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FINANCIAL SECTOR WEEKLY NEWS UPDATES9TH TO 14TH APRIL 2012 - BY VASANT PONKSHE SECRETARY AIBOA

India needs a socially conscious banking system: Pranab Mukherjee

MUMBAI: Nationalisation of banks was a path breaking step in deploying financial services for transformation of the economy, Finance Minister Pranab Mukherjee said Saturday and added that India needs to develop an integrated banking delivery model to promote financial inclusion and economic growth. "A socially conscious banking system will help us to reduce the glaring inequalities without compromising economic growth. In this context, continuous innovation in delivery and design of financial services targeted at the economically marginalized is of utmost importance," he said after inaugurating a conference on 'Leveraging Financial Services Sector as the Growth Engine for Transformation' organised by the Indian Merchants' Chamber. Mukherjee, however, pointed out that India's objectives are somewhat different from those of developed countries. "We need to indigenously develop a workable business model and an integrated delivery model geared to promote financial inclusion, and in turn, sustainable economic growth," he said. Mukherjee emphasised that the future challenge in the evolving circumstances is to maintain the momentum of growth against the background of deteriorating global growth rates, sovereign debt crisis in Europe, the possibility of systemic impact of crisis in international financial markets and some domestic constraints. He added that, in India, the process of leveraging financial services sector as the growth engine for transformation is closely entwined with the progress on financial inclusion. "It is a subject which is close to my heart. Financial Inclusion is a key strategy to achieve inclusive development. It is a necessary condition for financial deepening, which will help us to address the basic issue of growth with equity," he said. Mukherjee pointed out that the government and the Reserve Bank of India have taken a number of initiatives for furthering financial inclusion.

Slower growth in advanced economies to impact exports: Rangarajan

BANGALORE: Prime Minister's Economic Advisory Council Chairman C Rangarajan on Friday said slower growth in advanced economies would impact India's exports. He added that there is a need to increase exports to countries in East-Asia and other emerging economies. "Moderation in growth (in advanced economies) will affect some exports," Rangarajan told reporters while replying to some questions. He, however, said that in the case of IT services, the slower growth has not necessarily affected in the way one would have expected. "Therefore, there is a need for widening the geographical coverage of our exports. Certainly, the slower growth in western economies... advanced economies will have an impact upon our exports," he said. "But at the same time, we really need to see whether

we can increase exports to the East-Asian countries and emerging economies where the growth rate is now picking up," Rangarajan added.

IIP disappointing; Govt, RBI will take steps to revive it: FM

NEW DELHI: Attributing the "disappointing" industrial growth performance to tight monetary policy and global factors, Finance Minister Pranab Mukherjee today said government and RBI will take steps to revive growth. "These (IIP) figures will have bearing on monetary policy announcement scheduled for next week. The government along with RBI will take required steps to revive activity in the economy," he told reporters here. Mukherjee was commenting on the Index of Industrial Production (IIP) data which revealed that industrial growth rate slipped to 4.1 per cent in February from 6.7 per cent a year ago. During April-February 2011-12, IIP slipped to 3.5 per cent, as against 8.1 per cent a year ago. He further said that "uncertainty in the global economy coupled with monetary tightening in the past have impacted investment recovery". The RBI, which had raised interest rates 13 times since March 2010 to contain spiraling inflation, is yet to reverse its decision though the price situation has improved considerably. It kept the rates unchanged in its policy reviews in December 2011 and February 2012. The RBI is scheduled to announce the credit policy on April 17 amid demand for cut in short-term lending (repo) rates. On the revision of IIP figure for January 2012 from 6.8 per cent to 1.14 per cent, Mukherjee said, "this is disappointing ... the revival in manufacturing in the last quarter of 2011-12 has not materialised as anticipated." Mukherjee attributed the negative growth in the consumer goods sector to considerable moderation in domestic demand. The consumer goods sector output declined by 0.2 per cent in February as against a robust growth of 13.4 per cent in the corresponding period a year ago. However, on the positive side, he said, capital goods output for February 2012 showed an expansion of 10.6 per cent on back of domestic investment recovery.

Slowing economy to hurt banks' asset quality: Pranab Mukherjee

MUMBAI: A slowing economy may increase bad loans of banks forcing them to raise more capital to meet the evolving regulatory norms that prescribes high levels of capital to cushion against another credit crisis, Finance Minister Pranab Mukherjee said on Saturday. "Asset quality continues to compare favourably with peer countries. However, if GDP growth slows down, there could be some impact of that on the asset quality," Mukherjee said. "Additional capital will have to be raised, to meet the requirement of Basel III," the finance minister said.

RBI tells economists inflation a concern, seeks views on growth

The Reserve Bank of India on Tuesday reiterated its concerns on inflation and a widening current account deficit in a meeting with economists a week before its annual monetary policy review, according to two economists who were there. A Reuters poll of 20 economists issued on Tuesday showed the RBI is expected to cut rates for the first time in three years to give a boost to slowing growth, although the continued risk of inflation is seen squeezing the room for rate cuts. "Going by the risks highlighted, the monetary policy response could be muted," an economist present at the meeting told Reuters, declining to be identified because the meeting was off-the-record. "The RBI wanted to solicit our view on the growth situation and they wanted to know the impact of a rate cut on the investment scenario," the economist said. Investment in India has slowed in recent months, in part because of high borrowing costs after 13 interest rate increases between March 2010 and October 2011. Last week, the RBI met with top bankers and primary dealers as part of its series of meetings ahead of its annual policy release. India's balance of payments slipped into negative territory for the first time in three years and the current account deficit widened to $19.6 billion in the December quarter as exports slumped and imports rose. "The RBI gave an overview of the economy,

highlighting concerns to both inflation and growth, which seemed nothing different from their last policy review," said another economist who attended the meeting.

Bad loans spark bank downgrades

MUMBAI: Distressed borrowers are taking a toll on the credit profiles of Indian banks with almost half a dozen lenders being downgraded by rating agencies in recent weeks. Given that most public sector banks have similar credit profiles, analysts tracking the banking sector are asking, "Who's next?" In the past fortnight, rating agency ICRA has downgraded Central Bank of India, Oriental Bank of Commerce and Union Bank of India, citing rising bad loans and the high value of restructured loans. Some time earlier in 2012, Moody's had lowered its credit opinion on Syndicate Bank, Union Bank and Bank of India, again citing rising bad loans. In a report after the Budget, Mahrukh Adajania of Standard Chartered said that all public sector banks have asset quality issues in the form of huge restructuring pipelines, which are more or less in the same proportion. According to the report, Allahabad Bank, Bank of Baroda, Bank of India, Canara Bank, Punjab National Bank, State Bank of India and Union Bank have restructured loans ranging from 3.5% to 5.9%. Although they are not classified as defaults, restructured loans are an indicator of the extent of borrowers who find it difficult to meet payment schedules. The report states that the recent Union Budget and higher crude prices makes the operating environment challenging for banks as these two factors have lowered the probability of a rate cut in the near future. However, private equity firm Avendus Capital has taken a contrarian view. "Even with an assumption of a 20% delinquency in restructured loans, along with the current forecasts for a rise in gross NPAs (non-performing assets), the overall asset quality of public sector banks would stabilize within two years. It would also stay superior to the current status of European banks," a recent Avendus report said.

SBI sees credit, deposit growth of 20-25 per cent in FY13

MUMBAI: State Bank of India, the country's top lender, expects credit and deposits to grow 20-25 percent in the fiscal year ending in March 2013, a top official said on Saturday. The bank's plans to cut lending rates to small and medium enterprises will not depend on the central bank's policy decisions, A. Krishna Kumar, managing director and group executive, national banking, told reporters. The Reserve Bank of India will have a policy review on March 17.

LIC Housing Finance plans to borrow Rs 25,000 Cr. in FY13

MUMBAI: LIC Housing Finance, a subsidiary of state-run insurance giant LIC, is planning to borrow around Rs 25,000 Cr. in the current financial year, which is about 13.5 per cent higher than FY12, a top official said today. "We have plans to borrow around Rs 25,000 Cr. in the current fiscal to support our business growth against Rs 22,000 Cr. we had raised last fiscal," LIC Housing Chief Executive V K Sharma said on the sidelines of an event organised by Indian Merchants Chamber here. Sharma said most of these funds would be raised through bonds. The housing finance firm raises money from banks and also from markets by issuing bonds. The ratio of money raised through bonds is around 65 per cent of the total fund raised by the company. On growth projection for FY13, Sharma said the company is likely to grow its loan book by 20-25 per cent. "We hope to grow by around 20-25 per cent in the current financial year."

Government to infuse about Rs 15,500 cr in PSU banks in 2012-13

NEW DELHI: The government on Friday said it will infuse about Rs 15,500 Cr. in the public sector banks during the current fiscal to enhance their financial strength. "I understand the

problems, the constraints under which the Indian banking system are suffering for some time. We are trying to help them as you have noticed in the last two years in order to build up the capital adequacy of the Indian banking system particularly public sector banks, I have injected Rs 32,000 Cr." Finance Minister Pranab Mukherjee said here. "To improve the capital adequacy of the public sector banks, I am going to provide around Rs 15,500 rpt Rs 15,500 Cr. in 2012-13 because we want our banks should have adequate capital so that they can be in a position to compete with the others. "We can fully come to expectations and reach the parameters of the Basel III norms," he said at the 118th foundation day function of Punjab National Bank. In 2010-11, the government pumped in Rs 20,157 Cr. for infusion in public sector banks to maintain tier I capital at 8 per cent and increase the government equity in some banks to 58 per cent in 2010-11. In the following year, public sector banks got Rs 12,000 Cr. for improving their capital adequacy ratio. Indian banking system, the Finance Minister said, "it had some repercussions but substantially it came out of (2008 global) crisis unscathed. Thanks to the prudent management, well placed regulatory mechanism and also individual judgments of the bankers." Further, Mukherjee said, Reserve Bank is also strictly is monitoring the banking functioning to reach Basel III norms.

In order to strengthen risk management mechanism, the Reserve Bank issued draft guideline last year for Basel III envisaging that the equity capital of a bank should not be less than 5.5 per cent of risk-weighted loans. Drawing attention to the fact that world is passing through difficult phase once again, Mukherjee said "again there has been slowdown mainly because of the fact that Eurozone crisis has posed some problems to us." Highlighting that India is not isolated from global slowdown, he said, "the world recovery has not yet started with full and we are part of that system, we are globally linked and no country today is isolated from the global development." Meanwhile, the Finance Minister inaugurated 5555th branch of Punjab National Bank at Murshidabad. Besides, Mukherjee also launched 1111 ultra small branches of the bank to serve to far-flunged locations by business correspondent agents using hand held device.

RBI allows RRBs, cooperative banks to transfer funds online

MUMBAI: To popularise electronic transfer of funds, the Reserve Bank today allowed regional rural banks (RRBs) and cooperative banks to participate in the centralised payment systems. With this, all the banks can now transfer funds electronically through real time gross settlement system (RTGS) and national electronic funds transfer (NEFT). At present, the centralised payment systems -- RTGS and NEFT can be accessed only by members that included public and private sector banks. As an exception, RRBs have been given access to the NEFT system through their sponsor banks. "On a review, it has been decided to expand the sub- membership route to enable all licensed banks to participate in NEFT and RTGS systems," RBI said in a notification. NEFT, an electronic transfer of funds system meant for retail customers while RTGS system facilitates high-value transfer of money with threshold limit of Rs 2 lakh. This would be an alternate mechanism to all licensed banks which have the technological capabilities but are not participating in centralised payment systems on account of either not meeting the access criteria or because of cost considerations, it said. Eliciting condition for such transactions, the notification said, the sub-member would participate in the centralised payment systems through their sponsor bank which is a direct member of the centralised payment system.

Branches of loss-making PSU banks may be closed

The government may ask public sector banks and insurance companies to relocate or close loss-making branches as part of rationalisation. “This is part of an ongoing dialogue for not only banks but also insurance companies,” financial services secretary D K Mittal told reporters, when asked if the government had asked banks for a report on loss-making branches. “If there are loss-making branches, then we need to re-look at why they are there.

If that needs working out a business strategy — maybe relocating it, maybe scaling down of staff — all needs to be looked at. Ultimately, he said, branches have been set up to earn. “If they (loss-making branches) have been there for sometime, say 12 months, then I think there is a case to re-look at shutting them,” he said on the sidelines of a CII event here. There are about 87,000 branches of public sector banks across the country. Rising interest rates and slowdown in the economy has impacted the repayment capacity of borrowers, especially small and medium enterprises, leading to a rise in non-performing assets (NPAs) of banks. NPAs have risen to Rs 1.27 lakh Cr. till December 2011. Of this, public sector banks’ gross bad debt jumped 51 per cent to Rs 1.03 lakh Cr. in 2011. The gross NPAs of public sector banks increased from Rs 68,597 Cr. at December 2010 end, to Rs 103,891 Cr. as on December 2011. Mittal said the government will take a view on further recapitalisation of state-owned banks by June-end to help them enhance business growth and meet capital adequacy norms. “End of May, or maybe by the end of June, we will have a fairly clear picture as to which bank has to be capitalised and how much,” he said. The financial services secretary said all public sector banks should be touching nine per cent of Tier-I capital and State Bank of India should be touching 11 per cent. “This is the strategy,” he added. “The provision, which is there this year (for recapitalisation of banks), will be available only when the Budget has been passed.”

Lending rates may not fall drastically in FY13, says Crisil

MUMBAI: Corporate and retail borrowers will not see a significant reduction in lending rates in the current financial year owing to tightness in liquidity, higher Government borrowings and high cost of deposits, according to leading rating agency Crisil. Lending rates are likely to drop by 25-50 basis points (0.25-0.5%) during this period, it said. "Lending rates are likely to fall by 25-50 basis points (bps) over the next one year - lower than the 50-75 bps drop expected in repo rate as banks attempt to protect their margins," the agency said in a report here today. According to the rating firm, liquidity in the banking system has remained tight despite reduction in cash reserve ratio ( CRR) by 125 bps (1.25%) since January 2012. Average daily borrowings of banks under liquidity adjustment facility (LAF) were at Rs 1.34 trillion for the last four months ended March 2012 - almost double of the RBI's projected figure of Rs 60,000 Cr. This was due to low deposit mobilisation along with the RBI's intervention in forex market to check volatility in rupee, it said. The report said tight liquidity situation is likely to continue owing to low deposit mobilisation in the banking system.

Odisha opposes RBI decision to hike rate of RIDF loans

BHUBANESWAR: Strongly opposing the Reserve Bank of India's (RBI) recent decision of enhancing the rate of interest over RIDF loans by the NABARD, Odisha government today asked the Centre not to implement the new interest on loans sanctioned prior to April 2012."I understand that the rate of interest chargeable by NABARD to all Rural Infrastructure Development Fund (RIDF) disbursed on or after April 2012 has been enhanced to 8 per cent in accordance with the decision of the RBI," Chief Minister Naveen Patnaik wrote to Union Finance Minister Pranab Mukherjee. Terming the hike in the rate of interest on RIDF loans from 6.5 per cent to 8 per cent by RBI as "arbitrary", Patnaik said "this decision constitutes a breach of the terms and conditions of the loans sanctioned under RIDF prior to April 2012."Citing an instance, Patnaik said that NABARD has sanctioned Rs 12634.12 lakh for four irrigation projects in Odisha under RIDF-XVII on July 26, 2011. The tenure of this loan was seven years including the grace period of two years. As regard to the rate of interest, it has been clearly and unambiguously mentioned in the sanction letter that the loan will carry interest rate of 6.5 per cent. "I would urge you to persuade the RBI and NABARD to review the issue urgently and to ensure that the revised rate of interest of 8 per cent is not made applicable to RIDF loans sanctioned prior to April 2012," Patnaik told Mukherjee in the letter.

Reduction in CRR and SLR expected: HSBC

KOLKATA: The Reserve Bank of India should reduce CRR and SLR to ease the stress on liquidity, HSBC Asia Pacific Director and India Country Head Naina Lal Kidwai said. "We should see a reduction in Cash reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). The last reduction was supposed to ease liquidity, but that did not happen because there was offsetting cash withdrawals," she told reporters here today. She said inflation was sticky due to supply side constraints. "Huge borrowing programme of the government could crowd out the private sector and given the tight liquidity scenario, we may see a further easing of the CRR," Kidwai said. By doing that, the Reserve Bank would be able to inject money into the system, she said. The RBI is to announce the annual monetary policy on April 17. She added that CRR and SLR components in India was amongst the highest in the world at 28.5 per cent of total bank deposits. "Both should be brought down and that will significantly infuse money into the system," Kidwai said. She said the RBI was in difficult situation with the industry clamouring for interest rate cut and growth stalling. The RBI recognised that growth to be an issue while inflation was still a matter of concern, she added. To a query, she said that the bank was not concerned at the slowdown of the country's growth. "Seven per cent growth is still robust," she said.

HSBC wants a bigger share of Indian banking business

KOLKATA: HSBC rues the fact that expansion of banking business is still restricted for foreign entities in India, one of the fastest growing economies. Its country head in India and director for Asia Pacific, Naina Lal Kidwai said on Thursday that restriction of opening branches is an issue which very much bothers the management. HSBC is present in the country for over 150 years but it has a limited network of 50 branches as Reserve Bank of India does not give licences to foreign banks too easily. "The good news is India has always been on top of our mind,"" Kidwai said in the city. India happens to be the sixth largest contributor to HSBC Group's profit, after Hong Kong, China, UK, Brazil and Canada. Kidwai was on a two-day visit in Kolkata to held meetings with local officials. Foreign banks collectively account for less than 7% of banking business in the country while HSBC alone contributed 2% of it. ""India is slowing down. But a 7% growth is still one of the best growth rates anywhere in the world,"" she said. ""Our strength comes from the underlying strength of the economy,"" she said at an interaction with the media. ""All our businesses are power ahead very well,"" she said adding the retail business has become profitable too.

RBI directs banks to pay 8% compensation on delayed interest payment on Relief Bonds

MUMBAI: Banks are expected to be more prompt in crediting interest amount of Relief or Saving Bond investors to avoid a heavy compensation they will have to pay for delayed payment. The Reserve Bank of India (RBI) has directed banks to compensate investors of Relief or Savings Bonds at 8% per annum for financial loss incurred to them due to delay in payment of interest amount. Earlier RBI had asked banks to compensate for the delay in payment at their own savings bank rate, irrespective of the amount. However, the move to fix a uniform rate of 8% for all banks comes in context of different banks offering different rate on savings account after it was deregulated in October 2011. RBI said that the move is aimed at "avoiding ambiguity and variation in compensation rates across different agency banks." Banks like Yes Bank and Kotak Mahindra Bank are offering 6% while State Bank of India, HDFC Bank, ICICI Bank continue to pay 4% on saving account. The compensation of 8% is higher than savings rates offered by any bank now. In a letter to all commercial banks that are operating as agency banks for Relief bonds, RBI said, "an agency bank shall compensate an investor in Relief/Savings bonds, for the financial loss due to late receipt/delayed credit of interest warrants/maturity value, at a fixed rate of 8% per annum."

Low cost bank branches under lens

To ensure its financial inclusion drive is not restricted to meeting branch opening targets, the Union finance ministry is to ask banks for a performance report of the ‘ultra small’ branches set up in the past two years in about 73,000 villages. The performance would be examined on opening of new accounts, deposits and advances, as well as recovery of loans. “We will ask banks to give a report on how these branches have performed as on March 31, 2012. Banks will have to provide details with regard to various parameters,” said a ministry official. Customers at such branches are supposed to be serviced by banking correspondents (BCs), doing cash transactions where the population lives. The model has not picked up as hoped. A parliamentary standing committee had criticised the government for not taking any action on its recommendation of conducting a study on the model’s effectiveness.

TELLER TALES* Performance parameters like opening of new accounts, deposits and advances and loan recovery would be examined* Move to ensure financial inclusion drive is not restricted to meeting branch opening targets* Customers at low-cost branches are to be serviced by banking correspondents, doing cash transactions where the population lives* In 2006, banks were first allowed to adopt the BC model for delivery of services in unbanked and under-banked areas

The ministry recently asked banks to send a representative to such areas regularly, to address concerns and also extend services not provided by BCs. In 2006, banks were first allowed to adopt the BC model for delivery of services in unbanked and under-banked areas. Retired bank employees, retired teachers, retired government employees, former soldiers, individual owners of kirana/medical/fair price shops, individual public telephone operators, and agents of small savings schemes of government and insurance companies were permitted to act as BCs. The guidelines were reviewed by the Reserve Bank in September 2010 and banks were also allowed to engage companies registered under the Indian Companies Act, 1956, with large and widespread retail outlets, excluding non-banking financial companies, as BCs. Banks were asked in 2010-11 to provide appropriate banking facilities to habitations with a population in excess of 2,000 by March 2012. In Budget 2012-13, finance minister Pranab Mukherjee proposed to extend the campaign to habitations with a population of at least 1,000 in northeastern and hilly states. About 12,000-15,000 more villages are likely to be covered in the next round of financial inclusion.

NABARD extends Rs 14,970 Cr. under RIDF in FY 2011-12

SHIMLA: The National Bank for Agriculture and Rural Development (NABARD) extended a record support of Rs 14,970 Cr. under the Rural Infrastructure Development Fund in 2011-12, a growth of 24 per cent over the year-ago period. NABARD had disbursed Rs 12,070 Cr. under the RIDF scheme in 2010-11, a NABARD release said today. The aggregate assets held by NABARD rose to Rs 1,82,300 Cr. an increase of Rs 23,500 Cr. over the previous year, it said. Refinance assistance provided by NABARD to cooperative banks and regional rural banks (RRBs) during 2011-12 to disburse crop loans to farmers touched an all-time high of Rs 48,000 Cr. registering an increase of Rs 14,000 Cr. or 41 per cent over the previous year, the release added. The investment refinance provided to banks by NABARD during 2011-12 for capital formation in agriculture and allied sectors and for non-farm

activities stood at Rs 15,424 Cr. registering an increase of Rs 1,938 Cr. or 14 per cent, over the previous fiscal. During the year, 25,238 farmers clubs were launched by different agencies with NABARD support, taking the total number of such clubs to around 1,01946, the release said. Many pilot projects of innovative interventions were launched by NABARD where some of them were converting Kisan Credit Card to cashless transactions through mobile phone, financing for livelihood and agriculture productivity.

Where candidates who passed the bank probationary officers' exam stand

A large number of candidates appearing for the bank probationary officers’ exam have been an aggrieved lot ever since the results were declared. Many passed the exam, secured a decent score and applied to different banks on the basis of the prescribed cut-off scores. But they had no clue about what they were up against in terms of competition or how many other candidates were in the fray. The Institute of Banking Personnel Selection (IBPS), the organisation which conducts the exam, has now addressed that lacunae. It has put out the frequency distribution of the marks (total weighted scores) secured by successful candidates. It is clear that the topper of the exam has secured between 211 and 215 marks while the second ranker is in the next range of 205-210 marks. The exam was for a total of 250 marks. With this data, candidates can better assess their chances of success in interviews/group discussion tests. The number of candidates who scored between 146 and 150 marks were 12,389. And the cumulative number of candidates who scored above 146 marks were 44,026 candidates. If a bank fixed 146 as the cut-off mark, you know the number of potential candidates who would be competing for the job. Of course, the actual numbers could vary if some candidates have already secured jobs in other banks. The move to put out this data would allay concerns among aspirants about lack of transparency, said the director of a leading training institute for bank exams in Hyderabad. From a candidate's

point of view, the data would also help them improve on their individual score if it is on the lower side when compared to others.

Axis-Enam passes RBI litmus test; deal to go through after 17-month wait

MUMBAI: The Reserve Bank of India, or RBI, has approved Axis Bank's purchase of Enam Securities, ending a 17-month wait and paving the way for the private bank to expand its business to include investment banking and other advisory services. "The Reserve Bank of India has cleared the deal with no further conditions," said a member on the Axis Bank board. The board will meet in Jaipur on April 26 to discuss plans for the business, he added.

Axis Bank did not respond to an email query on the issue. Axis' acquisition of Enam Securities is aimed at strengthening its presence in the investment banking and stock broking business. Enam is rated among the leading equity underwriters in India while Axis Bank does not feature in the league tables in this business. The acquisition will help Axis Bank, which has a strong presence in the debt-related fund-raising business, to gain market share in equity share sales too. Asiamoney rated Enam as the fifth-best local brokerage in 2011. Critics said the deal is expensive and Axis will take a long time to recover the investment. Also, fierce competition in the Indian investment banking space in a weak market has squeezed fees. Indian units of foreign banks have earned roughly $20 million through their equity capital market (ECM) divisions and $100 million from merger and acquisition activities in 2011. The revenues last year were way behind what they earned in their heydays. ECM activities fetched about $400 million and M&A deals up to $600 million in fees at the peak of the bull run in 2007.

Business correspondents serving other banks' customers will help expand financial inclusion

Business correspondents (BCs) appointed by banks in rural areas aren't making enough money. Catering to anywhere between 100-200 low-income customers with low transaction volumes doesn't generate enough commission for them. Many of them quit after a few months in the job. Banks are, therefore, faced with the challenge of retaining these BCs, if they hope to make a dent in rural markets and advance financial inclusion. In this backdrop, the Reserve Bank of India's move to allow BCs of one bank to serve customers of other banks has been welcomed by all. Bankers say that it will benefit customers, banks and the BCs themselves. Mr. M. Narendra, Chairman and Managing Director, Indian Overseas Bank, told Press that customers will now get numerous access points for banking. This provision will also help improve the income of BCs. Mr. Ajai Kumar, Chairman and Managing Director, Corporation Bank, said the move would provide alternative channels for no-frill accountholders to access basic banking services. Even some operational difficulties such as machine failure or discontinuation of a BC will not hamper services as it has done in the past. Besides, it would also help customers when they visit any other place for social or business requirements, he said. Mr. Srikantha Shenoy, Executive Trustee of IDF (Initiatives for Development Foundation), a BC for SBI in Kunigal taluk in Karnataka, said: “It would diversify BCs' revenue sources, help in negotiation of better commission from the competing banks.” Ms. Subhalakshmi Panse, Executive Director, Vijaya Bank, said that cash management issues crop up while dealing with BCs. For servicing customers, BCs have to take cash from the nearest branch. Till now, for the BC, the bank was very near (because he/she was usually within a 15-km radius and servicing clientele who were on the periphery of urban clusters). Now, that banks have to go deeper (villages with population of 1,000 to 2,000), they will need to find ways to send cash, manage it and take care of security at the BC's place of business. Technological compatibility is another issue. The RBI says that the technology available with the bank, which has appointed the BC, should support carrying out such operations with other banks. The RBI had mandated that transactions and

authentications should be carried out online on a core banking software platform. Mr. Shenoy felt that this is still futuristic as the technology environment is very fragmented. However, bankers think that the National Payment Corporation of India could help in making point-of-sale (PoS) machines compatible to handle other banks' customers also.(The PoS terminals at BCs end help carry out small amount transactions — including deposits of money and withdrawals.)

RBI implements web-based bidding for G-Sec primary auctions

MUMBAI: Reserve Bank on Wednesday said it implemented its web-based online bidding in primary auctions of government securities. The module on web-based negotiated dealing system auction will allow internet-based direct participation of gilt account holders. "The module permits internet-based direct participation of gilt account holders (GAHs) in primary auctions of government securities (G-Secs)", the RBI said in a notification. 'Gilt account' is used by the RBI to refer to a constituent account maintained by a custodian bank for maintenance and servicing of dematerialised government securities owned by a retail customer. The RBI has, since February 2012, introduced an additional facility of web-based NDS auction module to facilitate online bidding by constituents subsidiary general ledger clients (CSGL clients) or GAHs in primary auctions of G-Secs. However, it said, the access is subject to controls by respective primary member (PM) as it would continue to be responsible for settlement of CSGL bids or trades in respect of its GAHs, as is presently the case.

High NPAs, cost of funds to weigh on bank margins in Q4

Banks are expected to report higher cost of funds for the fourth quarter of 2011-12, on account of tight liquidity conditions and slowdown in deposit accretion. Rising non-performing assets may also have an impact on net interest margins, say analysts. During January-March, short-term rates spiked as banks rushed to cover regulatory reserve needs and meet financial year-ending targets. Liquidity deficit was almost thrice the Reserve Bank of India’s comfort level, which is one per cent of net demand and time liabilities. Also, bank deposit growth suffered in the third quarter on account of reduced savings, both domestic and industrial, leading to dependence on bulk deposits. As on March 23, pace of bank deposit growth in 2011-12 stood at 13 per cent compared with the same period last year, according to data from RBI. As a result, banks were raising certificates of deposits at three-year high interest rates of 11.5 per cent in the last month of the final quarter. “It is hard to imagine how margins could expand in a soft credit cycle, given rate rigidities and the oncoming inflation from fuel, electricity and freight rates,” said analysts from HSBC Global Research. With a view to ease the liquidity pressure, RBI cut cash reserve ratio by 50 basis points in January and by 75 basis points in March, amounting to release of Rs 80,000 Cr. into the system. Analysts at Religare said that while short-term rates could put pressure on net interest margins, the impact would be offset by a cut in cash reserve ratio. The central bank also continued infusing liquidity via open market operations. Bank credit growth that remained slack for most part of the year picked up in the last quarter due to stability in interest rates. RBI has kept the policy rate unchanged since October 2011. As on March 23, annual credit growth clocked 17 per cent, higher than 16 per cent as projected by the central bank. P. Sitaram, chief financial officer, IDBI Bank, said significant loan growth in March will give some benefit to interest income. “But the pressure on margins due to provisioning of bad loans, restructuring and market-to-market losses on bonds will continue to weigh on the bottom line in the fourth quarter.”

SBT plans to diversify into bullion trade

State Bank of Travancore (SBT) has said it plans to diversify its products and services by foraying into the gold bullion trade. It is currently in the process of expanding its branch network across Kerala and other metro cities. The bank plans to add more than 100 branches, including NRI-specific centres, over the next 12 months. It currently has 880 units across the country, SBT Managing Director, Mr. P. Nanda Kumaran, said. The bank expects to have a branch network of more than 1,000 units soon, he said. “Our target is to become one of the top ten banks in India within five-six years,” Mr. Kumaran said. The SBT chief, who is on a visit to the UAE, said the bank has achieved 28 per cent growth in its NRI business in the last fiscal, due partly to an increase in interest rates following the deregulation of interest rates for NRE term deposits.

SBT, a subsidiary of State Bank of India, recorded 24 per cent growth in business in 2011-2012, that includes deposits and advances to Rs 13 Cr. ($26 billion). The NRI segment accounts for 21 per cent of the bank’s total deposits, while one-third of all overseas remittances to Kerala are routed through the bank. The lender also accounts for one-third of NRI deposits in the State, he said. The bank has set up a representative office in Dubai and manages City Exchange.

Nationalised banks to speed up processing of corporate loans

Indian companies can hope for a faster turnaround when they submit loan proposals to nationalised banks. Nationalised banks have set up credit approval committees (CACs) at their respective head-offices to speed up decisions on loan requests from companies. Realising that private sector and foreign banks have a competitive edge when it comes to decision making on loans, the Finance Ministry has pushed for a CAC in each of the 20 nationalised banks. Punjab National Bank, Canara Bank, Bank of Baroda, and Bank of India, among others, are classified as ‘nationalised banks'. They are governed by the Banking Companies (Acquisition and Transfer of Undertakings) Act. Until a few months back, large loan proposals could only be cleared in management committee meetings (MCMs) of the boards. “The MCM is convened only once in 20-30 days. Presence of the bank chairman and managing director, executive directors, RBI nominee director, Finance Ministry representative and two other directors is a must in the meeting. “Sometimes, this requirement leads to pile up of loan proposals for clearance,” said a senior banker. However, things appear to be changing for the better following the constitution of CACs. The CAC, comprising the chairman and managing director, executive directors, and chief general manager/general manager in-charge of credit, finance and risk management, can meet as and when loan proposals need to cleared, said a public sector bank official. That loan approval mechanism has been put on the fast-track is underscored by the fact that the quorum for a meeting of the CAC is just three members. The meeting has to be attended by the CMD and one of the EDs. In the case of Category ‘A' banks, with business of Rs 3-lakh Cr. or more, the CAC is empowered to take decisions on loan proposals up to Rs 400 Cr. In the case of Category ‘B' banks, with business less than Rs 3-lakh Cr. the CAC can take decisions on loan proposals up to Rs 250 Cr. However, loans proposals exceeding the limits of the CAC will have to be cleared at the MCM. Given the powers conferred on the CAC, companies will not have to wait for a month to hear from banks about the fate of their loan application. If there is merit in the proposal, the bank could clear it even in a day or two.

IDBI Bank may consider raising $2.5 billion by January

MUMBAI: IDBI Bank may consider raising its offshore fund raising plan to least $2.5 billion overseas by January from $1.5 billion now, Executive Director Melwyn Regi told reporters. The bank has so far raised $720 million as part of the $1.5 billion plan and is looking at some new markets to raise more funds, Rego said. "We want to diversify our sources of funds so as to achieve cost reduction," he added.

MSS ceiling fixed at Rs 50,000 cr for this fiscal

To absorb excess liquidity, the Reserve Bank has pegged the quantum of intervention through Market Stabilisation Scheme (MSS) at Rs 50,000 Cr. Under the MSS, RBI, on behalf of government, absorbs liquidity by issuing Treasury Bills and/ or dated securities.

Punjab National Bank plans 24 hours banking services centres

CHANDIGARH: State-run Punjab National Bank will roll out new service centres where customers can access select banking services like updating of passbook 24X7. The bank would set up 'E-Lobby' which will have one ATM, cash deposit kiosk, pass book printing terminal, cheque deposit machine and two Internet banking terminals, PNB Circle Head Kalpana Gupta told reporters here. "The main idea behind having E-Lobby is to provide 24 hours banking services to customers who do not have enough time to visit bank branches during office hours. Now they can visit these E-Lobbies where they can carry out banking transactions at their conveniences," she said. Initially, E-Lobby would be set up in Chandigarh, Panchkula and Ambala. Thereafter more such centres would be set up for the conveniences of customers.

Corporation Bank plans expansion

Corporation Bank plans to expand its presence across the country rapidly, according to its CMD Ajai Kumar. To expand branch network in northern and western parts, especially in Gujarat, Rajasthan, Punjab and Haryana, 12 new zonal offices were opened recently, he said. Circle Office concept being introduced by the bank will hasten the decision making process. The bank proposes to open SME loan centres across the country and first such centre will be opened in Pune soon.

Indian Overseas Bank eyes 16-18% credit growth in current fiscal

MUMBAI: Public sector lender, Indian Overseas Bank (IOB) is hopeful of posting a credit growth of 16-18 percent along with 18-20 percent of deposit growth in the current financial year. "Currently, we aim 18-20 percent deposit growth and 16-18 percent credit growth in FY13," Chairman and Managing Director of IOB, M. Narendra said. He also said that deposit growth for the bank stood at 18-19 percent for the last fiscal against 13-14 percent witnessed by the banking system. "Luckily for us, even though CASA has not given us much growth, we had a good retail growth. Our deposit growth is around 18-19 percent against the systemic growth of 13-14 percent," he added. Total deposit of banks grew by 13.4 percent to Rs 60.72 trillion as of March 23, which is below the RBI's projection of 17 percent for the last fiscal. Referring to expectation from the upcoming credit policy, Narendra said that the central bank would take a view after considering inflation number along with current tight liquidity situation. He, however, said reduction in lending rates by the bank will be little difficult due to present cost structure.

Banks told to lend more for   water, watershed management projects

Banks must look at funding more for water and watershed management projects since they are assets for future generations, according to the Member of Parliament, Mr. A. Sampath. He said this while addressing the district-level review committee meeting of banks held here. Minor irrigation projects should also be considered for targeted funding. Credit disbursement in this sector has been less than inspiring, he told the district-level bank officials. Mr. Sampth also released the annual credit plan for Thiruvananthapuram district for 2012-13. It envisages disbursement of Rs 6,452 Cr. under the priority sector. The break-up of this figure under individual components is Rs 2,792 Cr. for agriculture; Rs 510 Cr. for small and

medium enterprises; and Rs 3,150 Cr. for the service sector, a spokesman for the DLRC said. Banks in the district had disbursed Rs 5,125 Cr. for the priority sector until December 2011 against a target of Rs 5,394 Cr. for the entire 2011-12, he added.

To get back soft loans, govt plans hard move of seizing entrepreneurs’ property

Pune: The state government is considering the option of seizing assets of entrepreneurs in Pune district who have defaulted on loan repayment to the Industries department. There are around 1,700 entrepreneurs who have availed themselves of the soft loans totalling around Rs 17 Cr. Most of the defaulters are engaged in the service and manufacturing industry. This comes after a recovery notice issued last year by the District Industries Centre (DIC), Pune, to some 600 entrepreneurs across a range of businesses including computer and mobile repairing services and manufacturing utilities in food processing, plastic and auto components. Some 423 of them started making the payments after the notice and recovery under the state government’s Seed Money Scheme improved with realisation reaching Rs 1.17 Cr. against Rs 10-15 lakh per year earlier. Officials, however, said it was not enough as the money to be repaid was significantly higher than recovery being made, which is why they are considering seizure of properties under the Revenue Recovery Code of 1967. “We are contemplating seizure of properties of those not repaying the loan. We have also approached the Regional Transport Office (RTO) to prevent renewal of vehicle permits of such defaulters. We will begin seizure of property under the recovery code after involving the district collectorate in the process,” said General Manager DIC Pune, S. S. Survase. He added that the seizure move is being considered following heavy defaults. On the matter of not renewing vehicle permits of defaulters, RTO Pune, Arun Yeola, said his office will only do it after they get a government directive. Joint Director of Industries, Pune Region, M V Bhagat, however, said that recovery has been satisfactory for over a year now, owing to consistent efforts of the government to initiate recovery drives.

NABARD sanctions over Rs 6000 Cr. for fiscal 2011-12

CHENNAI: The National Bank for Agriculture and Rural Development has sanctioned Rs 6,318.27 Cr. for various projects in Tamil Nadu and Puducherry during fiscal 2011-12, up by 47 per cent over the same period of previous year. During the period 2010-11 the banks' refinance was extended for crop loans at Rs 2,620 Cr. and for other short term purposes Rs 330 Cr. It was also extended to co-operative banks for financing weavers' societies to Rs 230 Cr. NABARD Chief General Manager Lalitha Venkatesan said in a statement. NABARD is implementing 16 subsidy schemes across sectors like animal husbandry, cold storages, rural godowns, solar lighting and heaters. Some 154 watersheds in 25 districts of Tamil Nadu covering 1.81 lakh hectares is under implementation through grant and loan support from watershed development fund administered by NABARD, the statement added.

Agency business: State-run banks seek government help

NEW DELHI: State-run banks have sought the finance ministry's intervention to keep the lucrative agency business of central and state governments from going to private sector banks. Earlier this year, the Reserve Bank of India (RBI) had suggested all private-sector banks, apart from the Axis Bank, ICICI Bank and HDFC Bank that were already allowed in 2003, should be considered for handling central and state government business. The business is estimated at over 3,000 Cr. every year. "State-owned banks should get the agency business as they also bear much of the social sector burden," said the chairman of one of the protesting state-run banks. Confirming the development, a finance ministry official told ET that the ministry would speak to the Controller of Central Government Accounts (CGA) before taking up the issue with the RBI. While the RBI did not respond to a detailed questionnaire sent by ET, a spokesperson for the central bank directed the reporter to refer

to the RBI circular on the issue. In 2003, the RBI authorised HDFC, ICICI, UTI (now AXIS) and IDBI Bank (now PSB) as its agents for government business. These banks were selected on the basis of financial parameters such as profitability, non-performing assets (NPAs), their record in meeting priority sector targets and implementation of government schemes. In January, the RBI suggested that eligibility should be extended to all private sector banks. "It has been decided to fix criteria for appointment of various private sector banks (other than Axis Bank, HDFC Bank and ICICI Bank, which already exist as agency banks) as agency banks to handle any central/state government business (where RBI pays agency commission) at par with public sector banks," an RBI memorandum issued last month said. Simultaneously, the RBI, in consultation with the CGA, decided to set up a committee comprising officials from the CGA, RBI and the finance ministry to prescribe eligibility norms for private banks. State-run banks are unhappy that despite a poor record in implementing government schemes and meeting priority sector targets, the banks are being involved in the agency business.

71% jump in Nabard support for Pune

The National Bank for Agriculture and Rural Development (NABARD) has recorded the highest ever financial performance in 2011-12 with its regional office in Pune providing the financial support of Rs 6,023 Cr. for the development of agriculture and rural areas in the state. NABARD chief general manager M V Ashok said on Wednesday the financial support of Rs 6,023 marks a growth of 71 per cent against Rs 3,532-Cr. support provided last year. Listing out area-wise details of disbursements, Ashok said not only did the refinance to banks increase but the provision made to the state government under the Rural Infrastructure Development Fund (RIDF) had also increased. He said the NABARD support to cooperative banks and Gramin banks increased to Rs 4,035 Cr. in the state, showing a 79 per cent rise over the previous year. He also added that the NABARD’s support to creation of rural infrastructure like roads, bridges, irrigation projects, drinking water besides the projects like rural warehousing, waste water management was Rs 1,777.8 Cr. an increase of 58 per cent over 2010-11. Ashok also said that other areas like the special scheme for warehousing, direct lending to co-operatives, producers organisations and under the scheme of natural resource management also witnessed a significant growth. “For the first time, a special allocation of Rs 2,000 Cr. was made to NABARD for warehouse financing under the RIDF in the Union Budget for 2011-12.” “At national level, NABARD achieved 100 per cent utilisation of the fund during the year, by sanctioning warehousing projects to the state governments and private sector agencies through banks. Maharashtra stood at the top amongst all the states with a sanction of loan of Rs 460 Cr. representing 31 per cent of all-India total. NABARD also provided support through various banks to the extent of Rs 50 Cr. under the special warehousing refinance Scheme,” said NABARD CGM. “In tune with the changing needs of the external environment, an initiative to support Producers’ Organisation through credit and credit-plus activities was launched by NABARD. During the year, Rs 39.3 lakh was sanctioned to Devanagri Producers Company, promoted by NGO Yuva Mitra, for setting up an Agrimall at Sinnar in Nashik. Listing out the targets for 2012-13, NABARD CMD said that the bank proposes to take up dairy development in a big way.

ICICI Prudential losing 300 staff every month

ICICI Prudential Life Insurance Company is hiring close to 300 people every month. The life insurance arm of the country’s largest private-sector lender does it not to expand workforce, but to maintain its strength, as almost a similar number of staffers keeps leaving every month. “We believe that the insurance sector is under-penetrated,” said Judhajit Das, chief of human resources of the company. “There is an opportunity for profitable growth by serving our customers with the right products that meet their needs. Hence, we never stopped replacement hiring,” he told Press. The life insurer, functioning since 2000, currently has

13,500 employees. According to senior executives of the company, the current attrition rate of around 25 per cent is in line with the industry average, but unlike most other insurers in the country, ICICI Prudential was making fresh recruitment to replace the employees who left the company. The average attrition in the “frontline” or junior level staff is as high as 40 per cent, they added. The company has introduced new rewards and recognitions programme to arrest the growth in its attrition rate at the junior level. “We intend to keep the headcount in the range of 13,000-14,000 as of now. Hence, the replacement hiring will continue,” Das said. According to staffing consultancy firm Mercer, employees in the insurance sector are expected to receive salary increase of around 11 per cent this year. It also expects that maximum hiring will be witnessed in the insurance sector along with chemical and manufacturing industries. The insurer’s parent, ICICI Bank, has also seen a churn in its employee count in recent months. The bank’s employee base was reduced by 1,300 people in October-December period. This was the first such significant decline in the bank’s staff strength in two years.

SBI may buy loans from European lenders

State Bank of India (SBI), the country's largest lender, plans to buy loans from banks in the US and Europe to boost its credit assets abroad and profitability. The lender, based in Mumbai, is seeking to purchase loans given mostly to Indian companies, Hemant Contractor, who heads the bank's international operations, said in an interview yesterday. Record net interest margin for its international loans encouraged the 205-year-old lender to seek the acquisitions and expand the business, Contractor said. Credit at State Bank's overseas offices expanded 21 per cent last year, compared with a 17 per cent increase at its local unit, the bank said on February 13. "Being a state-run lender they have better access to dollar funding which gives them confidence that they will be able to widen the margins further," said Saikiran Pulavarthi, Mumbai-based banking analyst at Espirito Santo Securities. European banks are trying to sell euro 2.5 trillion ($3.3 trillion) of assets as they seek to cut balance sheets, PricewaterhouseCoopers LLP said in a report on February 3. While the total amount of their bad loans has remained stable at about euro 518 billion in the past year, increases in Spain, Greece and Italy are offsetting reductions in Germany and Ireland, PwC said. "Shedding of assets by European and some American lenders in the aftermath of the crisis gives us an opportunity to buy them selectively," Contractor said. State Bank had 174 branches overseas as of December 31, accounting for more than 16 per cent of its Rs 8.7 lakh Cr. ($169 billion) loan book, the lender said. Net interest margin on international loans will widen from a record 1.77 per cent as the cost of dollar funding narrows, Contractor said. Prime Minister Manmohan Singh's government, the biggest shareholder in State Bank, plans to invest Rs 7,900 Cr. in the lender to boost its risk buffers. Shareholders of the bank approved the sale of preference stock to the government last month, ending a two-year wait for the funds.

Heard on the street: CIMB, Kotak Mahindra groups may revisit 'working alliance'

Malaysia's CIMB Group and Kotak Mahindra Group may revisit their 'working alliance' in the wake of CIMB's acquisition of most of Royal Bank of Scotland's Asia-Pacific cash equities and investment banking units. Last year, both the banks announced they would work together across several areas including trade finance and NRI remittances. The tie-up also planned to tap merger and acquisition (M&A) opportunities involving companies in India, Malaysia and Indonesia. After splitting with Wall Street bank Goldman Sachs in 2006, Kotak Mahindra, whose activities are predominantly local, has been looking to build its presence in the cross-border M&A space through alliances with international investment banks. It has tie-ups with GCA Savvian for the India-Japan corridor and with Evercore Partners for collaboration between India and the US, the UK and Mexico. Besides, it has formed several

informal alliances covering key geographies such as South America, Europe and South Korea.

Bank of India to rename its Indonesian arm

MUMBAI: Public sector lender Bank of India today said it will rename its Indonesian arm, Bank of Swadesi, as Bank of India Indonesia. Bank of India holds 76 per cent stake in the Indonesian bank. The State-run lender said it has obtained the necessary approvals from the Ministries and Bank Indonesia. "Indonesia and India have close cultural and economic ties and with the core competency that Bank of India brings with it in areas of Agricultural and Industrial Finance capabilities, we are sure that Bank of India Indonesia will contribute in much larger measure to the growth of the Indonesian economy," Bank of India Chairman and Managing Director Alok Misra said. He added that Bank of India's global reach would be available to Bank of India Indonesia in expanding its business in Forex and International trade finance.

Mahesh Bank to expand operations in west

City-based AP Mahesh Cooperative Urban Bank Limited (Mahesh Bank) is looking at further expanding its footprint in Maharashtra and Rajasthan, besides covering new markets like Gujarat during the present financial year, according to Umesh Chand Asawa, managing director and chief executive officer. “We have already obtained approval from the Reserve Bank of India (RBI) to expand our area of operation to the entire states of Maharashtra, Rajasthan and Gujarat. We will be opening a branch each at Surat in Gujarat and Bhilwara in Rajasthan and two in the twin cities of Hyderabad and Secunderabad this year,” he told Press. The multi-state scheduled bank presently has a network of 38 branches — 30 in the twin cities, six in other districts of Andhra Pradesh, and one each in Jaipur and Mumbai. Mahesh Bank reported a net profit of Rs 17.41 Cr. for the financial year-ended March 2012, compared to Rs 15.02 Cr. in the previous year, reflecting a growth of 16 per cent. Its total business witnessed a 27.5 per cent growth to Rs 1,913 Cr. for the financial year 2011-12, as against Rs 1,500 Cr. a year ago. The bank’s total deposits stood at Rs 1,160 Cr. as against Rs 908 Cr. recording a growth of 27.8 per cent, while advances grew 23.2 per cent to Rs 747 Cr. as compared to Rs 606 Cr. Asawa said the bank’s credit deposit ratio stood at 64.36 per cent (66.73 per cent in FY11), and CRAR (capital to risk asset ratio) at 21 per cent, as against 9 per cent prescribed by the RBI.

Dhanlaxmi to cut corporate biz, reduce staff to boost financials

MUMBAI: The Thrissur, Kerala-based Dhanlaxmi Bank, which is facing a strain on liquidity due to its bloated cost structure, will cut the size of its corporate business unit, downsize manpower and focus on high-yielding businesses, such as gold loans, to boost its financials. PG Jayakumar, the bank's new managing director and chief executive officer, says the idea is to cut operating expenses by 50% for the year ending March 2013 from the previous year's levels. "In the current scenario, cost reduction is as important as fresh income generation. Manpower deployment shall be base minimum, so that cost can come down," Jayakumar said in a memo to the bank's employees. Jayakumar, who is seen to be close to the employees' unions, was appointed as the MD & CEO in February, when Amitabh Chaturvedi quit following differences with the bank's management. The Reserve Bank of India, or RBI, has approved Jayakumar's appointment for a year, said a person familiar with the development. "The RBI has also said it would review his appointment at the end of one year, based on the performance of the bank," said the official, who did not wish to be identified. The bank recently elevated the chief operating officer, Muralidaran Rajamani, as deputy CEO. The bank's board is also expected to give an extension to chairman GN Bajpai, whose term ends in May. Jayakumar said the bank will go slow on corporate business and

will focus on raising funds at lower costs. "Advance against gold will be given thrust in cluster branches. They (the branches) will contribute to retail business and priority-sector lending, mainly through gold loan business," said his memo. On manpower reduction, all branches, and regional and zonal offices have been instructed to identify excess manpower and come out with a plan to reduce it by the end of April. Cost reduction will be key to the turnaround of Dhanlaxmi Bank, whose key financials have come under severe stress in the past couple of years.

SIB now weighs preferential, rights to raise funds

KOLKATA: After two aborted attempts to raise 1,000-Cr. capital through qualified institutional placement, or QIP, South Indian Bank may now opt for preferential allotment of shares or a rights issue. The bank managing director and chief executive VA Joseph told ET that the board will take a decision next month. "Our board will decide whether we should raise capital by way of preferential allotment of shares or a rights issue," Joseph said in an exclusive interview. "Follow-on public offer can be another option," he said. The bank's board will discuss the capital raising plan on May 7 tentatively, when it meets to finalise the annual financial accounts. "There was no urgency for the bank to raise capital. But they will have to do it sometime this year," Vaibhav Agrawal, a stock analyst with Angel Broking said. The private sector lender had scrapped the QIP last month as domestic investors were not ready to pay a premium over the issue floor price fixed at 25.60, fixed by the Securities & Exchange Board of India. According to investment banking sources, the Kerala-based bank was seeking a minimum 10% premium over this. The bank had to necessarily keep 51% reserved for domestic investors since it had already reached the maximum permissible FII holding limit of 49%. So, it was barred from raising more than 49% of 1,000 Cr. through QIP. This was the second time the bank withdrew the plan in the last six months.

RBI THIS WEEKReserve Bank Cancels the Licence of Shri Bhadran Mercantile Co-operative Bank Ltd., Bhadran (Gujarat)

In view of the fact that Shri Bhadran Mercantile Co-operative Bank Ltd, Bhadran (Gujarat) had ceased to be solvent, all efforts to revive it in close consultation with the Government of Gujarat had failed and the depositors were being inconvenienced by continued uncertainty, the Reserve Bank of India on March 30, 2012 delivered its order dated March 21, 2012 to the bank cancelling its licence to carry out banking business. The Registrar of Co-operative Societies, Gujarat State has also been requested to issue an order for winding up the bank and appoint a liquidator for the bank. It may be highlighted that on liquidation, every depositor is entitled to repayment of his/her deposits up to a monetary ceiling of ` 1,00,000/- (Rupees One lakh only) from the Deposit Insurance and Credit Guarantee Corporation (DICGC) under usual terms and conditions. The bank was granted a licence by Reserve Bank of India on December 11, 1986 to commence banking business. In view of its precarious financial position and with a view to preventing preferential payments and protecting the interest of the depositors, the bank was placed under Operational Instructions under Section 36(1) of the Banking Regulation Act, 1949 (AACS) with effect from the close of business on October 31, 2006 restricting withdrawal of deposits to `1000/- per depositor. The statutory inspection of the bank carried out under Section 35 of the Act ibid with reference to its financial position as on March 31, 2010 revealed further deterioration in its financial position and other violations. Its net worth and CRAR were assessed at ` 10.72 lakh and 29.6% respectively. The gross NPAs formed 81.3% of the gross advances. The assessed net loss of the bank stood at ` 263.73 lakh. The statutory inspection conducted by Reserve Bank of India under Section 35 of the Banking Regulation Act, 1949 (AACS) with reference to its financial position as on March 31, 2011 revealed that the assessed networth

was (-) ` 272.67 lakh, CRAR was (-) 413.5%, gross NPAs were 78.2% of the gross advances and the deposit erosion was 55.0%. As the financial position of the bank with reference to its position as on March 31, 2011 turned precarious and revealed further deterioration, the bank was placed under Directions under Section 35A (1) of the Act ibid for a period of six months from the close of business on August 26, 2011 which was extended for a further period of six months from the close of business on February 26, 2012, subject to review.

A Show Cause Notice for cancellation of licence under Section 22 of the Banking Regulation Act, 1949 (AACS) was issued on December 22, 2011. The bank in its reply dated January 16, 2012 admitted the irregularities/observations and did not furnish any specific comment on the deficiencies detailed in the SCN. The bank had not submitted any concrete revival plan or any proposal for merging itself with any strong UCB. In the absence of any proposal for merger and in view of the bank’s precarious financials, chances of its revival are remote and continuation of the bank will lead only to further erosion in its deposits and will be against public interest. It is therefore, evident from the above that:

The bank does not comply with the provisions of Section 11(1), 22 (3) (a) and 22 (3) (b) of the Act ibid.

The bank is not in a position to pay its present and future depositors.

The affairs of the bank are being conducted in a manner detrimental to the interest of the depositors.

The financial position of the bank leaves no scope for its revival.

In all likelihood public interest will be affected if the bank is allowed to carry on its business any further.

Therefore, Reserve Bank of India took the extreme measure of cancelling the licence of the bank in the interest of bank's depositors. With the cancellation of licence and commencement of liquidation proceedings, the process of paying the depositors of the Shri Bhadran Mercantile Co-operative Bank Ltd, Bhadran (Gujarat), the amount insured as per the DICGC Act, 1961 will be set in motion subject to the terms and conditions of the Deposit Insurance Scheme. Consequent to the cancellation of its licence, Shri Bhadran Mercantile Co-operative Bank Ltd, Bhadran (Gujarat) is prohibited from carrying on business of ‘banking’ as defined in Section 5(b) of the Banking Regulation Act, 1949 (AACS). For any clarifications, depositors may approach Smt. M. K. Subhashree, Assistant General Manager, Urban Banks Department, Reserve Bank of India, Ahmedabad. Her contact details are as below: Postal Address: Urban Banks Department, Reserve Bank of India, La Gajjar Chambers, Ashram Road, Ahmedabad -380 009, Telephone Number: (079) 26589338, Fax Number: (079) 26584853, Email

RBI study on FDI Flows to India

An analysis of the recent trends in foreign direct investment (FDI) flows at the global level as well as across regions/countries suggests that India has generally attracted higher FDI flows in line with its robust domestic economic performance and gradual liberalisation of the FDI policy as part of the cautious capital account liberalisation process. Even during the recent global crisis, FDI inflows to India did not show as much moderation as was the case at the global level as well as in other EMEs. However, when the global FDI flows to Emerging Market Economies (EMEs) recovered during 2010-11, FDI flows to India remained sluggish despite relatively better domestic economic performance ahead of global recovery. This raised questions especially in the backdrop of the widening of the current account deficit beyond the sustainable level of about 3 per cent. Using Kauffmann’s Index, the Reserve Bank of India conducted an empirical exercise to analyse the factors behind such

moderation. The study suggested that institutional factors, such as, policy uncertainty, are causing the slowdown in FDI inflows to India despite robustness of macroeconomic variables. A panel exercise for 10 major EMEs showed that FDI was significantly influenced by openness, growth prospects, macroeconomic sustainability, labour cost and uncertainty in government policy. A comparison of actual FDI flows to India vis-à-vis the potential level worked out on the basis of underlying macroeconomic fundamentals showed that actual FDI which generally tracked the potential level till 2009-10, fell short of its potential during 2010-11. Further, counter factual scenario attempted to segregate economic and non-economic factors seemed to suggest that the divergence between actual and potential during 2010-11 could partly be on account of policy uncertainty.

RBI implements Web-based On-line Bidding for Primary Auctions of G-Secs

The Reserve Bank of India has, since February 2012, introduced an additional facility of web-based NDS auction module to facilitate online bidding by Constituents Subsidiary General Ledger clients (CSGL clients)/Gilt account holders (GAHs) in primary auctions of Government Securities (G-Secs). Explaining the module, the Reserve Bank stated that the module permits internet-based direct participation of GAHs in primary auctions of G-Secs. However, the access is subject to controls by respective Primary Member (PM) as PM would continue to be responsible for settlement of CSGL bids/trades in respect of its GAHs, as is presently the case. The web-based auction module is an additional facility and all regulations related to current CSGL account holders/PMs and client bidding system would remain, the Reserve Bank stated and added that all actions on web-based NDS auction application would also be governed by the extant Rules, Regulations, Notifications and/or any other instructions issued by it from time to time. The Reserve Bank would also have no role in any dispute between any GAH and its PM for any action performed on this application by either GAH or its PM. Further details and operational guidelines on the web-based NDS auction facility are available on CCIL website (www.ccilindia.com). Market participants may also contact NDS-auction Helpdesk on 022-66639399 or mail to “auctionshelpdesk@ccilindia.co.in” in regard to any further queries on the application.

Issue of ` 20/- and ` 50/- denomination Bank notes without inset letter and with symbol

The Reserve Bank of India will shortly issue of ` 20/- and ` 50/- denomination Banknotes without inset letter and with ` symbol, in the Mahatma Gandhi -2005 series bearing the signature of Dr. D. Subbarao, Governor, Reserve Bank of India, and the year of printing on the reverse of the Banknote. The design of these notes to be issued now is similar in all respects to the banknotes in Mahatma Gandhi Series 2005 issued earlier except for ` symbol. All the Banknotes in the denomination of ` 20/- and ` 50/- issued by the Bank in the past will continue to be legal tender.

Access criteria for payment systems – sub-membership to centralised payment systems

Under the overall guidance of the Board for Payment and Settlement Systems, the Reserve Bank over the last few years, has been taking a number of steps to popularise the electronic payment systems in the country. In this connection, a reference is invited to circular DPSS.CO.OD.494/04.04.009/2011-2012 dated September 21, 2011, in terms of which, liberalised revised access criteria for centralised and decentralised payment systems were announced. 2. The centralised payment systems, viz. Real Time Gross Settlement System (RTGS) and National Electronic Funds transfer (NEFT), currently provide for only direct membership. As an exception, Regional Rural Banks (RRBs) have been given access to the NEFT system through their Sponsor Banks. 3.  On a review, it has been decided to expand the sub-membership route to enable all licenced banks to participate in NEFT and RTGS

systems. This would be an alternate mechanism to all licenced banks which have the technological capabilities but are not participating in centralised payment systems on account of either not meeting the access criteria or because of cost considerations. This arrangement would be subject to the following conditions: A) The sub-member/s would participate in the centralised payment systems through their sponsor bank which is a direct member of the centralised payment system. B) In order to ensure compliance with the timely credit and return discipline which are of utmost importance in centralised payment systems, branches of sub-member/s that are not under core banking system shall be kept out of the centralised payment systems till such time they are brought under core banking. C) The sponsor banks would be responsible for sending/receiving the transactions/messages on behalf of their sub-member/s. D) There are no restrictions on the number of sub-members a sponsor bank could sponsor. Aspects relating to operational feasibility, risk mitigation, fund settlement, collaterals etc., have to be taken care of by the sponsor banks before sponsoring sub-member/s. E) The sponsor bank should put in place a risk management framework and a system of continuous monitoring of the risk management practices of sub-member/s that they desire to sponsor. The risk management framework should be approved by the Board of the sponsor bank. F) The settlement of transactions by/on the sub-members would take place in the settlement accounts of the sponsor banks maintained with Reserve Bank of India. The sponsor bank under this arrangement will assume complete responsibility for the settlement of all transactions by/on the sub-members. G) The sponsor bank at all times should  ensure that their sub-member/s adhere to and abide by the rules, regulations, operational requirements, instructions, orders, decisions etc, of the centralised payment systems, as laid down by Reserve Bank of India from time to time. H) Redressal of all customer complaints / grievance would be the responsibility of the sponsor bank. To aid in this process, the sponsor bank should ensure that the sub-member/s have put in place a transparent and robust mechanism to resolve customer complaints in a quick and efficient manner, as laid down in the procedural guidelines, business rules and regulations of the centralised payment systems. I) All disputes between the sponsor bank and the sub-member/s will be handled bi-laterally amongst them. J) The sponsor bank should bring to the immediate notice of the Reserve Bank of India:

(i) any involvement of its sub-member/s in any suspicious transactions, frauds, etc.,

(ii) any of its sub-member/s resorting to any unfair practices relating to their participation in centralised payment systems;

(iii) any of its sub-member/s not adhering to the rules, regulations, operational requirements, instructions etc, of centralised payment systems;

K) The sponsor bank is not required to take prior approval of the Reserve Bank of India for sponsoring a sub-member/s into the centralised payment systems. However, as and when they sponsor sub-member/s, they should immediately inform the Reserve Bank of India, the details of the sub-member/s, IFSC/MICR codes allotted to the branch/branches of sub-member/s, date of commencement of sub-membership etc. L) The sponsor bank should inform the Reserve Bank of India in case of cessation of sponsorship arrangement between the sponsor bank and sub-member/s immediately. M) The charges for customer transactions of sub-member/s cannot exceed the charges applicable to customers of sponsor banks/direct members of the centralised payment systems viz., RTGS and NEFT.

4. The scheme of sub-membership for centralised payment systems is effective from the date of this circular. 5. Any further rationalisation / liberalisation of the access criteria norms would be considered at a later stage based on the experience of these measures put in place.

Relief and Savings bonds-Compensation structure for delay in payment of interest and/or principal

Please refer to our circulars RBI/2005/477 and RBI/2011-12/294 dated May 20, 2005 and December 09, 2011 respectively, on the above subject. As per the circular dated December 09, 2011 it was advised that agency banks may compensate an investor in Relief/Savings bonds, for the financial loss due to late receipt/delayed credit of interest warrants/maturity value, at their own savings bank rate for respective amounts (i.e. upto ` 1 lakh and over ` 1 lakh) without any discrimination. 2. Under the present scenario of deregulated interest rate on the savings bank account, in order to avoid ambiguity and variation in compensation rates across different agency banks, these instructions have been reviewed. It has now been decided that with effect from the date of this circular, an agency bank shall compensate an investor in Relief/Savings bonds, for the financial loss due to late receipt/delayed credit of interest warrants/maturity value, at a fixed rate of 8% per annum. 3. It may be added that the Reserve Bank may review the above compensation rate as and when considered appropriate.

National Electronic Funds Transfer (NEFT) - Acceptance of NEFT inward for credit to Loan Accounts

National Electronic Funds Transfer launched in year 2005 has been working successfully over the years and occupies an important place in the payment system space. The system is meant for one-to-one funds transfer and can be used for transferring funds to beneficiaries (individual, institutions etc.) and no restrictions have been placed thereon. The phenomenal growth in the system, both in terms of branch coverage and volume / value of transactions handled reflects the acceptability and popularity of the system. However, we have received some complaints from customers regarding non-acceptance of NEFT for credit to loan accounts causing inconvenience to them. On examination of the matter, it was observed that only a few banks were following this restrictive practice. These banks, however, were willingly taking ECS (Dr) as one of the modes for the repayment. It is, therefore, advised that all banks should allow the customers to choose NEFT also as one of the electronic modes of making payment towards loan EMIs / repayments etc.

Annual Financial Inspection - Priority Sector Loans - Misclassification by Banks

Please refer to Para 3 of our circular RPCD.CO.Plan.BC.No.49/04.09.01/2010-11 dated January 28, 2011 on the captioned subject, wherein it was advised that the misclassifications reported by Principal Inspecting Officers, during the current year would be added to the shortfall reported by banks, as on the last reporting Friday of the following year, for allocations to various funds. 2. It has since been decided that the misclassifications reported by our Department of Banking Supervision would be adjusted/ reduced from the achievement of that year only to which the amount of declassification/ misclassification pertains, instead of next year, for allocation to various funds.

Prudential Guidelines on Capital Adequacy and Market Discipline- New Capital Adequacy Framework (NCAF) - Eligible Credit Rating Agencies - Brickwork Ratings India Pvt. Ltd. (Brickwork)

Please refer to the Master Circular DBOD.No.BP.BC.11/21.06.001/2010-11 dated July 1, 2011 on 'Prudential Guidelines on Capital Adequacy and Market Discipline - New Capital Adequacy Framework (NCAF)'. 2. In terms of para 6 of the circular, four domestic credit rating agencies viz. CARE, CRISIL, FITCH India and ICRA have been accredited for the purpose of risk weighting the banks' claims for capital adequacy purposes. The long term and short term ratings issued by these domestic credit rating agencies have been mapped to

the appropriate risk weights applicable as per the Standardised Approach under the Basel II Framework. 3. It has now been decided that banks may also use the ratings of the - Brickwork Ratings India Pvt. Ltd. (Brickwork) for the purpose of risk weighting their claims for capital adequacy purposes in addition to the existing four domestic credit rating agencies. The rating-risk weight mapping for the long term and short term ratings assigned by Brickwork will be the same as in case of other rating agencies.

IBA THIS WEEKDraft Report of the   Working Group on Technology Issues constituted by RBI on Micro ATM Standards

This report, which runs in to 24 pages in available on IBA web site.

Open Standards on Smart Card Based Solution for Financial Inclusion

This report is also available on web site of IBA.

FINMIN THIS WEEKGOVERNMENT TO MAKE PAYMENTS DIRECTLY TO THE BANK ACCOUNT OF PAYEES; MEASURE TO ENHANCE TRANSPARENCY AND ACCOUNTABILITY IN PUBLIC DEALINGS OF THE CENTRAL GOVERNMENT AND ALSO USHER GREEN BANKING

As part of the Government’s commitment to good governance and elimination of corruption, the Ministry of Finance has amended the rules to enable all the Ministries and Departments to facilitate payments by direct credit to the bank accounts of the payees. Orders have also been issued by the Controller General of Accounts(CGA) that, with effect from 1st April 2012, all payments above Rs.25,000 to suppliers, contractors, grantee and loanee institutions shall be directly credited to their bank accounts. While the government servants shall continue to have the option to receive their salaries by cash or cheques, they could also opt to receive their salaries by direct credit to their bank accounts. However, all other payments to government servants of the amount of above Rs.25,000 shall be credited directly to their bank accounts. Further, all payments towards the settlement of retirement/terminal benefits of the government servants shall also be directly credited to their bank accounts. The Union Finance Minister Shri Pranab Mukherjee had recently inaugurated a “Government e-payment gateway” set-up by the Controller General of Accounts(CGA) which will be used by the Pay & Accounts Officers(PAOs) of the Central Civil Ministries/Departments for implementing the above measures. The Controller General of Defence Accounts (CGDA) would also be progressively using this e-payment gateway. The measure is expected to streamline the process of making payment by government departments while minimizing the interface of the payees with government offices to receive their dues. This e-payment government measure will enhance transparency and accountability in public dealings of the Central Government and also usher green banking by the Government.

IMF THIS WEEK

IMF Executive Board Begins Review of Quota Formula( Little big matter, but it is interesting)

Public Information Notice (PIN) No. 12/35 April 13, 2012 As part of an agreement on quota and governance reform, the Board of Governors in December 2010 called for a comprehensive review of the quota formula, to be concluded by January 2013.1 The review would be followed by discussions of the 15th General Review of Quotas, to be concluded by January 2014. As a first step, the Board discussed a staff paper that provided initial background for the quota formula review. The quota formula has served in the past as a guide to quota adjustments. The current quota formula, which replaced the previous five formulas in 2008, consists of four variables. Gross domestic product (GDP) has the largest weight (50 percent), consisting of a blend of GDP converted at market exchange rates (30 percent) and PPP-based GDP (20 percent). The other variables in the additive quota formula are openness, which measures the sum of current payments and receipts (30 percent weight); variability of current receipts and net capital flows (15 percent weight); and official foreign exchange reserves (5 percent weight). A compression factor (of 0.95) is applied to the weighted sum of these variables. The staff paper takes stock of the role of the quota formula and discusses the key principles underlying the formula and its main properties. Building on previous guidance by the Board of Governors and Executive Directors for further work, the paper analyzes, among others, the scope for measuring openness on a value added rather than a gross basis, the appropriate treatment of intra-currency union flows, options for capturing financial openness, and issues related to the measurement of variability and its ability to capture members’ potential need for Fund resources. The scope for capturing members’ different financial contributions to the Fund is also explored. In addition, illustrative simulations for the impact on calculated quota shares of some possible modifications to the formula are presented. Given the early stage of the discussions, no proposals are made.

Executive Board Assessment

Executive Directors welcomed the opportunity to initiate discussions on the quota formula review, which is to be concluded by January 2013. They recalled that the agreement to conduct a comprehensive review of the formula was an integral part of the quota and governance reform agreed in 2010. Directors stressed the importance of agreeing on a quota formula that better reflects members’ relative positions in the global economy for future discussions on the 15th General Review of Quotas. Most Directors agreed that the principles that underpinned the 2008 reform of the quota formula remain broadly relevant for the current review. These are that the formula should be simple and transparent, consistent with the multiple roles of quotas, produce results that are broadly acceptable to the membership, and be feasible to implement statistically based on timely, high quality, and widely available data. A few Directors suggested that these principles be reviewed, and updated as necessary. Directors also highlighted the need to ensure adequate voice and representation for the poorest members. A few urged consideration of a further increase in basic votes to protect the voice of smaller members. A number of Directors considered it important that the quota formula be sufficiently robust in order to minimize the need to rely on ad hoc mechanisms for determining quota shares, and a number viewed the Fund’s mandate as a guiding principle in designing the formula. Some Directors noted a decreasing relevance of quotas for access decisions.

Directors generally concurred that GDP is the most comprehensive measure of economic size and should continue to have the largest weight in the quota formula. A number of Directors held the view that this weight should be increased, with a significant minority of the Board favoring a formula with GDP as the only variable. While a few expressed a preference to keep the weight of the GDP variable in the formula unchanged, a few others felt that it should be reduced. A range of views were expressed on the relative importance of market versus PPP GDP in the GDP blend variable. While a number of Directors noted that the current weights reflect a difficult compromise and should not be reopened, others argued in

favor of either increasing or reducing the relative weight of PPP GDP. Those supporting a greater role for PPP GDP argued that it better captures the dynamism of emerging market and developing countries and is a more relevant measure of members’ weights from the perspective of the Fund’s non-financial activities; on the other hand, those supporting a higher weight for GDP at market exchange rates argued that PPP GDP continues to suffer from conceptual and methodological problems.

Many Directors noted that openness is a measure of members’ integration into the world economy and should remain an important variable in the quota formula, with a few favoring an increase in its weight. Many of these Directors saw merit in further exploring options for better capturing financial openness, with some also preferring an increase in its weight. Others noted that the existing openness variable overstates members’ integration into the global economy and is highly correlated with the GDP variable. They also pointed to data availability constraints and measurement difficulties, which hinder efforts to develop a better measure of openness in the near term. Some of these Directors therefore suggested that the openness variable should be dropped from the quota formula altogether, while a few suggested reducing its weight, and these Directors expressed doubts about the benefits of continuing work on financial openness.

Directors took note of the staff’s finding that there is little empirical evidence of a relationship between variability and potential demand for Fund resources. Many saw a case for dropping variability from the quota formula, while a few were of the view that its weight should be significantly reduced in favor of the openness variable. However, others continued to see an important role for variability in the formula, and asked staff to further explore measures that might better capture members’ underlying vulnerability. Most Directors considered that reserves remain an important indicator of a member’s financial strength and ability to contribute to the Fund’s finances, with some calling for an increase in its weight. However, a significant minority of the Board favored dropping reserves from the formula or reducing its weight, noting that this variable does not accurately reflect members’ ability or readiness to contribute to the Fund’s finances and could also reward excessive reserve accumulation.

Many Directors supported, or could support, further work on the scope for capturing members’ financial contributions to the Fund in the quota formula, either instead of, or as a complement to, reserves. A few noted in this regard that the current resource mobilization effort highlights again the importance of members’ financial contributions. Other Directors viewed the inclusion of voluntary financial contributions in the formula as inconsistent with the Fund’s role as a quota-based institution, with a few considering that such contributions should be taken into account, if at all, outside of the quota formula, as has been done on occasions in the past. Recognizing the difficult compromise in 2008 on the use of compression to moderate the role of size in the formula and better protect the voice of smaller members and low-income countries, many Directors supported retaining the compression factor, with a number seeing scope for increasing its role. On the other hand, a view was expressed that compression distorts countries’ economic weights and thus should be eliminated. Looking forward, Directors called on staff to reflect on the views expressed today as it prepares a follow-up paper for discussion in the period after the Spring Meetings. This paper should also report on the results of the next quota data update through end-2010.

WORLD BANK THIS WEEKChina Aims for Soft Landing, Says World Bank

BEIJING: A new World Bank report projects GDP growth in China will be 8.2 percent in 2012 and 8.6 percent in 2013. The China Quarterly Update, released today, says that the prospects for a gradual adjustment of growth remain high. “China’s gradual slowdown is

expected to continue into 2012, as consumption growth slows somewhat, investment growth decelerates more pronouncedly and external demand remains weak,” says Ardo Hansson, Lead Economist for China. “The risks of overheating are moderating, increasing the prospects to achieve a soft landing.”  The China Quarterly Update, a regular assessment of China’s economy, identifies as the key near-term policy challenge the need to facilitate a soft landing and sustain growth. Key risk factors include the weak and uncertain growth prospects of high-income economies and the evolution of the ongoing correction in China’s property markets.  Sufficient policy space exists to respond to downside risks, but any policy response would need to be carefully crafted keeping in mind longer-term effects and objectives. The Update notes that the burden of any policy response should in the first instance fall on fiscal policy, with measures supporting consumption first priority. Reserve requirements could be tweaked further to ease the availability of credit, but policy rate action should best be reserved for potential downside scenarios since real interest rates are already accommodative. Administrative measures have been helpful in cooling the property market. Looking ahead they should be substituted by market-based measures that raise the cost of capital and expand the range of investment opportunities. China’s longer-term outlook will depend on its management of central structural challenges. As the traditional drivers of growth weaken over time, GDP growth may gradually slow. Sustaining strong per capita income growth requires invigorating underlying fundamentals of growth, especially productivity improvement.  To enhance the scope for competition and to redefine the source of China’s competitive advantage from low cost to higher value on the strength of innovation will be key. In the past rapid growth and structural change has come at the price of economic, social and environmental imbalances. Looking forward it will be important to sustain the ongoing shift in focus from the rate of growth towards the quality of development.

BASLE THIS WEEK

Quantitative impact study results published by the Basel Committee

The Basel Committee published today the results of its Basel III monitoring exercise. The study is based on rigorous reporting processes set up by the Committee to periodically review the implications of the Basel III standards for financial markets. A total of 212 banks participated in the study, including 103 Group 1 banks (ie those that have Tier 1 capital in excess of €3 billion and are internationally active) and 109 Group 2 banks (ie all other banks). While the Basel III framework sets out transitional arrangements to implement the new standards, the monitoring exercise results assume full implementation of the final Basel III package based on data as of 30 June 2011 (ie they do not take account of the transitional arrangements such as the phase in of deductions). No assumptions were made about bank profitability or behavioural responses, such as changes in bank capital or balance sheet composition. For that reason the results of the study are not comparable to industry estimates.

Based on data as of 30 June 2011 and applying the changes to the definition of capital and risk-weighted assets, the average common equity Tier 1 capital ratio (CET1) of Group 1 banks was 7.1%, as compared with the Basel III minimum requirement of 4.5%. In order for all Group 1 banks to reach the 4.5% minimum, an increase of €38.8 billion CET1 would be required. The overall shortfall increases to €485.6 billion to achieve a CET1 target level of 7.0% (ie including the capital conservation buffer); this amount includes the surcharge for global systemically important banks where applicable. As a point of reference, the sum of profits after tax and prior to distributions across the same sample of Group 1 banks in the second half of 2010 and the first half of 2011 was €356.6 billion. For Group 2 banks, the average CET1 ratio stood at 8.3%. In order for all Group 2 banks in the sample to meet the new 4.5% CET1 ratio, the additional capital needed is estimated to be €8.6 billion. They would have required an additional €32.4 billion to reach a CET1 target 7.0%; the sum of

these banks' profits after tax and prior to distributions in the second half of 2010 and the first half of 2011 was €35.6 billion.

The Committee also assessed the estimated impact of the liquidity standards. Assuming banks were to make no changes to their liquidity risk profile or funding structure, as of June 2011, the weighted average Liquidity Coverage Ratio (LCR) for Group 1 banks would have been 90% while the weighted average LCR for Group 2 banks was 83%. The aggregate LCR shortfall is €1.76 trillion which represents approximately 3% of the €58.5 trillion total assets of the aggregate sample. The weighted average Net Stable Funding Ratio (NSFR) is 94% for both Group 1 and Group 2 banks. The aggregate shortfall of required stable funding is €2.78 trillion. Banks have until 2015 to meet the LCR standard and until 2018 to meet the NSFR standard, which will reflect any revisions following each standard's observation period. As noted in a January 2012 press statement issued by the Group of Governors and Heads of Supervision, the Basel Committee's oversight body, modifications to a few key aspects of the LCR are currently under investigation but will not materially change the framework's underlying approach. The Committee will finalise and subsequently publish its recommendations in these areas by the end of 2012. Banks that are below the 100% required minimum thresholds can meet these standards by, for example, lengthening the term of their funding or restructuring business models which are most vulnerable to liquidity risk in periods of stress. It should be noted that the shortfalls in the LCR and the NSFR are not additive, as reducing the shortfall in one standard may also reduce the shortfall in the other standard.

Peer review of supervisory authorities' implementation of stress testing principles

Stress testing is an important tool used by banks to identify the potential for unexpected adverse outcomes across a range of risks and scenarios. In 2009, the Committee reviewed the performance of stress testing practices during the financial crisis and published recommendations for banks and supervisors entitled Principles for sound stress testing practices and supervision. As part of its mandate to assess the implementation of standards across countries and to foster the promotion of good supervisory practice, the Committee's Standards Implementation Group (SIG) conducted a peer review during 2011 of supervisory authorities' implementation of the principles. The review found that stress testing has become a key component of the supervisory assessment process as well as a tool for contingency planning and communication. Countries are, however, at varying stages of maturity in the implementation of the principles; as a result, more work remains to be done to fully implement the principles in many countries. Overall, the review found the 2009 stress testing principles to be generally effective. The Committee, however, will continue to monitor implementation of the principles and determine whether, in the future, additional guidance might be necessary.

Rapid credit growth and international credit: Challenges for Asia

by Stefan Avdjiev, Robert N McCauley and Patrick McGuireWorking Papers No 377 April 2012

Very low interest rates in major currencies have raised concerns over international credit flows to robustly growing economies in Asia. This paper examines three components of international credit and highlights several of the policy challenges that arise in constraining such credit. Our empirical findings suggest that international credit enables domestic credit booms in emerging markets. Furthermore, we demonstrate that higher levels of international credit on the eve of a crisis are associated with larger subsequent contractions in overall credit and real output. In Asia today, international credit generally is small in relation to

overall credit - as was not the case before the Asian crisis. So even though dollar credit is growing very rapidly in some Asian economies, its contribution to overall credit growth has been modest outside the more dollarised economies of Asia.

INTERNATIONAL NEWS THIS WEEK (SELECTIVE/INDIAN CONTEXT ALSO)

China's Q1 economic growth falls to nearly 3-year low of 8.1%

BEIJING: China's economic growth fell to its lowest level in nearly three years in the first quarter but analysts said the economy should rebound in coming months. Growth in the world's second-biggest economy declined to a still-robust 8.1 per cent in the three months ending in March, data showed Friday. That was down from the previous quarter's 8.9 per cent and the weakest rate since the second quarter of 2009. China's rapid growth has declined steadily since 2010 as a slump in global demand battered its exporters and Beijing tightened lending and investment curbs to cool an overheated economy and surging inflation. An uncontrolled slump could have global repercussions, hurting demand for oil, industrial components and consumer goods at a time when US and European growth are weak. It also might fuel political tensions in China as the ruling Communist Party prepares for a sensitive, once-a-decade handover of power to younger leaders. ``This quarter's growth was pretty weak,'' said IHS Global Insight analyst Xianfang Ren. ``Starting from next quarter, growth should strengthen.'' The World Bank and private sector analysts expect China to achieve a ``soft landing,'' with growth rebounding later this year. But some worry growth might fall too abruptly, raising the risk of job losses. Last year's unexpectedly sharp plunge in demand for China's exports due to U.S. and European economic woes prompted communist leaders to reverse course and ease controls on bank lending to help struggling manufacturers.

Iffco Tokio infuses Rs 125 cr capital to fund expansion

NEW DELHI: Private sector general insurer Iffco Tokio today said it has made fresh capital infusion of Rs 125 Cr. to fund expansion. With this, the total capital infusion by promoters stands at Rs 526.2 Cr. at March 2012, Iffco Tokio General Insurance said in a statement. "At a time when the insurance market is both competitive and growing, we have plans to increase market share and sustain profitable growth," Iffco Tokio managing director S Narayanan said. The infusion has come from Indian and foreign promoters in respective proportion of their share holding, it said, adding that Iffco and its associates hold 74 per cent stake in the general insurance venture while the remaining 26 per cent is with Japan-based Tokio Marine Asia Private Ltd.

JPMorgan reports lower net income

JPMorgan Chase & Co reported lower first-quarter profit, but higher earnings per share after the company bought back stock. The biggest U.S. bank by assets, JPMorgan said on Friday that net income was $5.4 billion, or $1.31 a share, compared with $5.6 billion, or $1.28 a share a year earlier. The company's quarter-end share count declined 4 percent from a year earlier as it bought back stock.

Bernanke says banks need bigger capital buffer

Federal Reserve Chairman Ben Bernanke said on Monday banks need to have more capital at hand in order to ensure the financial system is stable. Bernanke said regulators were taking steps to force financial institutions to hold higher capital buffers, even if they allow for

a long period of implementation to prevent any market disruptions. "We need to have higher capital, and that's what Basel III does," he said in response to questions at an Atlanta Fed conference, referring to the latest international effort to tighten bank oversight. "That's essential for a stable financial system." Bernanke made the comments the same day that an international bank lobby group, the Institute of International Finance, urged policymakers to pause in regulating the industry. Toughened capital standards, new liquidity requirements and rules that limit activities all restrict banks' ability to provide businesses and households with the credit needed to lift economic growth, the IIF said in a letter to central bankers and finance ministers. Whether big banks have sufficient levels of capital to protect against possible losses has been an ongoing source of contention. A call by the head of the International Monetary Fund, Christine Lagarde, last year for European banks to raise up to euro 200 billion in new capital was quickly rejected by European politicians. In his prepared remarks on Monday, Bernanke said the U.S. economy has yet to fully recover from the effects of the financial crisis, and regulators must continue to find new ways to strengthen the banking system.

Qatar Investment Authority looks to invest $10 billion in India

NEW DELHI: Qatar Investment Authority, the Gulf state's sovereign wealth fund, is looking to invest up to $10 billion in India every year, according to its executive director Hussain Al Abdulla. The authority, whose investment portfolio includes iconic brands like Harrods, Sainsbury, Volkswagen, LVMH and Porsche, had invested $29 billion globally last year. "I am interested in anything that is consumer focus and that yields profits," said Abdulla, who is in India as part of the delegation accompanying Qatar's Emir, Sheikh Hamad bin Khalifa al-Thani. Outside Qatar, the authority has opened offices only in Paris, China and India. This Abdulla said reflected the weightage his company gave to India as an investment destination. However, in the past five years the authority has invested only about $500 million in India and that too in the stock markets. In comparison, it has invested more than $30 billion in Germany and over $6 billion in China. "Even on a yearly basis, I am willing to invest up to $10 billion here," Abdulla said, adding that Qatar was waiting for the Indian government to facilitate foreign investors like QIA to take up huge projects. "I don't understand this business environment very well. It is a little complicated when it comes to issues like regulation and relationship between private sector and the government," he said, adding, "Government policies need to change." Abdulla is pinning his hopes on India's huge middle-class and the consumption growth in the market.

Swiss court blocks handout of bank data to US

A top Swiss court ruled Switzerland may not hand over the bank details of a Credit Suisse client to US tax authorities, in a potential setback to solving a dispute between the two countries. Switzerland and the United States have for years been locked in a conflict over the fact that wealthy Americans are dodging taxes by hiding money in Swiss accounts. Washington is pressuring banks in Switzerland to divulge their names and financial details. In a ruling published on Wednesday that cannot be appealed, Switzerland's Federal Administrative Court said the tax office was not allowed to hand over information on a Credit Suisse client to the US Internal Revenue Service because its request was based solely on a suspicion of tax evasion and did not include the bank account holder's name. Unlike most countries, Switzerland has distinguished between tax fraud, which is illegal, and tax evasion, which is not. Under a new deal, which has yet to be ratified by the United States, Switzerland would assist US authorities in cases of tax evasion as well as tax fraud. Eleven Swiss banks including Credit Suisse and Julius Baer are under investigation in the United States for aiding US citizens who are suspected of dodging taxes. Switzerland is trying to get the investigations dropped in return for the payment of fines and the transfer of US client names and is also seeking a deal to shield the remainder of its 300-odd banks from US prosecution.

Flagship bank UBS in 2009 was forced to pay a fine and release the names of 4,500 clients to US officials as the government was forced to bend Switzerland's long-cherished secrecy laws, which have underpinned its large financial sector. The deal over UBS data was later upended by a Swiss court, citing a breach of bank secrecy, forcing the government to turn to parliament to push the deal through.

South Korea's central bank freezes key interest rate

SEOUL: South Korea's central bank Friday said it froze the benchmark interest rate at 3.25 percent for April, leaving the 7-day repo rate unchanged for 10 straight months. The Bank of Korea (BOK)'s decision was in line with market consensus as experts predicted the rate freeze due to conflicting factors such as resurfacing downside risks to the economy and the remaining inflationary pressures, reported Xinhua. The BOK has lifted the borrowing costs by a total of 125 basis points (bps) in five steps to 3.25 percent since July 2010 in a bid to curb inflation. Before that, the central bank lowered the key rate by 325 bps to a record low of 2 percent following the 2008 global financial crisis.

Singapore's economic growth in Q1 faster than expected

SINGAPORE: Singapore's economy grew by a faster-than-expected 1.6 per cent year on year in the first quarter, mainly thanks to improvements in the manufacturing sector, according to advance estimates released Friday by the Ministry of Trade and Industry. On a seasonally-adjusted quarter-on-quarter annualized basis, the economy grew by 9.9 per cent, a reversal from the contraction of 2.5 per cent in the previous quarter, reported Xinhua. The manufacturing sector expanded by 14.7 per cent from the previous quarter, compared to the 11.1 per cent contraction in the previous quarter. On a year-on-year basis, the manufacturing sector contracted by 2 per cent due to high base effect. The construction sector grew by 6.2 per cent year on year, while the growth in the services industries remained modest at 2.9 per cent. On a quarter-on-quarter basis, the construction sector surged by 24.6 per cent, while the services sector expanded by 6.9 per cent.

Investors scared of Spain's battered banks

Spain's banks are fast joining the ranks of the most unloved in Europe, just as many need to raise capital urgently, deserted by investors who believe the country is on the brink of a recession that many lenders will not survive. The government has ruled out more state aid for a sector that comprises a motley mix of international lenders and heavily-indebted local savings banks. That leaves two options - raising private capital or turning to the EU for bailout funds. Prospects for a private sector solution are poor. Nothing on the horizon looks likely to persuade foreign fund managers to invest, such is the fear of the banks' growing bad loans, their holdings of shaky sovereign debt and the worsening economy. Already battered by a property market crash that began four years ago and continues unabated, few Spanish banks are able to borrow funds on wholesale credit markets and the majority are instead relying on the European Central Bank (ECB). "Most are currently on liquidity life support from the ECB but asset quality continues to deteriorate as house prices keep falling and unemployment is still rising," said Georg Grodzki, head of credit research at Legal & General Investment Management. "Their funding remains constrained and competition for deposits intense," he said. Economy minister Luis De Guindos said last week all Spanish banks had met capital requirements set by the European Banking Authority under a 115-billion-euro recapitalisation plan decided by European Union leaders in December.

Switzerland can't offer more to Germany: Swiss Finance Minister

ZURICH: Switzerland cannot make further concessions to Germany and the United States in a dispute over untaxed funds in secret bank accounts, Swiss Finance Minister Eveline Widmer-Schlumpf was quoted as saying in a newspaper interview on Friday. "With Germany we're at a point at which we say, if the partner doesn't want this agreement then the status quo is the better alternative for us than to negotiate still further," she told the Neue Zuercher Zeitung. "Also in the talks with the USA there's a threshold beyond which we cannot go as a sovereign state." She said Switzerland still hoped to reach a solution with the United States later this year. Switzerland has already revised the terms of a deal with Germany, designed to regularise untaxed funds hidden by its citizens, after opposition by left-of-centre German politicians.

EU lawmakers may seek ban on bank bonuses

Lawmakers in the European Parliament may seek a ban on banker bonuses that exceed fixed pay, as part of a draft law on Basel capital rules. "We are looking at a set limit" on the size of bonuses compared to fixed salary, Othmar Karas, the lawmaker leading work on the rules, said at a meeting of the body's economic and monetary affairs committee. This limit should be set at "100 per cent, so one-to-one," he said on Thursday. Karas said he's seeking a deal between the legislature's different political groups as part of a compromise on the draft law. He had previously suggested finance workers' bonuses be capped at twice their base pay. Labor leaders and politicians have criticized bank-bonus awards as out of touch with economic reality. Royal Bank of Scotland Group Plc chief executive officer Stephen Hester this year waived his £963,000 ($1.5 million) bonus after the UK's opposition Labour Party said it would ask the national Parliament to vote on the award at the bailed-out lender. Michel Barnier, the EU's financial services chief, has said he is considering proposing extra rules on bonuses in response to payouts that go against "all reason, common sense and morality."

Asian Development Bank projects 7% GDP growth for current fiscal

NEW DELHI: India's economy is likely to remain sluggish this fiscal and pick up momentum only in 2013-14, the Asian Development Bank has said, urging the government to fast-track reforms and address constraints that have held back investments. The Manila-based bank has forecast 7% growth for the country in the current fiscal and 7.5% the next year. "The outlook is for a moderate pick up," says a report released by the bank on Wednesday, projecting 6.9% growth for the just-concluded fiscal. "An expected easing in monetary policy after a long period of persistent inflation and rate hikes might help stimulate investment over the coming year, but its impact is likely to be limited until obstacles like land purchase and environmental regulations, which are currently deterring both domestic and foreign investors, are addressed," said Changyong Rhee, ADB's chief economist. Though the bank's forecast lags the government's expectation of 7.6% growth in the current fiscal, the report warns that even this projection is subject to risks such as deterioration in the Eurozone, poor monsoon, fiscal slippage and a continued policy logjam. The report has flagged the "growing sense of a national policy paralysis" because of the lack of political consensus on key issues as one of the primary reasons for the deceleration in investments.

Bernanke sees need for more curbs on shadow banking

Federal Reserve chairman Ben S Bernanke called on regulators to stem risks from "shadow banking" operating beyond traditional oversight and favored steps to promote the "resiliency" of money market funds. "An important lesson learned from the financial crisis is that the growth of what has been termed 'shadow banking' creates additional potential channels for the propagation of shocks through the financial system and the economy," Bernanke said on Tuesday in a speech in Stone Mountain, Georgia. Bernanke also called for close tracking of

financial innovation and backed curbs on intraday credit in tri-party repo markets. While not specifying what steps he supports to increase stability among money market funds, he referred to Securities and Exchange Commission proposals to require firms to maintain capital buffers or to redeem shares at the market value of underlying assets rather than at a fixed price of $1. Congress, under a 2010 regulatory overhaul known as Dodd-Frank, mandated the Fed to safeguard stability partly by monitoring firms whose collapse may provoke turmoil across financial markets. The law is aimed at averting a repeat of the credit crisis that was triggered by the collapse of US mortgage finance and deepened by the failure of Lehman Brothers Holdings Inc. in 2008. "About three and a half years have passed since the darkest days of the financial crisis, but our economy is still far from having fully recovered from its effects," Bernanke said in his only reference to the economy's current condition. He didn't refer to current monetary policy. US stocks fell on Tuesday and yields on 10-year Treasuries slipped as job creation in the world's biggest economy trailed estimates last week. The S&P 500 lost 1.1 per cent to 1,382.20 in New York. The yield on the 10-year Treasury note fell to 2.047 percent from 2.054 per cent on April 6.

14.04.2012

BY VASANT PONKSHE, SECRETARY, AIBOA MOBILE 9422319827

R J Shridharan Alok Khare S. S. Shisodia S. Nagarajan Chairman, AIBOA. Vice Chairman, AIBOA. President, AIBOA. General Secretary, AIBOA