09.01.2008

· Banks face rising defaults from retail loan borrowers

o NPAs (Non Performing Assets) from retail loans of commercial banks are set to rise, according to a recent report from CRISIL.

o Gross NPAs are set to rise to 4% over the next two years from 2.7% as of March 2007. Delinquencies across all retail asset categories have gone up and are likely to further increase in 2008-09. The recent move by the central bank to tighten the norms for recovery agents employed by commercial banks could also add to NPAs as it could further encourage wilful defaults by borrowers.

· Some thoughts on bank branch licensing

o One point of view that is worth our attention about this subject is that we should liberalise bank branch expansion by doing away with branch licensing by the RBI. With the caveat that we should demand reciprocity from the foreign governments.

o This is recommended in view of the fact that we are a very under-banked nation. You might remember the low financial inclusion figures that we have noted in our blog from time to time.

o The traditional rationale for licensing, since the days of bank nationalisation in 1969 was to oblige banks to go to rural and semi-urban areas, and not limit themselves to profitable urban centres.

· Joseph Stiglitz on US recession

o He says that it is quite likely that US is sure to experience slower growth – possibly recession. This is bound to have global consequences. If monetary authorities respond appropriately to growing inflationary pressure – recognizing that much of it is imported, and not a result of excess domestic demand – we may be able to manage our way through it. But if they raise interest rates relentlessly to meet inflation targets, we should prepare for the worst; another episode of stagflation.

o He gives three solid reasons why the world has been able to weather the relentless rise in oil prices:

§ First, China, with its enormous productivity increases – based on resting on high levels of investment, including investments in education and technology – exported its deflation.

§ Second, the US took advantage of this by lowering interest rates to unprecedented levels, inducing a housing bubble, with mortgages available to anyone.

§ Finally, workers all over the world took lower real wages and a smaller share of the GDP.

· The run up to the introduction of GST in 2010

o A good article appeared in today’s centre page. It was by NA Khan. Worth a read. A couple of points worth our noting:

o Fiscal responsibilities are shared by three levels of government – central, state and local. Thus a tax reform by governments at one level can have fiscal consequences for the governments at another level. Therefore, a tax reform requiring the introduction of VAT (read GST) should have the following objectives:

§ It should be revenue neutral between the governments

§ The tax base should be uniform across the country

§ The provincial and local governments should have the autonomy to set tax rates

§ The tax should be relatively simple to administer and to achieve complete compliance

§ Taxes on international flows of goods should be based on uniform rules across the country.

o Some international examples of VAT introduction

§ Brazil introduced it in 1967.

§ Mexico did in 1980

§ The EU introduced a full VAT in 1993.

o What he means by VAT in this context is the GST – Goods and Services Tax.

· An interesting fact about ESI – Employees’ State Insurance Scheme

o It covers 91 lakh families and the total number of beneficiaries under the scheme are about 3.5 crore.

· PM moots a PIO university

o It is a university for People of Indian Origin. This will be established on a PPP (Public Private Partnership) basis with active participation of credible overseas Indian trusts or societies.

o The university will have autonomy and flexibility in the disciplines that it offers and in its academic governance.