CLASS 2 Discussion

I Livemint: Gap in pay of private and public bank chiefs widens

1. The gap between the remuneration of chief executives of state-run banks and their
private counterparts has widened in the last two years. The average daily pay of a
public-sector bank chief was ₹8,541 in FY19, while a private bank chief executive
officer (CEO) earned ₹2.48 lakh per day in the same period, according to a Mint
analysis of annual reports of five public and private bank each.
2. It is to be noted that public sector bank chiefs also receive government
accommodation at prime locations, which are not included as part of the salary,
something that private bank heads do not get.
3. Banks Board Bureau (BBB) employee stock option programmes (Esops) to put in
place a performance-linked incentive structure. Allahabad Bank, United Bank of
India after getting a nod in 2017
4. Pay disparity within PSU banks have also widened after lateral hiring of some
managers from private banks at higher salaries, said Dutta.
 5. There is a lot of demand for PSU bank chiefs for board-level positions, Dutta said
Even mid-level employees are sought after, especially in credit and risk management
areas, where the PSU banks have greater exposure than their private counterparts,
she said. Arundhati Roy.

II Business Today: How effective is RBI's monetary policy transmission

1. Globally, countries have shifted from monetary policy tightening (2016 to early 2019)
to monetary policy easing since March 2019 as per the Global Monetary Tracker
which compiles monetary policy trend of 54 countries.
2. The policy in which a central bank lowers interest rates and deposit ratios to make
credit more easily available. This makes borrowing easier for businesses, which
stimulates investment and expansion of operations.
3. Much, however, depends on how effectively, with respect to speed and quantum,
the transmission mechanism works.
4. It mainly depends on two factors - the structure of the economy and the state of its
financial system.
5. Measures to improve transmission: transitioning from the prime lending rate (PLR)
system (1994) to the benchmark prime lending rate (BPLR) system (2003), the base
rate system (2010), and the current marginal cost of funds-based lending rate
(MCLR) system (2016).
6. There has been a reduction in the lag in transmission of policy rate to the
commercial rates in the recent period compared to the earlier decade. 7 to 2 months
7. Still longer period of transmission, and uneven transmission which prevailed a
decade ago still exist today.
8. Reasons: High average cost of deposits, limited flexibility to reduce interest rates in
the short-run, relatively high non-performing assets (NPAs), higher cost of acquiring
and servicing customers, non-interest operating expenses and procedural
bottlenecks in recovery of dues by banks coupled with large borrowings by the
government.
 9. Major Factors:
(i) Rigidity in saving deposit interest rates;
Term deposits have fixed interest rate which means the transmission is effective only for
fresh deposits. no incentive to decrease the deposit rate 
Solution:
1. Linking repo rate with deposit rate
2. variable interest rate structure on longer term deposits
3. Other sources: issuance of debentures/commercial papers and borrowings from the
capital market.

(ii) Competition from other financial saving instruments;

With an increased risk appetite, financial literacy, good performance of stock markets and
well-structured products, households are diverting a part of their savings to risky assets like
mutual funds. Risk-free instruments including public provident fund, national savings
certificate, etc. also compete with bank deposits. 
Solution: government decided to revise small savings rates quarterly, aligning them with
the government bond yields of previous quarter. Not implemented
(iii) Deterioration in the health of the banking sector.
Monetary transmission is impeded by weak balance sheets due to low loss-absorption
capacity to deal with troubled loans. NPA, Increased cost of funds
Solution: Initiatives like Insolvency Banking Code (IBC), NBFC regulations, Prompt Corrective
Action (PCA) framework for PSU banks along with increased liquidity in the system has given
a chance to banks to recover and transmit the benefit to its customers.
(iv) RBI Initiatives (Solution)
 Make it mandatory for banks to link all new floating rate personal or retail loans and
floating rate loans to MSMEs to an external benchmark.
 The external benchmark would be RBI's policy repo rate 1 October 2019. repo-
linked lending rate (RLLR) products. 
 Reset interest rates under external benchmark at least once in three months from
the earlier practice of resetting interest rates once in a year under MCLR will greatly
help in transmission of the RBI's monetary policy.
 the asset resolution and bank recapitalisation are expected to strengthen bank
balance sheets and improve banks' willingness to change their lending rates in
tandem with the change in the policy rates.
III Case Study: European central bank’s decision to bail out Greece
(Page 91)

Chronic fiscal mismanagement and resulting debt crisis has repeatedly threatened the stability
of the eurozone

The euro is introduced  as an accounting currency in eleven EU countries. (Euro banknotes and
coins begin circulating three years later.) Greece, however, is unable to adopt  the euro because
it fails to meet the fiscal criteria—inflation below 1.5 percent, a budget deficit below 3 percent,
and a debt-to-GDP ratio below 60 percent—

Greece belatedly adopts the euro currency. However, the country misrepresents its finances  to
join the eurozone, with a budget deficit well over 3 percent and a debt level above 100 percent
of GDP. It is subsequently made public that U.S. investment bank Goldman Sachs  helped Greece
conceal part of its debt in 2001 through complex credit-swap transactions.

Rising deficit (6.1 percent) and debt-to-GDP ratio (110.6 percent) for 2004.

Debt:GDP ratio 140%

As borrowing costs rise and financing dries up, Greece is unable to service its mounting debt.

The figure is later revised upward  to 15.4 percent. Greece’s borrowing costs spike as credit-
rating agencies downgrade the country’s sovereign debt to junk status  in early 2010.

EU provide Greece with 110 billion euros  ($146 billion) in loans over three years.  in spending
cuts and tax increases.

In 2012 Greece must reduce its debt-to-GDP ratio from 160 percent to 120.5 percent by 2020.
Greece and its private creditors complete the debt restructuring on March 9, the largest such
restructuring  in history.

first developed country to effectively default to the Fund. IMF

The eurozone passes an important milestone on 20 August 2018. The date marks the formal
end of the bailout of Greece.
Greece vs Ireland,Portugal
2010 was the first bailout signed
This was a case of government spending running far ahead of what it could raise in taxes,
and after a change of government in Athens it was revealed that the deficit was even larger
than initially reported.
In addition to the bailouts, there was a key response from the European Central Bank. It
created a new programme, called outright monetary transactions, to buy the government
debts of countries with bailout programmes and under severe pressure in the markets. The
aim was to bring down their borrowing costs to sustainable levels. start a programme of
buying the debts of all eurozone countries troubled or not, known as quantitative easing.
Q.2
In developed countries the task of maintaining price stability is entrusted to central banks
independent of the government and separated from policy. History has shown that politicians
cannot cope with maintaining price stability very well. There are always things on which they
want to spend to please their constituency and which are financed by printing more money. This
creates excessive inflation and worsens economic stability and, as a result, the well-being of
society. 

National central banks influence price stability through interest rates, quantity of money and
exchange rates, favouring economic activities and, thereby, a general increase in prices. This is
called monetary policy.

If banks receive money from the central bank at a lower interest rate or less expensively, the cost
of money is less expensive for a companies and this encourages them to take out bigger loans,
which also helps the economy recover. And, of course, vice versa – higher interest rates or more
expensive money cools the economy. Through this the central bank is able to manage price
stability and direct economic development.