The Financial Sector Legislative Reforms Commission (FSLRC) held its first meeting on April 5, 2011.The terms of reference of the Commission are wide and, although the term is two years, the task of the Commission is daunting. There are various aspects of autonomy. Some central banks derive their autonomy from traditions while others have legislative autonomy but do not have operational autonomy, and there are yet others that have neither legislative backing for autonomy nor operational autonomy by way of tradition. The Reserve Bank of India (RBI) belongs to this latter group. Central bank policies have to be broadly consistent with overall economic policy objectives, but within the overall framework, the central bank does need an element of operational autonomy. The present RBI Act is archaic and forecloses the effective discharge of responsibilities. There are many lacunae in the RBI Act but a few key drawbacks are set out below. While the government should have the right to appoint the Governor, the procedure should be akin to the appointment of the Comptroller and Auditor General of India, which is a Constitutional appointment. The Governor should have a single, non-renewable tenure of seven years. Such a long tenure is desirable as it would not be co-terminus with the electoral cycle. It would ensure that political economy considerations do not determine the appointment and tenure of the Governor. In the past two decades, the term of the Governor has been two or three years and extended by a year or two. The earlier tradition was a full five-year term (in the recent period there was one notable exception where the appointment has been a full five-year term). Although the Governor is not directly accountable to Parliament, increasingly, Governors are expected to appear before Parliamentary Committees. It would be best if there were a formal periodic deposition by the Governor before a Parliamentary Committee. Dismissal of a Governor should be only through a well-set-out procedure of Parliamentary impeachment, which should be strictly limited to personal malfeasance, bankruptcy or lunacy. The RBI Board members should be appointed by the Board itself, with one-third of the members retiring every four years and no member should have a total tenure of more than eight years. The appointment of Deputy Governors should be made by the RBI Board and there should be a single, non-renewable tenure of five years. This would avoid political patronage. Again, remuneration of the RBI officials should be determined by the RBI Board. The present impasse on the remuneration of RBI officials, being determined neither by the Pay Commission for government employees nor public sector units, is totally untenable. The RBI should not be treated like a poor relative of the system. There should be a requirement under the legislative framework that there should be an Agreement between the Government and the RBI as to the specific objectives of medium-term monetary policy with a clear prioritisation of objectives. This Agreement should be put in the public domain and any amendments should also be placed in the public domain, explaining the rationale for the changes. Once the objectives are set out, the RBI should have instrument independence on how to attain the objectives. There should be a provision in the RBI Act enabling the RBI to set up a Monetary Policy Committee (MPC). A large number of central banks have such a Committee as a legislative requirement. The MPC should be empowered to take decisions on key aspects of monetary policy. The MPC should consist of the Governor, the four Deputy Governors and four external experts, each with a four-year term. One fourth of the external experts should retire each year. The external experts should be remunerated as part-time top management officials. Decisions of the MPC should be by majority vote and the full minutes of the MPC should be put in the public domain after a stipulated period of time. The present Technical Advisory Committee on Monetary Policy is a poor substitute for a MPC with legislative backing and clear responsibilities and accountability. The Report of the RBI Advisory Group on Transparency of Monetary and other Financial Policies (2000) should be revisited by the FSLRC. Similarly, the RBI Board should be empowered by legislation to set up a Board of Supervision consisting of independent experts who should be remunerated as part-time top management. At present, penalties for violations of the regulatory framework are stultifying and are not effective deterrents. The penalties should involve a strong deterrent, such as twice the undue enrichment. The present system of handling financial frauds is permissive and there should be legislative requirements that these cases have to be brought to their logical end within a stipulated period. The Commission should arrange to have a comprehensive comparative study of central bank legislation in a large number of countries which would facilitate its work. There are many other areas where the RBI legislative framework needs to be revamped. The FSLRC has a long journey ahead, indeed!
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Friday, April 8, 2011
Chaudhuri takes charge as SBI chief
Ending the uncertainty over senior appointments at State Bank of India (SBI), Pratip Chaudhuri on Thursday took over the chairmanship of the country’s largest lender. Chaudhuri succeeds managing director R Sridharan, who was the acting chairman after O P Bhatt retired on March 31. The government also issued notifications for the appointments of Diwakar Gupta, A Krishna Kumar and Hemant Contractor as managing directors. While Chaudhuri would be at the helm of affairs at SBI for two and a half years (he would retire in September 2013), Gupta’s term would end in July 2013. A Krishna Kumar would enjoy the longest tenure till, November, 2014, while Contractor’s would end in April 2014. Before taking over as chairman, Chaudhuri was deputy managing director, in charge of international operations. The immediate task for Chaudhari and the three new managing directors would be to finalise the bank’s balance sheet for 2010-11. A senior SBI official said Chaudhuri had already stated his priorities to his colleagues. These include improving the net interest margin, getting rid of orgainsational weaknesses, stemming attrition at entry levels and improve lending to agriculture.
Coop banks seek better interest rate regime, regulatory enviorn
Umbrella bodies of cooperative banks today met with the Reserve Bank and demanded deregulation of interest rate regime, besides better regulatory environment to work more effectively. The federations that met central bank Deputy Governor Subir Gokarn at the customary pre-policy meeting included the National Federation of Urban Cooperative Banks and Credit Societies, National Federation of State Cooperative Banks, Maharashtra Urban Cooperative Banks Federation, NBFC body Finance Industry Development Council, and Microfinance Institutions Network. The Governor Duvvuri Subbarao could not attend the meeting as he was indisposed. "We have demanded deregulation of the interest regime in the forthcoming annual monetary policy as in the current interest rate scenario we will continue to bleed. Today we are forced to lend at 7 per cent to the farm sector, while we are paying at least 9 per cent to our depositors. This situation just cannot continue," National Federation of State Cooperative Banks managing director B Subramanyam told PTI after the meeting. He further said the federation has demanded a higher interest subvention at around 4.5 per cent from the current 1.5 per cent. Earlier state cooperatives were getting 2 per cent interest subvention to tide over the borrowing-lending rate mismatch. But last year, RBI had brought it down to 1.5 per cent, he explained. The National Federation of Urban Cooperative Banks and Credit Societies president H K Patil said they have requested the apex bank to facilitate setting up of an umbrella body for them for coordination and growth. "Though the VS Das committee has clearly called for this nearly two years ago, the RBI is yet to come back to us with its views on the report," Patil said. The RBI has, however, agreed to expedite its reply, he added.
Regular meetings with nodal officers help banking ombudsman in Chennai trim complaints
The banking ombudsman in Chennai is taking measures to streamline the functioning and improve the effectiveness of this grievance-redressal machinery. The objective is to ensure that complaints of poor service from customers get addressed in the first instance at the local branch level and the regional level, and only escalated when this option fails. The ombudsman, after instituting regular meetings with nodal officers and senior management of banks, feels that most problems can be sorted out at their level itself. Currently, about 1,000 complaints come in every month to the ombudsman's office. With this mechanism (meetings with nodal officers), the number of complaints has reduced to about 700 a month. In 2009-10, the banking ombudsman in Chennai received the highest number of complaints in the country at 12,727, or 16 per cent of the total complaints, according to the Reserve Bank of India. From 4,585 complaints in 2007-08 it more than doubled to 10,381 in 2008-09, recording the highest number of complaints alongside Delhi. Mr S. Ganesh, who had taken charge as Banking Ombudsman Chennai - Reserve Bank of India last April, told Business Line that complaints are monitored on a daily basis to ensure that resolution happens at the earliest. “Greater focus has been made to trim down the complaints that have been pending for more than three months. With banks being compliant, it makes our job easier”, he said. Mr Ganesh said the awareness level among customers about banking ombudsman could be the reason for the highest number of banking-related complaints. He also said that the region has the least number of awards. Awards are financial compensation paid by banks due to their negligence, to the customers. The nature of complaints are no different from that seen across the country with credit cards and failed ATM transactions accounting for the largest number of complaints. This is followed by complaints related to loans and advances, remittance and pensions. There are few cases which may require excessive documentation which would have to be rejected, according to him. He said, “As we are not investigative authority, the customer can approach any other forum to solve this issue.” While the customer does not pay a penny to get his complaint redressed, the average cost per complaint borne by the RBI is Rs 2,368. The regulator incurs close to Rs 20 crore for running 15 ombudsman offices across the country.
NBFC representatives meet RBI officials, raise industry concerns
Reserve bank of India (RBI) officials on Thursday met representatives from non-banking finance companies (NBFCs) and associations of cooperative banks and discussed the current environment prevailing in the industry. In the customary pre-credit policy meeting, representatives from Finance Industry Development Council (FIDC), an association of NBFCs, met RBI Deputy Governor Subir Gokarn and raised concerns on recent steps taken by the central bank. Also present at the meeting were representatives from National Federation of Urban Cooperative Banks and Credit Societies, the National Federation of State Cooperative Banks, the Maharashtra Urban Cooperative Banks Federation and the Microfinance Institutions Network. A major concern taken up in the meeting was RBI's decision to increase the minimum capital adequacy ratio (CRAR) for deposit-taking NBFCs from 12 per cent to 15 per cent, thereby aligning them with non deposit-taking NBFCs. “The decision by the regulator to increase the CRAR was unwarranted. There are a lot of other requirements which the deposit-taking NBFCs have to comply with, like maintaining 15 per cent SLR. This is not required by non deposit-taking NBFCs. So, this decision was totally unnecessary,” said FIDC Director General, Mahesh Thakkar. NBFCs also demanded that a differential risk weightage system should be introduced for NBFCs to replace the current uniform risk weightage system. “We demanded that risk weightage to commercial auto loans be brought down from 100 basis points to 50 basis points. If this happens, only then can the NBFC sector absorb the impact of the hike in CRAR,” Thakkar said. Currently, all NBFCs have to provide a risk weightage of 100 basis points against all types of advances. The NBFCs also expressed concerns on the current liquidity and inflationary situation. “Though there are signs of liquidity easing, interest rates have to come down, as they are already eating into the margins of companies,” said an NBFC official. “We have demanded the deregulation of the interest regime in the forthcoming annual monetary policy, since in the current interest rate scenario, we would continue to bleed. Thursday, we are forced to lend at 7 per cent to the farm sector. But we pay 9 per cent to the banks. This situation just cannot continue,” National Federation of State Cooperative Banks Managing Director, B Subramanyam, said after the meeting. “Earlier state cooperatives were getting 2 per cent interest rate subvention to tide over the borrowing and lending rate mismatch. But last year, RBI had brought it down to 1.5 per cent,” Subramanyam added.
RBI may not extend liquidity support beyond April 8
The Reserve Bank of India (RBI) may not extend the additional liquidity support of 1 per cent Statutory Liquidity Ratio (SLR) and the second Liquidity Adjustment Facility (LAF) window beyond April 8. Bankers say the additional liquidity support is not needed as of now, as the liquidity pressure has eased. RBI had introduced these measures on December 18, 2010 and had extended the measures till April 8, 2011, citing tight liquidity conditions in its third quarterly review of the monetary and credit policy, in January. “Most banks, especially public sector ones, are currently holding excess SLR. Hence, there is no need to extend the facility,” said a public sector bank treasury official. He said the liquidity condition is expected to remain comfortable till June, after which the credit offtake usually picks up. “Now that the market is lending to RBI, these measures may not be needed at the moment. I don’t see liquidity pressures till mid-June,” said Moses Hardings, head, global markets, IndusInd Bank. Net LAF has been positive since the beginning of financial year 2011-12. RBI had provided the liquidity support to scheduled commercial banks under the LAF, to a maximum of 1 per cent of their net demand and time liabilities.
Banks fall short of RBI deposit growth target
Banks have failed to meet the Reserve Bank of India’s (RBI) deposit growth target 18% year-on-year in the last fiscal. The year-on-year deposits growth for the fortnight ended March 25 was 15.84% or Rs5,204,702.64 crore. The main reason for this, said bankers, was high inflation. “Deposits haven’t grown as projected because of tight money market position and inflation,” said Ramnath Pradeep, chairman and managing director, Corporation Bank. Analysts said banks are to blame too since they were tardy about growing deposits in the first half of the last fiscal because they were sitting on ample funds. They scrambled to mop up deposits in the second half when the liquidity began to tighten drastically. This meant banks had to increase deposit rates. In all, deposit rates rose 250 basis points in the last fiscal,” said Nitin Kumar, deputy vice-president, Quant Broking. Bankers feel low government spending and investor preference for other avenues also resulted in low mobilisation of deposits. “Deposit is not only a function of interest rates. Low government spending was also a reason,” said R K Bansal, executive director (retail banking), IDBI Bank. Bansal said despite good deposit rate hikes, some people preferred investing in equities or some other government saving schemes depending upon their needs.
Mahesh Coop Bank branch opened
Hyderabad: Mahesh Bank has opened its 34th Branch at Motinagar, Near Borabanda, Erragadda, Hyderabad. Sri Kasu Venkata Krishna Reddy, Hon’ble Minister for Co-operation has inaugurated the branch. Mahesh Bank is progressing well year on year and advised to extend a helping hand for upliftment lower middle class particulary needy of downtrodden sections society, he said. Sri A.S.Rao, RD, RBI, Hyderabad, Chief Guest of the function said that Mahesh Bank is expanding its presence at several centres and operating prudently everywhere. He further said the bank has never exhibited any inhibitions in extending customer service and through its redressal mechanism, corporate governance, expansion of outreach the bank has set up an effective customer service. He has also complimented the bank for having chosen the underbanked area like Motinagar to have its presence. Sri Manam Anjaneyulu, Hon.President, A.P.Co-op.Urban Banks & Credit Societies Association said that Mahesh Bank has stood as a model bank as several banks have been following it in terms of its discipline, adoption of technology and imparting training to staff. While the differences and the gap caused by globalization is fulfilled by UCBs, Mahesh Bank has been endeavouring for betterment of lives of lower middle and middle class sections of society of State. He requested the State Government and regulatory authorities to extend co-operation to the co-operative sector so that the UCBS can discharge the social responsibilities more effectively. At the same time, co-ordination is required in this direction among Government, RBI, Management and Staff. Mahesh Bank has become a part of growth story of urban banking sector of the State, Smt. Nanda Dave, GM,RBI, Hyderabad said. Among 106 UCBs under Hyderabad RBI jurisdiction, Mahesh Bank has shown an increasing trend in its profits and as well as in networth. It has occupied a rightful place in banking sector with its diversified customers, she stated.
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