GOVERNOR'S TENURE

We are living in very difficult times and there is a great need for continuity in the positions of policymakers. The RBI Governor will complete his three-year term in September.  It has been a difficult period for him and the economy right from the beginning and he has earned plaudits for his management both from within the country and from international institutions. In an unprecedented gesture, three distinguished ex-Governors are reported to have appealed to government to keep him in the post for another term. Since the 1980s, the central bank has followed a convention of filling the four Deputy Governor posts with an economist, banker and a member each of RBI staff and the IAS. Whenever the Governor is from the IAS, the quota for that service is released for the benefit of the RBI staff. Recently, the RBI staff got a second DG from their ranks. The government might have taken a decision in principle to extend the term of the Governor, who is from the IAS. There seems to be no other contender from that service as of now.

HBL 

NABARD turned 30

National Bank for Agriculture and Rural Development (NABARD) celebrated the 30th Foundation Day at its Regional Office in Bangalore on July 12. Addressing the gathering of staff members of NABARD, Padmashree Aloysius Fernandez, chairman, NABARD Financial Services Ltd, remembered his long association with NABARD since 1986. “NABARD’s connect with the grassroot level is its strength and it should build on this to address the critical issues relating to the unorganised rural India. Promoting peoples’ institutions and connecting them to the developmental process should be the focus of NABARDs initiatives in the years to come,” he said.

Speaking on the occasion, Uma Shankar, Regional Director, Reserve Bank of India said, “NABARD and RBI need to work together to address the issues of national importance.”  Recalling its long journey of NABARD through the three decades of yeomen services for the development of rural area, S N A Jinnah, Chief General Manager, NABARD, Karnataka Regional Office, said, “NABARD’s efforts have been to ensure perpetual flow of peace in the country by balancing equity and growth. NABARD, while focusing on People and Profits (development), also takes care of the Planet (environment).” Responding to the changes sweeping across the economy, NABARD is repositioning itself by identifying new developmental business models such as supporting Producers Companies. Senior Officers of NABARD shared their experiences during the occasion. Several competitions were also organised among the staff to mark the Foundation Day celebrations.

Nimma Bengalaru

UCO Bank's adopted village in Bhadrak still backward

Reserve Bank of India (RBI) Governor D Subbarao had launched a financial outreach programme on December 3, 2009 in Jalanga village of Bhadrak district on the sidelines of UCO Bank adopting it as a model village. But, nothing has really been changed in the village so far. The promises for schools, hospitals, good communication, a community centre, and a viable financial boost to agriculture and cottage industries are yet to be fulfilled except the three solar lamps provided by the bank. The visit of the RBI Governor was part of the central bank's decision to reach out to villages in remote areas to spread the message of financial inclusion. As per sources, Jalanga, whose 70 per cent population are tribals, has been included in the list of areas with 100 per cent financial inclusion. Ever since, the villagers of Jalanga expected better life. But, nothing has come up in the last one year except some no-frills accounts in the bank. The adoption of the village under Samagra Gramin Vikas Yojana as part of RBI's initiative to create 200 model villages in country had marked a gala function.  The RBI Governor had said that the village would be an example of socio-economic empowerment within a few years. He had also inaugurated a farmers' club at the village and distributed self-help group linkage certificates, besides passbooks of no-frills accounts to the people. But, common minimum facilities are still a pipe dream in the village. After starting a branch, UCO Bank has opened 1,200 no-frills accounts in Jalanga. But nothing substantial has been done.

The Pioneer

Second innings for ‘retired bankers'

If you are relatively healthy, have the expertise in your area of work, and are willing to keep yourself engaged after retiring from service, have no fear. Job offers may not be too elusive, what with non-banking finance companies such as Manappuram Finance inviting applications from ‘retired bankers'.........

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Arcil and RBI

This refers to the news ‘Arcil Under Stress from Large Lenders, says RBI’ (ET, Jul 19). It has been reported that the RBI has questioned the resolution procedure adopted by Arcil. It would tend to cast aspersions on the credibility of service providers who have all been clubbed and called recovery agents. Some of the service providers are ex-banking and institutional personnel having followed the best practices during their service. They have taken up this assignment by forming corporate entities to make available their skill and in a transparent and professional way. They also provide training to the young management/law and other graduates, who otherwise find it difficult to get into the main banking stream. Such efforts should be encouraged and, if needed, the RBI can think of regulating them as well.

P KRISHNAN , Bangalore ET

RBI links bank licence to rural branch

MUMBAI: Signboards of new private banks which are common on high street will soon be visible in the remotest of rural areas with the Reserve Bank India (RBI) linking new branch licensing to the number of rural branches that banks open.  Most new private banks which have already drawn up branch expansion plans in large cities have decided to go ahead even if this means having to identify places that have never seen a bank branch before. Private banks are taking the change in policy in their stride although some feel RBI's policy increases the onus on smaller banks. "The new branch licensing policy changes priorities as we will now have to go to these rural areas earlier than we would have gone otherwise," said Shikha Sharma, MD & CEO, Axis Bank. She added that although the new policy mandates banks to advance their plans for rural markets these are growth markets and an opportunity for banks. Axis Bank, which had drawn up plans to open around 250 branches this fiscal, will have to open 60 branches in unbanked areas.  With financial inclusion being a key agenda of both RBI and the government, the central bank has decided to give private banks a push to go rural. RBI, in its circular, said that "banks should allocate at least 25% of the total number of branches proposed to be opened during a year in unbanked rural (tier 5 and tier 6) centres." An unbanked rural centre would mean a rural (tier 5 and tier 6) centre that does not have a brick-and-mortar structure of any scheduled commercial bank for customer-based banking transactions," the circular said. Earlier banks were expected to reach most of the unbanked customers through the use of business correspondents. The new circular shifts the emphasis to a physical branch. The rural directive could be a setback albeit a small one for new generation private banks which have turned into profit machines with earning growing over 20%. For these banks with heavy investment in technology, it would be difficult to break even in an unbanked branch unless banks are able to find some way to generate interest income by growing loans here. "This is a positive step and should be directed at the more mature public and private banks with established networks, high current and savings account deposits, who have the wherewithal for a greater outreach. The more nascent banks, with less than say 1,000 branches, still need to focus on high density deposit collection centres till such time they can build a sustainable reservoir of deposits," said Rana Kapoor, MD & CEO of Yes Bank. According to Kapoor, banks with a vintage of 10-15 years, should be ready to take on this "Inclusive Banking" challenge. According to Deepak Gupta, executive director, Kotak Mahindra Bank, lenders will have to come up with new ideas to do business in rural areas. "We need to think differently as we can't do business in the same manner. We will have to come out with new strategies for tying up deposits products and loans," said Gupta. Kotak Bank plans to add around 75 branches to its network every year for the next couple of years.  Some public sector banks, however, see an opportunity in the new regulation as it gives them permission to open one urban branch for every rural branch they open in excess of the statutory requirement. This licence for a branch in a tier one city over and above the other approvals they have received. "We are increasing out branch target by 200 outlets to take advantage of the new policy," said M Narendra, chairman, of the Chennai-based Indian Overseas Bank.

TOI

Banks to reach another 1.2L villages

New Delhi: Banks have been asked to reach another 1.2 lakh villages over the next 15-odd months to cover all villages that have a population of 1,000-2,000 in what is being described as the third round of banking push.  While banks – public sector, private and regional rural banks – had been mandated to reach around 73,000 villages with a population of up to 2,000 by 2012, the need to push for further expansion has been necessitated by the government’s decision to move to a system of cash transfer of entitlements ranging from fuel subsidy to payments for the rural employment guarantee scheme. Of the target given so far, around 30,000 villages were covered till March 2011 and banking facility will be provided in the remaining 43,000 villages during the current financial year. “Our estimate is that over the next few months, the target will be met. Given that banks have already done the groundwork, it should not take more than 12 months for them to reach another 1.2 lakh villages,” said a top source involved with the government’s financial inclusion programme.  Banks will use hand-held devices and business correspondents, most of whom will be kirana shop owners, retired school teachers or PCO operators to reach the villages. With banks having finalized technology platforms and SMS-based systems, the finance ministry believes that rollout will be easier. “Banks will need to hire around 10,000 people a month, which should not be very difficult,” said an official.

TOI

Troubling times

.......Now, as if to confirm the apprehension of firms, banks have petitioned the RBI for a pause in its key rate hikes. This is a significant development for it means that banks now fear credit demand has become increasingly “interest-sensitive”. What the RBI will now face is a triple dilemma, since it will have to balance not just growth with inflation control, but also with the health of banks, most of which rely on interest incomes for sound balance-sheets. ............

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DATA-WISE

RBI recently took a swipe at the poor quality of government data on industrial output and inflation that was making its job of cooling prices more difficult. The central bank has now started to release more of it. It now provides more details on credit flow on a monthly basis and last week for the first time it released data on overseas direct investment and is now attempting to reduce the lag in the weekly statistical releases.

ET

Statistics, damn lies & sample size

RBI Governor D Subbarao has recently expressed dismay that data on prices and industrial production are simply not reliable enough to form a good basis for policy. The inflation rate is frequently revised upward by as much as 100 basis points. Trends in industrial production data are so erratic as to leave analysts gasping. Governor Subbarao did not mention the National Sample Survey Organisation (NSSO), but its data are also looking unreliable enough to generate false conclusions and mistaken policy responses.  Consider the latest employment data from the 2009-10 round. These showed a fall in labour participation from 42% to 39.2% over five years, implying an increase of only two million jobs in this period. But after initial cries of "jobless growth" it became apparent that the real problem was "workerless growth." Female willingness to work fell a whopping 6% in five years, implying that 35 million women workers had withdrawn from the labour force. All calculations about India's demographic dividend went for a six.  This created a puzzle. Why on earth should poor people withdraw so massively at a time when wages are rising so sharply, even for casual unskilled workers? Rising numbers in secondary and college higher education can at best explain a small part of this.  Step back and take a longer look, and a new puzzle appears. Labour participation was 42% in the 1993-94 round of the NSSO, and fell to 39.7% in the 1999-2000. Then too this led to cries of "jobless growth" and theories on why economic reform had not created jobs. But then the participation rate rose again to 42% in the 2004-05 round, leading to the cheery conclusion that job growth was faster than workforce expansion, so the reforms were a great employment success. But now we once again have falling participation and talk of jobless growth. Deja vu, indeed. What's the true underlying trend? An expert from afar, looking at the data over two decades, will probably conclude that any trends that may indeed exist are getting obscured by data imperfections more than anything else. To put it succinctly, statistical noise may be drowning out genuine trends. Data imperfections may not be the only factors. But they do give a credible explanation of why participation seems to bounce up and down, why we see no sign of a demographic dividend although the numbers in the 15-60 age group have risen disproportionately, and why female participation has dipped so sharply as to be unbelievable. While it is up to statistical experts to work on this puzzle and provide answers, let me highlight one possibility. This is that the sample size of the NSSO surveys has become too small, and hence is yielding too much noise to make out the underlying trends.  Back in the 1970s, the sample size of a "thick" NSSO survey was 140,000 after taking into account non-responses. Over time this has fallen to around 120,000, mainly because of increasing non-response. Now, increasing non-response itself is a problem. But more important, surely, is the fact that the sample size has fallen even as the population has more than doubled. Statisticians will tell you that the sample size need not go up in proportion to population, but surely it should not fall dramatically, as is the case.

ET

Numbers don't tell inflation story

The data may not fully reveal this, but the fact is that we are faced with inertial inflation where people get used to a certain rate and adapt themselves to it. Hence, we need strong monetary measures to shock the system. The Reserve Bank faces a big challenge — that of finalising the review of its policy for the first quarter of the year amidst misleading signals emanating from data sources. The central bank Governor has already expressed his anguish over the situation in a recent speech. I remember a foreign statistician telling me many decades ago that India had produced great statisticians but poor statistics. The malaise continues to prevail at least in the real sector, although this is not the case with respect to the financial and banking sectors, thanks to the central bank.  There was an unexpected decline in the growth rate of industrial production to 5.6 per cent in May 2011, when experts and industry associations were expecting a better performance based on anecdotal evidence and the so-called base effect. One may not be sure of even this, because the rate for April was revised downwards from 6.3 per cent to 5.8 per cent. In the absence of reliable data on production and price trends, the formulation of policy becomes a game of blind man's buff. N EXPECTATIONS

The news on the price front, based on the Index Numbers of Wholesale Prices, is not encouraging either. The annual inflation rate for April 2011 has been revised from the provisional estimate of 8.66 per cent to 9.74 per cent. The annual numbers for all commodities for June at 9.44 per cent (9.06 per cent in May) and food inflation of 8.31 per cent as on July 2, 2011 (7.61 per cent on June 25), are indicative of the underlying excess demand in the economy. Seasonal factors compiled by the RBI show that the peak in food prices is reached around September-October and the trough in February. An analysis of select economic variables shows that seasonal swings have undergone a marked downward shift over the years. I have been arguing that differences owing to seasonality are in the nature of Tweedledum and Tweedledee. While this is welcome from the point of short-term policymaking, it does not support the traditional view that, come kharif or rabi season, prices will fall. What we see is a classic example of inertial inflation where people get used to a certain rate and adapt themselves to the situation. The inflation expectation surveys of both experts and the common man testify to this. Just as an object in equilibrium can be disturbed to move to a new position only by an outside force, what is needed is a strong monetary thrust to shock the system. QUEEZE CREDIT

A rise of 25 basis points each in policy rates and the Cash Reserve Ratio is the least that we need to deal with the crisis. Which sections of the population will be affected? Agricultural families that constitute the bulk of the population are immune to any consequent hardship as they are protected by the rate ceiling and the provision of interest subsidy to banks by the government.  For the manufacturing sector it will mean a cut in profits. The interest element in cost of production is not significant. At the end of May 2011, non-food credit grew by 21.9 per cent year-on-year compared with 18.1 per cent a year back. Credit to industry and the service sector increased by 26.7 per cent and 21.8 per cent, respectively, as compared with 25.8 per cent and 15.0 per cent, respectively, a year earlier. Industries have availed of the less expensive external commercial borrowing as well. The year-on-year percentage credit growth in respect of NBFCs, commercial real estate and personal loans at 54.4, 19.9 and 17.7 respectively, was significantly higher than the rate of 17.5, 1.2 and 5.6, respectively, recorded at the end of May 2010. Personal loans for consumer durables, housing and vehicles registered accelerated growth. They can all do with some deceleration in bank advances. The time is opportune for the RBI to formulate a tighter monetary policy without bothering itself about data limitations. Persistent inflation is a fact borne out by the daily experience of millions of people. Government also agrees on the need to sacrifice growth in the interests of price stability, which benefits all, unlike the former that is skewed in its impact.

HBL 

INFLATION CONTROL: CHASING A CHIMERA

We have had 10 rate hikes in past 15 months, yet inflation continues to be stubbornly persistent. Will a 25 or even a 50 basis points hike help in containing it? One basis point is one-hundredth of a percentage point. The average inflation rates in the first two quarters of 2011 on a year-on-year basis were 9.56% and 9.4%, respectively. Should we split this inflation into core and non-core categories, then the rate hike story becomes somewhat prescient. Core inflation, or price rise in items excluding food, manufactured food and fuel, was 6.43% and 6.24%, respectively, in the March and June quarters.  In the Wholesale Price Index, core items, or non-food manufactured goods, have a weightage of 55%. Whereas, non-core items have 45% weightage, inflation in these items was prevailing at the rate of 13% plus during the March and June quarters. In other words, two-thirds of the overall inflation was contributed by the non-core sectors. The rate increases by the Reserve Bank of India (RBI) have little impact on non-core inflation. Further, there is a feedback mechanism from non-core to core inflation operating through higher transport cost, higher raw material cost and higher wages. The impact of persistence of this shock can be econometrically estimated. We find that if fuel price goes up by say 10%, then 34% of it, or 3.4%, will be passed on to core inflation in three months. For this reason, given the volatility in food and fuel prices, the ability of RBI to contain core inflation, leave alone overall inflation, through rate hikes is somewhat limited. The answer lies in smoothening the structural rigidities in food and fuel supply chains. Bringing down fuel inflation rate will depend on our ability to strike long-term contracts and in the pursuit of cost-effective raw material securitization measures in oil, gas and coal outside the country. Similarly, in the food sector, our ability to contain prices would depend on our ability to improve supply chain efficiencies. Development of organized retailing can have a catalytic impact in this context. We have often been told that a rule-based policy rate hike is more robust than one which allows for significant discretion. For this purpose it is customary to examine the deviation between actual inflation and target (threshold) inflation and the deviation between actual output and potential output, along with their respective weightages for determining the signal rate. Already a 275 basis points hike has taken place during the past 15 months. For reasons elaborated earlier, the inflation rate continues to prevail at 9% plus when the threshold inflation is around 6%, creating a perpetual gap of 3%. Rate hikes have done little to bridge it. On the flipside, the 12-monthly moving average growth tells an interesting story. While the Index of Industrial Production was 9.3% in January, in May it came down to 7.4%. Capital Goods Index growth has come down from 21.2% to 12.2%, intermediate goods growth has come down from 8.4% to 5.8%, even consumer goods growth has come down from 7.7% to 7.5%. The decelerating growth trend is clear across the board. Further, the hike in interest rate along with land and regulatory issues have led to many project delays. The new investment announcements fell from Rs.5.7 trillion in March 2010 to Rs.2.6 trillion in March this year. Further, growth in fixed investment shows a sharp decline in the three months ended March.  In other words, the actual output is falling way short of the potential. Hopefully, policymakers will keep it in mind while reviewing the interest rate.

Mint

Manish Khera: The success stories of business

... Luckily,  he received support from his firm's key shareholders, ICICI Bank, besides K.C. Chakrabarty, the Deputy Governor of RBI who was then heading Indian Bank.......

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