Public Sector Banks Lending, Demonetisation and RBI Norms: an adumbration

How far is it true that in the current scheme of things with stressed assets plaguing the Public Sector Banks on one hand and the recent demonetisation rendering bills of Rs. 500 and Rs. 1000 legally invalid has fuelled once again the debate of these public banks with excess deposits or surplus liquidity in their kitty are roaring to go on a relentless lending, thus pressurising the already existing stressed assets into an explosion of unprecedented nature hitherto unseen? Now, that is quite a long question by a long way indeed. Those on the civil sector spectrum and working on financials leave no stone unturned in admitting that such indeed is the case, and they are not to be wholly held culpable for India’s Finance Minister has at least on a couple of times since the decision to demonetise on 8th November aided such a train of thought by calling upon banks to be ready for such lending to projects, which, if I were to speculate would be under project finance and geared towards the crumbling infrastructure of the country. Assuming if such were the case, then, it undoubtedly stamps a political position for these civil actors, but it would hardly be anything other than a cauldron, since economics would fail to feed-forward such claims.

So, what then is the truth behind this? This post is half-cooked, for it is as a result of an e-mail exchange with a colleague of mine. The answer to the long question above in short is ‘NO’. Let us go about proving it. Reserve Bank of India in no different manner has been toying the switch of a flip-flop in policy makeovers in the wake of demonetisation. But, what the Central Bank and the Regulator of India’s monetary policy has done increase Cash Reserve Ratio (CRR) by 100% of net demand and time liabilities (NDTL),  which is the difference between the sum of demand and time liabilities (deposits) of a bank and the deposits in the form of assets held by another bank. Formulaically,

NDTL = demand and time liabilities (deposits) – deposits with other banks.

The amount specified as the CRR is held in cash and cash equivalents, is stored in bank vaults or parked with the Reserve Bank of India. The aim here is to ensure that banks do not run out of cash to meet the payment demands of their depositors. CRR is a crucial monetary policy tool and is used for controlling money supply in an economy. towards the end of November, the RBI hiked the incremental CRR by 100%. The incremental cash reserve ratio (CRR) prescribes the reserve ratio based on the extent of growth in resources (deposits). It im­mobilises the excess liquidity from where it is lodged (the banks which show high growth), unlike the average ratio which impounds from the banks which are slow-growing as well as banks which are fast-growing. It also avoids the jerkiness of the average ratio. This means it has literally mopped the surplus liquidity that has gone into the banks as deposits in the wake of demonetisation. So, banks do not have capital to lend.  There is a formula on how much a bank could lend. It is:

Lending = Deposits – CRR – SLR (statutory liquidity ratio) – provisioning

; SLR is the amount of liquid assets such as precious metals (Gold) or other approved securities, that a financial institution must maintain as reserves other than the cash.

SLR rate = (liquid assets / (demand + time liabilities)) × 100%

As of now, the CRR and SLR rates are 4% and 23% respectively. Hence, the bank can only use 100-4-23= 73% of its total deposits for the purpose of lending. So, with higher CRR, banks can give less money as loan, since with higher interest rates, it becomes expensive to lend. This can curb inflation (and this is one of the main arguments of pro-demonetisation economists), but may also lead to slowdown in economy, because people wait for the interest rates to go down, before taking loans.

Moving on, what civil actors perceive, and not totally wrongly is that in the wake of demonetisation, deposits going into the banks are some form of recapitalisation, or capital infusion, which is technically and strictly speaking, not the case. For capital infusion in India happens through a budgetary allocation, and not this route. The RBI even came out with reverse repo, so that banks could purchase government securities from the RBI and thus lend money to the regulator. Thereafter, CRR was raised to 100, which, though incremental in nature would be revised 2 days from now, i.e. on the 9th. This incremental CRR is intended to be a temporary measure within RBI’s liquidity management framework to drain excess liquidity in the system. Though, the regular CRR would be 4, this incremental CRR is precisely to lock down lending going out from surplus deposits/liquidity as a result of Demonetisation. This move by the RBI was necessitated by the fact it at present holds Rs. 7.25 lac crore of rupee securities (G-Secs and T-Bills) and will soon run out of options of going in for reverse repo options, where it sells G-Secs in return for cash from banks, which have surplus deposits. These transactions have been reckoned at rates between 6.21% – 6.25%. There are expectations that the volume of deposits will increase by up to Rs. 10 lac crores by December due to demonetisation. The present equation of Rs. 3.24 lac crore impounded due to CRR and Rs. 7.56 lac crore to be used as open market option (OMO) or reverse repo options broadly covers this amount, leaving no extra margin.

There are two implications out of this:

One being, as the level of deposits keep increasing, banks may have to park the increments as CRR with RBI, which will affect their profit and loss (P&L). The expectation till today morning, i.e. the 7th December, 2016 had been that the RBI would lower the repo rate aggressively by 50 basis points (bps), which it did not do. This surely is deferred till stability due to demonetisation is achieved in the system. The other being on interest rate transmission. Banks could have delayed cutting their lending rates given that they had promised at least 3-4% interest rate to savings account depositors, and not be receiving any interest on the deposits impounded for CRR, which they haven’t as on individual levels, they have been cutting lending rates to approach RBI’s. This culminates into liquidity to tighten and send bond yields on a northward blip, and this is where lending would shrink automatically. Hence the banks cannot go after relentless lending, either in the wake or otherwise of demonetisation. QED.


Jaron Lanier gets real about AI & Acceleration

From CS: “The whole thing eats itself.” I, totally think we need to endeavor to birth new systems, not prop up the outmoded. Life feeds on life, canibalalize the old and over time use the bones to build something that’s compatible with the proper (non self defeating or borderline psychotically irresponsible) use of our technological abilities.

Thanks to Syn0

Excursus into disagreement over disagreement!!!!

For Laclau, all politics is basically reducible to ‘populism’. (On Populist Reason).

For Rancière, populism is the convenient name under which is dissimulated the difficulty of government: a kind of dissent is lumped together in relation to the prevailing consensus. (Hatred of Democracy: caution: pdf). This in short is a derogatory coating that results in the realization that people will not be governed properly.

Arditi (Politics on the Edge of Liberalism: caution: pdf) takes issue with Laclau and uses the strong Rancierean perspective to dissect/determine what is meant by ‘populism’.

Rancière in his 1998 book, Disagreement: Politics and Philosophy (caution: pdf) defines the term disagreement as:

“A determined kind of speech situation: one in which one of the interlocutors at once understands and does not understand what the other is saying. Disagreement is not the conflict between one who says white and another who says black. It is the conflict between one who says white and another who also says white but does not understand the same thing by it or does not understand that the other is saying the same thing in the name of whiteness.”

These three theorists seem to be in disagreement and the analysis here is provided to throw some clarity on the topic.

Let me take Arditi to begin with: The book is oriented with Freud’s oxymoronic notion of ‘Foreign Internal Territory‘ (essentials of Psychoanalysis). The Freudian notion denotes the relation between the ‘repressed’ and the ‘ego’. Arditi uses this in his political analysis and calls it the ‘Internal Periphery’. Internal Peripheries are the paradoxical edges. For Arditi, the edges are not to be looked at as some distances from the center, but are the spaces, where the distinction between the inside and the outside is always in dispute and cannot be conceived without a polemic. This is so much a Derridean notion of ‘Deconstruction’. Arditi rethinks the ‘symptom’ to discern his ‘internal periphery’ of the political analysis and one of the ways to understand this is through the Rancièrean conception of ‘Disagreement’.

For Rancière, ‘Disagreement’ is a political concept par excellence. This has to be distinguished from ‘difference’ and the Lyotardian ‘differend’ (The Differend, 1988). For Lyotard, ‘differend’ stands for a conflict that cannot be resolved in that there there is no legitimate adjudication. Whereas, for Rancière, ‘difference’ is difference from itself plus the ‘differend’ and this goes on to to dictate the structure of the community. Therefore, ‘differend’ is always an ontic problem, what he calls the ‘police’ problem. His ‘politics’ is close to what others in the continental tradition would call ‘the political’.

To quote Chantal Mouffe:

“If we wanted to express such a distinction in a philosophical way, we could, borrowing
the vocabulary of Heidegger, say that politics refers to the ‘ontic’ level while ‘the
political’ has to do with the ‘ontological’ one. This means that the ontic has to do with
the manifold practices of conventional politics, while the ontological concerns the very
way in which society is instituted.”

Rancière dismisses this distinction and claims that politics is rare and what is common is police. Politics is local and occasional, but, admissible to conflicts revolving around the social convulsion. To quote Rancière (Disagreement):

“So nothing is political in itself. But anything may become political if it gives rise to a
meeting of these two logics [police logic, which is opposed to egalitarian/political logic]. The same thing – an election, a strike, a demonstration – can give rise to politics or not give rise to politics. A strike is not political when it calls for reforms rather than a better deal or when it attacks the relationships of authority rather than the inadequacy of wages. It is political when it reconfigures the relationships that determine the workplace in its relation to the community. The domestic household has been turned into a political space not through the simple fact that power relationships are at work in it but because it was the subject of an argument in a dispute over the capacity of women in the community.”

If Disagreement talked about the classical political philosophy, then Hatred of Democracy deals with the present context and here he tells about the ‘here and now’, the ‘you and me’. The undecidability of the ‘internal periphery’ is decided/redecided by what Arditi calls the ‘polemicization’. ‘Polemicization’ refers to the process by which political arguments, disputes lead to transformations that reconfigure, redistribute, reinstitute and redraw the ‘lines of the community. This again gets so close to the Derridean version of drawing lines to set up any order that are neither simply internal, nor simply external (The Truth in Painting: caution: pdf). Rancière’s notion of ‘disagreement’ and the ‘internal periphery’ are akin to one another and the Rancierean notion revolves around a word or a concept. And the word is ‘Equality’.

To quote Rancière:

“Nothing is political in itself for the political only happens by means of a principle that
does not belong to it: equality. The status of this ‘principle’ needs to be specified.
Equality is not a given that politics then presses into service, an essence embodied in the
law or a goal politics sets itself the task of attaining. It is a mere assumption that needs to
be discerned within the practices implementing it…”

Arditi and Laclau would both agree on this. For Laclau, the fundamental term in political ontology is the ‘demand’. Laclau has argued this since his seminal book co-authored with Chantal Mouffe (Hegemony and Socialist Strategy: caution: pdf) that politics should not be confused with ‘fetishized’ positions, such as the class and this laid the foundations of post-Marxism (caution: pdf). Politics could arise wherever antagonisms flare up and they could be from any area like sex, gender, race, ethnicity, citizenry, environment etc. In Laclau, the key notion is the ineradicability of antagonism. Furthermore, Laclau sees the birth of modern politics in the democratic revolutionary space, a Claude Lefortian position and argues that ‘power’ is an empty space anybody can fight for. This gets translated as Rancière’s ‘Equality’. But, the key is Laclau’s dismissing of Rancière’s ’empty-ness’ as placing too much of an optimistic hope on people’s democratic tendencies on the one hand and as reluctant enough to let go of ‘class’, as an undeconstructed Marxist, on the other. Laclau does nod Rancière, when he talks of the Gramscian movement from ‘classes’ to ‘collective wills’ to be completed in order for the latter’s project to be realized.

Laclauian theory suffers from ontological parochiality, a contingent description of a contingent state of affairs. Laclau arrogantly votes for his politics as hegemony as an ontological category. Since all politics is hegemonic in nature, all politics is reducibly populist. For Arditi, populism is still a spectre of democracy and an internal periphery of democratic politics. Rancière, on the other hand gets pessimistic about politics and takes the police as the handmaiden of those who enjoy power.