YEAREND MUSINGS

As the year was drawing to a close, some legends such as Balamuralikrishna, Menon and Fidel Castro signed off majestically after having defied odds through their lifetime and not even giving an inkling of their imminent exit. Even as these legends who had touched our lives in one way or another was sinking in, the television beamed two memorable icons, Stanley Laurel and Oliver Hardy having the gumption to enter a mansion and let it out to third parties whilst the actual owner was absent. The tale took a twist when the owner turns up and Laurel identifies him while Hardy confines him to a cupboard in a rip roaring hilarious silent movie with the trademark kick delivered by Hardy to his chum Laurel.

This took yours truly to the first time television was viewed which also happened to be a show of the inseparable duo. In fact, this was a show we were taken to make us realize that the duo were real characters who had turned into comics and not vice versa such as Batman, Superman, Harry Potter et al. Unbelievable but true and these men have taught generations a sense of humour, inspired comedians, instilled camaraderie and may be one of the rare duo who also were converted into cartoon characters. These two figure among the men and women who have consciously and unconsciously moulded our characters, influenced our choice of words, left their indelible imprint on our gestures and form the bedrock of many of our friendships.

This led your truly to google the lifetime of the duo. Coincidence. 1926 is the year in which they came together while a revolutionary was born in Cuba. Another coincidence. They featured in a show This is your life on 1-12-1954 which is just days away as we pay this tribute. Astonishingly the duo were no more even as yours truly landed on the planet. Unlike the ones who just departed, these two touched lives even after they were gone and generations that came thereafter.

The compositions of Balamurali with the unique beginning of "Hari" or the works of Menon will also touch generations to come. The exploits of Castro will be fable for generations to come. These men did not just live life or lead life but infused life for generations and centuries. If they could do it for generations, could we not attempt at least leading our own lives rather than live life for others' perceptions? A question yours truly ponders on as another year looms large. May the humour of the irresistible duo lead everyone through the coming year 2017.

DEMONETISATION VS NON PERFORMING ASSETS- A DEBATE

The demonetisation of currencies in India has led to a debate as to whether the option of tackling the Non performing assets of the financial institutions would have been a better option and causing lesser inconvenience to the public at large. The point is well taken that this is also an issue to be addressed.

The issue, however, many are not aware of the intricacies of the classification norms of the Reserve Bank of India or its intent. The Reserve Bank being a regulatory body desires to ensure that at no point liquidity is in a crisis resulting in a run on any bank or financial institution. In this direction it prescribes cash reserve ration and statutory liquidity ratios to be maintained. In fact, the SBI is on record stating that the biggest non performing asset is the amount parked as cash reserve ratio as it does not earn any returns. Further, to ensure a strict vigil on the borrowers, it terms any borrowing which has even a small default of either repayment of principal or interest either in full or part for a period of 90 days or more to be classified as a non performing asset. The non performing assets are itself classified as sub standard assets, loss assets and doubtful assets. Besides this the institutions are also to classify the rest of them as standard assets. The mere classification does not have any bearing either on its realization or the borrowing turning bad warranting a write off.

The Reserve Bank recognizes this aspect and only requires a portion of the unsecured exposure to be provisioned for the purposes of non performing assets. Thus, if one were to consider a loan of Rs 1 crore lent by the bank with a security of an immovable property worth Rs 3 crores, there would be no real reason for provisioning against the asset in case of a couple of defaults as the unsecured portion would still be nil. It is only when the unpaid interest component reaches Rs 2 crores or is nearing it that provisioning needs to be made.

It is taking into account this cushioning the financial institutions do not really declare their entire non performing assets leading to situations wherein the institution could take a credibility beating on one of such hidden defaulters turning bad. Restructuring is also used as a window dressing tool to defer classification of such assets as non performing assets.

The moot question is how to address the issue. 

It is already settled principle that many institutions are not covered by the provisions of section 43 D of the Income tax Act to defer recognition of income on bad and doubtful debts. Thus, all such financial institutions need to be taxed on the accrued income. The amount having been taxed will drive the institutions to realize the income. The co operative banks are a sector which need to be focussed on. Secondly, the Tribunals ruling against the settled judgement of the Supreme Court in the case of Southern Technologies needs to be overruled unilaterally by executive action or the Supreme Court taking cognizance of the same.

Secondly, the scheduled banks which are foreign banks need to be excluded from the provisions of section 43 D of the Income tax Act.

Thirdly, it needs to be pointed out that all institutions are entitled for the benefit of the provision for bad and doubtful debts being allowed as expenditure. This being the case the need for these institutions to exclude such income from accounting does not arise. It is only for the purpose of reduction of its cash reserve ratio that this computation needs to be made and not for the purposes of taxation.

Fourthly, the provisions of section 43 D by itself needs to be considered for removal to avoid the Government losing revenue on this count.

There is a need for monitoring such assets which are on the verge of moving from standard to sub standard, sub standard to doubtful and loss categories. The prevention of such downward movement is the first step towards fiscal discipline. Instead of mere focus on percentage of non performing assets to the advances, it is necessary to focus on the quantum of such lateral movements both upward and downward to assess the performance of the banks and financial institutions. If this is done, the scope for window dressing reduces as virtually all accounts are under the scanner instead of the ratio to gross advances and the provisioning adequacy. This would have ensured that accounts such as Kingfisher were identified much before they turn bad.

The next step would be to mark all restructured loans as non performing as they require to be monitored on a priority basis even higher to bad assets. This is due to the fact that in these cases a quantum of the interest is being foregone through the restructuring process. All such restructured assets require to be barred from moving Courts at the time of realization to avoid undue delays. 

As a preventive measure granting loans on the basis of revenue stream with no collateral needs to be discouraged. Startups with innovative ideas with no fiscal backing need to be brought under subsidies rather than tampering with finances of financial institutions. 

The above will make it clear that the issue of non performing assets may mop up finances but will not rid the system of counterfeit notes, unaccounted money stashed or hoarded away nor flush into the system the currencies which are hoarded. In fact, the current process is not demonetization but a process of replacing currencies with new ones. The difference being that the entire notes were sought to be sucked in before the new currencies were deployed to have the desired shock impact on hoarders and counterfeiters.

In fact, the impact would have been better had the decision been to replace the same with more of lower denomination notes such as Rs 10/-, 20/- and 50/- besides 100/-. This would have ensured that the common man did not face hassles. Even now the decision to release the Rs 2000/- notes ahead of the Rs 500/- notes is puzzling as the system does not have the required lower denominations for utilization. This also brings out the moot point that any decision requires field level inputs rather than intellectual decisions put through and addressing them with off the cuff solutions.

The biggest spin off of this effort is we have now a new slogan - Jai Jawan, Jai Kisan, Jai Vigyan, Jai Bankman  

DEMONETISATION MUSINGS

"Black Tuesday", cried some while others hoped for a "whitewash". Though Demonetisation was in the air from the campaign days of 2014, there was an element of surprise, awe and shock in the air. These were followed by serpentine queues, heated debates, street corner discussions while the Mahatma laughed his way to the bank.

As one analysed the goings on from the sidelines, we could see collegians exchange their valuable pocket money while senior citizens and housewives jostled along with the youth to change their "mighty savings". If R K Laxman were around, we could have definitely expected a cartoon on the housewives lampooning the PM with the common man by the side for unearthing their "hard earned" pin money a la a Dushasana disrobing the legendary Draupadi. These women chose to disclose these facts to "brothers" rather than the "in-laws" little knowing that these brothers were brothers in arms with their spouses.

The working class tried to earn a profit by allowing access to their bank accounts or exchanging currencies at various banks for princely sums of Rs 200 to Rs 500 as " service charges" throwing light on the entrepreneurship of this class which can "encash" any crisis while also playing the good samaritan to the hapless senior citizen or divyang persons. Some college students volunteered to help streamline queues and distribute forms whilst others chose to plan their next withdrawal.

Suddenly, India awoke to the possibility of a cashless day. 

Queries emerged where were the hoarders of black money. The TTD hundi and the Ganges displayed the hard core attitude of this class. This class had failed to rise above board when the nation became independent. It refused to support a leader like Lal Bahadur Shastri to fight wars or hunger. It could care less when the nation had hardly any food stocks. It has missed more than 20 schemes to come clean and is ready to lose the entire sum rather than use it for some purpose. Only 31st March the last day to exchange the currencies at Reserve Bank will let us know what is the extent of currencies that have been sought to be burnt or buried or kept as a treasure trove to be sold in latter days as a souvenir at Sotheby's.

The intent is not lost on the general public who have humoured themselves into the situation. We have had owners of nearly Rs 67000 crores taking a brave step. Will the rest choose to pay a nominal sum of 30% on their illgotten money and deposit in the accounts? Will they at least care to share the booty with the nation in the form of donations to the National Defence Fund or the Prime Minister's National Relief Fund or Army Welfare Fund?  Or will they choose to revel in the Emperor's New Clothes as every other soul sees through their stark greed?

Let us be clear that the persons who have so far used the methods to deposit or exchange are the commonmen and not the ones who have hoarded money except in the odd cases of jugaad. Let this battle take us ahead in our war within the nation to make the haves behave responsibly.

Let it be disseminated that while the previous demonetisations were for high value currency in small numbers and with practically no exchanges a la this time, we are in the process of taking out over 80% of the currency notes in circulation and replacing them. The costs are high but the rewards are higher too. The only hitch is why introduce again high value currencies knowing the intent? Is it a case of giving the errant a longer rope or the hope of the return of the prodigal son?