SBT launches new financial inclusion project

Thiruvananthapuram, Feb 25:  The Banking Ombudsman, Mr F.R. Joseph, has launched ‘Sahayahastham,' a new project as part of the financial inclusion drive of State Bank of Travancore (SBT).  The project is being implemented with the help of Kudumbasree units under the State's larger poverty eradication mission of the same name, an SBT spokesman said here. The scheme would aim to bring the weaker sections and low-income groups under the banking services mainstream in as yet unbanked areas. The programme was launched at a function at Veeranakavu village in rural Thiruvananthapuram. In his presidential address, Mr P. Pradeep Kumar, Managing Director, SBT, said that ‘Sahayahastham' would aim to bring banking services to the common man's doorstep at an affordable cost.  The bank is using biometric cards and a simple portable machine for implementing the financial inclusion, the spokesman said. Fingerprints of the depositor are stored in the machine assuring 100 per cent security to the deposits. The bank will utilise the services of the Kudumbasree units for opening new accounts.

Finmin calls on PSBs to scrap housing loan foreclosure fees

In major relief for home loan borrowers, the government has suggested that the public sector banks (PSBs) stop levying pre-payment penalty or foreclosure charges on home loans. Banks impose penalty of over 2% of outstanding principal on borrowers who repay in totality or a portion of their home loan ahead of tenure. In a recent communique to public sector banks and the Indian Banking Association (IBA), the finance ministry advised lending institutions that there should not be any penalty in case a borrower pre-pays home loans from his/her own funds. Public sector banks have already implemented the government's advice, said bankers and government officials. State Bank of India, for example, does not levy any pre-payment penalty on borrowers repaying loans from their own funds.  Other PSBs too have followed suit. However, private sector banks continue to levy hefty pre-payment charges, which can go up to as much as 4% of the outstanding loan amount of a borrower. The department of financial services has issued the advisory, even as the Competition Commission of India (CCI) recently ruled that levy of pre-payment penalty on home loans is not anti-competitive. (The Commission's investigative wing later took the opposite view, which favoured scrapping foreclosure charges on housing loans.)  “No pre-payment charges may be levied by the lending institutions when the loan amount is paid by the borrowers out of their own funds,” according to a finance ministry communique issued to the PSBs as well as IBA. The ministry issued this advisory after discussing the matter with the Reserve Bank and IBA, official sources said.  Retail loan portfolio of scheduled commercial banks grew 20% year-on-year to Rs. 3,15,862 crore in March 2010, as per RBI data. Even though PSBs have implemented the government’s suggestion, IBA, the lobby group of leading private and public sector banks, pointed out to the government that banks would raise interest rates if they are not allowed to levy pre-payment penalty.  The RBI, meanwhile, is also in favour of private sector banks pruning these charges, and keeping them in line with the average cost of funds. Banks enjoy operational autonomy and pricing freedom with regard to banking transactions including loans. Bankers argue that pre-payment penalty or foreclosure charges are imposed keeping in mind the cost of funds and the issue of asset-liability mismatch. Banks’ term deposits are typically of 1-5 years duration, whereas maturity of the loans is usually 15 years plus, which results in asset-liability mismatch.

Rising NPAs of SBI group come under Parliamentary panel lens

A Parliamentary Panel has asked the Government to assess the reasons for rising non-performing assets (NPAs) of the State Bank of India (SBI) group. The Government has been asked to spell out the policy on merging the subsidiary banks with SBI. The Government must also do an in-depth analysis of the issues relating to merger and consolidation of public sector banks in general, the Parliamentary Standing Committee on Finance headed by Mr Yashwant Sinha, said in a report tabled in Lok Sabha today. The Standing Committee went into the State Bank of India (subsidiary banks laws) amendment Bill 2009, which was introduced in Lok Sabha in December 2009. A recent Reserve Bank of India (RBI) inspection report is also understood to have expressed concern over the rising NPAs in SBI, which is the country's largest commercial bank. On allowing SBI subsidiary banks and other public sector banks to raise equity capital by way of ‘rights issue' of shares as well, the Standing Committee said that it expects appropriate amendments to be carried out in the Bill and also the laws regulating the public sector banks so as to enable them to raise capital through rights issue

Some flaws in the Malegam report - RAHUL KUMAR

The panel will enable big NBFCs to carry on microfinance on a larger scale than the current microfinance players, without regulatory oversight. The objectives of the Malegam report are to protect the microfinance borrower, promote the SHG-bank linkage programme in preference to the MFI-JLG (Joint Liability Group) programme, ensure credit supply to the MFI-JLG programme, and protect the stake of banks and FIs in the microfinance sector.  The broad objectives are diverse and finding a balanced solution is a difficult task. The Committee's observations are not without shortcomings.  The committee recommends that for NBFCs to become NBFC-MFIs, 90 per cent of their total assets (excluding cash and cash equivalent) should be for microfinance activity.  On the contrary, it permits other NBFCs to engage in microfinance up to a cap of 10 per cent of total assets without specific regulation. The big NBFCs have an asset size of over Rs 10,000 crore. Ten per cent of such a size is bigger than the assets of the fifth biggest MFI in microfinance.  Big NBFCs can carry on microfinance on a scale larger than the current microfinance players without regulatory oversight. While the provision is obviously intended to encourage scale in microfinance it restricts the scope of product diversification of NBFC-MFIs.   This lack of flexibility of NBFC-MFIs, compared with the freedom of regular NBFCs, will allow them to gradually take over the market while functioning in an unfettered manner.  To prevent over-borrowing, the committee restricts the individual loan size to Rs 25,000. The aggregate outstanding loans of a borrower are restricted to Rs 25,000. The tenure of the loan is aligned with the borrower's cash flow.  The committee mandates that 75 per cent of the loans by MFIs should be for income-generation purposes, and leaves the repayment frequency (weekly/fortnightly/ monthly) to the choice of the borrower.  However, the limit of Rs 25,000 is too low to procure income-generating assets, or to protect the borrower from negative market or environmental shocks. In effect, the recommendation may drive borrowers to borrow from informal sources.  The committee does not clearly define the scope of loans for income-generating purposes.  On the repayment frequency, the committee's suggestions contrast with the JLG model, in which group decision prevails over that of the individual to ensure joint liability of repayment.  The third objective targets the growth of MFI-JLG programme because the factors driving the growth are found to be unjust.  The Committee recommends an interest rate cap to curb the growth. The interest rate cap is 24 per cent, subject to the net interest margin cap (difference between the amount charged to the borrower and the cost of funds to the MFI).  The net interest margin cap is 10 per cent for the larger MFIs (loan portfolio exceeding Rs 100 crore) and 12 per cent for the smaller MFIs (loan portfolio up to Rs 100 crore).  The margin cap applies at an aggregate level for the MFIs. The committee arrived at a normative cost structure to prescribe the margin cap with an overall interest cap.  The interest cap does not compensate for the higher cost of operation in remote areas. The committee's view to restrict scope of securitisation for NBFC-MFIs will burden traditional sources of debt and equity funds. The committee allows only corporates with a minimum net worth of Rs. 15 crore to become NBFC-MFIs. The suggestion is intended to induce economies of scale and better monitoring and control.  To protect the stake of banks and FIs, the committee recommends provisioning norms and capital adequacy norms. NBFC-MFI is required to maintain an aggregate provision for loan losses, which is the higher of 1 per cent of the outstanding portfolio or 50 per cent of the aggregate loan instalments which are overdue between 90 to 180 days and 100 per cent of the aggregate loan instalments which are overdue beyond 180 days.  The capital adequacy ratio is 15 per cent and all of the net owned funds should be in the form of Tier I Capital.  The provision is inconsistent with RBI Master Circular on Capital Adequacy. The de-recognition of the Tier II capital and other instruments of Tier I capital will prevent the broad basing of the capital structure of NBFC-MFI.  The committee feels that the regulatory standards will meet the objectives and, therefore, allows priority sector lending status for bank lending to MFI.  However, the committee fails to give specific direction to precipitate bank lending. A specific allocation of 10 per cent of 40 per cent limit of priority sector lending of banks through revision in RBI Circular on Lending to Priority Sector is realistic.  On the funding source for NBFC-MFIs, the committee emphasises setting up a “Domestic Social Capital Fund” for “Social Investors”. The idea has limited relevance without clear guidelines for the fund to operate. Specific invitation to banks and government institutions to participate in the fund may ensure its success.  The recommendations may be seen as a useful framework of guidelines to regulate NBFC-MFI, but one that needs to be strengthened to facilitate the growth of microfinance.

(The author is CFO, Mimo Finance, a New Delhi-based microfinance company.)

Policy first defence against inflation: RBI

Price rise largely driven by supply-side factors and monetary policy has limited impact. Reserve Bank of India (RBI) Governor D Subbarao today reiterated that monetary policy remained the first line of defence against rising inflation even as much of the pressure had been from the supply side.  He said inflation had largely been driven by supply-side factors and monetary policy had limited impact.  “However, RBI has to do something,” he said in an interaction with students. “Policy becomes the first line of defence. If inflation persists for a long period, people think it is going to (remain) high. It becomes like a self-fulfiling prophecy.” However, when asked if RBI would resort to inter-policy rate action, Subbarao refrained from any comment. “I have said what I had to. I can’t comment on whether I will take inter-policy action,” Subbarao said. RBI’s mid-quarter review is scheduled on March 17. Since November, it has been reviewing its policy every six weeks. Mid-quarter reviews were started to formalise any inter-policy rate action. Earlier this week, the governor said RBI reserved the right to change its policy stance any time, the scheduled mid-quarter and quarterly reviews notwithstanding. With the rise in incomes, the demand for protein-rich food had increased, driving up the prices of such articles, Subbarao said. He said both structural demand and transient factors such as an uneven monsoon had driven prices up. Food price inflation for the week-ended February 12 was 11.5 per cent, up from 11.05 per cent a week before. Headline inflation, based on the wholesale price index, has remained above eight per cent and was 8.2 per cent in January, as against 8.4 per cent in December. RBI had already taken steps to tame inflationary expectations, he said. “To break that inflationary expectation psyche, RBI had to act, which is why we have been acting over the last one year,” he said. The central bank has raised policy rates seven times since March to curb inflation and inflationary expectations. When asked about volatility in capital flows and the RBI’s response, Subbarao said the country needed to be predictable on its policy over flows. Although market participants expected RBI to intervene when the currency was appreciating, the central bank has to take cognisance of the impact on importers and, therefore, on government subsidies, he added. Earlier this week, the governor had reiterated that RBI intervened in the foreign exchange market to curb volatility and any impact on liquidity was incidental. On the growing concerns over the functioning of microfinance companies and the resultant report by the committee set up under the chairmanship of Y H Malegam, Subbarao said RBI was examining the report. The government and the central bank would come up with a better framework for the sector in the next two months, Subbarao said. The Malegam report has recommended a cap on interest rates charged by the microfinance companies and the amount of loans sanctioned by them to individuals.

Indian Central Bank Is Addressing High Inflation

BHUBANESWAR, Orissa—India's high food inflation is mainly due to supply-side constraints, and the central bank has been taking steps to control a buildup in inflationary expectations, its governor said Saturday. "Monetary policy becomes the first line of defense, so if inflation persists for a long time, people think inflation is going to be high, and that becomes a self-fulfilling prophecy," D. Subbarao said at an event in Bhubaneswar, the capital of the eastern Indian province of Orissa. "To break that inflationary-expectations psyche, [Reserve Bank of India] has to act, which is why we have been acting over the last year," he said. The central bank has raised its policy rates seven times in the past year.  Authorities have been grappling with high inflation as food prices increased owing to rising demand and choked supplies after unseasonal rains damaged some crops late last year. Mr. Subbarao declined to comment on the likelihood of an interpolicy-meeting rate move by the RBI. Earlier this month, he said that the central bank can act at any time to deal with the evolving macroeconomic situation. This fueled expectations of a rate increase, possibly before the next scheduled policy review March 17 if inflation didn't cool fast. "Notwithstanding scheduled quarterly and mid-quarterly reviews, we reserve the right to alter our policy stance at any time to respond to the evolving macro economic situation," Mr. Subbarao had said. Food inflation climbed slightly after two consecutive weeks of decline, accelerating to 11.49% in the week to Feb. 12 from 11.05% in the previous week, government data Thursday showed. The general inflation rate was at 8.23% in January, and the government expects it to ease to 7% by the end of the current fiscal year in March. High prices have led to protests from opposition lawmakers and public outcry in a country where more than 40% of the 1.2 billion population lives on less than $2 a day. Rising prices of crude oil and other commodities globally have stoked worries of intensifying inflationary pressures, which could further erode the spending power of the country's poor. High inflation also would lead to more monetary action, with most economists predicting the RBI could increase policy rates by 0.5 to 1.0 percentage point in 2011.

RBI Governor for stepping up farm productivity to fight food scarcity

Lively interaction :

Reserve Bank of India Governor D. Subbarao being greeted by students at a meeting on the IIT campus in Bhubaneswar on Saturday.

BHUBANESWAR: Reserve Bank of India Governor D. Subbarao here on Saturday emphasised on the need for stepping up agricultural productivity to fight food scarcity and rising food prices. Addressing students of Indian Institute of Technology, Bhubaneswar, here Dr. Subbarao said, “we need to increase production in order to manage prices. In poor country we need to keep food prices low.” “We cannot import food as we have to feed 1.2 billion people. Our food prices are lower than that of world prices. You cannot import food and sell them here unless you subsidise. You cannot expect to subsidise food on a large scale,” he said.  “RBI is responsible for management of inflation. But responsibility for food inflation is slightly lower because food inflation arises because of supply side constraints,” he said. “If you have supply shortages, it is not clear that RBI policies are most effective response. You have to have supply side response that you have to produce more,' Dr. Subbarao said. The RBI Governor, however, said, “monetary policy becomes the first line of defence, so if inflation persists for a long time, people think inflation is going to be high, and that becomes a self-fulfilling prophecy. To break that inflationary-expectations psyche, RBI has to act, which is why we have been acting over the last year.”

SBI’s kiosk opened in Warangal village

HYDERABAD: As part of the RBI's financial inclusion programme, State Bank of India (SBI) said its regional office in Warangal has so far appointed 38 business correspondents in the district. “Several measures are being taken by the Reserve Bank of India under financial inclusion programme with an aim to deliver the financial services at an affordable cost to the vast sections of disadvantaged and low income groups especially in rural areas,’’ said A S Rao, regional director, RBI. Addressing the gathering after inaugurating one of the SBI's kiosk in Veeraram village, a predominatly tribal village with low literacy rate today, he said RBI has chalked out an ambitious plan to cover about one lakh villages over the next three years. According to SBI, since the technology adopted for the kiosk platform is robust and foolproof, the government of India and RBI has envisaged the financial inclusion programme as a successful tool in implementing the welfare programmes effectively as the end use of funds is ensured to reach the targeted beneficiary. “The rural people will receive the payments from government directly through their accounts in a cost-effective and easy way. As the finger print-based biometric technology is being used, the system is foolproof and safe to customers. Account opening in this model is simple and easy,” Ashwini Mehra, general manager, SBI said. Giving details about the features and benefits for the rural people, Mehra said, the bank has been issuing smart cards for account-holders and that the financial inclusion programme will be aligned with UID project -- Adhaar' at a later stage. Meanwhile, SBI's regional director distributed loans worth Rs.1 crore to 40 SHGs in Maripeda mandal in Warangal district.

50,300 defaulters of bank loans of Rs. 1 cr or more: RBI

There are 50,300 defaulters across India who have not repaid loans amounting to Rs1 crore and more each in the last 15 years. The Reserve Bank of India (RBI) has mentioned this in response to a query under the Right to Information (RTI) Act. Though the RBI has not mentioned the amount of the defaulted loans, it is easily more than Rs 50,000 crore even if the minimum default figure of Rs1 crore is considered. The RTI query filed by one Manoranjan Roy had sought details of loan defaulters from the year 1995. However, figures available with the All India Bank Employees’ Association (AIBEA), which publishes reports on wilful defaulters, shows the defaulted loan amount figure is more than Rs 75 lakh crore in the last 20 years. The AIBEA is coming out with a fresh report by the end of next month, which will have the latest default figures (of Rs 75 lakh crore). “This includes those defaulting on amounts of Rs 25 lakh or more,” said Vishwas Utagi, secretary, AIBEA. Utagi said of the total defaulted amount, around 40% would be in Maharashtra alone. So, the amount of loans defaulted on in the state works out to Rs 30 lakh crore.

Rs.150 coin to mark the 150th anniversary of the income tax

When Finance Minister Pranab Mukherjee today unveiled the Rs.150 coin to mark the 150th anniversary of the income tax (I-T) department, numismatists would have taken heart from the fact that a similar coin with Nobel Laureate Rabindranath Tagore’s face inscribed on it is trading at a 116 per cent premium.  Numismatists are collectors of old and unique currency notes and coins. The coins, made by the Kolkata Mint on Tagore’s 150th birth anniversary last year, were sold at`2,310 a piece and booked by 2,000 buyers. The delivery started recently. They are already trading at `5,000.  “Tagore’s coin has the distinction of being India’s first `150 coin,” says Jayesh Gala, a Mumbai-based numismatist. Numismatists say the I-T department coin should also trade at a much higher price owing to the high silver content and exclusivity. Many are already waiting for the bookings to begin. The coin will be made of an alloy of silver, copper, nickel and zinc and will have the ‘Satyameva Jayate’ emblem on the front with a portrait of “Chanakya’ and ‘lotus with honeybee’ on the flip side. Coin collectors said the authorities had not issued any notification on booking. But they expect a limited number of VIP sets to be issued on Monday. Public bookings will begin later. They also expect that the VIP sets will come into the market in a few years at a much higher premium. Here’s a case in point: In 1972, the Reserve Bank of India issued about 200 special sets of ten rupee and fifty paise coins on the occasion of the silver jubilee of India’s independence.  At an annual exhibition of coins and notes held in Ahmedabad last month, one such set went for a staggering Rs 3.25 lakh. Each year, mints in different states issue such unique coins to mark special events. These are made-to-order, approved by the government. The buyers have to pay the premium upfront. The delivery happens six-seven months after the unveiling. The premiums rise before delivery owing to this long time gap between order and delivery. Even minting and printing errors are cherished as they add to the rarity. For instance, the coin issued in 2007 to mark the birth centenary of freedom fighter Bhagat Singh had a glaring mistake. On some coins, the name was wrongly printed -- Sagat instead of Bhagat. Today, these command about Rs 6,000 as compared to the ones with the correct spelling (Rs 3,500) on ebay, the online auction portal. These were first issued for Rs 1,435 per set. And in case you miss an opportunity to buy, you can hope for a‘restrike’. Though rare, sometimes mints restrike, that is, reissue coins depending on their popularity. But, these command a premium over the original coin. The Bhagat Singh coins, when they were re-issued, went for Rs 2,740 last year – almost twice the original price.