All OK, says RBI on financial stability. But is it really so?

........... The RBI is surely right to say that the Indian financial system is stable, but if policy-makers are not proactive, the system will grow more unstable as the chickens of bad loans and asset losses come home to roost in 2012.

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

Monetary tightening may ease if inflation falls: PM

.if the easing of inflation seen in the last few weeks is sustained, the RBI will be able to ease up on monetary tightening as well................

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

RBI report puts spotlight on fiscal deficit

India's banking system is stable and can withstand global shocks, but there are weak spots like decelerating growth and rising fiscal deficit which are needed to be addressed, said a Reserve Bank report. "The domestic financial system remains stable in the face of an adverse international backdrop ... soft spots (are needed) to be addressed going forward," said the RBI's Financial Stability Report (FSR) released on Thursday. Referring to the weak spots, the report said, "Poorer global growth prospects and sovereign debt crisis in Europe has heightened external sector vulnerability. At the same time the domestic growth has weakened while inflation has remained high". As regards weakening rupee, the report said, "Exchange rate depreciation has inflationary implications through the increase in the cost of oil and other imported goods which are inputs in overall production". Moreover, it said the increase in petrol and diesel prices and minimum support prices have a cascading effect on the entire economy. It is also moderating impact of the monetary policy measures taken by the RBI earlier. Rupee has weakened nearly 18 per cent since January and is currently trading at Rs 52.65 against dollar. The other major challenge before the government would be to contain fiscal deficit during 2011-12. "The fiscal situation remains challenging as the revenue collection was lower than expected in the first half of the current year," it said. The government proposes to bring down the fiscal deficit to 4.6 per cent in the current fiscal, from 4.7 per cent in 2010-11. However, poor disinvestment and tardy revenue collection is putting pressure on fiscal deficit. As far as growth is concerned, it is likely to moderate to 7.5 per cent in 2011-12 from 8.5 per cent a year ago. The report, further, said that the global risks to the stability of the domestic financial system have intensified over the past 6 months. "Emerging developments in the macro economy and in the financial soundness indicators of the banking system pose some concerns as do the sharp corrections accompanied by high volatility in financial markets," RBI said.

Business Today

RBI flags deteriorating loan portfolios of banks

....The Systemic Risk Survey conducted by the RBI for the first time has identified deterioration of asset quality as the highest risk..........

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

RBI fears rate war may stress bank margins

.......Competition in this space, which was non-existent earlier, could rise as banks with low Casa ratio would rush to garner such deposits by raising rates, RBI said. The effect could be muted, the regulator said, based on the churn in customers and the cost structure adopted by the individual banks.............

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

India urged to promote interest-free banking system

... The memorandum, addressing Indian Finance Minister Pranab Mukherjee, Reserve Bank of India Governor Subba Rao, Minister for Overseas Indians' Affairs Vayalar Ravi, and the general manager, State Bank of India, Jeddah Branch, requested that a notification may be published in the Official Gazette of India to include interest-free banking as a form of business and advise the Reserve Bank to issue necessary instructions to all banks to introduce interest-free banking or open interest-free banking windows.......

Read..........

Develop East Godavari as 1st financial inclusion district: RBI

Rajahmundry (AP), Dec 21 : Reserve Bank Governor D Subba Rao today directed banks to take steps to develop East Godavari district as the 'first financial inclusion' district in the country. Speaking at a bankers' meeting organised by State Bank of India and Andhra Bank here, the Governor asked the banks to prepare a comprehensive plan to develop East Godavari as the first financial inclusion district besides intiating steps to develop this district as a model district. Stating that the RBI has been giving special attention to financial inclusion for the past five years, Subbarao said the main objective behind financial inclusion is not only of opening bank accounts but also to provide information about subsidy, interest, banks loans and other schemes launched by the government for the benefit of people. He asked banks to inform customers about the various schemes launched by the Government for the benefit of public. In FY10 budget, Finance Minister Pranab Mukherjee had set a target of taking banking services to all the villages which have over 2,000 population by the end of FY13. To facilitate this, the Government, along with RBI, has allowed banks to relax KYC (know your customers) norms and also allow transactions through banking correspondents in places where it is not viable to set up bank branchs. Around 60,000 villages will be covered under this scheme. There are 6 lakh ubanked villages in the country, the Governor said. There are 6,600 villages in Andhra Pradesh with over 2,000 population where no banking services are available, he added.

IBN Live

Banks committed to RBI to make know-your-customer process easier

MUMBAI: Banks have committed to the Reserve Bank of India (RBI) to make the know-your-customer (KYC) process easier for individuals holding a bank account, a move that will come as a blessing to thousands of people moving from one city to another. This was conveyed by bank chiefs to the RBI at a recent meeting to discuss issues relating to the implementation of the M Damodaran committee report on customer services. The KYC norms, which were introduced after the 9/11 attacks in the US, are aimed at establishing a customer's identity and proof of residence and plug any loopholes in catching bogus accounts. The Damodaran committee was formed to look into banking services rendered to retail and small customers and pensioners. The committee was also mandated to look into the grievance redressal mechanism practised by banks and suggest measures for expeditious resolution of complaints. It submitted its report in August this year. The banks told the RBI that an individual who already has a bank account will not be required to furnish information on proof of residence. Instead, the person can just provide a statement of account from the bank. Some time ago, the central bank had told banks that there have been several complaints from customers who are required to fill up lengthy forms and submit documents everytime they open a new account. Especially those who either move to a new city in search of jobs or get transferred, as they do not own a house there. "Banks have mutually decided that for verifying residential proof, they will develop a mechanism wherein they can verify with each other if an individual is an account holder. However, an individual will have to provide supporting document for establishing his or her identity," said a bank chief who attended the meeting but did not want to be identified. 

TOI

India Revisits the '70s

The central bank risks stagflation by loosening to stimulate growth

The Indian economy hit choppy waters this year and investors fear it is about to get worse. Prime Minister Manmohan Singh's government has abandoned reforms, most spectacularly on foreign investment in retail this month. Some reassurance came from the central bank, which steadied the economy this year by fighting double-digit inflation. But that bit of stability is threatened after the Reserve Bank of India signaled Friday that it's about to give up the fight, too. India faces the worst bout of inflation in major Asian economies, a dilemma the RBI earlier seemed to acknowledge. Prices have been rising at an annual clip of above 8% for nearly 24 months and it was encouraging to see RBI Governor Duvvuri Subbarao push up the short-term interest rate by 2.25 percentage points this year.  Mr. Subbarao is now losing his nerve. On Friday, he refused to hike interest rates for the first time this year and strongly suggested he would loosen credit next year. That's incredible given that the policy rate is still negative in real terms and growth in the broad money supply is running higher than expected. Headline numbers did fall two months in a row, but prices still rose 9.1% year-on-year in November. The decline has much to do with base effects from the end of 2010.  The central bank surely understands that Indians' inflation expectations have hardened after witnessing the most persistent rise in the prices of goods in the last two decades. These expectations are not going to be altered by two months' data, especially now that goods inflation has spread to wages—and, thanks to the economy's rigidities, become sticky. The real reason for the RBI's change of heart is the pleading of various interest groups to bring down the cost of credit. GDP growth slowed to 6.9% in the latest quarter, while industrial output last month has deteriorated. Easy money is an easy response to flagging growth, but it's the wrong prescription. Mr. Subbarao seems to think he can trade off inflation in favor of growth, but the last 30 years of experience with priming the monetary pump—or even the last three—should have taught him that there is no such correlation in the long run.  The RBI is now recapitulating this experience. After it kept credit too cheap in 2008-09, India is now stuck with inflation and slowing growth. If Mr. Subbarao doubles down in coming months, he risks even more monetary instability this time around, probably without helping the cause of growth. He would also then fritter away the gains made by tightening in the past year. Meanwhile, as the RBI's credibility dissipates, the rupee is being hammered against the dollar. In desperation, Mr. Subbarao has dug into his toolkit, liberalizing foreign inflows into government bonds and some banking deposits, which is good though not sufficient at the moment. More worryingly, he's tried to curb speculation by imposing new rules last week on currency derivatives.  What the central bank needs to restore stability to the rupee is a mandate for price stability, ideally achieved by targeting the exchange rate. Instead Mr. Subbarao juggles multiple mandates, including promoting growth. Except growth at this point is being held back more by regulation, than by the cost of credit.  India's policy makers may not admit it, but they are stumbling into stagflation. The right way out of this mess is for Mr. Singh to drive growth through reforms and for Mr. Subbarao to maintain stable prices. It's bad enough that India's prime minister appears to have abdicated his responsibility, but its central banker will make things worse if he tries to compensate for Mr. Singh's failings. 

WSJ

Kerala State Credit Plan indicates potential of Rs 68,434 cr



The Chief Minister, Mr Oommen Chandy, flanked from his right by Ms Suma Varma, Regional Director, Reserve Bank of India, Thiruvananthapuram; Mr K.C. Shashidhar, Chief General Manager, Nabard; Mr K.P. Mohanan, Minister for Agriculture; and Mr K. Jayakumar, Additional Chief Secretary, at the State credit seminar, hosted by the regional office of Nabard in Thiruvananthapuram on Wednesday



Thiruvananthapuram, Dec. 21: The State Credit Plan for 2012-13 for Kerala presented by the regional office of the National Bank for Agriculture and Rural Development (Nabard) indicates a credit potential of Rs 68,434 crore. The State Credit Plan was officially released at a function held here on Wednesday, which was inaugurated by the Chief Minister, Mr Oommen Chandy. Speaking on the occasion, the Chief Minister congratulated Nabard for preparing a ‘quality' State focus paper and potential-linked State credit plan. The Chief Minister also indicated that the State Government may consider necessary budgetary support for providing infrastructural gaps identified in the document. While stressing the need for introducing a fruitful insurance scheme for farmers, he said easy availability of credit was necessary to instil in them the confidence to take up agriculture as a vocation. Mr Chandy also suggested that two crops be identified in every State and interest-free loan be made available for their cultivation. For Kerala, these could be rice and coconuts. In view of the role of cooperatives in agricultural credit, he assured that the State Government would take all-out efforts to ensure that cooperatives benefit from the Vaidyanathan Committee recommendations. In his presidential address, Mr K.C. Shashidhar, Chief General Manager, Nabard, Kerala, expressed himself in favour of incremental investment credit being committed for the State. While mooting a price stabilisation fund and a revamped agriculture insurance scheme, he also called for professionalism in running the cooperatives. The credit potential for agriculture is estimated at Rs 30,124 crore; the non-farm sector at Rs 4,657 crore; and other priority sectors at Rs 33,653 crore. Mr Shashidhar requested banks to prepare the annual credit plan based on the potential identified by Nabard in the State Credit Plan. In his keynote address, the Minister for Agriculture, Mr K.P. Mohanan, called for proper and full utilisation of various funds available with Nabard for which the Department of Agriculture needs to take initiative. The Additional Chief Secretary, Mr K. Jayakumar, urged bankers to focus more on quality of credit than quantity and sensible utilisation of credit. He requested Nabard's intervention in advising Government for channelising the funds. Among those who attended the State Credit Seminar were Ms Suma Varma, Regional Director, Reserve Bank of India; Mr Subrata Biswas, Secretary, Planning and Economic Affairs; Mr K.R. Rao, General Manager, Nabard; Mr V. Murali, Chief General Manager, State Bank of India; Mr S.K. Singh, General Manager, State bank of Travancore; and Mr T. Sreekanthan, General Manager and Convenor of State Level Bankers' Committee, Canara Bank.

HBL

E-payment for all: Kirana’ stores to sell Visa cards

MUMBAI: For the first time, Visa payment cards will be sold in kirana outlets to enable those without cards make electronic payments for travel tickets, utility payments and shopping. The US-based payment company has tied up with DCB Bank which has appointed Itz cash as a business correspondent which will distribute cards across 40,000 shops in 2,500 centres. Until now bank pre-paid payment cards have been largely in the travel space. These cards have replaced travelers cheques and bought by overseas travelers who are wary of using their debit or credit cards overseas. The Freedom Prepaid Card targets those who do not have access to electronic payments but miss its convenience when it comes to buying travel tickets or paying taxes. The target buyers include those in the unorganized sector such as taxi and auto drivers. As an agent of the bank, the shopkeeper will do the "know your customer" formalities which would involve getting an identity and address proof. Uttam Nayak, Visa's group country manager, India and South Asia, said the card is aimed at achieving financial inclusion through collaboration. He added that this segment can be profitable for banks if they were to achieve scale. The partners are looking at issuing one million of the pre-paid cards across India. At a later stage the partners would also consider a cash at point-of-sale facility with the merchant giving cash whenever required.

TOI

Holiday planner

A large private sector bank in Mumbai has formed a committee comprising members representing each religion (Hinduism, Islam, Sikhism and Christianity). The purpose is to decide the holidays that employees working in the bank’s corporate head office can take and those on which they have to work. For instance, out of Id-E-Milad, Ramzan-Id, Bakri-Id and Moharrum the committee will choose either one or two days when its employees at corporate office can take leave. This holiday-consensus has been prompted by the fact that people in the corporate head office work five days a week while the staff at branch offices work six days a week. So employees at corporate office have to work on some of the banking holidays.

BS

One year NRE deposits hit 10% as RBI triggers rate war

MUMBAI: The Reserve Bank of India's move to free interest rates on Non-Resident Deposits has triggered a rate war among banks. Laxmi Vilas Bank is offering 10% on one-year deposits as against 3.82 earlier. Mangalore-based Karnataka Bank which has hiked one-year returns to 9.75%. Kerala-based Federal Bank was the first to respond hiking rates on one-year NRE deposits to 6.5% from 3.82%. Meanwhile another Kerala-based lender South Indian Bank has said that it would offer non-residents 6.75% for deposits up to one year and above. Federal Bank which has one of the largest shares of non-resident deposits among banks in India has said that it has seen a surge in deposits after interest rates rose sharply during the current fiscal. The bank's NRI deposits had risen by as much as 40%. Late evening on Friday, RBI said that it has deregulated interest rates on non-resident (external) rupee (NRE) deposits and ordinary non-resident (NRO) accounts. RBI said that it has decided to deregulate interest rate on NRI deposits to provide flexibility to banks to raise deposits. "Banks are free to determine their interest rates on both savings deposits and term deposits of maturity of one year and above under NRE deposit accounts and savings deposits under NRO accounts. However, interest rates offered by banks on NRE and NRO deposits cannot be higher than those offered by them on comparable domestic rupee deposits," RBI said. Among other lenders Dhanlaxmi Bank said that it was reviewing its interest rates on NRI deposits but has not yet taken a decision. DCB Bank's Murali Natrajan said that his bank was also reviewing rates on NRE deposits.

TOI

Time for another RIB?

Various moves by RBI to come down on speculation on the rupee have helped stabilise the currency somewhat, but if you believe a large part of the rupee’s fall has to do with there not being enough compensatory capital account flows to match the rising current account deficit, this would suggest the rupee has some way to fall since the current account deficit isn’t going to get any better in the short term—very broadly, developing countries with current account surpluses have seen their currencies depreciate the least while those with deficits, like India, have seen sharp depreciation. Which is why, over a 90-day period, Standard Chartered’s research team says it expects the rupee to fall to 54—the rupee coming back after that depends on the outlook for reforms as also to what happens in the global economy. While anything RBI does has to be seen as only a short-term measure until the government is able to convince investors it plans to push policy reforms—the fact that two critical legislations have been put on hold while the food Bill has been pushed suggests investors will take some convincing—RBI does have many more options other than those which it has already exercised including raising interest rates on NRI deposits. Two other suggestions that are worth examining is whether SBI should be encouraged to go and mop up funds as it did so successfully through the Resurgent India Bonds (RIB) when things looked quite shaky after the nuclear tests—given the global liquidity, mopping up $10-15bn may be possible, and RBI could agree to take care of the exchange risk. Establishing swap lines with countries India runs trade deficits with, China for instance, will also help lower demand for dollars—in the long run, however, this works only if moves are made to help facilitate Chinese investment in India. China, it should be appreciated, has such arrangements with eight countries already, all of whom were keen to reduce their demand for dollars. Increasingly, India’s diplomacy needs to focus on this aspect of things.

FE

Banks can use SLR holdings to borrow more, says RBI

.......... "It has been decided to permit banks to avail of funds from RBI on an overnight basis, under the MSF, against their excess SLR holdings," the central bank said in a notification on Wednesday..............

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

Pranab asks banks to speed up financial inclusion

Finance Minister Pranab Mukherjee Wednesday asked banks and other financial institutions in the country to speed up the process of financial inclusion imperative for India’s higher economic growth. Financial inclusion refers to providing easy and affordable access to finance at reasonable costs and repayment terms to the poor. These can be loans for consumption, asset purchase, business, and enabling accumulation of savings and insurance. “We shall have to go a long way in achieving financial inclusion in the country which is important for sustained high economic growth rate, reduce poverty, deprivation and disparity in the country,” he said at the centenary celebration of Central Bank of India. Around 38 per cent of banks have branches in rural India while a mere 40 per cent of the country’s population has bank accounts. The number of bank braches has risen from 8,700, at the time of bank nationalisation in 1969, to around 85,300 at present. However, only 32,000 of these are in rural areas. The average population per bank branch is 13,900. The government has planned financial inclusion to ensure banking facilities in habitation with a population in excess of 2,000, by March 2012. The program will use various models and technologies, including branchless banking through business correspondents.

DH

Short-term rates

Many months have elapsed since the savings bank interest rate was deregulated by the RBI. Just five or six banks, which had a very low proportion of savings bank portfolio, rushed to increase the rates in the hope of large-scale migration of deposits. If the stubbornness with which the remaining banks have retained the four per cent interest rate for savings banks accounts, irrespective of the balances, is any indication, there hasn't been significant outflow of their savings bank deposits. With just a quarter left for the financial year to come to a close, and the RBI choosing not to reduce either repo or cash reserve ratio rates, one can expect most other banks too to jack up their short-tenure deposit interest rates in the coming days.

S. Ravindranath Coimbatore (HBL)

Cash strapped banks rush into certificates of deposit

...............“The cash infusion by the RBI is far short of our requirements. “What the RBI is offering is only cash through open market operations. Open market operations imply sale of excess securities with the banks to the RBI for cash......................

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

RBI releases book on Regional Economy of India: Growth and Finance

The book covers important research findings of economists working in regional offices of the Reserve Bank of India

Dr. Subir Gokarn, Deputy Governor, Reserve Bank of India released a book on Regional Economy of India: Growth and Finance last Friday at the Annual Conference of the economists of the Reserve Bank of India. Edited by Deepak Mohanty, Executive Director, Reserve Bank of India, the book is jointly published by the Reserve Bank of India and the Academic Foundation. The book covers important research findings of economists working in regional offices of the Reserve Bank of India. Given the divergence in growth potential, financial development and inflation across regions in India, studies on regional economies become particularly relevant. The analysis in the book reveals that –

The share of agriculture has shrunk across the states

The share of services has risen sharply

However, industrial growth remains uneven.

Urban-rural inequality has worsened.

There is, therefore, a need for concerted action on agricultural growth and infrastructure development besides increasing the penetration of formal financial sector to alleviate the constraints on growth and to control inflation.

There is also a need to prioritise expenditure towards social sector to develop the quality of the labour force and promote well-being.

IIFL

Gokarn says cash crunch temporary; announces 4th OMO

Even as the monetary authority said it will announce the fourth tranche of government bond buy back in as many weeks today to infuse liquidity, deputy governor Subir Gokarn termed the current cash crunch as temporary and is due to the advance tax payout that sapped Rs 69,000 crore from the system. "The immediate pressure on liquidity is due to the advance tax payout. We have had about Rs 69,000 crore going into the government kitty last week and now we will have to wait and see. Obviously, that money is going to be spent over a period of time. "So the current pressure is purely short-term. And we don't expect this to remain and things will normalise over the next few days," Gokarn said on the sidelines of a round table organised by Ficci here. Gokarn further said RBI will announce another open market operation (OMO) later today but did not quantify it. Since the last mid-November, it had announced three buyback of government securities of Rs 10,000 crore each. This comes in the wake of the deep cash crunch in the system. Yesterday, banks borrowed a record Rs 1.66 trillion-- which was a yearly high--from the temporary liquidity adjustment window of the central bank. Today, the lenders reportedly borrowed a tad less at Rs 1.64 trillion from the short-term borrowing window called repo. Banks borrow from this daily cash injection window at 8.5 percent. The RBI is scurrying to infuse liquidity into the system as there are no takers for the government debt in a sapped market, even as the government is trying to finish its borrowing plan for the fiscal. The government is slated to borrow a whopping Rs 4.7 trillion from the market this fiscal and it has already taken in 68 percent of that. When asked whether the RBI will put up an OMO calendar going forward or till liquidity returns to the market, Gokarn answered in the negative saying, "I don't think we want to put the OMO in a calendar. We are basically responding with our OMOs to the emerging liquidity conditions." "To the extent that we see there is tightness, as I just said, today's situation is temporary because of the advance tax pressure, but even before that and after that there may be pressure and we will respond to that accordingly. "We are announcing another round of OMO today. And we will follow that pattern," the deputy governor who is in charge of the monetary policy said. On the rupee, he said, "although the rupee is at 53 a dollar, it has been relatively stable (now) if you go by the intra-day volatility, than it was some weeks ago. And this shows that some of the measures we have taken recently are helping to keep some boundaries on the rupee."

IBN Live