The government has done well in starting the process of selecting a new deputy governor (DG) of the Reserve Bank of India (RBI) to fill in the vacancy arising in June (“RBI to interview all 7 EDs for Dy guv job”, May 6). But the question is whether the authorities will be equally fast in making the appointment. Contrary to what the report says, the convention that started in the early 1980s is that, of the four posts of DGs, one each is for RBI, commercial banks, Indian Administrative Service and the profession of economics. When an IAS officer is the governor, as is the case at present, the quota for that service for DGs goes to RBI as an additional post. My own hunch is that until the present Governor’s extension in office or otherwise is decided, bureaucrats would like to delay the appointment of the DG. There are economists with powerful connections aspiring for the governor’s post. If an RBI official becomes a DG now and then an economist is appointed as governor later in the year, the IAS fraternity would have lost its opportunity. The proper course for the government is to take a decision now on the post of Governor.
A Seshan, Mumbai
The very purpose of VITALINFO is to provide a platform for wider dissemination of updated information related to and happening of events in and around RBI.
Monday, May 9, 2011
Diamond jubilee of RBI staff association in city
GUWAHATI: Reserve Bank Employees' Association, Guwahati, celebrated its diamond jubilee at district library auditorium of the city on Saturday. Inaugurating the programme, Meghalaya Governor Ranjit Sekhar Mooshahary has expressed his happiness over the gathering of RBI employees here. Celebrating the glorious service of 75 years for the nation, the workers of the central bank organized a seminar on foreign institutional investment in the Indian scenario. Resource persons like Alok Sen from Assam University and Nanigopla Mahanta from Gauhati University delivered their lectures on the topic. The association said other programmes were also held.
RBI may make it mandatory for foreign banks to adopt WOS route
NEW DELHI: The Reserve Bank is likely to make it mandatory for foreign banks in the country to operate as wholly-owned subsidiaries, in line with the international practice, so that the central bank can have better control over their working. Initially, according to sources, the new banks and the existing ones with a few branches will be asked to convert into wholly-owned subsidiaries (WoS). The larger banks, they said, could be given some more time to adhere to the guidelines that are likely to be announced by June-end. At present, the foreign banks operate through their branches. Under the WOS model, the foreign banks will be required to set up a subsidiary under the Companies Act and operate as an Indian entity. Sources said that in several countries, including the US and Singapore, it is mandatory for banks to operate as WOS. In order to align Indian laws with the international best practices, the RBI had come out in January with the draft guidelines on the mode of operations for foreign banks in India. At present, foreign banks like Citi, Standard Chartered and HSBC operate as branches, mainly in bigger cities, and do not have the freedom to expand like the banks incorporated in India. In its discussion paper, the RBI has said that it expects large banks to convert them from branches to WOS and that the banks who adopt the subsidiary model would be given preferential treatment for opening of branches. The RBI has further called for making it mandatory for foreign banks with more than 0.25 per cent share in the Indian banking industry to convert themselves from a branch into a WOS. It points out that the government has clarified that a company with a foreign holding of over 50 per cent is a foreign company. At present, there are 34 foreign banks operating in India , with five major banks, including StanChart, HSBC, Citibank and Deutsche, accounting for over 70 per cent of the the total asset size. The discussion paper also said the WOS may be allowed to raise rupee resources through non-equity capital instruments.
The wait for new private banks might just get longer
The Reserve Bank of India (RBI) and the government are unlikely to push through with the final guidelines for issuing licences to new banks until the Parliament approves the Banking Laws (Amendment) Bill 2011. "The passing of the Bill is a necessary condition that will have to be fulfilled before guidelines for new bank licences are finalised," said a finance ministry official on the condition of anonymity. A Parliamentary standing committee is examining the Bill, which was introduced in the Lok Sabha in March. The Bill may come up for approval in Parliament only in the winter session, said sources. The Bill, when legislated, will empower the RBI to dismiss a bank's board and force a reconstruction to protect interests of depositors, shareholders and employees. Conferring the RBI with such powers will allow the central bank to take swift action if it suspects that the board is not functioning objectively or pushing for decisions favouring promoters of the bank. At present, the RBI is not empowered to supersede a bank's board, but can force an amalgamation or a merger among banks. The Bill will also allow the RBI to seek details of associate enterprises of banking companies. The RBI has prepared draft guidelines to allow private players in the banking sector and is awaiting comments from the finance ministry. "It has become necessary for the RBI to be aware of the financial impact of the business of such enterprises on the financial position of the banking companies," the Bill stipulated in is statement of objects and reasons. "This is necessary before allowing industrial houses to set up banks," the official said. The Adiyta Birla Group, Religare Enterprises, the Tatas and Reliance have shown interest in entering the banking sector.
Make it free and be fair to bank customers
RBI is all set to free interest rates in savings bank accounts. The deregulation will help household depositors and the economy in the long run, writes Dilip Maitra
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WHY THE HURRY TO HIKE LOAN RATES
Quite a few banks last week raised their loan rates. Unlike in the past, this time around, the quantum of hike is half a percentage point. This should make Reserve Bank of India (RBI) governor D. Subbarao happy as he has been harping on faster transmission of the monetary policy. The central bank raised its policy rate on 3 May by half a percentage point. Normally, banks take time to pass on the higher cost of borrowing to consumers and there have been instances in the past when despite RBI hiking its policy rate, banks did not raise their loan rates. Apart from raising its policy rate, RBI also raised the rate of interest that banks pay to savings bank account holders by an identical margin. This has pushed up the cost of savings deposits immediately. When they raise rates on their term deposits, it takes time to feel the impact as only the new deposits earn higher rates while the existing deposits continue to be priced at old rates till they mature. While the industry’s savings account portfolio is roughly about 22% of the overall deposit kitty, the impact on individual bank’s cost varies between 10 basis points (bps) and 15 bps, depending on their composition of deposits. One basis point is one-hundredth of a percentage point. This apart, higher provision requirement for bad loans and restructured loans will also affect banks as they need to set aside more money for such assets. The combination of all three—a hike in policy rate, savings rate as well as higher provision of bad assets—has made money more expensive and banks have no choice but to raise loan rates instantly. Following this, their loan growth will probably slow and quality of assets, too, may deteriorate as some firms may find it difficult to service higher interest cost. The Indian banking industry’s loan book grew 21.4% in fiscal 2011, higher than RBI’s projection of 20% growth. In 2012, RBI wants banks’ credit growth to be 19%. A drop in credit growth will bring down banks’ interest income and, on top of that, if their bad assets grow, they will have to set aside more money to provide for them. This will affect their profitability unless they find ways to bring down their cost of operation and become extra-sensitive to the quality of assets. This means a close monitoring of all loan accounts and a very strict appraisal of new loan proposals. They can earn high interest rate from a loan given to a relatively weak corporation but such an exposure runs the risk of loan default. If that happens, a bank not only stops earning interest on that loan but also is required to set aside money for such an asset. RBI allows banks to restructure bad loans (so that they do not need to provide for them) when there is an economic downturn but no such concession is given when loans turn bad because of indiscreet lending. So 2012 could be a year of conservative banking with a hawk eye on quality of assets, operating cost and fee income. The impact of the policy rate hike is sharper on short-term money. For instance, the yield on 10-year benchmark government bond rose from 8.14% on 2 May, a day before the announcement of monetary policy, to 8.25% on 5 May, but the three-month treasury bill yield, during this time, moved from 7.52% to 7.95%, and that of one-year treasury bill from 7.76% to 8.20%. Bond yields dropped on Friday, 6 May, as a sharp fall in commodity prices encouraged the market to bet on a lower inflation. The price of crude dropped around 12% last week. A bond auction on Friday, the first after the policy rate hike, saw good demand from buyers and no dramatic change in yields. This is good news for the government as there will not be any drastic rise in its cost of borrowing. The Indian government plans to borrow Rs.2.5 trillion from the market in the first six months of the fiscal year till September, 60% of its Rs.4.17 trillion annual borrowing programme. The February budget has pegged the government fiscal deficit for the year at 4.6%, and the money raised from the market will bridge the gap. Analysts are sceptical about the fiscal deficit target as the budget has not made adequate provision for crude oil, fertilizer and food subsidies, and a lot will depend on the crude price movement. For the time being, though, the government is tiding over its short-term cash mismatches by raising money through cash management bills. It raised Rs.32,000 crore in the first five weeks of the fiscal year through such bills and also raised the size of weekly treasury bill auctions. This extra borrowing has, however, got nothing to do with fiscal slippage. It’s just to take care of cash mismatches due to changes in the government’s spending pattern. It is making income tax refund faster to corporations, which, till recently, used to take around six months. Indian firms pay advance tax every quarter on their projected profits and in case the payment turns out to be higher than what they should have paid, the government refunds the difference. RBI will have wholesale price inflation data of April and May, and factory output data of March and April, apart from the gross domestic product figure for the January-March quarter to look at before taking a call on yet another rate hike when it announces its mid-quarter review of monetary policy in mid-June. Of all these, the most critical data to watch out for is non-food manufacturing inflation, which rose to a two-and-a-half-year high of 7.1% in March. The policy rate will probably be kept at a higher level than non-food manufacturing inflation.
Did You know ? | Soon, you’ll get online alerts for all types of card transactions for all amounts
Earlier banks were mandated to send online alerts to cardholders for all credit as well as debit “card not present” transactions for values of Rs 5,000 and above. As per the Reserve Bank of India’s (RBI) circular, you will soon get online alerts for any transaction you make through your debit/credit card, irrespective of the amount, at various channels. RBI has asked all commercial banks to take steps to put in place a system for such online alerts by 30 June 2011. This will make tracking payments a lot easier for you. Until the guidelines were issued, banks were mandated to send online alerts to cardholders for all credit as well as debit “card not present” transactions (when you are not physically present for the transaction such as during online shopping) for values of Rs. 5,000 and above. So if you used your credit or debit card at an online shopping website and the transaction amount was Rs. 5,000 plus, you got an online alert. As per the latest guideline, irrespective of the fact whether it is a “card present transaction” (where you are physically present such as at the automated teller machine or ATM) or a “card not present” transaction, you will get an online alert. This alert is applicable on transactions made over the interactive voice response (IVR) and point of sales (PoS) as well. The mode of sending online alerts has been left to the banks. So you could get email alerts as well as SMS alerts if your email address and mobile number are registered with the bank. The good part is that most banks are already sending alerts to their customers. For instance, ICICI Bank Ltd and Axis Bank Ltd. Many customers have direct debit facility activated on their credit cards—to pay utility bills or even insurance premiums. In such cases, too, the bank will send an online alert. A few banks are already providing such a facility. There is no doubt that online as well as offline financial fraudulent deals are on the rise. In fact, according to RBI, unauthorized and fraudulent withdrawals at ATMs have also been noticed recently. This step will help arrest possible fraudulent activities on your cards, besides helping you track your payments.
In high rates scenario, look for defensive bets
The Reserve Bank of India, in its monetary policy announced on May 3, raised the repo rate by 50 basis points to 7.25% and savings bank rate to 4% from 3.5%. With inflation and crude oil prices staying high, the central bank had little choice but to raise the rates. Soon after the rate hikes were announced, the markets went into a downward spiral. The Sensex lost as much as 617 points in the last week. Interest rate-sensitive sectors like banks, automobiles, real estate, construction and infrastructure fell much more. In response to the RBI policy, banks have raised base rates since their cost of funds has gone up. This would increase the borrowing costs for corporates, hitting their profitability. Market experts also worry that this may hamper growth in the near future. In such a scenario, what should the retail investors do with their portfolio?
NCP banks ensure their money is safe
NAGPUR: The NCP, which holds sway at Maharashtra State Cooperative Bank (MSCB) perhaps knew what was in store for the bank. Even before NABARD submitted a report to the state government damning the bank, five district central cooperative banks (DCCBs) withdrew their deposits amounting to Rs 3,305 crore. The list included the Pune DCCB, known to be the forte of deputy chief minister as well as state's finance minister Ajit Pawar. The other banks are from Ahmadnagar, Sangli, Satara and Kolhapur. The management in all these banks is dominated by NCP leaders. DCCBs and urban cooperative banks normally park their funds to meet the statutory liquidity ratio (SLR) requirements and for other purposes. "There is no urgency of withdrawing SLR money in totality as done by these banks," say sources. It was on the basis of this NABARD report the RBI finally ordered the state government to sack the board of directors. However, by withdrawing the money, the five banks were already safe. Only a select few were privy to the report as well as the likely decision on the board of directors being superseded. Sources say the NCP got a whiff of the likely move and five of its key DCCBs withdrew the money parked here. They probably smelt a rat when inspection notices were issued to MSCB. "The report was submitted to the state government on March 8 but withdrawals were already made. Even today the report remains to be a confidential document and the sudden decision to withdraw the money in lumpsum certainly raise eyebrows," said BJP MLA from Southwest Nagpur Devendra Fadnavis. This matter came to the fore through a legislative assembly question (LAQ) raised by Fadnavis in which the withdrawal was confirmed. The government justified the move saying that the deposits had matured. Even as a majority of the DCCBs in the state have the NCP dominance, these five banks are considered to be premium institutions in Maharashtra's cooperative fabric. It seems that the banks knew that MSCB board would be sacked leading to a panic run by the individual depositors. Though these deposits constitute a small part of the total figure, a run can certainly lead to a larger cooperative crisis with the funds parked by the banks also under threat. "The management seems to have showed financial prudence by acting on the insider information they received," alleges Fadnavis.
MFIs caught between RBI and AP Govt norms
Microfinance Institutions (MFIs) in Andhra Pradesh are in a state of confusion as some of the recommendations made by the Reserve Bank of India (RBI) for the sector are contradicting the rules prescribed by the State Government in its Microfinance Act. Andhra Pradesh accounts for almost 25% of the Rs 30,000-crore microfinance trade in the country. As many as 24 of the total 44 MFIs recognised by the RBI are operating in the State. The central bank, while accepting the Malegam Committee report, recently suggested that the repayment schedule (weekly or monthly) of loan can be chosen by the borrower. However, the AP Micro Finance Institutions (Regulation of Money Lending) Act, 2011 clearly says that the repayment cycle should not be less than a month. The dissimilarity may further affect the already crippling microfinance sector in the State, said Microfinance Institutions Network (MFIN), the representative body of micro lenders. "There is absolutely no clarity on the issue of repayments schedule. There are two people (AP government and RBI) trying to regulate the system. It can only increase the confusion. We will approach RBI, Finance Ministry and also the State Government for further clarity on the whole issue," Alok Prasad, Chief Executive Officer of MFIN, told PTI. The AP Government has no expertise in financial sector regulation. The RBI is the only institution that possesses the expertise and its regulation should be followed, he said. "There is a duality crisis in Andhra Pradesh. The AP government must step out from trying to regulate financial institutions," Prasad said. On the other hand, the state government is up in arms against the RBI's recommendations for the lenders. The government has decided to oppose some of the recommendations announced by the RBI last week as a part of the monetary policy announcement. Reddy Subrahmanyam, Principal Secretary (Rural Development), said the RBI did not address many critical matters like the issue of old loans extended by the MFIs at rates as high as 60%. The interest rate being charged by MFIs should have been capped at 24% as recommended by the Malegam Committee, instead of allowing it to be 26%, he said. "We are going to write a letter expressing our reservations to the RBI and Ministry of Finance," he added. The Rural Development Department of the state is gearing up take the apex bank head on. In a recent communication to its officials, the Society for Elimination of Rural Poverty (SERP), a state government body that is empowered to regulate MFIs, said despite the RBI's recommendations, the Microfinance Act will continue to apply to all MFI operations in AP. "The government has got legislation powers from the Constitution, whereas the RBI's power to issue executive instructions is a statutory power. Therefore, it is not in the domain of the RBI to annul the state legislation," a government circular said. "More so, the Act regulates the money lending aspects and transactions of the MFIs, which (fall) exclusively within the domain of the state government," it added.
Three factors that shaped the monetary policy
Three factors have shaped the outlook and monetary policy for 2011-12. First, global commodity prices, which have surged in recent months are, at best, likely to remain firm and may well increase further over the course of the year. This suggests that higher inflation will persist and may indeed get worse. Second, headline and core inflation have significantly overshot even the most pessimistic projections over the past few months. This raises concerns about inflation expectations becoming unhinged. The third factor, one countering the above forces, is the likely moderation in demand, which should help reduce pricing power and the extent of pass-through of commodity prices. This contra trend cannot be ignored in the policy calculation. However, a significant factor influencing aggregate demand during the year will be the “fiscal situation”. The budget estimates offered reassurance of a fiscal rollback. However, the critical assumption that petroleum and fertilizer subsidies would be capped, is bound to be seriously tested at prevailing crude oil prices. Even though an adjustment of domestic retail prices may add to the inflation rate in the short run, the Reserve Bank believes that this needs to be done “as soon as possible”. Otherwise, the fiscal deficit will widen and will counter the moderating trend in aggregate demand. The latter portion of the third factor is the operative and crucial part which shapes the monetary policy outlook for the current fiscal. The RBI is in a hurry to pass-through the high oil prices to consumers. Otherwise, navigating inflation to a soft landing of 6 per cent at end March 2012 would end up as an unfinished agenda for the central bank. The monetary policy trajectory that is being initiated in this annual statement is based on the basic premise that over the long run, high inflation is inimical to sustained growth as it harms investment by creating uncertainty. Current elevated rates of inflation pose significant risks to future growth. Bringing them down, therefore, even at the cost of some growth in the short-run, “should take precedence”.
Freeing the SB deposit rate
There has been much talk and debate about the Reserve Bank of India monetary policy that increased the key policy rate by half a percentage point. That headline grabber hogged so much limelight that the other significant prescription on increasing the savings bank accounts rate from 3.5 percent to 4 per cent almost went buried under the anti- inflationary hammer of the RBI. The monetary policy of last week marked a significant shift from drawing a balance between growth and inflation to fighting inflation and sacrificing growth. But no less significant was the RBI action on savings deposit rates which have remained unmoved for more than eight years. The increase in the rate of savings deposits has gone without due recognition that the RBI has used its mandate for the first time in many years to bring direct and immediate relief to the common depositors. It is pertinent to point out that in our country, the term “savings bank” is more of a misnomer: it brings access to the banking system but is not a tool to building savings. As such, the rate of 3.5 per cent has remained unchanged since as far back in time as March 1, 2003. The rate of interest on savings deposits was stipulated at 6 per cent in 1992. The rate has been progressively reduced by the RBI until we have arrived at this stage of 3.5 percent, and now 4 per cent with effect from last week. It is remarkable that in the period that saw the biggest and most successful push for liberalisation, a time when our leaders and policy makers repeatedly spoke of opening up the system to take our country on the road to a much touted economic stardom, the one rate that remained pegged and fixed at a ridiculously low level was for the money of the smallest of depositors who would add up to be the largest base of ordinary Indians in the banking system. As much as 84 per cent of the total savings deposits come from the household sector, according to the RBI. This is only typical of the Indian manner of governance where the one with the weakest voice is heard the least, and last. So it would be now in order to congratulate the RBI Governor for taking a step in favour of small depositors, embedded right within the monetary policy and for doing so at a time when the RBI has already put out a discussion paper on the deregulation of the savings bank deposit rate. There will be those who will argue that there was no need for the RBI to act on the savings bank rate even before the voice of the various participants on the discussion paper is heard. Indeed, there are already those who argue that the time is not right for freeing the savings rate, that the banks could suffer asset- liability mismatches and the net interest margins of banks would be badly hit. We have heard all of this before. As the RBI discussion paper itself points out, the central bank weighedin on the subject in 2002- 03 but held back the time was not considered right. It again came up in 2006- 07, when, interestingly, the Indian Banks’ Association (IBA) favoured deregulation “in the long run” but not just yet! The IBA wanted status quo; the RBI delivered it. It would be heartening to see the RBI not succumb this time. Already, the discussion paper has been praised for the quality of its inputs as well as its clear approach in favour of deregulation. This is the approach that sends out the right signals, that sets the ball rolling for change and will deliver the one message that the RBI must and needs to deliver -- that the marble white headquarters building is not an ivory tower for bureaucratic economists, that the RBI is an institution that will stand up for the common man. This is something that the RBI rightly aspires to. And it is the Governor, no less, who spelled out this aspiration earlier this year when speaking to graduate students at the University in Orissa. Here, Dr. D Subbarao candidly admitted that most people, even educated Indians, did not know much about what the RBI does. “ Many people think of the Reserve Bank as a mysterious institution, a sort of monolith doing obscure things that have no real relevance for the everyday lives of people,” the Governor told the audience at the University of Sambalpur. The perception needs to change. And it will change faster when the RBI stands up for the common man, the ordinary Indian and that faceless depositor whose money and trust is the real power behind all that the banking system delivers.
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