Rate hikes seen coming, but deposits first

With the Reserve Bank of India hiking repo and reverse repo rates by 25 basis points, banks are likely to increase lending and deposit rates in the near term. However, with banks looking to increase their deposit mobilisation, deposit rates are likely to go up before lending rates. Mr O. P. Bhatt, Chairman, State Bank of India, said the bank's asset-liability committee will meet soon to take a call on the increase in rates. “There has been an upward bias in rates for a very long time and you have seen this bias getting translated into increases in lending and deposit rates. But there has been a small lag between the rate hike and the transmission. It will depend on where each bank is on the liquidity curve and its asset-liability situation”, Mr Bhatt, who is also the Chairman of Indian Banks' Association. Ms Chanda Kochhar, MD and CEO, ICICI Bank, said there is an upward bias in interest rates. “Deposit and lending rates increase depends on how cost of funds is moving and what is the supply-demand situation. Cost of deposits has been moving up. So clearly there is an upward bias in interest rates. But when and how much will vary from bank to bank,” she said. Mr K.R Kamath, Chairman and Managing Director, Punjab National Bank, said there is a need for a balance between deposit and credit growth rates as the pace of the growth is not the same. “There is case for an increase in lending and deposit rates. When and how, the market will decide. In case banks are not getting deposits to fund the credit growth, then deposit rates will be increased first”, he said. Mr Anil Kothuri, Head-Retail Finance, Edelweiss Capital, pointed out that even though the RBI has increased interest rates six times in 2010 aggregating 300 bps, home loan interest rates have increased by only 150 bps. “The latest increase will put upward pressure on home loan interest rates, given that bank and housing finance companies have very little wiggle room left. Nonetheless, the demand for home loans will continue to be strong, if property prices stay stable and the environment continues to be buoyant,” he said. Mr M.V. Nair, Chairman and Managing Director, Union Bank of India, said the RBI wants the incremental growth in the repo rate to be passed on to the credit market. “The intent of the policy is absolutely clear. Deposit has to keep pace with the growth in credit,” he said.

Loan lessons

Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty retains his maverick streak. At the finance leadership summit of the Indian Institute Management, Lucknow (IIM-L), someone in the audience asked why car loans were cheaper than education loans in India. The veteran banker’s reply: "When a bank gives car loans, it knows that the borrower has a good job to repay. In education loans, the repayment capacity is not clear beforehand."

Bank of Baroda chief M D Mallya is BS Banker of the Year

Mangalore Devdas Mallya, the chairman & managing director of Bank of Baroda, is the Business Standard Banker of the Year for 2010. Mallya was chosen by a five-member jury headed by Securities & Exchange Board of India’s former chairman, M Damodaran, for BoB’s sterling performance over the last couple of years. The jury had shortlisted three bankers from 30 on performance parameters ranging from growth in deposits, advances, assets and bad debt to return on assets and business per employee.  Mallya took charge of BoB in 2008 at atime when global turbulence in the financial sector had threatened to shake India’s banking foundation. Mallya’s mandate was to take BoB to a new level and attract the young. Not only did the person with an “ice temperament” — as colleagues describe him — steer the bank out of the storm, he brought about good growth numbers and a better-than-counterparts showing. BoB’s profits grew 55 per cent in 200809 and 37 per cent in 2009-10. Return on assets improved to 1.21 per cent this financial year from 1.1 per cent last year, while return on equity increased to 22.19 per cent from 19.48 per cent. At the peak of the crisis, the bank contained its incremental delinquency ratio at 1.13 per cent (for 2009-10), with a provision coverage ratio of 74.9 per cent as on March 31, 2010. Investors took note and the stock price outperformed the sector, fetching a return of over 172 per cent. For Mallya, “cautious aggression” and “stable growth with quality” were key words that helped him steer a steady course through the mayhem. In an interview with Business Standard —the details of which are published in the Banking Annual distributed with today’s edition — when Mallya was asked if BoB’s risk appetite was less than its strength, the CMD said: “…look at our growth of 28 per cent (credit). Where is the conservative approach in that? We are aggressive, but cautious.” So, Mallya played with astraight bat, unlike those playing to the gallery with flamboyance, and it paid off.

RBI admits it’s lost its way on inflation management

RBI Governor D Subbarao said inflation management has not been proceeding the way policy makers expected it to go.  “Inflation management is not happening along the lines we were expected to,” Subbarao told analysts and investors in a conference call. “Demand-side pressures are abating because of our monetary policy.”  The RBI governor raised inflation forecast as rising prices threatens to shoot past the expectations for the second fiscal. He had raised rates seven times since March. Policy rates were raised 25 basis points on Tuesday, meeting market expectations, and he raised inflation forecast for the fiscal by 150 basis points to 7%. That led to criticism that the central bank’s inflation forecast and policy measures were not up to the mark. Inflation is at more than 8.4%. Food inflation has remained stubbornly above 15% for weeks as unseasonal rains damaged crops and rising income is leading to higher demand.  The bureaucrat-turned-monetary policy maker who had questioned the reliability of many data from the government, said factors that RBI takes are more or less what are available to analysts. “Increasingly, the central bank is working on the principle that there is no asymmetry between information that we have and that analysts have,” said Subbarao.  The index of industrial production fluctuates violently. The IIP grew 9.5% between April and November but it swung between 3% and 16%.  Mr Subbarao further said: “Liquidity deficit is independent of the government cash balances. Our comfort level is plus or minus 1%. This is linked to the statutory liquidity need. You should read this as comfort zone, irrespective of the transient factors. I don’t see it getting into a surplus. But certainly, we want to see less of it,” he added. Newly-appointed deputy governor Anand Sinha said: “So far as the increase in interest rate is concerned, it has to be a result of the monetary policy. But banks have to manage the issue of delinquency arising out of higher interest rates... Banks have to take care of their liabilities.”  Deputy Governor K.C.Chakrabarty said: “Risks are there. It depends on both the borrower as well as the bank.”

SBH to extend financial aid to 1,102 villages

Following the Reserve Bank of India (RBI) directions, the State Bank of Hyderabad (SBH) said it would extend financial inclusion across 1,102 villages with above 2000 population spread across 36 districts in Andhra Pradesh, Maharashtra, Karnataka and Gujarat. These districts together cover a rural population of about 42.69 lakh. Financial inclusion will provide banking products such as savings, loans and services like remittance and insurance in areas where there are no banking services. It caters to low income groups and offers services at an affordable cost. According to SBH, the proposed financial inclusion will be implemented in two phases. While the first phase will cover about 300 villages by March 2011, the remaining villages will be covered in the next fiscal. SBH said it has already commenced enrolment and opening of savings accounts in 261 villages covering AP and Karnataka. On Tuesday, the bank distributed biometric cards to customers in few villages in Mahaboobnagar district. As part of the project, the bank has launched overdraft products to meet the financial requirements of beneficiaries across all villages. Besides opening a savings account, customers can also opt for variable recurring deposit, term deposits, overdraft in recurring deposits and term deposits in loan category general purpose credit card will also be available to all villagers.

OMO a monetary policy tool, deposit accretion picking-up: RBI

I the second-half of 2010, transmission (of monetary policy action) has been good. "Banks have raised their rates as also their base rates," the RBI Deputy Governor said. Gokarn voiced concern over the decline in foreign direct investment (FDI) in 2010 and the possibility continuing in 2011 as well. "The recovery in the US economy may lead to global re-balancing of portfolios. This may hit the emerging markets' attractiveness and the country may not receive capital inflows that it would otherwise have," Gokarn said. This, combined with oil and fertilisers which are significantly imported into the country and whose prices are rising, may put pressure on India's current account deficit, (pegged close to 3.5 per cent of GDP) Gokarn said.

Black money: What have you done so far, SC asks govt

The Supreme Court on Thursday slammed the government again over the issue of illicit wealth parked in foreign banks, asking it to file a report on the action taken by it against people and firms that have stashed black money in tax havens abroad. Expressing concern that the black money stashed in banks abroad might have originated from arms deals, drug trafficking and smuggling, the Supreme Court asked the government as to what action it had taken against individuals and firms having foreign accounts. A bench headed by Justice B Sudarshan Reddy directed the government to file its response by Thursday next. The court also sought replies from the government, the Reserve Bank of India and the Chief Vigilance Commission of India on a petition seeking direction to the government to ratify UN convention on corruption which would facilitate in bringing back black money from foreign banks.

'Stronger action at this point might put some pressure on growth' - Subir Gokarn, RBI Deputy Governor

RBI has sounded very hawkish on inflation in recent times. The macroeconomic and monetary development (MMD) report released a day before the third quarter review said inflation was a dominant concern, while the governor recently said the central bank was desperate to bring down inflation. But a 25-basis-point rise is the least RBI could do...

Words like hawkish and desperate need to be placed in context. We are dealing with inflation of a variety of kinds. We are dealing with inflation related to domestic food prices, in that there are transitory as well as structural problems. We are dealing with inflation related to global commodity prices and, to some extent, inflation driven by domestic demand pressure. Certainly, we want to control inflation in the aggregate. But the use of instruments has to be related to the impact these will have.   So, on why an action of 25 bps as opposed to something stronger, we felt this was appropriate, given the price build-up in the non-food manufacturing segment, to us the best indication of demand-side pressures. Supply-side pressures, if they persist, will spill over and that is the risk we have pointed out. We are aware of that risk, we have repeatedly mentioned risks in the policy document and these essentially tell us we have to persist with the stance.  The actual action has to be seen in the context of the stance. The stance is hawkish. The stance is inflation is a dominant concern but the action is related to the specific circumstances we are dealing with today. Which is, there is some build-up of demand-side pressure, which we see in non-food manufacturing inflation, and stronger action at this point might put some pressure on growth, which we are trying to avoid. As the scenario unfolds, we will make our judgments and we have indicated the stance remains anti-inflationary, and this stance is not changing.

Was the high liquidity deficit a factor in deciding the hike?

It had a role, because one impact that persistent deficit is having is in making life a little difficult for banks, in terms of making long-term commitments (long term is anything beyond the immediate). That has taken call rates up outside the corridor. So, from a market perspective the deficit is somewhat tighter than the policy rates would indicate. In this situation, there was an assessment that a sharper action may have proved disruptive and we thought that was a risk we had to consider.

MMD said downside risk to growth had receded but today RBI spoke of moderation in growth.

MMD’s horizon is this financial year; it is not a very forward-looking document. It is designed to be a review. Looking at what happened in the last quarters, there are not too many risks that can take away the 8.5 per cent growth. And, here we are not giving a projection for the next year, we are giving a guidance. The guidance is simply an initial assessment of drivers of risks. When we look ahead, to some extent we see there are looming risks on growth coming from domestic and global factors, and that is what we have tried to point out.

Will the moderation mean the growth rate will be lower than 8.5 per cent in 2011-12, which RBI has projected for 2010-11?

It is too early to make that call. We will come out with the projection in the April document. There will be a base effect on agriculture which is quite clear. As of now, we expect the momentum in industry and services to continue. So, that might mathematically result in a slightly lower growth rate but not loss of momentum. But we have also highlighted risks, and those have to do with what is emerging as a somewhat unstable macroeconomic environment -- the inflation situation, the current account situation and the fiscal situation. Those are not base-line scenarios but are pointing out risks that are becoming visible, which may affect growth. That is a kind of downside risk.

Do you expect inflation to stay above your comfort zone in 2010-11?

We expect the impact of monetary actions taken so far and possibly taken in the future to keep the core inflation in check. If our baseline scenarios materialise, that is, we have a normal monsoon and some benefit from food prices and global oil prices don’t spiral out of control… but that’s a positive scenario. But if we are realistic about what is happening around us, there are these risks on the upside as well.

When do you see inflation coming back to RBI’s comfort zone?

It is a matter of how these risks materialise. I don’t have a forecast on how these risks are going to play out. It is certainly necessary for us to identify these and look at what impact they might have. That will shape our stance. But I am not in a position now to give a forecast.

Regarding the concern on high incremental credit-deposit ratio, is this a system-wide concern or related to some specific banks?

It is true for the system as a whole, because we have 24 per cent growth in credit and 16 per cent growth in deposits. But within this aggregate, there are huge differences across banks. That is why we have mentioned in the statement that we do plan to engage banks where the disparity is looking somewhat higher than the average. It is, therefore, both a system issue and a micro issue. We are telling banks these gaps are unsustainable; we do not intend to finance them by liquidity infusion. The measures we took for infusing liquidity in December had everything to do with frictional liquidity. There was build-up in government balances and for that we cannot penalise banks. But there is also the dimension that the gap between deposit mobilisation and credit growth, something inherent to the banking system, that’s a structural issue with the banking system. We have said we are not going to accommodate that gap in liquidity.

Is there a concern that banks are borrowing short and lending long?

That is the heart of the concern. If credit is growing at 24 per cent and deposits at 16 per cent, a large part of the gap is funded by borrowing overnight. That’s why the concern about sustainability comes up.

Do you expect lending rates to go up further?

That is part of the monetary transmission mechanism. From our view, having got liquidity in deficit, we would like to see policy actions on rates transmitting through quite effectively into lending rates. From our viewpoint, it is a desirable outcome. It is what we want to achieve in terms of putting a brake on the growth momentum, without disrupting it.

RBI moves gradually to contain inflation

Inflation continued to be the apex bank’s main concern. “The stance of the monetary policy is to contain the spill-over of high food and fuel inflation into generalised inflation and anchor inflationary expectations, while being prepared to respond to any further build-up of inflationary pressures,” RBI stated in its third-quarter review of monetary policy. The central bank also red flagged the high incremental credit-deposit ratio, which is at 102 per cent for the banking industry. “The message is exactly as we put out. We told banks that they must increase their deposits and they must restrain their credit. And the credit growth and the deposit growth have to be aligned. Additionally, we also said that we would monitor this very closely and use our supervisory responsibilities to ensure that those banks, which are far out of line, are brought in line,” said RBI Governor D Subbarao at a press briefing after the policy review announcement.

"Inflation is really our key priority" - Wipro Chairman Azim Premji

"Inflation is really our key priority. The hope is that we do not get knee-jerk reaction," Wipro chairman Azim Premji said. Several Indian corporate chiefs have voiced concern against excessive increase in interest rates as they fear that it could affect the pace of economic growth. They have used the recent deceleration in industrial growth to argue their case but RBI made its worries on inflation clear in the quarterly monetary policy review.

RBI warns of difficult times ahead

What the central bank seems to be saying s not just that we will have to live with high inflation and slower growth. What it also says is that inflation (and therefore higher interest rates) may deter consumption and investment, thereby affecting growth. Lower growth in turn could turn off the foreign institutional investor tap, lead to lower stock prices and affect tax collections, thus affecting the fiscal deficit, which again could lead to higher inflation. Faced with such a difficult scenario, all that RBI can do is confine itself to prevent “food and energy prices from spilling over into generalized inflation and anchoring inflation expectations”. It’s an admission that it has no magic bullet. RBI’s monetary policy statement clearly spells out the risks, not just to inflation remaining at an elevated level, but also to growth. This is what it had to say: “The combined risks from inflation, the CAD (current account deficit) and fiscal situation contribute to an increase in uncertainty about economic stability that consumers and investors will have to deal with. To the extent that this deters consumption and investment decisions, growth may be impacted. While slower growth may contribute to some dampening of inflation and a narrowing of the CAD, it can also have significant impact on capital inflows, asset prices and fiscal consolidation, thereby aggravating some of the risks that have already been identified.”

Reserve Bank’s role in inflation control is restricted: Subbarao

Reserve Bank of India Governor D Subbarao on Tuesday said the role of monetary policy in the current inflationary situation is confined to containment and prevention of food and energy prices from spilling over into generalised inflation and anchoring inflation expectations. Unveiling the quarterly monetary policy, he said, “While energy prices are driven by global developments, the food price scenario is primarily a reflection of persistent structural constraints in the domestic agricultural sector. While these have been debated upon for a long time, the recent price dynamics highlight the need for rapid action to increase the output of a number of products, the demand for which is being driven by changing consumption patterns reflecting increasing incomes.”  According to him, unless meaningful output enhancing measures are taken, the risks of food inflation becoming entrenched loom large and threaten both the sustainability of current growth momentum and realisation of its benefits by a large number of households. “Another challenge to effective management of inflation by monetary policy arises from the persistence of a large fiscal deficit. While the government may succeed in raising receipts, both from high tax buoyancy and one-off sources, the real measure of fiscal consolidation lies in improving the quality of expenditure,” Subbarao said. “If the government is able to commit more resources to capital expenditure, it will help deal with some of the bottlenecks that contribute to supply-side inflationary pressures. With reference to revenue expenditure, while large and diffused subsidies may contribute in the short term to keeping supply-side inflationary pressures in check, they may more than offset this benefit by adding to aggregate demand,” he said.  Indian equities markets, especially front-line stocks, were spooked after the Reserve Bank of India, having increased key lending rates by 25 basis points Tuesday, hinted at more rate hikes to rein in high inflation.

India's Reserve Bank hikes key rates to tame inflation

In a bid to tame prices that has seen annual food inflation soar to double digits, India's central bank Tuesday hiked its short-term lending and borrowing rates by 25 basis points that could make commercial, housing and auto loans dearer. Reserve Bank of India (RBI) Governor Duvvuri Subbarao hiked the repurchase or repo rate to 6.5 percent from 6.25 percent and reverse repo rate to 5.5 percent from 5.25 percent. Other rates like cash reserve ratio and statutory liquidity ratio remained unaltered. The key policy rates were tinkered for the seventh time since January last year as part of the third-quarterly review of the central bank's monetary policy by the governor at the headquarters on Mint Road in downtowm Mumbai. The repo rate, often referred to as the short term lending rate, is the interest charged by the central bank on borrowings by commercial banks. A hike in the rates makes cost of borrowing costlier for the commercial banks.

Finmin says RBI steps strong signal to cool inflation

Finance Minister Pranab Mukherjee said on Tuesday the steps taken by the Reserve Bank of India to calm inflationary pressures were consistent with government policies and were meant to send a strong signal that inflation has to be tackled. The RBI raised key policy rates on Tuesday and raised its March-end inflation estimate to 7% from the earlier 5.5% and cautioned that there could be a possible spillover of high food prices to a generalized inflation.  "These steps the Reserve Bank had to take to give a strong signal to tackle the inflationary pressure which is in the system. On the one hand we will have to control inflation and strong signal should be given. Supply management has to be tackled. Supply bottlenecks have to be removed," Mukherjee told a news conference.

Industry expresses concern over RBI policy change

Industry and commerce bodies on Tuesday expressed concern over the hike in repo and reverse repo rates by the Reserve Bank of India fearing that it would affect the growth prospects of the industrial sector. Stressing that industrial production had registered a sharp decline to 2.7 per cent, Federation of Indian Chambers of Commerce and Industry Secretary General Amit Mitra said that successive tightening of the monetary policy would force banks to raise lending rates given the tight liquidity situation and that would affect industry's growth path. Confederation of Indian Industry Director General Chandrajit Banerjee apprehended that the RBI action would trigger a spate of rise in interest rates negatively impacting the investment momentum.

RBI accords top priority to inflation management

“Banks have responded to this calibrated tightening by raising their deposit and lending rates, suggesting strong monetary policy transmission,” RBI Governor D. Subbarao said here, while announcing the third quarter review of Monetary Policy for 2010-11. With the current increase in interest rates, housing as well as other loans will be costlier for the customers In addition to changes in the policy rates, the RBI extended the additional liquidity support to banks under the liquidity adjustment facility (LAF) to the extent of up to one per cent and a daily second LAF up to April 8 to manage the current liquidity situation. “Inflation is clearly the dominant concern,” said Dr. Subbarao. “Even as the rate itself remains unacceptably high, the reversal in the direction of inflation is striking,” he added. He was mentioning on the moderation in headline inflation which was observed between August and November 2010 and its reversal when WPI inflation (year-on-year) moved up from 7.4 per cent in November to 8.4 per cent in December 2010, due mainly to sharp increase in the prices of vegetables, mineral oils and minerals. While the RBI retained the GDP growth forecast at 8.5 per cent with upward bias, it raised the March inflation forecast to 7 per cent compared to its earlier forecast of 5.5 per cent. Turning to the domestic macroeconomic situation, Dr. Subbarao said the 8.9 per cent GDP growth in the first half of 2010-11 suggested that the economy was operating close to its trend growth rate, powered mainly by domestic factors. “The kharif harvest has been good and Rabi prospects look promising.'' Dr. Subbarao said that tight liquidity conditions persisted throughout the third quarter of 2010-11. The RBI would endeavour to provide liquidity to meet the productive credit requirements of a growing economy, it was important that credit growth moderated to conform broadly to the indicative projection. This would prevent any further build-up of demand side pressures. “The RBI will constantly monitor the credit growth and, if necessary, engage with banks which show an abnormal incremental credit-deposit ratio,” it added. The RBI said the policy decisions would result in containing the spill-over from rise in food and fuel prices to generalised inflation; rein in rising inflationary expectations, which may be aggravated by the structural and transitory nature of food price increases; be moderate enough not to disrupt growth; and continue to provide comfort to banks in their liquidity management operations. Giving some guidance, the RBI Governor said current growth and inflation trends clearly warranted that “we persist with the anti-inflationary monetary stance.” Looking beyond 2010-11, the RBI expects the domestic growth momentum to stabilise. Inflation is expected to moderate from the first quarter of 2011-12, but several upside risks are already visible. “The monetary stance will be determined by how these factors impact the overall inflationary scenario,” the RBI said.

RBI highlights macro risks

In line with consensus expectation, the Reserve Bank of India (RBI) hiked both the repo and reverse repo rates by 25 basis points (bps) each. In doing so, following the pause in December, RBI flagged off renewed inflation concerns that had looked like subsiding for a brief while last year. Indeed, RBI is not concerned only about inflation but about a host of macroeconomic risks to the India story. These include the high current account deficit (CAD), its financing and the fiscal situation. It is this concern over how these risks could affect both the real and financial sectors that has likely persuaded RBI not to opt for a 50 bps hike.

Interest rate increase not round the corner: Bankers

Banks prepared to wait and watch, as the policy is in sync with market expectations. Terming the third quarter monetary policy review as judicious and in sync with expectations, bankers on Tuesday said although the scenario presented a case for a rise in interest rates, it might not just be round the corner.   “For a long time, there has been an upward bias in interest rates and we have seen that getting translated into actual rates increases, both on the deposit and the advances’ side. However, there is always a little lag between the transmission signal and the actual event,” said State Bank of India Chairman O P Bhatt. The asset liability committee (Alco) of the bank would meet shortly to discuss the issue, he said.  “Clearly, there is a bridge between deposit and credit growth and that’s the structural factor responsible for liquidity deficit...they (banks) must increase their deposits and restrain their credit. The credit and deposit growth has to be aligned,” RBI Governor D Subbarao said in the post-policy press meet. Union Bank Chairman and Managing Director M V Nair said though the key concern had been deposit mobilisation, attaining RBI’s projection of 18 per cent growth in deposits during the current financial year was possible. “Most banks have increased the deposit rates lately and the deposit growth has also moved up. Whether it will touch 18 per cent, I think it is possible. Otherwise, we may have to necessarily pass on the rise and increase the deposit rate which, in turn, may impact the base rate,” he said. Echoing Nair, Punjab National Bank’s Chairman and Managing Director K R Kamath added there was a need to balance credit and deposit growth in the coming quarters. “Inflation is a concern, interest rates have an upward bias. These are all indicative of things. There is a case for interest rate increase, both on the deposit and lending side, but when and how, the market will decide,” he added.

Dire need to improve govt expenditure quality

The Reserve Bank of India (RBI) on Tuesday raised the red flag on the high fiscal deficit. Highlighting the adverse effect this would have on economic stability, Governor D Subbarao said the Centre needed to curtail borrowings and spend on creating real assets. In its third quarter review of the monetary policy, the central bank read the Riot Act to the government, expressing displeasure over the means it was using to bridge the gap between revenue and expenditure. It expressed its displeasure over the government’s dependence on raising funds through disinvestment in public sector companies and receipts through sale of spectrum to bridge the gap. The third quarter monetary policy review states: “Fiscal consolidation based on one-off receipts is not sustainable.” If the government decides not to pass on the increase in petroleum product prices to consumers and farmers, it will have to make adequate budgetary provisions to meet the gap. This will constrain its ability to reduce the fiscal deficit. On the other hand, if it passes on the price rise to consumers, then it might undermine fiscal management and make it impossible to tame inflation.  The government may succeed in raising receipts through tax buoyancy and one-off sources like spectrum sale, but the real measure of fiscal consolidation lies in improving the quality of expenditure. If the government is able to commit more resources in generating real assets through capital investments, it will help deal with some of the bottlenecks that contribute to supply-side inflationary pressures. In other words, if the government invests in improving agricultural productivity, then it may go a long way in taming prices.

RBI does a balancing act

Admitting that the central bank had flirted with the idea of raising rates by 50 basis points, RBI Governor Duvvuri Subbarao told reporters that it was in the end a “judgement call” to go in for the moderate rate hike.  He explained that while the RBI had increased rates seven times since March last year, there was some more monetary transmission that had still to be played out. Further, monetary policy is not that effective when it comes to inflation driven by supply-side factors as is evident at present.   The RBI also came out with a guidance beyond the current fiscal. It said the coming year would see domestic growth momentum stabilising though the GDP growth might decline as agriculture reverted to its trend. Inflation, it said, could also moderate from the first quarter of 2011-12.

Bhatt refuses to call special home loans as teasers

The largest lender of the country, State Bank of India has declared that its special home loan scheme cannot be considered as teaser loans as per the definition of the same declared by Reserve Bank of India. "Our special home loan schemes are not teaser loans. If you go about the definition of teaser loans, as provided by RBI in the recent circular, our loan does not fall in this category. Hence, we have not made any extra provisioning on this account," OP Bhatt, Chairman, SBI said. The apex bank had been concerned over these loans since quite some time. "It has been observed that many banks at the time of the initial loan appraisal do not take into account the repaying capacity of the borrower at normal lending rates," RBI said in its November policy. "For the time being, RBI has exempted us from this higher provisioning and hence we have not made any extra provisioning for home loans in the third quarter," Bhatt added.

RBI raises inflation estimate; Basu says high prices to stay

The Reserve Bank of India (RBI) today raised its projection for wholesale price index-based inflation to 7 per cent at the end of this financial year, from its earlier estimate of 5.5 per cent.  The Finance Ministry, in its mid-term analysis in December, had pegged the figure at 6per cent, but later revised it to 6.5 per cent.  This prompted Chief Economic Advisor Kaushik Basu to say the government might have to live with high inflation for alittle longer than expected.  “The battle against inflation, which we were hoping would come to an end by March-April, will probably continue for some more months,” Basu said. If  RBI projections are true, inflation at the end of this financial year would be somewhat moderate than 10.22 per cent witnessed in March 2010. However, despite the high base effect, inflation is not coming down drastically. This clearly shows that prices rose significantly this year.

AIDED BY TECHNOLOGY, GOVT BANKS WIDEN OUTSOURCING

Call it a technology transformation. Where are the innumerable tellers, typists, peons and tea vendors that were so characteristic at a public sector bank (PSB)? Tellers have been replaced by ATMs, the work of peons are being done by computers and for other clerical jobs, including housekeeping and ATM management, there are outsourced employees or contractual workers.  The result is substantial reduction in growth of the work force. While banks have been growing at 20-25 per cent annually, fresh recruitment has been only four-five per cent.  The country’s largest lender, State Bank of India, is planning to optimise the work force in about 80 branches, whereby the job of three clerical staffers could be done by one, and the excess workforce shifted to other centres like Liability Central Processing Centre (LCPC), according to a senior official.  LCPCs at SBI are centralised service centres which specialise in opening accounts, after initial processing at branches. With almost 30 million accounts being opened at SBI each year, several committees are studying if some non-core part of LCPC operations could be outsourced, said a senior official.  “If some part of the work like feeding of the data can be outsourced, the process of account opening will be much faster,” said the executive.  “Some of the activities like marketing and call centres are being outsourced by our bank. Some recovery is also being done through recovery agents, after training,” said S L Bansal, executive director, United Bank of India.   According to RBI guidelines, activities which form part of core management functions such as corporate planning, organisation, management and control and decision-making functions cannot be outsourced. So, activities such as marketing and support functions, lead generation and promotional activities and initial contact point verification activities are generally outsourced by banks. Also, document processing, marketing and research, data processing, backoffice support services and general administration-related activities are some of the other functions which banks are outsourcing.  “In the last 10 years, recruitment in the banking industry is not more than seven-eight per cent, mostly because of use of technology. We are outsourcing work like marketing and providing leads for opening an account, but all verification and know-your-customer work is being conducted by bank staff only,” said Ramnath Pradeep, chairman and managing director, Corporation Bank.  But several clerical jobs like cheque delivery to clearing houses, which used to be done inhouse, are being outsourced to courier companies. ATM maintenance, software development, data centre operations, network administration and maintenance of hardware are some other services being outsourced.  “In the last three years, we have almost doubled in size, but the need for fresh recruitment has been reduced by use of technology. For example, we have installed mechanised cash drop boxes in our banks, which gives photocopy receipts instantly,” said T.M.Bhasin, Chairman and Managing Director, Indian Bank.

Giving employees more autonomy pays huge dividends

Workers who feel they are free to make choices at workplace and be accountable for them are happier and more productive, suggests a new book. The book, Human Autonomy in Cross-Cultural Context: Perspectives on the Psychology of Agency, Freedom, and Well-Being, co-authored by Marylene Gagne and Devasheesh Bhave from Concordia's John Molson School of Business, stated that there's no universal cross-cultural definition of autonomy. What people from one culture perceive as workplace freedom, those from another may view as simple disorganisation. "The perception of autonomy has very positive effects on workers. However, managers can't simply export North American methods of granting autonomy anywhere and expect them to work," said Gagne. No matter how autonomy is defined, when people feel they have latitude the results are impressive. Potential benefits include greater employee commitment, better performance, improved productivity and lower turnover. "Autonomy is especially likely to lead to better productivity when the work is complex or requires more creativity. In a very routine job, autonomy doesn't have much impact on productivity, but it can still increase satisfaction, which leads to other positive outcomes," said Gagne. Paradoxically, some employers are now actually reducing workers' autonomy by monitoring behaviour on workplace computers, or even on the phone or in the car. It's another reason why cartoons like Dilbert are so popular, says Gagne.

SBI to introduce green-channel banking soon

The State Bank of India is set to introduce green-channel banking to promote paperless work and reduce footfall of customers in the already over-burdened ATMs and branches.  SBI General Manager for network-I D Mozumdar said that apart from regular counters, a new counter was being opened in which customers could swipe their ATM cards and enter the pin code to receive cash from the person manning the counter. "In this way, there will be no requirement for paperwork and the process of money withdrawal will be fast," he said. 
Under the financial inclusion scheme of the Reserve Bank of India, SBI has been asked to take up responsibilities in 43 of the 156 "under-banked" blocks of the state, besides extending banking facilities to 408 villages having a population of over 2,000 people. Mozumdar said SBI would connect 200 villages by March this year through different banking techniques. "We do not require brick and mortar branches these days to extend banking facilities because technology has made the work easier and SBI is fortunate to have all the modern banking technology," he said.  All 200 villages where SBI is planning to launch services by March will be on technology platform that includes micro-ATM or mobile-based banking in which the customers having a mobile phone can access his or her account through the cellphone and bio-metric smart cards by which an user is identified on a hand-held machine through finger prints. Business correspondents appointed by bank will also disburse cash along with printed receipts and through kiosk-mode in which the bank provides a laptop with face-reading and voice-recognition software to enable transactions. 

Pension option: Banks face 12k cr liability

Banks are awaiting clarity on accounting for a liability of around Rs 12,000 crore due to nearly 2.75 lakh serving and retired employees opting for a second pension option.
Bankers said they had approached the Reserve Bank of India, seeking a longer duration to provide for the amount. Although banks have started providing for a higher pension bill, setting aside the fund to meet the liability that arises over the next few years in one shot would dent their balance sheets. Around 3.3 lakh public sector bank employees are estimated to be eligible to get pension post-superannuation as part of a second option being given to them. A second pension option was part of the wage settlement agreed upon by banks and unions, which had capped the average pay increase at 17.5%. Earlier, they could only get provident fund. Among the public sector lenders, only the SBI group had the provision of giving pension to all its employees before the wage settlement. As per the pact , bank managements will provide 70% of the deficit, while the remaining will have to be borne by the employee. The United Forum of Bank Unions, which negotiated the wage pact and pension with Indian Banks' Association, had said that employees had to pay 2.8 times of their Nov 2007 salary from the arrears of the wage settlement. Banks are in various stages of getting a firm idea on the number of employees as several of them had given time until December for employees to opt for the scheme. Bankers, however, expected over 90% of serving and retired employees to opt in favour of pension. Lenders had taken up the issue with RBI last year, which in turn is discussing it with Institute of Chartered Accountants of India that sets accounting standards. Under existing norms, at the end of their financial year in March, banks have to set aside funds to meet any actuarial shortfall. The deficit or surplus for pension is done through a technical exercise conducted by actuaries.

Govt should start spending this qtr: RBI

The Reserve Bank of India (RBI) today said the government should start spending to ease the liquidity situation that has significantly tightened towards the end of 2010. "It is expected that the government would spend in order to meet its committed expenditure for the year during the ongoing quarter, which is the last quarter of the financial year," the apex bank said in its macroeconomic review released today. The liquidity conditions tightened significantly to the point of imposing constraints on growth in the terminal months of 2010, it said. As of December, the government surplus increased at Rs 1,44,437 crore compared to Rs 93,425 crore in November, 2010. With government cash surplus beginning to flow back into the system, the liquidity position would improve, it said. The policy noted that liquidity conditions remained tight during the third quarter of 2010-11, warranting liquidity easing measures by the RBI.  Recognising the need to firmly anchor inflationary expectations and contain inflation, the RBI has raised policy rates six times since March 2010, it said. The RBI injected large primary liquidity through repo and open market operations, which was reflected in the high growth of base money, it said. Besides, it reduced the Statutory Liquidity Ratio (SLR) requirement from 25 per cent to 24 per cent with effect from December 18, 2010. This was necessary to avoid the risk of liquidity stress adversely impacting the real economy, even though the overall anti-inflationary stance was sustained throughout, it added.

High current account deficit cannot be sustained: RBI

Cautioning that high current account deficit cannot be sustained in the long run, the Reserve Bank of India (RBI) today said it would monitor closely the external sector as well as the global developments. India's current account deficit (CAD), representing the difference of inflows and outflows of foreign exchange barring capital movements, surged 72 per cent to $15.8 billion in the July-September quarter over $9.2 billion in the same period last year due to higher imports.  "...The external sector needs to be monitored closely. The economy is very well poised to absorb a higher current account deficit for a couple of years but this cannot remain a persisting trend," the RBI said in its macroeconomic review released today.  The RBI said that the widening of CAD is a result of factors like lower growth in services receipts reflecting uneven pace of global recovery; significant rise in imports relative to exports reflecting steep rise in international crude oil prices, moderation in FDI inflows reportedly because of environment sensitive policies, land acquisition issues and availability of quality infrastructure.

Taming Inflation a Predominant Objective: RBI

Indicating a hike in key policy rates tomorrow, the Reserve Bank of India has said containing inflation would be its top priority as rising prices could derail growth.
The RBI would announce its third quarter monetary policy tomorrow amid speculation that it may increase short-term lending (repo) and borrowing (reverse repo) rates ranging between 25-50 basis points. Even as the economy grew by 8.9 per cent in the first half of the current fiscal, inflation, which increased to 8.43 per cent in December, has remained an area of concern.
"While downside risks to growth have receded, upside risks to inflation have increased," the RBI said adding containing inflation will have to be the predominant objective of monetary policy in the near term. RBI, in its macroeconomic and monetary development report ahead of quarterly review of monetary policy, also warned that persistent high inflation could endanger the growth objective and also increases risks to inclusive growth. RBI, since March 2010, has increased the policy rates six times to anchor inflationary expectation and check rate of price rise. "Conventional wisdom says that there should be at least 25 basis point hike in interest rate," State Bank of India Chairman O P Bhatt had said last week. Despite moderating for two weeks, food inflation is still very high at 15.52 per cent on account of rising prices of essential items like vegetables, particularly onion and tomato, fruits, milk and eggs. A day before he met RBI Governor D Subbarao on January 20, Finance Minister Pranab Mukherjee had expressed concern over food inflation saying, "some of the vegetable prices are still high." Though analysts are not sure whether any further tightening of interest rate can check the price rise, the central bank seems to have few options but hike rates. Endorsing the widespread view, HDFC Chairman Deepak Parekh had said RBI is expected to raise key short-term rates by 25-50 basis points. "The RBI may be looking at an increase (of short-term rates) at 25-50 basis points... But I personally feel that interest rates are already high and it will impact the growth of retail loans and housing." Industry chambers, including FICCI and CII, had expressed apprehensions that RBI tightening the monetary policy could hit the growth, especially considering that industrial growth plunged to an 18-month low of 2.7 per cent in November, 2010.

Private sector banks march ahead in credit growth

Private sector banks have recorded higher credit growth than their state-owned counterparts on a year-on-year basis. According to latest data by the Reserve Bank of India (RBI), private banks saw 28 per cent growth in bank credit at the end of December 31, while public sector banks recorded a rise of 24.1 per cent. During the same period last year, private banks had registered 8.4 per cent growth whereas public banks had seen 16.9 per cent increase in credit growth. Foreign banks witnessed an 19.8 per cent increase compared to a decline of eight per cent in the same period last year. Public sector lenders, however, accounted for around three-fourth of the incremental year-on-year credit off-take at the end of the third quarter. ICICI Bank, the largest private sector lender which was shrinking its balance sheet for the last few quarters, registered an increase in advances in the third quarter. The bank’s advances rose 15.3 per cent to Rs 2,06,692 crore on December 31, from Rs 179,269 crore on December 31, 2009. Most private sector banks which have declared third-quarter results have seen a substantial increase in loan offtake.

Economy to grow 8.7% in 2010-11, finds survey

India’s gross domestic product (GDP) is expected to grow 8.7 per cent in the year, according to the Reserve Bank of India’s professional forecasters’ survey conducted in December. The previous survey showed a growth rate of 8.5 per cent. Improvement in exports, buoyant demand, a rise in volume of sales and new orders were factors that provided a boost to overall expectations. But persistently high rate of inflation can dent growth.  “The outlook for growth remains buoyant. The inflation persistence, led by stubbornly high food inflation, in double digits for close to two years, however, remains a major concern,” said RBI in its macroeconomic outlook, released a day before the third quarter review of the monetary and credit policy. On the brighter side, the survey results suggest manufacturers expect selling prices and profit margins to increase despite expectations of rising input costs, which reflect their pricing power. The survey says better agricultural production is expected on the back of satisfactory monsoon and reservoir levels. The survey revised growth estimate for the agricultural sector from 4.6 per cent to five per cent.

Rate hike to hamper industrial growth: Sharma

A day prior to the Reserve Bank of India's (RBI) third-quarter monetary policy review scheduled for tomorrow, Union Commerce and Industry Minister Anand Sharma said any rise in interest rates would hinder industrial growth. "Inflation is definitely a cause of concern. But it cannot be curbed by increasing interest rates. Instead, for the development of industry and growth of the economy, there is a need to provide easy credit to the industrial sector," Sharma told reporters on the sidelines of an event organised by the CII here today.   The RBI is widely expected to raise key short-term rates tomorrow to rein-in inflation.  There is a need to allow capital inflows and easy credit flow for the growth of economy, he said. "For a clear growth of the economy, there is a need for capacity addition. Foreign capital inflows and making credit easily available for the industrial sector by public sector banks will ensure robust industrial production," Sharma said. Cutting exports would only lead to cutting economic growth and not inflation. "This will result in job loss," he said.  On the government's policy on foreign direct investment (FDI) in retail, Sharma said, "We are actively considering allowing FDI in the retail sector. We have received inputs from stakeholders and investors and (now) have to formally finalise the issue."

RBI signals series of rate hikes to tackle inflation

The Reserve Bank of India (RBI) today set the stage for a series of rate hikes to tackle inflation, which the central bank believes is likely to remain above the comfort zone in the near term. Though RBI expressed satisfaction on growth prospects, it said higher growth is expected to coexist with high inflation. “The inflation outlook, which is being conditioned by both demand-side and supply-side factors, suggests slow-paced moderation in inflation, with the possibility of rigidity at above the comfort level in the near term,” RBI said in its macroeconomic and monetary developments report today.   Inflation based on the wholesale price index was at 8.43 per cent in December. RBI, which has projected March-end inflation at 5.5 per cent, is expected to revise its projection upward.  The central bank said sectoral imbalances in several non-cereal food items may not be addressed by higher policy rates, but aggregate demand-side pressures on inflation would have to be contained in a forward-looking manner. “The anti-inflationary focus of the monetary policy would have to continue, recognising the limits of monetary policy in dealing with structural pressures on inflation, and the need for forward-looking response to demand-side pressures. Since a lower inflation regime is essential for sustainable high growth, containing inflation becomes the dominant policy objective in the current environment,” RBI said.

Arrangement with RBI in the Interest of All: J&K Govt

The Jammu & Kashmir government today defended the new cash management arrangement with the RBI -- which restricts J&K Bank from extending overdraft facility to Jammu & Kashmir directly -- saying it is in the overall interest and benefit of the state, people and the lender. "The new cash management agreement with RBI as a supplementary agreement, necessitated to check continued financial indiscipline. The new arrangement is a major structural reform measure which is in the overall interest and benefit of the government people and the J&K Bank," Minister for Finance and Ladakh Affairs A B Rahim Rather said while addressing a press conference in Civil Secretariat today. Jammu & Kashmir enjoyed a special provision under which it could receive overdraft facility directly from J&K Bank instead of the way and means advances from the Reserve Bank of India (RBI). Overdraft is a facility extended by banks to obtain funds in excess than balance available from time to time. Rather said the overdraft facility with J&K Bank was meant for meeting a temporary miss-match between revenue and expenditures for only a few days. But, he added, due to continued financial constraints, the overdraft facility had become a permanent structural liability deficit in the state finances.

SMEs low on priority of banks, says study

The small and medium enterprises (SME) sector is low on the agenda of the country’s banks as a study by ratings agency Crisil Ltd has found that the bulk of the expansion in these companies had to be funded by the promoters themselves. The report also dispels the notion that SMEs are over-leveraged. While credit facilities by banks to the SME sector rose continuously from Rs.127,000 crore in 2006-07 to Rs.369,866 crore in February 2010, according to the Reserve Bank of India (RBI), the Crisil study, which looked at a sample of 2,000 SMEs between the financial years 2006-07 and 2008-09, presented a slightly unexpected picture.  It estimated that Indian banks funded on an average around 60% of the sector’s incremental working capital and long-term borrowing needs, representing a gap of Rs.50,000 crore of untapped opportunity.  This shortfall was funded, overwhelmingly, by the promoters’ own funds, apart from internal accrual, which was the next most oft-resorted avenue to financing. The third route was to lean on suppliers to extend short term—and often informal—credit agreements, the data revealed.

Foreign bankers hope RBI plan won't up tax burden

Although appreciative of the Reserve Bank of India's stance that foreign banks should operate in India as wholly-owned subsidiary (WOS) rather than as a branch of the parent, foreign bankers are hoping the conversion would not mean too much of a tax liability. Moreover, the RBI's proposal that the WOS become a listed entity over time, resulting in a dilution of the parent bank's holding, has not gone down too well with the fraternity. A dilution of the parent bank's stake would mean it would have to give up total control and also some share of the profits. A local listing, foreign banks fear, would restrict their ability to capitalise on the parent bank's balance sheet.

Fin inclusion duty of the mainstream: Chakrabarty

Financial inclusion requires work by mainstream financial institutions, such as banks and cooperatives, said K C Chakrabarty, Deputy Governor of the Reserve Bank of India, here today. “It’s not institutions like micro finance institutions (MFIs) which will make financial inclusion possible in the country. Rather, it’s the mainstream institutions,” he said on the sidelines of a financial inclusion programme arranged by Corporation Bank in Mallaohalli village, 50 km north of Bangalore. Adding: “MFIs play a very important role as of now and they will continue to do so.” RBI has already told banks they must provide basic banking services in all villages with a population of 2,000 and more by March, 2012. It is also planning to cover villages with a population of less than 2,000 in an integrated manner over the next three to five years. “In the first phase, 72,000 villages will be covered. The remaining villages will be covered in the second phase of the programme,” he said. Chakrabarty stressed the need to use technology in reaching out to ruralites. “Even after 40 years of nationalisation of banks, banking facilities have not reached even 50 per cent of the population. Only by leveraging technology can we bridge this gap,” he said. “We should ensure that every person has a bank account, so that he can avail various financial services offered by the government and other agencies.”

'Financial inclusion imperative to reap demographic dividend' - RBI Deputy Governor Dr.K.C.Chakrabarty at IIM-L leadership summit Manfest 2011

Financial inclusion is imperative for India to reap the benefits of its demographic dividend, Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty has said. “The challenge for the financial system is to become more efficient. Financial inclusion would mean efficiency of the the banking sector in allocations by reaching out to every individual.”  He said efficiency in the financial sector is in terms of both allocation and operation. While the former pertains to easy access to people, the latter is about harnessing technology rather than mere mechanisation to improve functioning. Chakrabarty was speaking today at ‘Arthashaastra’ —The finance leadership summit, as part of the Indian Institute of Management, Lucknow’s (IIM-L’s) annual international business conclave, Manfest 2011. “The financial sector is surviving due to its regulator, which occasionally bails it out and neutralises competition,” he noted. He said 50 per cent of India’s population did not have bank account, 90 per cent had no access to credit or life insurance cover, 95 per cent had no general insurance, while 98 per cent had no participation in the capital market. “The financial sector has to improve upon its delivery mechanism, especially for the poor and launch innovative products for the agriculture and micro, small and medium enterprise sectors,” he said. Exhorting future managers, Chakrabarty underlined that today’s business models lack the ability to reach out to the poor. “I do not espouse subsiding the poor or charity, but we can support them with appropriate financial products, one which is also commercially viable and does not exploit them.” Quoting a report, Chakrabarty said by 2030, India would account for 10 per cent of the world’s gross domestic product (GDP) with the latter been estimated at 308 trillion dollars Rs 14,075.60 lakh crore) up from 62 trillion dollars Rs 2,833.40 lakh crore) at present. “Two-third of the world’s GDP would be accounted for by the developing countries with India and China jointly accounting for 35 per cent by 2030,” he added. Other speakers at the conclave included Fullerton Securities president and CEO Pallav Sinha, Axis Asset Management CEO and Managing Director Rajiv Anand, Standard Chartered Bank fixed income currencies and commodities (South Asia)-Head Ananth Narayan and IIM-L finance professor Vipul. The speakers were unanimous that regulation in the financial sector would rather increase and be more stringent. “Know your customer’s business, risk management and fair treatment of customers, apart from financial inclusion would acquire centrestage for the financial sector in the future,” Chakrabarty observed. He suggested the country’s financial sector should first meet the aspirations of people, before venturing global or trying to integrate with global markets. “The focus of the domestic financial sector should be local with the blend of brick-and-mortar and technology approach, while catering the needs of the Indian diaspora,” he said. Commenting on black money in foreign banks, the RBI deputy governor said the money went to foreign shores, since the rate of returns in India were not attractive. “Tax evasion is not the only cause for black money transactions, as it is not easy to siphon-off black money,” he added.

Monetary policy cannot kill inflation, must not kill growth

The question of whether or not RBI should hike policy rates in its quarterly monetary policy review due on January 25 should have been answered rather forcefully by the inflation data for December.
After showing tentative signs of moderation in October and November, wholesale price inflation shot up close to 8.5 per cent on the back of a spike in vegetable prices led by onions and tomatoes.
Even if these prices were to cool off a tad, the prospect of a hike in diesel prices looms on the horizon. The chances of ending the current fiscal year at anywhere near the 5.5 per cent that RBI officially targets seem bleak indeed.  The question then is: should RBI stick to its measured approach and push the reverse repo and repo rates up by a quarter of a percentage point or go the whole hog and hike by half a percentage point? It might be tempting for the RBI governor to choose the latter and signal to the markets that he too packs a mean punch. However, by doing that he might just end up "over-compensating" for the other imbalances in the system that play an equally important role in keeping prices high - excessively loose fiscal policy and the woeful state of agriculture that years of neglect has bred. The result could be what economists term "hard landing" or a sharp slowdown in growth. Growth has incidentally started looking fragile again with the November industrial production index registering a growth of just 2.7 per cent. The RBI Governor has to keep the risk of pushing growth off a cliff in mind in deciding January's policy action. A quarter of a percentage point increase in rates should do the trick this time.

Government, RBI pact: a nail in Autonomy’s coffin?

A fresh agreement between the Jammu and Kashmir Government and the Reserve Bank of India on the role of the J&K Bank has put a spotlight on the National Conference’s Autonomy proposal,  which has been conceived as one of the solutions to the long-standing Kashmir dispute.
 With the RBI likely to take over the overdraft role of the J&K Bank from April 1, political analysts have begun to see the development as a ‘first dent’ in the NC’s autonomy proposal which naturally makes the financial autonomy of individual institutions a must.  Economists don’t rule out certain fears associated with the pact. “If the mismatch between the central flow of funds and the requirement of plan funds continues with a wide time gap, then the state government may get into financial crisis. And if the state government manages its finances efficiently in terms of expenditure compression measures and in terms of maximum internal resource mobilization or in terms of tapping IRM potential, then the state government has no problem. At least it has an advantage that it will come out of the JK Bank overdraft debt. In that process, the state will save on an average over Rs 250 crores which is a huge sum for meeting the other development expenditure which otherwise would go to the JK Bank as interest payment on overdraft borrowing,” said noted economist. According so observers, the pact will make more idle funds available to the J&K Bank in a market already flush with money. “That is likely to reduce profitability of the Bank which could lead to forcing the government in a few years to sell its shares making it like any other Bank that will have only the J&K name tag like Travancore or Hyderabad or Rajasthan. It will cease to be a government company which employs only the state subjects,” said the former official in the Finance Department. “Extra money will become available to markets outside J&K not where the deposits take place. Losing the tag of being official bankers to J&K government would adversely affect its prestige that had seen it grow as number one private bank in India. But according to experts in Banking, it will be a win-win situation for the Bank and the state government. “I think the agreement says that the JK Bank will continue to be the banker to the state government but under the overall supervision and monitoring of the Reserve Bank of India, as is the case with others banks across the country,” says the former J&K Bank Chairman, Muhammad Yousuf Khan.  He believes that it is not only the overdraft facility that makes the bank earn revenue. “If the bank would lend the overdraft amount, which it would give to the state government, to other institutions, it would earn more revenue,” Khan told Greater Kashmir.

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.