Most of the discussions on the Reserve Bank of India's (RBI) 'Discussion Paper' on deregulating the interest rate paid by banks on savings deposits have focused on the micro level; on what deregulation could mean for individual savers and borrowers. There has been virtually no discussion on what deregulation could mean for the safety and stability of banks. Yet, the final verdict on whether this is the right time for deregulation hinges critically on the second rather than the first. As far as the impact on individual savers and borrowers is concerned, opinion is unanimous that deregulation will spell the death-knell of the present system of a uniform, administered rate that bears little relation to underlying demand-supply conditions. Not only will rates be more market-related, they will also vary from bank to bank, depending on each bank's needs and strategy. To the extent rates will move up and down, as with any market-related rates, for savers there is trade-off between an assured (if low) rate of return and one that could, theoretically at least, be almost as volatile as the stock market. So, in situations of tight liquidity, savings bank depositors could see the interest rate on their deposits go up and when liquidity is plentiful, rates could fall, other things remaining constant. The problem is liquidity is not only a function of borrowers' demand for funds; it is also a function of the central bank's management of liquidity. So, in situations like in most of 2009 and 2010, when the RBI chooses to keep the system flush with liquidity, interest rates might not reflect the true supply-demand imbalance. Consequently, there is no certainty that deregulating rates will necessarily give savers a better deal. But yes, to the extent the savings bank (SB) deposits interest rate is the only regulated rate and has remained unchanged at 3.5% since March 1, 2003 even as the RBI's policy rates have moved up and down over time, there can be no case for continuing with an administered interest rate. Moreover, savings deposits account for about 13% of financial savings of the household sector. Presumably, deregulation will improve monetary transmission. In the present context, it will raise both real and nominal rates. It will also encourage product innovation as banks will try to compete, not only on rates, but also on productdesign as, for instance, by offering differentiated rates depending on the size of the deposit (something they are not allowed to do at present). International experience too suggests there are gains to be had from deregulation. In Hong Kong, for instance, interest rate deregulation increased the efficacy of monetary policy by improving the correlation between retail bank deposit rates and market interest rates. Besides, savings rates are not regulated in developed markets (though there are usually strict limits on the number of transactions permitted ). Thus, the theoretical arguments for deregulation are sound. What is less clear is whether these gains, both at the micro and at the macro level, will be outweighed by the fallout of deregulation on the composition of banks' deposits. Will the resultant volatility in savings bank deposits (that constitute a significant part of a bank's 'core' deposits) increase the vulnerability of banks, given their relatively large exposure to long-term loans? The reality is many banks have used short-term funds like savings deposits to make long-term loans, confident in the belief that these are 'core deposits' that will not be withdrawn. Never mind that, on paper, these are deposits that can be withdrawn on demand. That belief was not without basis in a scenario where a low and uniform rate of interest made savers 'lazy'. But deregulation could change that. Once banks begin to compete for funds based on interest rates, these deposits lose their 'core' element. This could jeopardise the safety of banks by widening the maturity mismatch between their assets and liabilities. The discussion paper does raise this issue but is confident the downside is limited. But with savings bank deposits accounting for 22% of total deposits of scheduled commercial banks, we could be skating on thin ice. Deregulating the SB interest rate could see substantial swings in savings bank deposits in individual banks in response to interest rate changes. Banks will be hard put to determine what is 'core' and can be used to make long-term loans and what is 'fleeting' and not to be lent for longterm purposes. It is significant that the share of term loans has increased during the period 2000-09 even as the share of term deposits has come down, suggesting maturity mismatches have widened during this period. The ball is, therefore, in the RBI's court. As banking sector regulator, if it feels the fallout in terms of maturity mismatches will not derail banks, it should go ahead. But not unless it is very sure! Else it should bide its time.
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 16, 2011
Veteran TT
Guwahati: The Indian Veteran Table Tennis Association has selected Gagan Choudhury of RBI Guwahati for the 3rd Asian Veteran Table Tennis Championship at Pattaya, Thailand, from May 25 to 29.
Be innovative to compete conventional banks, experts urge Islamic financial institutions
New Delhi: “In order to create a comprehensive and robust financial system, Islamic financial institutions need to be innovative and focus on developing Venture Capital (VC), private equity and alternative investments. This will create an industry with a niche that is capable of competing with conventional banks, with the added value of shared wealth for the society. It is hoped that Islamic VCs will play a major role in developing Muslim countries”. The above observation was made by Mr. Khaled M. Al-Aboodi, CEO & General Manager of Islamic Corporation for the Development of the Private Sector (ICD), Jeddah while speaking as a guest speaker at the inaugural session of the New Delhi based Institute of Objective Studies, (IOS), two-day International Conference on "Prospects for Islamic Venture Capital Funds in India" which began here on Saturday at the Parliament House Annexe. The International conference is the part of the Silver Jubilee celebrations of IOS. Continuing Mr. Al-Aboodi said the beauty of Islamic Finance is that it is a constitutionally developing and evolving industry, with new and innovative financial instruments and hybrid products being developed to fit particular business models, industries and countries, creating an edge over conventional products. He said this is the best divine alternative economic system available before the world and in which ever country this system is in vogue the recent economic meltdown has not affected its economy. While in comparison to this interest-based conventional banking institutions have become victims of bankruptcy and the world is in the grip of worst economic crisis, he pointed out. Mr. K. Rahman Khan, Deputy Chairman, Rajya Sabha who chaired the inaugural session in his presidential speech, while emphasizing the advantages of Islamic banking, said that it has originated from the Holy Qur’an which is not religious book of Muslims alone but for the whole humanity as it is a book of guidance for one and all. Mr. Khan said that in every economic transaction four things should be kept in mind viz. (i) justice, (ii) equilibrium, (iii) truth and (iv) fairness. Any transactions which complies with these four principles as enunciated by the Holy Qur’an then it will ensure well being, peace and harmony among the people which is the hallmark of a good society. The Holy Qur’an has stated that none should be exploited and Islamic banking takes care of this. However, the conventional banking system fails to grow and assist the poor who are thus exploited at the cost of the rich people in society, he added. Mr. D. R. Mehta, former Chairman, SEBI and Dy. Chairman, RBI, Jaipur, while delivering inaugural address said that if India has to progress then Islamic Venture Capital Funds, (IVCFs), has to be launched in the country as Malaysia and other countries are successfully experimenting with it. In India the prospects for IVCFs are very bright and it should be developed for different sections of society, he added. Dr. Mohammad Manzoor Alam, Chairman IOS, while speaking a few words on the occasion said that responsibility and prudence, to be precise, are essential features of Islamic finance including Islamic Venture Capital. He said IVCF is an increasingly visible component of the capital fund scene globally. It has extraordinary potential to be of use in India’s expanding economy over the years, he added. Prof. Z.M. Khan, Secretary General IOS, threw light on the Introduction of IOS and its Silver Jubilee year. Dr. Ausaf Ahmad, Finance Secretary IOS, delivered the welcome address while Mr. Ravi Kishore, Secretary General, Indo-Arab Economic Cooperation Forum, New Delhi proposed vote of thanks. Meanwhile, two panel discussions were held on the first day after the inaugural session. The theme of the first panel discussion was "Global Trends in Venture Capital and Private Equity, (VCPE),". It was chaired by Dr. Rudy Yaksick, Partner, Concord Capital Partners LLC, USA; The panelists were Prof. R. J. Masilamani, Professor, Institute of Management Studies, Ghaziabad; Dr. Ashok Haldia, Director, PTC India Ltd., New Delhi; Dr. Ausaf Ahmad, former Head, Special Assignment, IDB, Jeddah, & Finance Secretary, IOS; Prof. Ali Shervani, Director, Miftah Advisor, New Delhi; and Mr. Ravi Kishore, Secretary General, Indo-Arab Economic Cooperation Forum, New Delhi. The second panel discussion was on the theme "Venture Capital Funds in Islamic Perspective (I)". It was chaired by Dr. Ausaf Ahmad, Former Head, Special Assignment, IDB, Jeddah, & Finance Secretary, IOS. The panelists were Dr. Javed A. Khan, Associate Professor, Centre for West Asian Studies, Jamia Millia Islamia, New Delhi; Mr. M. H. Khatkhatay, Founder, TASIS, Mumbai; and Mr. Arshad Ajmal, CEO, Sahulat Microfinance Society, Patna.
Rangarajan favours law-backed autonomy for RBI
NEW DELHI: Chairman of the Prime Minister's economic advisory panel and former RBI chief C Rangarajan has strongly supported Reserve Bank Governor D Subbarao's demand for law-backed autonomy to the central bank. "I think we really need to move towards a situation in which the central bank of the country acts according to what it considers to be the right thing to do. Therefore, autonomy for the RBI is a good thing and we should work towards it", Rangarajan, Chairman of the Prime Minister's Economic Advisory Council (PMEAC) told PTI. However, he said the RBI autonomy should be "reconciled" with the Finance Minister's accountability to Parliament. "The Finance Minister is ultimately responsible for management of the economy. Therefore, we need to work out an arrangement by which the responsibility of the Finance Minister towards Parliament and the autonomy of the central bank are reconciled", Rangarajan said. Subbarao recently pitched for a legally-backed formal autonomy for the apex bank to be able to deal more effectively with monetary issues, while maintaining that the Government has not interfered so far with the Reserve Bank's functional autonomy. "...the central bank should be given legally-backed, formal autonomy", Subbarao said while addressing a meeting of the Central Bank Governance Group in Basel, Switzerland. Although the RBI Act empowers the Government to give directions to the central bank in public interest, the Centre has thus far refrained from doing so.
Co-operative Banking Revolutionary John D'Silva Turns 75
Mumbai, May 15: Born and brought up in a village in Karkala, he turned out to be the man who revolutionized the co-operative banking movement in his young age. He was the pioneer behind the founding of four co-operative banks, and now he is approaching his platinum year. John D’Silva will turn 75 on Monday May 16. D’Silva was born on May 16, 1936, in an agrarian family to Anthony and Remedia D’Silva in Sanoor village in Karkala taluk of Karnataka. He was one of six sons and a daughter and was used to tough times in his early childhood. John D’Silva is now settled in Dadar (West) and also owns John Farm House in his hometown Kuntalpady in Karkala which he has developed from his love for conservation of nature. After his early studies at St Joseph’s School in his hometown, D’Silva attended classes at SVT School located in Karkala. He also had to work in his family’s farm early morning every day. His thirst for knowledge was abundant and the free meals from the temple were a boon to rural youth like him. D’Silva migrated to the metro, like his elder brother, to study further. He was working during the day at his brother-in-law’s shop and completed Class X by attending evening classes at Karnataka Free Night School. He joined government service and secured a B A from Jai Hind College, and B Com from R A Poddar College. D’Silva, armed with degrees, joined Glaxo Pharmaceuticals. He was interested in social service which was a childhood dream. First of all, he had set up a school in his neighbourhood of Abhyudaya Nagar, in 1962. When this reporter asked him how he got this vision, he said, “Life struggles teach memorable lessons”. D’Silva is the chief promoter and first managing director of Abhyudaya Co-operative Bank, promoter and first managing director of New India Co-operative Bank, chief promoter and first chairman of Citizen Credit Co-operative Bank, and chief promoter and first chairman of Model Co-operative Bank. He is serving as the chief promoter and first chairman of Brahanmumbai Nagari Banks’ Association, promoter and founder director of Maharastra Urban Co-operative Banks’ Federation, director of National Federation of Urban Co-operative Banks and Credit Societies, New Delhi, advisory committee member of Reserve Bank of India (RBI) Agriculture Banking College, visiting professor at RBI Agriculture Banking College, president of Lokamitra Sahakari Mudrana Prakashan, honorary secretary and governing council member of Indian Banks’ Association, founder secretary of Banks Sports Board of Indian Banks Association, chairman of RBI committee on extension of Bombay Bankers’ Clearing House, and founder secretary of Abhyudaya education institutions. D’Silva is also actively involved as chief editor of Co-operative Bankers’ handbook, chief editor of Urban Banks All India directory, chairman of Mangalorean Catholic Education Co-operative Credit, chairman of Fudar Foundation, as well as founder director and deputy secretary of Christian Chamber of Commerce and Industry (CCCI and vice president of Konkani Bhasha Mandal Maharastra. He has bagged the ‘Entrepreneur of Year – 2005’ award by Rachana, Mangalore, ‘Lifetime achievement Award – 2008’ by Bangalore-based Federation of Konkani Catholic Association, and ‘Top Achiever’s Award – 2008’ by Dr T M A Pai Foundation, Manipal.
Align tech with business strategy: Anand Sinha
Hyderabad May 16, 2011: Reserve Bank of India (RBI) Deputy Governor Anand Sinha asked the bankers to align technology strategy with business strategy in a disciplined way to balance value creation with IT capabilities. Addressing a two-day seminar on IT governance in banks here on Saturday, Sinha said IT strategy and related processes should be in consonance with business goals as IT governance largely depended on corporate governance. Among others, technology tools have a role in reducing the cost of banking services, particularly in the rural and unbanked areas in the context of financial inclusion, he said. Adoption of appropriate IT solutions for moving toward acquiring information from the customer- centric perspective along with product-centric perspective would place the banks at a competitive advantage, according to him. B Sambamurthy, Director, Institute for Development and Research in Banking Technology (IDRBT), which organised this first-ever conference for directors of various banks in the country, stressed the need for having good measures, tools, frameworks and guidelines to evaluate IT governance in banks. Former RBI Governor Dr.Y.V. Reddy, who inaugurated the seminar, asked the bankers to draw lessons from the global financial crisis, especially from the perspective of governance.
Why SBI pays so much for short-term cash?
It’s fairly certain now that the Reserve Bank of India (RBI) will soon deregulate the savings bank rate, the last relic of mandated rate regime in the Indian financial system. Just a few days after circulating a discussion paper on the pros and cons of savings bank deregulation and inviting comments from various quarters, the central bank raised the savings bank rate by half a percentage point in its annual monetary policy early May.
How the process started
The process of deregulation of interest rates was resumed in April 1992 when the existing maturity-wise prescriptions were replaced by a single ceiling rate of 13 per cent for all deposits above 46 days. The ceiling rate was brought down to 10 per cent in November 1994, but was raised to 12 per cent in April 1995. Banks were allowed to fix the interest rates on deposits with maturity of over two years in October 1995, which was further relaxed to maturity of over one year in July 1996. The ceiling rate for deposits of 30 days and up to one year was linked to the Bank Rate less 200 basis points in April 1997. In October 1997, deposit rates were fully deregulated by removing the linkage to the Bank Rate. Consequently, the Reserve Bank gave the freedom to commercial banks to fix their own interest rates on domestic term deposits of various maturities with the prior approval of their respective board of directors/asset liability management committee (ALCO). Banks were permitted to determine their own penal interest rates for premature withdrawal of domestic term deposits and the restriction on banks that they must offer the same rate on deposits of the same maturity irrespective of the size of deposits was removed in respect of deposits of Rs.15 lakh and above in April 1998.
Liquid logic
Savings accounts need not be your only address to park liquid funds. MFs can be a better bet, says Srikumar Bondyopadhyay.
Micro-reforms
With reference to your editorial “Back on the rails” (May 11) the new microfinance rules framed by the Reserve Bank of India are certainly a good step towards bolstering the system. But there are many concerns for the rails of micro-finance in India to run smoothly and become “win-win” for all stakeholders. First, something should be done to increase awareness regarding microfinance opportunities and develop a culture of repaying loans on time. Second, it is timely and adequate microfinance that is important for the people who need it and this should be facilitated. Third, keeping the repayment period within a year is not enough to stop finance being diverted to consumption. An optimum mechanism should be developed to monitor the end-use of microfinance. Allowing a repayment period of two years is reasonable and would be useful for the people who need it.
Raman Kumar Agrawalla, BhubaneswarRBI tells banks to cut liquid MF exposure
MUMBAI: The flow of money from banks into liquid schemes could be lower than what asset management companies have estimated, if a rule capping lenders' investments in this mutual fund product becomes effective later in 2011. The Reserve Bank of India (RBI) has advised banks, specifically ones which own mutual funds, to keep investments in liquid funds "well below" the new limit of 10% of their networth after October, said two people familiar with the matter. This will force banks to focus more on raising funds through individual fixed deposits and mutual funds to turn to retail clients to build assets under management. Banks have been accused of sharing a cosy relationship with mutual funds to meet their money requirement. Capital markets regulator Securities and Exchange Board of India has repeatedly pushed mutual funds to build a business based on retail portfolios rather than institutional money. An RBI official is said to have conveyed the central bank's thinking to top bank executives soon after it announced this investment restriction in its monetary policy review on May 3. Though the RBI did not specify the extent to which banks need to bring down their investments in liquid schemes, executives are interpreting the unofficial "limit" as 5-6% of lenders' networth, said a banker familiar with the matter, requesting anonymity. "It would be ideal that they (banks) maintain their holding within the 10% mark or level," said a source. The RBI is said to have also told bank officials to cut exposure to liquid schemes in a phased manner over the next five months rather than redeem the entire amount just before the new limit comes to effect. An email query to RBI on this matter did not elicit a response. The revised investment limit will be based on the banking industry's total networth on March 31, 2011. The mutual fund industry estimates banks' total networth on this date between Rs 3 lakh crore and Rs 4 lakh crore. At 10% of the networth, banks' money flow into liquid schemes will be capped at Rs 30,000-40,000 crore after October. Currently, banks' investments in liquid schemes is about Rs 90,000 crore, fund managers said. If banks decide to cap the investments in liquid schemes at 5% of their networth, the mutual fund industry may end up getting only about Rs 15,000-20,000 crore. Total assets under management was Rs 7.85 lakh crore on April 30. "The message is very clear. RBI wants banks to keep exposure to liquid schemes to the minimum and wants to break the comfortable dependence that banks and mutual funds enjoyed," said a top mutual fund industry official, aware of the development. Banks park their surplus money in liquid schemes, which invest in debt securities of duration less than a year, including certificates of deposits issued by banks, commercial papers from companies, treasury bills and the collateralised lending and borrowing obligation (CBLO) market, for quick returns. These funds, in turn, lend to banks in the overnight CBLO market. Mutual funds are also among the major investors in certificate of deposits. "Such circular flow of funds between banks and DoMFs (debt-oriented mutual funds) could lead to systemic risk in times of stress/liquidity crunch. Thus, banks could potentially face a large liquidity risk," RBI said in the circular on May 3. Among top banks in the country, State Bank of India, ICICI Bank, Axis Bank, Canara and Punjab National Bank, among others, have mutual fund subsidiaries.
National Banking Conclave - Challenges and opportunities in a Trillion Dollar Economy
With the expansion of Indian economy at around 8%+ p.a., the growth in banking business is around three times. This indicates the huge opportunities that lay in front but it also comes with larger challenges for a safe secured and orderly growth. To discuss all related issues including Risk mitigation, Financial Inclusion, Managing NPAs, Enabling Regulation, Flow of Credit to infrastructure sectors, Entry of new banks in private sectors etc. ASSOCHAM is organising a National Banking Conclave “Challenges and opportunities in a Trillion Dollar Economy“ at 09:30AM, Friday, 17 June 2011, Hotel Shangri-La, New Delhi. It’s also heartening to inform you that Hon’ble Minister of Finance- Shri Pranab Mukherjee and Dr. K C Chakrabarty, Dy. Governor, Reserve Bank of India have kindly consented to grace the inaugural session.
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