RBI cancels licence of Chopra Urban Co-operative Bank Ltd

MUMBAI: The Reserve Bank of India has cancelled the licence of Jalagoan-based Chopda Urban Co-operative Bank Ltd as it had ceased to be solvent and depositors were being inconvenienced by continued uncertainty.  The banking regulator delivered the order cancelling the bank's licence after close of business on May 24, a release said here today.  The Registrar of Co-operative Societies, Maharashtra, has also been requested to issue an order for winding up the bank and appoint a liquidator for it, the release said.  On liquidation, every bank customer is entitled to repayment of his/her deposits up to a monetary ceiling of Rs 1 lakh from the Deposit Insurance and Credit Guarantee Corporation (DICGC) under usual terms and conditions. Consequent to the RBI order, the Chpda Urban Co-operative Bank Ltd is prohibited from carrying on 'banking business' as defined in Section 5(b) of the Banking Regulation Act, 1949 (as applicable to co-operative societies), including acceptance and repayment of deposits, it added.

ET

Why Subbarao went easy on inflation for so long

The Governor’s baby steps on inflation may have been the result of TAC’s doves

The Reserve Bank’s Technical Advisory Committee (TAC), which advises the Governor on his monetary policy options, seems to be a manned more by inflation doves than hawks. Till recently, one presumed that the RBI was going slow on raising rates because of political pressures. But now it seems like even TAC preferred to bark on inflation rather than bite. According to the recently released minutes of a TAC meeting held on 27 April, most members were calling for a 25 basis-points hike in the repo rate, the rate at which the RBI lends to banks in need of short-term funds. (100 basis points make 1 percent). Governor D Subbarao, however, ignored the advice and opted for a stiffer hike of 50 basis points in its 3 May monetary policy. Only two members had favoured a 50 basis-points hike, and the Governor came down on the side of the minority hawks this time. “While four members of the committee were of the view that the repo and reverse repo rates be raised by 25 basis points each, two members suggested a 50-basis point increase each…, The Economic Times says, quoting from the minutes. This is not very different from what transpired at the 19 January meeting of the TAC, where too members talked about the need to “contain inflation and anchor inflation expectations.” The committee said that the “main challenge before the Reserve Bank was to manage inflation,” but would not go beyond recommending homoeopathic doses of repo rate hikes (25 basis points at a time). This raises the possibility that the Governor’s baby steps on inflation may have been the result of TAC’s doves.  According to the minutes of the 19 January meeting that provided policy inputs for the 25 January monetary policy statement, only “one member suggested a 50 basis points increase in the repo rate and 25 basis points increase in the reverse repo rate.”  But some members were clearly becoming worried even then. “In addition to the increase in policy rates by 25 basis points each, one member was of the view that the statutory liquidity ratio (SLR) could be increased to reduce the borrowing capacity of the banks and the repo facility could be linked with the credit-deposit (CD) ratio of banks to bring in discipline.”  What stands out is the fact that the doves outnumbered the hawks in the 17-member TAC, and it was only after the 27 April meeting – when inflation was clearly seen as going out of control and heading towards double-digits – that the Governor took the hard decision of going with the minority view on raising interest rates by 50 basis points.  Apart from Subbarao, who is Chairman of TAC, the committee has the Deputy Governor, Subir Gokarn, Shyamala Gopinath, KC Chakrabarty, Anand Sinha, Shankar Acharya, YH Malegam, Sanjay Labroo, Sudipto Mundle, Samir K Barua, A Vasudevan, Dilip M Nachane, Deepak Mohanty, Janak Raj, KUB Rao, Pardeep Maria and Amitava Sardarwere as members.

First Post

Soon, merchant transactions too can be paid via mobile

The National Payments Corporation of India has got approval from the RBI to extend mobile payment to merchant transactions. The process will become operational within the next three months, said Mr A. P. Hota, Managing Director and CEO, NPCI........


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Microfinance Bill goes into ‘cold storage' - Govt feels RBI's policy covers problem areas

The much-hyped Microfinance Institutions Bill, proposed to be introduced in Parliament, has gone into cold storage. “For all practical purposes, the MFI Bill is not on the priority agenda of the Government. The draft work on the proposed Bill was also not fully completed… ,” a senior Finance Ministry official told Business Line.  The idea of introducing a Central law on MFIs came in the wake of the MFI (Regulation of Moneylending) Act brought in by the Andhra Pradesh Government in October 2010. The AP Act had introduced stringent norms on MFIs, including getting the permission of Government before disbursal of fresh loans, to check multiple lending, and collection of dues only in public places. “There is a feeling that the ground realities of the sector are now different, especially after the announcement of an MFI policy by the Reserve Bank of India early in May,” the official said. The Finance Ministry had ‘found' overlaps in the draft Bill and the Malegam panel recommendations, which were accepted by the apex bank almost in totality.

Under RBI control

“Some grounds on which the Bill has been put on hold are the caps on interest margin and rate of interest, and the redundancy of a central law when the RBI is the sole regulator for nearly 92 per cent of NBFC-MFIs,” he added.  Further, except in Andhra Pradesh, which accounts for 30 per cent of the MFI business in the country, not many markets in other States warrant a separate central law in view of the “low” volume of business.  “Microfinance in Karnataka, for instance, is about Rs 2,000 crore while in many other States, the microfinance portfolios are lower still. So, any urgency (for legislation) is not seen by the Government of India,” he explained.

Dual regulation

There is also no ‘immediate likelihood' of the Centre interfering with the situation in Andhra Pradesh arising out of dual regulation of MFIs by the State government and the RBI, he added. The disbursal of fresh loans and collection of old dues had almost come to a halt in AP since October 2010. The MFIs, however, feel that a central legislation is better for the industry as it would spell out rules of the game clearly. When contacted, Mr Alok Prasad, Chief Executive Officer of Microfinance Institutions Network (MFIN), said: “Even as I speak now, the AP Govt says its law prevails over the RBI policy. Having a central legislation will solve the problem of dual regulation.”

Business Line

Greater Bombay Co-op Bank on automation drive with e-lobby launch

Grocery shop-owners, vegetable vendors, owners of small restaurants, neighbourhood paanwallas, among others, can walk into this bank's lobby, deposit their day's cash earnings into a machine and get immediate credit for the amount deposited. Recently, the Greater Bombay Co-operative Bank opened an e-lobby with seven electronic machines, including one for cash deposits, at its Khargar branch, on the fringes of Mumbai, to facilitate 24x7 banking. A customer can walk into the lobby of the branch at his own convenience, even after the bank's business hours, for conducting any of the seven routine transactions — deposit cash; withdraw cash; deposit cheque; update passbook; print account statement; make utility bill payments and get coins. There's a machine installed to handle each of these functions at the branch. As transactions of Rs 50,000 and above require PAN number and supervision of the bank's staff, the bank has restricted cash deposits to up to Rs 49,000 in any denomination at the cash deposit machine. The machine is equipped to reject counterfeit and soiled notes.

‘Do-it-yourself' strategy

The bank gives a common personal identification number (PIN) to customers to access the seven machines. “The bank hit upon the ‘do-it-yourself' automated banking strategy as 80 per cent of the customer transactions are routine in nature. We have suggested to our vendors to compress all the seven identified routine transactions into a single machine so that the lobby space can be utilised optimally,” said Mr B. V. R. Sarma, Chief Executive Officer, Greater Bank. The seven machines, which are linked to the core banking platform of the bank, are installed in a 150 sq.ft area in the lobby of the branch. The total cost of these machines works out to around Rs 15 lakh. Plans are afoot to carve out up to 150 sq.ft of lobby space in each of the bank's 20-odd branches in the city to install machines that will enable automated banking, said Mr Narendrakumar Baldota, Chairman, Greater Bank.

Business Line

RBI to continue with rate increases, says Moody

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New trends in financial inclusion

Universal financial inclusion, talked of for decades by policymakers, finally may be coming to fruition. All the requisite pieces have been coming together, some rather rapidly in the past few years, and some of the most dramatic changes to sweep the economy have happened in the payment and settlement system...........

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Money plant: Clever farmers borrow at 4%, invest at 8.5%

When finance minister Pranab Mukherjee brought down the effective interest rate on crop loans to 4% in this year's budget, it was to encourage farmers to grow more food and address the supply side issue of food inflation. But canny farmers in some states have discovered an arbitrage opportunity in this — they avail of the loans from banks at 4% and then invest them in fixed deposits at 8.5%. A senior executive with an old-generation private bank told TOI that the bank was seeing an increase in short-term deposits from farmers. "We understand that several of these borrowers are availing of the special farm loan schemes from public sector banks," he said. Asked about this, Indian Banks Association chairman M D Mallya said that all banks exercised due diligence to make sure that farm loans were used for agricultural purposes. "We ensure that the farmer owns agricultural land and that the land is being used for growing crops," he said.  However, it is impossible to prevent anyone from taking undue advantage of the scheme, as the funds are handed over to the borrower.  The story of the 4% interest goes thus. A couple of years ago, the Reserve Bank of India introduced a scheme where short-term farm loans of up to Rs 3 lakh were made available to farmers at a rate of 7%. This year, Pranab Mukherjee announced that those farmers who repaid their dues in time would get an interest subsidy of 3%. This subsidy brought down the effective rate of crop loans to 4%. Combine this with the recent rise in interest rates on short-term deposits, and many finance-savvy farmers figured that they could make a neat packet on their loan without taking any risk. Some private banks offer as much as 8.5% on short-term 180-day deposits with half a percentage point more for senior citizens.  In southern states, where most families have at least some gold holdings, it is easy to avail of loans against gold jewellery. Farmers are discovering that banks are quite willing to extend a farm loan if the borrower is willing to offer security in the form of jewellery. A loan against gold is considered risk-free because banks maintain a significant margin between the loan amount and the value of gold.  Although these loans are not very profitable for banks, even with the interest subvention of 3%, they are keen on extending them since they form part of priority sector lending. For many banks, meeting priority sector lending is a challenge since the RBI has stripped the priority sector tag from other loans, which include refinancing of loans against gold extended by finance companies.

Phishers promise early tax refund to lure people

Doing the rounds in the cyber space are e-mails from phishers that promise early and assured income-tax refund to payers. Significantly, this time, phishers have spoofed the Reserve Bank of India's website as a ploy for a tax refund scam.....

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Economists for, Industry against rate increase

"Despite the (growth) moderation in the offing, we expect the Reserve Bank to hike rates by another 50-75 basis points as its recent rhetoric has clearly indicated its willingness to accept some pruning in growth, in its attempt to bring down inflation," said Shubhada Rao.........

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GDP slows, all eyes on RBI

Interest rate critical for industry and investment

Thanks to yet another hike in estimates for agriculture growth, taking it to a whopping 6.6%, the CSO has beaten all expectations to come up with a 8.5% GDP growth for 2010-11. This is heartening since it suggests the growth momentum has not been hit by the series of interest rate hikes, but keep in mind the numbers for the full year hide the fact that the growth momentum has been slowing for four quarters now, from 9.4% in Q4 2009-10 to 9.3% in Q1 2010-11 to 8.9% in Q2 to 8.3% in Q3 and finally to 7.8% in Q4. If the overall GDP number holds in 2011-12, there is reason to be satisfied. But, with inflation still being high, RBI will be focused on interest rate hikes. Industrial growth and investment has proved to be quite resilient to higher interest rates. But, for how much longer will this hold? Manufacturing growth has declined continuously over the four quarters—from 15.2% in Q4 2009-10, it fell to 12.7%, 10%, 6% and finally 5.5% in Q4 2010-11. Agriculture growth could be a saviour, but keep in mind we have never had two successive years of high agricultural growth, which means that getting a number of 5%-plus in FY12 will be a challenge; indeed, FY11’s growth comes on the back of just a 0.4% growth in FY10—the sharp growth in cotton and maize, thanks largely to the introduction of better seeds, is a good sign though. The government’s budget shows that expenditure will be only marginally higher this year and, therefore, there will not be too much support coming from this sector. This turns the onus on industry (manufacturing and construction) and services (trade, transport and finance) to propel the economy. The financial sector’s growth is linked with that of the rest of the economy and cannot independently grow. The focus will hence be a lot on industry and construction to provide a fillip and this is where interest rates will play a major role. Both manufacturing and construction have grown by a little over 8% in FY11 and will have to grow even faster in FY12. Going back to the rudimentary textbook formulation of GDP, it comprises consumption, investment, government and trade. High inflation will affect consumption and we will have to look at investment to bridge the gap, given that government expenditure will increase only marginally and the trade balance will be in the negative zone. The coming year will hence be the ultimate test for the relation between interest rates and investment. To borrow an analogy from the tennis court, which is the current flavour, so far it appears to be deuce, with advantage to investment. The serve in FY12 will be for the game and it needs to be seen whether it will be ‘game’, or reversion to ‘deuce’.

FE

India Aims to Reach Unbanked by Selling Prepaid Cards Through the Postal System

More people are expected to begin using prepaid cards in India in the coming years due to the launch of the white-label prepaid cards by the Indian Postal Department and also the rising number of online transactions that have been made possible due the increase in Internet penetration. Prepaid cards gained even......

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V.K.Sharma Tipped to be RBI Deputy Governor

MUMBAI: RBI Executive Director VK Sharma is widely perceived as the frontrunner for the Deputy Governor's post, which falls vacant on June 20, when current Deputy Governor Shyamala Gopinath retires. 

"V.K.Sharma, G.Gopalakrishna and V.S.Das are being considered for the slot. Based on seniority, Sharma may be the first choice for the job," said a source. "The final decision rests with the government. An announcement of the successor is expected around June 20," he added.  In September 2004, Sharma took charge as ED. At present, he is in charge of departments like Currency Management, Rural Planning and Credit Department, Customer Service Department and Financial Markets Department. Gopalakrishna is responsible for non-banking supervision, department of banking supervision and central security cell while Das is in charge of financial stability unit, department of payment and settlement systems, central vigilance cell and department of communication.  "This time around, the government would like to stick to the seniority criteria to avoid possible controversies. Sharma has missed out in the past, and hence, could be given a chance this time," said another banking source.  In 2006, PK Biswas, a former RBI ED, had moved court, arguing that the seniority criterion was ignored in the DG appointment. Biswas, who joined RBI in 1972, was never promoted as DG, even though he was high on the merit list. Prior to this, in 2003, soon after KJ Udeshi was promoted as deputy governor, the then executive director KL Khetrapal resigned. Among the four deputy governors currently holding office, KC Chakrabarty is a former banker, Subir Gokarn is an economist while Shyamala Gopinath and Anand Sinha are career central bankers. Ms Gopinath is in charge of internal debt management department, foreign exchange department, government & bank accounts and payment and settlement systems, besides other key responsibilities.

ET

Villagers get smart cards

Pune based information technology company DSK Digital has rolled out a project to issue smart cards to the residents of Velu village in Maharashtra's Pune district as part of the financial inclusion process steered by Central Bank of India CBI).  The initiative is under the Reserve Bank of India's (RBI) mandate to bring every citizen of the country in the banking network. A large number of funds are allotted by the Government of India to the people who are living below the poverty line. But, it is usually seen that there is a large scale pilferage of these funds. Issue of smart cards will not only help credit the funds straight into the accounts of the beneficieries but also create their 'banking history' which will make them eligible for various credit schemes of the government.  RBI has chosen Khopi as a model village to implement financial inclusion initiative by opening of bank accounts for beneficiaries. Closely monitored by RBI and CBI, the project was started in February with the help of DSK Mobilis. More than 300 villagers have opened accounts in CBI under this project until now. These accounts are no frill accounts i.e. zero balance accounts without any deposit.  DSK Digital has produced smart cards using its in-house integrated technology platform for the device DSK Mobilis. These smart cards were distributed to villagers by Chief General Manager-in charge RPCD of RBI, Deepali Pant Joshi.  "The banks have come to the doorsteps of villagers because opening bank branches in every village is not practical. The smart cards will introduce financial literacy in Khopi and increase the bank's daily transactions," Joshi said.  DSK Digital Chairperson Hemanti Kulkarni said, "Villagers will have simple and direct access to all the funds from government due to this RBI project. This will make the bank transactions easy and safe. This account can also be used for all day to day transactions. All the villagers will get a hassle free access to their financial accounts if this project is implemented throughout many villages".  Vinod Phillips, Head, Business Operations at DSK Digital said, "DSK Mobilis has an integrated GPS, GPRS services. An inbuilt camera takes the picture of the account holder, while finger prints are scanned by inbuilt finger print scanner. This entire enrollment process takes mere 180 seconds."  The responsibility of enrollment, verification and account transaction has been entrusted to DSK Digital. DSK Mobilis application supports all activities related to user enrollment, registration, remittance, disbursement, OD, loan etc. In addition, the device runs completely on solar power. Smart card slots in the DSK Mobilis are used to make transactions and a printed receipt is given to the account holder after the transaction. As finger prints of the account holder is verified using this technology, nobody besides the account holder can use the smart card".  DSK Digital will also implement smart card projects in 83 villages of Ahmednagar district, trgetting 1.25 lakh accounts, Phillips said.

TOI

Cover more villages, finmin tells banks

Enlarging the scope of ongoing ambitious financial inclusion (FI) programme which was targeting 73,000 villages initially , ministry of finance (MoF) has asked the banks to prepare plans to cover 6 lakh villages in the country. All the banks, involved in the FI project, have been asked to furnish the details of the villages to be covered by them by June 15. Arvind Kumar, the newly-appointed joint secretary in the finance ministry, met the officials of the Indian Banks’ Association (IBA), Reserve Bank of India (RBI) and the senior officials of a number of state-owned banks at New Delhi Friday last. Earlier while interacting with the heads of public sector banks (PSBs) , Shashikant Sharma, financial services secretary, had asked them to start working towards covering the entire 6 lakh villages in the country under the ongoing FI programme. The MoF had asked the IBA and RBI to prepare an action point for this during the forthcoming meeting. In the scaling up financial inclusion programme, the government has asked them to include those villages with a population of 1,000 that are located in the periphery of those villages that are having population above 2,000 and which are already being covered under the programme. In toto, there are nearly 1 lakh such villages in the country with a population of 1000. IBA will write to the state level bankers’ committees (SLBCs) in the country that will further get the details from their respective district level coordination committees in this connection so as to prepare a roadmap. Also, the government will ask the banks to take the Swabhiman project, a nationwide awareness programme on financial inclusion which was kicked off by the UPA chief Sonia Gandhi in February to the grassroots level. Talking to FE, K Unnikrishnan, deputy CEO who had attended the meeting, IBA, said the problem was only with those regional rural banks (RRBs) that were yet to complete core banking solutions (CBS). However, they will expedite the process of FI once they complete the CBS by September, added Unnikrishnan. There are 20,000 to be covered by the RRBs under FI, whereas they have been able to cover only 3,000-4,000 villages so far.

FE

4 RBI panel members wanted 25 bps hike

RBI committee had considered raising SLR in annual policy

Reserve Bank of India’s Technical Advisory Committee (TAC) on monetary policy had considered increasing the statutory liquidity ratio (SLR) by 100 basis points in the annual monetary policy to tighten liquidity supply to banks. Currently, the SLR — the mandatory liquid reserves (other than cash) that banks have to maintain with RBI — stands at 24 per cent of net demand and time liabilities. According to the minutes of the TAC meeting published by RBI, “In addition to the increase in policy rates by 25 basis points each, one member was of the view that SLR could be increased by 100 basis points.” The particular member also suggested RBI's repo facility should be limited to up to two per cent of the excess SLR securities held by banks. This step, if implemented, could limit the flow of liquidity from RBI to banks under the liquidity adjustment facility. The committee suggested RBI should continue with its anti-inflationary stance, since inflation could pose a major risk to growth in the future. The members, however, had varied opinions on the extent of the rate increase that the central bank should announce on May 3. “While four members of the committee felt the repo and reverse repo rates be raised by 25 basis points each, two members suggested a rise of 50 basis points each in the repo rate and the reverse repo rate,” said the RBI release. One member also suggested if needed, the central bank could exercise control on capital inflows. The TAC meeting was held on April 27 and was attended by Y H Malegam, Sanjay Labroo, Dilip M Nachane, A Vasudevan and Sudipto Mundle, along with RBI Governor D Subbarao and four deputy governors. On May 3, RBI had raised the repo and reverse repo rates by 50 basis points, while the SLR and cash reserve ratio were kept unchanged at 24 per cent and 6 per cent, respectively.

BS

International banks in emerging markets

The presence and growth of foreign banks in emerging markets pose important challenges, both for these countries and the international financial system. Yet, the debate on banking re-regulation ignores the implications of developments in the emerging economies.........

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Reconciliation period of failed transactions at ATMs is reduced to just seven days

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Which way will interest rates go?

Economists expect that higher interest costs and tight liquidity may adversely affect the GDP growth rate in the near term even though India’s economic fundamentals remain extremely strong.  Since March 2010, in the last 14 months, the Reserve Bank of India (RBI) has hiked the reverse repo rate on nine occasions. In combination with repo rate (which is the current operative rate), it means that RBI’s key policy rate has more than doubled during this period—from 3.25% in March 2010 to 7.25% at present. It may be recalled that the wholesale price index inflation, which was in negative territory in July 2009 went up to cross the double-digit mark at 10.36% by March 2010. The main contributor to such high inflation was food article prices, which increased at close to 20% per annum last year. During this period, three-month commercial paper (CP) rates also moved up from 3.5% then to about 10% currently, reflecting higher funding cost for corporate India.  Economists expect that higher interest costs and tight liquidity may adversely affect the GDP growth rate in the near term even though India’s economic fundamentals remain extremely strong. The question that, therefore, gets invariably asked in every discussion these days is: “Where are the interest rates headed next?”  In its monetary policy review for 2011-12 earlier this month, RBI has sought to maintain an interest rate environment that moderates inflation and anchors inflation expectations. It would imply, therefore, that RBI may continue to hike policy rates and maintain a tight liquidity stance till such time that inflationary expectations moderate sufficiently. There are three important variables that may affect inflation going forward. Monsoon will have a significant impact on inflation. As discussed earlier, last year inflation was driven largely by high food prices, which have moderated significantly over the last few months. A normal and timely monsoon will indicate stable food and vegetable prices and have positive impact on inflation.  The second critical variable would be global oil prices. In the last few months, following disturbance in North Africa and the Middle East, global crude prices have moved up sharply on apprehension of reduced supply from these areas. Recent collapse of a nuclear power plant in Japan following a massive earthquake has increased expectation of higher reliance on thermal power further supporting higher crude prices. With continued uncertainty on geopolitical environment, oil prices are expected to remain firm putting pressure on inflationary expectations.  Finally, price movements in other global commodity such as copper and aluminium will also have a strong impact on inflation. As per the current assessment, inflation is likely to remain elevated in the first half of the year. Assuming a good monsoon and gradual stability in North Africa and the Middle East resulting in lower oil prices, inflation may moderate thereafter. Let us examine the trajectory of short-term interest rates first over the next year. Last year, telecom companies borrowed aggressively from the banking system to fund the bids at 3G and broadband telecom licence auctions. Credit pick-up from other sectors also remained robust. With the government also holding large cash balances, the system liquidity turned negative. The credit-deposit ratio of the banking system was above one for the better part of the year, which means that banks were lending more than fresh collection by way of deposits.  Following a record subscription in Coal India’s initial pubic offer, system liquidity came under severe strain, necessitating special liquidity infusion measures from RBI in a counter-cyclical move. As a result, banks began to sharply hike deposit rates in order to attract fresh deposits to improve the liquidity and balance sheet ratios. By this time inflation was consistently exceeding all expectation and market rates started pricing in expectations of stronger hikes by RBI.  Consequently, short-term rates moved in a fast-forward manner to price all these negatives and spreads between repo rate and three-month bank CD rate widened from about 50 basis points last year to above 400 basis points in March. In the new financial year in April, liquidity situation improved with government spending and fresh system flows. With the financial year-end pressure behind and in a more balanced liquidity environment, short-term rates (up to one year) may already have peaked in the current interest cycle. They may now fluctuate between its March high and April lows. In other words, short-term rates should remain within the March highs of 11-12%. In so far as long-term rates are concerned, additional factors of government borrowing program, growth in credit and global bond markets will also play a role. While very high oil prices may result in higher subsidies, volatility in equity markets may undermine disinvestment targets. Further, poor monsoon may result in additional burden on government finances.  All the above factors will affect fiscal deficit and inflation. Thus, better visibility has to emerge on these factors before a decisive view on long-term bond yields can be available. However, currently the yield curve is pretty much flat with one-year treasury bill at 8.30% and 10-year government securities at 8.35%.  With overall interest rate environment uncertain and with RBI’s current focus on moderating inflationary expectation, one would expect a small rise in 10-year yields, maybe a push towards 8.50% levels, in the near term.

Mint