RBI right in pressing pause key – A.Seshan

The central bank has done well to keep the status quo rather than succumb to the pressure to reduce rates. The declining trend in inflation may turn out to be a false dawn, calling for a return to tightening measures. The RBI's neutral stance in its latest review — making a pause in its hard money policy — was somewhat predictable. In the first place, it had itself given an indication to that effect, ceteris paribus, on the last occasion. Secondly, a series of bad tidings for the economy tells us that the country is buffeted by problems both on domestic and external fronts, and cannot not bear with another dose of monetary tightening — despite inflation persisting above 9 per cent. The multiple whammies hitting the country are well known and need not be listed here. The only silver lining in the gathering clouds is the fall in the annual inflation rate from 9.73 per cent in October to 9.11 per cent in November; though small, it has provided a breather to the central bank. More importantly, the WPI for December 3, 2011, showed the rate of food inflation drop sharply to 4.35 per cent, reinforcing the trend seen for the previous week at 6.60 per cent. RBI can derive some satisfaction from the fact that its monetary policy actions are beginning to bear fruit on the prices front, though with a lag; its moves have led to a deceleration in the growth of aggregate demand. It could afford to shift its priority slightly towards promoting growth — not by loosening its grip on the flow of funds in the economy, but by not tightening it either. The RBI embarked on a dear money policy to help the economy experience a soft landing. Vested interests try to make it appear as though the country is facing a recession. A 7-7.5 per cent growth with an inflation rate of 7 per cent expected at the end of the year is something that many countries will be glad to achieve. The trends in monetary variables so far have been satisfactory from the point of view of an anti-inflationary approach. However, it remains to be seen whether the trend on the price front is going to continue. It is clear that with the expected non-realisation of revenue targets, ballooning expenditure and the lowering of growth estimates, the fiscal deficit will exceed 4.6 per cent of GDP envisaged in the budget. The only question is the extent of excess. It will certainly have an impact on prices, even if there is a bumper rabi crop. In that, case the declining trend in inflation may turn out to be a false dawn, calling for a return to tightening measures before long.  The press release of the central bank reveals awareness of a possible recurrence of high inflation. Rupee depreciation and oil prices are other factors to reckon with. Hence, the Bank has done well to wait and watch before relaxing the existing policy parameters, resisting pressures from official and business circles. The tempo of government expenditure is likely to gain further steam soon in view of elections to important State assemblies in the coming months. Their results might as well decide whether the UPA will have enough votes to get its candidate elected as President in mid-2012. The importance for the ruling coalition of having a pliable President in a situation of no party enjoying a clear majority in the Parliamentary election of 2014, or even earlier, needs hardly be emphasised.  Hence, the focus will be on floating new schemes before they are disallowed by the Election Commission, or expediting the expenditure on the existing ones in order to tap the vote bank before the appropriations expire on the last day of March. For starters, there is already an announcement by the Prime Minister on instituting a credit risk guarantee fund of Rs 1,000 crore soon for the poor. The UP Chief Minister has indicated her intention to ensure year-round employment guarantee for the rural residents – an initiative that the Centre may emulate at an appropriate time. The problem facing the country is not on the supply side. There is no shortage of supply of industrial or agricultural goods with the exception of coal. It is a failure of management of supplies, not of monetary policy. The real villain is to be found on the aggregate demand side. Three-fourths of the fiscal deficit budgeted for the year was ‘achieved' in seven months. There is no respite in issuing doles in the name of an employment guarantee scheme that sees neither inputs nor outputs. Now, the government is reported to be planning an advance payment of wages for work not done! What is disturbing are the results of the two surveys on inflation expectations and consumer confidence (See RBI Bulletin, December 2011). The households in the sample expect the annual rate of price rise to become 12.2 per cent and 12.9 per cent three months and one year ahead, respectively. It should worry the central bank no end as it sets store by expectations in formulating policy. Around two-thirds of the households are aware of the RBI's monetary actions. Of them, only about one-fourth is convinced that the Bank is doing the needful. Of the latter respondents, less than 60 per cent feel that the RBI policies have an impact on controlling inflation. Does it mean that, by and large, even the average ‘knowledgeable' citizen does not believe in the effectiveness of monetary policy?

(The author is a Mumbai-based economics consultant.) HBL

RBI keeps key rates unchanged in monetary policy; indicates cut from now on

....... Commenting on the RBI's move to keep policy rates unchanged, C Rangarajan, Chairman of PMEAC said that the pause in the rate hike was an appropriate thing to do and that headline inflation would come down in the future..............

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RBI pauses - finally!

The Reserve Bank of India took a pause from its rate tightening cycle in its mid- quarter monetary policy announcement today. After 13 consecutive hikes over the past 20 months, the Reserve Bank of India decided to stay still and do nothing. It also provided guidance that a reversal in its tightening cycle may happen if conditions improve. The RBI's last 13 hikes cumulatively amounted to a 350 basis point increase in key interest rates. The repo rate (the RBI's key policy rate - the rate at which the RBI lends money or infuses liquidity to banks) remains at 8.50 per cent, while the cash reserve ratio remains at 6 per cent. Over the past few weeks, there has been a clamour from bankers and the market for a reduction in repo rates as well as cash reserve ratio, as growth was slowing down. However, with inflation still remaining high at over 9 per cent, a cut might have sent the wrong signal about its intentions. As leading economist and a former Deputy Governor, Dr S.S.Tarapore, put it in an edit page article in Business Line today, "A monetary policy relaxation would earn encomiums for the RBI but would be deterimental to long term growth with price stability". Even earlier, Dr Subir Gokarn, Deputy Governor, Reserve Bank of India, had pointed out that CRR was a monetary policy tool which would not be used merely to address liquidity shortages. The RBI reiterated the guidance it had given at the time of the second quarter review. While noting that downside risks to growth remained, it said, "The guidance given in the second quarter review was that, based on the projected inflation trajectory, further rate hikes might not be warranted. In view of the moderating growth momentum and higher downside risks to growth, this guidance is being reiterated. From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth."

HBL

RBI forms working group to enhance liquidity in secondary market

With a view to increase liquidity in the secondary market, RBI on Friday appointed a working group on government securities and interest rate derivatives markets. The committee, under the chairmanship of RBI Executive Director R Gandhi, will analyse the G-Sec and interest rate derivatives markets and promote retail participation in them. "The RBI has set up a working group comprising representatives from market and RBI officials to examine and suggest ways for enhancing secondary market liquidity in G-Sec and interest rate derivatives markets," the apex bank said in a notification. Seeking comments from stakeholders by January 17, 2012, it said that the working group will study the determining and influencing factors on liquidity of G-Sec and interest rate derivatives and the factors responsible for enabling and inhibiting liquidity in the secondary market. In its second quarter policy review in October, the central bank had said it will form a working group to study ways for increasing secondary market liquidity. The government had last month increased the investment limit for foreign institutional investors in government securities to $15 billion with a view to enhance capital flows. 

NDTV Profit

RBI organises Financial Inclusion Progarmme

JAMMU: As part of its financial inclusion and awareness drive the Reserve Bank of India (RBI), Jammu Office organised an outreach programme at village Bhata Dhurian, District Poonch on Thursday. The programme was presided over by K.K Saraf, Regional Director, RBI, Jammu and was attended by G.M Sahibzada, Executive President, J&K Bank Ltd., other senior government officials, bankers, teachers and students. A large number of villagers including women, senior citizens, MGNREGA beneficiaries and farmers also attended the programme. Speaking on the occasion, Saraf stated that RBI’s outreach programme which started during its Platinum Jubilee Year in 2009-10 were being continued with a view to deepening the penetration of financial inclusion and expanding the coverage of financial services to all sections and all regions of the country in a meaningful way, particularly to the economically backward and weaker sections of the society. Saraf further stated that Bhata Durian village is the second village chosen by RBI for outreach activities in the State for 100 per cent Financial Inclusion during 2011-12 by using Information and Communication Technology (ICT) for issuance of smart cards through the Business Correspondent (BC) model. The main aim was to achieve the objective of financial inclusion and providing doorstep banking services to the rural poor, small and marginal farmers, people of small means, women, etc. He also explained to the gathering that the biometric smart cards have inbuilt security features and are therefore safe for conducting transactions. The card holders would also get receipt for each transaction. During the programme, smart cards issued by J&K Bank Ltd. were distributed and the participants witnessed activation / transactions through smart cards not only for the common customers but also for MNREGA beneficiaries. The audience was familiarised with the history and functions of RBI through a film show. Films on features of genuine bank notes and on the functioning of the Banking Ombudsman were also shown for the benefit of the public. A short cultural programme was presented by the school children. With the help of J&K Bank Ltd., a counter for exchange of soiled and mutilated notes and issuance of fresh notes and coins was set up at the venue which attracted a huge crowd. Literature highlighting the functions of RBI and on financial literacy and education were distributed to the students and other members of audience. This was a new and unique experience for the villagers who showed great enthusiasm in getting connected to banks without visiting a ‘brick and mortar’ branch.

State Times

RBI to promote small, medium enterprises

GUWAHATI: The Reserve Bank of India (RBI), NE region wants banks to clear the credits of the Micro Small Medium Enterprises (MSME) faster to promote these enterprises for the sustainable growth of the region. To mark its centenary celebration, the Central Bank of India organized a symposium themed 'Role of entrepreneurship and bank credit for development of MSME'. RBI Regional Director Sureskha Marandi said on the occasion, "We have received complaints that many banks take too long to clear an entrepreneur's credits or loans. Banks must follow the time line of its citizen's charter while accepting or rejecting a loan. With less number of heavy industries in the region, banks should play a vital role in encouraging small entrepreneurs." Marandi said stern action will be taken against any financial institution which fails to meet the norms of citizen's charter or involves in any financial mismanagement. The RBI has also opened a 'Banking Ombudsmen' cell here where an entrepreneur can file complaints against any bank violating the citizen's charter. According to RBI statistics, only nine per cent of banks loans in India go to MSMEs.

TOI

Farmers' forum alleges anomalies in farm lending

Chennai : Direct lending to agriculture by credit institutions such as banks suffer from various anomalies, according to a farmers' forum. The Centre has stipulated that 13.5 per cent of total loans advanced by banks have to be direct agriculture lending, “Credit institutions are, however, deliberately reporting higher disbursal of direct agriculture credit than what is actually given, possibly to the extent of 100 per cent in some cases,” said Mr Ajay Jakhar, Chairman of the Bharat Krishak Samaj, in a letter addressed to the RBI Governor, Dr D. Subbarao. The letter comes within days of the Union Finance Minister, Mr Pranab Mukherjee, telling the Chief Ministers of the East Zone that banks have achieved 50 per cent of the target set for farm credit in the first half of the current fiscal. In the Budget for the current fiscal, the Finance Minister fixed Rs 4.75 lakh crore as target for agriculture lending. Elaborating his charges by pointing out to “information compiled from credible sources”, Mr Jakhar said people living in cities such as Delhi and Chandigarh have obtained agriculture loans worth Rs 32,000 crore during 2009-10. “Farmers in Uttar Pradesh, Bihar, West Bengal and Jharkhand received loans worth Rs 31,000 crore. This is unbelievable,” he said. Though agriculture credit has increased, it has happened through urban and metropolitan branches of banks. “It is reported that agriculture loan disbursals from urban branches of banks have increased to more than 35 per cent of total agriculture lending,” the forum chief said. Going by the letter, 52 per cent of farm loans disbursed in 2009-10 went to only Andhra Pradesh, Maharashtra, Delhi, Haryana, Tamil Nadu and Chandigarh. “For obvious reasons, this actually seems unlikely,” Mr Jakhar said. Just 29 per cent of the credit is extended between June and September – the main season for kharif sowing. Another 24 per cent of loans is disbursed between February and March, a non-agricultural season but an ideal period to meet the Government target, Mr Jakhar said. He regretted that the share of loans above Rs 25 crore had increased to 16.8 per cent from 5.7 per cent, extension of loans with a limit of Rs 25,000 had dropped to 13.3 per cent from 35.2 per cent during 2009-10. According to the RBI data, agriculture lending by public sector and private banks dropped in share in priority sector lending during 2010-11. Public sector banks lent Rs 4.14 lakh crore last fiscal against Rs 3.72 lakh crore in 2009-10. However, in terms of lending in the priority sector its share dropped to 16.5 per cent from 17.9 per cent during the review period. In the case of private banks, the actual lending increased to Rs 92,136 crore (Rs 90,737 crore) but the percentage in priority sector lending dropped to 15.7 per cent from 19.4 per cent. Mr Jakhar also pointed out to a survey by Nabard that showed that non-interest and higher transaction costs imposed on farmers added another seven per cent to the interest cost of seven per cent, thus, doubling the total loan cost to 14 per cent. “These raise the questions of appropriateness and veracity of agri-credit lending,” Mr Jakhar said and urged the RBI to conduct an audit on banks' agriculture lending.

HBL

Bank officers brainstorm to curb rise in cheque fraud

NEW DELHI: Senior officials from seventeen leading banks attended a meeting organized by the Punjab National Bank to discuss ways to curb rise in frauds under the Cheque Truncation System (CTS). The first edition of the conference saw 44 senior officials from 17 banks, including banks like State Bank of India, Canara Bank, ICICI Bank, HDFC, Axis Bank among others; who brainstormed and discussed ways of controlling the menace and establishing ground rules for collecting bank's responsibility for 'due diligence and paying bank's duties'. The discussions ended with passing of a resolution on the role of banks to contain the menace and also decided to take up the issue with the Reserve Bank of India (RBI) for providing separate guidelines on reporting of frauds under CTS and other related issues.

TOI

Markets might want a rate cut, but Subbarao can’t oblige

........ So, the beleaguered economy will continue to wheeze along, with no respite from high interest rates. The markets might be sorely disappointed, but Subbarao has valid reasons for not cutting rates just yet. With the government not doing anything on the economic policy front, and the RBI holding fire on interest rates, it will be a tough ride for the economy as it enters 2012.

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Accountability needed at the Bank

The time has come for accountability at RBI. This institution makes decisions that affect the fortunes (lately misfortunes) of many Indians, rich and poor. By making its very predictable statement of no change in policy on December 16, RBI stands out alone in the entire world with its ultra-hawkish policy against inflation. This when fear of very low growth, and deflation, is the problem facing most economies in the world..................

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Rupee grabs RBI lifeline, gains most in 19 months

........ In the mid-quarter monetary policy review released on Friday, RBI said the rupee depreciated mainly because of a widening trade deficit, adding pressure to the current account and the tendency of exporters to defer repatriating their export earnings. The central bank said it expects the rupee to remain under stress.

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RBI frees rates on NRE deposits to attract dollar inflows

KOLKATA: The RBI has unleashed new ammunition to support the rupee from depreciating. On Friday, it deregulated interest rates on NRI deposits to attract more dollar flow into the country. It has decided to deregulate interest rates on non-resident (external) rupee (NRE) deposits and ordinary non-resident (NRO) accounts with immediate effect. This will attract more dollar as banks are likely to increase the interest rates. In case of NRI deposits, the dollar or any other foreign currency gets credited to a nostro account of a local bank which, in turn, deposits money in local currency. This comes within a day of taking a slew of administrative measures that helped the rupee to close higher 52.70 Friday from 53.65 the previous day, giving indication that the central bank is using all its ammunition arrest the rupee from sliding further. The rupee had depreciated by about 17% against the US dollar over its level on August 5, 2011, the day on which the US debt downgrade happened. RBI said the latest measure will provide greater flexibility to banks in mobilising non-resident deposits. Banks have been freed to determine interest rates on both savings deposits and term deposits of maturity of one year and above under NRE and savings deposits under NRO accounts.

ET

Auditors should provide early warning signals: Subbarao

Mumbai : Terming auditors as the "eyes and ears" of the central bank, the Reserve Bank of India (RBI) Governor D Subbarao today said accounting professionals should provide early warning signals to ensure better supervision in the banking system and also called for an inter-disciplinary approach to the job. "In our view, auditors are the eyes and ears of RBI and we trust them to alert us to early warning signals to assist us in supervisory process," Subbarao told the 26th western regional council meet of the Institute of Chartered Accountants of India here this morning. The governor also said inter-disciplinary approach of the auditing profession should be increased to bring in more practical approach. Citing the example of different accounting standards followed by RBI and statutory auditors, Subbarao said in certain cases, the central bank has found that the statutory auditors had underestimated the extent of non-performing assets (NPAs) and provisioning requirement for banks. "In RBI's view, in certain cases, the statutory auditors have underestimated the extent of NPAs and the required provisioning. Since the RBI, as the supervisor of the banking system, relies and leverages on the work done by auditors, the profession should effectively address this issue," he said. Subbarao also emphasised on the value system like integrity and transparency, for preventing a Satyam like fraud in the country.

BS

Credit quality still an issue: Bankers

..... “Just because the RBI has paused doesn’t mean that things will change right away. But the pause will certainly boost the sentiment,”...................

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If you don't read the fine print...

........While the Banking Regulation Act covers the control exercised by the Reserve Bank of India, the consumer protection issue and the related Act does not integrate itself with RBI's control over the banks................

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'Incredible' India? Hardly, say business leaders

..... India now faces the worst-case scenario that was touted earlier this year - stubbornly high inflation, slowing growth, a mounting fiscal deficit, a rupee that risks freefall -- and both policymakers and the Reserve Bank of India (RBI) have few levers to fix it......

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Pranab hails RBI move to press 'pause' button

The Finance Minister, Mr Pranab Mukherjee, has welcomed the RBI move to change its policy stance from monetary tightening to a pause and keeping its policy rates unchanged at the latest mid-quarter monetary policy review. This could help regain growth momentum with improved macro-economic parameters in remaining period of current fiscal, Mr Mukherjee told reporters outside Parliament soon after the RBI's mid quarter policy announcement. The central bank had in succession raised policy rates 13 times since March 2010 to tame overall inflation. The Finance Minister also welcomed the RBI Governor, Dr D. Subbarao's resolve to check speculative intervention in foreign exchange market which among other factors has contributed to the sharp slide in rupee against the dollar. Mr Mukherjee also expressed confidence that overall inflation would moderate in the coming weeks. He also pointed out that there has been an appreciable decline in food inflation in November. The Finance Minister, however, expressed concern that inflation in manufacturing goods remain firm at 7.7 per cent. "There is need to improve business sentiment and regain growth momentum," he said.

HBL

A tricky balance

The Reserve Bank of India's decision to retain the policy interest rates and the CRR (cash reserve ratio) at their existing levels is entirely in line with market expectations. But the decision could not have been easy. There were strong reasons that would have justified a rate hike, or for that matter even a cut in the rate. High up in the first category is the stubbornly high inflation, which has remained above 9 per cent for 12 months in a row. Despite food inflation moderating sharply, November's inflation rate of 9.11 per cent, marginally down from the October figure, is a cause for worry. Quite ominously, the non-food manufactured product inflation, which the RBI regards as the ‘core inflation', rose to 7.9 per cent (from 7.6 per cent in October), reflecting higher input costs. The sharp upward revision of inflation figures for September to 10 per cent is another worrying development; it raises fears of similar revisions for subsequent months. On the other side, the clamour for a rate cut has centred on the fact that a rapidly slowing economy, especially in the industrial sector, requires a boost. Under the circumstances, the RBI's decision to maintain the status quo is sober and well considered. It ensures continuity in seeking to strike a balance between the often conflicting goals of reining in inflation and encouraging growth. In its second-quarter policy statement (October 25), the central bank hinted at a pause in future interest rate hikes, while giving itself room to address short-term growth issues and concerns. While both inflation and inflation expectations are currently above the comfort level for the RBI, the pressures are likely to abate in the coming months, notwithstanding high crude prices and the sharp depreciation of the rupee. The year-end target of 7 per cent for inflation is retained. However, downside risks to growth have clearly increased owing to a combination of domestic factors and a deteriorating global economy. As matters stand, a growth rate of 7.6 per cent for the current year, projected by the RBI in October, will be difficult to achieve. The central bank is not hedging its bets when it says that “from this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth.” However, as the sharp downslide in rupee shows, monetary policy must be prepared to deal with unforeseen contingencies, many of which are likely to occur due to factors outside its domain.

HBL

Status quo from RBI

.....We need to have the policymakers sort out growth and inflation issues to avoid these contradictions. Neither of them is the prerogative or responsibility of just the government or RBI. Evidently, both have to speak to each other to make things work, which is important at the end of the day.

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The turn of the wheel

In the mid quarter monetary policy review announced on Friday, the RBI has actually used the words " reverse the cycle" but left this for future action, a significant change that comes at a particularly difficult time in the Indian economy...................

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Monetary policy: pause and effect - Madan Sabnavis

........... The RBI appears to have undertaken a stocktaking exercise this time by not invoking any action ostensibly, to closely monitor developments before taking any measures on the monetary and forex front. One can surmise that its view could change in January if it is convinced that liquidity and exchange problems are more permanent. Also, the growth-and-inflation trade-off will be tested in terms of the “good harvest argument” impacting consumer spending, and hence index of industrial production, or IIP, growth and food inflation.

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‘No change', a welcome change

.....The mid-quarter policy statement has addressed the concerns on the interest rate side, by clearly indicating a likely reversal in the cycle with monetary policy actions being directed towards addressing growth related issues going forward,'' .................

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Lock kiya jaye............

With interest rates likely to head southwards, lock in your investment at prevailing high interest rates in fixed income products such as bank FDs and debt MFs.............

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Hard-pressed to fill coffers with dollars

.......RBI move props up rupee, but dip in foreign currency reserves a big worry.......................

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RBI detects counterfeit notes

New Delhi, Dec 16 : RBI has detected more than two lakh pieces of counterfeit notes in the current financial year even as it has strengthened the mechanism to detect fake currency by banks, Parliament was informed today. RBI has reported that the "data on source-wise detection of counterfeit notes during the period April 2010 to September 2011 is 264,282 pieces," Minister of State for Finance Namo Narain Meena said in a written reply in the Lok Sabha. The maximum number of note pieces (152,930) have been detected in the Rs 500 category. One special FICN co-ordination group has been formed in Ministry of Home Affairs to share the intelligence/information amongst the different security agencies of the state/centre to counter the menace of circulation of fake currency within the country with CBI being the nodal agency, Meena said. "The security features in the high value currency notes are being constantly upgraded by RBI. RBI has also strengthened the mechanism for detection of counterfeit notes by the banks," he said.

IBN Live

What RBI must not do today – S.S.Tarapore

With inflation where it is, it would be best for the RBI not to attempt a direct or indirect relaxation of monetary policy. The central bank should not drive down yields on government paper

December 15, 2011: Market participants will be waiting with bated breath, hoping that the Reserve Bank of India (RBI) will shower goodies for all. We can trust the RBI to set out a well-crafted Policy Statement today as part of its Mid-Quarter Monetary Policy Review.The Indian economy continues to grow at a healthy rate of growth but there is gloom that we are no longer enjoying a 9 per cent real rate of growth. In India, policymakers, opinion makers, India Inc. and the public at large refuse to accept that there are cycles in economic growth and that it is not possible for an economy to grow at higher and higher rates of growth. Once an economy overheats, a slowdown is inevitable. The RBI and the government need to seek the advice of Gita Gopinath, the young Harvard Professor, who has specialised in economic cycles in the Emerging Market Economics (EMEs). We need to recognise that the global economy faces a number of serious threats which could result in a hair-curling slowdown. Given our proclivity for policies which serve narrow sectoral interests, we believe that the laws of economics do not apply to us in India, simply because we are different. We debunk the relationship between over-heating and generalised inflation. Of course, we can always blame the slowdown to the global contagion. The fact that inflation in India is well above that in major industrial countries is just not our fault! If the rupee is depreciating, it is all because of problems faced by the major currencies. The RBI has a major task of reconciling policy contradictions. It is now generally accepted that the growth rate in 2011-12 would reflect a sharp slowdown. While the official line still is that the growth rate will be 7.5 per cent in 2011-12, the top policy honcho, Dr Kaushik Basu, has conceded that the rate could be 7.25 per cent. With the shocking industrial production numbers, there are many analysts who are already talking of an even lower growth of 6.5 per cent. What is not fully appreciated is that, even at a growth rate of 6.5 per cent, we would continue to be one of the fastest growing economies in the world. The overall inflation rate continues to be in the 9 per cent plus range. It is unconscionable that the RBI is being blamed for the inflation just because it has been fighting it with a series of repo rate increases. Some analysts would see a glimmer of hope in food inflation falling to 6.6 per cent and hope that the base effect would bring down the year-on-year overall inflation rate to 7 per cent by March 2012 so that we can claim victory over inflation. It hardly needs to be stressed that the battle against inflation is far from over. If, at all, monetary policy is to be blamed, it is because the RBI has not raised the repo rate more sharply, and also not raised the cash reserve ratio (CRR) to tighten liquidity. But, then, this is nobody's criticism of the RBI.  As stressed in these columns, the window of opportunity for monetary policy action is very narrow and it is now clear that the authorities have missed the opportunity to slay the inflation monster. The fisc is hopelessly out of alignment with the objectives set out. The slowdown in the industrial sector is no surprise. The exchange rate is under pressure precisely because when the capital inflows were large, the rupee was allowed to appreciate as the RBI did not intervene. Now that the rupee is under pressure, it is not prudent to intervene to slowdown the depreciation. The balance of payments current account deficit (CAD) is reportedly over 3 per cent of GDP — the highest among the Asian EMEs. Taking all factors into account, it would be best that the RBI does not attempt either direct or indirect relaxation of monetary policy. Now, what is it that RBI should not do in its policy announcement today? First, with inflation where it is, there should be no question of reducing the repo rate. Secondly, the RBI should not respond to the cries of the seductive sirens pleading for reduction of the CRR. Thirdly, the RBI should not aid and abet the government's unreasonable demand that it should be able to borrow more at lower interest rates. More particularly, the RBI should not drive down yields on government paper by undertaking large open market operation purchase of securities.The present monetary policy measures are far too mild and allow arbitrage opportunities to banks to borrow from the RBI and profitably on-lend these funds.To sum up, the RBI would serve the larger interests of overall stability and growth by a standstill policy. A monetary policy relaxation would earn encomiums for the RBI but would be detrimental to long-term growth with price stability.

HBL

Let God Save the Rupee!

When the tried and tested economic principles fail, perhaps prayer is the best hedge against a crisis

Having lost faith in the Reserve Bank’s ability to stem the rupee’s free fall, thousands of devotees have sought divine intervention to save the currency. This week, devotees gathered at the Chilkur Balaji temple in Hyderabad on two days to recite the “Runa Vimochana Narasimha Stotram”, a chant invoking the half-man, half-lion God Narasimha to ease the onslaught of the dollar and help with the recovery of money from defaulters. The prayers were led by the temple’s head priests M V Soundararajan and C S Gopalakrishna who came up with the remedy when they were approached by a couple that was worried that the strengthening dollar would make it difficult for them to repay the $40,000 loan they had taken for their son’s education in the US. “I haven’t studied economics, but I know that the rupee’s depreciation is mainly due to market sentiment. So, if one sentiment can drag the rupee lower, I’m sure another sentiment can make it rise,” said M V Rangarajan, another priest at the temple. The prayer is an extract from the Narasimha Puranam and many demigods are known to have chanted the verse for relief from debt. Lord Venkateshwara, who is believed to have been indebted to the Hindu god of wealth, Kuber, is said to have invoked his family deity Narasimha to help clear his debts. Lord Venkateswara, whose temple is at Tirupati, is said to have borrowed money from Kuber for his marriage, and the legend goes that he is still paying the interest on the loan amount. When asked why the prayer sessions were being organised, the priests said that a temple must pray for the well-being of the people and that the current crisis will affect the common man. The Chilkur temple, about 25 km from Hyderabad, lacks the architectural splendor of most South-Indian temples. The road that leads to the temple is muddy and winding. In fact, the temple’s obscure locale could belie its popularity, but the temple bears an exceptional testimony to the number of students who have cleared their visa interviews after paying their respects to the presiding deity. The temple gets almost one lakh visitors every week, with the rush peaking on Fridays and Saturdays. Its presiding deity, Lord Venkateshwara, or Balaji, is one of the most worshipped incarnations of Hindu God Vishnu. The deity’s popularity has risen considerably in the last decade, earning him the nickname ‘Visa Venkateshwara’. Most of the temple visitors are students who come to pray for visas to travel or move to the West. Similar prayer sessions were held worldwide during the global financial crisis in 2008. Orthodox Jews in 11 major seminaries across Israel prayed for a fast resolution to the financial crisis. The Church of England, too, published a prayer that aimed to help people caught up in the difficult financial situation.

ET

Nabard pegs TN credit outlay at Rs 77,803 cr

The National Bank for Agriculture and Rural Development (Nabard) has pegged Rs 77,803.49 crore as the potential bank credit for 2012-13 in Tamil Nadu. This will be an 18 per cent growth over the ground level credit target of Rs 66,161 crore in 2011-12. The credit potential comprises crop loan at Rs 31,574.14 crore, agricultural term loan of Rs 17,010.05 crore, non-farm sector at Rs 14,032.35 crore and other priority sector at Rs 15,186.94 crore, said Lalitha Venkatesan, chief general manager, Nabard.Of the total credit, short-term will be 40.6 per cent, she added. “The real challenge for agriculture is to enhance capital from both public and private sectors in research, infrastructure, including market, cold storage, warehouse and others.” The other major challenge is labour shortage, for which mechanisation is the solution, she said.

Reserve Bank of India Regional Director N.S.Vishwanathan added, banks' performance in the state was much better compared with other parts of the country. For instance, the CD ratio of the banks in Tamil Nadu was 117 per cent compared with the national average 72-73 per cent. “However, we (Banks) need to scale up and improve supply-side infrastructure,” he said. On financial inclusion in Tamil Nadu, he said the target was to cover 4,500 villages, with a population of 2,000, by March 2012. "In the State Level Bankers' meet, we had decided to achieve it before December 2011. As of September, 75 per cent of the banks have achieved it,” said Vishwanathan on the sidelines of the State Credit Seminar, organised by Nabard.

Sharad Sharma, chief general manager, State Bank of India, said SBI had been allocated 900 villages, as part of financial inclusion programme in the state, and the target was to be achieved by March 2012. “But we have achieved in November 2011 itself -- half of the villages are covered by bank's branches and rest through the business correspondence model,” said Sharma.

BS

Rural Min seeks to convert MFIs to local area banks

The rural ministry has suggested conversion of micro finance institutions (MFIs) into local area banks. It proposes to create a separate category below local area banks for MFIs. Accordingly, the ministry has sought amendment in the banking regulation act. Local area banks cater to credit needs of rural people with a suite of products. If the proposal is passed, MFIs can provide variety of products. “This will probably enable MFIs to do the business of deposit taking along with lending. Once they are converted into rural area bank, their credit limit may also be enhanced. Currently, they are not allowed to lend more than Rs 50,000 to a single borrower. The government probably wants MFIs to pursue a bank’s business model and to own more responsibility of what they do,” an analyst from a rating agency told Moneycontrol.com on condition of anonymity. As per the Reserve Bank of India’s (RBI) stipulation, the minimum paid up capital to set up such a bank should be Rs 5 crore, with at least Rs 2 crore being contributed by the promoters. The area of operation shall be a maximum of three districts. MFI industry in India has been facing a tough time since October, 2010 when the state government of Andhra Pradesh passed a legislation effectively shutting down private sector institutions in the wake of rising number of suicide cases. Andhra is the so-called epicenter of MFI activities in India. Later, a sub-committee of the central board of directors of RBI under the chairmanship of Y H Malegam was formed to study issues and concerns in the MFI sector in January, 2011. Based on the committee’s recommendations, the RBI earlier this month, came out with a set of new norms for MFIs.

Some key norms include:

• Capping of net interest margin of individual MFIs to 12% (NIM is the difference between interest earned and expended.)
• Interest on individual loans will not exceed 26% per year (earlier it was in the range of 35-40%)

• Not more than two NBFC-MFIs should lend to the same borrower.
• Total indebtedness should cross Rs 50,000 a borrower

Recently, RBI Deputy Governor, H. R. Khan was also quoted saying that MFIs would be allowed to draw external commercial borrowings of up to $10 million. However, they need to have proper hedging strategy. 

Moneycontrol

Flicking the birdie

......when my dad got a transfer to Chennai, he requested for Hyderabad so that it would be easy for me. He works with RBI and they were kind enough to consider his request. ............

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SEBI forms intl advisory board, first meet next month

....... The decision to set up an IAB was taken by the Sebi board in its meeting on July 28, pursuant to which Sebi began the process of setting up this board. For the probable names, Sebi had sought suggestions from its Whole Time Members, as also from the two former RBI Governors YV Reddy and Bimal Jalan, besides Raghuram Rajan, Professor of Finance, University of Chicago, and Kaushik Basu, Chief Economic Adviser, Ministry of Finance..........

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No re-booking of cancelled forward contracts: RBI

.......The apex bank has now made it clear that forward contracts once cancelled cannot be rebooked....................

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RBI plans special purpose vehicle to help power distribution utilities with losses

The Reserve Bank of India can help wipe out losses of power distribution utilities amounting to 82,000 crore by setting up a special purpose vehicle that can purchase the liabilities, a high-level official panel appointed by the prime minister has recommended.............

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State going through 'overdraft crisis'

...... Ironically, when Reserve Bank of India (RBI) Governor D Subbarao was meeting the chief minister, the new dispensation was going through a maiden overdraft crisis. So while the RBI governor was warning the government against ways and means advances (WMAs), the state's liquidity crunch made it survive on overdrafts from the RBI which can be availed for a maximum 14 days and is usually the last resort.........

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PNB appointed lead bank for Pathankot and Fazilka

MUMBAI: The Reserve Bank assigned to state sector lender Punjab National Bank the responsibility of being the lead bank in newly created districts of Pathankot and Fazilka in Punjab. "It has been decided to assign the lead bank responsibility of the two new districts viz Pathankot and Fazilka to Punjab National Bank," the Reserve Bank of India said in a statement. The two new districts were created by the Punjab government in July this year. While Pathankot was carved out of the Gurdaspur district, Fazilka has been carved out from the Ferozepur district.  "The lead bank responsibility of existing Gurdaspur district and Ferozepur district will continue to be with Punjab National Bank and Oriental Bank of Commerce, respectively," the RBI added.

ET

How unaccountable are central banks?

They have made errors, too. Allow independent auditing of central bank decisions

............... how do we improve transparency and accountability in central-bank decision-making and regulatory policing? Central bankers would be more accountable if there were adverse consequences for their senior management, at least in terms of reputational damage, for non-performance. In India, there should be statute-based performance audits of the RBI on a periodic ex-post basis. Independent auditors should have full access to all decision memos, and their reports should be submitted to the government and tabled in Parliament for discussion.

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Case for cutting rates

Tough Guv Unlikely to Cut Rates

Subbarao’s Multiple Challenges Falling growth Plummeting Rupee Falling, but still high inflation Receding capital inflows Manufacturing Prices Still Rising
Any general’s nightmare is battle on multiple fronts. When RBI Governor Duvvuri Subbarao presents the midquarter review of monetary policy on Friday, he not only has to convince the market that he is close to winning the two-year battle on inflation, but is also prepared to fight the sinking rupee, dwindling investments, soaring government borrowings and ensure that flagging economic growth does not collapse completely. And, all this without leaving the inflation front open again. The burden is falling on the central bank to provide relief for every ailment as businesses and investors have almost given up on the government to act after the debacle over foreign investment in multibrand retail and policy inertia. The tools that Subbarao has to do with are few — a cut in policy rate, reduction in cash reserve ratio, and throwing a portion of the $300-billion, but deceptive, forex reserves at the market. The regulator spelt out a series of qualitative measures to arrest the rupee slide on Thursday. But no one is expecting an interest rate cut, thanks to inflation that has remained at an average of 9.5% for nearly two years and Subbarao's breaking away from consensus and his advisors on holding rates. There is a half-hearted hope that CRR, the portion of deposits that banks keep with the RBI, could be cut, with the Indian central bank taking a cue from others, including China, that have eased this reserve requirement. As he broke away from consensus in the past in fighting against inflation, will he do so to revive growth too? “It is an unfortunate situation where the monetary policy is doing double duty,” said Samiran Chakraborty, head of research, India, at Standard Chartered. “The fiscal policy is neither supportive of fiscal management nor is it doing anything to bolster growth, and policy movements have been more accentuated on both the sides, in raising as well as cutting rates, because of a weak fiscal policy.” Some are calling for a cut in CRR since the government, despite the RBI’s autonomy, may be prodding it to partially ease the pressure on the system because of its failures. “A CRR cut is desirable for two reasons, one it improves sentiment and the other it is not antithetical to it's monetary stance as the private sector is not borrowing and this money will support the government's enhanced borrowing programme,” said Madan Sabnavis, chief economist, Care Ratings. The repo rate, the rate at which the central bank lends to banks, is at 8.5% after 13 increases and the cash reserve ratio is at 6%. But rate increases and a slump in investment due to policy paralysis have led to industrial output shrinking 5.1% in October. Inflation as measured by the wholesale price index is at 9.1%, though food inflation has eased to a fouryear low of 4.35%. But manufacturing prices, which the RBI looks at for its cues, are still rising. “It would be strange for the RBI to ease liquidity conditions or monetary policy when core inflation is running at 1.2% on a monthly basis, and the rupee is sinking like a stone,” said Jahangir Aziz, Asia economist, JPMorgan Chase. “In such a situation, central banks typically tighten, not loosen monetary policy, to squeeze out forex short-selling. Lowering the funding cost of short INR position will just add to the already extreme pressures on the currency. The RBI is unlikely to administer experimental medicine on Friday and, therefore, it just pauses and eases liquidity with tactical open market operations.” The rupee, the worst-performing currency in the region, opened at a lifetime low of 54.20 on Thursday before closing at 53.64 as overseas flows dry up while consumption of imported items remain strong. There have been calls to the RBI to defend the currency and it has done so since Dec 2, by selling dollars and buying rupees.

ET 

RBI’s new norms to hit currency speculators hard

..... “RBI’s attempt is to stabilize the rupee and reduce speculation. There would be no impact on the genuine trades from importers and exporters. This move will reduce speculation because in volatile times it is seen that traders cancel forward contracts depending on their position. But bank volumes will be hit and that will impact fee income,”...........

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Will RBI governor D Subbarao cut interest rates?

........ The only notable thing that might happen is that the RBI could signal a change from its hawkish stance to a more dovish one, which should cheer investors.But, in all likelihood, no rate cuts...........

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RBI steps in to arrest rupee depreciation

.........The Reserve Bank of India (RBI) on Thursday abandoned its hands-off approach to the rupee, which on Thursday ended off an all-time low hit earlier in the day.......

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RBI seen easing tone, not rates, as economy falters

The best that investors can hope for from the Reserve Bank of India (RBI) on Friday are measures to improve market liquidity and an acknowledgement that economic conditions are worsening. The RBI is not expected to draw a line in the sand to defend the rupee, which hit a record low on Thursday, and rate cuts are out of the question as inflation remains above 9 percent. Dovish talk at its mid-quarter policy review would fuel expectations that the central bank accelerates moves to begin easing monetary policy after raising interest rates 13 times since March 2010, most recently in October. However, the tumbling rupee, which hit a record low on Thursday at 54.30 before central bank intervention pulled it back, puts upward pressure on import prices and complicates inflation management task, traders said. The rupee is down more than 18 percent from its July peak. "Quite clearly, weaker rupee is creating its own damage on the inflation front and on growth, (which) keeps the central bank that much further away from easing rates," said Shubhada Rao, economist at Yes Bank in Mumbai.Hopes that a worsening growth outlook might push forward the central bank's move to begin easing monetary policy have run up against the uncertainty caused by the plunge in the rupee, which has caught policymakers off-guard. The inflation picture, meanwhile, is mixed. Food inflation fell to a nearly four-year low of 4.35 percent in the year to December 3, data on Thursday showed. However, manufacturing inflation rose in November from the previous month, helping keep wholesale price index inflation above 9 percent for the 12the straight month. Mahindra & Mahindra Ltd, India's largest maker of utility vehicles, unveiled a price rise on Thursday. The fall in the rupee has exacerbated poor investor sentiment, with Indian stocks down nearly 23 percent this year, and the market will be looking to RBI Governor Duvvuri Subbarao for reassurance, even if his options are limited given the need to fund a widening current account deficit. The RBI steps in to smooth volatility but is otherwise officially agnostic about the rupee's level versus the dollar. "They will not, obviously, target a rupee level, but how do they manage the concerns emanating from a weaker rupee? That will be the question," Rao said. The central bank may also lay out more measures to ease tight market liquidity through open market operations (OMOs). In the past three weeks the RBI has injected more than 240 billion rupees into the banking system through bond buybacks. "I think he might announce the quantum of OMOs that the RBI might do until February or March," said Harish Aggarwal, a dealer with First Rand Bank in Mumbai. The RBI has kept banking system cash tight to help fight inflation and has said it is comfortable with a deficit of about 600 billion rupees. With a deficit now at about 1 trillion rupees, Aggarwal said he expects a further 300 billion-500 billion rupees in bond buybacks by March. These are troubled times for Asia's third-largest economy. Data showed on Monday that India's industrial output slumped more than 5 percent in October from a year earlier, far worse than expected and the first drop in more than two years, with capital goods output down 25.5 percent. Overall economic growth slowed to 6.9 percent in the September quarter, its weakest in two years, and some economists expect India to struggle to reach 7 percent growth in the fiscal year that ends in March 2012. The government had been targeting 9 percent earlier this year. India's central bank has been criticised for acting too late in taking the fight to inflation despite the series of rate increases since early 2010. In October, the RBI indicated its tightening may be coming to an end even though inflation remains well above its comfort zone "The central bank's burden right now remains to establish its credibility with respect to fighting inflation," said Taimur Baig, economist at Deutsche Bank in Singapore, who like most analysts expects the RBI to keep interest rates and the cash reserve ratio steady on Friday. The central bank has lifted the policy repo rate to a three-year high of 8.5 percent from 4.75 percent. That has helped to brake economic activity, as has the global downturn and poor local sentiment driven by policy gridlock in a government weakened by corruption scandals. While inflation prevents the RBI from becoming more accommodative to stimulate growth, lower-than-targeted tax receipts and a worsening fiscal outlook curtail the government's room to maneuver to prop up growth."Options for fiscal steps as well as monetary measures are increasingly limited," Finance Minister Pranab Mukherjee said on Thursday.

Reuters

Policy Review | Central bank’s focus may shift to growth

......... Much weaker growth will prompt RBI to ease monetary policy, our expectation of the sequence of easing remains first injecting liquidity through open market operations (which RBI has been doing), then cut the reserve requirement ratio of banks in January, followed by repo rate cuts in March 2012,”.....

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Growth must take centre stage now, says finance ministry

Recent slide in inflation no consolation amid exceptional shrinkage in industrial growth

Growth seems set to return as the key mantra tomorrow when the government will come out with its mid-quarter review of the Reserve Bank of India’s monetary policy, sources said on Thursday, sensing the “underlying thinking” in the finance ministry. A senior official with the ministry said growth would “now take the centre-stage” with a cool-down in prices. “Even so, inflation still remains a matter of concern,” he told Business Standard. Only yesterday had RBI governor D Subbarao met Finance Minister Pranab Mukherjee. The central bank’s head was reportedly briefed about the ministry’s view on the matter. Another official said on Thursday that the administrative circles did now expect a major change in the RBI’s stance immediately. That apart, the RBI governor “may make” a move in the direction tomorrow, he claimed. The review announcement comes close on the heels of news breaking that the October industrial growth registered a negative 5.1 per cent growth — the lowest figure in more than two years. This has raised serious concerns across the board, triggering fears of a re-run of the gloomy economic scenario after December 2008, when a global financial crisis led to contraction in industrial production for seven months in a row. Further, economic growth fell to nine-quarter low of 6.9 per cent in the second quarter of this fiscal. With 7.7 per cent growth in the first quarter, this has delivered 7.3 per cent growth in the first half. The finance ministry hoped the second half would witness a slight recovery compared to first, so that overall growth this fiscal would be 7.5 per cent. However, in the current scenario, experts feel the growth will be below seven per cent in 2011-12. The overall inflation fell to a one-year low of 9.1 per cent in November from 9.73 per cent in October. But, inflation has been over nine per cent for a year now.Food inflation, on the other hand, has been coming down quite fast. It stood at just 4.35 per cent for the week ended December 3. Chief economic adviser Kaushik Basu pegged food inflation to fall below 3 per cent in a month’s time. Analysts say RBI’s move of raising policy rates for 13 times since March 2010 has not pulled overall inflation to below 9 per cent. Food inflation has fallen because of supply issues and base effect. As such, RBI should not increase any rate further, as it is not killing inflation but growth.

BS

Inflation would ease further: R Gopalan, Economic Affairs Secretary

........ The government today expressed hope that price situation would ease further and said moderation in food inflation will give some space to RBI to address the worrying level of economic growth.............

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Make it a two-way bet

As a regulator of the forex market, the RBI must be seen to be in control

The rupee has been falling for months, losing 17.3 per cent of its value vis-a-vis the dollar since September. Many observers have come to believe that there is little reason to suppose that the rupee will recover before as late as March next year. The Reserve Bank of India (RBI), meanwhile, insists its mandate is merely to minimise volatility in the foreign exchange market, and not to defend the value of the rupee. While sensible in theory, in practice this is clearly beginning to show some flaws. A serious question needs to be raised: does this continuing precipitous decline reflect a sense taking hold in global markets that the rupee, the worst-performing currency in Asia this year, is a safe one-way bet? The rupee market is still thin, and not invulnerable to speculative action. In the presence of one-way bets, speculation can create a vicious cycle, making a falling rupee a self-fulfilling prophecy. The reason the RBI was given the mandate to manage volatility was that while the decision was taken, for the best of reasons, to allow the rupee to float, it was nevertheless known that a key purpose of regulation is to manage the impact that speculation can have on the real economy. That producers are now feeling the pinch is obvious; while net exporters, like information technology firms, are happy, an extensive array of companies with foreign-currency borrowing are being hit, as are those globalised companies that import a good deal of their inputs. No regulator should act merely to insulate market participants from the negative consequences of a business decision. But the purpose of regulation, in this case, is to ensure that markets function properly — and for financial markets, that they do not dash off uncontrolled by a concern for fundamentals. Yet, in its attitude to the rupee fall, the RBI has chosen to appear weak, a cardinal sin for a regulator. The belief is becoming universal that it could not affect or arrest a slide of significant proportions, even if it wished to; this further empowers speculators. Statements like that from the chairman of the Prime Minister’s Economic Advisory Council, C Rangarajan, indicating that the RBI is helpless, add to the damage. The point of a well-functioning financial market is that participants should never be faced with a one-way bet. There is little chance, then, of prices – in this case, the rupee exchange rate – finding their true value. The RBI stayed out of the foreign exchange market for nine months, leading participants to believe that it was incapable of intervening. Yet unless it does so occasionally, people will not be properly wary of taking positions, and insufficiently thoughtful about the positions they take. Like inflation targeting, regulating a floating currency is all about managing expectations. The RBI cannot manage expectations if it appears helpless. The game is psychological; it must be prepared to play the game well. And to play the game well, it has to show that it’s willing to play the cards it has.

BS

RBI may not hike rates as growth slows

...."The RBI should reduce interest rates to gradually reverse the impact of the 13 interest rate hikes it has undertaken over the last two years,"........

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Policy pundits clueless on inflation

.At a recent seminar on September 21, on inflation, Kaushik Basu, Chief Economic Adviser in the Department of Economic Affairs (DEA), apparently agreed with the comment of Govinda Rao, (Director of NIPFP and a member of the Prime Minister's Economic Advisory Council) that “the country's economic managers have not been able to fully grasp the processes underlying the persistence of high inflation.” Such a conclusion by the two senior policy makers is deeply disturbing. ..........

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Basix, Swaws seek RBI approval for debt recast by banks

..... Both Basix and Swaws want a special dispensation from the Reserve Bank of India (RBI) that can enable the banks to restructure loans without categorizing them as substandard assets, according to two persons familiar with the development..................

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The Great India Microfinance Credit Bureau: Questions that beg an answer…

.......... I would also like the DFIs like SIDBI, commercial banks, regulators like RBI and multi-laterals like IFC to come out and vouch safe the integrity and quality of the data being supplied to the credit bureau by Indian MFIs—in terms of data integrity, internal consistency and physical compatibility with client existence and records. Without question, they must make themselves accountable and responsible for the quality and integrity of such data, given the implications for financial inclusion and inclusive growth. ..............

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R.I.P one dollar coins

Thank you sirs, we can't afford you. Henceforth, the U.S. Mint will not produce one dollar coins bearing the images of former Presidents who have passed into the pages of history. A one dollar coin not produced is a dollar saved for the Obama Administration, which finds itself in a tough economic situation. In the face of poor demand, 1.4 billion surplus one dollar coins are stacked in the vaults of the Federal Reserve. Also, 1.6 million one dollar coins are scheduled to be minted over the next five years. The move to suspend production of one dollar coins is expected to save at least $50 million in production and storage cost. That is a huge saving in a downturn environment. For a recession-hit America, every one dollar coin is a pain on the economy, it appears.

HBL

Debit, credit card uses hit a new high

...Indians shopped for Rs 8,997 crore worth of goods and services using their credit card in October this year, compared with Rs 6,760 crore spent in October last year, an increase of 33 per cent, at a time when the number of outstanding credit cards fell to 1.76 crore in October 2011, against 1.82 crore cards in October last year, according to data available with the Reserve Bank of India (RBI). ...........

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'Banks not that transparent on loan pricing'

Chakrabarty Says Customers Must Approach Banking Ombudsman Over Rate Anomalies

NEW DELHI: RBI Deputy Governor K C Chakrabarty is known to speak his mind. In a freewheeling chat with TOI recently, he spoke on a host of issues ranging from transparency in interest rates to charges levied by banks and corporate governance issues. Excerpts:
Moody's has expressed concerns over the health of Indian banks. Do you agree with it?
We may or may not agree with them. Overall, the economy has slowed down and you cannot say that banks will not be affected adversely. We feel that banks will be able to overcome (the stress) and banks also say so. But banks will have to work hard, they must take corrective measures and they must be cautious so that they are able to withstand the pressure. The more you diversify, spread your risks, go for inclusion, you will be better off.
What should banks do?
One of the first things that they need to do is, improve the quality of management; they must improve the quality of asset management, they must control expenses, avoid unnecessary risk taking and they must see to it that they do not have unduly high exposure to sectors those are under stress. They should improve corporate governance. In terms of sectors, there is concern on power, aviation... Power and aviation are concerns. But these are all necessary vital sectors. We need more flights, more airports because the country needs them. We should collectively find out how we should deal with them. It does not mean that banks should not finance them. Banks being the provider of finance need to influence a company's decision in improving its performance. Power companies need to build efficiency - both generation and distribution costs need to come down and even transmission loss should be reduced. Banks can say that they will not provide fresh funds till power companies build in efficiencies. Wherever required, tariffs should go up. But we can't let the power sector close down.
There are comparisons between now and 2008 and there are demands for a special dispensation for loan restructuring...
This is a very controversial thing. The issue is whether we are out of 2008 crisis or if it is the same crisis? The second thing is, in 2008, the crisis started from banking sector and spread to the real sector. This time, it is a sovereign crisis that is spilling over to banks. We have to contain this spillover. If it spills over to the real sector we all will suffer. Unfortunately, central banks and governments are not in a position to provide the same kind of relief that was possible in 2008, hence need for more collective efforts.
In the past you had discussed the issue of pricing of loans and transmission of interest rate by banks...
What we are saying is, increase interest rates if the cost of funds go up. If one is saying that cost of funds has increased by one percentage point and one has increased base rates by two percentage points but average yield on advances has increased by only one percentage point. That means benefit in cost has been not passed on in an equitable manner. One may say that cost of operation has gone up, that is, inefficiency has gone up, we need to avoid that. Pricing has to be transparent and non-discriminatory. If petrol price goes up, everyone pays a higher price. This is what we want.
Do banks have the ability to do that? They say that they don't have data.
Banks cannot say this as the very meaning of having licence to do banking business is the ability to assess and price the risk. Anyhow, we are appointing a committee to examine the issue in totality.
There are also concerns about usurious charges and they have a huge interest margin. What are your comments?
I find some banks have prime lending rate of 21% and base rate is 12%. That is a huge gap. What kind of risk we are taking when we are lending to someone at 21%? If the risk is too high, don't lend to them. It does not make sense for the good borrowers to pay for that and in the process they also suffer. The second is the economy, which will suffer.
But didn't banks jack up PLRs to get customers to move to base rate, which was expected to usher in transparency?
If that was the case, everyone should have moved to base rate by now. We have no evidence on whether banks are doing it in a scientific manner. The committee will look at all these aspects and if there is a need, we will tighten the guidelines. What we are saying is that in the matter of pricing, banks are not that transparent, especially for small customers, and definitely they are not non-discriminatory.
Old customers have to pay higher rates than a new customer who walks into a branch now. Is that fair?
First, we have to conclusively prove that this is happening. If it is the case and if a customer complains, Banking Ombudsman will uphold the customer complaint and ask banks to rectify.
After a meeting with ombudsman, you had asked banks to come up with a fixed rate product. While there are products I will have to pay 15% for a fixed rate home loan, which does not make sense. What are you doing about this?
I have seen one bank offering a home loan at 11% fixed rate. We don't want to micro manage banks on pricing but in the interest of customers and in the interest of banks, there must be a fixed rate product because banks are better manager of risk than individuals. If the banks want to hedge their risk, they can go for interest rate swap, for which market exists.
Are you happy that banks are again offering loans where the rate is fixed for two years?
We have absolutely no problem with them. But if the objective is to deprive the existing customer the benefit of lower rates then we have objection. That is why we must give the customer a choice to exit free of cost.
Some banks levy very high penalty. For instance, if you go below the Rs 10,000 minimum balance to Rs 9,990, then they charge Rs 600-700. Is this fair?
All banks are not doing this. I am unable to understand the justification for Rs 10,000. Further, how can one charge him Rs 500 penalty if the balance goes to Rs 9,900? Banks must examine the charges and explain the reasonableness of these charges. But then a customer has to come to the Banking Ombudsman.
TOI

HOUSE CALL



RBI governor D Subbarao at Parliament House in New Delhi on Wednesday two days before the Policy meet



Regulations are essential for financial inclusion

With Reserve Bank of India stepping in to regulate NBFC-MFIs and a Microfinance Regulation Bill pending for enactment, industry experts discussed the role of regulators in achieving financial inclusion at the Microfinance India Summit in New Delhi today. Kate Mckee, Senior Advisor of the CGAP said that regulations clarify ambiguities and play a role in product diversification. “I do think it is very important to set a certain floor on the behaviour of markets and is important in building consumers confidence”, she said. Hassan representing the Central Bank of Bangladesh, pointed out the dichotomy in policy and regulation. “In Bangladesh, in addition to financial stability, we’ve included the role of promoting financial inclusion by strengthening payment system especially the mobile banking system. Similar to the RBI, we have certain targets of agricultural lending. And we do have targets to the SME sector as well. And several of these targets are done by commercial banks through MFIs.” Vijay Mahajan, Founder and Chairman of BASIX group, thinks that the RBI regulation is a very good step forward but it should not be the final point. He commented that, “It is the first time in the industry that a regulator has put down in writing that 26% interest rate is fine. The last time was 12%. To go from 12% to 26% is a huge leap.” P. N. Vasudevan, Managing Director of Equitas Microfinance India also remarked that the RBI regulations are much better than the AP government act. Therefore, it is more welcomed.

Microfinance Focus

Activist invokes RTI to find out truth behind a bank fraud pardoned by National Consumer Forum

RTI activist Sharad Phadke who successfully pursued a case of his failed ATM transaction which was not credited to his account for 65 days, has now taken up cudgels against bank frauds against small time loan takers. A report…............

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Loans disbursement by banks picks up

.......Currently, the year-on-year non-food credit growth is at 17.72 per cent. The banking system could face a liquidity crunch over the next fortnight due to outflows on account of advance tax payments by India Inc even as demand for credit is gathering pace. Given this scenario, if the RBI does not reduce the amount of cash that banks are required to park with it (cash reserve ratio), then banks could find themselves in a bind, said a banker........

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