New Delhi, March 21: New banking licences will be given only after the government vests more powers with the Reserve Bank of India to control the new entities — a process that is unlikely to be over in the next fiscal. Amendments to the Banking Regulation Act that will give more powers to the RBI are likely to be tabled in the monsoon session of Parliament. The act will in all probability be referred to a standing committee, effectively puncturing all hopes of industrial houses bagging a licence in fiscal 2011-12. “Empowering the RBI is essential for obtaining information about the other businesses of the corporate houses seeking banking licences in order to protect depositors’ interests,” said officials. The government is also likely to set up a panel to vet the draft entry rules framed by the RBI. “Effectively, new licences will be given by the end of 2012,” said the officials. The apex bank had brought out a discussion paper in August on licences to business houses and non-banking finance companies, and regulations to foster competition. Finance minister Pranab Mukherjee had said in his budget speech that the RBI was planning to issue the guidelines before the close of the current financial year. The Economic Survey 2010-11 had suggested two types of licences, one for providing basic banking to fulfil the obligation of financial inclusion and the other for full banking encompassing all the activities of a commercial bank. Meanwhile, the RBI has said it will look at the business plan for financial inclusion before granting a licence. “One of the criteria for evaluating an application (for new bank licence) that we will get in the due course of time will indeed be the business plan for financial inclusion,” RBI governor D. Subbarao had said earlier this month. The RBI has been contemplating whether to make it mandatory for new entrants to have a rural presence or to leave it to the competition in the market to force them to look for newer markets. Of the 600,000 habitations in the country, only about 5 per cent have a bank branch. Only 40 per cent of the population have bank accounts. India has 27 public banks, seven new private banks, 15 old private banks and 31 foreign banks.
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Tuesday, March 22, 2011
New analysis questions RBI's understanding of inflation
Days after the Reserve Bank of India (RBI) raised its key policy rates to tame an unexpected rise in inflation in February, a new analysis claims that none of the factors considered relevant by the central bank, are crucial for understanding inflation in India. A newsletter, Developing Trends, brought out by Surjit Bhalla of Oxus Investments, and others, also projected inflation to fall to five per cent in six months, if not sooner, from the current level of 8.31 per cent, saying the rate of price rise was close to or has peaked in India. The analysis says traditional factors like money supply, fiscal deficits and new theories about the changing pattern of consumption by Indians that lead to a mismatch between supply and demand of protein-based products are not very important. “None of the traditional or new factors, held important by many analysts, and RBI, are relevant for explaining Indian inflation,” the newsletter says. It says growth in money supply was able to partly explain inflation trends during 1980 to 1995, but nothing later. “A flatter line than that between money supply growth and inflation post-1995 cannot be found.” Also, fiscal deficit, says the analysis, is able to partly explain inflation, but has the wrong sign that is, higher the fiscal deficits lower the inflation. “Obviously, this is an example of lies and statistics and all that, but nevertheless it points to the rejection of the notion (or rather the unfounded belief) that fiscal deficits have led to higher inflation in India.” However, the newsletter clarifies that it is not asserting that fiscal deficits do not matter or they do not matter in India. Such deficits are relevant for interest rates and therefore growth, which in turn can have an effect on dampening inflation. “The simple point is that fiscal deficits are not useful for explaining inflation in post-reform India at all,” it says. Then, there are new theories that say that new determinants include dietary patterns to protein and supply shortages of protein. However, the study says protein demand has been going on for the last 30 years and not just in 2009, which was the real anomaly year of Indian inflation. Then there are theories that link inflation to convergence with developed country price levels in a hurry—the convergence that was to take place over a 50 to 100 years is now compressed into a few short years due to globalisation and recent high economic growth. The analysis says covergence to developed country theory is okay, but not in such a great hurry and truly depends on several other factors—higher productivity growth in fact leads to lower inflation and undervaluation of the real exchange rate through policy intervention most likely dampens the inflation rate. Developing Trends linked Indian inflation since 1996, even since 1980s, to intational inflation. “If this is measured by the inflation of the median country in a particular year, then 71 per cent in Indian inflation since 1982 is explained. This is the highest explanation for any G20 country, with Korea, Japan and the US close behind. The analysis furhter says there is a strong sustained relatoinship between world inflation and the price of crude. “For non-OECD countries, including India, the relationship between inflation and crude is extremely robust—each $10 increase in the price of oil leads to approximately 0.5% increase in inflation. The impact is a lot less for OECD countries—a negligible and insignificant increaes of 0.03 per cent.” An increase in the price of crude, however, caused sets in motion a sequence of price events in this hyper price sensitive world, says the newsletter. “Somewhat peculiarly, but not entirely unexpectedly, world food prices increase by 3.3 percentage points for each $ increase in the price of crude.” Expectedly, copper prices rise by $0.4/lb for each $10 rise in crude.
Ineffective policy - ''Persistent tinkering has not impacted inflation.''
The Reserve Bank of India has stuck to its tight monetary policy by raising the short-term policy rates by 25 basis points. It has, in its latest review, raised the repo and reverse repo rates to 6.75 per cent and 5.75 per cent respectively and there was no surprise as the apex bank had given indications of its hawkish thinking many times in the past. The hikes, which have been resorted to eight times in the past one year, underline the concern over inflation which the RBI considers as the major challenge. In spite of all RBI and government actions inflation rose to 8.3 per cent in February. What is worrying is that persistent tinkering with policy has no impact on the inflation curve. Food prices, which drove overall price index to high levels, have cooled off now. But other factors and the inflationary environment have remained largely insensitive to policy action. There is a recognition of this in the RBI’s position. The apex bank has noted the volatility in industrial production and the weak performance of the capital goods sector. The limits to the impact of monetary policy prescriptions are being tested now. Government policies have not helped much and an adverse international climate has added to the problem. Global oil prices are ruling above $115 per barrel, with chances of further escalation. The union budget has not earmarked adequate amounts for the oil subsidy. In fact the allocation for other subsidies and social sector commitments are also inadequate and the so the government will have to go beyond its budgeted expenditure. This will create additional pressures on the fiscal situation. Though there is no revision of GDP growth figures, the rate hikes can create worries on that score. An increase in interest rates will make capital costlier and hurt consumer demand and the competitiveness of the industry. Slower growth can also lead to a fall in tax revenues and result in higher fiscal deficit. The mishap in Japan may affect economic recovery in the US and elsewhere. Exports and foreign investment prospects may be hit because of this. The erosion in the government’s credibility and standing will be another negative factor. Therefore the situation on the price front and the larger economic scenario are not the best, in spite of the RBI’s best efforts.
Govt to unveil borrowing calendar on Friday
Officials of the finance ministry and Reserve Bank of India (RBI) would decide on the borrowing calendar for April-September on Friday, March 25. The Centre would conduct borrowing for the coming fiscal year in a “non-disruptive manner,” leaving enough space for private sector's investment needs.
RBI's misplaced concern
This refers to the report "RBI slams banks for LAF misuse&" by Manojit Saha (March 21). It is surprising to read that the Reserve Bank of India (RBI) has now expressed displeasure at the fact that some banks are borrowing under the Liquidity Adjustment Facility (LAF), on-lending the funds to other banks and earning a spread as a result. LAF, as has been rightly observed, is a secured facility available to banks for borrowing against surplus government securities in their portfolio and is not unsecured call money. Since there may be banks with inadequate surplus government securities to pledge with RBI and borrow directly, there was nothing sinister in surplus banks lending to them from LAF-borrowed funds. This way liquidity is managed in the system without much volatility in the call rates. This has been discussed with senior RBI officials in the past and the banks treasury officials have been clearly given to understand that it was perfectly in order for banks to lend to other entities from LAF-borrowed funds. RBI should not keep changing its stand, since it may aggravate volatility in the overnight money market. - S Ravindranath, Coimbatore
Get Real on Bank Licences - MYTHILI BHUSNURMATH
The suspense over new banking licences will soon be over. With finance minister Pranab Mukherjee announcing that the RBI is planning to issue the guidelines for new banking licences before the close of this financial year, presumably, it is only a matter of days before the RBI comes out with its final guidelines. It has already issued two draft papers inviting comments; so, the motions have been gone through and according to news reports, the final version has gone to the finance ministry for vetting. Ostensibly, new bank licences are needed to ensure competition and promote financial inclusion. The FM, in his Budget speech last year, was emphatic on that score. “We need to ensure that the banking system grows in size and sophistication to meet the needs of a modern economy. Besides, there is a need to extend the geographic coverage of banks and improve access to banking services.” RBI’s discussion paper on entry of new banks echoes this view. “It is generally accepted that greater financial system depth, stability and soundness contribute to economic growth. But beyond that, for growth to be inclusive requires broadening and deepening the reach of banking. A wider distribution and access of financial services helps consumers and producers raise their welfare and productivity.” The only difference between the FM and the RBI’s position seems to be one of emphasis. While the FM seems to regard the need for new bank licences as driven equally by the need for more sophisticated (?) banking services and financial inclusion, the RBI seems inclined to view it more as a means of ensuring greater financial inclusion. RBI governor D Subbarao is on record that financial inclusion will be one of the main criteria on which licences will be given. Either way, access to sophisticated banking and financial inclusion are the main drivers for issue of new bank licences. Take them one by one. First, the FM’s concern that we need to have banking services that ‘meet the needs of a modern economy’. As on March 31, 2009, we had 27 public sector banks, seven new private sector banks, 15 old private sector banks, 31 foreign banks, 86 regional rural banks (RRBs), four local area banks (LABs), 1,721 urban cooperative banks, 31 state cooperative banks and 371 district central cooperative banks. So, we certainly don’t lack numbers! And nor, it would seem, do we lack modern banking services, given that virtually every major foreign bank in the world has a presence in India. Hence, access to sophisticated banking products is not for want of sophisticated players. They are already here. What about financial inclusion? Here the position is less encouraging. Less than 50% of Indians have access to formal banking. Today more Indians have a mobile telephone than a bank account! If you allow for the fact that many Indians in metropolitan and urban areas have more than one bank account, the picture becomes even more disturbing with rural and semi-urban areas vastly under-banked. The far more pressing case for issuing more bank licences, therefore, is to remedy this imbalance and promote financial inclusion. Will new banks do that? If yes, the case rests and there is nothing more to be said. We must licence more banks. If not, there is no case for new bank licences; at least, not on the grounds of financial inclusion. So, let’s go back to the mid-1990s when 10 new banks were set up in the private sector (two more came up after the revised guidelines of 2001), ostensibly for the same reasons bandied about today — to promote competition and increase coverage. However, not all survived, leaving a total of seven new private sector banks on date. Seven out of 12 is not bad but it is not a score card that bolsters the case for new bank licences, especially in the light of what the 2008 crisis has taught us of the serious systemic consequences of bank failure. But we could still overlook that if the larger cause of greater coverage were served. Has it? No. Data shows new private sector banks had only 6.5% of their branches in rural areas as on March 2010. In contrast, nationalised banks had 31.6% of their branches in rural areas while State Bank of India had 32.7%. Meanwhile, the share of rural deposits and advances has come down from 10.8% in March 2006 to 9.2% in March 2010 and 8.4% to 7.5% over the same period. Therefore, whatever else the reason for issuing new bank licences, financial inclusion cannot be one. Neither can access to state-of-art banking products. So, what can? Corporate lobbying? Perhaps! But that does not mean the sector should be closed to entry. Rather that the fit-andproper test must remain the only yardstick and the RBI the only arbiter of that.
RBI accommodates IMC's recommendation on NBFCs
The Reserve Bank of India has accommodated the Indian Merchants’ Chamber’s (IMC) plea for including telecom towers in infrastructure finance definition for Non-Banking Financial Companies (NBFCs). The Chamber had recently brought to the notice of Deputy Governor Ms Shyamala Gopinath during a seminar on NBFC held in IMC on anomaly that in the same definition for banks for infrastructure loans, telecom towers were included, but not for NBFCs, a release issued by IMC said here today. The Reserve Bank has now issued a notification amending the Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 to include 'Telecom Towers' also as an infrastructure facility for availing credit facility from NBFCs, the release added.
Monday, March 21, 2011
Financial inclusion to be Syndicate Bank's priority
Udupi: Chairman and Managing Director of Syndicate Bank Basant Seth inaugurated the Financial Inclusion Resource Centre at the founder's branch premises of the bank, here on Saturday. The Financial Inclusion Resource Centre gives the public all the necessary information about the importance of financial inclusion. It tells them why they should open bank accounts, various types of banks accounts, loan provisions and details of other banking services. The resource centre is like a museum. All the information is available in a pictorial format in three rooms of the centre. It is manned by a counsellor, who will answer any question people might have about the banking services. He said that financial inclusion was of utmost importance. The Centre and the Reserve Bank of India (RBI) were giving priority to financial inclusion. “We would like children to visit this place so that competitions could later be held on the topics depicted here,” he said. Executive Director of Syndicate Bank Ravi Chatterjee said that besides the Centre, a van would be pressed into service to propagate the importance of financial inclusion in villages. The bank would open two more Financial Inclusion Resource Centre at Kumta in Uttara Kannada and Mangalore. The Financial Inclusion Resource Centre in Mangalore would be opened by the end of this month, he said. A.S. Rao, Regional Director of RBI, Hyderabad and D.T. Pai, former Chairman and Managing Director of Syndicate Bank, were present.
How do you like this?
The Reserve Bank of India insiders have come up with new names for the Department of Banking Operations and Development and Nabard. Thus DBOD stands for Department of Banking Obstruction and Destruction and Nabard for Not at All Bothered About Rural Development.
The fine art of doing nothing
Most commentators and analysts have tended to view the Reserve Bank of India's mid-quarter monetary policy review of March 17 as a statement of the central bank's intentions and views on the economy. But the review, like many previous such reviews, can also be read as an indictment of public policy's failure to do anything meaningful to combat the problems faced by the nation — be it inflation, the lacklustre growth of capital goods and, of course, the pitiful state of our infrastructure and agriculture. One way of ‘reading' the abysmal passivity of New Delhi policy planners is to cast an eye over the string of endorsements of the RBI's actions from the chairman of the Prime Minister's Economic Advisory Council to the ever-articulate Deputy Chief of Planning Commission and, of course, Finance Minister, Mr Pranab Mukherjee himself. According to the latter, the RBI's repo rate hikes of 25 basis points would moderate prices, though inflation could be “marginally” higher than earlier projections for the end of the fiscal. What the Finance Minister meant by this mind-bending logic is unclear, but what is not is the sorry state of the projections themselves that have emanated from New Delhi with unceasing regularity since last June.
WRONG LIMITS
There are signs that the Reserve Bank of India has decided to ignore the criticism of its Malegam report and enforce its recommendations. It is expected to introduce price control on interest that microfinance institutions may charge rural borrowers. Price control gives those subjected to it an incentive to increase costs. To prevent it, the RBI will also introduce a cap on their profit margins. That will also control what they can pay for the funds they borrow. Here, the RBI is principally thinking of banks, of which it is the prime regulator. In essence, it is going to tell the banks that they cannot earn more than a certain limit on small loans to villagers. The rate being bandied about is 12 per cent. Since the average interest earned by public sector banks on their bills and advances in 2009-10 was only 8.3 per cent, the RBI must feel that it is doing banks a favour if it lets them earn 12 per cent on rural loans. But a high proportion of government banks’ loans goes to politically favoured borrowers such as farmers, small industrialists and government enterprises; if they are excluded, the interest rate earned is considerably higher. So the RBI is likely to make banks’ rural credit no more paying than their urban commercial loans. It will thus deprive banks of all incentive to lend to villagers, who are dispersed and more expensive to service. That will perpetuate the malaise that has pervaded till now: villagers will continue to be under-served by banks. Those banks that still try out the rural market will have their costs further increased by maximum limits on the size of loans. They will also be forbidden to lend to villagers whose income exceeds a minimum; in other words, they will not be allowed to reduce their average risk by lending to more substantial farmers and traders. The net effect of these well-intentioned and ill-thought-out measures would be to leave the rural credit market to moneylenders at whose mercy villagers have been all these centuries. The RBI prides itself on being a conservative institution, but this is surely taking conservatism too far. More importantly, the RBI is a nervous regulator which puts protection of its reputation above development; it therefore prefers oligopolistic markets in which a few banks make comfortable profits. That is the market structure it has created in cities; it is determined to replicate it in villages. Viewed in this fashion, it is not just its approach to rural credit that is inimical to development; it is its stranglehold on the banks that is harmful. The country would benefit, whether in towns or in villages, from vigorous competition among a larger number of banks. If that makes the bank regulator’s job more difficult, that is an argument for redesigning the regulator.
People suffer, banks get richer- Rakesh Bhatnagar
For a self-proclaimed welfare state such as India, enrichment at the cost of the tax-payer and the millions of ordinary people who have parked their savings in banks and other financial institutions is anathema. Yet, there were unclaimed deposits to the tune of Rs13,603,159,647 in a variety of banks — Rs4,731,67,698 in foreign, Rs1,503,23,106 in other private and the remaining in public sector — for more than 10 years till December 2009. Moreover, Reserve Bank of India (RBI) says at the end of March 2010, there were 54,738 million small coins (which, by definition, include the 50 paisa), adding up to Rs1, 455 crore. Ironically, neither the government nor any bank has shown concern for welfare of the depositors. Whatever the case, the cash-rich, top-heavy banks, which have been using public money the way they want to, can’t be allowed to swallow the deposits. Isn’t it RBI’s sovereign duty to protect the interests of unidentified depositors by putting up notices across the country inviting attention of the unknown and unheard of millions who might have found it hard to get their money back for a variety of reasons. Owners of the assets must be identified and paid with interest.They should not be made to suffer for no fault for theirs as a friend of mine suffered. His wife had Rs50,000 in her bank account when she died over a decade ago. He approached the nationalised bank with her death certificate and other relevant papers to prove that she was his legally-wedded wife and claim the money, but was denied. The bank wouldn’t verify the facts, either, and instead asked him to move court. The friend calculated the legal exercise would cost him Rs30,000, apart from the hassles and man hours, and decided against it. The money that belonged to his wife and her child must have doubled by now and the bank enriched.For whose welfare the state is working? Not the people, at least.
RBI SLAMS BANKS FOR LAF MISUSE
Banks have come under fire from the Reserve Bank of India (RBI) for lending funds borrowed under the liquidity adjustment facility (LAF) in the overnight money market. LAF funds are meant to meet banks’ reserve requirement. At least twice last week, RBI officials told bank managements about their discomfort with lending of LAF funds in the overnight money market. “The liquidity deficit, which shot up last week, made the regulator enquire about the reason. When it came to know that banks were doing arbitrage by lending the borrowed funds in the call money market, it reminded us that LAF funds should not be used for lending,” said a top executive of a public sector bank. Last week, call rates went past 7 per cent on most days, while the repo rate — the rate at which banks borrow funds from RBI — was 6.5 per cent till Thursday’s first LAF. On Thursday, RBI raised the reverse repo and the repo rate by 25 basis points each to 5.75 per cent and 6.75 per cent, respectively. According to banking industry officials, some foreign banks and small private sector banks did not have excess government paper to get LAF funds and so they were dependent on the overnight market. Banks that had government bonds in excess of the regulatory requirement of 24 per cent seized the opportunity to make a 5075-basis-points margin in the call money market. “RBI was unable to accept the fact that the liquidity deficit was so high even when the government had started spending, despite advance tax outflows,” said another executive of a government-owned bank. During the November-January period, when a liquidity shortage was acute, banks were borrowing around `1lakh crore from RBI on a daily basis. However, from February, the quantum of deficit came down to the central bank’s comfort level of +/- 1 per cent of banks’ net demand and time liabilities, or `50,000 crore. The deficit has come down since because the government has started spending, reflected in the fact that government balances with RBI fell from a high of `1lakh crore in the middle of December to `100 crore — the minimum level the government should keep with RBI — in March. Bankers said the liquidity strain last week was due to corporate advance tax outflow, estimated in the region of `50,000 crore.
Dena Bank CMD at RBI Outreach Program
Sunday, March 20, 2011
Experts complain of deprivation of consumer rights in finance sector
Financial experts and bankers who assessed the status of consumer protection in the financial sector have termed access and affordability of financial services as still a dream in the country. In this modern era, when the global economy adds around 1.5 crore new consumers of financial services every year, awareness of their rights was awfully low, it was pointed out. Speaking on the occasion of World Consumer Rights Day, Jaipur circle Reserve Bank of India General Manager S.N. Panda conceded that the problem of poor awareness and lack of accessibility exists among consumers of the banking sector. “There is need for better terms and conditions in services for customers in the financial sector,” Mr. Panda said. The RBI has been taking various initiatives in creating financial literacy and better accessibility for consumers, he added. The event, “Consumers for Fair Financial Service”, was organised by consumer advocacy group CUTS. Calling for financial inclusion of poor, the migrants, disadvantaged and marginalised people, CUTS International director George Cheriyan said these segments often struggle even to open a bank account in the absence of proper identification or address proof. Mr. Cheriyan added that a study in 2009 had found that only 13 per cent people used ATM and debit cards in the country, and only 10 per cent possessed life insurance. Jaipur Office of Banking Ombudsman (BO) Deputy General Manager K. Sundari sought RBI intervention in cases of serious financial abuses. Talking about fairness in financial services, Ms. Sundari presented an overview of the BO and the mechanism of seeking redressal through it. The former Rajasthan State Consumer Dispute Redressal Commission chairman, Justice Vinod Shankar Dave, shared his personal and professional experience in the legal field and emphasised behavioural aspect of consumer and service-provider relationships and constraints due to ignorance. The banking sector needs to show more responsibility towards consumers, and digitalisation was taking away the personal touch from banking services, he noted. BO AGM S.N. Senapati said consumers should take advantage of the existence of many regulatory bodies like the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and the RBI existed. On the part of the banks and financial companies, they should ensure fairness and transparency in contracts, he felt. CUTS programme officer Deepak Saxena and project coordinator Amarjeet Singh threw light on consumer protection in the newly emerging financial areas.
SBI arms merger bill cleared
New Delhi: The government on Thursday cleared a bill to empower itself to effectively manage the affairs of subsidiary banks of State Bank of India. The move will also help facilitate the merger of the five subsidiaries with SBI, for which the government has indicate a timeframe of 12-18 months. While SBI executives said they were in favour of merging the remaining associate banks-State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore-the timing would depend on clearance from the government. SBI, the country's largest lender, has already merged two of its associate banks-State Bank of Saurashtra and State Bank of Indore-with itself to improve overall functioning and is ready with the template to merge the remaining five subsidiaries. Among other things, the bill that was supported by the parliamentary standing committee on finance seeks to empower the government to fix the authorised capital of associate banks and appoint managing directors. These amendments were necessitated as these powers were vested with the Reserve Bank of India from whom the ownership of these banks was transferred to the Centre a few years ago. The bill is among the six financial sector legislations being pushed by the government.
Pay tax dues early, says RBI
The Reserve Bank of India (RBI) has appealed to the income-tax assesses to remit the tax dues sufficiently in advance of the due date for avoiding last minute rush. In a release, the bank said that the remitting income tax dues at the RBI would be too heavy towards the due date and it would be difficult for the bank to cope with the pressure of receipts although additional counters to the maximum extent possible are provided. Further, the RBI also appealed to the assesses to take advantage of the facility available for payment of tax at the branches of public sector banks and designated private sector banks.
Macroeconomic indicators - RBI rate hike may hit factory output
Apex chamber ASSOCHAM said the Reserve Bank of India's calibrated approach with minimal risk to growth momentum by increasing its repurchase rate by a quarter point appears to be a fire fighting exercise with limited options. The Associated Chambers of Commerce and Industry of India The 25 basis points increase in short term lending and borrowing (reverse repo rate) in RBI's mid term policy review will hit the manufacturing sector which is already witnessing a slowdown due to rising input costs and wages. Mr Dilip Modi president of ASSOCHAM said that "This is the eighth time in 2010-11 that the central bank has raised key policy rates to cool prices. The demand-side inflationary pressures are a larger concern than risk to overall economic growth." He said Indian industry is already facing fluctuating crude oil prices due to Middle East crisis, threats of disruption in global supply chain because of the devastating earthquake and tsunami in Japan, besides uncertain recovery in the European Union and the United States after the economic meltdown. With inflation hovering at 8.31% in February and profit margins under squeeze, capacity expansion plans are being curbed, thereby restricting fresh investments. Mr Modi said the RBI should have waited till the new agriculture crop which is expected next month. He said that "The performance of capital goods sector is also a matter of concern as it has shown negative growth for the second consecutive month." Meanwhile, ASSOCHAM is advocating a single policy rate to improve monetary policy transmission. This will align the Indian monetary system with international best practices and swifter transmission of monetary policy instances. Mr Modi said that “We agree with the RBI panel recommendation that repo rate should be a single policy rate to unambiguously signal monetary policy stance to achieve macro-economic objectives of growth with price stability. This will also bring in more effectiveness and transparency in the banking system.”
RBI slams banks for arbitrage
Banks have come under fire from the Reserve Bank of India (RBI) for lending funds borrowed under the liquidity adjustment facility (LAF) in the overnight money market. The central bank has asked the banks not to engage in such a practice, as the purpose of LAF funds is to meet the reserve requirement only. At least twice last week, RBI officials communicated to banks’ top managements about their discomfort about lending liquidity adjustment facility funds to overnight money market. “Liquidity deficit, which had shot up last week had made the regulator start enquiring about the reason. When they came to know that banks were taking arbitrage opportunity by on-lending the borrowed funds in the call money market, they reminded us that LAF funds should be used for lending purposes,” said a top executive of a public sector bank. Last week, call rates went past 7 per cent on most days, while the repo rate — the rate at which banks borrow funds from RBI — was 6.5 per cent till the first liquidity adjustment facility of Thursday. On Thursday, RBI raised the reverse repo and the repo rate by 25 basis points each to 5.75 per cent and 6.75 per cent. According to banking industry officials, some of the foreign banks and small private sector banks were not having excess government paper to pledge funds from liquidity adjustment facility; so they were heavily dependent on the overnight market. Banks, which had excess government bonds, that was above the regulatory requirement of 24 per cent, seized the opportunity for making 50-75 bps margin in the call money market.“RBI was unable to accept the fact as to why the liquidity deficit should be so high when the government had started spending, despite advance tax outflows,” said another executive from a government-owned bank. During the November-January period when liquidity shortage was acute, banks were borrowing around Rs 1 lakh crore from RBI on a daily basis. However, from February the quantum of deficit came down to the central bank’s comfort level, which was +/- 1 per cent of banks’ net demand and time liabilities, or Rs 50,000 crore. The deficit, since, has come down because the government has stared spending which was reflected in the fact that government balances with RBI fell from a high of Rs 1 lakh crore in the middle of December to Rs 100 crore in the beginning of March — the minimum level that the government should keep with RBI. Bankers also said the strain in liquidity in the last week was moreover due to corporate advance tax outflow which was estimated in the region of Rs 50,000 crore.
Saturday, March 19, 2011
Bank holds soiled notes, coins exchange mela
BHUBANESWAR: The Indian Bank organised a Mela for the exchange of soiled, cut, mutilated notes and also coins in collaboration with the RBI here in the premises of Saheed Nagar Branch on Friday. RBI Deputy General Manager K.R.Padmanabha Rao inaugurated the Mela with distribution of coins to the public. It was conducted in the presence of DGM and Zonal Manager OP Ambasht, Assistant General Manager of Zonal Office HS Patro and Assistant General Manager of Bhubaneswar branch A Bhimeswar Rao with participation of staff members from different branches of the city here. All arrangements were made for the smooth conduct of the Mela that continued from 11 am to 3 pm.
'Good leader leaves behind a better leader'
HYDERABAD: Former governor of Reserve Bank of India, Y V Reddy, stressed on the need for better governance, especially in the public sector which he said is often encouraged to mimic the private sector these days. Speaking at a conference on `Leadership & corporate governance in turbulent times' organised in the city by the School of Management Studies (University of Hyderabad) on Friday, Reddy said that is was poor governance that led to the micro-finance trouble last year. Reddy, in response to questions posed at him during the session, expressed concern over the underlining feudalism prevalent in the country, which was leading to concerns of dearth in second-rung leadership in the country. Taking the example of a family enterprise, the Padma Vibhushan awardee said that family members are preferred to take over as successors as against an outsider, irrespective of the individual's credentials. "That is why I personally feel that a good leader is one who is able to ensure there are better leaders after him," Reddy said. He said, "I had the good fortune to have people like Dr.Jalan and others as my superiors who were men of great intellect and capability. My short five-year stint as a leader (I was following orders the rest of my career), was inspired by such people and what I learnt from them." Reddy then went on to speak about crisis situations during his stint in the RBI and elaborated on one incident that took place in the nineties. "We had to decide on whether or not to sell gold to clear India's debts. That was a crucial choice and after much deliberation we went ahead with it," Reddy said. Further, answering questions as to why RBI decided to abruptly increase interest rates, when the US, also reeling under inflation, has not, the former governor said: "The economic cycle of every country is not the same. Increasing the rates in India was a necessity. I said this when I was governor and I still maintain my stand."
‘New banking models needed for financial inclusion’
A large part of the Indian population does not have access to savings, credit and remittances. Many steps have been taken in this direction but we still need to go a long way. Janmejaya Sinha, chairman-Asia Pacific, The Boston Consulting Group, tells DNAin an interview what more needs to be done to increase the rate of financial inclusion. Excerpts:
In the past, the government along with the Reserve Bank of India has taken many steps towards financial inclusion. What other steps do you think we require?
India started pioneering financial inclusion long ago. Gandhiji talked about co-operatives, we created regional rural banks, social service area approach, priority sector and the Kisan Credit Card. For a long time we have been emphasising on inclusion. But the fact is at that stage it was not possible. It is only now that India has a $1,000 per capita and a large economy which will grow fast for many years. So you really have the bare bones of a strong platform. Together with this you now have technology. The other issue is rural has become more important as a part of sales for companies. For the first time there is a real chance to actually address the problem of financial exclusion. But the journey is long. Firstly, we have illiteracy. Both you and I struggle with financial products, so just imagine how big will be the challenge if somebody is illiterate. Then there is not enough income, and the banking models that have been created are for the rich. Those models are based on float, you keep a high deposit and I would not charge you. Overall the timing is good, but the way to use this timing requires new models to be used.
Which will be these new models?
I would think these new models will be based on four parameters—reduction in the cost of manpower, usage of technology to get a distribution reach, collaboration across industry boundaries and use of the Aadhar platform (India’s new unique identification system). Then you can have a model that will be able to reach and serve these people in a sustainable way which will be non-loss making.
In your financial inclusion report you had stressed that there should be a per-transaction cost for the “Aam Aadmi”. Can you tell us more about it?
Today if you want a savings account and if I tell you every time you withdraw money you will be charged, then it sounds bad. You will say it is my money and you are charging me for withdrawal. But let me give you an alternative. When we had done this survey in 2006, we were saying that if you want to have safekeeping then you must pay for it unless you keep a sufficient balance that the bank can make money from it. So many of them said they wanted to keep very small amounts. If you keep very small amount, the bank does not get much float. In that case the bank is giving you safe keeping. If you are willing to pay for a locker, this is another form of locker. This is not a bad thing because this is providing a service at a cost but this is a service that is needed.
Today if you want a savings account and if I tell you every time you withdraw money you will be charged, then it sounds bad. You will say it is my money and you are charging me for withdrawal. But let me give you an alternative. When we had done this survey in 2006, we were saying that if you want to have safekeeping then you must pay for it unless you keep a sufficient balance that the bank can make money from it. So many of them said they wanted to keep very small amounts. If you keep very small amount, the bank does not get much float. In that case the bank is giving you safe keeping. If you are willing to pay for a locker, this is another form of locker. This is not a bad thing because this is providing a service at a cost but this is a service that is needed.
In the report you have also talked about financial inclusion index. Can you elaborate?
This is an index which will decide whether financial inclusion is improving or not. There are four needs that must be served — savings, credit, remittance and insurance. Right now no one is measuring that. This index may be used by the government to measure progress.
Fin inclusion plan big opportunity for banks: BCG
Boston Consultancy Group (BCG), along with top industry body CII, has come out with a 15-point agenda on how to convert a Rs 20,000-crore obligation into a real opportunity for banks to realise the government's ambitious financial inclusion programme. The consultancy firm, in a report titled 'Obligation to Opportunity', said though India is emerging as a major economic force, growth in not broad-based as a majority of the population is excluded from the financial services sector and this needs to be addressed. "India's chances of being a major economic power will be severely jeopardised if growth is not broad-based. We have to include each and every person in the financial sector," BCG Chairman (Asia-Pacific) Janmanjaye Sinha told reporters while releasing the report here today. According to the report, about half of the Indian households do not have access to products like remittances, savings and credit. However, it pointed out that there has been an improvement in the current levels of financial inclusion at 47%, from about 35% five years ago. BCG's agenda, that would help market participants as well as policy-makers to ensure financial inclusion, includes the need to bring down human resource costs per employee, learning to make low-cost distribution partnerships, Aadhar (brand name for unique identification numbers) as a platform and disbursal of the government payments using Aadhar-linked bank accounts, among others.
RBI to enforce most Malegam panel proposals from 1 April
The Reserve Bank of India (RBI) is set to implement most of the recommendations of the Malegam panel to regulate India’s Rs.22,000 crore microfinance industry from 1 April, but existing loans of microlenders will be exempted from the new norms initially, according to three persons familiar with the development. This means that microfinance institutions (MFIs) will be unable to give fresh loans to anyone whose household income is more than Rs.50,000 or credit of more than Rs.25,000 to a single borrower. MFIs will not be able to charge more than 24% interest. Besides, they will have to cap their margins at 12%. Two of the three persons are bankers and one the head of a leading MFI. All three declined to be named. At a meeting with bankers on Thursday, RBI made it clear that the industry should be prepared to accept most of the suggestions of the panel, including the cap on family income, size of loan and interest rate from 1 April. The regulator had held discussions with top bureaucrats of state governments in February. It will meet MFIs next week in the last round. Once the new regulations come into play, all MFIs will have to lend 90% of their total loans in compliance with the new rules and if they fail to do so, such loans will not be treated as priority sector advances. Priority sector status for such loans is crucial for MFIs as banks mainly lend to them to cover their mandatory lending requirement. Under current norms, Indian banks are required to lend 40% of their loans to agriculture and other weaker sections. If banks fall short of this target, they can buy the loans of MFIs to meet the level. MFIs are engaged in the business of giving tiny loans to poor borrowers. Typically, they lend at 24-32% or even a higher rate, citing high operational costs. They get money from banks at 9-12%. The existing loans of microlenders will be exempted from the new regulations, which will be offered “grandfathering” to facilitate a smooth transition. Grandfathering implies allowing their continuation in compliance with the old rules, after these are changed, for a certain period. At Thursday’s meeting, banks told RBI they were not keen to launch an industry-wide loan restructuring for MFIs and this can be done only on a case-to-case basis. “Banks said they are ready to restructure loans of those MFIs which have majority exposure in Andhra Pradesh, but those having (relatively) minor exposure can seek alternative means to overcome the crisis,” one of the bankers said. RBI has also mandated the Indian Banks’ Association, the national bankers’ lobby, to take stock of bank funding to the microlending sector since mid-January when it had asked banks to resume lending to the crisis-ridden microlending industry and recycle loans to enable the sector tide over the crisis, until new regulations are in place. The Malegam panel was appointed in October to review microfinance industry regulations after the sector plunged into a crisis following the Andhra Pradesh government restricting operations. Andhra Pradesh accounts for more than a quarter of India’s total microlending loans. The state law barred weekly collections and made government approval mandatory for every second loan to a borrower. The regulation hit MFIs, causing a sharp fall in collection rates and forcing many of them to stop fresh lending. Banks, too, stopped fresh funding to the sector. The Malegam committee, which submitted its report on 19 January, recommended that MFIs with a loan portfolio of Rs.100 crore should not keep a margin of more than 10%. For the smaller MFIs, the margin is capped at 12%. According to the panel, the number of outstanding loan accounts serviced by MFIs in the country between March 2007 and March 2010, rose from 10.04 million to 26.7 million, while the outstanding loan amount increased from about Rs.3,800 crore to Rs.18,344 crore. Senior officials of the microlending industry said they will argue against the Rs.50,000 family income cap the panel has recommended as it is impractical to assess this. Besides, this will also disqualify 70-80% of the existing borrowers of MFIs from accessing microcredit. “It is unrealistic to limit the annual family income at Rs.50,000 and a large part of the market is going to be excluded from the fold of microfinance. Also, assessing the annual income of the borrower is extremely impractical,” said Alok Prasad, chief executive officer of Microfinance Institutions Network.
RBI Still Toddling on Its Tightening Path
India's central bank surprised no one by its decision to increase rates on Thursday. But the question is how much of an impact the move will really have on rampant inflation plaguing the economy. The Reserve Bank of India's quarter-point increase in its lending and borrowing rates was the eighth hike in the past year. In total, it has raised rates by two percentage points. Through this tightening, inflation has persistently beaten the RBI's own forecasts. The central bank raised its forecast for the wholesale-price index rate to 8% by the end of this fiscal year in March, revising it for the third time this fiscal year. Tightening hasn't worked that well, partly due to the RBI's tendency to break it into small quantums. Its rationale is that it doesn't want to disrupt the growth momentum. But this argument doesn't hold up now as well as it did a year ago. Despite the continued uncertainty in other economies, India has largely shown resilience and will likely record 8.6% economic growth in this fiscal year. Still, the RBI continues what it calls a "calibrated approach". Given interest rate hikes have a lagging effect "acting aggressively early, in October-December, would have brought inflation down to more tolerable levels," says Jay Shankar, economist with Religare Capital Markets. Acting aggressively now, poses a "greater risk of derailing investment and growth, even as inflation stays out of control," he says. A large part of this inflation problem is, of course, out of the RBI's control. It stems from food prices that rise because of supply shortage. Even though some food article prices are now cooling, the food articles index is still rising at close to a 10% rate from last year. Worse, this has spurred a more broad-based inflation in manufactured goods: non-food manufactured products inflation rate jumped to 6.1% in February, from 4.8% in January. Add to this the rising trend in global commodity prices and India could have a real problem at hand. RBI could at best try to keep in check speculation on further price gains that could further fuel inflation. But a quarter-point increase won't dampen any price rise expectations ahead.
Britain hopes for EU-India free trade accord this year
Chennai, Mar. 18: British Trade and Investment Minister Stephen Green said he hoped the Free Trade Agreement (FTA) between India and the European Union (EU) would be concluded by the end of this year. Speaking to reporters here Friday, Green said: "We hope the European Union-India Free Trade Agreement may be there by the end of this year. I had discussed this issue with Indian government officials." Queried about his meeting with Reserve Bank of India (RBI) Governor Duvvuri Subbarao during his current visit, he said: "We discussed about monetary policy. The UK welcomes the RBI's idea of having foreign bank branches as Indian subsidiaries rather than being a branch." While stating that foreign banks in India should also play their part in financial inclusion, he also said Indian banks like State Bank of India (SBI) were doing good business in the UK.
Govt may give more teeth to RBI
The government is considering giving more teeth to Reserve Bank to deal with banking sector problems before permitting private sector entities to float commercial banks. Empowering RBI is essential for obtaining information about other businesses of the corporate houses seeking banking licences, in order to protect depositors' interests, official sources said. The government, sources said, is considering to amend the Banking Regulation Act through which RBI would be empowered to seek information from an entity running bank and other businesses like insurance and asset management as well. Sources said this is relevant as the risks of these companies can slip into banks by virtue of same parentage, sources said. Banking Regulation Amendment Bill is likely to be tabled in the Monsoon session of Parliament. Presently, insurance companies are regulated by Insurance Regulatory and Development Authority and asset management business comes under the purview of SEBI. After the clearance of the bill, RBI would have power to call for information and assess information, sources said, adding, these powers are required if the private entities are allowed to enter into banking space to protect interest of depositors. As per the current practice, India follows subsidiary model where non-banking business of a bank like insurance and asset management are subsidiaries. By virtue of this, risks attached with this can impact the banking entity. Meanwhile, RBI has already said it will look at business plan for financial inclusion, in addition to other things, before granting banking licence to new companies. "One of the criteria for evaluating application (for new bank licence) that we will get in due course of time, will indeed be their business plan for financial inclusion," RBI Governor D Subbarao had said earlier this month. The apex bank had brought out a discussion paper in August, 2010, on giving out new banking licenses to business houses and non-banking finance companies, besides regulations for the same to foster competition. The RBI also sought to know "whether industrial and business houses could be allowed to promote banks." Various entities like Reliance Capital IndiaBulls Religare, IFCI and Aditya Birla Financial Services are said to be mulling entry in the banking space. India presently has 27 public sector banks, seven new private sector banks, 15 old private sector banks, 31 foreign banks, 86 regional rural banks, 4 local area banks, 1,721 urban cooperative banks, 31 state cooperative banks and 371 district central cooperative banks.
Nokia ties with Indian bank for mobile payments
March 18, 2011, 08:30 AM — IDG News Service — Nokia has tied with Union Bank of India to roll out mobile payment services that are targeted at the large number of Indians who do not have banking facilities. The service will enable consumers to transfer money to other persons, withdraw cash at automated teller machines (ATMs) and designated retail stores, and pay utility bills as well as recharge pre-paid mobile connections, Nokia said on Friday. Using the service, called "Union Bank Money powered by Nokia", Union Bank and Nokia plan to take banking services to over 10 million people across 32,000 villages by 2013. The service has been rolled out in Gurgaon near Delhi, with plans for a country-wide rollout in the next few months. India's central bank, Reserve Bank of India (RBI), has been attempting to make it easier for Indian banks to reach rural people by allowing them to appoint "banking correspondents" in remote locations where there are no bank branches. These correspondents, which can include small retail outlets, are allowed to open new accounts, dispense and accept cash from customers, and offer other services on behalf of the bank. The service from Nokia and Union Bank is based on the Obopay mobile payment platform, and will be available on a range of mobile phones, including those from vendors other than Nokia, a Nokia spokeswoman said. The service is also independent of the mobile operators. Once they have created an account at a correspondent outlet, and installed the banking application on the phone, users can use SMS (Short Message Service) to transfer funds or receive money, the spokeswoman added. The mobile number will be the unique identifier for the purpose of the bank. Users will be charged a fee on certain transactions. Nokia did not discuss its revenue sharing agreement with the bank. Nokia is already offering a similar service since last year in three locations in a tie-up with another bank, Yes Bank. The company will explore similar tie-ups with other banks, the spokeswoman said. Nokia will supplement 3,000 Union Bank branches across the country with its large network of retail outlets, some of which will serve as correspondents for Union Bank money services. The company currently has 200,000 retailers in the country selling its phones, of which about 70,000 sell only Nokia phones, the spokeswoman said. The company has not finalized on how many of these retailers will be acting as correspondents for the service. The RBI amended the rules for banking correspondents in September to allow "for profit" companies to do the job, besides individuals, non-governmental organizations, cooperative societies and post offices. India's mobile operators are also trying to get into the mobile payments business. Bharti Airtel, the largest mobile operator in the country, has tied with State Bank of India, India's largest commercial bank, to take banking services to people who do not currently have the facility. The mobile operator launched separately in January its "airtel money" service which allows users to purchase Airtel currency which can then be used to make payments using mobile phones. ICICI Bank, India's largest private sector bank, also announced a tie-up with Vodafone Essar, the Indian joint venture of Vodafone, to offer financial products such as savings accounts, pre-paid instruments and credit products through a mobile phone platform. The mobile banking ventures are expected to help the operators get customer loyalty while boosting their flagging margins, analysts said.
'Invest in liquid or liquid-plus funds'
With interest rates likely to go up in the future, staying with liquid or liquid-plus funds will mean better returns and flexibility. Today, when the Reserve Bank of India raised key rates - repo and reverse repo - by 25 basis points, debt fund investors would have wondered if this was the time to get locked into medium or long-term schemes. The answer, however, is still no.Financial experts feel with inflation still not under control, the apex bank could raise rates in the future. Amandeep Chopra, head, fixed income, UTI AMC, said: "It is advisable to go for liquid and liquid-plus or ultra short-term schemes because more rate rise is likely in the future." Staying short will also mean provide flexibility, in terms of moving money from one kind of scheme to another, if there is a change in the interest rate cycle. Also, short-term debt funds will give better returns because the constant churn that fund managers have to do. According to Value Research, a mutual fund research agency, ultra short and liquid debt funds have returned 6.09 per cent and 6.02 per cent annually. While gilt, medium and long-term debt funds gave 5.63 per cent. This clearly indicates that short-term funds were able to stay ahead from longer-term funds, in terms of returns. However, there is a word of caution. If one were to move their money too much in one year, there would be a tax on short-term capital gains. The capital gains will be added to your income and taxed, according to the income tax slab. Another reason why fund managers are advising against locking-in money in medium or long-term debt schemes is because of the inability to take advantage of any rise in the rates in the future. Also, rise in yields will impact returns of long-term funds adversely because of the inverse relationship with price of bonds . Mahendra Jajoo, executive director and chief investment officer, fixed income at Pramerica Mutual Fund feels by June, when early indications are available for monsoon, a clear trend on long-term rates will emerge. However, if you want to lock-in money in existing rates, look at fixed maturity plans. FMPs are offering 9.9 per cent to 10 per cent for a one-year term. And despite being riskier than other debt schemes because of their exposure to corporate paper, these schemes get double indexation benefits for tenures that are slightly more than one year. Say, if one invests in an FMP in March 2011 which is maturing in say, May 2012, there will inflation indexation benefits for years 2010-11 and 2012-13. This would mean higher post-tax returns for the investor.
Friday, March 18, 2011
9.5% interest on PF gets nod
New Delhi The finance ministry approved higher interest rate of 9.5 per cent to over 4.7 crore depositors with the Employees Provident Fund Organisation ( EPFO) for 2010- 11. The EPFO had been paying 8.5 % interest on PF deposits since 2005- 06. In September last year, it had recommended an increase in interest rate to 9.5 % for 2010- 11 after discovering Rs 1,731 crore surplus in their books of accounts. " The finance ministry has ratified 9.5 % rate of return on PF deposits for 2010- 11. We have received a notification in this regard," Central Provident Fund Commissioner Samirendra Chatterjee told PTI. Chatterjee further added that " our calculations regarding Rs 1,731 crore surplus in the interest suspense account were found correct by the finance ministry and so they approved this higher rate of return". The finance ministry's approval is subject to the condition that any shortfall on account of payment of 9.5 % rate of return would be met by making adjustments in the interest rate in 2011- 12. Chatterjee, however, said that there would be no need for making any adjustment in the next fiscal as " EPFO calculations are correct regarding the discovery of a surplus of Rs 1,731 crore in the interest suspense account." The finance ministry has also asked the EPFO to update its subscriber accounts within the next six months.
Cabinet approves PFRDA Bill
The Union Cabinet on Thursday gave its nod to the long-awaited Pension Fund Regulatory and Development Authority Bill (PFRDA) that aims to grant statutory status to the pension regulator and open up the sector for foreign direct investment. The Cabinet also cleared the State Bank of India (Subsidiary Banks Laws) Amendment Bill, which proposes to transfer certain powers vested with the Reserve Bank of India, with regard to its subsidiaries, to the central government. “The PFRDA Bill has been approved and is likely to be introduced in the current session,” said a Union minister, after a Cabinet meeting chaired by Prime Minister Manmohan Singh. If the Bills are not introduced in the current session, they may be tabled in a special session to be convened in end of May or in the Monsoon Session (July-August). The Bill seeks to allow foreign direct investment in pension funds, in line with the insurance sector, in which FDI up to 26 per cent is allowed. PFRDA, which was set up as a regulatory body for the pension sector, is yet to get statutory powers, since the Bill pertaining to that effect lapsed in Parliament with the dissolution of the last Lok Sabha in 2009. An interim PFRDA has been functioning since 2003 through an executive order. The PFRDA Bill was first introduced in Parliament in 2005 and referred to the parliamentary standing committee which submitted its report and recommended that FDI in pension should not be at variance with the insurance sector. An amendment to the Insurance Bill, which seeks to raise foreign investment cap in domestic private insurance companies to 49 per cent, is also pending. The State Bank of India (Subsidiary Banks Laws) Amendment Bill seeks to amend the State Bank of Hyderabad Act, 1956 and the State Bank of India (Subsidiary Banks) Act, 1959. The amendment will reflect the transfer of ownership of State Bank from the Reserve Bank to the central government. The Bill seeks to empower the government to fix the authorised capital of SBI subsidiaries and appoint managing directors. It will also fix the terms of office, salaries and allowances of managing directors of the subsidiaries by the government. The Bill had earlier lapsed with the dissolution of the 14th Lok Sabha.
RATE HIKE SEASON JUST GOT LONGER
The message from the country’s central bank is loud and clear: Expect a series of policy rate increases through the next financial year, as inflationary pressures have accentuated, even as risks to growth are emerging. In its mid-quarter monetary policy review today, the Reserve Bank of India (RBI) increased key policy rates by a quarter point – the eighth increase in ayear – warning that rising oil prices will put more pressure on the already high inflation. This was on expected lines. The repo rate – RBI’s short-term lending rate – has gone up from 6.5 per cent to 6.75 per cent with immediate effect. The reverse repo rate – its short-term borrowing rate – has risen from 5.5 per cent to 5.75 per cent. But what worried the markets was the hawkish tone adopted by RBI while raising its wholesale price inflation forecast for the year to 8 per cent, a full percentage point higher than the number in the third quarter review in January. RBI said rising global commodity prices, particularly of oil, were a major contributor to inflationary pressures. Domestic fuel prices, which were yet to fully adjust to the global prices, might put further pressure on inflation, it said. “Based on the current and evolving growth and inflation scenario, RBI is likely to persist with the current antiinflationary stance,” the central bank said. RBI clearly articulated the risks to growth from high inflation. “The continuing uncertainty about energy and commodity prices may vitiate the investment climate, posing a threat to the current growth trajectory,” it said. Financial sector pundits are thus no longer debating whether there will further rate rises. Their discussions centre on how much. “RBI’s stance clearly makes a case for frontloading rate hikes to cool inflation. RBI is likely to squeeze in more rate hikes in the first half of the next financial year.
Reserve Bank must continue with its anti-inflation stance - C RANGARAJAN
C. Rangarajan, chairman of the Economic Advisory Council (EAC) to the Prime Minister (PM), said the Reserve Bank of India (RBI) must persist with its anti-inflation stance. Edited excerpts: Every time we are close to a 9% growth rate in the economy, we have inflation and all signs of overheating. That is a real quandary for policymakers and the government. I don't think it's the over- heating of the economy in the current situation. The in flationary pressures have been mounting primarily be- cause of the failure on the food front. Last year, it was the decline on the foodgrain output and in the current year it has been the extraordinary rise in the prices of vegetables and certain other agricultural products. It's only recently the manufacturing sector has seen a rise in inflation, but that isn't very high either. I personally do not think that it is the high growth that is creating the inflation. It is the supply- side bottlenecks in specific areas, which is resulting in current levels of inflation. So isn't it high time we looked at the larger picture and took more structural steps to improve the situation? Well, last year when we had the imbalance due to the decline in the foodgrain production, the public distribution centre was activated and more foodgrains were pushed into the system. So you see the impact of it in the current year. As you will see in the case of cereals, the in- crease in the current year has been very modest and also in the case of commodities like pulses, the year-on-year in- flation is negative. Therefore, action taken last year has had the impact of bringing down foodgrain prices. But in the current year, we also had problems with respect to vegetables and fruit, where the prices rose very high and there was no method where we could reduce the inflationary pressures arising from this group, because there is no stock available with the government to re- lease in the market. The only thing that could be done is allow import wherever possi- ble. So I feel inflationary action has been taken. In the coming months, we should see inflationary pressures softening. Where do you see inflation settling? For 14 months in a row, we've been above 8%, even though we've had a couple of rate hikes in the interim. How do you see it panning out? I think it will decline in March, because in the four weeks of March, you'll see a further decline in the food prices. Therefore it will have an effect on the overall head- line inflation. We had expected that by March 2011, the headline inflation will come down to 7%, perhaps it will stay a little higher or a little above that level. Should RBI go easy on increasing interest rates beyond this point? I don't think so. The over- all inflation remains at a high level, even after adjustments in foodgrain prices. Inflation even at the end of March will remain above 7%, which is a very high level and, therefore, RBI must persist, as they have indicated in their review, in the anti-inflation stance.
RBI's policy rate hike is too small to quell inflationary expectations
THE Reserve Bank has hiked the policy interest rate by 25 basis points. While this is a move in the right direction, as long as the rate hike is less than the hike in inflationary expectations, the stance of monetary policy is expansionary as real interest rates have not been raised. Since the inflation forecast of the RBI has gone up from 7 per cent to 8 per cent, a move of 100 basis points, this suggests an easier stance of monetary policy. While both fiscal and monetary policies are responsible for the present high inflation situation, the fiscal situation cannot turn out to be better than what it is estimated in the budget. The risk might be on the downside since oil prices may rise and the oil subsidy bill may be much higher than budget estimates.Unless the RBI believes that the fiscal situation will actually play out exactly as estimated, or may even be better, the policy stance will be easy. The other element of the monetary story right now is the tight liquidity situation in the market. Banks are borrowing at the repo window from the RBI on a regular basis. In this situation, a 25 basis point increase in the policy rate is seen as an effective increase unlike when there is an easy liquidity situation. But even though tight liquidity and small 25 basis point hikes have come to characterise RBI policy for many months now, it has not been effective in controlling inflation. Will the 25 basis point hike be enough to bring inflation down? Unlikely. There has been a long and persistent build-up in inflationary expectation and an upward drift in inflation for more than two years. Full capacity utilisation with growing demand coming from high government spending characterise the Indian economy today. While the 25 basis point policy is a "safe" one, since it cannot do much damage, it is not safe if inflation is the biggest risk as it can pull down investment and growth and damage the Indian growth story. The weak transmission of monetary policy and long lags suggest the policy rate should have been hiked by more. The longer the high inflation stays with us, the greater will be the build-up of inflationary expectations and the harder it will be to get rid of them.
BANKS keen on preserving priority sector status for the microfinance sector
THE Reserve Bank of India (RBI) is likely to implement some of the Malegam committee recommendations on microfinance companies from April 1 this year. "The Malegam panel proposals are likely to be implemented from April 1. Only new loans are likely to come under the guidelines," said a banker. Besides, banks are keen on preserving the priority sector status for the microfinance sector, irrespective of the individual conduct of borrowing microfinance institutions. "Bankers' main reservation is nothing should hap pen by which some act or conduct or misconduct of MFIs should result in the priority sector status being withdrawn," an official of the Indian Banks Association said after a meeting between bankers and top RBI officials. Even though the Malegam committee has suggested the continuance of priority sector status for loans to the MFI sector, there are some conditions wherein the status can be cancelled due to the misconduct of borrowing MFI like using coercion, charging higher interest rate, etc. “If the MFIs don’t do certain things vis-a-vis borrowers, don’t penalise me in terms of regulation by taking out sector,” he said. He said that RBI was appreciative of the reservations expressed by the bankers. To p bankers, including Corporation Bank’s CMD Ramnath Pradeep, HDFC Bank’s MD Aditya Puri, Axis Bank CEO Shikha Sharma met RBI deputy governor K C Chakrabarty to voice their concerns regarding Malegam Committee recommendations on MFIs before they are ratified into guidelines on April 1. vis-a-vis borrowers, don't penalise me in terms of regulation by taking out sector," he said. He said that RBI was appreciative of the reservations expressed by the bankers.Top bankers, including Corporation Bank's CMD Ramnath Pradeep, HDFC Bank's MD Aditya Puri, Axis Bank CEO Shikha Sharma met RBI deputy governor K C Chakrabarty to voice their concerns regarding Malegam Committee recommendations on MFIs before they are ratified into guidelines on April 1.
Thursday, March 17, 2011
Banks should raise money from mkts: Chakrabarty
Rather than counting on the government for additional capital, banks need to grow their balance sheets by raising capital from the market, as keeping them adequately capitalised would be a challenge once the Basel II accord comes into force, according to K C Chakrabarty, deputy governor, Reserve Bank of India (RBI). “The era of cheap capital is over. Investors are wary of the volatility of returns. Newer instruments and techniques would be required to attract investors. While the creation of enabling conditions for capital flow to the sector would continue to remain on the top of the reforms agenda, banks would need to grow their balance sheets by raising capital from the markets rather than count on government,” Chakrabarty said. He added that balancing the interests of shareholders and depositors alike would be a challenge for banks. Another key issue where banks might face challenges was meeting the funding requirements of the productive sectors of the economy, estimated to grow by nine per cent annually, Chakrabarty said. “The debate over channeling a larger portion of available credit to the most productive sector or to those where the investment efficiency is lower is yet to be fully resolved. In any case, to make banks allocate increased credit to the productive sectors of the economy is strongly predicted on the bank’s capital strength. To do so, more capital infusion for banks will be required,” he said.
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