RBI asks NE Banks to monitor accounts of customer

Reserve Bank of India has asked the banks operating in the North East to closely monitor the accounts of the customers. According to the Executive Director of RBI, Mr HR Khan, banks in the North East have been asked to remain vigilant and extra cautious in this regard considering the gravity of the situation. Mr Khan stated that as this region shares international border and therefore more vigilance would be needed to avoid such incidents. To overcome the problem, the existing KYC (know your customer) rules have been strengthened, he added.  Reserve Bank of India has asked the banks operating in the North East to closely monitor the accounts of the customers. According to the Executive Director of RBI, Mr HR Khan, banks in the North East have been asked to remain vigilant and extra cautious in this regard considering the gravity of the situation. Mr Khan stated that as this region shares international border and therefore more vigilance would be needed to avoid such incidents. To overcome the problem, the existing KYC (know your customer) rules have been strengthened, he added.  It may be recalled that RBI recently issued a circular asking the banks and financial institutions to scan all existing accounts to ensure that these are not held by or linked to any entity or individual figuring in the UN list of terrorists or terror-related organisations.

Refinancing worries for microfinance continues

Microfinance industry in India seems to be in a real state of confusion. First, the industry facing setback of the RBI guidelines on securitization of short term loans making it impossible for microfinance loans to be securitized and leaving MFIs to depend on bank borrowings as a funding source. Then the microfinance institutions facing the ripple effects of the Andhra Pradesh government’s ordinance, borrowers defaulting; rising defaults, banks pulling credit and shying away from any further lending or securitizing loan pools leaving the cash strapped microfinance institutions with no other option but recasting their debt by banks and financial institutions. Just then, in such a state of frozen credit, banks were reported to provide additional line of credit of Rs 1,500 crore to MFIs to achieve their targets in the financial year 2010-11. Despite micro lenders facing several defaults, this came as a sign of relief to the microfinance institutions.  It was a double whammy when the finance ministry said it was mulling over reviewing the portfolio of public sector banks to ensure they were lending directly to the priority sector and not buying loans from regional rural banks (RRBs) or microfinance institutions (MFIs) to meet their priority sector lending requirements. The ministry felt that the purpose of emphasizing on priority sector lending for banks to channelize lending to agriculture and weaker sections was getting lost.  Another difficulty glaring at the face of microfinance institutions and bankers is, while the banks are continuing to gain exposure in MFIs by way of securitization, as it is considered as direct lending to the priority sector, the MFIs are topping the banks list of non-performing assets. In such a scenario the Indian Banks Association had requested RBI to relax its restructuring guidelines, for the MFI sector as the benefit of Prudential Guidelines on Restructuring of Advances by Banks are available to the dues to the banks that are fully secured, while the bank loans to MFIs are mostly unsecured. Taking stock of the situation, RBI vide circular RBI/2010-11/376 DBOD.BP.BC.No. 74 /21.04.132/2010-11 dated 19th January, 2011 provided the relaxation that special regulatory asset classification benefit would be extended to restructured MFI accounts which are standard at the time of restructuring, even if they are not fully secured. The relaxation was granted as a temporary measure and was to be made applicable to Standard MFI accounts restructured by banks up to March 31, 2011. RBI had also advised that the banks should adopt the consortium approach for restructuring where all the banks financing and MFI would decide on the course of action to be taken for that unit. RBI further looked at the Malegam Committee to resolve issues with regard to priority sector lending and restructuring of debts, the focus of the report was only on making the loans affordable and looking for a rationale for rate of interest charged.   It is estimated that almost a third of the loans that banks have given to microfinance institutions would be admitted for restructuring. Each MFI would have a core team of 10 lenders who would discuss restructuring of loans of that MFI. There are some banks wanting to restructure the securitized loans along with other loans and have requested Reserve Bank of India to treat these loans on par with microfinance loans as without restructuring these loans the loans would become non-performing. Also if securitized loans become non-performing the provisioning requirements would go up impacting the bank’s balance sheets. The Malegam Committee report stated that the assigned and securitised portfolios held by banks as at 31st March 2011 are believed to aggregate to around Rs. 4200 crores. While there is opposition from several banks, but if Reserve Bank was to accede to the request, the very essence of securitization may be lost. This would tantamount to securitized loans pools to be nothing but loans extended to the MFIs in the garb of securitization and in such a case the so called securitized loans should not go off the books of the MFI. Once the asset sale takes place, the risk is transferred.  Securitised loans are not a matter of convenience and cannot be treated as such. The industry in the recent times has faced tumultuous times and ironing of these is the need of the hour.

India for effective framework to deal with global imbalances

Washington, Apr 16: India has pressed for an effective G-20 framework to address the problem of structural imbalances and ensure sustainable growth of world economy.  "The success of this initiative (of G-20) is critical for a durable global economic recovery and for better economic and financial governance," Reserve Bank Governor D Subbarao said at the G-20 ministerial meeting.  The G-20, which is a club of developed and emerging economies, is currently engaged in formulating guidelines for identification of large imbalances and suggesting corrective steps. The structural imbalances refer to problems pertaining to high public debts, huge forex reserves, etc.  He further said the leaders of G-20 tasked the central banks to formulate indicative guidelines for identification of persistently large imbalances requiring corrective action, including their root causes and impediments to adjustment. "We now need to finalise these guidelines... this would focus on root causes, impediments to adjustment and corrective policies and actions," Subbarao said.  He added an effective outcome is needed to provide a signal the G-20 is not only serious in ensuring strong, sustainable and balanced growth for the world economy going forward, but it also intend to create an effective and relevant institution for addressing current structural problems in a fast evolving global economy.  Talking about debt, he said in India the public debt is predominantly domestic and therefore India’s potential to influence global systemic imbalances because of public debt is negligible if not nil.

Currency Intervention Shouldn't Be a Part of Trade Policy, Subbarao Says

Countries should not use currency intervention as a part of trade policy, and should allow economic fundamentals to dictate exchange rates, said Duvvyri Subbarao, Governor of India’s central bank.  “Letting exchange rates remain aligned with economic fundamentals, and an agreement that currency interventions should not be resorted to as an instrument of trade policy should be central to a coordinated approach at a multilateral level,” Subbarao, who is chief of the Reserve Bank of India, said today in the text of a speech to the International Monetary and Financial Committee in Washington.  The comments are part of a weekend of meetings during which Group of 20 nations officials outlined methods to decide when indicators, including budget deficits and external trade balances, appear excessive. India is among the seven countries targeted for further study.  The global recovery may be “jeopardized” by a sustained rise in oil prices, and food-supply constraints are also causing volatility in prices, Subbarao said in a separate statement to the IMFC, the steering committee of the IMF. Regarding capital flows into developing economies, Subbarao said that managing such flows “should not be treated as an exclusive problem of emerging market economies.” While growth prospects of emerging markets and their declining rates of inflation are helping to pull in capital, advanced economies are also pushing capital flows with “easy monetary policies,” he said.  Countries must collectively work to stem protectionism and resist the short-term pressures that are likely to grow in coming years, Subbarao said. “Covert protectionism has been on the rise,” he said in the speech. The challenges of a single reserve currency for the world have become apparent, and while a solution must be developed, the Special Drawing Rights don’t yet satisfy the conditions for an alternative, Subbarao said. “We see the move to a multicurrency world as a gradual evolution,” he said.

2G scam: RBI governor’s letter shows how Raja ignored objections

The Central Bureau of Investigation’s (CBI) probe into the 2G scandal has revealed that former telecom minister A Raja and his associates had blatantly ignored serious objections about spectrum pricing raised by the ministry of finance’s department of economic affairs.  In his statement to the CBI, the RBI governor, D Subba Rao, who was then the finance secretary, has said he had raised objections to the department of telecom’s (DoT) decisions on 2G spectrum allocation.  On November 22, 2007, Rao had written to the DoT, stating, “The purpose of this letter is to confirm if proper procedure has been followed with regard to financial diligence. In particular, it is not clear how the rate of Rs1,600 crore, determined as far back as in 2001, has been applied for a license given in 2007 without any indexation, let alone current valuation. Moreover, in view of the financial implications, the ministry of finance should have been consulted in the matter before you had finalised the decision.”  The letter further said, “I request you to kindly review the matter and revert to us as early as possible with responses to the above issue. Meanwhile, all further action to implement the above licenses may please be stayed.”  Rao further said that a full telecom commission meeting was called on December 7, 2007. “Pricing of spectrum was not an agenda item for this meeting. Later, a meeting of the telecom commission was also scheduled for January 9, 2008, wherein pricing of spectrum was an agenda item. However, this meeting was rescheduled by the DoT to January 15, 2008,” Rao has told CBI. However, before the meeting could take place, DoT issued a letter of intent to telecom operators.