New Delhi, April 10: New licences for banks are likely to be of two types — one to provide just basic banking and another one to provide the usual range of services that not only includes basic banking but also sophisticated facilities such as wealth management and merchant banking. The Reserve Bank of India is set to come out with the draft guidelines for new licences later this month. The basic licence will allow new banks to set up base in rural areas to fulfil the obligation of financial inclusion. Microfinance organisations and co-operative banks will, therefore, get an opportunity to convert themselves into banks. Large industrial houses will be allowed entry, though there will be strict rules in place to ensure that lending is not limited to group businesses. Top finance ministry officials said the RBI was likely to use its discretion to prevent groups with huge investments in high-risk businesses such as realty. Diversified groups having limited exposure to real estate such as the Tatas or Wadias will not be debarred. The past record of an industrial house will be an important factor. “The whole idea is to allow large corporate groups to enter banking but not to bring about a repeat of the 1950s and 1960s when India had witnessed a large number of private banks being set up by industrial houses collapsing,” officials said. Officials said the minimum capital requirement was likely to be jacked up. Under the revised guidelines issued in 2001, the minimum capital requirement for a bank is Rs 200 crore. Promoters are required to raise it to Rs 300 crore within three years. This minimum capital requirement is now likely to be raised to Rs 500 crore for basic banking and Rs 1,000 crore for a comprehensive licence. Officials said there were differences over the voting rights for foreign investors. It is unlikely that foreign investors will be given majority voting rights. “In all probability, their voting rights will be limited to 49 per cent,” the officials said. “The explanation in the recently announced changes in the FDI guidelines makes it very clear that we will distinguish between foreign-owned or controlled investments and Indian owned and controlled investments,” the officials said. The change is being interpreted to mean that for a bank to be defined as an Indian entity it should be owned and controlled by Indians. Otherwise it will be treated as a foreign bank and will face many restrictions. Sources said top industrial groups such as Mukesh Ambani’s Reliance Industries as well as his younger brother Anil’s ADAG group and the Tatas could make an entry. The Aditya Birla group could be keen on banking. Ghanshyamdas Birla had set up Uco Bank in 1943, but it was nationalised in the 1960s. Earlier this month, RIL had entered financial services through a joint venture with hedge fund DE Shaw.
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Monday, April 11, 2011
Govt eases rules for bank top jobs
The government has relaxed the norms for appointment to top jobs at public sector banks. To be eligible for the post of chairman and managing director (CMD), a candidate will now require at least 18 months of residual service, with six months experience as an executive director (ED). Earlier, a candidate was required to have at least two years of residual service, with one-year stint as an ED. The government has called 20 EDs for interviews by the end of this month. Eight CMD posts will fall vacant this financial year. In addition, the government has called 30 general managers for the interview for promotion as EDs. During 2011-12, a total of 13 vacancies are expected to arise. To be eligible for the ED's post, a candidate should have two years of residual service and two years of experience as a general manager. The norms for appointing EDs, however, have not been changed. Central Bank of India, Corporation Bank, Dena Bank, Andhra Bank, Syndicate Bank, OBC, Bank of Maharashtra and Union Bank of India will see new faces at the top this year. The appointment at Central Bank of India will be lateral, that is, a CMD of a smaller bank will be given charge. The norms were relaxed during the previous selection process, too. Then, the residual service requirement was made 15 months. The government may also consider appointing a second ED in banks that have a business of Rs 1 lakh crore and above. Some banks such as United Bank of India, Dena Bank and Punjab and Sind Bank have recently entered the league and, therefore, are eligible for a second ED. The search panel to interview candidates comprises RBI Deputy Governor Anand Sinha, Financial Services Secretary S K Sharma and former HDFC Bank chairman Jagdish Capoor, among others. The process for appointing the CMD of Punjab & Sind Bank has started. The post has been vacant for nearly a year. Sources say the finance ministry has initiated the process of shortlisting a suitable candidate. The selection of the chairman of Punjab & Sind Bank is not a part of the interview process followed for other banks.
Sunday, April 10, 2011
FINANCIAL INCLUSION BEYOND MICROFINANCE - Usha Thorat
The challenge in microfinance lies in taking advantage of economies of scale and passing on the benefits to the customer while providing a reasonable return to the investor. Financial inclusion is more than microfinance. Microfinance has shown how the poor are credit-worthy, how through regular savings and loan repayments, using group solidarity or guarantee, they have alleviated distress amongst low-income households, enabled consumption smoothening and facilitated self-employment and micro-enterprise. For borrowers who only had recourse to moneylenders and loan sharks, microfinance provided access to formal sector finance with very little formality and documentation. The MFIs have demonstrated innovative methods and technology to enhance outreach and attract equity which could be leveraged to make further investments to enhance coverage. They have been able to reach the last mile that banks have found difficult. The number of loan accounts serviced by MFIs in India increased from 10 million in 2007 to nearly 27 million in 2010 while loans outstanding increased from $840 million to $4 billion. On the other hand, the critics of microfinance have argued that the interest rates are too high and investors in such MFIs have obtained huge returns on their equity. Grameen Bank Founder Muhammed Yunus would argue that financial services to the poor cannot be rendered by profit-oriented enterprises. Others would argue that unless there are profits to be made, there can be no sustainable scale-up of business so as to cover the unreached and excluded. The whole issue boils down to what is considered to be abnormal or supernormal profits and what is considered to be cost covering and enough for the business to be sustained. The challenge ultimately lies in reducing costs through the use of technology, taking advantage of economies of scale and passing on the benefits to the customer while providing a reasonable return on capital to the investor. However, as has been the experience in microfinance, it is important that incentives are not distorted. Commissions have been given on basis of more clients and giving more loans. Executive remuneration has been based on profits generated. These, in turn, encourage imprudent lending and inappropriate practices such as multiple lending. As the credit risk gets transferred away from the MFI’s books through securitisation and assignment, there are no in-built measures to curb multiple lending and excess loaning to the same household. The MFIs are also accused of coercive methods of recovery. In India, matters came to a head in 2010, when one of the State Governments enacted an ordinance that effectively stopped collection of micro-debt and prohibited any new micro-loans in the State unless certain conditions were met. In this context, the RBI set up a committee under one its Board directors, Mr Y. H. Malegam. The report was submitted in January 2011. The committee has made a wide range of recommendations aimed at consumer protection. The crux of the recommendations is that lending to MFIs can be considered priority sector lending only when certain conditions are met by such MFIs. These include a cap of 10 per cent /12 per cent on the MFIS’ margins, a cap of 24 per cent on interest for individual loans, rules for ensuring transparency, cap of Rs 25,000 on size of loans, limit of Rs 50,000 on the income of the borrower to be eligible for micro finance, 75 per cent of the total loans of the MFI to be for income generation purposes, all loans to be only to members of JLG/SHGs and setting up a comprehensive credit information and referencing, MFIs to establish code of conduct and institute grievance redressal procedure, regulator to mandate Client Protection Code, and corporate governance principles to be laid down by the regulator. The Committee has also said that if its recommendations are accepted, the need for the Andhra Pradesh Act will not exist. The recommendations are under examination by the RBI. What I would like to emphasise is that financial inclusion is not just microfinance, although it plays an important role in providing credit access to the poor. Financial inclusion implies access to a mainstream bank account which, in itself, includes such accountholders in the economic lifeline of the system and provides him/her a savings product that is eligible for deposit insurance. Hence, financial inclusion has to ensure access to deposit insurance and the mainstream payments system through commercial banks, either directly or through various forms of electronic or mobile banking or through business correspondents. Financial inclusion has to be seen in the context of inclusive growth. The sections of the population that need access to affordable credit to be able to increase their income levels are the landless labourers and marginal farmers in agriculture and allied activities, and the small and micro entrepreneurs in industry and services sectors in the SME sector. This sector is ridden with problems of owning the title to land even though they may have the rights to the usufruct of the land — they have problems of not being able to provide sufficient collateral. Where the risk is perceived to be higher, lending agencies are usually risk-averse, especially as there are other opportunities. In this context, the policy on financial inclusion will have to address the design of appropriate credit guarantee or credit enhancement schemes with suitable disincentives for misuse or moral hazard. The public policy intervention in this area calling for fiscal support — directly or indirectly — will have to be carefully crafted looking at the international experience of such schemes and their effectiveness. (Excerpts from a speech delivered in Kuala Lumpur on April 5 at an event co-sponsored by CGAP OECD AFI and Bank Negara.)
(The author is Director, Centre for Advanced Financial Research and Learning.)
No turf war with FSDC, financial groups to be regulated by RBI
New Delhi: The finance ministry has told the Reserve Bank of India that regulation of financial conglomerates would be its sole prerogative. Addressing the central bank’s concerns over these conglomerates going out of its regulatory purview, the ministry has clarified that the Financial Stability and Development Council (FSDC)would only ‘monitor’ their activities. The RBI, on the other hand, would have the power to impose prudential and other regulatory conditions on the conglomerates. The FSDC is headed by the finance minister while its sub committee that meets more often is headed by the RBI governor as its vice-chairman. The government has outlined its view in the amended Banking Regulations Act recently approved by the Cabinet, an official said. Currently, there is no legal provision in the Indian financial laws or the RBI Act to specifically target regulation of financial conglomerates and holding companies. The changes in the Banking Regulations Act would empower the RBI to also supersede banks' boards in case of any wrongdoing. Besides, the RBI would be able to assess the risks arising out of subsidiary companies owned by the banking entity. “FSDC will not regulate but it will discuss conglomerates and accordingly issue guidelines. But individual regulators are masters of their own territory and FSDC cannot take a decision, which can be forced on a regulator,” the official said. The central bank, though, has a financial conglomerates cell in its department of supervision. “The RBI is now being vested with these powers through amendments in the Banking Regulations Act,” the official said. While changes in the Act would enhance the central bank's regulatory control over conglomerates, an internal working group of the RBI headed by deputy governor Shyamala Gopinath would shortly release draft guidelines pertaining to regulation of financial holding companies. Changes in these regulations are critical for the RBI as it prepares to unveil guidelines for the new banking licences. Industrial houses and conglomerates are expected to be given entry into the banking sector, subject to stringent criterion. Another official said the FSDC would monitor activities of large financial conglomerates by assigning them to lead regulators. A financial conglomerate deriving the majority of its revenues from banking activities, for instance, would be regulated by the RBI. The government created the FSDC in the aftermath the global economic crisis to look after financial stability, address inter-regulatory coordination issues and assess the functioning of large financial conglomerates. The central bank had recently highlighted the FSDC as a coordination mechanism whose efficacy is yet to be tested. “While coordination mechanisms within the financial sector have been strengthened (by the creation of the FSDC), it is yet early to assess their efficacy which will be tested by future developments,” RBI executive director Deepak Mohanty said last week in Jerusalem at the central banks conference of the Bank of Israel.
Slice of history: How IDBI came to be in 1960s
In the early 60s, when India was still battling to tackle the current account deficit and the negative industrial growth, the Reserve Bank of India decided to carve out a subsidiary that would finance the industrial development in the country. With this idea was born the Industrial and Development Bank of India (IDBI) in the year 1964. IDBI as a financial entity exceeded the expectations of not only industries but also RBI. IDBI within a decade fulfilled the role of a development finance company and expanded its base not only in the funding of large industrial or public sector undertakings, or PSU projects, but also short-term maintenance loans. In fact, according to the RBI history, the IDBI Act was amended in order to accommodate the scope of industrial concerns. Some of the criteria that were included in industrial finance were repair, testing or servicing of machinery, vehicles, tractors, etc. IDBI through this amendment was able to extend refinance facilities to state finance corporations (SFCs) and banks that provided assistance for setting up of industrial estates. According to narratives published in one of the issues of the Reserve Bank's history, the Big Daddy, aka RBI, was not too happy with the growing clout of IDBI. RBI had expressed its displeasure over the working of SFCs. It wanted to make SFCs financially viable and efficient. The issue was raised when IDBI was negotiating its second line of credit from multi-lateral agency the International Development Agency (IDA). RBI was not comfortable with this free-hand borrowing of IDBI. In one of the conferences of SFCs, the then RBI governor Jagannathan said "the World Bank's conditionality attached to lines of credit and measures of financial discipline stipulated by the World Bank were the ones that banks should be attaining in own interest. But by the late 60s, it was clear that RBI was losing its grip on the baby it had created. IDBI's de-linking with the central bank was proposed by the 'Administrative Reforms Committee'. In 1976, IDBI was de-linked from RBI and was declared an autonomous development bank. In 2004, IDBI converted itself into a full-fledged commercial bank.
Phishers bank on RBI mail address to bait victims
MUMBAI: In what is being described as an online shock for the Reserve Bank of India, cyber fraudsters masquerading as officials of the country's apex bank have started sending emails to unsuspecting citizens seeking their banking details. While it is still not known if people have actually taken the bait, the RBI has issued an advisory warning against responding to any such mails. The fraud came to light after several people reported having received a mail from the address update@rbi.org.in with the subject 'Important notice to all bank customers in India'. "Dear Account Holder, the Reserve Bank of India has introduced a new security update against online phishing in India. Download the attachment, select the bank you operate and update your account against online phishing," the mail read. Along with the mail is an attachment file and if anyone clicks on the attachment, he or she is directed to another page that has features similar to that of the RBI's official website, an official said. "To secure your credit/debit card, you are then advised to select the name of your bank and enter your information correctly," the official added. "Failure to match your details correctly may lead to permanent account suspension. The Reserve Bank of India apologizes for any inconvenience arising from this action," the mail warns. Alpana Killawala, Chief General Manager, department of communication said, "The RBI never asks for bank account details of any customer and we have not sent any such mails. The Cyber Emergency Response Team of India (CERT-IN), the central agency that monitors all government websites, has already blocked the website after the RBI issued the alert." "We appeal to the public to not respond to such mail or share their bank account details with anyone for any purpose," the RBI said in its alert put up on its website.Take Guard Those who have revealed their account numbers in response to the mail should immediately alert their respective bank. Bank officials should be told to keep them updated about any suspicious transactions through their account. Victims should approach the cyber crime cell of Mumbai police and file a complaint. Killawala said, "Those who have revealed their account numbers in response to the mail should immediately alert their respective bank. They should then also ask the bank officials to keep them updated about any suspicious transactions through their account. They can also approach the cyber crime cell of Mumbai police and file a complaint."
Rich Indians set their sights on properties abroad
April 10--WITH property prices in Mumbai soaring to record highs, many affluent Indians now find it more affordable to acquire a property abroad. Consequently, many rich Mumbai residents are buying properties in cities such as Dubai, Singapore and London, besides a few other locations. The Reserve Bank of India (RBI) under its 'liberalised remittance scheme' allows every resident individual to remit up to $100,000 a year for any current or capital account transaction, or a combination of both. Indians can acquire and hold immovable property or shares or any other asset outside India without seeking the RBI's prior approval. Of course, this facility is over and above the one relating to travel (private and business), overseas education and medical treatment.
Modi urges RBI to help expedite loan disbursals in Bihar
Deputy Chief Minister Sushil Kumar Modi today urged the Reserve Bank of India (RBI) to direct commercial banks to expedite loan disbursals in the state. At a meeting with RBI Deputy Governor Shyamala Gopinath, he informed her about the delays by commercial banks in distributing cheques for loans, including those under education programmes and Kisan Credit Card (KCC). Modi urged RBI to ensure monitoring of the functioning of commercial banks in Bihar and reviewing them regularly. He also apprised Gopinath about non-availability of banking facilities in two blocks - Ghatkutumba in Sheikhpura district and Ismailpur in Bhagalpur district. Besides, 14 other blocks do not have commercial bank branches. Modi asked RBI to strengthen the ''Lead Bank Manager'' in the state for providing better banking facilities. Gopinath assured the state government that the apex bank has given consent to the commercial banks to set up 148 new branches in the state in 2011-12, even as 461 new branches have already been set up across the state. Gopinath, at the same time, directed the state government to provide adequate security to the commercial banks'' branches in the state and set up a ''special battalion'' for the purpose.
Bihar
Financial literacy cell inaugurated at RBI Jaipur
Jaipur : The Reserve Bank of India on Wednesday inaugurated a Financial Literacy Cell (FLC) on RBI premises here. The cell is aimed at promoting financial literacy among citizens. Reserve Bank of India Executive Director V S Das said the cell would help in promoting knowledge about day to day banking transactions, financial proceedings, functioning of Reserve Bank of India and identification of fake currency etc. Reserve Bank of India has a number of programmes in place to promote financial literacy among citizens, including students. The new cell will also provide brochures and other written material on the concerned topic.
Friday, April 8, 2011
Legislation on RBI autonomy - S. S. Tarapore
The Financial Sector Legislative Reforms Commission (FSLRC) held its first meeting on April 5, 2011.The terms of reference of the Commission are wide and, although the term is two years, the task of the Commission is daunting. There are various aspects of autonomy. Some central banks derive their autonomy from traditions while others have legislative autonomy but do not have operational autonomy, and there are yet others that have neither legislative backing for autonomy nor operational autonomy by way of tradition. The Reserve Bank of India (RBI) belongs to this latter group. Central bank policies have to be broadly consistent with overall economic policy objectives, but within the overall framework, the central bank does need an element of operational autonomy. The present RBI Act is archaic and forecloses the effective discharge of responsibilities. There are many lacunae in the RBI Act but a few key drawbacks are set out below. While the government should have the right to appoint the Governor, the procedure should be akin to the appointment of the Comptroller and Auditor General of India, which is a Constitutional appointment. The Governor should have a single, non-renewable tenure of seven years. Such a long tenure is desirable as it would not be co-terminus with the electoral cycle. It would ensure that political economy considerations do not determine the appointment and tenure of the Governor. In the past two decades, the term of the Governor has been two or three years and extended by a year or two. The earlier tradition was a full five-year term (in the recent period there was one notable exception where the appointment has been a full five-year term). Although the Governor is not directly accountable to Parliament, increasingly, Governors are expected to appear before Parliamentary Committees. It would be best if there were a formal periodic deposition by the Governor before a Parliamentary Committee. Dismissal of a Governor should be only through a well-set-out procedure of Parliamentary impeachment, which should be strictly limited to personal malfeasance, bankruptcy or lunacy. The RBI Board members should be appointed by the Board itself, with one-third of the members retiring every four years and no member should have a total tenure of more than eight years. The appointment of Deputy Governors should be made by the RBI Board and there should be a single, non-renewable tenure of five years. This would avoid political patronage. Again, remuneration of the RBI officials should be determined by the RBI Board. The present impasse on the remuneration of RBI officials, being determined neither by the Pay Commission for government employees nor public sector units, is totally untenable. The RBI should not be treated like a poor relative of the system. There should be a requirement under the legislative framework that there should be an Agreement between the Government and the RBI as to the specific objectives of medium-term monetary policy with a clear prioritisation of objectives. This Agreement should be put in the public domain and any amendments should also be placed in the public domain, explaining the rationale for the changes. Once the objectives are set out, the RBI should have instrument independence on how to attain the objectives. There should be a provision in the RBI Act enabling the RBI to set up a Monetary Policy Committee (MPC). A large number of central banks have such a Committee as a legislative requirement. The MPC should be empowered to take decisions on key aspects of monetary policy. The MPC should consist of the Governor, the four Deputy Governors and four external experts, each with a four-year term. One fourth of the external experts should retire each year. The external experts should be remunerated as part-time top management officials. Decisions of the MPC should be by majority vote and the full minutes of the MPC should be put in the public domain after a stipulated period of time. The present Technical Advisory Committee on Monetary Policy is a poor substitute for a MPC with legislative backing and clear responsibilities and accountability. The Report of the RBI Advisory Group on Transparency of Monetary and other Financial Policies (2000) should be revisited by the FSLRC. Similarly, the RBI Board should be empowered by legislation to set up a Board of Supervision consisting of independent experts who should be remunerated as part-time top management. At present, penalties for violations of the regulatory framework are stultifying and are not effective deterrents. The penalties should involve a strong deterrent, such as twice the undue enrichment. The present system of handling financial frauds is permissive and there should be legislative requirements that these cases have to be brought to their logical end within a stipulated period. The Commission should arrange to have a comprehensive comparative study of central bank legislation in a large number of countries which would facilitate its work. There are many other areas where the RBI legislative framework needs to be revamped. The FSLRC has a long journey ahead, indeed!
Chaudhuri takes charge as SBI chief
Ending the uncertainty over senior appointments at State Bank of India (SBI), Pratip Chaudhuri on Thursday took over the chairmanship of the country’s largest lender. Chaudhuri succeeds managing director R Sridharan, who was the acting chairman after O P Bhatt retired on March 31. The government also issued notifications for the appointments of Diwakar Gupta, A Krishna Kumar and Hemant Contractor as managing directors. While Chaudhuri would be at the helm of affairs at SBI for two and a half years (he would retire in September 2013), Gupta’s term would end in July 2013. A Krishna Kumar would enjoy the longest tenure till, November, 2014, while Contractor’s would end in April 2014. Before taking over as chairman, Chaudhuri was deputy managing director, in charge of international operations. The immediate task for Chaudhari and the three new managing directors would be to finalise the bank’s balance sheet for 2010-11. A senior SBI official said Chaudhuri had already stated his priorities to his colleagues. These include improving the net interest margin, getting rid of orgainsational weaknesses, stemming attrition at entry levels and improve lending to agriculture.
Coop banks seek better interest rate regime, regulatory enviorn
Umbrella bodies of cooperative banks today met with the Reserve Bank and demanded deregulation of interest rate regime, besides better regulatory environment to work more effectively. The federations that met central bank Deputy Governor Subir Gokarn at the customary pre-policy meeting included the National Federation of Urban Cooperative Banks and Credit Societies, National Federation of State Cooperative Banks, Maharashtra Urban Cooperative Banks Federation, NBFC body Finance Industry Development Council, and Microfinance Institutions Network. The Governor Duvvuri Subbarao could not attend the meeting as he was indisposed. "We have demanded deregulation of the interest regime in the forthcoming annual monetary policy as in the current interest rate scenario we will continue to bleed. Today we are forced to lend at 7 per cent to the farm sector, while we are paying at least 9 per cent to our depositors. This situation just cannot continue," National Federation of State Cooperative Banks managing director B Subramanyam told PTI after the meeting. He further said the federation has demanded a higher interest subvention at around 4.5 per cent from the current 1.5 per cent. Earlier state cooperatives were getting 2 per cent interest subvention to tide over the borrowing-lending rate mismatch. But last year, RBI had brought it down to 1.5 per cent, he explained. The National Federation of Urban Cooperative Banks and Credit Societies president H K Patil said they have requested the apex bank to facilitate setting up of an umbrella body for them for coordination and growth. "Though the VS Das committee has clearly called for this nearly two years ago, the RBI is yet to come back to us with its views on the report," Patil said. The RBI has, however, agreed to expedite its reply, he added.
Regular meetings with nodal officers help banking ombudsman in Chennai trim complaints
The banking ombudsman in Chennai is taking measures to streamline the functioning and improve the effectiveness of this grievance-redressal machinery. The objective is to ensure that complaints of poor service from customers get addressed in the first instance at the local branch level and the regional level, and only escalated when this option fails. The ombudsman, after instituting regular meetings with nodal officers and senior management of banks, feels that most problems can be sorted out at their level itself. Currently, about 1,000 complaints come in every month to the ombudsman's office. With this mechanism (meetings with nodal officers), the number of complaints has reduced to about 700 a month. In 2009-10, the banking ombudsman in Chennai received the highest number of complaints in the country at 12,727, or 16 per cent of the total complaints, according to the Reserve Bank of India. From 4,585 complaints in 2007-08 it more than doubled to 10,381 in 2008-09, recording the highest number of complaints alongside Delhi. Mr S. Ganesh, who had taken charge as Banking Ombudsman Chennai - Reserve Bank of India last April, told Business Line that complaints are monitored on a daily basis to ensure that resolution happens at the earliest. “Greater focus has been made to trim down the complaints that have been pending for more than three months. With banks being compliant, it makes our job easier”, he said. Mr Ganesh said the awareness level among customers about banking ombudsman could be the reason for the highest number of banking-related complaints. He also said that the region has the least number of awards. Awards are financial compensation paid by banks due to their negligence, to the customers. The nature of complaints are no different from that seen across the country with credit cards and failed ATM transactions accounting for the largest number of complaints. This is followed by complaints related to loans and advances, remittance and pensions. There are few cases which may require excessive documentation which would have to be rejected, according to him. He said, “As we are not investigative authority, the customer can approach any other forum to solve this issue.” While the customer does not pay a penny to get his complaint redressed, the average cost per complaint borne by the RBI is Rs 2,368. The regulator incurs close to Rs 20 crore for running 15 ombudsman offices across the country.
NBFC representatives meet RBI officials, raise industry concerns
Reserve bank of India (RBI) officials on Thursday met representatives from non-banking finance companies (NBFCs) and associations of cooperative banks and discussed the current environment prevailing in the industry. In the customary pre-credit policy meeting, representatives from Finance Industry Development Council (FIDC), an association of NBFCs, met RBI Deputy Governor Subir Gokarn and raised concerns on recent steps taken by the central bank. Also present at the meeting were representatives from National Federation of Urban Cooperative Banks and Credit Societies, the National Federation of State Cooperative Banks, the Maharashtra Urban Cooperative Banks Federation and the Microfinance Institutions Network. A major concern taken up in the meeting was RBI's decision to increase the minimum capital adequacy ratio (CRAR) for deposit-taking NBFCs from 12 per cent to 15 per cent, thereby aligning them with non deposit-taking NBFCs. “The decision by the regulator to increase the CRAR was unwarranted. There are a lot of other requirements which the deposit-taking NBFCs have to comply with, like maintaining 15 per cent SLR. This is not required by non deposit-taking NBFCs. So, this decision was totally unnecessary,” said FIDC Director General, Mahesh Thakkar. NBFCs also demanded that a differential risk weightage system should be introduced for NBFCs to replace the current uniform risk weightage system. “We demanded that risk weightage to commercial auto loans be brought down from 100 basis points to 50 basis points. If this happens, only then can the NBFC sector absorb the impact of the hike in CRAR,” Thakkar said. Currently, all NBFCs have to provide a risk weightage of 100 basis points against all types of advances. The NBFCs also expressed concerns on the current liquidity and inflationary situation. “Though there are signs of liquidity easing, interest rates have to come down, as they are already eating into the margins of companies,” said an NBFC official. “We have demanded the deregulation of the interest regime in the forthcoming annual monetary policy, since in the current interest rate scenario, we would continue to bleed. Thursday, we are forced to lend at 7 per cent to the farm sector. But we pay 9 per cent to the banks. This situation just cannot continue,” National Federation of State Cooperative Banks Managing Director, B Subramanyam, said after the meeting. “Earlier state cooperatives were getting 2 per cent interest rate subvention to tide over the borrowing and lending rate mismatch. But last year, RBI had brought it down to 1.5 per cent,” Subramanyam added.
RBI may not extend liquidity support beyond April 8
The Reserve Bank of India (RBI) may not extend the additional liquidity support of 1 per cent Statutory Liquidity Ratio (SLR) and the second Liquidity Adjustment Facility (LAF) window beyond April 8. Bankers say the additional liquidity support is not needed as of now, as the liquidity pressure has eased. RBI had introduced these measures on December 18, 2010 and had extended the measures till April 8, 2011, citing tight liquidity conditions in its third quarterly review of the monetary and credit policy, in January. “Most banks, especially public sector ones, are currently holding excess SLR. Hence, there is no need to extend the facility,” said a public sector bank treasury official. He said the liquidity condition is expected to remain comfortable till June, after which the credit offtake usually picks up. “Now that the market is lending to RBI, these measures may not be needed at the moment. I don’t see liquidity pressures till mid-June,” said Moses Hardings, head, global markets, IndusInd Bank. Net LAF has been positive since the beginning of financial year 2011-12. RBI had provided the liquidity support to scheduled commercial banks under the LAF, to a maximum of 1 per cent of their net demand and time liabilities.
Banks fall short of RBI deposit growth target
Banks have failed to meet the Reserve Bank of India’s (RBI) deposit growth target 18% year-on-year in the last fiscal. The year-on-year deposits growth for the fortnight ended March 25 was 15.84% or Rs5,204,702.64 crore. The main reason for this, said bankers, was high inflation. “Deposits haven’t grown as projected because of tight money market position and inflation,” said Ramnath Pradeep, chairman and managing director, Corporation Bank. Analysts said banks are to blame too since they were tardy about growing deposits in the first half of the last fiscal because they were sitting on ample funds. They scrambled to mop up deposits in the second half when the liquidity began to tighten drastically. This meant banks had to increase deposit rates. In all, deposit rates rose 250 basis points in the last fiscal,” said Nitin Kumar, deputy vice-president, Quant Broking. Bankers feel low government spending and investor preference for other avenues also resulted in low mobilisation of deposits. “Deposit is not only a function of interest rates. Low government spending was also a reason,” said R K Bansal, executive director (retail banking), IDBI Bank. Bansal said despite good deposit rate hikes, some people preferred investing in equities or some other government saving schemes depending upon their needs.
Mahesh Coop Bank branch opened
Hyderabad: Mahesh Bank has opened its 34th Branch at Motinagar, Near Borabanda, Erragadda, Hyderabad. Sri Kasu Venkata Krishna Reddy, Hon’ble Minister for Co-operation has inaugurated the branch. Mahesh Bank is progressing well year on year and advised to extend a helping hand for upliftment lower middle class particulary needy of downtrodden sections society, he said. Sri A.S.Rao, RD, RBI, Hyderabad, Chief Guest of the function said that Mahesh Bank is expanding its presence at several centres and operating prudently everywhere. He further said the bank has never exhibited any inhibitions in extending customer service and through its redressal mechanism, corporate governance, expansion of outreach the bank has set up an effective customer service. He has also complimented the bank for having chosen the underbanked area like Motinagar to have its presence. Sri Manam Anjaneyulu, Hon.President, A.P.Co-op.Urban Banks & Credit Societies Association said that Mahesh Bank has stood as a model bank as several banks have been following it in terms of its discipline, adoption of technology and imparting training to staff. While the differences and the gap caused by globalization is fulfilled by UCBs, Mahesh Bank has been endeavouring for betterment of lives of lower middle and middle class sections of society of State. He requested the State Government and regulatory authorities to extend co-operation to the co-operative sector so that the UCBS can discharge the social responsibilities more effectively. At the same time, co-ordination is required in this direction among Government, RBI, Management and Staff. Mahesh Bank has become a part of growth story of urban banking sector of the State, Smt. Nanda Dave, GM,RBI, Hyderabad said. Among 106 UCBs under Hyderabad RBI jurisdiction, Mahesh Bank has shown an increasing trend in its profits and as well as in networth. It has occupied a rightful place in banking sector with its diversified customers, she stated.
Thursday, April 7, 2011
Mastercard Faces Domestic Challenge in India
The National Payments Corporation of India (NPCI) has finalized the commercial launch of the proposed India card which would be a domestic alternative to the global payment processing firms. MasterCard, the second largest global payment solutions company, provides a variety of services to support the credit, debit and related card payments of over 24,000 financial institutions. Given the size of India, this could have an impact on MasterCard's international transactions growth. Its main competitors are Visa, American Express and Discover Financial. Transaction processing, the major revenue source for MasterCard, constitutes about 32% of the $293 Trefis price estimate for MasterCard's stock. The Reserve Bank of India (RBI) in 2009, had asked the Indian Bank Association to launch a non-profit payment solutions company to meet the requirements of domestic banks. After almost two years of planning, NPCI has finalized the name of the proposed card as Rupay, which will launch later this year. The Rupay will resemble China's Union Pay, the domestic real-time payment processing firm for Chinese banks. RBI, in its vision paper on payment systems in India, said that the need for such a system arises from two major considerations: (1) the absence of a domestic price setter has caused the Indian banks to bear the high cost for affiliation with international card associations; and (2) the connection with international card associations resulting in the need for routing even domestic transactions, which account for more than 90% of the total, through a switch located outside the country.
Apex court notice to Centre, RBI in money laundering case against Lilawati Hospital
The Supreme Court today issued notices to the Centre and the RBI on a petition seeking probe into the alleged money laundering by the trustees of Mumbai’s Lilawati Hospital. A Bench comprising Justices Mr B. Sudershan Reddy and Mr S.S. Nijjar also sought response from the the Ministry of Corporate Affairs, Enforcement Directorate, Central Board of Direct Taxes and SEBI on a plea seeking investigation by appropriate agencies into the alleged tax evasion and money laundering by the trustees of the Lilawati Hospital. The petition filed by Delhi resident Harsh Raghuvanshi has sought investigation into the alleged siphoning of funds by the trustees – Mr Prabodh Mehta, Ms Rashmi Mehta, Mr Chetan Mehta and Mr Bhavin Mehta. Senior advocate, Mr Ram Jethmalani, appearing for Raghuvanshi submitted that the notice should be issued and all the respondents should be called upon to disclose facts which have come to their knowledge and steps taken by them against the trustees. The Bench tagged the petition with that of a petition filed by Mr Ram Jethmalani and others in which direction has been sought for bringing back the black money stashed by Indians in banks abroad. In the present petition also it has been alleged that the Mehtas have siphoned out money from the hospital and through the hawala route it has been deposited in banks abroad including Mauritius. It has been alleged that the money has been deposited in Liechtenstein Bank.
HC asks RBI report on banks’ malpractice
BANGALORE: Karnataka High Court on Tuesday directed the Reserve Bank of India (RBI) to submit the report on some of the banks deducting Rs 750 from customers' accounts for not maintaining quarterly balance.A petition had been filed in the court that some banks were wrongfully deducting Rs 750 from the accounts of customers who failed to maintain quarterly balance. The petition stated the bank was exempting those who draw more than Rs 1 lakh at a time if their quarterly balance was not maintained. The petition said only the poor found it difficult to maintain the minimum balance. The petition also said that some banks were charging penalty to customers even though they were repaying their loans in time. According to the RBI's report dated November 15, 2010, two banks have collected more than Rs 100 crore as penalty. On Tuesday, Karnataka High Court's division bench headed by Chief Justice J S Khehar directed the RBI to submit its report on the issue before the next hearing, which is on July 5. This came after the RBI requested the court for more time to submit the report. Earlier the RBI had submitted before the court that it had set up a special committee to study the issue and would submit the report in the court.
Govt clears name of Chaudhuri for the post of SBI chief
NEW DELHI: The government is believed to have cleared the name of Pratip Chaudhuri for appointment as SBI Chairman. Managing Director R Sridharan is officiating as the bank chairman now after O P Bhatt retired last month. Sridharan is due to retire in June, 2011. Chaudhuri joined State Bank of India (SBI) as a probationary officer in 1974. He became the deputy managing director (international banking) in April 2009. According to sources, the government has also cleared the names Hemant G Contractor, Diwakar Gupta and A Krishna Kumar for promotion as managing directors (MDs) in the bank. The three are now deputy managing directors. The search panel, headed by Reserve Bank of India Governor D Subbarao, had interviewed 4-5 candidates in December 2010. The SBI board comprises an executive chairman and two managing directors. After amendments to the SBI Act, the Government of India, which holds about 59 per cent stake in the bank, can appoint two more MDs. There is only one MD now in the bank against the provision of four. SBI commands about 25 per cent market share.
De-regulate interest rates on savings bank deposits
In a move reminiscent of the Bombay Club of industrialists who opposed the opening up of the economy in the early 1990s, bankers have almost unanimously opposed de-regulation of interest rates on savings bank deposits. They are, doubtless, wary of introducing yet an added element of uncertainty. However, administered interest rates are an anachronism when interest rates are essentially market-determined . There can be no justification for continuing with regulated interest rates whether on saving bank deposits or small savings like provident funds and national savings certificates. Despite this, successive governments and governors of the Reserve Bank of India have hesitated to pull the plug. More than eight years ago, the RBI had raised the issue in its April 2002 monetary policy statement. Only to defer the move! In its April 2006 policy, the central bank returned to the subject but once again opted to maintain the status quo; though it accepted that 'in principle, deregulation of interest rates is essential for product innovation and price discovery in the long run' .The need to reward savers (high household savings have been the prime driver of investment) and provide them with some stability in an environment where they have no social security is only part of the reason for the desire to maintain status quo. The main reason is the higher cost of funds that de-regulation is bound to bring in its wake. Savings bank deposits provide banks with a stable deposit base. Hence the mad scramble among banks for CASA or current and savings accounts. Once rates are de-regulated , it is quite possible competition will drive interest rates up; especially in a situation where there is a huge unsatiated demand for funds. Public sector banks , that have traditionally had a larger share of savings bank accounts thanks to their wider branch network, would be particularly hard hit. But to the extent deregulation will give individual banks flexibility to decide on savings bank interest rates even as greater competition could result in newer customised products being introduced , it is a goal we must work towards.
Wednesday, April 6, 2011
Twin cities get special force
Bhubaneswar, April 5: A special police battalion will now provide security cover to vital installations and VIPs in Cuttack and Bhubaneswar. The first batch consisting of 501 sepoys today participated in a passing out parade at the Urban Police and Traffic Training Institute in Bhubaneswar. Director-general of police (DGP), Manmohan Praharaj, said: “These personnel were provided advanced training for nine months.” They would be deployed at vital establishments such as residences of the governor and chief minister, state secretariat, legislative Assembly, Reserve Bank of India (RBI) in Bhubaneswar and Orissa High Court in Cuttack.
Reserve Bank of India penalises The Mehsana Urban Co-operative Bank Ltd., Mehsana (Gujarat)
The Reserve Bank of India, in exercise of powers vested in it under the provisions of Section 47A (1)(b) read with Section 46(4) of the Banking Regulation Act, 1949 (AACS), imposed a monetary penalty of `5.00 lakh (Rupees five lakh only) on The Mehsana Urban Co-operative Bank Ltd., Mehsana (Gujarat) The penalty was imposed for violation of Reserve Bank instructions on membership of co-operative societies, conduct of non-banking business, use of work "Bank" in the name of another institution and share linking norms. The Reserve Bank had issued a show cause notice to the bank, in response to which the bank submitted a written reply. After considering the facts of the case, the bank's reply and also personal submissions in the matter, the Reserve Bank concluded that the violation was substantiated and warranted imposition of penalty.
FII investment doubles since Dec'08; FDI grows gradually: RBI
NEW DELHI: Foreign direct investment (FDI) into India has grown gradually since December 2008, while overseas fund flow in the capital market have nearly doubled in the two year period, according to an RBI data. An analysis of the Reserve Bank data shows that since December 2008, FDI investment have grown from $ 125.2 bn to $ 198 bn in December 2010. Comparatively, portfolio investment, both in equity and debt securities, jumped from $ 91.6 bn to $ 171.7 bn in the aforesaid period. Experts said foreign investors are finding Indian securities market well priced and are preferring to put in money even as long term overseas fund in the form of FDIs are investing gradually. Growing from December 2008, FDI in India at the end of June 2009 stood at $ 145 bn, while increasing to $ 167 bn at the end of December 2009. It further grew to $ 178.3 bn in June 2010 and to $ 198 bn till December 2010. In sharp contrast, portfolio investment increased to $ 95.9 bn at the end of June 2009 and jumped to $ 117.2 at the end of December 2009. This was again followed by a sharp surge to $ 135 bn in June 2010 before touching the $ 172 bn mark by December 2010. FIIs mainly invested in equities, with their investments rising from $ 69 bn to $ 138.2 bn, while their investments in debt securities grew by $ 10.8 bn to $ 33.4 bn in two years. Meanwhile, the portfolio investments made by Indians in other countries grew from $ 0.6 bn to $ 1.1 bn, while the direct investments by them overseas rose from $ 63.3 bn to $ 92.4 bn during the period under review.
RBI admits to ‘new normal’ inflation tangle
Acceptance of higher inflation rate as the new normal will raise risks of accelerating inflation,” Subir Gokarn, Deputy Governor, Reserve Bank of India (RBI), said on Tuesday, adding the economy has to avoid the vicious circle of high inflation, low investment and slow growth. The economy should get into a virtuous cycle of low inflation, high investment and fiscal consolidation accompanying high growth, he said. Headline inflation stood at 8.31% in February after a gruelling year in which food inflation hovered close to double-digits. “Despite significant actions on policy rates and liquidity by the Reserve Bank of India, inflation remains high, giving rise to some very fundamental questions,” said Gokarn while speaking at the meeting of the national executive committee of FICCI. Highlighting on the need to tackle inflation Gokarn said, “India’s central bank cannot afford to be slack on inflation.” The current rate of inflation raises concerns about the risks of spiralling and may slow down the growth momentum, he said. “In essence, the trade-off is more between inflation now and growth in the future. The only way to keep food prices in check is to produce more than what people want to consume.” The RBI has already raised interest rates eight times since March 2010.
Bank CEOs oppose savings rate deregulation
MUMBAI: CEOs of large commercial banks have urged the Reserve Bank of India (RBI) not to deregulate interest rate on savings bank account. At a meeting between the chief executives of select banks and RBI Governor D Subbarao on Tuesday, most bankers vehemently opposed the move to deregulate savings account rates which is fixed at 3.5%, sources said. The meeting was a prelude to the central bank's annual monetary policy to be announced on May 3. The Reserve Bank of India has set up a committee to study the consequences of freeing up of savings rate. All interest rates except the rates on savings account are free now. Bankers told the governor that deregulation of savings rate could impact the stability of deposits. "These are uncertain times. There is uncertainty about inflation, interest rates and growth. Therefore, in such times, we have suggested that, perhaps , this may not be the right time to consider a deregulation in rates," said a banker present in the meeting. Recently, former RBI governor YV Reddy also opposed deregulation of savings bank account rate. "Many of the common people don't have time to apply their mind and shift money from savings to deposits, etc. So, for heaven's sake, give one banking instrument, one bank account where the man knows that this is the interest rate, this is the facility. This is required . I would even say, particularly , it is required for women in India whose money should be safe from their husbands ," Mr Reddy had said in a recent media interview. While expressing his reservation on deregulating savings rate, the recently retired chairman of the State Bank of India , Om Prakash Bhatt, said: "A bank may pay 1% or less for those account holders who have small deposits and 5% if they are willing to keep Rs 50,000 in savings account. This in turn will impact small depositors."
Monetary policy: Bankers urge RBI not to hike repo and reverse repo rates
Bankers present in Tuesday's meeting also urged RBI not to raise key rates - repo and reverse repo - on fears that borrowers may not have the appetite to pay higher rates on loans. Some banks also said they have not yet passed on the 25 bps hike in key rates in March to borrowers. The central bank has hiked repo and reverse repo rates eight times in the past one year to tame inflation. However, some bankers urged RBI to raise key rates to control inflation. India's headline inflation has remained above RBI's comfort level over a year now. The benchmark WPI rose to 8.31% in February from 8.23% in January. The latest weekly data showed food inflation at 9.5% in the week ended March 19, down from 10.05% in the previous week. Economists expect RBI to continue raising rates to keep inflationary expectations under check. Bankers have also asked RBI to give them time till June to restructure loans to MFIs. The central bank had given time till March 31, to reschedule loans of MFIs, while allowing them to classify it as standard assets. Banks have even told RBI that securitised portfolio sold by MFIs to banks should be allowed to be restructured under the same dispensation. During the meeting, RBI also raised concerns about steep rise in banks' loan to the real estate sector. Banks' exposure to the sector stood at 107,889 crore in the first 11 months of 2010-11, up 17% YoY. Bankers, however, felt their individual exposure has fallen in the past few months.
RBI Never asks for Your Bank Account Details
It has come to the notice of the Reserve Bank of India that mail has been sent in its name "inviting bank customers to update their bank account details against online phishing". The Reserve Bank has clarified that it has NOT sent any such email. It has further clarified that the Reserve Bank or banks never issue communication asking for bank account details for any purpose. The Reserve Bank has appealed to members of public not to respond to such mails and not to share their bank account details with anyone for any purpose.
More HK banks will set up ops if RBI issues licences: HKTDC
Mumbai, Apr 5 (PTI) The Hong Kong Trade Development Corporation (HKTDC), feels that more Hong Kong banks would set up operations in India if the Reserve Bank of India (RBI) issues licenses to foreign banks. "Presently, we have HSBC in India. We feel some more banks will be interested in starting operations in India if RBI permits banking licenses to foreign banks," HKTDC's Assistant Executive Director, Raymond Yip, told reporters here today. India is the second-largest market for Hong Kong as nearly 11 Indian banks have their operations here, he said. "With the economy reviving slowly, we are expecting a few more Indian banks to set up their operations in Hong Kong," he said. The HKTDC is also focusing on the Indian market for enhancing its imports and exports, he said. "We (India and Hong Kong) export and import pearls and jewellery at a larger scale as compared to other products. At the same time, India is emerging as an IT hub. Therefore, we are also looking at this sector as a potential trade destination for Hong Kong," Yip said.
Cardless banking with Aadhaar number may soon become reality
Some banks and the Unique Identification Authority of India (UIDAI), which is spearheading the ambitious Aadhaar project, are looking to allow customers operate ATMs armed with only their 12-digit Aadhaar number; the access will be facilitated by a biometric scan. New Delhi: Soon, it may be possible for customers to operate ATMs without cards. And, eventually, shop without credit cards. Some banks and the Unique Identification Authority of India (UIDAI), which is spearheading the ambitious Aadhaar project, are looking to allow customers operate ATMs armed with only their 12-digit Aadhaar number; the access will be facilitated by a biometric scan. Experts say the move could reduce cost of operations for banks and also reduce instances of debit card fraud. Even while UIDAI is still working to fine-tune the model, state-owned Corporation Bank is readying to implement the new model. “We will be launching this service in the next three-four weeks for our customers in Delhi,” said an official of the bank, asking not to be named. With a mere 58,000 Aadhaar numbers issued in Delhi (4.2 million have been issued across India), the number of customers using Corporation Bank’s service will be limited at first. But it will increase. UIDAI hopes to issue 600 million numbers by 2014. The number of credit and debit cards as on January stands at over 230 million in the country, according to the Reserve Bank of India (RBI); the issue cost of each card varies between Rs. 20 and Rs. 80. For cardless transactions to become a reality, customers will have to link their bank accounts with the Aadhaar number. At the time of enrolment, UIDAI is giving people the option of either opening a new bank account, which will be Aadhaar-enabled, or linking to an existing one. UIDAI has already done field tests in Jharkhand and is readying its infrastructure to support bulk transactions. “The servers and systems are currently being tested to see if they can take at least 100 million transactions simultaneously... UIDAI is working to ready them by July this year,” said an official familiar with the development, who did not want to be identified. Both the officials independently confirmed that the approval from the regulator is in place. “The Reserve Bank of India has given an in-principle approval for the plan, but the final go-ahead will be needed closer to the actual launch,” the second official said. “RBI’s main concern is safety... This will take care of all the safety aspects,” added the Corporation Bank official. “It is one of the safest ways to do banking... It will make sure that the right person is using the right account,” said the second official. The move to cardless banking will take quite some time. And the move to cardless shopping some more. That’s because banks will have to install a biometric reader in all their ATM machines and will also have to upgrade the applications on them to make them cardless. There were at least 43,000 ATMs across the country as of March 2010, according to RBI. Moreover, the core banking solution, through which banks integrate all transactions across branches, will also have to support the new model. According to Alpesh Shah, partner and director at Boston Consulting Group, the cardless banking model would have a large impact, but over the next three-five years. “Banks will have to upgrade their infrastructure, which may take a few years. So there will not be much impact in the next six months to one year. But over a longer term, once the concept catches on, it could change the way banking is done,” he said. A Union Bank of India official, who also did not want to be identified, said that while Aadhaar will provide sufficient authentication for transactions, it will take some time for banks to adapt to the new system and put in place the necessary infrastructure. Interestingly, UIDAI is hoping banks will rapidly upgrade their technological infrastructure as a sort of quid pro quo for pushing more business their way. The Aadhaar initiative will be facilitating the opening of several million new bank accounts during the enrolment process. UIDAI is already in the process of empanelling banks for this. Aadhaar has so far enrolled around 4.2 million people in the country and around 80% of them want a new bank account, according to UIDAI estimates. To make cardless banking work, UIDAI will have to link its servers at one end to the banks and on the other to the National Payments Corporation of India (NPCI). Each bank has its own financial switch, which is connected to the national financial switch (NFS). NFS facilitates routing of ATM transactions through connectivity between the banks’ switches. NPCI does the settlement under this network. “If banks agree on such a model, NPCI has no problems in switching the transaction,” said A.P. Hota, managing director and chief executive officer of NPCI. Cashless transactions at retail establishments pose a challenge. “A card is not built only for use in ATMs. It is meant to be used in other devices also, such as point of sale terminals used in retail outlets... So a bank cannot completely do away with issuing the card,” said an official at IDBI Bank Ltd, who did not want to be identified. UIDAI does have a plan to enable micropayments even at retail outlets through what it terms micro-ATMs, essentially low-cost hand-held devices with a fingerprint reader.
Liquidity surplus banks park Rs. 31,000cr with RBI
The beginning of the new financial year 2011-12 has witnessed some radical improvements in liquidity scenario in the system. For the first time, almost over a year the banks have parked surplus liquidity to the tune of R31,000 crore in the reverse repo window of Reserve Bank of India. RBI's reverse repo window pays 5.75% to the banks. The rates for certificate of deposits (CDs) also softened on Tuesday. One-year CD fell by almost 30 basis points from 9.70% to 9.40% on Tuesday. Till March end, banks had been borrowing consistently from the RBI's repo window, which has varied from over R50,000 to R1,000 crore. Banks have raised resources through high cost deposits and certificate deposits in the past. MD Mallaya, CMD of Bank of Baroda, said that the exact liquidity situation is likely to be good in the future. “By and large, we have entered the phase of slack season when credit demand will be less and government spending has already happened in March. Interest rates are to remain stable for now. Accretion of deposit shouldn't be a challenge in future,” he said. On whether RBI will take measures to suck out liquidity, he said, “It is too early for RBI to take a view on the issue. It will depend on overall macroeconomic conditions.” M Narendra, CMD of Indian Overseas Bank, said the sudden surplus may be happening as banks might have done it in a bid to go for pending deployment of credit. Few banks may go for deposit rate cuts too, he said. “But, such surplus may not continue further. Still, it is not indicator enough for RBI to take measures to suck out the surplus liquidity,” he said. SC Kalia, executive director of Union Bank of India, said it looked like liquidity crunch should not be any issue now. During the year, a lot of deployment of funds took place on short-term basis. The surplus of liquidity was also due to the redemption pressure on MFs. “When those funds are coming, there will certainly be liquidity surplus with banks. Liquidity may be at comfort level, but not that much surplus so that it would lead to RBI taking measures to suck out liquidity,” he added. D Sarkar, ED of Allahabad Bank, said that liquidity had improved now as lots of government funds had been released recently. “At the moment we don't feel there is any need to go for cut in deposit rates,” he said. Net liquidity injection through LAF declined from an average of R93,000 crore in January to R79,000 crore in February 2011, and further to R68,000 crore in March mainly due to increase in government spending and consequent decline in government cash balances with RBI. D Subbaro, governor of RBI, had said going forward, the overall liquidity situation is expected to move close to the comfort level of the RBI.
Inflation may hurt investments, growth: RBI
MUMBAI: The Reserve Bank of India has probably, for the first time in many years, said that inflation may 'spiral' out of control, hurting investments and economic growth. This is an indication that policy rates will keep rising till it re-creates an atmosphere for sustained growth. "The current rate of inflation does raise concerns about the risks of spiralling, as high inflation becomes increasingly entrenched into the wage and price-setting behaviour of workers and producers," Subir Gokarn , deputy governor at the Reserve Bank of India, told an industry conference. "In turn, if this were to adversely impact investment activity, the growth momentum would inevitably slow down. In essence, the trade-off is more between inflation now, and growth in the future," Mr Sbir Gokarn said. India's inflation that started climbing due to food prices two years ago and is fast spreading to all parts of the economy. That is forcing wage-earners to seek higher salaries and is triggering product price increases. Wholesale prices rose 8.31% in Feburary, above the RBI's 8% target that was revised many times. Food inflation was at 9.5% for the week ended March 19. RBI raised rates eight times in 13 months to 6.75%, but the negative real return continues. "It signifies the extent or magnitude of the spill-over of higher food and oil prices to generalised inflation," said Deepali Bhargava, chief economist at ING Vysya Bank . Central bankers, inspired by former US Federal Reserve chairman Alan Greenspan, are careful in their diction to describe the state of the macro economy. The RBI has been gradually moving to accepting that price rise is now widespread, after arguing that monetary policy is ineffective in tackling supply-side induced inflation. In the last few quarters, it shifted to saying that supply side is 'spilling over' to manufacturing that could keep inflation at elevated levels. Economists tracking the central bank say, this may be first time that the word 'spiralling' is being used by a top central banker. It could not be confirmed. Inflation is threatening to plunge economies into crisis. China raised interest rates for the fourth time since the crisis ended, and US Fed chairman Ben Bernanke and Jean Claude Trichet of the European Central Bank are joining the chorus about the destabilising effects of price rise. "We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability," Ben Bernanke said on Monday. The desire for above average economic growth may force people to live with higher prices for a sustained period. "Acceptance of a higher rate of inflation as the new normal - an inevitable consequence of rapid growth - will raise risk of accelerating inflation," said Gokarn. "If in fact, the contribution of investment spending to growth is declining, the constraints can only become more binding, further aggravating inflationary pressures." Crude oil prices near $120 a barrel and copper, lead and silver prices at historic highs could accelerate further as investors losing faith in paper currency chase real assets.
REVISED TAKEOVER CODE, JALAN COMMITTEE REPORT FACE DELAY
It is now clear that the revised takeover code and the Bimal Jalan committee report will not be implemented soon and in the same form, since the finance ministry wants to seek industry views on these two sets of recommendations this month, before the market regulator could take a decision. A section of industry has criticised the Jalan panel report for its opposition to listing of stock exchanges and the revised takeover code recommendations for making acquisitions costlier, among other issues. It was expected the two issues would be on top of the agenda of new Securities and Exchange Board of India (Sebi) Chairman U K Sinha. While the capital markets division in the finance ministry would hold consultations on the Jalan panel report, Chief Economic Advisor Kaushik Basu would have interactions on the revised takeover code. Both would happen this month, officials told Business Standard . In a clear indication that the Jalan panel report might be tweaked, a key official said, “Nowhere in the world are reports suggested by committees implemented in toto.” A committee set up by Sebi on the takeover code had recommended raising the trigger for open offer to 25 per cent from the current 15 per cent. A panel headed by the former presiding officer of the Securities Appellate Tribunal (SAT), C Achuthan, also proposed to raise the statutory open offer size to 100 per cent. The proposal on 100 per cent open offer may make it difficult for local players to fund the acquisition. As such, the local players may be placed at a disadvantageous position vis-avis foreign ones, said Equity Head of SMC Global Research Jagannadham Thunguntla. The Bimal Jalan committee on ownership and governance of market infrastructure institutions has recommended that exchanges should not be allowed to list, a ceiling should be put on their profits and dividends, and the role of anchor investors should be limited to only domestic players. A section of industry has criticised the report as anti-competitive. When asked whether the government has some concerns on the revised takeover code, Basu said, “At the moment, I have an open mind.” The chief economic advisor said he would shortly decide who should be invited for consultations.
Banks Mean Business, Inclusion Long Way off
RBI’s latest release of ‘Statistical Tables relating to Banks in India’ is quite revealing when we juxtapose FY00 and FY10 data. We’ve had several measures that have been invoked under financial liberalisation while a lot has also been spoken of on inclusion to add a social dimension. How has this model worked? The study of data over these 10 years has some interesting stories to tell. Three aspects of banking development could be looked at: banking structures, business profile and financial performance. Under banking structures, the growth in network increased from 67,532 branches to 87,768. However, the share of rural branches came down from 48% to 37% while that of urban and metro increased from 30% to 40%. Quite clearly, banks have been going to places where there is business. Simultaneously, the staff strength came down by around 14% to less than a million i.e. 869,412 (FY09). Banks have effectively used technology to replace surplus manpower. The business profile reveals that deposits remain the main source of funds, accounting for 79% of total liabilities as against 80% in FY00. Second, term deposits continue to be around 65% of deposits and there has been virtually no change here. Third, surprisingly, households have become less important for banks in terms of garnering deposits with their share going down from 67.6% in FY00 to 58.3% in FY09. Banks evidently prefer to raise bulk deposits from corporates which have lower transaction costs and are easier from the point of view of ALM considerations. This also reflects household’s preference for stock markets and insurance products and corporate proclivity for parking funds with banks through the CD markets, which is a sign of a mature banking system. On the lending side, some discernible patterns have emerged. To begin with, the share of term loans has gone up from 36.5% in FY00 to 57.4% in FY10, which may be attributed to the demise of development banking with banks taking on the role of long-term lending. Second, the share of priority sector lending remains at around 31% and banks have just about met their targets and have not really followed the inclusive model. Maybe, there is a very critical role for MFIs here. The fact that NPAs in this sector tend to be higher could be a reason for not converting enthusiasm into action. Third, the level of concentration in loans is unchanged and Maharashtra and Delhi still account for around 42% of credit, which is reflective of the demand coming from the more industrialised states where business is higher. Fourth, the sectoral distribution of credit has also changed. In terms of share in total credit, professionals (3.2% to 9.8%), personal (11.2% to 12.7%), finance (4.8% to 8.5%) have been gainers while trade has come down from 15.6% to 10.7%. The success of banks in terms of financial performance has been quite amazing. Profits, which were never really very important for public sector banks, have seen a turnaround. The return on assets has increased for the entire sector from 0.73% to 1.05% in FY10, after peaking at 1.12% in FY08. This is remarkable at a time when the base of total assets has quadrupled from . 15.16 lakh crore to . 60.25 lakh crore. Return on equity, however, has been more volatile. The increase in base of net worth explains most of this phenomenon. Third, despite interest rates coming down on account of RBI policy on both deposits and advances, the spread has remained rather stagnant. Such high spreads are atypical of mature banking systems and may be attributed to a combination of higher risk in the system as well as operating expenses. Intermediation costs have been coming down from 2.68% of total assets to 1.80% in FY10.Last, gross NPAs have come down from 12.8% to 2.5%. So, how does one evaluate the performance over this decade? Banks have been driven by commercial considerations as witnessed in improved financial performance and proliferation of banking structures towards centres and sectors of growth. Intermediation costs have to be improved upon and one vital missing link in banking ideology which has to get excluded is the 'inclusive nature of banking'. Quite evidently, new innovative models have to be built aggressively if we are really serious.
Kamath takes over as CMD at Vijaya Bank
HS Upendra Kamath took charge as the Chairman and Managing Director of Vijaya Bank, succeeding Albert Tauro who has retired from service. Kamath, who has 37 years of experience in the banking sector, was previously the executive director at Canara Bank. He is considered an expert in areas such as corporate finance, SME finance, risk management and international operations and has been a member of committees of the RBI and Indian Banks Association such as the working group on Benchmark Prime Lending Rate and the committee on retail banking.
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