RBI’s sepia-tinted conflicts



Visitors at the Reserve Bank of India's 'Newsibition' which was inaugurated in Mumbai on Monday

Nothing has changed in the relationship between India’s central bank and the government since the inception of the Reserve Bank of India (RBI) in 1935, if the historical documents and news reports exhibited by RBI at its Mumbai office are anything to go by. The issues that created tussles between RBI and the finance ministry include nationalization of the central bank and major commercial banks in the country, the bank rate, and management of RBI’s investments. These are highlighted at the RBI exhibition, where most documents are sourced from newspapers. RBI has been hosting such shows across India to educate the public about its history and increase transparency in its functioning. Former RBI deputy governor Usha Thorat inaugurated the exhibition in Mumbai. The turbulence at the top began in 1936-37, shortly after the central bank became operational, between then governor Osborne Smith and deputy governor James B. Taylor, who had the backing of finance member of the Viceroy’s Council, James Grigg. The differences were on two critical issues—RBI’s autonomy and the monetary policy stand on controlling inflation vis-à-vis fiscal policy. Even today, RBI and the finance ministry have differences on such issues. The “turbulence” between Smith and his deputy—“two men with a strong and pugnacious personality” or “temperamental incompatibility”—according to former governor Chintaman Deshmukh, led to the governor’s resignation. Even today, the debate on many of these issues, notably the central bank’s autonomy, monetary policy stance on fighting inflation and deficit financing, continue to strain the relationship between RBI and the government, even though senior central bankers prefer to dub them as “creative tensions”. Former RBI Deputy Governor S.S Tarapore, who joined as a research officer in 1961, said the differences between the first RBI governor and the then finance member of the Viceroy’s Council was the most acrimonious in RBI’s history. “The English didn’t trust Osborne because he was Australian and not from the British civil services. They doubted him because he was considered to be close to the Indian nationalists. He became governor just because he had the support of the then Bank of England governor, Montagu Norman,” Tarapore said. Norman was Bank of England governor between 1920 and 1944. According to Tarapore, change is a natural process in the central bank, especially because the complexities the economy is facing have increased over time. “When I joined RBI in 1961, M3 was just Rs.3,000 crore and a Rs.1 crore loan was considered to be huge. Now, a Rs.1 crore loan is given out by individual bank branches daily,” he said. M3 is the broadest definition of money supply. RBI numbers show M3 in the banking system is currently at Rs.70.13 trillion. The exhibition has not not only attempted to chronicle the evolution of central banking, but also the nation’s history. For instance, it features events of currency notes being used as a means of propaganda against the British in 1942, with protestors defacing notes with slogans such as “Down with the Union Jack” and “Quit India”. The government soon passed the Legal Tender (Inscribed Notes) Ordinance that made such defaced notes with political propaganda illegal with immediate effect. One of the earlier hiccups or early-stage challenges RBI had to face was handling the failure of the Travancore National and Quilon Bank in the Travancore region and this highlighted the need to strengthen the regulatory framework of banking institutions. Another interesting moment in Indian banking history—the nationalization of 14 major banks by then Prime Minister Indira Gandhi—was front page news in The Hindu on 26 July 1969 along with another news item of Apollo 11 being placed in lunar orbit. RBI, the banker for banks and the government, was nationalized in 1946, after nationalization of the Bank of England. This was immediately followed by a reconstitution of its central and state boards. The public appearances of top central bank executives, which are keenly watched and scrutinized by the media today, was not a big event in the old days—probably a reason that prompted R.K. Hazari, a deputy governor between 1969 and 1977 to light a cigar even when presiding at one of the conferences of RBI staff to discuss the Tandon committee report on bank loan norms. A young Thorat is also seen in the photograph. The exhibition also depicts the evolution of Indian currency. RBI issued Rs.5 notes in January 1938, followed by Rs.10 in February, Rs.100 in March, and Rs.1,000 and Rs.10,000 in June that year. The first note issued by the Indian central bank carried the portrait of George VI and the signature of the second governor, Taylor. A note with a design of Edward VIII was never issued after signed by then governor Smith as the design had to be changed following his abdication.

Mint

'IIP data reflects weak global and domestic economic outlook'

Mumbai, Dec 12: Industrial output numbers for October, which contracted significantly by 5.1 percent, are reflective of the global and domestic economic outlook, former Deputy Governor of Reserve Bank Ms Usha Thorat said here on Monday. The industrial output shrunk by 5.1 percent in October after witnessing a sustained slowdown over the past few months, hitting a 34 month low. Factory production had grown 11.3 percent last October. “The general message is that the outlook internationally and nationally is very clearly reflected in the IIP numbers,” Ms Thorat, who now heads the Centre for Advanced Financial Research and Learning (Cafral) as director said after inaugurating RBI’s ‘Newsibition’ here. ’Newsbition’ is part of the central bank’s outreach and financial literacy effort in which RBI depicts the 76 years of its history. The evolution has been depicted through newspaper clippings and photographs. “It gives a glimpse of the spirit of the times and events not only as they happened but also how they were viewed by the public at large through media reports,” RBI said in a release. The exhibition, which will remain open from December 12 to January 14, is divided into nine sections representing different phases in the apex bank’s evolution. “In addition to the history of RBI, it also has panels and films on currency and its security features among others,” the release added.  

HBL

Long-term future of MFIs ‘not too rosy’: Report

New Delhi, Dec 12: There are some signs of easing of equity and loan fund flows into the microfinance sector in the second quarter of 2011-12, according to a State of the sector report-2011. The report, authored by Mr N. Srinivasan, formerly of Nabard (National Bank for Agriculture and Rural Development) and an independent consultant, said the immediate future holds out a promise that the sector will recover. But the long-term future appears not too rosy, in view of the various factors stacked against it, including competition from peer models and initiatives. Mr Srinivasan listed them out: stiff competition from banks through their business correspondent (BC) model; a restructured self-help programme (SHG); the National Rural Livelihood Mission (NRLM) that would use institutions of the poor to deliver financial services; and the impending rollout of mobile-based financial services. Even as they emerge from the current struggle for survival, the MFIs should rethink their long-term business objectives and competition strategies. The SHG II will hopefully remove the cobwebs and infuse fresh energy into members, groups and banks and supporting institutions. Achieving a convergence of SHG-Bank Linkage Programme (SBLP) with NRLM, the Mahatma Gandhi National Rural Employment Guarantee Programme (MGNREGS) and the financial inclusion programme is one of the tasks before Nabard. But, overall, the dark clouds seem to be clearing in the short-to-medium term, the state of the sector report said. With some regulation in place and more comprehensive regulation on the anvil, the MFIs will get an identity and will be able to operate under a set of known norms with certainty. The credit reference bureau becoming functional will deal with some issues in customer selection and examination of multiple lending. The MFIs need to get back to the drawing boards to look at their products and processes and find ways of complying with the regulatory guidelines. Building confidence in the minds of banks and funders does seem to be a harder task; the MFIs could do with some support from the Reserve Bank of India and the Centre in this. 

HBL

VITALINFO for one and all.............

Currency notes being used to spread Telangana sentiment



A 20-rupee currency note with a rubber stamp of 'Jai Telangana’ in English and Telugu in circulation in Vijayawada

Agitation for carving out a separate State of Telangana might not be vocal at this point of time and the leaders lying low, but they have found a new channel of spreading the demand by marking currency notes with ‘Jai Telangana' both in Telugu and English. Writing in the white space – watermark window – is punishable under Section 35A of the Banking Regulation Act 1949. But, the people supporting the demand seem to be not bothered about the punishment and were using currency notes as permanent pamphlets. A few such currency notes have made way into the system in Coastal Andhra too and a Rs.20 note was passed on by a vendor in Vijayawada recently. A Reserve Bank of India directive as part of its Clean Notes policy had said that: Banks shall do away with stapling of fresh, re-issuable, non-issuable note packets and instead secure them with paper bands; banks shall sort notes into issuables and non-issuables and issue only clean notes to public. Banks are supposed to tender soiled notes in unstapled condition to Reserve Bank of India in inward remittances through currency chests as per the directive, but many banks do not accept soiled notes. Banks have been asked to forthwith stop writing of any kind on watermark window of bank notes. People are scared to accept such notes now as they fear these notes may not be exchanged at the banks and they could be branded pro-Telangana in Andhra region.

HBL

After Rs 500, Rs 1000, circulation of counterfeit currency notes of Rs 20 on rise

....The governmental records prove that not only the fake currency notes of Rs 500 and Rs 1000 are posing a threat to the economy but even Rs 20 note is being circulated in Indian markets on a large scale............

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Banks complete 62% of financial inclusion target in 20 months

KOLKATA: The country's banking sector has reached out to 45,000 unbanked villages over the last 19-20 months, which is 62% of the target of extending banking services to 73,000 villages by March 2012. Although this means banks are up to a daunting task of achieving 38% of the remaining task in five months, union finance minister Pranab Mukherjee thinks the target will be met within the deadline.  The government has identified 73,000 villages which have more than 2,000 population for extending banking services in the first phase of its financial inclusion drive by March 2012.  In the eastern region, 23,352 villages has been identified and banks have covered around 12,000 villages. Banks are either opening brick and mortar branches or using business correspondets to reach out to unbanked villages. The minister had announced in his budget for 2010-11: "It has been decided to provide appropriate Banking facilities to habitations having population in excess of 2000 by March, 2012. It is also proposed to extend insurance and other services to the targeted beneficiaries. These services will be provided using the business correspondent and other models with appropriate technology back up. By this arrangement, it is proposed to cover 60,000 habitations."  In order to expand bank branches in rural areas, Reserve Bank of India allowed large commercial banks to open branches and administrative offices in tier 3 to tier 6 centres with population up to 49,999 freely. The banking regulator said that banks should open at least 25% of their new branches in a year in unbanked rural centres.

ET

Will RBI be forced to issue regulation on prepayment charges?

...... We know that the National Housing Bank (NHB) had stolen a march over its parent the Reserve Bank of India (RBI) in passing a regulation that prepayment penalty cannot be charged by housing finance companies (HFCs) in case of loans that are on a floating interest rate basis irrespective of the source of such repayment (even if it is by way of transfer of loan to another lender)............

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RBI issues guidelines for banks' investments in non-finance cos

Equity investment by a bank in a non-financial service company would be subject to a limit of 10 per cent of the company's paid-up capital or 10 per cent of the bank's paid-up capital and reserves, whichever is less, according to the Reserve Bank of India. In new guidelines for banks' investments in companies which are not subsidiaries and are not ‘financial services companies', the RBI said that for arriving at this 10 per cent limit, equity investments held under ‘Held for Trading' category would also be reckoned. Investments within the 10 per cent limit, irrespective of whether they are in the ‘Held for Trading' category or otherwise, would, however, not require the central bank's prior approval. The RBI issued the guidelines as it felt that it is possible for banks, directly or indirectly through their holdings in other entities, to exercise control on financial service companies or have significant influence over such companies and thus, engage in activities directly or indirectly not permitted to banks. Equity investments in any non-financial services company held by a bank; its subsidiaries, associates or joint ventures or entities directly or indirectly controlled by the bank; and bank managed mutual funds should in the aggregate not exceed 20 per cent of the investee company's paid-up capital. A bank's equity investments in subsidiaries and other entities that are engaged in financial service activities together with equity investments in entities engaged in non financial service activities should not exceed 20 per cent of the bank's paid-up share capital and reserves. In this case, the 20 per cent cap would not apply for investments classified under the ‘Held for Trading' category and which are not held beyond 90 days. Equity holding by a bank in excess of 10 per cent of non financial services investee company's paid-up capital would be permissible without RBI's prior approval (subject to the statutory limit of 30 per cent) if the additional acquisition is through restructuring/ corporate debt restructuring, or acquired by the bank to protect its interest on loans/investments made in a company. In such cases, the equity investment in excess of 10 per cent of an investee company's paid-up capital would be exempted from the 20 per cent limit. However, banks will have to submit to RBI a time bound action plan for disposal of such shares within a specified period. A bank's request for making investments in excess of 10 per cent of a non-financial services company's paid-up capital, but not exceeding 30 per cent, would be considered by RBI if the investee company is engaged in non-financial activities which are permitted to banks. The RBI said that banks should strictly observe the guidelines while investing in companies undertaking non-financial service activities. They should also carry out a review of their investments in non financial companies as also by subsidiaries and joint ventures, within three months. Wherever investments do not conform to the new policy guidelines, banks have to ensure that the investments are brought down to the prescribed limits and/or control or the exercise of significant influence is given up as the case may be or seek the RBI's approval.

HBL

CPI-M opposes move to lower interest rate on PF deposits

...Raising the issue during Zero Hour in the Rajya Sabha, Mr Tapan Kumar Sen (CPI-M) said the move is a “retrograde step” and asked as to why interest rates on employees’ lifetime savings are getting cut when RBI has increased interest rates.....

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RBI can, should and will intervene. But they do not have unlimited ammunition

....... RBI can, should and will intervene. But they do not have unlimited ammunition. At the best case, may be USD 20 bln. But we believe that policy makers should always communicate their willingness to use any potential tool available to them and should not vocally rule out any option. Even a verbal message can sometimes be enough to ward of speculators............

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Apex bank to keep status quo

Below-trend gross domestic product growth (GDP) in the second quarter of 2011-12 and a poor start to the third quarter — October IIP was a reminder of the pain during the financial crisis — confirm India's economic slowdown. Even anecdotal evidence indicates the downtrend in economic activity witnessed lately is unlikely to reverse soon. Indeed, even GDP growth below 6.5 per cent in a few of the upcoming quarters would not surprise many. Thus, it is little surprise that the market has turned to the Reserve Bank of India (RBI) for some action to kick-start the investment cycle, since the scope for fiscal measures is limited. While nobody expects a reduction in the repo rate this week, a lowering of the cash reserve ratio (CRR) is being talked about as the first line of defence in containing the slide in growth. The banking system's liquidity deficit is often used as an argument in favour of such a move. However, recent comments by RBI indicate the CRR is also a monetary policy tool, and it would signal a reversal of its monetary policy stance. With inflation in November still close to nine per cent, we believe RBI would not be in a hurry to signal a change in stance. We expect it to maintain status quo on December 16, even though growth concerns are likely to occupy more space in the policy statement. Slower growth should eventually squeeze out excess demand-side inflationary pressures, which RBI has long been trying to address. In terms of supporting-banking system liquidity, RBI is likely to continue to employ tactical tools such as buying government securities through open market operations. Thus, a reversal in monetary policy would most probably have to wait until 2012

Anubhuti Sahay, Senior economist, Standard Chartered Bank (BS)

Reserve Bank is on the cusp of a shift to easier money

... Mid-quarter reviews are not given as much importance as quarterly reviews but this month’s mid-quarter review has much significance for the markets going forward. The reason is that the RBI is likely to signal a shift in policy stance from bringing down inflationary expectations to improving growth expectations. The RBI is not likely to announce any major policy changes, but the signal it will send to the markets on future policy moves will be of importance...........

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Investors beware: the RBI is going to ensure a bumpy ride this week

...............“A cut in the CRR will signal the end of tight monetary policy, but the time for that is not appropriate as inflation, and particularly the non-food manufacturing inflation, a proxy of core inflation, continues to be high, way beyond the RBI’s comfort level. Besides, any infusion of liquidity at this juncture may tempt banks to punt on the rupee, which recently touched its lifetime low of 52.73 to a dollar,”......

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The lurking debt problem

...............Rumour has it that there is a standoff between the Ministry of Finance and the Reserve Bank of India over interest rate policy. Given the government's own failure, the central bank has been forced to take on the burden of combating inflation, leading to the sharp rise in interest rates. But since the Finance Ministry does not seem to like that, it is reportedly using the ECB lever to counter the impact of the RBI's intervention on the corporate sector. Whatever the drivers, the process is increasing external vulnerability.

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Undone by policy

......The RBI has raised rates 13 times since March 2010, while acknowledging the relative ineffectiveness of monetary policy in tackling cost-push inflation. Now, high rates have caused producers to put expansion and growth on hold. Clearly, there is need for a more open debate on the RBI’s tardiness in altering its policy stance. And, more immediately, the case for a rate cut to rescue growth strengthens daily..............

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Growth and inflation

The article “RBI confronted with multiple concerns” (Business Line, December 12.) rightly pointed out the issues before the RBI in the monetary policy review on December 16. So far, it was observed that to tame inflation, raising key rates resulted in rising lending rates by banks and reduction in growth rate. The question is: How far can we sacrifice growth to curb inflation and whether it is sustainable in the wake of reduction in foreign investment and, thereby, depreciation in the value of the rupee? Already, industrialists and loan borrowers are burdened with heavy interest charged by banks. The time has come for the RBI to begin the process of easing interest rates and check the continuous decline in the value of rupee. At the same time, the growth rate should not be allowed to fall further because of monetary policy decisions. A combination of growth and inflation of 7 per cent and 8 per cent would serve the economy well, provided the RBI eases interest rates, preferably starting with the ensuing monetary policy.

T. S. N. Rao (HBL)

Janata Seva Coop Bank fined Rs 5 lakh

BANGALORE: The Reserve Bank of India (RBI) has imposed a penalty of Rs 5 lakh on Janata Seva Cooperative Bank Limited, Bangalore, under sections relevant to Anti- Money ‘Laundering Guidelines’ violations. The RBI informed that it issued a show-cause notice to the bank, in response to which the bank is said to have submitted its side of the case. But after the hearing and other procedures, the RBI imposed a penalty of Rs 5 lakh on the Janata Seva Co-operative bank.

IBN Live

Consumer confidence in financial situation fell in Sept:Survey

The number of people who felt that their financial circumstances have improved fell to 56 per cent in September, from 59 per cent in June, as per the latest consumer survey by the Reserve Bank. However, optimism about an increase in future income, though high, has been sliding over the last four quarters, according to the sixth round of RBI''s ''Consumer Confidence Survey September 2011''. "Though more than half of the respondents felt that their household circucmstances have become better off, this proportion has declined as compared to June 2011," the survey said. About 18 per cent respondents reported that their household circumstances became worse off due to increase in price level. "This proportion has declined during the last four quarters, from 27.5 per cent in December 2010 to 17.7 per cent in September 2011," the RBI said. The survey had 5,400 respondents from six metropolitan cities -- New Delhi, Mumbai, Kolkata, Chennai, Bangalore and Hyderabad -- and was conducted in September this year. It found that optimism regarding increase in future income remain high, but has declined in absolute terms. A total of 66 per cent of respondents said they expect their incomes to rise during the next one year period, down from over 69 per cent who had the same view in June 2011. "About 71 per cent of the respondents reported increase in spending as compared with a year ago. This proportion in response to future spending is less at 66 per cent," the survey found. The study also found that nearly three-fourth of the respondents were of the view that the current interest rates are high from borrowers viewpoint. The degree of negative perceptions on price levels for now as well as in future are down marginally in September 2011 as compared with June 2011. "However, about 85 per cent of the respondents felt that prices would continue to increase during the next year," it said. RBI started conducting the quarterly survey on consumer confidence in 2010. According to it, the change in consumer confidence has the potential to affect real economic activities through the changes in business sentiments and the findings of the survey on confidence level of consumers can be of use for policy making purposes.

MSN News

Positive perceptions on current economic conditions decline: RBI survey

.“The change in consumer confidence has the potential to affect real economic activities through the changes in business sentiments. Thus, the current and expected confidence on economic and personal financial situations, are of particular relevance for policy purposes,” said the survey. ............

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