Innovative policies for realty sector need of the hour: Vinod Rai, CAG

Banks Board Bureau Chairman, Vinod Rai, is enthusiastic about the outcome of the government’s demonetisation drive. The scheme, meant to clamp down on black money, is a good move for banks, especially PSU lenders, he said.

Late on November 8, Prime Minister Narendra Modi announced that currency notes of Rs 500 and Rs 1,000 denomination in circulation will cease to be valid and the central bank will issue new Rs 500 and Rs 2,000 notes. A few days later, the government announced that new Rs 1,000 will be circulated as well. Rai, unlike many others who have been critical of the drive, asserted that the move has been timed well, but said that it will be tough to ascertain the exact wealth that will come back as Comptroller and Auditor General audits only PSU banks.

The government, however, needs to put in place policies that ensure that black money generation doesn’t happen in future, Rai said. The government also needs innovative schemes for the real estate and construction sector — both of which have been witnessing a slow growth in recent months — he said, adding that the Reserve Bank of India and PSU banks have been discussing issues related to construction sector.

Rai also is optimistic that digitisation will spike further once the demonetisation drive ends. He added that already rural masses are getting familiar with the usage of debit and credit cards. Below is the verbatim transcript of Vinod Rai’s interview to Latha Venkatesh on CNBC-TV18.

Q: We are perhaps living through one of the most momentous decisions in the century, maybe even more by this demonetisation announcement or de-legalising announcement. First, the banks whom you are very close to, do you think this will worsen their non-performing asset (NPA) problem or do you think this will largely leave that untouched?

A: Yes, we are in this conference just now and I am convinced after this discussion with people over here that this move which as you said is a very major move and it has been timed very beautifully. It has been executed with a great deal of planning and in terms of short term pain that we had to face is behind us is going to work very well for banks and public sector banks (PSB) in particular specially because PSBs have a large branch network and they are prevalent in the rural areas too.

Q: You are in a vantage position as having been the Chief Auditor of the country. You will have some idea of the extent of undeclared incomes. What do you think is the amount of notes that will not come back. We understand that the total amount of Rs 1,000 and Rs 500 notes is about Rs 14.5-15 trillion. Do you think that about Rs 1-2 trillion may not come back at all? Any estimates at all?

A: It is very difficult for me as an auditor to be able to give you that estimate largely because we used to audit or the Comptroller and auditor general (CAG) audits only public sector or government. So, it is very difficult for us to make an assessment of how much would be the amount which will not come back. But I would certainly feel that the numbers that you mentioned are even by any conservative estimate those numbers would be the appropriate number.

Q: Do you think the auditor’s office and generally the digitisation level in the banking system and in the tax department is good enough now to use the audit trail left behind when the money is returned?

A: Absolutely. By this move not legalising that tender any more is taken care of this stock of currency which was floating around. Now what we have to address is the flow issues. On that I am confident that the government will come out with some policy measures which will attend to the flow to ensure that in future these kind of people do not get away, that is number one. Number two, to the extent that large sums of money have come into the banking formal channels I am reasonably certain that there would be an audit trail which will be easy to track and some defaulters we will certainly be able to put a finger on to them.

Q: I don’t know how closely as the auditor general you have worked with the tax department or whether you have spent any time over there, I remember you more as the DFS, in charge of the financial services unit. But it is very obvious that a lot of people are trying to use what we call money mules asking for no frill accounts or Jan Dhan accounts to be used to load some of their unaccounted cash. The Reserve Bank of India (RBI) has warned, they are seeking reports from the banks and the bankers told us that they are sending daily reports. What can be done. If something like 50 lakh money mules were used can this meaningfully – has the tax department got the bandwidth to meaningfully go after them and find the final culprit?

A: No, I am not saying that each one of these 50 lakh mules that you talk about could be tracked down but large number of these specially with large amounts coming in can be tracked and should be tracked. And it should be easy for the tax department to be able to concentrate their efforts on to this so that we send a clear message that you can’t get away with trying to hoodwink government all the time and Jan Dhan accounts which are being misutilised by these proxies I am sure audit will be able to put a trail on to them and that the tax department would be able to investigate these cases.

Q: So, this cleansing moment we are going through will not just cleanse the stocks you think? We could meaningfully address the flow of black money?

A: This is the opportunity for us that the cleansing that we have done or the government has done on these stocks is taken care of and that we now conceptualise policies which will ensure that the flow does not get generated going forward. I am sure government is in the process of laying out a road map where all concerned departments come together and create a cohesive policy which will address that issue, I am confident that it will work.

Q: Are you getting a sense from the bankers you speak with regularly that digitisation, use of maybe Rupay cards, M-PIN will get a quantum leap after this demonetisation?

A: Most certainly. In fact we were in the job of trying to encourage digitisation, use of cards in the past also but this will certainly send a very correct message and actually the encouraging part of it is that even in rural areas semi-urban areas the number of people wanting to use cards or what I would say that the fear that they had about using cards is now kind of fading away and they are confident, they are becoming familiar in using those cards. Jan Dhan accounts to a large extent have been very useful for that.

Q: I wanted to ask you as well about the real estate sector. Again you have some vantage point because of the amount of auditing you did and approximately to finance ministry and tax departments is that likely to destabilise a large sector for a longish bit because real estate closely ally to it is loans against property from banks and non-banks, allied to it is cement demand, allied to it is probably construction, workers, employment, paint industry, do you think we can destabilise a large part of the economy for a longish bit?

A: Real estate sector is already at present slightly depressed and things have been going slow for the last one odd years or so. Now, if government comes forward with certain measures, some very well conceptualised schemes to give a boost to that, for example the way the National Highways Authority of India (NHAI) came out or the ministry of roads and transport came out with this scheme regarding release of funds which we are under arbitration. These kind of innovative and imaginative schemes that the government comes out with this is the right time for government to be addressing those issues because if we can bring out the right kind of schemes to address real estate or the construction sector today government would be in a position to be able to give a major boost to as you said, as you rightly said construction which means cement, steel, workmen and things like that and that will be a driving factor going forward.

Q: There were some conversations happening between bankers and the RBI, is something on the anvil at all from the government?

A: About government I really can’t say because I don’t really contribute there but yes, there have been discussions going on between the RBI and PSBs for bankers in general and I am sure government is getting that feedback and the moment that the government can start concentrating on that we will have some results emerging soon.

Q: The leadership battle in the Tata Group of companies, is it conceivable at all that any company can be run in conflict with the dominant shareholder? What are your comments on this boardroom battle?

A: That is a very fine balance that we have to make in any boardroom. Between the dominant shareholder, between the promoter and the CEO or the management of the company it is a very fine balance that has to be driven and we have had examples from across the globe, you take large banks, you take large companies which are either promoter driven or large shareholder driven you see these kind of fine balances get upset but that is the way the story unfolds in all the boardrooms.

Q: Any lessons you will draw from this because we have some independent directors who think that the incumbent chairman did a fine job, they have backed him, there are some independent directors and we spoke to them yesterday who said that you can’t live in conflict with the dominant shareholder and so they did not back the incumbent, what are your lessons from this boardroom battle?

A: That is what I mentioned. It is a question of driving a fine balance. But one good that has emerged about this entire thing is that independent directors have asserted their independence and independent directors have looked to the health of the institution or the agency or the entity or the board that they sit on and to a very large extent they have come out faithfully aligned to that entity. So, on the whole it has been circumstances being what they are the independent directors have really played their card well.

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