Draft norms on new banking licences soon: RBI official

Reserve Bank of India (RBI) would shortly come out with draft norms on new banking licences, a senior RBI official said.  "RBI will shortly come out with draft guidelines on new banking licenses", B Mahapatra, CGM in-charge of Department of Banking Operations and Development, RBI, said.  Last year, RBI circulated a discussion paper on new banking licences which said that corporates and Non Banking Financial Companies (NBFCs) would be allowed to promote banks. The apex bank had already circulated the discussion paper on deregulation of savings rates, Mahapatra said here today.

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Bank on Your Mobile

In India, retail stores like grocery and medical shops have a very important role, especially for the poor and rural people. They sell medications by the pill, shampoo in tiny sachets, cell phone minutes in small denominations, and frequently extend credit when needed. Mobile as an access channel has the potential to bring a whole host of people that have no/little access to land line or Internet connection onto an electronic branch-less banking platform-an innovative way to generate financial inclusion in the country. In the last few months we saw many large Indian banks tying up with large mobile service providers and handset vendors to increase their reach through the mobile channel by providing access to financial services through their mobile phones. The service will enable consumers to transfer money to other individuals, withdraw cash from business correspondents and ATMs and recharge SIM cards by using their mobile phones. The Reserve Bank of India (RBI) has been attempting to make it easier for Indian banks to reach rural people by allowing them to appoint 'banking correspondents' to handle delivery of cash and accept cash deposits, opening of new accounts and other services for the unbanked and under-banked population segments in remote locations where there are no bank branches. The tie up between banks and service providers/ handset vendors will be a win-win situation for both as they can leverage on a large user base of 750 million.  In all the tie ups-be it Bharti Airtel-SBI, Idea-Axis, Vodafone-ICICI bank or Nokia-Union Bank-this system is being tried to cover all areas of India and also to reach out to a larger base of population which is not being connected to the traditional banking route. These tie ups will also help banks to understand the telecom industry. They can also look at financing service providers for their future expansion as the industry is going through a lean phase, and investor confidence is at an all time low. Banks will engage such retailers as Customer Service Points (CSPs) all over India thereby leveraging on mobile retailers as their extended arm. The mobile subscribers will visit these outlets and open their bank accounts and avail of banking products and services closer to their home. The retailers benefit by getting some extra commissions from these innovative transactions. The service providers/handset vendors also benefit by increasing their bouquet of services and making some money from banking transactions as their margins have shrunk due to increased competition between operator/handset vendors. These services have started in a small way but one has to see how this shapes up. The success of this new innovation will open up new opportunities for bankers and service providers/handset players.                           Pravin Prashant 

Loans to NBFCs in agriculture space could get priority tag

NEW DELHI: The government may ask the central bank to accord priority sector tag to bank loans to smaller non-banking finance companies that lend largely to agriculture and small and medium enterprises.  The Reserve Bank, in its monetary policy review last week, had struck down NBFCs from banks' priority list except for those lending to microfinance institutions. Banks are required to lend 40% of their total advances to 'priority' sectors, including agriculture, SMEs and MSMEs and weaker sections. Non-banking financial companies, which now face a cut in financing after the RBI move, have petitioned the different arms of the government, including the ministry of small and medium enterprises, or MSME.  "We expect that RBI should take a lenient view on those asset financing companies, which finance agriculture and SME sector through loans for equipment, plant and machinery, and also to small road transport operators (SRTOs)," said a government official. The Reserve Bank is also expected to take up this issue on May 13 when a working committee on NBFCs, headed by former RBI deputy governor Usha Thorat , will meet industry representatives.  RBI has expressed concern over a 55% increase in credit to NBFCs in the year ended March 2011 as compared to a 20% increase in the overall bank credit. "RBI's concern is that whether this increase is because NBFCs are lending for activities that banks are restricted to. They want to remove such regulatory arbitrage," said a finance ministry official.  The government admits that bank loans to systemically important NBFCs, which are mostly into 'loan and investments', should not be tagged as priority. "We support RBI's view that there should be a more stringent framework for such NBFCs who may have taken exposure in capital markets as well," the finance ministry official said.  Any non-deposit taking NBFC which has an asset size of 100 crore is considered as systemically important. This would mean loans to NBFCs such as Reliance Capital and Indiabulls won't be considered as 'priority' even if RBI relaxes the norms.  Banks, however, feel that any change in regulation is not going to impact their priority sector portfolio. "We have a large network of regional rural banks, and also with financial inclusion agenda being pursued we will meet the targets," said an executive director with a north-based state-run bank.

RBI sets up panel on forex facilities to individuals

The Reserve Bank of India (RBI) today set up a committee for streamlining foreign exchange transactions and also invited comments from public and other stakeholders for improving facilities pertaining to investments and repatriation of funds. The RBI, while referring to the Monetary Policy Statement for 2011-12, said in a statement that the committee chaired by former RBI Deputy Governor KJ Udeshi has been set up to streamline and simplify the procedures for facilitating genuine foreign exchange transactions by individuals.  The individuals are categorised into residents, non-resident Indians (NRIs), Persons of Indian Origin (PIOs) and expatriates employed in India under the Foreign Exchange Management Act (FEMA), 1999.  The committee will identify areas for streamlining and simplifying the procedure so as to remove the operational impediments, and assess the level of efficiency in the functioning of authorised persons, including the infrastructure created by them," the RBI said.  The banking regulator also invited comments and suggestions relating to forex transactions by individuals through post or e-mail by June 9, 2011. "The comments or suggestions could relate to deposit account, investment facilities, acquisition and sale of immovable property, remittance or repatriation of funds, remittance facilities for individuals or any other related procedural issue," the apex bank said.

Subbarao’s debt office view foxes North Block

New Delhi: RBI governor D Subbarao’s statement on Monday against an independent profile for the debt management office (DMO) has surprised finance ministry officials. The draft legislation to set up the office as an autonomous institution is already with the law ministry for vetting, though there is no decision yet on when it should be tabled in Parliament.  A source familiar with the developments said the RBI was involved at every stage of the plan for the DMO. “They have made their observations to the government in the course of the discussions.” The RBI, it is understood, has expressed its reservation, but “the government of India has made a decision”. Mandarins are accordingly puzzled the governor chose to go public on the issue when it was apparently sorted out. However, they refused to speculate on the development as a possible incipient turf war between the heads of monetary and fiscal policies in India. In Budget 2011-12, finance minister Pranab Mukherjee said he would introduce the debt management office Bill to handle the issuance of public debt. The RBI opposition could unsettle this promise as the standing committee on finance in the legislature could decide to stonewall the Bill in view of the differences. The DMO plan was first floated in Budget 2007-08, but got delayed over differences between the RBI and the finance ministry on the need for such an office. It was revived by Mukherjee. Once the Act is in place, the management of public debt including the floating of all government papers will be handled by the office. It will manage the registration of primary dealers and take a call on the types of papers the government should float in the debt market. When the Centre decides to float India’s debt papers abroad, the DMO will be very useful, say experts. It is expected that state government loans will also be eventually managed by the DMO. However, the government has given up its nascent plan to make the DMO a public sector entity to ensure greater control over its functioning. Rajiv Kumar, director-general of Ficci and eminent economist said he disagreed with Subbarao’s take on the DMO.  “It will optimise the performance of the debt portfolio of the government and minimise costs. The DMO is a promising idea that needs to be pushed,” he said. Government experts who have worked on the plan said the DMO will not harm the sovereign right of the finance ministry to set the quantum of market borrowing for the year in consultation with the RBI. Also, the borrowing calendar for the year, which is now issued with a six-month horizon, will also include RBI inputs. Since the draft of the Bill also envisages an RBI nominee in the board of directors of the new institution, the opposition from the central bank was difficult to understand, they said. Subbarao will, however, enjoy the support of state governments which feel the DMO will make them even more reliant on the Union finance ministry, at a time when they have to depend on market borrowing to meet their needs.

Subbarao's debt...

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RBI’s turf wars

RBI Governor D. Subbarao has, for the first time, explicitly and openly spoken against the government setting up its own Debt Management Office (DMO). The world over when central banks have modernised and moved their focus to monetary policy, they have got rid of conflicting objectives and additional responsibilities. And the government has proposed to set up its own DMO which would minimise the cost of its borrowing, go about it professionally, and do so without forcing banks to buy government securities in the statutory liquidity ratio environment. In his budget speech of 2011-12 the finance minister announced that it would be accomplished this year. Yet it seems the RBI would like to retain this job, regardless of whether this is the best allocation of responsibilities for the country or not.  This is especially disturbing in the present context. In the most recent credit policy, Subbarao had indicated that the RBI would conduct monetary policy with a focus on controlling inflation. The difficulty with the RBI’s present framework is that there are conflicting objectives. So, should interest rates be raised with a view to having an impact of monetary policy on inflation when the government has large borrowings and an increase would raise interest expenditure of the government? The moment the RBI says that it opposes setting up an independent DMO, it says more about the RBI’s priorities than raising the repo rate by 50 basis points does. It indicates that inflation control is not its top priority. In this scenario, it will be difficult for the RBI to change the public perception, as it tried to do with the credit policy announcement and the hawkish tone of the governor’s speech.  He suggested there should be a monetary policy committee structure and the RBI should have autonomy. In other countries, when this is so, it is part of giving the central bank a clear single mandate, often inflation-targeting, and then making it accountable for that mandate. Without accepting accountability, the RBI cannot realistically expect to be given autonomy. A public institution should be responsible to the people of India. A clear framework in which this system of accountability will work can pave the way for greater autonomy. However, today, the RBI has, barely a few days after its hawkish credit policy, quickly backed away from accepting responsibility for inflation and is back to fighting turf wars on the DMO. It is a pity, and it will unfortunately take credibility away from the RBI’s credit policy announcements. A monetary policy committee cannot compensate for lack of credibility.

Should the savings bank rate be deregulated?

The initiative will neither help banks nor borrowers since the cost of funds will rise, but it will provide greater scope for product innovation and service excellence.

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Rajeev Malik: Lower growth, higher inflation

The government finally appears to be in sync with the Reserve Bank of India (RBI) on the broader macro management. Fiscal dynamics have been a key factor in making the aggressive tightening in the current cycle less effective. The solution to that is not necessarily even more tightening – which may still be needed – but greater fiscal responsibility, as the long overdue increases in local fuel prices will finally show. Still, more fiscal adjustment is needed.
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Imposing policy discipline among nations may be tough: Duvvuri Subbarao, Governor, Reserve Bank of India

MUMBAI: Imposing economic policy discipline among nations may be elusive for many years as the fundamental analysis required to come out with an acceptable policy is not in place, Reserve Bank of India Governor Duvvuri Subbarao said. Enforcement of policies will also be difficult.  "It is far too early to think of reaching new formal international agreements on policy behaviour," Subbarao had said at the SNB-IMF Conference on The International Monetary System, Zurich. "Instead, countries will prefer to proceed through more exchange of information, peer review processes and ad-hoc international agreements, depending upon the situation prevailing at any point of time," he said. Economic policies practiced by countries have begun to differ widely in the last few months, compared to the 'co-ordinated action' chorus that was advocated during the credit crisis when central banks pumped in liquidity in an unprecedented way and cut rates to as low as zero. With the crisis behind and the outcomes of loose monetary policies varying between countries, leaders may not agree to a common policy. While the West may still need an easy policy, emerging nations may have to make funds expensive to rein in prices. "Developing consensus on a code of discipline will be challenging," said Subbarao, while speaking on a topic 'Policy Discipline and Spillovers in an Inter-Connected Global Economy'. There's difficulty, "in reaching international agreement just in the specific field of financial regulation. It will be even more difficult to reach a consensus on broader economic policy,'' he said.  The two major disruptions in the global economy in the recent past have been the so-called Quantitative Easing 2, or printing currency by the US, and the undervalued currencies in some countries. China has been accused by the US and others of keeping its yuan undervalued to export more. That is hurting producers in other nations.  Global economic analysis that focuses on trade alone to assess the impact of policies in various nations itself is flawed, said Subbarao. Econometric models are not factoring in events such as the financial crisis, tech bubble burst and such developments are making any international consensus difficult.  "Recent experience shows that our understanding of the nature of these linkages is seriously deficient," said Subbarao. "In fact, standard econometric models still suggest that shocks in one country have very small effects on others. They do that because they assume that trade is the primary channel for transmitting these shocks across countries, and trade moves in line with GDP."

RBI lobs inflation into govt's court - S.D.Naik

While the RBI has cracked down decisively against inflation, the Finance Ministry needs to work more on fiscal consolidation. In its Monetary Policy Statement for 2011-12, the Reserve Bank of India has come out boldly and decisively in its battle against raging inflation. For the first time over the past one year, inflation control has received precedence over growth. With inflation showing no signs of abating, the RBI now seems reconciled to sacrifice some growth in the short run. It is now for the government to take the RBI's cue.  Earlier, many commentators had said that the RBI continues to remain behind the curve in raising its policy rates by 25 basis points at a time even as inflation continued to surge ahead. Admitting that headline and core inflation have overshot even the most pessimistic projections over the past few months, the RBI has now opted for a decisive change in stance, according top priority to inflation control. According to RBI Governor Dr. D. Subbarao, the monetary policy trajectory that is being initiated is based on the following basic premise: Over the long run, high inflation is inimical to growth as it harms investment by creating uncertainty.  Announcing the changes in the operating procedure of monetary policy, the central bank has stated that henceforth there will be only one independently varying policy rate, and that will be the repo rate.  This has been done to more accurately signal the monetary policy stance. The reverse repo rate will be automatically pegged at 100 basis points below the repo rate. Also, a new Marginal Standing Facility (MSF) has been introduced. Banks will be able to borrow overnight from the MSF up to 1 per cent of their respective net demand and time liabilities (NDTL) at an interest rate that will be 100 basis points above the repo rate. This is intended to ensure that the banks do not face any sudden liquidity crisis. The repo rate has now been raised by 50 basis points from 6.75 per cent to 7.25 per cent. In a more significant change, it has been decided to raise the interest rate on savings deposits from the prevailing 3.5 per cent to 4.0 per cent with immediate effect. This could be interpreted as a precursor to deregulating this rate in the coming days. This rate had remained unchanged since March 2003 even as the real interest rate turned negative by a big margin because of the high rate of inflation.  Because of high oil and other commodity prices and the impact of the anti-inflationary monetary stance, the RBI expects the real GDP growth during 2011-12 to moderate to around 8 per cent from the estimated 8.6 per cent in 2010-11.  With regard to the WPI-based inflation, the RBI expects it to remain at an elevated level in the first half of the year, before gradually moderating to six per cent by March 2012 with an upside bias. Persistence of high international crude prices as also the prices of other commodities could keep the inflation rate at a much higher level. Moreover, the rate hike of 50 basis points and the increase in the savings bank will increase the cost of funds of the banking sector. This, in turn, will force the banks to raise their lending and also the deposit rates. For ensuring the efficacy of the aggressive monetary policy stance , there is a need for complementary action by the Finance Ministry aimed at fiscal consolidation. Unfortunately, the Centre's fiscal situation continues to remain worrisome. To add to the problem, the fiscal consolidation process that was witnessed in most States during the four years from 2004-05, has taken a turn for the worse during the past couple of years with economic slowdown following the financial crisis. The problem was further accentuated with the implementation of new pay scales recommended by the Sixth Pay Commission. The surging crude oil prices have seen the subsidies on petroleum products zoom to unprecedented levels.  At current prices, the oil marketing companies (OMCs) have been losing about Rs18.19 a litre on diesel, Rs29.69 a litre on PDS kerosene and Rs329.73 per LPG cylinder of 14.2 kg. The OMC's losses are estimated at Rs1,80,208 crore during the current fiscal. Not surprisingly, the RBI has recommended an immediate hike in fuel prices.

Concerns of capital inflows less acute in India: Subbarao

Reserve Bank of India (RBI) Governor D Subbarao said the concerns of capital inflows in India due to the interest rate differential were less severe than other emerging market economies. This is because capital inflows helped India to finance its capital account deficit. He, however, conceded volatility remained a concern. “Yet, even for us, the composition of the inflows remains an issue. About three-quarters of the current account deficit since 2009 has been financed by volatile capital inflows,” he said.  In August 2010, the US Federal Reserve had announced its plan to buy $600 billion worth of government securities in the second round of quantitative easing. This could have had a significant negative impact on emerging market economies, said Subbarao. He said the quantitative easing also seemed to contribute to rising global commodity prices, which intensified inflationary pressures. “This combination has put some emerging market economies in a policy bind, since rising inflation necessitates tighter monetary policy. However, higher interest rates would only intensify volatile capital inflows, potentially putting more pressure on exchange rates and domestic stability,” he said.  He added while the quantitative easing contributed to a stronger and more durable recovery in the US, it also benefited emerging market economies, including India. While addressing the Swiss National Bank- International Monetary Fund conference on the international monetary system in Zurich today, the RBI governor said there was a need to develop a proper framework for analysing linkages among economies. “We cannot do this by using current trade equations and attributing all the other spillovers to exogenous financial shocks. We need a deeper, truer, understanding of the channels and mechanisms that link our economies together,” he said. In order to deal with spillovers, Subbarao said there could be policy agreements through which countries could abandon policies that create negative spillovers, in exchange for other countries taking policy action with positive external spillovers for them. “Designing such deals and getting countries to agree to them, however, would remain a major challenge,” he said.  He added RBI did not intervene in the foreign exchange market since the last two years. “This policy has served the economy well, since it allowed the exchange rate to serve as a buffer, depreciating to help the economy when it was weak and appreciating to reduce excess demand when it was strong,” he said. The RBI governor also said India’s policy was subject to negative externalities from countries that maintain undervalued exchange rates, undermining competitiveness in third markets and efforts to contain the current account deficit.

For a good central bank

The Economist once wrote that the only good central bank is the one that can say no to politicians. On Monday, the cautious D. Subbarao, governor of the Reserve Bank of India (RBI), came as close as he could to saying that. In his comments at the meeting of the central bank governance group in Basel, Subbarao, among other issues, argued for creating a formalized monetary policy committee (MPC) architecture. The situation today is that while the governor is advised by a technical advisory committee, the final call on setting the policy rate is his alone to make. A proper MPC—which should include the governor, the four deputy governors along with outside experts—would give binding advice on setting of policy rates to the governor. The RBI chief said a precondition for this was to get legally backed autonomy for the central bank, something that the RBI Act 1934 does not provide.  While RBI’s ability to steer independent monetary policy is, by and large respected, there is, however, a catch. Between the arm-twisting by the Union government that the RBI Act enables and legally backed autonomy, there is a wide and opaque space for jousting between the government and the bank. The exact balance depends on circumstances. This is hardly the stuff of rule-based monetary policymaking. The case for independent central banking rests on one fundamental economic reality: in the long run, there is no trade-off between inflation and growth. And the conclusion is that there is no case for political decision making in this domain. In India, there is disbelief among politicians that this is so. It is only for the past 14-15-odd years that the central bank has been allowed to set policy rates without extraneous considerations. Left to their devices, finance ministers would stitch together a patchwork of short-term trade-offs between growth and inflation and call it policymaking. With frequent elections at the state and Central levels, this can only lead to economic chaos and it has for long. So far, the Union government has never seriously implemented rule-based fiscal policy. The Fiscal Responsibility and Budget Management Act was jettisoned at the first opportunity in the name of crisis management. If, however, the central bank were to have an MPC framework with formal autonomy, things could change. Once the central banks set policy rates only with a view to fighting inflation, it could potentially nullify the gains the governments hope to make politically by reckless spending. The short-term growth inflation trade-offs could become history. The Union government is unlikely to listen to Subbarao, but a future reform-minded government could well undertake the necessary steps.

The inflation genie is still out of the bottle in emerging markets

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Now, Sangli bank gets notice from NABARD

Days after the board of directors of Maharashtra State Cooperative Bank was superseded by the Reserve Bank of India (RBI), yet another bank — Sangli District Central Cooperative Bank (SDCCB) — has come under a cloud. The National Bank for Agriculture and Rural Development (NABARD), on Monday sent a notice to SDCCB seeking clarification on wrong loans leading to the bank’s negative net worth.  In its audit report for 2008-09 and 2009-10, NABARD observed that SDCCB’s credit had exceeded its deposits. The bank had offered loans worth Rs 168 crore to three cooperative sugar factories — Vasantdada, Manganga and Mahankali — even though these institutions had their loan accounts in “short margins”, meaning default.  Action against SDCCB came four days after RBI appointed administrators over MSC bank, which is the principal funding agency for all district cooperative banks in the state. Instead of showing those loans as non-performing assets (NPA), the SDCCB showed them as ‘profit making’ in its accounts. The NABARD in its notice under section 11 (1) asked bank directors to reply within 30 days. The bank and the three sugar factories, to whom it has given loans, are largely controlled by NCP and Congress leaders. NABARD has also observed that the bank wrongly allotted 5% dividend to its member credit societies. SDCCB chairman Dilip Vagyani termed NABARD’s action “politically motivated”. Vagyani and other SDCCB directors said NABARD should have referred to bank accounts of 2010-11 instead of the previous two years.  “Accounts of the latest year show that our bank has recorded profit worth Rs 18 crore. NABARD’s hasty action only suggests it was done on other grounds,” Vagyani said. The bank directors have decided to appeal against the notice before the central finance secretary. Meanwhile, deputy chief minister Ajit Pawar said, “When I go to Mumbai I will check all account related documents of the bank and will talk to chairman Manikrao Patil as there have been contradictory reports about its condition.”  Pawar and his party criticised the Congress for the RBI’s decision to supersede the bank, terming it a “political move”. Responding to allegations, chief minister Prithviraj Chavan said in Solapur that the state cooperative bank does not belong to any particular party.

RBI failure cause of reduction in India’s growth to 8%, China leads at 9.5

The International Monetary Fund has revised the growth projection of Asian countries. It has projected a downward trend of Indian’s growth for 2011 to around 8% owing to high inflation and overall global economic turmoil created due to rising prices of commodity goods and oil. Anoop Singh, the director of Asia Pacific department of International Monetary Fund stated on May 9th that as new downside risks have emerged across the globe and particularly in Asia Pacific economies IMF have revise downwards the growth for the region and also for India, where the growth momentum would be reducing to around 8%. On the other hand, China is expected to lead the rest of the region by growing at 9.5%. This announcement was made while presenting the latest reports of IMF on the Regional Economic Outlook for Asia and Pacific -Managing the Next Phase of Growth to the officials of Reserve Bank of India. This news comes as another slap on the face of Reserve Bank of India, who has been annoyingly failing to control the growing Inflation in the country. There is no doubt that the lower growth projection of the country is due to RBI’s step of excessive increase in interest rates, that too repeatedly in the last fiscal. For instance, the RBI has raised interest rates by 50 basis points recently, almost double of what the market was expecting. This was not only excessive but such continuous hike in interest rates by RBI is now proved to be uncalled for and it is evident that the government has failed to understand the root causes of inflation. The RBI has evidently come up with the wrong tackling solutions for tackling inflation and the growth rate projected by IMF has now showed the dark side of RBI’s wrong decisions.

Govt starts process to choose next SBI managing director

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India, Pak Mull Banking Facility for Cross Border Trade

Governments of India and Pakistan are considering a scheme formulated by the Reserve Bank of India for providing banking facility to cross Line of Control (LoC) trade in Jammu and Kashmir, a senior state minister said. Minister for Finance Abdul Rahim Rather told a delegation of Cross LoC traders that the State Government is very keen to give a big boost to the trade between the divided parts of the state, for which all the required measures are being taken. Rather referred to Government initiatives taken for establishing of Bank transaction facilities for the conduct of cross LOC trade through banking transactions. "RBI has already framed a comprehensive scheme which is under consideration of the Governments of India and Pakistan. Once the scheme gets the nod, the Banking facilities would be put in place as per the urges and aspirations of the traders," he said.  The Minister said the traders from other side of the LOC in Pakistan-occupied Kashmir are also keen to have the trade through Bank transactions. "The facility would take over the place of existing barter system of trade, which has various inherent problems concerning the traders’ community," he said. The Minister expressed hoped that respecting the aspirations and expectations of traders in PoK, Government of Pakistan will also take all facilitating steps for promoting this bilateral trade. Rather said the State Government has been interacting regularly with the Centre for including more items in the existing trade itinerary wherein only 21 items have been notified for transaction from Jammu and Kashmir State. Responding to the pleas of the traders, the Minister said legally and constitutionally the cross LOC trade is an intra-State trade.