The RBI should forget forex rates and focus on inflation

....... The exchange rate is the most important price of the economy. The decontrol of this exchange rate is the biggest achievement of the UPA in economic reforms. The credit for this goes to YV Reddy and Rakesh Mohan (who took the first two steps of doubling exchange rate flexibility twice) and to Dr Subbarao (who got out of trading on the currency market, which did remarkably little to INR/USD volatility)..............

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Insulate RBI from external influences

The downward slide in the value of the rupee vis-à-vis the dollar is not as hopeless as Union finance minister Pranab Mukherjee had made it out, when he attributed it to the global financial crisis. On the contrary, Reserve Bank of India deputy governor Subir Gokarn has asserted that the RBI had indeed taken some corrective steps and would continue to take them to arrest the slide. The bank’s intervention had, indeed, some effect, particularly when fears were expressed that the value of the rupee would plummet to Rs 55 per dollar. The bank took such steps as increasing the interest rates on non-resident (external) rupee term deposits to increase the flow of foreign exchange into the country’s financial system. As Gokarn mentioned while addressing the ‘CFO Summit 2011’ organised by the Confederation of Indian Industries (CII), in Mumbai on Saturday, the central bank does not usually make such interventions to prop up the rupee. But in the volatile financial conditions in which the rupee has a free fall, it is incumbent upon the RBI to take necessary corrective steps. After all, the financial health of the nation is closely related to the value the rupee commands in the international money market. For instance, the drastic drop in the rupee’s value has adversely affected imports, particularly of crude oil on which the country spends maximum foreign exchange. Under the circumstances, the interventions the RBI made were certainly called for. Most of the time, if the bank functions as an adjunct of the finance ministry, it cannot be found fault with, for they have to work in tandem. However, politicians in power have their vested interests, mainly because of their links with corporates, some of whom stand to gain if, for instance, the rupee falls. It is only natural that they may use their power to influence decision-making in the central bank. This is all the more reason that the RBI should be insulated from political and corporate influences in their day-to-day functioning as its primary task is to protect the interests of the common man, rather than the corporates. 

Expressbuzz

Consider inclusion as opportunity: RBI Dy Guv to banks

Deputy Governor of Reserve Bank of India Subir Gokarn advised the banks on Saturday to see the Financial Inclusion activities as an opportunity for them and not as mere obligation. He added that delivery of financial services to the masses is a critical challenge for the banks and RBI. Speaking at the Indian Chamber of Commerce (ICC)-organised summit here on Banking and Capital markets Gokarn said that sustainable growth, which alone can ensure improved quality of life, needs low inflation rate. He also shed light on challenges facing the country in human capital, balanced nutrition, infrastructural shortcomings and global integration.  State Bank of India Chief General Manager Praveen Kumar Gupta said that the key to double digit growth , which was the topic of the seminar , can happen only when growth is inclusive, environment friendly, non exploitive and generator of employment. Commenting upon the raging debate in the country on inflation vis-à-vis growth he predicted that on base line effect alone inflation would be down to low levels by the end of the current month. Chairman of Bhubaneswar Stock Exchange Vivekananda Pattanayak gave a brief description of the evolution of the capital markets and said regional stock exchanges have not become irrelevant and have a lot of role to play in spreading financial awareness. While giving the welcome address President of ICC Shrivardhan Goenka highlighted the brief history of ICC. The Director General of ICC Dr Rajiv Singh delivered the vote of thanks. 

The Pioneer

Crisis management group for financial markets on cards

With high volatility in the equity and currency markets, the Government aims to set up an empowered ‘Crisis Management Group' for the financial markets. This group is likely to take shape on December 8, when the sub-committee of the Financial Stability and Development Council (FSDC) will meet. It is proposed to nominate a Deputy Governor of the Reserve Bank of India as the Chairman, along with senior officials from market regulator SEBI, insurance regulator IRDA, pension regulator PFRDA and the Ministry of Finance as members. ......

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MFIs change business model on strict RBI guidelines

Stringent Reserve Bank of India (RBI) rules and a clampdown on profits have prompted a number of microfinance institutions (MFIs) to move out and/or move up the value chain. If some are devising innovative ways to come out of the MFI space, bigger players like SKS that plan to remain within are planning a "strategic redirection" to stay afloat. In the last six months, at least two MFIs have approached the umbrella body Microfinance Institutions Network (MFIN) with a proposal to move out, as they plan to serve a new segment of borrowers in the Rs 50,000 to Rs 5 lakh bracket. This way, the MFIs would no longer be guarded by the RBI regulation governing the MFI sector, but at the same time be able to cater to a huge untapped market. The two MFIs are targeting an entirely new segment, consisting of small entrepreneurs, traders, kirana stores, artisans, fabricators and small service providers. The RBI regulations stipulates that the total indebtedness of the borrower cannot exceed Rs 50,000 for MFIs. SKS, on the other hand, is planning to expand its business by augmenting other verticals in the rural sector, while remaining an MFI. Dilli Raj, chief financial officer, SKS, said the company would announce the new business model on Wednesday. “The sector is going through rapid changes. We will make an announcement on new business model, taking into consideration factors like consolidation and new regulatory guidelines,” said Raj. "We will continue to remain an MFI," said Raj. After mass defaults in Andhra Pradesh due to a state legislation curbing operations of MFIs, the RBI had constituted the Malegam committee to examine regulations governing the sector. Yesterday, the RBI introduced MFIs as a new category of non-banking finance companies, stipulating the institutions should have an aggregate margin cap of not more than 12 per cent and interest on individual loans should not exceed 26 per cent per annum, calculated on a reducing balance basis. “Between the ‘micro’ and the ‘small’, there is a segment which can be described as ‘mini’. This segment — small entrepreneurs, traders, kirana stores, artisans, fabricators, service providers, etc —need loans in the range of Rs 50,000 to Rs 5 lakh. The mainstream banks are, for the most part, not catering to the funding needs of this category of borrowers. We must also recognise that this market is economically vibrant, provides employment to millions of people and needs to be fully supported by the formal financial system. Also, it is not subject to RBI’s microfinance regulations,” said Alok Prasad, CEO, MFIN. Adding: “Under the May 3 RBI guidelines, with the imposition of margin caps and interest rate ceiling, for many MFIs it has become extremely difficult to stay profitable. Hence, they want to examine all options for dealing with the new reality. Offering non-microfinance products can be one way forward," said Prasad. Vistaar, a Bangalore-based NBFC, used to be an MFI till a few months earlier, terminated its microfinance operations recently to avoid the fallout of the RBI regulations. “We changed our lending profile and business model after the crisis. Now, we are serving clients in need of loans up to Rs 10-25 lakh,” said Brahmanand Hegde, one of the promoters of Vistaar.

BS

NBFC-MFIs: RBI's new norms seen as a booster

In AP, the sector would continue to be regulated by State legislation

Hyderabad, Dec. 4: The new norms for non-banking finance company-microfinance institutions announced by the Reserve Bank of India will be beneficial for the business, feel several micro-lenders. The Reserve Bank on Friday released new norms for classification of NBFC-MFIs and brought them under its regulatory purview.The cap on interest and margin at 26 and 12 per cent respectively, pricing transparency and safeguards against harassment of clients by field staff are some of the important aspects of the new norms. “It is a very positive step and auger well for growth of microfinance companies and clients,” Mr Dilli Raj, Chief Financial Officer, SKS Microfinance Ltd, told Business Line. Now, one should go with the sole regulatory approach adopted by the apex bank, he said. Mr Suresh K. Krishna, Managing Director of Bangalore-based Grameen Koota, said the exact definition of what constitutes microfinance is the single-most merit of the guidelines.  “This is good for MFIs outside Andhra Pradesh. The tough provisioning norms will make things tough for micro-lenders in AP,” he said. The general image of microfinance institutions may get a boost, feel some. “I think banks will start lending because of the clear definition of microfinance,” said Mr M. Udaia Kumar, Managing Director, Share Microfin. “Our performance outside is very good. These norms will help us further,” he added. On the implementation side, there are some uncertainties as well. The implementation of income levels suggested for the clients and ensuring that one gets loans only from two MFIs pose many practical challenges, said Mr Krishna. The Andhra Pradesh Government, which enacted a legislation to regulate micro-lending in October last, feels that while some aspects of the RBI norms were good, the lack of implementing mechanism would make them ineffective. “There is no change in our stance. Reserve Bank is a regulatory authority. The Andhra Pradesh law is by legislature,” Mr Reddy Subrahmanyam, Principal Secretary, Department of Rural Development, Andhra Pradesh Government, said.  The micro loans in the State would continue to be regulated as per the State Act, he added. So, the dual regulation and collection of about Rs 6,000 crore outstanding loans continue to haunt microfinance institutions in the State.

HBL

RBI may slash CRR by 25 basis points soon, feel experts

NEW DELHI: With the last date for payment of advance tax drawing closer, pressure is mounting on the Reserve Bank to cut Cash Reserve Ratio (CRR) by at least 0.25 percentage points to improve liquidity in the system. Bankers and analysts believe the RBI intervention may come anytime during the week as the payment of advance tax by companies will be due on December 15. This will result in substantial amount of money being sucked out from the market.  Such a move to lower CRR, which is the portion of deposit that banks are compulsorily required to keep with the central bank, will result in release of about Rs 15,000 crore into the system. "We expect 25-50 basis point cut in the CRR at any time. It could happen during this week," head of a leading public sector bank said. The CRR has been left unchanged at 6 per cent since May 2010. However, the policy rates have been raised 11 times during the same period. In October, the central bank raised the repo rate by 25 basis points to 8.50 per cent and the reverse repo rate moved up by a similar percentage to 7.50 per cent. Repo is the short-term rate at which the Reserve Bank of India (RBI) lends to banks, while reverse repo is the rate at which it gets funds from banks. According to senior official of another public sector bank, the liquidity infusion from the RBI looks very likely. He said CRR cut may happen either during the week or on December 16 when the RBI will release its mid-quarterly review of the monetary policy.  Analysts also feel there would be liquidity easing from the central bank in a gradual manner.  "We expect the Reserve Bank of India to continue to ease liquidity, first through open market operations, and then by cutting the reserve requirements of banks," Goldman Sachs said in a report.  "Given this backdrop of growth slowing and inflation peaking off, we are relieved that the RBI has finally begun Open Market Operations to cut the money market liquidity deficit and reduce undue pressure on interest rates," said Bank of America-Merrill Lynch India Economist Indranil Sen Gupta said.

TOI

Best wishes.....

                   



Dr Yashwant Thorat

Former Executive Director, RBI

Former Chairman, NABARD

Mob 09921111456



                    

Dear Mangesh,

Congratulation on the anniversary of VITALINFO.

Qulity conscious VITALINFO.......

Ratnakar Bank looking to double branch network

Private sector lender Ratnakar Bank plans to ramp up its branch network to 200 branches in the next 12-15 months, its Managing Director and CEO, Mr Vishwavir Ahuja, has said. Plans are afoot to open 30-35 branches in the next 4-5 months, including in Chennai and Hyderabad where the bank currently has no presence, Mr Ahuja told Business Line here. “We already have 30-35 branch licences from the RBI which will be used in the next 4-5 months,” he said. Mr Ahuja was in the Capital for the launch of Ratnakar Bank's Delhi main office and flagship branch at the commercial business district at Connaught Place, making this the 101st branch of the bank. The bank had in the beginning of this year raised Rs 700 crore from a group of investors to fund its growth.

HBL

Do we still need a microfinance Bill?

Now that RBI has defined the sector, it might be best left to the central bank to continue refining the regulation

...The MFIDR Bill makes RBI responsible for registration and supervision of the sector. Now that RBI has taken the initiative of defining this space, it might be best left to the central bank to continue refining the regulation than create confusion with multiple laws governing the same space..... 

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Government to weigh restrictions on forex outflows

... The meeting next week, to be chaired by the Reserve Bank of India Governor, will evaluate the various weapons in the central bank and the government's armory should further pressure build on the rupee.....

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GOVT NEEDS TO TAKE ON UNIONS TO SAVE BANKS

... Twenty years ago, a panel headed by former Reserve Bank of India governor M. Narasimham, that looked into banking reforms, first mooted the idea of dismantling the industry-wide wage pact and recommended bank-specific compensation package. The industry does not need a standardized wage structure when productivity of employees and profitability of banks are different from each other......

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Despite RBI reminders, state yet to notify Central Act

JAIPUR: The state government has not only failed in policing fraudulent financial activities but is also unsuccessful in regulating the existing law against such firms. So far, Rajasthan government has not notified the Central law - Prize Chits and Money Circulation Schemes (Banning) Act, 1978 - in the state despite repeated reminders from Reserve Bank of India. This Act covers the companies which operate in a similar manner like multi-level marketing companies. Money circulation schemes promises investors to become rich overnight. Such schemes work on the basis of enrolment of new members into process. A promoter promises that by enrolment of members into such a scheme, one would be getting back not only the initially paid investment but also keep gaining financially will further enrolment of new members into the chain. Thus, the number of members keeps increasing and the chain multiplies. The initial financial gains made by the earlier members encourage others to invest. However, at one stage, the bubble bursts, leaving several members at a loss but the promoters who are the initial investors in the chain kept the profits. Several firms are operating in the state using the modus operandi. "Many companies involved in money circulation are operating from the state. They lure investors by showing them big dreams. However, it turns out to be nightmare for them," an RBI official said. A chit fund company, which collects money from various investors and give prizes to few lucky investors through a lottery or some draw, can operate if approved by the state government. But Rajasthan has neither given consent by legalising it nor has made any efforts to restrict it so far. This leaves a grey area for fraudulent companies to run their dubious schemes. 

TOI

New law proposed to protect investors

...... Home department and RBI officials will meet on December 7 to chalk out the final details of the act. "We will try to formulate an act that is effective and prevents the defrauders from getting away. RBI, which plays an important role in regulating banking and financial transactions, has used its expertise in formulating the said draft,".......

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RBI unfazed by Moody's downgrade

...The RBI report counters Moody's rationale and highlights that the Indian banking system is healthy enough to withstand the deteriorating domestic and international economic conditions.....

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Probe cash-rich cricket bodies, says parliamentary panel

...The committee has sought information from the Reserve Bank on what penal action it has taken against the Axis Bank, the HDFC Bank and the State Bank of Travancore for failing to comply with the Foreign Exchange Management Act....

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Slowdown messages

...There is more bad news. While consumption demand is sought to be reined in by the RBI (to check inflation), the scope for government spending to stimulate growth is limited..........

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Gold, Currency & Common Person

.....God created gold as a gift to mankind, but man's avarice for printed money resulted in a move away from gold. The restoration of gold to its natural pre- eminence would be of comfort to the Common Person. An international monetary system centred on gold would enable mankind to regain God's gift.

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Use pre-payment penalty waiver to minimise debt

...If your bank has not announced removal of pre-payment penalty, don’t worry, because it is just a matter of time before banks do so. Regulatory pressure and market competition will force more banks to waive off pre-payment penalty on home loans......

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