Debt management office may be reality soon: Sources

Days after RBI Governor D Subbarao opposed the proposal to set up a debt management office (DMO), sources in the finance ministry have told CNBC-TV18 that, while more discussions would be held between the ministry and the RBI, the fact remains that the proposed DMO would indeed become a certainty at some point of time. Sources added that the RBI board may meet on May 19 to discuss the proposal. Once the central bank gives its final views on the matter, the government would begin the process of setting up a full fledged DMO. Finance Minister Pranab Mukherjee in his budget this year had announced setting up a DMO.

RBI clamps down on Maha coperative banks

The Reserve Bank's drive to tighten its control over co-operative banks has taken a political twist but CNBC-TV18’s Gopika Gopakumar reports that according to the RBI, this was just another day in the office. The RBI has hit a nerve, as it cracks down on co-operative banks. Its order to the Maharashtra government to supersede the Board of Maharashtra State Cooperative Bank (MSCB) and appoint administrators has political leaders like Maharashtra Deputy Chief Minister Ajit Pawar and Union Agriculture Minister Sharad Pawar miffed. Sharad Pawar blames the state government for the mess and Ajit Pawar says the Congress leadership has instigated this politically motivated action. The reaction is not surprising; say sources, since the bank was a source of funds to run cooperative sugar factories, spinning mills and dairy units.  Sources say that this action has been on the anvil for a while now. In 2005, both RBI and NABARD had issued directives to the bank asking it to reduce its exposure to the sugar sector. They said that 50% of its Rs 7,800 crore loan portfolio was to the sugar sector, and this was unacceptable. They had also directed the bank to reduce the number of board members from 57 to 20. The RBI order says as on March 2010, MSCB had a loss of Rs 800 crore and a negative net worth of Rs 144 crore. Also, its gross non-performing assets stood at 20%. it also said that the bank board had taken several decisions that were not in the bank's best interests. These irregularities came to light at NABARD's annual inspection in FY10. The NABARD report also highlighted a Rs 778 crore shortfall in provisions and said loans to sugar factories were rescheduled in November 2002, March 2005 and March 2007 without sufficient provisions. Sources say the Maharashtra government will now have to either call for elections within the next two months to appoint a new board, or bailout the bank. For the RBI, this is just one more in an ongoing crackdown on errant co-operative banks. This year alone, it has penalised 27 co-operative banks for various irregularities and sources say more cooperative bank boards could be superseded going forward.

50 better than 25 - Arjun Parthasarathy

The sharp upswing in March inflation, almost a percentage point over RBI forecasts, deserves a higher quantum of rate hikes. The RBI should raise repo and reverse repo rates by 50bps each as a signal of inflation veering sharply higher than estimates and as a signal of inflation being understated due to government’s fuel subsidy policies. RBI is scheduled to hold their policy meet in May 2011. The market is expecting a 25bps rate hike based on RBI’s wordings in their policy review in March, but will now start factoring in a 50bps hike after the March inflation numbers. A 50bps hike will be accompanied by a more benign inflation forecast as the RBI will then look to see the positive effects of rate hikes on inflation. The 50bps rate hike should then be taken positively by the market, as it decreases uncertainty on surprise hikes or jumps in inflation numbers. The market will also start looking ahead towards the end of rate hikes, which could just be a couple of policy reviews away. In the meanwhile if the government does raise fuel prices, inflation numbers become more reasonable and reflect reality.  The sensex will benefit from a 50bps rate hike as the currency will be under pressure to appreciate bringing in more foreign flows. The RBI is not alone in their anti inflation campaign. China saw inflation for March come in at 5.4% against expectations of 5.2%. China has raised rates twice this year to quell rising inflation expectations. The Yuan has benefitted from the rate hikes and has climbed by 4% over the last one year against the USD and is holding at 15 year highs. The Shanghai composite index has gained around 8% over the last three months, indicating that equity investors are expecting a soft landing for China.  Singapore allowed its currency to appreciate to a record high this week to counter inflation which is running at 5% levels. The Singapore dollar has gained around 10% over the last one year.   Inflation as measured by the WPI (Wholesale Price Index) came in at 8.98% for the month of March 2011 against economists’ consensus expectation of 8.38%. RBI had forecast an inflation rate of 8% for March 2011. The WPI growth was revised to 9.35% from 8.23% for the month of January. The March inflation number does not factor in the sharp rise in oil prices as the government has not raised fuel prices to pass on the oil price rise to the end user. The Indian crude basket price climbed to over USD 110/bbl in March up by 9% over the previous month. Global oil prices are higher by over 30% in the last six months. The government is running up a subsidy bill of over Rs 175,000 crores at current selling prices of fuel. The fuel subsidy is vastly understating inflation and the upside surge in inflation for March does not even remotely reflect the fuel price rise.

Non-food inflation reversal is a big concern: Subir Gokarn

Indian market has witnessed high volatility since a long time on rising crude oil prices and mounting inflation.  Most analysts feel that oil rates and inflation numbers are going to make it difficult for an emerging market like India to mark better-than-expected growth despite scoring higher on the GDP scale. In the opinion of the RBI deputy governor Subir Gokarn, rising crude prices have created more risks for the global economy besides inflation, which is hampering growth to a greater extent, reports CNBC-TV18 quoting Dow Jones. Gokarn is most concerned about non-food inflation reversal and sees investment momentum dipping down, which is again a worrisome matter. He said that he is trying to do a balancing act between growth and inflation and has been successful in not disrupting growth prospects so far. However, he added that there is a need to be watchful on monetary stance. “We can’t be insensitive to global and domestic growth risks,” he added.

Banking Bill could draw investors to old private banks

The proposed Banking Amendment Bill, if approved by in the Parliament, could trigger investor interest in some of the old private sector banks, say market participants. Among other things, the Amendment Bill seeks to remove the restriction on voting rights. Currently, voting rights for a single investor are restricted to 10% of the total, even if that investor owns more than 10% in the bank.  “Old private sector banks stand to benefit from the amendment bill,” said Chokkalingam G, ED—CIO, Centrum Wealth Managers. “If the existing cap on voting rights goes, many foreign investors will be keen to buy sizeable stakes in banks,” he said. The Reserve Bank of India is finalising guidelines for allowing corporates to enter the banking sector. Analysts feel non-banking finance companies (NBFCs) too would be interested in picking up stakes in existing banks to foray into banking business. Removal of 10% voting rights would encourage higher shareholding in a bank, by a single investor. The intention is to increase voting rights limit in proportion to shareholding. It is some kind of prelude to the new banking license,” said Bipin Karba, chief financial officer, at Dhanlaxmi Bank. However, Reserve Bank nod is needed for acquiring 5% or more share in banks..  “This move will certainly increase interest of NBFCs to get into banking business. They will try to acquire old private sector banks to kick-start banking business with an existing set-up,” said a head of an old generation private sector bank adding that his bank is ready to be acquired if the acquirer has a sound management background.  Old generation private sector banks are currently run by individuals, not by any anchor investors with majority stake holding. For example, Kotak Bank and IndusInd bank (new generation private sector banks) are promoted by Kotak group and Hinduja group respectively. However, there is no single promoter for banks like Karur Vysya or Lakshmi Vilas or Dhanlaxmi.  The amendment bill also proposes to allow banks to issue preference shares subject to RBI’s regulatory guidelines. “This is another avenue to raise capital other than plain equity or debt options. It is helpful to maintain higher capital adequacy ratio in times of rapid expansion in the loan book,” said Dhanlaxmi’s Karba.  Meanwhile, analysts look for further cues from the Amendment Bill once it is fully passed by the parliament.

Economists react to RBI's key rate hike by 25 bps

The Reserve Bank of India raised key interest rates on Thursday by a quarter point each, as expected, scrambling to contain inflation that has spread beyond food to fuel and manufacturing in Asia's third-largest economy.   The increase in key rates was the eighth since March last year. The repo rate, the short-term lending rate, was up 25 basis points at 6.75%. The reverse repo rate, the short-term borrowing rate, was hiked 25 basis points at 5.75%. The cash reserve ratio (CRR), the level of deposits that commercial banks must keep with the central bank, was unchanged at 6%. "This policy is very much on expected lines in terms of rate action, and no action on liquidity or SLR (statutory liquidity ratio). But the policy has now given more credence to domestic factors on inflation and so I expect the RBI to continue with its anti-inflationary stance and hike rates by another 25 basis points before it thinks of a pause. I don't expect bearishness in government bonds and swaps to materialise very heavily and markets will be mostly tracking liquidity and global developments," said Manish Wadhawan, director and head of rates trading, HSBC Mumbai. "The rate hike is basically on expected lines. The RBI has revised its inflationary expectations to 8% at March-end. So that is something that has influenced the rate hike decision. One or two more hikes cannot be ruled out (in 2011). It will depend on how inflation and the economy behave. RBI would not like to hurt growth," said KK Mital, head of portfolio management at globe capital, New Delhi "RBI is acknowledging the risks due to inflation and in turn a risk to growth. Its anti-inflationary stance will continue into the next quarter, and we expect it to hike rates further from hereon, said Rajat Rajgarhia director of research at Motilal Oswal Financial Services, in Mumbai "Today's hike was already priced in and despite external headwinds, which Today's hike might make other regional policymakers reconsider the pace of monetary tightening, RBI might not enjoy such luxury. We have penciled in +25bps hike every quarter, with risks that they could do more. Unfortunately monetary policy faces the complete burden of anchoring inflationary expectations and risks of generalization in price pressures seems more glaring than earlier," said Radhika Rao, economist, forecast PTE in Singapore "RBI is concerned about the international events and commodity prices. Inflation still remains a big challenge. I would expect RBI to hike rates by another 25 basis points at the next review," said Rakesh Rawal, head of private wealth management at Anand Rathi Financial Services, in Bangalore.

RBI to rewrite FEMA notification on foreign investment

The Reserve Bank of India (RBI) is rewriting the 11-year old Foreign Exchange Management Act's (FEMA) notification on foreign investment.  The revised FEMA notification No. 20 will reflect the changes made to the FDI policies over the last 11 years. It will touch on the issue of securities by persons residing overseas. The notification will define control and ownership of an Indian company as in Press Note 2. It will also remove ambiguity on the definition of capital by excluding warrants and partly-paid shares and non-convertible debentures.  The new notification will have seven schedules and three annexures.

RBI likely to raise repo rate to 7.5% in 2011: Expert

All eyes are on the monetary policy review by the Reserve Bank of India on March 17. However, there is a growing concern that RBI may further hike rates in this year.  In an interview to CNBC-TV18, Sameer Goel, Director, Head of Asia Rates Research of Deutsche Bank said the RBI may hike rates by 25 bps in March and subsequently increase it to 75 bps.   “There is more tightening to come from the RBI, starting including next week we think by 25 bps and probably by another 75 bps following that so take up the repo rate to 7.5%,” he said.  According to Goel, there are several structural factors which will keep liquidity still in deficit but an acute shortage of Rs 50,000-100,000 crore on a regular basis is unlikely.

The Muslim Co-operative Bank Ltd., Pune, Maharashtra – Penalised

The Reserve Bank of India has imposed a monetary penalty of Rupees one lakh on The Muslim Co-operative Bank Ltd., Pune, Maharashtra, in exercise of powers vested in it under the provisions of Section 47(A)(1)(b) read with Section 46(4) of the Banking Regulation Act, 1949 (AACS) for violation of instructions/guidelines of the Reserve Bank of India.  The bank had violated the RBI instructions by making donations over and above the prescribed limit of 1 per cent of the published profits of the bank for the previous year. The bank had violated the above instruction on five occasions between August 1, 2005 and July 27, 2009 and the percentage of donations ranged between 13.40 per cent and 18.20 per cent of the published profits of the previous year.  The Reserve Bank of India had issued a show cause notice to the bank, in response to which the bank submitted a written reply. After considering the facts of the case and the bank's reply in the matter, the Reserve Bank came to the conclusion that the violations were substantiated and warranted imposition of the penalty.

Banking Laws Amendment Bill: RBI to supersede PSBs

This is the second time that the Banking Laws Amendment Bill is being picked up by the cabinet. It was done about four to five years ago when the Reserve Bank of India (RBI) had sought that the voting rights be made commensurate with the actual shareholding in the bank. However, this was shot down at that time by UPA government which was seriously dependent on the left.  RBI’s argument has been that under the current rules RBI doesn’t allow any entity to have more than 10% shareholding in a bank. Therefore voting rights should be made commensurate with the shareholding because in any case no entity will have more than 10%. The rules currently say that no entity can have more than 10% voting rights in a private sector bank and in the public sector bank they can have a maximum of 1% voting rights. It doesn’t matter in the public sector banks because the government is always the majority shareholder. It doesn’t matter whether the other shareholding is dispersed or held in one block.  It matters in the private sector bank and RBI’s main argument was that in certain cases like Kotak or the Hinduja’s in Indus Ind, when the license is given they do have the power to hold more than 50% and they enter into an agreement with the RBI to bring it down in stages, however, because the banking regulation law says that no entity can have more than 10% voting rights, the shareholding of the dominant partner is divided into several companies which are really namesake companies.  RBI is uncomfortable conniving with such a practice which is really fraudulent. Hence, RBI has been asking to recognize it in the law itself. Last time it got shot down because of probable leftist pressures. It shouldn’t really change matters much; merely legalize what exists at this point in time. There is also the likely hood that this amendment will also give powers to RBI to supersede the private sector banks boards. State Bank of India chairman OP Bhatt has cheered the move saying that it will make investment in the banking sector more attractive. He says, “it is positive because you know if you have ownership and if you are not able to exercise. Therefore the benefits that come with that ownership then may be there are certain people who may be a little shy of investing in the banking sector, hence, going forward as we need more and more capital in the banking sector, this will sort of make it easy for those who are standing on the sidelines to put more capital into the banks as and when there are IPOs and FPOs.” While the jury is still out on whether business houses will be given bank licences, RBI Governor, D Subbarao says that financial inclusion will be one of the main criteria on which licences will be given. “We are planning to issue some licenses for new private sector banks and one of the criteria for evaluating the applications that we will get in due course of time, will indeed be their business plan for financial inclusion,” he says.

RBI releases its IT Vision Document for 2011-17

The Reserve Bank of India has today, placed on its website, the Report of the High Level Committee (HLC) on the IT Vision of Reserve Bank of India 2011-2017. The HLC report includes the IT Vision document for 2011-17.

Main recommendations in the IT Vision document 2011-17

Focus for RBI

• Transforming itself into an information intensive knowledge organisation
• Harnessing human resource potential, migration to enterprise architecture for IT systems
• Adopting appropriate business process re-engineering
• Conforming to internationally accepted standards and usage of business intelligence from data warehouse for optimal Management Information Systems (MIS) with effective Decision Support Systems (DSS)
• Improving IT governance, effective project management, evolving well defined information policies as well as information security frameworks, better vendor management and outsourcing practices
• Reviewing of IT processes for better alignment between business objectives and IT.

Focus for Banks

The Vision Document sets priorities for commercial banks to move forward from their core banking solutions to enhanced use of IT in areas like MIS, regulatory reporting, overall risk management, financial inclusion and customer relationship management. It also dwells on possible operational risks arising out of adopting technology in the banking sector which could affect financial stability and emphasises the need for internal controls, risk mitigation systems, fraud detection / prevention and business continuity plans. Although banks have deployed technology for transaction processing, analytical processing by banks is still in a nascent stage. The Report urges banks to work towards reaping benefits of technology in terms of cost reduction of small value transactions, improved customer services and effective flow of information within the banks and to the regulator. The Reserve Bank will begin implementing the recommendations of the HLC shortly.

Background

The Reserve Bank has played a pivotal role in this process of transformation of the financial sector with the use of IT.  As the central bank, it has also strived to create a conducive environment for promoting technological adoption encompassing the financial sector.  Since IT has evolved over the years it is important that the financial sector too reviews the developments in this area and adapt itself to them.  Over a period of 15 years, DIT has satisfactorily fulfilled most of the objectives set to it at the time of formation. It has been instrumental in designing, developing and implementing IT-based systems, which have helped in the discharge of various functions of the Reserve Bank. As the developments in IT have a bearing on the role, functions and organisation of DIT, it is necessary to review its objectives. To steer the financial sector to achieve the desired technological goals, the Reserve Bank has brought out two vision documents encompassing the periods 2005-08 and 2008-10.  As the tenure of the previous IT vision document was 2008-10, it was incumbent upon the department to prepare the next version of the vision document for the period 2011-17. Against this background, the Governor constituted a High Level Committee (Chairman: Dr K C Chakrabarty, Deputy Governor, Reserve Bank of India) to prepare the IT Vision for 2011-17.  The terms of reference for the Committee were:

1. Review of the contribution of DIT in establishment of IT infrastructure in the Reserve Bank and banking sector over the period of fifteen years;
2. Preparation of Information Technology Vision Document for the period 2011-17, taking into account requirements and expectations of banking system in general and Reserve Bank in particular;
3. Keeping in view the IT Vision Document, redefining the role, functions and organisation of DIT;
4. Specifying the role of the department in meeting the information needs of the Reserve Bank and the society at large

The report of the Committee discusses the context in which the IT Vision Document has been prepared and gives strategy for achieving the goals set in the document. It also delineates the review of the contribution of Department of Information Technology (DIT) in establishment of IT infrastructure in the Reserve Bank and the banking sector over 15 years. Further it discusses the information needs of the Reserve Bank and the society and finally it redefines the role, responsibilities and organisation of DIT.

Budget offers RBI more leg-room on monetary policy front

Reserve Bank Deputy Governor Subir Gokarn welcomed the budget proposals to check fiscal deficit by keeping a tab on the subsidy bill, saying they are the right steps towards fiscal consolidation and offer the central bank more leg-room on monetary policy front. "We have been saying that the more extended the fiscal position the more pressure it puts on demand and therefore more difficult it is to manage inflation...these measures give us some comfort," he told newsmen at an official briefing on budget. The Budget today proposed to bring down fiscal deficit to 4.6% next fiscal from this year's 5.1%. The Budget also proposed to bring down net market borrowing of the Government by Rs 40,000 crore to Rs 3.43-lakh crore in FY12. The measures to tackle fiscal deficit would help as the monetary measures taken by the rbi tend to get nullified by the high fiscal deficit, he observed adding, "the more there is reigning-in, the more room there is for monetary policy to act." Liquidity would not be volatile next fiscal as there would be lesser government borrowing which coupled with no major cash outflow from the system, as had happened earlier this fiscal due to the spectrum auctions. Gokarn also called the Government''s articulation about the change in food consumption patterns to fruits and protein- rich food as a step in the right direction, as such items have been fuelling food inflation

Hope govt adopts fiscal consolidation plan: D Subbarao

The government should adopt a plan of fiscal consolidation in the coming financial year to April 2012 and beyond, the Reserve Bank of India Governor Duvvuri Subbarao said on Thursday. Subbarao's comments come just over two weeks before Finance Minister Pranab Mukherjee releases his budget for the next financial year on Feb. 28. Persistently high food prices have been a bugbear for the Reserve Bank. The central bank at its January 25 credit policy had warned of food inflation spilling over to the general inflation process as it raised the reverse repo and repo rates by 25 bps. Today, Governor D Subbarao has said that it is difficult to balance growth and inflation. Recent spurt in oil prices and the crisis in Egypt would add to India's domestic woes. Subbarao said, "Spurt in oil prices on Egypt crisis will hurt India," adding,"we have to be prepared for a further spurt in oil prices." He said structural rigidity and rising commodity prices are pushing inflation higher. He also does not see much movement in prices of wheat and rice, adding that it is difficult to say that the government's welfare schemes are feeding inflation. Food inflation eased in late January to just over 13% after having reached a one-year high of more than 18% on December 25, due to soaring prices of onions and potatoes.  The RBI chief also urged for a consolidation in the Indian banking system. He said it is up to banks to come forward with merger proposals. He added that the size of Indian banks was smaller compared to their global peers. His advice to banks was to "set interest rates in a way that they do not hurt growth." He further said that the central bank would evaluate the business models of applicants looking to setup new banks. The Malegam Committee had recently recommended a 24% interest rate cap on loans paid by microfinance institutions. He said he would meet representatives of states and MFIs to discuss the Malegam report and work out modalities to implement the panel's recommendations. He also revealed that plans are in the works to form a panel to study a slowdown in foreign direct investment. Subbarao said that the panel would suggest ways to encourage FDI.