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Monday, January 31, 2011
Solar ATM Set Up By SBI At Banni
Banks urged to shed negative attitude towards industries
Industries Minister Renu Kumari Kushwaha on Saturday appealed to all stakeholders to have a positive approach towards rehabilitation of viable sick industries and said the banks, in particular, should shed their negative attitude in providing loans to the fledgling industries . Addressing a seminar on "Rehabilitation of Sick and Closed Industrial Units in Bihar" at the Bihar Industries Association (BIA) auditorium here, she said that in the changed scenario, every stakeholder had the responsibility to get Bihar on the track of industrial development. She said industrialists should also utilise the loans for the growth of their units and not divert them as was done in some cases. Bihar Industrial Area Development Authority 's plots should be utilised only for running industries and not for doing trade. BIA, led by its president SP Sinha, presented a background paper on the causes of sickness of industries and the measures needed to revive them. BIA secretary general Sanjay Goenka submitted to the principal secretary, industries, and other officials, the papers relating to some "viable sick industrial units" that could not be rehabilitated earlier despite being recommended for the same by a high-level committee. Many such entrepreneurs narrated their plight to the minister. Principal secretary, industries, C K Mishra, stressed the need for attitudinal changes among bankers for removing sickness of industries. He said entrepreneurs should also have the determination to run their industrial unit overcoming all odds. RBI's Regional Director G Mahalingam said the CD ratio of banks will improve if banks advance industrial loans. He assured to look into the genuine demands of industrialists for revival of their sick units.
RBI Guv to appear before PAC on 2G spectrum allocation
Continuing with its examination into the 2G spectrum allocation, Parliament's Public Accounts Committee has called RBI Governor Duvvuri Subbarao on Thursday to record evidence in connection with the matter. The Committee, headed by senior BJP leader Murli Manohar Joshi, is expected to ask Subbarao whether any bank regulations were violated while making the financial transactions related to the 2G spectrum allocation. A Raja had to quit as Telecom Minister following a furor over the alleged irregularities in the 2G spectrum allocations. Subbarao, who was the Finance Secretary when the 2G spectrum allocations were made in January 2008, is also expected to face questions on the issues, including on changes in the entry fee for telecom operators, he had raised with the Communications Ministry.
Banks under RBI lens for high credit-deposit ratios
The Reserve Bank of India (RBI) is expected to summon banks with high credit-deposit ratio (ratio of credit to deposit growth) and ask them to take appropriate action to bring it down in order to prevent credit growth outstripping deposit growth. Banks with incremental credit-deposit ratio in excess of 100 per cent will be the first ones to be summoned. The ratio going above 100 per cent means banks have lent more than they raised in deposits. RBI is worried that banks may be borrowing from the repo window (overnight refinance facility provided by the central bank) and call money market to fuel credit growth. RBI deputy governor Anand Sinha, in charge of banking operations and development, is expected to meet each of these banks. He may ask the banks to curtail credit growth until their deposits catch up.
Deceleration in FDI is no surprise
Foreign direct investment (FDI) inflows into India in 2010 are said to have decelerated by 31% in 2010, according to a report by the United Nations Conference on Trade and Development (UNCTAD), which is based on data from the Reserve Bank of India (RBI). China, Hong Kong, Malaysia, Singapore, Indonesia and Thailand, are reported to be beneficiaries of higher FDI inflows during the year. This should not come as a surprise at all. Systematically, the regulatory framework governing FDI has become increasingly ambiguous. FDI policy, through the past two years, has taken on a pretentious air of becoming "smart" and ostensibly "plugging loopholes" even without pointing out the rationale for the policy and the intended state of affairs. The entire framework of determining how to treat Indian companies on the basis of whether they are owned and controlled by foreigners is another such example. Without corresponding clarity from the Reserve Bank of India (RBI), which is the regulator of exchange controls, bizarre and unthinkable propositions on how an Indian company should conduct itself the moment majority ownership moves to foreign hands, abound. Would banking companies like ICICI Bank and HDFC Bank have to be treated as foreign entities because they are majority-owned by foreigners? Long-standing companies that have been in such ownership patterns even prior to the policy changing would continue to brave the ambiguity and fight it, but new capital can never come in without full clarity. Undoubtedly, FDI inflows have to slow down. ith other convertible instruments, the RBI has contributed its own share of ambiguity. It recently sent out letters to various issuers of convertible debt, asking them to confirm the precise number of shares that would be allotted upon conversion of the instruments, simply ignoring the very logic behind issuance of convertible instruments — of rewarding Indian issuers with a higher valuation if they in fact performed to the level they promised their investors, when taking their money. Worse, the law governing pricing for cross-border transfer of listed shares has been mindlessly linked to price regulations framed by the Securities and Exchange Board of India in a completely different context with a different policy objective. The Foreign Investment Promotion Board, a motley group of ministries that was cobbled together to get FDI going when India opened up her doors to FDI in 1991, has become anachronistic. The surprising absence of a dialogue between the draftsmen of FDI policy in the Government of India, and the draftsmen of exchange control policy in the RBI, is also remarkably surprising. Each is taken by surprise by the other. Worse, even the ministry handling FDI policy (commerce ministry) is different from the ministry that administers matters relating to the RBI (finance ministry). Either exchange controls should be taken away from the RBI, or more conveniently, FDI policy may be taken away from the commerce ministry. Each has a role to play, but the ambiguity they give rise to, without talking the same language, makes a strong case for merging the two arms, or doing away with one of them.
SBI chief stands up to RBI
State Bank of India Chairman O P Bhatt says the bank did differ with the Reserve Bank of India’s views on a host of issues, but it was unfair to blame the country’s largest bank for not taking care of the interests of the aam aadmi (common man). “My brief went much beyond looking after the interests of a select group of Indians only,” said Bhatt, whose five-year term as SBI Chairman ends in March. He is in Davos to attend the World Economic Forum. Bhatt admitted there were quite a few issues on which he “differed” with the regulator, but that is in the nature of things. “If you are the largest financial conglomerate in the country, often the regulator may do things that are not appropriate for us, or for the system. It was our responsibility to give feedback. When we give it on a regular basis, sometimes this gets into public domain. But let me add, there were no interpersonal issues here.” When asked how he managed to defy the regulator so often, Bhatt said defiance was too strong a term to use, but hastened to add that had he been wrong, the finance ministry or the regulator would not have allowed him to continue with certain schemes. “What power does an SBI Chairman enjoy? In any case, I am a simple Gadhwali. No one knew me and I didn’t have any political patronage either. So I could easily be removed if I had done anything wrong,” an emotional Bhatt said. On RBI’s disapproval of teaser loans (SBI is the only bank to continue with the special home loan scheme till March), Bhatt said he would look at the quarterly data and if the picture was good, he would extend it beyond March. “After that, it is up to my successor.” In strong defence of the scheme, the chairman said the bank had given home loans to nearly 300,000 people in India. “Many Indians own homes because of SBI. I am not fighting with RBI, but only clarifying it. I have not teased anybody, there is no risk and there is no opacity. There has also been no dilution of know-your customer norms or due diligence. We only gave discount on the rate for the first two to three years and the rate is higher than the cost of my funds. So what is wrong in what SBI does?” Bhatt said. According to him, almost 80 per cent of the home loans given by the bank are below Rs 10 lakh, which means the aam admi. “The NPAs on my loan are still the lowest and I also have the collateral of the customer’s house. So what wrong has SBI done?” He said SBI did what any efficient commercial banker would have done. It used the special home loan scheme for customer acquisition and more business – home loan insurance, car loans, personal loans, etc – without any risk to the bank. After the Lehman crisis in December 2008, the bank had a surplus of Rs 1 lakh crore as there was hardly any credit off-take. “If I had to park it with RBI, I would have got 3.5 per cent. We gave loans to common people by reducing the rate of interest to 8 per cent as this was much better for the bank,” Bhatt said. On the differences with the regulator over the 70 per cent provisioning coverage ratio, Bhatt said depending upon the mix of its NPAs, SBI provided for “enough” provisioning on its books. “If RBI suddenly asks us to hike our provisioning coverage ratio to 70 per cent, it reduces my profits and my share prices take a hit. What is the logic of such a decision? Are you penalising a bank which has low NPAs?” he said. SBI has provided for 54 per cent provisioning coverage ratio against the regulatory prescription of 70 per cent. Referring to RBI’s disapproval of the guarantee given by SBI to bonds issued by Tata Motors for refinancing loans taken for the Jaguar Land Rover acquisition during the slowdown period, Bhatt said it was unwarranted as the bank had to look for new ways to help its valued customers. In any case, SBI took the decision after asking RBI. It followed all norms and besides helping the company, it also helped the bank earn good commissions. “Since the concept was new, the regulator raised some issues. We went to the government which said SBI didn’t do anything wrong. In fact, such guarantees will deepen the corporate bond market,” Bhatt said. Asked whether his successor will have a tough act to follow, Bhatt said he hoped he had done enough to sort out things that would “make life easier” for his successor.
NHB sees upward bias in refinance rates
National Housing Bank (NHB), the regulator for housing finance companies (HFCs), may increase its refinance rate. This rate hike would come in less than a week after the Reserve Bank of India (RBI) raised key policy rates by 25 basis points. “We have started the process of analysing the cost of fund situation. Though we are yet to take a call (on increasing the lending rates), there is an upward bias in the interest rate in the market,” R V Verma, chairman, NHB, told Business Standard. A hike in refinance rates would lead to increase of cost of funds for HFCs, and consequently, a rise in interest rates for housing loans. For larger HFCs, such as Housing Development Finance Corporation, the dependence on refinancing is much less because they raise deposits from public. For smaller players, where dependence is 20-25 per cent, this hike would put further pressure on their cost of funds. Other option of raising funds for HFCs include non-convertible debentures, subordinate bonds, bank finance and public deposits. However, the refinance route is the cheapest. Typically, NHB lends to HFCs at 8 per cent. NHB last raised rate 18 months ago by 25 basis points. At present, the prime lending rate of NHB is 10.25 per cent.
Banks seek capital subsidy for financial inclusion
Banks have sought capital subsidy and other incentives from the Uttarakhand government to complete the financial inclusion process in the hill state where most of the villages are situated in remote areas. At a meeting held in New Delhi as an initiative of the Reserve Bank of India (RBI), the banks’ officials were of the view that since providing banking facilities in far-flung villages affected profitability of the banks, the government must provide some incentives to the banks. Representatives from 12 banks participated in the meeting. Under the financial inclusion programme, a total of 475 villages have to be provided with banking facilities through branches or business correspondents (BCs). According to the RBI guidelines, villages with population above 2,000 have to be included in the financial inclusion process. But under the Atal Gram Yojna, most of the villages have less than 2,000 population. “We have set up a sub-committee under the State Finance Secretary. This committee will organise a meeting to look into the various demands of banks in this regard,” said Principal Secretary (Finance) Alok Jain.
'Banks adopting new ways to reach out to needy'- H.K.Soni, DGM, RBI
New microfinance approaches were needed to reach out to the poorest and the deprived section of society in the country, said Deputy General Manager (DGM), Reserve Bank of India, H.K. Soni during the valedictory function of the two-day national conference on inclusive growth and microfinance access (CIGMA 2011), organised by the Faculty of Management Studies (FMS), Banaras Hindu University, on Sunday. Saying banking institutions in the country were being asked to adopt service area approach to reach out to the needy, the DGM emphasised that under the approach, rural branches were given a service area of 15 to 20 villages for operation of services, and other banks were allowed to set up a branch in that area only after obtaining a no objection certificate. He also pointed out the need for introducing flexible service like repay weekly and daily small instalments apart from simplification of procedures to open a bank account and facilities like access credit and doorstep banking. Caitlin Wiesen, country head, UNDP, highlighted severe constraints that were placed on the operational and financial autonomy of the banks. She also said microfinance institutions (MFI) were the only method to perform important task of financial intermediaries in the country. Earlier, a number of technical sessions and panel discussion on microfinance regulatory framework, responsible microfinance, women entrepreneurs were held. Dean (FMS) SK Singh, secretary general (CIGMA 2011) HP Mathur and other senior faculty members were also present on the occasion.
SBI sets up call centres for NPA recovery
With mounting pressure to set aside substantial amounts each quarter to improve provision cover for bad loans, State Bank of India is using every possible way to step up recoveries from non-performing assets. The country’s largest lender has opened two call centres at Gurgaon and Chennai to deal with NPAs and Special Mention Accounts — those in a zone in between standard assets and NPAs. It has also set up account tracking centres at 14 local head offices. As a step to improve tracking and recovery, the bank has begun assigning SMAs and NPAs to individual staff members. “This step will ensure a sense of ownership in dealing with stress asset cases,” a senior official said.
Groups eyeing banking licences may have to wait a little longer
Conglomerates eyeing banking licences may have to wait a little longer. The government is of the view that corporate houses should be allowed to open new banks in the country only after the banking laws are amended to empower sector regulator, the Reserve Bank of India , to monitor the parent or subsidiary companies of a bank, said a senior finance ministry official. This follows concerns raised by the central bank that the ownership structure of large business groups may lead to a turf war among regulators if they were given licences to run banks. "There are certain amendments proposed," the official said. "We need to ensure that there is a proper monitoring mechanism in place." RBI is yet to issue the final guidelines on new bank licences. The bank had in August last year released a discussion paper on the entry of new private banks. In December, it put out the gist of the comments it received in response to the paper.
Policing frauds: Bankers talk to ICAI
Stung by the recent housing loan scam and the Rs 300-crore Citibank fraud involving a relationship manager in Gurgaon that have dented the image of the domestic banking industry, the Indian Banks’ Association (IBA) has proposed to chalk out a new way to verify the authenticity of documents provided by loan applicants.The IBA has also written to the Institute of Chartered Accountants of India (ICAI) seeking suggestions to help its policing of fraud. The finance ministry has already asked the banks to adopt all means to eliminate possibilities of any fraud. The Reserve Bank of India (RBI) has also directed banks to fix staff accountability to prevent frauds. “Banks should ensure that the reporting system is suitably streamlined so that frauds are reported without any delay,” the central bank said in a circular last year.
Monetary policy: Implications for Common Person - S. S. TARAPORE
SEBI BOARD TO SKIP JALAN REPORT
The Bimal Jalan Committee report will have to wait for some time to get the regulatory nod. The board of the Securities and Exchange Board of India (Sebi), scheduled to meet on February 7, has not included it in the agenda. While the Takeover Code will be the highlight of the board meet, a final decision is unlikely due to the finance ministry’s reservations over certain issues. According to people familiar with the development, Sebi officials need more time to deliberate on the recommendations of the committee, formed to review the ownership and governance of market infrastructure institutions (MIIs), including stock exchanges, depositories and clearing corporations. “There are certain issues (in the Jalan report) on which consensus has not been reached and some more time is required for discussions,” said a person privy to the developments. “It will be placed before the board only after the regulator is through with its own share of deliberations,” he added on condition of anonymity. This will also be the last board meeting for chairman C B Bhave if he does not get an extension. His threeyear term ends on February 17.
Sunday, January 30, 2011
Don’t sign papers without knowledge of contents – Lalit Srivastava
Lalit Srivastava, Banking Ombudsman of the Reserve Bank of India (RBI) for Punjab, Himachal Pradesh, Chandigarh, Panchkula, Ambala and Yamunanagar has stressed that before signing a document, one must study its contents carefully and not sign it “in good faith”, since the contents of the document are considered binding in a court of law. During an interaction with people at Yes Bank in Sector 9, Chandigarh on Friday, Srivastava said that a common grievance among many people is that they were swindled of their money after signing a document but were not aware of its contents. The Banking Ombudsman highlighted that such ignorance is not accepted legally. Srivastava pointed out that during the last year and a half during his stint as Banking Ombudsman, he had received about 6,000 complaints from the areas under his jurisdiction. "About 2,000 of these were not maintainable on various grounds and were dismissed. The remaining 4,000 were taken up and in a large number of cases, the decisions went against the bank concerned. Almost all the decisions were accepted and implemented by the bank and there would be only 10-15 cases where the bank appealed against the order to the RBI Deputy Governor. If the complainant is not satisfied with the order, he too can seek remedy in a court of law,” said Srivastava. He highlighted that any person who has a grievance against a bank should first lodge a complaint with the respective branch and await the bank’s reply for a month.
RBI warns on inflation risk; rate rise seen
The Reserve Bank of India (RBI) said inflation may stay high for longer than earlier anticipated due to a rise in global commodities prices and domestic supply pressures that have pushed up food prices. The central bank also said downside risks to growth had receded. After raising rates six times since March to tame inflation, the central bank paused in December but indicated at the time that further rate hikes were possible, with inflation remaining well above its comfort zone. “As a result of newer factors and increased risks, the inflation trajectory is likely to show some persistence and moderate only gradually.” The central bank also called for measures to address structural drivers of inflation, which include inefficiencies in the agricultural sector. A sharp rise in food prices, a key driver of inflation in India, has been putting upward pressure on broader prices. The wholesale price index, the most widely watched gauge of prices in India, rose 8.43% in December from a year earlier, compared with 7.48% in November and well above the RBI’s March-end projection of 5.5%.
RBI Credit Policy: Debt instruments stage a comeback
The interest rates in the debt market that are already at quite high levels due to the multiple rate hikes by the RBI last year are expected to harden further in the near term. The RBI expressed concern over the high inflation rate due to the sharp increase in food, energy and commodity prices, and gave indications of further monetary tightening, going forward, to tame the inflation rate. The monetary policy tightening by the RBI has brought debt instruments back into the limelight as their yields have gone up due to the interest rate hardening. The rates on bank fixed deposits have gone up to almost nine percent levels. On the other hand, the volatility and stretched valuations in the stock markets have tilted the risk-return equation towards risk. Therefore, risk-averse investors are increasingly looking at increasing their portfolio allocation to debt-based instruments.
HEED RBI’S WARNING
On Tuesday, the eve of Republic Day, Reserve Bank of India Governor D Subbarao sent out a clear warning: inflation was here to stay due to a variety of factors, both domestic and global. His prescription for controlling inflation — raising interest rates by a mere quarter per cent — has come in for much criticism from economists who feel that the unabated inflation, which worsened in December, warranted a much bigger rate hike to signal that easy credit will not be tolerated any longer. Credit or loans by banks has grown faster than what the RBI projected, while growth in deposits has slowed. Dr Subbarao felt anything over a quarter per cent hike would limit his leeway in case inflation remains stubbornly high in the coming months. The RBI’s objective is limited to curbing inflation, which is spilling over from food to manufacturing. It is well known that monetary tools for controlling inflation are limited when it is caused mainly due to high food prices — particularly of items of daily consumption such as fruits, vegetables, milk, eggs, fish. The RBI chief stressed the need for “rapid action” to increase the output of several products whose demand is rising due to changing consumption patterns, reflecting increasing incomes. The government would do well to heed Dr Subbarao’s warning: unless meaningful output-enhancing measures are taken, the risk of food inflation getting entrenched looms large. The government should realise that food imports are not an easy option, given that global food prices have risen by 25 per cent in December, according to FAO estimates. A top FAO official noted in Davos earlier this week that the current world food crisis could be ascribed to falling investments in agriculture. Much of the rise in food and commodity prices can also be blamed on speculation — it would be in India’s interest to support French President Nicolas Sarkozy’s proposal to curb speculation in all commodities. The FAO official said he felt prices could get out of hand unless all futures markets were regulated — in fact he warned of the possibility of food riots like those seen in 2007-08. For the Manmohan Singh government, meanwhile, time may be running out — the importance of finding an urgent solution to the food crisis simply cannot be overestimated.
Credit Policy targets inflation
India's annual industrial output in November grew at its slowest in 18 months but headline inflation in December accelerated with costlier food items. These confirmed expectations of a rate increase. The RBI said demand-supply mismatch and rising global commodity prices will continue to put pressure on inflation, which could hurt economic growth. 'Persistent high inflation could endanger the growth objective and also amplify risks to inclusive growth. Containing inflation will have to be the predominant objective of the monetary policy in the nearterm', the RBI said in its macroeconomic review released on the eve of the quarterly policy. It further said the upside risk to inflation has increased, and supply side constraints and high global commodity prices could dampen the impact of a tight monetary policy. According to the RBI, while inflation is likely to soften in the coming months, it is likely to stay elevated above the earlier anticipated path. It has projected overall inflation to be at 5.5 percent by March end. The overall inflation for December shot up to 8.43 percent on high prices of food items, from 7.48 percent in November. The RBI said continued high food inflation is the main cause for the overall inflation holding up, adding that return of inflation to a more acceptable level will be gradual.
Saturday, January 29, 2011
Shri S.Karuppasamy appointed as Executive Director
Shri S.Karuppasamy, Regional Director, Kolkata has been appointed as Executive Director. The portfolios looked after by him are as under:-
1. Department of Expenditure & Budgetary Control
2. Department of Information Technology
3. Legal Department
4. Urban Banks Department
Tax vex on bank arms resolved
Foreign banks converting their branches into wholly-owned subsidiaries will not be required to pay capital gains tax from the transfer of assets and properties during this procedure. The finance ministry has resolved the tax tangle in the issue and wants the Reserve Bank of India (RBI) to go ahead and allow foreign banks to convert themselves into wholly-owned subsidiaries at the earliest. “There were some tax issues in conversion of branches into wholly-owned subsidiaries. We have resolved that matter. The new norms should come as soon as possible,” said a finance ministry official. Last week, RBI had released a discussion paper on the presence of foreign banks in India. It had sought comments on the subsidiary-led model for foreign banks operating in India, instead of the existing branch mode of expansion. It also proposed incentives to promote the subsidiary route. In its discussion paper, RBI had said that for capital gains tax arising from the transfer of property, goodwill and other assets of a capital nature to its newly incorporated subsidiary in India, the provisions of Section 47(iv) of the Income-Tax Act, 1961, would be applicable to foreign banks converting their branches into subsidiaries. Section 47(iv) exempts from capital gains tax the transfer of a capital asset by a company to its subsidiary if the parent company or its nominees hold the entire share capital of the subsidiary or the subsidiary company is an Indian company. The exemption, however, does not apply if the parent company dilutes its stake in the subsidiary before a period of eight years. “You have to continue with the parent-subsidiary relation for eight years if you want the exemption,” said Hiresh Wadhwani, a tax partner with Ernst & Young. He added that for full capital gains tax exemption without a lock-in of eight years would require an amendment to the law. The issue has been resolved under Section 49(e) of the Income-Tax Act, which states that where the capital asset becomes the property of an assessee under any such transfer, the cost of acquiring the asset would be deemed to be the cost for which the previous owner of the property acquired it. “If there is no change in the value of assets, there will be no capital gains tax,” explained another official. The first official also said the central bank’s discussion paper was in line with the finance ministry’s thinking that a subsidiary model would help contain risk within the country. “The government greatly favours this,” he said. He added that just like domestic banks, subsidiaries of foreign banks would be allowed to open branches in Tier-3 to Tier-6 cities, unlike branches of foreign banks. The subsidiaries would be considered Indian banks and regulated by RBI, the official added.
Deposits shrink by Rs 26,000 cr
After surging around Rs 2 lakh crore in the last fortnight of December, bank deposits fell Rs 25,742 crore during the 14-day period ended January 14. According to the Reserve Bank of India (RBI) data, deposits grew 16.43 per cent on a year-on-year basis till January 14. Credit off-take dropped Rs 43,327 crore during the fortnight and grew 23.6 per cent on a year-on-year basis. In the third quarterly monetary policy report, RBI had raised concerns over the widening gap between credit and deposit growth. RBI asked banks to bring down their incremental credit-deposit ratio or face action. RBI has projected 20 per cent credit growth and 18 per cent deposit growth for 2010-11. The incremental non-food credit-deposit ratio rose to 102 per cent by end-December due to the gap between credit and deposit growth. In the corresponding period of the previous year, the ratio was 58 per cent. To lure customers, banks have raised deposit rates by up to 250 basis points in the past few weeks. “We recently increased deposit rates, so the full impact will be seen towards January-end. Our daily monitoring has shown a slight increase,” said a senior executive of State Bank of India.
PayPal Changes Limits For Indian Users After RBI Guidelines
Following the latest guidelines issued by the Reserve Bank of India, popular online banking platform Paypal has made several drastic changes to their user agreement for India. Paypal has already issued notices to their Indian customers about the change. The PayPal letter states: "As part of our commitment to provide a high level of customer service, we would like to give you a 30-day advance notice on changes to our user agreement for India. With effect from 1 March 2011, you are required to comply with the requirements set out in the notification of the Reserve Bank of India governing the processing and settlement of export-related receipts facilitated by online payment gateways (“RBI Guidelines”).
RBI raps banks for misreporting loans to priority sector
Flagging the issue of misreporting of priority sector lending (PSL) performance by banks, the Reserve Bank of India (RBI) on Friday said loans wrongly classified as PSL would be included in the shortfall under priority sector targets. The annual financial inspection of books has shown instances of misclassification of loans under priority sector. Such misreported loans in the current financial year would be added to the shortfall reported on the last reporting Friday of the following year for allocation to various funds, RBI said in a communication to banks. Also, banks buy priority sector loans from intermediaries like microfinance institutions and non-banking finance companies. Banks reckon the present value of these loans by discounting them at their lending rate, which is typically much lower than the actual rate charged to end–borrowers by such intermediaries. Such practice leads to overstating of the actual amount of priority sector loans to the extent of the premium paid by banks to such intermediaries. Hence, must report the nominal amount actually disbursed to end priority sector borrowers and not the premium-embedded amount paid to the intermediaries.
Jain Irrigation to form non-banking finance company, raise Rs700 crore
Jalgaon-based Jain Irrigation Systems (JISL) plans to set up a non-banking finance company (NBFC) to finance farmers’ needs, said managing director Anil B Jain. The company’s board has already approved the move and will apply for a nod from the Reserve Bank of India for the same this quarter. “It normally takes 3-4 months for the approval to come through,” said Jain. JISL is hoping that the NBFC will help boost its sales. “Farmers need timely and adequate credit which the NBFC can provide and it can also improve JISL’s balance sheet by reducing debtors,” he added. To begin with, the company will finance just the purchase of it own products. JISL, the world’s second largest micro irrigation systems (MIS) maker after Israel’s Netafim, and India’s biggest, currently aids farmers in sourcing credit to buy its products. There are also government subsidy schemes for the same. Jain said the company also plans to raise by June Rs700 crore through a qualified institutional placement (QIP). “It will partly go into capital infusion for the NBFC and partly reduce our working capital debt,” Jain said. The JISL board also on Friday approved the hiving-off of its solar division, under which it makes solar lanterns, solar water heaters and, lately, solar water pumps. For the three months ended December 31, JISL saw its net sales grow by less than 10% to Rs693 crore while its net profit rose 24.6% to Rs71.47 crore. Jain said the heavy and unseasonal rains dented the topline. “In the first nine months, our irrigation business grew by 27% while we expected a growth of 30%. But the current quarter is better,” he said. JISL has an order backlog of Rs1,100 crore, most of which is in drip irrigation.
OMO, deposit accretion picking up: RBI
The country's apex bank, the Reserve Bank of India (RBI), today said that Open Market Operations (OMO) in the bond market is more a monetary policy tool and not a debt management instrument. "It is more of a monetary policy tool and not a debt management instrument," a senior RBI official told reporters here today. OMO is not being used to influence bond yields, he said. "OMO is done in a more enduring manner and not to influence the yield curves," the official said. On the statutory liquidity ratio (SLR) now at 24 per cent, the RBI's Deputy Governor, Subir Gokarn, said the apex bank presently feels that there is no need to tinker with it. SLR is the amount of liquid assets, such as cash, precious metals or other short-term securities, that a financial institution must maintain in its reserves. The RBI had reduced the ratio from 25 per cent to 24 per cent in December 2010. On January 25 (2011), the RBI, in its efforts to combat the prevailing high inflation, lifted its key short-term rates -- repo and reverse repo rates -- by 0.25 per cent each to 6.5 per cent and 5.5 per cent, respectively.
RBI objects to states using PSBs for own inclusion drive
The Reserve Bank of India (RBI) has expressed concern over dilution of its financial inclusion programme as some states, such as Uttarakhand, have launched similar schemes causing confusion among the institutions responsible for implementing them. "Banks have already submitted their financial inclusion roadmap to the RBI," a government official said. "Now, some states want banks also to participate in their own schemes, which will increase burden on them and further dilute the primary task set by RBI." The RBI had also mentioned the issue of overlap at the state-level bankers' committee. "States can push the co-operative banks and regional rural banks for their own schemes," a senior finance ministry official said. "Public sector banks are under the domain of the Central government and the RBI, and will follow the roadmap as decided." As of now, only 45% of the Indian population has access to basic banking services. The bank to people ratio is also very low with one bank branch catering to about 16,000 people. The finance ministry recently directed bank chairmen and executive directors to monitor 1% of the new villages that come under inclusion plans, and the general managers for 5% villages covered under such plans.
RBI to issue Rs 5 coin on Rajendra Prasad birth anniversary
The Reserve Bank of India (RBI) today said it will shortly put coins of Rs 5 into circulation, with the theme of 125th birth anniversary of the first President of the country Rajendra Prasad. The face of the coin shall bear the lion capital of Ashoka Pillar and it shall also bear the denominational value "5" in international numerals below the lion capital, RBI said in a release. The reverse of the coin shall bear the portrait of Rajendra Prasad in the centre, it said. Coins are legal tender as provided in the Indian Coinage Act, 1906. The existing Rs 5 coins in circulation shall also continue to be legal tender, it added.
Govt spending can be frontloaded in FY12: RBI
There was a possibility of heavy government spending in the first half of the next financial year beginning April, on account of large government cash holding, Subir Gokarn, deputy governor at the Reserve Bank of India (RBI) said on Thursday. He said RBI would not conduct open market purchase of bonds to contain any rise in yields as it was a monetary policy tool to address liquidity issues and not debt management. "When the (government borrowing) schedule is set with the existing cash balance in mind, that can front-load spending. So that is a possibility," he said. Gokarn was speaking to reporters after the central bank raised key rates by 25 basis points to clamp down on resurgent inflation and warned of persistently higher food prices unless steps were taken to boost supplies.
Limit on annual income can be changed – Malegam
The Malegam panel’s recommendation that only those households which have up to Rs 50,000 in annual income should be eligible for borrowing money from microfinance institutions (MFIs) have drawn flak from all quarters. Critics say by suggesting a cap on loan rate, the panel is also denying market forces in shaping the cost of loans. But noted chartered accountant Y.H. Malegam, 77, who has been serving as director on Indian central bank’s board for 17 years, said one should look at the philosophy of the report and not the figures. The objective is to define what microfinance is and regulate them and the numbers can be revised. He said in an interview that there could be a distinction between borrowers in rural, semi-urban and urban India. While Rs50,000 annual income criterion can be kept for rural India, it can be raised for semi-urban and urban pockets. He, however, strongly defended the idea of capping the exposure limit for an individual borrower at Rs25,000 and the loan rate at 24%. He described MFIs as “greedy” and said the mandate of the panel was to protect borrowers and not lenders. MFIs have enough profits and they can use part of it to reduce interest rate, he said. If indeed the Reserve Bank of India accepts the recommendations, there will be no need for the Andhra Pradesh law for regulating MFIs in the southern state, he said.
RBI seeks public comments on Malegam report
The Reserve Bank today invited public comments on Malegam panel report which suggested among other things capping interest rate at 24 per cent for loans extended by microfinance institutions. The committee, headed by Reserve Bank's Central Board Director Y H Malegam, also suggested that small loans cannot exceed Rs 25,000 and creating of a separate category of non-banking financial companies (NBFC-MFI) for the MFI sector. "The RBI has invited views/comments of all stakeholders and the public at large on the Malegam Committee report on MFIs...Latest by February 13, 2011," the central bank said.
Finmin backs RBI on subsidiary model for foreign banks
The Finance Ministry has come out in support of the central bank's recent proposal to permit expansion of foreign banks in the country through the subsidiary model, as opposed to the current model of expansion through branches. It is also considering allowing capital gains tax waiver for such conversion. "We will be taking it up at the earliest and hope to set up norms for starting it soon," a senior finance ministry official said. The norms are expected to exempt such subsidiary firms from capital gains tax as well as allow them expansion in smaller cities of tier 3, 4, 5and 6.
Friday, January 28, 2011
RBI again warns banks on asset-liability mismatch
Two days after the Reserve Bank of India (RBI) raised a red flag over the high incremental credit-deposit (ICDR) ratio, it on Thursday commented adversely on banks’ average maturity of deposits. "The maturity of deposits has gone down drastically. More than 70 per cent of these are of around two years. While on the lending side, if you consider infrastructure, it needs financing for a longer term,” RBI Deputy Governor Anand Sinha said in an interaction with analysts. “This imbalance needs to be controlled, otherwise it could pose a big systemic risk. If you do not have resources, then (you must) slow down credit growth.” The asset-liability management of banks is critically dependent on the maturity profile of their deposits. As banks generally raise resources through short-term liabilities to finance both short and long-term assets, the liquidity and credit risks get multiplied, particularly during crisis periods. On Tuesday, the central bank said the ICDR of banks was 102 per cent, indicating that banks were supporting their loan growth by borrowing one-day money from the repo window of RBI. ICDR indicates how much banks are lending for every rupee received as deposits. For every Rs 100 deposit, banks have to set aside Rs 30 in the form of the cash reserve ratio and the statutory liquidity ratio, which are six per cent and 24 per cent, respectively. So, for every Rs 100 deposit, banks can only lend up to Rs 70. Apart from deposits, banks can use borrowed funds for lending. However, RBI data show that Indian banks rely heavily on deposits, which constituted 78 per cent of all liabilities of banks in 2009-10. Borrowing accounted for only 8.7 per cent. The high ICDR is mainly on account of lower deposit growth as compared to credit growth. While credit growth has been a little over 24 per cent in the past one year, deposit growth has been 16 per cent. During the beginning of the financial year, RBI had projected credit and deposit growth at 20 per cent and 18 per cent, respectively. The central bank still maintains the projection and wants banks to cut credit expansion. RBI data show that for 2009-10, public sector banks experienced a shift in their deposit liabilities towards the short-term end of the maturity spectrum, while loans and investments moved towards the long term. New generation private sector banks, which normally rely heavily on short-term deposits, exhibited a shift in favour of medium and long-term deposits, while their loans moved closer towards the short end of the spectrum.
RBI tightens provisioning norms for non-banking financial companies
Setting the stage for a rate hike by non-banking financial companies (NBFCs), the Reserve Bank of India on Monday tightened the prudential norms for NBFCs to protect them from any impact of possible economic downturn. Under the new RBI norms, both deposit and non-deposit taking NBFCs will have to set aside 0.25 per cent of performing loans to meet any financial exigencies.
Inflation needs to be restrained to promote growth: RBI
Indicating another hike in key policy rates in its quarterly review on Tuesday, RBI on Monday said that containing inflation would be the top priority as high rate of price rise could hurt the economic growth. "... containing inflation will have to be the predominant objective of monetary policy in the near term," the Reserve Bank said in its macroeconomic review released a day before the third quarterly review of the policy. The review further said that upside risks of inflation have increased and it could endanger the growth objective and also amplify risks to inclusive growth. The economy grew by 8.9% in the first half of the current fiscal, but inflation remained at a high level of 8.43% in December, led by high food prices. The food inflation for week ended January 15 was 15.52% after touching a high of 18.32 on December 25, 2010. The central bank raised key short-term lending (repo) and borrowing (reverse repo) rates for six times in 2010 to tame inflation. The quarterly monetary policy, to be released tomorrow, is expected to balance the need for containing inflation and promoting growth.
Rate hikes seen coming, but deposits first
With the Reserve Bank of India hiking repo and reverse repo rates by 25 basis points, banks are likely to increase lending and deposit rates in the near term. However, with banks looking to increase their deposit mobilisation, deposit rates are likely to go up before lending rates. Mr O. P. Bhatt, Chairman, State Bank of India, said the bank's asset-liability committee will meet soon to take a call on the increase in rates. “There has been an upward bias in rates for a very long time and you have seen this bias getting translated into increases in lending and deposit rates. But there has been a small lag between the rate hike and the transmission. It will depend on where each bank is on the liquidity curve and its asset-liability situation”, Mr Bhatt, who is also the Chairman of Indian Banks' Association. Ms Chanda Kochhar, MD and CEO, ICICI Bank, said there is an upward bias in interest rates. “Deposit and lending rates increase depends on how cost of funds is moving and what is the supply-demand situation. Cost of deposits has been moving up. So clearly there is an upward bias in interest rates. But when and how much will vary from bank to bank,” she said. Mr K.R Kamath, Chairman and Managing Director, Punjab National Bank, said there is a need for a balance between deposit and credit growth rates as the pace of the growth is not the same. “There is case for an increase in lending and deposit rates. When and how, the market will decide. In case banks are not getting deposits to fund the credit growth, then deposit rates will be increased first”, he said. Mr Anil Kothuri, Head-Retail Finance, Edelweiss Capital, pointed out that even though the RBI has increased interest rates six times in 2010 aggregating 300 bps, home loan interest rates have increased by only 150 bps. “The latest increase will put upward pressure on home loan interest rates, given that bank and housing finance companies have very little wiggle room left. Nonetheless, the demand for home loans will continue to be strong, if property prices stay stable and the environment continues to be buoyant,” he said. Mr M.V. Nair, Chairman and Managing Director, Union Bank of India, said the RBI wants the incremental growth in the repo rate to be passed on to the credit market. “The intent of the policy is absolutely clear. Deposit has to keep pace with the growth in credit,” he said.
Loan lessons
Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty retains his maverick streak. At the finance leadership summit of the Indian Institute Management, Lucknow (IIM-L), someone in the audience asked why car loans were cheaper than education loans in India. The veteran banker’s reply: "When a bank gives car loans, it knows that the borrower has a good job to repay. In education loans, the repayment capacity is not clear beforehand."
Bank of Baroda chief M D Mallya is BS Banker of the Year
Mangalore Devdas Mallya, the chairman & managing director of Bank of Baroda, is the Business Standard Banker of the Year for 2010. Mallya was chosen by a five-member jury headed by Securities & Exchange Board of India’s former chairman, M Damodaran, for BoB’s sterling performance over the last couple of years. The jury had shortlisted three bankers from 30 on performance parameters ranging from growth in deposits, advances, assets and bad debt to return on assets and business per employee. Mallya took charge of BoB in 2008 at atime when global turbulence in the financial sector had threatened to shake India’s banking foundation. Mallya’s mandate was to take BoB to a new level and attract the young. Not only did the person with an “ice temperament” — as colleagues describe him — steer the bank out of the storm, he brought about good growth numbers and a better-than-counterparts showing. BoB’s profits grew 55 per cent in 200809 and 37 per cent in 2009-10. Return on assets improved to 1.21 per cent this financial year from 1.1 per cent last year, while return on equity increased to 22.19 per cent from 19.48 per cent. At the peak of the crisis, the bank contained its incremental delinquency ratio at 1.13 per cent (for 2009-10), with a provision coverage ratio of 74.9 per cent as on March 31, 2010. Investors took note and the stock price outperformed the sector, fetching a return of over 172 per cent. For Mallya, “cautious aggression” and “stable growth with quality” were key words that helped him steer a steady course through the mayhem. In an interview with Business Standard —the details of which are published in the Banking Annual distributed with today’s edition — when Mallya was asked if BoB’s risk appetite was less than its strength, the CMD said: “…look at our growth of 28 per cent (credit). Where is the conservative approach in that? We are aggressive, but cautious.” So, Mallya played with astraight bat, unlike those playing to the gallery with flamboyance, and it paid off.
RBI admits it’s lost its way on inflation management
RBI Governor D Subbarao said inflation management has not been proceeding the way policy makers expected it to go. “Inflation management is not happening along the lines we were expected to,” Subbarao told analysts and investors in a conference call. “Demand-side pressures are abating because of our monetary policy.” The RBI governor raised inflation forecast as rising prices threatens to shoot past the expectations for the second fiscal. He had raised rates seven times since March. Policy rates were raised 25 basis points on Tuesday, meeting market expectations, and he raised inflation forecast for the fiscal by 150 basis points to 7%. That led to criticism that the central bank’s inflation forecast and policy measures were not up to the mark. Inflation is at more than 8.4%. Food inflation has remained stubbornly above 15% for weeks as unseasonal rains damaged crops and rising income is leading to higher demand. The bureaucrat-turned-monetary policy maker who had questioned the reliability of many data from the government, said factors that RBI takes are more or less what are available to analysts. “Increasingly, the central bank is working on the principle that there is no asymmetry between information that we have and that analysts have,” said Subbarao. The index of industrial production fluctuates violently. The IIP grew 9.5% between April and November but it swung between 3% and 16%. Mr Subbarao further said: “Liquidity deficit is independent of the government cash balances. Our comfort level is plus or minus 1%. This is linked to the statutory liquidity need. You should read this as comfort zone, irrespective of the transient factors. I don’t see it getting into a surplus. But certainly, we want to see less of it,” he added. Newly-appointed deputy governor Anand Sinha said: “So far as the increase in interest rate is concerned, it has to be a result of the monetary policy. But banks have to manage the issue of delinquency arising out of higher interest rates... Banks have to take care of their liabilities.” Deputy Governor K.C.Chakrabarty said: “Risks are there. It depends on both the borrower as well as the bank.”
SBH to extend financial aid to 1,102 villages
Following the Reserve Bank of India (RBI) directions, the State Bank of Hyderabad (SBH) said it would extend financial inclusion across 1,102 villages with above 2000 population spread across 36 districts in Andhra Pradesh, Maharashtra, Karnataka and Gujarat. These districts together cover a rural population of about 42.69 lakh. Financial inclusion will provide banking products such as savings, loans and services like remittance and insurance in areas where there are no banking services. It caters to low income groups and offers services at an affordable cost. According to SBH, the proposed financial inclusion will be implemented in two phases. While the first phase will cover about 300 villages by March 2011, the remaining villages will be covered in the next fiscal. SBH said it has already commenced enrolment and opening of savings accounts in 261 villages covering AP and Karnataka. On Tuesday, the bank distributed biometric cards to customers in few villages in Mahaboobnagar district. As part of the project, the bank has launched overdraft products to meet the financial requirements of beneficiaries across all villages. Besides opening a savings account, customers can also opt for variable recurring deposit, term deposits, overdraft in recurring deposits and term deposits in loan category general purpose credit card will also be available to all villagers.
OMO a monetary policy tool, deposit accretion picking-up: RBI
I the second-half of 2010, transmission (of monetary policy action) has been good. "Banks have raised their rates as also their base rates," the RBI Deputy Governor said. Gokarn voiced concern over the decline in foreign direct investment (FDI) in 2010 and the possibility continuing in 2011 as well. "The recovery in the US economy may lead to global re-balancing of portfolios. This may hit the emerging markets' attractiveness and the country may not receive capital inflows that it would otherwise have," Gokarn said. This, combined with oil and fertilisers which are significantly imported into the country and whose prices are rising, may put pressure on India's current account deficit, (pegged close to 3.5 per cent of GDP) Gokarn said.
Black money: What have you done so far, SC asks govt
The Supreme Court on Thursday slammed the government again over the issue of illicit wealth parked in foreign banks, asking it to file a report on the action taken by it against people and firms that have stashed black money in tax havens abroad. Expressing concern that the black money stashed in banks abroad might have originated from arms deals, drug trafficking and smuggling, the Supreme Court asked the government as to what action it had taken against individuals and firms having foreign accounts. A bench headed by Justice B Sudarshan Reddy directed the government to file its response by Thursday next. The court also sought replies from the government, the Reserve Bank of India and the Chief Vigilance Commission of India on a petition seeking direction to the government to ratify UN convention on corruption which would facilitate in bringing back black money from foreign banks.
Thursday, January 27, 2011
'Stronger action at this point might put some pressure on growth' - Subir Gokarn, RBI Deputy Governor
RBI has sounded very hawkish on inflation in recent times. The macroeconomic and monetary development (MMD) report released a day before the third quarter review said inflation was a dominant concern, while the governor recently said the central bank was desperate to bring down inflation. But a 25-basis-point rise is the least RBI could do...
Words like hawkish and desperate need to be placed in context. We are dealing with inflation of a variety of kinds. We are dealing with inflation related to domestic food prices, in that there are transitory as well as structural problems. We are dealing with inflation related to global commodity prices and, to some extent, inflation driven by domestic demand pressure. Certainly, we want to control inflation in the aggregate. But the use of instruments has to be related to the impact these will have. So, on why an action of 25 bps as opposed to something stronger, we felt this was appropriate, given the price build-up in the non-food manufacturing segment, to us the best indication of demand-side pressures. Supply-side pressures, if they persist, will spill over and that is the risk we have pointed out. We are aware of that risk, we have repeatedly mentioned risks in the policy document and these essentially tell us we have to persist with the stance. The actual action has to be seen in the context of the stance. The stance is hawkish. The stance is inflation is a dominant concern but the action is related to the specific circumstances we are dealing with today. Which is, there is some build-up of demand-side pressure, which we see in non-food manufacturing inflation, and stronger action at this point might put some pressure on growth, which we are trying to avoid. As the scenario unfolds, we will make our judgments and we have indicated the stance remains anti-inflationary, and this stance is not changing.
Was the high liquidity deficit a factor in deciding the hike?
It had a role, because one impact that persistent deficit is having is in making life a little difficult for banks, in terms of making long-term commitments (long term is anything beyond the immediate). That has taken call rates up outside the corridor. So, from a market perspective the deficit is somewhat tighter than the policy rates would indicate. In this situation, there was an assessment that a sharper action may have proved disruptive and we thought that was a risk we had to consider.
MMD said downside risk to growth had receded but today RBI spoke of moderation in growth.
MMD’s horizon is this financial year; it is not a very forward-looking document. It is designed to be a review. Looking at what happened in the last quarters, there are not too many risks that can take away the 8.5 per cent growth. And, here we are not giving a projection for the next year, we are giving a guidance. The guidance is simply an initial assessment of drivers of risks. When we look ahead, to some extent we see there are looming risks on growth coming from domestic and global factors, and that is what we have tried to point out.
Will the moderation mean the growth rate will be lower than 8.5 per cent in 2011-12, which RBI has projected for 2010-11?
It is too early to make that call. We will come out with the projection in the April document. There will be a base effect on agriculture which is quite clear. As of now, we expect the momentum in industry and services to continue. So, that might mathematically result in a slightly lower growth rate but not loss of momentum. But we have also highlighted risks, and those have to do with what is emerging as a somewhat unstable macroeconomic environment -- the inflation situation, the current account situation and the fiscal situation. Those are not base-line scenarios but are pointing out risks that are becoming visible, which may affect growth. That is a kind of downside risk.
Do you expect inflation to stay above your comfort zone in 2010-11?
We expect the impact of monetary actions taken so far and possibly taken in the future to keep the core inflation in check. If our baseline scenarios materialise, that is, we have a normal monsoon and some benefit from food prices and global oil prices don’t spiral out of control… but that’s a positive scenario. But if we are realistic about what is happening around us, there are these risks on the upside as well.
When do you see inflation coming back to RBI’s comfort zone?
It is a matter of how these risks materialise. I don’t have a forecast on how these risks are going to play out. It is certainly necessary for us to identify these and look at what impact they might have. That will shape our stance. But I am not in a position now to give a forecast.
Regarding the concern on high incremental credit-deposit ratio, is this a system-wide concern or related to some specific banks?
It is true for the system as a whole, because we have 24 per cent growth in credit and 16 per cent growth in deposits. But within this aggregate, there are huge differences across banks. That is why we have mentioned in the statement that we do plan to engage banks where the disparity is looking somewhat higher than the average. It is, therefore, both a system issue and a micro issue. We are telling banks these gaps are unsustainable; we do not intend to finance them by liquidity infusion. The measures we took for infusing liquidity in December had everything to do with frictional liquidity. There was build-up in government balances and for that we cannot penalise banks. But there is also the dimension that the gap between deposit mobilisation and credit growth, something inherent to the banking system, that’s a structural issue with the banking system. We have said we are not going to accommodate that gap in liquidity.
Is there a concern that banks are borrowing short and lending long?
That is the heart of the concern. If credit is growing at 24 per cent and deposits at 16 per cent, a large part of the gap is funded by borrowing overnight. That’s why the concern about sustainability comes up.
Do you expect lending rates to go up further?
That is part of the monetary transmission mechanism. From our view, having got liquidity in deficit, we would like to see policy actions on rates transmitting through quite effectively into lending rates. From our viewpoint, it is a desirable outcome. It is what we want to achieve in terms of putting a brake on the growth momentum, without disrupting it.
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