samachar lehar jan 2012 issue

191
LOGO January 2012 Samachar Lehar

Upload: toms-varghese

Post on 28-Nov-2014

173 views

Category:

Documents


6 download

TRANSCRIPT

LOGO

January 2012

Samachar Lehar

Samacher Lehar- January 2012 Issue Sl. No Topic/ Sub-Topic

Page No.

1. Our Bank in News 2 2. Ten Commandments for a Successful Banking Career 5 3. FAQs on Speed Clearing 11 4. KHAS BAAT 13 5. Agriculture & Other Priority 22 6. BASEL… .. 24 7. Bonds & Money Market 25 8. Credit Card 25 9. Credit Growth 27 10. Deposits 28 11. Economy 29 12. Financial Inclusion & MFI 30 13. Forex Inflows 32 14. Housing Worries 36 15. Human Resources 37 16. Inflat ion 39 17. Infrastructure 40 18. Insurance 40 19. Liquidity 41 20. Mutual Funds & Capital Market 43 21. NPA 44 22. Other Banking News 46 23. Overseas Aspirat ions 50 24. RBI Direct ives & Guidelines 50 25. ` Movement 51 26. Technology 53 27. FAQs on Micro, Small and Medium Enterprises 54 28. Changing Contours of Monetary Policy in India 61 29. Financial Inclusion in NER and Other 72 30. An Assessment of Recent Macroeconomic Developments 77 31. Microenterprise Development-Path to Creating MNCs of Tomorrow 84 32. FAQs on Senior Cit izens Savings Scheme, 20 89 33. Food Inflation : This Time it 's Different 95 34. 'Gross Financial Flows, Global Imbalances, and Crises 111 35. Gross Financial Flows, Global Imbalances, and Crises 113 36. Challenges to the Accounting Profession Some Reflect ions 116

37. Empowering MSMEs for Financial Inclusion and Growth - Issues and Strategies 123

38. Economic and Financial Developments in Andaman and Nicobar Islands 132 39. Short Term Cooperat ive-Credit Structure and Financial Inclusion 143 40. Legislat ive Reforms - Strengthening Banking 147

41. Financial Report ing in the context of Financial Stability : A Regulator's view on Some Accounting Issues 156

42. Finmin tells RRBs to use sponsor banks infrastructure to become NEFT-enabled 163

42. Nabard planning interest-free loan 163

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

1

43. Small borrowers to get working capital loans 164

44. Compliance with Basel III norms will entail addit ional costs for banks : Subbarao 165

45. Parliament panel gives conditional nod to Banking Laws Amendment Bill 2011 166

46. Govt Plans Merger of more Regional Rural Banks 167 47. Banks' stakes in non-financial ent it ies capped at 10% 168

48. Sinha Panel Backs Non-Voting Shares for Bank Capitalisation Says RBI should put in place riders before granting 26% voting rights to shareholders in Banks

169

49. Parliamentary Panel Pitches for Integrated Banking Law 170 50. RBI panel to discuss raising of capital by urban co-op banks 172 51. Banks must support land development to conserve arable lands : NABARD 173 52. RBI steps in to arrest rupee depreciat ion 174

53. Global Regulators prepare Supervisory Framework to prevent Lehman-like collapses 176

54. Tighter Rules may give Fillip to Shadow Banks 177 55. RBI cuts Currency open Posit ion for Banks by up to 75% 178 56. Call Rates Harden on Tight Liquidity 179 57. Financial inclusion necessary for Banking Growth : FM 180 58. Global headwinds to impact banking sector stability 181 59. Losses in non-life insurance a worry 181 60. RBI Financial Stability Report 182 61. State-run Banks told to Discard Fast-track Promotion Policies 184 62. Reforms commission looking at uniform legislat ion for banks 184 63. Financial inclusion to soon fetch tax benefits for banks, inst itut ions 185 64. Banks Can't Charge for Account Closure 187 65. RBI pushes for consolidation in banking 188

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

2

OUR BANK IN NEWS

Corporate Social Responsibility Award 2010-11 to Canara Bank: In recognition of the valuable contribut ion made by Canara Bank for Corporate Social Responsibility, the Inst itute of Public Enterprises and Subir Raha Centre for Corporate Governance, Hyderabad conferred the bank with the Corporate Social Responsibility Award for the year 2010-11. The coveted award consist ing of a Statute and a citat ion was received by Smt Archna S Bhargava, ED from Sri R K Mishra, Inst itute of Public Entreprises in a glit tering funct ion held at Hyderabad on 10.12.2011. (FI Wing, HO) (ED's photo appears in p. 2 of today's(11.12.2011) Udayavani and news item appears in p. 5 of Business Standard) Canara Bank aims to become numero uno: Execut ive Director of Canara Bank, Mr Ashok Kumar Gupta inaugurated the 4th nat ional-level conference and general body meet ing of Canara Bank SC/ ST Employees’ Welfare Associat ion on Saturday and said, “In the ent ire banking industry, we are at the second posit ion in the domest ic business with a figure of ̀ .5.3 lakh crore and are aiming to secure the first place by crossing `. 6 lakh crore by next March. Canara Bank has all the schemes what other leading private sector banks have.” (TNE dt 11.12.2011 p.4) Social Action: Canara Bank sponsored washing machines and a grinder to M/ s. Prerana Resource Centre, Bangalore, a charitable Trust working for the welfare of the dest itute, Blind and challenged sect ion of the society. At a glit tering funct ion on 12th Dec. 2011 Sri M C Gauba, General Manager, Prime Corporate Credit Wing handed over the Washing Machines and Grinder. Everyone lauded the Bank’s noble gesture at the funct ion. (Social Banking Cell, PC Wing, HO) Cricket: Canman Mr K B Pawan completed his second century of the season as Karnataka consolidated their posit ion on Day-2 of their Ranji Trophy match against Saurashtra at the Chinnaswamy Stadium, Bangalore. Pawan, who had scored an unbeaten 251 in karnataka's season opener against Rajasthan, made 118 runs as the hosts ended the day of 369 for the loss of four wickets. Another Canman Mr Bharath Chipli was on unbeaten 66 when the match stopped due to bad light . (News item with photo appears in DNA dt. 01.12.2011 p. 18) Social Action: To commemorate the “Internat ional Day of the Disabled Persons”, which falls on 3rd December every year, Social Banking Cell, HO cosponsored sport ing and other cultural events for the challenged sect ion of the society in co-ordinat ion with Women and Child Development Department, Government of Karnataka on 1st December 2011. Sri S S Bhat, GM, F I Wing was one of the Chief Guests who distributed trophies to the winners. The

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

3

Principal Secretary, Government of Karnataka and Women and Child Development Officer Smt. Pali profusely thanked the Bank for support ing the event. (Social Banking Cell, HO) Cricket: If Wednesday's second day belonged to centurion Canman K B Pawan, the next day was largely about another Canman Chipli, who warmed up nicely with a relat ively caut ious 66 the previous day, the stylish right-hander unleashed his full repertoire of st rokes en route to third Ranji ton, helping the home team declare before lunch. Bharath Chipli made his comeback a memorable one by notching up his career best score of unbeaten 159. (News item with photo appears in today's(2.12.2011) Deccan Herald p. 20, DNA p. 18 and Deccan Chronicle p. 15) Kannada Nadu-Nudi-Nityotsava: Canara Bank Kannada Sangha celebrated Kannada Nadu-Nudi-Nityotsava at Head Office Auditorium, Bangalore on 13.12.2011. The funct ion was presided by Sri S Raman, C&MD. On this occasion, the Chief Guest Jnana Peetha Awardee Sri Chandrashekar Kambara was honoured by the Sangha. Sri P V Maiya, Director of Canara Bank and Sri D S Ananda Murthy, GM, FM&S Wing graced the occasion. (CC&PR Sect ion, SP&D Wing) The Annual Governing Body meeting: The Annual Governing Body meet ing 2011 was held on 13.12.2011 at HO, Bangalore. The meet ing was chaired and inaugurated by the ED, Sri A K Gupta. Sri Denis Rodrigues, GM & Principal, STC, Bangalore welcomed the gathering. The ED released two publicat ions viz., 'Compendium on Training Programmes' and the maiden issue of a publicat ion ‘Deeksha’ brought out by STC, Bangalore. (STC, HO) Two days RSETI conclave: Two days conclave of Canara Bank RSETI Directors was conducted from 19-12-2011 to 20-12-2011 at HO Bangalore. Smt Archna S Bhargava, ED inaugurated the conclave. The curtains were drawn for the programme on 20Th December, 2011 by Sri S Raman, C&MD in the gracious presence of Dr D Veerendra Heggade, Dharmadhikari Dharmasthala. Sri T Vijay Kumar, IAS, Joint Secretary, MoRD Govt. of India, interacted with the Directors. The other dignitaries who graced the conclave were - Smt Renuka Kumar, Dy Secy, MoRD, Sri A K Bhattacharya, GM RBI, Dr R N Hegde, Co-ordinator, NIRD. 30 Directors from Canara Bank Inst itutes part icipated in the conclave. (Rural Development Sect ion, PC Wing, HO) Social Action: At a funct ion on 21st December 2011, Smt S Aparna DGM, Credit Administration Wing, HO handed over Bunker Cots to “Society Of Mary Immaculate” a Missionary organisat ion running a semi resident ial school at Begur, Bangalore where they provide free educat ion to the children of the economically backward sect ion of the society in and around that region. Programme was organised by Social Banking Cell, HO (Social Banking Cell, HO) Review Meet: A review meet was conducted on 23.12.2011 at Bangalore by Sri K B Krishnamurthy, Ex-MP & Hon’ble Member, Nat ional Commission for Safai Karmcharis regarding various issues related to the service condit ions and amenit ies extended to Safai Karamchari and

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

4

other Group D Part Time Employees in Canara Bank. Our Execut ive Director Sri Ashok Kumar Gupta, GM, PC Wing Sri K S Prabhakar Rao, DGM, PW Sri A V Hebbar and other execut ives from HO were present during the meet ing. The Hon'ble Commission also met the leaders of Safai Karamchari and other Group D Part Time Employees in this regard. (PM Sect ion, HO)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

5

Ten Commandments for a Successful Banking Career Dr. K. C. Chakrabarty

Ms Chanda Kochhar, MD and CEO, ICICI Bank, Shri T. V. Mohandas Pai, Chairman, Manipal Global Educat ion Services, Dr K. Ramnarayan, Vice Chancellor, Manipal University, Shri Rajiv Sabharwal, Execut ive Director, ICICI Bank, other dist inguished guests, ladies and gent lemen, and my young friends. It is indeed a pleasure to be here in your midst today. Young people infuse energy and vigour into any gathering but bright , young bankers like you also make it a learning experience. Convocat ions are always a very special occasion as they signify both an end and a beginning. An end - to a formal learning process and, hence, a moment of great sat isfact ion and joy for everyone involved. And a beginning - as it marks the threshold of the next stage for applying practically the knowledge and skills acquired through the formal learning process, thereby, acquiring real world learning and experience. I congratulate all the graduates of the ninth to eleventh batch of the ICICI Manipal Academy and especially thank Ms. Chanda Kochhar for giving me the opportunity to address these young budding bankers. The ICICI Bank Probat ionary Officer Programme, I am sure, is an effort to 'Catch Them Young' and create the bankers of tomorrow - a set of new generat ion managers for banking in newer t imes. Nowadays, when the financial sector the world over is undergoing a period of most rapid acceleration and change, the greatest challenge before all organizat ions in this sector is to build up an inst itut ional architecture that enables and sustains intellectual capital. This is especially important as in t imes of 'creat ive destruct ion' - to use Joseph Schumpeter's classic phrase in his theory of economic innovat ion- new ideas, new constructs and new expectat ions emerge. And this, in turn, makes the role of new generat ion managers in these inst itut ions more demanding than that of bankers of yesteryears. The term 'generat ion' refers to a common ident ity arising from common experience. Thus, the ident ity of Gen Y Managers, that all of you perhaps are, would also arise from the common experience of a changing world around us, a product of the wider historical context . As you know, financial sector reforms since the year 1991 have heralded a dramat ic shift in the way banks funct ion and operate in India. The changed environment and the internal compulsions arising from greater compet it ion and the need to improve their market share and profitability have given rise to the quest for greater efficiency and the need to reposit ion themselves given the realit ies of the environment and their internal st rengths and weaknesses. But at the same t ime, the compulsions of business must not take away from the basic tenets of good banking. Understanding and inculcat ing certain qualit ies will help ensure each one of you becomes a successful banker in the years ahead and this, incidentally, would be the theme of my address today. But, before I delve into that , and knowing fully well that you would have studied about it during your graduat ion, let me start by explaining banking and its importance to the society.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

6

What is banking? Banking, convent ionally, is defined as the acceptance of deposits of money from the public for the purpose of lending or investment. These deposits are repayable on demand or otherwise and withdrawable by cheque, draft , order or otherwise. Deposits are accepted from individuals as well as from firms. In sum, the nature of banking business can be summarised in two words, i.e., 'financial intermediat ion', which needs to be carried out efficient ly (both operat ional and allocational) for st imulat ing the real sectors of the economy. Another essent ial characterist ic of Banks is that they are highly leveraged and, hence, special and need to be regulated for protect ing the interest of depositors. As banks are inst itut ions with legal backing and as there is a banking regulator to oversee their financial solvency and soundness, it enables the banks to earn the t rust and confidence of the public. You are also aware that banking in India, as elsewhere, takes diverse forms viz., banks formed under special statutes, companies registered under the Companies Act , 1956 or foreign companies and co-operat ive societ ies registered under the Co-operat ive Societ ies Act . Banks are classified based on their ownership pat tern such as public sector banks, private sector banks and foreign banks. Some specialized inst itut ions such as ICICI have morphed to banks. Yet other inst itutions such as EXIM bank, SIDBI and NABARD specialize in trade, small industries and agriculture, respect ively. Apart from basic banking business, banks also undertake other services such as safe custody of valuables, grant ing and issuance of let ters of credit to facilitate international t rade, buying and selling in foreign exchange and collect ions of bills, among others. Banks also act as agent of the Government and other ent it ies to undertake agency business. Extending loans and advances to the needy sectors of the economy on a priority basis is a very crucial funct ion of the banking sector. Keeping in view needs of the Indian economy, banks are mandated to extend 40 per cent of their Net Bank Credit to the priority sectors of the economy. The priority sectors of the economy include, inter alia, agriculture, weaker sect ions, small scale industries, educat ion and micro finance. These norms ensure adequate flow of funds to the most important and needy sectors of the economy. But as you are also aware, over the years, banking has t ransformed. It is no longer the "3-6-3" banking. Banking sector has become more liberalized, more compet it ive, more stable, more customer oriented, more technologically advanced and also more profitable. The prudent ial norms were implemented, interest rates were deregulated, asset quality improved, entry barriers were liberated, new products were introduced, capital was infused and risk management was improved. There was also a decline in the concentrat ion of the banking business in a few banks. Financial industry is moving towards expanded act ivit ies driven by customer needs, financial innovat ions, technological change, consolidat ion, convergence, global compet it ion and financial inclusion. Many challenges lie ahead such as st iff compet it ion, st ringent regulatory norms, shareholders demanding higher returns, and also challenges of globalizat ion and financial inclusion. Thus, as prospect ive successful bankers of future, each one of you should have a fairly good understanding of these opportunit ies and challenges to accomplish your job in an efficient way.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

7

Importance of Banking In the older days when banking was not prevalent , people were forced to borrow money from money lenders at very high interest rates. Even today, in the rural unbanked areas of the country, people are dependent on money lenders for credit . Moreover, when people had to save, they used to hoard money in their houses despite the risk of robbery. The existence of a bank, with its legal sanct ity, was a solut ion to both these issues. Banks extended loans and advances at affordable interest rates for product ive as well as consumpt ion purposes and started accept ing deposits from the public. The provision of loans at affordable interest rates helped people smoothen their income and expenditure fluctuat ions on the one hand and start remunerat ive economic activity on the other. Apart from the safety provided by banks to the money deposited by the public, the interest offered by banks on deposits of the public acted as an additional incentive for deposit ing money with the banking sector. This inculcated saving habits among the public. The savings of the people become a product ive part of the economy. This is one of the important reasons why the Reserve Bank encourages or nudges banks to expand the banking network to all unbanked villages in the country. While from a social point of view, distribut ion of credit at affordable interest rates is the most important argument for the existence of banks, from an economic point of view, it is the channelisation of savings into investments. Higher savings and investments are important in st imulating economic growth. Banks are important conduits for monetary policy transmission and play an important role in the payment and sett lement systems. The recent technological advancements in the banking sector through ATMs, debit cards, credit cards and electronic transact ions further made the t ransfer of money across the financial system easy and convenient for the public. The electronic cards and point-of-sale terminals facilitated day to day financial needs of customers without the need for carrying paper money. The internet banking facility offered by banks also help customers to manage their personal financial t ransact ions without visit ing their bank branch. Along with the technological advancements, the opening of specialised accounts designed for non-resident Indians further facilitated t ransfer of money from abroad, i.e., remit tances. Thus, in sum, banking affects all of us. Our lives are dependent on the banking sector in one way or another, direct ly or indirect ly. It is the life-blood of the economy, a contaminat ion of the same can affect any sector or region of the economy. Thus, as employees of the banking system, each one of you is taking up a big responsibility, not only towards the inst itut ion for which you are working but also towards the ent ire society. Having set out the context , what are the qualit ies that each one of you should inculcate to become a successful banker? Let me explain the Ten Commandments for a successful banking career : Thou shalt manage the people with empathy Banking is essent ially an art of managing people, be it customers or staff. In a compet it ive environment, customers have to be t reated as kings. Thus, delivering financial services to the sat isfact ion of customer, and prompt redressal of complaints of customers, if any, are very important . The complaints of customers should be heard with passion and remedial

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

8

act ion should be taken prompt ly. The bankers should also take pro-act ive act ions to increase customer awareness with regard to charges applicable to the financial services and the available redressal mechanisms. Managing staff by providing them with a comfortable work environment is also germane to ensure the quality of banking services. Thou shalt strive to become a knowledge worker A knowledge worker is one who apart from knowing how to do a work and what he is doing also knows why is he doing what he is doing. We are t ransit ing from an agrarian society, through an industrial society to a knowledge society. In the knowledge society, it is the knowledge inst itutions and knowledge workers who would thrive. Just because you have completed your studies and got into a job, you should not stop learning. Your career in the banking sector should be a learning experience. Now, while accomplishing your desk work in the bank, definitely you will go through a learning process. But that is not enough. You should develop and maintain reading habit to update your knowledge base. Because knowledge is the power of an employee and once you lose it , you are nowhere. Thus, there has to be a conscious effort from your side to keep your learning curve alive and be bet ter than the rest . And do not restrict your knowledge base to developments in the banking sector only; rather all of you should develop a fairly good understanding of the economy over a period of t ime. Then only you can become a sensit ive banker, i.e., a banker who is sensit ive to the needs of a growing economy. Thou shalt be accountable for all your work This is the most important quality which a banker should have. There should be accountability towards the society because you are working in a public inst itution and dealing with public money. And whatever you do in the bank as part of accomplishing your responsibilit ies are subject to scrut iny. Many of the financial frauds have taken place with the help of bank employees in the past . Thus, if the employees of a bank are sincere and commit ted to their inst itut ion and to the society as a whole, chances of financial frauds can be minimized. Further, try to know more about your customers and their occupat ions. This will also help in reducing financial frauds as well as financing of terrorism using bank funds. Thus, a vigilant and accountable bank employee is an asset to the banking sector. So, t ry to become an asset rather than a liability. Thou shalt do hard work All of you should remember always that hard work is the 'mantra' of success. Nothing can subst itute your hard work. And those who do hard work during the init ial years of their career, will be the ult imate winners in the system. Thus, try to have a posit ive at t itude towards work and t ry to have a good understanding about the challenges ahead. Prepare yourself for meet ing those challenges and meet ing the expectat ions of your inst itution. At the end of the day you will be rewarded in one way or another. So, do not hesitate to take more responsibilit ies in the init ial part of your career. Be pro-act ive and do more work; this will improve your understanding of the subject. Thou shalt develop the right attitude At t imes, the att itude of the bank staff also keeps rural illiterate customers away from the banking system. So, as new entrants to the banking industry, try to build up friendly customer relat ionships. Do not discriminate customers based on their caste, sex,

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

9

educat ion and also by financial background. Try to extend fair services to all customers of the bank irrespect ive of their background. You all should take extra efforts to bring financially illiterate customers to the bank. This is because a good bank should not confine it 's operat ions to metropolitan areas, it should be willing and innovat ive enough to expand its services to under banked rural and semi-urban areas. Thus, as employees of the banking sector you have an important role to play in furthering financial inclusion, dealing with underprivileged sect ions of society and ensuring adequate flow of credit to act ivit ies associated with such people. Thou shalt attempt to become a pioneer Globalizat ion opens up lot of opportunit ies for the banking sector from across the globe. However, to take advantage of these opportunit ies, banks have to prepare themselves. Banks will have to work in a mult i-cultural and mult i-linguist ic environment to compete with the globally act ive banks. A group of efficient , young and well educated employees is a sine qua non for achieving this compet it iveness. So, as employees of the banking sector, t ry to improve your communicat ion skills, try to learn about the developments in the global banking sector and t ry to learn about the emerging opportunit ies. Be innovat ive in taking advantage of the emerging opportunit ies. Because, a pioneer has always an advantage over followers. So, t ry to be pioneers rather than followers in your career. Thou shalt develop a professional approach Do your job with your brain, not your heart . You can be passionate about the needs and grievances of customers, but do not compromise on your logic. During the course of your careers, you might , at t imes, be faced with various pressures which seek to influence your decisions. Develop the ability to object ively evaluate situat ions, regardless of external pressures, and take the right decision - always. Do not allow your personal problems and relat ionships to influence your decision making process. Be object ive and be efficient . One cannot become a true professional in any area unless he / she remains commit ted to the core principles of the profession even under the most adverse circumstances. Though shalt be analytical Banking business, essent ially, involves managing risk. This job of managing risk cannot be done efficient ly without having sharp analyt ical capability. As employees of the banking sector you have an important role to play in shaping the financial soundness of the banking sector. While doing the banking business, t ry to analyse the financial background and economic act ivity of the customer thoroughly. This will help in limit ing the growth of non-performing loans, efficient ut ilizat ion of capital and higher profitability. Financial soundness is an important aspect of a good bank, especially because banking business involves public money. Further, failure of one banking inst itution may also t rigger contagion effect across the banking sector as financial inst itutions are highly inter-linked. Thou shalt be information literate Technological advancements have t ransformed class banking into mass banking. With cost effect ive technologies banks were able to change the face of banking. ATMs, debit cards, credit cards, internet banking and phone banking have enabled customers to do banking without visit ing the bank branch. Further, the Business correspondent model and mobile banking also depend on the latest technology to expand the banking network. The

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

10

electronic t ransact ions through NEFT, ECS and RTGS have increased the speed of fund t ransfer considerably. A good banker should continuously innovate and update themselves with the latest technological advancements to make banking further easier and convenient to customers. Thus, t ry to develop a good understanding of the latest technological developments. A bank can implement latest technology safely only with a strong in-house technical expert ise. In this mileu, you must "be informat ion literate", i.e. third generat ion literate. It is not enough to be a first generat ion literate, i.e. you know how to read and write, or to be second generation literate, i.e. to be computer literate, but to achieve informat ion literacy. When transit ing to a knowledge society and to be a successful banker, it is crit ical to be informat ion literate. Thou shalt avoid complacency during good times and not lose hope during bad times This is a very important commandment of a good banker because complacency hampers progress and may lead to sharp downfall and loss. Complacency can affect anybody but is all the more relevant to the financial sector. We cannot afford to be complacent even for a moment. You are part icularly advised to avoid complacency during good t imes as otherwise downturn may come any t ime. It is always advisable to conserve your energies during good t imes to be used during bad times. You should not only be satisfied with your victories but also t ry to achieve something bet ter than whatever you have already achieved. Last ly, life is not easy; it is difficult , whether of an individual or an inst itut ion. Bad t imes somet imes will come, and somet imes, all bad things may come together. In such t imes, do not become desperate. Wait and Hope. Do not lose hope, but lie low and pray to God because good t imes will return soon. This is my last commandment not only for banking but for any career. Concluding Thoughts All of you are growing up in an age of unprecedented opportunity. But with opportunity comes responsibility. To do things well and be responsible, one needs to cult ivate a deep understanding of oneself - not only the strengths and weaknesses but also how one learns, how one works with others, what his or her values are and where he or she can make the greatest contribut ion. You can achieve excellence only if you understand, work on and operate from your areas of st rength. As you pick up the t raits of modern t rade like leadership skills, the ability to mult i-task and manage compet ing imperat ives, please do not let go of the age-old and t ime-tested qualit ies of a desire to learn, a strong sense of professional ethics, an enquiring mind, a strategic view, the qualit ies of humility and empathy, a willingness to embrace pract ical experience and an eagerness to adapt to evolving experiences. These are excit ing t imes and as you stand on the threshold of a new life and a career in banking, I t rust you will cont inue to cherish the ideals and dreams of youth, after all they are what make life worthwhile. I wish all of you - tomorrow's t itans - every success in all your future endeavours. Let me conclude by wishing each one of you a very bright , promising and challenging career in the banking sector. --------------------------------------

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

11

FAQs on Speed Clearing Updated on 30-11-2011

Q.1What is Speed Clearing? Speed Clearing refers to collect ion of outstat ion cheques (a cheque drawn on non-local bank branch) through the local clearing. It facilitates collect ion of cheques drawn on outstat ion core-banking-enabled branches of banks, if they have a net-worked branch locally. Q.2Why Speed Clearing? The collect ion of outstat ion cheques, t ill now, required movement of cheques from the Presentat ion centre (city where the cheque is presented) to Drawee centre (city where the cheque is payable) which increases the realisat ion t ime for cheques. Speed Clearing aims to reduce the t ime taken for realisation of outstat ion cheques. Q.3What was the process followed by banks for collection of outstation cheques before the introduction of Speed Clearing ? A person who has an outstat ion cheque with him deposits it with his bank branch. This bank branch is called the Present ing branch. The cheque is sent for collect ion to the city where it is payable / drawn called Dest inat ion centre or Drawee centre. The branch providing the collect ion service at the Dest inat ion centre is called the Collecting branch. On receipt of the cheque, the Collecting branch presents it in local clearing to the Drawee branch or the Dest inat ion branch. Once the cheque is paid the Collect ing branch remits the proceeds to the Present ing branch. On receipt of realisat ion advice of the cheque from the Collect ing branch, the customer's account is credited. This, in short , is the process of Collect ion. When a cheque is accepted on a collect ion basis by a bank, it credits the customer's account only after realisation of its proceeds. Alternat ively, in the absence of a collect ion arrangement at the Dest inat ion centre, the Present ing branch will send the cheque directly to the Dest inat ion branch for payment. On receiving the proceeds from Dest inat ion branch, Present ing branch credits the customer's account. Q.4How long does it take for getting credit of an outstation cheque sent on Collection basis? Generally, it takes around a week to three weeks t ime depending on the drawee centre and collect ion arrangements to get outstat ion cheques realised on a Collect ion basis Q.5How does the Local Cheque Clearing work? In Local Cheque Clearing in 66 major centres, cheques are processed at the Clearing Houses on mechanised sorters, using Magnet ic Ink Character Recognit ion (MICR) technology. Local Clearing handles only those cheques that are drawn on branches within the jurisdict ion of the local Clearing House. Generally, the distance between the Clearing House and the part icipat ing branches is defined, taking into account the local t ransportat ion and communicat ion facilit ies as the cheques have to physically move to

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

12

and from the Clearing House. For example, for a cheque to be processed in Local Clearing in Mumbai, both the present ing and drawee branches should be situated within the jurisdict ion of the Clearing House in Mumbai. Q.6How does the Speed Clearing work? Banks have networked their branches by implement ing Core Banking Solut ions (CBS). In CBS environment, cheques can be paid at any location obviat ing the need for their physical movement to the Drawee branch. The concept of Speed Clearing combines the advantages of MICR clearing with that of CBS. Cheques drawn on outstat ion CBS branches of a Drawee bank can be processed in the Local Clearing under the Speed Clearing arrangement if the Drawee bank has a branch presence at the local centre. Q.7When will the beneficiary get funds under Speed Clearing? As on date, the local cheques are processed on T+1 working day basis and customers get the benefit of withdrawal of funds on a T+1 or 2 basis. 'T' denotes t ransact ion day viz. date of presentat ion of cheque at the Clearing House. So, the outstat ion cheques under Speed Clearing will also be paid on T+1 or 2 basis. Q.8Which are the centres where Speed Clearing is presently available? List of Speed Clearing centres is available at the link ht tp:/ / rbidocs.rbi.org.in/ rdocs/ content / Docs/ 10002_LSCC.xls. Q.9What are the charges for cheques cleared through Speed Clearing? Present ing branches are currently permit ted to levy charges at a rate not exceeding Rs.150 per cheque (inclusive of all charges other than Service Tax) for cheques of above Rs.1 lakh presented through Speed Clearing. No charges are payable for cheques of value up to Rs.1 lakh. With effect from April 1, 2011, no charges will be payable for cheques of value up to and including Rs.1 lakh from Savings a/ c customers. Banks would be free to fix charges for collect ion of other types of accounts for all values and also from Savings a/ c customers for cheque of value above Rs.1 lakh. Charges fixed should be reasonable and computed on a cost-plus-basis and not as an arbit rary percentage of the value of the instrument. Q.10How is Speed Clearing an improvement over collection basis? Outstat ion cheque collect ion through collect ion basis takes around one to three weeks t ime depending on the drawee centre. Under Speed Clearing, it would be realised on T+1 or 2 basis viz. within 48 hours. Further customers need not incur any service charge for collect ion of outstat ion cheques (value up to Rs. 1 lakh) in Speed Clearing which they may have to incur if such cheque is collected under collect ion basis. Q.11How will a customer know whether a cheque can be cleared in Speed Clearing? For facilitat ing customers to know CBS status of a branch, some of the banks stamp / print 'CBS' on the cheque leaves. Account numbers (if length of account number is more than 10 digits) printed on the cheque leaves may give a broad indicat ion regarding CBS status of the branch. Further customers may refer to the list of Speed Clearing-enabled bank

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

13

branches hosted on the website of the Reserve Bank of India under the link ht tp:/ / www.rbi.org.in/ Scripts/ bs_viewcontent.aspx?Id=2016. Q.12What type of cheques can be presented in Speed Clearing? Instruments of all t ransact ion codes (except Government cheques) which are drawn on CBS-enabled bank branches are eligible for being presented in Speed Clearing.

KHAS BAAT….. Fed, 5 Central Banks cut rate on $ swaps: The Federal Reserve cut the cost of emergency dollar funding for European banks as a part of globally coordinated central-bank response to the cont inent’s sovereign-debt crisis. The interest rate has been reduce to the dollar overnight index swap rate plus 50 basis points, or half a percentage point , from 100 basis points, and the programme was extended to February 1, 2013, the Fed said in a statement in Washington. The Fed will coordinate with the European Central Bank in the programme, which was also joined by Bank of Canada, Bank of England, Bank of Japan, and Swiss Nat ional Bank. The move is aimed at easing strains in markets and boost ing the central bank’s capacity to support the global financial system, the statement said. The cost for European banks to fund in dollars rose to the highest levels in three years on Wednesday as concerns about a possible breakup of the euro area increased after leaders said they had failed to boost the region’s bailout fund as much as planned.(ET dt 01.12.2011 p.1) S&P downgrades top US, European banks: In a major blow to the already-struggling banking sector in a weak global economic scenario, rat ing agency major S&P has downgraded as many as 15 large banks globally, including some big American names such as Bank of America, Cit igroup and Goldman Sachs. Standard and Poor’s has also cut rat ings for US-based banking giants such as JP Morgan, Morgan Stanley, Wells Fargo, while some European banking t itans like Barclays, HSBC, Lloyds Banking Group, RBS (Royal Bank of Scot land) and Rabobank have also been downgraded. In a major rat ing act ion review of as many as 37 banks globally, S&P has incidentally upgraded two Chinese banks-Bank of China and China Construct ion Bank. The review did not include any Indian banks. (BL dt 01.12.2011 p.6) RBI agreeable to asset sale to HSBC:RBS: Brit ish lender RBS India claimed that the Reserve Bank of India (RBI) has agreed to clear its proposal to sell commercial and retail assets to HSBC India.”We can confirm that the RBI is agreeable to the t ransfer of our retail and commercial businesses in India to HSBC,” an RBS statement said. Without offering more details, the bank said, “We cont inue to work closely with HSBC and the regulators to complete the transfer in a manner that is in the best interests of our clients and employees. (BL dt . 02.12.2011 p. 6) Net interest margins could fall by 15-20 bps in H2: CARE ratings: Banks could see their Net Interest Margins (NIMs) fall by 15-20 basis points due to low credit demand. There could also be a marginal increase in gross non performing assets to

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

14

2.86-2.9%, by the end of the current financial year, on account of slippages due to weak economic condit ions and restructured assets, said credit rat ing agency, CARE rat ings. According to the report released on Thursday, NIMs have already seen some compression in the first half of the current financial year due to fall in the credit -deposit rat io as well as hardening of interest rates. For the second half, liquidity is likely to remain tight owing to higher government borrowings coupled with the cont inued depreciat ion of the rupee. (BL dt 02.12.2011 p.6) Crisis management group for financial markets on cards: With high volat ility in the equity and currency markets, the Government aims to set up an empowered ‘Crisis Management Group’ for the financial markets. This group is likely to take shape on December 8, when the sub-commit tee of the Financial Stability and Development Council (FSDC) will meet. It is proposed to nominate a Deputy Governor of the Reserve Bank of India as the Chairman, along with senior officials from market regulator SEBI, insurance regulator IRDA, pension regulator PFRDA and the Ministry of Finance as members. A senior Government official familiar with the development says, “The effort is to bring sufficient ly high level of representat ion, so that prompt decisions could be taken for effect ive crisis management.” He said that though every segment of the financial sector has crisis prevent ion systems in place, an integrated system was needed to avoid sudden shocks which can quickly spread across market segments and inst itut ions. The genesis of the crisis may be different from time to t ime, but the manifestat ion is similar. Timely management of the crisis requires early detect ion of fault -lines based on informat ion on diverse inst itut ions and markets, he added. (BL dt 05.12.2011 p.3) Govt may cut EPF rate by 1.25%: About six crore employees could be in for a rude shock with the government considering a 1.25% cut in the Employees' Provident Fund (EPF) rate for this year. The first t ime in a decade that the returns on these ret irement savings would be slashed by more than a percentage point . Labour Minister Mr Mallikarjuna Kharge had promised workers that the Centre would try to raise the EPF rate for 2011-12 beyond the 9.5% paid last year. But now, a rate of 8.25% is on the cards. An official close to the development told ET that the primary reason for the proposed reduct ion in the EPF rate is the decision to pay 9.5% to members last year. Though the scheme's income for 2010-11 supported a payout of 8.5% to workers, the government decided to raise the rate to 9.5% after it found 'hidden' reserves of around `. 1,700 crore that had accumulated in its coffers over the years. (ET dt . 07.12.2011 p. 1) Interest rate futures market set to see regulatory changes: In a bid to give a boost to the interest rate futures (IRF) market , which has failed to take off despite a number of measures taken by the RBI and SEBI over the past three years, financial regulators plan to introduce some changes in the product features and delivery process. "In contrast to the currency futures market , the IRF segment has not taken off at all. We are examining this in consultation with the SEBI and will be introducing some changes in the product features and delivery process," a senior RBI official said. The central bank may introduce more of cash-set t led futures, and derivat ives with varying maturit ies, the official said. The RBI in March introduced a short term tenure futures contract on 91-

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

15

day t reasury bills in the market , but the market is st ill witnessing merger volumes. (FE dt . 07.12.2011 p. 2) Finmin panel gets 3,000 responses on black money: The high-level Finance Ministry commit tee on curbing the menace of black-money has received more than 3,000 comments from general public suggest ing ways to curb the generat ion of illicit funds. The commit tee, headed by Chairman of the Central Board of Direct Taxes (CBDT), has received close to 3,300 suggest ions through e-mail and the panel is now select ing the most appropriate ones for circulat ion among various agencies like the ED, DRI and Law Ministry. (FE dt . 07.12.2011 p. 2) CDS will catalyse growth of bond markets: The recent announcement of credit default swaps (CDS) guidelines by the RBI augurs well for the development of India's bond markets. The introduct ion of CDS will lead to a gradual deepening of the corporate debt market . At the same t ime, it is believed that RBI has set adequate safeguards in place in the regulatory framework to ensure systemic stability and safety. CDS are instruments that provide buyers with protect ion against credit losses, just as insurance products do. Introduct ion of CDS can catalyse the Indian corporate bond market in three ways. CDS can expand the bond market investors' appet ite for lower-rated issuers, as against their current preference for higher-rated securit ies. Since investors are now protected against any change in the credit quality of their investments, they will be more open to invest in instruments rated below AA category. (ET dt . 06.12.2011 p. 12) Govt overruled on key changes in banking, insurance Bills: Crucial financial sector reforms are again stuck, despite Finance Minister Mr Pranab Mukherjee’s appealing to polit ical part ies to help pass the legislat ions in this regard. Parliament’s standing commit tee on finance on Thursday rejected a clause in the insurance Bill to raise the foreign direct investment (FDI) cap in private insurance from the exist ing 26 per cent to 49 per cent . The panel also turned down a key clause in the banking Bill, to raise the cap on vot ing rights of a single shareholder in government-run banks to 10 per cent from the exist ing one per cent , and in other banks from the exist ing 10 per cent to a level proport ionate to the stake. “We wanted to retain the exist ing caps on vot ing rights in banks,” a member of the commit tee told Business Standard. The commit tee also refused to accept the government’s proposal to bring down the minimum paid-up capital in health insurance to `.50 crore from the current `.100 crore. It recommended retaining the exist ing norms. (BS dt . 09.12.2011 p. 4) TN Banks deposit rise 9.7%: The total deposits of the banks in Tamil Nadu registered an year-on-year increase of 9.7% by September 2011, touching `. 3,32,820.79 crore. The gross credit in the state registered an increase of 17.66% during the same period and reached `. 3,88,170.42 crore, according to the Tamil Nadu state-level bankers’ commit tee. The state has maintained a credit deposit rat io of 116.63%, one of the highest in the country. The banks have achieved the annual target for out standing priority-sector advances and the share of the advances have increased to 42.29% as against the nat ional norm of 40%. (FE dt 09.12.2011 p.3)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

16

To improve service, Finance Ministry asks banks to organise ‘customer contact week’: Customer is king. This is what the Finance Ministry wants all public sector banks to let their customers know. It has asked these banks to organise ‘customer contact week’ in mid-December.If you have a deposit with, or have taken a loan from, one of the 26 public sector banks (includes the five associate banks of State Bank of India), then don’t be surprised if branch staff seek your feedback on improving services and make efforts to address your grievances. Bankers say this is the first t ime that the Ministry has issued a communicat ion asking them to observe a ‘customer contact week’. This is to improve customer service, sensit ise staff about at tending to customers in a courteous manner, understand the grievances of staff, and mot ivate them. Further, banks have to ensure that branches, regional offices and zonal offices are kept clean and aesthet ically att ractive without incurring any major expenditure.During the ‘customer contact week’, zonal managers, regional managers and other senior funct ionaries are required to visit various branches for at least two days. The purpose of the visit should be to gauge the customers’ (big and small) impression about the bank’s service and get feedback on areas of improvement. (BL dt .10.12.11 p6) RBI may opt for status quo with a dovish tone: Though the buzz of a cut in the cash reserve rat io is doing the rounds among dealers, economists expect the Reserve Bank of India to hold the policy rates as well as the CRR during the mid-quarter review of the monetary policy scheduled for Friday, December 16. Experts say the central bank will refrain from using the CRR as a liquidity tool, as a reduct ion in the rate will go against its current ant i-inflat ionary stance. CRR is the proport ion of deposits banks need to set aside with the central bank as cash. It is current ly six per cent of the net demand and t ime liabilit ies. “Latest comments from the Reserve Bank of India indicate the CRR is also a monetary policy tool, and reducing it would signal a reversal of its monetary policy stance. “To avoid sending such a signal but support banking system liquidity, the Reserve Bank of India is likely to cont inue to employ tact ical tools, such as buying government securit ies via open market operat ions,” said Mr. Anubhut i Sahay and Mr. Nagaraj Kulkarni, economists at Standard Chartered Bank. (BS Dt 12.12.2011 P.1) Banks may be allowed to accept immovable property to settle claims: Banks and financial inst itut ions may soon be allowed to accept immovable property in full or part ial sat isfact ion of claims against default ing borrowers. A proposal to this effect has been made in a new Bill introduced in Lok Sabha on Monday to amend the exist ing SARFAESI law. Current ly, banks are not empowered to accept immovable property in full or part ial sat isfact ion of the claim against the default ing borrower, if no bidder comes to bid or banks are unable to find a buyer for such assets. Banks, as secured creditors, are, however, permitted to sell the securit ies to realise the defaulted loans.(BL dt .13.12.11 p4) Parliament panel for 26% voting right cap in private sector banks: A Parliamentary panel has suggested raising the cap on shareholders’ vot ing rights in private sector banks to 26 per cent from the current 10 per cent . This recommendat ion of the Standing Commit tee on Finance, headed by Mr Yashwant Sinha, is in sharp contrast to the Government’s proposal in the Banking Laws (Amendment) Bill 2011. This Bill proposes that vot ing rights in private sector banks be proport ionate to the shareholding, while

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

17

removing the exist ing 10 per cent ceiling. Allowing vot ing rights to be proport ionate to the shareholding would enable private sector banks to access capital for business development, the Finance Ministry had contended. However, the panel is not in favour of any such move by the Government. The vot ing right cap should be increased to 26 per cent in order to maintain a balance between concentrat ion of economic power/ control and promot ion of corporate democracy, the Commit tee said in its report tabled in Lok Sabha. The report is, however, silent on the Government’s proposal to raise the vot ing rights cap in public sector banks to 10 percent, on par with State Bank of India. (BL dt .14.12.11 p 13) Parliamentary panel pitches for integrated banking law: The parliamentary standing commit tee on finance has suggested instead of bringing piecemeal amendments t ime to t ime, the government should consider the formulation of an integrated modern banking law, consolidat ing the provisions of other statutes that cover various aspects of banking.”Such an integrated and holist ic law would also be in line with the proposed legislat ion in other areas like the Direct Taxes Code and the Companies Bill,” the panel out lined in its report on the Banking Laws (Amendment) Bill, 2011, tabled in Parliament on Tuesday. The commit tee stressed on employee-friendly measures in the integrated banking law. These include the introduct ion of employee stock opt ions, deterrent safeguards against ‘willful default’ by a borrower in repaying loans and other forward-looking proposals that reflect emerging realit ies. (BS dt .14.12.11 p7) Bank mergers must be kept outside competition panel’s purview: Chawla: The Chairman of the Compet it ion Commission of India, Mr Ashok Chawla’s view that bank mergers should be kept outside the purview of the compet it ion commission, aligns with that of the Standing Commit tee of Finance. “We had given our opinion earlier. Our opinion at that t ime was and it cont inues to be that may be there is a case for keeping bank mergers outside.... where some weak bank or failing bank is going to be acquired by a healthy bank,” he told Business Line. The Commit tee’s report on the Banking Laws (Amendment) Bill, 2011, which was tabled in the Lok Sabha recent ly, proposed keeping bank mergers out of the purview of the CCI. But it states that this exempt ion should be considered as a special case and revisited after the regulators gain a lit t le experience. (BL dt .15.12.2011 p.6) RBI to deal with multi headed dragon: Any General’s nightmare is a bat t le on multiple fronts simultaneously. That is what RBI Governor, Dr D Subbarao faces now. When he sits down for the mid-quarter review of the monetary policy on Friday, he not only has to ensure that he is close to winning the two year bat t le on inflation, but also be prepared to fight the sinking rupee, dwindling investments and soaring government borrowing. He also has to ensure that economic growth does not collapse. And all this, without leaving the inflat ion front open again. The burden has fallen on central bank to provide relief for every ill. Some of the tools Dr Subbarao is left with are - cut t ing policy rate, reducing the cash reserve requirement and throwing a port ion of the $300 billion, but decept ive foreign exchange, reserves, at the market .(ET dt 16.12.2011 p.1)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

18

Worried over slowing growth, RBI hits the ‘pause’ button: The Reserve Bank of India, facing flak from industry for st ifling growth through its t ight monetary policy in an attempt to curb inflat ion, acted on expected lines and left key rates unchanged.The stock markets, however, were not too happy, with the benchmark BSE Sensex falling 345 points, or a lit t le over 2 per cent , to 15,491.35 points, its lowest in almost two years, on a day when the rupee recovered smart ly against the dollar. In its mid-quarter monetary policy review, the RBI indicated that it may now shift gears and cut rates, responding to the risks to growth. Growth is back on centre-stage as inflat ion shows signs of moderat ion. The repo rate remains at 8.50 per cent and the cash reserve rat io at 6 per cent . Banks are unlikely to change their deposit and lending rates. (BL dt .17.12.11 p 1) Fitch affirms investment grade to SBI: Global rat ing agency Fitch affirmed ‘BBB-’ or investment grade with stable out look to the country’s largest lender State Bank of India. The agency has also affirmed SBI’s Viability Rat ing (VR) at ‘BBB-’. The rat ings of SBI are driven by a high probability of support from the government, given its systemic importance as the largest bank in India, as the sole banker in many economically backward regions and as a banker to various government ent it ies, Fitch said in a statement. As a result the long-term rat ings are linked to the sovereign rat ing and will move in tandem with the lat ter, it said. However, it said, some of SBI’s credit fundamentals are under pressure. (FE dt. 17.12.2011 p. 3) Karnataka Bank offers 5% interest on SB deposit: Karnataka Bank Ltd has increased the interest rate on SB deposit from 4 per cent to 5 per cent with immediate effect . Quot ing Mr P. Jayarama Bhat, Managing Director of the bank, a bank release said that the enhancement of interest rate on SB deposits, coupled with credit ing of interest on quarterly basis, will increase the yield on SB deposits of all the customers. (BL dt . 19.12.2011 p. 4) RBI offers new branch licences to StanChart, Deutsche Bank: After more than a year, the Reserve Bank of India has started offering new branch licences to foreign banks that have a large network of branches. Industry players say this indicates further delay in framing guidelines for the wholly-owned subsidiary model for foreign lenders in India. The top seven foreign lenders in the country, which account for over 70 per cent of foreign bank branches, have not added a single branch to their network this year, though they had applied to Reserve Bank of India for new branch licences.According to bankers, in the last few weeks, Reserve Bank of India offered new licences to Standard Chartered Bank and Deutsche Bank. With 94 branches, Standard Chartered has the largest network among foreign banks in India. The bank received three new licences and plans to open the branches next year. Deutsche Bank, which has 15 branches, has secured licences to open branches in Ahmedabad and Surat . (BS dt .20.12.2011 p6) Euro zone weakness may affect Asia-Pacific banks: S&P: Non-performing loans and credit provisioning are likely to increase, especially in banking systems exposed to high inflat ion, such as in India and Vietnam, as Euro zone weakness dampens global and regional growth, said credit rat ing agency S&P’s in a report . This observat ion also holds good for the banking systems of China and Hong Kong too, which witnessed high credit growth. The report, ‘A slowdown in Europe and China, and sluggish

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

19

exports moderate Asia-Pacific credit out look in 2012’, has assessed that the banking sector’s earnings are likely to weaken to reflect a dip in business volumes associated with slower economic act ivity. “Contagion from Europe could unleash more anxiety in the already jit tery credit markets in Asia-Pacific. Banks and other lenders in the region are already paying more to insure their debt financing, as reflected in the widening credit spreads,” the report said.(BL dt . 21.12.2011 p. 6) RBI penalises 19 banks for flouting derivative norms: Meena: The RBI has imposed penalt ies on 19 commercial banks, including SBI, HDFC Bank, ICICI Bank and Cit ibank, for violat ing norms on derivat ives, the Parliament was informed. The RBI has informed that they had imposed penalt ies on 19 commercial banks on April 26, 2011, for contravention of various instruct ions issued by RBI in respect of derivat ives such as failure to carryout due diligence in regard to suitability of products and selling derivat ives products to users not having risk management policies, Minister of State for Finance Mr Namo Narain Meena said in a written reply in the Rajya Sabha.(BS dt . 21.12.2011 p. 6) To grow, banks need ‘capital infusion of ̀ . 10,000cr a year’: Public sector banks need capital infusion of `. 10,000 crore a year if they were to grow their credit port folio and also their market share. “With credit growth between 15 and 20 per cent , then capital base also should be growing at 15-20 per cent,” Dr C. Rangarajan, Chairman, Prime Minister’s Economic Advisory Council, said at the India Finance Conference 2011, organised by the Indian Inst itute of Management - Bangalore, and IIM – Calcutta, on Wednesday. “There is a need for the Government to cont inuously inject capital into PSU banks to the order of `. 10,000 crore a year or more,” he said. With credit port folio of banks growing, there is a need for addit ional capital, some of which could be met through the banks’ internal resources. (BL dt .22.12.2011 p.6) Lok Sabha approves Bill to raise capital of Exim Bank: The Lok Sabha has given its nod for a Bill to enhance the authorised capital of Exim Bank of India from the exist ing ̀ . 2,000 crore to ̀ . 10,000 crore. This Bill - Export Import Bank of India (Amendment) Bill, 2011 - was passed after Mr Namo Narain Meena, Minister of State for Finance, assured the Lower House that supremacy of Parliament was not being diluted and that Members of Parliament would have a say in future capital enhancements of Exim Bank. “Capital infusion is made through Budget provision. It will have to come to you for approval,” Mr Meena said, responding to opposit ion members’ concern over an open-ended provision in the Bill. The Bill seeks to empower the Centre to raise the amount of authorised capital of Exim Bank from t ime to t ime through execut ive orders. (BL dt22.12.2011 p6) Banks safe, can handle shocks: RBI: India’s banking system is strong, although the rising volume of bad loans poses a minor concern, said a report by the Reserve Bank of India (RBI) on the health of India’s financial sector, which juxtaposes that largely cheery picture with gloomy ones about the economic environment and the markets. In its fourth Financial Stability Report published, the central bank said India’s banks can handle shocks to the system - even when bad debts rise 150% from current levels. “The banking sector remained resilient even under severe

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

20

credit risk stress scenarios, though a few individual banks could come under duress,” the biannual report said. The central bank ident ified agriculture, power, real estate and telecom as the sectors responsible for most bad loans. (Mint dt .23.12.2011 p1) Invest without waiting for rates to dip: Subbarao: Stat ing that it was very hard to spell out when the RBI will be in a posit ion to reduce interest rates, the central bank Governor, Dr D. Subbarao, has asked industrialists and others to go ahead with their projects. Addressing members of the Andhra Chamber of Commerce and Industry, Dr Subbarao said that the best t ime to make investments is now. Saying that fortune favoured those who take risks, he advised investors to be ready to “bat tle the uncertaint ies”.He said the crit icism RBI is facing today is that the raised interest rates were moderat ing growth. But the RBI also had a responsibility to discharge to the 80% of the people in the country who do not have a voice and are affected by rising inflat ion. (BL dt .23.12.2011 p6) Banks borrow ̀ . 1.73 trillion: Banks borrowed record money from the central bank more than ̀ . 1.73 trillion, as advance tax out flow cont inued to weigh on the liquidity of the banking system and in addit ion banks had to maintain their mandatory cash balance with the central bank. Last year around this t ime banks had borrowed about `. 1.72 trillion from the central bank for similar reasons. Reserve Bank of India lends banks at its repo rate, present ly at 8.5%. Banks’ borrowing from RBI generally goes up on Fridays as the daily liquidity support is not available for them on weekends and also because banks have to maintain a certain amount of their deposits in cash with the central bank. They pledge their bonds or borrow from the market to maintain these cash balances known as cash reserve rat io. (Mint dt . 24.12.2011 p. 10) SBBJ’s ‘Ready Money’ deposit scheme: The State Bank of Bikaner and Jaipur launched a new-term deposit , Ready Money, which carries 8.50 per cent interest for any period between seven and 180 days. The new deposit scheme is meant to at t ract high-value liquid funds from various segments including individuals and companies, Mr Shiva Kumar, Managing Director, State Bank of Bikaner and Jaipur, said in a release. “Apart from providing high return for short period, it also gives high liquidity, since the penalty for prepayment has been waived for this product ,” Mr Shiva Kumar said. Under this product , the minimum deposit required is `. 50 lakh. The bank also increased its one-year deposit rate from 9.25 per cent to 9.50 per cent with effect from 23.12.2011. (BL dt . 24.12.2011 p. 6) ICAI for branch-level audit of private sector banks: Banking and account ing regulators don’t see eye to eye, as Reserve Bank of India wants the pract ice relaxed even for public sector banks. Private sector banks may have their branches statutorily audited by an Reserve Bank of India-approved panel, on the pat tern of public sector bank audits, if the central bank accepts a suggest ion by the Inst itute of Chartered Accountants of India (ICAI). The ICAI fears a high incidence of corporate debt restructuring may affect banks’ financial health, the level of which cannot always be detected at the aggregated level. The account ing regulator has asked the Reserve Bank of India to introduce a mandatory audit of private sector bank branches by people chosen

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

21

from a central bank-approved panel. Though mandatory for all public sector banks, such independent audits at the branch level are not required for private banks. Current ly, the statutory auditor of private banks conducts branch audits, only if a need is felt to do so. Ironically, the suggest ion comes at a t ime when the RBI is talking of relaxing audit norms for public sector banks. At the ICAI’s recent western region conference, Reserve Bank of India Governor Dr D Subbarao had said, “With concepts like core banking and centralised record keeping, the relevance of the audit of branches of public sector banks has significant ly declined.” He had said these banks had represented to the RBI that branch audits should be reduced. (BS dt .26.12.2011 p1) RBI likely to go for rate cut in Q2 2012: Nomura: Inflat ion in India is likely to moderate as per the Reserve Bank’s project ion while the growth is expected to fall, prompt ing the apex bank to start interest rate cuts from the second quarter of 2012, global credit rat ing and research firm Nomura has said. “We share the view on the near-term inflation t rajectory with the Reserve Bank of India and believe that the rate-hiking cycle is over,” Nomura said in its latest issue of ‘Asia Economic Alert’. Falling economic growth numbers may also prompt Reserve Bank of India to go for rate cuts, it added. “We expect the Reserve Bank of India to start cutt ing policy rates in Q-2 2012, as growth is likely to deteriorate in the next few quarters,” Nomura said. (ET dt .26.12.2011 p) Reforms commission looking at uniform legislation for banks: The Financial Sector Legislat ive Reforms Commission (FSLRC) is considering a single, harmonised and uniform legislat ion applicable to all banks and giving the central bank the power to sanct ion takeover of a co-operat ive bank by commercial banks, said Mr Anand Sinha, Deputy Governor, RBI. The fact that different banks are governed by different laws has resulted in an uneven playing field and this need to be addressed. The Commission was set up by the Government earlier this year to recommend radical overhaul of laws governing the financial sector. For example, while amendments were carried out to enable State Bank of India, SBI subsidiary banks and nat ionalised banks to issue preference shares, though at different points of t ime, banks in the private sector cannot issue preference shares as the amendments to the Banking Regulat ion Act is st ill to be carried out . (BL dt .27.12.2011 p6) RBI to issue `. 500 notes with rupee symbol: The Reserve Bank will short ly issue `. 500 notes which will have the rupee symbol. The `. 500 notes will be of the Mahatma Gandhi-2005 Series bearing the signature of the RBI Governor Dr D Subbarao and with the year of print ing ment ioned on the back of the banknote, the apex bank said in a statement. The design of the notes to be issued is similar in all respects to the exist ing ̀ . 500 in Mahatma Gandhi Series-2005 issued earlier, except for the rupee symbol. (BL dt.27.12.2011 p6)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

22

Agriculture & Other Priority….. Improve credit delivery in rural areas: RBI to pvt banks: At a t ime when the government and regulators are emphasizing inclusion and increase in credit delivery to those without access to formal sources of finance, private sector banks are found to have low credit -deposit rat ios in rural areas as compared to public sector counterparts. In a recent interact ion at the SLBC meet ing, in which RBI Governor Dr D Subbarao was present, bankers brought this to the regulator’s notice. According to bank execut ives present, RBI asked private sector banks to boost credit expansion in rural areas. The credit -deposit (C/ D) rat io indicates the amount banks extend as loans for every `. 100 of deposit . (BS dt . 01.12.2011 p. 6) Govt plans merger of more regional rural banks: Following a move by the Central Government to further amalgamate regional rural banks in the country, employee unions are demanding the format ion of a Nat ional Rural Bank of India (NRBI), by amalgamat ing all regional rural banks and de-linking of regional rural banks from the sponsor banks. In a let ter dated November 28 to the chairmen of sponsor banks of regional rural banks, the Department of Financial Services, Ministry of Finance, said that current ly there are a large number of regional rural banks, sponsored by different banks, funct ioning in a State. It said that many of the regional rural banks are very small, with network of less than 100 branches. The let ter suggests that geographically cont iguous regional rural banks sponsored by different banks within a State could be amalgamated with single sponsor bank. It has also sought no-object ion cert ificates from the banks for this move. (BL dt 12.12.2011 p.13) Release ̀ . 200 cr for rural banks: FM to east CMs: Finance Minister Mr Pranab Mukherjee met chief ministers and bank heads of the eastern region on Saturday and said he had asked the chief ministers to release about `. 200 crore as part of their share to revitalise Regional Rural Banks. Talking about agricultural credit targets for the country, he said the credit target for the year is `. 4.75 lakh crore, of which `. 2.23 lakh crore had already been disbursed. He said 73,000 villages are to be covered under financial inclusion in 2011-12, of which 23,000 villages are in the east , and 50 per cent of the target had been met. “I have asked the 10 chief ministers of the east to release `. 198.50 crore for recapitalisat ion of 18 regional rural banks. I would request them to release their shares expedit iously,” Mr Mukherjee said. (FE dt 12.12.2011 p.11) Govt mulls `. 1 k-Cr risk guarantee fund: The government is considering set t ing up a `.1000 crore credit risk guarantee fund to encourage banks to give loan to the poor, Prime Minister Dr Manmohan Singh said, even as he asserted policies could not have a one-size-fits-all approach towards big and small cit ies. “To encourage banks to lend in significant volumes to the economically weaker sect ions and low-income groups, we are considering the establishment of a credit risk guarantee fund with a corpus of `. 1,000 crore this year,” Dr Singh said. (BS dt 14.12.2011 p.6)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

23

KVG Bank rolls out phase II plan for intensifying rural lending: Karnataka Vikas Grameena Bank (KVG Bank), Dharwad-based regional rural bank, has rolled out second phase of rapid act ion plan for intensifying lending in rural areas. Addressing the Grama Sabha at Hulikatt i Village, Mr C. Sambasiva Reddy, Chairman, KVG Bank, said “Grama Sabhas are helpful in giving disseminat ing information relat ing to Kisan Credit Cards (KCC) and General Credit Cards (GCC) and other specific products designed by the banks to cater to the financially excluded segments especially small and marginal farmers.” (BL dt .15.12.2011 p19) Bankers unhappy with Govt’s special rural credit drive: The Finance Ministry’s direct ive to all public sector banks to organise a special credit campaign to give loans to all eligible borrowers in rural areas in the fortnight beginning December 1 has not gone down well with key stakeholders in the banking system. Bankers and t rade union representat ives say the Ministry’s rapid act ion plan asking public sector banks to extend credit facilit ies to all eligible agricultural and non-agricultural borrowers - by issuing Kisan Credit Card (to farmers) and General-purpose Credit Card (to non-farmers) - in rural areas in 15 days flat was a major challenge. The target set by North Block for the 26 public sector banks (including five associate banks of State Bank of India) was daunt ing given that even after 42 years of bank nat ionalisat ion just about 40 per cent of the country’s cit izens have banking facilit ies. (BL dt .20.12.2011 p 6) Subbarao asks bankers to reach out to rural masses : The importance of financial inclusion cannot be overemphasised as the country has entered the second phase of economic reforms, said the RBI Governor, Dr D. Subbarao, on Wednesday. Banks, he said, have to play a crucial role by reaching out to rural as well as remote areas. Dr Subbarao addressed the local bank officials and said that most of the 6 lakh villages in the country were beyond the pale of banking and earnest efforts should be made to make banking services available to rural people. Cit ing the example of Ernakulam in Kerala, he exhorted bankers in East Godavari to emulate their Kerala counterparts and achieve 100 per cent financial inclusion. (BL dt .22.12.2011 p.6) Nabard projects ̀ . 52,168 cr credit potential for state: The Nat ional Bank for Agriculture and Rural Development (Nabard) has est imated a credit flow potent ial of `. 52,168.11 crore under the priority sector in Karnataka for 2012-13, an increase of 26.9 per cent over 2011-12. The share of crop loan formed 46.6 per cent of the est imated potential, followed by other priority sector at 27.3 per cent , agricultural term loan at 18.8 per cent and non-farm sector at 7.3 per cent .The State Focus Paper for 2012-13 has been prepared keeping in view the approach of the 12th Five Year Plan that envisages ‘faster, more inclusive and sustainable growth’. The SFP prepared by Nabard contains the aggregat ion of exploitable credit potent ial est imated for all dist ricts of the state for the ensuing year. The document contains intervent ions required at various levels, in policy, infrastructure and credit for harnessing the potent ials identified. The est imates have been brought out by Nabard in its State Focus Paper (SFP) 2012-13 which will be discussed by at the State Credit Seminar being held on December 27, 2011. Mr B S Shekhawat, Executive Director, Nabard, would be making a presentat ion on the SFP at the seminar. Karnataka’s chief secretary, Mr S V Ranganath would release the focus paper. (BS dt .26.12.2011 p5)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

24

Mixed response to amalgamation of RRBs: The Central Government’s proposal for another round of consolidat ion among Regional Rural Banks has received mixed response from a couple of workers’ unions in the Regional Rural Banks. While some sought the format ion of a Nat ional Rural Bank of India (NRBI) by amalgamat ing all Regional Rural Banks and de-linking Regional Rural Banks from the sponsor banks, others sought the merger of Regional Rural Banks with their sponsor banks. Mr Vasanth Bannigol, Joint Secretary of the All-India Regional Rural Bank Employees Associat ion, said that at the nat ional level there should be an NRBI, and each State should have a State-level Regional Rural Bank. However, All-India RRB Officers Federat ion, affiliated to AIBOC, said that it is demanding the merger of RRBs with their sponsor banks. (BL dt .27.12.2011 p6)

BASEL….. Compliance with Basel III norms will entail additional costs for banks: Subbarao: The RBI Governor, Dr D. Subbarao, on Wednesday said that Indian banks will have to incur addit ional costs to build capital buffers to comply with Basel III rules. Though the Indian banking sector was comfortably placed to implement Basel III regulat ions, some banks might need addit ional capital, Dr Subbarao said at a meet ing with bankers. “On aggregate, banks are comfortably placed in terms of capital adequacy, but a few individual banks may fall short due to implementat ion of Basel III.” The Basel III rules, formulated by the Basel Commit tee on Banking Supervision following the financial crisis of 2008-09, require banks to shore up their capital and liquidity buffers, and will be implemented in phases from 2013. The implementat ion of Basel III will lead to an increased cost of borrowing for Indian companies both in the domest ic and overseas markets, Dr Subbarao said. Banks should look at t rimming the interest rates on advances and hiking those on deposits in order to achieve a double-digit growth. “For double digit growth we need more deposits, and this (more deposits will come in) happen if banks provide att ractive interest rates on deposits,” he pointed out .(BL dt .08.12.11 p6) Basel Weighing Changes in rules: Global financial regulators meet ing this week will seek to eradicate unintended consequences from their draft bank-liquidity standards to avert a threat to lending. The Basel Commit tee on Banking Supervision will weigh changes to its proposed liquidity-coverage rat io, amid crit icisms that it may stymie lending. Banks have argued that requiring them to hold enough easy to sell assets to survive a 30-day credit squeeze may curtail loans by forcing them to hoard cash and buy up government bonds. “There’s a complete disconnect ion between the economic reality of what is highly liquid and what is allowed to count under the LCR,” Monika Mars, a PricewaterhouseCoopers AG director in Zurich, said in an interview. (BS dt 13.12.2011p.6)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

25

Bonds… Money Market…. CDS will help develop bond market: Crisil: Rating agency Crisil has said that introduct ion of credit default swaps (CDS) will give a much-needed liquidity boost to India’s bond market . It says the instrument will help in gradual deepening of the corporate bond market as it will increase investors’ appet ite for lower-rated issuers as they will look beyond the t radit ional ‘high-safety’ securit ies. It believes that CDS has the potent ial to provide a thrust to infrastructure financing. “Increased use of CDS has the potent ial to impart addit ional liquidity to the bond markets, which have so far been predominant ly illiquid,” the rat ing agency said. Coordinated act ion by the other regulators can allow insurance companies, pension funds and provident funds to part icipate through the CDS route. It will allow lower-rated borrowers diversify their funding sources by accessing the bond markets,” it added. (FE dt . 09.12.2011 p. 18) Call rates drop: Call rates eased at the overnight call money market due to lack of demand from borrowing banks. The overnight rate ended lower at 9.50% from Friday's closing level of 10%. It moved in a range of 9.70% and 8.90%. The RBI, under the LAF, purchased securit ies worth `. 1,66,055 crore from 64 bids at the one-day repo auct ion at a fixed rate of 8.50%. (BL dt . 20.12.2011 p. 6) Moody’s upgrades Indian govt bonds: Credit rat ing agency Moody’s upgraded its rat ings on Indian long and short-term government bonds to “investment” grade from “speculat ive”, holding that the country’s diverse sources of economic growth have enhanced its resilience to global shocks.The move is expected to lead to higher fund flows into the country and reduce the cost of overseas borrowing for Indian companies. (Mint dt .22.12.2011 p3) Call gains: Call rates firmed up further at the overnight money market owing to sustained buying support from borrowing banks amid scarcity of liquidity in the banking system. The rate ended higher at 9.85% from Thursday's close of 9.75%. It moved in a range of 9.85% and 9.80%. The RBI, under the Liquidity Adjustment Facility, purchased securit ies worth `. 1,73,330 crore from 76 bids at the three-day repo auct ion at a fixed rate of 8.50%. (BL dt . 24.12.2011 p. 6)

Credit Card….. Credit card spending on the rise: While most sectors of the economy are seeing a sluggish loan demand due to high interest rates, credit card spending seems to have bucked the t rend. Credit card outstanding in the first seven months of the current financial year has increased 7.2 per cent , as compared to 8.3 per cent decline during the year-ago period. According to latest data released by the Reserve Bank of India, the growth, on a year-on-year basis, was five

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

26

per cent t ill October 21, as compared to a 22 per cent decline in the previous year. Credit card outstanding stood at `. 19,401 crore as on October 21, which is higher by `. 1,300 crore since March 25 and by `. 923 crore over the past one year. This September even saw a rise in the number of outstanding credit cards, for the first t ime in 17 months. The number increased to 17.63 million from 17.59 million in the previous month, according to RBI data. It said, “Personal loans increased by 14.5 per cent (y-o-y) in October 2011, higher than the growth of 12.0 per cent in the previous year, with its components such as housing, advances against fixed deposits and credit card outstanding registered accelerated growth”. (BS dt . 01.12.2011 p. 7) HDFC Bank’s ‘Solitare’ range of premium cards for women: HDFC Bank has launched a premium bouquet of credit cards for women. Called ‘Solitare Premium’ and ‘Solitare’, the two cards offer a unique combinat ion of lifestyle and wellness benefits that are tailor-made for women. Solitare Premium is being billed as the first premium women’s card in the country. Ms Renu Sud Karnad, Director, HDFC Bank, unveiled the card on Wednesday. “We felt there was a vacuum in the premium credit card segment for women. We are sure that Solitare will fulfil a long-standing need for women who are pursuing a successful career, t ravelling the world and are at the forefront of the global consumpt ion story. We want to make sure that every professional woman has a Solitare in her purse,” Mr Prolay Mondal, Country Head, Retail Assets and Credit Cards, HDFC Bank, said. (BL dt . 01.12.2011 p. 6) Banks upbeat on credit card biz: After a gap of nearly three years, banks are once again planning to aggressively expand their credit card port folios in India. Foreign and private sector banks have announced a slew of init iat ives and are exploring inorganic opportunit ies to ramp up their card businesses. Bankers are confident that unlike the last t ime, there would not be significant erosion in asset quality, since their expansion strategies are backed by rich informat ion on borrowers’ credit histories. “In the last couple of years, the one factor that has changed the whole approach of banks in unsecured lending, especially in credit cards, is the ability to underwrite customers far more intelligent ly than ever before. The quality of the credit bureau in India has improved significant ly. Also, banks are not going for unbridled expansion. The growth is measured and researched, without compromising the credit quality,” said a senior official of a foreign bank in India.(BS dt .08.12.11 p6) Value of credit card transactions up 33% in October: Credit card t ransactions carried out in October were worth `. 8,997.63 crore, up 33.1% from that in the corresponding period last year, signifying that people are shift ing to electronic means of payment. The number of credit cards in circulat ion has, however, declined by 3.3% to 1.76 crore as of October 31, 2011 according to the Reserve Bank of India. Credit card t ransact ions during the April-October period were worth `. 54,369.69 crore, up 30.1 per cent over the corresponding period of 2010-11. Debit card transact ions were up by 50.5% in October to ̀ . 5,591.06 crore. (BL dt 13.12.2011 p.6)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

27

SBI Cards to customise offers around spending patterns: Credit -card issuers are increasingly turning into financial counsellors. Come January quarter, SBI Cards, a standalone credit -card company co-promoted by India’s largest state-owned bank, plans to launch ‘customised statements’ to help its customers know their spending pat tern, say over a year. Based on the analysed spending pat tern, which will be shared in the credit -card statements, SBI Cards will provide ‘offers’ that would help its customers save on their spends. “Our new customised statement will tell you where your `. 100 is going. X per cent in grocery, Y per cent in jewellery, and so on, We want to help customers know how are they spending… where their money is going … and we have offers which are going to help them make smart savings on their spends,” Mr Sanjeev Jain, Chief Execut ive Officer, GE Capital Business Processes Management Services (GECBP), said. (BL dt . 19.12.2011 p. 13) ICICI Bank launches 2-in-1 platinum credit-cards: ICICI Bank has launched a product under which two credit-cards are linked to a single card account with a single statement and single fee. Card members will receive two cards -ICICI Bank Rubyx American Express Plat inum Credit Card and the ICICI Bank Rubyx MasterCard Plat inum Chip Credit Card. The cards provide access to a host of privileges from American Express and MasterCard, said a press release from the bank. Card members can choose between three reward plans and earn bonus points across merchant categories where they normally spend more. (BL dt . 21.12.2011 p. 6)

Credit Growth….. Credit growth slows; moves closer to RBI’s projection of 18%: The persistent rate hikes by the RBI seem to be taking effect . The non-food bank credit increased by 18.2% for October 2011, as compared with 20.8% in the previous year, according to the sectoral deployment of credit data, released by the RBI. The RBI’s project ion for credit growth is 18% in the current fiscal. According to RBI data a slowdown in the pace of credit growth is visible across sectors. Credit to agriculture on a year-on-year basis, increased by 7.1% down from 20.4% in the previous year. Credit to industry increased by 23.1% (24.8% in the previous year). Credit to services sector increased by 18.2%, (21.5%) and credit to commercial real estate increased by 12.%, (1.76%). (BL dt 01.12.2011 p.6) Credit growth will start picking up next year, says Axis Bank MD: Credit growth, which has been moderat ing over the last two years, will start picking up next year, said Ms Shikha Sharma, Managing Director and Chief Execut ive Officer, Axis Bank. “Credit growth is direct ly linked to what is happening in the economy. Our belief is in the long term growth of the economy so we expect credit to pick up,” Ms Sharma told newspersons on the sidelines of a CII leadership summit on Friday. The slowdown in credit offtake was primarily on account of a dip in demand from large corporates. “The industry was on a t ightening mode, they were looking at leveraging their exist ing investments rather than pumping in fresh investments,” she said. Growth in credit would be fuelled by a moderat ion in interest rates on the back of easing inflat ion. The annual wholesale price

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

28

index-based inflat ion rate in October rose 9.73 per cent compared to 9.72 per cent in September. (BL dt .10.12.11 p.6) Banks unlikely to achieve RBI’s 18% loan growth target: Loan growth, which has slowed significant ly in the current financial year due to high interest rates, may result in banks falling short of the Reserve Bank of India’s loan growth project ion of 18 per cent for 2011-12. Annual growth in bank advances slowed to 17.7 per cent as on November 30, compared with 21.4 per cent in March. Banks had given loans worth `. 2.5 lakh crore t ill November and would need to disburse an addit ional `. 4.5 lakh crore to achieve 18 per cent growth for 2011-12. “Credit growth this financial year has only been about six per cent so far. So, maintaining the original 18 per cent would be difficult , given we have only four months left ,” said Mr B A Prabhakar, Execut ive Director, Bank of India. In the last four months of the previous financial year, banks had disbursed `. 3.6 lakh crore. (BS dt 13.12.2011 p.6) Loan growth may not pick up yet as downside risks remain: Bankers don’t see a pick-up in loan growth just yet despite the central bank signalling an end to the interest rate t ightening cycle. Mr B A Prabhakar, execut ive director, Bank of India, said: “Just the pause in the t ightening cycle alone may not help revive credit growth. The industry is looking at visibility on the policy and several other fronts.” (FE dt . 17.12.2011 p. 18)

Deposits…... Deposit growth stays ahead of credit expansion: Growth in bank deposits cont inued to outpace the credit disbursal tempo in December, reflect ing the economic slowdown and the moderat ion in demand for loans.According to data by the Reserve Bank of India (RBI), the year-on-year growth in deposits was 17.86 per cent at the end of the week (December 2). Deposits stood at `. 5710,061 crore. Banks reported a growth of 17.7 per cent in loan disbursals, while outstanding loans stood at `. 4,235,420 crore. In November, deposits rose 18 per cent , compared to the year-ago period. Credit growth was capped at 17.6 per cent.RBI has projected a deposit growth of 17 per cent and a credit growth of 18 per cent by March-end. However, t rends suggest otherwise. Bankers said beside a slowdown in the economy, the high-interest rate regime made borrowers put investment plans on hold. Thus, credit pick-up has moderated in the current financial year. Banks are also caut ious in credit disbursement to avoid a rise in risks of defaults. Sectors like steel and text iles are showing signs of st ress and non-performing assets have grown in the first two quarters, said a senior public sector bank execut ive. (BS dt .15.12.2011 p.6) More banks hike NRE deposit rates: More banks have entered into the race to at t ract overseas Indians after a dollar starved Reserve Bank of India freed the rates on nonresident external (NRE) accounts, offering interest as high as 9.6% per annum. Three more banks have announced hikes in their NRE

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

29

deposit offerings - Yes Bank and Dena Bank are now offering 9.6%, while IndusInd Bank has raised its offer to 9.25%. (Mint dt .26.12.2011 p7) Co-op banks: Interest on savings a/ c freed: The RBI deregulated interest rate on savings accounts in all state and central co-operat ive banks, a move that would fetch bet ter returns for depositors. RBI had freed these rates for scheduled commercial banks in October. In a not ificat ion addressed to all state and central co-operat ive banks, RBI said these were free to determine their savings bank deposit interest rate subject to two condit ions. On the first , the not ificat ion said, “Each bank will have to offer a uniform interest rate on savings bank deposits up to `. 1 lakh, irrespect ive of the amount in the account within this limit” The other states for savings bank deposits over `. 1 lakh, a bank may provide different ial rates of interest , if it so chooses. This would, however, be subject to the condit ion that banks would not discriminate over the interest paid on such deposits, between one deposit and another of similar amount accepted on the same date, at any of its offices, it said. (BS dt .27.12.2011 p6) Four banks raise interest rates on forex deposits: Four more banks have now upped interest rates on foreign exchange deposits since RBI deregulated rates. Oriental Bank of Commerce, Central Bank of India and Karur Vysya Bank upped their NRE term deposits, while Federal Bank revised its rates second t ime within a week. The increase in the NRE term deposits rates range between 8% to 9.25% across maturit ies. On December 16, the central bank freed interest rates on NRE rupee accounts to encourage Indians abroad to park more of their savings in Indian banks. Inflows of foreign exchange would help stem the depreciat ion of the rupee which has lost 18% to the dollar this year. (FE dt .27.12.2011 p16)

Economy….. Moderating GDP may prompt RBI to halt rate hike: Moderat ing economic growth and easing inflat ion may prompt the Reserve Bank to halt interest rate hike in the upcoming mid-quarterly credit policy review later this month, according to analysts. With actual growth coming in well below the potent ial, there are ‘dis-inflat ionary’ pressures in the economy, Goldman Sachs economist Mr Tushar Poddar said. “We therefore expect inflat ion to fall to 6% by March 2012. We expect the Reserve Bank of India to continue to ease liquidity, first through open market operat ions, and then by cutt ing the reserve requirements of banks,” he said. (BS dt 02.12.2011 p.6) Finance Minister may turn to RBI for reviving economy: Finance Minister Mr. Pranab Mukherjee, stopped in his t racks on economy boost ing policy measures by polit ical opposit ion, is hint ing that the RBI may have to pick up the slack to revive the flagging economic growth, less than 48 hours before a monetary policy review. “We must turn our at tention now to reviving growth as quickly as possible,” said Mr Mukherjee at the Delhi Economics Conclave organized by his Ministry and Nat ional Inst itute for Public Finance and Policy. “Our monthly industrial growth has slowed down

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

30

sharply. This is part ly a reflect ion of global t rends, but our own fight against inflat ion has also taken a toll on investments by our corporat ions.” (ET dt 15.12.2011 p.19) RBI to auction g-secs worth `. 15k cr on Friday: The government will sell bonds worth `.15,000 crore on December 30, the RBI said. It was an unscheduled announcement aimed at spelling out how the bank plans to meet its cash requirements. Government sources said Monday’s announcement did not amount to any addit ional borrowing, but is within the overall second half borrowing plan. The auct ion will be conducted due to the cancellat ion of the November 11 auct ion of 7.99% 2017 bonds. Nevertheless, the government’s move displayed the urgency of cash requirement and underscored the view that it would be really tough for the government to meet its fiscal deficit target of 4.6% of the GDP for this fiscal. (FE dt .27.12.2011 p2)

Financial Inclusion & MFI….. Private banks in Northeast come in for flak: Private sector banks that have branches in the Northeast faced crit icism from the industry for their alleged reluctance to lend to businesses in the region. Besides "engaging in retail act ivity," the industry alleged the role of private sector banks was "negligible" in the Northeast . The Federation of Industry and Commerce of North Eastern Region (FINER), the premier t rade and industry body of the Northeast , has requested the Reserve Bank of India to ensure private sector banks shed their conservat ive at t itude in the region. "These banks have plush branches, which are engaged in retail act ivity or raising deposits. Either no, or negligible, credit work is done in the branches. These banks include ICICI, HDFC Bank and Axis Bank, which are highly compet it ive in other parts of the country, but are reluctant to credit business in the northeastern region," FINER Chairman Mr R S Joshi told RBI Governor Dr D Subbarao. (BS dt 02.12.2011 p.7) NBFC-MFIs: RBI’s new norms seen as a booster: The new norms for non-banking finance company-microfinance inst itut ions announced by the Reserve Bank of India will be beneficial for the business, feel several micro-lenders. The Reserve Bank on Friday released new norms for classificat ion of NBFC-MFIs and brought them under its regulatory purview. The cap on interest and margin at 26 and 12 per cent respect ively, pricing t ransparency and safeguards against harassment of clients by field staff are some of the important aspects of the new norms. “It is a very posit ive step and auger well for growth of microfinance companies and clients,” Mr Dilli Raj, Chief Financial Officer, SKS Microfinance Ltd, told Business Line. Now, one should go with the sole regulatory approach adopted by the apex bank, he said. Mr Suresh K. Krishna, Managing Director of Bangalore-based Grameen Koota, said the exact definit ion of what const itutes microfinance is the single-most merit of the guidelines. (BL dt 05.12.2011 p.13) RBI tells banks to draw roadmap on financial inclusion: To ensure uniform services across the country, banks have been advised to draw a roadmap on set t ing up banking outlets in every unbanked village with a population of

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

31

more than 2,000 by March 2012. Underscoring the importance of entrepreneurship, RBI Deputy Governor Mr KC Chakrabarty said at an awards ceremony that about 74,000 unbanked villages have been identified and allot ted to various banks through state-level bankers commit tees (SLBCs).”As at the end of September 2011, as reported by the state-level bankers’ commit tees of various states/ Union Territories, banking out lets have been opened in 42,079 villages across the various states in the country. This comprises 1,127 branches, 39,998 business correspondents and 954 other modes like rural ATM mobile vans,” he added. The RBI has also advised banks to roll out financial inclusion plans (FIP), encouraging mult iple channels of lending and enhancing the scope of the business correspondent model, improving credit delivery procedures in micro and small enterprise (MSE) sectors and encouraging adopt ion of ICT solut ions in villages with a population of less than 2,000, he said.(FE dt .08.12.11 p16) FinMin to review credit flow to East zone states : Union Finance Minister Mr Pranab Mukherjee will meet chief ministers of east zone states, including West Bengal and Orissa, in Kolkata to discuss state-wise flow of credit to farming, small and micro units. He will also take stock of work on financial inclusion, progress on centrally sponsored schemes, performance of regional rural banks and credit to infrastructure projects in the zone, senior public sector bank official said.The meet ing will be attended by heads of Kolkata-based public sector banks, financial inst itut ions, as well as senior bank and state government officials. The review is happening in the backdrop of slowdown in the economy. (BS dt.10.12.11 p7) SBI donates vehicles under ‘Banks on Wheels’ model: To further the goal of financial inclusion in Karnataka, the SBI donated two ‘Banks on Wheels’ to the Shri Kshetra Dharmasthala Rural Development Project (SKDRDP) on Sunday. Mr Prat ip Chaudhuri, Chairman, SBI, handed over the vehicles to the Managing Director of SKDRDP, Dr H.L. Manjunath. Speaking at the event, Mr A. Krishna-kumar, Managing Director, SBI, said that the bank has over 100 ‘Banks on Wheels’ across the country. Each of these vehicles covers 5-6 villages every week. Dr Manjunath said SKDRP, which acts as the business correspondent (BC) of SBI in three under-served districts in Karnataka - Gadag, Haveri and Dharwad, has opened over 35,000 self-help groups in the three districts. (BL dt . 19.12.2011 p. 4) Pranab asks banks to focus on financial inclusion: The Finance Minister, Mr Pranab Mukherjee, has urged banks to speed up their financial inclusion efforts, stat ing that this was important for achieving higher economic growth. “We shall have to go a long way in achieving financial inclusion in the country. This (financial inclusion) is important for sustained high economic growth rate and to address the chronic problem of poverty, deprivat ion and disparity,” Mr Mukherjee said at the centenary celebration of Central Bank of India . The Government has already st ipulated that habitat ions with populat ion in excess of 2,000 should have banking facilit ies by March 2012. It has permit ted use of innovat ive models such as branchless banking through business correspondents. (BL dt .23.12.2011 p6)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

32

Financial inclusion to soon fetch tax benefits for banks, institutions: Banks and financial inst itut ions may get tax benefits on profits made through act ivit ies leading to financial inclusion. Further, any losses these inst itut ions incur, as a result , may also be allowed to be carried over for a longer period. At present under Sect ion 72 of the Income Tax Act , 1961, losses from any non-speculat ive business act ivity are allowed to be carried over for up to eight subsequent assessment years. A senior Government official told, “A proposal to this effect is being act ively considered by the Department of Revenue.” However, another senior official said, Segregat ing income from the financial inclusion is not an easy task. (BL dt .27.12.2011 p1)

Forex Inflows….. India set to lead in foreign remittances: Despite the economic downturn cast ing its shadow over the employment prospects in some high-income countries, the remit tances worldwide are projected to reach $406 billion in 2011 calendar year, post ing an eight per cent growth over the previous year. Of this, the developing countries account for the lion's share of $351 billion with India topping the list ($58 billion), followed by China ($57 billion), Mexico ($24 billion) and the Philippines ($23 billion), according to the latest World Bank update on remit tances. (BL dt . 05.12.2011 p. 3) Forex reserves up $2.48 billion to $306.8 billion: The country’s foreign exchange reserves rose by $2.479 billion to $306.844 on the back of a sharp increase in the value of gold reserves and foreign currency assets, according to the Reserve Bank of India’s ‘Weekly Stat ist ical Supplement’. In the previous week ended November 26, the reserves had fallen by a whopping $4.259 billion to $304.365 billion. The foreign exchange reserves have risen for the first t ime after four weeks of decline. (BL dt .10.12.11 p6) RBI prefers long-term equity flows: The RBI prefers long-term equity flows, like foreign direct investment, to short -term debt inflows, Deputy Governor Dr. Subir Gokarn said. With growing integrat ion with global economy arbit rage, opportunit ies had increased for investors. However, the Indian financial system is robust to face challenges, Gokarn said. Gokarn said the current account deficit was not much of a concern, adding the concern was how it was financed. (BS dt 14.12.2011 p.6) RBI imposes curbs on forward contracts as Re hits low of 54.30: As the rupee plunged to a lifet ime low of 54.305 to the dollar on Thursday, the Reserve Bank of India imposed wide-ranging curbs on the forwards currency market and sold dollars aggressively. The dollar sales took the rupee up to 53.65 at close. Among the measures announced by the Reserve Bank of India after market hours was the reduct ion of the overnight open dollar posit ions for banks across the board. It has also curbed the extent to which exporters and importers can cancel and rebook their hedges or forward contracts. Under contracted exposures, forward contracts that are taken to hedge current

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

33

account or capital account transact ions, falling due within one year, can no longer be cancelled and rebooked. But according to Mr Jamal Mecklai, CEO, Mecklai Financial, disallowing exporters from cancelling and rebooking may not help ease the pressure on the rupee to a significant extent .(FE dt 16.12.2011 p.1) Rates on non-resident deposits freed: To improve inflow of foreign currency, the RBI deregulated the interest rates that banks would pay on Non-Resident (External) Rupee (NRE) Deposits and Ordinary Non-Resident (NRO) accounts. RBI said this would provide greater flexibility to banks in mobilising non-resident deposits in the prevailing market condit ions. “Banks are free to determine their interest rates on both savings deposits and term deposits of a maturity of one year and above under NRE deposit accounts and savings deposits under NRO accounts with immediate effect ,” it said. The revised deposit rates will apply only to new deposits and on renewal of those that have matured. However, interest rates offered by banks on NRE and NRO deposits cannot be higher than rates offered on comparable domest ic rupee deposits. Also, at any point of t ime, an individual bank should offer uniform rates at all its branches. Current ly, banks offer 3.51% on NRE deposits for two-three years and 3.64% for deposits above three years.(BS dt . 17.12.2011 p. 4) Forex Reserves fall $69 Million: India’s foreign exchange reserves fell by $69 million to $306.775 billion in the week ended December 9, central bank data showed. According to the RBI’s weekly stat ist ical supplement, the reserves fell mainly due to a decline of $56 million in the bank’s foreign currency assets. The RBI doesn’t provide any reasons for the changes in foreign currency assets, but says the assets expressed in dollar terms capture fluctuat ions in the value of non-U.S. currencies, such as the euro, sterling and the yen, held in reserves. (BL dt . 17.12.2011 p. 6) Freeing up NRI deposit rates will boost forex inflows, say bankers: The freeing up of interest rates on NRI deposits by the RBI will at t ract more foreign currency, which in turn will st rengthen the rupee, said bankers. The RBI deregulated the interest rates on Non-Resident (External) rupee (NRE) deposits and Ordinary Non-Resident (NRO) Accounts. The rates on these deposits should now be comparable those offered on domest ic rupee deposits, said the RBI. As per RBI guidelines, banks can now determine their interest rates on both savings deposits and term deposits of one year and above maturity under NRE accounts and savings deposits under NRO accounts.(BL dt . 18.12.2011 p. 3) Mid-size private banks hike rates to increase NRI deposit base: Mid-sized private banks are looking to strengthen their non-resident deposit bases by offering higher rates. This follows the Reserve Bank of India deregulat ing interest rates on these deposits. Federal Bank and South Indian Bank have already announced 268-324 basis points rises in their non-resident (external) rupee (NRE) term deposits, and many other private banks are expected to follow. However, state-run lenders are yet to decide whether to increase non-resident deposit rates aggressively or not . Bank of India, which has significant foreign presence, said it would wait for other players before revising their rates. “No firm view has been taken so far. I cannot give a t imeline as to when these rates

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

34

will be revised,” a senior official of Bank of Baroda said. State Bank of India officials said there could be a rise of 200-300 basis points in the bank’s non-resident deposit rates, but added the bank was yet to decide when the rate rise would be effect ive. State Bank of Travancore may increase its non-resident deposit rates before its parent , State Bank of India, revises the rate, as the associate bank faces compet it ion from mid-sized private banks in Kerala. (BS dt .20.12.2011 p6) Three South-based banks hike NRE deposit rates: Karnataka Bank Ltd has increased interest rates on NRE deposits with effect from December 19. A bank release said here that the bank has increased the interest rates on NRE deposits from 3.82 per cent to 9.75 per cent for one year to less than two years; from 3.51 per cent to 9.50 per cent for two years to less than three years; and from 3.64 per cent to 9.50 per cent for three years to five years. South Indian Bank has also hiked its NRE term deposit rate for all maturit ies from 3.82 per cent to 6.75 per cent . This revision was effected from December 19. Lakshmi Vilas Bank has also decided to hike the interest rate on NRE deposits bringing the rate closer to resident deposits.The new rates would come into effect from December 22. (BL dt .22.12.2011 p6) Banks may limit unhedged forex exposure of cos: Banks may consider st ipulat ing a limit on unhedged posit ion of corporates on the basis of their board’s approved policy, the Reserve Bank of India (RBI) said. Further, since the rupee has depreciated sharply in recent months, thus raising the cost of redempt ion of FCCBs, proposals for restructuring of FCCBs not involving change in conversion price are being considered under the approval route. At the same t ime, report ing of data by banks in respect of unhedged exposures is being strengthened, the central bank observed in its fourth Financial stability Report . The central bank says banks should rigorously evaluate the risks arising out of unhedged foreign currency exposure of thecorporates and price them in the credit risk premium while extending fund based and non-fund based credit facilit ies to corporates. (FE dt .23.12.2012 p18) HDFC Bank among four to raise interest on forex deposits up to 9%: Indian banks have scaled up their rate of interest on foreign exchange deposits hugely within a week of the RBI deregulat ing the rates. Four banks, including HDFC Bank, upped their interest rates on such deposits, going up to 9%. But t ill late at night the bank had not issued any writ ten communicat ion. Interest rates on NRE term deposits: HDFC Bank offers up to 9% for 1 to 2 years; up to 8.5% for 2 to 3 years; up to 8.25% for

3 to 5 years. Yes Bank offers 6% for amounts less than ̀ . 1 lakh and 7% for above ̀ . 1 lakh. Federal Bank offers 6.5% for one-year bucket. South Indian Bank offers 6.75% for all maturit ies. Laxmi Vilas Bank offers 10% for 1 to 2 years; 8% for 2 to 3 years and 7% for 3 years and

above. Karnataka Bank offers 9.75% for 1 to 2 years; 9.50% for 2 years and above. Dhanalakshmi Bank offers 8% for 1 to 3 years; 7.75% for 3 years and above.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

35

Allahabad bank offers 7.50% for 1 to 2 years; 7% for 2 to 3 years; 6.75% for 3 years and above. (FE dt . 23.12.2011 p. 1)

Banks scramble to attract NRE deposits: Banks are t rying to outbid each other in the race to garner NRI deposits. A number of banks have either doubled or t rebled the rates they were offering just a few days ago on NRI deposits. This follows the deregulat ion of rates by the Reserve Bank of India.This outbidding to contract remit tance money is a funct ion of regulatory and governmental ‘overbearing,’ says the regional head of a leading public sector bank.He said rates are being kept up, thanks to the t remendous peer pressure to corner the precious funds.Karnataka Bank has quoted 9 per cent-plus for one year. State Bank of Travancore upped the ante by offering over 8 per cent for the same tenor. IndusInd Bank has increased its rates on NRE deposits to 9.25 per cent from 3.82 per cent . Karur Vysya Bank has increased its rate to 10 per cent .Officials said, banks are looking to retain the increasingly fleet-footed customers by offering what they think are ‘unbeatable’ rates. The remit tance inflow would last only for such t ime as the exchange arbit rage holds. (BL dt .24.12.2011 p6) Forex reserves fall by $4.6 b to $302 billion: Foreign exchange reserves declined by $4.675 billion to $302.100 billion for the week ended December 16, according to the Reserve Bank of India’s ‘Weekly Stat ist ical Supplement’. This is the second week in a row that foreign exchange reserves have declined. In the earlier week ended December 9, forex reserves had dipped by $69 million to $306.775 billion. The decline in reserves was mainly on account of currency revaluation. The foreign currency assets fell by $4.668 billion to $266.968 billion. Foreign currency assets expressed in US dollar terms include the effect of appreciat ion/ depreciat ion of non-US currencies such as the euro, sterling and yen held in reserves. (BL dt . 24.12.2011 p. 6) India & Japan to go for $10-bn currency swap: The Reserve Bank of India will enter into a $10-billion currency swap arrangement with its Japanese counterpart , Bank of Japan (BoJ), this week. The move would strengthen the Indian central bank’s armoury to tackle any liquidity crisis and volat ility in the currency market . Under the deal, the two central banks will supply each other with up to $5 billion from their foreign currency reserves for possible market intervent ion, in the event of a financial turmoil. For India, the swap arrangement is all the more important and it might actually draw into the facility, given the situat ion of net capital out flows, an exacerbat ing current account deficit (which could climb to a t roublesome 4.9% of GDP for the Oct -Dec quarter) and the weak composit ion of reserves. India is struggling to meet the projected level ($72 billion) of capital inflows for this fiscal and even the most opt imist ic forecasts don’t put the figure above $60-65 billion. (FE dt.26.12.2011 p1)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

36

Housing Worries….. LIC Housing Finance to launch fixed rate loans next month : LIC Housing Finance Ltd will roll out a completely fixed interest rate home loan product next month, according to Mr V. K. Sharma, the company’s Director and Chief Execut ive. “The product is ready. There is a possibility of interest rates going down. We plan to fix interest rate after the Reserve Bank of India’s policy review on December 16,” Mr Sharma told newspersons after inaugurat ing a three-day property show on Friday. The product would be first of its kind in the home-loan market as all exist ing products are combinat ion products with varying periods of fixed and float ing rates. “We strongly feel that there are customers who prefer fixed rate products,” Mr Sharma said. The proposed `. 500-crore real estate venture capital fund would be launched in January with an init ial fund size of `. 200 crore. (BL dt.10.12.11 p6) Banks agree to ease norms for customers: In a move that will cheer millions of small borrowers, banks have agreed to abolish penalt ies for prepayment of home loans taken on float ing rates of interest . They will also stop penalizing savers who fail to maintain a minimum balance in their bank savings accounts.The decisions were taken at a meet ing between the RBI and the bankers’ lobby IBA, hours after the central bank signalled an end to the cycle of rising interest rates that started in March 2010, according to bankers who part icipated in the meet ing and spoke on condit ion of anonymity. Banks charge 2-4% of the loan amount outstanding as a prepayment charge from home loan customers. At least 95% of home loans carry a float ing rate of interest , according to RBI, which effected 13 rate hikes before applying the brakes by leaving policy rates unchanged amid concerns over slowing economic growth. (Mint dt .19.12.2011 p.1) Bank of India waives pre-payment charges on home loans: The state-owned Bank of India joined the club of banks that has waived pre-payment charges on home loans. Bank of India has decided to abolish prepayment charges on home loans for both fixed and float ing rate loans across all tenures, for exist ing as well as new borrowers, said a bank’s release. Earlier, the country’s largest lender SBI and ICICI Bank, the largest private sector bank, and Central Bank had abolished pre-payment penalty on home loans. SBI had done away with pre-payment charges for loans on fixed and float ing interest rates, ICICI Bank will cont inue to charge 2% on the outstanding amount of fixed-interest loans. ICICI Bank waived off pre-payment charges on float ing-rate home loans effect ive from November 23, 2011 for both new and exist ing customers. (FE dt . 21.12.2011 p. 18)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

37

Human Resources….. PSBs to hire 5 lakh over next few years: State-run banks led by Union Bank of India and Punjab National Bank are picking up the slack in recruitment in financial services with plans to hire as many as 5 lakh in the next few years even as BNP Paribas, Nomura, Barclays and others cut jobs in India. A whopping 44 lakh candidates will appear for a common recruitment test for clerks in public sector banks up to December 11 for about 50,000 jobs in the next four months, bank execut ives said. This is above the 10.5 lakh who took the examinat ion for officers’ posts recent ly. State Bank of India and Bank of Baroda have cut thousands of posit ions in the last decade to improve efficiency by not filling up those left vacant due to ret irements and through early voluntary ret irement plans. That led to improvement in business per employee, which surged to `. 10 crore in 2011, from `. 3.8 crore in 2005, RBI data shows. (ET dt . 09.12.2011 p. 1) Federal Bank on recruitment drive: Kerala-based Federal Bank Ltd will recruit close to 1,500 probat ionary officers over the next one-two years to make good the retirements that are likely to take place and to create resource to meet its expansion targets. Close to 1,000 employees of the bank are set to ret ire in the next two years, Mr Abraham Chacko, Execut ive Director, Federal Bank, said. “The banking industry had witnessed massive recruitments during the post -nat ionalisat ion period. A majority of these employees are due for ret irement over the next two-three years. This is a huge challenge for the industry,” Mr Chacko said at a banking event organised by the Calcutta Chamber of Commerce. Federal Bank has already recruited about 1,500 probationary officers over the last one-and-a-half years. Recruitments have to happen to create adequate resources and achieve the bank’s ambit ious growth target over the next few years, he pointed out . (BL dt . 09.12.2011 p. 6) Government clears creation of new ED slot in public sector banks: Large state-run lenders like BoB and PNB will get a third ED on their board from next April, while smaller banks like Dena or United Bank will get their second ED. The government has cleared the Khandelwal Commit tee’s recommendat ion, two chief execut ives at state-run banks said. Banks with more than `. 3 lakh crore business are considered as large ent it ies. The government has created the new slot in six large banks and said the 3rd EDs will be responsible for human resource development and technology. BoI, Canara Bank, Central Bank of India and Union Bank of India are dubbed as large banks and will benefit from this move. (ET dt .14.12.11 p11) 1.11 lakh candidates pass bank officers’ exam: About 1,11,993 candidates have passed the first common writ ten exam (CWE) for probat ionary officers in 19 nat ionalised banks. The exams were conducted by the Inst itute of Banking Personnel Select ion (IBPS) in September this year. A lit t le over 10 lakh candidates had appeared for the exam. Of them, 36 per cent of the successful candidates were women, while a similar number of candidates were from the rural areas. The CWE for clerical posts has been held across the country over the past three Sundays. Nearly 43

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

38

lakh candidates have appeared for the exam. “The results would be available in February,” said Prof Konar, senior faculty of the inst itute. (BL dt .15.12.2011 p.6) Attempting bank exams with tech as scribe: Visually impaired candidates aspiring for a bank job may now find it a bit easier to compete in the writ ten select ion tests conducted by the Inst itute of Banking Personnel Select ion (IBPS). Although they can current ly use a ‘scribe’, the pract ical difficult ies include availability, difference in accent, cost among others. Out of an est imated 1.45 million visually impaired people aged 20 to 29 (according to census data), who are potent ial candidates, only 9,000 applied for the IBPS’s first common writ ten exam for the clerical cadre. Now, IBPS has together with the Nat ional Associat ion for the Blind (NAB) – Bangalore and the Internat ional Inst itute of Informat ion Technology – Bangalore (IIIT-B) launched the “NETRA SARATHY” project to enable visually impaired candidates at tempt banking services exams.(BL dt 16.12.2011 p.6) 5 ‘common’ exams every year for bank jobs: IBPS proposes to conduct five exams every year for the banking sector’s recruitment needs, its Director, Mr M. Balachandran said. There will be two exams for probationary officers, two for clerical levels and one for specialist officers (agricultural, law, technical). The scores provided by IBPS for the common written exam will be valid for a year and successful candidates can apply to any bank of their choices based on these scores. Earlier, candidates had to write mult iple exams conducted by each bank for their vacancies. The first such common test for probat ionary officers was conducted in September while the first set of clerical exams just got over on December 11. The first common test for specialised officers will be conducted in March 2012. Last year, IBPS screened 13 million candidates for employment while this year it is expected to screen 15 million candidates. Urging the inst itute to expand its act ivit ies, Mr Narayana Murthy complimented it for ‘providing hope’ of gainful employment to 1.5 crore Indians, of whom about a third were women. (BL dt 16.12.2011 p.6) Probationary officer candidates may get offers from private banks too: Successful candidates in the first probat ionary officers’ common writ ten test (conducted in September) may have some good news coming their way. They may be get t ing some more job opportunit ies – not only from the 19 nat ionalised banks for which the recruitment test was conducted – but also from a couple of private banks. About 1.12 lakh candidates passed the probationary officers’ common written test conducted in September (results just announced) for vacancies in 19 nat ionalised banks. At the moment, rough est imates indicate that there would be about 20,000 vacancies coming up in the next six months. (BL dt. 19.12.2011 p. 1) HSBC to cut jobs in India: Hongkong and Shanghai Banking Corporat ion (HSBC) is likely to cut jobs in India, as part of its plan to lay off 30,000 employees globally, according to sources. The move is aimed at reducing costs and improving efficiency. While the exact number of people who would be asked to leave is not known yet , as the restructuring would begin in January, sources said most of the layoffs are likely to take place in the commercial banking business. An HSBC spokesperson confirmed there could be some impact in India because of restructuring of

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

39

the bank’s global operations. “HSBC is going through an efficiency programme globally, as was set out by the HSBC Group chief execut ive, Mr Stuart Gulliver, at the Investors’ Day in May. All businesses across the world are undergoing a strategic review, and India would not be left out of this,” the spokesperson said. (BS dt . 20.12.2011 p. 6) AP leads in number of applicants for bank probationary officers’ exam: Successful candidates in the probat ionary officers exam conducted by Inst itute of Banking Personnel Select ion (IBPS) will get their scorecards short ly. The despatch of scorecards commenced last week and was done by ‘Speed Post’, IBPS director, Mr M. Balachandran, said. It will also be possible for candidates to see their scores on the IBPS Website by using relevant passwords. Asked what the disaggregated stat istics on applicants revealed, Prof. Dutt said, “In the officer cadre, the maximum number of applicants were from Andhra Pradesh while for the clerical cadre the highest number of applicants were from Uttar Pradesh.” (BL dt . 21.12.2011 p. 6) PSBs directed to do away with seperate promotion policies: The Finance Ministry has directed state-run banks to do away with their separate promot ion policies, a move strongly opposed by the officers' unions. The fresh guidelines aim at removing the anomalies across public sector banks and addressing severe manpower shortage by creat ing a common pool of managers. This spells the end of fast t rack and super fast t rack promot ions at managerial levels in some public sector banks, including the country's largest lender, State Bank of India. The new guidelines will allow lateral movement across banks without any remunerat ion issues, a finance ministry official said. "The guidelines will also ensure that there are eligible candidates across all vert icals in all 21 state-run banks, which is a big advantage when it comes to succession planning," said a human resources head at a Mumbai-based bank. (ET dt . 26.12.2011 p. 11)

Inflation….. Exchange rate is always on our radar: Subbarao: Dr D. Subbarao, Governor, Reserve Bank of India, said that some amount of rupee depreciat ion and oil prices have already been factored in RBI’s assessment of seven per cent WPI (wholesale price index) inflat ion for March 2012. However, the apex bank will intervene in the forex market if there is a sharp movement in exchange rate which is likely to impair macroeconomic stability. “Rupee depreciat ion over the last three months is a result of developments outside India, part icularly Europe. Exchange rate is always on our radar,” Dr Subbarao said at a press briefing after the RBI board meet ing. The rupee has depreciated against the dollar by about 14 per cent since August this year. “Rupee’s depreciat ion is adding to inflat ionary pressures,” Dr Subbarao said. The apex bank will come out with a ‘definit ive statement’ on the local currency at its forthcoming policy meet ing on December 16. (BL dt . 09.12.2011 p. 6) Inflation would have been higher if not for monetary tightening: RBI chief: The RBI Governor, Dr D. Subbarao, on Friday said that maintaining the right balance between growth and bringing down inflation within acceptable limits will be a

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

40

challenging task for the central bank. “There are several challenges, first is st riking the right balance between growth and price stability,” Dr Subbarao said while speaking at the 3rd Nat ional Conference on Leadership organised by the CII-Suresh Neot ia Centre of Excellence on Friday. Defending the RBI’s aggressive monetary t ightening, which has drawn crit icism for its impact on growth, Dr Subbarao said, “It is a legit imate concern that inflat ion has not come down appreciably despite hikes in interest rate 13 t imes since March 2010, but it has to be noted that the rate of price rise would have been even higher had monetary t ightening steps not been taken. Inflat ion rate could have been higher at 12-13 per cent, unlike 9.7 per cent at present.”(BL dt .10.12.11 p6)

Infrastructure….. Delay in nod for projects raises default risk for banks: The Finance Ministry has flagged the issue of delay in giving clearances by state governments to infrastructure projects increasing risks of defaults and bad loans for banks. In the eastern region, five infrastructure projects, with a total investment of `. 16,686 crore, are await ing various approvals. The banking sector, in general, and public sector banks, in part icular, have sanct ioned a significant amount of loans for large projects. In a number of projects, implementat ion is held up because of pending approvals at the central/ state levels, banks said in communicat ion to state governments in the eastern region. Lending by banks to infrastructure projects, including telecom, power and roads, increased 21.7 per cent to `. 5,74,569 crore in October, compared with `. 4,72,142 crore in October 2010, according to Reserve Bank of India data. (BS dt 13.12.2011p.6)

Insurance….. Bank of India to have 51% stake in JV with AXA: Bank of India said it would have a majority stake of 51% in its proposed asset management joint venture with AXA Investment Managers. French financial services firm AXA current ly has 74% stake in an asset management joint venture, Bhart i Axa Investment Managers, with Indian telecom major Bhart i. According to senior bank officials, AXA would acquire Bharti’s 26% stake in the firm and then transfer 51% of its holdings to the bank. AXA will hold the remaining 49% stake in the joint venture. Bhart i Axa Investment Managers is current ly the asset management company to Bhart i AXA Mutual Fund. (BS dt 04.12.2011 p.3) State Bank of India to launch mediclaim facility: India's largest lender, State Bank of India, will soon launch mediclaim and accidental insurance facilit ies for its savings bank account holders. The scheme is likely to be launched in January or February, SBI Chairman Mr Pratip Chaudhuri said. "We are holding a meet ing of State Bank of India general managers in Lucknow, in which the contours of the insurance scheme would be given the final shape before it is launched in the new

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

41

year," he said. Mr Chaudhuri also said the lower credit to deposits (CD) rat io in Uttar Pradesh would appear much higher if another dimension was considered. "When we talk about the CD rat io, we generally refer to the retail, agriculture and small loans," he said. (BS dt . 21.12.2011 p. 6)

Liquidity….. Pressure mounts on RBI to cut CRR: The RBI, buffeted by stubbornly high inflat ion and t ightening liquidity, is under increasing pressure to cut the CRR, the portion of deposits that banks keep in cash with central bank, to ease the strain in money markets. The central bank commit ted to an ant i-inflationary stance, may find it just ifiable to release as much as `. 60,000 crore into the system through a one percentage point CRR cut , rather than reducing policy rates which will signal a shift in stance when inflat ion is st ill above target , say economists. Many countries such as Australia and Thailand have cut interest rates to bolster growth when European sovereign crisis threatens growth, but India may not be able to match since price rise is not easing despite thirteen rate rises. China on Wednesday cut banks reserve requirements 50 basis points. A basis point is 0.01 percentage point . (ET dt 01.12.2011 p.1) OMO draws poor response, but bond yields lowest in 2 months: The Reserve Bank of India conducted its second open-market operation (OMO) worth `. 10,000 crore, of which it purchased only `. 5,783 crore worth of bonds. Bonds rallied yet another day, sending the yield on the 10-year benchmark gilts on Thursday to 8.697%, their lowest level since October 7. Demand for bonds perked up after the strong demand at the auct ion of quotas for gilts to foreign inst itutional investors (FII). The auct ion saw FIIs bid about 40% more than the $10-billion debt on offer. Market experts said the OMO was not as successful as expected because the central bank offered lower yields, adding that the strong FII demand, liquidity-boost ing measures like OMO and improvement in the global sent iment have fuelled opt imism. (FE dt 02.12.2011 P.18) Pressure for CRR cut mounts on RBI: Liquidity woes cont inue to haunt bankers, as overnight borrowings from the Reserve Bank of India (RBI) hover close to `. 1 lakh crore for more than a week. Bankers expect RBI to address the issue by cutt ing the cash reserve rat io (CRR) by 50 basis points in the mid-quarter policy review on December 16. However, the absence of st rong signs of moderat ion in inflat ion raises doubts on whether such a step would be taken. Current ly, the CRR is six per cent . Since November 24, banks have been drawing an average of `. 1 lakh crore daily from RBI, at a repo rate of 8.5 per cent under the liquidity adjustment facility. This is well above the central bank’s comfort zone of one per cent of net demand and t ime liabilit ies, which works out to ̀ .50,000-60,000 crore. RBI has bought government bonds worth about `.15,000 crore through open market operat ions (OMOs) in two consecut ive weeks, and has announced another round for this week as well. “There are rumours of a CRR cut , but that would depend on the acuteness of the liquidity shortage. As of now, it is less acute than in the third week of November,” said Mr Joydeep Sen,

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

42

Senior Vice-President (advisory desk - fixed income), BNP Paribas Wealth Management. (BS dt . 06.12.2011 p. 6) There is adequate liquidity in banking system: Chakrabarty: At a time when the RBI has been conduct ing open market bond purchases to relieve stress on liquidity, the Deputy Governor, Dr K C Chakrabarty, said on Monday that there is "sufficient" availability of funds in the banking system. Dr Chakrabarty was speaking on the sidelines of an event organised by Cit i Bank. The central bank typically undertakes bond purchases through open market operat ions to manage liquidity deficit in the system. In the previous fortnight , the central bank infused `. 15,218 crore in the banking system through purchase of government securit ies. In the last fortnight, banks have borrowed `. 1.02 lakh crore on an average from the RBI's repo auct ion. (BL dt . 06.12.2011 p. 6) CRR is a monetary policy signal: Subir Gokarn: The cash reserve rat io is not just a liquidity tool but a monetary policy signal, Deputy Governor of the Reserve Bank of India (RBI) said on Wednesday amid market speculat ion it may lower the rat io in order to ease t ight liquidity in the banking system. “CRR is not just a liquidity tool but is also a monetary policy signal and we are as of now st ill in a situat ion where inflat ionary pressures are high,” Mr. Subir Gokarn said. “Whether using an instrument that is part of monetary toolkit to address liquidity issue is certainly a debate which we have to engage in,” he said in an address to bankers. Cash reserve ratio is the proport ion of deposits that banks need to set aside with the central bank as cash. The rat io now stands at 6%.(Mint dt .08.12.11 p9) RBI to conduct additional repo auction: The Reserve Bank of India will conduct addit ional repo operat ions (by which banks can borrow money from the RBI) under the Liquidity Adjustment Facility, on Friday(16.12.2011), December 16, between 4.30 and 5 pm. The RBI has decided to conduct the addit ional repo operat ion keeping in view the prevailing liquidity condit ions and with a view to providing flexibility to scheduled commercial banks in their liquidity management, said a press release issued on Thursday. (BL dt 16.12.2011 p.6) RBI to ensure enough liquidity in the system: The Reserve Bank of India Governor, Dr D. Subbarao, said he cannot speculate on when he will start cutt ing policy rates, but assured that the central bank will ensure that there is enough liquidity in the system by conduct ing open market operat ions.”We have taken into account the inflat ion situat ion and also growth moderat ion. For the moment, we have kept the policy rates steady. However, we will manage liquidity through market operat ions (but) I cannot speculate when we might start cutt ing rates,” he said while speaking to reporters at an ICAI funct ion. In its mid-quarterly review of monetary policy, Reserve Bank of India maintained reverse repo (rate at which the Reserve Bank of India borrows from banks) at 7.5 per cent . (BL dt .17.12.11 p6) RBI allows banks to tap marginal standing facility without seeking waiver: To help banks t ide over the prevailing t ight liquidity condit ions in the call money market , the Reserve Bank of India on Wednesday did away the obligat ion that requires them to

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

43

seek a specific waiver for default in compliance of minimum holding of government securit ies when they borrow under the marginal standing facility. In May 2011, banks were allowed to borrow overnight from its marginal standing facility (currently at an interest rate of 9.50 per cent) against their excess government securit ies holdings as an addit ional liquidity enhancement measure. They could also dip a percentage point below the statutory requirement of holding government at 24 per cent of deposits, provided they sought a specific waiver for default in compliance of the limit . The latest RBI measure on MSF comes at a t ime when call money rates shot up to t rade in 9.45-9.75 per cent range. (BL dt .22.12.2011 p.6)

Mutual Funds & Capital Market….. BoI to re-enter MF industry with Bharti-AXA buy: Bank of India (BoI) is all set to re-enter the mutual fund industry with its buyout of a 51% stake in Bhart i AXA Mutual Fund. The bank is understood to have paid an amount of between `. 50-`. 75 crore for AXA Investment Managers' stake of 26% and Bhart i's stake of 25%. Bhart i Axa's assets under management (AUM) as on September were `. 176 crore. Typically, mutual funds are valued as a share of the AUM; there have been several t ransact ions over the past few years with the valuat ions ranging anywhere between 2.4% and 11% of the AUM. However, since Bharti Axa's AUM is a very small at `. 176 crore, the price would not have been worked out on the basis of the assets. "BoI is simply looking to shorten the t ime to market ," explained a fund manager, who pointed out that it typically takes close to two years to get a licence from Sebi. Moreover, industry experts point out that it would also take six months to put together the team and set up the network. (FE dt . 06.12.2011 p. 11) Big banks face the heat as investors short futures: Futures prices of selected bank stocks crashed as fears of rising non-performing loans and high interest rates turned sent iment against the sector. While bank stocks in the cash market have been touching record lows over the past week, investors offloaded long posit ions and went short on contracts of large banks like State Bank of India, ICICI Bank, Axis Bank and Punjab Nat ional Bank. At the end of t rading hours on Monday, Axis Bank stock futures closed at `. 835.55 at a significant discount of `. 15 to the underlying cash price, which hit a 52-week low of `. 850.65. Axis has been hit by heavy short selling since Friday, when a record 20% addit ion in open interest posit ions was accompanied by widening discounts. (ET dt . 20.12.2011 p. 9) PSBs to raise capital through preferential placement of equity: The Finance Ministry has decided to inject capital into state-run banks through equity, shelving for new plans to replenish their capital base through innovat ive instruments. The ministry will go in for preferent ial placement of equity, the quickest mode of raising funds for cash-starved banks, a senior official said. “Any of the new innovative methods would have required legislat ive changes, which are difficult in the current polit ical environment,” the official said request ing anonymity. The ministry has commit ted to maintain a Tier-I capital adequacy rat io of 8% in state-run banks and a holding of at least 58%. (ET dt . 24.12.2011 p. 9)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

44

NPA…. Net interest margin rises, asset quality falls: The Indian economy, at the present juncture, finds itself in a t ight spot . Both domest ic and global factors have contributed to the slowdown of the economy. How have banks performed in this macro environment? Recently, the banks announced their business and financial performance in the second quarter of 2011-12. Among other things, an elevated interest rate environment and the move towards system-based recognit ion of NPAs are the two major factors which have a direct bearing on the performance of the banks. In this backdrop, how the macro and bank-specific factors have played out in influencing the performance of banks in the second quarter would be of interest . " We consider the nat ionalised banks (NBs) which account for almost half of the assets of the banking system. We find that the business mix of the NBs has improved significant ly in the second quarter on a sequent ial basis - in the September quarter over the June quarter (3.2%) as compared to in the June quarter over the quarter ending March 2011 (0.5%). We also observe that asset quality represented through both the gross and net NPAs in absolute as well as in percentage terms have deteriorated for NBs in the September quarter on a sequent ial basis. While the gross NPA percentage increased by 17 bps (100 bps equal one percentage point) in the June quarter, it increased by 26 bps in the September quarter. However, the RoA (return on assets) and cost-to-income rat io for NBs have improved in the September quarter" said Mr Biswa Swarup Mishra, Xavier Inst itute of Management. (BL dt 05.12.2011 p.13) Govt Seeks PSU banks’ aviation credit data, banks hope for help: The government has asked PSU banks for data on loans given to airlines industry, a move which has sparked some hopes among banks that the Centre may step in to protect their interest . There are fears that banks may have to set aside cash as a provision against the loans turning bad. Banks have to provide data on the loans given to different airlines and the nature of exposures-working capital, term loan, guarantees, let ter of credit , equity and any other instrument. Banks highest exposure is to Air India where they have lent close to `.43,000 crore-which is undergoing debt restructuring. But lenders are more concerned about their ̀ .7000 crore loan outstanding with Kingfisher Airlines.(ET dt 09.12.2011 p.11) KVG Bank prepares roadmap to reduce bad loans: Karnataka Vikas Grameena Bank (KVG Bank) has prepared a roadmap to reduce non performing assets (NPAs) and has set a target of achieving a level of 1 per cent (NPAs) to total advances by the end of this financial year. According to Mr C. Sambasiva Reddy, Chairman, KVG Bank, “We plan to focus on bad debt management for reducing the NPAs.” The bank has taken the init iat ive based on recommendat ions relat ing to reforms in banking sector made by the Boston Consulting Group (BCG), in a report ‘Being Five Star in Product ivity: Roadmap to Excellence in Indian Banking’. The bank, at its regional/ senior managers’ meet held at Dharwad on Thursday reviewed the important areas relat ing to business growth, customer services, bad debt management, and operational excellence. (BL dt .10.12.11 p.17) Banks told to fast-track bad laon recovery: The Finance Ministry is driving capital-strapped public sector banks to hasten bad laons recovery to improve their health and has promised to fill vacancies at debt recovery

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

45

t ribunals across the nat ion which has been part ly responsible for inordinate delays in ending disputes. "Needless to say that `. 2 lakh crore (of bad loans) is a drag on the capital of banks," a bureaucrat from the Finance Ministry wrote to bank chairmen recent ly. "All cases should be reviewed and ensured that all cases pending above two years should be cleared by March 2012." (ET dt . 12.12.2011 p. 1) Banks nervous about telecom exposure: With muted 3G uptake and new 2G players hit by deepening losses, Indian banks seem to be heading for a rough ride due to their perceived huge exposure in the sector. State Bank of India, for instance, has a total exposure of `. 23,000 crore in the telecom segment, of which, `. 15,000 crore is direct funding and the balance is non-fund based (guarantees, and so on). Guarantees may be given when operators go in for overseas borrowing to buy network equipment. This is a cause of worry because the telecom sector is going through a tough phase with all the operators report ing declining profits and slowing growth in subscriber base. The operators paid nearly `. 1-lakh crore to the Government last year to acquire 3G and broadband spectrum. (BL dt 16.12.2011 p.1) Finance Ministry seeks data on loans to four stressed sectors: The Finance Ministry has sought from state-run banks company-wise exposure to loans in four stress sectors - aviat ion, telecom, commercial real estate and power ut ilit ies worried that a spike in bad loans could derail their lending. The total banking exposure to telecom, commercial real estate and power sectors at the end of September 2011 was over `. 5 lakh crore. "There are reports of st ress in these sectors. We want to evaluate if need to take some pre-empt ive act ion to support banks in making such accounts standard," said a finance ministry official. A spike in bad loans will mean banks will need to set aside capital to cover their potential losses, which will curb their credit growth and increase capital needs that a cash-strapped government will find difficult to meet. (ET dt . 17.12.2011 p. 9)) Credit quality still an issue: Bankers: Bankers believe that the RBI’s signal that interest rates have peaked will be good for both customers as well as banks as it would result in their stabilisat ion. However, they do not see a rate cut immediately and credit quality, too, is not expected to improve overrnight . Mr M D Mallya, C&MD, Bank of Baroda, said: “Banks have been maintaining their loan rates even though the RBI had persisted with policy rate hikes in September and October.” Mr Mallya points out that there are stress points in the system and, so, credit quality may not improve immediately. “Just because the RBI has paused doesn’t mean that things will change right away. But the pause will certainly boost the sent iment,” he added. Added Mr M V Nair, C&MD, Union Bank: “While the pause signalled by RBI will help, credit quality depends on the environment and there are issues in sectors like text iles or power.” (FE dt . 17.12.2011 p. 18) Audited bank books understate bad loans: RBI: Point ing to shortcomings in the quality of bank audits, the RBI has said financial statements cert ified by accountants show lower non-performing assets than is actually the case. There is a difference between the levels of non-performing assets (NPAs) found during the course of supervisions (by RBI) and those in audited books of banks. Bad loans

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

46

in cert ified statements are less, RBI Governor, Dr D Subbarao, said. Seeking an improvement on this front , he said, “We must ident ify where the systemic difference is coming from.” He was addressing a conference organised by the Inst itute of Chartered Accountants of India (ICAI). Dr Subbarao said accountants who sign bank books were RBI’s “eyes and ears”. He added the regulator expected them to send out early warning signals to assist the regulator in the supervisory process. A t rue and fair picture must be shown to shareholders, he said. (BS dt . 18.12.2011 p. 6) RBI flags deteriorating loan portfolios of banks: Risks are rising for the banking sector even as credit growth slowed and slippages outpaced credit growth, said the RBI’s Financial Stability Report (FSR) covering the last six months.The risks to banking sector have increased since the previous FSR in June. The banking sector faced profitability pressures due to higher funding costs and asset quality pressures due to a slowing economy. Even though the Capital To Risk Weighted Assets Rat io (CRAR) and NPA of Indian banks compared favourably with the major advanced countries as well as peer Emerging Market Economies, there has been a cont inuous decline in these parameters, said the report released by the RBI. The Systemic Risk Survey conducted by the RBI for the first t ime has ident ified deteriorat ion of asset quality as the highest risk. (BL dt .23.12.2011 p1) Poor financial health swells tally of debt recast cases: Debts referred for CDR rose to `. 47,304 cr in Apr-Dec, compared with `. 9,953 cr in year-ago period.As 2011 draws to a close, the deteriorat ing quality of corporate debt is becoming a concern for lenders. The number of t roubled loans referred to the corporate debt restructuring (CDR) mechanism increased five-fold in the first nine months of FY12.A State Bank of India execut ive said the rise was on expected lines. “The slowdown in growth and pressure from rising interest costs may substant ially increase the number of cases referred to the CDR forum in FY12,” he said. (BS dt .27.12.2011 p6)

Other Banking News….. New CMD for Andhra Bank: Mr B. A. Prabhakar, Executive Director, Bank of India, has been appointed as Chairman and Managing Director of Andhra Bank. Mr Prabhakar would assume charge on or before January 1, 2012, and would cont inue in the post t ill August 31, 2013. (BL dt . 21.12.2011 p. 6) Bank of Baroda to get ̀ . 775 cr infusion: The Union government has agreed to infuse `. 775 crore into state-owned lender Bank of Baroda, C&MD Mr M.D. Mallya said. "As part of increasing its stake to the mandated 58%, the government has agreed to pump in `. 775 crore into our bank. The fund infusion will happen before the end of the fiscal," Mr Mallya said. This could be done by a preferent ial allotment, he added. (Mint dt .27.12.2011 p9)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

47

Central Bank of India eyes expansion in Karnataka: As part of its centenary year celebrat ions on December 21, 2011, public sector lender Central Bank of India, announced its expansion plans in Karnataka. Chief General Manager Mr K A Somayajulu said the Bank has 103 branches in the State and is planning to add 37 branches more within the current financial year. ”We are aggressively persuing credit disbursal and expanding our branches to 4,000 from the current 3,849 spread across India, giving primacy to RBI st ipulat ion on financial inclusion and priority lending target ,” said Mr Somayajulu. (DH dt. 20.12.2011 p. 15) Dena Bank to grow balance-sheet to thwart takeover bids: Nupur Mitra The mid-size public sector lender Dena Bank seeks to grow its balance sheet to ensure that it is not gobbled up by bigger banks, a top bank official said. “The biggest challenge for Dena Bank is that we are one of the smallest . So, in the present environment, we have to go beyond a point to ensure that we are there in the future also,” the newly-appointed Dena Bank chairman and managing director Smt Nupur Mit ra said on the sidelines of an IBA meet on innovat ion, risk and regulat ion.She also said the bank’s presence in Gujarat is making it more vulnerable for a possible takeover.(ET dt .08.12.11 p11) Exim Bank: Bill to enhance authorised capital introduced in Lok Sabha: A Bill to enhance the authorised capital of Exim Bank from the exist ing ̀ . 2,000 crore to `. 10,000 crore was introduced in the Lok Sabha on Thursday. Also, it has been proposed to empower the Centre to raise the amount of authorised capital from t ime to t ime through execut ive orders. This would imply that Parliament’s nod would not be required if the Centre decides to increase the authorised capital beyond `. 10,000 crore. The Bill - Export Import Bank of India (Amendment) Bill, 2011 - was introduced in the Lower House by Mr Namo Narain Meena, Minister of State for Finance. The proposed amendments would enable Exim Bank, which provides financial assistance to exporters and importers, undertake fresh borrowing, borrow to fund commitments under export line of credits, st rengthen the capital base, and enhance single/ group borrowers’ exposure limits. (BL dt . 09.12.2011 p. 6) Pay more to close your HDFC Bank savings account: HDFC Bank, the lender with the highest proport ion of low-cost deposits to total, has raised charges on closure of savings bank accounts and other services as it attempts to ring fence customers from flocking to rivals who offer higher rates on these deposits. It is the first lender to raise such charges probably to save its profitability.For closure of SB account, an HDFC Bank customer, depending on the nature and tenure of the account, will have to pay a fee of `. 500 and if the average monthly balance falls below `. 20,000 in nonurban centres, it will charge `. 500 a month, according to its website list ing various charges effect ive January 2012.(ET dt .08.12.11 p11) Indian Overseas Bank may raise $500 mn next year: State-run Indian Overseas Bank may look at borrowing $500 million in the overseas market next year to meet dollar demand from Indian companies, its chief M. Narendra told Reuters. “We may, at an appropriate t ime, look at medium-term notes for $500 million next year, when the market is right ,” he said over the telephone. “This is to meet credit growth in internat ional market , corporates who want ECBs.” “There are other

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

48

markets like Chinese, Japanese where we can also raise money. So, all opt ions can be looked at . Not immediately, but next year,” he added. (BS dt .15.12.2011 p 6) KVG Bank to open 9th regional office, more branches in Mangalore: The Dharwad-headquartered Karnataka Vikas Gramina Bank (KVGB), a regional rural bank sponsored by Syndicate Bank, is planning to expand its network of branches, ATMs and business correspondents during the current financial year. Speaking on the sidelines of the inaugurat ion of 9th regional office of the bank in Mangalore, Mr C Sambashive Reddy, Chairman of KVGB, said that the bank has 482 branches. Of them, 57 were opened during the current financial year. The bank will open another 19 branches by the end of this fiscal. As of now, the bank has only one ATM at Dharwad. Plans are there to open 50 more ATMs during the current fiscal. (BL dt. 20.12.2011 p. 19) SBI to boost capital ratio: State Bank of India Chairman Mr Prat ip Chaudhuri said the nat ion’s largest lender will cancel untapped lines of credit and reorganise its balance sheet to boost capital while it waits for an infusion of government funds. The lender has set up a panel to review ways to conserve capital, Mr Chaudhuri said in an interview in Mumbai. The measures, which will include adjust ing the risk weighings on loans to companies, may help free up 30 basis points to 100 basis points of capital by March.(FE dt 13.12.2011 p.16) SBI acquires loans worth $500 million from foreign banks: The SBI has acquired loans worth around $500 million from overseas banks. SBI chairman Prat ip Chaudhuri said the bank has acquired quality assets of Indian corporates from overseas banks at a 4-5% discount. “The bank is doing brisk business in short -term trade finance as it has been able to raise enough retail deposits at LIBOR plus 60 or 80 basis points,” he said. “There is a long list of customers willing to borrow at LIBOR plus 350 basis points and, so, the net interest margin should go up by about 200 basis points,” he added. On an $11-billion t rade finance book, SBI hopes to make an additional $200 million by way of interest . With the euro zone in turmoil, European banks have been keen on shedding assets and Indian banks have been quick to grab the opportunity. (FE dt .15.12.2011 p16) SBI expects ̀ ..4000 crore capital infusion in FY12: The country’s largest lender SBI expressed hope it would get capital infusion of `..3000-4000 crore from the government this fiscal. “It (infusion) is round the corner. It could happen any day now. I think (the mode) is not decided, but whatever we are get t ing we will be get t ing in cash. We are expect ing `..3000-4000 crore either in December or by March,” SBI Chairman Mr Prat ip Chaudhuri said. Talking to reporters on the sidelines of Delhi Economic Conclave, he said that “if they (government) put in ̀ .3000 crore (in SBI), so this will mean another 3% increase in government holding”. At present, the Government of India holds 59.4% in the bank. The government has earmarked `.6000 crore for the fiscal for capital infusion in public sector banks to ensure that they meet the regulatory requirements. (ET dt 15.12.2011 p.10) SBI sees credit growth of 16-18% this fiscal: State Bank of India would st ick to its credit growth guidance of 16-18 per cent for the fiscal. “We are seeing some increase and some upsurge in credit growth in October and

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

49

November and hopefully that should cont inue,” Mr Pratip Chaudhuri, Chairman of the bank, said. On asset quality, he said that the bank’s net NPA had peaked at 2.05 per cent. “We don’t think it will go up sharply or go up at all.” There was some stress in the agricultural sector, he said, adding that with the new harvest coming in, recoveries in agriculture have also improved. According to him, several sectors of the economy are under stress: aviation, distribut ion companies of the electricity boards, and to some extent text ile sector - “because these companies had procured cotton at higher prices and the cot ton prices have come down”, and some steel companies in the intermediate sector. (BL dt . 19.12.2011 p. 13) SBI may defer raising $5 bn to next fiscal: The country’s largest lender, SBI, is unlikely to go ahead with a plan to raise $5 billion by selling dollar bonds in global markets this financial year because companies are no longer shopping around for high-value loans— a reflect ion of both the high interest rates and the poor investment climate in the country. The bank may revisit its plan in 2012-13.The money was expected to fund the investment plans of Indian firms and mult inat ionals with significant business interests in India. SBI had init ially planned to raise as much as $5 billion by December through the issue of medium-term notes (MTNs). SBI chairman Pratip Chaudhuri was quoted by news agency Press Trust of India on 8 July, stat ing “...we hope to raise $5 billion by December by means of foreign debt through MTNs”.The bank has decided not to go ahead with its capital-raising programme at least t ill March. (Mint dt .22.12.2011 p1) SBI, BoB set to raise NRE deposit rates: After private banks, it is now the turn of large public sector banks to raise interest rates on non-resident (external) rupee (NRE) deposits after the central bank lifted the cap on rates for these deposits. State Bank of India (SBI) and Bank of Baroda are set to raise NRE deposits rates. A senior SBI official said, “We are planning to revise the rates on NRE deposits to bring them on a par with domest ic rates.” Till late evening, the bank had not announced the revised interest rate. The bank current ly offers 9.25 per cent for domest ic term deposits maturing between one and 10 years. (BS dt . 24.12.2011 p. 7) Standard Chartered to Increase Takeover Financing in India: Standard Chartered Plc (STAN) plans to increase takeover financing for Indian companies as it seeks to gain ground in mergers advisory in emerging markets on rivals weakened by Europe’s credit crisis. “As the world goes through this turmoil, banks like ours which do have the capability and a strong balance sheet see that as an opportunity,” to lend for acquisit ions, Mr Neeraj Swaroop, the U.K. bank’s outgoing chief execut ive officer for India and South Asia, said in an interview in Mumbai. Standard Chartered funded deals including Aditya Birla Group’s $875 million acquisit ion of Columbian Chemicals Co. in January to help defend its No. 3 posit ion in Indian mergers advisory this year, data compiled by Bloomberg show. The London-based bank ranks 43rd globally among arrangers of takeovers. Banks that offer financing to gain advisory credit distort the rankings among takeover arrangers, said Uday Kotak, the billionaire owner of rival Kotak Mahindra Bank Ltd. Kotak did not specifically name Standard Chartered. (BL dt 16.12.2011 p.6)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

50

United Bank plans ̀ .100-cr bond issue: United Bank of India plans to raise about `.100 crore through non-convert ible bonds to augment its lower Tier-II capital, according to a company notificat ion to the BSE. The bank proposes to issue unsecured, subordinated, redeemable, non-convert ible bonds in the form of promissory notes of `. 10 lakh each, for `. 100 crore. The issue has been rated AA+ by Care and AA+/ Stable by Crisil. The bond issue will have green-shoe opt ions to raise addit ional `. 100 crore on private placement basis. The bank will int imate the coupon rate and the date of opening of the issue in due course. (BL dt .22.12.2011 p7) YES Bank ups savings rate to 7% for deposits over ̀ .1 lakh: YES Bank has hiked interest rate by 100 bps to 7% on SB deposits with balances of over `. 1 lakh. For those with balances below `.1 lakh, the rate cont inues to be 6%, said a press release issued by the bank. This is the second t ime that YES bank is hiking interest rate on SB deposits after the RBI deregulated the interest rates. (BL dt .23.12.2011 p 6)

Overseas Aspirations….. SBI opens branch in Saudi Arabia: State Bank of India started operat ions in Saudi Arabia with the opening of a branch in Jeddah. The branch was inaugurated on December 14 by His Excellency Dr Abdulrahaman Al kalaf, Deputy Governor for Technical Affairs, Saudi Arabian Monetary Agency. SBI’s Managing Directors, Mr Hemant Contractor and Mr A. Krishna Kumar were also present on the occasion, said a press release issued by the bank. The Jeddah branch is a full commercial branch that offers a bouquet of banking services to the around two million Indian residents of Saudi Arabia. It also offers remit tance facility for Indians residents in Saudi Arabia, added the press release. (BL dt 16.12.2011 p.6)

RBI Directives…. & Guidelines…. RBI norms on CDS become operational: RBI on Thursday operationalised the new guidelines on credit default swap (CDS), direct ing market part icipants to report such t rades within 30 minutes to the Clearing Corporat ion’s online repository. “It is advised that all market makers shall report their CDS trades in corporate bonds within 30 minutes of the trade to the Clearing Corporat ion of India Ltd (CCIL) t rade repository CCIL Online Report ing Engine (CORE) beginning December 1, 2011,” the Reserve Bank said in a circular. (BL dt . 02.12.2011 p. 6) RBI’s Dec 16 policy review to take note of forex volatility: The Reserve Bank of India is hopeful that there would be some improvement in the foreign exchange volat ility in coming days. “In view of the European Union Summit we are expect ing that there would be some correct ions in the value of rupee,” said Reserve Bank of India Deputy Governor Mr Harun Rashid Khan. He said that the outcome of the summit would bring some comfort to the world economy. “Reserve Bank of India policy review on

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

51

December 16 would take note of the foreign exchange volat ility besides the problem of inflat ion and the non-performing assets of banks,” Mr Khan said on the sidelines of a regional seminar on securit ies market , organised by Bhubaneswar Stock Exchange, on Saturday. The deputy governor said that the euro zone crisis has its impact on the Indian economy.(FE dt 11.12.2011 P.11) RBI issues guidelines for banks’ investments in non-finance cos: Equity investment by a bank in a non-financial service company would be subject to a limit of 10 per cent of the company’s paid-up capital or 10 per cent of the bank’s paid-up capital and reserves, whichever is less, according to the Reserve Bank of India. In new guidelines for banks’ investments in companies which are not subsidiaries and are not ‘financial services companies’, the Reserve Bank of India said that for arriving at this 10 per cent limit , equity investments held under ‘Held for Trading’ category would also be reckoned. Investments within the 10 per cent limit , irrespect ive of whether they are in the ‘Held for Trading’ category or otherwise, would, however, not require the central bank’s prior approval. The Reserve Bank of India issued the guidelines as it felt that it is possible for banks, direct ly or indirect ly through their holdings in other ent it ies, to exercise control on financial service companies or have significant influence over such companies and thus, engage in activit ies direct ly or indirect ly not permitted to banks. (BL dt .13.12.11 p6) RBI panel to discuss raising of capital by urban co-op banks: The issue of get t ing a level-playing field for urban co-oerat ive.banks vis-à-vis commercial banks with regard to raising capital and lowering the threshold for statutory investments will be taken up at a meet ing of the Reserve bank of India’s standing advisory commit tee next week. Current ly, growth prospects for the 1,600-odd UCBs are hamstrung due to limited opt ions for raising capital.Though Urban Co-operat ive Banks, which as of March-end 2011 collect ively had deposits and advances aggregat ing `. 2,12,031 crore and `. 1,36,341 crore, respect ively, have been allowed to issue preference shares and long-term deposits to augment their capital, both these opt ions are not preferred. (BL dt .14.12.11 p.6)

` Movement…. RBI will use all available tools if rupee fall escalates: Gokarn: To prevent the rupee from spiralling downwards, the RBI will resort to appropriate measures, including increasing the supply of foreign exchange by expanding market part icipat ion and intervening in excessively volat ile market condit ions, said Dr Subir Gokarn, Deputy Governor. Underscoring the importance of resist ing currency depreciat ion by increasing the supply of foreign currency by expanding market part icipat ion, the Deputy Governor said the RBI has done this by increasing the limit on investment in the Government and corporate debt instruments by foreign investors. Further, the central bank has also raised the ceilings on interest rates payable on non-resident deposits and the all-in-cost ceiling of external commercial borrowings has been enhanced. Dr Gokarn’s observat ions come at a t ime when the rupee has weakened nearly 17% against the dollar since April 2011, making it the worst performing currency in Asia. Referring to the recent sharp depreciat ion in the rupee, which led to an assessment in some quarters of ‘helplessness’ in dealing with the kind of global turbulence that is being witnessed, the

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

52

Deputy Governor said “our strategic behaviour should not be misconstrued as an inability to lean against the wind. “If we do see the short-term risk of a downward spiral escalat ing, we will not hesitate to use all available instruments.” (BL dt 04.12.2011 p.1) Rupee hits a fresh trough, breaches 53-a-dollar mark: The rupee on Tuesday breached the 53-per dollar mark, with investors cont inuing to shift their preference towards the dollar, as the country heads for an economic slowdown. The rupee on Tuesday ended at 53.23 against the dollar, down 0.7 per cent from Monday’s close of 52.84, after touching a record low of 53.52. The currency has lost 4.8 per cent against the dollar in the last four weeks and 16 per cent so far this year. According to dealers, the rupee is likely to remain under pressure, as not much intervent ion is expected from the Reserve Bank of India. (BS dt 14.12.2011 p.6) Rupee surges after RBI’s measures to curb speculation: The rupee ended almost 100 paise higher from its previous close on the back of Reserve Bank of India’s measures to curb speculat ion in the forex market . On Friday, the domest ic currency opened higher at 52.70 and touched a high of 52.21. It closed stronger at 52.68, against the previous close of 53.66. In intra-day t rades, dollar demand from oil companies saw the rupee weaken to 53.02. As part of its steps to curb speculat ion in the forex market , the RBI on Thursday evening withdrew the facility to cancel and rebook forward contracts by resident and foreign inst itutional investors as the rupee hit an all t ime low of 54.2925. (BL dt . 17.12.2011 p. 1) RBI needs to do more and decisively to propel growth: Considering the foreign exchange volatality and inflat ionary pressure, the RBI has been guarded in its approach to leave all rates unchanged with the basic object ive to stem Rupee depreciat ion and hopefully manage inflat ionary trend. Mr N Venkatakrishnan, Chairman of the Expert Committee on banking and Finance, Bangalore Chamber of Industry and Commerce (BCIC), while appreciating the RBI for not tampering with CRR and Repo rates, said: "The 20 per cent depreciat ion of the Rupee in 2011 is not warranted given India's strong economic fundamentals and RBI should have acted more pro-act ively when the Rupee was tending towards `. 48-49 per cent US Dollar. By delaying the act ion, RBI has allowed speculators to test its resolve." It can be construed the RBI would probably act in course t ime once it is uncomfortable with the level of exchange rate, he further added. (BS dt . 19.12.2011 p. 4) Rupee fall due to a combination of factors, says RBI's Chakrabarty: India's inflat ion is largely due to supply side pressures and these can be addressed by increasing product ivity, the RBI Deputy Governor, Dr K C Chakrabarty, said. Dr Chakrabarty said micro, small and medium enterprises must increase their product ivity to alleviate such pressures. He was speaking at a conference hosted by Central Bank of India. In the quest ion and answer session following his speech, Dr Chakrabarty said inflat ion has to be brought down quickly and this is not just the RBI's responsibility. "Inflat ion has to be brought down quickly and the society must co-operate," he said. (BL dt. 21.12.2011 p. 6)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

53

Technology….. Equip ATMs to accept cash directly, suggests panel: A year down the line government-owned bank ATMs in urban as well as rural areas may start accept ing cash (not in an envelope but direct ly), have solar powered back-up, and 24x7 surveillance. The aforement ioned are some of the recommendat ions of a government-appointed commit tee on ATMs headed by Dr Ashok Jhunjhunwala, Professor, IIT-Madras. These come at a t ime when the Government has directed the 21 banks in which it owns majority stake to go in for joint procurement of ATMs. Besides dispensing notes, which are soiled but can be issued, and retract ing notes left behind by customers, the ATMs to be deployed by PSBs will come equipped with a cash acceptor.(BL dt 02.12.2011 p.6) RBI removes cap on mobile banking transactions: The RBI has removed the cap of ̀ . 50,000 per day per t ransact ion through mobile banking. It has now been decided that individual banks can place t ransact ion limits based on their own risk percept ion and with approval of their respect ive boards. The RBI said that banks are increasingly extending mobile banking facilit ies to their customers. Inter-bank Mobile Payment Service (IMPS) developed and operated by the Nat ional Payment Corporation of India (NPCI) has also enabled real-t ime t ransfer of funds through the medium of the mobile phone between accounts in different banks. The volume and value of mobile banking t ransact ions are also showing an uptrend, said the RBI. (BL dt .23.12.2011 p6) RBI selects Thinksoft for CBS: Financial software test ing company Thinksoft Global Services has been selected by the RBI to test the central bank’s centralised CBS. As part of the `. 5-crore deal, Thinksoft will be responsible for the automat ion and integrat ion of the banking operat ions in all regional offices of the Bank. This deal will also cover departments such as Deposit Accounts Department, Public Accounts Department and Pubic Debt Office, RTGS, Central Account ing Scheme, Nat ional Small Savings Fund, Market Stabilisat ion Scheme, Open Market Operat ion and Liquidity Adjustment Facility among others. (BL dt . 23.12.2011 p. 7) Mobile banking grows 300 per cent in 2010-11: Indicat ing that mobile banking is fast catching up in the country, the Reserve Bank of India has said that the total number of transact ions effected through mobile banking in 2010-11 was 9.60 million (value of `. 780.648 crore) compared to 2.32 million in 2009-10 (value of `. 191.578 crore), showing an increase of more than 300 per cent in terms of volume and value. The RBI has given approvals to 52 banks for providing the service. The Interbank Mobile Payment Service (IMPS) developed and operated by the Nat ional Payments Corporat ion of India (NPCI) has also enabled real-t ime t ransfer of funds through mobile phones between accounts in different banks. (FE dt . 24.12.2011 p. 16)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

54

FAQs on Micro, Small and Medium Enterprises Updated as of 21-12-2011

Q.1What is the definition of MSME? The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act , 2006 in terms of which the definit ion of micro, small and medium enterprises is as under : a. Enterprises engaged in the manufacture or product ion, processing or preservat ion of

goods as specified below : i. A micro enterprise is an enterprise where investment in plant and

machinery does not exceed Rs.25 lakh; ii. A small enterprise is an enterprise where the investment in plant and

machinery is more than Rs.25 lakh but does not exceed Rs.5 crore; and iii. A medium enterprise is an enterprise where the investment in plant and

machinery is more than Rs.5 crore but does not exceed Rs.10 crore. iv. In case of the above enterprises, investment in plant and machinery is the

original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its not ificat ion No.S.O.1722(E) dated October 5, 2006 (Annex I).

b. Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fit t ings and other items not direct ly related to the service rendered or as may be notified under the MSMED Act, 2006 are specified below.

i. A micro enterprise is an enterprise where the investment in equipment does not exceed Rs.10 lakh;

ii. A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs.2 crore; and

iii. A medium enterprise is an enterprise where the investment in equipment is more than Rs.2 crore but does not exceed Rs.5 crore

Q.2What is the status of lending by banks to this sector? Bank's lending to the Micro and Small Enterprises is reckoned for priority sector advances. Lending to Medium enterprises is not eligible to be included for the purpose of computat ion of priority sector lending. Detailed guidelines on lending to the Micro, Small and Medium enterprises sector are available in our Master Circular no. RPCD.SME&NFS.BC.No.09/ 06.02.31/ 2011-12 dated July 1, 2011. The Master circulars issued by RBI, to banks, on various matters are available on our website www.rbi.org.in and updated in July each year. Q.3What is meant by Priority Sector Lending? Priority sector lending include only those sectors as part of the priority sector, that impact large sect ions of the populat ion, the weaker sect ions and the sectors which are employment-intensive such as agriculture, and t iny and small enterprises. Detailed guidelines on Priority sector lending are available in our Master Circular on Priority sector lending no. RPCD.CO.Plan.BC.10/ 04.09.01/ 2011-12 dated July 1, 2011. The Master

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

55

circulars issued by RBI, to banks, on various matters are available on our website www.rbi.org.in and updated in July each year. Q.4What is the status of loans granted to Khadi and Village Industries Sector (KVI)? All advances granted to units in the KVI sector, irrespect ive of their size of operat ions, locat ion and amount of original investment in plant and machinery will be treated as loans to the micro enterprises segment within the MSE Sector and covered under priority sector advances. Q.5Are there any targets prescribed for lending by banks to MSMEs? As per extant policy, certain targets have been prescribed for banks for lending to the Micro and Small enterprise (MSE) sector. The targets for domest ic banks and foreign banks are slight ly different keeping in mind the limited presence of the foreign banks. The domest ic commercial banks are expected to enlarge credit to priority sector and ensure that priority sector advances (which include the micro and small enterprises sector) const itute 40 per cent of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. A Prime Minister's Task Force was set up in 2009 by Government of India (Chairman : Shri T. K. A. Nair, Principal Secretary) to look into the various issues pertaining to MSMEs. In terms of the recommendat ions of the Task Force banks have been advised to achieve a 20 per cent year-on-year growth in credit to micro and small enterprises and a 10 per cent annual growth in the number of micro enterprise accounts (Refer circular RPCD.SME&NFS.No.BC.90/ 06.02.31/ 2009-10 dated June 29, 2010). In order to ensure that sufficient credit is available to micro enterprises within the MSE sector, banks should ensure that : a)40 per cent of the total advances to MSE sector should go to micro (manufacturing) enterprises having investment in plant and machinery up to Rs.5 lakh and micro (service) enterprises having investment in equipment up to Rs.2 lakh ; b)20 per cent of the total advances to MSE sector should go to micro (manufacturing) enterprises with investment in plant and machinery above Rs.5 lakh and up to Rs.25 lakh, and micro (service) enterprises with investment in equipment above Rs.2 lakh and up to Rs.10 lakh. Thus, 60 per cent of MSE advances should go to the micro enterprises. c)While banks are advised to achieve the 60% target as above, the allocat ion of 60% of the MSE advances to the micro enterprises is to be achieved in stages viz. 50% in the year 2010-11, 55% in the year 2011-12 and 60% in the year 2012-13 (Refer circular RPCD.SME&NFS.No.BC.90/ 06.02.31/ 2009-10 dated June 29, 2010). For Foreign banks the targets are the same except that Foreign banks are expected to enlarge credit to priority sector and ensure that priority sector advances (which includes the MSE sector) const itute 32 per cent of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. Within the overall target of 32 per cent to be achieved by foreign banks, the advances to MSE sector should

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

56

not be less than 10 per cent of the adjusted net bank credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. For details, the Master Circular RPCD.SME&NFS.BC.No.09/06.02.31/ 2011-12 dated July 1, 2011 on 'Lending to Micro, Small and Medium Enterprises (MSME) Sector, may please be seen. Q.6Are there specialized bank branches for lending to the MSMEs? Public sector banks have been advised to open at least one specialized branch in each district. The banks have been permitted to categorize their MSMEgeneral banking branches having 60% or more of their advances to MSME sector, as specialized MSME branches for providing better service to this sector as a whole. As per the policy package announced by the Government of India for stepping up credit to MSME sector, the public sector banks will ensure specialized MSME branches in ident ified clusters / centres with preponderance of small enterprises to enable the entrepreneurs to have easy access to the bank credit and to equip bank personnel to develop requisite expertise. Though their core competence will be ut ilized for extending finance and other services to MSME sector, they will have operational flexibility to extend finance / render other services to other sectors / borrowers. Q.7How many such specialized branches for lending to MSMEs are there? As on March 2011 there are 1220 specialized MSME branches. Q.8How do banks assess the working capital requirements of borrowers? The banks have been advised to put in place loan policies governing extension of credit facilit ies for the MSE sector duly approved by their Board of Directors (Refer circular RPCD.SME&NFS.BC.No.102/ 06.04.01/ 2008-09 dated May 4, 2009). Banks have, however, been advised to sanction limits after proper appraisal of the genuine working capital requirements of the borrowers keeping in mind their business cycle and short term credit requirement. As per Nayak Commit tee Report , working capital limits to SSI units is computed on the basis of minimum 20% of their est imated turnover up to credit limit of Rs.5crore. For more details paragraph 4.12.2 of the Master Circular on lending to the MSME sector dated July 1, 2010 may please be seen. Q.9Is there any provision for grant of composite loans by banks? A composite loan limit of Rs.1crore can be sanct ioned by banks to enable the MSME entrepreneurs to avail of their working capital and term loan requirement through Single Window in terms of our Master Circular on lending to the MSME sector dated July 1, 2010. All scheduled commercial banks were advised by our circular RPCD.SME&NFS.BC.No.102/ 06.04.01/ 2008-09 on May 4, 2009 that the banks which have sanct ioned term loan singly or joint ly must also sanct ion working capital (WC) limit singly (or joint ly, in the rat io of term loan) to avoid delay in commencement of commercial product ion thereby ensuring that there are no cases where term loan has been sanct ioned and working capital facilit ies are yet to be sanct ioned. These instruct ions have been reiterated to scheduled commercial banks on March 11, 2010. Q.10What is Cluster financing? Cluster based approach to lending is intended to provide a full-service approach to cater to the diverse needs of the MSE sector which may be achieved through extending banking

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

57

services to recognized MSE clusters. A cluster based approach may be more beneficial (a) in dealing with well-defined and recognized groups (b) availability of appropriate informat ion for risk assessment (c) monitoring by the lending inst itut ions and (d) reduct ion in costs. The banks have, therefore, been advised to t reat it as a thrust area and increasingly adopt the same for SME financing. United Nat ions Industrial Development Organisat ion (UNIDO) has ident ified 388 clusters spread over 21 states in various parts of the country. The Ministry of Micro, Small and Medium Enterprises has also approved a list of clusters under the Scheme of Fund for Regenerat ion of Tradit ional Industries (SFURTI) and Micro and Small Enterprises Cluster Development Programme (MSE-CDP) located in 121 Minority Concentrat ion Districts. Accordingly, banks have been advised to take appropriate measures to improve the credit flow to the ident ified clusters of micro and small entrepreneurs from the Minorit ies Communities residing in the minority concentrated districts of the country. Banks have also been advised that they should open more MSE focussed branch offices at different MSE clusters which can also act as counselling centres for MSEs. Each lead bank of the district may adopt at least one cluster (Refer circular RPCD.SME&NFS.No.BC.90/ 06.02.31/ 2009-10 dated June 29, 2010) Q.11Is there a time frame for disposal of loan applications made by the micro small enterprises? Banks have been advised to dispose of all loan applicat ions for MSE borrowers up to a credit limit of Rs.25,000/ -, within 2 weeks and those up to Rs.5 lakh within 4 weeks provided the loan applicat ions are complete in all respects and accompanied by a 'check list ' (Refer Master Circular RPCD.SME&NFS.BC.No.09/ 06.02.31/2011-12 dated July 1, 2011 on 'Lending to Micro, Small and Medium Enterprises (MSME) Sector). Q.12What are the RBI guidelines on interest rates for loans disbursed by the commercial banks? As part of the financial sector liberalisat ion, all credit related matters of banks including charging of interest have been deregulated by RBI and are governed by the banks' own lending policies. With a view to enhancing t ransparency in lending rates of banks and enabling bet ter assessment of t ransmission of monetary policy, all scheduled commercial banks had been advised in terms of our circular DBOD.No.Dir.BC.88/ 13.03.00/ 2009-10 on April 9, 2010 to introduce the Base Rate system w.e.f. July 1, 2010. Accordingly, the Base Rate System has replaced the BPLR system with effect from July 1, 2010. All categories of loans should henceforth be priced only with reference to the Base Rate. It is expected that the above deregulation of lending rate will increase the credit flow to small borrowers at reasonable rate. Q.13Can the MSE borrowers get collateral free loans from banks? In terms of guidelines contained in circular RPCD.SME&NFS.BC.No.16/ 06.02.31(P)/ 2009-10 dated August 24, 2009 issued by Reserve Bank of India, banks have been mandated to grant collateral free loans upto Rs.5 lakh to all MSE borrowers. Banks have been further advised vide our circular RPCD/ PLNFS/ BC.No.39/ 06.02.80/ 2003-04 dated November 3,

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

58

2003 that they may, on the basis of good t rack record and financial posit ion of the SSI (Now MSE) units, increase the limit of dispensat ion of collateral requirement for loans from the exist ing level of Rs.15 lakh to Rs.25 lakh with the approval of the appropriate authority. In terms of our circular RPCD.SME&NFS.BC.No.79/ 06.02.31/ 2009-10 dated May 6, 2010, the limit of collateral free loans to MSE borrowers has been increased from Rs.5 lakh to Rs.10 lakh based on the recommendat ions of the Working Group to review the Credit Guarantee Scheme of the Credit Guarantee Fund Trust for Micro and Small Enterprises (Chairman : Shri V. K. Sharma, Execut ive Director, Reserve Bank of India) Q.14What is the Credit Guarantee Fund Trust Scheme for MSEs? The Ministry of MSME, Government of India and SIDBI set up the Credit Guarantee Fund Trust for Micro and Small Enterprises ( CGTMSE) with a view to facilitate flow of credit to the MSE sector without the need for collaterals / third party guarantees. The main object ive of the scheme is that the lender should give importance to project viability and secure the credit facility purely on the primary security of the assets financed. The Credit Guarantee scheme (CGS) seeks to reassure the lender that , in the event of a MSE unit , which availed collateral- free credit facilit ies, fails to discharge its liabilit ies to the lender, the Guarantee Trust would make good the loss incurred by the lender up to 85 per cent of the outstanding amount in default . The CGTMSE would provide cover for credit facility up to Rs.100 lakh which have been extended by lending inst itutions without any collateral security and / or third party guarantees. A guarantee and annual service fee is charged by the CGTMSE to avail of the guarantee cover. Present ly the guarantee fee and annual service charges are to be borne by the borrower. Q.15Why is credit rating of the micro small borrowers necessary? With a view to facilitat ing credit flow to the MSME sector and enhancing the comfort -level of the lending inst itut ions the MSME units credit rat ing done by reputed credit rating agencies should be encouraged. Banks are advised to consider these rat ings as per availability and wherever appropriate structure their rates of interest depending on the rat ings assigned to the borrowing SME units. Q.16Is credit rating mandatory for the MSE borrowers? Credit rat ing is not mandatory but it is in the interest of the MSE borrowers to get their credit rat ing done as it would help in credit pricing of the loans taken by them from banks. Q.17What are the guidelines for delayed payment of dues to the MSE borrowers? With the enactment of the Micro, Small and Medium Enterprises Development (MSMED), Act 2006, for the goods and services supplied by the MSEME units payments have to be made by the buyers as under : i)The buyer to make payment on or before the date agreed on between him and the supplier in writ ing or, in case of no agreement before the appointed day. The agreement between seller and buyer shall not exceed more than 45 days.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

59

ii)The buyer fails to make payment of the amount to the supplier, he shall be liable to pay compound interest with monthly rests to the supplier on the amount from the appointed day or, on the date agreed on, at three t imes of the Bank Rate not ified by Reserve Bank. iii)For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the interest as advised at (ii) above. iv)In case of dispute with regard to any amount due, a reference shall be made to the Micro and Small Enterprises Facilitat ion Council, const ituted by the respect ive State Government. To take care of the payment obligat ions of large corporate borrowers to MSEs, banks have been advised that while sanct ioning / renewing credit limits to their large corporate borrowers (i.e. borrowers enjoying working capital limits of Rs. 10 crore and above from the banking system), to fix separate sub-limits, within the overall limits, specifically for meet ing payment obligat ions in respect of purchases from MSEs either on cash basis or on bill basis. Banks were also advised to closely monitor the operat ions in the sub-limits, part icularly with reference to their corporate borrowers' dues to MSE units by ascertaining periodically from their corporate borrowers, the extent of their dues to MSE suppliers and ensuring that the corporates pay off such dues before the 'appointed day' / agreed date by using the balance available in the sub-limit so created. In this regard the relevant circular is circular IECD/ 5/ 08.12.01/ 2000-01 dated October 16, 2000 (reiterated on May 30, 2003, vide circular No. IECD.No.20/ 08.12.01/ 2002-03) available on our website. Q.18What is debt restructuring of advances? A viable / potent ially viable unit may apply for a debt restructuring if it shows early stage of st ickiness. In such cases the banks may consider to reschedule the debt for repayment, consider addit ional funds etc. A debt restructuring mechanism for units in MSME sector has been formulated and advised to all commercial banks .The detailed guidelines have been issued to ensure restructuring of debt of all eligible small and medium enterprises. Prudent ial guidelines on restructuring of advances have also been issued which harmonises the prudent ial norms over all categories of debt restructuring mechanisms (other than those restructured on account of natural calamit ies). The relevant circulars in this regard are circular DBOD.BP.BC.No.34/ 21.04.132/ 2005-06 dated September 8, 2005 and circular DBOD.No.BP.BC.37/ 21.04.132/ 2008-09 dated August 27, 2008 which are available on our website www.rbi.org.in. Q.19On restructuring of advances does the asset classification by the bank change? The principles and prudent ial norms for asset classificat ion on restructuring of advances are prescribed in Part B of the Master Circular DBOD.No.BP.BC.12/ 21.04.048/ 2011-12 dated July 1, 2011 on 'Prudential Norms on Income Recognit ion, Asset Classificat ion and Provisioning pertaining to Advances'.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

60

The special regulatory t reatment for asset classificat ion, under which the asset classificat ion would not change upon restructuring, will be available to the borrowers engaged in important business act ivit ies, subject to the compliance with certain condit ions as specified in para 14 of the above circular. Q.20What is the definition of a sick unit? As per the extant guidelines, a unit is considered as sick when any of the borrowal account of the unit remains substandard for more than 6 months or there is erosion in the net worth due to accumulated cash losses to the extent of 50% of its net worth during the previous account ing year and the unit has been in commercial product ion for at least two years. The criteria will enable banks to detect sickness at an early stage and facilitate correct ive action for revival of the unit. Q.21Is there a time frame within which the banks are required to implement the rehabilitation package? Viable / potent ially viable MSE units / enterprises, which turn sick in spite of debt re-structuring would need to be rehabilitated and put under nursing. It will be for the banks / financial inst itutions to decide whether a sick SSI unit is potent ially viable or not . Viability of a unit ident ified as sick, should be decided quickly and made known to the unit and others concerned at the earliest . The rehabilitat ion package should be fully implemented within six months from the date the unit is declared as 'potent ially viable' / 'viable'. The rehabilitat ion package should be fully implemented by banks within six months from the date the unit is declared as potentially viable / viable. During this six months period of ident ifying and implementing rehabilitat ion package banks / FIs are required to do "holding operation" which will allow the sick unit to draw funds from the cash credit account at least to the extent of deposit of sale proceeds. The relevant circular on rehabilitat ion of sick units is RPCD.NO.PLNFS.BC.57/ 06.04.01/2001-2002 dated January 16, 2002 available on our website. Q.22What are the RBI guidelines on One Time Settlement scheme(OTS) for MSEs for settlement of their NPAs? Scheduled commercial banks have been advised in terms of our circular RPCD.SME&NFS.BC.No.102/ 06.04.01/ 2008-09 dated May 4, 2009 to put in place a non -discret ionary One t ime Settlement scheme duly approved by their Boards. The banks have also been advised to give adequate publicity to their OTS policies. (Refer circular RPCD.SME&NFS.BC.No.102/ 06.04.01/ 2008-09 dated May 4, 2009) Q.23What is the Banking Codes and Standard Board of India (BCSBI) and its role for MSEs? The Banking Codes and Standard Board of India (BCSBI) const ituted a Working Group comprising members from select banks, Indian Banks Associat ion, Rural Planning & Credit Department of Reserve Bank of India to formulate a Banking Code for SME Customers. On the basis of discussions with Industry Associat ions, banks, SIDBI and Government agencies, The Banking Codes and Standard Board of India (BCSBI) has formulated a Code of Bank's Commitment to Micro and Small Enterprises. This is a voluntary Code, which sets minimum standards of banking pract ices for banks to follow when they are dealing with Micro and Small Enterprises (MSEs) as defined in the Micro Small and Medium

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

61

Enterprises Development (MSMED) Act , 2006. The Code may be accessed on the website of BCSBI www.bcsbi.org.in

Changing Contours of Monetary Policy in India Mr. Deepak Mohanty

I thank the Royal Monetary Authority of Bhutan and Governor H. E. Daw Tenzin for invit ing me to address such a dist inguished gathering. I thought of speaking on monetary policy in India for four reasons. First , the currencies of Bhutan and India, i.e., Ngultrum and Rupee are closely linked. Hence, monetary policy developments in India have implications for monetary policy in Bhutan. Second, in October 2011, the Reserve Bank deregulated savings deposit interest rate of banks dismant ling the last vest ige of interest rate regulat ion. Earlier we completed the process of deregulat ion of lending rates of banks with the introduction of the base rate system in July 2010. Third, in May 2011 we also modified our monetary operat ing procedure with a move to a single policy repo rate to unambiguously signal the stance of monetary policy. Fourth, we are also addressing the challenge of near double-digit inflat ion for almost two years now. These developments obviously are of some interest in Bhutan given the close interlinkages of our currencies. I will begin my presentat ion by briefly describing the object ives and framework of monetary policy before coming to various aspects of implementat ion and formulat ion process in India. I will then briefly touch upon on our recent growth-inflation performance. I will conclude by drawing attent ion to some of the lessons that can be drawn from the recent global crisis for the process of monetary policy formulat ion. Objectives of Monetary Policy Monetary policy is an arm of public policy. It , thus, has set object ives and priorit ies, which are derived from the respect ive mandates of central banks. It ranges from a single object ive of price stability, considered to be the dominant object ive of monetary policy, to mult iple object ives that also include growth and financial stability. In the Indian context , the preamble to the Reserve Bank of India Act , 1934 delineates the basic funct ions of the Reserve Bank as, "to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage." The object ives of monetary policy evolved from this broad guideline as maintaining of price stability and ensuring adequate flow of credit to the product ive sectors of the economy. Monetary stability cannot be ensured without safeguarding the purchasing power of the currency. Similarly, the credit system helps foster growth which could reinforce monetary stability. Hence, stabilisat ion of inflat ion at a low level and stabilisat ion of output around its potent ial level remain the quintessent ial object ives of monetary policy in most countries. In pract ice, monetary policy in India endeavoured to maintain a judicious balance between economic growth and price stability. Price stability does not necessarily mean a constant price level, but a low and stable inflat ion. This is because both high inflat ion and deflat ion impose costs on the economy

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

62

by way of loss of output and misallocat ion of resources. However, it is difficult to define the precise level of low and stable inflat ion. In pract ice, inflation targets range from 2 per cent for developed countries to 3.5 per cent for developing countries which have come to be understood as price stability.1 For India, the Chakravarty Committee (1985) had defined an annual inflat ion rate of 4 per cent as the tolerable level. In this context, the not ion of threshold level of inflat ion, which is the inflexion point in the growth-inflation t rade-off, becomes important . Beyond the threshold, inflation by itself becomes inimical to growth. Recent studies on India suggest that the threshold inflat ion could be in the range of 4-6 per cent .2 However, inflat ion threshold need not necessarily be the target of monetary policy. In fact , the inflat ion object ive or the target level of inflat ion for monetary policy should be lower than the inflat ion threshold, considering the existence of significant lags in the transmission of monetary policy measures and the costs of inflat ion. Historically, India has been a moderate inflat ion country in the context of EMEs and other developing economies. The long-term average inflat ion rate since 1970-71 till the end of 2000s had remained in a single digit of about 7.5 per cent. In fact , the average inflat ion during the 2000s was even lower at 5.5 per cent . However, near double-digit inflation persist ing since the beginning of 2010-11 has been posing a challenge for monetary policy in India. Notwithstanding this recent inflat ion upsurge, monetary policy cont inues to be conducted to condition and contain percept ion of inflat ion in the range of 4.0-4.5 per cent . This is in line with the medium-term object ive of 3.0 per cent inflat ion consistent with India's broader integrat ion into the global economy. Recent global financial crisis has, however, shown that low levels of inflat ion and high levels of growth do not guarantee financial stability. Accordingly, there is an increasing emphasis that financial stability should also be an explicit object ive of central banks besides price stability and growth. In India, however, financial stability was recognised as another important objective of monetary policy much before the crisis. Thus, monetary policy in India has evolved to have mult iple objectives of price stability, growth and financial stability. These object ives are not inherent ly contradictory, but rather they are mutually reinforcing. This is so as price and financial stability are important for sustaining a high level of growth, which is the ult imate object ive of public policy. Monetary Policy Framework Achieving the monetary policy object ives requires art iculat ion of a consistent monetary policy framework. This becomes necessary as central banks strive to achieve these object ives only indirect ly through instruments which are under their direct control. For instance, under the monetary target ing framework, central banks, through the instruments under their direct control such as cash reserve rat io (CRR), t ried to influence an intermediate target such as money supply which had a stable relat ionship with the final object ives of price and output .

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

63

Monetary policy framework, however, has been a cont inuously evolving process cont ingent upon the level of development of financial markets and inst itut ions as also the degree of global integrat ion. In India as in other countries, monetary policy framework has undergone significant t ransformat ion over t ime. India followed a monetary target ing framework with feedback during the mid-1980s to 1997-98 under which broad money was used as an intermediate target for monetary policy. This framework was, however, rendered increasingly inadequate by the mid-1990s due to several developments that took place with economic and financial sector reforms. First , on account of measures undertaken during the 1990s to develop the various segments of the financial market , there was discernible deepening of the financial sector (Chart 1). This significant ly improved the effect iveness in the t ransmission of policy signals through indirect instruments such as interest rates. Chart 1 Indicators of Financial Sector Depth

Second, with the opening up of Indian economy, increase in liquidity emanat ing from capital inflows raised the rat io of net foreign assets to reserve money. This rendered the control of monetary aggregates more difficult . Third, there was also increasing evidence of changes in the underlying t ransmission mechanism of monetary policy with interest rate and the exchange rate gaining importance vis-a-vis quant ity variables. Due to these financial innovat ions in the economy during the 1990s, the stability of the demand funct ion for money came under quest ion. Recognising the challenges posed by financial liberalisat ion and the growing complexit ies of monetary management, the Reserve Bank switched to a mult iple indicator approach in 1998-99. Under the multiple indicator approach, while broad money cont inued to remain an informat ion variable, greater emphasis was placed on rate channels for monetary policy formulat ion. A host of macroeconomic indicators including interest rates or rates of return in different segments of financial markets, along with other indicators on currency, credit by banks and financial inst itut ions, fiscal posit ion, t rade, capital flows, inflat ion rate, exchange rate, refinancing and transact ions in foreign exchange available on high frequency basis are juxtaposed with output data for drawing implicat ions for monetary policy formulat ion. As a result , monetary policy operation became more broad-based on a diverse set of informat ion and provided flexibility in the conduct of monetary management.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

64

The mult iple indicator approach itself, however, cont inued to evolve and was further augmented by forward-looking indicators and a panel of parsimonious t ime series models. The forward-looking indicators are drawn from the Reserve Bank's industrial out look survey, capacity ut ilisat ion survey, professional forecasters' survey and inflation expectat ions survey. The assessment from these indicators and models feed into the project ion of growth and inflat ion. Simultaneously, the Reserve Bank also gives the project ion for broad money (M3), which serves as an important informat ion variable, so as to make the resource balance in the economy consistent with the credit needs of the government and the private sector. Thus, the current framework of monetary policy can be termed as an augmented multiple indicator approach as illustrated in Chart 2. Chart 2 Augmented Multiple Indicator Approach

Implementation of Monetary Policy For effect ive implementat ion of monetary policy, monetary policy framework needs a support ing operat ing procedure. An operating procedure is defined as day-to-day management of monetary condit ions consistent with the overall stance of monetary policy. Generally, it involves : (i) defining an operat ional target, generally an interest rate; (ii) set t ing a policy rate which could influence the operat ional target ; (iii) set t ing the width of corridor for short -term market interest rates; (iv) conduct ing liquidity operat ions to keep the operat ional target interest rate stable within the corridor; and (v) signalling of policy intent ions. As with monetary policy framework, the corresponding operat ing procedure has also been an evolving process in India. Applicat ion of CRR on banks' liabilit ies and open market operat ions (OMO) have t radit ionally been the instruments of monetary policy. But , with the introduct ion of liquidity adjustment facility (LAF) in 2004, overnight management of systemic liquidity at desired interest rate emerged as the most act ive instrument of monetary policy. The LAF was operated through overnight fixed rate repo (central bank liquidity inject ion rate) and reverse repo (central bank liquidity absorption rate) to provide necessary guidance to market interest rate. However, this procedure had two major drawbacks. First was the lack of a single policy rate. Consequent ly, the operat ing policy rate alternated between repo and reverse repo rates depending upon the prevailing

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

65

liquidity condit ion. Second was the lack of a firm corridor which often led the implicit target rate (call rate) breaching the upper and lower limits under liquidity st ress condit ions. Recognising these shortcomings, a new operat ing procedure was put in place in May 2011. New Operating Procedure The new operat ing procedure retained the essent ial features of the earlier LAF framework with the following key modificat ions. First , the weighted average overnight call money rate was explicit ly recognised as the operat ing target of monetary policy. Second, the repo rate was made the only one independent ly varying policy rate. Third, a new Marginal Standing Facility (MSF) was instituted under which scheduled commercial banks (SCBs) could borrow overnight at their discretion up to one per cent of their respect ive net demand and t ime liabilit ies (NDTL) at 100 basis points above the repo rate. Fourth, the revised corridor was defined with a fixed width of 200 basis points. The repo rate was placed in the middle of the corridor, with the reverse repo rate 100 basis points below it and the MSF rate 100 basis points above it. The current operat ing framework is illustrated in Chart 3.

The new operat ing procedure, by removing some of the major drawbacks in the earlier LAF framework, was expected to improve the implementat ion and transmission of monetary policy. First , explicit announcement of an operat ing target makes market participants clear about the desired policy impact. Second, a single policy rate removes the confusion arising out of policy rate alternat ing between the repo and the reverse repo rates. It also improves the accuracy of signalling monetary policy stance. Third, the inst itut ion of MSF provides a safety valve against unant icipated liquidity shocks. Fourth, a fixed interest rate corridor set by MSF rate and reverse repo rate, by reducing uncertainty and avoiding communicat ion difficult ies associated with a variable corridor, will help keep the overnight average call money rate close to the repo rate. Improvement in Monetary Policy Transmission As the new operat ing procedure was implemented just six months ago, it may be too early to draw conclusions regarding its efficacy. However, the experience so far suggests that overnight interest rate has been more stable since its implementat ion (Chart 4). Chart 4

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

66

Stabililty of Call Rate improves under new procedure

The new operat ing framework presupposes the dominance of the interest rate channel of monetary t ransmission, which is found to be more effect ive under deficit liquidity condit ion. Since its implementation, we have been able to maintain the systemic liquidity in deficit mode. Consequent ly, the t ransmission of monetary policy in terms of movement in call money market interest rate has shown improvement (Chart 5). Chart 5 Monetary Transmission Stronger under Liquidity Deficit

It has also been observed that money market interest rates are bet ter aligned after the implementat ion of new operat ing framework (Chart 6).

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

67

Further, better transmission to debt market segment is also evident from closer alignment between rates on debt market instruments and call rate (Chart 7). Chart 7 Monetary Transmission to Debt Market improves-as Call Rates rise from a low level

The t ransmission to the credit market is much more complex and occurs through the cost channel. Banks respond to policy changes by altering deposit rates depending on liquidity condit ions and credit demand. As the cost of deposits rises alongside money market rates, lending rates respond to policy rate changes with a lag (Chart 8). Chart 8 Transmission to Bank Deposit and Lending Rates

Policy Formulation Processes Given the monetary policy framework and the corresponding operat ing procedure, there is also a process in policy formulat ion. The process of monetary policy formulat ion in India had tradit ionally been largely internal with only the end-product of act ions being made public. The process has, over t ime, become more consultat ive and part icipat ive with an external orientat ion. The process leading to monetary policy act ions entails a wide range of inputs involving the internal staff, market participants, academics, financial market experts and the Reserve Bank Board (Chart 9).

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

68

Chart 9 Processes of Monetary Policy Formulation

Within the Reserve Bank, the work process has been re-oriented to focus on technical analysis, co-ordinat ion, horizontal management and more market orientat ion. The three concerned research departments - Monetary Policy Department (MPD), Department of Economic and Policy Research (DEPR) and Department of Stat ist ics and Informat ion Management (DSIM) - provide independent technical inputs and assessment in the monetary policy strategy meet ing chaired by the Governor and at tended by the top management. Given the inherent complexity of macroeconomic management, diversity of viewpoints helps avoid the pit falls of groupthink. Since banks are the major counterpart of the Reserve Bank, pre-policy consultat ions through resource management discussions are held with 20 large commercial banks which together account for more than three-fourths of banking business. In addition, in the financial sector, consultat ions are held with the Indian Banks Associat ion (IBA), urban and rural cooperat ive bank / credit associat ions and associat ion of non-banking financial companies. In the real sector, consultat ions are held with nat ional level t rade associat ions. Consultations are also held with select economists and senior economic journalists to ascertain their reading of the economic situat ion and policy recommendat ion.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

69

In keeping with internat ional best pract ice, the Reserve Bank has const ituted a technical advisory committee (TAC) on monetary policy with outside experts, though its role remains advisory. In order to enhance t ransparency, the deliberations of the TAC and policy recommendat ions are released to the public within four weeks of such meet ings. However, the Governor of the Reserve Bank is the ult imate authority to take decisions on monetary policy matters. There are several other standing and ad hoc commit tees or groups which play a crit ical role with regard to policy advice. An interdepartmental Financial Markets Commit tee (FMC) focuses on day-to-day market operat ions and tact ics on an ongoing basis. The whole range of consultat ions and technical analysis enable the Governor to make the best possible decision under the circumstances besides enhancing the t ransparency of the policymaking process. In addit ion, the Governor and the top management of the bank set out the rat ionale of policy decisions, through quarterly policy statements, mid-quarter reviews, press interviews and speeches. While monetary policy formulat ion is a technical process, it has evolved to be a highly consultat ive and part icipat ive process. This not only enhances the t ransparency of monetary policy but policy decisions become informed with the analysis and viewpoints of the concerned stakeholders. As many outcomes in modern market -based economies are guided by expectat ions, a consultative process also helps in managing expectat ions. Growth-Inflation Performance As I ment ioned, monetary policy framework in India shifted from a monetary targeting regime to a mult iple indicator regime. Such a t ransit ion was condit ioned by the developments of financial markets, increasing integrat ion of the Indian economy with the global economy and changing t ransmission of monetary policy. A pert inent quest ion is how did this t ransit ion impact economic outcomes, in part icular the growth-inflation performance? Table 1 Select Macroeconomic Indicators

Indicator GDP Growth (%) Inflation (%)

Call Rate (%) WPI CPI

1 2 3 4 5

Monetary Target ing Period 1985-86 to1997-98

5.5 8.1 9.1 11.7

(2.2) (3.0) (2.1) (4.0)

Mult iple Indicators Period

1998-99 to 2009-10 7.0 5.3 6.3 6.4

(1.9) (1.6) (3.5) (1.8)

2010-11 8.5 9.6 10.4 5.8

2011-12 (So far) 7.3* 9.6# 9.0* 7.6#

Note : Figures in brackets represent standard deviation implying volat ility in respect ive indicators

CPI : Consumer Price Index-Industrial Workers

* Apr-September 2011,

# : April-October 2011

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

70

From Table 1, two broad t rends can be gleaned. First , real GDP growth, on an average, improved over the period and became less volat ile. Second, inflation performance had improved significant ly in the last decade coinciding with the adopt ion of mult iple indicator approach. However, inflat ion performance deteriorated in the years 2010-11 and 2011-12 so far. In this context , it is important to recognise that the recent inflat ion surge has followed the global financial crisis. Managing inflat ion in an economy which is recovering from a downturn is much more complex because of associated uncertaint ies than managing inflat ion under normal condit ions. In the init ial phase of the crisis in 2007, it appeared that emerging market economies (EMEs) were bet ter posit ioned to weather the storm created by the global financial meltdown on the back of their substant ial foreign exchange reserve cushion, improved policy frameworks and generally robust banking sector and corporate balance sheets. However, any hope about EMEs escaping unscathed could not be sustained after the failure of Lehman Brothers in September 2008 which triggered global deleveraging and heightened risk aversion. Eventually, EMEs were also adversely affected by the spillover effects : first through contract ion in world t rade and then from reversal in capital flows. India, though init ially somewhat insulated from the global developments, was eventually impacted significant ly by the global shocks through all the channels - t rade, finance and expectat ions channels. In response, the Reserve Bank swift ly introduced a comprehensive range of measures to limit the impact of the adverse global developments on the domest ic financial system and the economy. The Reserve Bank, like most central banks, took a number of convent ional and unconvent ional measures to augment domest ic and foreign currency liquidity, and sharply reduced the policy rates. In a span of seven months between October 2008 and April 2009, there was unprecedented policy act ivism. For example : (i) the repo rate was reduced by 425 basis points to 4.75 per cent , (ii) the reverse repo rate was reduced by 275 basis points to 3.25 per cent , (iii) the cash reserve rat io (CRR) of banks was reduced by a cumulat ive 400 basis points of their net demand and t ime liabilit ies (NDTL) to 5.0 per cent , and (iv) the total amount of primary liquidity potent ially made available to the financial system was over 5.6 t rillion or over 10 per cent of GDP. The Government also came up with various fiscal st imulus measures. As there was increasing signs of recovery in growth and build up of inflat ionary pressures emanat ing from drought and spikes in global commodity prices, exit from the excessively accommodat ive monetary policy stance began in October 2009 in ant icipat ion of the likely path of the inflat ion trajectory as also on considerat ion of its source and composit ion. The init ial rounds of monetary policy response were in the nature of normalisat ion from an excessively st imulat ive stance in a non-disrupt ive manner. The policy response was calibrated to the domest ic growth-inflat ion dynamics. As growth took hold and inflat ion became more generalised, monetary policy response was strengthened. Init ially, monetary t ransmission was weak as systemic liquidity was in surplus. But once liquidity turned into deficit in July 2010, monetary t ransmission improved.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

71

Since October 2009, the CRR has been raised by 100 basis points. The policy repo rate has been raised by a cumulat ive 375 basis points. As the liquidity in the system transited from surplus to deficit , the effect ive t ightening has been of the order of 525 basis points. Thus, the cumulat ive monetary policy act ion would have the desired impact on inflation. It is expected that inflat ion would moderate towards the later part of 2011-12 and come down to around 7 per cent by the end of the year. The current monetary stance remains ant iinflationary. Lessons from the Global Financial Crisis As I ment ioned earlier, monetary policy evolution is influenced not only by the changing paradigm in monetary economics but also by the developments in the financial market and macroeconomic outcomes. In the event of adverse developments, adequacy of extant economic policies is put to test as was during the recent global financial crisis. Crises are not desirable but they seem unavoidable. They do, however, provide us the opportunity to assess various tenets of extant policy framework. Against this backdrop, let me highlight a few important monetary policy lessons that emerged from the recent crisis. First , the recent crisis has demonstrated that a monetary policy solely aimed at finetuning of short-term object ives can pose risks. Before the crisis, monetary policy focused more on short-term demand management while inflation was firmly under control, part icularly in the advanced economies. It was felt that fine-tuning of monetary policy on the basis of indicators, such as output gaps and measures of core inflat ion, led central banks towards excessive 'short -termism'. This in turn contributed to build up of risks. Thus, policies focused on short-term object ives may not deliver desired economic outcomes in medium to long term. Second, the experience of recent crisis has changed the percept ion as to how central banks should go about achieving their macroeconomic stabilisat ion object ives. It has become clear that mandate of monetary policy should encompass macro-financial stability and not just price stability. This has drawn attention to the impract icability of Tinbergen's rule of assigning one instrument for one object ive. In pract ice, interest rate changes affect financial stability. Similarly, macroprudential tools impact credit growth and hence monetary t ransmission. Recognit ion of interact ion between interest rate and macroprudent ial tools becomes crit ical for the appropriate design of monetary policy. This underscores the importance of close monitoring and analysis of financial system developments so that possible risks can be bet ter integrated into the formulat ion and implementat ion of monetary policy. Third, inadequacy of monetary policy instruments in central banks' operat ional frameworks was also evident during the crisis. As was seen during init ial phase of the crisis, monetary policy framed and implemented via instrument of policy interest rate remained ineffect ive. Consequent ly, central banks had to resort to a number other unconvent ional quant ity-based measures to ease financial condit ions. Thus, there is a need to broaden the toolkit of monetary instruments. Fourth, though financial frictions play an important role in business cycles, they were not explicit part of the models used for policy analysis by central banks (Mishkin, 2011).3 In

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

72

most crises, including the recent one, it has been seen that shocks to financial system accentuate information asymmetry and affect policy t ransmission. Therefore, not only must financial frict ions be properly understood, but they should also be built into macroeconometric models that central banks use for forecast ing and policy formulat ion. Fifth, after the crisis, it has been increasingly felt that central banks could better discharge lender of last resort (LOLR) funct ion if they are also vested with micro-prudent ial regulat ion and supervision of banks. It could reinforce macroprudent ial act ion by elicit ing regulatory and supervisory instruments to dampen pro-cyclicality. Sixth, the operat ing procedures of monetary policy in future would have to take into account the implicat ions of build-up of sovereign debt during the crisis. In this context , Cecchett i (2011) caut ions that central bank operat ing procedures in the future are likely to be more complicated with more tools and more opt ions.4 Monetary and fiscal coordinat ion, therefore, assumes further importance in the implementat ion of monetary policy. Conclusion Major crises do influence monetary policy formulat ion as they quest ion the adequacy of the extant pract ices and belief. In this regard, the issues that I have ment ioned are already being widely debated, though a consensus eludes. But one thing is clear : central banks will have to increasingly grapple with the challenge of a broader set of object ives without dilut ing the object ive of price stability. Monetary policy formulat ion is an ever evolving process both in response to and as a consequence of changes in the financial markets and the real economy. This is a phenomenon we have observed in India in our monetary policy formulat ion over the years. In the process, monetary policy in India has become increasingly transparent with greater involvement of all the stakeholders for bet ter policy outcome. ----------------------------

Financial Inclusion in NER and Other Dr. Duvvuri Subbarao

RBI has introduced financial inclusion programme to cover more and more people under the banking system. Though most of the banks have been carrying out this programme, the progress is st ill slow. Are you happy with the progress of the financial inclusion programme in the region and what is your best possible advice to the banks? Please allow me to give you the context before answering your specific quest ions. For the last several years, the Reserve Bank has been aggressively pursuing financial inclusion on the belief and understanding that financial inclusion is a necessary pre-condit ion for inclusive growth. Development experience over the last sixty years from around the world clearly evidences that what the poor want is not doles, but opportunity to improve their incomes and thereby their quality of life. Financial inclusion is a necessary condit ion for providing such an opportunity to the poor not only to raise their incomes but

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

73

also to insulate their families against income shocks and meet emergencies such as loss of job, illness or death in the family. Both the Government and the Reserve Bank have taken several init iat ives to further financial inclusion. We have liberalized branch licencing - domest ic commercial banks are now free to open branches anywhere they like in towns and villages of upto 100,000 populat ion. Banks are also required to ensure that at least a quarter of the branches they open are in villages with a maximum populat ion of 10,000. To provide an incent ive to banks, the Reserve Bank has also advised them that their performance in financial penetrat ion will be a criterion in giving them authorizat ion for branches in metros and other large urban areas. There is a road map for providing banking access to all villages in the country with populat ion of over 2000 by March 2012. Across the country, about 74,000 villages have been ident ified as falling within this category. Banking access will be provided either by opening a 'brick and mortar' branch or through the business correspondent model - although we are encouraging banks to set up as many 'brick and mortar' branches as possible. There are 3250 villages in the north-eastern region (NER) falling into this category of over 2000 populat ion with as yet no banking facility. Of these, only about 1031 villages were covered by end September 2011. There may have been further progress since, but admit tedly, the performance in NER is inferior to that in the rest of the country. The north-east poses a more complex challenge for financial inclusion because of difficult terrain, lower populat ion densit ies, poor infrastructure, inadequate communicat ion facilit ies and law and order disrupt ions. Regardless, we want to ensure that financial inclusion in NER is at par with that in the rest of the country. Towards this end, we have a Special Dispensat ion Scheme for opening bank branches in NER. Under the Scheme, the Reserve Bank provides one-t ime capital cost and recurring costs for five years for support ing a bank branch. The State Government is required to provide the required premises, resident ial accommodat ion for the staff and security for the bank branch. The scheme is operated by calling for bids from banks for opening branches in agreed centres. Meghalaya was the first state to get off the block, but other NE states are now eager to take advantage of the scheme. With that background, let me now answer your specific quest ions. First , the progress in financial inclusion, as you say, has been slow, but it has certainly picked up pace over the last several months. Banks across the country, including in the NER, are more enthusiast ic about financial inclusion than before. You also asked about my 'best possible advice' to the banks. In fact , I have three bits of advice. First, remember that financial inclusion is more than chasing and meet ing a target . To cover every household with a bank account is necessary, but not sufficient . Banks must also ensure that the bank account is act ive - which means that the household is using that account for saving, for remit tance and is also get t ing credit and where necessary micro insurance. In other words, make sure that financial inclusion is 'meaningful'. Second, look

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

74

upon financial inclusion not as an obligation, but as an opportunity. There is enormous 'banking potent ial' at the bot tom of the pyramid, and first mover banks will be able to exploit that potent ial. So, go on. Move forward boldly and enthusiast ically. Third, focus on the north-east . This is relat ively virgin territory as far as banking is concerned. Those banks which pursue financial inclusion in the north-east will be rewarded not only by business opportunit ies but by a fulfilling experience. Agriculture is the lifeline of the people in the North East . But as far as credit flow is concerned, the farmers don't get credit . The Government of India has asked the banks to increase their credit to the agriculture sector in order to boost product ivity. Are you going to review the performance of the banks in this regard? Agriculture is surely the life line of a majority of the people in the country including in the North East . Agriculture is one of the key priority sectors for lending by banks; under the priority sector lending sector, banks are required to ensure that at least 18% of their advances goes to agriculture. Even so, we are aware that millions of small farmers, many of them farming at subsistence levels, do not get access to credit for a variety of reasons. Simplified Know Your Customer guidelines, 'no frill' accounts, Kisan Credit Cards, General Credit Cards and overdraft facilit ies have all been designed keeping the rural borrower in mind. The Reserve Bank also mandates that banks prepare Annual Credit Plans whose roll out which we closely monitor through the State Level Bankers' Commit tee (SLBC). The SLBC, comprising banks, the state government, central government agencies, the Reserve Bank, NABARD and SIDBI meets every quarter to review the progress of inst itut ional credit flow in the State. Progress under the Annual Credit Plan is one of the key issues on the agenda of every SLBC meet ing. Where there is slippage, SLBC init iates prompt corrective act ion. Similar commit tees funct ion also at the District and the Block Levels. These meet ings are also held at quarterly intervals and the Reserve Bank plays a pro-act ive role in these meet ings. Many steps have been taken in the NER to increase credit flow to agriculture. Since Assam is one of the states selected under the scheme of 'Bringing Green Revolution in Eastern India' implemented by the Government of India, the annual credit plan for agriculture for Assam has been revised upwards. We want banks to sanct ion KCCs to all eligible farmers in the State. In Assam, block-wise weekly credit camps are being organised to bring more and more farmers under the KCC. The loan applicat ion format has been simplified and wherever land documents are not available, the Village Panchayat 's cert ificat ion is considered sufficient for grant of a loan. The exercise is being replicated in other NER states as well. Credit, however, is only one among several inputs needed for boost ing agricultural product ion. Experience shows that the quality and reach of extension services is crucial. Clearly, there is need for greater effort at bringing extension services in NER at par with those in other States. Furthermore, the state governments have to ensure t imely availability of fert ilisers, procurement of food grains at the Minimum Support Price, storage and t ransportat ion facility, etc.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

75

North East India has very close border with foreign countries. Taking advantage of porous border, fake currencies are coming to the region. Considering the gravity of the situat ion, what is the plan of RBI? The role of Reserve Bank in addressing the menace of counterfeit notes lies in the following areas : * Ensuring integrity of banknotes, * Put t ing in place proper systems for prompt detect ion and removal of counterfeit notes from the banking system, and * Educat ing the public through educat ion campaigns in mass media and through outreach programmes about the features of genuine currency notes to help them easily dist inguish genuine notes from counterfeit ones. Towards this end, we have init iated several measures : * The challenge for us is always to remain one step ahead of the counterfeiters. Towards that end, we periodically enhance security features of Indian banknotes. * We have made it mandatory for the banks to issue only clean and genuine banknotes - both over their counters and through ATMs. They also need to have mechanised processing capabilit ies for branches having daily receipt of 50 lakh and above. * We released a 60-second film, "Paisa Bolta Hai" made in Hindi and 11 other regional languages, including Assamese on Doordarshan and its regional channels. This film is intended to spread awareness about how to tell a genuine note from a fake one. * On our website (www.rbi.org.in), we hosted a sect ion called Paisa Bolta hai which explains, among other things, features of all genuine Indian banknotes. * We have also taken measures to improve inter-agency co-ordinat ion (Police, CBI, RAW, NCRB, MHA) to tackle the problem in a concerted manner. 4. CD rat io in the North East is poor compared to other states in the country. How to improve the CD rat io and what is your suggest ion to the banks? It is t rue that the rat io in the NER is lower than that in the rest of the country. Bridging this gap is crit ical to mainstreaming the north-eastern economy into the nat ional economy. Our constant and consistent advice to banks has been that they should achieve a CDR of at least 60 per cent in respect of their rural and semi-urban branches and also that disparit ies across regions and states should be narrowed, if not eliminated. The State Level Bankers Commit tee (SLBC) which I referred to earlier is mandated to review the flow of credit in each district with reference to the CDR and draw up a special, monitorable action plan for districts with CDR of less than 40%. If the CDR of NER is low, what it means is that savings of people in the region are going outside to finance investment elsewhere. This is unfair and strict ly inadvisable. The savings in the NER should be used to finance investment here in the region. This requires responses both from supply and demand sides. Our efforts have so far largely focused on the supply side. We must do much more to generate demand for credit . The state governments and the banks should work in partnership in this regard. The Reserve Bank will be happy and willing to promote this partnership for raising the absorpt ive capacity of states for inst itut ional credit .

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

76

Indian Government is now encouraging t rade with ASEAN. But unfortunately there are very limited bank branches along border. The exist ing branches are not sufficient to meet the demand of the customers. Will RBI take any step? As I have already pointed out earlier, at the policy level, we have been encouraging expansion of bank branches in the NER. If the state governments come forward with infrastructure development and other facilit ies along the border, the Reserve Bank will be happy to work with them to improve the presence of banks along the border. Perhaps, the NE Council should come up with a viable plan in this regard. Customers often complain about poor ATM service. Exist ing ATMs are inadequate to meet the demand as volume of business is increasing day by day. What is your advice to the banks? Scheduled commercial banks are no longer required to take Reserve Bank's permission to install off-site / mobile ATMs. As at end March 2011, there were close to 75,000 ATMs across the country. But you are right . With just about 1800 ATMs, the share of the NER in the total number of ATMs is low. You must, however, appreciate that North-East is a difficult terrain. There are frequent power failures, and problem of digital connect ivity and security. Lack of infrastructural facilit ies is a major problem restrict ing the spread of banking, including ATMs in the area. Nevertheless, at the policy level, we have taken some measures to enhance access of banking services as a whole to North East region. These include : * To improve branch network in the region, domest ic scheduled commercial banks (other than RRBs) are free to open branches / mobile branches / administrat ive offices / central processing centres (CPCs) / service branches in rural, semi-urban and urban centres in North-Eastern States and Sikkim without permission from Reserve Bank of India. * While preparing their Annual Branch Expansion Plan (ABEP), banks are required to allocate at least 25 per cent of the total number of branches proposed to be opened during a year to unbanked rural (Tier 5 and Tier 6) centres. An unbanked rural centre would mean a rural (Tier 5 and Tier 6) centre that does not have a brick and mortar structure of any scheduled commercial bank for customer based banking transact ions. * The Committee on Customer Services in Banks (Damodaran Committee) const ituted by the Reserve Bank, has made several recommendat ions for improving banking services in the North Eastern region. (Recommendat ions are given in the Annex for your use). An important one among them is to explore using the back up of alternate sources of energy for ATMs to ensure their cont inuous and uninterrupted availability in the North East region. Despite strict guidelines, a sect ion of fake microfinance companies have started their operat ion in the North East . Hundreds of people are the vict ims of these microfinance companies. As the situat ion is very alarming are you going to set up any committee to monitor the operat ion of these microfinance companies?

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

77

No such instance of any fake Microfinance Company cheat ing the public of the North East has come to our not ice. However, we are aware that many investors in this region have been vict ims of pyramid schemes operated by some Non-Banking Financial Companies (NBFCs) / Mult i Level Market ing Companies (MLM) and Unincorporated Bodies (UIBs). We are sensit ising the police and are creat ing awareness among the public about the nefarious act ivit ies of these companies. Having said that , I must add that it is important for the public to be discrete in invest ing their savings. The public should verify whether the company is registered with the Reserve Bank or any other regulatory body. The public must also be aware that high returns are often associated with high risk and they should part icularly look askance at promise of excessively high returns. ----------------------------------- * Text of interview of Dr. D Subbarao, Governor, Reserve Bank of India, with Assam Tribune published on November 29, 2011.

An Assessment of Recent Macroeconomic Developments Dr. Subir Gokarn

Introduction Thank you for invit ing me to share my thoughts at the Annual CII CFO Summit . In recent weeks, the macroeconomic environment has become part icularly turbulent. Global condit ions have contributed to a significant rebalancing of port folios as a result of rapidly changing risk percept ions and appet ites. This has led to increased instability and volat ility in financial markets, part icularly currency markets. On the domest ic front , growth is decelerat ing while inflat ion remains high, with upside pressures persist ing from the sharp depreciat ion in the rupee. While overall macroeconomic condit ions may cause concern, we need to take an integrated and forward-looking view of posit ive and negat ive indicators and future risks while thinking about appropriate policy responses. This is what I propose to do during the course of this talk. The Global Scenario Let me first speak about the global scenario. Over the past two years, the performance of the major advanced economies has raised significant concerns about the sustainability of the global recovery. By contrast , emerging market economies (EMEs) have generally shown reasonable growth, suggest ing that their domest ic drivers and increasing linkages with each other have provided some offset to the slower growth in advanced economies. However, periodically, either sovereign debt pressures in Europe or growth volatility in the US, have heightened those concerns. The European debt problem has unquest ionably been the dominant global factor over the past few months, which, in turn, has been a source of volat ility in asset and currency markets all over the world. As prospects of enduring solutions to the problem have ebbed and flowed, so have asset prices and exchange rates. , After several weeks of ant icipat ion, matters appear to be coming to a head. The prospects of a solut ion crit ically hinge on the Euro summit scheduled for December 9th, where arrangements that will help stabilize global markets are expected to be announced.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

78

Impact on India and Policy Responses The impact of this recent global instability on India has been enormous. India is a structurally current account deficit economy. This deficit is, in turn, financed by capital inflows, which over the past several years, had been large and stable enough to more than offset the current account deficit. For a few months during the 2008-09 financial crisis, the posit ion was reversed and, when that happened, the Rupee behaved much like it did over the past several weeks (Chart 1). Between July 2008 and February 2009, the Rupee depreciated by nearly 17 per cent . Essent ially, when capital stops coming in, the current account drives the exchange rate and, naturally, the pressure is to depreciate in the face of the deficit . With the kind of volat ility we have seen in global capital flows over this period, virtually all EME currencies faced pressure to depreciate. However, the eventual magnitude of change reflected differences between countries in current account condit ions as well as policy responses. Chart 1 Exchange Rate of Indian Rupee

For the past few years, the exchange rate regime in India has been what might be best described as a "bounded float". There are virtually no restrictions on Foreign Direct Investment (FDI), except for limits on specific sectors, and port folio investment in equit ies. However, there are restrict ions on debt inflows, driven by considerat ions of external stability. These limits relate to quant ity, tenor and pricing. Short -term debt is the least preferred, because it is seen as most vulnerable to sudden reversals, while long-term debt, despite risk concerns, is seen as contribut ing to the resource flow into infrastructure, so is viewed more favourably. These controls on debt might be viewed as "structural" or "strategic" capital controls; they are altered relat ively infrequent ly in response to changing macroeconomic condit ions and not with a view to impact ing the daily movement of the exchange rate. While we do not target the level of exchange rate, nor do we have a fixed band for nominal or real exchange rates to guide intervent ions, the capital account management framework helps in the bounded float . If volat ility increases, appropriate tools, including those in the realm of capital account management are used. Within these overall

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

79

boundaries, the exchange rate is determined by daily variations in demand and supply. In the recent episode of depreciation, as I indicated earlier, a sharp fall in capital inflows led to a drying up of supply, while demand on account of the current account deficit cont inued unabated, leading to the outcome we saw. There has been a long-standing debate on the merits and de-merits of this exchange rate policy, which has returned to centre-stage in the wake of recent developments. Time does not permit me to go into it here, but it is important to point out that the different policy responses we saw across EMEs to the volat ility in capital inflows were largely the outcome of their exchange rate policy framework. Countries that orient their exchange rate regimes to export compet it iveness typically have current account surpluses. This is a characterist ic of the Asian EMEs and, in this sense, India is a significant except ion to the Asian rule. These surpluses are reflected in a build-up of foreign exchange reserves, which may be further enhanced by large inflows of capital and the further accumulat ion of reserves to prevent currency appreciat ion, which undermines compet it iveness in the short run. In the current global context , when capital inflows stop, reserves built up from current account surpluses provide the capacity to manage exchange rates in the face of external pressure. India has large reserves, of course, over $300 billion, but because we have a current account deficit , the reserves are essent ially counterbalanced against our external liability posit ion. In an extreme scenario, if there is a large out flow of capital, the adequacy of reserves will be judged by the economy's ability to finance the current account deficit and, over and above that , meet short-term claims without any disrupt ion or loss of confidence. In light of this, the value and use of reserves in the Indian context must be viewed somewhat different ly than in the context of a structurally current account surplus economy. Reserves essent ially provide comfort to external counterpart ies that we have the capacity to meet our obligat ions. While the recent sharp depreciat ion has in certain quarters led to an assessment of "helplessness" in dealing with the kind of global turbulence we are seeing today, our strategic behavior should not be misconstrued as an inability to lean against the wind. Consider the following alternatives. Not using reserves to prevent currency depreciat ion poses the risk that the exchange rate will spiral out of control, reinforced by self-fulfilling expectat ions. On the other hand, using them up in large quant it ies to prevent depreciat ion may result in a deteriorat ion of confidence in the economy's ability to meet even its short -term external obligations. Since both outcomes are undesirable, the appropriate policy response is to find a balance that avoids either. That balance can be found in precisely the structural capital controls that I referred to earlier. Resist ing currency depreciat ion is best done by increasing the supply of foreign currency by expanding market part icipat ion. This, in essence, has been our response. We increased the limit on investment in government and corporate debt instruments by foreign investors. We raised the ceilings on interest rates payable on non-resident deposits. The all-in-cost ceiling for External Commercial Borrowings has been enhanced. All these channels will help to expand the inflow of foreign exchange. These capital control measures have been supported by a series of administrat ive measures, which are

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

80

aimed at curbing the capacity (or temptat ion) of market part icipants to take posit ions against the Rupee, which may further aggravate the pressures to depreciate. For example, ent it ies that borrow abroad were liberally allowed to retain those funds overseas, which in this environment, would fetch them some windfall gains. They are now required to bring the proport ion of those funds to be used for domest ic expenditure into the country immediately. In sum, within the broad parameters of our "bounded float" approach to exchange rate management, we do have the instruments and the capacity to enhance supplies of foreign exchange into the market and, as has been demonstrated by these recent act ions, will use them as appropriate. Within this overall framework, let me address the issue of direct intervent ion. As we have said, our policy approach does not involve strong intervention in the currency market to achieve a specific rate target . The risks of doing this have already been pointed out . However, in excessively volat ile market condit ions, "smoothing" intervent ions that help to keep markets orderly and prevent large jumps that can induce further spirals, are entirely just ified and have been carried out . To sum up my thoughts on this issue, let me re-emphasize that our broad object ive. It is to ensure that we find a balance between the short -term risk of the Rupee spiralling downwards and the medium-term risk of a loss of confidence in our ability to meet our external obligat ions. We do have the instruments to do this in the form of strategic capital controls, which can be used to enhance the supply of foreign exchange. These will be used as appropriate, with the goal of ensuring that the availability of foreign exchange does not become a de-stabilizing constraint. However, we must accept the likelihood of global turbulence persist ing for some t ime, with the consequent impact on asset price and currency volat ility. This is a risky environment and everybody would be well advised to mit igate their risks to the extent possible. Over t ime, the hedging opt ions for various stakeholders, including banks, corporates and small exporters have increased. Accordingly these stakeholders are advised to be vigilant and well-prepared with appropriate risk mitigat ion strategies, even while central bank acts to smooth excessive volat ility. But , beyond this, if we do see the short-term risk of a downward spiral escalating, we will not hesitate to use all available instruments. Notwithstanding our preference for a strategic approach to manage our external exposures, we would like to reiterate that to safeguard macroeconomic stability, use of intervent ion to mit igate the impact of sharp and large movements in the exchange rate would remains an instrument in our armoury. The Domestic Scenario Liquidity Let me first address the immediate concern about Rupee liquidity, which, in some ways, is related to the external situat ion. For several weeks now, the tightness of domest ic liquidity conditions has been highlighted by the fact that borrowing under the Liquidity Adjustment Facility (LAF) have been significant ly above our comfort threshold of one per cent of Net Demand and Time Liabilit ies (NDTL). Recent developments in our liquidity management approach have involved making a dist inct ion between the monetary stance

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

81

and the liquidity stance (Chart 2). In December 2010, we exploited this dist inct ion by carrying out Open Market Operat ions (OMOs) to inject liquidity into the system, despite maintaining an ant i-inflat ionary monetary stance. Chart 2 Exchange Rate of Indian Rupee

We appear to be in a somewhat similar situat ion now. Some of the tightness is at t ributable to the smoothing intervent ions that were carried out in the foreign exchange market . But , that apart , given the overall condit ions and the addit ional pressure, even if t ransitory, that will be exerted by the advance tax payments in mid-December, domest ic liquidity condit ions are expected to remain stretched for some t ime. Here again, the broad object ive is to ensure that these condit ions do not hamper the smooth funct ioning of financial markets and disrupt flows to the real economy. We have been inject ing liquidity into the market through LAF and OMOs and will cont inue to do so as condit ions warrant . Of course, we must guard against the risk of excessive accommodat ion, since this will conflict with our current monetary policy stance. But, having made a dist inct ion between the two, we will t ry and ensure that liquidity remains adequate without threatening the inflat ionary situat ion. In short, the endeavour will be to keep it within the parameters consistent with our comfort levels for a liquidity deficit . We do have a range of instruments to help us achieve this object ive. Current ly, the banking system as a whole holds government securit ies to the tune of 29 per cent of NDTL, which is five per cent above the statutory requirement of 24 per cent . This reflects a relat ively large capacity for liquidity infusions, about 2,74,000 crores, as and when the need arises. It is called the Statutory Liquidity Rat io (SLR) for a good reason. OMOs are our first preference for liquidity inject ion, since they are tact ical in nature and do not require a change in any policy stance, real or perceived. Further, although , OMOs are current ly

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

82

being used to make those infusions, the LAF window is always available to the system to the extent of this surplus capacity. In addit ion, the recent ly established Marginal Standing Facility (MSF) allows banks to use a further one per cent of their SLR holdings, which, given the interest rate structure, they will only do in situat ions of extreme stress. In recent weeks, there has been no recourse to this window, which could mean that the there isn't too much stress in the system. In a sense, this window serves as an early warning indicator and we watch it very closely. Beyond this set of instruments, there are others, like the SLR itself and, ult imately, the CRR. But, in thinking about these instruments, we must keep in mind that they straddle the divide between liquidity and monetary management, which, at the current juncture, we are intent on maintaining. To summarize the broad object ive on this front , it is to ensure that domest ic liquidity condit ions do not de-stabilize financial markets or flows to the real sector, within the overall confines of the current monetary policy stance. Important ly, we must realize that large fiscal deficits cannot be accommodated fully by OMOs. Fiscal consolidat ion is a high priority. Inadequate progress on this front will weaken monetary control and impact medium term inflat ion expectat ions. Growth and Inflation Dynamics Finally, let me say a few words on domest ic growth and inflat ion dynamics, which take us from the immediate to somewhat further into the future. Here, I am treading on familiar ground, since it is just about a month since our last quarterly policy review. Of course, some things have changed since then, most notably, the extent of depreciat ion of the Rupee since that announcement. In and of itself, this clearly heightens inflat ion risks. These risks are perhaps aggravated by the fact that , amidst all the global turbulence, crude oil prices have remained quite firm. While the relat ive stability of oil prices in dollar terms would have provided a strong favourable base effect for domest ic inflat ion beginning in December, this will be offset somewhat by the depreciat ion of the Rupee. However, our project ions suggest that the impact will not change the anticipated downward t rajectory of inflat ion. If a sustainable solut ion to the European sovereign debt problem emerges over the next few weeks, global port folio rebalancing could reverse the movement in the Rupee, which in turn will help moderate the inflat ion risk. Important ly, apart from oil, prices of some other commodit ies have shown some signs of softening, which is obviously posit ive for the inflat ion outlook. On the growth front, the recently published est imates for Q2 of 2011-12 substantiate the general expectat ion of a moderat ion in growth during the current year. Some of this is at t ributable to the cumulat ive impact of interest rate hikes. In this sense, it is an expected outcome of monetary policy act ions, which, as is well-known, work to curb inflat ion by moderat ing demand. Typically, a growth decelerat ion precedes an inflat ion decelerat ion, so the pat tern playing out now is consistent with the expectat ion that inflat ion will begin to moderate over the next few months. This has been the basis of our project ions and guidance on future policy actions. Of course, there have been other factors that have impacted aggregate demand, especially the investment component. However, just as with the exchange rate and inflat ion, there are growth risks as well. Persistent global turbulence is always going to adversely impact the investment climate, which may be further aggravated by domest ic condit ions. Apart from interest rates, investment activity,

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

83

which is crit ical to sustaining high growth with low inflat ion, is also sensit ive to a number of other factors. Policy act ions, both on the fiscal and regulatory fronts, that can favourably impact the investment climate will be crit ical to mitigat ing the risks to growth. These run the gamut from tax reform to land acquisit ion to skill development. A number of init iat ives on each of these fronts are visible, but quick resolut ion and implementat ion is the key. An important risk factor that we have been consistent ly highlight ing is food. Although data from the most recent weeks points to a steady decline in food inflat ion , the likelihood is that food prices will remain a persistent source of inflat ionary pressure unless there are significant improvements in product ivity, both at the cult ivat ion stage and in the distribut ion process. Many forces need to be brought into play quickly to achieve this - infrastructure, technology and extension services, reform of market inst itut ions and re-alignment of price incent ives and financial services that can support them. However, to come back to the growth and inflat ion view over the next year, in a scenario in which global turbulence reduces, we should see inflat ion moderat ing, which would then help the growth cycle reverse. Even in this scenario, reforms that improve the investment climate are crit ical. If global uncertainty persists, making us even more dependent on domest ic drivers to sustain growth, these reforms become absolutely essent ial Concluding Remarks Let me conclude by summarizing the main points that I wanted to make in this address. First , in dealing with global turbulence and its short -term impact on India, we need to balance between the risk of a rupee spiral and that of a loss of confidence. Our capital account management framework gives us the capacity to do this and we will cont inue to use that capacity as appropriate. We have to recognize that volat ility may be with us for a while and we have to deal with it . However, if the risk of a spiral escalates, reflected in sharp movements in the exchange rate, we will take swift act ion as and when necessary. Second, domest ic liquidity may be showing signs of st ress. Here again, we have the instruments and the willingness to use them, in the context of our dist inct ion between liquidity management and monetary policy. Third, while there are many challenges to managing the growth-inflat ion dynamics, both external and domest ic, they are manageable. Moderat ing growth will help ease inflat ionary pressures, which in turn will help growth stabilize. Of course, accelerat ing growth over the longer term without provoking inflat ion requires many structural changes, on which the policy establishment must put the highest priority. Let me end by thanking the organizers once again for invit ing me to speak at this event and for accommodat ing my scheduling constraints through the use of this video recording. I trust that my remarks have served as a useful input to your discussions. My best wishes for a product ive day. -------------------------------------

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

84

Microenterprise Development Path to Creating MNCs of Tomorrow

Dr. K. C. Chakrabarty Mr. Pramit Jhaveri, CEO, Citi Bank, India, Dr Isher Judge Ahluwalia, Chairperson, ICRIER, Mr. Haresh Shah, Chairman of Confederat ion for the promot ion of Khadi and Village Industries, Mr Anami Roy, ex-DGP (Maharashtra) and Chairman Vandana Foundat ion, Ms Radhika Haribhakti, Chairperson, Swadhaar Fin Access, dist inguished guests and winners, ladies and gent lemen. I am extremely happy to be here for the annual Citi Micro Entrepreneur Awards Ceremony. First of all, I would like to congratulate all the awardees who have come from various parts of the country. These awards recognize and celebrate the superior performance of the recipients. Coming as it does from an eminent jury, they fully deserve our wholesome applause and accolades. We hope their performance and achievement will serve as a beacon to others to emulate and perhaps even exceed. I would also like to compliment the organizers of Cit i Micro Entrepreneur Awards, i.e. Cit i Bank especially Mr Pramit Jhaveri and other members of his team for recognizing and honouring exemplary micro entrepreneurs who have overcome all challenges to successfully build self-sustaining micro enterprises, creat ing employment and contribut ing meaningfully to the economic growth of the country. The conferring of these awards also ent it les micro entrepreneurs an opportunity to receive t raining in business development in order to develop and grow in to 'state of the art ' micro enterprises. It is universally acknowledged that great opportunit ies open up if one is well trained and skilled. Entrepreneurs need not necessarily be born, but can be developed through well-conceived and well-directed act ivit ies. Spearheading entrepreneurship movement throughout the nat ion is the need of the hour and I compliment Cit i Bank for their commendable init iat ive in providing support to skill and knowledge building of the micro enterprises. Moreover, today's winners will serve as role models who could inspire and mentor future generat ions of entrepreneurs. Importance of Micro and Small Enterprises In a developing nation's economy, it 's the small and micro enterprises which play a vital role. If India has to have a growth rate of 8-10 percent for the next couple of decades, it needs a strong micro and small sector and micro entrepreneurs need to be nurtured. They not only give employment to a large number of people but also support bigger industries by supplying raw material, basic goods, finished parts and components, etc. The felicitat ion of micro entrepreneurs today, is not to be mistaken as the ult imate goal of the enterprise. It is in fact , only the beginning of its process in achieving greater heights. A small enterprise today will be a big enterprise tomorrow, and might well become a mult inational enterprise eventually, if given the support , among others, to build their skills and knowledge levels. In MSME sector, the failure rate may perhaps be relatively higher - the reasons for which range from delayed / inadequate availability of credit to non-availability of backward and forward support system. Despite the risk, financing of first t ime entrepreneurs is a must for financial inclusion and growth. Thus, the banks and other agencies should take pride while servicing the micro entrepreneurs as they are playing an instrumental role in the format ion of MNCs of tomorrow. There is a need for

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

85

sensit izat ion of the bank's staff towards the needs of small entrepreneurs. The banks should develop systems such that the field staff is regularly updated and is equipped to appraise the financial requirements of small enterprises. The banks may use the plat form provided by the technical inst itutions and send their staff to such inst itut ions on a regular basis. Training is also required to be imparted to the branch managers and their loan officers for change in their mindset away from the perceived risk in financing micro and small enterprises. Need for Microenterprise Development It is increasingly recognized that microenterprise development forms an essent ial element in the promotion of broad based, inclusive growth and improvement in the well-being of the poor by providing significant income - and employment-generat ing opportunit ies, and encouraging indigenous investment. Microenterprise development projects can serve four major object ives : (i) poverty reduct ion; (ii) the empowerment of women; (iii) employment generat ion; and (iv) enterprise development as an end in itself. Microenterprise development contributes to widening the pool of entrepreneurship available to the society. Thus, there is a need to strengthen the linkages between policy environment and entrepreneurship. The 21st century has been acknowledged worldwide as the 'knowledge century' and 'knowledge society' can play a greater role in taking India forward. In countries where the number of medium and large-scale enterprises is sparse, the importance of microenterprises as an incubator of new enterprises becomes even more important. In fact, development of microenterprises is a fert ile source of entrepreneurship for the future, a sort of seedbed for the universe of enterprises. We are a very young nat ion - just over 60 years since independence - set t ing out on a path of sustained economic growth, for decades to come.We already have over a billion fellow Indians. As per the Nat ional Commission on Populat ion, the age-wise distribut ion of the populat ion of India is going to change significant ly in the coming years. By 2016, approximately 50 per cent of the total populat ion will be in the age group of 15 - 25 years. Thus, there would be a t remendous increase in the number of youth entering the educat ion and job market in the ensuing years, which will result in increase in demand for skill development. On an average, it is est imated that around 1.5 crore persons per annum would enter the employment market during the next 30 years. Each person, in this bold new generat ion, will be in the prime of his or her life, st riving for a bet ter tomorrow - creat ing, in the process, new growth opportunit ies, for budding entrepreneurs! This burst of entrepreneurship across the country, spanning rural, semi-urban and urban areas has to be nurtured and financed. It is only through growth of enterprises across all sizes that compet it ion will be fostered. Thus, entrepreneur development should be seen as an investment for economic development and prosperity, since knowledge and informat ion would be the principal driving force for economic growth in the coming years. Much of the vast and growing populat ion of the country forms part of the economy that lies in what is known as the unorganized sector. It is generally agreed that the unorganized sector, whether rural or urban, comprises small scale and microenterprises producing and distribut ing goods and services. These enterprises are generally independent, largely family owned, employ low levels of skills and technology, and are highly labor intensive. It is imperat ive that we nurture and develop microenterprises in

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

86

view of their significant contribut ion to achieving equity as well as economic growth, and efforts to address gender and poverty reduction issues. With economic reforms in the country, and with the virtual removal of all trade barriers, the world is now our market - and our opportunity! The pursuit of these opportunit ies requires an indomitable spirit aimed at nurturing entrepreneurship. In India, there is a dearth of skilled people in micro small enterprises, which demands entrepreneurship development programmes throughout the country for the growth of Indian economy. At present, there are various organizat ions at the nat ional and State levels offering support to entrepreneurs in various ways. The Government of India and various State governments have been implement ing a number of schemes and programmes over the years. A cont inuous effort from the society is also needed, where cit izens are encouraged to come up with their entrepreneurial init iat ives. Going forward, we must develop an att itude that views innovat ion posit ively. Lessons from Emerging Countries We should learn from the experience of Korea which has now become a leader of many globally important brands. However, barely forty years ago, Korea had no industry at all. The Japanese, who ruled Korea for decades, did not allow any. They also did not allow any higher educat ion, so there were pract ically no educated people in Korea. By the end of the Korean War, South Korea had been destroyed. Today Korea is world -class in two dozen industries and the world's largest in ship building and other areas. Not far behind Korea is Taiwan, which like Korea was preindustrial in 1950. Today, Taiwan is a world leader in a number of high- tech areas, including microchips. Entrepreneurship and innovat ion are the key drivers of success in these two count ies and turned them into world class manufacturers and industry leaders. The Koreans have set up small groups of their brightest people to systemat ically apply the discipline of innovat ion to identify and develop new businesses. Innovat ion requires us to systemat ically ident ify changes that have already occurred in the business - in demographics, in values, in technology or science - and then look at them as opportunit ies. Four Pitfalls to Avoid Many new businesses start out with high promise but suddenly run into t rouble after a year or two. There are four typical mistakes entrepreneurs make and all four are foreseeable and avoidable. Here, I draw extensively from what Peter F. Drucker has very right ly pointed in one of his books. He said that there are four typical mistakes entrepreneurs make. First ly, majority of successful new invent ions or products do not succeed in the market for which they were originally designed. To illustrate the point , I would like to tell you of a man by the name of John Wesley Hyatt who invented the roller bearing for the axles of railroad freight cars. The railroads, however, were not ready for radical change; and Mr. Hyatt went bankrupt . Then Alfred Sloan, the man who later built General Motors, asked his father to buy Hyatt 's bankrupt business. Unlike Hyatt, Sloan was willing to broaden his vision of the product . It turned out that the roller bearing was ideal for the automobile, which was just coming to the market . In two years Sloan had a flourishing business; for twenty years Henry Ford was his biggest customer. Similarly, very few would know that Novocaine was invented by a German chemist , Alfred Einhorn for use as general anesthet ic in major surgery but it was not found suitable and ult imately it

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

87

was used successfully by dent ists. In fact , Peter Drucker had said that majority of successful new invent ions or products do not succeed in the market for which they were originally designed. Secondly, entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. It is the cash flow that matters. A business that grows fast devours cash. Constant investments have to be made to just keep even. Thirdly, when a business grows, the person who founded it gets too busy. Rapid growth puts an enormous strain on the business. It outgrows its product ion facilit ies and management facilit ies. The quality falls, customers do not pay and deliveries are missed. The best way avoid a crisis is to create a management team. Young entrepreneurs cannot pay to bring in a management team. So it is necessary to ident ify the core competencies of the people working with you. One may be good at market ing, the other, say in, customer service. They have to be ut ilized for their respect ive competencies to be able to deliver their optimum. This planning should take place well in advance. Last ly, when the business is a success the entrepreneur needs to ask what the business needs at this stage and whether he is concentrat ing on the right things. While entrepreneurship starts by putt ing himself before business and quest ions that are at the forefront is "What do I want to do?" or "What is my role?" , but when it succeeds the right quest ions to ask is "What does the business need?" and "Do I have these qualit ies?". As successful entrepreneurs, having gained experience and wisdom from past mistakes, going forward, it is necessary to ensure that the same mistakes are not repeated. First generat ion entrepreneurs can also take a lesson from the successful entrepreneurs to avoid commit t ing the same mistakes. Support from all Stakeholders There are ample opportunit ies in small businesses in India and such opportunit ies will t ransform the country in the coming future. For such t ransformat ion to happen there needs to be support from all stakeholders, government, banks, corporate, regulators, civic society, etc. Technology universit ies may be set up and the government can tie up with the best in the world to help in research. We need to harness entrepreneurship and look at skill building. A scheme for ut ilizing NGOs to provide training services to t iny micro enterprises could be encouraged. Entrepreneurship development is important in view of its visible impact on wealth creat ion and employment generat ion. To facilitate and encourage this, skill building has been impressed upon by the Prime Minister's Task Force for MSMEs. Enterprise Development Centres (EDC) should be set up by the Central / State Governments with incubators to provide t raining not just for set t ing up of new units but also to provide cont inuing educat ion on different aspects like product design, packaging, technology upgradat ion, financial management and market ing. Entrepreneurship development is the key factor to fight against unemployment, poverty and to prepare ourselves for globalizat ion in order to achieve overall economic progress. Initiatives by Government of India / Reserve Bank of India As the level of financial exclusion is very high in the sector, Government and Reserve Bank of India are taking the lead in facilitat ing access to finance by increasing the outreach of

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

88

banking facilit ies to unbanked centers. Financial access is crit ical for MSMEs growth and development. With an object ive of ensuring uniform progress in provision of banking services in all parts of the country, banks have been advised to draw up a roadmap to provide banking services through a banking out let in every unbanked village having a populat ion of over 2,000 by March 2012. Such banking services need not necessarily be extended through a brick and mortar branch but could be provided through any of the various forms of Informat ion and Communicat ion Technology (ICT)- based models, including Banking Correspondents (BCs). About 74,000 such unbanked villages have been ident ified and allot ted to various banks through State Level Bankers Commit tees (SLBCs). As at the end of September 2011, as reported by the State Level Bankers' Committees of various states / Union Territories, banking out lets have been opened in 42,079 villages across the various States in the country. This comprises of 1127 branches, 39,998 BCs and 954 other modes like rural ATM, mobile van etc. Further, the Reserve Bank of India has also advised banks to roll out the Financial Inclusion Plans (FIP), encouraging mult iple channels of lending and enhancing the scope of the Business Correspondent model, improving credit delivery procedures in micro and small enterprises (MSE) sectors and encouraging adopt ion of ICT solutions in villages with populat ion less than 2000. Both at the district and State level, Reserve Bank has advised the State Level Banker's Commit tee meet ing and the Lead banks to monitor init iat ives for providing 'credit plus' services by banks and State Governments. Given the importance of capacity building, Reserve Bank of India has impressed upon banks on the need for financial education to enable small and marginal borrowers to avail of the ent ire suite of financial products and services i.e., savings, remittance, insurance and pension from the banking sector, in addit ion to credit . The banks have been advised to set up Financial Literacy cum Credit Counselling (FLCC) centres in all districts. As on March 2011, 252 FLCCs were set up in various states of the country. The Ministry of Rural Development (Government of India) embarked upon a major init iat ive to set up one Rural Self Employment Training Inst itute (RSETI) in each district of the country to provide t raining to the rural Below Poverty Line (BPL) persons and ensure wage employment / self-employment to them. Ministry of Rural Development would provide assistance to establishment of 200 RSETIs. Public Sector Banks have been advised by Reserve Bank of India to associate with the Scheme to ensure credit linkage to the people who are trained by the RSETIs. The banks have also been advised the SLBC convenor banks, in consultat ion with State Governments, to formulate a scheme for ut ilising specified NGOs for providing t raining and other services to t iny micro enterprises, To leverage bank credit for inclusive growth bank's have been advised to develop linkages with such NGOs / Corporate houses operat ing in the area to ensure that the NGOs / Corporates provide the necessary 'credit plus' services. In fact , success stories could be presented in DCC / SLBC meet ings to serve as models that could be replicated. Each SLBC has been advised to have a dedicated Financial Literacy Division to propagate the various instructions and use the local media to frequent ly interact with the Financial Literacy Division and take their help to reach out to the common persons.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

89

To ensure enhanced credit flow to the sector, in terms of the recommendat ions of the Prime Minister's Task Force on Micro, Small and Medium Enterprises (MSMEs) (Chairman : Shri T. K. A.Nair, Principal Secretary, Government of India) const ituted by the Government of India, banks were advised to achieve a 20 per cent year-on-year growth in credit to micro and small enterprises; the allocat ion of 60% of the MSE advances to the micro enterprises is to be achieved in stages viz. 50% in the year 2010-11, 55% in the year 2011-12 and 60% in the year 2012-13 and achieve a 10% annual growth in number of micro enterprise accounts. The Reserve Bank is closely monitoring the achievement of targets by banks on a quarterly basis. Further, based on the recommendat ions of the Working Group (Chairman : Shri V. K. Sharma, Execut ive Director, RBI) const ituted by the Reserve Bank of India to review the Credit Guarantee Scheme (CGS) of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), the limit for collateral free loans to the MSE has been increased from the present level of Rs.5 lakh to Rs.10 lakh and it has been made mandatory for banks. On the issue of alternate sources of credit and infrastructure the PM's Task Force has examined the issues and has made several recommendat ions to address the bott lenecks. The implementat ion of the recommendat ions in a t ime bound manner is being monitored by the GOI. In terms of the recommendat ions of the Prime Minister's Task Force the proposal for set t ing up venture capital / risk capital Funds are being examined by the Government of India and a dedicated exchange for MSMEs would be Conclusion Let me end by once again congratulat ing the recipients of this award funct ion and wishing all of you all the very best . I hope that the award ceremony will inspire all to strive for excellence and thus contribute towards achieving greater heights in building a strong and prosperous India. I would also like to congratulate Cit i Micro Entrepreneur Awards for salut ing exemplary micro enterprises and wish them greater successes in days to come in ident ifying more and more such entrepreneurs throughout the length and breadth of our country. Thank You. --------------------------------------------

FAQs on Senior Citizens Savings Scheme, 2004 Updated as of 22-12-2011

1.What are the salient features of the Senior Citizens Savings Scheme, 2004? The salient features of the Senior Cit izens Savings Scheme, 2004 are given below. Tenure of the deposit account 5 years, which can be extended by 3 years. Rate of interest 9 per cent per annum Frequency of computing interest Quarterly

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

90

Taxability Interest is fully taxable. Whether TDS is applicable Yes. Tax will be deducted at source. Investment to be in mult iples of Rs.1000/ - Maximum investment limit Rs.15 lakh Minimum eligible age for investment 60 years (55 years for those who have ret ired on superannuat ion or under a voluntary or special voluntary scheme). The ret ired personnel of Defence Services (excluding Civilian Defence Employees) will be eligible to invest irrespect ive of the age limits subject to the fulfillment of other specified condit ions Premature closure / withdrawal facility Permitted after one year of opening the account but with penalty. Transferability Not t ransferable Tradability Not t radable Nominat ion facility Nomination facility is available. Modes of holding Accounts can be held both in single and joint holding modes. Joint holding is allowed only with spouse. Application forms available with Post Offices and designated branches of 24 Nat ionalised banks and one private sector bank Applicability to NRI, PIO and HUFs Non Resident Indians (NRIs), Persons of Indian Origin (PIO) and Hindu Undivided Family (HUF) are not eligible to open an account under the Scheme. Transfer from one deposit office to another Transfer of account from one deposit office to another is permitted. 2.Can a joint account be opened under the scheme with any person? Joint account under the SCSS, 2004 can be opened only with the spouse. [Rule 3 (3)] 3.What should be the age of the spouse in case of a joint account? In case of a joint account, the age of the first applicant / depositor is the only factor to decide the eligibility to invest under the scheme. There is no age bar / limit for the second applicant / joint holder (i.e. spouse). [Rule 3 (3)] 4.What will be the share of the joint account holder in the deposit in an account? The whole amount of investment in an account under the scheme is at t ributed to the first applicant / depositor only. As such, the quest ion of any share of the second applicant / joint account holder (i.e. spouse) in the deposit account does not arise. [Rule 3 (3)] 5.Whether both the spouses can open separate accounts in their individual capacity with separate limit of Rs.15 lakh for each of them? Both the spouses can open individual and / or joint accounts with each other with the maximum deposits up to Rs.15 lakh each, provided both are individually eligible to invest under relevant provisions of the Rules governing the Scheme. (Rules 3 and 4)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

91

6.Whether any income tax rebate / exemption is admissible? No income tax / wealth tax rebate is admissible under the Scheme. The prevailing Income Tax provisions shall apply. (GOI let ter F.No.2/ 8/2004/ NS-II dated October 13, 2004) 7.Is TDS applicable to the scheme? Yes, TDS is applicable to the Scheme as interest payments have not been exempted from deduct ion of tax at source. (GOI letter F. No.2/ 8/ 2004/ NS-II dated March 28, 2006) 8.Whether any minimum limit has been prescribed for deduction of tax at source? Tax is to be deducted at source as per the minimum limit prescribed by the Government. 9.What is the rate at which TDS is to be deducted from the account holder? The rate for TDS for a financial year is specified in Part II of Schedule I of the Finance Act for that year. (GOI let ter F.No.2/ 8/ 2004/ NS-II dated June 06, 2006) 10.Whether TDS should also be recovered from the undrawn interest payable to the legal heirs of the deceased depositors? Tax shall be deducted at source even from any interest paid / payable to the legal heir of the account holder. (GOI letter F.No.2/ 8/2004/NS-II dated June 06, 2006) 11.Whether TDS on interest payments will be applicable with retrospective effect or prospective basis? TDS is applicable from the very first day when SCSS, 2004 was made operat ional regardless of the fact that the Central Government or Reserve Bank of India or any authority might have issued any Notificat ion / circular / clarificat ion at a later stage. (GOI let ter F.No.2/ 8/ 2004/NS-II dated June 06, 2006) 12.Whether only one person or number of persons can be nominated in the accounts opened under the Scheme? The depositor may, at the time of opening of the account, nominate a person or persons who, in the event of death of the depositor, will be ent it led to payment due on the account. [Rule 6 (1)] 13.Can a nomination be made after the account has already been opened? Yes, nominat ion may be made by the depositor at any t ime after opening of the account but before its closure, by an applicat ion in Form C accompanied by the Pass book to the deposit office. [Rule 6 (2)] 14.Can a nomination be cancelled or changed? Yes, the nominat ion made by the depositor may be cancelled or varied by submitt ing a fresh nominat ion in Form C to the deposit office where the account is being maintained. [Rule 6 (3)]

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

92

15.Can nomination be made in joint account also? Nominat ion can be made in joint account also. In such a case, the joint holder will be the first person ent it led to receive the amount payable in the event of death of the depositor. The nominee's claim will arise only after the death of both the joint holders. [Rule 6 (4)] 16.Can a person holding a Power of Attorney sign for the nominee in the nomination form ? No, a person holding a Power of Attorney cannot sign for the nominee in the nominat ion form. (GOI let ter No. F.15/ 8/ 2005/ NS-II dated March 02, 2006) 17.In case of a joint account, if the first holder / depositor expires before maturity, can the account be continued? In case of a joint account, if the first holder / depositor expires before the maturity of the account, the spouse may cont inue the account on the same terms and conditions as specified under the SCSS Rules. However, if the second holder i.e. spouse has his / her own individual account, the aggregate of his / her individual account and the deposit amount in the joint account of the deceased spouse should not be more than the prescribed maximum limit . In case the maximum limit is breached, then the remaining amount shall be refunded, so that the aggregate of the individual account and deceased spouse's joint account is maintained at the maximum limit . [Rules 6 (4) and 8 (3)] 18.What happens to the accounts if both the spouses are maintaining individual accounts and not any joint account and one of them expires? If both the spouses have opened separate accounts under the scheme and either of the spouses dies during the currency of the account(s), the account(s) standing in the name of the deceased depositor / spouse shall not be cont inued and such account(s) shall be closed. The account can be closed by making an applicat ion in Form 'F'. Annexures II & III to Form 'F' can be attested by the Oath Commissioner or Notary Public [Rule 8]. 19.Whether any fee has been prescribed for nomination and / or change / cancellation of nomination? No fee has been prescribed for nominat ion and / or change / cancellat ion of nominat ion(s) in the accounts under the SCSS, 2004. (GOI let ter F.No.2/ 8/ 2004/ NS-II dated October 13, 2004) 20.What is the age limit in the case of retired Defence Personnel for investment in the scheme? The ret ired personnel of Defence Services (excluding Civilian Defence Employees) will be eligible to subscribe under the scheme irrespect ive of the age limit of 60 years subject to the fulfillment of other specified condit ions. (The Senior Cit izens Savings Scheme (Amendment) Rules, 2004 not ified on October 27, 2004) 21.What is the meaning of 'retirement benefits' for the purpose of SCSS, 2004? "Ret irement benefits" for the purpose of SCSS Rules have been defined as 'any payment due to the depositor on account of ret irement whether on superannuat ion or otherwise and includes Provident Fund dues, ret irement / superannuation gratuity, commuted value

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

93

of pension, cash equivalent of leave, savings element of Group Savings linked Insurance scheme payable by employer to the employee on ret irement, ret irement-cum-withdrawal benefit under the Employees' Family Pension Scheme and ex-grat ia payments under a voluntary ret irement scheme'. (Rule 2 (a) of the Senior Cit izens Savings Scheme (Amendment) Rules, 2004 not ified on October 27, 2004) 22.Can deposits under the SCSS scheme be made only from amounts received as retirements benefits? In case an investor has attained the age of 60 years and above, the source of amount being invested is immaterial [Rule 2 (d)(i)]. However, if the investor is 55 years or above but below 60 years and has ret ired under a voluntary scheme or a special voluntary scheme or has ret ired from the Defence services, only the retirement benefits can be invested in the SCSS. [Rule 2(d) (ii)]. 23.Is there a period prescribed for opening deposit account under the SCSS scheme, by the senior citizen, from the retirement benefits? If the investor is 60 years and above, there is no t ime period prescribed for opening the SCSS account(s). However for those below 60 years, following t ime limits have been prescribed. a)the persons who have at tained the age of 55 years or more but less than 60 years and who ret ired under a voluntary ret irement scheme or a special voluntary ret irement scheme on the date of opening of an account under these rules, subject to the condit ion that the account is opened by such individual within three months of the date of ret irement. b)the persons who have ret ired at any t ime before the commencement of these rules and at tained the age of 55 years or more on the date of opening of an account under these rules, will also be eligible to subscribe under the scheme within a period of one month of the date of the not ificat ion of the SCSS, 2004 i.e. 27th October 2004, subject to fulfillment of other condit ions. [Rule 2 of the Senior Cit izens Savings Scheme (Amendment) Rules, 2004] c)the ret ired personnel of Defence Services (excluding Civilian Defence Employees) will be eligible to subscribe under the scheme irrespect ive of the above age limits subject to the fulfillment of other specified condit ions. [Rule 2 of the Senior Cit izens Savings Scheme (Amendment ) Rules, 2004] 24.Can an account holder obtain loan by pledging the deposit / account under the SCSS, 2004? The facility of pledging the deposit / account under the SCSS, 2004 for obtaining loans, is not permitted since the account holder will not be able to withdraw the interest amount periodically, defeat ing the very purpose of the scheme. (GOI let ter F.No.2/ 8/2004/ NS-II dated May 31, 2005)

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

94

25.Is premature withdrawal of the deposits from the accounts under the SCSS, 2004 permitted? Premature withdrawal / closure of the deposits from the accounts under the SCSS, 2004 has been permit ted after completion of one year from the date of opening of the account after deduct ing the penalty amount as given below. i)If the account is closed after one year but before expiry of two years from the date of opening of the account, an amount equal to one and half per cent of the deposit shall be deducted. ii)If the account is closed on or after the expiry of two years from the date of opening of the account, an amount equal to one per cent of the deposit shall be deducted. However, if the depositor is availing the facility of extension of account under Rule 4 (3), then he / she can withdraw the deposit and close the account at any t ime after the expiry of one year from the date of extension of the account without any deduct ion. [Rule 9 (1) (a) (b) and (2)] 26.Are Non-resident Indians, Persons of Indian Origin and Hindu Undivided Family eligible to invest in the SCSS, 2004? Non resident Indians (NRIs), Persons of Indian Origin (PIO) and Hindu Undivided Family (HUF) are not eligible to invest in the accounts under the SCSS, 2004. If a depositor becomes a Non-resident Indian subsequent to his/ her opening the account and during the currency of the account under the SCSS Rules, the account may be allowed to cont inue t ill maturity, on a non-repatriat ion basis and the account will be marked as a Non-Resident account. [Rule 13 and GOI letter F.No.2/ 8/ 2004/ NS-II dated June 19, 2006) 27.Can an account be transferred from one deposit office to another? A depositor may apply in Form G, enclosing the Pass Book thereto, for t ransfer of his account from one deposit office to another. If the deposit amount is rupees one lakh or above, a t ransfer fee of rupees five per lakh of deposit for the first t ransfer and rupees ten per lakh of deposit for the second and subsequent t ransfers shall be payable. [Rule 11 and GOI Not ificat ion GSR.(E) dated March 23, 2006) 28.Can an SCSS account be extended? A depositor may extend the account for a further period of three years by making an applicat ion to the deposit office within a period of one year after maturity. 29.Does an account, which is not extended on maturity, earn any interest? In case a depositor does not close the account on maturity and also does not extend the account, the account will be t reated as matured and the depositor will be entit led to close the account at any t ime subject to the condit ion that the post maturity interest at the rate as applicable to the deposits under the Post off ice Savings Accounts from t ime to t ime will

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

95

be payable on such matured deposits upto the end of the month preceding the month of the closure of the account. 30.What happens if an account is opened in contravention of the SCSS Rules? If an account has been opened in contravention of the SCSS Rules, the account shall be closed immediately and the deposit in the account, after deduct ion of the interest , if any, paid on such deposit , shall be refunded to the depositor. (Rule 12) 31.Whether commission is payable to the agents under the Scheme? Payment of commission on the Scheme has been discont inued w.e.f. December 1, 2011 (Government of India Not ificat ion dated November 25, 2011). 32.Which are the banks authorized to open an account under the SCSS, 2004? At present, 24 Nat ionalized banks and one private sector bank(ICICI Bank), are authorized to handle the SCSS, 2004. It may be noted that only designated branches of these banks have been authorized to handle SCSS, 2004.

Food Inflation : This Time it's Different Dr. Subir Gokarn

(Kale Memorial Lecture delivered by Dr. Subir Gokarn, Deputy Governor, Reserve Bank of India at the Gokhale Inst itute of Polit ics and Economics, Pune on December 9, 2011) I would like to thank Prof. Parchure for invit ing me to deliver this year's Kale Memorial Lecture. The lecture has been inst ituted to honour Rao Saheb R. R. Kale, who was instrumental in set t ing up this great inst itut ion, the Gokhale Inst itute of Economics and Polit ics. Despite his professional achievements as a lawyer, he was apparent ly a rather modest and humble person. Given his financial contribut ion to the establishment of the inst itut ion, it would have seemed perfect ly appropriate for it to have been named after him. But, he demurred and it was named after Gopalkrishna Gokhale, a somewhat more recognizable name for readers of Indian history. While Rao Saheb Kale's name may not adorn the inst itut ion, the att ributes that he is given credit for are the foundat ions for any act ivity to be sustainable and effect ive. I feel very honoured and privileged to be delivering this lecture in his memory. I am also very pleased to be speaking at the Gokhale Inst itute itself. Many of my colleagues over the years are alumni of the Inst itute and I always enjoyed my interactions and collaborations with them and appreciated and valued their understanding and insights. Besides, the Inst itute has a Reserve Bank of India Chair, which we are very glad to have Prof. Parchure occupying at a t ime when we are strategically increasing our level of engagement and two-way knowledge t ransfer with the Chair Professors across the country.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

96

Turning to the topic of today's lecture, the t it le is admit tedly borrowed from a recent book, the very influent ial historical work on financial crisis by Carmen Reinhart and Kenneth Rogoff. Besides being a very catchy t it le, which is always very tempt ing to borrow, I felt that there was some similarity between the historical dynamic described in the book and the situat ion we are facing with food inflat ion in India today. Crises recur because there are just enough differences between the circumstances that cause them for people to be able to deny their inevitability. However, the underlying drivers of virtually every crisis are essent ially similar. In the story of financial crises that the book tells, unsustainable build-ups of exposures, underest imat ion of risks and an erosion or inadequacy of regulatory capacity are the common elements of all crises. When I joined the RBI, food inflat ion had been a headline issue for almost two years, beginning late 2007 and consolidat ing very sharply in the first half of 2008. There was definitely a global dimension to this during that period, but what was striking was that even after global food inflat ion moderated, Indian food inflat ion persisted. The weak monsoon of 2009 was, of course, blamed and we all believed that softening was only one good monsoon away. Well, 2010 was a good monsoon but , as it turned out , there was lit t le respite in food inflat ion. Let's wait for 2011, we thought. 2011 was also a relatively good monsoon year, but in the immediate aftermath of the monsoon, there wasn't much respite. Fortunately for policymakers, data from recent weeks suggests a softening in food inflat ion, but the level is st ill rather high. During the two years I have been with the RBI, persistent food inflat ion has been one of the crit ical challenges to monetary policy formulat ion. There is a view, entirely legit imate, that monetary policy has no role in dealing with food inflat ion. Policy act ions should, instead, be t riggered by some measure of core inflat ion. However, this argument weakens somewhat when we move from a scenario where food inflat ion episodes are t ransitory, or short-lived, to one in which they are persistent , as has been the case in recent years. In the face of persistent food inflat ion, just as with any persistent supply shock, the appropriate response is seen to be to use monetary policy to prevent the spill-over from the shock into more broad-based or generalized inflat ionary pressures. In other words, in order to keep inflat ion under check, relative prices across categories of commodit ies have to change in favour of the ones facing the supply shock. I want to get away from the monetary policy perspect ive for now and focus on the issue of relat ive prices. When we bring these into the discussion, we immediately enter the realm of microeconomics, i.e., the basic forces of demand and supply. From this perspect ive, the simple quest ion "why are food prices rising so persistent ly" gets a simple answer "because demand persistent ly exceeds supply". The next simple quest ion "how do we bring food inflat ion down?" again gets the simple answer "by increasing supply as quickly as possible". In the context of the t it le of my address, let me emphasize the point that the food inflat ion per se is not a new phenomenon for India. On Slide 1, beginning in the early 1950s, we can see a relat ively large number of episodes in which food prices spiked. In some of these episodes, the spikes were significant ly sharper than in others and many of

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

97

them, part icularly during the more recent decades, were relat ively short -lived. Of course, the most vivid ones were the two that followed closely in the late 1960s and the early 1970s. We have apparently had nothing comparable since then in terms of the peak rates of inflat ion. In the most recent episode, however, the pat tern is somewhat different ; there is a clear indicat ion of a prolonged upward t rend beginning somet ime in 2003 and showing persistence, albeit with a brief interrupt ion. Slide 1 Food Inflation in India : A Long View

This is, of course, very noisy data. We have t ried to systemat ize it to be able to draw some more substant ial inferences. In Slide 2, specific episodes during the six decades have been ident ified on the criterion that the average food inflat ion rate during each episode was 10 per cent or higher. The slide displays the average and peak rates during these episodes. The episodes during the late 1960s and early 1970s clearly stand out , while the more recent episodes are relat ively more moderate in terms of both average and peak rates. However, the most recent episode does suggest something of a hardening. Slide 2 Persistence of Food Inflation

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

98

Slide 3 Persistence of Food Inflation … … … 2

But , this is as far as magnitudes go. A more worrying att ribute of food inflat ion is persistence. Slide 3 displays an extremely significant pat tern, which is really the foundat ion for the t it le of this lecture. We had two episodes of high persistence in the early 1970s and the late1970s-early 1980s, during which food inflat ion was on the average above the 10 per cent mark for 35 months and 32 months, respect ively. Since then, as the graph clearly indicates, episodes were relat ively short -lived, with the longest one last ing 27 months in the early 1990s. Even in the severe drought condit ions of 1987, the high food inflat ion episode lasted only 18 months. But, st rikingly, the most recent one, which runs from September 2008 unt il October 2011, was 38 months long and, in a sense, st ill running. Further, if we are to overlook the brief interruption that was visible in Slide 1, the last two episodes could be counted as one even more prolonged stretch. Is this kind of persistence a return to the condit ions that prevailed before the 1980s? Are we now entering a phase in our economic development in which food supply constraints can once again threaten growth and macroeconomic stability? To answer these quest ions, we need to look at what drove food inflat ion in the past and whether the same forces are at work now. We try to do this in the next three slides. All three graphs provide, for different periods, the contribut ion of different categories of food items to overall food inflat ion. Slide 4 shows the picture for the 1960s and 1970s, Slide 5 for the 1980s and 1990s and Slide 6 for the first decade of the 2000s. A number of important inferences can be drawn from this historical comparison. In the 1960s and 1970s, as seen in Slide 4, the main contribut ions to food inflat ion in the years that have been selected for display came from cereals and sugar. In the graph for the three-year period 1972-1975, which was one of the prolonged episodes that were ident ified in the earlier discussion, what is striking is that these two categories vied with each other to drive food inflat ion. While sugar was the dominant contributor in the first year, cereals took on that role in the next two years. Between the two, they accounted for a very high proport ion of total food inflat ion.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

99

Slide 4 Drivers of Food Inflation

Slide 5 Drivers of Food Inflation 1980s & 1990s

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

100

Slide 6 Drivers of Food Inflation 2000s

In the next two decades, the picture did not change dramatically, although other categories of food clearly began to contribute more significant ly. In the decade of the 1980s, in the years selected for display in Slide 5, sugar was the predominant contributor and cereals played a relat ively modest role. In 1981-82, however, proteins (which include pulses, milk and eggs, meat and fish) made an appearance, as did fruits and vegetables. In the 1990s, the contribut ion of sugar subsided, while that of cereals made a comeback, supported to an extent by fruits and vegetables and proteins. Overall, though, if we were to characterize these four decades in terms of the drivers of food inflat ion, it would be reasonable to argue that it was dominated by cereals and sugar, with a support ing role being played by proteins and fruits and vegetables in the second half of the period. Let us now look at the contributions to food inflat ion over the past decade. In the years selected for display, cereals and sugar have clearly receded into the background, while proteins and fruits and vegetables have begun to play a more important role. In the earlier part of the decade, proteins and fruits and vegetables swapped roles, much like cereals and sugar did in the previous decades. However, in the last four years, which roughly correspond to the most recent episode of persistent high inflat ion, the contribut ions of proteins and fruits and vegetables, in both absolute and relat ive terms, have clearly been the dominant drivers of food inflat ion. Cereals and sugar have made some contribut ions, but they have been of a one-off nature, not sustaining over the entire period. Let me place this significant shift in the drivers of food inflat ion, which was clearly accentuated in the most recent episode, in the context of the not ion of "this t ime it 's different". There are obvious similarit ies between the earlier prolonged episodes - early 1970s and early 1980s - and the most recent one. In both these, two major food categories both saw sharp increases in their prices, presumably because of a combinat ion of steadily increasing demand and a sharp fall in supply, usually because of an inadequate monsoon. In the most recent episode, 2009 was a bad monsoon year and this many have been the

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

101

t rigger for prices of pulses to rise sharply, adding their own burden to the steady pressure from demand. In the following year, fruits and vegetables added their contribut ion, reinforcing and prolonging the inflat ion trajectory, despite 2010 being a decent monsoon year. While the contribution from proteins has gone down somewhat in 2011-12, the pressure from fruits and vegetables have sustained. Given the significance of proteins and fruits and vegetables in food inflat ion in the recent episode, let us look at the contribut ion of some major items in the protein category. Slides 7 and 8 show the contribut ions of the major protein items - pulses, milk and eggs, meat and fish - over a five-year period. In Slide 7, we see the sharp increase in the prices of pulses in the first year, but this did not persist for very long. However, milk was a significant contributor throughout the period, as is seen on Slide 8. In the later part of the period, eggs, meat and fish gained in significance, more or less matching the contribut ion of milk. The contribut ion from pulses virtually disappeared in these years. Beyond proteins, fruits and vegetables were a significant , though somewhat volat ile contributor. Slide 7 Proteins and Fruits & Vegs

Slide 8 Proteins and Fruits & Vegs … … … 2

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

102

In the context of the t it le of this lecture, the similarity between this latest episode of high food inflat ion and earlier ones of comparable durat ion clearly lies in the fact that it needed two major categories of food to drive these high rates of inflat ion. The difference lies in what those items were. It is also significant that between the relat ively prolonged episodes, there were a series of relat ively shorter ones, typically also with lower peak rates of inflat ion. This pat tern has important policy implicat ions, which I will come to in the concluding part of the lecture. Let us now explore the drivers of the recent pat tern of food inflat ion. When prices of individual commodities increase, it is always because of a gap between demand and supply. In the current scenario, I believe that both demand and supply forces are contribut ing to the persistence and possibly even the widening of that gap. To examine the demand side of the equat ion, let me first provide a backdrop in Slide 9. Generally speaking, as households grow more affluent , the proport ion of their income that they spend on food declines. This is a universal pat tern and India is no different . Over the decade and a half depicted in the slide, both urban and rural consumers show a decline in their relat ive Monthly Per Capita Expenditure (MPCE) on food. For now, the main observat ion is that , while there may be a decline in food expenditures in relat ive terms, what matters for demand is the absolute levels of consumpt ion. Slide 9 Changing Consumption Patterns

Source : NSSO surveys, Various rounds One way to depict this is by an Engel Curve, which shows the relat ionship between income and expenditure on a part icular commodity. Slides 10 and 11 show the Engel Curves for four food categories. Three of them are from the set that I have been talking about throughout the lecture, while the fourth captures expenditure on processed foods and beverages. There are a number of ways to interpret an Engel Curve, but a simple one in which relat ive changes in demand can be measured is in terms of the income elast icity. This essent ially measures how much consumpt ion increases for every unit increase in income (proxied here by total MPCE). The steeper the curve, the higher is the elast icity. Let me illustrate this with a simple comparison.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

103

Slide 10 Urban Engel Curves

In the graphs displayed in Slide 10, the rat io of expenditure on cereals by the top income decile to that by the bottom decile is about 1.8. For proteins, it is about 4.5. By this simple calculat ion, as household incomes increase, the incremental expenditure on proteins is more than double that on cereals. The same story goes for fruits and vegetables and, quite obviously, for processed foods and beverages. Rural households, for whom the Engel Curves are displayed on Slide 11, reveal a similar slope for cereals but an even steeper slope for proteins as compared with their urban counterparts. Slide 11 Rural Engel Curves

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

104

Although these curves are drawn from cross-sect ional data, which reflect a point in t ime, they can clearly be used to make inferences about consumer behaviour over t ime. The simple conclusion from these pat terns is that , as households move up the income ladder, their expenditure on food shifts relat ively towards proteins, fruits and vegetables and so on, which exacerbates demand pressures.2 Nobody would dispute this simple assert ion. People eat bet ter (as reflected in a more diversified and balanced diet) as they grow richer. But , even if the demand side of the equat ion is inevitable, that it translates into a persistent pressure on prices is not . One common and consistent feature of economic development is that it has been able to accommodate these changes in diets by increasing the supply of the food items involved. This is where we seem to have a problem. Let us look at the supply side of the picture, using pulses and milk as examples, though I believe that they do illustrate the broader issue. Slide 12 displays the t rend in product ivity of pulses in India over a long period of t ime. It increased steadily unt il about the mid-1990s, when it crossed the 600 kg / hectare. After that , for the last decade and a half, it has oscillated around this mark, but not shown any tendency for sustained increase. From an aggregate supply perspective, this means that the only way to increase product ion is by increasing the area under cult ivat ion, causing land available for other crops to decline. Slide 12 Stagnant Productivity in Pulses

Are there any opportunit ies to increase product ion by way of higher product ivity, which is the best way to do it? Slide 13 displays the variat ion in productivity in pulses across states. Of course, this depict ion does not dist inguish between different kinds of pulses, which is an important issue. But, at the aggregate level, the pat tern suggests that there are several large states, in which pulses may const itute an important part of the typical diet, whose product ivity is significant ly below the national average. If overall product ivity is to be improved, a strategy which focuses on the specific bot t lenecks in these states is probably the best way to go about it .

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

105

Slide 13 Productivity Differentials

Source : Ministry of Agriculture, GOI I have not gone down to the next level of disaggregat ion, looking at productivity pat terns across different kinds of pulses. Some of the inter-state variat ion is because the crop mix is different across states. The dist inct ion is important because of st rong inter-regional variat ions in preferences. Specifically, consumers in the western and southern regions have a preference for tur (or arhar) dal, while chana and urad are more popular in the north. Masur comes into the mix in the east . Because of the relat ive lack of subst itutability between these varieties, st rategies to increase product ivity need to take into account the supply-demand imbalances in each of these items. A large increase in a pulse variety that is not universally consumed will not be of much help in addressing the demand-supply imbalance. Going back briefly to Slides 7 and 8, in which the relat ive contribut ion of pulses to inflat ion was displayed, one reason why it has been muted at the aggregate level is that not all pulses face the same demand-supply imbalance. For example, chana, which is a significant Rabi crop in the northern region, has been relat ively stable in its yields and this in turn has resulted in relat ively stable prices. On the other hand, tur, which is grown largely in the southern half of the country, has shown much more volat ility in product ivity and has, as a result , shown much sharper increases in prices over the past few years. Let me come to the situat ion in milk. As we saw in Slides 7 and 8, in contrast to pulses, milk has been a significant contributor to food inflat ion throughout the period under considerat ion. And, of course, unlike pulses, milk is a homogeneous product . With the kind of demographic pat tern the country has, as well as the growing demand for processed food products, in which milk has a significant role, demand for milk has been growing and will cont inue to grow rapidly. However, as Slide 14 shows, the growth rate of milk yields has declined quite significant ly during the past decade. Again, this means that the only way in which milk product ion can be increased is by increasing the size of the cat tle herd. The investment and maintenance expenditures involved will come at the expense of other things. There may be lessons to be drawn from the experience of the previous decade, during which product ivity increased quite significant ly.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

106

Slide 14 Slowing Growth in Milk Yields

Product ivity gains can be a significant contributor to moderat ing food inflat ion. However, for given levels of product ivity, it is the cost of major inputs that determines the prices of the products. What is driving costs of product ion? In discussing this, although I have been talking about proteins and fruits and vegetables all along, I will use paddy as an illustrat ion, for two reasons. The first reason is that paddy is cult ivated across a wide range of states and its cost st ructure therefore reflects nat ional t rends. The relat ive share of different inputs in the cost of paddy cult ivat ion is shown on Slide 15. In terms of cost share, the dominant input clearly is labour. It 's contribut ion varies across states, but it is by far the largest component of costs in all the states displayed. Consequent ly, the cost of production across the country will depend on how the wages of agricultural labour have been moving. Slide 15 Cost Structure of Paddy Cultivation

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

107

The movement in this crit ical variable is shown in Slide 16. The longer bars reflect the increase in nominal wages of rural unskilled workers over the past year. The shorter bars reflect the change in the Consumer Price Index for this category of workers. In virtually all the states, the rise in nominal wages far outstrips the increase in consumer prices. Labour costs are clearly rising sharply, which for commodit ies like food usually mean a high degree of pass-through into the selling price. The broader point here is that , if wages are rising at current rates, for whatever reason, they will exert st rong pressure on the prices of all agricultural commodities for which wage costs are a dominant component of the cost structure. Slide 16 Rising Wages

I must point out that, from a larger development perspect ive, rising wage costs are actually a good thing. After all, a primary object ive of development is to raise standards of living through higher incomes. However, the sustainability of the process depends ent irely on whether wage increases are the consequence of productivity increases. Wages rising faster than product ivity can only result in rising prices, if producers cannot substitute other inputs for labour. The cost structure for paddy reflects the crit icality of labour. There may be subst itut ion possibilit ies for other crops, but these depend on many factors, such as the scale of cult ivat ion, the quality of infrastructure services and so on. In many commodit ies, rising wages combined with stagnant product ivity are a recipe for persistent price increases. The second reason why I used paddy as an example here is to highlight an important relat ionship between price dynamics and stocks. As is well known, the government holds substant ial stocks of rice and wheat. While they are meant to be released into the market in situat ions of shortage, thus ensuring availability at reasonable prices, there is some evidence to suggest that their mere presence acts as a dampener on price volat ility. Slide 17 shows the relat ionship between cereal price movements and their stock levels over the past decade and a half. The relat ionship is very clear and contemporaneous. As stocks

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

108

decline, the rate of increase in cereal prices accelerates. Conversely, periods in which stocks have been high show relat ively low rates of price increase. Slide 17 Cereal Stocks and Prices

There has been much public discussion on the rather inefficient way in which the stocks are being maintained and some concerns expressed about their ability to actually meet food security requirements should the need arise. That is an important debate but I don't want to get into it here. From the perspect ive of price stabilizat ion, evidence from cereals supports the case that a credible level of stocks can actually dampen price volat ility. Of course, not every commodity is amenable to stocking, part icularly over long periods of t ime. So, this part icular strategy might not be applicable to the commodit ies that we have been focussing on in this discussion. But, perhaps the lesson from the experience with cereals is that , wherever and however possible, the ability to counter supply disrupt ions with short notice infusions into the market may be a useful tool to have. I want to address one final issue on the supply side before I conclude. This has to do with the performance of the monsoon over a long period of t ime. We are used to thinking of "normal" or "deficient" monsoons in terms of a deviat ion from a benchmark labelled the "Long Period Average" (LPA). The LPA for a specific decade is the average of the rainfall over the 50 years before that decade. It is, therefore, updated every ten years, after the complet ion of a decade, which then gets added into the average. However, if the benchmark itself is changing, the not ions of normality and deficiency do not fully capture the absolute amount of rainfall in any given year. A normal monsoon in one year may actually deliver less rainfall than a normal monsoon in another. Slide 18 displays the LPA for the South-west monsoon across the country. It clearly shows a declining t rend. This means that normal monsoons are actually delivering less water than in the past . This may not be of great significance for regions that are subject to heavy rainfall, but in parts of the country, part icularly in the central regions, this kind of decline may be contributing to water scarcity and, consequent ly, keeping product ivity stagnant. Notably, pulses comprise a significant crop in these regions. In short , to add to all the

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

109

other hindrances to product ivity growth, long-term water availability will also potent ially play a role. Slide 18 South-West Monsoon Rainfall 50 Year moving average

Let me now wrap up the lecture by highlight ing two key points made in the lecture and then drawing out some policy implicat ions. First , we seem to be current ly in a situat ion that resembles the food inflat ion episodes of the early and late 1970s in terms of magnitude and duration. In all three comparable episodes, including the most recent one, two important categories of food made significant contribut ions to inflat ionary pressures and their persistence. However, the key difference between the earlier episodes and the recent one is the pair of commodit ies involved. Earlier, it was cereals and sugar, now it is proteins and fruits and vegetables. Second, when prices are rising because demand is growing strongly while supply stagnates or fails to keep up, there is no alternat ive to curbing food inflat ion than raising supply rapidly. The current pressure on the prices of proteins and fruits and vegetables is clearly the outcome of this combinat ion of circumstances. However, raising product ivity quickly is itself a serious challenge, given the pressures emanat ing from both labour costs and, over longer horizon, what appears to be a structural reduct ion in the absolute amount of rainfall. I draw three policy implicat ions from this analysis. First , the t ransit ion from an environment of persistent food inflat ion up unt il the 1970s to a series of more short-lived and less intense episodes in the 1980s and 1990s was the direct result of a set of policy interventions, which we collect ively labelled the "Green Revolut ion". These intervent ions, which combined price incent ives, input subsidies, technological inputs and infrastructure investments, particularly in irrigat ion and, very important ly, buffer stocks, helped to raise and stabilize the product ivity of cereal cult ivat ion, as well as some other crops. Over the years, cereals stopped contribut ing significant ly to food inflat ion and, perhaps, this led to the belief that the food inflat ion problem had been solved for good.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

110

However, as we all, or should all, know, the story of development is a cont inuously evolving one. Demands, for food as well as other products and services, change as consumers become more prosperous. Sustaining the development momentum involves creat ing the capacity in the economy to respond to these changing demands. Throughout history, increasing affluence has been associated with changing food habits. The t ransit ion from a cereal-dominated diet to a more balanced one with a greater appetite for proteins and fruits and vegetables is something that all countries have seen and we are no except ion. It is in full swing today and the absence of a strong supply response means that many aspiring consumers will actually be denied the opportunity to make that t ransit ion. Second, while the broad object ives of a supply enhancement policy remain the same, i.e., increasing and stabilizing product ion, predominant ly through product ivity increases, the elements of the strategy need to fit the requirements of both the commodit ies themselves and be consistent with the overall economic and inst itut ional environment. A mere replicat ion of the kinds of intervent ions we saw in the 1960s and 1970s may not turn out to be effect ive, because the nature of the commodit ies is so different . Also, in hindsight , these intervent ions imposed a signif icant fiscal cost , something which is rather difficult to absorb in today's circumstances. In short , an effect ive strategy must be compat ible with both the nature of the commodit ies and the state of the economy. I have no doubt that such a strategy can be devised from exist ing knowledge and the right kinds of resources being brought together. Co-ordinat ion will be the key. Third, coming back to the monetary policy context , the implications of persistent supply pressures on the economy, whether they are from food, energy, labour or any other crit ical input , are clearly not very good for maintaining the balance between fast growth and low inflat ion. A permanent supply shock leads to lower growth and higher inflat ion, which could further fuel inflat ionary pressures through expectat ions. In this situat ion, central banks have to choose between the risk of inflat ion spiralling through expectat ions and the burden of slowing growth even further by ant i-inflat ion policy measures. In other words, while t ransitory episodes of food inflat ion do not warrant a monetary policy response, there are strong just ificat ions for act ing in the face of more persistent ones, if the object ive is to keep overall inflat ion in check. In short , quickly increasing the product ivity of proteins and fruits and vegetables is the highest priority, both from the perspect ive of development and standards of living and from the viewpoint of monetary policy. Let me conclude by thanking the Gokhale Inst itute and Prof. Parchure once again for invit ing me to deliver the Kale Memorial Lecture for 2011. My best wishes for the future to the students graduat ing today. ------------------------

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

111

'Gross Financial Flows, Global Imbalances, and Crises' Professor Maurice Obstfeld, University of California, Berkeley,

delivered the 12th L. K. Jha Memorial Lecture on

Professor Maurice Obstfeld, University of California, Berkeley, delivered the twelfth L. K. Jha Memorial Lecture organised by the Reserve Bank on December 13, 2011 in Mumbai. The topic of his lecture was 'Gross Financial Flows, Global Imbalances, and Crises'. Governor Dr. D. Subbarao in his welcome address noted that Prof. Obst feld, who is present ly the 'Class of 1958 Professor of Economics' and Director of the Center for International and Development Economic Research (CIDER) at University of California, Berkeley, has a truly enviable reputation as an academic in the area of international t rade and finance, and as an adviser on economic policy making and practices. He is act ive as a Research Fellow of Centre for Economic Policy Research, a Research Associate at Nat ional Bureau of Economic Research and an Internat ional Research Fellow at the Kiel Inst itute of World Economics. 1. Introduction In his speech, Prof. Obst feld presented some useful lessons from current phase of prolonged global crisis that most ly emanated from the progress of financial globalisat ion. He pointed out that the global economic crisis of 2007-09 and the European sovereign debt crisis that followed have unleashed market forces that even policymakers in the mature economies were ill-prepared to counteract . 2. The Growth of Pure Asset-for-Asset International Trade He documented the proliferat ion of gross internat ional asset and liability posit ions and discussed some of the consequences for individual countries' external adjustment processes and for global financial stability. He pointed out that , if a country has maximally hedged its idiosyncrat ic risk in world asset markets, its net internat ional investment posit ion (NIIP) will respond to shocks (including shocks to current and future world prices) in ways that cushion domest ic consumpt ion possibilit ies. He ment ioned that , in mid-1970s, the gross financial flows were considerably smaller than t rade flows, but the former have grown over t ime and on average now are of comparable magnitude to t rade flows. In the real world of financial t rades, one agent viewing them as personally advantageous can work to the detriment of others implying that the sheer volume of financial t rade can be posit ively correlated with financial instability risks. 3. Balance Sheet Vulnerabilities Once a certain level of financial integration has been reached, gross posit ion build-ups likely to imply a proliferat ion of counter-party obligat ions that may be defaulted and thus carry the risk of contagious financial instability through chains of leverage. In contrast , a country's port folio equity or FDI liabilit ies can fall quickly through the price mechanism without creat ing defaults. But there is only so much domest ic capital for foreigners to hold, so beyond a point, increasing gross asset posit ions imply increasing associated default possibilit ies, with adverse implicat ions for financial stability.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

112

In the Indian context , external liabilit ies are heavily weighted toward equity, whereas external assets are heavily weighted toward debt-like assets (in no small measure consist ing of non-gold official reserves). In the crisis year 2008, the values of externally-held Indian equit ies collapse, improving the NIIP sharply, but they recover in 2009-2010. These asset-price developments provide some natural insurance against economic shocks rather than provoking an external debt crisis. 4. Does the Current Account Matter Anymore? With investment, the current account 's role is to allow investors to maintain globally diversified port folios of equity claims through purchases of newly issued shares in the profits of capital. The foreign gross asset and liability posit ions offer the best picture of potent ial stability risks, and that hazardous gross posit ions can build up even in the absence of any net internat ional capital flows. Low interest rates due to global saving and investment patterns, along with accommodat ive monetary policy responses and other government policies, promoted credit and housing booms that themselves led to a further widening of the global imbalances. Financial compet it ion, innovat ion, and arbit rage, proliferat ing within a lax regulatory environment, built a financially fragile superstructure of gross liabilit ies and claims on the back of those unsustainable booms. The big U.S. external deficit was a symptom of underlying destabilizing forces, and indeed enabled those forces to play out over an extended period. A purely macroeconomic perspect ive also argues for the cont inuing importance of the current account as a component of aggregate demand. The emergence of a current account surplus in one region may depress aggregate demand globally, affect ing global financial markets and elicit ing policy responses in t rade partners. 5. Conclusion For several reasons, the current account st ill matters. The gross internat ional asset and liability posit ions furnish the key conduit through which financial meltdown is t ransmitted and amplified. The nat ional divergences between saving and investment not only remain key macro variables, they may well reflect financial developments with direct systemic implicat ions. The evolving world of financial globalizat ion needs policy coordinat ion assembling consolidated global informat ion on financial act ivity, for regulating against macro risks, for providing liquidity support , and for resolving insolvent global financial inst itut ions and governments. Dr. Subir Gokarn, Deputy Governor, Reserve Bank of India highlighted the main messages of Prof. Obst feld's lecture and offered a vote of thanks. Background Shri Lakshmi Kant Jha was a many-sided personality who excelled in several walks of life. He was an eminent economist, a dist inguished administrator, an able diplomat and a sage counsellor. He was Governor of the Reserve Bank of India during July 1, 1967 to May 3, 1970. In recognit ion of his invaluable services to the nation and the Reserve Bank, the Reserve Bank of India has instituted a lecture series entitled as the L. K. Jha Memorial Lectures.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

113

Gross Financial Flows, Global Imbalances, and Crises Dr. Duvvuri Subbarao

Good evening. On behalf of the Reserve Bank of India, I have great pleasure in welcoming Prof. Maurice Obstfeld, who will short ly be delivering the L.K. Jha Memorial Lecture. Warm welcome also to Mrs. Jeniffer Obstfeld. I also have pleasure in acknowledging the presence here of members of the family of late Dr. L.K. Jha - Smt. Dipika Maharaj Singh, Smt. Sharika Glover and Master Kiran Glover. Your presence here means a lot to us. Thank you very much. Of course, a warm welcome to all our dist inguished invitees who have made t ime to be here for this lecture. Dr. L. K. Jha Dr. L.K. Jha was by far one of India's most dist inguished civil servants. With a remarkable career as an economic administrator and several impressive accomplishments to his credit , he has been a role model for generat ions of civil servants. After graduat ing from the Banaras Hindu University, 'LK', as he was popularly known, went on to study at Trinity College, Cambridge where he was a student of legendary economists such as A.C. Pigou, J.M. Keynes and D.H. Robertson. He joined the Indian Civil Service in 1936. After an early career in Bihar, he was seconded to Government of India in 1942 where he served in several important posit ions, and ended up in the pivotal job of Secretary to Prime Minister. Dr. Jha was Governor of the Reserve Bank from July 1967 to May 1970, at a t ime when the economy was going through one of India's most challenging phases. The country was shaken by food security concerns, and init iatives to redress this resulted in the much celebrated 'Green Revolution'. The Reserve Bank, under Governor Jha, was an influential force in shaping these init iat ives. The distress suffered by the poor because of the overall scarcity situat ion resulted in poverty reduct ion becoming the overarching considerat ion of all policy. The Reserve Bank, under Dr. Jha's stewardship, contributed to designing and implement ing many of these policies. After his tenure in the Reserve Bank, Dr. Jha served as India's Ambassador to the United States and as Governor of Jammu and Kashmir. He was also a member of the widely acclaimed Brandt Commission which made a persuasive case for North-South cooperat ion. That some of the issues raised in the Brandt Commission are relevant even today is a test imonial to the foresight and wisdom of the Commission's members such as Dr. Jha. This lecture series in his name honours Dr. Jha's outstanding service to the nat ion and his leadership of the Reserve Bank during a very crit ical period. So far, there have been 11 lectures. The last one was given by Prof. John Taylor in February 2010, two years ago, on 'Lessons from the Financial Crisis for Monetary Policy in Emerging Markets'. The lecture by Prof. Obst feld this evening will be the 12th in the series.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

114

The Distinguished Speaker - Prof. Maurice Obstfeld It is perhaps presumptuous to introduce Prof. Maurise Obstfeld, who is a dist inguished academic and internat ionally renowned economist . Regardless, I will indulge in the pleasure of doing so because the occasion demands it . Prof. Obst feld is current ly the Class of 1958 Professor of Economics and Director of the Center for Internat ional and Development Economic Research (CIDER) at the University of California in Berkeley. He got his Doctorate from the Massachusetts Inst itute of Technology (MIT) in 1979 under the supervision of the legendary Professor Rudiger Dornbusch of the textbook fame. Thereafter, Prof. Obst feld taught at Columbia, University of Pennsylvania and Harvard before moving to UC, Berkeley in 1989. Publishing papers is part of plying the t rade of being an academic. A few of them also write text books. But far fewer of them write text books that become standard teaching material cut t ing across university and nat ional barriers. Prof. Obst feld belongs to that select category. Many among the audience here must have learnt economics from his seminal textbook on Internat ional Economics, co-authored with Prof. Paul Krugman. Economists have been categorized in several ways - classical and neo-classical, macro and micro, Keynesian and monetarist , free market and left ist . It is fashionable these days to categorize economists as salt water or fresh water to classify their academic persuasion which, curiously, seems to be correlated with whether their university is located inland or on the coast . Prof. Obst feld has largely been in coastal schools, and it will be interest ing to find out if his academic persuasion fits in with this salt water - fresh water dichotomy. Prof. Obst feld's earliest research was focused on port folio models of exchange rate and capital flows, and the effects of sterilizat ion policies, including foreign exchange intervention. Later, he turned to models of monetary and real internat ional adjustment based on dynamic opt imizat ion, an approach that has since become standard in internat ional economics. In the mid-1980s, Prof. Obst feld began to pursue the insight that speculat ive at tacks on exchange-rate regimes could be self-fulfilling. Subsequent developments, notably the Asian crisis of the late 90s, validated this theory. Prof. Obst feld will be speaking today on 'Gross Financial Flows, Global Imbalances and Crises', unexcept ionably a topic of great relevance in the current context . Global imbalances need to be redressed for the sake of global stability No crisis as complex as the one we are going through has a simple or a single cause. In popular perception, the collapse of Lehman Brothers in mid-September 2008 will remain marked as the t rigger of the crisis. At one level that may well be true. Indeed, I can visualize future text books in finance dividing the world into 'before Lehman' and 'after Lehman'. But if we probe deeper, we will learn that at the heart of the crisis were two root causes - the build up of global imbalances and developments in the financial markets over the last two decades. And received wisdom today is that these two root causes are interconnected, and that financial market developments were in a sense driven by the global imbalances.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

115

Global macro imbalances got built up because of the large savings and current account surpluses in China and much of Asia in the wake of the Asian Crisis in the 1990s. These were mirrored by large increases in leveraged consumpt ion and current account deficits in the US. In short , Asia produced and America consumed. And why did these imbalances get built up? The answer lies in globalizat ion - globalizat ion of trade, of labour and of finance. The world witnessed a phenomenal expansion in global t rade over the last three decades; global t rade as a proport ion of global GDP increased from 37 per cent in 1980 to 53 per cent in 2008, just before the crisis hit us.1 Globalizat ion of finance was even more prolific, especially over the last decade. For the world taken together, the rat io of foreign assets and foreign liabilit ies to GDP rose from 133 per cent in 1994 to over 300 per cent in 2008.2 The impact of globalizat ion of labour was by far more striking. Emerging Asia added nearly three billion to the world's pool of labour as it integrated with the rest of the world over the last two decades thus hugely improving its comparat ive advantage. Together, the three dimensions of globalizat ion - t rade, finance and labour - helped emerging Asia mult iply by a factor its exports to the advanced economies. The result was large and persistent current account surpluses in the Asian economies and corresponding current account deficits in the import ing advanced economies. These global imbalances combined with developments in the financial sector to brew the crisis to its explosive dimensions. So, where do we go from here? The G-20 is now act ively engaged in the challenging task of redressing structural imbalances in the global economy. At their Pit tsburgh Summit in September 2009, the G-20 leaders agreed on a 'Framework for Strong, Sustainable and Balanced Growth' and commit ted to a 'Mutual Assessment Process' (MAP) which is a peer review of each country's progress towards meet ing the shared object ives underlying the framework. Recognizing that global imbalances, which had narrowed during the crisis, started widening again in the exit phase, the G-20 resolved that promot ing external sustainability should be the focus of the next stage of the MAP and entrusted this task to a Framework Working Group (FWG). India is privileged in co-chairing, together with Canada, the Framework Working Group for managing the task of developing the indicat ive guidelines for assessing and addressing persistent global imbalances. The success of this init iat ive is crit ical for redressing the problem of global imbalances. In moving forward on finding a sustainable solut ion to global imbalances, we will be guided, individually at the country level and collect ively at the G-20 level, by insights from academic research. It is in this context that work of insight ful economists like Prof. Obst feld will be important . Ladies and gent lemen, please join me in welcoming Prof. Maurice Obstfeld to deliver the 12th L.K. Jha Memorial Lecture. ------------------------------------

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

116

Challenges to the Accounting Profession Some Reflections Dr. Duvvuri Subbarao

Thank you for invit ing me to speak at this conference of the Western India Regional Council of the Inst itute of Chartered Accountants of India (ICAI). When I got invited to speak at this conference, at first I was a bit surprised. I wondered why you might be wast ing valuable conference t ime listening to the Reserve Bank when there is not much in common between the Reserve Bank and the account ing profession, except possibly the fact that we both lose sleep when numbers go wrong. I then spoke to my staff and realized how wrong I was. We share considerable professional space and have several mutual concerns. I will address some of those shared concerns. Before doing so though, I must acknowledge another link between the Reserve Bank and the account ing profession through Shri Y.H. Malegam, who has been a Director on the Central Board of the Reserve Bank almost cont inuously since 1994 except for a brief interlude of a few days. Shri Malegam is, by wide acknowledgement, one of the foremost Chartered Accountants in India who has set very exact ing standards of professional competence, and more important ly, of professional conduct . The Reserve Bank has benefited enormously from his vast knowledge of account ing, his understanding of the financial sector and his judgement of the larger public interest . As a profession, you can all be proud of colleagues like Shri Malegam who enhance public respect for the account ing profession. The Accounting Profession The development of the accounting profession owes its origin to the emergence of the joint stock company and the consequent separat ion of ownership from management. This arrangement t riggered the need for an independent and informed opinion on the account ing of the owners' funds entrusted to the management for their stewardship. The "raison d'etre" of the profession is consequent ly based on the confidence which the profession enjoys with the invest ing public, and its cont inued relevance is essent ially t ied up with retaining this confidence. While init ially the profession provided this confidence only to the shareholders of joint stock companies, today it provides this assurance to a wider base of stakeholders including the government, the banking system, regulators and society itself. At the Reserve Bank, we depend on the account ing profession for at least two reasons. You audit the Reserve Bank's balance sheet of course, and you also audit the balance sheets of commercial banks which we regulate and supervise. Reserve Bank's Balance Sheets Let me make a brief comment here on the Reserve Bank's balance sheet. The balance sheet of the Reserve Bank is different from that of commercial organizat ions in some important respects. Uniquely, the Reserve Bank is statutorily mandated to have two balance sheets - one for the Issue Department and the other for the Banking Department.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

117

The Issue Department handles the task of issue, exchange and withdrawal of currency notes. The Banking Department maintains the deposit accounts of banks and of governments. The rat ionale for building a firewall around the balance sheet of the Issue Department is to maintain the integrity of the asset backing for the currency that we issue. The firewall ensures that the explicit promise that every currency note carries, which is to pay the bearer the sum ment ioned therein, is honoured in the full account ing sense. Our other balance sheet, that of the Banking Department, reflects the transact ions we perform in our role as banker to banks and to the Central and state governments. In the Reserve Bank, we are deeply conscious of our responsibility for maintaining the integrity of our balance sheets. The Reserve Bank's balance sheets are analyzed by a wide array of stakeholders to study the underlying monetary and macro economic t rends so as to make informed decisions. We have an obligat ion, therefore, to maintain the highest standards of clarity, t ransparency and disclosure, and we try our best to meet this obligat ion. RBI and the Accounting Profession While the financial statements of the Reserve Bank are subject to audit by your profession, as the regulator and supervisor of the banking system, the Reserve Bank is a major stakeholder in commercial banks whose financial statements are audited by you. In our view, auditors are the "eyes and ears" of RBI, and we trust them to alert us to early warning signals to assist us in our supervisory process. We also encourage auditors to discuss any regulatory issues with RBI before finalizing the accounts. Further, during the process of 'Annual Financial Inspect ion' of banks, the inspect ion team interacts with the auditors to discuss issues of regulatory concern. Challenges for the Accounting Profession As several stakeholders depend upon the account ing profession, the profession too has to recognize that it has to cont inue to inspire the t rust and confidence of the stakeholders if it has to remain relevant and value adding. In recent years, several challenges have emerged, both at domest ic and global levels which, if not effect ively addressed, could erode that confidence. Let me address what, in my view, are some of the key challenges. Competence First , the challenge of competence. With the growing complexity of the financial sector and the emergence of new and sophist icated financial instruments, the knowledge base of the profession needs to keep pace with these emerging pract ices and innovat ions. This requires, not just a cont inual review of its curriculum, but more importantly, an act ive, well diversified and constant ly updated programme of cont inuing professional educat ion for its members. Cont inuing professional educat ion cannot be a mere 't ick in the box' or determined by participation in number of hours of educat ion or t raining, but should be evaluated by way of outcomes - upgradat ion of relevant knowledge and skill sets. Towards improving the skill set of the accounting profession, with part icular reference to audit ing banks, the Reserve Bank has taken some init iat ives. We have established a pract ice of an annual Statutory Auditors' Conference to apprise the statutory auditors of banks on the crit ical issues in the area of banking regulat ion and supervision. The

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

118

conference also provides a forum for auditors to give us their feedback on current concerns and to suggest any changes to our supervisory and regulatory policies. We have found this to be an effect ive forum for mutual exchange of views, and I hope you likewise have found it to be value adding. I am open to suggest ions on improving this engagement. I am also happy to note in this context that as a result of your Inst itute's init iat ive, India is embarking on convergence with Internat ional Financial Report ing Standards (IFRS), which would then result in our financial account ing and report ing get ting to be world class. As you are no doubt aware, IFRSs are largely broad principles rather than detailed rules. Their applicat ion requires judgment and possibly even lateral thinking, especially in the area of determining the fair value of financial assets and liabilit ies. The auditing profession needs to improve its skill endowment to facilitate a smooth and efficient convergence with IFRS. Globalization The second challenge the profession needs to reckon with is globalizat ion. Globalizat ion implies that countries can no longer afford to remain isolated in so far as their operat ing and legal systems are concerned. For the profession, this gets reflected not merely in internat ional account ing and audit ing standards but also in a number of other areas like educat ion, ethics, etc. I gather the ICAI, with its 180,000 members, is the second largest account ing inst itution in the world. It is not sufficient that the Inst itute merely responds to and adopts global standards. It should, in fact , go further and act ively part icipate in the formulat ion of these standards. I am happy to learn that the President of ICAI has recent ly been elected as a member of the board of the Internat ional Federat ion of Accountants (IFAC) and that there is an Indian member on the IASB. I also want to commend the Inst itute for its act ive part icipat ion and involvement in several internat ional commit tees and projects aimed at improving account ing systems and processes. I would only urge that going forward, ICAI should proact ively take the lead in the formulat ion of account ing standards in areas where we have specific concerns as an Emerging Market Economy (EME). Another task the profession needs to address in regard to managing globalizat ion is how it will select , from within its membership, persons of the requisite competence to part icipate in the global forums, and how it will provide them both financial and professional support to make this part icipat ion rewarding to them individually and to the profession more broadly. Needless to say, the process of select ion of persons for represent ing the Inst itute in internat ional forums should be strictly meritocratic and t ransparent. Information Technology (IT) Next on my list is the challenge of Informat ion Technology. In the past , one of the main object ives of audit was ensuring the arithmetical accuracy of financial statements. With the advent of IT, this task has now been taken over by machines. This has both nudged and facilitated the profession to move up the value chain. The main task of the profession has now shifted to judgments of value, and to discharge this task, auditors have to demonstrate much higher levels of maturity, integrity, independence and balanced judgment. The development of these qualit ies will be a major challenge in the future.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

119

Let me make a comment with regard to IT in banking. Over the past decade, most commercial banks have successfully implemented core banking solut ions. This has created both opportunit ies and challenges for auditors. Challenges come by way of lack of visible evidence, risk of undetected system errors and bugs and frauds hidden in a labyrinth of data. Retrieving informat ion in the computerized environment and assessing the implementat ion of computer related processes will also be crit ical to the audit process. Opportunit ies come by way of increasing use of Computer Assisted Audit Tools (CAATs) to access databases beneath the account ing software to create queries, write reports and develop audit t rails. While the profession has risen to the challenge of audit ing banks in an IT environment, we need to explore further on how audit can overcome the challenges and exploit the opportunit ies of the IT environment to make audit of banks more effect ive and meaningful. Opportunities I am told one of the issues agitat ing all of you is expansion of opportunit ies for the account ing profession especially in view of the growing membership of the Inst itute. So far, you have enjoyed a monopoly posit ion in respect of certain areas of work, for example, the audit of financial statements. The easy way out to seek and expand opportunit ies would be to agitate for cont inuat ion of this monopoly posit ion. I believe this will be a mistake. Rather, the profession needs to ident ify emerging opportunit ies in the market place and develop the skill needed to exploit them. Let me cite an example. With concepts like core banking and centralized record keeping, the relevance of the audit of branches of Public Sector Banks (PSBs) has significant ly declined. These banks have represented to RBI that the audit of bank's branches should be reduced. There is merit in this suggest ion, since currently the cost of audit of PSBs is significant ly higher than the cost of audit of comparable private sector banks. However, the Inst itute has been resist ing this because it would mean a reduction in work for its members. I believe the Inst itute's efforts in this regard are ill advised. In fact , it makes much more sense for the profession to sharpen its skills in the area of concurrent audit for which a need exists than to agitate for retent ion of work which does not add value. Similarly, the profession has shied away from the responsibility for prevent ion and early detect ion of fraud. The need for such a service exists and if the profession does not fulfill that need, other agencies which can provide this service will displace auditors and deprive them of a potent ially expanding opportunity. Independence Let me now turn to the challenge of 'independence'. The growth of large internat ional firms of accountants has created an opportunity for the provision of a mult iplicity of services. Clients benefit from such umbrella services and attach value to it . However, this also raises the vexed quest ion of the extent to which provision of these mult iple services erodes the concept of independence. The case of Enron, which took down along with it the audit firm Arthur Andersen, comes to mind in this context . The sudden collapse of Enron, an energy t rading and distribut ing

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

120

company, ranked seventh in the Fortune 500, raised a number of quest ions about the account ing and auditing pract ices followed by the company. The company used creat ive account ing to shift losses and debts off the company's balance sheet into special purpose ent it ies (SPEs) thereby concealing the extent of its indebtedness. The company was also reported to have withheld informat ion about SPEs which could have led auditors to insist on their consolidat ion in the balance sheet. Enron's account ing t ransgressions misled investors to believe that the company was more profitable and less leveraged than it really was. Andersen audited Enron for all sixteen years since the company's format ion. On top of pure audit , it also sold internal-audit and consult ing services. Despite this privileged insight , Andersen did not discover that Enron was publishing incorrect financial statements leading to the term "Enronisat ion of financial statements". This raises an important quest ion of conflict of interest . Is it the case that the extensive consultancy work done by Arthur Andersen for Enron compromised its independence leading to its failure to detect erosion of account ing standards? It also subsequent ly came to light that some members of the Audit Commit tee faced financial conflicts of interest , generated in part by the company's donat ions to charit ies to which they were connected. Could this conflict have been prevented? Account ing and audit ing pract ices were also called into quest ion in the collapse of Parmalat , the largest dairy company in Europe, in one of the biggest account ing frauds in corporate history. Like Enron, Parmalat too undertook elaborate derivat ive deals, often using complex offshore structures that involved some of its many subsidiaries. Investors and bankers struggled to understand the balance sheet or gauge the t rue extent of its liabilit ies. By the t ime it collapsed, Parmalat had established dozens of arrangements involving offshore companies, which did not form part of the company's consolidated financial statements. Instances such as these reaffirm the need for systemic reforms in two areas. The first is the regulat ion of auditors. The profession has argued for years that self-regulat ion and peer review are the right way to maintain standards. But the conduct of Enron, Parmalat etc. under the very nose of auditors has raised quest ion about the effect iveness of soft regulat ion. The profession has to find a way of remedying this if it wants to prevent the imposit ion of an external regulator. The second reform is the need to eliminate conflict of interest in accounting firms. Should there be a ban on auditors selling consult ing services to those they audit? One view is that there is no real conflict of interest and that better audits would be the best way to assure regulators that such a ban is unnecessary. Yet if confidence in audit ing is to be regained, percept ion is equally important . Regulators are likely to demand some meaningful change on the issue of such conflict of interest . Overall, this is a complex issue which needs to be addressed dispassionately. Inter-disciplinary Approach Inter-disciplinary approach is the next challenge on my list . In a complex world, no single profession can meet all the requirements of market part icipants. Neither is it possible for

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

121

individual professions to operate in silos catering to specialized needs. Inter-disciplinary interaction is therefore not only unavoidable, but in fact desirable. But this creates its own problems, part icularly in the area of disciplinary jurisdict ion as professional standards in different governing bodies - if such a body exists - may be different and members of such bodies may be different ly regulated. The recent global financial crisis illustrates the problems that can arise from divergence of views across disciplines - in this case between the account ing profession and prudent ial banking regulators. There is widespread crit icism that the account ing standards, more so fair value account ing insisted on by accountants, failed to reckon with illiquid markets and distressed sales, and thereby contributed to the crisis, or at the very least exacerbated the severity of the crisis. Post-crisis, there is convergence in the views of prudent ial regulators and account ing standard set ters on the desirability of forward looking expected loss approach to loan loss provisioning. The IASB, FASB as well as the Basel Commit tee on Banking Supervision (BCBS) are act ively engaged in finding a commonly agreed solution to this complex problem. While discussing the issue of loan loss provisioning, I would like to highlight the Reserve Bank's concern on the issue of divergence in ident ificat ion of Non Performing Assets (NPAs) and provisioning as cert ified by statutory auditors vis-a-vis the findings of the supervisory inspect ion conducted by RBI. In the Reserve Bank's view, in certain cases, the statutory auditors have underest imated the extent of NPAs and the required provisioning. Since RBI, as the supervisor of the banking system, relies and leverages on the work done by auditors, the profession should effect ively address this issue. Ult imately, it is the statutory auditors' cert ificat ion that is taken as the 't rue and fair' statement of the accounts of a bank and is disclosed to all stakeholders. It is therefore of prime importance that there is no underest imat ion of provisioning requirements while finalising financial statements of banks. Value Systems Finally, let me turn to the sensit ive and important issue of a value system. Recent months have witnessed an agitat ion across the country about erosion of values in the public domain. The norms of a society are determined by the dominant sect ions of that society, and the account ing profession is certainly a dominant sect ion of society. The value system you pract ise in your professional conduct influences the value system of the society. Sadly, we see several t ransgressions. Take the case of Worldcom. Worldcom indulged in major account ing misstatements which hid the precarious financial posit ion of the company. Invest igat ions revealed that more than three billion dollars worth of costs were wrongly classified as capital expenses over a five quarter period. This boosted the reported profits, which were in fact fict it ious. The case of Satyam Computer Services here in India was similar. The company's chairman confessed to more than a billion dollar fraud on its balance sheet which was hidden from the company's board, its senior managers and of course the auditors for several years. The

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

122

t ruth followed a now familiar pat tern - overstat ing profits, understat ing liabilit ies, and overstat ing cash causing a big hole in the balance sheet. With so much account ing misconduct in big corporat ions, stakeholders wonder why books are not being reviewed on the default assumpt ion that there could be fraud afoot . Account ing experts explain that the kind of forensic audit ing that reconstructs fraud is so t ime-consuming and expensive that it could bring an honest business to its knees. However, I st rongly believe that a robust system of audits, a corporate culture in which ethical conduct is encouraged and exemplified and an act ive and independent Board of Directors can make such frauds harder to perpetrate, easier to detect and help restore public confidence in published results. What has been RBI's contribut ion in this regard? Recognising the importance of the internal audit and inspect ion funct ion as an effect ive management tool, in April 1994, the Reserve Bank advised all banks to set up an Audit Committee of the Board (ACB) of Directors. Needless to say, we need to have skilled and qualified persons on the ACBs to make them truly effect ive. Accordingly, in September 1995, we advised banks to ensure that there is at least one non-execut ive director who should be a Chartered Accountant on the ACB. ACBs have since been contribut ing immensely by providing direct ion and also by overseeing the internal control funct ion in the bank. We have kept the CEO of the bank outside the ACB to keep it independent. However, the second in command, the Execut ive Director concerned is a member of the ACB to bring the insider perspect ive to bear on the Commit tee's deliberat ions. However, the presence of an execut ive director may be seen on compromising the independence of the ACB. I will be interested in your views on this. Returning to the larger issue of a value system, the challenge before the profession is therefore to demonstrate by its own conduct , its concern for upholding a value system within itself and consequent ly within its clientele as also to init iate programmes which create sensit ivity to the need for greater ethical conduct . In this context I would only like to reiterate that you have a significant role as the conscience-keeper of the business world. Conclusion Let me now sum up. I have started with briefly ident ifying the shared professional domain of the auditing profession and the Reserve Bank. I have alluded to the uniqueness of the Reserve Bank's balance sheet, or indeed balance sheets. I then went on to indicate, what in my view, are some of the key challenges that the profession has to address in order to remain effect ive and to add value to the real sector. Where relevant, I have given contextual references and illustrations from the Reserve Bank, part icularly stemming from its role as the regulator and supervisor of the banking system. I wish your deliberations over the next two days all success. ---------------------------------------

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

123

Empowering MSMEs for Financial Inclusion and Growth - Issues and Strategies

Dr. K. C .Chakrabarty Shri M. V. Tanksale, Chairman and Managing Director, Central Bank of India (CBI), Smt V. R. Iyer, Executive Director, Central Bank of India, Shri Chadrakant Salunkhe , President SME Chamber of India, Shri A. Ramesh Kumar, MD & CEO - Asia Pragat i Capfin Pvt Ltd, SME entrepreneurs, staff members of CBI, dist inguished guests, members of the print and electronic media, ladies and gent lemen. It is my pleasure to be here at this Conclave on the eve of the conclusion of Centenary Year Celebrat ions of Central Bank of India. As you all may be aware, Central Bank of India, which was established way back in 1911, has a glorious past and would be celebrating its Foundation Day on December 21, 2011. I take this opportunity to congratulate Shri Tanksale, CMD, Smt Iyer, ED, all employees and customers of the bank and all the other stakeholders on complet ing a remarkable hundred years of exemplary service to the nat ion. The bank was the realizat ion of the dream of Shri Sorabji Pochkhanawala, a visionary, a philanthropist and a rare breed of people who richly deserve our tributes. It was the first commercial bank which was wholly owned and managed by Indians. Central Bank of India, over the years, has won the t rust and confidence of its clients and it comes as no surprise then that it has become one of the most prominent banks in India. But more important ly, the bank had a rich t radit ion of promot ing small and medium entrepreneurship and played a sterling role in the industrial development of the Bombay Presidency region. However, over a period of t ime, this zeal of promot ing entrepreneurship development appeared to have dimmed a bit and, therefore, I am extremely happy that as their Centenary Year draws to a close, Central Bank of India is bringing the limelight back to SMEs and rededicat ing themselves to the cause. I congratulate Shri Tanksale for organizing this Conclave on "Empowering SMEs for Inclusive Growth- Strategies and Init iat ives" in collaborat ion with a predominant industry associat ion- the Small and Medium Business Development Chamber of India. A. Importance of the MSME sector Now, there is no need for me to overemphasize the role and importance of the micro, small and medium enterprises You are all aware that in a developing economy, the MSMEs play a vital role and if India were to have a growth rate of 8-10 percent for the next couple of decades, it needs a strong micro, small and medium sector and for that micro entrepreneurs need to be nurtured. As per available stat istics (4th Census of MSME Sector), this sector employs an est imated 59.7 million persons spread over 26.1 million enterprises. It is est imated that in terms of value, MSME sector accounts for about 45% of the manufacturing output and around 40% of the total export of the country. The MSMEs are the best vehicle for inclusive growth, to create local demand and consumption and also to fight with the global meltdown. Public policy has right ly accorded high priority to this sector in order to achieve balanced, sustainable, more equitable and inclusive growth in the country. A micro enterprise of today will be a big enterprise of tomorrow, and might well become a mult inat ional enterprise eventually, if given the support in finance and capacity building. It is also an opportune t ime for put t ing more emphasis on MSMEs due

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

124

to recession in many countries of the globe and rupee depreciat ion. The recession, while slowing down the global demand for goods and services, should not impact the sector, so adversely, as there is a huge demand in the local markets which could be tapped and the depreciat ion of the rupee has improved their price compet it iveness of export ing firms in the sector. Sizeable growth in credit - yet MSMEs feel not enough is being done The MSMEs primarily rely on bank finance for their operat ions and as such ensuring t imely and adequate flow of credit to the sector has been an overriding public policy objective. Advances extended to the micro and small enterprises sector are t reated as priority sector advances. Over the years there has been a significant increase in credit extended to this sector by the banks. As at the end of March 2011, the total outstanding credit provided by all Scheduled Commercial Banks (SCBs) to the MSE sector stood at Rs.4,575 billion as against Rs.3,622 billion in March 2010 registering an increase of 26.3%. Despite the increase in credit outstanding to the sector, the MSME borrowers feel that the lenders are not doing enough for the MSMEs and are catering more to the needs of the large corporate. Let me now focus on the major problems / challenges / issues faced by the MSMEs and, more specifically, the Micro and Small sector. B. Major Problems / Challenges / Issues faced by the Sector Access to credit Notwithstanding the increase in credit outstanding to the sector, access to adequate and t imely credit at a reasonable cost is a crit ical problem faced by this sector. The statist ics compiled in the Fourth Census of MSME sector September 2009, revealed that only 5.18% of the units (both registered and unregistered) had availed of finance through inst itut ional sources, 2.05% had finance from non-inst itut ional sources; the majority of units i.e. 92.77% had no finance or depended on self-finance. Thus, the extent of financial exclusion in the sector is very high. But , this is not ent irely unexpected because if one looks at the financial exclusion in our country in general, then MSMEs cannot remain unaffected by it . But there is a need to bridge this gap through enabling policies and the Government of India (GoI) needs to play a catalyt ic role to cater to the needs of this sector. First time entrepreneurs The MSE borrowers, especially new generat ion entrepreneurs, do not have collaterals to offer to avail of bank finance. It is generally observed that collateral security provides comfort to the lenders as it ensures commitment of the borrower to the project and is also available to them for recovery in the event of failure of the enterprise. Infrastructure In the present global environment, the MSMEs and more specifically the micro and small enterprises (MSEs) have to be compet it ive to survive and thrive. To ensure compet it iveness of the MSEs, it is essent ial that the availability of infrastructure, technology and skilled manpower are in tune with the global t rends. MSEs are either located in industrial estates set up many decades ago, or have come up in an unorganized manner in rural areas. The state of infrastructure including power, water, roads, etc. in such areas is inadequate and unreliable. Further, the MSE sector in India, with some except ions, is characterized by low technology levels, which acts as a handicap in the

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

125

emerging global market . Although India has the advantage of a large pool of human resources, the industry cont inues to face deficit in manpower with the right skill sets for specific areas like, manufacturing, service, market ing, etc. The HR problem is further exacerbated by the low retention rate. Access to alternate sources of capital The ability of MSMEs (especially those involving innovat ions and new technologies) to access alternat ive sources of capital like angel funds / risk capital needs to be enhanced considerably. For this purpose, removing fiscal / regulatory impediments to use such funds by the MSMEs should be considered on priority. Access to equity capital is a genuine problem. At present, there is almost negligible flow of equity capital into this sector. Absence of equity capital may pose a serious challenge to development of knowledge-based industries, part icularly those that are sought to be promoted by the first -generat ion entrepreneurs with the requisite expert ise and knowledge. There is a demand for a dedicated Exchange for MSMEs. Delayed realization of receivables Considerable delay in set t lement of dues / payment of bills by the large-scale buyers to the MSMEs units adversely affected the recycling of funds and business operat ion of MSME units. Though the Government has enacted the Delayed Payments Act , 1998 many of the MSME units are reluctant to pursue cases against major buyers. After the enactment of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006, the exist ing provisions of the Interest on Delayed Payment Act , 1998 to Small Scale and Ancillary Industrial Undertakings, have been strengthened. The banks have been advised to sanct ion separate sub-limits within the overall limits sanct ioned to the corporate borrowers for meet ing payment obligat ions in respect of purchases from MSME sector. Necessary instruct ions have been issued by banks to their branches to monitor the posit ion of payment by corporates to MSME and wherever found necessary, persuade the corporate to release the same on priority basis. Sickness of units Growing incidence of sickness of the sector is yet another area of concern. When the sickness prolongs it leads to the closure of units and unemployment. The mortality of the MSE units is high. This has wider implicat ions including locking of funds of the lending inst itut ions, loss of scarce material resources and loss of employment. As on March 2011, the number of units ident ified as potentially viable as a percentage to total sick MSE units is around 8. The units placed under nursing as a proport ion to the total number of sick units stood at 5.22%.The causes of sickness are both internal and external. The major causes are limited financial resources, lack of organisat ional, financial and management skills and expert ise, non-availability of power supply shortage of raw materials, market ing difficult ies, delayed and inadequate credit , obsolete technology, inadequate infrastructure, etc. Exit policy for MSMEs An exit route for non-viable units is necessary to manage sickness. Worldwide, MSMEs are credited with high level of innovat ion and creat ivity, which also leads to higher level of failures. Keeping this in view, most of the countries have put in place mechanisms to

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

126

handle insolvencies and bankruptcies. The present mechanism available in India for MSMEs is archaic. Business failure in India is viewed as a st igma, which adversely impacts individual creat ivity and development in the country. The exist ing legislat ions may have to be toned up so as to provide for efficient liquidat ion of non-viable businesses. C. Initiatives by Government of India / Reserve Bank of India Recognizing the important role played by MSMEs in economic development and its sizeable contribut ion to employment and GDP, and realizing that financial access is crit ical for MSMEs growth and development, Government and Reserve Bank of India are taking the lead in support ing init iat ives that improve access to finance. While at the broader level, financial inclusion makes growth broad based and sustainable by progressively encompassing the hitherto excluded populat ion, and has become a nat ional priority, at the more narrower level, since the level of financial exclusion is very high in this sector, drive to universal financial access, including SME finance, is no longer a policy choice but a compulsion. The Reserve Bank of India has intensified a number of measures and endorsed quant itat ive access targets over the last year to further financial inclusion. Let me very briefly touch upon a few of them. With an object ive of ensuring uniform progress in provision of banking services in all parts of the country, banks were advised to draw up a roadmap to provide banking services through a banking out let in every unbanked village having a populat ion of over 2,000 by March 2012. The Reserve Bank advised banks that such banking services need not necessarily be extended through a brick and mortar branch but could be provided also through any of the various forms of Informat ion and Communicat ion Technology (ICT) - based models, including Business Correspondents (BCs). A total of about 74,000 such unbanked villages have been ident ified and allot ted to various banks through State Level Bankers Commit tees (SLBCs). As at the end of September 2011, as reported by the State Level Bankers' Commit tees of various states / Union Territories, banking out lets have been opened in 42,079 villages across the various States in the country. This comprises of 1127 branches, 39998 business correspondents and 954 other modes like rural ATMs, mobile vans etc. To ensure enhanced credit flow to the sector, in terms of the recommendat ions of the Prime Minister's Task Force on Micro, Small and Medium Enterprises (MSMEs) (Chairman : Shri T. K. A. Nair, Principal Secretary, Government of India) const ituted by the Government of India, banks were advised to achieve a 20 per cent year-on-year growth in credit to micro and small enterprises; the allocat ion of 60% of the MSE advances to the micro enterprises is to be achieved in stages viz. 50% in the year 2010-11, 55% in the year 2011-12 and 60% in the year 2012-13 and achieve a 10% annual growth in number of micro enterprise accounts. The Reserve Bank is closely monitoring the achievement of targets by banks on a quarterly basis. The matter is followed up with the laggard banks to know their constraints and impress upon them the need to devise strategies to gear up the credit mechanism for the sector. Further, based on the Recommendat ions of the Working Group (Chairman : Shri V. K. Sharma, Execut ive Director, RBI) const ituted by the Reserve Bank of India to review the Credit Guarantee Scheme (CGS) of the Credit Guarantee Fund Trust for Micro and Small

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

127

Enterprises (CGTMSE), the limit for collateral free loans to the MSE has been increased from the present level of Rs.5 lakh to Rs.10 lakh and it has been made mandatory for banks. The Working Group has also made recommendat ions regarding increase in the extent of guarantee cover, absorpt ion of guarantee fees for the collateral free loans by CGTMSE subject to certain condit ions, simplificat ion of procedure for filing claims with CGTMSE and increasing awareness about the scheme. CGTMSE, which is implement ing agency for Credit Guarantee Scheme, has been advised to expedite implementat ion of the recommendat ions. The implementat ion of the Recommendat ions of the Working Group should result in enhanced usage of the Guarantee Scheme and facilitate increase in quality and quant ity of credit to the present ly included, as well as excluded, MSEs, leading eventually to sustainable inclusive growth. All Scheduled Commercial Banks have also been advised on May 4, 2009, to review and put in place MSE Loan policy, Restructuring / rehabilitat ion policy and Non-discretionary One Time Sett lement Scheme for recovery of non-performing loans duly approved by their Board of Directors. Banks were advised in December 2009 to give wide publicity to the Non-discret ionary One Time Sett lement Scheme for recovery of non-performing loans for the MSE sector by placing it on their bank's web-site and through other possible modes of disseminat ion. On the issue of alternate sources of credit , dedicated Exchange for MSMEs, market ing, technology up-gradat ion and infrastructure, the PM's Task Force has examined the issues and has made several recommendat ions to address the bot tlenecks. The implementat ion of the recommendat ions in a t ime bound manner are being monitored by the GOI. D. Role of Banks and Industry Associations in empowering MSMEs Role of banks There has been a burst of entrepreneurship across the country, spanning rural, semi-urban and urban areas. This has to be nurtured and financed. It is only through growth of enterprises across all sizes that compet it ion will be fostered. As I ment ioned in the beginning, a micro entrepreneur of today will become a small entrepreneur and then a big entrepreneur of tomorrow, and might eventually well become a mult inational enterprise if given the comfort of financial support and capacity building. There will be failures and successes. Despite the risk, financing of first t ime entrepreneurs is a must for financial inclusion and growth. Banks will therefore, have to tone up their risk assessment and risk management capacit ies and provide for these failures as part of their risk management. Banks have to recognise the vast potent ial that exists in responsible lending to the MSE segment. The banks must deliver on their voluntary commitments enshrined in their Code of Commitment to their MSE borrowers. Banks have, no doubt, through the Code of Bank's Commitment to MSEs, voluntarily commit ted to their MSE customers to provide easy, speedy and t ransparent access to banking services in their day-to-day operat ion. In the last Standing Advisory Commit tee meet ing held on July 5, 2011, it was decided that the SCBs should understand the problem of the sector and devise strategies to gear up their credit mechanism structure so as to achieve the prescribed target of lending to the sector by the PM's Task Force. Sensit ivity on the issue to be developed at various hierarchical levels, such as, discussion of the issue in the Board meet ings, management level meet ings

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

128

once in three months. Branch manager's conference on financing to the micro sector to be held and the local NGOs, KVIC could be involved so as to appreciate the problems of the sector and flagging major issues to remove constraints / bot tlenecks in financing. The performance of branch managers in dealing with the sector should be made a criterion in their performance appraisal. With increasing compet it ion, introduction of new products and stringent regulatory environment, the role of banks needs to change from mere lenders to partners in business. There is a need for greater part icipat ion of banks in the affairs of their const ituents by convergence of credit services and non credit services. The bank's staff should be t rained and sensit ised through customised t raining programmes to meet the diverse needs of MSEs such as knowledge of markets, both domest ic and global, use of technology, etc. Banks should be act ively providing advisory and planning services and in fact hand-holding their clients through the set t ing-up stage and such services should be extended to all regardless of the size of their turnover. The banks should not only provide different iated products for MSMEs, but also provide counseling & guidance to new and established businesses, market ing support etc. In short , all banks, in fact , may develop innovat ive mechanism to provide not only finance and banking services to their MSME customers but also non credit related services to them under one roof at reasonable charges. For creat ing t ransparency and wider disseminat ion of services provided by banks for their MSME clients, it was decided in the 12th Standing Advisory Committee on MSMEs that all SCBs should set up a SME Portal on their website, where they could put in all informat ion/ products of their bank for their MSE clients, as well as informat ion on awareness programs etc organized by them. I am sure Central Bank of India and other banks would have taken a step in that direct ion. In order to expedite sanct ion and disbursement of loan to MSMEs a single window concept could be provided by Central Bank of India, if not already done. Loan facility to small units, say Micro enterprises, should be sanct ioned at the level of the branch. A Centralised Credit Processing Cell (CPC) for MSMEs could be introduced. These Cells may be ut ilized for single point appraisal, sanct ion, documentat ion, renewal and enhancement. The arrangement is expected to help in reduct ion in delay and mult iple queries, ut ilizat ion of the available talent in an opt imal fashion besides building reliable MIS, developing fair pract ices and easier t racking. Init ially, the CPCs may be set up at each Regional Office of the banks and subsequent ly in the recognized clusters. In case of micro and small enterprises simplified procedure of loan applicat ion / sanct ion should be followed, score based lending be done up to Rs.2 crores, working capital limits be given by projected turnover method, and term loans be sanct ioned as recommended above to prevent the burden of data collect ion, project report / project ions preparation for MSMEs. The disposal of applicat ions should be done in a t ime bound manner, which should be within the overall t ime limit prescribed by RBI. All banks should tap the available technology and set up Central Registrat ion of Loan Applicat ions. The same set up can be used by the borrower for t racking of the status of applicat ion on the internet on the basis of the receipt issued to him. The borrower may also be provided opt ion of t racking his applicat ion over telephone on the toll-free helpline. The same technological setup may

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

129

also be used for making online applications. Online applicat ions may be popularized and publicized by all branches. Lack of adequate capacity is the key feature, as regards micro, small and medium enterprises are concerned. In order to equip the MSMEs with the capacity to manage their businesses effect ively and efficient ly comprehensive guidance and t raining on set t ing up new units as well as providing continuous educat ion on different aspects of successful management of exist ing business enterprises must be provided. While the Rural Self Employment Training Inst itutes (RSETIs) are working in this direct ion there is a need to examine the impact of RSETIs. A scheme for ut ilizing NGOs to provide t raining services to t iny micro enterprises could be encouraged. Entrepreneurship development is important in view of its visible impact on wealth creat ion and employment generation. To facilitate and encourage this, skill building has been impressed upon by the Prime Minister's Task Force for MSMEs. Enterprise Development Centres (EDC) should be set up by the Central / State Governments with incubators to provide t raining not just for set ting up of new units but also to provide cont inuing educat ion on different aspects like product design, packaging, technology upgradat ion, financial management and market ing. Role of Associations All SLBC Convenor banks have been to review their inst itut ional arrangements for delivering credit to the MSME sector, especially in 388 clusters identified by United Nat ions Industrial Development Organisat ion (UNIDO) spread over 21 states in various parts of the country. The Central Bank of India has presence in 47 clusters identified by UNIDO and these branches have been designated as Specialised MSME Branch. The MSME Associat ions / Chambers may bring to the not ice of SLBC Convenor banks clusters were banking facilit ies are not available so that the same could be addressed. Specific issues concerning the sector were banks could play a role should also be brought to the not ice of the SLBC Convenor bank and the Empowered Commit tee on MSMEs by the Industry Associat ions for appropriate measures to be taken to solve the issues. As any other sickness, the need for t imely t reatment after ident ificat ion of sickness cannot be overemphasized in MSMEs. For viable units, t imely and effect ive rehabilitat ion by way of renegot iat ions of terms of loans, induct ion of fresh dose of funds, business restructuring, change of management etc. may become necessary. The process should not only be quick, efficient , cheap and fair to all stakeholders but also acceptable to and implementable by all, with necessary monitoring arrangements for implementat ion of the same. In case the unit is not found viable, recovery of the dues of lenders through a fair, efficient and swift legal mechanism should be the focus. The senior-level representat ives of MSME Associat ions in each State are members of the Empowered Commit tee set up by RBI at each of its Regional Offices, of which the SLBC convenor, representat ives of banks having predominant share in SME financing in the State, SIDBI, Director of Industries of the State Government etc. are also members. MSME Associat ions need to use this Forum not only for removing bot t lenecks in the smooth flow of credit to the sector but also for reviewing the accessibility of bank finance to more and more MSMEs but also highlight gaps if any in the at titude and skills at the bank branch level. As it is observed that rehabilitat ion of sick micro, small and medium enterprises could not be taken up due to non-availability of promoters' contribut ion in a large number of cases, we

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

130

have recommended to the GOI to set up a Rehabilitat ion Fund for rehabilitation of sick MSME enterprises. The Industry Associat ions have often been often represent ing on the delayed payments from large corporates. While banks have been advised to allocate a sub-limit in respect of large borrower accounts, for making payments to the MSE units against purchases from them but it is not possible for banks to force the large buyers to ut ilize the limit for making payments. This problem could be inst itut ionally tackled by factoring. In the recent meet ing of the Standing Advisory Committee to review credit flow to this sector, it was urged upon the Industry Associat ions to bring forward exemplary cases where big corporates have defaulted in making payments to MSE suppliers so that appropriate act ion, under the Act , could be taken by the Government of India. The MSME Associat ions and Chambers of Commerce have an important role to play in stepping up credit to this segment. Asymmetry of informat ion and lack of t ransparency and reliability of data has been a major concern for organizat ions dealing with MSMEs world over. The Associat ion need to therefore, proact ively engage themselves in organising workshops and training programmes for their members to enlighten them about cash flow cycles, various financial products, account ing pract ices, etc. In this regard, I would urge upon the other MSME Associat ions, Chambers of Commerce etc. to collaborate, in the same manner with banks, NIBM or any other t raining inst itute in the area of banking and finance, basic accountancy and informat ion technology for MSMEs. Role of MSMEs MSEs too, on their part , should understand that banks are responsible to their depositors and shareholders and, therefore, they, i.e. the MSEs, as customers of bank credit , have certain obligat ions to fulfill by way of repaying bank loans, maintaining proper books of accounts, submit t ing informat ion correct ly and more importantly sharing informat ion about financial problems when these arise so that they can work together with the bank in resolving these. On the cost of credit , while interest rates have been deregulated by Reserve Bank of India, my message to the MSME sector is that as interest costs are a very small fract ion of their operat ing costs, only approximately 4%, do not ask for low interest rates from the banking sector, and instead ask for credit at compet it ive rates. Credit has to be self-liquidat ing on a viable project and has a cost . In fact , what the small entrepreneurs need to focus on are four typical mistakes entrepreneurs make as right ly pointed out by Peter F. Drucker in his book ‘Managing in the Next Society'. Many new businesses start out with high promise but suddenly run into t rouble after a year or two. There are typical mistakes entrepreneurs make and all are foreseeable and avoidable. First ly, majority of successful new invent ions or products do not succeed in the market for which they were originally designed. So one has to keep opt ions open and not be dogmat ic about pushing a product in a market for which init ially designed or targeted. Success may lie elsewhere. Secondly, entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. It is the cash flow that matters. A business that grows fast devours cash. Constant investments have to be made to just keep even. Thirdly, when a business grows, it is necessary to create a management team. Young entrepreneurs often cannot afford to bring in an external

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

131

management team. So, it is necessary to ident ify the core competencies of the people working with you. This planning should take place well in advance. Last ly, when the business is a success the entrepreneur needs to ask what the business needs at this stage and whether he is concentrat ing on the right things. As successful entrepreneurs, they have gained experience and wisdom from their mistakes and going forward, it is necessary to ensure that the same mistakes are not repeated. E. Need for financial Infrastructure Establishing a solid financial infrastructure (credit registries / bureaus, collateral, and insolvency regimes) should be a priority in the financial development agenda, as it can lower the costs and risks to financial inst itut ions of serving MSMEs. Bankruptcy regimes regulate the efficient exit ing of the market , and make the resolut ion of mult iple creditors' conflict ing claims more orderly, result ing in more extensive opportunit ies for recovery by both the bankrupt ent ity and its creditors. Stronger creditor rights improve access to finance. Stronger creditor rights tend to have a higher number of loan accounts per adult populat ion and also higher rates of private credit to GDP. There is a need for adequate and reliable credit informat ion mechanism, such as an MSME credit bureau, that serves the needs of both the MSMEs' and the potential lenders'. Transparency shall facilitate them in obtaining finances, get t ing favourable contracts and improving their business prospects. A World Bank report stated that a good credit informat ion infrastructure can contribute significant ly towards assist ing MSMEs' access to capital. The report further highlighted that small firms with access to credit bureaus have a 40% chance of obtaining a loan, whereas firms without access to credit bureaus have only a 28% chance of receiving a loan. Therefore, significant opportunit ies exist to increase lending act ivit ies to MSMEs with the establishment of MSME credit bureaus. A sound financial informat ion infrastructure should improve t ransparency and disclosure for MSMEs in a cost-effect ive way, and help MSMEs build a credit history, which is crit ical in helping to address both challenges of informat ion asymmetry and cost to serve. Setting of Credit Information Companies has already been approved by Reserve Bank of India. F. Conclusion The recent past has been a challenging t ime for the banking sector in India. You, along with the entrepreneurs, have coped well with these challenges and have emerged stronger from a difficult phase. While the banking sector has responded well so far, there are several challenges that lie ahead. Our banking system needs to equip itself to deal with emerging challenges and be prepared to cash in on the opportunit ies unleashed by higher growth. In dealing with the needs of small and medium enterprises, banks have to look for new delivery mechanisms. They must economise on t ransact ion costs and provide bet ter access to the current ly under-served. To serve new rural credit needs, innovative channels for credit delivery will have to be found. The proud history of your bank should inspire you to seek greater heights of professional glory. In the end, I once again congratulate Central Bank of India and the SME Chamber in joint ly organizing this Conclave. I also convey my best wishes to every employee and entrepreneur customer of your bank on the eve of the conclusion of your Centenary Year, to your customers and well-wishers, and wish you a great future of growth and development. You have had a

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

132

glorious hundred years. You now have a great opportunity. May the next hundred be even bet ter! ----------------------------------------

Economic and Financial Developments in Andaman and Nicobar Islands

Mr. Deepak Mohanty I thank the Andaman Chamber of Commerce and Industry for invit ing me to address this dist inguished gathering. This picturesque Union Territory (UT) of Andaman & Nicobar Islands (ANI) in the Bay of Bengal covers 0.25 per cent of the national geographical area but accounts for only a fract ional share of 0.03 per cent of national populat ion. This explains why ANI has the lowest populat ion density of 46 per square kilometre as against 382 at the all-India level. The high literacy rate and per capita income make ANI as one of the leading UTs in India in terms of socio-economic developments. Further, the lushness of its landscape with bio-diversity and att ractive spots for eco-tourism make it a prime tourist att raction. Notwithstanding these social and geographical advantages, ANI faces several developmental challenges, especially in the aftermath of tsunami that wreaked large-scale damage in December 2004. Apart from natural and rich human resources, it is important to have a wellfunct ioning financial system for sustainable economic development. In recognit ion of this, the Reserve Bank has stepped up its efforts in recent years to enhance the penetrat ion of the formal financial sector and promote financial inclusion with a view to improving the wellbeing of our society. In this regards, the Reserve Bank has been undertaking special init iat ives for extending the outreach of banking facilit ies in states and union territories. Against this backdrop, I propose to briefly out line the economic and financial st ructure of the UT of ANI as well as highlight various financial inclusion init iatives taken by the Reserve Bank. In conclusion, I shall flag some issues that need policy attent ion. Background Andaman & Nicobar Islands, a Union Territory of India since 1956, is an archipelago of 572 islands (306 islands and 266 rocks) and has a geographic area of 8,249 square kilometre. Of these islands, only 38 have human habitat ion. The UT is bestowed with abundant green vegetat ion and marine wealth besides huge potent ial for culture fisheries. It covers the Indian subcont inent 's richest rain-forest and houses indigenous t ribes of Negroid and Mongoloid origins. The diversified mangroves have been included in the World Wildlife Fund (WWF) Global 200 list of the world's highest priority biodiversity 'hot spots'. Furthermore, these islands are included in the UNESCO-designated Biosphere Reserve / Zone (Indo-Malayan Bio-geographic Zone). According to the Forest Survey of India (2005), 87 per cent of the total geographical area of ANI is under forest cover and only about 50,000 hectare is available for cult ivat ion and

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

133

allied act ivit ies distributed among various islands. At present, the major crops being grown are paddy, coconut, arecanut, vegetables and fruits. ANI has an aggregate coast line of 1,912 kilometres, which is about one-fourth of the total coast line of India. The Exclusive Economic Zone (EEZ) around the islands encompasses around 0.6 million square kilometre which is 30 per cent of the EEZ of India. This provides a great opportunity for development of fisheries and other marine resources. Social Indicators As per the Census 2011, the total populat ion of ANI registered a decennial growth of 6.7 per cent with a total populat ion of about 3.80 lakh. ANI consists of three districts, viz., South Andaman district , North and Middle Andaman district and Nicobar district . Over 88 per cent population of the UT lives in the first two districts of which 37 per cent live in urban areas. Nicobar district does not have any urban area. While the sex rat io in North and Middle Andaman and South Andaman districts has increased to 925 and 874, respect ively, in 2011 from 884 and 824 in 2001, the sex ratio of Nicobar district has decreased to 778 in 2011 from 857 in 2001. The populat ion density in ANI has increased from 43 per square kilometre in 2001 to 46 per square kilometre in 2011. The literacy rate in the Islands was high at 86.3 per cent in 2011 as compared with 74.0 per cent at the all-India level (Table 1). Table 1 Andaman and Nicobar Islands : Select Socio-Economic Indicators

Items Unit

Andaman & Nicobar Islands

All-India

1 2

Geographical Area Sq. kms. 8,249 32,87,263

Populat ion In Lakh 3.8 12,102

Per Capita Income (in 2009-10 at 2004-05 prices)

Rupees 54,830 33,731

Density of Populat ion Per sq. km. 46 382

Decennial Growth Rate of Populat ion (2001-2011) Per cent 6.7 17.6

Sex Rat io Females per 1000 Males 878 940

Literacy Rate Per cent 86.3 74.0

Source : Census of India, 2011. Macroeconomic Structure The UT of ANI has significant potent ial for growth given its natural resource endowment. However, the comparat ive isolat ion of the islands from the mainland, scattered islands, difficult communicat ion system, and heavy reliance on the government for supply of inputs and smaller base of local market are the major constraints in achieving rapid growth.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

134

In line with the nat ional economy, during the last decade, the economy of ANI has undergone significant structural t ransformat ion. The dominance of primary sector has declined and the share of the tert iary sector has increased. The reduct ion in the share of primary sector could part ly be att ributable to reduct ion in cut t ing of forest t imber as per the decision of the Supreme Court . Further, there was reduction of agricultural produce due to submerging of land in the wake of the tsunami. The increase in the share of services sector is at t ributable to enhanced construct ion act ivit ies due to rehabilitat ion measures and increased government expenditure in the post-tsunami period. The share of industrial sector, however, remained more or less stagnant. As per the available informat ion from the Central Stat istical Office (CSO), in 2009-10 the per capita income (NSDP) of ANI was over 62 per cent higher than all-India per capita income. However, during 2009-10, the growth in NSDP of ANI decelerated to 2.7 per cent mainly due to the sharp decline in the growth of the industrial and agriculture sectors. Notwithstanding this decelerat ion in growth, the average annual growth rate improved during the second half of the 2000s to almost 10 per cent from 6 per cent in the first half. The average growth of NSDP of ANI generally remained higher than that of the all-India NDP during the period 2005-10 (Chart 1). Chart 1

The increase in the average growth of NSDP of ANI during 2005-10 was mainly driven by industrial and services sector. The industrial sector made a sharp recovery from a low growth rate of 1.5 per cent during the first half of the 2000s to 12.4 per cent in the second half of the decade. However, it is observed that the growth rate in this sector has remained highly volat ile during the ent ire decade. The agriculture sector witnessed a turnaround from negat ive growth during 2000-05 to a growth rate of 3.7 per cent during 2005-10 (Table 2).

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

135

Table 2 Sectoral Net Domestic Product (At 2004-05 Prices) (In per cent)

Sectors

Growth Rate Share to NSDP

Average Average 2009-10

Average Average 2009-10 2000-05 2005-10 2000-05 2005-10

I. Agriculture and Allied Activities

-3.2 3.7 -6.3 22.6 11.8 11.0 (15.2)

of which :

Agriculture 2.2 -0.4 -11.6 16.2 8.3 7.2

II. Industry 1.5 12.4 -7.4 2.5 2.7 2.6 (16.5)

of which :

(i) Mining & quarrying

-24.9 35.0 -7.7 1.1 0.6 0.5

(ii) Manufacturing -2.0 12.2 39.3 1.2 0.8 1.0

(iii) Electricity, gas and water supply

30.9 20.4 -29.9 0.8 1.3 1.1

III. Services 9.4 11.1 4.3 74.8 85.5 86.4 (68.3)

of which :

(i) Construct ion 38.5 19.4 40.8 14 31.7 33.2

(ii) Transport , storage & communicat ion

2.7 7.9 -13.0 17.2 14.7 13.7

(iii) Trade, hotels and restaurants

5.0 11.5 33.2 10.0 7.6 8.3

IV. State Domestic Product

6.2 9.9 2.7 100.0 100.0 100.0

Memo Item :

All India NDP Growth (%) 7.6

State per capita Income ( ) 54,830

All India Per Capita NNI ( ) 33,731

Note : Figure in brackets denote shares of the different sectors in NDP at the all-India level.

Source : Central Stat ist ics Office. Drivers of Growth Keeping with the overall trend in the country, the economic act ivity in the UT is dominated by the tertiary sector and its share has been cont inuously rising. The share of the primary sector has been declining and the share of the secondary sector in NSDP is

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

136

stat ic at around 3 per cent . There is hardly any manufacturing act ivity in the UT which is most ly concentrated in wood processing, and with the present restrict ions on the exploitat ion of forests has led this act ivity to stagnate. Within the tert iary sector, construct ion act ivit ies, t ransport, storage and communicat ion and public administrat ion have been the major drivers of growth. Agriculture The average rainfall in the islands is very high and spread over eight months during April-November each year which produces a humid tropical climate. The agro-climat ic condit ion in these islands is suitable for cult ivat ion of plantat ion crops like coconut, arecanut, fruits like banana, mango, pineapple, guava, jackfruit and spice like clove, nutmeg and pepper. The soil has low water retent ion capacity. Out of a total reported geographical area of 8,24,900 hectares in 2009-10, the total cropped area in the Islands stood at 16,535 hectares (Table 3). Table 3 Land Utilisation Pattern during 2009-10

Type of Land Area in Hectares

Total Geographical Area 8,24,900

Forest Area 7,17,069

Total Cropped area 16,535

Net area sown 14,710

Source : Economic Survey of A & N Islands, Directorate of Economics and Stat ist ics Among the major crops, while the product ion of paddy has increased, the yield has gone down. The product ion of coconut, which covers maximum area under product ion, remained stagnant. Performances of other plantat ion crops were mixed. According to Agriculture Census 2005-06, the number of operat ional holdings as well as area have increased primarily for the holding size-class of less than 1 hectare and to a lesser extent for holding size 1 to 2 hectares. Mainly inst itut ional land falls in the 10 plus holding class. The average size of operat ional holdings has also decreased from 2 hectare in 2000-01 to 1.88 hectare in 2005-06 which indicate the increasing fragmentat ion of land holdings in the UT (Table 4). Table 4 Number, Area and Size of Operational Holdings in ANI

Size Class (Ha.)

Agricultural Census 2000-01 Agricultural Census 2005-06

No. of Holding

Area of Holding

Average Size

No. of Holding

Area of Holding

Average Size

Marginal 3656 1431 0.39 4823 2140.64 0.44

(Below 1.0) (32.2) (6.3) (41.6) (9.8)

Small 2686 3694 1.38 2118 3200.94 1.51

(1.0-2.0) (23.7) (16.3) (18.3) (14.7)

Semi- 3254 8224 2.53 2953 7793.21 2.64

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

137

Medium

(2.0-4.0) (28.7) (36.2) (25.5) (35.7)

Medium 1711 7374 4.31 1656 7199.58 4.35

(4.0-10.0) (15.1) (32.5) (14.3) (33.0)

Large 42 1965 46.79 40 1511.4 37.79

(10.0 & Above)

(0.4) (8.7) (0.3) (6.9)

Total (All Sizes)

11349 22688 2.00 11590 21845.77 1.88

Note : Figures in brackets indicate percentage share. Industry The absence of a sizeable local market for manufactured goods and the need to bring much of the raw materials from the mainland are considered the main impediments in the development of industries. Therefore, large and medium scale industrial act ivity is absent in ANI. The industrial base of ANI consists mainly of small and t iny industries. The industries in the region are mainly t imber and agro-based. The recent years have seen a decline in industrial output owing to closure of wood-based industrial units. There are 1,961 registered small-scale industrial (SSI) units in the Union Territory as at end-March 2010 (Table 5). Table 5 Industrial Scenario of Andaman and Nicobar Islands Type / Item March 2010

Large / Medium-Scale Industries -

Small-Scale Industries 1,961

Industrial Centres 14

Industrial Estate 8

Employment 9,106

Investment (in lakhs) 2,345

Product ion (in lakhs) 18,067

Source : Department of Industries, A&N Islands. Tourism The Andaman & Nicobar Islands have an unique combinat ion of sprawling beaches, rising hinterland and dense equatorial forests. More than 50 per cent of the forest area is Tribal Reserves, Nat ional Parks and Wildlife sanctuaries. Any development act ivity in the islands including tourism has to be sensit ive to ecological fragility. The key challenge facing the growth of tourism in ANI is connect ivity and the commensurate infrastructure to ensure bet ter accessibility. In this context, there is considerable scope for public-private partnership in sustainable development of tourism in the region. In recent years, the private sector has increased its role in providing t ransport services, theatres, restaurants

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

138

and shops. The number of units as well as employment provided by the private sector has increased over t ime. This trend needs to be reinforced. Infrastructure Given the geographical and topographical peculiarit ies of these islands, including separat ion by sea over great distances, there is no single power-grid for all the electrified islands but several diesel generator sets cater independent ly to the power requirements of an area / island. At present, ANI faces significant power shortage. Due to a steady rise in populat ion the demand for inter-island ferrying of goods and movement of people has become important . Lack of adequate t ransport facilit ies is a serious bot t leneck in the economic development of the islands. Further opening up of air traffic could give a boost to t rade and tourism. Fiscal Scenario As Andaman and Nicobar Islands is a Union Territory (UT) without legislature, all allocat ions for receipts and expenditure are made from the Union Budget. The UT's primary source of revenue emanates from non-tax receipts, which constitutes more than 80 per cent of revenue receipts. Non-tax revenues have been steadily increasing in recent years. On an average, total revenue receipts to GSDP rat io was around 4.7 per cent during 2007-12. The tax to GSDP rat io in ANI was less than 1 per cent which was far below the all-India average of 5 per cent for all states. Revenue expenditure to GSDP rat io increased mainly on account of the Sixth Pay Commission award. However, capital out lay to GSDP rat io has declined (Table 6). Table 6 Receipts and Expenditure ( Crore)

Item 2007-08 (RE) 2008-09 (RE) 2009-10 (RE) 2010-11 (RE) 2011-12 (BE)

Tax Revenue 21.4 (0.7)

26.0 (0.7)

27.0 (0.7)

36.0 (0.8)

38.0 (0.8)

Non-Tax Revenue 118.6 (4.0)

138.0 (4.0)

146.0 (3.8)

179.0 (4.1)

197.0 (3.9)

Total Revenue 140.0 (4.7)

164.0 (4.7)

173.0 (4.5 )

215.0 (4.9)

235.0 (4.7)

Revenue Expenditure 1141.0 (38.2)

1480.0 (42.5)

1799.0 (46.8)

1783.0 (40.4)

2009.0 (40.0)

Capital Expenditure 814.0 (27.2)

1136.0 (32.7)

921.0 (24.0)

368.0 (8.3)

599.0 (11.9)

Total Expenditure 1955.0 (65.4)

2616.0 (75.2)

20721.0 (70.8)

2151.0 (48.8)

2609.0 (51.9)

Note :

1. Figures in parentheses are percentages to GSDP.

2. GSDP for 2010-11 and 2011-12 are est imated as per past t rends.

Source :

1. Budget Documents of Union Government.

2. CSO for GSDP data upto 2009-10.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

139

Financial Developments It is important to have a well-funct ioning financial system for sustainable economic development. While the Reserve Bank has been act ively engaged in the development of the financial sector, it has stepped up its efforts in recent years to enhance the penetrat ion of the formal financial sector and promote financial inclusion with a view to improving the wellbeing of our society. Let me first broadly out line the financial fabric of ANI. There was a gradual improvement of banking penetrat ion in ANI in recent years. This is evident from the fact that the average population per bank branch improved to 11,000 at end-June 2010 from 13,000 at end-June 2002. The banking network is largely dominated to public sector banks. The recent t rend in the growth rate of deposits in ANI was lower than the corresponding growth rate recorded at all-India level. The credit deposit (C-D) rat io in ANI at 37.6 per cent at end-December 2010 was significant ly lower than the rat io of 76.7 per cent at the all-India level (Chart 2 and Table 7). Chart 2 Historical Trends in CD Ratio

Table 7 C-D Ratio by Population Group

Population Group Dec-02 Dec-06 Dec-09 Dec-10 Dec-02 Dec-06 Dec-09 Dec-10

Andaman and Nicobar India

Rural 23.1 26.0 40.2 39.7 41.5 58.0 57.3 58.5

Semi-urban 20.0 28.3 33.1 36.9 34.1 52.0 50.5 52.3

Urban - - - - 42.4 59.8 58.0 60.8

Metropolitan - - - - 80.0 89.6 83.1 90.7

Total 20.7 27.8 34.7 37.6 58.3 75.6 71.5 76.7 As at end-March 2010, almost 58.3 per cent of total priority sector advances were absorbed by small enterprises. Agriculture accounted for only 8.3 per cent of total priority sector advances during the same period. The occupat ional credit st ructure is dominated by personal loans, followed by advances to t rade and industry (Chart 3).

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

140

Chart 3 Occupational Credit

Financial Inclusion In the context of financial inclusion init iat ive taken by the Reserve Bank, the banks are being sensit ised to pursue the inclusive drive. It may be observed that the progress of banking in terms of the branch expansion was stagnant during the period 2007 to 2010 though there was an improvement in terms of deposits and credit expansion. Due to the recent init iatives taken by the Reserve Bank, the number of branches has increased from 37 in 2010 to 42 in 2011 (Chart 4). Chart 4 Progress of Banking in Andaman & Nicobar

Source : BSR, RBI. Further, in pursuance of the overall financial inclusion strategy, a total of 47 villages with populat ion over 1,000 were ident ified in the three districts of ANI. Of these, 17 villages have been ident ified in South Andaman, 21 in North and Middle Andaman and 9 in Nicobar. A total of 37,370 no-frill accounts have been opened up to end-June 2011 in ANI. As at end-March 2010, the total number of Kisan Credit Card (KCC) issued in ANI was 7,000 and the amount of loan sanct ioned under the scheme was 158 crore. As at end-June 2011 a total of 9.5 crore was disbursed to 1260 SHGs. Financial Inclusion Measures Financial inclusion is important for bringing the poor and under-privileged sect ions of the society within the banking fold and thereby generat ing and sustaining equitable growth.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

141

Let me now turn to the various measures init iated by the Reserve Bank for promot ing financial inclusion. First , the Reserve Bank for long has inst ituted a mechanism called 'priority sector lending' through which credit is channelised to certain preferred sectors, which, inter alia, include small-scale industry, small businesses and agriculture. In the post -reform period, the priority sector group has been expanded to include advances to retail t rade, educat ional loans, micro-finance and low-cost housing. This has helped in furthering the cause of financial inclusion. Second, the Union Finance Minister announced in the Budget 2010-11 that every village in the country with over 2000 populat ion must have access to banking services by March 2012. In order to operat ionalise this process, commercial banks have prepared financial inclusion plans which have been submit ted to the Reserve Bank. As brick-andmortar branches will not be viable in very small centres, the approach is to meet this challenge through the business correspondent (BC) model and by leveraging communicat ion technology. Under this model, banks appoint agents who provide basic banking services at the door-step of a client on behalf of the bank. Third, the Reserve Bank has asked banks to open no-frills accounts. These accounts have no or very low minimum balance requirement and have provisions for small loans by way of overdrafts. This is a very convenient account for small depositors, especially in rural areas. Fourth, a major impediment for a common person to open bank account is the 'Know Your Customer' (KYC) norm. The norm has been relaxed for small accounts, viz., deposits up to

50,000 and credit up to 1 lakh. A simple introduct ion by an exist ing account-holder in a bank should be adequate to open an account. In this regard, Aadhar, the Unique Ident ificat ion Number (UID) Project of the Central Government, which aims at providing a unique ID number for everyone in the country, will help the poor to establish their ident ity to meet the banks' KYC norms. Fifth, farmers can get credit from banks convenient ly through Kisan Credit Cards (KCCs) and General Purpose Credit Cards (GCCs). Sixth, financial literacy becomes crit ically important. While several banking facilit ies are available, a common person may not be aware of them. Hence, the Reserve Bank has init iated a 'Project Financial Literacy' with the object ive of disseminat ing informat ion regarding the central bank and general banking concepts to various target groups. Our 'Financial Educat ion' website link offers basics of banking, finance and central banking for children of all ages. Our website is also available in 13 languages. Finally, this is also a learning process for the Reserve Bank. We recognise that being responsible for banking, we must be sensit ive to the needs of a common person. Accordingly, our Governor, Dr. Subbarao init iated the outreach programme as a part of our Plat inum Jubilee celebrat ions. Under the outreach programme, the top management of the Reserve Bank visits at least one village in every state and union territory with state

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

142

government officials and commercial banks to give focused at tent ion on financial inclusion. This has been highly enriching experience for us to understand the ground realit ies. Accordingly, we have decided to continue these programmes. Policy Challenges First , the developmental activit ies pursued so far have been propelled by direct involvement of government in all areas of economic act ivit ies. However, there is a need for broad-based economic strategy with greater involvement of the private sector. Second, the limited size of the local market is a major constraint to growth. The UT should focus on a outward-looking policy of exports to the mainland in areas in which it has a natural advantage such as marine products, hort iculture and floriculture. Third, the islands have an exclusive economic zone (EEZ) which is about 30 per cent of the country's EEZ and endowed with unique marine habitat and coral diversity. However, this resource is not adequately tapped. There is a need to develop fishery for export to the mainland. This will not only boost the income of the UT but also significant ly reduce t ransport cost as current ly ships ferrying goods to the islands return empty to the mainland. Fourth, there is a need for renewed thrust on agriculture. Hort iculture, floriculture, plantation crops, medicinal plants and dye plants offer a lot of opportunit ies for the potent ial investors. Fifth, given the high level of literacy and strategic locat ion there is strong potent ial for development of informat ion technology. Sixth, tourism potent ial of the islands can be promoted through high-value lowvolume eco-tourism. This will need greater investment in tourism infrastructure. Seventh, the Great Nicobar Island is located centrally between Singapore / Colombo and just north of the sea t raffic route to South East Asia and beyond. This is an extremely busy route and substant ial part of the world's commercial t raffic flows through this area. Development of South Eastern t ip of Nicobar as a t rans-shipment port for container handling, bunkering and refuelling of international / nat ional ships passing through this route has great economic and strategic potential. Eighth, with the step-up in economic act ivity, the investment demand can be enhanced. The banks need to be more proact ive in support ing private investment and enterprise. This will help in improving the current low level of C-D rat io through greater penetrat ion of banking. Conclusion The comparat ive isolat ion of the Andaman and Nicobar islands from the mainland, scat tered landscape, difficult communicat ion system, heavy reliance on government departments for supply of inputs and smaller base of local market are the main impediments to the rapid growth of the economy. However, the UT of ANI has immense

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

143

potent ial for achieving higher growth aided mainly by extensive marine resources, high literacy rate, conducive work environment and strategic locat ion. In achieving this goal, government efforts need to be supplemented by private init iat ives where the banking sector has an important role to play. This will help in further improving the well-being of masses in the islands. ------------------ 1 Speech by Deepak Mohanty, Execut ive Director, Reserve Bank of India, delivered at Andaman Chamber of Commerce and Industry in Port Blair, on 22nd December 2011. The assistance provided by Dr. P. K. Nayak and Shri Suraj. S is acknowledged.

Short Term Cooperative Credit Structure and Financial Inclusion

Mr. V. K. Sharma Shri Charan Das Mahant, Hon'ble Minister of State for Agriculture & Food Processing, Government of India, Shri Gouri Shanker Bisen, Hon'ble Minister for Co-operat ion, Government of Madhya Pradesh, Shri Chandra Sekhar Sahu, Hon'ble Minister for Agriculture, Government of Chhatt isgarh, Dr. Chandra Pal Singh Yadav, President, Nat ional Cooperat ive Union of India, dist inguished invitees and guests, ladies and gent lemen. I indeed deem it an honour and a privilege to be addressing today this very august and dist inguished audience on issues, concerns and challenges that the rural cooperat ive credit st ructure faces at its current stage of evolut ion. As you may perhaps be aware, the United Nat ions has declared the year 2012 as the International Year of Cooperat ives and, to my mind, this is precisely what makes today's Central Zone Cooperat ive Conference, both contextually and topically, very relevant and it will culminate, I am sure, in most desired outcomes going forward ! And it will be no exaggerat ion to say that India has been among the pioneering nat ions in the matter of genesis, and democrat ic evolution, of agricultural and rural co-operatives, t ruly informed, and inspired, by the tenets and principles of cooperat ion. Given the extensive and widespread financial exclusion in the country, both the Government of India and the Reserve Bank, decided to put financial inclusion on the top of their policy and strategy agenda. As part of this veritable watershed policy and strategy init iative, the Government and the Reserve Bank enjoined upon Scheduled Commercial Banks and Regional Rural Banks to roll out, in a t ime-bound manner, Board-approved, Top-Management-owned, business-plan-integrated, mission-mode-driven and Government & RBI-monitored, BC-ICT-CBS (Business Correspondent - Informat ion & Communicat ion Technology - Core Banking Solut ion)-leveraged Financial Inclusion Plans for door-step delivery of a bouquet of basic financial services in the hitherto financially-excluded rural areas. But I must hasten here to add that the idea is not to compete with, but complement, rural and

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

144

agricultural cooperatives in their ever crit ical and central 'niche' role in delivering on financial inclusion ! I hardly need to belabour, before this learned and dist inguished audience, the point that , along its sojourn through t ime, the cooperat ive movement came to be bedevilled by some unfortunate developments undermining its vibrancy. To my mind, at the margin, this explains the imperative of a complementary role for commercial banks. But having said that , as regards the nat ional challenge of delivering, credibly and effect ively, on financial inclusion agenda, it would be very instruct ive to put in perspect ive the relative potent ial of the rural cooperat ive credit structure. Specifically, considering that compared to Commercial Banks and Regional Rural Banks (RRBs), which, between them, current ly account for 33000 rural branches, 33 State Cooperat ive Banks with 953 branches, 371 District Central Cooperat ive Banks (DCCBs) with 12858 branches and 1,09,000 Primary Agricultural Credit Societ ies (PACS), between them, account for a total of 1,22,590 service out lets, the penetrat ive outreach of the command area of the rural cooperat ive structure is simply formidable ! Indeed, it is precisely because of this formidable penetrat ive outreach of the rural cooperat ive structure that the Reserve Bank of India has not only allowed PACS to act as Business Correspondents of commercial banks but also allowed treatment of loans by commercial banks to farmers through PACS, Farmers' Service Societ ies (FSS) and Large-sized Adivasi Multipurpose Societ ies (LAMPS) as priority sector lending in the indirect finance category. Although under the Financial Inclusion Plan init iat ives, Commercial Banks and RRBs will, through both brick and mortar branches and business correspondents, provide banking out lets in around 3,50,000 villages by 2013, it is because of the huge potent ial and promise that the rural co-operat ive credit structure represents for financial inclusion that the Government and the Reserve Bank of India thought it fit to revive the financially haemorrhaged Short Term Cooperat ive Credit Structure (STCCS) by set t ing up the Vaidyanathan Committee and accept ing its comprehensive recommendat ions for implementat ion in a business like manner. Based on the recommendat ions of the Vaidyanathan Commit tee and after reaching consensus with Chief Ministers, Finance Ministers and Cooperat ion Ministers of States, Government of India decided to provide massive financial assistance (since revised to Rs.19,330 crores (Rs.193 Billion) from the originally est imated Rs.13,596 crores Rs.136 Billion) to the financially haemorrhaged Short Term Cooperat ive Credit Structure but also, only appropriately, made it condit ional upon rigorous and stringent compliance with, and progress on, pre-specified crit ical parameters like facilitat ing regulatory powers of the RBI, limit ing equity participation of State Governments in cooperat ive banks to 25%, limit ing the powers of State Governments to supersede the boards, removing State Government intervention in all financial and internal administrat ive matters, special audits of PACS, District Central Cooperat ive Banks (DCCBs), and State Cooperat ive Banks (SCBs), conduct of Statutory Audit by Chartered Accountants (CAs), t imely elect ion of Board of Directors, appointment / co-opt ion of professionally qualified Directors and appointment of Chief Execut ive Officers (CEOs) in accordance with the RBI-prescribed fit -and-proper criteria, t raining and Human Resources Development, computerizat ion, Common Accounting

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

145

System (CAS) and Management Information System (MIS), by amendment of State Co-operat ive Societ ies Acts and amendment of Rules and adopt ion of appropriate Bye-Laws. In this context , it is encouraging to note that 25 States have since signed the MoUs for implementat ion of the Revival Package. These are Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Chattisgarh, Gujarat , Haryana, Jammu & Kashmir, Jharkhand, Karnataka, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Orissa, Punjab, Rajasthan, Sikkim, Tamil Nadu, Tripura, Uttarakhand, Uttar Pradesh and West Bengal. Between them, they cover more than 96% of the STCCS units in the country. The financial assistance under the Package is released only on the implementat ion of legal and inst itut ional reforms. NABARD has, as on 31 October, 2011, has already released an amount of Rs.9002.98 crore (Rs.90 Billion) towards Government of India's share for recapitalisat ion of PACS in seventeen States while State Governments have released Rs.855.53 (Rs.8.5 Billion) crore as their share. It is also very encouraging to note that 21 States have amended their respect ive State Cooperat ive Societ ies Acts and these are Andhra Pradesh, Arunachal Pradesh, Bihar, Gujarat , Haryana, Karnataka, Jammu & Kashmir, Jharkhand, Madhya Pradesh, Maharashtra, Manipur, Mizoram, Meghalaya, Nagaland, Orissa, Rajasthan, Sikkim, Tamil Nadu, Tripura, Uttar Pradesh and West Bengal. The corner-stone of this realignment exercise was to overhaul and re-engineer governance and management in the rural co-operat ive credit structure with a view to prevent ing recurrence of such financial haemorrhaging. And, significant ly, to reinforce, and sustain, overhauled and re-engineered governance in such financially rejuvenated and renewed co-operat ive credit st ructure, effect ive and credible supervision and regulat ion is a sine qua non. As the dist inguished audience is aware, while NABARD supervises the co-operat ive credit inst itut ions, Reserve Bank regulates them. This supervisory and regulatory framework involves RBI framing and issuing regulatory instructions and guidelines and NABARD examining their actual compliance during inspect ion. Currently, these regulatory instructions and guidelines are scat tered across individual circulars containing them. The imperat ive of consolidat ing all the existing regulatory guidelines and instructions has long been felt both by NABARD and the supervised co-operat ive credit inst itutions. Accordingly, the Reserve Bank is in the process of consolidat ing all such instructions and guidelines in the form of a Master Circular and which, I assure this audience, will be in the public domain very soon. It will serve as a ready recokner for the rural co-operat ive inst itut ions facilitat ing their compliance with the regulatory instruct ions and guidelines in force. I would also take the present opportunity to share with you the recent decision to waive the signing of MoU as a pre-condit ion for opening of branches by State Co-operat ive Banks in the States which do not need the re-capitalisat ion assistance under the Revival Package, provided they comply with all other condit ions. The Committee on Financial Sector Assessment (Chairman : Dr. Rakesh Mohan and Co-Chairman : Shri Ashok Chawla) had recommended that rural co-operat ive banks, which fail to obtain licence by March 2012, should not be allowed to operate. Accordingly, it was

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

146

proposed in the Annual Policy Statement of April 2009 to work out a roadmap for licensing of unlicensed state and central co-operat ive banks. For this purpose, in consultat ion with Nat ional Bank for Agriculture and Rural Development (NABARD), revised guidelines on licensing of these banks were issued. All Regional Offices of RBI were advised to issue licences to banks, which meet the prescribed criteria. It is expected that a large number of co-operat ive banks will be licensed by 2012. The Revival Package based on Vaidyanathan Committee is under implementat ion which would also help the StCBs / CCBs to improve their financials and be eligible for licensing. In this context , it is important to note that as on 30th November 2011, out of 31 State Co-operat ive Banks (SCBs) and 371 District Central Co-operat ive Banks (DCCBs) in the country, 6 SCBs and 117 DCCBs were unlicensed compared to 17 SCBs, and 296 DCCBs, as on 31st March 2009. I take the present opportunity to share with this dist inguished audience the latest status of licensed and unlicensed StCBs and DCCBs in the four States of Chhatt isgarh, Madhya Pradesh, Uttarkhand and Uttar Pradesh which is as under :

Sl. No. Name of the State

Licensing position of State Co-op Bank

Licensing position of District Central Co-operative Banks

Total No. of DCCBs

No. of licensed DCCBs

No. of unlicensed DCCBs

1 Chhat isgarh Licensed 06 06 ---

2 Madhya Pradesh Licensed 38 27 11

3 Uttarakhand Unlicensed 10 09 01

4 Uttar Pradesh Licensed 50 20 30 Thus, while in Uttarakhand, the SCB is yet to be licensed, in the states of Chhat isgarh, Madhya Pradesh, Uttarakhand and Uttar Pradesh, out of 104 DCCBs, 42 DCCBs are yet to be licensed. As announced in the Annual Policy Statement of April, 2010, a study on well-run rural co-operat ives including Primary Agricultural Credit Co-operative Societ ies (PACS), Large Adivasi Multipurpose Co-operat ive Societ ies (LAMPS), Farmers Service Societ ies (FSS) and Thrift and Credit Co-operat ives was undertaken by the Reserve Bank in collaborat ion with NABARD and State Governments as part of its undivided policy focus on the 'niche' role of rural credit co-operat ives in financial inclusion. For the study, 208 well-run co-operat ives operat ing in 21 States were selected. Of these, 71 were operat ing under Parallel Self-Reliant Co-operat ive Societ ies Acts with the rest under respect ive State Co-operat ive Societ ies Acts. The broad object ives of the study as set out by the Reserve Bank were : a) To study the funct ioning of well-run thrift and rural credit co-operat ives, including PACS, LAMPS, FSS and other new financial co-operat ives, set up under the Parallel Self-Reliant Co-operat ive Societ ies Acts to assess their potent ial to contribute to financial inclusion and the local economy;

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

147

b) To study the member, borrower and depositor profiles, saving mobilizat ion and credit extended to tenant farmers, oral lessees and agricultural labourers; c) To study the quality of actual management and governance and external impediments that come in the way of good governance / management; d) To study and analyse the impact of funct ioning of such co-operat ives on the local economy / populace; e) To suggest measures necessary to effect ively encourage the emergence of many more such inst itut ions across the country, if the study indicated that they have a significant contribut ion to make to financial inclusion. The study was completed in November 2011 and after its due examinat ion, the Reserve Bank will take the findings and recommendat ions forward. We are at the threshold of the Second Green Revolut ion which envisages, and will entail, shift in focus and attent ion to pulses, fruits, vegetable, live-stock, fisheries, poult ry and hort iculture and raising their product ion and product ivity with a view to ensuring nat ional food security and sustainable high levels of growth. With these words, I conclude my address and wish today's Conference all success that it so very much deserves ! Thank you all so very much indeed. -----------------------

Legislative Reforms - Strengthening Banking Shri Anand Sinha

Just ice (Retd.) Shri B.N. Srikrishna, Chairman, Financial Sector Legislat ive Reforms Commission (FSLRC), Shri Swarup and Shri Malegam (members of FSLRC), Shri Yogesh Agarwal, Chairman, Pension Fund Regulatory and Development Authority (PFRDA), Shri Mudholkar and Shri Chikermane, and other delegates. It is an honour and privilege for me to address you today, on some of the key issues with regard to "Reforms in the Banking Sector" and I thank Financial Planning Standards Board of India for this opportunity. This Financial Planning Congress comes at a very opportune t ime when the far reaching exercise of rewrit ing financial laws is being undertaken by the FSLRC and I commend the organisers for their efforts in putt ing together this Congress. I. Introduction Empirical research shows that bet ter developed financial systems accelerate economic growth and shrink income inequality by disproport ionately increasing the earnings of lower income families2 i.e. enabling growth with equity, which is so vital for our country. A well developed financial system will require sound legislat ive framework because, legislat ion is the foundation on which inst itut ional frameworks stand. To be effect ive, legislat ion not only needs to be unambiguous and fair but also should be robust enough to address all the exist ing concerns while, at the same t ime, being flexible enough to accommodate the new needs on account of evolving environment. Role of legislat ion in the context of economic development in general and the financial sector in part icular, is an interest ing area of study. It has been argued that strong legal

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

148

systems foster development of sophist icated financial markets and intermediaries3, which enhances the economy's ability to manage risk and eventually lead to economic growth. Measures such as robust contract enforcement and disclosure discipline go a long way in strengthening the financial systems. Every legislat ion has a t ime dimension and its relevance has to be seen vis-a-vis this dimension. With the changing environment, pract ices and processes change, necessitat ing a review of extant legislat ions. This holds all the more t rue for an area like financial system where changes are rapid and frequent. The dynamic nature of legislat ion was well art iculated when Aristot le said "Even when laws have been writ ten down, they ought not always to remain unaltered". India is said to be one the most over-legislated countries. We have numerous Acts and regulat ions, some of which date back decades. As t imes have changed quite significant ly since they were enacted, there is an emphat ic need to update and fine tune them so as to enhance their relevance for the rapidly changing financial landscape. It is a welcome step that FSLRC has been const ituted to look into and revise the exist ing financial legislat ion. In this context , the role of this Congress is very important in facilitat ing deliberations. Financial sector policies comprise a set of policies, such as : - Prudent ial policies to ensure safety and soundness of the financial system (financial stability) - Regulatory and Supervisory policies - Depositor and Consumer protect ion policies - Financial Inclusion policies - Other policies for ensuring adequate supply of credit to economically important sectors i.e. SMEs, Infrastructure, etc. and - Market structure and Competit ion Prudent ial policies comprise macro prudent ial and micro prudent ial policies aimed at ensuring the safety and soundness of the financial system. Collectively, both macro and micro prudent ial policies ensure the stability of the financial system which would facilitate efficient allocat ion of resources to the real economy. While financial stability is a necessary condit ion to ensure other object ives of financial sector policies as well as for growth and macroeconomic stability, it is not a sufficient condit ion to at tain these object ives. Other financial sector policies will have to be implemented for balancing numerous considerat ions such as growth imperat ives, flow of credit to disadvantaged and preferred sectors, consumer protection, financial inclusion and equity, etc. At t imes, it becomes extremely challenging to balance these considerat ions and, if adequate care is not taken in designing and implement ing the other financial sector policies, financial stability may be adversely affected. Therefore, it is important that a set of sound financial sector policies (including prudent ial policies) backed by sound legislat ion must be adopted to deliver the various object ives - growth with equity in the backdrop of financial stability.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

149

II. Recent Amendments carried to various financial sector laws Before I delve into some of the key issues requiring legislat ive review, I list some of the enactments and amendments that have been made to the various Acts during the last decade to highlight the dynamic nature of legislat ion. i. Reserve Bank of India Act , 1934 was amended in 2006 to provide legality to certain OTC derivat ive t ransact ions and also to give explicit regulatory powers to Reserve Bank over derivat ives and money market instruments. ii. The Banking Regulat ion Act , 1949 was amended in 2007 for removing the lower limit prescribed in maintenance of Statutory Liquidity Ratio (SLR) by banks and conferring wide powers on RBI in st ipulat ing the SLR requirements for banks and to control liquidity in the market . iii. The State Bank of India Act, 1955 was amended in 2007 for enabling t ransfer of ownership from RBI to Government of India and again in 2010 to provide for enhancement of capital, issue of preference shares, raise capital by public issue or preferent ial allotment or private placement or rights issue; and to issue bonus shares to the exist ing shareholders, etc. iv. The State Bank of India (Subsidiary Banks) Act , 1959 was amended in 2007 to facilitate enhancement of capital, raise resources from the market and raise capital through rights issue. v. The Banking Companies (Acquisit ion and Transfer of Undertakings) Acts, 1970 and 1980 were amended in 2006 to enable nat ionalised banks to issue preference shares in accordance with the guidelines framed by the Reserve Bank and to raise capital by preferent ial allotment or private placement or public issue, with the approval of the Reserve Bank. vi. The Negot iable Instruments Act , 1881 was amended in 2002 to introduce the concepts of 'electronic cheque' and 'cheque truncat ion' by expanding the definit ion of 'cheque'. vii. The Securit ies Contracts (Regulat ion) Amendment Act , 2007 was passed with a view to providing a legal framework for enabling list ing and t rading of securit ised debt instruments, including mortgage backed debt. viii. The Government Securit ies Act, 2006 was enacted to consolidate and amend the laws relating to Government securit ies and its management by the RBI. The Act simplifies the procedure for set t lement of claims of legal representat ives, provides for admissibility of computerised informat ion as evidence, contains provisions for effect ively dealing with misuse of Statutory General Ledger (SGL) accounts and facilitates pledging and hypothecat ion of Government securit ies. ix. The Payment and Sett lement Systems Act , 2007 was enacted empowering the Reserve Bank to regulate and supervise payment and sett lement systems of the country and provides a legal basis for mult ilateral net t ing and set t lement finality. x. The Prevent ion of Money- Laundering Act , 2002 was enacted as a follow up to UN General Assembly resolut ion in 1998, calling for adopt ion of nat ional ant i-money laundering legislat ions and programmes by member states. The Act provides for prevent ing money laundering and connected act ivit ies, enables confiscat ion of proceeds of crime, set t ing up of agencies and mechanisms for co-ordinat ing measures for combat ing money laundering, etc. xi. The Foreign Contribut ion (Regulat ion) Act (FCRA), 2010 was enacted by repealing the erstwhile Foreign Contribut ion Regulation Act , 1976 mainly to rectify several deficiencies

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

150

found in the previous Act . The new Act covers the electronic media and organizat ions, other than polit ical part ies, apart from ent it ies in the prohibited list in FCRA, 1976. xii. The Credit Informat ion Companies (Regulat ion) Act, 2005 empowers the Reserve Bank to regulate the Credit Informat ion Companies (CIC) and to facilitate efficient distribut ion of credit and matters concerned or incidental to it . III. The Road Ahead : Legislative Reforms in the Banking Sector Multiple Acts- Need for Consolidation Banks are regulated and supervised under the Banking Regulat ion Act , 1949. Public Sector Banks viz., State Bank of India, State Bank of India subsidiary banks and Nat ionalized Banks which are const ituted under different statutes are governed by their respect ive statutes and by some of the provisions of the Banking Regulat ion Act . The provisions relat ing to the ownership and management of banking companies as contained in the Banking Regulat ion Act are not applicable to the public sector banks. Co-operat ive Banks are const ituted by the respect ive State Co-operat ive Societ ies Acts or by the Mult i-State Co-operat ive Societ ies Act and the provisions of Banking Regulat ion Act are made applicable to them with certain modificat ions. Since the origins of the banks have been historically different , they cont inue to be governed by the respect ive statutes as well as other general laws. Each of the statutes was crafted in a contemporaneous set t ing, reflect ing the needs and concerns of the t ime. Therefore, almost all the statutes were amended from t ime to t ime to reflect changes in circumstances and context prevailing at that t ime. There is a strong case for reviewing these legislat ions and recast ing them for a number of reasons. First , prudent ial regulat ions are ownership neutral. However, the fact that different banks are governed by different laws has resulted in an uneven playing field which needs to be addressed. For example, while amendments were carried out to enable SBI, SBI subsidiary banks and nat ionalised banks to issue preference shares, though at different points of t ime, banks in private sector cannot issue preference shares as the amendments to the BR Act is st ill to be carried out . Similarly, while bilateral net ting in the event of liquidat ion is admissible for private sector banks governed by the Companies Act and the normal bankruptcy laws, the posit ion in this regard for public sector banks, SBI and its subsidiaries is not clear in law, as liquidat ion, if at all, of such banks would be as per the Not ificat ion to be issued by the Government in this regard. Second, a single, harmonized and uniform legislat ion applicable to all banks will provide transparency, comprehensiveness and clarity and provide ease of regulat ion and supervision to the Reserve Bank. Third, there is also a need to sort out the conflicts and overlaps between the primary laws governing the banking sector and other applicable laws. For example, the Compet it ion Act , 2002 (as amended by the Compet it ion (Amendment) Act , 2007) is in conflict with the provisions of the Banking Regulat ion Act , SBI Act and other statutes dealing with the amalgamat ion of banks. Consolidat ion of banking sector laws and laying down of common regulatory framework for commercial banks are issues requiring serious considerat ion.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

151

Management of Banks Management of banking institut ions by fit and proper persons plays an important role in securing the safety of banks. While RBI has power, under certain circumstances, to remove the managerial and other persons from the banks and appoint addit ional directors, etc., these powers may not be effect ive in handling a situat ion where supersession of the Board is warranted. RBI, current ly, does not have the power to supersede the Board of Directors of a banking company. In the Banking Laws Amendment Bill, 2011 amendments are being proposed for conferring such a power on RBI, for being used with appropriate safeguards. With respect to public sector banks, by way of amendments, similar powers have been vested in the Central Government, which has the majority shareholding in those banks. The shareholding pat tern also plays a vital role with respect to the management of banks and, therefore, it is necessary that shareholders having sizeable holding should also be fit and proper. RBI has, by way of regulatory prescript ions, implemented an acknowledgement procedure. In the 2011 Bill, statutory provisions are being proposed for obtaining prior permission of RBI for acquiring 5% or more of the equity shares or vot ing rights in a banking company. At present, a deadlock situat ion arises if a group of persons acquires sizeable equity or vot ing rights in a bank without following the acknowledgement procedure. There is no statutory power for directing disgorgement of shares and as such, if any such acquisit ion takes place, it may result only in contravent ion in provisions of BR Act. The main object of prevent ing the management of a bank from being captured by persons who are not fit and proper for holding such sizeable interest will not be achieved. RBI should, therefore, have the power to direct , by order, at any t ime that persons who are not fit and proper to hold such equity or vot ing power in contravention of these provisions, shall not have vot ing power. The 2011 Bill proposes to confer such power on RBI. This will help prevent unscrupulous persons from exercising control over banks. Deposit Collection Activity Current ly, collect ion of deposits from members / shareholders is not t reated as acceptance of public deposits. This is a matter of serious concern, part icularly, with respect to Co-operative Societ ies. Deposits are accepted by enrolling members on tap and by collect ing nominal amounts from them, exposing such depositors to serious risks. Banking Regulat ion Act does not apply to such co-operat ive societ ies and they are outside the regulatory purview of the Reserve Bank. It is necessary to plug this important loophole. Unless deposits are received from members who have vot ing rights, the deposits have to be t reated as public deposits and the exempt ion from the provisions of Banking Regulat ion Act should not be made applicable. Every ent ity that accepts deposits from persons having no vot ing rights has to be t reated as deposit accept ing ent ity and should be regulated as such by RBI. RBI should have the discret ion to determine the level and intensity of regulat ion and supervision depending upon the risk to the system from such ent it ies. Financial Conglomerates In India, banks are ent it led to carry on certain financial act ivit ies under the bank subsidiary model. Some banks have formed subsidiaries to carry on securit ies and

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

152

insurance business. The performance of the subsidiaries affects the balance sheet of the bank. On account of varied act ivit ies carried on by the ent it ies in the group which fall within the regulatory jurisdict ion of mult iple regulators, the risk to the system as a whole posed by such financial conglomerates is difficult to assess. These raise systemic issues and RBI as the regulator of banks needs to be empowered to obtain informat ion, with respect to each of the ent it ies funct ioning under the umbrella of a bank. The 2011 Bill proposes to confer such powers on RBI to get informat ion with respect to such ent it ies. This ought to be pursued in the new legislative framework also. Non-operative Bank Holding Company The t radit ional theories of economies of scale and scope support bigger ent it ies. In India, we need bigger banks to finance our very large infrastructure needs and also large industrial projects. Thus, while there are advantages in growing big and handling mult iple act ivit ies, nobody knows where exact ly the t ipping point is, when the bigness of size starts becoming a disadvantage. The crisis has highlighted the downside of having 'Too Big to Fail' ent it ies. Very big and complex ent it ies pose supervisory issues to the regulators and pose serious systemic risks. So we need to ensure that structures are not complex and that there are effect ive resolut ion mechanisms to ensure orderly winding up of these systemically important ent it ies, in case of crisis. It has been suggested that a non-operative bank holding company structure may be useful to deal with financial conglomerates as this great ly mitigates the risks spilling over from other ent it ies in the Group. While the funct ional regulator of each subsidiary of the non-operat ive holding company may regulate and supervise the business of the subsidiary concerned, the non-operat ive holding company needs to be regulated on the lines of a bank and needs to be placed under the regulatory and supervisory control of RBI. Appropriate legislat ive measures are necessary for operat ionalising this model. Apart from the regulatory issues in the above model, there are other challenges to be addressed. One of them is related to placing public sector banks under such holding companies. Another is the impact of taxat ion on the t ransfer of shares of the subsidiaries to the holding company. Unless adequate tax relief is granted, it will be difficult for exist ing banks to come under the holding company structure. Stamp duty Issues In India, there are certain issues with respect to stamp duty on documents. One of the major hurdles facing the development of the securit isat ion market is the stamp duty structure. It can add up to a substant ial cost as there are different iated duty structures in different states. While some states have recognised the special nature of securit izat ion t ransact ions and reduced the stamp dut ies, other states st ill operate at stamp dut ies as high as 5% to 12% for transfer of secured receivables. Concerns about stamp dut ies have also been raised in the context of the proposed subsidiarisat ion of foreign banks. The broader object ive of proposed subsidiarisat ion of foreign banks is to promote financial stability in India and this requires harmonisat ion and simplificat ion of stamp duty structure across the country.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

153

Minimum Capital Requirements The minimum capital prescribed in the Banking Regulat ion Act for banks is too low and Reserve Bank is prescribing the minimum capital requirement in case of private sector banks from t ime to t ime (current ly banks should have a minimum networth of Rs.300 crores). Minimum capital requirements prescribed under the "Ownership and Governance" guidelines and that prescribed / being prescribed for new banks in private sector are way above the current provisions of the Act . It would, therefore, be more appropriate to empower Reserve Bank to st ipulate the capital requirements and other quant itat ive parameters from t ime to t ime, instead of prescribing quant itat ive limits in the respect ive Acts. Migration to IFRS As part of the efforts to ensure convergence of the Indian Account ing Standards (IAS) with the Internat ional Financial Report ing Standards (IFRS), the formats of financial statements will undergo changes consequent to the introduct ion of IFRS. Further, whenever banks introduce new types of capital instruments, etc. these will have to be appropriately incorporated in the format. Therefore, Reserve Bank should be empowered to prescribe the format of the balance sheet, profit and loss account, etc. given in Third Schedule of the B. R. Act . Bilateral Netting Issues Various banks had requested RBI to allow bilateral net ting of counterparty credit exposure, in respect of interest rate and foreign exchange derivat ives, and gold. The legal posit ion regarding bilateral net t ing is not unambiguously clear in case of banks established by special statutes [like SBI Act , Banking Companies (Acquisit ion and Transfer of Undertakings) Act , etc.]. Amendments to a large number of enactments part icularly in a synchronised manner may be pract ically difficult . Enact ing a single legislat ion which covers all aspects of banks' funct ioning, while possibly providing different ial legislative framework for corporate governance issues on account of ownership differences may make the legislat ive framework more efficient . Bank Resolution The significance of effect ive resolut ion mechanism for promot ing financial stability as well as consumer protect ion cannot be underest imated. The legal framework should address the resolut ion mechanism from a pract ical point of view and must have at least the following characteristics : * Early intervent ion before insolvency * Speed of intervent ion / resolut ion * Ability to t ransfer or merge operat ions * Effect ive write-down of shareholders' rights * Protect ion of on-going business In addit ion to banks, the resolut ion mechanism should address resolut ion of other Systemically Important Financial Inst itutions (SIFIs) also. Post crisis, globally, there have been init iat ives to strengthen the resolut ion framework of Financial Market Infrastructures (FMIs) and other ent it ies in the financial sector. The resolut ion mechanism should also include a framework for resolut ion of NBFCs and ent it ies operat ing payment

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

154

systems. Swift and simple procedure for quick resolut ion, part icularly, that of systemically important ent it ies - global and domest ic, is necessary. Under the evolving international framework it would be required of jurisdict ions, to have adequate resolut ion framework as per internat ional standards. The key att ributes of Effect ive Resolut ion Regimes were adopted by the Financial Stability Board (FSB) Plenary and endorsed by G-20 leaders at the Cannes Summit and these are an essent ial component of the package of policies to reduce the risks of moral hazard and the potent ial for systemic disrupt ion associated with Systemically Important Financial Inst itutions (SIFIs). This will require legislat ive changes and administrat ive actions. The powers of RBI for effect ive resolut ion of regulated ent it ies from this perspect ive need enhancement. Mergers Voluntary mergers and t ransfers help consolidat ion in financial sector and pave the way for stronger financial inst itut ions to rescue the weaker ones. Such voluntary measures, while saving the const ituents of weaker inst itut ions, provide business opportunity to the stronger ones to spread their presence in different geographies. The BR Act empowers RBI to sanct ion a scheme for voluntary amalgamation of banking companies. However, such a power is not available with respect to cooperative banks. Considering the challenges faced in quick resolut ion of failed cooperat ive banks, certain enabling provisions in the BR Act facilitat ing RBI to sanct ion a scheme for takeover of banking assets and liabilit ies of a cooperat ive bank by commercial banks would be desirable. Part ial merger of certain businesses or assets and liabilit ies of banks also may need to be examined. One of the issues that could complicate the resolut ion of banks through mergers and t ransfers due to the sensit ivity of the process is the applicability of compet it ion law. An enterprise proposing to enter into a combinat ion via a merger or an amalgamat ion is required to not ify the Compet it ion Commission, and the Commission has been allowed up to 210 days to decide on it before the default clause kicks in. The 2011 Bill t ries to address this issue. Consumer Protection and Globally Compatible Secrecy Laws For speedy redressal of consumer grievances, RBI has framed the Banking Ombudsman Scheme by statutory direct ions under the BR Act. The Scheme is working sat isfactorily. Secrecy of customer informat ion is a principle of common law which is pract iced in India also by banks, and recognized by courts. Statutory basis for this has to be provided, by clearly sett ing forth the except ions relevant to the present requirement of prevent ing money laundering and cross border financing of undesirable act ivit ies. The law should strike a balance between the privacy rights of the customer and the need to share crucial informat ion with law enforcement agencies and other regulators, both domest ic and foreign. In matters of crime and proceeds of crime, the larger public interest would outweigh the private interests of individuals. Appropriate amendments may have to be carried out in the BR Act to provide a statutory backing for the banking secrecy laws and the limits on the privacy of customers should be laid down.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

155

Protect ion is required in the law to the regulators with respect to the informat ion collected from the regulated ent it ies including its assessment and analysis made by the regulators or supervisors and the correspondence related to such informat ion. In larger public interest , the law should enable sharing of informat ion with other regulators, both domest ic and overseas, for mutual benefit . The recent crisis has demonstrated the need for such cooperat ion. The absence of specific protect ion to the informat ion held by the regulators whether collected from the regulated ent it ies or from other regulators impedes sharing of informat ion. Our laws have to be globally compat ible and specific exempt ion from disclosure needs to be provided in this regard. Disclosure of sensit ive informat ion could compromise the effect iveness of regulat ion and supervision. Further, unless the secrecy laws in our jurisdict ion are compat ible with global standards, it will not be possible to receive from, or share informat ion with, overseas regulators. Appropriate provisions may have to be inserted in the RBI Act and the BR Act in this regard. IV. Conclusion Financial sector is a very important segment of the economy and has direct bearing on growth and prosperity. Strong financial systems need strong legal systems which provide unambiguous and fair legislat ion. The financial system in India including banking, insurance, capital, taxat ion, etc. has many regulators, each having a separate mandate. This blend raises pert inent concerns. First , financial system is st ill characterised by considerable fragmentat ion of legislat ion, regulat ion and enforcement. Second, policy related frictions might arise from the diversity of different legislat ions and the overlapping of the regulatory jurisdict ions. Third, there might be a risk of legal arbitrage among financial jurisdict ions. A need has been cont inuously felt to rewrite and streamline the financial sector laws, rules and regulat ions and to bring them in harmony with the requirements of India's fast growing financial sector. The current legislat ions were drafted in the contemporaneous set t ing and have had to be amended from t ime to t ime to incorporate changes in the milieu. Enact ing new law or amending old law is a cont inuous process to remain aligned to changing circumstances. In the emerging scenario, the task of prevent ing financial risks has become more important and challenging. Amid global economic worries, this is an enormous task which, on completion, would immensely benefit the financial sector in India and economy at large. A sound legal framework may help deter imprudent risk-taking by financial inst itut ions and reduce systemic risks. Revision of banking sector laws should also be mot ivated by the recognit ion that the banking sector has been and remains a crit ical factor not only for accelerat ing India's growth but also for making it inclusive. Harmonising of financial sector legislat ions, rules and regulations has, therefore, become imperat ive. I have t ried to give my views from regulatory and financial stability perspect ive. I hope you all will benefit from today's discussions. Thank you. -----------------------------------

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

156

Financial Reporting in the context of Financial Stability : A Regulator's view on Some Accounting Issues

Mr. Anand Sinha Dr. Ashraf Nabhan Al Nabhani, Dean, College of Banking and Financial Studies, Mr. Kishore Rabi, Chairman, ICAI Muscat Chapter and other delegates. It gives me great pleasure to address this august gathering organised by the Muscat Chapter of the Inst itute of Chartered Accountants of India (ICAI). I am given to understand that the Muscat Chapter, the 19th overseas chapter of the ICAI is amongst the most active chapters of the ICAI and has been engaging in capacity building for Omani accountants and impart ing professional educat ion in the Sultanate. A key init iat ive is its t ie up with the College of Banking and Financial Studies (CBFS) in assist ing them with their account ing curriculum. This Chapter's engagement with the College of Banking and Financial Studies is just one of the many ways in which the banking community and regulators can benefit from the technical knowledge base of the account ing community. The history of the Indian account ing profession can be t raced back to the enactment of the Companies Act in 1857 that introduced for the first t ime the concept of preparing balance sheet on a voluntary basis by companies. We have come a long way since then and the ICAI, established in 1949 by an act of Parliament, is today the world's second largest professional account ing body after the American Inst itute of Cert ified Public Accountants (AICPA), with over 180,000 members. Over the six decades of its existence, it has played a vital role in nat ion building through its services. In line with its motto of "Ya Aeshu Suptaeshu Jagrut i" (a person who is awake amongst those that sleep) and its emblem of the Garuda, the "vahana" of Lord Vishnu, the Inst itute is playing a key role in keeping a watchful eye on financial statements, ensuring that they represent a t rue and fair view of the state of affairs. As regulators and supervisors of India's banking system, the Reserve Bank of India (RBI) places a significant amount of reliance on inputs provided to us by your profession through the statutory audit and long form audit reports of banks as well as our annual interactions with the statutory auditors of commercial banks. We also have periodic interactions with senior members of the Inst itute at various fora and take a keen interest in the latest developments in this field. RBI has closely worked with the Inst itute on account ing issues in the banking sector. In October 2001, the RBI set up a Working Group under the Chairmanship of Shri N. D. Gupta the then President of the Institute to ident ify gaps in compliance with account ing standards issued by ICAI and also recommend steps to eliminate such gaps. Based on the recommendat ions of the commit tee, landmark guidelines on compliance with account ing standards were issued to banks in March 2003 to ensure strict compliance with account ing standards and avoid qualifications in financial statements. RBI had formed a commit tee in 2000 to study the observance of internat ional standards and codes in India in various individual areas of the overall financial system. With respect

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

157

to Indian account ing and audit ing standards, it was found that there were several gaps when compared to the internat ional standards and recommendat ions were made to reduce this gap. I am happy to note that the ICAI has since issued many account ing standards, which have substantially reduced this gap. While on the subject of RBI's insistence on adherence with internat ional best pract ices and our ongoing benchmarking against these standards, I would like to draw your at tention to the Report on Observance of Standards and Codes (ROSC), a joint init iat ive between the IMF and World Bank in 2004 which among others, reviewed the strengths and weaknesses of the corporate accounting and audit ing pract ices in India. Some of the major recommendat ions were to bridge the gaps between Internat ional Financial Report ing Standards (IFRSs) and Indian account ing standards, strengthening the monitoring and enforcement mechanism, introducing pract ices to ensure compliance with code of ethics by auditors of public interest ent it ies and taking steps for improving professional educat ion and t raining arrangements. India also part icipated in the Financial Sector Self Assessment Programme (FSAP), a joint init iat ive of the Internat ional Monetary Fund and the World Bank that attempts to assess the stability and resilience of financial systems in member countries. Based on India's experience in the FSAP and subsequent self-assessments, the Government of India, in consultat ion with the Reserve Bank, const ituted the Committee on Financial Sector Assessment (CFSA) to undertake a comprehensive self assessment of India's financial sector, the report of which was submit ted in 2009. The CFSA made an assessment of Indian account ing and auditing standards and came up with some key recommendat ions that proved crit ical for the Inst itute. The report , inter-alia, suggested convergence with IFRS at the earliest and creat ing awareness among auditors and others involved in the process to ensure that systems and procedures are in place to comply with the IFRSs. Another important recommendat ion is that India should contribute significantly in the agenda sett ing of the IASB and its technical output . The challenge before the Inst itute is to take this up in right earnest by ident ifying persons with requisite competence to part icipate in global forums, the benefits of which will flow to the profession at large. Accounting issues in the context of the Financial Crisis The global financial crisis and the consequences thereof exposed some weaknesses in the account ing and audit ing aspects. During the course of my presentat ion here I would like to place before you some issues relat ing to financial report ing in the context of financial stability. There was widespread crit icism that certain account ing pract ices either contributed to or at the very least , exacerbated the severity of the crisis, in view of its failure to deal with illiquid markets and distressed sales. The G20 Working Group on "Enhancing Sound Regulat ion and Strengthening Transparency", in which I had an occasion to work act ively, recommended that account ing standard set ters should strengthen accounting recognit ion of loan loss provisions by considering alternat ive approaches for recognizing and measuring loan losses that incorporate a broader range of available credit

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

158

informat ion. Accounting standards set ters and prudent ial supervisors were advised to work together to ident ify solut ions that are consistent with the complementary object ives of promot ing the stability of the financial sector and of providing t ransparency of economic results in financial reports. G 20 report also recommended that the IASB should enhance its efforts to facilitate the global convergence towards a single set of high-quality account ing standards and also opined that account ing standard set ters should accelerate efforts to reduce the complexity of account ing standards for financial instruments and enhance presentat ion standards. These recommendat ions together with the recognition within the account ing and audit profession that there were certain drawbacks in the current standards has necessitated large scale revision of various standards especially those relat ing to financial instruments and Fair Value Account ing. During the global financial crisis, the Internat ional Account ing Standards Board (IASB) and the US Financial Account ing Standards Board (FASB) established a Financial Crisis Advisory Group comprising senior leaders with broad internat ional experience to address account ing issues emerging from the global crisis. The key issues ident ified by the FCAG involved : * the difficulty of applying fair value ("mark to-market") account ing in illiquid markets; * the delayed recognit ion of losses associated with loans, structured credit products, and other financial instruments by banks, insurance companies and other financial inst itut ions; * issues surrounding the broad range of off-balance sheet financing structures, especially in the US; and * the extraordinary complexity of accounting standards for financial instruments, including mult iple approaches to recognizing asset impairment. Some of these weaknesses also highlighted areas in which IFRS and US generally accepted account ing principles (US GAAP) diverged. While these aspects were ident ified by account ing professionals, regulators expressed concerns on systemic risk arising out of procyclicality in account ing standards. Procyclicality in policy making refers to financial developments and policies that add momentum to the economic cycle and have an amplifying effect on economic fluctuat ions. The procyclicality embodied in capital regulat ion and accounting standards was among the ident ified causes underlying the global financial crisis. The in-built procyclicality amplified business cycles, affect ing both the degree of credit expansion in benign conditions and the degree of credit contract ion in the downturn. The requirement to use fair value account ing for assets and liabilit ies in illiquid markets has serious disadvantages from the point of view of regulators, and of systemic financial risk. A mark-to-market approach i.e. fair value account ing contributes to excessive leverage during boom periods and leads to excessive write-downs in busts. Under such account ing irrat ional exuberance in asset prices can feed through to high published profits and perhaps bonuses, encouraging more irrat ional exuberance in a self-reinforcing fashion : when markets turn down, it can equally drive irrat ional despair. If all market part icipants at tempt simultaneously to liquidate posit ions, markets which were previously reasonably liquid will also become illiquid, and realisable values may, for all banks, be significant ly lower than the published accounts suggested.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

159

Volat ility in financial statements is also a concern for the regulator. Fair value account ing introduces volatility into financial statements through the following channels: * Volat ility on account of changes in underlying economic parameters. For instance if interest rates increase, the fair value of bonds reduces and vice versa. * Volat ility produced due to measurement errors and / or changing views regarding the economic prospects through the business cycle. Fair value measures generally represent the present value of a stream of expected cash flows. Very often the determinat ion of expected cash flows involves stat ist ical techniques which may have some amount of est imat ion errors as well as other errors. * Volat ility arising on account of using a mixed measurement model i.e. one that uses fair value for some categories of assets and liabilit ies and amort ised cost for others thereby reducing the nett ing effects that a full fair valuat ion of assets and liabilit ies would produce. Another area which has received focus is the delayed recognit ion of impaired assets. Account ing standards today rely more on an "incurred loss" model to recognise losses where an event such as non-payment of dues for 90 days t riggers the provisioning. Consequent ly, there is an overstatement of interest income in the early life of loan. When a series of defaults during a downturn t rigger provisioning requirements, there is no stock of provisions available to absorb credit losses. These losses direct ly impact the income statement of the bank and constrain further bank lending, thus exacerbat ing the procyclicality. This cycle-neutral approach to provisioning failed to account for the excessive deteriorat ion in loan port folio associated with excessive credit growth. There is broad international agreement on the need to have provisioning based instead on an "expected loss" basis where life t ime losses are recognised early, i.e. provisions are increased in good t imes for the possibility that the environment may deteriorate in future. However, the implementat ion of such a model has its own difficult ies with regard to the est imat ion of expected losses and the Internat ional Account ing Standards Board (IASB) and the US Federal Account ing Standards Board (FASB) are st ill engaged in deliberat ions on the modalit ies of implement ing such a model. The IASB has issued exposure drafts with an expected loss model which at tempts to mit igate these shortcomings by recognizing losses and making provisions thereof earlier during the life of the loan. However, present ly, IASB and FASB's deliberat ions revolve around a three bucket approach to capture the pat tern of deteriorat ion in credit quality. Under this model, loans are classified into three categories depending upon the possibility of expected losses. Loans, where there are no events with a direct relat ion to possible future defaults, are placed in the first bucket. The second and third buckets are used for loans affected by events that have a relat ionship to possible future defaults such as a drop in housing prices i.e. a t rigger event to which the default possibility of a loan / port folio of loans is sensit ive to has occurred. In the second bucket, expected credit losses are not ident ifiable for individual loans whereas in the third bucket expected credit losses are individually ident ifiable. The provisioning requirements also differ according to the bucket. Whereas entit ies are expected to provide expected life t ime losses for the second and third buckets the proposed approach for the first bucket is to make provision for 12 month of expected losses though this is yet to be agreed upon. Since there is no direct

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

160

relat ionship to possible future defaults, lifet ime expected losses are not required to be recognised for loans placed in the first bucket. Further, the criteria and guidelines for t ransfer between categories are st ill at the discussion stage. Let me dwell upon some of the proactive measures init iated by RBI to mit igate the effect of procylicality in the Indian context . Recognising the procylicality caused by provisioning norms, the RBI has t ried to build buffers through provisioning requirements. * First ly, banks are required to maintain provisions on assets that are classified as standard and are not showing signs of impairment. Sector specific provisions requiring banks to provide more for standard assets in certain sensit ive sectors have also been prescribed. * Secondly, banks are required to classify accounts as NPA where there are inherent weaknesses observed in the account even if there are few credits recorded before balance sheet date to avoid NPA classificat ion. Banks are also required to put in place appropriate internal systems to eliminate the tendency to delay or postpone the ident ificat ion of NPAs, especially in respect of high value accounts. * Thirdly, in 2009, observing the trend in profits being made by banks, the Provisioning Coverage Rat io (PCR) requirement for banks was introduced to address apprehensions about asset quality due to exuberant lending during the boom phase. Banks were required to build up a PCR of 70% of gross NPAs by September 2010. PCR was intended to be an interim measure and it was hoped that it would be replaced by a forward-looking counter-cyclical provisioning methodology being developed by the Basel Commit tee on Banking Supervision (BCBS) and IASB. Since this is taking t ime, RBI is working on a methodology similar to Spanish dynamic provisioning framework as an interim measure. As regards PCR, it was decided to freeze the PCR with reference to the gross NPA posit ion in banks as on September 30, 2010, since in the absence of a calibrated methodology it would be difficult to allow banks to use the countercyclical provisions built up under PCR freely and there were certain design issues too,. The buffer (surplus of provisions over specific provisions) will be allowed to be used by banks for making specific provisions for NPAs during periods of system wide downturn, with the prior approval of RBI. The financial crisis also led to heavy crit icism of account ing rules that permit ted certain structured / special purpose ent it ies and exposure to remain off-balance sheet. A key concern with such instruments and vehicles is that they have a tendency to veil the risks off-balance sheet and a robust account ing framework that provides for the recognit ion and disclosure of these risks is a prerequisite to their int roduct ion. The IASB has t ried to rect ify the situat ion by introducing IFRS 10 on Consolidated Financial Statements while the FASB has also worked towards toughening off-balance sheet account ing rules. In India, the RBI has always followed a caut ious and gradualist approach towards complex exot ic financial products and has taken steps to reduce and contain the regulatory arbit rage between the banking and the shadow banking sectors (mainly the Non Banking Financial Companies i.e. NBFCs) by considerably upgrading the prudential rules for NBFCs. Overall account ing for financial instruments had become highly complex and rules based in the period leading up to the crisis and IASB's project to replace IAS 39 with IFRS 9 is a

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

161

welcome init iat ive. However, delays in finalising proposals relat ing to impairment and hedge account ing coupled with recent proposals to reopen classificat ion and measurement of financial assets are a cause of concern. IASB's classificat ion requirements for assets revolve around the business model approach whereas FASB's approach is based more on the characterist ics of the instrument. Further, FASB's approach may also entail more items in the balance sheet being carried at fair value. Implementation of IFRS in India The convergence to IFRS in India is a work-in-progress and I would like to dwell upon the implementat ion issues and challenges with part icular reference to the Indian banking system. As part of the G 20's efforts to evolve a single set of global high quality standards, the Ministry of Corporate Affairs (MCA), Government of India released a roadmap that provided for a gradual convergence to IFRS in a phased manner commencing from April 1, 2011. In terms of the road map, commercial banks in India are required to converge with IFRS with effect from account ing periods beginning April 1, 2013. While the MCA placed on its website thirty five IFRS converged Indian Account ing Standards (Ind AS) in 2011, it stated that the standards will be implemented after various issues including taxat ion are resolved. In order to address the implementat ion issues and facilitate formulat ion of operat ional guidelines to facilitate the IFRS convergence for the Indian banking system the RBI has formed a Working Group. Specific issues relat ing to (i) classificat ion and measurement of financial assets, (ii) classificat ion and measurement of financial liabilit ies and hedge account ing, (iii) amort ised cost and impairment, (iv)fair value measurement, (v) presentat ion, disclosure and balance sheet formats and (vi) derecognit ion, consolidat ion and residuary issues are being dealt with by the Working Group. With respect to the financial sector in India, there are special issues and challenges in view of the large scale revision of standards pertaining to financial instruments (IAS 39) which are of central importance to the banking system. IASB had indicated that the period 2009 to 2011 will be kept as a stable plat form by them to facilitate convergence by many countries during this period. However, the global financial turmoil and the consequences thereof in the account ing scenario necessitated large scale revision of various standards especially those relat ing to financial instruments and fair value account ing. As India at tempts to t ransit ion to IFRS, the biggest challenge to the banking sector which is of equal concern to us as regulators, is the lack of clarity and uncertainty regarding the finalisat ion of IFRS 9 : Financial Instruments (scheduled to replace IAS 39) and its convergence with US GAAP. One of the intent ions behind scheduling banks for a later convergence was to avoid having them first apply IAS 39 and immediately t ransit ion thereafter to its replacement viz. IFRS 9. Countries like Canada which have recently converged to IFRS found it easier on account of pre-exist ing standards being fairly well aligned with IAS 39, which is not the case in India. With the delay and uncertainty in finalisat ion of IFRS 9, the convergence process has become almost equal to chasing a fast moving target.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

162

The finalisat ion of impairment provisions of IFRS 9 at an early date is a crit ical issue which needs to be addressed by the IASB and FASB. Our apprehensions are that the current proposals contained in the exposure draft or the three bucket model for provisioning are difficult to implement and operat ionalise. Further, in countries like India, there may not be enough data available to apply the highly quant itat ive and stat ist ical techniques to implement a robust expected loss model to recognise impairment losses. Therefore, the Working Group has suggested through its comment let ter to the IASB, the need for a pract ical expedient that allows for a simpler rule based model specified by the regulator at least in the init ial years. We hope that the IASB will consider this while finalising the requirements on impairment. In a country like India, where financial markets are st ill developing and are not as deep and liquid as in developed countries there are specific concerns regarding the implementat ion of fair value accounting in the absence of quoted prices and illiquid markets for several instruments. Consequent ly, the implementat ion of fair value account ing would necessitate a dependence on valuat ion techniques using unobservable inputs which would also bring in a fair share of est imat ion errors. There are also some major technical issues arising for Indian banks in the course of convergence. Differences between the IFRS and current regulatory guidelines on classificat ion and measurement of financial assets, focus in the standard on the business model followed by banks and the challenges for management in this area, lack of adequate number of skilled staff and modificat ions to IT systems and processes are some of the other challenges that may need to be tackled in due course. Apart from being preparers of financial statements, banks are also significant users of financial statements and base their lending and investment decisions on the financial statements of their customers. This aspect makes skill building all the more important for Indian banks as IFRS implementat ion will not only impact their accounts and finance teams but will pervade to their credit and investment analysts and decision makers. The RBI has been proact ive in facilitat ing skill building by conduct ing seminars and t raining programmes as well as providing faculty support to some inst itut ions. I am glad to learn that the ICAI too has incorporated IFRS in its curriculum for students and has introduced a cert ificate course on IFRS for its members. There is also scope for the RBI, banking system and the ICAI to work together to build skills in this area. Let me conclude by stat ing that there are several areas of common interest between regulators, bankers and accountants and frequent interact ion and interface between these groups would be of mutual benefit to all. I thank you for this opportunity to share a regulator's perspect ive on some current account ing issues.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

163

Finmin tells RRBs to use sponsor banks infrastructure to become NEFT-enabled

December 1, 2011 KOLKATA : The Ministry of Finance has directed regional rural banks to use sponsor banks IT architecture to become part of the Nat ional Electronic Funds Transfer (NEFT) system for offering one-to-one electronic payment facility to customers. RRBs have received a note from the government earlier this week to this end. RRBs will have to open set t lement accounts with sponsor banks for this purpose, an RRB chairman said. Under NEFT, individuals, firms and corporates can electronically t ransfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the scheme. All bank branches need to be NEFT-enabled for offering this service. Earlier, the government had told RRBs to take the direct route for becoming NEFT-enabled. But, it proved to be difficult for weak RRBs to do it as many of them are not eligible to become the member of centralised payment system, a must for NEFT system. Source:ht tp:/ / economict imes.indiat imes.com/ news/ news-by-industry/ banking / finance/ banking/ finmin-tells-rrbs-to-use-sponsor-banks-infrastructure-to-become-neft -enabled/ art icleshow/ 10929764.cms

Nabard planning interest-free loan December 5, 2011

The Nat ional Bank for Agriculture and Rural Development is bracing up to give a big push to develop primary agriculture cooperat ive societ ies (PACSs) as mult i-service centres, by providing them low- or zero-interest loans in place of grants. PACSs are expected to use such loans - or even grant - to support the set t ing up of knowledge disseminat ion centres, provide training to farmers and bear the init ial administrat ive cost to start a new business. Only that the societ ies cannot use them towards the capital cost of a project . The source for such financial aid would be a producer organisat ion development fund formed by the state-run Nabard, headquartered in this metropolis. The corpus is envisaged to be of help to about 77,000 agri coops across the country. Nabard also plans to provide loan to district central cooperat ive banks (DCCBs) to support PACs. Such banks would be allowed to charge a maximum of 1 per cent addit ional interest over and above the Nabard-charged interest rate. If DCCBs get loans sanct ioned at 10 per cent interest , they are not expected to charge more than 11 per cent from PACSs.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

164

Loans can be routed through regional rural banks, where DCCBs is not in good health. In the case of loans routed through DCCBs and RRBs, Nabard would cont inue to be involved in identifying PACSs, appraising proposals and monitoring project implementat ion and loan recovery. These init iat ives are part of broad guidelines that the 1982-founded Nabard has issued for developing PACSs into mult i-services centres. A Nabard official said on Saturday that PACSs could play a crucial role in providing input facilit ies to members - in the form of cash of kind component. They can also help in providing agriculture implements on hiring basis, besides storage facility, he told Business Standard. "However, to increase the business port folio of PACSs and make it a self-sustainable ent ity, it is essent ial that they should provide addit ional services. These include the enabling of collective purchase of inputs and quality storage capacity as per the negot iable warehouse receipt system," he noted. Also, PACSs can help curb incidents or avert situat ions that force farmers to go for distress sale of the produce in the wake of immediate credit . The official said the PACSs could also go for upgradat ion of exist ing storage capacity or construct ion of a godown, along with sort ing and grading units - to enable them to issue warehouse receipts. Based on these receipts, the farmers can get loan against the crop stored - and can cult ivate the next crop. This would help them earn better price. For, the crops are held without affect ing the fund flow posit ion. Moreover, PACSs can also take up the purchase of hi-tech agri implements like power t iller, land leveller, paddy t ransplanter and combine harvester depending upon the requirements of members. The earning would be from the rental of these equipment. The Nabard official said PACSs could also support the establishment of agro-processing and agri information centres. The societ ies can also help in the sett ing up of test ing laboratories for soil and water and create a panel of experts for providing services on payment basis. Both lab and guidance would be available to farmers at a cost . The PACSs, which are either in the area of market ing or intend to undertake this act ivity, may create this channel to facilitate the farmers in market ing, he added. Source:ht tp:/ / www.business-standard.com/ india/ news/ nabard-planning-interest-free-loans/ 457488/

Small borrowers to get working capital loans December 6, 2011

The finance ministry has asked state-owned banks to lend money to small borrowers in the form of working capital, where the borrower pays interest only on the fund drawn from the bank instead of the ent ire loan amount. The move aims to provide more

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

165

flexibility to small borrowers and reduce their cost of funds. The ministry has directed all stateowned banks to convert term loans given to self-help groups (SHG) to working capital loans by December 31. "The current pract ice of giving loans through term loans takes away t ime of bank staff due to the enormous amount of paperwork involved," the ministry had earlier said in a statement. Bankers said the move will boost loan books of banks as in working capital loan the principal amount is rolled over every year unless the loan is recalled. Also, monitoring working capital loans is easier for banks as they have access to borrowers' t ransact ions. However, some bankers feel the move will spoil the loan culture and impact recoveries. Since loan is rolled over each year, the borrower only has to service the interest without worrying about repaying the principal component. Most loans to SHGs are clean loans without any security. Lenders said in case of non-payment of dues, banks may find it difficult to recover the money. Term loans are the ones where a bank lends the ent ire sanct ioned amount to the borrower, who in turn has to repay the loan with interest every month t ill the end of prepayment period. Working capital loans are the ones where an amount is sanct ioned and the borrower pays interest only on the amount drawn. It gives flexibility to the borrower to deposit any surplus cash back in the bank and reduce their debt . Currently, a huge port ion of loan availed by SHGs is in the form term loans. According to the latest available data, as on March 31, 2010, outstanding bank loans stood at . 28,038 crore to 48.51 lakh SHGs. Source:ht tp:/ / economict imes.indiat imes.com/ news/ news-by-industry/ banking / finance/ banking/ small-borrowers-to-get-working-capital-loans/ art icleshow / 11001761.cms

Compliance with Basel III norms will entail additional costs for banks: Subbarao

December 8, 2011 The RBI Governor, Dr D. Subbarao, on Wednesday said that Indian banks will have to incur addit ional costs to build capital buffers to comply with Basel III rules. Though the Indian banking sector was comfortably placed to implement Basel III regulat ions, some banks might need addit ional capital, Dr Subbarao said at a meet ing with bankers here. "On aggregate, banks are comfortably placed in terms of capital adequacy, but a few individual banks may fall short due to implementat ion of Basel III." The Basel III rules, formulated by the Basel Commit tee on Banking Supervision following the financial crisis of 2008-09, require banks to shore up their capital and liquidity buffers, and will be implemented in phases from 2013. The implementat ion of Basel III will lead to an increased cost of borrowing for Indian companies both in the domest ic and overseas markets, Dr Subbarao said.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

166

Banks should look at trimming the interest rates on advances and hiking those on deposits in order to achieve a double-digit growth. "For double digit growth we need more deposits, and this (more deposits will come in) happen if banks provide att ract ive interest rates on deposits," he pointed out . The demand for credit is set to rise, he added. Managing liquidity Dr Subir Gokarn, Deputy Governor, Reserve Bank of India, said that the apex bank would not want to compromise its monetary stance to manage liquidity in the system, thereby hint ing that there could be lit t le possibility of a cut in the cash reserve rat io of banks. "The cash reserve rat io is not just a liquidity tool, but also a monetary signal and the RBI will do "whatever possible" to manage liquidity, but within the confines of its monetary policy," Dr Gokarn said at the bankers' meet ing. Talking about the rupee volatility, Dr Gokarn said, "The RBI's steps to increase inflows have helped cap the rupee movement." The central bank did not have a view on the value of rupee, he said. The RBI has not used large amount of reserves to manage currency depreciat ion. "Our approach has been non-interventionist ," he added. Source:ht tp:/ / www.thehindubusinessline.com/ industry-and-economy/ banking/ art icle2695663.ece

Parliament panel gives conditional nod to Banking Laws Amendment Bill 2011

December 10, 2011 India's Parliamentary Standing Commit tee on Finance has given a condit ional nod for introduct ion of Banking Laws Amendment Bill 2011, proposing the vot ing rights for investors be capped at 26% instead of in proport ion to equity holding, media reports said cit ing unident ified officials. Current ly, voting right of shareholders in public sector banks is restricted to 1%, whereas in private sector banks it is capped at 10% irrespect ive of equity holding. Private sector banks like Kotak Mahindra Bank, Yes Bank and IndusInd Bank have high promoter shareholding. The Bill also seeks to give addit ional powers to the Reserve Bank of India (RBI) to inspect books of financial conglomerates and vet mergers and acquisit ions in the banking sector. The RBI had also suggested that it should be given power to supersede the board of a bank in the event of self-dealing by company promoters.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

167

Earlier August , RBI issued draft guidelines for awarding new banking licenses to private sector companies, pegging the minimum capital requirement to set up a commercial bank at Rs.5 billion. In February, Finance Minister Pranab Mukherjee had said that banking laws amendment legislat ion along with six other bills targeting the financial sector reforms will be introduced by this fiscal year ending March 31, 2012. However, the commit tee, headed by Yashwant Sinha, a senior member of the opposit ion party Bharat iya Janata Party (BJP), has already rejected the much awaited Insurance Amendment Bill that seeks to raise foreign direct investment (FDI) limit in the sector to 49% from the current 26%. Source:ht tp:/ / banking.contify.com/ story/ standing-commit tee-condit ionally-approves-banking-laws-amendment-bill-2011-12-09

Govt Plans Merger of more Regional Rural Banks December 12, 2011

Following a move by the Central Government to further amalgamate regional rural banks (RRBs) in the country, employee unions are demanding the format ion of a Nat ional Rural Bank of India (NRBI), by amalgamating all RRBs and de-linking of RRBs from the sponsor banks. Ministry view In a letter dated November 28 to the chairmen of sponsor banks of RRBs, the Department of Financial Services, Ministry of Finance, said that current ly there are a large number of RRBs, sponsored by different banks, funct ioning in a State. It said that many of the RRBs are very small, with network of less than 100 branches. Unions' take The let ter suggests that geographically cont iguous RRBs sponsored by different banks within a State could be amalgamated with single sponsor bank. It has also sought no-object ion cert ificates from the banks for this move. However, the employees unions want a two-t ier st ructure, such as the one exist ing in State Bank of India (SBI), and are demanding an NRBI as well. Explaining this, Mr. Vasanth Bannigol, Joint Secretary of the All-India Regional Rural Bank Employees' Associat ion, told Business Line that SBI has a corporate office in Mumbai, and each State has got a local head-office. National and state levels "This two-t ier system should be implemented in RRBs also. At the nat ional level there should be NRBI, and each State they should have a State-level RRB," he said. Substant iating this, he said the RRBs have already grown and have become stronger. Let the control be there at the nat ional apex organisat ion. Stat ing that there are conflict ing interests between the RRBs and sponsor banks, Mr. Bannigol said in some places both of them have their branches. Somet imes it becomes difficult to compete in such a situation.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

168

Independent entity "If at all we are independent, then we can take independent decisions and become st ill st ronger. In Karnataka alone, the business of RRBs is more than Rs.26,000 crore. That being the case we must have independent ident ity and ent ity," he said. He suggested that the State and the Central Governments be the owners, and the share capital owned by sponsor banks be taken by Nabard. Credit delivery Endorsing these views, Mr. K. S. Bhat, All-India Secretary, Syndicate Bank Staff Associat ion, said that NRBI will help the Government achieve its agriculture growth and financial inclusion targets, and strengthen the credit delivery system of the country. Mr. Bhat said that MVS Chalapathi Rao Working Group, Vyas Commit tee, and the Standing Commit tee on Finance (Thirteenth Lok Sabha) in its 55th report presented to both Houses of Parliament on December 22, 2003, had also recommended set t ing up an NRBI. Source:ht tp:/ / www.thehindubusinessline.com/ industry-and-economy/ banking/ art icle2706913.ece

Banks' stakes in non-financial entities capped at 10% December 13, 2011

The Reserve Bank of India (RBI) today capped commercial banks' investments in non financial companies at 10 per cent to ensure they do not engage in act ivit ies barred by the Banking Regulat ion Act . Banks do not need the regulator's prior approval for investments in non financial services companies. Banks could, through their direct and indirect holdings in other ent it ies, exercise control or have a significant influence over such companies. As a result , they may be engaging direct ly or indirect ly in activit ies that are not permit ted. Hence, it was necessary to limit such investments, RBI said. Equity investment would be subject to a limit of 10 per cent of the company's capital, or 10 per cent of the bank's capital and reserves, whichever was less. The equity investments held under the 'held for t rading' category would be counted for calculat ing the limit . The combined equity investments in non-financial ent it ies by banks, their subsidiaries, associates or joint ventures, and asset management companies should not exceed 20 per cent of the company's capital. RBI said requests by banks request to hold a stake of over 10 per cent and less than 30 per cent would be considered if the company was engaged in act ivit ies permit ted by the Banking Regulat ion Act . Banks are also permit ted to set up subsidiaries for undertaking act ivit ies conducive to the spread of banking in India or are useful and necessary in public interest .

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

169

A stake of over 10 per cent , without RBI's prior approval, would be allowed if the addit ional acquisit ion was through restructuring, including corporate debt restructuring. The same norms would apply for a stake acquired to protect its interest on loans / investments made in a company. Source:ht tp:/ / www.business-standard.com/ india/ news/ banks-stakes-in-non-financial- ent it ies-capped-at-10/ 458400/

Sinha Panel Backs Non-Voting Shares for Bank Capitalisation Says RBI should put in place riders before granting

26% voting rights to shareholders in Banks December 13, 2011

A parliamentary commit tee has favoured allowing state-run banks to issue non-vot ing shares to help them access capital from the markets without dilut ing the government’s control over them. The suggest ion of the standing commit tee on finance comes at a t ime when a cash-strapped government is exploring opt ions to shore up the capital base of public sector banks. “This may fast t rack the process and will bring a major change in the current form of capitalisat ion support ,” a senior government official said, request ing anonymity. A non-vot ing share for a bank will be a share where the holder has no vot ing right . Banks are finding it tough to raise funds through issue of fresh shares as it will lead to a dilut ion of the government’s stake to below the mandatory 51%. The commit tee, headed by BJP leader and former finance minister Yashwant Sinha, has also recommended in its report that the Reserve Bank of India (RBI) should put in place strict riders before grant ing 26% vot ing rights to shareholders in banking inst itut ions. The panel has only given condit ional nod for the vot ing rights provision and said that vot ing rights for investors should be capped at 26%, instead of it being in proport ion to equity holding. The commit tee, however, has said that the government should look at the merits of issuing non-vot ing shares, as it will allow it to expand the capital base of banks without the risk of management control falling into a few hands. In 2010-11, the government infused . 20,157 crore in state-run banks to help them achieve a t ier-I capital adequacy rat io at 8%. For the current fiscal, the Planning Commission has approved an addit ional capitalisation demand of 14,000 crore. Earlier this fiscal, the finance ministry allocated . 6,000 crore towards bank capitalisat ion, of which half is expected to go to State Bank of India, the country’s largest lender.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

170

On vot ing rights, the committee has said that the RBI should take sufficient safeguards while st ipulat ing condit ions such as credent ials, source of funds, t rack record and financial inclusion, before grant ing approval. The panel has also said that mergers and acquisit ions in the sector should not be kept out of the compet it ion regulator’s purview forever. This should be considered as a special case and an “expedient measure” to be revisited after both the RBI and the Compet it ion Commission of India gain some experience, it has said. On Depositor Educat ion and Awareness Fund, the commit tee has said that it should be created without compromising the rights and claims of depositors or their legal heirs. Depositors’ legal heirs should be informed before t ransfer of money to the protect ion fund, it added. The government has said that money from an account that has not been in operat ion for the last 10 years should be transferred to this fund for promot ion of depositors’ interest . Source:ht tp:/ / epaper.t imesofindia.com/ Default / Script ing/ Art icleWin.asp?From=Archive& Source=Page&Skin=ETNEW&BaseHref=ETM/ 2011/ 12/ 13&PageLabel=15&Ent ityId= Ar01500&ViewMode=HTML

Parliamentary Panel Pitches for Integrated Banking Law December 14, 2011

The parliamentary standing commit tee on finance has suggested instead of bringing piecemeal amendments t ime to t ime, the government should consider the formulation of an integrated modern banking law, consolidat ing the provisions of other statutes that cover various aspects of banking. "Such an integrated and holist ic law would also be in line with the proposed legislat ion in other areas like the Direct Taxes Code and the Companies Bill," the panel outlined in its report on the Banking Laws (Amendment) Bill, 2011, tabled in Parliament on Tuesday. The commit tee stressed on employee-friendly measures in the integrated banking law. These include the introduct ion of employee stock opt ions, deterrent safeguards against 'wilful default ' by a borrower in repaying loans and other forward-looking proposals that reflect emerging realit ies. On the proposal to make vot ing rights in private sector banks proport ionate to shareholding, the panel said the finance ministry may consider increasing the limit from the current 10 per cent to 26 per cent to keep a balance between conflict ing factors - concentrat ion of economic power and control and promot ion of corporate democracy. The finance ministry had, in the Banking Laws (Amendment) Bill 2011, proposed that vot ing rights in private sector banks be proport ionate to the shareholding, while removing the exist ing 10 per cent ceiling.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

171

Market part icipants said the move was in the direct ion towards financial sector reforms. "It is a posit ive move, a move in the right direct ion. However, investors would want to have vot ing rights in line with their shareholding pattern. So, that goal has not been achieved. But the posit ive thing is the government is t rying to push reforms, may be in small steps," said Manek Fit ter, partner (financial services), Ernst & Young. The commit tee also emphasised on recent failures of major global private banks and said lessons learnt from these should not be lost sight of, while formulat ing the new policy on banking licences. "Key issues and concerns such as banking penetrat ion, coverage and financial inclusion should remain paramount and the ent ire banking industry, including banks in the private sector, should be clearly mandated to achieve the desired object ive in this regard," it said. While support ing the government 's proposal to keep bank mergers outside the purview of THE Compet it ion Commission of India (CCI) as of now, the panel said this exempt ion should be considered a special case and an expedient measure to be revisited in the light of the experience gained by both the Reserve Bank of India (RBI) and the CCI. "This, however, does not, in any manner, convey the commit tee's view on the mergers and acquisit ion policy in the banking sector, which is an issue merit ing a separate discourse," it said. "As RBI has been entrusted with the mandate to grant approvals for acquisit ions, transfers and mergers in the banking sector, the committee would expect RBI conduct due diligence of 'fit and proper' persons / ent it ies and take sufficient safeguards while st ipulat ing condit ions as to credent ials, source of funds, t rack record and financial inclusion before grant ing approvals under this clause, "the report said. The commit tee also stressed it would like the government to consider the merits of issuing non-vot ing shares as an avenue to expand the capital base of banks without allowing concentrat ion of management control in a few hands, as this would also enable banks to grow faster. "Considering the wide scope and amplitude proposed in the definit ion of 'associated enterprises' of a banking company, the commit tee would expect RBI's regulatory machinery be adequately beefed up in view of its expanding role and augmented funct ions as proposed in the Bill," the panel said in its report . The commit tee said no serving or ret ired officer of the central government or a state government should be considered for appointment as administrator on suppression of the board of directors of a banking company. Source:ht tp:/ / www.business-standard.com/ india/ news/ parliamentary-panel-pitches-for- integrated-banking-law/ 458496/

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

172

RBI panel to discuss raising of capital by urban co-op banks December 15, 2011

The issue of get t ing a level-playing field for urban co-operat ive banks vis-D-vis commercial banks with regard to raising capital and lowering the threshold for statutory investments will be taken up at a meet ing of the Reserve Bank of India's standing advisory committee next week. Current ly, growth prospects for the 1,600-odd UCBs are hamstrung due to limited opt ions for raising capital. These banks primarily depend on plough back of profits and borrowers' subscript ion to share capital at the t ime of loan disbursement, to shore up their capital. Though UCBs, which as of March-end 2011 collect ively had deposits and advances aggregat ing Rs 2,12,031 crore and Rs 1,36,341 crore, respect ively, have been allowed to issue preference shares and long-term deposits to augment their capital, both these opt ions are not preferred. Investors' interest The constraint for UCBs in issuing preference shares is that they can be issued only at face value. Investment in these shares is unattract ive as no exit mechanism is available for investors want ing to liquidate them. In the case of long-term deposits, the RBI's approval is required to pay back depositors even if a bank is financially sound. This is proving to be a deterrent for prospect ive investors. "We should be allowed to issue shares at book value. Also, to impart liquidity to co-operat ive bank shares, a market-making mechanism in the form of a t rust can be jointly put in place by all banks so that investors have an exit opportunity," said Mr B.V.R. Sarma, CEO, Greater Bombay Co-operative Bank. Review SLR requirement Current ly, commercial banks have to invest a minimum 24 per cent of their deposits in Government Securit ies. These investments are required to fulfil the statutory liquidity rat io (SLR) norm. However, in the case of UCBs, this limit is set higher at 25 per cent . UCBs want at par t reatment with commercial banks in this case. Further, they want the SLR limit to be suitably split into two - investment in government securit ies, and cash holding, investment in gold and deposits with the apex bank of a State. They are also seeking RBI's permission to tap its liquidity adjustment facility to t ide over temporary liquidity mismatches.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

173

"Many small banks do not have the expert ise to t rade in Government Securit ies. In a rising interest rate regime, these banks end up booking losses or making market -to-market provisioning on the balance sheet date. "To overcome this, they should be permitted to hold a port ion of their deposits in cash, invest in gold and park deposits with the apex bank of a State," said Mr Sarma. Allow repo transactions To overcome short-term liquidity mismatches, UCBs want to leverage their non-SLR investments (or investment in corporate bonds) by offering them as collateral in repo t ransact ions with commercial banks. Current ly, every branch that a co-operat ive bank opens has to be backed up by a networth of `.2 crore each. The UCBs want the RBI to do away with this stringent norm and take into account their overall financial health in grant ing future branch licences. Other demands Current ly, UCBs cannot lend more than `. 10 lakh against the pledge of shares. They want this limit to be doubled. These banks want RBI to clearly define bill discount ing under let ter of credit as a permissible banking act ivity. "There is some confusion on bill discount ing under letter of credit as some RBI inspect ion officials allow it while others don't ," said a senior UCB official. Source:ht tp:/ / www.thehindubusinessline.com/ industry-and-economy/ banking/ art icle2712314.ece

Banks must support land development to conserve arable lands : NABARD

December 15, 2011 Credit to land development for agriculture has to be stepped up to protect cult ivable lands, said Mr S.N. Misra, Convenor, State Level Bankers Commit tee. Mr Misra, who is also the General Manager, Indian Overseas Bank, said banks have the responsibility to support land development to conserve arable lands which are being unut ilised every year. But this has largely been ignored by the banks though the Reserve Bank of India classifies funding for purchase of agriculture land as priority sector lending. The call from SLBC, an inter-inst itutional forum to coordinate between Government and banks, to support land development gains significance against the backdrop of the decrease in gross cropped area every year in Tamil Nadu. The Nat ional Bank for Agriculture and Rural Development est imates that the area is going down by about 1 lakh

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

174

hectares annually. The gross cropped area was 55.72 lakh ha in 2009-10 against 60.32 lakh ha in 2005-06. Addressing the State-level credit seminar organised by Nabard, he said land redistribut ion has to be encouraged to ensure that surplus, uncult ivated land are brought into product ion. The annual event in which Nabard presents the State focus paper, is the foundat ion for planning the credit flow to agriculture and allied act ivit ies. For 2012-13, the refinance inst itut ion has pegged bank credit potent ial for the State at Rs.77,803.49 crore, a growth of 34.53 per cent over that est imated for 2011-12. Crop loan accounts for Rs.31,574.15 crore (40.58 per cent); term loan Rs.17,010.05 crore (21.86 per cent); non-farm sector Rs.14,032.35 crore (18.04 per cent); and other priority sector Rs.15,186 crore (19.42 per cent). The share of crop loans to aggregate potent ial has dropped from 42.94 per cent in 2011-12 to 40.58 per cent in 2012-13. The ground level credit flow to crop loans in 2011-12 is targeted at Rs.24,124 crore against Rs.29,047 crore in 2010-11. The Tamil Nadu Finance Secretary, Mr K. Shanmugam, said the Government is keen on support ing the primary sector. It is implement ing measures to increase product ion and product ivity with technology intervent ion at the farm level by support ing mechanisat ion, micro irrigat ion and value-addit ion. It is also focussing on allied sectors such as hort iculture, animal husbandry and fisheries. The Government is to implement an Rs.122-crore project to strengthen the extension infrastructure in animal husbandry. Source:ht tp:/ / www.thehindubusinessline.com/ industry-and-economy/ banking/ art icle2714880.ece

RBI steps in to arrest rupee depreciation December 16, 2011

The Reserve Bank of India (RBI) on Thursday abandoned its hands-off approach to the rupee, which on Thursday ended off an all-t ime low hit earlier in the day. In a move to temper speculat ion-led volat ility, the central bank took two measures. First , it curbed trading in rupee forwards. Once cancelled, forward contracts could not be bought again, the RBI said. The new rule applies to domest ic as well as foreign investors and takes effect immediately. Forwards are agreements to buy or sell assets at a set price and date. The RBI also said forward contracts booked by foreign inst itut ional investors, once cancelled, could not be rebooked. "Exporters were booking a forwards contract, cancelling it and then rebooking at a bet ter rate, which was contribut ing to the free fall of the rupee," said J Moses Harding, execut ive vice-president at IndusInd Bank. Second, the RBI reduced the amount of open posit ions dealers can maintain overnight. At present, a company's board is permit ted to fix suitable

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

175

limits for various t reasury funct ions with net overnight open exchange posit ions and aggregate gap limits. Dealers said the impact of lowering the t rading limits would be huge because banks would not be able to keep speculat ive posit ions open for a long t ime. "The broad message the RBI is trying to give is that speculat ive tendencies have to be curbed and genuine demand and supply should be allowed to move the currency rate," dealers said. In another move to defend the rupee, the central bank sold dollars on Thursday. Traders said the RBI's intervention sparked a slew of stop-losses on long dollar posit ions by market players who had expected the currency, which had plunged to a record low of 54.30 against the dollar, to hit 55 a dollar. The rupee ended near the day's highs of 53.64/ 65 per dollar, marginally stronger than Wednesday's close but well above the record low plumbed in early deals. At present, the RBI permits hedging of currency risks on the basis of past performance (exports or import) for average three years. The company or unit could also take a hedge based on actual performance in the last financial year. Now, for importers using the past performance facility, the facility stands reduced to 25 per cent of the limit . Importers, who have used the facility in excess of the revised or reduced limit , are barred from making further bookings. The RBI said forward contracts booked under the facility would be on a fully deliverable basis. The exchange gains emerging from the cancelling of contracts should not be passed on to the customers. All cash and spot t ransact ions by banks for clients will be done for actual remit tances / delivery only. They cannot be cancelled or cash-set t led. In an effort to control the effect of currency derivat ive deals by FIIs, the RBI banned rebooking of cancelled contracts by overseas port folio investors. They can, however, roll over contracts on or before maturity. At present, FIIs are allowed to hedge currency risk on the market value of the ent ire investment in equity and / or debt in India. The RBI also said the intra-day open posit ion / daylight limit of dealers should not exceed the exist ing approved limits. At present, a company's board is permit ted to fix suitable limits for various t reasury funct ions with net overnight open exchange posit ions and aggregate gap limits. The react ion from industry and dealers was mixed. Most said they expected the rupee to "set t le down" on Friday but a lot depended on other factors beyond the central bank's control.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

176

Moses Harding, head, global market group, IndusInd Bank, said the restrict ions would take out a big chunk of demand from exporters for dollars. As a consequence, the rupee, which has seen volat ile movements, could set t le between 53 and 54 against the dollar. Isaac George, chief financial officer, GVK, said though he would like to wait and watch, it would be good if the RBI was proved right on Friday. "We believe these kind of moves should have happened much earlier," he said. JSW Group CFO Sheshagiri Rao welcomed the move, saying it was the correct way to curb speculat ion. "Whatever arbitrat ion opportunity existed between the non-deliverable forward contract market overseas and India -- current ly 60 paise to every dollar -- will now go away," Rao said. Durgesh Mehta, CFO, Bombay Dyeing, said it was a welcome move for players like his company who did not believe in taking a posit ion and did direct t rade. The guidelines would affect companies that tended to supplement their business profits with speculative gains in the foreign exchange market , he said. But , he wasn't sure whether these measures alone would solve the problem. "I believe the RBI's move will provide some relief and arrest further decline in the rupee in the next few days. But, these measures alone cannot prevent rupee depreciat ion in the medium term," Mehta said. His counterpart in Infosys, V Balakrishnan, said though the guidelines would not affect Infosys, it was a good step to reduce volat ility and speculat ion in the market . Abhishek Goenka, CEO, India Forex Advisors, said he expected the rupee to open stronger on Friday at 53.10-53.20 a dollar. Source:ht tp:/ / www.business-standard.com/ india/ news/ rbi-steps-in-to-arrest-rupee- depreciat ion/ 458715/

Global Regulators prepare Supervisory Framework to prevent Lehman-like collapses

December 21, 2011 Global banking, securit ies and insurance regulators have proposed a framework for supervising financial conglomerates to ward off a Lehman-like crisis. For example, the framework discusses techniques for the detect ion and correct ion of double or mult iple gearing, where the same capital is used as a risk buffer for two or more legal ent it ies within the conglomerate. The principles out line the importance of prudent management and report ing of group wide risk posit ions and intra group exposures so that a contagion does not occur.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

177

The consultat ive report has been joint ly authored by the Bank of Internat ional Sett lements (BIS), Internat ional Organisat ion of Securit ies Commissions (IOSCO) and International Associat ion of Insurance Supervisors (IAIS). These are the apex associat ions of banking, insurance and securit ies regulators. The object ive of the framework is to close regulatory gaps, eliminate confusion on ent it ies that fall in the interface of two or more regulators and effect ively supervise unregulated ent it ies in a financial conglomerate. The principles out lined are supplementary and do not replace, banking, insurance or securit ies supervisory frameworks. It calls for greater exchange of informat ion and coordinat ion among supervisors (regulators), said the report . Individuals who exert a material influence over the conglomerate or any of its companies should be financially sound. In addit ion, they should have integrity and be competent in terms of experience and qualificat ions. Such an individual should be paid remunerat ion in line with internat ional standards and the risk profile. The remunerat ion policy should also account for material risks that an organisat ion is exposed to, including those from its employees' act ivit ies. The principles place greater emphasis on the conglomerate's ability to measure, manage and report all material risks to which the financial conglomerate is exposed, including those stemming from unregulated ent it ies and act ivit ies that could be a cause of regulatory arbit rage. Supervisors have been asked to assay the impact of these unregulated ent it ies on regulated entit ies, in terms of influence, interconnectedness, risk t ransfer, risk concentrat ion and exposure, intra-group t ransact ions, strategic and reputat ion risk. Source:ht tp:/ / www.thehindubusinessline.com/ industry-and-economy/ banking/ art icle2732575.ece

Tighter Rules may give Fillip to Shadow Banks December 21, 2011

International regulators' efforts to strengthen the financial system by t ightening bank rules may inadvertent ly serve to boost opportunit ies for unregulated or "shadow" financial players. That is because it is the shadow players, primarily hedge funds and private equity firms, who are expected to buy the billions of euros worth of assets that banks will be selling in the coming months as they slim down their balance sheets to comply with the new rules. "The growth of the shadow banking system is a logical consequence," said Merck Finck analyst Konrad Becker.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

178

Analysts worry that this raises risks for the financial system, as these investors borrow money to buy the assets for sale, potentially leading to a fresh credit bubble that could ult imately threaten the economy. "There will be some people who will wish for a return to the good old days when banks were relat ively harmless," said one management consultant to a range of financial firms, adding that this was part icularly t rue of the Brit ish and US banking sectors, where investors were already act ive. Financial leaders in the G20 group of developed and emerging economies had intended to draw a lesson from the financial crisis by ratchet ing up their surveillance of banking products, players and transact ions. While regulators have announced that they will turn their at tent ion in due course to the $60-trillion shadow banking sector, including money market funds, special investment vehicles, securit isat ion and securit ies lending, there has been lit t le in the way of concrete act ion so far. Investment bankers say shadow banking players, often based in tax havens, will not run out of financial ammunit ion anyt ime soon. "Shadow banks cannot print their own money but instead need to have their own investors lined up," said Carsten Dent ler, a member of the board of UBS's German unit . "However, those funds will cont inue to flow to them in the future. Of that I am sure." As dark as they are often portrayed, shadow banks may now play the role of white knights for lenders t rying to offload risky assets to comply with European regulatory capital targets by the middle of 2012. The European Banking Authority has identified a capital short fall of 115 billion euros (£96 billion) if the region's lenders are to raise their core Tier-1 capital rat io to 9 per cent of risk-weighted assets by the end of June as required. Source:ht tp:/ / www.business-standard.com/ india/ news/ t ighter-rules-may-give-fillip-to-shadow-banks/ 459190/

RBI cuts Currency open Position for Banks by up to 75% December 21, 2011

The Reserve Bank of India has cut banks' net open posit ion limits in currency t rading by as much as 75% for some, and at least by half for most of the top t raders, in its at tempt to end speculat ion on the rupee, said three people familiar with the matter. After robbing bank boards off the powers to determine the overnight posit ions, it is monitoring day t ransactions where it is liberal in intra-day t rading posit ions which banks are not keen, said those people who did not want to be ident ified.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

179

"It is quite drast ic," said one of the bankers who have been directed to reduce posit ions without disclosing how much his bank's posit ion has been reduced to. "For some of us, it is almost as good as nothing at all," he said. RBI on December 15 unleashed a series of measures to arrest the fall of the rupee, including taking powers from the board to determine the overnight posit ion, the net overnight dollar posit ion a bank can hold, to save the rupee from falling steeply. It also took off the flexibility to cancel or rebook the forward contracts. Hedging based on past three-year average imports was cut to 25%, from 75% making them deliverable. The domest ic currency which has fallen about 20% this year, recovered from its lows of 54.20 after these measures, but has since started sliding again. It ended at 52.87/ 88 on Tuesday. While the central bank's move has halted the sharp slide in the currency value, it could dry up liquidity in the currency market and reduce the earnings of many banks that have been benefit ing from rupee volat ility. "Opportunity has been curtailed," says Moses Harding, head of economic research and asset and liability committee at IndusInd Bank. "Banks running proprietary posit ions will obviously take a hit on their other income. To that extent , banks' trading income will come down. Also, inter bank-volumes will start thinning," he added. But the hedging activit ies of the corporat ions may not be hurt since the central bank has said the overnight posit ions could be breached, if it is for a client . "We are t rying to cope with the fresh restrict ion," said another banker. "The open posit ions for some large banks which was about Rs.100 crore has been slashed to about Rs.50 crore," said the t reasury head of a private sector bank. "But the central bank has clarified that a bank could exceed NOOPLs if it is on account of a part icular customer transact ion." Source:ht tp:/ / economict imes.indiat imes.com/ news/ news-by-industry/ banking/ finance/ banking/ rbi-cuts-currency-open-posit ion-for-banks-by-up-to-75/ articleshow/ 11186802.cms

Call Rates Harden on Tight Liquidity December 22, 2011

Call rates in the interbank overnight borrowing market hardened, reflect ing the pressure on liquidity, as advance tax funds went out of the system. The Reserve Bank of India (RBI) had, late in the evening, said it would purchase government bonds worth Rs.10,000 crore through an auct ion on December 22. RBI is conduct ing open market operat ions (OMOs) to infuse resources in the system and ensure government borrowings sail through.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

180

According to Clearing Corporat ion of India data, call rates touched a peak of 8.65 per cent during the day, before softening to close at 9.40 per cent . The average rate for the day was 9.56 per cent, against 9.19 per cent yesterday. Earlier in the day, RBI deputy governor Subir Gokarn said the immediate pressure on liquidity was from advance tax collect ions, which stood at about Rs.69,000 crore. Since that amount would be spent over a period of t ime, the current pressure is clearly for the short term. However, the quantity is reflect ive of a mismatch, and RBI does not expect this to remain. Things would normalise over the next few days, Gokarn said. RBI has maintained OMOs would be instruments of choice to ensure adequate liquidity in the system. The strain on resources has been evident from the huge borrowings under the central bank's liquidity adjustment facility. Banks borrowed about Rs.165,000 crore yesterday under the window, and the demand for funds remained the same on Tuesday, according to RBI data. Source:ht tp:/ / www.business-standard.com/ india/ news/ call-rates-hardent ight-liquidity/ 459196/

Financial inclusion necessary for Banking Growth : FM December 22, 2011

Finance Minister Pranab Mukherjee on Wednesday called upon banks to promote financial inclusion for sustaining high growth of the banking sector. "Financial inclusion is an important policy of the government not as an important instrument of socio-economic development but if you want to sustain a high growth rate and to address this chronic problem of poverty, deprivat ion and disparity," Mukherjee said at Central Bank of India centenary celebrat ion. He said banks have been advised to issue Kisan Credit Cards to all eligible farmers. "I have requested the state governments to take up this task on a campaign basis," he said. As on May 31, 2011, the banking system have issued 10.42 crore KCCs. During 2011-12 (April to May 2011), 4.09 lakh KCCs were issued by Commercial Banks, cooperat ive Banks and Regional Rural Banks with a loan amount of Rs.2,616 crore. For the current financial year, the target for agriculture credit flow has been fixed at Rs.4,75,000 crore against which the banking system has already extended credit of Rs.2,23,380 crore as on September 30, 2011. Kisan Credit Cards are the prime vehicle for the flow of agricultural credit. As on May 31, 2011, the banking system have issued 10.42 crore KCCs. Source:ht tp:/ / economict imes.indiat imes.com/ news/ economy/ finance/ financial-inclusion-necessary-for-banking-growth-fm/ art icleshow/ 11200184.cms

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

181

Global headwinds to impact banking sector stability December 23, 2011

Higher funding costs and asset quality pressures take a toll on the sector's health. The slowing domest ic economy and strong global headwinds may further increase loan defaults and funding costs of the Indian banking sector, according to the Reserve Bank of India (RBI)'s Financial Stability Report. However, the report said despite the deterioration, the health of the sector was robust . The banking sector faced profitability issues due to higher funding costs and asset quality pressure, owing to a slowing economy. A forecast by the banking stability indicator for the next two quarters shows a cont inuing a marginal deteriorat ion in stability. Credit growth decelerated from 22.6 per cent as of end-March to 19.2 per cent as of end-September. The gross non-performing assets (NPAs) rat io of 2.8 per cent is broadly in line with the average in peer countries. The growth of NPAs at 30.5 per cent and that of slippages at 92.8 per cent outpaced the credit growth of 19.2 per cent end-September. The priority sector, real estate, infrastructure and retail sectors contributed significant ly to the rise in NPAs. The power and telecom sectors together accounted for 77 per cent of infrastructure credit and saw a rise in impairments and restructuring. Capital adequacy, though well above the regulatory requirement, cont inued to decline, falling from 14.5 per cent as on end-March 2010 to 13.5 per cent as of end-September. Banks' profitability has come under pressure, as rising interest rates resulted in the growth of interest expenses outpacing that of interest income, and a consequent decelerat ion in net interest income and earnings. The turmoil in the euro zone has fanned fears of deleveraging by the European banks. Indian banks are not expected to see any direct impact, on account of negligible exposure to the t roubled area. However, some indirect impact due to funding pressures could be seen. Source:ht tp:/ / www.business-standard.com/ india/ news/ global-headwinds-to-impact-banking-sector-stability-/ 459470/

Losses in non-life insurance a worry December 23, 2011

The Reserve Bank of India (RBI) has expressed concern on the rising third-party motor pool losses in the non-life insurance sector, as this may hurt the stability of banks, which have substant ial exposure to the sector.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

182

This assumes importance, as the Insurance Regulatory and Development Authority (Irda) had recent ly said it may increase the provisioning requirement for the third-party commercial motor port folio of general insurance companies from 153 per cent to 175-205 per cent . If implemented, the industry may need addit ional capital of Rs.3,500-6,000 crore, which may impact banks that have general insurance subsidiaries. Current ly, State Bank of India, ICICI Bank and HFDC Ltd are the major lenders who have general insurance subsidiaries. "The Indian insurance sector is well-capitalised, as the solvency rat io exceeds the regulatory requirements in all the cases, with respect to life insurers. Recent ly, however, this has become a matter of concern for non-life insurers, as the liability requirement and the associated capital requirement for the mandatory third-party motor pool has increased, and so have underwrit ing losses in the non-life sector," RBI said in the half-yearly Financial Stability Report released on Thursday. "Inter-linkages between insurance and the banking sector are a matter of concern, with many insurance companies being part of financial conglomerates. Any financial stability issue regarding the bank in the conglomerate may have an amplifying effect on the insurer," RBI said. Most insurers in India have a foreign partner with 26 per cent stake, the maximum permissible foreign direct investment limit in the sector. Source:ht tp:/ / www.business-standard.com/ india/ news/ losses-in-non-life-insuranceworry/ 459471/

RBI Financial Stability Report December 23, 2011

First , the bad news. The Reserve Bank of India, or RBI, has hinted that foreign inst itut ional investment (FII) in stocks may dip due to uncertaint ies in the US and Europe; banks may have to grapple with more bad loans; and current account deficit can widen. The saving grace is that Indian banks and financial inst itut ions are strong enough to withstand the turmoil. In its Financial Stability Report released on Thursday, the central bank said a 'stress test ' carried out on banks shows that local lenders are "reasonably resilient", though capital adequacy of some individual banks may be affected under severe credit risk stress scenarios. Co-operat ive banks are on a more tricky terrain. According to the test results, these banks can withstand a rise in bad loans rat io by 50%, but will come under pressure if the total loans to st icky loans rat io doubles. Even as the RBI pointed to the lack of disclosures in financial markets, shifts in t rading patterns and risks from inter-linkages between banks and other institut ions, the regulator's predominant concerns relate to the macro indicators. For instance, current account deficit (CAD), which captures the gap between import and export of goods and services and has increased during Q1 of 2011-12, is expected to "widen further", it said. "Larger CAD would necessitate higher capital inflows."

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

183

The Sore Points Refinancing of ECB, FCCB will be necessary Private pledging by promoters for family-run cos should be disclosed Inflation and inflat ionary expectat ions st ill high More loans to builders, retail, farmers & infra turning badBank margins face pressure Exports will dip if slowdown cont inues in developed economies Inter-linkages among banks, insurers & NBFCs a concern Derivat ives t rading and proprietary t rading need to be monitored Bank Margins under Pressure In this context , the impact of risk aversion due to downward risk to economic and financial condit ions in the US and Euro area would be crit ical, part icularly for FII flows to India," the RBI said. In this context , the RBI report said foreign loans and foreign currency bonds of Indian companies, which have become cost lier due to a rise in dollar, may have to be refinanced. Bonds floated by more than 100 firms are maturing next year. According to the central bank (which will announce its next monetary policy on January 24), "low and stable inflat ion alone is not sufficient to promote macro-economic and financial stability". An inflat ion of 9.11% is well above the regulator's comfort level. Point ing out that bank margins could come under pressure, the RBI said servicing of loans have come under stress due to rise in input prices, interest rates, and slackening demand and infrastructure constraints. The year-on-year growth in bad loans at 30.5% at the end of September 2011 has outpaced credit growth of 19.2% while new bad loans grew at 92.8%. "Among all sectors, priority sector, real estate, infrastructure and retail sectors have contributed significant ly to the rise in NPAs," it said. The regulator has warned that banks' linkage with non-life insurance companies is a matter of concern due to increasing capital requirement towards thirdparty motor pool and mount ing underwrit ing losses. Calling for more t ransparency in the stock market , the RBI has recommended complete disclosure of private pledging of shares by promoters, especially in family-run businesses. The average promoter holding in listed companies is around 48%. The report pointed out that equity prices of companies where promoters have pledged significant port ions of their shares fell faster than the broader market on account of speculat ion. The report also emphasised the need to monitor the rise in derivat ives proprietary t rades to minimise systemic risk. The report said the growing interconnectedness of finance companies with banks and their relat ively less stringent regulat ions have raised the potent ial of arbit rage opportunit ies. In 2010-11, borrowings of finance companies from banks rose 54.7% while loans to them grew 30.4%. Source:ht tp:/ / epaper.t imesofindia.com/ Default / Script ing/ Art icleWin.asp?From=Archive& Source=Page&Skin=ETNEW&BaseHref=ETM/ 2011/ 12/ 23&PageLabel= 1&Ent ityId=Ar00103&ViewMode=HTML

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

184

State-run Banks told to Discard Fast-track Promotion Policies December 26, 2011

The finance ministry has directed state-run banks to do away with their separate promot ion policies, a move strongly opposed by the officers' unions. The fresh guidelines aim at removing the anomalies across public sector banks and addressing severe manpower shortage by creat ing a common pool of managers. This spells the end of fast t rack and super fast -t rack promot ions at managerial levels in some public sector banks, including the country's largest lender, State Bank of India. The new guidelines will allow lateral movement across banks without any remunerat ion issues, a finance ministry official said. "The guidelines will also ensure that there are eligible candidates across all vert icals in all 21 state-run banks, which is a big advantage when it comes to succession planning," said a human resources head at a Mumbai-based bank. The 2.5 lakh strong All India Bank Officers' Confederat ion has, however, slammed the revised guidelines. "The government should realise the situat ion is different in each bank and it cannot force its policies," said TN Goel, senior vice-president of the confederat ion. As per the guidelines, an employee will have to work in all vert icals of a bank before being promoted to the middle management level. "Specialists recruited in banks will however have to spend at least five years in their area before being moved to other funct ions," the finance ministry official said. Further, in a case where a relaxation has been provided on the basis of merit , the same officer will not be eligible again, the official said. The guidelines run contrary to the recommendat ions of a panel, set up to look into human resource issues at state-run banks, which had recommended that the banks should develop mechanisms for ident ifying star performers and to t rack their performance for fast-t rack growth. Headed by former Bank of Baroda chairman AK Khandelwal, the panel had suggested that such a move will act as a mot ivat ional and retent ion tool, besides creat ing a leadership pipeline. Source:ht tp:/ / economict imes.indiat imes.com/ news/ news-by-industry/ banking / finance/ banking/ state-run-banks-told-to-discard-fast-t rack-promot ion-policies/ art icleshow/ 11248127.cms

Reforms commission looking at uniform legislation for banks December 27, 2011

The Financial Sector Legislat ive Reforms Commission (FSLRC) is considering a single, harmonised and uniform legislat ion applicable to all banks and giving the central bank the power to sanct ion takeover of a co-operat ive bank by commercial banks, said Mr Anand Sinha, Deputy Governor, Reserve Bank of India.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

185

The fact that different banks are governed by different laws has resulted in an uneven playing field and this need to be addressed. The Commission was set up by the Government earlier this year to recommend radical overhaul of laws governing the financial sector. For example, while amendments were carried out to enable State Bank of India, SBI subsidiary banks and nat ionalised banks to issue preference shares, though at different points of t ime, banks in the private sector cannot issue preference shares as the amendments to the Banking Regulat ion Act is st ill to be carried out . Similarly, while bilateral net t ing (the amount that is due to or from the insolvent counterparty) in the event of liquidat ion is admissible for private sector banks (which are governed by the Companies Act and the normal bankruptcy laws), the posit ion in this regard for public sector banks, SBI and its subsidiaries is not clear, explained Mr Sinha in his address at the Financial Planning Congress. "A single, harmonized and uniform legislation applicable to all banks will provide t ransparency, comprehensiveness and clarity and provide ease of regulat ion and supervision to the RBI," said the Deputy Governor. He observed that there is also a need to sort out the conflicts and overlaps between the primary laws governing the banking sector and other applicable laws. For example, the Compet it ion Act , 2002 is in conflict with the provisions of the BR Act, SBI Act and other statutes dealing with the amalgamation of banks. Considering the challenges faced in quick resolut ion of failed cooperat ive banks, certain enabling provisions in the BR Act facilitat ing RBI to sanct ion a scheme for takeover of banking assets and liabilit ies of a cooperat ive bank by commercial banks would be desirable. Part ial merger of certain businesses or assets and liabilit ies of banks also may need to be examined, said Mr Sinha. Voluntary mergers and t ransfers help consolidat ion in financial sector and pave the way for stronger financial institut ions to rescue the weaker ones, he emphasised. Appropriate amendments may have to be carried out in the BR Act to provide a statutory backing for the banking secrecy laws and the limits on the privacy of customers should be laid down. Source:ht tp:/ / www.thehindubusinessline.com/ industry-and-economy/ banking/ art icle2750008.ece

Financial inclusion to soon fetch tax benefits for banks, institutions

December 27, 2011 Banks and financial inst itut ions may get tax benefits on profits made through act ivit ies leading to financial inclusion.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

186

Further, any losses these inst itut ions incur, as a result , may also be allowed to be carried over for a longer period. At present under Sect ion 72 of the Income Tax Act , 1961, losses from any non-speculat ive business act ivity are allowed to be carried over for up to eight subsequent assessment years. A senior Government official told Business Line, "A proposal to this effect is being act ively considered by the Department of Revenue." However, another senior official said, "This is not an easy task as segregat ing income from the financial inclusion is not easy". On behalf of the sub-commit tee on financial inclusion of the Prime Minister's Council for Trade and Industry, the CEO of ICICI Bank, Ms Chanda Kochhar, made a presentation before the Prime Minister, senior Cabinet Ministers and other members of t rade and industry councils on March 31. This sub-commit tee also includes Mr Sunil Bhart i Mit tal, Chairman, Bhart i Entreprises, among others. Banks say that at a t ime when profit margins are under pressure, tax breaks or carrying over losses for a longer period would be a big booster for incurring new expenditure, especially in areas where earnings are very low. Financial inclusion talks about expanding banking services in un-banked areas and opening no-frills accounts, among others. Key recommendations The sub-commit tee made 13 key recommendat ions. An Act ion Taken Report prepared by the Government said some of these have already been fulfilled. For example, the sub-commit tee suggested permit t ing 'for profit ' ent it ies to act as Business Correspondents. Barring NBFCs and microfinance inst itut ions, all 'for profit ' organisat ions have been allowed by the RBI to act as Business Correspondents. Another recommendat ion is about sharing common infrastructure to leverage benefits of economies of scale. Here, the Government said that two pilot projects are being implemented in Bulandshahar, Ut tar Pradesh (Punjab Nat ional Bank) and Mewat, Haryana (Syndicate Bank). The recommendat ions also include allowing basic but essent ial services such as low-value remit tances by non-banking players. While nothing has been said about non-banking players, the Act ion Taken Report said out of the 46 mobile banking licences issued, 33 have already commenced operat ions. Source:ht tp:/ / www.thehindubusinessline.com/ industry-and-economy/ government-and-policy/ art icle2750037.ece

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

187

Banks Can't Charge for Account Closure December 27, 2011

Banks have been told not to charge fees from customers who are closing their accounts as RBI moves to make modern banking accessible to millions of ordinary people, including pensioners and the poor. In a recent meet ing between the banking regulator and heads of various banks, the central bank has told the banks not to charge any fee if a customer desires to opt out of a bank either due to a change in employment or a t ransfer to another city. "How can you penalise a customer for not offering a service. Secondly, how can a bank have the authority to debit money from their customers account and credit it to their own P&L?" RBI deputy governor KC Chakrabarty told bankers who resisted the move to waive the fee, a banker present in the meet ing said on condit ion of anonymity. Coming just weeks after freeing savings rates, this diktat by RBI is likely to increase costs for all banks. But the worst -affected are likely to be the the private sector and foreign banks who charge high fees for account closures. The savings rate deregulat ion has already kicked off a rate war in the industry with aggressive new banks such as YES Bank and Kotak Mahindra increasing their rates to 7% and 6%, respect ively. Account closures by people tempted by these high rates are likely to increase and banks are unlikely to have the freedom to impose any costs on such customers. But customers are likely to feel happy as it would make it easier for them when they move jobs or cit ies. "Waiver of fee for closing a deposit account is a natural corollary to waiver of pre-payment fee on float ing rate home loans. The customer should have right to freely exit from their loan or deposit account and this should not at t ract any charge," is the message from RBI, a banker present in the meet ing told ET. The central bank recent ly persuaded most banks to waive prepayment penalty for customers who wish to prepay their home loans. Fees on closure of accounts is now on top of its agenda, especially after the Damodaran Committee report on improving customer service advocated that the customer should have a right to a basic savings account with cheque book and ATM card facilit ies. The commit tee was formed to look into banking services rendered to retail and small customers and pensioners. The commit tee was also mandated to look into the grievance redressed mechanism pract iced by banks and suggest measures for expedit ious resolut ion of complaints. It submit ted its report in August this year. All banks charge customers for closing their accounts. In some cases, it is as low . 100, but private sector and foreign banks are known to charge anywhere between . 500 and 1,000. Recent ly, HDFC Bank quadrupled its fee to 500 from January 1, 2012.

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

188

The meet ing with RBI was at tended by CMDs of some PSU banks and the CEOs of ICICI Bank, Chanda Kochhar, and HDFC Bank's Aditya Puri. Officials said the private and foreign banks conveyed to RBI that there is cost involved in close an account which is being levied on the customers. Source:Http:/ / epaper.t imesofindia.com/ Default / Script ing/ Art icleWin.asp?From=Archive&Source=Page&Skin=ETNEW&BaseHref=ETM/ 2011/ 12/ 27&PageLabel=12&Ent ityId= Ar01203&ViewMode=HTML

RBI pushes for consolidation in banking December 27, 2011

RBI has said that consolidation in the banking sector would pave the way for stronger financial inst itutions with the capacity to meet corporate and infrastructure funding needs, and to rescue distressed lenders. However, it has prescribed a non-operat ive bank holding company' st ructure to avoid creat ion of complex inst itut ions. "Voluntary mergers and t ransfers help consolidat ion in the financial sector and pave the way for stronger financial inst itut ions to rescue the weaker ones. Such voluntary measures, while saving the const ituents of weaker inst itut ions, provide business opportunity to the stronger ones to spread their presence in different geographies," said Anand Sinha, deputy governor, RBI. Sinha was speaking at the Financial Planning Congress 2011, organised by the Financial Planning Standards Board of India here last week. He added that India needs bigger banks to meet its infrastructure needs and to finance large industrial projects. However, the Compet it ion Act , 2002 (as amended by the Compet it ion (Amendment) Act , 2007) could come in the way of consolidat ion. One of its provisions requires an enterprise proposing to enter into a combinat ion via a merger or an amalgamat ion to not ify the Compet it ion Commission. The commission has been allowed up to 210 days to decide on it before the default clause kicks in. RBI's comments come at a t ime when many in the Indian industry feel that Indian banking has not kept pace with India Inc's funding requirements. In the two years preceding the outbreak of the 2008 global financial crisis, most business houses acquired multinat ionals through leveraged finance, with the support of internat ional borrowers. "Given the crisis in the West, it would be difficult for Indian corporates to acquire internat ional assets as none of the large lenders are in a posit ion to extend funds for acquisit ion," said the head of a large consultancy firm. At the same t ime Indian banks do not have the balance sheet size to fund large corporates. One of the lessons of the crisis, according to Sinha, was the downside of having ‘too big to fail' ent it ies. Very big and complex ent it ies pose supervisory issues to the regulators and pose serious systemic risks. He emphasised the need to ensure that structures are not

Canara Bank Samachar Lehar January 2012

Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

Page

189

complex and that there are effect ive resolut ion mechanisms to ensure orderly winding up of these systemically important ent it ies, in case of crisis. According to RBI, a non-operat ive bank holding company structure may be useful to deal with financial conglomerates as this great ly reduces risks spilling over from other ent it ies in the group. Source:ht tp:/ / epaper.t imesofindia.com/ Default / Script ing/ Art icleWin.asp?From=Archive& Source=Page&Skin=TOINEW&BaseHref=TOIM/ 2011/ 12/ 27&PageLabel=20&Ent ityId= Ar02001&ViewMode=HTML

KEY BANKING INDICATORS BANK RATE 6.00% Base Rate of major Banks 9.50-11.00% CRR 6.00% BPLR of major Banks 14.00-17.50% SLR 24% FOREX RESERVES US $ Billion 310.562 REPO RATE 8.50% SCB Total Deposits - `. Cr. 54,17,244 REVERSE REPO 7.50% SCB Total Credit - `. Cr 40,14,556 LIBOR US $ 6 month

0.8025% CREDIT- DEPOSIT RATIO 74.11%

Compiled by

Regional Staff Training College, Gurgaon Sector- 18, Plot no- 80, Near IFFCO Chowk

Gurgaon.

Email:[email protected] PH: 0124-2341589 FAX: 2341588