Shri S.Karuppasamy appointed as Executive Director

Shri S.Karuppasamy, Regional Director, Kolkata has been appointed as Executive Director.  The portfolios looked after by him are as under:-

1.   Department of Expenditure & Budgetary Control

2.   Department of Information Technology

3.   Legal Department

4.   Urban Banks Department

Tax vex on bank arms resolved

Foreign banks converting their branches into wholly-owned subsidiaries will not be required to pay capital gains tax from the transfer of assets and properties during this procedure. The finance ministry has resolved the tax tangle in the issue and wants the Reserve Bank of India (RBI) to go ahead and allow foreign banks to convert themselves into wholly-owned subsidiaries at the earliest. “There were some tax issues in conversion of branches into wholly-owned subsidiaries. We have resolved that matter. The new norms should come as soon as possible,” said a finance ministry official. Last week, RBI had released a discussion paper on the presence of foreign banks in India. It had sought comments on the subsidiary-led model for foreign banks operating in India, instead of the existing branch mode of expansion. It also proposed incentives to promote the subsidiary route.  In its discussion paper, RBI had said that for capital gains tax arising from the transfer of property, goodwill and other assets of a capital nature to its newly incorporated subsidiary in India, the provisions of Section 47(iv) of the Income-Tax Act, 1961, would be applicable to foreign banks converting their branches into subsidiaries.  Section 47(iv) exempts from capital gains tax the transfer of a capital asset by a company to its subsidiary if the parent company or its nominees hold the entire share capital of the subsidiary or the subsidiary company is an Indian company. The exemption, however, does not apply if the parent company dilutes its stake in the subsidiary before a period of eight years.  “You have to continue with the parent-subsidiary relation for eight years if you want the exemption,” said Hiresh Wadhwani, a tax partner with Ernst & Young. He added that for full capital gains tax exemption without a lock-in of eight years would require an amendment to the law. The issue has been resolved under Section 49(e) of the Income-Tax Act, which states that where the capital asset becomes the property of an assessee under any such transfer, the cost of acquiring the asset would be deemed to be the cost for which the previous owner of the property acquired it. “If there is no change in the value of assets, there will be no capital gains tax,” explained another official. The first official also said the central bank’s discussion paper was in line with the finance ministry’s thinking that a subsidiary model would help contain risk within the country. “The government greatly favours this,” he said. He added that just like domestic banks, subsidiaries of foreign banks would be allowed to open branches in Tier-3 to Tier-6 cities, unlike branches of foreign banks. The subsidiaries would be considered Indian banks and regulated by RBI, the official added.

Deposits shrink by Rs 26,000 cr

 After surging around Rs 2 lakh crore in the last fortnight of December, bank deposits fell Rs 25,742 crore during the 14-day period ended January 14. According to the Reserve Bank of India (RBI) data, deposits grew 16.43 per cent on a year-on-year basis till January 14. Credit off-take dropped Rs 43,327 crore during the fortnight and grew 23.6 per cent on a year-on-year basis.  In the third quarterly monetary policy report, RBI had raised concerns over the widening gap between credit and deposit growth. RBI asked banks to bring down their incremental credit-deposit ratio or face action. RBI has projected 20 per cent credit growth and 18 per cent deposit growth for 2010-11.  The incremental non-food credit-deposit ratio rose to 102 per cent by end-December due to the gap between credit and deposit growth. In the corresponding period of the previous year, the ratio was 58 per cent. To lure customers, banks have raised deposit rates by up to 250 basis points in the past few weeks. “We recently increased deposit rates, so the full impact will be seen towards January-end. Our daily monitoring has shown a slight increase,” said a senior executive of State Bank of India.

PayPal Changes Limits For Indian Users After RBI Guidelines

Following the latest guidelines issued by the Reserve Bank of India, popular online banking platform Paypal has made several drastic changes to their user agreement for India. Paypal has already issued notices to their Indian customers about the change. The PayPal letter states: "As part of our commitment to provide a high level of customer service, we would like to give you a 30-day advance notice on changes to our user agreement for India. With effect from 1 March 2011, you are required to comply with the requirements set out in the notification of the Reserve Bank of India governing the processing and settlement of export-related receipts facilitated by online payment gateways (“RBI Guidelines”).

RBI raps banks for misreporting loans to priority sector

Flagging the issue of misreporting of priority sector lending (PSL) performance by banks, the Reserve Bank of India (RBI) on Friday said loans wrongly classified as PSL would be included in the shortfall under priority sector targets. The annual financial inspection of books has shown instances of misclassification of loans under priority sector. Such misreported loans in the current financial year would be added to the shortfall reported on the last reporting Friday of the following year for allocation to various funds, RBI said in a communication to banks. Also, banks buy priority sector loans from intermediaries like microfinance institutions and non-banking finance companies. Banks reckon the present value of these loans by discounting them at their lending rate, which is typically much lower than the actual rate charged to end–borrowers by such intermediaries. Such practice leads to overstating of the actual amount of priority sector loans to the extent of the premium paid by banks to such intermediaries. Hence, must report the nominal amount actually disbursed to end priority sector borrowers and not the premium-embedded amount paid to the intermediaries.

Jain Irrigation to form non-banking finance company, raise Rs700 crore

Jalgaon-based Jain Irrigation Systems (JISL) plans to set up a non-banking finance company (NBFC) to finance farmers’ needs, said managing director Anil B Jain. The company’s board has already approved the move and will apply for a nod from the Reserve Bank of India for the same this quarter. “It normally takes 3-4 months for the approval to come through,” said Jain. JISL is hoping that the NBFC will help boost its sales. “Farmers need timely and adequate credit which the NBFC can provide and it can also improve JISL’s balance sheet by reducing debtors,” he added. To begin with, the company will finance just the purchase of it own products. JISL, the world’s second largest micro irrigation systems (MIS) maker after Israel’s Netafim, and India’s biggest, currently aids farmers in sourcing credit to buy its products. There are also government subsidy schemes for the same. Jain said the company also plans to raise by June Rs700 crore through a qualified institutional placement (QIP). “It will partly go into capital infusion for the NBFC and partly reduce our working capital debt,” Jain said. The JISL board also on Friday approved the hiving-off of its solar division, under which it makes solar lanterns, solar water heaters and, lately, solar water pumps. For the three months ended December 31, JISL saw its net sales grow by less than 10% to Rs693 crore while its net profit rose 24.6% to Rs71.47 crore. Jain said the heavy and unseasonal rains dented the topline. “In the first nine months, our irrigation business grew by 27% while we expected a growth of 30%. But the current quarter is better,” he said. JISL has an order backlog of Rs1,100 crore, most of which is in drip irrigation.

OMO, deposit accretion picking up: RBI

The country's apex bank, the Reserve Bank of India (RBI), today said that Open Market Operations (OMO) in the bond market is more a monetary policy tool and not a debt management instrument. "It is more of a monetary policy tool and not a debt management instrument," a senior RBI official told reporters here today. OMO is not being used to influence bond yields, he said. "OMO is done in a more enduring manner and not to influence the yield curves," the official said. On the statutory liquidity ratio (SLR) now at 24 per cent, the RBI's Deputy Governor, Subir Gokarn, said the apex bank presently feels that there is no need to tinker with it.  SLR is the amount of liquid assets, such as cash, precious metals or other short-term securities, that a financial institution must maintain in its reserves. The RBI had reduced the ratio from 25 per cent to 24 per cent in December 2010. On January 25 (2011), the RBI, in its efforts to combat the prevailing high inflation, lifted its key short-term rates -- repo and reverse repo rates -- by 0.25 per cent each to 6.5 per cent and 5.5 per cent, respectively.

RBI objects to states using PSBs for own inclusion drive

The Reserve Bank of India (RBI) has expressed concern over dilution of its financial inclusion programme as some states, such as Uttarakhand, have launched similar schemes causing confusion among the institutions responsible for implementing them. "Banks have already submitted their financial inclusion roadmap to the RBI," a government official said. "Now, some states want banks also to participate in their own schemes, which will increase burden on them and further dilute the primary task set by RBI."  The RBI had also mentioned the issue of overlap at the state-level bankers' committee. "States can push the co-operative banks and regional rural banks for their own schemes," a senior finance ministry official said. "Public sector banks are under the domain of the Central government and the RBI, and will follow the roadmap as decided." As of now, only 45% of the Indian population has access to basic banking services. The bank to people ratio is also very low with one bank branch catering to about 16,000 people. The finance ministry recently directed bank chairmen and executive directors to monitor 1% of the new villages that come under inclusion plans, and the general managers for 5% villages covered under such plans.

RBI to issue Rs 5 coin on Rajendra Prasad birth anniversary

The Reserve Bank of India (RBI) today said it will shortly put coins of Rs 5 into circulation, with the theme of 125th birth anniversary of the first President of the country Rajendra Prasad. The face of the coin shall bear the lion capital of Ashoka Pillar and it shall also bear the denominational value "5" in international numerals below the lion capital, RBI said in a release. The reverse of the coin shall bear the portrait of Rajendra Prasad in the centre, it said. Coins are legal tender as provided in the Indian Coinage Act, 1906. The existing Rs 5 coins in circulation shall also continue to be legal tender, it added.

Govt spending can be frontloaded in FY12: RBI

There was a possibility of heavy government spending in the first half of the next financial year beginning April, on account of large government cash holding, Subir Gokarn, deputy governor at the Reserve Bank of India (RBI) said on Thursday. He said RBI would not conduct open market purchase of bonds to contain any rise in yields as it was a monetary policy tool to address liquidity issues and not debt management. "When the (government borrowing) schedule is set with the existing cash balance in mind, that can front-load spending. So that is a possibility," he said. Gokarn was speaking to reporters after the central bank raised key rates by 25 basis points to clamp down on resurgent inflation and warned of persistently higher food prices unless steps were taken to boost supplies.

Limit on annual income can be changed – Malegam

The Malegam panel’s recommendation that only those households which have up to Rs 50,000 in annual income should be eligible for borrowing money from microfinance institutions (MFIs) have drawn flak from all quarters. Critics say by suggesting a cap on loan rate, the panel is also denying market forces in shaping the cost of loans. But noted chartered accountant Y.H. Malegam, 77, who has been serving as director on Indian central bank’s board for 17 years, said one should look at the philosophy of the report and not the figures. The objective is to define what microfinance is and regulate them and the numbers can be revised. He said in an interview that there could be a distinction between borrowers in rural, semi-urban and urban India. While Rs50,000 annual income criterion can be kept for rural India, it can be raised for semi-urban and urban pockets. He, however, strongly defended the idea of capping the exposure limit for an individual borrower at Rs25,000 and the loan rate at 24%. He described MFIs as “greedy” and said the mandate of the panel was to protect borrowers and not lenders. MFIs have enough profits and they can use part of it to reduce interest rate, he said. If indeed the Reserve Bank of India accepts the recommendations, there will be no need for the Andhra Pradesh law for regulating MFIs in the southern state, he said.

RBI seeks public comments on Malegam report

The Reserve Bank today invited public comments on Malegam panel report which suggested among other things capping interest rate at 24 per cent for loans extended by microfinance institutions. The committee, headed by Reserve Bank's Central Board Director Y H Malegam, also suggested that small loans cannot exceed Rs 25,000 and creating of a separate category of non-banking financial companies (NBFC-MFI) for the MFI sector.  "The RBI has invited views/comments of all stakeholders and the public at large on the Malegam Committee report on MFIs...Latest by February 13, 2011," the central bank said.

Finmin backs RBI on subsidiary model for foreign banks

The Finance Ministry has come out in support of the central bank's recent proposal to permit expansion of foreign banks in the country through the subsidiary model, as opposed to the current model of expansion through branches. It is also considering allowing capital gains tax waiver for such conversion. "We will be taking it up at the earliest and hope to set up norms for starting it soon," a senior finance ministry official said. The norms are expected to exempt such subsidiary firms from capital gains tax as well as allow them expansion in smaller cities of tier 3, 4, 5and 6.