The RBI flashes caution – S.S.Tarapore

While the RBI's Financial Stability Report is sure that the financial sector is sound and resilient, there is a need to be vigilant about asset quality and exuberant credit growth in select sectors

Over the years, the Reserve Bank of India (RBI) reports show progressive improvement both in presentation and content. Opinion-makers take these comprehensive reports for granted and often pay scant attention to the central message. While comparisons are odious, the Financial Stability Report, Issue No. 4 (December 2011) is an outstanding piece of work and policymakers, market participants, opinion makers and analysts should all give careful attention to this report. At the outset, the report warns that Emerging Market Economies (EMEs), like ours, face the risk of sudden capital outflows and or a rise in funding costs, both of which could jeopardise the stability of the domestic economy. This contrasts with the experience in 2008, when policymakers assured that India was different and immune to the headwinds from the global economy. Mercifully, the decoupling theory no longer carries any credibility.

Risks to stability

The RBI has instituted a Systemic Risk Survey, wherein it is recognised that growth in 2011-12 would moderate, while inflation and inflation expectations remain elevated. While the report reassures that the Indian financial sector is sound and resilient, there is a need to be vigilant about asset quality and exuberant credit growth in select sectors. It is reassuring that the RBI is working on a forward-looking provisioning framework. In the Systemic Risk Survey, the assessment is supplemented through wider consultation. The RBI has constructed a Financial Stability Map based on macro-stability, financial market stability and banking stability, which clearly shows that there is a progressive increase in risks to financial stability of the Indian economy. The report expresses concern about the widening balance of payments, current account deficit (CAD) as a result of increased imports and moderation of exports. On the fiscal front, slowdown in revenues and increased subsidy expenditures could result in the fiscal deficit exceeding the target. There has been considerable discontent in the recent period that the Indian rupee has depreciated, in nominal terms, by much more than other Asian EMEs. The report does well to explain that countries such as India, which have a large CAD, have experienced a larger currency depreciation than those with a current account surplus. The report cautions that the corporate sector will have to refinance its external commercial borrowing (ECB) at significantly higher interest rates. Hitherto, India Inc. used the soft option of financing itself at low interest rates on ECB and many have opted to keep open exchange positions. A basic tenet is that a corporate should never keep an open position. If a corporate opts to make money on the swings, it should also be prepared to lose on the roundabouts.

Flaw in thinking

In recent years, a dangerous proposition has been doing the rounds, that is, that currency appreciation is disinflationary and that currency depreciation is inflationary. This flaw in thinking has become fashionable in respected circles. The RBI has also embraced this false analysis When, in the recent period, the rupee exchange rate was appreciating against fundamentals, the RBI followed a policy of “non-intervention”. As a result, when the turn in the cycle took place, the rupee depreciated by much more than what it would have, had the RBI undertaken purchases in the forex market to stem the appreciation.  Given the avowed policy of the RBI to avoid volatility, it was incumbent on it to prevent undue appreciation. Basic international monetary theory teaches us that depreciation of the currency, by absorbing more domestic currency per unit of foreign exchange, is disinflationary and, per contra, an appreciation is inflationary (subject to the Marshall-Lerner Condition of the combined supply and demand elasticity being greater than unity). One cannot fault the Report for merely following the new gospel truth. The new thesis suited the industrial countries which were preaching to the EMEs. But surely, EMEs with large CADs should not have accepted the reversal of the Law of Gravity. The report cautions that funding constraints in global markets could impact the availability and cost of funding for banks and corporates.

Banks resilient, but..

The report indicates that slippages in asset quality of banks exceeded credit growth. Notwithstanding this, the report emphasises that Indian banks have fared better than in other countries. The report concludes that that the loss of assets in an extreme loss scenario would still leave Indian banks resilient. A word of caution is necessary here. When a banking system experiences a break down, all earlier stress tests become irrelevant and firewalls protecting the banking system melt away. In the euphoria of the general perception that Indian banks are the soundest in the world, it is necessary to caution that in the current milieu, banks, the government, borrowers and the RBI are all not prepared to be the harbinger of a possible banking crisis, lest the messenger be shot. The report concludes that the Indian financial system remains robust and well-equipped to face the headwinds of instability; however, one can never be too cautious.

HBL

Return of the white label ATM buzz

White label automated teller machines (ATMs) are back in banking industry debates. Big banks, still smarting from the central bank’s rejection of their proposal for white label ATMs in 2006, are believed to be making a fresh effort to build opinion in favour of them. What’s more, a key advisory committee of India’s finance ministry, chaired by DK Mittal, has recently proposed that the white label ATM model be approved. The committee has also proposed that charges be levied on all ATM transactions, irrespective of the type of ATM. Typically, a white label ATM is owned, run and maintained by a third-party service provider. In a sense, banks outsource the ATM part of their operations to third parties. Customers from any bank can withdraw money from a white label ATM, but will need to pay a fee for the service. What determines the fee is the ATM’s location, but not in the geographical sense. Rather, if there are more customers from a particular bank near an ATM, fee for them will be lower, compared to other customers. Banks love white label ATMs for a reason: the machines are said to reduce per-transaction cost and even help in reducing overall costs. “Managing a payment channel like ATMs is a big problem for banks. If a third party is ready to manage the operations entirely, then it reduces the capital expenditure for banks considerably,” says B A Prabhakar, chairman and managing director, Andhra Bank. The Reserve Bank of India, he says, needs to come out with clear norms for cash deposits and customer grievances in relation to ATMs. Some bankers, however, believe that ATMs boost a bank’s brand-equity and visibility. “It is very easy for larger banks to feel that these ATMs will help in reducing costs. But we need to realise that an ATM is an intangible asset which not only brings in transactions but helps in branding. It is important for the customer to be able to recognise the brand, and that will not be possible in the white label system,” says a senior official from a new-generation private sector bank. There are other concerns as well. For instance, the RBI is not very happy with the lack of clarity on who will address the customer’s grievances in the proposed new system. The central bank believes that the Indian market is not yet ready to adopt a white label model. Some bankers, too, are wary about the instances of counterfeit currency entering the system.For, internationally, retailers that own white label ATMs, and not banks, load cash into the machines. Such risks are minimised in the existing brown system, according to Stanley Johnson, executive vice-president, AGS Transact Technologies (a “third party” in the ATM context). In the brown system, most of the ATM-related operations are still outsourced. But banks are responsible for three important features: cash in the machine, customer grievances and branding at the ATM site. (AGS Transact is an automated dispensing services provider for the banking industry dealing with ATMs and banking transaction terminals.) Such responsibilities placed on banks seem to be helping the brown system to grow. As at March 2011, the total number of ATMs in India stood at 74,743, up 24% year-on-year. The number is projected to grow to over 92,000, according to a report on the bank cards industry by Atos Worldline. (The study is limited to the ATMs of commercial banks and excludes ATMS of co-operative banks.) Data charts alongside capture the essence of the story. It is important to note that the State Bank of India continues to top the list of banks with ATM networks. SBI boasts the highest number (21,625) of ATMs in India. Its associate banks have 5,066 ATMs. Together, the SBI Group is way ahead of other banks. Lately, there has been a buzz that public sector banks will announce a common tender for close to 40,000 ATMs across India. Talk is these banks will likely request the RBI to turn them into white-label ATMs. Public sector banks, however, deny any such plan and state that all these proposed ATMs will be owned by them. But such denials are not strong enough to scotch talk the white label ATMs will dot the Indian landscape sooner than later.

DNA

An idea yet to take off

Ever since the Reserve Bank of India (RBI) first released associated guidelines in 2008, mobile banking has been touted as the future of broad-based financial services in India. It was an elegant solution that married one of the country’s achievements—booming mobile phone penetration—with one of its major shortcomings—a vast financial hinterland of consumers without access to banking services, popularly known as the“financially excluded”. It is widely believed that there are at least 800 million mobile phone users in India, and around 450 million “unbanked”. But so far mobile banking continues to thrive largely in the realm of possibility. The buzz, pilot projects, research reports and numerous joint venture announcements have so far done little to extend financial services to those who desire financial inclusion. Earlier this week RBI announced that it was removing the cap of Rs50,000 per customer per day for mobile transactions. Banks are now free to limit mobile banking bandwidth to customers based on their own assessments of risk. Once again while this might seem like a step forward, it is clearly not targeted at those who remain outside the current banking system by virtue of distance or net worth. While RBI says that 9.6 million transactions were made through mobile banking last year, other reports indicate that offtake is still very slow. (RBI numbers, which indicate an average transaction value of around Rs800, may include hundreds of thousands of mobile phone recharges.) There are several hurdles to widespread mobile banking usage in India. Besides issues of security, there are also issues with platform and standardization. Many of these could be solved if banks collaborate more closely with technology providers. But RBI continues to be wary of allowing telcos dabble in banking. A joint venture between the State Bank of India​ and Airtel fell through this week after RBI felt this was a back-door entry into banking without licences. The banks can’t roll out technology. The telcos can’t roll out banks. Who will roll out mobile banking?

Mint

Chief executives named for two public sector banks

New Delhi: The Centre has appointed Mr D Sarkar, Executive Director at Allahabad Bank, as the next Chairman and Managing Director of Union Bank Of India.  He is expected to assume charge in April. Mr Sarkar will replace Mr M.V.Nair, incumbent CMD, who is due to superannuate in end March.  The Government has also appointed Mr S.L. Bansal, Executive Director of United Bank of India as Chairman and Managing Director of Oriental Bank of Commerce (OBC). He will take over on March 1 next year and replace Mr Nagesh Pydah, who is due to superannuate in end February. The Finance Ministry has also elevated Mr B. Raj Kumar, General Manager at Andhra Bank, as Executive Director of Indian Bank. He will assume charge of his new role on January 1. Mr Kumar will replace Mr V. Rama Gopal, an incumbent executive director, who is due to superannuate on December 31. The Department of Financial Services in the Finance Ministry has also appointed Mr M.S. Raghavan, General Manager at Indian Overseas Bank, as Executive Director at Bank of India. He will assume charge of his new role on January 1. Both Mr Kumar and Mr Raghavan have been placed at the disposal of Indian Bank and Bank of India respectively as General Manager on attachment basis with immediate effect. Meanwhile, Mr K.K.Mishra, who was General Manager at Canara Bank, has joined as Executive Director of Andhra Bank at Bangalore today.

HBL

Perils of the banking system

The timing of your edit analysing the banking sector’s negative indicators is significant since it comes soon after the Reserve Bank of India’s reassuring Financial Stability Report 2011 (“Fearing financial feedback,” December 28). The regulator’s optimism stems from the robust numbers generated by banks over the last four quarters. But banks have been resorting to window dressing to cover their operations despite RBI’s repeated calls to stop such practices. Three sectors – real estate, infrastructure and power – contribute to 85 per cent of the total non-performing assets (NPAs). RBI has agreed to the restructuring of those exposures since such restructured loans do not figure under the NPA data. This greening practice has helped both the banking sector and the regulator. Some time ago, RBI mentioned the problems at the individual bank level, but it should be noted that over-leveraged sectors are a potential threat to the banking sector on the whole. So far, we have had only over-leveraged companies but now we have over-leveraged sectors, too. For instance, look at the aviation sector — promoters can simply walk out, while banks stand to lose everything. The growing disconnect between accounting profits and real profits is likely to ruin the banking sector. The remedy lies in surprise audits of bank branches with large corporate exposures on a random basis in addition to regular year-end audits.

K V Rao Bangalore (BS)

Tumultuous year for rupee

........The rupee will continue to see a period of high volatility, because of the bad news from the Euro zone. However, the domestic currency could appreciate to 50 in two months' time if the RBI maintains its dovish stance, as was seen in the last monetary policy.............

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Income tax deductions that you should not miss

As we approach the last quarter of the financial year, most salaried individuals would have received a deadline from their employers to submit their proof of investments that qualify for deductions from their taxable salary income. It can be a taxing affair if you don't plan ahead.................

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Interest rates to soften as economy starts to cool

…Some analysts said even if RBI hikes rates further to stem inflation, banks are unlikely to pass on the burden to borrowers given the poor demand for credit. Besides, any further hike would put more pressure on the asset quality of the banks by lowering the ability of companies and individuals to pay back their debts. “Even if RBI hikes rates now, banks will not be able to follow when the demand for loans is already low given the current high interest rates in the system,”………..

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Reversal of rate cycle seen as Union Bank blinks first

….“Even if deposit rates are lowered, it will take some time for any significant reduction in the overall costs. We will wait for the RBI’s rate action,”……

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NRIs can hedge currency risks with banks

The Reserve Bank of India has allowed non-residents to hedge their currency risk in respect of external commercial borrowings (ECB) denominated in rupees, with AD Category-I (authorised dealer) banks in India. In its notification on Thursday, the apex bank said the amount and tenor of the hedge should not exceed that of the underlying transaction. Besides, it should be in consonance with the extant regulations regarding tenor of payment or realisation of the proceeds. The NGOs (non-Government organisations) engaged in microfinance activities have been permitted to avail themselves of ECBs designated in Indian rupee under the automatic route from overseas organisations and individuals as per the ECB guidelines. The RBI said that the contracts, once cancelled, cannot be rebooked. The contracts may, however, be rolled over on or before maturity. On cancellation of the contracts, gains may be passed on to the customer.

HBL

NRE rate war could raise cost of funds for firms

As Kerala banks scramble to mop up NRI money following the Reserve Bank of India (RBI) freeing interest rates on December 16 to stem the massive slide of the rupee, the perennial challenge of bagging new customer deposits seems to be at bay for now. But cost of funds could rise significantly, as banks end up paying higher interest of 125-300 basis points on new deposits, say financial experts………….

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Kanakamahalakshmi Co-op bank to up presence

City-based Kanakamahalakshmi Cooperative Bank Limited (KCB) has got approval from the Reserve Bank of India to open branches across Andhra Pradesh. KCB initially started its operations in Visakhapatnam district and later got permission from the RBI to extend its jurisdiction to West Godavari district. “Now, we are eligible to start operations across the state. The bank is, therefore, planning to set up operations in other districts too,” P Raghunadha Rao, chairman of KCB, told Business Standard. It operates five branches at present of which three are in Visakhapatnam and two in West Godavari districts. Last fiscal, it took over loss-making Palakol Cooperative bank, and later opened a branch in Bhimavaram in West Godavari district. “This year we have opened two new branches at Anakapalli and Narsipatnam in Visakhapatnam district and are going to open two more branches by the end of February at Chodavaram in Visakhapatnam district and Eluru in West Godavari district,” Rao added. This apart, KCB has applied for licence to open two more branches in Visakhapatnam. The branches will begin operations before July. It is expecting significant growth in deposits on the back of these new branches. The bank has deposits of Rs 115 crore and advances at Rs 85 crore. “We are aiming to touch Rs 150 crore deposits by the end of this fiscal and next fiscal we would add another Rs 100 crore deposits,” he said.

BS

Insurance made child's play, with comic books

......The country's insurance regulator will use the power of comic books to drive home the basic concepts, needs and importance of insurance in one's life, starting right from the school level.........

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Banking grievances should be resolved at branch levels says Ashok Rawat

..........However, what is deterrent and what has not come out even in the Damodaran Committee report is that there are internal auditors in each bank wherein some banks say that if there is some compensation given to the customer, the branch manager will have to justify it. The justification is because if the branch manager compensates the customer, it would reduce the bank’s profit. This is a deterrent for branch managers while dealing with grievances. ........

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