New financial reporting format to enable data sharing among company watchdogs

NEW DELHI: The government hopes to improve surveillance of companies through the introduction of a new financial reporting format that will make data accessible to all regulators. The new reporting tool, mandatory for large companies from July, will help the government prevent financial frauds like the Satyam scam, as filings made by a company before its primary regulator will be available to other regulators electronically as and when required. This will also reduce compliance burden for corporates, as they will no longer have to file data separately to multiple agencies. The format, known as eXtensible business reporting language or XBRL, is being developed by regulators such as the Securities Exchange Board of India (SEBI), ministry of corporate affairs, and the Reserve Bank of India (RBI).  Companies are required to periodically furnish financial statements and information to regulators such as the RBI, SEBI, stock exchanges, registrar of companies and banks. While the regulator governing any company is responsible for keeping all information regarding its functioning, other regulators too require the information for issues falling in their domain. "With the growing Indian economy, regulators, investors and analysts demand corporates to be financially transparent. This call for financial transparency has been heightened in recent times by certain corporate crises that affect the very fabric of the economy," said RPN Singh, minister of state for corporate affairs, in an internal communique on the ministry's adoption of XBRL as a reporting tool.  With XBRL, the government hopes to prevent another Satyam-like corporate scam, where the outsourcer was able to cover financial manipulation for nearly seven years because of lack of co-ordination between various regulators and financial institutions before which the company filed its data.  "There was no cross-validation of data which the company filed before regulators, like the exchanges, banks and tax agencies," said a corporate affairs ministry official who was involved in the investigation of the fraud at the erstwhile Satyam Computer Services , now taken over by Tech Mahindra. "As XBRL is embraced widely, financial statements prepared in this format can be submitted uniformly and at one place to various regulators, external auditors and financial institutions," the minister said.  Although companies will incur a one-time cost for the switch in the reporting system, and may have to spend some more for sharing regulatory information with other agencies, experts say the new system will reduce compliance cost.  "The overall cost for companies (on adoption of XBRL) will be reduced by 50 to 60% in the long run," said Rakesh Rathi, national head of audit and assurance at BDO India, a consulting entity.  According to reports, SEBI is currently developing SUPER-D ("SEBI Unified Platform for Electronic Reporting - Dissemination"), a platform that will enable it to receive financial and business information in XBRL format. Other agencies too are tweaking their systems to facilitate use of XBRL.  Corporates too are convinced about the workability of the new reporting tool. "The proposal is feasible and practical as well. A technical platform with standardised format would enable companies to load information and data, which then could be used as a base for filing as per the requirement of various regulators and for different purposes," said Ashok Haldia, director at PTC India Financial Services Ltd. Besides saving time, effort and money, XBRL would help bring in consistency and uniformity in data provided by companies, Haldia added.  All India-listed companies and their subsidiaries, having paid up capital of Rs 5 crore or above, or with a turnover of Rs 100 crore or above, will have to file their financial statements in XBRL format from year 2010-11. The first phase of the transition has, however, excluded banking companies, insurance firms, power companies and non-banking financial companies. Many countries and their financial regulators have approved or are in the process of implementing requirements around XBRL as the electronic financial reporting standard. These include the US, Japan, UK, Australia and China among the major economies.

Corporation Bank to soon operate in Africa

PANAJI: The Mangalore-based Corporation Bank will soon be setting foot on African shores in its bid to expand its operations globally, a top bank official said Thursday.  Addressing a press conference here, chairman and managing director of the public sector bank Ramnath Pradeep said Tanzania was one of the four African nations, where the bank was keen on setting up its business. "We have approached the Reserve Bank of India (RBI) for a licence to start operations in four African countries. I can name one, Tanzania. The rest of the countries, I cannot disclose at this time," he said.  "African countries are developing and there are a lot of Indian companies and individuals who are setting up businesses there. Because of that fact there is already a sense of familiarity with the Indian clients and there are good business prospects," Pradeep said, adding that his bank was in the process of obtaining licences from the African nations for starting operations there.  "Presently, we have a representative office in Hong Kong, which we want to upgrade to a full fledged banking operation," he said.  The Corporation Bank has a nationwide network of 5,000 service outlets throughout India.

Inflation "very high", RBI hints at more monetary tightening

AGARTALA: Terming as "very high" the 8.6 per cent inflation, the Reserve Bank today hinted that it could take more policy actions in its review meeting next month.  "8.6 per cent (headline inflation) is very high which needs to be brought down. We would study it and the matter would be reviewed on June 17 next," RBI Governor D Subbarao told reporters here after a board meeting which reviewed monetary and financial developments in the country.  In its annual credit policy meeting earlier this month, Subbarao had made it clear that containing inflation would take precedence over growth, which its pegged at 8 per cent for 2011-12.  Although RBI has already hiked the key policy rates nine times since March 2010, inflation has continued to remain at about nine per cent, which is much higher than the RBI's comfort zone of 5-6 per cent.  Inflation came marginally down to 8.66 per cent in April from 9.04 per cent in March.  Referring to the government's fiscal deficit target of 4.6 per cent for 2011-12, Subbarao said it would be difficult to achieve in view of the impact of rising crude oil and fertiliser prices in the international market.  "It would be very difficult to attain the fiscal deficit target unless there is adjustment on expenditure or tax.. It depends on what decision they take and a number of issues, most importantly on the adjustment of fuel prices," he said.  The government proposes to bring down the fiscal deficit to 4.6 per cent of GDP in the current fiscal, from 5.1 per cent in 2010-11.  Earlier in the day, the RBI opened a sub-office office here with a view to expediting economic development of the North-East region.  Stressing the need for financial literacy, Subbarao said, it would be launched in the entire north-eastern region to educate people about what facilities they could get from banks.  He said about 6 lakh villages having population of more than 2,000 have no access to the banks and the RBI would endeavour to bring those habitations under coverage of banks by March 2012.  When asked if he was aware about circulation of fake currencies in the north-east, Subbarao said he has advised banks to install machines in their branches to identify fake currencies.  He also stressed the need for stringent police action against the racket of circulating fake currencies.

RBI rejects banks' plea to recast part of MFI exposure

MUMBAI: The Reserve Bank of India (RBI) has rejected a request from banks to restructure securitised papers bought from microfinance institutions.  In a notice to Indian Banks' Association (IBA), the regulator said securitised portfolio that banks have purchased from MFIs will not be considered for restructuring under special dispensation. The central bank did not give any reason for rejecting the plea. RBI, however, said loans given by banks in consortium to MFIs may be considered for restructuring.  In securitisation, MFIs bundle up microloans while structuring debt papers around it. MFIs are estimated to have issued securitised papers worth 4,000 crore to banks. Banks lend to MFIs either directly or by purchasing securitised papers.  A number of private banks, including ICICI Bank , had appealed to RBI to restructure securitised papers. However, some private banks and state-owned banks opposed it on grounds that reworking loans would hit financial ratios of MFIs.  Under corporate debt restructuring, an indebted company is generally given relaxation in repayment schedule and interest rates, on conditions such as restrictions on new lending and borrowing. The corporate debt restructuring forum is estimated to be in talks with half a dozen MFIs to rework nearly 10,000-crore loans.  Bankers against restructuring of securitised papers said if the central bank had allowed restructuring, it would not be deemed as true sale. Banks classify securitised papers purchased from MFIs as priority sector loan and not direct exposure to MFIs. However, those in favour said even as the portfolio is sold to banks, MFIs are servicing the loan on behalf of banks that hold the pass through certificate. After an ordinance issued by the Andhra Pradesh government last year to restrain new loans and recovery, microfinance institutions had requested banks to set up a fund to infuse liquidity into the cash-strapped system and sought the Reserve Bank of India's intervention to build the fund. As a special dispensation to MFIs to enable them to come out of stress, RBI allowed banks to classify loans given to MFIs as standard assets provided they are restructured before June 6, 2011.

25 paise coins to be demonetised

MUMBAI: Reserve Bank today asked public to exchange 25 paise coins and those with lower denominations with banks before June 30, the day from which they would be demonetised or cease to be a legal tender for payment.  "Coins of denomination of 25 paise and below will cease to be legal tender from June 30, 2011. These will not be accepted for exchange at bank branches from July 1, 2011 onwards," the RBI said.  "The RBI has, therefore, appealed to the members of public to exchange these coins at the branches of banks maintaining small coin depots or at the offices of the Reserve Bank," the central bank said.  The exchange facility at specified bank branches or the Reserve Bank offices will be available till the close of business on June 29, 2011.  RBI has instructed the banks maintaining small coins to arrange for exchange of coins of denomination of 25 paise and below for their face value at their branches.  The Government had decided to withdraw the coins of denomination of 25 paise and below from circulation from June 30.

Rangarajan favours separate Debt Management Office

NEW DELHI: Joining the debate over hiving off the debt management activities of the Reserve Bank, Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan has favoured setting up a separate Debt Management Office (DMO) under the aegis of the central government.  "There are many countries in the world where the public debt office is managed only by the government. Therefore, even here, the Reserve Bank can continue to play its role as a monetary authority, without having the DMO under it," the PMEAC chief told PTI.  The Reserve Bank has opposed setting up a DMO under the Union government to manage sovereign debt, saying only the central bank has the requisite expertise to manage market volatility.  "Only central banks have the requisite market pulse and instruments to aid in making contextual judgements which an independent debt agency, driven by narrow objectives, will not be able to do," RBI Governor Duvvuri Subbarao said at a meeting of the Central Bank Governance Group in Basel.  However, Rangarajan, a former RBI Governor, said times have changed and the government could take up the job if it is "adequately prepared to undertake that function".  He said that earlier, the government required the helping hand of the RBI to enable it to raise the required amount, because prior to 1991, the borrowing rate of the government was well below the market rate.  "But things have changed since then... According to the Fiscal Responsibility and Budget Management (FRBM) Act, the RBI is not supposed to be in the primary market," he said.  The government has proposed to set up an independent Debt Management Office, aimed at separating the RBI's roles as the decider of the interest rate in the market and being the banker to the government.  At present, both the government's debt and fresh borrowings are managed by the central bank.  In his 2011-12 Budget speech, Finance Minister Pranab Mukherjee had mooted the proposal to introduce the Public Debt Management Agency of India Bill.

Change in forex derivatives hedging rules may hit banks - V VENKATARAMANAN

The Reserve Bank of India has amended the guidelines for OTC forex derivatives and overseas hedging of commodity price and freight risks, which were effective from February 1, 2011. The amendment removes the requirement for companies, intending to undertake "cross-currency option cost reduction structures" and "foreign currency-Indian rupee option cost reduction structures" for contracted exposures, to adopt AS 30 (accounting standard on financial instruments issued by ICAI) related to derivatives and hedging.  Also, the threshold net worth limit for unlisted companies intending to enter into such contracts has been doubled from Rs 100 crore to Rs 200 crore. These changes have been effected due to representation received from industry associations and owing to the fact that the said accounting standard is not yet notified by the ministry of corporate affairs (MCA).  In the current legal framework, notification by MCA is an essential requirement before an accounting standard needs to be mandatorily applied by corporates. Under the amended guidelines, companies entering into such structures are required to fair value such products. These companies are required to follow the existing standards notified by MCA, the applicable guidance of ICAI as also the principle of prudence which requires recognition of expected losses and non-recognition of unrealised gains.  Certain unlisted companies that had already entered into the 'costreduction structures' based on the previously issued net worth criteria of Rs 100 crore could now be in noncompliance with the amended guidelines owing to the change in the threshold net worth limit. While the circular and the amendment primarily applies to banks (as authorised dealers), it will also have a wide-ranging impact on corporates that transact with banks in certain types of derivative instruments. These entities are required to comply with the guidelines in the amended circular before they can enter into further derivative transactions with their bankers.  The underlying intent of the circular remains that an entity can enter into specified derivative transactions for hedging purposes only. The amendment is expected to be welcomed by affected corporates since it removes the onerous requirements to early adopt AS 30.  In addition to the accounting requirements, the guidelines also regulate the categories of persons permitted to access the OTC foreign exchange market in India and the permitted products for hedging different categories of foreign exchange exposures.  Companies have been provided with a 15-day period for submission of original documents for permitted transactions under these guidelines. They are also required to submit quarterly statutory auditor certificates in respect of derivatives transacted both, under the contracted exposure and past performance routes.  These reporting requirements will impose additional compliance-related costs and efforts for companies that access the OTC market for currency derivatives. Banks will also have increased compliance requirements to submit various reports on a weekly, monthly or quarterly basis in respect of such transactions to RBI.   Further, banks will be responsible for ensuring receipt of relevant certificates and compliance by its clients to be able to continue transacting with these clients.   These requirements remain unchanged by the amendment. In summary, the amended RBI guidelines have a wide ranging and significant accounting and compliance impact for banks as well as other entities that transact in certain types of derivative structures. The amendments are expected to bring relief to entities that have not yet adopted the financial instrument standard.

(The author is executive director, accounting advisory services, KPMG India . Views expressed are personal)

ET in the classroom: What is stagflation?

Stagflation is an economic situation where the growth rate slows down, unemployment levels remain steadily high & inflation also stays high.

What is stagflation?

Stagflation, a concept which did not gain acceptance till the 1960s, is described as a situation in the economy where the growth rate slows down, the level of unemployment remains steadily high and yet the inflation or price level remains high at the same time. At the first instance, high inflation and unemployment or slower growth seem like opposites and mutually exclusive.  It came to be seen in the 1970s as a situation when the economy has low productivity and yet the goods are highly priced in spite of low unemployment. The term 'stagflation' came to be used for the first time in the British Parliament by Lain Macleod in 1965. Once stagflation occurs it is difficult to deal with. The measure a government usually takes to revive an economy in recession (cutting interest rates or increasing government spending) also increases inflation.  Under normal recessionary conditions, inflationary policies are acceptable, but here, given the already high inflation, pushing inflation still higher could mean prices spiralling out of control, thus further hitting productivity and growth.

What causes stagflation?

The major reasons for stagflation, whenever it has occurred in history, have been-supply shocks or shortages due to unforeseen reasons which push up prices of essential commodities, causing an inflationary situation and at the same time pushing up production costs, as it happened in 1970s in the US. The other reason is failure of the monetary authority to control excessive growth of money supply in the economy and excessive regulation of goods and labour markets by the government. For example, in the 1970s, a similar situation occurred during the global stagflation, where it began with a huge rise in oil prices, but then continued as central banks used stimulative monetary policy to counteract the resulting recession, causing a runaway wage-price spiral.

Is India on the brink of stagflation?

Though the central bank and the Centre have had to revise their growth targets, which have taken a hit due to persistently high double-digit inflation, economists are far from assuming a stagflation like situation in India just as yet. The Reserve Bank of India deputy governor Subir Gokarn has said headline inflation numbers are much higher than the appropriate rate of inflation that will moderate growth but will keep it steady, which according to RBI's estimates, should be between 5% and 6%.

Foreign investment in MFs likely to face cap

MUMBAI: India's policy-makers are considering putting a cap or ceiling of between $5 and $10 billion on investment by foreign investors in Indian mutual funds to possibly limit the impact of any surge in inflows once this route is opened up soon.  The government had announced in this year's budget that it would allow overseas individuals to invest in equity schemes of Indian mutual funds as part of a move to diversify the class of foreign investors in the local equities market. Securities market regulator, Sebi, the Reserve Bank of India and the finance ministry have been in talks to operationalise a scheme for this and the central bank has suggested that as a prudential measure, a ceiling on investment by these foreign investors should be fixed to start with, two senior officials ent said.  The way the scheme will operate is that a foreign investor will have to open a dematerialisation or paperless trading account and a bank account here for which the Know Your Customer norms will be done by a local bank or intermediary registered with regulators here. Once this is done, foreign investors can buy into over 400 equity schemes.  Foreign funds and non-resident Indians who are registered with Sebi are allowed to invest in equity mutual funds but there has hardly been any investment except in select exchange traded funds.  In the Indian equities market, there are no fetters on foreign funds in terms of investment except a limit of 10% on a single foreign investor buying into a company's capital. For investments in Indian corporate and government debt too, there are restrictions. "We need a framework for both capital inflows and outflows and we thought that it would not only be prudent but also provide clarity upfront if we say that there would be a ceiling on investment," a senior official said. This official declined to be identified.  What could be of concern to the central bank is a possible surge in volatile capital inflows later which could put pressure on currency and inflation management. When foreign capital flows are robust, the Reserve Bank will have to mop up these flows which in turn results in boosting liquidity in the local markets. To check this excess liquidity, the RBI sells securities or bonds to banks and institutions to drain it out - a process known as sterilisation. This however comes at a cost to the government - which has to service the interest cost on these bonds.  Right now, such worries are overblown because excess inflows if any are being used to finance India's current account deficit - the excess of goods and services imports over exports. In FY11, foreign portfolio investors bought stocks and bonds of over $31 billion. In the year to date, foreign funds have been net sellers at $490 million. Sebi has worked out a scheme for foreign investors to buy into local mutual funds which is being vetted by the government and the Reserve Bank of India. One of the challenges in getting the scheme going is in ensuring KYC or due diligence of the foreign investor. Only some of the depository participants such as banks which have a wide global network may be in a position to carry this out. Indian institutions may either to forge tie-ups with foreign partners or open offices abroad if they want to woo greater foreign portfolio investment. If the scheme takes off as policy makers are hoping it would - it will boost India's mutual fund industry which manages assets of over Rs 7,00,000 crore and is now weighed down by the problem of lack of interest on the part of distributors to sell mutual funds. They have been loath to push mutual fund products after the regulator banned fund houses from charging investors an entry fees or load.

Banking on savings deposits

Most of the discussions on the Reserve Bank of India's (RBI) 'Discussion Paper' on deregulating the interest rate paid by banks on savings deposits have focused on the micro level; on what deregulation could mean for individual savers and borrowers.  There has been virtually no discussion on what deregulation could mean for the safety and stability of banks. Yet, the final verdict on whether this is the right time for deregulation hinges critically on the second rather than the first.  As far as the impact on individual savers and borrowers is concerned, opinion is unanimous that deregulation will spell the death-knell of the present system of a uniform, administered rate that bears little relation to underlying demand-supply conditions.  Not only will rates be more market-related, they will also vary from bank to bank, depending on each bank's needs and strategy. To the extent rates will move up and down, as with any market-related rates, for savers there is trade-off between an assured (if low) rate of return and one that could, theoretically at least, be almost as volatile as the stock market.  So, in situations of tight liquidity, savings bank depositors could see the interest rate on their deposits go up and when liquidity is plentiful, rates could fall, other things remaining constant. The problem is liquidity is not only a function of borrowers' demand for funds; it is also a function of the central bank's management of liquidity.  So, in situations like in most of 2009 and 2010, when the RBI chooses to keep the system flush with liquidity, interest rates might not reflect the true supply-demand imbalance. Consequently, there is no certainty that deregulating rates will necessarily give savers a better deal.  But yes, to the extent the savings bank (SB) deposits interest rate is the only regulated rate and has remained unchanged at 3.5% since March 1, 2003 even as the RBI's policy rates have moved up and down over time, there can be no case for continuing with an administered interest rate. Moreover, savings deposits account for about 13% of financial savings of the household sector. Presumably, deregulation will improve monetary transmission.  In the present context, it will raise both real and nominal rates. It will also encourage product innovation as banks will try to compete, not only on rates, but also on productdesign as, for instance, by offering differentiated rates depending on the size of the deposit (something they are not allowed to do at present).  International experience too suggests there are gains to be had from deregulation. In Hong Kong, for instance, interest rate deregulation increased the efficacy of monetary policy by improving the correlation between retail bank deposit rates and market interest rates. Besides, savings rates are not regulated in developed markets (though there are usually strict limits on the number of transactions permitted ).  Thus, the theoretical arguments for deregulation are sound. What is less clear is whether these gains, both at the micro and at the macro level, will be outweighed by the fallout of deregulation on the composition of banks' deposits.  Will the resultant volatility in savings bank deposits (that constitute a significant part of a bank's 'core' deposits) increase the vulnerability of banks, given their relatively large exposure to long-term loans? The reality is many banks have used short-term funds like savings deposits to make long-term loans, confident in the belief that these are 'core deposits' that will not be withdrawn.  Never mind that, on paper, these are deposits that can be withdrawn on demand. That belief was not without basis in a scenario where a low and uniform rate of interest made savers 'lazy'. But deregulation could change that. Once banks begin to compete for funds based on interest rates, these deposits lose their 'core' element. This could jeopardise the safety of banks by widening the maturity mismatch between their assets and liabilities. The discussion paper does raise this issue but is confident the downside is limited.  But with savings bank deposits accounting for 22% of total deposits of scheduled commercial banks, we could be skating on thin ice. Deregulating the SB interest rate could see substantial swings in savings bank deposits in individual banks in response to interest rate changes. Banks will be hard put to determine what is 'core' and can be used to make long-term loans and what is 'fleeting' and not to be lent for longterm purposes. It is significant that the share of term loans has increased during the period 2000-09 even as the share of term deposits has come down, suggesting maturity mismatches have widened during this period. The ball is, therefore, in the RBI's court. As banking sector regulator, if it feels the fallout in terms of maturity mismatches will not derail banks, it should go ahead. But not unless it is very sure! Else it should bide its time.

Rangarajan favours law-backed autonomy for RBI

NEW DELHI: Chairman of the Prime Minister's economic advisory panel and former RBI chief C Rangarajan has strongly supported Reserve Bank Governor D Subbarao's demand for law-backed autonomy to the central bank.  "I think we really need to move towards a situation in which the central bank of the country acts according to what it considers to be the right thing to do. Therefore, autonomy for the RBI is a good thing and we should work towards it", Rangarajan, Chairman of the Prime Minister's Economic Advisory Council (PMEAC) told PTI.  However, he said the RBI autonomy should be "reconciled" with the Finance Minister's accountability to Parliament.  "The Finance Minister is ultimately responsible for management of the economy. Therefore, we need to work out an arrangement by which the responsibility of the Finance Minister towards Parliament and the autonomy of the central bank are reconciled", Rangarajan said.  Subbarao recently pitched for a legally-backed formal autonomy for the apex bank to be able to deal more effectively with monetary issues, while maintaining that the Government has not interfered so far with the Reserve Bank's functional autonomy.  "...the central bank should be given legally-backed, formal autonomy", Subbarao said while addressing a meeting of the Central Bank Governance Group in Basel, Switzerland.  Although the RBI Act empowers the Government to give directions to the central bank in public interest, the Centre has thus far refrained from doing so.

RBI tells banks to cut liquid MF exposure

MUMBAI: The flow of money from banks into liquid schemes could be lower than what asset management companies have estimated, if a rule capping lenders' investments in this mutual fund product becomes effective later in 2011. The Reserve Bank of India (RBI) has advised banks, specifically ones which own mutual funds, to keep investments in liquid funds "well below" the new limit of 10% of their networth after October, said two people familiar with the matter. This will force banks to focus more on raising funds through individual fixed deposits and mutual funds to turn to retail clients to build assets under management. Banks have been accused of sharing a cosy relationship with mutual funds to meet their money requirement. Capital markets regulator Securities and Exchange Board of India has repeatedly pushed mutual funds to build a business based on retail portfolios rather than institutional money. An RBI official is said to have conveyed the central bank's thinking to top bank executives soon after it announced this investment restriction in its monetary policy review on May 3. Though the RBI did not specify the extent to which banks need to bring down their investments in liquid schemes, executives are interpreting the unofficial "limit" as 5-6% of lenders' networth, said a banker familiar with the matter, requesting anonymity. "It would be ideal that they (banks) maintain their holding within the 10% mark or level," said a source. The RBI is said to have also told bank officials to cut exposure to liquid schemes in a phased manner over the next five months rather than redeem the entire amount just before the new limit comes to effect. An email query to RBI on this matter did not elicit a response. The revised investment limit will be based on the banking industry's total networth on March 31, 2011. The mutual fund industry estimates banks' total networth on this date between Rs 3 lakh crore and Rs 4 lakh crore. At 10% of the networth, banks' money flow into liquid schemes will be capped at Rs 30,000-40,000 crore after October. Currently, banks' investments in liquid schemes is about Rs 90,000 crore, fund managers said. If banks decide to cap the investments in liquid schemes at 5% of their networth, the mutual fund industry may end up getting only about Rs 15,000-20,000 crore. Total assets under management was Rs 7.85 lakh crore on April 30. "The message is very clear. RBI wants banks to keep exposure to liquid schemes to the minimum and wants to break the comfortable dependence that banks and mutual funds enjoyed," said a top mutual fund industry official, aware of the development. Banks park their surplus money in liquid schemes, which invest in debt securities of duration less than a year, including certificates of deposits issued by banks, commercial papers from companies, treasury bills and the collateralised lending and borrowing obligation (CBLO) market, for quick returns. These funds, in turn, lend to banks in the overnight CBLO market. Mutual funds are also among the major investors in certificate of deposits. "Such circular flow of funds between banks and DoMFs (debt-oriented mutual funds) could lead to systemic risk in times of stress/liquidity crunch. Thus, banks could potentially face a large liquidity risk," RBI said in the circular on May 3.  Among top banks in the country, State Bank of India, ICICI Bank, Axis Bank, Canara and Punjab National Bank, among others, have mutual fund subsidiaries.

RBI panel to interview 7 RBI Executive Directors for Dy Guv’s Post

MUMBAI: A committee headed by RBI governor D Subbarao will interview seven executive directors of the central bank today to select a new Deputy Governor, who will succeed Shyamala Gopinath, slated to retire on June 20. Besides Subbarao, the Secretary Financial Services will also be part of the committee, which will recommend the names to the Governor. The Executive Directors who have been called for the interview are V.K Sharma, V.S.Das, G.Gopalakrishna, H.R.Khan, D.K.Mohanty, S.Karuppasamy and R.Gandhi, said a person with knowledge of the development. "Based on seniority, V.K.Sharma, G.Gopalakrishna and H.R.Khan could be frontrunners for the job," said three senior RBI officials. However, the final decision rests with the government, said the official. V.K.Sharma, who is the seniormost Executive Director, is in charge of the Rural Planning and Credit, Customer Service and Financial Markets. G Gopalakrishna oversees the department of non-banking supervision, department of banking supervision and central security cell. H.R.Khan, another contender for the post, now handles the department of government and bank accounts, external investments and operations, internal debt management and foreign exchange. Of the four deputy governors that RBI has, KC Chakrabarty is a former commercial banker while Subir Gokarn is an economist. Shyamala Gopinath and Anand Sinha are career central bankers.

RBI apprehensive on portfolio inflows, wants more FDI

BANGALORE: The Reserve Bank of India today pitched for increased foreign direct investment into the country, even as it expressed apprehension over the quality of portfolio inflows. RBI Deputy Governor Shyamala Gopinath said India has been able to absorb capital inflows because it has a current account deficit. "But we have expressed apprehension on the quality of inflows in terms of portfolio inflows," she told reporters on the sidelines of a function here. "But as we see today, we are not seeing too much volatility in that sense. But we would want more of FDI to come in so that quality of the flows do alter," she added. Gopinath also said the RBI would issue draft guidelines on new banking licences in the next couple of weeks. "We are in consultation with the government (in regard to draft guidelines). There is no tussle with the government as such," she said in response to a question, adding that the RBI and the government converge on many issues vis-a-vis these guidelines. When asked about SKS Microfinance "struggling" with Andhra Pradesh government norms, Gopinath said the RBI expects MFIs (Microfinance Institutions) to be in full compliance with its regulations. She said the RBI hopes the Andhra Pradesh government takes a relook at its (Andhra government's) regulations to ensure that MFIs are able to function in that state. Gopinath also said rising commodity prices, particularly oil and gas, would add to the inflationary pressures, adding that the other factor driving inflation is that the price rise has not been factored in the administrative price of items like fuel. "So, yes, we would be impacted if commodity prices go up substantially," she added.

Imposing policy discipline among nations may be tough: Duvvuri Subbarao, Governor, Reserve Bank of India

MUMBAI: Imposing economic policy discipline among nations may be elusive for many years as the fundamental analysis required to come out with an acceptable policy is not in place, Reserve Bank of India Governor Duvvuri Subbarao said. Enforcement of policies will also be difficult. "It is far too early to think of reaching new formal international agreements on policy behaviour," Subbarao had said at the SNB-IMF Conference on The International Monetary System, Zurich. "Instead, countries will prefer to proceed through more exchange of information, peer review processes and ad-hoc international agreements, depending upon the situation prevailing at any point of time," he said. Economic policies practiced by countries have begun to differ widely in the last few months, compared to the 'co-ordinated action' chorus that was advocated during the credit crisis when central banks pumped in liquidity in an unprecedented way and cut rates to as low as zero. With the crisis behind and the outcomes of loose monetary policies varying between countries, leaders may not agree to a common policy. While the West may still need an easy policy, emerging nations may have to make funds expensive to rein in prices. "Developing consensus on a code of discipline will be challenging," said Subbarao, while speaking on a topic 'Policy Discipline and Spillovers in an Inter-Connected Global Economy'. There's difficulty, "in reaching international agreement just in the specific field of financial regulation. It will be even more difficult to reach a consensus on broader economic policy,'' he said. The two major disruptions in the global economy in the recent past have been the so-called Quantitative Easing 2, or printing currency by the US, and the undervalued currencies in some countries. China has been accused by the US and others of keeping its yuan undervalued to export more. That is hurting producers in other nations.  Global economic analysis that focuses on trade alone to assess the impact of policies in various nations itself is flawed, said Subbarao. Econometric models are not factoring in events such as the financial crisis, tech bubble burst and such developments are making any international consensus difficult. "Recent experience shows that our understanding of the nature of these linkages is seriously deficient," said Subbarao. "In fact, standard econometric models still suggest that shocks in one country have very small effects on others. They do that because they assume that trade is the primary channel for transmitting these shocks across countries, and trade moves in line with GDP."

Volatile commodity prices may drag down India growth

NEW DELHI: Finance minister Pranab Mukherjee on Wednesday warned volatile commodity prices may drag down the country's annual economic growth to below an estimated 9 per cent in this fiscal year, a week after indicating further rises in oil prices could shave 1 percentage point off Asia's third-largest economy's growth.  Pranab Mukherjee also said inflation was likely to remain at elevated levels between 7-7.5 per cent during this period, at least a per centage point higher than the central bank's end-March 2012 projection of 6 per cent.  Oil prices rose to 32-month peaks in April due to tensions in the Middle East and North Africa, but a combination of a stronger dollar and signs of cooling in China has brought down prices.  ICE Brent crude futures were 39 cents lower at $117.24 a barrel by 1058 GMT, having earlier risen to as high as $118.43.  "Due to volatility in international commodity prices and other supply constraints, it may not be possible to achieve the growth rate of 9 per cent, +/-0.25 per cent, for the current fiscal," Mukherjee said in a statement.  While private economists are increasingly trimming their 2011/12 growth forecasts for India, citing high inflation, rising interest rates and high oil prices, the government has not yet officially revised down its growth forecast.  India's central bank has forecast an annual economic growth of around 8 per cent for this fiscal year on the assumption that crude oil prices would average $110 a barrel over the full year.  While higher oil prices are threatening to slowdown the economy, they are posing inflationary risks.  Headline inflation surged to nearly 9 per cent in March, well above forecasts, prompting the central bank to raise key rates by a bigger-than-expected 50 basis points to tame stubbornly high inflation last week.  The Reserve Bank of India (RBI), which has raised its main operating policy rate by 250 basis points since March 2010 in nine moves, expects the headline inflation to remain around 9 per cent in the April-September period. The RBI Governor Duvvuri Subbarao on Monday reiterated India will maintain its anti-inflationary stance even if that means sacrificing growth in the short term. [ID:nL3E7G918K] High inflation is seen preventing New Delhi from passing on high global crude prices to domestic consumers, a decision that has a bearing on its fiscal health.  A ministerial panel meeting to consider raising fuel prices was deferred on Tuesday, signalling the government's reluctance to tackle a political hot potato that is needed to bolster public finances, but which could also stoke inflation.  Any hike in prices of diesel and gasoline is expected to be small, given the political sensitivity of such a move for hundreds of millions of poor who form the bedrock of support for the government. Even a small rise would help limit the government's fuel subsidy burden to a budgeted $5.2 billion for 2011/12 and help it meet its fiscal deficit target of 4.6 per cent of gross domestic product. But the government also appears wary of the effect of raising fuel prices on headline inflation. Even a 10 per cent hike in petrol and diesel prices would add around 70 basis points directly to headline inflation, brokerage Nomura said in a report late last month.

Is RBI helping or hurting you?

The Reserve Bank of India has been battling for months to protect you from high inflation. Ironically, in its war against high prices-that intensified with a sharp hike in interest rates recently-the RBI has also managed to raise the cost of living for some.  All EMI-funded purchases get more expensive every time interest rates are raised. And if high rates also begin to hurt corporate earnings, dividends and returns from stock investments will also be impacted. So, is the central bank really helping you or not?

Continue reading............

Loans to NBFCs in agriculture space could get priority tag

NEW DELHI: The government may ask the central bank to accord priority sector tag to bank loans to smaller non-banking finance companies that lend largely to agriculture and small and medium enterprises.  The Reserve Bank, in its monetary policy review last week, had struck down NBFCs from banks' priority list except for those lending to microfinance institutions. Banks are required to lend 40% of their total advances to 'priority' sectors, including agriculture, SMEs and MSMEs and weaker sections. Non-banking financial companies, which now face a cut in financing after the RBI move, have petitioned the different arms of the government, including the ministry of small and medium enterprises, or MSME.  "We expect that RBI should take a lenient view on those asset financing companies, which finance agriculture and SME sector through loans for equipment, plant and machinery, and also to small road transport operators (SRTOs)," said a government official. The Reserve Bank is also expected to take up this issue on May 13 when a working committee on NBFCs, headed by former RBI deputy governor Usha Thorat , will meet industry representatives.  RBI has expressed concern over a 55% increase in credit to NBFCs in the year ended March 2011 as compared to a 20% increase in the overall bank credit. "RBI's concern is that whether this increase is because NBFCs are lending for activities that banks are restricted to. They want to remove such regulatory arbitrage," said a finance ministry official.  The government admits that bank loans to systemically important NBFCs, which are mostly into 'loan and investments', should not be tagged as priority. "We support RBI's view that there should be a more stringent framework for such NBFCs who may have taken exposure in capital markets as well," the finance ministry official said.  Any non-deposit taking NBFC which has an asset size of 100 crore is considered as systemically important. This would mean loans to NBFCs such as Reliance Capital and Indiabulls won't be considered as 'priority' even if RBI relaxes the norms.  Banks, however, feel that any change in regulation is not going to impact their priority sector portfolio. "We have a large network of regional rural banks, and also with financial inclusion agenda being pursued we will meet the targets," said an executive director with a north-based state-run bank.

Imposing policy discipline among nations may be tough: Duvvuri Subbarao, Governor, Reserve Bank of India

MUMBAI: Imposing economic policy discipline among nations may be elusive for many years as the fundamental analysis required to come out with an acceptable policy is not in place, Reserve Bank of India Governor Duvvuri Subbarao said. Enforcement of policies will also be difficult.  "It is far too early to think of reaching new formal international agreements on policy behaviour," Subbarao had said at the SNB-IMF Conference on The International Monetary System, Zurich. "Instead, countries will prefer to proceed through more exchange of information, peer review processes and ad-hoc international agreements, depending upon the situation prevailing at any point of time," he said. Economic policies practiced by countries have begun to differ widely in the last few months, compared to the 'co-ordinated action' chorus that was advocated during the credit crisis when central banks pumped in liquidity in an unprecedented way and cut rates to as low as zero. With the crisis behind and the outcomes of loose monetary policies varying between countries, leaders may not agree to a common policy. While the West may still need an easy policy, emerging nations may have to make funds expensive to rein in prices. "Developing consensus on a code of discipline will be challenging," said Subbarao, while speaking on a topic 'Policy Discipline and Spillovers in an Inter-Connected Global Economy'. There's difficulty, "in reaching international agreement just in the specific field of financial regulation. It will be even more difficult to reach a consensus on broader economic policy,'' he said.  The two major disruptions in the global economy in the recent past have been the so-called Quantitative Easing 2, or printing currency by the US, and the undervalued currencies in some countries. China has been accused by the US and others of keeping its yuan undervalued to export more. That is hurting producers in other nations.  Global economic analysis that focuses on trade alone to assess the impact of policies in various nations itself is flawed, said Subbarao. Econometric models are not factoring in events such as the financial crisis, tech bubble burst and such developments are making any international consensus difficult.  "Recent experience shows that our understanding of the nature of these linkages is seriously deficient," said Subbarao. "In fact, standard econometric models still suggest that shocks in one country have very small effects on others. They do that because they assume that trade is the primary channel for transmitting these shocks across countries, and trade moves in line with GDP."

RBI: Inflation targeting neither feasible nor advisable

MUMBAI: The Reserve Bank of India chief said inflation targeting was neither feasible nor advisable in India and the bank cannot escape the difficult challenge of weighing the growth-inflation trade off. "...In an emerging economy like ours, it is not practical for the central bank to focus exclusively on inflation oblivious of the larger development context," Duvvuri Subbarao said in a speech posted on the Reserve Bank of India's website. "The Reserve Bank cannot escape from the difficult challenge of weighing the growth-inflation trade off in determining its monetary policy stance."  He also said monetary policy transmission in India has been improving but it is still a fair bit away from best practice.