RBI Governor calls on bankers to implement corporate governance as their 'dharma'

Dr D Subbarao emphasises difference between corporate governance in general and corporate governance for banks, saying both cannot be motivated by measurable performance indicators only

Reserve Bank of India (RBI) Governor Dr D Subbarao has emphasised the need for more effective and enlightened corporate governance to improve banking productivity, saying that the ideal of 'dharma' which is so much a part of Indian heritage and culture should guide corporate governance in Indian banks.  Speaking at a banking conference hosted by the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Indian Banks' Association (IBA) today, Dr Subbarao said, "This conference is jointly organised by FICCI, which pursues the interests of corporates, and IBA which looks after the interests of banks. I have simply inserted the Reserve Bank's area of interest, 'governance', between corporates and banks, so that all our collective interests are covered. And importantly, I believe more effective and enlightened corporate governance of Indian banks can be a vital avenue for improving banking productivity."  "We had instances of poor governance in the banking sector as well-erosion of standards in forex derivative transactions and fraud in wealth management schemes-reminding us that we need to work hard to get to best practices in every area of corporate governance," the RBI governor said.  While admitting the role of effective regulation for ensuring robust corporate standards in banks, Dr Subbarao said, "Regulation can establish principles and lay down rules, but the motivation to implement these principles and rules in their true spirit is a matter of organisational culture."  Some big corporates like Reliance, Tatas, Mahindra & Mahindra, the Reliance Anil Dhirubhai Ambani group (R-ADAG) as well as Religare, have shown interest in entering the banking business. The RBI, which is opposed to the entry of corporates into banking, is schedule to publish draft guidelines for new banking licences soon. "As we contemplate allowing corporates to promote banks, there is need for changes in statutes and regulations to address these concerns," the RBI governor said. He, however, cautioned that while there are statutory and regulatory checks available against self-dealing, there are still gaps. For instance, if a corporate has an interest in a bank as a promoter or a shareholder, but has no position on the board, then there is no prohibition on the bank lending to the corporate. This opens up opportunities for self-dealing.  Another apprehension that has been raised in the debate on the (RBI) discussion paper is that it is not easy for supervisors to prevent or detect self-dealing, because banks can hide related party lending behind complex company structures, or by lending to suppliers of the promoters and their group companies.  On the subject of compensation in the banking sector, particularly since the slowdown, Dr Subbarao said, the central bank is in the process of finalising guidelines relating to compensation of whole-time directors/CEOs/risk-takers and control staff. "Taking into account the feedback received on the draft guidelines (issued in July 2010), the result of the impact studies and the final prescription issued in the matter by the Basel Committee in May 2011, the Reserve Bank is in the process of finalising the guidelines relating to compensation. The guidelines are scheduled to be implemented from the financial year 2012-13, and banks have already been advised to start preparatory work in this regard," he said. On the issue of accountability, transparency and ethics, the RBI governor said, "While over the years, we have tried to align our transparency and disclosure standards to global best practices, we need to address critical questions like whether the voice of independent directors is always independent. Also, do bank CEOs countenance criticism from the board? Are boards succumbing to 'group think' and abandoning their responsibility of independent judgement? It is only through such soul-searching that corporate governance in banks can improve in effectiveness."  The RBI Governor pointed out that while the Shyamala Gopinath Working Group has recommended that the financial holding company model should be pursued as a preferred model for the financial sector in India, "We must recognise that regardless of the corporate structure, banks cannot be totally insulated from the risks of non-banking activities of their affiliates. In moving to a new regime, we must also contend with legacy issues relating to existing conglomerates. Any framework to harmonise them under the FHC model will require a new legislation and new regulatory architecture." (FHC is the abbreviation for financial holding companies.)

Moneylife  

Tata Elxsi - Appointment of Additional Director

Tata Elxsi Ltd has informed BSE that the Board of Directors have appointed Mrs. Shyamala Gopinath (Ex-Deputy Governor, Reserve Bank Of India) as an additional Director (Non-Executive Independent) of the Company with effect from August 18, 2011.

Moneycontrol 

Subir Gokarn to inaugurate BL Club

Chennai, Aug. 23:  Dr Subir Gokarn, Deputy Governor, Reserve Bank of India, will inaugurate the Chennai region's Business Line Club for this academic year on Wednesday, at SRM University. Dr Gokarn will deliver the inaugural lecture on ‘The future of organisations – environmental drivers and strategic responses' to an audience comprising 4,000 students of the SRM University.

HBL

Bonus clawback

Dr.D.Subbarao said the RBI was looking to introduce a clawback mechanism while framing a new compensation policy for executive directors and CEOs of banks that would enable banks to gouge back payments made in the form of bonuses to key officers to offset future losses caused by actions taken by these executives. The draft guidelines for the new compensation policy of top bank officials was floated in June. The new policy will kick in from 2012-13.  “Banks have already been advised to start preparatory work in this regard,” he told the conclave of bankers. At the same time, the RBI is debating compensation practices for non-executive directors and will examine the feasibility of switching to a “fixed contractual remuneration” for them as has been suggested in the case of non-executive directors at companies.  The RBI governor, however, added that this might be difficult to implement in practice. Subbarao was more certain about the need to extend the principle of separating the posts of chairman and CEO of public sector banks as the experience of such a split was satisfactory with respect to private sector banks. The principle, which was suggested by the Ganguly committee in 2007, “is already in force in private banks and has worked well”, he told the gathering. Pointing out that the central bank is in discussions with the government to split the posts of the chairmen and managing directors of state-run banks, the governor said, “Given our own positive experience, as well as the global endorsement for this position (of separation of these posts)... we will discuss this issue with the government.”

The Telegraph

India’s RBI Watching for Signs of Slowing Demand, Gokarn Says

The Reserve Bank of India is watching for signs of any slowdown in domestic demand as it seeks to tame “inflation drivers” that are “very much in play,” Deputy Governor Subir Gokarn said yesterday.  The moderation, “we anticipate, will happen at some point,” Gokarn told reporters at a banking conference in Mumbai. “The question is whether what’s happening globally is going to impact commodity prices significantly or not. Ultimately, that is going to determine how domestic inflation plays out.”  Inflation in India has stayed above 9 percent since the start of December, eroding spending power. While the risk of a global slowdown prompted nations from South Korea to Indonesia to keep interest rates unchanged this month, Reserve Bank Governor Duvvuri Subbarao said Aug. 12 it’s “too early to say” whether India’s policy stance to raise borrowing costs will be changed. India’s economy has expanded at an average pace of 8.6 percent since 2006, compared with China’s 9.8 percent during the period, data compiled by Bloomberg show. Central bank policy makers in India expect India’s growth to slow to 8 percent in the year ending March 31, from an estimated 8.5 percent in the previous 12 months.  

Bloomberg

Current Slowdown Factored in Monetary Policy: Gokarn

Reserve Bank Deputy Governor Subir Gokarn today said the present slowdown in credit off take is a part of the demand adjustment process visualised by the central bank in its tight monetary policy stance. "This (low credit pick up) is, in fact, an anticipated outcome...That's part of the demand adjustment process that we visualised," Gokarn told reporters on the sidelines of a Ficci-IBA event here. "Things are happening as per our projections which will then result in some moderation in growth as well," he said, adding the RBI has also revised downward its overall credit growth projection to 18 percent from the earlier 19 percent. The Reserve Bank has hiked its key rates a record 11 times since March 2010 to batten down sticky inflation, which stood at 9.22 percent for July. The rate hikes can have an adverse impact on demand, which along with sliding global commodity prices, can be one of the key measures to drive to the inflation numbers. Off late, a slew of banks said they were witnessing slower-than-normal credit pick up and blamed the successive tightening by the central bank. Many banks have also downwardly revised their credit growth targets midway as a result of this phenomenon. On the forthcoming festive season and the resultant pressure on liquidity, he said "we have already said we aim to keep liquidity in a certain range. And if it is significantly disrupted from that range, we will obviously consider measures. But festival seasons are predicable and temporary, will not require any response, he said. Stating that domestic inflation will be guided by the global commodity prices and domestic consumption, Gokarn said he expects commodity prices to remain flat at the levels where they are now and hoped that this will lead to inflation going down from November because of the base effect. "Clearly by November-December, we will start to get the base effect if commodity prices remain flat, so inflation will come down mathematically. Our projection was that by November-December, the number will start to turn down, that projection remains intact," he said. Though global growth may be slower than what was expected, India need not worry as the driving factors of our growth is domestic consumption and public expenditure continue to be at play, he said. But the moot question is whether what is happening globally can impact commodity prices significantly or not and if it does it will help us bring down our inflation, he said.  

The Outlook

Allowing corporates in banking may pose self-dealing risks, says RBI Governor D Subbarao

Amid debate over whether business houses should be allowed to to set up banks or not, the Reserve Bank Governor D Subbarao said that entry of corporates into the banking space could open up opportunities for "self-dealing" and use of bank money for own needs.......

Read........... 

Banking licence should be given discreetly: RBI

India needs to plug gaps in existing banking rules before it lets corporate houses open banks, the Reserve Bank chief said on Tuesday, signalling the need for tighter regulation to deter firms from practices like self-lending. Duvvuri Subbarao's comments come amid expectations that the Reserve Bank of India will soon announce initial draft guidelines for the issue of new bank licenses, a move keenly awaited by a host of Indian corporates eyeing the banking space. "As much as these prescriptions are extensive, there are still gaps," Subbarao told a banking conference, noting that if a corporate had an interest in a bank as a promoter or shareholder but had no board position, current rules did not prevent the bank from lending to the corporate. "As we contemplate allowing corporates to promote banks, there is need for changes in statutes and regulations to address these concerns," Subbarao said. Corporate houses such as the Tatas, the Anil Dhirubhai Ambani Group, the Bajajs and the Mahindras who are in the financial services space through non-banking financing companies, may look at the banking space as it opens up avenues to mop up low-cost deposits and raise large amounts of funds. The government brought a bill to parliament in March to amend the banking laws to give the RBI more teeth. The measures include giving the RBI powers to set conditions while approving the acquisition of share capital and also to call for information and returns from associate companies of banking companies engaged in financial services. "We have sent a draft amendment to the Banking Regulations Act to the government and the government is working on it. So amendments to the Banking Regulations Act are necessary before we contemplate corporates coming into banks," Subbarao later told reporters. The RBI had last issued licenses a decade back and has said it will only issue a few new licenses. The RBI issued an initial discussion paper last year on new bank licenses and subsequently sought feedback. But the issue has since been delayed as the Finance Ministry and RBI reportedly had differences on issues such as the scale of foreign ownership permitted in new banks. There are persuasive arguments both for and against the issue of new licenses, Subbarao said. The strongest point in favour is that corporates can bring in capital as well as business experience and managerial competence, he said. But it was hard for regulators to prevent or detect "self-dealing" because banks can hide related party lending behind complex company structures or by lending to suppliers of the promoters and their group companies, he said.

BS

Allow farm loans at market rates: RBI

Banks must be allowed to lend to agriculture at market rates to ensure the money reaches the farmers, Reserve Bank of India depu- ty governor K.C.Chakrabarty said on Tuesday.  “One of the reasons why credit has not reached all sections of the agricultural community is subvention,“ Chakrabarty told a bankers' meet. “Pricing of credit should be at market rate.“ The government offers an interest rate subvention of 3-5% on farm loans, allowing farmers to borrow cheap to grow food. However, though credit to agriculture has increased steadily in the past 10 years, banks are reluctant to lend to farmers fearing default and also because the state subvention is usually delayed or remains unpaid for years. Both the number of agriculture accounts and credit outstanding have increased in 10 years, data from Chakrabarty's presentation showed.  From 2.05 trillion in 2000, the total number of agriculture accounts has increased to 4.27 trillion in 2010, according to the Basic Statistical Returns of Scheduled Commercial Banks, which are filed with the central bank. Total credit outstanding has also increased to `3.9 trillion in 2010 from `4,563.82 crore in 2000, Chakrabarty said in his presentation. The central bank does not have enough detailed data on farm credit, but such loans have increased from urban and metropolitan branches, he said. “This raises questions about which segments this credit is actually flowing to. Little is known about agri- cultural credit to various crops, horticulture, allied activities, even on a consolidated basis,“ Chakrabarty said, adding that banks have to suggest as to how to aggregate data and link it to credit with productivity. He rubbished bank claims about rising non-performing loans from agriculture. Bad farm loans are among the highest in Indian banking at 3.61%, just behind 4.24% non-performing as- sets from medium and small enterprises and 5% from un- secured loans, said a Boston Consulting Group report on banking released on Mon- day. But Chakrabarty said fears on agriculture loans are unfounded. “Even if banks do not re- cover the loans, the government writes them off, so they are not bad loans for banks,“ he pointed out. Chakrabarty said data from financial institutions, state and central governments has to be revamped to monitor flow of credit to various farm segments and also in terms of outstanding loans and disbursements.

Mint

Bank licence: RBI chief fears promoting cos may use funds as ‘private pools'

Mumbai, Aug. 23: Changes in laws and regulations are needed before corporates can be allowed to promote banks. This is to prevent corporates from using banks as private pools of readily available funds, Dr D. Subbarao, RBI Governor, said here on Tuesday. “By far the biggest apprehension (whether corporates should be made eligible to promote banks) is about ‘self-dealing' — that corporates will use the bank as a private pool of readily available funds,” said Dr Subbarao in his address at the FICCI-IBA Banking Conference. The Governor's comments come at a time when the central bank is weighing the possibility of allowing corporates to promote banks. Large corporates such as the Tatas, AV Birla Group, Anil Dhirubhai Ambani Group, Bajaj, and Shriram Group plan to seek the regulator's permission to float banks once the RBI draws up the final guidelines on new bank licences. While there are extensive statutory and regulatory prescriptions against self-dealing, there are still gaps.  For instance, if a corporate has an interest in a bank as a promoter or a shareholder, but has no position on the board, then there is no prohibition on the bank lending to the corporate. This opens up opportunities for self-dealing, explained the Governor. It is not easy for supervisors to prevent or detect self-dealing because banks can hide related-party lending behind complex company structures or through lending to suppliers of the promoters and their group companies. Even as he flagged the issue of self-dealing by corporates in case they are allowed to promote banks, the Governor pointed out that the strongest point in favour of corporates is that they can bring in the capital, business and managerial competence.

HBL

Self-dealing a major worry

Bank licences for firms? But RBI wants leaks plugged first

Mumbai: India needs to plug gaps in existing banking rules before it lets corporate houses open banks, the Reserve Bank chief said on Tuesday, signalling the need for tighter regulation to deter firms from practices like self-lending. Duvvuri Subbarao’s comments come amid expectations that the Reserve Bank of India will soon announce initial draft guidelines for the issue of new bank licenses, a move keenly awaited by a host of Indian corporates eyeing the banking space. “As much as these prescriptions are extensive, there are still gaps,” Subbarao told a banking conference, noting that if a corporate had an interest in a bank as a promoter or shareholder but had no board position, current rules did not prevent the bank from lending to the corporate. “As we contemplate allowing corporates to promote banks, there is need for changes in statutes and regulations to address these concerns,” Subbarao said.  Corporate houses such as the Tatas, the Anil Dhirubhai Ambani Group, the Bajajs and the Mahindras who are in the financial services space through non-banking financing companies, may look at the banking space as it opens up avenues to mop up low-cost deposits and raise large amounts of funds. The government brought a bill to Parliament in March to amend the banking laws to give the RBI more teeth. The measures include giving the RBI powers to set conditions while approving the acquisition of share capital and also to call for information and returns from associate companies of banking companies engaged in financial services. “We have sent a draft amendment to the Banking Regulations Act to the government and the government is working on it. So amendments to the Banking Regulations Act are necessary before we contemplate corporates coming into banks,” Subbarao later told reporters. The RBI had last issued licences a decade back and has said it will only issue a few new licenses. The RBI issued an initial discussion paper last year on new bank licenses and subsequently sought feedback. But the issue has since been delayed as the Finance Ministry and RBI reportedly had differences on issues such as the scale of foreign ownership permitted in new banks. There are persuasive arguments both for and against the issue of new licenses, Subbarao said. The strongest point in favour is that corporates can bring in capital as well as business experience and managerial competence, he said. But it was hard for regulators to prevent or detect “self-dealing” because banks can hide related party lending behind complex company structures or by lending to suppliers of the promoters and their group companies, he said. 

Firstpost

Bank licences to corporates: Reserve Bank for strong rules



Reserve Bank of India Governor D. Subbarao (centre), FICCI Vice-President and HSBC India Country Head Naina Lal Kidwai (right) and State Bank of India Chairman Pratip Chaudhuri at a conference in Mumbai on Tuesday.



The Reserve Bank of India on Tuesday cautioned the banking community against self-dealing by corporate promoters and shareholders, who use banks as a private pool of readily available funds and called for changes in statutes and regulations to stem the practice. “As we contemplate allowing corporates to promote banks, there is need for changes in statutes and regulations to address these concerns,” said RBI Governor D. Subbarao, while inaugurating the FICCI-IBA conference on ‘Global banking: paradigm shift' on the theme ‘Productivity Excellence', here. Dr. Subbarao said, “If a corporate has an interest in a bank as a promoter or a shareholder, but has no position on the board, then there is no prohibition on the bank lending to the corporate. This opens up opportunities for self-dealing.” The issues, he said, was critical as “it is not easy for supervisors to prevent or detect self-dealing because banks can hide related party lending behind complex company structures or through lending to suppliers of the promoters and their group companies.” The RBI Governor's comments came at a time when many corporate houses were hoping to enter the banking business with the new guidelines for banking licences. The RBI Governor exhorted the banking fraternity to engage with and seek corrective action on five key areas of corporate governance — bank ownership; accountability, transparency and ethics; compensation; splitting the posts of chairman and CEO of banks; and corporate governance under financial holding company structure. He said there was typically a divergence between the interests of shareholders and of depositors. Shareholders want profits to be maximised by taking on greater risk; depositors have an overriding preference for the safety of their deposits and hence for lower risk. At the same time, depositors have little say in the governance of banks whereas the shareholders' say is pronounced.  Within the shareholder group, the extent of control exercised by promoter shareholders too is an important determinant of the effectiveness of corporate governance. On the issue of accountability, transparency and ethics, the RBI Governor said that while over the years, “we have tried to align our transparency and disclosure standards to global best practices, we need to address critical questions such as is the voice of independent directors always independent? Do bank CEOs countenance criticism from the board? Are boards succumbing to ‘group think' and abandoning their responsibility for independent judgement? It is only through such soul searching that corporate governance of banks can improve its effectiveness.” Dr. Subbarao said the RBI was in the process of finalising the guidelines relating to compensation of whole-time directors/CEOs/risk takers and control staff. The guidelines were scheduled to be implemented from 2012-13. On the question of splitting the posts of chairman and CEO of banks the banking regulator noted that the moot question was whether the principle of separation of the posts of chairman of the board and CEO should be extended to public sector banks. “An important criterion for deciding on this will be to what extent we will be able to lay down and enforce strict eligibility criteria for the position of the chairman of the board of a public sector bank. We will discuss this issue with the Government,” he pointed out.  The RBI Governor said that while the Shyamala Gopinath Working Group appointed by the RBI has recommended that the financial holding company (FHC) model should be pursued as a preferred model for the financial sector in India, “We must recognise that regardless of the corporate structure, banks cannot be totally insulated from the risks of non-banking activities of their affiliates. In moving to a new regime, we must also contend with legacy issues relating to existing conglomerates. Any framework to harmonise them under the FHC model will require a new legislation and new regulatory architecture.”

HBL

PSUs like LIC, Power Finance Corporation may not get banking license

NEW DELHI: The government is not keen on state-run firms securing bank licences under the proposed new banking licence policy. Currently, there are 21 public-sector banks besides five subsidiaries of the State Bank of India. The government has so far supported merger in public sector banks but has maintained that any merger proposal should come from the banks themselves. The RBI is expected to make the norms for new licences public soon. Several state-owned firms, including Power Finance Corporation (PFC) and LIC Housing Finance, have shown interest in opening new banks under the proposed policy. "One of the key priorities of new banks is to further the cause of financial inclusion while the state-runs firms interested in securing new bank licences are dedicated lenders to particular sectors," a finance ministry official said. PFC's chairman, Satnam Singh, however, said their administrative ministry was fully supportive of PFC's banking foray. "I don't see any concern," he said. The RBI is likely to mandate that new banks should have at least 25% of their branches in unbanked rural areas. "It also has to be looked if the proposal of a new bank is totally public sector in nature or through a joint-venture with a private partner," the official said. The finance ministry expects that the share of public sector banks in the total banking business may not reduce even after entry of new private banks. The government may, however, relent to the proposal of India Post for securing a bank licence. As per a standing committee report, the department of post is preparing a roadmap to set up a Post Bank of India and will send the proposal to the finance ministry. "The final decision will be taken by the Reserve Bank. India Post has a stronger case because of their outreach," the above quoted official said.  KPMG's executive director Ravi Trivedi said it would be a disavantage for these dedicated lenders if they have to get out of their current developmental role. "That will be counter productive, so they need to find a suitable model that allows them to use their existing eco-system for funding larger projects and managing cash flows," he said. Another concern with the government is the capitalisation support that banks will require over a period of time to meet the Basel III norms. The government is already reviewing plans to convert its perpetual bonds and preference shares in state-run banks into equity. The new prudential norms under Basel-III, which are yet to be finalised, will restrict Tier-I capital to common equity and retained earnings.  "We are already facing a challenge in bank recaptialisation. If there are more public sector banks then there will be an added responsibility on the government," the official said. The Basel-III framework, which seeks to strengthen regulation, supervision and risk management in the banking sector, is to be implemented in phases beginning January 2013.  

ET

RBI for bifurcation of chairmen, MDs in PSU banks

MUMBAI, AUG 23:  The Reserve Bank Governor Dr D Subbarao on Tuesday favoured bifurcation of the posts of chairman and managing director in state-run banks, saying the experience of such a split in the private sector has been satisfactory. Stating that the central bank is in discussions with the government to split the posts of the chairmen and managing directors of state-run banks, the governor said, “Given our own positive experience, as well as the global endorsement for this position (of separation of these posts)... we will discuss this issue with the government.” “This experience proves to be positive in the private sector banks (in our country), which has also been proved to be value-adding in international banks. Not giving too much power to one person is good,” he told reporters on the sidelines of a FICCI-IBA summit here this morning. Addressing the banking summit, Mr Subbarao, however, warned that an important criterion for deciding on splitting the post of chairmen and managing director in PSU banks “will be to what extent we will be able to lay down and enforce strict eligibility criteria for the position of the chairman of the board of a public sector bank.” The RBI had set up a committee under the chairmanship of A S Ganguly in 2004—05 to study the issue of bifurcation of the posts of chairman and managing director of banks, which had recommended such a bifurcation. Following this, such a bifurcation was implemented in private sector banks in 2007. “The Reserve Bank implemented the Ganguly group recommendations in all the private sector banks in 2007. Experience shows that this arrangement has worked well,” Mr Subbarao said. It can be noted that in the public sector banks, the top executive is designated as chairman and managing director, with the exception of the largest lender State Bank, where the top honcho is the chairman and there are four managing directors with clearly defined executive roles under him. Explaining the logic behind such a separation, Mr Subbarao said that bifurcation of leadership of the board from the day-to-day running of the business will bring about more focus and vision, as well as give the necessary thrust to the functioning of the top management of the bank. When asked whether the RBI will allow corporates to enter the banking space, he said, “We have sent in a draft amendment to the Banking Regulation Act to the government and the government is working on it. So amendments to the Banking Regulation Act are necessary before we contemplate corporates coming into the banking system.”

HBL 

Bankers divided over RBI Guv's proposal to split CMD post

RBI Governor flagged off an important debate on the need to separate the roles of a board chairman from CEO for public sector banks. He said this will act as a check on the CEO. The Governor was probably moved by the regularity with which banks see severe profit declines when their CMDs retire. CNBC-TV18's Gopika Gopakumar and Supraja Srinivasan report. Governor Subbarao recommended the need to split the posts of chairman and CEO of public sector banks. This has already been done for private sector banks and the Governor pointed out that after the 2008 global banking crisis, such a split of roles is being recommended globally. “The logic is that such a bifurcation of leadership of the board from the day to day running of the business will bring about more focus and vision as also the necessary thrust to the functioning of the top management of the bank. It will also provide effective checks and balances,” he said.  The suggestion evoked mixed response. Bankers hailed this suggestion, but said there would be challenges. “Considering that it will give a chairman of the board who will focus on strategy, vision and the MD will focus on the implementation... I think is a good observation by the governor,,, but one has to look at how exactly finally it turns out to be,” MV Nair CMD, Union Bank said. On the other hand, Naina Lal Kidwai, Group GM & Country Head, HSBC India points out, “The problem then becomes how do we access a pool of people who are capable of filling that role as chairman and are they going to put hands up to become chairman of PSU banks. Therein lies in the aspect of where does the pool exist. I don't think this pool exists. It's very difficult today for people who sit no other boards to come on board of bank.”  More critical area who will decide who will become chairman of PSU bank. What's the process of selection going to be? That again if it's murky and if it's not open and transparent that will system will go away. If you look at process followed in listed companies, role of nomination committee is key. Nomination committee puts it up to the board to choose. Don't think we can get there easily. Governor Subbarao said he will take up this issue with the government soon.

Moneycontrol

Banking growth runs parallel with economic growth: Bankers

The RBI governor D Subbarao today hinted the new bank license rules may allow corporates to promote banks.  Speaking at the FICCI-IBA banking conference he said that as the country contemplates allowing corporate groups to promote banks, there is a need to strengthen rules that prevent banks from lending to interested or promoter groups and directors.  The draft new rules are expected to be issued by the RBI end of this week or early next week.  Naina Lal Kidwai, group general manager and country head of HSBC India, SBI chairman Pratip Chaudhuri and Chanda Kochhar, managing director and CEO of ICICI Bank shared their views with CNBC-TV18 on this issue.  Kidwai said that inflation is a main concern right now and raising interest rates haven’t helped taming inflation.  “There are multiple factors around inflation. Food inflation has everything to do with logistics, supply and people eating better which is great. But what are we doing to improve the food chain on vegetables, fruits, meat and getting them to consumers in a low cost way,” questions Kidwai. She feels that these issues won’t get resolved by hiking interest rates. Chaudhuri feels that in the global banking crisis, the risk takers were not responsible for taking those risks. “So, the people who originate the risks are asked the right questions because all the time you cannot take a favourable outlook and say everything will work out well,” he said adding that it is important to look into the downside adequately. He said further that at the global level, the regulators would increasingly focus on capital as a ratio to the risk and hence, that aspect has to be drilled down to the micro level. In Kochhar’s view, the size of the banking sector is always related to the size of the economy per se. She says, if India can grow at about 8% per annum over a long term and the banking sector normally grows at 2.5 times the GDP multiple, then it means the banking sector can continue to grow at 20% per annum for many years to come, which means that the banking industry which is today say about Rs 40 trillion can become around Rs 200 trillion by 2020; five times by 2020. “Yesterday’s report also said that India may have the third largest banking sector by 2025. So it is size in relation to the growth in economy and not just size per se,” added Kochhar. 

Moneycontrol

Bank credit growth moderation in line with RBI policy: Gokarn

Reserve Bank of India (RBI) Deputy Governor Subir Gokarn on Tuesday said the moderation in bank credit growth so far this financial year was in line with the central bank’s expectation. "It is a part of the demand-adjustment process that we had envisaged. We do not know the magnitude (of the recent numbers), but RBI had scaled down estimates for credit growth," Gokarn said, while talking to reporters on the sidelines of a banking seminar organised by the Indian Bank's Association and the Federation of Indian Chambers of Commerce and Industry. RBI, in its first quarter policy review in July, had cut the non-food credit growth estimate for 2011-12 from 19 per cent to 18 per cent. The decline in credit growth partly reflects the moderation in economic growth and the effect of the series of policy rates rises that made credit costly for borrowers. On the global turmoil, Gokarn said uncertainty had increased. Growth estimates for the US have been cut and European numbers were looking weak. International economic growth would be less than what was estimated earlier, he said. On the effect of the global slowdown on India, he said exports may cool, but domestic drivers—public expenditure and domestic demand—would drive growth. RBI would monitor the situation, he said. On inflation, Gokarn said if global commodity prices continued to remain flat or decline sharply, inflation in India would moderate from November-December. Inflation, as measured by the wholesale price index, stood at 9.22 per cent in July. RBI had said inflation would remain at around nine till November

BS

Stronger co-operatives can boost agri output, says RBI

Mumbai, Aug. 23:  Strengthening co-operatives and involving private parties can help in improving productivity of agriculture sector, said Dr K.C. Chakrabarty, Deputy Governor, Reserve Bank of India.  Pricing of credit needs to be market based to ensure effective flow of credit to all sections of the agricultural community, said Dr Chakrabarty. Speaking at the FICCI-IBA banking seminar, Dr Chakrabarty said that the share of agriculture in GDP has fallen to 14 per cent from 50 per cent about 15-16 years ago. The sector also provides employment for about 60 per cent of the population, he said. Therefore, food processing industry and agro-based industry need to be given necessary boost and impetus to improve productivity and employment opportunities. Dr Chakrabarty called for more granular data with regard to agriculture production — flow of credit to various segments and sub-segments of agriculture and storage activities, flow of credit in terms of outstanding and disbursements, number of beneficiaries and monitoring of credit with non-credit inputs. Although agricultural credit has grown, it is from the urban and metropolitan branches of banks. This raises the question to which segments is this credit actually flowing to, Dr Chakrabarty pointed out.  “The share of rural credit in agriculture has come down from 55 per cent to 38 per cent. The share of metropolitan credit has gone up. But that will not add to productivity. We need to see where the credit is going” he said. Little is also known about agricultural credit to various crops, horticulture, allied activities even on a consolidated basis, he added. To improve the flow of credit, there is also a need for systematic co-operation between Regional Rural Banks and Primary Agriculture Credit Societies. Apart from improving credit risk, there is also the need for an institutional mechanism to take care of marketing.

HBL

No ban on teaser loans, will take action if needed: RBI

“There are no concerns about teaser loans. We have not banned teaser loans,” said KC Chakrabarty, deputy governor, RBI when asked about whether the regulator was worried about teaser loans......

Read..............

'The nature of the HSBC-RBS deal is unprecedented' - Naina Lal Kidwai, HSBC

Hongkong & Shanghai Banking Corporation (HSBC) is still awaiting the regulator’s nod for its proposed acquisition of Royal Bank of Scotland’s retail and commercial banking businesses in India. In an interview with Somasroy Chakraborty, Naina Lal Kidwai, country head (India) HSBC, says the unprecedented nature of the deal is delaying the approval of the Reserve Bank of India (RBI).

Read........

Agents hold up small saving rate hike

NEW DELHI: A key reform measure which would help investors earn higher interest rates is being held up due to stiff resistance from agents selling instruments such as National Savings Certificate and post office deposit plans. Officials say a large chunk of such agents come from finance minister Pranab Mukherjee's state -- West Bengal. The agents are protesting the move to do away with commission on Public Provident Fund and Senior Citizens' Savings Scheme. A government panel had recommended that the commission for other products such as the NSC and post office schemes be halved to 50 basis points (100 basis points equal one percentage point). The panel headed by former RBI governor Shyamala Gopinath had recommended a reduction in cost as part of a move to increase the returns on the schemes. The plan, based on calculations then, was to increase the interest rate on various instruments by 20 to 70 basis points from July 1. The delay is expected to increase the returns further as interest rates have gone up.  In addition, the panel had suggested that the investment limit for PPF be increased from Rs 70,000 a year to Rs 1 lakh. Several states have already stopped paying commission to agents but the protests from the agents has put the finance ministry in a fix given that political sensitivities are involved. Sources said that the report has already been discussed at the highest level and there is endorsement of the recommendations at the official level. Over the last few years there have been several recommendations to make the return structure for small savings schemes market-linked but in all cases the reports had suggested that the rates be lowered. The latest report, however, makes it easier to implement the suggestions as there would be no public protest given the increase in interest rates.

TOI

CAG: 1,142 NBFCs slipped service tax net

The Comptroller and Auditor General (CAG) has suggested the revenue department should liaise with the Reserve Bank of India (RBI) to bring non-banking financial companies under the service tax net. The CAG found 1,142 service providers in the banking and financial services segment were liable to pay service tax but not on the tax department’s registration list. About 65 of them were liable to pay service tax to the tune of Rs 92 crore in 2009-10. In its report tabled in Parliament on Tuesday, the CAG said there were procedural deficiencies in registration of assessees, receipt of returns and scrutiny of returns, beside ambiguities in rule provisions and non-compliance. “We recommend the department may liaise with statutory authorities such as the RBI to obtain information regarding non-banking financial companies, to bring them under the service tax net,” it said. It advised the department to take up various measures, including surveys, to identify potential assessees for service tax and get these registered. CAG also conducted a performance audit of the Duty Drawback Scheme and found instances of procedural deficiencies and absence of clear provisions. It observed no supplementary rules were framed, laying down parameters for identification of goods in case of re-exports. The auditor noticed there were no instructions specifying how to determine whether goods were “used” or not and recommended instructions be issued. It suggested the tax department frame rules, indicating parameters for identification of re-exported goods with originally imported items, and issue instructions to clarify the conditions under which goods are to be treated as “used after import”.

BS

It’s a Long Road Ahead for Indian Banking

A first-of-its-kind extensive productivity study among 40 Indian banks conducted by BCG with Indian Banks Association’s (IBA) assistance has thrown surprises for both bulls and bears. Experienced industry professionals are pleasantly surprised to see the impressive performance of Indian banks as compared to other large economies. On almost all parameters — profitability, cost to income ratio, non-performing asset (NPA) levels, valuations, net interest margins, fee income — the industry is on the right side of average among comparable economies. This is a significant achievement especially when compared with where Indian banks started a decade ago. Compared to the West, where economies are paying through their noses for the folly of their banks, it is a matter of great relief (and pride). The Indian banking industry and its regulator, the Reserve Bank of India, deserve every bit of acclaim they have earned so far. The massive unbanked population of India is a constant reminder of a task unfinished. Developments in the micro finance sector highlight that the solutions for the unbanked have to come at reasonable interest margins. These conflicting demands of wider coverage but at low cost can come only with a substantial productivity increase in the Indian banking sector. Thankfully, there is no dearth of areas where improvement in productivity is possible in Indian banks. I highlight three areas here — bad debt management, technology and people.  Banks will need to develop customised risk management strategies for each segment. PSU banks, which are losing a lot of experienced people, rapidly have a stiff task. RBI should not shy away from championing a new paradigm of risk management beyond Basel III. Technology is a bank’s best friend in pursuit of productivity. New channels (like ATM and mobile phones) allow transactions at a fractional cost. The study exposes a possibility for the next decade. Investment in technology in the Indian banking industry is about half of international average. In the public sector, it is less than a quarter. Hesitation with large discretionary procurement decisions is a weakness of the public sector. Should this hesitation inhibit continuous upgrade of technology in the public sector, the industry will soon lose its edge. The industry has moved to technology-based processing. It is far from technology-based decision making. The huge opportunity shows up in customer adoption rates of new channels. Only about half of active customers in metros use ATM. Adoption rates of other new channels are much lower. India could be a world leader in mobile banking. Our estimates show that, with the latest development in technology, 20-30% of banking transactions could be on mobile phone by 2020. This could lead to a 10-fold productivity rise in the not-too-far future. Banks need to invest in such technology and experiment with ways to induce considerable customer adoption.  The last issue is people. Banking is ultimately a service business where human touch will always be important to generate trust. The study has highlighted that compared to the global average, Indian banks are understaffed in finance and HR. These functions help develop the HR by proper measurement and talent management. Such economising will be debilitating in the future. Service standards on response time have a long way to go. Customers can get a mortgage sanction within hours in many developed markets. The best in India would be in days. The public sector has an unprecedented HR challenge. They have to deal with massive retirements and massive recruitments at the same time. Their talent shortage is preventing them from offering investment advisory to their clients. This will weaken their franchise. Administrative overheads of some banks are high at 15% of the staff costs as against global average of 10%. Larger public sector banks show little scale of benefit.  As the Indian economy grows rapidly in size and influence over the next few decades, it is imperative to have a strong and dynamic banking sector supporting it. Many analysts claim that among the competing emerging economies, India’s strength in banking will give it an edge. Indian banks are not yet ready to claim this recognition. But they can.

ET

No proposal for merger of PSBs, says govt

The government said it is not considering any proposal for merger of public sector banks. No," minister of state of finance Namo Narain Meena said in a reply to a question whether the government has taken a decision to merge public sector banks ( PSBs). The current policy of the government on consolidation leaves the initiatives for consolidation to come from the managements of the banks themselves, he said in a written reply to the Rajya Sabha. While examining any merger proposal, government keeps in view the interest of the shareholders and employees of merging banks. He also said the Reserve Bank issues a single class banking licence, both to domestic as well as foreign banks, to conduct all types of banking business ranging from retail, wholesale, forex and derivative products, credit cards etc. In January, 2011, he said RBI issued a discussion paper on the mode of presence of foreign banks through branch or Wholly Owned Subsidiary for public comments. After examining the feedback, comments and suggestions on the discussion paper, comprehensive guidelines on the mode of presence of foreign banks in India would be issued by the RBI. In a separate reply, Meena said the share of institutional credit has increased to 61.1 per cent in 2002 from 31.7 per cent in 1971 as per All India Debt and Investment Survey of the National Sample Survey Organisation in 2003.  At the same time, the share of money lenders came down from 36.1 per cent in 1971 to 26.8 per cent in 2002, he said.  In response to another question, Meena said the RBI released a discussion paper on entry of new banks in private sector in August 2010 inviting comments and suggestions from various stakeholders.  RBI is examining the views and comments received from various stakeholders. Thereafter, RBI will issue draft guidelines for public comments, he said.

ET

Assocham for raising minimum capital for MFIs

..The proposed law is silent on percentage of profits to be set aside to form a fund for taking care of financial eventualities. There is a need to specify a percentage and also define the term ‘profit.' The RBI should spell out minimum benchmarks for healthy growth of MFIs so that inflow of funds from banks can increase substantially........

Read........

Madras HC dismisses H&M petition challenging Rs5 lakh fine by ED

....The ED raided H&M's Chennai office after it received a complaint from the RBI about the fraud and violation of FEMA by H&M in its acquisition of vMoksha .....

Read....