RBI tells banks to stop re-circulation of soiled notes

SAMBALPUR(Orissa): Soiled notes may soon be a thing of past as the Reserve Bank has asked all bank branches handling large amounts of currency to put in place note-sorting machines by the end of next month with a view to halting re-circulation of unfit currency notes.  "The Reserve Bank is committed to a 'clean note' policy. RBI exchanges soiled notes for clean ones, and mutilated notes for new ones subject to certain conditions," central bank Governor D Subbarao said at the Convocation function of Sambalpur University here.  "In pursuit of our clean note policy and to check counterfeiting, we also prescribed that by March 31, 2011, all bank branches with cash receipts of over Rs 50 lakhs per day be equipped with a note sorting machine so that every high denomination currency note is checked for fitness and genuineness before being put back in circulation," he said.  Furthermore, he said, RBI has instructed banks to ensure that the notes that they issue through their ATMs are also pre-checked for genuineness and cleanliness.  He pointed out that cost and longevity are important dimensions of currency management.  "We are a large cash economy; in fact, we are the second largest producer and consumer of currency in the world, next only to China . Producing such a large amount of currency is expensive," he said.  Talking about introduction of plastic notes, Subbarao said, one option for economizing is replacing paper currency with plastic one as some countries such as Singapore and Australia have already done.  "We are planning to try this out on a pilot basis, starting with a plastic note in the Rs 10 denomination, which we will distribute out of five of our regional offices in the country including our Bhubaneswar office," he said.  During the pilot phase, RBI needs to study not only the relative costs but also the carbon footprint associated with the recycling and disposal of plastic notes vis-à-vis paper notes.  "If the pilot proves successful, we will mainstream the use of plastic currency," he said.  By far the most important facet of currency management is building in security features to prevent counterfeiting. People should be aware of these security features so that they can tell a forged note from a genuine one, he said.  This is the motivation for the awareness campaign that the Reserve Bank has launched in the print and electronic media to educate people on the security features, he said.

RBI hints at policy stance rejig to rein in inflation

Reserve Bank of India (RBI) Governor D Subbarao, on Thursday, said it can change policy stance at any time to rein in inflation based on the macroeconomic situation.  “Notwithstanding (the) scheduled quarterly and mid- quarterly reviews, we reserve the right to alter our policy stance at any time to respond to the evolving macroeconomic situation,” Subbarao said said at the Convocation function of Sambalpur University. The statement assumes significance in the light of double digit food inflation and rising crude oil prices. Subbarao said “we are deeply conscious that inflation is a regressive tax that hurts the poor the most as their earnings are not protected against rising prices.”   He admitted “the tension that we need to manage is that economic growth requires that we maintain a low interest rate regime whereas inflation management warrants that we raise interest rates.” As part of managing growth-inflation dynamics in the post-crisis period, RBI has raised policy interest rates seven times since March 2010. Subbarao said, “we are sensitive to the need for supporting growth as economic growth is a necessary condition for poverty reduction.”  On capital inflows, Subbarao said, “the liquidity infusion policy of the US Fed, popularly known as quantitative easing (QE), has triggered larger capital flows to emerging market economies (EMEs).”   This has in turn put upward pressure on EME exchange rates eroding their export competitiveness and pushing up asset prices. EMEs had to adjust their macroeconomic policies to manage the implications of these flows, he said.

RBI to float discussion paper on deregulating savings a/c rate

The Reserve Bank today said it will come out with a discussion paper on deregulation of interest rates on savings account.  "There is a view that we should deregulate the interest rate on savings bank accounts too. We are examining the pros and cons of doing that and will shortly put out a Discussion Paper for eliciting feedback," RBI Governor D Subbarao said at the Convocation function of Sambalpur University.  At present, RBI only monitors interest rates on NRI deposits and on savings bank accounts, while interest rates both to savers and borrowers now work on the market principle of competition among banks.  "Regulation has both costs and benefits. excessive or inappropriate regulation increases intermediation cost, impedes efficiency and stifles innovation...," Subbarao said.  Currently, banks pay 3.5 per cent on savings deposit. While the RBI as part of the economic reforms programme deregulated fixed deposit rates, it had not freed the rates which banks pay on savings deposit.  While banks adjust fixed deposit rates keeping in view their asset liability position, they pay 3.5 per cent on savings bank as mandated by the Reserve Bank.

Managing growth vs inflation biggest challenge: RBI

Terming management of tension between demands of growth and of inflation as a major challenge after the global financial crisis, the Reserve Bank of India (RBI) today said though India recovered early, it was hit by inflation before others. "In the aftermath of the crisis, our biggest challenge has been to manage the tension between the demands of growth and of inflation," RBI Governor D Subbarao.  "Even though we have recovered from the crisis ahead of most other countries, inflation too has caught up with us sooner than elsewhere," he said. Economic growth requires maintaining a low interest rate regime whereas inflation management warrants raising interest rates. "In managing this tension, we are deeply conscious that inflation is a regressive tax that hurts the poor the most as their earnings are not protected against rising prices," the RBI governor said. As part of managing growth-inflation dynamics in the post-crisis period, the apex bank has raised policy interest rates seven times since March 2010, he said, adding the apex bank was are also sensitive to the need for supporting growth, a necessary condition for poverty reduction.  On financial inclusion programme that seeks to provide banking access to poor and those living in the villages and remote parts of the country, the RBI chief said banks had been advised to draw up board approved Financial Inclusion Plans for a period of three years upto March 2013. Subbarao said this should be integrated with the business plan of the bank. A uniform model has not been imposed so that each bank can build its strategy in line with its business model and comparative advantage, he said. In order to further financial literacy, the RBI has established centres focused on financial education at its regional offices in Chandigarh, Pune and Bangalore. "We hope to replicate this in other cities too," he said. The RBI has also encouraged commercial banks to set up financial literacy and credit counselling centres to help people develop better financial planning skills and to learn of the opportunities available in the financial sector, Subbarao said. "Most importantly, we are encouraging both central and state governments to include financial literacy in school and college curriculum so that the next generation enters the adult world financially literate," he said.

Budget to decide on growth-inflation tradeoff

At over 8 per cent, inflation has been consistently high over the past few months. And that probably is the biggest challenge for finance minister Pranab Mukherjee, who faces the difficult choice of choosing between a strategy aimed at containing high prices or sustaining the growth momentum.  Experts say, presenting a non-expansionary Budget, which means a fiscally tight Budget with higher taxes on commodities and services, is the only way out. But a look at the government's accounts and policy compulsions might render it difficult. The Reserve Bank of India (RBI) would like the government to adopt a credible fiscal consolidation plan. That is important because monetary policy framed by the central bank is effective when there is fiscal consolidation. “The government must adopt a credible fiscal consolidation plan, which is important because monetary policy is most effective when there is fiscal consolidation,” said RBI Governor D Subbarao. 

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State Level Bankers' Committee review held

DEHRADUN, 23 Feb: The State Level Bankers' Committee third quarterly review of all banks upto December was conducted here today. The meeting was inaugurated by Principal Secretary and FRDC Rajiv Gupta. He directed the banks to increase the flow of loans in villages and suburban areas. A review was also conducted of all the plans and projects being run by banks like the 'Atal Adarsh Gram Yojana', 'Chief Minister's Jadi-Booti Vikas Yojana', 'Kisan Credit Card' scheme, 'Pradhan Mantri Rozgar Srajan Programme' and others.Present on the occasion were Sunil Pant, Chief General Manager, State Bank of India, Principal Secretary Alok Jain, Dr Amarendra Sahu, Regional Director of the RBI, Lucknow and others.

Cuttack bank fined for RBI rule violation

The Urban Co-operative Bank, Cuttack is once again in news for wrong reasons. The RBI on Monday imposed a monetary penalty of Rs one lakh on the bank for flouting the apex bank's instructions. The Urban Co-operative bank had opened four collection centres in various schools of the city without prior approval of the RBI. The Urban co-operative bank authorities claim that the counters were opened to provide better services to the people. "We had opened the collection counters to provide better services to our customers. At the counters we collected school fees from the students. We did not violate the instructions intentionally," said Manas Ranjan Pattanaik, chief executive officer of Urban co-operative bank. He added that an appeal will be made before the RBI for a reconsideration of the penalty. According to sources, the RBI had issued a show cause notice to the Urban Co-operative bank earlier, in response to which the bank submitted a written reply also. But the RBI was not satisfied with the reply and had imposed the fine of Rs one lakh. The RBI release said "After considering the facts of the case and the bank's reply in the matter, the RBI came to the conclusion that violations were substantiated and warranted imposition of the penalty."

RBI rejects NBFCs' parity demand

RBI has rejected the demand for level-playing field by NBFCs on par with banks. Responding to a presentation made by NBFC representatives, RBI deputy Governor Shyamala Gopinath said: " banks were governed by separate and more stringent set of rules and they have various statutory liquidity requirements. So there is no point in asking for parity with banks."  NBFCs discussed a number of issues, including tax deduction allowed to banks on their NPAs, NBFCs not being included in the process of financial inclusion, among others. They also asked for a revision of deposit limits accepted by them, which has remained unchanged since 1998.  One of the major points of contention was the various versions of the definition of 'infrastructure' being used by various regulatory bodies, which needs some streamlining based on the nature of assets, class of sector and other parameters. Besides, they also asked for extending the scope of SARFAESI to NBFCs.  NBFCs met the RBI top official, following the central bank's recent circular asking them to step up capital to 15% of their assets from the earlier stipulated 12%. Ms Gopinath said: "In our communication with NBFCs, we had found that except for one, most of them already maintained their capital adequacy ratio above the benchmark."

RBI Working Group to clear up NBFC issues

The Reserve Bank of India (RBI) has formed a working group to look into the various issues related to the Non Banking Finance Companies (NBFCs). "We have formed a working group that is headed by Usha Thorat, former Deputy Governor, RBI which will look into various issues and problems faced by NBFC," said Shyamala Gopinath, deputy governor, RBI while addressing the seminar organised by Indian Merchants' Chambers on issues and challenges faced by NBFC sector. The working group also includes members of NBFC sector.

Consolidation of public sector banks back on front burner

The long-standing proposal for consolidation of public sector banks is back on the government's agenda. Senior officials in the banking sector have told FE that finance ministry is likely to appoint a committee to look into the consolidation of such banks. An announcement is expected in the Budget. The committee, which will have officials from the finance ministry, Reserve Bank of India and some bankers, will look into the merits of bank consolidation, recommend a plan of action to achieve the goal and also identify possible banks to take the process forward. Recently, the standing committee on finance headed by Yashwant Sinha also recommended that the government to spell out clear policy on bank mergers and conduct an in-depth analysis on various aspects of bank consolidation.

Subbarao risks losing war on inflation

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The importance of being Prof Reddy - S.S.Tarapore

The former RBI Governor's book attributes the global crisis to a climate of competitive deregulation in the industrialised world. Apprehensive of overheating, he argues that the benefits of growth trickle down slowly, while inflation hurts the poor instantly.  Dr Y.V. Reddy was Governor of the Reserve Bank of India (RBI) from 2003 to 2008. During his tenure he had more than his fair share of brickbats. But once the financial crisis hit the global economy and India weathered the storm with minimal damage, his percipient policies were acclaimed, both in India and globally, as being oracular. As an interlocutor, he participated vigorously in the international debate on the global financial crisis and in the designing of a new international financial architecture. This voluntary role was, in some ways perhaps, more distinguished than his now acclaimed role as Governor. Professor Reddy's book Global Crisis, Recession and Uneven Recovery, published by Orient Blackswan (2011) has already received media attention which is necessarily instantaneous and short-lived. However, even those who have read the book carefully would find it difficult to absorb the leitmotif of this seminal work which is breathtaking in its expanse.  In a foreword Andrew Sheng says, “India is a land of many talents but it was in the stars to have central bank governors of the calibre of Professor Reddy.”  Sheng commends Prof Reddy's concern for the poor, as in the run-up to the recent bubbles too much attention was devoted to becoming rich, with an inclination to forget the under-privileged. Examining the causes of the global crisis, Dr Reddy argues that least regulation was considered to be the best and self-regulation was equated with optimal regulation. In some industrial countries development of the financial sector was co-terminus with their national interest which resulted in a race to reduce financial sector regulation. Dr Reddy attributes the global crisis to regulatory capture of the government by market forces. While the achievements of the financial sector were glorified, the penalties imposed by regulators were underplayed. Respectability was accorded to unfettered market forces which fostered untrammelled greed. Human values changed which elevated markets to the status of God. In the all-pervasive climate of “greed” Dr Reddy recalls Gandhiji's statement that there is enough on this earth to meet the needs of all but not the greed of all. It is fortuitous that the global crisis occurred before India embarked on an irrevocable direction of excessive deregulation of the financial sector. Dr Reddy recalls the pithy statement of Dr Mervyn King, Governor, Bank of England, that banks are global in life but national in death — in effect, the buck stops at the national government to pick up the losses. Globalisation of finance without globalisation of regulation has inherent problems, but experts are unanimous that there is unlikely to be agreement on global regulation. Discussion on the Tobin Tax (i.e. on financial transactions tax) has now emerged on the agenda at international fora. In 2004, Governor Reddy, in a speech referred to the need to study Tobin tax kind of measures. There was an uproar both in financial circles and government and Governor Reddy was forced to recant. It must be of great satisfaction to Governor Reddy that he was in the avant garde. Dr Reddy suggests that individual countries may find it appropriate to introduce such taxes without waiting for a global consensus. Dr Reddy's assessment is that the potential output growth is in the range 8.5 -9.0 per cent. The concept of overheating raises hackles in India and when Governor Reddy referred to “over-heating”, the government advised him not to use this term — a case of macho spirits prevailing over hard realities. Governor Reddy followed a monetary policy suited to an ‘over-heated' situation without referring to the forbidden word! Stressing the need for stability in the EMEs, Dr Reddy argues that the gains from growth trickle down to the poor after a time lag but the pains of inflation visit the poor instantly. Responding to the critics on the excessive build-up of forex reserves by the EMEs, Dr Reddy argues that greater blame should accrue to the rich who consumed more, rather than the poor who worked harder and saved more. In dealing with the threat to stability, monetary policy is the first line of defence, particularly when governance is weak or absent — this was amply borne out by the Indian experience in 1979-80, 1990-91 and 1995-96. While analysis is focused on what went wrong in the major industrial countries, not enough attention is given to understanding why countries like Canada and Australia came out relatively unscathed from the global crisis. In sum, one just cannot do justice to the rich expanse of this book. Suffice it to say that this book is a lexicon on global and national finance which should be mandatory reading for all policymakers, regulators, academics and others interested in the financial sector.

Pranab Set to Give You a Salary Hike

Finance minister Pranab Mukerjee is set to spring a surprise on personal income-tax payers hurt by a sharp increase in prices. He could lighten the tax burden for those with an annual income of Rs 5 lakh by Rs 7,660 a year to compensate them for the increase in cost of living. The sum saved will be much higher for those with a higher annual income. The relief is set to come from a rejig in tax slabs, to be aligned with those recommended in the direct taxes code. “The UPA government will partially roll out the direct taxes code in the coming Budget to provide relief to the aam aadmi,” said a top government functionary. The bill has proposed a 10% tax rate for taxable income between Rs 2 lakh and Rs 5 lakh, 20% for income above Rs 5 lakh to Rs 10 lakh and 30% for income above Rs 10 lakh. An individual can also claim a deduction of Rs 1.5 lakh a year, which will be split into two segments. One will be a deduction up to Rs 1 lakh on investments in long-term savings instruments such as Public Provident Fund, new pension schemes and recognised superannuation funds. In addition, a deduction of up to Rs 50,000 will be available on premiums paid for life insurance, medical insurance and tuition fee for children. The income tax payer will not have to pay an education cess of 3% as well either in the new structure. The tax break of up to Rs 1,50,000 on home loan interest will continue. So, the tax burden of an individual with an annual income of Rs 5 lakh would work out to Rs 15,000 a year instead of Rs 22,660 now, if he has no housing loan. Income-tax slabs were last changed in 2010-11. The slabs were widened again to compensate for a higher cost of living and reward the missing middle for better compliance. The government also introduced infrastructure bonds, with a separate ceiling of Rs 20,000 to increase investment avenues for individuals, taking the total tax deduction to Rs 1,20,000. The tax break on infra bonds was meant to be available only for one year.

Panel discourages super profits by bourses, says Jalan

The committee headed by Bimal Jalan to suggest a roadmap for stock exchanges has generated a lot of interest with the response being extremely positive or extremely negative. In his first interview since the report on regulation and governance of market intermediaries was submitted, Jalan, a former Reserve Bank of India Governor and a lawmaker, tells TOI that the idea behind the recommendations was to benefit investors at large.