Corporates need to spruce up risk management: Gopinath

Reserve Bank of India Deputy Governor Shyamala Gopinath has cautioned that in an open economy like India , there is need for greater recognition of currency and interest rate risks and the risk management in banks and corporate firms need to gear up their risk management practices further in this area. “It is our experience that a large number of corporates still do not have well-designed risk management policies and practices to take care of volatile exchange rate movements and give scant regard to tail risks. There is also need for greater disclosure and adherence to accounting standards for financial instruments,'' said Gopinath who was addressing .Annual Conference of the Foreign Exchange Dealers’ Association of India (FEDAI) on Friday ``Approach to Capital Account Management - Shifting Contours''. There is also need to more comprehensively qualitatively assessment of of India's external liabilities to encompass liabilities of subsidiaries and branches of Indian financial institutions overseas, not in nominal terms but through a risk-based approach on the probability of recourse to parent bank liquidity support, said Gopinath. However, with focus on capital flows on a net basis, it is often not realized that portfolio flows were $174 billion a year over last three years on a gross basis, far outstripping FDI flows at $37 billion a year. In gross terms, over the last five years (2005-06 to 2009-10) FII flows have accounted for 47% of the gross capital inflows to India as against 9% for FDI inflows. This of course has more to do with the nature of these flows with a much larger churn for portfolio capital. High gross flows make economy more susceptible to such reversals and as such we need to continue to maintain adequate buffers, said Gopinath. In the current context, a high current account deficit (CAD) has been absorbing much of the capital flows in aggregate terms. The concerns, however, arise on account of the composition of flows coupled with lower order of reserves accretion and faster increase in external liabilities, added Gopinath. The enhanced exposure to external liabilities is reflected in the sharp increase in the ratio of external debt to foreign exchange reserves from 89.1% of GDP in 2008-09 to 99.1% as at end June 2010. Moreover, the ratio of short-term debt to reserves has increased from 17.2% to 21.0% during the same period. Another issue that may come up going forward relates to repayment of FCCBs. The redemption pressures on account of FCCBs would start building up from 2010-11 and peak in the next couple of years till 2012-13. She further said that there have been some concerns on the declining FDI flows in the recent past though as stated earlier it has little to do with the regulatory framework per se except in certain sectors. The moderation in FDI inflows to India during April-November 2010 has been driven by sectors such as construction, mining and business services.

Technology not reaching customers: Chakrabarty

RBI Deputy Governor Dr.K.C.Chakrabarty has said the benefits of technology adopted by the banks have not percolated in terms of cost, speed and convenience of the customer. The banks should move towards empowering the present day customers of information or digital age by greater choice, greater access, and better, faster, more efficient modes of delivery and service. "Customers are not going back to the old ways of banking. They are moving forward. If the banks do not complement their speed, the customers will pass by,'' said Chakrabarty.

Diesel price may be freed if inflation falls

Dr. Rangarajan, a former governor of the Reserve Bank of India, said headline inflation was likely to come down to 7 percent by the end of March on moderating food prices. Annual inflation based on wholesale prices eased marginally to 8.23 percent in January as against 8.43 percent in the previous month. ‘We have witnessed two years of high inflation. It has been around 7-8 percent. It needs to be brought down to a comfortable level of 4-5 percent,’ said Rangarajan adding the policy markers would continue to tighten monetary and fiscal policy until inflation was brought down to a comfortable level. ‘Inflation distorts the economy. It hits the poor hardest. We have to bring it down,’ he added.

Loans under JNNSM at 5% not violation of base rate norms: RBI

The Reserve Bank today said banks financing power generation equipment under the Jawaharlal Nehru National Solar Mission (JNNSM) at a concessional 5 per cent interest rate is not violation of norms. This financing below the base rate would not be considered violation of guidelines, RBI said in  a statement. "We advise that such lending at interest rates not exceeding five per cent per annum where refinance of Government of India is available, would not be considered to be a violation of our Base Rate guidelines," it said. In the new lending rate mechanism, no loans except few exceptions can be offered below the base rate of a bank. Base rates of most of the banks are 9 per cent. Other category of loans exempt from the guideline include loans to banks'' own employees and loans to banks'' depositors against their own deposits. The Ministry of New and Renewable Energy (MNRE) has formulated a scheme on financing of off-grid and decentralised solar (Photovoltaic and Thermal) applications as part of the JNNSM, it said. Under the scheme, banks may extend subsidised loans to entrepreneurs at interest rates not exceeding five per cent where refinance of two per cent from Government of India is available, it added.

Andhra Pradesh set to usher in new products under new MFI Act

Sensing foul play in the introduction of new products like loans for men and interest-free loans by microfinance institutions (MFIs), the Andhra Pradesh government is set to issue a notification to bring these products under the purview of the new MFI Act. MFIs in the state, whose revenues dropped after the introduction of the MFI Act, were finding new methods to carry on their business by introducing fresh products like loans to men and interest-free loans, a senior state government official said. According to R Subrahmanyam, Principal Secretary (Panchayat Raj and Rural Development), some MFIs are offering loans to the husbands of women members of selfhelp groups(SHGs), saying that extending loans to them will not attract the provisions of the Microfinance Act, which came into existence in December. Some MFIs were considering extending interestfree loans, arguing they would not come under the purview of the Act, he said. “That shows the desperation. When you want to make hyper profits, try to duck and find ways. We will not let that happen. A notification will be issued in a day or two, making it clear that these kinds of loans will also come under the Act,” Subrahmanyam said. The Andhra Pradesh Microfinance Institutions (Regulation of Moneylending) Act, 2010 is aimed at regulating the sector by keeping tabs on lending and recoveries by MFIs. It prohibits them from lending to SHGs already covered by the formal banking system, without seeking prior approval from banks.  Share Microfin, one of the largest MFIs in the country, recently launched ‘Suraksha Loan’ exclusively for men. In acircular to its branches, the company said the loan had to be extended to the husband of a woman member of an SHG. The circular stated the outstanding loan would be nullified only in case of death, but not suicide. Sources in SKS Microfinance said extending interest-free loans was a vague idea and one of the 40-odd concepts the company was mulling over.  “Even if they term these loans as interest-free or loans to men, they will attract all sections of the Microfinance Act. It will be viewed as a violation,” Subrahmanyam said.

PMEAC forecasts 9% growth in FY12, pitches for GST rollout, stimulus cut

RBI clarification on forex trading

The Reserve Bank of India (RBI) has clarified that existing Foreign Exchange Management Act (Fema) norms do not allow residents to trade in foreign exchange through electronic or Internet based trading portals.  The clarification comes after some advertisements recently by electronic /Internet portals offering trading or investing in foreign exchange with guaranteed high returns. “Many companies even engage agents who personally contact gullible people to undertake forex trading/ investment schemes and entice them with promises of disproportionate / exorbitant returns. RBI cautions the public not to remit or deposit money for such unauthorized transactions. The advice has become necessary in the wake of many residents falling prey to such tempting offers and losing money heavily in the recent past,“ the central bank said.