Case for a national gold bank - T.V. Gopalakrishnan, Former Chief General Manager, RBI

India owns over 18,000 tonnes of above ground gold stocks worth around $800 billion, almost 11 per cent of the global stock, according to the World Gold Council (WGC) estimates. This is equivalent to nearly half an ounce of gold ownership per capita, a figure which is significantly below consumption in Western markets, representing scope for more growth, says a WGC research paper ‘India: Heart of Gold'. In 2009, total domestic gold demand reached $19 billion, or Rs 97,400 crore, which accounts for 15 per cent of the global market, according to the WGC. While Indian consumers continue to stock gold despite rising prices, when it comes to total gold reserves India ranks 11th in the world with 557.7 tonnes. Above ground gold stock is different from the total gold reserves. Over the past 10 years, the value of gold demand in India has increased at an average rate of 13 per cent a year, outpacing the country's real GDP, inflation and population growth by 6 per cent, 8 per cent and 12 per cent, respectively. The country at present has one of the highest savings rates in the world, estimated at around 30 per cent of total income, of which, 10 per cent is already invested in gold. In this backdrop, the setting up of a national gold bank (NGB) assumes importance. Such a bank, if set up, can gradually pave the way to have stock of surplus gold in the economy in one place. Over a period, the bank can have a say in controlling the volatility of gold prices in the domestic market, in particular, and can also act as a regulator of bullion market which is fast expanding, with international linkages. The bank can engage in the purchase and sale of the yellow metal and act as a trustee/pledgee for banks/institutions having gold surplus, and also keep gold for safe custody or raise funds against the precious metal to meet their liquidity constraints. As it is, the rate of deposit growth of commercial banks has been on the decline for the past few months and the investments in gold and real assets have been on the increase. Generally, Indians have a weakness for gold and the demand for gold is price insensitive. It is all the more so when the real rate of interest on deposits has been negative or insignificant compared to the rise in gold price. The banking system has been facing liquidity problem off and on and raising funds from the market poses a series of difficulties. Funds are becoming a major constraint to develop infrastructure. It is time for banks to find alternative sources of funds to continue to be vibrant in business and provide the well-needed support system for economic growth. One way to attract deposits is to encash the idle gold. In this context, the revival of the gold deposit scheme (introduced in 1999) has to be seriously considered. According to WGC, India's annual gold consumption is around 800 tonnes and gold reserves could be around 25,000-30,000 tonnes. The banks should be encouraged to accept gold as deposits and create fixed deposits linked to gold keeping very good margin. To start with, for instance, for pure gold worth Rs 50,000, the banks can create a fixed deposit for Rs 25,000 for a minimum period of three years and give an interest rate of, say 3 or 4 per cent a year. The banks can keep this gold as trustees. The investor earns interest on the idle gold while also securing his holdings under the custody of the bank. For the banks, they get gold as deposits and they should be in a position to raise funds against the security of gold. The borrowing power of the banks increases in the market and they will have required resources to expand credit portfolio. The banks should be given exemption from SLR for these deposits against the gold, as there is no additional liquidity created and the liabilities are fully backed by the gold they hold. However, the borrowings that these banks subsequently make against the gold can attract SLR and the advances they create can attract usual capital adequacy norms. The advantages of setting up a National Gold Bank are many. The bank can make bulk purchases from the open market including the international market and act as a store house of gold for banks and institutions. The banks and institutions holding gold can sell it to the National Gold Bank or raise funds by pledging it. This will bring down banks' borrowings from the RBI. The National Gold Bank can have a refinance arrangement with the Reserve Bank of India till such time it stabilises its operations. Money market operations can be better regulated and the black money component may gradually come down if the gold held in the country is brought under regulated market. Over a period, when the gold bank's operations get fully stabilised, the influence of gold in the market becomes predictable and circulation of hard cash and black money gets reduced, then framing of monetary policy and transmission of signals to financial markets by the Reserve Bank will prove to be easy. For the banks, such an arrangement provides opportunities to expand their business in terms of deposits, borrowings and loans. For the economy, benefits out of a gold bank are tremendous. The idle gold turns into cash to expand economic activities particularly the infrastructure and the gold and financial markets widen. It facilitates minimising generation of black money as the gold becomes a declared asset with the banks. Once a large quantum of gold comes under the custody of the gold bank, Government's fiscal policy and fiscal deficit can hope to have a totally different scenario than what is today. The image of the economy in the international market will improve. It will be a win-win situation for banks, investors, the economy, and the Government. (The author is former Chief General Manager, RBI. Views are personal.)

RBI pushes for manufacturing boost

Amid decelerating manufacturing growth, the Reserve Bank wants the government to come out with measures in the Budget to give a boost to the sector, which can employ surplus labour from agriculture. The suggestion was made by RBI Governor D Subbarao at a meeting of the Financial Stability and Development Council (FSDC), which met for the second time recently after its constitution last year, officials said. However, none of the regulators expressed reservations over the FSDC’s functioning. The body had seen criticism from RBI and Sebi initially over one of its proposed roles, to coordinate between financial sector regulators.

Chitale to replace Malegam as accounting standards body chief

The National Advisory Committee on Accounting Standards (Nacas), the country's apex body in this regard, has been re-constituted. M M Chitale, veteran chartered accountant, will take charge as chairman in February from Y H Malegam. Indian accounting standards are in the process of being tweaked to converge with International Financial Reporting Standards (IFRS). The Institute of Chartered Accountants India (ICAI) has formulated a ‘ converged-IFRS ’, a proposal that will merge the accounting standards to meet the IFRS stipulations and the timeline of their application to Nacas. The proposal now awaits Nacas’ nod. Under Malegam, the committee had advised the government to defer implementation of AS-11, an important tax regime, to 2011. This is the accounting standard on mark-to-market provisioning in corporate profit and loss accounts for foreign exchange-related gains and losses.  Chitale has been practising for 38 years and heads an independent CA firm, Mukund M Chitale & Co. He is on the board of many reputed companies, including Larsen & Toubro, Sriram Transport Finance and L&T General Insurance, as an independent director. Other key members who have joined Nacas with Chitale include P R Ravi Mohan (Reserve Bank of India), Usha Narayayan (executive director, Securities & Exchange Board of India), G Ramaswamy (ICAI) Anil Murarka (Institute of Company Secretaries of India), Brij Mohan Sharma (Institute of Costs and Works Accountants of India), Sarit Jafa (principal director, commercial audit, Comptroller and Auditor-General of India), Sunil Gupta (joint secretary, ministry of finance, nominee of the Central Board of Direct Taxes), Ashok Haldia (Associated Chambers of Commerce and Industry of India), S Santhanakrishnan (Confederation of Indian Industry), Renuka Kumar (joint secretary, ministry of corporate affairs) and a nominee from the Indian Institute of Management, Kolkata. The new team, with Chitale, will hold office till January 31, 2012.

Discussion paper on foreign banks

The discussion paper on foreign banks should have been issued two years ago, but then the global financial crisis made foreign banks look more dangerous and less worth letting in. However, its significance becomes clearer if it is read together with another paper the RBI issued last August on entry of new private banks. It is seriously thinking of giving new licences.  It has done so only rarely; it licensed 10 banks after the 1991 reforms, and another two a decade later. After that it has been resolutely inactive for a decade. Why the sudden end of somnolence? It points to the poor outreach of banking in India; despite the fact that the RBI forced banks to work for the common man at least since the bank nationalization of 1969, a large proportion of the population has no access to banks. This has led a series of official committees, notably the Percy Mistry Committee and the Raghuram Rajan Committee, to admonish the RBI to allow more competition. It was pretty cold to the committees while they sat; even now it cannot bring itself to mention Percy Mistry. But the finance minister himself promised more competition in banking in his last budget speech. In case the RBI still continued to resist, he created the Financial Stability and Development Council, an overlord which would override even the RBI. Overcoming all obstacles, he actually created the council last month; its membership left no doubt that the finance ministry was going to be in charge. So the RBI could no longer put off acting on new bank licences; and if it allowed new banks, it could hardly ignore foreign banks queueing to set up business in India. Opening up of the financial sector is the one demand India has consistently faced in its international negotiations going back to the Uruguay round of two decades ago; every time it persistently stonewalled. All that it conceded in the Uruguay round was that it would allow a dozen new branches of foreign banks to be opened every year, in a country with close to 80,000 branches. But times have changed. India has become a superpower, albeit a junior one. The prime minister sups with the mightiest leaders of the world, and as leader of the country immune to a meltdown, advises them on how to run their countries. If they ask him to let their banks come to India and learn lessons from a stern schoolmaster called the RBI, he can hardly refuse. But the RBI has put its foot down: foreign banks must bring equity, set up subsidiaries, and not expect to raise capital in India. This may be a rearguard fighting a losing battle, but it will take as long as it can to lose.

What use rate hikes, when banks borrow at 9%+, govt at 8%?

The Reserve Bank of India is scheduled to hold its third-quarter review of the annual monetary policy for the current fiscal on Tuesday. But would it say anything new? Inflation has been above the central bank’s estimates for a while now and the market is expecting it to raise reverse repo and repo rates, which are at 5.5% and 6.5%, respectively. And the growth versus inflation debate continues at all fora. By now, you must have realised that while everyone talks about inflation, no one wants anything done about it. That’s because growth is dear to all — businessmen cannot make profits without growth, government cannot get votes without growth (even if it comes at the cost of worsening finances and high inflation) and market players cannot earn bonuses without growth. So, the unsaid diktat seems to be that inflation, even if it kills the economy, should not hurt growth — meaning, the RBI must make sure growth does not suffer at the hands of inflation. Now that’s beyond the scope of any policymaker and hence precedence will be given to support government borrowing, which is inflationary in nature because money borrowed is not spent on creating capacities but on fuelling temporary demand. The RBI is expected to raise rates by 25 basis points (bps) or even 50bps as it has to show it is doing something. Banks are borrowing in money markets at 9.5% levels, while the government’s cost of borrowing is around 8.10%. This won’t change with a hike in repo rates. Inflation will not come down with rate hikes, nor will it affect growth in any form. And after the policy, the usual suspects — the finance minister, the prime minister’s advisers, the finance secretary, marketmen and economists — will all have a point of view. That’s because economists have to forecast inflation, growth and other macro-economic variables. But how often are they right? If they were on the ball, they will be managing money, not forecasting. The soap opera continues.

RBI’s model will raise tax bill of foreign banks, feel experts

Tax liabilities of foreign banks will rise marginally if the Reserve Bank makes it mandatory for them to conduct their operations in the country through wholly- owned subsidiaries ( WOS) rather than a branch model, experts said. " Although the WOS model will provide greater control over the function of foreign banks in the country, the tax liability would rise slightly under the proposed structure," said Diljeet Titus, a senior partner in law firm Titus and Co. In the discussion paper, RBI had suggested that foreign banks should be incentivised to operate in India as wholly- owned subsidiaries, as against the current system that allows them to have a presence under a branch model. The central bank has invited comments from stakeholders on the concept paper till March 7.

Microfinance for Macro Change Emerging Challenges – Dr.Deepali Pant Joshi

The book combines the detailed painstaking research of a noted scholar with the practical experience of the policymaker it furnishes and extensive analysis of the remarkable traits that have ensured the success of microfinance. Microfinance for Macro Change. Dr.Deepali Pant Joshi, the author of the book under review is an executive of the Reserve Bank, a Fellow of Harvard University and is an authority on development economics. Poverty reduction has been the main plank of the Indian planning process for over six decades and access to finance by the poor and vulnerable group is undoubtedly an overriding factor. The aim of financial inclusion is to enlarge the role of the organised financial system to cover those segments with low incomes. Microfinance is a crucial motivator in this and acts as a tool in improving productivity of the poor. This will spring from the evolution of a market serving the requirements of the poor. Microfinance is the provision of a wide range of financial services, credit and insurance to low income households and their micro enterprises. The poor can create projects that generate income and lift themselves up by their bootstraps. The S H G- Bank linkage programme is a laudable initiative to deliver the financial services to the poor on a continuous basis. There has been a strident growth in this and today the number of SHGs finance is over 30 lakhs. This programme confers gains on banks through externalisation of part of the credit cycle. It ensures screening of borrowers, gauging credit requirements, appraisal as also enforcement of contracts. The volume under review is an authoritative treatise on microfinancing and surveys it at length, raises several questions and answers them with assurance. The first chapter furnishes a lucid background of how microfinance has become a paramount agent in poverty reduction. The next chapter deals with different delivery models assessing their success and drawbacks. Nabard sponsored SHG- bank linkage programme is dealt with in the next chapter. Chapter Four highlights the role of RRBs and DCBs in delivery of micro- credit to the poor. How microfinance has changed the life of women through " SEWA" with examples of foreign experience is the subject of the next chapter. Concrete examples from a number of developing countries how microfinance has strengthened the poor are provided in Chapter Six. The subsequent chapter reveals how the frontiers of conventional finance are being expanded. The concluding chapter tackles the challenges, issues and concerns. The book is an admirable and succinct analysis of the gamut of microfinance dealing with objectives, participants, roles and comparative advantages. The author has argued vehemently for expansion of the financial frontier to cover the remotest rural areas. This can be done by systematic mapping of financial services for the poor, improving knowledge industry, co-ordinating at national and international levels. The book has a bibliography and a number of tables detailing relevant parameters. Dr.Rangarajan, former Governor of RBI has contributed a Foreword and declares that the book is a useful addition to the literature on the subject. The book is useful for planners, bankers, students of economics and those dedicated to alleviating poverty.

Book review by P. P. RAMACHANDRAN

Beat inflation with bonds

With inflation galloping at 12 percent, fixed deposits (FDs) offering a meagre 7-8 percent returns do not meet the needs. Such fixed interest instruments tend to give negative real returns, and the worst affected are fixed income earners who have no indexation facilities. In view of this, a committee of the Reserve Bank of India (RBI) has proposed the introduction of fully inflation (price movements) indexed bonds (IIB) for institutional investors with maturities of 10-12 years. This is intended to ensure inflation-linked returns to investors as both the principal amount and interest payments are indexed to inflation. The interest rate is usually lower than that of fixed rate bonds with comparable maturity. Though, as the principal amount grows, the payments increase with inflation. In India, a variant of indexed bonds, called the Capital Index Bond (CIB) 2002, was issued on December 29, 1997 wherein only principal repayments at the time of redemption were indexed to inflation. Based on the experience and feedback from market participants, a new version of IIB has been designed with both interest payments and principal repayments linked to Wholesale Price Index (WPI) for all commodities, and hence protected from inflation.

Over-regulation likely in financial sector: RBI Deputy Governor

The financial industry of the country is likely to see over-regulation in the coming years. In fact, regulation is the reason why the Indian financial sector is surviving, said K.C. Chaktabarty, Deputy Governor of Reserve Bank of India, who was in the town to participate in the financial leadership summit organised by the Indian Institute of Management Lucknow. The programme was part of the three-day annual management festival celebrated by the institute, called Manfest 2011. Chakrabarty, in his speech, said the financial market cannot be made totally free in an environment where there is lack of transparency and understanding about the sector is less among its consumers. Chakrabarty said 40 per cent population of the country is still without a bank account. “But by 2030, all Indians will have a bank account,” he said. K.C.Chakravarty, who was also one of the panelist spoke about financial inclusion and regulation. He quipped, "If you are an economist and have committed any sin, then in your next life, you would be a central bank governor of a developed country." Financial market, he said, will have to be subservient to real market in 2030. "Financial market is surviving in this market only because of regulators," he said, stressing that financial regulation will remain vital to the economy. "If there is one country that has the opportunity in the 21st century it is us. We must seize the opportunity," he said.

RBI’s takeover of J&K Bank’s overdraft role raises questions

A new wave of anxiety has suddenly engulfed Jammu & Kashmir. The news that the Reserve Bank of India (RBI) has taken over from J&K Bank some of the jobs the latter would do for this state is official now. To most Kashmiris, this step constitutes ‘nationalization’ of their most important institution. And the message that they see in this is not financial but significantly political.
On Friday, all speculations about this matter were put on rest when RBI came up with an official press release mentioning the signing of the agreement between J&K government and itself, making RBI take over from J&K Bank the role of providing overdraft facilities to J&K state. A big majority of J&K’s people see any such step a dilution of the state’s special status. They also see it as ‘nationalization’ of the state’s key institutions. And that is a grim message. A lot of state’s indigenous institutions have been ‘nationalized’ over the years. The problem is that such ‘nationalization’ creates greater centralization, challenging J&K’s quest for political autonomy even further. At the end of the day, Jammu & Kashmir’s case for restoration of political autonomy in practical terms is not about a political luxury, it is about need. Centralisation of powers is always bad for people’s welfare. In J&K’s case it is a recipe for long term instability and political chaos, rather than political reconciliation. This latest step has even the potential of putting spikes in the ongoing peace process being steered by the special interlocutors.  No matter the merits of ‘financial discipline’, steps like these will not help in bridging the trust deficit between Srinagar and New Delhi. These steps also raise serious questions over National Conference’s ability to safeguard the state’s special status, howsoever symbolic that might be.

Variety of factors behind price rise: Chidambaram

Attributing the price rise to a variety of factors including the international trends, Union Home Minister P Chidambaram today said "it is difficult to explain" to the people the reasons for price hike. "Sometimes, price of certain commodities, such as sugarcane, goes up when their their procurement price is increased. Some commodities such as petrol reflect the international prices whereas the others are based on demand-supply gap, like onion," he said here. In his address at the release of the book 'Global Crisis, Recession and Uneven Recovery,' written by former Governor of Reserve Bank of India Dr Y V Reddy, Chidambaram, however, said the aforesaid issues could not be explained to the people. On recession and the global crisis, he said India had managed to see off the situation, thanks to the planning and steps taken by Prime Minister Manmohan Singh, Deputy Chairman of the Planning Commission Montek Singh Ahluwalia and Reddy, who was the RBI Governor during those times. He also said India's central bankers, including Dr Reddy, and previous RBI chiefs were persons of outstanding integrity. The book is a sequel to his 'India and the Global Financial Crisis: Managing Money and Finance,' and provides a policymaker's understanding of the progression and impact of the financial crisis and the lessons it offered, a release said.

RBI tightens Tier I, II bond issue norms

The Reserve Bank of India on Friday said banks would not be allowed to issue Tier I or Tier II bonds with an option of offering higher coupon after some years, known as "step-up option". The change is in line with the new definition of regulatory capital under the Basel Committee on Banking Supervision, the Reserve Bank of India (RBI) said in a statement on its website. Such instruments can be issued with only 'call option'...," the RBI said.

Workshop on Knowledge Discovery Tools and Techniques

BKC Knowledge Network, formed in 2007, provides a platform for Library & Knowledge professionals in the emerging business district to network and share resources wherever feasible. Members include RBI, MMRDA, IL&FS, Bank of Baroda, NABARD and ICICI Bank. With a successful session on ‘Open Indexing Initiative’ by Dr. Manjunath, Librarian, IGIDR in April 2010, the BKC Knowledge Network initiated its second event by organizing a one day workshop on “Knowledge Discovery Tools & Techniques” at Reserve Bank of India, Bandra-Kurla Complex. 

Subsidiary route for foreign banks: RBI

RBI made a categorical assertion that the advantages in wholly owned subsidiary far outweighs the downside risks vis-a-vis branches because branches are not separate legal entities in India. Whereas subsidiaries are concerned they are locally incorporated separate legal entity with its own capital base and board of directors. Till date no foreign bank has approached RBI for setting up a subsidiary probably due to lack of incentives, the apex bank said.  Hence, RBI added, there may be a need to incentivise that model. Also, from a financial stability perspective, RBI views there would be a need to mandate the subsidiary form of presence at the entry level.  Minimum capital requirements for the entry-level wholly owned subsidiaries of foreign banks may be in line with new private sector banks. It also dwelt on various factors for setting up foreing bank presence in the country such as ownership pattern and financial soundness and rating. The Reserve Bank of India (RBI) in a discussion paper presented, on Friday, on its website said it prefers allowing foreign banks entry in the country through subsidiary route than the branch model, after taking lessons from the recent global financial crisis.

FM meets financial sector regulators ahead of budget

Finance Minister Pranab Mukherjee on Friday met India’s top economic regulators seeking inputs on the macro economy and developments in the financial sector as preparation for budget 2011-12 entered the final leg. Mukherjee’s meeting with members of the high-level Financial Stability Development Council (FSDC) came days ahead of the Reserve Bank of India’s (RBI’s) quarterly monetary policy review on January 25. This was the second meeting of the high-level FSDC within a month. The first meeting was held on December 31, 2010. “The RBI policy is scheduled on January 25. As a standard practice I have come to review the macroeconomic situation with the finance minister,” RBI Governor D.Subbarao told reporters after the meeting. The RBI has raised key policy rates six times so far this year as prices raced into high-double digits pummeled by a supply crunch of staple items. In November RBI had increased the repo and reverse repo rates each by 0.25 percentage points to 6.25% and 5.25%, respectively. A higher repo, the rate at RBI lends to lenders, raises the banks’ borrowing costs prompting them to raise interest rates for final home, auto and corporate borrowers. A higher reverse repo — the rate at which RBI absorbs excess cash — means it would suck cash from the system to stymie demand and cool prices. The issues discussed in the meeting include, functioning of FSDC, state of the Indian economy, economic recovery in advanced countries and implications for India. Besides, Subbarao and officials of the finance ministry, the meeting was attended by Securities and Exchange Board of India (SEBI) chairman C B Bhave, Insurance Regulatory and Development Authority (IRDA) chief J Hari Narayan and Pension Fund Regulatory and Development Authority chairman Yogesh Agarwal.

Malegam panel fell short of expectations: AP

Andhra Pradesh government, whose controversial law to rein in micro-finance institutions had led to a serious crisis in the MFI sector, said the Reserve Bank of India appointed Malegam Committee fell short of expectations. In a letter addressed to the Reserve Bank, the AP government said the Malegam report failed to put in place an effective protection mechanism for the poor borrowers from being exploited. The AP government said the RBI panel did not attempt addressing the existing debt burden on the poor that had reached unserviceable levels at interest rates ranging from 28 to 60 per cent. Also, the suggestions of the state government for rescheduling or debt swapping of high cost debt was not heeded. The government said “no relief has been proposed by applying the interest rate cap for the outstanding loans” and the “recommendations do not cover the loans which are outstanding.” Further, the state government said the Malegam report did not make any concrete recommendations for improving credit flow from the banks directly to the poor using the self help group (SHG) mechanism that allows cheaper credit. The AP government was also of the view that self regulation didn’t work in any sector, more so where a profit motive was involved. Referring to the suggestion of RBI panel that asked the MFIs to comply with the regulations through code of conduct, the government said “the implementation mechanism proposed is very weak. Greater reliance is placed on the ability of MFI to regulate itself. Even now, such codes exist, which are never implemented.”

Sobti re-appointed Managing Director & CEO of IndusInd Bank

The Reserve Bank of India has conveyed its approval for the re-appointment of Romesh Sobti as Managing Director & CEO of IndusInd Bank for a further period of three years. This will be with effect from February 1, a press release issued here today stated. Sobti joined IndusInd Bank on February 1, 2008. In the past three years, the bank has seen a magnificent turnaround in profitability/productivity and the health of its loan-book. The bank is now well-capitalised and positioned for robust growth in the next 3-years, the release said.

RBI Planning To Boost ATM Security In India

ATM fraud in India is not a new crime. It has been in existence for long. Even techno legal solutions for the same have been provided in this regard by techno legal experts for long. However, ATM frauds were not taken seriously by Indian government in general and reserve bank of India (RBI) in particular. It is only recently that RBI took some pro active actions in this regard. RBI would soon ask banks to shift to chip-based ATM cards from the existing magnet strips ones and upgrade the currency vending machines. This was one of the original solutions provided by Praveen Dalal, a Supreme Court Lawyer and leading techno legal expert of India. According to Praveen Dalal ATM frauds cannot be tackled successfully till we use techno legal measures. The technological mechanisms like Designated time, Microchip technology, Biometric tokens, Enhanced security, ATM Monitoring, Customised softwares, Customer motivation, Alerts, etc can be used to minimise and prevent ATM frauds in India, suggests Dalal. In a welcome move, RBI has accepted some of the suggestions of Praveen Dalal, including using a chip-based ATM card. According to Dalal the banks should use cards containing a microchip that can make them harder to forge. RBI has also decided to adopt widespread changes in the existing IT system of the Indian banking industry to make banking services more safe and secure. The apex bank has also suggested setting up separate cell on bank fraud in police departments. It has also suggested that for debit or credit card transactions at the POS (point of sale) terminals, PIN-based authorisation should be put in place instead of the signature-based system. The non-PIN based POS terminal would be withdrawn in a phased manner.

RBI wants banks to beef info security

In a move to strengthen the information technology architecture of banks, the Reserve Bank of India (RBI) has asked the institutions to form an policy approved by the board. The central bank has emphasised the need to create an exclusive board-level IT strategy committee, with two directors as members, where one would be an independent director. A working group, under the chairmanship of RBI executive director G Gopalakrishna, has recommended enhancing RBI guidelines relating to the governance of IT and information security measures to tackle cyber fraud, apart from enhancing independent assurance about the effectiveness of IT controls. “All members of the IT Strategy Committee would need to be technically competent, while at least one member would need to have substantial expertise in managing/guiding technology initiatives,” the committee said. The committee has been asked to review the plans at least once an year. In addition, banks will soon have a chief information officer (CIO), who would play a role in the executive decision making function. “The key role of the CIO would be to act as an owner of the IT function and enable alignment of business and technology,” said the central bank. The working group has also suggested an additional post of Chief Information Security Officer (CISO) who will be responsible for making and implementing policies to protect information. “An official of GM/DGM/AGM level can be appointed as CISO, who will report directly to the head of the risk management function and should not have a direct reporting relationship with the CIO,” RBI said. A board-approved information security policy needs to be in place and reviewed at least annually. To prevent skimming of credit and debit cards, the working group recommended that RBI move to use chip-based cards in a phased manner. “Chip-based cards help prevent frauds using the details recorded on the magnetic-stripe of the card. Sparing one or two private sector banks, all other banks currently issue cards with a magnetic stripe on it,” RBI said.

Governance deficit, graft extremely serious issues: Azim Premji

Wipro chairman Azim Premji on Friday reiterated that governance deficit and corruption were extremely serious issues for the future of the nation.
"Enough is enough. The situation in the country is extremely serious for its future and it is important that people in leadership give constructive suggestions to the government to rectify the situation," Premji told. Referring to the open letter written Jan 17 by 14 eminent citizens, including himself, to national leaders on governance deficit and corruption, Premji said though there was a response from the government, he would like to maintain the sanctity of the dialogue than making it public.  In the open letter, the noted citizens expressed concern with the general deterioration in the overall value system of the nation. They were also alarmed at the widespread governance deficit almost in every sphere of national activity, covering government, business and institutions.  Besides Premji, other eminent citizens who were signatories to the letter were former Reserve Bank of India (RBI) chief Bimal Jalan, HDFC chairman Deepak Parekh, former Hindustan Lever chairman Ashok Ganguly and Godrej & Boyce chairman and managing director Jamshyd Godrej.

Special sop goes as RBI replaces J&K Bank as state's banker

Bringing the curtain down on a special dispensation available to Jammu and Kashmir, the Reserve Bank of India (RBI) has entered into an agreement with the state government to undertake its general banking business and act as the sole agent for investment. Following Friday`s agreement, effective April 1, Jammu & Kashmir Bank will not be permitted to provide overdraft to the state government. Unlike other states, the bank, which is majority-owned by the state, provided these services to the state government as part of a special arrangement for J&K. The other states, like the Centre, use RBI`s ways and means advances for overdrafts to meet cash flow mismatches. From April, J & K Bank will act as an agent of RBI to conduct the state government`s general banking business, the central bank said in a statement on Friday. It also said the agreement was signed on the basis of a recommendation from the state government.

RBI moots arms model for MNC banks

The Reserve Bank of India expects existing branches of foreign banks, of a certain size to voluntarily convert themselves into wholly owned subsidiaries (WOS). In a discussion paper on presence of foreign banks in India, the central bank said on Friday, it would be mandatory for banks which opt for branch mode of presence, in the country, to convert themselves into WOS if they become systemically important. To incentivise them to set up or convert into an WOS, the central bank says it could consider extending to foreign banks a branch expansion policy as applicable to private sector banks. In other words, they would not be given ‘national treatment’ like public sector banks.  Moreover, foreign banks WOS, with a capital adequacy ratio of at least 9% for preceding two completed years, and the accounting year and net non performing loans of less than 7% could declare a dividend.

Sahara objects to RBI ad on deposits

The Sahara group has taken umbrage over a Reserve Bank of India advertisement, issued earlier this week, cautioning deposit holders to be cautious about deposits raised by the Sahara India Pariwar and has challenged the central bank’s jurisdiction in doing so. Sahara Pariwar, in a letter to the RBI, has said that there are a host of companies in the group which are raising funds and come under purview of other regulators, which are not governed by the RBI. These companies include Sahara India Life Insurance, Sahara Asset Management, Sahara Real Estate Corporation and Sahara Housing Investment Corporation. Challenging the banking regulator, Sahara, said that Sahara Real Estate Corporation and Sahara Housing Investment Corporation are issuing optionally fully convertible debentures and these investments do not come under the RBI’s purview. Similarly, it also pointed out that the Sahara Credit Cooperative Society is promoting micro savings for micro lending, which also does not come under RBI regulations. The RBI on January 18 had issued advertisement in leading newspapers stating that it had received complaints that Sahara group of companies has been mobilizing deposits from the public under the generic name of Sahara Pariwar. The central bank had cautioned the public stating that when money is collected in the name of Sahara Pariwar they should verify the name of the company which issues the deposit receipt and whether the company is authorized by the RBI to accept deposits from the public. They were also cautioned that the RBI does not guarantee repayment of deposits accepted by Sahara India Financial Corporation (SIFCL) or any other company in the group.

Chakrabarty gets his domain back, and some more

The Deputy Governor of the Reserve Bank of India, K.C.Chakrabarty, who was stripped of a few portfolios in August last year after his reported remarks on how the central bank had done little to combat inflation, has now been assigned additional responsibilities.  The new portfolios assigned to him include departments such as human resources development, administration and personnel management, rural planning and credit, banking supervision and currency management. Financial inclusion, which is being pushed by the government and RBI, will also be handled by him in what is seen as a rehabilitation for him.  Mr Chakrabarty’s portfolio was reduced to customer services, information technology, inspection and Rajbhasha, after those reported comments on inflation. His old portfolios were not restored even in November when deputy governor Usha Thorat retired. The portfolios handled by Usha Thorat was then assigned to two other deputy governors — Shyamala Gopinath and Subir Gokarn. Mr Chakrabarty allegedly said with the central bank injecting liquidity at 5% and inflation being at 10%, RBI will never be able to control inflation, everything else remaining the same. His comment came just two days after RBI raised the repo rate by 25 basis points to 5.75% and the reserve repo by 50 bps to 4.50%. Mr Chakrabarty is known for his blunt approach and does not hesitate to offer his views to the sound byte hungry media, in a sharp contrast to career central bankers.  According to bankers, the deputy governor’s portfolios were reduced because the governor was disappointed that he voiced his opinion in public and was critical of measures taken by RBI to control inflation. Some officials, however, added that even after the portfolio changes in August last year, Mr Chakrabarty, a former bank CEO, was consulted by the governor on policy decisions relating to new banking licences and operations of microfinance institutions.  The changes in the portfolios and the appointment of Anand Sinha as the new deputy governor come just a few days before the next review of the monetary policy.  Several economists and analysts have said RBI has been behind the curve, or been lagging in raising interest rates, an observation that has also allegedly been attributed to Mr Chakrabarty. In fact, recently Governor Subbarao said RBI is ‘desperate to control inflation’. Economists expect RBI to take aggressive measures to rein in inflation, which is now close to 9%.

Co-op banks cannot lend housing loans beyond 5% of assets

The Reserve Bank has barred cooperative banks from giving housing loans beyond 5 per cent of their total assets. Earlier, State cooperative banks (StCBs) and central cooperative banks (CCBs) were allowed to extend housing finance up to 10 per cent of their total loans and advances. These banks, with exposure in excess of the new limits, have been asked to initiate steps to bring it down to the revised limits within six months. “It has been decided that the exposure of StCBs and CCBs to housing finance would, henceforth, be limited to 5 per cent of their total assets, as against 10 per cent of their total loans and advances," a RBI notification said. The assets of StCBs and CCBs may be reckoned, based on the audited balance sheet as on March 31 of the preceding financial year, it said. The decision would curtail exposure of such lenders to real estate. The revised limit of credit exposure for housing would be applicable with immediate effect. The StCBs and CCBs were earlier allowed to give house loan to an individual borrower up to Rs 20 lakh. In case of a bank having a net worth of Rs 100 crore and above, the limit was Rs 30 lakh.

Banks tighten lending for commercial realty

Banks are getting tough with developers of commercial projects such as office buildings, malls and shopping centres--a fallout of the corporate loan scam that came to light last year. Meanwhile, several large property developers have to repay loans in the coming months.  Builders seeking fresh loans have been asked to meet more stringent conditions, including demands to produce five-year lease agreements with tenants, and having to settle for considerably lower borrowings against future rent receivables, two bankers said. Indian Overseas Bank, for instance, will lend to develop- ers only if they produce a five- year leasing agreement with a lock-in period for tenants. “This is what banks do at this moment,“ said M. Narendra, Chairman and Managing Director of the public sector bank. “This way, you can be sure of the repayment capacity of the borrower.“  Banks grew wary of lending to commercial real estate projects after several of them turned sour during the slow- down and developers struggled to repay debt. Their worries increased when in November the Central Bureau of Investigation nabbed eight senior officials of state-owned banks and other financial institutions for irregularities in lending to builders. Volatile sector The Reserve Bank of India (RBI) had been warning banks even earlier about the high- risk nature of realty, terming it a “sensitive sector“ along with capital markets and commodities because of likely price fluctuations. Anand Gupta, honorary treasurer of Builders' Association of India, an industry body of construction contractors and builders, said no new commercial real estate project has been launched in the past couple of months. “Banks have not approved any fresh proposals in the last one-two months,“ he said. “Most banks are even hesitating to release sanctioned money.“

REGULATORY PRESCRIPTIONS - Microfinance: misunderstood, Malegamed

A generally beleaguered microfinance industry was eagerly waiting for Yezdi Malegam for deliverance. Any conversation about the microfinance business would end with the expectation that the Malegam committee would de- liver a healthy dose of oxygen to the choking microfinance industry. The report was expected to be the panacea for all that ails microfinance in India. The report, which came out on Monday, disappoints not only in its inability to meet these expectations, but also on fundamentals. While each one of the recommendations may have merit when seen in isolation, together they are a lethal combination. It is difficult to ac- cept that the collective wisdom of Malegam, Shashi Rajagopalan, an expert in cooperatives; Aditya Birla Group head Ku- mar Mangalam Birla; Reserve Bank of India (RBI) Deputy Governor K.C. Chakrabarty and former chief of India's space research organization U.R. Rao could have delivered this blow to the microfinance sector in the country. First, the good things in the recommendations: The committee suggests retaining priority sector status for the micro- credit business; keeping micro-finance institutions (MFIs) out of the Moneylenders Act; keeping the regulatory role with RBI instead of state governments; enhancing the role of RBI in supervision; and engaging with industry associations on an on- going basis. However, there are several problems with the report. Chakrabarty, during his brief tenure as the central banker in charge of rural credit, provided progressive measures for financial inclusion in the banking sector by suggesting two radical steps in the rather conservative atmosphere of RBI — the first was to remove licensing requirements for opening branches in towns with a population less than 50,000 people; the second was to remove the interest rate cap on all loans as the base rate regime kicked in. The only area where there were some controls on interest rates was in the case of politically sensitive agricultural loans. As a member of the Malegam committee, he has signed off on a report that puts a cap on micro- finance interest rates at 24%, without dissent. The question is not whether 24% is an appropriate cap; it is more about the principle. One of the concerns that led to the formation of the committee was that microfinance companies were profiteering from the poor and not treating them with dignity. As a central banker, a more non-invasive way of addressing the issue would have been in controlling the capital flow to these institutions both through the nature of equity investments and through the banking system, thereby giving the market an opportunity to experiment and provide diversity of services, improving transparency and enforcing a customer responsibility code. If the banking sector, the auto finance sector and the housing finance sector have plurality of institutions (and no loan size and interest rate caps and definitions of moratoriums) with the central bank stepping in whenever it seems to think a larger customer interest is involved (as it did in the case of teaser rates offered by housing finance companies), we see no reason why the same principles should not be applied to the poor. Dealing with poverty does not mean restricting choices and giving people what we think is good. Dealing with poverty means trying to give the poor as much dignity and diversity of choices that the non-poor enjoy. The report defies the plurality of institutions and choices. The Andhra Pradesh ordinance (as recommended by the sub-committee) can lapse because the panel has effectively completed the task that was started by the state government. For not having abdicated the responsibility to supervise and inspect MFIs that have shown poor governance and indifferent behaviour towards customers, this antidote by the RBI committee appears populist and misplaced in what should be controlled and what should not be.

Malegam panel recommendations not feasible, say microlenders

Microfinance institutions, or MFIs, could well run into a crisis if certain recommendations of a Reserve Bank of India (RBI) panel are implemented in the current form, executives in the business warned, even as shares of SKS Microfinance Ltd, the largest and lone listed MFI in the country, rose 3.84% to close at `694.25 apiece on Thursday on the Bombay Stock Exchange. The stock rose 13.08% intraday to `756. The exchange's benchmark index, the Sensex, rose 0.36% to close at 19,046.54 points. Udaia Kumar, managing director of Share Microfin Ltd, and a member of Microfinance Institutions Network, an industry lobby group, said MFIs would approach RBI to sort out some of the contentious issues in the report. MFIs, in the business of lending tiny loans to poor peo- ple, are already facing a tough time in Andhra Pradesh on ac- count of a controversial state law. The RBI committee, headed by noted chartered accountant Y.H. Malegam, has proposed capping the interest rate at 24% for individual loans; a ceiling of `50,000 on the annu- al family income of the borrower; and a Rs. 25,000 ceiling for loans to a single borrower. The proposals, if accepted, will be implemented by 1 April. More than the cap on the loan rate, MFIs are worried about the ceilings on income and loan amount. Senior executives in MFIs said most of the people who currently borrow from them will not be able to access money if these limits are implemented as a majority belong to families with an annual in- come in excess of `50,000, and require loans higher than `25,000. Smaller MFIs, in particular, will be severely hurt, they added.

Microfinance institutes in UP welcome Malegam Committee recommendations

Malegam proposals will weaken small MFIs, say experts

The recommendations of the Malegam committee, if accepted by the Reserve Bank of India (RBI), will be a positive step towards enhancing stakeholder confidence in the microfinance institution (MFI) sector — a critical element for long term sustainability of the sector — but once implemented, these proposals will pose additional operating and compliance-related challenges for the MFI sector, experts said. The sector’s growth prospects and profitability will weaken, thereby leading to a possible consolidation in the industry. The decline in the gross interest spreads of the top five MFIs is expected to be in the range of 5 to 8 per cent, over the medium term. Consequently, rating agency Crisil foresees a possible consolidation in the MFI industry with higher minimum net worth norms which will raise the entry barrier for new MFIs. “Smaller MFIs will find it difficult to raise capital, given the challenges of lower growth and profitability. MFIs with stronger internal processes, higher focus on transparency and governance, and efficient operations will reap the maximum benefits,” it said.

NABARD to launch Development Correspondents project

Country’s apex agricultural development bank NABARD said it aims at giving localized weather and crop advisories to farmers through SMS service in association with India Meteorological Department and Krishi Vidnyan Kendras.  NABARD also plans to launch a pilot project called Development Correspondents for information dissemination through use of technology in this regard, said K.V.Rao, General Manager, Maharashtra Regional Office, Pune. He was speaking at a state level Farmers’ Club award function. “Farmers should avail loans to expand their activities and earn profit and repay the loan.  They should desist from asking for loan waiver “ said Shri J.B.Bhora, Regional Director, RBI

RBI allocates portfolios of DGs

Four months after the Reserve Bank of India (RBI) took away important departments handled by K C Chakrabarty, one of its Deputy Governors, the central bank on Wednesday restored most of those and also gave two new portfolios, Department of Banking Supervision and Department of Currency Management.  RBI on Wednesday re-allocated the portfolios of its Deputy Governors, along with assigning responsibilities to Anand Sinha, who took charge as Deputy Governor on promotion today. Chakrabarty got back most of his lost departments — Human Resources, Administration and Personnel Management, Rural Planning and Credit (which looks after financial inclusion). He got Banking Supervision and Currency Management, earlier with Usha Thorat, a Deputy Governor who retired in November. After Thorat’s retirement, all her departments had been temporarily given to another Deputy Governor, Shyamala Gopinath. In August last year, RBI took away four departments from Chakrabarty, though the reason was not made public. Sinha has got the Department of Banking Operations and Development, Urban Banks Department, Information Technology, Expenditure and Budgetary Control, Inspection, Legal and Premises Departments. Information Technology was with Chakrabarty. This is the first time in many years that the Department of Banking Operations and Development and the Department of Banking Supervision are being handled by different Deputy Governors. Earlier, Thorat and then V Leeladhar looked after both departments. Mint Road sources said it had been difficult to ignore Chakrabarty’s experience and efficiency when RBI was dealing with several important policy decisions. The Rural Planning and Credit Department, for example, which carries the responsibility of financial inclusion, may have more responsibility once micro finance institutions (MFIs) comes under the purview of the central bank. At present, only MFIs registered ad non-banking financial companies are under RBI’s lens, but there is a view that almost all important MFIs should come under the regulator’s purview. There is a proposal to bring MFI regulation under the rural planning and credit department, though NBFCs are regulated by the non-banking supervision department. Portfolios of some of the Executive Directors have also been reallocated. RBI is in the process of appointing new EDs by promotion. Till the time, some of the Chief General Managers will report directly to the respective Deputy Governors.

RBI panel proposes guidelines for microlenders

The Reserve Bank of India (RBI) temporarily relaxed rules for bank loans to the microfinance sector, which will allow banks to continue lending to the embattled industry, and unveiled proposed guidelines for the lenders to the poor. The RBI panel's recommendations include margin caps and other measures for a sector that has been hit hard since a key state imposed strict regulations in response to complaints over high interest rates, aggressive recovery practices and overextended borrowers. Microlenders in India typically make loans of about $140, mostly to women. The panel recommended a margin cap of 10 percent over the cost of funds for larger microfinance lenders and 12 percent for smaller lenders in a sector where interest rates can top 30 percent. The report also recommended limiting to two the number of microfinance firms that can lend to the same borrower, and called for a customer protection code for microfinance companies. Other recommendations include creating a separate category of non-banking financial companies (NBFCs) in the sector, which will be designated as NBFC-MFIs. The panel was appointed in October to look into problems confronting the sector, which had been growing quickly and has outstanding loans of more than $6 billion. The recommendations, which were generally in line with industry expectations, are not binding but are expected to act as guidelines for the loosely regulated sector. Shares of India's largest microfinance company SKS Microfinance, which have fallen by more than half since the company went public last August, ended nearly 3 percent higher after the RBI's move to temporarily ease lending rules. EASING CREDIT The RBI will temporarily allow banks to classify as standard loans to microfinance firms that are potentially delinquent, which is expected to ease the flow of credit to the industry. "The fact that the RBI is making an exception on behalf of MFIs (microfinance institutions) and taking special steps to support the industry is a good sign from a direction point of view," said Anurag Agarwal, senior vice president at Intellecap, a Hyderabad-based consulting firm in the microfinance segment. Some critics have argued that microfinance companies should not be profit-driven, while supporters say profits allow lenders to lend to more poor borrowers. The southern state of Andhra Pradesh, which was the largest microfinance market in India, imposed a series of regulations on the sector in October that has severely curtailed operations in the state. India's central bank and finance ministry have both spoken up in support of the sector. "The Sub-Committee has cautioned that while recognising the need to protect borrowers it is also necessary to recognise that if the recovery culture is adversely affected and the free flow of funds in the system interrupted, the ultimate sufferers will be the borrowers themselves," an RBI statement said.

Now withdraw cash at a shop, but bear a cost

ICICI Bank Ltd, the largest private bank in the country, on Tuesday announced the launch of a facility that allows withdrawal of cash at the point of sales (PoS) terminal, an electronic retail payment device or a shop with such a device. The Reserve Bank of India (RBI) first allowed this facility through a notification issued in 2009. Union Bank of India (UBI) was the first to launch this facility in rural areas with the motive of financial inclusion; ICICI Bank claims to be the first to come out with this facility. You can withdraw up to Rs1,000 per day at the PoS terminal at a shop. The best part is that you need not make any purchases from the shop where you avail this facility. If the merchant refuses to give cash, the debit cardholder can lodge a complain with the bank. It is similar to the process where a merchant refuses to accept card for purchase of goods. The RBI circular says, “In case the facility is being availed with the purchase of merchandise, the receipt generated shall separately indicate the amount of cash withdrawal.” The facility, however, comes at a cost. You will need to pay Rs10 per transaction as a fee. You do not have to pay the merchant on the spot; the fee will be charged by the bank and directly debited from your account.

Ensuring security of payment systems a big challenge: RBI

Reserve Bank of India's Deputy Governor K.C.Chakrabarty today said ensuring security of payment systems and protecting customers' funds is the biggest challenge before central banks and payments systems operators. Banks should spread awareness to increase usage of newer payment systems, Chakrabarty said, adding, "this (safety and security) is a big challenge to be faced to avoid erosion of customer confidence in the new age payment systems." Delivering the inaugural address at Banknet's 7th annual conference on payment systems in Mumbai, Chakrabarty said the RBI had mandated the additional factor of authentication for all card-not-present transactions - perhaps the first attempt by any regulator - apprehending security being compromised. "The RBI is currently in discussion with "banks and the card companies to introduce an authentication system for transactions at POS (points of sale)," Chakrabarty said. Apart from that, in case of ATM cards, it is also mulling a move over to the more secure "Chip and Pin" cards from the current pin-only system to check instances of cloning, Chakrabarty said.

FDs: Banks charge penalty for early withrawal

As interest rates inch upwards, returns on fixed deposits (FD) are also getting better, but it may not be a good idea to hop from one FD to another, hoping for a better rate of interest. If you decide to withdraw the earlier fixed deposit to make your money work harder, it will come at a cost to you.
HDFC Bank, one of the few banks that were not charging a penalty on premature withdrawal, will now charge a penalty of 1 per cent from next week. However there are banks such as the Punjab National Bank which has halved its penalty to 1 per cent in line with the penalties that other public sector banks charge like State Bank of India. While ICICI Bank charges a penalty of 0.5 per cent to 1.5 per cent depending on the tenure and size of the fixed deposit. Axis Bank and IDBI Bank are the only banks that do not charge a penalty. RBI guidelines allow banks to determine the penalty on premature withdrawal. "If someone is breaking a contract they will have to pay a penalty," said K.C.Chakrabarty, Deputy Governor  of Reserve Bank of India. This means if a customer decides to invest Rs. 1 lakh in a three year fixed deposit and chooses to withdraw it at the end of the first year, he will get the rate applicable on one-year deposits, but the penalty will be deducted from the interest rate payable. Experts say that with penalties for premature withdrawal becoming the norm, it will be wiser to put your money into a fixed deposit scheme for a shorter tenure.

Reserve Bank of India in tax net

The Reserve Bank of India had some unusual visitors a week ago. Officials from the tax deducted at source (TDS) wing of the income tax department visited the Reserve Bank of India (RBI) headquarters to inquire into the latter’s failure to deduct tax at source since July 2007 on payments amounting to more than Rs.800 crore. The department claimed that according to income tax (I-T) rules, the RBI should have deducted TDS at the rate of 10% on this amount, which comes to more than Rs. 80 crore. After deduction, RBI should have deposited the TDS with the I-T department by the 7th of the month after the one it was deducted for. The I-T authorities found that the RBI had made payments to some government banks as “agency commission” but failed to deduct TDS on it. The commission was paid for banking and government business conducted by these banks on behalf of the RBI. The RBI, in its defence, cited a circular issued by the Central Board of Direct Taxes (CBDT) in 2003, which said that no TDS was required to be deducted on turnover commission paid by RBI to agency banks. The I-T department contended that agency commission and turnover commission are different and the circular was in force only until 2006. The department will not ask the RBI to pay the TDS because it will recover that from the banks.

RBI allows outstation cheque charges hike

The Reserve Bank of India has allowed banks to hike charges for outstation cheques and cheques under speed clearing “to hasten the migration of transactions to electronic mode“, the central bank said on its website. Henceforth, banks will be allowed to charge customers for outstation cheques and cheques under speed clearing valuing above Rs. 1 lakh. Both these charges were capped at Rs. 150 before the notification.

Intermediaries can’t outsource KYC, says SEBI

The Securities and Exchange Board of India wants financial intermediaries to stop outsourcing their know your client (KYC) processes to third parties. The suggestion is part of a SEBI discussion paper on outsourcing by intermediaries. “The informal feedback indicates that the compliance with securities laws, investor grievance redressal and KYC must not be outsourced under any circumstance,” says the discussion paper. SEBI has invited comments from market intermediaries by February 5. According to an industry expert, mutual funds, brokers and depository participants are among the financial intermediaries who have been outsourcing their KYC processes.

Salaried taxpayers may be spared filing returns

Salaried taxpayers with no other income could get a respite from filing tax returns. The Income Tax (I-T) Department is open to examining a proposal to exempt them from the annual chore. Asked whether the department would think about doing away with income-tax returns for employees, who had no other income apart from salaries in a financial year, Central Board of Direct Taxes (CBDT) Chairman Sudhir Chandra said the department would certainly consider the proposal. He agreed that for a substantial chunk of salaried employees, savings bank interest is the only additional income and that in most cases, this not substantial. This proposal, if approved, will benefit a large section of people and would reduce the I-T departments workload in a big way. Of the country’s 35 million taxpayers, roughly half are salaried employees. The proposal to do away with returns for salaried taxpayers was earlier internally mooted within CBDT a few years ago. The argument in favour of the proposal was that income records for this class of taxpayer were available with both employers and banks.

Anand Sinha to take over today as Deputy Governor of RBI

Anand Sinha, who is currently an Executive Director of the Reserve Bank of India, has finally been elevated as the Deputy Governor of the central bank. The finance ministry notified Sinha's appointment on Tuesday.  Sinha, 59, who would have retired as ED after reaching 60 by February-end, has been given a two-year extension as the Deputy Governor. “I will take over the new charge on Wednesday,” he said. After Sinha’s appointment, the central bank is expected to announce a reshuffle of departments among the four Deputy Governors. Sinha who has managed some of the most important departments like Banking Operations and Supervision and helped in shaping the paper on entry norms for new private and foreign banks, will take the place of Usha Thorat, who retired in November 2010. Thorat had to retire as she was denied two-year extension (beyond 60), which has been given to some of her predecessors. However, Thorat had completed a five-year tenure as a Deputy Governor when she retired. Sinha will be the fourth Deputy Governor at the RBI, joining Shyamala Gopinath, K.C. Chakrabarti and Subir Gokarn. The normal practice is to appoint two deputy governors from within the central bank, besides a banker and an economist who are appointed from outside.  Gopinath who is on a two year extension will also be calling it a day after reaching 62 in June. The MoF is expected to start looking for Gopinath's successor soon. Earlier a search committee, comprising RBI Governor D Subbarao, Financial Services Secretary R.Gopalan and National Institute of Public Finance and Policy Director Govind Rao, had interviewed six Executive Directors from RBI and selected Sinha and slotted another Executive Director Shri H.R.Khan next to Sinha. However same search committee is expected to undertake the exercise all over again, said sources.

“Inclusive growth and human resource challenges are the two big issues for banks - Sandip Ghose

Sandip Ghose, Regional Director, Reserve Bank of India, said, “Inclusive growth and human resource challenges are the two big issues for banks. Banking sector is going to face a shortage of skilled manpower in the future. Bankers should not forget that human resource issues are as important as cost and availability of credit. Bank CMDs should play a major role in planning HRD requirements for the next decade or so. They should focus at strategy rather than number crunching. He was talking at a Conference on “Emerging Role of Banking Sector in Economic Development and Growth of Businesses, “organized by PHD Chamber in New Delhi on Monday.

Govt working with RBI for deeper penetration of banking services

Finance Minister Pranab Mukherjee on Tuesday said that the government in consultation with the Reserve Bank of India (RBI) is trying to reduce the inter-mediation cost to improve penetration of the financial services in the country. “...the cost of banking intermediaries in India is high and bank penetration is limited to only a few customer segments and geographies. The government is trying to address this in collaboration with the Reserve Bank of India, but much more is needed to be done,” Mukherjee said in his pre-budget consultation with bankers and financial services providers. The finance minister emphasized financial inclusion was a key determinant of sustainable and inclusive growth. Access to affordable financial services - especially credit and insurance - enlarges livelihood opportunities and empowers the poor to take charge of their lives. It is critical to connect the banked and the unbanked sectors and enable the unbanked to become vibrant and productive participants in the process of economic growth, the finance minister said. The government has accorded high importance to financial inclusion to cover the entire gamut of financial services pertaining to savings, credit, insurance and transfers, he added. As a part of the financial sector reforms in India, Mukherjee said, an apex-level Financial Stability and Development Council (FSDC) has been set up with a view to strengthen and institutionalize the mechanism for maintaining financial stability. Without prejudice to the autonomy of market regulators, this council would undertake macro prudential supervision of the economy and address inter-regulatory co-ordination issues. It would also focus on financial literacy and financial inclusion, he said. It has also been decided to set-up a Financial Sector Legislative Reforms Commission (FSLRC) to rewrite and clean up the financial sector laws and bring them in line with the requirements of the sector, he said.

SBI plays 'priority' card to avoid higher teaser loan provisioning

State Bank of India (SBI) – the country’s largest lender and the pioneer of teaser loans in the country – has requested the Reserve Bank of India (RBI) to waive the higher provisioning requirement for these loans. RBI had mandated higher provisioning for teaser loans — which offered lower rates in the initial years and higher in the subsequent ones. The standard asset provisioning requirement for such loans is two per cent, as against 0.4 per cent for any other loan. As a result, SBI, which has a portfolio of nearly Rs 32,000 crore of teaser loans, would have to make an additional provisioning of nearly Rs 400 crore. After the RBI move, SBI tweaked its home and auto loan schemes from January 1. Instead of a fixed interest rate, it started offering a fixed discount. However, it did away with the fixed rate. The interest now changes with the base rate.

Withdraw cash from PoS with ICICI Bank debit card

The country''s largest private sector lender ICICI Bank today introduced cash withdrawal facility at point of sale terminals at merchant outlets. ICICI is the first lender to offer this facility inthe country, the bank said in a release here. Currently cash withdrawal using a plastic card is available only at ATMs. The new facility will be available for all ICICI Bankdebit cards holders who can withdraw up to Rs 1,000 a day as per Reserve Bank guidelines and can be done with and without associated purchase transactions at PoS terminals, the bank said in a statement here today. Launching the facility, Managing Director and Chief Executive Chanda Kochhar said, "ICICI Bank continues to be at the forefront of offering new functionalities and convenience to customers by leveraging technology. The launch of cash withdrawals at PoS terminals will create a new mode of access to financial services, which not only enhances customer service but can also be leveraged for financial inclusion." The ability to offer cash is likely to be attractive to merchants as it means they can reduce the risk and cost associated with managing cash.

RBI, SEBI again slam reform role for FSDC

The Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) have once again opposed the finance ministry’s move to include development or reforms in the financial sector as part of the mandate of the newly-formed Financial Stability and Development Council, or FSDC, bringing to fore the regulators’ unease over the government’s intrusion into their turf.  Both these regulators had from the beginning resisted the proposal to broaden the mandate of the FSDC, saying the council should restrict itself to issues related to financial stability. At the first meeting of the council a few weeks ago, which was presided over by Finance Minister Pranab Mukherjee, Sebi and RBI again flagged the issue and made it clear that financial sector reforms should not form part of the council’s mandate. Such a move would impinge on the autonomy of the regulators, they said, according to a person with direct knowledge of the issue.  The trigger for these fresh concerns was a recent notification by the government that said the FSDC would deal with issues relating to financial stability, financial sector development, inter-regulatory co-ordination, financial literacy and financial inclusion, and macro-prudential supervision of the economy, including the functioning of conglomerates. The contention of the regulators is that the decision of the government goes way beyond what was originally announced in the budget last year. To buttress their argument, they have pointed out the structure of similar agencies operating abroad, saying most of them focus solely on financial stability.   Sebi has backed RBI on this, saying the structure of the council should be such that it remains a forum for discussing mainly financial stability instead of overreaching, the person quoted earlier said. There has been a fair amount of exchange of communication on this between the government and regulators, which have now sought clarity from the centre before final guidelines on the functioning of the council and its sub-committee are firmed up.

Compulsory off for SBI staff to sniff out frauds

All Officers Told To Take ‘Vigilance Leave’ For 10 Days Every Financial Year

SBI has told all its officers to take compulsory ‘preventive vigilance leave’ for at least 10 days every financial year. The decision, taken by the high-powered committee of the bank’s board, was communicated to employees a week ago. It follows a string of frauds that have rattled several financial institutions in recent months.  While reviewing high-value frauds, the committee found they had been perpetrated by officers who had established a reputation for being dedicated and hardworking. These are employees who did not avail of any leave earned by them. The frauds only came to light when such employees went for training or took leave for some other reason. Public sector banks are strengthening their internal processes and reporting systems to counter fraud, and some of them may introduce a policy of compulsory leave, said a senior official with another state owned bank.  State Bank will amend its Officers Services Rules to cover 50,000 employees. In the next stage, the same rules will apply to more than 1 lakh clerical staff. According to a senior SBI official, the committee feels it’s a “prudent risk-containment measure”. Making employees step into the shoes of colleagues who go on leave may help in quicker detection of fraud.  There are MNC banks which go a step further. For high-risk activities like bond and foreign currency trading, these banks assign compliance officers to scan the books while the dealer is holidaying.