Archive for the ‘Indian Economy/Financial Markets’ Category

Study of the Non-Banking Finance Companies in India

June 29, 2022

Rajeswari Sengupta, Lei Lei Son, and Harsh Vardhan in this IGIDR paper:

In late 2018, the default by a major non-banking financial company (NBFC) in India led to a credit crunch in the Indian economy. The crisis raises questions about the business model of the NBFCs, and the role they play alongside banks in the economy. In this paper we analyse the evolution of the NBFC sector in India over time and its importance in extending credit and discusses the factors that may have contributed to the 2018 crisis. We attempt to understand the advantages and disadvantages of the business model of NBFCs, and the drivers of their rapid rise and subsequent challenges in recent years. We also briefly discuss the potential impact of the Covid-19 pandemic on the NBFC sector. Drawing lessons from the past, NBFCs need to be strengthened to play an important role in India’s financial landscape.

Reserve Bank of India encourages cardholders to tokenise their cards: Can it encourage nudging too?

June 28, 2022

RBI issued a press release encouraging cardholders (both debit & credit) to tokenise their card information. Merchants store a lot of information about our cards on their network. This could lead to problems:

Currently, many entities, including merchants, involved in an online card transaction chain store card data like card number, expiry date, etc. [Card-on-File (CoF)] citing cardholder convenience and comfort for undertaking transactions in future. While this practice does render convenience, availability of card details with multiple entities increases the risk of card data being stolen/misused. There have been instances where such data stored by merchants, etc., have been compromised.

Given the fact that many jurisdictions do not mandate Additional Factor of Authentication (AFA) for authenticating card transactions, stolen data in the hands of fraudsters may result in unauthorised transactions and resultant monetary loss to cardholders. Within India as well, social engineering techniques can be employed to perpetrate frauds using such data.

Tokenisation helps prevent these frauds:

Given the foregoing, the Reserve Bank mandated that after December 31, 2021, entities other than card networks and card issuers cannot store card data. This timeline was subsequently extended to June 30, 2022. A framework for CoF Tokenisation (CoFT) services was also issued. Under this framework, cardholders can create “tokens” (a unique alternate code) in lieu of card details; these tokens can then be stored by the merchants for processing transactions in future. Thus, CoFT obviates the need to store card details with merchants and provides the same level of convenience to cardholders.

To create a token under the CoFT framework, the cardholder has to undergo a one-time registration process for each card at every online / e-commerce merchant’s website / mobile application, by entering the card details and giving consent for creating a token. This consent is validated by way of authentication through an AFA. Thereafter, a token is created which is specific to the card and online / e-commerce merchant, i.e., the token cannot be used for payment at any other merchant. For future transactions performed at the same merchant website / mobile application, the cardholder can identify the card with the last four digits during the checkout process. Thus, the cardholder is not required to remember or enter the token for future transactions. A card can be tokenised at any number of online / e-commerce merchants. For every online / e-commerce merchant where the card is tokenised, a specific token will be created.

Till date, about 19.5 crore tokens have been created.

To sign for CoFT:

Opting for CoFT (i.e., creating tokens) is voluntary for the cardholders. Those who do not wish to create a token can continue to transact as before by entering card details manually at the time of undertaking the transaction (commonly referred to as “guest checkout transaction”).

This is where nudging can come. Instead of keeping it voluntary, one could enroll citizens automatically into the program. They can opt out of tokenisation if they wish to. An experiment worth doing?

 

RBI’s RRA merits replication for other sectors as well

June 28, 2022

RBI’s Regulatory Review Authority (RRA) recently submitted its report.

My new article in Financial Express. The article analyses the various recommendations of the RRA report and argues for RRAs across sectors.

Banking | Creative destruction of existing models will pose new challenges for regulators

June 23, 2022

RBI Governor Shaktikanta Das recently gave a speech at the Financial Express Modern BFSI Summit in Mumbai. Das discussed the ongoing technological disruptions in the financial sector, and how the disruptions are creating new opportunities for the financial sector. The opportunities have led to emergence of new banking models which are posing challenges for regulators.

In this moneycontrol articles, I discuss the emergence of the new banking models and challenges for RBI/regulators going ahead.

A review of undergraduate economics curriculum in India:

June 22, 2022

Rethinking Economics India has released its review of UG economics curriculum in India.

Summary:

The report shows that the undergraduate curriculum of Economics is falling short of students’ needs or expectations. Both microeconomics and macroeconomics are grounded in neoclassical interpretations of economic theory, barring a few exceptions. A dearth of readings and authors from India and countries of the Global South, as well as female authors, is largely prevalent combined with a lack of more recently published texts. Economic methodologies are predominantly based in quantitative components with less focus on application based approaches and lack qualitative elements.

While every one of the drawbacks of the extant curriculum structure potentially represents an opportunity that could promote curriculum
change for the better, we must keep in mind that universities as decision makers are constrained. The ‘rules of the game’, that is, the regulatory governance framework may act as a significant constraint to the autonomy of individual departments to structure or restructure their curricula. Questions pertaining to the governance of universities in India are outside the scope of this report. However, they do constitute an area of future research.

Very useful review..

Does the creation of smaller states lead to higher economic growth? Evidence from state reorganization in India

June 20, 2022

Vikash Vaibhav and K. V. Ramaswamy in this IGIDR paper analyse whether creation of Chattisgarh, Uttarakhand and Jharkhand led to higher economic growth in the three states:

In the largest territorial reorganization since the 1950s, when the modern state boundaries were demarcated, the Indian union government carved out three new states from three large north Indian states in November 2000. This was accompanied by discussions along political and sociological lines. But the debates along economic lines were muted, owing to a lack of data. Equipped with three and a half decades-long macro panel data, we investigate whether the event had an impact on the per capita income. For comparison, we construct five separate counterfactuals using techniques such as synthetic control and elastic net regularization.

The three erstwhile ‘combined’ states do not show any evidence of extraordinary growth. We further investigate the six states separately to see if the ‘new’ states grew at the expense of their ‘parent’ states. The state of Uttarakhand shows ‘extraordinary’ growth in the post-reorganization period. Two other smaller states (Bihar and Chhattisgarh) did grow faster than their counterfactual, but do not qualify for the statistical significance test. Three other states (Jharkhand, Madhya Pradesh, and Uttar Pradesh) also do not show a significant change in their growth path. Overall, we find that the creation of smaller sub-national administrative units may not be a panacea for their economic problems.

While economics is a useful and a very important lens, we need to look at political dimensions too. Did creation of new states lead to better administration?

Linking UPI with credit cards: Meaning, Implications and Importance

June 10, 2022

In the Jun-2022 monetary policy, RBI permitted linking of UPI to credit cards. What does this mean? What are its implications? Why is it important?

My new article in Moneycontrol looks at the several questions around UPI linkage with credit cards.

UPI is increasingly becoming a super payment interface, shaking the payment ecosystem which was controlled by private banks and the payment duopolies

Permitting Urban Cooperative Banks (UCBs) to Offer Door-step banking: Remembering Syndicate Bank and Dr TMA Pai

June 9, 2022

In its Monetary Policy yesterday, RBI permitted urban cooperative banks to offer doorstep banking:

In order to attain harmonization of regulatory framework across REs and to provide convenience of banking services to the customers at their door-step, it has been decided to permit UCBs to extend doorstep banking services to their customers on par with scheduled commercial banks. A detailed circular will be issued separately.

RE implies Regulated Entities.

RBI followed this announcement with changes in Banking Regulation Act:

In terms of Section 23 of the Banking Regulation Act, 1949 (AACS) Primary (Urban) Co-operative Banks (UCBs) are required to seek prior approval of the Reserve Bank for opening any new place of business including offering services at the doorstep of the customer.

2. Keeping in view the above, it has been decided to allow financially sound and well managed (FSWM) UCBs to provide Doorstep Banking Services to their customers on a voluntary basis. However, Non-FSWM UCBs would have to seek prior approval of concerned Regional Office of Department of Supervision of the Reserve Bank to provide Doorstep Banking Services.

3. Eligible UCBs may formulate a scheme for providing Doorstep Banking Services to their customers, with the approval of their Boards, in accordance with the guidelines enclosed to this letter.

4. UCBs are further advised to take into account the various risks that may arise on account of offering Doorstep Banking Services to customers either directly through own employees or through agents and take all necessary steps to manage the same.

5. The operation of the scheme may also be reviewed by the Boards of UCBs on a half-yearly basis during the first year of its operation. The scheme may be reviewed thereafter on an annual basis.

Obviously each time I see announcements on doorstep banking, memories jog to Syndicate Bank and its founder Dr. TMA Pai. Dr Pai had pioneered door to door banking in India way back in 1920s for mobilizing its innovative pigmy deposits across rural South Canara region.

The RBI was established a decade later in 1935. The regulator did not understand the bank’s practices. It asked the Bank to stop door to door banking as the employees could not be appointed as agents to collect deposits! RBI also disagreed with Dr Pai on many other new ideas that the bank had implemented. Ironically many of these ideas became policies later.

 

 

Why India needs a Fiscal Council?

June 8, 2022

Lekha Chakraborty of NIPFP and Emmanuel Thomas of JNU in this blogpost reiterate a long standing demand of economists: Need for a Fiscal Council in India:

…an earlier than expected fiscal normalisation process by drastically curbing public debt can affect growth recovery. So strengthening the credibility of fiscal policy is significant to ensure fiscal marksmanship. ‘Communication’ of the medium-term fiscal framework by providing the roadmap to reduce the public debt is important to gain investors’ confidence. Fiscal transparency and accountability need to be ensured to create room for market confidence in a high public debt regime. Constituting a Fiscal Council in India is therefore crucial at this juncture to analyse the fiscal risks and to formulate post-pandemic fiscal strategies to ensure fiscal credibility in times of geopolitical uncertainties. 

Explainer | Sri Lanka and Pakistan crisis: What can India do?

May 31, 2022

My new piece in moneycontrol is an explainer on SL and Pakistan crisis and what India can do amidst the crisis.

The Roller Coaster Ride of Non-performing Assets in Indian Banking

May 30, 2022

Rakesh Mohan and Partha Ray provide a sweeping account of NPA crisis in India’s baking system:

This paper narrates the story of the roller coaster ride of non-performing assets (NPA) of the Indian banking sector. Three distinct phases of intertemporal broad trends can be discerned in NPAs of the Indian banking sector. First, since the initiation of financial sector reforms till about the beginning of the North Atlantic Financial Crisis (NAFC), NPAs showed a consistent downward trajectory. Second, during 2008-09 through to 2017-18, they showed a distinct spurt. Third, since 2017-18, NPAs have been on a downward trend till 2019-20, until the economic disruptions caused by Covid 19. In contrast to the popular practice of treating the second phase of rising NPAs as emanating exclusively from governance issues in public sector banks (PSBs), four factors have been identified: (a) falling commodity prices; (b) regulatory forbearance; (c) initial exuberance in infrastructure projects punctured by a downward phase in business cycles (leading to substantial debt accumulation of select big corporates); and (d) governance failure in select PSBs. Moving forward, while the pandemic and some of the associated policy measures could reverse the recent downward trends in NPAs temporarily, more durable policy initiatives like bankruptcy reforms are expected to make significant positive changes in the NPA situation of Indian banks.

From Protectionism to Global Integration: India’s Trade Policy Before and After 1991

May 26, 2022

Anupam Manur of Takshashila Institute has written a fine essay on India’s industrial policy before and after 1991. The essay is published on https://the1991project.com:

This essay will focus on India’s import policy—the highly restrictive and protectionist tendencies until 1991, the liberalizing reforms, and the effects of the reforms on the Indian economy. Postindependence, the Indian government disfavored free trade and imposed heavy restrictions on imports using tariff and non-tariff barriers while trying to encourage exports using subsidies. The large theme of India’s trade policy during this period was that each instance of trade liberalization and reform was not only backtracked soon after it came into effect but also pulled further back—a case of one step forward and two steps back. For instance, small reductions in import duties was followed by bigger hikes, or any easing of license requirements was followed by stricter requirements in the next period. This was followed by piecemeal and inadequate liberalization in the 1980s.

The year 1991 witnessed a balance-of-payments crisis. The government responded with currency devaluation, relaxation of the import licensing system, and a broad reduction in tariffs. In the years following the reforms, the Indian economy grew at significantly higher rates, the share of trade in India’s GDP increased, and the share of Indian goods and services in global trade increased.

 

Entry barriers for banking licence in India are high… very high

May 24, 2022

The new CII President Sanjiv Bajaj spoke on the need for more bank licences in India and allowing large NBFCs to convert to banks. Around same time RBI rejected 6 applications for bank licences: 4 for universal banks and 2 for small finance banks

My new piece in moneycontrol on the really high entry barriers in Indian banking. Dejure barriers may not be that high, defacto they are….

Economic Planning in India: Did We Throw the Baby Out with the Bathwater?

May 23, 2022

Ajay Chhibber of George Washington University in this IPPR paper says we need to revisit role of planning and Niti Aayog:

 India has a long and checkered history of planning with some success but many failures. Despite India’s federal structure India’s approach to planning has been top-down with the union government controlling many levers – financial and otherwise to determine the direction of the economy and social programs. India has tried 3 types of planning – “directed planning”, “indicative planning” and now just a “strategy but no planning”.  India needed to replace the Planning Commission but not give up on planning altogether. Just as the rest of the world was going back to a “new planning” surge to handle climate change and the desire to meet the SDGs, India abolished planning altogether. The successor to the planning commission – the Niti Aayog needs to get back to “new planning”, that is now being adopted by many countries with stronger leadership. A legitimised authorising environment and effective use to plan can help India achieve the SDGs by 2030 and become a prosperous country by 2047.

Irrigation Management for Sustainable Agriculture

May 18, 2022

Rishabh Kumar, Jobin Sebastian and Arun Vishnu Kumar in RBI’s May-22 Bulletin analyse irrigation in 19 States:

In the backdrop of recurrent episodes of drought and declining ground water table, ensuring irrigation efficiency is of paramount importance for sustainable agriculture. This article analyses the trends in the area-weighted cost and efficiency of irrigation across 19 agriculturally important Indian states using the Comprehensive Cost of Cultivation data published by the Ministry of Agriculture and Farmers’ Welfare, Government of India for the period from 2002-03 to 2017-18.

Highlights:

    • The area-weighted cost of irrigation declined during the study period perhaps reflecting the impact of increased access to subsidised power in most of the states. However, the costs are still high in some states.
    • The estimated technical efficiency of irrigation suggests that majority of the states lie far from the efficiency frontier and have also recorded declining trends over the study period.
    • The inefficiency appears to be driven by the energy consumption in the farm sector and ground water accessibility.
    • The findings call for policy focus on energy and water efficient irrigation technologies, particularly in states where irrigation efficiency is declining.

NSDL@25: Ushering India’s stock market through the digital era for 25 years

May 18, 2022

National Securities Depository Limited (NSDL) recently celebrated its 25th anniversary.

My article in Moneycontrol on how this organisation silently paved way for digitalisation of equity markets.

25 years of Telecom Regulatory Authority of India

May 17, 2022

The Telecom Regulatory Authority of India (TRAI) was established in 1997 and completes 25 years in 2022. The authority celebrated its 25th anniversary and one can watch the ceremony on this youtube link.

On its 20th and 10th anniversary, TRAI released useful documents to reflect on its history.

Hope they upload one on the 25th anniversary as well.

Bridging regulatory gaps for NBFCs

May 17, 2022

My new article in Financial Express on the recent policies by RBI to bridge regulatory gaps between NBFCs and Banks.

 

India’s inflation at 7.8%: Few links

May 13, 2022

India’s CPI inflation touched 7.8% highest since May-2014 when it touched 8.33%. The sharp rise in inflation has led to fair bit of discussion. Here are some of the articles I read and found interesting:

Jahangir Aziz of JP Morgan argues in Indian Express that RBI’s monetary policy alone will not help contain inflation.  His point is RBI’s policy brings inflation via three channels: lowering inflationary expectations, exchange rate appreciation and lowering credit growth. OF these three, lowering credit growth is the most effective but is not going to do much as credit growth has been subdued.

Prof Rajeshwari Sen Gupta of IGIDR in Times of India lines up a 4 point battle plan for RBI: Anchor inflation expectations, avoid sudden rate hikes, give credible data, restore MPC role.

Prof TT Rammohan in Business Standard says we should blame Ukraine war and not the central banks & RBI for the current spurt in inflation

Pranjul Bhandari of HSBC Securities and Capital Markets in Business Standard dissects the current inflation trend and says brace for more.

 

 

RBI communications: Do you understand what I say?

May 9, 2022

My new piece on moneycontrol:

Central bank communications have come a long way from being an ignored tool to an important one of monetary policy. RBI clearly can do better 


%d bloggers like this: