On payment banks: Rajan is right, Bhattacharya is wrong

On August 19, 2015, the Reserve Bank of India (RBI) gave an approval to 11 entities to start “payment banks”. These include Vodafone, PayTM, Department of Post, Aditya Birla Nuvo, Reliance Industries, Airtel M Commerce, Vodafone m-pesa etc. As the name suggests, payment banks will be allowed to collect money from depositors and make payments to others, on their behalf.

These banks can accept deposits of up to Rs 1 lakh only. Further, they are not allowed to give out loans like normal banks are. A bulk of the deposits they collect need to be invested in government securities which mature in a period of up to one year.

So what is the idea behind setting up these banks? The simple answer is financial inclusion—to improve the penetration of the banking system in India. A recent World Bank report points out that between 2011 and 2014 the number of bank accounts in India increased by 17.5 crore, thanks to a massive push by the government. With this increase in numbers, the penetration went up from 35% to 53%. The worrying thing is that even after this massive increase, half of India does not have a bank account.

Further, the high dormancy rate is another worrying factor. As the World Bank report points out: “India, with a dormancy rate of 43 percent, accounts for about 195 million of the 460 million adults with a dormant account around the world.”

The hope is that payment banks will help address this problem to some extent.  As the Draft Guidelines for Licensing of “Payments Banks” document points out: “There is a need for transactions and savings accounts for the underserved in the population…Higher transaction costs of making remittances diminish these benefits. Therefore, the primary objective of setting up of Payments Banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users, by enabling high volume-low value transactions in deposits and payments.”

The RBI governor Raghuram Rajan has been a driving force behind these banks and sees them as a game-changer. Nevertheless, the existing banks are not looking forward to the competition that these new banks will bring in.

As Arundhati Bhattacharya, chairperson of the State Bank of India said recently: “Why this payments bank is a little worrisome is because they will be allowed to have savings deposits. What if they go for poaching rates, then many of the commercial banks could lose a portion of the deposits which are relatively lower priced so that will take away the ability to transmit rates and give further loans at lower rates.”

What Bhattacharya is worried about is that the new payment banks will try and attract savings deposits at a higher rate of interest. Most big banks currently pay around 4% on deposits on their savings accounts. It is a cheap source of funding for them.

The payment banks will offer higher rates of interest on deposits, Bhattacharya feels. This is a possibility. The question is how high? The payment banks are not allowed to give out loans. Further, they are allowed to invest only in government securities of up to one year. Also, they are supposed to maintain a cash reserve ratio of 4% with the RBI. On these deposits no interest is paid. If all these factors are taken into account, the payment banks cannot go overboard with offering very high rates of interest on deposits, if the idea is to make profits.

As Rajan said in response to Bhattacharya: “I don’t think these 11 new banks are a threat to the existing banks. These new banks will complement the existing system by traversing the last mile. The reason for this is that there is nothing the universal banks cannot do that the payments banks can do. But there are some of the things that the payments banks can’t do which the universal banks can.”

What Rajan meant here was that payment banks unlike scheduled commercial banks cannot give out loans. And that limits their ability to make profits. And given that they cannot go overboard while offering a higher rate of interest to attract deposits.

Another fear that has been raised is that people will move their money from scheduled commercial banks to payment banks in order to be able to pay electricity/telephone bills etc. The point is that people are already using services offered by scheduled commercial banks to pay such bills. Hence, there is no real reason for them to move on to a payment bank, lock, stock and barrel.

If we might just rephrase what Rajan said: “A scheduled commercial bank can do everything that a payment bank can do.” In fact, a lot of them already have the necessary infrastructure in place to do things that payment banks are likely to do.

Also, banking in cities and urban areas is pretty much stagnated. The low hanging fruit has more or less been taken. If payment banks want to attract deposits, they need to look beyond the middle class, and look at the urban poor as well as the rural areas to attract deposits.

Anybody who has read Rajan’s first book Saving Capitalism from the Capitalists (co-authored with Luigi Zingales) would know where his thinking is coming from. In this book Rajan explains in great detail as to how the only way to develop finance is to increase competition. As he writes along with Zingales: “Finally, and perhaps most important, increased competition resulting from forces beyond control of incumbents—in particular, competition as a result of technological changes…—can reduce incumbents’ incentives to use financial underdevelopment as a barrier to domestic entry.”

What does this mean in the context of payment banks? Payment banks will bring in increased competition through forces that are beyond the control of incumbents i.e. the scheduled commercial banks. Further, payment banks are likely to use a lot of technology in their bid to expand the market. This will keep the scheduled commercial banks on their toes.

Rajan is hoping that payment banks will bring in a new way of doing things. As he said last week: “The bank branch can become a centre of activity, helping with cash handling or do some completely new work…There is a lot of scope for everyone… not everybody will succeed but this is a revolution which can happen.”

Further, if these banks end up expanding the banking penetration of the country, Bhattacharya’s fear of interest rates going up, will not hold true. If payment banks are able to expand the total deposit base of the country at a faster rate than the current rate, the interest rates are likely to come down.

So, why did Bhattacharya react the way she did? Rajan and Zingales have an explanation for that in their book. As they write: “Throughout its history, the free market system has been held back, not so much by its own economic deficiencies as Marxists would have it, but because of its reliance on political goodwill for its infrastructure. The threat primarily comes from…incumbents, those who already have an established position in the marketplace…The identity of the most dangerous incumbents depends on the country and the time period, but the part has been played at various times by the landed aristocracy, the owners and managers of large corporations, their financiers, and organised labour.”

Bhattacharya runs the biggest bank in the country, the State Bank of India. And given that she is an incumbent, and incumbents don’t like increased competition. It tends to disrupt their existing business model. Hence, her reaction was not surprising.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on SwarajyaMag.com on August 25, 2015

Down 1600 points: Why the Sensex is on a free-fall

As I write this, I am listening to one of my favourite songs, “Free Fallin’”, sung by Tom Petty and the Heartbreakers.

And it is indeed heart-breaking to see the BSE Sensex go on a free-fall today. It fell by 1624.51 points during the course of the day to close at 25,741.56 points.
In absolute terms it is the biggest single day fall ever. But that is not the right way of looking at it (though that is how much of the media will report it).

In percentage terms, the Sensex fell by 5.94% during the course of the day. This is the 29th biggest fall ever. Given this, the Sensex fall today is a big fall, but it is not as big as it will be made out to be.

Much analysis has happened around the fall and various reasons have been offered on why the stock market is on a free-fall.
A major reason that has been offered is that the Chinese stock market has fallen by around 8.5% today. The Shanghai Composite Index is quoting at around 3,210 points, down 298 points from Friday’s close. And given that the Chinese market has fallen, the contagion has spread to other stock markets as global investors try and limit their losses by selling out.

But this is only partly true. The thing is that the Chinese stock market has been going down for a while now. Here is a column I wrote on July 9, 2015, trying to explain why the Chinese stock market has fallen. It has been more than six weeks since then.

Hence, the question to ask is why has it taken so long for the Indian stock market to react to the Chinese fall? Why has the contagion taken so long to spread?
The answer is not as simple as it is being made out to be. Until August 11, 2015, one dollar was worth 6.2 yuan. The People’s Bank of China, the Chinese central bank, over the years, has maintained a stable value of the dollar against the yuan. This has essentially been done to help Chinese exporters. By ensuring the yuan had a fixed value against the dollar, the Chinese central bank took this variable out of the Chinese exporters’ equation totally. This helped Chinese exports and exporters flourish and has been a very important part of the Chinese economic miracle.

Between August 11 and August 14, 2015, the Chinese central bank devalued the value of the yuan against the dollar and pushed down its value to around 6.39 yuan to a dollar. This was the biggest devaluation of the yuan against the dollar in nearly two decades.

A major reason for the same was the fact that Chinese exports for the month of July 2015 had fallen by 8.3% in comparison to June 2014. Even in June 2015, the Chinese exports went up by only 2.8%, in comparison to a year earlier.

But all that happened nearly 10 days back, why is all hell breaking lose now? On August 21, 2015, data pertaining to the Chinese factory sector was released. It showed that the Chinese factory sector had shrunk to its lowest level since January to March 2009.

This data point led to stock markets around the Western world falling. The Dow Jones Industrial Average, one of the premier stock market indices in the United States, fell by around 531 points or 3.12% to close at around 16,460 points. The FTSE 100 Index of the London Stock Exchange fell by 2.8%.

Why were these markets reacting to negative Chinese factory data? The simple answer lies in the fact that a shrinking factory sector is a reflection of weak Chinese exports. And what this means is that the People’s Bank of China is likely to devalue the yuan more in the days to come.

If that were to be the case, it would give Chinese exporters some leeway to cut their prices in order to get their exports growing again. And this will lead to imports prices of Chinese goods coming into the United States, Europe and other parts of the world, falling.

As Albert Edwards of Societe Generale wrote in a recent research note: “This move will transform perceptions about the resilience of the US economy… Up until now Japanese yen devaluation has been the main driver of falling US import prices.” Now the devaluation of the Chinese yuan (i.e. if it continues) will add to falling import prices in the United States.

What this means is that the local goods being produced in the US and Europe will also have to cut prices in order to compete with cheaper Chinese imports. And that can’t be good for the economy.

This is precisely the reason why stock markets through much of the Western world fell on Friday. These stock markets close a few hours after the Indian stock market had closed. The BSE Sensex had gone up marginally on Friday.

So, when it opened today, the BSE Sensex had to adjust to a new level and the possibility of the Chinese authorities devaluing the yuan further. If the yuan is devalued further, it would mean cheaper Chinese goods hitting all parts of the world (not that they are not already). In the process China would end up exporting deflation (lower prices) to large parts of the world.

Lower prices would mean that the economies will not grow at the same pace as they were in the past. And that is a possibility that the stock market needs to adjust to. Further, as markets fall, selling leads to more selling.

To conclude, since I started with a Tom Petty song, I will end with one as well: Coming down is the hardest thing. Hope this helps, dear reader. Happy listening!

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column appeared originally on Firstpost on August 24, 2015

Property prices must fall: Rajan reads out the riot act to real estate wallahs

Vivek Kaul

Raghuram Rajan, the governor of the Reserve Bank of India (RBI), merely stated the obvious when he said today (August 20, 2015): “It would be a “great help” if realty developers sitting on unsold stock bring down prices…Once the prices stabilise, more people will be keen to buy houses.”

The RBI governor added that property prices need to fall before interest rates on home loans come down, any further. “I think we need the market to clear. With growing unsold stock, we need to see the ways to do it. Some of it might be by making loans easier, but we also don’t want to create a situation where prices stay high at the level which means demand can’t pick up,” he said.

There are multiple points that need to be made here: First is that Rajan was essentially replying to all the real estate wallahs (real estate companies, lobbies and others associated with the sector) who demand interest rate cuts at a drop of a hat. The message from the RBI governor is loud and clear. The home prices are in a bubble zone and he does not want to inflate the bubble further by cutting interest rates. Home prices need to fall.

Also, it is worth mentioning here that even at high interest rates home loans given by banks continue to grow at a very brisk pace. The Reserve Bank of India (RBI) puts out the sectoral deployment of credit data every month. As per these numbers, the total amount of home loans given by banks grew by 15.6% to Rs 6,53,400 crore, over the last one year. In comparison, the overall lending by banks grew by just 7.3%. These numbers were as of June 2015.

How was the situation in June 2014? Home loans had grown by 17.1% to Rs 5,65,000 crore. In comparison the overall lending by banks had grown by 12.8%. What this clearly tells us is that even though the overall lending growth of banks has crashed from 12.8% to 7.3%, home loans continue to grow at a fairly brisk pace.
Further, banks have given out Rs 88,400 crore of home loans in the last one year. This formed around 21% of all the lending carried out by banks. For a period of one year ending June 2014 and June 2013, home loans formed around 12.7% and 12.2% of the total loans given by banks.

What this clearly tells us that banks are giving out a greater amount of home loans as a proportion of their overall loans, than they were in the past. And if this hasn’t led to a fall in inventory of unsold homes, the only reason is that home prices have gone up way beyond what most people afford. Hence, even though the total amount of home loans has gone up, the total number of home loans being given out may have even fallen (This data is not available).

The only way this situation can be corrected is if home prices fall, which is precisely what Rajan said.

The other interesting point that needs to be made here is that central bank governors normally stay away from calling a bubble, a bubble. Alan Greenspan, the Chairman of the Federal Reserve, from 1988 to 2006, was a pioneer in this school of thought. He told the US Congress in June 1999: “Bubbles are generally perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong. Betting against markets is usually precarious at best.”

So, the Federal Reserve could not spot the dotcom bubble, explained Greenspan. But once it had burst, steps could be taken to ease its fallout, Greenspan felt. As he said in a speech titled Economic Volatility on August 30, 2002: “The notion that a well-timed incremental tightening could have been calibrated to prevent the late 1990s bubble is almost surely an illusion. Instead, we noted in the previously cited mid-1999 con­gressional testimony the need to focus on policies ‘to mitigate the fallout when it occurs and, hopefully, ease the transition to the next expansion.’”

There is a fundamental problem with this argument. Greenspan was basically saying that the Federal Reserve could not recognize a bubble, but it could figure out when the same bubble had burst.

Raghuram Rajan exposes the flaw in this argument in his book Fault Lines. As he wrote: “This speech seemed to be a post facto rationalization of why Green­span had not acted more forcefully on his prescient 1996 intuition: he was now saying the Fed should not intervene when it thought asset prices were too high but that it could recognize a bust when it happened and would pick up the pieces.” Greenspan had used the term “irrational exuberance” to describe the dotcom bubble in a speech he had made in December 1996, and then chosen to do nothing about it.

Rajan clearly does not believe in the fact that a central bank cannot identify a bubble. What he said today regarding property prices being high and that they need to fall, before people can start buying homes again, clearly proves that.

Further, the real estate wallahs seem to have come up with a new explanation for why real estate prices cannot fall any further(they have barely fallen to start with). As Shishir Baijal, chairman and managing director of Knight Frank India, a real estate consultancy, told Mint recently: “Theoretically, if prices come down, perhaps the demand can increase. But I’m not sure if developers have any leeway left now for reducing prices. This is because input cost has increased quite a lot over the past few years— be it cost of labour, construction and material, or even the historical cost of land itself, which is very high. It does not look like there is any scope left for a serious correction in prices.”

This, after he had said: “there is a mismatch [between demand and supply] because people are finding it unaffordable (to buy).”And this came, after he had said: “If you look at investor demand, property is not their primary choice anymore. This is due to muted price appreciation, high level of unsold inventory, and the fact that there are other more lucrative financial instruments to choose from. Earlier, there weren’t any options as the equity market was not performing.”
So, investors are not buying because they are not getting high returns from investing in real estate, anymore. The end users are not buying because prices are high. But prices will still not fall, say the real estate wallahs. What sort of an argument is that?

If home prices do not fall, the real estate sector will continue to remain in a mess for a much longer period of time. The market will go through what analysts call a longer time correction (i.e. prices will stagnate for a long period), if prices don’t fall. And this can’t possibly be good for anyone—buyers will continue to stay away, and sellers won’t be able to sell.

This will mean that the real estate companies will continue to hold on to unsold homes that they have accumulated over the years. Given this, Rajan was absolutely right when he said if the market has to function, and buy and sell transactions have to happen, home prices need to fall. The sooner the real estate wallahs understand this, the better it will be for all of us.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The article originally appeared on Firstpost.com on August 20, 2015

If we go by what Keynes said, the world is currently going through a depression


In a few weeks, it will be the seventh anniversary of the start of the current financial crisis. The fourth largest investment bank on Wall Street, Lehman Brothers, filed for bankruptcy on September 15, 2008. A day later, AIG, the largest insurance company in the world, was nationalized by the United States government.

A week earlier two governments sponsored enterprises Fannie Mae and Freddie Mac had also been nationalized by the United States government. In the months to come many financial institutions across the United States and Europe were saved and resurrected by governments all across the developed world. Some of them were nationalized as well.

Economic growth crashed in the aftermath of the financial crisis. Central banks and governments reacted to this by unleashing a huge easy money programme, where a humongous amount of money was printed(or rather created digitally) in order to drive down interest rates, in the hope that people would borrow and spend, companies would borrow and spend, and economic growth would return again.

And how are we placed seven years later? It would be safe to say that despite all that governments and central banks have done in the last seven years, the world hasn’t returned to its pre-crisis level of economic growth.

In fact, if we go by what the greatest economist of the twentieth century, John Maynard Keynes, wrote in his tour de force, The General Theory of Employment, Interest and Money, a large part of the developed world is currently going through a “depression”.

Keynes, defined a depression as “a chronic condition of sub-normal activity for a considerable period without any marked tendency towards recovery or towards complete collapse.”

This is something that the economists tend to ignore. As James Rickards writes in The Big Drop—How to Grow Your Wealth During the Coming Collapse: “Mainstream economists and TV talking heads never refer to a depression. Economists don’t like the word depression because it does not have an exact mathematical definition. For economists, anything that cannot be quantified does not exist.”

Hence, if we go as per what Keynes said, depression is a scenario where economic growth is below the long-term trend growth. And that is precisely how large parts of the global world have evolved in the aftermath of the financial crisis. As Rickards writes: “The long-term growth trend for U.S. GDP is about 3%.

Higher growth is possible for short periods of time. It could be caused by new technology that improves worker productivity. Or, it could be due to new entrants into the workforce…Growth in the United States from 2007 through 2013 averaged 1% per year. Growth in the first half of 2014 was worse, averaging just 0.95%.”

The current year hasn’t been any better either. The economic growth between January and March 2015 stood at 0.6%. Between April and June 2015, it was a little better at 2.3%.  As Rickards puts it: “That is the meaning of depression. It is not negative growth, but it is below-trend growth. The past seven-years of 1% growth when the historical growth is 3% is a depression as Keynes defined it.”

The United States economy accounts for nearly one-fourth of the global economy and if it grows slowly that has an impact on many other economies as well.
China, another big economy, has also been growing below its long term growth rate. Between 2003 and 2007, the Chinese economy grew by greater than 10% in each of the years. It slowed down in 2008 and 2009 as the financial crisis hit, and grew by only 9.6% and 9.2% respectively. In 2010, the economic growth crossed 10% again with the economy growing by 10.6%. This was after the Chinese government forced the banks to unleash a huge lending programme.

Nevertheless, growth fell below 10% again and since then the Chinese economy has been growing at below 10%. In fact, in the recent past, the economy has grown at only 7%, which is very low compared to its rapid rate of growths in the past.

Interestingly, people who observe China closely, are sceptical of even this 7% rate of economic growth. As Ruchir Sharma, Head of Global Macro and Emerging Markets at Morgan Stanley wrote in a recent column for the Wall Street Journal: “Chinese policy makers seem unwilling to accept that downturns are perfectly normal even for economic superpowers…But Beijing has little tolerance for business cycles and is now reviving efforts to stimulate sectors that it had otherwise wanted to see fade in importance, from property to infrastructure to exports….While China reported that its GDP grew exactly in line with its growth target of 7% in the first and second quarters this year, all other independent data, from electricity production to car sales, indicate the economy is growing closer to 5%.”

The moral of the story being that China is growing much slower than it was in the past. What this means is that countries like Brazil and Australia, which are close trading partners of China, will also feel the heat. Over and above this, much of Europe continues to remain in a mess. As Rickards puts it: “Keynes did not refer to declining GDP; he talked about “sub-normal” activity. In other words, it is entirely possible to have growth in a depression. The problem is that the growth is below trend. It is weak growth that does not do the job of providing enough jobs or staying ahead of national debt.”

In fact, much of the economic growth that has been achieved through large parts of the developed world has been on the basis of more lending carried out at very low interest rates. Data from the latest annual report of the Bank of International Settlements based out of Basel in Switzerland, suggests, that the total global debt has touched around 260% of the global gross domestic product (GDP). In 2008, it was around 230% of the global GDP.

As the BIS annual report for the financial year ending March 31, 2015 points out: “very low interest rates that have prevailed for so long may not be “equilibrium” ones, which would be conducive to sustainable and balanced global expansion. Rather than just reflecting the current weakness, low rates may in part have contributed to it by fuelling costly financial booms and busts. The result is too much debt, too little growth and excessively low interest rates.”

The tragedy is that there seems to have been no change in the thought process of those who are in decision making positions.

The column originally appeared on Firstpost on Aug 20, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Indradhanush framework is not “sanjivini booti” for govt banks

On August 14, 2015, the ministry of finance released the Indradhanush framework for transforming the government owned public sector banks (PSBs), which are currently in a bad shape primarily due the bad loans that have piled up over the years.

In fact, the press release accompanying the announcement was extremely self-congratulatory in nature and pointed out: “Indradhanush framework for transforming the PSBs represents the most comprehensive reform effort undertaken since banking nationalisation in the year 1970. Our PSBs are now ready to compete and flourish in a fast-evolving financial services landscape.”

The framework has seven steps, and hence has been named Indradhanush or rainbow (which has seven colours). Enough has been written in the mainstream media regarding what these steps are. Hence, in this column I will concentrate on what is missing in the Indradhanush framework and why it is unlikely to help the public sector banks in a major way.

The third step in the Indradhanush framework talks about the government putting in Rs 70,000 crore into these banks over the next four years. Of this Rs 50,000 crore will be invested in the current and the next financial year.

There are a number of questions that crop here. The first question is whether this is going to enough? The PJ Nayak committee report released in May 2014 estimated that between January 2014 and March 2018 “public sector banks would need Rs. 5.87 lakh crores of tier-I capital.” The committee further said that: “assuming that the Government puts in 60 per cent (though it will be challenging to raise the remaining 40 per cent from the capital markets), the Government would need to invest over Rs. 3.50 lakh crores.”

The government on the other hand estimates that “the capital requirement of extra capital for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore.” Of this amount it proposes to invest Rs 70,000 crore.

In a research note titled A Growing Need for Indian TARP, Anil Agarwal, Sumeet Kariwala and Subramanian Iyer, analysts at Morgan Stanley, estimate that an immediate infusion of around $15 billion (or Rs 97,500 crore assuming $1 = Rs 65) is needed in these banks.

The international rating agency Standard & Poor’s said: “The Central government’s planned capital infusions come at a good time for public sector banks. But they don’t go far enough.”

So, the government is clearly not investing as much as the public sector banks really need to get out of the current mess that they are in. Further, as I have pointed out in the past, the government putting in more money into public sector banks goes totally against the “minimum government maximum governance” philosophy that Narendra Modi had espoused in the run-up to the Lok Sabha elections that happened last year.

This does not mean that the government should abandon these banks. But there is no reason that it should own 25 public sector banks, especially given that they require a massive amount of money to continue functioning. It is best to own five or six big banks and sell out of the others. In this way it will be able to concentrate its efforts on managing the big banks. At the same time, it will get more bang for the buck on the money that it is putting into the public sector banks.

This brings me to the next point I want to make. There is nothing in the Indradhanush framework that talks about the government trying to sell its stake in the public sector banks. Many public sector banks have a very good branch network in place and hence, will be attractive buys despite their balance sheets being in a mess.

This non-reference to disinvestment is not surprising given that it will be a politically very difficult thing to do. And from whatever evidence we have had from the Modi government up until now, it has shown no zeal to push through politically difficult reform. Given this, the government will continue to own 25 banks and hence, it is likely to pump more tax payer money into these banks in the days to come, because Rs 70,000 crore is clearly not going to be enough.

The fourth point in the Indradhanush framework talks about de-stressing public sector banks. The press release has a long-winded paragraph written in a fine bureaucratic way which comes up with practically every possible reason to explain the bad loans that have piled up with public sector banks.

Here it goes (you won’t miss much if you decide to skip it): “Due to several factors, projects are increasingly stalled/stressed thus leading to non-performing assets(NPAs) burden on banks. In a recent review, problems causing stress in the power, steel and road sectors were examined.  It was observed that the major reasons affecting these projects were delay in obtaining permits / approvals from various governmental and regulatory agencies, and land acquisition, delaying Commercial Operation Date (COD); lack of availability of fuel, both coal and gas; cancellation of coal blocks; closure of Iron Ore mines affecting project viability; lack of transmission capacity; limited off-take of power by Discoms given their reducing purchasing capacity; funding gap faced by limited capacity of promoters to raise additional equity and reluctance on part of banks to increase their exposure given the high leverage ratio; inability of banks to restructure projects even when found viable due to regulatory constraints.  In case of steel sector the prevailing market conditions, viz. global over-capacity coupled with reduction in demand led to substantial reduction in global prices, and softening in domestic prices added to the woes.”

There is no mention of how the banks are going to go about recovering the loans that they have given out and which are not being repaid. As an editorial in The Financial Express points out: “The lack of a concrete plan to tackle NPAs is worrying. There is no mention of how the debt of state electricity boards (SEBs), running into several lakh crore rupees, is going to be recovered or that from wilful defaulters or highly-leveraged promoters.”

Further, many measures that the government has listed out as a part of the Indradhanush framework have already been around for a while now, having been put in place by the Reserve Bank of India.

The fifth point in the Indradhanush framework talks about “no interference from government,” in the functioning of banks. It further states that “banks are encouraged to take their decision independently keeping the commercial interest of the organisation in mind.”

How are banks supposed to interpret this point given that in his Independence Day speech Prime Minister Narendra Modi talked about “Start-Up India, Stand-Up India”. The idea, as Modi explained during the speech, is that each of the 1.25 lakh bank branches all across India “should encourage at least one Dalit or Adivasi entrepreneur, and at least one woman entrepreneur”.

So how independent does this make the banks, given that they have to follow diktats like these from the government? Also, it is worth mentioning here that lending to start-ups is a very high risk kind of lending. Further, do public sector banks have the capability to analyse the loan proposals of start-ups, is a question worth asking here.

To conclude, it is safe to say that the Indradhanush framework is essentially a clever repackaging of steps and processes that are already in place. It is not the sanjivini booti that it is being made out to be.

The column originally appeared in The Daily Reckoning on August 20, 2015