The commoner’s banker

Reserve Bank of India (RBI) Governor D Subbarao took a momentous decision this week to deregulate savings bank deposit rate, the last of regulated rates. The man, who was forced to hike policy rates for 13 consecutive times in a relentless pursuit of lower inflation over the past 19 months since March, 2010, can now take pride in deregulating savings account rate, even if that means squeezing profit margins of banks in a fiercely competitive market. In an exclusive interview with Financial Chronicle after unveiling the second quarter review of monetary policy, Subbarao said: “For a large majority of low-income households, this is their principal avenue for savings. So they must get a market-related interest rate. That was the main motivation, and not managing banks’ margins.” The fineprint of the move tells another story. By deregulating rates, he wants to continue what RBI has been doing through this long rate-tightening cycle — increase lending rates. Once banks start increasing savings bank deposit rates, their cost of funds will move up, forcing them to increase lending rates. Subbarao was appointed the 22nd governor of RBI on September 5, 2008. As his term was coming to an end last month, he got an extension up to September 4, 2013. Last year, Subbarao ushered in base rate to replace the long-existing benchmark prime-lending rate in a bid to make the loan pricing mechanism more transparent. He has also proactively pushed banks to cover unbanked areas through a slew of sops and policy measures. His balancing act to keep inflation down by sacrificing overall economic growth may have drawn many critics, especially those in the middle-class. Home, car, education loans have all become pretty expensive over the past two years. Unfortunately, in the past 19 months of the rate-tightening cycle, the apex bank has always been behind the curve with small predictable moves of 25 basis points. It was forced to revise its inflation target for March 2012 twice since May, which has been now pegged at 7 per cent. Whatever one may argue about the independence of RBI, it is clear that finance minister Pranab Mukherjee has finally prevailed upon the governor to give up on the rate-tightening cycle for the larger interest of pushing growth and investment in India. With food inflation hovering over 10 per cent and wholesale price index above 9 per cent, it was but imperative for RBI to maintain a hawkish stand. But Subbarao has always been known to be a man of consensus, someone willing to take a few risks notwithstanding the criticism. From his days in Andhra Pradesh, where he was assigned to set up the state beverage corporation, to the deregulation of savings deposit rates, Subbarao’s focus has been very clear — the man on the street. He remains an egalitarian in a banking system where small customers pay higher rates of interest to cross-subsidise lower rates availed by corporate borrowers.

FC

Not to hike rates is guidance, not commitment: RBI's Gokarn

The New Money Order

...RBI sees mobile payments as a tool for financial inclusion. Banks stand to gain, too. They get deposits on which they pay out no interest. The Boston Consulting report says agents service customers for less than 50 paise per transaction, compared to Rs 40 to Rs 60 at a bank branch......

Continue reading.............

Creation of low-income micro-lending NBFC cleared

MUMBAI: The Reserve Bank of India has approved the creation of a separate category of specialised finance companies catering to low-income groups, a move that will make banks more comfortable lending to microfinance institutions (MFIs) and help alleviate some of the pain being felt by the sector.  RBI will announce its detailed guidelines for these so-called NBFC-MFIs by the end of November, it said in its second quarter review of the monetary policy. A RBI-appointed panel headed by its board member YH Malegam earlier this year recommended creating a special category of NBFCs operating in the MFI sector. The panel had suggested a minimum net worth of 15 crore for an entity to qualify as an NBFC-MFI. "A long-standing industry demand has now been met," said Alok Prasad, chief executive officer at MFIN, a representative body of MFIs, adding that RBI's move would lift the cloud of uncertainty over the MFI sector.  The MFI sector has faced tough times for the past year or so, battling charges of predatory lending practices. In November 2010, the Andhra Pradesh government promulgated an ordinance, putting drastic curbs on MFIs after reports of coercive loan recoveries by some of them, which had allegedly led some debtors to commit suicide.  The ordinance - which requires MFIs to declare interest rates upfront and make all details relating to borrowers public, among other stipulations - brought MFI business almost to a standstill.  Currently, out of the 300 MFIs in the country, about 70 are regulated by the central bank as NBFCs, but account for the majority of the loans disbursed by the sector. The panel also recommended a margin cap of 10% for MFIs with portfolio less than 100 crore and 12% for smaller MFIs.

ET

Obopay rolls out mobile payment service for Nokia users

With mobile banking steadily gaining pace, the service providers are gearing up to make the most out of it. Obopay, a mobile payment service provider, is all set to expand across the country on the back of a tie-up with handset manufacturer Nokia. The company had earlier joined hands with Union Bank of India and YES Bank. The prepaid service is currently available in 130 cities in India and going ahead will be available at more than 200,000 Nokia Priority dealers, 2,300 branches of Union Bank of India and 214 branches of YES Bank. “Over the past two quarters there has been more than 50% growth on a monthly basis hence ensuring faster uptake of the service across the country,” said Deepak Chandnani, chief executive officer, Obopay. He said that the company is in talks with other banks and the service will be available across the country by end of this financial year. An individual need not have a bank account to make use of this service. A prepaid mobile account can be opened with the help of a photo identification card and address proof. The service allows an individual to transfer money, make utility bill payments and recharge mobile phone accounts. Money can also be transferred from one bank to another with the help of National Payments Corporation of India.

BS

RBI doubles transaction cap on amall amount transfers

The Reserve Bank of India (RBI) has been making consistent efforts to achieve the objective of financial inclusion. There is a need to extend coverage to those who cannot open a bank account. It includes those working in far off places from home and have to transfer money to their families back home.  Now, transferring a small amount has been eased further. In order to help those who do not have a bank account, the RBI has eased the norms. It has doubled the transaction cap on small money transfers.  Cash payouts of amounts transferred out of bank accounts to beneficiaries not having a bank account have been liberalised. There is an enhancement of transaction cap from the existing limit of Rs 5,000 to Rs 10,000. This is subject to an overall monthly cap of Rs 25,000 per beneficiary. Banks are permitted to provide services that facilitate transfer of funds from accounts with them of their customers to recipients not having bank accounts at an ATM or through an agent appointed as a business correspondent. Banks can facilitate such fund transfers through any other authorised payment channel as well. Banks can enable walk-in customers not having a bank account there to transfer funds to any of the accounts in the bank subject to a transaction limit of Rs 5,000 and a monthly cap of Rs 25,000 per remitter. A walk-in customer at a bank can also remit funds up to Rs 50,000 to the bank account of a beneficiary through the National Electronic Funds Transfer (NEFT). Such a walk-in customer needs to provide minimum details such as his name and complete address to the remitting bank.  Banks can also enable transfer of funds between domestic debit, credit and pre-paid cards. These will be subject to the same monthly cap. The total outstanding amount on a prepaid payment instrument should not, at any point in time, exceed the limit prescribed by the RBI.  All these changes will benefit a large number of people who does not have access to formal banking channels. Such people faced difficulties in using authorised channels to transfer funds. According to the RBI, these relaxations will provide money transfer facilities in a safe, secure and efficient manner across the length and breadth of the country. The RBI has asked banks and other financial institutions to put in place a system of safeguards, including velocity checks and alerts to customers about credit into accounts, using the new facility. Any unusual spurt in volume of credits in a particular account needs to be immediately investigated. Appropriate authorities will be alerted regarding suspicious transactions. The RBI has also directed that such fund transfers are to be effected on a real or near real time basis. All these steps will certainly give an impetus to the process of financial inclusion.

ET 

RBI seeks views of stakeholders on terms of reference of Nair Committee on priority sector lending

MUMBAI: The Reserve Bank has sought views of stakeholders on the terms of reference of Nair Committee to look into various issues related to priority sector lending, including review of loan limits under the segment.  The stakeholders have been asked to give their views and comments by November 15.  "The RBI has, through a questionnaire, sought views/ comments of all stakeholders on the terms of reference for the Nair Committee on Priority Sector Lending. Comments/ suggestions/views may be emailed latest by November 15, 2011," the Reserve bank of India (RBI) said in a statement.  The committee, headed by former Union Bank of India Chairman and Managing Director M V Nair, was constituted by RBI in August and is expected to submit its report of priority sector lending by the end of December.  Stakeholders' views have been sought on various issues including desirability of simplifying the approach to directed lending, inconsistencies or ambiguities in the existing guidelines, nature of activities presently classified as priority sector that need relook and new areas which should be incorporated. Besides, they have been asked to name the activities for which the classification changes depending upon the limit of loan amount need to be revisited and ways to ensure that loans given by banks reach the eligible categories, and so on.  The terms of reference of the Nair committee is to revisit the current eligibility criteria for classification of bank loans as priority sector with reference to nature of activities and types of borrowers (individuals versus institutions, corporate and partnership firms) of loans.  It will review nature of activities and types of borrowers (individuals versus institutions, corporate and partnership firms) of loans under priority sector segment.  The terms of reference of the panel include review of limits on loan amounts.  It will also review appropriate documentation and due diligence thresholds to ensure that loans extended by banks are for the eligible categories of purposes and borrowers, which need special attention and treatment, it said.  Besides, the panel will consider the desirability, or otherwise, of capping interest rate on priority loans.  The panel will also review the current allocation mechanism for Rural Infrastructure Development Fund (RIDF) and other funds.

ET

Base effect behind RBI’s projection on inflation dipping in December

In his recent monetary policy review statement, the RBI Governor, Dr D. Subbarao, has projected that the wholesale inflation rate will “begin falling in December 2011 and then continue down a steady path to 7 per cent by March 2012”. What explains this optimism, reflected in the reference to reassuring “momentum indicators”?  A look at the ‘WPI-All Commodities Index' indicates that the assertions could be based, to a large measure, on a favourable base effect coming into play in December, which should help achieve what a sustained rate hike spree since early last year has failed to accomplish. The base effect essentially refers to the statistical impact of the previous year's high index reading in calculating the annual inflation. Data show that the ‘WPI-All Commodities Index' reading for December 2010 had shot up to 146 points from November's 143.8 points — a 1.5 per cent sequential increase compared with an average sequential increase of 0.6 per cent in the previous two months.  As a result, the year-on-year headline inflation estimate for this December, which will use the All Commodities Index reading for December 2010 as the base, should see sharp moderation as the base year reading is high. Going forward too, the index shows big spurts in both March and April 2011. This should sufficiently ensure that by the beginning of next fiscal (March-April 2012), the headline inflation estimate would dip further, exactly in line with the RBI's projections, with the base effect again coming into play.  In its efforts to bring runaway inflation under control, the RBI has raised the benchmark rate by 375 basis points since March last year. Despite these measures, headline inflation was recorded at 9.72 per cent in September, its tenth straight month above 9 per cent and the highest among the BRIC group that includes Brazil, Russia and China.

HBL

13 repo rate revisions in 19 months, yet no results

Is the monetary policy not yielding desired results or the government has erred somewhere? The RBI is trying to control money supply in the economy by raising repo rates, at which it lends to other banks, and reverse repo rates, at which it borrows from other banks. This has jacked up the interest rate in commercial banks......

Read......... 

At 11.43 pc, food inflation skyrockets

... According to RBI Governor D Subbarao, lower production of pulses and inadequate supply of protein-based food may put further pressure on food prices in the near term.....

Read........

Battling inflation while pursuing growth

.... We know that the fruits of GDP growth are not equally distributed among the people of the country especially to the poor. But the effect of inflation is badly experienced by all especially the poor. Therefore it is preferable that control of inflation should get priority over growth. Keeping the inflation well within control, whatever the growth the country achieves, should be good for all the people of the country……

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

RBI panel may propose reserve, provisioning rules for non-banking finance cos

MUMBAI: A panel constituted by the Reserve Bank of India may suggest provisioning and reserve requirement rules for non-banking finance companies that will narrow the gap between these lenders and banks, two people familiar with the thinking of the committee said. "In terms of risk management, there will be movement closer to that of banks," said a person familiar with the group's deliberations. "The room available for regulatory arbitrage should no longer be there with some reserve requirements," he added. For the first time in more than a decade, the central bank in May formed a committee under former Deputy Governor Usha Thorat to address issues relating to non-banking finance companies (NBFCs). The group was asked to focus on the definition and classification of finance companies and may make its suggestions public as early as this week. Finance companies that have few restrictions on sectoral lending, group-wise exposure, lending against shares and real estate loans are seen as creating risk to the system since they borrow from banks. Any seize-up in lending due to a crisis similar to the 2008 meltdown may put even the banks at risk, the person added.  The recommendations will address these issues. Some of the proposals could crimp the profitability of finance companies. Bank loans to NBFCs have risen 55% in fiscal 2011, prompting the RBI to call it 'lazy banking'. Gold loans such as the ones offered by Muthoot Finance and Mannapuram Finance are growing at 50% annually. Securitisation of loans and assignment transactions have raised red flags. The committee included, among others, Sanjay Labroo, director, central board of RBI and Rajiv Lall, MD and CEO of IDFC. But there were no representatives from deposittaking finance companies, leading to fears that their interests may not be protected. 

ET

Competition to intensify onsavings bank deregulation

...Banks in India held 26 per cent of their total deposits in the form of savings bank deposits as of June 2011. Assuming the savings bank deposit rates of these banks rise by 1 percentage point, profits before provisions and taxes will be lower by 9.3 per cent (based on FY-11 profits) if they do not pass on the deposit rate hikes to borrowers...

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

What to make of free bank deposit rates

............The rates will now closely reflect the policy rates. This means like any other deposit rate, savings rate will also fluctuate and a bank offering a higher rate today may not be the one always offering the best rate............

Read..................... 

Thumbs up for RBI decision

The deregulation of interest rates by Reserve Bank of India (RBI) augurs well for those city residents who have been saving money in their banks, instead of investing it in other avenues like the share market....

Read............ 

Deregulation of savings bank deposit interest rates likely to push loan rates up

.......The deregulation of savings bank deposit interest rates is expected to put additional cost pressures on banks and thereby impact their profitability. Analysts believe banks are likely to offset the impact of this increase in interest costs partially by levying transaction and service charges on bank accounts.....

Read.......... 

Deregulation of savings bank interest rates: RBI’s move not practical in the present scenario

....The RBI has only created discrimination between the lower middle class and the upper middle class by allowing the banks to quote differential rates for balances below and above Rs1 lakh. .......

Read......... 

SBI may raise saving deposit rate by up to 125 basis points

....By freeing the savings bank deposit rates, RBI has demolished the last bastion of the regulated interest rate regime. As part of the economic reforms programme, the Reserve Bank of India (RBI) had earlier given freedom to banks to determine fixed deposit rates, depending on their asset-liability positions.......

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