RBI must fight inflation despite slowdown: Rangarajan



Inflation remains way above what is considered as the comfort level, said C. Rangarajan



New Delhi: India’s economy will grow at a lower-than-expected pace of 8% during the fiscal year, but a slew of rate rises are not solely to blame, and the Reserve Bank of India (RBI) should keep up its inflation fight, a top adviser to the prime minister said. Inflation remains way above what is considered as the comfort level,” said C. Rangarajan, the chairman of the prime minister’s economic advisory council said on Thursday. “In that situation it becomes absolutely essential for the central bank to act.”  At a time when peers around the world are easing monetary policy to head off a downturn in the global economy, the RBI is widely expected to raise rates again at its 25 October policy meeting. “The primary responsibility of the country’s central bank is to tame inflation,” Rangarajan said at a news conference in New Delhi. In a further sign the rate increases have failed to rein in inflation, the latest weekly data showed the food price index was up 10.60% through 8 October versus a year ago, compared with a 9.32% reading in the prior week. Sluggish industrial output growth, high rates and fallout from the euro zone crisis have all taken their toll on Asia’s third-largest economy, with its main policymakers revising down their growth forecasts for the fiscal year. Businesses have seen a steady rise in their cost of funding following a dozen rate increases by the RBI even as emerging economies such as Brazil and Indonesia have eased policy. “Slow growth in industrial production should not be entirely put at the door of rising interest rates,” he said, adding that economic growth was also hurt by bottlenecks on the supplyside, citing coal shortages and problems in the mining sector. Economists expect India’s slowing growth and inflationary pressures to stretch well into next year, a Reuters poll showed, and consensus predicts inflation at 8.8% in the year ending March 2012, much higher than their previous forecast in July.  Rangarajan, the adviser to Prime Minister Manmohan Singh echoed finance minister Pranab Mukherjee’s comments on Wednesday that most observers expect India’s economy to grow by less than 8% in the fiscal year.  The Union budget had projected economic growth of around 9% for this fiscal year that ends in March 2012. Both officials appeared resigned to another rate hike, despite grumblings from industry leaders that high borrowing costs were damaging investment. Rangarajan said India needs to use both fiscal and monetary methods to tame inflation and to maintain high growth. He predicted headline inflation would ease to 7% by March, when the current fiscal year ends. The council provides economic forecasts twice every year. It had revised downward its initial forecast of around 9% growth to 8.2% in July. Rangarajan said it will be difficult for India to meet the budgeted fiscal deficit target of 4.6% of GDP this year, without controlling subsidies. However, he said he did not expect the deficit to breach 5%. He said India needed to raise controlled prices for diesel to cut oil firms’ revenue losses on retail sales, adding such a move could happen when inflation starts moderating. India freed petrol prices in June 2010, but still subsidizes diesel, which accounts for about 70% of all petroleum products used in the country. Private economists see the fiscal deficit widening to up to 5.6% of gross domestic product in the current fiscal year, against government’s target of 4.6% as the gap between tax receipts and spending widens. India’s industrial output growth has dwindled to low single digits, while car sales are expected to rise just 2-4% this fiscal year, an industry body had forecast, sharply lower than 30% growth last year.  Headline inflation has been above 9% for 10 straight months, driven up by snags affecting food distribution, weakness in the rupee and high oil prices.

Mint

Singh’s Top Aide Signals Need for Higher Interest Rates in India

... “When inflation remains at a level which is way above what is considered to be the acceptable threshold level of inflation, then the monetary authority has a major responsibility to contain inflation, and therefore that becomes the primary focus of the monetary policy.”....

Read............

Coin crunch forces traders to buy change at 15% premium

NEW DELHI: Expect a pocketful of toffees by the end of your Diwali shopping this year as, traders claim, loose change has become scarce. Coins of Re 1 and Rs 2 denominations are disappearing fast, they say, adding that they are forced to buy change from unauthorized agents for a premium that's shot up with the rush for festive shopping. Is it a fact, or a ruse for handing out toffees to customers? TOI asked a shopkeeper to call up one such currency agent who provides low denomination notes to several shops in Khan Market. The recorded conversation revealed that the commission on notes and coins ranges from 1.5% to 15%. "Diwali ki wajah se bhav bahut badha hua hai... Sikka toh bahut mehenga hai... 15% se kam nahin milega (rates are high because of Diwali. Coins, especially, are hard to get for less than 15%)," said Ram (name changed), the agent. As per this agent, the going rate for a bundle of crisp Rs 10 notes, which contains 10 packets of 100 notes each, is Rs 400. For Rs 20 notes, it is Rs 500 per bundle. And coin bags (2,500 coins each) fetch a flat 15% commission regardless of the denomination. Market associations claim they have to depend on agents as banks refuse to provide adequate low denomination currency. "Shoppers don't have change, as they withdraw money from ATMs. Almost all customers give us a Rs 500 note. We can't say no to them, so we have to arrange for loose change every day. We need low denomination notes and coins amounting to Rs 4 lakh every month. Banks don't provide us sufficient change, so we have to buy change worth Rs 1 lakh from the market," said BR Gopala, owner of Gopala Sweets in Lajpat Nagar.  Following repeated complaints from shop owners, Khan Market Trader Association (KMTA) carried out a survey to find out how many shops source currency from agents, and the average amount they pay.  "On average, shopkeepers pay Rs 8,000 to Rs 12,000 to source coins and new notes. Ours is a VVIP market, so we avoid giving soiled notes to customers. Khan Market's monthly requirement of loose currency is Rs 70-75 lakh, but we get only Rs 20-25 lakh from banks. We have informed RBI about the survey, but they have done nothing to address the problem. Most banks say that they don't have low denomination currency," said Sanjiv Mehra, president of KMTA.

While it denied reports of a shortage of coins, Reserve Bank of India accepted that there was a 'slight imbalance' in the demand and supply of small currency. "We have a lot of Re 1 and Rs 2 coins with us. There is no shortage of these coins. The distribution depends upon the supply received from government presses and mints. There may be some transient shortages in particular denominations during the festival season," said Chandan Sinha, Regional Director, RBI. "We have never received any official complaint from banks or individuals regarding agents selling currency (of any denomination). But our market intelligence does suggest that there are stray incidents of small denomination notes and coins being sold at a premium," he added.  The problem is severe in markets like Lajpat Nagar, Sarojini Nagar and Chandni Chowk where shoppers prefer to pay cash. Grocers, eateries and chemists generally need a lot of change. "It really pinches us when we have to pay 15-18% for a bag of coins. A lot of shopkeepers have stopped keeping items that cost less than Rs 10. But traders buy change from these agents, as they want to avoid the inconvenience of going to RBI to get the currency," said KS Bakshi, president of Lajpat Nagar Market Association.  In Sadar Bazaar, currency agents ply their trade openly. An agent in Sadar Bazaar told TOI that this was the time to stock up on change as the rates would shoot up soon. "We get the currency from banks. The rates will shoot up during the wedding season. The demand for notes of Rs 10, Rs 20 and Rs 50 goes up during the wedding season," said Gaurav (name changed).
TOI

A DIFFERENT BRIIC IN THE WALL?

Brazil and Indonesia, members of the motley crew of BRIIC countries (Brazil, Russia, India, Indonesia, and China), have recently seen their central banks cut policy rates. Consequently, there is some speculation that others may follow suit, including the Reserve Bank of India (RBI). However, this perspective, it would seem, is based heavily on a follow-thy-neighbour assumption and not on country-specific considerations......

Read........... 

'Outcome of EU meeting vital for RBI' - Warren Hogan, Australia and New Zealand Banking Group

The European Union Summit on Sunday would try to work out a plan to solve the region's debt crisis. Warren Hogan, chief economist and head (global markets research), Australia and New Zealand Banking Group tells Parnika Sokhi this would have an impact on India. Edited excerpts:

What are your expectations from the Reserve Bank of India’s (RBI) policy review next week?

The real issue for central banks of Asian countries and RBI is how much of impact the problems in Europe would have on inflation in India. The real issue, in a policy perspective, is if you have the policy settings right, you can afford the pause. Of all Asian economies, India is heavily linked with Europe, and that's why for RBI, the outcome of the EU meeting would be important.

What do you think would be outcome of the EU meeting?

Policymakers in Europe need to demonstrate to the market that their priorities are restructuring of debt and recapitalisation of banks, and that the broad framework of financing these activities is in place. We can wait for the actual plan till the G20 meeting, but the outline is needed now.

Are the problems of the US and euro zone interlinked, and how can the US deal with its own challenges?

The Europeans are going through what the US went through in 2009. Now, US banks have good capital and reasonably healthy balance sheets, the household sector is de-leveraged, house prices have come down and household debt has fallen. But corporate America is not very confident on whether investing is the right thing to do. The final issue is its currency is highly over-valued, and the lower the currency goes, the more likely is it to secure investments from corporate America

Which Asian economies would be more vulnerable to these developments in the West?
India has the highest exposure to Europe, but the economies that are most exposed to the slowdown are economies like Singapore, Hong Kong, Taiwan and Philippines. The slowdown has not had a big impact India, China and Indonesia.

BS

RBI may hike rates by 25 bps on Tuesday: RBS

The Reserve Bank of India is likely to go in for another round of rate hike of 25 basis points (bps) when it meets on Tuesday, and then will pause till March, according to a poll by the British lender RBS. The 10th edition of RBS Clients' Survey, which is the third this fiscal, covered 103 local market participants, including corporates, banks, insurers and mutual funds among others. "...An overwhelming majority of 67% are sure of a 25 bps hike in the repo rate, and then the RBI pause till March," said RBS India Managing Director & Head, Markets, Ramit Bhasin. However, 30% of the polled expected the central bank to pause this time around. None expected any change in cash reserve ratio, which is pegged at 6% for almost two years now. Reserve Bank Governor Duvvuri Subbarao will unveil the second quarter monetary policy on October 25; it is widely expected that he will go for yet another round of tightening. The central bank has increased its key short-term policy rates a record 12 times since March 2010 to contain runaway inflation that has remained at elevated levels despite the government's discomfort. Core inflation stood at 9.72% in September. Interestingly, a majority of the industry believes that the country is near the end of the tightening cycle. They also expect the repo rates to be stable at 8.5% in December and March. On the strength of rupee, majority of those surveyed believed the local unit was likely to trade over 50 against the dollar in the near term, given the weak fundamentals of the economy.

BS

RBI set to enter a 'wait and watch' phase

The Reserve Bank of India (RBI) has a tough task ahead on October 25, when it announces its monetary policy for the second half of this financial year. On one side are industry bosses and consumers, who are keenly looking up to RBI and hoping it does not signal more increases to their borrowing costs. On the other side are inflation hawks, who would still want to see tightening by RBI, irrespective of the growth dynamics. We think RBI should be looking to press the pause button now, a view that I had held from September 16. To reiterate, in the September policy, RBI had indicated its future stance on monetary policy would be influenced by “signs of downward movement in the inflation trajectory”. At that time, RBI also expected the impact of its past policy actions “should now be increasingly felt in further moderation in demand”, and, in turn, reverse the inflation trajectory in the later part of FY12. Some definitive signs of a slowdown have also emerged now. Manufacturing PMI had been consistently dropping from April, but the more pertinent issue is it is now close to the contraction zone, tending to tip below 50. The services PMI is already below 50, indicating a contraction in this segment. Further, some lead indicators for growth such as excise collections have tended to show a very sharp contraction, while earnings growth for the Bombay Stock Exchange-30 companies (ex-energy) is also expected to be lower in the second quarter, compared to the first. Anyway, the slowdown story in segments such as that of passenger cars, is well known. The history of past policy tightening by RBI suggests it has tended to pause after inflation peaked out. In September, headline WPI inflation stood at 9.72 per cent, down from the previous month, while the more relevant non-food manufactured products inflation is now down to 7.62 per cent from 7.74 per cent in the previous month. There also appears to be a close correlation between PMI manufacturing and non-food manufactured inflation, lagged by six months. This should suggest to RBI that the impact of the past rate rises are percolating into the economy. However, the suggestion of a pause in the current rate rise cycle in no way indicates RBI would be changing its monetary policy stance soon. The fight against inflation is likely to be intact, and the rhetoric of RBI on inflation would continue to stay hawkish. The stance is unlikely to change, unless there is a significant drop in headline inflation numbers, which could be much later. If all goes well, and global commodity prices do not surprise on the higher side in the interim, I would expect headline WPI inflation to stand at 5.5-6.0 per cent in the second quarter of the next financial year. Hence, till then, RBI should be seen holding on to its tight monetary policy stance.

BS

Mixed reaction to move on pre-penalty on home loans

... "Pre-payment penalty is not a major revenue earner but used to serve as a deterrent. With exit barriers removed, banks will be at an advantage as they can woo away our customers with lower interest rates while we don't have the same advantage. Unless RBI ensures a level-playing field HFCs will go bust,"...

Read.......... 

RBI defers putting CDS guidelines into effect

The Reserve Bank of India (RBI) said on Thursday said it had postponed putting into operational the credit default swaps (CDS) guidelines for corporate bonds that were issued on May 24. A new date will be announced shortly, the RBI said in a statement. Earlier, the RBI had said the guidelines on CDS would be effective from Oct. 24. Necessary infrastructure required for the launch of the product is being put into place, the RBI said. "Market participants have asked for certain clarifications regarding documentation, operational aspects and the arrangement for the necessary institutional framework. Hence it has been decided to postpone the date," RBI said. A CDS is a swap contract in which the buyer of protection against a bond or loan makes regular premium payments to a counterparty who assumes the risk in the event of a default.

Moneycontrol

Now, Economists can’t Agree on Policy Direction

Some analysts, traders & economists take a u-turn and call for just one more rate hike next week, a few say RBI could continue with the bias

For the first time in more than three years, economists, analysts and traders are at sixes and sevens on what the monetary policy stance should be. They are changing their stance so quick that few are sure as to what should be the direction. Some were calling for a pause in interest rate increase last month itself. But when it did not happen, they said RBI governor D Subbarao would not raise rates on October 25 at the half-yearly review. Now, there is a view he would not just stop with a raise next week, but could prolong it. Indeed, Subbarao himself had reversed his stance, of course, a year ahead of the rest when he indicated at a pause in November last, but soon shifted it. “While the view of the house is that RBI might pause for now, I think this will be the last rate hike and then a pause,” said Ramit Bhasin, MD-global markets at the Royal Bank of Scotland. Bhasin’s RBS is not alone in a confused state. Bond yields are now expected to rise to as high as 9.25%, indicating tougher macro economic environment as government overshoots borrowing targets. Benchmark 10-year Gsecs ended at 8.79% after rising to 8.82% during the day. Goldman Sachs, which termed last policy rate increase unnecessary, given the sharp slowdown in economic indicators, has now taken a u-turn.  “We now think RBI may hike policy rates again on October 25, due to recent hawkish commentary coming from the central bank,” Goldman’s Tushar Poddar said in a report on Thursday.  This is in contrast with what he believed just a week earlier.  “The significant decline in domestic activity, the adverse global environment, falling asset prices and tightening financial conditions suggest to us that RBI will likely pause on October 25,” Goldman said on October 12.  Policy makers and economists are clueless as to where the economy is headed. Inflation remains above 9% despite 12 rate increases, but the index of industrial production growth slumped to 4.1% in August, compared with a forecast of 4.7%. Motorcycle and tractor sales are surging with loans growing at an annual pace of 20% while sales of cars are forecast to grow at an anaemic 4-5%.  ‘We revise our expectation. Inflation is still too high for the central bank’s comfort,” Sidhartha Sanyal, chief India economist at Barclays Capital, said recently. “RBI has made its stance and priorities explicit on the growth/inflation debate. Therefore, the continued weakness in industrial production is not likely to deter the central bank from another rate hike,” he said.  With the macro-economic situation set to deteriorate, many fear yields may get volatile, unless RBI intervenes. “Any delay in the open market operations could further accentuate supply pressure, pushing the 10-year GoI sec yield beyond 9%,” Standard Chartered said in a recent report.

ET 

Acting lessons for RBI- Jamal Mecklai

Many years ago, I went through a very brief – and eminently unsuccessful – period of being a theatre actor. I was living in New York, where everybody was an actor or an artist – this is long before Wall Street became sexy – and, having just quit my job, happened upon an opportunity to – get this – play the lead in an off off – very off – Broadway show. I went to audition, and, despite the fact that I don’t know anything about acting – my wife will tell you that I am genetically unable to take direction – I got the part, playing opposite the director’s wife. There is a strange story behind that, but that’s for another time (and, perhaps, publication). Anyway, we got started, and after a couple of rehearsals, the director – a Malaysian fellow, who I remarkably re-encountered recently after some thirty years – frustrated at my inability to create a character in any way different than myself, suggested we have a few training workshops. We met the next day, just two of us in his living room. We started out with an exercise, where I was to internalise news I had just received that absolutely required me to leave the room but I wasn’t to tell him why; correspondingly, he had to keep me in the room at all costs. So, we began. I tried to push past him and he held me back – no violence or strength, just an exercise. I tried this repeatedly, and each time he held me back. Finally, frustrated after seven or eight attempts, he said, OK, let’s reverse roles. He tried to push past me and I held him back. He tried again; again, I held him back. Then, he suddenly pointed out of the window and shouted, Look at that. Distracted, I looked away, and he slipped out.

Lesson: If you need to achieve something, but pushing steadfastly on the most obvious lever doesn’t work – indeed, appears to have no impact at all – change tack and try something different.

Hardly earth-shattering, but often the most obvious truisms need to be relearned again and again. RBI has been edging rates doggedly higher – 12 times since March 2010 – but inflation is still loudly in the room. The classic approach did appear to work at first, with inflation coming down nicely till November, by which time industrial growth had started showing signs of stress. After that, however, despite RBI’s steadfastness – let us kill inflationary expectations – inflation has started climbing again and appears to have stabilised just below double digits. Till recently, I had felt that RBI was on the right track – inflation hurts the poorest the most and so, in a country like India, policy should err (as, by definition, it will) on the side of hawkishness on inflation. Blinded by this other truism, I paid scant attention to Kaushik Basu’s as-usual-sound comments (recently silenced) that as strong growth is redistributed, we may need to live with somewhat higher inflation. Indeed, the government’s redistributive policies as part of its inclusive growth mantra – notably, the NREGA – has, indeed, resulted in higher rural incomes. This was highlighted to me recently by the fact that even as fertiliser prices have shot dramatically higher, demand at the farm gate is still hugely overwhelming supply. Clearly, farmers – or, I should say, some farmers – are not hurting, despite the higher inflationary environment. Then, of course, there is the fact that higher interest rates have no impact on inflation caused by supply constraints – indeed, they could worsen the situation. Added to this is the recent recognition that China – what a way the world turns – is now exporting inflation; again, something higher domestic rates can only exacerbate. Then there is the point raised by Surjit Bhalla that if we shorten the cycle of inflation measurement, prices are not rising anywhere near sharply enough to warrant further tightening. Indeed, given the increasingly dynamic nature of the world today, perhaps this measurement issue should be carefully considered. The market, too, is saying enough. The devolvement of the last G-Sec auction is a case in point. The inability of the rupee to take advantage of the recent Euro strength (dollar weakness) is another. The continuing demand for foreign currency borrowings, despite extravagant spreads over LIBOR, is a third. Finally, and perhaps most importantly from an operational perspective, the populace at large and, in response, the politicians appear to be more focused on corruption and governance than prices – just the opportunity for RBI to surprise us all, stand pat, and see what happens outside the room.

BS

Control inflation but not at the cost of growth

.....One would like to see that inflation is controlled, but not at the cost of growth. Perhaps, going forward, one could see the inflation numbers coming down probably on account of the various policy initiatives which the RBI has taken. There is always a lag between the action and the result...........

Read....... 

Pranab’s inflation options: Higher taxes or higher rates?

...Over the last six months, even as Subbarao sounded firm, the government undermined him by talking of rates being too high and indulging in loose talk of inflation-control being just round the corner. This continues to be a pipedream, and inflationary expectations have taken hold in the economy. Both incomes and prices will continue to spiral in this scenario....

Read..............

Inflation in double digits, will weigh on RBI policy

....On the negative impact of rate hikes on economic growth, Rangarajan, a former RBI Governor himself, said growth has slowed down due to other factors as well and it would not be fair to blame just rate hike for it.....

Read..............

Banks told to open rural branches

Thiruvananthapuram : A. Sampath, MP, said here on Tuesday that banks in the district must ensure better services to people in rural and semi-urban areas by opening more branches in these areas.  Inaugurating the second District Level Review Committee (DLRC) meeting on banking, Mr. Sampath said that even though Kerala had achieved the status of ‘total banking State,' there were many regions in the State, including in the capital district, where there was still a dearth of banking facilities. “The need of banking facilities is increasing even in rural areas. Banks should be in a position to meet this demand,'' he said. He added that banks should device schemes to encourage savings habit among students and to increase credit flow to women. Mr. Sampath released the Potential Linked Credit Plan (PLP) for the district for the year 2012-13. The PLP projection for the priority sector for the next fiscal is Rs.6,478.96 crore. RBI Assistant General Manager P. Thomas presided.

Lead Bank convenor Indira Padmini presented the banking performance report for the quarter at the meeting.  Financial institutions in the district disbursed Rs.1,006 crore under three major categories of priority sector in the first quarter of the financial year recording an achievement of 19 per cent against a total target of Rs.5,393 crores. Banks disbursed Rs.611 crore to the agriculture sector in the first quarter of 2011-12 against a total target of Rs.2,176 crore. An amount of Rs.364 crore was disbursed under the service sector against a target of Rs.2,865 crore. In the non-farm sector the disbursement was Rs.31 crore. Total bank deposits in the district stood at Rs.32,327 crore and advances at Rs.26,704 crore. The credit deposit (C/D) ratio for the district is 83 per cent. Around Rs.917 crore was disbursed as education loan till June 30. The bank loan outstanding for Micro, Small and Medium Enterprises (MSME) in the priority sector is Rs.2,224 crore.

HBL

6,000 villages in AP to have BCs by Dec

Banks in Andhra Pradesh are expected to complete the appointment of business correspondents to over 6,000 villages with a population of 2,000 and more where no bank branch exists, by the end of this calendar year, a state finance department official said here on Tuesday. The Reserve Bank of India Regional Director on Tuesday reviewed the progress of the financial inclusion initiatives in the state as the banking regulator had mandated the banks across the country to appoint business correspondents in those villages with a population of 2,000 and more in the first phase by March next year. So far, the banks have completed the appointment of business correspondents in 60 per cent of such villages in the state and informed the RBI regional head that they would be able to cover the rest of the villages by December this year. These business correspondents will act as an extension of the nearest branch of their respective banks to offer banking services, including opening an account for people at their doorsteps. Opening of savings accounts for all the families in rural households is also necessary because the financial benefits under various social welfare schemes will be directly transferred to the accounts of eligible beneficiaries in future, the official said. The banking connectivity to the rural habitations with less than 2,000 people will be taken up after the completion of the present round. 

BS

George no more.................

I regret to advise the demise on 18th August, 2011 of Shri.M.B.George, in Kerala, at the age of 88. He retired as A.C.O in the Credit Planning Cell on 30th June 1982. He has worked earlier in Department of Statistics and A C D. He was a jolly good person, hugely popular and always sporting a smile.  His wife pre-deceased him and the couple had no children. After his wife's death he shifted from Bombay to Kerala.

I append below a report I got from a close friend.

George (Vackachan) retired from Credit Planning Cell (Now MPD) on the 30th June 1982 (the last day of the existence of ACD--The very next day on the 1st of July 1982 NABARD came into existence) in the grade of ACO (now AGM)
I was also in CPC at that time. Wearing white dress, he was always ready to help anybody with pleasure. During those days, after lunch, we some malayalees used to meet at the entrance of Amar Building with him as "Chairman". Late Krishna Iyer, Vivekanandan and Elayadi also used to be there. It was the time when IG Patel was Governor and a Pension Scheme, which did not see the light of the day used to be the main topic of Gossip. I always found him very cheerful. He used to visit us and we used to visit him in Kalina. After the death of his wife, when we visited him, he as entirely a different man. Before leaving Kalina, he asked me to see him. When I went to him, he asked both of us to come out (his one or two nephews were inside) and in a sad voice said that since he did not have any children, he had no alternative but to go with nephews in Kerala and he EXPRESSED a fear whether his decision would be the right one. After that I used to call him during Christmas/ New Year eve. Last time when I called he, though recognised my voice, he was finding it difficult to talk and told me he was very weak. To me he was like a guru and used to advise whenever necessary.

May his soul rest in peace.

As reported by Shri P.P.Ramachandran (via e-mail)

'Rhetoric spells RBI's discomfort in pausing now'

The Reserve Bank of India's (RBI) action in the upcoming policy review remains a close call between a pause and a rise of 25 basis points in the repo rate. We expect it to eventually deliver a final 25-basis point rise next week. The choice for RBI is not easy. Even its own technical advisory committee had recommended a pause in July (RBI has already raised the rate by 75 basis points since then). Industry lobbies are vocal against tightening. Still, recent rhetoric from RBI clearly spells out its discomfort in pausing now. Indeed, inflation is stubborn, at near double-digits for almost two years, with wide-spread pressures across sectors. The headline print is just 50 basis points lower compared to March 2010, when the tightening cycle began. ‘Core’ inflation remains sticky—7.5 per cent, markedly above historical levels. The increasingly complicated global backdrop and slowing growth have induced several central banks to tone down their hawkishness. RBI, however, has repeatedly reiterated its focus on domestic developments and the explicit policy priority in containing inflation, even at the cost of near-term growth, if required. So far, RBI stood vindicated on its cautious view of commodities—key commodity prices have remained fairly sticky despite renewed global fears of a slowdown. The weakening rupee has actually increased import costs for several commodities. The fiscal dynamics seem to be hurting, rather than helping, on the inflation front, thereby inducing RBI to maintain an extra-vigilant monetary stance. RBI can enter into a pause mode from the policy review in December, as inflation would likely roll off to an average seven per cent in the next quarter. However, given the recent history of overshooting inflation, it would possibly prefer to maintain a hawkish stance even then, and would not risk prematurely signalling any easing, barring severe systemic growth risks. Rate rises are neither costless, nor the remedy of all evils. Inflation in India is far more structural than what can be contained with cyclical tools like rate increases alone. However, RBI is currently fire-fighting inflation, without many options to experiment with.

BS

Is RBI just an inflation-targeter?

.....Going by the book, the RBI Governor D Subbarao may have to resort to a few more rate hikes to signal that he wants to break the back of inflationary pressures. However, six months down the line, one may still face a situation where inflation levels remain elevated at around 8% and quarterly GDP growth falls closer to 7%. Is this what RBI would want? ............

Read.............

Reserve Bank of India warns of another global financial crisis

MUMBAI: Reserve Bank of India (RBI) has warned of another financial crisis brewing, as global liquidity becomes a concern amidst central banks pegging their lending rates at near zero levels, leaving scope for another asset bubble to take down the global financial system.  "There is, thus, incontrovertible evidence that there is yet again a huge under-pricing of risks in the financial system and, therefore, it is not a question of if, but when, the generic asset bubble caused by manifold increases in balance sheets of central banks will burst," said RBI, Executive Director, V.K.Sharma in his address in Singapore on 'Identifying Systemic Risks in the Global Markets - Lessons Learnt from the Crisis'. He spoke about what has been done by Asian central bankers in detecting and mitigating risks of future crises similar to the one in 2008-09.  One of the major worries this time around, which did not exist back then, is global liquidity, Sharma said. Balance sheets of major banks have grown by almost three times from pre-2007 levels, while near-zero policy rates have added $4 trillion in incremental central bank liquidity. Sharma mentioned that the US has been keeping excess reserves of about $1.5 trillion with the Federal Reserve rather than lending it to small businesses and households.  "Alongside, non-financial corporations in the US are reportedly sitting on cash and liquid assets worth $2 trillion which they do not know what to do with it. In this background of huge deluge of global liquidity, there are unmistakable signs of asset bubble inflating again in almost a replay of the last global financial crisis." Sharma said.  "In India, we have had remarkable financial stability, not fortuitously, but thanks to pre-emptively and pro-actively delivered prudential measures like increase in risk weights for exposures to commercial real estate, capital market, venture capital funds and systemically important non-deposit accepting NBFCs.

ET

Pause in rate hikes is in order

Since the RBI has done enough on the monetary front, it can afford a pause in further rate hikes until the next review, allowing the lagged effects of its earlier hikes to play themselves out through the system...........

Read............

SAD STATE OF INCLUSION - Government banks are not right for developing rural finance

.... The Reserve Bankers talk ponderously about new technologies such as mobile banking and mini-ATMs and cost-saving innovations like business correspondents. But despite their goading, government banks have not developed a profitable model of rural banking; so they will do as little as they can to expand into villages. And the RBI will continue to boast about their modest achievement.....

Read............

‘Growth to dip, but still be a reason for celebration’

Finance Minister Pranab Mukherjee today said that the uncertain global economic situation will impact India’s growth in the current fiscal. The growth may be lower than the earlier estimation of 9 per cent but “it will still be a reason for celebrations”, he said. “Most observers are expecting India’s growth to go down to below 8 per cent. This is disappointing but at the same time we must not lose perspective of the global situation...” Mukherjee said while addressing the economic editors’ conference here. “A number of policy measures are being taken and the long-run indicators look robust ... In this climate, even if India’s growth rate this year goes down to below our earlier expectation, we will still be among the 10 or so fastest growing nations in the world,” he said. The economy recorded a growth of 7.7 per cent during April-June, 2011-12 — the lowest in 18 months. “Let me not hide the fact that I have been disappointed by growth performance over the last few months. It is evident that India’s growth rate in 2011-12 will be less than what we were expecting in February when I presented the Budget,” he said.

IE

RBI norms for new bank licences likely by Nov-end: FinMin

The Reserve Bank of India (RBI) is likely to come out with guidelines on allowing new private banks by November end, Financial Services Secretary DK Mittal said today. "The RBI is actively working on the guidelines...And is likely to come out with the final licencing norms by November," he told reporters on the sidelines of the Economic Editors conference here. The RBI had in August released the draft guidelines on allowing industrial houses to promote banks. As per the draft norms, private sector entities or groups owned and controlled by Indian promoters, with diversified ownership, sound credentials and integrity, and having successful track record of at least 10 years, would be eligible to promote banks. Earlier this week some Members of Parliament (MPs) had expressed reservations at a meeting of Standing Committee over the RBI's proposal to grant banking licences to industrial houses arguing that it would not promote financial inclusion. The draft norms on bank licences have pegged the minimum required capital for promoting bank at Rs 500 crore and restrict foreign shareholding at 49% for the first five years. On implementation of the Shyamala Gopinath committee report on small savings scheme, Economic Affairs Secretary R Gopalan said,"final decision will be taken shortly." The Committee had suggested that the returns on small savings scheme be aligned the market rates and post office savings scheme interest rate be raised to 4%. According to government estimates, small savings during the first quarter (April-June) of the current fiscal declined by Rs 26,542 crore. They had increased by Rs 13,250 crore in the same period last year. 

BS

Did You Know | The difference between RTGS and Neft?

Like RTGS, Neft also transfers funds from one bank, but unlike RTGS the settlement takes place in batches (that may include transfers from various individuals) rather than individually....

Read...... 

Tight money hurts: Pranab

Ahead of the Reserve Bank’s credit policy review later this month, finance minister Pranab Mukherjee on Wednesday did not hide his disappointment over sluggish economic growth, blaming it on the tight monetary policy and an uncertain global environment. Though he did not directly say growth would fall below eight per cent for the year, he referred to “most observers” pegging economic expansion at that rate. He, however, called for an analysis of the number in the global context, as all major economies were witnessing low growth — the US grew 1.6 per cent in the first quarter and the European Union 1.7 per cent. Addressing the annual Economic Editors’ Conference, Mukherjee admitted meeting the Budget target to rein in the fiscal deficit at 4.6 per cent of GDP would be a great challenge due to high crude prices. He still exuded confidence the target would be met. Already, till August, the fiscal deficit stood at 66 per cent of the target for the entire fiscal. When asked if the RBI should pause monetary tightening, Mukherjee said, “I have the opportunity of discussing with the governor before he announces the rates. So, it would not be proper on my part to make any comment.” He refused to buy the “so-called popular perception” the government was suffering from a policy paralysis, citing a number of initiatives such as the draft telecom policy, the proposed manufacturing policy, the proposed mining Bill, the land acquisition Bill, and finalisation of the infrastructure debt fund guidelines. 

BS

JK in fiscal fix - Govt Coffers Run Dry, Liabilities Mount As RBI Tightens Noose

Jammu, Oct 19: Having piled up huge fiscal liabilities, the Jammu and Kashmir government is confronted with unprecedented financial crunch, particularly in the backdrop of the Rs 1,500 crore cap imposed by Reserve Bank of India (RBI) on overdraft facility. Sources said with its coffers almost running dry, the state government is unable to deal with immediate cash liabilities of around Rs 100 crore, besides meeting the expenditure on account of annual Durbar move and festival season of Diwali and Eid as it has been strictly barred from taking recourse to liberal overdraft facility, especially after the shifting of OD arrangement from JK Bank to RBI, sources in the government said. Pertinently, Chief Minister Omar Abdullah and Finance Minister Abdul Rahim Rather were the biggest proponents of the state’s new financial arrangement with RBI. “As RBI has taken over from JK Bank granting of OD facility after the agreement signed last year, the state government is caught in catch -22 situation—the biggest problem being the failure to meet the financial liabilities, which have crossed Rs 100 crore” said a highly placed source in the finance department. Under the agreement RBI was allowed to carry on the general banking business of the Jammu and Kashmir and is acting as the sole agent for investment of government’s funds. If sources are to be believed, the treasuries across the state are empty with bills worth crores of rupees pending for last many months. Even the contractors who have completed various development projects are not able to get their bills cleared. Officials said that liability of Rs 100 crore has become a great burden on the government as out of which 75 percent bills belong to the contractors, who had recently threatened agitation. “Even the employees are not able to get their GPF from the treasures as they have been asked to wait till funds are released by the government”, said a source. The biggest problem for the government is that Durbar is shifting from Srinagar to Jammu and salaries of move employees have to be cleared by October 22 alongwith move allowance”, sources said. Officials said that earlier state government would immediately take OD from J&K Bank in such pressing circumstances, but the RBI has strict with OD facility and seeks even minutest details before release of funds. “There is a severe financial crisis. The treasuries are out of money, while government is unable to utilize OD option as everything is now under the control of RBI and its approval is necessary”, sources said. Important to note that shifting of OD facility to RBI had political storm in the state with the main opposition Peoples Democratic Party terming it a fiscal sell-out. Though the state’s Finance Minister had later cleared that it will not have any affect on JK’s control over the J&K bank, but in recent past, RBI has become more strict against the unending financial mess in the state. However, a senior government functionary, on the condition of anonymity said that RBI is doing debt management in J&K from 1972 and there is nothing new in the present crisis. “It is short term crisis and liabilities will be cleared soon. This is not for the first time that such things have happened. We had pleaded with the 13th Finance Commission to grant us one time financial assistance of Rs 2300 crores to remove the structural deficit and that is being pumped slowly in the financial system”, he claimed. 

Greater Kashmir

RBI guidelines on new banks to promote financial inclusion, say experts

Banking and finance experts today said that draft guidelines issued by the Reserve Bank of India (RBI) for new licenses to operate commercial banks in the private sector will allow only serious players, promote financial inclusion and encourage high level of corporate governance..........

Read.............

No unscheduled power cuts from Nov 1

JAIPUR: Reviewing the power situation in the state, the cabinet on Wednesday decided to prepare an action plan report to be submitted to the Reserve Bank of India, to ensure that the Discoms become eligible for bank loans again.  Moreover, the government is expecting a positive response over its action plan from RBI, which in the first place directed the banks to discontinue the loans.

TOI

Now, NRIs can hold accounts in any currency

The Reserve Bank today said Indians who have non-resident accounts in the country can now hold them in any currency which is fully convertible. The move is likely to help NRIs/Persons of India Origin as it will give them more options in the holding of accounts, and lessen the risk from fluctuations in major currencies. Earlier, FCNR(B) account holders were allowed to hold accounts in only certain currencies such as the Pound Sterling, US dollar, Japanese yen, euro, Canadian dollar and Australian dollar. "It has been decided that Authorised Dealer banks in India may be permitted to accept Foreign Currency (Non-Resident) Account (Banks) deposits in any permitted currency. It may be noted that 'Permitted currency' for this purpose would mean a foreign currency which is freely convertible," RBI said in a notification.

IE

Corporates turn to MFs as banks cut bulk deposit exposure

...It is noteworthy that the RBI has hiked interest rates 12 times – 325 basis points on a cumulative basis - since March 2010 According to data sourced from the Association of Mutual Funds in India, for the period September 2010-March 2011, the average monthly contribution of liquid schemes to the total assets under management (AUM) of the industry was about 17 per cent and that of the income schemes was about 48 per cent....

Read.........

Pick-up in bank loan disbursements

Signs of credit pick-up are gradually emerging in the so-called ‘busy season' for banks, going by Reserve Bank of India's latest data. .............

Read..........................

Time to stop the chorus against RBI rate hikes

The chorus of voices against a rate hike is getting far too loud. And it is dangerous both for the cause of reining in high inflation, and guaranteeing the independence of the Reserve Bank of India (RBI). A few days back, the Department for Industrial Promotion and Policy (DIPP) in the commerce ministry wrote to the RBI asking it to desist from raising rates. This is a strange and unheard of step. Finance ministry officials have never missed a chance to similarly advise the RBI. And now a committee of parliamentarians has told the governor not to hike rates when he deposed before it. Parliament is a law-making body and the RBI’s authority comes from it. Yet, as the guardian of the longer-term interests of the nation, and which has the expertise to take a call on interest rates, the RBI’s independence on matters of rate setting is necessary for the health of the economy. One would assume the governor would have strongly informed parliamentarians about the donwside of continuing inflation. While their tears over growth are well taken, India, or for that matter any country, can post strong GDP growth only when prices are reasonably stable. High rates are a much smaller disincentive to growth than erratic government policy, politicking and corruption. Also, a big input to inflation has been the government’s runaway fiscal deficit. From around Rs 1,50,000 crore in 2007-08, the fiscal deficit has ballooned to over Rs 4,00,000 crore per year in the past three years. This creates massive aggregate demand and has been a big factor in boosting inflation over the last three years. The push to rural demand through the National Rural Employment Guarantee Act (NREGA) has come on top of decades of agrarian neglect. In the past 10 years, the compounded annual growth of agricultural output has been only 1.8 percent. It’s not surprising then that when a stagnant pool of foodgrain output is chased by rising wages, it has inflated food prices by over 40 percent in the past few years. It is important that parliamentarians ponder over these long-term issues of neglect instead of attacking the independence of a central bank which has but only one instrument to tackle inflation. Sure, they can express their concerns about growth. But the chorus against rate hikes is getting worrisome. It is important for the RBI to maintain its anti-inflationary stance when the WPI has been over 9 percent for the past 10 months and over 8 percent for 18 consecutive months. Such structural inflation can reverse the country’s healthy savings growth too, as people see the value of their savings being dented by inflation. India’s long term growth trajectory can be endangered if parliamentarians and bureaucrats in Delhi don’t see the real dangers to growth — sustained inflation and bad policies, and the real triggers of inflation. These include runaway deficits and neglect of agriculture and infrastructure. Rate hikes are not the main villains.

Firstpost

Ombudsman rues lack of complaints

Guwahati, Oct. 18: The Banking Ombudsman for the Northeast, B.B. Sangma, has expressed dissatisfaction over the inadequate complaints received compared to the number of bank branches in the region.In 2010-11, the ombudsman received 584 complaints which is not satisfactory given that there are 2,645 bank branches in the region. “I am not satisfied with the number of complaints received as compared to the bank branches. The low number of complaints does not mean that customer service in the banks of the region is very good,” Sangma said here today. The office of banking ombudsman in the Northeast has been functioning since June 1996. He said the people in the region do not give their complaints in writing which was one of the major problems. “I have disposed a few complaints over the phone itself as the people were hesitant to give their complaints in writing,” he said, adding that banks have responded positively to complaints over the phone. The RBI had introduced the Banking Ombudsman Scheme in India on June 14, 1995 to provide an expeditious and inexpensive forum to bank customers for resolution of their complaints relating to deficiency in banking services provided by commercial banks, regional rural banks and scheduled primary co-operative banks. The scheme has undergone extensive changes in 2002, 2005 and 2007 and underwent more changes in 2009 whereby the RBI has widened the scope to include deficiencies arising out of Internet banking. A customer will also be able to lodge a complaint against a bank for its non-adherence to the provisions of fair practice code for lenders or the code of bank’s commitment issued by the Banking Codes and Standards Board of India.He said it was mandatory for banks to display the name of the nodal officer dealing with customer grievances and the Banking Ombudsman Scheme with contact details. “We conduct surprise checks and have found that it has been complied satisfactorily. There are, however, no statistics in this regard,” he said.  Connectivity and logistics are another set of problems being faced in the region. “A person from a remote place finds it difficult to attend the hearings, which are organised to redress grievances,” he said. Many letters delivered by the office of banking ombudsman come back undelivered.

The Telegraph 

RBI & India's financial growth

...This definitive analysis of India’s monetary policy and its financial sector reforms by Rakesh Mohan — a former Deputy Governor of the Reserve Bank of India who was a part of its policy group during a crucial period in the last decade — is a timely contribution to the debate on these issues. ...

Read.................... 

Allahabad Bank - Change in Directorate

Allahabad Bank has informed BSE that in exercise of the powers conferred by clause (c) of sub-section 3 of section 9 of the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970, read with sub clause (1) of clause 3 of the Nationalised Banks (Management & Miscellaneous Provisions) Scheme, 1970, the Govt. of India, Ministry of Finance, Department of Financial Services vide their Notification dated October 13, 2011, have nominated Shri A. Udgata, CGM-in-Charge, Reserve Bank of India, Urban Banks Department, Central Office, Mumbai as Director of the Bank under RBI Nominee Category, in place of Shri S. Ramaswamy, with effect from the date of Notification i.e. October 13, 2011, until further orders.

Moneycontrol

Two more Members join RBI Board

The Government of India has appointed two more members on the Central Board of Directors of the Reserve Bank of India. The new Directors are:

1.  Shri Y.H. Malegam, who has been re-appointed from October 7, 2011 vice Shri H. P Ranina.

2.  Prof. M.V. Rajeev Gowda who has been appointed from October 17, 2011 vice Shri Lakshmi Chand.

Shri Malegam is a renowned Chartered Accountant. He is also the Chairman of the National Advisory Committee on Accounting Standards, and has been a past President of Institute of Chartered Accountants of India. Prof. Gowda is Professor of Economics and Social Sciences, Indian Institute of Management, Bangalore. Both the members have been appointed for a period of four years. Prof. Gowda has also been appointed as a Member of the Local Board Southern Area. Last month, the Government of India nominated seven new members reconstituting the Reserve Bank of India Central Board. 

Moneycontrol

RBI grants banking license to Co-op Bank

Srinagar, Oct 18: In a significant move, Reserve Bank of India has granted license to the J&K State Co-operative Bank Ltd, Srinagar to carry on the business activities in any part of the country. Giving this information at a high-level meeting of officers held here today, the Minister of State for Cooperatives, Finance & Planning, Dr Manohar Lal Sharma said that it is a matter of pride for the State to get the license for a public sector bank. He hoped that the bank will be able to expand its activities in other parts of the country besides Jammu and Kashmir. This is an indication towards excellent performance of the bank which has paved way for granting the license, the Minister asserted. The Minister directed the Managing Director, J&K State Co-operative Bank Ltd to further speed up its efforts to promote the business activities of the bank. He asked him to identify potential areas for establishment of more branches so that the network of the bank can be strengthened. While reviewing the functioning of the SCARDB, the Minister issued instructions to the Managing Director, SCARDB to initiate measures to improve the functioning of the bank as per the laid down benchmarks so that the bank is revived as per its full capacity. He maintained that Government has already agreed to provide Rs. 25 crore as State equity for the revival of the bank over a period of ten years.

The Greater Kashmir

RBI may hold fire after 25 bps hike

....... Beyond October, the central bank is likely to hold fire as the cumulative effect of its past actions start rippling through the economy. On the growth front, I expect RBI to revise down its projection for the year, thereby recalibrating financial markets’ expectations on growth and its role in monetary policy...........

Read........

Food inflation: Barking up the wrong tree?

It's Monetary Policy Review time again and, ahead of it, the media reports a full meeting of the ‘War Council' — the Prime Minister, the Finance Minister, their Economic Advisers, and the RBI Governor. Not likely that any new ideas emerged and none was announced. But the key architects — the Prime Minister's Economic Adviser, Dr C. Rangarajan, and the central bank chief, Dr D. Subba Rao — have made their choice: they want to increase interest rates till inflation dies down — in fact, they don't seem averse to cutting growth to achieve this. For, the goal clearly is to kill ‘evil inflation expectations' and encourage those of the ‘right' kind — ‘rational expectations'. (‘The RBI won't stop till inflation cools to its target level'). Shorn of the jargon, it means making businesses and consumers feeling less confident about the future — so less spending, and falling inflation. But less spending on what? Food? Surely not. Armchair advice from desi, videshi and Indian expat economists is not in short supply. But it's obvious that, if not exactly, the situation bears recognisable resemblance to the old story of nine blind men describing an elephant.

Wage policies

In a sense, inflation is entrenched in the Government's own wage policies, which incorporate automatic cost-of-living adjustments. Inflation rises, so, pronto, do Government salaries. They are as far away from productivity link as one can imagine. One desperately looks for a reference to this in official economic documents. The closest is the ritual advice found in the annual ‘Economic Surveys' and RBI reports on containing the fiscal deficit. The truth is that the RBI ‘accommodates' Government's completely elastic wage expenditure and the two are in ‘collusion' in stimulating demand amidst their professed concern about inflation. What about the private sector? Are its actions inflation-enhancing? Unlike in Government, there's a clear connect between wages and productivity. The Chief Economic Adviser is right that wages have gone up but, therefore, wrong in his inflation attribution to wages. And Indian industry has little leeway in pricing, exposed as are most segments of it to domestic and global competition. Price trends in consumer durables are generally soft and price increases are offset with more or less equivalent discounts. There's a pretty high degree of absorption of rising fuel and freight costs. No culprits here.

Key areas

Thus we are left with two major areas responsible for general inflation — energy and food. The former is a pass through, at the mercy of international prices. The sub-10 per cent rise in overall food prices actually masks the high rate of increase in several individual categories, including necessities. But will monetary policy do the trick of controlling food inflation? The fact is food inflation is less important in a rapidly-growing economy characterised by productivity-backed rapidly-growing incomes even in the bottom rungs of the population. On the other hand, the net effect of policy-tightening may be eroding consumer and investment confidence, risking private sector job creation and the need to employ the massive additions to the labour force year after year. What's required is razor-sharp focus on non-productive incomes, profits and activity, not the loose cannon of just increasing interest rates. 

S. Balakrishnan (The author is Chennai-based financial consultant.) HBL

‘Growth may not cross 9% threshold’

The finance ministry on Tuesday said the economy may register a lower growth during the current financial year as against the earlier projections of 9 per cent given a fragile recovery of the global economy and a subdued industrial growth. However, it said India could clock 9-10 per cent growth in the medium- to long-term given its strong focus on inclusive growth and economic reforms.  Recently at the G-20 forum, Finance Minister Pranab Mukherjee said that India is likely to grow by 8-8.2 per cent during the current fiscal while chief economic advisor Kaushik Basu has pegged the growth for the current fiscal at 7.5 per cent. However, Mukherjee has maintained that the economy will succeed in recording 8-9.5 per cent in the long run. According to a background statement prepared for the annual Economic Editors’ Conference (EEC) to be held here from Wednesday, the government said India managed a fast turnaround from the global economic crisis due to its strong fundamentals.

IE

‘Lower economic growth the new normal for RBI’

Credit Reporting and the Indian MFI Bill: If not a silver bullet, at least a silver lining?

... By compelling registered MFIs to participate in credit reporting, the RBI could facilitate the development of vastly more comprehensive databases on base-of-the-pyramid borrowers than presently exist....

Read..... 

Inflation to drop to 7% by March: R. Gopalan

The stubbornly high inflation is likely to prompt the RBI to hike rates at least by another quarter percentage point on October 25.

India’s wholesale price inflation rate may fall to about 7% by the end of March 2012, Economic Affairs Secretary R. Gopalan said on Monday.  “I expect around 7% (inflation) by March-end. It (current inflation) is too high from comfort level,” the Economic Affairs Secretary told reporters in New Delhi. It is possible to achieve 9% economic growth in the next five years, Gopalan said. Inflation increased to 9.72% in September 2011 from 8.98% in the year-ago period. However, inflation, as measured by the Wholesale Price Index (WPI), was marginally lower than the 9.78% figure recorded in August. The stubbornly high inflation is likely to prompt the RBI to hike rates at least by another quarter percentage point on October 25. The RBI has already hiked rates 12 times since March 2010, to rein in inflation. 
http://www.indiainfoline.com/Markets/News/Inflation-to-drop-to-7-percent-by-March-R.-Gopalan/5267828720

Economic growth to be around 8% this fiscal: Montek

.....“We must remember that the current financial year is very unusual year for the world economies. And the euro zone crisis has made virtually every country revise its growth rate downwards,”......

Read.................

RBI against letting MFIs collect small deposits

.... India’s central bank has objected to a government proposal to allow microlenders to collect thrifts, or small deposits, from poor borrowers.......

Read...... 

FinMin questions need for another rural bank

Rural development ministry wants a bank for women self-help groups; finance ministry says Nabard is enough

New Delhi: The rural development ministry’s plans to set up a dedicated national bank for women self-help groups (SHGs) may have hit a roadblock with the finance ministry questioning the feasibility of the proposal, especially given the existence of the National Bank for Agriculture and Rural Development (Nabard). The proposed new bank is intended to promote self-employment among women living below poverty line. Rural development minister Jairam Ramesh, who took charge of the ministry in July this year, had on 18 July said the ministry would prepare a detailed paper on the subject before taking up the matter with the finance ministry.  Ramesh had also mooted lowering the interest rate on the credit women SHGs receive from any nationalized bank. While crop loans are available to farmers at 4-7% interest, SHGs pay more than 9% interest on loans. The rural development ministry then sent the proposal to the Reserve Bank of India for consideration. The finance ministry, however, does not seem keen on the proposal, particularly since Nabard is already in place. “There is no point in setting up another bank when Nabard already exists. Setting up a separate bank will require large-scale investments for infrastructure creation, especially since the bank will need to have a presence in rural areas,” said a senior finance ministry official, who did not want to be identified.  Nabard was set up by the government as a development bank with a mandate to ensure credit flow to agriculture and promote integrated rural development. It is the apex institution that refinances banks for onlending to critical sectors, including agriculture and rural infrastructure, and administers many funds on behalf of the government.  Finance minister Pranab Mukherjee, in this year’s budget, had also announced the creation of “Women’s SHGs Development Fund” with a corpus of Rs. 500 crore, to empower women and promote SHGs. “The fund that was announced for women SHGs in the budget can be administered by Nabard,” the finance ministry official said. “There is no need for another organization to dispense with the funds,” he said. Ramesh, however, says he is still in talks with the finance ministry. “We are waiting for final comments from the finance ministry,” Ramesh said. “We will then take up the matter with the Union cabinet.” S.L. Rao, former director general of the National Council of Applied Economic Research (NCAER), says another specialized institution is not needed. “As far as lending to SHGs is concerned, the existing structure is enough particularly with the proposed Microfinance Bill. Overall, Nabard does suffice,” said Rao. “For the poor, the best system is where SHGs save to create a pool and then use funds out of that for further activities. Further, commercial banks and non-banking financial companies have also started lending much larger sums of money to SHGs.”  
Mint

PSU bank CEOs seek elbow room

...The finance ministry, which is now looking into the issue, however, could soon relax the overseas travel norms, a senior government official who did not wish to be identified told Hindustan Times. The government and the Indian Banks Association (IBA) have also held discussions on the issue.....

Read..........

Federal Bank to beef up SME, agri lending

At a time when corporate credit growth appears to be slowing, banks like Kerala-based Federal Bank are discovering immense lending opportunities in SME and agriculture sector, especially in providing credit to large-scale farmers...............

Read............

MFIN-NACER study unearths agents’ role in microfinance, but does not find these middlemen in Chennai

....As the Ministry of Finance and the RBI (Reserve Bank of India) are trying to solve the Indian microfinance regulatory puzzle, there is further evidence on the use of agents in Indian microfinance. The question to be asked then is whether and how the proposed Microfinance Bill will prevent use of such middlemen in the future. .............

Read................