Centre in poor light on RBI leadership issue

In less than two months from now, Duuvri Subbarao, Governor of the Reserve Bank of India (RBI) will demit office. The silence of the government over what intends to do - whether his term would be extended or whether it would opt for a new incumbent to don the mantle of responsibility at the central bank- even at this late hour only serves to add to the suspense. In this milieu, rumours are rife that the choice may fall on an outsider. All this shows the official decision-making process in a very poor light. It is, therefore, all to the good that three former governors of the RBI — C Rangarajan, Bimal Jalan and Y V Reddy — have interceded with the Prime Minister Manmohan Singh — who had also worked in this capacity — not to disrupt the present arrangement for the sake of stability and continuity of policy. An extension for Subbarao would therefore be a step in the right direction. Far from lobbying, their intention was that discretionary powers in appointments to posts like these should be exercised with caution, especially in the current environment. Certainly, their timing is right as the department of financial services has prepared an internal note seeking the nod of the finance minister for setting up a search committee. It is common knowledge that the governorship of RBI will fall vacant in the first week of September and yet the department woke up to the fact only now. This apart, other things being equal, why this hesitancy of the part of the government to do the most logical thing - extend the tenure of Subbarao for another two years. His stewardship of the RBI through troubled times has much to commend itself. He was barely in office for a fortnight when the Lehman Brothers had collapsed, the tsunami-like effect of which was felt across the global financial markets. At home, economy was in serious trouble, with the real GDP growth and industrial growth sharply down while the monthly inflation rate had topped 11%. This crisis lingered through part of 2009 as well. In retrospect, he was equal to the challenges and economy soon rebounded. Of course, inflation is still a problem but RBI has been doing its best to tame this monster by tackling the demand pressures; if success is still elusive, it is because inflation arises from a complex interplay of factors such as global commodity and crude prices and supply-side deficiencies. Of course, the RBI governor had his differences with the government on certain issues, most notably in regard to the establishment of the Financial Stability and Development Council — where both have now arrived at a compromise - and the divestment of the debt management function from the central bank and vesting it with the Centre. But, his dissent was voiced with reasoned arguments and was from free from polemical overtones. From being a top bureaucrat in the finance ministry to the helm of affairs at the central bank, Subbarao made the transition with ease and speed and if his three-year stint proves anything, it is this: the case for his extension is strong. If the government thinks otherwise, let it announce its decision without delay. This is not the way to treat a high functionary. Another point needs underscoring here: for global investors and for the economy itself, long-term regulatory stability is a necessary condition.

DNA 

The New Bond Man on Mint Street

Bond house officials and bank treasurers used to rue the fact that informal guidance from a central banker such as Usha Thorat, was no longer available. Once Thorat, a former central bank deputy governor known for her understanding of the bond and forex markets, was moved out of RBI's internal debt market department, all such lines of communication had snapped. A revival of that may be in sight with the appointment of Harun Rashid Khan , a career central banker who worked with Thorat for years, as the new deputy governor of RBI.  Mr Khan, who succeeds Shyamala Gopinath who retired last month, has superseded three executive directors and has been appointed for term of three years. In his new avatar, Mr Khan would be in charge of external investment, internal debt management, foreign exchange and payments and settlement systems.  Bankers say Mr Khan is the most approachable deputy governor among the current lot. "Among career central bankers, he is one person who is open to reasoning," say several senior bankers and a few bank CEOs . They reckon that most RBI officials are more steeped in theory rather than being tuned to market realities.  In a three-decade stint with RBI, Mr Khan has handled a wide range of assignments ranging across departments such as rural credit, currency management, banking supervision and regulation, debt management, reserve management, exchange control, personnel administration and internal accounts of RBI. Prior to becoming executive director in 2007, he was principal of the College of Agricultural Banking , based in Pune. That stint provided Mr Khan with an opportunity to mingle with RBI staffers across all cadres.  Mr Khan has been a familiar face for treasurers and bond houses. Many others in the financial sector started noticing him after a report on rural credit and microfinance was unveiled. A committee headed by Mr Khan had suggested measures to expand banking in rural India. Based on its recommendations, RBI expanded the list of business facilitators and business correspondence for achieving financial inclusion.  Those who have worked closely with Mr Khan say he is mild but sharp. "He may not be as articulate as Usha Thorat and KC Chakrabarty, but if needed, he is able to send across a message," said a senior RBI official. However, a lot has changed since the time Thorat was in charge of debt management and now. The money and forex markets are now far more integrated with the overseas markets now than in the past. Also, there are newer products and currency exchanges coming up in the country which was not the case a few years ago. Mr Khan's challenge will be to deal with growing inter-linkages not only between domestic and foreign markets, but also inter-linkages within different markets at home front.  Mr Khan, going against the stereotype, happens to be a pure vegetarian. Some of his closest friends call him 'vegetarian Khan.'

ET  

Pranab asks Nabard to create viablemodels of financial inclusion



Finance Minister Pranab Mukherjee is greeted by RBI Deputy Governor K C Chakrabarty and NABARD CMD Prakash Bakshi during the meeting of Board of Directors of NABARD in
New Delhi on Tuesday



Finance Minister Pranab Mukherjee on Tuesday exhorted the National Bank for Agriculture and Rural Development (Nabard) to deploy new technology, innovate and create financially viable models to take forward the process of financial inclusion.

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Much depends on mobile phone network

Financial inclusion has been a policy priority of late. The RBI has indicated the importance of involving all agents in the universal financial inclusion exercise by opening the space to business correspondents (BCs) and for-profit companies.Its insistence that banks should recognise the poor as a business opportunity calls for newer strategies from the banks. ..............

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Orissa Chief Secretary inaugurates MSME Summit , 2011

Bhubaneswar: Micro Small & Medium Enterprises (MSME) Summit , 2011 has been inaugurated by Chief Secretary Sri Bijaya Kumar Patnaik here today in Premises of Hostel Swosti Premium. In his inaugural address Patnaik held that Small & Medium Enterprises form a major portion of industrial activities in any growing economy like Odisha. Giving the sector a lead, he added that MSME should take up services and ancillary products that the large-scale industries require.  The Govt will do all that is possible to persuade the large scale industries to support MSME’s. The Chief Secretary has given a call to MSME’s to join hands with Govt in skill enhancement of youth. They have been asked to plan out their skill requirement in coming years so that youth can be trained and they can be absorbed in MSME sector. The opportunities in construction works are growing day by day and the MSME’s catering to different segments of construction sector can come together through collaborative efforts for developing single window delivery system. While addressing the summit as guests of honor Principal Secretary Industries T. Ramchandru and Steel & Mining Secretary Manoj Ahuja said that Govt has enabling policies and MSME’s are required to avail those in right perspective. Discussions in the Summit reveal that MSME’s contribute 8% of country’s GDP, 45% of manufactured output and 40% of exports. It provides employment to near about 6cr. people. Other major topics of deliberation included development of MSME clusters around different specific industrial and agro-based products, credit support, capacity enhancement, revival of sick units and increasing productivity of MSME’s through marketing support. A mini-exhibition was displayed on the occasion by Odi – Fab, a women SHG initiative and Jindal Community College, Angul. Visiting the stalls the Chief Sri Patnaik advised them to scale up their production. Regional Director Reserve Bank of India Sri B.K.Bhoi while addressing the participants told that they should should use grievance redressal mechanism and help line of RBI when they face any genuine problem with regard to credit linkage through banks. The Director General , Indian Chamber of Commerce Dr. Rajeev Singh gave the welcome address and Director , Industries K.Khatai presented the votes of thanks. The summit has been hoisted by Indian Chamber of Commerce.  

http://www.orissadiary.com/ShowBussinessNews.asp?id=27853

RBI calls for ‘forensic audit' of two Kolkata-based firms

Chennai : The Reserve Bank of India has called for a “forensic audit” (investigative audit) of Kolkata-based Prime Impex and Prime Pulses Pvt Ltd, importers and traders of pulses. Initial investigations by banks have, prima facie, shown irregularities and misuse of letters of credit by the two companies by colluding with suppliers and committing an alleged fraud to the tune of Rs 500 crore.  Six banks — Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, IDBI, Development Credit Bank and YES Bank — have been affected by the irregularities. According to sources close to the development, both the companies had “excellent financial track record” and had good rating from global rating agency, Fitch. Therefore, banks from time to time enhanced the L/C limit. “At one point Prime Impex seemed to have breached the L/C limit and, therefore, one bank stopped the payment which had snapped the chain of this kite-flying-operation,” said the source. Banks had roped in BDO India, formerly BDO Haribhakti Consulting Private Ltd, to do the initial investigation and found irregularities in letters of credit, and in many cases there was no genuine movement of goods.  However, the full extent of how the fraud was perpetrated will be known only when a forensic audit is done, said the source.  These companies have told banks that they have lost money in the forex and derivative markets and owing to fluctuations in the pulses market and were, therefore, unable to pay. The company did not respond to an email sent by Business Line. In April 2011, a press release from Fitch said it downgraded the rating of banks' Rs 115-crore L/C limit to Prime Pulses, noting that the banks had informed Fitch that the company has defaulted on its L/C in the previous quarter

The Hindu

RBI doubles bond purchases in june to stabilise yields

MUMBAI: Purchase of government bonds by RBI - the government's debt manager - doubled in the last week of June, signalling it won't hesitate to intervene in stabilising yields when the government borrowing for the fiscal year is forecast to surpass the budget target. The central bank bought government bonds worth Rs 1,143 crore in the secondary market, almost double of what it bought in the first two months of this fiscal, RBI data shows.  "The concern now is on risk of overshoot in budgeted fiscal deficit of 4.6% of the GDP," says Moses Harding, head of global markets, IndusInd bank. "The poor economic performance will put pressure on revenue collections and disinvestment plans may not go as per schedule. It seems that the government is worried on locking into higher coupon rate in the longer-tenor segment and the belief is that 10-year bonds above 8.25% are beyond their tolerance level," he said. Yields on the benchmark 10-year government bonds have remained above 8.3% since June as investors believe that the central bank may raise policy rates by at least another 50 basis points this year. Also, the rising subsidy bill of the government and slowing of revenue collections could force the government to borrow more than the budgeted Rs 4.17 lakh crore. Finance minister Pranab Mukherjee said on Tuesday the government would stick to its targeted borrowing programme and fiscal deficit aim of 4.6% despite rising subsidies. The reduction in customs duties to zero from 5% for crude oil, and to 2.5% from 7.5% for petroleum products, is expected to cost the exchequer Rs 49,000 crore. The government target of raising Rs 40,000 crore from sale of stakes in state-run companies may also fail for the second year if equity markets remain choppy. "I think the government and RBI are concerned about the unrelentingly high g-sec yields, which they would like to see at 8.10-8.20% levels," said the head of a bank treasury. "Whether or not the government overshoots its borrowing programme, yields have to come down to reduce its cost of borrowing. Even an increase of 20-30 basis points in yields would impact borrowing costs."  Even the RBI has been worried about the government's fiscal profligacy. "It would be very difficult to attain the fiscal deficit target unless there is adjustment on expenditure, or tax," Governor D Subbarao had said in a press conference on May 19. RBI would raise aboutRs 63,000 crore through g-sec auctions in July.

ET 

Bankers request RBI to defer deregulation of savings rate

Mumbai: Bugged by the current volatile environment the bankers have said no to the banking regulator-Reserve Bank of India’s proposal to deregulate the rate on savings account. The Indian Bank’s Association, the official representative body of bankers, has written to the RBI explaining the industry’s stand that the status quo be maintained for the time being. Based on the suggestions received from 24 banks , the consolidated feedback of the banking industry has been sent to the RBI for consideration. KR Kamath, CMD, Punjab National Bank, said, “It is not the appropriate time to go for deregulation of savings bank account. Particularly, at a time when the interest rates are going up and inflation is having an upward bias.’’ However, banks have said in case RBI preferred to decontrol the rate on savings rate, they should be allowed to charge adequately for the services that they are providing at no cost. The banks have argued that since the rate has now been revised upward to 4%, the depositors are getting compensated. “Also the rate is being calculated on a daily basis. Till the time there is some stability on inflation and other key rates, savings rate should not be deregulated in the interest of the industry,” bankers pointed out. The RBI had said it has to examine whether the deregulation can help bring more people into the formal banking system. The interest rate on savings bank deposits has remained unchanged at 3.5% (raised to 4% on May 3) since March 1, 2003. Keeping in view progressive deregulation of interest rates, RBI had prepared a discussion paper to delineate the pros and cons of deregulating the savings bank deposits interest rate. Interest rates on savings account in developed countries such as Canada, Japan, Australia, New Zealand, UK and USA are all deregulated and determined by the commercial banks themselves on the basis of market interest rates. However, most savings bank accounts may carry customer charges if the number of transactions exceeds the permissible level in these countries.

FE

Constitutional Validity of Micro Finance Bill - UMARJI

At the outset, it is worthwhile noting some factual statements in RBI reports in regard to micro finance activities: Alongside self help group, or SHG – bank linkage programme, micro finance institutions, or MFIs, such as non-government organisations, nonbanking finance companies (NBFCs) among others have emerged as important sources of micro finance delivery in India. Incentives have been provided for penetration of banking into unbanked areas and encouraging MFIs as intermediaries. Emerging role of MFIs as institutions other than banks engaged in providing financial services to the poor is being recognised and the banking sector has been extending loans to MFIs for on lending to SHGs. In 2009-10, around 691 MFIs were provided loans worth . 8,063 crore by banks. The growth under MFI-linkage programme in terms of both number of credit-linked institutions and the amount of loans was much higher than the corresponding growth under SHG–bank linkage programme. If one reads the pre-amble of the Micro Finance Institutions (Development and Regulation) Bill, 2011, it is clear that MFIs are being treated as extended arms of the banks and FIs and the above factual statements in RBI reports on Trend & Progress of Banking clearly support such treatment of MFIs. Further the expression “micro finance services” is defined in the Bill as providing micro credit, collection of thrift, remittance of funds, insurance and pension services. It is, thus, clear from the activities that can be undertaken by MFIs under the provisions of the Bill, that micro finance cannot be equated with money lending. Micro finance is much more than moneylending and, therefore, the proposed legislation for regulation of MFIs rightly equates the micro finance activity with banking and seeks to regulate activities of MFIs with the object of promoting financial inclusion. Assumption of such legislative power is clearly covered by entry 45 i.e. banking in the Union list in the 7th Schedule of the Constitution. The other ground on which legislative power of the Union is questioned is that the entities engaged in micro finance activities particularly non-corporates are clearly not within the legislative powers of the Union. This interpretation is not tenable for following reasons: Companies, including not-for-profit firms licensed under Section 25 of the Companies Act, 1956, are covered by Entry 44 in the Union list regarding incorporation and regulation of corporations including banking, insurance and financial corporations. Any company engaged in micro finance activity has to be registered as NBFC or seek exemption from such registration, under the provisions of RBI Act, 1934, which is a central law. Trusts and trustees are covered by entries 10 and 12 of the concurrent list. Charities and charitable institutions are included in Entry 28 of the concurrent list. It is clear from the above legislative powers that Parliament is well within its rights to enact a law on micro finance activities undertaken by companies’ trusts, charities and charitable institutions. The only entity not covered by the above list is co-operative society, which is included in entry 32 in the state list in the 7th Schedule. If one looks at the provisions contained in the Banking Regulation Act, 1949 applicable to co-operative banks, it is clear that to the extent a cooperative society undertakes banking business it is subject to regulatory powers of RBI as provided in the regulatory law enacted by Parliament. Such regulatory powers over co-operative societies are further proposed to be enhanced under the Banking Laws (Amendment) Bill, 2011 pending before Parliament. It is, therefore, clear that if a co-operative society undertakes micro finance activities that are treated as akin to banking, central law can regulate such activities.  Assumption of legislative powers of Parliament for enacting Micro Finance Institutions (Development & Regulation) Bill, 2011, on the ground that micro finance sector is engaged in providing credit and other financial services to the poor households and their micro enterprises, as an extended arm of the banking systems is constitutionally valid and free from objection.

The author is Chief Adviser, Legal, IBA.

ET 

Hackers may catch Indian banks napping

About two months ago, there was a major phishing attack on one of India's largest public sector banks. I too received a phishing mail even though I didn’t even have an account in that bank then. When I checked with the bank if account holders had lost money, they were not sure. Users, who enter their credentials in a phishing site and subsequently lose money, do not always admit what they have done. Instead, they blame the bank for losing money. The increasing incidents of online fraud and hacking have put banks in a difficult position. Phishers are becoming more and more sophisticated and phishing mails have begun to appear in Hindi too, targeting the growing numbers of regional language Internet users. Also, it seems that the law applying to the loss of money in an Internet banking transaction is tilted against the banks. A well-known legal expert says the liability of cyber crime, in which the customer is not a co-conspirator, is always on the banks. In other words, if a user loses her money, RBI may ask the concerned bank to compensate the user unless it can show that the user herself is involved in a conspiracy to steal the money.  So, even if there is no anti-virus on the user's computer or a key-logger is installed by a malicious hacker on the user's machine, banks would still be held responsible for the loss of money. To avoid these risks, experts say banks should come up with automated methods to ensure that the user's machine is secure before allowing her access to Internet banking. But not many banks have realised the gravity of the situation and life goes on as usual for them. But surely it won't be long before banks start to realise how vulnerable they are. A chief information security officer (CISO) of a well known bank retorted when confronted with a blatant security hole in the bank's procedure: “Has a fraud happened? If not, why worry?” This means that he will wake up only when the bank is swindled of significant money, and it may be too late then to plug the hole. The PSU banks usually do not reward performance adequately and hence, you can expect the bank personnel managing security to be not very highly motivated. Further, with their present salary structure, PSU banks fail to attract top security professionals. Fortunately, in India the major frauds in banks are still not the ones involving hacking. In most circumstances, it is an acquaintance, who defrauds the victim. Recently, in the US, large companies such as Sony and Citibank have been hacked and passwords of millions of users stolen. Why hasn’t such an incident happened in India? My take is that hacker-criminals in India are not sophisticated enough as yet. And international criminals haven’t turned their gaze towards India as yet. But the situation could change anytime. To be frank, not all security holes of Internet banking can be blamed on the banks. Today's Internet infrastructure is full of holes, and still, banks are moving at high speed introducing newer and newer services, without closing the holes that are found. To give a few examples, most of the home routers come with default passwords, which few users change. As a result, it is not difficult for a hacker to log into them. Wireless networks using WEP are vulnerable to WEP cracking, and software to do so is freely available on the net. And many of Indian payment gateways have security holes. Banks have to also worry about mobile transactions, which are becoming common. Vulnerabilities have been found in iphones and other mobiles. Mobiles are increasingly used on wireless hotspots also, and they are particularly vulnerable there. Along with banks, the government also needs to wake up to online security needs. Recently, Indian Institute of Science, Bangalore tied up with a major Chinese company Huawei Technologies, which has funded its center for testing security in telecom systems. It is inconceivable that our government exposes such a critical national security area to a foreign company. The UIDAI, another critical project for national security, is associated with the US companies with dubious credentials.  The government has also failed to act on cyber crime. Until a year ago, Bangalore had not had a single conviction in cyber crime. Having interacted with the cyber crime police, I can vouch for the good job the investigators are doing. However, if the grapevine is to be believed, the reason for the zero rate of conviction seems to be that the powers-that-be have a tough time distinguishing between the IT Act as in the Income Tax Act and the IT Act as in the Information Technology Act. There are also some bright sides. The two-factor authentication --- requiring a one-time password that is sent on a mobile --- is a much needed improvement that the RBI has mandated for banking transactions. The hacker’s task has got more difficult as he now has to hack the mobile of the victim too along with the desktop computer. However, two-factor authentication is not followed in case of transactions involving share purchase as the time factor is crucial there and one cannot wait for an SMS, which might take minutes or sometimes hours before making the transaction. What can a lay person do to protect his interest online? While the law favours the user as of now, it is an open question if banks would compensate users in case of a major breach. Thus, it would be surely a good idea for high-value depositors to spread their funds across different banks. ICICI Bank has introduced an insurance policy, which provides a cover of Rs one lakh if money is lost due to fraudulent use of an ATM card. This is a good start. Secondly, consumer forums should tie up with banks and security companies in educating the users about security of internet banking. After all, however difficult it may look, there is nothing better than taking the bull by the horns.

(Dr Kelekar, a cyber security expert, is managing director of Teknotrends, Bangalore.) – Deccan Herald 

Regulating microfinance

The Microfinance Institutions (Development and Regulation) Bill, unveiled recently, envisions a larger regulatory role for the Reserve Bank of India and proposes that all microfinance institutions with net-owned funds of over Rs.5 lakh register with it. The RBI will define and fix what the Bill calls “an annual percentage rate”, to be charged by private MFIs, and also set the range within which it can operate. That rate will include interest, processing fees, service charges and any other charges or fees that are payable by the borrowers. Although these stipulations seek to remove a serious lacuna in the regulation of microfinance, they are extremely cumbersome and will be difficult to enforce. In mainline financial sector regulation, the accent has been on laying down broad rules for banks and others to follow. Moreover, given the low threshold for registration envisaged under the Bill, the number of MFIs that will come under the regulatory scanner will be too large for any meaningful supervision. Neither self-regulation nor regulation by Nabard, which also lends to the MFIs, has been found viable. Hence the onus has fallen squarely on the RBI.  Evidently, the context in which the new legislation is proposed is as important as its substantive provisions. About a year ago, the government of Andhra Pradesh — the State that accounts for nearly a third of microfinance business in the country — introduced tough rules to clamp down on such practices as overcharging customers and employing coercive methods to recover loans. These stringent rules came in the wake of allegations that some MFIs were indulging in such wrongful and high-handed practices. As a consequence of the government's action, some high-profile MFIs were badly hit because banks pulled out their loans and this, in turn, snapped those institutions' loan recovery circle. If enacted, the new Bill, which empowers the central government to override existing laws, might give the MFIs some relief, but there is very little chance they will be allowed to go back to their old ways. For its part, the Andhra Pradesh government has voiced its opposition to several of the provisions and pointed out that, even if the RBI became the principal regulator, it would be well within the State government's jurisdiction to exercise control over money lenders and check usurious practices.

The Hindu

AP up in arms over Centre’s bill to shield MFIs

HYDERABAD: Alarm bells are ringing in the state government that the Union government is moving to protect micro-finance institutions (MFIs) and take them out of its regulatory purview. State government mandarins, who are hostile to the lending and recovery practices of MFIs, have compiled a long list of objections to the fine print in a bill the Centre is proposing to introduce in Parliament. The Micro-finance Institutions (Development and Regulation) Bill 2011, the draft of which was released last week, effectively seeks to place MFIs under the watch of the Reserve Bank of India rather than a stringent bill the state enacted last year reining in the lending companies. The AP government sought comprehensive amendments to the draft before the bill is introduced in Parliament. It questioned the move to put MFIs under RBI oversight while ignoring the borrower protection aspect of the problem.  Broadly, the state government objects to the bill’s treatment of MFIs as ‘extended arms of banks and financial institutions’ and would rather deal with them as moneylending agencies subject to the stern law it enacted last year.  The Andhra Pradesh MFIs (Regulation of Moneylending) Act 2010 was enacted after suicides by several borrowers were reported. “This is nothing but infringement of the powers of state governments. Considering the MFIs as arms of banks will give them privileges enjoyed by a bank without any related responsibilities,” fumed a senior official in the Law Department. Government officials say the Centere’s bill does nothing to protect borrowers’ interests.  Unlike the state law, the draft bill does not crack down on multiple lending and evergreening of loans. It also frees MFIs from having to do due diligence before lending. Much of the borrower distress reported last year was due to MFIs giving multiple loans to poor borrowers who had no capacity to repay. State officials are particularly sore that the draft bill deals only cursorily with the coercive recovery practices of MFIs. “We received scores of complaints against MFIs’ practices of lending and recovery including collection of high interest rates and use of coercion in recovery process. There is need to protect poor borrowers against such exploitation,” said an official in the Rural Development Department. As an example of the shielding of MFIs in the draft bill, officials said it proposes that only a person authorised by RBI can file a complaint against MFIs in courts. “The draft seems to have been prepared keeping the interests of MFIs in mind. Civil society, experts and millions of stakeholders from vulnerable sections of society must be consulted and their concerns incorporated in the bill,” said the official. 

http://expressbuzz.com/states/andhrapradesh/ap-up-in-arms-over-centre%E2%80%99s-bill-to-shield-mfis/293285.html

Handicapped by paraplegics : Rajeev Malik



Subbarao’s effectiveness has been compromised by a government that often appears to think of RBI as a vacuum cleaner



Reserve Bank of India Governor D Subbarao will complete his three-year term in early September. It remains to be seen if he will get an extension, but it is best to avoid the useless speculative zeal that some columnists and the local media have succumbed to. However, it is instructive to assess his hits and misses. He is the third consecutive RBI Governor who had to navigate the Indian economy through significant global financial and economic turbulence. Earlier, Bimal Jalan (1997-2003) had to deal with the fallout of the Asian financial crisis of 1997, and Y V Reddy (2003-08) had to check the build-up of the global liquidity-driven boom-bust cycle. The complexities were different in each case as the Indian economy continued to increase its integration with the rest of the world. However, each governor distinguished himself in dealing with the emerging challenges, and in limiting the subsequent economic, social and political costs, though Dr Subbarao probably had the worst cards dealt to him. It was a baptism of fire for Dr Subbarao. After all, he took over from Dr Reddy in early September 2008 and the Lehman bust occurred soon afterwards, pushing the world into uncharted dangerous waters. No one knew exactly how events and markets’ reaction would unfold. There was heightened uncertainty and most of the conventional policy-making tools seemed limited in their effectiveness. Policy makers cannot conduct experiments in such crises, and while everyone wants to be protected, the beast transforms itself suddenly and repeatedly, thus forcing policy makers to be quick on their feet but with no guarantee of success. Dr Subbarao deserves full marks for the aggressive policy response that cushioned the downside to growth following the global financial crisis, for the measures that prevented significant economic crippling, and for engineering a quick economic turnaround. The RBI announced several monetary and non-monetary measures, conventional and unconventional, to deal with the global financial crisis. More importantly, it reportedly resisted the calls for even bigger reduction in rates, and fought against a formal monetisation of the fiscal deficit, the latter being a hard-won battle by the RBI. Central banks are risk managers, not gamblers, and the RBI’s calculated approach paid off. People expect central banks to always have the right answers but it is often forgotten that central banks are run by people and, in the absence of perfect foresight, actions and solutions may not always be clear. This is particularly true when a new crisis erupts as financial innovation outsmarts financial regulation to change the nature of the next crisis. High inflation is where the RBI under Dr Subbarao will get brickbats, some of them undeserved, in my opinion. It goes without saying that the essential dharma of a central bank is to at least keep inflation in check. But India’s inflationary pressures are a complex mix of demand- and supply-side factors, cover food and non-food categories, and are structural and cyclical in nature, with global commodity prices also being a key driver. A lax fiscal policy undermined the effectiveness of monetary tightening, and poor RBI was left to clean up the mess while making sense of the embarrassingly inadequate and poor-quality economic data published by the government. The lasting solution for India’s inflation challenge lies with the government’s supply response and faster reforms, not just in higher interest rates. Dr Subbarao continued with the reform agenda of developing the local financial markets and sticking with the gradual liberalisation of the capital account. But his term should be best remembered for the path-breaking hands-off approach towards the rupee, partly owing to the compulsions of a tight monetary policy. The hike in the savings deposit rate was another important decision during his term, so was the move to a single policy rate (finally!).  He brought about some important changes in monetary policy communication, including the release of the minutes of the meetings of the technical committee on monetary policy. These matter less for the common person but play a crucial role in the transmission across the financial world, which in turn affects the real economy. The policy statement was shortened and policy reviews were moved to a six-week cycle, the latter being an important reform. However, the live telecast of monetary policy was an unnecessary overkill. A recent editorial in this paper unconvincingly argued about moving back to a quarterly frequency for policy reviews. Bad advice sometimes crops up in the most unexpected areas, as was the case with this suggestion. The need and importance of the six-week cycle arise because India is more integrated with the rest of the world, which is, in any case, in a topsy-turvy mode. There are quickly shifting global cross-currents and the high-frequency data allow for quicker reaction than waiting for once-a-quarter move. More importantly, high frequency of meetings does not mean that the RBI has to act at each meeting, but such a schedule anchors markets to expect any possible move as per the schedule rather than the old “anything, anytime” approach that added to policy uncertainty. Dr Subbarao, with his surprisingly disarming personality for a central banker, often explained things in a non-technical manner, and was refreshingly secure to avoid pretending to know more than he did. He often came across as a consensus builder but was not a pushover as initially feared. He spoke his mind on issues such as the Financial Stability Development Council and the setting up of the debt management office (DMO). Ironically, as finance secretary, Dr Subbarao had endorsed the DMO, but as RBI Governor, he has been right to advise not to rush into it. The DMO should eventually happen, but the government first needs to show fiscal responsibility by convincing investors that it can properly add and subtract on its fiscal accounts. In the final tally, the positives under Dr Subbarao’s tenure more than outweigh the negatives. High inflation is perhaps the biggest stigma but that outcome would have been there no matter who was leading the war. This is because the government’s irresponsible fiscal approach and the embarrassing inability to move on reform initiatives undermined the effectiveness of monetary tightening. Indeed, Dr Subbarao’s constructive record as RBI Governor does not warrant a place in history as the first of the four consecutive Governors to be denied less than five years in office. He surely deserves better, and has earned it.

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

BS

Experts warn RBI may find too tough to regulate MFIs

Micro-finance companies have welcomed the new Microfinance Bill, as it says that the Reserve Bank of India (RBI), and not state governments, will be the regulator. But experts warn that the apex bank may find it too tough to regulate this sector, reports CNBC-TV18’s Gopika Gopakumar. The draft Microfinance Institutions Development Bill aims to bring all MFIs under the purview of the RBI, and asserts that the bill will override existing state laws. For MFIs who are about to lose all the money lent in Andhra Pradesh, this is a lifeline. However, several experts doubt the central bank’s ability to supervise hundreds of these tiny companies in far flung areas. Usha Thorat, Former Deputy Governor of RBI said, “It’s going to be a huge challenge because it relates to millions of borrowers for MFI, groups and purposes which loan you are giving, say, sewing machine loan and spent on education. So it’s not that easy as to how the money is mismatched and so ultimately it has to be innovatively made.” PS Reddy, principal secretary, Andhra Pradesh said, “Our understanding is that the existing RBI machinery or the proposed ombudsman may not be a solution and may not be adequate to look at ground level realities. I think that's the fact which we need to discuss further.” According to the new draft bill, microfinance is not money lending, and, therefore, not under the state governments' jurisdiction. For now, states like Andhra Pradesh are questioning the constitutional validity of this argument but legal experts are dismissing this contention. HP Ranina, member - central board of RBI said, “Even banks do money lending even non banking financial organizations do money lending but yet they are in the purview of RBI, who is the regulator of all banks and banks is necessarily which lends money to the outside world, the money lenders act which is covered by constitution part of state subject generally applies to un organized sector were money lending is done.” However, the RBI top brass is aware that state government opposition can pose problems. So, one can expect some changes to the bill before it becomes law.

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Moneycontrol

MP microfinance players welcome draft Bill

The new Draft Microfinance Bill, which sets Reserve Bank of India (RBI) as the sole regulator for the MFI sector; have given MFI players in Madhya Pradesh something to cheer about, as they eagerly wait to expand their presence in the State. Microfinance Institutions Network (MFIN) central chapter convener Mrinal Pant said that proposed law would require microfinance institutions to be registered with the Reserve Bank of India (RBI), which in turn would dictate the margins these firms are allowed to have between their own borrowing costs and the interest rates. "It is a revolutionary step that now all MFIs have to register with RBI and by reducing the limit to Rs 5 lakh would help the smallers players to a great extent," said Pant.  "Bhopal and Ujjain are the main markets in the State where MFI is going to concentrate," he added. The total market capital of MFI in India is speculated at around Rs 20,000 crore and Madhya Pradesh MFI market is bridged at Rs 200 crore. "'Multiple loan unwinding issue' would be one of the main challenges for the MFI in the State," said Pant. The new draft makes it mandatory for all players to check the indebtedness of the borrower by a RBI registered credit bureau. "The draft hopefully would create an environment for the MFI spirit to spurt and grow the right kind of livelihood development in the State," said Pant. The RBI would also have a say on other fees the MFIN charge. The proposed law also says that these institutions are not to be confused with local money-lenders, and laws to control money-lenders and prevent usury will not apply to registered micro-credit firms. "But until the law is passed and rules are set, it is not clear whether the proposed bill will be as positive as the market seems to feel," said Pant. Civil societies which were apprehensive about the way MFI operate, have their fears taken care off too in the draft law which gives the Government the power to decide how and how frequently microlending firms can collect on loans, which will be specified only once the rules to implement the legislation are drawn up. Pant pointed out that if the same legislation would have been brought in two years ago, one of the issues with respect to the Andhra Pradesh could have been avoided. The Ministry of Finance is taking comments on the proposed draft until August 7.

Pioneer 

Touts make chillar party, traders suffer

Jaipur: Scarcity of coins in the market has city traders on the edge. So much so that most of them are paying 8-10 per cent commission to 'agents' for a bagful of coins. The RBI office in Jaipur has made arrangements for distribution of coins, but those are just not enough. "There are serpentine queues and there is no surety you will get a bagful of coins at the end of the day," said Pradeep Shah, a pharmacist who had to return empty-handed on Monday.  "I did not get the coins despite waiting for three hours on Monday," said Satyender, who runs a milk shop. "I am forced to pay agents Rs. 20 per day for the Rs. 200 worth of coins I need," he added. The coins' crunch is not limited to small retail shops; even big chains are also suffering. They claimed that they are forced to turn to private coin changers, who charge anywhere between 6-8 per cent commission.  "Acute shortage of coins has hit businessmen hard. They have to deal with loss of business and irate customers who often have to forego the change," admits Ravi Nayyar, vice-president, Federation of Trade and Industry, Rajasthan.  "The growth of both the retail sector and over-all economy has led to this. There are many players in the market now and so the demand for coins has gone up by many-fold. Sadly, the supply of coins is still the same old," Ravi added.

Daily Bhaskar

RBI Cautions on Capital Outflows

MUMBAI – India needs to adopt a calibrated approach toward achieving full capital account convertibility, Reserve Bank of India Governor Duvvuri Subbarao said Monday.  The country also needs foreign exchange reserves sufficient to buffer against uncertainties, Mr. Subbarao said at an event. The Indian rupee is fully convertible on the current account but is only partially convertible on the capital account as the government wants to shield the economy from sudden outflows of foreign capital in times of crisis.  The RBI had appointed a committee to set a road map on fuller capital account convertibility. The committee, headed by former RBI Deputy Governor S.S. Tarapore, had suggested a three-phased approach to making the rupee fully convertible.  However, the central bank has maintained it would move gradually to make the rupee fully convertible.  Though the South Asian economy hasn't implemented any capital control measures, it is more vulnerable to any sudden stops or reversal of capital inflows than countries with current account surpluses as its foreign exchange reserves mostly comprise borrowed resources.  India's foreign exchange reserves were $315.715 billion in the week ended July 1, according to central bank data. India is one of the few emerging market economies to have a persistent current account deficit and is dependent largely on volatile portfolio inflows to fund it, posing macroeconomic risks.  "We need to focus on the external sector, which means looking at a sustainable level of current account deficit, a market-determined exchange rate but an exchange rate that is managed by the RBI such that there is no volatility and such that it doesn't militate against the macro-economic stability," Mr. Subbarao said.  India's current account deficit was 2.6% of gross domestic product in the fiscal year ended March 31.  The RBI allows the exchange rate to be market-determined and intervenes in the foreign exchange market only to smoothen out excessive volatility.

WSJ

Rural demand growth can push up inflation: D Subbarao

MUMBAI: Job creation will be one of the key challenges of the new reform policy , said RBI governor D Subbarao while releasing the India Development Report in Mumbai.  "Demographic dividends are not independent, we need to find jobs for the young population," said Subbarao. Though services has contributed 65% to India's GDP, the governor feels manufacturing and agriculture will have to be developed for job creation. According to the India Development Report, economic sustainability is in doubt because of issues like stagnation in agriculture, marginal growth in the manufacturing sector post the reforms and doubts about the sustainability of services-led growth in the context of weak linkage with the farm sector.  The advantage of the liberalisation should have ideally shifted towards agriculture. Though the leakage in NREGA has come down, it is still unclear whether trade is shifting towards rural areas. The governor also raised concerns that growth in rural demand can push inflation up.  He has also stressed upon RBI's need to focus on external factors for sustained growth momentum. Some of them include maintaining sustainable level of current account deficit, market-determined exchange rate and a calibrated approach to capital account convertibility and ample foreign reserves to buffer against uncertainties.

ET

Gradual approach to achieve full convertibility: RBI



(L to R) T C A Srinivasa Raghavan, Associate Editor, Hindu Business Line, D Subbarao, RBI Governor, S. Mahendra Dev, Chairman of the Commission for Agricultural and Vikas Chitre, Director, Indian Institute of Political Economy during the release of 'India Development Report 2011' at the RBI headquarters in Mumbai



Mumbai : The Reserve Bank of India (RBI) on Monday said the country would adopt a calibrated approach towards full capital account convertibility so that the macroeconomic stability was not affected. “India needs to adopt a calibrated approach to achieve full capital account convertibility,” RBI Governor D Subbarao said in a speech here. The Indian rupee is fully convertible on the current account but only partially convertible on the capital account, as the government wants to shield the economy from sudden outflows of foreign capital in the times of crisis. RBI had appointed a committee to chart out a road map for fuller capital account convertibility. The committee, headed by former RBI deputy governor S S Tarapore, had suggested a three-phased approach to making the rupee fully convertible. Subbarao also reiterated that RBI looked at market-determined exchange rates and its intervention in the foreign exchange market was only to limit volatility. India’s forex reserves were at $315.715 billion in the week ended July 1, according to RBI data. “We need to focus on the external sector, which means looking at a sustainable level of current account deficit and a market-determined exchange rate but an exchange rate managed by RBI such that there is no volatility and it doesn’t militate against macroeconomic stability.” India’s current account deficit stood at 2.6 per cent of gross domestic product in the financial year ended March 31.

BS

RBI favours manufacturing over services-led growth model

“We forget the most important thing-- demographic dividend is not inevitable. To reap the demographic dividend, we need to find jobs for the 150-200 million people who will be thrown out of the farm sector (in the near future.”

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NDCCB faces RBI strictures

..... RBI has issued directives under the Section 11 of the Banking Regulation Act, the cooperatives have to now attain a positive net worth within a specific deadline. This means the banks' own funds should be more than the losses, if any......

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Inflation must be brought down to 5%: Rangarajan

Hyderabad : It is important to bring down inflation to five per cent in the medium term, according to Dr C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister. Speaking on ‘Current economy and policy options' at the College of Defence Management here on Monday, he said: “We need to use all policy instruments to achieve this.” The Reserve Bank of India is likely to consider changes in the policy rates in its first quarter policy review slated for July 27.  Along with measures to increase supply of essential items, the monetary and fiscal policies have to be tightened, the economist said. Food inflation is expected to come down in the coming months due to monsoon, among other factors.  The economy has potential to grow in the range of 9-9.5 per cent during the 12{+t}{+h} Plan period while in the present year, it might clock a growth rate of 8-8.5 per cent. For achieving this, it is important to control inflation, maintain a ‘comfortable' current account deficit and take up fiscal consolidation, he said.  “There is a need to control expenditures, especially on the subsidies,” Dr Rangarajan said. Referring to the recent hike in diesel prices, he said the Government might have to ‘act again' on diesel prices, if there is any further hike in international crude oil prices. Later, while responding to questions from newspersons, Dr Rangarajan said: “Probably, the RBI would act (on the interest rates) if inflation persists at a higher level.” Inflation is , however, expected to come down to 6.5 per cent by March 2012, he added. Food inflation has already come down to 7.7 per cent, driven by decrease in cereal prices even though prices of fruits and vegetables continue to be on the higher side, he pointed out.

HBL 

Damodaran panel on customer services submits report to RBI

Mumbai: The Reserve Bank of India will soon unveil measures to revamp customer services in the banking industry. A committee, constituted by the RBI under the former Sebi chairman M Damodaran to prepare a report on the customer services, submitted its report to the central RBI on July 4. Speaking to FE Damodran confirmed the development. The source added that the report, which runs in more than 160 pages, was likely to be put in the public domain by the apex bank shortly. The committee was asked by the RBI to look into banking services rendered to retail and small customers, including pensioners. Also, the committee was asked to look into the system of grievance redressal mechanism prevalent in banks, its structure and efficacy and suggest measures for expeditious resolution of complaints. Earlier speaking to FE KC Chakrabarty, deputy governor, RBI had said, “Providing a good customer service is the job of the banks. If they don’t do so, customers will punish them. If need be, we will bring more competitors and we are working in that direction too by allowing more players. Customer laws have to be strengthened. My priority is to reach to people who are not getting any service at all,We are trying to create an ecosystem to make financial inclusion (FI) more robust.” The committee which was formed in June last year and was supposed to submit its report within a period of four months from its first meeting was expected to submit the final report in June. Some of the other members of the committee include Union Bank of India CMD MV Nair, former Indian Bank CMD MS Sundar Rajan, National Consumer Disputes Redressal Commission former member P Rajyalakshmi Rao, All India Bank Depositors’ Association secretary Ashok Rawat and the former Banking Codes & Standards Board of India chief executive officer, BM Mittal. Interestingly, the Karnataka high court had sought the committee report in connection to a public interest litigation PIL. The PIL was against the service charges by banks from its customers for not maintaining minimum balance in their bank accounts. Also, the PIL was against the interest being charged by the banks for the delay on the part of customers in the payment of credit card dues.

IE 

Banks refuse NATGRID client info

NEW DELHI: Banks have refused to share information related to customer details with the government's ambitious anti-terror National Intelligence Grid (NATGRID) citing violation of the confidentiality clause and the possibility of fraud. The proposal — that is key to tracking terror financing by NATGRID — has been rejected by banks unless a specific legislation is brought that would make it mandatory to share information. This is the first time that financial institutions have expressed concern publicly over sharing information with intelligence agencies. NATGRID is expected to link 21 data sources from 11 intelligence agencies to provide real time information to counter threats to India's internal security and combat terrorism.  The Reserve Bank of India (RBI), in response to an RTI query, said, "Banks opined that such sharing of information may not be possible given the extant customer confidentiality clause and the possibility of frauds. However, in case any specific legislation for providing the information is passed, banks would comply with provisions."  RTI activist Venkatesh Nayak had sought information on the interface between NATGRID and financial institutions and decisions taken from RBI. NATGRID has been categorized as an intelligence and security agency and exempted from disclosure of information under the RTI Act.  The RBI also said there were two meetings between banks and NATGRID in 2010. The meetings held on October 1 and December 22, included public and private sector banks, foreign banks and money transfer agencies. RBI said it had informed bankers about the government's request for information on customer name, address and account number which was turned down.  NATGRID was envisaged after the Mumbai terror attacks as a system that would provide integrated information sharing. Despite concerns about security preparedness, there has been little headway with ministries including finance, defence and home caught in a turf war. The project actually received clearance for setting up of infrastructure only in May this year. The Cabinet Committee on Security cleared Rs 1,200 crore to establish a minimum infrastructure in the next 18 months.  There has been widespread concern over the use of data that will be accessible to intelligence agencies. Nayak said the issue was as much about security as about people's right to privacy. "It is not merely about securing data that is found on the computers of public and private sector and security agencies. It is also about the our right to know what data will be or has been collected about us, what uses such data will be put to and what measures have been laid down for each one of us to access our own personal data," he said.

TOI 

Poor performance of co-op banks worries Modi

PATNA: The Reserve Bank of India (RBI) has given license to conduct banking activities to just two of the 22 cooperative banks operating in the state and, therefore, the banking activities of the remaining 20 cooperative banks, if they have engaged themselves in such activities, would be in contravention of the RBI rules and banking norms.  This transpired at the recent review of the activities of the 22 cooperative banks operating in Bihar conducted by deputy CM Sushil Kumar Modi. The RBI representative present at the meeting informed Modi that only two cooperative banks had been issued license to conduct banking operations in the state.  The RBI representative also said applications of 12 other cooperative banks seeking to do banking activities were under review at the level of the country's central bank. If the 12 cooperative banks fulfilled the criteria required, then they would be issued license, the RBI representative said at the meeting. He added that the performance of seven of the 20 remaining cooperative banks was unsatisfactory and, therefore, they may not be issued license to conduct banking activities in the state. According to the RBI representative, the demand for license by the cooperative bank operating at Siwan was under process.  On the other hand, Modi also expressed unhappiness over the failure of the cooperative banks to provide enough number of Kisan Credit Cards (KCCs) to farmers. He said these banks have provided KCCs to only 42,571 farmers during the 2010-11 financial year against a revised target of 1.60 lakh.  Moreover, the agriculture loan given to farmers holding the KCCs was only Rs 85.95 crore. Modi, in the situation, told the chairmen of the 22 cooperative banks present at the review meeting to activate their respective cooperative banks to extend agriculture loan to farmers. He also told them to meet the target fixed regarding the issuance of KCCs to them in the current financial year for the benefit of farmers.  To streamline the activities of the cooperative banks in tune with the recommendations of the Baidyanathan Commission, Modi told them to appoint chief executive officers of their respective banks fulfilling the already defined criteria and selection process. The CEOs selected should have at least eight year service in banking services besides they must be below 55 years, Modi added.

TOI

RBI frown makes SBI shelve JV with Tata Motors Finance

...... State Bank of India (SBI) has put on the backburner its plan to acquire a stake in Tata Motors Finance, following the Reserve Bank of India’s (RBI’s) objection.......

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Nomura backs RBI rate increase transmission

The Reserve Bank of India’s (RBI) action in raising rates appears more effective now than in the past, as commercial banks continue to increase lending rates aggressively, amidst tight liquidity and rising cost of deposits. “The improved transmission was a result of the rate hikes being complemented by tight money market liquidity. This raised bank funding costs substantially, resulting in faster increase in lending rates,” said a note by Sonal Varma and Aman Mohunta, economists with Nomura Financial Advisory and Securities.  RBI had raised its repo rate, at which banks borrow from it, by 275 basis points to 7.5 per cent since March 2010. The rate is still 150 bps below its 2008 peak of nine per cent. In response, the country’s largest lender, State Bank of India, raised its benchmark prime lending rate (BPLR) by 225 bps to 14 per cent during this period. SBI’s current BPLR has also surpassed its 2008 peak of 13.75 per cent. Its base rate has also gone up 200 bps since it was first introduced in July 2010. The base rate is currently 9.5 per cent. ICICI Bank, the largest private sector lender, raised its prime lending rate and base rate by 200 bps each. The bank’s prime lending rate is currently 18.25 per cent, higher than its 2008 peak of 17.25 per cent. Its base rate is 9.5 per cent. “In our view, arguments that real repo rates are still negative in India overlook this important fact (of higher transmission),” Nomura economists said. According to them, the repo rate need not touch its past peak to have the desired impact on the banking system.

BS 

Hit by slow credit offtake and thin margins, banks will outsource 50% ATMs by 2015

....... About a couple of years ago, RBI allowed banks to expand their ATM network directly or through independent ATM deployers without its prior approval. While the transaction is free for the customer, there is a cost for the bank which owns the ATM. The transaction cost is recovered from the bank that has issued the card. Banks get into 5-7 years contract with ATM outsourcers and either pay a fixed monthly charge or fee based on the number of transactions. The outsourcing model also ensures a higher level of efficiency...............

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RBI penalises two Gujarat-based cooperative banks

MUMBAI: The Reserve Bank has imposed a penalty of up to Rs 1 lakh each on two Gujarat-based cooperative sector lenders -- Dahod Urban Co-operative Bank Limited and Pragati Sahakari Bank Limited -- for violation of its guidelines.  In case of Dagod Urban Co-operative Bank, the RBI has imposed the fine for giving donations beyond the permissible limit. It was also found violating the Know Your Customer (KYC) and Anti-Money Laundering guidelines.  In case of the Pragati Sahakari Bank Limited, the RBI imposed the fine on the cooperative bank for violation of cash transactions reporting norms.

ET 

Alert: Don't fall prey to sms fraud

................Reputed automobile companies such as BMW, Honda, Mercedes, fast moving consumer goods (FMCG) giants like Coke and Reebok, banks, the Reserve Bank of India (RBI) and the British Broadcasting Corporation (BBC) are some names fraudsters commonly use to con you. Giving out details like your name, address, mobile number and email address may seem fairly harmless. However, if in wrong hands, these can be used for notorious purposes..............

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Who’s accountable?

This refers to the article “Provisioning for credibility” (July 11) by K P Shashidharan. The author has expressed his dismay at the absence of collective wisdom in the pillars of corporate governance represented by various committees in banks. The truth is that these committees have succumbed to the pressures exerted by the dominant leadership. The Reserve Bank of India (RBI) or, for that matter, the government can create any number of pillars of corporate governance but that will not guarantee good governance.  It is common knowledge that most public sector bank managements indulge in window dressing to suit the tenure of their CEOs. But the question is that why has RBI remained a mute spectator?  If RBI, as claimed by the author, has stringent norms on corporate governance in banks, then it should accept the responsibility for allowing window dressing on such a large scale.

KV Rao, Bangalore (BS) 

Curbing fake currency menace

I refer to the article “Is the RBI helpless in dealing with fake currency notes”? (DH, July 9). The author has suggested demonetisation of currency as a solution for fake currency menace. With inflation the intrinsic value of our currency has come down significantly. Demonetising lower currency is not feasible as we need to carry on our financial transactions with them. Government should retain 100, 50 and other lesser denomination currencies. However higher denomination currencies like 1000 and 500 series should be demonetised. This will not only curb black currency transactions but also control the menace of fake currency. But the economics of printing and the sheer logistics of moving huge volumes of money will be a natural disincentive.
H N Ramakrishna, Bangalore (Deccan Herald)

Cashing in on a Rare Fortune

"Money attracts more money"!  - Investing in rare coins, currencies can help your portfolio

"Coins and bank notes can be ideal investments to diversify  your  portfolio. As more collectors are getting interested and the supply is comparatively less, it can be a very good investment channel for investors who are looking for longterm gains. But those looking for high returns in the short-term, should avoid putting their money in coins,".....

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Who will be the next RBI governor?

Will D. Subbarao get an extension after his three-year term as India’s chief money manager comes to an end on 5 September? Newspaper and television channels have started speculating on Subbarao’s likely successor as well as an extension as Reserve Bank of India (RBI) Governor with right earnest. Each time an RBI Governor’s tenure comes to an end, this has been a normal practice in Indian media. This time around, three names have been doing the rounds—Raghuram Rajan, a University of Chicago professor, an Economic Advisor to the Prime Minister and former Chief Economist of the International Monetary Fund;  Kaushik Basu, Chief Economic Advisor in the finance ministry; and Economic Affairs Secretary R. Gopalan. And many believe Subbarao will get an extension. Before his predecessor Y.V. Reddy’s five-year came to an end in 2008, the media indulged in similar speculations. Reddy, one of the few RBI Governors who were given a five-year term from the beginning, had made it clear that he would not like to continue after his term expires. Planning Commission Deputy Chairman Montek Singh Ahluwalia was a strong contender for the post. Adarsh Kishore, an Executive Director at the International Monetary Fund, and Rakesh Mohan, then  Deputy Governor at RBI, were also in the fray. Mohan, the first Deputy Governor born after independence, came to RBI in late 2002 but, before finishing his three-year term, moved to Finance Ministry as Secretary of Economic Affairs, only to come back to the central bank after eight months. His familiarity with RBI and his reputation as an economist were the factors in his favour. He was even informally interviewed by then finance minister P. Chidambaram but ultimately Finance Secretary Subbarao was chosen for the post. If indeed Subbarao gets an extension, it won’t be a first for a serving Governor. In fact, Reddy’s predecessor Bimal Jalan, who served for six years, received an extension as did C. Rangarajan, who was Governor before Jalan, for five years. I am not aware whether the government has initiated any formal process to identify Subbarao’s successor. In fact, there is no formal process for such an appointment. There is no search committee to prepare a list of candidates. The Prime Minister ’s Office (PMO) chooses the Governor with inputs from the Finance Ministry and the outgoing Governor. The politicians of the ruling party, and even regional parties, do play a role in the selection but the corporate houses that normally try to influence the appointment of chiefs of commercial banks don’t have a voice here. In its 76-year history, only once has a commercial banker been appointed Governor—A. Ghosh—who held the post for three weeks in 1985. By tradition, bureaucrats and economists are considered for this post. Ahluwalia was also the strongest contender for the Governor’s post in 1997 when he was the finance secretary, but Jalan, then member secretary, Planning Commission, piped him to the post. Arjun Sengupta, also a member of the Planning Commission, was in the fray at that time. When Jalan moved out of Mint Road in September 2003 before completing his extended term to become a Rajya Sabha member, two bureaucrats were keen to replace him but neither N.K. Singh, then a special secretary at the PMO, nor S. Narayan, then finance secretary, could make it. Reddy, who was a deputy to Jalan as well as his predecessor Rangarajan, came back to head RBI, cutting short his stint as India’s director on the executive board of the International Monetary Fund (IMF) in Washington.  Jalan, RBI insiders say, was in favour of Reddy over others as he was not fond of the idea of a finance secretary moving to the Indian central bank directly from North Block, the secretariat building on Raisina Hill that houses the finance ministry. Apparently, he thought this would encourage bureaucrats to consider the RBI governor’s post as an automatic career progression. Jalan himself was a finance secretary but there was long gap between his stint at North Block and RBI. Reddy, it seems, did not push his deputy Mohan for the top job and Subbarao came directly from North Block. Bureaucrats in Delhi say Prime Minister is in favour of Rajan while the finance minister’s candidate is Basu. Meanwhile, newspaper reports suggest a couple of past RBI governors strongly feel that Subbarao should continue as he has been doing a fine job. There is no way I can confirm the veracity of such claims but there is no doubt that an early government announcement will help remove uncertainties that has gripped the financial sector. With inflation continuing to rule very high and many believing that India’s policy rate is coming close to a peak, balancing price stability and growth will be a tough task for the central bank in coming months. Apart from taming inflation, RBI also needs to close a few projects such as private entities’ entry into banking, savings bank rate deregulation and larger play for foreign banks. There have been enough discussions on these but no closure in sight as yet. One critical difference between Subbarao and his predecessors Jalan and Reddy is that the two past governors had competent deputies who could move to the corner room at the RBI headquarters in Mumbai but Subbarao’s deputies are relatively inexperienced for the top job at this point of time. During his five-year tenure, Reddy only raised rates to contain an overheating economy. Subbarao brought down the policy rate from 9% to 3.25% to prop up a sagging economy, and later, with the rise in inflation, pushed the rate up to 7.5%. This will probably rise a little more till September. So, his rate actions will take a V shape. If indeed Subbarao gets an extension, his rate actions may look different—three-fourth of a W.

Tamal Bandyopadhyay – Mint