VITALINFO taking a short break..........................

As you know, VITALINFO was launched on 23^rd November 2010 with the very purpose to provide a platform for wider dissemination of updated information related to and happening of events in and around RBI. It has continuously been updated on a daily basis well before 8 a.m. without taking even a day’s break, be it Sunday or public holiday. I have been receiving excellent feedback from RBIeties all over India.  I shall be away on official tour to Malaysia and Singapore leaving India today and returning back on 4^th May 2011. Much as I would wish to, the VITALINFO will not be available during the period.  Hence VITALINFO intends to take a short break.  See you again on 5^th May 2011. Meanwhile, I request you to submit your vital feedback on VITALINFO online by clicking the link on the site.

Regards

‘There is a crying need for well-informed decision making, based on proper research'

Ms Usha Thorat has been a familiar presence to most RBI watchers for the last two decades when she held the reins in various departments after rising through the ranks. An alumnus of the Lady Shriram College and Delhi School of Economics, Ms Thorat handled a range of portfolios in her 38-year career, capped by a stint as Deputy Governor between November 2005 and November 2010. Her all-round exposure has given her deep knowledge of the way markets and various players function. She herself rates her work in connection with the growth of government securities and debt market a decade ago as among her important contributions. Always careful with her words, she has been an articulate and photogenic ambassador for the central bank. Her handling of the many challenges in this job came in for praise from the Union Home Minister, Mr P. Chidambaram, at a public function some months ago. He complimented both her and her long-time colleague Ms Shyamala Gopinath for their ‘safe pair of hands' in the tumultuous days of 2008-09.  She is described by those who know her well as pleasant, dynamic, vivacious, and knowledgeable. A woman with a no-nonsense approach, she is said to be forceful in her presentation, creative and brimming with new ideas, and has yoga and bird-watching for hobbies. She met Business Line recently at her office in Mumbai and talked about her latest assignment as Director of Centre for Advanced Financial Research and Learning (CAFRAL). 
What is CAFRAL about? What is its mandate?
We had a vision for this centre in 2006 when the Prime Minister and former governors and deputy governors were here for a function. We felt that our bankers training college (BTC) needed to be revamped. Although some of its programmes were well-regarded, most banks have now developed their own training establishments. And markets have also taken care of training needs of bankers. So we had to reinvent ourselves. Dr Y.V.Reddy, then Governor, felt that instead of focussing on training, we need to focus on research and learning. We wanted to develop this into a global hub for policy research in banking and finance — of use to policy makers and central bankers and serving the requirements of the system. The context was also that as India was a growing into a dominant player, its financial sector should also set its aspirations higher and try and become a more important player in the globe.  When I left the RBI, the governor asked me to take up this role. I liked the idea because I have been participating in global conferences and been part of various committees. There is so much of research that is done in these countries on regulatory issues. Today, we are accepting global standards and internationally accepted guidelines such as capital adequacy, the methodologies and so on. But we don't have enough research to even differ with that approach. Take for instance the issue of having countercyclical buffers if credit to GDP ratio exceeds a particular level. Now, we are an emerging country whose Credit-GDP ratio will grow for the next few years. So what we said is that we'll look at credit to certain sectors — such as real estate or capital market and when they go beyond our comfort zone, we'll put in limits and build buffers.  And that has worked better. But all of these things – about what made us decide on 2 per cent provisioning for instance, we need lot more research. We have been quite hard-pressed when we have gone to Basel committees with our prescriptions. We also need to build capacity both with the regulator and the regulated entities.  Financial sector regulation is still in its infancy because data is still not fully available on a lot of things. For example, if you look at Basel requirements, you need seven years data (that includes one year of downturn). Our data is still not good enough. So, can we measure risk better? There is a crying need for well-informed decision making, based on proper research. If we can fulfil that need, we would be rendering a great service. We would like to be a kind of interface between academia, practitioners and bankers. There are people who have the knowledge and the methodologies and lots of Indian talent that is available. We would like to use this skill for public good and do something that is useful for central banks. BIS (The Bank for International Settlements) will also collaborate with us and provide us resource persons. We have been in touch with researchers who are very enthusiastic because of the potential access they will have to data from banks and regulators. Even in the few meetings I have had with academics and bankers, they have found talking to each other has been very useful. There are a lot of issues that need clarity – many people don't understand why we need controls on capital flows and why we need caps on debt capital. They argue that this denies them access to cheap credit. But there are other considerations — including macro-economic stability. We are planning to have programmes for boards of banks — for their directors. We will start with a CEO's conference on May 28 — where we are going to discuss business strategies in the changing regulatory landscape — about coping with new demands for raising more capital. We are going to discuss regulatory challenges — the issue of addressing growth challenges while also keeping an eye on risks and destabilising factors, the trade-offs that are required to maintain a stable financial system. We are going to look at financial markets, financial stability and financial inclusion. Later on, we can look at things like e-learning, like what other global institutions have — where they put even regulators and heads of institutions through a ladder of tutorials. I have found this whole thing quite exciting.  
How are you staffing your organisation? Do you have people coming in from RBI?

Yes. There are a few people who are from RBI. We have been told that we need to get a few people who will be anchored in this institution for a longer spell — but we can look for many others who will see it a short term assignment. We'll be putting up our Web site soon. We are looking for people who are interested in financial sector research and who are willing to spend some time. We could have people who are with us for 2 to 3 years but we are also looking at project based assignments. We could even look at neighbouring countries and central banks from South East Asia so that there are some mutual learning possibilities. We can look at people who would like to come on sabbaticals.

The one challenge that researchers usually face is the quality of data and the difficulty of reconciling two pieces of data from two different agencies. How are you addressing this?
Yes. That is a challenge. In fact some people have advised us that CAFRAL should focus on data — on data consistency, data mining, data packaging etc. And although we are sponsored by the RBI, the data that we will get from RBI, will of course have to go through the same protocol — there are confidentiality issues. The banks may not want us to single them out and publish any research that could be identifiable with them. We have to look into this.
What about funding for the centre? Are you looking at tapping funds from government or other market sources?
Right now, it is met by Reserve Bank of India. We can't become completely dependent on market funding because if we don't focus on the subject that will help the bottom lines of those who commission the research – then that may not be able to sustain. The funding will go naturally into those areas which will yield benefits for them. But money is not a problem. We will try to do what the BTC did in terms of providing a platform for policy and regulatory issues. We could, for instance, hold a dialogue there and bring people together. It is not in the RBI — so it provides an academic environment that is neutral — so everybody can speak more freely – both the banks and the regulator.

Banks’ profits to go up on RBI relaxing provisioning norms

The Reserve Bank’s recent decision to relax provisioning requirement for banks will improve the profitability of lenders in the short run, bank officials have said. Responding to representations of banks on mandatory provisioning of bad assets, RBI has said that till the time it introduces a more comprehensive methodology of countercyclical provisioning taking into account the global standards, lenders are required to set aside stipulated capital with reference to NPA position as on September, 2010. Welcoming the decision, a senior banker said the initiative will help in improving the bottom line of banks as they will not have to make additional provision towards bad assets. Thus, operating profit will not be drained out for making additional provision for rise in bad debts, another banker said. As per the current prudential norms, banks are required to set aside capital to the tune of 70 per cent of their bad debt on running basis. This is called as provision coverage ratio (PCR). Country’s largest lender State Bank of India’s profitability has been impacted as the bank had to set aside capital each quarter to meet the 70 per cent provision coverage ratio as prescribed by RBI. The bank has been given additional time till September this year to meet requirement. RBI decided to hike the provision level in the aftermath of financial downturn with a view to enhance the asset quality in the banking system as additional provisioning would give more cushion to banks against the rise in bad loan levels. Majority of the banks achieved the PCR of 70 per cent and have been representing to RBI whether the prescribed PCR is required to be maintained on an ongoing basis, RBI said in a notification. “The matter has been examined and till such time RBI introduces a more comprehensive methodology of countercyclical provisioning taking into account the international standards as are being currently developed by Basel Committee and other provisioning norms,” it said, adding banks are required to set aside stipulated capital with reference to gross NPA position as on September 30, 2010, it said. Besides, banks have been allowed to utilise the additional PCR beyond the 70 per cent for making provision against bad assets. “The surplus of the provision under PCR vis-a-vis as required as per prudential norms should be segregated into an account styled as countercyclical provisioning buffer,” it said.  This buffer, it said, will be allowed to be used by banks for making specific provisions for non-performing assets (NPAs) during periods of system wide downturn, with the prior approval of RBI.

INCLUSION BANKING WILL SOON BE PROFITABLE: UNION BANK

Union Bank of India, the fifth largest public sector lender with over Rs 3.55 lakh crore in assets, has said its financial inclusion project, called the ‘new bankable class’, will turn profitable sooner than expected. “Going by our experience with the financial inclusion project, which we call ‘banking for the new bankable class’, this will turn in profits sooner than later, especially when the cash transfer facilities under Adhaar scheme starts flowing in,” Union Bank chairman and managing director MV Nair told PTI in an interaction here.  Nair, who recently got a three-month extension after completing his tenure, said, “For us, this is not a loss making business. Some of the segments such as remittance facilities for the migrant labourers as also those for the milk and fruit vendors, under the inclusion project are already profitable.  The MNREGA (National Rural Employment Guarantee Scheme) payments may remain in loss for some more time but then the government is subsidising it.”  He said the bank got into this business three-four years ago, well before the government and the Reserve Bank began pushing it and made it mandatory from the last financial year.  “At Union Bank, we always believed in the opportunity at the bottom-of-the-pyramid and our innovative approaches have worked well so far and we hope this will continue to be so. This has given us the confidence to move into financial inclusion space well in advance. “When we looked at this large unbanked class, we realised that they were a future business opportunity and not a burden on our finances. Hence we started it off and looked at it as an investment for the future. And we are happy that we started it earlier than others,” the chairman of the Mumbai-based lender explained the rationale behind this move. The bank has already opened six million inclusion accounts and its project is well on course, he continued. “The RBI has allotted us 3,159 villages. As of March 2011, we have already covered 2,511 villages. We intend to cover 10 million customers by March 2013 under the inclusion plan,” Nair said. For the new bankable class, the UNI is offering a combination of banking products such as no-frills savings account, microcredit, micro insurance, remittance facilities and overdraft, the chairman said. However, industry analysts are not so hopeful about the profitability of the inclusion drive. For instance, Ernst & Young India partner and financial services head Ashvin Parekh is of the view that looking at the way the government and RBI are pushing this, it will impact the profitability of small banks. According to Parekh, “the ideal model would be the government setting up some banks, specifically for the inclusion project, and once the target is met, privatise them. “Or else, it could ask only large banks, which can absorb the losses for a longer period to drive the project and give them some tax incentives,” Parekh said.

Why IMF advice finds no takers

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Inflation and growth

The RBI should take some additional steps to curb inflation, instead of taking baby steps, which it has done in the last one year, without it yielding much result. The spectre of inflation continues to loom large and bite into the wallets of the common man. The key policy rates should be increased by at least 50 basis points and there should be some sacrifice on the growth front to prevent any further escalation in inflation. Inflation will have a long-term impact and a cascading effect on various sectors of the economy, which will result in both social and economic crisis. So, curbing inflation should be given the precedence over double-digit GDP growth.
R. Karthik, Chennai  (Hindu – Business Line)

Why the delay in new bank licence norms?

The delay, it seems, is deliberate, and neither the government nor RBI is too keen to welcome a new set of private banks in a hurry.  India’s banking regulator is yet to release draft guidelines on licensing norms for new banks. Finance minister Pranab Mukherjee first announced the government’s intention to allow a set of private firms in the banking space in his February 2010 budget speech, surprising the Reserve Bank of India (RBI), which was till such time pushing for consolidation in banking. More than a year later, there is no sign of the draft rules even after Mukherjee said in this year’s budget speech that RBI would issue guidelines on new banking licences by 31 March. This has not happened because the finance ministry is not happy with the draft prepared by the central bank. It wants too many changes. RBI first prepared a discussion paper on the subject in August and sent the first draft guidelines to the ministry ahead of this year’s budget. But the ministry has not cleared the guidelines yet. It is pushing hard for the regulator to make some changes—big and small—and RBI is willing to accommodate some but not all. We don’t know when the regulator will be in a position to release the draft guidelines. Let’s take a look at the suggestions of RBI. I have not reviewed the draft guidelines prepared by the central bank, but from various sources who have direct and indirect knowledge of what it contains, I understand that RBI is ready to allow big industrial houses to set up banks if it gets the power to supersede boards of banks that are not being run properly. It also wants the right to oversee the operations of the promoting company and any affiliates that will have business relationships with the bank. This is being done through an amendment of the Act that governs banking in India. Mukherjee in his February 2011 budget speech promised the changes in the Act, and the proposed amendment to the Act was tabled in Parliament during the budget session itself. Currently, RBI does not have the power to dismiss a bank board, but under section 45 of the Banking Regulation Act, 1949, it can force the amalgamation or merger of a bank with another, and force a reconstruction of the board to protect the interests of depositors, shareholders and employees. RBI is also in favour of an industrial group setting up a holding company to own the bank and other financial services companies of the group, keeping the manufacturing and trading business out of it. This will help the Indian central bank regulate the group better. The so-called wholly-owned non-operative holding company, according to the draft, should be registered with RBI as a finance firm and governed by a separate set of prudential guidelines. Those industrial groups that will be allowed to set up banks will have strict restrictions on exposures to other group firms. The regulator is not comfortable giving a licence to any industrial group that gets 10% of its income from real estate or the broking business. The minimum capital a new bank would need is pegged at Rs. 500 crore, and the RBI paper that is lying with the finance ministry also insists that the new banks need to be listed within the first few years. Among other things, the draft guidelines outline how much the foreign shareholding should be in a new bank, and how fast the promoter needs to pare its stake from 40% to 15%, and says rural branches should constitute one-fourth of the branch network to ensure the spread of banking services. Although the new private banks that have been functioning are required to have at least 25% of their branch network in rural and semi-urban India, most have focused only on semi-urban centres and have ignored rural India. This time around, RBI does not want to take any chance, and it wants the new banks that will be given licences to spread banking services in even remote and thinly populated villages. I am told that the finance ministry is not comfortable with RBI’s suggestions on paring the promoter’s stake within the first few years as well as capping the foreign stake. It also does not want RBI to be bluntly saying that no industrial house with exposure to the real estate sector will be allowed to set up banks, even though it appreciates the spirit behind it. Similarly, it is not very excited about the central bank’s insistence on rural banking and tough talk on superseding bank boards. I don’t know when the finance ministry will finally give its green signal. After its nod—and necessary changes—RBI will release the draft guidelines, seeking public comments. It will take a few months more to prepare the final guidelines. And all applications seeking banking licences will be examined by an external group before RBI considers them. I will not be surprised if we hear Mukherjee in his February 2012 budget speech reiterating his commitment to allow new private companies to establish banks. What is not clear is: why did RBI have to send the draft guidelines to the finance ministry? After all, it’s a mere draft, and it will be finalized only after receiving comments and feedback from various quarters. Couldn’t RBI have gone ahead with the draft guidelines and taken into consideration the government’s feedback before finalizing it?  There are various theories doing the rounds. One is the regulator’s reluctance to be solely responsible for drafting the guidelines for the most critical segment of the financial segment when the second-generation spectrum licensing scam is emerging as the largest political corruption case in India. For the same reason, the government also is not in a hurry to push new banking licences, many in Delhi say. The delay, it seems, is deliberate, and neither the government nor RBI is too keen to welcome a new set of private banks in a hurry.

RBI likely to pull up 7 banks for flouting currency regulations

MUMBAI: Banks will face regulatory action and penalties for old derivative deals where currency laws were flouted and complex products missold to companies. The Reserve Bank of India (RBI), which has been scanning the derivative books of banks for close to a year, has identified the errant banks and the nature of irregularities .  A fortnight ago, in a meeting with senior members of the money and currency markets, the banking regulator spelt out that errant banks will be pulled up. Seven banks, including six private and foreign banks and a state-owned lender, may be pulled up by RBI, said a source familiar with the development .  "RBI has come up with specific views on each bank and the penalty will depend on how severe the violations are," said the person. The central bank has conveyed its decision to association of money market dealers, currency dealers and the lenders' lobby, Indian Banks' Association. "In some cases, it may just be a rap on the kuncles and word of caution. But some will be fined. That's the impression we get," a senior banker told ET. RBI had sought information and went through derivative deals of as many as 22 banks. It has now come to a conclusion that some banks had entered into transactions that were not only sharp but unacceptable.  "The penalty to be imposed is relevant as banks had marketed high risk products," said Sandeep Parekh , lawyer, Finsec Law Advisors. "This move will give further teeth to the demand for a further probe by a law enforcement," he added. "Banks had structured these derivative transactions in accordance with the RBI guidelines. If the RBI imposes a penalty corporates and the authorities would be convinced that the banks were at fault. This would weaken the banks defence," said a lawyer who had handled the case of a private sector bank. "If the penalty is imposed the only positive is that the court may rule against a CBI probe as it would be convinced that the regulatory body has taken prudential action," he added.  "Banks have stopped marketing these exotic derivatives since 2008 hence this move will not have any significant impact on the derivatives market. At present, banks are offering plain vanilla products," said a senior banker. Over-the-counter derivatives help companies to hedge against fluctuations in foreign exchange and interest rates. Banks had sold currency derivatives to enable corporates of all sizes to either improve the earnings on their exports, or lower the outgo on imports or cut the interest and repayment cost on loans.

Inflation hurting the growth process

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Co-op banks take RBI to court over Parekh losses' write-off

In another case of a regulated entity taking the regulator to court, the Gujarat Urban Co-operative Banks Federation (GUCBF) has petitioned the Gujarat High Court, seeking relief from a circular issued by the central bank. The case relates to the Madhavpura Mercantile Co-operative Bank (MMCB), which was trapped in the 2001 Ketan Parekh scam and had lost money heavily. The 150-odd Gujarat-based co-op banks had kept deposits with MCCB, which was also acting as the clearing bank for many of these smaller banks.  In December, RBI issued a circular asking them to write off all the losses in one go in the financial year 2010-11. If implemented, the net worth of at least four co-op banks from Gujarat would get wiped out. Most banks have partially provided for such losses and a few have provided for fully, but the four smaller banks whose net worth would get wiped out have joined the federation in filing this petition. The petitioners have told the court that “on account of the negative impact on the balance sheet, there would be erosion of faith” that can lead to the depositors resorting to massive withdrawals. “This would further affect the working of the bank. The bank would also not be in a position to maintain the statutory CRR (cash reserve ratio) and SLR (statutory liquidity ratio). This would again lead to further action under the Act, making it virtually impossible for the bank to survive and function,” they said. The High Court has admitted the petition and has issued notices to the Union government, RBI, CBI, Central Registrar and MMCB. The case is scheduled for hearing on Monday. The federation has also asked the court to set aside RBI’s December circular. The banks’ representation to RBI has not helped them in securing more time for making such a provision. They have represented to the RBI, seeking seven years’ time to make full provision. The petitioners have also requested the court to ask the investigators to file a report and show how money is being recovered from Ketan Parekh. When contacted, Jyotindra Mehta, chairman of the Gujarat Urban Co-operative Banks’ Federation said, “The recovery of dues from Parekh could solve the problem. RBI should provide for more time for the revival of MCCB, which is under way, and the RBI deadline will end in the second quarter of the current financial year.”  A committee led by a retired IAS officer is trying for the revival of MCCB, leading accounting firm Deloitte was appointed to suggest a plan. Deloitte had submitted an interim report and the final one is expected soon. “The RBI deadline for MCCB revival is ending in the next quarter, which should be extended to give revival a chance,” said Mehta.  The federation has also petitioned the High Court to direct the Central Bureau of Investigation and the authorities concerned to take effective steps for recovery of amounts outstanding from broker Ketan Parekh and his firms. It has sought a speedier investigation and the cancellation of broker’s bail.

Monetary Policy, Inflation and Depositors – S.S.Tarapore

The Common Person could live with the current inflation rate if it were a 'true' indicator of inflation which is commonly known to be much higher than what the official indices show. The Reserve Bank of India ( RBI) is scheduled to announce its first quarterly monetary policy review of 2011- 12 on May 3, 2011. There would be considerable interest as each set of players would evaluate it from their own viewpoint. What then should the Common Person look for in the monetary policy? The central anxiety, for quite some time, has been the acceleration of inflation. Inflation is hurting the vulnerable sections the most. What is the extent of inflation? There are various ways of measuring inflation but the official focus in India is on the year- on- year change in the Wholesale Price Index ( WPI). This index does not correctly reflect the impact on consumers. The authorities are making efforts to have a comprehensive Consumer Price Index ( CPI) and although this has been undertaken there is need for the new index to stabilize before it becomes relevant for policy purposes. The RBI has many constraints in dealing with inflation. The RBI does not have a single inflation target while the issue of growth predominates and quite often inflation becomes a secondary objective to overall growth. Policymakers have repeatedly said that monetary policy should not do anything which would jeopardize growth. This has blunted the efficiency of monetary policy. RBI's comfort zone was all along meant to be around a 5 per cent inflation and higher inflation rates would invite monetary policy action. In this context, the present episode of a prolonged high inflation rate has made a dent into RBI's credibility. The RBI's cherished goal of a medium- term inflation rate of 3 per cent is no The kind of inflation we now have is generalized and not restricted to a few sectors and it no longer makes sense to go on talking about supply side inflation. It is heartening to see that the government is somewhat subdued on the issue of growth and now concedes that some sacrifice of growth would be necessary if inflation is to be brought under control. The Common Person could live with the current inflation rate if it were a ' true' indicator of inflation which is commonly known to be much higher than what the official indices show. Moreover, what hurts the Common Person is not the rate of inflation but its level. Illustratively, when mong dal prices rise from Rs 60 per kilo to Rs 100 per kilo the increase is 66.6 per cent, but when it rises further to 120 per kilo, we are told that the rate of increase has come down from 66.6 per cent to 20 per cent. Now when the price comes down to Rs 105 per kilo we are expected to rejoice and forget that a price of Rs 105 per kilo is historically very high causing great distress to the Common Person. It is time the Common Person is not deceived by these numbers and told the true story which would then push monetary policy to take stronger action to tackle inflation. It would be unfair to only blame the RBI as the problem lies elsewhere. The government wants its borrowing programme to go through smoothly without unduly high interests and at the same time expects that adequate credit is made available to the commercial sector. To meet these conflicting objectives, the RBI keeps the system sloshing with liquidity. This also enables banks to keep lending What the RBI has done is to fix its current policy repo rate at 6.75 per cent ( the repo rate is the rate at which RBI provides liquidity to banks against the security of government securities). The RBI has, over the past year or so, undertaken eight increase of the repo rate, each of ' baby' steps of 0.25 per cent. The current policy rate is totally ineffective. Given the present inflation rate, what is required is a full one percentage point increase in the repo rate but the present philosophy of the RBI would not permit it. The May 3, 2011 increase in the repo rate should be, at least, 0.50 per cent. The RBI would do well to take a leaf out of the Chinese central bank's policy which prefers strong monetary policy action. The other powerful instrument is the cash reserve ratio ( CRR) under which the RBI presently impounds 6 per cent of deposits of banks. An increase in the CRR by 0.50 per cent, which would impound Rs 25,000 crore of liquidity, would be appropriate. But the RBI has been shy of using this instrument during the past two and a half years. Here again, the RBI needs to closely study the active Chinese CRR policy. A victim of the present monetary policy has been the depositor who faces negative real rates of interest as the return to depositors is less than the inflation rate. It is true that, in the February- March 2011 period, some banks offered rates as high as 10 per cent. This was largely to swell the balance sheet numbers for March 31, 2011. Predictably, these banks have, in early April 2011, cut back deposit rates by one percentage point. Depositors are the mainstay of banks but they are not fairly remunerated. All that depositors can pray for is that the RBI, on May 3, 2011, shifts gears to undertaking a strong tightening of monetary policy. The RBI is at the cross roads. If it chooses the path of tightening monetary policy it would be criticized by vested interests, but if it does not it will be condemned by history for not alleviating the suffering of the masses.