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Overdraft: Saving the Indian Saver
SHORTLISTED FOR THE GAJA CAPITAL BUSINESS BOOK PRIZE Winner of the Business Book of the Year at the Kalinga Literary Festival All of us love to spend. But before we can do that, we have to have earned or saved some money. Only sovereigns don't have they can print money, or borrow; in our country, where they own banks, they can use our deposits to lend and splurge for goals that may not always be economic in nature. Many rulers have succumbed to the temptation, with dire results - inflation, debased currency, payments crises, bankrupt banks, economic stagnation, loss of public confidence. After centuries of ruinous experiences, some governments learnt, others haven't, to control themselves, create self-governing Central banks and let them manage money and regulate banks. Sometime in 2015, news of unsustainable bad debts (non-performing assets or NPAs) in the Indian banking sector started to first trickle out, and then became a flood. In the forefront were some of India's largest government banks, and a series of tycoons who were running their empires on unpaid debts. The banks' problems landed on the table of Urjit Patel when he became Governor of Reserve Bank of India in September 2016. Based on thirty years of macroeconomic experience, he worked out the '9R' strategy which would save our savings, rescue our banks and protect them from unscrupulous racketeers. In this book, he explains the problem and how it blew up; and how he would have resolved it if he had not been prevented.
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July 28, 2020
The 24th Governor of the Reserve Bank of India, Urjit Patel in his latest work “Overdraft” mounts a scathing albeit nuanced indictment on the malaise and miasma plaguing the Indian banking sector. Taking utmost care to ensure that his views do not transmogrify into an all-out polemic, he is measured in his criticism and optimistic in his outlook. As Mr. Patel clinically expostulates in his compelling book, a pugnacious desire to further populism, a byzantine set of self-defeating regulations and a regulator who is reduced to a mere bystander if not a toothless tiger, all contrive to produce a parlous ecosystem, that is ever engaged in temporary ‘repairs’ with hardly any time for ushering in meaningful reforms.
“I HAVE BEEN IN the news; while it lasted, the contretemps made good theatre. It ended when I stepped down. The theatre of eminences has been going on for centuries and will continue for many more; eventually, everyone is forgotten.” Any book which begins as loquaciously as this invariably does not disappoint and “Overdraft” certainly doesn’t. Dwelling about the banking crisis in the country, Mr. Patel attributes this condition to the phenomenon of creeping banking sector-fiscalization, which in layman terms refers to “ownership of banks as a means for day-to-day macroeconomic management rather than primarily for efficient intermediation between savers and borrowers.”
At the root of the crisis, lies the issue of ownership. As Mr. Patel holds forth, despite three decades of banking sector reforms and an encouragement accorded to the entry of private banks, state-sponsored credit creation retains a majority share. The looming presence of government institutions in all segments, according to Mr. Patel has resulted in a mushrooming of ‘Stackelberg leaders’, an allusion to a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially.
The mandate and priorities of the financial institutions in India seem to be haphazard and misaligned. These institutions have been tasked with priming “vague (and extraneous) objectives – underwriting the government’s disinvestment targets, preserving employment in public enterprises, contributing assistance to states based on the political clout of the representatives, intermittently providing artificial support to stock markets, and occasionally overt lapses in due diligence.” Mr. Patel identifies 9 “Rs” against which he undertakes an impartial evaluation of the performance of the Indian banks, both in the public sector as well as the private banks.
9Rs
For the canard spewing reprobates who strive to lay the blame of a broken-down banking system, squarely, on the doorstep of the Narendra Modi Government, Mr. Patel in no uncertain terms, traces the genesis behind the horror story. …”the dominant antecedent is excessive lending and borrowing; it is not surprising that in the decade since 2009/10, the bank credit–GDP ratio peaked in 2013/14.1 (If we include corporate bonds outstanding, credit from non-banking financial companies [NBFCs], housing finance companies [HFCs] and cooperative banks, the augmented financial resources/GDP ratio for 2018/19 is around an estimated 85 per cent.) Secondly, the asymmetry of information between the regulator and lenders, which is why the supervisor is almost always too late, is inevitably a critical ingredient. Thirdly, policymakers and regulators convince themselves, when the credit cycle is motoring along, that ‘this time it is different’ so there is no need to judiciously apply brakes – take away the ‘punch bowl’ or, at the least, dilute it. The present mountain of bad debt in India is no exception. The lending cycle/asset build-up started in the mid-2000s and even through the global financial crisis, we kept lending channels wide open – at a growth rate of about 17 per cent (in non-food credit) as late as 2011/12 – based on ambitious projections of debt-servicing capacity underpinned by an assumption of 8–8.5 per cent annual growth over a long period. Project execution would, in turn, have assumed minimal glitches or hold-ups. There was a (systemic) failure to maintain balanced credit expansion; non-food credit growth annually over 2006/07–2011/12 was 20 per cent versus the real GDP growth rate of around 7 per cent per annum.”
Mr. Patel also identifies gaping and inexcusable holes in the Corporate Governance of the Public Banks which leads to a rot in the system that is both systemic as well as endemic. With a dearth of senior management in place, governance according to Mr. Patel transcends the plight of a neglected child. “Ditto for the GBs’ board of directors; it is common knowledge that this has traditionally been a placeholder for sinecure to political supporters. Key committees of the board, like the audit committee, have suffered from both inadequate membership, as seats go unfilled, as well as paucity of talent/domain knowledge to carry out fiduciary responsibilities to the level that is required and expected.”
An insidious arrangement of quid pro quo also contributes to ensure a virtual stagnation of reforms in so far as the banking sector is concerned. Consider this damning fact, “In July 2019, the regulator imposed fines on eleven banks for a wrongdoing. A few months later, in September 2019, one government bank in that list received an award from a financial publication. In October 2019, a private bank that had been punished in July won an award from another financial publication. One can go on, as there are other such instances.” As many as 90 per cent of frauds (by value) occurred in the government banks as against 8 per cent in the private banks.
Since the advent of the NDA, a plethora of reforms have been initiated to stem the rot. The Asset Quality Review (AQR) exercise was initiated in the second half of 2015. “The clean-up started with a candid assessment of the sloth hiding in the sector’s balance sheet. Asset Quality Review. Around one-sixth of GBs’ gross advances were found, at first pass, to be stressed (non-performing, restructured or written-off), and a greater part of these were bad debts. For some banks, the share of assets under stress approached or exceeded 20 per cent. The estimate of stressed assets had doubled from 2013 in terms of what had been recognized by banks and acknowledged by the RBI. The Strategic Debt Restructuring (SDR) Mechanism was introduced in February 2014 (and revised in June 2015). The 5:25 scheme was introduced in July 2014 and its scope was extended in December 2014. The Scheme for Sustainable Structuring of Stressed Assets (S4A) was notified in June 2016. In May 2016, the Insolvency and Bankruptcy Code (IBC) was enacted as a watershed towards strengthening India’s financial architecture”
As Mr. Patel illustrates, reforms more than punitive measures are the need of the hour. Imposing penalties on errant banks in general and Public Sector Banks in general, result in a perverse play of “neutrality.” Large fines and strictures on banks have been imposed for underreporting NPAs, accounting fudges and regulatory violations, more generally. As mentioned earlier, banks in December 2019 have had to reveal bookkeeping discrepancies and restate balance-sheet figures. This casts doubt on the effectiveness of penalties imposed by the regulator. Frankly, the flow of funds in the case of GBs suggests that monetary penalties are a case of money going from the ‘left pocket’ to the ‘right pocket’ (money collected by the RBI is passed on to the government as surplus), and back to the ‘left pocket’ (government returns the money to GBs for recapitalization).”
Further, the Reserve Bank of India, although the primary regulator is rendered infuriatingly impotent as the powers to remove Directors and appoint a new management etc. in the case of Government Banks is totally taken out of the ambit of the RBI. This has the effect of transforming the premier regulator of the banking industry into a spectator lamenting over unfortunate occurrences.
However, all is not lost. A firm resolve, a firmer mindset and a paradigm shift in resoluteness can still bring the Indian banking sector back in the reckoning. For that to happen, the need of the hour is people with the caliber of Mr. Urjit Patel.
“I HAVE BEEN IN the news; while it lasted, the contretemps made good theatre. It ended when I stepped down. The theatre of eminences has been going on for centuries and will continue for many more; eventually, everyone is forgotten.” Any book which begins as loquaciously as this invariably does not disappoint and “Overdraft” certainly doesn’t. Dwelling about the banking crisis in the country, Mr. Patel attributes this condition to the phenomenon of creeping banking sector-fiscalization, which in layman terms refers to “ownership of banks as a means for day-to-day macroeconomic management rather than primarily for efficient intermediation between savers and borrowers.”
At the root of the crisis, lies the issue of ownership. As Mr. Patel holds forth, despite three decades of banking sector reforms and an encouragement accorded to the entry of private banks, state-sponsored credit creation retains a majority share. The looming presence of government institutions in all segments, according to Mr. Patel has resulted in a mushrooming of ‘Stackelberg leaders’, an allusion to a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially.
The mandate and priorities of the financial institutions in India seem to be haphazard and misaligned. These institutions have been tasked with priming “vague (and extraneous) objectives – underwriting the government’s disinvestment targets, preserving employment in public enterprises, contributing assistance to states based on the political clout of the representatives, intermittently providing artificial support to stock markets, and occasionally overt lapses in due diligence.” Mr. Patel identifies 9 “Rs” against which he undertakes an impartial evaluation of the performance of the Indian banks, both in the public sector as well as the private banks.
9Rs
For the canard spewing reprobates who strive to lay the blame of a broken-down banking system, squarely, on the doorstep of the Narendra Modi Government, Mr. Patel in no uncertain terms, traces the genesis behind the horror story. …”the dominant antecedent is excessive lending and borrowing; it is not surprising that in the decade since 2009/10, the bank credit–GDP ratio peaked in 2013/14.1 (If we include corporate bonds outstanding, credit from non-banking financial companies [NBFCs], housing finance companies [HFCs] and cooperative banks, the augmented financial resources/GDP ratio for 2018/19 is around an estimated 85 per cent.) Secondly, the asymmetry of information between the regulator and lenders, which is why the supervisor is almost always too late, is inevitably a critical ingredient. Thirdly, policymakers and regulators convince themselves, when the credit cycle is motoring along, that ‘this time it is different’ so there is no need to judiciously apply brakes – take away the ‘punch bowl’ or, at the least, dilute it. The present mountain of bad debt in India is no exception. The lending cycle/asset build-up started in the mid-2000s and even through the global financial crisis, we kept lending channels wide open – at a growth rate of about 17 per cent (in non-food credit) as late as 2011/12 – based on ambitious projections of debt-servicing capacity underpinned by an assumption of 8–8.5 per cent annual growth over a long period. Project execution would, in turn, have assumed minimal glitches or hold-ups. There was a (systemic) failure to maintain balanced credit expansion; non-food credit growth annually over 2006/07–2011/12 was 20 per cent versus the real GDP growth rate of around 7 per cent per annum.”
Mr. Patel also identifies gaping and inexcusable holes in the Corporate Governance of the Public Banks which leads to a rot in the system that is both systemic as well as endemic. With a dearth of senior management in place, governance according to Mr. Patel transcends the plight of a neglected child. “Ditto for the GBs’ board of directors; it is common knowledge that this has traditionally been a placeholder for sinecure to political supporters. Key committees of the board, like the audit committee, have suffered from both inadequate membership, as seats go unfilled, as well as paucity of talent/domain knowledge to carry out fiduciary responsibilities to the level that is required and expected.”
An insidious arrangement of quid pro quo also contributes to ensure a virtual stagnation of reforms in so far as the banking sector is concerned. Consider this damning fact, “In July 2019, the regulator imposed fines on eleven banks for a wrongdoing. A few months later, in September 2019, one government bank in that list received an award from a financial publication. In October 2019, a private bank that had been punished in July won an award from another financial publication. One can go on, as there are other such instances.” As many as 90 per cent of frauds (by value) occurred in the government banks as against 8 per cent in the private banks.
Since the advent of the NDA, a plethora of reforms have been initiated to stem the rot. The Asset Quality Review (AQR) exercise was initiated in the second half of 2015. “The clean-up started with a candid assessment of the sloth hiding in the sector’s balance sheet. Asset Quality Review. Around one-sixth of GBs’ gross advances were found, at first pass, to be stressed (non-performing, restructured or written-off), and a greater part of these were bad debts. For some banks, the share of assets under stress approached or exceeded 20 per cent. The estimate of stressed assets had doubled from 2013 in terms of what had been recognized by banks and acknowledged by the RBI. The Strategic Debt Restructuring (SDR) Mechanism was introduced in February 2014 (and revised in June 2015). The 5:25 scheme was introduced in July 2014 and its scope was extended in December 2014. The Scheme for Sustainable Structuring of Stressed Assets (S4A) was notified in June 2016. In May 2016, the Insolvency and Bankruptcy Code (IBC) was enacted as a watershed towards strengthening India’s financial architecture”
As Mr. Patel illustrates, reforms more than punitive measures are the need of the hour. Imposing penalties on errant banks in general and Public Sector Banks in general, result in a perverse play of “neutrality.” Large fines and strictures on banks have been imposed for underreporting NPAs, accounting fudges and regulatory violations, more generally. As mentioned earlier, banks in December 2019 have had to reveal bookkeeping discrepancies and restate balance-sheet figures. This casts doubt on the effectiveness of penalties imposed by the regulator. Frankly, the flow of funds in the case of GBs suggests that monetary penalties are a case of money going from the ‘left pocket’ to the ‘right pocket’ (money collected by the RBI is passed on to the government as surplus), and back to the ‘left pocket’ (government returns the money to GBs for recapitalization).”
Further, the Reserve Bank of India, although the primary regulator is rendered infuriatingly impotent as the powers to remove Directors and appoint a new management etc. in the case of Government Banks is totally taken out of the ambit of the RBI. This has the effect of transforming the premier regulator of the banking industry into a spectator lamenting over unfortunate occurrences.
However, all is not lost. A firm resolve, a firmer mindset and a paradigm shift in resoluteness can still bring the Indian banking sector back in the reckoning. For that to happen, the need of the hour is people with the caliber of Mr. Urjit Patel.
August 20, 2020
While I respect what Urjit Patel was trying to do here, he should have been more domestic with words. The book was like some research paper. The language used was meant for his peers from RBI.
Apart from that, Urjit didn't pull any punches. He tore right into the system from NPAs to misgovernance.
Apart from that, Urjit didn't pull any punches. He tore right into the system from NPAs to misgovernance.
October 11, 2020
I really enjoyed this book.
My background is in engineering, but I've been on a finance kick recently and I really enjoyed this book. The author takes us on a journey of the problems plaguing the Indian banking sector. Early in the book the focus is on government banks (GBs) being inundated with non-perforiming assets (NPA). He goes into the reasons this exists and points out those that have enabled and even continue to promote it. However, in comparison to other books describing 'problems' within society/structures Urjit Patel provides detailed discussions on what can be done to combat the problems. It is rare that I find books where the author spends as much time on the solutions as well as the problem, in that sense, the book was rather refreshing.
One additional note: I found the footnotes very very helpful. Often, if there was a concept I was unfamiliar with, the footnotes pointed me to resources to help me understand.
My background is in engineering, but I've been on a finance kick recently and I really enjoyed this book. The author takes us on a journey of the problems plaguing the Indian banking sector. Early in the book the focus is on government banks (GBs) being inundated with non-perforiming assets (NPA). He goes into the reasons this exists and points out those that have enabled and even continue to promote it. However, in comparison to other books describing 'problems' within society/structures Urjit Patel provides detailed discussions on what can be done to combat the problems. It is rare that I find books where the author spends as much time on the solutions as well as the problem, in that sense, the book was rather refreshing.
One additional note: I found the footnotes very very helpful. Often, if there was a concept I was unfamiliar with, the footnotes pointed me to resources to help me understand.
September 9, 2020
Overdraft: Saving the Indian Saver by Urjit Patel , lists out the issues which regulators fell short on several counts in addressing and reason for failure. Latitude of this book spans from the productivity difference or due diligence controls of Government Banks to Private Banks , Higher institutional credits to basic farmer loans.
90% of the frauds by value has happened in government owned bank. Why? Any issue, the ruling government will inject billions to arrest the current concern and government bank directors claim “Lenders are not policemen or Enforcement Directorate” or and banks hiding the problematic assets essentially there banks does not convey their balance sheet.
As mentioned in 2017 Acharya report
Current government IBC law is a breakthrough reform in banking to watershed towards strengthening Indian Financial sector, there is no doubt in that but until we have banking professional who maintain professional integrity and are not the puppets of the government (government bank directors are appointed by government) , this issues will be a vicious cycle.
The idea behind nationalization of banks in India is to have government control over credit allocation to economy, whereas in the name of investment and economic development every Tom Dick and Harry allotted with capital and even worse they are provided with evergreen loans when they default one loan with additional due diligence.
RBI’s regulatory power over government banks are weaker than those over private banks.
Mr.Patel highly recommend legal reforms which empowers RBI to fully exercise the same responsibilities for government banks as of now apply to private banks.
The bottom line of Mr.Patel literature is any economic slowdown , capital crisis, bailouts, waiver before government decides to injects fund in the system (not RBI, RBI is just a devise to inject. As far as I know only in New Zealand central bank decides.), government or the group experts should find the root cause, at least in a reasonable time and develop credible solution (it should not be like as quoted by Mr.Patel towards the end). Issue which is fixed without identifying the root case is a ticking time bomb. Because this will assist in developing a framework which will enable early identification of further issues and resolve.
90% of the frauds by value has happened in government owned bank. Why? Any issue, the ruling government will inject billions to arrest the current concern and government bank directors claim “Lenders are not policemen or Enforcement Directorate” or and banks hiding the problematic assets essentially there banks does not convey their balance sheet.
As mentioned in 2017 Acharya report
“Only a bank that fears losing its deposits base or incurring the wrath of its shareholders is likely to recognise losses in a timely manner. In many of our banks , such market discipline is simply not present at the moment.”
Current government IBC law is a breakthrough reform in banking to watershed towards strengthening Indian Financial sector, there is no doubt in that but until we have banking professional who maintain professional integrity and are not the puppets of the government (government bank directors are appointed by government) , this issues will be a vicious cycle.
The idea behind nationalization of banks in India is to have government control over credit allocation to economy, whereas in the name of investment and economic development every Tom Dick and Harry allotted with capital and even worse they are provided with evergreen loans when they default one loan with additional due diligence.
RBI’s regulatory power over government banks are weaker than those over private banks.
Mr.Patel highly recommend legal reforms which empowers RBI to fully exercise the same responsibilities for government banks as of now apply to private banks.
The bottom line of Mr.Patel literature is any economic slowdown , capital crisis, bailouts, waiver before government decides to injects fund in the system (not RBI, RBI is just a devise to inject. As far as I know only in New Zealand central bank decides.), government or the group experts should find the root cause, at least in a reasonable time and develop credible solution (it should not be like as quoted by Mr.Patel towards the end). Issue which is fixed without identifying the root case is a ticking time bomb. Because this will assist in developing a framework which will enable early identification of further issues and resolve.
“In playwriting there is a conception known as “Chekhov’s gun”: if there is rifle hanging above the mantelpiece in Act One, it’s going to be fired at someone by the end of Act Five. In the regulatory, enforcement and legal landscape around loan recoveries in India over last decade, the unused rifle usually disappears by Act Three, hence not credible since all stakeholders know about the preordained vanishing act. Investment in policy and regulatory integrity requires staying the course there is no other way.”
August 23, 2020
Urjit has beautifully explained the multidimensional ramifications of the phenomenon, he calls, banking sector fiscalization, wherein Government Banks (GBs) and other financial agencies that it owns, for managing day-to-day macroeconomic challenges, than allowing these institutions to be efficient intermediary between savers and borrowers. We see ample evidence of this phenomenon in Banks being used for liberal credits to boost consumption, Farm loan waivers, support unviable MSME, underwriting of Government disinvestment targets, and sustain employment in Public Enterprises. It dilutes Banks incentive to be market efficient, nor exercise greater risk management discipline, and enhance dependence on Government to bailout, and meet capital adequacy norms, for example.
None of this is disputable or is mostly understood as well.…and this books authoritatively adds more substance (in terms of chronology, instrumentalities and figures) to the appreciation of the collateral damage that banking sector fiscalization has on economy in terms of high instances of NPAs, increased cost of capital, enhanced risk for depositors and overall weakening of economy to manage downturns and shocks.
It would have been interesting to know, how effective has Government been in meeting its objectives and overcoming short term socio-political-economic challenges leveraging GBs, and some would say to some extent, but at high long-term cost. And were there any viable alternatives that were consciously ignored and would have been equally effective and palatable to Government.
Question is that using GBs to deliver its objectives comes as easy and convenient first option or the only the most prudent and viable option for the Government, driven by political needs and for-ever on- election seasons. While the generic trend may looks to support the first case, it would have been interesting to get insight into options that were available (suggested by RBI) and still not exercised by Government of the day.
Clear highlight of the book, and the most readable one. is the middle section titled as clean the augean stables, wherein Urjit takes us through the financial sector reforms trajectory woven around recognizing, resolving and ring-fencing the NPA mess. with the help of 9R framework. The establishment of Central Repository of Information on Large Credits (CRILC) in 2014 rightfully marks the start of the journey, for it provided the critical information around the view on borrower-wise and bank-wise exposure, an essential baseline to conduct Asset Quality Review and report realistic assessment of distressed assets.
Early attempts to revitalize distressed assets included schemes like SDR, 5:25, S4A (collectively called alphabet soup!) but with limited success. May 2016, marked the passing of Insolvency and Bankruptcy Code(IBC), which not only promised time-bound route for resolution of distressed assets but also instill the real fear among promotors of losing their firm/assets to outside bidders and that liquidation is a real possibility at the end of road. Despite this process being available, there was hesitancy among the lenders (mainly GBs) to push for initiating IBC process for understandable reasons, which meant that RBI has to be empowered, under BR Amendment Act 2017 to issue direction to banking companies to initiate IBC process for default companies on resolution of stressed assets. We all recall with amazement and sceptism, the declaration by RBI in September 2017, of 41 accounts, with aggregate exposure of Rs 5 trillion (45% of total NPA) to be taken up under IBC process.
To avoid been perpetually involved in identification of accounts, on case-2-case basis and hence invite criticism, it was prudent on part of RBI (in February 2018)to issues prudential norms regarding account classification as special mention accounts on default of payment and eventual reference to NCLT in six months. RBI believed that the provision that NCLT can be avoided by undertaking viable restructuring accredited by rating agencies, within six months, would be shot in the arm of bankers to push for improving recognition of asset quality and also work with promotors to revive assets. However, future events did not endorse the RBIs beliefs.
Book recounts set of events and role played by Government, Lenders, Borrowers and their lawyers that led to serious dilution of the IBC effectiveness, most notably by removing timelines and by making the reference to IBC non-compulsory. Urjit presents, quite convincingly and sometimes regretfully, his understanding of the possible motivations, compulsions and perspectives different stakeholders behind installing the pathway that was so meticulously created by RBI. Nevertheless there is still credit to be given for resolution of 45% assets identified under first 41 accounts, and in general there is more vigilance and pressure on promotors to take care of quality of assets.
Book asks a very interesting question- if courts had allowed RBI to issue directions for specific accounts, may be RBI could have come with another supplementary list in 2018-19 and continued with the cleaning process case-by-case! What makes this books narration of the events different, is its complete obliviousness of the actors involved, within the RBI, Government, Banks and third parties.
On the aside, book covers the emergence and subsequent dilution of PCA framework, debate around bad-bank, strengthening of RBI enforcement capabilities to detect operational frauds, recapitalization of Banks, Sector and MSME specific interventions and its impact on health of GBs and overall financial sector stability.
Book looks into reasons of high instance of frauds in GMS against that in PBs. Market induced discipline is very high in PBs as any loss of reputation can lead to run on the bank by the depositors, besides curtailing their ability to raise fund in the market. In cases where the market mechanism is weak, one would expect regulatory oversight to be stronger, which is actually not the case.
Infact, regulatory disciple imposed by RBI is quite effective in case of PBs, in comparison to GBs. Banking regulatory powers are not ownership neutral ie to say that RBI does not have / unlikely to have same level of control over GB as in case of PB, especially in the areas of corporate governance. RBI cannot trigger liquidation, revoke license, force merger, nor remove directors and management at GBs.
Vigilance as source of discipline is effective only in the form of preventive vigilance, while punitive vigilance seems to be quite weak, in case of GBs. Interestingly there seems to be correlation between instances of fraud and rise in stressed assets problem.
Urjit doesn’t lay much hope of GBs improving in its efficiency and competitiveness and sees PBs increasing their share in banking sector, which he believes is not necessarily a bad thing
December 4, 2021
Urjit Patel's field notes, hardly anything new here. Typical failure of a semi-decent idea in implementation. Patel does not call out outright thievery in as many words but we all know what it is. Good thing the new IBC is making some scumbag promoters lose their cash cows. Unfortunately with the pro-cyclical nature of India's government business and the black swan of COVID, the tax payer will have to keep bearing the brunt of deficit-ballooning solutions.
The book itself is fairly short and reads like a diluted economics paper. Interestingly, the most useful part I thought was not the core IBC saga but rather the observation on how agri credit has been bulked up, essentially front-ending subsidies that should have been whittled away gradually. Some numbers are really alarming. Sample this gem - bank credit to agriculture has gone from 20% to 52% of GDP in the last 20 years. And so far in India, there are no futures markets in agri commodities to speak of, nor has this credit caused any noticeable improvement in productivity. What looks like credit deepening in an essential sector is basically an unsecured loan for feeding the marginalized farmer families. A lot of this will eventually be waived during elections and the tax payer will foot the bill.
But the bill always comes due. Unless India discovers oil, lithium or cobalt tomorrow; the downward slide will continue. Also the words "Raghuram" and "Rajan" are conspicuously missing. I wonder why.
Overall a good flip through on a slow WFH afternoon.
The book itself is fairly short and reads like a diluted economics paper. Interestingly, the most useful part I thought was not the core IBC saga but rather the observation on how agri credit has been bulked up, essentially front-ending subsidies that should have been whittled away gradually. Some numbers are really alarming. Sample this gem - bank credit to agriculture has gone from 20% to 52% of GDP in the last 20 years. And so far in India, there are no futures markets in agri commodities to speak of, nor has this credit caused any noticeable improvement in productivity. What looks like credit deepening in an essential sector is basically an unsecured loan for feeding the marginalized farmer families. A lot of this will eventually be waived during elections and the tax payer will foot the bill.
But the bill always comes due. Unless India discovers oil, lithium or cobalt tomorrow; the downward slide will continue. Also the words "Raghuram" and "Rajan" are conspicuously missing. I wonder why.
Overall a good flip through on a slow WFH afternoon.
June 2, 2021
A slow read but a short one.written by Ex RBI Governor who decided to quit Mid-way as usual media projected it in a way convenient to them.
The book in a way turned out to be an eye opener, sharing the problem we are facing in Banking Space, How RBI was trying to solve it and why it isnt solved yet.
Numbers or Graphs are more like a speed breaker so the book wasnt smooth but being a short book and short concise chapters to the point with lot of references, theories made it a fast read.
Book indeed taught me lot of new stuff, concepts on economy and economic theories.
If you are interested to know whats happening in Banking space, Monetary Space and the buzzword NPAs.
This is the book one should reas.
Reading the book became easy cauze of my recent read "Pandemonium" by Tamal Bandhopadhyay which more or less dealt with same NPA issue.
Do read if this topic pleases you or you are curious about it.
The book in a way turned out to be an eye opener, sharing the problem we are facing in Banking Space, How RBI was trying to solve it and why it isnt solved yet.
Numbers or Graphs are more like a speed breaker so the book wasnt smooth but being a short book and short concise chapters to the point with lot of references, theories made it a fast read.
Book indeed taught me lot of new stuff, concepts on economy and economic theories.
If you are interested to know whats happening in Banking space, Monetary Space and the buzzword NPAs.
This is the book one should reas.
Reading the book became easy cauze of my recent read "Pandemonium" by Tamal Bandhopadhyay which more or less dealt with same NPA issue.
Do read if this topic pleases you or you are curious about it.
December 27, 2020
It is a tell-tale of contemporary Indian banking system. It has data enough for any researcher on any aspect of Indian banking. This aspect though, I come across every speech / article by RBI officers.
Despite being viewed as a macro-economic decision maker, he has the knack and the patience to delve deep into framework and the micro-elements that are significant but too small to be visible from Governor's lens.
What comes out are some bold statements and insights; some common but mostly uncommon. Some of these are:
A. Government being the owner of large part of banking system (pre-2014), didn't question risk controls.
B. There was inadequate focus on filling key positions in important committees of banks. Instead, there was huge push for Government Banks (GBs) to help stimulate economy.
C. The narration that GBs are fundamentally safer than Private Banks (PBs) may be weaning thin.
D. RoA and RoE were negative in Mar 2019. However, the figures could have been worse had it not been for the PBs.
RoA: GBs: -0. 9% and PBs: 1.2%
RoE: GBs: -13% and PBs: 10.8%
E. Establishment of CRILC reduced assymetry of information w.r.t. accounts & loans.
F. Inactions by banks against large defaulters undermined the credibility of a large legal & institutional reform designed to improve the allocative efficiency of the economy.
G. There was an absence of hard-coded and time-bound procedure for handling NPAs.
H. NCLT based NPA resolution reset the power between the borrowers and lending banks.
I. High rish perception for the banking sector may emanate either from Government's non-support to injecting desired capital or the cross-connections between Banks, NBFCs and MFs.
J. Detective & punitive vigilance are strategic compliments whereas preventive & detective vigilance are strategic substitutes.
K. Punitive vigilance is difficult in GBs making their case tougher to handle in case of NPAs.
L. Total Global External Liabilities have grown from 30% to 185% of GDP between 1980 and 2018 outpacing the growth of global trade in goods & services during the same period.
M. Cyber security and Fintechs are identified risks for the financial systems.
N. Allowance of internal-rating based approach has resulted in models showcasing lower (than actual) risky assets for Banks.
O. Too Big to Fail (TBTF) concept may promote riskier activities for the TBTF Banks while smaller Banks may be provoked to do so.
He strongly defends economists. Key mentions are the works of Gary Becker, Paul Romer and Hyman Minsky.
Some good things that find mention are:
A. There was unanimity between Government and RBI on the point of developing bad bank.
B. He acknowledges measures taken by Governments to deal with the adverse scenarios coming out in the agriculture sector.
I personally appreciate the usage of some words which are typically used by writers with a history / literature background. Some are: "augean", " Gordian Knot", "oikonomika" and "Chekov's Gun".
Overall, it seems to be a serious reading but when gets into it, it's more dealing with common-sense and thus is interesting. One clearly gets to know the bandwidth in which the Governor of RBI operates. Overdraft: Saving the Indian Saver
Despite being viewed as a macro-economic decision maker, he has the knack and the patience to delve deep into framework and the micro-elements that are significant but too small to be visible from Governor's lens.
What comes out are some bold statements and insights; some common but mostly uncommon. Some of these are:
A. Government being the owner of large part of banking system (pre-2014), didn't question risk controls.
B. There was inadequate focus on filling key positions in important committees of banks. Instead, there was huge push for Government Banks (GBs) to help stimulate economy.
C. The narration that GBs are fundamentally safer than Private Banks (PBs) may be weaning thin.
D. RoA and RoE were negative in Mar 2019. However, the figures could have been worse had it not been for the PBs.
RoA: GBs: -0. 9% and PBs: 1.2%
RoE: GBs: -13% and PBs: 10.8%
E. Establishment of CRILC reduced assymetry of information w.r.t. accounts & loans.
F. Inactions by banks against large defaulters undermined the credibility of a large legal & institutional reform designed to improve the allocative efficiency of the economy.
G. There was an absence of hard-coded and time-bound procedure for handling NPAs.
H. NCLT based NPA resolution reset the power between the borrowers and lending banks.
I. High rish perception for the banking sector may emanate either from Government's non-support to injecting desired capital or the cross-connections between Banks, NBFCs and MFs.
J. Detective & punitive vigilance are strategic compliments whereas preventive & detective vigilance are strategic substitutes.
K. Punitive vigilance is difficult in GBs making their case tougher to handle in case of NPAs.
L. Total Global External Liabilities have grown from 30% to 185% of GDP between 1980 and 2018 outpacing the growth of global trade in goods & services during the same period.
M. Cyber security and Fintechs are identified risks for the financial systems.
N. Allowance of internal-rating based approach has resulted in models showcasing lower (than actual) risky assets for Banks.
O. Too Big to Fail (TBTF) concept may promote riskier activities for the TBTF Banks while smaller Banks may be provoked to do so.
He strongly defends economists. Key mentions are the works of Gary Becker, Paul Romer and Hyman Minsky.
Some good things that find mention are:
A. There was unanimity between Government and RBI on the point of developing bad bank.
B. He acknowledges measures taken by Governments to deal with the adverse scenarios coming out in the agriculture sector.
I personally appreciate the usage of some words which are typically used by writers with a history / literature background. Some are: "augean", " Gordian Knot", "oikonomika" and "Chekov's Gun".
Overall, it seems to be a serious reading but when gets into it, it's more dealing with common-sense and thus is interesting. One clearly gets to know the bandwidth in which the Governor of RBI operates. Overdraft: Saving the Indian Saver
June 19, 2021
A good overview of the RBI and the Union Government's attempts to address the NPA mess created in government banks (primarily), starting in 2014 with the RBI enforced recognition of historical bad assets that had, for long, been 'evergreened' and not transparently recognised. At the same time the book is also a chilling reminder of the difficulty of actually fixing the issue as evidently, none of the measures taken post recognition have worked the way they were intended to. Case in point - the IBC outcomes have been far from satisfactory for lenders, despite what was originally, on paper, a strong regulation. As Urijit Patel points out through the book, every strong regulation drafted to enable a quick resolution, let alone recover dues, has been weakened over time due to government interference for various reasons - political compulsions, malfeasance or influenced by affected interest groups. In fact, the lack of growth and the fiscal constraints thereof over the past few years have only made the situation worse. This book was written pre-covid, so l imagine things are only bleaker now.
There are limitations to the book though. It does not take a more systemic view that looks into other factors that may have further compromised the situation during the post 2014 period - for instance the ill-thought demonetization move does not even get a mention and GST only gets a passing favorable mention without any discussion on the incompetent rollout. Similarly, there is very limited discussion on the causes and circumstances that led to such an undesirable NPA situation, and why previous attempts to address them failed. Some of this is likely beyond the remit of what Urijit Patel wanted to cover, nevertheless it is a gap in the analysis.
Towards the end, the book gets a bit academic as well with a discussion on a framework that the author presents, which he himself admits is simplistic. The writing is also somewhat professorial, the desire to be precise leading to complex sentence construction at times.
Overall, a good book to get a better understanding of the significant (maybe insurmountable) challenges facing government banks and their direct consequences to our economy. I certainly understand the issues better than l did before.
There are limitations to the book though. It does not take a more systemic view that looks into other factors that may have further compromised the situation during the post 2014 period - for instance the ill-thought demonetization move does not even get a mention and GST only gets a passing favorable mention without any discussion on the incompetent rollout. Similarly, there is very limited discussion on the causes and circumstances that led to such an undesirable NPA situation, and why previous attempts to address them failed. Some of this is likely beyond the remit of what Urijit Patel wanted to cover, nevertheless it is a gap in the analysis.
Towards the end, the book gets a bit academic as well with a discussion on a framework that the author presents, which he himself admits is simplistic. The writing is also somewhat professorial, the desire to be precise leading to complex sentence construction at times.
Overall, a good book to get a better understanding of the significant (maybe insurmountable) challenges facing government banks and their direct consequences to our economy. I certainly understand the issues better than l did before.
October 18, 2020
Urjit Patel was formerly the Governor of the Reserve Bank of India, India’s central bank. So rightaway, I knew that this would be no ordinary book.
Patel dedicates the book to the Indian saver. He stays true to his dedication throughout the book, highlighting first the approach taken to address the NPA problems of India’s banks. Then he explains how effective this approach was, and how it was diluted by stealth. He succinctly links the effects of all of these actions on the Indian saver, who has traditionally held bank deposits to be a safer investment over any other. In between, he also briefly touches on the follies and dangers of the farm loan waiver approach. All along, he keeps cautioning that the dilution of the approach will eventually lead to an undesirable situation, an interesting and impossible trilemma of policy making concerning the financial sector. As he concludes, he draws on the Chekov’s gun conception in playwriting to caution that policy and regulatory integrity is not optional.
What I loved about the author’s style is that he does not meander. The book is short, maybe too short for the policy maker or the researcher. But for the lay reader, the book is perfect and a must read if she wants to understand what ails India’s banking system. Very few academicians are able to put complicated policy making details in lay terms, but Patel has no problem in doing that. This is one of the strengths of this book.
I think this is a must-read for the general Indian reader - to understand the relation between government ownership of Indian banks and the NPA problem and its effect on her.
Patel dedicates the book to the Indian saver. He stays true to his dedication throughout the book, highlighting first the approach taken to address the NPA problems of India’s banks. Then he explains how effective this approach was, and how it was diluted by stealth. He succinctly links the effects of all of these actions on the Indian saver, who has traditionally held bank deposits to be a safer investment over any other. In between, he also briefly touches on the follies and dangers of the farm loan waiver approach. All along, he keeps cautioning that the dilution of the approach will eventually lead to an undesirable situation, an interesting and impossible trilemma of policy making concerning the financial sector. As he concludes, he draws on the Chekov’s gun conception in playwriting to caution that policy and regulatory integrity is not optional.
What I loved about the author’s style is that he does not meander. The book is short, maybe too short for the policy maker or the researcher. But for the lay reader, the book is perfect and a must read if she wants to understand what ails India’s banking system. Very few academicians are able to put complicated policy making details in lay terms, but Patel has no problem in doing that. This is one of the strengths of this book.
I think this is a must-read for the general Indian reader - to understand the relation between government ownership of Indian banks and the NPA problem and its effect on her.
April 24, 2021
This is an erudite work on the current state of Indian banking sector in the light of its control by the owner (Government of India) and the regulator (Reserve Bank of India).
The author laments increasing banking sector NPAs, the watering down of the IBC, the striking down of the RBI's Feb 2018 circular specifying 1 day default norms, control of Public Sector Banks by the Govt. resulting in dual regulation, farm waivers, etc. Throughout the book, the author emphasizes on the need for ownership-neutral regulation, fiscal prudence by the Govt. and effective regulation by the regulator. The author prescribes his 9R strategy to remedy the malaise ailing the banking sector.
The book is thoroughly researched with plenty of tables, charts and appendices. This somehow gives the book a very serious tone that would reduce the book's appeal for the layman. However, people interested in the world of economy, banking and finance will certainly gain from reading the book. Since such books on Indian banking sector come few and far between, it becomes a good read for the interested.
The author laments increasing banking sector NPAs, the watering down of the IBC, the striking down of the RBI's Feb 2018 circular specifying 1 day default norms, control of Public Sector Banks by the Govt. resulting in dual regulation, farm waivers, etc. Throughout the book, the author emphasizes on the need for ownership-neutral regulation, fiscal prudence by the Govt. and effective regulation by the regulator. The author prescribes his 9R strategy to remedy the malaise ailing the banking sector.
The book is thoroughly researched with plenty of tables, charts and appendices. This somehow gives the book a very serious tone that would reduce the book's appeal for the layman. However, people interested in the world of economy, banking and finance will certainly gain from reading the book. Since such books on Indian banking sector come few and far between, it becomes a good read for the interested.
September 28, 2021
I think Patel wanted to publish a research paper is an economic journal for his PhD dissertation, but at the last moment decided to make it as book. Generally, policy and economics can be dry subjects to deal with. However, Patel made it a point that not many people can read beyond 20 pages.
Having said that, points Patel discussed in the book, although neither New nor novel, are very crucial for long term financial stability of country. We need to have lesser influence of govt in banking activities, particularly in Government banks. As he rightly pointed out, Banks are being used to push government's agenda without bringing the debt on govt's balance sheet. Apart from, it is not practical to have two different regulators with conflicting interests driving the banks. Government on one hand wants to push growth by lending to selective sectors notwithstanding the risks associated with it, on the other hand RBI wants to have prudent lending with restricted lending to sensitive sectors. The conflict will not sustain in long run and someone has to bow down and release the pedal.
Having said that, points Patel discussed in the book, although neither New nor novel, are very crucial for long term financial stability of country. We need to have lesser influence of govt in banking activities, particularly in Government banks. As he rightly pointed out, Banks are being used to push government's agenda without bringing the debt on govt's balance sheet. Apart from, it is not practical to have two different regulators with conflicting interests driving the banks. Government on one hand wants to push growth by lending to selective sectors notwithstanding the risks associated with it, on the other hand RBI wants to have prudent lending with restricted lending to sensitive sectors. The conflict will not sustain in long run and someone has to bow down and release the pedal.
September 8, 2020
The author tries to explain the mess, in the form of a synchronised collection of essays, that is plaguing the banking ecosystem and looks at the role of public sector banks that may have been responsible for the deteriorating NPA.
The book is a scholarly and well-researched account of all that ails the Indian monetary framework, has formulas and graphs embedded in it, and tries to present a holistic view of solving the weak credit discipline problem (9R strategy). Mr.Patel's anguish over the unnecessary interference from the top is pretty evident in the book, things are not so simple as it seems and there are way too many stakeholders involved (both inside and outside the Government) while implementing policy in RBI.
Overall, I liked this book, and I enjoyed the thought process of Mr. Patel.
The book is a scholarly and well-researched account of all that ails the Indian monetary framework, has formulas and graphs embedded in it, and tries to present a holistic view of solving the weak credit discipline problem (9R strategy). Mr.Patel's anguish over the unnecessary interference from the top is pretty evident in the book, things are not so simple as it seems and there are way too many stakeholders involved (both inside and outside the Government) while implementing policy in RBI.
Overall, I liked this book, and I enjoyed the thought process of Mr. Patel.
July 25, 2020
Urjit Patel, media shy and a man of few words has spoken to the point in this book. Clearly India is at a crucial juncture where the erstwhile RBI Governer lays bare the systemic issues in GBs (Government Banks).
The elected government in India clearly drags its feet when it comes to much need transformation/ reforms required in GBs to cater to the size of Indian economy. Hopefully with dwindling state revenues due to Covid-19 and debt burden, the government will be left with no option but to privatize the beleagured GBs for the better. This will unshakle them from the issues facing the current regulatory and legal framework into more transparent structures. And not to mention the billions that will be saved of future tax payers.
The elected government in India clearly drags its feet when it comes to much need transformation/ reforms required in GBs to cater to the size of Indian economy. Hopefully with dwindling state revenues due to Covid-19 and debt burden, the government will be left with no option but to privatize the beleagured GBs for the better. This will unshakle them from the issues facing the current regulatory and legal framework into more transparent structures. And not to mention the billions that will be saved of future tax payers.
September 19, 2021
Anyone who has ever read any RBI guideline document would know thay aee difficult to read to say the least. Overdraft is no different. For eg I didn't knew "inter alia" means "among other things".
To give credit to the book its not simply a chronological description of steps taken by RBI to curtail NPAs but takes a nuanced view covering agency problem, moral hazard, IBC, bad banks and so forth. But it fails to provide a proper context on how and what NPAs are. The book presupposes prior knowledge of NPA and restructuring practices. A good place to start would be Bad Money by Vivek Kaul.
Author has gone to lengths not to aggravate any associated party - the government l, the banks and has simply refused to use first name for any of them.
All in all a good, deatiled and brief read.
To give credit to the book its not simply a chronological description of steps taken by RBI to curtail NPAs but takes a nuanced view covering agency problem, moral hazard, IBC, bad banks and so forth. But it fails to provide a proper context on how and what NPAs are. The book presupposes prior knowledge of NPA and restructuring practices. A good place to start would be Bad Money by Vivek Kaul.
Author has gone to lengths not to aggravate any associated party - the government l, the banks and has simply refused to use first name for any of them.
All in all a good, deatiled and brief read.
January 7, 2024
📚 Just finsihed reading "Overdraft - saving the Indian saver" by Urjit Patel, Indian economist and ex RBI governor🌟. This gem had been patiently waiting on my bookshelf, for sometime now and boy, it's worth the read. Patel unravels the saga of India's banking challenges, non-performing assets, and the crucial Urjit Patel trilemma. 🤯
His insights on the delicate dance between public sector dominance, independent regulation, and fiscal prudence are eye-opening! Whether you're into banking reforms, economic dynamics, or just love a no-nonsense perspective on Indian banking sector reforms, this book is a must read. 📈💡
His insights on the delicate dance between public sector dominance, independent regulation, and fiscal prudence are eye-opening! Whether you're into banking reforms, economic dynamics, or just love a no-nonsense perspective on Indian banking sector reforms, this book is a must read. 📈💡
August 22, 2020
The books was simply amazing - contents were superior - and gave lots of insights into working of Bank and comparison between private and Govt Banks. The book displays author's command and depth of knowledge.
I noticed small editorial mistakes - in acknowledgement in the beginning of book mention was made - Mr. Deepak Parikh and Mr. Keiki Mistry were associated with IDFC - I feel they are/were associated with HDFC.
Once again grateful thanks Mr. Urjit Patel for giving such an amazing book.
I noticed small editorial mistakes - in acknowledgement in the beginning of book mention was made - Mr. Deepak Parikh and Mr. Keiki Mistry were associated with IDFC - I feel they are/were associated with HDFC.
Once again grateful thanks Mr. Urjit Patel for giving such an amazing book.
December 28, 2020
This is an essential read for everyone, for everyone is a stakeholder in the financial sector. The book highlights the tremendous progress made in recent times for recognition, resolution and recovery of bad loans, and how these measures are dying on the vine. The book is solution-oriented for it lays out exactly what needs to be done to address the deficiencies of the banking sector, but also underscores the conflicting interests in realisation of these solutions.
June 6, 2021
As the architect of the MPC and its initiation in to achieving it's core objectives, Urjit Patel was in the thick of things when "demonitisation" struck the Central Bank like a tornado. But he has chosen to ignore a true account of his thought process in this book- though he has given a vivid account of the obstacles the Central Bank faced in the identification & eventual resolution of non performing loans. His articulation of "clash of interest" in regulating GBs(PSBs) is remarkable.
October 4, 2020
NPA crisis and the reforms undertaken is analysed in brief by Urjit Patel. Partly a pat on himself for initiating the reforms; partly lamentations of unfinished reforms n setback to the reforms initiatives. Except a brief portions and an annexure easy read for non economic background people too. Ideal for those who is concerned about banking reforms, RBI, NPA, IBC etc.
December 19, 2025
This is jargon-porn. Mr Patel's editor should have his head examined for allowing such a dense, impossibly obfuscated book to make it to the publisher.
Absolutely hated it. Now that we have AI, save your time and read an AI summary. Or better still, don't read this self-aggrandizing piece of garbage.
Absolutely hated it. Now that we have AI, save your time and read an AI summary. Or better still, don't read this self-aggrandizing piece of garbage.
July 26, 2020
The former RBI governor does explain why Indian banking sector mainly government banks(GB) are in trouble and how vested interests are kicking the problem down the road. Book is well written but he does not link the title to the content(what exactly the Indian saver can do), so deducted a star
July 28, 2020
Must read for all economics and policy students. The book is concise showing the systemic issues with the GB and the autonomy required by the Central bank to keep vigilance and act without prejudice to avoid any systemic failures to occur impacting economic growth.
August 3, 2020
Very well explained why RBI doesn't have powers on Govt banks, what can be done for better governance in the banking sector, truth on the financial media, loan waivers by state governments
Was my first read on economics by a Central banker so a little heavy for me. Otherwise a great read
Was my first read on economics by a Central banker so a little heavy for me. Otherwise a great read
Want to read
September 9, 2020Insightful and informative read
Book by one of the authorities on the Indian Economy. Author despite being a macroeconomist by practice and research interest, lends a voice for the microeconomist brethren.
Book by one of the authorities on the Indian Economy. Author despite being a macroeconomist by practice and research interest, lends a voice for the microeconomist brethren.
August 3, 2020
The book delivers a keen insight into the current challenges faced by the Indian Banking System and the steps being implemented by the RBI and the Finance Ministry in resolving them.
August 7, 2020
While the content is good, I feel cheated. the publisher is charging Rs 500 for 150 pages of content.
August 11, 2020
It's a master's words for the lay man.
August 16, 2020
This is a collection of essays rather than a book. Readers who are interested in banking and Economics can read these essays.
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