Thursday, October 6, 2011

'We've given a solution to the co-op bank dual control problem' -Y H Malegam, Chairman, RBI panel

Y H Malegam, chairman of the Reserve Bank of India’s panel on the licensing of new banks in the urban co-operative sector, in conversation with Abhijit Lele, gives his assessment of changes in the sector. Edited excerpts:
The panel has suggested allowing setting up of new urban banks in the co-operative sector. What issues impacting their working?
There is the issue of dual control. Action against the management, etc, can only be taken by the registrar of co-operatives (RoC). That registrar is often subject to political and other pressures. RBI, which is responsible for banking supervision, makes an inspection, finds problems but is not able to enforce discipline because it has to always go through the registrar. The situation has improved after RBI and state governments formed a task force of urban banks (Tafcub) to coordinate work on improving the financial health and management of urban banks.

Tafcub panels have been operating for four-five years. Is their work satisfactory? Can we allow new banks?
There has been significant improvement in the health of urban banks but the process is still time-consuming. What we have said is when you look upon a co-operative bank, conceptually you say it is a co-operative which owns the bank. Therefore, you can get out of the problem of dual control if you recognise this factor. As the co-op regulator is RoC, the bank regulator is RBI. Make it a condition that in addition to having a board of directors (BoD) under the Co-operative Act, you have a board of management. The latter is appointed by the BoD, but it has all the characteristics of the board of a commercial bank. That means it has people with professional qualifications and a chief executive officer. It is subject to RBI discipline. We make this a condition of the licence.

Would this arrangement limit or minimise the room for interference of political or other interests in the working of the board of management?
It will reduce the interference because they (political elements) have no role to play on the board of management. They have a role to play in the board of directors. The directors are not going to run the bank; BoM is going to do so. So, RBI has the power to remove people from the BoM and to approve the appointment of a chief executive officer. The same powers as in the case of a commercial bank.

You have recommended that co-operative societies working in urban areas need to be given preference in setting up a new urban bank. What is the rationale?
Look at it in a different context. First, there was the proposition problem of dual control. This is solved by having a board of management. Second, our statistics showed the geographical distribution of urban banks is not even. There are certain states like Maharashtra, Andhra Pradesh and Gujarat where there are a lot of UCBs. There are other states with a few urban banks. We do not know whether people starting these new banks will in fact run these well. But you already have credit societies, which are large and running like banks. So, we said, if we have an existing credit society, well run and meeting all parameters, then give it preference in becoming a bank.

Some of the existing primary credit societies are in a controversy and face political interference at a local level.
They will be subject to the same organisation structure. When they become a bank, they must have a board of management and corporate governance and all the specified conditions. If these are not fulfilled, their licence will be cancelled.

Do you expect RBI to do some ground work to improve the quality of oversight capability, to improve regulation?
RBI has a very large urban co-operative bank department. It does a tremendous amount of inspection. In the past two-three years, the licences of more than 100 urban banks have been cancelled. So, the health has improved significantly. It is not as if we have not identified what needs to be done. It was always a problem of dual control. With this being solved, we hope it will not be a problem for the new banks. From the start itself, they will be monitored and work well. The problem is of existing banks. Therefore, we have suggested Tafcub be persuaded to adopt this model (for existing banks).
BS
'Be cautious in interpreting HSBC PMI data'
The Prime Minister’s Economic Advisory Council (PMEAC) on Wednesday advised caution in interpreting the data released by HSBC Purchasing Managers’ Index (PMI) on services sector. Its chairman, C Rangarajan, said other parameters do not suggest that services are contracting, as is shown by PMI data. “We should exercise caution in interpreting PMI services numbers,” he told Business Standard. However, Rangarajan agreed there were other parameters that suggest a slowdown in the growth of manufacturing, as the PMI revealed. On their part, industry chambers like Confederation of Indian Industry, Federation of Indian Chambers of Commerce and Industry (Ficci) and the Associated Chambers of Commerce and Industry of India (Assocham) point out that the PMI data showed a growth slowdown that is spreading to sectors, and blamed successive Reserve Bank of India (RBI) rate hike for a moderation in the growth momentum. PMI data showed that private sector services activities contracted last month, for the first time since April 2009, which was a period of global financial crisis. Also, manufacturing index was almost close to contraction point. Rangarajan’s remarks today assume importance since various parameters point to a slowdown in manufacturing growth, but services sector growth indications are difficult to get as they are released once in a quarter as part of the gross domestic product (GDP) numbers. According to India’s official figures, eight core industries grew at the slowest pace in 11 months at 3.5 per cent this August — down more than half of their highest growth in a year at 7.8 per cent in July. Already industrial growth plummeted to a 21-month low of 3.3 per cent in July and that too when core sector performed stupendously. Within industry, manufacturing growth fell to just 2.3 per cent in July. Ficci said the slowdown in PMI reflects that the slowdown fears were becoming all-encompassing. “The Index of Industrial Production data, recently released export data and the balance of payment data all point towards a deteriorating macro-economic environment-both external and internal,” according to Soumya Kanti Ghosh, director (economics & research), of the industry chamber. Exports were quite high in August year-on-year, but have sequentially shown a decline in the month. Industry constitutes over 18 per cent of India’s GDP, while services (including construction) account for 63 per cent. Assocham, while attributing the main blame on RBI’s rate hike spree, said high input costs amid global economic uncertainties – especially in the Eurozone – were adding to negative sentiments.
BS

Bank licences for private sector entities agitate MPs

The Reserve Bank of India (RBI)'s draft guidelines for granting licences to new private sector banks has come under the scrutiny of Parliament's standing committee on finance. The panel has summoned RBI governor D. Subbarao for an explanation, particularly on the issue of allowing corporate players to start banks in the country. The committee, reconstituted in September, is learnt to have taken up the issue for discussion in its next meeting, scheduled on October 17. At its first meeting, certain members, cutting across political lines, are learnt to have expressed doubts about the RBI's decision. They want the committee to address the issue because the guidelines, if implemented, could impact the banking sector in a big way. Former finance minister and chairman of the standing committee on finance Yashwant Sinha said a response from the RBI had been sought on the issue. "We have called them (RBI). The committee has taken cognisance of the draft guidelines," Sinha told Mail Today. Subbarao is likely to appear before the panel since that has been the practice in general. A majority of the committee members are likely to oppose the guidelines. The bone of contention is a provision that makes private sector entities or groups, owned and controlled by residents, eligible to promote banks. The minimum stipulated capital requirement is Rs 500 crore. Several corporate players have hailed the provision and expressed interest to start new banks. "Promoters, promoter groups with diversified ownership, sound credentials and integrity that have a successful track record for at least 10 years in running their businesses shall be eligible to promote banks. The RBI may seek feedback on applicants on these aspects from other regulators and enforcement and investigative agencies such as Income-Tax, CBI, Enforcement Directorate, etc. as appropriate," says the provision. Sources in the parliamentary panel said the entry of corporates into the banking sector could undermine the functioning of nationalised banks. "We need some clarifications from the RBI. Will the entry of corporates lead to outflow of money from public sector banks? What will be the nature of foreign direct investment (FDI) in these banks? Will the RBI regulate the FDI inflow?" a member asked. The senior MP said if the corporates were allowed to start new banks, the essence of nationalisation of banks could be lost. "Is the UPA government trying to revert to the pre-1969 system when private banks were allowed to operate?" he asked, hinting that many Congress members were also taking the RBI's guidelines with a pinch of salt. The RBI, however, maintains that the draft guidelines have been prepared on the basis of responses received, extensive internal discussions and consultation with the Centre. The Left parties are vehemently opposed to the move. "This is outrageous. We will oppose this tooth and nail. It's a deviation from the Centre's existing banking practices. We will raise the issue in and outside Parliament," CPI leader Gurudas Dasgupta, who is also a member of the standing committee, said.
India Today 

Indian banks healthy but stress signals showing

The past three months have been tough for Indian banking. High interest rates and threats of a global recession have taken their toll on bank stocks. The NSE banking index fell 15 per cent compared with the Nifty’s 11 per cent slide in the past three months. Indian banks, ironically, have never been in a better state of health in the past 10 years.  A recent study by Boston Consulting Group (BCG) found that bad loans fell from a peak of 11.4 per cent in 2001 to just 2.4 per cent in 2010, showing the efficiency of management of capital. In fact, Indian banks have been performing better in controlling defaults with only 0.6 per cent of loans handed out last year turning sticky, compared to 1 per cent in the US and China. Indian banks also have a cost-to-income ratio of 47 per cent, which is lower than Germany, France and the US.  The main reason for the robustness was the banks’ focus on return on investment, cost-to-income ratios and the efficient use of technology. BCG expects that by 2025 the Indian banking sector will be the third largest in the world on assets, behind China and the US. But now stress signals are showing up. The Reserve Bank of India expects non-performing assets (NPA) to inch up to 2.9 per cent during 2011. IDFC Securities, a broking firm, recently said at least 17 per cent of loans are stressed and some could go bad. Total bank credit to the industrial sector stands at about Rs 17,60,600 crore. “Credit to power and infrastructure sectors has grown 40 per cent in the past four years and the proportion of the same has gone up to 14 per cent in terms of total credit offtake, which has created additional risks to the banking segment,” says Ajay Parmar, head of institutional research at Emkay Global. State-owned banks have a higher allocation to small industries, which could get hurt early if there is an industrial slowdown. Additionally, the central bank’s battle with persistent inflation is raising the cost of money, pressuring net interest margins that are expected to continue to narrow for at least another two years. But no one is pressing the panic button yet because there is no dearth of liquidity in the system. Says Rajeev Thakkar, CEO, Parag Parikh Financial Advisory Services, “If margins are high then NPAs are not a cause for concern... There is a difficulty in the system but we are certainly not into recessionary territory.”
IBN Live

RBI increases domestic money transfer limits

The Reserve Bank of India (RBI) has provided an impetus to financial inclusion by liberalising money transfer across the country. The apex bank has issued guidelines to open up the formal banking channel to facilitate fund transfers of small value, subject to monthly ceilings and monitoring. Currently, only banks are permitted to initiate money transfers in the country, subject to the adherence of 'know-your-customer' guidelines. As a result, many individuals, particularly the migrant population, have no access to formal banking channels to transfer funds back home, owing to the lack of proofs of identity/address. However, following the guidelines issued by RBI, the amount that can be transferred from the customer's bank account to beneficiaries not having a bank account has been liberalised. The transaction cap has also been increased from the current limit of Rs 5,000 to Rs 10,000, capped at Rs 25,000 per beneficiary per month. The remitting bank would also have to obtain the complete details of the beneficiary (name and address) for the transaction. Walk-in customers, too, can transfer up to Rs 5,000 per transaction to bank accounts of family members, or subject to a maximum of Rs 25,000 per remitter, after providing the details to the remitting bank. Fund transfers among domestic debit/credit/pre-paid cards would also be subject to the same transaction/monthly cap. Until now, prepaid cards could be used only for payments of goods and services. However, after reviewing the 'potential reach of such cards', RBI decided to allow card-to-card transfers, subject to the notified limits. According to RBI's operational guidelines, these fund transfers are expected to be effected on a real/near-real time basis. And, banks may levy 'reasonable charges' to popularise the scheme.
BS

Banks breathe easy as liquidity improves

For the first time since the start of this financial year, liquidity in the banking system has turned to surplus mode, as banks garnered deposits towards the end of the second quarter. Most banks have parked funds worth Rs 41,530 crore with the Reserve Bank of India (RBI) in the last two days under the liquidity adjustment facility (LAF)....

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Cabinet nod sought for converting IIFCL into NBFC

NEW DELHI: The finance ministry has decided to go ahead and seek cabinet approval for converting the dedicated infrastructure financier India Infrastructure Finance Company Limited (IIFCL) into an infrastructure finance company despite opposition from the Planning Commission.  The IIFCL escapes regulatory oversight of the Reserve Bank of India, as it is currently regulated by the finance ministry. "Converting IIFCL into an NBFC (non-banking finance company) will strengthen risk management and avoid concentration of risk," said a finance ministry official. The finance ministry says the RBI has also supported the finance ministry proposal and even agreed to relax the risk weight norms to 50% instead of 100% for PPP projects at par with infrastructure development funds.
ET

'Be cautious in interpreting HSBC PMI data'

The Prime Minister’s Economic Advisory Council (PMEAC) on Wednesday advised caution in interpreting the data released by HSBC Purchasing Managers’ Index (PMI) on services sector. Its chairman, C Rangarajan, said other parameters do not suggest that services are contracting, as is shown by PMI data. “We should exercise caution in interpreting PMI services numbers,” he told Business Standard. However, Rangarajan agreed there were other parameters that suggest a slowdown in the growth of manufacturing, as the PMI revealed. On their part, industry chambers like Confederation of Indian Industry, Federation of Indian Chambers of Commerce and Industry (Ficci) and the Associated Chambers of Commerce and Industry of India (Assocham) point out that the PMI data showed a growth slowdown that is spreading to sectors, and blamed successive Reserve Bank of India (RBI) rate hike for a moderation in the growth momentum. PMI data showed that private sector services activities contracted last month, for the first time since April 2009, which was a period of global financial crisis. Also, manufacturing index was almost close to contraction point. Rangarajan’s remarks today assume importance since various parameters point to a slowdown in manufacturing growth, but services sector growth indications are difficult to get as they are released once in a quarter as part of the gross domestic product (GDP) numbers. According to India’s official figures, eight core industries grew at the slowest pace in 11 months at 3.5 per cent this August — down more than half of their highest growth in a year at 7.8 per cent in July. Already industrial growth plummeted to a 21-month low of 3.3 per cent in July and that too when core sector performed stupendously. Within industry, manufacturing growth fell to just 2.3 per cent in July. Ficci said the slowdown in PMI reflects that the slowdown fears were becoming all-encompassing. “The Index of Industrial Production data, recently released export data and the balance of payment data all point towards a deteriorating macro-economic environment-both external and internal,” according to Soumya Kanti Ghosh, director (economics & research), of the industry chamber. Exports were quite high in August year-on-year, but have sequentially shown a decline in the month. Industry constitutes over 18 per cent of India’s GDP, while services (including construction) account for 63 per cent. Assocham, while attributing the main blame on RBI’s rate hike spree, said high input costs amid global economic uncertainties – especially in the Eurozone – were adding to negative sentiments.
BS

Is RBI aiding creation of black money in India?

NEW DELHI : Due to deficiencies in its monitoring mechanism for exports, India's central bank might be inadvertently abetting the creation of black money outside the country. These Reserve Bank of India (RBI) deficiencies were first pointed out in July by the Karnataka anti-graft agency's report on illegal iron-ore mining in the state, but had gone unreported. A follow up by ET with various parts of the banking sector and the export transaction chain not only confirms the same, but also suggests similar shortcomings could exist in other sectors of India's $252-billion goods exports.  In order to establish a money trail, every transaction involving the export of goods is broken into two parts. One, when goods leave India, the customs department at ports and airports record it, and send the information to the RBI. Two, when the payment comes into India, the receiving banks record it, and send the information to the RBI. By matching the two databases, the RBI can find out which payments have not come in during the designated time of 180 days (extendable by 180 days).  The Karnataka Lokayukta, while following the trail of iron-ore exports from the southern state, found bank records with the RBI for only 20% of the 5,000 iron-ore export bills scrutinised by the anti-corruption body between 2006 and 2010. For the remaining 80%, the RBI could not confirm whether export proceeds had come into India within the stipulated period or not. "The RBI is supposed to collate and compare the two databases, and monitor whether the realisation of export proceeds is as per law," says the Lokayukta report. "This is not happening  effectively."  The RBI, in an email reply to ET, says its software can match the two databases. However, it adds: "The matching procedure is often fraught with throwing of mismatched/erroneous entries due to the involvement of multiple agencies handling the documents." It further says the daily volume of transaction reports coming from the customs department made the matching exercise "cumbersome and time consuming". The RBI did not disclose the quantum of the mismatch.  In 2010-11, according to Directorate General of Commercial Intelligence and Statistics (DGCIS) data, India's exports stood at $448 billion, of which $252 billion is related to goods. Service exports accounted for most of the rest; service transactions, however, do not face this issue because, being a service, they don't have a customs leg. PV Raghunathan, a foreign exchange expert and a consultant to ITC and Ashok Leyland, says 90% of export remittances are remitted to India within 180 days. He says the RBI could be doing more. "Even when the two databases do not match, a random checking of transactions is possible," he says. "But the RBI, in general, lacks supervisory skills because a majority of its workforce does not have a commercial background and their training is entirely academic."  The numbers from Karnataka provide a worst-case illustration of illegal business and transactions thriving in a deficient system. According to the Lokayukta, 126 million tonnes of iron ore was exported from Bellary, Karnataka, between 2006 and 2010. Of this, it says, 30 million tonnes, valued at Rs 12,228 crore, was illegal. Extrapolating this to all iron-ore exports from the region yields a value figure of Rs 51,702 crore. If 80% of this was unaccounted for in the banking system, then the unexplained amount could be as high as Rs 41,360 crore (about $8 billion).
ET

DIPP advises RBI to pause rate hike


....the Department of Industrial Policy and Promotion is of the opinion that RBI's strategy to control inflation is wrong. The industry department has suggested an alternative to the central bank to control inflation....

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Stop the dribble game

...Some time ago, Reserve Bank of India Governor Duvvuri Subbarao expressed grave doubts regarding the reliability of basic statistics in India for real time policy formulation....

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