To counter the menace of fake currency notes, the government will soon start using indigenous paper and ink, Union finance minister Pranab Mukherjee said today. So far, we have been using foreign paper and ink. But now, we will start making our own paper and ink to control fake currency notes," Mukherjee said. - DNA
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Monday, February 7, 2011
Sunday, February 6, 2011
Need for regulatory forum to resolve customer grievances - Dr.K.C.Chakrabarty, RBI Deputy Governor
“Scams are everywhere. And they will continue to be, because every sector has finance involved. But citizens suffer because of scams, and they need to be empowered, said Sanjay Nirupam, member of Parliament, speaking on the first anniversary of Moneylife Foundation on Saturday. He also released a Position Paper on issues faced by retail investors prepared by Moneylife Foundation. Dr K.C.Chakrabarty, Deputy Governor of the Reserve Bank of India, spoke on customer issues relating to banking and para-banking services. He said, “In this country, 50% people don’t have bank accounts, 90% don’t have access to loans and 98% don’t have access to capital markets. Banks must increase their reach to rural people, and ensure better service.” He also said that there is a need for effective regulatory forum, and there should be a system to resolve the issues. Customers must raise their concerns and demand justice. Speaking on the problems faced by the customers in banks, he said, “India is a big country, and I agree there are many problems. Unfortunately, banks are not properly equipped, technologically or otherwise, to solve the problems and provide good service. There needs to be a strong movement. But the citizens should also understand that there are certain limitations, many of them are legal.” Moneylife Foundation was launched by Mr Sanjay Nirupam a year ago on 6th February.
RBI clarifies stand on gold loan move
High interest rate and lack of clarity on end use of funds was the primary reason behind the regulator asking banks not to classify loans to non-banking finance companies (NBFCs) for on-lending against gold jewellery as priority sector lending. On Wednesday, the Reserve Bank of India (RBI) had asked banks to not classify loans extended to NBFCs which were lent by NBFCs against gold as priority sector loans. Gold loan companies are lending the money at a very high rate to customers. The money may not be going to priority sector borrowers. We do not know whether the gold loan companies are using the money, which they borrowed from banks, for borrowers who come under priority sector,” K C Chakrabarty, Deputy Governor of the Reserve Bank of India, said on Friday. According to norms, banks have to extend 40 per cent of their loans to the priority sector. NBFCs, however, do not have such mandate. Chakrabarty, however, clarified that banks could continue to lend to the NBFCs which are in the gold loan business.”
The way forward for microfinance
Social sciences literature now recognises social, human, and cultural capital, in addition to economic and physical capital. Even though independent, different types of capital possess attributes of interdependency and reciprocity. Simply, this means that even social capital can be transmuted into economic capital. And, women groups repaying loans to microfinance institutions through frequent instalments in a group setting exemplify social capital at work. The underlying idea, as Robert Putnam found in the Italian rotating credit associations, is that membership in associations (or SHGs) generates trust and norms of reciprocity. Typically, SHGs are small groups possessing ‘thick trust’ (trust based on personal knowledge of other actors in the group) that makes responses of group members predictable and enforcement of loan repayment relatively easy; therefore, attracting financial institutions to lend. Accordingly, in social capital — relationships of trust embedded in social networks — the poor have a non-monetised resource that metamorphoses into loans and the attractiveness of the SHG model is founded on inclusiveness, the unique democratic accessibility of social capital, because all other forms of capital exclude the poor, ignorant, and unpropertied. Furthermore, researchers agree that social capital is a multidimensional construct having several forms and two forms of social capital — bonding (that links people together with others like them) and bridging (social ties that cut across differences such as caste, class or religion) — distinguished by Avis Vidal, are generally accepted. Bonding social capital promotes exclusive identities, gives precedence to the group over community and generates specific reciprocity; in contrast, bridging social capital is outward looking, promotes acquaintances with different and distant people and leads to generalised reciprocity. Importantly, as the work of Xav Briggs has shown, the outcomes associated with the two forms of social capital are different. Bonding capital helps the poor to get by or cope with particular challenges (social support), as opposed to bridging capital that helps to change the opportunity set and get ahead in life (social leverage). Presently, lending activities of MFIs are primarily confined to lend and enforce collections drawing down on the social ties found in supportive groups. Recently, Dr Rangarajan, chairman of the PM’s Economic Advisory Council, also referred to the “flawed business model” in which the MFIs primarily leverage on the existing social ties to engage in multiple lending, that too for consumption. Additionally, insights available from a recent MIT study (Abhijit Banerjee and others, 2009) in 104 slums of Hyderabad show the importance of context while designing interventions for the poor. The MIT study found that pre-existing conditions of households matter. In response to MFI loans, households with existing businesses increase spending on durable goods (e.g., investment). Households with high propensity to start businesses, finding loan amounts to be inadequate to start businesses reduce spending on temptation goods (e.g., tobacco, alcohol). And, households with low propensity to start businesses increase spending on nondurables spending (e.g., food, marriage, illness). Therefore, the challenge, in addition to broadening and deepening ties, is to design specific interventions that are based on the existing business activities of households and their propensity to engage in income-generating activities. The fact that the bonding and bridging capital interact and mediation by intermediary structures is possible provides a useful way to access outside resources (build bridging capital) to transform social ties to economic capital. Drawing from practice stories elsewhere, MFIs can work as intermediary organisations to design deep contextual interventions. Households having pre-existing businesses will require social ties that provide more than mere emotional support and everyday favours. More useful are bridging contacts that can help them to get a crucial new idea or news of an impending market downturn or provide political and managerial access. The value of such bridging networks lies in the fact that they are not passive bridges, but are active links relaying important information and are also capable of endorsing (vouching for) the poor having limited access to money and other scarce resources. For households with little propensity to do business, the MFIs intervention will include training and other support to help the households — including those with no formal schooling or language skills — to acquire and practise ‘public life skills’ to earn more than subsistence wages that only help them to cope with daily life. Research by Michael Woolcock and others is increasingly pointing to the contribution of such linking social ties to help the poor to expand their opportunity set, for example, getting jobs through external contacts. Finally, for households with high inclination to engage in income-generating activities, getting ahead in life will require training and other support, such as leveraging funds from the government and locating funding sources to meet their complete fixed and working capital needs. All in all, social capital is about relationships; therefore, freely accessible to the poor and the common availability differentiates social capital from other forms of capital. The MFIs have mainly limited themselves to using the existing bonding capital in groups to lend and recover. However, the simple but crucial support/leverage distinction and the fact that the two forms of capital interact and mediation by intermediary structures is possible have the potential to give competitive advantage to the poor by broadening and deepening their social networks and the MFIs can purposefully facilitate the development of meaningful bridging ties by working as intermediary organisations to help the poor to get ahead in life and move beyond the support networks that only help them to stay where they are and only cope with calamities of life. - Sameer Sharma, IAS
RBI fines 2 Gujarat-based banks
The Reserve Bank today imposed a penalty of Rs 1 lakh each on two Gujarat-based banks for irregularities in reporting of cash transactions. The RBI said the two banks -- Ghoghamba Vibhag Nagrik Sahakari Bank and Janata Co-operative Bank -- had violated the guidelines for reporting of cash transactions of over Rs 10 lakh.
Not surprised if RBI increases rates by 25%: Rangarajan
With a spike in food inflation, C Rangarajan, Chairman of Economic Council to the Prime Minister, today said he would not be surprised if RBI hikes the rate by 25 basis points to contain it. Replying to a question about whether he expected another hike in the rates due to the increase in food inflation, Rangarajan said, "I will not be surprised if the RBI raises the rate by 25 basis points". Driven by high prices of fruits, milk, meat, eggs, India's food inflation crossed 17% for the week-ended January 22. Rangarjan, who was speaking on the sidelines of a book release function organised by Southern India Mills Association, said RBI would continue to act as long as there was a need to contain the rapid escalation in food prices.
SKS threatens exit from Andhra
SKS Microfinance may consider pulling out of Andhra Pradesh if the state government does not revoke its recent restrictive legislation on microfinance institutions by April 1. “Until RBI (Reserve Bank of India) steps in and does something on the AP Act, we are going to see some uncertainty. The committee (Malegam panel, which recently gave a report on the issue to RBI) has given seven reasons why the state government should not have its Act. The committee has also said April 1 is when it would like to see these recommendations in place,” said Vikram Akula, chairman of SKS Microfinance.
Foreign bankers hope RBI plan won’t up tax burden
Although appreciative of the Reserve Bank of India’s stance that foreign banks should operate in India as wholly-owned subsidiary (WOS) rather than as a branch of the parent, foreign bankers are hoping the conversion would not mean too much of a tax liability.
Moreover, the RBI's proposal that the WOS become a listed entity over time, resulting in a dilution of the parent bank's holding, has not gone down too well with the fraternity. A dilution of the parent bank's stake would mean it would have to give up total control and also some share of the profits. A local listing, foreign banks fear, would restrict their ability to capitalise on the parent bank’s balance sheet. Some foreign banks are dispapointed that the RBI may restrict the entry of new players as also the expansion plans of existing foreign banks once their assets in India exceed 15% of the assets of the banking system. “We would suggest that the RBI consider increasing this limit given that the opportunity in the country is tremendous,’’ said the CEO of a foreign bank. There are 34 foreign banks operating in India as branches, accounting for 7.65% of total banking assets as on March 31, 2010, up from 9.03% a year ago. If credit equivalent of off-balance sheet assets are included, their share was 10.52%. The share of top five foreign banks alone was 7.12%. Currently, top five foreign banks account for more than 70% of total balance sheet assets of foreign banks in India.
Friday, February 4, 2011
India's microfinance sector can expect healthy growth if RBI the sole regulator for the sector
India's microfinance sector can expect healthy growth if the Reserve Bank of India (RBI) becomes the sole regulator for the sector, SKS Microfinance chairman Vikram Akula said on Thursday. The fast-growing Indian microfinance sector suffered a setback in October when Andhra Pradesh, which had the largest microfinance market in the country, approved legislation to regulate the industry following complaints about high interest rates, aggressive recovery practices and overextended borrowers. "The Banking Act supercedes anything else in the country," and it would be a matter of time before the RBI became the single regulator of for-profit microfinance companies resulting in "measured, yet healthy growth," Akula told reporters. Growth in the sector would be significantly affected if Andhra Pradesh does not recognise the RBI as the sole regulator, he said, adding the company may have to downsize its operations in the state. The RBI panel earlier this month recommended an interest rate cap of 24.7 percent, limited to two the number of microfinance firms that can lend to the same borrower, and also called for a customer protection code for microfinance companies. The creation of a separate classification of MFI-NBFCs (microfinance institution - non-banking finance companies) and access to priority sector lending to companies that fall under this category were two of the recommendations that Akula highlighted as being positive to the sector. The RBI formed a panel in late October in response to the Andhra Pradesh rules, which severely curtailed microfinance activities in the state, curbed collections and hurt new business.
Set up risk mitigation system: RBI to Fx dealer banks
Revising the guidelines for foreign exchange business, the Reserve Bank of India (RBI) today asked banks dealing in forex to set up a comprehensive risk management procedure for trading as well as non-trading activities. "Banks should have a comprehensive and adequate risk management procedure covering both trading and non-trading activities...Such a procedure will assist in limiting and monitoring risk taking activities," the RBI said in revised guidelines for 'Internal Control Over Foreign Exchange Business'. The central bank has also advised the Authorised Dealer (AD) banks to tape conversations in the dealing rooms. "The tapes may be preserved for at least two months and where a dispute has been raised, until the issue is resolved. Access to the equipment and tapes should be subject to strict control," it said. The RBI has also asked the banks to set the limits for inter-bank business as well as transactions in overseas markets. "The limits when exceeded should be promptly reported to appropriate senior management and got approved," it said, adding the procedure would help in exercising control over the forex business and contain risks. Asking the banks to strengthen concurrent audit mechanism, the RBI said that minor irregularities in forex trading should be rectified immediately and the serious ones should be reported to the controlling authorities for action. The RBI has also asked the ADs to segregate their operations into dealing room, risk management, and settlement and reconciliation of accounts. The AD banks, RBI said, should ensure that brokers should not take over the functions of dealers. "Complaints relating to malpractices by brokers should be promptly brought to the notice of the Foreign Exchange Dealers Associations of India, Mumbai," it said. The internal control guidelines were initially framed by the RBI in 1981 and were revised in 1996. The RBI said they are being revised again in view of rapid changes in the global and domestic forex markets and developments in the field of information technology, and introduction of forex derivatives trading.
RBI Governor appears before PAC on 2G issue
The Reserve Bank of India (RBI) Governor D Subbarao, who was Finance Secretary when the 2G spectrum allocations were made, today appeared before Parliament's Public Accounts Committee (PAC) and shared "accurate information" on the controversial issue. Subbarao, as Finance Secretary, had raised questions over the entry fee for mobile operators ahead of the 2G spectrum allocations that led to the resignation of Telecom Minister A Raja and his subsequent arrest by the CBI. "The current RBI Governor was the Finance Secretary and he shared accurate information regarding his communications with the Department of Telecommunications (DoT)," PAC Chairman Murli Manohar Joshi told reporters here. He said the Committee members held "significant discussions" on the issue but ruled out submission of an interim report on the matter during the Budget Session of Parliament. He said the Finance Ministry, Telecom Regulatory Authority of India and DoT were interconnected and hold consultations before taking any significant decisions. “We have received very important and pointed information from him,” said PAC chairman Murli Manohar Joshi after the meeting.
RBI to tighten oversight norms for portfolio management
The multi-crore fraud at the Gurgaon branch of Citibank has prompted the banking regulator to review existing norms for the portfolio management services (PMS) of banks. With the Reserve Bank of India’s (RBI’s) inspection report on the Citibank fraud ready, banking industry sources said RBI would compile a comprehensive report on the loopholes in PMS guidelines. The report, which is being prepared by the department of banking supervision, will be discussed by the board for financial supervision and the guidelines revised based on feedback. According to RBI norms, no bank can offer PMS without specific permission. However, bank-sponsored non-banking financial services companies are allowed to offer discretionary PMS. PMS offered by banks are classified into four categories: Referral services, investment advisory, non-discretionary and discretionary. Sources said present norms do not clearly distinguish between investment advisory and non-discretionary PMS. The regulator will address the issue while revising the norms. It will also look into the way discretionary PMS are provided by banks. According to sources, the central bank may also bring in norms to govern relationship managers, something current guidelines do not. “Some countries do have norms for relationship managers, and the central bank feels the need to have some kind of code of conduct for them,” said a source. Sources also said that until fresh guidelines are formed, RBI may go slow on issuing fresh permission to banks for PMS. Some government-owned banks, which were planning to offer PMS, are now awaiting RBI’s revised norms before starting operations. Present norms do not allow funds to be accepted by portfolio managers for less than one year. In addition, portfolio funds cannot be deployed in the overnight, inter-bank term deposit & bill rediscounting markets or lent to corporate bodies. Banks must maintain client-wise records of funds accepted and investments made. Portfolio clients are entitled to a statement of account.
Kerala HC paves way for India’s first Islamic bank
The Kerala high court on Thursday 8 dismissed a petition challenging the state government's plans to co-promote an Islamic 8 finance institution. The move could pave the way for introduction of Islamic finance products by existing lenders and also reduce regulatory objections for an Islamic Bank. On Thursday, a division bench comprising Chief Justice J Chalameswar and Justice P R Ramachandra Menon dismissed petitions objecting to the creation of an Islamic financial institution and said the proposed body was to work in accordance with financial laws of the country even while it complied with sharia rules. The move has much broader implications considering Islamic finance has not taken off due to a stand taken by RBI that such a form of banking is not possible given present regulation. This stance was taken by an internal working group of RBI whose report was never made public. In the past, Islamic scholars had made representations to RBI to allow such products. Subsequent representation to allow Islamic finance products was stalled as the government was awaiting the verdict of the Kerala High Court. The key difference between Islamic and conventional banking is that while the conventional form offers interest on deposits mobilized, Islamic finance works on the principles of investment and sharing of profits. Islamic banking products are offered by leading banks in the West who also use Shariah compliant products to mobilize funds from the Middle East. Exisiting lenders like State Bank of India too have considered the feasibility of launching Islamic finance products through its international banking operations. However, these products have not taken off because of lack of regulatory clarity. Some bankers feel that considering that India has the second largest Muslim population in the world, there will be large potential for Islamic banking products.
UK Sinha appointed Sebi chairman
A 1976 BATCH IAS OFFICER OF BIHAR CADRE, UK SINHA IS CURRENTLY THE CHAIRMAN AND MANAGING DIRECTOR UTI AMC. HE ALSO HEADS THE MUTUAL FUND INDUSTRY BODY AMFI. Market watchdog's eighth chief's three-year term to start on February 18. The government on Thursday appointed UTI AMC chief U K Sinha as the chairman of capital markets regulator, Securities and Exchange Board of India (Sebi). A 1976 batch IAS officer of Bihar cadre, Sinha replaces C B Bhave who retires on February 17, 2011. Sinha has been appointed as Sebi chief for a period of three years from February 18, 2011, said a notification issued by the government on Thursday. He will be the eighth chief of Sebi.
CARRYING THE TORCH OF TRANSFORMATION
Dr.C.Rangarajan, who served as governor of the Reserve Bank of India from 1992 to 1997, was also a distinguished academic, having held faculty positions at University of Pennsylvania and Indian Institute of ManagementAhmedabad. During his tenure at RBI, first as deputy governor and then governor, Rangarajan was responsible for initiating several reforms such as harnessing information technology to streamline banking sector operations. His contribution in helping India manage the fallout of the 1991 financial crisis is notable. It was due to his efforts that the automatic monetisation of the government’s deficit was terminated, which enabled the central bank to absorb the huge losses incurred through various non-resident schemes. Upon completion of his tenure at RBI, Rangarajan was appointed chairman of the Prime Minister’s economic advisory committee.
Sushma Nath appointed as Finance Sec
With barely a month to go for Budget 2011- 12, the government appointed Sushma Nath as the new Finance Secretary and gave her an extension for two months till May 31 this year. Nath, now the Expenditure Secretary, succeeds Ashok Chawla who retired on January 31. She will continue to hold the charge of Expenditure Secretary as well. Nath was to retire on March 31. Meanwhile, R Gopalan, who has been appointed as Secretary, Department of Economic Affairs, will hold charge till April 30 this year. Both Nath and Gopalan are expected to be the main architects of the Budget which will be presented by Finance Minister Pranab Mukherjee on February 28.
Thursday, February 3, 2011
Technology use yet to reflect in better services: Chakrabarty
Even as banks adopted technology in the decade gone by, the envisaged benefits were yet to reach the customers, the Reserve Bank of India (RBI) said on Wednesday. “Adoption of technology has changed the face of the sector, which can be seen in the various transformational developments of the recent past. The benefits of technology are, however, not commensurate with the developments,” RBI Deputy Governor K C Chakrabarty said in the annual report for the banking ombudsman scheme for 2009-10. According to the report, due to an increase in customer awareness, the number of complaints under the ombudsmen scheme rose 15 per cent to 79, 266 during 2009-10, as against 69,117 in the previous year. “The speed, cost, convenience and efficiency of banking services have not improved by using technology. A part of the problem is that banks are still trying out fledgling delivery models rather than putting in place a cost-effective, decentralised and realistic delivery model,” Chakrabarty said. “Thus, fixing a problem when it happens becomes the weakest link in providing efficient customer service,” he added. The ombudsman report shows an increase in the number of complaints from metropolitan and rural areas during 2009-10. Complaints received from the former constituted 34 per cent of the total, followed by rural areas (32 per cent), urban areas (20 per cent) and semi-urban areas (14 per cent). “Unfortunately, information technology has not been properly implemented, leading to a rise in the number of complaints. This is due to lack of IT strategy, vision, business process re-engineering and business model, on the banks’ part,” he said. According to RBI, banks are required to bring cost-effective technology with an appropriate delivery model to improve the speed, efficiency and quality of service. Banks would also have to ensure that customers were treated fairly as technology had this unique characteristic of bringing in equality, RBI said
Shri Karuppasamy takes charge as New Executive Director at Reserve Bank of India
Shri S. Karuppasamy, assumed charge as Executive Director of the Reserve Bank of India today. As Executive Director, Shri Karuppasamy will look after Department of Expenditure and Budgetary Control, Department of Information Technology, Legal Department and Urban Banks Department. Shri Karuppasamy was Regional Director of the Reserve Bank’s Kolkata office prior to taking charge as Executive Director. Shri Karuppasamy has also headed two Central Office departments, namely, Department of Banking Supervision and Urban Banks Department. Joining the Reserve Bank of India in 1975, Shri Karuppasamy has worked in various departments in different capacities. These include, Issue Department, Department of Economic Analysis and Policy, Banking Department, Agricultural Credit Department, Rural Planning and Credit Department, Department of Banking Operations and Development and Urban Banks Department. He has also worked in various regional offices of the Reserve Bank. He has been a Member Faculty in College of Agricultural Banking, Pune and has also been the Principal of the Reserve Bank’s Staff Training College, Chennai. Shri Karuppasamy has also been associated with working groups in certain areas, such as, High Power Committee on Urban Cooperative Banks, Rating Framework for Urban Cooperative Banks, Cross Border Supervision and Integrated System of Alert. Shri Karuppasamy is a post graduate in Economics, is a Certified Associate of Indian Institute of Bankers, has a Post Graduate Diploma in Bank Management (NIBM) and is a Pragya. As Regional Director, Shri Karuppasamy was an RBI Nominee Director on the Board of Indian Bank.
Budget may have roadmap for new private banks
India is considering allowing new private sector banks, including those by industrial houses, and a roadmap for the same could be announced in the Union Budget to be presented later this month. While the formal and final guidelines regarding who should be allowed to set up new banks and what should be the terms and conditions would be announced by the Reserve Bank of India (RBI), a roadmap could be announced in the Budget speech on February 28 by Finance Minister Pranab Mukherjee, sources said. mong other options, RBI was considering the grant of licences to small banks for the initial few years, which could be upgraded to full-fledged banking licences after it was satisfied with their performance and the fulfillment of certain criteria, sources said. The guidelines would dwell upon issues like the minimum capital for new banks, the promoters’ contribution, minimum and maximum caps on the holding of promoters and others, foreign shareholding, business model and whether industrial houses and NBFCs (non-banking financial companies) could be allowed to run banks. Among others, a number of corporate houses, including Anil Ambani-led Reliance group, the Aditya Birla group and the Religare group, have expressed interest in obtaining banking licences. A number of NBFCs and micro-finance institutions are also said to be interested. RBI has said new licences were required since vast segments of population, especially underprivileged, still have no access to banking services.
Pvt banks should participate in inclusive banking: AIBOC
The All India Bank Officers' Confederation (AIBOC) has demanded that all banks including the new generation private sector banks and foreign banks need to participate in the inclusive banking process. It also called for upgradation of pension as and when salary revision takes place, medical facilities to the pensioners as in the case of chairman and managing directors (CMDs), provision of five-day week for the banking industry and regulated working hours for the bank officers. Addressing media persons here, G D Nadaf, general secretary, AIBOC said, “Presently, the working hours of bank officers are not regulated. We demand that their duty hours should be specified. Our confederation is opposed to mergers and acquisition in the banking industry and we demand more number of branches of public sector banks and also a commensurate addition in manpower.” The two-day business session of AIBOC began on January 30. The conference is expected to be attended by over 1500 delegates and observers from all over the country. The General Council of AIBOC will deliberate on the issues confronting the labour movement, threat to trade union rights and de-unionization. The AIBOC has alleged that continuous efforts are being made to dilute labour welfare measures as part of the globalization process of the economy and attacks are mounted on the trade unions in order to create a trade union free environment and throttle the voice of the workers
Paypal RBI Issue–Paypal Violated FEMA Act - RBI
RBI has issued a circular regarding the ongoing Paypal/RBI issue, and the following sentence sums the entire story. “It was observed that a few OPGSPs (Online Payment Gateway Service Providers ) have not only facilitated conclusion of the transactions but also allowed exporters to retain the export proceeds abroad without repatriation resulting in violation of the provisions of FEMA, 1999. Acknowledging however the importance of the services provided by the OPGSPs to the exporters, particularly in facilitating small value export transactions, it has been considered necessary to issue a set of guidelines to cover such e-commerce arrangements.”
Some microfinance policy considerations for the Reserve Bank of India beyond the Malegam committee report - Sasidhar Thumuluri
The ongoing microfinance regulatory policy formulation exercise should not be a missed opportunity. The resulting framework should enable greater financial inclusion and lead to a more integrated financial system. Mr. Yezdi Malegam and his high profile committee will adorn a special place in the annals of Indian microfinance. The report produced by this Reserve Bank of India (RBI) board committee is touted as a major milestone and some even called it a savior of the sinking sector. It has received as many accolades as criticisms. The microfinance community at large welcomed some key recommendations that would go a long way in offering much needed legitimacy to microfinance institutions (MFIs) and subject the industry to higher levels of accountability and disclosure standards. Serious concerns were however raised almost in unison with respect to provisions that could pose practical challenges of enforcement, stifle competition, raise entry barriers and limit customer choice. RBI is currently seeking public opinion on the report and will hopefully take these reactions into account before declaring the rules of the game. The purpose of this article is to offer some thoughts over and beyond Malegam committee’s work as the RBI prepares to formulate the policy framework that would define the future course of the sector. Given the time constraint and circumstances under which the committee delivered the report it has done a commendable job but, understandably, it had a limited mandate or opportunity to look into the issue more comprehensively. RBI should nevertheless consider long term implications while formulating the policy that would enable greater financial inclusion and lead to a stronger well integrated financial system. Same applies to the finance ministry which is about to table new microfinance bill in the parliament. Following suggestions may be considered in addition to the Malegam committee report and other expert opinions:
1. Include a wide spectrum of basic financial services in microfinance definition:
Poor people require access to all kinds of financial services just like everybody else. Thus far the emphasis has been on frequent cash flow income generation loans primarily offered through group mechanisms. Money is fungible and these loans tend to be diverted for consumption and asset building many a times in the absence of suitable loan products. A good policy environment should enable financial institutions to design and deliver customized products that fit varied financial needs of the target market. Hence it is important to recognize this fact and keep in mind credit requirement for other vital needs such as housing, agriculture, education, health, water & sanitation etc., as well as the unmet need for savings, remittances and insurance services while ascertaining the boundaries of microfinance regulation in order to effectively address the challenge of financial inclusion. Mobile banking promises great potential in achieving scale efficiently. Safely leveraging the ever expanding mobile phone network in credit delivery, insurance distribution and money transfers may also be explored.
2. Allow the establishment of small finance banks:
Raghuram Rajan committee on financial sector reforms made this recommendation back in 2008. This has also been a long standing demand of certain leading players involved in financial inclusion initiatives. Local Area Banks were a step in the right direction but met with limited success apparently due to lack of regulator’s interest in pursuing the idea further. More than 10 MFIs in the country manage over Rs. 500 crores each in assets with equity base of anywhere between Rs. 50 crores and Rs. 2000 crores. By allowing limited service small banks with minimum capital requirement of Rs. 50 crores would not only accelerate the provision of much needed savings services to the unbanked clientele but also significantly and sustainably reduce cost of funds, and improve operating efficiency for MFIs, in turn reducing borrowing rates for end-clients. Moreover, since the Malegam committee has made it loud and clear that MFIs must be supervised more closely by the RBI, small microfinance banks in addition to the committee recommended NBFC-MFIs would make a decent portfolio for the Reserve Bank to merit a separate supervision wing with adequate resources to enforce policies more effectively rather than by just adding a new category under NBFC group which may or may not have dedicated resources necessary to regulate the sector. On the top if it, RBI regulated “banks” enjoy greater credibility and are less likely to be subjected to knee-jerk political actions.
3. Allow NBFC MFIs to offer business correspondence services for commercial banks:
MFIs together deliver credit and, to a limited extent, insurance successfully to over 20 million households in India today, of which NBFC MFIs make up for roughly 85%. Those MFIs that would not qualify to be small banks (per the above suggestion) may be allowed to offer core banking services on behalf of commercial banks via business correspondence model. Given high potential for outreach through an extensive network of field force these MFIs make perfect partners for taking banks to the last mile. This would not only enable non-bank MFIs to offer savings and other banking services to the unbanked but also help enhance banks’ oversight on MFI activities.
4. Bring all sizable private microfinance activities under one umbrella:
Malegam committee apparently left out a large number of NGO MFIs and small NBFCs from the purview of its recommendations. If implemented the recommended framework would leave ample room for recurrence of situations like those led to the recent turmoil or create regulatory confusion at the least. It is important to define rules for all significant players through a common policy regime. At the same time it is also imperative to enable seamless transformation of small MFIs into large responsible entities. All privately owned MFIs that manage an asset base of more than Rs. 10 crores or serve more than 10,000 clients may not be allowed to operate as non-profits since it is in societal interest that financial business of sizable proportion be practiced under proper supervision, especially where majority clientele constitute vulnerable population. Beginning with a minimum capital requirement of Rs. 5 crores for newly transforming or start-up MFIs a timeline, say 3-5 years horizon, may be set for raising the capital base to Rs. 15 crores as recommended by the Malegam committee.
5. Promote public-private partnerships:
SHG-bank linkage program is a hugely successful government sponsored microcredit program that is aimed at making bank credit accessible to the poor. Public sector banks and state governments work together under NABARD’s support in making this subsidized credit program work. MFIs with their extensive outreach into the hinterlands could prove great partners in funding to and managing the credit risk of SHGs. At the behest of RBI and the central government, NABARD could consider lending directly to MFIs for on-lending to government sponsored SHGs that are unable to access bank credit. This will not only minimize the possibility of duplication of groups and multiple lending but also help build strong symbiotic relationship between state governments and MFIs, in turn avoiding some of the troubles that seem to have caused Andhra Pradesh government to act the way it did. Similar thought could be extended to other transactional services such as bill payments, government pensions, welfare payments etc., in a phased manner.
6. Extend tax breaks and special status to MFIs operating in remote and difficult terrains:
The objective of financial inclusion would only be fulfilled when basic financial services reach every corner of the country through legitimate means. Offering MFIs with tax breaks and special recognition for reaching out to remote and underserved areas could prove an effective strategy in deepening the financial access. Such recognition could mean having access to special credit lines from banks at below-market rates. Lower cost of funds and tax savings could in turn be useful in offsetting extra operating costs incurred in serving less accessible areas without significant negative impact on revenues and/or effective cost to the borrowers. This is the first time RBI has ever commissioned an intensive exercise on MFI regulation. Such opportunities do not come too often and should be best utilized. Policy frameworks of Philippines, Cambodia, Peru, Bolivia, Ghana, Kenya and Uganda could come handy as good reference points. These countries have been hailed for achieving some success in establishing progressive regulatory environments for microfinance. It is understood that implementation of some of the above suggestions would mean commitment of significant additional resources on the part of RBI and the government. The very task of making financial services available to roughly 50% of nation’s population that is unbanked is no simple matter either and an earnest investment in a robust regulatory oversight infrastructure sooner than later may not be a bad idea. - Sasidhar Thumuluri is a seasoned microfinance professional who keeps a close eye on the developments in India. He has studied the business of microfinance in over 30 countries and has a good grasp of its details. He is currently employed with Habitat for Humanity International in Washington DC and manages its global housing microfinance portfolio
Indian Banks form core team for microfinance loan restructuring
under the Indian Banks Association (IBA) bankers met recently to set up a core team of lenders to decide on the restructuring loans to micro-finance institutions (MFIs). The decision to restructure the MFI loans was taken after a few MFIs approached the banks for restructuring their loan portfolio. The Reserve Bank of India had also earlier permitted banks to restructure loans to MFI sectors even if they were not secured. In the first phase only 10 MFIs, including SKS Microfinance, Spandana Sphoorty, Asmita and Share Microfinance with operations in Andhra Pradesh, have been called for discussions. According to a banker, the restructuring of loans would be done on the basis of the “projected cash flows of the MFIs”, to be calculated and suggested by charted accountants. Banks can restructure a loan either by extending the time for repayment, by repayment holidays and by interest rates rebate.
Wednesday, February 2, 2011
Anand Sinha - Man Friday you can always count on
In Delhi’s North Block, which houses the finance ministry, bureaucrats there often say that central bankers are paid to be conservative. And that is a description which may well fit the new Deputy Governor of the Reserve Bank of India, Anand Sinha. The career central banker has straightway been assigned the charge of the Department of Banking Operations and Development which handles banking licences. That is in keeping with his core competence on this front and banking supervision. A former boss of his says Mr Sinha was admired most for his ability to think originally on many issues. This has also earned him respect in global banking circles. He is well versed in finer details of new prudential and supervision norms, also known as the Basel III norms, which are currently being debated globally among central banks. Mr Sinha has been involved in drafting and formulation of several major regulatory and supervisory policies for commercial banks. And that includes draft guidelines in the making on licensing new private banks, besides the policy paper on the entry of foreign banks. Mr Sinha has had vast global as well as local exposure. He represented India and the RBI on several international committees. He was Reserve Bank of India’s alternative representative on the Basel Committee on Banking Supervision (BCBS), Bank for International Settlements (BIS), Basel, Switzerland, and was also on various sub-committees. Besides, he was also a nominee of the RBI on the boards of several state-run banks. Commercial bankers view him a little differently. In his interaction with bankers, they say, he talks less and listens more and comes across as a die-hard central banker who reckons that the regulator is always right. They do acknowledge his in-depth knowledge not only of prudential accounting norms, Basel II and III, but also his knowledge relating to the new financial accounting norms such as the international financial reporting standards or the IFRS. There are others who say he is very theoretical in his approach, lacking the pragmatism of his predecessor who despite being a central banker was open to change — a quality which is seen as crucial in the changing financial environment as Indian markets integrate with global markets. His colleagues on Mint Street too acknowledge his cautious approach. According to bankers, Sinha’s personality is in sharp contrast to that of his fellow Deputy Governor, K.C.Chakrabarty, who is known to speak his mind even beyond the confines of the RBI headquarters in Mumbai. A voracious reader in his free time, Mr Sinha is said to prefer reading serious academic books on banking regulation and supervision. He is known to be the ‘Man Friday’ of the bosses and a boss whom his juniors can depend on, as he is not one who is imposing. An IIT alumnus — a masters in Physics from IIT Delhi — solving mathematical puzzles is a stress buster for Mr Sinha. That is something he may have to reach out for more over the next two years.
Banks’ interest rates on deposits, lending go up again
Barely a week after Reserve Bank of India (RBI) raised key policy rates by 25 basis points and asked banks to restrain lending and promote deposit growth, a slew of commercial banks have begun by increasing their benchmark lending rates and deposit rates. As many as six PSU banks announced hike in base rates, benchmark prime lending rate and deposit rates by 25-50 basis points across various maturities. Bank of India increased its Base Rate (BR) from existing 9.00 per cent to 9.50 per cent a year and Benchmark Prime Lending Rate (BPLR) from existing 13.25 per cent to 13.75 per cent per annum. Dena Bank increased its BR by 50 basis points from 8.95 to 9.45 per cent. Two others Oriental Bank of Commerce and Indian Bank hiked deposit and lending rates by 50 basis points, while Indian Overseas Bank raised its base rate from 9 per cent to 9.5 per cent. Oriental Bank has also revised its deposit rates by 25-50 bps across various maturities. Bank of Baroda revised its rates of interest payable on term deposits by 25 bps.
Credit card complaints top list of grievances: RBI Ombudsman
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.
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.
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