Will he, won’t he? RBI chief waits for a call from North Block

It may amaze some readers that the man who is at the apex of the financial system should be kept hanging like this even as the press continues to speculate on who his successors might be. Subbarao, according to The Economic Times , may get an extension. But the paper is obviously not sure, for it also names Chief Economic Advisor Kaushik Basu and India’s Executive Director at Asian Development Bank Ashok Lahiri as potential candidates. The Indian Express on Thursday endorsed Subbarao for an extension citing support from former RBI governors Bimal Jalan, YV Reddy and C Rangarajan. Monetary policy needs a steady hand. It also needs autonomy from day-to-day political pressures. US central bank governors work for a decade or more. Alan Greenspan spent almost two decades as chairman of the Fed. Ben Bernanke, a Bush appointee, will remain even through the Obama years. Why should Subbarao be treated any different? The other problem with top appointments in the financial sector is that government officials have a tendency to speculate through the press. Unlike the US, there is no nomination from the executive and ratification by Parliament. Prime Minister Manmohan Singh, a former RBI Governor himself, will clear the appointment based on a short-list put up by the finance ministry. Even now, there are many key government appointments where speculation continues. The position of LIC chairman is yet to be filled. A PTI report in June said that the announcement would take more time as various government departments are scrutinising candidates. The chairman of the Insurance Regulatory Authority of India was quoted in the story. It is strange that the IRDA chairman is involved in the whole process. Imagine a test cricket umpire giving an opinion on who India should select as captain. There appears to be no method by which key appointments are made. There is also the tendency to continue influencing decision-making at state-owned companies or quasi-PSU companies. Agreed that the government is majority owner in public sector companies. However, the same ad-hoc policy seems to drive appointments in these entities. The government also seems to be exercising undue influence on organisations like UTI Mutual Fund, owned by LIC, SBI, PNB, and Bank of Baroda, according to T Rowe Price, a foreign institutional investor owning a 26% stake. When government is not the direct owner of UTI, why should it decide who runs the mutual fund? The shareholders’ agreement provides for the appointment of a CEO through the unanimous choice of all shareholders, according to a June 2011 report in The Economic Times.  The report states that T Rowe Price has been irked by the alleged attempt by the finance ministry to back the candidature of an IAS officer, Jitesh Khosla, over the claims of others shortlisted by a professional search firm. Quite clearly, the government needs to have a clear roadmap on how apointments at these levels should be made. First, the decisions must be taken at least three months before the term of an incumbent ends. Second, the length of tenures cannot be arbitrarily fixed at three years when five years is the norm. Manmohan Singh, here is your chance to set a good precedent.

http://www.firstpost.com/  

Mint-fresh: new series of coins launched with latest rupee symbol

Finance minister Pranab Mukherjee on Friday launched a new set of coins of 50 paise, Rs 1, 2, 5 and Rs 10 with the new rupee symbol embedded in them. The new series of coins have been introduced with features at the edge, which make it convenient for easy recognition and distinction. “The design has been adopted keeping in mind the difficulties faced by visually challenged people,” a finance ministry statement said. Last year the government had approved a symbol for the rupee that elegantly combines Devanagiri and Roman scripts to signify the rising strength, ambition and spread of the country’s currency in a fast globalising economy.  The rupee, introduced as a silver coin for transactions by emperor Sher Shah Suri — who built the Grand Trunk road in the 16th century — was only two decades ago largely unrecognised in global markets, but now joins an elite club of symbol-endowed national currencies that include the US dollar, the British pound, the euro and the Japanese yen. The symbol designed by D Udaya Kumar, who has just joined the faculty of the department of design at IIT Guwahati, was selected from more than 3,000 entries that were evaluated by a jury of experts, government and RBI officials. “The new coins will not only reduce the cost of moving materials but also are of user-friendly size and weight, Mukherjee said. Security Printing and Minting Corporation of India Ltd (SPMCIL) is minting the new series of coins of all denominations. As on date, approximately 100 million coins of all denominations have been minted.  The new coins will be lifted by the RBI for circulation to public very soon.Mukherjee had promised to launch the new series of coins in his budget speech in February.

Hinustan Times 

Regulating microfinance

If the Bill hopes to create an enabling environment for the microfinance sector, involving too many agencies may be counter-productive. If there is one area where the Government is acting with consistency, if not speed, it is in the microfinance sector that has, for the past year or more, taken a severe beating, especially in Andhra Pradesh, which accounts for almost 30 per cent of the total business. It was the State government's legislation against private MFI companies that exposed just how much the sector had grown without consistent oversight enforced by Central legislation. Private companies, once touted as the model for microfinance, and trudging a middle course between the Bangladesh Grameen Bank and commercial banks, were almost put out of business after the Andhra Pradesh government passed the MFI Act.  Now the Finance Ministry means to empower the RBI to regulate and fix what it calls the maximum annual percentage rate to be charged by any MFI. It was the interest rate charged by the private MFIs that had drawn the ire of the Andhra Pradesh Government. The private companies had countered that they did not charge exorbitant rates but what had added to the burden of the actual rate were other charges loaded on to the basic rate. The draft ‘Micro Finance Institutions (Development and Regulation) Bill, 2011' has taken this issue into account by defining the ‘annual percentage rate' to include interest, processing fees, service charges and any other charges or fees that MFI clients have to pay. Just to make sure that these charges are not excessive, the RBI will stipulate that the rates operate within the ‘percentage of margin' to be decided by the apex bank. The Bill attempts to create an overarching structure that would include Nabard, the agency that currently oversees the microfinance sector. Nabard was also a player through self-help groups, alongside private firms that it also refinanced. It could, therefore, oversee private firms only to a certain extent; once the latter began to source funds from equity they became answerable to their shareholders, and were thus obligated to maximise earnings. So the Bill proposes an umbrella-type structure with the RBI as regulator, which will delegate some powers to Nabard. The Bill also proposes a ‘ Micro-Finance Development Council' to frame policies, schemes and other measures for orderly growth of the sector. Questions arise at this point. What will the council do that the RBI cannot, with its vast experience and expertise? If the idea is to create an enabling environment for the troubled sector, loading on more agencies than may be required may have just the opposite effect.

Business Line

Dr Subbarao, does KYC stand for Kick Your Customer? - R Jagannathan

The Reserve Bank imposed a fine of Rs 25 lakh on Citibank on Monday for violating its so-called know-your-customer (KYC) and anti-money laundering laws. Reason: one of its employees in Gurgaon duped around 40 wealthy investors by promising them high returns from a bogus investment scheme. The fraud was perpetrated by Shivraj Puri, who took the money from gullible clients claiming Citibank was running a special Sebi-approved investment scheme and then routed the money for speculation in stocks. Even the Munjal-controlled Hero group managed to part with Rs 200 crore to invest in these bogus schemes. The total value of the fraud is estimated at Rs 400-plus crore. And the Sebi-documents were obviously forged. Is the RBI barking up the wrong tree? One wonders how the central bank hauled up Citi for failure to follow KYC norms, when the fraud was perpetrated by one of its own employees –possibly with a wink and a nod from bosses and other employees. The services of a few other Citi employees were terminated in the wake of the fraud. The truth is that the KYC requirements are fairly mindless – they are intended to trouble the honest customer, who will run from pillar to post to satisfy the norms, while the fraudsters simply fake the documents to get around the law. If I were the Reserve Bank of India, I would impose a Rs 25 lakh fine on the person who invented the KYC rules – for some of them are simply not possible to comply with. The key problem for urban residents is the address proof one requires under KYC to do anything – whether it is to open a bank account or apply for a PAN card or a driving licence or a demat account or even a mutual fund account. Proof of address usually comes from passport, driving licence, demat account, electricity bill, telephone bill, or even a bank account statement. But since passport, driving licence, bank account and demat account require the same address proof, it is like chasing your own tail. You can prove your address only if you already have a document saying this is your address. And you can’t get that document without already having another document which says this is your address. Smart, really smart. At the fundamental level, an address proof basically comes only from buying or renting a house in your name. But then, this means your spouse or adult children living with you are stuck for their KYC. This circular nature of proof amounts to a stupidity in the KYC requirement and the RBI surely should have thought about it a bit before mandating it. Nandan Nilekani’s Unique ID project will not solve this problem, for it is about ID, not address proof. I know the kind of problems I have had trying to prove my wife and daughters live with me. Though recent changes in rules allow banks to accept blood relatives on the basis of the same address proof as their parents or spouses, this message has not really percolated among staff – who continue to slavishly demand passports and driving licences. The rule relaxation, of course, is not enough. For it still leaves paying guests or relatives staying with you—a not uncommon phenomenon in Indian families—without documentation to open a bank account. I know a senior journalist who receives all his communications and bank statements at the office address because he does not have address proof where he stays. Not surprisingly, many people have dubbed KYC as “Kick your customer”, given the kind of run-around the public gets from this rule. As for Citibank, its problem was not KYC, but KYE – Know Your Employee. It ought to have been fined for not knowing what its employees were upto. Dr Subbarao, I know the Reserve Bank has loads of other worries—the government’s fiscal deficit, inflation, etc—but KYC is bugging many people too. Do something.

http://www.firstpost.com/business/dr-subbarao-does-kyc-stand-for-kick-your-customer-36841.html

RBI fines Kolhapur Dist Central Coop Bank

The Reserve Bank of India (RBI) has imposed a monetary penalty of Rs 5 lakh on Kolhapur District Central Co-operative Bank Ltd, Kolhapur, Maharashtra for violation of guidelines issued for Anti Money Laundering (AML). The apex bank on Friday issued a statement stating that the RBI in exercise of powers vested in it under the provisions of section 46 read with section 47A of the banking regulation act, 1949 (AACS) had imposed a monetary penalty to the Kolhapur District Central Co-operative Bank. In the letter issued today, the RBI observed that the cooperative bank had violated guidelines issued by the Reserve Bank on Know Your Customers (KYC) norms or AML standards. The RBI had issued a show cause notice to the bank, in response to which the bank had submitted a written reply. "After considering the facts of the case, bank's reply and personal submissions in the matter, the Reserve Bank came to the conclusion that the violations were substantiated and warranted imposition of the penalty," the official statement said.

BS

SBI not to finance disputed projects

In a clear indication of banks pulling out their hand in the aftermath of the Supreme Court ruling in the Greater Noida land acquisition case, State Bank of India on Friday said it would not finance real estate projects that were mired in disputes over land acquisition. “If in a particular area where there has been a difficulty, those will not be financed,'' bank Chairman Pratip Chaudhuri told reporters on the sidelines of a conference here. Mr. Chaudhri's remarks come two days after the Supreme Court asked the U.P. Government to return the land acquired in Greater Nodia for realty projects. “How can we give a loan when there is no land, where there are no land rights,'' Mr. Chaudhuri said when asked about the bank's position on funding projects in disputed areas. “Due diligence is important while advancing credit to the commercial real estate sector as the high interest regime is pushing up project costs and hence greater chances of default,'' National Housing Bank Chairman and Managing Director R. V. Verma said. The Reserve Bank of India has already asked banks to be cautious while extending loans to commercial real estate projects in view of increasing bad assets. On Wednesday, the Supreme Court had upheld the Allahabad High Court order quashing the acquisition of over 156 hectares from farmers in Greater Noida by the Greater Noida Industrial Development Authority and its allotment to builders.

Business Line

FM cautions state banks, FIs on NPAs

The finance minister asked banks to pursue financial inclusion through the business correspondent (BC) model and stressed that there should be transactions in the no-frill accounts....

Read............

Gaddafi bait in sham RBI site nets gullible

NEW DELHI: The next time you receive an SMS or email informing you that you have been chosen by Libyan premier Muamar Gaddafi to partake of a share of his riches, or that you have won millions of dollars/pounds in a lucky draw held by a cola giant, ignore it completely. For years, the city police have had to deal with a slew of rackets that when investigated always have a Nigerian link. But the latest racket has left even the cops dumbfounded.  To give it a stamp of authenticity, fraudsters have set up a sham RBI website that shows money actually being deposited into the 'winners' account. A Nigerian national, Nosakhare Edwin, has been arrested for running such a racket and conning people to the tune of Rs 1 crore. The accused, who was living in New Delhi's Safdarjung Enclave, had opened five accounts with a private bank. "We have asked for detailed statements of these accounts from the bank, as all details and papers submitted so far were found to be forged," said DCP (crime) Ashok Chand. The crime branch was alerted after one Surender Kumar received an SMS on April 20 from an unidentified number informing him that he had won a lottery and the prize amounted to about Rs 2.86 crore. "The SMS also demanded he submit his bank account details, on a cola major's fake e-mail ID, to claim the prize. Accordingly, Kumar emailed his particulars and ID proof to claim the winning amount," said additional DCP (crime) Sanjay Bhatia. On May 3, Surender received another e-mail, informing him that his prize money was being sent by demand draft and that a Nigerian diplomat named Edward William (Nosakhare) would contact him regarding a parcel containing a demand draft, a laptop and a cellphone. Edward contacted him on May 16 and asked him to deposit Rs 18,700 in a bank account for customs clearance. Two weeks later, the victim received a call from an Indian woman, who identified herself as a RBI representative. She directed him to deposit Rs 49,000 more as a transaction tax. "After depositing the said amount, Surender again received an e-mail that had the url of the fake RBI website (rbinet.co.cc). There, he saw that the money had been deposited into his account, but the transaction was only 98% complete and that he was required to deposit more money," said Bhatia. Surender deposited Rs 2,75,000 to complete the transaction and another Rs 17,75,600 towards taxes. Again, he received an email, asking him to deposit Rs 8,95,000 more.  "As Surender had already borrowed a lot of money, he couldn't pay such a big sum. So, he requested Edward to meet him. They met on May 27 at Chanakyapuri and Surender paid Rs 3 lakh more. The same day, he received another email, asking for Rs 5,95,000. He finally smelled a rat and contacted the cops," said Chand. Police arrested Edward when he came to meet Surender on July 2. During interrogation, he said that he and a friend had duped others too.

TOI

RBI for insurance, pension funds in infrastructure

NEW DELHI: The government may be repeatedly asking banks to increase loan flow to the infrastructure sector but the Reserve Bank of India has a different take on the issue. During finance minister Pranab Mukherjee's meeting with bank chiefs on Friday, RBI Deputy Governor K.C.Chakrabarty flagged the issue of lenders nearing capacity as far as loans for road, port, airport and power sector projects were concerned . Besides, he is learnt to have pointed to asset-liability mismatch issues – 80% of the bank deposits mature in less than five years, while infrastructure loans are typically provided for over 10 years. Instead, Chakrabarty, himself a former bank chairman, suggested that the government clears policy impediments to enable life insurance companies and pension funds, which have funds for 20-30 years at their disposal, to invest in the infrastructure sector.  Though it is not known what the reaction of the finance ministry was, a bank chief told TOI after the meeting that bankers came up with the same set of solutions to deal with the issue of mismatch and reaching the exposure limit. One of the suggestions was to seek permission to issue tax-free infrastructure bonds, something that the government is unwilling to do.  At the meeting, the government once again made a pitch for the Takeout Finance Scheme, which is aimed at providing further lending space to banks. Under the scheme, relaunched by India Infrastructure Finance Company last year, banks financing infrastructure projects can enter into arrangements with another entity to transfer the outstanding loans. But till May this year, only nine infrastructure projects, involving a takeout amount of Rs 1,600 crore, have been cleared.

TOI

RBI: Inflation is a significant near term macro challenge for India

“To contain inflationary pressures without disrupting recovery” has been the challenge for the Indian Reserve Bank's monetary policy over the past year and a half. The Indian economy recovered relatively quickly from the financial crisis of 2008, but inflationary pressures emerged even in the early stages of the recovery in late 2009, stated RBI Deputy Governor, Dr. Subir Gokarn in a presentation on Striking the Balance between Growth and Inflation in India. The economy grew by 8.5% in the fiscal year 2010-11, which is close to the five-year average pre-crisis, but year-end headline inflation was over 9%, well above tolerance limits.  There are some factors affecting inflation, global and domestic, that is clearly outside the purview of monetary influence, the deputy governor said. But, that doesn't mean that monetary policy does not have a role in addressing factors that it does influence - demand pressures and the risks of inflation becoming generalized through expectations and price-setting actions. The domestic growth scenario suggests that the growth rate will moderate somewhat in the coming year. However, he said that even though growth could be impacted, it must be understood as a short-term tradeoff with positive consequences for long-term performance. The Reserve Bank of India projects growth during 2011-12 to be 8% in its baseline scenario. The current cycle of contractionary monetary policy was initiated in the context of two important factors. First, there was an enormous volume of liquidity in the domestic financial system, as a result of policy responses to the crisis, which also took policy rates to very low levels. Second, even as the early signs of recovery were visible, inflationary tendencies had also begun to show. All this was happening in a global environment which was still quite turbulent and uncertain in late 2009 and early 2010. In the early phase of the cycle, surplus liquidity conditions persisted, which, clearly made transmission of policy rates through to transaction rates very sluggish. From this perspective, the early actions were essentially a signaling effort, accompanied by steady moves to eliminate the liquidity surplus through CRR increases. By the middle of the 2010, the liquidity scenario had moved to a deficit and transmission became much stronger. The immediate impact was shown on the call rate, which is effectively the operating target of monetary policy, of a change in the liquidity situation. The call rate has moved up by about 450 basis points over a little more than a year which is likely to soften both growth and inflation in the second half of 2011-12.  According to the central banker, the persistence and recent acceleration of inflation has clearly increased the risk of expectations becoming unanchored. Global developments have implications for both growth and inflation trajectory in India. The inflationary situation is India's most significant near-term macroeconomic challenge. The RBI monitors short-term expectations through household surveys that have reinforced the perception that household expectations are moving up. However, the relative stability of long-term (10-year) yields on government securities suggest that expectations over this horizon remain anchored.

IIFL 

Banks are Special

They impact the larger economy and so it is wise to ring-fence the banking sector

At first glance, the RBI’s move to cap banks’ holding in non-financial service companies that are not their subsidiaries at a low 10% (of the company’s paid-up capital or the bank’s paid up capital and reserves, whichever is lower) might smack of paranoia. That first impression quickly evaporates under closer scrutiny. As the financial crisis, especially the role of shadow banks, has shown, one can never be too careful when it comes to financial stability. The consequences of bank failure are not confined to the banking system but affect the entire economy. Two, given the scope for multilayering of share-holding in companies, it is entirely possible for banks to exercise control or have significant influence even over companies that are not their subsidiaries and thereby engage indirectly in activities that are otherwise out-of-bounds. Therefore, it is only logical that the RBI, as banking regulator, should want to limit such investments by banks. In any case, the 10% cap is not absolute, but can be breached where the additional holding stems from corporate debt restructuring or where the company is engaged in activities permitted under the Banking Regulation Act and the RBI’s prior approval has been obtained. Banks are also free to set up subsidiaries for activities that are conducive to the spread of banking in India or are useful or necessary in the public interest. The attempt is to ring-fence the banking system from risks that lie outside. From this perspective, the latest stricture is of a piece with the Bank’s keen pursuit of the ‘holding company model’ for large financial groups and its recent guidelines on registration of Core Investment Companies (CICs). The holding company model envisages banks as subsidiaries of the holding company rather than the other way round, thereby insulating banks from non-bank activities. Likewise, CICs, which do not carry on any trading activity and whose assets are predominantly shares in group companies, call for a regulatory treatment different from that of non-deposit taking, systemically important non-banking financial companies (NBFCs). The message, post the crisis, seems to be that ‘banks are special’. For now, few will disagree.

ET 

RBI staff stage protest

Employees of the Reserve Bank of India on Thursday held a demonstration on the RBI premises in Chennai. According to a press release, the convenor of the United Forum of Reserve Bank Officers and Employees Samir Ghosh was among the speakers. RBI Governor D.Subbarao met the representatives and assured them that the issues would be resolved soon. The call for demonstration was given by the All India United Forum of Reserve Bank Officers and Employees, the release said.

The Hindu

‘Devise strategies to contain NPAs'

Union Finance Minister Pranab Mukherjee on Friday exhorted chief executives of all public sector banks (PSBs) and financial institutions to contain the downward trend in asset quality by devising suitable strategies for curbing and rolling back their non performing assets............

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