Despite protests, Rs 500, Rs 1000 notes to stay

NEW DELHI: The government has decided not to discontinue circulation of higher denomination notes of Rs 500 and Rs 1,000 despite demands from civil society groups that big currency notes were breeding black money in the economy and were the primary causes of inflation. While giving details of various currency notes in circulation, the finance ministry recently made its stand clear that there was no thinking on the government's part to discontinue such notes. Though RBI prints currency notes, it is the government that decides the denominations in which they would be printed. Of the total Rs 9.70 lakh crore worth currency notes in circulation as on June 30, 2011, more than 80% are in the denomination of Rs 500 and Rs 1,000. The total value of notes of Rs 2, 5, 10, 50 and 100 in circulation is less than Rs 2 lakh crore. The demand to curb higher denomination notes has been made to check the menace of unaccounted money, stop fake currency circulation and curb anti-national and terrorists using these counterfeit currency to destabilize the economy. According to the civil society groups demanding withdrawal of higher denomination notes, even US and European countries where the per capita income is much higher than India's, the denomination used is much smaller in comparison. For instance, the largest denomination note in the US is of $100. The demand also has the support from revenue intelligence agencies which have been grappling with the menace of counterfeiting. A recent report prepared by the Directorate of Revenue Intelligence (DRI) in association with the Intelligence Bureau, RAW and CBI has said that fake Indian currency notes in circulation in India could be as high as worth Rs 6,000 crore and that this is seriously undermining the credibility of the rupee.

TOI

Right policy mix for the rupee – S.S.Tarapore

The time-tested policy of intervening in the forex market (both ways) would need to be blended with monetary policy tightening supported by stabilisation bonds. It is best to keep the current account deficit within 3 per cent of GDP.  The major international currencies are in turbulent waters and many currencies are facing volatility with downward swings. As per the analytical construct of the Impossible Trinity, it is not possible to have a fully open capital account, an independent monetary policy and a managed exchange rate; one of these objectives has to be jettisoned. In India there are still a number of capital controls and monetary policy is not fully independent. As such, it is reasonable to have some hold over the exchange rate. Given the fragile financial structure it is hazardous to totally give up one of these objectives and it should be possible to optimise policies following the general theory of the second best.

EFFECTS OF CAPITAL FLOWS

In the 1990s, the Reserve Bank of India (RBI) considered the real effective exchange rate (REER), based on the five-country model, as a ‘policy polestar'. As capital inflows gathered momentum there were fears that a marauder could “break the Bank”. While after 1997, the RBI continued to be guided by the REER, there was a move from the explicit REER basis to an implicit REER policy.  As capital inflows increased, there was a growing concern that in the absence of forex intervention, the current account deficit (CAD) could rise substantially above the level of 3 per cent of GDP. Between 2003 and 2008, there was decisive action to avoid excessive appreciation through aggressive forex intervention combined with sterilisation of the increased domestic liquidity. In the more recent period it would appear that the RBI has been reluctant to intervene if the rupee appreciates but is willing to take action if it depreciates.

The recent movements in the exchange rate are revealing. The REER six-country index (with 2004-05=100) rose from 98.48 in September 2009 to 119.16 by July 2011 and then depreciated to 113.87 by August 2011 (there has been further depreciation in September 2011). The RBI last undertook purchases in November 2010. It was only in September 2011 that the RBI undertook sales to stem the depreciation of the rupee. If the exchange rate policy is strictly non-interventionist, a la New Zealand, then there would be no need to hold any forex reserves. A policy of not intervening when the rupee appreciates has a corollary that there should be no intervention when the rupee depreciates. An asymmetrical policy of intervening only when there is depreciation is obviously unsustainable. Although capital inflows are much higher than the CAD, they are capricious and, as such, it is best to keep the CAD within 3 per cent of GDP. If the surplus capital flows are mopped up through forex intervention there would an increase in domestic liquidity. If the surplus capital flows are not mopped up by forex intervention, domestic liquidity would swell or the CAD would widen. It would be preferable to bolster the forex reserves and then deal with excessive domestic liquidity rather than try and contain the CAD by reducing domestic liquidity. A purist policy of non-intervention in the forex market would require that there are effective monetary policy instruments to deal with the evolving liquidity situation. As it is, monetary policy is bartered away to handle the fiscal excesses. An increased burden on monetary policy would imply a quantum jump in interest rates and reserve requirements. The time-tested policy of intervening in the forex market (both ways) would need to be blended with monetary policy tightening supported by Stabilisation Bonds. This provides for a more equitable burden-sharing among the overall policy instruments.

Given the interest rate differentials between India and the major industrial countries, the rupee should be at a discount in the forward market whereby the interest rate differentials are reflected in the forward exchange rate.  Forward market intervention can be more effective than spot intervention. The net forward purchases/sales have been zero since November 2011 and the RBI could significantly reduce domestic liquidity pressures through aggressive forward intervention.  Whichever way one looks at it, the authorities need to have a fix of some sort on what they consider an equilibrium exchange rate. Considering the nominal exchange rate, the secular depreciation since 1993 has been of the order of 1.5 per cent per annum which is insufficient to cover the inflation rate differentials and the interest rate differentials. Hence, there is a need for the nominal exchange rate to depreciate. An iconoclastic approach of abjuring the REER as a reference point, without a new creed in place, could be dangerous. The present exchange rate policy articulation emphasising “volatility” leaves market players without a reference point and creates confusion in the forex market. A dedicated, clear enunciation by the RBI top management of the present exchange rate policy is the need of the hour.

HBL 

You have to be decisive on fighting inflation – Bimal Jalan

Whatever option you finally choose and what you feel should be done, must be done irrespective of its popularity and you have to succeed........

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Banking M&As may be kept out of competition regulator’s ambit

The Reserve Bank of India has found a way to keep the banking sector out of the Competition Commission of India’s (CCI) ambit on mergers and acquisitions (M&As). The Banking Laws (Amendment) Bill, 2011, currently being vetted by a parliamentary standing committee, has a new clause — Section 2A — inserted after Section 2 that specifies, “Notwithstanding anything contrary contained in Section 2, nothing contained in Competition Act, 2002, shall apply to any banking company, the State Bank of India, any subsidiary bank, any corresponding new bank or any regional rural bank or cooperative bank or multi-state cooperative bank in respect of the matters relating to amalgamation, merger, reconstruction, transfer, reconstitution or acquisition under respective Acts.” With the move of the central bank of getting an “indirect exemption” for the sector from Section 5 and 6 of the Competition Act, pertaining to mergers and acquisitions (M&As), the CCI has been effectively kept away from the banking sector.

IE

First ‘total banking’ state yet to achieve financial inclusion

Kerala added another first to its credit last week when it became the first state in India to have banking facility in every village. It achieved the unique distinction with banks opening either ‘brick and mortar’ branches or appointing customer service providers in 127 villages without bank branches.It came four years after the state attained total banking by providing at least one bank account to every family. Under the total banking programme, families without bank accounts were provided with “no-frills accounts”, a pass book and an automated teller machine (ATM) card. With these, Kerala has marched close to the target set by the Reserve Bank of India for financial inclusion, which is the delivery of banking services at an affordable cost to the poor, the disadvantaged and the low-income groups. The financial inclusion that the state has achieved is confined to providing merely a bare minimum access to a savings bank account without frills. The state has to go a long way in achieving the larger objective of ensuring easy credit to the poor. Taking the banking service to every family in the state has not been a difficult task since a vast section of the population had availed the banking service due to high literacy and large scale migration. The families of the migrants, who number over two million, are forced to maintain savings accounts since they get remittances through banks. In fact, the banks have been wooing the NRI customers by opening branches in all major migrant pockets. Kerala witnessed a sporadic increase in the bank network following nationalisation of banks in 1969. The state accounted for 5.3 per cent of the total number of offices of the commercial banks in India in 1987. In addition to the commercial banks, Kerala also has large number of cooperative banks and non-banking financial institutions, mobilising deposits and disbursing credits. The state at present has 3.6 cooperative institutions in each village. As a result of these, the average population per branch in Kerala came down steadily over the years. It stood at 10, 000 in 1996 as against 15, 000 in the whole country. The savings in the state is also high compared to other states. The deposits in the commercial banks alone crossed the Rs1.5-trillion mark by the third quarter of 2010. About 30 per cent of this is non-resident deposits. These provide the right infrastructure for targeting higher financial inclusion in the state but sadly the performance of the commercial banks in credit disbursement has been very dismal. There has been a sharp decline in the credit-deposit (CD) ratio of the commercial banks in the nineties. The CD ratio declined from 64.77 in March 1988 to 44.9 in September 1997. Although it has gone up to 74.32 per cent at the end of September, 2010, it is very low compared to the neighbouring states. The DD Avari Committee appointed by the RBI endorsed the State’s view that the CD ratio commercial banks functioning in Kerala was totally inadequate and also observed that the philosophy of banking needs a new orientation and human touch under the Kerala situation. The low CD ratio has hampered the general investment tempo in the State. Politicians have been accusing the banks of diverting deposits mobilized from the state to other states. Chief Minister Oommen Chandy said that the banks were reluctant to provide education and agriculture loans. He said that he has been getting a number of complaints from people regarding the negative approach of banks towards their loan applications. Chandy said that the state will be able to achieve total financial inclusion only if the banks adopted a more liberal approach in lending money to the vulnerable sections of the society.

Khaleej Times

Banks against proposal to hike deposit insurance cover five-fold

Mumbai : Banks have opposed the Damodaran Committee's proposal for a five-fold increase in deposit insurance cover as it could have serious cost implications for them due to higher premium outgo. They have represented to the Reserve bank of India that the current deposit insurance cover per capita gross domestic product in India is adequate when compared with the global benchmark. The RBI's Committee on Customer Service in Banks (chaired by former SEBI Chief Mr M. Damodaran) had, in August 2011, recommended that the deposit insurance cover should be raised five-fold to Rs 5 lakh from Rs 1 lakh so as to encourage individuals to keep all their deposits in a bank convenient for them. Banks, under the aegis of the Indian Banks' Association, have buttressed their case against a hike in deposit insurance cover using RBI's own data.  According to the RBI, at the current level, the deposit insurance cover in India works out to 1.63 times per capita GDP as on March 31, 2011. This is comparable with the international benchmark of around 1-2 times per capita GDP prior to the financial crisis. Another reason why commercial banks are not favourably inclined to an increase in deposit insurance cover is that smaller banks, especially from the co-operative sector, could possibly use this fact and the above average deposit rates that they invariably offer to lure depositors into their fold. “There is a moral hazard involved in raising the deposit insurance cover five-fold,” said Mr K. Unnikrishnan, Deputy Chief Executive, IBA. Moral hazard could arise because a financial intermediary does not take full responsibility for the consequences of its actions. Hence, it has a tendency to act less carefully than it otherwise would, leaving the other party (depositors) to bear the brunt of its actions. Commercial banks also want the deposit insurance premium halved to 5 paise per deposit of Rs 100 from the current 10 paise as there are hardly any claims from them on the Deposit Insurance Credit Guarantee Corporation, the wholly-owned subsidiary of the RBI. The deposit insurance premium that commercial banks are paying is cross-subsidising the claims arising from the co-operative banking sector, said a banker. Commercial banks, including regional rural banks and local area banks, account for about 93 per cent of the total deposit insurance premium paid to DICGC, with co-operative banks accounting for the rest. Commercial banks and co-operative banks paid deposit insurance premium aggregating about Rs 5,000 crore in FY-11. During 2010-11, the Corporation settled aggregate claims for Rs 379 crore in respect of one commercial bank (supplementary claim) and 73 co-operative banks (28 original claims and 45 supplementary claims) as compared with claims for around Rs 655 crore during the previous year. In the current financial year so far, DICGC has paid depositor insurance claims aggregating Rs 144 crore on account of eight co-operative banks.

HBL

HSBC, Royal Bank of Scotland to meet Reserve Bank of India on acquisition of select assets

MUMBAI: HSBC and Royal Bank of Scotland (RBS) are set to meet banking regulator RBI to resolve issues concerning the impending acquisition of select assets of RBS. "The senior management from RBS and HSBC will meet the RBI. The regulator is yet to clear the deal as it is not in favour of transferring branch licences to HSBC as part of the deal since it was a portfolio sale,'' said a source in the know of the development. "Transfer of branches is critical to the valuation and the fate of the deal,'' the person said on condition of anonymity. RBS, which had acquired 31 branches in the country when it bought out ABN Amro Bank's Asian operations in 2007, had decided to retain five branches and surrender the remaining to RBI. Following this, HSBC was to apply for fresh licences. "We are working closely with the regulators and HSBC to complete the deal,'' said RBS spokesperson Jane Ong in an email response. An email sent to HSBC did not elicit any answer. In a recent interview to ET, HSBC India CEO Stuart A Davis had said, "When we first looked at the business, we thought this acquisition would give us distribution and customers, and bring in one to two years of growth... We have made an application to RBI on a certain basis and the RBI has given us indications on what we can expect. Our discussion with RBI was such that we thought what we got would be satisfactory to us.''. In 2010, HSBC agreed to buy the commercial and retail businesses of the erstwhile ABN Amro in India that RBS received as part of its share in a 3-way split of the Dutch bank with Fortis of Belgium and Santander of Spain. The exclusivity deal signed by the two banks lapsed in September. However, it could not be ascertained if the bank will extend this agreement. While RBS has exited the retail business in most parts of Asia when it sold it to ANZ of Australia, it is yet to conclude the India leg of the deal. In India, the bank's retail and commercial banking book is likely to be around Rs 1,800 crore. Of which, the home loan portfolio will be Rs 800 crore, personal loans Rs 300 crore and credit card outstanding would be to the tune of Rs 700 crore. In July 2010, HSBC said it would buy select assets of RBS for a premium of $95 million over the net asset value, which has not been set as yet. The price will be subject to claw-backs, depending on losses in unsecured lending in the two years after the deal is completed. The RBI does not allow automatic transfer of bank branches to buyers in a portfolio sale. The RBI, in line with the WTO guidelines, grants around 12 branches annually to foreign banks.

ET

Capital inadequacy

....Naturally, there is no surprise in RBI Deputy Governor K.C.Chakrabarty’s observation that profits in public sector banks follow the entry and exit of the incumbent. The word he did not use is “cooking the books”, but the comments by themselves should have raised concerns among the rating agencies earlier.....

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AADHAR to be linked to MGNREGS wages

Bid to add social content to UID scheme, otherwise in limbo

With the AADHAR scheme apparently in limbo, the Centre is making a desperate effort to provide it social content. As of now, only 3.5 crore unique identification cards have been issued as against an enrolment of 10 crore people across the country. Matters turned worse when the Reserve Bank of India issued a directive that bank accounts could not be opened on the basis of UID cards. But later it issued a clarification accepting AADHAR cards as proof of identity and residence. What is bothering the Union government is that AADHAR will be judged not by the coverage in terms of numbers but by the impact it creates as a card-bearing benefit. But possession of the AADHAR card is not mandatory. Rural Development Minister Jairam Ramesh has taken the initiative to link AADHAR with payment of wages under the Mahatma Gandhi National Rural Employment Guarantee Scheme in the five States where the ministry has been appointed registrar for issuance of UID cards. To facilitate this, Mr. Ramesh held a meeting with Unique Identification Authority of India (UIDAI) Chairman Nandan Nilekani. Under a Memorandum of Understanding the UIDAI signed with the States, the ministry has been appointed registrar for collection of data in Assam, Bihar, Jharkhand, Tripura and West Bengal. Other Central government departments such as Food and Civil Supplies and Information and Technology have been assigned the role in other States. Within its limited jurisdiction, the Ministry is seeking to provide the UID card a social content. The MGNREGS wages will be paid in these States through AADHAR-linked bank accounts.The Ministry will hold a meeting of officials on October 23 and 24 to decide whether to start the project across these five States or make a beginning by concentrating on a few districts in each of them, and the time frame to implement the scheme. Mr. Ramesh favours a reasonable timeline of 12 months to issue UID cards to all job cardholders. But that seems an uphill task as of now, even if linking AADHAR to MGNREGS wage payment is limited to these five States. For, as against the 3.09 crore job cards issued in these States, only 39 lakh BPL households have been provided with bank accounts. Out of these households with bank accounts, West Bengal accounts for 22.16 lakh, way behind the 1.08 crore job cards issued there. In Assam too, only about 20 per cent (7.42 lakh) of the job card holders (38.4) have secured bank accounts. It is pretty bad in Bihar, where only 1.73 lakh MGNREGS workers have bank accounts, though the number of job card holders is 1.16 crore, and in Jharkhand, where only 2.6 lakh out of 39.5 lakh job card holders have bank accounts.Tripura is the only State which has done well, ensuring that four lakh MGNREGS workers out of 5.9 lakh job card holders have bank accounts.

HBL

SBI downgrade to impact Indian banking sector: Ficci

SBI's credit rating downgrade by Moody's could have far reaching implications on the Indian banking system as bad debts are expected to rise on account of high interest rates..........

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