'Auditors should work to cope with new risks'

Accounting professionals and auditors of banks have to gear up to cope with newer risks and shocks in the banking and financial institutions segment, said K C Chakrabarty, Deputy Governor, Reserve Bank of India (RBI). In a keynote address, to a two-day international conference on the accountancy profession, he said they and auditors should work with the regulator to bring resilience to risk and shock in the banking sector. The bank management and auditors have to ask pointed and relevant questions on the adequacy of capital and advances to make banks pro-actively block risks and shocks. "The recent global financial crisis underscored the fact that risks and shocks are unavoidable. Taking risk is an inevitable part of the business of banks," he said. "If we have to improve the role of auditing profession in managing the resilience to risk and shocks, our entire audit system has to undergo change," he added. Accountants need to come out from the narrow consideration of accounting standards and come at specific answers. Similarly, auditors need a system-wise understanding of markets, products and their connectedness, especially in times of stress. Auditors have to move beyond narrow transaction audits and considered to look at the larger picture. The diversification of activities of banks from the traditional function of lending and borrowing to various other activities, including corporate advisory consulting and the technology-driven nature of the sector in modern times has changed the risk and shock profile of banks. It is also critical that periodical stress-test results are incorporated in the business and capital assessment and planning exercise of banks. The overall acceptable levels of expected (risk) and unexpected (shock) loss willing to be incurred by banks should be a management decision, based on rigorous and analytical assessment of available information, he said.

BS

VITALINFO - Never to miss.........

 

Banks viewing financial inclusion as an opportunity and not just obligation

The banking sector is poised to see significant changes in the immediate future. Reserve Bank of India ( RBI) & the government are taking several steps to strengthen and liberalise the Indian financial system. These steps are expected to transform and boost the banking sector further.......

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Coins' hoarders claim to be RBI dealers

AHMEDABAD: Hoarders and transporters of four tones of coins have got out on bail. The duo was arrested in connection with the huge consignment of coins headed for Indore in a truck. Commercial tax department officials had intercepted the truck and reported the matter to Reserve Bank of India (RBI). A city session court on Saturday released city-based trader Ravi Gupta and his accomplice from Chhatisgarh, Jeteendra Rajai, on bail. Surprisingly, the bail application submitted by the duo's lawyer before the court says: "We are RBI's official dealers for trading in old and mutilated currency notes and coins. RBI has written letters to different banks about us being official dealers. Exchange of small coins is a legal business so we take coins from RBI and send it to places or businessmen where it is needed." "After learning about the letter, in which the duo claimed that they are RBI dealers, when we spoke to RBI officials, they denied having any such dealers," said Ajay Tomar, joint commissioner of police, Sector-1. RBI, in its police complaint against Gupta and Rajai, had claimed that the duo was part of a conspiracy to misuse currency coins. RBI and other investigating agencies have cracked down on gangs that melt currency coins and use the metal as raw material for a variety of products. Gupta was sending the coin consignment to Indore using a fake dispatch order claiming that the consignment consisted of nuts and bolts. Rajai was the consignee of the coins, but his name was not mentioned in the order.Referring to the bank's letter submitted along with the bail application, an RBI official said: "The letter, dated June 29, 2010, issued by RBI just requests the manager of Punjab National Bank's Mascati Market branch in Kalupur to extend exchange facility of old and mutilated notes and coins to Gupta and six others. However, Gupta was blacklisted in February, 2011, when we suspected him to be misusing the facility for profit-mongering." The RBI official added, "As per the Indian Coinage Act 1906, coins of the value of less than one rupee are termed as 'small coin.' However, the currency coins found in 72 gunny bags are of Rs one, two and five denominations."

Coin cruise

Dec 27: A truck with four tonnes of currency coins intercepted at Dahod Checkposts by Gujarat commercial tax department official.

Dec 29: City-based trader Ravi Gupta and Chhattisgarh-resident Jeetendra Rajai goes to the tax department claiming themselves as dealers of RBI and asks them to release the seized consignment. However, the plot fails when tax sleuths call RBI officials to verify their claims.

Dec 30: RBI files a police complaint against Gupta and Rajai at Naranpura police station. RBI accuses the duo of fraudulently hoarding currency coins and misusing them.

Jan 2: A local court turns down bail application of the duo. During hearing, investigating official tells the court that the custody of the seized coins is yet to be secured and that they are lying at Dahod checkposts.

Jan 6: City session court hears bail application of the duo. Investigating officer tells the court that they were yet to take the coins in their custody. The duo's lawyer submits a letter claiming that Gupta is a registered RBI dealer and so he can trade in coins. The court grants them bail in an order on January 7.

Jan 8: A team of Naranpura police station officials leaves for Dahod to bring the coins and truck to Ahmedabad. Officials open one of the 72 gunny bags to find Rs 2 coins packed in small packets inside.

TOI

Now, a malware that can steal your bank account

....According to Trusteer, a security company which detected the attack, the software, which steals your bank passwords to give access to your account, waits for you to enter the same banking details before "adjusting" what you see. The idea is to gives criminals more time to use debit card details on fraudulent transactions without the person realising it's happening,.....

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RBI to ask banks to have ombudsmen in zones

To prevent the recovery agents from harassing customers and to stem the tide of customer complaints, Reserve Bank of India (RBI) will shortly direct all banks to have independent banking ombudsman at all zonal offices and at the central office. The central bank expects to add about 500 banking ombudsman all over India to channelise complaints from all corners of the country. The banks could appoint advocates or retired bank officials who will be paid by the bank but work independently and report directly to the RBI regional ombudsman. The State Bank of India, the largest bank by bank branches, for example, will alone have to set up 75 banking ombudsman one each at its zonal offices. An RBI official told Financial Chronicle that the present banking ombudsman scheme has limitations as it has only 15 banking ombudsman one in each of its regional offices all over the country. “We feel that this network is to small to capture all the complains that the customers have.” In 2010-11, though the total number of customer complaints against banks declined by 7,992 to 71,274, there was a large number of complaints with regard to direct selling agents harassing customers against new private sector banks and foreign banks. “A point to be noted at this juncture is the concentration of complaints with regard to DSA against new private sector banks and foreign banks,” RBI in the latest Banking Trends report has noted. “In 2010-11, more than 90 per cent of total complaints relating to DSA were received against foreign banks and new private sector banks. Further, more than 50 per cent of the complaints related to hidden charges were received against private sector banks and foreign banks. Such complaints were relatively less in case of public sector banks. However, more than 95 per cent of the complaints regarding pension were received against public sector banks.” Due to the large network and a large number of branches in rural and semi-urban areas, the public sector banks have seen an increase in complaints against them in 2010- 11, over the previous year, whereas the number of complaints against private sector banks and foreign banks witnessed a decline over the same period. Number of complaints per branch was particularly high for foreign banks at 22.34 in 2010-11. In 2010-11, almost one fourth of the total complaints were received against credit/debit/ATM cards.

FC

Banks resorting to value-dating come under scanner

The practice of banks resorting to value-dating of credit in the customer's account to avoid payment of penalty has caught the banking regulator's eye. It has asked banks to put up a stop to this practice forthwith and strictly adhere to the extant instructions of paying penal interest at the stipulated rate to the customers' suo motu without waiting for a claim from customers. Value date is the date on which an account holder can use funds from deposited cheques that have passed through the bank's clearing cycle. Under the extant RBI guidelines, banks are required to pay penal interest at the current RBI LAF Repo Rate (8.50 per cent) plus two per cent for the period of delay/till the date of refund as the case may be to the affected customers. These measures on payment of penal interest for delayed credit/refunds of national electronic funds transfer (NEFT) transactions were instituted with the objective of enhancing customer service and efficiency parameters of the system in view of large-scale growth in electronic payment transactions. Banks have been asked to keep contact details of their CFCs updated at all times and also advise changes, if any, immediately to the National Clearing Cell for updating the central directory placed on the RBI Web site. Emphasising that CFCs are the first point of contact for aggrieved customers and play a vital role in success of NEFT system, the RBI observed that in many instances, the CFC contact details given are non-functional/out-dated and/or there is no response from these numbers or mail-ids, thereby defeating the very purpose of setting up such centres. Banks should ensure that calls made/e-mails sent to CFCs are promptly attended to and sufficient resources are dedicated for the same. Compliance to this effect should also be submitted to the Board of the bank in its next meeting and a copy of the same should be sent to the RBI immediately after the board meeting.

HBL

Private banks more prone to fraud

The public sector banks (PSBs) may have a 75% market share, but the number of banking frauds by private banks is five times that of PSBs. Information obtained under the Right to Information (RTI) Act from the Reserve Bank of India (RBI), revealed that while private banks, including foreign banks, have reported about 15,000 cases during 2010-11, PSBs, comprising 19 nationalised banks, including the State Bank of India and its six associates, recorded 3,700 cases. While PSBs lost approximately Rs2,500 crore, their better equipped counterparts in the private sector lost Rs1,100 crore. According to data released by the RBI as on June-end 2011, PSBs accounted for 74.6% of bank deposits while private sector banks had only 18%, with the rest of the funds lying with regional rural banks and foreign banks. Interestingly, it is the private banks, including foreign banks, which stand for perfection and are known for prompt service that appear to be more prone to banking frauds. During 2010-11, the ICICI and HSBC banks put together have reported 13,067 cases. SBI tops the list of PSBs with the highest number of fraud cases reported in the current financial year.
SBI reported 784 cases involving Rs298 crore for the year 2010-11, the RTI query revealed. ICICI Bank alone accounted for almost half of the total frauds reported to the RBI. Of the 5,319 cases reported in the current financial year (till September) by 29 private banks, a whopping 3,304 were from ICICI. Similarly, in 2010-11, ICICI reported 10,684 of the total 19,845 cases. The second highest numbers of cases were reported by HSBC at 2,383 for the same period. With the advent of mobile and internet banking, the number of banking frauds in the country is on the rise as banks are losing money to the tune of Rs2,500 crore every year. While the figure for 2010-11 was Rs3,500 crore, for the current financial year (till September) it is about Rs1,800 crore. Further, state-wise list of information on banking frauds shows Maharashtra reporting the highest number of cases to the RBI. In the last financial year, banks in the Maharashtra reported 1,179 cases with Rs1,141 crore being lost to such frauds. Maharashtra is followed by Uttar Pradesh with 385 cases during the same period.

DNA

Eleven executive directors in race for six CMD posts

As many as 11 Executive Directors are in the fray to fill the six posts of Chairman and Managing Director (CMD) of public sector banks that will fall vacant in financial year 2012-13. A top-level panel, comprising a RBI Deputy Governor, Financial Services Secretary as well as certain external experts, is to meet here on January 12, to conduct interviews for the top slots in six public sector lenders, sources said. The public sector banks where the incumbent chief executives are to retire during the next financial year are Bank of Baroda, Bank of India, Canara Bank, Allahabad Bank, United Bank of India and Dena Bank. This panel will shortlist the names and also do allotment of banks. The names are expected to be finalised the same day after discussions with the RBI Governor. The names of the selected candidates would be forwarded to the Union Finance Minister and then to the Appointments Committee of the Cabinet, sources said. After a gap of two years, the panel may also look at the possibility of lateral movement of existing CMDs to the large banks (category A banks – over Rs 3 lakh crore turnover). In the next financial year, the CMDs of three large banks (Category A) — Bank of Baroda, Bank of India and Canara Bank — are to superannuate, raising expectations that some existing CMDs in mid-sized banks may get to move over to these banks. Over the last two years, the Government and the RBI have opted to elevate Executive Directors to the posts of CMDs rather than looking at lateral movement of CMDs.

HBL

Basel Norms

This refers to “Basel-III overlooks our growth needs” (Business Line, January 6). Basel-III provides transparency, accountability and minimises the risk of lending loans, thus reducing NPAs. The management should train the concerned staff towards implementation of the Basel norms and the need to adhere to guidelines so that the financial structure is strong and will withstand global competition.

- Vedula Krishna (HBL)

Allopathy, not apathy

..... the current bout of policymaking—allopathic economic policy—is countering the tendencies of the economy, but is not addressing the pathological problems or leveraging the structural strengths of the system. For instance, the measures taken to increase the inflows of foreign savings and help “broaden the class of investors and provide more depth to the market” can be of little macroeconomic consequence when the rate of savings in the economy at present is a staggering 36% of gross domestic product.....

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Strengthening the financial system

..........Basel-III norms seek to build a strong banking system with adequate capital, sufficient liquidity in times of stress, and reduced systemic risk in the long run, but these norms are bound to put pressure on the banks to raise capital in uncertain macro-economic conditions, particularly in a period when the government's finances and ability to meet the incremental capital needs are already stressed.

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Specifics of risk management strategies for hedging

Edited excerpts of the speech delivered by Shri V.K.Sharma, Executive Director of RBI at Bangalore Chamber of Commerce and Industry on January 5

..................Therefore, to my mind, nothing conveys and expresses the Risk Management mantra more trenchantly than the following: “Just as you make friends when you don't need them, not when you need them and certainly not after you need them, so also you hedge when you don't need it, not when you need it and certainly not after you need it”. Complete internalisation and ingraining of this holistic risk hedging culture, attitude and temper by business and industry will, in equilibrium, reduce cost of both debt and equity capital by reducing volatility of ROE as markets will perceive them as much less risky and more safe. If they do this, they will exemplify the following fairy tale ending viz. “And they lived happily ever after”!

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Facing a twin challenge

....A sound non-inflationary growth stimulus in the coming budget can contribute to building consumer and investor confidence and help RBI tackle inflation and manage external value of the rupee. A performance audit of fiscal stimulus package in the coming budget will be necessary to assess how far the target of growth with controlled inflation is successful......

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Basel-III norms: Government must gear up for financial reforms

The objective of the draft guidelines issued by the Reserve Bank of India (RBI) on implementation of Basel-III capital regulations is unexceptionable. It is to "improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillovers from the financial sector to the real economy". After the 2008 financial crises, the ripple effects of which we are still living through, few will dispute this is a critical objective. It is only appropriate, therefore, that the latest guidelines should introduce new buffers like leverage ratios and counter-cyclical capital buffers. Thus, banks have been directed to build capital buffers during normal times that they could draw down when losses are incurred during periods of stress. The crisis threw up new kinds of risks such as those posed by inter-connectedness among large financial players and deterioration in counter-party credit risk. These did not figure in Basel-II; but, rightly, find place in Basel-III. The guidelines also try to improve the quality of capital by doing away with ingenious instruments that masqueraded as equity in the past. Consequently, tier-I capital will henceforth predominantly consist of common equity. The net effect is that banks will have to find additional sources of capital. This is not going to be easy even though banks have been told to ensure compliance in a phased manner commencing January 2013 and ending January 2015. The government's unwillingness to reduce its stake in public sector banks (PSBs) means the additional capital for PSBs will have to come from public coffers. Given the opportunity cost of this additional capital, especially when government finances are very constrained, it is far from certain the cost-benefit trade-off justifies such infusion.  Opting out is not an option. As one of the members of the Basel Committee, India has played a key role in developing the Basel-III safeguards. The government must be prepared to dilute its stake down to 51% in state-owned banks, and churn other assets. Sell holdings in other public enterprises and slash subsidies, use the proceeds to infuse fresh capital in the banks.

ET

Rate cut unlikely, but CRR may be cut

..... A rate cut could be a couple of months away, but RBI may use other monetary tools such as a cut in CRR to improve liquidity and see through the government’s hefty borrowing programme......

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A new low on earnings front likely

.... Although the earnings of Indian firms are unlikely to bring cheer anytime soon, the silver lining is that depleting margins could provide RBI with a cue to start cutting policy rates significantly.....

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Three regulatory changes that will make NRIs happy

.... RBI has accepted some of the recommendations made by the committee headed by K.J. Udeshi, which was set up to review the facilities for individuals under the Foreign Exchange Management Act (Fema), 1999. The apex bank has liberalized certain provision of Fema, which besides helping NRIs would also help resident Indians......

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Recovery of loans

It is a welcome move by the Reserve Bank of India in asking banks to acknowledge MSME (micro, small and medium enterprises) loan applications. At the same time, the central bank should strengthen banks, especially public sector banks, in the recovery of these loans. These loans most often become NPAs and the poor bankers have limited ways to recover them. Even securitisation is not helping banks in the recovery of loans. Also, the rights are not exercised by the genuine and needy borrowers. Not only MSME loans, even crop loans are not taken by the needy. There is no income-generation in the loans given to self-help groups. The RBI should ensure that loans are disbursed only to the really needy. If strict legislation with regard to recovery is enacted, any number of rights can be given to borrowers and the banks can be made accountable.

- I. Rama Rao, Visakhapatnam (HBL)

Bank on banks for better returns

.... To contain inflation, the RBI has raised rates 13 times by 425 basis points (bps) and, as a result, FD rates reached close to 10 per cent towards the end of last year. But it is almost certain that such a high rate is unlikely to continue and investors will be wiser if they rush to banks now.......

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Will RBI go for a Rate Cut Just Yet?

For industrialists and consumers facing uncertain times, an imminent cut in interest rates by the Reserve Bank of India appears to be the proverbial light at the end of the tunnel. But the tunnel may be longer than it appears. A cut in policy rates, promised by RBI Governor Duvvuri Subbarao, will begin to ease the pressure from next fiscal, but the revival of investments and return to 9% economic growth may take longer as the economy nurses its wounds. Just as taming inflation took longer than expected due to the RBI’s ‘baby steps’, the revival of animal spirits could be equally prolonged as the government gets its act together. “An interest rate cut is just one of the pillars to boost revival in the economy,” says Romesh Sobti, CEO at IndusInd Bank. “There are a variety of factors that would fuel growth, which include fiscal measures, and excise rate cuts.” Squeezed by rising funding costs for nearly two years and administrative inaction, industry is looking to the RBI for relief. The central bank has ruled out raising interest rates, but it is not saying when it will begin easing. Economic activity is not as weak as the dodgy industrial output numbers suggest. Costly crude oil, suppressed inflation in the form of administered prices of items such as coal, deteriorating fiscal position and a weak currency are delaying the cut. After 13 increases, the repo rate — the rate RBI charges banks for lending — is at 8.5%. “The monetary cycle has peaked,” RBI Deputy Governor Subir Gokarn said last week. “That does not necessarily say that a quick reversal is in order because inflation risks are still visible, still high.” HSBC’s Purchasing Managers’ Index (PMI) for India, more relied upon than the government’s Index of Industrial Production, rose to 54.2 in December, from 51 in November. It was driven by a jump in output growth at 55.8 compared to 50.5 a month ago. New orders were at 57.9, up from 52.8. Services sector activity accelerated to 54.2 from 53.2 in November. “It is premature to replace inflation with growth as the dominant policy concern,” said Leif Lybecker Eskesen, chief economist for India and Asean at HSBC.  “A rate cut is, therefore, not just around the corner, but will have to await a sustained decline in core and not just headline inflation. This will take a while to materialise.”  Not many are betting on a rate cut when the governor announces the quarterly monetary policy review on January 24, though falling food prices could take the Wholesale Price Index closer to the RBI’s target of 7% by March, from 9.11% in November. “With the sharp depreciation of the currency constituting a de facto loosening of monetary conditions and the fiscal slippage expected to be strong, policy is looser than commonly thought,” said Sajjid Chinoy, economist at JPMorgan. “In this environment, it would be imprudent for the RBI to start easing monetary policy. We don’t expect any rate cuts in the first quarter of 2012, at least.” Unlike in the previous downtrend after the 2008 credit crisis, commodity prices are not falling enough to substantially ease inflationary pressure and the sliding Indian rupee has negated any declines. Crude oil, India’s main import, is up 18% in the last year. The 16% fall in the rupee against the US dollar is amplifying the rise in price. “The rupee sustained sharp losses in 2008-09, but at that time there was little passthrough to inflation as global commodity prices collapsed concurrently,” said Taimur Baig, economist at Deutsche Bank, who doesn’t expect a cut this month. “In contrast, energy price inflation continues to be a major risk this year. We think the RBI has become more concerned about growth over the past six months, but not to the extent of seeing the need for immediate easing measures.” But with economic expansion, which fell to 6.9% in the September quarter from 8.5% a year ago, expected to slow further as the European crisis dampens exports and state elections resulting in lack of policy measures, there could be room to cut interest rates by March. “We expect the RBI to cut rates by March,” said Indranil Sengupta, economist at Bank of America Merrill Lynch. “Most lead indicators suggest growth is slowing,” he said, adding a delay in cutting rates could lead to the RBI falling behind the curve.  By then, Finance Minister Pranab Mukherjee might have also announced the Union Budget for the next financial year, which could address the concerns on deficit where the government will miss the 4.6% of the gross domestic product target by a wide margin this year. Although various different factors point to better times, the industry is looking for concrete action before readying to cheer. “The Deputy Governor has indicated that we have reached the ceiling on interest rates. That’s good, but he hasn’t told us when he is going to do that (easing),” said Anand Mahindra, vicechairman and managing director, Mahindra & Mahindra.

ET

Interest rate cuts are just a matter of time

.... In terms of expectations, I think it is going to be a 50-50 kind of probability because RBI may want to look out for more evidence of growth slowing. I think that’s going to more or less happen. I think growth is going to meaningfully disappoint over the next two to three months, but it’s a matter of time before RBI cuts rates. Be it now or be it later in the year, perhaps sometime towards the end of the first quarter, but I would expect them to cut rates at some point over the first half of this year.........

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Think global but act local

..................A redeeming feature of the reform scenario is RBI's introspection and transparency. It has admitted openly the mistakes committed and set out to correct distortions. The interest rate structure is a case in point. RBI's call for total financial inclusion articulated forcefully in this Report, one hopes, will spur all PSBS to achieve the goal.

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Volatility eases in currency market after RBI measures

.....“The real effective exchange rate that measures the rupee’s value against major currencies shows that the rupee is moving towards a neutral territory,” Gokarn said, adding that RBI does not want to protect any level but will check the volatility................

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