ANOTHER RATE HIKE IN SEPT?

The past 10 days in which the economic landscape of the US and the euro zone has changed should have an impact on India’s monetary policy, but that may not happen too soon with no signs of inflation coming down in Asia’s third largest economy. The market is vertically divided on what the Indian central bank should do when it reviews its monetary policy on 16 September. 

Many economists believe that Reserve Bank of India (RBI) Governor D. Subbarao will continue to tighten the policy and opt for yet another rate hike, the 12th in the past 19 months, and raise the policy rate to 8.25% before he presses the pause button. There are others who equally strongly feel that RBI should wait and watch before tightening the rate further. After all, it had raised the policy rate by 50 basis points in July, surprising the market, and by doing so, it’s ahead of the curve. One basis point is one-hundredth of a percentage point.

The latest factory output data, released on Friday, will hardly help RBI to make up its mind. The Index of Industrial Production rose sharply by 8.8% in June year-on-year, higher than the revised 5.8% in May, and significantly higher than what most analysts had estimated, but an unusually volatile capital goods index is responsible for this. The capital goods index rose 9.5% month-on-month after showing a decline in the past two months. The consumer goods index, meanwhile, continued to decline for four months in a row with both consumer durables and non-durables showing weak demand. In fact, consumer durables rose just 1% year-on-year, the slowest rise in 23 months. The decline in the Purchasing Managers’ Index—53.6 in July, down from 55.3 in June—also reflects weak investor sentiment. Domestic passenger car sales slumped by almost 16% in July, the first monthly dip since January 2009. It’s pretty evident now that dear money has started dampening demand, something which RBI has been pushing for.  The developments in the US and Europe and the stock market meltdown have shaken business confidence and if senior bankers are to be believed, most corporations are shelving investment plans for the time being. Following this, concerns about growth will definitely be back on RBI’s radar along with managing price stability. But is the time ripe to press the pause button? One major positive for the Indian economy is the fall in crude prices. In Asian markets, the benchmark West Texas Intermediate fell to around $82 per barrel from at least $100 per barrel a week ago and Brent crude is trading at around $105 per barrel, sharply down from $125 in early August. India imports at least 75% of its crude requirements. If crude prices continue to soften, it will have a bearing on domestic inflation, but nobody is sure how long the decline in crude prices will continue. At a bankers’ meet in Kathmandu, on Friday, Subbarao said it was important to bring down inflation to sustain growth and that it was too early to signal a change in monetary stance. The suggestion was clear—the central bank may not be done with monetary tightening as yet. Earlier, meeting bankers in Mumbai, RBI deputy governor Subir Gokarn said unless inflation comes down, monetary policy will continue to remain tight. The crude price decline may not last long because of the US Federal Reserve’s ultra-easy monetary stance. Last week, the Fed decided to keep interest rates at near-zero level till mid-2013 and said it would be ready to take further policy measures if economic conditions deteriorate further. Fed has held rates at near zero for more than two years since December 2008, and the economy is flooded with almost-free money. Its second quantitative easing programme that ended in June, and involved $600 billion of bond purchases, led to massive capital inflows into emerging markets and a surge in commodity prices. The Fed has promised to continue to consider additional measures to support the economy, but chairman Ben Bernanke may not find enough support for yet another quantitive easing programme. If he can push through that, the fresh flood of money will prop up commodity prices and the Indian central bank will find it extremely difficult to fight inflation. Wholesale inflation was 9.44% in June and is not expected to slow before October. In its quarterly review of monetary policy, RBI has, in fact, raised its year-end inflation projection to 7%. Before RBI announces its semi-quarterly review of monetary policy on 16 September, July factory output data as well as wholesale inflation data will be available, as will first-quarter gross domestic product or GDP data. On top of all that, RBI will have a clear idea of the trajectory of the monsoon by that time. All of those factors will influence its monetary stance. There is a subtle difference between continuing with the tight money policy and making it tighter—the difference between taking a pause and going for another round of rate increases. A pause doesn’t mean the reversal of policy. My column last week on customer service in banks evoked strong reactions from banks and their customers. I refrain from reproducing their emails as I have no intention to play the role of a banking ombudsman. A couple of them have pointed out, and rightly so, that the quality of service is equally bad across the financial sector and it’s not fair to blame banks alone. Mis-selling of insurance policies and mutual funds is rampant in India. One retired bureaucrat told me he has not been able to continue with his insurance policies till they mature as his insurance agent always encourages him to prematurely withdraw money from old policies and start new ones to earn higher commission.  

Mint 

1000 notes too big for Kolkata wallet

KOLKATA: The city where the cheapest bus ride is five bucks and the base Metro fare even cheaper doesn't have much of an appetite for the 'big note'. The demand for the one thousand rupee currency note in this city is only about a third of Mumbai and Delhi. It'd rather make do with small change - there is a perennial shortage of coins in Kolkata.

The Reserve Bank of India's Regional Office in Kolkata says that 26 million 'Rs 1000' denomination notes have been supplied in Kolkata over the past year. In Delhi and Mumbai, the figure is around 80 to 100 million. Kolkatans mostly prefer currency notes of Rs 100 or lower, say bankers. The middle-class people of Kolkata "cannot really afford" to keep thousand-rupee notes in their wallets, says Tarakeswar Trivedi, secretary of the Federation of Traders' organization of West Bengal. Alok Saha, a grocery shop owner in Shyambazar, a bustling part of north Kolkata, agrees: "We hardly get 1000 rupee notes from customers. We get a few in the first days of the month, generally for monthly grocery purchases. It's not even 10-15% of our business." Satyajit Das, a food court employee in Salt Lake's City Centre Mall - one of the most happening places in town - says he rarely gets 1000-rupee notes. "We get more 500 rupee notes," he says. You would hardly find an ATM in Kolkata that dispenses 1000-rupee notes. "Customers here don't like getting thousand rupee notes," said an official of United Bank of India. "The yearly demand at any of our branches is no more than 2,000-3000 such notes. Customers are even apprehensive about the 1000 note. They fear the notes could be fake," he added. An HDFC Bank official said they stock currency notes of 500 and 100 denominations in its ATMs. "The Kolkata customer's first preference is the 100 rupee note, followed by 500," he said. Even the demand for 500-rupee notes, though ten times the demand for the 1000-rupee note, is low compared with other metros. "Banks in Kolkata don't want 1000 rupee notes in large numbers," an RBI officer told TOI. Samita chatterjee, an IT employee, said she withdraws money from ATM twice or thrice a week so that she gets more 100-rupee notes. "Generally, for each withdrawal in Kolkata, you get only five 100 rupee notes. It is difficult to get change for 500 rupees for day-to-day transactions like bus fare, metro fare and even food," she added. The cost of living is relatively low in Kolkata. For 10 bucks you can go from one end of the city to the other in a bus. At pavement stalls, the costliest dish would not be more than Rs 50 and you can still get a decent rice-fish meal, streetside, for Rs 15-20. "I wouldn't like if someone hands me a 1000-rupee note," said Remesh Samanta, a food vendor at BBD Bag.  The Reserve Bank of India's Regional Office in Kolkata says that 26 million ‘Rs 1000' denomination notes have been supplied in Kolkata over the past year.  

TOI 

On accountability drive, Nabard chief axes official

The Chairman of the government-owned National Bank for Agriculture & Rural Development, Prakash Bakshi, has started cracking the whip to bring accountability among the 5,000-plus employees.  Bakshi, who took over as chairman in June, has suspended an officer of the rank of Chief General Manager (CGM) from the department of production credit, for lack of presentation in time of certain data he’d sought. This is the first time since the ban’s inception that a CGM has been suspended. Further, an explanation was sought from another CGM from a regional office in southern India on an alleged impropriety. Disciplinary action has also been ordered against a senior lady officer. A Nabard official, who did not want to be identified, told  Business Standard :“The chairman has also asked the officials and employees to remain present well before the timing of a meeting. If they fail to do, they will be barred from attending it. Besides, staff at official meetings have been told to switch off their mobiles or keep it on silent mode; if not, they may be fined Rs. 25,000.” Bakshi was not reachable for comments. A Nabard Officers’ Association member confirmed the chairman’s drive, and was critical, saying: “Accountability should commensurate with the work handled. The CGM suspension was not at all warranted, as the ground on which the action has been initiated is not sustainable. The Associations Central Executive Committee (CEC) at its two-day meeting in the last week of July held a marathon discussion in this regard. The CEC members, by and large, felt the steps under the garb of bringing accountability in the functioning are in the nature of victimisation.” Bakshi’s initiative comes at a time when the bank is reanalysing its product range and work processes. It is also exploring the design of new products, such as supporting and financing producers’ organisations, to capitalise on the advantages of value-chain financing and increasing the incomes of grassroot producers.

BS

Your post office may double up as a bank soon

NEW DELHI: Your friendly neighbourhood post office may soon also function as a bank. The department of posts is working on a plan to get a bank licence, which will be sent to the Cabinet for approval. Once it gets a go-ahead, the postal department will formally seek a licence from the Reserve Bank of India.  If the plan is approved and India Post gets to start its own banking operations, it has the potential to emerge as one of the biggest banks in the country, thanks to its massive network and reach. India Post, the largest postal network in the world, comprises 1.55 lakh post offices, of which nearly 1.4 lakh are in rural areas.

TOI

Better customer service = higher deposit insurance coverage?

One wonders why the Damodaran Committee on customer service has made a broad-brush recommendation on increasing deposit coverage for all banks.

It would seem so if the recommendation of the Damodaran Committee on customer service in banks is any indication. Indeed, a key and interesting recommendation of the Committee is that the deposit insurance cover should be enhanced to Rs 5 lakh from the present Rs 1 lakh (per customer per bank).  The Committee feels that the coverage enhancement can encourage individuals to keep all their deposits in a bank convenient to them. Going further, the Committee has even said that “a way should be found out to insure 100 per cent of deposits by making necessary amendments in the relevant Acts.”

Implicit view

Implicit in this statement is the view that the limited cover of Rs 1 lakh compels individuals to split their deposits amongst a number of banks and even possibly with non-banks.  That implicit view also seems somewhat supported by the data — according to the RBI, in terms of number of term deposit accounts of “individuals”, only some 20 per cent of the total number of accounts are in the greater than Rs 1 lakh category as of March 2010. This could mean either that deposits are getting split or that the fraction of individuals with above Rs 1 lakh deposits is quite small.  Now, one can wonder how a Committee tasked with looking into the operational aspects of how customer service is rendered in banks can make a recommendation on a policy issue.  Indeed, deposit insurance is a core macro policy issue in banking. It impinges on how the banking regulator can reconcile the objective of minimising risks of a bank-run with the need to not create or aggravate the moral hazard inherent in providing a liability-guarantee for lending institutions.  The recommendation is also interesting in that it comes in the backdrop of global regulatory efforts (at least efforts) of the past year or so to ensure that “TBTF” (too big to fail) does not happen again.  To make a recommendation on 100 per cent deposits coverage is certainly interesting in this context. This means all lenders will be ‘too big to fail'.  Be it as it may, one cannot but recognise that the Committee recommendation has the potential to spark off a larger debate on the concept of deposit coverage itself.  More pertinently, in India, given the organisational landscape of banking (and more generally financial intermediation) — marked by the significant presence of public sector banks and the notable presence of new and old private sector banks and an expanding non-bank financial institution sector — some brainstorming on deposit coverage could well be in order.  It can potentially generate ideas and proposals which can contribute to the policymaker's larger objectives — for instance, attaining higher and deeper financial penetration and inclusion. Indeed, if that larger objective is kept in mind, some fresh thinking on employing new tools — such as deposit insurance — to attain that objective could well be considered seriously.  It is well accepted that different types of financial intermediaries — large banks, small banks, public banks, local banks, private banks and, importantly, non-banks, too — are critical in expanding financial reach and penetration, be it on the savings side or on the credit side. This recognition of the importance of different types of intermediation to achieve some broader economic objectives can be acted upon through various policy tools — one such tool seems to be the medium of deposit coverage.

For whom?

One wonders why the Committee made a broad-brush recommendation on increasing deposit coverage for all banks. Now, do we really need it for the public sector banks in India? Does not their public ownership character mean that the government fisc is backstopping all the creditors of such banks for all amounts?  More broadly, going beyond banking, for all public sector financial intermediaries, it is well understood that the government budget ultimately backstops them — like the US Treasury's backstop for Fannie Mae and Freddie Mac. A clear example in recent times was when LIC was diagnosed with an actuarial deficit of some Rs 10,000 crore on some of its guaranteed return schemes. Now, does anyone believe that LIC — or more specifically the policyholders who purchased insurance from LIC — will be left to fend for themselves here? A broad brush recommendation therefore does not appear necessary at all here. Indeed, experience shows that 100 per cent deposit coverage has been provided in India even in the case of (some) failing private sector banks. But, precisely for that reason — that the 100 per cent deposit protection in the case of private sector lenders could be selective — it does seem possible to think of alternative and different deposit coverage structuring for private sector banks or, more broadly, private sector financial intermediaries.

Positive discrimination

Now, it may not need much convincing to note that public sector financial intermediaries — given the 100 per cent deposit backstop they have — are in a “higher playing field”, so to say, vis-à-vis their private sector counterparts here. In banking particularly, the private sector banks, and specifically the old private sector banks which have so far had a largely regional focus, certainly do not have a level-playing field. The new private sector banks with their recent entry and the benefit of starting with a fresh slate across all operational parameters do not seem to be that affected by this “playing field” syndrome. The weak hand dealt to the old private banks is also broadly inferable from the financial data. In the past decade, their average cost of funds has been uniformly higher than that of public sector banks by a margin of some 60-70 basis points. That is not fully offset by higher returns from the asset side of the balance-sheet. That shows both in accounting and market based measures of return. Also, deposits growth for the old private sector banks has consistently lagged behind that of government banks in the past decade — a possible pointer that higher deposits growth could have been attained only with much higher deposit rates than were posted hitherto. Now, why cannot deposit coverage be enhanced only for the (old) private sector banks? More broadly, why cannot deposit coverage be provided even for non-bank financial intermediaries up to a certain limit based on some rigorous operational and prudential parameters?  The Committee has said (euphemistically) that deposit coverage should be enhanced given the “rise in general income levels”. Why cannot we say that there has been a serious decline in the real value of deposit insurance?  It is the decline in the real value of deposit insurance that should call for coverage enhancement, more particularly for small financial institutions for which deposits is the primary source of funding.  Going by the GDP deflator, inflation has averaged 12-13 per cent per annum in the past decade. That means coverage of close to Rs 4 lakh to keep the real value constant.

HBL  

Value of cheque transactions down 13.9% in June: RBI

MUMBAI: The cumulative value of transactions carried out through cheques across the country during June, 2011, amounts to Rs 7.19 lakh crore, a 13.9 per cent decline vis-a-vis the year-ago period, according to new RBI data.  Banks had cleared cheques worth Rs 8.35 lakh crore in June, 2010, according to the latest data from the Reserve Bank of India.  The total number of cheques cleared by banks across the country during June, 2010, was also 3.8 per cent less than in the same month last year.  A total of 10.62 crore cheques were cleared by banks during the month under review, compared to over 11.04 crore in the corresponding month of 2010.  During the April-June quarter, the total value of the transactions carried out using cheques stood at Rs 24.06 lakh crore, as against Rs 25.17 lakh crore in the first quarter last fiscal, a fall of over 4.4 per cent.  In addition, a total of 32.61 crore cheques were cleared by banks during the first quarter of the current fiscal, a decline of almost 3.8 per cent from 33.90 crore in the April-June period a year-ago.  In June, the Mumbai region reported the highest number of cheque clearances, as well as the maximum transaction value for any zone.  Banks in the Mumbai region cleared a total of 1.95 crore cheques, with a cumulative value of over Rs 1.28 lakh crore.  In the Delhi region, banks reported that 1.27 crore cheques with a total value of a little over Rs 1.06 lakh crore were cleared in June.  The Bangalore region stood third in terms of both the parameters. Banks in the region reported a total 55.4 lakh cheque clearances worth over Rs 39,700 crore, it added.  The fall in the value of transactions through cheques in June, 2011, is in line with the trend of the previous fiscal. However, the numbers went up marginally in April this year.  The value of cheque transactions in the country declined by 2.6 per cent year-on-year to Rs 101.33 lakh crore in 2010-11. Delhi and Bangalore were the only major centres to report a rise in the value of clearances last fiscal. However, the total number of cheques cleared by banks across the country grew marginally by 0.4 per cent in 2010-11. Over 1.38 lakh crore cheques were cleared by banks across the country last fiscal, as against 1.30 lakh crore in 2009-10.  

ET

No major impact of US crisis on Indian economy: Y V Reddy

Ruling out any major impact of the ongoing crisis in the West on India’s GDP growth, former RBI governor Yaga Venugopal Reddy has said the impasse is “very fluid” and it is too early to assess its effect on the domestic economy.  Reddy, credited for firmly anchoring the domestic financial system and economy during the pre-crisis boom that helped the country tide over the 2008 disaster earlier than expected, said, “Though there will be some spillover effect on our economy, it won’t be that grave as our growth is primarily driven by domestic consumption.” Ruling out a recession in the short term, he said a slowdown in global economic growth was certain in the mid-to medium-term. “While the 2008 crisis was a revelation for everyone, the present crisis arising from the US downgrade by S&P and the lingering debt crisis in the Eurozone economies, is a realisation of the fact that the fundamental problems are still not rectified,” Reddy told PTI over the phone from Hyderabad. However, he cautioned that it was too early to assess the development as the situation was too fluid. Projecting an economic expansion of around eight per cent for the domestic economy, with a downward bias, he said to achieve that growth rate, our policy focus has to be fine-tuned at the earliest. Whether there would be a flight of capital if the US economy slips into another recession in the wake of the last week's credit downgrade-from AAA to AA+, Reddy said, “If there is excess liquidity in the US system, then we have a fair chance of getting more capital inflows. But if a serious slowdown kicks in, there could be volatility in the fund inflows”. “This is more so because the global situation is more complex and fluid today than it was in 2008. Moreover, the inherent strength of the economy is not as strong as it was three years (back) when the fall of Lehman Brothers yanked down the global economy into one of the worst recessions,” he added. Therefore, Reddy says “the key monetary focus should be domestic economy.” He refused to answer when asked what would be his advice to the Mint Road in this situation, saying, “whatever the governor is doing now is on the basis of well informed choice. I have trust in the current RBI governor.” When sought his view on the second term for the incumbent Governor Duvvuri Subbarao, Reddy said, “I am very happy that the government has given him an extension.” It was granted that he would get an extension and that it is only a formalisation of continuity.”

BS

Regulators frown at put option mode of exit

An RBI spokesperson said that under the Foreign Exchange Management Act (Fema), notification 20 (regulations 3, 4 and 5), only Sebi-registered foreign institutional investors and non-resident Indians are allowed to invest in exchange-traded derivative contracts where the underlying securities are equity shares of an Indian firm. “No other class of foreign investor is allowed to enter into any derivative contract where the underlying security is an equity share of an Indian company.”....

Read.................. 

Problems persist - ''There are weaknesses in economic growth.''

Last week some economic indicators of the country showed good and healthy growth, though there was bad news too in the form of a near double digit food inflation too. The rise in food inflation was not unexpected as the general price rise was still strong and had got a special push from the diesel price hike in June. Even after all the tough and persistent monetary measures from the Reserve Bank of India, there is a realisation that inflation will be a fact of life for some time to come. In that gloomy context, the impressive 8.8 per cent growth in the Index of Industrial Production (IIP) in June, as against below 6 per cent in the previous two months, and the spectacular 81.5 per cent increase in exports in July should have lifted spirits. But the performance reports fade in brightness on closer scrutiny. A break-up of the IIP figures shows that there was actually a deceleration in some important sectors that make up the index. It was the growth in capital goods, especially power machinery and equipment, which grew by 89 per cent, that contributed to a good part of the 8.8 per cent growth. Capital goods has only a 9 per cent weightage in the index and its growth is not very real because it is built on a low base of last year. Areas like consumer goods and mining which have 30 per cent and 15 per cent weightage in the index grew poorly by 1.6 per cent and 0.6 per cent respectively. A high IIP growth rate with uneven performance by constituent sectors does not inspire confidence. The inconsistencies actually expose the weaknesses and problems in industrial and economic growth. The high export growth rate of last month is also outwardly creditable, especially in a very difficult global environment. The greater diversification of exported goods and of trade partners is also good. But the export growth was on account of the orders received before the current crisis in Europe and the US started. In the coming months the momentum is actually likely to be lost. The government has itself admitted that the year’s export target may not be met. Imports are likely to increase and trade deficit may increase, in spite of the likely fall in crude prices. Therefore the value of one month’s extraordinary performance should not be exaggerated.
DH

The Slowdown Scare

On Friday, when correspondents hounded Subir Gokarn, Deputy Governor, Reserve Bank of India, in New Delhi for his reaction to the ‘good’ 8.8 per cent growth in industrial production, he cryptically replied, “Good for whom?” He would just hope that the rebound in output after a slowing trend over the last three months is freak. The RBI has been aggressively tightening its monetary stance since mid-March 2010—it hiked the repo rate (the rate at which the RBI lends to banks) 11 times, or a cumulative 475 points, over the last 15 months—to pull down demand in its sustained, yet unsuccessful, battle against inflation.  Despite all these hikes, inflation continues to remain stubbornly high, in fact flirting with double-digit numbers—headline inflation rose to 9.4 per cent in June and food inflation almost touched 10 per cent for the week-ended July 30 from a year ago. In fact, according to Thursday’s RBI survey of 4,000 households across 10 cities, expectations continue to run high—they think inflation will rise to 12.9 per cent over the next one year.  

IE

‘MFIs can be regulated via four pillars of compliance’

Deputy Governor of Reserve Bank of India K.C.Chakrabarty went on record last week saying the central bank is not capable of regulating microfinance institutions (MFIs) in the country and that “it needs to get equipped to do the job”. However, Y.H.Malegam, the person who headed the RBI committee to look into MFI operations, says MFIs can be regulated through four pillars of compliance.  While Malegam admitted that “it’s impossible for the regulator to ensure compliance when loans run into thousands,” he also said, “the regulator should look at whether MFIs have an internal organisation for compliance. Whether you have an internal audit department, or an inspection department.”  “The second pillar is an association. If one third of MFIs become members of an association, they (RBI) will recognise it. The association will have its own code of conduct. If discipline is not observed, the association, which will be something like an SRO (self-regulatory orgnisation) can remove that member,” he told The Indian Express.  As per the draft Micro Financial Sector (Development & Regulation) Bill, 2011, the RBI will become the sole regulator for the micro-finance sector.  “If the MFI applies for a bank loan, it can say it’s a member of the association and it’s safe. There will be a lot of incentives for MFIs to become a member,” he said. “The third pillar being, banks that gives funds will supervise MFIs as this funding comes under priority sector lending. Fourth: the RBI will inspect the MFIs to see if they have the systems for internal regulation.” Malegam said.  “Once the Central Act comes into practice, it might be argued that it supersedes state laws. In this case, the Ordinance (in AP) becomes ineffective. On the other hand, states can probably argue under the Constitution, money lending is under the states purview,” he said.

IE

The microfinance sector needs urgent and sensible policy attention

Three Andhra Pradesh-based microfinance institutions — Spandana Spoorthy Financial Services, Share Microfin and Asmitha Microfin — want to merge their businesses. A merger is a good idea to trim costs and achieve scale as operations of these MFIs turned unviable after unsound politics and the Andhra Pradesh state law curbed lending and loan recovery practices. However, merger and consolidation cannot revive the micro finance industry whose loan portfolio has shrunk from . 27,000 crore last year. The real threat to microfinance is from politicians who instigate loan defaults, promising an inevitable waiver. How can micro lenders in AP do business if the opposition Telugu Desam Party (TDP) prevents them from entering villages and promises a state-funded loan waiver, and the state government lacks the courage to counter such senseless campaigns? Politics must change. The country needs microfinance as the poor do not have access to formal finance. MFIs are a huge improvement on moneylenders charging 60% and using force to seize assets. Policy should aim at increasing, not thwarting, the supply of microfinance. Unlike banks, MFIs lend without any collateral. Till last year, they charged interest rates of upto 30% to cover high operational costs. Business grew at phenomenal rates, largely because of the absence of a collateral, and the peer pressure among borrower groups kept defaults below 2%. However, politicking in AP, where two-thirds of the MFI business is concentrated, led to voluntary defaults and recovery collapsed to 22%. The RBI’s cap on lending rates will further erode profitability. Price controls are retrograde and will curb MFIs from entering remote areas, undermining the goal of inclusive finance. A review of the cap is, therefore, in order.  The government now wants the RBI to regulate MFIs and have the power to frame policies for the sector. However, the RBI is spot on when it says that it does not have the administrative resources to deal with MFIs. A viable alternative would be for the RBI to lay down prudential norms and state governments to monitor the industry.

ET