Centre in poor light on RBI leadership issue

In less than two months from now, Duuvri Subbarao, Governor of the Reserve Bank of India (RBI) will demit office. The silence of the government over what intends to do - whether his term would be extended or whether it would opt for a new incumbent to don the mantle of responsibility at the central bank- even at this late hour only serves to add to the suspense. In this milieu, rumours are rife that the choice may fall on an outsider. All this shows the official decision-making process in a very poor light. It is, therefore, all to the good that three former governors of the RBI — C Rangarajan, Bimal Jalan and Y V Reddy — have interceded with the Prime Minister Manmohan Singh — who had also worked in this capacity — not to disrupt the present arrangement for the sake of stability and continuity of policy. An extension for Subbarao would therefore be a step in the right direction. Far from lobbying, their intention was that discretionary powers in appointments to posts like these should be exercised with caution, especially in the current environment. Certainly, their timing is right as the department of financial services has prepared an internal note seeking the nod of the finance minister for setting up a search committee. It is common knowledge that the governorship of RBI will fall vacant in the first week of September and yet the department woke up to the fact only now. This apart, other things being equal, why this hesitancy of the part of the government to do the most logical thing - extend the tenure of Subbarao for another two years. His stewardship of the RBI through troubled times has much to commend itself. He was barely in office for a fortnight when the Lehman Brothers had collapsed, the tsunami-like effect of which was felt across the global financial markets. At home, economy was in serious trouble, with the real GDP growth and industrial growth sharply down while the monthly inflation rate had topped 11%. This crisis lingered through part of 2009 as well. In retrospect, he was equal to the challenges and economy soon rebounded. Of course, inflation is still a problem but RBI has been doing its best to tame this monster by tackling the demand pressures; if success is still elusive, it is because inflation arises from a complex interplay of factors such as global commodity and crude prices and supply-side deficiencies. Of course, the RBI governor had his differences with the government on certain issues, most notably in regard to the establishment of the Financial Stability and Development Council — where both have now arrived at a compromise - and the divestment of the debt management function from the central bank and vesting it with the Centre. But, his dissent was voiced with reasoned arguments and was from free from polemical overtones. From being a top bureaucrat in the finance ministry to the helm of affairs at the central bank, Subbarao made the transition with ease and speed and if his three-year stint proves anything, it is this: the case for his extension is strong. If the government thinks otherwise, let it announce its decision without delay. This is not the way to treat a high functionary. Another point needs underscoring here: for global investors and for the economy itself, long-term regulatory stability is a necessary condition.

DNA 

The New Bond Man on Mint Street

Bond house officials and bank treasurers used to rue the fact that informal guidance from a central banker such as Usha Thorat, was no longer available. Once Thorat, a former central bank deputy governor known for her understanding of the bond and forex markets, was moved out of RBI's internal debt market department, all such lines of communication had snapped. A revival of that may be in sight with the appointment of Harun Rashid Khan , a career central banker who worked with Thorat for years, as the new deputy governor of RBI.  Mr Khan, who succeeds Shyamala Gopinath who retired last month, has superseded three executive directors and has been appointed for term of three years. In his new avatar, Mr Khan would be in charge of external investment, internal debt management, foreign exchange and payments and settlement systems.  Bankers say Mr Khan is the most approachable deputy governor among the current lot. "Among career central bankers, he is one person who is open to reasoning," say several senior bankers and a few bank CEOs . They reckon that most RBI officials are more steeped in theory rather than being tuned to market realities.  In a three-decade stint with RBI, Mr Khan has handled a wide range of assignments ranging across departments such as rural credit, currency management, banking supervision and regulation, debt management, reserve management, exchange control, personnel administration and internal accounts of RBI. Prior to becoming executive director in 2007, he was principal of the College of Agricultural Banking , based in Pune. That stint provided Mr Khan with an opportunity to mingle with RBI staffers across all cadres.  Mr Khan has been a familiar face for treasurers and bond houses. Many others in the financial sector started noticing him after a report on rural credit and microfinance was unveiled. A committee headed by Mr Khan had suggested measures to expand banking in rural India. Based on its recommendations, RBI expanded the list of business facilitators and business correspondence for achieving financial inclusion.  Those who have worked closely with Mr Khan say he is mild but sharp. "He may not be as articulate as Usha Thorat and KC Chakrabarty, but if needed, he is able to send across a message," said a senior RBI official. However, a lot has changed since the time Thorat was in charge of debt management and now. The money and forex markets are now far more integrated with the overseas markets now than in the past. Also, there are newer products and currency exchanges coming up in the country which was not the case a few years ago. Mr Khan's challenge will be to deal with growing inter-linkages not only between domestic and foreign markets, but also inter-linkages within different markets at home front.  Mr Khan, going against the stereotype, happens to be a pure vegetarian. Some of his closest friends call him 'vegetarian Khan.'

ET  

Pranab asks Nabard to create viablemodels of financial inclusion



Finance Minister Pranab Mukherjee is greeted by RBI Deputy Governor K C Chakrabarty and NABARD CMD Prakash Bakshi during the meeting of Board of Directors of NABARD in
New Delhi on Tuesday



Finance Minister Pranab Mukherjee on Tuesday exhorted the National Bank for Agriculture and Rural Development (Nabard) to deploy new technology, innovate and create financially viable models to take forward the process of financial inclusion.

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Much depends on mobile phone network

Financial inclusion has been a policy priority of late. The RBI has indicated the importance of involving all agents in the universal financial inclusion exercise by opening the space to business correspondents (BCs) and for-profit companies.Its insistence that banks should recognise the poor as a business opportunity calls for newer strategies from the banks. ..............

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Orissa Chief Secretary inaugurates MSME Summit , 2011

Bhubaneswar: Micro Small & Medium Enterprises (MSME) Summit , 2011 has been inaugurated by Chief Secretary Sri Bijaya Kumar Patnaik here today in Premises of Hostel Swosti Premium. In his inaugural address Patnaik held that Small & Medium Enterprises form a major portion of industrial activities in any growing economy like Odisha. Giving the sector a lead, he added that MSME should take up services and ancillary products that the large-scale industries require.  The Govt will do all that is possible to persuade the large scale industries to support MSME’s. The Chief Secretary has given a call to MSME’s to join hands with Govt in skill enhancement of youth. They have been asked to plan out their skill requirement in coming years so that youth can be trained and they can be absorbed in MSME sector. The opportunities in construction works are growing day by day and the MSME’s catering to different segments of construction sector can come together through collaborative efforts for developing single window delivery system. While addressing the summit as guests of honor Principal Secretary Industries T. Ramchandru and Steel & Mining Secretary Manoj Ahuja said that Govt has enabling policies and MSME’s are required to avail those in right perspective. Discussions in the Summit reveal that MSME’s contribute 8% of country’s GDP, 45% of manufactured output and 40% of exports. It provides employment to near about 6cr. people. Other major topics of deliberation included development of MSME clusters around different specific industrial and agro-based products, credit support, capacity enhancement, revival of sick units and increasing productivity of MSME’s through marketing support. A mini-exhibition was displayed on the occasion by Odi – Fab, a women SHG initiative and Jindal Community College, Angul. Visiting the stalls the Chief Sri Patnaik advised them to scale up their production. Regional Director Reserve Bank of India Sri B.K.Bhoi while addressing the participants told that they should should use grievance redressal mechanism and help line of RBI when they face any genuine problem with regard to credit linkage through banks. The Director General , Indian Chamber of Commerce Dr. Rajeev Singh gave the welcome address and Director , Industries K.Khatai presented the votes of thanks. The summit has been hoisted by Indian Chamber of Commerce.  

http://www.orissadiary.com/ShowBussinessNews.asp?id=27853

RBI calls for ‘forensic audit' of two Kolkata-based firms

Chennai : The Reserve Bank of India has called for a “forensic audit” (investigative audit) of Kolkata-based Prime Impex and Prime Pulses Pvt Ltd, importers and traders of pulses. Initial investigations by banks have, prima facie, shown irregularities and misuse of letters of credit by the two companies by colluding with suppliers and committing an alleged fraud to the tune of Rs 500 crore.  Six banks — Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, IDBI, Development Credit Bank and YES Bank — have been affected by the irregularities. According to sources close to the development, both the companies had “excellent financial track record” and had good rating from global rating agency, Fitch. Therefore, banks from time to time enhanced the L/C limit. “At one point Prime Impex seemed to have breached the L/C limit and, therefore, one bank stopped the payment which had snapped the chain of this kite-flying-operation,” said the source. Banks had roped in BDO India, formerly BDO Haribhakti Consulting Private Ltd, to do the initial investigation and found irregularities in letters of credit, and in many cases there was no genuine movement of goods.  However, the full extent of how the fraud was perpetrated will be known only when a forensic audit is done, said the source.  These companies have told banks that they have lost money in the forex and derivative markets and owing to fluctuations in the pulses market and were, therefore, unable to pay. The company did not respond to an email sent by Business Line. In April 2011, a press release from Fitch said it downgraded the rating of banks' Rs 115-crore L/C limit to Prime Pulses, noting that the banks had informed Fitch that the company has defaulted on its L/C in the previous quarter

The Hindu

RBI doubles bond purchases in june to stabilise yields

MUMBAI: Purchase of government bonds by RBI - the government's debt manager - doubled in the last week of June, signalling it won't hesitate to intervene in stabilising yields when the government borrowing for the fiscal year is forecast to surpass the budget target. The central bank bought government bonds worth Rs 1,143 crore in the secondary market, almost double of what it bought in the first two months of this fiscal, RBI data shows.  "The concern now is on risk of overshoot in budgeted fiscal deficit of 4.6% of the GDP," says Moses Harding, head of global markets, IndusInd bank. "The poor economic performance will put pressure on revenue collections and disinvestment plans may not go as per schedule. It seems that the government is worried on locking into higher coupon rate in the longer-tenor segment and the belief is that 10-year bonds above 8.25% are beyond their tolerance level," he said. Yields on the benchmark 10-year government bonds have remained above 8.3% since June as investors believe that the central bank may raise policy rates by at least another 50 basis points this year. Also, the rising subsidy bill of the government and slowing of revenue collections could force the government to borrow more than the budgeted Rs 4.17 lakh crore. Finance minister Pranab Mukherjee said on Tuesday the government would stick to its targeted borrowing programme and fiscal deficit aim of 4.6% despite rising subsidies. The reduction in customs duties to zero from 5% for crude oil, and to 2.5% from 7.5% for petroleum products, is expected to cost the exchequer Rs 49,000 crore. The government target of raising Rs 40,000 crore from sale of stakes in state-run companies may also fail for the second year if equity markets remain choppy. "I think the government and RBI are concerned about the unrelentingly high g-sec yields, which they would like to see at 8.10-8.20% levels," said the head of a bank treasury. "Whether or not the government overshoots its borrowing programme, yields have to come down to reduce its cost of borrowing. Even an increase of 20-30 basis points in yields would impact borrowing costs."  Even the RBI has been worried about the government's fiscal profligacy. "It would be very difficult to attain the fiscal deficit target unless there is adjustment on expenditure, or tax," Governor D Subbarao had said in a press conference on May 19. RBI would raise aboutRs 63,000 crore through g-sec auctions in July.

ET 

Bankers request RBI to defer deregulation of savings rate

Mumbai: Bugged by the current volatile environment the bankers have said no to the banking regulator-Reserve Bank of India’s proposal to deregulate the rate on savings account. The Indian Bank’s Association, the official representative body of bankers, has written to the RBI explaining the industry’s stand that the status quo be maintained for the time being. Based on the suggestions received from 24 banks , the consolidated feedback of the banking industry has been sent to the RBI for consideration. KR Kamath, CMD, Punjab National Bank, said, “It is not the appropriate time to go for deregulation of savings bank account. Particularly, at a time when the interest rates are going up and inflation is having an upward bias.’’ However, banks have said in case RBI preferred to decontrol the rate on savings rate, they should be allowed to charge adequately for the services that they are providing at no cost. The banks have argued that since the rate has now been revised upward to 4%, the depositors are getting compensated. “Also the rate is being calculated on a daily basis. Till the time there is some stability on inflation and other key rates, savings rate should not be deregulated in the interest of the industry,” bankers pointed out. The RBI had said it has to examine whether the deregulation can help bring more people into the formal banking system. The interest rate on savings bank deposits has remained unchanged at 3.5% (raised to 4% on May 3) since March 1, 2003. Keeping in view progressive deregulation of interest rates, RBI had prepared a discussion paper to delineate the pros and cons of deregulating the savings bank deposits interest rate. Interest rates on savings account in developed countries such as Canada, Japan, Australia, New Zealand, UK and USA are all deregulated and determined by the commercial banks themselves on the basis of market interest rates. However, most savings bank accounts may carry customer charges if the number of transactions exceeds the permissible level in these countries.

FE

Constitutional Validity of Micro Finance Bill - UMARJI

At the outset, it is worthwhile noting some factual statements in RBI reports in regard to micro finance activities: Alongside self help group, or SHG – bank linkage programme, micro finance institutions, or MFIs, such as non-government organisations, nonbanking finance companies (NBFCs) among others have emerged as important sources of micro finance delivery in India. Incentives have been provided for penetration of banking into unbanked areas and encouraging MFIs as intermediaries. Emerging role of MFIs as institutions other than banks engaged in providing financial services to the poor is being recognised and the banking sector has been extending loans to MFIs for on lending to SHGs. In 2009-10, around 691 MFIs were provided loans worth . 8,063 crore by banks. The growth under MFI-linkage programme in terms of both number of credit-linked institutions and the amount of loans was much higher than the corresponding growth under SHG–bank linkage programme. If one reads the pre-amble of the Micro Finance Institutions (Development and Regulation) Bill, 2011, it is clear that MFIs are being treated as extended arms of the banks and FIs and the above factual statements in RBI reports on Trend & Progress of Banking clearly support such treatment of MFIs. Further the expression “micro finance services” is defined in the Bill as providing micro credit, collection of thrift, remittance of funds, insurance and pension services. It is, thus, clear from the activities that can be undertaken by MFIs under the provisions of the Bill, that micro finance cannot be equated with money lending. Micro finance is much more than moneylending and, therefore, the proposed legislation for regulation of MFIs rightly equates the micro finance activity with banking and seeks to regulate activities of MFIs with the object of promoting financial inclusion. Assumption of such legislative power is clearly covered by entry 45 i.e. banking in the Union list in the 7th Schedule of the Constitution. The other ground on which legislative power of the Union is questioned is that the entities engaged in micro finance activities particularly non-corporates are clearly not within the legislative powers of the Union. This interpretation is not tenable for following reasons: Companies, including not-for-profit firms licensed under Section 25 of the Companies Act, 1956, are covered by Entry 44 in the Union list regarding incorporation and regulation of corporations including banking, insurance and financial corporations. Any company engaged in micro finance activity has to be registered as NBFC or seek exemption from such registration, under the provisions of RBI Act, 1934, which is a central law. Trusts and trustees are covered by entries 10 and 12 of the concurrent list. Charities and charitable institutions are included in Entry 28 of the concurrent list. It is clear from the above legislative powers that Parliament is well within its rights to enact a law on micro finance activities undertaken by companies’ trusts, charities and charitable institutions. The only entity not covered by the above list is co-operative society, which is included in entry 32 in the state list in the 7th Schedule. If one looks at the provisions contained in the Banking Regulation Act, 1949 applicable to co-operative banks, it is clear that to the extent a cooperative society undertakes banking business it is subject to regulatory powers of RBI as provided in the regulatory law enacted by Parliament. Such regulatory powers over co-operative societies are further proposed to be enhanced under the Banking Laws (Amendment) Bill, 2011 pending before Parliament. It is, therefore, clear that if a co-operative society undertakes micro finance activities that are treated as akin to banking, central law can regulate such activities.  Assumption of legislative powers of Parliament for enacting Micro Finance Institutions (Development & Regulation) Bill, 2011, on the ground that micro finance sector is engaged in providing credit and other financial services to the poor households and their micro enterprises, as an extended arm of the banking systems is constitutionally valid and free from objection.

The author is Chief Adviser, Legal, IBA.

ET 

Hackers may catch Indian banks napping

About two months ago, there was a major phishing attack on one of India's largest public sector banks. I too received a phishing mail even though I didn’t even have an account in that bank then. When I checked with the bank if account holders had lost money, they were not sure. Users, who enter their credentials in a phishing site and subsequently lose money, do not always admit what they have done. Instead, they blame the bank for losing money. The increasing incidents of online fraud and hacking have put banks in a difficult position. Phishers are becoming more and more sophisticated and phishing mails have begun to appear in Hindi too, targeting the growing numbers of regional language Internet users. Also, it seems that the law applying to the loss of money in an Internet banking transaction is tilted against the banks. A well-known legal expert says the liability of cyber crime, in which the customer is not a co-conspirator, is always on the banks. In other words, if a user loses her money, RBI may ask the concerned bank to compensate the user unless it can show that the user herself is involved in a conspiracy to steal the money.  So, even if there is no anti-virus on the user's computer or a key-logger is installed by a malicious hacker on the user's machine, banks would still be held responsible for the loss of money. To avoid these risks, experts say banks should come up with automated methods to ensure that the user's machine is secure before allowing her access to Internet banking. But not many banks have realised the gravity of the situation and life goes on as usual for them. But surely it won't be long before banks start to realise how vulnerable they are. A chief information security officer (CISO) of a well known bank retorted when confronted with a blatant security hole in the bank's procedure: “Has a fraud happened? If not, why worry?” This means that he will wake up only when the bank is swindled of significant money, and it may be too late then to plug the hole. The PSU banks usually do not reward performance adequately and hence, you can expect the bank personnel managing security to be not very highly motivated. Further, with their present salary structure, PSU banks fail to attract top security professionals. Fortunately, in India the major frauds in banks are still not the ones involving hacking. In most circumstances, it is an acquaintance, who defrauds the victim. Recently, in the US, large companies such as Sony and Citibank have been hacked and passwords of millions of users stolen. Why hasn’t such an incident happened in India? My take is that hacker-criminals in India are not sophisticated enough as yet. And international criminals haven’t turned their gaze towards India as yet. But the situation could change anytime. To be frank, not all security holes of Internet banking can be blamed on the banks. Today's Internet infrastructure is full of holes, and still, banks are moving at high speed introducing newer and newer services, without closing the holes that are found. To give a few examples, most of the home routers come with default passwords, which few users change. As a result, it is not difficult for a hacker to log into them. Wireless networks using WEP are vulnerable to WEP cracking, and software to do so is freely available on the net. And many of Indian payment gateways have security holes. Banks have to also worry about mobile transactions, which are becoming common. Vulnerabilities have been found in iphones and other mobiles. Mobiles are increasingly used on wireless hotspots also, and they are particularly vulnerable there. Along with banks, the government also needs to wake up to online security needs. Recently, Indian Institute of Science, Bangalore tied up with a major Chinese company Huawei Technologies, which has funded its center for testing security in telecom systems. It is inconceivable that our government exposes such a critical national security area to a foreign company. The UIDAI, another critical project for national security, is associated with the US companies with dubious credentials.  The government has also failed to act on cyber crime. Until a year ago, Bangalore had not had a single conviction in cyber crime. Having interacted with the cyber crime police, I can vouch for the good job the investigators are doing. However, if the grapevine is to be believed, the reason for the zero rate of conviction seems to be that the powers-that-be have a tough time distinguishing between the IT Act as in the Income Tax Act and the IT Act as in the Information Technology Act. There are also some bright sides. The two-factor authentication --- requiring a one-time password that is sent on a mobile --- is a much needed improvement that the RBI has mandated for banking transactions. The hacker’s task has got more difficult as he now has to hack the mobile of the victim too along with the desktop computer. However, two-factor authentication is not followed in case of transactions involving share purchase as the time factor is crucial there and one cannot wait for an SMS, which might take minutes or sometimes hours before making the transaction. What can a lay person do to protect his interest online? While the law favours the user as of now, it is an open question if banks would compensate users in case of a major breach. Thus, it would be surely a good idea for high-value depositors to spread their funds across different banks. ICICI Bank has introduced an insurance policy, which provides a cover of Rs one lakh if money is lost due to fraudulent use of an ATM card. This is a good start. Secondly, consumer forums should tie up with banks and security companies in educating the users about security of internet banking. After all, however difficult it may look, there is nothing better than taking the bull by the horns.

(Dr Kelekar, a cyber security expert, is managing director of Teknotrends, Bangalore.) – Deccan Herald 

Regulating microfinance

The Microfinance Institutions (Development and Regulation) Bill, unveiled recently, envisions a larger regulatory role for the Reserve Bank of India and proposes that all microfinance institutions with net-owned funds of over Rs.5 lakh register with it. The RBI will define and fix what the Bill calls “an annual percentage rate”, to be charged by private MFIs, and also set the range within which it can operate. That rate will include interest, processing fees, service charges and any other charges or fees that are payable by the borrowers. Although these stipulations seek to remove a serious lacuna in the regulation of microfinance, they are extremely cumbersome and will be difficult to enforce. In mainline financial sector regulation, the accent has been on laying down broad rules for banks and others to follow. Moreover, given the low threshold for registration envisaged under the Bill, the number of MFIs that will come under the regulatory scanner will be too large for any meaningful supervision. Neither self-regulation nor regulation by Nabard, which also lends to the MFIs, has been found viable. Hence the onus has fallen squarely on the RBI.  Evidently, the context in which the new legislation is proposed is as important as its substantive provisions. About a year ago, the government of Andhra Pradesh — the State that accounts for nearly a third of microfinance business in the country — introduced tough rules to clamp down on such practices as overcharging customers and employing coercive methods to recover loans. These stringent rules came in the wake of allegations that some MFIs were indulging in such wrongful and high-handed practices. As a consequence of the government's action, some high-profile MFIs were badly hit because banks pulled out their loans and this, in turn, snapped those institutions' loan recovery circle. If enacted, the new Bill, which empowers the central government to override existing laws, might give the MFIs some relief, but there is very little chance they will be allowed to go back to their old ways. For its part, the Andhra Pradesh government has voiced its opposition to several of the provisions and pointed out that, even if the RBI became the principal regulator, it would be well within the State government's jurisdiction to exercise control over money lenders and check usurious practices.

The Hindu

AP up in arms over Centre’s bill to shield MFIs

HYDERABAD: Alarm bells are ringing in the state government that the Union government is moving to protect micro-finance institutions (MFIs) and take them out of its regulatory purview. State government mandarins, who are hostile to the lending and recovery practices of MFIs, have compiled a long list of objections to the fine print in a bill the Centre is proposing to introduce in Parliament. The Micro-finance Institutions (Development and Regulation) Bill 2011, the draft of which was released last week, effectively seeks to place MFIs under the watch of the Reserve Bank of India rather than a stringent bill the state enacted last year reining in the lending companies. The AP government sought comprehensive amendments to the draft before the bill is introduced in Parliament. It questioned the move to put MFIs under RBI oversight while ignoring the borrower protection aspect of the problem.  Broadly, the state government objects to the bill’s treatment of MFIs as ‘extended arms of banks and financial institutions’ and would rather deal with them as moneylending agencies subject to the stern law it enacted last year.  The Andhra Pradesh MFIs (Regulation of Moneylending) Act 2010 was enacted after suicides by several borrowers were reported. “This is nothing but infringement of the powers of state governments. Considering the MFIs as arms of banks will give them privileges enjoyed by a bank without any related responsibilities,” fumed a senior official in the Law Department. Government officials say the Centere’s bill does nothing to protect borrowers’ interests.  Unlike the state law, the draft bill does not crack down on multiple lending and evergreening of loans. It also frees MFIs from having to do due diligence before lending. Much of the borrower distress reported last year was due to MFIs giving multiple loans to poor borrowers who had no capacity to repay. State officials are particularly sore that the draft bill deals only cursorily with the coercive recovery practices of MFIs. “We received scores of complaints against MFIs’ practices of lending and recovery including collection of high interest rates and use of coercion in recovery process. There is need to protect poor borrowers against such exploitation,” said an official in the Rural Development Department. As an example of the shielding of MFIs in the draft bill, officials said it proposes that only a person authorised by RBI can file a complaint against MFIs in courts. “The draft seems to have been prepared keeping the interests of MFIs in mind. Civil society, experts and millions of stakeholders from vulnerable sections of society must be consulted and their concerns incorporated in the bill,” said the official. 

http://expressbuzz.com/states/andhrapradesh/ap-up-in-arms-over-centre%E2%80%99s-bill-to-shield-mfis/293285.html