THE MICRO FINANCE MESS - DR. N. A. MUJUMDAR

Recent revelations of forprofit Micro Finance Institutions ( MFIs) have exposed naked exploitation by these institutions in the name of financial inclusion. Dr. . V. Reddy, former Governor, Reserve Bank of India ( RBI), recently said that these MFIs are worse than money- lenders. A money- lender lends out of his own money, whereas here, MFIs were actually borrowing money from depositors and banks and then further lending the money. In retrospect, the government of Andhra Pradesh deserves to be congratulated on its 2010 ordinance which spelt out clearly the malpractices of such MFIs. Whereas these Self Help Groups ( SHGs) are being exploited by private MFIs through usurious interest rates and coercive means of recovery resulting in their impoverishment and in some cases leading to suicides..., the ordinance said. This triggered a crisis which almost paralysed for- profit MFIs, with banks reluctant to lend, repayments dwindling and depositors tending to withdraw their money. It is this shock therapy which led to subsequent soul- searching on the part of those MFIs, the promoters of which were fattening themselves off the sweat of poor borrowers. The Microfinance Institutions Network ( MFIN), a grouping of for- profit micro lenders, has now set up a Committee to look into these deficiencies. In fact the clout of these MFIs seems to be so strong that in spite of all that has been now exposed, some influential papers plead: Dont Kill Microfinance. The short answer to such pleas is: We do not want to kill these MFIs but we certainly want to prevent them from killing their poor borrowers. No doubt the for- profit MFIs represent the predatory face of financial capitalism. But this was compounded by the institutional support which was extended to these MFIs. Such support came from the RBI, the public sector banks ( PSBs), NABARD and SIDBI. For instance, during 2008- 09, banks extended loans of something like Rs. 3,700 crore. Why should PSBs extend loans to MFIs at something like 12 per cent, when they were fully aware that these funds would be on- lent by MFIs at 25 to 30 per cent? The answer is that such loans by PSBs to MFIs were treated as riority sector lending. So this had the blessings of RBI. Similarly, some equity or quasi- equity support came from SIDBI and NABARD, of course, at concessional rates. RBI could have stipulated that PSBs should lend only to not- for- profit category of MFIs. PSBs could have also stipulated, on their part, that the on- lending rate of beneficiary MFIs should not exceed say 17 or 18 per cent. This was not done. This systemic support perhaps also lent some respectability to for- profit MFIs. Thus public sector financial resources were used to perpetuate usurious lending practices of MFIs. It is one thing to say that RBI had no stautory powers to regulate MFIs. But was it obliged to support for- profit MFIs? These questions must be answered by Dr. Reddy, during whose tenure the MFI party began. RBI could have stipulated that PSBs should lend only to not- for- profit MFIs, fixing a ceiling on their on- lending rates. This support made the system, in a manner of speaking, a co- conspirator in this business of exploiting poor rural borrowers. Public funds were allowed to generate private profits. RBI has not covered itself in glory in this episode. Because of obscenely high returns, stemming from exorbitant lending rates, for- profit MFIs have become attractive investment destinations for Private Equity and Venture Capitalists. The recent success of the IPO of SKS Microfinance is a case in point. It attracted high profile investors like billionaire George Soros, venture capitalists Vinod Khosala and Infosys Founder Narayan Murthy. Alluding to this transformation of the humble animal microfinance, Muhammad unus, the father of microfinance movement said: “ It is a complete detour and nothing but a quitting of microfinance mission.” Basically, lending to the rural poor at 30 or 40 per cent defies all economic logic. Our small rural borrowers are not Schumpeterian mini- heroes, who can make the project or activity for financing what they have borrowed, financially viable. In fact, by inflating interest cost, we are building ‘ ab initio’ non- viability into the project. Secondly, the engagement of for- profit MFIs with borrowers has been shallow based on touch and move on business models shorn of any development content. The average loans per client in both MFIs and SHGs have been low, between Rs. 3,500 and Rs. 5,000. The duration of the loan is short, typically one year or less. The small loan size and short duration do not enable most borrowers to do much except to ease liquidity problems.

(Dr. Mujumdar is editor of the Indian Journal of Agricultural Economics.He has worked for the RBI and has advised the central banks of Zambia, Mauritius, Tanzania, Belize and Cambodia.He was consultant to the World Bank, the FAO and ESCAP)

Non-review of MFI's programs by banks draw RBI's ire

The Reserve Bank of India is pulling up banks for not adhering to best practices and slacking on their role of reviewing microfinance institutions’ operations after extending credit support, reports The Hindu Business Line. The newspaper is quoted as saying that the apex bank sent a circular to the public sector lenders, mentioning that they were “not engaging themselves in capacity building and empowerment of the groups to the desired extent.''  At present, MFIs are disbursing loans within 10-15 days of the formation of new groups. However, the practice is to take six-seven months of group formation or nurturing/ hand-holding. “As a result, cohesiveness and a sense of purpose were not being built up in the groups formed by these MFIs,” the RBI is reported to have said in the paper.

Finmin weighs extension for Union Bank, LIC chairmen

After putting new SBI and a new SEBI chiefs at helm, the finance ministry is currently evaluating whether to give extension to the tenures of LIC chairman T.S.Vijayan and Union Bank of India CMD M.V.Nair - both will be completing their respective five-year tenure but will be having residual services to reach 60. Vijayan, who recently had to do a lot of firefighting after Central Bureau of Investigation arrested officials from LIC's investigation department and LIC Housing Finance CEO R.R.Nair in bribe-for-loans cases, will be completing five years in April but will have two more years to reach the superannuation age of 60. Similarly, Nair will ending his five-year tenure at UBI in March but will have one more year to reach the retirement age of 60. It has not been an easy decision for the finance ministry to decide whether to go for extension in both Vijayan and Nair's cases as not giving extension after 'a tenure of five years' has become a parctice for so many other important appointments in financial sector and other public sector enterprises. Usha Thorat, Deputy Governor, Reserve Bank of India, Sarthak Behuria, CMD, India Oil, Ashok Sinha, CMD, Bharat Petroleum Company were earlier denied extension though all of them had residual services to reach 60. Sources point out that initial round of discussion among the top official of the ministry hasn't found favour for giving extension to both Vijyan and Nair.. But finance minister Pranab Mukherjee is yet take a call. There are indications that Vijayan may be rehabilitated in any other top posts like UTI Chief which has fallen vacant after U.K.Sinha's appointment as SEBI Chairman or a member in the Securities Appellate Tribunal. Similarly, Nair may be shifted as the executive chairman of Star Union Life Insurance, a life insurance joint venture among Bank of India, Union Bank of India and Japanese major Dai-ichi. The contenders for the LIC chiefs in terms of seniority are DK Mehotra, Thomas Mathew, AK Dasgupta - all are currently LIC's three managing directors. Finance ministry sources point out there will be a decision about the LIC chief soon. Meanwhile, the ministry is also in the process of filling up posts of UTI chairman, Nabard chairman, CMDs of Sidbi and ECGC. For top posts of Nabard, the name of Prakah Bakshi, one of the junior most executive directors in Nabard is doing the round, sources point out. If selected Bakshi will be superseding many of his seniors including SK Mitra who is the senior most ED in the organisation. Incidentally, KG Karmakar, managing director of Nabard who has almost completed five years in the post was excluded from the exercise to choose chairman as he has one and half years of service left, falling short of the two year of residual service norms for selection of Nabard chief.

April 1 date hint for MFI interest rate cap

The Reserve Bank of India may impose an interest rate cap on loans by microfinance institutions (MFIs) from April, in line with the recommendations of the Malegam committee last month. According to RBI Deputy Governor K.C.Chakrabarty, the apex bank has commenced talks with the stakeholders on the implementation of the Malegam proposals. “Some part of the report such as interest rate will be applicable from April 1,” he said. He, however, said officials at the RBI were still discussing the proposals and no binding decision had been taken it. The committee, headed by Y.H. Malegam, proposed the capping of interest rate charged by the MFIs at 24 per cent. Its recommendations followed a regulation by the Andhra Pradesh government restraining the MFIs from adopting strong-arm tactics to facilitate loan recovery. It also stipulated that the loan repayment cycle should at least be monthly from the earlier practice of weekly collections.

India Infoline launches financial literacy programme

Brokerage firm India Infoline (IIFL) on Friday said it has launched a financial education and awareness initiative called FLAME (Financial Literacy Agenda for Mass Empowerment), with an aim to improve financial literacy across over 1,000 cities in India. The company has a budget of Rs 25 crore for its initiative towards the corporate social responsibility, IIFL said in a statement.  “We shall leverage our network of 3,000 locations, 15,000 employees and 1 million customers across the country to reach out to small towns as well as under-privileged sections of the society. We have set aside a budget of Rs 25 crore, in addition to efforts of a crack team of 500 from the company,” IIFL Chairman Mr Nirmal Jain said. The company’s programme will comprise a mass media campaign, an online portal, a helpline, ground level financial awareness workshops, connecting with students at B-schools, books and training via expert sessions on financial literacy, the statement added. FLAME was launched by Reserve Bank of India’s Deputy Governor Mr K C Chakrabarty and HDFC Chairman Mr Deepak Parekh. Commenting on the occasion, Mr Parekh said “India cannot grow at a sustained high pace without greater financial inclusion and hence a significant investment in financial literacy is no longer a policy option, but a compulsion.” As a part of this new initiative, IIFL will setup a helpline to answer queries pertaining to financial services, which will be manned by the company’s trained professionals, the statement said.

Beyond Core Banking

Seen in the photograph is Dr. K. C. Chakrabarty, Dy. Governor, Reserve Bank of India, along with M. V. Nair, Chairman & Managing Director, Union Bank of India, S. S. Mundra, Executive Director, Union Bank and B. Sambamurthy, Director, IDRBT during the Executive Round Table on ‘ Beyond Core Banking’ organised by Union Bank and IDRBT in Mumbai. This was a unique effort for benefit of the banking community to draw a road map for better customer services and business growth by leveraging investment already made in Core Banking System.

RBI starts discussion with stakeholders on Malegam report

Reserve Bank of India (RBI) Deputy Governor Mr K C Chakrabarty on Friday said the Central bank has started discussion with all the stakeholders regarding implementation of the Malegam committee recommendations on microfinance. “This (the Malegam report) is at the discussion stage... We have not decided anything yet,” Mr Chakrabarty told reporters.  “Some part of the report like interest rate will be applicable from April 1,” he said. RBI has already 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 Mr Y H Malegam, 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. RBI constituted the committee in October last year in the wake of allegations of overcharging and use coercive recovery practices by MFIs that led to a spate of suicides in Andhra Pradesh. The committee submitted its report on January 19. These recommendations, the committee said, should be implemented from April 1, 2011.

New CPI series out, retail inflation at 6 pc in January

The new consumer price index, intended to reflect the actual movement of prices at the micro-level and help policy-makers like the RBI in better framing of decisions was launched today, with initial data pointing to six per cent retail inflation in January. While Consumer Price Index (CPI), according to new series, has increased to 106 in January this year from a base of 100 in 2010, government has chosen not to mention the inflation figure saying the exact level could be arrived only next year. Analysts were also guarded as the new indices have a long way before they evolve into the country''s benchmark for inflation. The figure was arrived based on a comparison with the annual all-India CPI index average for the whole of 2010. According to new series, all-India Consumer Price Index stood at 106 (provisional figure) for January 2011 taking the base at an annualised level of 100 for the entire last year. "Since these indices are being introduced for the first time, annual inflation rates have not been compiled," the Ministry of Statistics and Programme Implementation said in a statement. Inflation, as measured by the Wholesale Price Index -- which remains the top benchmark -- stood at 8.23 per cent in January. Economists said the new series will help both the Government and Reserve Bank to frame their polices as CPI is a better reflection of actual prices than the current practice of following the wholesale price index (WPI). Crisil chief economist D K Joshi said that the country desperately needed an index which is comprehensive. "Not much should be read from the figure of 106 as released today. However, they could be used for framing policy decisions by both the Government and RBI with the passage of time," he said adding the index will move up as there is inflation in the economy. The WPI based inflation for the month under review stood at 8.23 per cent. The CPI has been released for rural, urban and all-India levels. While the rural CPI indices stood at 107, CPI urban stood at 104 during the month under review. ICRA economist Aditi Nayar too said the new series would become benchmark for policy makers, including the RBI, in the future. "Broadly speaking, India is one of the few countries in the world using the WPI as benchmark. The new unified CPI would help the RBI to frame policies in a proper manner," she said adding this reflects the micro level price situation more clearly.

Canara Bank reverses decision to charge for updating passbooks

The Bank had decided to charge Rs10 for updating passbooks of account holders from other branches, but relented after a customer insisted that such basic services should not be charged. When a customer of a nationalised bank protested against new charges to be levied, the officials reversed the decision. Banks, however, insist that it is becoming increasingly difficult to continue providing basic services free of charges and customers will have to start paying up.

How do migrant workers move money in India? - Justin Oliver & Dan Radcliffe

Imagine you’re a migrant laborer living entirely in the cash economy. How do you send money home to your wife and kids? How do you buy supplies from the next town over? How do you pay utility bills? In short, how do you move physical cash over distances? Without access to systems that permit transferring money conveniently, safely, and cheaply, hundreds of millions of domestic migrants face these dilemmas regularly. To better understand just how costly making remote payments can be for poor households, the Bill & Melinda Gates Foundation commissioned the Centre for Micro Finance at the Institute for Financial and Management Research (IFMR) and the Reserve Bank of India’s College for Agricultural Banking to survey 274 domestic Indian migrants and their families living at opposite ends of four domestic remittance corridors.

This is a guest blog by Justin Oliver & Dan Radcliffe. Justin is Executive Director of the Centre for Micro Finance in India and Dan is Program Officer with the Bill & Melinda Gates Foundation.

State Bank chief Bhatt doesn’t see big policy rate hike

State Bank of India chairman OP Bhatt on Friday has said that the interest rates are unlikely to harden in a big way. “Still, I do believe that if the situation on the inflation front continues to remain at the present level, then the Reserve Bank of India (RBI) may increase key policy rates by 25 basis points,’’ Bhatt said.

Budget will be a platform to provide directions on reforms

This year's budget is significant for two reasons. First, the recent spate of corruption scandals has dampened investor sentiment and the budget will be an important platform for the government to provide policy direction on reforms. Second, the current macro challenge facing the government is one of containing inflation and sustaining growth, unlike the last two years when a fiscal stimulus was the need of the hour. Hence, the government's resolve in tightening its fiscal belt will be closely watched.  The Reserve Bank of India has been doing a lot of heavy lifting in terms of containing inflation, but monetary policy is less effective if fiscal policy is not supportive, particularly since the food price inflation partly reflects supply constraints in agriculture. At least on paper, the budget should persist down the path of fiscal consolidation. In FY11, the central government budgeted a fiscal deficit of 5.5% of GDP, but this will likely be bettered at 5.2% due to seignorage (inflation tax) and a one-time revenue gain from 3G spectrum auctions.

U.K.Sinha assumes charge at SEBI

Upendra Kumar Sinha with his predecessor CB Bhave (right) as he arrives to assume charge at the Sebi headquarters in Mumbai on Friday. Sinha, who was the Chairman and Managing Director of UTI Mutual Fund, took over as the eighth Chairman of the market watchdog.

RBI undertakes programmes on financial literacy

New Delhi : As part of its financial literacy campaign, the Reserve Bank organised an interface on policy decisions relating to foreign exchange here. During the event yesterday, RBI's Chief General Manager-in-charge of Foreign Exchange Department (Central Office) Salim Gangadharan presented an overview of systems under the Foreign Exchange Management Act (FEMA) since 1999, and explained major initiatives taken towards liberalisation, the central bank said in a statement. The event was attended by students, money changers and people engaged in export-import business, it added. Reserve Bank personnel also visited Kendriya Vidyalayas in the city to provide information on the role and functions of the apex bank and issues such as security features of genuine currency notes, complaints redressal mechanism through Banking Ombudsman Scheme and its initiatives on financial inclusion and literacy, the statement said.

NBFCs told to drive up CAR to 15%

Finance companies which raise public deposits will have to bring in more capital to do business. The new rule, laid down by the Reserve Bank of India , will apply to large non-banking finance companies such as Mahindra Finance , Shriram Transport Finance and Sundaram Finance , among others.  This is in response to an RBI directive, which asks finance companies taking deposits from the public to maintain higher capital adequacy ratio (CAR) of 15% by March 2012. CAR is the ratio of capital (comprising equity, free reserves and long-tenure debt) to risk-weighted assets.  At present, finance companies are required to maintain a CAR of 12%.  RBI report has noted that as on March 2010, 212 NBFCs had a capital adequacy ratio of more than 12% against 221 NBFCs a year ago. "It may be highlighted that the NBFC sector is witnessing a consolidation process in the last few years, wherein the weaker NBFCs are gradually making an exit, paving the way for a stronger NBFC sector," it said. There are as many as 12,630 NBFCs registered with RBI as on end-June 2010, slightly lower than 12,740 a year ago.

RGB becomes first rural bank to achieve CBS

The Rushikulya Gramya Bank (RGB), a regional rural bank (RRB) operating in south Orissa, has become the first RRB in the state to have placed all its branches on the Core Banking Solutions (CBS) platform. Presently, five RRBs including RGB are functioning in the state.  All the 81 branches of the RGB located in Ganjam (71) and Gajapati (10) districts migrated to CBS on Monday. The day coincided with the Foundation day of the Berhampur based bank, which completed 31 years of its service. The bank was established on February 14, 1981.  “Our bank is the first RRB in the state to have fully implemented CBS, much before the stipulated time set by the Reserve Bank of India (RBI)”, said RGB's chairman PVSTR Seshagiri Rao. The Central government had directed the RRBs across the country to implement CBS before the end of September 2011.  The bank has planned to issue debit cards to its customers and explore the possibilities to utilise the ATMs of its sponsoring bank- Andhra Bank.

Sebi looks at cash settlement in IRF

As part of efforts to boost volumes in exchange-traded interest rate futures (IRF), the Securities and Exchange Board of India (Sebi) is evaluating the option of introducing cash settlement in the segment. If approved, it could come as a shot in the arm for the niche market that has been witnessing almost nil volumes for months.  IRF is an exchange-traded derivatives product for hedging interest rate risks. Only the National Stock Exchange (NSE) offers IRFs, which were launched for the first time in 2003. According to people familiar with the development, the joint technical committee reviewing the guidelines and contract specifications for IRFs is looking at cash settlement as one of the ways to attract more market participants. The committee comprises representatives of Sebi and the Reserve Bank of India (RBI).  With U K Sinha, the new chairman of Sebi assuming office from Friday (February 18), it is expected that the revised guidelines for IRFs will be unveiled soon.

MFIs demand bank funding resumption

Microfinance institutions, or MFIs, plan to approach banking regulator, Reserve Bank of India (RBI) and banking lobby Indian Banks’ Association (IBA) to demand the resumption of bank finance to the industry.  Commercial banks have been slow in releasing loans and considering new loan requests from microlenders since October, when Andhra Pradesh, the hub of the Indian microlending industry, imposed curbs on how MFIs recover money from borrowers—putting their ability to repay bank loans in question. “At an industry level, we are going to take up the issue with the Reserve Bank and IBA as survival of MFIs without adequate bank finance is difficult,” said Alok Prasad, chief executive of Microfinance Institutions Network (MFIN), an industry lobby.  MFIN is likely to approach RBI by next week, Prasad said. Microlenders said banks were unwilling to comply despite an RBI notice last month asking them to recycle loans to the sector—or channel money received as payment of earlier loans back to MFIs. “Banks are advised that they should endeavour to recycle the collections to MFIs,” RBI had said.

Foreign travel made easier with prepaid cards

As per the Reserve Bank of India guidelines, a tourist can carry foreign exchange up to $10,000 per fiscal, of which only $3,000 can be carried in the form of foreign currency notes and coins.  For the rest, one has to resort to traveller’s cheques or banker’s draft. What if the cheque or draft was misplaced or stolen, or got stuck in baggage that was delayed?  Prepaid travel cards are available in different currencies and can be bought even on the day of travel. The exchange rate for a particular currency is based on what is prevalent on the day the card is loaded.  Though one can get multiple travel cards for different currencies, only one card will be issued for a single currency. One can load up to $7,000 on such cards and carry up to $3,000 in notes and coins. There are three types of prepaid cards —- closed-ended, semi-closed and open-ended. Closed-ended prepaid cards are used for payments meant for a single purpose. For example, the card will be issued to the holder to make payments towards DTH TV bills. Semi-closed prepaid cards are available in physical and virtual forms. A physical card is like a normal debit or credit card and has an account number and password. A virtual card only has an account number and password and can be used for online payments. Open-ended cards combine foreign exchange, travel and gift cards. These cards are issued by banks, travelling agencies and are accepted by all current point of sale (POS) terminals.

Banks should push financial inclusion – Ms. Suma Verma, Regional Director, RBI

Ms Suma Verma, Regional Director, Reserve Bank of India, Thiruvananthapuram has urged banks to extend more facilities to the rural population for making the concept of financial inclusion meaningful and fruitful.  Ms Verma said this while inaugurating ‘Sneha,' the Financial Literacy and Credit Counselling Centre (FLCC) established by Indian Overseas Bank (IOB), Lead Bank for Thiruvananthapuram, on Thursday. Delivering the keynote address, Mr K.C.Shashidhar, Chief General Manager, National Bank for Agriculture and Rural Development (Nabard), too, urged banks to reach out to the rural population to push financial inclusion. Ms Indira Padmini, Convenor, District Consultative Committee for Banking Development and Chief Regional Manager, IOB, spoke on the occasion. Among others who spoke were Mr K. Sudhir, General Manager, District Industries Centre; Mr K.S.Sasidharan, Principal Agricultural Officer; Ms J.Prasanna Kumari, Project Officer, Khadi and Village Industries Board; Ms Nalinakumar Ghosh, District Employment Officer; and Mr K. Sasikumar, Counsellor, FLCC.

MFIs in AP may face dual regulation

Microfinance institutions in Andhra Pradesh are likely to face dual regulation (from the RBI and the State Government) with the latter keen on continuing with its stringent Microfinance Regulation Act.  The State Government, which was the first in the country to put in place an act to check “excesses” of MFIs, is meeting top officials of the RBI to inform them that the MFI Regulation Act is going to stay notwithstanding the apex bank's view on the Malegam panel's report. “We have been called for a meeting with the RBI on February 22. Our position is that the AP Act is here to stay and the RBI is not empowered to ask the Government to repeal the Act,'' Mr Reddy Subrahmanyam, Principal Secretary, Department of Rural Development, Government of Andhra Pradesh, told Business Line. The Malegam Committee in its report, submitted to the RBI last month, has recommended that the RBI should be sole regulator of NBFC-MFIs, among other proposals. “This is not viable. The RBI in Hyderabad had about 250 staff. How can it regulate MFI activities in over 40,000 villages? Further, self-regulation of MFIs, as mooted by Malegam, has never worked in the MFI sector till now as a profit motive is involved,'' the official said. The State Government had already communicated its “strong objections” on the Malegam's report to the RBI. It also points to the Constitutional immunity enjoyed by the AP Act, thereby contesting the view that the need for AP act “will not survive” if the Malegam report is accepted. According to the list II of the Constitution, the regulation of money-lending is the original jurisdiction of the State Government. “An Act is the will of the people. Accordingly, whether the need for AP MFI (Regulation of Money Lending) Act exists will be decided only by the AP legislature and not by the RBI,'' says the communication. It also points out many lacunae in the Malegam's recommendations such as lack of provision for relief on a large amount of outstanding loans with interest ranging from 28 to 60 per cent. Given the situation, MFIs in the largest market of the country, which accounts for about 30 per cent of total outstanding portfolio of Rs 33,000 crore, are likely to go under dual regulation soon. “We don't have any problem if the RBI bothers itself with corporate governance of MFIs, solvency and capital issues. But the State Government is responsible for regulation of money-lending in whichever form it occurs,'' Mr Subrahmanyam said.

RBI pulls up banks for non-follow-up of client MFIs' operations

The Reserve Bank of India has found fault with public sector banks for not undertaking review of microfinance institutions' (MFIs') operations after sanctioning credit facility. In a circular sent to public sector banks, the apex bank had also noted that many MFIs supported by banks were “not engaging themselves in capacity building and empowerment of the groups to the desired extent.'' MFIs were disbursing loans to the newly-formed groups within 10-15 days of their formation, in contrast to the practice obtaining in the SHG-bank linkage programme which takes about 6-7 months for group formation or nurturing/ hand-holding. “As a result, cohesiveness and a sense of purpose were not being built up in the groups formed by these MFIs,” the RBI said. MFIs, which were financed by banks or acting as their intermediaries/partners, appear to be focusing on relatively better-banked areas, including areas covered by the SHG-bank linkage programme. Competing MFIs were also trying to reach out to the same set of poor, resulting in multiple lending and overburdening of rural households, it pointed out. Taking a dig at banks, the central bank said, as principal financiers of MFIs, they “do not appear to be engaging them with regard to their systems, practices and lending policies with a view to ensuring better transparency and adherence to best practices.” The RBI has made these observations on the basis of report of a joint fact-finding study on microfinance conducted by itself a few major banks.  It had also asked all scheduled commercial banks to take necessary corrective action where required.  The timing of the circular — which was sent a couple of days back to banks — was crucial as the RBI is currently studying recommendations of Malegam panel on MFIs and is expected to announce a policy shortly. The panel had suggested that creation of one or more ‘Domestic Social Capital Fund' may be examined by the RBI in consultation with the Securities and Exchange Board of India. At present, over 75 per cent of finance of NBFCs operating in the MFI sector is provided by banks and financial institutions, including SIDBI.  As of March 2010, the total outstanding loans granted to MFIs were at Rs 13,800 crore. In addition, banks were also holding securitised paper issued by NBFCs to the tune of Rs 4,200 crore, according to the Malegam report.

O P Bhatt's mission accomplished

Despite his run-ins with RBI, the State Bank of India chairman has managed to keep the public sector behemoth ahead of peers.  The chairman’s angst sums up the public display of the uneasy relationship between the country’s largest bank — State Bank of India — and the Reserve Bank of India (RBI), in the last couple of years over several issues, including the so-called teaser home loan rates (Bhatt, of course, has serious reservations over the term. He says he is not teasing anybody), higher provisioning coverage, guarantee to bonds issued by Tata Motors, etc. But more of that, later.  Even his worst detractors can’t deny that Bhatt, who is due to retire in March after a five-year term, has been able to turn SBI from a lethargic elephant to one that can dance. When he took over the reins in June 2006, the usual lament about SBI was: “It is too slow and past its prime. Soon, the nimble-footed private banks will go ahead.”  The numbers supported this argument. ICICI Bank was a serious threat. In June 2006, SBI’s total business stood at Rs 639,817 crore. ICICI, though behind, was closing in with a much faster growth rate. Its total business stood at Rs 330,490 crore. Analysts assumed it was only a matter of time – may be, another five years – before the private sector bank became the number-one bank in the country.  Bhatt’s appointment wasn’t a smooth affair, either. Yogesh Agarwal, then managing director of State Bank of Patialia, was considered a strong contender for the top position. But Bhatt pipped him to the post. Though Agarwal became the managing director of SBI in October, he moved to head IDBI Bank in July 2007. Internally, the bank was grappling with many issues. For one, it had serious software problems that were not allowing it to roll out core banking solutions. This had to be addressed on a war footing, since core banking solutions were the backbone required for any scaling up and offering value-added services to corporate clients. Bhatt evaluated the situation for the first three months. Then, he asked the software vendor, Tata Consultancy Services, to rectify the glitches. Then, the business process re-engineering process plan was started at branches. This involved training every staff and redesigning the layout of branches to make work a little better, faster and cheaper. He put in place capital-raising plans to support growth for the next four-five years. SBI raised Rs 16,000 crore in March 2008 through rights issue. At present, the bank has been working on another rights issue to raise about Rs 20,000 crore by March. Banking analysts say this capital should support its growth plans for another five years. “SBI has recorded a consistent growth in business in the last four years. The credit to deposit ratio of 77 per cent indicates efficient deployment of resources,” said D R Dogra, managing director of ratings agency CARE. Other important measures include an aggressive focus on the retail customer (the introduction of teaser loans being one such example); Parivartan I and II — programmes for employee motivation and skill set improvement; Udan — preparing a pipeline of future leaders at both senior and middle levels. These have improved the perception of SBI among both peers and analysts. He resumed clerical recruitment, which had been frozen for over a decade, in view of growing business. Importantly, the process of consolidation within the SBI associates was started. He merged State Bank of Saurashtra and State Bank of Indore with SBI. “This will improve the bank’s operating efficiencies,” added CARE’s Dogra. Many, however, say the SBI chairman could have handled his relationship with the regulator with a little more finesse. “He could have easily avoided the in-your-face and aggressive approach with the regulator. That had to deal with the banking industry as a whole,” said an observer. But Bhatt remains adamant and says he has done nothing wrong. “Many Indians own homes because of SBI. I am not fighting with RBI, but only clarifying... we only gave discount on the rate for the first two-three years and at higher than the cost of my funds. So what is wrong in what SBI does?” Bhatt said, while admitting that there were quite a few other issues on which he “differed” with the regulator.  Besides the teaser loan, the bank faced regulatory ire for guaranteeing Tata Motors’ debenture issue of Rs 10,000 crore and overall provisioning of 70 per cent for bad loan portfolio. The empire struck back. RBI was highly critical of the bank’s performance, including its financial health. Consequently, it downgraded the bank’s CAMEL (capital, asset quality, management, earnings, liquidity and systems and control) ratings from B to B- in an internal report for the year ended March 2009. There were internal rumblings too. When Bhatt restructured operations at state-level units, popularly known as circles, by dismantling a decision-making layer (zone) headed by deputy general managers, there was again a lot of criticism. While work would be sped up by cutting on red tape, it put immense pressure on general managers. The jury is out on whether or not this has made the bank more efficient.  A top official of the bank, under condition of anonymity, says: “Bhatt has improved the bank’s image and introduced aggressiveness. The performance, in terms of market share, speaks for itself.” In the same breath, however, the official admits that the down side of his leadership style has, perhaps, weakened the collective decision-making culture at SBI.  The good news: SBI continues to be at the top of the table. In December 2010, SBI’s total business stood at Rs16,19,950 crore, compared to ICICI Bank’s Rs 424, 439 crore. Of course, ICICI Bank took a conscious decision to shrink its balance sheet size to manage the adverse effects of exponential growth and global financial crisis. Jamal Mecklai, chief executive of Mecklai Financials, says: “During Bhatt’s regime, SBI has become more competitive in a market (like money and foreign exchange markets, and advisory services) where foreign banks and Indian private banks were very active. This helps expand the revenue base.” The fear: His aggressive style may have compromised the bank’s standing with RBI. In addition, some of the asset quality, especially the restructured portfolio (part non-performing assets and part standard assets) may be concerns in the future and hurt profitability – a big challenge for the next chairman. But on March 31, when Bhatt retires as chairman, he will have one satisfaction – no one calls SBI laid back anymore.

SBI launch ‘Tiny card’ scheme in Dimapur

The State Bank of India launched ‘SBI Tiny no frills account’ in Dimapur on Wednesday, February 16. It is part of the Reserve Bank of India’s ‘Financial Inclusion Programme’.  “The State Bank of India with over sixteen thousand four hundred plus branches has taken up this challenge by introducing `SBI Tiny no frills account` for the urban slum communities & Rural India. In this new account there is no need of `KYC` (or Know Your Client) documents and the account can be opened with a zero balance. In this account one can deposit or withdraw from Rs.10/- to Rs.10,000/- the upper limit for this account is Rs.50,000/-. Bank has various loan schemes to cater different needs of rural farmers and urban slum based persons.” For this programme the SBI has tied up with NGO’s who will play the role of ‘Customer Service Providers’ or rather work like a local branch. In this way the NGO’s will also benefit while the “RBI will be benefited as it is making this database for the (Unique Identity Number) UID scheme of the Government of India.” “The aim of this unique scheme is to cover as many of the poor unbanked population in the country.” In Nagaland, Thahekhu village became the first place to have the facility of this unique scheme today, in the form of a ‘Customer Service Point’.  It was launched in the presence of SBI officials of Dimapur. The Tiny Card with biometric identification is SBI’s answer to the challenge of financial inclusion of one lakh villages in the country.  SBI had recently announced plans to cover one lakh villages through the extensive network of business facilitators and business correspondents. Among other benefits, the cards are currently being used as a means of payment of government benefits directly to the poor persons, such as pension payments and wages under the rural employment guarantee programme. SBI is also looking at adding facilities like fund transfers through the Tiny cards. The cards also provide services like micro savings, micro credits, micro insurance and utility payments.

New norms on pension liabilities to hit profits

A new rule on how banks should expense pension costs is likely to hit profits of many public sector lenders in the fourth quarter.  Some of the country’s top banks have already begun internal exercises to estimate how much money they will have to put aside this quarter to meet the new norms on providing for pension liabilities, said senior officials.  “A clear picture will emerge only at the end of this quarter when we take into account the actuarial provisions,” Punjab National Bank (PNB) chairman and managing director K.R. Kamath said, and added that he hopes that there will not be any “disproportionate increase” in provisions. The genesis of the problem is an agreement between public sector banks and employee unions in 2009 that allowed bank staffers, who had initially opted to get a single lump sum payment on retirement, to shift to regular pension payments. Besides, in an unrelated development, the government also increased the maximum gratuity paid to departing employees from Rs.3.5 lakh to Rs.10 lakh, following a proposal in the 2010 Union budget. Both have increased the payouts to be made to retiring and retired bank employees. Public sector banks were worried that higher pension and gratuity liabilities would eat into their profits this fiscal because of provisioning requirements. On 9 February, the Reserve Bank of India (RBI) told banks they could expense their new pension costs over five years in the case of existing employees rather than make a one-shot provision that would destroy their profits. However, the accounting breather has not been extended to pension payments to retired employees, whose numbers are unofficially estimated to be around one-fifth of the current staff strength of public sector banks.  The sting in the tail has taken bankers by surprise. They have petitioned RBI through the Indian Banks’ Association, an industry lobby, to relax this norm. However, a senior central banker shot down the possibility of a further relaxation in the pension accounting requirements. At the sidelines of a conference organized by Tata Consultancy Services Ltd in Mumbai on Tuesday, RBI deputy governor K.C. Chakrabarty told Mint that it is the “management’s discretion to provide for the amount”, and that it is “perfectly legal” that banks should provide for retired employees. Calculating the provisions banks will have to make this quarter—and, hence, the precise effect on their profits—is a complex task involving assumptions about the number of retired employees having moved from a lump sum payment to annuities, their average age, life expectancy and discount rates needed to figure out the present value of all future pension payouts. State Bank of India has its own pension scheme and is not affected by the shift from lump sum payments to annuities. Others such as IDBI Bank Ltd is also not covered by industry-level wage negotiations because of its origins as a development financial institution spun off from RBI. Mint spoke with the top five banks that have offered employees the option to shift to pension payments—PNB, Bank of Baroda (BoB), Canara Bank, Bank of India (BoI) and Union Bank of India—to gauge the hit they might have to take. PNB’s total pension liability is about Rs.3,600 crore. Chairman and managing director Kamath did not want to provide a precise number because the bank is working out its potential pension liabilities. BoB Executive Director R.K. Bakshi said the actual figure is being worked out, but about one-fifth of its employees fall in the retired category. The bank has an estimated additional pension liability of Rs.2,060 crore. Some of this has already been provided for in the previous three quarters. A senior official of BoI estimates the provision the bank has to make in this quarter could be around Rs.450-600 crore. According to Canara Bank chairman and managing director S. Raman, the extra provision towards pension could be as high as Rs.500-550 crore, but he expects the figure to come down substantially when adjusted with gratuity, which has been fully provided for by the bank.  “The net effect could be Rs.100-150 crore in the fourth quarter, which is nothing for a bank of our size,” said Raman. Canara Bank’s total extra liability towards pension is around Rs.2,200 crore.  Union Bank could have to provide anything between Rs.350 crore and Rs.600 crore in the quarter towards pension for its retired employees, according to a senior official. The bank’s additional liability towards pension is Rs.2,400 crore.

Deposit rate on savings accounts: To deregulate or not?

The interest rate on savings bank deposits in India has been at 3.5% since March 2003, before which it was at 4%). In April 2010, the Reserve Bank of India (RBI) had changed the methodology of interest calculation on savings deposits to an average daily basis. For banks, this has effectively increased the savings deposit cost by 50-100 basis points (bps) and overall deposit cost by 10-25 bps. While interest calculation on average daily basis has led to higher earnings on savings deposits for deposit holders, the inflation-adjusted return continues to be negative. Against the 3.5% rate on savings deposits, the average inflation rate in India has been around 5.3% in the last decade, around 5.5% over financial years 2005-10 and around 6.5% over fiscal 2008-11. On multiple occasions, the RBI has expressed its intention to deregulate the savings bank deposit rate and is likely to float a discussion paper on this topic.

Banks bet big on technology to boost efficiency, curb fraud

Both international and Indian banks are fast adopting information technology (IT) to improve efficiency, curb fraud, cut costs, comply with regulatory changes and take their products to the market faster. For customers, the increased IT adoption by banks offers greater convenience, safety and accuracy in monetary transactions. “A bank wants a real-time, unified view of the customer. And the customer wants a unified experience of the bank,” says Sriram Srinivasan, senior vice-president and global banking business head at Wipro Technologies. “Customer-centricity is a key driver. How do you get the right focus, the right services for the business that customers give banks?” Bank customers have various channels of interaction today—automated teller machines (ATMs), the Internet, call centres, branch offices and even mobile phones. A simple text message can effect a financial payment as reliable and secure as with a few mouse clicks on a Web portal. Akhilesh Tuteja, executive director at consulting firm KPMG India, who works on technologies for the banking sector, identifies the several dimensions in which IT is changing the sector. “One is clearly customer service. The second is reducing the cost of doing business. The cost of processing a cheque leaf is several-fold over the cost of an electronic fund transfer.” The third dimension is risk management. Cellphone text alerts on credit card transactions have dramatically brought down fraud. On the banking side, analytics available today are capable of preventing even seemingly innocuous but fraudulent transactions. If a credit card is swiped in Bangalore and an hour later in Malaysia, a bank’s IT system will block the transaction. “It knows that you can’t get to Malaysia from Bangalore in an hour,” says Tuteja.  good part of the banking system in India has gone in for integrated core banking, the platform that offers a unified view of customers. A key challenge lies in standardizing how data is captured. A misplaced initial in a name can compromise a unified view of a customer. A big bet for the future is the creation of so-called digital wallets on mobile phones. Tuteja notes that a convergence of several factors is facilitating such a adoption: “The communication devices, the security on these devices, integration of banking IT infrastructure, and the regulatory framework and guidelines from RBI (Reserve Bank of India) are all in place.”

How Bhave’s Term was Regulated at Regulator !

C.B.Bhave, the Chairman of India’s securities market regulator, Sebi, will step down on Thursday after three years on the job, raising questions on the relative brevity of his tenure. The heads of other financial regulators such as the Insurance Regulatory and Development Authority (Irda), and PFRDA, the regulator of pensions, enjoy five years at the helm. The circumstances under which the government decided to limit Bhave’s term remain unclear, a number of officials said. Three people familiar with decision-making at India’s ministry of finance in 2009 and 2010 have told ET that the government had decided to extend his term by two years, only to abruptly change its mind. Bhave, who has been praised by many for his stewardship, will be succeeded by UK Sinha, the head of UTI Mutual fund. Sinha also has a three-year term though the government can extend it by two more. Around August-September 2009, soon after the government decided to provide a uniform five-year term for all regulators, the finance ministry asked Bhave and the other full-time members on the Sebi board if they were agreeable to serving for two more years. After they concurred, the finance ministry finalised a note which was sent to the Appointments Committee of the Cabinet, or ACC, for endorsement. The basis of the note was a recommendation by Sixth Pay Commission, which made out a case for a stable term of five years for all regulators. Indeed, the government had prepared the basis for the longer tenure.  In July 2009, it approved changes to Sebi rules relating to the terms and conditions of appointment of the chairman and members to incorporate a five-year term for them. The changes were then notified. But while the proposal was being vetted by ACC — which in this case includes the home minister and the prime minister — it was recalled by the finance ministry and then withdrawn before the end of 2009. The sequence of events indicates that the decision not to extend Bhave’s tenure was not linked to the ugly spat in 2010 between Sebi and insurance regulator Irda over regulating unitlinked insurance plans.  That the government was looking for a new chairman for Sebi became evident only in September 2010 after the formation of a search committee headed by the cabinet secretary. No reasons were assigned for this change of heart and the proposal was never considered again, according to the three persons with knowledge of the circumstances. All three confirmed the sequence of events but declined to go on record given the sensitivity of the issue. A e-mail query to the spokesperson of the finance ministry on Tuesday did not evoke any response.

SLSC Meet at RBI Jammu

The 21st meeting of the State Level Security Committee (SLSC) was held on Tuesday at Reserve Bank of India, Jammu, under the chairmanship of B.R.Sharma, Financial Commissioner (Home), and Government of Jammu and Kashmir to deliberate upon the security scenario in the banking industry. The meeting was attended by Dr. B. Srinivas IGP (CID),   Arnab Roy, Regional Director, Jammu and Kashmir, Reserve Bank of India and senior officers from police department, Airport Authority of India, Railways, Fire and Emergency Services, BSNL, and controlling heads of all the banks. In his keynote address, the Chairman B.R.Sharma called upon all the stakeholders to address the security concerns of the banks and emphasized the need for proper functioning of security gadgets installed at banks. He regarded fake notes to be a major threat to the economy and urged all the stakeholders to intensify necessary actions to curb the menace. Arnab Roy, Regional Director, Jammu & Kashmir, RBI in his opening remarks highlighted the latest developments in the area of currency management. 

Axis Bank launches everywhere teller machine service in Vijaywada

Axis Bank has tied-up with 120 merchants to offer everywhere teller machine facility. Axis Bank has launched its everywhere teller machine (ETM) service in India at Vijaywada, Andhra Pradesh. Debit card holders in Vijaywada, using this service, can now withdraw up to Rs1,000 in cash per day from a point-of-sale (PoS) terminal at select merchant outlets.  Axis Bank has over 180,000 PoS terminals deployed across India. In the first phase of roll-out, Axis Bank has tied-up with 120 merchants to offer this facility and plans to tie-up with 500 merchants across Andhra Pradesh by the end of March 2011. The bank plans to roll out this service in Maharashtra, Tamil Nadu, Karnataka, Kerala, and Gujarat in this fiscal and expects to cover all states by the end of next fiscal year.  As of now the facility of cash withdrawal using plastic cards is available only at automatic teller machine (ATMs) and certain EDC terminals installed at financial institutions exclusively for cash withdrawal. ETM's will ease the process of withdrawing cash for the customers when an ATM facility is not available nearby.  The ETM service will initially be available at Axis Bank EDC machines installed at select merchant outlets. All customers holding a debit card issued in India, as per Reserve Bank of India guidelines can avail this service for which they would be charged up to Rs10 per transaction.

Do Not Pay Money to receive Large Funds from Abroad : RBI Advisory

The Reserve Bank has today once again issued an advisory cautioning the members of public against responding in any manner to offers of moneys from abroad. It has stated that such offers are fraudulent and has advised the public to immediately register a complaint with the local police/ cyber crime authorities when they receive such offers or become a victim of any such fraud. Members of public have also been cautioned against making any remittance towards participation in such schemes/offers from unknown entities since such remittances are illegal and any resident in India collecting and effecting/remitting such payments directly/indirectly outside India is liable to be proceeded against for contravention of the Foreign Exchange Management Act, 1999. They are also liable for violation of regulations relating to Know Your Customer (KYC) norms/Anti Money Laundering (AML) standards. The Reserve Bank has further stated that it does not undertake any type of money arrangement, by whatever name called, and it does not take any responsibility for recovering moneys remitted in response to such bogus communication. For any further clarification in the matter, the Reserve Bank has advised the public to contact  the  officials of the Foreign Exchange Department at its various Regional Offices or at its Central Office, Foreign Exchange Department on telephone numbers 022- 22610589 / 22610618 or 2260 1000 extn. 2772 / 2732 during office hours (9.45 hours to 17.45 hours Monday to Friday) or seek clarification by e-mail . The public may also refer to the cautionary advices hosted on the home page of the RBI website (www.rbi.org.in) as a ticker for more information. The Reserve Bank has stated that it has urged the Indian Banks’ Association and banks to educate their customers to be extra vigilant with regard to such fictitious offers. Banks have also been advised to take up with law enforcing agencies whenever accounts of their customers are misused for such fraudulent activities. The Reserve Bank of India has, on several occasions in the past, cautioned the members of public not to fall prey to fictitious offers / lottery winnings / remittance of cheap funds in foreign currency from abroad by so-called foreign entities/ individuals or to Indian residents acting as representatives of such entities/individuals. Describing the manner in which the fraudsters operate, the Reserve Bank has stated that the fraudsters send attractive offers to gullible public through letters, e-mails, mobile phones, SMSs, etc. To lend credence to such offers, the communication is often sent on/ from letterheads /websites that appear to be like that of some public authorities like the Reserve Bank of India. The offers are apparently signed by top executives/senior officials of such authorities. However, only the names of the officials may be correct but their signatures are faked. The offer document would contain contact details of a so-called RBI officer working in some department in the Reserve Bank. The fraudsters initially ask potential victims to deposit small sums of money for different official sounding reasons, such as, processing fees/ transaction fees/tax clearance charges/conversion charges, clearing fees, etc. The victims are asked to deposit the money in certain accounts in banks. The fraudsters often have multiple accounts in the name of individuals or proprietary concerns in different bank branches for collecting such charges. Often gullible genuine account holders are persuaded by the fraudsters to lend their accounts for such fraudulent activities on the promise of receiving some commission. Once the initial amount is deposited, demands for more money follow with more official sounding reasons. After accumulating a sizeable amount in these accounts, the fraudsters withdraw or transfer the money abroad and vanish leaving the victims in a lurch. Many residents have already become victims and have lost huge sums of money by falling for such fictitious offers.

Banks likely to get subsidy of`Rs.140 for each no-frills account

Banks will likely get a subsidy of Rs.140 from the government for each so-called no-frills account they open, according to top bankers and finance ministry officials. The move will make banking accessible to many of India’s unbanked and help banks meet their target of opening, by 2012, 50 million such accounts in 73,000 villages with a population of at least 2,000. The target was set by finance minister Pranab Mukherjee last year; subsequently, the Reserve Bank of India (RBI) had asked banks to submit reports on how they planned to achieve the target. An official at the Indian Banks’ Association, a banking lobby group, said the government could give banks a subsidy of Rs.140 for every account. “It may come in this budget; that’s what we have been made to understand by finance ministry officials,” added this person, who did not want to be identified.  Two finance ministry officials said that the issue was being seriously considered as recently as December. The officials couldn’t be reached this week because they have been quarantined in the run-up to the presentation of the Union budget on 28 February.  To be sure, the government doesn’t make any promises on budgetary provisions, so there’s no certainty that Rs.700 crore (for 50 million no-frills accounts) will be earmarked for banks. Mint had first reported the possibility of such a subsidy on 2 October.  No-frills accounts allow customers to have zero balance, and also offer limited facilities. They are targeted at first-time customers whose banking needs are rudimentary. Between November 2005—when RBI introduced them—and March 2010, at least 50 million such accounts were opened.  Bankers say just around five million of these accounts are active, and that the low volume of transactions on some other accounts—sometimes, a mere Rs.10 is transacted—makes maintaining and servicing them unviable for banks. They have repeatedly asked the government to chip in, at least with the initial cost of Rs.200-300 they incur in opening an account.  While the subsidy, if it happens, will help, banks will also benefit from the Unique Identification Authority of India’s Aadhaar programme that is seeking to give every Indian a unique ID. This number is good enough to meet the know-your-customer norms of banks, thereby making opening accounts easier for the unbanked. The agency is also working with several government departments to see whether wages under the job guarantee scheme, or subsidies can be directly transferred to the bank accounts of the beneficiaries. This could ensure that more no-frills accounts remain active. Financial inclusion remains one of the United Progressive Alliance government’s focus areas. Last week, it launched a campaign to help small farmers borrow low-cost funds from banks—a move that will prevent them from falling into the clutches of moneylenders, who lend at usurious rates. Banks have been asked to cover all unbanked areas of the country, either directly or through agents. Bankers say the task is a challenging one. In a speech in November, RBI Deputy Governor K.C. Chakrabarty said that out of 600,000 villages in India, only around 50,000 have access to finance and that India has 145 million unbanked households, the highest in the world.

Pre-payment penalty should go forthwith : Subir Roy

The Reserve Bank of India (RBI) is reportedly engaged in active discussion with commercial banks to try and bring within reasonable limits, if not stop entirely, the practice of banks charging a hefty penalty, often going up to as high as 2 per cent or more of outstandings, from borrowers seeking to take their housing loans elsewhere. While this is clearly the right thing to do, it is about time RBI got moving a little faster.  It is now clear that in at least one other instance, microfinance, many of the sector’s present troubles would have been avoided had RBI discharged its regulatory role with greater speed. It is also a bit disingenuous in letting it be known that we do not approve these things and players are advised to change their ways, but leaving matters there indefinitely. The attempt to use moral suasion can be produced as evidence to counter the charge of inaction but if no firm action is eventually taken, then the brazen can get away with continuing to do what they want even though everybody agrees that this is not the right thing to do. Commercial banking is already a restricted market in the sense that you need a licence to run a bank and accept deposits, something that you do not need if you were to, say, manufacture a motor car. If on top of that the incumbent players engage in something which is clearly anti-competitive, then it is the customer who gets the short end of the stick and the overall efficiency of the sector suffers. The fact that the Competition Commission does not think the practice is anti-competitive says more about the Commission than the wisdom of its reasoning. At a time when there is mobile number portability and health insurance portability is round the corner, it is absurd that in a sphere which attracts the most amount of the lifelong savings of a middle class family, housing, restrictive market practices are allowed to continue. Like mobile telecom service providers and health insurance firms, banks have to live by the quality of their service and not anti-competitive practices. If State Bank of India offering teaser rates has not caused HDFC to go out of business, there must be a reason why people are willing to pay more to still develop a long-term relationship with HDFC. Two reasons are cited by banks for charging penal rates for pre-payment of a housing loan by a borrower seeking to change bankers. One is the original lender loses on the processing expenses that it had incurred on sanctioning the loan. This is fair and refund of the processing cost should certainly be in order in case a loan is prepaid soon after its disbursal. But this is a finite cost — how many man hours do you really need to process a loan, what with technology reducing costs? — which is independently computable and can be levied according to norms laid down by the regulator. But it is likely to be far lower than the Rs 40,000 that a borrower will have to pay if she pre-pays an outstanding of Rs 20 lakh which can be taken to be a rough median figure. The second argument holds even less water. Banks claim that they will land in asset-liability mismatch if a long-term borrower, say someone who has taken a 20-year housing loan, walks away as the bank will lose the asset against which it will have created a liability of similar tenure. The fact is, long-term lending by commercial banks which live mostly by taking short-term deposits, invariably leads to asset-liability mismatch. Banks are living with this and the regulator is allowing them to do so. It is for this reason that earlier there were term lending agencies in the shape of development financial institutions which lent long term and banks lent at most medium term. The situation will change when there is an active long-term debt market where pension funds can park their corpuses and banks float paper to access those resources. There is one other reason why levying of exorbitant pre-payment penalties should be outlawed. This practice makes for a lethal combination with another unhealthy practice — teaser rates. The current position is that a bank can induce a borrower to take a long-term housing loan by offering a teaser rate and then slap a sharp pre-payment penalty on anyone seeking to go elsewhere later when interest rates start going up. Both of these practices should be disallowed. Instead, RBI is allowing both to prevail even while making noises that it does not approve of them. In fact, the banking regulator can go a step further and take some innovative measures that will give retail customers of real estate a better deal and, what is systemically more important, spread a superior culture among real estate companies that makes for better health in the sector. Realty firms that give their ordinary customers a transparent and fair deal are likely to have greater integrity, be sounder and make for a more stable industry. RBI can well say that its primary job is to worry about the banking sector and not the real estate sector, but it does have a developmental role and can take a legitimate interest in the health of an asset class with a long life. It can, for example, tell banks that they should encourage realty firms that borrow from them to ensure two sound practices. One, mention the carpet area along with whatever else they want to like super built-up area while selling an apartment. Two, offer a warranty for a reasonable period, indemnifying the buyer against manufacturing defects. This will be as revolutionary as feasible.     

Students visit RBI Kanpur

A group of students from a school visited the Reserve Bank of India on Tuesday to study its functioning as part of the bank's financial literacy programme.  Shri N.K. Sethi, General Manager, RBI, Kanpur inaugurated the financial literacy programme.  Bank officials gave an overview of the functions of RBI and insights of currency management and foreign exchange management to the students.  Short films on working of RBI were also shown to the students. The youngsters got the opportunity to visit the exchange counters and coin-vending machines, which was a memorable experience for them.  The financial literacy campaign is organised by RBI for different target groups like students, women, rural populace and senior citizens to impart knowledge about RBI.

No cap on MFI interest rates

Amidst hue and cry over micro-finance institutions (MFIs) charging the rural poor exorbitant interest rates, Reserve Bank of India norms continue to allow these entities a free hand in determining their charges. The banks lending to MFIs too continue to have full discretion in fixing their rate of interest.   RBI has issued a latest master circular reiterating its earlier stand on micro-credit on February 14. Master circulars are like ready-reckoners on RBI rules related to a particular aspect. MFI sources said the latest circular removes doubts whether a cap on their rates was in offing, hinting there was a chance of upward revision now. Farm activists of the region, on the other hand, are crying foul, saying finally MFIs were replacing the usurious moneylenders in villages.  The circular said the interest rate applicable to loans given by banks to micro-credit organisations or by micro-credit organizations to self help groups (SHG) or their members would be left to their discretion. At the same time, the circular said competing MFIs were operating in the same area trying to reach out to the same set of poor. This had resulted in multiple lending and overburdening of the rural households.  MFI lending is divided into loans to SHGs mainly run by women and having a common bank account and joint liability group that need not have a common account. D Sathiah, head of strategic services of Basix, a NBFC engaged in micro-lending, said with this circular there were chances of the rates going up by 2% as even the banks might be now charging more.  He said the circular amounted to reiteration of the earlier status while the Malegham Committee on micro-finance had recommended MFIs should charge up to 24% though not directly mentioning a cap should be imposed. However, he also said that there was negligible lending by the banks to MFIs that also meant there might not be much change.  Moin Qazi of Asia Pragati, also a MFI, said that a cap should have been imposed on lending rates. MFIs get funds at around 12% from the banks but lend at around 24%. The rates were as high as 32% before the issue came into limelight. Even as a higher rates were needed to cover defaults, a spread of almost 100% of the cost of the funds was too high, he added.  Farm activists say that the move would only add to the farm distress. States were preparing laws to control MFIs with Andhra Pradesh already having put in a place a regulatory body, the circular would shield the MFIs, said Kishore Tiwari of Vidarbha Jan Andolan Samiti. He said, "there is an urgent need to appoint a regulator for this sector."

9.5% interest on EPFO may get nod

The Employees Provident Fund Organisation ( EPFO) stood its ground on offering 9.5% interest to over 4.71 crore subscribers with Labour and Employment Minister Mallikarjun Kharge expressing hope that the finance ministry will shortly give its concurrence to the proposal. The Finance Ministry has to give concurrence to the rate of return decided by CBT and notify allowing tax exemption on the entire such earnings on PF deposits.  Downplaying the ongoing tussle between the two ministries over hiking the interest rates on PF deposits, Kharge said there was " no tussle between the two ministries over giving 9.5 per cent interest rate." Following discovery of Rs 1,731.57 crore in suspense account, the EPFO trustees favoured raising the rate of interest on provident fund deposits to 9.5 per cent for its 4.71 crore subscribers from 8.5 per cent which is being paid by EPFO since 2005- 06.

Is a further hike in interest rates by the RBI required to keep inflation in check?

The majority concurs that the Reserve Bank of India should increase rates.  The central bank raised interest rates six times in 2010 to help tame inflation. But analysts are divided over whether further rate increases will help in combating inflation. The problem now is not demand-pull inflation. Food prices, which are stoking inflationary expectations in the economy, are being driven by supply bottlenecks. An increase in key rates will do little to check food inflation. Further rate increases will only take a toll on India's growth story just when the economy is recovering from the slowdown. The growing interest rate differential between India and the US will also attract a torrent of capital, putting pressure on the rupee and hurting the interests of exporters.