When RBI chiefs speak their mind - K. KANAGASABAPATHY



Speeches of RBI Governors have at times been path-breaking, confronting the public policy environment to bring about desired changes. Clear communication helps in providing forward guidance to market players.



The Reserve Bank of India (RBI) has enhanced and strengthened its transparency and disclosure practices considerably in the post-reform period after the mid-1990s and, thereby, enlarged the open area of two-way communication with the market.

First, the RBI publishes extensive data and information on the central bank's operations periodically. Second, the policy statements have detailed pronouncements and clear statements of stance. Third, the interventions have become more frequent — the two half-yearly statements have now increased to twice a quarter. Finally, such assessments bring out both the upside and downside biases and risks to the RBI's own outlook and projections as also the policy dilemmas.

Speeches by Top Management

One key element of the RBI communication has always been the speeches delivered by top management in different fora. The media eagerly looks forward to such speeches and pick up insights into policy-making. Many a time, such speeches were path-breaking, at times, confronting the public policy environment to bring about desired changes, and establishing the credibility and autonomy of central bank's operations.

The former RBI Governor, Dr C. Rangarajan, in 1993, came out forcefully in favour of procuring greater autonomy for the central bank in his Kutty Memorial Lecture. This paved the way for setting the limit for net issue of ad hoc treasury bills, putting an end to automatic monetisation of government deficits.

Dr Y. V. Reddy, while talking on dilemmas in exchange rate management on August 15, 1997, in Goa, subtly raised the issue of whether the rupee was overvalued or not and pronounced that, as per the Real Effective Exchange Rate (REER), it would certainly appear so, irrespective of the base chosen. This paved the way for a much-needed correction in the rupee exchange rate which helped to tide over the impact of Asian financial crisis shortly afterwards.

Dr Bimal Jalan, spoke less compared to others, but made his strategic thoughts on exchange rate and reserves management policies from time to time. While speaking at the symposium of central bank governors in London on July 5, 2002, with considerable foresight, he enunciated three fundamental requirements, quite unconventional at that time, for a country to prevent a financial crisis: First, careful monitoring and management of exchange rates without a fixed target or a pre-announced target or a band with ability to intervene, if and when necessary; second, a policy to build a high level of foreign exchange reserves which takes into account not only anticipated current account deficits but also “liquidity at risk” arising from unanticipated capital movements; and third, a judicious policy for management of the capital account, discouraging short-term capital for financing investments and encouraging foreign direct investment and portfolio investment. It is now history that these home-grown principles stood the test of time and entrenched in Indian policy-making since then.

Dr Y. V. Reddy, as Governor from 2003 to 2008, had brought out the risk of global imbalances and mispricing of risks in global markets that enabled him to keep a tight leash on monetary policy stance throughout this period.

Dr Duvvuri Subbarao, with his forthright views expressed on several occasions on the role of the RBI in financial stability, promoted amendments to government's intervention on financial stability issues and helped reconstitution of the Financial Stability and Development Council.

Who Spoke on What

The RBI, in the archives section of its Web site, provides a complete list of speeches by top management, at least from 1997. Governors have delivered in all 172 speeches since 1997 and Deputy Governors as many as 322 speeches. A subject-wise distribution of speeches shows that in order of priority, banking, with 122 speeches, topped the list. Monetary policy attracted only 33 speeches, perhaps because there are regular policy statements issued on the subject. The other major subject areas were Indian economy (65), financial markets (55) and financial sector reform (33)

Functional Delegation

There has been a welcome functional diversification in communication in the recent period. The Communications Policy of the RBI has enunciated the following broad principles: The Governor and Deputy Governor in charge of monetary policy are the only spokespersons on issues relating to monetary policy and the exchange rate; Deputy Governors are the spokespersons in their respective areas of responsibility; and the Executive Directors (EDs) and heads of departments speak only with explicit authority from the Governor/Deputy Governors.

Speeches by EDs were obviously rare till 2009 and, thanks to some activism of Mr Deepak Mohanty and, of late, Mr. G. Padmanabhan, there were as many as 23 speeches by EDs in the last about two years.

Mr Mohanty has been the key architect of the recent changes in operating procedures of monetary policy and has, appropriately, brought out the rationale behind the new operating procedures and the main challenges that need to be recognised. He has observed that the transmission of policy signals is most effective under deficit liquidity conditions and the challenge is to keep the systemic liquidity in a deficit mode consistently.

Any prolonged phases of autonomous liquidity infusion due to sustained capital inflows or liquidity drain due to persistent surplus of government cash balances would call for creating the capacity to conduct operations through instruments such as outright open market operations, market stabilisation scheme and cash reserve ratio, besides a scheme of auctioning government cash balances. There is a need for further deepening of financial markets by removing structural rigidities coming in the way of market determination of interest rates. Drawing attention to the debate on internationalisation of rupee, Mr Padmanabhan has observed that international interest in the Indian rupee and emerging off-shore markets are consistent with progressive globalisation of the Indian economy and the efforts must be to bring all genuine users seeking to hedge underlying exposures on-shore. Such speeches have further strengthened the Communication Policy of the Reserve bank and help in providing forward guidance to market participants.

HBL

Trust the gatekeeper

RBI can be relied upon for a fit and proper policy

The news of a meeting of minds between the Union finance ministry and the Reserve Bank of India (RBI) on the government’s policy on issuing licences to new private sector banks has been widely welcomed. India needs new banks and a transparent and robust policy framework will boost public confidence in the licensing process. Given the heightened public concern about transparent licensing procedures, it is most unlikely that the government and the central bank would do anything to invite criticism. Although the final policy framework will be made public next week, information suggests that the minimum capital requirement for a new bank would be Rs 1,000 crore, of which the promoters’ contribution is expected to be fixed at 40 per cent, to be brought down over a 10-year period to half that. As several analysts have noted, the guiding principle for both minimum capital required and the ceiling on promoters’ quota should be that they are consistent with existing and widely acceptable risk management norms. The new policy framework is also expected to limit foreign shareholding in new banks to 49 per cent. In defining policy on this issue, the central bank may consider the suggestion made by some analysts that the definition of “foreign shareholding” should include, rather than exclude, the category of non-resident Indians. In other words, anyone permanently residing outside India should be classified into one category of “foreign investors”, for both investment and taxation purposes. The most contentious and controversial issue relating to the policy on new private banks remains the question of whether “large industrial houses” should be allowed to own new banks. The existing policy, defined at the time of bank nationalisation in 1969 and subsequently tweaked, disallows it. There is neither global uniformity on the issue nor an accepted “best practice”. Global experience does not establish that there is anything inherently right or wrong about permitting industrial houses to own banks. However, there is no pressing reason for the government to revisit the existing policy at this point in time. It has been reported that the Union finance ministry would like to liberalise the policy, with riders and caveats that would disallow companies in areas like real estate from investing in banking. It is best to leave the matter to the central bank’s judgement, which is capable of defining who is a “fit and proper” applicant and what constitutes a “fit and proper” criterion for granting bank licences. The central bank would naturally consider issues like concentration of business power, the need for checks and balances even in the private sector, and the need to identify credible private sector entities that have the resources to set up and run a bank. There are ways in which the power and control that can be exercised by private owners over banks can be restricted and RBI has pointed to this in its original discussion paper. The central bank is the best judge of its capability to regulate, monitor and punish large private sector entities, and should base its policy on an objective assessment of its own capabilities to regulate the private sector.

BS

RBI asks Orissa to examine its Debt Recovery Act

Bhubaneswar, Aug 18 (PTI) Not satisfied with the rate of recovery under different government schemes in Orissa, the RBI today asked the state administration to examine Orissa Public Debt Recovery Act for stepping up the rate of recovery. "The provisions of the Orissa Public Debt Recovery Act need to be examined," Reserve Bank of India Deputy Governor H R Khan said, while attending a meeting of State Level Bankers'' Committee (SLBC) here. Stating that recovery under government schemes was "far from satisfactory", Khan said that bad recovery of loans occurred mostly due to under financing and excess interest rates. The state government need to analyse why the rate of recovery was so low, he said adding that banks too have to ensure that the rate of interest should be within the payable limit of the loanee. Raising concern over the stagnant growth in bank accounts of farmers, Khan urged the sector to include more farmers into the ambit of banking. Lending to farmers adds to increase in productivity, he said suggesting the state government to set up a sub-committee under the SLBC to look into the areas of extension support for agriculture sector, he said. About 84 per cent of the farmers in the state come under the small or marginal category, Khan said though the crop loan ratio had increased, term financing rate was low. "The state government need to create facility so that term loan rate can increase," he said. "Twenty-five per cent of all new bank branches would now be opened in rural areas," he said, adding that financial closure was not an obligation but an opportunity for the banks.

MSN News

Orissa pulls up banks for dismal lending to agriculture sector

Commercial banks operating in Orissa have been chastised by the state government for their below par lending to the agricultural sector that supports over two-thirds of livelihoods in the state. The overall agricultural advances by commercial banks stood at Rs 22,063.71 crore (as on June 30 this year), which is disproportionately low at only 30.52 per cent of the total advances (Rs 72,298.44 crore) in the same period. “The picture is disturbing with regard to the achievement under the agriculture sector. Lending by the public sector banks to this sector is only 20 per cent of the target. Performance of a large number of public sector banks in terms of their overall performance under the Annual Credit Plan, more specifically to the agriculture sector, can hardly be reckoned as satisfactory,” state Chief Minister Naveen Patnaik said while addressing the delegates at the 124th meeting of State Level Bankers’ Committee (SLBC). With such a huge shortfall in performance during the first quarter, how are we going to achieve our overall target in this year, he questioned. Prafulla Chandra Ghadai, the state finance minister said, “Credit to the agriculture sector is not growing as per the state’s expectations. Only 30.52 per cent of the total advances by the commercial banks have been to the agricultural sector. For Andhra bank, the agri-lending is only 6.6 per cent of the total advances, 1.8 per cent for Bank of Baroda, 2.73 per cent for Dena Bank, 1.62 per cent for Oriental Bank of Commerce and even zero for some other public sector banks.” The banks that have not advanced even a single rupee to the agriculture sector in the April-June quarter include State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, ING Vysya Bank, Orissa State Financial Corporation (OSFC) and Small Industries Development Bank of India (SIDBI).

Speaking on the occasion, Harun R Khan, Deputy Governor, Reserve Bank of India (RBI) said, “Credit flow to the agriculture sector has been far from satisfactory. I can see that the credit targets in this sector have not been met. Agriculture sector is definitely a priority sector as it has lot of linkages with the industry and we need to ensure that the credit flow to this sector increases and this leads to rise in productivity. A sub-committee of the SLBC needs to be formed to look into the areas of extension support for the agricultural sector.” Raising concern over the stagnant growth in number of bank accounts of farmers, he urged upon the banks to include more and more farmers within the ambit of banking. Lending to the agricultural sector aside, the commercial banks have also failed to live up to the expectations in other parameters like credit flow to the MSME (Micro, Small & Medium Enterprises) sector and Credit-Deposit (CD) ratio. “The advances to the MSME sector stood at Rs 10,919 crore by June-end which represents only 15.09 per cent of the total advances by the banks. This is certainly not in tune with the steps taken by the state government to promote the sector. Besides, the CD ratio of 12 districts in the state is below the RBI stipulated norm of 60 per cent. The continuous decline in CD ratio of commercial banks remains a cause of concern for us,” said Ghadai. Commenting on the CD ratio, the Chief Minister said, “While the overall CD ratio under the commercial banks is reported to be 63 per cent, the ratio for the public sector banks is only 57 per cent. The CD ratio of some of the strong public sector banks is below 50 per cent. If we disaggregate the CD ratio into rural and urban segments, a more disquieting picture emerges. While the overall CD ratio of rural branches of the public sector banks is only 48 per cent, the corresponding ratio for the urban branches is 72 per cent.”

BS

Financial Planning Corporation (India) Pvt. Ltd. (FPCIL) launches Professional Certification Standards for Financial Planning and Advisory Services Organizations

Financial Planning Corporation (India) Pvt. Ltd. (FPCIL), established by Financial Planning Standards Board India (FPSB India) today launched the Professional Certification Standards for Financial Planning and Advisory Services Organizations. The objective of this certification, which is a first-of-its-kind in the world, is to create quality standards and benchmarks across the Financial Advisory services. These would help financial consumers immensely in choosing the right financial intermediary to achieve their long term financial goals based on professional and scientific analysis. The financial advisory industry would also be suitably stratified by a yardstick which measures several parameters such as Approach to Financial Planning Process, Policy on Investors’ interest, Quality of Service, Systems and Processes, Governance, Risk Management, Resources and Infrastructure, etc. The Certification Standards is expected to professionalize the financial advisory industry by institutionalizing and establishing competency levels from Level 1 to Level 5 (Level 5 denotes the highest maturity level) for the organization based on the established parameters which are scientifically measured and tested. The benchmarks would also serve as key differentiators in the competition, which is expected to evolve and further benefit financial consumers. The Model is supported by M/s. BDO Consulting Private Limited and M/s. Morison Vasudeva Consulting Private Limited as Knowledge Partners.

On the occasion of the launch, Mr. Prashant Saran, Whole Time member, Securities and Exchange Board of India (SEBI)said;We Congratulate FPCIL for initiating the Professional Certification Standards for Financial Planning and Advisory Services Organization. The main aim is overall Financial Well Being of the Consumer.

At the Launch, Mr. G. Prabhakara, Member (Life), Insurance Regulatory and Development Authority (IRDA) said; This is a proactive measure to develop Professional Certification Standards for Financial Planning and Advisory Services Organizations, provided it is feasible and worthwhile. It is important to give confidence to consumers through self regulation and accreditation. The initiative towards certification standards is a significant milestone to keep the efforts of financial advisors on a high pedestal.

At the Launch, Dr. K.C. Chakrabarty, Deputy Governor, Reserve Bank of India (RBI) said; There is need for a consumer focused wealth management and that is where, across the globe, Financial Planning is assuming great significance. Constructing, Executing and Monitoring the portfolio is an onerous task where customer must be in focus. We need to create an ecosystem where customer is at the centre and the risk-return matrix is mapped to his interest.  

The Certification Standards would be available from September, 2011 onwards. Financial Planning Corporation (India) Pvt. Ltd (FPCIL) was established by Financial Planning Standards Board India (FPSB India) along with BNP Paribas SA, SBI, and Tata AIG Life Insurance Co. Ltd, essentially to undertake education activities in the Financial Planning segment. Globally, many leading financial service institutions are coming together to establish Financial Planning as a profession, and setting up standards in the discipline. FPSB India has been set up to achieve the same. The key ob-jective for FPSB India to promote FPCIL has been to augment and enhance the scalability and quality of Financial Planning education across the financial advisory spectrum. FPCIL shall continue various initiatives including knowledge workshops, seminars and publications. FPCIL aims to create new horizons based on collective and shared vision with all the stakeholders. It shall aim to create new benchmarks for quality and performance in meeting its goals.

http://apnnews.com/2011/08/18/financial-planning-corporation/

RBI says demand moderating, inflation will come down

The Reserve Bank of India on Thursday said domestic demand is starting to moderate indicating that inflation would come down. "We think that this moderation in demand that we are seeing this year is going to help inflation come down, along with any potential softening of commodity prices...these are two factors that have been keeping the inflation up," RBI Deputy Governor Subir Gokarn told reporters in Bangalore. "...and the fact that at least domestic demand is starting to moderate for us is an indication that inflation will come down", he said after delivering an address on inflation and growth to members of the Federation of Karnataka Chambers of Commerce and Industry (FKCCI). Gokarn added: "...the (GDP) growth rate this year will be more consistent with a more moderate inflation trajectory...". He said the RBI last month gave its outlook that GDP would grow "roughly eight per cent" in the current fiscal. "It's roughly at that level (GDP growth of eight %) that we expect inflationary pressure to start easing off". Gokarn said it's "our judgement now" that "non-inflationary sustained rate of growth" would start happening when the economy grows at roughly eight per cent. Asked about the impact of the "global scene" on Indian economy and its growth, he said so far the impact has largely been on financial markets and commodity prices. "That's not enough of a basis to completely rethink the growth outlook".

High inflation not conducive to investment: RBI

BANGALORE: High inflation even with high growth is not conducive to investment and corporate performance, said Subir Gokarn, a Deputy Governor with the Reserve Bank of India on Thursday. Earlier in the day Anand Sinha, another deputy governor of the central bank had said tackling inflation is the bank's primary concern. Indian inflation eased in July although the still-high headline number and persistent price pressures in manufactured goods raised the odds that policy will have to stay tight in the economy despite the rising risks to growth. The food price index rose 9.03 percent and the fuel price index climbed 13.13 percent in the year to Aug. 6, data on Thursday showed.

ET

RBI likely to introduce Basel III norms

The Reserve Bank is likely to place fresh curbs on banks' dependence on wholesale deposits. The central bank said that it is coming out with guidelines based on Basel III, an international agreement on broad regulatory principles, which will incorporate these changes. "In the guidelines, we will be looking at the liquidity measures mandated under the international agreement," said Anand Sinha, Deputy Governor, RBI. He was speaking on the sidelines of an event to launch Union Bank of India's Union Chetna service, a private television channel for customer and employee education. Sinha said that to grow their core deposits banks will have reach out to those outside the fold of banking and this would be feasible only if they bring down the cost of transactions by adopting technology. "One of the reasons for the crisis was the liquidity mismatch. In fact, during 2003-07, the overnight repo had increased three to four times in the US, which means that long-term assets were being funded by overnight funds in the US. These are the things one should be careful about," Sinha said.  Sinha told newspersons said that RBI would come out with draft guidelines on new bank licences very soon and the central bank would also shortly take a view of increasing the interest rates on savings deposits. He said that the downgrade of US by S&P would not impact investments of either the central bank or commercial banks. "The universe is not only built of only triple a rating. As far as There are various layers of investment grade rating. As far as banks with US operations are concerned the US government has said that for banks in their jurisdiction that the rating downgrade will not lead to higher risk" he said.

TOI

Job of monetary policy is not to take country to 10-12% growth

Bangalore, Aug. 18: The RBI is looking at 8 per cent growth as the “trigger point”, beyond which inflationary pressures are expected to come down, according to Dr Subir Gokarn, Deputy Governor, RBI. Keeping inflation low and stable is “something we are articulating more now”, he said. “We have to get away from the notion that tolerating high inflation is a way in which we can sustain high growth, because we may get it for some short period of time, but eventually it is going to peter out,” he said. According to him, it was not the job of the monetary policy to take the country to 10 per cent or 11 per cent growth. An 8 per cent growth this fiscal amid weak global scenario was significant, said Dr Gokarn. However, growth acceleration inevitably seems to trigger inflationary pressures, and it was a “realism we have to view the situation with”, he said. Recent inflationary pressures are being exacerbated by structural trends in food prices, “something that weighs heavily on inflationary judgments”. The virtuous circle of low inflation, fiscal consolidation, high investment and high growth was driving policy thinking, he explained. Keeping government spending low, the focus should be on addressing capacity constraints, “as our ability to match demand has not kept pace with growth”. According to him, the investment-GDP ratio must be around 35-40 per cent, and the country needs high investment-GDP ratio for sustained growth.  Talking on the sidelines of an FKCCI event, Dr Gokarn said that inflation was “more or less in line with our July statement — consistent to the 9 per cent plus range”, adding that domestic demand and commodity prices were factors keeping inflation at the current levels. These are drivers for a change in stance and “we are watching very closely”, he said.  However, there was a moderation in demand this year, which will help inflation come down. “Growth rate will be more consistent with moderate demand,” he said, adding that he doesn't see GDP growth slowing to 2008 levels.

HBL

Burden of inflation management solely on monetary policy: RBI

MUMBAI: A RBI committee, headed by Governor D Subbarao, is of the view that the government, fearing fiscal slippages, has placed the entire burden of inflation management on the central bank's monetary policy.  "Most members felt that there could be a slippage in the fiscal deficit budgeted in the Union Budget 2011-12. They (members) were concerned that the fiscal situation had placed the entire burden of inflation management on monetary policy," said the minutes of the Technical Advisory Committee (TAC) on Monetary Policy meeting.  The meeting, which was held in the run up to the first quarter review of the monetary policy announced last month.  The government is aiming to restrict its fiscal deficit to 4.6 per cent in the 2011-12, from 4.7 per cent last year. "Uncertainty about the fiscal situation would continue to pose a serious challenge for monetary policy," said the minutes, which was posted on the RBI website today.  As inflation continued to remain at elevated level, the Committee decided to go ahead with the 25 basis points hike.  The overall inflation has remained close to the double digit mark in the April-June quarter of the current fiscal. It was 9.44 per cent at the end of June.  "Inflation expectations were high and wages were rising. This could worsen the vicious wage-prices spiral, which to some extent was already evident," the minutes said.  It said there was disagreement among members of the committee to raise the policy rates as four members opposed the rate hike with the view that the past monetary policy actions had an impact and the spillover was still playing out.  "In view of this, as also the fact that the uncertainty in the global environment had increased and domestic investment was slowing down, they suggested that the RBI should follow a wait and watch policy," it said.  Besides, one member had suggested an increase in the cash reserve ratio (CRR) by 25 basis points, while another felt that RBI could give clear signals of more stringent capital requirements in future, at least for systemically important financial institutions.  The meeting also reviewed the global and domestic macroeconomic developments and said the US debt problems could have its impact on India as well.  "It felt that the global macroeconomic situation had worsened with the uncertainty clouding the increase in the US debt ceiling issue and continuing problem in the Euro area. If the US debt crisis was not resolved satisfactorily, it would have serious ramifications for the global economy," the members observed.  Regarding the global commodity prices, the committee noted that the situation remained uncertain and that investment activity was slowing down due to a variety of factors.

ET

Sinha: Inflation remains the primary concern

The Reserve Bank of India (RBI) on Thursday reiterated that inflation continued to be the primary concern for the central bank as it stayed much above its comfort zone. “RBI will be looking towards a secular trend of inflation coming down. But anything what RBI will do depends upon how the situation develops. It is not that you see a figure on one day and you come to a conclusion,” Deputy Governor Anand Sinha said. Sinha, however, refused to comment on whether the central bank would go for a pause in interest rate hike. “Can’t comment (on if RBI will pause hiking rates). RBI has made it very clear, the governor has made it very clear that tackling inflation is a prime concern,” he added. According to the inflation data released on Thursday, food inflation eased marginally as the index rose 9.03 per cent for the week ended August 6 as against 9.90 per cent in the previous week. However, the fuel price index rose to 13.13 per cent in the year to August 6, as against 12.19 per cent a week earlier. In a bid to tame the headline inflation, which stood at 9.22 per cent in July, RBI raised the key policy rates 11 times since March 2010. The central bank has projected 7 per cent inflation for March-end and said it was expected to remain elevated for a few more months, before moderating towards the later part of the year. The medium-term projection for inflation is 4.5-5 per cent. In its first-quarter review of the monetary policy, RBI retained its baseline projection for GDP growth at 8 per cent, but said some moderation in growth trend might be underway. Commenting about the government’s borrowing programme, Sinha said RBI should tackle it in a smooth manner. “RBI will tackle it... Try to make it as smooth and as efficient as it has always done.”

BS

Need to peg growth at 8% to tame inflation, says Gokarn

Reserve Bank of India (RBI) Deputy Governor Subir Gokarn on Thursday said India's growth rate should be maintained at around eight per cent for a while to tame inflation and spur growth at a later stage. Delivering a lecture on ‘Inflation and Growth’ at an event organised by Federation of Karnataka Chambers of Commerce & Industry, he said the objective was to ensure maximum growth without provoking inflation. “Our past experience substantiates this argument. When our growth rate was around seven per cent, inflation was peaking and corrective monetary measures were taken. This eventually led to 8.5 per cent growth at a later stage,” he said, saying it was time the growth rate was kept at eight per cent to contain inflation. Adding: “This may result in somewhat slower growth than is possible at any given time, but it would help achieve sustained high growth.” Supporting the decisions taken by RBI in recent times to raise rates, he said the moves were essential and tailored with the objective of controlling inflation. Gokarn further said public spending should be curbed to an extent to spur private investment and create capacities and demand, leading to healthier growth and lower inflation. “Low inflation is associated with growth sustainability. Among other channels, it also has a positive impact on investment. High inflation, even with high growth, is not conducive to investment or corporate performance,” he said. On the virtuous cycle of low inflation, fiscal consolidation, high investment and high growth, he said corporate performance benefits from this cycle and data for the last financial year on corporate performances substantiated this fact. “There is a drop in the margin levels for the first quarter of the ongoing financial year, but I don't see any meltdown. Corporates are managing to pass on the increase in input costs to an extent and recent inflationary pressures are being exacerbated by structural trends in food prices,” he said.  Gokarn's statements come amid food inflation falling to 9.03 per cent for the week ended August 6, even as the price of all items, barring pulses, rose on an annual basis. Food inflation, as measured by the wholesale price index, stood at 9.90 per cent in the previous week.

BS

Growth to continue, India to see better governance: D&B

Amid allegations against policy paralysis and graft flying thick and fast, US-based information services firm Dun & Bradstreet (D&B) on Thursday said India would see improvement in governance and reduction in corruption as it is expected to continue on high growth path in this decade. In a report, D&B pegged Indian economy’s growth at 185 per cent to more than five trillion dollars by 2020 from 1.75 trillion dollars at the end of 2010-11, to be driven by services. “As India moves ahead to achieve economic and social development, we anticipate significant improvement in governance and reduction in corruption,” the New Jersey-headquartered consultancy firm said in its report, India 2020 Outlook. At five trillion dollars, India’s economy size would be what Japanese economy was at 2010, D&B said. “India’s growth would be driven by rapidly expanding services sector. Strong growth in domestic savings will support domestic investment,” said the report. At a function to mark release of the report, Planning Commission Principal Advisor Pronab Sen said, “In 2020, we can achieve to become a 5-trillion-dollar economy, if economy grows at 8.5-9 per cent and inflation at 5-5.5 per cent.” It means an annual economic growth between 13.5-14.5 in nominal terms can make India a 5-trillion-dollar in the next nine years. The report said consumption would continue to be the major contributor to GDP in the current decade, though its share was expected to decline gradually due to significant increase in share of domestic investment. The report further spoke of “substantial rise” in private investment activity and surge in infrastructure investment to drive investment.

Former RBI Deputy Governor Shyamala Gopinath, speaking at the same function, said focus should be on execution rather than financing to expedite infrastructure development. The 1841-founded D&B further said rising income levels, coupled with a bulging of the young working-age population, would lead to significant growth in private final consumption expenditure. Maharashtra, Gujarat and Andhra Pradesh “will be among the most developed states” in the country by 2020. The so-called BIMAROU states (Bihar, Madhya Pradesh, Rajasthan, Orissa & Uttar Pradesh), which have been considered sick in terms of development, are expected to begin leveraging their huge potential in terms of vast natural resources and manpower. Their growth is expected to gain traction, especially in the second half of the current decade. Besides, per capita income of Bihar and Madhya Pradesh is expected to triple by 2020, although remaining below national average.

BS

Frame a policy on overseas investments: RBI to government

NEW DELHI: The Reserve Bank has asked the government to frame a policy on overseas investments to prevent Indian companies from setting up operations in tax havens through a puzzling structure of subsidiaries. The central bank, which decides on overseas investments in investing companies on a case-by-case basis, has written to the North Block, highlighting its concern after an exhaustive study of overseas investments of Indian companies.  "The RBI is concerned about multi-layered structures as they make tracking funds flow very difficult," a source said. The central bank has raised two objections, both related to setting up of special purpose vehicles, or SPVs, which are used to make onward investments in other countries. One, these SPVs float opaque structures, such as trusts, in tax havens. Two, they leverage domestic assets to give guarantees without informing RBI as required under the Foreign Exchange Management Act, or FEMA. There have also been cases where the Indian parent gave guarantees to its subsidiary abroad to enable it to borrow from foreign banks. Such unmonitored borrowings can create systemic risk, the RBI says.  The central bank, therefore, wants the government to restrict SPVs that have multiple tiers below them. Sources said the central bank has already become strict with companies when they come for approval to invest overseas. In a specific case, it told a company to collapse its multi-layered structure into two tiers before approving its proposal.  Indian companies can invest up to 400% of their net worth in overseas subsidiaries. RBI's approval is not required if the second-level entity is an operating company. In May, the RBI had mandated that the parent company should own more than half of step-down operating subsidiary to be able to offer guarantee. But a number of companies have tried to get around the rule by floating SPVs, or holding companies, instead of operating company.  "Having a multi-tiered structure overseas helps in better planning of taxes in overseas jurisdictions, as it improves valuations for Indian shareholders. Therefore, the RBI and the government should consider creating a more enabling environment," said Akash Gupt, partner, PwC.  The new companies bill seeks to bar investment companies from having more than two tiers of subsidiaries, but it is not clear if this proposal will apply overseas.  Multi-layered structures, especially through SPVs in tax havens, have come under the scanner, particularly after the inquiry into the Indian Premier League revealed a complex web of companies to route funds.  Tax authorities fear these opaque structures may be used to take Indian funds out and bring them back into India through tax havens to avoid tax.  The central board of direct taxes, or CBDT, has proposed a new regime called Controlled Foreign Corporations in the new Direct Taxes Code to ensure that tax due to the exchequer is not lost. Under this regime, the undistributed dividends of foreign corporations controlled or owned by Indian companies will be added to the parent's income and taxed in India. 

ET

Data reporting should be automated, RBI tells banks

Alarmed at the trend of state-run banks' profitability eroding soon after their chairmen retire, the Reserve Bank of India (RBI) has asked banks to ensure the absence of human intervention in the maintenance and submission of regulatory reports. The move is aimed at minimising the scope of errors and manipulations in management information systems (MIS) or data warehouses of banks, sources familiar with the development said on condition of anonymity. MIS contains various data like provisioning requirement, non-performing assets, top borrowers and exposure to top clients. RBI has made it clear to all banks that the process of keeping records and data should be automated as far as possible. The central bank has specifically told banks to ensure there is no human intervention in the maintenance of regulatory reports submitted at periodic intervals,” a senior official with a Mumbai-based bank told Business Standard. In public sector banks, losses and successions often go hand-in-hand. For instance, the country's largest lender, State Bank of India (SBI), reported a 99 per cent decline in net profit for the quarter ended March after Pratip Chaudhuri took charge as the bank's new chairman. It was the worst quarter for the bank in more than a decade. SBI is not the only example, as other such cases have also been reported at Bank of Baroda, Bank of India, Canara Bank, UCO Bank and Vijaya Bank in the last six years. In June, RBI Deputy Governor K C Chakrabarty slammed state-run banks, pointing to the trend of profits dipping when a new chairman took charge. Sources said RBI has told public and private sector banks to strengthen their MIS by making it automated and reducing human interference. “It applies to all banks in public and private sectors. Most private banks have better MIS than public sector banks,” said a senior official of a Mumbai-based bank. Bankers said regulatory reports are prepared by combining data from various systems and human intervention increases the scope for errors and misrepresentations. “In banking, unlike other industries, there are different systems for keeping data. Systems used for maintaining corporate banking data may differ from those used for storing retail banking information. Even in retail banking, different systems could be used to keep data for different retail products like auto loans, housing loans and credit cards,” said a banker. “To prepare a final report, one needs to extract these data from different systems, transform them and load them into the report. The process is commonly referred to as ETL (extraction, transformation and loading). RBI wants this process to be automated including submission of these reports,” he said. Sources said RBI was also exploring options to create a central server, where data from different banks would be stored. The move, however, was still in the planning stage, they said. Last year, the government had asked state-owned banks to adopt a system to identify non-performing assets. Banks were told to migrate to a system where the classification of non-performing assets (NPAs) was carried out by using technology, without human interference. Banks would have to migrate to such a system by the end of September. Some of the banks have already seen an increase in bad loans as a result of the shift to system-driven identification of NPAs.

BS

Microfinance, mega trouble

It is the human-interest anecdotes that grab your attention in Ramesh S. Arunachalam's The Journey of Indian Micro-finance: Lessons for the Future. While taking a timely and much-needed look at the factors that led to the crisis in the microfinance industry in Andhra Pradesh last year, the author relates interesting case studies of borrowers who were ensnared in a debt trap thanks to the easy availability of loans from multiple MFIs.

Take the story of Sarju Bai Prajapati from Bhopal. It is 2005, the UN year of Microcredit, and she is an “archetype of the poverty-ridden Indian woman, engaged in a daily struggle to make ends meet”. A skilled pottery-maker, she puts in 16 hours of hard work at making pots and then works on household chores such as cooking, cleaning. For the five-member family she is virtually the sole bread-earner. Her monthly profit of Rs 800, coupled with her son's remittance of Rs 1,200, is insufficient to meet the “crushing expenditure on health and food, increasing debts and spiralling medical costs”. She had an accumulated debt of Rs 23,000.  She is the “definitive, though unacknowledged” head of her household… and not due to any definitive shift from the patriarchal system. The position is thrust upon her because of her husband's paralysis. Over the years she has invested Rs 9,000 in her business, 90 per cent borrowed. This excludes “bribes paid to local municipal officials and goonda elements.” Fast forward to 2010, to Zaheera Bhee in Kurnool, Andhra Pradesh, the hotbed of MF activity. The author enters the Nabee Saheb household, crammed into all of 60 sq ft, to find a tiny girl wailing for her mother, Zaheera, who has committed suicide. Her family says this is due to her “huge indebtedness”. She had borrowed a whopping Rs 1.6 lakh from eight different organisations, and with the weekly household income — including Zaheera and Nabee's earnings — being only Rs 2,700, there was no way she could keep her weekly repayment commitments. Worse, found the author, the woman never started any of the business ventures for which she had borrowed the money. A member of her family was surprised to find that one of the groups was a “willing and easy source of loans — even the local moneylenders would hesitate to give us more money”. With “no serious questions being asked about the purpose of the loans” the family spent the money on marriages and emergencies; the debt trap ultimately claimed her life.

SIDBI's role

Arunachalam takes a critical look at SIDBI, the single-largest financier of MFIs, and adopting an unnecessarily apologetic stance, questions its frenetic pace in financing MFIs, due diligence, monitoring, and so on. The book is also a very useful source to collate details on how five of the top 11 Indian MFIs, in terms of reach, were headquartered in Andhra Pradesh. The top three were in AP and had added a staggering 10.1 million clients between 2006 and 2010. A telling statistic is that of the 20.3 million clients with India's top 11 MFIs in 2010, as many as 17.5 million had been added after 2006. Arunachalam asks some crucial questions on the speedy growth of MFIs and wonders if the real reasons for this growth were the credit needs of poor people, the MFIs' desire to push the “frontiers of financial inclusion”, or the “urgent need for the MFIs to show better operating performance”. The runaway success of the SKS IPO, and its promoter Vikram Akula's comment that for the sake of a few rogue elements the entire MF industry should not be punished, leads the author to raise pertinent questions on who were these “rogue elements”. He urges industry associations, banks, regulators and other stakeholders to identify and bring to book these elements that caused the Andhra Pradesh crisis in 2010.

No better than moneylenders?

The author zeroes in on former RBI Governor Dr Y.V. Reddy's suggestion that “for-profit MFIs should be regulated as moneylenders; after all they are no better than moneylenders”. Questioning this premise, he says that having been associated with the industry for two decades “I can vouch for the fact that when it started out, at least in the initial years, and before hardcore commercialisation of the industry, microfinance was nowhere close to moneylending. He was aware of numerous cases where it had positively impacted the lives of poor people. Vis-à-vis the Andhra Pradesh legislation on the issue, he advocates the monitoring of MFIs either by the RBI, a specialised microfinance regulator or through Central-driven measures rather than measures taken by individual States.  Arunachalam describes how it didn't take too long for the MF crisis to spread from Andhra to a neighbouring State such as Tamil Nadu. Here, too, the SHG members wilfully defaulted on loans by either plainly refusing to repay instalments or complained of coercion by the MF male staff. He thinks the mess in India's MF industry will continue for a long time and the “credit culture in our low-income economy appears as good as dead”.  The unfortunate fallout of the Andhra Pradesh debacle is that banks are now reluctant to lend to SHGs because of “the hugely indebted rural/micro-finance credit system”. Bankers are afraid that fresh loans would only be used to repay old dues; particularly in Andhra Pradesh, the formal/alternative rural credit delivery system might be “close to collapsing”. Even though portions of this massive 612-page tome — brought out on art-grade paper, that too A4 size, making the book too heavy to even hold in your hands — are written in a readable style, there is too much repetition. Even while reciting interesting anecdotes the author tends to overstate a point by repetition, and that takes away from the merit of the book.  But for researchers and serious students of microfinance, Arunachalam's tome will be invaluable, giving as it does details about the microfinance crisis in 2010 and examining critical issues associated with it. But the pity is that through some tough editing and ruthless use of the meethi chhuri, a weapon that the proficient variety of editors love to use, this could have been made an interesting book for a much wider audience, as the author does have an easy and readable style. Both the publishers and the author should consider bringing out a better edited and thinner paperback version.

HBL

Need to re-look at forex rules, regulations, says RBI official



A committee has been set up to look into specific issues relating to software exports, which is expected to come out with its recommendations by end-September.



Bangalore, Aug. 18:  A committee has been set up to look into specific issues relating to software exports, which is expected to come out with its recommendations by end-September.  “We will come out with viable solutions that will make things easy for the software exporters,” said the Reserve Bank of India Executive Director, Mr G. Padmanabhan, at an interface with bankers on foreign exchange held here on Thursday. Speaking at the event, he pointed out that there was a need to take a re-look at the various rules and regulations with regard to foreign exchange in the light of developments in the last 10 years.  “We are aware that we should not make rules and regulations impossible to comply with,” he said.  The RBI, on its part, has opened a helpdesk, been updating FAQs, and conducting awareness programmes on foreign exchange, said Mr Padmanabhan, and urged banks to also train their frontline staff adequately on matters relating to foreign exchange.  Mr Padmanabhan also emphasised the need for people to exercise caution with regard to schemes announced via e-mails, and said that the RBI was taking enough measures to create awareness on phishing activities.

HBL

Banks should look to mobilise more retail deposits: RBI

Mumbai, Aug. 19:  Banks should focus on garnering more retail deposits and reduce overdependence on wholesale deposits, as effective liquidity management is one of the conditions of the Basel III regulatory standard on bank capital adequacy and liquidity.  While systemically the banking industry is well placed, there could be cases where individual banks may have higher share of wholesale deposits, said Mr Anand Sinha, Deputy Governor, Reserve Bank of India. “One of the reasons for the economic crisis was the liquidity mismatch. In the US, long-term assets were being funded by overnight repo,” Mr Sinha said. The RBI is in the process of finalising guidelines for Indian banks which will include liquidity management measures as mandated by Basel III norms. It is also working on new guidelines for provisioning, under which banks will have to make countercyclical provisioning or increase provisioning during good times. Mr Sinha urged banks to reduce transaction costs by leveraging technology more efficiently. If banks have to go to the hinterland, it may not be very profitable unless they reduce transaction costs.  Therefore, there is no alternative but to leverage technology, the Deputy Governor explained. When asked about the dip in food inflation to 9.03 per cent during the week ended August 6, from 9.9 per cent in the previous week, Mr Sinha said the RBI will look to a secular trend in inflation. “Tackling inflation is a prime concern,” he said. He, however, refused to comment on the likely policy action by the central bank.

HBL

Indian Central Bank's Advisory Panel Favored A Softer July Policy

MUMBAI :- Most members of the Reserve Bank of India's advisory committee favored a softer stance than the central bank took with its July monetary policy, minutes of the committee's meeting released Thursday reveal. On July 26 the RBI surprised markets by hiking its key lending rate by a sharper-than-expected 50 basis points. Four members of the technical advisory committee, or TAC, suggested the RBI " wait and watch" as the transmission of earlier rate hikes was still playing out and uncertain global conditions were slowing domestic investments. "While one member suggested an increase in the repo rate by 25 basis points, two members felt that the increase in the policy rate be avoided, if possible," the minutes released on the RBI website stated. Another member suggested an increase in the cash reserve ratio by 25 basis points. The committee said while investment activity was slowing down, overall growth was strong compared to other emerging markets. Inflation, however, is stubbornly high and a major concern. Most members felt there could be a slippage in the fiscal deficit estimated in the federal budget. They expressed concern that the entire burden for inflation management was on monetary policy, it stated. The central bank's TAC, chaired by the RBI Governor, includes some central board members, deputy governors and external experts in the areas of monetary economics, central banking, financial markets and public finance. The TAC periodically advises the RBI on the stance of monetary policy in the light of macroeconomic and monetary development. The last meeting, as a run up to the first-quarter policy review, was held on July 20 and was chaired by Governor Duvvuri Subbarao. 

http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201108180957dowjonesdjonline000343&title=indian-central-banks-advisory-panel-favored-a-softer-july-policy

New players needed for competition in banking sector: PMEAC

New Delhi : Amid RBI framing norms for the setting up of new banks, Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan today said more lenders were required to ensure competition in the sector. "New [bank] licences are required because no industry can remain competitive if the entry is completely excluded," Rangarajan said when asked if Indian customers need new banks. Speaking on the sidelines of a function here, he said the Reserve Bank of India (RBI) would lay down conditions for the entry of new banks, "but it can not be that the opportunity for entry can be completely denied."  Following a Budget announcement, the RBI last year floated a discussion paper on allowing the opening of new banks and invited stakeholders' comments on the issue. According to sources, the Finance Ministry is not in favour of immediately allowing large corporates to open banks and has conveyed it to the RBI. They said the Reserve Bank might initially give only four licences mainly to NBFCs or Non-Banking Finance Companies. On the plans of the postal department to seek banking licences, Rangarajan said "Well, I do not know how that will be treated because a bank not only receives deposits but also gives loans...I don't know what they have in mind...." The department had over Rs 3.72 lakh crore in deposits from 26.45 crore small savings accounts at the end of June. Telecom Minister Kapil Sibal wants to reach out to the masses in the rural areas with modern banking facilities through the post offices. With an aim to to commercialise the department, he said recently that the government would seek licence from RBI to convert all post offices into banks.

BS

Subbarao ignored majority view to hike key rates by 50 bps

MUMBAI: Minutes of RBI's technical advisory committee's meeting on July 20, ahead of the monetary policy review, reveals that governor D.Subbarao went against the majority opinion to raise repo and reverse repo rates by 50 basis points each. All but one panel members had favoured a pause in monetary tightening. Even the one who suggested a hike was in favour of a 25 basis points rise in the repo rate. Among those who submitted their written views were Subir Gokarn, K C Chakrabarty, H R Khan, Shankar Acharya, Y H Malegam, Sanjay Labroo, A. Vasudevan and Prof Sudipto Mundle, Dilip M. Nachane and Samir K. Barua. 

TOI

Only one panel member wanted RBI to raise rate

A majority of the members of the panel, chaired by the RBI governor, wanted the central bank to wait and watch for the transmission of past monetary actions and give equal weight to the objectives of “fostering growth and controlling inflation while formulating monetary policy,” according to the edited excerpts, posted on the central bank’s website. The views of the members, which include 10 outside members and several senior central bankers, are not binding on Governor D. Subbarao......

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Subbarao is lone inflation hawk in RBI advisory panel

....But the Governor, who has shown his independence many times, felt that he had to stamp out inflationary expectations and opted for 50 basis points. In the monetary policy, the governor made inflation his primary target, and the RBI actually raised its year-end inflation forecast from 6 percent to seven percent......

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Atyant Capital's Rahul Saraogi: Rule of Law Determines Depth of Debt Market - India Knowledge@Wharton

India has a very sophisticated and well-developed equity market -- comparable with the best in the world; however, the debt markets in India remain underdeveloped. Former deputy governor of the Reserve Bank of India (RBI), Shyamala Gopinath, had once stated that the RBI is keen to develop the corporate bond market in India. She said, however, that none of the stakeholders have really been able to tell the RBI what changes they need in the regulatory environment for the development of the bond market........

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The business of banking : Jaimini Bhagwati

A discussion paper put out by the Reserve Bank of India (RBI) in August 2010 examines the pros and cons of the “Entry of New Banks in the Private Sector”. The central issue in the paper is whether large industrial houses should be allowed to sponsor new private sector banks. This article reviews the discussion paper and comments on the six topics listed in it for further debate. The RBI paper starts with a discussion on widening financial inclusion as one of the objectives in granting licences to new private sector banks. A separate July 2011 RBI paper titled “Financial Inclusion in India: A Case Study of West Bengal” rates Indian states on the extent of financial inclusion achieved. Kerala, Maharashtra and Karnataka are ranked one, two and three and Uttar Pradesh, Madhya Pradesh and Bihar are at positions 13, 20 and 21. Clearly, there is a positive correlation between social development levels and financial inclusion. New private sector banks could be required to help promote financial inclusion by using profits from their branches in urban clusters. However, such cross-subsidies will not be sustainable since banks can only complement development efforts, not substitute for them.  The first and second questions posed in the discussion paper are: (a) what should be the minimum capital requirements for new banks; and (b) what should be promoters’ contribution? My sense is that these two capital requirements may be Rs 1,000 crore and 40 per cent, respectively, with the latter number to be brought down to, say, 20 per cent over 10 years. The guiding principle for required minimum capital and ceiling on promoters’ contribution should be consistency with a risk management framework that includes existing banks. The third question is the extent to which foreign shareholding is to be allowed in new banks. The licensing norms for new banks should not be complicated by simultaneously reopening the issue of caps on foreign ownership of banks in India. If anything needs to be changed on norms for foreign holdings in the financial sector, it is the often misused distinction between non-resident Indians and non-Indians. Everyone permanently residing outside India should be in one category for investment and taxation purposes.  The fourth, and most important, question posed in the paper is “whether large industrial and business houses could be allowed to promote banks”. The Indian licensing guidelines of 2001 do not allow “large” industrial houses to sponsor new banks. The reasons go back to the dubious practices of such banks directing credit to preferred borrowers prior to bank nationalisation in 1969. All the disadvantages of allowing industrial houses to sponsor banks are as valid today as before. Among major economies, Canada, UK, Germany and France do not bar industrial companies from promoting banks. In contrast, the US does not allow industrial houses to own banks. It is evident from the dispersed nature of past banking sector breakdowns that permitting industrial houses to own banks or disallowing them was not a good indicator of whether banks would need government back-stop funding assistance. As the RBI paper has suggested, the probability of industrial houses interfering in banks promoted by them could be reduced by restricting banking licences to companies with diversified ownership. On balance, continuing indefinitely with policies that restrict the entry of new private banks and, thus, inhibit competition would not be efficient. There could be ways through which large industrial houses can provide equity capital without the egregious wrongdoing of the past. The downside risk is that it may be practically impossible for RBI to prevent crony lending practices. Consequently, it is for RBI to assess whether, at our current stage of development, it can consistently monitor bank lending and stand up to pressures from corporate oligopolies. The fifth question is whether non-banking financial companies (NBFCs) should be allowed to convert into banks or promote banks. A large number of Indian NBFCs are engaged in tax and other forms of financial arbitrage. Hence, while in principle NBFCs can be allowed to sponsor new banks, their antecedents and possible ownership links with corporate houses through non-transparent cross-holding structures should be investigated and taken into account. The last question is what the business model for new banks should be. The short answer is that there is no need for a separate business model for new banks. Taking a step back, the RBI discussion paper needs to be broader in its outlook and should analyse the causal reasons for banks having to periodically depend on funding support from taxpayers. The section in the paper titled “lessons from the recent global financial crisis” is too short and perfunctory. Indian household and private sector debt, as a proportion of GDP, is lower than comparable numbers in several developed countries. As for smaller Indian companies, they often pledge shares as collateral to borrow. Indian banks have recently had to take over equity stakes in some companies that were not in a position to service their debt. Further, dark clouds are again gathering on the European and US economic horizons. Consequently, we need to assess if periodic banking sector crises are inevitably linked to business cycles or whether they are more influenced by unconstrained and under-regulated growth of the banking sector as compared to the rest of the economy. For example, the banking sectors in the US, the UK, Iceland, Ireland, Cyprus and regional savings banks in Spain are significantly oversized and/or over-leveraged. It is high time to reflect on the received wisdom that more is good in banking since this promotes growth. A related issue is the extent to which deposit taking and investment banking should be segregated in new private banks in India. In this context, it has been reported that the UK Independent Commission on Banking headed by John Vickers is likely to recommend strict segregation of deposit taking from investment banking (the report is expected in October 2011). According to press reports, RBI would soon issue draft guidelines for large industrial houses to sponsor new private banks. RBI should take its time to reassess outstanding levels of household, corporate and public internal and external debt, sectoral growth of credit and preferred size of the banking sector versus that of the economy before issuing licences for the entry of new private banks.

BS