ISSN (Online) - 2349-8846

Money, Banking and Finance 2017Subscribe to Money, Banking and Finance 2017

Long-run Performance of Seasoned Equity Offerings

Using data for 518 seasoned equity offerings during 2003 to 2015, it is argued that equity market performance of SEOs declines significantly post issue, compared to peer firms. This is particularly true for SEOs issued during market upswings and more so for follow-on public offers or FPOs where money is raised from external shareholders. Evidence suggests that this declining equity performance is mainly due to the deterioration in operating performance after such an issue. Further, firms with more available free cash flows and greater perceived growth opportunities show higher declines, while larger firms and those with higher pre-existing leverage with more monitoring, register lower declines in performance. Indian firms on average tend to “time” the market, take advantage of information asymmetry to raise SEO money during boom years and mostly engage in value-destroying activities, while a few big-ticket SEOs issued and subscribed during market downturns are the only outliers to this generally gloomy performance scenario.

Reflections on Analytical Issues in Monetary Policy

Analytical issues have arisen in the conduct of flexible inflation targeting as the framework of monetary policy, adopted formally by India in 2016, despite the noticeable downward drift in the inflation rate and concerns of many economists about its relevance in the light of the global financial crisis. Issues such as the framework’s rationale, the medium-term inflation target, the meaning of real interest rate in the Indian context, the realism in respect of inflation expectations and of the inferred logic of the yield curve, and the implications for economic inequalities have been pointed out.

Negative Interest Rates

A near-unprecedented turn to negative interest rates to trigger a recovery has characterised the monetary policy in several developed countries and in Europe. This is the result of a shift away from fiscal policy to an almost exclusive reliance on monetary policy, involving quantitative easing and low interest rates, in macroeconomic interventions across the globe. The failure of this macroeconomic stance has led to the phenomenon of negative rates in countries other than the United States, and the first sign of even a partial recovery in that country has been enough to set off a reversal.

Vulnerability of Emerging Market Economies to Exogenous Shocks

The transmission of global demand, oil supply and monetary policy shocks on the Indian economy are empirically examined using a parsimonious structural vector autoregression model for the period 1996 to 2016. Global demand shocks exert the most dominant effect causing fluctuations in various macroeconomic variables, whereas global monetary policy spillovers play an important role in affecting domestic short-term interest rates and financial asset prices. Global oil supply shocks, given its relative weightage as an intermediate input, have a greater impact on wholesale price index inflation than on consumer price index inflation. Given the rising trade and financial integration of the Indian economy, a quantitative impact analysis of these global shocks assumes importance for macroeconomic and monetary policy frameworks.

Were Public Sector Banks Victimised through AQR?

An inadvertent consequence of asset quality review by the Reserve Bank of India is that it portrayed public sector banks as inefficient managers of the burgeoning non-performing asset crisis relative to their private sector peers. A study, which used panel data regression to investigate the NPAs of 46 scheduled commercial banks between 2007 and 2016, has explored the myth by adopting a strategic orientation perspective to look into the antecedent periods of high uncertainties and jolts, leading to the build-up of NPAs, the changes in banks’ strategic orientations, and their effects on provisioning and NPA reduction. But no evidence was found to support the myth and to suggest that banks, across ownership, are incrementally exposing their NPAs ex post, subject to provisioning ex ante and that a moderate approach during periods of high uncertainty is most effective in managing NPAs. The study questions the received wisdom regarding the nature of risk-free sovereign debts and their impact on the NPA problem.

Did MGNREGS Improve Financial Inclusion?

Utilising household-level data, this paper investigates the impact of Mahatma Gandhi National Rural Employment Guarantee Scheme on financial inclusion. Exploiting the staggered timing of the roll-out of the programme across districts, while controlling for its non-random implementation, it is found that MGNREGS improves financial access. This is confirmed in simple univariate tests as well as in multivariate regressions that take into account several district- and household-level controls. The evidence, however, is less compelling when the use of finance is examined, although there is a differential impact for districts with higher proportion of women. The magnitudes in most cases are quite large and suggest that public works programme can positively influence financial inclusion.

Non-performing Assets in Indian Banks

Growing non-performing assets is a recurrent problem in the Indian banking sector. Over the past two decades, there have been two such episodes when the banking sector was severely impaired by balance sheet problems. A comparative analysis of two banking crisis episodes— one in the late 1990s, and another that started in the aftermath of the 2008 Global Financial Crisis and is yet to be resolved—is presented. Taking note of the macroeconomic and banking environment preceding these episodes, and the degree and nature of crises, policy responses undertaken are discussed. Policy lessons are explored with suggestions for measures to adapt to a future balance sheet-related crisis in the banking sector such that the impact on the real economy is minimal.

Indian Banking

This paper overviews the issues of non-performing assets held by banks; slowdown in credit growth; corporate debt; absence of modern risk-based approaches to management and regulation; the poor record of banks in transmitting monetary policy impulses; and their contributions to financial inclusion. It attempts to show that reality is more nuanced than the standard perspective that blames public ownership or a failure to modernise for the stresses public sector banks face.

How Efficient Are India’s Cooperative Banks?

In spite of their distinct organisational structure and banking philosophy based on mutuality, there is scant evidence on efficiency of cooperative banks. The efficiency of district central cooperative banks in India is investigated by constructing a panel of 297 cooperative banks over the period 2002–14. Using parametric and non-parametric frontier analysis, it is found that efficiency estimates vary depending upon whether advances or investments of DCCBs are used as output. The efficiency of cooperative banking is mapped, and shows considerable variation in efficiency of DCCBs across states. The findings suggest the need for innovative strategies to improve cooperative banking efficiency in the country.

Role of ‘Fintech’ in Financial Inclusion and New Business Models

The convergence of finance and technology to provide financial services by non-financial institutions, popularly known as “fintech,” has come to dominate the financial landscape. Taking stock of this development, its impact and implications for new products, processes and services, including for financial inclusion are examined. The Jan Dhan–Aadhaar–mobile phones trinity provides fertile ground for fintech to permeate to the “last mile.” Notwithstanding its manifold benefits, there is a need to exercise caution in areas such as privacy and ownership of data. In a fast-paced world of rapidly evolving technology and related financial services, regulators have new paradigms to grapple with and therefore, need to be proactive so as to not stifle the growth of this nascent sector.

Determinants of Bid-ask Spread in the Indian Government Securities Market

Liquidity measurement in financial markets has generated considerable attention in financial research. In this paper, the cost of liquidity is measured by computing the bid-ask spreads of liquid securities traded in the Indian government securities market, and is analysed with other liquidity measures. Overall, volatility is found to be the key variable impacting bid-ask spreads. Trading volume has a negative impact on spreads, although at a much smaller magnitude. Trade initiation and net liquidity appear to be smaller but significant drivers of spreads. Order imbalance and trade execution variables, analysed separately with the other variables, show divergent relationship with spreads.
Back to Top