RBI Governor bats for collective efforts to tackle economic issues

UNITED ACTION: Bank of Sri Lanka Governor Ajith Cabraal lighting the traditional lamp ahead of RBI Governor Subba Rao's (left) oration at the Central Bank of Sri Lanka, Colombo, on Tuesday. Photo: R. K. Radhakrishnan

More countries have begun to think on the problems of common economic concerns with a wider perspective despite there being no natural constituency for the global economy as such, Reserve Bank of India Governor D. Subbarao said here on Tuesday.  Talking to this correspondent at the Central Bank of Sri Lanka, he said that he based his optimism on the proceedings of the Paris conference on global economic recovery held early this year. Though each country normally talks for itself in global fora, there was a sense of purpose to come together at this meeting. “I think this trend will continue,” he said.  Delivering the 60th anniversary oration on ‘Frontier Issues on Global Agenda — emerging economy perspective,' Dr. Subbarao said that it was more than clear that every single financial crisis came from the same fundamental issues.   If these issues were not addressed, then it would again repeat itself. “The global problems we are facing today are complex and not amenable to easy solutions. Many of them require significant and often painful adjustments at the national level, and in a world divided by nation-states, there is no natural constituency for global economy. At the same time, the global crisis has shown that the global economy as an entity is more important than ever,” he said.   The adjustments that are required as part of the collective efforts to get out of the present crisis “will be painful for every country” but there was no easy way out. Steps had to be taken otherwise the global economy would be headed for another crisis sooner or later. “We should cooperate not only to firmly exit from the crisis, but also to ensure that in resolving the crisis, we do not sow the seeds of the next crisis,” he said.  Dr. Subbarao warned that after the crisis, there would be a tendency for most developed nations to resort to protectionist policies.  “Recent international developments mark an ‘ironic reversal' in the fears about globalisation,” he said and added that earlier the developing economies feared integration into global markets, but now the developed world was resisting because the electorate in those countries have been led to believe that, at one level, globalisation meant loss of jobs. In actual terms, for the low-end jobs shipped abroad, better paying jobs were being created in those countries. But if creation of this better paying job lags, as it sometimes does, then, people would find it difficult to accept shipping out of jobs to other countries, he added.

Reforms to prevent economic sector excesses needed

Central Bank Governor Ajith Nivard Cabraal presenting ‘Retrospect 2010’ as a token of appreciation to Reserve Bank of India Governor Dr Duvvuri Subbarao at the Central Bank yesterday. Central Bank of Sri Lanka has acquired a great reputation for professionalism, integrity and sense of purpose over the last 60 years. As Central Banks of emerging economies , both Central Bank and Reserve Bank of India have their tasks cut out for them, Reserve Bank of India Governor Dr Duvvuri Subbarao said . Speaking on “Frontier issues on the global agenda - Emerging economy perspective” at the Central Bank yesterday Subbarao said both countries need to learn from the best in the world, but adapt each one’s learning to the demands and culture of maturing emerging economies.  “Both countries need to remain sensitive to the core concerns of an emerging economy all the time and be at the frontiers of domain knowledge,” he said.  He said all the global crises have taken a devastating toll on global growth and welfare, and each time of crises experts have said that this time it is different claiming that the old rules do not apply and the new situation is dissimilar to the previous one.  However, it would be too costly for the world to heed this lesson and everyone should cooperate not only to firmly exit from the crisis but also to ensure not to sow the seeds of the next crisis in resolving the crisis.  He said emerging market economies have not completely decoupled from the advanced economies and their economic prospects remained linked to the prospects of advanced economies.  However, all will be collectively better off if all segments of the world grow at a sustainable pace. Elaborating on the issue of global rebalancing he said it is necessary to address three inter-related issues namely, exchange rate flexibility, capital controls and an agreement on a framework for strong, sustainable and balanced growth.  Dr Subbarao said protectionism is an important issue on the global agenda and protectionist pressures may arise again.  But global welfare will be maximized when collectively resisting short-term pressures and put long-term interest ahead of narrow short-term advantage.  Referring to financial sector reforms he said vigorous reforms in the sector are underway and the reform agenda is driven by the need to prevent the type of excesses in the financial sectors of advanced economies that led to the crisis. But emerging economies too will have to implement these reforms, he said.

ATM in your cellphone

Forgot your wallet at home? No worries. Book tickets, pay for groceries and settle your coffee bill with just a few clicks on your mobile phone. Money on your phone sets you free,” philosophizes 20-year-old business student Lalit Ramsisaria. “I don’t need to be in front of a computer to book train tickets or buy a gift for my girlfriend. All I need to do is to launch an application on my phone, make a few clicks and my shopping is done.” Ramsisaria, who has a Nokia E71, is an avid user of a mobile wallet service called ngpay (www.ngpay.com). “All I need is GPRS on my phone and my debit card details,” says Ramsisaria.  Ngpay is one of the many applications launched over the last few years in the fast-growing sector of mobile wallet services. Also called m-banking, these services are an initial step towards a world where you can replace your wallet and credit cards completely with your phone. “Mobile banking is a form of cashless banking that enables you to access and use your bank account, debit or credit card through an application on the mobile phone,” says Gautam Shiknis, chief executive officer, mChek (www.mchek.com), another mobile wallet service.  These services connect you to vendors—merchants, retailers, cinema halls, restaurants, etc—and allow you to make payments using debit or credit card details. All you need is either a GPRS-enabled phone or the ability to send simple SMSes. If you are not comfortable with third-party applications, you can take a wallet from your mobile phone operator. Recently, the Reserve Bank of India (RBI) cleared the way for a second kind of mobile wallet service—called the “semi-closed mobile wallet”. In this service, you can load money into your cellphone from a licensed company and make payments with it, but you can’t use it to withdraw money, which is what a full-fledged mobile wallet aims to do.  In a pilot, Airtel has launched semi-closed mobile wallet services in Delhi, Gurgaon, Faridabad and Chennai. Called Airtel Money (www.airtelmoney.in), it is a free service that allows you to load up cash in your phone, making your SIM a prepaid account as it were, and use it with partnering vendors to pay bills. Airtel Money has, for instance, tied up with around 40 vendors in Haryana and Delhi, including coffee shops, restaurants and cinema halls. Some semi-closed mobile wallet services, such as Mobile Money Services from Nokia and Yes Bank, even allow you to withdraw cash from specified ATMs.  Furnishing your bank account details to an unknown application when there’s so much fraud going on is never easy. But mobile wallets are as safe as any other online transaction. “The technology which drives the mobile wallet is quite secure and mostly works on two-way authentication,” says Ashish Sinha, founder of www.pluggd.in, a website on start-ups. It means that every time you make a transaction, the program will automatically ask you for your PIN, which only you know. “Transacting like this is as safe as an ATM transaction. You need to enter a six-digit PIN to complete the transaction,” says Sourabh Jain, CEO of ngpay. Though most of these services are at a nascent stage, especially when you look at their list of vendors, it’s a fast-growing market. After Airtel, Vodafone is in the process of tying up with ICICI Bank to launch a semi-closed mobile service called m-paisa, which it has floated successfully in countries such as Kenya and Japan. Services such as ngpay have over one million users across the country, while mChek boasts of over two million customers, with a network of more than 100 partners that offer a variety of products and services. This is tiny when compared with the number of mobile users in the country, which currently stands at around 650 million.  “The system is very simple for the masses to adopt. I think Indians will adopt m-banking much more efficiently once they figure that with an SMS they can transfer money to their loved ones. It’s like a move from no phone to mobile phones which Indians did, skipping the landline completely,” says Shiknis.

Growing Sharia Finance in India a Boon or Bane?

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Cooperation between countries vital to overcome crises - RBI Governor

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Need for an alternative to dollar: Subbarao

Mumbai: Governor of Reserve Bank of India (RBI) D Subbarao has said though it is not feasible now to find an alternative to the problems arising from a single global reserve currency — US dollar — at a global level, countries need to explore other options for protecting themselves from the vulnerabilities that they confront as a consequence of a single reserve currency.  “The problem with the world having only a single reserve currency came to the fore during the crisis as many countries faced dollar liquidity problems as a consequence of swift deleveraging by foreign creditors and foreign investors. Paradoxically, even as the US economy was in a downturn, the dollar strengthened as a result of flight to safety,’’ said Subbaro while speaking on ‘Frontier Issues on the Global Agenda Emerging Economy Perspective’ on the occasion of the 60th anniversary celebrations of Central Bank of Sri Lanka, in Colombo on Tuesday.  Based on the experience of the crisis, several reform proposals have been put forward to address the problems arising from a single reserve currency, he hinted.  “One is to have a menu of alternative reserve currencies. But this cannot happen by fiat. To be a serious contender as an alternative, a currency has to fulfill some exacting criteria. It has to be fully convertible and its exchange rate should be determined by market fundamentals and it should acquire a significant share in world trade,” he said. The currency issuing country should have liquid, open and large financial markets and also the policy credibility to inspire the confidence of potential investors. In short, the exorbitant privilege of a reserve currency comes with an exorbitant responsibility, he explained.  Subbarao also drew attention to the fact that managing currency tensions will require a shared understanding on keeping exchange rates aligned to economic fundamentals, and an agreement that currency interventions should be resorted to not as an instrument of trade policy but only to manage disruptions to macroeconomic stability.  However, he was vociferous about the fact that currency appreciation is not the only problem arising from the ultra loose monetary policy of advanced economies. Speculative flows on the lookout for quick returns can potentially lead to asset price build up. The assurance of advanced economies to keep interest rates ‘exceptionally low’ for ‘an extended period’ has also possibly triggered financialisation of commodities leading to a paradoxical situation of hardening of commodity prices even as advanced economies continue to face demand recession.  “EMEs have been hit by hardened commodity prices through inflationary pressures, and in the case of net commodity importers, also through wider current account deficits,” he said. Managing capital flows should not be treated as an exclusive problem of EMEs. In as much as lumpy and volatile flows are a spillover from policy choices of advanced economies, the burden of adjustment has to be shared, suggested Subbarao.  “How this burden has to be measured and shared raises both intellectual and practical policy challenges. Our current theory of external sector management draws from an outdated regime of fixed exchange rates and limited capital flows when the task was largely limited to managing the current account of the balance of payments. What we now need is a theory that reflects the changed situation of flexible exchange rates and large and volatile capital flows. The intellectual challenge is to build such a theory that encompasses both current and capital accounts and one that gives a better understanding of what type of capital controls work and in what situations,” Subbarao said.  The practical challenge in these matter is that once such a theory is accepted, there is a need to reach a shared understanding on two specific aspects: first, to what extent are advanced economies responsible for the cross border spillover impact of their domestic policies, and second, what is the framework of rules that should govern currency interventions in the face of volatile capital flows.

Pressures for protectionism to rise in coming years: RBI

The Reserve Bank of India (RBI) today said there are chances that protectionism by the advanced countries would rise and will also take new forms in the post-crisis scenario.  "In the years ahead, the pressures for protectionism will mount and protectionism will also take new forms," RBI Governor D Subbarao said at a conference here, a press release said.  He further said there is concern in some quarters that even as open protectionism has been resisted relatively well during the current crisis, opaque protectionism has been on the rise.  "Opaque protectionism takes the form of resorting to measures such as anti-dumping actions, safeguards, preferential treatment of domestic firms in bailout packages and discriminatory procurement practices," Subbarao added.  During the global financial crisis in 2008, many advanced countries, including US, were hit by recession. Many fear that in the post-crisis scenario, developed countries would resort to protectionism measures to protect their domestic industry.  He said the efforts of several countries around the world in recent times to resist currency appreciation is a manifestation of macroeconomic protectionism.  Subbarao added that in the post-crisis world, there may not actually be 'deglobalisation', but the earlier orthodoxy that globalisation is an unmixed blessing is being increasingly challenged.  He said the rationale behind globalisation was that even as advanced countries may see some low-end jobs being outsourced, they will still benefit from globalisation because for every low-end job gone, another high end job - that is more skill intensive, more productive - will be created.  "If this does not happen rapidly enough or visibly enough, protectionist pressures will arise, and rapidly become vociferous and politically compelling," Subbarao added.

RBI asks Axis Bank to justify Enam deal price

MUMBAI: The Reserve Bank of India (RBI) has questioned the valuation and structure of the high-profile deal cut by private lender Axis Bank last November to buy Enam Securities - an influential Dalal Street brokerage and investment bank. The banking regulator, which has sweeping powers over lenders, has asked Axis to justify the valuation of the all-stock transaction worth Rs 2,067 crore. At the time of the deal, Axis, the country's third-largest private bank led by CEO Shikha Sharma-a former ICICI Bank director-was on the lookout for an i-bank, and Enam was up for sale.  "There are no indications that the deal may fall through, but Axis will have to explain the pricing and nature of the deal, which is essentially issuing stocks to pay for something," said a person familiar with the issues raised by the central bank. The point is whether the proposed practice of issuing new shares should be the preferred mode for banks to acquire new businesses, particularly brokerages.  Axis Bank officials declined comment on the matter. But bank insiders were hopeful the regulator would approve the deal. "Technically, the RBI can make certain observations on the deal or ask the bank to tweak the valuation," said the person.  Axis senior officials have met the RBI to put across the bank's views on the pricing and structure, which have been cleared by the bank board as well as Enam's. Enam founders -Nemish Shah, Vallabh Bhanshali and Jagdish Master-will own 3.3% equity in Axis once the deal is executed. Interestingly, for Enam shareholders, swapping their unlisted stock for listed shares of Axis would help them avoid capital gains tax. As per the deal, Axis Bank would offer shares to stakeholders of Enam Securities , even though the company would be acquired by a subsidiary of the bank. The newly-formed subsidiary would be headed by Manish Chokani.

Tech shift set to send bank NPAs soaring next month

NEW DELHI: Public sector banks are set to report a spurt in bad loans beginning next month when they shift to a new technology platform to calculate their non-performing assets (NPAs).   The platform, called the Core Banking System, automatically processes and updates transactions, helping identify NPAs on a daily basis, as against the current system where most transactions are managed manually, leaving scope for slippages.  Bankers say as a result of the mandatory migration to the new system, NPAs of some banks may rise by as much as 150%. This will force the lenders to set aside more funds to cover losses from such loans, which in turn will impact their bottomlines, they said.  Several bankers had met finance ministry officials on Monday to ask for an extension of the March 31 mandatory migration deadline. "The government has decided to extend the deadline to June 30 only for accounts up to 50 lakh, and complete the entire process by September 2011," a finance ministry official said. "We don't see a case for relaxation beyond this."  According to latest data from the Reserve Bank of India, the gross non-performing assets of state-run banks touched 68,597 crore at the end of December 2010, an increase of 27% from a year ago.  "Already there is concern over the rising NPAs," said the chairman of a public sector bank who attended Monday's meeting. "If we reflect an increase in this fiscal, it will have an impact on the banking system as a whole."  A look at the loan book of the country's largest public sector lender, the State Bank of India (SBI), gives an indication of the impact. SBI's NPAs rose by about 1,000 crore every quarter in the last fiscal after it started the process of shifting its loan book on the new technology platform, its managing director Diwakar Gupta said. Gupta was also present in the meeting with finance ministry officials. SBI has completed the process, barring agricultural loan, which account for about 3% of its total loans.  The bank is concerned that a substantial part of agricultural loans, which are not accounted as bad loans under the manual system, may become NPAs on being shifted to the new platform.  Punjab National Bank chairman K R Kamath said the banks would require time to correct any data inconsistencies, which may arise while shifting to the new platform.  "We are shifting from a legacy system and a lot of data needs to be aligned," Kamath said. "Undoubtedly, there will be some rise in NPAs."  Indian Bank , which was one of the first banks to move to the new system, had reported a jump of 830 crore in bad loans to 1,340 crore. "Shifting to CBS will result in a jump in bad loans but it help in monitoring the system," said T A M Bhasin, chairman and managing director of Indian Bank. The banks would require additional time to further cleanse the data, said Ramnath Pradeep, CMD of Corporation Bank. "So far it has been done manually," he said. "We need to further fine tune the system to avoid any discrepancies."

BoB's Mallya to take over as IBA chairman

Bank of Baroda (BoB) Chairman and Managing Director M.D. Mallya will take over as chairman of the Indian Banks' Association (IBA) from 1 April.  He will succeed O.P. Bhatt, who will be superannuating as chairman of State Bank of India on 31 March, an IBA release said here on Tuesday.

The 5 yrs that transformed State Bank of India

OP Bhatt will be most remembered for SBI's rights issue of Rs 20,000 crore, coupled with employee stock purchase scheme that no other PSU bank had ventured into. Besides, the bank also raised equity capital in 2008 when companies such as Wockhardt Hospitals and Emaar MGF pulled out their IPOs. It was a proof of shareholder faith in him.  The merger of SBI's associate banks with the parent was talked about since mid-nineties when McKinsey first suggested it. Mr Bhatt recognised the need to build a huge organisation without working at cross purposes. Fortunately for Mr Bhatt, his predecessor, AK Purwar had set the ball rolling by creating a platform for mergers. Mr Purwar ensured a common technology platform and systems and procedures at SBI and its associate banks. Mr Bhatt took it forward. He pushed merger of State Bank of Saurashtra with SBI at a time when the ruling party had a coalition with the conservative Left.  SBI's 8% fixed rate home loan scheme, in response to global crisis, gained enormous attention. Although, arch rival and HDFC chief, Deepak Parekh was quick to term it as a gimmick. Its humongous success forced rivals to launch similar schemes, which offered fixed rate in initial years and floating rate for the remaining term of the loan.  RBI's then Deputy Governor Usha Thorat expressed concerns over such loans, calling them teaser loans. In response, most home loan providers decided to withdraw such schemes from the market, except SBI. To make a strong case, RBI asked banks to set aside higher capital on such loans, probably to dissuade banks from offering such loans. Mr Bhatt, who felt that the bank's special loans can no way be called teaser scheme, declined to make any provisions for such loans.  "There is total transparency on it," said Mr Bhatt. "The customer is not taken by surprise. On the risk side, the eligibility is considered based on the highest interest charged at the time of giving loan. Neither is there opacity, nor is there risk."  Mr Bhatt, in fact, felt SBI was not given due credit. "We brought the home loan market back. Lakhs of people own their homes because we kept rates down. It pushed up the economy. But this is something that is not recognised by many."  But RBI remains worried about it - possibly relating it to the US sub-prime crisis that sank the global financial system. "Some of us have a strong apprehension that the motivation for introducing teaser loans was not product innovation, but to deprive existing floating rate home loan borrowers from the full benefit of declining interest rates, based on market realities," KC Chakrabarty, deputy governor at RBI, said in a recent interview. "A number of existing home loan borrowers did not get the benefit of lower interest rate."  His another clash with the regulator was when he guaranteed bonds of Tata Steel worth Rs 4,200 crore. RBI claimed that regulations do not allow banks to guarantee corporate bonds, while SBI stood by its client - the Tata Group, which was unable to raise funds for the Corus Group purchase. Disputes with RBI does not seem to cease. The banking regulator downgraded SBI by one notch to B- on grounds that the bank has made lower-than-required provisions for bad loans. The rating, which is highly confidential and is not made public, had upset Mr Bhatt, who recently made a case to RBI to review its rating. The biggest challenge for his successor would be to retain the aggressive brand that Mr Bhatt has created for the once sleepy bank.

State Bank of India: Life in the Times of OP Bhatt

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NBFCs seek time on new gold loans rule

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RBI and its offices in Mumbai and Navi Mumbai will function normally on April 01

The Reserve Bank of India and its offices in Mumbai and Navi Mumbai will function normally on April 01, 2011. The Government of Maharashtra has declared Friday, April 01, 2011 as a Bank Holiday under the Negotiable Instruments Act, 1881, to facilitate annual closing of banks’ accounts. Commercial banks will remain closed for public transactions on that day.

Now, alerts for all credit card payments

MUMBAI: The Reserve Bank of India has asked banks to put in place a system for providing online alerts for all card transactions irrespective of amount. Until now banks had to send online alerts to the cardholders for only 'Card Not present' (CNP) transactions which were for the value of Rs 5,000 and above. Taking note of unauthorized or fraudulent withdrawals from ATMs, RBI has said that banks must implement by June 30 a system of instant alerts for all types of transactions irrespective of the amount, involving usage of cards at various channels.  "This measure is expected to encourage further usage of cards at various delivery channels" an RBI circular said.  In a circular to all banks, RBI said that it has been informed of unauthorized or fraudulent withdrawals from ATMs.  "It is important to arrest the incidents of such frauds in order to further encourage card based transactions in the country where the use of credit/debit cards plays an important role" the central banks said.  RBI has said that banks must implement by June 30, 2011 a system of instant alerts for all types of transactions irrespective of the amount, involving usage of cards at various channels. "This measure is expected to encourage further usage of cards at various delivery channels" it said.  February `09, RBI had asked banks to send online alerts to cardholders either through SMS or email where the card was used for transaction above Rs 5000. At that time these alerts were required for only those transactions where the card was not present such online purchases or over the telephone. "This measure has been generally welcomed by customers as it enabled them to take prompt action if the card is misused. This measure goes a long way in arresting further perpetration of such fraudulent transactions" RBI said in its circular.  Earlier this year RBI sought to make `card not present' transactions more secure by insisting that banks ask for an additional password in addition to the credit card number and the CVV number printed on the back of the card. The additional security feature came into effect from last month.