#37 Direct to Consumer

Bank-related Budget announcements + Retail Direct

From the Budget

Bad Banks

I’m sure you’ve already heard about this from multiple sources. Why wouldn’t you? Our Government keeps returning to it like an ex it can’t get over. From the Finance Minister’s speech (brackets indicate my notes):

“The high level of provisioning (profits set aside for potential NPAs) by public sector banks of their stressed assets calls for measures to clean up the bank books. An Asset Reconstruction Company Limited and Asset Management Company would be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realization”

Are you wondering why there’s no mention of “bad bank”? Well, they are simply being classy and calling it an ARC (Asset Reconstruction Company). Look no further - I’ve already de-mystified ARCs in a previous post here. (hint: It’s not good) For those who have subscribed recently, I’ll repost my illustration here:

Recapitalization

Banks need capital. This “equity” is supposed to act as a cushion for depositors if (or when) the bank fails. From the speech,

“To further consolidate the financial capacity of PSBs, further recapitalization of ₹20,000 crores is proposed in 2021-22”

Just like the bad bank episode, each year, the government needs to put money into these badly run public banks. Unlike private banks, PSUs do not inspire enough confidence from institutional players - so they have trouble raising money from them. In the end, the Government has to bail them out. So,

Step 1: Remove all the bad loans from PSUs through ARCs
Step 2: Infuse capital so that they can be up and running again

Privatisation

From the speech,

“Other than IDBI Bank, we propose to take up the privatization of two Public Sector Banks in the year 2021-22.”

To put it simply, in order to make a bank private (from public), the Government needs to sell it’s stake. But they can only do when there are buyers on the other side of the table. Why would anyone buy a non-performing bank anyway?

If you leave out all the public banks that got merged last year (and of course SBI and BOB because they’re the only ones doing well), you are left with only a handful of candidates:

Note: The insights for the table above have been taken from this Livemint article (collated through analyst viewpoints)

However, this “game” of privatisation could be a lot more political than logical, a concept lucidly explained by Ira here.

She asks important questions like:

Is the privatisation driven by the desire to reduce government influence on banking? Or is it simply driven by the need to reduce the proportion of government resources going towards banking?

Is the government doing this to raise resources for its budget or is it more a signal?

What did you think of the Budget? Did it leave a lot to be desired?

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What’s up with RBI?

RBI concluded yet another Monetary Policy Meeting yesterday. As I’ve mentioned before, I’ll only be covering the new stuff - for the basics, please read my previous posts.

Retail Direct

From the Governor’s Statement,

“In continuation of these (deepening financial markets) efforts, it is proposed to provide retail investors with online access to the government securities (G-Secs) market – both primary and secondary – directly through the Reserve Bank (‘Retail Direct’). This will broaden the investor base and provide retail investors with enhanced access to participate in the government securities market.”

If you’re anything like the guy in the meme above, let’s understand what G-Secs are first.

Let’s start by thinking of G-Secs (or Government Securities) as a fixed deposit (FD). Just that, instead of a bank, it is issued by the Government (Central or State). Unlike a FD, it is tradeable (you can buy or sell within it’s maturity period). You can hold most FDs for a maximum duration of 10 years, where some G-Secs have maturities upto 40 years!

..and investors choose G-Secs over other instruments exactly for these reasons. For example, since it is directly issued by the Government, it is considered even safer than FDs, which honestly, people have started losing faith in, after the Yes Bank and PMC fiasco. Also, if you believe interest rates are going to fall in the future, you can lock in the current rates for a much much higher duration (40 years compared to 10 for a FD).

Till now, you could only invest in these bad boys through:

  • Mutual Funds

Here is a snapshot of the instruments held by a particular liquid fund (these are mutual funds you choose to keep your “rainy day” fund in). As you can see, most of it is in T-Bills, which are basically G-Secs with a maturity of less than one year.

  • Brokers

Here’s the landing page for Zerodha which allows you to invest in these securities.

Both these instances are an “indirect” way of investing in G-Secs. RBI wants to change this by allowing us to open an account directly with them - of course, details around this are still a bit hazy (Would you have to go through a bank? What about KYC?) - but this is going to be landmark step when it comes to transparency and treating retail investors at par with other institutional players.

Implications

Now that we’ve cleared the basics, let us understand why this is a landmark step.

  • More returns for savers like you and I (?): When you remove an additional layer in between (in this case, mutual fund or a broker), it generally means that you get to pay lesser commissions i.e. more returns. However, do note that may NOT be true for everyone. Depending on if you plan to hold G-Secs till maturity (there might be other costs if you sell them before the due date) and also depending on your tax bracket (mutual funds are more tax efficient than G-Secs) - it could be a zero sum game for you.

  • Lower funding cost for the government: With the Budget that we saw, our government sure needs money. Once “Retail Direct” goes live, expect to see campaigns encouraging investors to participate in this. Experts believe that this source of funding will be more stable than the institutional one - as it not prone to external factors (profits, bonuses, redemptions etc).

  • Banks might be forced to become more efficient/competitive: Due to the nature of my work, I have stopped being surprised at people who leave their idle money (often running into crores) in the savings account of their bank. Why would anyone want to keep their idle money in a bank for less than 3% when they can directly keep it with the government at 3.35%? (I repeat: interest rates are dynamic in nature so this may change, but as long as there is a considerable rate difference between these two instruments, this argument will hold ground)

  • This might open the floodgates to CBDCs: I’ve talked about Central Bank Digital Currency before. It’s not a matter of “if” anymore, it’s a matter of “when”, especially since RBI has officially talked about it in one of their recent publications. Once retail investors have direct access to RBI (through Retail Direct, for starters), it’ll be easier for the central bank to roll this out. I’m excited!

Note: To understand more about G-Secs, I suggest you directly read the FAQ section from the RBI website here.

Of course, if this goes through, almost everyone will have a direct access to RBI except… NBFCs?

Retail Payments - Helpline

As digital payments continue to soar higher, RBI keeps tightening loose ends… as it should.

During his statement, he announced a few key measures:

  • Payment System Operators would now be required to set up a 24x7 helpline number to address customer queries and grievances. I’ve seen countless instances on Twitter where people keep an account just to reach out to these digital-only companies, who apparently respond faster on social media than through their own customer service (which in most cases, is only email)

  • Some of these grievance related functions are often outsourced to other players. RBI will soon come out with guidelines regarding this as well.

  • One Nation One Ombudsman - Currently, there are three separate Ombudsman (a Government official who investigates customer complaints) schemes for banks, non-banks and prepaid payment issuers. To make all this simpler, they will be rolled into just one centralized location, making it easier for customers. This is coming up on June 2021.

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That’s it for this week.

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