Fin inclusion duty of the mainstream: Chakrabarty

Financial inclusion requires work by mainstream financial institutions, such as banks and cooperatives, said K C Chakrabarty, Deputy Governor of the Reserve Bank of India, here today. “It’s not institutions like micro finance institutions (MFIs) which will make financial inclusion possible in the country. Rather, it’s the mainstream institutions,” he said on the sidelines of a financial inclusion programme arranged by Corporation Bank in Mallaohalli village, 50 km north of Bangalore. Adding: “MFIs play a very important role as of now and they will continue to do so.” RBI has already told banks they must provide basic banking services in all villages with a population of 2,000 and more by March, 2012. It is also planning to cover villages with a population of less than 2,000 in an integrated manner over the next three to five years. “In the first phase, 72,000 villages will be covered. The remaining villages will be covered in the second phase of the programme,” he said. Chakrabarty stressed the need to use technology in reaching out to ruralites. “Even after 40 years of nationalisation of banks, banking facilities have not reached even 50 per cent of the population. Only by leveraging technology can we bridge this gap,” he said. “We should ensure that every person has a bank account, so that he can avail various financial services offered by the government and other agencies.”

'Financial inclusion imperative to reap demographic dividend' - RBI Deputy Governor Dr.K.C.Chakrabarty at IIM-L leadership summit Manfest 2011

Financial inclusion is imperative for India to reap the benefits of its demographic dividend, Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty has said. “The challenge for the financial system is to become more efficient. Financial inclusion would mean efficiency of the the banking sector in allocations by reaching out to every individual.”  He said efficiency in the financial sector is in terms of both allocation and operation. While the former pertains to easy access to people, the latter is about harnessing technology rather than mere mechanisation to improve functioning. Chakrabarty was speaking today at ‘Arthashaastra’ —The finance leadership summit, as part of the Indian Institute of Management, Lucknow’s (IIM-L’s) annual international business conclave, Manfest 2011. “The financial sector is surviving due to its regulator, which occasionally bails it out and neutralises competition,” he noted. He said 50 per cent of India’s population did not have bank account, 90 per cent had no access to credit or life insurance cover, 95 per cent had no general insurance, while 98 per cent had no participation in the capital market. “The financial sector has to improve upon its delivery mechanism, especially for the poor and launch innovative products for the agriculture and micro, small and medium enterprise sectors,” he said. Exhorting future managers, Chakrabarty underlined that today’s business models lack the ability to reach out to the poor. “I do not espouse subsiding the poor or charity, but we can support them with appropriate financial products, one which is also commercially viable and does not exploit them.” Quoting a report, Chakrabarty said by 2030, India would account for 10 per cent of the world’s gross domestic product (GDP) with the latter been estimated at 308 trillion dollars Rs 14,075.60 lakh crore) up from 62 trillion dollars Rs 2,833.40 lakh crore) at present. “Two-third of the world’s GDP would be accounted for by the developing countries with India and China jointly accounting for 35 per cent by 2030,” he added. Other speakers at the conclave included Fullerton Securities president and CEO Pallav Sinha, Axis Asset Management CEO and Managing Director Rajiv Anand, Standard Chartered Bank fixed income currencies and commodities (South Asia)-Head Ananth Narayan and IIM-L finance professor Vipul. The speakers were unanimous that regulation in the financial sector would rather increase and be more stringent. “Know your customer’s business, risk management and fair treatment of customers, apart from financial inclusion would acquire centrestage for the financial sector in the future,” Chakrabarty observed. He suggested the country’s financial sector should first meet the aspirations of people, before venturing global or trying to integrate with global markets. “The focus of the domestic financial sector should be local with the blend of brick-and-mortar and technology approach, while catering the needs of the Indian diaspora,” he said. Commenting on black money in foreign banks, the RBI deputy governor said the money went to foreign shores, since the rate of returns in India were not attractive. “Tax evasion is not the only cause for black money transactions, as it is not easy to siphon-off black money,” he added.

Monetary policy cannot kill inflation, must not kill growth

The question of whether or not RBI should hike policy rates in its quarterly monetary policy review due on January 25 should have been answered rather forcefully by the inflation data for December.
After showing tentative signs of moderation in October and November, wholesale price inflation shot up close to 8.5 per cent on the back of a spike in vegetable prices led by onions and tomatoes.
Even if these prices were to cool off a tad, the prospect of a hike in diesel prices looms on the horizon. The chances of ending the current fiscal year at anywhere near the 5.5 per cent that RBI officially targets seem bleak indeed.  The question then is: should RBI stick to its measured approach and push the reverse repo and repo rates up by a quarter of a percentage point or go the whole hog and hike by half a percentage point? It might be tempting for the RBI governor to choose the latter and signal to the markets that he too packs a mean punch. However, by doing that he might just end up "over-compensating" for the other imbalances in the system that play an equally important role in keeping prices high - excessively loose fiscal policy and the woeful state of agriculture that years of neglect has bred. The result could be what economists term "hard landing" or a sharp slowdown in growth. Growth has incidentally started looking fragile again with the November industrial production index registering a growth of just 2.7 per cent. The RBI Governor has to keep the risk of pushing growth off a cliff in mind in deciding January's policy action. A quarter of a percentage point increase in rates should do the trick this time.

Government, RBI pact: a nail in Autonomy’s coffin?

A fresh agreement between the Jammu and Kashmir Government and the Reserve Bank of India on the role of the J&K Bank has put a spotlight on the National Conference’s Autonomy proposal,  which has been conceived as one of the solutions to the long-standing Kashmir dispute.
 With the RBI likely to take over the overdraft role of the J&K Bank from April 1, political analysts have begun to see the development as a ‘first dent’ in the NC’s autonomy proposal which naturally makes the financial autonomy of individual institutions a must.  Economists don’t rule out certain fears associated with the pact. “If the mismatch between the central flow of funds and the requirement of plan funds continues with a wide time gap, then the state government may get into financial crisis. And if the state government manages its finances efficiently in terms of expenditure compression measures and in terms of maximum internal resource mobilization or in terms of tapping IRM potential, then the state government has no problem. At least it has an advantage that it will come out of the JK Bank overdraft debt. In that process, the state will save on an average over Rs 250 crores which is a huge sum for meeting the other development expenditure which otherwise would go to the JK Bank as interest payment on overdraft borrowing,” said noted economist. According so observers, the pact will make more idle funds available to the J&K Bank in a market already flush with money. “That is likely to reduce profitability of the Bank which could lead to forcing the government in a few years to sell its shares making it like any other Bank that will have only the J&K name tag like Travancore or Hyderabad or Rajasthan. It will cease to be a government company which employs only the state subjects,” said the former official in the Finance Department. “Extra money will become available to markets outside J&K not where the deposits take place. Losing the tag of being official bankers to J&K government would adversely affect its prestige that had seen it grow as number one private bank in India. But according to experts in Banking, it will be a win-win situation for the Bank and the state government. “I think the agreement says that the JK Bank will continue to be the banker to the state government but under the overall supervision and monitoring of the Reserve Bank of India, as is the case with others banks across the country,” says the former J&K Bank Chairman, Muhammad Yousuf Khan.  He believes that it is not only the overdraft facility that makes the bank earn revenue. “If the bank would lend the overdraft amount, which it would give to the state government, to other institutions, it would earn more revenue,” Khan told Greater Kashmir.

Case for a national gold bank - T.V. Gopalakrishnan, Former Chief General Manager, RBI

India owns over 18,000 tonnes of above ground gold stocks worth around $800 billion, almost 11 per cent of the global stock, according to the World Gold Council (WGC) estimates. This is equivalent to nearly half an ounce of gold ownership per capita, a figure which is significantly below consumption in Western markets, representing scope for more growth, says a WGC research paper ‘India: Heart of Gold'. In 2009, total domestic gold demand reached $19 billion, or Rs 97,400 crore, which accounts for 15 per cent of the global market, according to the WGC. While Indian consumers continue to stock gold despite rising prices, when it comes to total gold reserves India ranks 11th in the world with 557.7 tonnes. Above ground gold stock is different from the total gold reserves. Over the past 10 years, the value of gold demand in India has increased at an average rate of 13 per cent a year, outpacing the country's real GDP, inflation and population growth by 6 per cent, 8 per cent and 12 per cent, respectively. The country at present has one of the highest savings rates in the world, estimated at around 30 per cent of total income, of which, 10 per cent is already invested in gold. In this backdrop, the setting up of a national gold bank (NGB) assumes importance. Such a bank, if set up, can gradually pave the way to have stock of surplus gold in the economy in one place. Over a period, the bank can have a say in controlling the volatility of gold prices in the domestic market, in particular, and can also act as a regulator of bullion market which is fast expanding, with international linkages. The bank can engage in the purchase and sale of the yellow metal and act as a trustee/pledgee for banks/institutions having gold surplus, and also keep gold for safe custody or raise funds against the precious metal to meet their liquidity constraints. As it is, the rate of deposit growth of commercial banks has been on the decline for the past few months and the investments in gold and real assets have been on the increase. Generally, Indians have a weakness for gold and the demand for gold is price insensitive. It is all the more so when the real rate of interest on deposits has been negative or insignificant compared to the rise in gold price. The banking system has been facing liquidity problem off and on and raising funds from the market poses a series of difficulties. Funds are becoming a major constraint to develop infrastructure. It is time for banks to find alternative sources of funds to continue to be vibrant in business and provide the well-needed support system for economic growth. One way to attract deposits is to encash the idle gold. In this context, the revival of the gold deposit scheme (introduced in 1999) has to be seriously considered. According to WGC, India's annual gold consumption is around 800 tonnes and gold reserves could be around 25,000-30,000 tonnes. The banks should be encouraged to accept gold as deposits and create fixed deposits linked to gold keeping very good margin. To start with, for instance, for pure gold worth Rs 50,000, the banks can create a fixed deposit for Rs 25,000 for a minimum period of three years and give an interest rate of, say 3 or 4 per cent a year. The banks can keep this gold as trustees. The investor earns interest on the idle gold while also securing his holdings under the custody of the bank. For the banks, they get gold as deposits and they should be in a position to raise funds against the security of gold. The borrowing power of the banks increases in the market and they will have required resources to expand credit portfolio. The banks should be given exemption from SLR for these deposits against the gold, as there is no additional liquidity created and the liabilities are fully backed by the gold they hold. However, the borrowings that these banks subsequently make against the gold can attract SLR and the advances they create can attract usual capital adequacy norms. The advantages of setting up a National Gold Bank are many. The bank can make bulk purchases from the open market including the international market and act as a store house of gold for banks and institutions. The banks and institutions holding gold can sell it to the National Gold Bank or raise funds by pledging it. This will bring down banks' borrowings from the RBI. The National Gold Bank can have a refinance arrangement with the Reserve Bank of India till such time it stabilises its operations. Money market operations can be better regulated and the black money component may gradually come down if the gold held in the country is brought under regulated market. Over a period, when the gold bank's operations get fully stabilised, the influence of gold in the market becomes predictable and circulation of hard cash and black money gets reduced, then framing of monetary policy and transmission of signals to financial markets by the Reserve Bank will prove to be easy. For the banks, such an arrangement provides opportunities to expand their business in terms of deposits, borrowings and loans. For the economy, benefits out of a gold bank are tremendous. The idle gold turns into cash to expand economic activities particularly the infrastructure and the gold and financial markets widen. It facilitates minimising generation of black money as the gold becomes a declared asset with the banks. Once a large quantum of gold comes under the custody of the gold bank, Government's fiscal policy and fiscal deficit can hope to have a totally different scenario than what is today. The image of the economy in the international market will improve. It will be a win-win situation for banks, investors, the economy, and the Government. (The author is former Chief General Manager, RBI. Views are personal.)

RBI pushes for manufacturing boost

Amid decelerating manufacturing growth, the Reserve Bank wants the government to come out with measures in the Budget to give a boost to the sector, which can employ surplus labour from agriculture. The suggestion was made by RBI Governor D Subbarao at a meeting of the Financial Stability and Development Council (FSDC), which met for the second time recently after its constitution last year, officials said. However, none of the regulators expressed reservations over the FSDC’s functioning. The body had seen criticism from RBI and Sebi initially over one of its proposed roles, to coordinate between financial sector regulators.

Chitale to replace Malegam as accounting standards body chief

The National Advisory Committee on Accounting Standards (Nacas), the country's apex body in this regard, has been re-constituted. M M Chitale, veteran chartered accountant, will take charge as chairman in February from Y H Malegam. Indian accounting standards are in the process of being tweaked to converge with International Financial Reporting Standards (IFRS). The Institute of Chartered Accountants India (ICAI) has formulated a ‘ converged-IFRS ’, a proposal that will merge the accounting standards to meet the IFRS stipulations and the timeline of their application to Nacas. The proposal now awaits Nacas’ nod. Under Malegam, the committee had advised the government to defer implementation of AS-11, an important tax regime, to 2011. This is the accounting standard on mark-to-market provisioning in corporate profit and loss accounts for foreign exchange-related gains and losses.  Chitale has been practising for 38 years and heads an independent CA firm, Mukund M Chitale & Co. He is on the board of many reputed companies, including Larsen & Toubro, Sriram Transport Finance and L&T General Insurance, as an independent director. Other key members who have joined Nacas with Chitale include P R Ravi Mohan (Reserve Bank of India), Usha Narayayan (executive director, Securities & Exchange Board of India), G Ramaswamy (ICAI) Anil Murarka (Institute of Company Secretaries of India), Brij Mohan Sharma (Institute of Costs and Works Accountants of India), Sarit Jafa (principal director, commercial audit, Comptroller and Auditor-General of India), Sunil Gupta (joint secretary, ministry of finance, nominee of the Central Board of Direct Taxes), Ashok Haldia (Associated Chambers of Commerce and Industry of India), S Santhanakrishnan (Confederation of Indian Industry), Renuka Kumar (joint secretary, ministry of corporate affairs) and a nominee from the Indian Institute of Management, Kolkata. The new team, with Chitale, will hold office till January 31, 2012.

Discussion paper on foreign banks

The discussion paper on foreign banks should have been issued two years ago, but then the global financial crisis made foreign banks look more dangerous and less worth letting in. However, its significance becomes clearer if it is read together with another paper the RBI issued last August on entry of new private banks. It is seriously thinking of giving new licences.  It has done so only rarely; it licensed 10 banks after the 1991 reforms, and another two a decade later. After that it has been resolutely inactive for a decade. Why the sudden end of somnolence? It points to the poor outreach of banking in India; despite the fact that the RBI forced banks to work for the common man at least since the bank nationalization of 1969, a large proportion of the population has no access to banks. This has led a series of official committees, notably the Percy Mistry Committee and the Raghuram Rajan Committee, to admonish the RBI to allow more competition. It was pretty cold to the committees while they sat; even now it cannot bring itself to mention Percy Mistry. But the finance minister himself promised more competition in banking in his last budget speech. In case the RBI still continued to resist, he created the Financial Stability and Development Council, an overlord which would override even the RBI. Overcoming all obstacles, he actually created the council last month; its membership left no doubt that the finance ministry was going to be in charge. So the RBI could no longer put off acting on new bank licences; and if it allowed new banks, it could hardly ignore foreign banks queueing to set up business in India. Opening up of the financial sector is the one demand India has consistently faced in its international negotiations going back to the Uruguay round of two decades ago; every time it persistently stonewalled. All that it conceded in the Uruguay round was that it would allow a dozen new branches of foreign banks to be opened every year, in a country with close to 80,000 branches. But times have changed. India has become a superpower, albeit a junior one. The prime minister sups with the mightiest leaders of the world, and as leader of the country immune to a meltdown, advises them on how to run their countries. If they ask him to let their banks come to India and learn lessons from a stern schoolmaster called the RBI, he can hardly refuse. But the RBI has put its foot down: foreign banks must bring equity, set up subsidiaries, and not expect to raise capital in India. This may be a rearguard fighting a losing battle, but it will take as long as it can to lose.

What use rate hikes, when banks borrow at 9%+, govt at 8%?

The Reserve Bank of India is scheduled to hold its third-quarter review of the annual monetary policy for the current fiscal on Tuesday. But would it say anything new? Inflation has been above the central bank’s estimates for a while now and the market is expecting it to raise reverse repo and repo rates, which are at 5.5% and 6.5%, respectively. And the growth versus inflation debate continues at all fora. By now, you must have realised that while everyone talks about inflation, no one wants anything done about it. That’s because growth is dear to all — businessmen cannot make profits without growth, government cannot get votes without growth (even if it comes at the cost of worsening finances and high inflation) and market players cannot earn bonuses without growth. So, the unsaid diktat seems to be that inflation, even if it kills the economy, should not hurt growth — meaning, the RBI must make sure growth does not suffer at the hands of inflation. Now that’s beyond the scope of any policymaker and hence precedence will be given to support government borrowing, which is inflationary in nature because money borrowed is not spent on creating capacities but on fuelling temporary demand. The RBI is expected to raise rates by 25 basis points (bps) or even 50bps as it has to show it is doing something. Banks are borrowing in money markets at 9.5% levels, while the government’s cost of borrowing is around 8.10%. This won’t change with a hike in repo rates. Inflation will not come down with rate hikes, nor will it affect growth in any form. And after the policy, the usual suspects — the finance minister, the prime minister’s advisers, the finance secretary, marketmen and economists — will all have a point of view. That’s because economists have to forecast inflation, growth and other macro-economic variables. But how often are they right? If they were on the ball, they will be managing money, not forecasting. The soap opera continues.

RBI’s model will raise tax bill of foreign banks, feel experts

Tax liabilities of foreign banks will rise marginally if the Reserve Bank makes it mandatory for them to conduct their operations in the country through wholly- owned subsidiaries ( WOS) rather than a branch model, experts said. " Although the WOS model will provide greater control over the function of foreign banks in the country, the tax liability would rise slightly under the proposed structure," said Diljeet Titus, a senior partner in law firm Titus and Co. In the discussion paper, RBI had suggested that foreign banks should be incentivised to operate in India as wholly- owned subsidiaries, as against the current system that allows them to have a presence under a branch model. The central bank has invited comments from stakeholders on the concept paper till March 7.