Performance sops for PSU bank staff

The New Delhi: Nearly nine lakh public sector bank employees could soon be rewarded for helping their employer improve its performancde. The government is planning to announce a performance-linked incentive which will be over and above what bank employees get at present. Some bank chairmen and executive directors would also be better off with the government deciding to reward the good performers. At present, irrespective of their performance, all public sector bank chiefs and EDs get the same amount as bonus.  Now, sources said, the idea is to grade the banks into three categories—State Bank of India, large public sector banks and smaller players —for the reward scheme for employees as well as chiefs.   While the idea of a performance-linked pay was first discussed at the time of the last wage negotiation, it had to be shelved due to opposition from bank unions. However, the issue was revived by an expert committee headed by A K Khandelwal, a former Bank of Baroda CMD.  With the unions insisting that they did not agree to variable pay, the government is of the opinion that this can be over and above the 17.5% increase that has been agreed upon, which in any case was in addition to a second pension option. So far, only IDBI Bank has a performance-linked salary plan but that is unoperational given the government’s concerns.  Once the scheme is implemented for all banks, which is expected to be from the next financial year, banks will be able to earmark over 1% of their net profit for payment of incentives. At present, public sector banks can pay up to 1% of their net profit as incentive to employees. Apart from increasing this ceiling, the government is also going to increase the ceiling on welfare schemes. The scheme will entail that banks sign a Statement of Intent with the government at the start of the financial year which will prescribe certain targets such as loan and deposit growth and target for non-performing assets. If the targets are met, then the incentive will be paid. Banks will, however, be required to put in place a performance management system before rolling out the new plan.

Banking Laws Amendment Bill: RBI to supersede PSBs

This is the second time that the Banking Laws Amendment Bill is being picked up by the cabinet. It was done about four to five years ago when the Reserve Bank of India (RBI) had sought that the voting rights be made commensurate with the actual shareholding in the bank. However, this was shot down at that time by UPA government which was seriously dependent on the left.  RBI’s argument has been that under the current rules RBI doesn’t allow any entity to have more than 10% shareholding in a bank. Therefore voting rights should be made commensurate with the shareholding because in any case no entity will have more than 10%. The rules currently say that no entity can have more than 10% voting rights in a private sector bank and in the public sector bank they can have a maximum of 1% voting rights. It doesn’t matter in the public sector banks because the government is always the majority shareholder. It doesn’t matter whether the other shareholding is dispersed or held in one block.  It matters in the private sector bank and RBI’s main argument was that in certain cases like Kotak or the Hinduja’s in Indus Ind, when the license is given they do have the power to hold more than 50% and they enter into an agreement with the RBI to bring it down in stages, however, because the banking regulation law says that no entity can have more than 10% voting rights, the shareholding of the dominant partner is divided into several companies which are really namesake companies.  RBI is uncomfortable conniving with such a practice which is really fraudulent. Hence, RBI has been asking to recognize it in the law itself. Last time it got shot down because of probable leftist pressures. It shouldn’t really change matters much; merely legalize what exists at this point in time. There is also the likely hood that this amendment will also give powers to RBI to supersede the private sector banks boards. State Bank of India chairman OP Bhatt has cheered the move saying that it will make investment in the banking sector more attractive. He says, “it is positive because you know if you have ownership and if you are not able to exercise. Therefore the benefits that come with that ownership then may be there are certain people who may be a little shy of investing in the banking sector, hence, going forward as we need more and more capital in the banking sector, this will sort of make it easy for those who are standing on the sidelines to put more capital into the banks as and when there are IPOs and FPOs.” While the jury is still out on whether business houses will be given bank licences, RBI Governor, D Subbarao says that financial inclusion will be one of the main criteria on which licences will be given. “We are planning to issue some licenses for new private sector banks and one of the criteria for evaluating the applications that we will get in due course of time, will indeed be their business plan for financial inclusion,” he says.

Sub-Committee of the Financial Stability Development Council meets today

The first meeting of the Sub-Committee of the Financial Stability Development Council (FSDC) was held on 4^th Marach 2011 in the Reserve Bank of India, New Delhi. Dr. D. Subbarao, Governor, Reserve Bank of India chaired the meeting. The list of members of the Sub-Committee who participated in the meeting are :

Reserve Bank of India (RBI) : Dr. D. Subbarao, Governor, Smt. Shyamala  Gopinath, Deputy Governor, Dr. K. C. Chakrabarty, Deputy Governor, Dr. Subir Gokarn, Deputy Governor, Shri Anand Sinha, Deputy Governor, Shri V. S. Das, Executive Director.

Government of India (GoI) : Smt. Sushma Nath, Finance Secretary and Secretary (Expenditure), Shri R.Gopalan, Secretary, Department of Economic Affairs (DEA), Shri Shashi Kant Sharma, Secretary, Department of Financial Services, Dr. Kaushik Basu, Chief Economic Adviser, Shri Bimal Julka, Additional Secretary & Director General (Directorate of Currency), Thomas Mathew, Joint Secretary (Capital Markets), DEA

Securities and Exchange Board of India (SEBI) : Shri U. K. Sinha, Chairman

Insurance Regulatory and Development Authority (IRDA) : Shri J. Hari Narayan, Chairman

Provident Fund Regulatory and Development Authority (PFRDA) : Shri Yogesh Agrawal, Chairman

The Sub-Committee of the FSDC has been formed to assist the FSDC. The Sub-Committee has replaced the High Level Coordination Committee on Financial Markets.  The Sub-Committee reviewed the developments in the macro economy and the financial markets and deliberated on issues related to:

·         The global developments in respect of policies for systemically important financial institutions (SIFIs) and their possible impact on financial institutions in India;

·         The existing arrangements for supervision of financial conglomerates;

·         Information sharing arrangement among regulators for systemic risk assessment;

·         Regulatory issues relating to wealth management/private banking undertaken by banks; and

·         Financial stability issues that are of particular relevance to emerging market economies.

Five States join AP in seeking tough regulation of MFIs

The Microfinance Institutions (MFIs) may be heading for bigger trouble in Andhra Pradesh.  Many State Governments have urged the RBI Governor, Dr D. Subba Rao, to put in place stringent regulation to rein in MFIs to “protect” interests of the poor.  RBI, which is currently working on regulation of MFIs following submission of recommendations of the Malegam panel, held a meeting with officials from various States last week to ascertain their views.  “Along with Andhra Pradesh, other States including Tamil Nadu, Bihar, Uttar Pradesh, Karnataka and Puducherry have made presentations seeking tough regulation,'' Mr R. Subrahmanyam, Principal Secretary, Department of Rural Development, Government of Andhra Pradesh, told Business Line.  On the points that came up during the discussion, he said: “There has been congruence that there is a need to encourage banks for direct Self Help Group (SHG) linkage instead of encouraging intermediaries with a profit motive like MFI to do the financial inclusion.''  The apex bank was also asked by the States to provide more clarity on the field-level regulation of MFIs.   “The States have impressed upon the RBI Governor that it is not safe to regulate MFIs through Chartered Accountants who can only ensure corporate interests,'' the official added.   The much-awaited meeting had witnessed a “prolonged” discussion on the issue of regulation of interest rates.The Andhra Pradesh Government had also categorically told RBI that “there is no question of withdrawing its MFI Regulation Act even after RBI announced its own regulation policy.”   “The RBI Governor appeared to have been convinced by our arguments and we need to see what the final outcome is. Anyway, we are going by our Act to protect the poor,'' he added.  Irrespective of the final decision of RBI, MFIs will surely be in trouble soon in other States too, say experts.  “At present, we are working on increasing exposure in non-AP States to steer clear of credit risk in Andhra Pradesh. If other major States join AP, the whole business model would be in trouble,'' said the head of a large, Hyderabad-based MFI.  Even SKS Microfinance Ltd, the country's only listed MFI, may have to rework its strategy as it has plans to increase exposure in States like Bihar.

Bankers trash Basel-III rules on rigidity

Governor, Reserve Bank of India, Dr. D. Subbarao with Dy. Chairman, Planning Commission, Dr. Montek Singh Ahluwalia at the 2011 Institute of International Finance (IIF) spring membership meeting, in the Capital.

Global bankers and economists on Friday slammed the Basel liquidity proposals and different approaches by regulators to modify the Basel capital requirements . At a press conference at the Institute of International Finance (IIF) meeting here, Deutsche Bank CEO Josef Ackermann said the Basel liquidity proposals could undermine banks’ ability to provide a range of basic services. He said back-up credit lines that were critical to corporations, as well as funding for businesses in international trade and retail borrowers, could be affected due to the proposals. Banks will be subject to stiffer liquidity and capital norms under the Basel-III rules, made after the global financial crisis exposed their huge lacunae.  The Basel committee has come out with two standards to address the acute liquidity problems seen by banks at the start of the global financial crisis. First, it expects banks to comply with a liquidity coverage ratio from the start of 2015, requiring them to hold sufficient high-quality assets to withstand a 30-day period of acute stress. Meanwhile, a net stable funding ratio will come into force from January 2018, aimed at removing long-term structural liquidity mismatches on bank balance sheets. Ackermann also came down heavily on different regulatory approaches to modify Basel capital requirements. “It poses the risk of fragmenting the global financial system. And, it would have severe consequences on financial markets and the global economy,” he added. In many countries, all sorts of political pressure were mounting on regulators to start implementing regulatory changes, he added. “Because, if you have different capital requirements in different parts of the world, different liquidity provisions, different compensation structures, you will have arbitrage opportunities that is not in the interest of prosperity in growth on a global scale,” he said. Ackermann also criticised a move by the Financial Stability Board of G-20 countries to develop approaches to systemically important financial institutions, a highly complex area. “We believe that there should be no rush to judgement regarding capital surcharges on such companies. Rather, there should be an assessment of a full range of responses,” he said. IIF chief economist Philip Suttle said more regulations were required when economies overheat, but currently many advanced economies were still recovering. “It (over-regulation) is a good policy but at the wrong time.” ICICI Bank Non-Executive Chairman K V Kamath said Indian banks were ahead of the curve and would meet any requirement that would come up from Basel-III. Reserve Bank of India Governor D Subbarao had yesterday stated that the Indian banking system would meet the capital requirements of Basel-III at an aggregate level, though a couple of banks might not be geared up to the situation.

Banks' borrowing from RBI to soar in mid-March

Banks' woes over tight liquidity conditions will mount in the middle of March during advance tax outflows, which could push up the call rate and also borrowing from the central bank's daily repo window.  Dealers expect banks to borrow more than 1.25 trillion rupees a day from the central bank compared with an average daily borrowing of 740 billion rupees daily so far this month.  Borrowing from the Reserve Bank of India (RBI) could touch a peak of 1.5 trillion rupees during mid-March and the inter-bank cash rate will be around 7.5 percent, said Manish Wadhawan, director and head of rates trading at HSBC India.  The call money rate, which is the overnight borrowing and lending rate of banks, may not breach 7.5 percent, which should be a comfort to the central bank given that banks can meet their funds requirement from the RBI's repo window.  Cash tightness in the banking system has been acute since November following inadequate government spending after the windfall collection from telecom spectrum, and public withdrawal of money from banks.  From November through January, banks borrowed an average around 850 billion rupees a day from the RBI's repo window, touching over 1 trillion rupees even in February.  Dealers estimate the advance tax outflows to be around 500-600 billion rupees, which could take the average liquidity deficit to around 1.5 trillion rupees.  Liquidity-driven short-term rates have been edging up with the three-month CD rates at 10.10 percent while the one-year was at 10.20 percent on Thursday.  Short-end rates on certificates of deposits are expected to inch up faster compared with the long-end in March, leading to an inversion in the CD curve, a phenomenon not seen since October 2008, when the global recession was at its height.  Expectations of at least a 25-basis-point rate hike at the March 17 central bank policy review, to contain inflation pressure, is also adding to upward pressure on short-term rates, bankers added.  Besides the existing cash crunch, a pick-up in credit growth for banks will also keep the demand for funds high.  Banks' loan growth has been a robust 23.9 percent on year to Feb 11 compared to the RBI's projection of 20 percent for 2010/11.  Repo borrowings should go up also because we expect that the credit growth will pick up. There has been good incremental credit growth. So going forward if it becomes stronger as expected, the repo borrowing will also go up, an official from a state-run bank said.  However, dealers expect the cash crunch to ease by March-end and liquidity deficit to come down to around 400 billion rupees on government spending.  The RBI has said it aims to maintain liquidity in the range of positive 500 billion rupees to negative 500 billion rupees and therefore should be comfortable with cash conditions March-end.  Post the advance tax, for a short while the call rates may go up to 7 percent but that will be only a temporary aberration for about a week's time, said R.V.S. Sridhar, president and head of markets of treasury at Axis Bank.  While many banks may be genuinely borrowing from RBI to meet liquidity mismatches, some may try to make hay while the sun shines.  These banks usually during such cash crunch conditions, use their excess government bond holdings, otherwise known as statutory liquidity ratio or SLR, to borrow funds from RBI at the repo rate which is 6.5 percent now, and lend in the uncollateralised call market at 7.25-7.50 percent, thereby making a plum arbitrage gain. This is nothing new and always happens with mostly public sector banks who run high SLR during advance tax payments, said a foreign bank dealer.  Some dealers also expect cash rate to remain near 7.50 percent on March 31 despite improved liquidity, as typically banks prefer to stay away from lending on the last day of a quarter as they would otherwise need to set aside capital for such lending, which would reduce their capital adequacy ratio.

New MFI Bill to leave no space for state laws

The new law to regulate the microfinance sector may make similar state legislation null and void.  The Bill — to centrally regulate microfinance institutions (MFIs) — may also cap the rates charged by these institutions or limit margins, that is, the difference between the rate charged from the borrower and the lender’s cost of funds.  The Microfinance Bill is being drafted on the lines of the report of the Reserve Bank of India’s (RBI’s) Malegam committee.   The committee was set up after a number of borrowers in Andhra Pradesh, the largest market for MFIs, committed suicide due to coercive recovery practices adopted by these lenders. This forced the state to pass a law to regulate MFIs. MFIs say their recovery rate in the state has fallen steeply in the wake of this borrower-friendly law.  A finance ministry official, who did not wish to be identified, said under the proposed law, there would be a cap on rates. MFIs would also not be allowed to take deposits from the public, he said.  The Malegam committee has recommended a margin cap of 10 per cent for MFIs with a loan portfolio of Rs 100 crore and above and 12 per cent for smaller MFIs. It has also suggested a 24 per cent cap on rates charged from individuals.  The Centre plans to draft the Bill in such a way that microfinance is seen as an activity enabling the poor to use credit to improve their lives. If microfinance was defined as just a money lending activity, if would come in the Constitution’s State List, said the official.  Finance Minister Pranab Mukherjee, in his Budget speech, had given a strong indication that the government would come up with a law for MFIs.  “The committee set up by RBI to look into issues related to the microfinance sector in India has submitted its report. The government is considering putting in place an appropriate framework to protect the interests of small borrowers,” Mukherjee had told Parliament.  The finance ministry was forced to review plan to introduce such a legislation after the Malegam Committee said the said Bill would cater only to a small number, as organisations not regulated by RBI accounted for only eight per cent of the microfinance loan portfolio.  The finance ministry official said such microfinance institutions would be treated as non-deposit taking non-banking finance companies and the proposed Bill would be in sync with RBI regulations for NBFCs. RBI Governor D Subbrao has said it will take a view on the Malegam Committee report by April-end.

Govt will not intervene in working of financial regulators: Pranab

The Finance Minister, Mr Pranab Mukherjee, on Friday ruled out any Government intervention in the functioning of the financial sector regulators, stating that they are doing a “good job” in their respective domains.  “There is no need for intervention,” Mr Mukherjee told the Lok Sabha during question hour, adding that regulators need to continue having functional autonomy so that they can discharge their functions as “vested in law.”   At the same time, the Finance Minister pointed out that the respective laws governing the Reserve Bank of India, the Securities and Exchange Board of India and the Insurance Regulatory and Development Authority, had a specific provision (Section 3) enabling the Government to issue directions on matters of policy to these three financial sector regulators.  He also highlighted that the three financial sector regulators — the RBI, SEBI and the IRDA — submit their annual reports to Parliament, which in turn had the authority to check any “gross misdirection” by them. As for the Pension Fund Regulatory and Development Authority, Mr Mukherjee said this Authority was created through an executive order, and that the Government was “contemplating” introducing a Bill to provide statutory status.  At present, all financial sector regulators have been mandated to look after regulation, development of the market segment under their regulatory domain and protection of the participants and consumers of the financial services.

Existing banks too have a role in financial inclusion: Kochhar

MUMBAI: ICICI Bank Managing Director and CEO Chanda Kochhar today said existing banks, not just new banks, can contribute significantly towards financial inclusion and underlined that rural market will be the future growth engine.   "As far as financial inclusion is concerned, not just the new banks but the existing ones (as well) have an important role to play ... Rural India is going to be the market of tomorrow. Therefore, it is important for us to find business models for the rural population," Kochhar told reporters here.   Kochhar comments came a day after RBI Governor D Subbarao said that "one of the criteria for evaluating application (for new bank licence) that we will get in due course of time, will indeed be their business plan for financial inclusion."  Kochhar also welcomed the Banking Laws Amendment Bill, describing it as a "good step forward". However, one has wait for it to become a public document before commenting on its impact, she said.