CDS recast timing, modalities need to be defined well: RBI

Mumbai, Feb 24 (PTI) Reserve Bank Deputy Governor Shyamala Gopinath today said the timing, definition, and the modalities of debt rescheduling under the proposed credit default swap (CDS) scheme have to be discussed in detail as it is a very complex issue. "We need to look at the entire issue clearly. Since CDS is a tradable product, we have to make it transparent," said Gopinath. Speaking on the sidelines of an Indian Merchant Chamber function here, she said, "Debt rescheduling is a very complex issue globally, and so was here when we discussed it with the industry initially...There are many questions involved in it and the first question is who does the rescheduling?" Gopinath added, "If one company goes to its bank and asks for rescheduling its debt or loan, how do you go about doing it? The point is the whole issue has to be transparent as CDS is a tradable product." Yesterday, RBI issued the draft CDS guidelines, and has sought comments from stakeholders by March 8. The CDS is a swap contract in which the buyer of protection against a bond or loan makes regular premium payments to a counterparty who assumes the risk in the event of a default. It is a risk management product that helps entities guard against possibility of defaults and helps in developing the corporate bond market, which is almost non-existing here as the debt market is nearly 80 per cent dominated by government papers.

Beware of Email Lottery Scam - J.B.Bhoria, Regional Director, RBI

Rural prosperity is fuelling food inflation - Subbarao

Bhubaneswar, Feb 27 (PTI) RBI Governor D Subbarao has said that rising prosperity in rural India is leading to food scarcity, which is driving up food prices. "Since rural incomes are going up, people are eating better by shifting from cereal to protein (rich diet) and it is leading to food scarcity," Subbarao told students of the Indian Institute of Technology (IIT), Bhubaneswar yesterday. Food inflation, which has been hovering in double digit levels for the last few months has been a cause of concern for the government. It rose to 11.49 per cent for the week ended February 12 from 11.05 per cent in the previous period, driven by rising prices of milk, egg, meat and vegetables. "RBI is responsible for management of inflation. But responsibility for food inflation is slightly lower because food inflation arises due to supply side constraints," Subbarao said.

Plastic notes only after satisfying ecological concerns: RBI

The Reserve Bank's ambitious plastic currency note programme runs the risk of falling victim to ecological issues and the roll-out will depend on a study of the project's impact on the environment.  The RBI is in the process of starting a pilot project for issue of plastic currency notes, wherein plastic notes of Rs. 10 denomination would be distributed through the central bank's five regional offices.  The proposed shift to plastic currency notes, instead of the normal paper notes, is primarily aimed at checking the high cost associated with printing of paper currency, as they need early replacement due to soiling and mutilation.  Besides studying the potential cost savings through plastic notes, the pilot project will also look into the environmental impact of the proposed plastic notes.   In an address at a convocation last week at Sambalpur University in Orissa, RBI Governor D Subbarao also said the central bank would need to study the "carbon footprint" of recycling and disposal of plastic notes.  During the pilot phase, we need to study not only the relative costs, but also the carbon footprint associated with the recycling and disposal of plastic notes vis-a-vis paper notes," he added. Subbarao said the RBI would "mainstream the use of plastic currency" only after the success of the pilot project. A detailed mention of environment aspects was also mentioned for the first time in this year's Economic Survey.  At a time when the government is trying to balance the twin challenges posed by climate change and achieving economic growth, the Survey called for steps to ensure that green growth strategies do not result in slow growth.  Terming cost and longevity as important for currency management, Subbarao said that India was the second largest producer and consumer of currency in the world after China. He said that producing such a large amount of currency was expensive and one option to cut the costs was replacement of paper currency with plastic notes.  Some of the countries to have moved to plastic currency notes include Singapore and Australia.  In April, 2010, the RBI floated a tender seeking supply of one billion plastic notes of Rs. 10 denomination.  Later in August, the central bank said in its annual report for 2009-10 that it was exploring methods to increase the life of currency notes, especially those of lower denomination, which have a much shorter life.  "The Reserve Bank, in consultation with the government, has initiated steps to conduct a field trial of plastic notes in the denomination of Rs. 10 in the year 2010-11 to gather valuable lessons," the report added.

LIC's market investments to acquire greater transparency

The Life Insurance Corporation, the country's largest financial sector entity, could soon get a makeover. At stake is clearing up governance roles within the organisation, ensuring more transparency in securities market investments and a possible listing. The finance ministry recently appointed a committee headed by former RBI Deputy Governor Vepa Kamesam with a wide-ranging mandate to suggest reforms in LIC. Both Kamesam and LIC chairman TS Vijayan refused to comment on the development. LIC has often enjoyed a very close relationship with the government especially in its securities market operations.

Firms wary of basic banking licence model

The finance ministry's plan to offer basic banking licences may find few takers because of doubts over the commercial viability of the proposed business model. The Economic Survey released on Friday had proposed two types of licences to set up banks in India: One for basic banking activities and another for full-fledged banking. It said non-banking financial companies (NBFCs) and microfinance institutions should be considered for basic banking licences. This, the Economic Survey stated, would help in financial inclusion. However, prospective entrants have given such a proposal the thumbs down, as they want full-fledged banking licences. Reserve Bank of India (RBI) is formulating draft guidelines for the entry of new players in the banking sector, which are expected to be published shortly. "Banking is a long-term business. Naturally, we will like to be present in all areas. Rural banking is necessary. But one has to evaluate if only rural banking is commercially viable," said Y M Deosthalee, chairman & managing director of L&T Finance, who is also whole-time director and chief financial officer of Larsen & Toubro. L&T Finance, which is engineering giant Larsen & Toubro's NBFC, hopes to set up a bank.  The Economic Survey did not elaborate on the functions of basic banking, but had stated these should be clearly defined. This lack of clarity has also raised doubts among some companies, which say there is no need to create a separate structure for basic services. "I do not subscribe to this idea. NBFCs already provide basic banking functions. So, there is no need for a separate structure. It will only add to the confusion," said Hemant Kanoria, chairman & managing director of SREI Infrastructure Finance. He said SREI will review its decision on a banking foray once RBI releases draft guidelines on new bank licences. The experience of regional rural banks and local area banks, which proved unviable, also weighs on the minds of some who wish to set up a bank. Among them is the Shriram Group, which has evinced interest in applying for a banking licence through one of its subsidiaries.

New chairman UK Sinha plans to revamp Sebi

Within a week of taking charge, U.K. Sinha, the new chairman of capital market regulator Securities and Exchange Board of India (Sebi), has initiated plans to revamp the organization. Sinha circulated a note last Thursday on the review of eight advisory committees that are currently working under Sebi.  The new chairman has sought opinion from all department heads about the scope of the proposed reconstitution, said two persons with direct knowledge of the matter. “He wants to take a fresh look at the issues handled by these committees,” one of them said. “The chairman has asked about the relevance of all the existing members of such committees,” the second person said. Both officials requested anonymity as the matter is yet to be made public. Sinha has proposed to look into the tenure of the members of such committees, their contribution to Sebi’s policies and the relevance of their recommendations. An email sent to Sebi on Friday remained unanswered. A Sebi official, on condition of anonymity, said exploration of the scope of reconstitution of the committees is only part of the new chairman’s plan.  “He wants to take a fresh look at the ways the entire organization has been working. At the second stage, possible changes will be made,” the official said. “One should not view the proposed reconstitution of the committees in isolation.” There are eight Sebi advisory committees on mutual funds, the secondary market, the primary market, corporate bonds and securitization, investor protection and education fund, disclosures and accounting standards, consent orders and compounding of offences, and the takeover panel. Incidentally, Sinha has been a member of at least two such committees—the committees on mutual funds and the secondary market—as chairman of UTI Asset Management Co. Ltd, his previous assignment. “Sometimes, the chairman may have a reform agenda and he may want to bring in new committee members to suggest ways to bring changes,” said one of the members of the committee for disclosures and accounting standards. He declined to be named. The Sebi chairman has the authority to reconstitute committees, form new committees, and close or merge any of them. Under the stewardship of Sinha’s predecessor C.B. Bhave, who stepped down on 17 February, the regulator formed a new statutory committee to review and suggest changes for India’s takeover regulations. During the tenure of M. Damodaran, whom Bhave replaced, the committee on disclosures and accounting standards was formed by merging two panels on disclosures and accounting standards. Typically, a member serves on a committee for three years, but there is no fixed term. “It’s not a statutory requirement to reconstitute advisory committees when the chairman changes. The members of advisory committee could be a continuity from one chairman to another,” said Susan Thomas, member of the secondary market advisory committee, and assistant professor, Indira Gandhi Institute of Development Research. “Mere change in the constitution of committees may not help. Sebi may ensure regularity of meetings of these committees. Sometimes the committees do not meet for several quarters and this prevents continuity in reforms in line with the evolution of markets,” said H.N. Sinor, a member of the advisory committee on mutual funds and chief executive officer, Association of Mutual Funds in India. Bhave went up against companies and other regulators during his tenure as part of efforts to enhance transparency and benefit investors. On Sinha’s agenda are a new framework for mergers and acquisitions for Indian companies (following the recommendations of the takeover regulations advisory committee headed by C. Achuthan, former chief of the Securities Appellate Tribunal), new guidelines for market infrastructure institutions, such as stock exchanges, and depositories and clearing corporations (following recommendations by a panel headed by former Reserve Bank of India governor Bimal Jalan), among others. “Since a new incumbent can’t change senior officials of the organization, he may try to bring in new voices as advisers. It makes sense to bring new members in the advisory committees for a fresh perspectives on critical issues,” said a member of the secondary market advisory committee, requesting anonymity.

SBT launches new financial inclusion project

Thiruvananthapuram, Feb 25:  The Banking Ombudsman, Mr F.R. Joseph, has launched ‘Sahayahastham,' a new project as part of the financial inclusion drive of State Bank of Travancore (SBT).  The project is being implemented with the help of Kudumbasree units under the State's larger poverty eradication mission of the same name, an SBT spokesman said here. The scheme would aim to bring the weaker sections and low-income groups under the banking services mainstream in as yet unbanked areas. The programme was launched at a function at Veeranakavu village in rural Thiruvananthapuram. In his presidential address, Mr P. Pradeep Kumar, Managing Director, SBT, said that ‘Sahayahastham' would aim to bring banking services to the common man's doorstep at an affordable cost.  The bank is using biometric cards and a simple portable machine for implementing the financial inclusion, the spokesman said. Fingerprints of the depositor are stored in the machine assuring 100 per cent security to the deposits. The bank will utilise the services of the Kudumbasree units for opening new accounts.

Finmin calls on PSBs to scrap housing loan foreclosure fees

In major relief for home loan borrowers, the government has suggested that the public sector banks (PSBs) stop levying pre-payment penalty or foreclosure charges on home loans. Banks impose penalty of over 2% of outstanding principal on borrowers who repay in totality or a portion of their home loan ahead of tenure. In a recent communique to public sector banks and the Indian Banking Association (IBA), the finance ministry advised lending institutions that there should not be any penalty in case a borrower pre-pays home loans from his/her own funds. Public sector banks have already implemented the government's advice, said bankers and government officials. State Bank of India, for example, does not levy any pre-payment penalty on borrowers repaying loans from their own funds.  Other PSBs too have followed suit. However, private sector banks continue to levy hefty pre-payment charges, which can go up to as much as 4% of the outstanding loan amount of a borrower. The department of financial services has issued the advisory, even as the Competition Commission of India (CCI) recently ruled that levy of pre-payment penalty on home loans is not anti-competitive. (The Commission's investigative wing later took the opposite view, which favoured scrapping foreclosure charges on housing loans.)  “No pre-payment charges may be levied by the lending institutions when the loan amount is paid by the borrowers out of their own funds,” according to a finance ministry communique issued to the PSBs as well as IBA. The ministry issued this advisory after discussing the matter with the Reserve Bank and IBA, official sources said.  Retail loan portfolio of scheduled commercial banks grew 20% year-on-year to Rs. 3,15,862 crore in March 2010, as per RBI data. Even though PSBs have implemented the government’s suggestion, IBA, the lobby group of leading private and public sector banks, pointed out to the government that banks would raise interest rates if they are not allowed to levy pre-payment penalty.  The RBI, meanwhile, is also in favour of private sector banks pruning these charges, and keeping them in line with the average cost of funds. Banks enjoy operational autonomy and pricing freedom with regard to banking transactions including loans. Bankers argue that pre-payment penalty or foreclosure charges are imposed keeping in mind the cost of funds and the issue of asset-liability mismatch. Banks’ term deposits are typically of 1-5 years duration, whereas maturity of the loans is usually 15 years plus, which results in asset-liability mismatch.

Rising NPAs of SBI group come under Parliamentary panel lens

A Parliamentary Panel has asked the Government to assess the reasons for rising non-performing assets (NPAs) of the State Bank of India (SBI) group. The Government has been asked to spell out the policy on merging the subsidiary banks with SBI. The Government must also do an in-depth analysis of the issues relating to merger and consolidation of public sector banks in general, the Parliamentary Standing Committee on Finance headed by Mr Yashwant Sinha, said in a report tabled in Lok Sabha today. The Standing Committee went into the State Bank of India (subsidiary banks laws) amendment Bill 2009, which was introduced in Lok Sabha in December 2009. A recent Reserve Bank of India (RBI) inspection report is also understood to have expressed concern over the rising NPAs in SBI, which is the country's largest commercial bank. On allowing SBI subsidiary banks and other public sector banks to raise equity capital by way of ‘rights issue' of shares as well, the Standing Committee said that it expects appropriate amendments to be carried out in the Bill and also the laws regulating the public sector banks so as to enable them to raise capital through rights issue

Some flaws in the Malegam report - RAHUL KUMAR

The panel will enable big NBFCs to carry on microfinance on a larger scale than the current microfinance players, without regulatory oversight. The objectives of the Malegam report are to protect the microfinance borrower, promote the SHG-bank linkage programme in preference to the MFI-JLG (Joint Liability Group) programme, ensure credit supply to the MFI-JLG programme, and protect the stake of banks and FIs in the microfinance sector.  The broad objectives are diverse and finding a balanced solution is a difficult task. The Committee's observations are not without shortcomings.  The committee recommends that for NBFCs to become NBFC-MFIs, 90 per cent of their total assets (excluding cash and cash equivalent) should be for microfinance activity.  On the contrary, it permits other NBFCs to engage in microfinance up to a cap of 10 per cent of total assets without specific regulation. The big NBFCs have an asset size of over Rs 10,000 crore. Ten per cent of such a size is bigger than the assets of the fifth biggest MFI in microfinance.  Big NBFCs can carry on microfinance on a scale larger than the current microfinance players without regulatory oversight. While the provision is obviously intended to encourage scale in microfinance it restricts the scope of product diversification of NBFC-MFIs.   This lack of flexibility of NBFC-MFIs, compared with the freedom of regular NBFCs, will allow them to gradually take over the market while functioning in an unfettered manner.  To prevent over-borrowing, the committee restricts the individual loan size to Rs 25,000. The aggregate outstanding loans of a borrower are restricted to Rs 25,000. The tenure of the loan is aligned with the borrower's cash flow.  The committee mandates that 75 per cent of the loans by MFIs should be for income-generation purposes, and leaves the repayment frequency (weekly/fortnightly/ monthly) to the choice of the borrower.  However, the limit of Rs 25,000 is too low to procure income-generating assets, or to protect the borrower from negative market or environmental shocks. In effect, the recommendation may drive borrowers to borrow from informal sources.  The committee does not clearly define the scope of loans for income-generating purposes.  On the repayment frequency, the committee's suggestions contrast with the JLG model, in which group decision prevails over that of the individual to ensure joint liability of repayment.  The third objective targets the growth of MFI-JLG programme because the factors driving the growth are found to be unjust.  The Committee recommends an interest rate cap to curb the growth. The interest rate cap is 24 per cent, subject to the net interest margin cap (difference between the amount charged to the borrower and the cost of funds to the MFI).  The net interest margin cap is 10 per cent for the larger MFIs (loan portfolio exceeding Rs 100 crore) and 12 per cent for the smaller MFIs (loan portfolio up to Rs 100 crore).  The margin cap applies at an aggregate level for the MFIs. The committee arrived at a normative cost structure to prescribe the margin cap with an overall interest cap.  The interest cap does not compensate for the higher cost of operation in remote areas. The committee's view to restrict scope of securitisation for NBFC-MFIs will burden traditional sources of debt and equity funds. The committee allows only corporates with a minimum net worth of Rs. 15 crore to become NBFC-MFIs. The suggestion is intended to induce economies of scale and better monitoring and control.  To protect the stake of banks and FIs, the committee recommends provisioning norms and capital adequacy norms. NBFC-MFI is required to maintain an aggregate provision for loan losses, which is the higher of 1 per cent of the outstanding portfolio or 50 per cent of the aggregate loan instalments which are overdue between 90 to 180 days and 100 per cent of the aggregate loan instalments which are overdue beyond 180 days.  The capital adequacy ratio is 15 per cent and all of the net owned funds should be in the form of Tier I Capital.  The provision is inconsistent with RBI Master Circular on Capital Adequacy. The de-recognition of the Tier II capital and other instruments of Tier I capital will prevent the broad basing of the capital structure of NBFC-MFI.  The committee feels that the regulatory standards will meet the objectives and, therefore, allows priority sector lending status for bank lending to MFI.  However, the committee fails to give specific direction to precipitate bank lending. A specific allocation of 10 per cent of 40 per cent limit of priority sector lending of banks through revision in RBI Circular on Lending to Priority Sector is realistic.  On the funding source for NBFC-MFIs, the committee emphasises setting up a “Domestic Social Capital Fund” for “Social Investors”. The idea has limited relevance without clear guidelines for the fund to operate. Specific invitation to banks and government institutions to participate in the fund may ensure its success.  The recommendations may be seen as a useful framework of guidelines to regulate NBFC-MFI, but one that needs to be strengthened to facilitate the growth of microfinance.

(The author is CFO, Mimo Finance, a New Delhi-based microfinance company.)

Policy first defence against inflation: RBI

Price rise largely driven by supply-side factors and monetary policy has limited impact. Reserve Bank of India (RBI) Governor D Subbarao today reiterated that monetary policy remained the first line of defence against rising inflation even as much of the pressure had been from the supply side.  He said inflation had largely been driven by supply-side factors and monetary policy had limited impact.  “However, RBI has to do something,” he said in an interaction with students. “Policy becomes the first line of defence. If inflation persists for a long period, people think it is going to (remain) high. It becomes like a self-fulfiling prophecy.” However, when asked if RBI would resort to inter-policy rate action, Subbarao refrained from any comment. “I have said what I had to. I can’t comment on whether I will take inter-policy action,” Subbarao said. RBI’s mid-quarter review is scheduled on March 17. Since November, it has been reviewing its policy every six weeks. Mid-quarter reviews were started to formalise any inter-policy rate action. Earlier this week, the governor said RBI reserved the right to change its policy stance any time, the scheduled mid-quarter and quarterly reviews notwithstanding. With the rise in incomes, the demand for protein-rich food had increased, driving up the prices of such articles, Subbarao said. He said both structural demand and transient factors such as an uneven monsoon had driven prices up. Food price inflation for the week-ended February 12 was 11.5 per cent, up from 11.05 per cent a week before. Headline inflation, based on the wholesale price index, has remained above eight per cent and was 8.2 per cent in January, as against 8.4 per cent in December. RBI had already taken steps to tame inflationary expectations, he said. “To break that inflationary expectation psyche, RBI had to act, which is why we have been acting over the last one year,” he said. The central bank has raised policy rates seven times since March to curb inflation and inflationary expectations. When asked about volatility in capital flows and the RBI’s response, Subbarao said the country needed to be predictable on its policy over flows. Although market participants expected RBI to intervene when the currency was appreciating, the central bank has to take cognisance of the impact on importers and, therefore, on government subsidies, he added. Earlier this week, the governor had reiterated that RBI intervened in the foreign exchange market to curb volatility and any impact on liquidity was incidental. On the growing concerns over the functioning of microfinance companies and the resultant report by the committee set up under the chairmanship of Y H Malegam, Subbarao said RBI was examining the report. The government and the central bank would come up with a better framework for the sector in the next two months, Subbarao said. The Malegam report has recommended a cap on interest rates charged by the microfinance companies and the amount of loans sanctioned by them to individuals.

Indian Central Bank Is Addressing High Inflation

BHUBANESWAR, Orissa—India's high food inflation is mainly due to supply-side constraints, and the central bank has been taking steps to control a buildup in inflationary expectations, its governor said Saturday. "Monetary policy becomes the first line of defense, so if inflation persists for a long time, people think inflation is going to be high, and that becomes a self-fulfilling prophecy," D. Subbarao said at an event in Bhubaneswar, the capital of the eastern Indian province of Orissa. "To break that inflationary-expectations psyche, [Reserve Bank of India] has to act, which is why we have been acting over the last year," he said. The central bank has raised its policy rates seven times in the past year.  Authorities have been grappling with high inflation as food prices increased owing to rising demand and choked supplies after unseasonal rains damaged some crops late last year. Mr. Subbarao declined to comment on the likelihood of an interpolicy-meeting rate move by the RBI. Earlier this month, he said that the central bank can act at any time to deal with the evolving macroeconomic situation. This fueled expectations of a rate increase, possibly before the next scheduled policy review March 17 if inflation didn't cool fast. "Notwithstanding scheduled quarterly and mid-quarterly reviews, we reserve the right to alter our policy stance at any time to respond to the evolving macro economic situation," Mr. Subbarao had said. Food inflation climbed slightly after two consecutive weeks of decline, accelerating to 11.49% in the week to Feb. 12 from 11.05% in the previous week, government data Thursday showed. The general inflation rate was at 8.23% in January, and the government expects it to ease to 7% by the end of the current fiscal year in March. High prices have led to protests from opposition lawmakers and public outcry in a country where more than 40% of the 1.2 billion population lives on less than $2 a day. Rising prices of crude oil and other commodities globally have stoked worries of intensifying inflationary pressures, which could further erode the spending power of the country's poor. High inflation also would lead to more monetary action, with most economists predicting the RBI could increase policy rates by 0.5 to 1.0 percentage point in 2011.

RBI Governor for stepping up farm productivity to fight food scarcity

Lively interaction :

Reserve Bank of India Governor D. Subbarao being greeted by students at a meeting on the IIT campus in Bhubaneswar on Saturday.

BHUBANESWAR: Reserve Bank of India Governor D. Subbarao here on Saturday emphasised on the need for stepping up agricultural productivity to fight food scarcity and rising food prices. Addressing students of Indian Institute of Technology, Bhubaneswar, here Dr. Subbarao said, “we need to increase production in order to manage prices. In poor country we need to keep food prices low.” “We cannot import food as we have to feed 1.2 billion people. Our food prices are lower than that of world prices. You cannot import food and sell them here unless you subsidise. You cannot expect to subsidise food on a large scale,” he said.  “RBI is responsible for management of inflation. But responsibility for food inflation is slightly lower because food inflation arises because of supply side constraints,” he said. “If you have supply shortages, it is not clear that RBI policies are most effective response. You have to have supply side response that you have to produce more,' Dr. Subbarao said. The RBI Governor, however, said, “monetary policy becomes the first line of defence, so if inflation persists for a long time, people think inflation is going to be high, and that becomes a self-fulfilling prophecy. To break that inflationary-expectations psyche, RBI has to act, which is why we have been acting over the last year.”

SBI’s kiosk opened in Warangal village

HYDERABAD: As part of the RBI's financial inclusion programme, State Bank of India (SBI) said its regional office in Warangal has so far appointed 38 business correspondents in the district. “Several measures are being taken by the Reserve Bank of India under financial inclusion programme with an aim to deliver the financial services at an affordable cost to the vast sections of disadvantaged and low income groups especially in rural areas,’’ said A S Rao, regional director, RBI. Addressing the gathering after inaugurating one of the SBI's kiosk in Veeraram village, a predominatly tribal village with low literacy rate today, he said RBI has chalked out an ambitious plan to cover about one lakh villages over the next three years. According to SBI, since the technology adopted for the kiosk platform is robust and foolproof, the government of India and RBI has envisaged the financial inclusion programme as a successful tool in implementing the welfare programmes effectively as the end use of funds is ensured to reach the targeted beneficiary. “The rural people will receive the payments from government directly through their accounts in a cost-effective and easy way. As the finger print-based biometric technology is being used, the system is foolproof and safe to customers. Account opening in this model is simple and easy,” Ashwini Mehra, general manager, SBI said. Giving details about the features and benefits for the rural people, Mehra said, the bank has been issuing smart cards for account-holders and that the financial inclusion programme will be aligned with UID project -- Adhaar' at a later stage. Meanwhile, SBI's regional director distributed loans worth Rs.1 crore to 40 SHGs in Maripeda mandal in Warangal district.

50,300 defaulters of bank loans of Rs. 1 cr or more: RBI

There are 50,300 defaulters across India who have not repaid loans amounting to Rs1 crore and more each in the last 15 years. The Reserve Bank of India (RBI) has mentioned this in response to a query under the Right to Information (RTI) Act. Though the RBI has not mentioned the amount of the defaulted loans, it is easily more than Rs 50,000 crore even if the minimum default figure of Rs1 crore is considered. The RTI query filed by one Manoranjan Roy had sought details of loan defaulters from the year 1995. However, figures available with the All India Bank Employees’ Association (AIBEA), which publishes reports on wilful defaulters, shows the defaulted loan amount figure is more than Rs 75 lakh crore in the last 20 years. The AIBEA is coming out with a fresh report by the end of next month, which will have the latest default figures (of Rs 75 lakh crore). “This includes those defaulting on amounts of Rs 25 lakh or more,” said Vishwas Utagi, secretary, AIBEA. Utagi said of the total defaulted amount, around 40% would be in Maharashtra alone. So, the amount of loans defaulted on in the state works out to Rs 30 lakh crore.

Rs.150 coin to mark the 150th anniversary of the income tax

When Finance Minister Pranab Mukherjee today unveiled the Rs.150 coin to mark the 150th anniversary of the income tax (I-T) department, numismatists would have taken heart from the fact that a similar coin with Nobel Laureate Rabindranath Tagore’s face inscribed on it is trading at a 116 per cent premium.  Numismatists are collectors of old and unique currency notes and coins. The coins, made by the Kolkata Mint on Tagore’s 150th birth anniversary last year, were sold at`2,310 a piece and booked by 2,000 buyers. The delivery started recently. They are already trading at `5,000.  “Tagore’s coin has the distinction of being India’s first `150 coin,” says Jayesh Gala, a Mumbai-based numismatist. Numismatists say the I-T department coin should also trade at a much higher price owing to the high silver content and exclusivity. Many are already waiting for the bookings to begin. The coin will be made of an alloy of silver, copper, nickel and zinc and will have the ‘Satyameva Jayate’ emblem on the front with a portrait of “Chanakya’ and ‘lotus with honeybee’ on the flip side. Coin collectors said the authorities had not issued any notification on booking. But they expect a limited number of VIP sets to be issued on Monday. Public bookings will begin later. They also expect that the VIP sets will come into the market in a few years at a much higher premium. Here’s a case in point: In 1972, the Reserve Bank of India issued about 200 special sets of ten rupee and fifty paise coins on the occasion of the silver jubilee of India’s independence.  At an annual exhibition of coins and notes held in Ahmedabad last month, one such set went for a staggering Rs 3.25 lakh. Each year, mints in different states issue such unique coins to mark special events. These are made-to-order, approved by the government. The buyers have to pay the premium upfront. The delivery happens six-seven months after the unveiling. The premiums rise before delivery owing to this long time gap between order and delivery. Even minting and printing errors are cherished as they add to the rarity. For instance, the coin issued in 2007 to mark the birth centenary of freedom fighter Bhagat Singh had a glaring mistake. On some coins, the name was wrongly printed -- Sagat instead of Bhagat. Today, these command about Rs 6,000 as compared to the ones with the correct spelling (Rs 3,500) on ebay, the online auction portal. These were first issued for Rs 1,435 per set. And in case you miss an opportunity to buy, you can hope for a‘restrike’. Though rare, sometimes mints restrike, that is, reissue coins depending on their popularity. But, these command a premium over the original coin. The Bhagat Singh coins, when they were re-issued, went for Rs 2,740 last year – almost twice the original price.

HDFC Bank conducted a 'Coin Mela' in Lucknow / Bhopal

HDFC Bank, second largest private bank in the country, organized a 'Coin Mela' at Aminabad Branch in Lucknow. The Coin mela was inaugurated by Mr. Gouresh R. Kotian, Dy. General Manager, Issue Department, RBI, Lucknow. The initiative was in conjunction with RBI's Clean Note Policy to provide fresh notes in exchange for solid ones. HDFC Bank organized a total of 18 successive 'Coin Melas' in 16 cities in a single day, across the nation. Apart from the four metros namely; Mumbai, Delhi, Chennai, Kolkata, the mela also took place in semi-metros such as Ludhiana, Chandigarh, Patna, Indore, Jaipur, Ahmedabad, Bangalore, Hyderabad, Pune, Cochin and Gurgaon. People from all walks of life took advantage of the coin mela to exchange their soiled notes and old and disfigured coins. The Bank exchanged over Rs. 27.00 Lakh worth of coins and notes during this exercise in Lucknow. A total of Rs.1280.06 lakh were exchanged across the 18 locations. A similar ‘Coin Mela’ at its Ujjain branch in Indore was inaugurated by Mr. S.C. Gandhi, Manager, Issue Dept, RBI, Bhopal. The initiative was in conjunction with RBI’s Clean Note Policy to provide fresh notes in exchange for solid ones.

Financial inclusion and literacy twin pillars: RBI Governor

Reserve Bank of India Governor Dr D Subbarao stressed the need for the 'financial literacy' in the context of the present fiscal scenario, stating that it had to be an integral part of financial inclusion and consumer protection. ''In RBI, we treat financial inclusion and financial literacy as Twin Pillars,'' Mr Subbarao said while addressing the 24th Foundation Day and Convocation of Sambalpur University. He said many people think RBI to be a mysterious institution. In a bid to clarify such monolith, the RBI Governor explained the activities of the institution and the range and diversities of the apex bank. Dr Subbarao said the RBI was the regulator and supervisor of Banks, non-banking financial companies and significant parts of the financial markets. In a market system, regulation is required in order to protect the interests of the stakeholders and preserve the financial stability, he added. Orissa Governor M C Bhandare said the imperatives of neo-liberal economy had influenced the priorities and perspectives of higher education in India in ''startling'' new ways. He appealed to the staff and students of this university to face the challenges that are likely to come in the future. The Governor said Orissa, well endowed with mineral resources, had not achieved the desired progress and development. ''Poverty and illiteracy are the biggest hurdles and are two ugly spots which need to be removed,'' he said and urged the graduating students to play a major role.

RBI to hold financial outreach programme

VILLUPURAM: The Rural Planning and Credit Department (RPCD) of the Reserve Bank of India will organise a “financial outreach programme” at Karuvachi near here on Saturday. A statement from the Chennai RPCD said during the current financial year (2010—2011), RBI has proposed to conduct the programme in four villages in Tamil Nadu and one in Puducherry. Of these, already two in Tamil Nadu, including Paluvanchi in Tiruchi and Seelapandiankalam in Dindigul, and, Mangalam in Puducherry, had been covered. The objectives of the programme are to create awareness among rural people about RBI in general and banking activity in particular so as to include them in the mainstream financial system by opening no frills or savings accounts, extending small credit and issuing smart cards. At the Karuvachi programme, Principal Secretary to Tamil Nadu Finance Department K.Shanmugam, Collector R. Palanisamy, Indian Bank executive director Rajeev Rishi, General Manager (RPCD) M.M.Majhi, deputy general manager S.Selvarajan and assistant general manager M.A. Nasser will participate

Court notice to RBI in co-op bank merger case

Gujarat High Court has issued notices to Reserve Bank of India, Abhyuday Co-operative Bank Ltd and the registrar of co-operative societies while hearing a petition challenging the merger of a multi state co-operative bank with a state level bank. The petitioners questioned the legality and validity of the order passed by joint registrar (audit), co-operative societies, Gandhinagar, on October 8, 2008, which paved way for the merger of Abhyuday Co-operative Bank Ltd with erstwhile Manekchowk Co-operative Bank Ltd. The plea was filed on the grounds that there is no directive in law on the merger of a co-operative bank constituted under state mechanism with a multi state co-operative bank. The petitioners sought an appropriate writ, order or direction to quash and set aside the joint registrar’s order. The petitioners, alleged debtors of Manekchowk bank, stated that they received no individual notice prior to the merger. While Abhyuday Co-operative Bank Ltd is constituted under the Multi State Co-operative Societies Act, Manekchowk Co-operative Bank Ltd was formed under the Gujarat Co-operative Societies Act. Manekchowk bank had instituted summary lavad suit No 182 of 2003 for an amount of Rs 1,77,04,503 against the petitioners before the board of nominees. The court has posted the case for further hearing on March 1.

Grant more banking licenses, but have strict regime: Economic Survey

India's Economic Survey 2010-11, tabled by Finance Minister Pranab Mukherjee in the Lok Sabha Friday, recommended more banking licences but added that strict regulations must be in place before granting licenses to more players. "Providing access to banking facility to all the citizens is one of the main objectives of the inclusive development. While providing banking access, the issue of regulatory robustness for the banking sector should not be compromised," said the annual report on the state of the economy in the current fiscal. According to the survey, the minimum capital requirement for those proposing to start a banking institution should be graded, while the government should consider having two banking licenses - one for those who would provide basic financial services to unbanked areas and the other to those involved in all spheres of banking services. The survey said that industrial houses and non-banking finance corporations (NBFC) should be considered for full banking licenses, only with clearly defined roles and regulations. "MFIs (micro finance institutions) and NBFCs should be considered for being given license for basic banking. It is very essential that the basic banking functions are clearly and objectively defined."

Obituary

MR.R.V.VARADARAJAN (88 years) Rtd. DCO, RBI, Mumbai expired on 24.02.2011 at Chennai. May his soul rest in eternal peace.

The Impact of Interest Rate Controls on Financial Inclusion: A Comparative Analysis

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RBI action against PayPal as new edition of capitalism - Priyankan Goswami

The ongoing issue in the country between PayPal the new RBI guidelines is being shamelessly portrayed as a correct step of Reserve Bank of India by the bureaucrats, stock brokers and high capitalists of the country. Although the new rules of PayPal are set to disturb and create huge inconveniences to the Indian freelancers and small scale & growing IT Service providers, these lots are found to continue giving reasons for the guidelines. The 7 day time limit within which PayPal users are bound to withdraw money is being portrayed by the pro-RBI lot as a mandate which will allow better tax flow and help boost economy. However in actual, -by the new guidelines PayPal was mandated by RBI to pay interest to its Indian users for keeping money for more than seven days, something which a global virtual monetary service can never comply because of obvious reasons.  This is plain dictatorship from RBI in either bringing PayPal into a framework within which the Banks in India operate, or to tie down their hands and restrict their powers in Indian market ( one of the biggest globally) so that other Banks in India can take benefits off the gap created by the situation. In fact with PayPal being tamed down, it is bigger and better chance to reap benefits for other Payment gateway services of other banks / Providers in India & abroad such as ICICI Payment Gateway (PAYSEAL), Citibank Payment Gateway, HDFC Bank Payment Gateway and AXIS Bank Payment Gateway and even third party gateway providers like CC Avenue- Mumbai, Transecute- Mumbai & Time of Money.  It would be worth mentioning that with the increasing popularity and huge fan following of Pay Pal amongst Indian customers was hampering the business of Banks in India more and more, until these dictatorial guidelines restricted PayPal, at the cost of huge blow to Indian freelancers of course.  Another question that arises here is why the Indian freelancers who work for their living for foreign services have to pay taxes to the Indian Government, apart from paying service taxes for using Internet and Phone connections. Such freelancers are mostly dependent on small projects (ranging from data entry to creation of small software’s) of foreign companies and clients because of the inability of the Government and current system to provide them with their daily bread and butter. They would work for another country with no aide and help from the Indian government and yet pay taxes to Indian Government. What for?  With the new guideline asking PayPal to report any transactions above 500 dollars to the government, the RBI tried to showcase that the Government is now trying to have better transparency and control of funds flowing in and out of the country. But the question is, – all this while was there no check or verification on transactions taking place to and fro? The answer is YES, there were of course verifications of the PayPal transactions. As reported in a previous article in Times of Assam, the flow of funds to Indian PayPal customers is actually through PayPal India, which is monitored and transactions verified by Authorities. So the claim by RBI and the pro-RBI guideline group is nothing but a false propaganda, misleading public, to tie up PayPal and thereby help the capitalistic banks in India to rise and shine. We cannot ignore the fact the millions of fraudulent money hidden by Indians in Swiss Banks have been ignored by Government so far by Authorities except for giving Ashwashan (Assurances) to eradicate it. In fact a huge number of such people whose money is well hidden in Swiss Banks are the bureaucrats, stock brokers, bankers, etc who run the show in capitalistic India. Ultimately the entire game plan of RBI in this gimmick is something similar to the Government’s lowering down costs of vegetables and food items for the public and increasing price of petrol or cooking gas at the same time, so that the people ultimately pays more (yet be happy to see onion or brinjal prices going down!). There’s no doubt rulers of India are getting more and more capitalistic, helping the same rich section getting richer by sucking everything out of the common public. The Pay pal RBI story is part of the same ploy; inconvenience to freelancers, small scale IT service providers are going to create opportunities to the bigger players, restriction on PayPal would allow Indian Banks to capture more market.

SBI has last laugh, 'teaser' loans get nod

If there's one person who would be pleased with the Economic Survey, it would be State Bank of India chairman O P Bhatt. The government has after all sided with him in the public sector banker's battle with the regulator over "teaser rates".  To begin with, government has said home loans offered by SBI (and almost all banks earlier), for which interest rates remain fixed in the initial years before turning flexible, should be called "terraced" loans. On these loans, typically, monthly installments would rise over time.  Singling out the success of SBI's fixedcum-floating rate home loans, the survey said the product launched after the financial crisis of 2008 helped several new home buyers. Till November 2009, SBI had sanctioned over 28,000 such loans with an aggregate value of Rs 3,273 crore and defaults on them have been negligible.  Amid protests from some of SBI's rivals, RBI tried to discourage banks from offering similar loans by mandating that they set aside more capital to deal with potential default. But the government does not seem to be in favour of this approach.  "In general, it is worthwhile giving banks and financial institutions the freedom to introduce new products and thereby expand the options available to consumers and firms," it said.

Govt to remove `hurdles' for MFIs

Hyderabad:   With micro finance institutions trying to lure the poor by introducing new products that supposedly do not come under the purview of MFI Act, the state government is all set to issue a notification that will replace the word "SHG women" and include a generic word " BPL households", so that MFIs continue to adhere to the stringent norms laid down in the Act. According to sources in the chief minister's office, the law department vetted the notification on Friday in order to ensure that MFIs adhere to the existing stringent rules. "The notification aims at bringing all kinds of MFI loan products, existing and future, under the purview of the Act. The MFIs are lending extensively to poor self-help group women and even their families. The notification will be made public in a day or two," the source at the CMO said.

RBI tells banks to stop re-circulation of soiled notes

SAMBALPUR(Orissa): Soiled notes may soon be a thing of past as the Reserve Bank has asked all bank branches handling large amounts of currency to put in place note-sorting machines by the end of next month with a view to halting re-circulation of unfit currency notes.  "The Reserve Bank is committed to a 'clean note' policy. RBI exchanges soiled notes for clean ones, and mutilated notes for new ones subject to certain conditions," central bank Governor D Subbarao said at the Convocation function of Sambalpur University here.  "In pursuit of our clean note policy and to check counterfeiting, we also prescribed that by March 31, 2011, all bank branches with cash receipts of over Rs 50 lakhs per day be equipped with a note sorting machine so that every high denomination currency note is checked for fitness and genuineness before being put back in circulation," he said.  Furthermore, he said, RBI has instructed banks to ensure that the notes that they issue through their ATMs are also pre-checked for genuineness and cleanliness.  He pointed out that cost and longevity are important dimensions of currency management.  "We are a large cash economy; in fact, we are the second largest producer and consumer of currency in the world, next only to China . Producing such a large amount of currency is expensive," he said.  Talking about introduction of plastic notes, Subbarao said, one option for economizing is replacing paper currency with plastic one as some countries such as Singapore and Australia have already done.  "We are planning to try this out on a pilot basis, starting with a plastic note in the Rs 10 denomination, which we will distribute out of five of our regional offices in the country including our Bhubaneswar office," he said.  During the pilot phase, RBI needs to study not only the relative costs but also the carbon footprint associated with the recycling and disposal of plastic notes vis-à-vis paper notes.  "If the pilot proves successful, we will mainstream the use of plastic currency," he said.  By far the most important facet of currency management is building in security features to prevent counterfeiting. People should be aware of these security features so that they can tell a forged note from a genuine one, he said.  This is the motivation for the awareness campaign that the Reserve Bank has launched in the print and electronic media to educate people on the security features, he said.

RBI hints at policy stance rejig to rein in inflation

Reserve Bank of India (RBI) Governor D Subbarao, on Thursday, said it can change policy stance at any time to rein in inflation based on the macroeconomic situation.  “Notwithstanding (the) scheduled quarterly and mid- quarterly reviews, we reserve the right to alter our policy stance at any time to respond to the evolving macroeconomic situation,” Subbarao said said at the Convocation function of Sambalpur University. The statement assumes significance in the light of double digit food inflation and rising crude oil prices. Subbarao said “we are deeply conscious that inflation is a regressive tax that hurts the poor the most as their earnings are not protected against rising prices.”   He admitted “the tension that we need to manage is that economic growth requires that we maintain a low interest rate regime whereas inflation management warrants that we raise interest rates.” As part of managing growth-inflation dynamics in the post-crisis period, RBI has raised policy interest rates seven times since March 2010. Subbarao said, “we are sensitive to the need for supporting growth as economic growth is a necessary condition for poverty reduction.”  On capital inflows, Subbarao said, “the liquidity infusion policy of the US Fed, popularly known as quantitative easing (QE), has triggered larger capital flows to emerging market economies (EMEs).”   This has in turn put upward pressure on EME exchange rates eroding their export competitiveness and pushing up asset prices. EMEs had to adjust their macroeconomic policies to manage the implications of these flows, he said.

RBI to float discussion paper on deregulating savings a/c rate

The Reserve Bank today said it will come out with a discussion paper on deregulation of interest rates on savings account.  "There is a view that we should deregulate the interest rate on savings bank accounts too. We are examining the pros and cons of doing that and will shortly put out a Discussion Paper for eliciting feedback," RBI Governor D Subbarao said at the Convocation function of Sambalpur University.  At present, RBI only monitors interest rates on NRI deposits and on savings bank accounts, while interest rates both to savers and borrowers now work on the market principle of competition among banks.  "Regulation has both costs and benefits. excessive or inappropriate regulation increases intermediation cost, impedes efficiency and stifles innovation...," Subbarao said.  Currently, banks pay 3.5 per cent on savings deposit. While the RBI as part of the economic reforms programme deregulated fixed deposit rates, it had not freed the rates which banks pay on savings deposit.  While banks adjust fixed deposit rates keeping in view their asset liability position, they pay 3.5 per cent on savings bank as mandated by the Reserve Bank.

Managing growth vs inflation biggest challenge: RBI

Terming management of tension between demands of growth and of inflation as a major challenge after the global financial crisis, the Reserve Bank of India (RBI) today said though India recovered early, it was hit by inflation before others. "In the aftermath of the crisis, our biggest challenge has been to manage the tension between the demands of growth and of inflation," RBI Governor D Subbarao.  "Even though we have recovered from the crisis ahead of most other countries, inflation too has caught up with us sooner than elsewhere," he said. Economic growth requires maintaining a low interest rate regime whereas inflation management warrants raising interest rates. "In managing this tension, we are deeply conscious that inflation is a regressive tax that hurts the poor the most as their earnings are not protected against rising prices," the RBI governor said. As part of managing growth-inflation dynamics in the post-crisis period, the apex bank has raised policy interest rates seven times since March 2010, he said, adding the apex bank was are also sensitive to the need for supporting growth, a necessary condition for poverty reduction.  On financial inclusion programme that seeks to provide banking access to poor and those living in the villages and remote parts of the country, the RBI chief said banks had been advised to draw up board approved Financial Inclusion Plans for a period of three years upto March 2013. Subbarao said this should be integrated with the business plan of the bank. A uniform model has not been imposed so that each bank can build its strategy in line with its business model and comparative advantage, he said. In order to further financial literacy, the RBI has established centres focused on financial education at its regional offices in Chandigarh, Pune and Bangalore. "We hope to replicate this in other cities too," he said. The RBI has also encouraged commercial banks to set up financial literacy and credit counselling centres to help people develop better financial planning skills and to learn of the opportunities available in the financial sector, Subbarao said. "Most importantly, we are encouraging both central and state governments to include financial literacy in school and college curriculum so that the next generation enters the adult world financially literate," he said.

Budget to decide on growth-inflation tradeoff

At over 8 per cent, inflation has been consistently high over the past few months. And that probably is the biggest challenge for finance minister Pranab Mukherjee, who faces the difficult choice of choosing between a strategy aimed at containing high prices or sustaining the growth momentum.  Experts say, presenting a non-expansionary Budget, which means a fiscally tight Budget with higher taxes on commodities and services, is the only way out. But a look at the government's accounts and policy compulsions might render it difficult. The Reserve Bank of India (RBI) would like the government to adopt a credible fiscal consolidation plan. That is important because monetary policy framed by the central bank is effective when there is fiscal consolidation. “The government must adopt a credible fiscal consolidation plan, which is important because monetary policy is most effective when there is fiscal consolidation,” said RBI Governor D Subbarao. 

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State Level Bankers' Committee review held

DEHRADUN, 23 Feb: The State Level Bankers' Committee third quarterly review of all banks upto December was conducted here today. The meeting was inaugurated by Principal Secretary and FRDC Rajiv Gupta. He directed the banks to increase the flow of loans in villages and suburban areas. A review was also conducted of all the plans and projects being run by banks like the 'Atal Adarsh Gram Yojana', 'Chief Minister's Jadi-Booti Vikas Yojana', 'Kisan Credit Card' scheme, 'Pradhan Mantri Rozgar Srajan Programme' and others.Present on the occasion were Sunil Pant, Chief General Manager, State Bank of India, Principal Secretary Alok Jain, Dr Amarendra Sahu, Regional Director of the RBI, Lucknow and others.

Cuttack bank fined for RBI rule violation

The Urban Co-operative Bank, Cuttack is once again in news for wrong reasons. The RBI on Monday imposed a monetary penalty of Rs one lakh on the bank for flouting the apex bank's instructions. The Urban Co-operative bank had opened four collection centres in various schools of the city without prior approval of the RBI. The Urban co-operative bank authorities claim that the counters were opened to provide better services to the people. "We had opened the collection counters to provide better services to our customers. At the counters we collected school fees from the students. We did not violate the instructions intentionally," said Manas Ranjan Pattanaik, chief executive officer of Urban co-operative bank. He added that an appeal will be made before the RBI for a reconsideration of the penalty. According to sources, the RBI had issued a show cause notice to the Urban Co-operative bank earlier, in response to which the bank submitted a written reply also. But the RBI was not satisfied with the reply and had imposed the fine of Rs one lakh. The RBI release said "After considering the facts of the case and the bank's reply in the matter, the RBI came to the conclusion that violations were substantiated and warranted imposition of the penalty."

RBI rejects NBFCs' parity demand

RBI has rejected the demand for level-playing field by NBFCs on par with banks. Responding to a presentation made by NBFC representatives, RBI deputy Governor Shyamala Gopinath said: " banks were governed by separate and more stringent set of rules and they have various statutory liquidity requirements. So there is no point in asking for parity with banks."  NBFCs discussed a number of issues, including tax deduction allowed to banks on their NPAs, NBFCs not being included in the process of financial inclusion, among others. They also asked for a revision of deposit limits accepted by them, which has remained unchanged since 1998.  One of the major points of contention was the various versions of the definition of 'infrastructure' being used by various regulatory bodies, which needs some streamlining based on the nature of assets, class of sector and other parameters. Besides, they also asked for extending the scope of SARFAESI to NBFCs.  NBFCs met the RBI top official, following the central bank's recent circular asking them to step up capital to 15% of their assets from the earlier stipulated 12%. Ms Gopinath said: "In our communication with NBFCs, we had found that except for one, most of them already maintained their capital adequacy ratio above the benchmark."

RBI Working Group to clear up NBFC issues

The Reserve Bank of India (RBI) has formed a working group to look into the various issues related to the Non Banking Finance Companies (NBFCs). "We have formed a working group that is headed by Usha Thorat, former Deputy Governor, RBI which will look into various issues and problems faced by NBFC," said Shyamala Gopinath, deputy governor, RBI while addressing the seminar organised by Indian Merchants' Chambers on issues and challenges faced by NBFC sector. The working group also includes members of NBFC sector.

Consolidation of public sector banks back on front burner

The long-standing proposal for consolidation of public sector banks is back on the government's agenda. Senior officials in the banking sector have told FE that finance ministry is likely to appoint a committee to look into the consolidation of such banks. An announcement is expected in the Budget. The committee, which will have officials from the finance ministry, Reserve Bank of India and some bankers, will look into the merits of bank consolidation, recommend a plan of action to achieve the goal and also identify possible banks to take the process forward. Recently, the standing committee on finance headed by Yashwant Sinha also recommended that the government to spell out clear policy on bank mergers and conduct an in-depth analysis on various aspects of bank consolidation.

Subbarao risks losing war on inflation

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The importance of being Prof Reddy - S.S.Tarapore

The former RBI Governor's book attributes the global crisis to a climate of competitive deregulation in the industrialised world. Apprehensive of overheating, he argues that the benefits of growth trickle down slowly, while inflation hurts the poor instantly.  Dr Y.V. Reddy was Governor of the Reserve Bank of India (RBI) from 2003 to 2008. During his tenure he had more than his fair share of brickbats. But once the financial crisis hit the global economy and India weathered the storm with minimal damage, his percipient policies were acclaimed, both in India and globally, as being oracular. As an interlocutor, he participated vigorously in the international debate on the global financial crisis and in the designing of a new international financial architecture. This voluntary role was, in some ways perhaps, more distinguished than his now acclaimed role as Governor. Professor Reddy's book Global Crisis, Recession and Uneven Recovery, published by Orient Blackswan (2011) has already received media attention which is necessarily instantaneous and short-lived. However, even those who have read the book carefully would find it difficult to absorb the leitmotif of this seminal work which is breathtaking in its expanse.  In a foreword Andrew Sheng says, “India is a land of many talents but it was in the stars to have central bank governors of the calibre of Professor Reddy.”  Sheng commends Prof Reddy's concern for the poor, as in the run-up to the recent bubbles too much attention was devoted to becoming rich, with an inclination to forget the under-privileged. Examining the causes of the global crisis, Dr Reddy argues that least regulation was considered to be the best and self-regulation was equated with optimal regulation. In some industrial countries development of the financial sector was co-terminus with their national interest which resulted in a race to reduce financial sector regulation. Dr Reddy attributes the global crisis to regulatory capture of the government by market forces. While the achievements of the financial sector were glorified, the penalties imposed by regulators were underplayed. Respectability was accorded to unfettered market forces which fostered untrammelled greed. Human values changed which elevated markets to the status of God. In the all-pervasive climate of “greed” Dr Reddy recalls Gandhiji's statement that there is enough on this earth to meet the needs of all but not the greed of all. It is fortuitous that the global crisis occurred before India embarked on an irrevocable direction of excessive deregulation of the financial sector. Dr Reddy recalls the pithy statement of Dr Mervyn King, Governor, Bank of England, that banks are global in life but national in death — in effect, the buck stops at the national government to pick up the losses. Globalisation of finance without globalisation of regulation has inherent problems, but experts are unanimous that there is unlikely to be agreement on global regulation. Discussion on the Tobin Tax (i.e. on financial transactions tax) has now emerged on the agenda at international fora. In 2004, Governor Reddy, in a speech referred to the need to study Tobin tax kind of measures. There was an uproar both in financial circles and government and Governor Reddy was forced to recant. It must be of great satisfaction to Governor Reddy that he was in the avant garde. Dr Reddy suggests that individual countries may find it appropriate to introduce such taxes without waiting for a global consensus. Dr Reddy's assessment is that the potential output growth is in the range 8.5 -9.0 per cent. The concept of overheating raises hackles in India and when Governor Reddy referred to “over-heating”, the government advised him not to use this term — a case of macho spirits prevailing over hard realities. Governor Reddy followed a monetary policy suited to an ‘over-heated' situation without referring to the forbidden word! Stressing the need for stability in the EMEs, Dr Reddy argues that the gains from growth trickle down to the poor after a time lag but the pains of inflation visit the poor instantly. Responding to the critics on the excessive build-up of forex reserves by the EMEs, Dr Reddy argues that greater blame should accrue to the rich who consumed more, rather than the poor who worked harder and saved more. In dealing with the threat to stability, monetary policy is the first line of defence, particularly when governance is weak or absent — this was amply borne out by the Indian experience in 1979-80, 1990-91 and 1995-96. While analysis is focused on what went wrong in the major industrial countries, not enough attention is given to understanding why countries like Canada and Australia came out relatively unscathed from the global crisis. In sum, one just cannot do justice to the rich expanse of this book. Suffice it to say that this book is a lexicon on global and national finance which should be mandatory reading for all policymakers, regulators, academics and others interested in the financial sector.

Pranab Set to Give You a Salary Hike

Finance minister Pranab Mukerjee is set to spring a surprise on personal income-tax payers hurt by a sharp increase in prices. He could lighten the tax burden for those with an annual income of Rs 5 lakh by Rs 7,660 a year to compensate them for the increase in cost of living. The sum saved will be much higher for those with a higher annual income. The relief is set to come from a rejig in tax slabs, to be aligned with those recommended in the direct taxes code. “The UPA government will partially roll out the direct taxes code in the coming Budget to provide relief to the aam aadmi,” said a top government functionary. The bill has proposed a 10% tax rate for taxable income between Rs 2 lakh and Rs 5 lakh, 20% for income above Rs 5 lakh to Rs 10 lakh and 30% for income above Rs 10 lakh. An individual can also claim a deduction of Rs 1.5 lakh a year, which will be split into two segments. One will be a deduction up to Rs 1 lakh on investments in long-term savings instruments such as Public Provident Fund, new pension schemes and recognised superannuation funds. In addition, a deduction of up to Rs 50,000 will be available on premiums paid for life insurance, medical insurance and tuition fee for children. The income tax payer will not have to pay an education cess of 3% as well either in the new structure. The tax break of up to Rs 1,50,000 on home loan interest will continue. So, the tax burden of an individual with an annual income of Rs 5 lakh would work out to Rs 15,000 a year instead of Rs 22,660 now, if he has no housing loan. Income-tax slabs were last changed in 2010-11. The slabs were widened again to compensate for a higher cost of living and reward the missing middle for better compliance. The government also introduced infrastructure bonds, with a separate ceiling of Rs 20,000 to increase investment avenues for individuals, taking the total tax deduction to Rs 1,20,000. The tax break on infra bonds was meant to be available only for one year.

Panel discourages super profits by bourses, says Jalan

The committee headed by Bimal Jalan to suggest a roadmap for stock exchanges has generated a lot of interest with the response being extremely positive or extremely negative. In his first interview since the report on regulation and governance of market intermediaries was submitted, Jalan, a former Reserve Bank of India Governor and a lawmaker, tells TOI that the idea behind the recommendations was to benefit investors at large.