Thursday, December 15, 2011

'Banks not that transparent on loan pricing'

Chakrabarty Says Customers Must Approach Banking Ombudsman Over Rate Anomalies


NEW DELHI: RBI Deputy Governor K C Chakrabarty is known to speak his mind. In a freewheeling chat with TOI recently, he spoke on a host of issues ranging from transparency in interest rates to charges levied by banks and corporate governance issues. Excerpts:
Moody's has expressed concerns over the health of Indian banks. Do you agree with it?
We may or may not agree with them. Overall, the economy has slowed down and you cannot say that banks will not be affected adversely. We feel that banks will be able to overcome (the stress) and banks also say so. But banks will have to work hard, they must take corrective measures and they must be cautious so that they are able to withstand the pressure. The more you diversify, spread your risks, go for inclusion, you will be better off.
What should banks do?
One of the first things that they need to do is, improve the quality of management; they must improve the quality of asset management, they must control expenses, avoid unnecessary risk taking and they must see to it that they do not have unduly high exposure to sectors those are under stress. They should improve corporate governance. In terms of sectors, there is concern on power, aviation... Power and aviation are concerns. But these are all necessary vital sectors. We need more flights, more airports because the country needs them. We should collectively find out how we should deal with them. It does not mean that banks should not finance them. Banks being the provider of finance need to influence a company's decision in improving its performance. Power companies need to build efficiency - both generation and distribution costs need to come down and even transmission loss should be reduced. Banks can say that they will not provide fresh funds till power companies build in efficiencies. Wherever required, tariffs should go up. But we can't let the power sector close down.
There are comparisons between now and 2008 and there are demands for a special dispensation for loan restructuring...
This is a very controversial thing. The issue is whether we are out of 2008 crisis or if it is the same crisis? The second thing is, in 2008, the crisis started from banking sector and spread to the real sector. This time, it is a sovereign crisis that is spilling over to banks. We have to contain this spillover. If it spills over to the real sector we all will suffer. Unfortunately, central banks and governments are not in a position to provide the same kind of relief that was possible in 2008, hence need for more collective efforts.
In the past you had discussed the issue of pricing of loans and transmission of interest rate by banks...
What we are saying is, increase interest rates if the cost of funds go up. If one is saying that cost of funds has increased by one percentage point and one has increased base rates by two percentage points but average yield on advances has increased by only one percentage point. That means benefit in cost has been not passed on in an equitable manner. One may say that cost of operation has gone up, that is, inefficiency has gone up, we need to avoid that. Pricing has to be transparent and non-discriminatory. If petrol price goes up, everyone pays a higher price. This is what we want.
Do banks have the ability to do that? They say that they don't have data.
Banks cannot say this as the very meaning of having licence to do banking business is the ability to assess and price the risk. Anyhow, we are appointing a committee to examine the issue in totality.
There are also concerns about usurious charges and they have a huge interest margin. What are your comments?
I find some banks have prime lending rate of 21% and base rate is 12%. That is a huge gap. What kind of risk we are taking when we are lending to someone at 21%? If the risk is too high, don't lend to them. It does not make sense for the good borrowers to pay for that and in the process they also suffer. The second is the economy, which will suffer.
But didn't banks jack up PLRs to get customers to move to base rate, which was expected to usher in transparency?
If that was the case, everyone should have moved to base rate by now. We have no evidence on whether banks are doing it in a scientific manner. The committee will look at all these aspects and if there is a need, we will tighten the guidelines. What we are saying is that in the matter of pricing, banks are not that transparent, especially for small customers, and definitely they are not non-discriminatory.
Old customers have to pay higher rates than a new customer who walks into a branch now. Is that fair?
First, we have to conclusively prove that this is happening. If it is the case and if a customer complains, Banking Ombudsman will uphold the customer complaint and ask banks to rectify.
After a meeting with ombudsman, you had asked banks to come up with a fixed rate product. While there are products I will have to pay 15% for a fixed rate home loan, which does not make sense. What are you doing about this?
I have seen one bank offering a home loan at 11% fixed rate. We don't want to micro manage banks on pricing but in the interest of customers and in the interest of banks, there must be a fixed rate product because banks are better manager of risk than individuals. If the banks want to hedge their risk, they can go for interest rate swap, for which market exists.
Are you happy that banks are again offering loans where the rate is fixed for two years?
We have absolutely no problem with them. But if the objective is to deprive the existing customer the benefit of lower rates then we have objection. That is why we must give the customer a choice to exit free of cost.
Some banks levy very high penalty. For instance, if you go below the Rs 10,000 minimum balance to Rs 9,990, then they charge Rs 600-700. Is this fair?
All banks are not doing this. I am unable to understand the justification for Rs 10,000. Further, how can one charge him Rs 500 penalty if the balance goes to Rs 9,900? Banks must examine the charges and explain the reasonableness of these charges. But then a customer has to come to the Banking Ombudsman.

TOI

HOUSE CALL


RBI governor D Subbarao at Parliament House in New Delhi on Wednesday two days before the Policy meet


Regulations are essential for financial inclusion

With Reserve Bank of India stepping in to regulate NBFC-MFIs and a Microfinance Regulation Bill pending for enactment, industry experts discussed the role of regulators in achieving financial inclusion at the Microfinance India Summit in New Delhi today. Kate Mckee, Senior Advisor of the CGAP said that regulations clarify ambiguities and play a role in product diversification. “I do think it is very important to set a certain floor on the behaviour of markets and is important in building consumers confidence”, she said. Hassan representing the Central Bank of Bangladesh, pointed out the dichotomy in policy and regulation. “In Bangladesh, in addition to financial stability, we’ve included the role of promoting financial inclusion by strengthening payment system especially the mobile banking system. Similar to the RBI, we have certain targets of agricultural lending. And we do have targets to the SME sector as well. And several of these targets are done by commercial banks through MFIs.” Vijay Mahajan, Founder and Chairman of BASIX group, thinks that the RBI regulation is a very good step forward but it should not be the final point. He commented that, “It is the first time in the industry that a regulator has put down in writing that 26% interest rate is fine. The last time was 12%. To go from 12% to 26% is a huge leap.” P. N. Vasudevan, Managing Director of Equitas Microfinance India also remarked that the RBI regulations are much better than the AP government act. Therefore, it is more welcomed.
Microfinance Focus

Activist invokes RTI to find out truth behind a bank fraud pardoned by National Consumer Forum

RTI activist Sharad Phadke who successfully pursued a case of his failed ATM transaction which was not credited to his account for 65 days, has now taken up cudgels against bank frauds against small time loan takers. A report…............

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Loans disbursement by banks picks up

.......Currently, the year-on-year non-food credit growth is at 17.72 per cent. The banking system could face a liquidity crunch over the next fortnight due to outflows on account of advance tax payments by India Inc even as demand for credit is gathering pace. Given this scenario, if the RBI does not reduce the amount of cash that banks are required to park with it (cash reserve ratio), then banks could find themselves in a bind, said a banker........

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Banks must support land development to conserve arable lands: Nabard

..........banks have the responsibility to support land development to conserve arable lands which are being unutilised every year. But this has largely been ignored by the banks though the Reserve Bank of India classifies funding for purchase of agriculture land as priority sector lending...........

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Chart view: Why the RBI can’t use forex reserves to rescue the rupee

...... The fall in the rupee — it hit a new record of 53.74 against the dollar today — makes repaying those debts an even heavier burden. It also makes the Reserve Bank of India less inclined to spend the country’s forex reserves to prop up the rupee...........

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Furnish Accounting Details: RBI to ARCs

Worried about the accounting practices followed by asset reconstruction companies, the Reserve Bank of India (RBI) has asked them to furnish complete details on accounting policies, in a bid to take a closer look at the systems. The move comes as an aftermath of loopholes detected in accounting policies of the country’s largest ARC, Asset Reconstruction Co of India (Arcil). In a letter to all ARCs, the banking regulator has said: “Please inform us about practice or system followed in your company and furnish complete details of accounting policy relating to income recognition on all items such as management fee, yield on security receipts, booking of upside, interest on funded expenses, expenses incurred on behalf of trust for valuation and due diligence extra.” Earlier, the RBI had found gaps in accounting policy of Arcil and the company had to restate its profits from . 51 crore to . 3 crore for fiscal year 2010-11.  “The regulator may want all ARCs to follow standard and sound accounting practice. The collection of information could be a prelude to it,” said an official from an ARC, who did not want to be named.  The RBI’s inspection report on Arcil observed that “Arcil’s accounting practice of recognising income on accrual basis and its reversal only if the same is not realised for more than two years was not in conformity with RBI rules which require reversal of income that is due for more than 180 days.” A big part of Arcil’s income was on accrual basis. Sources from the ARC industry said even as the RBI has asked ARCs to reverse income after six months, a few ARCs continue to accrue income for three years while there are some ARCs who book income only after receiving income.  While restating profits, Arcil had said it has done so “for making an additional provision of . 71.05 crore against accrued yield on investment in senior class security receipts not realised till date.”  In a parallel development, the finance ministry has formed a committee to look into the different aspects of ARCs’ operations and measures that can be taken to stimulate the sector in the backdrop of few banks resorting to selling their bad loans portfolio to them.
ET

With our bucks to the wall

.........The government has allowed oil companies a facility to source their dollar requirements from the Reserve Bank of India (RBI). This is band-aid, it doesn't cover the hit the oil marketing companies are taking on account of the rupee's fall..............

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Soft RBI stance is okay as India is liquid now: Expert

........ People are expecting 9% or thereabouts, a good improvement compared to last month. That sets tongues wagging whether the Indian Central Bank would follow suit of other emerging markets in either CRR cut or rate cuts. The RBI would be thinking twice before doing that because of the ugly rupee number. But today, even if the RBI adopts a soft stance, that would be okay for the market because in terms of liquidity, the Indian markets are one of the most liquid markets...............

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RBI likely to prefer open mkt operations over CRR cut

Despite headline inflation falling to its lowest level in 12 months, owing to a contraction in factory output, economists said the central bank would not resort to a cut in the cash reserve ratio (CRR) when it meets to review the policy on Friday, but would opt for open market operations (OMOs) to tide over the liquidity crunch. Wholesale price index-based annual inflation rose 9.11 per cent in November, compared with 9.72 per cent in October, primarily due to the statistical impact of a higher base. Noticeably, the headline inflation for September was revised to 10 per cent from the provisional 9.72 per cent. The revision to double digits was seen after a gap of 14 months. Abheek Barua, chief economist, HDFC Bank, said, “Given today’s inflation release, it is unlikely that the Reserve Bank of India (RBI) would opt for a CRR cut when it meets this Friday for its mid-quarter review. Instead, it would focus on using tactical measures such as OMO buybacks to ease the recent drag on liquidity.” Today, banks borrowed about Rs 80,000 crore from RBI’s repo window. This is above the central bank’s comfort zone of +/- 1 per cent of net demand and time liabilities. According to RBI estimates, headline inflation would cool to seven per cent by March. Economists said RBI may not be in a hurry to change its stance from an anti-inflationary one to a pro-growth one, though inflation’s current trajectory is expected to sustain. “Despite the moderation in November, inflation, especially core inflation, continues to remain significantly above RBI’s comfort level. With core inflation also coming under pressure because of rupee depreciation, we believe the anti-inflationary stance of the central bank would remain intact,” YES Bank said in a research note. “We believe OMOs would be the preferred route for RBI to alleviate the liquidity stress in the economy, rather than a cut in CRR, since CRR is essentially a monetary policy tool, not a liquidity tool.” A pro-growth stance is expected to be adopted only next month, when the central bank would meet for the third quarter policy review on January 24. “With growth slowing much more than expected and the likelihood that headline inflation could cool to seven per cent by March, the central bank is, however, likely to build in a dovish rhetoric in its monetary stance, leaving the door open for a possible CRR cut in January and a repo rate cut in the first quarter of FY13,” Barua said. Economists said RBI’s decision to adopt a pro-growth approach would be complicated, as inflation and wage expectations remained high. RBI may not adopt measures to support growth until headline inflation is close to its tolerance zone. Inflation has stayed around the double-digit mark for the last 21 months, despite a series of rate rises by RBI. The central bank has raised the key policy rate by 375 basis points since March 2010. RBI is widely expected to leave the key policy rate unchanged in Friday’s policy review. Taimur Baig and Kaushik Das, economists at Deutsche Bank, said, “In our view, significant monetary-easing measures would require another 200 basis points of disinflation, along with evidence of both a decline and stabilisation of inflation and inflation expectations. We believe unless growth and financial markets begin to deteriorate in a disorderly manner, RBI is still three to four months away from taking major easing measures”.
BS

Inflation versus rupee

.....In other words, if RBI wants to keep inflation under control, it has to start devising ways to at least slow down the fall in the rupee.........

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Urban households expect inflation to be 12.9% by Sept: RBI survey

.............The survey was conducted in July-September 2011 and covered 4,000 urban households across 12 cities for the October-December 2011 quarter and the July 2011-June 2012 period. The RBI and the government have forecast headline inflation to moderate to around 7% by March 2012.

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Rupee's tumble

....The RBI apparently thought it prudent to keep a close watch and tweak policy here and there to ease fund inflows, reserving its firepower for use should the situation deteriorate. With the macroeconomic numbers unlikely to improve in the next few months — if anything, they might worsen — the rupee appears to be really up against it...........

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Rs free fall continues, worst not over yet

.. In a poll conducted by Business Standard, a majority of respondents said the rupee would fall further at least till March, taking cues from global economic conditions and strong demand for dollar in the country............

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RBI must stay focused on how to rein in rising prices: Rangarajan

New Delhi: Even as economists say high interest rates are choking the growth momentum in the country, Prime Minister’s Economic Advisory Council chairman C Rangarajan on Wednesday said the central bank should continue to focus on controlling rising prices. “According to latest (inflation) numbers, it is still above 9%. Therefore, concerns regarding inflation cannot be taken away from the monetary authorities,” he said on the sidelines of Delhi Economics Conclave. The inflation data released on Wednesday showed that the rate has declined marginally to 9.11% in November from 9.73% in the previous month. Both the government and RBI have pegged the year-end inflation at around 7%. RBI, which has raised interest rates 13 times since March 2010, to rein in inflation, is scheduled to review the monetary policy on Friday, December 16. In the last review, it had indicated that it may take a pause in rate hike in December if inflation situation improves. Industry has maintained that RBI’s tight monetary policy regime is hurting investments and industrial production. Asked if the central bank should intervene to arrest the slide of rupee against the US dollar, Rangarajan said India can do little to check the movement in the rupee, which is driven by external factors He added, “the stated policy of RBI is to prevent volatility in foreign exchange market. I think RBI will act but it is really a call of RBI and it will depend on what is happening on market.’’ He said behaviour of the rupee, which touched an all-time low of 53.75 vis-a-vis the US dollar on Wednesday, is a reflection of current account deficit and extent of capital flows. “If there is a temporary mismatch, this will lead to pressure on capital flows, but if capital flows pick up, then what we are now seeing, can also get reversed,” he added.
FE

Immediate RBI rate cut unlikely: SBI chief

With inflation at uncomfortable levels, the Reserve Bank of India (RBI) is unlikely to opt for a rate cut in Friday’s mid-quarter monetary policy review, growth slippage notwithstanding, State Bank of India (SBI) Chairman, Pratip Chaudhuri, said today. “I do not think so (that RBI would cut rates) because food inflation has to come down significantly and steadily...at that rate (9.11 per cent WPI inflation), I don’t think RBI would take a view that inflation and inflationary expectations have been controlled,” he said at a conference on economic policies for emerging economies here. Most market participants expect RBI to hold its repo rate, the interest rate at which it lends to banks under the liquidity adjustment facility, on Friday.Chaudhuri doesn’t expect the central bank to cut the cash reserve ratio either, as the move would be seen as contradictory to its anti-inflationary stance. Many market participants expect RBI to cut the cash reserve ratio to ease the liquidity situation in the banking sector, especially due to the payment of the third tranche of advance tax by companies.
BS

There is no stopping bad news on the economic front

There is no stopping bad news on the economic front. For, if the currency woes were not enough, the wholesale price index (WPI)-based inflation came in at a very high 9.11% in November compared with street expectations. Sure, the number has fallen from 9.73% in October due to a substantial decline in food inflation to 8.54% from 11% in October but the figure remains very high. And the rupee’s 20% depreciation in this year will likely push up prices of goods that have a substantial import content, particularly fuel products that are not administratively adjusted, wrote Taimur Baig and Kaushik Das, economists with Deutsche Bank, in a note. So all eyes are now on what RBI Governor Duvvuri Subbarao will do this Friday when he announces the mid-quarter review of monetary policy. Will he be forced once again to hike policy rates or will he stand pat? “The RBI will estimate if the current inflation will sustain before making that decision,” said Rajrishi Singhal, chief economist at Dhanlaxmi Bank. Analysts believe the central bank’s aim to bring down inflation to 7% by March still looks reasonable considering the drop in prices of foodstuff and primary articles — and the fact that the statistical high base effect of last December comes into play. “Today’s inflation print makes the RBI’s case even stronger to maintain status quo on rates,” Anubhuti Sahay, economist at Standard Chartered, told Bloomberg. “Weakening growth will find space in the policy statement, but they are unlikely to completely remove inflation from their radar.”
DNA

Giving trouble currency

........It is true RBI Deputy Governor Subir Gokarn’s statement about RBI’s reserves not being sufficient to seriously defend the rupee was probably ill-advised, but that’s in the past. Indeed, the sharp fall in the rupee adds to inflationary pressures—........

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Inflation eases marginally, all eyes on RBI now

..... The latest figures may complicate matters for the Reserve Bank of India (RBI), which was expected to shift its bias towards growth from inflation in its Friday policy review as the pace of economic growth eased........

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Time to start cutting interest rates

.RBI’s system liquidity band at plus/minus 1% of banks’ funds has been breached in the past month or so. The situation is likely to worsen over this week, even if transiently, with advance tax payments by corporates, before they flow back into the system through expenditures. How best to mitigate this, though, is another story.......

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India inflation tops 9%, adds to cbank headache

Indian inflation held stubbornly above 9 percent in November, maintaining pressure on the central bank to keep interest rates steady this week, although signs of a rapidly weakening economy mean it is likely to adopt a more dovish tone. The wholesale price index (WPI), the main inflation gauge, rose 9.11 percent from a year earlier, slowing from a 9.73 percent rise in October and above the 9.04 percent increase forecast in a Reuters poll. The pull-back from October’s pace was largely due to a sharp drop in food inflation, with price pressures in manufacturing and fuel rising as a tumbling rupee pushes up import costs. “The rapid depreciation of the rupee is going to throw out of the window all the calculations on inflation, given the contribution of imported inflation to manufactured product price inflation,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai. The rupee is down 18.4 percent from its year-high in July and hit a fresh record low on Wednesday, undermining the central bank’s forecast for inflation to drop to 7 percent by March and making its job of shifting to a looser policy of cutting interest rates all the more tricky.  “Even though the RBI will definitely pause on rates (on Friday), the exact timing from which it would have started easing interest rates has once again turned uncertain due to the tumbling currency,” Nitsure said. Reuters.
http://www.dailytimes.com.pk/default.asp?page=2011%5C12%5C15%5Cstory_15-12-2011_pg5_28

Rupee depreciation: Are we on the same page?

That is what the Reserve Bank of India (RBI) Governor D Subbarao would like everyone to be on while discussing the sharp rupee depreciation against the US greenback. The Indian rupee has been mauled nearly 20 per cent in the last one year. And the downslide is unstoppable. The rupee closed at $52.22 on Tuesday, the second week of December 2011. Why the dramatic slide? Subbarao isn't the only one in the hot seat. ...........

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