Coop banks seek better interest rate regime, regulatory enviorn

Umbrella bodies of cooperative banks today met with the Reserve Bank and demanded deregulation of interest rate regime, besides better regulatory environment to work more effectively. The federations that met central bank Deputy Governor Subir Gokarn at the customary pre-policy meeting included the National Federation of Urban Cooperative Banks and Credit Societies, National Federation of State Cooperative Banks, Maharashtra Urban Cooperative Banks Federation, NBFC body Finance Industry Development Council, and Microfinance Institutions Network. The Governor Duvvuri Subbarao could not attend the meeting as he was indisposed. "We have demanded deregulation of the interest regime in the forthcoming annual monetary policy as in the current interest rate scenario we will continue to bleed. Today we are forced to lend at 7 per cent to the farm sector, while we are paying at least 9 per cent to our depositors. This situation just cannot continue," National Federation of State Cooperative Banks managing director B Subramanyam told PTI after the meeting. He further said the federation has demanded a higher interest subvention at around 4.5 per cent from the current 1.5 per cent. Earlier state cooperatives were getting 2 per cent interest subvention to tide over the borrowing-lending rate mismatch. But last year, RBI had brought it down to 1.5 per cent, he explained. The National Federation of Urban Cooperative Banks and Credit Societies president H K Patil said they have requested the apex bank to facilitate setting up of an umbrella body for them for coordination and growth. "Though the VS Das committee has clearly called for this nearly two years ago, the RBI is yet to come back to us with its views on the report," Patil said. The RBI has, however, agreed to expedite its reply, he added.

Regular meetings with nodal officers help banking ombudsman in Chennai trim complaints

The banking ombudsman in Chennai is taking measures to streamline the functioning and improve the effectiveness of this grievance-redressal machinery. The objective is to ensure that complaints of poor service from customers get addressed in the first instance at the local branch level and the regional level, and only escalated when this option fails. The ombudsman, after instituting regular meetings with nodal officers and senior management of banks, feels that most problems can be sorted out at their level itself.  Currently, about 1,000 complaints come in every month to the ombudsman's office. With this mechanism (meetings with nodal officers), the number of complaints has reduced to about 700 a month.  In 2009-10, the banking ombudsman in Chennai received the highest number of complaints in the country at 12,727, or 16 per cent of the total complaints, according to the Reserve Bank of India. From 4,585 complaints in 2007-08 it more than doubled to 10,381 in 2008-09, recording the highest number of complaints alongside Delhi. Mr S. Ganesh, who had taken charge as Banking Ombudsman Chennai - Reserve Bank of India last April, told Business Line that complaints are monitored on a daily basis to ensure that resolution happens at the earliest.  “Greater focus has been made to trim down the complaints that have been pending for more than three months.  With banks being compliant, it makes our job easier”, he said. Mr Ganesh said the awareness level among customers about banking ombudsman could be the reason for the highest number of banking-related complaints. He also said that the region has the least number of awards. Awards are financial compensation paid by banks due to their negligence, to the customers. The nature of complaints are no different from that seen across the country with credit cards and failed ATM transactions accounting for the largest number of complaints. This is followed by complaints related to loans and advances, remittance and pensions.  There are few cases which may require excessive documentation which would have to be rejected, according to him. He said, “As we are not investigative authority, the customer can approach any other forum to solve this issue.” While the customer does not pay a penny to get his complaint redressed, the average cost per complaint borne by the RBI is Rs 2,368. The regulator incurs close to Rs 20 crore for running 15 ombudsman offices across the country.

NBFC representatives meet RBI officials, raise industry concerns

Reserve bank of India (RBI) officials on Thursday met representatives from non-banking finance companies (NBFCs) and associations of cooperative banks and discussed the current environment prevailing in the industry. In the customary pre-credit policy meeting, representatives from Finance Industry Development Council (FIDC), an association of NBFCs, met RBI Deputy Governor Subir Gokarn and raised concerns on recent steps taken by the central bank. Also present at the meeting were representatives from National Federation of Urban Cooperative Banks and Credit Societies, the National Federation of State Cooperative Banks, the Maharashtra Urban Cooperative Banks Federation and the Microfinance Institutions Network.  A major concern taken up in the meeting was RBI's decision to increase the minimum capital adequacy ratio (CRAR) for deposit-taking NBFCs from 12 per cent to 15 per cent, thereby aligning them with non deposit-taking NBFCs. “The decision by the regulator to increase the CRAR was unwarranted. There are a lot of other requirements which the deposit-taking NBFCs have to comply with, like maintaining 15 per cent SLR. This is not required by non deposit-taking NBFCs. So, this decision was totally unnecessary,” said FIDC Director General, Mahesh Thakkar. NBFCs also demanded that a differential risk weightage system should be introduced for NBFCs to replace the current uniform risk weightage system. “We demanded that risk weightage to commercial auto loans be brought down from 100 basis points to 50 basis points. If this happens, only then can the NBFC sector absorb the impact of the hike in CRAR,” Thakkar said. Currently, all NBFCs have to provide a risk weightage of 100 basis points against all types of advances. The NBFCs also expressed concerns on the current liquidity and inflationary situation. “Though there are signs of liquidity easing, interest rates have to come down, as they are already eating into the margins of companies,” said an NBFC official.  “We have demanded the deregulation of the interest regime in the forthcoming annual monetary policy, since in the current interest rate scenario, we would continue to bleed. Thursday, we are forced to lend at 7 per cent to the farm sector. But we pay 9 per cent to the banks. This situation just cannot continue,” National Federation of State Cooperative Banks Managing Director, B Subramanyam, said after the meeting. “Earlier state cooperatives were getting 2 per cent interest rate subvention to tide over the borrowing and lending rate mismatch. But last year, RBI had brought it down to 1.5 per cent,” Subramanyam added.

RBI may not extend liquidity support beyond April 8

The Reserve Bank of India (RBI) may not extend the additional liquidity support of 1 per cent Statutory Liquidity Ratio (SLR) and the second Liquidity Adjustment Facility (LAF) window beyond April 8.  Bankers say the additional liquidity support is not needed as of now, as the liquidity pressure has eased. RBI had introduced these measures on December 18, 2010 and had extended the measures till April 8, 2011, citing tight liquidity conditions in its third quarterly review of the monetary and credit policy, in January.  “Most banks, especially public sector ones, are currently holding excess SLR. Hence, there is no need to extend the facility,” said a public sector bank treasury official. He said the liquidity condition is expected to remain comfortable till June, after which the credit offtake usually picks up.  “Now that the market is lending to RBI, these measures may not be needed at the moment. I don’t see liquidity pressures till mid-June,” said Moses Hardings, head, global markets, IndusInd Bank. Net LAF has been positive since the beginning of financial year 2011-12. RBI had provided the liquidity support to scheduled commercial banks under the LAF, to a maximum of 1 per cent of their net demand and time liabilities.

Banks fall short of RBI deposit growth target

Banks have failed to meet the Reserve Bank of India’s (RBI) deposit growth target 18% year-on-year in the last fiscal. The year-on-year deposits growth for the fortnight ended March 25 was 15.84% or Rs5,204,702.64 crore.  The main reason for this, said bankers, was high inflation. “Deposits haven’t grown as projected because of tight money market position and inflation,” said Ramnath Pradeep, chairman and managing director, Corporation Bank. Analysts said banks are to blame too since they were tardy about growing deposits in the first half of the last fiscal because they were sitting on ample funds. They scrambled to mop up deposits in the second half when the liquidity began to tighten drastically. This meant banks had to increase deposit rates. In all, deposit rates rose 250 basis points in the last fiscal,” said Nitin Kumar, deputy vice-president, Quant Broking. Bankers feel low government spending and investor preference for other avenues also resulted in low mobilisation of deposits. “Deposit is not only a function of interest rates. Low government spending was also a reason,” said R K Bansal, executive director (retail banking), IDBI Bank. Bansal said despite good deposit rate hikes, some people preferred investing in equities or some other government saving schemes depending upon their needs.

Mahesh Coop Bank branch opened

Hyderabad: Mahesh Bank has opened its 34th Branch at Motinagar, Near Borabanda, Erragadda, Hyderabad.  Sri Kasu Venkata Krishna Reddy, Hon’ble Minister for Co-operation has inaugurated the branch. Mahesh Bank is progressing well year on year and advised to extend a helping hand for upliftment lower middle class particulary needy of downtrodden sections society, he said.  Sri A.S.Rao, RD, RBI, Hyderabad, Chief Guest of the function said that Mahesh Bank is expanding its presence at several centres and operating prudently everywhere. He further said the bank has never exhibited any inhibitions in extending customer service and through its redressal mechanism, corporate governance, expansion of outreach the bank has set up an effective customer service. He has also complimented the bank for having chosen the underbanked area like Motinagar to have its presence. Sri Manam Anjaneyulu, Hon.President, A.P.Co-op.Urban Banks & Credit Societies Association said that Mahesh Bank has stood as a model bank as several banks have been following it in terms of its discipline, adoption of technology and imparting training to staff. While the differences and the gap caused by globalization is fulfilled by UCBs, Mahesh Bank has been endeavouring for betterment of lives of lower middle and middle class sections of society of State. He requested the State Government and regulatory authorities to extend co-operation to the co-operative sector so that the UCBS can discharge the social responsibilities more effectively. At the same time, co-ordination is required in this direction among Government, RBI, Management and Staff.  Mahesh Bank has become a part of growth story of urban banking sector of the State, Smt. Nanda Dave, GM,RBI, Hyderabad said. Among 106 UCBs under Hyderabad RBI jurisdiction, Mahesh Bank has shown an increasing trend in its profits and as well as in networth. It has occupied a rightful place in banking sector with its diversified customers, she stated.

Mastercard Faces Domestic Challenge in India

The National Payments Corporation of India (NPCI) has finalized the commercial launch of the proposed India card which would be a domestic alternative to the global payment processing firms.  MasterCard, the second largest global payment solutions company, provides a variety of services to support the credit, debit and related card payments of over 24,000 financial institutions.  Given the size of India, this could have an impact on MasterCard's international transactions growth. Its main competitors are Visa, American Express and Discover Financial.  Transaction processing, the major revenue source for MasterCard, constitutes about 32% of the $293 Trefis price estimate for MasterCard's stock.  The Reserve Bank of India (RBI) in 2009, had asked the Indian Bank Association to launch a non-profit payment solutions company to meet the requirements of domestic banks. After almost two years of planning, NPCI has finalized the name of the proposed card as Rupay, which will launch later this year. The Rupay will resemble China's Union Pay, the domestic real-time payment processing firm for Chinese banks.  RBI, in its vision paper on payment systems in India, said that the need for such a system arises from two major considerations: (1) the absence of a domestic price setter has caused the Indian banks to bear the high cost for affiliation with international card associations; and (2) the connection with international card associations resulting in the need for routing even domestic transactions, which account for more than 90% of the total, through a switch located outside the country.

INDIA INC WANTS RBI TO GO SOFT ON MONETARY POLICY

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Apex court notice to Centre, RBI in money laundering case against Lilawati Hospital

The Supreme Court today issued notices to the Centre and the RBI on a petition seeking probe into the alleged money laundering by the trustees of Mumbai’s Lilawati Hospital.   A Bench comprising Justices Mr B. Sudershan Reddy and Mr S.S. Nijjar also sought response from the the Ministry of Corporate Affairs, Enforcement Directorate, Central Board of Direct Taxes and SEBI on a plea seeking investigation by appropriate agencies into the alleged tax evasion and money laundering by the trustees of the Lilawati Hospital.  The petition filed by Delhi resident Harsh Raghuvanshi has sought investigation into the alleged siphoning of funds by the trustees – Mr Prabodh Mehta, Ms Rashmi Mehta, Mr Chetan Mehta and Mr Bhavin Mehta.  Senior advocate, Mr Ram Jethmalani, appearing for Raghuvanshi submitted that the notice should be issued and all the respondents should be called upon to disclose facts which have come to their knowledge and steps taken by them against the trustees.  The Bench tagged the petition with that of a petition filed by Mr Ram Jethmalani and others in which direction has been sought for bringing back the black money stashed by Indians in banks abroad.  In the present petition also it has been alleged that the Mehtas have siphoned out money from the hospital and through the hawala route it has been deposited in banks abroad including Mauritius.  It has been alleged that the money has been deposited in Liechtenstein Bank.

HC asks RBI report on banks’ malpractice

BANGALORE: Karnataka High Court on Tuesday directed the Reserve Bank of India (RBI) to submit the report on some of the banks deducting Rs 750 from customers' accounts for not maintaining quarterly balance.A petition had been filed in the court that some banks were wrongfully deducting Rs 750 from the accounts of customers who failed to maintain quarterly balance. The petition stated the bank was exempting those who draw more than Rs 1 lakh at a time if their quarterly balance was not maintained. The petition said only the poor found it difficult to maintain the minimum balance. The petition also said that some banks were charging penalty to customers even though they were repaying their loans in time. According to the RBI's report dated November 15, 2010, two banks have collected more than Rs 100 crore as penalty. On Tuesday, Karnataka High Court's division bench headed by Chief Justice J S Khehar directed the RBI to submit its report on the issue before the next hearing, which is on July 5. This came after the RBI requested the court for more time to submit the report. Earlier the RBI had submitted before the court that it had set up a special committee to study the issue and would submit the report in the court.

Govt clears name of Chaudhuri for the post of SBI chief

NEW DELHI: The government is believed to have cleared the name of Pratip Chaudhuri for appointment as SBI Chairman.  Managing Director R Sridharan is officiating as the bank chairman now after O P Bhatt retired last month. Sridharan is due to retire in June, 2011. Chaudhuri joined State Bank of India (SBI) as a probationary officer in 1974. He became the deputy managing director (international banking) in April 2009.  According to sources, the government has also cleared the names Hemant G Contractor, Diwakar Gupta and A Krishna Kumar for promotion as managing directors (MDs) in the bank. The three are now deputy managing directors.  The search panel, headed by Reserve Bank of India Governor D Subbarao, had interviewed 4-5 candidates in December 2010. The SBI board comprises an executive chairman and two managing directors.  After amendments to the SBI Act, the Government of India, which holds about 59 per cent stake in the bank, can appoint two more MDs.  There is only one MD now in the bank against the provision of four.  SBI commands about 25 per cent market share.

High inflation can derail India's growth, warns S&P

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De-regulate interest rates on savings bank deposits

In a move reminiscent of the Bombay Club of industrialists who opposed the opening up of the economy in the early 1990s, bankers have almost unanimously opposed de-regulation of interest rates on savings bank deposits. They are, doubtless, wary of introducing yet an added element of uncertainty.  However, administered interest rates are an anachronism when interest rates are essentially market-determined . There can be no justification for continuing with regulated interest rates whether on saving bank deposits or small savings like provident funds and national savings certificates. Despite this, successive governments and governors of the Reserve Bank of India have hesitated to pull the plug.  More than eight years ago, the RBI had raised the issue in its April 2002 monetary policy statement. Only to defer the move! In its April 2006 policy, the central bank returned to the subject but once again opted to maintain the status quo; though it accepted that 'in principle, deregulation of interest rates is essential for product innovation and price discovery in the long run' .The need to reward savers (high household savings have been the prime driver of investment) and provide them with some stability in an environment where they have no social security is only part of the reason for the desire to maintain status quo.  The main reason is the higher cost of funds that de-regulation is bound to bring in its wake. Savings bank deposits provide banks with a stable deposit base. Hence the mad scramble among banks for CASA or current and savings accounts. Once rates are de-regulated , it is quite possible competition will drive interest rates up; especially in a situation where there is a huge unsatiated demand for funds.  Public sector banks , that have traditionally had a larger share of savings bank accounts thanks to their wider branch network, would be particularly hard hit. But to the extent deregulation will give individual banks flexibility to decide on savings bank interest rates even as greater competition could result in newer customised products being introduced , it is a goal we must work towards.

Twin cities get special force

Bhubaneswar, April 5: A special police battalion will now provide security cover to vital installations and VIPs in Cuttack and Bhubaneswar.   The first batch consisting of 501 sepoys today participated in a passing out parade at the Urban Police and Traffic Training Institute in Bhubaneswar. Director-general of police (DGP), Manmohan Praharaj, said: “These personnel were provided advanced training for nine months.”  They would be deployed at vital establishments such as residences of the governor and chief minister, state secretariat, legislative Assembly, Reserve Bank of India (RBI) in Bhubaneswar and Orissa High Court in Cuttack.

Reserve Bank of India penalises The Mehsana Urban Co-operative Bank Ltd., Mehsana (Gujarat)

The Reserve Bank of India, in exercise of powers vested in it under the provisions of Section 47A (1)(b) read with Section 46(4) of the Banking Regulation Act, 1949 (AACS), imposed a monetary penalty of `5.00 lakh (Rupees five  lakh only) on The Mehsana Urban Co-operative Bank Ltd., Mehsana (Gujarat) The penalty was imposed for violation of Reserve Bank instructions on membership of co-operative societies, conduct of non-banking business, use of work "Bank" in the name of another institution and share linking norms.  The Reserve Bank had issued a show cause notice to the bank, in response to which the bank submitted a written reply. After considering the facts of the case, the bank's reply and also personal submissions in the matter, the Reserve Bank concluded that the violation was substantiated and warranted imposition of penalty.

FII investment doubles since Dec'08; FDI grows gradually: RBI

NEW DELHI: Foreign direct investment (FDI) into India has grown gradually since December 2008, while overseas fund flow in the capital market have nearly doubled in the two year period, according to an RBI data.  An analysis of the Reserve Bank data shows that since December 2008, FDI investment have grown from $ 125.2 bn to $ 198 bn in December 2010.  Comparatively, portfolio investment, both in equity and debt securities, jumped from $ 91.6 bn to $ 171.7 bn in the aforesaid period.  Experts said foreign investors are finding Indian securities market well priced and are preferring to put in money even as long term overseas fund in the form of FDIs are investing gradually.  Growing from December 2008, FDI in India at the end of June 2009 stood at $ 145 bn, while increasing to $ 167 bn at the end of December 2009. It further grew to $ 178.3 bn in June 2010 and to $ 198 bn till December  2010.  In sharp contrast, portfolio investment increased to $ 95.9 bn at the end of June 2009 and jumped to $ 117.2 at the end of December 2009. This was again followed by a sharp surge to $ 135 bn in June 2010 before touching the $ 172 bn mark by December 2010.  FIIs mainly invested in equities, with their investments rising from $ 69 bn to $ 138.2 bn, while their investments in debt securities grew by $ 10.8 bn to $ 33.4 bn in two years.  Meanwhile, the portfolio investments made by Indians in other countries grew from $ 0.6 bn to $ 1.1 bn, while the direct investments by them overseas rose from $ 63.3 bn to $ 92.4 bn during the period under review.

RBI admits to ‘new normal’ inflation tangle

Acceptance of higher inflation rate as the new normal will raise risks of accelerating inflation,” Subir Gokarn, Deputy Governor, Reserve Bank of India (RBI), said on Tuesday, adding the economy has to  avoid the vicious circle of high inflation, low investment and slow growth. The economy should get into a virtuous cycle of low inflation, high investment and fiscal consolidation accompanying high growth, he said. Headline inflation stood at 8.31% in February after a gruelling year in which food inflation hovered close to double-digits.  “Despite significant actions on policy rates and liquidity by the Reserve Bank of India, inflation remains high, giving rise to some very fundamental questions,” said Gokarn while speaking at the meeting of the national executive committee of FICCI.  Highlighting on the need to tackle inflation Gokarn said, “India’s central bank cannot afford to be slack on inflation.”  The current rate of inflation raises concerns about the risks of spiralling and may slow down the growth momentum, he said. “In essence, the trade-off is more between inflation now and growth in the future. The only way to keep food prices in check is to produce more than what people want to consume.”  The RBI has already raised interest rates eight times since March 2010.

Bank CEOs oppose savings rate deregulation

MUMBAI: CEOs of large commercial banks have urged the Reserve Bank of India (RBI) not to deregulate interest rate on savings bank account.   At a meeting between the chief executives of select banks and RBI Governor D Subbarao on Tuesday, most bankers vehemently opposed the move to deregulate savings account rates which is fixed at 3.5%, sources said. The meeting was a prelude to the central bank's annual monetary policy to be announced on May 3.  The Reserve Bank of India has set up a committee to study the consequences of freeing up of savings rate. All interest rates except the rates on savings account are free now. Bankers told the governor that deregulation of savings rate could impact the stability of deposits.  "These are uncertain times. There is uncertainty about inflation, interest rates and growth. Therefore, in such times, we have suggested that, perhaps , this may not be the right time to consider a deregulation in rates," said a banker present in the meeting. Recently, former RBI governor YV Reddy also opposed deregulation of savings bank account rate.  "Many of the common people don't have time to apply their mind and shift money from savings to deposits, etc. So, for heaven's sake, give one banking instrument, one bank account where the man knows that this is the interest rate, this is the facility. This is required . I would even say, particularly , it is required for women in India whose money should be safe from their husbands ," Mr Reddy had said in a recent media interview.  While expressing his reservation on deregulating savings rate, the recently retired chairman of the State Bank of India , Om Prakash Bhatt, said: "A bank may pay 1% or less for those account holders who have small deposits and 5% if they are willing to keep Rs 50,000 in savings account. This in turn will impact small depositors."

Monetary policy: Bankers urge RBI not to hike repo and reverse repo rates

Bankers present in Tuesday's meeting also urged RBI not to raise key rates - repo and reverse repo - on fears that borrowers may not have the appetite to pay higher rates on loans. Some banks also said they have not yet passed on the 25 bps hike in key rates in March to borrowers. The central bank has hiked repo and reverse repo rates eight times in the past one year to tame inflation. However, some bankers urged RBI to raise key rates to control inflation. India's headline inflation has remained above RBI's comfort level over a year now. The benchmark WPI rose to 8.31% in February from 8.23% in January. The latest weekly data showed food inflation at 9.5% in the week ended March 19, down from 10.05% in the previous week. Economists expect RBI to continue raising rates to keep inflationary expectations under check.   Bankers have also asked RBI to give them time till June to restructure loans to MFIs. The central bank had given time till March 31, to reschedule loans of MFIs, while allowing them to classify it as standard assets. Banks have even told RBI that securitised portfolio sold by MFIs to banks should be allowed to be restructured under the same dispensation.   During the meeting, RBI also raised concerns about steep rise in banks' loan to the real estate sector. Banks' exposure to the sector stood at 107,889 crore in the first 11 months of 2010-11, up 17% YoY. Bankers, however, felt their individual exposure has fallen in the past few months.

Can absorb only 25-bps repo hike, bankers tell RBI

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RBI Never asks for Your Bank Account Details

It has come to the notice of the Reserve Bank of India that mail has been sent in its name "inviting bank customers to update their bank account details against online phishing". The Reserve Bank has clarified that it has NOT sent any such email.  It has further clarified that the Reserve Bank or banks never issue communication asking for bank account details for any purpose. The Reserve Bank has appealed to members of public not to respond to such mails and not to share their bank account details with anyone for any purpose.

More HK banks will set up ops if RBI issues licences: HKTDC

Mumbai, Apr 5 (PTI) The Hong Kong Trade Development Corporation (HKTDC), feels that more Hong Kong banks would set up operations in India if the Reserve Bank of India (RBI) issues licenses to foreign banks. "Presently, we have HSBC in India. We feel some more banks will be interested in starting operations in India if RBI permits banking licenses to foreign banks," HKTDC's Assistant Executive Director, Raymond Yip, told reporters here today. India is the second-largest market for Hong Kong as nearly 11 Indian banks have their operations here, he said. "With the economy reviving slowly, we are expecting a few more Indian banks to set up their operations in Hong Kong," he said. The HKTDC is also focusing on the Indian market for enhancing its imports and exports, he said. "We (India and Hong Kong) export and import pearls and jewellery at a larger scale as compared to other products. At the same time, India is emerging as an IT hub. Therefore, we are also looking at this sector as a potential trade destination for Hong Kong," Yip said.

Gearing for lower growth

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Cardless banking with Aadhaar number may soon become reality

Some banks and the Unique Identification Authority of India (UIDAI), which is spearheading the ambitious Aadhaar project, are looking to allow customers operate ATMs armed with only their 12-digit Aadhaar number; the access will be facilitated by a biometric scan.  New Delhi: Soon, it may be possible for customers to operate ATMs without cards. And, eventually, shop without credit cards. Some banks and the Unique Identification Authority of India (UIDAI), which is spearheading the ambitious Aadhaar project, are looking to allow customers operate ATMs armed with only their 12-digit Aadhaar number; the access will be facilitated by a biometric scan. Experts say the move could reduce cost of operations for banks and also reduce instances of debit card fraud. Even while UIDAI is still working to fine-tune the model, state-owned Corporation Bank is readying to implement the new model. “We will be launching this service in the next three-four weeks for our customers in Delhi,” said an official of the bank, asking not to be named.  With a mere 58,000 Aadhaar numbers issued in Delhi (4.2 million have been issued across India), the number of customers using Corporation Bank’s service will be limited at first. But it will increase. UIDAI hopes to issue 600 million numbers by 2014. The number of credit and debit cards as on January stands at over 230 million in the country, according to the Reserve Bank of India (RBI); the issue cost of each card varies between Rs. 20 and Rs. 80.   For cardless transactions to become a reality, customers will have to link their bank accounts with the Aadhaar number. At the time of enrolment, UIDAI is giving people the option of either opening a new bank account, which will be Aadhaar-enabled, or linking to an existing one.  UIDAI has already done field tests in Jharkhand and is readying its infrastructure to support bulk transactions. “The servers and systems are currently being tested to see if they can take at least 100 million transactions simultaneously... UIDAI is working to ready them by July this year,” said an official familiar with the development, who did not want to be identified.  Both the officials independently confirmed that the approval from the regulator is in place. “The Reserve Bank of India has given an in-principle approval for the plan, but the final go-ahead will be needed closer to the actual launch,” the second official said.  “RBI’s main concern is safety... This will take care of all the safety aspects,” added the Corporation Bank official. “It is one of the safest ways to do banking... It will make sure that the right person is using the right account,” said the second official.  The move to cardless banking will take quite some time. And the move to cardless shopping some more. That’s because banks will have to install a biometric reader in all their ATM machines and will also have to upgrade the applications on them to make them cardless. There were at least 43,000 ATMs across the country as of March 2010, according to RBI. Moreover, the core banking solution, through which banks integrate all transactions across branches, will also have to support the new model.  According to Alpesh Shah, partner and director at Boston Consulting Group, the cardless banking model would have a large impact, but over the next three-five years.  “Banks will have to upgrade their infrastructure, which may take a few years. So there will not be much impact in the next six months to one year. But over a longer term, once the concept catches on, it could change the way banking is done,” he said.  A Union Bank of India official, who also did not want to be identified, said that while Aadhaar will provide sufficient authentication for transactions, it will take some time for banks to adapt to the new system and put in place the necessary infrastructure. Interestingly, UIDAI is hoping banks will rapidly upgrade their technological infrastructure as a sort of quid pro quo for pushing more business their way. The Aadhaar initiative will be facilitating the opening of several million new bank accounts during the enrolment process. UIDAI is already in the process of empanelling banks for this.  Aadhaar has so far enrolled around 4.2 million people in the country and around 80% of them want a new bank account, according to UIDAI estimates. To make cardless banking work, UIDAI will have to link its servers at one end to the banks and on the other to the National Payments Corporation of India (NPCI). Each bank has its own financial switch, which is connected to the national financial switch (NFS). NFS facilitates routing of ATM transactions through connectivity between the banks’ switches. NPCI does the settlement under this network.  “If banks agree on such a model, NPCI has no problems in switching the transaction,” said A.P. Hota, managing director and chief executive officer of NPCI.  Cashless transactions at retail establishments pose a challenge.   “A card is not built only for use in ATMs. It is meant to be used in other devices also, such as point of sale terminals used in retail outlets... So a bank cannot completely do away with issuing the card,” said an official at IDBI Bank Ltd, who did not want to be identified.   UIDAI does have a plan to enable micropayments even at retail outlets through what it terms micro-ATMs, essentially low-cost hand-held devices with a fingerprint reader.

Liquidity surplus banks park Rs. 31,000cr with RBI

The beginning of the new financial year 2011-12 has witnessed some radical improvements in liquidity scenario in the system. For the first time, almost over a year the banks have parked surplus liquidity to the tune of R31,000 crore in the reverse repo window of Reserve Bank of India.   RBI's reverse repo window pays 5.75% to the banks. The rates for certificate of deposits (CDs) also softened on Tuesday. One-year CD fell by almost 30 basis points from 9.70% to 9.40% on Tuesday. Till March end, banks had been borrowing consistently from the RBI's repo window, which has varied from over R50,000 to R1,000 crore.   Banks have raised resources through high cost deposits and certificate deposits in the past.   MD Mallaya, CMD of Bank of Baroda, said that the exact liquidity situation is likely to be good in the future. “By and large, we have entered the phase of slack season when credit demand will be less and government spending has already happened in March. Interest rates are to remain stable for now. Accretion of deposit shouldn't be a challenge in future,” he said.   On whether RBI will take measures to suck out liquidity, he said, “It is too early for RBI to take a view on the issue. It will depend on overall macroeconomic conditions.”   M Narendra, CMD of Indian Overseas Bank, said the sudden surplus may be happening as banks might have done it in a bid to go for pending deployment of credit. Few banks may go for deposit rate cuts too, he said. “But, such surplus may not continue further. Still, it is not indicator enough for RBI to take measures to suck out the surplus liquidity,” he said.   SC Kalia, executive director of Union Bank of India, said it looked like liquidity crunch should not be any issue now. During the year, a lot of deployment of funds took place on short-term basis. The surplus of liquidity was also due to the redemption pressure on MFs. “When those funds are coming, there will certainly be liquidity surplus with banks. Liquidity may be at comfort level, but not that much surplus so that it would lead to RBI taking measures to suck out liquidity,” he added.   D Sarkar, ED of Allahabad Bank, said that liquidity had improved now as lots of government funds had been released recently. “At the moment we don't feel there is any need to go for cut in deposit rates,” he said.   Net liquidity injection through LAF declined from an average of R93,000 crore in January to R79,000 crore in February 2011, and further to R68,000 crore in March mainly due to increase in government spending and consequent decline in government cash balances with RBI.  D Subbaro, governor of RBI, had said going forward, the overall liquidity situation is expected to move close to the comfort level of the RBI.

Inflation may hurt investments, growth: RBI

MUMBAI: The Reserve Bank of India has probably, for the first time in many years, said that inflation may 'spiral' out of control, hurting investments and economic growth.   This is an indication that policy rates will keep rising till it re-creates an atmosphere for sustained growth.   "The current rate of inflation does raise concerns about the risks of spiralling, as high inflation becomes increasingly entrenched into the wage and price-setting behaviour of workers and producers," Subir Gokarn , deputy governor at the Reserve Bank of India, told an industry conference.   "In turn, if this were to adversely impact investment activity, the growth momentum would inevitably slow down. In essence, the trade-off is more between inflation now, and growth in the future," Mr Sbir Gokarn said.   India's inflation that started climbing due to food prices two years ago and is fast spreading to all parts of the economy. That is forcing wage-earners to seek higher salaries and is triggering product price increases.  Wholesale prices rose 8.31% in Feburary, above the RBI's 8% target that was revised many times.  Food inflation was at 9.5% for the week ended March 19.  RBI raised rates eight times in 13 months to 6.75%, but the negative real return continues.   "It signifies the extent or magnitude of the spill-over of higher food and oil prices to generalised inflation," said Deepali Bhargava, chief economist at ING Vysya Bank .   Central bankers, inspired by former US Federal Reserve chairman Alan Greenspan, are careful in their diction to describe the state of the macro economy. The RBI has been gradually moving to accepting that price rise is now widespread, after arguing that monetary policy is ineffective in tackling supply-side induced inflation. In the last few quarters, it shifted to saying that supply side is 'spilling over' to manufacturing that could keep inflation at elevated levels. Economists tracking the central bank say, this may be first time that the word 'spiralling' is being used by a top central banker. It could not be confirmed.   Inflation is threatening to plunge economies into crisis. China raised interest rates for the fourth time since the crisis ended, and US Fed chairman Ben Bernanke and Jean Claude Trichet of the European Central Bank are joining the chorus about the destabilising effects of price rise.   "We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability," Ben Bernanke said on Monday.   The desire for above average economic growth may force people to live with higher prices for a sustained period.  "Acceptance of a higher rate of inflation as the new normal - an inevitable consequence of rapid growth - will raise risk of accelerating inflation," said Gokarn. "If in fact, the contribution of investment spending to growth is declining, the constraints can only become more binding, further aggravating inflationary pressures."   Crude oil prices near $120 a barrel and copper, lead and silver prices at historic highs could accelerate further as investors losing faith in paper currency chase real assets.

REVISED TAKEOVER CODE, JALAN COMMITTEE REPORT FACE DELAY

It is now clear that the revised takeover code and the Bimal Jalan committee report will not be implemented soon and in the same form, since the finance ministry wants to seek industry views on these two sets of recommendations this month, before the market regulator could take a decision.  A section of industry has criticised the Jalan panel report for its opposition to listing of stock exchanges and the revised takeover code recommendations for making acquisitions costlier, among other issues.  It was expected the two issues would be on top of the agenda of new Securities and Exchange Board of India (Sebi) Chairman U K Sinha.  While the capital markets division in the finance ministry would hold consultations on the Jalan panel report, Chief Economic Advisor Kaushik Basu would have interactions on the revised takeover code. Both would happen this month, officials told Business Standard .  In a clear indication that the Jalan panel report might be tweaked, a key official said, “Nowhere in the world are reports suggested by committees implemented in toto.” A committee set up by Sebi on the takeover code had recommended raising the trigger for open offer to 25 per cent from the current 15 per cent.  A panel headed by the former presiding officer of the Securities Appellate Tribunal (SAT), C Achuthan, also proposed to raise the statutory open offer size to 100 per cent. The proposal on 100 per cent open offer may make it difficult for local players to fund the acquisition. As such, the local players may be placed at a disadvantageous position vis-avis foreign ones, said Equity Head of SMC Global Research Jagannadham Thunguntla.  The Bimal Jalan committee on ownership and governance of market infrastructure institutions has recommended that exchanges should not be allowed to list, a ceiling should be put on their profits and dividends, and the role of anchor investors should be limited to only domestic players. A section of industry has criticised the report as anti-competitive.  When asked whether the government has some concerns on the revised takeover code, Basu said, “At the moment, I have an open mind.” The chief economic advisor said he would shortly decide who should be invited for consultations.

Banks Mean Business, Inclusion Long Way off

RBI’s latest release of ‘Statistical Tables relating to Banks in India’ is quite revealing when we juxtapose FY00 and FY10 data. We’ve had several measures that have been invoked under financial liberalisation while a lot has also been spoken of on inclusion to add a social dimension. How has this model worked?  The study of data over these 10 years has some interesting stories to tell. Three aspects of banking development could be looked at: banking structures, business profile and financial performance. Under banking structures, the growth in network increased from 67,532 branches to 87,768. However, the share of rural branches came down from 48% to 37% while that of urban and metro increased from 30% to 40%. Quite clearly, banks have been going to places where there is business.  Simultaneously, the staff strength came down by around 14% to less than a million i.e. 869,412 (FY09). Banks have effectively used technology to replace surplus manpower. The business profile reveals that deposits remain the main source of funds, accounting for 79% of total liabilities as against 80% in FY00. Second, term deposits continue to be around 65% of deposits and there has been virtually no change here. Third, surprisingly, households have become less important for banks in terms of garnering deposits with their share going down from 67.6% in FY00 to 58.3% in FY09. Banks evidently prefer to raise bulk deposits from corporates which have lower transaction costs and are easier from the point of view of ALM considerations. This also reflects household’s preference for stock markets and insurance products and corporate proclivity for parking funds with banks through the CD markets, which is a sign of a mature banking system.  On the lending side, some discernible patterns have emerged. To begin with, the share of term loans has gone up from 36.5% in FY00 to 57.4% in FY10, which may be attributed to the demise of development banking with banks taking on the role of long-term lending. Second, the share of priority sector lending remains at around 31% and banks have just about met their targets and have not really followed the inclusive model. Maybe, there is a very critical role for MFIs here. The fact that NPAs in this sector tend to be higher could be a reason for not converting enthusiasm into action.  Third, the level of concentration in loans is unchanged and Maharashtra and Delhi still account for around 42% of credit, which is reflective of the demand coming from the more industrialised states where business is higher. Fourth, the sectoral distribution of credit has also changed. In terms of share in total credit, professionals (3.2% to 9.8%), personal (11.2% to 12.7%), finance (4.8% to 8.5%) have been gainers while trade has come down from 15.6% to 10.7%. The success of banks in terms of financial performance has been quite amazing. Profits, which were never really very important for public sector banks, have seen a turnaround. The return on assets has increased for the entire sector from 0.73% to 1.05% in FY10, after peaking at 1.12% in FY08. This is remarkable at a time when the base of total assets has quadrupled from . 15.16 lakh crore to . 60.25 lakh crore. Return on equity, however, has been more volatile. The increase in base of net worth explains most of this phenomenon.  Third, despite interest rates coming down on account of RBI policy on both deposits and advances, the spread has remained rather stagnant. Such high spreads are atypical of mature banking systems and may be attributed to a combination of higher risk in the system as well as operating expenses. Intermediation costs have been coming down from 2.68% of total assets to 1.80% in FY10.Last, gross NPAs have come down from 12.8% to 2.5%.  So, how does one evaluate the performance over this decade? Banks have been driven by commercial considerations as witnessed in improved financial performance and proliferation of banking structures towards centres and sectors of growth. Intermediation costs have to be improved upon and one vital missing link in banking ideology which has to get excluded is the 'inclusive nature of banking'. Quite evidently, new innovative models have to be built aggressively if we are really serious.

Monetary response, must to stop inflation from spiralling away: Gokarn

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Kamath takes over as CMD at Vijaya Bank

HS Upendra Kamath took charge as the Chairman and Managing Director of Vijaya Bank, succeeding Albert Tauro who has retired from service. Kamath, who has 37 years of experience in the banking sector, was previously the executive director at Canara Bank. He is considered an expert in areas such as corporate finance, SME finance, risk management and international operations and has been a member of committees of the RBI and Indian Banks Association such as the working group on Benchmark Prime Lending Rate and the committee on retail banking.

EDI celebrates 12th convocation in G'nagar

AHMEDABAD: Cheerful smiles and warm greetings filled the lush green campus of Entrepreneurship Development Institute of India (EDI) at Gandhinagar which donned a celebrative mood on Monday. The institute was celebrating its 12{+t}{+h} convocation of the 'Post-Graduate Diploma in Management - Business Entrepreneurship' and 'Post-Graduate Diploma in Management of NGOs.'  The convocation, which had deputy governor ofReserve Bank of India K C Chakrabarty as its chief guest, awarded diplomas to a total of 74 students from the two programmes. EDI president and IDBIchairman R M Malla, EDI director Dinesh Awasthi, faculties of the institute and many parents were present at the event.  At the convocation's speech, Chakrabarty said that the youth are at a right time to explore opportunities in entrepreneurship and other areas in the country. "If one goes by indicators, such as spending power, lifestyle, health and opportunities in general, one can derive that the Indian economy has come a long way in terms of economic growth. Especially over the last few years, the economy has entered a high-growth phase, averaging 8.6% per capita income per annum. India is sure emerging as a dynamic economic hub where growth is facilitated by efficient banking system, foreign direct investment, export demand, capital markets etc. The domestic entrepreneurial class is greatly benefiting from this and leading growth," he said.  Chakrabarty also referred to globalisation and its consequential changes in economic policies and technology as an opportunity for entrepreneurship. "Look at how new communication technologies have reduced economic distances, lowering costs and ensuring faster and cheaper movement of goods and services. I would say amidst such an environment, it is easy for potential entrepreneurs to grow," he said. Highlighting the importance of both commercial entrepreneurship and social entrepreneurship before concluding his speech, Chakrabarty said that the two kinds of entrepreneurship are like the two sides of the same coin and they must go hand-in-hand.

Messing up succession

There was no reason why the Union finance ministry should have messed up succession planning at the country’s premier bank, State Bank of India (SBI). If the idea was to allow the incumbent managing director, R Sridharan, a limited tenure in the top job, as a consolation since he missed out being considered for the job given the existing rules on age and eligibility, it is understandable. No harm done if you allow a senior person a brief term, before the regular appointment is made. In the past, even the Reserve Bank of India (RBI) had such interim governors. However, if the reason for the present situation was lack of proper paper work by those responsible for the selection process, then it reflects poorly on the Union government and the Union finance ministry. Also, it is unfair to whoever finally gets the top job at the country’s biggest bank. It is axiomatic that the successor to an outgoing top executive of any important organisation should be identified at least six months in advance. Not doing this lays the system open to the allegation that there is a conscious desire to build scope for extended lobbying and influence peddling. As and when a chairman with a reasonable tenure takes over, he will have his hands full, and a handicap to boot. The previous chairman had defied the RBI by not fully meeting the provisioning norms laid down. Doing so now will immediately depress the bottomline, thus putting it in an unfavourable light compared to the earlier period. This will reinforce an unfortunate pattern in the reporting of public sector banks’ bottomlines. As the time for one chief to go approaches, performance starts smelling of roses and there is a sharp decline immediately after the new chief takes over, inviting the notion that he has inherited a poor legacy.  Another challenge the next chairman will face is to improve the quality of assets. It is far from what it should be, with SBI trailing its peer group. There was, in fact, no improvement in this regard during the long tenure of the previous incumbent. The asset quality appears to have been sacrificed on the altar of high growth and improvement in market share, important as they are. Therefore, a period of consolidation instead of chasing growth for the sake of growth may be in order. The outgoing chairman, O P Bhatt, had displayed remarkable aggression vis-à-vis the competition and this can-do attitude had enthused the organisation and enabled him to lead from the front. The challenge for the new leader will be to continue to enthuse without some of the earlier bravado, particularly picking a fight with the regulator. But though motivation is needed, there must be something to motivate. It is highly doubtful if the likes of Mr Bhatt are being recruited now at the entry level. Four decades ago, not only were the bank’s entry level salaries among the best in the country, including the private sector, the number of decent private sector jobs obtained on merit was far fewer. The bank has developed a serious talent deficit and the government has to do something to allow it to win appropriate talent across levels. SBI is a national organisation so it must get the best in the national interest. Better leadership planning is a necessary part of building organisational morale, which is critical to attracting good talent in any organisation.

Delay led to uncertainty: Anand Sinha

The Deputy Governors of the Reserve Bank of India (RBI) are known to rarely, if ever, let anyone know what’s on their minds. However, in a rare interview, RBI Deputy Governor Anand Sinha didn’t shy away from expressing his anxiety about the delay in his appointment.  Sinha replaced Usha Thorat, who retired in early November.  “With the time for my usual super-annuation from the bank’s services fast approaching, it made things a bit uncertain for me and my family, since in such a situation, I was not able to a take a view on my plans for the future. I could also see my wife and children were tensed,” Sinha said in an interview published in Without Reserve, an RBI magazine. Chief General Manager Deepak Singhal is the editor of the magazine. The search committee to identify a deputy governor was formed in August and the recommendations were sent in September. Yet, the post was vacant for more than two months, due to a delay in the appointment announced by the government. To be eligible for the post of RBI deputy governor, one has to be less than 60 years of age, with two years of residual service. The retirement age for a deputy governor is 62 years, while for other RBI employees, the retirement age is 60. Things became uncertain for Sinha because he attained the age of 60 in February, and as an executive director, he would have retired had he not been appointed a deputy governor. “To be honest, the instant thought was more of relief than happiness. Yes, I did feel happy when, just after the interview, newspapers started indicating that my name had been recommended by the selection panel. The final announcement of course, came after quite a while,” Sinha said. “So, when it came, I just felt relieved. Did I feel ecstatic? No, I have a pretty steady temperament,” said Sinha, who names Mahatma Gandhi as his favourite personality.

Paisa bolta hai

Top jobs at PSU banks lie vacant

NEW DELHI: State Bank of India, the country's largest lender, is not the only bank to have a near empty top deck. There are at least half-a-dozen high-level banking jobs that are lying vacant as various government agencies keep tossing files from one ministry to another. On Monday, the number of vacancies shrunk marginally with Sushil Muhnot taking over as the new CMD of  SIDBI, a post that had been lying vacant for over nine months. But the job of Punjab & Sind Bank CMD has been lying vacant for over nine months as the Prime Minister's Office and the finance ministry cannot decide if they should stick to the 30-year-old practice of appointing a Sikh or change the rule. South Block, where PMO is housed, has raised the issue at least twice but amid opposition from Sikh leaders, the finance ministry went ahead and suggested that a bureaucrat be appointed Punjab & Sind Bank CMD as there were no Sikh bankers available to step into the corner office in Delhi's Rajendra Place. Similarly, despite interviewing candidates last November, the government is yet to decide on who should be the new Nabard chief though the post is empty since U C Sarangi moved out of the refinance and regulatory agency in early December. But this would pale in comparison to the delay in the appointment of an IDBI Bank deputy MD for which interviews were held as early as November 2009. On March 30, nearly 18 months later, the personnel department asked the finance ministry to resubmit the proposal to appoint B K Batra as deputy MD after seeking fresh vigilance clearances from RBI and the Central Vigilance Commission. At SBI, four of the top board-level executive slots are unoccupied as the government has been unable to finalise appointments. The fifth position—held by R Sridharan, a managing director who is the officiating chairman—is due to fall vacant in less than three months. This is in sharp contrast to the private sector where the CEO is announced months in advance and groomed to take over the corner office. Following the sacking of P J Thomas as CVC, the government has increased due diligence in government appointments in recent weeks. But over the last 12-18 months, most appointment proposals put up by the finance ministry has run into hurdles in the PMO, only to be cleared on resubmission.

A case in point is the selection of a bunch of CMDs for public sector banks where the finance ministry had proposed to lower the eligibility norms. The PMO initially turned down a proposal saying that those with less than two years of residual service were ineligible. Similarly, it opposed the finance ministry's proposal to straightaway appoint an executive director as the CMD of a large bank. Typically, on promotion, an executive director is appointed as the head of a small public sector bank and later moved to a larger bank. Subsequently, the PMO cleared both the appointments, said an official. Between tossing of files, there is complete uncertainty at banks. For instance, Union Bank of India staff and clients do not know if they will have to deal with a new chairman in three months as M V Nair has been given only 18 months extension against the original proposal to reappoint him for a year. Officials said that what also delays is frequent change in rules or complete absence of procedures. For instance, the cabinet secretariat recently pointed out that there were no norms in place for the appointment of SBI chairman. Similarly, there are no norms for reappointment of bank and financial institution chiefs. This was recently pointed out by cabinet secretary K M Chandrasekhar who has now asked the finance ministry to set up a board to review the performance of an incumbent before recommending him or her for reappointment. So, an extension to LIC chairman who is due to retire in around two months, is likely to be routed through this committee first before going to the Appointments Committee of Cabinet.

Sebi to address RBI concerns on foreign investment in MFs

The Securities and Exchange Board of India (Sebi) will address the concerns of the central bank while framing the guidelines for allowing foreign individual investors to invest directly in registered mutual funds.  The guidelines, which will be in place by mid-May, will also ensure that the subscription process is as simple as possible.  A senior finance ministry official said Sebi was working on the guidelines in consultation with the Reserve Bank of India (RBI). RBI has been worried over the high share of portfolio funds in overall capital inflows as they are prone to sudden stops and reversals. It has also been insisting on strict adherence to know-your customer (KYC) norms for investments from abroad. The official said the guidelines would address these concerns. At present, foreign institutional investors (FIIs) are allowed to invest in mutual funds. “The group on capital inflows, in July last year, suggested general permission for foreign institutional investments. It has been decided that the recommendations will be implemented in stages, beginning with mutual funds,” he said. The group on foreign investment, headed by the current Sebi Chairman, U K Sinha, who was UTI Mutual Fund chairman that time, recommended an overhaul of the regulatory framework. The panel proposed doing away with different categories such as FIIs, foreign venture capital investors and non-resident Indians (NRIs). In the Budget, Finance Minister Pranab Mukherjee announced the government’s intent to liberalise the Portfolio Investment Scheme to allow Sebi-registered mutual funds to accept funds for equity schemes directly from foreign investors who meet the KYC norms. Sebi will issue the guidelines to implement the move while RBI will rewrite the Fema Inbound Investment Regulations.

No easy banking entry for NBFCs as finance ministry seeks tougher norms

NEW DELHI: The finance ministry has sought strict norms for non-banking finance companies, or NBFCs, that want to convert into banks or promote banks. The move threatens to upset plans of several finance companies that are keen to enter the banking space. The ministry has suggested that only those NBFCs, which have a minimum balance sheet size of Rs 10,000 crore and gross non-performing assets of less than 5%, should be allowed to convert into banks or set up new banks, said an official privy to the discussions between the ministry and the Reserve Bank of India (RBI). "We want only those NBFCs that have a strong capital base and smooth operations to participate in the process," the official said requesting anonymity. Various entities like Religare , Bajaj Finance , Mahindra & Mahindra , IL&FS and Shriram City Union Finance are mulling entering the banking space. The ministry is currently examining the draft guidelines on the new banking licenses submitted by RBI last month. The banking regulator had originally planned to release the draft by the end of the month. But divergent views between the ministry and RBI have delayed their release. The RBI's discussion paper on conditions for entry of new banks had invited arguments for and against allowing NBFCs to convert into banks. It had also deliberated on the issue of allowing NBFCs to promote banks. In the guidelines sent to the government, the RBI has favoured both the options. It has even proposed that if an NBFCs converts itself into a bank, its existing branches in Tier III to Tier VI cities should get a branch status automatically. But the finance ministry does not agree with this view. "One of the major initiatives for new banking licenses is financial inclusion," said the official quoted earlier. "NBFCs which have already set up their base in smaller cities are more competent to take the cause of financial inclusion." RBI had in 2001 allowed an NBFC with a good track record to convert into a bank, provided it was not promoted by a large industrial house and satisfied the prescribed minimum capital requirement. Only one finance company has so far converted into a bank. he finance ministry has also opposed RBI's suggestion to restrict foreign direct investment in new banks. It says bringing down foreign investment limit to 49% from the existing 74% will send a wrong signal to investors. "But RBI has argued that when it is already encouraging foreign banks to set up wholly-owned subsidiaries, allowing 74% FDI in new business will defeat the objective of setting up Indian banks," the official said. Foreign banks have already said they should not be treated differently from lenders such as ICICI Bank and HDFC Bank , in which foreign holding is more than 49%. RBI has, so far, maintained that both the banks are exceptions and if 74% FDI was allowed in new banks, it would not be able to justify the difference between foreign and private banks, which have more than 50% foreign investment.

Malegam panel mulls recommending more licences for urban co-op banks

The cooperative banking sector is gearing up for a makeover, with greater participation of cooperative societies in banking operations.  A high-powered committee, under the chairmanship of Y H Malegam, a member of the board of directors of the Reserve Bank of India (RBI), is considering  recommending licences to new cooperatives planning to become urban cooperative banks (UCBs), and convert the existing credit cooperative societies into a cooperative bank.  At a recent meeting, the six-member Malegam Committee decided to meet national and state cooperative federations and cooperative bankers to chalk out the road map for making urban cooperative banking more inclusive for the cooperative sector. “We are exploring the possibility of simplifying the licensing procedure for cooperative societies seeking to become a registered UCB. Further, we are also considering an option of converting existing credit societies into a UCB,” said H K Patil, president, National Federation of Urban Cooperative Banks and Credit Societies (NAFCUB). Patil is also a member of the Malegam committee.  The terms of reference laid out by the committee seek to recognise the need for UCBs in India and rising financial inclusion in non-banked regions of the country through these UCBs. The committee would also look at giving credit societies the authority for banking operations. Currently, there are about 50,000 credit societies in India.  The Malegam committee will also discuss the possibility of an apex body under the umbrella organisation concept to advise UCBs for better monitoring of funds and investments. The apex body will also offer guidance on various technological aspects to modernise the functioning of UCBs.  “Only UCBs can reach the non-banked regions of the country. So far, there is only 40 per cent financial inclusion in India. For the remaining 60 per cent, UCBs bear immense importance. So, there are a lot of expectations from the Malegam committee recommendations,” said Subhash Gupta, chief executive, NAFCUB.  According to industry sources, going forward, some issues related to higher authority and freedom in the urban cooperative banking may also come up. “The UCBs are not allowed to operate in forex or take deposits from trusts or government agencies, while nationalised banks are permitted under the banking act. Hence, it would be required to put UCBs on a par with nationalised commercial banks to make them sustainable,” said Ghanshyambhai Amin, president, Gujarat State Cooperative Federation.  So far, the committee met four times in the past three months and the next meeting is scheduled to be held later this month. “Though we have a deadline, we cannot comment on when would the report be finalised, as we not even come halfway so far,” said Patil.  Currently, there are around 1,674 UCBs operating in India, with 6,900 branches spread across the country. The total number of customers with these USBs exceeds 20 million. The deposits are expected to grow by around 16 per cent in the current financial year. UCB deposits were recorded at Rs 1.82 lakh crore as on March, 2010.  This was a rise of 14 per cent compared to the previous year.  The growth in advances has been almost on a par with growth in deposits.

High interest rate regime over

CHENNAI: Good news for potential home and car buyers. Bankers said that lending rates have peaked and they may not go up further. That holds true for deposit rates too.   "I am not expecting either lending or deposit rates to move up from here. They are going to remain benign, depending on the situation of inflation," Mohan Tanksale, executive director of Punjab National Bank, said.   M Narendra, chairman and managing director of Indian Overseas Bank, said that some small banks, who have not been able to fully pass on the increase in their cost of fund, may go for a further 0.25% increase in their lending rates. "However, interest rates in general are going to remain stable in the first quarter of 2011-12." S C Sinha, executive director of Oriental Bank of Commerce, said deposit and lending rates are going to fall from here on. The bankers' opinion is based on the expectation that inflation rate will come down further. They are also expecting the liquidity situation to improve in the coming days. "We have seen that the inflation rate is coming down because of the combine effort of the RBI and the government. We are expecting inflation to come down further to 7%. The government also has started spending, which would ease the pressure on liquidity. Thus we may see only one or two small steps from the RBI," said Narendra.   United Bank of India's executive director S C Bansal said that the RBI may increase its policy rates by another 0.25%. He, however, said that the hike will not have any further impact on the interest rates.  "There are two reasons why interest rates may not go up further. Banks are comfortable with the liquidity, where it stands now. Second, the first quarter of a financial year is usually sluggish in terms of credit demand. Thus, there is no pressure on banks to raise lending and deposit rates," Bansal said.  According to the Reserve Bank's latest data, banks have seen a 23.3% growth in their credit in FY11, compare to a 16.2% in FY10. The demand for deposit grew only by 16.6% as against 18.8% the previous year.  Banks are expecting things to change. They are pegging deposit growth at 20%+ in the current financial year.

ASSOCHAM urges govt to exempt currency conversions from service tax

The volatility in exchange rate markets even on intra-day is quite large, said The Associated Chambers of Commerce and Industry of India (ASSOCHAM). Apex industry body ASSOCHAM has urged the government to exempt currency conversions from service tax as the new rule will put extra burden on corporates and blunt competitiveness of exports out of India.  The Reserve Bank of India (RBI) publishes market rates at noon to act as a reference rate and the foreign exchange market is open between 0900 to 1630 hrs. Even if a bank decides to charge no incremental charge or fee over and above its cover rate in inter-bank market, the final transaction rate charged to a corporate can be significantly different from the RBIB (RBI reference rate).  The volatility in exchange rate markets even on intra-day is quite large, said The Associated Chambers of Commerce and Industry of India (ASSOCHAM). On many days in the past one year when exchange rate moved by one per cent, the median intra-day movement was half per cent.  “Therefore a banking and financial services entity cannot charge such difference to its customers on real time basis when transaction is booked,” said chamber’s secretary general D.S. Rawat. “This valuation basis will significantly increase transaction costs and decrease India’s competitiveness in global markets.”  Charging service tax on the differential between RBIB and the rate at which transaction is booked has no link with service provided by a bank. There is no element of service involved in such transactions, said Mr Rawat in a representation to the Central Board of Excise and Customs. “Moreover, companies have no control over such transactions.”  There are no such instances of a similar tax being imposed anywhere in the world – especially in countries where Indian companies compete in common markets. This has also been stated in a research study released by the Department of Economic Affairs.  “As a matter of fact, competing countries have been facilitating their external sector by various measures like a stable currency in China, procedural relaxations and lower interest rates,” said Mr Rawat. “It would tantamount to imposing service tax not on the service part – which otherwise is absent in such transactions – but on the profit or loss made by money changers.”  This is against the very spirit of service tax legislation where rendering services is a determining factor, he added.  If at all the government wants to bring these transactions within the ambit of service tax, then determination of value of services should be restricted to fees or spreads charged by banks towards foreign exchange conversions, and not otherwise.  In any case, said Mr Rawat, the taxable value tax should not be more than 0.01% of transaction value.

RBI to make public roadmap for introduction of holding co soon

The RBI is likely to soon come out with a roadmap for introducing a holding company structure for banks which will help conglomerates in the finance sector to generate funds for subsidiaries.  An RBI working group, headed by Deputy Governor Shyamala Gopinath, has almost finalised the discussion paper on this and it would be out soon for public comments, sources said. The holding company would be regulated by the Reserve Bank of India (RBI) and all the entities, including the new and the old, in the banking sector will follow the holding structure model once the central bank puts this in practice, according to the sources. A holding company can usually have a bank, life insurance firm, a general insurance and an asset management company as its subsidiaries. India now follows a universal bank model which can have financial services like insurance, asset management, securities business are separate subsidiaries of a bank.  For example, county''s largest bank SBI has SBI Life, SBI MF, SBI Capital etc as its subsidiaries now.  Following the announcement made by the RBI in its last annual policy, it constituted working group headed by Gopinath to recommend a roadmap for the introduction of a holding company structure together with the required legislative amendment or framework.  The other members of the committee include financial sector expert Y H Malegam, Prashant Saran, member SEBI, Keki Mistry Vice Chairman HDFC Ltd, R Sridharan Managing Director SBI, N S Kannan, Chief Financial Officer ICICI Bank. The last discussion paper on the Holding Companies in Banking Groups by Reserve Bank was made public in 2007.  The feedback on the discussion paper emphasised the need for introduction of bank holding companies or financial holding companies in India to ensure an orderly growth of financial conglomerates and better insulation of a bank from the reputation and other risks of the subsidiaries within the group.  The holding company model is expected to ease burden on banks for infusion of funds into capital-intensive subsidiaries like life insurance.  The Committee on Financial Sector Assessment (CFSA), in its report issued in March 2009, observed that given the lack of clarity in the existing statutes relating to the regulation and supervision of financial holding companies, the holding company structure as prevalent in the US for financial conglomerates is not currently in use in India.  The CFSA noted that the absence of the holding company structure in financial conglomerates exposes investors, depositors and the parent company to risks, strains the parent company''s ability to fund its own core business and could restrict the growth of the subsidiary business.