“Rise in NPAs, slippages need to be urgently addressed”

Anand Sinha, Deputy Governor, RBI (third from right), releasing an IDRBT’s book at the valedictory function of BANCON in Chennai on Sunday .(From left) B. Sambamoorthy, author of the book and Director, IDRBT, M.D. Mallya, Chairman of IBA , M. Narendra, CMD, IOB and A.K. Bansal, Executive Director, IOB are in the picture

RBI Deputy Governor attributes problem to aggressive lending

Deputy Governor of Reserve Bank of India Anand Sinha on Sunday flagged the steep increase in Non Performance Assets (NPAs) and slippages as two issues that the country's banking sector needed to urgently address. In his valedictory address at ‘BANCON 2011' hosted by the Indian Overseas Bank and the Indian Banks' Association (IBA), Mr. Sinha said while part of the up-trending of NPAs could be attributed to the fallout of the global financial crisis, the bulk of the problem had its roots in very aggressive lending during the boom period.  While ruling out a systemic issue because of this, Mr. Sinha pointed out that while gross NPAs have been going down — in spite of inching upwards slightly in percentage terms — in absolute terms, the stock of NPAs had been going up in the last four to five years despite the ratio coming down. In fact, between March 6 and 10, the NPA stock grew by 63 per cent, Mr. Sinha said. While overall profitability had helped peg the net NPAs at a respectable level, this measure of management was more akin to putting a lid on the garbage, he said. “The fact is that there are a lot of unproductive assets lying underneath and that needs to be resolved,” he said. The other area of worry was the substantial increase in slippage — from 1.8 per cent during 2007-08 to 2.2 per cent in 2009-10. As a result, slippage outsized recovery despite heavy write-offs, he said. Mr. Sinha urged banks to tone up credit management to contain slippage, mobilise recovery and reduce NPA stock. The RBI would be issuing draft guidelines on Basel III capital adequacy norms for the banking system by December and put out a final version by March 31, 2012, Mr. Sinha said. Stating that the Basel norms were not a regulatory product, he said the RBI sought a smooth transition to the Basel III norms. It is important for senior management of banks have to understand the nitty-gritty of specialised niche products as the complexity of products coupled with excessive risk-taking had led to the governance failure that triggered the global financial crisis, Mr. Sinha said. Mr. Sinha advocated appropriate standardisation of the Know Your Customer (KYC) norms to make them a one-time or single-point procedure. While new accounts are largely in adherence with the KYC norms, there is a lot of deficiency with regard to older accounts, he said. Pointing to projections that the Indian banking system could become the third largest in the world by 2025, Mr. Sinha said the focus should not be on size but on sustaining “excellence in responsible banking”, through an advocacy of corporate governance, higher productivity, product innovation and financial inclusion. Responsible banking was no longer a choice as it was an obligation to the nation and the world in a globalised economy and banks should combine their pursuit of profits with a balancing of the interests of all stakeholders, Mr. Sinha said. Mr. Sinha also launched a handbook ‘Holistic CRM and Analytics' authored by B. Sambamurthy, director, IDRBT. M. Narendra, IOB chairman and managing director, M. D. Mallya, IBA chairman and A. K. Bansal, IOB executive director, also participated. 

HBL

RBI has a special website dedicated to the common man

Apart from information on various roles and functions of RBI, this website also contains information on various regulations which affects your banking transactions

The bank’s customer care executive on the other side of the phone line may not be too cooperative and the Reserve Bank of India (RBI) website may be an information overdose. Then how do you find a small and specific information that you urgently need to know? Well, RBI has a website especially dedicated to the common man and this can be of help.

The Website

RBI has a website, http://www.rbi.org.in/commonman/English/Scripts/Home.aspx, for the common man. The central bank’s website offers information on various topics in an easy to understand language. The thought behind the website is to reach out to the people and disseminate information regarding various banking-related activities. Apart from information on various roles and functions of RBI, this website also contains information on various regulations which affects your banking transactions. This website works like an one-stop shop for information on various notifications, press releases, master circular and customer service guidelines. The website also gives information on various service-related charges and cheque collection policy by providing the relevant links to more than 50 banks’ website on a single page. This means that you don’t need to remember or visit several websites. Also, if you are someone who is looking for an authorized dealer of foreign currency or a money changer and not sure if you’ve approached the right party, this website solves your problem by providing a list of such entities. That’s not all, it also provides a list of entities whose licences have been cancelled. The website offers elaborate answers to frequently answered questions on various topics related to banking, foreign exchange, government securities, non-banking finance companies and various payment systems.

Other Utility

Apart from getting information on various topics, you can also use the website to lodge complaints against banks or non-banking finance companies regarding deficiency in service and other related issues. If you have a grievance against any RBI department or office, you can file a complaint through the website. The website has games related to money matters which can be used to impart financial education to your kids as well.

Mint

Bait the young for biz growth, banks told

India has a very large growing young population and understanding their needs and requirements provides a big opportunity for banking system to grow with, RBI Deputy Governor Subir Gokarn has said. Delivering his address at the banking conference ‘Bancon 2011’ organised by Indian Banks’ Association and Indian Overseas Bank here, he said, understanding the needs of customers and their requirements was an opportunity for banks. “It not only helps to know your customer but also to grow with your customer”, he said. Stressing that people in their late 20s and early 30s and even in mid-thirties, have a consumption need, investment need and security needs. this was really a size of an opportunity for banks, he said. “Bringing knowledge and understanding the customer is a very big opportunity (for banks)”, he said. Giving some statistics he said there would be close to 400 million people in the 0-15 age groupo..”, he said. Besides, he said along with the younger population, the number of senior citizens would also grow and by 2020 which was expected to be around 100 million over the age of 60years. Stating that 42 per cent of rural households exclusively rely on cash (for their day to day purposes) he said, “bringing people from that segment to the upper segment, by banking services is clearly a market opportunity”. Around 350 million accounts were likely to be opened in Indian banks during the next 10 years. Urging banks to try and understand drivers for savings and borrowings, he said there are opportunities for financial inclusion in urban areas as well.

DH

'New banks should be allowed to maintain competition, says Rangarajan

If the banking system needs to remain competitive over time, there should be no bar on the entry of new banks, Dr C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister, said at the Bancon-2011. “A closed system could only become oligopolistic. The ‘threat’ of entry should not be eliminated,’’ he added. It is up to the RBI to lay down norms for entry and also decide on who satisfies the criterion of “fit and proper’’.  Dr Rangarajan also said that the recent financial crisis has “forced us to re-evaluate the size, role and rate of growth of the financial sector’’.  The regulatory regime needs to be restructured to make the banking system more sound.  “Excessive risk taking and leveraging by banks need to be discouraged by appropriate regulatory measures or controls,’’ he said.  In order to enable the financial system to meet the diversified needs of a growing economy, there is the “need to encourage the emergence of a vibrant corporate debt market’’, which will help not only large industries but also SMEs.  “We would also need institutions which will serve as market makers offering two-way quotes. This will provide the required liquidity to the market and make it attractive to the investors,’’ he said, adding that banks should explore innovative ways of financing infrastructure. Even as regulatory oversight of innovations is necessary, Dr Rangarajan said that regulatory perspective on innovation “must not become too restrictive’’. Policy-makers should strike an appropriate balance between the “need for financial innovations to sustain growth and the need for regulation to ensure stability’’.  He also urged the banks to take a re-look at the organisational structure of rural branches to meet the credit needs of marginal farmers.  The banks should also play a proactive role in organising self-help groups, and it is important to enlarge the scale and scope of activities of the SHGs. “This would enable the banks to reach out to people with low incomes including marginal farmers,’’ said Dr Rangarajan. According to him, the business correspondents’ model of financial inclusion has not been satisfactory. Hence, banks should explore the possibilities of looking at other alternatives.  “We should explore the possibilities of looking at low-cost brick-and-mortar branches in panchayat headquarters. Profitability rests on making the operational cost of such branches low,’’ he pointed out. He added that it was worthwhile to re-open the issue of setting up local area banks.

HBL

RBI considers SLR for BASEL III

Chennai: The Reserve Bank of India (RBI) is considering to what extent banks' holdings under the statutory liquidity ratio (SLR) can be used to meet capital requirements for Basel III global banking rules, a central banker said on Sunday. SLR or the proportion of deposits that banks need to invest in government debt and other approved securities, currently stands at 24 percent. But analysts estimate banks' overall holding of SLR bonds is around 29 percent. "We are looking at some norms to what extent SLR portion can be used under Basel III norms," said Anand Sinha, a RBI Deputy Governor. Indian bankers estimate state-run banks will require an extra 8 trillion rupees ($162.9 billion) to meet new capital norms and their growth requirements over next eight years. According to Basel III, banks must shore up their capital adequacy ratios and maintain top-quality capital at 7 percent of risk-weighted assets. Top quality capital includes equity capital. Although Indian banks have much higher capital adequacy ratios than the minimum total capital requirement under Basel III, analysts say their so-called Tier I, or equity capital, needs to be shored up to meet the top-level capital requirement. Basel III also proposes building countercyclical and additional capital buffers, which is expected to involve additional costs for Indian banks. Sinha said the central bank will issue detailed guidelines for BASEL III implementation by end-December and the final framework should be in place by March next year. "The trajectory (for Basel III) would be decided by (the) RBI and banks together," he said. The proposed changes under BASEL III are to be phased in gradually, starting in January 2013 to January 2015, while the creation of a conservation buffer could be set up by banks during the period January 2016 to 2019.

FE

Banks to open branches in area with population 5,000 by 2012

NEW DELHI: The Finance Ministry has asked all banks, including private sector lenders, to open branches in locations with population of more than 5,000 in the under-banked districts by September, 2012.  RBI has identified 296 districts, which are under-banked, spread across 18 states and union territories. "Such branches could initially have lesser staff, say 2 persons, with ATM facilities," Finance Ministry said in its recent guideline on financial inclusion. The staff strength could be increased as the business grows, it said. The new bank branch opened would also provide banking services in the adjoining areas. "While planning for branch expansion, it may be seen that in the unbanked areas the branches are available within a radial distance of 5 km," it said. As per the branch authorisation policy of RBI, prior approval of the the central bank is not required to open branches in Tier-III to Tier-VI areas. In fact, opening bank branches in the under banked districts of the under banked states would entitle the banks to seek branches in Tier-I towns under their annual branch authorisation plan. Such a branch would be assigned a service area by the State Level Bankers Committee covering one or more Gram Panchayats, it said. In other districts, it said, the banks must try to open as many brick and mortar branches, in their service areas, in habitations having population of 10,000 and above by September 2012.  It is to be noted that only about 5 per cent of the nearly six lakh villages in the country have bank branches.  With the Financial Inclusion Plan under implementation, around 73,000 villages, having population of 2000 and above, would be provided facilities for banking services by March 2012.  As of June 2011, banks have opened banking outlets in 1.07 lakh villages up from just 54,258 as on March 2010. Out of these, 22,870 villages have been covered through brick and mortar branches, 84,274 through business correspondents outlets and 460 through other modes like mobile vans, etc.  

ET

Dharwad credit plan at Rs 1,868.63 cr

The District Consultative Committee (DCC) has approved Potential Linked Credit Plan for Dharwad at Rs 1,868.63 crore. The meeting chaired by the Deputy Commissioner, Mr Darpan Jain, approved the credit plan prepared by Nabard for 2012-13. Mr Y.N. Mahadevayya, AGM, Nabard, explained in detail the potential plan. According to the plan, Rs 749.82 crore for crop loan, Rs 247.12 crore (agriculture term loan), Rs 153.62 crore (non-farm sector) and for Rs 718.07 crore (other priority sector). The Manager, RBI, Mr Ramachandran, reviewed the performance of the banks under the Financial Inclusion Plan and advised bankers to achieve the set target. Mr Phulwar Singh, AGM, Vijaya Bank, and Mr G.S. Basavarajappa, Lead Bank Manager, were present on the occasion. 

HBL

Lack of awareness of workers, banks staff discouraging formal transfers

KATHMANDU, Nov 8: With some 4.5 million Nepali workers, India has always remained the largest foreign employment destination for Nepalis.  But despite years of efforts, officials said the volume of income that workers formally remit back home remains so low that Nepal Rastra Bank (NRB) tags it as ´almost nil´ when compared with other countries.  The formal workers´ remittance transfers barely stand at a billion rupees, though we estimate it should have been around Rs 50 billion, said an NRB official.  Then what´s preventing Nepali workers from remitting money through formal banking channel? For long, NRB believed it is solely due to lack of awareness among Nepali workers in India. But a recent finding of Reserve Bank of India (RBI) suggests that NRB´s perception is not completely true. Fewer Nepalis workers in India have been remitting money through National Electronic Funds Transfer (NEFT) -- a formal transfer system put in place in India -- also because of lack of awareness of staff members of Indian banks dealing with Nepali workers, RBI has stated. “It is true the number of Nepali making use of this service is low. But it is also learnt that a large number of already low level of money transfer transactions done by Nepalis in India are getting rejected at the pooling branch of State Bank of India -- through which transfers are made -- due to incorrect contents of message,” RBI has noted. For instance, some of the banks providing money transfer services were found putting actual account number of Nepali beneficiary instead of SBI central pool account -- the main account through which the transfers are cleared. Likewise, the dealing staffers of banks too were widely found filling up the format provided for such transactions in a faulty manner. As such mistakes by bank staffers have been affecting timely receipt of money by families back home, even the Nepali workers making use of the service have been shifting to informal channels to remit their income. Following such finding, RBI has recently issued a strict instruction to the banks in India that have been operating NETF-enabled branches to create awareness among the branch officials about the application. “The bank officials must be aware so that they could guide the Nepali customers, many of who may be illiterate,” RBI has said in its instruction. RBI has also instructed the banks to ensure that the dealing officials exercise correct knowledge and necessary care while making the data entry in the system so as to avoid rejection of the payment requests at SBI Pooling Branch.  Furthermore, it has also instructed banks to make tangible efforts to increase awareness of Nepali workers in India toward their money transfer services and enhance its usage. “Branches, especially those situated in areas with sizeable migrant Nepali population, are advised to organize periodic workshops and awareness campaigns about the money transfer schemes,” RBI has said in its directives. In this connection, RBI has even suggested that the banks solicit help of Nepali workers´ association for wider disseminations of information about the service. The fresh instruction from RBI came mainly as a part of an understanding, which it has reached with NRB, to facilitate and promote formal transfers of workers income to Nepal. Nepal had made similar request during the recent visit of Prime Minister Dr Baburam Bhattarai as well.

Republica, Nepal

Key reformist finance laws all set for passage

... The draft Microfinance Institution Bill, which was released for public debate in July, gives the Reserve Bank of India (RBI) sweeping powers to regulate lending rates and margins apart from fixing capital adequacy and other norms. At the same time, the Bill provides for delegation of powers by the RBI to National Bank for Agriculture and Rural Development (NABARD).....

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Basu supports setting up sovereign fund using forex reserves

Supporting the industry ministry's proposal to set up a sovereign wealth fund to finance infrastructure projects, Chief Economic Adviser Kaushik Basu today said India can use a part of its large foreign exchange reserves to create the fund. "If a small part of our forex reserves is used to set up a sovereign wealth fund and deployed strategically, this can yield steady long-run returns and at the same time enhance India's policy role in the world," Basu told PTI. Sovereign wealth funds have existed for a long time, though they got this name only six or seven years ago. Recently, the industry ministry in a discussion paper suggested that India should consider setting up a sovereign wealth fund to finance infrastructure which would require an investment of USD 1 trillion in the next five years. The paper recommends that government should use a part of its foreign exchange reserves to set up the sovereign wealth fund as has been done by countries like China, Korea and Singapore. Basu said sovereign wealth funds could be set up under the control of either the government or the Reserve Bank of India (RBI). "A sovereign wealth fund does not necessarily mean money moved from the RBI to the government," he said. Basu said, "The returns from the first USD 15 or 20 billion set aside for this can be enormous." India has one of the biggest foreign currency reserves in the world at USD 320 billion. It is, however, far less than USD 3.2 trillion held by China and USD 1 trillion by Japan. The RBI, however, has been expressing reservations on setting up a sovereign wealth fund. The central bank wants the government to set up a sovereign wealth fund from the budget and not out of forex reserves. Citing example of Singapore, Basu said, "There are countries with relatively small foreign exchange holdings that have operated very successful sovereign wealth funds."

DH

Not just bankers, but advisors too

...Banks would need to know their customers' businesses well and should also be able to measure the profitability of the businesses, he said. (This, incidentally, ties-up well with what Dr Subir Gokarn, Deputy Governor, RBI, said at the conference — that banks should not only know-your-customer, but should know customers' businesses to grow-with-your-customers.)....

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Cash reserve ratio must be reduced once the war against inflation is won

State Bank of India ( SBI) chairman Pratip Chaudhuri has hit the nail on the head. The (interest-free) cash reserve ratio (CRR) that banks are compelled to keep with the Reserve Bank of India (RBI) is a non-performing asset (NPA). For now, the suggestion to scrap it might be out of tune with the RBI's effort to tighten liquidity. But there is no mistaking that this is a desirable long-term policy goal. The CRR is an impost on banks; which is why the Narasimham Committee on financial sector reform in the early 1990s had recommended that CRR be reduced to 3% and the statutory liquidity ratio (SLR), to 25%. We have made progress on the latter; indeed SLR is now 24%. But on CRR, the RBI has wavered. After a phase of steady reduction, it has reversed direction, and CRR has inched up to twice the level suggested by the Narasimham Committee. The reason is that CRR is a handy, if somewhat gross, tool to mop up liquidity.  Unlike a hike in policy rates whose impact can vary from sector to sector and, in addition, depends on the efficacy of the monetary transmission mechanism, a hike in CRR hits all sectors indiscriminately. CRR is noticeably absent from the armoury of mature central banks, even though the impact on interest rates is the same (a hike in CRR reduces availability of funds with the banking system and, hence, pushes up interest rates).  In the Indian context, however, the RBI is constrained in its choices for two reasons. One, it needs to use all the tools at its command to tighten liquidity in a scenario where inflationary expectations seem deeply entrenched. Two, the monetary transmission mechanism leaves much to be desired. So, the central bank is at times forced to use a sledgehammer where a chisel might have sufficed.  The RBI may not have much of an option now. But once inflation trends down, the central bank must get back on track and lower CRR, ideally to no more than 3%. The case for prudential requirements has, undoubtedly, received a shot in the arm following the 2008 financial crisis. But excessive caution can be as bad, if not worse, than none. Banking  is about taking  risks. 

ET

Should you switch banks or exit liquid mutual funds?

.................Many financial experts believe that it’s unlikely that customers would switch banks anytime soon, purely on account of higher interest rate. Moreover, if you have a salary account (your monthly salary comes in your bank account every month) or your bank account gets debited every month towards your loan commitments or even for utility bills such as electricity or telephone bills, changing a bank account can get tedious. Also, the average Indian consumer has till now shown little interest in moving funds from one bank to another.....

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RBI favours fixed rate on long-term loans

Reserve Bank of India appears to favour long-term loan products on fixed interest rates, believing it will help banks reduce credit risks and prevent significant deterioration in asset quality. “Any long-term product, if it is on a fixed-rate basis, is better from the interest rate risk perspective,” the central bank’s deputy governor, Anand Sinha said on Sunday. “Otherwise, what happens is if interest rates are changing, you don’t know what will happen in the future,” he told reporters here on the sidelines of Bancon 2011. Sinha explained that long-term loans on floating rates carry a risk similar to un-hedged foreign exchange exposure of companies. “When you are going for a fixed-rate product, you are taking a view that you are insulating yourself from interest-rate risks. Floating rates on very long-term products can lead to credit risks,” he said. Currently, a majority of banks’ long-term retail loan products like housing loans are on floating rate of interest. So, is the banking regulator planning to introduce guidelines on managing interest-rate risks on long-term loans? “We will see about it,” is all what Sinha would say. Separately, he said there was a need for banks to reduce their dependence on wholesale funding and market borrowing — for, it may add to the systemic risks. “If you have too much wholesale funding and you are looking to renew it...if you get into a difficult situation, then you will not find a replacement for that,” he said. “Now if you don’t get fresh funding, then what are your options? You have to go for fire sale of assets and book a loss. Not only you suffer, but you put the whole system at a loss,” he added. However, he clarified that currently there were no signs of systemic risks on banks’ asset quality. “Slippages are increasing. It is higher than recovery. Credit management needs to be geared up; more efforts needed for arresting slippages,” he said. “But I don’t see any systemic issue building up as of now.”  

Business Today

RBI may start reversing policy stance from Dec: Rangarajan

The Reserve Bank of India (RBI) may start easing the tight monetary policy as early as from December, as inflation changes its trajectory, C Rangarajan, chairman of the Economic Advisory Council to the Prime Minister, said. “It is expected that by December-January, we should see a decline in inflation, that may be the time when perhaps reversal of the policy (monetary policy) will become possible,” Rangarajan said on the sidelines of banking seminar Bancon 2011. “As the inflation rate shows definite signs of a decline, the policy regime also has to change,” he said. The central bank, which has raised key policy rates 13 times in 20 months, indicated in October it was through with the rate hikes and interest rates would be stable for some time. “It would be fairly reasonable to predict this interest rate regime will extend for some time before we think of cutting rates. Inflation must come to more sustainable levels before we can think of reducing interest rates,” RBI governor D Subbarao said in post-policy interview to Business Standard. Inflation has remained stubbornly high despite the series of rate hikes by the central bank. Inflation is hovering around the double-digit mark for the last 20 months. However, both RBI and Rangarajan expect inflation to start easing from December-January and come down to seven per cent by March. A cumulative rate tightening of 375 basis points since March 2010, however, has slowed economic growth. It also prompted the central bank to signal a pause. Rangarajan, a former RBI Governor, said the government should make all possible efforts to keep the fiscal deficit at the budgeted level and consider deregulation of petroleum prices once inflation starts slowing. “We cannot let domestic prices not reflect international crude prices,” he said.

Availability of capital may limit public sector banks' credit expansion in the coming years, Rangarajan said. “Given, the current government policy of no stake dilution below 51 per cent, capital for public sector banks will have to come from the government budgets, banks' own resources and public issues. The availability of capital through budget sets a limit on the extent of expansion of credit by these banks." The government has budgeted Rs 6,000 crore capital infusion in public sector banks in this financial year after injecting Rs 20,157 crore in 2010-11. But Rangarajan feels the government will have to bring in Rs 4,000 crore -10,000 crore supplementary demands for grants to meet capital requirements of banks. “A long-term programme of injecting capital into public sector banks will have to be drawn up. Otherwise, the market share of public sector banks will have to come down and the slack will have to be taken by existing and new private sector banks,” he said. On Friday, Namo Narain Meena, minister of state for finance, said the government had approved Rs 14,000 crore capital infusion in state-run banks in 2011-12. Banks had asked for Rs 18,000 crore capital.

Rangarajan warned non-performing assets on banks' books might rise this financial year because of high interest rates and slow economic growth. “The Indian banking system is also exposed to some sectors of the economy such as power and aviation, which are not doing well. Non-performing assets in these areas will need continuous watch by banks,” he said. Banks should also be cautious of liquidity risks that may expand because mismatch in maturity of assets and liabilities. “Increased exposure to real estate and infrastructure will lengthen the maturity of bank assets.” He added banks should improve bad loan recoveries and operational efficiencies, as deregulation of savings deposit rates, new capital rules and financial inclusion obligations would keep the lenders’ profitability under pressure. 

BS

Govt is ruining your savings, and the RBI shouldn’t let it

Inflation targeting should be the first and primary objective of the Reserve Bank of India (RBI). The other objectives should be secondary, and this includes growth objectives. There are some sections in the market that believe that India is a growth economy and the RBI should tolerate higher levels of inflation to achieve the growth objective. A growth-oriented RBI will be a disaster in the Indian context as India’s debt is predominantly funded by domestic savers and inflation will hit the saving population the most. The RBI should not tolerate higher levels of inflation and should strive to bring down inflation to its medium term targets. The medium term target rate for inflation is below 5 percent. Inflation, as measured by the WPI (Wholesale Price Index), is running at 9.7 percent as of September 2011 and, as per the RBI’s expectation, inflation should trend down to 7 percent levels as of March 2012. Inflation in India has been running at over 7 percent since December 2009, touching highs of 11.23 percent in March 2010 (as per the old WPI series). The central bank has raised the benchmark repo rate by 375 basis points (bps, where 100 bps equals 1 percent) over the last 20 months to bring down inflation expectations and while it has given us a guidance that rate hikes will stop if inflation trends down, it has not deviated from its inflation control policy. Inflation and rate hikes are affecting India’s economic growth. GDP growth is forecast to come down to 7.6 percent levels in 2011-12 from 8.6 percent levels in 2010-11. The drop in growth is prompting some economists, business lobbies and some sections of the financial markets to tell RBI to look at growth and tolerate inflation at 6-7 percent levels. A drop in economic growth typically means lower profits for corporates and lower or negative returns for the market and lower kickbacks for politicians; hence the call for the RBI to tolerate higher levels of inflation. Let us assume the RBI tolerates higher levels of inflation and loosens its grip on policy rates and other policy tools are used to fight inflation (though there is no sign of that). Inflation will then remain at higher levels and these higher levels will then have its effect on domestic savers, who largely depend on fixed return instruments for their savings. When inflation runs higher than the rate of return offered by provident funds, small savings schemes and bank deposits, it is tantamount to a huge tax on savers as seen in the last two years. Inflation has consistently been higher than provident fund rates at 8.5 percent, small savings rates of 8 percent and bank deposit rates of less than 8 percent (two-year average tenure). Savers also lose out indirectly as a large part of their savings is exposed to government bond yields which rise sharply (value of government bond goes down when yields rise) and the institutions holding these bonds have to face a depreciation on their assets. The Indian government is cannibalising the savings of its citizen. The exposure to government debt for the Indian citizen is through compulsory provident and pension fund investments (nearly 20 percent of gross salary goes into this), through savings in the form of bank deposits (banks have to necessarily invest 25 percent of their net deposits in government debt), through other forms of savings instruments like national savings schemes, post office deposits, etc. The government also makes sure that over 25 percent of insurance investments goes into government bonds and those investments come from premiums paid by the citizens. Government debt in India is predominantly internal (98 percent of GDP) and denominated in rupees and inflation brings down the value of government debt. The average person on the street is given a double whammy by high inflation. One is by eating into savings, and the second is by indirectly weakening the balance-sheets of institutions holding government debt. There is no place to hide for the saver as India does not have capital account convertibility and the saver cannot take his money out of the country. The RBI should protect savers first and that means inflation has to be under control.

Firstpost

Small savings schemes could be in for overhaul as panel suggests changes

Managing money requires more skill than making it. That is why it is important to invest wisely by optimally balancing both risk and returns. Private investments such as deposits with commercial banks and mutual funds have been attractive due to convenience and better liquidity. On the other hand, investments in government saving schemes have been popular with investors as they are considered secure investments. On July 8, 2010, the Centre constituted an expert committee under the chairpersonship of Shyamala Gopinath, Deputy Governor, Reserve Bank of India, for a comprehensive review of the National Small Savings Fund. The committee submitted its report in June. Broadly, recommendations in the report include increasing liquidity, linking returns on small savings with returns on secondary market yields of comparable government securities, etc. Let us now see the available savings options, the tax implications on them under the Income-Tax Act, 1961, and what suggestions the committee has for some of these schemes.

15-Year Public Provident Fund: Public Provident Fund, or PPF, with its various tax benefits, is a popular saving instrument. Falling in the Exempt Exempt Exempt (EEE) regime, an amount invested in PPF is deductible under Section 80C of the I-T Act. (Under the section investments of up to Rs 1 lakh per financial year in specified instruments will be eligible for tax deductions). Interest generated in the account (approximately 8% compounded annually) is tax-free. Further, withdrawal amount is also tax exempt. Investment in PPF is currently restricted to Rs 70,000 per financial year (FY). However, the committee has recommended that the limit be increased to Rs.1 lakh per FY, to align it with the ceiling of Section 80 C of the I-T Act.

National Savings Certificates: Investment in National Savings Certificate, or NSC, qualifies for deduction under Section 80C of the I-T Act. The interest accrued is taxable in the hands of the individual. However, the annual interest accrued is deemed to be reinvested (except interest in the maturity year) and, thus, qualifies for deduction under Section 80C of the I-T Act.  The committee's report has, however, proposed that the benefit under Section 80C of the I-T Act on the accrued interest on NSC be withdrawn.  Currently, NSC is issued for a fixed term of six years and offers 8% interest, compounded half yearly. The committee's report says that two NSC schemes be introduced with maturity periods of five years and 10 years and the interest rates be benchmarked to the five-year and 10-year government securities.

Post Office Schemes: Investments in five-year time deposit qualifies for deduction under Section 80C of the I-T Act, subject to the overall limit of Rs 1 lakh in an FY. However, interest earned on the deposit is liable to tax. These deposits offer interest varying from 6.25% to 7.5% depending on the period of deposit.  With respect to savings account, from FY 2011-12, interest income of Rs 3,500 (in single account) and Rs 7,000 (in joint account) is exempt from tax under Section 10(15) of the I-T Act. There is also a proposal in the Committee Report to increase the interest rate on savings accounts from current 3.5% to 4%.

ET

PSBs wait for RBI norms to revise savings rates

...“Though the RBI had said the deregulation of savings account was with immediate effect, we are waiting for a final word from the regulator as we will be keen to unveil innovative deposit products along with the new rates for savings accounts,”....

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