Credit card grievances relating to overcharging and issuance of unsolicited cards accounted for bulk of the complaints received by the banking ombudsman during 2009-10. The banking ombudsman has received 18,810 credit card complaints, which accounted for 24 per cent of the total grievances received during 2009-10, data released by the Reserve Bank of India (RBI) showed. The number of complaints has been increasing year-on-year basis. In 2008-09, the ombudsman received 17,648 complaints, while it stood at 10,129 in 2007-08. The RBI had launched the banking ombudsman scheme in 2005 to redress grievances of customers. "A general source of these complaints continues to be the difficulty in accessing the credit card issuers and the poor response from the call centres. Simply put, this is the issue of non-transparency and mis-selling," the RBI said. The types of card-related complaints consists of items like issuance of unsolicited credit cards and recovery of premium charges, charging of annual fee in spite of being offered as 'free' card, it said. The ombudsman also received credit card complaints for disputes over wrong billing, abusive calls, excessive charges, wrong debits to account, non-dispensation of money from ATM, among others. "Complaints relating to credit cards (comprising 24 per cent of the total complaints in 2009-10 as compared to 25.5 per cent in 2008-09) show a declining trend this year," the RBI said. The credit card complaints also include complaints related to debit cards and ATM cards also. The ombudsman has also received complaints relating to failure on commitments made by banks, which include delay in providing banking facilities. The ombudsman received 11,569 complaints for failure to meeting commitments during 2009-10, which was 15 per cent of the total complaints received. "This points to the lack of sensitivity, transparency... As these complaints mostly relate to basic banking facilities, banks need to address these issues on priority basis without any demur," the RBI said. Further, it has also received 6,612 complaints related to loans and advance, 1,609 complaints against direct selling agents or recovery agents. In total during 2009-10, the ombudsman has received 79,266 complaints, higher than 69,117 received in the previous year.
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Wednesday, February 2, 2011
RBI wants escrow accounts to protect home buyers
Is your property developer delaying construction or possibly using your booking amount or funds from banks for purposes other than building? Help could be at hand with a new measures proposed by the Reserve Bank of India (RBI), which has advised commercial banks to create escrow accounts to ensure transparency. Sources in public sector banks told HT that the RBI had taken steps to push for escrow accounts following recent instances of abuse of money meant for home building in the home loan finance scam. The money was channelised for other activities. An escrow is an account held by a lender or neutral third party into which either a homeowner pays money or deposits assets. In the case of real estate purchases, the escrow is created by a tripartite agreement between the developer, the banker and the home buyer and the amount needed to complete the project is calibrated with the progress of construction. Several banks including HDFC and Punjab National Bank have started directing funds to certain real estate projects through escrow accounts.
RBI rejects Karnataka banks' plea on coffee loans
The Reserve Bank of India has not ‘favourably' considered the Karnataka-based banks' request for retention of asset classification status of Coffee Debt Relief Package (CDRP) loans as on June 30, 2009, said a top regional official of RBI at the State-Level Bankers' Committee (SLBC) – Karnataka meeting held on Monday. Mr P. Vijaya Bhaskar, Regional Director, Reserve Bank of India, Bangalore, informed bankers at the 115 {+t} {+h} SLBC meeting that the RBI was not able to ‘favourably consider' their request since asset reclassification cannot be considered on a retrospective basis. Banks in Karnataka have an exposure of about Rs 1,400 crore to coffee growers in the State. According to bankers, such a step would lead to the increase in the level of NPAs under coffee loans, and that banks would have to make provision for these loans. Besides, they would also now have to provide for extra provisioning in addition to normal provisioning for diminution of fair value in case of restructured NPAs.
MFI law could be stalled
The proposed Microfinance Bill may not see the light of day, as the finance ministry is having second thoughts on coming out with legislation to regulate the sector. This comes in the backdrop of recommendations by the Malegam committee, which said the Bill would cover only about 8 per cent of the outstanding microfinance loan portfolio. “Our Bill is looking at only 8 per cent of the lending industry. We are yet to take a decision on whether it should be introduced. But if there is a Bill, it will be in harmony with the central bank’s regulations,” a finance ministry official, who did not wish to be identified, told Business Standard. He said the ministry would take a final call on this after the Reserve Bank of India (RBI) decided on the Malegam report. The committee, constituted by RBI to look into various issues related to microfinance institutions (MFIs), has said that 58 per cent of the outstanding loan portfolio in the sector is owned by the self-help groups- bank linkage model and 34 per cent by designated non-banking finance companies-microfinance institutions (NBFC-MFIs). Both banks and NBFCs are outside the scope of the proposed Act and regulated by RBI. Organisations not regulated by RBI account for only 8 per cent of the loan portfolio. Since cooperative societies, which give members voting rights, are excluded from the provisions of the proposed legislation, this percentage may be even lower, the committee said. While the committee, headed by Y H Malegam, a senior member of RBI’s central board of directors, largely agreed that the entities not governed by the central bank should come under the Microfinance Bill to eliminate regulatory gaps, a member of the panel, Shashi Rajagopalan, disagreed.
'Banks need to strike a balance between loans & deposits'
At the morning meeting with bankers before announcing the January monetary policy, RBI governor Duvvuri Subbarao had a few simple, curt messages to the CEOs. Increase deposits and go slow on loans, or else be prepared to face the music. His concern stemmed from a number derived from FY11 9-month data submitted by banks. It said that incremental credit-deposit ratio of the banking industry was more than 100%. Simply put, it meant that banks gave more loans than deposits received during the period. As loans outstripped deposits, banks borrowed overnight and short-term money from RBI and money market to lend. It was a risk, Mr Subbarao felt, they should not be taking. The central bank rarely spells out its concerns in too many words. But bank chiefs were quick to sense what's expected of them. RBI thinks that banks, largely to preserve their profits, have been slow in raising interest on deposits which reflects their cost of funds. As they dragged their feet, there was a growing mismatch in bank books which was not immediately visible to shareholders, many of whom felt that a lower fund cost meant great business sense. But the banking system was slowly exposing itself to a risk that disturbed Mr Subbarao. As banks kept interest rates low, savers moved money to other avenues like small savings where it gets locked for a long time. RBI has partly blamed banks for the liquidity crunch which is roughly measured by the amount that banks borrow daily from it; that number for many months has been around Rs 1 lakh crore. Money so borrowed was cheaper than deposits, but it was short-term money that went to fund longer duration loans. In the financial year to December, bank credit rose 16% while deposits moved up by 10%. RBI Deputy Governor Subir Gokarn was forthright when ET reporters met him. "We have articulated our belief that this is not an individual bank's issue... the disparity across banks leads to some sense of risk of instability and ultimately, it's the question of how credit is being financed by overnight borrowing from the repo window. It's not sustainable," he said. What also worried RBI was the widening gap between the average tenure of loans and deposits. "On the one hand, the maturity of deposits has come down substantially - more than 70% of these are of around two years. But on the lending side, if you consider infrastructure, it needs financing for a longer term," pointed out Anand Sinha , Deputy Governor, RBI.
Banks must accept 25p coins till June
The Reserve Bank of India has asked state-run banks and some private lenders to accept 25 paise coins for exchange until end-June 2011. The humble 25 paise coin represent 'four annas' of a bygone era will soon be history. The RBI has said that coins with a denomination of 25 paise and below will be pulled out of circulation by June 2011 after which they will cease to be legal tender. Raging inflation has reduced the monetary value to such an extent that it will not buy even the cheapest lozenge. Also, the cost of minting these coins is higher than their value because of which they are no longer minted. Although many traders already refuse to accept payments in small change below 50 paise, these coins are currently legal tender and it is an offence to refuse them. The RBI has for some time now been working on a strategy for the reverse flow of coins from circulation before withdrawing them as legal tender. Having now put in place a process, the RBI has asked 45 banks, including all government-owned banks, which maintain small coin depots to arrange for exchange of coins. The general public can exchange small denomination coins at any branch of these banks. The government had earlier under Section15A of the Coinage Act, 1906 decided to withdraw the coins of denomination of 25 paise and below from circulation with effect from June 30, 2011. From this date, these coins shall cease to be legal tender for payment as well as on account. Some time back, the RBI had recommended that the government should withdraw coins below 50 paise. The central bank had also asked for coinization of low-denomination notes of up to Rs 10 since these are high velocity notes and have to be replaced very frequently.
Tuesday, February 1, 2011
RBI shuffles top deck
Following Anand Sinha’s elevation as Reserve Bank of India (RBI) Deputy Governor, S Karuppasamy has been promoted as Executive Director to fill the vacancy. Prior to this, Karuppasamy was the Regional Director (Kolkata). Now, he will look after the Department of Expenditure and Budgetary Control, besides Information Technology, Urban Banks and Legal affairs. Mint Road sources said the Legal Department had been brought under an ED after a long time. Earlier, it was directly being looked after by a Deputy Governor. Earlier this month, V K Sharma, the senior-most ED, was relieved from the Department of Urban Banks, while the Department of Information Technology had no ED earlier. Sources said the Department of Banking Operations and Development, that of Payments and Settlement and the Financial Stability Unit would have no ED as of now. The Chief General Managers of these three departments will directly report to their respective Deputy Governors. As an Executive Director, Anand Sinha was looking after Banking Operations and Development, Financial Stability and the Department of Expenditure and Budgetary Control. Karuppasamy, the senior-most among Chief General Managers, was interviewed in November by a search panel comprising the Governor and Deputy Governors. He has three years of service left and is to retire in January 2014. To be eligible for the post of ED, a Chief General Manager should have three years of residual service. The retirement age for all RBI employees is 60. The central bank, which has seven EDs, will see one more vacancy in February, with C Krishnan’s term coming to an end. Interviews were conducted last week to find a replacement. R Gandhi, a Chief General Manager looking after the Department of Currency Management, and P Vijaya Bhaskar, Regional Director (Bangalore), had appeared for the interview. The chief executive officer’s post in the Deposit Insurance and Credit Guarantee Corporation (DICGC) – a wholly owned subsidiary of RBI – has been lying vacant since October 31 after H N Prasad’s retirement. For the past few years, DICGC has been headed by an ED-rank officer. In May, Deputy Governor Shyamala Gopinath will retire. She will be replaced by an ED.
Reserve Bank of India goes digital
The Reserve Bank of India is looking to clear its offices from the heavy paper-load and digitise all the documents lying in its various offices. The move could be a humongous exercise as RBI is looking at digitisation of approximately 30 lakh paper documents and it might take more than a year to complete the task. However, once complete, the exercise could help the RBI to a great extent in its day-to-day operations as a full digitisation of its entire archive of documents would cut down heavily on the time taken in finding the relevant documents for any of its future actions. Going paper-less has already become a trend in the banking sector with banks encouraging their customers to opt for email account statements, instead of the traditional paper documents.To meet its digitisation goal, RBI has sought requests for proposals (RFPs) till February 11 from the entities capable of digitising the paper documents at all its offices. The RBI also held a pre-bid meeting on January 28 to explain the queries raised by potential bidders who would be required to first digitise the paper documents, provide training to the staff and also supply the required software and hardware products to meet the digitisation goal. The RBI told the potential bidders that approximately 10,000 pages would be required to be scanned per day and the exercise could involve digitisation of approximately 30 lakh documents.
Top bankers speak at Banking Summit 2011 organised by JIM Noida
Jaipuria Institute of Management, Noida recently organized Banking Summit 2011. The theme of the summit was 'Banking in India: Issues and Challenges'. The summit successfully provided a one to one interactive platform to MBA students who shared their doubts and fears with renowned Banking industry leaders. Jaipuria Institute of Management, Noida recently organized Banking Summit 2011. The theme of the summit was ‘Banking in India: Issues and Challenges’. The Summit was launched by the top level personalities of the Banking Industry and the academia. The program commenced with lighting of the lamp by Mr. Sandip Ghose, Regional Director, RBI; Dr. Anup K Singh, Director, JIM Noida and Dr. JD Singh, Director General, Jaipuria Institute of Management. The summit successfully provided a one to one interactive platform to MBA students who shared their doubts and fears with renowned Banking industry leaders. The esteemed industry leaders shared their thoughts and experiences with the keen management students. The keynote speakers for the inaugural session were Mr. Sandeep Ghose (Regional Director, RBI), Mr. Ranjan Dhawan (Chief General Manager, PNB, New Delhi), Mr. R. C. Khurana (General Manager, Bank of India, New Delhi) , Mr. Sunil Pant (Chief General Manager, State Bank of India, New Delhi) , Mr. Rajnish Kataria (Director, National School of Banking Studies and Corporate Management ), Mr. S. C. Sinha (Executive Director, Oriental Bank of Commerce, New Delhi). The session was inaugurated by Mr. Sandip Ghose, Regional Director, RBI. According to Mr. Ghose, the two challenges that lie in future for the banking sector in India are: Human Resources Management and Financial inclusion. “The banking sector will have a great shortage of human resources in future as there will be a huge number of retirements within the next 5 years,” said Mr. Ghose. He asked all the budding managers to “put on their learning hats” and sharpen their reading, writing, speaking and listening skills to gear up for a banking job.
India's reserves more vulnerable to reversal of capital: Subbarao
‘Move towards capital account convertibility will be gradual’. India’s foreign exchange reserves are more vulnerable to reversal of capital inflows as compared to countries with current account surpluses, Reserve Bank of India (RBI) Governor Duvvuri Subbarao said on Monday. “Our reserves comprise essentially borrowed resources, and we are therefore more vulnerable to sudden stops and reversals as compared with countries with current account surpluses,” Subbarao said in a speech at the Special Governors’ Meet in Japan. Subbarao said it was important to distinguish between countries whose reserves were a consequence of current account surpluses and countries with current account deficits whose reserves were a result of capital inflows in excess of their absorptive capacity. In the third quarter review of the monetary policy, RBI had expressed discomfort over financing the current account gap with short-term capital inflows. As a source of funding the current account gap, FIIs posed a threat due to their unsustainable nature, RBI said. India’s current account deficit hit an all time high of $15.8 billion in July-September. Subbarao said capital account convertibility was not a standalone objective and the move towards it should be gradual. “India has followed a consistent policy on allowing capital inflows in general and on capital account management in particular. Our position is that capital account convertibility is not a standalone objective but a means for higher and stable growth. We believe our economy should traverse towards capital convertibility along a gradual path — the path itself being recalibrated on a dynamic basis in response to domestic and global developments,” he said. “Historically, we have used policy levers on the debt side of the flows to manage volatility. Contrary to popular perception, we have used both quantity and price=based variables to moderate debt flows,” he said.
Rs 250,000 cr bulk deposits up for renewal, rates may be hiked
Interest rates on bulk deposits are expected to shoot up as about Rs 250,000 crore of bulk deposits, out of a total Rs 5,000,000 crore in the system, come up for repricing during this quarter. Banks are vying with each other to widen their deposit base after the Reserve Bank of India (RBI) warned them not to fund credit through the repo window or the call money market. The problem will be aggravated further in the March quarter, when there is a 30 per cent to 40 per cent higher concentration of fixed deposits, as banks contract a higher amount of deposits to show a higher topline growth. About Rs 180,000 crore of bulk deposits mature every month, according to treasury heads of leading banks. A bulk deposit is any deposit over Rs 1 crore. K.R.Kamath, CMD of Punjab National Bank, said the bulk deposits form about 22.43 per cent of their deposit base. “The rates on these deposits could go up if there is a good credit demand in the fourth quarter. We do not have a bunching of bulk deposits, every month we have a portion maturing,” said Kamath. A senior SBI official who deals with revenue and resource management said the total deposits of the banking system is estimated to be around Rs 5,000,000 crore, which includes the current accounts, savings account, retail term deposits and bulk deposits. “About 35 per cent of this is Casa and the remaining Rs 3,250,000 crore are term deposit of which bulk deposits would be Rs 2,275,000 crore. Term deposits are spread out in the 12 months of the year, which works out to roughly about Rs 180,000 crore maturing every month,” said the official.
MFIs want 12-18 months to comply with rate cap
Small and mid-sized microfinance institutions (MFIs) are likely to seek more time to comply with the recommendations of the Malegam Committee report. The institutions plan make a representation to the regulator through the Micro Finance Institution Network (MFIN), asking for at least 12-18 months to bring down their interest rates to 24 per cent. Smaller MFIs charge 31-50 per cent. The Reserve Bank of India (RBI) has said that it will take a decision on implementing the recommendations by the end of March. The committee has suggested that if its recommendations are accepted, they should be implemented by April.
Benefits of local incorporation
The discussion paper on the presence of foreign banks in India circulated by the Reserve Bank of India draws heavily on the experiences of the global financial sector during the crisis period. A road map for foreign banks drawn up in 2005 had recommended a two-track approach aimed at, on the one hand, increasing the stability and pace of consolidation of both private and public banks in India and, on the other, enhancing foreign bank presence in a synchronised manner. An action plan to be executed in two phases was stalled in the wake of the global financial crisis. There have been valuable lessons from the crisis — among them, the desirability of “subsidiarisation” of significant cross-border presence, which brings with it the advantages of greater regulatory control and comfort to the host jurisdiction. The crisis was exacerbated by complex structures and the implicit belief that certain financial institutions are either too big or too connected to be allowed to fail. The risks can be minimised, although not entirely eliminated, by asking foreign banks to incorporate subsidiaries locally rather than operate as branches. Unlike branches, subsidiaries will have their own capital and boards of directors and be subject to domestic legislation such as the Companies Act. While opting for the subsidiary model, the discussion paper does not downplay the advantages of foreign banks functioning as branches. These include greater operational flexibility and an enhanced lending capability based on the ability to leverage the capital of their head offices. However, the much-vaunted strengths of major international banks were of no avail during the crisis and, in India especially, their branches seemed to be in a far better shape than the bank as a whole. In the post-crisis period, a majority of regulators are stipulating local incorporation requirements to protect retail depositors and to limit the impact of operations of systemically important banks. A clear demarcation of assets and liabilities between branches of subsidiaries and the head offices is possible. It also becomes easier to define laws of jurisdiction and, in general, enhance the capabilities of the domestic regulators. One important lesson from the crisis is that a foreign bank's support to either its branches or subsidiaries need not be automatic. Given the perceived reluctance of foreign banks to incorporate subsidiaries, certain incentives can be offered without relaxing the entry level requirements suggested in the discussion paper. The issue of reciprocity will also come up, with Indian banks operating branches in many jurisdictions.
THE FINANCIAL CRISIS
Dr.Y.V. Reddy, a former Reserve Bank of India governor, is credited for saving the Indian financial system from the crisis that rocked the globe in the wake of the collapse of US investment bank Lehman Brothers. He was prudent, conservative, and did not allow Indian banks to indulge in those exotic derivatives that he himself did not understand.
High salaries of MFI bosses raise eyebrows
“In general, when you are dealing with the poor, it does not appear morally right to take high compensation given that the income is coming exclusively from the poor,” says MS Sriram, adjunct professor at the Indian Institute of Management, Ahmedabad. Sriram documented such promoter-friendly payouts in his March 2010 paper titled ‘Commercialisation of Microfinance in India: A Discussion on the Emperor’s Apparel’. After the collapse of Lehman Brothers in 2008, banking regulators across the world are taking greater interest in the compensation of executives in the financial sector. In India, the Reserve Bank of India (RBI) vets the salaries of bank CEOs and has even intervened in the odd case. However, the central bank has so far not intervened in the case of microfinance institutions. The RBI-appointed Y.H.Malegam committee, which last month gave recommendations on the way forward for the distressed microfinance sector, was silent on the issue of managerial compensation. It did, though, talk of microfinance companies developing corporate governance norms that limit variable compensation for employees.
Monday, January 31, 2011
Solar ATM Set Up By SBI At Banni
Banks urged to shed negative attitude towards industries
Industries Minister Renu Kumari Kushwaha on Saturday appealed to all stakeholders to have a positive approach towards rehabilitation of viable sick industries and said the banks, in particular, should shed their negative attitude in providing loans to the fledgling industries . Addressing a seminar on "Rehabilitation of Sick and Closed Industrial Units in Bihar" at the Bihar Industries Association (BIA) auditorium here, she said that in the changed scenario, every stakeholder had the responsibility to get Bihar on the track of industrial development. She said industrialists should also utilise the loans for the growth of their units and not divert them as was done in some cases. Bihar Industrial Area Development Authority 's plots should be utilised only for running industries and not for doing trade. BIA, led by its president SP Sinha, presented a background paper on the causes of sickness of industries and the measures needed to revive them. BIA secretary general Sanjay Goenka submitted to the principal secretary, industries, and other officials, the papers relating to some "viable sick industrial units" that could not be rehabilitated earlier despite being recommended for the same by a high-level committee. Many such entrepreneurs narrated their plight to the minister. Principal secretary, industries, C K Mishra, stressed the need for attitudinal changes among bankers for removing sickness of industries. He said entrepreneurs should also have the determination to run their industrial unit overcoming all odds. RBI's Regional Director G Mahalingam said the CD ratio of banks will improve if banks advance industrial loans. He assured to look into the genuine demands of industrialists for revival of their sick units.
RBI Guv to appear before PAC on 2G spectrum allocation
Continuing with its examination into the 2G spectrum allocation, Parliament's Public Accounts Committee has called RBI Governor Duvvuri Subbarao on Thursday to record evidence in connection with the matter. The Committee, headed by senior BJP leader Murli Manohar Joshi, is expected to ask Subbarao whether any bank regulations were violated while making the financial transactions related to the 2G spectrum allocation. A Raja had to quit as Telecom Minister following a furor over the alleged irregularities in the 2G spectrum allocations. Subbarao, who was the Finance Secretary when the 2G spectrum allocations were made in January 2008, is also expected to face questions on the issues, including on changes in the entry fee for telecom operators, he had raised with the Communications Ministry.
Banks under RBI lens for high credit-deposit ratios
The Reserve Bank of India (RBI) is expected to summon banks with high credit-deposit ratio (ratio of credit to deposit growth) and ask them to take appropriate action to bring it down in order to prevent credit growth outstripping deposit growth. Banks with incremental credit-deposit ratio in excess of 100 per cent will be the first ones to be summoned. The ratio going above 100 per cent means banks have lent more than they raised in deposits. RBI is worried that banks may be borrowing from the repo window (overnight refinance facility provided by the central bank) and call money market to fuel credit growth. RBI deputy governor Anand Sinha, in charge of banking operations and development, is expected to meet each of these banks. He may ask the banks to curtail credit growth until their deposits catch up.
Deceleration in FDI is no surprise
Foreign direct investment (FDI) inflows into India in 2010 are said to have decelerated by 31% in 2010, according to a report by the United Nations Conference on Trade and Development (UNCTAD), which is based on data from the Reserve Bank of India (RBI). China, Hong Kong, Malaysia, Singapore, Indonesia and Thailand, are reported to be beneficiaries of higher FDI inflows during the year. This should not come as a surprise at all. Systematically, the regulatory framework governing FDI has become increasingly ambiguous. FDI policy, through the past two years, has taken on a pretentious air of becoming "smart" and ostensibly "plugging loopholes" even without pointing out the rationale for the policy and the intended state of affairs. The entire framework of determining how to treat Indian companies on the basis of whether they are owned and controlled by foreigners is another such example. Without corresponding clarity from the Reserve Bank of India (RBI), which is the regulator of exchange controls, bizarre and unthinkable propositions on how an Indian company should conduct itself the moment majority ownership moves to foreign hands, abound. Would banking companies like ICICI Bank and HDFC Bank have to be treated as foreign entities because they are majority-owned by foreigners? Long-standing companies that have been in such ownership patterns even prior to the policy changing would continue to brave the ambiguity and fight it, but new capital can never come in without full clarity. Undoubtedly, FDI inflows have to slow down. ith other convertible instruments, the RBI has contributed its own share of ambiguity. It recently sent out letters to various issuers of convertible debt, asking them to confirm the precise number of shares that would be allotted upon conversion of the instruments, simply ignoring the very logic behind issuance of convertible instruments — of rewarding Indian issuers with a higher valuation if they in fact performed to the level they promised their investors, when taking their money. Worse, the law governing pricing for cross-border transfer of listed shares has been mindlessly linked to price regulations framed by the Securities and Exchange Board of India in a completely different context with a different policy objective. The Foreign Investment Promotion Board, a motley group of ministries that was cobbled together to get FDI going when India opened up her doors to FDI in 1991, has become anachronistic. The surprising absence of a dialogue between the draftsmen of FDI policy in the Government of India, and the draftsmen of exchange control policy in the RBI, is also remarkably surprising. Each is taken by surprise by the other. Worse, even the ministry handling FDI policy (commerce ministry) is different from the ministry that administers matters relating to the RBI (finance ministry). Either exchange controls should be taken away from the RBI, or more conveniently, FDI policy may be taken away from the commerce ministry. Each has a role to play, but the ambiguity they give rise to, without talking the same language, makes a strong case for merging the two arms, or doing away with one of them.
SBI chief stands up to RBI
State Bank of India Chairman O P Bhatt says the bank did differ with the Reserve Bank of India’s views on a host of issues, but it was unfair to blame the country’s largest bank for not taking care of the interests of the aam aadmi (common man). “My brief went much beyond looking after the interests of a select group of Indians only,” said Bhatt, whose five-year term as SBI Chairman ends in March. He is in Davos to attend the World Economic Forum. Bhatt admitted there were quite a few issues on which he “differed” with the regulator, but that is in the nature of things. “If you are the largest financial conglomerate in the country, often the regulator may do things that are not appropriate for us, or for the system. It was our responsibility to give feedback. When we give it on a regular basis, sometimes this gets into public domain. But let me add, there were no interpersonal issues here.” When asked how he managed to defy the regulator so often, Bhatt said defiance was too strong a term to use, but hastened to add that had he been wrong, the finance ministry or the regulator would not have allowed him to continue with certain schemes. “What power does an SBI Chairman enjoy? In any case, I am a simple Gadhwali. No one knew me and I didn’t have any political patronage either. So I could easily be removed if I had done anything wrong,” an emotional Bhatt said. On RBI’s disapproval of teaser loans (SBI is the only bank to continue with the special home loan scheme till March), Bhatt said he would look at the quarterly data and if the picture was good, he would extend it beyond March. “After that, it is up to my successor.” In strong defence of the scheme, the chairman said the bank had given home loans to nearly 300,000 people in India. “Many Indians own homes because of SBI. I am not fighting with RBI, but only clarifying it. I have not teased anybody, there is no risk and there is no opacity. There has also been no dilution of know-your customer norms or due diligence. We only gave discount on the rate for the first two to three years and the rate is higher than the cost of my funds. So what is wrong in what SBI does?” Bhatt said. According to him, almost 80 per cent of the home loans given by the bank are below Rs 10 lakh, which means the aam admi. “The NPAs on my loan are still the lowest and I also have the collateral of the customer’s house. So what wrong has SBI done?” He said SBI did what any efficient commercial banker would have done. It used the special home loan scheme for customer acquisition and more business – home loan insurance, car loans, personal loans, etc – without any risk to the bank. After the Lehman crisis in December 2008, the bank had a surplus of Rs 1 lakh crore as there was hardly any credit off-take. “If I had to park it with RBI, I would have got 3.5 per cent. We gave loans to common people by reducing the rate of interest to 8 per cent as this was much better for the bank,” Bhatt said. On the differences with the regulator over the 70 per cent provisioning coverage ratio, Bhatt said depending upon the mix of its NPAs, SBI provided for “enough” provisioning on its books. “If RBI suddenly asks us to hike our provisioning coverage ratio to 70 per cent, it reduces my profits and my share prices take a hit. What is the logic of such a decision? Are you penalising a bank which has low NPAs?” he said. SBI has provided for 54 per cent provisioning coverage ratio against the regulatory prescription of 70 per cent. Referring to RBI’s disapproval of the guarantee given by SBI to bonds issued by Tata Motors for refinancing loans taken for the Jaguar Land Rover acquisition during the slowdown period, Bhatt said it was unwarranted as the bank had to look for new ways to help its valued customers. In any case, SBI took the decision after asking RBI. It followed all norms and besides helping the company, it also helped the bank earn good commissions. “Since the concept was new, the regulator raised some issues. We went to the government which said SBI didn’t do anything wrong. In fact, such guarantees will deepen the corporate bond market,” Bhatt said. Asked whether his successor will have a tough act to follow, Bhatt said he hoped he had done enough to sort out things that would “make life easier” for his successor.
NHB sees upward bias in refinance rates
National Housing Bank (NHB), the regulator for housing finance companies (HFCs), may increase its refinance rate. This rate hike would come in less than a week after the Reserve Bank of India (RBI) raised key policy rates by 25 basis points. “We have started the process of analysing the cost of fund situation. Though we are yet to take a call (on increasing the lending rates), there is an upward bias in the interest rate in the market,” R V Verma, chairman, NHB, told Business Standard. A hike in refinance rates would lead to increase of cost of funds for HFCs, and consequently, a rise in interest rates for housing loans. For larger HFCs, such as Housing Development Finance Corporation, the dependence on refinancing is much less because they raise deposits from public. For smaller players, where dependence is 20-25 per cent, this hike would put further pressure on their cost of funds. Other option of raising funds for HFCs include non-convertible debentures, subordinate bonds, bank finance and public deposits. However, the refinance route is the cheapest. Typically, NHB lends to HFCs at 8 per cent. NHB last raised rate 18 months ago by 25 basis points. At present, the prime lending rate of NHB is 10.25 per cent.
Banks seek capital subsidy for financial inclusion
Banks have sought capital subsidy and other incentives from the Uttarakhand government to complete the financial inclusion process in the hill state where most of the villages are situated in remote areas. At a meeting held in New Delhi as an initiative of the Reserve Bank of India (RBI), the banks’ officials were of the view that since providing banking facilities in far-flung villages affected profitability of the banks, the government must provide some incentives to the banks. Representatives from 12 banks participated in the meeting. Under the financial inclusion programme, a total of 475 villages have to be provided with banking facilities through branches or business correspondents (BCs). According to the RBI guidelines, villages with population above 2,000 have to be included in the financial inclusion process. But under the Atal Gram Yojna, most of the villages have less than 2,000 population. “We have set up a sub-committee under the State Finance Secretary. This committee will organise a meeting to look into the various demands of banks in this regard,” said Principal Secretary (Finance) Alok Jain.
'Banks adopting new ways to reach out to needy'- H.K.Soni, DGM, RBI
New microfinance approaches were needed to reach out to the poorest and the deprived section of society in the country, said Deputy General Manager (DGM), Reserve Bank of India, H.K. Soni during the valedictory function of the two-day national conference on inclusive growth and microfinance access (CIGMA 2011), organised by the Faculty of Management Studies (FMS), Banaras Hindu University, on Sunday. Saying banking institutions in the country were being asked to adopt service area approach to reach out to the needy, the DGM emphasised that under the approach, rural branches were given a service area of 15 to 20 villages for operation of services, and other banks were allowed to set up a branch in that area only after obtaining a no objection certificate. He also pointed out the need for introducing flexible service like repay weekly and daily small instalments apart from simplification of procedures to open a bank account and facilities like access credit and doorstep banking. Caitlin Wiesen, country head, UNDP, highlighted severe constraints that were placed on the operational and financial autonomy of the banks. She also said microfinance institutions (MFI) were the only method to perform important task of financial intermediaries in the country. Earlier, a number of technical sessions and panel discussion on microfinance regulatory framework, responsible microfinance, women entrepreneurs were held. Dean (FMS) SK Singh, secretary general (CIGMA 2011) HP Mathur and other senior faculty members were also present on the occasion.
SBI sets up call centres for NPA recovery
With mounting pressure to set aside substantial amounts each quarter to improve provision cover for bad loans, State Bank of India is using every possible way to step up recoveries from non-performing assets. The country’s largest lender has opened two call centres at Gurgaon and Chennai to deal with NPAs and Special Mention Accounts — those in a zone in between standard assets and NPAs. It has also set up account tracking centres at 14 local head offices. As a step to improve tracking and recovery, the bank has begun assigning SMAs and NPAs to individual staff members. “This step will ensure a sense of ownership in dealing with stress asset cases,” a senior official said.
Groups eyeing banking licences may have to wait a little longer
Conglomerates eyeing banking licences may have to wait a little longer. The government is of the view that corporate houses should be allowed to open new banks in the country only after the banking laws are amended to empower sector regulator, the Reserve Bank of India , to monitor the parent or subsidiary companies of a bank, said a senior finance ministry official. This follows concerns raised by the central bank that the ownership structure of large business groups may lead to a turf war among regulators if they were given licences to run banks. "There are certain amendments proposed," the official said. "We need to ensure that there is a proper monitoring mechanism in place." RBI is yet to issue the final guidelines on new bank licences. The bank had in August last year released a discussion paper on the entry of new private banks. In December, it put out the gist of the comments it received in response to the paper.
Policing frauds: Bankers talk to ICAI
Stung by the recent housing loan scam and the Rs 300-crore Citibank fraud involving a relationship manager in Gurgaon that have dented the image of the domestic banking industry, the Indian Banks’ Association (IBA) has proposed to chalk out a new way to verify the authenticity of documents provided by loan applicants.The IBA has also written to the Institute of Chartered Accountants of India (ICAI) seeking suggestions to help its policing of fraud. The finance ministry has already asked the banks to adopt all means to eliminate possibilities of any fraud. The Reserve Bank of India (RBI) has also directed banks to fix staff accountability to prevent frauds. “Banks should ensure that the reporting system is suitably streamlined so that frauds are reported without any delay,” the central bank said in a circular last year.
Monetary policy: Implications for Common Person - S. S. TARAPORE
SEBI BOARD TO SKIP JALAN REPORT
The Bimal Jalan Committee report will have to wait for some time to get the regulatory nod. The board of the Securities and Exchange Board of India (Sebi), scheduled to meet on February 7, has not included it in the agenda. While the Takeover Code will be the highlight of the board meet, a final decision is unlikely due to the finance ministry’s reservations over certain issues. According to people familiar with the development, Sebi officials need more time to deliberate on the recommendations of the committee, formed to review the ownership and governance of market infrastructure institutions (MIIs), including stock exchanges, depositories and clearing corporations. “There are certain issues (in the Jalan report) on which consensus has not been reached and some more time is required for discussions,” said a person privy to the developments. “It will be placed before the board only after the regulator is through with its own share of deliberations,” he added on condition of anonymity. This will also be the last board meeting for chairman C B Bhave if he does not get an extension. His threeyear term ends on February 17.
Sunday, January 30, 2011
Don’t sign papers without knowledge of contents – Lalit Srivastava
Lalit Srivastava, Banking Ombudsman of the Reserve Bank of India (RBI) for Punjab, Himachal Pradesh, Chandigarh, Panchkula, Ambala and Yamunanagar has stressed that before signing a document, one must study its contents carefully and not sign it “in good faith”, since the contents of the document are considered binding in a court of law. During an interaction with people at Yes Bank in Sector 9, Chandigarh on Friday, Srivastava said that a common grievance among many people is that they were swindled of their money after signing a document but were not aware of its contents. The Banking Ombudsman highlighted that such ignorance is not accepted legally. Srivastava pointed out that during the last year and a half during his stint as Banking Ombudsman, he had received about 6,000 complaints from the areas under his jurisdiction. "About 2,000 of these were not maintainable on various grounds and were dismissed. The remaining 4,000 were taken up and in a large number of cases, the decisions went against the bank concerned. Almost all the decisions were accepted and implemented by the bank and there would be only 10-15 cases where the bank appealed against the order to the RBI Deputy Governor. If the complainant is not satisfied with the order, he too can seek remedy in a court of law,” said Srivastava. He highlighted that any person who has a grievance against a bank should first lodge a complaint with the respective branch and await the bank’s reply for a month.
RBI warns on inflation risk; rate rise seen
The Reserve Bank of India (RBI) said inflation may stay high for longer than earlier anticipated due to a rise in global commodities prices and domestic supply pressures that have pushed up food prices. The central bank also said downside risks to growth had receded. After raising rates six times since March to tame inflation, the central bank paused in December but indicated at the time that further rate hikes were possible, with inflation remaining well above its comfort zone. “As a result of newer factors and increased risks, the inflation trajectory is likely to show some persistence and moderate only gradually.” The central bank also called for measures to address structural drivers of inflation, which include inefficiencies in the agricultural sector. A sharp rise in food prices, a key driver of inflation in India, has been putting upward pressure on broader prices. The wholesale price index, the most widely watched gauge of prices in India, rose 8.43% in December from a year earlier, compared with 7.48% in November and well above the RBI’s March-end projection of 5.5%.
RBI Credit Policy: Debt instruments stage a comeback
The interest rates in the debt market that are already at quite high levels due to the multiple rate hikes by the RBI last year are expected to harden further in the near term. The RBI expressed concern over the high inflation rate due to the sharp increase in food, energy and commodity prices, and gave indications of further monetary tightening, going forward, to tame the inflation rate. The monetary policy tightening by the RBI has brought debt instruments back into the limelight as their yields have gone up due to the interest rate hardening. The rates on bank fixed deposits have gone up to almost nine percent levels. On the other hand, the volatility and stretched valuations in the stock markets have tilted the risk-return equation towards risk. Therefore, risk-averse investors are increasingly looking at increasing their portfolio allocation to debt-based instruments.
HEED RBI’S WARNING
On Tuesday, the eve of Republic Day, Reserve Bank of India Governor D Subbarao sent out a clear warning: inflation was here to stay due to a variety of factors, both domestic and global. His prescription for controlling inflation — raising interest rates by a mere quarter per cent — has come in for much criticism from economists who feel that the unabated inflation, which worsened in December, warranted a much bigger rate hike to signal that easy credit will not be tolerated any longer. Credit or loans by banks has grown faster than what the RBI projected, while growth in deposits has slowed. Dr Subbarao felt anything over a quarter per cent hike would limit his leeway in case inflation remains stubbornly high in the coming months. The RBI’s objective is limited to curbing inflation, which is spilling over from food to manufacturing. It is well known that monetary tools for controlling inflation are limited when it is caused mainly due to high food prices — particularly of items of daily consumption such as fruits, vegetables, milk, eggs, fish. The RBI chief stressed the need for “rapid action” to increase the output of several products whose demand is rising due to changing consumption patterns, reflecting increasing incomes. The government would do well to heed Dr Subbarao’s warning: unless meaningful output-enhancing measures are taken, the risk of food inflation getting entrenched looms large. The government should realise that food imports are not an easy option, given that global food prices have risen by 25 per cent in December, according to FAO estimates. A top FAO official noted in Davos earlier this week that the current world food crisis could be ascribed to falling investments in agriculture. Much of the rise in food and commodity prices can also be blamed on speculation — it would be in India’s interest to support French President Nicolas Sarkozy’s proposal to curb speculation in all commodities. The FAO official said he felt prices could get out of hand unless all futures markets were regulated — in fact he warned of the possibility of food riots like those seen in 2007-08. For the Manmohan Singh government, meanwhile, time may be running out — the importance of finding an urgent solution to the food crisis simply cannot be overestimated.
Credit Policy targets inflation
India's annual industrial output in November grew at its slowest in 18 months but headline inflation in December accelerated with costlier food items. These confirmed expectations of a rate increase. The RBI said demand-supply mismatch and rising global commodity prices will continue to put pressure on inflation, which could hurt economic growth. 'Persistent high inflation could endanger the growth objective and also amplify risks to inclusive growth. Containing inflation will have to be the predominant objective of the monetary policy in the nearterm', the RBI said in its macroeconomic review released on the eve of the quarterly policy. It further said the upside risk to inflation has increased, and supply side constraints and high global commodity prices could dampen the impact of a tight monetary policy. According to the RBI, while inflation is likely to soften in the coming months, it is likely to stay elevated above the earlier anticipated path. It has projected overall inflation to be at 5.5 percent by March end. The overall inflation for December shot up to 8.43 percent on high prices of food items, from 7.48 percent in November. The RBI said continued high food inflation is the main cause for the overall inflation holding up, adding that return of inflation to a more acceptable level will be gradual.
Saturday, January 29, 2011
Shri S.Karuppasamy appointed as Executive Director
Shri S.Karuppasamy, Regional Director, Kolkata has been appointed as Executive Director. The portfolios looked after by him are as under:-
1. Department of Expenditure & Budgetary Control
2. Department of Information Technology
3. Legal Department
4. Urban Banks Department
Tax vex on bank arms resolved
Foreign banks converting their branches into wholly-owned subsidiaries will not be required to pay capital gains tax from the transfer of assets and properties during this procedure. The finance ministry has resolved the tax tangle in the issue and wants the Reserve Bank of India (RBI) to go ahead and allow foreign banks to convert themselves into wholly-owned subsidiaries at the earliest. “There were some tax issues in conversion of branches into wholly-owned subsidiaries. We have resolved that matter. The new norms should come as soon as possible,” said a finance ministry official. Last week, RBI had released a discussion paper on the presence of foreign banks in India. It had sought comments on the subsidiary-led model for foreign banks operating in India, instead of the existing branch mode of expansion. It also proposed incentives to promote the subsidiary route. In its discussion paper, RBI had said that for capital gains tax arising from the transfer of property, goodwill and other assets of a capital nature to its newly incorporated subsidiary in India, the provisions of Section 47(iv) of the Income-Tax Act, 1961, would be applicable to foreign banks converting their branches into subsidiaries. Section 47(iv) exempts from capital gains tax the transfer of a capital asset by a company to its subsidiary if the parent company or its nominees hold the entire share capital of the subsidiary or the subsidiary company is an Indian company. The exemption, however, does not apply if the parent company dilutes its stake in the subsidiary before a period of eight years. “You have to continue with the parent-subsidiary relation for eight years if you want the exemption,” said Hiresh Wadhwani, a tax partner with Ernst & Young. He added that for full capital gains tax exemption without a lock-in of eight years would require an amendment to the law. The issue has been resolved under Section 49(e) of the Income-Tax Act, which states that where the capital asset becomes the property of an assessee under any such transfer, the cost of acquiring the asset would be deemed to be the cost for which the previous owner of the property acquired it. “If there is no change in the value of assets, there will be no capital gains tax,” explained another official. The first official also said the central bank’s discussion paper was in line with the finance ministry’s thinking that a subsidiary model would help contain risk within the country. “The government greatly favours this,” he said. He added that just like domestic banks, subsidiaries of foreign banks would be allowed to open branches in Tier-3 to Tier-6 cities, unlike branches of foreign banks. The subsidiaries would be considered Indian banks and regulated by RBI, the official added.
Deposits shrink by Rs 26,000 cr
After surging around Rs 2 lakh crore in the last fortnight of December, bank deposits fell Rs 25,742 crore during the 14-day period ended January 14. According to the Reserve Bank of India (RBI) data, deposits grew 16.43 per cent on a year-on-year basis till January 14. Credit off-take dropped Rs 43,327 crore during the fortnight and grew 23.6 per cent on a year-on-year basis. In the third quarterly monetary policy report, RBI had raised concerns over the widening gap between credit and deposit growth. RBI asked banks to bring down their incremental credit-deposit ratio or face action. RBI has projected 20 per cent credit growth and 18 per cent deposit growth for 2010-11. The incremental non-food credit-deposit ratio rose to 102 per cent by end-December due to the gap between credit and deposit growth. In the corresponding period of the previous year, the ratio was 58 per cent. To lure customers, banks have raised deposit rates by up to 250 basis points in the past few weeks. “We recently increased deposit rates, so the full impact will be seen towards January-end. Our daily monitoring has shown a slight increase,” said a senior executive of State Bank of India.
PayPal Changes Limits For Indian Users After RBI Guidelines
Following the latest guidelines issued by the Reserve Bank of India, popular online banking platform Paypal has made several drastic changes to their user agreement for India. Paypal has already issued notices to their Indian customers about the change. The PayPal letter states: "As part of our commitment to provide a high level of customer service, we would like to give you a 30-day advance notice on changes to our user agreement for India. With effect from 1 March 2011, you are required to comply with the requirements set out in the notification of the Reserve Bank of India governing the processing and settlement of export-related receipts facilitated by online payment gateways (“RBI Guidelines”).
RBI raps banks for misreporting loans to priority sector
Flagging the issue of misreporting of priority sector lending (PSL) performance by banks, the Reserve Bank of India (RBI) on Friday said loans wrongly classified as PSL would be included in the shortfall under priority sector targets. The annual financial inspection of books has shown instances of misclassification of loans under priority sector. Such misreported loans in the current financial year would be added to the shortfall reported on the last reporting Friday of the following year for allocation to various funds, RBI said in a communication to banks. Also, banks buy priority sector loans from intermediaries like microfinance institutions and non-banking finance companies. Banks reckon the present value of these loans by discounting them at their lending rate, which is typically much lower than the actual rate charged to end–borrowers by such intermediaries. Such practice leads to overstating of the actual amount of priority sector loans to the extent of the premium paid by banks to such intermediaries. Hence, must report the nominal amount actually disbursed to end priority sector borrowers and not the premium-embedded amount paid to the intermediaries.
Jain Irrigation to form non-banking finance company, raise Rs700 crore
Jalgaon-based Jain Irrigation Systems (JISL) plans to set up a non-banking finance company (NBFC) to finance farmers’ needs, said managing director Anil B Jain. The company’s board has already approved the move and will apply for a nod from the Reserve Bank of India for the same this quarter. “It normally takes 3-4 months for the approval to come through,” said Jain. JISL is hoping that the NBFC will help boost its sales. “Farmers need timely and adequate credit which the NBFC can provide and it can also improve JISL’s balance sheet by reducing debtors,” he added. To begin with, the company will finance just the purchase of it own products. JISL, the world’s second largest micro irrigation systems (MIS) maker after Israel’s Netafim, and India’s biggest, currently aids farmers in sourcing credit to buy its products. There are also government subsidy schemes for the same. Jain said the company also plans to raise by June Rs700 crore through a qualified institutional placement (QIP). “It will partly go into capital infusion for the NBFC and partly reduce our working capital debt,” Jain said. The JISL board also on Friday approved the hiving-off of its solar division, under which it makes solar lanterns, solar water heaters and, lately, solar water pumps. For the three months ended December 31, JISL saw its net sales grow by less than 10% to Rs693 crore while its net profit rose 24.6% to Rs71.47 crore. Jain said the heavy and unseasonal rains dented the topline. “In the first nine months, our irrigation business grew by 27% while we expected a growth of 30%. But the current quarter is better,” he said. JISL has an order backlog of Rs1,100 crore, most of which is in drip irrigation.
OMO, deposit accretion picking up: RBI
The country's apex bank, the Reserve Bank of India (RBI), today said that Open Market Operations (OMO) in the bond market is more a monetary policy tool and not a debt management instrument. "It is more of a monetary policy tool and not a debt management instrument," a senior RBI official told reporters here today. OMO is not being used to influence bond yields, he said. "OMO is done in a more enduring manner and not to influence the yield curves," the official said. On the statutory liquidity ratio (SLR) now at 24 per cent, the RBI's Deputy Governor, Subir Gokarn, said the apex bank presently feels that there is no need to tinker with it. SLR is the amount of liquid assets, such as cash, precious metals or other short-term securities, that a financial institution must maintain in its reserves. The RBI had reduced the ratio from 25 per cent to 24 per cent in December 2010. On January 25 (2011), the RBI, in its efforts to combat the prevailing high inflation, lifted its key short-term rates -- repo and reverse repo rates -- by 0.25 per cent each to 6.5 per cent and 5.5 per cent, respectively.
RBI objects to states using PSBs for own inclusion drive
The Reserve Bank of India (RBI) has expressed concern over dilution of its financial inclusion programme as some states, such as Uttarakhand, have launched similar schemes causing confusion among the institutions responsible for implementing them. "Banks have already submitted their financial inclusion roadmap to the RBI," a government official said. "Now, some states want banks also to participate in their own schemes, which will increase burden on them and further dilute the primary task set by RBI." The RBI had also mentioned the issue of overlap at the state-level bankers' committee. "States can push the co-operative banks and regional rural banks for their own schemes," a senior finance ministry official said. "Public sector banks are under the domain of the Central government and the RBI, and will follow the roadmap as decided." As of now, only 45% of the Indian population has access to basic banking services. The bank to people ratio is also very low with one bank branch catering to about 16,000 people. The finance ministry recently directed bank chairmen and executive directors to monitor 1% of the new villages that come under inclusion plans, and the general managers for 5% villages covered under such plans.
RBI to issue Rs 5 coin on Rajendra Prasad birth anniversary
The Reserve Bank of India (RBI) today said it will shortly put coins of Rs 5 into circulation, with the theme of 125th birth anniversary of the first President of the country Rajendra Prasad. The face of the coin shall bear the lion capital of Ashoka Pillar and it shall also bear the denominational value "5" in international numerals below the lion capital, RBI said in a release. The reverse of the coin shall bear the portrait of Rajendra Prasad in the centre, it said. Coins are legal tender as provided in the Indian Coinage Act, 1906. The existing Rs 5 coins in circulation shall also continue to be legal tender, it added.
Govt spending can be frontloaded in FY12: RBI
There was a possibility of heavy government spending in the first half of the next financial year beginning April, on account of large government cash holding, Subir Gokarn, deputy governor at the Reserve Bank of India (RBI) said on Thursday. He said RBI would not conduct open market purchase of bonds to contain any rise in yields as it was a monetary policy tool to address liquidity issues and not debt management. "When the (government borrowing) schedule is set with the existing cash balance in mind, that can front-load spending. So that is a possibility," he said. Gokarn was speaking to reporters after the central bank raised key rates by 25 basis points to clamp down on resurgent inflation and warned of persistently higher food prices unless steps were taken to boost supplies.
Limit on annual income can be changed – Malegam
The Malegam panel’s recommendation that only those households which have up to Rs 50,000 in annual income should be eligible for borrowing money from microfinance institutions (MFIs) have drawn flak from all quarters. Critics say by suggesting a cap on loan rate, the panel is also denying market forces in shaping the cost of loans. But noted chartered accountant Y.H. Malegam, 77, who has been serving as director on Indian central bank’s board for 17 years, said one should look at the philosophy of the report and not the figures. The objective is to define what microfinance is and regulate them and the numbers can be revised. He said in an interview that there could be a distinction between borrowers in rural, semi-urban and urban India. While Rs50,000 annual income criterion can be kept for rural India, it can be raised for semi-urban and urban pockets. He, however, strongly defended the idea of capping the exposure limit for an individual borrower at Rs25,000 and the loan rate at 24%. He described MFIs as “greedy” and said the mandate of the panel was to protect borrowers and not lenders. MFIs have enough profits and they can use part of it to reduce interest rate, he said. If indeed the Reserve Bank of India accepts the recommendations, there will be no need for the Andhra Pradesh law for regulating MFIs in the southern state, he said.
RBI seeks public comments on Malegam report
The Reserve Bank today invited public comments on Malegam panel report which suggested among other things capping interest rate at 24 per cent for loans extended by microfinance institutions. The committee, headed by Reserve Bank's Central Board Director Y H Malegam, also suggested that small loans cannot exceed Rs 25,000 and creating of a separate category of non-banking financial companies (NBFC-MFI) for the MFI sector. "The RBI has invited views/comments of all stakeholders and the public at large on the Malegam Committee report on MFIs...Latest by February 13, 2011," the central bank said.
Finmin backs RBI on subsidiary model for foreign banks
The Finance Ministry has come out in support of the central bank's recent proposal to permit expansion of foreign banks in the country through the subsidiary model, as opposed to the current model of expansion through branches. It is also considering allowing capital gains tax waiver for such conversion. "We will be taking it up at the earliest and hope to set up norms for starting it soon," a senior finance ministry official said. The norms are expected to exempt such subsidiary firms from capital gains tax as well as allow them expansion in smaller cities of tier 3, 4, 5and 6.
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