Evaluating the macroeconomy

The Reserve Bank of India's latest annual report, released recently, makes a candid assessment of the macroeconomic performance during 2010-11 and the prospects for the current year. Although the economy returned to its high growth path, it faced several challenges: investment activity slowed; fiscal consolidation was led by cyclical and one-off factors casting doubts on its sustainability; and inflation remained stubbornly high on the back of new pressures. The RBI responded to the challenge of inflation by raising policy rates by 4.75 percentage points on a cumulative basis from March 2010. The report points out that high inflation by itself would have brought down growth. When inflation is high, the theoretical tradeoffs between inflation and unemployment or between inflation and growth do not work. Well into the current year, inflation has continued to be the number one concern for policymakers. The RBI is poised to raise interest rates further even though it is well recognised that some of the growth momentum will be lost in the process. Indeed, the lower GDP growth at 7.7 per cent in the first quarter is partly attributed to the high interest rate environment.

The RBI's GDP growth projections for the current year have been more modest than those of the government. However, even with the expected deceleration, growth is likely to remain close to the trend of about 8 per cent, the rate forecast by the central bank way back in May. Inflation is expected to remain high for the rest of this year and moderate to about 7 per cent by 2012. In the absence of supply side responses, monetary policy has its own limitations as an instrument for curbing inflation, although it can still play an important part in countering the second-round effects of supply-led inflation. On current assessment, the fiscal deficit this year is likely to overshoot the figure anticipated in the budget. The deficit will widen further, if the economy slows down, as feared, and the revenues drop sharply from the anticipated levels as a consequence. On the other hand, the current account deficit can be contained within a sustainable level of 2.7-3 per cent of the GDP. However, the outlook for the external sector during 2011-12 looks uncertain. The annual report lists six medium-term challenges for the Indian economy. Predictably, bringing inflation and inflationary expectation down to acceptable levels tops the list. It is one thing to get the diagnosis right; it is yet another to come up with the remedy.

HBL

RBI banks on financial solvency and credibility

... Yes, the draft guideline is ready but before the RBI makes it a final one, the Parliament will have to make some amendment in the existing banking regulations. As the government at the Centre is already saddled with many financial bills, it is not clear when the bill to amend the Banking Regulation Act will be taken up and cleared.....

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How should the govt exercise owner’s right?

RBI has made it clear that it will give licence on a “very selective basis” and “it may not be possible…to issue licences to all the applicants meeting the eligibility criteria”. A senior professional of an industrial house suggests that if there are too many candidates and all of them technically qualify, RBI should auction the licences...

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Bank capital structure: Does Modigliani-Miller operate?

...It would appear so if the Reserve Bank of India's draft guidelines on the entry of new private banks is any indication. Indeed, an interesting conceptual issue thrown up by the draft guidelines is about the validity of that well-known capital structure theorem in the realm of banking and, more generally, financial intermediation. ...

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FDI Deals Should Not Come with Any Strings Attached: RBI

The Reserve Bank is hardening its stand on FDI deals to drive home the point that there should be no strings attached to such inbound flows. In eight out of 10 FDIs, foreign investors have a right to sell back shares to Indian promoters if certain conditions are not fulfilled. In the last few months, the RBI has questioned many such deals as it thinks such inflows are foreign ‘loans’ and not ‘equity’. This is turning out to be a hotly-debated issue amid arguments that such a regulatory stance is not only misplaced but can also slow down FDI. But, according to recent communications, the central bank is not only sticking to its stand but also thinks that such transactions are ‘illegal’. The RBI feels that a sellback right, or a put option, to foreign investors amounts to one-to-one derivative deals. Since equity derivatives can be traded only on stock exchanges, such over-the-counter (OTC) contracts are not permitted under law. Under Indian laws, banks and corporates can enter into foreign currency and interest rate derivatives. These are transactions done to lower the cost of borrowing and lock into a better foreign exchange rate to extract more out of export receivables. While currency and interest rate derivatives can be OTC deals as well as traded on exchanges, stock futures and options have to be traded and settled in a registered stock exchange. “The central bank has recently expressed views that such OTC deals are illegal. The regulator, in some cases, has taken a view that such agreements may be viewed to be in violation of the FDI policy and Fema regulations. This may cause great exit uncertainties for foreign investors,” said Siddharth Shah, who heads the funds practice at the Mumbaibased law firm Nishith Desai Associates. However, industry circles think that a put option in an FDI agreement cannot be equated with a stock option traded on exchanges: in exchanges, options can be traded and cash settled with receiving and delivering underlying shares; but put options in FDI shareholder pacts result in shares changing hands since the option and the shares are inseparable. There is a distinct possibility that the present standoff between the regulator and industry could boil over into litigations. Corporates have been arguing that a sell-back agreement does not convert an FDI into loan simply because it is the promoter who is buying back shares and not the company which is receiving the FDI money. Perhaps, in the face of such an argument, RBI has taken a tougher stand to arrive at a view that put option clauses in FDI deals are stock derivative contracts. According to regulatory sources, RBI is keen to ensure that FDI deals are plain-vanilla, long-term equity risks; making them quasi loan – as RBI thinks they are with put options — can blunt the power of monetary policy and interest rate hikes because companies that need money will sidestep local banks that charge a higher interest rate to source cheaper finance from offshore investors. Typically, foreign investors insist that they should be in a position to exercise such a sell-back right if the company where they invest fails to list its stock within an agreed time frame. Indeed, “Put option continues to be the most preferred mode of potential exit for the parties to the transaction, mainly due to the high level of uncertainty associated with capital markets exits in India,” said Punit Shah, executive director (tax & regulatory Services) at the consultancy KPMG. According to a ET report dated June 1, 2011, while in the past RBI had objected to deals, particularly by real estate firms, where securities issued by Indian firms (to foreign investors) are debt or quasi debt in nature, such as convertible debentures, optionally convertible bonds, compulsorily convertible papers and preference shares, it was now objecting to sell-back pacts in plain equity deals. “As long as such a sell-back agreement is not based on any fixed IRR (or internal rate of return) promised to the investor and is within the Fema pricing regulations, there is no reason why RBI should object,” said Anup Shah, partner at Mumbai-based chartered accountancy firm Pravin P Shah & Co. In fact, RBI is also understood to have questioned the shareholder agreement with foreign venture capital funds which are not bound by any price restrictions. Sources said that RBI’s attention was drawn on the subject by some of the local promoters who wanted to wriggle out of the buy-back commitments. “In cases where local promoters are willing to pay up, foreign investors have freely exercised their put option to exit. One of the large global real estate funds sold 80% of its portfolio in the last one year through this route,” said a real estate fund manager.  But more recently, RBI has been digging up old records and ‘FC-GPR’ forms, which companies have to submit with RBI after issuing shares to foreign investors. “RBI’s serious. Despite a slowdown in FDI, it’s toughening its stand. Many companies have received letters from RBI asking them to share their shareholder agreements. In some cases the regulator has warned that it may initiate the compounding process to fix fines that will have to be paid by the local company as well as the offshore investor,” said a banker.

ET

A cautious approach to new banks

The bias against large industrial houses has continued in the reform era

The Reserve Bank of India took one step forward in what has been a long drawn-out process of issuing licences for new banks in the private sector. The draft guidelines, which have been put up on the central bank's website, spell out the eligibility criteria, the organisational structure to be adopted by the new banks, the minimum capital requirements, corporate governance standards, the business model and related issues. The issue of giving licences to a few private parties to start commercial banks has always been a sensitive one. More so, at this juncture, when it is believed that the new policy relaxation is primarily for the benefit of large industrial houses and business groups. Before 1969, many leading banks, including Bank of India, Bank of Baroda and United Commercial Bank, were owned or controlled by leading business groups. In a two-stage process that began in 1969, the government nationalised these banks in a decision that had as much to do with domestic politics as economics. The case for the takeover was built on the ground that these banks were serving their private promoters' interests and that in any case there was a need to reorient the banking system towards national interests (a period of social control of banks preceded their takeover). The bias against large industrial houses has continued in the reform era. Following the guidelines of 1993 and 2001, some private banks came into being but none of them was sponsored by large business houses. However, this time it is likely that a few industrial houses will make the grade. The RBI discussion paper, which had considered the pros and cons of such a move, received wide ranging feedback. Even at the draft stage, the RBI has laid down stringent conditions.

Tough conditions

1. Eligible promoters: Entities/groups in the private sector, owned and controlled by residents, with diversified ownership, sound credentials and integrity and having successful track record of at least ten years will be eligible to promote banks.

In a significant move, the RBI has barred groups having even an exposure of 10 per cent (by way of assets or income or both) in real estate and/or broking activities over the past three years. Evidently, these sectors are ‘speculative' in nature and the business model adopted in such businesses will be ‘misaligned' with that required by a bank.

2. Corporate structure: New banks will be set only through a wholly-owned non-operative holding company (NOHC), which will be registered with the RBI as a non-banking finance company. All financial activities of the promoter group will come under the NOHC. The idea is to ring fence the financial interests of the group from its other business activities and give a measure of protection to the bank's depositors.

3. The minimum capital requirement will be Rs.500 crore. The NOHC will hold a minimum 40 per cent of the capital for five years from the date of licensing. The aggregate non-resident shareholding will not exceed 49 per cent for the first five years.

4. Corporate governance: At least 50 per cent of the directors of the NOHC should be independent directors.

5. The business model should be realistic and viable and should address how the bank proposes to achieve financial inclusion. The bank should have a fourth of its branches in unbanked rural areas. The RBI will have the powers to vet the business plan and pull up the promoters for any deviations.

6. Amendments to the Banking Regulation Act, 1949, will be carried out to give the central bank extensive powers in a wide range of matters necessary for effective supervision. The bank shall get its shares listed on the stock exchanges within two years of licensing.

HBL

Pranab to hold meeting with Chief Ministers, bank chiefs

In continuation of an economic exercise started last year for direct interaction with States, Finance Minister Pranab Mukherjee is slated to hold a meeting with western and central region State Chief Ministers and chief executives of public sector banks in Mumbai on September 17 to review problems pertaining to credit offtake and flow of funds to the farm sector.  The meeting, being convened a day after the RBI's quarterly monetary and credit policy review on September 16 in the wake of an uncertain environment of high inflation and economic slowdown, is likely to discuss, among other issues, the progress of centrally-sponsored schemes.

HBL

Don't allow big businesses to run banks: CPI (M)

...Referring to the draft guidelines unveiled on August 29 by the Reserve Bank of India for licensing of new banks in the private sector, party general secretary Prakash Karat said at a press conference here: “In the light of the global financial crisis sparked by the profligacy of banks and financial speculation in 2008, this is an irrational decision.” ...

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SKS may approach RBI for bank licence

....SKS Microfinance CEO and Managing Director M R Rao said the company does not see any major issue in meeting the eligibility criteria set by the Reserve Bank of India (RBI).......

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The Bank Customer is King? - DR. N. A. MUJUMDAR

Are we really pampering the customer of banks, particularly public sector banks (PSBs)? This is the question we are likely to raise when we see yet another " Report of the Committee on Customer Service in Banks" submitted by M. Damodaran, former Chairman of SEBI last month. There was the Talwar committee on customer service in banks appointed in 1975, the Goiporia Committee appointed in 1990; the Tarapore Committee appointed in 2004, made recommendations which led to the formation of Board level Committees for monitoring customer service in banks. Are we treating the bank customer as king? Not in reality, alas! The Damodaran Committee appointed by Reserve Bank of India in May 2010, aroused particular interest because the first among its six terms of reference was the following: " To review the existing system of attending to customer service in banks approach, attitude and fair treatment to customers from retail, small and pensioners segment". After perusing through this scholarly Report of some 150 pages one is disappointed that this specific issue has not been adequately addressed. Let there be no misunderstanding. It is a scholarly Report and the Committee has done its homework. It has sought guidance from " international best practices". The United Nations Guidelines for consumer protection, the Financial Services Authority, U. K.' s ( FSA) fairness commitment to be made by banks, the Community Reinvestment Act ( CRA) of U. S. A. which prohibits discrimination by banks against low and moderate income neighborhoods, all these were analysed by the Committee to derive policy inputs. The Committee has made excellent recommendations for streamlining Grievance Redressal System in banks, Banking Ombudsman Scheme, Banking Technology and Role of Boards of Banks in customer Service.

The Committee deserves to be congratulated on the high quality of the Report. This article seeks to highlight the fact that the Committee has failed to address adequately the problems faced by the small borrower the aam admi precisely what the terms of reference mentioned above required.

Glancing through the recommendations, one gets the impression that most bank customers are familiar with mobile banking, and receiving and sending SMS: if a bank wants to make an account inoperative, banks must intimate the customer by SMS; not maintaining the minimum balance should be intimated by SMS; small discounts should be offered to customers to promote electronic payments; provision to apply for small retail loan should be available in bank's portal and Internet Banking; and so on. No doubt your vegetable vendor may be using mobile phone today: but is he capable of sending and receiving SMSes? The perception of banking business by Reserve Bank today is reflected in the following statement of a Senior Officer: " Assets with banks are maintained more in digitized rather than physical form, transactions are carried out over technology- enabled platforms/ applications and communications are over electronic modes ..... There are newer products and channels of delivery. Networked environment has enabled delivery of banking services at the door step of the customer. Anywhere and anytime banking with core banking and newer delivery channels viz, ATM online banking and mobile banking etc. have provided convenience of banking to the customer and an increasing number of people rely upon the convenience and ease of inter net banking services, in their business as well as daily life". ( Secured Online Banking and Customer Convenience G. Padmanabhan, RBI Bulletin August 2011). It is such a perception of high profile banking which colours most of the recommendations of the Damodaran Committee. Are we focusing on elite banking or high profile banking, at the cost of core banking? One begins to wonder. Let us discuss the following three core banking issues.

First KC ( Know your Customer) Norms. Dr. S. S. Tarapore the veteran Central Banker, has been carrying on a one- man campaign to expose how many public sector banks ( PSBs) are using this instrument to shoo away the small customer from accessing banking services. He has put into public domain several concrete cases to demonstrate that small customers are prevented from opening accounts on flimsy grounds: authenticating residential address or even spelling mistakes in their names or localities in which they reside. The victims include domestic help, drivers or a labourers working with a construction firm. In this sense, Dr. Tarapore has bitterly argued that KC has become a synonym for " Kill your Customer". One does appreciate the security concerns but the managers at the branch level should be discerning enough to discriminate between bona fide cases and suspicious cases. The Damodaran Committee does refer to reforming " attitudinal aspects" and " rude Relationship Managers" but does not offer any concrete recommendations to redress them. It does, however, recommends that " self- attested photograph and address proof should be treated as sufficient kyc to open no frills account". In cities like Mumbai where 40 per cent of the population lives in slums or semi- slums, it may be difficult to produce documents re: residence. The point is bank managers should be flexible in appraising such documents. Financial inclusion campaigns will be meaningful only if mangers adopt a helpful attitude towards opening accounts. Secondly, on the positive side, take financial inclusion. Under this campaign, some 75 million no- frills bank accounts have been opened. Unfortunately, about 85 per cent of these accounts are not operational and the average deposit per account is Rs. 11 because the account holder's are not involved in any economic activities. What purpose on earth such " dead" or " near dead" accounts serve? Recently RBI has pulled up banks for paying lip service to financial inclusion and asked them to activate these accounts. Is this issue not part of customer service? Thirdly, in the not- too- distant pastsome public sector banks played a critical role in agricultural development. They appointed their own agricultural officers and provided extension services. This extension- linked credit was a great success. Today, with the Government deemphasing the role of the extension worker, there is a gap which could be usefully filled by banks. Agricultural growth is necessary not only for food security but also for overall growth of the economy. The main point to drive home is that when we talk of customer services of banks in India, we should grow out of the " international banking practices" syndrome. India- specific issues should receive equal emphasis Serving ( HNIs) high networth individuals or high profile bank customer is indeed banks' legitimate business. But this should not overshadow the core and traditional banking business, including serving and nourishing the small borrowers. Our banking culture should be so shaped that it blends the dual functions.

FPJ

CIC: Government employees have an equal stake in good governance

Chief information commissioner says citizens should get proactive about government functioning through the use of RTI. But this should not become a tool to harass officials. Rather, there should be minimum friction between the information seeker and the provider. "Even a government servant spends only 32% of his time at his job and he is an ordinary citizen for the rest of the time. His stake in the ruling government is much lesser than in his citizenship. So it is in his benefit to uphold the Right to Information and improve governance," Shailesh Gandhi, central information commissioner, said today. Mr Gandhi was addressing a seminar on "How to use the Right to Information effectively," hosted by Moneylife Foundation at Ravindra Natya Mandir, in central Mumbai.  The central information commissioner described the history and scope of the Act and outlined the provisions, and even elaborated on the proper format and procedure for citizens to seek information. He explained the functioning and powers of public information officers (PIOs) and deemed PIOs. "The procedure and system should be so smooth that there is minimum friction between the information seeker and the provider," Mr Gandhi said. 

Referring to an observation made by V.S.Das, Executive Director of the Reserve Bank of India, on the needless and voluminous queries that tax an organisation's resources and time, Mr Gandhi said the RTI should not become a tool to harass officials. He also drew attention to the definition of 'public authority' in the Act to point out that cooperative housing societies, unless specified by a government body or funded substantially by the government, cannot be termed as public authorities. However, he argued that public-private partnerships should come under the RTI Act. "A lot of public assets will be shifted to these PPPs soon, so these should be covered by the RTI. Otherwise, it will be like a fraud, when public resources are privatised without anybody's consent," Mr Gandhi said. The central information commissioner also talked about section 4 of the RTI Act, which relates to suo moto dissemination of information by public authorities, which he said is at the heart of the Act. On the matter of exemptions mentioned in the Act, Mr Gandhi gave examples from his personal in this area saying that government deals with any private businesses or parliamentary papers (six months after they are tabled) must not be exempted from the purview of the Act. "A PIO cannot deny information just by saying that the matter is sub judice or that it is personal," he said.  Asked about the proper way to sensitise people about the Right to Information and how to become pro-active in demanding good governance, Mr Gandhi said it requires a combination of lobbying and campaigning to develop a culture of transparency.  On disciplinary penalty for erring PIOs, the central information commissioner said, "Asking for more penalty is not a solution. Lots of corrective measures can be taken by the authorities within the framework of the law available." But he agreed that a time frame must be specified for the second appeal as well.

On the inspection of files under the Act raised by a participant, Mr Das, who is the appellate authority at the RBI, said that in case information was left out of the manuals and other documents, or they are not updated, the people should draw the bank's attention to this. On this matter, SS Mundra, Executive Director, Union Bank, said, "In physical form, most information is available at the offices."  Mr Das said RTI activism has a long way to grow. "Very few applications are received from less developed areas of the country. It we get only two applications from Tripura and four from Assam this year, I think there is a need to educate people on the scope of the Act," he said. Mr Das outlined the RBI's engagement with the Act, how the highly centralised operation had spread out to all its regional offices, and said that the RBI has proactively disclosed a lot of information on its website. "Being the central bank of the country, it is our duty to disseminate information and also protect sensitive data," he said. In six years since the RTI Act was adopted, the RBI has received over 18,000 applications, but only 16% of these have gone for first appeal.  In this respect Mr Mundra added, "There are doubts in the mind of both the provider and the seeker of information. The central information commissioner can dispel these doubts and give us guidelines on how to access and disseminate information." He said Union Bank was committed to organise six seminars on different topics with Moneylife Foundation this year and felt privileged to be a part of this initiative.  This seminar is the latest in a series of discussions on RTI organised by Moneylife Foundation, which have been very popular with alert citizens, activists and civil society workers.

Moneylife

JIMS holds National Seminar on Indian Banking

The objective of this seminar was to identify the emerging trends in this sector while keeping in mind the international perspective, in the context of global financial turbulence. Jagan Institute of Management Studies (JIMS) Group of Institutions, an institute of excellence in the field of management studies and technical education, today organized a National Seminar on “Indian Banking: Robust; Reliable; Resurgent”. Outlining and emphasizing the inspiring story of Indian banking sector that successfully sailed through the financial tornado witnessed by the global as well as the Indian economy a few years ago JIMS, organized the day-long seminar at PHD House in the capital. Present on the occasion were Chief Guest Nagesh Pydah (Chairman & MD, Oriental Bank of Commerce), Guest of Honour, Chandan Sinha (Regional Director, Reserve Bank of India) among others. Multiple technical sessions were organized on issues such as ‘Survival in Turbulent times and Strategy for Risk Management’, ‘Beyond Centralized Core Banking Solutions: Issues and Way Forward’ and entrepreneurial opportunities through working capital loans etc. Speaking on the occasion Dr. J.K. Goyal, Director, JIMS said, “JIMS takes pride in organizing a National Seminar on the robust and resilient Indian banking sector. The objective of this seminar was to identify the emerging trends in this sector while keeping in mind the international perspective, in the context of global financial turbulence. The success story of Indian banking sector could be attributed to the sound policies of our apex bank and fiscal stimulus packages provided by the Government. The experiences shared by the experts here at this platform today are bound to help our students in understanding, at a deeper level, the banking operations and appreciating our banking institutions.” The seminar was well attended by executives from banks, financial institutions, corporate, academicians, research scholars and JIMS’ students.

IIFL 

Sholinganallur taluk yet to get treasury account

CHENNAI: More than 18 months after coming into existence, the Sholinganallur taluk  office on Old Mamallapuram Road (OMR) remains without a bank account where money paid for land transactions, community certificates and other jobs can be deposited. Presently, applicants deposit the required sum at the SBI branch attached to the Tambaram taluk office on GST Road and submit the receipt at Sholinganallur. There is an SBI branch near the Sholinganallur taluk office but the RBI is yet to give its nod for the branch to receive money from the applicants. "The taluk office was opened on December 31, 2009. We gave complaints to officials at all levels of governance including CM's cell on grievances and commissioner of treasuries and accounts," says G Satish of Semmenchery. Most of the applicants are senior citizens and women, who come to get certificates for land patta, birth and death certificates, copies of land records and other documents, are the most affected. The distance between Sholinganallur and West Tambaram is 36km and the two are not directly connected by bus. People have to change two buses to reach Tambaram and walk another two km to the bank. "Delays, either at the taluk office or at the bank, force us to visit the taluk office often. For elderly people like me, it is physically tiring," says K Sarawathi of Perungudi. After a Government Order was issued on December 24, 2009, bifurcating Sholinganallur and Alandur taluks from Tambaram, the taluk office at Sholinganallur began functioning on December 31, 2009. Since then, however, it has not got proper administrative and infrastructure facilities. Officials say they have taken up the issue with the government many times. "The government has also written to the RBI for its nod to allow the SBI branch at Sholinganallur to receive amount from people coming to the taluk office but nothing has been done."

TOI

Threshold level for inflation is 4-6%, says RBI

The Reserve Bank of India (RBI) said on Saturday if inflation stayed beyond the threshold level of four-six per cent, it could hurt economic growth in the medium term. “The Reserve Bank’s current assessment suggests that the threshold level of inflation for India is in the range of four-six per cent. If inflation persists beyond this level, it could lower economic growth over the medium term. These costs, therefore, necessitate monetary policy response to control inflation,” Deepak Mohanty, Executive Director, RBI, said in a speech at the Indian Institute of Technology, Guwahati. With high global commodity prices likely to stay firm, the threat to price stability from global inflation continues to persist. Mohanty said the stance of the central bank was to bring down medium-term inflation to three per cent, which was consistent with the country’s integration with the global economy. “In this direction, monetary policy aims to contain perceptions of inflation in the range of 4-4.5 per cent, with a particular focus on the behaviour of the non-food manufacturing component,” he said, setting aside the theory of high inflation seen as ‘new normal’. India’s headline inflation has stayed much above RBI’s comfort zone for more than a year now, despite policy tightening measures. RBI has hiked the key policy rates by 11 times since March 2010. The central bank’s inflation management became more challenging, as supply side factors stoked food inflation. As Mohanty pointed out, inflation remained high on account of high food prices, rising rural incomes, high global commodity prices and increase in administered fuel prices. “Inflation has remained elevated and persistent over 18 months now. The inflation path was influenced by a number of domestic and international supply shocks.” He emphasised monetary policy recognised that over the long-run, high inflation was inimical to sustained growth, as it slowed investment by creating uncertainty which posed significant risks to future growth. “It was indicated by the Reserve Bank that bringing down inflation, given its generalised nature, even at the cost of some growth in the short-run, should take precedence,” he added.

BS

Reducing food inflation will take time: Pranab

Conceding that double-digit food inflation is worrisome, union finance minister Pranab Mukherjee on Saturday said the monetary policies of the Reserve Bank of India (RBI) will take some time to have an impact. "The double-digit food inflation is a matter of concern. There is a seasonal factor, but apart from the seasonal factor, there are supply constraints in some critical agricultural products which we have to remove," Mukherjee told reporters in Kolkata.  Stating that so far as the demand side was concerned, the monetary policies adopted by the RBI will take some time to have their impact, he said: "It will take some time to have full impact on the demand management. "In short and medium term, we are trying to improve the supply constraint so that the moderating influence of the inflation is felt in the coming weeks," he added. Food inflation was recorded at 10.05% for the week ended Aug 20, as onion, fruits, vegetables and protein-based items turned more expensive.

HT

How much is too much? Legal experts debate new bank norms

However, the question is are the restrictions threatening to make a Frankenstein out of RBI or is RBI opening a Pandora’s Box and the sector will be impacted uncontrollably?

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‘Business confidence levels have dipped' - Industry bodies want RBI to cut interest rates

Major industry bodies have come out with reports indicating a decline in business confidence levels and have called upon the Reserve Bank of India (RBI) to cut interest rates to boost sagging industry. The Federation of Indian Chambers of Commerce and Industry (FICCI) and the Confederation of Indian Industry (CII) have in their separate reports expressed concern over the global economic downturn and the U.S. fiscal position and the European debt overhang which in addition to the domestic factors were generating uncertainty about the economic outlook. The FICCI business confidence index (BCI) was at the lowest level in the last two years, while the CII quarterly BCI showed a decline by 8.9 points. Both the exercises were carried out in August. The CII, however, said expectations for the second quarter indicated a modest recovery, while FICCI forecast a further slowdown in gross domestic product (GDP) growth rate during the third and fourth quarters based on U.S. and India GDP growth correlation. Both CII and FICCI seemed to agree on the GDP growth rate for the current fiscal. The former expects it to be in the range of 7.5-8 per cent while FICCI puts it at 7.9 per cent. According to CII, most firms do not plan to increase investment plans and FICCI maintained that corporates saw a significant downward pressure on profit margins, affected by high interest rates and input prices. The CII held high interest rate and high raw material cost as the two top business concerns and FICCI pointed to the 11 times increase in interest rate by the RBI and said the tightening monetary policy had resulted in sharp slowdown in industrial growth and had also impacted consumer demand. FICCI suggested a cut in interest rate to boost corporate confidence including those of exporters who had taken a hit as well. According to the CII, other factors of concern to the business community are global economic and political instability and institutional shortages.

HBL

New banking guidebook: What does it mean to the industry?

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RBI for doing away with subsidised credit for farm sector

Pune The Reserve Bank today made a case for doing away with subsidised credit for the agriculture sector, saying timely availability of funds is more important. "Pricing of credit needs to be market-based to ensure effective flow of credit to all sections of the agricultural community," RBI Deputy Governor K C Chakrabarty said at the National Seminar on Productivity in Indian Agriculture here. "Emphasis has to shift from subsidised credit to timely and adequate credit at reasonable cost especially where credit delivery system is very weak and complex," he suggested. The Government of India provides 2 per cent subsidy on the short-term crop loan. The short-term crop loan is available to farmers at 7 per cent. It is also important to carefully monitor the usage of credit right from the input to the output stage so as to ensure proper utilisation, he said, adding, monitoring of credit should not only be limited to crops but also to related activities that are funded by financial institutions like NABARD. He also suggested that the delivery of credit by co-operative sector need to be improved and NABARD should play a key role in converging credit services with other requirements that support agriculture and allied activities, including updating the farmers which help in facilitating completion of production cycles and ultimate value creation. Although, he said, schemes such as Kisan Credit Cards have helped in improving credit linkage to farmers but we need to urgently look into ways to increase the supply of agricultural credit especially to small and marginal farmers. There is a need also a need to strengthen micro-insurance, particularly for small farmers to adequately weather vagaries of nature, which affect these farmers more adversely, he said.  

ExpressIndia

NRB urges RBI to purchase its US$ reserves for IC

KATHMANDU  -  Nepal Rastra Bank (NRB) has urged its Indian counterpart—the Reserve Bank of India (RBI)—to open its window for purchasing Nepal’s US dollar reserves in exchange of Indian currency. Currently, the Nepali central bank sells its US dollars to Indian commercial banks to get IC. If RBI opens the window, NRB can sell its dollars to the Indian central bank in case it is unable to find better exchange rate in the Indian market. “If RBI’s rate is better than that of the market, we can get IC from RBI which will be beneficial for the country,” said a senior NRB official. NRB had proposed the Indian central bank formally in this regard a month ago when Nepali officials visited the Indian central bank. “We also proposed the same during RBI governor D Subbarao’s recent Nepal visit,” said the official. Nepal has increasingly been purchasing IC in recent years due to huge trade deficit with India. As of the first 11 months of last fiscal year, Nepal’s trade deficit with India stands at Rs 200.87 billion, up by 26.2 percent compared to the same period in the previous year.  Not only has the trade deficit, Nepal’s trade dependence on India also risen to 66.9 percent as of the first 11 months of 2010-11 compared to 56 percent a year ago.  According to officials, NRB usually purchases IC twice a month by selling $20 million each time. “Lately, we are purchasing IC three to four times a month,” the official said. That’s why Nepal’s IC reserve has also increased to IRs 31 billion as of Aug 13 from the usual reserve of Rs 20-25 billion, according to officials. As of the first 11 months of the last fiscal year, NRB purchased IC worth IRs 111.31 billion by selling $2.46 billion. The central bank had purchased IRs 102.09 billion by selling $2.19 billion in the same period a year ago.

The Kathmandu Post

Inflation a serious problem, says Montek

New Delhi : The Planning Commission today termed the current inflationary situation in the country as a “serious problem” but exuded confidence it will improve by the end of the year. “Inflation is a serious problem. We need to worry about that... inflation, as of now, cannot be said to be under control,” the Planning Commission Deputy Chairman, Mr Montek Singh Ahluwalia, told reporters on the sidelines of a CII event. His comments came a day after food inflation entered the double-digit zone after a gap of over five months. Meanwhile, headline inflation, which also factors in manufactured items and fuel products, has been above the per cent mark since December 2010. Mr Ahluwalia, however, said high inflation is a global phenomenon. “Everywhere in the world inflation is higher...,” he said. Asked about his views on the likely trajectory of inflation in India, he said: “I am not predicting but I hope that by the end of the year it will be lower.”  He said the price situation is being constantly monitored. “That (inflation) is not the Planning Commission’s immediate concern. We look at it in the medium term... I am sure both the RBI and the Finance Ministry are doing what is necessary,” Mr Ahluwalia said. The Planning Commission Deputy Chairman also said that the country’s economic growth this fiscal would be around 8 per cent, lower than the 8.5 per cent achieved in 2010-11. “Growth (in 2011-12) will be 8 per cent... It is quite clear that we are cyclically seeing a slowdown compared to last year...,” he said. He further added: “Growth in India is going to be lower than in the last year but that is also true of the rest of the world. If India grows at 8 per cent in the current year, it will be the second fastest of any country in the world“. Mr Ahluwalia has in recent days maintained that economic growth this fiscal will not be more than 8 per cent, lower than government’s projection of around 8.5 per cent.

HBL

A Profile of Banks 2010-11

The Reserve Bank of India has, today, placed on its website A Profile of Banks 2010-11 . The publication, being seventh volume in the series, provides bank-wise and bank group-wise information on important performance indicators of all scheduled commercial banks, excluding regional rural banks, for the period 2006-07 to 2010-11. The publication covers about 18 important indicators, including return on assets, capital adequacy ratio (CRAR), business per employee, and profit per employee. To facilitate comparison, the publication also provides aggregates at bank groups and all banks level for 2010-11.

Highlights

·         Business per employee across the bank groups increased during 2010-11 over 2009-10, except for new private sector banks.

·         Profit per employee across the bank groups increased during 2010-11 over 2009-10, except for State Bank of India and its associates.

·         At all banks’ level, employees' productivity show improvement in terms of both business per employee and profit per employee; these two indicators have been increasing since 2006-07.

·         Profitability in terms of return on assets of all scheduled commercial banks at aggregate level improved during 2010-11. At bank group level, all the bank groups witnessed an increase in return on assets during 2010-11, except State Bank of India and its associates, which witnessed decline in return on assets.

·         CRAR of all banks at aggregate level declined during 2010-11.

·         Net NPA ratio of all scheduled commercial banks at aggregate level declined during 2010-11.

Copies of the publication can be obtained from the Director, Division of Reports and Knowledge Dissemination (Sales Section), Department of Economic and Policy Research, Reserve Bank of India, Amar Building, Ground Floor, P. M. Road, P. B. No.1036, Fort, Mumbai - 400 001. This publication is also available at the Reserve Bank's website on the Internet at ( www.rbi.org.in ).

Moneycontrol 

‘Our panel seeks to resolve problem of expenditure classification'

....If inflation shows signs of declining, it may be appropriate for the RBI to reverse the trend. But if it does not, I think the present stance will continue......

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Why NBFCs should not be treated as banks?

What's in a name? A lot, if you are a non-banking finance company (NBFC). For one, though, you are virtually a bank, at least as far as the assets side of your balance-sheet is concerned, you play by a different set of rules compared to banks.

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Salman Khan is like Reserve Bank of India

Mumbai: Salman Khan is like Reserve Bank of India. He creates money for him and his industry the way Reserve Bank of India mints money for the nation. RBI is bankers bank that delivers money or cash to all the banks. The same way Sallu Bhai delivers hit after hit, this giving hope to the industry. Irrespective of the economic slowdown or the best time for economy, the maverick bhai of the filmdom always comes with one surprise after the other, bringing smiles back on parched lips.

http://nvonews.com/2011/09/03/salman-khans-bodyguard-box-office-report-suggests-a-huge-hit-in-the-making/

RBI’s Tough Guidelines

This refers to the edit 'Cautious Opening' (ET, Aug 31). The RBI's new draft guidelines for the issue of fresh banking licences have defined some strict parameters. But the best among them is the stipulation to ensure 25% branches in rural India. But chances are that very few new banks will be ready to meet this particular criterion. In such a scenario, how the central bank will pick and choose new banks would be interesting to watch.

BAL GOVIND, Noida (ET)

RBI guidelines

1.  This refers to “Raising the bar” (editorial, Sept. 1) on the set of “draft” guidelines issued by the Reserve Bank of India permitting the entry of new private banks. It is quite paradoxical that our policymakers cry from the rooftops for merger of public sector banks while simultaneously opening the gates to more private banks. The disastrous collapse of the much talked-about private banks is a matter of the immediate past that demands a serious study and reversal of wrong policies. The government has done precious little on rural credit despite the shocking number of farmers' suicides. The record of private banks in this area is well known. Further, the draft guidelines pose a threat to hard-earned savings in these new banks, enabling take over by foreign capital after five years of inception. The issues raised by employees of nationalised banks must be taken note of.

S.V. Venugopalan, Chennai

2. Further to the Finance Minister's budget speech in March 2010, the modified policy on the opening of new branches by promoters and corporate bodies has assumed importance. The recent RBI amendments issuing licences for opening new branches have taken a pragmatic view towards enhancing the Indian economy. The banking sector can now reach remote corners of the country.

K.V. Balachandran,Chennai (HBL)

In RBI's interest

“The slowdown has arrived” (Business Line, September 1) made interesting reading. Today's inflation numbers clearly indicate that the RBI should not relax its inflation watch and continue its hawkish stance. Why are real estate prices so high? If prices are reduced, will not demand pick up? Automakers have not indicated a major decline in sales. In fact, there have been increases in certain cases. Why the cry for low interest rates?  The RBI has resisted pressure from interest groups to reduce interest rates. Kudos to the RBI to sticking to its dharma of inflation control! As the RBI governor rightly stated, economists should be people-oriented.  Given the present difficulties in sourcing External Commercial Borrowings (ECBs), corporates should prepare for much tighter liquidity and higher interest rates.

Srinivas (HBL)

What are the PMO, the RBI, and the finance ministry smoking? - Surjit S Bhalla

Dr Subbarao, the governor of the Reserve Bank of India, has outlined five principles for policymaking. How does he, and his ultra-hawkish monetary policy, stack up against his own principles? Let us find out.

The first principle is that “people matter”. Presumably that means that both growth and inflation matters: the latter because it hurts purchasing power, and the former because it hurts jobs. Inflation has been stuck at a high level of 8 to 10 per cent for the last six months, and that is both good news and bad news. Good that it hasn’t increased, and bad that it is too high.

On growth, the RBI’s record is not only not good, it is plain bad. Industrial growth has crawled to the slowest pace in the last 10 years (excepting the global recession months between September 2009 and October 2010), and growth in construction, where jobs and income and people really matter, has come to a standstill. According to the latest GDP data, year-on-year construction growth was just 1.2 per cent.

Second principle: when economists build models, they should fit it to the real world, and not the “real world to the models.” What reality has the RBI targeted? It alone, in the entire policy making world, utilises a monetarist model to tackle inflation. Worse, it alone uses the WPI as an indicator of inflation. If the US were to use this indicator, then it would presently show inflation at a 6 per cent annualised rate versus the 9 per cent observed in India. Given that developing countries have a 2 to 3 per cent higher inflation rate than developed countries, it does not seem that Indian inflation is that much out of line. So maybe the good doctor can tell us about whether he is living in a model world of virtual monetarism?

Third — fourth and fifth and sixth? — principles: “Economic policymaking is more than a straight application of textbook knowledge; you need to apply judgment, avoid groupthink and have a sense of history.”

History and Judgment: Subbarao’s RBI increased the repo rate by 125 basis points from 6.75 per cent to 8 per cent in the space of just 3 months. This is the second fastest increase in history, nearly matching the gallop from 8 to 9 per cent in June-July 2008. In an eerie repeat of history, at the time Dr Reddy instituted the record hikes, industrial production growth had slowed to a near zero per cent rate in August 2008, actually 1.9 per cent. According to the new IIP index, August 2008 witnessed a low growth rate of 5.4 per cent; in both April and May 2011, IIP growth was a low 5.8 per cent.

The history lesson continues. In 2008, just two months after the record hikes, and level, of the repo rate, the world economy entered a big-time slide. In 2011, at the time of Subbarao’s BMW speed hikes, the world economy is also in trouble. There was serious talk of a Euro, and European, crash. No one is raising rates anymore, and just a few days back, Brazil has actually reduced the repo rate notwithstanding the fact that inflation in Brazil is some 2 to 3 per centage points higher than the Brazilian “target” or “comfort” level.

Groupthink: RBI’s hawkishness, and policy, has been nose-led by the groupthink of several domestic journalists and many investment bank economists. The argument by these scholars has been repetitive and grossly misleading. Unlike what their peers do in other countries, these scholars have failed to note the decline in the more accurate CPI inflation (from a level of 16.5 per cent in January 2010, to a flattish 9 per cent for the last 1 year) and the fact that commodity prices are a major determinant of WPI inflation — and that the trend in international commodity prices is something they, or the RBI, can do precious little about. To reiterate, even in the very low-inflation US economy, wholesale or producer prices are up a hefty 6 per cent. Indeed, non-groupthink would dictate that Dr Subbarao take the lead of his counterpart in Brazil.

Textbook knowledge: In the non-application of text book knowledge, the RBI has made a grievous mistake, and with slowing growth, grievously is India paying for it. In recent months, the RBI has constantly been mentioning one price as a major contributor to India’s high inflation: the absolute price increases set by manufacturers of non-food items. It calls it “pricing power”. According to the RBI, this pricing power is indicated not by an increase in relative prices, but by an increase in absolute prices!

If input costs go up by 10 per cent and output prices by 5 per cent, the RBI would have us believe that there is pricing power on the part of the firm when in reality (assuming productivity and technological change to be zero) the firm is going out of business. Textbook economics would say that pricing power means at least an increase in the price of output relative to the price of inputs. According to the latest GDP data, manufacturing inflation (output prices) has stayed steady at 5.5 per cent since Jan-March 2010; the GDP deflator (input prices) has averaged close to 10 per cent. In the good overall inflation years of 2004 to 2007, inflation in the manufacturing sector averaged a higher 6.1 per cent, and GDP deflator inflation averaged a lower 4.7 per cent. One did not hear of the possibility of pricing power then.

It should be mentioned, or at least noted, that in 2008 there were strong rumours of the PMO and/or the finance ministry, dictating to Dr Reddy the July 2008 rate hike of 50 basis points. Most likely, this occurred because of a traditional misunderstanding, and panic, in these quarters about the political impact of inflation and its determinants. Something similar may have happened in the last two rate hikes of Subbarao. If that is the case, it does not say much about the “independence” of the RBI. And if that is the case, then the ban on smoking applies equally to the three sets of policymakers, and their staff, and their advisers!

The author is chairman of Oxus Investments, an emerging market advisory and fund management firm (IE)

S K Jain joins Union Bank as ED

Union Bank of India today said Suresh Kumar Jain has joined the bank as Executive Director. Jain, who joins the bank from Bank of India where he served as a General Manager, replaces S C Kalia who retired from service, a release issued by the bank said here. Having spent over 33 years in the banking sector, Jain has worked in various capacities in the country and abroad with specialisation in credit and foreign exchange, the release added.

MSN News

Banking system facing liquidity deficit: Pranab

The government today said that the banking system was facing liquidity crunch as was reflected from increased borrowings by lenders from the Reserve Bank of India (RBI). "The net borrowings by bank from RBI in the recent times, is a reflection of the deficit liquidity conditions," Finance Minister Pranab Mukherjee said to a question in the Lok Sabha. On an average, banks and primary dealers have borrowed Rs 46,298 crore on a daily basis from the RBI so far this fiscal (April-August). This is marginally lower than the Rs 46,946 crore borrowed in the previous fiscal (2010-11). "Borrowings by banks from the RBI with the government securities as a collateral is a normal liquidity management operation for banks and this happens whenever there is overall liquidity deficit in the system," Mukherjee added. According to the Minister, during 2008-09 and 2009-10, banks have placed funds worth Rs 4,212 crore and Rs 1,00,310 crore with the RBI. Banks invest in government securities as part of their statutory requirement to maintain the Statutory Liquidity Ratio (SLR), which is currently at 24%. The RBI managed the day-to-day liquidity in the banking system through its Liquidity Adjustment Facility (LAF). Under this facility, banks which are short of liquidity can borrow from the RBI (overnight) at the Repo Rate (8%), by keeping government securities as collateral. "This is in line with the best international practices," Mukherjee added. He said that increased bank borrowings from RBI indicates the strenghthening of the monetary transmission mechanism and is consistent with the anti-inflationary stance of monetary policy. As part of efforts to control inflation, the RBI has hiked policy rates 11 times since March 2010. However, inflation continued to remain on higher trajectory. The overall inflation, which crossed the 9% mark in December 2010, stood at 9.22% in July.

BS

SBI group's efficiency falls, other banks on a high

India’s largest lender, State Bank of India and its associates, fell behind other banks operating in India in efficiency in 2010-11, with a fall in both profit per employee and return on assets, compared to the previous year. “Profitability in terms of return on assets of all scheduled commercial banks at the aggregate level improved during 2010-11. All bank groups witnessed an increase in return on assets during 2010-11, except State Bank of India and its associates, which witnessed a decline in return on assets,”The Reserve Bank of India (RBI) said on Friday. SBI, which had recorded a 99 per cent per cent dip in net profit in the fourth quarter ending March 31, saw its profitability per employee down to Rs 3,85,000 in 2010-2011, against Rs 4,46,000 in 2009-2010. According to RBI, the return on assets also fell on a standalone basis to 0.71 per cent in FY11 from 0.88 per cent in the year before. For the SBI group, profit per employee and return on assets fell for the bank and its associates. Profit per employee fell from Rs 4,70,000 to Rs 4,20,000 and return on assets was down to 0.79 per cent from 0.91 per cent. SBI’s profits had been marred in the previous financial year on account of higher provisioning for both non-performing assets and staff related issues. The bank also has to provide nearly Rs 8,000 crore from its capital reserve for pension, which led to a fall in the bank’s capital adequacy ratio.

BS

ICBC, two more foreign lenders get banking permission

NEW DELHI: Reserve Bank has given permission to Industrial and Commercial Bank of China (ICBC) to start operations in India in 2011, the Lok Sabha was informed on Friday.  Besides, two other banks Rabobank International (The Netherlands) and Woori Bank (South Korea) have also been given approval to expand their presence in India.  In the last calender year, eight foreign banks, including DBS Bank, Credit Suisse AG and Barclays Bank, were given approval by RBI to open branches or expand the existing ones.  As of now, 38 foreign banks are functioning in India through 321 branches.  This information was given by Minister of State for Finance Namo Narain Meena in the Lok Sabha in a written reply.  Replying to another query, the Minister said State Bank of India (SBI) proposes to open additional branches/offices in Bahrain, Bangladesh, China, Germany, Hong Kong, United Kingdom, South Africa and Sri Lanka.  "While giving approvals for opening offices, RBI/ Government of India desires that only banks, which have the capacity to survive in a competitive global market are allowed (to mark their) presence abroad," Meena added.

ET

Tenure of home loans may be increased

..... Banks would give interest concessions on loans to MSMEs based on the rating they got from the RBI-empanelled credit rating agencies such as ICRA, CRISIL, and Dun and Bradstreet. Each bank must show an increase of 20 per cent in the amount of credit given to MSMEs as well as an increase of 10 per cent in the number of MSME beneficiaries (small units funded by the bank)......

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Inflation is big concern for RBI: RBI Deputy Governor K C Chakrabarty

NEW DELHI: With food inflation entering the double digit level at 10.05 per cent after a gap of five months, the Reserve Bank today said its main priority is to combat rising prices.  "I am again telling monetary authority anywhere in the world, inflation is the bigger concern," RBI Deputy Governor K C Chakrabarty said on the sidelines of Skoch summit here.  "Growth is always government's concern because government collects revenue. But then we (RBI) have to look at everything. We have to look at inflation. We have to balance the growth, we have to do everything," he said.  Food inflation rose to 10.05 per cent for the week ended August 20.  "Food inflation has gone up...This is really disturbing. We shall have to ensure and remove the supply constraints on food items," Finance Minister Pranab Mukherjee said after the weekly inflation data was released.  Attributing the jump in food inflation to seasonal factors, experts said it could again force the Reserve Bank to hike interest rates during its mid-quarter monetary policy review scheduled on September 16.  In its bid to anchor inflationary expectations, the RBI has raised policy rates 11 times since March 2010. In its July policy review, the central bank increased rates by a hefty 50 basis points. The short-term lending (repo) rate of RBI now stands at 8 per cent and the short-term borrowing (reverse repo) rate at 7 per cent.  Subsequently, the interest rate under the Marginal Standing Facility, an additional borrowing window, has gone up to 9 per cent from the earlier level of 8.5 per cent.

ET