Banks should push financial inclusion – Ms. Suma Verma, Regional Director, RBI

Ms Suma Verma, Regional Director, Reserve Bank of India, Thiruvananthapuram has urged banks to extend more facilities to the rural population for making the concept of financial inclusion meaningful and fruitful.  Ms Verma said this while inaugurating ‘Sneha,' the Financial Literacy and Credit Counselling Centre (FLCC) established by Indian Overseas Bank (IOB), Lead Bank for Thiruvananthapuram, on Thursday. Delivering the keynote address, Mr K.C.Shashidhar, Chief General Manager, National Bank for Agriculture and Rural Development (Nabard), too, urged banks to reach out to the rural population to push financial inclusion. Ms Indira Padmini, Convenor, District Consultative Committee for Banking Development and Chief Regional Manager, IOB, spoke on the occasion. Among others who spoke were Mr K. Sudhir, General Manager, District Industries Centre; Mr K.S.Sasidharan, Principal Agricultural Officer; Ms J.Prasanna Kumari, Project Officer, Khadi and Village Industries Board; Ms Nalinakumar Ghosh, District Employment Officer; and Mr K. Sasikumar, Counsellor, FLCC.

MFIs in AP may face dual regulation

Microfinance institutions in Andhra Pradesh are likely to face dual regulation (from the RBI and the State Government) with the latter keen on continuing with its stringent Microfinance Regulation Act.  The State Government, which was the first in the country to put in place an act to check “excesses” of MFIs, is meeting top officials of the RBI to inform them that the MFI Regulation Act is going to stay notwithstanding the apex bank's view on the Malegam panel's report. “We have been called for a meeting with the RBI on February 22. Our position is that the AP Act is here to stay and the RBI is not empowered to ask the Government to repeal the Act,'' Mr Reddy Subrahmanyam, Principal Secretary, Department of Rural Development, Government of Andhra Pradesh, told Business Line. The Malegam Committee in its report, submitted to the RBI last month, has recommended that the RBI should be sole regulator of NBFC-MFIs, among other proposals. “This is not viable. The RBI in Hyderabad had about 250 staff. How can it regulate MFI activities in over 40,000 villages? Further, self-regulation of MFIs, as mooted by Malegam, has never worked in the MFI sector till now as a profit motive is involved,'' the official said. The State Government had already communicated its “strong objections” on the Malegam's report to the RBI. It also points to the Constitutional immunity enjoyed by the AP Act, thereby contesting the view that the need for AP act “will not survive” if the Malegam report is accepted. According to the list II of the Constitution, the regulation of money-lending is the original jurisdiction of the State Government. “An Act is the will of the people. Accordingly, whether the need for AP MFI (Regulation of Money Lending) Act exists will be decided only by the AP legislature and not by the RBI,'' says the communication. It also points out many lacunae in the Malegam's recommendations such as lack of provision for relief on a large amount of outstanding loans with interest ranging from 28 to 60 per cent. Given the situation, MFIs in the largest market of the country, which accounts for about 30 per cent of total outstanding portfolio of Rs 33,000 crore, are likely to go under dual regulation soon. “We don't have any problem if the RBI bothers itself with corporate governance of MFIs, solvency and capital issues. But the State Government is responsible for regulation of money-lending in whichever form it occurs,'' Mr Subrahmanyam said.

RBI pulls up banks for non-follow-up of client MFIs' operations

The Reserve Bank of India has found fault with public sector banks for not undertaking review of microfinance institutions' (MFIs') operations after sanctioning credit facility. In a circular sent to public sector banks, the apex bank had also noted that many MFIs supported by banks were “not engaging themselves in capacity building and empowerment of the groups to the desired extent.'' MFIs were disbursing loans to the newly-formed groups within 10-15 days of their formation, in contrast to the practice obtaining in the SHG-bank linkage programme which takes about 6-7 months for group formation or nurturing/ hand-holding. “As a result, cohesiveness and a sense of purpose were not being built up in the groups formed by these MFIs,” the RBI said. MFIs, which were financed by banks or acting as their intermediaries/partners, appear to be focusing on relatively better-banked areas, including areas covered by the SHG-bank linkage programme. Competing MFIs were also trying to reach out to the same set of poor, resulting in multiple lending and overburdening of rural households, it pointed out. Taking a dig at banks, the central bank said, as principal financiers of MFIs, they “do not appear to be engaging them with regard to their systems, practices and lending policies with a view to ensuring better transparency and adherence to best practices.” The RBI has made these observations on the basis of report of a joint fact-finding study on microfinance conducted by itself a few major banks.  It had also asked all scheduled commercial banks to take necessary corrective action where required.  The timing of the circular — which was sent a couple of days back to banks — was crucial as the RBI is currently studying recommendations of Malegam panel on MFIs and is expected to announce a policy shortly. The panel had suggested that creation of one or more ‘Domestic Social Capital Fund' may be examined by the RBI in consultation with the Securities and Exchange Board of India. At present, over 75 per cent of finance of NBFCs operating in the MFI sector is provided by banks and financial institutions, including SIDBI.  As of March 2010, the total outstanding loans granted to MFIs were at Rs 13,800 crore. In addition, banks were also holding securitised paper issued by NBFCs to the tune of Rs 4,200 crore, according to the Malegam report.

O P Bhatt's mission accomplished

Despite his run-ins with RBI, the State Bank of India chairman has managed to keep the public sector behemoth ahead of peers.  The chairman’s angst sums up the public display of the uneasy relationship between the country’s largest bank — State Bank of India — and the Reserve Bank of India (RBI), in the last couple of years over several issues, including the so-called teaser home loan rates (Bhatt, of course, has serious reservations over the term. He says he is not teasing anybody), higher provisioning coverage, guarantee to bonds issued by Tata Motors, etc. But more of that, later.  Even his worst detractors can’t deny that Bhatt, who is due to retire in March after a five-year term, has been able to turn SBI from a lethargic elephant to one that can dance. When he took over the reins in June 2006, the usual lament about SBI was: “It is too slow and past its prime. Soon, the nimble-footed private banks will go ahead.”  The numbers supported this argument. ICICI Bank was a serious threat. In June 2006, SBI’s total business stood at Rs 639,817 crore. ICICI, though behind, was closing in with a much faster growth rate. Its total business stood at Rs 330,490 crore. Analysts assumed it was only a matter of time – may be, another five years – before the private sector bank became the number-one bank in the country.  Bhatt’s appointment wasn’t a smooth affair, either. Yogesh Agarwal, then managing director of State Bank of Patialia, was considered a strong contender for the top position. But Bhatt pipped him to the post. Though Agarwal became the managing director of SBI in October, he moved to head IDBI Bank in July 2007. Internally, the bank was grappling with many issues. For one, it had serious software problems that were not allowing it to roll out core banking solutions. This had to be addressed on a war footing, since core banking solutions were the backbone required for any scaling up and offering value-added services to corporate clients. Bhatt evaluated the situation for the first three months. Then, he asked the software vendor, Tata Consultancy Services, to rectify the glitches. Then, the business process re-engineering process plan was started at branches. This involved training every staff and redesigning the layout of branches to make work a little better, faster and cheaper. He put in place capital-raising plans to support growth for the next four-five years. SBI raised Rs 16,000 crore in March 2008 through rights issue. At present, the bank has been working on another rights issue to raise about Rs 20,000 crore by March. Banking analysts say this capital should support its growth plans for another five years. “SBI has recorded a consistent growth in business in the last four years. The credit to deposit ratio of 77 per cent indicates efficient deployment of resources,” said D R Dogra, managing director of ratings agency CARE. Other important measures include an aggressive focus on the retail customer (the introduction of teaser loans being one such example); Parivartan I and II — programmes for employee motivation and skill set improvement; Udan — preparing a pipeline of future leaders at both senior and middle levels. These have improved the perception of SBI among both peers and analysts. He resumed clerical recruitment, which had been frozen for over a decade, in view of growing business. Importantly, the process of consolidation within the SBI associates was started. He merged State Bank of Saurashtra and State Bank of Indore with SBI. “This will improve the bank’s operating efficiencies,” added CARE’s Dogra. Many, however, say the SBI chairman could have handled his relationship with the regulator with a little more finesse. “He could have easily avoided the in-your-face and aggressive approach with the regulator. That had to deal with the banking industry as a whole,” said an observer. But Bhatt remains adamant and says he has done nothing wrong. “Many Indians own homes because of SBI. I am not fighting with RBI, but only clarifying... we only gave discount on the rate for the first two-three years and at higher than the cost of my funds. So what is wrong in what SBI does?” Bhatt said, while admitting that there were quite a few other issues on which he “differed” with the regulator.  Besides the teaser loan, the bank faced regulatory ire for guaranteeing Tata Motors’ debenture issue of Rs 10,000 crore and overall provisioning of 70 per cent for bad loan portfolio. The empire struck back. RBI was highly critical of the bank’s performance, including its financial health. Consequently, it downgraded the bank’s CAMEL (capital, asset quality, management, earnings, liquidity and systems and control) ratings from B to B- in an internal report for the year ended March 2009. There were internal rumblings too. When Bhatt restructured operations at state-level units, popularly known as circles, by dismantling a decision-making layer (zone) headed by deputy general managers, there was again a lot of criticism. While work would be sped up by cutting on red tape, it put immense pressure on general managers. The jury is out on whether or not this has made the bank more efficient.  A top official of the bank, under condition of anonymity, says: “Bhatt has improved the bank’s image and introduced aggressiveness. The performance, in terms of market share, speaks for itself.” In the same breath, however, the official admits that the down side of his leadership style has, perhaps, weakened the collective decision-making culture at SBI.  The good news: SBI continues to be at the top of the table. In December 2010, SBI’s total business stood at Rs16,19,950 crore, compared to ICICI Bank’s Rs 424, 439 crore. Of course, ICICI Bank took a conscious decision to shrink its balance sheet size to manage the adverse effects of exponential growth and global financial crisis. Jamal Mecklai, chief executive of Mecklai Financials, says: “During Bhatt’s regime, SBI has become more competitive in a market (like money and foreign exchange markets, and advisory services) where foreign banks and Indian private banks were very active. This helps expand the revenue base.” The fear: His aggressive style may have compromised the bank’s standing with RBI. In addition, some of the asset quality, especially the restructured portfolio (part non-performing assets and part standard assets) may be concerns in the future and hurt profitability – a big challenge for the next chairman. But on March 31, when Bhatt retires as chairman, he will have one satisfaction – no one calls SBI laid back anymore.

SBI launch ‘Tiny card’ scheme in Dimapur

The State Bank of India launched ‘SBI Tiny no frills account’ in Dimapur on Wednesday, February 16. It is part of the Reserve Bank of India’s ‘Financial Inclusion Programme’.  “The State Bank of India with over sixteen thousand four hundred plus branches has taken up this challenge by introducing `SBI Tiny no frills account` for the urban slum communities & Rural India. In this new account there is no need of `KYC` (or Know Your Client) documents and the account can be opened with a zero balance. In this account one can deposit or withdraw from Rs.10/- to Rs.10,000/- the upper limit for this account is Rs.50,000/-. Bank has various loan schemes to cater different needs of rural farmers and urban slum based persons.” For this programme the SBI has tied up with NGO’s who will play the role of ‘Customer Service Providers’ or rather work like a local branch. In this way the NGO’s will also benefit while the “RBI will be benefited as it is making this database for the (Unique Identity Number) UID scheme of the Government of India.” “The aim of this unique scheme is to cover as many of the poor unbanked population in the country.” In Nagaland, Thahekhu village became the first place to have the facility of this unique scheme today, in the form of a ‘Customer Service Point’.  It was launched in the presence of SBI officials of Dimapur. The Tiny Card with biometric identification is SBI’s answer to the challenge of financial inclusion of one lakh villages in the country.  SBI had recently announced plans to cover one lakh villages through the extensive network of business facilitators and business correspondents. Among other benefits, the cards are currently being used as a means of payment of government benefits directly to the poor persons, such as pension payments and wages under the rural employment guarantee programme. SBI is also looking at adding facilities like fund transfers through the Tiny cards. The cards also provide services like micro savings, micro credits, micro insurance and utility payments.

New norms on pension liabilities to hit profits

A new rule on how banks should expense pension costs is likely to hit profits of many public sector lenders in the fourth quarter.  Some of the country’s top banks have already begun internal exercises to estimate how much money they will have to put aside this quarter to meet the new norms on providing for pension liabilities, said senior officials.  “A clear picture will emerge only at the end of this quarter when we take into account the actuarial provisions,” Punjab National Bank (PNB) chairman and managing director K.R. Kamath said, and added that he hopes that there will not be any “disproportionate increase” in provisions. The genesis of the problem is an agreement between public sector banks and employee unions in 2009 that allowed bank staffers, who had initially opted to get a single lump sum payment on retirement, to shift to regular pension payments. Besides, in an unrelated development, the government also increased the maximum gratuity paid to departing employees from Rs.3.5 lakh to Rs.10 lakh, following a proposal in the 2010 Union budget. Both have increased the payouts to be made to retiring and retired bank employees. Public sector banks were worried that higher pension and gratuity liabilities would eat into their profits this fiscal because of provisioning requirements. On 9 February, the Reserve Bank of India (RBI) told banks they could expense their new pension costs over five years in the case of existing employees rather than make a one-shot provision that would destroy their profits. However, the accounting breather has not been extended to pension payments to retired employees, whose numbers are unofficially estimated to be around one-fifth of the current staff strength of public sector banks.  The sting in the tail has taken bankers by surprise. They have petitioned RBI through the Indian Banks’ Association, an industry lobby, to relax this norm. However, a senior central banker shot down the possibility of a further relaxation in the pension accounting requirements. At the sidelines of a conference organized by Tata Consultancy Services Ltd in Mumbai on Tuesday, RBI deputy governor K.C. Chakrabarty told Mint that it is the “management’s discretion to provide for the amount”, and that it is “perfectly legal” that banks should provide for retired employees. Calculating the provisions banks will have to make this quarter—and, hence, the precise effect on their profits—is a complex task involving assumptions about the number of retired employees having moved from a lump sum payment to annuities, their average age, life expectancy and discount rates needed to figure out the present value of all future pension payouts. State Bank of India has its own pension scheme and is not affected by the shift from lump sum payments to annuities. Others such as IDBI Bank Ltd is also not covered by industry-level wage negotiations because of its origins as a development financial institution spun off from RBI. Mint spoke with the top five banks that have offered employees the option to shift to pension payments—PNB, Bank of Baroda (BoB), Canara Bank, Bank of India (BoI) and Union Bank of India—to gauge the hit they might have to take. PNB’s total pension liability is about Rs.3,600 crore. Chairman and managing director Kamath did not want to provide a precise number because the bank is working out its potential pension liabilities. BoB Executive Director R.K. Bakshi said the actual figure is being worked out, but about one-fifth of its employees fall in the retired category. The bank has an estimated additional pension liability of Rs.2,060 crore. Some of this has already been provided for in the previous three quarters. A senior official of BoI estimates the provision the bank has to make in this quarter could be around Rs.450-600 crore. According to Canara Bank chairman and managing director S. Raman, the extra provision towards pension could be as high as Rs.500-550 crore, but he expects the figure to come down substantially when adjusted with gratuity, which has been fully provided for by the bank.  “The net effect could be Rs.100-150 crore in the fourth quarter, which is nothing for a bank of our size,” said Raman. Canara Bank’s total extra liability towards pension is around Rs.2,200 crore.  Union Bank could have to provide anything between Rs.350 crore and Rs.600 crore in the quarter towards pension for its retired employees, according to a senior official. The bank’s additional liability towards pension is Rs.2,400 crore.

Deposit rate on savings accounts: To deregulate or not?

The interest rate on savings bank deposits in India has been at 3.5% since March 2003, before which it was at 4%). In April 2010, the Reserve Bank of India (RBI) had changed the methodology of interest calculation on savings deposits to an average daily basis. For banks, this has effectively increased the savings deposit cost by 50-100 basis points (bps) and overall deposit cost by 10-25 bps. While interest calculation on average daily basis has led to higher earnings on savings deposits for deposit holders, the inflation-adjusted return continues to be negative. Against the 3.5% rate on savings deposits, the average inflation rate in India has been around 5.3% in the last decade, around 5.5% over financial years 2005-10 and around 6.5% over fiscal 2008-11. On multiple occasions, the RBI has expressed its intention to deregulate the savings bank deposit rate and is likely to float a discussion paper on this topic.

Banks bet big on technology to boost efficiency, curb fraud

Both international and Indian banks are fast adopting information technology (IT) to improve efficiency, curb fraud, cut costs, comply with regulatory changes and take their products to the market faster. For customers, the increased IT adoption by banks offers greater convenience, safety and accuracy in monetary transactions. “A bank wants a real-time, unified view of the customer. And the customer wants a unified experience of the bank,” says Sriram Srinivasan, senior vice-president and global banking business head at Wipro Technologies. “Customer-centricity is a key driver. How do you get the right focus, the right services for the business that customers give banks?” Bank customers have various channels of interaction today—automated teller machines (ATMs), the Internet, call centres, branch offices and even mobile phones. A simple text message can effect a financial payment as reliable and secure as with a few mouse clicks on a Web portal. Akhilesh Tuteja, executive director at consulting firm KPMG India, who works on technologies for the banking sector, identifies the several dimensions in which IT is changing the sector. “One is clearly customer service. The second is reducing the cost of doing business. The cost of processing a cheque leaf is several-fold over the cost of an electronic fund transfer.” The third dimension is risk management. Cellphone text alerts on credit card transactions have dramatically brought down fraud. On the banking side, analytics available today are capable of preventing even seemingly innocuous but fraudulent transactions. If a credit card is swiped in Bangalore and an hour later in Malaysia, a bank’s IT system will block the transaction. “It knows that you can’t get to Malaysia from Bangalore in an hour,” says Tuteja.  good part of the banking system in India has gone in for integrated core banking, the platform that offers a unified view of customers. A key challenge lies in standardizing how data is captured. A misplaced initial in a name can compromise a unified view of a customer. A big bet for the future is the creation of so-called digital wallets on mobile phones. Tuteja notes that a convergence of several factors is facilitating such a adoption: “The communication devices, the security on these devices, integration of banking IT infrastructure, and the regulatory framework and guidelines from RBI (Reserve Bank of India) are all in place.”

How Bhave’s Term was Regulated at Regulator !

C.B.Bhave, the Chairman of India’s securities market regulator, Sebi, will step down on Thursday after three years on the job, raising questions on the relative brevity of his tenure. The heads of other financial regulators such as the Insurance Regulatory and Development Authority (Irda), and PFRDA, the regulator of pensions, enjoy five years at the helm. The circumstances under which the government decided to limit Bhave’s term remain unclear, a number of officials said. Three people familiar with decision-making at India’s ministry of finance in 2009 and 2010 have told ET that the government had decided to extend his term by two years, only to abruptly change its mind. Bhave, who has been praised by many for his stewardship, will be succeeded by UK Sinha, the head of UTI Mutual fund. Sinha also has a three-year term though the government can extend it by two more. Around August-September 2009, soon after the government decided to provide a uniform five-year term for all regulators, the finance ministry asked Bhave and the other full-time members on the Sebi board if they were agreeable to serving for two more years. After they concurred, the finance ministry finalised a note which was sent to the Appointments Committee of the Cabinet, or ACC, for endorsement. The basis of the note was a recommendation by Sixth Pay Commission, which made out a case for a stable term of five years for all regulators. Indeed, the government had prepared the basis for the longer tenure.  In July 2009, it approved changes to Sebi rules relating to the terms and conditions of appointment of the chairman and members to incorporate a five-year term for them. The changes were then notified. But while the proposal was being vetted by ACC — which in this case includes the home minister and the prime minister — it was recalled by the finance ministry and then withdrawn before the end of 2009. The sequence of events indicates that the decision not to extend Bhave’s tenure was not linked to the ugly spat in 2010 between Sebi and insurance regulator Irda over regulating unitlinked insurance plans.  That the government was looking for a new chairman for Sebi became evident only in September 2010 after the formation of a search committee headed by the cabinet secretary. No reasons were assigned for this change of heart and the proposal was never considered again, according to the three persons with knowledge of the circumstances. All three confirmed the sequence of events but declined to go on record given the sensitivity of the issue. A e-mail query to the spokesperson of the finance ministry on Tuesday did not evoke any response.