Banking

KYC-Led Freezing of Bank Accounts Leaves Jharkhand Adivasis Without Access to Own Money: Survey

New bank rules require all account holders to update their KYC details every few years, but this has also created another layer of bureaucratic hassle for people living in the hinterland.

New Delhi: Mass freezing of bank accounts because of incomplete “KYC formalities” – KYC is ‘know your customer’ – has left countless people in Jharkhand without access to their own savings, a recent survey found.

New bank rules require all account holders to update their KYC details every few years, but this has also created another layer of bureaucratic hassle for people living in the hinterland, many of them without much institutional and financial literacy.

The survey was conducted by NREGA Sahayata Kendras in two Adivasi-majority districts of Jharkhand – Latehar and Lohardaga. Three villages of Manika Block in Latehar District (Dumbi, Kutmu and Uchvabal) and four villages of Bhandra and Senha Blocks in Lohardaga District (Booti, Dhanamunji, Kandra and Palmi) were surveyed by NREGA volunteers, who found that 60% of the 244 households had at least one frozen bank account, while in some all their accounts had been frozen.

They also found that the frozen bank accounts have prevented many welfare beneficiaries from accessing even the meagre pensions for the elderly, student scholarships, and Rs 1,000 per month that the women receive under Jharkhand’s Maiya Samman Yojana.

In Uchwabal, Latehar, Ashok Pahariya’s three children could not withdraw their scholarships. He paid a CSC agent Rs 150 per child to get his KYC updated and submitted his children’s Aadhaar and passbook to him. However, nothing has changed even after following the procedure. Similarly, Sangeeta Devi of Kutmu, Latehar, allegedly paid Rs 1,000 as bribe to fix a mistake in her own Aadhaar card to the CSC operator but nothing moved even then.

The “tyranny of KYC”– examples from Jharkhand.

Case 1: Ashok Parhaiya (PVTG). His three children get scholarships, but their bank accounts are frozen because “KYC laga hua hai”. He is running around and spending money to solve the problem, without success. pic.twitter.com/8LQp60tLXg

— Road Scholarz (@roadscholarz) October 14, 2024

Case 2: Somwati Devi explains how she had to run around for two weeks to get her KYC done after her bank account was frozen. She kept going to the bank and being sent away. pic.twitter.com/pv6tPbizuG

— Road Scholarz (@roadscholarz) October 14, 2024

At Kandra, Lohardaga, Bhola Ram’s KYC issues could take months to be solved. His name is correctly spelt in the bank account but misspelled as ‘Bhoula Ram” in his Aadhaar card. The bank manager told him that unless the name matches entirely, he cannot do anything to unfreeze his account. Bhola Ram’s journey now will begin at getting his name corrected in his Aadhaar card.

2/8 Case 2: Sora Oraon. Three accounts are frozen in this household of 5. When Sora applied for KYC, the bank gave her a ‘token’ with an appointment for 27 December 2024. Here she explains how people like her get pushed around at the bank. pic.twitter.com/PjTvsrybtQ

— Road Scholarz (@roadscholarz) October 22, 2024

“Urmila Oraon is a resident of Kandra in Lohardaga district. Her family has 7 members, out of which 6 have bank accounts – all of them are frozen due to KYC issues. She recently stood in queue for two full days at the bank, but nothing came out of it. She was simply told to go back home,” the survey noted.

There are numerous such instances where either inconsistencies in names, addresses, or any other information, the responsibility for all of which should be borne by government agencies, have led to automatic freezing of bank accounts of numerous people. Yet, the account holders have found themselves trapped in complex bureaucratic nets to access their own savings, even as the government agencies have shown wilful neglect or simply turned a blind eye towards this widespread problem, the survey said.

“KYC (Know Your Customer) refers to identity verification formalities in the banking system. These formalities are not easy to complete for poor people. They require biometric verification of Aadhaar number at a Pragya Kendra, taking the verification certificate to the bank, filling a form there, and submitting both with the requisite documents. After that, the customer is at the mercy of the bank for timely reactivation of the account. This can take months,” the survey noted.

The problem has worsened because of “overcrowding in rural banks”, the survey said. In both the survey areas, there were long queues at the local banks. The crowds consist largely of people trying to complete KYC, or women who are looking for their Maiya Samman Yojana money,” it said.

The survey inferred, “This crisis reflects the growing insistence of banks on periodic KYC, under pressure from the Reserve Bank of India. One local bank manager explained that he had a backlog of 1,500 KYC applications, against a processing capacity of just 30 KYCs per day.”

“Poor people generally have an Aadhaar-linked account with a maximum balance of Rs 1 lakh. What is the need for such tight KYC every few years? This entire process needs urgent review,” it recommended.

India’s Bank Deposit Quagmire Has Structural Underpinnings

The fall in the credit-deposit ratio could extend the pressure on margins, reduce return ratios, and increase NPAs, collectively leading to further pressure on valuations.

The relentless alerts from Reserve Bank of India about structural issues facing the banking system and the deposit crunch begs a deeper inquest.

The latest data showing base money supply of the RBI slowing to near multi-decade low of 3.8% foretells continued drag on both the broad money and bank deposits, which at 10.8% and 10% are lagging the credit growth averaging at 15%. Consequently, the credit-deposit ratio banks has risen to a peak of 77-78%. The scamper of deposits has forced banks towards asset-liability mismatch to sustain lending.

RBI attributes this problem to households shifting away from bank deposits towards stocks and mutual funds.

But in essence, the banking sector drag is rooted to the macroeconomic disequilibrium caused by past shocks and the lopsided post-COVID recovery, which has impacted households in a structural manner.

Compared to 15 years ago, household income and real wages have decelerated substantially. At 3.9% compound annual growth rate
(FY19-24, RBI KLEMS), growth in real worker wages has declined by 5.8 percentage points (pp), more than nominal (9.3%) and real (4.4%) GDP growth which have decelerated by 5.2pp and 3.6pp respectively. The disequilibrium also feathers weak private capex despite corporates gaining from the policy impetus, stepped up government infra capex and post-COVID bounties.

Since the dominant share of household in the overall GDP has come down, the overall money demand has slowed. The correlation of bank deposit growth with household income has increased significantly since FY11 to 0.91. Consequently, the growth in broad money (M3, 10% CAGR) and deposits (10.5%) have seen a larger deceleration of 9pp and 10.5pp respectively.

Banks have also seen a structural slowdown. With broad money slowing to an average of 10.5% since FY11, bank deposit and credit growth averaged at 10.8% and 11.4% respectively; 11.7% and 15.1% respectively for Jul’24.

These are significantly lower than averages during FY85-FY11; broad money at 17.2%, and even higher deposit and credit growth at 17.8% and 18.5% respectively.

The structural dampeners for deposit are multi-faceted:

a) the share of households in bank deposits has declined from the recent peak of 63% in FY18 to 61% in FY24,

b) improved corporate cashflows resulted in their contribution rising from 10.8% to 14.3%,

c) governments deposits have slowed fallen from 14.6% to 12.5%, and,

d) despite the robust 18.2% 5yr CAGR growth in private corporate deposits, the metropolitan areas which dominate the overall deposit accretion have seen a modest growth in deposits. This implies that the household deposits even in metropolitan areas have been subdued, akin to the situation in rural, semi-urban and urban areas.

Constrained household income has also resulted in a skewed lending profile with disproportionate reliance on retail lending backfilling for shortfall in income even as corporates lack demand for capex led credit.

Consequent to the disequilibrium, banks are forced banks to rely on non-deposit liabilities to fund retail lending. It rose to 9.5% of total liabilities from 5.8% pre-COVID level (currently at 8.4%). And since this imbalance is unsustainable and fraught with risks, the credit deposit ratio will need to decline by at least 300 basis points in a normalisation process, which may take two years.

Evidently, the lack of deposit growth is not due to RBI induced constraints. Over the last 8.4 years, 78% of the 200 fortnights have seen surplus balances under RBI’s Liquidity Adjustment Facility with an average of 2.2% of bank deposits. Thus, RBI’s monetary easing at the current juncture could be futile; it would further stimulate retail lending and be inconsistent with the lagging bank term deposits and the RBI’s recent attempts to bring down the credit-deposit ratio.

The adverse household situation is associated with a high level of effective unemployment, contracting labor productivity, and real wages per worker. Enabling positive real income and revival in financial savings would require the RBI to sustain inflation below its outmoded target of 4% adopted in 2016.

The peak levels of credit-deposit ratios have not resulted in better profitability. Improved corporate balance sheet and cash flows have implied lower NPAs (non-performing assets) but also low yields on assets due to lack of capex. Over-reliance on retail lending is associated with heightened competition, low margins and sustained lower core profitability even as NPA write-backs from earlier provisioning and dwarfing of retail NPA ratios due to exuberant retail lending have aided reported profits.

Compared to the third quarter of FY22, credit-deposit ratios of most large banks are currently 600-700 basis points higher with large private banks ranging at 80-100%. But they have started to fall. For public sector banks it continues to rise to 70-76%. There has been a sharper fall for smaller private banks and small finance banks. Consequently, there has been a significant rise in NPA ratios for small finance banks and micro finance institutions. Public sector banks continue to see a decline in NPA ratios, while for the large private banks, the NPA ratios are beginning to rise.

Thus, the performance of banks is susceptible to the anticipated reduction in the credit-deposit ratio. The fall in this ratio could extend the pressure on margins, reduce return ratios and increase NPAs, collectively leading to further pressure on valuations.

Despite RBI Rules, Govt Agencies and States Are Accepting Guarantees From a Bank in the Caribbean

With not enough reserves and no collateral charged, the question arises as to how the bank will pay up if a guarantee is invoked by a government entity.

New Delhi: Union and state government departments appear to have been given the nod to do business with foreign banks located in tax havens which who have a history that can at best be called dodgy.

As part of tender conditions for government projects, Reserve Bank of India guidelines require bank guarantees that are to be issued by nationalised or scheduled banks. For the past few years, however, this requirement has been done away with by project managers. Sometimes, even if the condition for a bank guarantee from a government bank is specified, officials look the other way. The result has been that hundreds of bank guarantees are now being given by the Euro Exim Bank Limited, a bank located at Saint Lucia, an Eastern Caribbean island country.

The bank’s balance sheets, audited by Grant and Thornton and viewed by The Wire, indicate a net worth of around Rs 1,900 crore. However, as of December 2023 alone, this bank, by its own admission, has done business worth Rs 26,560 crore in India. RBI guidelines say a bank’s outstanding obligations should not exceed 10% of its total owned resources.

‘Very risky’

The bank says in communication seen by The Wire that its functioning hinges on the fact that “transactions can be structured without the need of any hard collateral or margin money from the client”. All that the bank charges as per its own admission is a transaction fee ranging from 4.5% to 6.5% of the cost of the bank guarantee. With not enough reserves and no collateral charged, the question arises as to how the bank will pay up if a guarantee is invoked by a government entity.

Former chairman of National Highways Authority of India, Raghav Chandra says, “This is certainly not established practice and an unusual situation. I have not come across such a case in my entire career. It is very risky from the point of view of a possible situation arising where you have to invoke the bank guarantee in case of non-performance of the contractor.”

These guarantees have been given to state governments under both the Bharatiya Janata Party and parties in opposition to it, like Maharashtra, Andhra Pradesh, Tamil Nadu, Karnataka, and Madhya Pradesh, along with the National Highway Authority of India. It is believed that these guarantees are furnished mostly by private contractors for government contracts.

Interestingly, while the bank is headquartered in the Caribbean, it is doing a majority of its business in India and even has an office at Gandhinagar in Gujarat. The bank is mainly into issuing bank guarantees and letters of credit, as per its website. Opening an account is prohibitively expensive and not encouraged by the bank.

Indian banks’ role

Government banks in advisory capacity do not seem to mind.

The Department of Financial Services is yet to respond to questions from The Wire on whether it sees any risk involved and if this has been red flagged. Experts say it is the SWIFT code that the Indian bank recognises of a corresponding foreign bank for it to acknowledge that the bank is kosher. A SWIFT code or a BIC number is used to identify banks and financial institutions globally.

But of late, Indian banks have been shrugging off the responsibility of looking into any guarantee given by a foreign bank. “This is akin to playing the postman. In the case of the Mumbai Metropolitan Region Development Authority, for instance, the advising bank is State Bank of India. With SBI lending its reputation to such questionable bank guarantees, it becomes easy for smaller banks to follow suit,” says an SBI official requesting anonymity.

With details of such business practices now becoming public, several infrastructure companies are on the backfoot.

The Mumbai Metropolitan Regional Development Authority that awarded the prestigious Rs 14,400-crore Thane-Borivali twin tunnel project to Megha Engineering and Infrastructure Limited, in complete violation of its tender conditions with regards to the bank guarantee, has now cracked the whip. In documents The Wire has viewed, Megha Engineering has been told to substitute the bank guarantees with those from a scheduled bank. The tender norms say the bank guarantees shall be from a scheduled commercial bank in India and shall be governed by Indian laws and the jurisdiction of Indian courts.

MMRDA is not alone.

The National Highway Authority of India has decided, at least for one project the documents of which The Wire has viewed, to do away with the RBI’s requirement of a scheduled bank for bank guarantees altogether. Euro Exim Bank gave a bank guarantee of Rs 22 crore to NHAI in 2022. Sources in NHAI say they can confirm that the requirement of a scheduled bank was done away with and NHAI decided to accept a bank guarantee given by a foreign bank in one particular case. The sources said that since an Indian bank was involved in “advising” the bank guarantee, they went by what the Indian bank said. For the 2022 bank guarantee by Euro Exim, the Union Bank of India clearly said that it is “advising” the bank guarantee “with no risk or responsibility to itself”.

An NHAI official said, “NHAI follows all general financial rules of the finance ministry on all subjects.”

The Chandrababu Naidu-led Andhra Pradesh government is now reviewing at least 31 bank guarantees issued mainly by the previous government. “The AP government is seized of the matter and is examining all options. No view has been taken as yet,” it said. Government sources are yet to respond to questions as to whether the tender conditions for projects in Andhra Pradesh allowed a foreign bank such as Euro Exim to do business.

Why else is the bank doing business in India problematic?

The bank was accused by the UK’s Financial Conduct Authority of trying to do business in the country under false pretences, claiming to be a representative of a bank in The Gambia called Euro Exim Bank Limited. “We have checked against the list of banks on the Central Bank of Gambia website and note that Euro Exim Bank Limited is not included in the list and does not appear to be a genuine Gambian Bank”, the FCA said in a letter to the bank’s director, Sanjay Thakrar. The Wire has viewed the letter.

The FCA suggested the bank voluntarily cancel its registration in the UK and that otherwise the FCA would be “minded to take action to cancel the firm’s registration”. The bank now has just a representative office in the UK.

Thakrar, believed to be the promoter, had coincidentally in December 2016 asked his agent, who was getting regulatory clearances for the bank, to get his existing shares transferred to his colleague Kaushik Punjani. He also resigned and got Punjani appointed as sole director. Later, Thakrar “rejoined” the bank and is now “Head of Global Operations”. Thakrar did not answer questions emailed to him. He also did not respond to phone calls.

The firm next tried to scout for a licence in The Gambia but that move came a cropper with the government raising objections in the registration process for off short companies. Correspondence seen by The Wire indicates the bank’s agent even tried to unsuccessfully bribe government officials in The Gambia. The bank then moved to a new jurisdiction, at Saint Lucia.

The bank appears to be in trouble in neighbouring Bangladesh as well. As per an audit that was conducted at the behest of the Bangladesh Commerce Bank Limited, Euro Exim Bank was found to be one of five foreign banks that did not have licence to open a letter of credit.

The situation is a lot smoother when it comes to doing business in India. Take the Maharashtra government’s MMRDA case for instance. The government agency asked Megha Engineering and Infrastructure Limited to replace the bank guarantees only when questions began to be raised in the media. In a point-by-point rebuttal to the government’s objections, Megha Engineering told MMRDA, “The substitution was done following discussions with the general consultant and the finance division of MMRDA”.

In response, the latter said, “No formal instruction (was) given … regarding acceptance of Exim Bank’s BG” (sic).

No one in the government deemed it fit to ask who accepted them and why, when there were no instructions to accept the bank guarantees. Megha Engineering is now being threatened with “appropriate action” if the guarantees are not replaced. Megha Engineering refused to comment on the issue.

No government agency has found it worthwhile to check the ratings of the Euro Exim bank either. Graham Bright, the bank’s CEO admitted to The Wire that the bank is “privately rated” by Moody. He adds, “We are not S&P rated, not having been through their independent rating process.” He, however, refused to answer questions on the bank’s business practices being followed in India.

After Hindenburg Allegations, SEBI Chief’s Blackstone Connection Raises New Questions: Report

As a result of the allegations, SEBI will now have to deal with the fact that it has a chairperson who was a high-profile private sector executive before becoming a regulator and the probable conflict of interest that comes with this.

New Delhi: While Securities and Exchange Board of India (SEBI) Chairperson Madhabi Puri Buch had recently issued statements to deny the conflict of interest allegations levelled by Hindenburg Research for having held “stakes in both the obscure offshore funds used in the Adani money siphoning scandal”, there are several unanswered questions about her associations with other companies as well. Buch’s close connections with American private equity major Blackstone raise several questions about conflict of interest, reports The Morning Context. “Blackstone is heavily invested in India. It is the promoter of many companies in India. That [Buch] has recused herself from Blackstone matters isn’t enough given the amount of investment they have in India,” a veteran fund manager, requesting anonymity told The Morning Context. The Blackstone connection has ensured that Hindenburg’s allegations have continued to raise questions and have not slipped away from the headlines. As a result of the allegations, SEBI now will now have to deal with the fact that it has a chairperson who was a high-profile private sector executive before becoming a regulator and the probable conflict of interest that comes with this. Madhabi Puri Buch’s circle of influence is possibly a hindrance to her doing her job as regulator, capital market circles say While Buch had said in a statement that she had recused herself from all matters involving Blackstone, it is noteworthy that Blackstone, through its different subsidiaries, either owns or holds a significant stake in some major companies including Indiabulls Housing Finance (now Sammaan Capital), Aadhar Housing Finance, asset and wealth management firm ASK Investment Managers, hospital chain Care Hospitals and IT services provider Mphasis, reports The Morning Context. It is yet to be seen whether Buch has recused herself from all matters involving companies that Blackstone has a stake in and how many Blackstone companies find a place on that recusal list. So far, neither SEBI, nor Buch has made this list public. Back in February, SEBI had cleared an IPO of Aadhar Housing Finance, a company controlled by Blackstone, during the leadership of Buch. Between April and October 2019, Blackstone, through its subsidiary Epsilon Bidco Pte Ltd, acquired a 75% stake in Essel Propack Ltd (now named EPL Ltd). In July 2019, Dhaval Buch joined Blackstone as a senior adviser. “A major chunk of the Blackstone stake (51% of the 75%) was acquired from the Ashok Goel Trust in April 2019. Atul Goel is part of the leadership advisory board of Ashok Goel Trust. The trust continues to hold a significant 7.6% stake in EPL, but is now classified as a public shareholder. On 27 August 2021, Madhabi Puri Buch, as a whole-time member of SEBI, disposed of an insider trading case against Atul Goel and his company, E-city Hi-tech Projects,” says The Morning Context. This amounts to a big question mark over the recusal claim made by Puri-Buch in her statement.

RBI’s Extraterritorial Influence on the Rupee Market

The emergence of the offshore non-deliverable forward market in the rupee has made it more challenging for the RBI to maintain exchange rate stability.

Maintaining stability of the exchange rate is among the most important goals of the Reserve Bank of India (RBI). On a de-jure basis, India moved towards a market-determined exchange rate system in 1993. Yet the de-facto reality is that the RBI regularly and actively intervenes in the foreign exchange (FX) markets. The official position of the RBI is that FX interventions are made to curb excessive volatility of the exchange rate and maintain orderly conditions in the market. This task however has become progressively more challenging for the Central Bank owing to the steady rise of the offshore non-deliverable forward (NDF) market in the rupee (INR).

An NDF contract is similar to a regular forward currency contract (which sets a fixed foreign currency exchange rate for a transaction at a future date), with the main difference that an NDF does not require physical exchange of the underlying currency. Instead, it allows the counterparties to settle profit or loss in a convertible currency like the US dollar. Hence, the moniker “non-deliverable”.

The INR-NDF market has grown substantially in size over the years. It has emerged as the second largest NDF market globally in terms of average daily turnover. In fact, the INR-NDF market is almost thrice as large as the onshore deliverable forward market. This has led to concerns in the RBI that the offshore market is playing an increasingly important role in determining the value of the rupee and hence may hamper the ability of the Central Bank to maintain exchange rate stability. This has been of concern especially because the offshore market is beyond the RBI’s legal jurisdiction.

It seems that the RBI may have finally found a way to influence this offshore market. The Central Bank recently released a draft direction proposing to allow offshore electronic trading platforms (ETPs) to register with it. If this regulatory strategy works, it could help establish the RBI’s extraterritorial reach over the offshore market in an unprecedented manner, and other emerging-market (EM) central banks could also follow suit.

Background

After World War II, the Bretton Woods Conference of 1944 led to a fixed exchange rate system under which all countries’ currencies were fixed, but adjustable, to US dollar. This system came to an end in 1971, and the world’s major currencies moved towards floating exchange rate regimes. On the other hand, emerging economies like India, gradually shifted to ‘managed floating’ regimes over the next couple of decades, wherein their central banks would intervene in the FX markets to maintain currency stability.

In an increasingly globalised world where investors, traders and other market participants regularly conduct transactions in multiple currencies, fluctuations in exchange rates expose them to currency risks – that is, they experience financial gains or losses depending on fluctuations in exchange rates. To protect themselves from such risks, they use financial instruments called currency derivatives such as currency forwards. Currency derivatives are contracts in which a specified amount of a particular currency pair is traded on a specified date in the future. These instruments help hedge their currency exposures and also help FX market participants take speculative positions in multiple currencies.

For participants undertaking transactions in EM currencies such as the rupee, there are additional layers of complication. The financial markets in these economies are underdeveloped and currency derivatives may not be available. And even if these financial products are available, foreign investors’ access to these derivative markets is limited. This is because EM policymakers occasionally impose capital controls to limit the flow of foreign money moving in and out of their economies.

Access to Indian financial markets is even more difficult than most other EMs because India is the only emerging economy, other than China, that continues to have in place a complex and elaborate framework of capital controls, despite liberalisation reforms undertaken more than three decades ago.³ Hence, despite the existence of an onshore INR forward market, capital controls and other institutional constraints such as high transaction costs, complex tax regime, etc., impede the ability of foreign participants to take positions on this market.

As a result, over the years an offshore INR-NDF market has developed at various international locations such as Singapore, Hong Kong, London, Dubai, and New York. This offshore market allows participants to avoid the stringent capital-account restrictions of India and take positions on the rupee. Given that the NDF does not require physical exchange of the underlying currency, it is ideal for hedging risks arising from currencies such as the rupee, which are not freely convertible due to capital controls.

Apart from INR, South Korean won, Brazilian real, Chinese renminbi and New Taiwan dollar also have sizable offshore NDF markets. The NDF contracts in rupees are bilaterally settled in the US dollar and are traded in the over-the-counter (OTC) market. India accounts for close to 20% of the global trade in NDFs. According to the Bank of International Settlements (BIS) Triennial Survey, 2019, the NDF volumes for the USD-INR currency pair reported a staggering three-fold increase, from around US$16.4 billion in 2016 to US$50 billion in 2019.

Domestic impact of offshore NDF market

Over the years, the linkages between the NDF market and the onshore financial markets have drawn considerable policy attention. In India’s case, there is evidence that the NDF market exerts influence on the value as well the volatility of the INR-USD exchange rate. Especially in times of heightened uncertainty and stress (such as the taper tantrum episode of 2013-14 or the 2018 emerging market crisis when the rupee depreciated substantially), the price volatility in the NDF market tends to spill over to the domestic market.

In response to this, the RBI set up the Task Force on Offshore Rupee Markets in July 2019, under the chairmanship of ex-Deputy Governor Usha Thorat, for a deeper understanding of the factors causing the sharp growth of the NDF market and to identify measures to reverse the trend. Based on the recommendations of this committee, the RBI allowed all Indian banks having an IFSC (International Financial Services Centre) Banking Unit to participate in the NDF market from June 2020 onwards. This would arguably give the RBI greater control over the NDF market.

However, in October 2022, the RBI reversed its stance and informally restricted banks from building additional positions on the NDF. This was done presumably to manage the rupee, which was rapidly depreciating against the US dollar in response to the aggressive interest rate hikes by the US Federal Reserve. In December 2022, RBI lifted these restrictions only to bring them back in August 2023 when the rupee began depreciating again. By April 2024, banks were once again allowed to take positions on the NDF market, but by then, according to news reports, banks were no longer interested due to the uncertainty arising from the RBI’s policy flip-flops.

It seems that the RBI has now proposed the latest regulations on offshore ETPs, in an attempt to once again encourage Indian banks to take positions on the NDF market.

Regulations for ETPs

One of the crucial learnings from the 2008 Global Financial Crisis was that the OTC derivatives market needs to become more transparent. This had prompted the G20 group of countries to come to an agreement in 2009 that all standardised OTC derivatives should be traded on ETPs. Since then, ETPs have been encouraged globally.

In October 2018, the RBI issued its first ETP directions providing detailed eligibility criteria, technology requirements and reporting standards for ETPs executing transactions in financial instruments regulated by the Central Bank. Thirteen ETPs run by five operators have since been authorised under these directions. On 8 February 2024, the RBI’s statement on developmental and regulatory policies highlighted some new developments in this space:

“Over the last few years, there has been increased integration of the onshore forex market with offshore markets, notable developments in the technology landscape and an increase in product diversity. Market makers have also made requests to access offshore ETPs offering permitted Indian Rupee (INR) products. In view of these developments, it has been decided to review the regulatory framework for ETPs. The revised regulatory framework will be issued separately for public feedback.”

On 29 April 2024, RBI released a draft Master Direction on ETP for public feedback. This draft adds a new concept, namely, ‘offshore ETP’. Such an ETP is operated from outside India by an operator incorporated outside India. Operators of offshore ETPs need to apply for registration with RBI only if they are desirous of providing resident Indians access to their platform for transactions with non-residents in eligible derivative instruments involving rupee or rupee interest rate, as permitted by RBI under the Foreign Exchange Management Act (FEMA). This implies that, effectively, only registered offshore ETPs can allow residents to transact with non-residents in INR-NDF contracts, albeit on the assumption that residents (other than banks) are also prima facie permitted to enter into such transactions on a cross-border basis.

Legality of extraterritorial operation

A unique feature of RBI’s proposed regulation on offshore ETPs is its extraterritorial nature, that is, its effect beyond the territory of India. It may be worthwhile to note here that Article 245(2) of the Indian Constitution categorically states:

“No law made by Parliament shall be deemed to be invalid on the ground that it would have extraterritorial operation.”

The RBI Act, 1934 is a parliamentary legislation. Section 45W of this legislation empowers RBI to give directions to any agency dealing in derivativesas long as the same is “in public interest or to regulate the financial system of the country to its advantage”. The definition of ‘derivative’ includes an instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, etc.

The RBI proposes to issue the new directions for registration of offshore ETPs under this provision. However, section 1(2) of the RBI Act, 1934 explicitly states that the RBI Act “extends to the whole of India”, thus potentially implying that it does not extend beyond India. The legal implications of this particular provision on RBI’s proposed directions on offshore ETPs merit a brief discussion.

A similar provision exists in section 1(2) of the SEBI Act, 1992. The Supreme Court in SEBI vs. Pan Asia Advisors, however, upheld SEBI’s powers to initiate proceedings even when the underlying acts or transactions took place outside India as long as they have an effect on the interest of investors in India. This legal position is supported by the constitution bench decision in GVK Industries Ltd. vs. Income Tax Officer, which held that the parliament is empowered to make laws with respect to extraterritorial aspects or causes that may have an impact on or nexus with India.

The underlying legal principle is often referred to as the “effects doctrine”. Following the same doctrine, it could be argued that the proposed RBI directions requiring registration of offshore ETPs are within the scope of the RBI Act, 1934 since such offshore ETPs are envisaged to permit Indian residents to enter into INR-NDF contracts offshore. This in turn will have an effect on the INR-USD exchange rate and consequently, the RBI’s attempt to stabilise the exchange rate. Therefore, the extraterritorial operation of RBI’s proposed intervention could be legally justified under Indian laws.

Potential impact

Offshore ETPs as well as the RBI are likely to benefit from this new regulation. Offshore ETP operators interested in the INR-NDF market have strong commercial reasons to apply for an RBI registration under this proposed direction. This is because Indian banks and other Indian entities can potentially become important players in the INR-NDF market. Till date, their participation in the NDF market was limited due to the lack of a comprehensive regulatory framework. The RBI is clearly trying to fix this lacuna. Hence this should make offshore ETP operators keen to offer their NDF products to Indian banks, which are all major potential clients in this space.

From the RBI’s side, the more offshore ETP operators register with the Central Bank, the more leverage RBI will have on the NDF market. RBI is likely to exert its extraterritorial influence on this market by modulating Indian banks’ access. This will effectively enhance the RBI’s influence over the INR exchange rate in the NDF markets.

For this strategy to yield results, RBI has to be cautious that its regulatory approach is predictable and consistent. If it arbitrarily keeps cutting out Indian banks’ access to this market, like it did over the last few years, these banks will once again stop building positions on the offshore NDF market. That would ultimately limit their influence in this market, which in turn would also limit RBI’s own extraterritorial influence.

Conclusion

A large offshore INR-NDF market has developed over the years largely owing to capital controls imposed by the RBI on onshore currency and financial markets. Yet the existence of this offshore market has made it more challenging for the RBI to manage the INR-USD exchange rate. The RBI has been trying to get a hold on the NDF market, albeit with little success. So now, in order to deal with the problems created largely by its own capital controls, and given its objective of exchange rate management, the RBI has issued directions to register offshore ETPs. This latest attempt may be more successful than the previous ones at getting a foot in the door because the commercial incentives of offshore ETPs are aligned with the RBI’s objectives – to increase the participation of domestic Indian banks in the NDF market.

If this strategy works, other EM central banks may follow suit. How this may impact the NDF market in the long run is difficult to predict at this point in time. At an extreme, extraterritorial application of rigid local laws of EMs with capital controls may end up shifting the focus of the NDF market from registered ETPs to unregistered ETPs. EM policymakers such as in India should instead take proactive steps to liberalise their onshore currency derivative markets, if they want to curb the influence of the NDF market on exchange rates.

Pratik Datta is Associate Director (Research) at Shardul Amarchand Mangaldas & Co, a leading Indian law firm. Dr. Rajeswari Sengupta is an Associate Professor of Economics at the Indira Gandhi Institute of Development Research (IGIDR) in Mumbai, India.

This article was originally published by Ideas for India.

Minimum Balance Penalties: Public Sector Banks Collect Around Rs 8,500 Crore in Five Years

Minister of State for Finance Pankaj Chaudhary stated that banks must inform customers of the minimum balance requirements when opening an account and notify them of any changes.

New Delhi: Despite State Bank of India’s decision to waive penalties for minimum balance requirements, other public sector banks have seen a significant increase of over 35% in collections under this head over the past five years. Data presented as part of written response to un-starred question in the Lok Sabha reveals that these banks collected around Rs 8,500 crore in penalties over the past five years starting from FY20, The Hindu Businessline reported.

The 11 public sector banks have varying mechanisms for collecting penalties, with Punjab National Bank, Bank of Baroda, Bank of India, Punjab & Sind Bank, Union Bank of India Bank and UCO Bank levying charges for not maintaining a minimum Quarterly Average Balance (QAB) and others like Indian Bank, Canara Bank, Bank of Maharashtra and Central Bank of India levying penalty for not maintaining an Average Monthly Balance (AMB).

Also read: Health Ministry Fails to Spend Rs 8550.21 Crore – More Than ‘Establishment Cost of New AIIMS’

The penalties range from Rs 25 to Rs 600, depending on the bank and the customer’s location.

Minister of State for Finance, Pankaj Chaudhary, emphasised the importance of transparency in these practices. He stated that banks must inform customers of the minimum balance requirements when opening an account and notify them of any changes.

If the minimum balance is not maintained, banks should alert customers to the penal charges, applicable if not rectified within one month, and ensure that savings accounts do not turn into negative balances solely due to these charges, he underlined.

“It should be ensured that savings account does not turn into negative balance solely on account of levy of charges for non-maintenance of minimum balance,” Chaudhary was quoted as saying by Businessline.

Unravelling RBI’s ‘Unemployment’ Houdini Act

Far from the enormous increase in employment reported by the RBI’s KLEMS data, the situation is of an unprecedented level of disguised unemployment.

The latest release of KLEMS database by the RBI, which estimates a detailed break up of India’s Gross Domestic Product into contributions of factors of production, has triggered a wide debate on the employment situation. KLEMS stands for capital (K), labour (L), energy (E), materials (M) and service (S). Amid the high unemployment rate estimated at 9.2% by Centre for Monitoring Indian Economy, the RBI’s report does a Houdini act of not just making joblessness vanish but positing an employment explosion.

As per RBI, at 643 million jobs in FY’24, India added 168 million since FY’18, implying that over a fourth of the total were added in just six years – higher than the additions in the previous 33 years since 1985.

With this, the workforce grew by 5.2%, significantly outpacing the 0.34% average during the previous 10 years, and the working-age population by 1.1%, thereby reversing the FY’11-FY’18 decline in employment/working-age population ratio to reach a peak of 71.2% in FY’24. Such an employment explosion is unprecedented, unmatched even by the post-pandemic surge in the US.

If RBI’s claims of improving employment quality and productivity are true it should result in a) an extremely tight labour market, b) skyrocketing wages and household incomes, and c) a considerable surge in spending and savings.

But since the real consumption expenditure has slowed sharply to 3.5-4% growth over the recent years and the household savings rate has declined to a 12-year low of 18.4% of GDP, it is appropriate to critically examine RBI’s claims of employment explosion.

KLEMS data has multiple abnormalities

We start by highlighting some critical observations on the KLEMS data:

The primary disconnect arises from the fact that while RBI KLEMS shows exuberant job creation since FY’18, real Gross Value Added growth decelerated sharply to 4.2% 5-year CAGR from 7% during FY’13-FY’18.
ASUSE data for the informal sectors shows contraction in real value added over the past seven years which intensifies the disconnect with the employment boom as per KLEMS.
RBI KLEMS estimates employment numbers as a product of reported worker-population ratio (WPR) as per PLFS data and extrapolated India’s population from the last census (2011), which is outdated and hence can be exposed to significant estimation risk.
The 643 million employment in FY24 implies a peak WPR of 46.2%, surging from a low of 36.1% in FY18, reversing the decline from 42% in FY05 and breaching the levels in FY81 at 42% when the economy was more labor intensive.

Long-term data shows a declining trend in WPR matching the progression of capital-deepening technology which intensified since FY’06, thereby reducing the employment elasticity and labor required per unit of capital. Since the private capital formation has been slowing since FY’12, employment creation consistently fell to negligible levels till FY’18 (five-year increment of 2.9 million).

Hence, the sudden surge in WPR in the backdrop of rising digitisation and automation, numerous exogenous shocks including demonetisation (2016), GST-led dislocations (2017), NBFC crisis (2018), global trade war (2019), pandemic lockdown (2020-21), and the persistent slackness in private capex is an aberration.

Women in Assam’s Dhalpur returning home from Hajira (work as day labourers) Photo: Aditi Mukherjee

What qualifies for productive and disguised unemployment?

For emerging markets such as India, the primary factor driving relatively higher growth is the shift of labor from less productive primary sectors such as agriculture and associated rural services to urban and modern sectors, which aligns with structural transformation process.

Conversely, disguised unemployment is characterised by rising dependence of employment on rural and agriculture signifying reversal of economic transformation resulting in decrease in labor productivity, real earnings, and household savings.

Employment explosion is de facto disguised unemployment

The employment explosion since FY’18 as per KLEMS appears to be driven by disguised unemployment. We estimate and ascertain disguised unemployment by a) calculating counterfactual employment assuming a pre-demonetisation trend in capital deepening (FY’08-FY’16), and b) reflecting on the trends in labor productivity and real wages since FY’18.

Following a trend decline in employment additions during FY06-FY18, the counterfactual trend indicates that employment would have fallen by 14mn during FY18-FY23 as against a rise of 122 million as per KLEMS.

Thus, out of a total employed population of 597 mn in FY23, 441 mn are estimated to be productively employed, leaving 156 mn as disguised unemployment or less productive work. (these estimates ignore disguised unemployment in FY16).

When this is combined with the reported unemployment of 18 million (3% of the labor force, PLFS), the total effective unemployment is 174 million, with an effective unemployment rate of 28% of the reported labour force. Further analysis shows that agriculture accounts for 72% of the projected disguised unemployment, followed by services (28%), construction (-12%), and manufacturing (12%). The negative gap in employment in construction despite the significant government capex in the infrastructure sector indicates declining labor intensity due to mechanisation.

According to the PLFS data (2023), the considerable increase in WPR is being driven by young cohorts, particularly women who have turned to agriculture, and male workers resorting to low-wage rural construction the share of employment in urban construction drop.

Also read: India Has 110 Million Informal Sector Workers, Govt Releases Data for the First Time in a Decade

Lower labour productivity and income confirm rising disguised unemployment

According to the 2018-23 KLEMS data, real value added per worker decreased by 0.4% (5-year compound annual growth rate or CAGR), the lowest since FY86. Interestingly KLEMS data also shows that the five-year CAGR of real worker income decelerated to 4.7% (FY’18-FY’23) and a 28-year low of 3.8% between FY’19 and FY’24, down from 8% in FY’09. Even more significantly, worker income/worker contracted by 1.6% CAGR (FY’19-24), the lowest since 1986.

Furthermore, there is a broad-based deceleration in labour quality reflecting education level. The labour quality index fell to 0.3% CAGR from 0.6% between 2008 and 2013. PLFS data reveals that, while educated workers up to primary school continue to climb, all other categories, from middle school education to post-graduation, are declining. The deterioration in labor quality appears to be the outcome of household income constraints impacting education investment, as also reflected in the Consumer Expenditure Survey (CES 2023).

KLEMS results of contracting real wages are consistent with household income stress evidenced in other sources such as ASUSE, PLFS, CBDT, and a summary of corporate results.

Sas per PLFS 2022-23, the average monthly real wage in rural and urban areas for self-employed, casual, and regular workers is estimated at INR 13,467, with a 5-year CAGR decline of approximately 3% in real terms.

In the formal sector, the average real earnings of individual and HUF Income Tax filers decreased by 0.7% (5-year CAGR)

Non-finance companies excluding IT have seen a 6% gain in employee remuneration since FY20, implying no growth in real spending net of CPI inflation. If we assume even a minor increase in formal sector employment, real average salaries probably fell.

Representative image of a woman at work. Photo: Flickr/ICRISAT (ATTRIBUTION-NONCOMMERCIAL 2.0 GENERIC)

KLEMS also reveals the GDP aberrations

Growth in real worker income correlates closely with real private final consumption expenditure [2004-05 series] till 2014, with a correlation coefficient of 0.82 (FY’91–FY’14).

However, the updated GDP statistics (base year 2011-12) and downwardly revised India’s growth from 2006 to 2014 demonstrate a low correlation between worker income and consumption, particularly during FY’09-FY’16 when it turns negative (-0.91).

Thus, flipping of the long-term correlation between real worker income and real PFCE from positive to negative is blatantly contradictory.

The urgency of a policy face-lift was never so high

Far from the enormous increase in employment reported by the RBI’s KLEMS data, the resounding evidence of contraction in real labour productivity and wages shows that unusual surge in employment numbers is symptomatic of an unprecedented level of disguised unemployment.

With household income accounting for 78% of GDP facing headwinds, the strong headline GDP growth likely masks the underlying structural fragility.

The discordances have possibly led to a misplaced policy strategy that overwhelmingly relied on supply-side strategy in the hopes of reviving the elusive private capex.

There is an urgent need for a policy facelift in favour of a growth model based on jobs in services, as well as a progressive tax structure that stimulates demand. This can be accomplished by reducing reliance on indirect taxes, lowering taxes on necessities, and raising income tax brackets for low-income earners. Healthcare, tourism, education, transportation and logistics are some low hanging fruits in the employment intensive services sector.

The consequent budgetary burden can be mitigated by raising taxes on the wealthiest, decreasing subsidies for the affluents, limiting corporate exemptions, and relying on public-sector enterprises.

Dhananjay Sinha is co-head of Equities and head of Research of Strategy and Economics at Systematix Group.

The Economic Survey Only Increases Concerns of Inequality

A closer look at the figures reveals a worrying story.

As the country gears up for the presentation of the Budget for the financial year (FY) 2024-25, the economic survey for 2023-24, tabled by Union finance minister Nirmala Sitharaman is key to understanding what plagues the current government.

This will be the first budget presented by a Bharatiya Janata Party which does not hold a majority in the Lok Sabha.

The economic survey tabled yesterday projected that India’s real GDP grew by 8.2% in FY24, marking a growth of over 7% for the third consecutive year. Does this unprecedented growth benefit those who are at the bottom, with approximately 3.44 crore people living in extreme poverty in the country? Numerous issues impact those at the bottom of the socioeconomic ladder, with major macroeconomic indicators affecting them far more significantly than those at the top.

Inflation is one of the variables that significantly impacts the poorer and middle-class, as it leads to higher spending on the same basket of goods, thereby reducing household gross savings. Household savings hit a record low of 5.2% of gross national disposable income (GNDI) in FY23. The recently released monthly data from the MOSPI (Ministry of Statistics and Programme Implementation) shows that while headline and core inflation have eased to 5.1% and 3.1% respectively, the CFPI (Consumer Food Price Index) remains high at 9.4% in June 2024. There has been ongoing debate that India’s inflation is primarily driven by food inflation. The present economic survey notes that “India’s inflation targeting framework should consider targeting inflation excluding food,” citing that it is not demand-induced but supply-induced.

Is the government now considering hiding the increased rate of food prices by changing the inflation targeting framework? Regardless of what the government does, the brunt of the rise will continue to affect the people.

Also read: Economic Survey Reads Like a Part Fantasy, Part Mythology Document

Many countries use the GDP deflator, also known as the implicit price deflator, to measure inflation. This measure reflects the ratio of the value of goods and services an economy produces in a particular year at current prices to those in the base year, capturing the true economic scenario as it is not confined to a fixed basket of goods but reflects changes across the entire economy. An eye-opening analysis by the Financial Accountability Network, titled ‘Inflation’ reveals a surge in India’s GDP implicit deflator, skyrocketing from 2.4% in 2019 to 8.2% in 2022, averaging 6%. This rate is significantly higher than that of lower middle-income countries (5.2%) and high-income countries (2.9%).

Source: Made by the author for Financial Accountability Network India – FAN India.

Taxation is another crucial variable that garners significant speculation and close attention during the budget presentation. The economic survey has projected a 13.4% growth in gross tax revenue for FY24, with a tax buoyancy of 1.4, attributing this to enhanced progressivity in taxation over recent years. However, a closer examination of the major tax revenue sources reveals some alarming trends. While the government claims that direct taxes contribute about 55% to gross tax revenue and indirect taxes 45%, several issues emerge.

Visualisation by the author. Source: Union Budget documents.

Particularly concerning are the disparities in taxation between corporates and individual income taxpayers, and the increasing percentage of GST receipts in total tax revenue, indicating that even those not within the tax slabs are ultimately taxed at a higher rate. The share of total tax revenue receipts from corporates was around 31% in FY 2015-16 but has significantly declined to 26% in 2023-24. This reduction led to a government loss of about Rs 1 lakh crore in FY 2020-21, which was offset by taxing the people. Consequently, receipts from income tax have surged from 19.8% to 30%.

Adding to the burden on the populace is the rise in GST, which has increased from 23% of total tax revenue in FY 2017-18 to 28% in FY 2023-24. Moreover, the introduction of GST has led to a sharp increase in tax collection expenditures. The total expenditure on tax collection was around Rs 10.6 thousand crore in FY 2015-16, which has ballooned to around Rs 47.7 thousand crore in the revised estimates for FY 2023-24. This problem could have been alleviated with the wealth tax, but the government abolished it in favour of the ultra-rich.

Visualisation by the author. Source: Union Budget documents.

Another major problem that has surfaced in recent years are non-performing asset write-offs and haircuts offered to big corporates. Over the last decade, the government has written off around Rs 14.5 lakh crore since it assumed power in 2014, with Rs 2.09 lakh crore wiped out in FY23 alone. Regarding haircuts, banks took a loss of around Rs 69 for every Rs 100 admitted in every insolvency and bankruptcy case. Despite this, the government has touted the mechanism as remarkable progress in the present economic survey.

Data from the quarterly newsletter released by the Insolvency and Bankruptcy Board of India (IBBI) shows that the percentage of realisation of admitted claims under IBC has decreased from 54% in FY18 to 32% in FY24. In 2018, the RBI referred 12 large corporate accounts to IBC for resolution, highlighting concerns about significant NPAs in these accounts, which have been resolved with an average haircut of around 46%.

The analysis by FAN India reveals that the total haircut offered to these 12 large corporate accounts under IBC amounts to Rs 2.84 lakh crore. This figure is significantly greater than the combined allocation of Rs 2.13 lakh crore for agriculture and farmer’s welfare and MGNREGS in the interim budget estimates for 2024-25. If this written-off amount had been recovered, the allocation for these sectors could have been doubled.

Visualisation by author. Source: https://ibbi.gov.in/en

Expenditure on social services is crucial for a developing nation like India, contributing to eradicating poverty, improving health infrastructure, enhancing education, promoting social equity, fostering social cohesion, and advancing rural development. According to the government in the economic survey, “Over the last decade, the Indian concept of welfare has significantly transformed into a long-term oriented, effective, and empowering avatar”. As per government estimates, overall welfare expenditure has grown at a CAGR of 12.8%, education by 9.4%, and health by 15.8%.

Visualisation by the author. Source: Union Budget documents.

However, a closer look at the figures in terms of percentage of total expenditure reveals a different story. For example, spending on education was just around 1.9% in FY 2017-18, which has fallen to 1.7% in 2023-24. Medical and public health expenditure has decreased from 0.8% to 0.16%, and welfare for Scheduled Castes, Scheduled Tribes, and minorities has declined from 0.16% to 0.13%. Despite overall growth in expenditure, the proportion allocated to these critical sectors has either decreased or remained stagnant, highlighting a gap between intent and impact.

As we await the finance minister’s announcement, one can only hope for a budget that prioritises inclusivity and equitable growth.

Pranay Raj works as a Data Analyst at the Centre for Financial Accountability, New Delhi.

Speculative Money Has Been Turning Millions of People into Commodities

he 2024 electoral mandate of neglected India that showed a lack of trust in an autocratic government must also be seen as a vote of no confidence against such speculative capital interests feeding such a government and its policies.

The hoopla from the exit polls during the recent Lok Sabha election exposed links between the political leadership of the Narendra Modi government and the economic leadership of big speculative capital, locked with each other in a double helix structure.

For those of us who may not have followed, the Indian stock market witnessed an all-time high on June 3, right after exit polls predicted that the Modi alliance would win a decisive majority. The predicted numbers danced around “400 paar (beyond 400 seats)” – a prophecy the Prime Minister had repeated in many of his initial campaign speeches. Within the next 24 hours, as the vote counting began to suggest that the Modi alliance was unlikely to win an overwhelming majority, the stock market suffered the worst intraday fall since the COVID-19 lockdown in March 2020, wiping out around Rs. 30 lakh crore from the market in a matter of few hours.

While ‘who exactly profited from this’ is a matter of proper investigation, the episode nonetheless demonstrated a direct interdependence between the top political and economic powers in the current economic system. A few months prior to this, the electoral bonds case had exposed how many big corporations might have obtained privileged protection and immunity from law by donating part of their wealth to the ruling party, through such bonds.

This exit poll-stock market “scam” is in fact only the tip of the iceberg of a system that is based on speculation and gambling at the cost of millions of poor families on the edge of survival. The 2024 electoral mandate of neglected India that showed a lack of trust in an autocratic government must also be seen as a vote of no confidence against such speculative capital interests feeding such a government and its policies.

Debt fuelled ‘growth’

Over the last 10 years, the Modi government channeled large amounts of transnational investments into the domestic economy, through private equity. The only way this capital influx ‘trickled down’ to the majority of the population was through shrinking consumption, high rates of unemployment, stagnant real wages, evaporating savings, severely low welfare spending and systematic dismantling of social infrastructures such as public health, public education, and even access to basic food supply, altogether resulting in skyrocketing household indebtedness.

According to the RBI Annual Report of 2023-24, household debt levels was up to 38% of GDP in 2022-23, an all-time high, with the only exception of 39.1% of GDP recorded in the pandemic. Local studies by Isabelle Guerin and others working in rural Tamil Nadu, have pointed to soaring levels of indebtedness (99%), much higher than in the national level surveys.

Debt-to-Asset ratio trends for rural and urban India. Source: AIDIS reports.

This indebtedness in particular has come to rest with women, who are often the last person responsible for ensuring basic survival needs for the family, along with being a full-time wage worker. The past decade in particular has created millions of such indebted women who have been forced to depend on the capital market, through MFIs, for their daily sustenance including basic food. This has only further deepened existing casteist and patriarchal controls, by inflicting and legitimising violence on women and Dalit women, in particular.

Private transnational capital, and the MFI gamble story

The economics of the Modi regime has been a vicious loop of dispossession-speculation-indebtedness. First step is to dispossess the people by taking away their lands, jobs, schools, hospitals, rivers and forests, selling them off to the brokers of big capital. Subsequently, ‘injecting’ a portion of the profit into the same dispossessed people, as debts for survival.

The debt trap

A key piece in this loop are the microfinance institutions (MFI) lending to the poor. This June 4, when the financial markets came crashing down, the share prices for the largest MFIs operating in India also dropped significantly. While the narrative is that these MFIs are “eradicating poverty” and “banking the unbanked”, in reality, they are making record profits by connecting big speculative capital to poor women borrowers in India.

Consider two cases of Equitas Small Finance Bank (which started off as a NBFC-MFI, but eventually received its banking licence in 2016); and Belstar, a NBFC-MFI, also a subsidiary of Muthoot Finance. Between 2011 and 2016, both MFIs greatly benefited from the microfinance frenzy from the richer countries in the Global North, receiving transnational capital of Rs 325 crores and around Rs 200 crores respectively, from the UK, Germany, Netherlands, World Bank, and Swedish and Danish development banks.

In order to make a profitable business out of lending to the economically vulnerable, the MFI machinery are engaging in the process of ‘securitisation’ (the same process that caused the US sub-prime crisis of 2007-08), to facilitate speculation and gambling on primarily working class women’s perpetual state of indebtedness. While the American bets relied on mortgage payments of low-income house owners in urban America, the MFI bets rely on regular interest repayments by MFI borrowers in rural India.

How does securitisation work?

Such women’s unpaid loans are grouped into different high and low risk categories, and packed into tranches or ‘Special Purpose Vehicles’ (SPVs), and sold to investment banks or private equity funds who further sell these to the next layer of investors. This raises ‘new’ money for the MFI which is then lent back to the women borrowers at astronomical interest rates. In this way, both the MFI and the investment bank receive immediate cash and the risk of the loans are transferred to the final investors, many of whom can (at least temporarily) cover potential losses from such investments, given their investment in diverse portfolios across different sectors for their profits. Belstar raised Rs 21,116 crore rupees in 2023 just through this process of securitisation. Their net profit and returns to equity holders were 130 and 1303 crore rupees respectively.

Belstar net profits (after taxes) and return on equity in %. MIX Market dataset, World Bank.

The role of the government

Despite being fully aware of the fragility of the financial markets to varying economic and political circumstances, the government continues to support transnational private capital by promoting MFIs as one of the main tools in the fight against poverty.

After the horrific cases of MFI related mass suicides in 2010 in Andhra Pradesh, the Malegam Committee in 2011 suggested recommendations for ‘partial regulation’ of the MFIs. One recommendation included setting an arbitrary limit on the interest rates that actually worked in favour of large MFIs, who charged individual borrowers an explosive annualised interest rate between 18 to 26%, while diversifying the pool of investors from whom they borrowed, maintaining the net interest margin at less than 10%. In 2022, post-COVID, the RBI announced new guidelines for the NBFC-MFIs that not just raised the acceptable level of household indebtedness by double, but allowed a complete deregulation by removing any cap on interest rates, claiming that this will create a “level playing field” for the MFIs. In reality, complete deregulation is only going to make the MFI landscape more monopolistic than it already is with a few large MFIs (gross lending portfolio > Rs. 500 crore) owning roughly 97% of the lending portfolio and client base.

For small finance banks such as Equitas and Ujjivan, the RBI introduced the priority sector lending certificates (PSLC) in 2016, allowing banks to trade RBI-issued certificates that make it possible to trade their priority sector lending targets. A policy that was meant to provide subsidised loans directly by public sector banks to important sectors such as agriculture and MSMEs, has been converted into exchangeable certificates that can be bought and sold for income (‘Miscellaneous Income’ in the balance sheet), thereby transferring all the risk of the loans onto banks that purchased these certificates to meet their own PSL targets. From 2018-2023, Equitas and Ujjivan received a total income of Rs 188 crores and Rs 941 crores by selling such PSLCs.

What we have tried to describe above is how speculative money has been turning millions of people into commodities, as literal ‘assets’ and ‘liabilities’.

The new government as well as the opposition must respect the mandate of the poor people of this country, as not just a mandate against political dictators, but also against the dictatorship of big, speculative capital. They must take appropriate measures to cancel the debts of the poor that are quite clearly artificially manufactured and used to sustain the interests (literally) of such speculative capital.

Pooja Balasubramanian is a social feminist economist currently working on questions related to debt, social protection, care work and capitalist structural relationships across different countries.

Tathagata Sengupta is an education researcher, specifically working on questions of mathematics, mathematics education, and the history, economics and sociology of mathematical knowledge practices.