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358th Issue Banking News 21st to 26th April 2014 By Vasant Ponkshe, Secretary AIBOA Pune

Year 7. Issue 45

SINCE 20.06.07 ISSUE NO- 358BANK OF MAHARASHTRA OFFICERS’ ASSOCIATION

(AFFILIATED TO AIBOA) Mumbai Office: Jiva Devashi Niwas, Ranade Rd, Dadar, Mumbai 029.

Pune Office: 1501, Lokmangal, Shivajinagar, Pune 005.

BY VASANT PONKSHE SECRETARY AIBOA CHAIRMAN BOMOA

BANKING NEWS21st to 26th April 2014

Raghuram Rajan’s Wars: Rift among freemasons, tension at home

For the past hundred years, central bankers - men and women with the magical power to create and extinguish money - have been perceived as a club of freemasons. Among them, they even shared a few secrets that they held back from the rulers who put them in office. Disagreements, which couldn't be sorted out over a glass of wine, rarely found their way to the Press. It had been left to authors of financial history to discover subtle clefts years later while rummaging through archival papers and yellowing documents; some differences, had these been ironed out in time, could have cushioned busts and minimized miseries.

Kept in the Dark So, when a closely tracked central banker, flags off his differences with counterparts elsewhere, possibly for the media to lap it up, it, in a way, marks the start of an era. Last week, when Raghuram Rajan forcefully argued that monetary authorities across continents should consult each other, make a mental note of the turbulence their policies could cause on emerging markets, he made news. First, it came from an economist of the stature of Rajan; second, the RBI governor chose Washington to make his point at a time diplomatic relations between India and US have worsened. At the meeting of central bankers, the governor met with surprising resistance. His counterparts reacted the way ministers do on trade barriers and subsidies at WTO summits. Rajan's advice may be ignored for years to come, but his statement, besides bringing out into the open differences between central banks, would carry a brewing debate beyond the confines of academia. Five years ago, the same central banks which were willing to spell out their woes, discuss and seek support from peers (or inferiors) all over the world for a co-ordinated action to bail out America and Europe, are today unwilling to share information, or even give a sense of what they have in mind. When there was an urgency to save basket economies through stimulus, everyone mattered; today, when things are beginning to look up and windows of easy money are being shut gradually, the distant central banks of emerging economies (EMs) - which had to deal with the inflow and outflow of hot money and trail of destruction such flows leave behind - are being kept in the dark. It's a valid argument and Rajan's views would certainly find takers among central bankers of some of other EMs who are hesitant to voice similar concerns. A possible sharing of information on tapering and views on interest rate cycle by Fed with other central banks is not exactly insider information or parting with a state secret. It would reflect a certain maturity that central bankers have displayed in the past. The

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358th Issue Banking News 21st to 26th April 2014 By Vasant Ponkshe, Secretary AIBOA Pune

meltdown of 2008, after all, was an outcome of inept monetary policy feeding the greed of foolish bankers.

But while Rajan's may not be a voice in the wilderness, he may not find support from countries that are less affected by sudden cross-border money flows. Information of what Fed's and ECB's plans are is more crucial for India which needs more dollars for imports than what it earns through exports. China, for instance , will be less bothered. Even India, which looked more helpless a year ago when it had to grapple with news of tapering and high current account deficit, was largely unruffled by the crises in Argentina, Turkey and Ukraine , thanks to a dramatic improvement in the deficit number.

Battle at Home?As a central banker in an interconnected world, Rajan strongly feels what he said at Washington. His remarks bring to the fore arguments economists like Helene Rey of the London Business School had made in the past. It's a polemic that would play out in the ethereal world of central banking, and occasionally find mention in newspapers. But at home, with a new government a month away, Rajan will have to deal with another question that is more immediate and lot more noisy. It's "inflation targeting" -- a subject that's core to Rajan's thinking. He was quick to dismiss reports of his differences with the BJP as mere speculation. Faced with a pointed question, there is little else that he could have said. But it would be naive to think that BJP's stance on interest rates was a surprise to Rajan. By the time he took charge at RBI, it was fairly certain that UPA was afading force. He wasted no time to put down his thinking on inflation and interest rates in black and white. Now, irrespective of whether a crop failure or demand recovery pushes up inflation, chances are he would display a streak of stubbornness if the next FM nudges him to cut rates.

RBI Governor Raghuram Rajan gets Ben Bernanke's support for inflation targeting

MUMBAI: Raghuram Rajan's efforts to make 'inflation targeting' the corner stone of Indian monetary policy drew support from former Federal Reserve chairman Ben Bernanke, though with the caveat that a focus on inflation does not mean the central bank ignores everything else. Bernanke, credited with saving the global financial system from collapse with unconventional monetary policy, said that in a high inflation economy even a relatively high target is helpful since it anchors expectations. "I have been very supportive of inflation targeting," Bernanke told the audience at Kotak Presidium, a thought leadership series from Kotak Mahindra Bank. "Monetary policy benefits from clarity and transparency. It really helps people know what you are trying to achieve. Particularly in a country where inflation has been high, setting a target, even if higher...it tells markets what to expect." Inflation targeting has become a contentious issue in India ever since the a committee headed by Urjit Patel, a deputy governor, recommended that the RBI target consumer price inflation rate of 4% with a two percentage point band. Although, Rajan has not formally accepted the report, he is said to be inclined to formally adopt inflation-targeting. Critics have argued that targeting consumer price rise would kill growth in an emerging market. On Tuesday, Bernanke balanced his general support of inflation-targeting with the caveat that a single minded pursuit of a price target may not always be helpful. "Being in favour of inflation targeting is not as saying ignore everything else," said Bernanke. "Central banks, even paying single minded attention, do pay some attention to growth." Amid the rising debate in India about the future of Rajan as a central banker if the Bharatiya Janata Party is voted to power, Bernanke said a mature economy needs an independent central bank, though he did not comment directly on the matter. "I do think that a mature economy, which India is becoming, a modern financially oriented economy.... an independent and responsible central bank is really central," said Bernanke. Countering Rajan's charge that central bankers in the developed did not pay enough attention to what their actions mean to developing markets, Bernanke said the US Federal Reserve had always dome so. Bernanke who said he goes 'back a long way' in his relationship with Rajan, said the Indian central banker may be barking up the wrong tree by claiming that central banks in the developed world were turning

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358th Issue Banking News 21st to 26th April 2014 By Vasant Ponkshe, Secretary AIBOA Pune

Nelson's eye to the impact of their decisions in emerging markets. "There is a perception in some quarters that US does not pay attention to the situation," said Bernanke. "Nothing could be farther from the truth. We meet at least 8 or 10 times a year with emerging markets and central bankers all around the world explaining the state of the US economy and listening to their comments. We have always heard. While the mandate of the Fed is to focus on US employment and inflation, we always recognised the US is part of a global system. That certainly feeds into monetary policy makers." Bernanke said the US economy is recovering and that it could help all the emerging markets to benefit from it as well.

Rajan went with panel view on status quo

RBI has been placing the main points of discussions of the meetings of TAC on monetary policy in the public domain with a lag of roughly four weeks after the meeting

For the Reserve Bank of India (RBI)’s first bi-weekly monetary policy held on April 1, governor Raghuram Rajan decided to go with the recommendations of all the members of the technical advisory committee (TAC) and maintain status quo on policy rates. The TAC meeting was held on March 26. RBI has been placing the main points of discussions of TAC meetings on monetary policy in the public domain with a lag of about four weeks. These meetings are chaired by the RBI governor and attendees include senior RBI officials and external members, with expertise in various fields. To manage the risks from capital outflows, most members recommended RBI focus on building foreign exchange reserves. One member suggested to improve transmission of monetary policy signals, the statutory liquidity ratio be lowered to 22 per cent of net demand and time liabilities. The TAC members emphasised the framing of the forward guidance (estimate) was important. “Forward guidance should aim at maintaining interest rate stability, while recognising the challenges of dealing with capital outflows and supply shocks in the process of negotiating the disinflation path set out for January 2016,” read the minutes. At the March 26 meeting, one member felt while forward guidance was important for anchoring inflation expectations, it should indicate the policy would turn growth-supportive if inflation adjusted for base-effect declines. Another member recommended RBI give forward guidance of a decline in the repo rate. Members expressed concern on inflation being persistently higher than in other countries. On the inflation outlook, most noted moderation in vegetable prices drove the recent dip in headline inflation, adding this was unlikely to be sustained. The members felt growth in real gross domestic product would be muted. As exports and imports were declining, the manufacturing outlook was also weak, they said. Some TAC members said risks on the current account deficit front couldn’t be ignored, considering the sluggish financial savings. In the near term, external sector risks might have eased because of a rise in forex reserves through the last six months. In the medium term, however, the risk of capital outflows remained and might be accentuated if the US Federal Reserve raised interest rates earlier than anticipated, they said. Other members expected a surge in foreign currency inflows, which would put upside pressure on the rupee. The members cautioned against a policy of allowing the real exchange rate to appreciate. While exchange rate appreciation might help lower inflation, it wasn’t good for the economy, as some categories of exports were highly sensitive to real appreciation and due to the current account deficit, they said. One member felt an exchange rate below 60/dollar could hurt manufacturing growth due to severe import competition. Some members were of the view that RBI must actively intervene in the foreign exchange market to prevent excessive exchange rate appreciation, while some questioned the need for intervention when capital inflows were high. They felt when inflows were high, companies should be allowed to adjust their balance sheets; RBI shouldn’t intervene in the market. Reserves should be used to manage volatility alone, not the exchange rate, they said.

Finmin widens monitoring of NPAs at public sector banks to top 50   accounts

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358th Issue Banking News 21st to 26th April 2014 By Vasant Ponkshe, Secretary AIBOA Pune

Stepping up pressure on public sector banks (PSBs) to bring down bad loans, the finance ministry has widened its monitoring of non-performing assets (NPA) from ‘top 30’ NPA accounts to ‘top 50’ for all state-owned lenders. The ministry has also asked lenders to submit an action-taken report on recovery for the ‘top 50′ NPA accounts as on December-end 2013.In a communication to PSB chiefs, the new secretary of department of financial services (DFS), GS Sandhu, also sought a list of willful defaulters and findings of prima facie diversion of funds by such borrowers. The scope of supervision has been extended to the top 50 NPA accounts to get a better picture of the bad loan problem, official sources said. At June-end 2013, gross NPAs with the top 30 accounts of 26 PSBs were worth Rs. 63,671 Cr., which is around 35% of their total gross NPAs of Rs. 1,82,829Cr. Incidentally, the CBI is also scrutinising the top 30 cases of NPAs for the entire banking system as part of its efforts to find out any instances of criminality, including fund diversion. In the last quarterly meeting to review the performance of PSBs and financial institutions, finance minister P Chidambaram had expressed concerns over high NPAs in two segments — large corporates and small industries. The seriousness of the NPA problem was also captured by ratings agency Fitch. In a report released on Thursday, Fitch Ratings expressed concerns over stressed assets in India compared to other Asian emerging markets. Fitch said it “expects Indian banks’ asset quality to weaken further, with stressed assets (NPAs and restructured loans) to rise from 10% (at mid-2013) to around 15% during FY15 (by March 2015).” “State banks are most affected and may need R3.8 lakh Cr. of new equity by 2019 to achieve full compliance with Basel rules, although delayed implementation has reduced near-term capital pressure,” it added.

In addition to bad loan recovery efforts on top 50 NPAs and the list of willful defaulters, the DFS secretary also sought details of monitoring of projects by state-owned lenders in corporate credit after loan disbursement. He also wanted to know if the PSBs were maintaining a database of assets to which lending has been done and, if so, the details of it. This will form part of the ministry’s performance review of PSBs, following its concerns over rising NPAs and deteriorating asset quality, sources told FE. The ministry had in October last year asked PSBs to set up a separate vertical headed by an officer of the rank of general manager for recovering money from bad loans. Gross NPAs of PSBs had surged to 5.17% of their advances in December-end 2013 from 3.84% at March-end 2013 (and 4.18% in end-December 2012) while their restructured assets increased to 7.44% from 7.18% during the period. A harder look at the NPA data reveals that at December-end 2013, maximum NPAs were in the small and medium enterprises loan segment with 7.21% of advances while agriculture loan NPAs were at 5.99%. NPAs in the corporate loan segment were 5.28%. In retail loans, NPAs were 2.74% and, in real estate, they were 1.83%. Data for last fiscal’s December quarter show that PSBs were able to bring down NPAs by just Rs. 60,426 Cr., of which recoveries were only Rs. 18,933 Cr. while upgrades were to the tune of Rs. 21,988 Cr. Write-offs stood at Rs. 19,505 Cr.

RBI governor Rajan urges global crisis 'safety net'

MUMBAI (Reuters) - Reserve Bank of India (RBI) Governor Raghuram Rajan on Thursday proposed the creation of a global "safety net" administered by a multilateral body such as the International Monetary Fund (IMF) that could provide funds for countries in case of economic emergency. Providing such cash would ease pressures on countries to build up currency reserves as defences against any sudden outflows, said Rajan, endorsing a scheme that has previously been proposed by the IMF and discussed by policymakers. Rajan, a former chief economist at the IMF, repeated his call for central banks to be mindful of the impact of their policies on other countries. The RBI governor went on to propose the appointment of "an impartial international assessor" who could examine the effects of unconventional central bank monetary policies on the global economy, although he did call this recommendation "a little too idealistic."Rajan's reflections were contained in a prepared speech the prominent

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358th Issue Banking News 21st to 26th April 2014 By Vasant Ponkshe, Secretary AIBOA Pune

economist was due to deliver at the Brookings Institution in Washington on Thursday."We have to design a better multilateral liquidity safety net so that countries do not feel they are on their own in managing market turmoil, and so that they do not build enormous stockpiles of reserves," the text of the speech read. Rajan, who took the helm of the RBI in early September, has previously criticised the U.S. Federal Reserve for not taking into account the impact of its easy monetary policy on emerging economies. The Fed's policies, adopted gradually in the aftermath of the 2008 global financial crisis, had propped up emerging market assets, but hit India hard last year when investors feared the U.S. central bank would start unwinding its programme. The rupee slumped to a record low in late August as investors feared outflows in a country that depends on foreign capital to bridge its current account deficit. Although the actual start of the Fed's withdrawal of its monetary stimulus in December had little impact on India after the country took steps to narrow its current account deficit, the RBI has started buying dollars and bolstering its foreign exchange reserves since last month to curb volatility in the rupee after a recent rally. Rajan said a global safety net would be good policy that could help limit the need to build up reserves, offering little credit risk against what he called "extreme balance sheet policies," without specifying whose policies he was referring to."Multilateral arrangements are tried and tested, and are available more widely, and without some of the possible political pressures that could arise from bilateral and regional arrangements," Rajan said."Indeed swap arrangements can be channelled through multilateral institutions like the IMF instead of being conducted on a bilateral basis."

UBI issue points to lack of corporate governance in PSBs: RBI

RBI has raised issue of enhancing corporate governance norms in PSBS with govt and called for action on priority basis

The recent fiasco in United Bank of India (UBI) is not an isolated example and points to the larger issue of corporate governance in public sector banks , Reserve Bank of India’s (RBI) deputy governor K C Chakrabarty said on Tuesday. RBI has raised the issue of enhancing corporate governance norms in public-sector banks with the government and called for action on a priority basis. Kolkata-based UBI reported doubling of net losses in the third quarter, following which its chairperson and managing director Archana Bhargava took voluntary retirement. RBI had asked an external agency to conduct a forensic inquiry in the bank, upon Bhargava’s request, which is also seen as unprecedented. “With respect to UBI, it is neither shock nor surprise to RBI. Bank chairperson wrote to RBI and finance minister is saying that in the bank, accounts are not classified as NPA (non-performing assets), and requested for forensic audit. So we started forensic audit and the conclusions are found to be valid that bank accounts are not classified as NPA, because of technology or other reasons. This is nothing new that bank chiefs say NPAs gone up due to system-generated NPAs,” said Chakrabarty. He also highlighted that the bank has suffered losses because of higher provisioning to pension (Rs 625 Cr.), which was not provided earlier. “It is not only UBI, but many banks have been found to have deferred provision on this regard,” he said. “These issues point towards issues of corporate governance. We have written to the government of India to take steps and this is not for UBI but for banking system as a whole,” said the outgoing deputy governor. “It is not a question of one or two banks. We are definitely worried about how the overall system is functioning. We are in dialogue with the government to improve the situation,” said Chakrabarty. On whether the central bank has asked the government to reduce its stake in public-sector banks in order to provide greater autonomy, which is seen as key for better efficiency, Chakrabarty said while bank performance is ownership-neutral and if government ownership can ensure autonomy in banks, if the management quality can be maintained, there is no need for such a step. “It is a question of quality of management and autonomy. If government ownership can ensure the autonomy in banks, if the management quality can be maintained, (then) there is no need.

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358th Issue Banking News 21st to 26th April 2014 By Vasant Ponkshe, Secretary AIBOA Pune

But if there is a constraint on that, the government may look forward. Second, there is an issue of budgetary constraint. So, if the government has some limitations, they may think of other options,” he added.

Reserve Bank of India's executive director G. Gopalakrishna takes VRS, joins as CAFRAL director

MUMBAI: G. Gopalakrishna, Reserve Bank of India's executive director, who was superseded for deputy governor's post, has voluntarily retired from his post. He has taken charge as the director of the Centre for Advanced Financial Research and Learning ( CAFRAL), a fledgling research body, from April 21, according to a statement from the central bank. His term was to end in a few months. In January, the finance ministry had expressed its displeasure when the RBI search committee headed by RBI governor, Raghuram Rajan, had ignored G. Gopalakrishna, the senior most RBI executive director, from the shortlist for the post of deputy governor. RBI had shortlisted three of its executive directors to succeed Anand Sinha who retired recently. R. Gandhi and P. Vijaya Bhaskar were the other two executive directors named in the list to succeed Sinha. Finally, the government appointed R Gandhi as the deputy governor. To resolve the conflict, the RBI had offered Gopalakrishna the position as the director of the research body, which would have given him a deputy governor rank.

Domestic banks well-positioned to cope with tapering: Moody's

MUMBAI: The country's banking system is well-positioned to cope with the financial impact of the reduction in monetary stimulus by the US Federal Reserve and the resultant rise in interest rates, according to global rating agency Moody's Investors Service. "The strengths of the banking systems in India and also in the Asean region are currently underpinned by their relatively strong capital buffers, modest levels of problem loans, high recurrent profitability and low reliance on foreign funding," Moody's vice-president and senior credit officer Eugene Tarzimanov said in a note. The US Fed had on May 24 hinted at withdrawing its third round of quantitative easing, or bond buying programme, worth $85 billion each month, which began in the wake of the worst credit crisis in September 2008. However, the Fed started trimming its programme in January. The Moody's report, titled 'Asean and Indian Banks Resilient to US Tapering and Higher Interest Rates,' noted that compared with other emerging markets, Asean and Indian banks are more resilient to the potential adverse impacts associated with tapering, mostly due to the high economic growth rates in the region, relatively large reserves at the sovereign level, rising income levels and their own good credit fundamentals. The report painted a good picture of Asean banks and said they will continue to benefit from a supportive economic environment in the region, characterised by growing trade flows between Asia and the recovering US and European economies. At the same time, the report warned that banks will see higher stressed loans on their corporate and retail books, especially on foreign currency loans, if their domestic currencies fall substantially. That apart, negative financial market adjustments would also lead to mark-to-market losses on their bond investments. However, the report stated that higher interest rates will support banks' net interest margins, which, to some extent, will mitigate their higher credit costs.

Shares of govt banks rise on reports of capital infusion

Despite the negative market sentiment, shares of state-owned government banks rallied on Friday on reports of additional capital infusion by the government. Shares of most PSBs gained, even as the overall market ended weak due to disappointment fourth-quarter results posted by many companies, including private sector lender ICICI Bank. Major gainers were mid-sized government banks, including Oriental Bank of Commerce, Indian Overseas Bank and Allahabad Bank, which gained about three per cent each. The Sensex and the BSE

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358th Issue Banking News 21st to 26th April 2014 By Vasant Ponkshe, Secretary AIBOA Pune

Bankex closed with a loss of 0.82 per cent and 0.68 per cent, respectively. Quoting finance ministry officials, a Press Trust of India report said the Centre was planning to infuse up to Rs. 7,000 Cr. into public sector banks (PSB) this financial year. “In the interim Budget, the government had provided Rs. 11,200 Cr. for public sector banks. There could additional provision of Rs. 7,000 Cr. for these banks when the government tables the regular Budget for 2014-15 in June-July,” a senior finance ministry official was quoted as saying. In 2013-14, the government had infused about Rs. 14,000 Cr. into PSBs. Besides capital infusion by the government, state-owned banks also tap the equities market for capital. In the recent past, however, many banks, including State Bank of India (SBI), have found it challenging to raise capital from the market. In January, SBI’s qualified institutional placement had to be bailed out by state-owned insurer Life Insurance Corporation. Earlier, investors had turned wary towards state-owned banks, owing to their weak financial and credit profiles. Also, their profitability had been under pressure due to higher provisioning towards non-performing assets. In recent months, investor sentiment towards PSBs has improved due to cheap valuations. So far this year, most state-owned banks have outperformed the market.

Bandhan to appoint consultants for banking foray soon

KOLKATA: Bandhan Financial Services, the city-based micro-finance institution which got the in-principle banking licence from Reserve Bank of India, will shortly appoint consultants for facilitating its transformation into a bank. "We are talking to various consultancy firms like KPMG, BCG, McKinsey and Ernst & Young, among others, for appointing a consultant. We will shortly give a mandate to one of them," CMD of Bandhan Financial Services, Chandra Sekhar Ghosh told PTI. The mandate to the consultancy firm would be on how to transform the MFI into a full-fledged bank. "The consultancy firms have a huge experience in these matters. So it is necessary to seek outside help for smooth transition", Ghosh said. Besides this, the MFI is also in the process of hiring IT consultants for putting in place the required infrastructure needed for running a bank. He said the appointed IT consultants would, among other things, assist in providing the necessary software and hardware for connecting the branches of the proposed bank online. On getting the suggestions from the consultants, Bandhan Financial Services would go for hiring specialists to fill the gaps in the existing manpower strength."We hope that we will be able to start the operations within the stipulated 18 months given to us by the RBI," he said. In reply to a query, Ghosh said there was no immediate need for capital. "The regulatory capital requirement to start a bank was Rs. 500 Cr. and our networth is Rs. 1,100 Cr.. The bank will be promoted by Bandhan Financial Services," he said. Out of the present 2016 branches of Bandhan, 70 per cent are in the rural belt, Ghosh said adding some of them would be restructured. Presently, Bandhan is serving 55 lakh borrowers and has 13,000 employees on its rolls.

RBI curbs banks from extending guarantees, ‘letters of comfort’ to overseas arms of firms

The Reserve Bank of India on Tuesday imposed restrictions on non-fund based credit facilities — guarantees, stand-by letters of credit, letters of comfort, and so on — extended by banks to Indian companies’ overseas arms. Further, the central bank disallowed repayment of rupee loans taken from the domestic banking system through external commercial borrowings (ECBs) extended by overseas branches/subsidiaries of Indian banks. The overseas arms of India companies include joint ventures, wholly-owned subsidiaries, and wholly-owned step-down subsidiaries. The RBI directed banks, including their overseas branches/subsidiaries, not to issue non-fund based credit facilities on behalf of overseas arms of Indian companies for the purpose of raising loans/advances of any kind from other entities except in connection with the ordinary course of overseas business.

Non-fund based credit

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358th Issue Banking News 21st to 26th April 2014 By Vasant Ponkshe, Secretary AIBOA Pune

This directive has been issued as the RBI has found that banks were extending non-fund based credit on behalf of Indian companies’ overseas arms for purposes which are not connected with their business. Rather, in certain cases, the credit was used to get foreign currency loans for repaying rupee loans. About a year back, a clutch of Indian banks found themselves in a soup when the stand-by letters of credit extended by them on behalf of a big gem and jewellery company was invoked by a couple of foreign banks. Since the risk remains within the Indian banking system where the ECB is from overseas branches/subsidiaries of Indian banks, the RBI said repayment of rupee loans taken from the domestic banking system through ECBs extended by overseas branches/subsidiaries of Indian banks will, henceforth, not be permitted.

Exporters

The RBI asked exporter-borrowers to desist from the practice of using export advances, received on the strength of guarantees issued by Indian banks, for repayment of loans taken from Indian banks. This practice is a clear violation of RBI’s instructions except in cases where banks have received approvals under the Foreign Exchange Management Act.

RBI likely to be in pause mode till Dec: BofA-ML

Financial services company says inflation pressures are likely to remain as a possible El Nino could affect the monsoon, which in turn would push up food prices

The Reserve Bank of India is likely to be in a "pause" mode till December, as rising El Nino risks threaten the monsoon, a Bank of America Merrill Lynch report said. According to the global financial services major, inflation pressures are likely to remain as a possible El Nino could affect the monsoon, which in turn would push up food prices. "On balance, we expect the RBI to pause till December, with rising El Nino risks threatening the monsoon," the report said, adding that a "5% swing in food prices impacts CPI inflation by 250 basis points". The RBI's target is to ease retail inflation, as measured by the Consumer Price Index, to 8% by January 2015 and 6% by January 2016.Both retail and wholesale price inflation accelerated in March due to rising food prices. While wholesale inflation rose to a three-month high of 5.7%, retail inflation inched up to 8.31%, after softening for three straight months since December. The RBI had increased the key policy repo rate three times since Raghuram Rajan took over as Governor in September. El Nino refers to the warmer-than-average sea surface temperature in the central and eastern tropical Pacific Ocean. This condition occurs every 4-12 years and had last impacted India's monsoon in 2009, leading to the worst drought in almost four decades. If El Nino occurs by summer, it will drive rain clouds away and impact the June-September monsoon. If it stretches to the fall, India will mercifully escape, it added.

YES Bank, L&T Finance Holdings' deal: Will RBI give a nod?

MUMBAI: YES Bank and L&T Finance Holdings are independently testing the regulatory waters on what the Reserve Bank of India's stance could be on a possible merger or a stake purchase by one of the two in the other, said two people familiar with the development. YES Bank chairman Mr. Srinivasan, who used to be with the RBI, met some officials of the banking regulator to get a sense of how it would react to a stake sale or a bank merging with a non-banking finance company (NBFC), said the people cited above, requesting anonymity. The queries were said to be general in nature with no names mentioned. An L&T Finance representative is also said to have met officials at the regulator to find out whether the company could buy a stake of more than 5% in a bank."I have no information on this," said Rajat Monga, chief financial officer at YES Bank."As a policy we do not comment on speculation," said N Sivaraman, president and wholetime director, L&T Finance. L&T

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358th Issue Banking News 21st to 26th April 2014 By Vasant Ponkshe, Secretary AIBOA Pune

Finance didn't get a bank licence in the latest round that saw just two successful applicants and is keen to convert itself into a bank as that could lower its cost of funds. The company has been positioning itself in the past few years as a full-fledged financial services firm and includes a mutual fund and mortgage lending among its divisions. YES Bank, which has been caught up in a legal row between two founders, may be looking for ways to put that behind it. The dispute is between Rana Kapoor and the widow of Ashok Kapur on the rights of the late Kapur's family to nominate a director on the board. There is no precedent of an NBFC acquiring a bank and any such deal will have to pass strict RBI scrutiny. In 2004, RBI had approved the merger of Ashok Leyland Finance or ALF with IndusInd Bank both promoted by the Hindujas. Following this, the central bank made it mandatory for banks to take prior approval before acquiring an NBFC.

PSU banks may get additional capital infusion of Rs. 7,000 Cr.

NEW DELHI: To further enhance capital base, the government is planning to make additional infusion of up to Rs. 7,000 Cr. in the public sector banks during the current fiscal. "In the interim budget, the government provided Rs. 11,200 Cr. for the public sector banks. There could be additional provision of Rs. 7,000 Cr. for these banks when government tables regular budget for 2014-15 in June-July," a senior Finance Ministry official said. The Department of Financial Services would request for additional funds in regular budget as banks require more capital than what has been allocated in the interim budget, the official said. Even Finance Minister P Chidambaram after interim budget had indicated that the government will provide more funds if it mobilises higher resources. "What we have provided is what we have budgeted now. This is an Interim Budget. In regular budget you will get a full picture what government can provide as additional capital," he had said. "As you know, government has provided Rs. 11,200 Cr. for next year. This is not adequate, but that's the budget estimate... As we find more money, we should infuse more into the public sector banks," he had said. The government infused Rs. 14,000 Cr. in public sector banks during the current financial year ending March 31. Of this, the State Bank of India got Rs. 2,000 Cr. while Indian Overseas Bank received Rs. 1,200 Cr.. In view of the Basel III, or global prudential banking norms, all banks have been planning to shore up their Tier 1 capital. According to RBI Indian banks will require an additional capital of Rs. 5 lakh Cr. to meet the new global banking norms, Basel III. The government, which owns 70 per cent of the banking system, alone will have to pump in Rs. 90,000 Cr. equity to retain its shareholding in the Public Sector Banks (PSBs) at the current level to meet the norms. Of the total Rs. 5 lakh Cr., equity capital will be of the order of Rs. 1.75 lakh Cr. and Rs. 3.25 lakh Cr. as non-equity. RBI recently extended the deadline for Basel III implementation in a phased manner by banks by one year March 2019.

Local boutique firms target HNIs; offer competition to Barclays, Kotak

MUMBAI: India may be going through an economic slump but there's been a surge over the past few years in the number of wealth creators leading to an increase in the ranks of the ultra high net worth (UHNW) and high net worth (HNW) segments. That in turn has fuelled the emergence of new age boutique firms that provide family-office services, business succession planning and estate planning. These desi firms, promoted by top finance and legal professionals, have stormed the wealth management market in the last few months, offering competition to big-league rivals such as Barclays, Kotak and IL&FS. Meanwhile there is talk that a leading global private bank is tying up with an old business group in India to start a boutique family office management firm. The boutique firms sense a windfall in the changing economic scenario. HNIs want to protect the wealth they've created and hold in the form of securities, jewellery, real estate, intellectual property rights (IPR), giving rise to the renewed popularity of proper trust structures.

RBI appoints 3 new executive directors

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358th Issue Banking News 21st to 26th April 2014 By Vasant Ponkshe, Secretary AIBOA Pune

The Reserve Bank of India (RBI) appointed three new executive directors to fill up the posts that were vacated earlier. NS Vishwanathan, who was a principal chief general manager looking after department of non-banking supervision and the senior most among the 14 candidates who were interviewed, has been promoted as ED. The other two EDs are Chandan Sinha, principal CGM of banking operations and development and US Paliwal, principal CGM of human resources. Sources in the central bank indicate, both seniority and merit was considered by making the appointments. The central bank has nine executive directors, and one of them S Karuppasamy, retired recently. R Gandhi, who was executive director, has now been promoted to deputy governor. Also, G Gopalakrishna, one of the executive directors will now become the director of Centre for Advanced Financial Research and Learning (CAFRAL). CAFRAL is a research institution, is promoted by RBI. Separately, the central bank has also re-allocated the departments of the deputy governors following retirement of KC Chakrabarty. Among others, one of the deputy governor HR Khan, has been made in-charge of banking supervision. The process to find Chakrabarty's successor is on and the government has interviewed nine chief executives of various public sector banks.Sources indicate, SS Mundra, the chairman and managing director of Bank of Baroda, is tipped to become the next deputy governor. Traditionally, among the four deputy governors, two are promoted from within the ranks of RBI while one is an economist and the fourth one is a commercial banker. Apart from Chakrabarty - who was a commercial banker -- the other deputy governors are HR Khan and Urjit Patel. A deputy governor can be appointed for a maximum of five years or till the age of 62 while a candidate has to be below 60 years to become eligible for the post. However, there are instances when the criterions were relaxed.

How RBI Governor Raghuram Rajan will build an equation with the new Finance Minister if NDA comes to power

With indications that NDA may come to power, there is speculation over conflict between the central bank governor and the new govt. But much will depend on the equation Rajan can build with the new FM, the way some of his predecessors did. The Reserve Bank of India Governor, Raghuram Rajan, passed the banking licence litmus test by leaning on Bimal Jalan. The former Chicago University Professor can take a leaf out of the same elder statesman of Indian bureaucracy on how to navigate the rough seas after May. Soon after the Atal Bihari Vajpayee-led National Democratic Alliance, or NDA, Government came to power in May 1998, Jalan, the then RBI governor, reached out first to finance minister Yashwant Sinha and principal  secretary to the prime minister, Brajesh Mishra. That was not to save his job, but to save the economy. So convincing was Jalan that not only did he manage to end the cacophony of voices from the party that called for a stronger rupee, he also got rewarded with another term at the RBI, and a nomination to the Rajya Sabha. Sorting out such politically tricky issues is inevitable for any central bank governor globally. At that time, it didn't matter to the alliance that Jalan had been appointed by the previous United Front Government led by IK Gujral with P Chidambaram as Finance Minister. Similar challenges await Raghuram Rajan, with a new government set to assume office — one which is widely perceived to be a non-Congress political formation. Doom sayers, among them, shockingly, government officials, are already at work claiming how his approach may not be in consonance with a Modi-led sarkar.

Allahabad Bank registers 7 pc growth last fiscal

KOLKATA: State-owned Allahabad Bank has registered a growth of 7 per cent in the last financial year. "In the fiscal 2013-14, the bank's business stood at Rs. 3.31 lakh Cr., with deposits at Rs. 1.90 lakh Cr. and advances at Rs. 1.41 lakh Cr.," bank's chairman and managing director Rakesh Sethi told reporters here today. He said that in the absence of takers of any corporate credit, the bank was now focusing on farm credit, retail and the MSME sector. The newly-appointed CMD said that the bank would target arresting of slippages as well as maintaining asset quality. Although the bank had obtained the RBI

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approval for qualified institutional placement (QIP), Sethi said the government nod was yet to come. He said that the bank would raise Rs. 320 Cr. from the market through QIP once the government approval was accorded to it. The bank would celebrate its 150th year of existence tomorrow. It would open 150 units of branches, ATMs and e-lobbies tomorrow. He said that the bank was eyeing the semi-urban and rural areas for growth.

PSU lenders crack the whip on defaulters, sell off assets

MUMBAI: Banks have been showing never-before urgency in getting rid of bad loans. They have been selling stressed assets to asset reconstruction companies (ARCs) as soon as they realise that restructuring the debt won't work, say banking sector executives. Banks have put at least three large corporate loans - of Electrotherm, Deccan Chronicle and KS Oil - on the block in recent months. The corporate debt restructuring (CDR) cell, a forum of lenders and borrowers which decides on restructuring programmes, doesn't allow lenders to sell any loans when the restructuring process is ongoing. However, they can offload a loan if the CDR has failed or soon after the lender and debtor sign a master restructuring agreement. According to a recent report from ratings firm Moody's, high interest rates and delays in industrial projects are driving up bad loans at Indian banks. Gross non-performing assets - bad loans prior to making provisions - in the sector totalled more than Rs. 2.43 lakh Cr. in 2013, up 35% from the previous year. Meanwhile, new regulations requiring banks to set aside more money against bad and restructured loans are putting pressure on lenders to get such assets out of their books. During the fiscal year ended on March 31, 2014, lenders sold close to Rs. 50,000 Cr. of outstanding loans to ARCs, which buy stressed assets at deep discounts, help the creditors in restructuring operations and then collect the loans from them. The CDR cell had approved a plan to recast Gujarat-based manufacturing company Electrotherm's Rs. 3,200 Cr. loans two months ago. Its consortium of 17 lenders led by Bank of India had asked the company to demerge its business into four independent units - steel, pipe, engineering and auto. But the programme failed to take off. Senior bank officials who did not want to be named said a large public sector bank had sold its loan to Electrotherm to JM Financial ARC through an auction. Similarly, IndusInd Bank sold its Deccan Chronicle loan to Pegasus ARC as soon as the bank realised that lenders had rejected a proposal to revive it at the CDR cell.

Money laundering cases against firms

The Enforcement Directorate (ED) has decided to register money laundering cases against firms, including Jindal Steel and Power Ltd (JSPL) and Rathi Steel and Power, which are under the CBI scanner. ED officials said the agency has issued directions to its various zonal offices across the country to initiate investigations under the Prevention of Money Laundering Act (PMLA) in the financial dealings of the firms which have also been booked by CBI in this case. The agency, according to sources, has taken cognisance of the over 17 FIRs filed by the CBI and will investigate if these firms laundered illegal money and generated “proceeds of crime” in the entire process of coal allocation. The probe by both the agencies is being monitored by the Supreme Court.

Banks shouldn’t charge varying spreads from borrowers, says RBI committee

If the Reserve Bank of India’s latest proposals become prudential guidelines, banks will not be able to arbitrarily charge different spreads for different borrowers and will have to follow a board-approved system for the same. An RBI committee, under the chairmanship of former deputy governor Anand Sinha, has made a series of recommendations for transparent pricing of loans by banks in its draft report on pricing of credit released on Thursday. The central bank has also recommended setting up a benchmark base rate by the Indian Banks' Association called Indian Banks' Base Rate, which banks can use to price floating rate

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products. RBI said banks should have a board-approved policy delineating the factors behind the pricing of a loan, which may include operating cost, credit risk premium and tenor premium and broad factors like competition, business strategy and customer relationship. “Banks should be able to demonstrate to the Reserve Bank of India the rationale of the pricing policy,” the RBI said. Noting that arbitrary changes in spreads has led to many complaints from customers, the RBI said that banks’ internal policy must spell out the rationale for, and range of, the spread and the delegation of powers in respect of loan pricing. Further, the RBI said that changes in the base rate should not immediately result in a change in the interest rate of the loan, but the pricing must alter only on the next reset date as per the loan covenant. Also, the borrower must be given an option of exiting the loan at the beginning itself. The loan can be priced accordingly in case of such a exit clause or without it, the RBI said. Further, the benefit of interest reduction on the principal on account of pre-payments should be given on the day the money is received by bank without waiting for the next equated monthly installment cycle date to effect the credit, the RBI said.

Punjab National Bank sells its stake in India Factoring for Rs. 108 cr

State-owned Punjab National Bank (PNB) has sold its entire 30 per cent stake in India Factoring & Financial Solutions Ltd (IFFSL) for Rs. 107.83 Cr. The bank has offloaded its stake in IFFSL to parent promoter FIM Bank Malta last month, a senior official of PNB said. The decision to offload stake was taken after board approval, the official added. With the acquisition of PNB's stake, FIMBank's share in IFFSL increased to 79 per cent. The other shareholders include Italy's Banca IFIS (10 per cent), Employees Trust (10 per cent) and Mumbai-based Blend Financial Services (1 per cent). The company started its business in October 2010 with Rs. 100 Cr. initial capital. India Factoring provides financial solutions to over 200 SMEs and SSIs in Delhi, Mumbai, Chennai, Bangalore, Kolkata, Ahmedabad and Hyderabad.

Finance Ministry detects over Rs. 1800 Cr. excise duty evasion in 2013-14

NEW DELHI: Increased efforts in checking revenue leakage have resulted in detection of over Rs. 1,800 Cr. central excise duty evasion across the country during 2013-14. As many as 379 cases of central excise duty evasion were registered by the Directorate General of Central Excise Intelligence (DGCEI) during the last fiscal. These cases involved central excise duty evasion of Rs. 1,879.69 Cr., Finance Ministry officials said. Various private entities were evading the central levy through misrepresenting the quantity of goods being produced by them and misuse of government incentives or abatements among others, they said. However, DGCEI officials could realise only Rs. 362.80 Cr. from these detections, the officials said. In 2012-13, as many as 458 cases involving evasion of about Rs. 2,940 Cr. were detected by the excise intelligence officials. The realisation was about Rs. 1,018 Cr. An excise duty is applicable at the rate of 12.36 per cent on the total quantity of goods produced by a company. The detection of excise duty evasion cases was excluding of such cases registered by various central excise Commissionerates spread across the country. Manufacturers of pan masala, cigarettes, iron and steel, vehicles parts and accessories, malted foods and chocolates are most prone to evade excise duty, the official said.

SBI launches scheme for women boutique owners

KOLKATA: The country's largest lender State Bank of India (SBI) has launched a financing scheme for women fashion boutique owners. Labelled 'boutique financing', the scheme is designed to offer working capital expenses as well as term loan to boutique owners. Chief General Manager of SBI (Bengal Circle) Sunil Srivastava said the bank has identified the growth potential of the segment. He said the bank would give loans at concessional interest rates and the maximum loan to be made available would be Rs. 50 lakh for a period of seven years. The owners would also get overdraft facilities, he added.

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358th Issue Banking News 21st to 26th April 2014 By Vasant Ponkshe, Secretary AIBOA Pune

FIIs bullish on ICICI Bank; stake hits 6-year high

During quarter ended March, the stock gains 13.3% compared with the Bankex's 12% rise

The recent rally in banking stocks has been aided by hope that a stable government at the Centre will help boost the economy. This year, the BSE banking index, or the Bankex, has risen 12 per cent, compared with a rise of seven per cent in the benchmark S&P BSE Sensex and CNX Nifty. In the banking pack, foreign institutional investors (FIIs) have been aggressively buying into ICICI Bank; their holdings in the leading private sector lender touched a six-year high of 39.85 per cent in the quarter ended March. During this period, the stock gained 13.3 per cent, compared with the Bankex’s 12 per cent rise. FII holding in ICICI Bank stood at 46.4 per cent in the December 2004 quarter and 40.3 per cent in the March 2008 quarter. According to latest data available with exchanges, FIIs bought additional stake of 1.46 percentage points in ICICI Bank in quarter ended March this year; in the quarter ended December 2013, they held 38.39 per cent stake, while in the September 2013 quarter, their stake stood at 37.54 per cent. In the March 2014 quarter, FIIs bought 17 million shares, worth Rs. 1,838 Cr., in ICICI Bank; in the December 2013 quarter, they had bought 9.8 million shares, worth Rs. 1,033 Cr. An analyst at Angel Broking says: “From a cyclical perspective, an improvement in the macro environment is likely to benefit all banks, including ICICI Bank. We have a ‘buy’ recommendation on ICICI Bank, with a target price of Rs.1,606.”

For the quarter ended March 2014, Dhananjay Sinha, strategist and head of research at Emkay Global, expects 16.5 per cent year-on-year growth in ICICI Bank’s net interest income, led by 19 per cent growth in the loan portfolio and a stable margin of 2.9 per cent. “With 13 per cent growth in other income, operating profit is likely to grow 16.9 per cent year-on-year,” he says. Meanwhile, Life Insurance Corporation of India reduced its holdings in ICICI Bank to 8.74 per cent in the March quarter from 9.7 per cent in the December 2013 quarter. In the September 2013 quarter, the insurer held 10.46 per cent stake in the bank. Aalok Shah, analyst with Centrum Broking, believes considering the healthy capital position and profitable subsidiaries, the upside for the bank seems capped “The guidance over higher levels of slippages/credit cost has raised apprehension over further re-rating. While we derive comfort in the bank’s ability to provide for this, valuations are near historic averages, limiting further upsides. We have rolled our price target to FY16 ABV (adjusted book value), valued the bank on an SOTP (sum-of-the-parts)-based valuation methodology and arrived at a target price of Rs. 1,350,” he says. Currently, ICICI Bank is being traded at Rs. 1,252 on BSE, having rallied 38 per cent from Rs. 884 on September 30, 2013, when FIIs began increasing their stake. The benchmark S&P BSE Sensex has gained 15.9 per cent during the same period.

10-15 pc cards used only for online transactions: RBI report

MUMBAI: Of the 369 million debit and credit cards in the country, 10-15 per cent are used only for online transactions, the Reserve Bank said. India is one of the fastest-growing countries in the plastic money segment, with close to 350 million debit cards and 19 million credit cards in circulation."Credit cards have a higher share in the discretionary category whereas debit cards dominate in routine expenses like utility payments. About 30 per cent of credit card spends are being done online. At least 10-15 per cent of customers use their cards only online, many from smaller cities," the central bank said in a report. The RBI quoted studies of two major payment networks -- MasterCard and Visa. According to MasterCard, 75 per cent of all card payments are concentrated in top 20 cities with Delhi, Mumbai and their suburbs alone accounting for 43 per cent. A Visa study reveals that people in the monthly income band of Rs. 75,000-100,000 are the most prolific users of electronic cards. The RBI said electronic payments dominate their expenses: rail/airfare (71 per cent),

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durable goods (61 per cent), rent (49 per cent), tele/mobile (47 per cent), medical institutions (46 per cent), clothing/footwear (44 per cent), beverages and refreshments (35 per cent). "Card payments form an integral part of e-payments in India because customers make many payments on their card -- paying their bills, transferring funds and shopping," said the RBI report on 'Enabling Public Key Infrastructure (PKI) in Payment System Applications'. Debit cards entered India in 1998 and they currently account for almost 95 per cent of the total number of cards in circulation. Credit cards have shown relatively slower growth even though they entered the market one decade before debit cards. A majority of credit card purchases come from expenses on jewellery, dining and shopping, the RBI added.

United India eyes Rs. 11,000 Cr. premium in 2014-15

CHENNAI: State-run United India Insurance Company has set a target of reaching Rs. 11,000 Cr. premium during the current financial year, a top official said today. "We will keep the momentum with the industry growth. We are looking at completing premium of Rs. 11,000 Cr. this financial year, 2014-15...", United India Insurance Chairman and Managing Director Milind Kharat told reporters here while declaring the company's annual results. The Chennai-based company clocked total premium of Rs. 9,709 Cr. in 2013-14, an increase of Rs. 443 Cr. compared to the previous financial year's Rs. 9,266 Cr., he said. "What we have targeted is not a modest growth (on total collection of premium). It is an aggressive growth. The insurance industry has been growing 10-12 per cent and we are looking at an aggressive growth this year (2014-15)..," Kharat told PTI later. The profit after tax in 2013-14 remained flat at Rs. 527.60 Cr. as against Rs. 527.33 in 2012-13. Asked about this, he said it was reflection of the increase in the underwriting loss while the management expenses remaining still high. "Underwriting loss has slightly gone up compared to last year. Management expenses also remaining high," he said. The company will give thrust to retail, motor and rural insurance portfolio, Kharat said, adding: "the company has filed two The company will give thrust to retail, motor and rural insurance portfolio, Kharat said, adding: "the company has filed two motor insurance products with the market regulator IRDA seeking its approval". "We are also planning to launch a new health insurance policy for High Networth Individuals in which the sum insured will be up to Rs. 50 lakh. We are also looking at another health insurance product in which the sum insured will be Rs. one to Rs. five lakh", United India Insurance, General Manager, Asha Nair said. On the exposure to Tamil Nadu Chief Minister's Health Insurance scheme, Kharat said so far the company had collected premium of Rs. 1,252 Cr. covering 1.30 Cr. families. It is also planning to introduce insurance policies through online, he said.

Non-banking finance companies to be hit by tough reserve rules

CHENNAI: Non-Banking Finance companies (NBFCs) have been stumped by a provision in the new Companies Act. It mandates all such players that raise funds by issuing debentures to create a debenture-redemption reserve (DRR) and maintain 15% of the monies in low-interest securities or SLR-backed instruments. SLR or the statutory liquidity ratio is the percentage of deposits banks need to maintain in liquid form — cash, gold or government bonds. The Companies Act appears stricter for NBFCs, particularly on two counts: creation of a DRR equivalent to 50% of debentures or bonds over the repayment term, and building liquidity support at the start of fiscal for debentures maturing during the year (at least 15% of the value maturing). "This is a retrograde step. Cost of funds could increase 80 to 90 basis points (100 bps = 1%). The move is sure to impact profitability of those companies which raise debt through bond issues," said G S Sundararajan, group director, Shriram Group, and MD, Shriram City Union Finance an NBFC that is active in the bond market. While one RBI's Nachiket Mor Committee wants SLR requirements for NBFCs to be abolished, another arm of the government — the ministry of corporate affairs (MCA) — wants increased investments in SLR-backed securities, he said. Though market players are not clear whether the norms are prospective or retrospective, Sundararajan said, "Our legal interpretation suggests it is

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prospective." The Act has not only increased reserve requirement for debentures raised through public source (from 25% to 50%), it has also introduced requirements for privately placed debentures (to 50%).

'No entry age limit for govt staff under NPS'

The pension sector regulator has said all eligible government employees (central & state) on the rolls of the government can be enrolled into the National Pension System (NPS), irrespective of age at the time of entry. However, this is subject to the condition that the total period of contribution to NPS account shall not be more than 42 years. NPS is the contributory pension scheme launched by the Union government in January 2004. It was made compulsory for all new government employees.

INTERVIEW OF THE WEEKGranting licences to corporate sector is tricky: K C Chakrabarty

K C Chakrabarty, the outgoing Reserve Bank of India (RBI) deputy governor (Friday will be his last day in office), believes non-banking financial companies (NBFCs) can’t bring about financial inclusion; that job is best left to mainstream regulated financial institutions. In an interview with Manojit Saha, Chakrabarty, who became RBI deputy governor on June 15, 2009, and sought a “slightly earlier departure” from the central bank, says a deputy governor’s job is less challenging than that of a bank’s chairman and managing director. Edited excerpts:

What has been the progress on financial inclusion since you took charge as deputy governor? Which are the areas that need improvement?

Financial inclusion has two aspects— access and use of banking services. In the first phase, we have been reasonably successful in increasing access to banking. The total number of villages with access to banking services has risen to about 300,000 from 67,000 at the end of March 2010, when we started the planned approach to financial inclusion and banks were asked to prepare plans in this regard. The number of basic savings bank  accounts has increased by about 200 million. The number of rural branches, which fell by 4,000 between 1990 and 2007, has increased by 10,000 since then.The number of transactions has also increased. It will increase further when a proper ecosystem is in place, for instance, when state governments start to transfer all benefits through bank accounts, if banks streamline the operations of business correspondents, etc. Of the new accounts opened, transactions are taking place in 25 per cent. Our objective is by 2016, everyone in the country should have access to banking services.The ‘use’ of banking services is a continuous process. This, too, is showing signs of improvement. Earlier, we had 2.5 million transactions a year; now, that number is recorded in a month.

Has the business correspondent (BC) model worked?

The total number of bank branches isn’t more than 110,000. Whatever progress has been made is because of the BC model, without which we could not have reached 300,000 villages.

Should banks be allowed to have a subsidiary exclusively for financial inclusion?

If a bank can do business through a subsidiary route, why cannot they do it departmentally?

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What is financial inclusion? It is providing banking services. So, are you saying a bank will provide banking services by creating a subsidiary? Creating an institution for the poor has never been successful on a commercial basis.

One of the recommendations of the Nachiket Mor committee on financial inclusion is NBFCs should have a key role in financial inclusion. What’s your view?

According to RBI’s definition of financial inclusion, NBFCs cannot bring about it. Our definition says such financial inclusion should be brought about by mainstream regulated financial institutions. NBFCs can play the role of a facilitator, as penetration is an issue for banks. I don’t think NBFCs have a great business model to succeed. Also, globally, shadow banks are under criticism. My view is NBFCs can become BCs.

Why do you say financial inclusion can only be carried out by mainstream entities?

Financial inclusion will not happen without an element of cross-subsidisation, and that should be provided by banks that have the ability to do that. Second, financial inclusion demands access to banking services at reasonable costs, which can be done by regulated entities alone. If you charge Rs. 25 for transferring Rs. 500, that is not financial inclusion.

In terms of currency management, what are the key challenges in delivery?

Last-mile delivery is a big issue. Distribution of currency/coins is a big issue. This is because we have left it to RBI and banks. RBI focuses more on distribution; as a result, it is unable to monitor whether banks are doing it or not. The view of the government-constituted high level committee on currency management, which I chaired, is we must use private parties (the franchise model) for distribution. We have already done it for foreign exchange and that has worked well.

In the wake of rising non-performing assets (NPAs), is there a need for a re-look at governance issues in banks?

It is not only NPAs; banks aren’t able to carry out financial inclusion and priority sector lending and offer better customer service—-all these are governance issues. Banks are not able to carry out efficient financial intermediation; that, too, is a governance issue. Banks are not able to manage, not able to govern. They have not made people accountable, including boards. Those who don’t deliver must be held accountable.To make people accountable, we first have to create the proper ecosystem. We have to select fit and proper persons to head banks and give them adequate time, autonomy and flexibility. Unless we create this system, governance will not improve. We also need to redefine the role of the board, the bank’s chairman, its chief executive, etc.

But public sector banks say their remuneration is not market-driven.

I am all for market-related remuneration. But selection should also be market-driven. For the selection of the chief executive, there should be advertisements. It cannot happen under the present disposition. For example, a promotion to the top post in State Bank of India (SBI) is from within the bank. Nowhere in the world will you get market-related remuneration if the selection is limited to that domain.

Are you indicating the SBI chairmanship should be thrown open to candidates from other banks, too?

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All I am saying is look at global best practices. Globally, vertical movement in the same organisation is disappearing. If you have to move vertically, you have to criss-cross the path. For the appointment to the post of SBI chairman, let there be newspaper advertisements, so that candidates from other banks can also apply.Before becoming the deputy governor of RBI, you headed two public sector banks. Which of the jobs was more challenging?Both were challenging assignments. But I would say the deputy governor’s job is less challenging. In our system, the Number 1 has all the responsibilities. So, if I faced any problem in RBI, I could push the paper to the governor, whereas as a chief executive, I couldn’t do so. But in terms of learning, it was a great experience as deputy governor. I would not have learnt how the central bank functioned and I would not have got global exposure. Also, I have met some great minds such as Mario Draghi and Ben Bernanke. I have learnt how the international financial system works.

Industrial houses were not given licences this time. Why is the corporate sector still ineligible to enter the banking business?

Policy-wise, we have said the corporate sector is eligible.

But corporate houses weren’t given licences.

At this stage, they are not ‘fit and proper’, according to our criteria. Granting licences to the corporate sector is a tricky affair anywhere in the world. But we have taken the step; we are open. But they must stand the test of ‘fit and proper’.

INTERVIEW II

We plan to raise Rs. 2,500 Cr. this fiscal: Indian Overseas Bank CMD

Having just weathered a tough year, Chennai-based Indian Overseas Bank (IOB) is sparing no effort to get back on the growth path. In an interview with Sajan C Kumar, IOB CMD M Narendra shares his views on the bank’s performance and overall prospects of the economy.

How did the bank fare in FY14, considering the tough external conditions?

IOB’s gross NPAs rose to 5.27% in December 2013 against 4.13% in the year-ago period. We expect a possible decline in the NPA levels for Q4FY14. However, as fas as return on assets (ROA) are concerned, the major constraints are incremental NPAs and interest reversal on restructured advances. Our total provisions were very high at 85.15% of the total operating profit during FY13, which limited our ROA to 0.24% despite all-out efforts to cut NPAs.

What steps are you taking to contain NPAs?

The problem of NPAs is related to several internal and external factors. The internal factors include diversion of funds for expansion, diversification, promoting associate concerns, cost/time over-runs during project implementation, inefficient management, strained labour relations and technical problems, among others. External factors include global recession, power shortage, natural calamities, and so on. The asset quality of PSBs, in general, is impaired due to significant exposure to troubled sectors like power, steel, aviation, real

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estate and telecom. It is our objective to keep NPAs as low as possible. For that, NPAs are monitored at all levels, including the top management of the bank and ministry of finance.

Are you satisfied with the current rate of growth? What are your network expansion plans?

In FY14, the bank opened 363 branches. The overall Casa percentage of all new branches is well above 40%. The bank has opened around 37 lakh Casa accounts through intensive campaigns held throughout the year. We can expect an increase in Casa deposits only over a period of time, say, 2-3 years. Hence, our Casa rate is expected to increase uniformly. We plan to open 400 new branches covering more rural and semi urban areas this fiscal. Accordingly, new recruitment would be made to meet the requirements.

Will there be any capital-raising in FY15?

During FY14, we raised R1,200Cr. from the government, which holds 73.80% in the bank, and R396.04 Cr. from LIC, which now holds a 14.77% stake. As far as medium-term notes (MTNs) are concerned, there are a host of regulatory

NEWS OF THE WEEKWhether it is 'PM' Narendra Modi, or Rahul Gandhi, India's economic growth prospects dim

Prospects for a strong economic growth rebound in India are dim as industry remains weak, and although a business-friendly opposition party, led by Narendra Modi looks likely to form a new government, its ability to pass sweeping reforms is in doubt, a poll showed. An anticipated victory for the Bharatiya Janata Party (BJP), against the incumbent Congress led by Rahul Gandhi, at the conclusion next month of the Lok Sabha elections in the world's largest democracy has pushed India's stock market to a record high. But many worry that its power to drive change will be muted if it has to form a coalition with other parties, which in the past have held policy hostage to local agendas. The latest poll of over 20 analysts taken this week showed Asia's third-largest economy likely grew 4.7 percent in the fiscal year that ended this March, with growth seen picking up to 5.5 percent in the current fiscal year. Economic growth slumped to a decade-low of 4.5 percent in 2012/13 - less than half the almost double-digit rates in 2010. Anubhuti Sahay, senior economist at Standard Chartered Bank, said that against that backdrop, and with chances of even higher inflation, a strong government with the ability to legislate change is needed to put the economy back on track. "If we get into a situation where again the government, because of coalition politics, is not able to implement good policies, that is the biggest risk. We have seen such situations since 2010," she added. India's economic gloom deepened in the first quarter of this year. Industrial output shrank and exports fell, underscoring the enormous challenges awaiting whatever new government takes over in May. The current government has been heavily criticized for not implementing economic reforms and for being unable to control persistently high inflation -- both leading to reduced foreign investment and low consumer demand. The Reserve Bank of India (RBI), which recently shifted its focus to retail price inflation, aims to bring that down from 8.31 percent at present to 6 percent by January 2016. But the poll shows inflation only coming down to 7.5 percent by then. That would leave a 1.5 percentage point gap to close. The RBI is expected to keep its key repo rate steady for another year before a modest cut in the second half of 2015, the poll also showed. A weak economic outlook for China and the euro zone, India's two biggest trading partners, does not help the outlook for exports, either.

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358th Issue Banking News 21st to 26th April 2014 By Vasant Ponkshe, Secretary AIBOA Pune

Supreme Court order marks a crucial turn in Sree Padmanabhaswamy temple history

The interim order of the Supreme Court in the Sree Padmanabhaswamy temple case that virtually de-controlled the shrine from the erstwhile Travancore royal family marks clean break from the past. The apex court, while agreeing with the report of the amicus curiae Gopal Subramaniam, had yesterday ordered the creation of a five-member administrative set-up under the district judge which will not have any direct representation of the royal family. The decision also signalled a critical turn in the long-drawn litigation for transparency in administration and proper audit of the huge treasures of the temple, started years back as a private petition in a local court. Lord Padmanambha is the family deity of Travancore royal house and since 18th century the princes of the lineage had ruled most of south Kerala and adjoining parts of Tamil Nadu as "Padmanabhadasa" (servants of Padmanabha). After the integration of the princely state in 1947, the royal rule came to an end and most major temples of Travancore were brought under a Devaswom Board. But as a special case, control over the Padmanabhaswamy temple was left in the hands of the royal family. Interestingly, the elected governments that came to power in the state since then, including those led by the Left, have bothered a little about the temple or the priceless treasures hidden in its vaults. Though old-timers used to say about the 'maha nidhi' (fabulous treasure) in the underground chambers, the public at large had for long taken such claims as exaggerated. Things started changing when two devotees approached a sub-court here in 2007 seeking to restrain the temple authorities from opening the chambers and photographing the treasures for making an album. Considering the plea, the court appointed a two-member lawyers' commission vesting them with the authority to open a particular chamber to take out jewels and utensils required for festivals and other important occasions. The court also suggested creation of an administrative body on the lines of the Guruvayur temple, which was challenged in the High Court by the temple authorities. It was at this juncture that T. P. Sunarrajan, a former IPS officer, stepped in with the argument that the temple is no longer a private property and there should be accountability and transparency in its management. Sundararajan's stand was endorsed by the High Court and suggested that temple administration be brought under a trust or a separate body formed for it.

INTERESTING TO KNOW THIS WEEKThe challenge: a bank account for everyone

The Reserve Bank of India's (RBI) decision to grant 'in-principle' approval for banking licence to two new players - Bandhan and IDFC - out of a list of 25 applicants surprised many.New banking licences were being offered for the first time in a decade with the objective of expanding the reach of financial services to masses and the decision to grant only a couple of licences appeared to fall short of expectations. The applications of large corporate houses such as Anil Ambani's Reliance Group, Kumar Mangalam Birla-led Aditya Birla Group and the Bajaj Group were ignored even though industry analysts felt that their deep pockets would have accelerated the progress of financial inclusion."One of the challenges with the existing licencing regime is that regulatory opportunity determines market entry rather than business need and preparedness of applicants. One would hope that licensing of these two banks is just the start," says Shinjini Kumar, leader-banking and capital markets at Pricewaterhouse-Coopers (PwC) India. Financial inclusion is certainly not a new dispensation that Indian policymakers are craving. The nationalisation of banks in 1969 and the thrust on branch building that followed were attempts at including the financially excluded. Even in the previous round of bank licensing (in 2003-04) new players were directed to open branches in rural and semi-urban geographies. In recent years, RBI has adopted a planned and structured approach to improve financial inclusion. In January 2010, it directed all public and private sector banks to submit a board-approved, three-year financial inclusion plan starting in April 2010. Lenders were advised to devise plans

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congruent with their business strategy and make them an integral part of their corporate objectives. Banks were asked to prepare self-set targets in respect of opening rural brick and mortar branches, hiring business correspondents, covering un-banked villages and offering financial products like basic savings bank deposit (BSBD) accounts, kisan credit cards (KCC) and general credit cards (GCC). The implementation of financial inclusion plans was closely monitored by the regulator on a monthly basis through quantitative reporting format. The qualitative aspects were reviewed through quarterly reports submitted by banks.

The progress has been encouraging in the first three years (April 2010 to March 2013). Banking outlets in villages had increased to 268,454 from 67,694, close to 7,400 rural branches were opened and nearly 109 million BSBD accounts were added. Also, around 9.48 million farm sector households and 2.24 million non-farm sector households were included leading to higher disbursement of small entrepreneurial loans.To continue the process of ensuring access to banking services to the excluded, lenders were asked to sketch another three-year financial inclusion plan for the period 2013-16.Technology played a key role in expanding the reach of formal banking services. "If this (financial inclusion) is something we have been working on since 1969 what is the difference now? Critically it is technology, which enables undreamt of outreach. For financial inclusion to succeed and an effective business delivery model to be in place it is essential that servicing costs are brought down and large numbers covered rapidly. This exponential growth is a possible dream with the use of technology," said Deepali Pant Joshi, executive director at RBI, at a seminar in Kolkata in October, 2013.Banks, including regional rural banks, have migrated to core banking system and developed in-built capability to provide remittances using electronic payment systems such as the real time gross settlement system (RTGS), national electronic funds transfer (NEFT), national electronic clearing service, immediate payments service and Aadhaar enabled payment systems. Lenders are increasingly using alternate channels of delivery (such as ATMs, net banking and phone banking) and depending on information and communication technologies (ICT) to expand their reach. Nearly 490 million transactions were carried out in ICT-based accounts through business correspondents between April, 2010 and March, 2013.But despite these efforts a large section of India's population still does not have access to formal banking services. The numbers are mind-numbing. According to the government's population census 2011, only 58.7 per cent of households were availing banking services in the country. While compared to the previous census 2001 there is a significant improvement in the access to banking services, it indicates that still over 40 per cent of India's 1.2 billion people continue to remain financially excluded. Also, a survey on financial access in 2011 revealed that India had 10.6 branches and 8.9 ATMs per 0.1 million population. Compared to this China had 23.8 branches and 49.6 ATMs, while Brazil had 46.2 branches and 119.6 ATMs per 0.1 million people. This is probably the reason why the government wanted more banks in the country. That new players will be offered banking licence was revealed for the first time by former finance minister (and now president) Pranab Mukherjee during his budget speech in February, 2010.While RBI reluctantly agreed to invite applications from industrial groups, ultimately it stopped short of granting approval to any of the corporate houses. The central bank admitted that its decision to offer only two new licences may be categorised as 'conservative', but it justified its stance as appropriate because of the public concern on governance.Globally, it is fairly common to permit industrial houses in the banking business. Only 12 per cent of countries restrict the mixing of banking and commerce, according to RBI's discussion paper on new bank licensing (released in August, 2010).It is believed that the regulator's dilemma in allowing industrial houses in banking stems from the fact that these groups, if permitted, could undermine the independence of banks."There is no contradiction in the principle of financial inclusion and fit and proper criterion. It is a scrutinised criterion to make sure that other people's money, which is what banks deal with, are disbursed and allocated in a manner which is appropriate and fit and proper," Bimal Jalan, former governor of RBI, said earlier this week while responding to queries on why only two new banking licences were offered.

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Jalan also headed the high-level advisory committee that scrutinised the applications for new banking licences.

However, there is still hope for industrial groups in getting a permit to set up a bank. RBI has kept the door open saying that it intends to use the learning from this round's licensing exercise to revise the guidelines appropriately and move to give licences more regularly, almost on tap. The central bank also indicated that it plans to frame categories of differentiated bank licences, building on its prior discussion paper. RBI felt that some of the entities who did not qualify in this round for a full-fledged banking licence could apply in future. In October, 2007 RBI had prepared a discussion paper on differentiated bank licensing, wherein it stated that the case for such licensing may be reviewed after a certain degree of success in financial inclusion is achieved and the central bank is satisfied with the quality and robustness of the risk management systems of the entire banking sector. The banking regulator, in a discussion paper on banking structure in India (released in August 2013), said that banks have shown significant progress in financial inclusion and in improving the quality of risk management but added that a "lot more needs to be done". The universal banking model still remains the dominant model, but there are countries like the United States, Australia, Singapore, Hong Kong and Indonesia that grants differentiated banking licence. "While RBI has been conservative in granting in-principle approval to only two applicants in this round based on the eligibility criteria defined and other quantitative and qualitative aspects, what is very heartening to note is the stated outlook to review the guidelines and make this a regular process moving towards an on-tap policy including differentiated licences," says Shashwat Sharma, partner-financial services at KPMG in India. This, along with RBI's own assessment that a lot remains to be done, means there can be no ambiguity about speeding up the task of financial inclusion.

Rollout of Rs 10 plastic notes hits technical hurdle: RBI’s Chakrabarty

Introduction of plastic banknotes of ₹10 denomination has been delayed due to failure of the selected bidders in meeting the technical specifications, said KC Chakrabarty, Deputy Governor, RBI. The Deputy Governor observed that the quality of lower denomination notes, especially ₹10, continues to be a cause for concern, possibly due to reluctance/constraints on the part of banks to mop up such notes from circulation. In its annual report for 2012-13, the central bank had said that it has decided to introduce one billion pieces of ₹10 banknotes on plastic substrate for field trials in five cities — Jaipur, Bhubaneswar, Kochi, Shimla and Mysore — which have been identified because of their geographic and climatic diversity. One of the advantages of plastic over paper is less soilage, thanks to the smoother surface. The RBI reasoned that plastic banknotes are cost-effective because they last longer; they create minimal dust and no fibres during printing and handling. They can contain certain security features that are difficult and expensive to counterfeit. Globally, the cash in circulation to GDP ratio has ranged from 2.5 to 8 per cent whereas in India it has been around 13 per cent due to the predominant usage of cash by a majority of the population As at March-end 2013, ₹10 notes accounted for about 34 per cent of the total banknotes aggregating 7351.70 Cr. in circulation. In value terms, ₹10 denomination notes accounted for about 2 per cent of total ₹11,64,800 Cr. worth of banknotes in circulation.

Distribution

To improve last mile connectivity, the RBI has decided to involve private entrepreneurs in the distribution function. The cash-in-transit companies/ business correspondents have been allowed to process coins and banknotes, including packaging, sorting and delivery to banks’ customers and for retrieval. Banks, including urban co-operative banks and regional rural banks, are also being involved to ensure that last mile delivery of cash-related services penetrates throughout the country. Chakrabarty said the RBI has also initiated a pilot

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exercise under the lead bank scheme for currency management and it intend to upscale it going forward, based on the experience gained. As at December-end 2013, the notes in circulation was 7,647 Cr. pieces valued at Rs. 12, 46,800 Cr., while the coins in circulation were around 8,991 Cr. pieces valued at Rs.16,800 Cr..

INTERNATIONAL NEWS THIS WEEKPoor rains may hurt growth by 50-75 bps: BoA

Bank of America Merrill Lynch’s Economist, Indranil Sen Gupta, has warned investors about rising El Nino risks, after the India Meteorological Department forecast a below-normal monsoon, at 95 per cent of long-run average for the June-September south-west monsoon, with 60 per cent chance of an El Nino. In a report, he said that the Australian weather bureau also sees a strong possibility of El Nino by July, on the anvil of the key sowing months of July-August. If the rains are normal, growth should climb to 5.4 per cent from 4.7 per cent last year. BoAML estimates that poor rains will hurt by 50-75 basis points. With a normal monsoon, CPI inflation will likely soften to 7 per cent levels by March 2015 opening the possibility of RBI rate cuts by December. An El Nino will stick it up at 8-10 per cent, pushing RBI rate cuts to 2015.

China Q1 growth falls to 7.4 %

China’s economy registered 7.4 per cent growth in the first quarter of the year — a figure that most emerging economies would perhaps deem robust, but the slowest growth in China over the past five quarters, underlining renewed concerns here over falling investment, a cooling real estate market and a slump in foreign trade. Growth in the first three months fell from 7.7 per cent in the last quarter of 2013. Chinese officials said the figures reflected the economy entering a new period of lower growth where the focus would be on structural adjustment — away from investment-driven growth to boosting domestic demand and high technology industries — rather than on achieving double-digit growth rates. “After high speed double-digit growth rate of over 30 years, we have now entered a new stage of transformation and transition,” said Sheng Laiyun, Director-General at the National Bureau of Statistics. “This is still around our set target of 7.5 per cent so it is within our expected range,” he said. “If you look at the world, a growth rate of 7.4 per cent is still a high speed growth rate.” Nevertheless, the slowing down economy has concerned analysts, with growth this year, if below 7.6 per cent, likely to be the slowest since 1990. Growth has continued to decline since 2010, when the economy grew 10.4 per cent propelled by a massive $586 billion stimulus plan put in place after the financial crisis by a leadership worried about job losses. A subsequent surge in fixed asset investment has, however, worsened imbalances, and created bubbles in sectors such as real estate and steel — where a boom also helped fuel record imports of ores from countries like India — prompting the government to put in place a rebalancing plan. “This is like driving a car uphill,” Mr. Sheng said, “If you slow down, it is a bit easier to drive more steadily. We are now in a crucial period of shifting gear.” Yet, the government has found it hard to hit the brakes: this quarter, despite the overcapacity fears, fixed asset investment grew 17.6 per cent, although 3.3 percentage points lower than last year. Investment in real estate grew 16.8 per cent. However, sales of commercial buildings and residential buildings were down by 5.2 per cent and 7.7 per cent, respectively. Mr. Sheng said the ‘brightest spot’ was signs of readjustment. Domestic demand was making a greater contribution to growth, with retail sales up 12 per cent and consumption accounting for 65 per cent of GDP, he said.

Moderate to strong recovery in the U.S., says Bernanke

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The United States has begun looking at “moderate to strong” economic growth and the impact of the financial crisis in the country was fading, former U.S. Federal Reserve chairman Ben Bernanke said here on Tuesday.Addressing a Kotak Mahindra Bank event, Dr. Bernanke took the view that slow recoveries follow financial crises and the U.S. was in one of them. The housing sector was doing better and both activity and sales were up. Dr. Bernanke said he was also seeing some improvement in Europe and Japan. Also, emerging markets performed better when the U.S. itself was growing, he argued. Talking about how he dealt with the financial crisis, he said that “orthodoxy may not be the approach when the crisis was severe”. According to him, the most intense phase of the financial crisis is behind the U.S., but unemployment is still too high. However, the financial system is much safer. Describing the events of 2008, Dr. Bernanke claimed that all efforts were made to save Lehmann Brothers, but in the end no buyer could be found. He told a huge gathering at the Jamshed Bhabha Theatre at Nariman Point that handling the crisis was a team effort and somebody had to be the face of the institution at such a time. On whether the Chinese economy faced a hard landing, Dr. Bernanke said a transition was taking place there and the leadership was trying to encourage domestic demand and consumption. China, he said, was also trying to liberalise some bits of its financial sector. “They are still on a growth path and that’s good for the world economy.” Though China had eased off on the purchase of U.S. treasury bonds, the financial crisis had shown that the dollar was still an attractive currency. To a question on the future of gold and oil, he said gold was a very volatile and hard commodity to predict. Oil, too, was very volatile. Referring to the growing extraction of shale oil through the use of new fracking technology, Dr. Bernanke pointed out that the U.S. was becoming self-sufficient in oil. According to him, given that oil is also very sensitive to geo-political risks, the world will have to watch out for issues in the Middle East and Russia. On whether banks and capital flows would become more national in nature, Dr. Bernanke quipped, quoting a fellow economist as saying: “Banks live globally, but die locally.”

US calls for more investment-friendly Indian government

WASHINGTON: The United States on Wednesday urged the Indian government that emerges from ongoing elections to follow economic policies that encourage investment, saying Washington would like to see bilateral trade grow to $500 billion a year. NishaBiswal, US assistant secretary of state for South and Central Asia, said future economic growth in South Asia hinged on India as the region's growth engine. However, Biswal said that while Indian leaders had targeted $1 trillion in infrastructure investment over five years to close gaps preventing growth in manufacturing, policies still inhibited foreign investment. She said India ranked a poor 134 out of 189 countries as a place to invest and start a business. "India, the world's largest democracy, must decide its own path to the future," Biswal said in a speech at Harvard University's Kennedy School of Government. "Will it make the reforms necessary to attract investment? Will it capitalize on the opportunities that lie in front of it? "Those are the questions that India's voters are asking as they cast their ballots and those are the questions that we want to see answered," she said. Growth in Asia's third-largest economy, has almost halved to below 5 per cent in the past two years on weak investment and consumer demand, the worst slowdown since the 1980s. Polls show the nationalist Bharatiya Janata Party (BJP), the main opposition party, is on course to win most seats in the election that began on April 7. In its election manifesto, the BJP said it would welcome foreign direct investment in all sectors that create local jobs, — except for supermarkets, a setback to global chains such as Wal-Mart Stores Inc and Carrefour It remains unclear though whether the BJP will follow through on the supermarket ban or whether its announcement was just pre-election rhetoric.

BJP policy caution: BJP insiders remain cautious about laying out specific plans because the party may need to adjust its policies after the election to win over allies and form a coalition government if it falls short of the parliamentary majority required to rule. Biswalsaid

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India had the potential to exceed all expectations economically, but needed to adopt investment and tax policies designed to lure, not deter, capital flows and a system of timely regulatory approvals and contract enforcement. It also needed to protect intellectual property rights, she said. "The more integrated India is into global markets and into the economic architecture of Asia, the more India's economy will grow and benefit the entire global economic system," she said. Biswal said the United States wanted to see bilateral trade grow to $500 billion a year. It is about $100 billion currently. ArunJaitley, the senior BJP leader tipped to be finance minister in the new government, said in an interview this weekend that the party should give direction in five broad areas: infrastructure, building suburban and new urban townships, massive skill development programmes, tourism, and lowering costs for business. Capital investment contributes nearly 35 per cent to India's $1.8 trillion economy, but it barely grew in the fiscal year that ended in March as delays in clearances from various ministries and funding issues grounded many major projects. In its manifesto, the BJP said it would seek friendly relations with neighbours, but in an apparent reference to the historical troubles India has experienced with its rival Pakistan, vowed to "deal with cross-border terrorism with a firm hand" and take a "strong stand and steps" when required. Biswal said an improved climate between Indian and Pakistan could "pay enormous economic dividends." "India-Pakistan trade in 2013 was still a paltry $2.5 billion," she said. "There's no reason that number can't quadruple in a few years' time to $10 billion." "We have heard some positive murmurings in Islamabad and Delhi that both governments are moving in this direction and we are hopeful that they will make progress after the Indian election."

Finance officials confident of global growth

WASHINGTON: Finance officials from the world's major economies believe an ambitious goal to boost global growth by $2 trillion in the next five years is within reach despite a variety of threats, including rising tensions over Russia's actions in Ukraine. In a statement Friday, finance ministers and central bankers from the Group of 20 wealthy and developing nations avoided substantial differences in areas such as interest rate policies and tougher penalties against Russia. Their talks were to resume Saturday with meetings of the policymaking committees of the International Monetary Fund and the World Bank. In the G-20's statement, officials pledged to keep working on economic reforms that could increase growth by 2 percent over the next five years. But they acknowledged the political difficulty in the changes needed to reach that goal. "We remain vigilant in the face of important global risks and vulnerabilities," the statement said. "We are determined to manage these risks and take action to further strengthen the recovery, create jobs and improve medium-term growth prospects." Australia's treasurer, Joe Hockey, said officials know that hard decisions await regarding overhauling labour market policies and dealing with budget deficits. "It is hard but that is the only way we are going to grow the economy," Hockey, the G-20 chairman this year, told reporters after the group's two days of discussions. Next up is a September meeting in Australia, ahead of a G-20 summit Nov. 15-16 in Brisbane that President Barack Obama and other world leaders will attend. The G-20 includes Russia, which helps explain why the group's statement did not mention the Obama administration's threat of "additional significant sanctions" if Moscow were to escalate its actions toward Ukraine. Instead, finance officials said they were monitoring the situation in Ukraine and were "mindful of any risks to economic and financial stability." But at a news conference late Friday, US Treasury Secretary Jacob Lew insisted there was strong support for harsher penalties, saying that Western allies "stand together in asking Russia to step back." The G-20 endorsed the $14 billion to $18 billion loan package that the IMF has developed to help Ukraine avoid a financial collapse. IMF officials have said its board probably will approve the assistance plan by early May.

The US and various European nations have imposed an initial round of penalties aimed at punishing Russia for its annexation of the Crimean Peninsula. The US is raising the

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prospect of tougher sanctions if Russia attempts to annex parts of Eastern Ukraine. European officials have been hesitant to go further, worried about possible economic retaliation by Russia. Also missing in the G-20 statement: a lengthy section from its February statement concerning the need for continued low interest rate policies by central banks. Britain's chancellor of the exchequer, George Osborne, said, "I wouldn't read too much into that." He joked, "We're trying to keep the communique much shorter." He noted that the Federal Reserve and the Bank of England were moving cautiously to reduce stimulus efforts as the US and British economies improve. Some critics have expressed concerns that there is a danger that central banks could move too quickly to reduce support before labour markets improve. The US came in for criticism in the G-20 statement for the failure of Congress to approve funding for the IMF that's needed to put in place a reform program that the 188-nation lending agency adopted in 2010. That program would give the IMF more resources to help countries in economic distress and provide greater voting rights to developing economies such as China. The measure has stalled in Congress for years. The G-20 officials said the IMF should explore other options, which weren't specified, if US approval doesn't come by year's end.

RBI THIS WEEKD. Shri G. Gopalakrishna, takes voluntary retirement from RBI to take charge as Director, CAFRAL

Shri G. Gopalakrishna, Executive Director, Reserve Bank of India (RBI) voluntarily retired from the service of the Reserve Bank on April 20, 2014 to take over charge as Director, Centre for Advanced Financial Research and Learning (CAFRAL) with effect from April 21, 2014. A career central banker, Shri Gopalakrishna joined the Reserve Bank in August 1980 and in a distinguished career spanning more than 33 years has worked in the areas of regulation and supervision of the banking sector, foreign exchange management, supervision of non-banking finance companies sector, payments systems, etc. He was appointed as Executive Director on October 26, 2007 and has been in charge of areas relating to banking supervision, financial stability and communication before seeking retirement from the Reserve Bank. He also had a stint as the Executive Director of the Deposit Insurance & Credit Guarantee Corporation. Shri Gopalakrishna has been Chairman and Member of several working groups set up by the Reserve Bank/Government of India. Some of these are: Working Group on Information Security, Electronic Banking Technology, Risk Management and Cyber Frauds, Technical Group to Review Supervisory Rating Framework for banks in India, etc. He was the Regional Director, Kerala from April 2001 to March 2004 and Vice-Principal/Member of Faculty in the Reserve Bank Staff College during 1989-1995. Shri Gopalakrishna has served the Reserve Bank with great distinction and dedication, and the Reserve Bank looks forward to his continued success as Director of CAFRAL.

RBI releases Final Report on Enabling PKI in Payment System Applications

The Reserve Bank of India has today released, on its website, the final Report of the Technical Committee on Enabling Public Key Infrastructure (PKI) in Payment System Applications. It had released the draft report for public comment on February-March 2014. Cognisant of the fact that non-PKI enabled payment systems, such as, clearing (Magnetic Ink Character Recognition (MICR/Non MICR), electronic credit system, credit card and debit cards contributed 75 per cent in volume terms but only 6.3 per cent in value terms in the year 2012-13, the Group has suggested that in order to ensure a safe, secure payment system in the country and to ensure legal compliance, digital technology, such as, PKI may be used. Based on the feedback received, the Group has also included a detailed study of cloud-Hosted Digital Signature Certificate (DSC), Trusted Execution Environment, Hardened

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―Soft‖ Signatures, Mobile PKI, Portable Security Transaction Protocol and Hybrid PKI Solution by Institute for Development and Research in Banking Technology (IDRBT) as alternative strategies keeping in view the Indian context (para 19 in the executive summary of the report). The report also highlights, among other things, security features in existing payment system applications and feasibility in implementing PKI in all payments system applications. All banks’ internet banking applications should mandatorily create authentication environment for password-based two-factor authentication as well as PKI-based system for authentication and transaction verification in online banking transaction. In online banking transactions, banks should provide the option to its customers for enabling PKI for its online banking transactions as optional feature for all customers. The Group has also recommended that banks may carry out in phases PKI implementation for authentication and transaction verification.

Background

Payment systems are subjected to various financial risks, such as, credit risk, liquidity risk, systemic risk, operational risk, legal risk. As customers continue to increasingly adopt electronic payment products and delivery channels for their transactional needs, it is necessary to recognise that security and safety have to be robust. Any security related issues resulting in fraud have the potential to undermine public confidence in the use of electronic payment products which will impact their usage. Necessary measures to strengthen security have to be taken as such attacks are growing in scale and sophistication. Against this background, the Reserve Bank of India had, in September 2013, constituted a group to prepare an approach paper for enabling PKI for Payment System Applications in India comprising members from banks (State Bank of India and ICICI bank), Institute for Development and Research in Banking Technology-Certifying Authority (IDRBT-CA), Controller of Certifying Authority (CCA), New Delhi and Reserve Bank of India [(Department of Technology (DIT), Department of Payment and Settlement Systems (DPSS), Department of Government and Bank Accounts (DGBA) - Core Banking Solution (CBS) and Chief Information Security Officer (CISO)]. The Group had also interacted with Indian Banks’ Association (IBA) and other banks which have given their suggestions/feedback on earlier version of the Report.

RBI releases Report of the GIRO Advisory Group

The Reserve Bank of India has today released, on its website for public comments, the Report of the GIRO Advisory Group. The comments may be e-mailed or sent by post to the Chief General Manager, Department of Payment and Settlement Systems, Reserve Bank of India, Central Office, 14th Floor, Shahid Bhagat Singh Marg, Mumbai – 400 001 on or before May 25, 2014. The Reserve Bank of India had announced the constitution of a GIRO Advisory Group (GAG) under the chairmanship of Prof. Umesh Bellur, Indian Institute of Technology, Bombay to implement a national GIRO-based Indian Bill Payment System. The details are availabl at http://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPR849RB1013.pdf. The GAG submitted its report on March 20, 2014 to the Reserve Bank of India. The GAG has observed that bill payments landscape in the country are mostly biller-specific and thus do not provide an environment to customers to make bill payments through an inter operable system in a seamless and efficient manner at many of the agent / customer service points that exist today. These gaps in delivery of services in large parts of the country thus present an opportunity, as well as potential, for the creation of a centralised bills payment system in the country.The GAG had interacted with various stakeholders / institutions from the bill payments industry and many organisations with experience and expertise in the area of bill payments. Based on these deliberations, the GAG examined multiple options that are available to establish and run such a system in the country  and recommended a tiered

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structure where the Bharat Bill Payment Services (BBPS) will be the authorised standard setting body (also handling settlement functions) while the Bharat Bill Payment Operating Units (BBPOUs) will be the authorised operational units, working in adherence to the standards set by the BBPS. The BBPS will function as a ‘not-for-profit’ organisation which has necessary experience in the payment systems space, while the BBPOUs may be operated on commercial lines by existing entities in the bill payments space as well as new entities interested in this segment. The BBPS will also handle the settlement responsibilities arising out of the transactions in the system. All the entities in this tiered structure will operate under the uniform and single brand of the BBPS. This will also ensure a uniform dispute resolution and customer grievance redressal mechanism, thereby building trust and confidence in such a centralised bill payment system. Reserve Bank proposes to issue further detailed guidelines after taking into account comments if any received on the approach suggested in the report.

Minutes of the March 26, 2014 Meeting of the Technical Advisory Committee on Monetary Policy

The thirty sixth meeting of the Technical Advisory Committee (TAC) on monetary policy was held on March 26, 2014 in the run up to the First Bi-monthly Monetary Policy Review of 2014-15 on April 1, 2014.The main points of discussion in the meeting are set out below.

1. Most of the Members were of the view that global growth is likely to be better than anticipated, led by advanced economies, especially the US, while growth impulses are still relatively weak in the emerging market economies. In the US, of the two targets indicated by the Federal Reserve – inflation at 2 per cent and unemployment at 6.5 per cent – the unemployment target may be hit earlier, leading to wage pressures, and hence inflation. As a result, the Fed may raise interest rates earlier than is being anticipated. Some Members were of the view that global recovery may be weaker than expected.

2. On the domestic front, Members’ outlook was that real GDP growth will be muted. The manufacturing sector is stagnant. Since exports and imports are declining, the manufacturing outlook is also weak. Members sensed that investment may pick up as stalled projects take off after the election results. This could raise the output-capital ratio as well as potential output and savings. If revival in growth is driven by a pick-up in investment, without matching revival in savings, there could be larger imbalances. The composition of growth, therefore, becomes important.

3. Members expressed concern on inflation in India being persistently higher than in other countries. On the inflation outlook, most of the Members noted that moderation in vegetable prices drove the recent softening of headline inflation and this is unlikely to be sustained. There are clear upside risks, such as suppressed pricing in electricity, LPG and diesel; impact of hailstorms on potato prices, if not on onion; increase in NREGA employment guarantee by 50 days; and decline in female labour force participation. Inflation excluding food and fuel is sticky since inflation in housing, education and medical care is still elevated. As the economy picks up, there will be an increase in these components and inflation may surge again after October/November 2014. Members cautioned that the Reserve Bank needs to be watchful of the decline in CPI to ascertain if the decline is likely to be on a sustained basis. One Member was of the view that consumer price inflation may soften to 7 per cent or even less, with the rate of growth in wages also likely to decline. According to this Member, inflation persistence factors could be food inflation and the fiscal deficit. High food inflation influencing nominal wage growth but not vice versa, implies that autonomous factors drive food prices. The shift in land utilisation by as much as 10 per cent of total cultivable area away from traditional agriculture and in favour of vegetables should help soften the inflation momentum, but for short-run blips, like hailstorms/unseasonal rains.

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4. On the external sector, some Members noted that current account deficit risks, given sluggish financial savings, cannot be ignored. In the near-term, external sector risks might have eased because of the increase in forex reserves over the last six months. In the medium-term, however, the risk of capital outflows remains and may materialise if the US Fed raises interest rates earlier than is currently anticipated. Other Members expected a surge in foreign currency inflows going forward, which would put upside pressure on the rupee. They cautioned against a policy of allowing the real exchange rate to appreciate. While exchange rate appreciation may help in lowering inflation, it is not good for the economy in general as some categories of exports are highly sensitive to real appreciation, and there is a current account deficit. One Member was of the view than an exchange rate below ` 60 per US$ could hurt manufacturing growth because of severe import competition. Some Members were of the view that the Reserve Bank must actively intervene in the foreign exchange market to prevent excessive exchange rate appreciation. On the other hand, some other Members questioned the need for intervention when capital inflows are large. They were of the opinion that when inflows are good, firms should be allowed to adjust their balance sheets rather than the Reserve Bank intervening in the market. Reserves should only be used to manage volatility and not the level of the exchange rate.

5. On policy action, all Members unanimously recommended that status quo be maintained in the policy. Members listed upside risks to headline inflation in the near term which provide the rationale for a pause: high order of political and economic uncertainty engendered by the forthcoming national elections; the policy stance not being tight enough as the real policy rate is still negative; anchoring inflation expectations; sticky core CPI; and the large fiscal deficit. To manage the risks associated with capital outflows, most of the Members recommended that the Reserve Bank should focus on building up foreign exchange reserves. One Member recommended that the SLR be lowered to 22 per cent of net demand and time liabilities (NDTL) to improve transmission of monetary policy signals.

6. Members emphasised that the nuancing of forward guidance is important. Forward guidance should aim at maintaining interest rate stability, while recognising the challenges of dealing with capital outflows and supply shocks in the process of negotiating the disinflation path set out for January 2016. One Member was of the view that while forward guidance is important for anchoring inflation expectations, guidance should indicate that policy will turn growth supportive if inflation adjusted for base effects declines. Another Member recommended that the Reserve Bank should give forward guidance of a decline in the policy repo rate.

7. The meeting was chaired by Dr. Raghuram G. Rajan, Governor. Internal Members: Dr. Urjit R. Patel (Vice-Chairman), Dr. K.C. Chakrabarty and Shri Harun R. Khan, Deputy Governors; and external Members: Prof. Indira Rajaraman, Dr. Arvind Virmani, Prof. Ashima Goyal, Prof. Errol D’Souza and Dr. Chetan Ghate were present in the meeting. Shri Y.H. Malegam and Dr. Shankar Acharya could not attend the meeting. Dr. Acharya submitted his written views. Officials of the Reserve Bank Shri Deepak Mohanty, Dr. Michael D. Patra, Shri B. M. Misra and Dr. B.K. Bhoi were in attendance.

Since February 2011, the Reserve Bank has been placing the main points of discussions of the meetings of TAC on Monetary Policy in the public domain with a lag of roughly four weeks after the meeting.

Financial Benchmarks- Governance Framework for Benchmark Submitters

As you are aware, the Committee on Financial Benchmarks (Chairman: Shri P. Vijaya Bhaskar, Executive Director) had submitted its Report on February 7, 2014 recommending several measures/principles to be adopted in respect of major Indian Rupee interest rate and

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Foreign exchange benchmarks to strengthen their quality, setting methodology and the governance framework. The Reserve Bank has accepted the recommendations of the Committee and as per the announcements made in theFirst Bi-monthly Monetary Policy Statement 2014-15 on April 1, 2014, the Bank has set in motion the process to implement the recommendations of the Committee in consultation with the Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Foreign Exchange Dealers’ Association of India (FEDAI). 2. The Bank has since advised the FIMMDA and FEDAI to act as the Administrator of the Indian Rupee interest rate and Foreign exchange benchmarks respectively and to take necessary steps to implement the recommendations of the Committee. In order to overcome the possible conflicts of interest in the benchmark setting process arising out of the current governance structure of the FIMMDA and FEDAI, an independent body, either separately or jointly, may be formed by the FIMMDA and FEDAI for administration of the benchmarks. In case of benchmarks determined based on polled submissions, the FIMMDA and FEDAI may select the Benchmark Submitters on the basis of their standing, market-share in the benchmark/instrument linked to the benchmark and representative character and may put in place a Code of Conduct specifying various provisions including hierarchy of data inputs for submissions as recommended by the Committee. The Benchmark Submitters thus selected by the respective Administrator, have to necessarily participate in the polling process and comply with the various provisions specified in the Code of Conduct. The Benchmark Submitters may extend necessary support and cooperation to the respective Benchmark Administrator in strengthening the benchmark determination process. 3. In order to strengthen the governance framework for benchmark submission, the Benchmark Submitters are advised to implement the following measures:

i. The Benchmark Submitters may put in place an internal Board approved policy on governance of the benchmark submission process. The policy may ensure that clearly accountable personnel at appropriate senior positions with requisite knowledge and expertise are responsible for benchmark submissions.

ii. They may put in place an effective conflicts of interest policy which facilitates identification of potential and actual conflicts of interest with respect to benchmark submissions and lays down procedures to be followed for management, mitigation or avoidance of such conflicts.

iii. They may establish a maker-checker system to ensure integrity of the submissions. The submissions may be periodically reviewed by appropriate senior level officials in terms of minimum variance threshold1 with respect to the published benchmark levels.

iv. They may establish appropriate internal controls to secure compliance with the benchmark submission procedures. The transactions which are taken as the basis for submission may be recorded so as to verify that they represent bonafide arm’s length commercial transactions, and are not undertaken solely for the purpose of benchmark submission. The personnel involved in benchmark submissions may document the verifiable basis for their qualitative assessment in absence of actual transaction data.

v. They may establish an effective whistleblowing policy to facilitate early detection of any potential misconduct or irregularities in the benchmark data submissions.

vi. They may retain all records relating to benchmark submissions including those containing procedures and methodologies governing the submissions; names and roles of personnel responsible for submissions and oversight of submissions;  declaration of conflicts of interest by the related personnel; relevant communications between submitting parties; interactions with Benchmark Administrator; exposure of

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individual traders as well as the aggregate exposures of the Benchmark Submitters to the instruments referenced to the benchmark; findings of internal and external audits and remedial actions taken thereof for a minimum period of eight years.

vii. They may subject the benchmark submissions to periodic internal audit, and where appropriate, to external audit.

viii. They may undertake submissions by way of written communications or through robust contribution devices which leave an audit trail to eliminate possibilities of errors.

ix. They may conduct a reality self-check of their existing governance framework vis-à-vis the above guidelines and report the status to the respective Benchmark Administrator by May 31, 2014.

x. They may periodically (periodicity to be specified by the respective Benchmark Administrator) submit a confirmation to the Benchmark Administrator for having complied with the regulatory guidelines as well as the provisions of the Code of Conduct to be issued by the respective Benchmark Administrator.

Reporting of information / data relating to Cash and Suspicious Transactions to the Director, Financial Intelligence Unit-India (FIU-IND)

Please refer to the circular DNBS.(PD).CC.No.339/03.10.42/2013-14 dated July 1, 2013 [ para III (17)] on the above subject. 2. In terms of the extant instructions, NBFCs are required to report information / data relating to Cash and Suspicious Transactions to the Director, Financial Intelligence Unit-India (FIU-IND) on the FINnet Gateway in Test Mode to test their ability to upload the reports electronically till the time NBFCs are informed about ‘go-live’ of the project. The project has since gone ‘live' and henceforth NBFCs may discontinue submission of reports in CD, using only FINnet gateway for uploading of reports in the new XML reporting format. Any report in CD will not be treated as a valid submission by FIU-IND. For any clarification / assistance regarding submission of reports, you may contact FIU-IND help desk at email or telephone numbers 011-24109792 / 93.

Scaling up of the Business Correspondent (BC) Model –Issues in Cash Management

Please refer to Para 26 (Part B) of Governor's bi-monthly policy statement dated April 1, 2014 on the above subject. 2. In this connection, we advise that, after opening of large number of banking outlets in the last three years in hitherto unbanked areas of the country through the BC-ICT model, the time has come to monitor the usage in terms of transactions per BC so as to ensure sustainability of the BC model. One of the critical issues identified in this regard has been of Cash Management of BCs. 3. The insistence by banks on BCs to fully prefund their accounts even after considerably long business relationship has become a major impediment in scaling up operations of BCs. Similarly, low/delayed payment of remuneration of BCs and passing on the responsibility of insuring cash to BCs have also been proving to be irritants in increasing the usage in large number of bank accounts opened. It is, therefore, important for banks to recognize that cash handled by BCs, while doing banking business on behalf of the Bank, is Bank's Cash. In view of the above and with a view to scale up the BC model it has been decided that:-

i. The Boards of the Banks must review the operations of BCs at least once every six months with a view to ensuring that requirement of prefunding of Corporate BCs and BC Agents should progressively taper down with the passage of time. Ideally in all normal cases the prefunding should progressively come down in such a manner so

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as to reach around 15% of the limits fixed for each BC/CSP in case of deposits and 30% in case of Bank Guarantees, etc. in say 2 years from the time a BC starts operations.

ii. The Board should also review the position of payment of remuneration of BCs and should also lay down a system of monitoring by the top management of the Bank. The issue of allowing BCs to handle deposit and payment transactions of various credits, remittance, overdraft and other products of banks must also be examined by the Board from time to time. Complaints redressal system in this regard should also be laid down by the Board.

iii. As the cash handled by BCs is Bank’s cash, the responsibility for insuring this cash should rest with the banks.

Uniform Accounting Standards at ARCs

Please refer to "The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003" dated April 23, 2003 (herein after called Guidelines). 2. Pursuant to the recommendations of the Key Advisory Group (KAG) constituted by the Government of India on the Asset Reconstruction Companies (ARCs), Reserve Bank of India advises the guidelines on uniform accounting standard for ARCs as under:

a. Acquisition cost (Pre and post acquisition)

Expenses incurred at pre acquisition stage for performing due diligence etc. for acquiring financial assets from banks/ Fls should be expensed immediately by recognizing the same in the statement of profit and loss for the period in which such costs are incurred.Expenses incurred after acquisition of assets on the formation of the trusts, stamp duty, registration, etc. which are recoverable from the trusts, should be reversed, if these expenses are not realised within 180 days from the planning period [In terms of RBI Notification No.DNBS.2/CGM(CSM)-2003, dated April 23, 2003 planning period means a period not exceeding twelve months allowed for formulating a plan for realization of nonperforming assets (in the books of originator) acquired for the purpose of reconstruction] or downgrading of Security receipts (SRs) (i.e. Net Asset Value(NAV) is less than 50% of the face value of SRs ) whichever is earlier.

b.  Revenue Recognition-

(i) Yield should be recognised only after the full redemption of the entire principal amount of Security Receipts.

(ii) Upside income should be recognized only after full redemption of Security Receipts.

(iii) Management fees may be recognized on accrual basis. Management fees recognized during the planning period must be realized within 180 days from the date of expiry of the planning period. Management fees recognized after the planning period should be realized within 180 days from the date of recognition. Unrealised Management fees should be reversed thereafter. Further any unrealized Management fees will be reversed if before the prescribed time for realisation, NAV of the SRs fall below 50% of face value. [In terms of RBI Notification No.DNBS.2/CGM(CSM)-2003, dated April 23, 2003 planning period means a period not exceeding twelve months allowed for formulating a plan for realization of non-performing assets (in the books of originator) acquired for the purpose of reconstruction.]

c. Valuation of Security Receipts (SRs)

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Considering nature of investment in SRs where underlying cash flows are dependent on realization from non performing assets, it can be classified as available for sale. Hence investments in SRs may be aggregated for the purpose of arriving at net depreciation/ appreciation of investments under the category. Net depreciation, if any shall be provided for. Net Appreciation, if any should be ignored. Net depreciation required to be provided for should not be reduced on account of net appreciation.

d. Applicability of 'Operating Cycle Concept' under Schedule VI

SC/ RCs are advised in their balance sheet to classify all the liabilities due within one year as "current liabilities" and assets maturing within one year along with cash and bank balances as "current assets". Capital and Reserves will be treated as liabilities on liability side while investment in SRs and Long term deposits with banks will be treated as fixed assets on the assets side.

3. The accounting guidelines will be effective from the accounting year 2014-15.

Reporting of Cross Border Wire Transfer Report on FINnet Gateway

Please refer to our circular RPCD.CO.RRB.RCB.AML.BC.No.36/03.05.33(E)/2012-13 dated October 15, 2012 on ‘Uploading of Reports on FINnet Gateway’ wherein Regional Rural Banks (RRBs) and State/Central Cooperative Banks (StCBs/CCBs) and financial institutions were advised to upload reports as required by FIU-IND using only FINnet gateway.2. With the amendments to Prevention of Money Laundering (PML) Rules, notified by the Government of India vide Notification No. 12 of 2013 dated August 27, 2013 and in terms of amended Rule 3, every reporting entity is required to maintain the record of all transactions including the record of all cross border wire transfers of more than Rs.. 5 lakh or its equivalent in foreign currency, where either the origin or destination of the fund is in India. FIU-IND has advised that the information of all such transactions may be furnished to Director, FIU-IND by 15th of the succeeding month.3. In this regard, it is advised that the ‘Transaction Based Reporting Format’ (TRF) already developed by FIU-IND and being used for reporting Cash Transaction Reports (CTRs), Suspicious Transaction Reports (STRs) and Non-Profit Organizations Transaction Reports (NTRs) may be used for reporting the Cross Border Wire Transfers. The information may be furnished electronically in the FINnet module developed by FIU-IND. All RRBs and StCBs/CCBs are accordingly advised to take action as required by FIU-IND and ensure that reports are submitted in time as per the schedule.4. The format along with sample data filled in as an illustration is available in the ‘Downloads’ section of the FIU-IND website (http://fiuindia.gov.in).5. The Compliance Officer / Principal Officer may acknowledge receipt of this circular to our Regional Office concerned.

Financial Benchmarks- Governance Framework for Benchmark Submitters

As you are aware, the Committee on Financial Benchmarks (Chairman: Shri P. Vijaya Bhaskar, Executive Director) had submitted its Report on February 7, 2014 recommending several measures/principles to be adopted in respect of major Indian Rupee interest rate and Foreign exchange benchmarks to strengthen their quality, setting methodology and the governance framework. The Reserve Bank has accepted the recommendations of the Committee and as per the announcements made in the First Bi-monthly Monetary Policy Statement 2014-15 on April 1, 2014, the Bank has set in motion the process to implement the recommendations of the Committee in consultation with the Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Foreign Exchange Dealers’ Association of India (FEDAI).

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2. The Bank has since advised the FIMMDA and FEDAI to act as the Administrator of the Indian Rupee interest rate and Foreign exchange benchmarks respectively and to take necessary steps to implement the recommendations of the Committee. In order to overcome the possible conflicts of interest in the benchmark setting process arising out of the current governance structure of the FIMMDA and FEDAI, an independent body, either separately or jointly, may be formed by the FIMMDA and FEDAI for administration of the benchmarks. In case of benchmarks determined based on polled submissions, the FIMMDA and FEDAI may select the Benchmark Submitters on the basis of their standing, market-share in the benchmark/instrument linked to the benchmark and representative character and may put in place a Code of Conduct specifying various provisions including hierarchy of data inputs for submissions as recommended by the Committee. The Benchmark Submitters thus selected by the respective Administrator, have to necessarily participate in the polling process and comply with the various provisions specified in the Code of Conduct. The Benchmark Submitters may extend necessary support and cooperation to the respective Benchmark Administrator in strengthening the benchmark determination process. 3. In order to strengthen the governance framework for benchmark submission, the Benchmark Submitters are advised to implement the following measures:

i. The Benchmark Submitters may put in place an internal Board approved policy on governance of the benchmark submission process. The policy may ensure that clearly accountable personnel at appropriate senior positions with requisite knowledge and expertise are responsible for benchmark submissions.

ii. They may put in place an effective conflicts of interest policy which facilitates identification of potential and actual conflicts of interest with respect to benchmark submissions and lays down procedures to be followed for management, mitigation or avoidance of such conflicts.

iii. They may establish a maker-checker system to ensure integrity of the submissions. The submissions may be periodically reviewed by appropriate senior level officials in terms of minimum variance threshold1 with respect to the published benchmark levels.

iv. They may establish appropriate internal controls to secure compliance with the benchmark submission procedures. The transactions which are taken as the basis for submission may be recorded so as to verify that they represent bonafide arm’s length commercial transactions, and are not undertaken solely for the purpose of benchmark submission. The personnel involved in benchmark submissions may document the verifiable basis for their qualitative assessment in absence of actual transaction data.

v. They may establish an effective whistleblowing policy to facilitate early detection of any potential misconduct or irregularities in the benchmark data submissions.

vi. They may retain all records relating to benchmark submissions including those containing procedures and methodologies governing the submissions; names and roles of personnel responsible for submissions and oversight of submissions;  declaration of conflicts of interest by the related personnel; relevant communications between submitting parties; interactions with Benchmark Administrator; exposure of individual traders as well as the aggregate exposures of the Benchmark Submitters to the instruments referenced to the benchmark; findings of internal and external audits and remedial actions taken thereof for a minimum period of eight years.

vii. They may subject the benchmark submissions to periodic internal audit, and where appropriate, to external audit.

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viii. They may undertake submissions by way of written communications or through robust contribution devices which leave an audit trail to eliminate possibilities of errors.

ix. They may conduct a reality self-check of their existing governance framework vis-à-vis the above guidelines and report the status to the respective Benchmark Administrator by May 31, 2014.

x. They may periodically (periodicity to be specified by the respective Benchmark Administrator) submit a confirmation to the Benchmark Administrator for having complied with the regulatory guidelines as well as the provisions of the Code of Conduct to be issued by the respective Benchmark Administrator.

FINMIN THIS WEEKCBDT SIGNS THE FIRST BATCH OF FIVE (5) UNILATERAL ADVANCE PRICING AGREEMENTS (APA); AGREEMENTS COVER A PERIOD OF FIVE (5) YEARS FROM AY 2014-15 TO AY 2018-19 AND SPECIFY THE ARM’S LENGTH PRICE FOR THE COVERED INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE TAXPAYERS

The Central Board of Direct Taxes (CBDT) has signed the first batch of five (5) unilateral Advance Pricing Agreements (APA) here today. The agreements cover a period of five (5) years from AY 2014-15 to AY 2018-19 and specify the arm’s length price for the covered international transactions entered into by the taxpayers. These agreements cover a range of international transactions, including interest payments, corporate guarantees, non -binding investment advisory services and contract manufacturing. The agreements pertain to different industrial sectors including pharmaceuticals, telecom, exploration and financial services. The agreements provide a complete certainty to the taxpayers for five (5) years with regard to the covered international transactions. The APA programme came into effect on 1st July 2012 and the first batch of 146 APA applications was received in March 2013.The CBDT has been able to conclude the first set of agreements within a period of one (1) year as against the internationally accepted norm of at least 2 years. The whole scheme of APA has been designed with the intention of creating a taxpayer friendly environment in transfer pricing matters and to minimise the transfer pricing disputes. Before filing the APA applications, taxpayers are given the opportunity to share their expectations from the APA process during the pre-filing consultations and the APA team shares a broader understanding of the forthcoming APA procedure. Having received an APA application, the APA team works towards establishing the appropriate economic analysis of the covered international transactions which also involves a site visit i.e. physical verification of the business of the applicant with regard to the said transactions. It is this detailed fact finding exercise which lends credibility to the determination of arm’s length price under the APA. The APA team furnishes a report incorporating functions, assets and risk (FAR) analysis which is further examined at length by the CBDT before its submission for the final approval of the Central Government.

FinMin appoints Ila Patnaik aseconomic adviser

Noted economist Ila Patnaik has been appointed Principal Economic Adviser in the Ministry of Finance. “The Appointments Committee of the Cabinet has cleared her name,” a senior Finance Ministry official said.

WORLD BANK THIS WEEK6,700-cr World Bank loan for freight corridor link

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he World Bank has approved $1.1 billion (about ₹6,700 Cr.) as the second tranche of its loan for construction of the 393-km-long electrified double line between Mughalsarai and Bhaupur sections of the eastern dedicated rail freight corridor. The loan agreement for the second phase is expected to be signed in June, an official release said. As a preparatory step, the Dedicated Freight Corridor Corporation Ltd (DFCCIL), the special purpose vehicle responsible for implementing the rail freight corridor project, has already shortlisted bidders for the civil construction contract of this segment. The value of the contract is expected to be ₹3,500-4,000 Cr.. The bidders include Isolux Corsan-Sadbhav Engineering, Gammon-Yuksel, Posco-PNC Infratech and Continental Engineering Corporation Taiwan-JMC-Brahmaputra Infrastructure, among othersThe World Bank had agreed, in principle, to part finance the eastern corridor project from Mughalsarai to Ludhiana, which has been divided in three phases. The total in-principle loan commitment is $2.725 billion, of which $975 million for the first phase was sanctioned in May 2011. The loan agreement was signed in October 2011.

IMF/World Bank Spring Meetings 2014: Development Committee Communique

1. The Development Committee met today, April 12, 2014, in Washington DC.

2. Economic recovery in high-income countries shows signs of strengthening and growth continues in many emerging market economies. However risks remain. Fostering strong, inclusive and sustainable growth in today’s interconnected global economy will require policy adjustments and appropriate coordination and communication. We encourage the World Bank Group (WBG) and the International Monetary Fund (IMF) to work jointly and with all member countries in pursuing sound and responsive economic policies; addressing underlying macroeconomic vulnerabilities; rebuilding macroeconomic buffers; and strengthening prudential management of the financial system.

3. The ability of the WBG to assist countries in achieving the goals of ending extreme poverty and promoting shared prosperity in a sustainable manner, and to support member countries in addressing their development needs, should be enhanced by the implementation of the WBG Strategy that we endorsed at our last meeting.  We welcome the progress made in implementing the change agenda, and call on the WBG to work effectively to complete the reforms. The WBG should build on its country engagement model as a platform for selectivity based on client demand and the new corporate goals, to deliver better, faster and evidence based solutions that result in transformative outcomes for the benefit of low and middle income countries alike. We expect the new WBG structure should lead to better global knowledge sharing to benefit all client countries, and to strengthening its role in support of south-south and regional cooperation. We welcome the WBG scorecard and look forward to regular updates on the implementation of the WBG strategy.

4. Strengthening the foundations for strong, inclusive and sustainable growth calls for macroeconomic stability, good governance, promoting public investment, improving the enabling environment for private investment, boosting quality investment in resilient infrastructure and improving access to finance.  Social inclusion and policies that broaden income opportunities and the full participation of all groups, including women and the marginalized and vulnerable, are essential. Raising skills, productivity, and innovation capabilities are also key elements.  An open business climate that fosters competition, more inclusive human capital development and well-targeted social protection programs are good both for growth and for shared prosperity.  Private investment flows complement development finance and are a vital factor in achieving our goals. In this context, we emphasize the importance of the roles of the International Finance Corporation and the Multilateral Investment Guarantee Agency, working as part of one WBG, in catalyzing private financial flows and promoting the development of a dynamic private sector that can help

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support sustainable growth, shared prosperity and real opportunities for all citizens in all client countries. Environmental considerations need to be integrated into policymaking: climate-smart policies are necessary for environmental sustainability and resilience, and could also generate side benefits for growth and jobs.

5. The level of ambition of the WBG Strategy demands better utilization of existing resources as well as strengthening the WBG’s financial capacity. We are encouraged by and we welcome the conclusion of a successful IDA 17 replenishment, which included strong support from traditional and new donors, and innovative financing mechanisms.  The record US$52 billion approved by shareholders puts IDA in a strong position to maximize impact in supporting our poorest and most vulnerable member countries, including many fragile and conflict-affected situations (FCS) as well as small states, which face particular development challenges.  We welcome IDA 17’s commitment to maximize development impact with its special focus on inclusive growth; gender equality; climate change, including disaster risk management (DRM); and FCS. We are also encouraged that the subsidy resources needed to ensure the sustainability of subsidized IMF lending to low income economies have been largely secured. We value the IMF’s work on how countries can use fiscal policy to address inequality in an efficient manner.

6. The measures taken to grow revenues, reduce costs, and make more efficient use of capital within a prudent risk framework will increase the WBG’s financial capacity to serve its clients, both by supporting them with their specific development objectives and by providing countercyclical support in times of crisis. We look forward to continued progress in achieving a leaner cost base via improved organizational and operational efficiencies, as well as ongoing efforts to develop innovative approaches and mechanisms to mobilize additional financing.  We encourage increasing the level and quality of investment in infrastructure, which is critical for growth, job creation, prosperity and poverty reduction in countries of all income levels. We call on the WBG to remain actively engaged with middle income countries to help them address their development needs. We also encourage the WBG to explore extending IBRD loans to well performing IDA-only countries while ensuring their debt sustainability.

7. We urge the WBG and the IMF to continue to strengthen their engagement with Sub-Saharan Africa and ensure that their financial, analytical, and capacity-building support is geared toward fostering country-driven structural transformation, reducing extreme poverty, boosting job creation, and making economic growth more inclusive and resilient. We especially welcome the WBG’s stepped up engagement in addressing the regional drivers of fragility and conflict, most recently through the Sahel Initiative and continued implementation of the Great Lakes Initiative. The WBG should learn from these initiatives and apply lessons to the Horn of Africa, Central Africa and the Gulf of Guinea. We also commend the role of the WBG in helping to close the infrastructure gap of Sub-Saharan Africa, by attracting new investments and financing sustainable energy supply and distribution. We call on the WBG to assist clients to further develop nutrition-sensitive agriculture production, including through support to smallholders and cooperatives, and to broaden support for sustainable agriculture. We are encouraged that the IMF has now completed its program of establishing five technical assistance centers to meet needs across the entire region. We welcome the forthcoming IMF high-level conference in Mozambique that will bring together economic policy makers from Africa and beyond to discuss some of the key challenges facing the continent. We call for enhanced focus and attention to the Middle East and North Africa region, and emphasize the importance of WBG support to Arab countries in transition.

8. We remain deeply concerned about the continuously deteriorating humanitarian situation in the Central African Republic, South Sudan and Syria. We commend the generosity of governments and families in neighbouring countries who are hosting those displaced at

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significant economic and social cost. The WBG’s work in FCS is fundamental to delivering on its goal to end extreme poverty, and active IMF engagement in FCS is key to achieving macroeconomic stability under what are often very difficult circumstances. We urge the WBG and the IMF to remain closely engaged in these as well as other FCS and countries in transition, in coordination with other development partners. We welcome the continuous support of the WBG and IMF to Ukraine given the challenges the country is facing.

9. We encourage the WBG to maintain strong collaboration with the UN system in the definition of the Post-2015 Millennium Development Goals.

10. We welcome the WTO Bali Ministerial Declaration on Trade Facilitation. We believe the agreement will increase competitiveness for developing countries by improving border management and reducing transaction costs and we call on the WBG to support countries in its implementation.

11. We are encouraged by progress made by the WBG in mainstreaming DRM in its operations and recognize the need to further intensify these efforts in country partnership frameworks. We recognize the challenges faced by small states vulnerable to the effects of climate change and natural disasters. We would welcome a further update on progress two years from now.

12. We remain committed to completing the implementation of the 2010 WBG shareholding realignment. We urge all members who are yet to subscribe to their allocated IBRD and IFC shares to do so without delay, and look forward to the next review of Voice by 2015.

13. We thank Jorge Familiar for his excellent services to the Development Committee over the past four years and wish him well in his future role as the World Bank’s Vice President for Latin America and the Caribbean. The next meeting of the Development Committee will be held on October 11, 2014, in Washington, DC.

IMF/World Bank Spring Meetings 2014: Development Committee Communique

2. Economic recovery in high-income countries shows signs of strengthening and growth continues in many emerging market economies. However risks remain. Fostering strong, inclusive and sustainable growth in today’s interconnected global economy will require policy adjustments and appropriate coordination and communication. We encourage the World Bank Group (WBG) and the International Monetary Fund (IMF) to work jointly and with all member countries in pursuing sound and responsive economic policies; addressing underlying macroeconomic vulnerabilities; rebuilding macroeconomic buffers; and strengthening prudential management of the financial system. 3. The ability of the WBG to assist countries in achieving the goals of ending extreme poverty and promoting shared prosperity in a sustainable manner, and to support member countries in addressing their development needs, should be enhanced by the implementation of the WBG Strategy that we endorsed at our last meeting.  We welcome the progress made in implementing the change agenda, and call on the WBG to work effectively to complete the reforms. The WBG should build on its country engagement model as a platform for selectivity based on client demand and the new corporate goals, to deliver better, faster and evidence based solutions that result in transformative outcomes for the benefit of low and middle income countries alike. We expect the new WBG structure should lead to better global knowledge sharing to benefit all client countries, and to strengthening its role in support of south-south and regional cooperation. We welcome the WBG scorecard and look forward to regular updates on the implementation of the WBG strategy. 4. Strengthening the foundations for strong, inclusive and sustainable growth calls for macroeconomic stability, good governance,

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promoting public investment, improving the enabling environment for private investment, boosting quality investment in resilient infrastructure and improving access to finance.  Social inclusion and policies that broaden income opportunities and the full participation of all groups, including women and the marginalized and vulnerable, are essential. Raising skills, productivity, and innovation capabilities are also key elements.  An open business climate that fosters competition, more inclusive human capital development and well-targeted social protection programs are good both for growth and for shared prosperity.  Private investment flows complement development finance and are a vital factor in achieving our goals. In this context, we emphasize the importance of the roles of the International Finance Corporation and the Multilateral Investment Guarantee Agency, working as part of one WBG, in catalyzing private financial flows and promoting the development of a dynamic private sector that can help support sustainable growth, shared prosperity and real opportunities for all citizens in all client countries. Environmental considerations need to be integrated into policymaking: climate-smart policies are necessary for environmental sustainability and resilience, and could also generate side benefits for growth and jobs.

5. The level of ambition of the WBG Strategy demands better utilization of existing resources as well as strengthening the WBG’s financial capacity. We are encouraged by and we welcome the conclusion of a successful IDA 17 replenishment, which included strong support from traditional and new donors, and innovative financing mechanisms.  The record US$52 billion approved by shareholders puts IDA in a strong position to maximize impact in supporting our poorest and most vulnerable member countries, including many fragile and conflict-affected situations (FCS) as well as small states, which face particular development challenges.  We welcome IDA 17’s commitment to maximize development impact with its special focus on inclusive growth; gender equality; climate change, including disaster risk management (DRM); and FCS. We are also encouraged that the subsidy resources needed to ensure the sustainability of subsidized IMF lending to low income economies have been largely secured. We value the IMF’s work on how countries can use fiscal policy to address inequality in an efficient manner. 6. The measures taken to grow revenues, reduce costs, and make more efficient use of capital within a prudent risk framework will increase the WBG’s financial capacity to serve its clients, both by supporting them with their specific development objectives and by providing countercyclical support in times of crisis. We look forward to continued progress in achieving a leaner cost base via improved organizational and operational efficiencies, as well as ongoing efforts to develop innovative approaches and mechanisms to mobilize additional financing.  We encourage increasing the level and quality of investment in infrastructure, which is critical for growth, job creation, prosperity and poverty reduction in countries of all income levels. We call on the WBG to remain actively engaged with middle income countries to help them address their development needs. We also encourage the WBG to explore extending IBRD loans to well performing IDA-only countries while ensuring their debt sustainability. 7. We urge the WBG and the IMF to continue to strengthen their engagement with Sub-Saharan Africa and ensure that their financial, analytical, and capacity-building support is geared toward fostering country-driven structural transformation, reducing extreme poverty, boosting job creation, and making economic growth more inclusive and resilient. We especially welcome the WBG’s stepped up engagement in addressing the regional drivers of fragility and conflict, most recently through the Sahel Initiative and continued implementation of the Great Lakes Initiative. The WBG should learn from these initiatives and apply lessons to the Horn of Africa, Central Africa and the Gulf of Guinea. We also commend the role of the WBG in helping to close the infrastructure gap of Sub-Saharan Africa, by attracting new investments and financing sustainable energy supply and distribution. We call on the WBG to assist clients to further develop nutrition-sensitive agriculture production, including through support to smallholders and cooperatives, and to broaden support for sustainable agriculture. We are encouraged that the IMF has now completed its program of establishing five technical assistance centers to meet needs across the entire region. We welcome the forthcoming IMF high-level

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conference in Mozambique that will bring together economic policy makers from Africa and beyond to discuss some of the key challenges facing the continent. We call for enhanced focus and attention to the Middle East and North Africa region, and emphasize the importance of WBG support to Arab countries in transition. 8. We remain deeply concerned about the continuously deteriorating humanitarian situation in the Central African Republic, South Sudan and Syria. We commend the generosity of governments and families in neighbouring countries who are hosting those displaced at significant economic and social cost. The WBG’s work in FCS is fundamental to delivering on its goal to end extreme poverty, and active IMF engagement in FCS is key to achieving macroeconomic stability under what are often very difficult circumstances. We urge the WBG and the IMF to remain closely engaged in these as well as other FCS and countries in transition, in coordination with other development partners. We welcome the continuous support of the WBG and IMF to Ukraine given the challenges the country is facing. 9. We encourage the WBG to maintain strong collaboration with the UN system in the definition of the Post-2015 Millennium Development Goals.10. We welcome the WTO Bali Ministerial Declaration on Trade Facilitation. We believe the agreement will increase competitiveness for developing countries by improving border management and reducing transaction costs and we call on the WBG to support countries in its implementation.

11. We are encouraged by progress made by the WBG in mainstreaming DRM in its operations and recognize the need to further intensify these efforts in country partnership frameworks. We recognize the challenges faced by small states vulnerable to the effects of climate change and natural disasters. We would welcome a further update on progress two years from now.12. We remain committed to completing the implementation of the 2010 WBG shareholding realignment. We urge all members who are yet to subscribe to their allocated IBRD and IFC shares to do so without delay, and look forward to the next review of Voice by 2015. 13. We thank Jorge Familiar for his excellent services to the Development Committee over the past four years and wish him well in his future role as the World Bank’s Vice President for Latin America and the Caribbean.The next meeting of the Development Committee will be held on October 11, 2014, in Washington, DC.

Release of World Development Indicators 2014

The 2014 edition of World Development Indicators (WDI) has just been released. WDI 2014 provides high-quality cross-country comparable statistics about development and people’s lives around the globe. The WDI suite of products can be accessed from data.worldbank.org/wdi, and include:

An update to the WDI database including notes and metadata explaining the relevance of the indicators for development, their source, and their methodology. Visit databank.worldbank.org.

Online tables: Over 90 tables presenting country and aggregate data organized into six main topics (world view, people, environment, economy, states and markets, and global links) providing both data and comprehensive “About the Data” explanations. These tables are automatically updated when the database is updated four times a year, and can be accessed and downloaded from wdi.worldbank.org/tables.

The WDI “DataFinder” application available in English, Spanish, French and Chinese, in tablet and mobile phone editions for both Android and iOS. The full text of the printed book is also included.

The WDI publication, containing highlight stories and other related information, will be available in May. Some of the changes for 2014 include new indicators for severe wasting, disaggregated by sex; national estimates for labor force participation; ratios of employment to population; and unemployment. All revisions to indicators and

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related metadata are documented here. For the full set of WDI products, visit data.worldbank.org/wdi, or contact the Development Data Group by sending an e-mail to data@worldbank.org.

World Bank Group Hones Poverty Strategy as Meetings Wrap

A year ago, the World Bank Group won support for the audacious goal of ending extreme poverty. Today, as the 2014 International Monetary Fund-World Bank Spring Meetings wrap up, the Bank Group is close to implementing its strategy to tackle the goal. The Development Committee, the body that advises the Bank Group and the IMF on development issues, said in its communiqué that it welcomed “progress made in implementing the change agenda,”  since it was endorsed six months ago, and called on the Bank Group to “work effectively to complete the reforms.” “Literally everyone from the advanced countries, from the low-income countries, from emerging countries, all the participants, all the attendees, expressed admiration" for the change process, said Development Committee Chairman Marek Belka, adding that change "is never easy, but has a potential to release a lot more from the excellent group of people that we have in the World Bank Group."

“Today, I was very humbled to receive such a strong endorsement of the change agenda we’ve put forward,” said World Bank Group President Jim Yong Kim. “We have made a lot of progress … and we will continue to focus all of our efforts on improving our ability to serve clients.” At the 2013 Spring Meetings, the committee backed two goals proposed by the Bank Group: reducing extreme poverty to no more than 3% by 2030, and boosting the incomes of the bottom 40%  of the population.  The poverty goal will entail lifting 50 million people a year out of extreme poverty – defined as living on less than $1.25 a day.  Kim said this week achieving the goal will require a “laser-like focus on making growth more inclusive and targeting more programs to assist the poor directly.” While “extraordinarily difficult,” the goal can be met, he said. “This can be the generation that ends extreme poverty.”

A new paper, “Prosperity for All,” released April 10 says economic growth is vital to achieving the goals, but must be complemented by policies that allocate more resources to the extreme poor, such as cash transfer programs.  In the last several months, the Bank Group has begun to implement a strategy to improve its effectiveness as a development institution and align its work to the goals.  Changes under way include cutting costs, realigning personnel, streamlining some processes, and encouraging closer collaboration among teams and among the various arms of the Bank Group. Starting in July, the Bank Group will have communities of experts focusing on bringing “global solutions to local problems,” said Kim at his Spring Meetings opening press conference. The Bank Group will retain a strong presence in the countries where it works. The Development Committee said it expects the Bank Group’s new structure “should lead to better global knowledge sharing to benefit all client countries, and to strengthening its role in support of South-South and regional cooperation.” It also welcomed the Bank Group’s plans to increase financing capacity from $45 billion to $50 billion a year today to more than $70 billion within a decade. “We look forward to continued progress in achieving a leaner cost base via improved organizational and operational efficiencies, as well as ongoing efforts to develop innovative approaches and mechanisms to mobilize additional financing. We encourage increasing the level and quality of investment in infrastructure,” the communiqué said. The Development Committee praised the Bank Group’s “stepped-up engagement in addressing the regional drivers of fragility and conflict” through initiatives in Africa’s Sahel and Great Lakes regions, as well as its role in helping to close infrastructure gaps in Africa. The committee called for “enhanced focus” on the Middle East and North Africa and support for Arab countries in transition. “We remain deeply concerned about the continuously deteriorating humanitarian situation in the Central African Republic, South Sudan, and Syria,” the committee said. “We

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commend the generosity of governments and families in neighbouring countries who are hosting those displaced at significant economic and social cost.”

IMF THIS WEEKIMF-World Bank Publish Revised Guidelines for Public Debt ManagementInternational Monetary Fund (IMF) and World Bank staffs have prepared and issued to the Executive Boards of both institutions the Revised Guidelines for Public Debt Management for information on April 1, 2014. Application of these guidelines should strengthen the international financial architecture, promote policies and practices that contribute to financial stability and transparency, and reduce member countries’ external vulnerabilities. The revision of the original 2001 Guidelines and their 2003 Amendments was requested by the G-20 Finance Ministers and Central Bank Governors at their meeting in Moscow on February 15–16, 2013. The request was triggered by structural changes in many countries’ debt portfolios— in terms of both size and composition—over the last decade, as a result of financial sector and macroeconomic policy developments, especially in response to the recent financial crisis. The 2014 revision of the Guidelines was carried out by the IMF and World Bank staffs, supported by a working group of debt management offices and central bank authorities from Argentina, Bangladesh, Belgium, Brazil, the Comoros, Denmark, the Gambia, Germany, India, Italy, Jamaica, Korea, the People’s Republic of China, Russia, Sierra Leone, Spain, Sudan, Sweden, Turkey, the United States, Uruguay, and Vietnam. Lars Hörngren, Chief Economist at the Swedish National Debt Office, chaired this working group. The OECD provided inputs during the review process. The revisions to the Guidelines mainly concentrate on: (i) management objectives and coordination, including clarifying the roles and accountabilities of fiscal authorities and debt managers to the debt sustainability analysis process; (ii) transparency and accountability by enhancing communication with investors, especially during periods of crisis; (iii) institutional framework with the use of collective action clauses (CACs) in bond contracts as necessary for the efficient resolution of sovereign debt restructuring; (iv) debt management strategy, including debt portfolio risk mitigation strategies and contingency plans; (v) risk management framework, with emphasis on stress testing of the public debt portfolio and the use of derivatives in managing portfolio risk; and (vi) development and maintenance of efficient markets for government securities, as an integral part of developing a robust debt management strategy. The revised Guidelines will be used by IMF and World Bank staffs to provide a framework for technical assistance and will serve as background for discussions in the context of IMF surveillance. It may also be used as reference material by third party consultants and experts dealing with public debt management issues.

Transcript of a Press Briefing: G-24 MinistersAshraf El Araby, Chairman: Egypt and Minister of Planning and International CooperationAlain Bifani, First Vice Chairman: Lebanon and Director General, Ministry of FinanceLuis Fernando Mejía, Second Vice Chairman: Columbia and Politica Macroeconómica, Ministerio de Hacienda y Crédito PúblicoAmar Bhattacharya, G-24 Secretariat and DirectorSilvia Zucchini, Senior Communications Officer, IMFMs. Zucchini - Good evening and welcome to the Spring Meetings of the IMF and the World Bank. Welcome to the G-24 press conference. I'm Silvia Zucchini from the Communications Department of the IMF.The G-24 ministers just met. On the podium with me for the press conference we have Minister Ashraf El Araby, representing the G-24 chair, Minister of Planning and International Cooperation of Egypt; representing the First Vice-Chair, Mr.. Alain Bifani, Director General of the Ministry of Finance of Lebanon; representing the Second Vice-Chair, Luis Fernando Mejía, Macroeconomic Policy Director, Ministry of Finance and Public Credit of Colombia. And, in addition, we have Amar Bhattacharya, the Director of the G-24 Secretariat.

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So, let's start giving the floor to the G-24 Chairman, and then we will take questions.Mr. El Araby - Let me welcome you all once again to this press conference. You will have received our communiqué, so I will be very brief.The central focus of our meeting was the global economy and the implications for emerging market and developing countries. We also discussed the role and reform of both the IMF and World Bank Group. First, our ministers agreed that despite recent improvements, the global economy is not yet firmly on the path of strong, sustainable growth. The slowdown in growth in emerging markets and developing countries (EMDCs) is not unexpected, given their exceptional performance in the years leading up to and following the crisis. At the same time, it also reflects the adverse impact of cumulative uncertainties and difficulties in the external environment, together with the recent turbulence in financial markets.There has been a lot of focus on fundamentals in EMDCs, but our members emphasized that they are generally strong and that developing countries continue to drive the bulk of global growth. Our immediate concerns revolve around the potential for disruptive capital flows and exchange rate volatility arising from the normalization of monetary policy in major advanced economies. In order to avoid harmful spillovers and spillbacks, we urge advanced economies to take steps to coordinate and more clearly communicate their policies, and satisfies also have a crucial role to play in facilitating multilateral dialogue and policy coherence. We also called on the international financial institutions and wider international community to provide increased support for the Arab countries in transition.Looking ahead, we recognize that the growth outlook for developing countries will be less favorable as a result of a variety of factors, including tighter financing conditions, lower growth potential, and full growth in some advanced and emerging market economies and slower trade growth. We thus affirm our commitments to continue supporting domestic as well as global growth. To this end, we agreed that job creation and increased productivity is critical for the long-term sustained growth and development of our members. We also agree to pursue measures to reduce poverty and inequality and increase social inclusion.With regard to the IMF, our discussion today revolved around the absolute imperative of coming to a closure on IMF quota and governance reforms. We are deeply disappointed that the already agreed 2010 package of reforms had not been implemented. This impacts the credibility, legitimacy, and effectiveness of the IMF, and prevents us from undertaking further necessary reforms and meeting forward-looking commitments. We believe all options to sustain voice and governance reforms need to be considered, keeping in mind that the goal of any reforms must be to recognize the growing role of emerging markets and developing countries in the global economy, while enhancing the voice of the poor and small, low, and middle income countries.The third issue we discussed was the role and reform of the World Bank Group. Ministers expressed support for the change initiative under way at the Bank, but stressed the importance of ensuring that it does not become disruptive. We believe the overarching focus of reforms must be on supporting clients and ensuring that enough capital is available to meet their financial, technical and advisory needs in a more cost effective, timely and less bureaucratic manner.We see the repositioning of the organization as one World Bank Group as a positive development and call for this to be implemented in a timely fashion. We also support the design of a new country engagement model and stress that this must enhance and not undermine country ownership. We believe that the global infrastructure facility represents a constructive step toward meeting the enormous infrastructure investment and projected development requirements in developing countries.With that, I will open the floor to questions.QUESTIONER: I have two questions. One is on the IMF. In your communiqué you say all options to sustain voice, etcetera, should be considered. Are you thinking of something in particular to go beyond the 2010 Quota and Governance reforms, given that is seems hard that it will come into effect swiftly? And my second question is concerning the Global

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Infrastructure Facility the World Bank is considering. Can you elaborate on any progress being made? Are countries interested in contributing to this fund?Mr. Bhattacharya: Let me begin with the global infrastructure facility. What we have on the table is a proposal from the World Bank, and there was an initial discussion yesterday basically outlining it. As none of the elements of design or detail have been agreed upon, it would be premature for us to comment on it. Let's say we have a wish list. We have huge needs and would like to see those needs met. We support very much the fact that it is focused on trying to catalyze private sector investment. We think that is very important. But, we also want to make sure it is as inclusive as needed, and that it must meet the needs of all our countries. That is on the global infrastructure facility.With regard to the IMF, as the minister just said, we believe it is absolutely imperative to follow through on the 2010 Quota and Governance reforms. Those reforms had some forward-looking commitments, namely undertaking a comprehensive review of the quota formula by January, 2013, and to complete the 15th quota review by January, 2014. Those, of course, have not been met. But, we need to make sure that we can not only deliver on the 2010 reforms, but we keep the momentum for future reform, because the 2010 was only a step, but only a step toward what is needed.QUESTIONER: Just to follow-up, so it is important to deliver. The U.S. congress is not open to it. So are you ready to be stuck in this situation for another at least six months to a year? Do you see any possibility that the U.S. would ratify this?Mr. Bhattacharya: That is why the language in the communiqué, which our ministers discussed, states that all options need to be considered. We know that the U.S. authorities are committed to the ratification of the reform. But, nobody knows exactly when this will happen. And in that context, we need to think about the adequacy of the Fund's resources, we need to think about the Fund’s governance—that is the shifts of representation in favor of EMDCs—, and we need to think about delivering on the fundamental changes that were agreed upon.So, of course, this is not a discussion the G-24 can have just by itself. It includes all members of the Fund. Indeed, this will be discussed in the G-20 and in the IMFC. And, we are basically putting pressure that we get the results we are looking for.QUESTION: I know the IMF, World Bank, G-20 and G-24 meetings are just getting started, but I'm wondering if you could describe anything about the mood in Washington, are there concerns about Russia and Ukraine, are they souring any parts of the talks particularly? Thank you.Ms. Zucchini: I don't think this is actually an issue that we can address in this press conference. The G-24 covers different issues.QUESTIONER: In 2010 there were initial contributions made in the form of bilateral loans to the IMF that were contingent on the quota reform. Has there been any talk of withdrawing those or reconsidering, or is that a done deal that stays on the table?Mr. Bhattacharya: You’re right that the bilateral loans are temporary and they have to be renewed. And they were indeed provided on the assumption that the 2010 reforms would go through. And, that there would be the augmentation of quotas as a result. If that doesn’t happen in time, then the membership has to consider how to deal with that issue. That issue is very much alive and under discussion.Ms. Zucchini: If there are no more questions, we will draw this press conference to a close. Thank you very much for attending the G-24 press conference today, and have a nice stay in Washington D.C.

Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development

1. We, the Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development, held our ninety-first meeting in Washington, D.C. on April 10, 2014 with

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H.E. Dr. Ashraf El Araby, Minister of Planning and International Cooperation of Egypt in the Chair; Mr... Alain Bifani, Director General of the Ministry of Finance of Lebanon as First Vice-Chair; and Luis Fernando Mejía, Director General of Macroeconomic Policy of the Ministry of Finance of Colombia as Second Vice-Chair.Global Economy and Implications for Developing Countries2. We are encouraged by the strengthening recovery in major advanced economies (AEs), but note that growth remains tepid and subject to considerable risk. We underscore that emerging market and developing country (EMDC) fundamentals remain generally strong and that EMDCs will continue to account for the bulk of global growth. Nevertheless, they have been impacted by the adverse cumulative effects of the difficult external environment and recent turbulence in financial markets. Despite this challenging environment, many low-income countries (LICs), notably in Sub Saharan Africa (SSA), have been able to maintain high growth momentum supported by generally sound policies. We are concerned by the challenges facing small developing states and fragile and conflict-affected countries, some of which remain highly indebted and vulnerable and face limited prospects for growth.3. We remain highly concerned about the adverse impact of disruptive capital flow and exchange rate volatility resulting from the potentially abrupt changes in monetary policy in a few major AEs. We urge policymakers, especially in countries that issue reserve currencies, to pursue multilaterally coordinated actions to mitigate adverse spillover effects of monetary policy, including through effective communication. At the same time, AEs must do more to stimulate global demand and facilitate rebalancing. We believe that the IMF has a role to play in facilitating policy coordination and coherence at the multilateral level to navigate policy challenges. We also emphasize the necessity of ensuring that EMDCs have adequate access to financial safety nets, including from the international financial institutions (IFIs). We are particularly concerned about the unique challenges facing Arab countries in transition that have yet to receive the full support of the international community, and call for flexibility by the IFIs in dealing with these countries, in view of their political and socio-economic challenges. We call for additional resources to neighboring countries, in particular, Lebanon, which is facing a disproportionate impact from the influx of Syrian refugees.4. We note that the economic outlook for EMDCs will be less favorable than in the past because of tighter financing conditions, geopolitical tensions, slower actual and lower potential growth than before the crisis in AEs, more moderate growth in trade and less buoyant commodity prices. Against this backdrop, we are committed to boosting domestic sources of growth and tapping opportunities for trade and investment amongst ourselves. In order to ensure that our countries are on a robust long-term growth path, we will pursue measures to boost productivity and accelerate structural transformation. We are also committed to taking a broad range of actions over the medium term to reduce poverty and inequality and increase social inclusion. We will focus, in particular, on creating more and better jobs by investing in skills and education and facilitating labor mobility.Role and Reform of the IMF5. We are deeply disappointed that the IMF quota and governance reforms agreed to in 2010 have not yet come into effect due to non-ratification by its major shareholder. This represents a significant impediment to the credibility, legitimacy and effectiveness of the Fund and inhibits the ability to undertake further, necessary reforms and meet forward-looking commitments. We strongly believe that the IMF must remain a quota-based institution with adequate quota resources to play its systemic role on a sustainable basis. To this end, we feel that all options to sustain voice, representation and governance reforms should be considered. We continue to believe that the fundamental goal of quota and governance reform must be to reflect the underlying shifts in the global economy and enhance the voice and representation of EMDCs, including poor and small low- and middle-income countries. We reiterate our longstanding call for a third chair for SSA on the IMF Executive Board, provided it does not come at the expense of other EMDC chairs, and ask that all available options be explored.

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6. We are concerned about the delayed completion of the review of the IMF’s policy on debt limits. We urge the IMF to complete the review, with the aim of having in place a structured and unified debt limit framework for all countries, anchored in existing debt sustainability assessments. Given the large and critical financing needs in LICs, particularly for infrastructure, we emphasize the importance of adopting a flexible and non-intrusive operational framework. We are also closely following the litigation in U.S. courts between NML and Argentina and believe it has systemic relevance and potentially profound implications for all countries. Any resolution that incentivizes predatory holdout behaviour would undermine the basic architecture for sovereign lending and debt resolution. Given the limited progress towards a comprehensive sovereign debt workout mechanism, EMDCs may have to take leadership in facilitating dialogue.Role and Reform of the World Bank Group7. We take note of the major change initiatives and reforms underway in the World Bank Group (WBG). We strongly support the change agenda and repositioning of the organization as ‘One World Bank Group’, respecting the different nature of each institution. We call for an effective, timely approach to implementing this shift. As the reform process progresses, we stress the importance of ensuring continuity in the Bank’s ongoing programs and avoiding disruptive change. We trust that these reforms are strongly anchored in and guided by the ultimate objective of supporting clients by delivering customized development solutions backed by finance, knowledge and convening services. In order to attain this goal, the WBG must meet the financing, technical and advisory needs of clients in a more cost-effective, timely and less bureaucratic manner. We take note of the design of a new country engagement model, including the Country Partnership Framework and Systematic Country Diagnostic and stress that this must reinforce country ownership. In that regard, we welcome the strengthening of statistical capacity of client countries as one of the priorities of the WBG. We are concerned about the stalemate in the engagement of the WBG with some members and reiterate the importance of the WBG engaging with and providing support to all its members on the basis of its development mandate and without political considerations.8. We are thankful for the timely replenishment of IDA in order to meet the immense needs of the poor and vulnerable. We note the efforts to improve the WBG’s lending capacity through better utilization of the balance sheet and measures to improve efficiency, as outlined in the expenditure review. We believe it will be important to monitor the impact of these proposals for unintended consequences, including on demand. If necessary, the proposals should be adjusted in order to ensure affordability and fair burden-sharing. We feel that a further capital increase should be considered in the long-run as a measure to ensure the balance of demand and supply in IBRD lending and the financial sustainability of the institution.9. We also take note of the proposal to establish the Global Infrastructure Facility as a constructive contribution to overcoming the gaps and constraints in infrastructure financing and project development. The ultimate proposal must ensure adequate and broader participation of recipient countries and the availability of additional resources, together with sufficient flexibility to meet diverse infrastructure finance needs.10. We underscore the need to remain committed to the implementation of the 2010 WBG shareholding reform as well as to the conclusion of the next shareholding review by no later than October 2015, as previously agreed.11. We note the adverse effects of climate change and environmental degradation, particularly for poor, fragile and vulnerable countries, and recognize the importance of addressing shared global challenges. We welcome the progress on incorporating disaster and climate risk management into the WBG’s development priorities and operations. We call for continued efforts to implement the recommendations of the Sendai report. We also call for an ambitious replenishment of the Global Environment Facility (GEF) in order to ensure it has adequate resources to meet its mandate.Other Matters

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12. We reiterate the importance of staff diversity at all levels in enhancing the legitimacy and effectiveness of the IFIs, and call for further efforts to increase the share of staff from underrepresented regions, building on diversity initiatives.13. The next meeting of the G-24 Ministers is expected to take place on October 9, 2014 in Washington, D.C.

LIST OF PARTICIPANTS1

Ministers of the Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development held their ninety-first meeting in Washington, D.C. on April 10, 2014 with H.E. Dr. Ashraf El Araby, Minister of Planning and International Cooperation of Egypt in the Chair; Mr... Alain Bifani, Director General of Finance of Lebanon, as First Vice-Chair; and Luis Fernando Mejía,  Director PoliticaMacroeconómica of Colombia, as Second Vice-ChairThe meeting of the Ministers was preceded on April 9, 2014 by the one hundred and third meeting of the Deputies of the Group of Twenty-Four, with Mr... Karim Wissa, Alternate Executive Director at the World Bank, as Chair.African Group: FaridTiaiba, Algeria; NialéKaba, Côte d’Ivoire; MutomboMwanaNyembo, Democratic Republic of Congo; A. ShakourShaalan, Egypt; Sufian Ahmed Beker, Ethiopia; Christophe Akagha-Mba, Gabon; Seth E. Terkper, Ghana; NgoziOkonjo-Iweala, Nigeria; Pravin Gordhan, South Africa.Asian Group: Arvind Mayaram, India; Ali Taiebnia, Islamic Republic of Iran; Nada Mufarrij, Lebanon; Ma. CyoTuaño-Amador, Philippines; Sarath Amunugama, Sri Lanka; Maya Choueiri, Syrian Arab Republic.Latin American Group: Axel Kicillof, Argentina; Carlos Cozendey, Brazil; Maria A. Arbelaez, Colombia; Johnny GramajoMaroquín, Guatemala; Fernando AportelaRodrígues, Mexico; Julio Velarde, Peru; Larry Howai, Trinidad and Tobago; José Rojas, Venezuela.Observers:AbdulrahmanAlhamidi, Arab Monetary Fund; Ping Sun, China; Inés Bústillo, ECLAC; Alvaro Hernandez, Ecuador; Shamshad Akhtar, ESCAP; Steven Ciobo, G-20; Luis-Alberto Arce, G-77; MetellusAlfredfis, Haiti; Stephen Pursey, ILO; Mohamed Taamouti, Morocco; Suleiman Alherbish, OFID; Omar Abdul-Hamid, OPEC; Sulaiman Al-Turki, Saudi Arabia; Manuel F. Montes, South Centre; Sultan Alsuwaidi, United Arab Emirates; PetkoDraganon, UNCTAD; Alexander Trepelkov, UNDESA.

To Build Resilience in Growth, Focus Must Turn to Structural Reforms

IMF Survey

Mix of policies has to change with focus on growth and jobs Need to find a practical way forward on quota reforms

Key to addressing inequality is “redistribution of productivity”

At the IMF-World Bank Spring Meetings in Washington D.C., policymakers’ concerns shifted from crisis recovery to achieving durable and high-quality growth. In an interview, Tharman Shanmugaratnam—Deputy Prime Minister of Singapore and Chair of the IMF’s International Monetary and Financial Committee (IMFC)—says that the focus must now turn to structural reforms to “build resilience in growth and jobs”. He also highlights that steps to address income inequality should focus on raising skills and productive potential across the workforce.

IMF Survey: As Chairman of the IMF's policysetting body, can you give us a sense of the key themes from the meetings today?-setting body, can you give us a sense of the key themes from the meetings today?

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Tharman: The overarching theme is that we are in a new phase of the recovery. It’s most clear in the U.S., but Europe is past the worst although there's still some downside risk. Globally we are now four to five years out of the crisis. It requires a new balance in policymaking, focused on the medium term, and building resilience in growth and jobs. The second important theme in our discussions had to do with financial stability. I'm not talking here about the legacy of the last crisis, which is still with us, such as the impaired bank balance sheets in Europe and elsewhere; but about new risks. With the recovery, we also see new risks. Yields are compressed in a whole range of risk assets. Some people think that is a positive because it is cheaper to borrow now, but we have to ask whether it is because risk has gone down or risk is being mispriced. Eventually rates will correct, and we get new instabilities. Another risk is the rapid growth of corporate leverage, as several of my colleagues pointed out, both in the developing countries as well as in some of the advanced countries—not in Europe as much. Leverage has gone up, much more than investment has. These are new risks that we've got to keep a very close watch on. And for emerging market economies, there's continuing risk of volatility in capital flows. It's not, in my opinion, a short-term phenomenon, it's not episodic. It's going to be with us for a while.

IMF Survey: We seem to have moved away from talking about recovery to talking about strengthening growth and, in fact, high-quality, durable growth. How can we achieve that?

Tharman: The mix of policies has to change. The basic macroeconomic measures to keep demand afloat remain important. But increasingly, our focus has to be on structural reforms because our aim should be to build not just quarter-to-quarter, year-to-year growth, but self-sustaining resilience in growth. And that can only come from structural reforms. The world is operating at below potential output—everywhere in the advanced world, in the U.S., the U.K., Europe and Japan; many emerging countries too are still below potential output levels. There is by definition a shortage of demand. But the question is, how do we bridge that shortage for demand? If we rely solely on demand management, macroeconomic policy stimulus basically, it won’t do the trick. The key at this stage of the recovery is to build long-term confidence into our economies. And that long-term confidence is going to come much less from macroeconomic policy than from better education, stronger institutions, a better and more predictable investment environment, matters that give long-term investors confidence in our economies. That's why the supply side featured a lot more in our discussions this time.

Demand-oriented policies still play a role, but it's the supply side that brings confidence at this stage of the recovery, confidence that can last.

IMF Survey:The IMFC expressed deep disappointment in the delay in passing the 2010 quota reform. How do we move forward?

Tharman: Well, we're not in an ideal situation. We never wanted to be here, but we have to find a practical way forward. First, full focus on the United States. They’ve got to ratify the reforms, and I believe they will. It's in their interest, and I believe they will eventually do the responsible thing. But more fundamentally these reforms, including the 14th Review of Quotas, are part of the evolution of a critical international institution.

The IMF is about multilateralism. It's about global solutions to global problems. If the IMF doesn't reform, if it doesn't get the resources it needs—permanent resources, not just temporary borrowings—then what we are going to see is a rise of regionalism, and bilateralism. We are going to see a more fragmented world. And that's not a world that will be safer. It's not a world that will be better for anyone, including the United States.

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IMF Survey: We've heard a lot during these Meetings on income inequality. Any reflections on the priorities to address this issue?

Tharman: Well, it's an issue that's increasingly occupying our minds. The IMF is not just about macroeconomic and financial matters. It's ultimately about the well being of people. And when we talk about well being, we are talking about inclusivity, about people across a whole spread of occupations and sectors of our society doing better in their lives.

Poverty, itself, quite apart from inequality, is still a major challenge. When we talk about self-sustaining growth, it is the quality of growth that matters. It's not just a GDP growth number; it is about the quality of growth that can uplift lives across the whole spectrum of people in a society. But how do we do it? How do we tackle a challenge that's not just a result of this crisis, but a whole new phase in the global economy where technology is doing some things that jobs used to do and where globalization itself, particularly for countries that are more advanced or middle income, is taking away jobs because they're redistributed elsewhere?

I think the key to it is what my Mexican colleague mentioned, which they call the redistribution of productivity. It's about raising skills and the productive potential of everyone, not just those in the most modern and advanced sectors, not just the professionals or the knowledge-based workers; but raising skills and productive potential of everyone so they can earn a better wage and earn their own success. That's the most sustainable way of improving inequality. It means biasing our policies towards the broad base of people in our society, and thinking of this not just from the point of view of traditional redistribution, but in terms of their productive potential, their ability to contribute. It's a challenging task. There's no one model that works superbly in the world today. We've got to listen to each other and learn from each other.

Transcript of a Press Briefing on the Fiscal Monitor Report

SPEAKERS:Sanjeev GuptaActing Director, Fiscal Affairs DepartmentMartine GuerguilDeputy Director, Fiscal Affairs DepartmentJulio EscolanoDivision Chief, Fiscal Affairs DepartmentWafa AmrSenior Communications Officer, Communications DepartmentMS. AMR: Good morning, everybody. Thank you for joining us. I would like to welcome you to the Press Conference on the Fiscal Monitor. I would like to remind journalists online to send their questions. Mr... Sanjeev Gupta, Acting Director of the Fiscal Affairs Department, will make a short presentation. We also have with us Martine Guerguil, Deputy Director, and Julio Escolano, Division Chief. After the presentation, we will open the floor for questions.MR. GUPTA: Thank you, Wafa, and thank you to all for coming to this Press Conference. Since the publication of the previous Fiscal Monitor, fiscal risks are abating somewhat, but remain elevated in advanced economies. In emerging economies and low-income countries, fiscal vulnerabilities are rising, although from moderate levels. Let me elaborate briefly on these trends. I will start with advanced economies, and here I will make two points. First, the average fiscal deficit in advanced economies has nearly halved since the crisis peaked and now stands at 3.5 percent of GDP. Fiscal consolidation will continue in 2014 but at a more gradual pace, with a lesser drag on growth. The exception to this picture is Japan, where fiscal consolidation is starting this year, notably with the first stage of [collection?] tax increase that took place last week. However, despite advanced countries’ progress in

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narrowing in fiscal deficits, the average debt-to-GDP ratio remains stubbornly high and will exceed a hundred percent of GDP even by 2019, as you can see in this accompanying slide.The second point I want to make on advanced economies is that the composition of fiscal consolidation is shifting from revenue to expenditure measures by end-2013. Close to half of the consolidation has come from the revenue side, quite more than originally intended, but the share is expected to decline in the coming years as spending cuts take hold. The blue part of the bar reflects the revenue measures. There is, however, heterogeneity across countries, with the U.S. relying on revenue measures more than the euro area, where the scope to raise additional taxes is very limited, as was discussed in the previous issue of the Fiscal Monitor.Passing now to emerging market economies, these countries have overall stronger fiscal positions. They initially weathered the crisis well, in large part by running down the fiscal buffers. While there is significant heterogeneity among emerging economies, deficits and debt ratios remain significantly above pre-crisis levels.The environment faced by emerging economies has turned more challenging. In some economies, financial vulnerabilities and changes in market sentiment will likely compound fiscal challenges. For example, those economies with higher non resident holdings may see sharper increases in interest rates as liquidity conditions in advanced countries tighten. On average, non resident holdings amount to about one third of emerging market debt, and local currency debt has more than doubled in several emerging market economies since 2009. While this is a welcome development for domestic market deepening and overall financial development, it does come with some risks.Let me now turn to low-income economies. Fiscal space has also declined in those economies, as revenue mobilization has lagged fast-spending growth. As a result, the average fiscal deficit remains almost 3 percentage points of GDP above pre-crisis levels. As a result, in about half of the low-income country sample, debt ratios are projected to keep increasing through 2019 and the increase in debt is expected to be sizable in some of the so-called “ frontier markets,” such as Honduras, Senegal and Zambia.Debt build up has had adverse consequences for LICs in the past because it was not used for growth-enhancing investments, so it seems warranted to wonder whether the story will be different this time. In other words, has the new borrowing been used to increase productive spending? The evidence here is mixed. In many countries, large increases in debt have not been associated with higher capital spending, for example, in Honduras, Sudan and Zambia. This raises concerns about the quality of spending in some low-income countries and point to the need to strengthen institutional capacity to raise the efficiency of spending.So, what is our policy advice against this backdrop? Our policy advice for advanced countries has not changed. Fiscal consolidation must continue at a steady and gradual pace to lower debt ratios to prudent levels. The design and implementation of well-articulated, credible, medium-term consolidation plans can help in this regard, but these plans are still lacking in some countries, most notably in the United States and Japan.Those emerging market economies with large debt and deficits and most vulnerable to market volatility should start to rein in deficits now. In other emerging market economies, fiscal reforms are still needed, even with less urgency. In low-income countries, stepped-up revenue mobilization and higher expenditure efficiency are needed to restore fiscal buffers and to create room for much-needed public services.Let me now turn to the second chapter of the Fiscal Monitor which is focused on public expenditure reform, a topic which we believe is both timely and politically challenging. Expenditure reforms have a key role to play in country strategies to strengthen their fiscal positions. In advanced economies, expenditure reforms can support fiscal consolidation efforts, as there is now greater reliance on expenditure measures in advanced economies. In emerging economies and low-income countries, expenditure reforms can help respond to growing demands for better delivery of public services.

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The challenge for policymakers around the globe is to ensure the sustainability of expenditure programs, maximize the efficiency of public spending, and foster equitable access to public services. Reaching these goals is not easy, but will require mobilizing political and social support. I do not think I have the time to walk through all the details of the analysis in the chapter, but let me pick up a few important conclusions.First, any spending reform must ensure the sustainability of major budget items, particularly the government wage bill and social benefits. In advanced economies, these two items together account for 30 percent of GDP and about 80 percent of non-interest government spending. In emerging markets and low-income countries, these two items constitute 60 percent of total spending.Second, expenditure reforms should seek to achieve efficiency gains while preserving equity. These reforms should be designed and sequenced taking into account country-specific circumstances. The reforms could be achieved through better targeting of social programs and promoting greater competition in the healthcare and education sectors.My final slide is focused on capital spending. What it shows is that there is a secular decline in public capital stock in relation to GDP in advanced and emerging market economies. In order to arrest this decline, either more productive public investment or higher involvement of the private sector would be needed. Thank you very much.MS. AMR: We will open the floor for questions now. We will take a couple of questions before we give them a chance to answer. Please identify yourself and the organization you work for.QUESTIONER: Many central banks around the world are targeting/battling inflation that is below the target. U.S. inflation is below 2 percent and the U.S. has already normalized monetary policy. Do you think the time is right? With inflation below 2 percent, what do you think is an appropriate simulative package for the U.S. at this moment and its implication for emerging markets?QUESTIONER: I was wondering if you can throw some light on—you already talked about expenditure reforms. In particular, we have seen expenditure controls through cutting down public sector development programs and slower disbursements through income support programs. What do you think is the right direction?MR. GUPTA: - I will take up this question on the U.S. and the general question on expenditure reforms. Then my colleague will talk about Saudi Arabia. In the case of the U.S., as you know, the budget deficit has been reduced quite substantially in the last few years. The major issue for them is really to put their medium-term debt trajectory on a downward path by dealing with age-related spending, so they need to focus more on implementing these reforms so that the debt is on a more sustainable path over the medium term. As I said earlier in my remarks, we do not have a credible medium-term consolidation plan for both the U.S. and Japan.On the general sort of issue of cutting expenditure programs, one of the things that we discussed in our Fiscal Monitor is that countries should avoid across-the-board cuts in spending, and they should look at efficiency and equity when sort of restructuring their expenditure programs, whether it is employment, government employment, whether it is social transfers, because in all those programs one has to find ways to improve the spending quality and that is possible in those countries. So, what we have to avoid is that in reforming these programs there are no across-the-board cuts which may penalize both efficiency and equity.QUESTIONER: I wanted to ask about pension reform. Could you explain why you think it is acceptable to increase retirement ages when blue collar workers are the least able to cope with higher retirement ages? Could you also comment on the U.K. government’s decision to ring-fence health and education spending and cut other departments? Do you think that is a good way to go about dealing with public spending?

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QUESTIONER: You mentioned in the report the fiscal risks associated with elections in Brazil this year. I would like you to elaborate a little bit more of what would be the concerns. The second question would be what kind of fiscal reforms do you recommend or are most needed in Brazil right now.MR. GUPTA: - Thank you for these questions. These are all very relevant questions. The reason why we recommend raising the retirement age is because, if you look at the life expectancy going forward, that is rising quite a bit. What it means is that people are going to live longer and the pension system will have to provide pensions to people who may not have contributed enough to be able to recover these amounts.However, I also understand your concern, which is that some of the low-income workers may not live that long. So, what we are suggesting, if you look at the Fiscal Monitor, is that for those people, there would have to be some other social assistance provisions, whether it is done in the context of disability payments, whether it is in the context of increasing the years that they contribute, and that is taken into account in determining the pension payments.But the fact remains that when you compare the life expectancy now against the statutory pension age in most countries, the life expectancy is much higher and that could be a major fiscal challenge for many of the countries unless something is done about it. The choices the countries face is either to raise the retirement age or to raise payroll taxes, which again is not going to be very beneficial to the economies, or cut the benefits. These are the tradeoffs. We feel that against all these tradeoffs, perhaps raising the retirement age is a better option.The second issue that you raised was on why do we need to ring-fence health and education spending. During an adjustment process or fiscal consolidation, you want to make sure that access of the population to critical social services is maintained. So, I think it is a good idea to protect that spending. In fact, if you look at Fund-supported programs, this is one of the key elements of those programs. We have told countries that they ought to protect or increase such spending during the period when fiscal consolidation is taking place.MR. ESCOLANO: Brazil is indeed facing elections soon. However, you know that recently it has been announced that the outcome for the primary surplus in Brazil has been 1.9 for 2013. The government has announced the target for 2014 as also 1.9. So, at this point, the government has expressed intentions to maintain fiscal discipline through to 2014. We think that this is important, something that we have supported, and we think is appropriate to do so in this coming year.The Fiscal Responsibility Law, which underpins the fiscal policy framework in Brazil, has so far provided good guidance and we have encouraged the government to maintain this fiscal framework and stick to it this year and the following.Over the medium term, however, we think that Brazil should set itself a bit more ambitious targets, including going back to the 3 percent primary surplus that they had before. Another challenge is to address specific challenges that exist in the fiscal framework in Brazil, such as, for example, the discipline of sub-national governments, which so far is an important point of pressure on public finances; curtail policy lending, which is also an important point of pressure in the budget; and not to rely on exceptional items of financing. Those are tasks that over the medium term should be tackled.MS. AMR: Thank you all for coming and thank you, Sanjeev, Martine, and Julio.

G20 gives US year-end deadline for IMF reforms

WASHINGTON: Finance chiefs from around the globe on Friday gave the United States until year-end to ratify long-delayed reforms to the International Monetary Fund and threatened to move forward without it if it fails to do so. The inability to proceed with giving emerging markets a more powerful voice at the IMF and shoring up the lender's resources appeared the most contentious issue for officials from the Group of 20 leading economies and the representatives for all IMF member nations who met with them. In a final communique, G20

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finance ministers and central bankers said they were "deeply disappointed" with the delay. "I take this opportunity to urge the United States to implement these reforms as a matter of urgency," Australian treasurer Joe Hockey told reporters on the sidelines of the IMF-World Bank spring meetings. The reforms would double the Fund's resources and hand more IMF voting power to countries like the so-called BRICS - Brazil, Russia, India, China and South Africa. The US Congress has refused to sign off on the overhaul, which was agreed to in 2010, and the failure overshadowed even the crisis in Ukraine and the spillover effects of ultra easy monetary policies in advanced economies in the discussions. Some Republicans have complained the changes would cost too much at a time Washington was running big budget deficits. The reforms also ran afoul of a growing isolationist trend among the party's influential Tea Party wing. If Washington does not ratify the reforms this year, the G20 advanced and emerging economies said they would ask the IMF to develop possible next steps. A source said Brazil had pushed for a harder line. It wanted to require the Fund to begin work now to determine options to be implemented if the United States failed to act, a notion that was floated in an early draft of the communique. "The end of the year for me is the final limit," Guido Mantega, the Brazilian finance minister, said later through a translator. "Four years waiting for me is just too much."

US elections loom: There are a handful of ad hoc measures officials can take to achieve at least some of the governance overhaul for the global lender without formal USapproval. But Singaporean finance minister Tharman Shanmugaratnam, who is head of the IMF's policy committee, said it was too early to talk about alternatives. "We have every reason to think the 2010 reforms will be passed by the US," he said, adding that a failure to pass them would affect the Fund's credibility and effectiveness because, for now, it was relying on borrowed resources. Earlier on Friday, Russian finance minister Anton Siluanov said developing nations may demand changes to the IMF's emergency borrowing mechanism if the United States does not approve the overhaul. Still, giving the Americans until year-end puts the deadline beyond US midterm elections in November, and some officials said the US Congress would find it easier acting then. US treasury secretary Jack Lew said the Obama administration would do its best to push IMF quota reforms through the US Congress this year. "We will keep taking steps to get this done," he said at a news conference.

Ukraine, Russia; monetary policy: The G20, which is careful to focus on economics and not politics, said it was monitoring the crisis in Ukraine for any risks to economic and financial stability. Ukraine's economy was thrown into chaos after popular protests in Kiev ousted pro-Russian president Viktor Yanukovich, and Russia seized Ukraine's Crimea and annexed it, causing the worst standoff between Moscow and the West since the Cold War. Despite the simmering international standoff, Australia's Hockey said there were "no tensions at all" on the issue and "goodwill" in the G20 meeting room. "There was just recognition in the general discussion about geopolitical risks around the globe; there wasn't a specific discussion of Ukraine," said Hockey, who coordinated the meetings under Australia's G20 presidency. Russia, a G20 member, was not specifically mentioned in the communique. The G20 source said there were no discussions of sanctions on the country, which has already been hit with US and European Union sanctions. German finance minister Wolfgang Schaeuble said top finance officials from the Group of Seven developed nations, who met on Thursday, were resolved to work together to defuse the crisis, and that Russia must be a part of the solution. "We were all agreed that we must solve this problem together," he told reporters, adding that Russia must be part of the solution. "We don't want to make this difficult for Russia," he said. Hockey said he expected Russia would attend G20 leaders summit in November. The G20 communique did not explicitly mention monetary policy, and it dropped a reference from the group's February statement that stressed central banks should be careful in withdrawing stimulus. Nevertheless, the nations pledged to provide "clear and timely communication" of their actions, with an eye on the global fallout as policies are "recalibrated." The gradual withdrawal of the US Federal Reserve's aggressive monetary accommodation has rocked the currencies of emerging

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economies like India and Argentina, as investors en masse have sought out higher-yielding markets.

IMF study on economic change amid transition

To support governments’ efforts, the IMF released last week a new paper titled “Toward New Horizons—Arab Economic Transformation amid Political Transitions.” The paper makes the case for the urgency of launching economic policy reforms, beyond short-term macroeconomic management, to support economic stability and stronger, job-creating economic growth in the Arab Countries in Transition. It looks at key structural reform areas that are likely to generate faster and more inclusive growth. The main elements of the reforms suggested in the paper include fiscal and monetary policies that support stability and growth, deepening trade integration, strengthening access to finance, improving the business environment to support entrepreneurship and address corruption, and reforming the labor market and educational systems to reduce the mismatch between the skill set of people coming out of universities and schools and the skills that the private sector requires. The paper also looks at how to gradually replace the current system of untargeted price subsidies—proved to be inefficient and unfair as it benefits the rich more than the poor—with more targeted social safety nets to cover vulnerable groups. The study argues that countries need to stay in the driver’s seat and plan their policy programs through wide national consultation to ensure broad support for these reforms. However, there is a need for the international community to support policy efforts through financing, access to trade, technical assistance, or policy advice, the paper says.

Seminar on reforms and consensus-building

To encourage debate about the policy agenda articulated in the study, the IMF hosted a high-level panel discussion on the sidelines of the Spring Meetings, bringing together policymakers from within the region as well as experts from other parts of the world. Panelists agreed on the key areas for reforms, noted above, and stressed that countries need to ensure that reforms benefit the population widely. An increase in economic growth has to go hand in hand with an equal increase in opportunity and poverty reduction.

They also cited the value of learning from other country experiences.

“We are not going to reinvent the wheel—countries have diagnosed their economic problems and they know the solutions and the measures that need to be taken,” said HanyDimian, Egypt’s Finance Minister. “The safest way to do economic reforms is to implement what has been tested elsewhere,” he added. Eric Berglöf, Chief Economist at the European Bank for Reconstruction and Development, noted that Eastern European countries that managed to seize windows of opportunities by implementing economic reforms early on in their transition had much easier political paths. But how to build a consensus for reforms? Here panelists had mixed views on the definition of consensus, and the way to achieve it. “Reforms that can be framed in the context of a project can move relatively fast. Things that are framed as policy choices and reforms are much harder to implement,” said HomiKharas, Senior Fellow and Deputy Director, Development Assistance and Governance Initiative. Others recognized that this was a challenge, citing that more must be done to communicate with influential stakeholders in the society. “It’s very important to talk with actors like the private sector, labor unions, and whoever would lose when reforms are done,” said Nizar Baraka, President of the Economic, Social, and Environmental Council in Morocco, and added that, according to the Moroccan constitution now, the civil society has the opportunity to propose laws to the parliament.

Upcoming conferences in the region

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The IMF study will serve as an important input to the upcoming regional conference organized by the IMF, in collaboration with the Jordanian government and the Arab Fund for Economic and Social Development, in Amman, Jordan titled “Building the Future: Jobs, Growth, and Fairness in the Arab World,” during May 11–12. The IMF will also co-host with the Government of Kuwait a conference in the oil-rich country during April 30–May 1. This high-level conference on “Economic Development, Diversification, and the Role of the State” will look at the global experiences of economic diversification in oil exporting countries, a critical policy issue for all the Gulf Cooperation Council countries.

To Build Resilience in Growth, Focus Must Turn to Structural Reforms Mix of policies has to change with focus on growth and jobs Need to find a practical way forward on quota reforms

Key to addressing inequality is “redistribution of productivity”

At the IMF-World Bank Spring Meetings in Washington D.C., policymakers’ concerns shifted from crisis recovery to achieving durable and high-quality growth. In an interview, Tharman Shanmugaratnam—Deputy Prime Minister of Singapore and Chair of the IMF’s International Monetary and Financial Committee (IMFC)—says that the focus must now turn to structural reforms to “build resilience in growth and jobs”. He also highlights that steps to address income inequality should focus on raising skills and productive potential across the workforce.

BASLE THIS WEEKFrequently Asked Questions on Basel III's January 2013 Liquidity Coverage Ratio

The Basel Committee on Banking Supervision today issued frequently asked questions (FAQs) on Basel III's liquidity coverage ratio (LCR). To promote consistent global implementation of those requirements, the Committee has agreed to periodically review frequently asked questions and publish answers along with any technical elaboration of the rules text and interpretative guidance that may be necessary.The Committee has received a number of interpretation questions related to the January 2013 publication of the LCR standard. The FAQs published today correspond to the text set out in that standard.

International banking statistics at end-December 2013The Bank for International Settlements (BIS) today released international banking statistics at end-December 2013. The cross-border claims of BIS reporting banks contracted by $93 billion (0.3%) between end-September and end-December 2013. Claims on banking offices as well as non-bank entities fell. While this was the seventh consecutive quarterly reduction in cross-border claims, the pace of decline was slower than in the preceding two quarters. Euro-denominated claims contracted by $325 billion (3.3%) between end-September and end-December 2013. By contrast, claims in US dollars and in Japanese yen grew by $49 billion (0.4%) and by $62 billion (5.3%), respectively. Cross-border lending to emerging market economies rose by $95 billion (2.7%) in Q4 2013. The expansion was mainly concentrated in emerging Asia, and China in particular ($85 billion or 11%) Developments in the latest international banking statistics, including breaks in series arising from methodological changes, are summarised in the Statistical release. Data are available on the BIS website, via the BISWebStats query tool, or as tables in PDF. Data are subject to change; revised data will be released in conjunction with the forthcoming BIS Quarterly Review on 2 June 2014. Data at end-March 2014 will be released on or before 24 July 2014.

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Capital requirements for bank exposures to central counterparties - final standard

April 2014

The Basel Committee completed its work on the capital treatment of bank exposures to central counterparties, following a collaborative effort between the BCBS, the Committee on Payment and Settlement Systems (CPSS), and the International Organization of Securities Commissions (IOSCO) to improve upon the interim capital requirements that were published in July 2012. The final standard will take effect on 1 January 2017. The interim requirements will continue to apply until that time. When developing the final standard, the Basel Committee sought to simplify the interim policy framework and to complement relevant initiatives undertaken by other supervisory bodies, including the CPSS-IOSCO Principles for financial market infrastructures. The Committee also aimed to support broader policy efforts advanced by the G20 leaders and the Financial Stability Board, particularly those relating to central clearing of standardised OTC derivative contracts.

The final standard differs from the interim requirements by:

including a single approach for calculating capital requirements for a bank's exposure that arises from its contributions to the mutualised default fund of a qualifying CCP (QCCP);

employing the standardised approach for counterparty credit risk (as opposed to the Current Exposure Method) to measure the hypothetical capital requirement of a CCP;

including an explicit cap on the capital charges applicable to a bank's exposures to a QCCP;

specifying how to treat multi-level client structures whereby an institution clears its trades through intermediaries linked to a CCP; and

incorporating responses to frequently asked questions posed to the Basel Committee in the course of its work on the final standard.

A related consultative document was published in June 2013, which was followed by a joint quantitative impact study (QIS) that was designed to assess the capital impact of proposed revisions to the interim requirements, inform the calibration of the revised policy framework, and to obtain feedback on implementation issues and operational burden. The Committee wishes to thank those institutions that responded to the consultative document and participated in the joint QIS exercise.

One currency, two markets: the renminbi's growing influence in Asia-Pacific

byChang Shu, Dong He and Xiaoqiang ChengWorking Papers No 446April 2014

Large-scale forex intervention in emerging market economies (EMEs) aimed at resisting currency appreciation has major implications for the composition of banking system balance sheets. The domestic monetary consequences depend on the nature of central bank liabilities that are the counterpart of forex reserves. Even if the immediate change in bank reserves due to FX intervention is offset by the sale of securities, bank lending may still be stimulated, running counter to the aims of the monetary authority. In this paper, we empirically investigate the impact of banks' holdings of liquid government securities, generated by such intervention, on bank credit in a panel of EMEs. We find that, for well

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358th Issue Banking News 21st to 26th April 2014 By Vasant Ponkshe, Secretary AIBOA Pune

capitalised banking systems, holdings of government and central bank paper over time lead to an expansion in their credit to the private sector. This result is confirmed at both country and bank level. The balance sheet effects of large-scale FX intervention therefore require close attention.

26.04.2014

COMPILED AND EDITED BY VASANT PONKSHE SECRETARY AIBOA CHAIRMAN BOMOA

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