Bank licences to corporates: Reserve Bank for strong rules



Reserve Bank of India Governor D. Subbarao (centre), FICCI Vice-President and HSBC India Country Head Naina Lal Kidwai (right) and State Bank of India Chairman Pratip Chaudhuri at a conference in Mumbai on Tuesday.



The Reserve Bank of India on Tuesday cautioned the banking community against self-dealing by corporate promoters and shareholders, who use banks as a private pool of readily available funds and called for changes in statutes and regulations to stem the practice. “As we contemplate allowing corporates to promote banks, there is need for changes in statutes and regulations to address these concerns,” said RBI Governor D. Subbarao, while inaugurating the FICCI-IBA conference on ‘Global banking: paradigm shift' on the theme ‘Productivity Excellence', here. Dr. Subbarao said, “If a corporate has an interest in a bank as a promoter or a shareholder, but has no position on the board, then there is no prohibition on the bank lending to the corporate. This opens up opportunities for self-dealing.” The issues, he said, was critical as “it is not easy for supervisors to prevent or detect self-dealing because banks can hide related party lending behind complex company structures or through lending to suppliers of the promoters and their group companies.” The RBI Governor's comments came at a time when many corporate houses were hoping to enter the banking business with the new guidelines for banking licences. The RBI Governor exhorted the banking fraternity to engage with and seek corrective action on five key areas of corporate governance — bank ownership; accountability, transparency and ethics; compensation; splitting the posts of chairman and CEO of banks; and corporate governance under financial holding company structure. He said there was typically a divergence between the interests of shareholders and of depositors. Shareholders want profits to be maximised by taking on greater risk; depositors have an overriding preference for the safety of their deposits and hence for lower risk. At the same time, depositors have little say in the governance of banks whereas the shareholders' say is pronounced.  Within the shareholder group, the extent of control exercised by promoter shareholders too is an important determinant of the effectiveness of corporate governance. On the issue of accountability, transparency and ethics, the RBI Governor said that while over the years, “we have tried to align our transparency and disclosure standards to global best practices, we need to address critical questions such as is the voice of independent directors always independent? Do bank CEOs countenance criticism from the board? Are boards succumbing to ‘group think' and abandoning their responsibility for independent judgement? It is only through such soul searching that corporate governance of banks can improve its effectiveness.” Dr. Subbarao said the RBI was in the process of finalising the guidelines relating to compensation of whole-time directors/CEOs/risk takers and control staff. The guidelines were scheduled to be implemented from 2012-13. On the question of splitting the posts of chairman and CEO of banks the banking regulator noted that the moot question was whether the principle of separation of the posts of chairman of the board and CEO should be extended to public sector banks. “An important criterion for deciding on this will be to what extent we will be able to lay down and enforce strict eligibility criteria for the position of the chairman of the board of a public sector bank. We will discuss this issue with the Government,” he pointed out.  The RBI Governor said that while the Shyamala Gopinath Working Group appointed by the RBI has recommended that the financial holding company (FHC) model should be pursued as a preferred model for the financial sector in India, “We must recognise that regardless of the corporate structure, banks cannot be totally insulated from the risks of non-banking activities of their affiliates. In moving to a new regime, we must also contend with legacy issues relating to existing conglomerates. Any framework to harmonise them under the FHC model will require a new legislation and new regulatory architecture.”

HBL

PSUs like LIC, Power Finance Corporation may not get banking license

NEW DELHI: The government is not keen on state-run firms securing bank licences under the proposed new banking licence policy. Currently, there are 21 public-sector banks besides five subsidiaries of the State Bank of India. The government has so far supported merger in public sector banks but has maintained that any merger proposal should come from the banks themselves. The RBI is expected to make the norms for new licences public soon. Several state-owned firms, including Power Finance Corporation (PFC) and LIC Housing Finance, have shown interest in opening new banks under the proposed policy. "One of the key priorities of new banks is to further the cause of financial inclusion while the state-runs firms interested in securing new bank licences are dedicated lenders to particular sectors," a finance ministry official said. PFC's chairman, Satnam Singh, however, said their administrative ministry was fully supportive of PFC's banking foray. "I don't see any concern," he said. The RBI is likely to mandate that new banks should have at least 25% of their branches in unbanked rural areas. "It also has to be looked if the proposal of a new bank is totally public sector in nature or through a joint-venture with a private partner," the official said. The finance ministry expects that the share of public sector banks in the total banking business may not reduce even after entry of new private banks. The government may, however, relent to the proposal of India Post for securing a bank licence. As per a standing committee report, the department of post is preparing a roadmap to set up a Post Bank of India and will send the proposal to the finance ministry. "The final decision will be taken by the Reserve Bank. India Post has a stronger case because of their outreach," the above quoted official said.  KPMG's executive director Ravi Trivedi said it would be a disavantage for these dedicated lenders if they have to get out of their current developmental role. "That will be counter productive, so they need to find a suitable model that allows them to use their existing eco-system for funding larger projects and managing cash flows," he said. Another concern with the government is the capitalisation support that banks will require over a period of time to meet the Basel III norms. The government is already reviewing plans to convert its perpetual bonds and preference shares in state-run banks into equity. The new prudential norms under Basel-III, which are yet to be finalised, will restrict Tier-I capital to common equity and retained earnings.  "We are already facing a challenge in bank recaptialisation. If there are more public sector banks then there will be an added responsibility on the government," the official said. The Basel-III framework, which seeks to strengthen regulation, supervision and risk management in the banking sector, is to be implemented in phases beginning January 2013.  

ET

RBI for bifurcation of chairmen, MDs in PSU banks

MUMBAI, AUG 23:  The Reserve Bank Governor Dr D Subbarao on Tuesday favoured bifurcation of the posts of chairman and managing director in state-run banks, saying the experience of such a split in the private sector has been satisfactory. Stating that the central bank is in discussions with the government to split the posts of the chairmen and managing directors of state-run banks, the governor said, “Given our own positive experience, as well as the global endorsement for this position (of separation of these posts)... we will discuss this issue with the government.” “This experience proves to be positive in the private sector banks (in our country), which has also been proved to be value-adding in international banks. Not giving too much power to one person is good,” he told reporters on the sidelines of a FICCI-IBA summit here this morning. Addressing the banking summit, Mr Subbarao, however, warned that an important criterion for deciding on splitting the post of chairmen and managing director in PSU banks “will be to what extent we will be able to lay down and enforce strict eligibility criteria for the position of the chairman of the board of a public sector bank.” The RBI had set up a committee under the chairmanship of A S Ganguly in 2004—05 to study the issue of bifurcation of the posts of chairman and managing director of banks, which had recommended such a bifurcation. Following this, such a bifurcation was implemented in private sector banks in 2007. “The Reserve Bank implemented the Ganguly group recommendations in all the private sector banks in 2007. Experience shows that this arrangement has worked well,” Mr Subbarao said. It can be noted that in the public sector banks, the top executive is designated as chairman and managing director, with the exception of the largest lender State Bank, where the top honcho is the chairman and there are four managing directors with clearly defined executive roles under him. Explaining the logic behind such a separation, Mr Subbarao said that bifurcation of leadership of the board from the day-to-day running of the business will bring about more focus and vision, as well as give the necessary thrust to the functioning of the top management of the bank. When asked whether the RBI will allow corporates to enter the banking space, he said, “We have sent in a draft amendment to the Banking Regulation Act to the government and the government is working on it. So amendments to the Banking Regulation Act are necessary before we contemplate corporates coming into the banking system.”

HBL 

Bankers divided over RBI Guv's proposal to split CMD post

RBI Governor flagged off an important debate on the need to separate the roles of a board chairman from CEO for public sector banks. He said this will act as a check on the CEO. The Governor was probably moved by the regularity with which banks see severe profit declines when their CMDs retire. CNBC-TV18's Gopika Gopakumar and Supraja Srinivasan report. Governor Subbarao recommended the need to split the posts of chairman and CEO of public sector banks. This has already been done for private sector banks and the Governor pointed out that after the 2008 global banking crisis, such a split of roles is being recommended globally. “The logic is that such a bifurcation of leadership of the board from the day to day running of the business will bring about more focus and vision as also the necessary thrust to the functioning of the top management of the bank. It will also provide effective checks and balances,” he said.  The suggestion evoked mixed response. Bankers hailed this suggestion, but said there would be challenges. “Considering that it will give a chairman of the board who will focus on strategy, vision and the MD will focus on the implementation... I think is a good observation by the governor,,, but one has to look at how exactly finally it turns out to be,” MV Nair CMD, Union Bank said. On the other hand, Naina Lal Kidwai, Group GM & Country Head, HSBC India points out, “The problem then becomes how do we access a pool of people who are capable of filling that role as chairman and are they going to put hands up to become chairman of PSU banks. Therein lies in the aspect of where does the pool exist. I don't think this pool exists. It's very difficult today for people who sit no other boards to come on board of bank.”  More critical area who will decide who will become chairman of PSU bank. What's the process of selection going to be? That again if it's murky and if it's not open and transparent that will system will go away. If you look at process followed in listed companies, role of nomination committee is key. Nomination committee puts it up to the board to choose. Don't think we can get there easily. Governor Subbarao said he will take up this issue with the government soon.

Moneycontrol

Banking growth runs parallel with economic growth: Bankers

The RBI governor D Subbarao today hinted the new bank license rules may allow corporates to promote banks.  Speaking at the FICCI-IBA banking conference he said that as the country contemplates allowing corporate groups to promote banks, there is a need to strengthen rules that prevent banks from lending to interested or promoter groups and directors.  The draft new rules are expected to be issued by the RBI end of this week or early next week.  Naina Lal Kidwai, group general manager and country head of HSBC India, SBI chairman Pratip Chaudhuri and Chanda Kochhar, managing director and CEO of ICICI Bank shared their views with CNBC-TV18 on this issue.  Kidwai said that inflation is a main concern right now and raising interest rates haven’t helped taming inflation.  “There are multiple factors around inflation. Food inflation has everything to do with logistics, supply and people eating better which is great. But what are we doing to improve the food chain on vegetables, fruits, meat and getting them to consumers in a low cost way,” questions Kidwai. She feels that these issues won’t get resolved by hiking interest rates. Chaudhuri feels that in the global banking crisis, the risk takers were not responsible for taking those risks. “So, the people who originate the risks are asked the right questions because all the time you cannot take a favourable outlook and say everything will work out well,” he said adding that it is important to look into the downside adequately. He said further that at the global level, the regulators would increasingly focus on capital as a ratio to the risk and hence, that aspect has to be drilled down to the micro level. In Kochhar’s view, the size of the banking sector is always related to the size of the economy per se. She says, if India can grow at about 8% per annum over a long term and the banking sector normally grows at 2.5 times the GDP multiple, then it means the banking sector can continue to grow at 20% per annum for many years to come, which means that the banking industry which is today say about Rs 40 trillion can become around Rs 200 trillion by 2020; five times by 2020. “Yesterday’s report also said that India may have the third largest banking sector by 2025. So it is size in relation to the growth in economy and not just size per se,” added Kochhar. 

Moneycontrol

Bank credit growth moderation in line with RBI policy: Gokarn

Reserve Bank of India (RBI) Deputy Governor Subir Gokarn on Tuesday said the moderation in bank credit growth so far this financial year was in line with the central bank’s expectation. "It is a part of the demand-adjustment process that we had envisaged. We do not know the magnitude (of the recent numbers), but RBI had scaled down estimates for credit growth," Gokarn said, while talking to reporters on the sidelines of a banking seminar organised by the Indian Bank's Association and the Federation of Indian Chambers of Commerce and Industry. RBI, in its first quarter policy review in July, had cut the non-food credit growth estimate for 2011-12 from 19 per cent to 18 per cent. The decline in credit growth partly reflects the moderation in economic growth and the effect of the series of policy rates rises that made credit costly for borrowers. On the global turmoil, Gokarn said uncertainty had increased. Growth estimates for the US have been cut and European numbers were looking weak. International economic growth would be less than what was estimated earlier, he said. On the effect of the global slowdown on India, he said exports may cool, but domestic drivers—public expenditure and domestic demand—would drive growth. RBI would monitor the situation, he said. On inflation, Gokarn said if global commodity prices continued to remain flat or decline sharply, inflation in India would moderate from November-December. Inflation, as measured by the wholesale price index, stood at 9.22 per cent in July. RBI had said inflation would remain at around nine till November

BS

Stronger co-operatives can boost agri output, says RBI

Mumbai, Aug. 23:  Strengthening co-operatives and involving private parties can help in improving productivity of agriculture sector, said Dr K.C. Chakrabarty, Deputy Governor, Reserve Bank of India.  Pricing of credit needs to be market based to ensure effective flow of credit to all sections of the agricultural community, said Dr Chakrabarty. Speaking at the FICCI-IBA banking seminar, Dr Chakrabarty said that the share of agriculture in GDP has fallen to 14 per cent from 50 per cent about 15-16 years ago. The sector also provides employment for about 60 per cent of the population, he said. Therefore, food processing industry and agro-based industry need to be given necessary boost and impetus to improve productivity and employment opportunities. Dr Chakrabarty called for more granular data with regard to agriculture production — flow of credit to various segments and sub-segments of agriculture and storage activities, flow of credit in terms of outstanding and disbursements, number of beneficiaries and monitoring of credit with non-credit inputs. Although agricultural credit has grown, it is from the urban and metropolitan branches of banks. This raises the question to which segments is this credit actually flowing to, Dr Chakrabarty pointed out.  “The share of rural credit in agriculture has come down from 55 per cent to 38 per cent. The share of metropolitan credit has gone up. But that will not add to productivity. We need to see where the credit is going” he said. Little is also known about agricultural credit to various crops, horticulture, allied activities even on a consolidated basis, he added. To improve the flow of credit, there is also a need for systematic co-operation between Regional Rural Banks and Primary Agriculture Credit Societies. Apart from improving credit risk, there is also the need for an institutional mechanism to take care of marketing.

HBL

No ban on teaser loans, will take action if needed: RBI

“There are no concerns about teaser loans. We have not banned teaser loans,” said KC Chakrabarty, deputy governor, RBI when asked about whether the regulator was worried about teaser loans......

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'The nature of the HSBC-RBS deal is unprecedented' - Naina Lal Kidwai, HSBC

Hongkong & Shanghai Banking Corporation (HSBC) is still awaiting the regulator’s nod for its proposed acquisition of Royal Bank of Scotland’s retail and commercial banking businesses in India. In an interview with Somasroy Chakraborty, Naina Lal Kidwai, country head (India) HSBC, says the unprecedented nature of the deal is delaying the approval of the Reserve Bank of India (RBI).

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Agents hold up small saving rate hike

NEW DELHI: A key reform measure which would help investors earn higher interest rates is being held up due to stiff resistance from agents selling instruments such as National Savings Certificate and post office deposit plans. Officials say a large chunk of such agents come from finance minister Pranab Mukherjee's state -- West Bengal. The agents are protesting the move to do away with commission on Public Provident Fund and Senior Citizens' Savings Scheme. A government panel had recommended that the commission for other products such as the NSC and post office schemes be halved to 50 basis points (100 basis points equal one percentage point). The panel headed by former RBI governor Shyamala Gopinath had recommended a reduction in cost as part of a move to increase the returns on the schemes. The plan, based on calculations then, was to increase the interest rate on various instruments by 20 to 70 basis points from July 1. The delay is expected to increase the returns further as interest rates have gone up.  In addition, the panel had suggested that the investment limit for PPF be increased from Rs 70,000 a year to Rs 1 lakh. Several states have already stopped paying commission to agents but the protests from the agents has put the finance ministry in a fix given that political sensitivities are involved. Sources said that the report has already been discussed at the highest level and there is endorsement of the recommendations at the official level. Over the last few years there have been several recommendations to make the return structure for small savings schemes market-linked but in all cases the reports had suggested that the rates be lowered. The latest report, however, makes it easier to implement the suggestions as there would be no public protest given the increase in interest rates.

TOI

CAG: 1,142 NBFCs slipped service tax net

The Comptroller and Auditor General (CAG) has suggested the revenue department should liaise with the Reserve Bank of India (RBI) to bring non-banking financial companies under the service tax net. The CAG found 1,142 service providers in the banking and financial services segment were liable to pay service tax but not on the tax department’s registration list. About 65 of them were liable to pay service tax to the tune of Rs 92 crore in 2009-10. In its report tabled in Parliament on Tuesday, the CAG said there were procedural deficiencies in registration of assessees, receipt of returns and scrutiny of returns, beside ambiguities in rule provisions and non-compliance. “We recommend the department may liaise with statutory authorities such as the RBI to obtain information regarding non-banking financial companies, to bring them under the service tax net,” it said. It advised the department to take up various measures, including surveys, to identify potential assessees for service tax and get these registered. CAG also conducted a performance audit of the Duty Drawback Scheme and found instances of procedural deficiencies and absence of clear provisions. It observed no supplementary rules were framed, laying down parameters for identification of goods in case of re-exports. The auditor noticed there were no instructions specifying how to determine whether goods were “used” or not and recommended instructions be issued. It suggested the tax department frame rules, indicating parameters for identification of re-exported goods with originally imported items, and issue instructions to clarify the conditions under which goods are to be treated as “used after import”.

BS

It’s a Long Road Ahead for Indian Banking

A first-of-its-kind extensive productivity study among 40 Indian banks conducted by BCG with Indian Banks Association’s (IBA) assistance has thrown surprises for both bulls and bears. Experienced industry professionals are pleasantly surprised to see the impressive performance of Indian banks as compared to other large economies. On almost all parameters — profitability, cost to income ratio, non-performing asset (NPA) levels, valuations, net interest margins, fee income — the industry is on the right side of average among comparable economies. This is a significant achievement especially when compared with where Indian banks started a decade ago. Compared to the West, where economies are paying through their noses for the folly of their banks, it is a matter of great relief (and pride). The Indian banking industry and its regulator, the Reserve Bank of India, deserve every bit of acclaim they have earned so far. The massive unbanked population of India is a constant reminder of a task unfinished. Developments in the micro finance sector highlight that the solutions for the unbanked have to come at reasonable interest margins. These conflicting demands of wider coverage but at low cost can come only with a substantial productivity increase in the Indian banking sector. Thankfully, there is no dearth of areas where improvement in productivity is possible in Indian banks. I highlight three areas here — bad debt management, technology and people.  Banks will need to develop customised risk management strategies for each segment. PSU banks, which are losing a lot of experienced people, rapidly have a stiff task. RBI should not shy away from championing a new paradigm of risk management beyond Basel III. Technology is a bank’s best friend in pursuit of productivity. New channels (like ATM and mobile phones) allow transactions at a fractional cost. The study exposes a possibility for the next decade. Investment in technology in the Indian banking industry is about half of international average. In the public sector, it is less than a quarter. Hesitation with large discretionary procurement decisions is a weakness of the public sector. Should this hesitation inhibit continuous upgrade of technology in the public sector, the industry will soon lose its edge. The industry has moved to technology-based processing. It is far from technology-based decision making. The huge opportunity shows up in customer adoption rates of new channels. Only about half of active customers in metros use ATM. Adoption rates of other new channels are much lower. India could be a world leader in mobile banking. Our estimates show that, with the latest development in technology, 20-30% of banking transactions could be on mobile phone by 2020. This could lead to a 10-fold productivity rise in the not-too-far future. Banks need to invest in such technology and experiment with ways to induce considerable customer adoption.  The last issue is people. Banking is ultimately a service business where human touch will always be important to generate trust. The study has highlighted that compared to the global average, Indian banks are understaffed in finance and HR. These functions help develop the HR by proper measurement and talent management. Such economising will be debilitating in the future. Service standards on response time have a long way to go. Customers can get a mortgage sanction within hours in many developed markets. The best in India would be in days. The public sector has an unprecedented HR challenge. They have to deal with massive retirements and massive recruitments at the same time. Their talent shortage is preventing them from offering investment advisory to their clients. This will weaken their franchise. Administrative overheads of some banks are high at 15% of the staff costs as against global average of 10%. Larger public sector banks show little scale of benefit.  As the Indian economy grows rapidly in size and influence over the next few decades, it is imperative to have a strong and dynamic banking sector supporting it. Many analysts claim that among the competing emerging economies, India’s strength in banking will give it an edge. Indian banks are not yet ready to claim this recognition. But they can.

ET

No proposal for merger of PSBs, says govt

The government said it is not considering any proposal for merger of public sector banks. No," minister of state of finance Namo Narain Meena said in a reply to a question whether the government has taken a decision to merge public sector banks ( PSBs). The current policy of the government on consolidation leaves the initiatives for consolidation to come from the managements of the banks themselves, he said in a written reply to the Rajya Sabha. While examining any merger proposal, government keeps in view the interest of the shareholders and employees of merging banks. He also said the Reserve Bank issues a single class banking licence, both to domestic as well as foreign banks, to conduct all types of banking business ranging from retail, wholesale, forex and derivative products, credit cards etc. In January, 2011, he said RBI issued a discussion paper on the mode of presence of foreign banks through branch or Wholly Owned Subsidiary for public comments. After examining the feedback, comments and suggestions on the discussion paper, comprehensive guidelines on the mode of presence of foreign banks in India would be issued by the RBI. In a separate reply, Meena said the share of institutional credit has increased to 61.1 per cent in 2002 from 31.7 per cent in 1971 as per All India Debt and Investment Survey of the National Sample Survey Organisation in 2003.  At the same time, the share of money lenders came down from 36.1 per cent in 1971 to 26.8 per cent in 2002, he said.  In response to another question, Meena said the RBI released a discussion paper on entry of new banks in private sector in August 2010 inviting comments and suggestions from various stakeholders.  RBI is examining the views and comments received from various stakeholders. Thereafter, RBI will issue draft guidelines for public comments, he said.

ET

Assocham for raising minimum capital for MFIs

..The proposed law is silent on percentage of profits to be set aside to form a fund for taking care of financial eventualities. There is a need to specify a percentage and also define the term ‘profit.' The RBI should spell out minimum benchmarks for healthy growth of MFIs so that inflow of funds from banks can increase substantially........

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Madras HC dismisses H&M petition challenging Rs5 lakh fine by ED

....The ED raided H&M's Chennai office after it received a complaint from the RBI about the fraud and violation of FEMA by H&M in its acquisition of vMoksha .....

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Second wind



Subbarao has taken RBI through exciting times and 180-degree turns in policy management in three years



Unlike the huge 50 basis point hike in key policy rates he announced in July, the two-year extension granted to Reserve Bank of India Governor Duvvuri subbarao was not entirely unexpected. The soft-spoken Subbarao, 62, had displayed a hard-nosed approach in dealing with the global financial crisis that unfolded soon after he moved into the corner office at the RBI headquarters in Mumbai on September 5, 2008. Today, when the global economy faces its worst challenge since 2008, few could have ignored his record in effectively managing liquidity during the height of the financial crisis, least of all Prime Minister Manmohan Singh.  "I am happy that the government has reposed its confidence in me at this difficult juncture in the world economy," was the brief response from the finance ministry veteran.Subbarao has taken RBI through exciting times and 180-degree turns in policy management in the past three years. In order to cut off-cycle rate revisions, monetary policy reviews began to be conducted eight times a year from the quarterly cycle earlier.  When the government first mooted the idea of a super regulator in the aftermath of the financial crisis for better coordination amongst regulators, Subbarao strongly fought for RBI's independence.  He also recently took the government head-on over the issue of managing inflation, saying monetary policy works efficiently only when the fiscal situation is under control. However, one thing that stayed ahead of this marathon runner for most part of his tenure as RBI chief was high inflation. It has persisted in high single digits despite eleven rate hikes over the past 15 months, fuelling criticism that Subbarao was always "behind the curve". He may now finally win the race against inflation given the global fall in commodity and crude prices.  The rise in both in the recent past had largely queered the pitch for him. 

The Outlook

Rupay Card commercial launch by fiscal end: NPCI head

Nearly a year after the soft launch as a limited-service debit card, the Rupay Card, which is the domestically developed equivalent of the Visas and MasterCards of the world, will offer full-service debit card services by the end of this fiscal. "We hope to commercially launch the Rupay Card before the end of this fiscal. We will be equipped to offer full service debit cards to our mainstream partner banks by February or March next," National Payments Corporation of India (NPCI) MD and Chief Executive Abhaya Prasad Hota told PTI.  "By then, we hope to integrate our software with the nearly 4.5 lakh merchant terminals across the country," he said. NPCI, set up by the Reserve Bank, has developed the Rupay Card in April. In 2009, RBI had asked the Indian Banks Association to launch a not-for-profit company and design a rival card to Visa and MasterCard. China has already developed a similar card called the Union Pay of China. Since April, the Rupay Card has been in use, mostly by rural and urban cooperative banks offering limited service. NCPI has so far roped in four banks -- two urban cooperative banks, one regional rural bank, and one mainstream commercial bank, Bank of India, which has issued this card to its financial inclusion customers. Hota said that five more banks, including mainstream banks like Corporation Bank and Syndicate Bank, are testing the card now and the former will complete the process by next week. The Rupay Card, once commercially launched as a full service debit card, would eventually replace global real-time payment processing leaders--Visa and MasterCard --from the domestic payment system, the NPCI head said. Hota further said that leading financial consultancy firm Ernst & Young India is assisting NCPI in developing and rolling out the national payment switch (NPS) software that is needed for the commercial launch.  The member banks have already invested around Rs 100 crore so far in the project. Of this, Rs 60 crore have gone into developing the Rupay Card and building the NPS network, Hota said. Hota also said he does not have immediate plan to enter the credit card space, saying that will involve tying up with external payment gateways, which would push up charges. "Hopefully we may be able to do that from the fourth year onwards. But our priority is the debit card segment now. Also, the full service debit cards will be only domestically operable as international debit cards will be costly for the banks." But he pointed out that as much as 95% of the debit card transactions are done within the country only. Another area that NPCI is evaluating is the pre-paid cards market, which include travellers cards, gift cards and salary cards. As per the latest RBI data, debit card transactions rose 45.6% in June to Rs 3,784 crore in June from Rs 2,597.5 crore y-o-y. There were over 23.95 crore debit cards in use in the country as of June 30, up 24.8% over 19.19 crore in the year-ago period. Against this, credit card transactions rose 30% in the month to Rs 7,191.11 crore, from Rs 5,538.75 crore y-o-y, despite a 6.7% drop in the number of credit cards in circulation to 1.76 crore during the month. As per the data, credit card deals during the first quarter of this fiscal stood at Rs 22,127.5 crore, as against Rs 16,948 crore y-o-y, a jump of 30.5%. In 2010-11, transactions through credit cards went up 22.15% to touch Rs 75,516 crore, while debit card transactions rose 46.46% to Rs 38,692 crore. NPCI is registered as a company with nine public sector, private sector and foreign banks owning stakes. RBI will oversee its operations in initial years, but will be regulated by RBI throughout. 

Moneycontrol

Do terrorists have accounts in your bank branch?

Indore: The Reserve Bank of India (RBI) has asked all the banks to check terror groups or terrorists do not have an account in any of their branches. The step comes after the United Nations released a list of such outfits or terrorists who could be holding accounts in the banks. Similar instructions have been given by the RBI to some non-banking organisations as well. These directives have been issued in three stages starting August 1. RBI General Manager A Mangalgiri said that on the basis of the list released by United Nations Security Council, an eye would be kept on all the suspicious accounts.

Daily Bhaskar

'No collective responsibility' - Bimal Jalan, former RBI Governor, on India's institutions

Bimal Jalan, former Governor of the Reserve Bank of India, discusses India's institutions and the challenges they face with Sanjiv Shankaran. Edited excerpts from the interview:

On India's institutional framework:

There are some extremely important distinctions. One, there are the institutions of the state, which are permanent. They are Parliament, the executive and the judiciary. That is the Constitutional design.  Second, there are the government institutions. Take ministries. They are institutions from the public point of view. In the third category are institutions that are autonomous. There are rules of the game that can be decided by the government. Policy can be decided by the government. The implementation is the autonomous responsibility of government institutions. For example, the Election Commission, or EC. People [who head it] are appointed by the government. The EC is not accountable to the home ministry. Conducting of elections is the duty of the EC. When we talk about institutions, [we must] distinguish between the layers. One is institutions of the state, they differ from the government. It is open to all to enter the civil services or the judiciary. With this structural paradigm in place, we are very fortunate that our institutions of the state are responsible, accountable and are really responsive to the law and to rights. That is the greatest strength of India. On big issues, we did very well. On delivery issues, which are controlled by ministries, we have done very badly. The main institutional private-public dichotomy is where ministerial decisions [are taken] or administrative autonomy is not there. It is all in the hands of whoever happens to be the minister. If you take the Food Corporation of India, who decides who should be the chairperson? [The Food Minister]

On financial sector institutions:

What you are regulating is delivery of service by others. There are trade-offs. It is a complex issue. People go by trust. The regulator's job is to ensure public interest is protected. Fortunately for us, over a period of time conventions have developed ensuring a harmonious relationship between the different organs. Through the finance ministry, all regulatory organs are accountable to Parliament. In all democracies, the government has the responsibility. Fortunately, over a period of time, I can say from my experience, the relationship is very good. There may be differences from time to time, but they are resolved. This is a positive thing about India. Having worked with a large number of ministers, [I can say] that when there is a national issue of importance, the government rises to the occasion.

On current challenges:

The problem essentially has emerged in the last 20 years. We have passed the antidefection law. It says if you have been elected on a party ticket, you cannot defect. It was a good thing in those days. [But] see the unintended consequences. We have generated a situation where we cannot have a government without coalitions. [There are] parties with five or six members [in the government]. There is no collective responsibility. You have given an incentive for fragmentation. It is one of the worst things that could have happened. We have substituted British imperialism with the imperialism of ministers.  We have to give great importance to two priorities. One, Central ministers will [continue to] decide policy, will bring about macroeconomic growth along with stability. They will appoint executives, but there has to be a clear division of responsibility between policy makers and implementers. Every decision should be subject to the Right to Information Act.

On change:

It can only happen if you make some political reforms. You make anti-defection law applicable to all parties that join the government. If they defect, they go for elections.

Business Today

New policy on cards to boost foreign flights

Stung by what it calls an ‘unfair charge’ of favouring foreign airlines, the ministry of civil aviation is working on a comprehensive aviation policy that would attempt to increase international traffic from India. The ministry would examine India’s air traffic growth projections, the number of countries which remain unserviced by domestic carriers and how to increase connectivity to these countries for both foreign and domestic carriers. A senior civil aviation ministry official said former Reserve Bank of India Deputy Governor Rakesh Mohan is drafting a mega transport policy, where civil aviation will figure prominently.

DNA

New banks may need Rs 1,000 crore

The Reserve Bank of India (RBI) is set to release the draft licencing norms for new private banks in the next few days, with wide-ranging conditions that would include a minimum net worth of Rs 1,000 crore for companies to be eligible to set up banks in India. The central bank, however, is unlikely to push through with issuing final licences to new banks until such time as the Parliament approves the Banking Laws (Amendment) Bill 2011. A parliamentary standing committee is examining the bill which was introduced in Lok Sabha in March. Sources, who did not wish to be identified, said the Bill may come up in parliament only in the winter session. IFCI Ltd, Srei Infrastructure Finance Ltd, Religare Enterprises Ltd, Shriram Transport Finance Co Ltd, L&T Finance Ltd, Bajaj Finserv Ltd, Indiabulls Financial Services Ltd, and Reliance Capital Ltd are among those who are keen to set up banks. The bill, when legislated, will empower RBI to dismiss a bank’s board and force its reconstruction to protect the interests of depositors, shareholders and employees. It will allow RBI to seek details of associate enterprises of banking companies. “Passing the bill is necessary before guidelines for new bank licences are finalised,” said a finance ministry official, who did not wish to be identified.

HT

RBI won't open licence floodgates

MUMBAI: Several corporates aspiring for banking licences may end up being disappointed with the Reserve Bank of India's licencing policy. As against the hopefuls who run into several dozens, the central bank is likely to grant licences to only a handful that it feels may make the mark.  "It is likely that RBI will set out the filters in addition to the capital requirement to identify which are the banks that will qualify," said Ashvin Parekh, partner, National Industry Leader for Global Financial Services, Ernst & Young. He adds that RBI is likely to consider the "systemic risk point of view". "From a systemic risk perspective, those in diversified businesses pose a lesser risk," he adds, giving the example of the steel industry where even very large players lost value and had to go for some form of restructuring. The other factor would be the ability of the corporate to provide capital in a difficult situation like during the financial crisis in 2008.  A host of corporates are preparing the ground to apply for a bank licence. Hopefuls include the Tatas, Aditya Birla Group, and Reliance Capital. Bajaj Financial Services, too, has evinced interest in obtaining a bank licence. In the financial sector, LIC Housing Finance and Shriram Transport Finance are among those keen on setting up banks. Besides, there are a host of other corporates that are keen on obtaining a banking licence. Last week, RBI deputy governor Anand Sinha said that the central bank would come out with draft guidelines for new bank licences "very soon".  According to Monish Shah, director, Deloitte in India, RBI is unlikely to have a limited period window. "If they accept applications for only a limited period, they would end up choosing those who have prepared their applications early rather than choosing the best of breed."  The other issue to watch out for in the draft guidelines would be how RBI defines the fit and proper guidelines. In its discussion paper, the central bank had said that a corporate aspiring for a licence should get a clean chit from all enforcement authorities. But in the wake of scandals in the telecom sector where most of the big business houses have come under the scanner, it is not clear how RBI will address the governance issue. The finance minister had first said in his Budget speech last year that the central bank would come out with new bank guidelines. This was reiterated in his budget speech in February this year. The central bank responded to this call from the government by coming out with a discussion paper where it expressed a host of concerns on granting licences to corporates. RBI had also ruled out giving licences to builders or groups which have a large real estate business.  Post liberalization, when RBI opened its banking licence window in 1992, the central bank received as many as 154 applications. Although RBI did not immediately reject them, it granted licences to only nine and rejected pending proposals in a phased manner over a decade.

TOI

RBI needs to rethink banking licences process in wake of 2G scandal

With banking licences set to be issued in a few weeks (according to media reports), should the government and RBI re-think their basic contours in light of the current 2G scandal engulfing our country? In essence, the 2G scam involves the awarding of valuable licence & spectrum to companies without first discovering the true market price of the licence/spectrum through a competitive auction.  The government's defence that an auction would have increased the cost of doing business and not be in line with the larger social objective of reducing telecom costs through increased competition has not been accepted by anyone.  To calculate the loss to the exchequer of this government decision, one of the methods that the CAG used was to base it on the valuation at which subsequent equity infusion by new investors took place. Therefore, Etisalat's investment in Swan Telecom & Telenor's investment in Unitech was used to benchmark the size of the loss to the government in not awarding these licences at the underlying true market price.  In the current market context, banking licences are as valuable today as perhaps telecom licences were a few years ago. Winners of these licences would be able to instantly raise hundreds of millions of dollars from capital markets/private equity investors, etc. The Reserve Bank of India should worry as to why that will not invite CAG scrutiny! Why should banking licences not be auctioned the same way as telecom licences were supposed to be auctioned?  The Reserve Bank of India can first evaluate all the bidders on all the parameters that they would anyway otherwise use to award licences under the current plan. After that, instead of giving licences to all the eligible parties, there should be an auction among the eligible bidders. In the initial round, the number of bank licences should be limited (say 3 or 4) with complete transparency that no further bank licences will be issued for (say) another 2-3 years.  It is possible that the Reserve Bank of India believes that more banks are really needed to broaden financial inclusion and increase the penetration of banking services in India, but try explaining that to the CAG if something goes wrong.  One of the biggest outperformers in our stock markets this year has been Jubilant Foodworks. One reason for this outperformance is that Jubilant has been able to continuously pass on price increases in the face of rising inflation and maintain its margins.  How is that the Indian government is always so nervous about increasing oil prices and fertiliser prices but the private sector is able to pass on price increases so smoothly?  I believe that the government can easily adopt private sector strategy to increase prices of subsidised goods. For example, Jubilant says it normally increases prices twice a year by about 2.5% each time, which separately is too small for consumers to notice but adds up over time. 

ET

Why not Auction Banking Licences? - MIR ARORA

With banking licences set to be issued in a few weeks (according to media reports), should the government and RBI re-think their basic contours in light of the current 2G scandal engulfing our country? In essence, the 2G scam involves the awarding of valuable licence & spectrum to companies without first discovering the true market price of the licence/spectrum through a competitive auction. The government’s defence that an auction would have increased the cost of doing business and not be in line with the larger social objective of reducing telecom costs through increased competition has not been accepted by anyone.  To calculate the loss to the exchequer due to this government decision, one of the methods that CAG used was to base it on the valuation at which subsequent equity infusion by new investors took place. Therefore, Etisalat’s investment in Swan Telecom & Telenor’s investment in Unitech was used to benchmark the size of the loss to the government in not awarding these licences at the underlying true market price.  In the current market context, banking licences are as valuable today as perhaps telecom licences were a few years ago. Winners of these licences would be able to instantly raise hundreds of millions of dollars from capital markets/ private equity investors, etc. The Reserve Bank of India should worry as to why that will not invite CAG scrutiny! Why should banking licences not be auctioned the same way as telecom licences were supposed to be auctioned? The Reserve Bank of India can first evaluate all the bidders on all parameters that they would anyway otherwise use to award licences under the current plan. After that, instead of giving licences to all the eligible parties, there should be an auction among the eligible bidders. In the initial round, the number of bank licences should be limited (say 3 or 4) with complete transparency that no further bank licences will be issued for (say) another 2-3 years.

It is possible that the Reserve Bank of India believes that more banks are really needed to broaden financial inclusion and increase the penetration of banking services in India, but try explaining that to the CAG if something goes wrong. One of the biggest outperformers in our stock markets this year has been Jubilant Foodworks. One reason for this outperformance is that Jubilant has been able to continuously pass on price increases in the face of rising inflation and maintain its margins.  How is that the Indian government is always so nervous about increasing oil prices and fertiliser prices but the private sector is able to pass on price increases so smoothly? I believe that the government can easily adopt private sector strategy to increase prices of subsidised goods. For example, Jubilant says it normally increases prices twice a year by about 2.5% each time, which separately is too small for consumers to notice but adds up over time.  Should the Indian government look at creeping price rises rather than onetime increases announced with much scrutiny and visibility? What if the government announces that the price of LPG cylinder will be raised by . 2 each month for the next x number of months and the price of kerosene will be increased by 25 paise each month for the next many months. How will various groups react to this when this is announced? Economists will not know how to immediately build this into their inflation forecasts, opposition parties will not know how to protest about 25 paise price hikes in kerosene, TV channels will not be able to call a . 2 LPG price hike as “Breaking News” and consumers will be too busy eating pizzas to realise what has happened.  

ET - The author is fund manager at Helios Capital

RBI May Resort To Another Rate Increase In Sept: Experts

Experts believe that the Reserve Bank of India or RBI may continue with its tight monetary policy stance to check inflation and announce another increase in key interest rates in September, though the global economic environment is on a downslide. However, while the RBI is likely to go for another interest rate hike at its next mid-quarterly policy review on September 16, it will not be very aggressive, they said. Global research firm Macquarie economist Tanvee Gupta Jain said though the RBI would continue on its anti-inflationary attitude, adverse global environment suggests that it might become less aggressive. On the other hand, Morgan Stanley also reckons, "The RBI will continue with its anti-inflationary stance with one more 25 basis points hike to anchor inflation expectations decisively, barring a further deterioration in the growth outlook." The RBI has increased the repo (borrowing) rate by 50 basis points to eight percent and the reverse repo (lending) rate by 50 basis points to seven percent at its latest monitory policy review in July. The apex bank has increased the key policy rates 11 times since March last year, to rein in inflation, which has been hovering above the 9 percent mark since December last year. Headline inflation stood at an eight-month low of 9.22 percent in July. However, this was much above the RBI's comfort zone of around five percent. Economic Advisory Council to the Prime Minister of India (PMEAC) in its Economic Outlook for 2011-12, had projected inflation to remain high at around nine percent till October, before moderating to 6.5 percent by March next year. Notwithstanding the adverse global economic scenario, better-than-expected June factory output data is likely to prompt the apex bank to go for another round of rate hikes. In June this year, the Index of Industrial Production grew by 8.8 percent, compared to 7.4 percent in the corresponding period last year. However, the recent negative global developments, such as, the sovereign debt crisis in Europe and increasing concerns that the US economy may slip into recession after its long-term debt rating was lowered a notch to AA+ by Standard & Poor's are expected to eventually affect the Indian economy to some extent, the experts added. 

http://www.rttnews.com/Content/IndianNews.aspx?Id=1697235&SM=1

BRBNMPL man siphons off Rs 4 lakh from employee's PF

Deputy Manager of BRBNMPL is in the dock for pocketing Rs 4 lakh, which was actually the Provident Fund (PF) of the employees.  Senior manager of Bharatiya Reserve Bank Mudrank S Satanarayana, has filed a complaint against Niranjan Tippa for misappropriation. According to him, Tippa was in charge of the PF section, apart from handling other sectors. The scam came to light during the bank's annual audit and officials found that Rs 2.94 lakh and Rs 1.3 lakh went missing in August and November 2010 respectively. When they enquired with Tippa, he failed to give them any details about the missing amounts."He was kept under suspension and a criminal case was filed against him," Satyanarayana informed. The Tilak Nagar Police has filed a case of criminal breach of trust and is not investigating the matter. PI Kalyan Shetty said, "A case has been booked and we have initiated investigations. We are yet to ascertain where the money has gone from the bank account."

Mid Day

Microfinance experts meet in Bangalore

Prof. Satchindananda Sogala noted that the regulation attempted by the Reserve Bank of India (RBI) has failed due to its wrong focus on uniformity and micromanagement. While the RBI had the right intentions, its one-size-fits-all solution to regulation cannot work. There should be self-regulation instead.....

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Indian banking sector to be 3rd largest by 2025: BCG

The Indian banking sector is poised to become the world's third largest in asset size over the next 14 years, a report released here today said. "The domestic banking industry is set for an exponential growth in the coming years with its assets size poised to touch USD 28,500 billion by the turn of the 2025 from the current asset size of USD 1,350 billion (2010)" says an IBA-FICCI-BCG report, titled "Being five-star in productivity--Roadmap for excellence in Indian banking, prepared for the Indian Banks Association. The report was released on the eve of the three-day IBA-FICCI-BCG (Indian Banks Association, FICCI and Boston Consultancy Group) bank summit beginning tomorrow here. The summit will be launched by Reserve Bank Governor D Subbarao and will be attended by heads of banks and the four RBI deputy governors among others. The report further says China will overtake the US as the world's largest banking industry by 2015, when it is expected that the asset size of Chinese banks will be nearly USD 30,000 billion, while that of the US will be around USD 28,000 billion. By 2025, the Chinese banks will have an asset size of over USD 1,15,000 billion, while that of the US it will be around USD 1,00,000 billion. Releasing the report, Bank of Baroda chairman and IBA chief M D Mallya said, "the global banking crisis has highlighted the perils of irresponsible banking and through this theme of productivity excellence, we wanted to focus on the tremendous scope for our banks to improve their productivity and consequently, their profitability." The report sets out an action agenda for banks, based on insights from an extensive productivity benchmarking exercise conducted across 40 banks which highlights that banks have to strive for excellence on five dimensions: branch sales and service, new channels, lean operations, organisational design and bad debt management.  Commenting on this, BCG India partner and director Saurabh Tripathi said, "within each of the five dimensions, the industry looks sound at an overall level but disaggregation of performance into components and comparisons with various players exposes significant scope for improvement,". The report notes that domestic banks can improve sales if they increase their branch presence. "Domestic banks deploy 62% of staff in customer-facing roles as against the benchmark of 82% observed by BCG globally," Tripathi said. Among the new channels, mobile phones, propelled by 3G and smart phones, will emerge as an undisputed winner by 2020, potentially accounting for 20-30% of total transactions, says the report. On efficiency, the report notes that the domestic banks are doing well overall with industry cost-income ratio below 50%. However, the survey says there is room for improvement. "On an average, our banks have about 20% of staff deployed in back office processing (for some banks, as high as 40%) as against a global best of 10 percent," says the report. "Should our banks embrace the above given ideas, they can break the compromise between profitability and serving low ticket-high risk business at reasonable margins. At the same time, the government and RBI have enabling and catalysing roles to play", concludes the report.

Moneycontrol

Indian banking poised to become 3rd largest by 2025

Banks need to focus on branch sales and service, new channels, lean operations, organisation design and debt management

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No double-dip recession, US to see modest growth: Macklem

... Well, Canada and India have been working together at the G20 table. We have been asked to co-chair two working groups within the G20. The first one, the working group that I co-chaired with Rakesh Mohan had made a number of recommendations to strengthen the financial regulatory framework. The other group co-chaired by Canada and India focused on sustainable and balanced growth.....

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Inflation worries likely to cause RBI interest rate hike

New Delhi: The Reserve Bank of India is likely to continue with its tight monetary policy stance to fight inflation and effect another hike in key interest rates in September, even though the global economic environment is on a downslide, believe experts. However, while the Reserve Bank of India is likely to go for another interest rate hike at its next mid-quarterly policy review on 16 September, it will not be very aggressive, the experts said. According to global research firm Macquarie economist Tanvee Gupta Jain, “While the RBI will continue on its anti-inflationary stance, adverse global environment suggests that it might become less aggressive…” Global investment banking major Morgan Stanley also thinks, “The RBI will continue with its anti-inflationary stance with one more 25 basis points hike in order to anchor inflation expectations decisively, barring a further deterioration in the growth outlook.” The RBI, at its last review meet in July, raised the repo (borrowing) rate by 50 basis points to 8 percent and the reverse repo (lending) rate by 50 basis points to 7 percent. The apex bank has hiked the key policy rates 11 times since March, 2010, to curb inflation, which has been hovering above the 9 percent mark since December last year. Headline inflation stood at an eight-month low of 9.22 percent in July. However, this was much above the Reserve Bank’s “comfort zone” of around 5 percent. Despite several interest rate increases, the rising discretionary income of the middle class is likely to exert upward pressure on inflation, say experts. In its Economic Outlook for 2011-12, the PMEAC had projected inflation to remain high at around 9 percent till October, before moderating to around 6.5 per cent by March, 2012. Notwithstanding the adverse global economic scenario, better-than-expected June factory output data is likely to prompt the Central Bank to go for another round of rate hikes. The Index of Industrial Production grew by 8.8 percent in June, 2011, compared to 7.4 per cent in the corresponding period last year. However, recent negative global developments like the sovereign debt crisis in Europe and increasing concerns that the US economy may slip into recession after its long-term debt rating was lowered a notch to AA+ by Standard & Poor’s are expected to eventually affect the Indian economy to some extent, the experts believe.

Firstpost

Wary RBI alert on capital flows

With the level of capital inflows into the country from foreign institutional investors (FIIs) expected to swell significantly as the financial crisis deepens in the US and Eurozone, the Reserve Bank of India (RBI) is taking no chances and keeping a close watch on the developments. While a surge in overseas portfolio would mean an increased confidence in the Indian growth story, it would fan inflation, which is already a cause for concern. “The central bank is not very comfortable with the idea of a surge in capital inflows at this stage as it is already battling high inflation,” a government source told HT on the condition of anonymity. “However, an increase in the inflows is imminent and the situation is being closely monitored.”  “Hot money” or FII investment is considered volatile as it be could be pulled out anytime. However, in India, a large chunk of the FII investment is also used to finance the current account deficit. FIIs invested a net $39 billion or Rs 75,500 crore in 2010 against Rs 83,423 crore in 2009. Finance minister Pranab Mukherjee had said that the financial crisis in the West would result in increased capital inflows, which would keep the growth story intact.

HT

India Inc’s global liabilities exceed forex reserves

....According to latest RBI data, corporates have a net liability of $437 billion on adjusted IIP at December-end 2010, as against a forex cover of $279 billion during the same period. This means corporate India’s financial liabilities far exceed the comfort provided by the forex cover...........

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Common test to select bank officers on Sept 18

New Delhi Over 14 lakh candidates have applied for the first common examination, introduced from this year, for selection of officers in 19 nationalised banks other than the State Bank of India group. "As many as 14.5 lakh applications have been received for the first Common Written Examination (CWE) which is quite substantial," Institute of Banking Personnel Selection (IBPS) Director M Balachandran said. The CWE will be held on September 18, he said. Explaining the process, he said successful candidates in the CWE who will be issued scorecards are required to apply, quoting their CWE scores, to any of the participating banks they wish as and when individual banks call for applications, quoting their person. The scorecard will be valid for one year. Each bank will then individually shortlist candidates and carry out their own selection processes such as interviews for final selection, he said. Each participating public sector bank will independently issue a separate recruitment notification, specifying their vacancies and stipulating the eligibility criteria in terms of age and educational qualification, experience, minimum required level of IBPS score in each test etc, he said, It is to be noted that during 2010-11, IBPS conducted 17 written examinations for recruitment of Officers and Management Trainees in 19 PSBs in which about 20 lakh candidates appeared.

The institute, promoted by PSU banks and the Reserve Bank, has been rendering assistance to the financial sector in activities of employee selection, promotion and placement.  Similarly, the institute will be inviting application for selection of clerks of various banks during this week.

Expressindia

Coin Scrap

....Shafi feels that a coin never falls in value after it is minted, when its value ends as legal tender, it always givesgood returns as scrap, and once this phase ends itsantique value begins to grow........

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RBI Likely to Outsource Regulation of Microfin Cos

 

May focus on framing regulation, leave supervision to other agencies

The Reserve Bank of India (RBI) may outsource the regulation of microfinance institutions (MFIs) as it lacks the ammunition to do it. India has a whopping 444 MFIs and their loans run into thousands of small borrowers, which is why RBI was earlier against taking up the task of regulating the sector before the MFI Bill proposed to vest the power with it. The banking regulator is now contemplating taking the support of chartered accountants and banks to regulate micro lenders once the MFI Bill becomes an Act. RBI is also thinking of building a self-regulating organisation (SRO) for the microfinance sector. RBI Deputy Governor KC Chakrabarty told ET while RBI will have the power to frame policies for the sector, supervision can be done by outside agencies.  “If you know that the police are behind you, you don’t commit misdeeds. It is not important who does the policing,” Chakrabarty said. “We will frame the regulation, the implementation part can be outsourced,” he added. Last week, the deputy governor went on record saying the central bank is not equipped to regulate the fledgling MFI sector. In the absence of a central regulator, the sector has been going through a prolonged patch of crisis since October last year, as banks had stopped lending to them following a decision by Andhra Pradesh to slap an ordinance on them restricting their activities. “We are not saying that we are capable of regulating MFIs as of now. But we have to get equipped. This job has to be done and somebody needs to do it,” he had said last week. The draft Micro Financial Sector (Development & Regulation) Bill, 2011, proposed to vest the power with RBI to regulate MFIs and frame policies for the sector. Bandhan Financial Services founder Chandra Shekhar Ghosh said: “We welcome RBI as a central regulator as dual regulation does not work well. How does the central bank carry out the task is the bank’s prerogative.” The Malegam Committee on MFIs has recognised the importance of an SRO for the sector. “We are happy that the regulator recognised the importance of an SRO,” said Mathew Titus, executive director of Sa-Dhan, the umbrella organisation for the 444 MFIs doing micro-lending business in the country. Sa-dhan has built a database on 170 organisations capturing seven years of their operation. “With this data, Sa-Dhan can be prepared as an effective monitoring agency. If we are able to build good analytical backbone, we will be able to spot trouble, if any,” Mathew said. Chakrabarty said RBI may engage chartered accountants to conduct audits of MFIs regularly. 

ET