Banking award to Leeladhar

Mangalore : The ‘K.K. Pai National Award for Excellence in Banking 2010-11' will be awarded to Mr V. Leeladhar, former Deputy Governor of Reserve Bank of India (RBI), at Manipal on July 22. A press statement said here that Dr Ramdas M. Pai, Chancellor of Manipal University, will present the award to Mr Leeladhar at 4 p.m. on July 22. Mr T. Satish U. Pai, President of K.K. Pai Trust, Manipal, will preside over the function, it said.  

HBL

Include HRA, conveyance to calculate PF, says HC

The retirement kitty of employees could see a hefty rise, but at the cost of their take-home salaries. The Madhya Pradesh High Court has recently ruled that employers should include house rent and transport allowances, besides the basic pay of their staff, while calculating provident fund (PF) liabilities. Contribution towards PF is mandatory for all workers earning upto Rs 6,500 per month, at a rate of 12 per cent. Employers match this by making an equal contribution. At present, most employers add only daily allowance with the basic wages while calculating the PF liability.  The Employees’ Provident Fund Organisation has now forwarded the HC ruling to all its regional offices and directed them to ensure it is followed. “We will monitor PF deductions and ensure that conveyance and special allowances are included with basic pay,” said an EPFO official. The case pertains to Montage Enterprises Pvt Ltd versus the Employees Provident Fund, Indore, wherein the court ruled that if any allowance is being paid uniformly, necessarily and ordinarily, it should be included for calculating PF contribution. The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, however, excludes many allowances like dearness allowance and HRA from the definition of basic wages.

IE

Dearness allowance link brings retail inflation figures under cloud

NEW DELHI There could be a systemic over-estimation of the retail inflation as measured by the consumer price index for industrial workers, or CPI-IW, as it forms the basis for revision in the dearness allowance of central government employees.  This retail measure of inflation has generally shown a wide divergence with the widely followed wholesale price index (WPI) inflation. "Since the people who collect data for the CPI get their salaries indexed by the same index it actually feeds into some tendency to bloat that," said Kaushik Basu, Chief Economic Advisor , Ministry of Finance. The CPI-IW is compiled by the Labour Bureau and investigators are employed by state governments - directorate of economics and statistics -to collect the prices. The index is used to decide the dearness allowance of central government employees, which creates the incentive for bloating up the index. "We have found a couple of items that occur in both the WPI and CPI collected by different agencies. We are now tracking these two to see if there is any bias in them. But there are no results as yet," Basu said. "A team at the ministry of finance is looking at various aspects of inflation, this is one thing we are indeed looking at," he said. The labour bureau has strongly denied any such possibility and insisted there was no form of manipulation whatsoever. "Our system is foolproof, there are multiple levels of checks. There is no bias in the data collected," said an official at the Labour Bureau. Even experts are skeptical of the possibility of such widespread coordination between all those involved in the process. "It maybe true and there is an incentive to do that (unfairly bloat the CPI-IW), but one can't say that without empirical proof ", said Arup Mitra, labour and employment professor, IEG. "This needs a nexus, because unless all the officials coordinate it won't be possible," added Mitra. The CPI-IW and WPI have shown vastly diverging trends through the years. During 2009, when inflation rate as per the CPI-IW was actually rising above 11%, the WPI inflation rate was falling to negative rates. Since January 1, 2008 the rate of dearness allowance for central government employees has risen from 12% to 51%, an increase of 39 percentage points. According to Ila Patnaik, professor, NIPFP, the divergence can be explained by the difference in baskets used for both the indices. She dismissed the collectors' bias theory, saying, "in a study, we found that the prices for a particular commodity reported under CPI is in line with other sources like the NCDEX , ministry of agriculture data. So evidence doesn't suggest a bias," said Patnaik.

ET

'RBI likely to increase policy rate by 50 bps in July'

Investor concern is that the removal of the priority sector tag by the Reserve Bank of India (RBI) for bank loans through NBFCs in these sectors would push up funding costs. The classification of portfolios acquired by banks from these NBFCs is another concern as STFC sold 45 per cent of total assets in financial year 2010-11......

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New ED of Punjab National Bank

Stressed assets

The Reserve Bank of India's (RBI) inspection report on Arcil, the earliest asset reconstruction company set up to buy distressed loans of banks and other financial institutions, is a wake-up call for the banking sector regulator. It points to a number of deficiencies in the asset-reconstruction business and in Arcil's functioning in particular. First, there is the issue of poor corporate governance that enabled major shareholders to collude in offloading their bad loans to Arcil.

ET

Bankers want RBI to halt rate hikes, clarity on inflation

Amidst a steep slowdown in credit off-take and an unexpected spike in deposits, bankers today urged Reserve Bank of India (RBI) at the pre-credit policy meeting to hold the policy rates at the current levels, and sought a clearer picture on the future interest rates and inflation scenarios at the policy review next week. "Credit growth has been too lax for some time now. So we want the monetary authority to send out a signal that there is a pause on rate tightening. Such a stance can send out the right signal to bankers as well as the industry. We have also urged RBI to come out with a clear statement on the future interest rate and inflation scenarios in the July 26 policy document, so that the banks and the industry can plan better," CEO of Indian Banks Association, K Ramakrishnan, told reporters. He was talking to the media after the customary pre-policy meeting with RBI brass at Mint Road office here. Prominent bankers, led by State Bank of India chairman Pratip Chaudhuri, HDFC Bank's Aditya Puri, Bank of Baroda's M D Mallya, and Bank of India's Alok Misra met deputy governor Subir Gokarn and aired views on the interest rates, credit and deposit growth, overall economic growth, stressed assets and other macroeconomic data ahead of the first quarter policy review on July 26. In its attempt to tame inflation, the central bank has spiked its key rates a record 10 times, whereby it has ratcheted up the short-term lending (repo) and reverse repo or borrowing rates by a massive 275 basis points since March '10. Analysts are expecting another 25 bps spike on July 26 as inflation remains still highly sticky. Since the June provisional inflation number has sniffed at a double-digit mark at 9.44% on the back of recent hike in fuel prices, analysts and the industry are expecting further fillip to price rise, and another bout of tightening next week by RBI. Bank of Baroda chairman and managing director M D Mallya, who is also chairman of IBA, warned of a steeper slowdown in credit growth; and said as no new projects are being planned by the industry, it is unlikely that banks will see an uptick in advances in the current quarter as well. The apex bank has kept a 19% loan growth target for the banks to achieve this year. However, he said, the industry would wait a while longer to decide whether to scale growth target further down.  On the sectors which have seen the most muted level of credit growth, he said it was mostly the infrastructure space. Ironically, this was one of the most vibrant sectors last year, he pointed out. Telecom alone took out nearly Rs 70,000 crore from the system last year to pay for the spectrum licences, he said. The head of the third largest state-run lender also warned that bankers could see more deterioration in the asset quality of SME advances going forward, if the overall industry scene remained cloudy as it is today.  On the liability front, the bankers in general have been witnessing reasonable growth in deposits, especially the savings accounts. Bank of India chairman and managing director Alok Misra also said that it is a bit early to revise downwards the industry's growth target. However, the early signals are not encouraging, he added.

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RBI to Embark on Further Tightening

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Taming inflation needs audacity

With core inflation at 9% and threatening to rage on there, the best way to bring it down in a hurry could be slowing growth

The economy is slowing on many fronts. Industrial production, car sales, Purchasing Managers’ Index—all point to activity moderating. On cue, there has been a lot of hand wringing over this. But a slowing economy is not necessarily a bad thing. Indeed, the real risk is the economy will not slow sufficiently to bring down the raging inflation. Consider the following: Back in January 2010, headline inflation was 8.7%. Food inflation was at a scary 19.8% and core inflation a benign 3.7%. Between then and now, there were 10 interest rate hikes and two bumper harvests. But all that changed was that headline inflation rose to 9.4% (in reality over 10%, given the now-customary 0.8 to 1% upward revision) and non-food manufacturing inflation or core inflation replaced food as the main driver of inflation.  With core inflation at 9% and threatening to rage on there, the best way to bring it down in a hurry could be slowing growth. Core inflation is rising because producers have sufficient pricing power to pass cost increases to consumers—a tell-tale sign that demand remains strong. Boosting investment to expand capacity and release the pressure on prices is clearly needed, but it is a medium-term solution.  When food inflation is tolerated for too long, as was done in India, it hardens inflationary expectations that eventually spark a generalized inflation. This happens in every economy. And India has not been the exception we tried so hard to believe would be true. So like other countries, India too will need to slow growth further if it intends to avoid a hard landing. In the last six months the Reserve Bank of India’s (RBI) survey of inflation expectations has moved relentlessly upwards despite the 10 rate hikes, underscoring its ugly nature. Once the expectations genie is out of the bottle, it is very difficult to contain it without audacious policy changes. Inflation today is poised to rise well into the double digits. Unlike in 2008, when luck (the global financial crisis) more than anything else, brought an end to the runaway inflation, this time around it looks unlikely that the global economy will slow sufficiently to bring down the pace of price rise. Surging export and non-oil import growth suggest that the global economy has not lost as much zing as feared and that private investment in India may soon start adding to domestic demand.  Last May RBI shrugged off its institutional inertia to raise rates 50 basis points (bps). One basis point is one-hundredth of a percentage point. Till then, its 25 bps rate hikes relied more on hope than design to tame inflation. Importantly, it also acknowledged that inflation was demand-driven and expectations were coming unhinged. Those were the clearest signals yet that RBI was not afraid to turn on the heat when needed.  Next week it needs to move more audaciously. Market pressure will be against RBI to hike rates on fears of slowing activity further. But hopefully, RBI will see the writing on the wall that another 25 bps hike just won’t be enough and raise rates more aggressively.

Mint

Crisil questions GDP data

MUMBAI: Ratings major Crisil has now joined the long list of top policymakers and economists who have started doubting the government`s crucial set of data used in formulating major policy decisions. On Monday, a report by Crisil pointed out that the recent move by the Central Statistical Organisation (CSO) to change the base year for computing Index of Industrial Production (IIP) to 2004-05 from 1993-94, a key component for estimating GDP, will boost the latter`s growth rate for the fiscal year 2010-11 to 8.9% from 8.5% under the old base year. This change has also prompted the ratings major to question the robustness of India`s GDP estimates. "Large revisions in GDP estimates in recent years have led to questions on the robustness of these estimates," said Roopa Kudva, MD & CEO, Crisil. "As the most important economic indicator, GDP estimates influence policy making at the highest level, and hence the need for accurate estimation," she added. Crisil study finds that the current method of computing GDP underestimates the size and growth of the Indian economy. The Crisil study comes on the heels of RBI governor D Subbarao questioning the series of revisions for a number of crucial data heads that are taken into consideration for major policy decisions, including the key policy rates by the central bank that decide the interest rate in the economy. Speaking at RBI`s Statistics Day, the RBI chief said that the central was handicapped by the reliability of some of the basic data that it needed to use in policy calculations, and warned that poor quality data could potentially mislead policy calculations. "We make policies in real time and if the provisional data that these are based on are inaccurate, the resultant policies can turn out to be sub-optimal choices," Subbarao had said. The Crisil study has identified four major issues with respect to accurate estimation of India`s GDP, the IIP revision being one of those. In addition, the report pointed out, the current methodology does not accurately measure the contribution of the unorganized sector. Nearly half of India`s GDP originates in the unorganized sector, but the CSO surveys that capture this data are conducted only once in five years. "Given the rapidly changing nature of the economy and increasing self-employment, the absence of annual surveys for the unorganized sector leads to incorrect measurement of its contribution to India`s GDP," said Sunil Sinha, head & senior economist, Crisil. It also pointed out that the estimation of service sector GDP is constrained by the absence of appropriate price indices to convert nominal GDP into real GDP. And lastly, the GDP estimates do not account for improvement in the quality of goods, the report pointed out.

ET

Revive development finance institutions

At a recent meeting between the Finance Minister, Mr Pranab Mukherjee, chairman of public sector banks and officials from the Reserve Bank of India, the latter had mooted the idea of allowing insurance and pension funds to invest in the infrastructure sector. Reserve Bank Deputy Governor, Mr. K. C. Chakraborty had observed that commercial bank loans for road, port, airport and power sector projects were at levels which could not be increased much further..........

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AP refuses to budge on microfinance legislation

State says proposal for a national law doesn’t change the fact that microfinance comes under moneylending

Mumbai: The battle over the regulation of India’s Rs. 20,000 crore microfinance industry is far from over, with Andhra Pradesh, the largest market for Indian microlenders, remaining firm on retaining its own law on the issue despite a proposed national legislation.....

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SC gives SKS Micro 2 wks to amend affidavit against AP Act

The Supreme Court today directed SKS Microfinance , which has challenged the special act passed by the Andhra Pradesh government to regulate micro-finance institutions in the state, to amend its affidavit. A bench of Justice Markandey Katju and Justice CK Prasad asked the SKS Microfinance to amend its affidavit within two weeks and the Andhra Pradesh government to file its reply. "SKS Microfinance is granted permission to amend affidavit within two weeks from today. Four weeks' time, thereafter, is allowed to file reply to the additional affidavit filed by the SKS Microfinance herein," the bench said while listing the matter to September 26. SKS Microfinance has challenged the special act of the Andhra government to regulate micro-finance institutions in the state after allegations that their high interest rates and strong-arm recovery methods led farmers to commit suicide. SKS -- the country’s largest and only listed micro finance company -- has submitted that the state government has no power to regulate the sector. The state government had passed the Andhra Pradesh Micro Finance Institutions (Regulation of Money lending) Act, 2010, to ensure that it has oversight on the sector. According to the SKS, micro finance sector falls under the central list and is not a state subject on which the Andhra Pradesh government could pass any act. SKS further submitted that the state government can regulate only the money lending sector and not the Non Banking Finance Companies (NBFCs), which are registered by the banking sector regulator RBI. The company also cited some recent studies on the micro-finance sector and contended that it was a central subject. The Act empowers the state government to take action against micro-finance companies, if they violate provisions mentioned in the section 9 and 16 of the Act. SKS has requested the Supreme Court to immediately quash the section 10 of the act, so that it can continue its operations in the state.

Moneycontrol

Looking at financial inclusion as an opportunity, not an obligation

Taming inflation has been on the radar of the RBI. The apex bank doesn't mind sacrificing growth as long as inflation can be controlled. .........

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RBI talks inclusive growth, pvt banks need to roll up sleeve

The cost of banking is set to rise for private sector banks soon. They would now have to spruce up their expansion plans for rural India. A Reserve Bank of India (RBI) circular issued last Friday makes it mandatory for all scheduled commercial banks to have 25% of their new branches in rural India where banking services are not available. It’s no longer enough for banks to have mere representatives for rural areas. They need to open proper branches. The RBI has identified 72,800 villages with population over 2,000 that must be brought under the banking purview by March 2012. The RBI has defined ‘unbanked’ rural centre as one that does not have “a brick and mortar structure of any scheduled commercial bank for customer-based banking transactions”. The private sector banks will be hit harder compared to their public sector peers as these have only 6% of their branches in rural India. Compare this to the State Bank of India group which has 35% of its branches in rural centres and nationalised banks that have 34% of their branches in rural areas. Krishnan ASV, analyst, Ambit Capital, had calculated a dip of 30 bps (100 bps is equal to 1%) in return on assets for banks from the current levels of 1.5% to 1.2% over 3-5 years. In fact, Krishnan expects the RBI to be aggressive in its branch approval policy, especially with private sector banks, to enforce financial inclusion.  At present, all domestic scheduled commercial banks are allowed to open branches in tier 3 to tier 6 cities, with population up to 49,999, without RBI’s approval and subject to reporting to the central bank. However, in tier 1 and 2, with population above 50,000, these need RBI’s permission to open a new branch. The only exceptions are north-eastern states and Sikkim, where the permission extends to all cities. While giving approvals, the RBI generally ensures that at least one third of branches opened in tier 3 to tier 6 cities, are in under-banked districts. It also assesses the bank’s participation in financial inclusion and priority sector lending. Now that the banks will be required to open 25% branches in unbanked areas, it will not be compulsory to follow the mandate one third branches of tier 3-6 cities to be in under-banked regions. Now to get the permission to open branches in tier 1 and tier 2 cities, the RBI will see the commercial bank’s proposal to open 25% of total branches in unbanked regions.  The RBI has also decided on a scheme of incentives for the commercial banks. Over and above the 25% mandate they are supposed to follow, for every extra branch they propose to open in under-banked regions in under-banked states, they will receive approval for an extra branch in tier 1 city. This will be excluding the general approvals of tier 1 and tier 2 city branches that the RBI anyway gives, the conditions for which have been already discussed. A banking analyst from a major broking firm said, “This could be a blessing in disguise for the commercial banks.” Till now, the banks were not very upbeat about expanding to rural areas, as it was economical for them to expand till they gathered strength in urban areas. But now that the NBFCs are being kept out of the priority sector lending ambit, the rural branches could actually be crucial for commercial banks to meet the minimum percentage that they must lend to the priority sector. Moreover, opening a branch could be a lot less expensive in rural areas than urban centres and would generate a lot of current and savings account deposits for these branches, which could keep costs of funds low for the concerned banks. However, the break-even period for a typical branch could go up to 15-18 months from 9-12 months in urban centres.

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