Prokerala News
The very purpose of VITALINFO is to provide a platform for wider dissemination of updated information related to and happening of events in and around RBI.
Friday, August 26, 2011
RBI to promote use of cashless payment system
Rising wage bill pushes RBI expenses 16%
Rising wage bill pushed up the establishment expenditure of the Reserve Bank by about 16 per cent to Rs 2,300.71 crore during 2010-11 (July-June). The establishment expenditure during the financial year increased by Rs 313.89 crore mainly "due to the revision of wages of all categories of staff with retrospective effect", said the RBI's annual report released today. In 2009-10, the expenses were Rs 1,986.82 crore.
Expressindia
Growth prospects for 2011-12 subdued: RBI
... “Downside risks to growth have increased since our assessment in July. The decline in global commodity prices has not been significant, and despite all the financial market turbulence, oil prices are back to earlier levels,” RBI Deputy Governor Subir Gokarn said, while releasing the report.....
High inflation, low deposit rates force people to hold on to cash
High inflation coupled with low bank deposit rates saw currency holding in financial savings of the household sector rise significantly in 2010-11, according to the Reserve Bank of India's Annual Report 2010-11. The gross financial savings increased to Rs 10,43,977 crore from Rs 9,91,582 crore in 2009-10. Of this, the share of currency increased substantially to Rs 1,39,344 crore, from Rs 96,940 crore, an increase of Rs 42,404 crore. As against this, the share of deposits increased to Rs 4,93,237 crore (Rs 4,67,575 crore), a rise of Rs 25,662 crore. According to the report, several factors could explain the growth in currency demand in India in 2010-11. Inflation remained high, often in double digits, in respect of commodities such as foodgrains, pulses, fruits and milk during 2009-10 and 2010-11 where transactions are expected to be cash-intensive. Second, there was a step-up in real economic activity from 6.8 per cent in 2008-09 to 8.5 per cent in 2010-11. Third, the interest rate on bank deposits was generally lower than inflation during 2010-11 implying a negative real rate of return on deposits. In the years when inflation was relatively high, currency demand shot up significantly. However, the situation has reversed in 2011-12. Currency demand has come down because deposit rates have gone up, said Mr Deepak Mohanty, Executive Director, RBI. The share of households' financial assets to GDP fell to 9.7 per cent in 2010-11, from 12.1 per cent in 2009-10. This is the first time in 15 years that the share of households' financial assets to GDP fell below 10 per cent. Due to high inflation people dipped into savings for consumption. This was evident from redemptions in mutual funds, Dr Gokarn explained.
HBL
Downside Risks to Growth Rising, No Hard-Landing: RBI
The Reserve Bank today warned against accepting high inflation as the 'new normal', and said more downside risks to growth are emerging even as inflation remains very high, but ruled out any possibility of hard-landing of the domestic economy.
"The outlook for the domestic industrial sector for this fiscal remains uncertain, with the downside risks outweighing the upside risks," RBI Deputy Governor Subir Gokarn told reporters this afternoon here while releasing the central bank's Annual Report for the year ended June 2011. "However, we are not seeing any hard-landing, which will be a possibility if the economy falls behind the trend growth of 8 percent," the Deputy Governor said adding accepting the sticky inflation as the new normal would not help serve the economy in the long term. Growth prospects for this fiscal are "relatively subdued" compared with the previous year because of the increased global uncertainties, persistent inflationary pressures and higher borrowing costs, the report said and noted that "the economy needs to brace up for a difficult year from a macroeconomic perspective. With weak supply response, inflation remains an important macroeconomic challenge." Stating that growth is likely to remain at 8 percent this fiscal, with a downward bias and lower than 8.5 percent clocked in FY11, the report warns that if the global financial condition deteriorates, it could further lower the growth projections in the current fiscal. "Growth prospects for FY12 seem to be relatively subdued compared to the previous year due to a number of unfavourable developments. Global uncertainties have increased," the report said. "While the immediate challenge to sustaining growth lies in bringing down inflation, growth sustainability over the medium-term depends on addressing the structural bottlenecks facing the economy," Gokarn said. Inflation, which still remains high despite near average monsoon, the Deputy Governor said, "our anti-inflationary stance as presented in the July 26 policy remains the same, while on the growth outlook front there have emerged more downside risks since then and now." However he added, "as inflation starts going down (in view of the softening global commodity prices following the worsening debt crisis in the US and the Eurozone) and which is what we are anticipating post-November-December, that changes the overall perspective on the growth-inflation balance." The RBI, which has raised interest rates 11 times since March 2010 by increasing the repo rate by a whopping 475 basis points, out of which 350 bps hike have been in FY11 alone, but still faces inflation above 9 percent, said becoming resigned to high inflation can push up inflationary expectations in the long term and ultimately lead to a hard landing for Asia's third-largest economy. Core or wholesale-price inflation rate has stayed over 9 percent since December last and stood at 9.22 percent in July, while weekly food inflation numbers have been seeing lots of volatility of late after softening in the first quarter of this fiscal. Food price numbers inched closer to double-digit mark for the week ended August 13 and rose to 9.80 percent on the back of dearer vegetables, up from 9.03 percent in the previous week. However, this is much lower that the number for the corresponding week of last August when it stood at 14.56 percent. "On a year-on-year basis, inflation may remain stubborn in the near-term and start falling sometime in the third quarter of 2011-12," said the RBI report, which reiterated the Reserve Bank's inflation forecast of 7 percent by the end of March 2012. When asked on the possible impact of a likely third round of quantitative easing (QE3) by the US Fed, (which is meeting tomorrow), Gokarn said, it may boost commodity prices and fan inflation in the country and noted that already crude prices have started going up. "Given the fiscal limitations and growing signs of weakness in the US, the Fed has already indicated that it will pursue its near-zero rate policy at least till mid-2013. It has also hinted at another dose of quantitative easing. This policy stance may keep the commodity prices elevated," the RBI said in its annual report. The upside risks to inflation are more pressing concerns for the short-term, and it is too early to change the central bank's anti-inflationary policy stance, added the report. On the fiscal measures to contain inflation, Gokarn said the government needs to raise fuel prices further, to contain the burden of subsidies if global oil prices stay at current levels, which if rises further would burden the fiscal target. Despite the rising threat to GDP growth, the report said, it doesn't not see any major pressure on the current account deficit front, which stood at 2.6 percent of GDP last fiscal. "The quality of foreign capital inflows into the country this fiscal has vastly improved as the first quarter has seen strong FDI inflows, unlike last year, and so we are of the view that the CAD position should be comfortable. But if the robust exports growth gets impacted very badly due to the slowing global growth, it may pose some challenges," Executive Director Deepak Mohanty said. The current account deficit(CAD) improved to 2.6 percent in 2010/11 from 2.8 percent the previous year and is expected to be within 3 percent this fiscal.
The Outlook
RBI annual report hawkish: Does it indicate a rate hike?
The Reserve Bank of India (RBI) annual report which takes a comprehensive look at the economy has warned of a tough 2011-12. It remains hawkish on inflation and worried about growth. In the near term it asks the government to qualitatively improve fiscal consolidation. In the long term it questions the 12th plan’s 9% GDP target and says much will have to be done to improve the economy potential growth. CNBC-TV18's Latha Venkatesh reports on what this means for the rate scenario going ahead? Going by the hawkish overtones, it is quite possible that the Reserve Bank of India will hike rates. It says that in FY11 fiscal deficit came down to 4.7% from 6.5% in the earlier year only because of one of reasons and a cyclical upturn in the economy created by fiscal stimulus, without that they would not have been able to achieve it. It points out that the level of expenditure by the government actually created aggregate demand and made monetary policy’s task of bringing down inflation much more difficult. Going from current assessment it also points out that capital outlay of the government is coming down. “Even at a time when the expenditure was way up high and fiscal deficit was high, capital outlay as a percentage of GDP in FY11 actually declined to 12.9% from the earlier years’ 13.8%,” the report said. It says that any enthusiasm of 9-9.5% brought about by the 12th plan’s targets needs to be smothered as already there is a global growth scare. If you want 9-9.5% growth the current 33-33.5% savings rate should increase to 38% or thereabouts, so increase by 5% points and the investment rate should go to 40.5% only then that is achievable. So, at the moment potential of the economy needs to improve before you get such dreams.
Moneycontrol
Scope to simplify forex norms
The Report of the Committee to Review the Facilities for Individuals under FEMA, 1999 (August 2011) was submitted to the Reserve Bank of India (RBI) within the stipulated period of three months. In a milieu where committees/working groups invariably violate the stipulated timeframe, the Chairman of the Committee, Ms. K. J. Udeshi, deserves kudos for strictly adhering to the time limit.........
RBI’s earnings on forex hit another low; gold is the savior
The Reserve Bank of India’s hoard of foreign exchange is increasingly a losing proposition. If, in 2009-10 the central bank earned a meagre return of 2.09 percent on its average foreign currency assets, in 2010-11, it was down to an even more abysmal 1.74 percent. In actual terms, the earnings fell from Rs 25,103 crore to Rs 21,150 crore – a fall of Rs 3,953 crore on average foreign currency assets of over Rs 12 lack crore in both years. This sorry state of fund management is the result of holding huge exchange assets in US dollars – which is, in turn, the result of the Federal Reserve’s deliberate policy of keeping interest rates at near-zero levels in view of weak growth. The only bright spot in the RBI’s external fund management was its gold reserves. Thanks to an inspired decision to purchase 200 tonnes of gold in November 2009 from the International Monetary Fund (IMF), the RBI made a huge valuation gain of Rs 17,613 crore in its gold reserves, which went up from Rs 92,704 crore as on 30 June 2010 to Rs 1,10,317 crore a year later. The RBI’s financial year runs from 1 July to 30 June.
Firstpost
Nabard refinancing rates won’t come easy, results count
....The Reserve Bank of India (RBI), of late, has been asking banks to step up their priority sector lending. Under current regulations, banks are required to lend 40 percent of their loans to agriculture, exports and other sections recognised as priority sectors.......
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Madhavpura Bank gets life, conditions apply
Infamous for Ketan Parekh scam and several other crisis plaguing it, Madhavpura Mercantile Cooperative Bank (MMCB) has got yet another lease of life. Regulator of banks, Reserve Bank of India (RBI) has reappointed the same board at the bank to be chaired by Radha Singh, retired IAS officer and ex-secretary to government of India in department of Agriculture and Cooperation. The board received an indefinite extension from RBI On Tuesday, the board has got indefinite extension from RBI with a motive of not leaving culprits including Ketan Parekh, free. But simultaneously, RBI has restricted the bank by imposing Article 35 A on MMCB. By putting Article 35 A on bank, MMCB can not accept new deposits as well as the account holders can not withdraw more than Rs1,000 in six months. Hardly 100 people have invested Rs60 lakh in MMCB in last 10 years, on whom the restriction is imposed. Rest, the Article 35 A will not be barrier to bank either for revival or for reconstruction. But by getting extension to board of MMCB, the hopes of investors getting their money back is alive again. As many as 10,400 account holders have been waiting for their Rs100 crore for past 10 years. "It is good news for investors that they can still get their money back. RBI has reappointed the same board and now the co-operative bank can once again put pressure on Ketan Parekh for recovery," said Jyotindra Mehta, chairman of Gujarat Urban Cooperative Banks Federation (GUCBF). So far, Ketan Parekh has already paid around Rs400 crore in installments in last three years but the remaining amount of around Rs800 crore is yet to be recovered. In the Ketan Parekh scam, MMCB is supposed to recover around Rs1,200 crore which includes interest. Bank is yet to pay around Rs100 crore to around 10,400 account holders in Gujarat.
DNA
Speak Asia COO fears re-arrest by police from other states may petition SC
... Speak Asia had asked for an appointment with the RBI and accordingly the central bank had fixed a meeting for 24th August, in the second half of the day. However, on the morning of 24th August, Speak Asia sent an email to the RBI saying that since its officials were in jail, the meeting be postponed to another date. Speak Asia had to get an order from the Bombay High Court to fix an appointment with the RBI. ....
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Thursday, August 25, 2011
RBI does not see any systemic risk yet: Anand Sinha
Reserve Bank of India Deputy Governor Anand Sinha on Wednesday said that though bad loans were rising in the system, the central bank did not see it as a systemic risk yet. Talking to reporters on the sidelines of FICCI-IBA summit here, he said, “We don't see any systemic risks from the current trend of rising non-performing assets. But, there could be some sectoral risks going forward.” The central bank had jacked up its key lending rate by a steep 425 basis points in the past 15 months to batten down inflation and the banks have passed on the increased cost to borrowers. “I would not say we are particularly worried about retail loan segment, but yes, the retail segment is the one that is likely to feel the pressure.” Banks have been witnessing rising risks from small and medium scale industries and unsecured portfolios, which primarily consist of personal loans and credit cards business, apart from the home loan front. Bankers had told RBI Governor D. Subbarao last month that there was no systemic risk as of now for banks, even as the interest rate got tightened. On Tuesday, State Bank of India Chief Financial Officer Diwakar Gupta said his bank's Rs.7,000 crore education loan had been witnessing pressure and the level of the stressed assets had reached 4 per cent of this exposure. Kolkata-based United Bank Chairman and Managing Director Bhaskar Sen had also said there were rising risks to assets, especially from the SMEs and the retail sector, and that he might look at increasing in the tenor of the loan than increasing the EMIs. On the impact of the Basel III on the domestic banks, especially on state-run banks, which control over 70 per cent of the banking assets in the domestic system, Mr. Sinha said the government would have to infuse funds into the banks to ensure that they were adequately capitalised. Meanwhile, Crisil Ratings Director Ramaraj Pai said the 26 public sector banks would need a huge Rs.8 lakh core capital by 2019, when the Basel III norms would be implemented. As of 2009-10, these banks had a core (Tier I) of capital of only Rs.70,000 crore, which is well above the Basel II requirement.
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RBI Deputy Governor Anand Sinha (left) and SBI Chairman Pratip Chaudhuri at banking conference in Mumbai on Wednesday |
HBL
Gokarn flags up changes reforms brought in
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RBI Deputy Governor Subir Gokarn (second from left) at the inaugural function of The Hindu Business Line Club for the 2011-12 academic year at SRM University at Kattankulathur on Wednesday. Central Bank of India Executive Director Rajiv Kishore Dubey (right) and Chancellor T.R. Pachamuthu and Vice- Chancellor M. Ponnavaikko (left) are in the picture |
Globalisation has created a boundaryless market place”
Twenty years after the launch of economic reforms in the country and the technological advances that accompanied it, there had been enormous changes in employment opportunities, markets, company structures and hierarchies and the economic environment, Reserve Bank of India Deputy Governor Subir Gokarn said on Wednesday.Speaking at the inaugural function of The Hindu Business Line Club for the current academic year at SRM University, Kattankalathur, he said there was a time when people had to “wait in queue to buy a wristwatch and [for] seven years to buy a Bajaj scooter.” All those had become a thing of the past. Mr. Gokarn, who spoke on ‘Future of Organisation: Environmental Drivers and Strategic Responses,' said the reforms had ushered in a growth rate that had not been witnessed earlier as the economy began to be integrated with the rest of the world. “In our times, we did not have the options of entering the media, software or ITES, where there are huge opportunities now,” he said, reminding the students of the importance of their keeping themselves abreast of developments. Young people in companies were able to adapt themselves swiftly to technological advances faster than the older generation. “We can see Chief Executive Officers who are just 30 years old.” Rapid advancements in technology, he said, had made many jobs redundant. “Employees in offices communicate more through intranet and e-mail, though they may be only five feet away from each other.” Companies brought along with them their own work culture and technologies, causing changes in hierarchy where a person no longer had to report to one boss. “In a global context, they report to many people, resulting in the extinction of middle-level management.” Mr. Gokarn said the entry of global organisations in India and the expansion of Indian companies worldwide had resulted in a “boundaryless market place.” While companies competed with each other in one country, they worked together elsewhere. The nature of competition could be anything and could come from anywhere. In his keynote address, N. Ram, Editor-in-Chief, The Hindu, said the RBI had protected the country's economy when the economy was in turmoil all over the world. The RBI was in sound hands under the leadership of its Governor D. Subbarao and Mr. Gokarn. He said a good curriculum, infrastructure, qualified faculty members, transparency, and fairness in the system of admission and career opportunities were the five important hallmarks of a good educational institution. Referring to a recent news report, he said it was sad to note that among 518 young lawyers who appeared in tests to be selected as magistrates in Karnataka, 517 had failed. He said the anti-corruption movement taking place in India could be taken up as a good subject for a case study by students and faculty. Pointing to a CRISIL report, which said India would need 55 million additional jobs in the next five years, Mr. Ram said young men and women would have to push themselves to do well in the new environment. He praised SRM University and its founder-chancellor T.R. Pachamuthu for creating an educational institution of excellence. He also lauded the Central Bank of India, with which The Hindu had associated itself even before the nationalisation of banks. Through its association with The Hindu, the bank had indirectly contributed to the freedom of speech and expression. Mr. Ram said The Hindu Business Line Club had associated itself with 175 educational institutions in and around Chennai. Rajiv Kishore Dubey, Executive Director, Central Bank of India, said education of India's youth was among the top priorities of the bank and it had extended a huge amount in educational loans, and this would continue. Offering his felicitations, K. Venugopal, Joint Editor, The Hindu Business Line, said the newspaper would continue to provide news and information that would be of immense value to students. Mr. Pachamuthu and Vice-Chancellor M. Ponnavaikko, Registrar N. Sethuraman and Pro Vice-Chancellor P. Thangaraju spoke.
HBL
Reserve Bank of India has done well
Reserve Bank of India (RBI) Governor D Subbarao has done well to place his cards on the table on the issue of new bank licences. Speaking at a bankers' conference in Mumbai on Tuesday, the Governor clarified that the Banking Regulation Act, 1949, would have to be amended before new bank licences are issued. As the banking sector regulator, the Bank wants certain statutory provisions strengthened/incorporated, to strengthen its hands in dealing with banks, presumably, those on lending to related entities, powers to supercede the Bank's Board and transfer of shares, among others. While this will delay new licences, given what is at stake - financial and macro-economic stability - there is no virtue in haste. The reality is, when banks get into trouble , fears of systemic consequences invariably lead to taxpayer money being expended in their rescue. Moreover , the two main objectives finance minister Pranab Mukherjee put forth to justify issue of new bank licences - competition and financial inclusion - are unlikely to be served exclusively by licensing more banks. New banks, as past experience has shown, tend to open branches in prosperous metropolitan and urban areas rather than in rural, un-banked ones. As for competition, with almost 2,300 banks (including cooperative banks), we can hardly complain of lack of competition. But yes, there is no reason why any sector should be closed to entry altogether. So the RBI must clearly spell out the prerequisites for entry. The Bank is reportedly not in favour of allowing corporates into the sector. It is not alone. Even in lightly regulated markets like the US, neither GE nor Wal-Mart has been given a branch banking licence. Also, past experience the world over has shown that when corporate houses control banks, the outcome has never been happy from the public perspective . So, how can the RBI ensure it strikes the right balance and be seen as the best judge rather than as opaque and arbitrary? The way out would be to make matters as transparent as possible and retain the right to decide who satisfies the all-important 'fit-and-proper' criterion.
ET
Bankable idea
The RBI's caution on the proposal to issue banking licences to corporate houses is understandable. Its Governor D Subbarao says he's chiefly worried about big firms using deposits as a private repository of funds for other interests. It's feared that opaque and complex company structures may serve to conceal the practice of these entities lending to themselves and their associates. Such "self-dealing" would mean conflict of interest and heightened risk, both wholly avoidable in a trade founded on customer trust as well as the stability and interdependence of financial institutions. Since these apprehensions can't be blinked at, the central bank rightly calls for better checks against misuse of public money before giving the go-ahead. That shouldn't, however, become an excuse for putting the issue in cold storage. Let's not forget the positives of letting corporate houses promote banks. As Subbarao concedes, they have capital, business acumen and managerial competence. These attributes are invaluable in a sector we all know needs to grow, modernise and innovate in a woefully underbanked country. Well-established, reputed companies are likely to be mindful of the importance of customer confidence, on which they've built their existing enterprises. Moreover, issue of new banking licences is linked to the goal of financial inclusion. With corporate social responsibility already built into business blueprints, resource-rich, efficient firms can help further this aim. Neither the finance ministry nor RBI opposes granting banking licences to industrial houses in principle, on account of the benefits the move can bring. What we need, therefore, is for policymakers to strengthen statutory and regulatory safeguards to both check the credentials of would-be licencees and deter malpractice. What we don't need is to bar entry to corporate entities simply out of fear of reform.
TOI
Basel III norms may dull banks in the short run
Implementation of Basel III norms in India would result in erosion of banks' profitability (return on equity), said experts. The norms are to be implemented over a six year horizon starting January 1, 2013. Full implementation is expected to be achieved by January 1, 2019.
RBI's Sinha allays fears of larger impact of Basel III
Reserve Bank Deputy Governor Anand Sinha today allayed fears that the Basel III implementation will seriously hit the domestic banks. "The estimate RBI has done is that transition to Basel III would not be much of an issue for our banks as all the capital ratios of our banks are at about the minimum requirement of Basel III. Moreover, capital requirement on increased covering of risks would not be applicable to our banks as either those activities are not allowed or the magnitude is quite small," Sinha told a session on the topic at the Ficci-IBA banking summit here. The Basel III kicks in from January 1, 2013 and has to be completed by January 1, 2019. However, Crisil Ratings director Ramaraj Pai said the public sector banks would need a whopping Rs 8 trillion in core capital by 2019, when the Basel III norms will be implemented. As of FY2010, these banks had a core (Tier I) of capital of only Rs 70,000 crore, well above the Basel II requirements. Explaining further, Sinha said resecuritisation is not allowed in the country and there is a whole lot of capital load that we don't have, similarly our trading books are much smaller. The stress point for our banks would be to adjust to the amortised portion of pensions and gratuity liabilities in opening balance sheet on April 1, 2013, while transitioning to the international financial reporting standards or IFRS. Sinha also pointed out that going forward the capital requirements, including core equity capital, are likely to be substantial for supporting high GDP growth, and the credit to GDP ratio, at 55%, is currently lower than some of the Asian countries. But he warned that this ratio is bound to jump as arapidly growing and structurally changing economy will demand more funds. He said initiatives like financial inclusion, and rising loan demand from more credit intensive sector like manufacturing and infrastructure, would pose challenges. "So in our estimate, the Basel III transition is not a problem, but going ahead there would be large capital requirements and that has to be managed," Sinha said, adding "we are in the process of drafting the Basel 3 guidelines after which we will request the banks; and RBI also would separately estimate what is the capital requirement so that you have the adequate time frame to plan for that". The RBI is also looking at to what extent banks' holdings under the statutory liquidity ratio (SLR) provisions will be eligible as liquid funds under the Basel III norms, Sinha said. Currently, the 24% mandatory SLR exposure of banks is not a readily available liquid asset. However, he admitted that "the definition of liquid assets is very stringent under Basel II and strictly speaking SLR requirements would not qualify as liquid assets under it, because SLR need being mandatory has to be complied with at all times." "Our dilemma is asking banks to maintain more liquid assets over and above SLR, as it would put them in a competitively disadvantageous position. Therefore we are considering to what extent the SLR can be reckoned towards Basel 3 requirement for holding big assets or if there is any other way," he said. He further said as the capital requirement both equity and non-equity are likely to be substantial, there will be pressure on financial markets to increase the cost of capital. "But of course the government will have to find the sources to infuse capital in public sector banks." Under Basel III, capital requirement, especially the equity component, will be much larger. So far the capital requirement was 8 percent of which equity requirement was 2% , he noted. Though now it remains at 8 percent, the equity component is now 4.5%.On top of that there is another capital conservation buffer of 2.5%, which has to be composed of equity and therefore the capital requirement is 10.5%, of which equity has to be 7%. So a banks' equity requirement from goes up from 2 to 7% at one shot, he pointed out. Quoting an analysis done by the BCBS (Basel Committee on Banking Supervision) in 2010 of 94 large banks, including three domestic ones, Sinha said there is a shortfall of 165 billion euro and 577 billion euro in equity component against the measure of 4.5%of equity and 7 percent of equity, respectively. On the projected dent in annual GDP growth due to Basel III implementation, Sinha said according BCBS, the maximum decline in GDP is baseline annual forecast of 0.22% after 35 quarters or roughly nine years; after that there will be a recovery. "Of course the private sector's estimate is much higher, in fact many times higher. Obviously we have to give more credence to the BCBS estimate."
Moneycontrol
'Indian banks will need more equity for Basel III'
With four years left for the implementation of Basel- III norms, banks in India would have to gear up for the phased transition from the next financial year. While the overall adaptation of new norms would not be difficult, some banks in India may face hurdles in meeting capital requirements, said Reserve Bank of India (RBI) Deputy Governor Anand Sinha. In March, the average tier-I capital ratio of Indian banks was a little above nine per cent. However, going forward, there would be a need for more equity. “This huge need for equity capital by banks would have to be managed, and in the case of state-owned banks, the government would have to find resources to capitalise them,” Sinha said, while addressing an event on Wednesday. He added the additional capital requirement for the banking sector had not been finalised yet, though private sector banks have reported their estimates to the regulator. Sinha said RBI was working towards tweaking liquidity norms to suit the Basel-III requirements. Currently, banks in India are mandated to maintain 24 per cent of their net demand and time liabilities as the statutory liquidity ratio (SLR). “In the central bank, our view is asking banks to maintain more liquid assets besides SLR would put them in a competitively disadvantageous position. Therefore, we are considering to what extent SLR should be reckoned for Basel-III requirements,” Sinha said. In terms of asset quality, Sinha said further deterioration was expected, but added there was no systemic concern. He said the retail segment was also likely to feel the pressure, owing to a rise in interest rates. The banking industry is already reeling from rising non-performing assets, owing to exposure to other sectors like infrastructure and real estate. The central bank has raised policy rate by 325 basis points in 11 tranches since March 2010, including two strong increases of 50 basis points each this financial year. Sinha said past rate rises had started impacting consumer demand. “In fact, the investment has become subdued, but the consumer demand was high or strong. Currently, it seems the interest rate rise has started having an impact,” he said.
BS
Financial Wizard of the week
Shri M G Warrier, Ex-General Manager, DGBA, RBI, CO, Mumbai (mgwarrier@yahoo.com) was selected Financial Wizard of the week by Economic Times Wealth for the week ended August 21, 2011. He will get gift voucher worth Rs3000/- The prize-winning entry is reproduced below:
The Economic Times Wealth, August 22-28, 2011
Financial Wizards of the week
Last week’s question:
I am a 36-year old doctor, and after my wife passed away, my 8-year old son is living with my parents.I am shifting to the US and want to take my son with me, but I believe it will be more expensive to raise him there, besides the fact that he will find it difficult to settle down. Instead, my father suggests I go to the US leaving my son here and invest money in his name so that he has a safe future. Please advise.
Jayashekhar R Chennai
Warrier’s Solution
If your parents are financially dependent on you or because of the special situation, too attached to your son, and vice versa, you should let your son stay in India for the time being. It will be easier for you to continue your investments here because of the foreign exchange rate advantage. Once you settle down, you will have an idea of how much time and money are needed to be a single parent and, if you can afford it, you can take your son later. Moreover, it will be easier and safer for you to invest in India, especially through the SIP route in mutual funds, as you probably understand the Indian markets better than the US ones.
RBI: Rising Rates Hit Consumer Demand
MUMBAI -- Rising interest rates have begun to hurt consumer demand in India, a deputy governor of the central bank said Wednesday, underscoring a cool-off in demand pressures after more than a year of monetary tightening aimed at controlling high inflation. "As far as monetary policy transmission is concerned, there is a lag," Anand Sinha said at a conference. "[But] one thing is certain, that [higher] interest rates have started having an impact on consumer demand," he added. India's central bank has been one of the most aggressive in the region, raising its policy rate 11 times since March 2010 in an effort to reduce demand pressures that have fueled inflation to intolerably high levels. Inefficient distribution systems that have caused supply-driven price shocks and high government spending are further strengthening price pressures. The sharp monetary tightening has led to a moderation in economic activity, raising hopes of calming inflationary pressures that have been a problem for more than two years. The most recent government data showed that July's inflation eased slightly to 9.22% from a year earlier, compared with 9.44% in June. Mr. Sinha also said there was no systemic risk from the increase in bad loans of Indian banks. "Asset quality of late is a bit of a concern. As interest rate rises, growth slows down, there could be some deterioration in asset quality, but we don't see this as a systemic risk," Mr. Sinha said. Some banks' bad loans have risen lately, sparking wider concerns of a hit to the industry's profitability as high inflation and a slowing economy shrink borrowers' repaying capacity. However, authorities have often said the bad loans are within acceptable limits and that Indian banks are adequately capitalized to weather any economic crisis. Mr. Sinha also said Indian banks won't face much of a problem in the transition to the Basel III rules, which require banks to shore up their capital and liquidity buffers and will be implemented in phases from 2013.
WSJ
HC upholds RBI rule on FX derivatives
MUMBAI: The Bombay high court on Wednesday held that non-payment of dues under a foreign exchange derivatives contract by a company would qualify as willful default. The judgment is significant because this will strengthen the hands of the Reserve Bank of India (RBI), the banking regulator, in bringing about transparency and financial discipline in the commercial banking space. The judgment by HC bench of Justices D Y Chandrachud and Amjad Sayed was delivered while deciding the scope of powers of RBI and interpreting one of its circulars on foreign exchange derivatives contracts issued last year. The RBI circular issued in 2010 gave banks the right to take action against those companies which borrowed money from banks and failed to repay even under derivative contracts with the banks. The HC construed the RBI circular in regard to prudential norms for off balance sheet transactions mainly from derivatives contracts, disclosure norms and governing of non-performing assets of banks. Derivative transactions involve hedging in foreign exchange transactions and covers fluctuations in currency rates on which contracts are signed. The case relates to Finolex Industries and Emcure Pharmaceuticals, two companies which were classified as willful defaulters by their lenders because of non-payment of dues under foreign exchange derivatives contracts. Of these two companies, Finolex had dues in excess of Rs 100 crore. The move by the banks to classify them as willful defaulters, under the RBI circular of 2010, was challenged in Bombay HC in January 2011. The argument of the petitioners was that the master circular of RBI covers defaults in only "borrower-lender transactions." The petitions, through counsels Janak Dwarkadas, Pradeep Sancheti and Hitesh Jain, argued that derivatives transactions do not involve a borrower-lender relationship and thus do not fall within the terms of the RBI circular. The HC, while rejecting this submission, agreed with counsel Virag Tulzapurkar to hold that the RBI as an expert body is conferred with powers to maintain monetary and financial stability of the country and has in fact control over derivative transactions. However, in these two cases involving Deutsche Bank and ICICI Bank, the HC held that principles of natural justice was not followed and has directed for fresh orders by the banks. This Bombay HC differed with a Calcutta HC judgment that last year placed a restriction on powers of RBI. Justice Chandrachud, however, while dictating the important verdict for three hours recognized and upheld the expansive powers of RBI. The Calcutta HC held that the RBI circular was not applicable to foreign exchange derivatives contracts. The Calcutta HC judgment has been challenged by Kotak Mahindra Bank before the Supreme Court which on Wednesday scheduled it for final hearing on October 18. As banks started using the RBI circular's provisions against several companies, they felt the lenders were threatening borrowers with consequences to the extent that these defaulting companies will not be able get any loans from other banks or seek any credit facility. The circular was affecting the directors of companies too.
TOI
'Gold rally is not a bubble' - Ajay Mitra, World Gold Council
We are getting a sense that the Reserve Bank of India(RBI) and ministry of finance are closely tracking gold movement. We cannot say whether RBI would buy gold or not, but they need to do something in gold reserves that can facilitate funding of infrastructure projects in India......
Right time for RBI to sell gold – A.Seshan
No, it's not 1991 once again. This time, the profits can be used to address fiscal deficit concerns.
Under a programme of gold sales limited to 403.3 tonnes during October 19-30, 2009, the International Monetary Fund (IMF) sold 200 tonnes to the Reserve Bank of India (RBI) for $6,699 million or Rs 31,462.88 crore at an average price around $1040 per Troy ounce. If one takes the value of gold now at $1,740 per ounce and the exchange rate at Rs 45 to a dollar, by selling the 200 tonnes the RBI could make a profit of about Rs 20,000 crore. Besides the financial gain, there are other advantages. At the end of the RBI's accounting year (June 30, 2012) it will be transferred to the government along with the other surplus, contributing substantially to the reduction in fiscal deficit in 2012-13.
BENEFITS OF THE MOVE
The forex reserves will not be affected, the decline in the gold value being made up by the rise in foreign currency assets. The pressure on the market due to government borrowing will be lessened and there will be a saving in the interest cost implied in an equivalent amount of floatation of government securities. The transfer of the amount does mean the creation of money but it could be adjusted against the desired estimate for the growth in money supply. The sale would also take care, in whole or part, of any planned disinvestment programme of government. It is likely to result in fewer objections from the Opposition and trade unions than in the latter case. Further, it will forestall the possible adverse impact on the market due to money flowing from the bank accounts of the buyers of the enterprises to government account in RBI, creating a liquidity shortage. It is not likely to be criticised as selling family jewels in distress. Many Western countries have sold the metal. There have been three Central Bank Gold Agreements (1999, 2004 and 2009) for the sale of official gold by the ECB member banks. The RBI Act requires only that its aggregate value of gold coin, gold bullion and foreign securities should not at any time be less than Rs 200 crore, of which the value of gold should be at least Rs 115 crore. The current position is comfortable.
LENDING OUT GOLD
The other option is to lend at least a part of the holdings to bullion banks. Often, the mining companies borrow to fulfil their commitments when there is a shortfall in production. The lease transactions are totally opaque and no institution has an idea of the total world turnover in a year. It is only the central banks of Switzerland and Portugal which mention the leases in their Annual Reports. Others keep them off their balance sheets. However, gold lent continues to be reckoned as reserve. Estimates of gold lending by central banks in 2008 ranged from 4,000 tonnes to 16,000 tonnes, the latter accounting for about a half of the total official holdings, including those of the IMF and the Bank for International Settlements (BIS). The gold lease market is the equivalent of the carry trade in currencies. It provides an arbitrage opportunity to borrowers to sell the gold and make an investment. The carry return is the return on the bonds (LIBOR) minus the gold lease rate. The lease rates (in percentages) on August 12, 2011 were 0.08, 0.21, 0.47 and 1.05 for one, three, six and 12 months, respectively. The difference between LIBOR and the lease rate determines the contango, which is influenced by credit market conditions. Because of the inherent strength of the gold market contango has prevailed more often than backwardation. The Bank of England (BoE) holds gold on behalf of many central banks, Bank of Korea being the latest, and often acts on their behalf in market transactions besides being a lender itself.
THEN AND NOW
The sale or leasing out of gold is not likely to encounter any opposition of the type one saw during the Gulf Crisis in 1991 when RBI raised a forex loan from BoE and Bank of Japan on the security of the metal kept with the former. The Opposition then accused the government of mortgaging the family jewels; but if the RBI had not done so, India would have defaulted on the instalment repayment of a foreign loan that would have done immense damage to its reputation in the international markets.
I accompanied the then RBI Governor, Mr S. Venkitaramanan, as his Adviser and as a member of the Indian delegation to the 1991 Annual Meetings of the IMF and the World Bank in Bangkok. He met the Deputy Governors of IMF and World Bank with a request that the pledged gold might continue to be with the BoE even after the loans were repaid as one did not know whether another occasion would arise for a similar borrowing from the central banks. The two banks agreed to consider the matter. According to a recent RBI report, it held 557.75 tonnes of gold, forming about 7.5 per cent of the total foreign exchange reserves in value terms, as on March 31, 2011. Of this, 265.49 tonnes were held abroad (65.49 tonnes since 1991 and 200 tonnes since November 2009) in deposits/safe custody with the BoE and the BIS. It is not clear whether the BoE has been entrusted with the management of the stock in terms of leasing. However, the report refers to the rate of earnings on foreign currency assets and gold being 2.09 per cent during July 2009-June 2010.
HBL
Punjab National Bank to recruit 9,000 people
KOLKATA: Punjab National Bank is in the process of hiring 3,000 officers and 6,000 clerks, the bank chairman and managing director KR Kamath said. "We have started the hiring procedure. But the process may spill over to next year." Mr Kamath said here on Wednesday. The bank has already conducted written exams for both the categories and interview for clerks will start soon, the chairman said. The Delhi-based bank has envisaged to grow its business by 20-22% this fiscal. This will be lower than last year's 30% growth rate as the economy is expected to grow at a sub-8% level. He said new proposals in the infrastructure space are fewer now but this will not impact advances growth as banks have had many projects already sanctioned but yet to start disbursement. "RBI placed the growth expectation at around 18%. We will grow more than the industry average like last year," Kamath said at a banking seminar, organised by Ficci here. He said interest rate has almost peaked and it may start coming down after six months or so. The veteran banker is of the opinion savings rate deregulation would de-stabilise banks' interest rate structure initially. "It acts as an anchor rate. We decide other rates based on the savings rate. So, the deregulation will destabilise the system in the short run," he said. But he said it is an eventuality now and only the timing has to be decided upon.
ET
Post-scams, RBI plans wealth mgmt laws
New Delhi Concerned over banks offering wealth management services beyond the existing regulatory framework, the RBI has decided to bring in exhaustive rules for such services in consultation with market regulator Sebi. "Both the RBI and the Sebi are studying the issue...," a source said. The matter came up for discussions in the last meeting of the Sub-Committee of Financial Stability and Development Council (FSDC) held on August 16 here and chaired by RBI Governor D Subbarao. The present regulatory guidelines permit banks offering wealth management services to give only non-discretionary or advisory services. However, over the time there has been a "blurring of activities" between offering non-discretionary and discretionary services (like investment management), they said. "Banks may actually be offering a greater gamut of services than is permitted under the extant guidelines," sources said. The RBI in consultation with Sebi had earlier circulated a questionnaire to banks offering the services. All major banks like SBI, ICICI and Standard Chartered offer wealth management services in the country. The RBI, Sebi and the Government began to look at ways to revise the norms for offering by banks after the alleged multi-crore fraud at Citibank's Gurgaon branch came to light late last year, sources added. Several depositors and high-networth individuals (HNIs) were duped in the Rs 460.91-crore fraud, allegedly engineered by a Citibank¿s Global Wealth Manager Shivraj Puri who was working at the branch of the bank. The RBI has already imposed a Rs 25 lakh fine on the bank for not following account opening and anti-money laundering norms at the Gurgaon branch. Wealth management services are tailor-made asset management facility provided to high network individuals (HNIs). In FSDC meeting held in May, sources said, RBI was of the view that if such services are offered by banks, there should be effective firewalls or they should offer the services through a separate legal entity which could then be regulated by SEBI.
Expressindia
SIT in black money can't act as "super power" Centre tells SC
NEW DELHI: The Centre on Wednesday told the Supreme Court that the SIT appointed by it to probe and unearth the black money stashed abroad needs to be scrapped as the investigating agency cannot function like a "super power." Attorney General G E Vahanvati making a plea for recall of the apex court's July 4 order on the SIT said the Government had "very serious" reservations on the directions which had also cast aspersions on sincerity of the Government in tackling the black money menace. "It (SIT) can't act as a super power or you forget Parliament. If the SIT has to function it needs funds. But it is finally Parliament which has to approve it," Vahanvati told a bench of justices Altamas Kabir and S S Nijjar. He alleged that the earlier bench headed by Justice B Sudershan Reddy(since retd) of which Justice Nijjar was a member had passed an erroneous judgement in which it was commented that the Government was weak, soft and hand-in-glove with mafia elements. "We had passed the orders after going through the proceedings. The team is the same except the two judges," the bench remarked pointing out that the SIT was initially constituted by the Centre and the apex court had merely incorporated the names of retired SC judges justices B P Jeevan Reddy and M B Shah. The Attorney General argued that the wide powers conferred on the SIT has "dislodged every authority under the various Acts like FEMA, Income Tax, Prevention of Money Laundering Act. "How can the Deputy Governor of RBI, the Director of RAW become an investigator. Director of the RAW, many people even do not know his name. He is a faceless person how can he be brought to investigate?" Vahanvati asked. However, senior counsel Anil Divan appearing for the petitioners Ram Jethmalani and others said there was nothing wrong in the setting up of the SIT as the apex court had done in a number of earlier cases like the Bandhuva Mukti Morcha and the post-Godhra Gujarat riots. The arguments would resume tomorrow.
ET
Extending the Reach of Banking Facilities to Villages
As reported by Reserve Bank of India (RBI), there are 28,921 rural centers, where Scheduled Commercial Banks are functioning as on 31st March, 2011. RBI defines a rural population group as those centres which have population of less than 10,000. In order to extend the reach of banking to the rural hinterland, to begin with, banks were advised in 2010-11 to provide appropriate banking facilities to habitations having a population in excess of 2000 (as per 2001 census) by March, 2012, using the Business Correspondent and other models, with appropriate technology back up. Approximately 73,000 such habitations across the country have been identified and allocated to Public Sector Banks, Regional Rural Banks, Private Sector Banks and Cooperative Banks for extending banking services by March, 2012. As per reports received from banks, 29,569 villages have been covered as on 31 March 2011.
KVG Bank opens 20 village branches
Karnataka Vikas Grameena Bank (KVG Bank), a Dharwad-based regional rural bank, has opened 20 village branches under the financial inclusion plan of RBI in a single day...........
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'Deregulating savings bank rate not viable'
Deregulation of the savings rate is likely to destabilise the interest rate structure in the country, K R Kamath, chairman and managing director, Punjab National Bank (PNB), said on Wednesday. “The savings bank interest is the anchor rate in this country. The interest rate structure in the country is based on that. If you destabilise it, the entire interest rate scenario would come under turmoil for some time,” Kamath said on the sidelines of a Ficci banking conclave He said whether this was the right time for the reform should be considered. “Along with this, we should deregulate savings bank products as well. But savings deregulation would adversely affect the lower-end customers adversely,” he said. Kamath said he expected the interest rate to come down in six months. “With the Reserve Bank of India (RBI) expecting industry growth of 18 to 20 per cent, we are confident of growing between 20 to 22 per cent (this financial year),” Kamath said.
BS
Govt reviews PF and small savings norms
NEW DELHI: The government has sought a review of the rules governing Employees Provident Fund Organization (EPFO), government securities and small savings schemes such as public provident fund (PPF) and National Savings Certificate (NSC). The Financial Sector Legislative Reforms Commission (FSLRC) has been tasked to relook at the rules along with the existing job of examining all laws related to the financial sector, including those for banks, insurance and stock markets. The FSLRC was set up earlier this year to look at all financial sector legislations, some of which are more than a century old, and update them. The commission, headed by Justice B N Srikrishna, has two years to submit its recommendations to the government. Though a review of regulations related to EPFO, small savings and others such as the Public Debt Act was not part of the original mandate, a reference was made by the FSLRC itself and the government agreed to the suggestion as it concerns small investors. Although the government is currently reviewing the operations of the small savings scheme, following recommendations by a committee headed by former RBI Deputy Governor Shyamala Gopinath, the finance ministry has been seeking a review of the functioning of EPFO for quite some time, which has only recently started modernizing. A major bone of contention is investment in equities, something that EPFO has resisted and a shift to market-based returns. In addition, over the years there have been suggestions that EPFO, which also has an element of pension, be linked to the National Pension Scheme, which will help shift to an improved investment scheme and also deal with unfunded liability of over Rs 20,000 crore. In fact, a major task before the FSLRC is to make the laws more contemporary as financial instruments have evolved over the years and often it is difficult for an investor to distinguish an insurance scheme from a mutual fund plan. Similarly, the regulation of these instruments is also getting to be a tricky issue given that there are several hybrid products in the market.
TOI
Is the credit that’s supposed to be fuelling India’s agriculture actually going to the farmers who need it the most?
Is the credit that’s supposed to be fuelling India’s agriculture actually going to the farmers who need it the most? This is the question that Nabard chairman Prakash Bakshi raised on Tuesday when he pointed out that one-fourth of the money is disbursed in February and March, which isn’t farming season. Besides that, only one-third of the amount is loaned during the peak kharif season. The Reserve Bank of India said earlier that there was a need for better data on the farm sector, which is of a piece with the oft-repeated sentiment that the quality of official figures has to be drastically improved so that they can be safely used when drawing up policy. The need for better information is critical given that the Planning Commission is pushing to ensure that the sector grows at 4% in 2012-17. At stake are food inflation and getting the economic growth trajectory back on track.
Mint
Credit offtake up 20 pc, deposits 18 pc in last 12 months
Mumbai: Credit offtake from banks grew by 20.3 percent to over Rs 41 lakh crore during the one-year period ended 12 August, 2011, suggesting an upswing after a brief period of moderation. According to data from the Reserve Bank, credit offtake during the period stood at Rs 41.73 lakh crore as against Rs 34.67 lakh crore in the same period of the previous year. The latest rise signals a renewal in investments and industrial activity. The year-year credit growth has fallen below 19 percent since mid-July after growing above this level in the past few months. It grew by 18.7 percent only for the one-year period ended 29 July. Meanwhile, deposits went up to over Rs 56.44 lakh crore till 12 August this year, against Rs 47.83 lakh crore as on 13 August, 2010, clocking a rise of 18 per cent. In its first quarterly monetary review last month, the RBI had said that credit growth is likely to slow down as a result of the recent rate hikes. The RBI said credit growth would be around 17-18 percent this fiscal, as against the earlier projection of 19 percent, while deposit growth has been pegged at 17 percent. During 2010-11, bank credit had increased by 21.5 percent, while deposits grew by only 15.5 percent. India Inc has also complained that frequent rate hikes have resulted in slowing down of investments and industrial growth. While industrial production recorded a dismal growth of 5.9 percent and 5.6 percent in April and May, respectively, it went up by 8.8 percent in June. The Reserve Bank has hiked its key-policy rates three times this fiscal, and 11 times since March 2010, to curb inflation.
Firstpost
Can the marriage of MFIs with banks be a sustainable option out of the microfinance crisis?
...However, they also think that the Reserve Bank of India (RBI) must take the initiative and prepare the stage for the bank-MFI swayamvar to take place......
Karnataka: BJP netas forge farmers’ signatures BJP farmers
....The Canara Bank head office reported the matter to the Reserve Bank of India and since the amount involved was more than Rs. 1 crore, the RBI referred the matter to CBI for investigation, sources said......
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