New EDs

The Committee of Governor and Deputy Governors has decided to promote: 

S/Shri P. Vijaya Bhaskar, Regional Director, Bangalore and B. Mahapatra, Chief General Manager-in-charge, DBOD, CO as Executive Directors in the Bank with effect from June 13, 2011.

Cause for pause

With the central government basically abdicating the responsibility of inflation fire-fighting to RBI, there seems little alternative to a further jump in the repo rate on Thursday. This is despite a clear acknowledgment by Subir Gokarn, deputy governor of RBI, that the chief drivers of inflation — commodity prices — were outside the influence of the monetary policy. But, as agricultural reforms will not happen soon, the pass-through of the monetary measures have to be through the manufacturing sector, despite the consequences. RBI will, of course, take heart from the sustained rise in bank credit to the commercial sector, which was growing 21.3% year-on-year till the end of May. But within that, weakness is increasing, as the disaggregated sectoral data shows. The sector that has witnessed the fastest rise in credit is services, at 24% compared with 13% a year ago. Against this, the growth rate of credit to large industry has shrunk to 27%. So, overall, the rise in credit to the manufacturing sector is only 12.7%, year-on-year. Obviously the rising rates are beginning to hurt. So, more than the raise, the key indicator will be whether RBI will signal a pause. That will be the forward message which industry and the financial sector will be most interested in. How RBI words the pause will be the basis for all sectors to calculate their annual business plans.  It is rather unfortunate that the management of the short-term goals of the Indian economy has passed almost totally to RBI. The supportive environment that would have allowed RBI to pause earlier in the cycle does not exist. On three key issues, that of expenditure management, reform in the food economy and creating impetus for foreign capital to flow into the economy, New Delhi has stopped working. The government will go through with its borrowing for the year, despite the adverse implication for the rest of the economy, including the hardening of interest rates. No hard limits have been set for subsidy management in the budget. The government, as we have already said, has no clear intention to invest more in the agriculture sector and, therefore, create an incentive to cut down opposition to changes in food marketing. Finally, midway into the year, an OECD report says the tax architecture being planned under the DTC will enhance capital intensity in the labour surplus economy.

Just before the RBI governor decides on his course of action on Thursday, corporate India would have told him what they think this year will turn out for them in the first instalment of advance corporate tax on Wednesday. Will Subbarao read the tax leaves?

FE

Centre mulls booster shot for growth

NEW DELHI: At a time when the Reserve Bank of India is trying to temper growth, the government is contemplating a stimulus of sorts for so-called labour-intensive sectors such as textiles and leather. Commerce & industry minister Anand Sharma told TOI in an interview that he had raised the issue with finance minister Pranab Mukherjee during a recent meeting but no decision has been taken. The stimulus, which could take the form of some sort of an interest rate concession, would be meant only for units in specified sectors that undertake capital expenditure to add capacity.  The industry is already complaining of higher interest rates taking a toll on capacity addition. Economists too said that the nine rounds of policy rate hikes undertaken by RBI since March 2010 had now begun to show its impact on overall industrial growth numbers, which are estimated to have hit a three-month low of 6.3% in April.  The apprehension is that high interest rates would deter companies from adding capacity and once interest rates start moderating and demand picks up, the industry would find itself short of production capability to meet the requirement. Inadequate capacity can again lead to inflation and emerge as a policy headache. After the latest factory output data was released on Friday, Kaushik Basu, the chief economic advisor in the finance ministry, acknowledged the impact of high rates and suggested that RBI balance its monetary policy tightening in view of the growing concerns that growth is affected. Sharma too seems to be taking a similar position.  Though finance ministry officials do not acknowledge it, North Block and RBI have not been on the same page as far as raising interest rates are concerned. Finance ministry has taken a view that undue tightening will take a toll on growth, which it is seeking to fuel. Though RBI was widely criticized for taking what governor D Subbarao had described as baby steps – increase policy rates by 25 basis points every time (100 basis points = one percentage point) – the central bank had to finally signal that taming inflation was its primary concern, even if it meant sacrificing growth. As a result, RBI opted for a 50 basis point hike in policy rates in early May and is widely expected to follow it up with a 25 basis point increase on Thursday.  Following the financial crisis in 2008, the government had announced special measures for sectors such as textiles, rubber, engineering, chemicals, electronics and engineering goods to boost their production and exports.

TOI

Ramdev vs RBI

As with other issues raised by Baba Ramdev, the Reserve Bank of India is not at all convinced that scrapping of Rs 500 and Rs 1,000 currency notes can really help curbing black money in the country. “Is there any study to show that the circulation of Rs 500 and Rs 1,000 currency notes are responsible for creating black money? Rather, it will increase the cost of other currency notes to replace the Rs 500 and Rs 1,000 currency notes. It will create more problems than providing any solution,” thundered KC Chakrabarty, Deputy Governor, RBI.

FE

MSF debut: Banks borrowed Rs 100 cr on Friday

Banks on Friday used the Reserve Bank of India's (RBI) marginal standing facility (MSF) for the first time since its inception in May. According to data released by the central bank on Monday, banks borrowed Rs 100 crore for three-day loans through the facility. To borrow funds through this window, banks have to pay interest at a rate 100 bps higher than the repo rate, which currently stands at 7.25 per cent. Banks are allowed to use MSF only after exhausting the excess statutory liquidity ratio (SLR), which stands at 24 per cent of their net demand and time liabilities. Banks keep excess SLR to pledge securities for funds from the central bank or the overnight market to meet their product needs. In May, MSF had replaced the second liquidity adjustment facility (LAF). Though RBI did not publish the names of banks that used MSF, according to market players, a few small private sector banks facing a liquidity crunch may have used the facility. "The amount borrowed was very low compared to the LAF borrowing on Friday. Maybe one or two small banks have used the window to sail over short-term needs,&" said a treasury head of a large public sector bank. On Friday, banks borrowed around Rs 75,000 crore through the LAF window at 7.25 per cent. Interestingly, though the call money rate, at 7.30-7.40 per cent, was stable last week, banks opted for MSF funds instead of the call market route. When MSF was announced, RBI had said it expected banks to exhaust all other sources before taking this route. "Every bank has an internal limit set for borrowing from the call money market. Exhaustion of that limit would have forced a bank to approach RBI's marginal standing facility. Also, while lending call money, factors like the borrowing bank's net worth, its market standing and its past experience in repaying the debt play major roles, since borrowing in call is non-collateralised,&" said Pawan Bajaj, deputy general manager, Bank of India. Liquidity is expected to remain tight due to the advance tax outflow scheduled later this week. Banks expect Rs 25,000 crore to Rs 30,000 crore to go out of the system owing to the tax outflow. RBI had earlier said the MSF would be tested when the tax outflow takes place. "Every quarter, it (advance tax) happens. I don't think there is anything different in that. A new type of liquidity management facility has come, so it would be tested,&" RBI Deputy Governor K C Chakrabarty had said in the beginning of June.

RBI likely to hike key rates this week

After the Reserve Bank of India hiked key policy rates by 50 basis points in May, most analysts expect further tightening by the central bank when it reviews the monetary policy on June 16. While there’s a strong possibility of RBI hiking repo rates by 25 bps, it could also opt for status quo as growth and investment activity have decelerated. The bank is also grappling with rising inflation. A survey conducted by the RBI says households expect inflation to rise further by 40 and 120 basis points during the next quarter (11.9 per cent) and the following year (12.7 per cent) respectively, from the perceived current rate of 11.5 per cent. “Given the trend in the overall IIP growth numbers as per the new series and the prevailing inflationary pressures, we expect the RBI to continue with its rate tightening regime i.e. increasing the repo rate by another 25 basis points in the upcoming monetary policy review. Going forward, this would lead to a subdued growth in the consumption and investment demand in the near term,” said Arun Singh, Senior Economist, D&B India. The RBI survey said, “households’ expectations of general price rise were mainly influenced by movements in food prices. The percentage of respondents expecting price rise have gone down for all product groups (namely, general prices, food products, non-food, household durables, housing and services).” The Inflation Expectations Survey of Households conducted in the January–March 2011 quarter captures inflation expectations of 4,000 urban households across 12 cities for the next quarter (April-June) and for the next year (April 2011-March 2012). Ashutosh Datar, Economist, IIFL, said, “While growth is decelerating, it is still reasonably strong. And inflation remains unacceptably high… therefore we don’t expect the RBI’s stance on monetary policy to change significantly. Thus, May WPI data will set the stage for RBI’s policy decision on 16th June.” The IIP growth with new base, new components and weightings revealed a better than expected growth of 6.3 per cent compared to 4.2 per cent based on the old index, Singh said. “Food inflation is again inching up, adding to the core inflation pressures we have observed lately. The current expectation on monsoons is closer to 98 per cent normal. The degree of slowdown in growth would have implications on RBI’s rate increase plans,” said Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Old Mutual Life Insurance.  “Though, currently the bias is to control inflation, there would be a close watch on growth numbers as well since the tightening over the last 12 months will start showing impacts now and over the next few quarters.”

IE

Mahesh Bank joins RBI's fund transfer system

Customers of AP Mahesh Co-operative Urban Bank will now be able to transfer funds from their accounts to other locations across the country in no time. According to Mr Ramesh Bung, Chairman of Mahesh Bank, the bank was admitted as member of the National Electronic Funds Transfer (NEFT) system of the Reserve Bank of India (RBI). “This will enable customers to transfer their funds, even small amounts across India instantaneously,” Mr Bung said in a release. Mahesh Bank had also got approval from the RBI to open three more branches at Champapet, Seethaphalmandi and Chintal in the State capital. In addition, two more branches — at Banjara Hills and Attapur in the city — and an ATM at Begum Bazar would be opened shortly. This would take the total number of branches to 36. Plans were also afoot to become the member of National Financial Switch ATM network through which customers can transact their business through more than 70,000 ATMs spread across the country, the released added.

Business Line

Your secured savings landscape is bound to change, and how

Interest rates on Public Provident Fund (PPF) to be linked to the market yields on government securities of comparable maturity,
Annual reset of interest rates of NSC, PPF, etc and Discontinuation of Kisan Vikas Patra instruments. These and many other recommendations shall become reality if the government accepts the last week’s report of the committee headed by Shyamala Gopinath, deputy governor of the Reserve Bank of India (RBI). The committee was formed to recommend reforms required in overall administration of National Small Savings Fund (NSSF). Small savings schemes covered under NSSF and on which the recommendations are made in the report. The report acknowledges the importance of small saving schemes. “Small saving schemes have been always an important source of household savings in India. Although these instruments are technically not government securities and do not have any explicit government guarantee, their legacy has given them characteristic of being equivalent to that of a sovereign liability. These schemes have been extremely popular amongst a large number of small investors in India who seek to invest in a secure instrument. At the same time, these instruments have been treated as a means of providing social benefit to the small savers.” Hence the benefits these schemes provide to various sections of the population, especially small savers, are beyond doubt.In this article, Bachhat lists down key recommendations made by the committee which directly impacts the investors. Changes in interest rates. One of the key recommendations of the committee relates to the interest rates. The committee recommends that, other than for savings deposit, interest rates for all other instruments should be benchmarked against secondary market yields on central government securities of comparable maturities and should be reset yearly. It means that as the interest rates of government securities rise, the interest on these securities shall also increase and vice versa. The committee has, depending on the instrument, its liquidity and its tenure, also recommended a spread of minimum 25 basis points (bps) vis-a-vis government securities of comparable maturities. 100 bps is equal to 1 percentage point. The spread is larger for NSC (50 bps) and Senior Citizen Savings Scheme (100 bps).For eg: If a comparable security for PPF is trading at 8%, then the interest rate on PPF for the reference period shall be 8.25%. Further, to avoid year-on-year volatility, a cap of 100 bps has been recommended so that the rates are neither raised nor reduced by more than 1% from one year to the next, even if the benchmark rates fluctuate by higher margins. These rates shall be fixed in advance and shall be known before the start of the  financial year. The committee recommends that interest rates on postal savings deposits should be in line with rates offered on bank’s savings account and be increased to 4% from current 3.5%. Further, the interest should be calculated on a daily basis on such deposits.

Other recommendations

1. Option of premature withdrawal of time and recurring deposits with provision to pay lower interest rate in such cases.
2. Abolition of 5% maturity bonus on Monthly Income Scheme (MIS) and reduction in tenure from 6 years to 5 years.
3. Increase in annual investment limit for PPF to ¤1 lakh. To discourage premature withdrawal, interest rates on advances against PPF deposits should be 2% higher than the prevailing PPF interest rate (as against 1% at present).
4. NSC to be available with maturities of 5 years and 10 years (as against 6 years NSC at present) with interest rates linked to comparable G-sec rates. No income tax exemption under Section 80C on accrued interest from NSC.
5. The committee has also recommended reduction in commission paid to agents for the products sold.

This and similar changes which happened in mutual fund industry earlier, will lead to emergence of fee based financial service industry wherein agents will start charging customers directly for the services provided by them. Assuming that the government accepts these proposals and implements the same with effect from July 1, 2011, the revised administered interest rates based on above recommendations. Above recommendations, if implemented, will have long term impact on the way individuals save. For eg: One will be required to consider the variation in interest rates, which hitherto were more or less constant, while planning for his retirement savings. Reduction in agency commission will ensure that products are sold to investors on the basis of their merits. Though these recommendations shall bring year-on-year variability in interest rates, provision of cap and floor of 100 bps shall limit the impact of such variability.

DNA

Offers for women: Do women-only products come with a catch?

Banks are wooing women through savings accounts that require a lower average minimum balance compared with that in standard accounts, or by including add-ons, such as free insurance. Currently......

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For operational efficiency, RBI to issue Rs 500 notes in packets

The Reserve Bank said on Monday it will soon start issuing bank notes of Rs 500 denomination in packets, which may not be sequentially numbered, for easier transactions. The measure has been announced to increase operational efficiency, the RBI said in a statement. “With a view to enhancing operational efficiency and cost effectiveness in bank note printing at banknote presses, it has been decided to issue...fresh banknotes of Rs 500 denomination in packets which may not necessarily all be sequentially numbered,” it said. The apex bank said such a practice is prevalent in other countries.

Business Line

Containing inflation

Both the Government and the Reserve Bank have failed to take appropriate measures to contain inflation, and the masses suffer. The economy also suffers. The blame game between the Government and the RBI is only to confuse the masses. The failure of administration and fiscal management are the major factors contributing to price instability, for which the Government is to blame.

T. V. Gopalakrishnan (Business Line)

For PSBs, loss & succession go together

Last week, Reserve Bank of India Deputy Governor K C Chakrabarty slammed public sector banks (PSBs) for the strange phenomenon of profits dipping when a new chairman takes over. Although the outspoken Deputy Governor did not name anybody, the hint was clear. It was the State Bank of India (SBI) which Chakrabarty was referring to. Last month, the country’s largest bank had announced its financial performance for the first time under its new chairman Pratip Chaudhuri. Its net profit for the quarter ended March 2011 was down 99 per cent from a year earlier, due to the higher provisions made to cover delinquencies in the loan book. The fourth quarter of 2010-11 was the worst quarter of SBI in more than a decade. The poor show made investors jittery and they dumped the stock, pulling it down by 7.7 per cent. Though the most recent one, SBI was just one among many banks with such a chequered history. Consider this. Five years ago, Prakash P Mallya took charge as chairman and managing director of Vijaya Bank in Bangalore. In his first press conference, Mallya tried to explain why the bank incurred a net loss of Rs 34.5 crore for the quarter ended March 2006 when it earned a net profit of Rs 155.9 crore in the corresponding period previous year. Despite his best efforts, Vijaya Bank’s share closed two per cent down that day. “It was a difficult situation. There were so many accounts where provisions had to be made. I was left with no other option but to take a hit on my profits,” Mallya, who retired from Vijaya Bank in 2008 and currently a board member of IFCI, recollects. A similar story unfolded in Mumbai when Bank of India’s chairman and managing director T S Narayanasami retired in May 2009. In the very next quarter ending September 2009 the state-run lender’s net profit halved to Rs 323.34 crore, prompting brokerages to downgrade the bank’s share. Gross bad loan of the bank increased by Rs 1,132 crore sequentially to Rs 3,919.7 crore during the quarter. Bank of India’s share shed 12 per cent after the financial results were announced. “Auditors were taking up classification issue (treating loans as non-performing assets) with Narayanasami. When Alok Misra became the chairman (in August, 2009) he made the norms more stringent. As a result, provisions and bad loans increased,” a former Bank of India official who worked in accounting and finance department during Narayansami’s tenure told Business Standard. Similar instances of declining profitability post chairman’s retirement were also witnessed in other public sector banks. It happened when AC Mahajan took charge of Canara Bank in July 2008, Anil K Khandelwal became the chairman and managing director of Bank of Baroda in March 2005 and SK Goel retired as chief of UCO Bank in July 2010. Most bankers remained tight-lipped on this issue and none of them were willing to speak on record. “It is messy out there. The chairman has the final say on how accounts are prepared. A retiring chairman often leaves the task of cleaning the books for his successor as he wants to show higher profitability during his term. This makes the task of the new chairman difficult and erodes shareholders’ confidence,” an executive director of a Mumbai-based public sector bank said requesting anonymity. Bankers, however, said the standard of reporting could only improve if the past chairmen are made accountable for financial performance of the bank during their tenure even after retirement. “We have a situation, where if you are chairman, the moment you retire you are absolved of all responsibilities. In such an environment it is impossible to avoid issues like these,” a former general manager of a state-run bank said. According to the RBI norms, an asset becomes non­performing when it ceases to generate income for the bank. Banks have to classify a loan as non-performing if interest payment remains due for more than 90 days. There is a silver lining, however, which can do away with the under reporting syndrome. The finance ministry wants all public sector banks to shift to a system where all non-performing should be identified by using technology. The move is aimed to reduce discretionary powers of the bank management. The deadline to adopt such mechanism is September 30. Bankers said though the move will increase NPAs in the short term, but it is beneficial for the banking industry in the long run.

BS

India Post may include buyback provision in gold retailing plan

India Post is planning to include the provision of buyback into the gold retailing scheme, which offers gold coins to customers through its post offices. Under the retail scheme launched in 2008, over 700 post offices sell gold coins. Till now, over 900 kg of gold have been sold through the post offices to around one lakh customers. In 2010-11 itself 581 kg of gold coins were sold. The Swiss gold coins of 24-carat purity are available in 0.5 gm, one gm, five gm and eight gm denominations. India Post has tied up with Reliance Money Infrastructure for the scheme and World Gold Council is the marketing partner. “The India Post is working out a plan to introduce buyback provision in the scheme,” said Keyur Shah, head of investments, World Gold Council. The absence of buyback arrangement is one of the key issues that restrict the growth of gold coin retailing through banks and post offices. An investor has to approach a jeweller when he has to sell the coin. Jewellers usually deduct higher melting charges for the coins bought from outlets other than their own stores. “Banks need RBI’s permission to introduce the provision. For India Post, however, it is easier if the partnering agencies agree on it,” said Shah. As per the WGC’s gold demand report for the first quarter of 2011, the investment demand for the metal grew by 26 per cent in and the main growth driver was bars and coins.
http://www.mydigitalfc.com/

There is no liquidity shortage

Official soothsayers are predicting a fall in inflation rate, though the timing differs from one to the other. If so, the RBI may wait for the next quarterly review before making any changes in.......

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Finance minister allays fears of slowdown ahead of RBI policy

Amid fears of an economic slowdown this year and a rate hike by RBI on June 16 to tame inflation, finance minister Pranab Mukherjee did some pep talk, asserting that growth drivers are intact and the economy needed to target 9-9.5 per cent growth in the twelfth five-year plan by deepening reforms. “The overall GDP gro­wth in 2010-11 has now been revised to 8.5 per cent (against projections of 8.6 per cent) with agriculture growing at 6.6 per cent, services by 9.4 per cent and industry at 7.9 per cent. Though there is some slowdown in industrial growth, partly due to the base effect from the previous year, growth drivers of the Indian economy are broadly intact,” Mukh­erjee told an Organisation for Economic Cooperation and Development (OECD) tax seminar. “The medium-term gro­wth prospects of the economy remain buoyant … as we put ourselves to the task of preparing the 12th five-year plan, we need to aim at GDP growth of 9-9.5 per cent for the plan period. It would imply raising the average growth rate by at least one percentage point from 8.2 per cent, likely to be realised in the eleventh plan,” the finance minister said. Though Mukherjee has not indicated what could be the growth forecast for 2011-12, the Reserve Bank of India, the International Monetary Fund and the Asian Development Bank have scaled it down to 8-8.5 per cent. The finance minister had projected GDP growth of 9 per cent plus or minus 0.25 per cent in the 2011 budget. India’s chief economic adviser Kaushik Basu said the finance ministry is yet to carry out a review of growth targets that is usually done in the mid-term economic review in October-November each year. However, with RBI and multilateral agencies downgrading India’s growth, the ministry would carry out a review in June-July 2011. Until then, the ministry will go with the lower end of the range indicated in the budget -- 8.75 per cent. The planning commission too said it would indicate growth projections in the approach paper to the twelfth plan later this year. Though no estimate has been made, it could not be less than 8.5 per cent. Inflation has been a worry for policy makers, particularly with food inflation remaining in double digits for 18 months before it came down in April this year. Inflation has been pegged at 8.66 per cent in April 2011 and some analysts say May inflation figures to be released on Tuesday could be slightly lower. There are also reports that hawkish money policy will continue. RBI has raised rates nine times in the recent past and liquidity squeeze since April 2010 has had its toll with factory output slowing to 7.9 per cent in 2010-11 from double-digit growth in the previous year, that too at a time when capacity additions were taking place. Principal adviser to planning commission Pranob Sen is, however, of the view there will be pick-up in factory output in the coming months and the government should resort to more fiscal tightening rather than monetary measures as it has not had a significant impact on food inflation, which is mainly due to supply constraints. Mukherjee said hard work was needed to ensure incremental improvement in growth rate, which comes from states that so far have been lagging behind the national average. “We are now in the process of deepening policy reforms, especially on both direct and indirect taxation and will provide domestic as well as foreign investors a much simplified taxation regime,” he said. Despite fears of some slowdown in growth this year, India is still the second fastest growing major economy barring China and has clocked over 8 per cent GDP growth after the global economic crisis of 2008, indicating rapid economic recovery. OECD secretary-general Angel Gurria told a news conference on Monday that he was enthused by India’s growth story and said some of the developed countries grew at one-third of India’s rate. Gurria said there was no expectation of yet another global recession and the global economy was picking up slowly and countries like India, with their high growth, are contributing to it. On China’s move to rein in growth to 7 per cent, Gurria said there was some sort of overheating of the economy that was growing around 10 per cent. China has decided to lower it to 7 per cent so that the economy grows at “cruising speed”. Though European growth is not spectacular, there is no debt crisis as feared to be, he said, adding that economic woes in Europe are due to fiscal problems in Greece, bank problems in Ireland and self-inflicted political crisis in Portugal. He said the EU was creating a 500 billion euro safety net to deal with the crisis and the IMF was providing an additional 250 billion euros. Besides, the European Central Bank is setting up a fund of around 250 billion euros for bringing about fiscal discipline, he said, adding that this amounts to one trillion euros to deal with the crisis in Europe. On Christine Lagarde’s candidature for IMF top job, Gurria said OECD want selection process to be “transparent and merit-based.”

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