Chakrabarty gets his domain back, and some more

The Deputy Governor of the Reserve Bank of India, K.C.Chakrabarty, who was stripped of a few portfolios in August last year after his reported remarks on how the central bank had done little to combat inflation, has now been assigned additional responsibilities.  The new portfolios assigned to him include departments such as human resources development, administration and personnel management, rural planning and credit, banking supervision and currency management. Financial inclusion, which is being pushed by the government and RBI, will also be handled by him in what is seen as a rehabilitation for him.  Mr Chakrabarty’s portfolio was reduced to customer services, information technology, inspection and Rajbhasha, after those reported comments on inflation. His old portfolios were not restored even in November when deputy governor Usha Thorat retired. The portfolios handled by Usha Thorat was then assigned to two other deputy governors — Shyamala Gopinath and Subir Gokarn. Mr Chakrabarty allegedly said with the central bank injecting liquidity at 5% and inflation being at 10%, RBI will never be able to control inflation, everything else remaining the same. His comment came just two days after RBI raised the repo rate by 25 basis points to 5.75% and the reserve repo by 50 bps to 4.50%. Mr Chakrabarty is known for his blunt approach and does not hesitate to offer his views to the sound byte hungry media, in a sharp contrast to career central bankers.  According to bankers, the deputy governor’s portfolios were reduced because the governor was disappointed that he voiced his opinion in public and was critical of measures taken by RBI to control inflation. Some officials, however, added that even after the portfolio changes in August last year, Mr Chakrabarty, a former bank CEO, was consulted by the governor on policy decisions relating to new banking licences and operations of microfinance institutions.  The changes in the portfolios and the appointment of Anand Sinha as the new deputy governor come just a few days before the next review of the monetary policy.  Several economists and analysts have said RBI has been behind the curve, or been lagging in raising interest rates, an observation that has also allegedly been attributed to Mr Chakrabarty. In fact, recently Governor Subbarao said RBI is ‘desperate to control inflation’. Economists expect RBI to take aggressive measures to rein in inflation, which is now close to 9%.

Co-op banks cannot lend housing loans beyond 5% of assets

The Reserve Bank has barred cooperative banks from giving housing loans beyond 5 per cent of their total assets. Earlier, State cooperative banks (StCBs) and central cooperative banks (CCBs) were allowed to extend housing finance up to 10 per cent of their total loans and advances. These banks, with exposure in excess of the new limits, have been asked to initiate steps to bring it down to the revised limits within six months. “It has been decided that the exposure of StCBs and CCBs to housing finance would, henceforth, be limited to 5 per cent of their total assets, as against 10 per cent of their total loans and advances," a RBI notification said. The assets of StCBs and CCBs may be reckoned, based on the audited balance sheet as on March 31 of the preceding financial year, it said. The decision would curtail exposure of such lenders to real estate. The revised limit of credit exposure for housing would be applicable with immediate effect. The StCBs and CCBs were earlier allowed to give house loan to an individual borrower up to Rs 20 lakh. In case of a bank having a net worth of Rs 100 crore and above, the limit was Rs 30 lakh.

Banks tighten lending for commercial realty

Banks are getting tough with developers of commercial projects such as office buildings, malls and shopping centres--a fallout of the corporate loan scam that came to light last year. Meanwhile, several large property developers have to repay loans in the coming months.  Builders seeking fresh loans have been asked to meet more stringent conditions, including demands to produce five-year lease agreements with tenants, and having to settle for considerably lower borrowings against future rent receivables, two bankers said. Indian Overseas Bank, for instance, will lend to develop- ers only if they produce a five- year leasing agreement with a lock-in period for tenants. “This is what banks do at this moment,“ said M. Narendra, Chairman and Managing Director of the public sector bank. “This way, you can be sure of the repayment capacity of the borrower.“  Banks grew wary of lending to commercial real estate projects after several of them turned sour during the slow- down and developers struggled to repay debt. Their worries increased when in November the Central Bureau of Investigation nabbed eight senior officials of state-owned banks and other financial institutions for irregularities in lending to builders. Volatile sector The Reserve Bank of India (RBI) had been warning banks even earlier about the high- risk nature of realty, terming it a “sensitive sector“ along with capital markets and commodities because of likely price fluctuations. Anand Gupta, honorary treasurer of Builders' Association of India, an industry body of construction contractors and builders, said no new commercial real estate project has been launched in the past couple of months. “Banks have not approved any fresh proposals in the last one-two months,“ he said. “Most banks are even hesitating to release sanctioned money.“

REGULATORY PRESCRIPTIONS - Microfinance: misunderstood, Malegamed

A generally beleaguered microfinance industry was eagerly waiting for Yezdi Malegam for deliverance. Any conversation about the microfinance business would end with the expectation that the Malegam committee would de- liver a healthy dose of oxygen to the choking microfinance industry. The report was expected to be the panacea for all that ails microfinance in India. The report, which came out on Monday, disappoints not only in its inability to meet these expectations, but also on fundamentals. While each one of the recommendations may have merit when seen in isolation, together they are a lethal combination. It is difficult to ac- cept that the collective wisdom of Malegam, Shashi Rajagopalan, an expert in cooperatives; Aditya Birla Group head Ku- mar Mangalam Birla; Reserve Bank of India (RBI) Deputy Governor K.C. Chakrabarty and former chief of India's space research organization U.R. Rao could have delivered this blow to the microfinance sector in the country. First, the good things in the recommendations: The committee suggests retaining priority sector status for the micro- credit business; keeping micro-finance institutions (MFIs) out of the Moneylenders Act; keeping the regulatory role with RBI instead of state governments; enhancing the role of RBI in supervision; and engaging with industry associations on an on- going basis. However, there are several problems with the report. Chakrabarty, during his brief tenure as the central banker in charge of rural credit, provided progressive measures for financial inclusion in the banking sector by suggesting two radical steps in the rather conservative atmosphere of RBI — the first was to remove licensing requirements for opening branches in towns with a population less than 50,000 people; the second was to remove the interest rate cap on all loans as the base rate regime kicked in. The only area where there were some controls on interest rates was in the case of politically sensitive agricultural loans. As a member of the Malegam committee, he has signed off on a report that puts a cap on micro- finance interest rates at 24%, without dissent. The question is not whether 24% is an appropriate cap; it is more about the principle. One of the concerns that led to the formation of the committee was that microfinance companies were profiteering from the poor and not treating them with dignity. As a central banker, a more non-invasive way of addressing the issue would have been in controlling the capital flow to these institutions both through the nature of equity investments and through the banking system, thereby giving the market an opportunity to experiment and provide diversity of services, improving transparency and enforcing a customer responsibility code. If the banking sector, the auto finance sector and the housing finance sector have plurality of institutions (and no loan size and interest rate caps and definitions of moratoriums) with the central bank stepping in whenever it seems to think a larger customer interest is involved (as it did in the case of teaser rates offered by housing finance companies), we see no reason why the same principles should not be applied to the poor. Dealing with poverty does not mean restricting choices and giving people what we think is good. Dealing with poverty means trying to give the poor as much dignity and diversity of choices that the non-poor enjoy. The report defies the plurality of institutions and choices. The Andhra Pradesh ordinance (as recommended by the sub-committee) can lapse because the panel has effectively completed the task that was started by the state government. For not having abdicated the responsibility to supervise and inspect MFIs that have shown poor governance and indifferent behaviour towards customers, this antidote by the RBI committee appears populist and misplaced in what should be controlled and what should not be.

Malegam panel recommendations not feasible, say microlenders

Microfinance institutions, or MFIs, could well run into a crisis if certain recommendations of a Reserve Bank of India (RBI) panel are implemented in the current form, executives in the business warned, even as shares of SKS Microfinance Ltd, the largest and lone listed MFI in the country, rose 3.84% to close at `694.25 apiece on Thursday on the Bombay Stock Exchange. The stock rose 13.08% intraday to `756. The exchange's benchmark index, the Sensex, rose 0.36% to close at 19,046.54 points. Udaia Kumar, managing director of Share Microfin Ltd, and a member of Microfinance Institutions Network, an industry lobby group, said MFIs would approach RBI to sort out some of the contentious issues in the report. MFIs, in the business of lending tiny loans to poor peo- ple, are already facing a tough time in Andhra Pradesh on ac- count of a controversial state law. The RBI committee, headed by noted chartered accountant Y.H. Malegam, has proposed capping the interest rate at 24% for individual loans; a ceiling of `50,000 on the annu- al family income of the borrower; and a Rs. 25,000 ceiling for loans to a single borrower. The proposals, if accepted, will be implemented by 1 April. More than the cap on the loan rate, MFIs are worried about the ceilings on income and loan amount. Senior executives in MFIs said most of the people who currently borrow from them will not be able to access money if these limits are implemented as a majority belong to families with an annual in- come in excess of `50,000, and require loans higher than `25,000. Smaller MFIs, in particular, will be severely hurt, they added.

Microfinance institutes in UP welcome Malegam Committee recommendations

Malegam proposals will weaken small MFIs, say experts

The recommendations of the Malegam committee, if accepted by the Reserve Bank of India (RBI), will be a positive step towards enhancing stakeholder confidence in the microfinance institution (MFI) sector — a critical element for long term sustainability of the sector — but once implemented, these proposals will pose additional operating and compliance-related challenges for the MFI sector, experts said. The sector’s growth prospects and profitability will weaken, thereby leading to a possible consolidation in the industry. The decline in the gross interest spreads of the top five MFIs is expected to be in the range of 5 to 8 per cent, over the medium term. Consequently, rating agency Crisil foresees a possible consolidation in the MFI industry with higher minimum net worth norms which will raise the entry barrier for new MFIs. “Smaller MFIs will find it difficult to raise capital, given the challenges of lower growth and profitability. MFIs with stronger internal processes, higher focus on transparency and governance, and efficient operations will reap the maximum benefits,” it said.