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Maratha warrior Peshwa Bajirao followed the adage to remain undefeated throughout his life time.

But the Indian banking system, caught in a fierce battle with non-performing assets (NPAs), does not
have Peshwa's luck despite help arriving from the Ministry of Finance and the Reserve Bank of India.
The two entities have taken many steps to contain and reduce NPAs that accumulated as a result of
inordinate delays in project execution, loss of raw material/supply linkage, high real interest
rates and dumping by our trade partners.

Also, gold-plating of projects, faulty planning and poor execution etc were non-economic reasons for
high levels of bad assets in the banking system.

A host of schemes, such as CDR, SDR, 5: 25 and S4A, had been launched in the past to reduce NPAs.
Introduction of oversight committee along with the Insolvency and Bankruptcy Board of India is the
latest step to ensure a timebound settlement of NPAs.

Despite the efforts, banks have not found adequate capital to write off bad assets. Over the past
three years, the government has provided Rs 60,000 crore towards recapitalisation, but that has not
bridged the gap between what's available and what banks require.

Markets refused to give capital to banks battling NPAs as book value was not taken at stated banks
battling NPAs has slowed down to decades low mid- single digit, impacting investment, job creation
and overall economic growth.

The government doesn't have space under FRBM framework to recapitalise banks. The root cause of
inadequate Capital to write off NPAs needs to be tackled along with other steps which are being
taken. Clearly, these are tough times for banks, and desperate times, as they say, require desperate
measures. The following steps can be considered to raise capital for the banking sector.

1. USE UNCLAIMED DEPOSITS

Many banks have unclaimed deposits (including balances in inoperative accounts). Many accounts
will become inoperative with compulsory linking of Aadhar card. Such unclaimed deposits can be
transferred to the government with a provision for future claims by the depositors. The same can be
returned to banks as capital. It is extremely unlikely that depositors will go to the government to
claim the deposits. The government has similar provision for unclaimed dividends.

2. MONETISE ASSETS OF CUSTODIAN OF ENEMY PROPERTY


To monetize is to convert an asset or any object into money or legal tender. The term "monetize"
has different meanings depending on the context. Governmentsmonetize debt to keep interest
rates on borrowed money low and to avoid financial crisis, while businesses monetize products and
services to generate profit.

The Custodian under Enemy Property Act of 1968 has Shares, Securities and Real Estate valued at
more than Rs 100,000 crore, as per a PTI Report of March 17. The same can be monetised in a time
bound and transparent manner to provide capital to the banking system. Those unproductive assets
can be used more productively through such monetiation.

3. MONETISATION OF INVESTMENTS HELD BY BANKS ..


Banks have promoted many nation building institutions like rating agencies, exchanges and clearing
corporations. They also have investments in financial services like insurance, broking, mutual fund,
housing finance, factoring services etc. Many banks have started monetising such investments.

It can be explored more with markets lapping up all the recent issuances. Many banks with retail
franchisee will create far more value through auctioning a bank assurance partnership than running
an insurance company blocking precious capital.

4. USE OF FX RESERVE A LA CHINA

foreign exchange reserves- Forex reserves are foreign currency assets held by the central
banks of countries. India has 8th highest FX reserves in the world. Some amount can be borrowed
from the FX reserves to recapitalize the banks.

China had injected more than $60 billion of capital out of its foreign exchange reserves into its
banking system in last decade. Since Chinese central bank-PBC couldn't invest in commercial banks
directly, a SPV called The Central Huijin Investment Corporation Limited (Huijin) was set up to
receive funding from the PBC. India has 8th highest FX reserves in the world. Some amount can be
borrowed from the FX reserves to recapitalize the banks.

5. REFINANCE FROM CENTRAL BANK BALANCE SHEET A LA US


US Fed spent $700 billion to purchase stressed assets like mortgage loans, student loans etc. from
banks under TARP in 2008 during subprime crisis. This was over and above guarantees and refinance
of few trillion dollars. US Fed's capital adequacy pales against that of RBI. Some of the stressed
assets can be bought by the RBI directly or through SPV to release NPA pressure from the banking
system.

6. TREASURY GAINS TO SET OFF NPAS

Many people agree that mark-to-market reflects the true value of an asset as it is decided
with respect to the current market price.
Indian Banks are holding Gilts (fixed-interest loan securities ) worth Rs 29.5 trillion. 1% reduction
in interest rates can create mark-to-market gains of Rs 1.18 trillion assuming portfolio duration of
four years. Mark-to-market gains on treasury portfolios can be used to set off NPAs.

The current inflation trajectory is below RBI's target rate. It is likely that RBI will succeed in
containing inflationary expectations paving the way for lower interest ..

The current inflation trajectory is below RBI's target rate. It is likely that RBI will succeed in
containing inflationary expectations paving the way for lower interest rates. A fiscally prudent
government an dan independent RBI should be able to achieve lower interest rates.

7. MAKE CRR REMUNERATIVE

Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of
customers, which commercial banks have to hold as reserves either in cash or as deposits
with the central bank. CRR is set according to the guidelines of the central bank of a
country.
Banks have to keep 4 % of deposits in CRR at zero return. This results into an opportunity loss of Rs
296 billion assuming that banks will be able to deploy the same at 7%. This is could be a transient
step to help bank provide additional profitability. In the past three years, paying interest on CRR
would have provided more capital to banks than government's recapitalisation.

efinition: Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of
customers, which commercial banks have to hold as reserves either in cash or as deposits
with the central bank. CRR is set according to the guidelines of the central bank of a country.

Description: The amount specified as the CRR is held in cash and cash equivalents, is
stored in bank vaults or parked with the Reserve Bank of India. The aim here is to ensure
that banks do not run out of cash to meet the payment demands of their depositors. CRR is
a crucial monetary policy tool and is used for controlling money supply in an economy.

CRR specifications give greater control to the central bank over money supply. Commercial
banks have to hold only some specified part of the total deposits as reserves. This is called
fractional reserve banking.
Increase in CRR means that banks have less funds available and money is sucked out of circulation.

What is CRR (For Non Bankers): CRR means Cash Reserve Ratio. Banks in India are
required to hold a certain proportion of their deposits in the form of cash. However, actually
Banks dont hold these as cash with themselves, but deposit such case with Reserve Bank of India
(RBI) / currency chests, which is considered as equivlanet to holding cash with RBI. This minimum
ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known
as the CRR or Cash Reserve Ratio. Thus, When a banks deposits increase by Rs100, and if the
cash reserve ratio is 6%, the banks will have to hold additional Rs 6 with RBI and Bank will be able
to use only Rs 94 for investments and lending / credit purpose. Therefore, higher the ratio (i.e.
CRR), the lower is the amount that banks will be able to use for lending and investment. This
power of RBI to reduce the lendable amount by increasing the CRR, makes it an instrument in the
hands of a central bank through which it can control the amount that banks lend. Thus, it is a tool
used by RBI to control liquidity in the banking system

Banks will not have access to this amount. They cannot use this money for any of
their economic or commercial activities. Lowering the percentage of CRR
It is the ratio of Deposits which banks have to keep with RBI. Under CRR a certain
percentage of the total bank deposits has to be kept in the current account with RBI.
Banks dont earn anything on that.
The current CRR is 4%. If RBI cuts CRR in its next monetary policy review which is
scheduled on 2nd, December then it means banks will be left with more money to
lend or to invest. So, more money can be released into the economy which may spur
economic growth.
https://www.relakhs.com/crr-slr-repo-rate-reverse-repo-rate/
Also See: Fractional Reserve System, Reserve Requirements, Central Bank, Monetary
Policy, Multiplier, Fractional Reserve Banking

8. SALE AND LEASE-BACK OF ASSETS


The world is struggling for yield. There are more than $9 trillion worth of bonds at negative yields.
FIIs preference of Indians credit and yield is visible in their investment over last few years. Banks
have real estates at nominal book value in their book. (In the early 90s when I was doing my CA, I
was taught that iconic SBI main branch building in Mumbai was having a book value of Rs 1/-)

Banks should be encouraged (through tax exemption) to do sale and lease-back transactions to
encash capital assets like real estate to unblock capital. The government can negotiate with
sovereign funds, development agencies to provide low-cost financing for such sale and lease-back in
lieu of exclusive entry in Indian markets.

9. STRUCTURAL IMPROVEMENT TO ATTRACT PRIVATE CAPITAL


Many of the private banks and foreign banks in India as well as abroad have employees who have
their origin in PSU banking system. The market is unwilling to give capital to banks where there are
concerns about the reported book value.

Market doesn't like banks where decision making is influenced externally without accountability.
Current compensation structure of PSU bank also creates doubt about attracting and retaining
talents.

There is a need to make structural improvement in the banking system by making them truly board-
governed with appropriate compensation structure. If the government's ownership is brought below
51% in some of the banks to begin with, lot of private capital will be attracted. It is worth learning
from India's most successful military chief Peshwa Bajirao to strike at the root to tackle a problem.

Provision of capital to write down NPAs and structural reforms will make Indian banking system
robust. It is a prerequisite to create double-digit economic growth for years to come.