Archive for August, 2019

Central Bank of Iceland vs Iceland’s largest fishing exporter: Case of lost reputation

August 16, 2019

Central banks are embroiled in all kinds of things.

Iceland government imposed capital controls in 2008 crisis with central bank incharge of their enforcement.

Jon Danielsson of London School of Economics in this article points how things went wrong for the central bank:



Network Analysis of NEFT Transactions in India

August 16, 2019

Shashi Kant and Sarat Chandra Dhal of RBI in Aug-2019 Bulletin article do network analysis of NEFT transactions in India:

Since the global crisis in 2008, network models have emerged as a tool for analysis of interbank financial exposures. The recent literature has accordingly emphasised the role of network analysis of interbank payment transactions in complementing the existing framework for financial stability analysis (Caccioli et al., 2018). Where central banks are the operators of payment and settlement infrastructure, as in India, a comparative advantage is that it is relatively easier to acquire clean, structured and accurate data that are crucial for network analysis.

Surprisingly, therefore, there has been little research on the interconnectedness of participating entities in the payment system in India. The motivation for
this study is to bridge this gap as a first attempt in the Indian context. We use the National Electronic Fund Transfer (NEFT) system as a case study. Operated by the Reserve Bank of India (RBI), it is India’s largest payment system by volume and a game changer in the retail payments sphere.

We examine the network topology of the NEFT system and analyse financial interconnectedness using network metrics of centrality. Using bilateral transaction information for each participating institution aggregated for March and April months of 2019, we build a network graph depicting the linkages. We use these data to explore the connections between various groups of banks in order to identify patterns. We also seek prominent players in the payment network in order of their systemic importance using a non-parametric methodology (Jaramillio et al., 2014). 

In summary, our findings show that out of the public sector, private sector and foreign banks that constitute around 83 per cent and 87 per cent of the
total transactions by value on NEFT in the month of March and April respectively, the flow from private sector to public sector banks is very large, with public
sector banks being net receivers in the system. We also present evidence of strong connections between public and public sector, and between private sector
banks, nascent role of co-operative banks and newly established payment banks in NEFT. 

Lots of amazing pictures of networks..

Project to create digital history of tea plantations in Nilgiris

August 16, 2019

Fascinating initiative by the British Library and the Government of France:

Tea plantations in the Nilgiris and Coimbatore districts now have the opportunity to get their historic documents preserved for posterity free of cost, thanks to a special project supported by the British Library and the Government of France.

“The project aims to create digital documentary resources in the Nilgiris and Coimbatore districts covering the period from 1850 to 1970,” coordinator of the project K Rameshkumar, who is Head of Photo Archives of French Institute of Pondicherry (IFP), told Business Line.

The IFP is under the French Ministry of Foreign Affairs.

“This project coming under Endangered Archives Programme is supported by the British Library Arcadia,” he said. “We will help planters possessing old documents preserve them forever through high quality digitalisation and save them permanently from loss.”

“Our intention is to work on the site of the plantations itself. We will not take any documents with us; instead, we will return the original documents along with a digital copy of high resolution images to the owners.

The digital copies will be preserved at the British Library archives as well,” Rameshkumar noted.

“The historic documents can be of any type – land and property records, photographs, old maps, route sketches, pencil or other drawings, printed materials, books or manuscripts,” the project’s Research Assistant Noel Francis said. “We can document the lifestyle of planters of yesteryears in terms of their working conditions, bungalows, medical facilities, schools, churches, labour quarters, workers’ wages and other registers, planters’ clubs, dresses horse rides and transportation,” he said. “Collectively, we aim to create a digital version for the history of the Nilgiris and Coimbatore districts which will be a treasure for posterity.

Those interested can contact us through e-mail: or over phone (0) 9363156400.”

The Nilgiri Planters’ Association is 128 years old.

“Besides, the small scale tea sector is in the possession of Badaga, the predominant community of the Nilgiris, whose ancestral family property holding records as also photographs and handwritten documents should be nearly a century old.

We have come across some of them during our initial survey,” said Rameshkumar, who had digitised some other aspects of the historic lifestyle in The Nilgiris in his earlier projects.


Who regulates public sector banks: Government or RBI?

August 16, 2019

The dual control over public sector banks is one of the biggest problems facing Indian banking.

In this moneycontrol article, I ponder over the recent Finance Bill where government framed regulations over appointment of Directors and recent RBI’s definition ‘fit and proper’ status of these directors.

Monetary transmission in Australia: Fairly efficient even at lower interest rates

August 16, 2019

Australian central bank has cut policy rates in June and July meetings by 25 bps. The policy rate is at 1% currently.

In this speech, Christopher Kent, Assistant Governor (Financial Markets) speaks about how interest rates are being lowered everywhere including Australia. The transmission in Aus has been quite efficient with most %age of rate cuts passed on to people:


A short history of Indian economy 1947-2019: Tryst with destiny & other stories

August 15, 2019

Happy independence day to all. Some links on this day:


Offshore to onshore forex market: Review of RBI Committee on offshore forex markets

August 14, 2019

My column in moneycontrol on the topic.

Turkey central bank fires its chief economist and other departmental heads

August 13, 2019

Central bankers continue to be under pressure and be ousted from their job. An Indian parliamentarian openly says he had asked the Finance Minister to sack RBI Governor without naming the person. He says the “RBI Governor was no good and should be sacked outright.”

However, the government anger on central bank is not limited to Governor or Deputy Governor. It could be hit at the central bank staff too. After all the staff was advising the senior team.

This is what we are learning from Turkey.

They just fired the the Governor, but were not happy. They have even dismissed its chief economist and several other departmental heads:


History of Jammu and Kashmir Bank: 80 years of Hope and Crisis

August 13, 2019

J&K Bank is a unique bank as unlike other public sector banks, it is owned by the J&K State and not central government, yet is classified as a private bank. The Bank has played a pivotal role in financial development of the State.

With J&K to become a Union Territory, the future ownership of J&K Bank is in question. The central government has promised to restore J&K to full statehood. Thus, it is unclear whether the central government will use this opportunity to transfer the ownership of the bank to itself or allow it to continue as a State government bank, under some special circumstances.

For time being, the bank is under investigation for frauds and illegal recruitments.  It is also reeling under NPA crisis as all banks (explained below).

This post tracks the history of J&K Bank showcasing its importance to the region.

Origins of the Bank

Most banks in India emerged due to presence of indigenous banks which charged high interest rates. This story applies to J&K as well. Though, before advent of J&K Bank, few banks opened branches in towns of Jammu, Srinagar and Gulmarg. In particular, Lloyd Bank (an exchange bank) and Imperial Bank had branches in both Gulmarg and Srinagar. Lahore based banks, Punjab and Kashmir Bank and Punjab National Bank had opened branches in both Jammu and Srinagar. However, the presence of formal banking was not enough.

This led Maharaja Hari Singh to think of opening a local bank. The sources suggest that Maharaja had requested Lala Harikshekn Lal, founder Punjab National Bank who called the idea as unpractical.  Later, Sir Sorabji Pochkanwala, founder, Central Bank of India guided on establishing the bank. After deliberating options of whether it should be a fully-State of Private bank, they settled for ownership of both State and public in the bank. They perhaps drew inspiration from other Princely States such as Baroda, Patiala, Indore etc which had already established State-sponsored banks.

The J&K Bank was registered on 1-Oct-1938 and commenced operations from Jul-1939 onwards. Its head office was in Srinagar and had eminent persons as shareholders and provided employment to local people.

The opening of J&K Bank led to establishment of another local bank: Federal Bank of Srinagar which started in 1945. It also had 7 branches and reached out to smaller locations such as Shopian, Sopore and Udhampur. The bank started with capital of Rs 1.67 lakhs and had deposits of Rs 23 lakhs in 1946. The deposits declined to 9 lakhs as it faced withdrawal of deposits due to Partition and political turmoil in Kashmir. The bank disappears from RBI records from 1950 inwards and it is unclear whether the bank was merged with some bank or liquidated. The region also saw Cooperative Banks opening in places such as: Baramulla, Jammu and Srinagar.

J&K Bank and Partition

By 1947, several other banks had opened branches in Srinagar and Jammu: Traders Bank, Oriental Bank of Commerce, National Bank of Lahore, New Bank of India etc. Some of these banks started in Pakistan but then moved to India during Partition.

RBI started registering financial data of J&K Bank from 1942 onwards. The bank had capital and reserves worth Rs 7.9 lakh in 1942, deposits worth 72 lakh and loans worth 33 lakh. It also had branches in 7 locations of the region (Anantnag, Baramulla, Jammu, Muzaffarabad and Srinagar). RBI registered it as an A2 bank which was working in Indian States and having no branches in British India and therefore not eligible for inclusion in the Second Schedule.

By 1947, J&K Bank had deposits worth Rs 2.64 crore and 12 branches. In 1948, the deposits of the bank decline sharply to 1.24 crore due to political turmoil in the State. J&K Bank also faced financial trouble as two of its branches viz. Muzaffarabad and Mirpur, fell to Pakistan administered Kashmir along with cash and other assets. Further, Punjab and Kashmir Bank which had major presence in the State shifted operations from Lahore to Ludhiana which must have created problems for the people as well. This is a phase of Indian financial history which needs to be studied.

RBI tries to restore normalcy

The Banking Regulation Act enacted in 1949 applied to all of India barring J&K. There were two legislative changes in 1956 which bought J&K Bank under purview of RBI. First, the Companies Act (1956) which did not apply to J&K State made an exemption if business is “related to the incorporation, regulation and winding up of banking, insurance and financial corporations”. Second, following the first change, the RBI Act (1934) and Banking Regulation Act (1949) also started applying to J&K and thereby to J&K Bank.

In 1950s, RBI began reviewing the status of Princely State Banks including J&K Bank. RBI noted that nearly two-thirds of its paid-up capital was contributed by the Jammu and Kashmir government. The Government had three nominees on the bank’s Board, one of whom was its Chairman. The Government had not just entrusted the bank with treasury work but the government and its institutions contributed substantial deposits and took loans on a large scale.

In 1959, RBI inspections revealed that the financial position of the J&K Bank was extremely unsatisfactory. Its capital had been wiped out, had major defects in the bank’s investment and advances portfolio, earning capacity, and head office supervision and control over its branches. It was ineligible for a bank licence. Despite RBI directions, the bank took ‘no concrete steps’. Unlike other banks where RBI could push stricter measures, this approach was not possible in case of J&K Bank as it was owned by the State Government.

By then, the stronger princely State Banks were made associates of State Bank of India. The possibility of the SBI taking over the J&K Bank was discussed by RBI Governor H.V.R. Iyengar and SBI Chairperson P.C. Bhattacharyya (later RBI Governor from 1962-67) in October 1961. RBI opined that this required answering two questions: First, whether RBI should agree to become banker to the state government. Second, whether RBI should appoint the J&K Bank as its own agent in the State. If RBI became the banker to the State government, this would imply J&K Bank would become RBI’s agent bank and would have access to currency chest. The RBI Governor said there was “so much trouble with State Governments regarding misuse of the currency chests that it is undesirable to add one more State to our list if we could possibly avoid doing so.”

Thus, it was decided to go slow on the integration of SBI with J&K Bank. This approach was also favored by the J&K Government as its own report showed that a local bank was needed to finance the businesses in the State. The report also suggested that the State should continue to conduct its business through the J&K Bank. Later, the J&K Bank became RBI’s agent for carrying out banking business for Government of J&K.

Bank Nationalisation opened gates

Despite these intentions, J&K state remained one of the most unbanked state. The average population per branch fell from about 87,000 in 1951 to about 73,000 in 1967 in India. Within India, the State of Madras had the lowest population of 39,000 per branch followed by Gujarat at 41,000 and Mysore at 43,000 people per office. The most under-banked areas of the country were Bihar (2,18,000), Assam (1,99,000), and Jammu and Kashmir (1,26,000).

This was partly due to inability of J&K Bank to expand in the State. In 1969, at the time of first bank nationalisation, there were just 48 branches in the State of which 22 were those of J&K Bank (all branches in home state). J&K Bank’s capital was Rs 8 lakh at time of formation which had barely increased to touch Rs 11.3 lakh in 1969. Its deposits were placed at Rs 8 crore making it the 38th largest bank in a list of 72 banks.

Post- bank nationalization in 1969, the Government encouraged and pushed banks into reaching out to unbanked regions. Under the Lead Bank Scheme, J&K Bank was made incharge of the State and was allocated 14 Districts.  The Bank was included in the Second Schedule of RBI in 1971, which was an important landmark in the history of the bank. This push reflected in the numbers as well. At the time of second nationalization in 1980, the State had 426 branches of which 180 branches were those of J&K Bank. J&K Bank had 200 branches which showed the bank had opened branches in other States such as Punjab, Haryana, Gujarat, Himachal Pradesh etc. The Bank had deposits of Rs 192 crore, making it the 29th largest bank in a list of 64 banks.

1991 reforms and 75 years of Bank: Glorious Days

On the eve of reforms in 1991, the bank had capital and deposits worth Rs 4.57 crore and Rs 1550 crore respectively. By 1991, there were either Public Sector Banks or Private Banks. J&K Bank was the lone State Bank. As RBI allowed new private sector banks, J&K Bank along with older private banks was reclassified as Old Private Sector Bank. It was really odd for a State bank to be classified as a Private Bank.

The financial sector reforms of 1991 pushed banks to list shares on stock exchange. The Bank listed on 4-August-1998 with staring price at Rs 35 per share. The State government continues to hold nearly 2/3rd share (59.23%) in the bank. Through its IPO, the bank popularised share ownership in the State.

The bank completed its 75 years in 2013. In its Annual Report 2013-14, Chairperson Mushtaq Ahmed said the bank is “at the cusp of a momentous event in our journey” and “it is such moments that enable us to understand our contribution to the socio-economic landscape of Jammu & Kashmir and nation as a whole”. He also proudly announced that the Bank had achieved Rs 100,000 crore of business and Rs 1000 crore of profit in its Platinum year. It had deposits of Rs 65000 crore and given loans worth nearly Rs. 40,000 crore. It had highest Return on Equity and lowest Cost to Income ration. The bank began to advertise itself as a private bank in terms of earnings and public sector bank in terms of cost structure.

The bank has aggressively tried to spread financial inclusion through Business Correspondents, Common Service Centres and branches.

Engulfed in crisis again

However, the bank has slipped since then. Its share price which had increased to above Rs 1000 levels in 2007 and is currently at Rs 44-45 levels which is nearly similar to its listing price. The bank generated losses in 2017 due to higher provisions on account of rising NPAs. The Gross NPAs rose from 5.97% in 2015 to 11.3% in 2017.

Apart from slipping finances which is common for most Indian banks, the bank has got involved in political turmoil as well. We have to wait and watch how and whether the bank is able to return to normalcy in future. In a way J&K Bank’s fortunes have mirrored those of the State. The State and its bank have gone through numerous cycles of hope and crisis. Hopefully, they are able to get out of this crisis as well.


Trivia: State of J&K has interesting connections with RBI as latter’s initial Deputy Governors came from the State. The first on the list was Mr. Wajahat Hussain, Minister in the Jammu and Kashmir State replaced C.D. Deshmukh in 1943, who was appointed as the RBI Governor. In 1945, Mr. MG Mekhri at that time Development Minister in the Jammu and Kashmir Government replaced Mr Hussain. The idea was to stick to the prevailing convention of appointing a Muslim as one of the DGs. Will RBI get a Governor from the State?

Public Trust and Central Banking

August 12, 2019

Mario Marcel, Governor of the Central Bank of Chile in this speech talks about how central banks can restore public trust.

I underscore the importance of public trust as foundation of modern monetary policy and for the legitimacy of independent central banks in performing their broader mandates. This is ingrained in the agenda of our Annual Conference this year: new challenges to central bank independence, the management of central bank credibility, and the designing of the best communication strategies for an effective monetary policy.

There was a time when central banks spoke about discretion vs rules, macro models, inflation expectations and so on. Now it is all about trust, credibility. integrity etc etc..

GIFT City gets a second life after SGX deal

August 9, 2019

My new article in

I reflect on this new development of National Stock Exchange (NSE) partnering with Singapore Stock Exchange (SGX) to offer NIfty products in GIFT city, international financial centre in Gujarat.

10 great twitter accounts for investors to follow..

August 9, 2019

Valueresearch has prepared this list of 10 twitter accounts which investors could/should follow.


A tale of two countries: Cash demand in Canada and Sweden

August 9, 2019

Superb paper by Walter Engert and Ben S. C. Fung (Bank of Canada) and Björn Segendorf (Riksbank). They try and understand why cash demand is different in the two countries.

First, Sweden and Canada economies are quite similar:


Locating Equality: Real estate the main driver of rising inequality?

August 9, 2019

Harold James has a fascinating piece:

For years, wealth and income inequalities have been rising within industrialized countries, kicking off a broader debate about technology and globalization. But at the heart of the issue is a fundamental good that has been driving social and economic inequality for centuries: real estate.

Inequality is the leading political and economic issue of the current era, yet debates about it have long suffered from a degree of imprecision. For example, the standard measure of inequality, the Gini coefficient, reduces a country’s entire income distribution to a single number between zero and one, and is thus highly abstract. Similarly, while inequality is rising in many parts of the world, there is no simple correlation between that trend and social discontent or unrest. France is much less unequal than the United States, and yet it has similar or even greater levels of social polarization.

Today’s inequality debate effectively began in 2013 with the publication of French economist Thomas Piketty’s Capital in the Twenty-First Century, which found that the rate of return on capital tends to outpace the rate of growth, thereby causing inequality to increase over time. Specifically, appreciating real-estate values seem to be a fundamental driver of rising inequality. But here, too, one encounters a degree of imprecision. Real estate, after all, is not a homogenous good, because its value famously depends on “location, location, location.” There are elegant castles and palaces that now cost less than small apartments in major cities.

Wealth stirs the most controversy where it is most tangible, such as when physical spaces become status goods: the corner office is desirable precisely because others cannot have it. More broadly, as major cities have become magnets for a global elite, they have become increasingly unaffordable for office workers, policemen, teachers, nurses, and the like. While the latter must endure long, tiresome commutes, elites use global cities as they see fit, often hopping around from place to place. Large swaths of Paris and London are eerily shuttered at night. Manhattan now has nearly a quarter-million vacant apartments.

Whenever violence and revolution have  unequal societies, real estate has been a focus of discontent. 


NZ central bank cuts rates by 50 bps: Uses cartoons from Rugby to communicate (wish it was cricket)

August 8, 2019

I had blogged about how NZ central bank is using cartoons to communicate its decisions to public.

In the recent mon pol decision, it cut policy rates by 50 bps to 1%. It used cartoons from its national sport rugby to communicate. The entire dashboard is as simple as it can get.

But one so wishes pictures were from cricket. What a match and what display by NZ. Can’t still get over it. And yes Happy Bday to Kane Williamson!

100 years of Bank of North Dakota: A rare public sector bank in US

August 8, 2019

I had blogged about how there are two public sector  banks in US: Bank of North Dakota and Territorial Bank.

BND is celebrating its 100 years and has put up a useful website to track its history:


Can ethics be taught: Doing a RCT to figure?

August 8, 2019

Pert Singer in this piece wonders whether teaching ethics can shape behavior:

In The Righteous Mind, Haidt draws support for his views from research by the philosopher Eric Schwitzgebel of the University of California, Riverside, and Joshua Rust of Stetson University. On a range of ethical issues, Schwitzgebel and Rust show, philosophy professors specializing in ethics behave no better than professors working in other areas of philosophy; nor are they more ethical than professors who don’t work in philosophy at all. If even professors working in ethics are no more ethical than their peers in other disciplines, doesn’t that support the belief that ethical reasoning is powerless to make people behave more ethically?

Perhaps. Yet, despite the evidence, I am not entirely convinced. I have had a lot of anecdotal evidence that my classes in practical ethics changed the lives of at least some students, and in quite fundamental ways. Some became vegetarian or vegan. Others began donating to help people in extreme poverty in low-income countries, and a few changed their career plans so that they could do more to make the world a better place.

How to figure this? Do a RCT!:

Two years ago, Schwitzgebel offered me an opportunity to test, more rigorously than had ever been done before, whether a class on the ethics of eating meat could change what students eat. Together with Brad Cokelet, a philosophy professor at the University of Kansas, we ran a study involving 1,143 students at the University of California, Riverside. Half the students were required to read a philosophical article defending vegetarianism, followed by a small group discussion with the option of watching a video advocating avoiding meat. The other half were a control group. They received similar materials and discussion on donating to help people in poverty.

We used information from campus dining cards to find out what food purchases the students in the two groups made before and after these classes. We had data on nearly 6,000 food purchases from 476 students. The purchases were identified with students who had, or had not, read and discussed the ethics of eating meat, but the data we received were made anonymous so that we could not identify any named student’s purchases.

The result was a decline, from 52% to 45%, in meat purchases among students in the meat ethics group, and the lower rate of meat purchases was maintained for a few weeks after the class. There was no change in the level of meat purchases in the charitable giving group (and we had no way of discovering whether these students gave more to charity).

Our results are, at this stage, preliminary and have not yet undergone peer review. We are seeking further data on the significance of watching the video – which may have appealed to students’ emotions more than their reason. Nevertheless, to our knowledge, this is the first properly controlled study, in the real world and not in a laboratory setting, of the impact of university-level philosophy classes on student behavior. The decline in meat-eating is not dramatic, but it is statistically significant, and suggests that in some contexts, ethical reasoning in the classroom can change behavior.



When Central European countries gave loans in Swiss Francs and it backfired..

August 7, 2019

Before the 2008 crisis, certain Central Europeans took loans in Swiss Francs given the stability etc. As Swiss entered the crisis and did their own thing, the CHF appreciated given its safe haven status. This led to problems for these countries as the borrowers had to pay more due to CHF appreciation. Some respite was there when Swiss National Bank decided to target their currency to prevent this appreciation. But once they removed the target, the problems again continues. This led to some of these economies to restructure their loans in either Euro or local currency.

For instance, the Slovenian government has decided to restructure in Euro and asked their central bank to face losses if any. They sent a letter to ECB for its view as per the law. ECB replied raising concerns over this move saying it is the role of the government and not Slovenia central bank.

Andreas Fischer and Pınar Yeşin in this SNB working paper look at evidence from other countries:

This paper examines the effect of currency conversion programs from Swiss franc-denominated loans to other currency loans on currency risk for banks in
Central and Eastern Europe (CEE). Swiss franc mortgage loans proliferated in CEE countries prior to the financial crisis and contributed to the volume of non-performing loans as the Swiss franc strongly appreciated during the post-crisis period.

Empirical findings suggest that Swiss franc loan conversion programs reduced currency mismatches in Swiss francs but increased currency mismatches in other foreign currencies in individual countries. This asymmetric effect of conversion programs arises from the loan restructuring from Swiss francs to a non-local currency and the high level of euro mismatches in the CEE banking system.


Amidst digitisation, Bandhan Bank opens its 1000th branch

August 7, 2019

Quite a few banks are either shutting down branches or going slow on new branches.

Bandhan Bank which got a banking licence in 2014 is thinking otherwise. It started with 500 branches and has doubled the number of branches in just 4 years.

Private sector lender Bandhan Bank on Saturday opened a new branch at Haltu in Kolkata. With this,  the bank has now a total of 1,000 branches.

The announcement of the 1,000th branch coincided with the inauguration of the bank’s new head office in Salt Lake City, Kolkata.

With a network of 3,014 Doorstep Service Centres that the bank already has, the total number of banking outlets now stands at 4,014 across 34 of the 36 states and union territories in India.

Chandra Shekhar Ghosh, MD and CEO, said, “This is a big milestone for Bandhan Bank. We started the bank with 501 bank branches in August of 2015. In just about four years, we have doubled that count to 1,000. We have always aimed at making banking accessible to all, and this landmark of 1,000 branches is another step in that direction.”

Some banks continue to believe that branches still matter…

RBI cuts policy rate by 35 bps!

August 7, 2019

RBI Governor Shaktikanta Das had earlier argued why should be change policy rates in multiples of 25 bps. RBI’s Monetary Policy Committee has gone ahead and changed the status quo and lowered the policy repo rate by 35 bps to 5.4%.

Four members agreed to cut the rate by 35 bps and 2 for 25 bps:

All members of the MPC unanimously voted to reduce the policy repo rate and to maintain the accommodative stance of monetary policy.

Four members (Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Shri Bibhu Prasad Kanungo and Shri Shaktikanta Das) voted to reduce the policy repo rate by 35 basis points, while two members (Dr. Chetan Ghate and Dr. Pami Dua) voted to reduce the policy repo rate by 25 basis points.



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