financial resources for capital-intensive sectors such as infrastructure, automobiles, iron and steel, industrials and high-growth sectors such as pharmaceuticals, healthcare and consumer discretionary. In emerging economies like India its role grows multi-fold. Apart from acting as agents of financial intermediation banks also have an additional responsibility of realising the governments social reform agenda. Because of this close relationship between banking and economic development, the growth of the overall economy is intrinsically correlated to the health of the banking industry. What led to the Banking Crisis?
Ajinkya Salunkhe IIFT K
Indian economy was going through a dream run in terms of growth from 2002 to 2008 which led to spiralling of credit growth in the Indian banking sector in excess of 22%. But as the financial crisis struck a slowdown in economic growth started which further resulted in lower credit demand as well as a receding appetite on the part of the banking industry, to extend credit. This further led to ballooning of stressed assets from a mere 5.7% INFINEETI
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in FY08 to 10.2% in FY13. At this point of time an iceberg was created that kept on pilling up every year owing to the inefficiency of existing frameworks to restructure bad loans. Some of these frameworks were Corporate Debt Restructuring, Sustainable Structuring of Stressed Assets or S4A, Strategic Debt Restructuring, and Flexible Structuring of Existing Long-Term Project Loans. A need was felt by the RBI for having proper bankruptcy laws since most of the wilful defaulters were able to find loopholes in the existing schemes which further aggravated the situation for the banks to recover loans. In order to resolve this government first initiated a Banks Board Bureau (BBB) under the leadership of former CAG, Vinod Rai and then brought into effect Insolvency Bankruptcy Code (IBC) in 2016 which further led to scrapping schemes like CDR, SDR, S4A, JLF altogether. During this time the major industries which contributed to stressed assets were infrastructure, metals and the textiles which also got reflected in some of the major companies whose large NPA accounts went for resolution to National Company Law Tribunal (NCLT). Some of these companies included Lanco Infra, Bhushan Power & Steel, Electro Steel, Es-
sar Steel & Alok Industries. When the things were looking to improve considerably another setback struck the banking sector due to PNB fraud and a slowdown in global economy due to trade war which further dragged the NPA recognition process and also led to creation of new NPA’s. Opinion on Banking Crisis
any discrepancies. • Skill sets of the credit teams need to be upgraded from time to time so that proper credit evaluation takes place • In order to reduce work load on banking employees a separate team can be instituted to look at the accounting records in order to detect any irregularities.
NPA situation has definitely improved in comparison to the situation in 2016 or 2017 majorly owing to the scrapping of restructuring schemes and making accelerated recognition of a number of large stressed accounts as NPAs. Another reason for the improvement in Gross NPA ratios is the capital infusion into state-owned banks under the restructuring scheme which has further led to increase in the credit growth. Although the situation has improved the current NPA situation has turned into a crisis which can be mitigated but cannot be eliminated. Considering the government has set a target of turning India into a $10 trillion economy by 2030 would require strong credit growth by the banks and amidst global headwinds and macro shocks this will certainly keep the iceberg floating around. Suggestions to improve the NPA situation • Technology and analytics can play a crucial role in upgrading the monitoring process & in providing insights into the anomalies, risk indicators and trends. • Major reason for NPAs is lack of due diligence during the sanctioning of loan. In order to resolve this past history revelation by the borrower to the banks should be mandatory and surprise visits by banks should be done in case of INFINEETI
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Final Placements : The Batch year in review
Paras Goel, IIFT K
1719 INFINEETI
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Summer Placements for 201820
1820 INFINEETI
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POLICY
RBI Under the lens of Facts and the Law
Shubham, IIM Indore
Jaskiran, IIM Indore
“I think, for any regulatory mechanism, stakeholder consultation has to be of a very high quality, which will probably lead to a revisiting of traditional thoughts and opinions” Arun Jaitley, Finance Minister “Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution” Viral Acharya, Deputy RBI Governor
two can’t even stand each other. Seems a situation unique to India? Even Trump has expressed discontent with Fed rate hikes publicly. Let’s understand why RBI and MoF’s congruence is important for the country. RBI performs many functions controlling the money supply in the country. To take an example, RBI defines the policy rates for the banks which in turn determine the interest rates charged/offered by banks. RBI being the central banks is assumed, and expected to be independent of the political influences whereas the Ministry is run by the political party in power. Ministry of Finance is entrusted with the responsibility to manage the fiscal policy of the country. This includes the determining the taxation structure, imposing duties and allocating the Union budget.
“Regulators have a very important function, regulators ultimately decide the rules of the game and they have to have a third eye which perpetually be open. Unfortunately, in the Indian system we politicians are accountable but regulators are not.” Arun Jaitley, Finance Minister RBI enjoys a quicker impact of its policy changes. For example, the In a speech at the Gujarat Law Uni- Open market operations (OMOs) versity Wednesday, Patel pointed it conducts soaks the liquidity from out that dual regulation ownership the market immediately. On the by the finance ministry and the other hand, government decisions RBI has led to a deep crack in the take time to implement and are banking regulatory setting. influenced by political parties and face higher resistance from the pu“A good analogy of the Central blic. Bank is - it’s a seat belt for the Government, which is a driver. The dri- What the statue says about the ver may not put on the seatbelt but two? the seatbelt is useful in times of a crash.” Reserve Bank of India Act, 1934 Raghuram Rajan, Ex-RBI Governor contains two sections empowering the two to advise the other: The above statements made in public clearly indicate that all is • Sec 26(2) says that the Central not well between the Mint Street Government, on the recommendaand the North Block. It’s not just tion of the Governor of RBI, can withe words, but the actions too are thdraw the legal tender of currency in sync with the speech. Monetary note of any denomination. Policy Committee (MPC) members • Sec 7 empowers the Central godeclined to meet the officials from vernment, after consultation with Ministry of Finance before the June the Governor of RBI, to give instrucmeeting last year. Seems like the tions to banks in public interest. But INFINEETI
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the government can proceed with ment of PSBs and their tenure is its decision even if Governor thinks protected by the government. Also, otherwise. the regulatory guidelines of the RBI face delays to take effect. The statue requires for cooperation among the two entities and expect Time and again experts in the field the two to act in best interest of have called for to put an end to this their stakeholders. dual command, but no one really cared to do so. Starting with NaraBelow we look at what all has brou- simhan Committee, RBI governors ght us to the present face offfrom YV Reddy to Urjit Patel have acknowledged this as a barrier to Dual Regulation of Public Sector RBI’s control over banking industry. Banks (PSBs) Dividend by RBI This is a classic example of violation We have heard Raghuram Rajan of Unity of Command wherein the quoting that the dividend paid by PSBs are accountable to both the the RBI to the government during Central government and RBI. It is his tenure exceeded the dividend constantly stuck in the middle in an paid during the entire last decade. attempt to make both happy. The RBI, as mandated by the RBI Act, Central Government controls the pays the entire surplus remaining PSBs via the Banking Companies after provisioning for bad and douAct, 1970, Bank Nationalization btful debts, depreciation on the Act, 1980 and the SBI Act, 1955. assets owned and making payRBI controls all the banks under ments to the staff and contribution Banking Regulation Act, 1949 that to the superannuation fund to the enlists certain exemptions for the central government. The governPSBs. ment takes this into account while formulating the budget and wants The case is for governance and re- maximum dividend possible. It congulations of banks. RBI oversees siders this as one of the source for the governance and regulations of meeting its fiscal deficit target. On the private banks, but the govern- these lines only, transfer of funds ment controls the governance of to Contingency Reserve (CR) and the PSBs while the regulation re- Asset Development Reserve (ADR) mains with the RBI. It holds back by the RBI has been stopped. RBI from exercising its operational autonomy, which is its prerogative. Both the governance of the bank and regulation might sound different but are interconnected in more ways than a person can think of. Separate entities overseeing both create conflicting opinions. For instance, the Government is of the opinion that RBI has more reserves than it required, whereas RBI finds it sufficient to maintain strong Balance sheet. Now the RBI does not control the top manageINFINEETI
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The dividends paid in the past have fluctuated a lot, with the FY’17 dip due to expenses for printing new currency notes and managing excess liquidity. The government demands a clear dividend policy from the RBI so as to have realistic budget statements for future. There are also views that government is eyeing on the reserves held by the RBI. RBI act is silent about the transfer of funds from previous year’s surplus. RBI Board The RBI board can have a maximum of 21 directors - Governor, four deputy governors, two government nominees, four from RBI’s regional board and ten directors are appointed by the government. Deputy Governors and government nominees do not have voting rights, the governor’s vote acts as tie breaker. Modi government is not considering any changes to the RBI board but a notable change was made with the removal of Nachiket Mor. Mor was vocal about the government advancements. The new appointee was S Gurumurthy, who publicly slammed the Raghuram Rajan’s decision on asset quality review. Though RBI is an autonomous re-
gulator, but it is answerable to the RBI Board. As Rajan also mentioned recently, the board is not expected to micromanage and interfere in the operations of the RBI but act as directive to the RBI. With the new governor Shaktikanta Das coming from south block itself, it’s important to see how the board functions. Feb 12th 2018 Circular This circular shook the banking industry to the core. It required the banks to take large accounts, wherein amount due exceeds Rs. 2,000 crores, to insolvency proceedings if remaining overdue for 180 days. This means compulsory appointment of resolution professional after 180 days. The banks had 1.74 lakh crores to initiate proceedings on and feared that they would not get a fair value if these many assets are sold at once. Power companies attributed the default to erratic state owned coal supply and payment delays by discoms. Even the Allahabad court directed the government to use
Section 7 and see if RBI and the government can reach a consensus. RBI held its stand firmly and is eager to clean up the banks’ balance sheets. The revised framework of this circular calls for initiation of proceedings in NCLT in case of one-day default. The banks are in talk with the new governor and feel that a 30 day default is normal. Banks welcome the idea of faster resolution but want larger allowable default period. Also, NCLT’s unpreparedness for quick resolution is another story altogether. The committee formed by the government to review the Payment and Settlement Systems Act, 2007 has recommended setting up a Payment Regulatory Board (PRB). This would strip the RBI’s power of regulating payment and settlements. With India becoming a hotbed for fintech companies as well as for NBFCs, the government feels a need to have a separate regulator for managing this similar to the way Australia and UK have. This government is encouraging digi-
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tal payments and wants the NEFT, RTGS and card transactions to be regulated separately. While RBI wants the system to be interconnected and wants to retain this power, the Bill stating the need of PRB is to be sent to Union Cabinet. If established, this would exert the legal dominance the government has over RBI and might be discerned as dilution of RBI’s power over the financial sector. It is high time that both these entities start working in tandem for national interest. With new RBI governor Shaktikanta Das on board, the hopes are set high. Das has served in the department of Economic Affairs and was given the task of easing RBI’s relations with the government at the time of demonetization. There are many challenges ahead for him from tackling the non-performing assets in the banking system to maintaining balance between government’s pressures in pre-election period and safeguarding the RBI’s operational freedom.
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