While the RBI has cracked down decisively against inflation, the Finance Ministry needs to work more on fiscal consolidation. In its Monetary Policy Statement for 2011-12, the Reserve Bank of India has come out boldly and decisively in its battle against raging inflation. For the first time over the past one year, inflation control has received precedence over growth. With inflation showing no signs of abating, the RBI now seems reconciled to sacrifice some growth in the short run. It is now for the government to take the RBI's cue. Earlier, many commentators had said that the RBI continues to remain behind the curve in raising its policy rates by 25 basis points at a time even as inflation continued to surge ahead. Admitting that headline and core inflation have overshot even the most pessimistic projections over the past few months, the RBI has now opted for a decisive change in stance, according top priority to inflation control. According to RBI Governor Dr. D. Subbarao, the monetary policy trajectory that is being initiated is based on the following basic premise: Over the long run, high inflation is inimical to growth as it harms investment by creating uncertainty. Announcing the changes in the operating procedure of monetary policy, the central bank has stated that henceforth there will be only one independently varying policy rate, and that will be the repo rate. This has been done to more accurately signal the monetary policy stance. The reverse repo rate will be automatically pegged at 100 basis points below the repo rate. Also, a new Marginal Standing Facility (MSF) has been introduced. Banks will be able to borrow overnight from the MSF up to 1 per cent of their respective net demand and time liabilities (NDTL) at an interest rate that will be 100 basis points above the repo rate. This is intended to ensure that the banks do not face any sudden liquidity crisis. The repo rate has now been raised by 50 basis points from 6.75 per cent to 7.25 per cent. In a more significant change, it has been decided to raise the interest rate on savings deposits from the prevailing 3.5 per cent to 4.0 per cent with immediate effect. This could be interpreted as a precursor to deregulating this rate in the coming days. This rate had remained unchanged since March 2003 even as the real interest rate turned negative by a big margin because of the high rate of inflation. Because of high oil and other commodity prices and the impact of the anti-inflationary monetary stance, the RBI expects the real GDP growth during 2011-12 to moderate to around 8 per cent from the estimated 8.6 per cent in 2010-11. With regard to the WPI-based inflation, the RBI expects it to remain at an elevated level in the first half of the year, before gradually moderating to six per cent by March 2012 with an upside bias. Persistence of high international crude prices as also the prices of other commodities could keep the inflation rate at a much higher level. Moreover, the rate hike of 50 basis points and the increase in the savings bank will increase the cost of funds of the banking sector. This, in turn, will force the banks to raise their lending and also the deposit rates. For ensuring the efficacy of the aggressive monetary policy stance , there is a need for complementary action by the Finance Ministry aimed at fiscal consolidation. Unfortunately, the Centre's fiscal situation continues to remain worrisome. To add to the problem, the fiscal consolidation process that was witnessed in most States during the four years from 2004-05, has taken a turn for the worse during the past couple of years with economic slowdown following the financial crisis. The problem was further accentuated with the implementation of new pay scales recommended by the Sixth Pay Commission. The surging crude oil prices have seen the subsidies on petroleum products zoom to unprecedented levels. At current prices, the oil marketing companies (OMCs) have been losing about Rs18.19 a litre on diesel, Rs29.69 a litre on PDS kerosene and Rs329.73 per LPG cylinder of 14.2 kg. The OMC's losses are estimated at Rs1,80,208 crore during the current fiscal. Not surprisingly, the RBI has recommended an immediate hike in fuel prices.
The very purpose of VITALINFO is to provide a platform for wider dissemination of updated information related to and happening of events in and around RBI.
Wednesday, May 11, 2011
Concerns of capital inflows less acute in India: Subbarao
Reserve Bank of India (RBI) Governor D Subbarao said the concerns of capital inflows in India due to the interest rate differential were less severe than other emerging market economies. This is because capital inflows helped India to finance its capital account deficit. He, however, conceded volatility remained a concern. “Yet, even for us, the composition of the inflows remains an issue. About three-quarters of the current account deficit since 2009 has been financed by volatile capital inflows,” he said. In August 2010, the US Federal Reserve had announced its plan to buy $600 billion worth of government securities in the second round of quantitative easing. This could have had a significant negative impact on emerging market economies, said Subbarao. He said the quantitative easing also seemed to contribute to rising global commodity prices, which intensified inflationary pressures. “This combination has put some emerging market economies in a policy bind, since rising inflation necessitates tighter monetary policy. However, higher interest rates would only intensify volatile capital inflows, potentially putting more pressure on exchange rates and domestic stability,” he said. He added while the quantitative easing contributed to a stronger and more durable recovery in the US, it also benefited emerging market economies, including India. While addressing the Swiss National Bank- International Monetary Fund conference on the international monetary system in Zurich today, the RBI governor said there was a need to develop a proper framework for analysing linkages among economies. “We cannot do this by using current trade equations and attributing all the other spillovers to exogenous financial shocks. We need a deeper, truer, understanding of the channels and mechanisms that link our economies together,” he said. In order to deal with spillovers, Subbarao said there could be policy agreements through which countries could abandon policies that create negative spillovers, in exchange for other countries taking policy action with positive external spillovers for them. “Designing such deals and getting countries to agree to them, however, would remain a major challenge,” he said. He added RBI did not intervene in the foreign exchange market since the last two years. “This policy has served the economy well, since it allowed the exchange rate to serve as a buffer, depreciating to help the economy when it was weak and appreciating to reduce excess demand when it was strong,” he said. The RBI governor also said India’s policy was subject to negative externalities from countries that maintain undervalued exchange rates, undermining competitiveness in third markets and efforts to contain the current account deficit.
For a good central bank
The Economist once wrote that the only good central bank is the one that can say no to politicians. On Monday, the cautious D. Subbarao, governor of the Reserve Bank of India (RBI), came as close as he could to saying that. In his comments at the meeting of the central bank governance group in Basel, Subbarao, among other issues, argued for creating a formalized monetary policy committee (MPC) architecture. The situation today is that while the governor is advised by a technical advisory committee, the final call on setting the policy rate is his alone to make. A proper MPC—which should include the governor, the four deputy governors along with outside experts—would give binding advice on setting of policy rates to the governor. The RBI chief said a precondition for this was to get legally backed autonomy for the central bank, something that the RBI Act 1934 does not provide. While RBI’s ability to steer independent monetary policy is, by and large respected, there is, however, a catch. Between the arm-twisting by the Union government that the RBI Act enables and legally backed autonomy, there is a wide and opaque space for jousting between the government and the bank. The exact balance depends on circumstances. This is hardly the stuff of rule-based monetary policymaking. The case for independent central banking rests on one fundamental economic reality: in the long run, there is no trade-off between inflation and growth. And the conclusion is that there is no case for political decision making in this domain. In India, there is disbelief among politicians that this is so. It is only for the past 14-15-odd years that the central bank has been allowed to set policy rates without extraneous considerations. Left to their devices, finance ministers would stitch together a patchwork of short-term trade-offs between growth and inflation and call it policymaking. With frequent elections at the state and Central levels, this can only lead to economic chaos and it has for long. So far, the Union government has never seriously implemented rule-based fiscal policy. The Fiscal Responsibility and Budget Management Act was jettisoned at the first opportunity in the name of crisis management. If, however, the central bank were to have an MPC framework with formal autonomy, things could change. Once the central banks set policy rates only with a view to fighting inflation, it could potentially nullify the gains the governments hope to make politically by reckless spending. The short-term growth inflation trade-offs could become history. The Union government is unlikely to listen to Subbarao, but a future reform-minded government could well undertake the necessary steps.
Now, Sangli bank gets notice from NABARD
Days after the board of directors of Maharashtra State Cooperative Bank was superseded by the Reserve Bank of India (RBI), yet another bank — Sangli District Central Cooperative Bank (SDCCB) — has come under a cloud. The National Bank for Agriculture and Rural Development (NABARD), on Monday sent a notice to SDCCB seeking clarification on wrong loans leading to the bank’s negative net worth. In its audit report for 2008-09 and 2009-10, NABARD observed that SDCCB’s credit had exceeded its deposits. The bank had offered loans worth Rs 168 crore to three cooperative sugar factories — Vasantdada, Manganga and Mahankali — even though these institutions had their loan accounts in “short margins”, meaning default. Action against SDCCB came four days after RBI appointed administrators over MSC bank, which is the principal funding agency for all district cooperative banks in the state. Instead of showing those loans as non-performing assets (NPA), the SDCCB showed them as ‘profit making’ in its accounts. The NABARD in its notice under section 11 (1) asked bank directors to reply within 30 days. The bank and the three sugar factories, to whom it has given loans, are largely controlled by NCP and Congress leaders. NABARD has also observed that the bank wrongly allotted 5% dividend to its member credit societies. SDCCB chairman Dilip Vagyani termed NABARD’s action “politically motivated”. Vagyani and other SDCCB directors said NABARD should have referred to bank accounts of 2010-11 instead of the previous two years. “Accounts of the latest year show that our bank has recorded profit worth Rs 18 crore. NABARD’s hasty action only suggests it was done on other grounds,” Vagyani said. The bank directors have decided to appeal against the notice before the central finance secretary. Meanwhile, deputy chief minister Ajit Pawar said, “When I go to Mumbai I will check all account related documents of the bank and will talk to chairman Manikrao Patil as there have been contradictory reports about its condition.” Pawar and his party criticised the Congress for the RBI’s decision to supersede the bank, terming it a “political move”. Responding to allegations, chief minister Prithviraj Chavan said in Solapur that the state cooperative bank does not belong to any particular party.
RBI failure cause of reduction in India’s growth to 8%, China leads at 9.5
The International Monetary Fund has revised the growth projection of Asian countries. It has projected a downward trend of Indian’s growth for 2011 to around 8% owing to high inflation and overall global economic turmoil created due to rising prices of commodity goods and oil. Anoop Singh, the director of Asia Pacific department of International Monetary Fund stated on May 9th that as new downside risks have emerged across the globe and particularly in Asia Pacific economies IMF have revise downwards the growth for the region and also for India, where the growth momentum would be reducing to around 8%. On the other hand, China is expected to lead the rest of the region by growing at 9.5%. This announcement was made while presenting the latest reports of IMF on the Regional Economic Outlook for Asia and Pacific -Managing the Next Phase of Growth to the officials of Reserve Bank of India. This news comes as another slap on the face of Reserve Bank of India, who has been annoyingly failing to control the growing Inflation in the country. There is no doubt that the lower growth projection of the country is due to RBI’s step of excessive increase in interest rates, that too repeatedly in the last fiscal. For instance, the RBI has raised interest rates by 50 basis points recently, almost double of what the market was expecting. This was not only excessive but such continuous hike in interest rates by RBI is now proved to be uncalled for and it is evident that the government has failed to understand the root causes of inflation. The RBI has evidently come up with the wrong tackling solutions for tackling inflation and the growth rate projected by IMF has now showed the dark side of RBI’s wrong decisions.
India, Pak Mull Banking Facility for Cross Border Trade
Governments of India and Pakistan are considering a scheme formulated by the Reserve Bank of India for providing banking facility to cross Line of Control (LoC) trade in Jammu and Kashmir, a senior state minister said. Minister for Finance Abdul Rahim Rather told a delegation of Cross LoC traders that the State Government is very keen to give a big boost to the trade between the divided parts of the state, for which all the required measures are being taken. Rather referred to Government initiatives taken for establishing of Bank transaction facilities for the conduct of cross LOC trade through banking transactions. "RBI has already framed a comprehensive scheme which is under consideration of the Governments of India and Pakistan. Once the scheme gets the nod, the Banking facilities would be put in place as per the urges and aspirations of the traders," he said. The Minister said the traders from other side of the LOC in Pakistan-occupied Kashmir are also keen to have the trade through Bank transactions. "The facility would take over the place of existing barter system of trade, which has various inherent problems concerning the traders’ community," he said. The Minister expressed hoped that respecting the aspirations and expectations of traders in PoK, Government of Pakistan will also take all facilitating steps for promoting this bilateral trade. Rather said the State Government has been interacting regularly with the Centre for including more items in the existing trade itinerary wherein only 21 items have been notified for transaction from Jammu and Kashmir State. Responding to the pleas of the traders, the Minister said legally and constitutionally the cross LOC trade is an intra-State trade.
Tuesday, May 10, 2011
RBI invites application for post of NIBM director
Mumbai : The Reserve Bank has invited application for the post of director of the National Institute of Bank Management (NIBM). NIBM was established in 1969 by the Reserve Bank of India in consultation with the Government of India as an autonomous apex institution, with the mandate of playing a proactive role of think tank of the banking system. The institute seeks a director who shall also be the Chief Executive Officer of the institute, RBI said in an advertisement. The director enjoys the pay scales and other facilities at par with the directors of IIMs and IITs. The appointment will be for a three to five years term or till maximum age of 65 years, it said.
RBI seeks law-backed autonomy to deal with monetary issues
Mumbai, May 9 (PTI) The Reserve Bank of India (RBI) today pitched for ''law-backed'' autonomy to be able to deal more effectively with monetary issues. While maintaining that the government has not interfered so far with the Reserve Bank''s functional autonomy, RBI Governor D Subbarao made a case for its "legally-backed formal autonomy" while addressing a meeting of the Central Bank Governance Group in Basel, Switzerland. He also made a case for setting up a Monetary Policy Committee (MPC) to advice RBI on policy issues. Such a system prevails in the UK, where MPC advices the Bank of England. "My own view is that we should be moving towards an MPC system, but in a phased manner", Subbarao said. He added, however, that as a pre-conditions for shifting to the MPC system, "...the central bank should be given legally-backed, formal autonomy". Shifting to MPC system, Subbarao said, would become a realistic option with the deepening of financial markets and improvement in operating procedure. Although the RBI Act empowers the Government to give directions to the central bank in public interest, the centre has thus far refrained from doing so. RBI has enjoyed functional autonomy, Subbarao said, adding that there has been no instance so far of the Government exercising its reserve powers to issue a directive. On Financial Stability and Development Council (FSDC), the RBI Governor said, "It is important for the Government and the regulators in India to develop conventions and practices which will serve the goal of preserving financial stability without eroding the autonomy of the regulators". The proposed FSDC structure attempts to strike a balance between the government''s objective of ensuring financial stability to reduce the probability of a crisis and the operative arrangements involving the central bank and other regulators. While the Sub-Committee under the RBI Governor is expected to evolve as a more active, hands-on body for managing financial stability in normal times, the FSDC would have a broad oversight and will assume central role in the time of crisis.
RBI is not an inflation targeting central bank
That will give you the broad context for appreciating the specific issues that I will raise later. | |
| Click to read................. | |
|
RBI: Need Phased Approach to Monetary Policy Committee System
MUMBAI – India's central bank should move in a phased manner to having a committee to take monetary policy decisions, Reserve Bank of India Governor Duvvuri Subbarao said Monday. "When our financial markets deepen further, operating procedures improve and monetary transmission becomes more efficient, shifting to a monetary policy committee system becomes a realistic option," Mr. Subbarao said in a speech at a meeting of a central bank governance group in Basel. The speech was posted on the RBI's website. The RBI governor currently has sole authority to take monetary policy decisions. He consults his four deputy governors, but there is no voting involved and the final decision rests with the central bank chief. A move towards setting up a monetary policy committee with a majority decision deciding the outcome will bring the RBI more in line with international counterparts, including the U.S. Federal Reserve and the Bank of England. The RBI only consults with a technical advisory committee for monetary policy. The committee comprises of the governor as its chairman, the deputy governor in charge of monetary policy as its vice chairman and the three other deputy governors as members. The committee also has five external members--two of whom are experts from the central board of the RBI while the other three are drawn from a wider pool. The RBI recently overhauled its monetary policy framework to move to a single independent monetary policy variable--the repurchase rate. The central bank's other main policy rate, the reverse repurchase rate, will now be automatically adjusted one percentage point below the repurchase rate. It has also introduced a Marginal Standing Facility, which banks can access during acute liquidity stress, at a rate of one percentage point above the repo rate. Mr. Subbarao said some preconditions need to be met before setting up a panel for monetary policy, including giving the central bank legally-backed formal autonomy. The central bank chief reiterated that inflation-targeting wasn't a feasible option in India. "[The central bank] cannot escape from the difficult challenge of weighing the growth inflation trade-off in determining its monetary policy stance," he added.
RBI: Inflation targeting neither feasible nor advisable
MUMBAI: The Reserve Bank of India chief said inflation targeting was neither feasible nor advisable in India and the bank cannot escape the difficult challenge of weighing the growth-inflation trade off. "...In an emerging economy like ours, it is not practical for the central bank to focus exclusively on inflation oblivious of the larger development context," Duvvuri Subbarao said in a speech posted on the Reserve Bank of India's website. "The Reserve Bank cannot escape from the difficult challenge of weighing the growth-inflation trade off in determining its monetary policy stance." He also said monetary policy transmission in India has been improving but it is still a fair bit away from best practice.
RBI unveils MSF norms for liquidity to banks
In line with the annual credit policy announcement last week, the Reserve Bank of India has unveiled the guidelines for the Marginal Standing Facility (MSF) to help banks tide over short-term liquidity problems. The central bank said in a notification that this facility will be effective today. As per the guidelines, a bank can borrow up to 1 per cent of their total deposits from the RBI under the MSF at a rate which is 100 basis points higher than the short-term lending (repo) rate. The repo rate, which was increased last week by 50 basis points, stands at 7.25 per cent. As such, the rate charged under the MSF would be 8.25 per cent. The facility is expected to contain volatility in the overnight inter-bank market. The call money rate was about 6.75 per cent during the afternoon trading session. “Under the facility, eligible entities can avail overnight up to 1 per cent of their respective Net Demand and Time Liabilities (NDTL) outstanding at the end of the second preceding fortnight,” it said. The notification further said that requests will be received for a minimum amount of Rs 1 crore and in multiples of Rs 1 crore thereafter. In the event the banks’ SLR (Statutory Liquidity Ratio) holdings fall below the statutory requirement on account of the use of this facility, banks will not have the obligation to seek a specific waiver for any default in SLR compliance, subject to a ceiling of 1 per cent of their NDTL. SLR is the percentage of total deposits kept in government securities and other specified instruments. Currently, the SLR requirement is 24 per cent.
RBI against setting up of separate debt management office
The Reserve Bank today opined against setting up a separate entity -- Debt Management Office (DMO) -- to manage the sovereign debt of the government, saying only the central bank has the requisite expertise to manage market volatility. "Only central banks have the requisite market pulse and instruments to aid in making contextual judgements which an independent debt agency, driven by narrow objectives, will not be able to do," RBI Governor D Subbarao said at a meeting of the Central Bank Governance Group in Basel. The government is in the process of setting up of an independent Debt Management Office, aimed at separating RBI's role as the decider of interest rate in the market, and at the same time being the banker to the government. At present, both the government's debt and fresh borrowings are managed by the central bank. The Governor further said that in order to achieve monetary and financial stability, separation of debt management from central bank seems to be a "sub-optimal choice". Finance minister Pranab Mukherjee in his 2011-12 budget speech had said that he proposed to introduce the Public Debt Management Agency of India Bill in the next financial year. "The case for shifting debt management function out of the central bank is made on several arguments such as resolving conflict of interest, reducing the cost of debt, facilitating debt consolidation and increasing transparency. These advantages are overstated," Subbarao said. He said market borrowings are the major source of deficit financing at state level and such borrowings are exceeding the absorptive capacity of the market. "That makes it imperative to harmonise the market borrowing programmes of the Centre and the states. Separation of the Centre's debt management from the central bank will make such harmonisation difficult," Subbarao added. He said even internationally, there is closer association between the central bank with sovereign debt management for proper monetary policy and financial stability.
Bank employees cry foul over drafts given to Trinamool
Kolkata: A bank employees’ group Monday alleged that officials of two public sector banks were spreading ‘misinformation’ to justify their decision of illegally issuing drafts to the Trinamool Congress. The group alleged that while issuing the drafts last month the banks violated the Reserve Bank of India (RBI) guidelines because of political pressure. ‘The United Bank of India (UBI) and the Allahabad Bank chiefs have stated deliberate misinformation to confuse and mislead the public regarding issuance of bank drafts to Trinamool Congress,’ Bank Employees Federation of India (BEFI) general secretary Pradip Biswas told reporters here. ‘As a responsible organisation of bank employees, we are clarifying the position,’ he said. He said a city branch of the UBI issued 20 bank drafts, each of Rs.49,500, to the Trinamool Congress April 12 and the sole beneficiary of these drafts was M Power Global Access India Private Limited. One branch of the Allahabad Bank in Kolkata issued a total of 11 drafts, 10 drafts each of Rs.49,000 and one of Rs.10,000, to the Trinamool Congress April 13,’ he said. ‘It is understood that the banks had intentionally structured the transactions. This is gross violation of RBI’s Master Circulars issued July 1, 2010. We have come to know that initially the concerned employees of the banks refused to do so, but because of pressure from the higher authorities they allowed the transactions,’ Biswas said. Allahabad Bank chairman and managing director J.P. Dua in a press conference in Kolkata May 2 said no irregularities had taken place in issuing the demand drafts to the Trinamool Congress. ‘No irregularity has taken place. We have followed the rules and regulations,’ he said.
Drabu resigned, was not sacked, says Omar
Srinagar: Chief Minister Omar Abdullah Monday said the government didn’t sack former Jammu and Kashmir Bank (J&K Bank) chairman Haseeb Drabu and also rejected his claims that J&K Bank-RBI agreement was a “sell-out”. Replying to a query about Drabu’s claims that the J&K Bank was going to lose its identity in the next two to three years due to the pact with RBI, Abdullah termed the JKB-RBI pact as “a win-win situation for the state government, the Jammu and Kashmir Bank and people of the state.” He added, “Drabu was not sacked by the government but resigned on his own.” RBI has not bought over J&K Bank. It continues to be the property of Jammu and Kashmir’s people, and the state’s banker but rather than implementing overdraft facility of Jammu and Kashmir Bank we are implementing the ways and mean position of RBI,” he said. Abdullah said the Union Finance Commission had recommended an award of Rs 1,000 crore to the state government and the provision of borrowing another Rs 1,000 crore at low interest rates from the market. "This will save the state government the interest it had to pay to the Jammu & Kashmir bank, while the bank will have Rs 2,000 crore to pump into the market. The only thing is that the J&K Bank(employees) will have to work harder now, " he said.
Subdued growth may trigger MFI mergers
Chennai: Growth prospects for microfinance institutions (MFIs) will remain subdued over the medium-term. Operating challenges arising from RBI’s recent guidelines for MFIs, coupled with expected difficulty in raising capital, are likely to trigger consolidation in the sector. However, RBI’s guidelines should ease pressure on MFIs’ profitability, as it has relaxed some recommendations of the Malegam committee, a Crisil research said. Furthermore, the continuation of priority sector status and steps to enhance transparency and governance should improve stakeholder confidence and enable resumption of bank funding. It is believed that clarity on regulatory jurisdiction for MFIs is a critical next step for long-term sustainability of the sector, the research said. Rupali Shanker, head, Crisil Ratings, said, “The MFI sector’s growth is likely to remain subdued over the medium-term, especially in regions with high microfinance penetration, because of proposed regulatory restrictions on multiple lending, loan size, and end-usage of loans. This will provide an impetus for consolidation in the sector.” To comply with the new regulations, MFIs will have to enhance their internal systems and processes, strengthen their monitoring mechanisms, and invest in training their employees, she added. “Crisil also expects RBI’s guidelines to provide cushion to MFIs’ profitability and enable resumption of bank funding to MFIs. RBI’s guidelines are largely based on the Malegam committee recommendations, with some modifications: RBI has allowed a higher cap on interest rates and margin (of 26% and 12%, respectively) and has clearly defined the manner of computation for these caps,” she said. Pawan Agrawal, director, Crisil Ratings, said, “The regulatory jurisdiction for MFIs, however, remains unclear. While RBI has created a new category of non-banking financial companies to regulate the MFI sector, multiple regulators continue to oversee the sector. A clearer regulatory framework will remain critical to instill greater confidence in the sector.”
Suman Bery: Monetary policy - where next?
The RBI is becoming more accountable. What is the Reserve Bank of India’s (RBI’s) view of the Indian economy’s prospects over the next 18 months? Does this view justify the RBI’s move to more aggressive monetary policy actions announced on May 3? These are questions T N Ninan rightly raised in his column titled “The wrong war?” on May 7. These are also questions that are directly, if not wholly, addressed convincingly in the monetary policy statement issued in the name of the RBI governor that day. The early summer statement of monetary policy is by convention the most authoritative articulation of the RBI’s goals and stance. It is based on data for the previous fiscal year, and takes into account the Union government’s fiscal stance indicated in the Budget. The primacy of this statement dates back to a more sedate era when domestic influences were paramount, and it was still possible to speak of a policy for the “busy” and the “lean” season. I am not aware that any of the other major central banks follows an equivalent ritual in the more globalised and fast-paced environment for monetary management today. Nonetheless, I think this practice is worth preserving to provide an accountability benchmark for the year as a whole. The governor’s case is most compactly enunciated in the introduction. He admits that the resurgence of inflation in the last quarter of 2010-11 came as an unpleasant shock. While asserting that the initial trigger came from abroad, in the form of a surge in commodity prices, he argues that “the fact that these were quickly passing through into the entire range of domestic manufactured goods indicated that domestic pricing power is significant. In other words, demand has been strong enough to allow significant pass-through of input price increases. Significantly, this is happening even as there are visible signs of moderating growth, particularly in capital goods production and investment spending, suggesting that cumulative monetary actions are beginning to have an impact on demand”. What is one to make of this remarkable formulation? Taken at face value, it seems to assert that pricing power in domestic non-food manufacturing has increased rather than decreased in a slowing economy. A more charitable interpretation would disassociate the recent commodity price spike (mainly in fuels and metals) from pricing power in manufacturing, but this would then raise the uncomfortable question of why this pricing power has surfaced now when it was largely dormant in the golden growth years up to 2008. In making the case for monetary tightening, the statement cites three proximate factors. These are the outlook for global commodity prices, the overshooting of inflation in recent months, and the fiscal outlook on a business-as-usual, no-reform scenario. These “momentum” factors are only partially offset by the already perceptible slowing of the economy. The summary judgement is: “Current elevated rates of inflation pose significant risks to future growth. Bringing them down, therefore, even at the cost of some growth in the short-run [sic], should take precedence.” Press reports about reactions from the finance minister, the deputy chairman of the Planning Commission, the chairman of the Economic Advisory Council to the Prime Minister and the chief economic advisor suggest that the decision to sacrifice growth at the altar of inflation control enjoys at least a modicum of support throughout the government, no matter how slender the analytic basis. To its credit, the RBI has this time committed itself to a more specific view on the outlook for growth and inflation, with a confidence margin associated with each. In the case of growth, the range of outcomes is projected as lying between 7.4 and 8.5 per cent, with a central level of 8 per cent and the balance of risks on the downside. In the case of inflation, the statement frankly acknowledges the RBI’s poor performance in predicting year-end inflation in 2010-11, at substantial cost to its credibility. The baseline projection for March 2012 is placed at 6 per cent with an upward bias. In addition, in an effort to manage expectations, the RBI warns that “inflation is expected to remain at an elevated level in the first half of the year due to expected pass-through of increase in international petroleum prices to domestic prices, and continued pass-through of high input prices into manufactured products”. It is instructive to link this discussion to controversies on the appropriate framework for monetary management raging elsewhere in the world. Neither of these is particularly novel, but both are relevant to the situation facing India at this time. The first is the familiar debate on rules versus discretion in the conduct of monetary policy; the second is the suitability of a formal inflation target in the Indian environment, something that the RBI has consistently and repeatedly rejected. It should be stressed that these are quite distinct debates, in that the implementation of an inflation-targeting regime actually requires entrusting the central bank with almost total discretion in the tools it deploys to hit its target. As against this, the rules versus discretion debate essentially revolves around the near impossibility of timing monetary policy actions correctly so that they act as a force for stability rather than instability. It would be irresponsible to ask the RBI to commit itself to a formal inflation-targeting regime under the fiscal and debt circumstances that currently prevail in India. However, this does not prevent it from giving primacy to what the Raghuram Rajan report called a “low inflation objective”. Indeed, the record of non-intervention in the foreign exchanges under the present team in the RBI, coupled with the finance ministry’s continued maturity on the issue of capital flows, suggests the RBI is now focused on delivering low and stable inflation. It has now publicised the indicator, namely the wholesale price index for non-food manufacturing, which it intends to monitor as an indicator of demand pressure in the economy. And finally we have “fan charts” for growth and inflation, as well as a clean-up of the system of policy rates. So at the end of the day, despite my initial concerns, I come away with the feeling that the RBI is moving in the right direction in terms of how it should be held accountable. It is now up to the rest of the research community to give it the tools it requires to do its job.
Deregulation may bring added costs on savings a/c holders
With Reserve Bank of India in all favors for deregulating savings bank account rates, customers are expected to be in a win win situation. But the scenario may not completely be a win win for customers in reality with lenders planning to levy charges for the services associated with this account. The RBI has recently raised the savings bank account rate to 4% during the annual monetary policy of this fiscal. The transaction charges will go up for the consumers if the rates on savings bank accounts keep on going up...the banks also have to survive," HDFC Bank Managing Director Aditya Puri said. "The pressure on net interest margins is likely to further increase if the RBI deregulates savings account deposit rates," said credit rating agency Crisil. Central Bank of India Chairman and Managing Director S Sridhar said, "Levying of transaction charges is a trade-off." "If you go to any foreign country, banking is so costly...banking is expensive. Try getting a cheque book in a foreign bank," he said.
Corporation Bank opens microfinance branch
Mangalore-headquartered public sector lender, Corporation Bank has opened a new micro-finance branch in Hyderabad in its bid to increase financial inclusion initiative of the bank. “The basic objective of opening a micro finance branch is to help the weaker sections of the society especially women through financial inclusion, micro credit and financial literacy,” a bank release said. The other major areas of functioning of this branch will be direct lending to self help groups, NGOs, MFIs among others with provision for micro insurance products like Janashree Bima Yojna, Jeevan Madhur, Jeevan Mangal of LIC through group approach and micro pension. “The special focus of this micro finance branch in Hyderabad will be to address the banking needs of the urban poor,” the release added. The public sector lender has already opened three micro finance branches across the country and this newly opened branch at Kothapet in Hyderabad is the fourth one by the bank. Earlier, Reserve Bank of India has classified all bank loans to micro finance institutions after April 1 as priority sector lending. Corporation Bank has posted a 10.6 per cent rise in its net profit to Rs 345.3 crore in the fourth quarter of last financial year. “The net profits were low on account of higher provisioning for pension liability,” Ramnath Pradeep, chairman and managing director of Corporation Bank said. The bank had to provide Rs 184 crore towards pension liability in the fourth quarter. Total income of the bank grew by 39.5 per cent to Rs 3046.78 crore in this period as compared with Rs 2184 crore reported last year. Operating profit increased by 37 per cent to Rs 746.57 crore during this period. Meantime, while interest spread rose by 29 per cent to Rs 761.76 crore in this period, net interest margin was at 2.48 per cent, up by 18 basis points from the previous quarter.
Is the task of RBI done?
Said simply in plain English, real interest rates have been too low to foster real savings and investment
Read more..................
Read more..................
Let committee, not governor, take monetary decisions: Subbarao
RBI Governor D Subbarao on Monday proposed that all monetary policy decisions be taken by a committee of the central bank — as is the practice in the US and UK. The Federal Open Market Committee of the US Fed and the Monetary Policy Committee (MPC) of the Bank of England decide on actions by a majority vote. In India, the final call is the RBI governor’s. The governor does hold structured consultations with the four deputy governors with whom he constitutes an informal monetary policy committee, but there is no voting, and the final decision is the governor’s. “My own view is that we should be moving towards an MPC (monetary policy committee) system, but in a phased manner. There are some preconditions to be met,” Subbarao said at the meeting of the Central Bank Governance Group in Basel today. “We do have a Technical Advisory Committee (TAC) on Monetary Policy that acts as a proxy policy committee, but it is advisory in nature. It comprises the governor as chairman, the deputy governor in charge of monetary policy as vice chairman and other three DGs as members,” Subbarao said. The committee also has five external members — two experts from the Central Board of the Bank, and three drawn from a wider pool — nominated by the governor. “They give specific recommendations on policy options and these are minuted,” Subbarao said. Listing conditions for the MPC system, he said the central bank should be given legally-backed formal autonomy. “Second, in a situation where inflation dynamics are more often dictated by supply side elements, the central bank’s ability to control inflation is restricted. An MPC mechanism in such a situation can weaken the coordination between the government and the Reserve Bank. However, when our financial markets deepen further, operating procedures improve and monetary transmission becomes more efficient, shifting to an MPC system becomes a realistic option,” he said. Close to the policy decision, an established practice for the governor is to meet the prime minister and finance minister informally, give them an assessment of the macroeconomic situation, and indicate to them the proposed policy stance. “This is only a matter of courtesy, and the process has not impinged on the autonomy of the Reserve Bank in monetary policy making,” Subbarao said. The consultation with the finance minister, in particular, should be seen as an avenue for fiscal-monetary coordination, since on a reciprocal basis, the finance minister too takes the governor into confidence on the fiscal stance ahead of presenting the budget to Parliament, he said. “The RBI in effect functions with a functionally autonomous mandate and there has been no instance so far of the government exercising its reserve powers to issue a directive. This is all the more remarkable since the interaction between the government and the Reserve Bank is closer and more frequent than is typical in other countries, and this draws from the key role of the RBI in financial sector reforms and economic development...” Systems of accountability are tight, he said. “Since we are not an inflation targeting central bank, there is no formal memorandum of understanding or a ‘results agreement’ between the government and the Reserve Bank. Nevertheless, we render accountability for our performance on inflation. We explain the rationale for our monetary policy stance quite extensively,” Subbarao said.
Core issues in monetary policy
Inflation targeting is neither feasible nor advisable in India. The RBI cannot escape from the challenge of weighing the growth-inflation trade off. Even if we settle on inflation targeting, we have a problem about which index to target.
More....................
More....................
‘No quick fix solution for lowering inflation
Reserve Bank of India Governor D. Subbarao on Monday said it was unrealistic to expect the central bank to deliver on an inflation target in the short-term. “In an emerging economy like ours it is not practical for the central bank to focus exclusively on inflation oblivious of the larger development context. The RBI cannot escape from the difficult challenge of weighing the growth-inflation trade off in determining its monetary policy stance,” said Dr. Subbarao while addressing the meeting of Central bank governance group in Basel. The drivers of inflation in India often emanate from the supply side, which are normally beyond the pale of monetary policy. In particular, given the low income levels, food items have a relatively larger weight in the consumption basket in India compared to advanced economies and even many emerging market economies. India has three consumer price indices each covering different segments of the population with the weight for food ranging between 46 and 70 per cent. “Monetary policy, as is well known, is an ineffective instrument for reining in inflation emanating from supply pressures.” “An alternative that is put forward is that we could target core inflation rather than headline inflation. That is not a feasible solution either.” An inflation index, with half the basket excluded from it, hardly reflects reality. Moreover, the exclusion of food from the core index can be justified if average food inflation is the same as the average non-food inflation. “If food inflation is higher, as is typically the case in many low income countries including India, then we would be underestimating inflationary pressures on a systemic basis. That would mislead policy prescriptions,” he added. Further Dr. Subbarao said India had a problem about which inflation index to target. The headline inflation index was the Wholesale Price Index (WPI), and that did not, by definition, reflect the consumer price situation. However, getting a single representative inflation rate for a large economy with 1.2 billion people, fragmented markets and diverse geography was a formidable challenge. “The recent introduction of CPI-Urban and CPI-Rural is welcome, but it still does not solve the problem of heterogeneity.” “A necessary condition for inflation targeting to work is efficient monetary transmission. In India, monetary transmission has been improving but is still a fair bit away from best practice,” Dr. Subbarao pointed out. There are several factors inhibiting the transmission process such as an asymmetric relationship between depositors and banks, administered interest rates on postal savings that are not adjusted in line with prevailing interest rate trends and rigidities in the financial markets. All these factors dampen the efficacy of monetary signals and complicate the adoption of an inflation targeting regime in India. Given the compulsions of democracy and the large population of poor, any government in India had always to be, and indeed had been, sensitive to price stability even if it means sacrificing output in the short-term, said Dr. Subbarao, adding, both the government and the RBI had to factor in the short-term growth-inflation trade off in their policy calculations.
RBI team studies mobile banking scheme
PALAKKAD: The Reserve Bank of India (RBI) has deputed a team to study the mobile banking scheme of the Palakkad District Cooperative Bank, introduced last year, to take banking to the remote tribal villages of Attappady. The scheme is part of financial-inclusion programmes of the bank. In the Agali-Attappady area, banking facility is available only at the Agali town now. The mobile bank visits each village once in a week. The people living in the 187 tribal hamlets had no option but walk 20-30 km to reach Agali. Those employed under the MGNREGS in Attappady have benefitted (from the scheme) as the payment is made only through bank, District Cooperative Bank president K.V. Ramakrishnan said.
Wake up Call for Dormant Accounts
RBI asks banks to track down inactive account holders. If you are not operating your bank account due to any reason, you can get a call or an email from your banker very soon for clarifications. Recently, the Reserve Bank of India (RBI) has instructed banks to track dormant accountholders or the person who introduced them to the bank. According to the reports, the central bank has decided to take this step as commercial banks have around 10 million inoperative accounts with unclaimed deposit of around Rs 1,700 crore. The RBI has decided either to revive the dormant account or the balance can be transferred to a new account or legal heirs. An account, whether savings and current, is treated as dormant if there are no transactions in them for over two years. If you give suitable reasons for not operating your account, bank should continue classifying the account as an operative account for one more year.
Monday, May 9, 2011
Act now
The government has done well in starting the process of selecting a new deputy governor (DG) of the Reserve Bank of India (RBI) to fill in the vacancy arising in June (“RBI to interview all 7 EDs for Dy guv job”, May 6). But the question is whether the authorities will be equally fast in making the appointment. Contrary to what the report says, the convention that started in the early 1980s is that, of the four posts of DGs, one each is for RBI, commercial banks, Indian Administrative Service and the profession of economics. When an IAS officer is the governor, as is the case at present, the quota for that service for DGs goes to RBI as an additional post. My own hunch is that until the present Governor’s extension in office or otherwise is decided, bureaucrats would like to delay the appointment of the DG. There are economists with powerful connections aspiring for the governor’s post. If an RBI official becomes a DG now and then an economist is appointed as governor later in the year, the IAS fraternity would have lost its opportunity. The proper course for the government is to take a decision now on the post of Governor.
A Seshan, MumbaiDiamond jubilee of RBI staff association in city
GUWAHATI: Reserve Bank Employees' Association, Guwahati, celebrated its diamond jubilee at district library auditorium of the city on Saturday. Inaugurating the programme, Meghalaya Governor Ranjit Sekhar Mooshahary has expressed his happiness over the gathering of RBI employees here. Celebrating the glorious service of 75 years for the nation, the workers of the central bank organized a seminar on foreign institutional investment in the Indian scenario. Resource persons like Alok Sen from Assam University and Nanigopla Mahanta from Gauhati University delivered their lectures on the topic. The association said other programmes were also held.
RBI may make it mandatory for foreign banks to adopt WOS route
NEW DELHI: The Reserve Bank is likely to make it mandatory for foreign banks in the country to operate as wholly-owned subsidiaries, in line with the international practice, so that the central bank can have better control over their working. Initially, according to sources, the new banks and the existing ones with a few branches will be asked to convert into wholly-owned subsidiaries (WoS). The larger banks, they said, could be given some more time to adhere to the guidelines that are likely to be announced by June-end. At present, the foreign banks operate through their branches. Under the WOS model, the foreign banks will be required to set up a subsidiary under the Companies Act and operate as an Indian entity. Sources said that in several countries, including the US and Singapore, it is mandatory for banks to operate as WOS. In order to align Indian laws with the international best practices, the RBI had come out in January with the draft guidelines on the mode of operations for foreign banks in India. At present, foreign banks like Citi, Standard Chartered and HSBC operate as branches, mainly in bigger cities, and do not have the freedom to expand like the banks incorporated in India. In its discussion paper, the RBI has said that it expects large banks to convert them from branches to WOS and that the banks who adopt the subsidiary model would be given preferential treatment for opening of branches. The RBI has further called for making it mandatory for foreign banks with more than 0.25 per cent share in the Indian banking industry to convert themselves from a branch into a WOS. It points out that the government has clarified that a company with a foreign holding of over 50 per cent is a foreign company. At present, there are 34 foreign banks operating in India , with five major banks, including StanChart, HSBC, Citibank and Deutsche, accounting for over 70 per cent of the the total asset size. The discussion paper also said the WOS may be allowed to raise rupee resources through non-equity capital instruments.
The wait for new private banks might just get longer
The Reserve Bank of India (RBI) and the government are unlikely to push through with the final guidelines for issuing licences to new banks until the Parliament approves the Banking Laws (Amendment) Bill 2011. "The passing of the Bill is a necessary condition that will have to be fulfilled before guidelines for new bank licences are finalised," said a finance ministry official on the condition of anonymity. A Parliamentary standing committee is examining the Bill, which was introduced in the Lok Sabha in March. The Bill may come up for approval in Parliament only in the winter session, said sources. The Bill, when legislated, will empower the RBI to dismiss a bank's board and force a reconstruction to protect interests of depositors, shareholders and employees. Conferring the RBI with such powers will allow the central bank to take swift action if it suspects that the board is not functioning objectively or pushing for decisions favouring promoters of the bank. At present, the RBI is not empowered to supersede a bank's board, but can force an amalgamation or a merger among banks. The Bill will also allow the RBI to seek details of associate enterprises of banking companies. The RBI has prepared draft guidelines to allow private players in the banking sector and is awaiting comments from the finance ministry. "It has become necessary for the RBI to be aware of the financial impact of the business of such enterprises on the financial position of the banking companies," the Bill stipulated in is statement of objects and reasons. "This is necessary before allowing industrial houses to set up banks," the official said. The Adiyta Birla Group, Religare Enterprises, the Tatas and Reliance have shown interest in entering the banking sector.
Make it free and be fair to bank customers
RBI is all set to free interest rates in savings bank accounts. The deregulation will help household depositors and the economy in the long run, writes Dilip Maitra
Continue reading.................
WHY THE HURRY TO HIKE LOAN RATES
Quite a few banks last week raised their loan rates. Unlike in the past, this time around, the quantum of hike is half a percentage point. This should make Reserve Bank of India (RBI) governor D. Subbarao happy as he has been harping on faster transmission of the monetary policy. The central bank raised its policy rate on 3 May by half a percentage point. Normally, banks take time to pass on the higher cost of borrowing to consumers and there have been instances in the past when despite RBI hiking its policy rate, banks did not raise their loan rates. Apart from raising its policy rate, RBI also raised the rate of interest that banks pay to savings bank account holders by an identical margin. This has pushed up the cost of savings deposits immediately. When they raise rates on their term deposits, it takes time to feel the impact as only the new deposits earn higher rates while the existing deposits continue to be priced at old rates till they mature. While the industry’s savings account portfolio is roughly about 22% of the overall deposit kitty, the impact on individual bank’s cost varies between 10 basis points (bps) and 15 bps, depending on their composition of deposits. One basis point is one-hundredth of a percentage point. This apart, higher provision requirement for bad loans and restructured loans will also affect banks as they need to set aside more money for such assets. The combination of all three—a hike in policy rate, savings rate as well as higher provision of bad assets—has made money more expensive and banks have no choice but to raise loan rates instantly. Following this, their loan growth will probably slow and quality of assets, too, may deteriorate as some firms may find it difficult to service higher interest cost. The Indian banking industry’s loan book grew 21.4% in fiscal 2011, higher than RBI’s projection of 20% growth. In 2012, RBI wants banks’ credit growth to be 19%. A drop in credit growth will bring down banks’ interest income and, on top of that, if their bad assets grow, they will have to set aside more money to provide for them. This will affect their profitability unless they find ways to bring down their cost of operation and become extra-sensitive to the quality of assets. This means a close monitoring of all loan accounts and a very strict appraisal of new loan proposals. They can earn high interest rate from a loan given to a relatively weak corporation but such an exposure runs the risk of loan default. If that happens, a bank not only stops earning interest on that loan but also is required to set aside money for such an asset. RBI allows banks to restructure bad loans (so that they do not need to provide for them) when there is an economic downturn but no such concession is given when loans turn bad because of indiscreet lending. So 2012 could be a year of conservative banking with a hawk eye on quality of assets, operating cost and fee income. The impact of the policy rate hike is sharper on short-term money. For instance, the yield on 10-year benchmark government bond rose from 8.14% on 2 May, a day before the announcement of monetary policy, to 8.25% on 5 May, but the three-month treasury bill yield, during this time, moved from 7.52% to 7.95%, and that of one-year treasury bill from 7.76% to 8.20%. Bond yields dropped on Friday, 6 May, as a sharp fall in commodity prices encouraged the market to bet on a lower inflation. The price of crude dropped around 12% last week. A bond auction on Friday, the first after the policy rate hike, saw good demand from buyers and no dramatic change in yields. This is good news for the government as there will not be any drastic rise in its cost of borrowing. The Indian government plans to borrow Rs.2.5 trillion from the market in the first six months of the fiscal year till September, 60% of its Rs.4.17 trillion annual borrowing programme. The February budget has pegged the government fiscal deficit for the year at 4.6%, and the money raised from the market will bridge the gap. Analysts are sceptical about the fiscal deficit target as the budget has not made adequate provision for crude oil, fertilizer and food subsidies, and a lot will depend on the crude price movement. For the time being, though, the government is tiding over its short-term cash mismatches by raising money through cash management bills. It raised Rs.32,000 crore in the first five weeks of the fiscal year through such bills and also raised the size of weekly treasury bill auctions. This extra borrowing has, however, got nothing to do with fiscal slippage. It’s just to take care of cash mismatches due to changes in the government’s spending pattern. It is making income tax refund faster to corporations, which, till recently, used to take around six months. Indian firms pay advance tax every quarter on their projected profits and in case the payment turns out to be higher than what they should have paid, the government refunds the difference. RBI will have wholesale price inflation data of April and May, and factory output data of March and April, apart from the gross domestic product figure for the January-March quarter to look at before taking a call on yet another rate hike when it announces its mid-quarter review of monetary policy in mid-June. Of all these, the most critical data to watch out for is non-food manufacturing inflation, which rose to a two-and-a-half-year high of 7.1% in March. The policy rate will probably be kept at a higher level than non-food manufacturing inflation.
Did You know ? | Soon, you’ll get online alerts for all types of card transactions for all amounts
Earlier banks were mandated to send online alerts to cardholders for all credit as well as debit “card not present” transactions for values of Rs 5,000 and above. As per the Reserve Bank of India’s (RBI) circular, you will soon get online alerts for any transaction you make through your debit/credit card, irrespective of the amount, at various channels. RBI has asked all commercial banks to take steps to put in place a system for such online alerts by 30 June 2011. This will make tracking payments a lot easier for you. Until the guidelines were issued, banks were mandated to send online alerts to cardholders for all credit as well as debit “card not present” transactions (when you are not physically present for the transaction such as during online shopping) for values of Rs. 5,000 and above. So if you used your credit or debit card at an online shopping website and the transaction amount was Rs. 5,000 plus, you got an online alert. As per the latest guideline, irrespective of the fact whether it is a “card present transaction” (where you are physically present such as at the automated teller machine or ATM) or a “card not present” transaction, you will get an online alert. This alert is applicable on transactions made over the interactive voice response (IVR) and point of sales (PoS) as well. The mode of sending online alerts has been left to the banks. So you could get email alerts as well as SMS alerts if your email address and mobile number are registered with the bank. The good part is that most banks are already sending alerts to their customers. For instance, ICICI Bank Ltd and Axis Bank Ltd. Many customers have direct debit facility activated on their credit cards—to pay utility bills or even insurance premiums. In such cases, too, the bank will send an online alert. A few banks are already providing such a facility. There is no doubt that online as well as offline financial fraudulent deals are on the rise. In fact, according to RBI, unauthorized and fraudulent withdrawals at ATMs have also been noticed recently. This step will help arrest possible fraudulent activities on your cards, besides helping you track your payments.
In high rates scenario, look for defensive bets
The Reserve Bank of India, in its monetary policy announced on May 3, raised the repo rate by 50 basis points to 7.25% and savings bank rate to 4% from 3.5%. With inflation and crude oil prices staying high, the central bank had little choice but to raise the rates. Soon after the rate hikes were announced, the markets went into a downward spiral. The Sensex lost as much as 617 points in the last week. Interest rate-sensitive sectors like banks, automobiles, real estate, construction and infrastructure fell much more. In response to the RBI policy, banks have raised base rates since their cost of funds has gone up. This would increase the borrowing costs for corporates, hitting their profitability. Market experts also worry that this may hamper growth in the near future. In such a scenario, what should the retail investors do with their portfolio?
NCP banks ensure their money is safe
NAGPUR: The NCP, which holds sway at Maharashtra State Cooperative Bank (MSCB) perhaps knew what was in store for the bank. Even before NABARD submitted a report to the state government damning the bank, five district central cooperative banks (DCCBs) withdrew their deposits amounting to Rs 3,305 crore. The list included the Pune DCCB, known to be the forte of deputy chief minister as well as state's finance minister Ajit Pawar. The other banks are from Ahmadnagar, Sangli, Satara and Kolhapur. The management in all these banks is dominated by NCP leaders. DCCBs and urban cooperative banks normally park their funds to meet the statutory liquidity ratio (SLR) requirements and for other purposes. "There is no urgency of withdrawing SLR money in totality as done by these banks," say sources. It was on the basis of this NABARD report the RBI finally ordered the state government to sack the board of directors. However, by withdrawing the money, the five banks were already safe. Only a select few were privy to the report as well as the likely decision on the board of directors being superseded. Sources say the NCP got a whiff of the likely move and five of its key DCCBs withdrew the money parked here. They probably smelt a rat when inspection notices were issued to MSCB. "The report was submitted to the state government on March 8 but withdrawals were already made. Even today the report remains to be a confidential document and the sudden decision to withdraw the money in lumpsum certainly raise eyebrows," said BJP MLA from Southwest Nagpur Devendra Fadnavis. This matter came to the fore through a legislative assembly question (LAQ) raised by Fadnavis in which the withdrawal was confirmed. The government justified the move saying that the deposits had matured. Even as a majority of the DCCBs in the state have the NCP dominance, these five banks are considered to be premium institutions in Maharashtra's cooperative fabric. It seems that the banks knew that MSCB board would be sacked leading to a panic run by the individual depositors. Though these deposits constitute a small part of the total figure, a run can certainly lead to a larger cooperative crisis with the funds parked by the banks also under threat. "The management seems to have showed financial prudence by acting on the insider information they received," alleges Fadnavis.
MFIs caught between RBI and AP Govt norms
Microfinance Institutions (MFIs) in Andhra Pradesh are in a state of confusion as some of the recommendations made by the Reserve Bank of India (RBI) for the sector are contradicting the rules prescribed by the State Government in its Microfinance Act. Andhra Pradesh accounts for almost 25% of the Rs 30,000-crore microfinance trade in the country. As many as 24 of the total 44 MFIs recognised by the RBI are operating in the State. The central bank, while accepting the Malegam Committee report, recently suggested that the repayment schedule (weekly or monthly) of loan can be chosen by the borrower. However, the AP Micro Finance Institutions (Regulation of Money Lending) Act, 2011 clearly says that the repayment cycle should not be less than a month. The dissimilarity may further affect the already crippling microfinance sector in the State, said Microfinance Institutions Network (MFIN), the representative body of micro lenders. "There is absolutely no clarity on the issue of repayments schedule. There are two people (AP government and RBI) trying to regulate the system. It can only increase the confusion. We will approach RBI, Finance Ministry and also the State Government for further clarity on the whole issue," Alok Prasad, Chief Executive Officer of MFIN, told PTI. The AP Government has no expertise in financial sector regulation. The RBI is the only institution that possesses the expertise and its regulation should be followed, he said. "There is a duality crisis in Andhra Pradesh. The AP government must step out from trying to regulate financial institutions," Prasad said. On the other hand, the state government is up in arms against the RBI's recommendations for the lenders. The government has decided to oppose some of the recommendations announced by the RBI last week as a part of the monetary policy announcement. Reddy Subrahmanyam, Principal Secretary (Rural Development), said the RBI did not address many critical matters like the issue of old loans extended by the MFIs at rates as high as 60%. The interest rate being charged by MFIs should have been capped at 24% as recommended by the Malegam Committee, instead of allowing it to be 26%, he said. "We are going to write a letter expressing our reservations to the RBI and Ministry of Finance," he added. The Rural Development Department of the state is gearing up take the apex bank head on. In a recent communication to its officials, the Society for Elimination of Rural Poverty (SERP), a state government body that is empowered to regulate MFIs, said despite the RBI's recommendations, the Microfinance Act will continue to apply to all MFI operations in AP. "The government has got legislation powers from the Constitution, whereas the RBI's power to issue executive instructions is a statutory power. Therefore, it is not in the domain of the RBI to annul the state legislation," a government circular said. "More so, the Act regulates the money lending aspects and transactions of the MFIs, which (fall) exclusively within the domain of the state government," it added.
Three factors that shaped the monetary policy
Three factors have shaped the outlook and monetary policy for 2011-12. First, global commodity prices, which have surged in recent months are, at best, likely to remain firm and may well increase further over the course of the year. This suggests that higher inflation will persist and may indeed get worse. Second, headline and core inflation have significantly overshot even the most pessimistic projections over the past few months. This raises concerns about inflation expectations becoming unhinged. The third factor, one countering the above forces, is the likely moderation in demand, which should help reduce pricing power and the extent of pass-through of commodity prices. This contra trend cannot be ignored in the policy calculation. However, a significant factor influencing aggregate demand during the year will be the “fiscal situation”. The budget estimates offered reassurance of a fiscal rollback. However, the critical assumption that petroleum and fertilizer subsidies would be capped, is bound to be seriously tested at prevailing crude oil prices. Even though an adjustment of domestic retail prices may add to the inflation rate in the short run, the Reserve Bank believes that this needs to be done “as soon as possible”. Otherwise, the fiscal deficit will widen and will counter the moderating trend in aggregate demand. The latter portion of the third factor is the operative and crucial part which shapes the monetary policy outlook for the current fiscal. The RBI is in a hurry to pass-through the high oil prices to consumers. Otherwise, navigating inflation to a soft landing of 6 per cent at end March 2012 would end up as an unfinished agenda for the central bank. The monetary policy trajectory that is being initiated in this annual statement is based on the basic premise that over the long run, high inflation is inimical to sustained growth as it harms investment by creating uncertainty. Current elevated rates of inflation pose significant risks to future growth. Bringing them down, therefore, even at the cost of some growth in the short-run, “should take precedence”.
Freeing the SB deposit rate
There has been much talk and debate about the Reserve Bank of India monetary policy that increased the key policy rate by half a percentage point. That headline grabber hogged so much limelight that the other significant prescription on increasing the savings bank accounts rate from 3.5 percent to 4 per cent almost went buried under the anti- inflationary hammer of the RBI. The monetary policy of last week marked a significant shift from drawing a balance between growth and inflation to fighting inflation and sacrificing growth. But no less significant was the RBI action on savings deposit rates which have remained unmoved for more than eight years. The increase in the rate of savings deposits has gone without due recognition that the RBI has used its mandate for the first time in many years to bring direct and immediate relief to the common depositors. It is pertinent to point out that in our country, the term “savings bank” is more of a misnomer: it brings access to the banking system but is not a tool to building savings. As such, the rate of 3.5 per cent has remained unchanged since as far back in time as March 1, 2003. The rate of interest on savings deposits was stipulated at 6 per cent in 1992. The rate has been progressively reduced by the RBI until we have arrived at this stage of 3.5 percent, and now 4 per cent with effect from last week. It is remarkable that in the period that saw the biggest and most successful push for liberalisation, a time when our leaders and policy makers repeatedly spoke of opening up the system to take our country on the road to a much touted economic stardom, the one rate that remained pegged and fixed at a ridiculously low level was for the money of the smallest of depositors who would add up to be the largest base of ordinary Indians in the banking system. As much as 84 per cent of the total savings deposits come from the household sector, according to the RBI. This is only typical of the Indian manner of governance where the one with the weakest voice is heard the least, and last. So it would be now in order to congratulate the RBI Governor for taking a step in favour of small depositors, embedded right within the monetary policy and for doing so at a time when the RBI has already put out a discussion paper on the deregulation of the savings bank deposit rate. There will be those who will argue that there was no need for the RBI to act on the savings bank rate even before the voice of the various participants on the discussion paper is heard. Indeed, there are already those who argue that the time is not right for freeing the savings rate, that the banks could suffer asset- liability mismatches and the net interest margins of banks would be badly hit. We have heard all of this before. As the RBI discussion paper itself points out, the central bank weighedin on the subject in 2002- 03 but held back the time was not considered right. It again came up in 2006- 07, when, interestingly, the Indian Banks’ Association (IBA) favoured deregulation “in the long run” but not just yet! The IBA wanted status quo; the RBI delivered it. It would be heartening to see the RBI not succumb this time. Already, the discussion paper has been praised for the quality of its inputs as well as its clear approach in favour of deregulation. This is the approach that sends out the right signals, that sets the ball rolling for change and will deliver the one message that the RBI must and needs to deliver -- that the marble white headquarters building is not an ivory tower for bureaucratic economists, that the RBI is an institution that will stand up for the common man. This is something that the RBI rightly aspires to. And it is the Governor, no less, who spelled out this aspiration earlier this year when speaking to graduate students at the University in Orissa. Here, Dr. D Subbarao candidly admitted that most people, even educated Indians, did not know much about what the RBI does. “ Many people think of the Reserve Bank as a mysterious institution, a sort of monolith doing obscure things that have no real relevance for the everyday lives of people,” the Governor told the audience at the University of Sambalpur. The perception needs to change. And it will change faster when the RBI stands up for the common man, the ordinary Indian and that faceless depositor whose money and trust is the real power behind all that the banking system delivers.
Subscribe to:
Posts (Atom)