📰 Bills on bankruptcy code, mineral law get RS nod
•After days of disruption, the Rajya Sabha on Thursday passed two Bills — the Insolvency and Bankruptcy Code (Amendment) Bill, 2020 and the Mineral Laws (Amendment) Bill, 2020.
•The Insolvency and Bankruptcy Code (IBC) Amendment Bill, that will help ring-fence successful bidders of insolvent companies from the risk of criminal proceedings for offences committed by previous promoters, was passed by the Lok Sabha on March 6. The Bill replaces an ordinance.
•The IBC, which came into force in 2016, has already been amended thrice. Introducing the Bill, Finance Minister Nirmala Sitharaman said the Bill was an exact replica of the ordinance and the changes recommended by the Standing Committee of Finance would be incorporated later.
•The Minister said the need for amendment in the IBC arose because of the “changing requirement” and “requirement of fine tuning” the law.
‘This is euthanasia’
•Opening the debate on the Bill, Congress member Jairam Ramesh said only 10% of defaulted loans had been recovered other than seven big ones to be resolved so far. The law was brought to find a way to keep the firms afloat. However, Mr. Ramesh pointed out that out of 970 cases referred to the IBC, 780 had been liquidated, indicating a mortality rate of 80%. “This is euthanasia,” he said.
Draft notification introduces updates
•A set of key updates to India’s Environment Impact Assessment (EIA) Act, the law that governs how the threat posed by large infrastructure projects to the environment ought to be evaluated, proposes to reduce the time given to people to air objections.
•The draft EIA notification proposes to be an update to the EIA of 2006, which specifies a “minimum of 30 days” for people to respond. The current version of the update, which will likely become law in 60 days, gives a “minimum of 20 days” of notice period. It also requires that the public-hearing process be wrapped up in 40 days, as opposed to the existing norm of 45 days.
•Under the process, an organisation has to submit a detailed plan explaining the nature, need, and remedial measures, if their proposed project could significantly impact a region. A committee constituted by the Union Environment Ministry then decides on whether the project should be cleared.
📰 Why oil prices are crashing
Prices crashed by almost 50% this year, from $66 a barrel on December 31, 2019 to the current levels, primarily driven by lack of demand.
•Oil prices saw their biggest single-day crash in almost 30 years on March 9, throwing global equity markets into turmoil. The price of a barrel of Brent crude closed down 24% at $34.36 after a price war was initiated between Saudi Arabia and Russia, two of the world’s largest oil producers. It recovered slightly on March 10, but crashed again. On Thursday, Brent crude price was hovering around $33 a barrel. Prices crashed by almost 50% this year, from $66 a barrel on December 31, 2019 to the current levels, primarily driven by lack of demand.
What happened to the OPEC-Plus alliance?
•After 2014 “glut” diplomacy which brought down prices below $30 a barrel, Saudi Arabia and Russia came together to cut output and steady prices. Known as the “OPEC Plus” arrangement (Russia is not a member of the Organisation of Petroleum Exporting Countries, or OPEC), this alliance kept production lower and pumped up the prices. The OPEC-Plus cooperation collapsed last week after Russia rejected a Saudi request to effect more cuts in output given the fall in demand owing to the economic impact of the coronavirus outbreak. The exiting output reduction deal is set to expire later this month. The Russian and Saudi sides have said they are no longer constrained by the deal and are free to ramp up production. Saudi Arabia’s oil giant Aramco announced that it would increase output from 9.7 million barrels a day now to 12.3 million barrels a day in April. Aramco also offered a discount to its variety of crude, targeting Russian markets in Asia and Europe. The fear of glut at a time of slowing demand (supply and demand shock) rattled the markets, crashing prices.
What does Saudi Arabia want?
•As it was clear that Russia was not ready to cut its output further, the Saudis moved to the attack mode. The plan is to flood the markets with Saudi oil and depress the prices, which would hurt all oil exporters. Riyadh may have multiple targets. One is to exert pressure on Russia and make it come back to the negotiation table. And if both sides agree to a new deal, they can reverse the decision to ramp up production and collectively take steps to pump up prices. Second, if the Russians do not blink, the plan is to capture market share from Russia with discounts. Third, bleed the U.S. shale oil producers who could not sustain production at depressed prices. In a way, Crown Prince Mohamed bin Salman, the de facto ruler of the kingdom, is trying to take on both Russia and U.S. shale oil companies with a single move. But the question is whether Saudi Arabia could sustain the price war for a longer term. Roughly 90% of Saudi budget revenues are coming from the petroleum sector. The Kingdom wants prices to be over $60 a barrel to balance its budget. Prolonged depressed prices will leave a bigger hole in the Saudi budget, complicating further the Crown Price’s economic reform and diversification agenda.
What’s Putin’s plan?
•Though Russia had been cooperating with OPEC for three years, there’s a growing opinion in Moscow that the output cut was hurting Russian energy companies. Russian companies also want to open the taps and gain more market share. Furthermore, there’s a convergence of interests between Saudi Arabia and Russia in hurting the U.S. shale oil companies, which are flooding markets with shale oil and challenging the supremacy of traditional oil producers in determining the prices (U.S. output was more than 12 million barrels a day in February). Russia is in a relatively stronger economic position than Saudi Arabia. Oil now accounts for less than a third of its budget revenue. The country has also built a war chest of $435 billion in foreign exchange reserves. Russian President Vladimir Putin may be in for a long game — to weaken both U.S. shale oil industry and the OPEC’s clout in the market.
📰 Retail inflation eases to 6.58%, industrial production quickens
Food inflation abates; faster output growth in mining, manufacturing
•Retail inflation based on the Consumer Price Index slowed to 6.58% in February, while the industrial production growth as measured in the Index of Industrial Production (IIP) quickened to 2% in January amid subdued performance by the manufacturing sector, official data released on Thursday showed.
•Retail inflation, which was 7.59% in January 2020 and 2.57% in February 2019, slowed mainly due to easing food prices. Inflation in the food basket was 10.81% February 2020, lower from 13.63% in the previous month, as per data from Ministry of Statistics and Programme Implementation.
•The government has mandated the central bank to keep inflation at 4% with a margin of two percentage points on on either side.
•“The moderation in inflation has expectedly been led largely by food inflation while core inflation remains muted amid tepid demand,” Upasna Bhardwaj, Economist at Kotak Mahindra Bank said. “We expect the inflation trajectory to continue to moderate going ahead led by deflationary trends from falling crude oil prices, lower food prices and weak demand.”
•She added that with domestic and global growth expected to face downside risks from the spread of COVID-19 and deflationary forces emerging, “we see room for up to 50 bps of rate cut by the MPC, with any further easing contingent on the evolving growth environment.”
•The IIP had accelerated 1.6% in January 2019. For January 2020, official data showed that the mining sector output grew 4.4% against a rise of 3.8%, manufacturing output rose 1.5% compared with 1.3% in the year-ago month, and electricity generation rose 3.1% versus 0.9% in January 2019.
•Cumulative IIP growth for the period April-January 2019-20 over the corresponding period of the previous year stands at 0.5%, as against a growth of 4.4% in the corresponding period of 2018-19.
📰 Fighting COVID-19 together for a shared future
China and India have maintained close communication and cooperation on epidemic prevention
•The COVID-19 outbreak is a major public health emergency that is most difficult to contain for China since the founding of the People’s Republic of China in 1949. It is also a formidable challenge to global public health security. Under the strong leadership of the Communist Party of China (CPC), China adopted unprecedented, most comprehensive, rigorous and thorough prevention and control measures, which not only protected the health and the security of the Chinese people, but also gained time for global response.
•Since the outbreak of the epidemic, President Xi Jinping has personally taken charge of the nationwide response. He has chaired a series of important meetings, passed instructions every day, clearly guided and ensured the scientific deployment of epidemic prevention and control, and enabled the resumption of work and production. On March 10, President Xi went to Wuhan, the capital city of Hubei Province and the epicentre of the epidemic, to inspect prevention and control work there. He paid respects to the front-line workers and local residents. This has greatly encouraged and inspired the people of Wuhan and the whole nation.
•The Chinese government has mobilised the whole nation with confidence, unity, a science-based approach and a targeted response. We focused on the following aspects: first, formulated timely strategies for epidemic prevention and control; second, strengthened a unified command and response in Wuhan and Hubei; third, coordinated the prevention and control work in other regions; fourth, strengthened scientific research, emergency medical and daily necessity supplies; fifth, effectively maintained social stability; sixth, strengthened public education; and seventh, actively engaged in international cooperation.
A resilient country
•We are consolidating the positive momentum in outbreak control across the country. In general this round of the epidemic peak is over in China. The progress once again demonstrates the great strengths of the CPC’s leadership and the system of socialism with Chinese characteristics. As President Xi pointed out, China is a resilient nation that has emerged stronger from numerous trials and tribulations. The bigger the difficulties and challenges China faces, the more cohesion and fighting spirit the Chinese nation demonstrates. We have all the confidence, capacity and determination to triumph over the epidemic.
•Guided by the vision of a community with a shared future for mankind, China is fulfilling its responsibility for the life and health of its own people and for global public health. With an open, transparent and responsible attitude, we have actively engaged in international cooperation against the outbreak, and our efforts have been highly recognised by the World Health Organization (WHO) and the international community.
•The UN Secretary-General, António Guterres, described China’s sacrifice in fighting and containing the spread of COVID-19 as a great contribution to all mankind. At this critical moment, many countries embodied the spirit of standing together with mutual assistance amid difficulties. Leaders of over 170 countries and the heads of more than 40 international organisations expressed sympathy and support for China. Also, 71 countries and nine international organisations announced the donation of epidemic prevention and control materials to China.
Mutual support
•China and India have maintained close communication and cooperation on epidemic prevention and control. In a letter to President Xi, India’s Prime Minister Narendra Modi has expressed support for China. We appreciate the medical supplies provided by India and have helped facilitate the safe return of Indian nationals in Hubei. I am also deeply touched by the understanding and support in various ways from all sectors of the Indian society.
•We have been closely following the global footprint of COVID-19. President Xi Jinping has said China will stay in close communication with WHO, share its epidemic control experience with other countries, seek closer international cooperation on medicine and vaccine development, and provide assistance to the best of its capabilities to countries and regions that are affected by the spread of the virus in keeping with its role as a responsible major country.
Reaching out
•China has provided various kinds of assistance including testing reagents, remote assistance and medical supplies to countries with a severe outbreak such as Japan, the Republic of Korea and Iran and countries with fragile health systems in Asia, West Asia, Africa and Latin America. We have shared diagnosis and treatment experience and protocols with many countries including India. Recently, the number of confirmed cases in India is increasing. I sincerely wish the patients an early recovery. We are ready to maintain communication with India, share experience in a timely manner, render assistance and make joint efforts to overcome the epidemic.
•The impact on the Chinese economy will be short lived and generally manageable. China has a resilient economy with robust domestic demand and a strong industrial base. We will definitely sustain the good momentum of economic and social development and meet the goal of achieving moderate prosperity in our society and eradicating extreme poverty in China. We will also strengthen coordination and communication with economic and trading partners and give priority to the resumption of production and supply of leading enterprises and key sectors that have a major impact on the stability of global supply chains. The fundamentals of China’s economy will remain strong in the long run, and China will remain an important engine for global economic growth.
•The history of civilisation is also one of a history of fighting diseases and a great journey of ceaseless global integration. President Xi Jinping has said that to prevail over a disease that threatens all, unity and cooperation is the most powerful weapon. In the process of fighting the epidemic, China is fulfilling its solemn commitment to build a community with a shared future for mankind with its own actions. The world is facing a real threat as WHO characterises COVID-19 as a pandemic. In the face of an increasingly severe situation, China will strengthen international coordination and cooperation, and jointly safeguard our only home, the blue planet, together with the world.
📰 Danger ahead
District committees must hold open meetings to better India’s terrible record on road safety
•Union Transport Minister Nitin Gadkari has expressed optimism that the significant amendments made to the Motor Vehicles Act have begun reducing the terrible death toll due to accidents on India’s roads. As the prime mover of these changes, he finds the reported reduction in crashes, notably in Gujarat, Uttar Pradesh, Manipur, Jammu and Kashmir, Andhra Pradesh, Chhattisgarh and Maharashtra, proof of the law’s beneficial impact. Any reduction in road safety incidents in a rapidly motorising country is encouraging, but the cold reality is that data on those who lose their lives or are incapacitated do not reflect a marked decline. In fact, they underscore the culture of indifference among States. Unlike acute crises such as the COVID-19 pandemic, which has sent governments scrambling to save lives and stop economic derailment, a chronic malaise such as deadly road accidents begets only token measures. What else could explain policymakers tolerating the loss of about 1.5 lakh lives each year since 2015, with the graph rising from 80,888 fatalities in 2001? Small reductions in this infamous tally, which Mr. Gadkari took note of at a transporters’ summit, have little meaning, since they do not represent a trend of targeted reductions. The new Motor Vehicles law does have more muscle in being able to levy stringent penalties for road rule violations — some States are using it — but that is not the same as saying that India has moved to a scientific road system marked by good engineering, sound enforcement, appropriate technology use and respect for all road users. In fact, a World Bank ‘Delivering Road Safety in India’ report is apprehensive that rapid motorisation and more high-speed road infrastructure have raised the risks for road users.
•The transition to a professional road environment requires implementation of first-tier reforms that deal with quality of road infrastructure, facilities for vulnerable users and zero-tolerance enforcement of rules by a trained, professional and empowered machinery. A key mechanism of change are District Road Safety Committees, which were enabled even by the 1988 Act, but remain obscure. A mandatory monthly public hearing of such committees involving local communities can highlight safety concerns, and their follow-up action can then be supervised by the Members of Parliaments’ Road Safety Committees, created last year. Here, it is essential to make the Collector, local body and police accountable. Making dashboard cameras mandatory, with the video evidence accepted in investigation, would protect rule-abiding motorists and aid enforcement. To save lives on highways, quality trauma care at the district level holds the key. In the absence of good hospitals and cashless free treatment, no significant improvement is possible in the quest to save life and limb.
📰 Should distressed private banks be saved by PSBs?
It should be the last resort, but right now, the government is facing severe fiscal constraints
•A day after the government imposed a moratorium on the financially troubled Yes Bank last week, the Reserve Bank of India announced a draft restructuring plan that entails the State Bank of India acquiring a 49% stake in the private lender. In a discussion moderated by Suresh Seshadri , T.T. Ram Mohan and Ananth Narayan examine whether the proposed bailout is warranted and what lies ahead for the wider financial sector. Edited excerpts:
Is a bailout of a failing private lender by a public sector bank justified? And if so, on what grounds?
•T.T. Ram Mohan:It’s not the best option certainly. I think the first option should always be to have a private investor come in and infuse his capital into the private bank. The RBI did give some time to the Yes Bank management to work out such an arrangement but evidently that did not succeed.
•The next option then, the straightforward option, would have been for the government to simply nationalise Yes Bank. And as you know, that’s exactly what happened during the global financial crisis with innumerable private banks all over the world.
•But here the government is facing severe fiscal constraints. And also, it is finding it very difficult to infuse money into its own public sector banks. That perhaps explains the reluctance of the government to nationalise Yes Bank. So, what we have is really something that should be the very last resort, which is getting a public sector institution, a public sector bank, SBI, to lead the rescue.
Why is it that in the case of a private lender, unlike, say, an airline, there’s a reluctance on the part of authorities to let the bank fail?
•Ananth Narayan:It’s never pleasant or elegant to see something like this… intervention by the government. But let’s face it, this is an issue of financial stability. Yes Bank was not a small bank. The total balance sheet size was close to Rs. 3.5 lakh crore, lots of depositors, lots of businesses. And one thing which the Financial Stability Report of the RBI does kind of enumerate is the level of inter-connectedness within the financial services ecosystem. While after the global financial crisis, the idea was always to have no bank which is too big to fail, the reality is the inter-connectedness between banks themselves, banks and the rest of the financial sector ecosystem, including mutual funds, insurance companies, non-banking finance companies (NBFCs), etc. And then the inter-connectedness of the financial sector with the real economy is so deep, that you know, what is good in theory would rarely be good in practice. So, I don’t dispute that what the government has done, which is stepping in to try and resolve the Yes Bank crisis, is the right approach. We can argue about what could have been the best approach. In the past, banks such as Global Trust Bank have been subsumed within existing banks, rather than trying a half-way measure as we are doing right now. So we can argue about the right way of doing this and the right modalities of doing this. But some kind of intervention was definitely required.
•I will only also add, this isn’t over. While Yes Bank was an immediate problem, which obviously had to be resolved and I’m sure will be resolved, the larger trust deficit in the financial services ecosystem remains. And much work needs to be done beyond this.
Are larger public sector banks, including SBI, being made more fragile by involving them in bailouts of their public sector or private peers?
•AN:It’s never good for a bank to have to step in and practically as a last resort have to rescue another bank. I’m sure given the choice, the SBI management would have probably rather not gotten themselves involved in a Yes Bank rescue. But as the chairman and managing director of SBI himself said, when the country’s interests come to the forefront, people have very little choice.
•Things are a little fragile for the overall financial services ecosystem. As per the Financial Stability Report, public sector banks have 12.7% of gross non-performing assets (NPAs) as of September 2019. That number could actually be higher if you were to include or remove the kind of forbearance available on some sectors like small and medium-sized enterprises [SMEs] and real estate. Plus, as of September, loans to NBFCs such as DHFL [Dewan Housing Finance Corporation] were actually counted as current. So, accounting for all of that, that number is probably higher, and it’s higher than the rest of the ecosystem. Plus, over the last few years, the government has had to infuse Rs. 3.5 lakh crore of equity into public sector banks. So, the overall banking system is kind of fragile at this point in time, and it’s clearly burdened with things like NPAs and loans.
•I wouldn’t call this particular Yes Bank episode a question as to whether public sector banks are better governed or private sector banks are. I think the reality is that every element of the financial services ecosystem requires governance reforms. Governance is a cross bank and cross institutional issue. It’s not limited to public sector banks or private sector banks or NBFCs; it’s across the board.
Are we creating a larger number of banks that potentially become ‘Too Big to Fail’ ? The RBI had earlier identified only SBI, ICICI and HDFC Bank as Domestic-Systemically Important Banks.
•TTR:The systemically important banks are banks which are tracked more carefully and which are also subject to higher capital requirements under Basel III. But that is not to say that banks which are relatively smaller in size, such as Yes Bank, do not pose systemic risk and therefore, should not be rescued. In practice, the threshold for a bank to be considered large enough to constitute a risk to the system is much lower. So characterising a bank as systemically important has more to do with tracking particular banks more carefully. That does not mean that there is no case for a rescue with banks of a much lower size. Even a bank with a size of about Rs. 2,00,000 crore, if it were to fail today, would need to be rescued. And that way it does constitute a systemic risk.
Are there wider risks to banking stability given the underlying stress among corporate borrowers in a wide range of sectors from telecom to power to aviation?
•AN:This is a risk that a lot of us have been flagging for a while now, that there is a trust deficit in the financial services ecosystem which is linked to several stresses on corporate and SME balance sheets at this point in time. As per the Financial Stability Report of the RBI, as of September, the gross NPAs of the banking system was 9.3% of advances. And there are analysts who say that if you include the forbearance available to SMEs and to some real estate assets, besides the fact that some NBFCs were not classified as non-performing in September, even though they subsequently have [become] non-performing like DHFL, the actual number could be higher than 9.3%. The problem really is for NBFCs where the official number for gross NPAs, as of September, was 6.3% of advances. That number doesn’t make sense. NBFCs typically lend to sectors which are riskier than banks. And it does feel like the real number could be much, much higher and mind you, no asset quality review has happened for NBFCs as yet.
•Now, the whole edifice of a financial services ecosystem is trust — if people don’t trust the numbers, which are being put out for the asset quality, clearly that has implications for financing, that has implications for the ability and the willingness of people to actually lend and put out money. And this is something which has to be addressed. Eventually to restore trust, I think we have no choice but to actually make a clean breast of where we are in terms of the true asset quality. Which is, where all the ramifications of the stressed sectors including real estate, construction, power, telecom, airline and shipping, maybe even several public sector enterprise loans, will come to the fore. So, alongside that disclosure, if you don’t want the system to actually go through a lot of strain, you obviously require a solution as well. Now, while we have a very good Insolvency and Bankruptcy Code and the NCLT [National Company Law Tribunal] process, I don’t think it’s geared to handle the overhang of stock that
we have right now of NPAs. We already have more than 2,000 cases pending at the NCLT courts. So we probably require a one-time solution as well to go along with this actual disclosure of the real state of affairs. Absent these two things, and of course, the larger reforms… it is possible that this overall financial services ecosystem remains in a bit of a comatose condition for a long time and that’s terrible news for us. We need our financial system to be able to fund growth; at the moment, that’s not the case at all.
How confident are you about the outlook for the financial system?
•TTR:I agree the conditions are very challenging, and not just the adverse global conditions. At the moment the stresses within our own financial system have got considerably exacerbated consequent to the Yes Bank episode. We have to see what happens to the attempted rescue. The details of the rescue plan are evolving, even as we speak. It’s not clear what the precise rescue plan is going to be. And so we have to wait and watch and see whether any attempted rescue of Yes Bank has a reasonable chance of success. That is a crucial factor.
•But irrespective of how that problem is resolved, the damage to confidence caused by the moratorium, one month moratorium, and the cap on withdrawal of deposits of Rs. 50,000 cannot be overstated. And I think that is duly reflected in the hammering that several private bank stocks have received over the last few days. It’s also not helpful that the Maharashtra government has made it very clear that none of the State government’s accounts or the accounts of the civic and other bodies under the State government will be left lying with private banks hereafter. Now, I shudder to think of what the implications would be if other State governments were to imitate the State government of Maharashtra, which is highly likely. So we need some cool heads at this point and there has to be coordination between the Central government, the State governments and the RBI to bring about some calm in the sector.
•The rescue plan for Yes Bank is a starting point. But there are various other things that need to be done. And let me say that the impending bailout package for telecom is one of the many imponderables in the scenario. But my guess is that whatever plan is announced is going to prove quite stressful for the banking sector.
