NAGPUR: Micro Finance Institutions (MFIs) which have earned the disrepute of being worse than the unscrupulous village moneylenders may finally be reined in. In an oblique move, the RBI has not only capped the interest rate to be charged by these agencies, but MFIs have also been barred from charging any penalty on delay by its borrowers. The rule does not directly apply to the MFIs but is certainly expected to impact their business in a big way. MFIs have been a cause of concern in Vidarbha too. There were apprehensions that their proliferation may put farmers in the region into a debt trap. RBI has now allowed banks to classify loans given to MFIs as priority sector lending. However, that would be if the loans are given to only those MFIs that meet a whole gamut of conditions including the cap on interest rates and no penalty on delay. The qualifying MFIs will also have to cut down on consumer loans as RBI conditions want at least 75% of loans be given for income generating purposes only. No borrower can be indebted for an amount more than Rs 50,000 in at least 85% of the loans. The conditions also restrict the choice of borrowers for an MFI. In 85% loans the borrower's household income should not exceed Rs 60,000 a year in rural areas and Rs 1,20,000 in urban areas. Loans have to be without a collateral security and borrower will have the choice over repayment schedule. If the banks want the loans to be classified under priority sector, they have to ensure that the MFIs comply. Currently the lending rates by MFIs go as high as 36% per annum. MFIs source their funds from bank loans at 13%-14% thus ensuring a huge spread for themselves. The banks will have to ensure that MFIs to whom they lend do not further disburse loans at a margin more than 12% while an overall cap of 26% has to be maintained. Which means the rate charged by a MFI cannot be more than 12% of what it pays to the bank and it has to be under 26% all the time. MFIs can also not take any security deposit or margin money from the borrowers. Sources said the move will go a long way as banks are always under pressure to meet priority sector lending targets which have to be 40% of its total advances. As a result it would be ensured that the MFIs adhere to the conditions laid down by the RBI as the latter are always in need of bank funds. "A cap of 26% is reasonable. The RBI plan will work as a big majority of MFIs would starve without bank loans. The latter in turn are under pressure to meet the priority sector lending targets," said Moin Qazi, vice-president of Swarana Pragati, a non-banking finance company having a major stake in micro finance and also a presence in the region. Loans meeting RBI conditions would be categorized under the priority sector from April 1, 2011, onwards. RBI has also placed certain conditions on the size of the loans by MFIs.
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Friday, May 6, 2011
Malaysia: Asia’s interest rate hawk
India has raised official interest rates nine times in a year, and China four times in six months, but little Malaysia’s 25 basis point rise may be a better guide to how serious Asia’s inflation problem really is. Zeti Akhtar Aziz, the long-serving governor of Bank Negara, celebrated her reappointment for a further five years by announcing on Thursday that interest rates would go up to 3 per cent, backed up by an increase in the reserve requirement for commercial from 2 per cent to 3 per cent. The governor, who has been in office since May 2000, surprised global markets by hiking interest rates in March 2010 ahead of other Asian central banks, effectively firing the starting gun for the tightening cycle that has dominated regional monetary policy ever since.
Finally, RBI cracks the whip: S.S.Tarapore
The 50-basis-point increase in repo and reverse repo rates is entirely justified in the current monetary and economic environment. The government, too, has accepted the reality that growth may have to be sacrificed for inflation control. From a stance where its loud bark was accompanied by baby bites, the Reserve Bank of India (RBI) is now concerned that inflation is strongly embedded in the system and that price pressures are spilling over into generalised inflation. The RBI accepts that inflation in the first half of 2011-12 could remain at around 9 per cent and it is hoped that it will fall to 6 per cent by March 2012, which would still be above the RBI's comfort zone of 4.0-4.5 per cent. A slowdown in growth in 2011-12 is inevitable. The RBI's baseline real growth is put at 8 per cent and, in view of the uncertainties, the growth rate could range between 7.4-8.5 per cent. It is now recognised by the government that some slowdown in growth is inevitable if inflation is to be brought down to acceptable levels. Consistent with the growth and inflation outlook for 2011-12, RBI has projected M3 expansion for 2011-12 at 16 per cent, deposit growth at 17 per cent and non-food credit expansion at 19 per cent. These projections would imply that the incremental credit–deposit ratio would come down from an unsustainable 95 per cent in 2010-11 to 83 per cent in 2011-12, and even this would be unsustainable given reserve requirements. It is against this backdrop that the measures of May 3 should be assessed. The market was conditioned to baby steps and only in this context does the 50 basis point increase in the repo rate appear high. But this increase is clearly justified in view of the overall monetary situation and the need to reduce the inflation rate. The RBI has done well to follow the sagacious advice of the Mohanty Working Group on Operating Procedures of Monetary Policy and moved over to a single independently varying policy rate to signal the stance of monetary policy. The reverse repo rate will be fixed at one percentage point below the repo rate and as such this would no longer be an independent rate. Under the new Marginal Standby Facility (MSF), banks will be allowed to borrow overnight up to 1 per cent of their net demand and time liabilities at one percentage point above the repo rate. Thus, with the repo rate in the middle, which would be independently set as the policy rate, the MSF would be one percentage point above the repo rate and the reverse repo rate would be one percentage point below the repo rate and thus the corridor would be 2 percentage points. Predictably, the RBI may have found it too drastic to implement the recommendation on the Bank Rate. It would be best that RBI expeditiously implements the Mohanty Working Group's recommendations on the Bank Rate and other recommendations in 2011-12. More recently, the RBI has come out with an excellent discussion paper on deregulation of the savings bank deposit rate -- this paper reflects the RBI at its best. Pending a decision on the issues raised, the RBI has done well, as an interim measure, to raise the savings bank deposit rate from 3.5 per cent (fixed) to 4.0 per cent (fixed). On the issues raised in the discussion paper, the RBI has sought feedback from the general public on a number of crucial issues. In this connection some responses are set out seriatim: (i) The time is apposite to further the deregulation process. (ii) Initially, the savings bank deposit rate could be prescribed as a range, say 4.0-5.0 per cent. Banks should be strongly counselled to use the discretion with finesse so that their net interest margins are protected. Once banks show maturity and judgement, the ceiling could be dispensed with, but the floor rate should be retained. (iii) The process of deregulation suggested above would ensure that small savers are not affected. (iv) As the experience of deregulation of term deposit rates in the late 1990s showed, a well modulated process of deregulation would ensure against any adverse effects. (v) Each bank should be required to ensure that their savings bank deposit rate is uniform for all depositors of the bank. The institutional memory of the 1977-78 experiment would advise against separate interest rates for deposits with cheque book facilities -- in 1977-78, all depositors with cheque book facilities opened two accounts. In the proposal now under examination cheque book facilities should be subject to increased charges, and there should be charges for excessive credit/debit entries. Moreover, interest should not be paid on any daily amount in the savings bank account above, say, Rs 2 lakh. There is a crying need to reform the present savings bank deposit rate and the phased deregulation should be completed in 2011-12. The development and regulatory policies have been well constructed and deserve separate treatment.
The message is the aim - Ila Patnaik
In the monetary policy statement this week, the Reserve Bank changed its policy stance to a strong anti-inflationary one. However, though this step was much needed and is in the right direction, it will not be enough to bring inflation down. Hiking rates and contracting demand is only one part, the painful part, of the story. An equally important element is public perception about the central bank. To build credibility on its anti-inflationary stance, the RBI will need to improve its research capacity and communication strategy, get rid of conflicting objectives and be consistent in its pursuit of inflation control. This part, fortunately, does not hurt anyone. It needs a change in the framework, functions and objectives of the RBI. Not only are there long lags in the weak monetary policy transmission mechanism in India, the bigger problem for the effectiveness of the tighter monetary policy is that the RBI is yet to build credibility as a central bank that puts inflation control above all objectives. To control inflation it will need to build this credibility with a consistent pursuit of inflation control as its primary function. To consistently pursue inflation control as its objective, it will have to get rid of conflicting objectives like maintaining the competitiveness of exports and being the government’s debt manager. Given its poor record on projecting inflation in the last two years, it will have to visibly create new research capacity to ably forecast future inflation and measure inflationary expectations better. Considering its exchange rate pegging in the past, it is not enough that the RBI has stopped intervening in the foreign exchange market — it has to communicate its new framework and make a clean break from the framework of exchange rate pegging and multiple objectives. In the past, the RBI has prevented liberalisation of financial markets for both domestic and foreign participants for fear of bringing in capital flows and making it difficult to prevent volatility in the foreign exchange market. Preventing financial markets from developing has not allowed the monetary policy transmission mechanism to strengthen. As a consequence, even when the RBI has been tightening policy over many months, the tightening has not yielded results. The RBI has to become a central bank that actively seeks to improve the transmission mechanism of monetary policy through developing the bond-currency-derivatives nexus. Once public perception about the RBI changes, the effectiveness of monetary policy in India will improve. What should the RBI’s next step be, even before the rate hike? First, if inflation control has to be its dharma, the central bank must attempt to get rid of all those functions that might conflict with this objective. In the past, some of these conflicting objectives have come in the way of inflation control. For example, if keeping Indian exports competitive by manipulating the exchange rate had not been an important object of RBI policy, the 2004-2008 period would not have witnessed the build-up of reserves and the consequent increase in liquidity, and inflation might arguably have been quite different. Indeed, the RBI would have preferred an appreciating rupee to keep prices under control. Similarly, if the RBI did not have the responsibility of being the debt manager of the government and keeping its interest expenditure low, it might have raised interest rates more sharply last year. Even though the RBI has moved to a floating rupee, it has shied away from making a commitment that it will not go back to intervening in the foreign exchange market. The market does not believe that if the rupee hits Rs 40 to a dollar, the RBI will still be wedded to inflation control. It is because of such conflicts with the objective of inflation control that most central banks in advanced economies no longer intervene in foreign exchange markets or act as the government’s debt manager. The RBI cannot build credibility as a central bank focused on inflation if it continues its present stance of arguing that it will continue to have multiple objectives and will somehow manage these objectives when a conflict arises. Second, the RBI’s communication on inflation needs to change. On the trade-off between growth and inflation, it has often been argued that inflation targeting means that a central bank must ignore all other objectives such as growth in employment. The present policy statement has seen a break from this framework. The RBI has acknowledged that the objective of high growth does not conflict with that of inflation control. Indeed, high and volatile inflation reduces investment by introducing uncertainty and hurts medium- and long-term growth. This analytical framework needs to become the RBI’s main message. Next, to build credibility, the RBI should state its inflation measure and target. In the present policy it says: “Accordingly, the conduct of monetary policy will continue to condition and contain perceptions of inflation in the range of 4.0-4.5 per cent, with particular focus on the behaviour of the non-food manufacturing component. This will be in line with the medium-term objective of 3.0 per cent inflation consistent with India’s broader integration into the global economy.” This is not enough. The RBI needs to state which measure of inflation, such as the one based on the Consumer Price Index, underlies this target. More, few people would find this objective credible. The RBI can gain credibility by presenting how it is faring against this objective in the next policy announcement. A report similar to the Bank of England report and a framework where the governor is questioned by Parliament if he fails to meet his targets would help in bringing credibility to the RBI’s commitment. Third, better conduct of monetary policy would also require creating a much stronger research capability for measuring inflationary expectations. For example, the present policy statement asserts: “Significantly, the stability of long-term yields, despite the current high rates of inflation, suggests that inflationary expectations remain anchored.” The RBI’s own data on inflationary expectations strongly contradicts this. Fourth, a short, concise policy statement would be more effective than the present statement which also includes other policy initiatives. The above are some of the steps that can be taken relatively painlessly in the fight against inflation that could last many quarters. If the RBI is serious about this fight, it needs to start on these urgently.
The writer is a professor at the National Institute of Public Finance and Policy, DelhiFM takes cue from RBI, says GDP may slip to 8%
Finance Minister Pranab Mukherjee today projected India’s economic growth at 8 per cent for the current fiscal, lower than the budgetary estimate of 9 per cent, due to measures taken to rein in high inflation. “If oil prices continue to rise, it would be difficult to achieve higher GDP. GDP may come down to 8 per cent from (the projected) 9 per cent,” Mukherjee told reporters on the sidelines of ADB annual meeting here. The government’s (India) primary concern now is to manage inflation while sustaining high growth rate. Hardening of global commodity prices, particularly oil prices has accelerated inflation, he said adding “our projection is 7.5-8 per cent inflation during the year”. Earlier this week, Reserve Bank of India too had lowered economic growth projection to 8 per cent due to measures taken to tackle high inflation especially food prices. India’s economy is estimated to have clocked 8.6 per cent growth in 2010-11. Mukherjee said Inflation, particularly the increase in food prices, is a major concern for India as well as other developing countries. “We are trying to reduce it through supply and demand side management. “On supply side we are trying to remove bottlenecks and on demand side RBI has adjusted interest rates to mop up excess liquidity in a manner so that it may not affect the economic activity,” he said. With adequate buffer stock and hopefully a good monsoon, “we are looking at easing of the price situation in India”, he said. Overall inflation was 8.98 per cent in March and has been above the 8 per cent mark since January, 2010. Asked whether the government is planning to increase diesel prices in the near future, Mukherjee said “We will announce it as and when the decision is taken”. In its annual monetary policy, the RBI had advocated hike in prices of petroleum products. The government has not allowed state oil firms to revise diesel prices since June last year when crude oil was ruling at $72-73 per barrel. Crude oil is today trading at around $110 a barrel in international markets.
RBI hike: Home buyers to pay 'penalty'
Housing prices could go up, as the borrowing cost for developers is set to increase following the hike in short-term lending rates by the RBI, industry body CREDAI said today. The RBI's decision to hike key rates - lending (repo) and borrowing (reverse repo) rates by 50 basis points to 7.25 per cent and 6.25 per cent respectively - will raise the cost of home, auto and other loans. It was reacting to the news that the reserve Bank of India (RBI) in its credit policy meet had hiked key rates by 50 bps to India's largest realty firm DLF said that banks should not increase the interest rates and felt that prices, whether of food or housing, can only be controlled by improving supplies. Reacting to the RBI's decision to raise the repo and reverse repo rates, Confederation of Real Estate Developers Association of India (CREDAI) Chairman Pradeep Jain said: "This is going to increase the cost of funds for both developers and home buyers."
“RBI’s new microfinance regulations will clear the uncertainty” -Samit Ghosh
Microfinance Focus May 5, 2011: Managing Director of Bangalore based Microfinance firm, Ujjivan Financial Services, Samit Ghosh in an interaction with Microfinance Focus today said that the Reserve Bank of India’s new regulations on microfinance will clear uncertainty within the sector, which has been hanging over since October 2010.He said, “Overall the regulations are vastly improved from those which were initially recommended by the Malegam Committee. In this, both the RBI and Mr. Malegam needs to be commended for keeping an open mind and incorporating feedback from the sector. There are some areas which need to be ironed out and hopefully this will be the start of the revival of the sector.”Ghosh added, “There are some concerns on the other recommended regulations. Firstly, MFls need to be given at least a month for implementing these changes. Second, the minimum two year tenure recommended for loans of Rs. 15,000 or more, will encourage misuse of funds, as majority of loans for customers are for working capital requirements of one year or less.” He further said, “Unnecessarily extending the loan period will ultimately lead to higher defaults, which is not RBI’s objective. Finally, there is concern on the appropriate methodology of implementing the margin cap, which needs to be further discussed and finalized, and MFIs need additional time to comply with this specific requirement.” Meanwhile, Ujjivan Financial Services has said that effective from today it will comply with the new RBI regulations for microfinance institutions on the interest cap of 26% p.a. and processing fee of 1%. It will also discontinue security deposit on new loans which are funded under priority sector loans from banks. This will benefit Ujjivan’s customers by reducing the effective cost on their loans. Ujjivan continues to have healthy business operations across twenty states, portfolio quality with no exposure in Andhra, and sufficient liquidity to meet all its business requirements. The institution serves over 1 million urban and semi-urban poor customers in 20 states across India through 351 branches and with over 4000 employees.
Thursday, May 5, 2011
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God incarnate - Gunit Chadha
My parents have been long-standing devotees of Sri Sathya Sai Baba, and I grew up visiting Puttaparthi a few times during the past two decades. I did this morning [April 24] what I have done every day for years—silently prayed to him. So even though Swami has left his physical form, for me he is still omnipresent in spirit and faith.?A few years ago, at a seminar on ethics in the financial world, Sai Baba asked a few of us including K.V. Kamath, chairman, ICICI, V.S. Das, Executive Director, RBI, and me to deliver a talk in the Kulwant Hall. This came as a total surprise to us. Another cherished memory is of the time I received vibhuti from him, which produced tears of joy. We grow up having deep faith in God and in our parents—my faith in Sai Baba is equally deep. To me he is an incarnation of God. One of the things I admired in him was that he was disinterested about your religious faith. His selfless service to society has been truly remarkable. Sai Ram.
Chadha is Chief Executive Officer, Deutsche Bank AG India.
Chadha is Chief Executive Officer, Deutsche Bank AG India.
RBI imposes Rs 1-lakh penalty on Chopda People's Co-op Bank
The Reserve Bank of India (RBI), today said that it has imposed a monetary penalty of Rs 1-lakh on Chopda People''s Co-operative Bank Ltd, based in Jalgaon of Maharashtra. The action has been initiated for violating the provision of Section 5 (ccv) of the Banking Regulation Act, 1949 (AACS) and violation of the Reserve Bank of India''s directive on unsecured advances, the apex bank said in a statement. The RBI had issued a show-cause notice to the concerned bank, in response to which it submitted a written reply, it said. "Based on the reply, the Reserve Bank of India came to the conclusion that the violations were substantiated and warranted imposition of the penalty," it said.
Gokarn says RBI mulling futures with 2-, 5-year gilt as underlying security
The Reserve Bank of India (RBI) is considering introduction of futures contracts with two-year and five-year government bonds as underlying security, Deputy Governor Subir Gokarn said opn Wednesday. Norms for credit default swaps will also be issued soon, he said. “The draft guidelines on CDS were placed on our website in February and we have received a large amount of feedback on those guidelines...we have had certain discussions and we expect to issue the guidelines very soon,” Gokarn said at a National Stock Exchange event. He added the recent financial crisis had brought to light the risks involved in the over-the-counter derivatives market, and the RBI had therefore taken regulatory steps to reduce these risks. “We believe that the OTC derivative markets here are quite well regulated,” he said. The deputy governor said the central bank had a calibrated approach towards developing the financial markets in India.
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RBI raises m-wallet limit to Rs 50,000
Relaxing the norms for payments through mobile phones, known as m-wallets, the Reserve Bank of India on Wednesday increased the money-loading limit from the current Rs 5,000 to Rs 50,000. “The maximum value of such prepaid semi-closed m-wallets shall not exceed Rs 50,000,” said an RBI notification. Leading mobile operators Bharti Airtel and Vodafone had tied up with State Bank of India and ICICI Bank, respectively, to offer such facilities to their subscribers. The central bank also decided to treat semi-closed mobile wallets on a par with other semi-closed prepaid instruments. In a semi-closed mobile wallet, money can be loaded into one’s mobile phone from a licensed company, and can be used to make payments. However, it can’t be used to withdraw money.
Banks on a rate-hike spree after Mint Road action
The Reserve Bank of India's message to increase lending rates in the system and control inflation seems to have found a ready audience in banks. Since the central bank’s repo rate hike on Tuesday, at least five banks have raised their base rates and benchmark prime lending rates by a minimum of 50 basis points (bps). IDBI Bank has raised its base rate to 10% and BPLR to 14.5%; Punjab National Bank to 10% and 13.5%; Yes Bank to 9.5% and 19%; Bank of Maharashtra to 10% and 14.25%; Oriental Bank to 10% and 14.25%, respectively. “The increase in base rate and PLR will enable the bank to fully absorb the increased costs on account of rising interest rates,” Yes Bank said in a statement. The central bank also raised interest rates on savings bank deposits by 50 bps for the first time since 2003. “The impact of the savings rate hike on banks’ margins could be negative, unless banks pass on the higher cost to borrowers… charge higher fees for transactions, require higher account balances,” Goldman Sachs said in its report post the annual monetary policy. Banks across the board are expected to raise lending rates after their respective asset liability committee meetings. Asked if banks at large would be looking to pass on costs to customers, T M Bhasin, chairman and managing director of Indian Bank, said, “That is there. It is the prescription of the policy.” “The overall message from the RBI is that lending rates have to go up in the system. The bankers are taking a hint from it. We think that 50 bps hike in lending rates is something that will happen across the board,” said Vaibhav Agarwal, vice-president - research with Angel Broking. Although the rate hikes have followed the regulator’s move for now, further rate hikes would also depend on the strength of demand, said Nitin Kumar, deputy vice-president, Quant Broking. “Going further, it would be a function of the credit off-take also. If the credit demand sustains and the corporates are able to absorb the rising cost of funds, then we will see more lending rate hikes.”
A ‘priceless’ era begins for 25 paise
As many as 45 banks in the State, designated by the Reserve Bank of India (RBI) will take coins of 25 paise or less in exchange for their face value during working hours till June 29, RBI Regional Director P Vijaya Bhaskar said on Wednesday. While these 45 banks have been designated by the RBI, Bhaskar said that any bank branch will exchange these coins. This follows the announcement that coins of denomination 25 paise or less will literally lose their value from June 30. RBI is embarking on a major drive to withdraw these coins from circulation. The banks will accept these coins till June 29 and will stop accepting them from June 30 onwards. "Coins of denominations 25 paise, 10 paise, five paise, two paise and one paise will not be legal tender anymore," he said. He said 50 paise will still remain legal tender. While the Union government has stopped minting these coins for the past seven to eight years, they have not been withdrawn from circulation until now. RBI undertakes currency management through its issue offices in the States. These issue offices supply currency and coins to currency chests attached to various banks. In all, there are 19 issue offices and 4,300 currency chests across the country. In Karnataka, there are 268 currency chests that are serviced by the issue office in Bangalore.
Calibrated steps to tame inflation failed: Subbarao
The Reserve Bank, on Tuesday, admitted its calibrated steps aimed at cooling inflation have not resulted in desired effects so far, but expressed confidence that its ''hawkish'' stance would help contain rising prices now on. “You are quite right in questioning the reliability of RBI’s inflation predictions and also the ability of RBI in containing it," Governor Duvvuri Subbarao said in his customary post-policy meet when asked whether he was sure to meet the 6 per cent inflation target for this fiscal. But he quickly added, “Over the year, we expect to be preoccupied with inflation control and hope to regain our credibility in predicting more accurately.” However, to a question whether RBI was behind the curve in containing inflation, the Governor answered in the negative and said as the nature of inflation has suddenly changed with many known unknowns (commodity and crude prices, geopolitical unrests in the Middle East and North Africa, and the impact of Japanese tragedy etc) coming into effect. Explaining the reasons for the calibrated approach to batten down inflation, he said, “Why we consistently under-predicted inflation was that last year’s inflation surge was due to a series of unpredicted supply-side pressures. But now many known unknowns have increased and hence the hawkish measures.” “When we started tightening, that was needed to sustain the growth momentum. The aim of monetary policy was then to check inflation by discouraging demand and thus help the economy for a soft-landing,” he added. “But over time this led to a dramatic change in the growth-inflation dynamics. Over time, food-driven inflation has given way to manufacturing inflation. As a result all the risks to inflation are up now,” Subbarao said. Subbarao also admitted that RBI’s inflation numbers for December 2010 to February 2011 went off the track hence March prediction also went off the track and he attributed this mismatch to a series of factors and variables which were at play. The surge in vegetable prices in December and January were quite unexpected, he pointed out. Pointing out that the known unknowns increased overtime, the Governor said since there was no cooling in demand the producers could pass on the input cost increase to consumers, thus pushing up price-pressure. On the view that a higher growth can be a trade-off for high inflation, the Governor was categorical in stating that “we don’t subscribe to that view and that we would rather compromise growth in the medium term to cool inflation off.” On the impact on the hawkish approach to GDP, the Governor said, “We have talked through the GDP numbers, which could be around 8 per cent or a little above or below it.” He also added that industrial growth may take a further hit due to inputs cost rise but private demand may be sustained. However, government investments are to be seen and so is the monsoon forecast to have a better perspective on the actual impact.
RBI classifies bank loan to micro-finance institutions priority sector lending
New Delhi: The Reserve Bank of India (RBI) on Tuesday said that it would monitor the micro-finance institutions (MFI) charging high rate of interest. The RBI also said that loans extended by banks to MFIs from April 1 will be classified as priority sector lending. “The recommendations made by the Malegam Committee for the micro-finance sector have been broadly accepted. Bank loans to all MFIs, including non-banking finance companies (NBFCs) working as MFIs on or after 1 April 2011, will be eligible for classification as priority sector loans,” RBI governor D Subbarao said while announcing the 'Monetary Policy’ for 2011-12'. RBI has broadened some of the parameters, such as increasing the annual income limits for eligible households to Rs 60,000 for rural and Rs 1.20 lakh for urban and semi-urban for seeking households. Apart from it, the tenure of loan has been fixed to not to be less than two years. Loans must be reimbursed on weekly, monthly and yearly basis. The limit of interest charged by MFI will also be decided by the RBI. Several questions were raised over the functioning of MFIS. AFTER Andhra Pradesh government brought an ordinance against MFI. Situation turned worse after banks stopped giving them loan and customers refused to return their loan to MFIs. Following the outcry, RBI set up the Malegam panel to look into the loopholes.
Another 75 bp of Hikes to Come
Before yesterday's (3 May) Reserve Bank of India meeting, we had expected a total of another 50 bp in policy rate hikes, sticking with our long held view that the repo rate would peak at 7.25% in July. That 50 bp move came through in one go, however, inevitably leading us to review our forecasts. We have decided to make a significant change to the view, now expecting another 75 bp of hikes, with the repo rate peaking at 8% by September this year. The key reason for the change is not so much the 50 bp move itself but rather Governor Subbarao's statement. There he surprised us by expressing a willingness to sacrifice some growth to calm inflation, while also indicating a reluctance to wait and see what the lagged effects of the policy tightening to date would be. The additional rate increases make us more secure in our below consensus growth forecasts. Not only do we look for 7.5% GDP growth in 2011/12, but we are expecting the same outturn in 2012/13. The “new” hikes will have a more of an effect on 2012/13 growth given the long lags involved with rate changes. Not only did the Reserve Bank of India increase the repo and reverse repo rates by 50 bp (to 7.25% and 6.25%, respectively, bringing the total increase to 250 bp and 300 bp) at yesterday's meeting but also hiked the savings deposit rate (the administered rate commercial banks must pay on some savings deposits) for the first time in years, from 3.5% to 4.0%, as well as increasing loan provisioning requirements for non-performing loans. All in all, the meeting signaled a heightened disquiet from the RBI concerning the stickiness of inflation and the fear that this would damage the country's medium term growth prospects. Exactly why this has taken so long to materialise given that inflationary pressures have been so high for so long is somewhat puzzling. Better late than never, however. Several commercial banks in India have already raised their deposit and lending rates by 25-50 bp in reaction to the RBI's move, while others have indicated their intention to do so shortly. As such, it is clear, that the vast bulk of the policy rate changes will be passed on to savers and borrowers. The accompanying statement from the RBI surprised us in three ways. First, an open acceptance by the central bank that some growth would need to be sacrificed in the short term at least in order to calm inflationary pressures. Second, the implicit reluctance of the RBI to wait and see what the lagged impact of the tightening that has already taken place would be on growth and inflation. Third, the heavy emphasis on the vagaries of WPI inflation, which most acknowledge is a poor indicator of underlying inflationary pressures. It seems highly likely that the shock March inflation release (where headline WPI was reported at 9.0%, driven up largely by the manufacturing component) was the tipping point for a 50 bp hike, rather than the normal 25bp move. With all this in mind and given the prospect of WPI inflation remaining uncomfortably high over coming months (we expect the headline rate to stay above 8% for the first half of the fiscal year, probably touching 10% in the not too distant future), further rate action looks highly likely. We are therefore lifting our interest rate call - expecting another 75 bp of hikes in total, which would take the repo rate up to a peak of 8.0% before the end of the July-September quarter. The next move is likely to come at the next meeting in mid-June and, at this stage, we have pencilled in a 25 bp hike. Clearly, however, a 50 bp increase can't be ruled out given the RBI's current hawkishness. The prospect of another 75 bp of rate hikes makes us even more secure in our bottom-of-the-range GDP growth forecasts. So far we have focussed 7.5% projection for 2011/12, but we also have the same number for 2012/13. Given that it typically takes 12-18 months for rate increases to feed through to the real economy, it is next year's growth that will feel the impact of the additional hikes. As far as we are aware, no one else has a growth forecast below 8% in 2012/13. Overall, the Indian economy and markets are facing a particularly unpleasant combination of macroeconomic circumstances right now. That is high and rising inflation, high and rising interest rates and the likelihood of downside growth surprises. This is also set to continue for some months, in our view, making it hard to remain anything other than pessimistic about the equity market outlook and somewhat cautious about bonds.
The right priority
It is heartening that the Reserve Bank of India, in consultation with the Centre, has picked up enough courage to bite the bullet and take up the issue of tackling inflation as its main priority. So far, it was taking mere baby steps by way of a 25 basis point hike eight times since March 2010 to ensure that GDP growth does not falter. This time, the central bank surprised the market and a section of economic analysts by turning hawkish and raising its short-term lending (repo) rate by an unanticipated 50 basis points to 7.25 per cent and leaving the borrowing (reverse repo) rate to float lower by one percentage point at 6.25 per cent. Even as the bank rate and the cash reserve ratio have been left unchanged so as not to affect the flow of liquidity, the net effect of the annual credit policy action is that short-term funds the banks borrow from the RBI will be available at a higher rate and, as a result, housing, auto, and consumer loans will cost more to the consumer. The policy move, which will mean marginally lower GDP growth in the short term, has come as a disappointment to India Inc. owing to the negative impact on investment. But the higher-than-expected increase in key policy rates should be viewed as a chemotherapeutic dose to combat the cancer of inflationary expectations. As it is, while food inflation has been ruling high through almost all of the past year owing to seasonal and other factors and a solution lies in easing the supply bottlenecks and increasing production and productivity, the more worrying factor is the headline inflation that has remained at a high of near nine per cent, belying even the scaled-up projection of the RBI at eight per cent for 2010-11. With prices of most commodities, especially oil, skyrocketing in global markets and with the external environment not exactly benign, the apex bank expects overall inflation to stay in the higher regions during the first half of the current fiscal and, in the absence of any further downside risks, moderate to more reasonable levels of about six per cent by the end of the year. It is clear that the reining in of demand pressures to contain inflation will have a negative impact on overall growth. While the government projected a GDP growth of nine per cent for 2011-12 as against 8.6 per cent achieved in 2010-11, the RBI has scaled down the estimate of overall expansion to eight per cent, which is in line with the realistic projections of various think tanks and multilateral financial institutions. Clearly, the country will have to bear the short-term pains if the long-term gains are to be achieved.
Primary dealers need a track record: RBI draft
Mumbai: Unveiling the draft paper on the proposed changes on functioning of primary dealers (PD), the Reserve Bank of India (RBI) has said it is necessary to ensure that the new PDs are adequately equipped to participate in all auctions of central government securities and T-bills, including an underwriting commitment and play an active role in the debt market. “There is a need that the prospective primary dealers have a track record of relevant experience on which an assessment of the entity’s operational performance, control environment, and compliance position may be based. Moreover, if applicant PD is already registered as an NBFC for a year or so, the due diligence and ‘fit and proper’ criteria could be better assessed,” RBI said on Wednesday. The current guidelines to authorise PDs in the Indian G-sec market were prescribed in the year 1995 when the PD system was introduced in India. With a view to putting in place transparent regulatory guidelines on eligibility of a PD, RBI proposed new eligibility criteria for an entity activities to become of a PD. The existing PDs would be given two years time period to comply with the minimum turnover requirement of 15% of their total turnover in the G-sec business.
Decisive moves
RBI Governor D. Subbarao has announced a sharp change in monetary policy, to tightening, with a clear anti-inflationary stance. This is welcome in an environment where the inflation rate has been persistently moderately high, without showing signs of going down on its own. Two years ago when inflation started rising in India, in contrast to the rest of the world, there was confusion on how to deal with it. Today, for the first time, in a clear and firm voice the RBI has announced its commitment to fight inflation. The stance of monetary policy is not defined merely by a change in the repo rate, but also by the increase in the savings deposits rate, the increase in provisioning and the reduction in the expected GDP growth rate. This change has been long overdue and perhaps has come too late to impact inflation quickly and decisively. In that case the RBI has indicated that it will continue to fight inflation, which means we are likely to see rate hikes. The governor held that a low and stable inflation rate was necessary to create certainty about the investment environment and is needed to see greater capacity-building. Since India has seen little addition to capacity after 2008, today growth will come not by increasing shortterm demand, but by higher investment. The change in the monetary policy framework to a 200 basis point corridor in which banks can borrow from the RBI and lend to the RBI; the move to a single instrument, the reverse repo rate; and to a single intermediate target in the liquidity market, the weighted call money overnight rate, will improve the working of monetary policy. The next change the RBI needs to make is to move away from the WPI to the CPI as the measure of inflation on which it focuses. Since the CPI is the rate that affects the lives of people, it is what matters, especially in creating wage-price spirals and inflationary expectations. The RBI's policy is a clear and welcome step in the right direction. After denying the role of monetary policy in inflation (depending on what is causing inflation) the present communication strategy suggests that regardless of what is the cause, controlling inflation will be the guiding objective of the RBI. If the RBI continues to give this strong message, inflationary expectations should hopefully come down -and as monetary policy transmission takes place over the next two years, we will see lower inflation.
Monday, April 25, 2011
VITALINFO taking a short break..........................
As you know, VITALINFO was launched on 23rd November 2010 with the very purpose to provide a platform for wider dissemination of updated information related to and happening of events in and around RBI. It has continuously been updated on a daily basis well before 8 a.m. without taking even a day’s break, be it Sunday or public holiday. I have been receiving excellent feedback from RBIeties all over India. I shall be away on official tour to Malaysia and Singapore leaving India today and returning back on 4th May 2011. Much as I would wish to, the VITALINFO will not be available during the period. Hence VITALINFO intends to take a short break. See you again on 5th May 2011. Meanwhile, I request you to submit your vital feedback on VITALINFO online by clicking the link on the site.
Regards
‘There is a crying need for well-informed decision making, based on proper research'
What is CAFRAL about? What is its mandate?
We had a vision for this centre in 2006 when the Prime Minister and former governors and deputy governors were here for a function. We felt that our bankers training college (BTC) needed to be revamped. Although some of its programmes were well-regarded, most banks have now developed their own training establishments. And markets have also taken care of training needs of bankers. So we had to reinvent ourselves. Dr Y.V.Reddy, then Governor, felt that instead of focussing on training, we need to focus on research and learning. We wanted to develop this into a global hub for policy research in banking and finance — of use to policy makers and central bankers and serving the requirements of the system. The context was also that as India was a growing into a dominant player, its financial sector should also set its aspirations higher and try and become a more important player in the globe. When I left the RBI, the governor asked me to take up this role. I liked the idea because I have been participating in global conferences and been part of various committees. There is so much of research that is done in these countries on regulatory issues. Today, we are accepting global standards and internationally accepted guidelines such as capital adequacy, the methodologies and so on. But we don't have enough research to even differ with that approach. Take for instance the issue of having countercyclical buffers if credit to GDP ratio exceeds a particular level. Now, we are an emerging country whose Credit-GDP ratio will grow for the next few years. So what we said is that we'll look at credit to certain sectors — such as real estate or capital market and when they go beyond our comfort zone, we'll put in limits and build buffers. And that has worked better. But all of these things – about what made us decide on 2 per cent provisioning for instance, we need lot more research. We have been quite hard-pressed when we have gone to Basel committees with our prescriptions. We also need to build capacity both with the regulator and the regulated entities. Financial sector regulation is still in its infancy because data is still not fully available on a lot of things. For example, if you look at Basel requirements, you need seven years data (that includes one year of downturn). Our data is still not good enough. So, can we measure risk better? There is a crying need for well-informed decision making, based on proper research. If we can fulfil that need, we would be rendering a great service. We would like to be a kind of interface between academia, practitioners and bankers. There are people who have the knowledge and the methodologies and lots of Indian talent that is available. We would like to use this skill for public good and do something that is useful for central banks. BIS (The Bank for International Settlements) will also collaborate with us and provide us resource persons. We have been in touch with researchers who are very enthusiastic because of the potential access they will have to data from banks and regulators. Even in the few meetings I have had with academics and bankers, they have found talking to each other has been very useful. There are a lot of issues that need clarity – many people don't understand why we need controls on capital flows and why we need caps on debt capital. They argue that this denies them access to cheap credit. But there are other considerations — including macro-economic stability. We are planning to have programmes for boards of banks — for their directors. We will start with a CEO's conference on May 28 — where we are going to discuss business strategies in the changing regulatory landscape — about coping with new demands for raising more capital. We are going to discuss regulatory challenges — the issue of addressing growth challenges while also keeping an eye on risks and destabilising factors, the trade-offs that are required to maintain a stable financial system. We are going to look at financial markets, financial stability and financial inclusion. Later on, we can look at things like e-learning, like what other global institutions have — where they put even regulators and heads of institutions through a ladder of tutorials. I have found this whole thing quite exciting.
How are you staffing your organisation? Do you have people coming in from RBI?
Yes. There are a few people who are from RBI. We have been told that we need to get a few people who will be anchored in this institution for a longer spell — but we can look for many others who will see it a short term assignment. We'll be putting up our Web site soon. We are looking for people who are interested in financial sector research and who are willing to spend some time. We could have people who are with us for 2 to 3 years but we are also looking at project based assignments. We could even look at neighbouring countries and central banks from South East Asia so that there are some mutual learning possibilities. We can look at people who would like to come on sabbaticals.
The one challenge that researchers usually face is the quality of data and the difficulty of reconciling two pieces of data from two different agencies. How are you addressing this?Yes. That is a challenge. In fact some people have advised us that CAFRAL should focus on data — on data consistency, data mining, data packaging etc. And although we are sponsored by the RBI, the data that we will get from RBI, will of course have to go through the same protocol — there are confidentiality issues. The banks may not want us to single them out and publish any research that could be identifiable with them. We have to look into this.
What about funding for the centre? Are you looking at tapping funds from government or other market sources?
Right now, it is met by Reserve Bank of India. We can't become completely dependent on market funding because if we don't focus on the subject that will help the bottom lines of those who commission the research – then that may not be able to sustain. The funding will go naturally into those areas which will yield benefits for them. But money is not a problem. We will try to do what the BTC did in terms of providing a platform for policy and regulatory issues. We could, for instance, hold a dialogue there and bring people together. It is not in the RBI — so it provides an academic environment that is neutral — so everybody can speak more freely – both the banks and the regulator.
Banks’ profits to go up on RBI relaxing provisioning norms
The Reserve Bank’s recent decision to relax provisioning requirement for banks will improve the profitability of lenders in the short run, bank officials have said. Responding to representations of banks on mandatory provisioning of bad assets, RBI has said that till the time it introduces a more comprehensive methodology of countercyclical provisioning taking into account the global standards, lenders are required to set aside stipulated capital with reference to NPA position as on September, 2010. Welcoming the decision, a senior banker said the initiative will help in improving the bottom line of banks as they will not have to make additional provision towards bad assets. Thus, operating profit will not be drained out for making additional provision for rise in bad debts, another banker said. As per the current prudential norms, banks are required to set aside capital to the tune of 70 per cent of their bad debt on running basis. This is called as provision coverage ratio (PCR). Country’s largest lender State Bank of India’s profitability has been impacted as the bank had to set aside capital each quarter to meet the 70 per cent provision coverage ratio as prescribed by RBI. The bank has been given additional time till September this year to meet requirement. RBI decided to hike the provision level in the aftermath of financial downturn with a view to enhance the asset quality in the banking system as additional provisioning would give more cushion to banks against the rise in bad loan levels. Majority of the banks achieved the PCR of 70 per cent and have been representing to RBI whether the prescribed PCR is required to be maintained on an ongoing basis, RBI said in a notification. “The matter has been examined and till such time RBI introduces a more comprehensive methodology of countercyclical provisioning taking into account the international standards as are being currently developed by Basel Committee and other provisioning norms,” it said, adding banks are required to set aside stipulated capital with reference to gross NPA position as on September 30, 2010, it said. Besides, banks have been allowed to utilise the additional PCR beyond the 70 per cent for making provision against bad assets. “The surplus of the provision under PCR vis-a-vis as required as per prudential norms should be segregated into an account styled as countercyclical provisioning buffer,” it said. This buffer, it said, will be allowed to be used by banks for making specific provisions for non-performing assets (NPAs) during periods of system wide downturn, with the prior approval of RBI.
INCLUSION BANKING WILL SOON BE PROFITABLE: UNION BANK
Union Bank of India, the fifth largest public sector lender with over Rs 3.55 lakh crore in assets, has said its financial inclusion project, called the ‘new bankable class’, will turn profitable sooner than expected. “Going by our experience with the financial inclusion project, which we call ‘banking for the new bankable class’, this will turn in profits sooner than later, especially when the cash transfer facilities under Adhaar scheme starts flowing in,” Union Bank chairman and managing director MV Nair told PTI in an interaction here. Nair, who recently got a three-month extension after completing his tenure, said, “For us, this is not a loss making business. Some of the segments such as remittance facilities for the migrant labourers as also those for the milk and fruit vendors, under the inclusion project are already profitable. The MNREGA (National Rural Employment Guarantee Scheme) payments may remain in loss for some more time but then the government is subsidising it.” He said the bank got into this business three-four years ago, well before the government and the Reserve Bank began pushing it and made it mandatory from the last financial year. “At Union Bank, we always believed in the opportunity at the bottom-of-the-pyramid and our innovative approaches have worked well so far and we hope this will continue to be so. This has given us the confidence to move into financial inclusion space well in advance. “When we looked at this large unbanked class, we realised that they were a future business opportunity and not a burden on our finances. Hence we started it off and looked at it as an investment for the future. And we are happy that we started it earlier than others,” the chairman of the Mumbai-based lender explained the rationale behind this move. The bank has already opened six million inclusion accounts and its project is well on course, he continued. “The RBI has allotted us 3,159 villages. As of March 2011, we have already covered 2,511 villages. We intend to cover 10 million customers by March 2013 under the inclusion plan,” Nair said. For the new bankable class, the UNI is offering a combination of banking products such as no-frills savings account, microcredit, micro insurance, remittance facilities and overdraft, the chairman said. However, industry analysts are not so hopeful about the profitability of the inclusion drive. For instance, Ernst & Young India partner and financial services head Ashvin Parekh is of the view that looking at the way the government and RBI are pushing this, it will impact the profitability of small banks. According to Parekh, “the ideal model would be the government setting up some banks, specifically for the inclusion project, and once the target is met, privatise them. “Or else, it could ask only large banks, which can absorb the losses for a longer period to drive the project and give them some tax incentives,” Parekh said.
Inflation and growth
The RBI should take some additional steps to curb inflation, instead of taking baby steps, which it has done in the last one year, without it yielding much result. The spectre of inflation continues to loom large and bite into the wallets of the common man. The key policy rates should be increased by at least 50 basis points and there should be some sacrifice on the growth front to prevent any further escalation in inflation. Inflation will have a long-term impact and a cascading effect on various sectors of the economy, which will result in both social and economic crisis. So, curbing inflation should be given the precedence over double-digit GDP growth.
R. Karthik, Chennai (Hindu – Business Line)
R. Karthik, Chennai (Hindu – Business Line)
Why the delay in new bank licence norms?
The delay, it seems, is deliberate, and neither the government nor RBI is too keen to welcome a new set of private banks in a hurry. India’s banking regulator is yet to release draft guidelines on licensing norms for new banks. Finance minister Pranab Mukherjee first announced the government’s intention to allow a set of private firms in the banking space in his February 2010 budget speech, surprising the Reserve Bank of India (RBI), which was till such time pushing for consolidation in banking. More than a year later, there is no sign of the draft rules even after Mukherjee said in this year’s budget speech that RBI would issue guidelines on new banking licences by 31 March. This has not happened because the finance ministry is not happy with the draft prepared by the central bank. It wants too many changes. RBI first prepared a discussion paper on the subject in August and sent the first draft guidelines to the ministry ahead of this year’s budget. But the ministry has not cleared the guidelines yet. It is pushing hard for the regulator to make some changes—big and small—and RBI is willing to accommodate some but not all. We don’t know when the regulator will be in a position to release the draft guidelines. Let’s take a look at the suggestions of RBI. I have not reviewed the draft guidelines prepared by the central bank, but from various sources who have direct and indirect knowledge of what it contains, I understand that RBI is ready to allow big industrial houses to set up banks if it gets the power to supersede boards of banks that are not being run properly. It also wants the right to oversee the operations of the promoting company and any affiliates that will have business relationships with the bank. This is being done through an amendment of the Act that governs banking in India. Mukherjee in his February 2011 budget speech promised the changes in the Act, and the proposed amendment to the Act was tabled in Parliament during the budget session itself. Currently, RBI does not have the power to dismiss a bank board, but under section 45 of the Banking Regulation Act, 1949, it can force the amalgamation or merger of a bank with another, and force a reconstruction of the board to protect the interests of depositors, shareholders and employees. RBI is also in favour of an industrial group setting up a holding company to own the bank and other financial services companies of the group, keeping the manufacturing and trading business out of it. This will help the Indian central bank regulate the group better. The so-called wholly-owned non-operative holding company, according to the draft, should be registered with RBI as a finance firm and governed by a separate set of prudential guidelines. Those industrial groups that will be allowed to set up banks will have strict restrictions on exposures to other group firms. The regulator is not comfortable giving a licence to any industrial group that gets 10% of its income from real estate or the broking business. The minimum capital a new bank would need is pegged at Rs. 500 crore, and the RBI paper that is lying with the finance ministry also insists that the new banks need to be listed within the first few years. Among other things, the draft guidelines outline how much the foreign shareholding should be in a new bank, and how fast the promoter needs to pare its stake from 40% to 15%, and says rural branches should constitute one-fourth of the branch network to ensure the spread of banking services. Although the new private banks that have been functioning are required to have at least 25% of their branch network in rural and semi-urban India, most have focused only on semi-urban centres and have ignored rural India. This time around, RBI does not want to take any chance, and it wants the new banks that will be given licences to spread banking services in even remote and thinly populated villages. I am told that the finance ministry is not comfortable with RBI’s suggestions on paring the promoter’s stake within the first few years as well as capping the foreign stake. It also does not want RBI to be bluntly saying that no industrial house with exposure to the real estate sector will be allowed to set up banks, even though it appreciates the spirit behind it. Similarly, it is not very excited about the central bank’s insistence on rural banking and tough talk on superseding bank boards. I don’t know when the finance ministry will finally give its green signal. After its nod—and necessary changes—RBI will release the draft guidelines, seeking public comments. It will take a few months more to prepare the final guidelines. And all applications seeking banking licences will be examined by an external group before RBI considers them. I will not be surprised if we hear Mukherjee in his February 2012 budget speech reiterating his commitment to allow new private companies to establish banks. What is not clear is: why did RBI have to send the draft guidelines to the finance ministry? After all, it’s a mere draft, and it will be finalized only after receiving comments and feedback from various quarters. Couldn’t RBI have gone ahead with the draft guidelines and taken into consideration the government’s feedback before finalizing it? There are various theories doing the rounds. One is the regulator’s reluctance to be solely responsible for drafting the guidelines for the most critical segment of the financial segment when the second-generation spectrum licensing scam is emerging as the largest political corruption case in India. For the same reason, the government also is not in a hurry to push new banking licences, many in Delhi say. The delay, it seems, is deliberate, and neither the government nor RBI is too keen to welcome a new set of private banks in a hurry.
RBI likely to pull up 7 banks for flouting currency regulations
MUMBAI: Banks will face regulatory action and penalties for old derivative deals where currency laws were flouted and complex products missold to companies. The Reserve Bank of India (RBI), which has been scanning the derivative books of banks for close to a year, has identified the errant banks and the nature of irregularities . A fortnight ago, in a meeting with senior members of the money and currency markets, the banking regulator spelt out that errant banks will be pulled up. Seven banks, including six private and foreign banks and a state-owned lender, may be pulled up by RBI, said a source familiar with the development . "RBI has come up with specific views on each bank and the penalty will depend on how severe the violations are," said the person. The central bank has conveyed its decision to association of money market dealers, currency dealers and the lenders' lobby, Indian Banks' Association. "In some cases, it may just be a rap on the kuncles and word of caution. But some will be fined. That's the impression we get," a senior banker told ET. RBI had sought information and went through derivative deals of as many as 22 banks. It has now come to a conclusion that some banks had entered into transactions that were not only sharp but unacceptable. "The penalty to be imposed is relevant as banks had marketed high risk products," said Sandeep Parekh , lawyer, Finsec Law Advisors. "This move will give further teeth to the demand for a further probe by a law enforcement," he added. "Banks had structured these derivative transactions in accordance with the RBI guidelines. If the RBI imposes a penalty corporates and the authorities would be convinced that the banks were at fault. This would weaken the banks defence," said a lawyer who had handled the case of a private sector bank. "If the penalty is imposed the only positive is that the court may rule against a CBI probe as it would be convinced that the regulatory body has taken prudential action," he added. "Banks have stopped marketing these exotic derivatives since 2008 hence this move will not have any significant impact on the derivatives market. At present, banks are offering plain vanilla products," said a senior banker. Over-the-counter derivatives help companies to hedge against fluctuations in foreign exchange and interest rates. Banks had sold currency derivatives to enable corporates of all sizes to either improve the earnings on their exports, or lower the outgo on imports or cut the interest and repayment cost on loans.
Co-op banks take RBI to court over Parekh losses' write-off
In another case of a regulated entity taking the regulator to court, the Gujarat Urban Co-operative Banks Federation (GUCBF) has petitioned the Gujarat High Court, seeking relief from a circular issued by the central bank. The case relates to the Madhavpura Mercantile Co-operative Bank (MMCB), which was trapped in the 2001 Ketan Parekh scam and had lost money heavily. The 150-odd Gujarat-based co-op banks had kept deposits with MCCB, which was also acting as the clearing bank for many of these smaller banks. In December, RBI issued a circular asking them to write off all the losses in one go in the financial year 2010-11. If implemented, the net worth of at least four co-op banks from Gujarat would get wiped out. Most banks have partially provided for such losses and a few have provided for fully, but the four smaller banks whose net worth would get wiped out have joined the federation in filing this petition. The petitioners have told the court that “on account of the negative impact on the balance sheet, there would be erosion of faith” that can lead to the depositors resorting to massive withdrawals. “This would further affect the working of the bank. The bank would also not be in a position to maintain the statutory CRR (cash reserve ratio) and SLR (statutory liquidity ratio). This would again lead to further action under the Act, making it virtually impossible for the bank to survive and function,” they said. The High Court has admitted the petition and has issued notices to the Union government, RBI, CBI, Central Registrar and MMCB. The case is scheduled for hearing on Monday. The federation has also asked the court to set aside RBI’s December circular. The banks’ representation to RBI has not helped them in securing more time for making such a provision. They have represented to the RBI, seeking seven years’ time to make full provision. The petitioners have also requested the court to ask the investigators to file a report and show how money is being recovered from Ketan Parekh. When contacted, Jyotindra Mehta, chairman of the Gujarat Urban Co-operative Banks’ Federation said, “The recovery of dues from Parekh could solve the problem. RBI should provide for more time for the revival of MCCB, which is under way, and the RBI deadline will end in the second quarter of the current financial year.” A committee led by a retired IAS officer is trying for the revival of MCCB, leading accounting firm Deloitte was appointed to suggest a plan. Deloitte had submitted an interim report and the final one is expected soon. “The RBI deadline for MCCB revival is ending in the next quarter, which should be extended to give revival a chance,” said Mehta. The federation has also petitioned the High Court to direct the Central Bureau of Investigation and the authorities concerned to take effective steps for recovery of amounts outstanding from broker Ketan Parekh and his firms. It has sought a speedier investigation and the cancellation of broker’s bail.
Monetary Policy, Inflation and Depositors – S.S.Tarapore
The Common Person could live with the current inflation rate if it were a 'true' indicator of inflation which is commonly known to be much higher than what the official indices show. The Reserve Bank of India ( RBI) is scheduled to announce its first quarterly monetary policy review of 2011- 12 on May 3, 2011. There would be considerable interest as each set of players would evaluate it from their own viewpoint. What then should the Common Person look for in the monetary policy? The central anxiety, for quite some time, has been the acceleration of inflation. Inflation is hurting the vulnerable sections the most. What is the extent of inflation? There are various ways of measuring inflation but the official focus in India is on the year- on- year change in the Wholesale Price Index ( WPI). This index does not correctly reflect the impact on consumers. The authorities are making efforts to have a comprehensive Consumer Price Index ( CPI) and although this has been undertaken there is need for the new index to stabilize before it becomes relevant for policy purposes. The RBI has many constraints in dealing with inflation. The RBI does not have a single inflation target while the issue of growth predominates and quite often inflation becomes a secondary objective to overall growth. Policymakers have repeatedly said that monetary policy should not do anything which would jeopardize growth. This has blunted the efficiency of monetary policy. RBI's comfort zone was all along meant to be around a 5 per cent inflation and higher inflation rates would invite monetary policy action. In this context, the present episode of a prolonged high inflation rate has made a dent into RBI's credibility. The RBI's cherished goal of a medium- term inflation rate of 3 per cent is no The kind of inflation we now have is generalized and not restricted to a few sectors and it no longer makes sense to go on talking about supply side inflation. It is heartening to see that the government is somewhat subdued on the issue of growth and now concedes that some sacrifice of growth would be necessary if inflation is to be brought under control. The Common Person could live with the current inflation rate if it were a ' true' indicator of inflation which is commonly known to be much higher than what the official indices show. Moreover, what hurts the Common Person is not the rate of inflation but its level. Illustratively, when mong dal prices rise from Rs 60 per kilo to Rs 100 per kilo the increase is 66.6 per cent, but when it rises further to 120 per kilo, we are told that the rate of increase has come down from 66.6 per cent to 20 per cent. Now when the price comes down to Rs 105 per kilo we are expected to rejoice and forget that a price of Rs 105 per kilo is historically very high causing great distress to the Common Person. It is time the Common Person is not deceived by these numbers and told the true story which would then push monetary policy to take stronger action to tackle inflation. It would be unfair to only blame the RBI as the problem lies elsewhere. The government wants its borrowing programme to go through smoothly without unduly high interests and at the same time expects that adequate credit is made available to the commercial sector. To meet these conflicting objectives, the RBI keeps the system sloshing with liquidity. This also enables banks to keep lending What the RBI has done is to fix its current policy repo rate at 6.75 per cent ( the repo rate is the rate at which RBI provides liquidity to banks against the security of government securities). The RBI has, over the past year or so, undertaken eight increase of the repo rate, each of ' baby' steps of 0.25 per cent. The current policy rate is totally ineffective. Given the present inflation rate, what is required is a full one percentage point increase in the repo rate but the present philosophy of the RBI would not permit it. The May 3, 2011 increase in the repo rate should be, at least, 0.50 per cent. The RBI would do well to take a leaf out of the Chinese central bank's policy which prefers strong monetary policy action. The other powerful instrument is the cash reserve ratio ( CRR) under which the RBI presently impounds 6 per cent of deposits of banks. An increase in the CRR by 0.50 per cent, which would impound Rs 25,000 crore of liquidity, would be appropriate. But the RBI has been shy of using this instrument during the past two and a half years. Here again, the RBI needs to closely study the active Chinese CRR policy. A victim of the present monetary policy has been the depositor who faces negative real rates of interest as the return to depositors is less than the inflation rate. It is true that, in the February- March 2011 period, some banks offered rates as high as 10 per cent. This was largely to swell the balance sheet numbers for March 31, 2011. Predictably, these banks have, in early April 2011, cut back deposit rates by one percentage point. Depositors are the mainstay of banks but they are not fairly remunerated. All that depositors can pray for is that the RBI, on May 3, 2011, shifts gears to undertaking a strong tightening of monetary policy. The RBI is at the cross roads. If it chooses the path of tightening monetary policy it would be criticized by vested interests, but if it does not it will be condemned by history for not alleviating the suffering of the masses.
Sunday, April 24, 2011
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