RBI should crack down on inflation – S.S.Tarapore

Whatever the vested interests might say, inflation has got out of hand even as 8 per cent growth is still on the cards. The RBI must step up the assault on inflation, before a cold turkey approach becomes inevitable.

Inflation has persisted for over 18 months and is currently in the region of 9 per cent on a year-on-year basis using the Wholesale Price Index (WPI). It was earlier felt that inflationary pressures would, on their own, moderate and all that monetary policy would have to do is take baby steps. In eight policy reviews since April 2010, the RBI undertook seven increases in the repo rate of 0.25 per cent each (on the eighth occasion there was no policy action).  When, in May 2011, the RBI raised the repo rate by 0.50 per cent, there was a broad-based agitation by borrowers (particularly India Inc.), bankers, analysts and the government that monetary policy would be disruptive to growth. In the June review, the RBI reverted to baby steps.

RELENTLESS INFLATION

There are two hazards to baby steps. First, taking inadequate doses of antibiotics over a prolonged period is not only ineffective, but makes the system immune. Secondly, political economy considerations and active lobbies restrict the window of opportunity for policy action.  There is strong advocacy for the view that inflation would dissipate on its own and that no policy action is called for. These expectations have been belied. Inflation has got out of hand and there is no way that it can be talked down by the authorities. The government now argues that anti-inflation measures are inevitable and some growth would have to be sacrificed. A dangerous line of thinking is that there is a new higher ‘normal' for inflation. Such an attitude is a standing invitation for social unrest. With the recent increase in petroleum prices, it is recognised that inflation would accelerate. Dr C. Rangarajan, the doyen among advisers to the government, has categorically stated that in July 2011, the inflation rate could reach 10 per cent and thereafter it would decline. The earlier ‘tolerable' rate of inflation of 5 per cent is no longer being talked about and inflation, at the end of March 2012, is projected at 6.5-7 per cent; there are some analysts who claim that a realistic projection for inflation at the end of March 2012 would be nearer 8.5 per cent. What is particularly relevant is that official price indices understate the ‘true' level of inflation, which, at the present time in India could be as high as 15 per cent per annum. Such a high rate of inflation destroys the socio-economic fabric of the country. The inflation expectations survey by the RBI indicates that inflation would accelerate. While analysts are right in arguing that the government should bear a part of the burden of adjustment, the ground reality is that the central focus of the authorities is on matters other than economic and financial policies.

ONUS IS ON RBI

The historical experience is that when there are difficulties in governance, it is the central bank which holds up the rear. The media has been vociferous that further increases in interest rates will hit credit expansion and growth in the next 12-18 months. Despite talk about a lower pace of expansion of new projects, it is generally accepted that India can easily sustain an 8 per cent real rate of growth. India's growth rate is the second highest in the world, but the inflation rate is one of the highest among the emerging market economies. At the present time, inflation reflects a pressure cooker situation.  The genie of inflation is out of the bottle and suasion cannot be used to get it back in. It would be necessary to twist a few limbs and break a few bones before the genie of inflation gets back under the lid. If the authorities do not take action now, like a drug addiction, inflation will get strongly embedded in the system and the only option would be a cold turkey approach, which would be detrimental to long-term growth.  Accordingly, on July 26, 2011, the RBI should raise the repo rate from 7.5 per cent to 8.0 per cent. Furthermore, to ensure that monetary policy transmission is effective, the banks should be in deficit mode and accordingly, the cash reserve ratio (CRR) should be raised by at least 0.25 per cent to 6.25 per cent. These measures would be the minimum required for monetary correction.  The present repo rate is out of kilter with deposit rates, lending rates and government securities rates. In such a situation the RBI becomes a first recourse for accommodation rather than a lender of last resort. The RBI should take a leaf out of Chinese monetary policy, which has aggressively raised interest rates and reserve requirements even though inflation is much lower than in India. The RBI is in a Catch-22 situation. If it tightens monetary policy on July 26, 2011, it will be pilloried by vested interests. If it resorts to inaction it will be applauded today but will be condemned by history. The choices before the RBI are clear.

HBL

Should We Pick the Microfinance Bill? - M S SRIRAM

The draft microfinance Bill justifies its introduction stating that the microfinance sector lacks a formal statutory framework. This is a fallacious argument parroted by microfinance players asking for ‘regulation’ and thus ‘legitimacy’. Microfinance is no different from consumer/retail finance in form. If we have non-banking finance companies (NBFCs) doing the business of any retail financing, the same framework will work for microfinance. Most MFIs are NBFCs, and are being governed by an appropriate regulatory framework.  The fundamental difference between the NBFCs and the NBFC-MFIs is only about the client base. MFIs serve the poor and the vulnerable and regulation assumes greater significance because of a disproportionate balance of power between the lender and the borrower. If this is recognised then the issue is about client protection more than anything else. The current problems of MFIs have not occurred on account of their registration, capital structure, governance structure. They are on account of the practices at the client end. The draft Bill recognises this issue amidst addressing a many imaginary problems. But the Bill fails to elaborate on how this could be ensured. It goes back to the self-regulatory organisations while assigning some powers to the RBI to take punitive action. This provision of punitive action is available to the RBI as a regulator of NBFCs and it was found wanting in the light of reports of suicides attributed to MFIs in Andhra Pradesh. The last-mile instrumentality in investigating and fixing the responsibility has to be done in consultation with the state governments. The Bill fails to establish this crucial link. The power imbalance between the institution and the client is pervasive. Institutions have greater resources, better support systems and deeper pockets than individuals. In the banking sector, we have seen that the RBI has stepped in to protect the consumers from time to time — whether it was about coercive recovery practices, opaquely loading charges, or guidelines for consumer compensation. The existing regulatory framework could very well have been used for making these interventions. In framing the “improved” version of the Bill, the drafting team has succumbed to the closet agenda of the microfinance sector: (1) microfinance activities of organisations other than NBFCs being given recognition by the RBI, and (2) opening the window for deposit taking from the customers in the name of thrift.  Both need to be examined closely. While trusts, societies and other forms of organisations are engaged in microfinance, they are not appropriate forms to scale. By definition, they carry out charitable activities and are registered under the provincial laws. By making it mandatory for all such organisations to come under its ambit, the RBI is bringing in the aspect of “dual control” that has plagued the cooperative banking sector. The regulatory framework should also recognise the most appropriate form of organisation than take a fait accompli and endorse it.  By prescribing a clause for the compulsory conversion of systemically important MFIs into a Section 25 company, the Bill traverses different legislations where legislations do not permit the unfettered use of residual claims. This forces an organisation registered under a state law to move to a central law. The constitutional propriety of this clause needs deeper examination. The more important issue is of thrift. The draft doesn’t elaborate much. The argument that MFIs should be able to collect thrift/deposits has merit and risk at the same time, which can be weighed by the regulator. The argument for collecting thrift from the customers is valid because, one, the MFI in any case has a network and is in constant contact with the customers and it makes immense sense to provide this service to the poor, and, two, thrift diversifies the funding sources of an MFI, thereby making it less vulnerable to the whims of the commercial banks and will provide them with a greater opportunity to tide over any difficult periods such as the recent Andhra episode after which banks stopped funding MFIs.  But the concerns of the RBI on allowing deposit taking services should also be considered — whether this window will be used by organisations with low capitalisation to collect deposits from a section of the people who technically might not want a loan at that point. This essentially means collecting deposits from “public” and not necessarily borrowers. Talking of a net owned fund base of. 5 lakh to run a microfinance operation and also talk about thrift/deposits is a dangerous trend and the central bank should be wary of this. In all, it appears that what could have been achieved through a policy intervention by suitably reformatting the Malegam Committee recommendations within the existing regulatory framework is being frittered to a new legislation that seems to have conceptual problems.  Also, the draft Bill seems to define everything that is definable but “microfinance”. Can there be a more glaring gap?

(The author is adjunct professor, IIM-Ahmedabad)  ET

Dear FM, your WPI inflation numbers are probably wrong

Inflation in June has probably touched double-digits. The official wholesale prices index (WPI) released on Thursday shows that the annual inflation rate rose from 9.06 percent in May to 9.44% in June, but this is likely to be widely off the mark. Reason: fuel prices were hiked substantially towards the end of June and the second-round effects will show up only gradually. A look at the revised WPI numbers for April tells us why. The provisional WPI number for April showed inflation at 8.66 percent. But the new, revised figure released on Thursday shows a sharp increase to 9.74 percent. That’s a huge difference of 1.08 percent between the provisional and final figures for April. If the final June figure is revised anywhere like what we saw in April, the 9.44 percent is most certainly a gross underestimate and we are already into double-digit inflation. In fact, we may have tipped over into double-digits in May itself. But June and July could really be worse, since we have seen a major hike in petroleum product prices – especially in cooking gas (LPG), kerosene, and the all-important diesel. On 24 June, the government revised the prices of diesel and kerosene by Rs 2-3 a litre, while cooking gas cylinder prices were raised by Rs 50. Since “Fuel and Light” has a weight of nearly 15 percent in the WPI, the chances are that these will be reflected in the revised June numbers and also in July, when the second-round effects of the diesel price hike will also begin to be felt. The latest WPI figure thus comes in well below a Reuters forecast of 9.7 percent rise in June. It also tells us why June should really be higher than what has now been disclosed. For example, the disaggregated numbers show that food inflation has actually risen from 7.61 percent on 25 June to 8.31 percent in the week to 2 July, while fuel shows a fall from 12.67 percent to 11.89 percent during the same week. This means the indices have probably captured the first round impact of the 24 June fuel price hikes, but nothing more. This will happen in July. So what will the Reserve Bank do now? If it takes the June WPI numbers at face value—which it probably won’t, given the recent doubts expressed by Governor Duvvuri Subbarao over faulty data—the next policy review on 26 July will see a 25 basis points (0.25%) hike in the repo rate (the rate at which the Reserve Bank lends to banks). If the RBI assumes that the actual WPI may be in double-digits, as seems likely, it will continue its monetary tightening for a bit more time. The betting is that between now and March 2012, there may be two or three hikes adding up to 50-75 basis points in the repo rate, which means interest rates will peak towards the end of this year. They haven’t yet peaked. Only if the industrial slowdown gets worse—the May Index of Industrial Production (IIP) fell to 5.6%, its lowest since August last year—will the Reserve Bank ease up earlier. So, hold tight. The worst isn’t over.

First Post

Short of words, but not feelings...................

Plastic fantastic for Indian banks

Two years after millions of credit cards were cancelled because of record delinquencies, Indian banks are aggressively promoting plastic money again to boost profit margins hit by high interest rates and growing competition.......

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Now, micro-lenders looking beyond core biz to shore up income

As the RBI has now permitted MFIs to have up to 15 per cent of their portfolio in the non-priority sector, they are working on new offerings in housing finance, gold loans, mobile financing, among others...........

Continue reading...........

Parliamentary Panel grills officials on IPL issue

A Parliamentary panel on Thursday grilled top tax officals as well as the Reserve Bank, in connection with irregularities in the much-hyped Indian Premier League (IPL). The Parliamentary Standing Committee on Finance, according to sources, pulled up the officials for indifference with regard to tax collection and probe relating to dealings of the IPL franchisee. The meeting was attended by top officials of the Central Board of Direct Taxes (CBDT), Central Board of Excise and Customs (CBEC) and Ministry of Corporate Affairs, besides top representatives of the RBI. The members of the Committee, sources said, questioned the CBEC for its inability to assess and collect service tax from IPL franchisees and Board of Control for Cricket in India (BCCI).

HT

Profits in first two quarters may be a tad subdued: SBI chief

Mr Pratip Chaudhuri, Chairman, State Bank of India, indicated on Thursday that the bank's profitability during the first and second quarters of the current fiscal could be slightly subdued on account of provisioning towards building a ‘counter-cyclical buffer' as mandated by the Reserve Bank of India (RBI)............

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RBI asks PSU banks to furnish business plan by July 20

Mumbai: Even as the government has launched austerity measures to cut down the fiscal deficit and delayed the decision on the R21,000 crore rights issue of the State Bank of India, the ministry of finance has asked the public sector banks (PSBs) to furnish their details on the capital requirement and other business plans till 2014 by July 20. “We have received communication from the ministry of finance asking about the details of our capital needs and other business plans like credit growth and capital adequacy ratio (CAR) for the next two years. The exercise is meant to keep the government ready for any kind of fund support we want from them. They want to know whether our capital plans are in tandem with the expansion plans or if there is any gap,” said a CMD of a prominent public sector bank. The R21,000 crore rights issue of the country’s largest bank State Bank of India (SBI) is being delayed as the government is yet to decide whether it wants to provide the cash to retain its existing stake holding at 59% in the bank. It is believed that though the government was keen earlier, its present fiscal constraints may come in the way in providing large amount of funds to the SBI. SBI is currently busy in preparing an alternative plan to mobilise the required capital so that it can go ahead with its expansion plans for next two years. While reviewing the financial performance of the PSBs in New Delhi on July 8, the finance minister Pranab Mukherjee, had in fact asked the PSB to do their capital planning much in advance, as it is difficult for the government to provide funds to the PSBs for their business growth, in case it comes at short notice. Though the Reserve Bank of India (RBI) norms require the banks to maintain capital adequacy ratio (CAR) of 8%, the government insists that the PSBs maintain it at 12% as a matter of extra caution. As the credit growth is happening at over 20 %, so it is quite obvious that the banks will require capital to fuel the credit growth. Alok Misra, CMD, Bank of India, said that the bank will go for capital mobilisation as its credit is likely to grow by 20-25% over a period of next three years. “Though government has already infused a capital of R1,000 crore in our bank earlier this year, it is not sufficient to take care of bank’s capital requirement for next three years,” said Misra. Bank of India is planning a follow-on public offer (FPO) later this year, said Misra. “But, we will have to wait until we get a good pricing for our shares,” he added. Currently, the government has a stake of 65.8% in the bank. Nagesh Pydah, CMD, Oriental Bank of Commerce (OBC), said that the bank is looking at a credit growth of 20% for next three years. “We are fine for next two years, when it comes to the capital requirement. However, we may need fund after two years from now, which we may do by diluting the government’s stake in the bank by 2-3%,” added Pydah. Currently, the government owns 58% of its stake in OBC. OBC holds a stake of 58% and has got a capital infusion of R1,740 crore from the government which is enough to take care of its business growth for the next two years. PK Anand, executive director, Punjab & Sind Bank, said that the bank has written to the government a fortnight ago requesting for a capital infusion of R990 crore.“If that happens, then it would take care of the capital requirement of our bank for next three years,” said Anand. The bank, which is projecting a credit growth of 23-25% during next three years is having a CAR of 12.9% as of now, and has got government stake of 82% post the IPO which hit the market late last year.

FE

SBI against savings rate deregulation

Kolkata : Country''s largest commercial bank State Bank of India (SBI) has said it was against deregulation of savings bank interest rates. "We are not in favour of savings interest rate deregulation," SBI Chairman Pratip Chaudhuri said. He said there was an impression that the banks were sitting on a huge pool of savings deposits. It is to be noted that RBI in its draft discussion paper floated in April favoured deregulation of the interest rate on savings banks accounts. Chaudhuri said the margins on interest rates were required to finance delinquencies and deregulation would create an upward pressure on the savings rates. This, he said, would lead to higher cost of credit which would be detrimental to industry. Contrary to SBI''s views, many private bankers like YES Bank were in favour of savings rates deregulation. To this, Chaudhuri said that unlike nationalised banks, the private banks'' presence in the rural areas were almost negligent. "They are not opening no-frills accounts unlike us and offering other benefits for which the bank has to take a substantial financial drag," he said.

MSN News

Trend continues to stay on the higher side: Kotak Mahindra Bank

Looking at the WPI numbers that have come out, the more crucial bit for the Reserve Bank would be what the ex-food manufactured which is the more preferred gauge for core inflation for the Reserve Bank.................

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New Executive Director of NHB

Shri Arnab Roy, Regional Director, Jammu  has moved on new assignment as Executive Director of National Housing Bank.  He has taken charge w.e..f July 11, 2011.

Striking it rich with pocket change !

HYDERABAD: If you are one of those who don’t often carry coins jingling in your pocket, you would have got frustrated looks from many a shopkeepers. “Change nahi hai, bhai,” they say glumly at the prospect of losing a customer. It was in such a situation that brokers came started selling coins of different denominations, pocketing a neat profit for themselves. There are more than 750 such brokers in the twin cities with each of them earning nearly Rs 1,000 a day. These people stand in queues at the Reserve Bank of India from 10 a.m. to 2 p.m every Monday to Friday and exchange money for coins. They then sell these coins to shopkeepers and charge Rs 5 for every Rs 100 they sell. In total, these brokers may withdraw up to Rs 1 crore from RBI in a single day! A broker K Nageswar says, “I supply the change I collect in shops and take a commission of Rs. 5 per Rs. 100. Everyday I supply coins worth Rs 20,000 and earn Rs 1,000.” He adds that his colleagues supply coins worth anywhere between Rs 15,000 to Rs 25,000 per day according to their capacity and contacts with shops in the city. “We have some threats from RBI officials and city policemen but manage to get away by offering them some money. After all, it is our profession and we have to do it everyday. We do the business in a group because of security problems,” he adds. But apart from giving warnings from time to time, RBI officials say they cannot do anything. “The brokers are like any other customers for us. It’s not our business to know what they do outside with the change,” says Shri S.V.Patil, Assistant General Manager of RBI. And sure enough, some brokers sell the coins immediately after stepping out of the RBI building. “Some brokers sell around the RBI to customers who do not want to stand in queue,” says R Anjappa, owner of a sugarcane juice shop in front of the RBI. When RBI officials warn them against it, they quickly go to the sides of the building and carry out their business, adds K Balaram, an RBI security guard. Saifabad police inspector V Umender also says they do not allow brokers to sell coins around the RBI building. Moreover, they have also received a complaint from State Bank of India officials that the brokers crowding the place make it difficult for genuine customers to get change from RBI. But shopkeepers in the city feel these brokers are a godsend. Y Kameswara Rao, a sweet shop owner says, “I cannot spend my time waiting in a queue to get coins. So I buy coins of Rs 1, Rs 2 and Rs 5 denominations and bundles of Rs 5, Rs 10 and Rs 20 notes from brokers. I have my personal brokers who I call up whenever I need change. They even supply it to me within two hours of my call.” The RBI General Manager adds that there are no rules that prevent the brokers from getting change at the bank. “If we find someone coming in everyday, we can only dissuade them verbally but cannot force them out.” He even adds that what the brokers do is not illegal. “It is a kind of service or self-employment. This business is found everywhere in the country,” says Patil. But it is the lack of rules that worry other bank officials like B Spandan, probationary officer at Syndicate Bank. He says, “In such a situation, genuine customers will have no choice but to leave in frustration.”

IBN Live

Nabard celebrates 30th foundation day in Pune

Commercial, agricultural and central banker meet to celebrate the NABARD Foundation Day

The Maharashtra Regional Office of National Bank for Agriculture and Rural Development (Nabard) celebrated its 30th foundation day on Tuesday. Bank of Maharashtra Executive Director, M.G.Sanghvi, was the chief guest and Kamla Rajan, Principal of the Reserve Bank of India’s College of Agricultural Banking, was the special invitee at the function. Rajan said the bank has been consistently meeting the challenges of rural India for 30 years. “India’s success depends largely on its rural infrastructure and development and Nabard has successfully been supporting this cause,” she said. Nabard had in fiscal 2010-11 extended financial support of Rs692.92 crore to the Maharashtra government for strengthening rural infrastructure. The bank also injected Rs2,843.52 crore into the state rural banking sector. Nabard Chief General Manager (Maharashtra Regional Office), M.V.Ashok said, “Refinance, loans to cooperative banks and the state government, apart from supervision were the three ways in which Nabard contributed.”

DNA 

SBI R-SETI initiatives, SKEWPY by JK Bank given wide publicity

Vijaypur : During second day of Baba Sidh Goria mela being held at Vijaypur, Reserve Bank of India Jammu actively participated with a team under the leadership of LDO -Kunal Dass and Banking knowledge was provided to numerous devotees visiting the Mela. Ladies visitors were separately sensitized by Sumitra Sodhi, an official from RBI Jammu and advised to use their ATM cards carefully while withdrawing money and ensure keeping their savings. While visiting the mela LDM-SBI Rohit Mehta along with Sumit Mahajan from Cluster office J&K Bank Zonal Office Jammu interacted with various visitors/Pilgrims and narrated different varied products of investment/Loans keeping in view recently changed interest structure in the Banking sector. Under the supervision of Cluster Head J&K Bank Adarsh Gupta, Uttar Kumar Sambyal, Branch Head Ramgarh distributed various pamphlets regarding recent products among the visitors in the mela. M K Bhat Director R-SETI Vijaypur along with LDM explained different training modules shortly going to be held and urged the young visitors to take maximum benefits of employment SBI R-SETI initiatives, SKEWPY by JK Bank given wide publicity generation initiatives of Banks. Among other who disseminated Financial Literacy during the mela were Ravi Kumar and Rattan Singh, RBI Officals, Asstt. LBO Vikram Singh, Somnath, Balbir, Sandeep Singh Rep. SBI Vijaypur and others.

Jammu Kashmir Newspoint

Indian banks not for savings rate deregulation now

Bankers seek charges for services provided if savings rate deregulated; banks’ cost of funds up after savings rate increase in May; deregulation seen aiding deposit mobilization of new banks more

Mumbai: Indian lenders are not in favour of the Reserve Bank of India’s (RBI) proposal to deregulate savings deposit rate--the only regulated one in the system now--citing the current volatile market environment. Savings deposits that are a source of low-cost funds for banks form 22% of banks’ total deposit base, the RBI had said in late April.  The Indian Banks’ Association (IBA), the apex banking body, has conveyed banks’ stance to the RBI ahead of its quarterly monetary policy review on 26 July. “Given the conditions in which we are today, the bankers felt it will not be appropriate for actually not going in for deregulation at this point of time,” K. Ramakrishnan, chief executive officer of IBA told the news agency on Wednesday.  Already banks’ cost of funds have gone up after the RBI mandated that banks calculate interest paid on savings deposits on a daily basis and later in May raised rates on such deposits by 50 basis points to 4%, he said.  Echoing the view, state-run Corporation Bank’s chairman and managing director Ramnath Pradeep said it was “not the right time to go for deregulation”.  “They (RBI) must consider not to deregulate the interest rate,” he said.  In late April, the central bank had argued in a discussion paper savings rate deregulation will aid in monetary policy transmission, and it cannot be regulated for all times to come when all other interest rates have already been deregulated.  Bankers feels if the savings deposit rate has to be deregulated, they must be allowed to charge for services provided.  “We can’t have a situation where we give free ATM transactions, free transfers and there is no cost for cheque books,” said Ramakrishnan. “This is broadly what we have communicated to the RBI - should the deregulation happens, the deregulation must be in totality.”  Of late, banks have witnessed their credit growth easing due to the rise in interest rates, and higher deposit rates would add to the pressure on margins.  Banks’ credit grew 1.6% to Rs40,01,521 crore as of 17 June from Rs39,38,659 crore as of 25 March, while deposits were up 2.7% at Rs53,44,701 crore from Rs52,04,703 crore. Right now, the liquidity is really tight and in this kind of an environment you can’t deregulate a product which can potentially throw nasty surprises to bankers on how to manage their deposit base,” said an analyst with a local brokerage who did not wish to be named.  However, savings rate deregulation would have helped newer banks to increase their share of savings deposit by offering more attractive rates.  “Established banks will be against it and new banks be in favour because if I have rate as a tool to compete in the market, it makes it that bit easier,” said a banker with a new private sector bank. 

Mint

Inflation may go up further; no respite in interest rate

RBI has hiked its key policy rates ten times since March last year to curb demand and tame inflation. However, increase in rates has led to a fall in investments and the industry has blamed this for slowdown in factory output........

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RBI wants all PSBs to have uniform pension provision

After coming down heavily on banks for not making adequate provision for increased pension liabilities arising out of wage revision, the Reserve Bank of India (RBI) now wants all public sector banks to have uniform pension liabilities. According to sources in the banking industry, the central bank sees no reason why each public sector bank should have different pension liabilities, since the inputs which go into calculation of pension provision are nearly the same. “RBI says the salary structure is same, the mortality rate is similar and the attrition rate is almost the same for all government-owned banks—at around 0.5 per cent. There is no reason for different actuarial estimates for banks. It feels all public sector banks should have similar actuarial estimates,” said a banker after discussing the matter with RBI officials. The basic pension of retirees from all government banks is 50 per cent of the last salary drawn. Bankers said actuaries of different banks have different estimates, particularly on parameters like the discount rate and the attrition rate for calculating pension liability, which has led to a variation in the burden. As far as the mortality rate is concerned, most banks follow Life Insurance Corporation of India's estimates. The pension provision issue cropped up in the last quarter of the previous financial year, when State Bank of India (SBI) had sought the regulator's approval for pension provision from the bank's capital reserve for wage increases. As a prudential practice, banks make provision out of their profit and loss account. To use capital reserves for provision, banks need RBI's approval. After RBI’s approval, SBI charged nearly Rs 8,000 crore from its reserves to provide for pension liabilities. As a result, SBI’s capital eroded, with Tier-I capital falling below eight per cent. Though RBI had allowed SBI to make provisions from reserves for pension liabilities, the regulator had made it clear that such requests would not be entertained in the future. The central bank had come down heavily on the bank’s chairman and managing directors at an interaction. The regulator had also made it clear such practices were non-compliant with International Financial Reporting Standards. In 2010-11, provisioning had increased sharply because of the pay revisions agreed during the ninth bipartite settlement. Wages were raised 17.5 per cent and a second pension option was given to both current and retired employees. Gratuity limits were also increased from Rs 3.5 lakh to Rs 10 lakh. According to RBI's financial stability report, the expected additional liability for 24 public sector banks was Rs 30,366 crore, which constituted 81.9 per cent of their net profit for 2009-10. Indian Banks' Association has been mandated by RBI to prepare a pension scheme to facilitate the assessment by banks and help provide adequate provisions for such liabilities.

BS 

Banks want RBI to hold fire on savings rate decontrol

Mumbai: Indian lenders are not in favour of the Reserve Bank of India’s proposal to deregulate savings deposit rate — the only regulated one in the system now — citing the current volatile market environment. Savings deposits that are a source of low-cost funds for banks form 22 percent of banks’ total deposit base, the Reserve Bank of India had said in late April. The Indian Banks’ Association (IBA), the apex banking body, has conveyed banks’ stance to the RBI ahead of its quarterly monetary policy review on July 26. “Given the conditions in which we are today, the bankers felt it will not be appropriate for actually not going in for deregulation at this point of time,” K Ramakrishnan, Chief Executive Officer of IBA, told Reuters on Wednesday. Already banks’ cost of funds have gone up after the RBI mandated that banks calculate interest paid on savings deposits on a daily basis and later in May raised rates on such deposits by 50 basis points to 4 percent, he said. Echoing the view, state-run Corporation Bank’s Chairman and Managing Director Ramnath Pradeep said it was “not the right time to go for deregulation”. “They (RBI) must consider not to deregulate the interest rate,” he said. In late April, the central bank had argued in a discussion paper savings rate deregulation will aid in monetary policy transmission, and it cannot be regulated for all times to come when all other interest rates have already been deregulated. Bankers feel if the savings deposit rate has to be deregulated, they must be allowed to charge for services provided. “We can’t have a situation where we give free ATM transactions, free transfers and there is no cost for cheque books,” said Ramakrishnan. “This is broadly what we have communicated to the RBI – should the deregulation happens, the deregulation must be in totality.” Of late, banks have witnessed their credit growth easing due to the rise in interest rates, and higher deposit rates would add to the pressure on margins. Banks’ credit grew 1.6 percent to Rs 40,01521 crore as of June 17 from Rs 39,38659 crore as of March 25, while deposits were up 2.7 percent at Rs 53,44701 crore from Rs 52,04703 crore. “Right now, the liquidity is really tight and in this kind of an environment you can’t deregulate a product which can potentially throw nasty surprises to bankers on how to manage their deposit base,” said an analyst with a local brokerage who did not wish to be named. However, savings rate deregulation would have helped newer banks to increase their share of savings deposit by offering more attractive rates. “Established banks will be against it and new banks be in favour because if I have rate as a tool to compete in the market, it makes it that bit easier,” said a banker with a new private sector bank.

First Post

RBI, bankers to meet on Monday

Top officials of the Reserve Bank of India (RBI) would meet the chiefs of both public as well as private sector banks on Monday to take stock of the business environment before announcement of the first quarter policy review. RBI is scheduled to review the monetary and credit policy on July 26. In the pre-policy meet, RBI would review factors like the liquidity condition, banks' performance on loan growth and deposit accretion in the first quarter. RBI had raised key policy rates by 25 basis points in the mid-quarter review in June, after which most banks, including State Bank of India, ICICI Bank and HDFC Bank, had raised their respective lending rates. The Indian Banks' Association would also present its view on further policy actions. At a recent meeting, economists had concluded RBI should continue the rate increase cycle to control inflationary expectations. “Everyone felt RBI should continue to tighten monetary policy to bring down inflationary expectations, though there were differences in opinion on how much more the central bank needed to raise the rates. Some of us felt there could be a further rise of 50 basis points in two policy reviews, before RBI takes a pause,” said an economist who attended the meeting. RBI had raised policy rates 10 times since March 2010 but inflation continues to stay high. “Inflation is expected to remain in double digits till August, as the impact of recent fuel price rises fully sets in,” said Rupa Rege-Nitsure, economist, Bank of Baroda. The Wholesale Price Index stood at 9.06 per cent in May. Growth in bank advances has showed signs of a slowdown because of the impact of rising interest rates. As on July 2, bank advances grew 20 per cent, compared with 21 per cent a month ago. On the other hand bank, deposits grew 18.4 per cent as on July 2, compared with a growth of 18.2 per cent a month ago.

BS