L&T will engineer, procure, construct and install four wellhead platforms for ONGC spread over the Mukta, Bassein and Mumbai High South fields
Mumbai: Engineering company Larsen & Toubro Ltd (L&T) on Monday said it has secured an offshore contract valued at Rs749 crore from the Oil & Natural Gas Corporation (ONGC) for total 'EPCI' or engineering, procurement, construction and installation of four wellhead platforms, reports PTI.
The contract was won against international competitive bidding. The project, spread over the Mukta, Bassein and Mumbai High South fields is part of ONGC's strategy to develop marginal fields to meet India's rising energy demands, a company statement said here.
L&T is scheduled to complete the project by April 2014.
In addition to conventional wellhead facilities, one of the platforms-the B-127, will also have process gas compression facility.
L&T has been serving the upstream hydrocarbon sector since early the 90s. This contract reiterates the long-term association of ONGC with L&T in the development of offshore fields in India.
The company's offshore track record includes successful completion of several challenging projects for domestic and international clients.
L&T provides complete 'EPCI' solutions for the offshore oil & gas industry combining customized engineering and procurement, fast-track project management and world class fabrication & sea installation capabilities, the release said.
The Prime Minister asserted that aggregating the 'purported gains' to private parties 'merely on the basis of the average production costs and sale price' of Coal India could be highly misleading
New Delhi: Dubbing computation of loss of Rs1.86 lakh crore in coal block allocation by the Comptroller and Auditor General (CAG) as 'flawed' and 'misleading', Prime Minister Manmohan Singh on Monday took the battle to the Opposition camp, blaming it for thwarting the Centre's effort to shift to competitive bidding, reports PTI.
Making a statement in both Houses of Parliament amid uproar created by BJP members, Singh refused to be on the back foot, declaring that he takes 'full responsibility' for the decisions taken as he contended that CAG's "observations" are "clearly disputable".
With BJP creating disruptions, he read out a few portions of his four-page statement before laying it in Lok Sabha and Rajya Sabha which were repeatedly adjourned because of uproar.
Conscious that the CAG reports are normally discussed in detail in the Public Accounts Committee (PAC) of Parliament where the ministry concerned responds, Singh said he was departing from this established procedure "because of the nature of the allegations that are being made and because I was holding the charge of Coal Minister for a part of the time covered by the report."
Responding point-by-point to the CAG's observations, the Prime Minister said even if the government auditor's contention that benefits accrued to private companies were accepted, "their computations can be questioned on a number of technical points."
He asserted that aggregating the "purported gains" to private parties "merely on the basis of the average production costs and sale price of Coal India Ltd (CIL) could be highly misleading."
As coal blocks were allocated to private companies only for captive purposes for specified end-uses, he said, it would not be appropriate to link the allocated blocks to the price of coal set by CIL.
The Prime Minister, whose resignation is being sought by the BJP, asserted that "any allegation of impropriety is without any basis and unsupported by facts".
Seeking to corner the Opposition over the issue, he said the policy of allocating coal blocks without competitive bidding existed since 1993 and previous governments also allocated "precisely in the manner that the CAG has criticised".
He also said major coal and ignite bearing states like West Bengal, Chhattisgarh, Jharkhand, Orissa and Rajasthan "ruled by Opposition parties" were "strongly opposed" to a switch over to competitive bidding process.
On the charge of delay in bringing the Coal Mines Nationalisation (Amendment) Bill, 2000 to facilitate commercial mining by private companies, Singh said it was pending in Parliament for a long time owing to "stiff opposition from the stakeholders" and government wanted broader consultations and consensus.
Singh said these state governments felt that a switch over would increase the cost of coal, adversely impact value addition and development of industries in their areas and dilute their prerogative in the selection of leases.
Citing instances, he said the then BJP Chief Minister of Rajasthan Vasundhara Raje had written to him in April 2005 opposing competitive bidding.
The Prime Minister quoted Raje as saying then that the competitive bidding was against the spirit of the Sarkaria Commission recommendations.
Singh also named another BJP Chief Minister Raman Singh (Chhattisgarh) saying that the latter had written to him in June 2005 seeking continuation of the extant policy of coal block allocation.
He said the Chhattisgarh Chief Minister had requested that any change in coal policy be made after arriving at a consensus between the central government and the states.
"The state governments of West Bengal (Left) and Orissa (BJD-led) also wrote formally opposing a change to the system of competitive bidding," Singh said.
With rising NPAs of the banking industry and strain on their profitability due to slowdown in the economy, there is every justification for commercial banks to clamour for marked reduction in the CRR, which alone can provide some reprieve to the banking industry
Of late, the Cash Reserve Ratio (CRR) has become a bone of contention between the Reserve Bank of India (RBI) and the commercial banks, though it is as yet at a low key for obvious reasons. Some time back, one chairman of a public sector bank equated the CRR to a non-performing asset (NPA) and said that his CRR was the biggest NPA in his books. This is because, CRR does not earn any income for the banks just like the non-performing loans, and is, therefore, a drain on the profitability of banks. The similarity ends here, but the banks are feeling the pinch now more than any time before.
Traditionally CRR has been one of the monetary tools in the hands of the RBI along with other instruments like Statutory Liquidity Ratio (SLR) and Open Market Operations (OMO) to fight inflation in the country. Under Reserve Bank of India Act, 1936, a certain percentage of net demand and time liabilities (NDTL) of banks is required to be mandatorily parked with the RBI on a daily basis, which is called CRR, and RBI has the statutory right to raise or lower the ratio according to the needs of securing monetary stability in the country. At present it is pegged at 4.75% and every scheduled commercial bank (SCB) is required to maintain 4.75% of its NDTL as cash balance with RBI and this amount does not earn any interest for the SCBs. Till 2007, RBI was required to pay interest on the CRR balances kept by SCBs, but by an amendment to the RBI Act, this provision to pay interest was withdrawn, and hence the RBI does not pay any interest on the CRR balances maintained with it from 31 March 2007.
Magnitude of the CRR balances held with RBI
The magnitude of the CRR balances maintained by banks with RBI can be gauzed from the following figures. As on 27th July, 2012 on a NDTL of all SCBs amounting to Rs.66,29,500 crore, all banks put together maintained a cash balance of Rs3,14,900 crore with the RBI every day, and this keeps on growing with the growth in deposits of the banking industry. This humungous amount does not earn any interest for the banks. If you calculate the interest on this amount at the average lending rate of banks, say at 10%, the total loss to the banking industry is in excess of Rs31,000 crore per year. The total net profit of the entire banking industry for the year 2010-11 was Rs 70,331 crore. If only this additional income by way of earnings on the CRR was available to the banks, the total profit would have gone up by over 40%. As this makes a huge difference in the performance of banks, one can imagine the agony and anguish of banks over this issue.
And the vexatious part of it is that the RBI lends to commercial banks up to a certain limit to each bank at the repo rate of 8% per annum at present and that too against pledge of government securities as it is a collateralized lending by RBI to banks.
Impact of CRR on State Bank of India
State Bank of India, the biggest bank in the country is quite vocal about this matter because of the considerable loss of revenue caused to the bank. According to Pratip Chaudhuri, chairman of SBI, the annual loss to SBI alone on account of CRR is of the order of Rs3,500 crore which is nearly 30% of the annual declared net profit of the bank of Rs11,707 crore for the year 2011-12. He has, therefore, suggested phasing out of CRR, and its eventual abolition within a reasonable time-frame, as impounding of this large quantum of lendable resources in a capital-scare economy with vast requirement for infrastructure, does not stand to reason. As per the report in the Hindu Business Line, Mr Chaudhuri went a step further and said, “these funds have an opportunity cost, in terms of foregone lending opportunity. Thus holding back funds and keeping them idle hurts overall productivity, affects growth and leading to stunting of banks.” He further said that SLR of 23% was sufficient to address the issues of solvency of and liquidity in banks and CRR was largely redundant.
Finance ministry proposal to pay interest on CRR deposits
With a view to give some reprieve to the banks and to persuade them to bring down the lending rates, the finance ministry is reported to have mooted the idea of giving 7% interest on CRR deposits to banks, and then ask them to lower the lending rates, as the RBI has not so far resorted to any easing of the monetary policy. If the RBI concurs with this proposal, the banks will earn interest at 7% p.a., and this will bring down the cost of funds, enabling them to pass on the benefits to borrowers by lowering their lending rates. It is not known whether the RBI has agreed to this proposal and whether it is legally in order for the RBI to pay interest on CRR balances, when such a provision existing earlier was withdrawn by amending the RBI Act in 2007.
What is the practice followed in developed countries?
Most of the central banks in developed countries have dispensed with the system of CRR and have been using the tool of open market operations to control inflation. While countries like the UK, Canada, Sweden, Australia and New Zealand have zero reserve requirements, USA has a graded system of reserve requirements depending upon the size of the bank. It starts from zero percent to 10%, but the critical point is that this reserve is not on the total demand and time liabilities of the bank, but on dollar balances only on net transaction accounts, i.e. only on checking accounts, which form a much smaller part of the total liabilities of the bank. And unlike in India, the entire cash held by the banks in their own vaults is considered as reserve and only the balance amount is required to be deposited with the Federal Reserve—the central bank of the US. Surprisingly, Federal Reserve pays interest on the reserve balances maintained with it including on the excess balances, and the current rate of interest paid is 0.25% p.a., which is equivalent to their discount rate at present.
Story of a whipping boy
Here is a story going round the banking circles. There was a disciplined school teacher in village school, who ensured that his students followed value systems, etc. He had one student, coming from the richest family in the village, but the boy was very indifferent in his studies, very mischievous and would not listen to the teacher’s admonitions. But the teacher was afraid to punish him as it might boomerang against him due to the influence commanded by the boy’s parents with the school management. The teacher would, therefore, pick up a poor man’s son and though he was innocent, punish him for all the wrong-deeds of the rich man’s son, making the poor student a whipping boy, much against his own wishes.
Are banks too whipping boys for the ills of the economy?
This is exactly what is happening in the banking industry today. The RBI puts the onus squarely on the government for the rising inflation in the economy, saying that it is due to supply side constraints and the fiscal deficit caused by the rising subsidy burden but can do nothing about it. And it does not bring down the interest rates fearing that it would fuel inflation and tinkers with the monetary policy by reducing the SLR, when the banks needed reduction in CRR to shore up their profits. RBI expects the banks to reduce their lending rates without any corresponding reduction either in repo rate or CRR. This amounts to punishing the banks for the inaction of the government.
The corporate debt restructuring scheme (CDR) was devised by RBI to give relief to the industries which are in distress due to the slowdown in the economy. And now banks are blamed for the huge restructured loans in the banking industry, and are asked to increase provisioning against such restructured advances, affecting their profitability.
Here is another example. In the wake of deficit monsoon and the failure of rain gods, banks should have been advised to be discreet in lending to agriculture to ensure that they do not accumulate further NPAs in agricultural sector. Instead, the government is pushing the public sector banks to lend more, having set a target of Rs5.75 lakh crore for the current financial year, an increase of 20% over last year. And the banks may reluctantly comply with the orders of the government and achieve the set target, with a ray of hope that these loans would be recovered when the government comes out with another loan waiver scheme next year before the general elections. This may throw the fiscal deficit to winds, but who cares?
Slowdown in the economy is due to policy inaction on the part of the government, but the banks are facing the music of increased non-performing loans and higher provisioning on restructured advances. Instead of giving the banks powers to change the management of badly managed units, so as to bring down the restructured advances, the government is busy issuing instructions to public sector banks as to how to manage their liabilities, which, in fact, is the domain of the RBI.
The final verdict
With the rising non-performing assets of the banking industry, growing number of accounts falling under the hammer of corporate debt restructuring, dwindling margins of commercial banks and the strain on their profitability, there is every justification for the commercial banks to clamour for marked reduction in the CRR, which alone can provide some reprieve to the banking industry.
The final verdict, however, is in the hands of the RBI. If the mood in the RBI is any indication, and going by the views aired in the media by some of the economists who were part of RBI in the years gone by, there appears to exist an ego clash with the government, due to which the RBI may not easily relent either to reduce, leave alone abolishing, the CRR or to pay interest on the CRR balances for the time being, until the core inflation comes down to the comfort zone of 5% as repeatedly stated by the governor of the RBI.
But from the angle of practicality and pragmatism, with a view to assist the banks in meeting the capital adequacy norms prescribed by the RBI under Basel III norms, and in view of the threat of a downgrade in rating of banks hanging like a Damocles’ sword over the banking industry, RBI should not be carried away by the economist’s dogma, as the country’s banks do need an olive branch to hang on in this difficult period in history.
In the words of Shakespeare, banks in our country are “more sinned against than sinning”.
(The author is a banking analyst. He writes for Moneylife under the pen-name ‘Gurpur’)