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Indian bank shake-up proposal stirs concern over corporate power

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As Indian conglomerates have sprawled across the economy, there has been one long-held regulatory taboo on their operations — owning a bank. Until now, that is.

A Reserve Bank of India working group made an attention-grabbing proposal last month to allow the country’s industrial houses to fulfil long-held aspirations to expand into banking.

It was only in a working paper but it has prompted much consternation, even about the future of Indian democracy. Former RBI governor Raghuram Rajan and an ex-chief economic adviser to prime minister Narendra Modi are among those raising concerns.

Critics have warned the proposal would entrench the historical nexus among the financial system, industrialists and politicians, giving tycoons additional financial clout to play an undue role in everything from the economy to election funding.

India’s conglomerates are a defining feature of the country’s economy. The Tata Group until recently had more than 100 operating companies providing everything from coffee to IT. Reliance Industries and Adani are expanding into a growing range of business areas including telecoms and airports. The concentration of corporate power under Mr Modi has increased, with some fretting that an age of entrepreneurship is giving way to an age of corporations. But one thing Indian conglomerates don’t have are banks.

Arvind Subramanian — who served as Narendra Modi’s chief economic adviser — warned along with two other former officials in an Indian Express article that “a rules-based, well-regulated market economy, as well as democracy itself . . . will be undermined, perhaps critically” if authorities implement the proposal by the RBI working group.

Mr Rajan and a former RBI deputy went further. Such a move “will increase the importance of money power yet more in our politics, and make us more likely to succumb to authoritarian cronyism”, they wrote in a paper.

India’s financial sector is burdened by one of the world’s highest bad-loan ratios. For years, tycoons exploited cosy relationships with politicians to tap state banks for easy credit to fund ventures that collapsed. Lenders have followed, with alarming frequency.

But some in India think officials should rethink their attitude on ownership to address a shortfall in credit. Domestic bank credit to the private sector, at 50 per cent of gross domestic product, is less than half that of Asian countries including China, Korea and Thailand. State-run lenders control two-thirds of banking assets, and the central bank subjects would-be newcomers to onerous tests. Few pass: the RBI has only given out a handful of licences since 2014.

To be sure, the RBI group proposes allowing corporations to own banks only after it beefs up regulatory supervision. But critics argue that the dangers of going down this road outweigh the benefits. They say allowing hungry borrowers to become lenders raises the risk that some tycoons at poorly managed conglomerates will find ways to dip into their own in-house bank or encourage lending to affiliates.

As S&P notes, this would heighten the risk of contagion in the financial sector if a bank found itself in trouble. The losers would be depositors and taxpayers, who would probably have to fund any bailouts. It would also widen the chasm between corporate haves and have-nots. India’s most powerful corporations have gained market share in recent years, muscling aside competitors. Giving them banks could turbocharge their potential power.

Some bank analysts argue that another RBI working group proposal to let well-run non-banking financial companies turn into banks would be a better way of bolstering the banking system, giving the lenders access to deposits and other more reliable sources of funding. They say even though some of the biggest NBFCs such as Bajaj are part of conglomerates, this would pose less risk than allowing corporate newcomers. But whether these NBFCs would even want to is unclear, given the extra regulatory burdens.

Another mooted solution remains off the table for now: privatising some of India’s state banks. Some analysts argue underperformers should be sold off to private sector parties interested in their large branch and customer networks. That could improve allocation of lending if the banks could be turned around with fresh capital and better management. However, privatisation is one taboo that remains.

Benjamin.Parkin@ft.com



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Emerging Markets

Bond sell-off roils markets, ex-Petrobras chief hits back, Ghana’s first Covax vaccines

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The yield on the benchmark 10-year Treasury exceeded 1.5 per cent for the first time in a year and the outgoing head of Petrobras warns Brazil’s President Jair Bolsonaro against state controlled fuel prices. Plus, the FT’s Africa editor, David Pilling, discusses the Covax vaccine rollout in low-income countries. 

Wall Street stocks sell off as government bond rout accelerates

https://www.ft.com/content/ea46ee81-89a2-4f23-aeff-2a099c02432c

Ousted Petrobras chief hits back at Bolsonaro 

https://www.ft.com/content/1cd6c9fb-3201-4815-9f4f-61a4f0881856?

Africa will pay more for Russian Covid vaccine than ‘western’ jabs

https://www.ft.com/content/ffe40c7d-c418-4a93-a202-5ee996434de7


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Petrobras/Bolsonaro: bossa boots | Financial Times

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“Brazil is not for beginners.” Composer Tom Jobim’s remark about his homeland stands as a warning to gung-ho foreign investors. Shares in Petrobras have fallen almost a fifth since President Jair Bolsonaro said he would replace the widely respected chief executive of the oil giant.

Firebrand Bolsonaro campaigned on a free-market platform. Now he is reverting to the interventionism of leftist predecessors. It is the latest reminder that a country with huge potential has big political and social problems.

Bolsonaro reacted to fuel protests by pushing for a retired army general to supplant chief executive Roberto Castello Branco, who had refused to lower prices. This is politically advantageous but economically short-sighted.

Fourth-quarter ebitda beat expectations at R$60bn (US$11bn), announced late on Wednesday, a 47 per cent increase on the previous quarter. This partly reflected the reversal of a R$13bn charge for healthcare costs. Investors now have to factor the cost of possible fuel subsidies into forecasts. The last time Petrobras was leaned on, it set the company back about R$60bn (US$24bn at the time). That equates to 40 per cent of forecast ebitda for 2021.

At just over 8 times forward earnings, shares trade at a sharp discount to global peers. Forcing Petrobras to cut fuel prices will make sales of underperforming assets harder to pull off and debt reduction less certain. Bidders may fear the obligation to cap prices will apply to them too.

A booming local stock market, rock bottom interest rates and low levels of foreign debt are giving Bolsonaro scope to spend his way out of the Covid-19 crisis. But the economy remains precarious. Public debt stands at 90 per cent of gross domestic product. The real — at R$5.40 per US dollar — remains near record lows. Brazil’s credit is rated junk by big agencies.

Rising developed market yields will make financings costlier for developing nations such as Brazil. So will high-handed treatment of minority investors. It sends a dire signal when a government with an economic stake of just over a third uses its voting majority to deliver a boardroom coup.

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South Africa’s economy is ‘dangerously overstretched’, officials warn

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South Africa is pushing ahead with plans to shore up its precarious public finances as officials warn the economy is “dangerously overstretched” despite the recent boom in commodity prices.

Finance minister Tito Mboweni hailed “significant improvement” as he delivered the annual budget on Wednesday and said that state debts that will hit 80 per cent of GDP this year will peak below 90 per cent by 2025, lower than initially feared.

But Mboweni warned that President Cyril Ramaphosa’s government was not “swimming in cash” despite a major recent tax windfall. The Treasury now expects to collect almost 100bn rand ($6.8bn) more tax than expected this year after a surge in earnings for miners. This compares with a projected overall tax shortfall of more than 200bn rand. Still, the finance minister made clear that spending cutbacks would be necessary.

“Continuing on the path of fiscal consolidation during the economic fallout was a difficult decision. However, on this, we are resolute,” Mboweni said. “We remain adamant that fiscal prudence is the best way forward. We cannot allow our economy to have feet of clay.”

The pandemic has hit South Africa hardest on the continent, with 1.5m cases recorded despite a tough lockdown. An intense second wave is receding and the first vaccinations of health workers started this month. More than 10bn rand will be allocated to vaccines over the next two years, Mboweni said.

‘We remain adamant that fiscal prudence is the best way forward’ – South African finance minister Tito Mboweni © Sumaya Hisham/Reuters

Even before the pandemic’s economic hit, a decade of stagnant growth, corruption and bailouts for indebted state companies such as the Eskom electricity monopoly rotted away what was once a prudent fiscus compared with its emerging market peers. 

Government spending has grown four per cent a year since 2008, versus 1.5 per cent annual growth in real GDP. The country’s credit rating was cut to junk status last year. Despite this year’s cash boost, the state expects to borrow well over 500bn rand per year over the next few years. The cost to service state debts is set to rise from 232bn rand this year to 338bn rand by 2023, or about 20 cents of every rand in tax.

The fiscal belt-tightening will have implications for South Africa’s spending on health and social services. On Wednesday Mboweni announced below-inflation increases in the social grants that form a safety net for millions of South Africans. “We are actually seeing, for the first time that I can recall, cuts in the social welfare budget,” said Geordin Hill-Lewis, Mboweni’s shadow in the opposition Democratic Alliance.

The finance minister is also facing a battle with union allies of the ruling African National Congress over a plan to cap growth in public sector wages. South Africa lost 1.4m jobs over the past year, according to statistics released this week. The jobless rate — including those discouraged from looking for work — was nearly 43 per cent in the closing months of 2020.

The South African treasury expects the economy to rebound 3.3 per cent this year, after a 7.2 per cent drop last year, and to expand 2.2 per cent and 1.6 per cent next year and in 2023 — growth rates that are widely seen as too low in the long run to sustain healthy public finances.

“The key challenges for South Africa do however persist, clever funding decisions aside,” Razia Khan, chief Middle East and Africa economist for Standard Chartered, said. “Weak structural growth and the Eskom debt overhang must still be addressed.” 



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