New Delhi: With inflation showing no signs of moderation, economists expect the Reserve Bank to hike key policy rates by at least 25 basis points in its annual monetary policy to be unveiled on May 3. The headline inflation (WPI) stood at 8.98 per cent for March, much above the RBI's projection of 8 per cent, fuelling speculation that the central bank may go in for another hike in the repo (lending) and reverse repo (borrowing) rates. "We are definitely expecting a rate hike. While we do see a 25 basis points (bps) hike in repo and reverse repo rates, it is also likely that the RBI could hike both rates by 50 bps each," Yes Bank Chief Economist Subhada Rao said. Referring to 8.98 per cent inflation in March, she said: "These are very, very disturbing numbers. The sharp upward movement in core inflation is at 29-month high. For RBI this is going to be of great concern, as demand is extremely robust". Expressing similar views, Crisil Chief Economist D K Joshi said, "We expect the RBI to hike repo and reverse repo rates by 25 bps each in its May policy review". "Another hike of 25 bps in the next policy meeting is a certainty," opined Tushar Poddar, Chief India Economist at Goldman Sachs. The repo rate is 6.75 per cent and reverse repo is 5.75 per cent. In order to check rising prices, the RBI has raised the key policy rates eight times since March 2010. The rise in wholesale price inflation was mainly on account of increasing prices of manufactured items, milk, vegetables and fruits. The WPI stood at 8.31 per cent in February. Besides, food inflation, which accounts for nearly 15 per cent of overall WPI inflation, touched the year-low level of 8.28 per cent for the week ended April 2 as prices of certain essential items like pulses and wheat declined, from 9.18 per cent in the previous week. "Food inflation will not have much of a bearing on the RBI's decision making process. From a policy perspective non-food inflation is very critical and it is rising. Looks like inflation will remain high this year", Joshi said. Right now, inflation is suppressed because the fuel price increases globally have not been passed on to Indian consumers yet. If they are transferred, inflation will be much higher than it is at present, Joshi added. On an annual basis, fuel and power prices went up by 12.92 per cent, driven mainly by a 23.14 per cent rise in petrol prices and a 14.99 per cent jump in cooking gas (LPG) rates.
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Tuesday, April 19, 2011
PSU LENDER, AP GOVT MAY START NBFC FOR MICROFINANCE CREDIT
HYDERABAD: A city-based public sector bank is mulling to start a Non-Banking Financial Company, in which the Andhra Pradesh government will join in the equity participation, to extend microfinance credit to the poor, said a state government official said. The state government move may spell doom to the already crippled microfinance institutions with significant exposure in the state. “A couple of banks are in touch with us. We also want to take part in the equity participation. By August 15 we may start operations,” R Subrahmanyam, principal secretary, told PTI. He said the feasibility study has been entrusted to Andhra Pradesh Mahila Abhivruddhi Society (APMAS) a non- governmental public society stands under the Foreign Contribution Regulation Act. MFI have preferred to focus more in the areas where banking network is active and on the groups that are already in the financial inclusion, taking advantage of the awareness of poor in group dynamics and lending methodology, the state government had earlier said. The proposed NBFC would have Rs 500 crore of authorised capital and Rs 150 crore of paid-up capital. Besides, a PSU Bank, both the central government and the state government would join the company as equity investors along with the National Bank for Agriculture and Rural Development (Nabard). Once the feasibility study is completed, the proposal will be sent to Reserve bank for further proceedings and approvals, Subrahmanyam said, adding the NBFC will extend microfinance to mandal samakhyas in the state through self help group (SIG)-bank linkage programme. The MFI lending in the State has come down drastically after the state government came out with a regulation to control microfinance activities. Microfinance Institutions Network strongly criticised AP Microfinance Bill and said it the Bill will create hurdle for the legitimate RBI-registered microfinance in providing access to finance for the poor. “The issue of unavailability of credit to 97 lakh borrowers and outstanding loans of Rs 7,500 crore is looming large before the industry and passing the bill without required amendments will impact the ability of MFIs to function smoothly,” Alok Prasad MFIN CEO had said earlier.
RBI to take new anti-inflation steps
The Reserve Bank of India (RBI) is likely to come out with a new policy measure to rein in inflation in its annual monetary policy review as high inflation remains a "matter of concern" for the apex bank. "We will have our own policy very soon. Inflation remains a matter of concern and we need to evaluate and underline the inflationary pressures," RBI deputy governor Shyamala Gopinath told reporters on the sidelines of a programme organised by the apex bank on Monday. She said that monetary policies required about 12 to 18 months to have an impact on inflation. "Once a policy is in place, it will take around 12 to 18 months to work. It is better that different mechanisms work in a calibrated manner," she stated. Gopinath said that the current inflationary pressure had been a result of high inflation from the food and the non-food manufacturing sector. "We will have to mark these trends and then ensure that there is no demand and supply mismatch," she added.
Inflation a concern for us: Gopinath
Ahead of the monetary policy review on May 3, Reserve Bank of India (RBI) Deputy Governor Shyamala Gopinath today said inflation was a concern, mainly on account of the high prices of non-food manufacturing goods.
50 better than 25 - Arjun Parthasarathy
The sharp upswing in March inflation, almost a percentage point over RBI forecasts, deserves a higher quantum of rate hikes. The RBI should raise repo and reverse repo rates by 50bps each as a signal of inflation veering sharply higher than estimates and as a signal of inflation being understated due to government’s fuel subsidy policies. RBI is scheduled to hold their policy meet in May 2011. The market is expecting a 25bps rate hike based on RBI’s wordings in their policy review in March, but will now start factoring in a 50bps hike after the March inflation numbers. A 50bps hike will be accompanied by a more benign inflation forecast as the RBI will then look to see the positive effects of rate hikes on inflation. The 50bps rate hike should then be taken positively by the market, as it decreases uncertainty on surprise hikes or jumps in inflation numbers. The market will also start looking ahead towards the end of rate hikes, which could just be a couple of policy reviews away. In the meanwhile if the government does raise fuel prices, inflation numbers become more reasonable and reflect reality. The sensex will benefit from a 50bps rate hike as the currency will be under pressure to appreciate bringing in more foreign flows. The RBI is not alone in their anti inflation campaign. China saw inflation for March come in at 5.4% against expectations of 5.2%. China has raised rates twice this year to quell rising inflation expectations. The Yuan has benefitted from the rate hikes and has climbed by 4% over the last one year against the USD and is holding at 15 year highs. The Shanghai composite index has gained around 8% over the last three months, indicating that equity investors are expecting a soft landing for China. Singapore allowed its currency to appreciate to a record high this week to counter inflation which is running at 5% levels. The Singapore dollar has gained around 10% over the last one year. Inflation as measured by the WPI (Wholesale Price Index) came in at 8.98% for the month of March 2011 against economists’ consensus expectation of 8.38%. RBI had forecast an inflation rate of 8% for March 2011. The WPI growth was revised to 9.35% from 8.23% for the month of January. The March inflation number does not factor in the sharp rise in oil prices as the government has not raised fuel prices to pass on the oil price rise to the end user. The Indian crude basket price climbed to over USD 110/bbl in March up by 9% over the previous month. Global oil prices are higher by over 30% in the last six months. The government is running up a subsidy bill of over Rs 175,000 crores at current selling prices of fuel. The fuel subsidy is vastly understating inflation and the upside surge in inflation for March does not even remotely reflect the fuel price rise.
Options to shop with your mobile increase
Plastic money has helped wallets shed a lot of weight. Technology has taken a step ahead and enabled you to get rid of the wallet completely. With the Reserve Bank of India (RBI) taking a proactive role in popularizing mobile payments and beginning to issue the necessary licences, and mobile banking becoming popular by the day, you may soon get hooked on to the facility if you haven’t already. Last week, Corporation Bank launched a mobile wallet, known as YPayCash, a mobile payment platform along with eMudhra Consumer Services Ltd. At the launch function, Ramnath Pradeep, chairman and managing director, Corporation Bank, said, “Mobile banking has become very popular as it creates a convenient and fast financial transactional channel. We are glad to provide this secure mobile payment platform.” A few other banks also offer mobile wallets. These include Yes Bank Ltd and Union Bank of India. Airtel is the only telecom company to have been granted the licence by RBI to provide a similar service through Airtel Money. The facility being provided by Corporation Bank is currently restricted to person-to-merchant establishment payments. In other words, it cannot be used for person-to-person fund transfers but only to make payments to retailers. The payment solution has currently gone live in Mumbai and Bangalore where the bank has almost 16,000 point of sales (PoS) terminals. However all these PoS have not gone live with the facility and the bank expects them to do so in the coming months. Existing Corporation Bank account holders who have signed up for the payment solution can make use of the facility at merchandise outlets that have gone live with the system. If you are an existing Corporation Bank account holder, just walk into a bank branch and apply for the facility. Once your number is added to the system, you will get an SMS with a link in it. Click on it to install the client application. The first time you log in, you will be prompted to create an alphanumeric password. You can either ask the bank to maintain a fixed amount in your mobile wallet, request for periodic transfer of a fixed amount from your savings account or do a top-up through your cellphone same as in a prepaid connection. Currently, the limit is Rs. 5,000. In order to initiate the transaction, you have to log in to the client application installed on your cellphone and key in the amount to be paid. The application will then generate a unique 2-dimensional bar code. This bar code captures your personal data such as your account number, phone number, time scan and certain other details. The merchant will then photograph the bar code from the bank’s client application installed on his cellphone and the payment is complete. Both you and the merchant will get an SMS alert, stating the amount paid and that the payment has been successful. The best part is while transacting, you don’t need to share any personal details such as your account number, user identity or name with the retailer. You can use this to make payments at retail outlets. Eventually, you would be able to use it to pay utility bills and for other transactions. Says Ravi Jagannathan, managing director and CEO, eMudhra Consumer Services, “What we are looking at is a whole ecosystem that will allow you to do a host of transactions as it evolves. In fact, we are also in talks with several other banks to get them on board. We expect three of them to go live by June-end.” More banks coming on board could also mean inter-bank transactions, he adds. Says Jagannathan, “You will receive an SMS alert for each and every transaction, so in case you have been unable to track your expenses, then you also have a record of your transactions and expenses.” So now you need not worry about having to count the exact change when shopping.
Breather for SBI as RBI seeks clarification on special loans
Mumbai: State Bank of India (SBI) has got a breather on its controversial special home scheme as Reserve Bank of India has asked clarification from the bank. The communication from RBI reached SBI last weekend. "We have received communication from RBI seeking clarification on certain issues relating to our special home loan scheme. We will send a reply by this weekend," a senior SBI official said. The SBI had written to the RBI soon after it had raised provisioning amount on teaser home loan scheme to 2% from 0.4% clarifying that the bank's special home loan scheme couldn't be termed as teaser, and hence, the bank didn't have to provide any extra capital. However, RBI hadn't replied to the SBI earlier and the bank has been reviewing and relaunching its scheme after end of every quarter. SBI had conducted a high level meeting under Krishna Kumar, MD of SBI, to review the situation where the bank may have to modify its special home loan scheme. "We haven't decided anything on the scheme and it continues as it is," said the official. Meanwhile, sources at.RBI said the central bank may ultimately ask the bank to provide at 2% for its special home loan scheme. "Our stand is very clear. Any home loan product having feature of both fixed and floating rates will fall under teaser home loan scheme. SBI product is neither fully fixed nor fully floating. The new customers of SBI are being attracted with low fixed rates but may have to pay higher floating rates afterwards. We don't want to encourage this product,'' sources at RBI said. Soon after taking over as the new chairman of SBI, Pratip Chaudhuri had hinted that the bank’s special home loan schemes may be modified since the higher provisioning norms for such assets of 2%, as prescribed by the regulator, were beginning to hurt. “We are continuing with the schemes at present. At the same time, we are in dialogue with RBI and will try to address the concerns of the regulator, deliver value to the customer and also make sure the provisioning is affordable,” said Chaudhuri. Chaudhuri's predecessor OP Bhatt, who was instrumental in growing SBI's home loan portfolio with the special home loan scheme, had staunchly defended the product. Reiterating RBI’s stance that SBI’s special home loans are similar to the sub-prime loans lent in the US in the run-up to the 2008 global financial meltdown, Bhatt said this view is beyond logic as his offering is sold to those who are “absolutely credit-worthy.”
RBI refuses to endorse Sivasankaran's Tamilnad Mercantile Bank stake sale
CHENNAI: The Reserve Bank of India has refused to acknowledge maverick NRI businessman C Sivasankaran's sale of nearly 33% stake in the private sector Tamilnad Mercantile Bank (TMB) to Indian and foreign investors four years ago. Sivasankaran had sold the stake to Ramesh Vangal and ex-McKinsey chief Rajat Gupta , among others. The RBI, which was directed by the Bombay High Court last year to decide on the ownership, has said the deal lacked transparency and it violated the Foreign Exchange Management Act ( FEMA . According to a copy of the RBI order, available with ET, RBI deputy governor Anand Sinha has found "no transparency" in the deal. He said the seven foreign investors, and the Indian investors had acted in concert and "formed a group" while buying the stake. This, he said, is a violation of FEMA. The investors now have to reduce their collective holding to below 5%. TMB managing director AK Jagannathan said the RBI has submitted its decision to the bank. "The appropriate stakeholders should study it and see what needs to be done. The RBI order is an order for us and only the implications of the order matter to us." Vangal couldn't be reached for his comments. In May 2007, seven foreign investors - Vangal's Katra Holding, Ravi S Trehan's RST, Rajat Gupta's GHI, Kamehemaha Mauritius, FI Investments (Mauritius), Cuna Group (Mauritius), and Swiss Reinvestors (Mauritius) - and Indian investors Gokul Patnai and Vector Programme bought 24.93% in TMB, a Nadar community-dominated bank. These investors paid 24,182 a share for the 10 paid-up share of bank. Besides the new non-Nadar investors, another 8% was picked up by influential Nadar businessmen and Indian investors such as MGM Maran and MG Muthu, PS Sathiyaseelan, Hemangini Finance and Leasing, Shanmuga Financial Services, L Sridhar, and N Ganeshan. R Chinnakannan and C Chandammal, the parents of Sivasankaran, were also part of this group. These investors had paid 6,050 a share. The shares where bought from four companies belonging to Sivasankaran's Sterling group. Jagannathan said the bank's accounts are being audited and the balance sheet would be ready by the end of this month. The AGM will also be held shortly where major decisions would be taken. "We will be raising capital and things will evolve after that," he said. In October 2010, the Bombay HC had restrained the TMB from taking any major policy decision or holding its annual general meeting till the Reserve Bank of India acknowledged the transfer of shares. Sources told ET that based on the RBI's directive, the bank's board has decided to hold the AGM for the 2010 and 2011 fiscals at Tuticorin on June 15. Among other things, it will list resolutions to be adopted by members for increasing the authorised capital from 1 crore to 100 crore, issue 30 bonus shares for every one share and allow investors to hold shares in the demat form. Sources said following the directive from the RBI, the bank has to find investors for the over 32% stake at a huge premium. At the same time, the RBI's stand will pave the way for the bank to float a public issue and offer shares to retail investors. On a thin equity of 28.45 lakh, TMB has reserves of over 1,200 crore.
Leighton faces India payment snag
Leighton Holdings Ltd has been forced to re-extend the payment deadline for the $104 million sale of part of its Indian business, according to a report by The Australian newspaper. The report said the sale of 35 per cent of Leighton Contractors India was formalised last December, and cash payment was due on March 31. Leighton said this was delayed by the Reserve Bank of India's bureaucratic process, and the deadline was extended. The company had hoped for payment by last Friday, but this deadline also lapsed. Leighton shares tumbled more than 15 per cent last week after the company announced a sudden profit downgrade of about $900 million. It was yesterday forced to defend the announcement to the ASX, after being hit with a disclosure query.
Heat on vexed trade payment route
Calcutta, April 18: The Reserve Bank of India (RBI) may take a relook at the Asian Clearing Union mechanism — set up in 1974 under the aegis of the United Nations Economic and Social Commission for Asia-Pacific — involving the central banks of India, Bangladesh, Myanmar, Iran, Pakistan and Sri Lanka. Speaking at an interactive session on the Foreign Exchange Management Act, RBI deputy governor Shyamala Gopinath said, “ACU mechanism may be relooked into. We need to reflect on this.” The Tehran-based ACU mechanism was virtually dismantled after an RBI notification, which said that all eligible current account transactions, including trade transactions, with Iran should be settled outside the ACU mechanism. Under the ACU mechanism, payments for all transactions between Indian firms and entities of any of the member countries are settled by debiting to the ACU dollar account in India of a bank of the member country or crediting to the ACU dollar account of the authorised dealer maintained with the correspondent bank in the member country. “This (the December sanction) has been imposed in view of the difficulties being faced in payments to and receipts from Iran. The country is now facing ban of the US dollars and euro. This situation has become more complex and it is engaging a lot of our attention. The matter is now with the ministry of external affairs and the government,” Gopinath said. Following the December notification, banks have stopped paying domestic exporters any remittances from Iran and opening letter of credit account for the importers of Iranian produce. Meanwhile, domestic importers and exporters to Bangladesh have also urged the deputy governor to allow them to settle payments outside the ACU mechanism. “I get a feeling from this forum that exporters want the flexibility of settling payments outside the ACU mechanism,” Gopinath said. While India is trying to find ways to settle the payment row through using some other currency, including the rupee, some quarters believe that the RBI sanction may in fact help India-Iran bilateral trade to grow because exporters and importers of both the countries can now engage in bilateral trade and payment settlement outside the ACU mechanism. This development assumes significance given the fact that in its third summit the Brics (Brazil, Russia, India, China and South Africa) countries have mooted the idea to engage in multi-lateral trading among themselves in their own currencies and thereby reducing the dominance of the dollar and the euro.
IMF expects RBI to confront inflation challenge
The International Monetary T Fund expects the Reserve Bank of India to effectively deal with the challenge of inflation, noting that the initial food price driven inflation now appears to be generalizing. “At one point, it (inflation) was thought to be a temporary factor, but apparently, that is not the case, and the initial food price-driven inflation is now somewhat generalizing,“ IMF's India Mission Chief Masahiko Takeda said, adding: “So the Reserve Bank of India is now very concerned about it, and we expect the RBI to stay vigilant and take necessary action.“ If combating inflation is the immediate job on hand, the medium term challenge for India will be to focus on maintaining its current high growth, Takeda said, noting: “There must be some appropriate environment for high growth to continue.“ India, he said, would have to address struc tural reform issues in order to give a boost to infrastructure sector, enhancing foreign direct investment, boosting agricultural productivity and increasing the level of human capital. Looking at the whole Asian region, the IMF reckons that inflation and overheating are the twin risks now confronting several key economies. Even while lauding the region for its sound growth performance and weathering the global downturn, it wants action to deal with the two dangers. “Headline inflation has accelerated in the last six months and initially that reflected commodity prices, but we do see these pressures now spilling over into core inflation and inflation expectations,“ said Anoop Singh, Director of IMF's Asia and Pacific Department, providing an Asian perspective to the media at the just-concluded IMF-World Bank spring meetings. The IMF expects inflation in many Asian economies to increase further this year before slowing modestly next year as global commodity prices stabilize and macroeconomic policies are tightened. “But the inflation risk for Asia is clearly on the upside,“ said Singh. Overall the Asian region is expected to grow at 7 per cent in 2011 and 2012 (India is projected to grow at 8.25 per cent this year and 7.75 per cent next year), but the economies of the region have to stave off the danger of overheating. According to Singh, pockets of overheating pres sures have emerged across Asia in both goods and asset prices. The rising commodity prices pose an added risk, Singh said, noting: A more proonged disruption of industrial production n Japan could have effects on o t h e r economies n the region, and elsewhere in the world, that are linked to a pan through the global supply chain.“ The prescription for the whole region as it combats inflationary pressures will be “certainly further monetary tightening“. Exchange rate appreciation would help tighten monetary conditions, while some economies in Asia needed more fiscal consolidation, he said. While IMF expects foreign capital flows into the region to continue this year and next, although at a lower pace than last year, Singh said global tensions could cause more volatility in inflows. “Macro prudential measures targeted at reducing the risks from volatile capital flows can be helpful, and they are being taken forward. They are complements to macroeconomic policy adjustments, but of course they are not substitutes,“ he said.
Monday, April 18, 2011
New rules soon for better service to bank customers
Bank customers may soon expect better services and fast-track redressal of their grievances as RBI is likely to soon consider a fresh set of rules to improve the banks' customer service practices. Almost a year after RBI put in motion a process to improve banks' customer service practices, a high-profile panel set up by the central bank in this regard is likely to submit its recommendations later this month. Sources close to the matter said that the panel is likely to suggest a tighter vigil by RBI for banks lacking on customer service front, monetary and procedural penalties and other remedial measures to guard against such lapses. Besides, banks may be asked to resolve various customer grievances within a pre-determined time period, they added. The committee, constituted by RBI in June last year under the Chairmanship of former SEBI chief M Damodaran, is likely to submit its recommendations on required changes in existing policy framework and prevalent practices of customer service in banks, sources said.
RBI fails again – Inflation mocks Government Prediction
Proving an absolute failure by the Finance Ministry as well as the Reserve Bank of India (RBI) in controlling inflation, the annual average inflation rate in the country has climbed up to a record high of 9.4%. This comes as a grave concern as the rate of average inflation in the previous year of 2009-10 was a low 3.6%. It is to be noted that exactly a month ago on March 17th, the Reserve bank of India had raised the interest rates for the eighth time in the last twelve months. The policy rates were raised by 25 bps, the repo rate (the lending rate) rose to 6.75% and the reverse repo rate (the borrowing rate) rose to 5.75%. This was all with a big claim by the RBI that controlling inflation was their first priority and that the increase in interest rates would bring down inflation in the country. In fact, the Reserve Bank had forecasted that with the increase in interest rates, the inflation would be limited to 8% by end of March. However with the inflation in March rising to about 9% (8.98% accurately), the projections of both the finance ministry and the Reserve Bank of India (RBI) has been proved to be wrong. The Indian Government is continuously making big claims about India’s high growth rate and using it as a principal political campaign. However, if the inflation continues with the same increasing curve, the growth in India will be unsuccessful. For the lives of 1.2 billion people of India to get better, the growth rate makes sense only when the inflation rate is under control. It is an absolute necessity for the Reserve Bank of India to undertake additional policy changes to tighten its grip on the economy. All eyes are now on the monetary policy meeting of the RBI scheduled in May.
Central bank rebuffs SBI on home loans
India’s banking regulator has rejected State Bank of India’s (SBI) appeal to waive the additional provision requirement for its special home loans, two persons familiar with the development said. This means the country’s largest lender will have to set aside around Rs.400 crore to provide for such loans which, according to the Reserve Bank of India (RBI), carry more risk of default as they are priced at relatively lower interest rates for the initial two-three years before the rates are raised. Setting aside money for making extra provisions dents a bank’s profits. The Indian central bank has also turned down SBI’s request to revise its decision to downgrade its rating, following an inspection of the bank’s books for the fiscal year ended March 2009. The rating, based on the six parameters—capital, asset quality, management, earnings, liquidity, and systems and controls (CAMELS)—has been brought down by one notch, from B to B minus, as RBI found the bank had underestimated bad assets and inflated its capital by not making provisions or setting aside money for certain assets. The CAMELS rating of a bank is highly confidential and neither the bank nor the regulator ever discloses it. RBI’s inspection for fiscal 2009, completed in January 2010, also pointed out corporate governance issues with the bank. SBI had a few months ago moved the central bank, asking it to reconsider the revision. It argued that its large loan book is being continuously monitored and minor deterioration in the quality of assets is no cause for worry and does not call for the downgrade. The size of its loan book was Rs.7.4 trillion in December. The banking regulator, in its communication, made it clear that it has taken a serious view of the bank’s failure in making adequate provisioning and underestimation of bad assets and stuck to its decision of downgrading its rating. RBI has also made the on-site inspection of a large bank like SBI an annual affair and not once in two years, which had been the case till recently. An SBI executive confirmed receiving RBI’s communications on home loan provisions and the bank’s rating. Another official said the banking regulator’s inspection for fiscal 2010 is just getting over. No one was willing to be named considering the sensitivity of the issues and involvement of the regulator. In its mid-year review of monetary policy in November, RBI had raised the provision for standard assets of special home loans fivefold—from 0.4% to 2%. According to RBI, such loans impact the quality of assets as chances of defaults by the borrowers are high when the rate rises and, hence, the directive for higher provisioning, which will discourage them from selling such loans. While SBI calls the product a special home loan, RBI dubs it a “teaser loan” as it carries a relatively lower rate of interest in the first few years, after which it’s reset at a higher level. RBI’s concern is some borrowers may find it difficult to service the loan once regular rates become effective. The regulator is willing to bring down the provision rate from 2% to 0.4% for those loans that do not turn bad one year after the loan rates go up. Former SBI chairman O.P. Bhatt strongly contested RBI’s perception of risk and had said that while giving such special loans, the bank takes into consideration a customer’s capacity to service the loan when the rates go up. His view was that, in the absence of any risk of default, the bank does not need to make extra provisioning as directed by RBI. The audit committee of SBI’s board, headed by chartered accountant Dileep C. Choksi, endorsed the chairman’s decision, and did not make any provision for the December quarter. Armed with the audit committee note, Bhatt had moved RBI seeking a waiver of the extra provisioning. Incidentally, SBI has also been raising provision requirements for its bad loans in phases unlike other banks that have already done this in conformity with RBI’s norms. There are three types of bad loans—substandard, doubtful and loss assets. Till recently, banks were required to set aside the entire amount of loss assets, or those assets which can never be recovered, while provisioning requirement for other two categories varied, depending on their age and quality. RBI, in 2009, made 70% provision mandatory for bad assets for all banks. SBI has so far made close to 64% provisioning for its bad loans and sought time till September 2011 to raise it to 70%. Bhatt had called the RBI move “arbitrary” and argued that since money has already been set aside for different categories of bad assets, there was no need for 70% provisioning. No SBI official is willing to speak on the rating downgrade on record, but in private, SBI executives said all concerns of the regulator have been addressed and many of the issues raised by RBI’s inspection team have been resolved. SBI raised its provisions in the September quarter and as a result of this, net profit was flat at Rs.2,501.37 crore. In the December quarter, net profit rose 14% to Rs.2,828 crore, taking the profit of nine months in fiscal 2011 to Rs.8,243.64 crore. With Bhatt having retired in March, new chairman Pratip Chaudhury will sign off on the bank’s annual accounts. SBI closed at Rs.2,803.30 on Friday on the Bombay Stock Exchange. Since January, it has remained flat, as has the banking index, Bankex, while the bellwether equity Sensex has lost 5.47%.
Fin holding firm must for entering banking space
New Delhi: The government and Reserve Bank of India have decided to make it mandatory for corporate groups wanting to set up banks to ring-fence their financial sector operations from other businesses by setting up a financial holding company (FHC). For the existing financial conglomerates, however, conversion into FHC would be optional. Officials also indicated that companies being investigated by the CBI, Central Vigilance Commission and Enforcement Directorate will not be permitted entry in the banking sector. This could dash hopes of some companies which are embroiled in the 2G spectrum scam but are known to be interested in a foray into the banking sector. The FHC structure would help the central bank in ensuring that new banking entrant’s activities are ring-fenced from its promoters. “Holding company should ring fence the regulated financial services activities of the group including the new bank from other commercial and industrial activities of the group,” according to RBI’s draft on new banks submitted to the finance ministry. The FHC model has been suggested by an internal panel of the RBI, headed by deputy governor Shyamala Gopinath. The panel suggested to the finance ministry a number of legislative changes required to implement this model. These include removing restrictions on voting rights and empowering RBI to supersede a bank’s board, among others. “Many legislative changes suggested by the RBI panel on holding companies and its draft on new bank licences, are overlapping. The government is trying to see how both these proposals can be handled simultaneously,” a source said, indicating why there has been some delay in unveiling the norms for entry of private sector firms into the banking sector. RBI was supposed to release the guidelines by March end. Finance ministry is deliberating on the Gopinath panel’s recommendations, as well as draft guidelines on entry of new private sector banks. The ministry has, in principle, agreed to accommodate these changes by amending the Banking Regulations Act. A FHC structure is currently the missing link in India’s financial sector. Government panels including the Committee on Financial Sector Assessment, in its report issued in March 2009, highlighted the need for more clarity in existing statutes relating to regulation and supervision of financial holding companies. In a discussion paper on the subject in August 2007, the RBI has preferred a financial holding company model over an intermediate holding company model, as the latter is seen as less transparent and difficult to regulate. The central bank had then struck down proposals from SBI and ICICI Bank to set up intermediate holding companies. Gopinath panel’s draft would outline the central bank’s thinking on the subject. FHC are seen as an efficient vehicle to raise capital for subsidiary companies. The regulators find it easier to supervise FHCs as compared to intermediate holding companies.
IMF monitoring to avert future financial crisis
WASHINGTON: International Monetary Fund (IMF) member countries including India have agreed to expand and deepen its surveillance of the global economy to identify largest systematic risks to avert future crisis. The IMF will produce a new report investigating how financial policy decisions in countries around the globe affect others, the 187- nation institution's policy making International Monetary and Finance Committee said Saturday. The new IMF report will mesh in with Group of 20 economies' decision Friday to monitor world's seven largest economies, including India, to highlight and suggest corrective steps to rectify imbalances that could pose risks to the global economy. "Global challenges demand global solutions. The need for global cooperation in solving our most pressing problems of today is vital," said leader of the Indian Delegation, Reserve Bank of India governor Dr. Duvvuri Subbarao. "The crisis has taught us that no country can be an island, and that economic and financial disruptions anywhere can cause ripples, if not waves, everywhere," he said warning "uncoordinated responses will lead to worse outcomes for everyone." Noting that complex global problems facing the world today are "not amenable to easy solutions and many of them require significant, and often painful adjustments at the national level," Subbarao said. "At the same time, the global crisis has shown that the global economy, as an entity, is more important than ever," he said underlining the central role of IMF "in reforms so that it continues to spearhead and weave together the fabric of international cooperation." "There are significant vulnerabilities still in the global financial and economic system," said Tharman Shanmugaratnam, the finance minister of Singapore and chairman of the panel. "That reflects the legacy of an international monetary system that is still not in what we consider satisfactory shape. On top of that, we have new vulnerabilities and new risk," he said, mentioning the Middle East, Japan and higher commodity prices. "We need to strengthen the linkage between surveillance of the financial and macro-economic dimensions of the world economy," he said. The IMF is trying to learn from the 2008 crisis and become better at understanding developing risks in the world economy, said a communique of the governing body. The committee also said authorities need to implement existing international agreements to better regulate the global financial system and cautioned that excessive risks remain in place more than two years after the financial crisis. The global economic recovery "remains vulnerable" despite showing some signs of sustained momentum," it said warning that some international banks continue to pose system risks to the international economy. The IMF board also asked members to push forward with a new framework for dealing with capital flows saying a "comprehensive and balanced approach" to deal with capital flows is needed. The committee separately said the IMF will chalk out a "criteria-based path" to include other currencies in the basket that makes up the special drawing right (SDR), IMF's lending unit.
Settling the dues
The financial difficulties faced by families on account of delayed settlement of life insurance claims are well known. What’s generally not known is the problems that legal heirs run into when it comes to accessing the bank accounts and lockers of deceased depositors The banking regulator— the Reserve Bank of India (RBI) — is, however, aware of this and has issued detailed instructions to banks on the subject, aimed at reducing the hassles faced by relatives. Yet, all banks don’t follow the regulator’s instructions in letter and spirit, resulting in considerable hardship for the surviving family members. Firstly, when a customer opens an account or hires a locker, the bank is supposed to advise him or her on the imperative need for nominations. Similarly, term deposits should have nominations and even if the depositor is unaware of its importance or forgets about it, the banks have a responsibility in ensuring that it is done. Banks, however, never take this task seriously. In fact, the regulator has also advised banks to educate customers on the importance of the “survivorship clause” in case of joint accounts, as otherwise the surviving joint account holder does not automatically get the right to the account. Similarly, in respect of term deposits, the RBI says that banks should not insist on completion of the term of the deposit and should allow premature termination on the death of the deposit holder. Yet, there are many cases where banks have refused to cut short the term of the deposit and denied the deposit amount to the legal heirs in urgent need of money. Even where the deceased depositor has not made any nomination, banks should adopt a simple procedure for repayment to the legal heirs, advises the regulator. In fact, on June 9, 2005, the banking regulator issued detailed instructions to banks on how to simplify and expedite claim settlement following the death of a depositor. Even after six years, such simplified procedures elude family members. In fact, the RBI circular sets a time limit of 15 days for settling the claims in respect of deceased depositors. I wonder how many banks really stick to this time limit? Well, in order to keep tabs on this, the regulator suggests banks should report to the customer service committee of the bank’s board the details of the number of claims received and the time taken for settlement and if there has been a delay, the reasons for it. It’s time the regulator asked banks to make this information public.
RBI, Sebi likely to crack the whip on FII funds in banks
The flow of foreign portfolio money into banks' certificate of deposits (CDs) through fixed maturity plans (FMPs), a debt mutual fund product, of late, has raised concerns among financial market regulators. The subject was discussed in a recent inter-regulatory body meeting, involving the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi). In this meeting, top regulatory officials expressed worries about the indirect flow of 'hot money' - an euphemism to describe short-term foreign fund flows into a country's financial markets - into certificate of deposits through FMPs. Foreign investors are barred from directly investing in CDs, which are money market instruments used by banks to raise money for the short-term. But these investors have managed to gain exposure to this instrument by investing in FMPs that invest in CDs, which are instruments that banks float to raise short-term funds. A decent return on CDs and uncertain equity market conditions prompted foreign investors to invest through FMPs. In March, CDs with tenure of three months fetched as high as 10% because of tight liquidity, though returns have dropped to about 8.5%. Mutual fund industry officials said many foreign investors have managed to lock in money in short-term FMPs at as high as 9-10 %. "Its easy arbitrage for them, as they are getting money at less than 1% and here they can easily make risk-free returns of 7-8 %," said a top official with a mutual fund, owned by a foreign bank, requesting anonymity. Investing in CDs is considered risk-free, as they are floated by banks. In India, a dominant section of the money market participants is state-owned banks and its securities enjoy a rating equivalent to sovereign bonds. This is a reason why foreign investors prefer investing indirectly in CDs than buy commercial paper (CPs)- another money market instrument used by companies to raise short-term funds - where they are allowed to invest directly. Though CPs deliver higher returns, foreign investors prefer investing in instruments that have status equivalent to sovereign bonds despite lower returns, fund managers said. "While FII money going into CDs may help banks raise cheaper, RBI does not want foreign money in short term in debt. That's why they are encouraging FII money in infrastructure bonds, though it's yet to take off," said a senior official with a primary dealer. The extent of flows into mutual funds' FMPs in recent months could not be ascertained, but asset management officials said some top fund houses have managed to attract significant money. Regulators are un-comfortable about such flows, because they are volatile in nature and causes uncertainty in currency movements. But the central bank, or Sebi, can't legally stop the flow of foreign institutional money into mutual funds. Sebi regulates mutual funds. However, regulators can use the power of moral suasion - an informal per-suasion tactic used by regulators to get entities to comply with their decision - to control such flows. "It will not be possible for regulators to selectively control foreign investor inflows through the legal route. Probably, there could be some verbal restrictions," said a chief investment officer with a mutual fund, partly owned by a public sector bank.
Sunday, April 17, 2011
RBI asks NE Banks to monitor accounts of customer
Reserve Bank of India has asked the banks operating in the North East to closely monitor the accounts of the customers. According to the Executive Director of RBI, Mr HR Khan, banks in the North East have been asked to remain vigilant and extra cautious in this regard considering the gravity of the situation. Mr Khan stated that as this region shares international border and therefore more vigilance would be needed to avoid such incidents. To overcome the problem, the existing KYC (know your customer) rules have been strengthened, he added. Reserve Bank of India has asked the banks operating in the North East to closely monitor the accounts of the customers. According to the Executive Director of RBI, Mr HR Khan, banks in the North East have been asked to remain vigilant and extra cautious in this regard considering the gravity of the situation. Mr Khan stated that as this region shares international border and therefore more vigilance would be needed to avoid such incidents. To overcome the problem, the existing KYC (know your customer) rules have been strengthened, he added. It may be recalled that RBI recently issued a circular asking the banks and financial institutions to scan all existing accounts to ensure that these are not held by or linked to any entity or individual figuring in the UN list of terrorists or terror-related organisations.
Refinancing worries for microfinance continues
Microfinance industry in India seems to be in a real state of confusion. First, the industry facing setback of the RBI guidelines on securitization of short term loans making it impossible for microfinance loans to be securitized and leaving MFIs to depend on bank borrowings as a funding source. Then the microfinance institutions facing the ripple effects of the Andhra Pradesh government’s ordinance, borrowers defaulting; rising defaults, banks pulling credit and shying away from any further lending or securitizing loan pools leaving the cash strapped microfinance institutions with no other option but recasting their debt by banks and financial institutions. Just then, in such a state of frozen credit, banks were reported to provide additional line of credit of Rs 1,500 crore to MFIs to achieve their targets in the financial year 2010-11. Despite micro lenders facing several defaults, this came as a sign of relief to the microfinance institutions. It was a double whammy when the finance ministry said it was mulling over reviewing the portfolio of public sector banks to ensure they were lending directly to the priority sector and not buying loans from regional rural banks (RRBs) or microfinance institutions (MFIs) to meet their priority sector lending requirements. The ministry felt that the purpose of emphasizing on priority sector lending for banks to channelize lending to agriculture and weaker sections was getting lost. Another difficulty glaring at the face of microfinance institutions and bankers is, while the banks are continuing to gain exposure in MFIs by way of securitization, as it is considered as direct lending to the priority sector, the MFIs are topping the banks list of non-performing assets. In such a scenario the Indian Banks Association had requested RBI to relax its restructuring guidelines, for the MFI sector as the benefit of Prudential Guidelines on Restructuring of Advances by Banks are available to the dues to the banks that are fully secured, while the bank loans to MFIs are mostly unsecured. Taking stock of the situation, RBI vide circular RBI/2010-11/376 DBOD.BP.BC.No. 74 /21.04.132/2010-11 dated 19th January, 2011 provided the relaxation that special regulatory asset classification benefit would be extended to restructured MFI accounts which are standard at the time of restructuring, even if they are not fully secured. The relaxation was granted as a temporary measure and was to be made applicable to Standard MFI accounts restructured by banks up to March 31, 2011. RBI had also advised that the banks should adopt the consortium approach for restructuring where all the banks financing and MFI would decide on the course of action to be taken for that unit. RBI further looked at the Malegam Committee to resolve issues with regard to priority sector lending and restructuring of debts, the focus of the report was only on making the loans affordable and looking for a rationale for rate of interest charged. It is estimated that almost a third of the loans that banks have given to microfinance institutions would be admitted for restructuring. Each MFI would have a core team of 10 lenders who would discuss restructuring of loans of that MFI. There are some banks wanting to restructure the securitized loans along with other loans and have requested Reserve Bank of India to treat these loans on par with microfinance loans as without restructuring these loans the loans would become non-performing. Also if securitized loans become non-performing the provisioning requirements would go up impacting the bank’s balance sheets. The Malegam Committee report stated that the assigned and securitised portfolios held by banks as at 31st March 2011 are believed to aggregate to around Rs. 4200 crores. While there is opposition from several banks, but if Reserve Bank was to accede to the request, the very essence of securitization may be lost. This would tantamount to securitized loans pools to be nothing but loans extended to the MFIs in the garb of securitization and in such a case the so called securitized loans should not go off the books of the MFI. Once the asset sale takes place, the risk is transferred. Securitised loans are not a matter of convenience and cannot be treated as such. The industry in the recent times has faced tumultuous times and ironing of these is the need of the hour.
India for effective framework to deal with global imbalances
Washington, Apr 16: India has pressed for an effective G-20 framework to address the problem of structural imbalances and ensure sustainable growth of world economy. "The success of this initiative (of G-20) is critical for a durable global economic recovery and for better economic and financial governance," Reserve Bank Governor D Subbarao said at the G-20 ministerial meeting. The G-20, which is a club of developed and emerging economies, is currently engaged in formulating guidelines for identification of large imbalances and suggesting corrective steps. The structural imbalances refer to problems pertaining to high public debts, huge forex reserves, etc. He further said the leaders of G-20 tasked the central banks to formulate indicative guidelines for identification of persistently large imbalances requiring corrective action, including their root causes and impediments to adjustment. "We now need to finalise these guidelines... this would focus on root causes, impediments to adjustment and corrective policies and actions," Subbarao said. He added an effective outcome is needed to provide a signal the G-20 is not only serious in ensuring strong, sustainable and balanced growth for the world economy going forward, but it also intend to create an effective and relevant institution for addressing current structural problems in a fast evolving global economy. Talking about debt, he said in India the public debt is predominantly domestic and therefore India’s potential to influence global systemic imbalances because of public debt is negligible if not nil.
Currency Intervention Shouldn't Be a Part of Trade Policy, Subbarao Says
Countries should not use currency intervention as a part of trade policy, and should allow economic fundamentals to dictate exchange rates, said Duvvyri Subbarao, Governor of India’s central bank. “Letting exchange rates remain aligned with economic fundamentals, and an agreement that currency interventions should not be resorted to as an instrument of trade policy should be central to a coordinated approach at a multilateral level,” Subbarao, who is chief of the Reserve Bank of India, said today in the text of a speech to the International Monetary and Financial Committee in Washington. The comments are part of a weekend of meetings during which Group of 20 nations officials outlined methods to decide when indicators, including budget deficits and external trade balances, appear excessive. India is among the seven countries targeted for further study. The global recovery may be “jeopardized” by a sustained rise in oil prices, and food-supply constraints are also causing volatility in prices, Subbarao said in a separate statement to the IMFC, the steering committee of the IMF. Regarding capital flows into developing economies, Subbarao said that managing such flows “should not be treated as an exclusive problem of emerging market economies.” While growth prospects of emerging markets and their declining rates of inflation are helping to pull in capital, advanced economies are also pushing capital flows with “easy monetary policies,” he said. Countries must collectively work to stem protectionism and resist the short-term pressures that are likely to grow in coming years, Subbarao said. “Covert protectionism has been on the rise,” he said in the speech. The challenges of a single reserve currency for the world have become apparent, and while a solution must be developed, the Special Drawing Rights don’t yet satisfy the conditions for an alternative, Subbarao said. “We see the move to a multicurrency world as a gradual evolution,” he said.
2G scam: RBI governor’s letter shows how Raja ignored objections
The Central Bureau of Investigation’s (CBI) probe into the 2G scandal has revealed that former telecom minister A Raja and his associates had blatantly ignored serious objections about spectrum pricing raised by the ministry of finance’s department of economic affairs. In his statement to the CBI, the RBI governor, D Subba Rao, who was then the finance secretary, has said he had raised objections to the department of telecom’s (DoT) decisions on 2G spectrum allocation. On November 22, 2007, Rao had written to the DoT, stating, “The purpose of this letter is to confirm if proper procedure has been followed with regard to financial diligence. In particular, it is not clear how the rate of Rs1,600 crore, determined as far back as in 2001, has been applied for a license given in 2007 without any indexation, let alone current valuation. Moreover, in view of the financial implications, the ministry of finance should have been consulted in the matter before you had finalised the decision.” The letter further said, “I request you to kindly review the matter and revert to us as early as possible with responses to the above issue. Meanwhile, all further action to implement the above licenses may please be stayed.” Rao further said that a full telecom commission meeting was called on December 7, 2007. “Pricing of spectrum was not an agenda item for this meeting. Later, a meeting of the telecom commission was also scheduled for January 9, 2008, wherein pricing of spectrum was an agenda item. However, this meeting was rescheduled by the DoT to January 15, 2008,” Rao has told CBI. However, before the meeting could take place, DoT issued a letter of intent to telecom operators.
Saturday, April 16, 2011
RBI Conflicted Managing Interest Rates, Bond Sale: India Credit
April 15 (Bloomberg) -- The Reserve Bank of India is facing conflicts in its dual role of fighting inflation and managing the government's debt issuance, according to former governor Bimal Jalan. The most-active 2022 bonds are headed for a third week of losses, with the yield reaching a two-month high of 8.26 percent as the Reserve Bank held the first government debt auction of the fiscal year on April 8 and prepared to meet to set monetary policy on May 3. Jalan, chairman of the Centre for Development Studies, said policy makers may be discouraged from raising interest rates to keep price increases in check. Rupee notes have lost 0.6 percent this month, the worst performance among 10 Asian local-currency debt markets outside Japan, according to indexes compiled by HSBC Holdings Plc. Wholesale prices rose 8.98 percent last month after gaining 8.31 the previous month, four times the rate in the U.S. and the highest among BRIC economies except Russia. "There is always some tension and some trade-off if you're managing government debt," Jalan said in an interview on April 11. "If you're a borrower, whether you acknowledge it or not, the only way is to try and keep interest rates lower than they should be." The yield on 7.8 percent notes due April 2021 rose six basis points, or 0.06 percentage point, to 8.00 percent today, according to data compiled by Bloomberg. The Reserve Bank raised 120 billion rupees ($2.7 billion) from the April 8 sale, which included new 10-year bonds. Inflation in the nation, where 66 percent of the population lives on less than $2 a day, has climbed from an 11-month low of 8.08 percent in November. The difference in yields between the nation's 10-year bonds and similar-maturity U.S. Treasuries has widened to 451 basis points from this year's low of 436 reached on April 8. "The RBI needs to be vigilant and look at whether these increases are becoming more persistent," Namrata Padhye, a Mumbai-based economist at IDBI Gilts Ltd., said in an interview on April 13. In the U.S., the Federal Reserve sets interest rates while the Treasury manages government issuance. Most OECD countries established independent debt-management offices in the 1980s and 1990s, while emerging-market economies including Brazil, South Africa and Argentina have restructured public finances. Most countries "don't have this sort of a problem, but in our situation it has evolved over years," said Jalan, 70, who led the central bank from November 1997 to September 2003. The Reserve Bank and the Finance Ministry have examined the separation of roles since 1991, with the central bank's 2000-01 annual report "unequivocally" recommending the move. There is a "severe conflict of interest between setting short-term interest rates and selling bonds," according to a finance ministry report in 2008. Finance Minister Pranab Mukherjee said in his budget speech on Feb. 28 the government will introduce legislation to set up an independent debt-management office. "Establishing a separate debt office earlier would have helped," said Deepali Bhargava, an economist at the Indian unit of ING Groep NV in Mumbai. "Maybe the Reserve Bank could have had a better hold on inflation today." Finance Minister Pranab Mukherjee aims to reduce the shortfall in the government's finances to 4.6 percent of gross domestic product from an estimated 5.1 percent in the prior 12 months. The International Monetary Fund estimates the gap in the government's finances will be the highest among the BRIC economies at 8.5 percent of gross domestic product in 2011, including the gap in state government budgets. The central bank, which next meets on May 3, will raise the benchmark repurchase rate to 7 percent by end-June from 6.75 percent now, according to Royal Bank of Canada. "The deficit is falling at a very slow pace and that just means that the onus is on the RBI to do all the work" on fighting inflation, Brian Jackson, an emerging-markets strategist at Royal Bank of Canada in Hong Kong, said in an interview on April 8. The deficit "is a consideration which guides how quickly they can go on interest rates," he said. The rupee has dropped 1 percent this week on speculation oil refiners stepped up dollar purchases to pay for costlier crude imports. Oil for May delivery was at $108.23 a barrel on the New York Mercantile Exchange, taking this year's gains to 18 percent. The currency traded at 44.461 per dollar today, according to data compiled by Bloomberg. "Inflation globally is being caused by a rally in commodity prices like oil," said N.R. Bhanumurthy, a New Delhi- based economist at the National Institute of Public Finance and Policy. "The RBI has limited tools at its disposal to influence" external factors, he said. The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, has increased three basis points to 166 this month, according to CMA prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt. "The setting up of a debt management office is overdue, but at least it is getting done now," Dharmakirti Joshi, Mumbai-based chief economist at Crisil Ltd., a unit of Standard & Poor's Ratings Services, said in an interview on April 13. He predicts inflation will range from 7 percent to 8 percent over the next six months if oil prices drop to $90 a barrel.
RBI Penalizes Four Gujarat Co-operative Banks for KYC/ AML Violations
Mumbai (ABC Live): The Reserve Bank of India imposed a monetary penalty of Rs. 5.00 lakh (Rupees five lakh only) on The Siddhi Co-operative Bank Ltd., Ahmedabad. The penalty was imposed for violation of RBI instructions/directions on Know Your Customer (KYC) / Anti Money Laundering (AML) and for submitting improper compliance of the observations made in its last inspection report. The Reserve Bank had issued a show cause notice to The Siddhi Co-operative Bank Ltd. The bank submitted a written reply in response to the Show Cause notice and after considering facts of the case, the bank's reply and personal submissions in the matter, the Reserve Bank concluded that the violations were substantiated and warranted imposition of penalty. The Reserve Bank of India has imposed a monetary penalty of Rupees five lakh on Shri Vinayak Sahakari Bank Ltd., Ahmedabad, Gujarat for violation of Reserve Bank of India instructions on unsecured advances, Know Your Customers (KYC) norms and Anti Money Laundering (AML) guidelines, shortage in cash balances, opening of benami accounts and violation of Dos' and Donts' prescribed for board of directors. The Reserve Bank of India has imposed a monetary penalty of ` 1.00 lakh (Rupees one lakh only) on The Suvikas Co-operative Bank Ltd., Ahmedabad, Gujarat for violation of Reserve Bank of India instructions on Know Your Customers (KYC). The Reserve Bank of India has imposed a monetary penalty of Rupees one lakh on The Botad People's Co-operative Bank Limited, Botad, Dist. Bhavnagar for violations of Reserve Bank of India instructions in respect of reporting of cash transactions above ` 10.00 lakh to Financial Intelligence Unit-India (FIU-IND), New Delhi, non compliance of Know Your Customers (KYC) norms and persistence of irregularities pointed in previous inspection report.
Single rate, multiple realities : A Seshan
There are several caveats in the assumptions made by RBI?s working group. The working group on operating procedure of monetary policy – appointed by the Reserve Bank of India (RBI) – has done a timely and professional job in its report. Its findings are supported by empirical evidence and provide the rationale for recommendations it made in relation to the liquidity adjustment facility (LAF). However, a few caveats are in order. First, the working group refers to the policy rates of different central banks. The proposal is that following them, India too should have a single policy rate and other official rates should be linked to it. The fact is that there is a hierarchy of policy or official rates. The cut-off or implicit yields in the auctions of treasury bills and dated securities are as much indicative of the policy stance of the central bank as the repo rate recommended by the working group. These rates cannot in any way be linked to the repo rate because they depend on the demand and supply factors in the market. As a governor of the Bank of England once said, the central bank is as much guided by the market in rate setting as it is the other way round. The single policy rate obtains in the UK and Japan and it is the lending rate. The three key interest rates of European Central Bank (ECB) are: (1) the interest rate on the main refinancing operations (MROs), which normally provide the bulk of liquidity to the banking system. The Eurosystem may execute its tenders in the form of a fixed rate or variable rate tenders; (2) the rate on the deposit facility, which banks may use to make overnight deposits with the Eurosystem; and (3) the rate on the marginal lending facility, which offers overnight credit to banks from the Eurosystem.(See http://www.ecb.int/mopo/decisions/html/index.en.html). As far as the US Federal Reserve is concerned, its Discount Rate is as much a policy rate as the targeted Federal Funds Rate (FFR). In the normal course of things, purchases or sales of securities by the Federal Reserve, whether outright or temporary, are its principal tool for influencing the supply of balances at the Federal Reserve Banks and FFR. It is not clear whether the working group expects RBI to intervene in the market through open-market operations on a daily basis, as in the US, to influence the market rates. The linking of a comfortable level of deficit or surplus as a proportion to the total Net Demand and Time Liabilities (NDTL) of banks, based on the results of the econometric exercises presented in Technical Appendix II, raises the question on its relevance to the estimated growth of the gross domestic product (GDP). Since the central bank has a multiple-indicator approach, it should take an overall view of conditions in the economy in relation to the expected GDP growth rate (nominal as well as real) and decide on the deficit or surplus that it can live with. A mechanical linking of the amount to NDTL can be misleading, especially when there are technical or autonomous factors, like currency in circulation and government balances with RBI that are beyond the central bank’s control. The reverse repo rate needs to be determined keeping in view, inter alia, the problem of carry trade and not the repo rate alone. The proper course is to intervene in the market to bring its rate within the desired corridor, irrespective of the size of the deficit or surplus. The working group’s preference for the deficit mode in liquidity is influenced by its finding that monetary policy is more effective when the market is in surplus. Monetary policy is a means to an end. The objective is to promote growth with price stability. If the surplus mode does not pose a threat to price stability, then so be it. It keeps the rates lower than otherwise. One should normally expect a deficit situation in a growing country devoted to price stability unless there is money creation to finance fiscal deficits or there is a foreign inflow of funds that are not sterilised. The cash reserve ratio (CRR) is still very much in the armoury of many central banks, developed or developing. China has been using it to the hilt as RBI did in the past. Although I have argued elsewhere that it is not financial repression, as claimed by Western economists, the central bank may revisit the idea of paying interest on the reserves of commercial banks. In fact, both the Fed and European Central Bank pay interest not only on the required reserves but also on excess reserves — consider it yet another instrument for monetary policy! The cash reserve ratio should be the ultimate brahmastra for RBI to deal with liquidity problems, although in Hindu mythology it could be used only once.
The author is an economic consultant and was a former Officer-in-charge in the Department of Economic Analysis and Policy at the Reserve Bank of India.
Malegam report may be part of monetary policy
Mumbai: Banks and microfinance institutions (MFIs), which are eagerly waiting for the implementation of the Malegam report by the Reserve Bank of India (RBI), will have to wait till May 2 when the central bank will announce its annual credit and monetary policy. It was expected that RBI will announce the implementation of the report in April first week. “RBI will make announcements on Malegam panel in the credit policy,” sources at RBI said. In October 2010, RBI constituted the Malegam Committee to study the state of MFIs in the country. The committee, which submitted its report on January 19, suggested among other things capping interest rate at 24% for MFI loans. The committee also suggested that small loans cannot exceed the Rs 25,000 ceiling and asked for creation of a separate category of non-banking financial companies (NBFC-MFI) for the MFI sector. Finance minister Pranab Mukherjee in his Budget 2011-12 had announced creation of an equity fund of R100 crore for MFIs, which would help the cash-strapped sector to continue lending to small borrowers. Dalli Raj, CFO, SKS Microfinance, said, “We think it is a very positive report for the sector. First, it brings in regulatory clarity and it says that the RBI will act as a sole regulator for the sector.” Raj further said the implementation of the report would ensure in funding certainty, because it had reinstated priority sector status for the bank loans to MFIs. Finally, the report called for the withdrawal of Andhra Pradesh MFI Act. “SKS has not asked for any kind of restructuring of exposure of banks to the company as we have go a strong networth of R1,850 crore and our exposure to the state of Andhra Pradesh was only 25% of our total loan portfolio. Still, our concern being that banks must start funding to the sector in a big way so that it results in augmenting the credit flow from the banks to the MFI sector,’’ he said. However the microfinance industry, which of late has witnessed slowdown in business said banks are shying away from advancing loans to them.
Gokarn to lead working group on savings
Mumbai: The government has formed a working group on savings for the 12th Five Year Plan under the chairmanship of Subir Gokarn to suggest measures to boost savings in the country. The 12th Five Year Plan begins in 2012-13. The committee, which met for the first time in New Delhi last week, has been asked to submit its report before the government within six months from now. Chaired by Gokarn, the meeting also was attended by officials from the Planning Commission, RBI, State Bank of India, Nabard and Sidbi. Being the first meeting of its kind, the panel asked different members of the committee to come up with their notes on various issues relating to savings like how to estimate the small savings in the future and how to bridge the savings gap and so on, a member of the committee told FE. “We also discussed what could be the savings estimate for the proposed plan period,” a member of the committee said, and added it was also decided to form another sub-group to dwell upon financial issues on small savings.
Mobile Banking In India Dominated By State Bank of India
Mobile transactions in India have not yet reached the scale of online banking transactions yet, but a significant majority of transaction volumes are being dominated by one bank – State Bank of India, the country’s largest public sector bank. According to data retrieved from the Reserve Bank of India (RBI) by MediaNama using the Right To Information Act 707,496 mobile banking transactions, Rs. 61.61 crore were reported for the month of February 2011, of which as many as 529,318 transactions (74.81% of total) and Rs. 32.63 crore transacted (52.96% of total) were from customers of State Bank of India. There was a decline in transactions month on month, with 7,24,682 transactions and Rs. 62.77 crore reported in total for January 2011. Readers might recall that in February 2011, the One Time Password second factor of authentication was introduced by Banks, following a notification from the RBI. Cleartrip, for one, had reported a decline in mobile ticketing at the beginning of the month. All in all, there has been growth in transaction volumes and amounts since September 2010, when 499039 transactions of value Rs. 43.79 crores had been reported. As as aside, Central Bank of India reported just one mobile banking transaction in Feb 2011, worth Rs. 5000. We’ve received fairly granular information today – transaction volumes and value, segmented by bank, for every month since May 2009. Unfortunately, we’ll have to type out all this information, since what we have is in the form of printouts. Hopefully, by the end of next week, we should have responses to six other RTI requests, made of DAVP, DoT, the Income Tax department, Indian Airlines, MTNL and BSNL. As we’ve mentioned before, we believe government data should be made public, accessible and usable.
medianama.com
DARE TO LEAD: THE TRANSFORMATION OF BANK OF BARODA
The refurbishing of the BoB brand is one of the success stories of public sector banking in India. The story of how it was done, told by the former CMD Anil K Khandelwal . He presents it as a memoir, in problem-diagnosis solution format.
Sage, Rs. 795 THE WANDERING FALCON
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