Fees will go up, track what you pay

With the cost of funds increasing, banks will fill the gap through fees charged from customers

The Indian banking industry has grown at least four times in the last 10 years. One of the major factors that adds to its income stream, along with interest income, is a steady increase in income from fees and commissions that is charged from the customers.  Over the last five years, fee income as a percentage of total income has progressively risen for a number of banks. For instance, Axis Bank Ltd’s fee income as a percentage of total income is up from 13% in 2007 to 17% in 2011. Similarly, for IDBI Bank Ltd, it has grown from 3.5% in 2007 to 7% in 2011. Changes in the latest credit policy by the Reserve Bank of India (RBI) will impact your net earnings (interest earned and paid and charges) from banks both directly and indirectly. With the latest increase of 50 basis points (bps), the repo rate has increased 200 bps since April 2010. This means higher interest rate on loans as well as deposits. In the last credit policy, RBI also increased the savings account deposit rate to 4%. While hike in deposit rates bodes well for customers, it increases the cost for banks. All put together, banks are likely to see tighter margins. Says K.C. Jani, executive director, IDBI Bank Ltd, “In an environment with higher interest rates, cost of funding increases and companies think twice before borrowing; this trend affects all banks.” Says Gaurang Shah, assistant vice-president, Geojit BNP Paribas Financial Services Ltd, “Credit policy is expected to remain hawkish for the rest of the year and may see another 50-75 bps hike in interest rates in FY12.”  In this scenario, where net interest margins are under pressure, there is merit for banks to look towards fee income to fill the gap. According to a recent report on the banking sector by Ambit Capital Pvt. Ltd (along with its affiliates it is a full service integrated investment bank, investment advisory and brokerage group), HDFC Bank Ltd, which generates consistent fee income and has core fee income at over 2% of loans, is less dependent on interest rate movement and is relatively better insulated from interest rate risk compared with other banks. According to Shah, approximately 25-30% of fees come from the retail segment.

What it means for you

Higher credit cost: As mentioned earlier, you will have to shell out more on loans you take, owing to hike in interest rates. This will be offset, to some extent, by higher deposit rates. Base rates for loans have increased around 200 bps since last year. For example, Union Bank of India has increased its base rate from 8% to 10% and ICICI Bank Ltd’s base rate is up at 9.25% from 7.5%.

Higher outflow on charges: Jaimin Bhatt, chief financial officer, Kotak Mahindra Bank Ltd, doesn’t expect much pressure on margins as increase in costs can mostly be passed on to customers. In other words, the banks may try and increase their income through the fees it collects on various counts. Says Shah, “In an attempt to offset the negative impact on interest income, banks will concentrate on enhancing other sources of income.”  It will become difficult to negotiate your fees on loans and credit cards. Says Pathik Gandotra, head (broking), IDFC Securities, “Credit-linked fees for customers are going to look higher. A couple of years ago such fees got competed out of the market, but are back now—customers will have to pay more.” Banks will not want to forgo any part of the fee income, which means the bargaining power that customers had a few years ago will cease to exist.

Know what you are paying for

With banks’ focus on fee income, it is of immense importance for you to know the precise fees involved in any relationship you may start with a bank. Says Bhatt, “Any change in retail fees would depend on competition in the market, customer acceptance and what other companies are doing.”

Savings account: As we move closer to a system with a deregulated savings rate, you may find a simultaneous increase in service-related fees from banks. With increase in savings account costs, banks are likely to be more vigilant in managing them. Says Gandotra, “Deregulating savings rate may mean that fees on maintaining the accounts will go up. The regulator will have to be more comfortable with higher fees from customers.”  There is likely to be some amount of innovation in products and charges. We may see different types of savings accounts and may see them being linked to usage. Bhatt says, “We operate in a dynamic market, will have to see how things change in this market. If indeed margins come lower, we’ll have to see the market conditions at the time to decide on increasing fees to compensate.”

Read fee detail carefully: These charges can be in the form of non-maintenance of minimum account balance, charge on the number of transactions at a branch (beyond a fixed number) and account-closing charges, among others. Keep an eye for all such account-related charges and any gradual increase.  Also watch out for any growth in credit-linked fees, such as processing charges, late payment of equated monthly instalments, prepayment and foreclosure charges and credit card finance charges. If you’re one who has a car loan, home loan or even personal loan, look out for charges on prepayment, processing, and duplicate loan certificates.

Customer protection

As fee income is rising, so are complaints about excessive charges. Keeping such complaints in mind, RBI had asked the Indian Banks’ Association (IBA) last year to form a committee to look into the issue of unreasonable charges. Says a senior officer of IBA, who did not want to be named, “The committee had met and then a higher committee also met but it was not feasible for banks to do anything (about charges). So the status quo remains.” RBI had also formed a committee under the former chief of Securities and exchange Board of India, M. Damodaran, to look into customer service in banks. The committee, which was formed last year, is yet to submit it’s proposal. Says, Ashok Rawat, honorary secretary, All-India Bank Depositors’ Association (Mumbai), and one of the members of the committee, “The report is ready and should be submitted to RBI in around 10 days. Once RBI reviews the report, the details will be out, but customers can expect some positives as far as service charges go.” While the regulator does its bit, you need to keep your eyes and ears open to protect yourself against unreasonable charges.

Mint

No time to pause yet, rates may go up

At this juncture, RBI should go ahead with its agenda of fighting inflation as by its own estimate it will continue to remain high, around 9% till September, and hike the policy rate..........

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RBI move on foreign banks

The RBI perhaps has taken a cue from its insurance counterpart, the IRDA which right from the inception has been steadfast in its belief that foreign insurance companies can operate in India only through their subsidiary companies.....

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Inflation challenge

So far inflation, despite aggressive monetary signals from the apex bank, has remained stubbornly high

The release of the Wholesale Price Index (WPI), which measures headline inflation, on Tuesday will be a key statistic that the Reserve Bank of India will consider ahead of its policy review meeting on 16 June. So far inflation, despite aggressive monetary signals from the apex bank, has remained stubbornly high. Analysts do not see any early reversal in the trend, especially given that the long-pending increase in diesel prices could soon be implemented. At the same time, the growing cost of capital is squeezing fresh investments and is now threatening the growth trajectory of the economy. Clearly, the debate on inflation versus growth is poised to get more contentious.

Mint

BIS chief seeks a holistic policy to financial stability

........ as in some cases central banks' duties and powers to promote financial stability were being enhanced, they would need to be “careful not to undermine price stability mandates........

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India’s wobbly regulators

Former Sebi chief C.B. Bhave was keen to introduce the IDR to add depth and class to Indian market, but the current thinking of the regulator seems to be different

Early this month, the Securities and Exchange Board of India (Sebi) effectively killed the Indian depository receipts (IDRs) market by saying it will not allow fungibility of frequently traded IDRs. Both Sebi and the banking regulator may have viewed fungibility as a backdoor route to capital account convertibility and hence opposing it, but this position should have been clarified a year before allowing Standard Chartered Bank (StanChart ) to float its IDR. Redemption of IDRs after a year will only be permitted if they are infrequently traded and since StanChart IDRs are not infrequently traded by Sebi definition, the IDR holders will not get a chance to convert them into underlying shares. For all practical purposes, StanChart IDR will be the first and last IDR. Former Sebi chief C.B. Bhave was keen to introduce the instrument to add depth and class to Indian market, but the current thinking of the regulator seems to be different. This is not the first instance of Sebi taking a U-turn on policy issues. Recently, it has reversed its stance and agreed to keep its surplus funds in the so-called Consolidated Fund of India or government accounts. Bhave was in favour of holding surplus funds with itself. Even flak from the Comptroller and Auditor General of India could not force him to change his stance as he strongly, and possibly rightly, felt that the independence of regulatory bodies will be compromised if they have to rely on the government for funds. The Sebi board has also not cleared yet the new takeover code as the government apparently has certain reservations about it. What is more surprising is Sebi’s reluctance to act on the recommendations of the Bimal Jalan committee on market infrastructure institutions. It constituted the committee in December 2009 to take a close look at the role of market infrastructure institutions that has been continuously evolving to meet the challenges of the emerging securities market. As lobbying and counter-lobbying by exchanges intensified to influence decision on the controversial report, Sebi has abdicated its responsibility and left it to the ministry of corporate affairs to take a call on this.  

One can see a definite pattern in this space where regulators are increasingly becoming committed to the government and, given a chance, would not like to take decisions in critical policy matters even those falling within their domain. We have seen the Reserve Bank of India, too, behaving in this manner. It is not willing to release the licensing norms for new banks unless the finance ministry clears it even at the draft stage. Nobody should blame the government for curbing regulators’ autonomy when regulators themselves are not willing to exercise it.

Mint

Policy of pusillanimity

The price of the overall faint-heartedness, both in the government and in the RBI, will have to be paid by the economy

The Chief Economic Advisor, Dr Kaushik Basu, has, in a straightforward statement, suggested that if the Reserve Bank continues to raise the price of money, the industrial growth rate will slow down even further. The Reserve Bank of India (RBI), on the other hand, is pretty clear in its mind that inflation control is its main objective. This is not a new divergence. Nor is it a peculiarly Indian one. The conflict between inflation and growth is a very old one. But what is new this time is the clumsiness with which the government, on the one hand, and the RBI on the other, have gone about resolving it. That India was getting into a growth-induced inflation was known to the RBI since at least mid-2007. At that time, the government did not allow it to act. A year later, just before the parliamentary vote on the nuclear bill, when the government was unsure about its prospects and thought that there might be a general election in 2008 itself, it forced the RBI to raise rates steeply. Then, when the danger passed, it reversed its stand even though there was no evidence that inflation was abating. Since then, partly driven by the need to attract foreign capital inflows to sustain the current account and partly because the Prime Minister had a dream of achieving 10 per cent growth under his watch, the RBI has followed a policy of pusillanimity. The result was a blind embrace of the strategy of baby steps, which the market discounted weeks before it was announced. Inflation roared on and, in the last quarter, the RBI suddenly shifted gears and gave up the baby steps policy, perhaps a year too late. But now that the higher price of money has begun to affect investment, the government, which always wants to have its cake and eat it, is getting jumpy. It knows that the current bout of inflation in India is not originating in the manufacturing sector but in agriculture. The reason for this is staring everyone in the face: whereas the industrial sector has been subject to persistent reform since 1991, including having to face up to import competition, reform in agriculture has remained a gleam in the eyes of some diehards. The political imperative behind this inaction has meant that the entire burden of getting inflation down has fallen on the industrial sector, especially since global commodity prices have also started to come down. The RBI will now have to do the best it can. One could have felt some sympathy for it but not any longer because it failed during 2009 and 2010 to stand up to the government. The price of this overall faint-heartedness, both in the government and in the RBI, will have to be paid by the economy. Truly has it been said that when elephants fight, it is the grass that gets trampled.

Business Line

RBI may hike key rates 25 bps

“Rate hikes by the RBI since March have done nothing to bring down food price led inflation. Now, the focus has shifted to fuel price inflation. But monetary policy action alone cannot address either food or fuel.....

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RBI price survey

Households across the country believe the rate of price rise will go up to almost 13 per cent by March 2012, contrary to the RBI contention that inflationary pressures will moderate by the second half of this fiscal. In the RBI’s ‘Inflation Expectations Survey of Households: March 2011’, urban households have said inflation is likely to touch a high of 12.7 per cent within a year.

The Telegraph

‘The market has already priced in one more hike by RBI’

.....However we believe that RBI may want to further tone down high inflationary expectations and thus hike the rates by 25 basis points The market has already priced in one more hike by RBI...

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RBI is doing the right thing by raising rates - MICHAEL PREISS/STANDARD CHARTERED

UNTAMED INFLATION MAY FORCE RBI GOVERNOR’S HAND

 

Subbarao may Wield Rate Sword Yet Again

The Reserve Bank of India may raise policy rates for the tenth time in 15 months to curb prices as inflation management outweighs concerns over a slowdown in economic growth and sliding corporate profits. Governor Duvvuri Subbarao, who raised rates double of what his advisors recommended on May 3 to silence critics he was behind the curve, may increase policy rates 25 basis points during the mid-quarter review on Thursday. A basis point is 0.01 percentage point. “Monetary policy can affect systemic risk through the asset price channel,” Subbarao said last week. “Interest rates represent the opportunity cost of holding assets and an accommodative monetary policy can influence credit expansion for financing asset purchases. Should this happen in times of excessive optimism, it can lead to asset price bubbles threatening systemic stability.” All but one of the 13 financial institutions polled by ET say the repo rate, the rate at which the central bank lends to banks, may rise to 7.5%.  The reverse repo, the rate banks receive for parking surplus funds with the RBI, may go up by a similar margin to 6.5%. IndusInd Bank is the lone voice that said Subbarao may pause. “Inflation continues to be a worry and we cannot afford to be behind the curve,” said Pradeep Madhav, MD and chief executive at primary dealer STCI, forecasting a quarter-point increase. Subbarao last month abandoned his year-long ‘baby step’ approach, promising to persist with anti-inflationary stance. He raised repo rate by 50 basis points when most of his advisors suggested a 25-bps hike. Pundits, who initially argued that price rise was due to food items which could not be controlled by monetary policy, made a U-turn when it spread to manufacturing goods that is now threatening economic growth. “The focus is on commodity prices, especially oil, and they are not showing any signs of easing,” said Manish Wadhawan, director and head (interest rates), global markets, HSBC in India. “Even the data seem to be conflicting ... industrial production, exports and imports, PMI data are still hinting towards sustained recovery, albeit at a mildly lower pace. Overall the economy is still growing at a healthy rate. In that context, the RBI is expected to continue with its stance in coming months,” said Manish Wadhawan. Stubbornly high prices of crude oil above $100 a barrel and the likely impact of that on inflation when the government passes it on to consumers may play a dominant role on the rate decision. Inflation is expected to remain at an elevated level of around 9% in the first half of the year, before gradually moderating to 6% by March 2012, the RBI has said. The central bank has forecast a 20% loans growth this fiscal and 18% deposit growth, with the economy growing at 8%. Spiralling of commodities prices over the past year has led to higher prices for many products leading to a slowdown in demand, including automobiles. Growth in sales of cars and durables such as televisions and refrigerators has slumped to two-year lows and the sliding value of the rupee is forcing people to seek higher interest rates on their bank deposits. An inflationary expectation survey by the RBI says that people in Bangalore and Jaipur think it may touch as high as 16% and on an average it may rise by 1.2 percentage point. “Daily-wage workers and housewives expected higher inflation rates compared to other categories,” said the survey. Food prices are climbing after a brief lull with wholesale agricultural prices gaining 9.01% in the week ended May 28, from a year earlier. Food could become more expensive with the government raising minimum prices for rice and oilseeds. Overall inflation as measured by the wholesale price index has been over 8% for 16 months. But companies are complaining that rising interest rates are hurting sales and that policy actions till now are having desired impact. The government, which usually benefits from higher inflation, is seeking a halt to rate hikes. “The RBI will have to balance its monetary policy tightening in view of growing concerns, particularly in consumer goods front, where higher interest rates are impacting demand,” said Kaushik Basu, chief economic advisor to the finance minister. Industrial production growth slowed to 6.3% in April from a year earlier following an 8.8% expansion in March after the base year was changed to 2004-05. Manufacturing grew 6.9% in April from a year earlier after a 10.4% gain in March. Gross domestic product growth fell to 7.8% in the quarter ended March 31 from a year earlier, the weakest in five quarters. But international trade has been robust with trade deficit touching a four-year high at $15 billion, which Commerce Secretary Rahul Khullar said was “disturbing”. “The high input costs and borrowing cost have impacted growth momentum without any kind of relief on inflation despite the RBI’s hawkish stance on rates and liquidity since March 2010...the RBI has to shift to pause mode till July/October monetary policy and await fresh cues thereafter,” said Moses Harding, head (global markets), IndusInd Bank.

ET

‘Credit growth is likely to be around 19-20% this fiscal’

The Indian banking industry is going through a phase of business consolidation and introspection. With RBI continuing to raise interest rates to cool prices, a slowdown in demand for loans is expected. This could adversely affect............

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Markets hope for some rate relief after Thursday's policy

The market has already factored in a 25 basis points (bps) increase in key policy rates on Thursday, when the Reserve Bank of India (RBI) announces its mid-quarter review of the monetary policy.  But with interest rates already shooting through the roof, bankers expect RBI to press the pause button after that.  With inflation staying above RBI's comfort zone, economists and bankers said it was likely to further tighten the policy. "We are expecting a 25 bps increase. The market is divided between a pause and a 25 bps increase. There are some people who feel the slowdown is acute enough to reassess the strategy of tightening monetary policy,&" said Samiran Chakraborty, regional head of research, Standard Chartered Bank.  Driven by higher fruit prices, food inflation for the week ended May 28 was at a two-month high of 9.01 per cent. The figure was 8.06 per cent a week ago. The headline inflation, reflected in wholesale price index, rose 8.66 per cent in April. The government will release the May inflation number on Tuesday. The expectation of a pause in the rate increase cycle is gathering steam as supply factors have been the main inflation drivers.  "Interestingly, at our investor conference, RBI Deputy Governor Subir Gokarn admitted that while the current drivers of inflation (food/commodity prices) were outside the purview of the monetary policy, RBI's aim was to contain the pass-through of higher prices through demand management,&" said Rohini Malkani, chief economist, South Asia, Citigroup Global Markets.  RBI has raised key policy rates eight times in 2010-11. It increased rates by another 50 bps in May this year to combat inflation. The country's gross domestic product growth slipped to 7.8 per cent in January-March, the slowest in the last financial year, as high rates and input costs dragged down manufacturing sector growth to a 21-month low.  Growth in industrial output slowed to 6.3 per cent in April from a year ago under the new series, which takes 2004-05 as the base year. The index of industrial production grew 8.84 per cent in March.  "There could be a maximum 25 bps rate increase on Thursday. I think there will be a pause after that. Otherwise, growth may be seriously affected. Inflation is also expected to come down. A normal monsoon has been forecast, which will ease food prices,&" said M Narendra, chairman and managing director, Indian Overseas Bank.  Bankers said while loans would become dearer if policy rates were increased, any further increase in deposit rates would happen with a lag. "Deposit rates have already gone up. Margins are under pressure. There will be no other option but to increase lending rates,&" said Ramnath Pradeep, chairman and managing director, Corporation Bank. He admitted this might slow credit growth. Credit growth for the banking system was 22.3 per cent year-on-year for the fortnight ended May 20. Deposits grew 17.5 per cent in the period.

BS

Banks told to follow security norms

WELL DESERVED

N.S. Vishwanathan, Regional Director, RBI (right), giving away Life Time Achievement Award to

N. Vittal, former Chief Vigilance Commissioner,  at a workshop in Chennai on Saturday. P.W.C. Davidar, the other awardee, is in the picture

CHENNAI: The Reserve Bank of India is serious about the security guidelines provided by it to nationalised banks and is keen that they implement them properly, said N.S. Vishwanathan, Regional Director, RBI, Chennai, here on Saturday. Speaking at a workshop on ‘Cyber Crimes: Safe and Secure e-banking', organised by the Cyber Society of India and Computer Society of India, Mr Vishwanathan said that the RBI was closely monitoring, whether the banks were strictly implementing the guidelines. In February 2001, the RBI released its information technology vision document, one of the components of which was the introduction of core banking system, which offered new opportunities and rendered best services to the customers, he said. Another example of the system was the mobile alert to customers. Whenever account holders used credit or debit card, they would get a message on their mobile about the amount spent or withdrawn. Similarly, the RBI had insisted that the banks keep the customer-related information confidential, which was one of the major initiatives of the RBI. Introduction of a second password for online transactions was another important directive of the RBI. This was introduced after a lot of deliberations with the banks. The official website of the RBI carries two or three notifications every day, he said. Last year, the RBI constituted a committee to look into governance, information security, access control and accountability. Mr. Vishwanathan said governance was very critical. A proper segregation of duties was necessary for good governance. As far as information security was concerned, bankers had to take into account various aspects such as quality of data, accuracy and usability of data. Accountability could be achieved through internal audits and they could check whether the controls were in place and whether they were giving the expected results; these were some of the issues that needed to be addressed, the Committee had pointed out. Banking system should mainly focus on the human element, which is most neglected, said N. Vittal, former Chief Vigilance Commissioner. Problems in security were caused mostly due to neglect of human element. Another aspect was human greed. Both could be checked through transparency in selection process, he suggested. Eighty per cent of cyber crimes were committed by insiders, he said.

The Hindu

Follow senior citizen scheme strictly, RBI advises banks

The Reserve Bank on Saturday, asked banks to strictly implement a government order mandating them to give 9 per cent interest on a saving scheme for senior citizens and retired defence personnel. RBI has found that some of the banks do not implement Senior Citizens Savings Scheme - 2004(SCSS), particularly in case of retired army personnel and have denied the facility of SCSS to some of them in contravention of the instructions ibid. “We, therefore, reiterate that you may strictly adhere to the instructions issued vide our above circular and ensure extending the benefits of the scheme to retired army personnel also, if otherwise found in order,” the RBI said in a notification. The scheme can be availed by people of 60 years or above. However, persons retiring from defence services are given a relaxation of five years in age availing this scheme. The scheme is operated through all branches of public sector banks which are operating PPF Scheme. Under the SCSS, the deposit made will earn an interest rate of 9 per cent per annum and interest is paid on quarterly basis. In another notification, RBI allowed banks to continue practice of keeping aside 5 per cent of the restructured accounts by their rural branches for another two years.  This facility was given to back rural branches which lacked expertise or appropriate infrastructure to ensure computation of diminution in the fair value of advances extended by their small or rural branches. Such banks were given the option of notionally computing the amount of diminution in the fair value and providing therefor at 5 per cent of the total exposure in respect of all restructured accounts where the total dues are less than Rs 1 crore till the financial year ending March 2011. “On a review, it has been decided... (it) will remain applicable...till the financial year ending March 31, 2013,” the Central bank said.

Are profits of PSU banks becoming hostages to Chairmen?

Earlier this week, a Deputy Governer of the Reserve Bank of India no less raised the issue that profits and losses of banks are becoming hostage to retiring or incoming chairmen, or something to that efect. This observation that profits of PSU banks tend to dip when the chaimen change has now become a bit of a derisive fact for stock market investors.

Among the banking fraternity, there are loud whispers that chairmen refuse to recognise NPAs towards the end of their career to avoid looking bad. As also, a tendency among incumbents to be more than cautious early in their tenure so that the profits start improving later in their career. In an interview with CNBC-TV18's Latha Venkatesh, Former Finance Secretary, S Narayan, Former Oriental Bank Chairman & MD, BD Naranag and UR Bhat, Head, Dalton Capital, talk about the effect a new chairman has on the profits of a PSU bank.

Below is the transcript of the interview.

Q: Is this just an optical illusion or do you in your experience actually notice that incumbent Chairmen want to start with a slightly poorer performance so that they look good in their tenure. What is your comment on the kind of data that was presented to you?

Naranag: There are two common things that make a serious impact on the bottom-line of the bank; that is pension provisions and NPA provisions, they are common denominators.

Second is how we handle it. It is true that the incumbent would like to see that slate is cleared and he doesn’t have to bear the brunt. But without realizing that banks are an institution on home, the whole country looks at their results and any major volatility will give a very, very wrong impression of the situation which otherwise doesn’t warrant. For a simple reason that when we talk of an economy for a layman, 60% of what it means is banking. So projecting so much of volatility into the bank results would mean you are just sending wrong signals to the entire investment community.

Q: How do savvy investors, big investors, institutional investors look at his whole trend. Are you, over the past several years, almost beginning to believe that every time a Chairman is retiring. let me get out of that stock?

Bhat: I think that is something the market has factored in in terms of valuations. If you see there is a huge valuation divergence, for the same amount of profit within public sector bank and a new generation private sector bank. Typically the price to book could be almost double, or for e.g. PE ratio would also be something like double, so which basically shows that the confidence level in the balance sheet of a public sector banks from the investor community is somewhat less. I think it really happens because of two reasons; one is everyone wants to look good so therefore do the big bath, take the big bath, clean the slate - that is what happens. Why is it that is possible? Because when we started the reform process in the early 90s, we came to this conclusion that on the 91st day if an asset is not serviced becomes non-performing. So the element of discretion that was available earlier has come down dramatically, that is what it looks like. But what really happens is there is a performing asset, there is a non-performing asset. There is class in between which is a barely performing asset or a technically performing asset, which is a sort of an animal where you scramble on the 90th day and see that it becomes performing by ensuring that the critical amount is remitted, and this is what incumbent Chairman continue to do and the new Chairman doesn’t have to do that because he knows that this is eminent NPA anyway so why should it become an NPA when I am fully in charge so let me do it in the first stage itself.

Q: Now what has happened is that the finance ministry and the Reserve Bank of India are insisting on system recognition of NPAs. Is that at least plugging some loopholes, you just have to go with the computer and when it shows a non-payment or even there can discretion be used and you are able to make some borderline cases as Mr. Bhat said?

Narang: At least if the banks accept and implement that system-driven NPA recognition system, 90% of it will be accurate. So the element of inaccuracy will be only 5-10%. Even that makes a great job.

Moneycontrol

Crossword

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RBI expected to maintain tough stand on inflation in mid-term monetary policy review

The mid-term monetary policy review is scheduled for next week, and talk of another interest rate hike is in the air. The economy is at a critical juncture with respect to a balance between inflation, industrial growth and the monetary policy tightening. The Reserve Bank of India (RBI) has already tightened the monetary policy several times since the last one and half years.  The interest rates have gone up to a level where they are threatening to impact industrial growth. Although the inflation rate has shown some signs of coming down, it is still ruling quite high and is yet to come under complete control. Due to several domestic as well as global factors, more action from the policymakers is needed to bring the inflation rate down further. These are some major factors that would be under consideration during the forthcoming monetary policy review: 

The headline inflation based on the Wholesale Price Index (WPI) data and also the inflation rate based on food articles has come down in the recent weeks. However, it is still above eight percent which is much higher than the comfortable limits of 5-5 .5 percent.  There are several domestic as well as global factors fuelling the inflation rate. On the domestic front, the demand is quite robust and as a result the price rise has spread to broader items. This is fuelling the headline inflation. On the other hand, the soft monetary policies and other ongoing issues in the global markets is constantly pushing prices of international commodities up. This is another significant factor contributing to the high inflation rate here. A high inflation rate will prompt the RBI to maintain a tough stance.  The monsoon is a significant factor that influences the economy directly and indirectly as a large portion of the population depends on agriculture-based income. The Met Department has predicted a normal monsoon this year and its progress has been good. A good monsoon has the potential to stimulate economic activity and also check food prices due to good crop yields.  Recent data shows the GDP growth has started coming down a bit due to the tight monetary policy regime followed by the RBI in the recent past. Analysts feel a slower economic growth rate is on the cards in the short term, provided the RBI can control the inflation rate through a tight monetary policy.

ET

Visual exhibition by RBI under way

GUWAHATI, June 10: Governor of Assam Janaki Ballav Patnaik today inaugurated the exhibition – Newsibition – of RBI at Srimanta Sankardeva Kalakshetra, Panjabari, and said: “It is a story being  told in the shape of news and pictures from its inception in 1935 to the present day. Under section 22 of the RBI Act, it is the only national agency in India which has the sole right to issue bank notes of all dominations. In fact it is the bankers’ bank and every bank in India is required to maintain with the Reserve Bank a cash balance equivalent to 5 per cent of its demand liabilities and 2 per cent of its time liabilities”.  Newsibition is a visual exhibition which traced the 75 years of the history of the Reserve Bank of India (RBI) through many anecdotes, photographs, documents and interesting visuals. The exhibition titled ‘Mint Road Milestones’ is based on a book with the same title published by the RBI during its Platinum Jubilee last year. He also said that in the recent economic growth of the country’s economy, the RBI has played a pivotal role. When the financial systems in United States and the other developed countries of the world failed to withstand the worst depression they faced, India was least affected by it. He also said, “Inflation has emerged as a major concern. Despite some fall in food prices, prices have not come down in other major commodities. This is a challenge to be met with utmost urgency by adequate financial measures”. Speaking on the occasion, RBI Regional Director Surekha Marandi said that the narrative of the book interwined the history of the central bank with the financial history of the country and world developments of the time. “The exhibition also displays internal documents and photographs, tells the story and the context of Reserve Bank policy measures and give glimpses of how the newspapers and media viewed the policies of RBI,” she said and added that the exhibition would remain open for public viewing from till June 29, 2011 from 11 am to 7 pm.

The Sentinel

Subbarao favours autonomy to achieve medium-term goal

Favouring greater autonomy, Reserve Bank of India (RBI) Governor D Subbarao today said greater freedom would help central banks to focus on price stability in the medium term. Monetary policy typically acts with a lag, and price stability therefore has to be viewed in a medium-term perspective, Subbarao said in a speech at the SAARC Finance Governors' symposium at Kumarakom in Kerala. "Having autonomy frees the central bank from the pressure of responding to short-term developments, deviating from its inflation target and thereby compromising its medium-term inflation goals," he said. In a bid tackle inflation, the RBI raised key policy rate nine times since March 2010. Last month, it raised short term lending rate and savings bank rates by 50 basis points to check price rise. "Even as the importance of central bank autonomy in monetary policy is now broadly accepted, there is a growing view that central bank decision making has to become transparent and that central bankers have to be more accountable for the outcomes of their decisions," he said. The standard argument for central bank autonomy is that autonomy enhances the credibility of the central bank’s inflation management credentials, he said. He noted that the much prized autonomy of central banks has come under assault post-crisis with an influential view gaining ground that one of the principal causes of the crisis was the unbridled autonomy of central banks. Subbarao said with central banks assuming increasing responsibility for financial stability, the autonomy question has acquired an additional dimension and greater urgency. The main apprehension is that a formalised mechanism for coordination between the government and the central bank for financial stability will alter the level, content, process and frequency of interaction between the two, and over time this will erode the autonomy of the central bank, he said. It is argued that it will be difficult to keep monetary policy and policies for financial stability strictly apart, and a formal forum for coordination would facilitate spillover into monetary policy, he added. Subbarao also pointed out that the financial stability is not exclusive responsibility of central bank.

BS

Greater need to ensure autonomy to central banks: RBI

With central banks assuming increasing responsibility for financial stability, there is a greater need and urgency to ensure their autonomy, the Reserve Bank of India's governor said on Friday. The RBI is not constitutionally independent and the government has the power to direct it, and also appoints the central bank's governor and four deputies.  "It is important for the government and the regulators in India to develop conventions and practices which will serve the goal of preserving financial stability without eroding the autonomy of the regulators," Duvvuri Subbarao said in a speech at the SAARC Finance Governors' symposium in the southern Indian city of Kumarakom. Though many central banks do not have an explicit mandate for financial stability, post crisis in 2008, several jurisdictions are vesting this as a formal mandate to central banks, Subbarao said. The RBI's mandate is to maintain prices and financial stability and includes macro and microprudential regulation. Preserving financial stability requires coordination among regulators, and between regulators and governments, he said. "...it is generally acknowledged that these coordination mechanisms, especially as between the government and the regulators, must function in ways that do not compromise the autonomy of the regulators." The RBI raised interest rates more than expected last month and vowed to battle price pressures even at the cost of sacrificing short-term growth, even as the government counts on strong growth for the current fiscal year to help fund increased social spending and keep the fiscal deficit in check. "Having autonomy frees the central bank from the pressure of responding to short-term developments, deviating from its inflation target and thereby compromising its medium term inflation goals," Subbarao said

BS

SBI breaches RBI norms on RIL exposure for 3rd year

The country's largest bank, State Bank of India, has breached RBI's credit exposure norms during three consecutive years with regard to its loans..........

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Families see inflation rising 120 basis points

MUMBAI: Households expect inflation to rise by 120 basis points in the next one year with those living in Bangalore and Jaipur expecting inflation to touch 16% unlike those in Patna and Kolkata, who see inflation hovering around 9%.  These were the findings of 'Inflation expectation survey of households' released by the Reserve Bank of India on a quarterly basis. The survey was conducted on 4,000 urban households across 12 cities from January to March 2011. It captures inflation expectation over the next three months and for the next one year. As things stands now, the headline inflation stood at 8.6% in April. RBI expects inflation to be around 9% in the first half of the financial year and set a target of 6% by the end of 2011-12. As against the current expectation of 11.5%, households expect inflation to rise to 11.9% during the next quarter and 12.7% next year. The survey showed that 34% of the respondents felt that RBI is taking necessary action to control inflation while 39.6% felt that the central bank was not taking action to control inflation. Out of these 34% respondents, 61% are aware that RBI's action has got an impact on inflation.  The central bank survey shows that inflation expectations of households have come down compared with the previous round of survey. The inflation expectation for the next three months and for next one year stood at 11.9% and 12.7%, respectively, against 12.4% and 13.1% assessed in the earlier round of survey. Households' expectations of general price rise were mainly influenced by movements in food prices. The percentage of respondents expecting price rise has gone down for all product groups such as general prices, food products, nonfood, household durables, housing and services. RBI has said the movement of inflation expectations shows that the future inflation expectations are usually higher than the perception of current inflation. They provide useful inputs on directional movements of future inflation. However, these are not to be treated as forecast of any official measure.

ET

A litmus test for RBI - Rajeev Malik

The central bank will appear vacuous if it holds fire next week following its ultra hawkish guidance at the last monetary policy review

All eyes are on the Reserve Bank of India’s (RBI’s) upcoming mid-quarter monetary policy review on June 16, the first review following the unexpected 50 basis point (bp) increase in early May. It is ironic that the RBI’s aggressive 50-bp move came just as global commodities hit an air pocket. Indeed, the CRB index of commodities and Brent are both slightly lower now compared to early May. However, neither decline is big enough so far or can be viewed as being firmly sustainable to prompt the RBI to stay on hold. India’s inflation remains suppressed owing to the lack of a more complete adjustment in several local prices. After having sounded exceptionally hawkish just six weeks ago, the RBI will appear to be avoiding its own guidance if it stays on hold next week, especially since inflation remains worryingly high. Also, the inflation data are yet to be fully impacted by the long overdue adjustments in local fuel and other prices, and the much-needed meaningful fiscal adjustment remains uncertain. Even a slightly better-than-expected wholesale price index (WPI)-based inflation for May should not be a cause for celebration. In the absence of fuel price adjustments, looking at the inflation readings is like looking at a swimsuit without a body — it just does not capture the real effect. The March quarter GDP report cannot be an excuse for staying on hold as signs of moderation existed even when the RBI increased key policy rates by 50 bps. GDP data are, for the most part, a lagging indicator, as several monthly indicators provide earlier clues. It has been widely overlooked that non-agricultural GDP growth moderated only marginally to 7.8 per cent year-on-year (YoY) in January-March from 8.0 per cent in the December quarter. A sizeable upward adjustment in the GDP for January-March quarter in 2010 also made the YoY comparison less flattering. Further, gross tax receipts suggest a better tone of economic activity even though economic growth is widely expected to moderate as a desired policy outcome. In the annual policy, the RBI stated the obvious that there is no trade-off between growth and inflation in the long run. While that it true (and it is encouraging that the RBI discovered that after missing inflation forecast in the last few years), it conveniently overlooked to point out that there is little role for monetary policy in the long run. Low inflation is favourable to long-term growth as interest rates decline, which in turn boosts growth, which in India’s case could also get a shot in the arm if the government ever wakes up to work on reforms. In an earlier piece (“Lower growth, higher inflation”, May 11) , I had pointed out that there is a risk of over-tightening as the WPI inflation that the RBI focuses on appears to have little sensitivity to softening non-agricultural GDP growth if commodity prices are rising. This is because WPI inflation (and non-food manufactured goods component) is significantly more sensitive to international commodity prices than the typical consumer price index (CPI)-based inflation. It is instructive to note that the new CPI series shows inflation running around 6.0 per cent YoY, and a sequential pass-through (not seasonally adjusted as there are still not enough data points) that is much lower than what the WPI indicates. This is as it should be, but the RBI appears idiosyncratically wedded to the input prices in the WPI for setting interest rates, an approach that is faulty, in my view. India has not had many monetary tightening cycles in the last two decades. The first cycle, in the mid-nineties, ended in tears. Unstable domestic politics, post-reform bust in investment, and external events (ie Chinese renminbi devaluation in 1994 and the Asian financial crisis in 1997) were among the important reasons, with the RBI’s tightening being a contributor to but not the key driver of the domestic slump that followed. The industrial sector was painfully flat on its back through FY02, although the downturn was also instrumental in restructuring businesses. Essentially, inflation was killed but so was the industrial sector — hardly the desired finesse. The last monetary tightening in 2004-08, especially the mature phase of 2006-08, is a far better case study to gauge the RBI’s response function. However, it too had several important differences from the current monetary tightening that began in early 2010 following the exceptional easing in late 2008 put in place after the global credit crisis. Higher inflation due to global commodity prices is common to both cycles, but there are several important differences on the composition and drivers of economic growth, magnitude of capital inflows, and the nature of the RBI’s tightening (for example, less reliance on the use of cash reserve ratio). In particular, domestic demand was much stronger and more balanced in the last cycle. However, the cycle was cut short by the global credit crisis that prompted an aggressive monetary and fiscal easing by the RBI and the government. An important aspect of the last tightening that is overlooked is that the RBI had maintained the repo rate (at which banks borrow from the central bank)at 7.75 per cent for a little over a year before an unexpected jump in inflation (driven mainly by global commodity prices) prompted an additional tightening of 125 bps packed in June-July 2008. Non-agricultural growth had been slowing until then but we never got to see the full impact of the tightening as the deceleration that followed was also affected by the global credit crisis. Subsequently, there was a quick and significant reversal in policy. Even though the RBI’s policy comes every six weeks, the central bank appears to have a bias for announcing rate increases more often in the quarterly reviews than in the inter-quarter meetings. That bias should be eliminated unless that is what the RBI intends, in which case the sensible approach of inter-quarter reviews is a waste. The bottom line is that in the absence of favourable lasting inflation news, holding fire next week will only compromise the effectiveness of the RBI’s signalling from the last meeting. At the very least, the guide should follow his own guidance.

The author is senior economist at CLSA, Singapore. The views expressed are personal BS

RBI to soon issue new Rs 100, Rs 10 notes

MUMBAI: The Reserve Bank today said it will soon issue new notes of Rs 100 and Rs 10 denominations in the existing series named after Mahatma Gandhi. While the Rs 100 denomination notes will have the inset letter 'L' in both numbering panels, the Rs 10 notes will have the inset letter 'B', the RBI said in separate statements.  "The Reserve Bank of India will shortly issue Rs 100 denomination banknotes with inset letter 'L' in both numbering panels in Mahatma Gandhi Series," it said.  The notes will have the signature of RBI governor D Subbarao on one side and the year 2011 printed on the other.  Similarly, it will shortly issue Rs 10 denomination banknotes with inset letter 'B' in both numbering panels in Mahatma Gandhi Series 2005.  "Except the change in the inset letter, the design of these notes (of Rs 10 denomination) to be issued now is similar in all respects to the banknotes in Mahatma Gandhi Series 2005 issued earlier," it said.  All banknotes in the denomination of Rs 100 and Rs 10 issued by RBI in the past will continue to be legal tenders.

TOI

'Electronic payments can curb black money'

The group president for Visa, one of the world's largest payment companies, has said that governments can curb black money by partnering commercial institutions to promote.......................

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High rates hurting growth, RBI needs to fix problem: Basu

NEW DELHI: Concerned over the impact of high interest rate on consumer demand, Chief Economic Advisor ( CEA )) Kaushik Basu on Friday said the RBI will need to have a re-look at the monetary tightening policy . "RBI will have to balance its monetary policy tightening in view of growing concerns, particularly in consumer goods front, where higher interest rates are impacting demand," Basu told reporters here. The comments comes as the RBI is scheduled to hold a mid-quarter review of the monetary policy on Wednesday. The central bank, in its bid to tame high inflation, has raised its key policy rates nine times since March 2010 It is widely expected that the bank may again hike the rates on June 16. As per the latest Index of Industrial Production (IIP) data, output in the consumer goods sector slowed to 2.9% in April from 13.8% in the year-ago period. Meanwhile, the growth in factory output numbers for the fiscal 2010-11 has been revised upward to 8.2% in the new series (with base as 2004-05) from 7.8% growth projected in the series with 1993-94 as base year. Basu said there will be a marginal upward revision in 2010-11 GDP figures following change in IIP growth. "There will be a small upward revision in FY'11 growth figure due to change in IIP growth. We are in the midst of re-calculation of our growth prospects. We will be able to come out with clear assessment by the end of the month," Basu said. According to the Central Statistics Office (CSO), the GDP in last fiscal is esimated at 8.5%year-on-year. On the diesel price hike, he said the government should soon take a decision in this regard. "We (the Government) are committed to our fiscal consolidation target. We don't want to divert from it. We will very soon have to take stock of diesel prices," Basu said. Oil Minister S Jaipal Reddy today met Finance Minister Pranab Mukherjee this afternoon to apprise him of the precarious financial state of the stateowned oil firms, who are living off borrowed money in the absence of the government raising prices of diesel, domestic LPG and kerosene.

ET

M. V. Nair gets extension till March 2012

The Central Government has approved the extension of Mr M. V. Nair, as Chairman and Managing Director, Union Bank of India, for a year till March 31, 2012. The bank is yet to receive the government notification, said an official from the bank. Mr Nair had completed his five-year term as CMD on March 31, 2011, but he had not completed 60 years of age. He was first granted an extension of three months till June 2011. With this extension Mr Nair will complete six years as CMD Union Bank of India. He had taken charge as head of the bank in April 2006.

The Hindu

ASSOCHAM-Deloitte study says Payments by mobile phones set for sharp upswing

Electronic wallets are a must for India to retain its growth where most people do not have a bank account but have a mobile phone. “Companies identifying this opportunity and leveraging available technologies and regulations to carve out mobile retail payment solutions that are suitable to Indian marketplace are set to emerge leaders in this space, leaving others behind.”..............

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Floating Rate still the best Option

The interest rates have been increasing steadily . Thanks to the inflation rate, interest rates are not showing any signs of cooling down. The Reserve bank of India (RBI) is doing all it can to bring down the inflation rate and control the inflationary pressures. So far, the success rate has not been much. The RBI has to balance its measures with growth. It has been increasing the key rates - repo and reverse repo rates - in order to control the inflationary conditions. As a result of these measures , banks have been increasing the home loan interest rates. The lending rates, in fact, have been increasing on all kinds of loans - personal, vehicle, and housing loans. The increasing interest rates have resulted in increases in EMIs. The question that now arises is whether it is a good time to lock-in to a fixed interest rate. Considering the past trend of continuous interest rate increases , will it makes sense to opt for a fixed rate is the question many prospective borrowers ask.  In case of an increasing interest rate scenario, borrowers on a floating interest rate scheme are always at a disadvantage. The interest rate on the loan is increased as soon as the bank decides to increase its interest rates.  Therefore, the dilemma faced by many borrowers is whether to opt for a fixed rate loan or a floating rate loan in the present scenario . This becomes all the more important because the quantum of a home loan is mostly large and the tenure long.  In a fixed rate of interest scheme, the rate of interest is decided before-hand - at the time of taking the loan. Ideally, the rate should remain the same through the tenure of the loan irrespective of the market rates. In case the interest rates go up, the borrower should still pay the rate of interest fixed at the time of availing the loan. In case the interest rates go down, the borrower loses as he has to pay a higher interest as compared to the market rates. However, as of now, there are no fixed rate loans for the entire term. The banks incorporate a reset clause. This clause gives the bank the right to increase the interest rate in case the market interest rates increase drastically.  In case of a floating rate loan, the rate of interest is linked to the market rate or a benchmark rate - the base lending rate of the bank. The rate of interest varies directly with the market rates of interest. In case the market interest rates go down, the cost of borrowing for the borrower also goes down. In case the market rates go up, the cost of borrowing for the borrower also goes up. Thus, the borrower floats along with the market rates of interest and has to constantly monitor the market movements. In the present scenario, a borrower is unsure about which loan to choose. There is some risk involved in both the cases, and the borrower needs to take a conscious decision. The present increase in interest rates has been due to the increase in inflation rate. Once the inflation rate comes under control, the interest rates have to come down too.  For the growth of the economy, high interest rates cannot be sustained for long. Although no timeframe can be fixed, the measures initiated to control inflation should start showing results shortly. This will result in a reduction in interest rates. As such, it does not make sense for a home loan borrower to lock-in to a fixed interest rate loan. It would be better to opt for a floating rate loan. The interest rates have almost peaked. Although another increase could happen in the near term, in the long run the rates are bound to come down.

ET

Why Are Banks Not Promoting The IMPS Money Transfer Service?

Six months after the National Payment Corporation of India (NPCI) launched the ambitious Inter Bank Mobile Payments Service, 22 Banks have integrated the service across the country. Around 10 million customers registered for the service in the month of April. However……

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Central banks best positioned to maintain financial stability: Subbarao

The fear is that a formalised mechanism for coordination between the Government and the central bank for financial stability will, over time, erode the autonomy of the central bank, Dr Subbarao pointed out....................

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Subbarao makes peace with govt on FSDC

In a reversal of its earlier stand, the Reserve Bank of India (RBI) on Friday said financial stability cannot be its exclusive responsibility. The latest stance is in line with the government’s view that financial stability should be under its jurisdiction. RBI Governor Duvvuri Subbarao, who had always argued that financial stability should be an exclusive domain of the central bank, on Friday changed his position and said, “Even as the Reserve Bank has implicitly been the systemic regulator in India, financial stability cannot be its exclusive responsibility.” He was addressing the SAARCFINANCE Governors’ Symposium at Kumarakom, Kerala. The government had made its intention clear from the beginning by setting up the Financial Stability and Development Council (FSDC), headed by the finance minister. Ever since the proposal for setting up of the FSDC was mooted, the RBI governor has been expressing his reservation, on the ground that it can impinge on the central bank’s autonomy and flexibility.

12 FEBRUARY, 2010 - MUMBAI Post-crisis, there is a growing view that unless financial stability is explicitly included in the mandate of central banks, it is likely to fall through the cracks

5 AUGUST 2010 - HYDERABAD Should financial stability be an explicit mandate of the central banks? Pre-crisis, as I said, there was no answer; post-crisis, the answer is mostly ‘yes’

10 JUNE 2011 - KUMARAKOM Even as RBI has implicitly been the systemic regulator in India, financial stability cannot be its exclusive responsibility. Other financial sector regulators such as Sebi, Irda, PFRDA too have important responsibilities. Beyond the regulators, the crisis has demonstrated the importance of the coordinating role the Government has to play, especially in crisis times

On August 5 last year, in a speech made in Hyderabad, Subbarao had said the answer to the question, should financial stability be an explicit mandate of the central banks, is “mostly yes”, in the aftermath of the global financial crisis. However, Subbarao — whose three-year term will end on September — on Friday said the FSDC will play the central role in a crisis, and the sub-committee of the council headed by RBI governor will only be active during normal times. “Beyond the regulators, the crisis has demonstrated the importance of the coordinating role the Government has to play, especially in crisis times,” he said. The RBI governor acknowledged that formation of a sub-committee strikes a balance between the government's desire to head the Financial Stability and Development Council and the need for centrality of the RBI in matters of financial stability. “In the Indian context, the proposed structure attempts to strike a balance between the government objective of ensuring financial stability to reduce the probability of crisis and the operative arrangements involving the central bank and other regulators,” he said. The governor, who now thinks central banks should play a substantive role in maintaining financial stability but not the exclusive role, says prioritisation across multiple objectives will be a challenging task. He cites the example of the statutory liquidity ratio regime in India, which poses a growth-stability trade off dilemma for RBI. The SLR requirement, which mandates banks to maintain 24 per cent of the net demand and time liabilities as statutory liquidity ratio, entails lesser flow of funds to productive sectors, which can adversely impact investment and growth. Mint Road sources said the change in the governor’s stance on this important issue is because of the government going ahead with its plans despite RBI reservations on several issues, like the Ulip ordinance, creation of separate DMO, etc. Sources said the Governor may have thought there was no point in staying in a state of perpetual conflict with the government.

BS