Unconventional mechanism needed to reduce debt: YV Reddy

Former Reserve Bank of India Governor YV Reddy said the government should adopt unconventional mechanism in both real and financial sectors to reduce debt. “Quality fiscal policy and primary distribution of income are the two major factors the government should focus on,” Reddy said at a seminar here on Friday. He said globally it had been a major concern for the government to maintain the equal distribution level. Over the last two decades, the gap between rich and poor was getting immensely wider and that was creating economic uncertainty. The middle class segment is not much impacted, whereas the upper class is getting richer and the lower strata of society is getting poorer. “To solve this problem, the government should improve the quality of fiscal adjustment,” he added. Household savings have come down in India, whereas corporate savings have gone up. When the micro economic weakens, it makes the structural problem even worse. So, quality fiscal policy is an answer to that, Reddy said. Former United Nations Development Programme (UNDP) director Kemal Dervis said this was a major global problem. Citing the US, he said, “During 1970s-1980s, the top 1 per cent of the upper top US population received 8 per cent of the countries GDP, whereas now it has increased three-fold to 24 per cent.”

BS

Depositor of failed bank questions premium charged by DICGC

Nagpur : A petitioner here has alleged through a public interest litigation that the Reserve Bank of India (RBI) and Deposit Insurance & Credit Guarantee Corporation Ltd. (DICGC) have "extorted" crores of rupees from about 200 "failed" banks including the Nagpur Mahila Nagari Sahakari Bank Ltd. Justice Sharad Bobde and Justice MN Gilani have granted further time of four weeks to the respondents to make their submissions through affidavits in reply to the allegations and prayers made in the PIL. One Sunil Prabhat Khare had filed the PIL and earlier on June 22 last, Justice Bhushan Dharmadhikari and Justice PD Kode had issued notice to the respondents. Khare alleged that DICGC has recovered premium up to the year 2009 from the Mahila Bank, though its license was suspended and the Mahila Bank was placed under restrictions issued by RBI from 2004.  The petitioner has also alleged that both the respondents have violated the provisions of sections 15(1) and 13C of the DICGC Act, 1961 and forced the Mahila Bank to part with about Rs 50 lakhs during the years 2004 to 2009 from the funds/ assets belonging to the petitioner-depositors in the name of "insurance premium". Khare also claimed that DICGC has retained such amounts though it is not entitled to do so.  The petitioner appeared in person. Advocates SN Kumar and Swapnil Lautewar represented the RBI. Advocate Sumant Deopujari also appeared in the matter. 

http://www.lawetalnews.com/NewsDetail.asp?newsid=4701

Finance ministry rejects bank ESOPs, okay with rural stint for newcomers

"At a time when attrition is high and is expected to grow further as private banks expand, letting remuneration be decided by trade unions is not a positive approach," said the chairman of a state-run bank. RBI governor D Subbarao, too, had said the compensation structure of public sector banks has to change if they have to compete with private banks..........

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Expand rural ATM network to enable subsidy, entitlement transfers: Govt tells public sector banks

With financial inclusion being one of the top social agendas of the UPA Government, the ATM procurement process by public sector banks is likely to undergo a sea change. The Finance Ministry has asked public sector banks to work out the modalities of joint sourcing of ATMs, State/district wise.......

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Pak-India quest for Asian supremacy

In conclusion it can be said that while both the countries continue to face similar problems India has collectively turned their weaknesses into their strengths……….

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Another rate hike cannot be ruled out

It will be a close call for RBI on 16 September. I would like to believe it’s slightly tilted in favour of a rate hike, possibly the last before it presses the pause button as inflation continues to be a bigger problem in the Indian context than an economic slowdown. But one won’t be surprised if the Indian central bank takes a breather and allows the impact of four rate hikes in the past five months to be felt before going for another hike. A pause doesn’t mean the end of the tightening cycle, but RBI will have to communicate that message well to the market, if indeed it decides to do so.....

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Final norms on new bank licences after Banking Bill amendment

The Reserve Bank is likely to issue the final guidelines for granting bank licences to corporates only after Parliament approves the Banking Laws (Amendment) Bill, 2011. The final guidelines on new banking licences would be released only after the necessary amendments to the Banking Laws (Amendment) Bill, which seeks to give more power to the regulatory powers of the RBI, sources said. The central bank had last month issued the draft guidelines which pegged the minimum capital needed to set up a commercial bank by a corporate house having successful track record of 10 years at Rs 500 crore. It is to be noted that the Banking Laws (Amendment) Bill was introduced in Parliament in March this year. Sources added that empowering the RBI is essential for obtaining information about the other businesses of the corporate houses seeking banking licences in order to protect depositors' interests. Banking companies are engaged in multifarious activities through the medium of associate enterprises. It has, therefore, become necessary for the Reserve Bank, as the regulator of the banking companies, to be aware of the financial impact of the business of such enterprises on the financial position of the banking companies, sources said. It is, therefore, proposed to confer power upon the RBI to call for information and returns from the associate enterprises of banking companies also and to inspect the same, sources added. The amendment seeks to allow the RBI to supersede the board of a banking company for a total period not exceeding 12 months. The proposed amendment moved by the government also exempts mergers and acquisitions in the banking sector from the scrutiny of the Competition Commission of India. According to the draft guidelines, companies which are primarily engaged in the real estate or stock broking will not be eligible for promoting bank. "Entities or groups having significant [10 per cent or more] income or assets or both from real estate, construction and broking activities individually or taken together in the last three years will not be eligible to set up new banks," the draft said. On foreign holding, it said the aggregate non-resident shareholding in the new bank should not exceed 49% for the first five years. At present, the foreign shareholding in private sector banks is allowed up to 74% of the paid-up capital.

BS

NBFC policy: Devil in the detail? - Somasekhar Sundaresan

A working group set up by the Reserve Bank of India (RBI) on non-banking financial companies has recommended a very progressive framework to regulate non-banking financial companies (NBFCs) but the path ahead can be treacherous and needs to be treaded upon carefully. The working group on issues and concerns of the NBFC sector has recommended a strong focus on the big picture and refraining from regulating for the sake of it. The group has recommended that the RBI should exempt every NBFC with an asset size of below Rs 50 crores from registration with the RBI. Such an exemption would mean that such tiny NBFCs need not be bothered with having to comply with various statutory and regulatory requirements imposed by the RBI on NBFCs. The working group has also recommended that NBFCs with an asset size of below Rs 1,000 crores that do not access “public funds” (a term different and much wider than public deposits, and essentially meaning exposure to debt) also need not be registered with the RBI. The central theme of the recommendations of the report is to focus on the big picture in regulating the NBFC sector, which is a segment in the financial system, which can do quite much of what banks can do. The approach also seems to be take away as many NBFC licences as possible, since once a licence is issued, an entity would pretty much be able to do everything that the licence entitles it to do. Towards this end, the working group says that NBFCs that do not accept public deposits and have an asset size of below Rs 50 crores should be “encouraged to de-register” with the RBI. If such an NBFC were to not de-register, the NBFC would have to apply afresh for a registration as and when its asset size exceeds Rs 50 crores. Having narrowed down the scope of who would be regulated, the working group has also tightened the screws on change of control of NBFCs. Any change of ownership in excess of 25 per cent in an NBFC would now need RBI approval. So would any change of control and any restructuring such as a merger or a de-merger of an NBFC. Current requirements of the RBI bring an extremely wide range of companies within the scope of the definition of the term “NBFC”. So long as more than 50 per cent of the assets of a company were financial assets, and more than 50 per cent of the income of any company were income from financial assets, such a company would be regarded as an NBFC. The working group has now proposed to enhance this threshold to 75 per cent - again a move that would ensure that only entities that really have the profile of a financial sector player would need to be within the remit of the RBI’s jurisdiction over NBFCs. The active disinclination to have many NBFCs in the system is also writ large in a recommendation to give existing NBFCs three years to meet these requirements of a minimum 75 per cent of financial assets and minimum 75 per cent of income from financial assets. If a company registered as an NBFC that does not accept public deposits, fails to meet these criteria in three years, it would be de-registered as an NBFC. The report also says deposit-taking NBFCs that do not reach the standard of having more than 75 per cent in financial assets and income from financial assets should stop taking further deposits and should prepay existing deposits. However, the zeal to throw companies out of the NBFC space should be tempered with caution. Not having to register with the RBI is great. However, a company that is not required to register could legitimately require that it should be permitted to continue its existing operations, which avowedly fall outside the scope of regulation. In other words, if the operations are such that income is materially not financial income, and assets are not materially financial assets, they should be capable of being continued without registering with the RBI. Of course, such an approach may pose systemic risks and the RBI should be tempted to intervene. Therefore, a reporting requirement without any compliance obligation should be conceived. The devil will indeed be in the detail. In implementing the transition to the proposed policy, the RBI should work in close co-ordination with market players to understand the implications of each move. It need not accept all it gets to hear, but it will profit from openly listening to everything that has to be said. 

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own. – BS)

Running out of steam

The advisories indicate that caution will spread and if banks get wary about lending, the economy could wind down even faster...........

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Limited benefits

This refers to the report “No prepayment penalty on floating home, auto loans” (September 7). The Reserve Bank of India’s (RBI’s) move to ask banks to charge no pre-payment penalties on floating rates loan will provide relief to customers who have been burdened with extra payment liabilities as a result of the steep increase in the interest rates. However, I am surprised that RBI has restricted this move to only floating rate loans. It should have been made applicable to cases of fixed rate loans too, where interest rates have gone up after borrowing by a customer. Banks should not charge pre-payment penalty to customers who had availed of fixed rate loans around two years ago and want to pre-pay the loan now since the rates have increased steeply in the last two years. Also, the upper ceiling of pre-payment penalty should be defined by RBI for all types of loans. RBI should allow banks to charge a maximum pre-payment penalty of 2.5 per cent and it should also be slab-based. This means if the loan amount is high, pre-payment penalty should be low, which will be less burdensome for a borrower. I feel that RBI’s current suggestion can only help customers in a limited way.

Vivek Sharma, Navi Mumbai (BS)

Bank loans may dry up for truant discoms

Power distribution companies using bank loans to fund their recurring losses might find this door shut soon, with the Reserve Bank of India (RBI) agreeing to the Union power ministry’s proposal to tighten lending norms for discoms.......

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Economy in for a double whammy

Making sense of the latest official numbers on economic growth throws up the old question: Is the glass half empty or half full? Do the numbers confirm an expected slowdown or reveal unexpected resilience? While economists and observers take their pick, the economy is likely to get a double whammy in the form of another interest rate hike in the face of sluggish investment. To state the facts baldly, India’s economy grew by 7.7 per cent in the first quarter (April-June 2011) of the financial year 2011-12, compared with 8.8 per cent growth in the same quarter last fiscal. Growth in the manufacturing sector dipped to 7.2 per cent from 10.6 per cent, and that in the mining and quarrying sector to 1.8 per cent as against 7.4 per cent. Farm output expanded by 3.9 per cent, much higher than 2.4 per cent in the same quarter last year. The services sector, which contributes almost 55 per cent of India’s GDP, offered a mixed bag. This is the fifth quarter in a row that the economy has reported a lower year-on-year growth. It is much lower than official estimates of eight to 8.5 per cent.The data comes at a time when India is vulnerable to global economic developments, especially in the United States and the eurozone. The Reserve Bank of India, or RBI, is unlikely to be impressed by these arguments. It has warned last week against accepting high inflation (9.22 per cent for July) as the new normal. There is a consensus among professional economists that the central bank will put up key policy rates by at least 25 basis points (0.25 per cent), if not 50, in the next policy review due on September 16. According to them, the performance of the economy in the June 2011 quarter has to be seen against the several domestic and global headwinds it has been facing. Although growth is slowing down, it is not collapsing as feared by some. Also, with full-year growth number still above seven per cent, it allows the central bank to keep focus on fighting inflation. Therefore, a 25 basis point rate increase on September 16 is very likely. The decline in GDP growth may turn into a sustained trend — unless the RBI realises its hawkish policy has served its purpose. Given the fragile state of the global economy with both the US and the eurozone on the brink of a recession, China slowing down and the home economy losing pace, corporate India’s confidence levels are fairly low. A recent survey by Morgan Stanley revealed that for a second successive year, corporate India is unlikely to up capital spending by more than a tepid 10 per cent. Moreover, while 15 per cent of those polled are unlikely to spend at all, about a third of those who do invest would do so more with a view to improving productivity rather than adding greenfield capacity. So we are unlikely to see companies rushing to set up too many new plants or build more roads. Having exhausted the fiscal stimulus, the government can no longer spend its way back to higher growth. However, fiscal reform, consensus on land acquisition policy, labour reform, facilitating private investment in food processing, logistics and supply chains, and liberalisation of investment policy in the strategic and defence industries could once again help stimulate the “animal spirits” of entrepreneurs. If the government could convince industry that it will push through legislation and be less bureaucratic, that in itself would go a long way in boosting industry’s morale.

Khaleej Times

India Struggles to Tame Inflation, Spare Economy

The Reserve Bank has gotten more aggressive in recent months, surprising markets with a series of half-percentage-point rate increases. In a Sept. 3 speech, the RBI's Executive Director, Deepak Mohanty, acknowledged that inflation has become "generalized" in the economy, but predicted the rate increases would begin to bring down inflation later this year and in early 2012...........

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Asia offers rate status quo hope

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The central bankers at four Asian countries — South Korea, the Philippines, Indonesia and Malaysia — have hit the pause button on rate increases even though they have been battling the spectre of rising inflation just as India. Is there a cue here that Reserve Bank of India governor Duvvuri Subbarao and his bunch of policymakers will take when they hunker down for the mid-quarter review of the monetary policy on September 16?

Key indices likely to retreat at opening

...When the RBI board members meet this week for a policy review, they will, perhaps, have an inflation figure close to 10 per cent, and a weakening fiscal position. Against this backdrop, Deutsche Bank thinks that the RBI will be inclined to deliver one more 25 basis points rate hike. It also predicts that there may be scope for a prolonged pause after this policy measure. ....

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