How the Indian banking system works and money is created – An explainer
The combined balance sheet of all the banks in India is given and then reserve assets are explained. All the banks are required to maintain some amount as reserve assets.
Currently, CRR must be maintained at 4% , SLR are to be maintained at 18.25 and HQLA to be maintained to cover 30 days of expected cash flows(All are taken with respect to the NDTL). HQLA depended on type and tenor of banking deposits and loans. At the moment, SLR+HQLA together comprises 23% of NDTL. The banks are allowed to keep surplus amount as reserves and therefore they can have overall reserve of more than 27%. Any shortfall in any of the ratio is can convert the surplus balance in CRR to SLR/HQLA and vice versa through LAF.
The banks does not require liquidity surplus to lend fresh loans, as new loans create their own fresh deposits. Bank lending creates fresh money to chase goods and services.
The banks are not giving loan as the loan creates a deposit due to which bank has to keep some amount of the reserves from that deposit so it becomes hard for the bank to maintain that reserve. Another reason is that the RBI has the power to maintain the liquidity so there may be a rise in the rate of reserves due to which it becomes hard to maintain reserves so the bank is not ready to lend the money from the excess reserves.
In today’s business environment, accounting frauds are becoming more and more common. An Accounting fraud means the intentional manipulation of financial statements to create a false appearance of corporate financial health. In the video the, speaker talks about forensic accounting which means investigating the accounts and audits of the company to check if everything is alright or not. Many accounting frauds are being done by routing the money through subsidiary companies. The video tries to bust the myth about MNCs management being clean by giving the example of an MNC called Clariant Chemicals and its subsidiary in India.
One of the independent Director’s of the company called Deepak Parikh who was the director in the Clariant India Private Ltd. was also the director of the parent company but has not given any details about the directorship so the people were not able to know that he holds the directorship. The company has smartly prepared the annual report in which they have written the director does not hold the directorship in any company and it does not include the name of the unlisted company so people are not are being mis lead and are unable to see the truer picture that director is holding the directorship in the unlisted subsidiary as many people don’t check the annual reports.
What are a TLTRO and its impact on NBFC
Impact of Covid-19 on NBFC sector
Like most of the sectors, NBFCs are also struggling amid lockdown which is cutting their cash flows. NBFCs are facing problems as both the informal and semi-formal have been hit by coronavirus, and as a result there are going to be delays or defaults in payments. Moratorium has been provided to borrowers but not to NBFCs and so they are still obliged to make coupon or fixed deposit payments on time without delay. This event is causing liquidity issues in the NBFCs.
As a solution to this problem, RBI has introduced TLTRO(Targeted long term Repo Operations). RBI cannot lend money to NBFCs as it does not regulate NBFCs and so RBI with a new borrowing policy for the banks and the banks are expected to buy bonds of the suffering firms using the monkey provided by RBI to create liquidity and so they can make the coupon payments. However, to play safe and not willing to take the risk of default, the banks started using TLRTO money to fund mutual funds which have also been suffering and were unable to meet redemptions due to frozen market.
RBI gave a total Rs. 1 lakh crore in four tranches of Rs 25000 crore each. The lending was done at the current REPO i.e at 4.4% but the interest will float as the REPO changes over the next 3 years i.e till the tenure. Banks were supposed to invest money in bonds of grade BBB or better. 50% of money was expected to be allocated for buying fresh issues while other 50% to buy existing ones from secondary market. Bonds could be of any duration or tenure but they have to pay the money back to RBI after 3 years.
To ensure that the money is used to help NBFCs, RBI introduced TLRTO 2.0 and the banks aren’t allowed to lend this money to corporates but only NBFCs.
In TLRO 2.0 the bank has mandated to invest it in the NBFCs in this the bank has given 50,000 crores money to the bank in two tranches but in this they had to compulsory invest in the time limit has extended from 30 to 45 days. 10% of the allocated fund (Rs 5,000 Cr) should be used for Micro financiers (MFIs). 15% of the allocated fund should be used for NBFCs with asset size of Rs 500 Cr and below.25% of the allocated funds should be used for NBFCs with asset size of Rs 500 Cr – Rs 5,000 Cr. The rest 50% can be deployed any which way they choose. But in this was an issue as in the small NBFCs they had to compulsory invest 7500 Cr which is to more for them you can buy mostly 50 NBFC. While the big players need more money but in this only 25000 Cr which is very but the maturing in the next 60 days is 28,600 Cr. A 5,000 Cr+ NBFC (Bajaj, Shriram, even Manappuram will qualify) can get a maximum of Rs 12,500 Cr but this 12,500 crore can be gulp by the one NBFCs and the one who didn’t have liquidity problem also started earning the money through this.
Ramesh Damani conversation with Manish Chokhani about the current situation
The conversation is about the current situation of market and how investors aren’t able to determine whether it is a bear market or bull market as the market keeps going down and up due to the lockdown. The question about Nasdaq and Dowjones apparently looking bullish is being raised and Manish Sir calls it a result of quantitative easing which may help in short term but in long term it’s going to be destructive.
He also talks about the Global Crisis in 2008 in which the US was printing the money roughly and also other countries were printing the money but as it was backed with US dollar so he is in power. Due to the printing money Indian currency depreciated from 40 to 76 Rs. But in the term of gold dollars had depreciated very badly.
It also that in short span there will be the bull market as people think the market will be lockdown and reopened will go own for the approx. one year. The world is roughly 88-90 trillion GDP while the global debt stands at 260 trillion dollars which is almost 3 times debt to GDP. The US markets that are looking bullish at the moment are actually not bullish. He compares the current situation of US market with India during the 90s when the economy was being called bullish and growing well but the people lost purchasing power and the value of Rupee depreciated from Rs. 19 to Rs. 31. The next year is going to be really crucial for India and India should try to make the best out it which it hadn’t been able to do in the past.
The following steps are can help India take advantage of this situation and do better than it’s been able to do before:-
- The government should ease the business and develop the industries by taking the step like a stability in polices & taxation policies.
- Keep the currency high, try to improve the currency if the currency doesn’t get depreciate and build the trust of countries.
- Keeping the rates low.
It’s time to build
It’s a great essay written by Marc Anderson which makes us put up the question that ”Are we doing the things right?”
According to him, Covid-19 situation help to realize what is the need of the different things at the time of problem or even actually not realizing the actual problem as the other thing satisfies that need, so we don’t feel that he should have the solution for that problem.
The problem here which the writer addressing is that there could be a better solution to the problem but we will realize it late. He uses various examples that help us there should be the want to change as there are many problems other than money. As if the new idea came suddenly it would be difficult for the people to be people and if they try to satisfy that wants then it will destroy the thing which has already developed. It also talks about education as in educated. He talks about developing the system which will benefit the people.
Real Estate bubble
Research done by A small Real Estate research company did not gather a lot of interest but is of great importance, it talks about the formation of Real Estate bubble and how it unfolded.
It all started during the economic boom of 2004-2008 when GDP was constantly growing at good rates and the crony capitalists started injecting the excessive amounts of borrowed money. They were launching new projects worth lakhs of crores in steel, power and real estate sector until the 2008 Global Economic Crisis which destroyed the whole world economy. However, India was affected much but the growth rates slowed down. With interest rates increasing, instead of the downturn in real estate sector, the prices increased to make space to raise more debt. It may look like a solution to the problem in short term but in long term it creates even more problems. As the prices appreciated as a result of a result of artificial inflation, the middle class people lost their purchasing power in Real estate and unsold inventory kept on increasing. With the home prices increasing, the rental Yield decreased to about 2% in 2015 which was about 6% in 2008.
New laws against black money were introduced which added to the misery of Real estate developers and the bank and lending institution were naturally started seeing these as NPAs. Although, the banks extended maturity date for bad loans as the banks try were trying to avoid adding to NPAs. This cycle kept going till 2016 and In 2016 the parliament passed an act that the loan developers cannot raise the money through from the buyers due to which the developers were not able to pay the loan and due to which the PSUs were now in problem. After that, Introduction of GST and demonetisation struck the industry too. On the other hand, NBFCs kept funding the projects and even the ones that hadn’t even started at that time. NBFCs had been raising money from short term market and giving long term loans irrespective of low liquidity in Real estate sector. This caused asset Liability mismatch and problems were starting to manifest .After IL&FL crisis there’s nobody to turn to for additional capital. The sales can’t be increased, margins can’t be pushed , loans can’t be refinanced.
The article talks about corporate governance issue of KRBL which included different cases and kept on going for a period of time. Firstly, On April 18, Mohnish Pabrai’s transaction to buy 2.7% from Omar Ali Balsharaf in KRBL was cancelled when an ED alleged Omar ali to be involves in the VVIP chopper scam and when taken to high court came the conclusion that ED orders to block the transaction was out of the law and the ED officer was simply lying as Balsharaf had bought the shared 5 years before the crime was committed.
Aug 18, Gautam Khaitan (one of the independent directors of the company between 2007- 2013) was alleged that he was included in the VVIP chopper scam and that the director was trying to route the money through the RACKGT Company which is linked with the KRBL. RACKET is a company that sells basmati rice in Dubai. But in the KRBL there is no formal allegation that he had been routing the money through the director.
July 19, another case of an allegation of crime money and land worth of equal amount was attached by the enforcement Directorate. The KRBL management engaged in Embrarer scam around 2009 to benefit for a partly sum of Rs. 15 Crore looked a little outlandish, however the jury is still out.
8th Feb-2019, There was also the case of IT in which they say that the company showed more expenses than actual that had been incurred. The management said that methodology of purchasing paddy was different in different states and that allegation was also proved wrong as they have the receipt of the purchase. So according to the writer of the blog says that the KRBL was innocent as the allegation was not proved true.