Agartala, May 17, 2011 : Tripura is all set to have first sub office of the Reserve Bank of India (RBI) at Agartala in North-eastern region, RBI officials said here today. RBI Regional Director Ms Surekha Marandi told media that Dr D Subbarao, Governor of RBI, would inaugurate the new RBI sub office at Agartala on Wednesday. For the first time RBI will also hold its Board of Directors’ Meeting at Agartala with its Governor, four Deputy Governors and Finance Secretary along with luminaries from the country’s trade, industries and accounting profession on May 19 next, she stated. On this occasion RBI to hold 10 days photo exhibition - Mint Road Milestones- on Wednesday at Agartala Press Club. The exhibition would depict milestone events in the evolution of the RBI over last 75 years, she added.
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Wednesday, May 18, 2011
RBI employees demand national consensus on DMO
Kolkata, May 17 (PTI) The Reserve Bank Employees Association has demanded a national consensus on the proposal of setting up a Debt Management Office. "We strongly urge for a national discussion and consensus before taking a hasty decision by the Finance Ministry for DMO," Association''s General secretary Samir Ghosh today said. He said the RBI Governor had also opposed the plan to set up the independent debt management office. Ghosh said if the debt management is taken out of RBI, then weak states would find difficulty in raising resources.
Rangarajan favours separate Debt Management Office
NEW DELHI: Joining the debate over hiving off the debt management activities of the Reserve Bank, Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan has favoured setting up a separate Debt Management Office (DMO) under the aegis of the central government. "There are many countries in the world where the public debt office is managed only by the government. Therefore, even here, the Reserve Bank can continue to play its role as a monetary authority, without having the DMO under it," the PMEAC chief told PTI. The Reserve Bank has opposed setting up a DMO under the Union government to manage sovereign debt, saying only the central bank has the requisite expertise to manage market volatility. "Only central banks have the requisite market pulse and instruments to aid in making contextual judgements which an independent debt agency, driven by narrow objectives, will not be able to do," RBI Governor Duvvuri Subbarao said at a meeting of the Central Bank Governance Group in Basel. However, Rangarajan, a former RBI Governor, said times have changed and the government could take up the job if it is "adequately prepared to undertake that function". He said that earlier, the government required the helping hand of the RBI to enable it to raise the required amount, because prior to 1991, the borrowing rate of the government was well below the market rate. "But things have changed since then... According to the Fiscal Responsibility and Budget Management (FRBM) Act, the RBI is not supposed to be in the primary market," he said. The government has proposed to set up an independent Debt Management Office, aimed at separating the RBI's roles as the decider of the interest rate in the market and being the banker to the government. At present, both the government's debt and fresh borrowings are managed by the central bank. In his 2011-12 Budget speech, Finance Minister Pranab Mukherjee had mooted the proposal to introduce the Public Debt Management Agency of India Bill.
Managing debt
It is tempting to interpret Reserve Bank of India Governor Duvvuri Subbarao’s recent statement questioning the need for setting up an independent debt management office as an early indication of yet another turf war between the monetary policy authority on Mumbai’s Mint Road and the fiscal policy authority in Delhi’s North Block. The two authorities have not seen eye to eye in the recent past on many other issues including the one that led to the creation of the financial stability and development council or FSDC with the finance minister as its chairperson. The finance ministry under Pranab Mukherjee was keen on setting up the FSDC that would undertake macro-economic supervision of the economy along with co-ordination among all financial sector regulators. However, the RBI had expressed its opposition to the proposal arguing that the new council could undermine its autonomy. The finance ministry had responded by agreeing to make the RBI governor the chairperson of the only sub-committee created under the Council, and subsequently also the vice chairman of the inter-regulatory co-ordination committee. The difference this time is that the idea of creating a debt management office or DMO is several years old and is rooted in strong economic logic. The central bank ideally should not undertake the responsibility of managing the government’s debt issues and this job should vest with an independent body. Moreover, the proposal, first mooted in 2007, has crossed several stages and the finance ministry will soon place a legislative bill in Parliament. To raise questions over the need for creating a separate debt management office at this stage, therefore, can draw the charge that the RBI is merely worried about losing its power over this function, not mindful of what clearly should be a better and more effective system. On the other hand, however, the central bank has good reasons to feel worried over the loss of its debt management functions to an independent body. One, it has a few thousand employees who are now engaged in managing the debt issues for the government. Transferring this function to a new body will thus pose a formidable human resources challenge. Two, if indeed the debt management functions should not vest with the central bank, the government must ensure that the new body is sufficiently empowered to function independently and not merely as an extension of the finance ministry. Three, in light of the recent surge in the government’s fiscal deficit, the finance ministry should consider reviewing the logic and relevance of creating an autonomous debt management office. The finance ministry, after all, had mooted the idea of an independent DMO, when the government’s fiscal deficit was on a decline. However, with a rising fiscal deficit, there is perhaps need to retain for some more time the government’s debt management functions with the central bank, which has undertaken this responsibility with fair competence so far. Finally, the central bank is a federal institution that occupies a neutral position between the Centre and states. Given the debt requirements of states, in an era of diverse political parties running state governments, debt management should vest with RBI rather than a central institution. While the idea of an autonomous debt management office is good, these issues cannot be brushed aside. So, better to place the proposal on the backburner for now.
It’s ‘us’ versus ‘them’ in the battle for IMF top job - Venky Vembu
I was being only halfways polemical yesterday when I pitched for RBI Governor D Subbarao to be made the IMF chief following the disgraceful (near-certain) end to Dominique Strauss-Kahn’s stewardship of the organisation. But I gather from some of the responses that there are many who think the notion that a non-European would ever head the organisation is disingenuous. That’s an entirely erroneous understanding of how the world is evolving.
Yes, I know how the old order works. The rich countries got the top jobs, and us poor countries got shafted. Under that old Bretton Woods arrangement, the US and the Europe pretty much carved up the world and played monopoly. An American has traditionally headed the World Bank whereas the IMF has always had an European on top. Even today, with the hunt for Strauss-Kahn’s successor already under way, leaders in Europe are marking the territory as only fit for a European. But as Edward Hadas of the Financial Times, explains:
“This will be a turning point in the history of the IMF: European predominance, European leadership and European centre of interest will be marked as having come to an end. The power structure of the world has changed.” Hadas emphasises that while some of this relates to the IMF’s momentary “embarrassment” over circumstances surrounding the arrest of Strauss-Kahn, that ties in with longer-term trends which are reshaping the world. “It will be very difficult for the Europeans to now claim that they have a natural right to run this institution.” So if India — or any other emerging economy — did make a pitch for the top job, the chances of getting our man in at the door aren’t as outlandish as might have appeared even three days ago. Certainly not a done deal, but not a fantasy either. The lack of unanimity among emerging countries is still a hurdle. There could be some opposition or competition from China to an Indian candidate, partly because China looks to leverage a seat at the high table for political gain — as it did when it used its clout at the ADB to block a loan to India that was to be used in Arunachal Pradesh. But in the event that India does decide to put up a candidate, who might it be? I still hold that Subbarao is a great candidate. Previous rounds of iteration have thrown up the names of Planning Commission Deputy Chairman Montek Singh Ahluwalia, but more recent speculation appears to revolve around Central Bank of India chairman S Sridhar. Then there’s Subbarao’s predecessor at the RBI, YV Reddy, the man widely credited with having steered the ship of the Indian economy through the troubled waters of the 2008 global financial crisis. Reddy too commands immaculate authority in global financial circles. All this is not to say that the power balance at the IMF, which reflects a 1940s world, will shift overnight. But know this: the old order that determined the relationship between ‘us’ and ‘them’ is well and truly dead.
Not eyeing IMF chief's job, says Montek Singh Ahluwalia
The Planning Commission Deputy Chairman, Montek Singh Ahluwalia, on Monday said that he was not eyeing up the top job at the International Monetary Fund (IMF). "I am not looking for any such thing," said Ahluwalia, who was being talked about by media as a potential candidate for the IMF post after the arrest of Dominique Strauss-Kahn on sex assault charges. Ahluwalia said he would wait and see how the Kahn's case evolves. He also said that he would wait and see who the IMF comes up with as the next head. The United States has been keen on having Ahluwalia as the IMF chief. A senior US official told Headlines Today that Singh was the best bet to head IMF at the moment. The official said that US was pursuing the policy for diversification on IMF and World Bank posts and hence wanted a non-European to get the IMF post.
A monetary fix for inflation - Rajiv Lall
Confusion remains over the reasons why inflationary pressures in India have not abated. The spread of inflationary pressure from just a basket of commodities and food items to general manufacturing seems to have caught even the Reserve Bank of India (RBI) by surprise. What has caused this acceleration in “core inflation”? Answering this question is key to evaluating RBI’s response and to understanding the desired future course of policy action. There are at least four hypotheses doing the rounds. The first is that supply shortages led to a spike in food prices that is now baked into inflationary expectations. In this view, the solution lies in dealing with supply bottlenecks, not in raising interest rates. The second is that there is an inflation growth trade-off such that higher growth is sustainable, but at a higher equilibrium rate of inflation. For a shining India, an inflation rate higher than its historical average is the new normal. The third is that the impact of rising oil prices has been transmitted to the Indian economy. In this view, there are no good monetary policy choices— should high international prices of oil persist, we are headed for a period of stagflation. The fourth is the great QE2 theory. In this view, waves of international liquidity crashing into emerging markets in search of superior returns are causing currencies to appreciate and/or economies to overheat. None of these hypotheses is fully credible. The evidence that supply bottlenecks were widespread enough in 2008-09 to cause a sharply elevated inflation rate for a broad basket of food items is not compelling. There is also no reliable evidence that we can buy higher sustainable growth with a higher equilibrium inflation rate. While domestic inflation rates and international oil prices appear correlated, domestic controls on petroleum prices make the pass-through effect less obvious than it seems. As for the impact of capital inflows from abroad, these did contribute to a surge in domestic liquidity in the run-up to the 2008 Lehman crisis, but have not been a factor since. A good old-fashioned monetarist framework is the most useful for understanding what is happening. The simple premise of the quantity theory of money is that for a given velocity of money, the higher the growth rate of money supply relative to the real gross domestic product (GDP) growth rate, the higher the inflation rate. In this framework, ensuring that monetary aggregates stay within an estimated equilibrium growth rate is key to controlling inflation. But estimating this target growth rate depends on the predictability of the demand for money, which in turn depends on the stability of velocity. Most emerging markets experience prolonged periods of financial deepening, which is to say, periods of declining velocity of money such that the non-inflationary equilibrium stock of broad money (M3) relative to GDP keeps rising over time. Thus in India, between 1997 and 2010, the ratio of bank deposits to GDP rose steadily from about 40% to more than 75%; inflation at the same time was a reasonable 5%, even as bank credit grew at an average rate of 19% a year. But something changed in 2010. Even though credit growth remained within the historical range deemed compatible with non-inflationary GDP growth, the average inflation rate accelerated to 9.5%, well above the average of the previous decade. Something has caused the predicted relationship between M3 growth and GDP to break down. Starting in 2010, the M3/GDP ratio came down for the first time in over a decade (see chart). It seems that the economy was experiencing a bout of financial shallowing. Since then, the income elasticity of demand for broad money has fallen instead of rising, suggesting a degree of disintermediation from the formal banking and financial systems. But what could have caused this? I think the culprit is the type of fiscal stimulus unleashed in the wake of the 2008 crisis. In response to the crisis, the government aggressively expanded social spending through schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme. There is no data on how much “leakage” there is in such spending. But by all accounts, there has been substantial diversion of funds, which over a period of 12-18 months have found their way into the cash economy rather than being intermediated through the banking system. This phenomenon has caused a liquidity shortage in the formal banking system, even as currency in circulation has grown at a faster pace than commensurate with the demand for cash balances. This is what has caused inflation to accelerate. Under the circumstances, as long as the government remains unwilling to rein in its subsidy-related spending and reduce the associated leakages, the burden of action will fall upon RBI. Ideally, RBI would want to reduce the growth in currency without choking credit off-take. In this context, raising the interest rate on savings accounts was exactly the right policy measure. This should attract more deposits into the banking system from the cash economy, making more liquidity available for banks to lend. But should the behaviour of small depositors prove to be rate-insensitive, RBI would have no choice but to further drive down the demand for credit. They would be forced to crowd out private investment demand to accommodate lower quality government funded consumption spending. That would be unfortunate. I hope the finance minister takes note.
Rajiv Lall is managing director and chief executive officer IDFC Ltd
UID-enabled bank accounts in 2-3 months
These accounts assume significance as govt, in future, may implement direct transfers of subsidies through banks.
New Delhi: India will see at least five million bank accounts being opened in the next two to three months, mostly in rural areas, thanks to the government’s ambitious Unique Identification (UID) or the Aadhaar programme, according to Ashok Pal Singh, deputy director general, Unique Identification Authority of India (UIDAI). The programme, which gives out unique 12-digit UID numbers and maintains a database of the personal details of individuals, including biometric information, has thus far given out 6.58 million numbers. While enrolling people, one option it gives them is to open a bank account to which the UID number will be linked. The UIDAI has empanelled a total of 64 banks of which 25 are state-owned banks, 12 private banks and one foreign bank. The rest are regional rural banks and cooperative banks. These banks—State Bank of India, ICICI Bank Ltd and Citibank are among them—will be given access to data of customers who have enrolled for Aadhaar and want to open a bank account. According to Singh, around 80-85% of the people so far enrolled by UIDAI don’t have a bank account and have asked for one. According to the Reserve Bank of India data, only 40% of the country’s population has access to banking facilities. Singh and another UIDAI official, who also did not want to be named, said the banks would have to open the accounts within the next two to three months. “Once the data is shared with the banks, they will have to open the accounts within one month,” said Singh. A senior official from State Bank of India said the bank will be able to open accounts within the stipulated time frame. “We already open bank accounts in rural areas through our own branches. The only difference will be that volume of accounts will be higher when opened through Aadhaar. But we should be able to manage it using a mix of our branches and banking correspondents,” he said. Aadhaar-linked bank accounts assume significance also because the government has set up a committee to look at the issue of direct transfers of subsidies and benefits. The committee is headed by UIDAI chairman Nandan Nilekani and is expected to submit its report by June. Indeed, UIDAI told the banks it was empanelling that their systems should facilitate direct transfers to the accounts of beneficiaries. “Apart from the clear benefits from the cash transfers of subsidy, Aadhaar-enabled bank accounts will bring large masses of people into the net of banking services; banks were earlier incapable of doing so (opening accounts) for the want of proper documentation,” said Sunil Chandiramani, partner and national leader, government services, at audit and consulting firm Ernst and Young, an adviser to the project. His reference is to so-called KYC, or know your customer norms that banks need to follow while opening an account. The government has since mandated that an Aadhaar number will suffice. The Reserve Bank of India (RBI) has said that banks will have to cover villages with a population of 2,000 and above by March 2012; this adds up to around 73,000 villages. It asked banks to cover 20,000 villages in 2010-11 and the remaining 53,000 villages in 2011-12. In 2010-11, the banks covered 29,000 such villages. People opting for a bank account while enrolling with UIDAI may not always be able to choose the bank that serves them. If a bank adopts a village under RBI’s financial inclusion plan or only one bank is empanelled in that area, then that is the bank that will serve customers in that area. In other areas, customers can choose between banks which are empanelled for that particular district.
Unique number delay for lack of introducers
RANCHI: Though the Unique Identification Authority of India (UIDAI) has prioritized enrolling people who have no valid proof of their identity and worked out a mechanism called the "introducer based verification system", it came to light in camps organized in the state that there are few takers for this system. An authorized person with a valid UID number can introduce a person with no documentary evidence. Commissioner NREGA, Ajay Kumar Singh, who has been entrusted with the task of enrollment of people, said the idea of the Aadhaar number based on introduction has not gained popularity. "There could be many reasons for this, introducers themselves may not have the Aadhaar number as is mandatory," he said, adding, "it could also be because the common man is not aware of the scheme." According to rough estimates, 90-95 per cent Aadhaar numbers distributed till date have been based on identity proof. Officials at the regional office of UID in Ranchi looking after the states of Bihar, Jharkhand and West Bengal, said the UIDAI targeted including such people who have no documentary proof of their identity so that benefits of social welfare schemes could be extended to them. The UIDAI has offered to pay Rs 10 per introduction as an encouragement. The UIDAI in its guidelines under the introducer enrolment and monitoring process released in December 2010, had categorically mentioned that people's representatives should be enrolled first so that they can act as introducers. But this has not been followed. Ward councillor Rajesh Gupta said he once received a phone call asking him to arrange a camp for this purpose. He said he is waiting for summer vacation to begin in schools so that he can arrange a camp. "There has not been any special camp for potential introducers or ward councillors," he said. Gupta added that had there been a separate camp for representatives of urban local bodies before camps for common people, the response of the people would have been much higher.
RBI hints at more steps as April inflation still high
MUMBAI: Reserve Bank governor Duvvuri Subbarao on Monday said April inflation at 8.66% was too high and stressed upon the central bank's resolve to batten it down to a comfortable level, indicating that he will continue with the hawkish monetary stance. Stating that inflation needs to be brought down to a comfortable level to maintain high growth, the governor said, "if you try to drive up growth by driving up inflation, what you will get left with is high inflation". The government data released on Monday showed a minor dip in headline inflation to 8.66% in April, driven by a moderation food and manufactured items prices. However, the government revised upwards the March figure to 9%, which was provisionally reported at 8.98%.
Cross Border Bank Guarantees, LCs under finmin scanner
As part of the stepped-up efforts to track transfer of funds parked overseas in India, the investigating agencies have brought Cross Border Bank Guarantees (CBBGs) and Standby Letters of Credits (SLOCs) under the scanner. A senior finance ministry official told Business standard funds parked in other countries were indirectly being brought into India with the help of these instruments. He added the process for preparing a list of such cases had already been started. “The list would help zero in on potential cross-border account holders and a letter has been sent to the Reserve Bank of India in this connection,” said the official. He said these instruments were offered as collateral to banks in India and huge loans taken, which were often not repaid. “The bank invokes the guarantee and collects its dues,” he added. The official said after the inception of the Securitisation Act, a number of non-performing assets (NPAs) were turned around through cross-border SLOCs and bank guarantees, adding the whole matter had been taken up for speedy action. The investigating agencies have also found critical intelligence on a number of individuals associated with transfer of funds from India to places like Dubai and Singapore. In one of these cases, critical intelligence involves a resident of Delhi, who earlier worked with a private bank in India and is currently working with a Dubai-based Foreign Institutional Investor (FII). According to the intelligence gathered, he has been luring high net-worth individuals from Delhi and Mumbai to invest their money through the FII for handsome gains and is also promising to take care of their black money. In the other case involving a Bangalore-based middleman, the person under the garb of non-resident Indian (NRI) status is understood to be handling funds for liquor barons. He is transferring funds through his Singapore operation. Market intelligence by the agencies has also led to a Zurich-based entity claiming to be organising funds mostly from Switzerland and making these available to Indian companies. The ministry official said intelligence suggested the unit was facilitating re-routing of funds parked in Switzerland in the garb of PE to Indian promoters. He added further surveillance and intelligence were on in all these cases, which gave clear indication of how the funds were being routed in the country and also being parked in other countries.
Is government planning to cut SBI down to size?
Nobody, but nobody, expected the State Bank of India (SBI) to say that it had almost no profits to report in the last quarter of 2010-11. The reported net profit of Rs 20.88 crore is a fleabite when weighed against a loan-book of Rs 7,56,719 crore as on March 31, 2011. The shares duly tanked, and at the close of trading on Tuesday, the stock lost 8 percent and brought the market down with it. What gives? Many reasons, really. First, the results came as a shock. If SBI was the toast of the market for much of the past five years when OP Bhatt was chairman, Tuesday’s results showed the price Bhatt paid for growth: huge bad loans. The bank’s bad loan and prudential provisioning was a humungous Rs 4,157 crore, up 76 percent from the fourth quarter figures of 2010. Second, the new chairman Pratip Choudhuri, is in clean-up mode. By pushing all the bad numbers to the fourth quarter of 2010-11, when Bhatt was at the helm, he now starts with a cleaner slate in his term. No one will blame him for the losses of last year; his new loan-book now looks much healthier. Third, all this provisioning and bad news means SBI needs more capital for growth this year. But will that be forthcoming? SBI’s capital adequacy is now below 12 percent, adequate to look solvent, but not enough to support robust loan growth beyond 2011. A question-mark has been raised about the government’s willingness to pump equity into SBI this year. The bank needs lots of capital (Rs 20,000 crore, to be exact) to keep growing and maintain its edge in the lending business, but an Economic Times report on Tuesday said the government is dithering about investing around Rs 11,000-12,000 crore to maintain its shareholding in SBI at 59.4 percent when it makes a rights issue of capital. The apparent reason: the tight fiscal situation. That’s bull. If there is one thing the government does not lack, it’s money. At least, it has never lacked money when its political interests were at stake. Through 2007-09, the Centre has been spending money hand over fist to feed its voting constituencies by waiving farm loans, keeping petro-product prices down, and splashing money on safety net programmes like the National Rural Employment Guarantee Scheme (NREGA). Only the last is truly vital, since it helps the poorest of the poor. So finding Rs 11,000 crore to keep its holdings in SBI constant should be a no-brainer. And it’s not even about handing over the money. All it needs to do is invest in SBI’s rights shares, and ask the bank to reinvest the cash in special government bonds. The money will be a book transfer. The bank wants to raise Rs 20,000 crore this year to strengthen its capital base and maintain the pace of lending, but if the government delays the equity infusion, SBI will lose market share. State Bank under Bhatt has been a stellar performer because it has been behaving less like an arm of government and more like a commercial entity eager to carve out market share. To scale up in size and strength, it began the process of merging its subsidiaries with itself (two done, five more to go) and launched an aggressive loan growth strategy with its special home loan scheme. Under the latter, interest rates were kept low in the initial two years and then raised to normal rates. It was a huge hit with borrowers, especially during the 2008-09 downturn. But this aggression caused turmoil among its private sector rivals — especially HDFC and ICICI Bank – which were forced to match SBI’s low rates with their own versions of low-priced loans (dubbed “teaser loans”). With SBI wading deeply into their turf, HDFC chairman Deepak Parekh attacked teaser loans as a “gimmick” but fought back with his own variants to retain market share. Parekh said in an interview: “We were losing business. I still feel that teaser rates are a gimmick; it is a marketing tool. But my marketing people said that if we do not have attractive rates in the first two years no one would come to us. So we had to fall in line immediately. So everyone is doing it now…”. Parekh had good reason to worry. Around March 2010, the SBI overtook HDFC as India’s largest mortgage lender, thanks largely to the teaser loan scheme. But as the volume of teaser loans grew in size, the Reserve Bank of India (RBI) weighed in with new provisioning norms for teaser loans, which it felt could turn bad when interest rates rose. From 0.40 percent of loans outstanding, the RBI asked banks to set aside 2 percent on such schemes as potential loan loss provisions. Bhatt fought back, and went down claiming the RBI simply does not understand the teaser loan scheme. He told Mint newspaper on the eve of retirement: “Of course, they have not understood it (teaser loans). These loans are, in fact, less riskier. The selection of (the) borrower is done in such a way that they are creditworthy individuals.” Bhatt also fought tooth-and-nail with the RBI to avoid hiking the total loan loss coverage ratio to 70 percent of non-performing loans (potential bad loans, where interest is not being paid), but the RBI did not relent. That explains the huge loss provisioning under the new chairman, but the point to underscore is this: the SBI under Bhatt was giving the private players a run for their money, and they were lobbying hard to get it to ease up on market share expansion. This is exactly what happened once Bhatt retired in April. Within days of taking over, Pratip Chaudhuri called it quits and scrapped the teaser loans. This is where the rights issue decision of the government matters. If it does not cough up the money or finds reasons to postpone it, SBI will rapidly lose market share to private players. It would be a pointer that the government is a willing party to letting the SBI shrink in terms of market share. If this happens, SBI would only be the latest public sector institution to be taken down the road to irrelevance under the UPA. In thepast seven years of UPA rule, ministers and babus have between them ruined the oil companies, the telecom companies and airlines in the name of public interest. Consider the evidence: First, by refusing to raise petro-product prices when world prices went up, the three oil marketing companies have been reduced to basket cases. The Indian Oil chairman says if diesel and cooking gas prices are not raised, he will be forced to borrow Rs 7,000-8,000 crore every month to manage his operations. As oil companies bleed, and ONGC is held down by the need to subsidise the marketing companies, who’s the only beneficiary? Reliance Industries, which sells petroleum products in the world market and mints money on its gas output. Second, telecom. In less than five to seven years, BSNL has been converted from market leader to bailout pleader. Between them, the state telecom companies BSNL and MTNL are bleeding profusely, and they will post losses of more than Rs 5,500 crore in the year to March 2011. Reason: Under Dayanidhi Maran and then A Raja, these state sector players were repeatedly restrained from competing aggressively. Now, they are waiting for their epitaphs to be written. The beneficiaries of their decline: private players like Bharti Airtel, Vodafone, Tata Teleservices, and Reliance Communications, among others. Third, Air India. Under Praful Patel as Civil Aviation Minister, the two national carriers – Air India and Indian Airlines — were forced into wedlock without a clear game plan. Air India was also forced to buy airplanes it could not afford and forced to cede profitable routes. The airline is busy ratcheting up losses and fighting its own pilots rather than flying passengers. The beneficiaries: Jet Airways and Kingfisher, among others. Quite clearly, when it comes to destroying taxpayer assets and public sector solvency, our political system shows unparalleled efficiency. Under Bhatt, SBI showed the way to market expansion and growth. The downside of this may be higher short-term losses, but the critical thing now is to continue growing by boosting capital. The government needs to do its bit here. Else, one can presume it is putting a crimp on SBI’s ability to compete. Like it did with oil, telecom and airlines.
http://www.firstpost.com/business/is-government-planning-to-cut-sbi-down-to-size-11154.htmlGhost From the Past Returns to Haunt SBI
Bank suffered similar profit shocks in the quarter after Janki Ballabh & OP Bhatt took over as chiefs !
After delivering shocking results for the quarter to March 2011, the State Bank of India Chairman Pratip Chaudhuri told the media on Tuesday that this was a quarter that the bank would like to forget. That is a sentiment which some of those who have headed India’s largest bank would have surely shared and for good reasons. Janki Ballabh, who succeeded GG Vaidya in November 2000 as the bank’s chairman, saw the net profit decline 45% in the very next quarter after taking over, only to show vastly improved set of numbers in the subsequent quarter. Om Prakash Bhatt, who steered SBI for five years until March this year, also followed the same script. The first quarter after he took charge as chairman in 2006, was marked by a 35% drop in profits, only to see a reversal of trend in the quarter that followed with a 45% growth in the bottom line. The perceived attempt in some of these cases, which also involve other state-run banks, is to boost the performance of the CEO of the bank shortly after taking over. For analysts who got the latest quarter results wrong, the numbers may have come as a big shock, but inside SBI, there were many who were anticipating this. But not the magnitude of the cleaning-up exercise. Mr Chaudhuri, who succeeded Mr Bhatt last month, sought to play it down saying it was just a coincidence that too many things such as provisions for bad loans, wage revisions and higher taxes were clubbed in a single quarter. “For the nine months,the bank has shown a 13% growth in earnings and in Q4 it has shown a 99% decline. What has happened in the fourth quarter to justify this performance? The only thing that is different and that is visible is the new chairman,” said Hemindra Hazari, head of equity research at Nirmal Bang Institutional Equities. Fingers are now being pointed at OP Bhatt for what some insiders in the bank say was an overtly aggressive drive to boost market share at the cost of the quality of assets.SBI did succeed on this front by taking on aggressive private banks, especially on home loans, even if it meant walking the thin line on regulations. Even when RBI sounded a warning to SBI to withdraw its teaser loans, Mr Bhatt did not relent, arguing that such loans benefited customers and could not be compared to the subprime loans in the US. Mr Chaudhuri’s predecessor could not be reached for comments despite several attempts. The face-off between the regulator and an unrelenting Bhatt led to RBI dropping by a notch the bank’s top rating which it assigns. This was done as the central bank said that the lender had not set aside enough funds against bad loans. By now going the full hog in provisioning or setting aside more funds for bad loans, SBI may gain a respite on the ratings front from RBI. “This is a lesson to those banks who want to be aggressive in garnering market share, or overall visibility, because in their drive to achieve this, margins had to take a hit and bad debt provisioning deferred to show higher profit,” says Mr Hazari of Nirmal Bang Institutional Equities. In an earlier interview to ET, when asked whether the drive to gain market share could be at the cost of asset quality, Mr Bhatt had this to say: “Whenever a financial institution grows fast, the rate of NPA also grows. It is co-related. But even then, whenever a financial institution, in India and abroad, grows fast, it is a natural corollary that NPAs will also grow fast. Add to that the crisis to the economy. But with all that, our growth (in NPAs) was not the highest. There are banks whose NPA growth was more than ours compared to our asset growth.”
Change in forex derivatives hedging rules may hit banks - V VENKATARAMANAN
The Reserve Bank of India has amended the guidelines for OTC forex derivatives and overseas hedging of commodity price and freight risks, which were effective from February 1, 2011. The amendment removes the requirement for companies, intending to undertake "cross-currency option cost reduction structures" and "foreign currency-Indian rupee option cost reduction structures" for contracted exposures, to adopt AS 30 (accounting standard on financial instruments issued by ICAI) related to derivatives and hedging. Also, the threshold net worth limit for unlisted companies intending to enter into such contracts has been doubled from Rs 100 crore to Rs 200 crore. These changes have been effected due to representation received from industry associations and owing to the fact that the said accounting standard is not yet notified by the ministry of corporate affairs (MCA). In the current legal framework, notification by MCA is an essential requirement before an accounting standard needs to be mandatorily applied by corporates. Under the amended guidelines, companies entering into such structures are required to fair value such products. These companies are required to follow the existing standards notified by MCA, the applicable guidance of ICAI as also the principle of prudence which requires recognition of expected losses and non-recognition of unrealised gains. Certain unlisted companies that had already entered into the 'costreduction structures' based on the previously issued net worth criteria of Rs 100 crore could now be in noncompliance with the amended guidelines owing to the change in the threshold net worth limit. While the circular and the amendment primarily applies to banks (as authorised dealers), it will also have a wide-ranging impact on corporates that transact with banks in certain types of derivative instruments. These entities are required to comply with the guidelines in the amended circular before they can enter into further derivative transactions with their bankers. The underlying intent of the circular remains that an entity can enter into specified derivative transactions for hedging purposes only. The amendment is expected to be welcomed by affected corporates since it removes the onerous requirements to early adopt AS 30. In addition to the accounting requirements, the guidelines also regulate the categories of persons permitted to access the OTC foreign exchange market in India and the permitted products for hedging different categories of foreign exchange exposures. Companies have been provided with a 15-day period for submission of original documents for permitted transactions under these guidelines. They are also required to submit quarterly statutory auditor certificates in respect of derivatives transacted both, under the contracted exposure and past performance routes. These reporting requirements will impose additional compliance-related costs and efforts for companies that access the OTC market for currency derivatives. Banks will also have increased compliance requirements to submit various reports on a weekly, monthly or quarterly basis in respect of such transactions to RBI. Further, banks will be responsible for ensuring receipt of relevant certificates and compliance by its clients to be able to continue transacting with these clients. These requirements remain unchanged by the amendment. In summary, the amended RBI guidelines have a wide ranging and significant accounting and compliance impact for banks as well as other entities that transact in certain types of derivative structures. The amendments are expected to bring relief to entities that have not yet adopted the financial instrument standard.
(The author is executive director, accounting advisory services, KPMG India . Views expressed are personal)
R Ramachandran: Troubleshooter who maintains a low profile
Mr Ramachandran has seen the fall and the rise of Indian Bank, having worked with a tough boss like Ranjana Kumar and also with RBI deputy governor KC Chakrabarty, who was his boss in the Chennaibased bank a few years ago.
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Corp debt mkt: RBI, Plan panel differences come out in open
What the industry and observers have been saying that there is a lot of regulatory confusion on developing a corporate debt market came out in the open on Monday, with the RBI Governor and the Plan panel chiefs taking divergent views on the issue.
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