Bank customers may soon expect better services and fast-track redressal of their grievances as RBI is likely to soon consider a fresh set of rules to improve the banks' customer service practices. Almost a year after RBI put in motion a process to improve banks' customer service practices, a high-profile panel set up by the central bank in this regard is likely to submit its recommendations later this month. Sources close to the matter said that the panel is likely to suggest a tighter vigil by RBI for banks lacking on customer service front, monetary and procedural penalties and other remedial measures to guard against such lapses. Besides, banks may be asked to resolve various customer grievances within a pre-determined time period, they added. The committee, constituted by RBI in June last year under the Chairmanship of former SEBI chief M Damodaran, is likely to submit its recommendations on required changes in existing policy framework and prevalent practices of customer service in banks, sources said.
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Monday, April 18, 2011
RBI fails again – Inflation mocks Government Prediction
Proving an absolute failure by the Finance Ministry as well as the Reserve Bank of India (RBI) in controlling inflation, the annual average inflation rate in the country has climbed up to a record high of 9.4%. This comes as a grave concern as the rate of average inflation in the previous year of 2009-10 was a low 3.6%. It is to be noted that exactly a month ago on March 17th, the Reserve bank of India had raised the interest rates for the eighth time in the last twelve months. The policy rates were raised by 25 bps, the repo rate (the lending rate) rose to 6.75% and the reverse repo rate (the borrowing rate) rose to 5.75%. This was all with a big claim by the RBI that controlling inflation was their first priority and that the increase in interest rates would bring down inflation in the country. In fact, the Reserve Bank had forecasted that with the increase in interest rates, the inflation would be limited to 8% by end of March. However with the inflation in March rising to about 9% (8.98% accurately), the projections of both the finance ministry and the Reserve Bank of India (RBI) has been proved to be wrong. The Indian Government is continuously making big claims about India’s high growth rate and using it as a principal political campaign. However, if the inflation continues with the same increasing curve, the growth in India will be unsuccessful. For the lives of 1.2 billion people of India to get better, the growth rate makes sense only when the inflation rate is under control. It is an absolute necessity for the Reserve Bank of India to undertake additional policy changes to tighten its grip on the economy. All eyes are now on the monetary policy meeting of the RBI scheduled in May.
Central bank rebuffs SBI on home loans
India’s banking regulator has rejected State Bank of India’s (SBI) appeal to waive the additional provision requirement for its special home loans, two persons familiar with the development said. This means the country’s largest lender will have to set aside around Rs.400 crore to provide for such loans which, according to the Reserve Bank of India (RBI), carry more risk of default as they are priced at relatively lower interest rates for the initial two-three years before the rates are raised. Setting aside money for making extra provisions dents a bank’s profits. The Indian central bank has also turned down SBI’s request to revise its decision to downgrade its rating, following an inspection of the bank’s books for the fiscal year ended March 2009. The rating, based on the six parameters—capital, asset quality, management, earnings, liquidity, and systems and controls (CAMELS)—has been brought down by one notch, from B to B minus, as RBI found the bank had underestimated bad assets and inflated its capital by not making provisions or setting aside money for certain assets. The CAMELS rating of a bank is highly confidential and neither the bank nor the regulator ever discloses it. RBI’s inspection for fiscal 2009, completed in January 2010, also pointed out corporate governance issues with the bank. SBI had a few months ago moved the central bank, asking it to reconsider the revision. It argued that its large loan book is being continuously monitored and minor deterioration in the quality of assets is no cause for worry and does not call for the downgrade. The size of its loan book was Rs.7.4 trillion in December. The banking regulator, in its communication, made it clear that it has taken a serious view of the bank’s failure in making adequate provisioning and underestimation of bad assets and stuck to its decision of downgrading its rating. RBI has also made the on-site inspection of a large bank like SBI an annual affair and not once in two years, which had been the case till recently. An SBI executive confirmed receiving RBI’s communications on home loan provisions and the bank’s rating. Another official said the banking regulator’s inspection for fiscal 2010 is just getting over. No one was willing to be named considering the sensitivity of the issues and involvement of the regulator. In its mid-year review of monetary policy in November, RBI had raised the provision for standard assets of special home loans fivefold—from 0.4% to 2%. According to RBI, such loans impact the quality of assets as chances of defaults by the borrowers are high when the rate rises and, hence, the directive for higher provisioning, which will discourage them from selling such loans. While SBI calls the product a special home loan, RBI dubs it a “teaser loan” as it carries a relatively lower rate of interest in the first few years, after which it’s reset at a higher level. RBI’s concern is some borrowers may find it difficult to service the loan once regular rates become effective. The regulator is willing to bring down the provision rate from 2% to 0.4% for those loans that do not turn bad one year after the loan rates go up. Former SBI chairman O.P. Bhatt strongly contested RBI’s perception of risk and had said that while giving such special loans, the bank takes into consideration a customer’s capacity to service the loan when the rates go up. His view was that, in the absence of any risk of default, the bank does not need to make extra provisioning as directed by RBI. The audit committee of SBI’s board, headed by chartered accountant Dileep C. Choksi, endorsed the chairman’s decision, and did not make any provision for the December quarter. Armed with the audit committee note, Bhatt had moved RBI seeking a waiver of the extra provisioning. Incidentally, SBI has also been raising provision requirements for its bad loans in phases unlike other banks that have already done this in conformity with RBI’s norms. There are three types of bad loans—substandard, doubtful and loss assets. Till recently, banks were required to set aside the entire amount of loss assets, or those assets which can never be recovered, while provisioning requirement for other two categories varied, depending on their age and quality. RBI, in 2009, made 70% provision mandatory for bad assets for all banks. SBI has so far made close to 64% provisioning for its bad loans and sought time till September 2011 to raise it to 70%. Bhatt had called the RBI move “arbitrary” and argued that since money has already been set aside for different categories of bad assets, there was no need for 70% provisioning. No SBI official is willing to speak on the rating downgrade on record, but in private, SBI executives said all concerns of the regulator have been addressed and many of the issues raised by RBI’s inspection team have been resolved. SBI raised its provisions in the September quarter and as a result of this, net profit was flat at Rs.2,501.37 crore. In the December quarter, net profit rose 14% to Rs.2,828 crore, taking the profit of nine months in fiscal 2011 to Rs.8,243.64 crore. With Bhatt having retired in March, new chairman Pratip Chaudhury will sign off on the bank’s annual accounts. SBI closed at Rs.2,803.30 on Friday on the Bombay Stock Exchange. Since January, it has remained flat, as has the banking index, Bankex, while the bellwether equity Sensex has lost 5.47%.
Fin holding firm must for entering banking space
New Delhi: The government and Reserve Bank of India have decided to make it mandatory for corporate groups wanting to set up banks to ring-fence their financial sector operations from other businesses by setting up a financial holding company (FHC). For the existing financial conglomerates, however, conversion into FHC would be optional. Officials also indicated that companies being investigated by the CBI, Central Vigilance Commission and Enforcement Directorate will not be permitted entry in the banking sector. This could dash hopes of some companies which are embroiled in the 2G spectrum scam but are known to be interested in a foray into the banking sector. The FHC structure would help the central bank in ensuring that new banking entrant’s activities are ring-fenced from its promoters. “Holding company should ring fence the regulated financial services activities of the group including the new bank from other commercial and industrial activities of the group,” according to RBI’s draft on new banks submitted to the finance ministry. The FHC model has been suggested by an internal panel of the RBI, headed by deputy governor Shyamala Gopinath. The panel suggested to the finance ministry a number of legislative changes required to implement this model. These include removing restrictions on voting rights and empowering RBI to supersede a bank’s board, among others. “Many legislative changes suggested by the RBI panel on holding companies and its draft on new bank licences, are overlapping. The government is trying to see how both these proposals can be handled simultaneously,” a source said, indicating why there has been some delay in unveiling the norms for entry of private sector firms into the banking sector. RBI was supposed to release the guidelines by March end. Finance ministry is deliberating on the Gopinath panel’s recommendations, as well as draft guidelines on entry of new private sector banks. The ministry has, in principle, agreed to accommodate these changes by amending the Banking Regulations Act. A FHC structure is currently the missing link in India’s financial sector. Government panels including the Committee on Financial Sector Assessment, in its report issued in March 2009, highlighted the need for more clarity in existing statutes relating to regulation and supervision of financial holding companies. In a discussion paper on the subject in August 2007, the RBI has preferred a financial holding company model over an intermediate holding company model, as the latter is seen as less transparent and difficult to regulate. The central bank had then struck down proposals from SBI and ICICI Bank to set up intermediate holding companies. Gopinath panel’s draft would outline the central bank’s thinking on the subject. FHC are seen as an efficient vehicle to raise capital for subsidiary companies. The regulators find it easier to supervise FHCs as compared to intermediate holding companies.
IMF monitoring to avert future financial crisis
WASHINGTON: International Monetary Fund (IMF) member countries including India have agreed to expand and deepen its surveillance of the global economy to identify largest systematic risks to avert future crisis. The IMF will produce a new report investigating how financial policy decisions in countries around the globe affect others, the 187- nation institution's policy making International Monetary and Finance Committee said Saturday. The new IMF report will mesh in with Group of 20 economies' decision Friday to monitor world's seven largest economies, including India, to highlight and suggest corrective steps to rectify imbalances that could pose risks to the global economy. "Global challenges demand global solutions. The need for global cooperation in solving our most pressing problems of today is vital," said leader of the Indian Delegation, Reserve Bank of India governor Dr. Duvvuri Subbarao. "The crisis has taught us that no country can be an island, and that economic and financial disruptions anywhere can cause ripples, if not waves, everywhere," he said warning "uncoordinated responses will lead to worse outcomes for everyone." Noting that complex global problems facing the world today are "not amenable to easy solutions and many of them require significant, and often painful adjustments at the national level," Subbarao said. "At the same time, the global crisis has shown that the global economy, as an entity, is more important than ever," he said underlining the central role of IMF "in reforms so that it continues to spearhead and weave together the fabric of international cooperation." "There are significant vulnerabilities still in the global financial and economic system," said Tharman Shanmugaratnam, the finance minister of Singapore and chairman of the panel. "That reflects the legacy of an international monetary system that is still not in what we consider satisfactory shape. On top of that, we have new vulnerabilities and new risk," he said, mentioning the Middle East, Japan and higher commodity prices. "We need to strengthen the linkage between surveillance of the financial and macro-economic dimensions of the world economy," he said. The IMF is trying to learn from the 2008 crisis and become better at understanding developing risks in the world economy, said a communique of the governing body. The committee also said authorities need to implement existing international agreements to better regulate the global financial system and cautioned that excessive risks remain in place more than two years after the financial crisis. The global economic recovery "remains vulnerable" despite showing some signs of sustained momentum," it said warning that some international banks continue to pose system risks to the international economy. The IMF board also asked members to push forward with a new framework for dealing with capital flows saying a "comprehensive and balanced approach" to deal with capital flows is needed. The committee separately said the IMF will chalk out a "criteria-based path" to include other currencies in the basket that makes up the special drawing right (SDR), IMF's lending unit.
Settling the dues
The financial difficulties faced by families on account of delayed settlement of life insurance claims are well known. What’s generally not known is the problems that legal heirs run into when it comes to accessing the bank accounts and lockers of deceased depositors The banking regulator— the Reserve Bank of India (RBI) — is, however, aware of this and has issued detailed instructions to banks on the subject, aimed at reducing the hassles faced by relatives. Yet, all banks don’t follow the regulator’s instructions in letter and spirit, resulting in considerable hardship for the surviving family members. Firstly, when a customer opens an account or hires a locker, the bank is supposed to advise him or her on the imperative need for nominations. Similarly, term deposits should have nominations and even if the depositor is unaware of its importance or forgets about it, the banks have a responsibility in ensuring that it is done. Banks, however, never take this task seriously. In fact, the regulator has also advised banks to educate customers on the importance of the “survivorship clause” in case of joint accounts, as otherwise the surviving joint account holder does not automatically get the right to the account. Similarly, in respect of term deposits, the RBI says that banks should not insist on completion of the term of the deposit and should allow premature termination on the death of the deposit holder. Yet, there are many cases where banks have refused to cut short the term of the deposit and denied the deposit amount to the legal heirs in urgent need of money. Even where the deceased depositor has not made any nomination, banks should adopt a simple procedure for repayment to the legal heirs, advises the regulator. In fact, on June 9, 2005, the banking regulator issued detailed instructions to banks on how to simplify and expedite claim settlement following the death of a depositor. Even after six years, such simplified procedures elude family members. In fact, the RBI circular sets a time limit of 15 days for settling the claims in respect of deceased depositors. I wonder how many banks really stick to this time limit? Well, in order to keep tabs on this, the regulator suggests banks should report to the customer service committee of the bank’s board the details of the number of claims received and the time taken for settlement and if there has been a delay, the reasons for it. It’s time the regulator asked banks to make this information public.
RBI, Sebi likely to crack the whip on FII funds in banks
The flow of foreign portfolio money into banks' certificate of deposits (CDs) through fixed maturity plans (FMPs), a debt mutual fund product, of late, has raised concerns among financial market regulators. The subject was discussed in a recent inter-regulatory body meeting, involving the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi). In this meeting, top regulatory officials expressed worries about the indirect flow of 'hot money' - an euphemism to describe short-term foreign fund flows into a country's financial markets - into certificate of deposits through FMPs. Foreign investors are barred from directly investing in CDs, which are money market instruments used by banks to raise money for the short-term. But these investors have managed to gain exposure to this instrument by investing in FMPs that invest in CDs, which are instruments that banks float to raise short-term funds. A decent return on CDs and uncertain equity market conditions prompted foreign investors to invest through FMPs. In March, CDs with tenure of three months fetched as high as 10% because of tight liquidity, though returns have dropped to about 8.5%. Mutual fund industry officials said many foreign investors have managed to lock in money in short-term FMPs at as high as 9-10 %. "Its easy arbitrage for them, as they are getting money at less than 1% and here they can easily make risk-free returns of 7-8 %," said a top official with a mutual fund, owned by a foreign bank, requesting anonymity. Investing in CDs is considered risk-free, as they are floated by banks. In India, a dominant section of the money market participants is state-owned banks and its securities enjoy a rating equivalent to sovereign bonds. This is a reason why foreign investors prefer investing indirectly in CDs than buy commercial paper (CPs)- another money market instrument used by companies to raise short-term funds - where they are allowed to invest directly. Though CPs deliver higher returns, foreign investors prefer investing in instruments that have status equivalent to sovereign bonds despite lower returns, fund managers said. "While FII money going into CDs may help banks raise cheaper, RBI does not want foreign money in short term in debt. That's why they are encouraging FII money in infrastructure bonds, though it's yet to take off," said a senior official with a primary dealer. The extent of flows into mutual funds' FMPs in recent months could not be ascertained, but asset management officials said some top fund houses have managed to attract significant money. Regulators are un-comfortable about such flows, because they are volatile in nature and causes uncertainty in currency movements. But the central bank, or Sebi, can't legally stop the flow of foreign institutional money into mutual funds. Sebi regulates mutual funds. However, regulators can use the power of moral suasion - an informal per-suasion tactic used by regulators to get entities to comply with their decision - to control such flows. "It will not be possible for regulators to selectively control foreign investor inflows through the legal route. Probably, there could be some verbal restrictions," said a chief investment officer with a mutual fund, partly owned by a public sector bank.
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