Non-interest income can be risky: Gopinath

Reserve Bank of India Deputy Governor Shyamala Gopinath cautioned that while non-interest income did offer diversification benefits, it might not necessarily be less risky than conventional loans. Apart from the financial risks, there were significant reputational risks, particularly when banks engage in distribution of third party products.

“There cannot be rule based prescriptions in this regard. But it would be imperative for the bank boards to closely understand the underlying risks, assess whether returns are commensurate with the risks and monitor such businesses of banks. For the market discipline to work,increased, granular disclosures of fee based income may have to be looked into,'' said Gopinath while inaugurating 12th FIMMDA-PDAI Annual Conference last week. Gopinath further explained that regulatory prescriptions had not recognised the concept of ‘risk as a fungible commodity” and the fundamental distinction between banks taking credit exposure through giving loans and investing in bonds had not been lost. “There are stipulations capping banks’ investments in corporate bonds, particularly unrated bonds which are nothing but proxy-loans. Recently, a limited relaxation from these norms has been permitted in the case of bonds issued by companies engaged in infrastructure development,'' said Gopinath. On developing a corporate bond market Gopinath said that in India in spite of persistent policy focus, this was one area where the outcomes had been less than satisfactory. “The intractable issues pertain to the structural elements relating to the lack of appetite for credit risk among nonbank institutional investors. The issuances have therefore been largely restricted to financial institutions and public sector entities,'' said Gopinath.  However, Gopinath clarified that in India, the bank balance sheets are relatively less aligned with capital market – both on the asset side as well as liability side. Capital in the form of subordinate debt and other non-equity instruments constitutes only around 38% of total capital. Issuance of such instruments is restricted by the limit on non-equity elements of regulatory capital.

Banks may charge for mobile transactions from April – A.P.Hota

The Reserve Bank of India had set up the National Payments Corporation of India (NPCI) as an umbrella institution to devise an affordable payment mechanism and help in the financial inclusion process. A.P.Hota, Chief Executive Officer of NPCI explains how the organisation is working towards consolidating the multiple payment systems into a nation-wide uniform and standard business process for all retail payment systems. The mandate of RBI is that NPCI should be the umbrella organization for all retail payment systems in the country. Loosely speaking, NPCI can play an operator's role in al lretail payment systems and can act as the central processing organizations for various retail payment system, if need be, for inter-operability. Retail payments system are cheque clearing, Electronic Clearing Service (ECS), Electronic FundsTransfer (EFT), ATM Switching, POS Switching, card payment schemes and mobile payments. Currently, NPCI has been authorised only for three activities -ATM switching, inter-bank mobile payments and Cheque Truncation. In-principle approval has also been received for building a card network, 24x7 remittance system and Automated Clearing House. The central bank will accord specific approval as and when NPCI gets ready technically, procedurally and organisationally to handle new activities. Experts are of the view that NPCI's mobile payment initiative is a game-changer. For mobile payment, we are in the news for the last couple of months. You know that, the number of mobile subscribers in the country is now more than 600million, which is substantially larger than the number of bank accounts. Quite likely, almost all bank account holders are mobile subscribers. If banks can deliver banking services on mobile, the cost of banking services would be considerably reduced. Banks would be able to process various transactions including the money transfer transactions in a straight manner without the use of cash or cheques. It would be a game-changer because of its 24x7 nature of operation. Money transfer can happen on a real time and as per the latest data, about 40 lakh customers have been registered for mobile payments. Currently , banks as well as NPCI are providing the service free of charges. These are only promotional offers. From April 1, 2011, NPCI would be charging 25 paise per transaction. The remitting banks may also start charging from April 1. But the charges are likely to be very nominal. Banks know very well that unless, the charges are much lower than the National Electronic FundsTransfer (NEFT) charges, it would not take off.  We have already launched the 24x7 remittance system on the mobile channel. We propose to use the same core infrastructure for handling remittances received by banks through other channels like internet, ATM and bank branches. We are discussing with banks as to how the same can be done. Once the blue print is ready, we would approach RBI with a request to enlarge the scope of the remittance system they have approved. It is just a few months away. Payment systems has been evolving on a continuous basis. Mandate therefore is, not a fixed one.  NPCI's role would be to keep approaching the Reserve Bank of India with new ideas and new products on a continuous basis. But I can say that for next three years we have a number of projects at hand. Mobile payment was not a specific mandate of RBI. We approached the central bank with a blue print and it approved the same.
Currently, our primary data centre is in Hyderabad with the disaster recovery centre in Mumbai. We have already taken third party data centre space at Chennai for our CTS project . Also, we are setting up a new communications network. Currently, we are using the INFINET of IDRBT for banks to connect to us. If banks can deliver banking services on mobile, the cost of banking services would be considerably reduced. Banks would be able to process various transactions including the money transfer transactions in a straight manner without the use of cash or cheques.

Banks’ business correspondents may get higher pay

Business correspondents, who work mainly in rural areas and urban slums on behalf of nationalised and commercial banks to extend benefits of banking to the economically weaker sections, are likely to get higher remuneration.  Reserve Bank of India (RBI) officials said on Monday that in comparison to the efforts put in by these correspondents, their income is very low. This,in turn, does not help widen the reach of banking facilities to economically weaker sections. “A circular hiking their remuneration will be issued by the RBI shortly,” sources said. The correspondents are appointed to get new customers for banks from poor families, introduce them to various banking services, and assist them in understanding the banking process. A correspondent visits the villages on regular intervals, collects whatever amount the persons want to deposit in their accounts and process the deposits with a handy electronic machine. The machine immediately informs the main server of the bank about the transactions. The customers can withdraw money and check the account balance through the machine. The correspondents also answer all queries of the customers.“The RBI has recognised the efforts involved in the job and is thinking of revising the remuneration,” sources said. Business correspondents are part of financial inclusion,a policy mooted by the Reserve Bank of India in 2005. The policy has compelled nationalised as well as commercial banks to implement it by enrolling account holders from economically weaker sections of society. The current payment of these correspondents is around Rs 1,000 to Rs 1,500 per month. After the RBI circular, it could go up to Rs 5,000 per month. RBI officials discussed the payment issues of correspondents during a meeting held in Pune in the last week of November 2010 where business correspondents from various parts of the state had gathered along with the villagers who are now customers of nationalised banks.

‘Don’t put onus of fin inclusion on banks alone’

The government’s financial inclusion agenda is desirable but that should not be discriminatory and lead to unmanageable burden on banks with specified lending targets for the poor, said Aditya Puri, Managing Director and Chief Executive at HDFC Bank. “We cannot have two worlds,” said Mr Puri, winner of The Economic Times Business Leader of the Year Award. “We cannot have the haves and have-nots. I think financial inclusion is a political, economical and social necessity. That opening a banking account or giving a loan without creating a repayment capability is not the solution, so please do not have this priority sector targets only for banks.”

RESERVE BANK ‘OVERSIGHT’ FUNCTIONING

The Bank for International Settlements defines oversight as “central bank function, whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against these objectives and, where necessary, inducing change”. The three key ways in which oversight activity is carried out are through (i) monitoring existing and planned systems; (ii) assessment and (iii) inducing change. In India, the Payment and Settlement Systems Act, 2007, and the Payment and Settlement Systems Regulations, 2008, provide the necessary statutory backing to the Reserve Bank of India for undertaking the oversight function. The central bank manages the various settlements system, including cash, through currency chest and clears cheques, besides various electronic clearing services.

Proposals invited for taking Residential Flats on "Lease/Leave and License basis

The Reserve Bank of India (RBI), Belapur, Navi Mumbai urgently requires 25 nos.; residential flats having carpet area (exclusive of balcony/ sleeping-out terrace, staircase, lift, lift/staircase lobby, common passages, service shafts, etc.) between 71 to 79 sq. m., 20 nos.; having carpet area between 91 to 95 sq. m. and 10 nos.; having carpet area between 117 to 118 sq. m on lease for its officers in different Grades. The flats should be located in and around 2/3 km from Belapur/ Kharghar Railway Station.  All flats should have minimum 2BHK accommodation. The complex in which the flats are situated should have at least one car-parking per flat.

Interest on bank fixed deposits likely to go up

Banking experts believe sharp rise in food inflation and in the overall inflation rate in December may prompt Reserve Bank of India (RBI) to go for an interest rate hike by at least 50 basis points (bps) at its review meet on January 25.  This in turn may lead to another round of rate hike in fixed deposits, experts believe.
Contrast this with the crash in the stock markets. The BSE Sensex, the leading benchmark index for stock prices, has lost almost 1,400 points in just five trading sessions. No wonder that risk-averse investors are flocking to safe havens and parking money with banks. Already the rates have gone up significantly. The country’s premier lender, State Bank of India (SBI), recently came up with the second round of rate hikes in less than a month. This has made the rate of interest very attractive for retail depositors.  It has hiked interest on its 555-day special deposit scheme by 175 basis points in the last four months to 9 per cent, even better for senior citizens who earn 0.5 percentage points more in bank deposits. Such high rates in term deposits by banks were last seen 22 months ago in March 2009. Last year, around this time deposit rate by leading banks was around 7 per cent. Following SBI’s example, Bank of India raised interest rates on select term deposits of maturities of one to three years. On deposits for a tenure of one year to less than two years, the new rate was 8.25 per cent against 7.5 per cent earlier. Others like ICICI Bank, HDFC Bank, IDBI Bank and State Bank of Patiala hiked their rates to protect their deposit base. Some private sector banks, which had pre-empted the deposit rate hikes, may have to come up with another round of hikes to attract retail depositors as their rates are only marginally higher than that of SBI.The interest rates started rising because RBI in 2010 continued with its monetary tightening in order to rein in inflation and in the process the effective policy rate has gone up by around 300 basis points.

India seeks financial sector audit by IMF, World Bank

After carrying out a comprehensive health check-up of the financial sector in 2009, India has sought an assessment under the Financial Sector Assessment Programme (FSAP) of the International Monetary Fund (IMF) and the World Bank. “India did a self-assessment (by the Committee on Financial Sector Assessment, or CFSA) of its financial sector in 2009. This has given us the confidence to get our financial sector evaluated by international financial institutions like IMF and the World Bank. We have voluntarily sought a full-fledged Financial Sector Assessment Programme,” Finance Minister Pranab Mukherjee said at the second International Finance Conference at the Indian Institute of Management, Calcutta.  Referring to the Financial Stability and Development Council (FSDC), Mukherjee said the government would set up a Financial Sector Legislative Reforms Commission to rewrite and clean up financial sector laws.  “Without prejudice to the autonomy of market regulators, FSDC will undertake macro-prudential supervision of the economy, including functioning of large financial conglomerates, and address inter-regulatory coordination issues,” he said. FSAP, established in 1999, is a comprehensive analysis of a country’s financial sector. In developing and emerging market countries, FSAP assessments are conducted jointly with the World Bank. In these countries, FSAP assessments include two components: a financial stability assessment, which is the responsibility of the Fund, and a financial development assessment, the responsibility of the World Bank.

Interest rates may rise by 25-50 basis points: SBI

Liquidity pressures to top agenda of RBI’s meeting with bankers.

With inflation remaining at elevated levels, banks are bracing for an up to 50-basis-point increase in key policy rates. State Bank of India (SBI) Chairman O P Bhatt said the Reserve Bank of India (RBI) might raise interest rates by 25 basis points soon. Banks are waiting for the monetary policy review on January 25 for further indication. Seconding the SBI chairman’s outlook, Crisil Chief Executive and Managing Director Roopa Kudva said there was a general expectation that the rates would be raised considering the current rate of inflation. RBI was likely to raise the repo and reverse repo rates by 50 basis points in the next six to nine months, she added. RBI has been in the rate hardening mode since the fourth quarter of 2009-10. So far in the current financial year, the central bank has increased policy rates by 125-175 basis points to check inflationary pressures. RBI has said policy transmission improves if liquidity in the banking system is in the deficit mode. Tight liquidity has prompted several banks to raise deposit rates many times. They have also increased lending rates, but at a slower pace.