RBI comes down heavily on banks for lack of governance

Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty came down heavily on banks for lack of governance and opaque practices that were followed on pricing of loans. “There should be non-discriminatory and transparent loan pricing…It would be one of the most important aspects of regulatory guidelines. Banks that will not follow this are going to suffer,” Chakrabarty said on the sidelines of Bancon, a banking seminar. Chakrabarty’s comments come after banks failing to implement various processes aimed at benefitting customers, steps they had promised would be implemented. These include waiving the prepayment penalty on floating home loans, as is being advocated by the regulator. Chakrabarty also said RBI's supervisory department would check how much time banks’ managements, including chairmen and executive directors, spend in their offices. The central bank would also review the governance structures of banks. During the second quarter review of monetary policy in October, RBI had set up a committee on to look into principles governing proper, transparent and non-discriminatory pricing of credit. “We have appointed a pricing committee…Banks must strengthen corporate governance. As a regulator, it is my job to caution banks. If they don't improve governance, the restraint would not come from me, it would come from the owner,” Chakrabarty said. He added the regulator had noticed certain discrepancies. Among these were concerns like the rise in base rates was not reflecting the increase in the cost of funds. Base rate, a cost-plus method of loan pricing, is the minimum rate below which banks cannot lend, implemented in July 2010 to increase transparency while pricing loans. “Corporate governance would undergo a change and senior managements would have to bring out good corporate governance in managing issues,” he said. “Banking in India is one of the most profitable businesses. Banks lose money everywhere in the world, but not in India. Because of lack of competition, banks are making too much money at the cost of competition,” he added.

BS

Retirement, expansion to send banks into recruitment overdrive



(From left) Ms Usha Thorat, former Deputy Governor, RBI and now Director, CAFRAL; Mr Mohandas Pai, Board Member, Manipal Education and Medical Group’; Dr Pritam Singh, Director, IMI, New Delhi; and Mr J.P. Dua, CMD, Allahabad Bank



Here is good news for job-seekers. Public sector banks will recruit seven lakh clerks and officers in the next four-five years. The need for hiring this large number will be driven by a number of retirements and the expansion of banking at about 20 per cent per annum, Mr J.P. Dua, Chairman and Managing Director of Allahabad Bank, said in a panel discussion on talent.  The manpower gap is already being felt in rural areas, Mr Dua said.  This would mean that annual hiring by banks could be at about 50,000 from next year.  Mr Supriyo Sinha of McKinsey said 30 to 50 per cent of bank employees were set to retire in the next three to five years. The rate of attrition in the front-desk staff in banks was 75-80 per cent, he added.  Ms Usha Thorat, Director, Centre for Advanced Research in Finance and Learning, said the increasing number of global and domestic customer base, urbanisation and financial inclusion needs would also make talent management vital for banks. Mr M. Balachandran, Director, Institute for Banking Personnel Selection, Mumbai, said there was increasing interest among the youth in taking up a career in banking. Out of 45 lakh applicants for the common written examination for the posts of clerks in 19 public sector banks notified last month, 85 per cent were graduates and post-graduates, he said. The minimum educational qualification for clerical posts in banks is intermediate. There are three lakh employees in 27 public sector banks while about 70 per cent of them are clerks. 

HBL

End to Financial Tyranny? S.S.Tarapore

Savings accounts amount to about one fourth of total deposits and there is, on average, about one account per family of four persons. It is sad that for 35 years these poor small depositors have been subsidising the well off segments of society.

October 25, 2011 is a watershed moment as Savings Bank account holders were finally freed from financial tyranny. It is amazing how a con job was inflicted on small savers by banks and the Reserve Bank of India ( RBI) for over 35 years. Small savers have been brainwashed into believing that savings bank accounts are costly to banks and, therefore, small savers deserve to get low rates of interest relative to other modes of savings. Banks and the RBI are both culpable in committing this atrocity on small savers. Savings bank accounts amount to about one fourth of total deposits and there is, on average, about one account per family of four persons. It is sad that for 35 years these poor small depositors have been subsidising the well off segments of society. The issue of deregulation of the savings bank deposit interest rate has been discussed for the past 15 years but the RBI has, on each occasion, backed off in the light of stiff resistance from vested interests.

When the RBI, in April 2011, put out a Discussion Paper on Deregulation of the Savings Bank Deposit Rate, banks went ballistic and warned about a sinister nemesis lurking round the corner and some banks went to the extent of threatening that they would not undertake financial inclusion. In such a milieu, Governor Subbarao and his team need to be saluted for taking the bold measure of deregulating the Savings Bank Deposit Rate. The RBI has, however, stipulated that in the case of savings bank deposits up to Rs one lakh, the rate determined by each bank should be the same irrespective of the amount. In the case of deposits of over Rs one lakh the banks can prescribe different rates for different amounts but for the same amount the rate should be the same for all depositors. There is a history to how the savings bank facility has evolved. In the early 1960s, savings bank accounts were restricted to only 52 withdrawals per annum and interest was paid on deposits only up to Rs 50,000. As such this facility was available only to small depositors. With increased competition, these stipulations were observed in the breech and large savings bank accounts emerged which were really current accounts masquerading as savings accounts. Many of these large accounts are held by trusts, institutions, societies etc. It is reported that about 90 per cent of the number of savings bank account holders are below Rs one lakh but the remaining 10 per cent account for a disproportionately high amount in terms of value. Most bankers have been wringing their hands that the recent deregulation will erode their net interest margins ( NIM).

This is a simplistic conclusion based on the strong possibility that the deregulated rate would be higher than the regulated rate and hence the NIM would be affected. What is not taken into account is the fact that in a deregulated environment, banks would be able to raise more savings bank deposits and reduce their high cost term deposits, and thereby bring down the effective cost of funds. As Mr. Rana Kapoor, Managing Director and CEO of es Bank has aptly said the savings bank rate deregulation is a win- win situation for depositors as well as banks. In determining the Savings Bank Deposit Rate, the es Bank has been the first off the block and it has prescribed a uniform rate of 6 per cent for all savings bank accounts irrespective of the amount. The Indus Ind Bank and Kotak Mahindra Bank have opted for a rate of 5.5 per cent for deposits up to Rs one lakh and 6 per cent for deposits over Rs one lakh. The larger banks have, intriguingly, not revealed their cards. The public sector banks ( PSBSs) are probably waiting for a cue from Big Daddy ( State Bank of India). The SBI has hinted that its savings bank deposit rate could rise by 1.0- 1.25 per cent. One hopes that the PSBs do not cartelise the Savings Bank Deposit Rate. A war of mutual annihilation, feared by some banks, is unlikely to take place and as such no disruption is envisaged in the banking system. The All- India Bank Depositors' Association ( AIBDA) has played a constructive role in bringing about the deregulation of the savings bank deposit rate. It is time the AIBDA alters its low profile. This may involve some funding. If the AIBDA were to make it known that it is open to receiving voluntary donations for financing of the stepped up activities of the Association would not be a problem. The AIBDA should now focus attention on a few operational issues First, the savings bank facility should not be available for amounts above a certain stipulated figure- any balances above the prescribed maximum should not be eligible for interest. This modification would facilitate the prescription of a single savings bank interest rate. Secondly, as part of transparency, there should be a uniform rest for savings bank accounts- monthly, quarterly or half- yearly. Thirdly, a hawk- like eye should be kept on unfair practices of imposing disproportionately high charges on small depositors. Fourthly, the AIBDA should not clamour for increasing the limit for deposit insurance. Such an increase will only put an additional burden on small depositors.

Fifthly, the Association should advocate that the Deposit Insurance Agency should be given strong regulatory powers to safeguard the interests of depositors. Sixthly, differential premium for banks should be introduced which should be put in the public domain which would assist depositors to take a view on the safety of their deposits. It is hoped that banks will use the freedom to fix their savings bank deposit rates with maturity and judgement without adversely affecting depositors.

FPJ

Engineering graduates rejoice! Banks are hiring

...The institute, an arm of the Reserve Bank of India, has studied the customer relationship management process. ``Banks will need to focus on analytics to understand the life-time value of a customer and retaining them.....

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Banking at panchayat offices soon

Banking in East Godavari will be heading for a radical change from the new year with the facility at the doorstep in 436 uncovered villages in the district. The Reserve Bank of India (RBI) has directed the 17 scheduled banks with 15 public sector and two private sector banks to extend the facility under their service area. The concerned banks under the guidance of the lead bank in the district identified these 436 villages with over 2,000 population from the total 1,032 uncovered villages. The banks either have to open branches at these villages or provide service in the form of operations through business correspondents on their behalf. According to reliable sources, bankers have opted for the second mode in the form of service providers. These will visit the village on banking days in banking hours and conduct operations at the village panchayat office. All operations that are permitted by the bank can be had from the service provider at these places. These include savings bank operations, extension of loans and repayment, acceptance of fixed deposits, loans and other activities pertaining to women’s self-help groups, payments of cheques to farmers for paddy, maize and other purchases by women’s groups and agriculture department and allied activity. The concerned bank branch will cross-check these transactions and update records through the computers attached to operations by these service providers. The East Godavari lead bank district manager, Mr S. Jagannadha Raju, said on Sunday that the RBI has directed these banks to provide the facility to villages of above 2,000 population on or before March 31, 2012. 

DC

RBI favours fixed rate on long-term loans

Reserve Bank of India appears to favour long-term loan products on fixed interest rates, believing it will help banks reduce credit risks and prevent significant deterioration in asset quality. “Any long-term product, if it is on a fixed-rate basis, is better from the interest rate risk perspective,” the central bank’s deputy governor, Anand Sinha said on Sunday. “Otherwise, what happens is if interest rates are changing, you don’t know what will happen in the future,” he told reporters here on the sidelines of Bancon 2011. Sinha explained that long-term loans on floating rates carry a risk similar to un-hedged foreign exchange exposure of companies. “When you are going for a fixed-rate product, you are taking a view that you are insulating yourself from interest-rate risks. Floating rates on very long-term products can lead to credit risks,” he said. Currently, a majority of banks’ long-term retail loan products like housing loans are on floating rate of interest. So, is the banking regulator planning to introduce guidelines on managing interest-rate risks on long-term loans? “We will see about it,” is all what Sinha would say. Separately, he said there was a need for banks to reduce their dependence on wholesale funding and market borrowing — for, it may add to the systemic risks. “If you have too much wholesale funding and you are looking to renew it...if you get into a difficult situation, then you will not find a replacement for that,” he said. “Now if you don’t get fresh funding, then what are your options? You have to go for fire sale of assets and book a loss. Not only you suffer, but you put the whole system at a loss,” he added. However, he clarified that currently there were no signs of systemic risks on banks’ asset quality. “Slippages are increasing. It is higher than recovery. Credit management needs to be geared up; more efforts needed for arresting slippages,” he said. “But I don’t see any systemic issue building up as of now.” 

BS

Likely delay in new banking licence rules

... The two options in this case before RBI now is to either wait for the clearance of Banking Law Amendment Bill by Parliament or issue the final guidelines and then clearly specify that those getting the licenses will have to accommodate the provisions of the Bill when it becomes an ........


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Demand drafts over Rs 20,000 to be account payee only: RBI

NEW DELHI: On Friday, the Reserve Bank of India issued a notification making it mandatory for all demand drafts above Rs 20,000 to be account payee only. The step has been taken following reports that a lot of black money was being transacted within the country using banking channel.  In 2005 after the finance ministry introduced Banking Cash Transaction Tax, it was found that a lot of cash was being withdrawn from banks using demand drafts. Subsequently, a series of income tax raids revealed these bank drafts were being used as an instrument to transact black money.  Hawala agents, in connivance with banking officials, raised bogus bills and discounted bank drafts on behalf of beneficiaries. These agents, sources said, discounted bank drafts for a 1% commission. While earning of these agents were anywhere between Rs 5 crore and 10 crore each annually, the transaction was estimated by I-T officials to be above Rs 50,000 crore a year. The latest RBI directive to the chairman and chief executive of all commercial banks is likely to put some deterrence to domestic hawala transactions.  The notification says though the issue of demand drafts for Rs 20,000 and above are required to be credited to the payee's account and not paid in cash over the counter, there were "some unscrupulous elements using them without any crossing for transfer of money as an alternative to settlement through cash."

TOI

Inflation in India to 'drop considerably' by March 2012: Nomura

NEW DELHI: Financial services company Nomura has said inflation in India is likely to "drop considerably" by end of the current fiscal and the Reserve Bank is expected to pause its policy of monetary tightening.  "We share the view with the RBI that inflation will likely drop considerably as we approach March 2012, due to lagged effects of past monetary actions and the recent moderation in commodity prices.  "Further, as growth prospects appear to be weakening ... we expect no further rate hikes by the RBI in the current cycle," Nomura said in its Asia Economic Alert. RBI has hiked its key policy rates 13 times, totalling 350 basis points, since March 2010 to tame demand and curb inflation. The rate of price rise has been above the 9 per cent mark since December last year. At its second quarterly review of credit policy last month, RBI projected inflation to moderate from December onwards and touch 7 per cent by end of the financial year. Economic growth slowed to 7.7 per cent in April-June, lowest in six quarters. Growth in industrial production stood at 4.1 per cent in August. Experts have blamed the repeated rate hikes, which has led to increase in the cost of borrowing, for slowdown in fresh investments and industrial growth. In its review, the apex bank said that notwithstanding current rate of inflation the likelihood of a rate action in the December mid-quarter review is relatively low.  "Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted," RBI had said.  Commenting on RBI's forward guidance, Nomura said: "This, in our view, is a very strong statement indicating that there will be no rate hikes in December and beyond, so long as inflation moderates as expected.

ET

Can MFIs lower their loan rates?

....In this context, it will be interesting to note some of the recommendations of an RBI working group that never saw the light of the day. Headed by V.K. Sharma, an Executive Director of the central bank, it submitted a report in August 2010 and I don’t know why it was given a silent burial. The working group took a close look at the key financial parameters such as return on assets (RoA), return on equity (RoE), net interest margin (NIM), and equity multiplier or leverage of banks, non-banking finance companies and MFIs.....

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Google to put Wallet in pockets of 50m Indians

Google Wallet that has been a hit in the US will shortly become a reality in India as well. But, the company will offer this deal in India once it enrolls at least 50 million smartphone users with access to the internet. This will enable customers to make payments on purchases directly through such devices in any store. Google Wallet is a mobile payment gateway that allows its users to store credit cards, loyalty cards and gift cards among other facilities to make secure payments faster and convenient by simply tapping the phone on any terminal at counters.  So even if a customer does not carry cash, credit or debit cards, he may pay directly through their mobile phones. But, the catch is, there should be enough sma­rtphone users in India for that to happen. “For mobile wallet to work there should be enough penetration of smartphones,” said Rajan Anandan, managing director, Google India.  “Today there are only around 10 million smartphones users in India. Once it reaches at least 50 million, then Google Wallet would be interesting in India,” he told Financial Chronicle on Friday. Without giving any specific time frame, Anandan said smartphones market in India could reach up to 50 million users anytime soon, which could be even six months or a year. “Definitely between now and 2015, Google Wallet will be launched in India,” he added. He said right now one can change payment system in the US, but it would take some time in India as there are not many people that are using smartphones. Google had released ‘Google Wallet’ application on September 19, 2011 that was available only for Sprint Nexus S 4G phone. The company is now working on developing the application for more phones. Companies that partnered with Google for this application such as MasterCard PayPass, American Eagle Outfitters, The Container Store, Foot Locker, Guess, Jamba Juice, Macy's, OfficeMax and Toys R Us accept payment through ‘Google Wallet’ in US. Therefore, India could also become a good destination for such applications with more of such retail stores becoming hi-tech. Google India, on its part also will talk with number of companies in retail, travel and other sectors for introducing the application soon. So, from paperwork such as bank cheques to plastic cards such as credit or debit cards, soon mobile handsets would become a mode of payment for customers. India already has around 18.04 million credit cards and 2,27.85 million-debit card users as per RBI data of 2010-11. 

FC

RBI destroyed notes worth Rs 1.8L cr in '10-11

The RBI public relations officer said that 26 offices across the country are equipped with machinery to destroy notes. "The small denomination notes have a life of about six months as they are constantly circulated and they change a lot of hands. In fact from that came the idea of coining Rs 10," said Alpana Killawala, Chief General Manager, Department of Communication..........

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SBI chief for doing away with cash reserve ratio

...The Chairman of State Bank of India, Mr Pratip Chaudhuri, wants the cash reserve ratio (CRR) to be abolished....

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Gokarn to banks: Use KYC to ‘Grow with Your Customers’



Mr Pratip Chaudhuri, Honorary Secretary, IBA and Chairman, SBI, greeting Dr Subir Gokarn, Deputy Governor, Reserve Bank of India, at Bancon 2011, in Chennai on Saturday

Knowing customers will help banks to grow, said Dr Subir Gokarn, Deputy Governor, Reserve Bank of India, while delivering a special address at the Bancon 2011, held here on Saturday. “If you really know your customer, you will be able to grow with your customers,” he said, adding that knowledge capital will enable banks to move from “KYC to GYC” (grow with your customer).  According to him, knowledge is key in understanding the market. KYC norms will thus help banks understand the demographics, income, etc which banks could use favourably in serving customers better and thus grow with their customers. Dr Gokarn pointed out that it is the middle ground where there are many opportunities, and even as the banking system is dealing with its internal challenges, it is important for banks to come out with products and services targeting this opportunity. Just as there is an opportunity in rural financial inclusion, urban financial inclusion also throws open lot of opportunities for banks, said Dr Gokarn. Banks should analyse the basic motivating factors for savings and borrowings, which will help them meet the needs of customers better. For all emergencies, the primary source of credit for the financially excluded in the rural and urban areas is the informal sector.  “Banks need to explore this opportunity and meet these needs, which mean lower cost of borrowings for these people,” he said.  Encashing the demographic dividend properly is not possible without knowing the customers better. Understanding the motivators for savings and borrowings is key to making financial inclusion a profitable venture.

HBL 

RBI followed 'text-bookish' method to control inflation: Basu

KOLKATA: Chief Economic Adviser to the Finance Ministry Kausik Basu today said the Reserve Bank followed conventional methods of raising interest rates to tame inflation which do not seem to have worked.  "I was concerned about the use of traditional methods by RBI for anti-inflationary monetary policy to contain prices. The RBI followed the text-bookish way to announce monetary policy," Basu told reporters here.  He said the standard anti-inflation policies of raising interest rates were not working.  The central bank has hiked interest rates 13 times since March 2010 in its bid to tame inflation.  Basu said raising interest rates to suck out liquidity from the system would have disastrous effect on the economy.  On the persistent high food prices, he said the food inflation is likely to come down in three weeks time and overall inflation by the December end.  Food inflation was 12.21 per cent in the week ended October 22, while the headline inflation in September (latest data) was 9.72 per cent.

ET

Strike will damage customer confidence: SBI

State Bank of India today termed the strike called by its officers for November 8 and 9 as unfortunate and said that it would damage the customers' interest and confidence. "It is unfortunate. The talks are still going on..." SBI Chairman Pratip Chaudhuri told reporters on the sidelines of three-day conference "Bancon 2011", organised by Indian Banks' Association and Indian Overseas Bank here. Stating that the strike called by the All India State Bank Officer's Federation (AISBOF) would damage the interests of its customers, he said, "We expect and hope that the strike will be called off. We have not estimated our losses on account of the strike yet. More than loss of money, it will damage the confidence of our customers". Services in the banks' nearly 13,500 branches across the country are likely to be affected as its officers have given a strike call on November 8 and 9. The bank has a customer base of over 13.60 crore. AISBOF served a notice for the two day country-wide strike in pursuance of certain demands. Asked about the deregulation of savings account interest rates by RBI, Chaudhuri said the bank would not look at changing the interest rates in the immediate term. "We are not contemplating any change in the savings account interest rates", he said. Citing the RBI's move, some private sector banks have already increased the interest rates on their savings bank accounts. Asked about the Finance Ministry's ruling out SBI's proposed rights issue, Chaudhuri said, "It is not ruled out. We have different options. The Government has put Rs 4,000 crore (for SBI). Whether it will be through rights issue or by preferential issue will be decided by the government.”

BS

No tight monetary policy once inflation softens: Rangarajan

CHENNAI: The Reserve Bank of India (RBI) may reverse its tight monetary policies once inflation softens, said top economist C. Rangarajan Saturday. "By December-January, the inflation would break and a reversal of policy is possible," Rangarajan, chairman of the Prime Minister's Economic Advisory Council, told reporters on the sidelines of Bancon 2011 - a banking conference held here by Indian Overseas Bank (IOB) and Indian Banks' Association (IBA). According to Rangarajan, the inflation will continue to be high for one or two more months and then soften by this fiscal-end. Earlier inflation rate was driven by prices of vegetables and food grains but now has spread to manufacturing sector as well, he said. Queried whether corporate groups were to be allowed to venture into banking, he said the issue needs to be debated and if there are proper applicants, then they should be allowed.  On the infusion of fresh capital in public sector banks, Rangarajan said the government will have to come out with supplementary demands for grants between Rs.4,000 crore and Rs.10,000 crore as against Rs.6,000 crore budgeted for the current year.

ET 

'New banks should be allowed to maintain competition, says Rangarajan

If the banking system needs to remain competitive over time, there should be no bar on the entry of new banks, Dr C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister, said at the Bancon-2011 here on Saturday. “A closed system could only become oligopolistic. The ‘threat’ of entry should not be eliminated,’’ he added. It is up to the RBI to lay down norms for entry and also decide on who satisfies the criterion of “fit and proper’’.  Dr Rangarajan also said that the recent financial crisis has “forced us to re-evaluate the size, role and rate of growth of the financial sector’’.  The regulatory regime needs to be restructured to make the banking system more sound.  “Excessive risk taking and leveraging by banks need to be discouraged by appropriate regulatory measures or controls,’’ he said. In order to enable the financial system to meet the diversified needs of a growing economy, there is the “need to encourage the emergence of a vibrant corporate debt market’’, which will help not only large industries but also SMEs.  “We would also need institutions which will serve as market makers offering two-way quotes. This will provide the required liquidity to the market and make it attractive to the investors,’’ he said, adding that banks should explore innovative ways of financing infrastructure. Even as regulatory oversight of innovations is necessary, Dr Rangarajan said that regulatory perspective on innovation “must not become too restrictive’’. Policy-makers should strike an appropriate balance between the “need for financial innovations to sustain growth and the need for regulation to ensure stability’’. He also urged the banks to take a re-look at the organisational structure of rural branches to meet the credit needs of marginal farmers. The banks should also play a proactive role in organising self-help groups, and it is important to enlarge the scale and scope of activities of the SHGs. “This would enable the banks to reach out to people with low incomes including marginal farmers,’’ said Dr Rangarajan. According to him, the business correspondents’ model of financial inclusion has not been satisfactory. Hence, banks should explore the possibilities of looking at other alternatives.  “We should explore the possibilities of looking at low-cost brick-and-mortar branches in panchayat headquarters. Profitability rests on making the operational cost of such branches low,’’ he pointed out. He added that it was worthwhile to re-open the issue of setting up local area banks.

HBL

Challenges to Central Banking

THIS VOLUME CONTAINS AN ILLUMINATING SNTHESIS OF THE COLLECTED WISDOM ON CRISISRELATED RESEARCH B RECOGNISED LUMINARIES AMONGST ACADEMIA, POLIC- MAKERS AND MARKET PARTICIPANTS – Book Review by P.P.Ramchandran

The RBI celebrated its Platinum Jubilee during 2009- 2010 and as a part of its celebration organized an International Research Conference in Mumbai. The papers and proceedings of the Conference have been brought out in this new book edited by Deputy Governor Subir Gokarn. The theme of the Conference was " Challenges to Central Banking in the context of the Financial Crisis". The inaugural address was given by Governor Subbarao followed by a keynote speech by the Nobel Laureate Andrew Michael Spence of Stanford University; four technical sessions were held and papers were presented and discussed.

There are in all 36 contributors including seven Central Bank Governors and six Deputy Governors and a galaxy of bankers, economists and professors. The volume offers the distilled wisdom of recognised academicians, policy makers and central bankers. It analyses thoroughly, inter alia, problems like monetary policy, debt crisis, exchange rate policies, financial stability imperatives, etc. According to Governor Subbarao, who effectively poses the problems, there are five key challenges to all central banks. The first one is managing national monetary policy decisions in a globalised environment. The second is redefining the mandate of the central bank in the context of inflation targeting and asset prices. The third challenge is central bank responsibility to maintain financial stability.The fourth is the ability to manage costs and benefits of regulation. The final challenge is the need for autonomy and accountability of central banks. The Nobel Laureate economist Prof. Spence was the Chairman of the " Commission of Growth and Development ". The Commission was formed chiefly by political and public policy leaders from the developing world. According to him 13 countries grew at the rate of seven percent or more over 25 years. India and Vietnam are likely to join this group in the near future. Two factors responsible for this was maintenance of a stable macro- economic environment conducive to investment. Also there was high level of investment including public sector investment. A key component of high growth was the very heavy investment in human capital. Prof. Spence averred that central banks have an informative advantage because of the work they do. They have, in addition, a capital advantage, much as an entity like the IMF has - and that is superb analytical talent. He laid emphasis on four factors - managing inflation, internal and external crises, volatility and achieving autonomy without losing credibility. The technical sessions discussed threadbare issues like ' policy discretion', ' regulatory systems' ' flexible inflation targeting' and ' asset prices'. Another subject was the challenges posed by globalisation to central banks, fiscal problems of industrial countries. The third session concentrated on disruptions in financial systems and the imperative need for financial stability mandate. Regulatory responses should not be allowed to stifle financial innovations. The fourth session examined whether financial stability should be an explicit objective of monetary policy and whether its absence contributed to the financial crisis. In two panel discussions Governors of central banks offered their candid views on important issues with both country and global perspective. Five critical issues related to International Monetary system were the subject of discussion in a panel. The discussions were given direction by the Deputy Governors of R B I , who also offered a summing- up. Quoting from the latest book of Niall Ferguson, " The Ascent of Money" Governor Subbarao stated, " Sometimes the most important historical events are the non- events: the thing that did not occur." The spectacular non- event of the crisis is that the ' Great Recession' did not turn into the ' Great Depression'. For this central bankers should get a part of the credit. This is a volume to be read with great care and diligence. It contains the essence of wisdom of some of the wisest heads of our generation. Among the distinguished participants were Martin Wolf, Chief commentator of Financial Times, William Pole of Federal Reserve Bank of St. Louis, John Lipsky, Deputy Managing Director of the IMF and B Friedman, Professor, Harvard University. The RBI and the Academic Foundation deserve praise for making the valuable proceedings of the conference available to students, scholars, bankers, economists, planners and the public.

FPJ

Govt banks won't pay more on savings a/cs

Bankers said savings deposit accounts were used mostly for transactional purposes, not for saving funds. So, customers may not be willing to move from one bank to another. “Customers may have issued post-dated cheques or have ECS on savings accounts. No-one is going to take the trouble of shifting all these services from one bank to another,” said a senior executive from a public sector bank....

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The rate dilemma

With the Reserve Bank of India (RBI) decontrolling the savings bank interest rate, investors are in two minds whether to continue investing in short-term debt funds or park their money in savings bank accounts. Banks like Yes Bank, Kotak Mahindra Bank and IndusInd Bank have already raised the savings bank account interest rate to 5.5% per annum for balances below R1 lakh and to 6% per annum for R1 lakh and above. Other banks are likely to follow suit. Analysts say some investors would prefer to park money in savings bank accounts now, instead of liquid mutual funds because of higher liquidity and safety of the principal amount. Liquid funds primarily invest in debt securities — commercial paper, certificates of deposits and treasury bills of maturities less than 91 days — and offer higher post-tax returns than savings bank accounts. They also provide a dividend option where the dividend distribution tax is deducted by the fund house. 

IE

RBI directs UCBs to adhere to extension of interest subsidy

....The announcement comes in the wake of RBI's decision last month to extend the 2 per cent interest subsidy on rupee export credit to such sectors to cushion them from slowdown in major markets like the US and Europe......

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India’s folly: Borrowing abroad to create a sovereign fund

......RBI Deputy Governor HR Khan recently emphasised at an export conference that “We are a current account-deficit country…We are a balance of payments-stressed country. We have to promote exports to see that this is not going out of hand

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Banks making too much money at the cost of the consumer: K.C. Chakrabarty

Chennai, Nov.4:  Banks in India are making too much money, at the cost of the consumer, according to Dr K.C. Chakraborty, Deputy Governor, Reserve Bank of Inida. Speaking at Bancon 2011 here on Friday, Dr Chakraborty observed that while banks lose money anywhere else in the world, they do not lose money in India. Dr Chakraborty, a former banker himself, said this in the context of impressing upon the audience that consisted mostly of bankers, that all this would change. Competition is inevitable, he said. Competition, Dr Chakraborty said, is one of the drivers of banking business, along with financial inclusion, consolidation and globalisation. Consolidation, he said, would become a reality in the next decade. Similarly, globalisation too is inevitable, with both foreign banks coming into India and Indian banks going abroad. For this, he said that a cadre of ‘global' people would need to be developed in the banking system. The Deputy Governor said that going forward, ‘Know your customer' would not only become a key imperative, but the principle would also extend into ‘Know your customer's business' and even ‘Know your customer's business risk'. It doesn't stop there. Banks would need to know not only the risk, but also the return. Knowing what the ‘return' is, is something today's banks are lacking, he said, noting that no bank today would be able to tell precisely the cost of servicing, for instance, a savings bank account or a current account.

Customer-centric model

Besides, he said that technology must help banks reduce cost, and banks should look at a customer-centric model rather than an employee-centric one. Management information systems and internal assessment systems should be more meaningful, while the senior management of banks should also have a corporate governance structure in place. He also warned the banks that ‘lenders liability' would become a reality (which means banks would be held to account if their lending practices dent a business.)

HBL

Strengthen corporate governance: RBI to banks

CHENNAI: The Reserve Bank of India today cautioned banks that it will have to step in if they did not strengthen their corporate governance.  "You (banks) have to strengthen the Corporate governance. If you dont do, micro management will come from the owner (RBI)," RBI Deputy Governor K C Chakraborty told reporters on the sidelines of banking conference 'Bancon 2011' organised by Indian Bank's Association and Indian Overseas Bank here.  He said "as a regulator its my job to caution. We must strengthen our corporate governance."  Asked whether a monetary and fiscal action was required to contain food inflation, he remained affirmative and said all inflation required monetary and fiscal measures.  "You see if inflation is going up it absolutely requires monetary and fiscal measures. How much measure has to be taken will be decided by the Governor of Reserve Bank and the fiscal position will be decided by the Finance Minister and the Parliament.", he said.  On Thursday the food inflation rose to 12.27 per cent while headline inflation remained at 9.27 per cent in September.  Earlier in his address at the conference, he said Indian banks were making lot of money riding on the customers as in the last 40 years Indian banking industry has not seen any competition. "Indian banking is the second largest profitable business in the world...",he said.  Banks not only need to know about their customer norms, but also their businesses and the risks involved, he said.

ET

RBI asks banks not to honor cheques beyond 3 mths

MUMBAI: Banks should not make payment of cheques, drafts, pay orders or banker's cheques presented beyond a period of three months from the date of issue, compared with six months currently, the central bank said on Friday.  The rule is effective from April 1, 2012. "Some persons are taking undue advantage of the said practice...as these instruments are being circulated in the market like cash for six months," said the Reserve Bank of India in a notification on its website.

ET

Pre-payment charge is a clear banking canon, says IBA chief

...Pre-payment charge is a very clear banking canon. Because I will be suffering a loss as a result of money coming back into my system before time, I am charging the customer. It is not a penalty but a charge. Suppose you decide to pre-pay the home loan, the bank will accept the offer. But still I am going to have an opportunity loss of the money coming back to me. Hence, I am levying some charge to only offset the loss and nothing more....

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All banks must issue savings account pass book: RBI

Mumbai : The Reserve Bank today directed all banks to offer the pass book facility, without any charges, to all customers with savings account. "It has come to our notice that some banks are not issuing pass books to their savings banks account holders (individuals) and only issue a computer generated account statement even when the customer desires pass book facility. "Banks are, therefore, advised to strictly adhere to the instructions...," the Reserve Bank of India (RBI) said in a notification. Under the existing rules, banks are expected to offer pass book facility to all individual savings banks account holders. In case banks offer the facility of sending statement of account and the customer chooses it, banks must issue that on monthly basis. At present, some of the private sector banks do not provide the pass book facility. Meanwhile, in another notification, RBI has asked banks to ensure that demand drafts of Rs 20,000 and above are issued with account payee crossing. "Instruments with account payee crossing are required to be credited to the payee's account and not paid in cash over the counter. However, some unscrupulous elements use demand drafts without any crossing for transfer of money as an alternative to settlement through cash," RBI said. In view of concerns raised, it said, RBI reiterates that banks shall strictly adhere to the instructions and not collect account payee cheques for any person other than the payee constituent. Banks may note that the above prohibition and relaxation shall also extend to drafts, pay orders and bankers’ cheques, RBI notification said. 

IBN Live

Rising interest rates may hit banks' loans quality further: Minister

...........In 2007-08, the MSME segment received only 11 per cent of the non-food credit, and after three years too, it remained at the same level, he pointed out. Even though the RBI has mandated 20 per cent year-on-year growth in credit to the micro and small enterprises, “only 38 of the 81 non-RRB scheduled commercial banks have attained the target”..............

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Jammu and Kashmir Bank appoints Hari Narayan Iyer as RBI nominee director on board

New Delhi: Indian state-run lender Jammu and Kashmir Bank has appointed Hari Narayan Iyer, general manager of Reserve Bank of India (RBI), Jaipur, as director on its board with effect from October 7. Iyer will be RBI's nominee on the bank's board, Jammu and Kashmir Bank said in a filing to stock exchanges. The bank's board comprises of nine members, including Chairman and CEO Mushtaq Ahmad, Non-Executive Director Sudhanshu Pandey and Non Executive Independent Director M I Shahdad, among others. 

http://banking.contify.com/story/jammu-kashmir-bank-ltd-inducts-general-manager-hari-narayan-iyer-on-board-of-directors-2011-11-03

RBI for increasing FII cap in govt bonds

Reserve Bank of India will have a calibrated approach regarding increasing foreign institutional investment limit in government bonds, Deputy Governor of the central bank HR Khan said on Friday. Currently, FIIs are allowed to invest up to $10 billion in government bonds and the limit has been almost exhausted in the first half of 2011-12. “We are not ruling it out, we are moving in a calibrated manner. I have no comments on the time frame,” Khan said at the sidelines of banking seminar Bancon. The government and the central bank are in talks to increase the FII limit as yields on government securities have hardened following enhanced borrowing plan of the government. The government has announced Rs 53,000-crore extra borrowings in the October-March period. “There are views on foreign funds coming to debt market. We have a hierarchy of flows. First preference is FDI which is a stable source of funds. Second preference is FII and third preference is debt,” Khan said.

BS

Deregulation implications

This refers to “RBI's most interesting move” (Business Line, November 4). At a time when indecision is the order of the day, the RBI has announced deregulation of Savings Bank interest rates, after making very clear what direction the rates on Savings Bank balances should take post-deregulation.  This is another case where Dr Subbarao's move towards more transparent communication is evident. Till perhaps a decade ago, there was a clear public-private sector divide in the financial sector. Public sector banks got certain ‘monopoly' in the case of government and public sector undertakings' accounts, which, in a way, compensated for the losses incurred in rural business, which essentially involved an unmanageably large number of small and un-remunerative accounts. Private sector banks had a choice to select clientele, and were even provided safety routes such as investment in Rural Infrastructure Development Fund against shortfall in meeting priority sector targets.  The competition is chasing its logical end of ‘level playing field', and in the near future, the public-private sector distinction will reduce further. On all fronts, the new private sector banks had an advantage, namely, technology, freedom to manage HR issues on market-related terms, and choice of business. Private sector banks are rightly trying to compete and are likely to taste success sooner than later.  The Government and the RBI should see this as a healthy sign and modulate their policies to encourage growth. In the financial sector, supervision of credit and a robust recovery mechanism are pre-requisites for ensuring the health of institutions across public and private sectors.

M. G. Warrier Mumbai (HBL)

Strengthening boards vital for good corporate governance in banks

.......More recently, while reviewing the policy of granting fresh bank licences to corporations, the RBI Governor, Dr D. Subbarao, raised concerns of “possible self-dealing” by promoter groups in private banks. He also cautioned bank boards regarding excessive risk taking. In April 2011, the RBI levied a penalty on 19 banks, including India's largest bank — State Bank of India — for violations on sale of derivatives. It also imposed a Rs 25 lakh fine on Citibank for frauds related to portfolio/wealth management by one of its managers at the Gurgaon branch.............

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SBI officers to proceed with 2-day strike, as talks fail

Customers of the State Bank of India may have to face a lack of branch services for five days beginning Sunday, as talks between the management and officers’ union on employee demands failed. Officers of SBI’s associate banks may join the strike, over pay and some related issues. G A Nadaf, general secretary, The All India State Bank Officers Federation (AISBOF), “Even reconciliation efforts by the Central Labour Commissioner were not fruitful. Officers will go ahead with a strike on November 8 and 9.” AISBOF has given a call for a strike on Tuesday and Wednesday. Banks are shut on Monday due to Id ul Zuha and on Thursday for Guru Nanak Jayanti. Pratip Chaudhuri, the chairman of SBI, said the regional labour commissioner (Mumbai) has directed the officers union not to proceed with a strike and instead attend a conciliation meeting. If the union pursues the strike call, the bank would look at other legal options. He said the management was making efforts to extend skeleton services at branches/offices. Officers at SBI’s five associate Banks may join the two-day strike. C Raj Kumar, president of SBI Associate Bank Officers Association, said: “Our main issue is about discrimination in treatment to associate banks in extending benefits.” He said the Central Labour Commissioner had convened a meeting of union and management representatives tomorrow in Thiruvananthapuram to find a solution.

BS

RBI penalises two Gujarat Coop banks

The Reserve Bank of India (RBI) has penalised two Gujarat-based cooperative banks for violation of instructions on know your customers (KYC) norms and customer identification norms. Vadodara-based Baroda City Cooperative Bank is slammed with a monetary penalty of Rs 1 lakh for violation of customer identification norms. "RBI has imposed a monetary penalty of Rs 1 lakh on the Baroda City Cooperative Bank... For non-adherence to Know Your Customers (KYC) norms and incorrect compliance certificate furnished for the earlier inspection report," the apex bank said in a statement. RBI also imposed a monetary penalty of Rs 5 lakh on Shreenath Co-operative Bank Ltd, Ahmedabad for violation of instructions on know your customers (KYC) norms and anti money laundering (AML) guidelines.

BS

Inflamed by inflation!

According to RBI Deputy Governor Subir Gokarn, "Rising affluence has also led to an increase in demand for proteins and nutrition." ...................

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RBI, backdoor financier? – A.Seshan

How the central bank acts as an agent of the government and why this matters

The Reserve Bank of India (RBI) has once again expressed its anguish over the state of central finances in its latest monetary policy review. This is a repetition of the view in an earlier review that monetary policy cannot bear the burden of fiscal deficits. The proposed additional borrowing by the Centre of Rs 53,000 crore has already sent the securities market into jitters. RBI refers to the consequent crowding out of the private sector from the market. Yields on central bonds are rising. State governments are hit even worse than the Centre because, generally, their securities carry a few basis points more as yields than the central ones on the grounds that they are more risky than the latter. The truth is that the Centre has the backing of RBI to honour its financial obligations, which states do not have. This is one aspect of the absence of level playing in our federal polity that has escaped the attention of political scientists and fiscal experts.

For a long time, the Centre had unlimited access to the spigot of money creation by RBI. Its excess borrowings from the central bank were automatically transformed into treasury bills owned by the latter. This arrangement was supposed to be terminated after an agreement between RBI and the Centre under which the Ways and Means Advances System (WAMA) was devised with penalties and other provisions for overdrafts. It was only cosmetic since at the end of the year, the penalties were returned to the government by RBI as part of the transfer of the available surplus of income over expenditure. In the consolidated balance sheet of the government and the central bank interest payments and penalties are just transfers of entries with no material significance for the government, which is not affected adversely. Then came the Fiscal Responsibility and Budget Management Act that was supposed to put an end to RBI buying securities in the primary market. Thus, the monetisation of public debt was sought to be eliminated, except for Open Market Operations (OMO) that had a monetary objective. But the financial wizards found a way out when they discovered that the central bank could buy back old securities in the secondary market, thus, releasing funds that would facilitate the purchase by banks of new securities in the primary market ensuring their success. Does this not, then, amount to RBI financing the government by the back door? I have called it Debt Management Operations (DMO), the objective of which is fiscal, while OMO has a monetary objective of tightening or loosening money supply. Of course, financial sophists would argue that DMO is also OMO because it relieves the market of the stringency of funds! The point is that RBI should stop the practice of DMO. If, as a result, yields and interest rates go up, then so be it. The blame will then be on the government, not on RBI. After all, the aim of a tightening regime is to raise the yields and rates.

Coming back to federal-state relations, state governments do not enjoy the Centre’s privileges, except for their own WAMA. Right from the beginning, RBI never bought any treasury bill or long-term security of states on grounds of controlling the money supply. The states do not have the advantage of RBI engaging in buybacks of their securities to help banks subscribe to new flotations. This asymmetrical position has resulted in yields of state loans going up substantially in the recent period. Although the Finance Commissions have done their bit to increase the transfer of resources from the Centre to states, some thought needs to be given to the asymmetry in the relationship between RBI and the Centre, on the one hand, and that between the former and states on the other. I am not saying states should have the same privileges in RBI as the Centre does. On the other hand, I would urge the central bank to consider placing its policy approach to debt transactions with the Centre on a par with those with the states. But then, this is more easily said than done, given RBI’s lack of autonomy. As Sir Ivor Jennings said in a memorable lecture at the University of Madras shortly after the inauguration of the Republic, the Indian Constitution is federal in structure but unitary in spirit. One reason given for the proposed separation of public debt office from RBI is that there is a conflict of interest in the present arrangement under which RBI acts as an agent of the government and its duty is to ensure the best terms for its client in raising loans as against its responsibility to formulate its interest rate policy in accordance with its monetary objective. Now the question is: Will RBI stop its DMO once it is divested of its function to manage public debt?

The author is an economic consultant and was officer-in-charge in the department of economic analysis and policy at the Reserve Bank of India (BS)

RBI Adviser: Further Rate Increases Unlikely

NEW DELHI -- India's unprecedented monetary tightening since early last year has run its full course as any further rate increases will have little impact on cooling inflation and may instead hurt economic growth, a senior adviser to the central bank said. "I thought it [rate increases] should have ended last time [July policy] itself, but they [central bank] pushed it forward," Sudipto Mundle, a member of the Reserve Bank of India's technical advisory committee on monetary policy, said late Thursday. The panel is headed by the RBI governor and includes some RBI board members, Deputy Governors and external experts. Mr. Mundle said an overwhelming majority of members favored the central bank to hold its policy rate steady at the October meeting. "There was just one member who favored a 25 basis-point increase while five wanted no change," he said. The RBI, however, raised the rate by 0.25 percentage point, its 13th increase since March 2010. Still, the RBI's quickest-ever pace of tightening hasn't tamed intolerably high inflation, which has remained above 9% for 10 months to September. Mr. Mundle said inflation was being driven by high global commodity prices and local supply issues, and raising the policy rate will be ineffective in controlling price pressures. "You can't say I have got a cold and, therefore, I would bandage my foot. You have to match the medicine to the disease." Mr. Mundle said the RBI's cautious "baby steps" approach hasn't been very effective and the central bank should have rather raised rates in much more chunkier moves, which would have helped "shock" the market and break inflationary expectations. He was referring to the RBI's practice of raising the policy rate by 0.25 percentage point at each go--the central bank stuck to this practice 11 times of its 13 increases. Mr. Mundle said inflation will ease in the January-March quarter as global commodity prices will begin to cool by then, helped by a favorable base. However, it will still overshoot the RBI's March-end projection of 7%, possibly ending the fiscal year at as high as 8%. The recent weakness in the rupee will exacerbate inflationary pressures. The rupee has fallen about 10% against the U.S. dollar since April. While the RBI's aggressive tightening has had little impact on inflation, growth has slipped considerably due to higher borrowing costs that have crimped economic activity. Mr. Mundle expects the economy to grow 7.0%-7.5% this fiscal year, below the RBI's 7.6% forecast. 

WSJ

EEPC India announces India's largest engineering International show

Engineering Export Promotion Council (EEPC India) on the eve of their Western Region awards function announced India’s largest Engineering Sourcing Show (IESS). IESS will be organized for the first time in India by EEPC India, under the tutelage of the Union Ministry of Commerce & Industry.. The show will take place in Mumbai between March 22 and 24, 2012. Chief Guest H R Khan, Deputy Governor, Reserve Bank of India who presented the Awards enlightened the award winning companies about the current growth trajectory of the sector. He also mentioned, “With a growth target of 500 billion exports by 2015 and a with higher growth focus for the coming months we need to focus on diversifying our markets around the globe. EEPC being an industry body is helping companies to achieve their projected targets by giving them the support required. We are very positive that through our sustained and collective efforts, we will sail through this slowdown and emerge again.”

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Virtues of zero interest rate - P. V. INDIRESAN

The RBI's rate hikes are not working, while inflation continues to hurt the poor. The poor can be provided cheap food and health services, if the businesses doing so are rewarded with interest-free credit.

There is a story about Robert Bruce, the Thirteenth century king of Scotland. Having been defeated six times by the English, he was hiding in a cave when he saw a spider try and try again to spin a web until at last it succeeded. Inspired by it, he fought again and again until he succeeded. The policymakers of the RBI are following that example: they have raised the bank rate for the thirteenth time in the past nineteen months. Robert Bruce would not have succeeded if he had stuck to the same old tactic. Hence, it is not certain that the RBI will succeed this time either — even though they have reportedly said that this is the last time. I hope it is not like the way circuses used to advertise – last week, the very last week, the very final week, and so on. I hope that the RBI realises that its method is not working and tries something else — notwithstanding what the experts may advise.

ANOTHER BUSINESS MODEL

Incidentally, the RBI has expressed particular concern about the way food inflation hurts the poor. That inflation is indeed serious. For instance, in Delhi, the price of vegetables in the bazaar is three to four times the wholesale price. It is a pity that merely moving these perishable goods a few kilometres should increase their price so drastically.  If the RBI is serious, it should ask the government to fund at low, or even zero interest, refrigerators for vegetables in consumer shops and also silos for grain. Let them proliferate so much that competition sets the prices right. In my opinion, better storage, low cost entry and free competition will help the poor better than higher and higher interest rates.

If poverty alleviation is the concern, can businesses help? According to the late Prof C. K. Prahalad, who postulated the concept of the ‘bottom of the pyramid', poverty alleviation may be achieved simply by reducing the cost of services and thus make them affordable to the poor. Businesses have liked the idea: They realise that thereby they can improve their profits and, at the same time, earn the reputation of helping the poor. Usually, Prof Prahalad's idea is used to sell more to the poor but not to buy anything from them. The question is whether business would not profit more if it buys something from the villages in exchange for what is sold to them. Incidentally, Prof Prahalad commends a type of Public-Private Partnership (PPP) as practised, for instance, by Arvind Eye hospitals. Those hospitals serve both the rich and the poor. The rich pay full costs and the poor only the much lower marginal costs. The very poor may even get the services free. As Arvind Eye Hospital is a private enterprise, why should others not do the same? Essentially, our society needs a system by which the poor can get education, healthcare, housing and municipal services like water, sanitation and roads of acceptable quality at affordable prices. That is what Arvind Eye Hospitals does – by inducing the rich to subsidise the treatment of the poor.

CREDIT AS REWARD

On the other hand, there is a well-accepted theory that the primary aim of any business should be maximising return on investment for the shareholders. It is also accepted that poverty alleviation is the responsibility of the government and not that of business houses. So, when businesses help the poor they should have a PPP – support from the government on behalf of the public.  Usually, governments do so by providing (very expensive) land free or at a low cost. That is a pre-operative subsidy. It does not work when the hospitals and schools take the land virtually free but keep their beds and seats empty rather than serve the poor. The only thing the poor can sell is their labour. Will not businesses profit more if the quality of their labour increases? At present, the businesses expect the government to do so by providing education and healthcare to the poor. Unfortunately, the Indian government is not doing as much as it should — look at the way infants are dying in Bengal.  How will businesses profit more – by selling to untrained, uneducated and unhealthy poor, or by utilising their talents after making the poor better skilled and more healthy? I suggest that the government should help when businesses observe the statistical 80-20 rule: The richer half of the population spends 80 per cent and the poorer half only 20 per cent. Then, the government may offer a post-operative incentive — interest free loans when they let the same number of the poor as the rich (with acceptable reduction in quality, for instance, general wards Vs special wards) and make them pay only 20 per cent of the total cost.  Then, indifferent performance may be checked by reducing interest subsidy in proportion to the shortfall in the number of the poor served. Will not businesses ultimately make more profits by promoting self-supporting schools and hospitals? Will their profits not increase if they have better trained and healthier staff, as against allowing the state to continue with its inefficiency in this area?  Should not the government help such ventures by offering them loans not at high interest rates, but zero interest rate? The government will benefit because businesses can offer the services more efficiently and it is easy to check what percentage of the clients are from the certified poor. Will that not promote those at the bottom of the pyramid?

(The author is a former Director, IIT Madras.) HBL

Allow stock broking companies to operate banks: ASSOCHAM

BANGALORE: ASSOCHAM today said stock broking companies should be allowed to operate banks as they are under the supervision of Securities and Exchange Board of India (SEBI).  "Since the stock broking companies have deep penetration into various geographies ..., they can achieve the objective of financial inclusion, which is one of the key objectives of new banking licensing guidelines issued by RBI," ASSOCHAM said in a statement here today.  As various financial service companies have exposure to broking business, it would be logical to keep a benchmark of ten per cent of revenues or assets on prospective basis, it said.  "In fact, some existing banks have subsidiaries involved in broking business and this will create an uneven playing field for the new banks," ASSOCHAM Secretary General D S Rawat said.  But it would not be feasible to make it mandatory for a new bank to get listed within two years of licensing "this period may be extended to five years," he said.  The minimum paid-up capital requirement of Rs 500 crore should be raised to Rs 1,000 crore within five years of starting the new bank. "This will help ensure that only serious and resourceful entities are eligible to apply," it said.  The stipulation of non-operative holding company holding minimum 40 per cent of paid-up capital for five years will ensure promoter's economic interest during the start-up period.  "The reduction to 20 per cent in ten years and 15 per cent in twelve years will serve the cause of necessary diversification," ASSOCHAM said.  It appreciated cap of 49 per cent for foreign shareholding in the new bank during first five years, but asked for clarity on the status of limit for foreign institutional investors so that they can plan long-term investment decisions.  ASSOCHAM also said the guideline to open 25 per cent of branches in un-banked areas should be gradual and progressive, which would give time for new players to get their feet right and stabilise financial viability.  "Maybe 10 per cent in first year, 15 per cent in second, 20 per cent in third and 25 per cent in fourth," the chamber said.  ASSOCHAM called for relaxations in statutory liquidity ratio and cash reserve ratio to encourage financial inclusion. "Nearly 60 per cent of Indians do no have a bank account," it said.

ET