SHRI M V TANKSALE TAKES OVER AS NEW CHAIRMAN & MANAGING DIRECTOR, CENTRAL BANK OF INDIA

Shri Mohan Vasant Tanksale has been appointed as Chairman & Managing Director, Central Bank of India with effect from June 29, 2011. Prior to his appointment as Chairman & Managing Director, Central Bank of India Shri Tanksale was the Executive Director, Punjab National Bank since March 2009. Shri Tanksale started his career as an officer in Union Bank of India at Gwalior in 1974.

Shri Tanksale, a seasoned Banker having rich experience in Banking is backed by professional credentials like Associate Member of Institute of Cost & Works Accountants of India (ICWA), Company Secretary (Inter) of the Institute of Company Secretaries of India, CAIIB, a Bachelor degree of Science and a Master degree in English literature.

A prudent Banker with a vision, Shri Tanksale has been instrumental in introducing many innovations in the Banking field especially in the area of e-banking products, new initiatives like insurance and mutual funds. He has been pioneer in setting up ‘Transaction Banking Division’, wherein on the strength of technology based platform, a wide array of products and services for the customers could be introduced. He is also having to his credit the exposure in Overseas Banking, Credit Monitoring and Risk Management.

SOURCE: https://www.centralbankofindia.co.in/upload/news/Press_Editors_Press_Release_New_cmd.pdf

CENTRAL BANK OF INDIA APPOINTS MV TANKSALE AS CHAIRMAN

The government on Tuesday appointed MV Tanksale, a executive director of the country's second-largest state-run lender Punjab National Bank (PNB), as the new chairman and managing director of Central Bank of India.

Tanksale, who joins Central Bank on Wednesday, has been appointed till July 2013, PNB said in a statement late on Tuesday.

SOURCE: http://www.business-standard.com/india/news/central-bankindia-appoints-mv-tanksale-as-chairman/139679/on

CREDIT OFF-TAKE FROM BANKS NOT ENCOURAGING SO FAR THIS FISCAL

Even as banks are seeing a robust accumulation in deposits, credit pickup has been dismal in the April-June quarter so far.

Thanks to the rising deposit rates, banks have mobilised four-and-a-half times more deposits (about Rs 1.40 lakh crore) in the reporting quarter so far (up to June 17), against about Rs 31,000 crore mobilised in the corresponding period last year.

The interest rates on term deposits (of more than one year maturity) of major banks have increased to 8.25/9.10 per cent (as on June 10, 2011) as compared to 6.00/7.50 per cent last year (as on June 11, 2010), according to Reserve Bank of India data.

The RBI has upped key short-term rates 10 times since February 2010 to fight the stubborn inflation. Consequently, the deposit rates and lending rates have also moved up, thereby ensuring monetary transmission.

The reverse repo rate (the interest paid by the RBI to banks on surplus funds parked with it) has gone up by 325 basis points (bps) and the repo rate (at which the RBI lends funds to banks) rose by 275 bps since February 2010. Currently, the repo rate is 7.50 per cent and the reverse repo rate is 6.50 per cent.

NoT-so-healthy

While deposits inflow has been healthy for banks, the picture on the credit front is not encouraging.

Outstanding credit has come down by about Rs 84,500 crore in the reporting quarter so far, against an increase of Rs 70,000 crore in the corresponding period last year.

Typically, the first two quarters are dull. The increase in bank credit in the first quarter last year was on account of the licence fees paid by telecom companies which won the bids for the 3G spectrum, said a banker.

“The credit off-take scenario will improve in the third and fourth quarters. Given that interest rates have moved up and could go up further, banks will tread carefully when it comes to sanctioning loans as projects with high element of risk could come up for funding,” said Mr P Sitaram, Chief Financial Officer, IDBI Bank.

As for good projects backed by blue-chip companies, Mr Sitaram said, they may either depend on internal accruals or delay them due to high interest rates.

In sync with the increase in deposits, banks' investments in statutory liquidity ratio securities (or government securities) also jumped by about Rs 1.05 lakh crore in the quarter so far, against around Rs 31,000 crore in the corresponding period last year.

SOURCE: http://www.thehindubusinessline.com/industry-and-economy/banking/article2145089.ece

CREDIT GROWS 20.9%, DEPOSITS UP 17.7% TILL JUNE 17

Credit offtake from banks grew by 20.9 per cent to over Rs 41 lakh crore during the one-year period ended June 17, 2011, indicating an upswing in industrial activity.

According to the RBI data, credit offtake during the period stood at Rs 41.23 lakh crore against Rs 34.10 lakh crore in the same period of the previous year.

Meanwhile, deposits went up to over Rs 54.94 lakh crore till mid-June this year against Rs 46.64 lakh crore as on June 18, 2010. This is a rise of over 17.7 per cent on an annual basis.

In the annual monetary policy 2011-12 announced last month, the RBI had said that credit is likely to rise at a faster pace because of the economy’s growth momentum.

“Sustained growth momentum could ... continue to exert pressure on interest rates through high demand for credit,” it had said.

The RBI had projected credit growth to be 19 per cent this fiscal, while deposit growth has been pegged at 17 per cent.

During 2010-11, bank credit had increased by 21.5 per cent, while deposits grew by only 15.5 per cent. In December last year, the apex bank had expressed concern over the widening ratio between the credit and deposit rates of banks. Toward the end of the last fiscal, however, the gap in the credit-deposit ratio stood reduced.

SOURCE: http://www.thehindubusinessline.com/industry-and-economy/banking/article2144767.ece

CANARA BANK UPS BASE RATE BY 25 BPS

Canara Bank has revised its base rate upwards by 25 basis points (bps) -- from 10% to 10.25% with effect from July one.

It has also revised its benchmark PLR upwards by 25 bps -- from 14.25% to 14.50%.

The move is in the context of the hike in policy rates by the RBI as part of monetary measures, a Canara Bank statement said.

SOURCE: http://www.business-standard.com/india/news/canara-bank-ups-base-rate-by-25-bps/139783/on

BANKING FOR THE POOR MORE VIABLE THAN FOR THE RICH: CHAKRABARTY

KC Chakrabarty, Deputy Governor, Reserve Bank of India believes that banking for the poor is always more viable than doing the same for the rich and said this is clear from the no-frills accounts that banks have opened under the financial inclusion programme.

Calling for a radical approach to banking, he said, "it is an irony that the poor always end up paying more for the same product and services than the rich. And this is true of banking too."

"My belief is that commerce or banking for the poor is always more viable than commerce or banking for the rich. That's why corporates get money at 7-8% and the poor MFI borrowers get it at a 60% interest rate. It is viable provided you have the ability to do business with the poor," Chakrabarty who oversees banking supervision, rural credit, customer service and the financial inclusion programme, said. 

Pointing out that the inclusion banking project has already proved this point right, Chakrabarty said, "in many places, the inclusion banking is already profitable. When they are able to do transactions properly, these accounts will give them profits, and many such accounts are already doing so."

"What we are saying is that don't subsidise the poor, but don't exploit them, because so long as the rich get a thing cheap, they will not allow that item to reach the poor. And this has to change, at least in banking," he said.

Pegging the overall cost of financial inclusion project at around Rs 6,000 crore for the entire banking industry, he said, "my calculation is that the entire cost of this banking programme to cover all the targeted villages will not be more than Rs 6,000 crore."

Challenging banks to prove that inclusion banking is not profitable, he said, "Wherever a bank is able to provide three-four products together, it can make it profitable. When a bank uses proper technology and delivery model and devises saleable products, inclusion banking will easily be profitable."

What banks should do is to create a structured delivery model through which they are able to interact with the poor and do business with them, he said, adding, "pricing is left to the banks and it will be viable and sustainable. I am sure banks can and will lend to the poor at a much cheaper rate than MFIs."

On whether the apex bank is happy with the progress of the inclusion programme so far, he said, "We are never happy with anything nor are we depressed. It is not that nothing has happened on the inclusion front. Many things have happened, but we have to scale up."

Stating that the real issue is not about viability, but the ability of banks to do it properly, he said, "banks are not able to do this because they don't have the capacity to do so. That is why we are asking them to build their capacities through technology and new delivery models."

Comparing inclusion banking like buying a house, he said, "you have to invest first to make future profits. You will never say your are spending money on your house, but investing in your house. Banks have to look at the inclusion project as an investment and over a period of time they will get the return on their investment."

When queried whether instead of each bank being pushed to do inclusion banking, should not the government set up a separate bank to handle this programme by diverting the money it annually infuses into it banks, he quipped.

"No, the government should not get into any business as it can never be a good businessman. Its job is to facilitate, encourage and regulate business so that is it done in an ethical and in a non-exploitative manner, he concluded.

SOURCE: http://www.business-standard.com/india/news/banking-forpoor-more-viable-than-forrich-chakrabarty-/139758/on

SPECULATION FLARES ON RBI TOP JOB

With Reserve Bank of India Governor Duvvuri Subbarao's three-year term due to end in September, speculation is heating up over who will replace him if, as many in the market and government predict, his term is not extended.

Government sources said candidates for a successor would most likely include Raghuram Rajan, a University of Chicago professor and advisor to the prime minister; Economic Affairs Secretary R Gopalan; and Kaushik Basu, a Cornell University professor and chief economic advisor in the finance ministry.

A new face at the top would be unlikely to result in a change in policy direction in a country where the government and central bank tend to be on the same page, although a year ago Subbarao was perceived to be more hawkish than New Delhi in its anti-inflationary stance.

The choice of who will head the Indian central bank after September is likely to be made by Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee. A decision may still be months away but is a hot topic of discussion in financial and government circles.

Mukherjee declined on Tuesday to say whether Subbarao would be appointed for another term.

"He's a good governor," Mukherjee told Reuters in Washington, adding that it was too soon for Singh to decide on another term.

Subbarao was not available for comment.

Whether it is Subbarao or a replacement, the next occupant of the 18th floor at the RBI's Mint Street headquarters in Mumbai faces an uphill battle against inflation heavily driven by forces beyond the control of monetary policy.

Those drivers include infrastructure bottlenecks, global commodity prices and the unpredictability of monsoon-fed agriculture.

The RBI is not constitutionally independent, and whoever heads it needs the political skills to manage the relationship with the powerful finance ministry.

While Subbarao has been credited with helping steer the Indian economy through the global financial crisis and improving communication with markets, he has struggled to tame inflation, which stands at 9%, highest among major Asian economies, despite 10 rate increases since March 2010.

"I am aware that the governor has copped a lot of criticism for his inflation management but to be honest, I think there were far too many causes of inflation which were beyond the realms of monetary policy," said DK Joshi, principal economist with rating agency Crisil in Mumbai.

It is Subbarao's disagreement with Mukherjee over a few issues that has prompted a widely held view among market players and government sources that his term may not be extended.

Belying his mild-mannered demeanor, Subbarao opposed Mukherjee's plan to set up a body to settle disputes between financial regulators, as well as the finance minister's plan to take over the task of debt management.

Joshi downplayed the notion of confrontation.

"Any governor who steps into Mint Street has to think RBI and monetary policy first, which is natural, never mind the fact that Subbarao and some of his predecessors have been mandarins at North Block," he said, referring to the building in New Delhi that houses several key ministries.

Also working against Subbarao: he was not appointed by Mukherjee, a Congress party heavyweight considered the second most influential person in government, but by his predecessor.

Mukherjee may well prefer to make his own appointment at the RBI in the same way he did not extend the services of former market regulator CB Bhave and former Finance Secretary Ashok Chawla, who were both hired by his predecessor and were widely regarded as competent bureaucrats.

Of the three RBI governors preceding Subbarao, two were reappointed and one, his immediate predecessor YV Reddy, was not, although Reddy's term was five years.

The candidate?

Among potential successors, Rajan has the highest global profile, thanks in part to his book, "Fault Lines: How Hidden Fractures Still Threaten The World Economy."

An economic adviser to Singh since November 2008 and former chief economist of the International Monetary Fund, Rajan is a professor of finance at the University of Chicago and topped a poll by The Economist publication earlier this year of economists who have delivered the most important ideas in a post-crisis world.

Last year, Forbes named Rajan among the seven most powerful economists in the world, alongside US Federal Reserve Chairman Ben Bernanke and Nobel laureate Paul Krugman.

Considered by bureaucrats to be close to the Prime Minister, Rajan's pro-market views that favour reforms and tighter fiscal management may put him at odds with those in New Delhi used to spending on programmes that reap electoral dividends.

A lack of work experience in India may also count against him.

Gopalan, a long-serving bureaucrat and member of the elite Indian Administrative Service, is considered by politicians to be well-regarded by Mukherjee and would have the backing of India's strong civil servants' lobby.

Supporters in the finance ministry and the civil service say his administrative experience, including a stint in the commerce ministry, makes him the best candidate.

If chosen, Gopalan would follow a well-worn path from New Delhi to the central bank. The last three central bank chiefs were all chosen from India's bureacracy.

Of the three most-talked about potential candidates, Basu has the highest profile within India.

On a sabbatical from Cornell, Basu advises the government and the finance minister on matters including inflation and is said to enjoy the confidence of both Mukherjee and Singh.

Frequently in the public eye and widely quoted in the media, Basu is not a favourite of the civil servants' contingent but has many admirers at the top including Montek Singh Ahluwalia, a pro-reform member of the prime minister's in-house think-tank, and many influential ministers.

Not considered to be pushy or aggressive, Basu might be less prone to a run-in with the sometimes-cantankerous Mukherjee. The two hail from the eastern state of West Bengal.

SOURCE: http://www.business-standard.com/india/news/speculation-flaresrbi-top-job/139727/on

DEMAND FOR HOME LOANS SET TO DIP: EXPERTS

At the peak of the global housing crisis in 2008, a group of executives at State Bank of India (SBI) were busy devising a new home loan scheme meant to boost the sluggish demand.

The growth in housing loans had fallen from a high of 31.2 per cent in December 2006 to 4.1 per cent in March 2009. After State bank of India (SBI) launched its special home loan scheme, home loan portfolio of banks in India rose 30 per cent on a year on year basis till September 30 2010, against 20 per cent in 2009-10, according to data from the Reserve Bank of India (RBI).

In 2011, as the housing market in the West slowly picks up, the Indian market may be in for slack. SBI withdrew its home loan scheme with effect from May, after RBI raised concerns on the borrowers' ability to repay them over longer tenures. After a period of sustained growth, bankers expect a moderation in home loan growth in the coming months. Rising interest rates and property prices are once again set to hit demand for home loans, say bankers.

The impact of the slowdown is already visible in the priority sector lending portfolio of banks.

According to RBI data, the growth in outstanding credit of banks, under priority sector housing loans, halved to 6.80 per cent in April, against 11.90 per cent in the year-ago period.

SBI, the country's largest public sector bank, expects a moderation in the growth in home loans. “We expect a slowdown, a moderation in the home loan market. It has been evident in the last two quarter. It is difficult to estimate the extent of the moderation,” said Diwakar Gupta, managing director and chief financial officer, State Bank of India.

Close to 30 per cent of the home loan market in India is currently accounted for by the teaser home loan market, according to Monish Shah, director, Deloitte, India. “The withdrawal of teaser loans would have a marginal negative impact on the demand. After 2009, in the two-to three year period, the home loan growth was mostly seen in the teaser home loan segment. It gained about 20-30 per cent market share, which is an absolutely phenomenal growth,” said Shah.

SBI launched the special home loan scheme in 2008, under which it offered an interest rate of 8.5 per cent for a loan of Rs 5 lakh and 9.25 per cent for a loan of Rs 20 lakh, with a reset clause after every five years. The scheme was tweaked several times since then.

High interest rates are also expected to play a dampener. “Demand for home loans is likely to be impacted due to high interest rates. The impact would be more visible in the next two months. Both investors and home loan buyers are likely to wait for few months before buying property. In the last one year, the burden of easy monthly installments for borrowers has gone up by 15-20 per cent,” said S L Bansal, executive director, United Bank of India.

The slowdown in home loan disbursements is already visible. The home loan growth recorded by United Bank of India till April was about 10-11 per cent on a year-on-year basis, against 12-13 per cent last year. R V Verma, chairman and managing director, National Housing Bank had said there was a slowdown in the growth in housing loans due to rising interest rates and property prices.

Smaller banks expect a level-playing field after the exit of teaser home loans from the market. Allured by lower interest rates, several home loan customers had shifted to teaser loans. “Now, we hope our customers will remain with us. Earlier, we saw some customers moving to teaser home loans. “During the first few months, the demand for housing loan is generally low, but for the whole year, we expect a reasonable growth in the home loan portfolio,” said M Narendra, chairman and managing director, Indian Overseas Bank.

Rising property prices have also dented the prospects of robust home loan growth. According to realty consultant Cushman & Wakefield, residential property prices in Delhi-national capital region and Mumbai saw prices rise 36 per cent in 2010 on good demand. The trend was reflected in loan disbursements for banks as well. Housing Development Finance Corporation, one of the biggest players in the home loan market, saw fourth-quarter net profit rise 27 per cent rise last year.

“In some markets, the outlook on property prices is expected to correct, while the interest rates are high. This could lead to a slowdown,” said Vibha Batra, co head, financial sector ratings, Icra.

“A lot of factors would contribute to the slight slowdown in credit off-take. Affordability, interest rates and uncertainty in the real estate market are some of the reasons. So, going forward, there would be a slowdown in the home loan market for sure,” Deloitte’s Shah said.

SOURCE: http://www.business-standard.com/india/news/demand-for-home-loans-set-to-dip-experts/440703/

CHAKRABARTY FOR PAPERLESS, CHEQUELESS, CASHLESS BANKING

Reserve Bank of India (RBI) Deputy Governor KC Chakrabarty today called up on banks to begin a journey onto the path of paperless, chequeless and cashless banking stating that the future of banking lies there.

"The next big challenge for our banks is to make banking paperless, chequeless and cashless," he told the sixth Banking Technology Summit organised by CII here.

"I know the answers to these questions are not easy and nobody has a readymade answer. But this should put us on the track to think differently and think big. It would definitely take time to achieve these goals but it is not impossible as it is already happening globally," he noted.

Noting that technology is changing the cultural and business landscapes beyond recognition, the deputy governor said the world over, organisations are using transformative power of technology to create business value for today, and step-function growth for tomorrow. And the banking sector cannot be any exception, he added.

With financial inclusion gaining faster currency, he admitted that role of the banker is very challenging today as at one end of his spectrum lies the demand to achieve financial inclusion as nearly 50% are yet to be covered under the formal system of banking and at the other end lies the task to fulfil the needs of the existing customer.

Stating that core banking is one of the top priorities of RBI, Chakrabarty said, "the first priority is to get all banks on adopting core banking solution, including all RRBs. The next is a multi-channel approach using handheld devices, mobiles, cards, micro-ATMs, branches, kiosks etc can be used."

The RBI had recently released its IT Vision document for 2011-17 that envisages transforming RBI into a knowledge organisation using IT as a strategic resource, IT governance. It also looks at banks moving from core banking to enhanced use of IT in areas like regulatory reporting, risk management, MIS, financial inclusion and CRM.

On the need for curbing the rising instances of cyber fraud in banks, he said it is necessary to improve controls and examine the need for pro-active fraud risk assessments and management processes in commercial banks.

"My belief is that commerce or banking to the poor is always more viable than commerce or banking for the rich. That's why corporates get money at 7-8% and MFI borrowers pay at 60%. It is viable provided you have the ability to do business with the poor.

"What we are saying is that don't subsidise the poor, but don't exploit them, because so long as the rich get a thing cheaper, they will not allow that item to reach the poor. And this has to change, at least in banking," Chakrabarty said.

On whether RBI is happy with the progress of the inclusion programme so far, he said, "we are never happy with anything nor are we depressed. It is not that nothing has happened on the inclusion front. Many things have happened, but we have to scale up."

Stating that the real issue is not about viability, but the ability of banks to do it properly, he said, "banks are not able to do this because they don't have the capacity to do so. That is why we are asking them to build their capacities through technology and new delivery models."

Comparing inclusion banking to buying a house, he said, "you have to invest first to make future profits. You will never say your are spending money on your house, but investing in your house. Banks have to look at the inclusion project as an investment and over a period of time they will get the return on their investment."

Asked whether instead of each bank being pushed to do inclusion banking, should not the government set up a separate bank to handle this programme by diverting the money it annually infuses into PSU banks, he quipped, "No, the government should not get into any business as it can never be a good businessman."

"Its job is to facilitate, encourage and regulate business so that is it done in an ethical and in a non- exploitative manner," he concluded.

SOURCE: http://www.business-standard.com/india/news/chakrabarty-for-paperless-chequeless-cashless-banking/139656/on

CENTRAL BANK OF INDIA ORGANISED FINANCIAL INCLUSION PROGRAMME IN KASAL PIPARIYA VILLAGE OF SAGAR DISTRICT

Central Bank of India organised programme on Financial inclusion in Kasal Pipariya, Sikandar Barkheda & Khairana Villages in Sagar District in Madhya Pradesh. Central Bank of India, Executive Director Shri R.K. Dubey & Collector, Sagar Dr. E. Ramesh Kumar distributed smart cards (Biometric Cards) to villagers & they witnessed the transaction through these cards also. These cards will enable the villagers to fulfil their financial requirements. Money transfer facilities will also be introduced in the due course through this system.

550 Villagers from Khairana Village, 805 Villagers from Kasal Pipariya & 650 from Barkheda Sikandar were enrolled in the financial inclusion programme involving technology. In this way 2005 villagers were enrolled in financial inclusion programme. On this occasion loans were disbursed to Self Help Groups and School bags were also distributed to primary & middle school students. Collector, Sagar Dist., appreciated the role played by Central Bank of India on financial inclusion.

Central Bank of India, Executive Director Shri R. K. Dubey, General Manager Shri. B. Mondal, Collector, Dr. E. Ramesh Kumar, CEO Shri R.K. Tripathi, SDM Rehli Shri. Harvansh Sharma, Rehli Block CEO Shri. Rakesh Shukla, Tahshildar of Rehli, Central Bank Regional Manager Shri. A. S. Tiwari, Shri. P.K. Singh, AGM & other officers were present in programme.

SOURCE: https://www.centralbankofindia.co.in/upload/news/Press_Editors_Press_Release_sagar.pdf

BANKS SAY TIME NOT RIPE TO DEREGULATE SAVINGS RATE

Banks have moved the Reserve Bank of India to defer the proposal to deregulate the interest rate on savings bank (SB) deposit till such time that interest rates don't moderate.

Unshackling the interest rate on SB deposits in the current rising interest rate regime could set-off unhealthy competition, fear bankers.

This could prompt banks to jack up their SB rates in their attempt to outbid rivals, with attendant consequences for net interest margins (net interest income/ earning assets).

The RBI should consider ushering in deregulation of the SB deposit rate only when the interest rate is falling as banks then will not attempt to outdo each other by quoting attractive interest rates, said a senior public sector banker.

SPREAD WIDENS

The spread between the SB rate (4 per cent) and fixed deposit rates (according to the RBI, the average of major banks for term deposits of more than one year maturity is 8.25/9.10 per cent) has widened to 4.25/5.10 percentage points over the last one-and-a-half years.

Should the RBI free the SB rate when interest rates in the economy are headed north, then it will have a telling impact on banks' net interest margins, the banker said.

Around this time last year, the spread between the SB rate (3.5 per cent) and fixed deposit rates (average of major banks for term deposits of more than one year maturity: 6.00/7.50) was lower at 2.50/4.00 percentage points.

If the RBI allows complete deregulation of the interest rate on SB deposits at a time when interest rates are rising, then it will set off a price war, leading to banks, especially from the private sector, offering even 5-6 per cent interest on these deposits, according to a bank economist.

Bankers from the public sector have an apprehension that the proposed deregulation by the RBI could see a portion their assiduously built SB portfolio getting shifted to private sector banks as the latter typically have a proclivity to attract depositors by offering slightly higher interest rates.

GIVE A FREE HAND

If the RBI ushers in deregulation then banks want a free hand to innovate as well as price their SB deposit schemes, as per the feedback given by banks to the RBI. SB depositors can expect a differential treatment in a deregulated regime. Those maintaining higher balance could earn higher interest rate and enjoy free transactions while those maintaining lower balance would earn lower interest and get charged for transactions.

Meanwhile, the All India Bank Depositors Association said the RBI should determine the floor rate for SB deposit interest rate without prescribing any ceiling.

To protect the small depositor and ensure healthy competition, the RBI should determine the floor rate from time to time depending on the market conditions and the prevailing inflation scenario without prescribing any ceiling rate, suggested the Association.

SOURCE: http://www.thehindubusinessline.com/industry-and-economy/banking/article2139645.ece

RBI TO UNVEIL QUARTERLY REVIEW OF MONETARY POLICY ON JULY 26

The Reserve Bank today said it will announce the first quarterly review of monetary policy on July 26.

This will be done in a meeting with the chief executives of major banks, RBI said in a statement.

In its mid quarterly review earlier this month, RBI raised key policy rates by 25 basis points in its effort to tame inflation.

The RBI has raised the short-term lending (repo) rate by 25 basis points to 7.50 per cent and the short-term borrowing (reverse repo) rate will move up by a similar margin to 6.5 per cent.

The rate hike was 10 time in the last 15 months as part of inflation containing measure.

SOURCE: http://economictimes.indiatimes.com/news/economy/policy/rbi-to-unveil-quarterly-review-of-monetary-policy-on-july-26/articleshow/9016242.cms

PSBS MULL FUNDING ON STAFF LIABILITIES

RBI wants banks to agree on method for enough margin on pension, related liabilities

After taking a significant hit on net profits in 2010-11, public sector banks (PSBs) may now have to set aside funds for employee benefits such as pension and gratuity on a monthly basis, to avoid piling of liabilities towards year-end. At present, some banks set aside funds on a quarterly basis and others yearly, as there are no norms in this regard.

The issue arose after the country’s largest bank, the State Bank of India (SBI), wanted an okay for allowing it to dip into reserves for making pension provisions in the last financial year. To ensure this did not recur, the Reserve Bank of India (RBI) had asked banks to work out a way to create adequate reserves in a phased manner to deal with pension liabilities and avoid approaching the regulator for privileges.

In a meeting of the Indian Banks’ Association (IBA) last week, bankers mooted the idea of making pension provision on a monthly basis, with any adjustments needed to be done while finalising the quarterly results. A debate is on regarding how to bring uniformity regarding liabilities among banks. “There is a need for consensus among bankers regarding cost computation on various parameters. Mortality, for example, a key variable for calculating pension liabilities, differs bank to bank. There is a need for some homogeneity regarding actuarial valuation,” said the chairman and managing director of a PSB.

Some banks also suggested regulatory fiat to bring uniformity on the provisioning requirement if a consensus is not arrived at. RBI, however, is unlikely to issue a circular on this issue. It wants banks to agree on the the matter between themselves.“Pension provisioning is an ongoing process. Banks are free to make provisions even on a monthly basis if their respective boards decide to,” said a senior IBA official.

According to accounting standards, banks are supposed to make ongoing provisions for employee costs but banks provide only when the settlement amount is ascertained close to the settlement date. This issue caught the regulators’ attention when SBI’s net profit dipped by 99 per cent due to a one-time provisioning in the last financial year. RBI said such under-provisioning could lead to systemic risks.

In 2010-11, the provisioning had increased sharply because of the pay revisions agreed upon under the ninth bipartite settlement. Wages were raised 17.5 per cent, a second pension option was given to existing and retired employees and gratuity limits were increased from Rs 3.5 lakh to Rs 10 lakh. According to the financial stability report, the expected additional liability was Rs 30,366 crore for 25 PSBs, which constituted 81.9 per cent of their net profit for 2009-10.

Since the impact was significant, RBI allowed banks to amortise the liabilities towards existing employees over five years. Hence, PSBs absorbed Rs 4,971 crore towards pension and Rs 1,677 crore towards gratuity in the profit and loss account for the year ended March 31, 2011, while carrying an unamortised expenditure of Rs 16,897 crore for pension and Rs 2,903 crore for gratuity in the balance sheets as on March 31.

SOURCE: http://www.business-standard.com/india/news/psbs-mull-fundingstaff-liabilities/440516/

NON-INTEREST INCOME: A MIXED BLESSING FOR BANKS?

Next to CASA, the parameter which Indian commercial banks have probably stressed most (among others) as key to their overall profitability in recent times has been non-interest income.

At one level, the emphasis on non-interest income signifies that banks have moved quite some distance from the good, old “3-6-3” rule. Shareholders, analysts, the investing community and even bank managements seem to have grown fond of the earnings, risk diversity, growth potential and market insulation that non-interest income may provide.

Indeed, fee income from non-traditional banking activities, such as investment banking, securities underwriting, sales of third party products, and so on — given the freedom from interest rate risk and credit risk that it delivers — is sometimes considered the way to go.

But viewed from a larger macroeconomic and financial risk perspective, one wonders if non-interest income is the unmixed blessing it is portrayed to be.

In this piece, we attempt to list out the peculiarities, intricacies and challenges involved in focusing on non-interest income.

Sales of third party products

The argument that follows is mainly based on a theoretical analysis of the issue. The data on non-interest income of Indian commercial banks are not available in great detail for us to make an empirical study.

It is a reasonable guess that while non-interest income is quite significant in Indian banking — accounting for close to 30 per cent on average of operating income across bank categories — bulk of that income is still generated from traditional banking services such as deposits, payments and loans.

That is, fees on traditional banking services such as savings and transaction account charges, payment services, safe custody services and that on credit products/quasi-credit products such as LCs, BGs and customer foreign exchange still account for the lion's share of fee income.

Non-traditional services such as insurance and mutual fund agency, investment banking comprising equity and debt underwriting, advisory and related services, and so on, still do not form a notable part of overall fee income.

The arguments given below therefore may not immediately and fully apply to Indian banks — particularly the public sector variety.

As is well known, almost all commercial banks in India — both in the public and private sectors — have entered into agency agreements with insurance companies to sell life insurance products through their branch network.

Indeed, with close to 80,000 bank branches and some 60 per cent of those in urban, metropolitan and semi-urban areas, the distribution reach of Indian commercial banks is quite strong.

It is no surprise that the life insurance industry desires to tap into this network to sell its products. It may take years for them to create a matching physical network. The fixed/semi-fixed expenditure which would be incurred in creating and maintaining such a network would be significant.

Large scale deployment of advanced communication technologies could obviate the need for a physical network matching that of banks' but even a network half as wide could be a resource challenge.

From the perspective of commercial banks also, selling third party financial products such as mutual funds and insurance for generating fee income seems to make “eminent” sense.

This is an activity whose impact would not be directly seen on the balance-sheet of the bank but rather only in the income statement. Since the impact would not be directly visible on the balance-sheet, there is a distinct attractiveness attaching to the activity — no credit risk involved and therefore no capital consumption. That combination of enhanced income but no capital consumption could indeed be seen as an unmixed blessing.

Is it really so?

An analysis of the issue shows that any fee-income or non-interest income generating activity from non-traditional banking services may not be an unmixed blessing.

To be sure, there is no credit risk involved and, therefore, no capital consumption.

The downside is that banks have to incur considerable fixed and semi-fixed expenditure or inputs — primarily wages and related overheads — in commencing and sustaining such activities.

These expenditures “normally” cannot be wound down or modified in line with the level of third party products selling. Such activities enhance the level of operating leverage the bank is exposed to. Higher the level of operating leverage, higher the variability in a bank's operating revenues.

The same argument applies in case of any other non-interest income generating activity. Be it investment banking, financial markets and commodities trading, debt syndication, equity capital markets underwriting and such other activities, the bank is exposed to a higher operating leverage and the ups and downs of the business cycle.

As a contrast, in the context of the main lending business of a bank, the critical “input” to expanding interest income is a variable item only — interest expense. You just borrow more and lend more. Operating leverage is not enhanced since only variable costs are incurred in seeking to expand operating income.

Switching costs

A more important feature in the context of the main lending business is that “switching costs” — or the costs of breaking a relationship — are quite high both for the borrower customer as well as the banker. Given the high switching costs, revenue flows from lending relationships are generally far more stable and are not subject to the vicissitudes of the business cycle.

In the case of non-interest income generating activities, of course, there is no particular or individual relationship with “customers” and therefore switching costs are quite low. In a competitive market situation, customers may not lose much as they can go to the next bank offering such services. For the bank, though, lost business has to be matched against the overheads which will continue to be incurred.

Financial leverage

Another downside can be noted as a corollary to the above. Since these activities do not consume capital on the balance-sheet (except where some credit risk may be assumed, say in securitisation), there is the incentive for a bank to enhance the level of debt to fund these activities. Therefore, these activities could also increase the level of financial leverage on the balance-sheet.

Higher operating and financial leverage, per se, is not a negative. It just increases the level of risk attaching to a bank's earnings stream. (It is interesting to note here that the non-interest income of some major public sector banks in India has fluctuated considerably in the past decade).

In the specific context of mutual funds and insurance, it is also possible they cannibalise the savings products viz. deposits, which banks themselves offer. Technically, insurance is a (mortality) risk hedging tool and cannot cannibalise the bank deposit. But at the level of bank branches, will the distinction between a bank deposit and an endowment assurance be that clearly appreciated?

That awareness can be created only by intensive education campaigns both for bank staff as well prospective customers. That, in turn, could inflate overheads expenditure again.

All in all, fee income generating activities do not seem to be the unmixed blessing they are made out to be. Rigorous scenario analyses may be called for as banks take up more non-traditional products/services to boost their earnings stream

SOURCE: http://www.thehindubusinessline.com/industry-and-economy/banking/article2136808.ece

AIBOC CIRCULAR NO. 64 DATED 17TH JUNE 2011

AIBOC issued its circular No. 64 dated 17th June 2011 on OECD’s report on India Economic Survey 2011. We are reproducing the same here for our readers.

CIRCULAR NO.64                                           17th June, 2011

TO ALL AFFILIATES/MEMBER:

PROTEST AGAINST OECD’S REPORT ON INDIA ECONOMIC SURVEY 2011

We reproduce hereunder the text of UFBU Circular No.UFBU/2011/CIRCULAR No.5 dated 17th June, 2011 contents of which are self-explicit.

With greetings,

Sd/-

(G.D. NADAF)

GENERAL SECRETARY

TEXT

SUGGESTING

-          IMPLEMENTATION OF FINANCIAL SECTOR REFORMS

-          REDUCTION OF GOVT. CAPITAL TO 33 % IN PSBs

-          IN STATE BANK OF INDIA ALSO GOVT. CAPITAL SHOULD BE REDUCED TO 33 %

-          PUBLIC SECTOR BANKS SHOULD NOT BE GOVERNED BY SOCIAL OBJECTIVES

-          SMALL PUBLIC SECTOR BANKS SHOULD BE SOLD AWAY

-          PRIVATE SHAREHOLDERS SHOULD RUN THE PSBs

-          RESTRICTIONS ON THE VOTING RIGHTS OF LARGE SHAREHOLDERS SHOULD BE REMOVED

-          GRANTING OF MORE BANKING LICENCES TO PRIVATE HANDS

-          EMPLOYEES OF THE NATIONALISED BANKS SHOULD HAVE THE SAME EMPLOYMENT STATUS AS THOSE IN PRIVATE BANKS

MONTEK SINGH AHLUWALIA, DY. CHAIRMAN OF PLANNING COMMISSION WELCOMES THESE RECOMMENDATIONS

MAKE THE 7TH JULY ALL INDIA STRIKE A DOUBLE SUCCESS

See what the OECD Report says:   The Organisation for Economic Co-operation and Development (OECD) has presented its Report on Indian Economic Survey and has recommended, among other things, wide ranging financial sector reforms to be implemented.  The Survey Report prepared by OECD was discussed in a special seminar on 4th April, 2011 in which representatives of Indian Government participated.

The Report has recommended speeding up of financial sector reforms and privatization of Public Sector Banks by reducing the Government capital to 33% and thus increase private share holding to 67%. The Report has recommended that in State Bank of India also, Government’s capital should be reduced to 33%.  The Report says that even though during the recent global crisis, our Public Sector Banks appeared to be sound because of Government backing, it is high time now that they should be privatised. The OECD feels that the Government should become passive shareholders and let private shareholders run these banks.  The Report says that Public Sector Banks should not be governed by social objectives i.e. priority sector loans to be abandoned.

The report pointed out that in the year the 2000 in the Budget, Government proposed such reduction of its capital to 33% but in the face of strong opposition from the unions, it was not implemented. The Reports suggests that “ It is high time to push it through now and to go further by completely selling smaller public sector banks in line with the Raghuram Rajan Committee (2009) recommendations ”.

The Report has welcomed the idea of giving more licences to private players and to increase the competition. The Report also recommends removal of restrictions on voting rights of shareholders in Banks so that they can own and control the Banks. The Report also says that Directors and Chief Executives of Banks should be appointed by the shareholders and not by the Government.

The Report further recommends that the employees of the nationalised banks should have the same employment status as those in private banks.

Government already on the move:  Bank employees are aware that the Central Government is already taking steps to implement the financial sector reforms and in the Budget 2011, the Government has proposed the following steps:

Quote from Finance Minister’s Budget speech on 28-2-2011:

“ The financial sector reforms initiated during the early 1990s have borne good results for the Indian economy. The UPA Government is committed to take this process further. Accordingly, I propose to move the following legislations in the financial sector:

-          The Insurance Laws (Amendment) Bill, 2008;

-          The Life Insurance Corporation (Amendment) Bill, 2009;

-          The revised Pension Fund Regulatory and Development Authority Bill, first introduced in 2005;

-          Banking Laws Amendment Bill, 2011;

-          Bill on Factoring and Assignment of Receivables;

-          The State Bank of India (Subsidiary Banks Laws) Amendment Bill, 2009; and

-          Bill to amend RDBFI Act 1993 and SARFAESI Act 2002.

In my last Budget speech, I had announced that Reserve Bank of India would consider giving some additional banking licences to private sector players. Accordingly, the RBI issued a discussion paper in August 2010, inviting feedback from the public. The RBI has proposed some amendments in the Banking Regulation Act. I propose to bring suitable legislative amendments in this regard in this session. RBI is planning to issue the guidelines for banking licences before the close of this financial year.”

Khandelwal Committee Report – Attacks galore:  Bank employees are also aware that the Government appointed Khandelwal Committee has made sweeping and retrograde recommendations and has unleashed wholesale attacks on all our rights and benefits like dismantling of industry-level bipartite wage agreement, bundling up all agreements on transfer of employees, total freedom to outsource all our routine jobs, introduction of performance based differential wages, elitism in recruitments, etc.

What is our alternative than to fight back:  It is in this context that the UFBU has given the clarion call for All India Strike on 7th July, 2011 to save our Banks, to save our jobs and job security, to protect our hard-won rights and to resolve our pending issues.

March on to 7th July Strike:  Comrades, let us march on to make our All India Strike on 7th July a double success.

With greetings,

Yours Comradely,

Sd/-

C.H.VENKATACHALAM

CONVENER

REMINDER:

Ø       Submit Mass Memorandum in all Branches

Ø       Hold Demonstrations and Mass Rallies

Ø       Badge Wearing on 30th June, 2011

Montek pitches for more financial sector reforms:

BUSINESS LINE, OUR BUREAU NEW DELHI, JUNE 14: 

India should continue with the process of financial sector reforms and not look at further tightening the existing controls in the financial system, the Planning Commission Deputy Chairman, Mr Montek Singh Ahluwalia, has said.

“I am a bit concerned that we should not be reading the wrong lessons from the crisis (global financial crisis). There is a point of view that we avoided the crisis because we had lot of financial controls and we would be well advised to tighten these controls further. This would be in my view wrong. We need to liberalise the financial system,” Mr Ahluwalia said at a OECD-NIPFP organised symposium here on Tuesday.

Mr Ahluwalia said that he agreed with the view expressed in the OECD's latest India economic survey that financial sector reforms should be continued. The Planning Commission Deputy Chairman noted that India did very well in following a cautious programme of reform of the financial sector, but now felt there was need to further open it up.

“We need to liberalise the financial system. There is lot of questioning about the usefulness of financial liberalisation, which is actually well positioned. But some of the latest work I have seen suggests that at early stages of development, generally more liberal financial system contributes to growth.

“Of course there is a turning point beyond which further financial liberalisation will have no impact whatsoever. We have an ideal system and not continuing to move forward will be a serious mistake.”

Banking reforms

On the banking sector, the OECD's second India Economic Survey, which was released today, has recommended that the Government should reduce its stake in public sector banks to 33 per cent, as suggested by the Narasimham Committee report, to make them more dynamic.

The report pointed out that the 2000 budget proposed such a measure but in the face of strong opposition from the unions it was not implemented.

“It is high time to push it through now and to go further by completely selling smaller public sector banks in line with the Rajan Committee (2009) recommendations,” the OECD survey said.

The recent performance of these banks suggests that in addition the Government should become passive shareholders and let private shareholders run these banks, the survey said. Reduction in the Government share should also apply to the State Bank of India, it added.

Public sector banks, with reduced Government holding, should no longer be governed by social objectives. The employees of the nationalised banks should have the same employment status as those in private banks.

Reducing the Government shareholding to one-third would be insufficient. The corporate governance norms too have to be improved so that directors and chief executives are appointed by shareholders and not the Government.

Also, restrictions on the voting rights of large shareholders need to be removed, so that ownership can equate with control, the Survey has said.