Ex-RBI deputy guvs for savings rate deregulation

Mumbai: Even as the Reserve Bank of India (RBI) is weighing options on the deregulation of savings rates in the banking industry, three of its former Deputy Governors—Usha Thorat, SS Tarapore, Kishore Udeshi— have urged it to announce the measure without any delay. Thorat, said, “There are several issues related to the topic. First, the question being raised whether the rate on savings bank deposit be deregulated. I don’t think the issue needs to be discussed anymore. Secondly, the rate of interest on savings bank accounts has been negative for long. The question is why should savings bank rates be kept low at a time when the interest rates are going up’’ Currently, there are 55 crore savings bank accounts in the country. Rural and semi-urban areas in the country have been responsible for 40% of banks’ savings accounts in the country. Deregulation doesn’t necessarily mean that the rates can go up always. Rather, the rates falling below 3.5%, which was the rate before it was raised to 4%, can’t be ruled out, though such periods are quite short-lived. Since 2004, for most of the periods, short-term rates have always been more than that of the savings bank rates, pointed out Thorat. Thorat expected that savings bank rates will move more in tandem with short-term rates. “Yet another moot question is whether unhealthy competition will push up the rates. The rates would go up because they have been put low artificially. For a public sector bank (PSB), a considerable part of savings bank comes from rural and semi-urban areas. Dilemma before the PSBs is that they have to take a call on their depositors at the time of stiff competition. Also , should higher interest rates be paid without cheque book facility. Overall cost recovery is a good thing. It is reasonable to fix various service charges,’’ explained Thorat. Tarapore, suggested that deregulation should be implemented in the first half of the current fiscal itself and no discrimination should be allowed on the basis of size of deposits. “There should be a link between the short-term and long-term deposit rates. In the mature markets, the two rates are aligned,’’ said Tarapore. Udeshi who is also the chairman of Banking Codes & Standards of India (BCSBI) cautioned that the ratio of saving deposits to aggregate deposits is on the decline for past few years. “For decades, the depositors have been getting negative return. But, the competition will show that the return was better post deregulation. Banks are free to fix interest rate charges. The deregulation may lead to product innovation by banks.We must protect the depositors.” added Udeshi.

FE

IOB Sampoorna and IOB Smile launched

People’s cry for the chawanni

Bhopal : As the humble chawanni receives a nostalgia-soaked send-off from many Indians following the Reserve Bank’s refusal to give it any more quarter, some are ready to put up a last stand for the little guy-turned overnight hero. A BJP activist from Indore has moved court alleging the 25-paisa coin’s withdrawal from June 30 is illegal, while many others are dismayed at the silence of politicians and civil society on what they see as a “momentous decision with major financial implications”. One hitch is already being encountered in Madhya Pradesh’s post offices, which are charging 50 paise for the 25-paisa stamps that carry Jawaharlal Nehru’s picture and are used mainly to send medical literature and newspapers by book-post.  Paan shops and small groceries have been rounding off the bills, as are petrol pumps for those two-wheeler riders who buy in small amounts. Neighbourhood photocopiers have raised the rate from 75 paise to a full rupee, the bara aana now having died with its lifeblood, the chawanni. If all this sounds like small change, Bhopal-based industrialist and former head of a chamber of commerce, Rajendra Kothari, disagrees. He estimates that consumers in Madhya Pradesh would be losing Rs 700 crore a year because the 25-paisa coin has been abolished as legal tender. His charge against finance minister Pranab Mukherjee, under whose watch the decision came, is that “no thought was given” to the fact that levies like service tax and value-added tax are calculated “in rupees and paise”. “So, customers are being forced to pay extra for no fault of theirs,” Kothari said. Bhopal civil judge Varsha Sharma has issued a notice to the RBI after BJP activist Anil Bhargava sought a stay on the chawanni’s withdrawal. “Even some medicines are priced in rupees and paise. If the government doesn’t want the chawanni, why can it not announce that anything cheaper than 50 paise will not be charged and that anything over 50 paise will cost a whole rupee? It will at least even out customers’ expenses,” Bhargava said. They will not admit it but at bottom, the reactions of Bhargava and Kothari may have less to do with economic arguments and more with sentimental affection for the underdog and nostalgia for a time when it counted for something. Since last week, many ordinary Indians and celebrities have flooded social networking sites with laments for the quarter, recalling its role as their “tiffin allowance” at school, good enough to buy an ice-cream or chocolate bar —or at least a lozenge or toffee, if the writers are younger. Older Calcuttans will remember that the lowest tram fare was 25 paise even 30 years ago. For all that, the use of the coins, introduced in 1950, had already gone down because of inflation and very few people seemed to have any to return to the banks on June 29 (unless they were holding on to them as keepsakes).

The Telegraph

Growth conundrum: high rates hit industry, but prices out of control

.........."What started out as food inflation has become more generalised. We must use all policy instruments --- interventions in the foodgrains market and fiscal and monetary policies --- to bring down inflation to a more acceptable level," Rangarajan, a former RBI Governor, said...........

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Shoppers grapple with parking blues

CHANDIGARH: Lack of proper parking in Sector-17 not only poses a major problem for visitors, but also, it has turned out to be a menace for traders. Shopkeepers are claiming that due to improper parking conditions in the commercial hub of the city, visitors prefer to go to other places for shopping.  The parking problem in Sector-17 is going from bad to worse and the authorities seem the least bothered. MC is now planning to set up a parking lot near RBI office in Sector-17 and is completing formalities.

TOI

Release function of “India Development Report – 2011”

Is the RBI helpless in dealing with fake currency notes? - Vinod Vyasulu

There has been a spate of recent reports about fake currency notes which is really alarming. A few days ago, it was reported that the Bangalore branch of the Reserve Bank of India had filed a case against the branches of several reputed banks, including the State Bank of India and ICICI Bank for depositing fake currency notes with the RBI.

There was another report on July 4 from Lucknow saying that the RBI had filed a case against 20 well known banks for depositing fake currency notes with it. These were valued at over Rs 6 lakh. Mind you, fake notes circulating in posh areas, among the affluent, not the poor. And these are not isolated incidents, nor are they recent phenomena. It is a strange and yet serious matter that the custodian of currency in India has found no option of dealing with this issue than the courts of law. The courts can certainly penalise the banks if found to be in breach of law, perhaps a failure of due diligence at some level. It appears that the Bangalore incident was indeed a case of lack of diligence. But apart from issuing legal notices, nothing much is likely to happen. But the question is can the court, even if it penalises these banks for negligence, solve the problem of fake currency in circulation? That will be the responsibility of the Union government and the RBI. Conversely, cannot the banks file a counter case saying that they do not control the currency and if the RBI did its job properly, there would be no fake notes in circulation?   The Reserve Bank presently manages the currency operations through its 18 Issue Offices located in various cities. These offices receive fresh banknotes from the banknote printing presses. The Issue offices of RBI send fresh banknote remittances to the designated branches of commercial banks. That being case, the banks could well argue that these notes came from the RBI! There have been complaints of counterfeit currency for a long time from the public. People have been caught off guard at ATMs dispensing fake currency notes. Since the ATMs are controlled by the banks, the systems they have in place to keep fake notes out of circulation are clearly inadequate. We should welcome any improvements in this area.

Printing and smuggling

There have been reports in the Press that Pakistan has a policy of printing fake Indian currency notes and getting them smuggled into India through Nepal, Bangladesh etc. Now, with the RBI going to court against scheduled banks, this seems to have reached a new level of helplessness. Is the government abdicating its responsibility to maintain the currency, by asking the RBI to go to court? Does this absolve the RBI of its responsibility to maintain the sanctity of the currency? The Reserve Bank manages currency in India. The government, on the advice of the Reserve Bank, decides on various denominations of banknotes to be issued. The RBI also co-ordinates with the government in the designing of banknotes, including the security features. The RBI estimates the quantity of banknotes that are likely to be needed denomination-wise and accordingly, places indent with the various printing presses.  In recent years, there has been a shift from cash transactions to those based on electronic funds transfer, like debit and credit cards. Many transactions are conducted using cheques and drafts. This makes it possible for the RBI to consider demonitising high denomination notes, as was done in January 1978. This would make hoards of counterfeit cash useless. The RBI should consider demonitising Rs 500 and Rs 100 notes right away. That will immediately make the counterfeit notes worthless. The issue of identifying such notes, of inadequate due diligence, would also become unimportant—for a while at least. Those who stash black money in cash would also be hit. The RBI could give people, say about 15 days, to deposit their hoard of demonitised notes in any bank, along with their PAN number, and no questions would be asked, in converting some specified amount, like Rs 1 lakh. This would protect the honest people who for some reason had cash. The RBI could also consider a new design of currency notes, perhaps using different materials. Many countries do this in a routine way. Technology can be deployed for this purpose. The transition need not take long. This would be a blow against both counterfeit notes and black money. But it is not likely that the Union government, embroiled in the largest corruption cases this county has known, will ever take such steps. Cosmetic cases in court, which will have no effect, seem to be as far as it is willing to go. We cannot even hope for an improvement in the due diligence procedures.

(The writer was formerly RBI chair professor at ISEC, Bangalore) The Deccan Herald

FSDC to meet on July 27 to discuss growth prospects

New Delhi : The spectre of high inflation and a possible slowdown in the economy continue to weigh heavy on the government’s mind. The recently set up Financial Stability and Development Council is expected to discuss the issue in its next meeting. The FSDC, which consists of the four financial sector regulators and is chaired by finance minister Pranab Mukherjee, is scheduled to meet on July 27, a day after the central bank RBI presents the first quarterly review of the monetary policy.  The council is expected to discuss the macroeconomic scenario and prospects for growth. “It is a just review meeting to understand how the economy is faring and growth prospects for the year ahead,” a person close to the development said. The FSDC was set up by the government in the wake of the global financial crisis in 2008-09 and is aimed at better coordination between financial sector regulators to ensure macro-economic stability. While the economy is expected to grow between 8 and 8.5 per cent in 2011-12, the persistently high inflation and subsequent interest rate hikes by the RBI have curtailed India Inc’s expansion plans and led to fears of a possible slowdown. A burgeoning fiscal deficit is also being seen as a potential threat to the economy. Industrial production grew 6.3 per cent in April and is expected to have slowed down further in May.  Meanwhile, headline inflation rose to 9.06 per cent in May and is likely to have soared to double digits in June, following the government’s decision to hike prices of LPG, diesel and kerosene.  While the finance ministry has till now not pared down its growth forecast of close to 9 per cent in 2011-12, most economists expect GDP growth to be lower.  A worried government has held a number of meetings with investors and financial institutions. Finance minister Pranab Mukherjee discussed the economic prospects with institutional investors early last month asking them to stay optimistic about growth prospects.  The Prime Minister’s Economic Advisory Council also held a similar meeting to understand investors’ opinion about economic scenario.

IE 

Uday Kotak of Kotak Mahindra gets biggest raise, but Aditya Puri of HDFC Bank remained highest paid bank chief

Uday Kotak of Kotak Mahindra Bank led the executives pay increments in top banks last fiscal with a 58% jump, while Aditya Puri of HDFC Bank remained the highest paid bank chief as the Reserve Bank of India (RBI) debates capping fixed pay at 15%, and linking compensation to risk taken..........

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Give bank licences to non-corporates: Former RBI governor C Rangarajan

... the former central bank governor says the government should explore giving bank licences first to non corporates, before allowing corporates in the field.....................

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Provisioning for credibility - K P Shashidharan

The way banks have been providing for liabilities disproportionately in different quarters over the years came to the attention of all stakeholders and regulators when the fourth quarter results of State Bank of India (SBI) for 2010-11 devastated investor confidence and credibility in financial reporting. This impacted the bank major’s share price plummeting to one of its lowest marks............

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Spruce up the data

......India's GDP statistics are widely watched across the globe. It is understandable that the data will need to be adjusted along the way at different stages. But the extent of revisions seen recently calls into question the dependability of the data..............

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Official statistics need to be reliable -C. R. L. NARASIMHAN

Dissemination of economic data will facilitate a wider participation

It is not the first time that the reliability of official economic statistics has been publicly called into question. But Reserve Bank of India Governor D. Subbarao's well articulated and critical comments on the quality and availability of important economic data are in a separate league and ought to be viewed with all the seriousness they deserve. The RBI is perhaps the most important official user of the macroeconomic data. Monetary policy in India is not explicitly mandated to keep inflation low and stable. Yet, it needs to choose a measure of inflation as a reference. The Wholesale Price Index, despite its shortcomings, has emerged as the reference point. The RBI also generates high quality economic data. Its estimates of inflation and economic growth are widely watched. On GDP growth, the RBI's estimates have recently tended to be more conservative than the official ones. In its annual credit policy statement (May 3), the RBI sharply lowered its growth projections to around 8 per cent for 2011-12.  Obviously, the central bank depends on the official statistics to a large extent and even while it makes its own assessment, as with growth and inflation, makes copious reference to the official statistics. It is no one's case that officialdom is not aware of the shortcomings.  In fact, improvements in collection, collation and release of data have been taking place all the time. More than any other reason, the government itself needs reliable statistics to base its policy decisions on. Besides, the government had agreed a few years ago to comply with the International Monetary Fund's Special Data Dissemination Standards. Almost ten years ago, a committee headed by C. Rangarajan had suggested improvements in the official statistics and a road map for reaching certain goals. Despite all the nudging and commitment, the economic data generated falls short of what is needed for a modern, fast-growing and fast-integrating economy. It can only reflect on the complexity of the task. Primary data collection in a country so vast is obviously a stupendous task. Analysing and making the data available at a reasonable time are again a herculean task. In these circumstances, the good work being done by the National Statistics Commission and other official agencies is lost sight of. The government should seek to educate experts and lay people alike on the difficulties involved. A communication strategy, which inter alia stresses on the urgent need to spruce up the economic data and seeks widespread co-operation, should help in reducing the burden on those in charge of the statistics. Talking of education, this column has for long stressed the need to make the common person aware of the intricacies of decision making in the government, whether economic or political.  Obviously, dissemination of information on the relatively arcane subject of economic statistics will facilitate a wider participation in economic decision making. Outside interest on the Indian economy has never been higher. The country's macroeconomic data — the statements of the Finance Ministry, the RBI and others — are widely watched and interpreted. The growing integration of India with the rest of the world is the main reason. That is why quality economic data matters so much. The financial markets, especially the stock markets, are forever glued to data releases from India. Almost all businessmen need the data for a variety of purposes such as in their planning, formulating strategies and indeed in fixing production schedules. Consistent and reliable data influence business decision making positively. Dr. Subbarao's critical comments extend to the entire gamut of economic statistics. However, he chose to buttress his points with reference to the three key ones — the GDP growth data, the Index of Industrial Production (IIP) and the WPI. Citing concrete examples from the recent past, he said the data were neither reliable nor consistent. Extreme volatility as, for instance, in the IIP last year could mislead policymakers. The RBI underestimated its year-end estimate of inflation for March, 2011, pegging it at 5.5 per cent .The actual figure turned out to be a few percentage points higher. The GDP growth figures — perhaps the most widely watched — have also proved to be unreliable. In February, 2010, the advance estimate of GDP growth for 2009-10 was at 6.8 per cent. Just three months later, it was revised to 7.7 per cent and again in February, 2011, to 9.1 per cent, a revision of over 30 per cent in a year. Even conceding that the GDP data go through stages and are, hence, open to revision, the magnitude of change is staggering. As for relying on the WPI for monetary policy purposes, the Governor has pointed out that it is only a second best choice. The WPI is more like a producer price index and the only reason it is persisted with is because no viable alternative has emerged. Almost every other country relies on consumer price indices.  In India, the ongoing efforts on harmonising the various consumer price indices to arrive at one that is truly representative have not been successful so far. Finally, efforts at updating the data through new methodologies for constructing the indices have not yielded the desired results. The IIP has been revamped recently with its coverage extended and the base year brought forward. However, apart from not being able to overcome the deficiencies of the index it replaced, the new IIP might be already obsolete. Its base year is six years old and there have been frenetic changes in the structure of the industrial sector and manufacturing.

Business Line 

Microfinance: Bill to bring in order

.... The Reserve Bank Deputy Governor, Dr K.C.Chakrabarty, had said a few days earlier: “If we don’t act under a common set of regulations (for the microfinance industry), it won’t be practical to work. Five states having five different laws on the same subject will have practical difficulties for the industry.”..................

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Major role of technology in financial inclusion

..............Financial inclusion is a major agenda for the Reserve Bank of India (RBI). Without financial inclusion, banks cannot reach the un-banked. It is also a major step towards increasing savings and achieving balanced growth. ...............

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Invest in small, make it big

......In other South Asian countries such as Bangladesh, microfinance projects have helped 15 million people escape the trappings of poverty so far the sector has a massive scope for growth in a populous country such as India..............

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A big step for small lenders

.... The attempt to treat microfinance organizations as quasi-banks is puzzling, since the reason microlenders have mushroomed is that banks have not done enough to promote financial inclusion. Yet, the draft Bill speaks of “promoting the growth and development of microfinance institutions as extended arms of the banks”. This may hinder growth of the sector......

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RBI against changes in ADR, GDR voting rights

The Reserve Bank of India (RBI) is not in favour of market regulator Securities and Exchange Board of India’s (Sebi) proposal to modify voting rights of holders of American or global depositary receipts, people aware of the development said. Sebi last year amended takeover rules with regard to such voting rights and asked the finance ministry and RBI to look again at the terms of issue. Terms of issue is the agreement between an issuing company and the global depository, which also determines the voting rights. Of the 111 such listed receipts, 57 empowers the management to exercise voting rights on their behalf. Only four companies give rights to receipt holders.  Sebi proposed that the terms of issue should not curtail rights of receipt holders and suggested removing the clause empowering management to exercise such voting rights.  RBI wants to further review Sebi’s proposal, the people said on condition of anonymity. It has concerns that the changes will bring the depository receipts at par with indian equity shares, they said.

Mint

India Exchange Rate Policies - Sunil Awasthi

.................A number of suggestions have been made from time to time calling for a shift in the RBI’s exchange rate policy. One strong recommendation made by S S Tarapore in 1997 in his first report on convertibility, which he reiterated in his second report of 2006, is that the RBI should attempt to follow a policy of maintaining a real effective exchange rate (REER) band which is tantamount to a fixed target within a wider band. The RBI, while acknowledging that REER could be an indicator from a medium-term perspective, refrained from using it for managing short-term rate movements..........

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Expect a rate hike of 25 basis points: UCO Bank

.........."We expect that due to a sustained high inflation rate, the apex bank may hike the key rates by about 25 basis points at its quarterly review scheduled later this month," Arun Kaul, chairman and managing director (CMD), UCO Bank told ...........

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Lamenting chavanni’s demise - Sudheendra Kulkarni

Chavanni died last week. But the Reserve Bank of India’s unemotional announcement couched in official language—‘Coins of denomination of 25 paise will cease to be legal tender from June 30, 2011’—conveyed nothing of the immense sadness associated with the death of this lowly coin and, with it, the passing of an entire era in the man-money relationship in India. Coins of 1, 2, 3, 5, 10 and 20 paise denominations had vanished long ago. Now chavanni (four annas) is gone. Soon, athanni (eight annas or 50 paise coin) too will probably be dead ‘demonitised’, in RBI’s pitiless lingo. All money from then onwards will be counted only in rupees. When that happens, there will be nothing left of the species called ‘paisa’ in India. Has anyone paused to spare a thought on what the death of ‘paisa’ means for the social, cultural and psychological history of India?  Mourning resurrects memories. I remember the many things I did with chavanni and with other coins of lesser value when I was young. The first ‘rice plate’ I ate, while on a school outing, cost only 25 paise. The cinema ticket in an itinerant tent theatre that I frequented in my mother’s village during vacation months cost less—10 paise (for kids). The ‘pocket money’ of five paise that my grandfather occasionally gave us when I was studying in first standard was enough for me to buy a handful of locally made sweets in the next-door village shop. The boatman who ferried us across the river to the village on the other bank took no money at all. In the barter system that was still prevalent in our village in the 1960s, my grandfather gave him—and also the shoe-maker, barber and other rural service providers—grains, jaggery and other farm produce after harvest. It was an era when the rich were called ‘paisewale’. Now, with paisa itself on the brink of extinction, the rich are called millionaires and billionaires, and their millions and billions are counted not even in rupees but in dollars. How much India has changed in just 40-50 years!

IE

New coins released.............

Finance Minister Pranab Mukherjee along with MoS Namo Narayan Meena releasing a new series of coins in New Delhi on Friday

(For mroe details see VITALINFO of 9^th July)

'RBI right on rate hikes'

Conceding that intrerest rates were on the higher side and that the Reserve Bank of India (RBI) has had to raise interest rates frequently.....

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If inflation's peaked so have interest rates: Chakrabarty

Just about a fortnight before the first quarterly review of the monetary policy statement by the Reserve Bank of India (RBI), deputy governor K C Chakrabarty has made a statement which reflects the central bank’s state of mind on interest rate scenario. When asked whether interest rate had peaked, on the sidelines of finance minister Pranab Mukherjee’s meeting with the public sector bank chiefs in the capital yesterday, Chakrabarty initially feigned ignorance. “How would I know?... If inflation has peaked, interest rates, too, would. And if it hasn't, then interest rate hasn't peaked,” he said. RBI is slated to announce the first quarterly review of the monetary policy on July 26. This will be done in a meeting with the chief executives of major banks. In its mid-quarterly review in June, the RBI raised key policy rates by 25 basis points (bps) in its effort to tame inflation. It had raised the short-term lending (repo) rate by 25 bps to 7.50 per cent and the short-term borrowing (reverse repo) rate was moved up by a similar margin to 6.5 per cent. (A basis point is one hundredth of a percentage point — 0.01 per cent). “Going forward, notwithstanding both signs of moderation in commodity prices and some deceleration in growth, domestic inflation risks remain high. Against this backdrop, the monetary policy stance remains firmly anti-inflationary. Recognising that in the current circumstances, some short-run deceleration in growth may be unavoidable to bring inflation under control,” the RBI had said in its June review. Inflation rose to 9.06 per cent in May after dropping to 8.66 per cent in April. Prior to this, it had been over 9 per cent for the previous four months. The data of June will be released on Tuesday and will factor the impact of fuel price rise. The second round of impact will be evident later.

BS 

Centre to seek review of SC rulings on black money, SPOs

....... The government feels the HPC and its members -- directors of CBI, Enforcement Directorate (ED), Intelligence Bureau (IB), Revenue Intelligence and chiefs of Central Board of Direct Taxes (CBDT), Narcotics Control Bureau (NCB), Financial Intelligence Unit (FIU), Foreign Trade and Tax division, as well as deputy governor of the Reserve Bank of India ( RBI) -- are mandated to submit periodic probe status reports to the court......

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Micro-mismatch

The draft Micro Finance Institutions (Development and Regulation) Bill, meant to provide a legal framework to an otherwise unregulated sector in the Indian financial system, is an attempt to over-regulate and micro-manage the microfinance sector. The draft can at best be termed a mimic of legislation on usurious practices and moneylenders that is in place in several states of the country. Buzzwords such as “systemically important” replace “exploitation”, “expropriation” provides the modern setting to justify pervasive regulation. The draft bill adds a retrograde touch to the stalled process of financial sector reforms. The bill, if made law, will reduce competition in this industry as it hopes to regulate net margins. It will limit new entry into the industry. From the point of view of the customer, such regulation can push customers back to moneylenders who will now be outside these regulatory requirements. The present draft represents the microfinance industry as “extended arms” of banks, allowing for bank-like regulatory architecture for microfinance firms. This could potentially stall any progress in the microfinance industry. Capital adequacy requirements work for banks and not for non-deposit-taking financial institutions. In allowing a regulator to set “capital adequacy based on risk weights for assets and deployment of funds”, the draft bill fails to recognise that not all microfinance companies are deposit-taking, and even if so, the extent of deposit-taking, by virtue of the business model itself, is limited to and well below the maturity mismatch possible in its balance sheet. Prudential norms for banks lending to microfinance companies are already in place. Financial regulation is required to contain systemic risk and protect consumers. Systemically important microfinance institutions cannot be defined in terms of the number of clients they cover, but whether the failure of the institution could bring down the financial system altogether and, consequently, impact the underlying real economy. This is not an issue the microfinance industry poses today. The real issue is that of customer protection. An issue of consumer protection does not require micro-management of the business enterprise, but an effective arrangement to ensure that contracting parties are doing so knowing fully the consequences of non-adherence. The government may do well by looking into consumer protection more carefully than stifling microfinancial innovation.

IE

The New MFI Bill: Challenges before RBI

In the past two years the microfinance sector has witnessed an euphoric and unregulated growth as over-regulation and stoppage of lending in one state. The draft Microfinance Institutions (development and regulation) Bill 2011 seeks to bring some clarity and uniformity of rules to this sphere, reports Gopika Gopakumar of CNBC-TV18. The key feature of this Bill is that it will bring all microfinance services under one regulator – the Reserve Bank of India.  The Bill also proposes setting up of Centre and state level councils to advise the government on policies for the development of the sector. The central council will consists of officers from Finance and Rural Development Ministries, the RBI, SIDBI, NABARD and NHB besides six experts. The state advisory councils will have representatives from the state microfinance sector, the RBI and banks. They will advise on lending, recovery methods and grievance redressal mechanism.

What the New Microfinance Bill 2011 says?

> All microfinance companies must first register with the RBI before they begin operation.

> If activities of MFIs are found to be hurting the interest of clients, the regulator can issue 'cease and desist' order and can even cancel the registration.

> If the MFI is not satisfied with RBI's actions, then it can appeal to the central government, which will have the final say. The Bill also directs all MFIs to set up a reserve fund which cannot be used without RBI's permission. All MFIs will also be required submit their balance sheets to an RBI approved auditor. The bill gives sweeping powers to the RBI.  Among other things, the regulator will have a say on how much loans can be disbursed by the MFIs, the numbers of borrowers who can avail these loans and also the areas where they can operate. The RBI can also delegate an inspecting authority to look into the books of MFIs.

Will the Reserve Bank be able to handle such intricate details about hundreds of tiny companies working in far off villages?

Usha Thorat, Former Deputy Governor, RBI, said, "Consumer protection objective is most difficult areas of regulation to enforce because it requires various process. It is not like I go to a bank offsite and onsite inspection and look at their terms and procedures, look at the riskiness of assets or at their mismanagement." Reddy Subrahmanyam, Principal Secretary, Rural Devpt, AP, said, "Our understanding is that the existing RBI machinery or the proposed ombudsman may not be a solution. It may not be adequate to look at ground level realities. I think that's the fact which we need to discuss further." The new draft Bill says microfinance is not money lending and therefore not under the state governments' jurisdiction. But states like Andhra Pradesh are questioning the validity of this.  However, legal experts are dismissing this contention. HP Ranina, Central Board Member, RBI said, “What the Bill says is that money lending done by MFIs is not deemed to be money lending. But that is right and fair for the simple reason that even banks do money lending, even non-banking financial organizations do money lending."  "But yet they are in the purview of RBI, who is the regulator of all banks and banks necessarily lend money to the outside world. The Money Lenders Act which is covered by Constitution, which is part of state subject generally applies to unorganised sector were money lending is done." But RBI believes state government opposition could pose problems. There are many skeptics and it is yet to be seen what changes will happen before the bill becomes law.

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Andhra Pradesh lambasts microfinance bill, wants full rethink

In a 1200-word, aggressive response, the Andhra Pradesh government has called for a rethink on the microfinance bill introduced by the finance ministry. “Even if the Reserve Bank of India (RBI) becomes the sole regulator of the sector, the fallout of coercive recovery practices including suicides becomes a subject of state........

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Will he, won’t he? RBI chief waits for a call from North Block

It may amaze some readers that the man who is at the apex of the financial system should be kept hanging like this even as the press continues to speculate on who his successors might be. Subbarao, according to The Economic Times , may get an extension. But the paper is obviously not sure, for it also names Chief Economic Advisor Kaushik Basu and India’s Executive Director at Asian Development Bank Ashok Lahiri as potential candidates. The Indian Express on Thursday endorsed Subbarao for an extension citing support from former RBI governors Bimal Jalan, YV Reddy and C Rangarajan. Monetary policy needs a steady hand. It also needs autonomy from day-to-day political pressures. US central bank governors work for a decade or more. Alan Greenspan spent almost two decades as chairman of the Fed. Ben Bernanke, a Bush appointee, will remain even through the Obama years. Why should Subbarao be treated any different? The other problem with top appointments in the financial sector is that government officials have a tendency to speculate through the press. Unlike the US, there is no nomination from the executive and ratification by Parliament. Prime Minister Manmohan Singh, a former RBI Governor himself, will clear the appointment based on a short-list put up by the finance ministry. Even now, there are many key government appointments where speculation continues. The position of LIC chairman is yet to be filled. A PTI report in June said that the announcement would take more time as various government departments are scrutinising candidates. The chairman of the Insurance Regulatory Authority of India was quoted in the story. It is strange that the IRDA chairman is involved in the whole process. Imagine a test cricket umpire giving an opinion on who India should select as captain. There appears to be no method by which key appointments are made. There is also the tendency to continue influencing decision-making at state-owned companies or quasi-PSU companies. Agreed that the government is majority owner in public sector companies. However, the same ad-hoc policy seems to drive appointments in these entities. The government also seems to be exercising undue influence on organisations like UTI Mutual Fund, owned by LIC, SBI, PNB, and Bank of Baroda, according to T Rowe Price, a foreign institutional investor owning a 26% stake. When government is not the direct owner of UTI, why should it decide who runs the mutual fund? The shareholders’ agreement provides for the appointment of a CEO through the unanimous choice of all shareholders, according to a June 2011 report in The Economic Times.  The report states that T Rowe Price has been irked by the alleged attempt by the finance ministry to back the candidature of an IAS officer, Jitesh Khosla, over the claims of others shortlisted by a professional search firm. Quite clearly, the government needs to have a clear roadmap on how apointments at these levels should be made. First, the decisions must be taken at least three months before the term of an incumbent ends. Second, the length of tenures cannot be arbitrarily fixed at three years when five years is the norm. Manmohan Singh, here is your chance to set a good precedent.

http://www.firstpost.com/  

Mint-fresh: new series of coins launched with latest rupee symbol

Finance minister Pranab Mukherjee on Friday launched a new set of coins of 50 paise, Rs 1, 2, 5 and Rs 10 with the new rupee symbol embedded in them. The new series of coins have been introduced with features at the edge, which make it convenient for easy recognition and distinction. “The design has been adopted keeping in mind the difficulties faced by visually challenged people,” a finance ministry statement said. Last year the government had approved a symbol for the rupee that elegantly combines Devanagiri and Roman scripts to signify the rising strength, ambition and spread of the country’s currency in a fast globalising economy.  The rupee, introduced as a silver coin for transactions by emperor Sher Shah Suri — who built the Grand Trunk road in the 16th century — was only two decades ago largely unrecognised in global markets, but now joins an elite club of symbol-endowed national currencies that include the US dollar, the British pound, the euro and the Japanese yen. The symbol designed by D Udaya Kumar, who has just joined the faculty of the department of design at IIT Guwahati, was selected from more than 3,000 entries that were evaluated by a jury of experts, government and RBI officials. “The new coins will not only reduce the cost of moving materials but also are of user-friendly size and weight, Mukherjee said. Security Printing and Minting Corporation of India Ltd (SPMCIL) is minting the new series of coins of all denominations. As on date, approximately 100 million coins of all denominations have been minted.  The new coins will be lifted by the RBI for circulation to public very soon.Mukherjee had promised to launch the new series of coins in his budget speech in February.

Hinustan Times 

Regulating microfinance

If the Bill hopes to create an enabling environment for the microfinance sector, involving too many agencies may be counter-productive. If there is one area where the Government is acting with consistency, if not speed, it is in the microfinance sector that has, for the past year or more, taken a severe beating, especially in Andhra Pradesh, which accounts for almost 30 per cent of the total business. It was the State government's legislation against private MFI companies that exposed just how much the sector had grown without consistent oversight enforced by Central legislation. Private companies, once touted as the model for microfinance, and trudging a middle course between the Bangladesh Grameen Bank and commercial banks, were almost put out of business after the Andhra Pradesh government passed the MFI Act.  Now the Finance Ministry means to empower the RBI to regulate and fix what it calls the maximum annual percentage rate to be charged by any MFI. It was the interest rate charged by the private MFIs that had drawn the ire of the Andhra Pradesh Government. The private companies had countered that they did not charge exorbitant rates but what had added to the burden of the actual rate were other charges loaded on to the basic rate. The draft ‘Micro Finance Institutions (Development and Regulation) Bill, 2011' has taken this issue into account by defining the ‘annual percentage rate' to include interest, processing fees, service charges and any other charges or fees that MFI clients have to pay. Just to make sure that these charges are not excessive, the RBI will stipulate that the rates operate within the ‘percentage of margin' to be decided by the apex bank. The Bill attempts to create an overarching structure that would include Nabard, the agency that currently oversees the microfinance sector. Nabard was also a player through self-help groups, alongside private firms that it also refinanced. It could, therefore, oversee private firms only to a certain extent; once the latter began to source funds from equity they became answerable to their shareholders, and were thus obligated to maximise earnings. So the Bill proposes an umbrella-type structure with the RBI as regulator, which will delegate some powers to Nabard. The Bill also proposes a ‘ Micro-Finance Development Council' to frame policies, schemes and other measures for orderly growth of the sector. Questions arise at this point. What will the council do that the RBI cannot, with its vast experience and expertise? If the idea is to create an enabling environment for the troubled sector, loading on more agencies than may be required may have just the opposite effect.

Business Line

Dr Subbarao, does KYC stand for Kick Your Customer? - R Jagannathan

The Reserve Bank imposed a fine of Rs 25 lakh on Citibank on Monday for violating its so-called know-your-customer (KYC) and anti-money laundering laws. Reason: one of its employees in Gurgaon duped around 40 wealthy investors by promising them high returns from a bogus investment scheme. The fraud was perpetrated by Shivraj Puri, who took the money from gullible clients claiming Citibank was running a special Sebi-approved investment scheme and then routed the money for speculation in stocks. Even the Munjal-controlled Hero group managed to part with Rs 200 crore to invest in these bogus schemes. The total value of the fraud is estimated at Rs 400-plus crore. And the Sebi-documents were obviously forged. Is the RBI barking up the wrong tree? One wonders how the central bank hauled up Citi for failure to follow KYC norms, when the fraud was perpetrated by one of its own employees –possibly with a wink and a nod from bosses and other employees. The services of a few other Citi employees were terminated in the wake of the fraud. The truth is that the KYC requirements are fairly mindless – they are intended to trouble the honest customer, who will run from pillar to post to satisfy the norms, while the fraudsters simply fake the documents to get around the law. If I were the Reserve Bank of India, I would impose a Rs 25 lakh fine on the person who invented the KYC rules – for some of them are simply not possible to comply with. The key problem for urban residents is the address proof one requires under KYC to do anything – whether it is to open a bank account or apply for a PAN card or a driving licence or a demat account or even a mutual fund account. Proof of address usually comes from passport, driving licence, demat account, electricity bill, telephone bill, or even a bank account statement. But since passport, driving licence, bank account and demat account require the same address proof, it is like chasing your own tail. You can prove your address only if you already have a document saying this is your address. And you can’t get that document without already having another document which says this is your address. Smart, really smart. At the fundamental level, an address proof basically comes only from buying or renting a house in your name. But then, this means your spouse or adult children living with you are stuck for their KYC. This circular nature of proof amounts to a stupidity in the KYC requirement and the RBI surely should have thought about it a bit before mandating it. Nandan Nilekani’s Unique ID project will not solve this problem, for it is about ID, not address proof. I know the kind of problems I have had trying to prove my wife and daughters live with me. Though recent changes in rules allow banks to accept blood relatives on the basis of the same address proof as their parents or spouses, this message has not really percolated among staff – who continue to slavishly demand passports and driving licences. The rule relaxation, of course, is not enough. For it still leaves paying guests or relatives staying with you—a not uncommon phenomenon in Indian families—without documentation to open a bank account. I know a senior journalist who receives all his communications and bank statements at the office address because he does not have address proof where he stays. Not surprisingly, many people have dubbed KYC as “Kick your customer”, given the kind of run-around the public gets from this rule. As for Citibank, its problem was not KYC, but KYE – Know Your Employee. It ought to have been fined for not knowing what its employees were upto. Dr Subbarao, I know the Reserve Bank has loads of other worries—the government’s fiscal deficit, inflation, etc—but KYC is bugging many people too. Do something.

http://www.firstpost.com/business/dr-subbarao-does-kyc-stand-for-kick-your-customer-36841.html

RBI fines Kolhapur Dist Central Coop Bank

The Reserve Bank of India (RBI) has imposed a monetary penalty of Rs 5 lakh on Kolhapur District Central Co-operative Bank Ltd, Kolhapur, Maharashtra for violation of guidelines issued for Anti Money Laundering (AML). The apex bank on Friday issued a statement stating that the RBI in exercise of powers vested in it under the provisions of section 46 read with section 47A of the banking regulation act, 1949 (AACS) had imposed a monetary penalty to the Kolhapur District Central Co-operative Bank. In the letter issued today, the RBI observed that the cooperative bank had violated guidelines issued by the Reserve Bank on Know Your Customers (KYC) norms or AML standards. The RBI had issued a show cause notice to the bank, in response to which the bank had submitted a written reply. "After considering the facts of the case, bank's reply and personal submissions in the matter, the Reserve Bank came to the conclusion that the violations were substantiated and warranted imposition of the penalty," the official statement said.

BS

SBI not to finance disputed projects

In a clear indication of banks pulling out their hand in the aftermath of the Supreme Court ruling in the Greater Noida land acquisition case, State Bank of India on Friday said it would not finance real estate projects that were mired in disputes over land acquisition. “If in a particular area where there has been a difficulty, those will not be financed,'' bank Chairman Pratip Chaudhuri told reporters on the sidelines of a conference here. Mr. Chaudhri's remarks come two days after the Supreme Court asked the U.P. Government to return the land acquired in Greater Nodia for realty projects. “How can we give a loan when there is no land, where there are no land rights,'' Mr. Chaudhuri said when asked about the bank's position on funding projects in disputed areas. “Due diligence is important while advancing credit to the commercial real estate sector as the high interest regime is pushing up project costs and hence greater chances of default,'' National Housing Bank Chairman and Managing Director R. V. Verma said. The Reserve Bank of India has already asked banks to be cautious while extending loans to commercial real estate projects in view of increasing bad assets. On Wednesday, the Supreme Court had upheld the Allahabad High Court order quashing the acquisition of over 156 hectares from farmers in Greater Noida by the Greater Noida Industrial Development Authority and its allotment to builders.

Business Line

FM cautions state banks, FIs on NPAs

The finance minister asked banks to pursue financial inclusion through the business correspondent (BC) model and stressed that there should be transactions in the no-frill accounts....

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Gaddafi bait in sham RBI site nets gullible

NEW DELHI: The next time you receive an SMS or email informing you that you have been chosen by Libyan premier Muamar Gaddafi to partake of a share of his riches, or that you have won millions of dollars/pounds in a lucky draw held by a cola giant, ignore it completely. For years, the city police have had to deal with a slew of rackets that when investigated always have a Nigerian link. But the latest racket has left even the cops dumbfounded.  To give it a stamp of authenticity, fraudsters have set up a sham RBI website that shows money actually being deposited into the 'winners' account. A Nigerian national, Nosakhare Edwin, has been arrested for running such a racket and conning people to the tune of Rs 1 crore. The accused, who was living in New Delhi's Safdarjung Enclave, had opened five accounts with a private bank. "We have asked for detailed statements of these accounts from the bank, as all details and papers submitted so far were found to be forged," said DCP (crime) Ashok Chand. The crime branch was alerted after one Surender Kumar received an SMS on April 20 from an unidentified number informing him that he had won a lottery and the prize amounted to about Rs 2.86 crore. "The SMS also demanded he submit his bank account details, on a cola major's fake e-mail ID, to claim the prize. Accordingly, Kumar emailed his particulars and ID proof to claim the winning amount," said additional DCP (crime) Sanjay Bhatia. On May 3, Surender received another e-mail, informing him that his prize money was being sent by demand draft and that a Nigerian diplomat named Edward William (Nosakhare) would contact him regarding a parcel containing a demand draft, a laptop and a cellphone. Edward contacted him on May 16 and asked him to deposit Rs 18,700 in a bank account for customs clearance. Two weeks later, the victim received a call from an Indian woman, who identified herself as a RBI representative. She directed him to deposit Rs 49,000 more as a transaction tax. "After depositing the said amount, Surender again received an e-mail that had the url of the fake RBI website (rbinet.co.cc). There, he saw that the money had been deposited into his account, but the transaction was only 98% complete and that he was required to deposit more money," said Bhatia. Surender deposited Rs 2,75,000 to complete the transaction and another Rs 17,75,600 towards taxes. Again, he received an email, asking him to deposit Rs 8,95,000 more.  "As Surender had already borrowed a lot of money, he couldn't pay such a big sum. So, he requested Edward to meet him. They met on May 27 at Chanakyapuri and Surender paid Rs 3 lakh more. The same day, he received another email, asking for Rs 5,95,000. He finally smelled a rat and contacted the cops," said Chand. Police arrested Edward when he came to meet Surender on July 2. During interrogation, he said that he and a friend had duped others too.

TOI

RBI for insurance, pension funds in infrastructure

NEW DELHI: The government may be repeatedly asking banks to increase loan flow to the infrastructure sector but the Reserve Bank of India has a different take on the issue. During finance minister Pranab Mukherjee's meeting with bank chiefs on Friday, RBI Deputy Governor K.C.Chakrabarty flagged the issue of lenders nearing capacity as far as loans for road, port, airport and power sector projects were concerned . Besides, he is learnt to have pointed to asset-liability mismatch issues – 80% of the bank deposits mature in less than five years, while infrastructure loans are typically provided for over 10 years. Instead, Chakrabarty, himself a former bank chairman, suggested that the government clears policy impediments to enable life insurance companies and pension funds, which have funds for 20-30 years at their disposal, to invest in the infrastructure sector.  Though it is not known what the reaction of the finance ministry was, a bank chief told TOI after the meeting that bankers came up with the same set of solutions to deal with the issue of mismatch and reaching the exposure limit. One of the suggestions was to seek permission to issue tax-free infrastructure bonds, something that the government is unwilling to do.  At the meeting, the government once again made a pitch for the Takeout Finance Scheme, which is aimed at providing further lending space to banks. Under the scheme, relaunched by India Infrastructure Finance Company last year, banks financing infrastructure projects can enter into arrangements with another entity to transfer the outstanding loans. But till May this year, only nine infrastructure projects, involving a takeout amount of Rs 1,600 crore, have been cleared.

TOI

RBI: Inflation is a significant near term macro challenge for India

“To contain inflationary pressures without disrupting recovery” has been the challenge for the Indian Reserve Bank's monetary policy over the past year and a half. The Indian economy recovered relatively quickly from the financial crisis of 2008, but inflationary pressures emerged even in the early stages of the recovery in late 2009, stated RBI Deputy Governor, Dr. Subir Gokarn in a presentation on Striking the Balance between Growth and Inflation in India. The economy grew by 8.5% in the fiscal year 2010-11, which is close to the five-year average pre-crisis, but year-end headline inflation was over 9%, well above tolerance limits.  There are some factors affecting inflation, global and domestic, that is clearly outside the purview of monetary influence, the deputy governor said. But, that doesn't mean that monetary policy does not have a role in addressing factors that it does influence - demand pressures and the risks of inflation becoming generalized through expectations and price-setting actions. The domestic growth scenario suggests that the growth rate will moderate somewhat in the coming year. However, he said that even though growth could be impacted, it must be understood as a short-term tradeoff with positive consequences for long-term performance. The Reserve Bank of India projects growth during 2011-12 to be 8% in its baseline scenario. The current cycle of contractionary monetary policy was initiated in the context of two important factors. First, there was an enormous volume of liquidity in the domestic financial system, as a result of policy responses to the crisis, which also took policy rates to very low levels. Second, even as the early signs of recovery were visible, inflationary tendencies had also begun to show. All this was happening in a global environment which was still quite turbulent and uncertain in late 2009 and early 2010. In the early phase of the cycle, surplus liquidity conditions persisted, which, clearly made transmission of policy rates through to transaction rates very sluggish. From this perspective, the early actions were essentially a signaling effort, accompanied by steady moves to eliminate the liquidity surplus through CRR increases. By the middle of the 2010, the liquidity scenario had moved to a deficit and transmission became much stronger. The immediate impact was shown on the call rate, which is effectively the operating target of monetary policy, of a change in the liquidity situation. The call rate has moved up by about 450 basis points over a little more than a year which is likely to soften both growth and inflation in the second half of 2011-12.  According to the central banker, the persistence and recent acceleration of inflation has clearly increased the risk of expectations becoming unanchored. Global developments have implications for both growth and inflation trajectory in India. The inflationary situation is India's most significant near-term macroeconomic challenge. The RBI monitors short-term expectations through household surveys that have reinforced the perception that household expectations are moving up. However, the relative stability of long-term (10-year) yields on government securities suggest that expectations over this horizon remain anchored.

IIFL 

Banks are Special

They impact the larger economy and so it is wise to ring-fence the banking sector

At first glance, the RBI’s move to cap banks’ holding in non-financial service companies that are not their subsidiaries at a low 10% (of the company’s paid-up capital or the bank’s paid up capital and reserves, whichever is lower) might smack of paranoia. That first impression quickly evaporates under closer scrutiny. As the financial crisis, especially the role of shadow banks, has shown, one can never be too careful when it comes to financial stability. The consequences of bank failure are not confined to the banking system but affect the entire economy. Two, given the scope for multilayering of share-holding in companies, it is entirely possible for banks to exercise control or have significant influence even over companies that are not their subsidiaries and thereby engage indirectly in activities that are otherwise out-of-bounds. Therefore, it is only logical that the RBI, as banking regulator, should want to limit such investments by banks. In any case, the 10% cap is not absolute, but can be breached where the additional holding stems from corporate debt restructuring or where the company is engaged in activities permitted under the Banking Regulation Act and the RBI’s prior approval has been obtained. Banks are also free to set up subsidiaries for activities that are conducive to the spread of banking in India or are useful or necessary in the public interest. The attempt is to ring-fence the banking system from risks that lie outside. From this perspective, the latest stricture is of a piece with the Bank’s keen pursuit of the ‘holding company model’ for large financial groups and its recent guidelines on registration of Core Investment Companies (CICs). The holding company model envisages banks as subsidiaries of the holding company rather than the other way round, thereby insulating banks from non-bank activities. Likewise, CICs, which do not carry on any trading activity and whose assets are predominantly shares in group companies, call for a regulatory treatment different from that of non-deposit taking, systemically important non-banking financial companies (NBFCs). The message, post the crisis, seems to be that ‘banks are special’. For now, few will disagree.

ET 

RBI staff stage protest

Employees of the Reserve Bank of India on Thursday held a demonstration on the RBI premises in Chennai. According to a press release, the convenor of the United Forum of Reserve Bank Officers and Employees Samir Ghosh was among the speakers. RBI Governor D.Subbarao met the representatives and assured them that the issues would be resolved soon. The call for demonstration was given by the All India United Forum of Reserve Bank Officers and Employees, the release said.

The Hindu

‘Devise strategies to contain NPAs'

Union Finance Minister Pranab Mukherjee on Friday exhorted chief executives of all public sector banks (PSBs) and financial institutions to contain the downward trend in asset quality by devising suitable strategies for curbing and rolling back their non performing assets............

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An insight into foreign exchange matters



Awareness drive

Collector V.N. Vishnu speaking at the inaugural of RBI's exhibition on foreign exchange matters in Guntur on Tuesday. RBI Regional Director A.S. Rao (second from left) looks on



District Collector V.N. Vishnu inaugurated a two-day public interface-cum-exhibition on foreign exchange matters organised at Siddhartha Gardens on the Ring Road here by the Reserve Bank of India (RBI) on Tuesday. The exhibition comprised stalls of the RBI, the Axis Bank, the HDFC, the SBI, the SBH, the Andhra Bank, the Syndicate Bank, and the Indian Overseas Bank. Publicity material on foreign investment in India, fictitious offers, e-mails and SMSs, Foreign Exchange Management Act, 1999, overseas direct investments, and a basic guidebook titled ‘Foreign exchange for you' were made available. Addressing the gathering, Mr. Vishnu said it was a good initiative taken by the RBI to spread awareness on a variety of foreign exchange transactions taking place on a sizable scale in Guntur district on account of cultivation of major commercial crops, particularly cotton and chilli. The exponential growth in remittances across the borders required businessmen and the general public to be well informed of the procedures lest they should face legal consequences of failure to comply with the statutory norms due to ignorance. The RBI would do well to organise similar events in all major towns so that people would benefit from the apex bank's financial literacy campaign, he added. RBI Regional Director A.S. Rao said liberalisation policies triggered a substantial growth in the flow of foreign currencies into and out of India. The emphasis has shifted from ‘regulation' to ‘management' (the erstwhile Foreign Exchange Regulation Act was changed to Foreign Exchange Management Act). This simplified the procedures to a large extent and the concurrent banking reforms facilitated easier ways of dealing in foreign exchange. People continue to be cheated in the conduct of foreign exchange transactions in a myriad new ways. It was, therefore, imperative that the RBI took up their cause, he said. Andhra Bank General Manager Y. Prameela Rani, DGM P.S. Subba Rao, and RBI AGM K. Mahadeva Swamy were present on the occasion.

The Hindu