samachar lehar march 2012 issue

Samachar Lehar Samachar Lehar (A monthly update of Banking News)

March 2012 March 2012 issueissue

22th March, 2012

From General Manager & Principal's Desk

It has been said that Information is power. Information in important to individuals and organizations, and therefore the need to manage it well, is growing rapidly. Now more than ever, we need to understand the critical role information plays in so many aspects of business and life. It drives our communication, our decision-making, and our reactions to the entire environment.

Information is vital to communication and a critical resource for performing work in organizations. For updating ourselves, we have to regularly gather process and disseminate information. Managing information also involves coping with a myriad of information sources and ultimately making decisions about what to do with it. However, because of our very busy schedule, we miss some vital information. Hence, we are bringing out Samachar Lehar, latest being March 2012, which gives you the latest happening in Banking World.

I request all the readers to make the best use of the latest issue of Samachar Lehar March 2012 issue, which is before you and come out with you views for further improvement of the publication With Best Wishes,

V.K. Shukla General Manager and Principal

Samacher Lehar- March 2012 Issue

Sl. No Topic/ Sub-Topic Page No. 1. Our Bank in News 01 2. Monetary Policy 2011-12 Contextual Significance ofThird Quarter Review 05 3. Khas Baat 14 4. Agriculture and Other Priority 21 5. Basel 24 6. Bonds & Money Market… . 26 7. Plast ic Money 26 8. Credit Growth 27 9. Economy 32 10. Financial Inclusion & MFI 33 11. Minsitry of Finance 34 12. Forex Inflows 36 13. Housing Worries 37 14. Human Resources 39 15. Inflat ion 43 16. Infrastructure 43 17. Insurance 44 18. Liquidity 46 19. Mutual Funds & Capital Market 48 20. NPA 51 21. Other Banking News 57 22. Overseas Aspirat ions 62 23. RBI Direct ives & Guidelines 63 24. ` Movement 66 25. Technology 67 26. Indian Banking - Journey into the Future 69

27. Price Stability, Financial Stability and Sovereign Debt Sustainability Policy Challenges from the New Trilemma 81

28. Monetary Policy, Sovereign Debt and Financial Stability : The New Trilemma 95

29. Empowering MSMEs for Financial Inclusion and Growth- Role of Banks and Industry Associations 99

30. Understanding Psychology for Responsible Financial Behaviour 109 31. The Reserve Bank of India : Pulling every lever 115 32. Indian Banking Sector : Towards the Next Orbit 119 33. Moving towards Technology Led Excellence in Banking 130 34. Governance Deficit and Financial Crisis 137 35. Report of the Nair Committee on Priority Sector Lending 145

36. Interview of RBI Governor, Dr. D Subbarao by Alex Frangos of The Wall Street Journal 146

37. Agriculture Agenda for Odisha - Issues & Challenges 155 38. BCSBI, Customer Service and Consumer Protect ion-Issues and Challenges 173 39. Nabard encourages banks for warehousing finance 181 40. RBI may consider paring 40% priority sector target for commercial banks 182

41. RBI asks Banks to Closely Monitor unhedged Forex Exposures of Cos 183

42. Finance ministry opposes RBI's view to stretch priority sectors lending list 183

Canara Bank Samachar Lehar March 2012

Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon

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43. Micro branches to cater to rural areas 184 44. RBI to meet banks soon on issue of rising bad loans 185

45. Banks told to give Subsidised Post-harvest Loans to Farmers FinMin asks PSBs not to overstate profit 186

46. FinMin asks PSBs not to overstate profit 186 47. Capital support assured for public sector banks 187 48. Finmin may Dilute RBI Panel's Proposed Harsh NBFC Rules 188

49. Banks must exercise strict norms while giving education loans under mgmt quota : banking body IBA 190

50. Foreign Banks Should Step Up Priority Lending 190 51. DGFT for nominated agency status to gold refiners 191 52. Government mulls PSU banks to cut loan rates by March 192

53. E-Payment for social schemes : Finance Ministry asks Banks to Change Fund transfer process to check Fraud 193

42. Key Banking Indicators 194



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OUR BANK IN NEWS

Canara Bank hopes to improve credit growth, NIM next fiscal: With early signs of improvement in the market sent iments and talks of a likely cut in the Cash Reserve Rat io (CRR), public sector lender Canara Bank is now hoping to get back to a Credit Deposit Rat io (CDR) of around 72 per cent from the present 69 per cent . This apart , the bank is ant icipat ing a rise in net interest margin (NIM) to 2.9 per cent in the next fiscal from the current 2.6 per cent . In the given condit ions, we were deliberately going slow and there was hardly any capex this year. Market sent iment has suddenly improved and logically one or two CRR cuts would come. Credit demand would be much more higher next year, Sri S Raman, C&MD of Canara Bank, said. At tribut ing the sudden rise in NPAs to migrat ion to system generated mode, Sri S Raman said the bank was in full control of the credit port folio including NPAs and had almost zero exposure to MFIs and a very minimal exposure to the aviat ion sector. “Especially, we have no exposure to the companies that are in the news, he said referring to Kingfisher Airlines. Stat ing that there was an improvement even in the restructured credit port folio, he said the bank would be collect ing ` 3,000 crore from the NPA port folio this year as compared with ` 2,000 crore in the previous year. (BS dt 23.02.2012 p.5) (Related news also appears with photo in p. 12 of today’s DC, p. 12 of NIE, p. 6 of BL. News item appears in p. 20 of The Hindu, p. 13 of DNA, p. 12 of ET) CanBank ups rate on tax - saver scheme: Canara Bank has revised upwards interest rate on Canara Tax Saver Deposit Scheme (tax Saving Deposit ) from February 11, 2012. The bank offers an interest rate of 9.25% for five years Tax Saving Deposit with an effect ive yield of 17.17%. It has also revised upwards interest rates on domest ic term deposits. (BS dt 11.02.2012 p.5) (For Details refer Cir 43/ 2012 & 44/ 2012) All India Faculty Conference 2011-12: All India Faculty Conference 2011-2012 was inaugurated by our ED Sri A K Gupta, at RSTC Gurgaon on 27.02.2012 in the presence of Sri V K Shukla, GM& Principal, STC and Sri T Sreekanthan, GM, CO, Delhi. During the funct ion, Training Compendium for the year 2012-13 and a pocket booklet on Retail Lending products were released by ED. Awards for best performing Regional Staff Training colleges were distributed.RSTC Gurgaon was adjudged as the best RSTC followed by Chennai and Bangalore RSTCs (Source :RSTC Gurgaon) Social Action: Our CED for Women, HO,Bangalore organised a 15 days skill development t raining in "Fabric Paint ing" from 12th Jan to 1st Feb 2012 for Minority Muslim Women, at Jame-Ul-Uloom Tailoring Centre, Jamia Masjid, Bangalore. Sri K S Prabhakara Rao, GM, PC Wing, HO, Bangalore presided over the valedictory funct ion. Smt M M Bindu, Joint Director, Women & Child Welfare Department, Govt of Karnataka was the chief guest . 33 Women were benefited by the said t raining programme. (PC Wing, HO, Bangalore)



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Vigilance Study Circle: 4th Anniversary of Vigilance Study Circle was celebrated on 6th Feb 2012 at Bangalore. Vigilance Study Circle comprises of Execut ives from various public sector undertaking, nat ionalised banks and other government organisat ions. Speaking at the event, Canara Bank C&MD Sri S Raman, urged the VSC-Bangalore, to focus more on understanding the reasons and contribut ing factors behind wrongdoings in companies and to come up with procedures and systems to prevent them. He also suggested that measures should be taken to ensure that people who work with honesty, be protected. The Chief Guests were Sri Pradeep Kumar, CVC, New Delhi and Sri R Srikumar, Vigilance Commissioner, New Delhi. Padmashri Dr S Subramanian also graced the occasion. Canara Bank co-ordinated the event. (Vigilance Wing, HO & DH p. 15) Canara Bank face RWF in final clash: Canara Bank will lock horns with Rail Wheel Factory Sports Associat ion in the day-night final of the Dell-KSCA Group II Division I Super League tournament at the Chinnaswamy stadium on Wednesday. In their final league matches, Canara Bank defeated Central Excise and Customs by ten wickets, while RWF overpowered DTDC Sports Club by 144 runs. Canara Bank, whose only loss in the six-team league came at the hands of DTDC, finished on top with eight points, while RWF were involved in a three-way t ie for the second spot with State Bank of Mysore and Vijaya Bank. RWF made it through to the final by virtue of having a superior net run rate. (DH dt .08.02.2012 p8) CRICKET: Veteran Sunil B Joshi dished out an all round show to guide Canara Bank to a victory over Rail Wheel Factory in the final of the Dell -KSCA Group II, Division I Super League at the M Chinnaswamy Stadium on Wednesday. In the day/ night t it le clash, Canara bat ted first and posted 267/ 6 in the st ipulated 50 overs with southpaw Joshi top-scoring with a fiery 34 ball 61 laced with five fours and three maximums. Bharath Chipli (45), C. Ragh (42) too made vital contribut ions with the willow to prop up the Bank men's total. (DC dt 10.02.2012 p.14) Mega Rural Outreach Programme: In a glit tering funct ion at Kolar, 32 branches of Pragathi Gramin Bank and 3 Ult ra Small Branches of Canara Bank were declared open by the Honourable Union Minister of State for Finance, Shri Namo Narain Meena in the presence of Shri K H Muniyappa, Honourable Union Minister of State for Railways and Smt. Archna S Bhargava, Execut ive Director, Canara Bank. A host of other activit ies included distribut ion of Smart Cards, Kisan Credit Cards, General Credit Cards and SHG credit linkage, declarat ion of 4 villages of Canara Bank and 3 villages of PGB as ‘Sampoorna Solar Villages’ and launching of e-products – ATM cards and NEFT facility by the Gramin Bank. Nearly 2000 people part icipated in the programme. Canara Bank has opened nearly 200 financial inclusion branches and about 300 rural branches all over India. The Bank is planning to open 100 such ult ra-small branches during 2012. With the opening of 32 new branches, the Pragathi Gramin Bank has achieved the milestone mark of 400 Branches (News item appears in BS dt 13.02.2012 p.5) (SP&D Wing, HO, Bangalore)



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PRCI Awards: Our Bank has won 5 Awards inst ituted by the Public Relat ions Council of India (PRCI). PRCI held the “6th Global PR Conclave 2012” at Mumbai, where, the Corporate Collateral Awards for 2012 were announced. Our bank was awarded the following five awards in recognit ion of its outstanding services and key contribut ions made to the profession, industry and society at large :- SILVER : Corporate Advert isement – Single Language. BRONZE : Shreyas – In-House Magazine English Annual Report Corporate Brochure on CSR activit ies Corporate Advert isement – Single These awards were given away in a glit tering funct ion by Mr.Iqbal Haider, Ex-Law Minister of Pakistan. Dr.S T Ramachandra, AGM, SP&D Wing, HO, received the awards on behalf of our Bank. Further, the PRCI announced the induct ion of Dr.S T Ramachandra, AGM, into the prest igious PRCI Hall of Fame in PR-2012 for Communicat ion Professionals. This was conferred on him by Shri H K Dua, Member of Parliament. (CC & PR SECTION, SP&D Wing HO) Sports: Canara Bank Sports Council has been conducting Sports Compet it ion for the employees working at Head Office and City branches/ offices at Bangalore. Athlet ic event is being held on 19.02.2012 at Kanteerava Stadium at 8.30.AM. Our C&MD Sri S Raman will grace the occasion. (PM Section, HR Wing, HO) Free dental checkup camp for head office staff: Social Banking Cell, HO has arranged for a free Dental Checkup Camp for the benefit of HO staff on Saturday, the 25th February 2012. M/ S Narayana Hrudayalaya Dental Clinic, India’s largest Dental Care Centre, would be co-ordinat ing the checkup camp. They would render free Dental Checkup and free Oral Hygiene counselling. (Soicial Banking Cell, PC Wing, HO) Harbinger of positive sentiments: Tuesday’s monetary policy could well be the harbinger of posit ive sent iments, bankers told Business Line. The policy’s focus is on liquidity management, said Mr S. Raman, Chairman and Managing Director, Canara Bank. The RBI has projected inflat ion levels to be around 7 per cent by March this year.”If it’s not close to the zone of comfort , and liquidity cont inuing to be t ight , there could be more act ion on the CRR front ,” he said. If the target rate is achieved, “they could fleet ingly consider act ion on repo rates,” he explained. The reduct ion in CRR and the resultant infusion of ` 32,000 crore into the system is a “good posit ive” for the banking system, he said. (BL dt .25.01.2012 p7) Canara Bank unveils portal for implementing girl education scheme: Canara Bank has developed a new web portal in partnership with the ministry of Human Recourse Development for implement ing the Nat ional Scheme of Incent ive to Girls for Secondary Education (NSIGSE). The programme will be launched today in New Delhi by the Minister of State for Human Recourse Development, Ms. D Purandeshwari. An amount of `. 3,000 is deposited by the Ministry in the name of the eligible students at the



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t ime of enrolment to Class IX. After successful complet ion of Class X and at taining 18 years of age, the amount along with accrued interest will be automat ically credited to the accounts of the students through the Web Portal developed by Canara Bank. (BL, dt . 28.02.2012, p6) RBI shifts focus to growth, cash management: "RBI prefers systemat ic liquidity to be in deficit mode for bet ter and more effect ive monetary t ransmission; liquidity deficit of such a high order is clearly beyond the comfort zone of RBI. Hence, the infusion of ` 32,000 crore into the banking system. This would induce banks to cut rates, part icularly in interest-sensit ive segments, such as, housing and auto." (Excerpt from the article which appears in p. 9 of 31st Jan 2012 Financial Chronicle written by Dr Manoranjan Sharma, DGM & Chief Economist of our bank, SP&D Wing, HO)



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Monetary Policy 2011-12 Contextual Significance of

Third Quarter Review Dr Manoranjan Sharma

The broad object ives of monetary policy in India relate to maintenance of a reasonable degree of price stability andadequate expansion of credit to foster faster growth. But the relat ive emphasis on these object ives differs because of varying socio-economic requirements and priorit ies, level of development, etc. On an analysis of various macroeconomic parameters, such as, inflat ion, liquidity, economic growth, industrial growth, banking development, fund inflows, the RBI adapts its key policy levers - repo rate, reverse repo rate, cash reserve rat io (CRR) to achieve the central banking object ives. Historically, some of the basic concerns of monetary policy in India relate to price stability, adequacy, t imelinessand cost of credit , liquidity and the external sector. Ult imately, monetary policy must be evaluated in anintegrated framework in terms of the inter-relat ionship among money, credit , output and prices. Monetary policy is the process by which the government, central bank, or monetary authority of a country controls the supply of money, availability of money, and cost of money or rate of interest , to attain pre-determined object ives of growth and stability. Monetary policy is generally referred to as either being an expansionary or a contractionary policy. While an expansionary policy increases the total supply of money in the economy, a contract ionary policy decreases the total money supply.Expansionary policy is t radit ionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy has the goal of raising interest rates to combat inflat ion (or cool an otherwise overheated economy). Despite several variat ions, monetary policy is essent ially aimed at st rengthening the financial system, streamlining the credit delivery mechanism and inst itut ional improvements to support growth consistent with stability in a medium-term perspective. Further, the issue of financial stability in the context of st ronger linkages between various segments of the financial markets including money, Government securit ies and forex markets has also now emerged as an important concern of monetary policy. Macro-economic growth While slashing CRR by 50 bps to 5.50 percent with effect from January 28, 2011, the RBI left the repo and the reverse repo rates unchanged at 8.5 percent and 7.5 percent, respect ively. Boost ing domest ic growth and reducing huge systemic liquidity deficit emerged as key policy concerns.



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According to CSO's est imates of nat ional income, India's economy grew by 6.9 percent in the second quarter of FY12. While there has been a steady decelerat ion for 6 quarters because of the combined impact of the uncertain global environment, the cumulat ive impact of 13 policy Quarterly GDP Growth (%)

hikes between March 2010 and October 2011 and domest ic policy uncertainty, this is the lowest growth since March 2010 in Asia's third-largest economy. Cumulat ive GDP growth in the first half of 2011-12 moderated to 7.3 percent because of slowdown in manufacturing (2.7 percent) and construction (4.3 percent) sectors and contract ion in mining (-2.9 percent) sector. It is, however, necessary to have a sense of balance and proport ion because Joseph St iglitz characterised 7 percent growth this year an ‘achievement’ in a global downturn. Despite its socioeconomic and fiscal problems, Professor Nouriel Roubini st ressed that India is bet ter placed than other BRIC countries. Growth of eight infrastructure industries (coal, crude oil, natural gas, refinery products, fert ilisers, steel, cement and electricity) also slowed down to 0.1 percent in October 2011 from 7.2 percent growth in the same period last year. The growth, however, improved to 6.8 percent in November. Global economic recovery is threatened by intensifying strains in the euro area and fragilit ies elsewhere. As the Internat ional Monetary Fund (IMF) stressed ‘Financial condit ions have deteriorated, growth prospects have dimmed and downside risks have escalated’ leading to reduct ion in world economic growth from 4 percent projected earlier to 3.8 percent in 2011. Further, there are disconcert ing global developments with fragile growth in the US and the spread of the Euro crisis from Greece, Portugal and Ireland to larger economies like Italy, Spain and possibly France also leading to the persist ing threat of a global financial shock ‘similar in magnitude to the Lehman crisis’. India’s t rade linkages with the advanced economies are certainly smaller than those of other emerging economies. But a percept ible slowdown in global t rade will debilitate manufacturing and service sectors through the usual exports, financing and confidence channels. Since Euro Zone accounts for nearly 15 percent of India’s



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merchandise exports, this worrisome concern would significant ly widen t rade deficit beyond $150 billion and foreign investments to India would also be hit . The policy stance, which ‘has now shifted to growth’, is bjust ified because of the globally synchronised moderat ion in growth, increased stress on financial markets and reinforcing of domest ic factors, eg, slackening industrial growth and in some of the services sector, high fiscal deficit because of higher subsidies and lower tax collect ions, widening current account deficit , fall in investments, moderat ion in capital flows and the change in the nature of capital flows in favour of debt by global linkages. Inflation While India’s inflat ion is the fastest among the BRICs, WPI inflat ion eased to a two year low of 7.47 percent for December 2011 (inflat ion dropping below the 9 percent level first t ime in 13 months) as against 9.11 percent in November 2011 and 9.45 percent in November 2010 because of a sharp drop in food inflat ion. Prices of food items increased at a lower rate of 0.74 percent in December 2011, compared to 8.54 percent increase in December 2010. Inflat ion in overall primary art icles stood at 3.07 percent in December 2011 compared to 8.53 percent in November 2011. However, inflat ionary pressure cont inued in manufactured items with a weight of 64.97 percent. Prices of manufactured products rose by 7.41 percent year-on-year in December 2011. Inflat ion in the fuel and power segment stood at 14.91 percent in December 2011 compared to 15.48 percent in November 2011. Food Inflation

WPI inflat ion for October 2011 was revised upwards from 9.73 percent to 9.87 percent. Food inflat ion rate, which cont inued to be in the negat ive territory for the third consecut ive week, stood at -0.42 percent for the week ended January 7, 2011 because of downtrend in prices of essent ial items, such as vegetables and wheat. The moderat ion in food inflat ion is expected to reduce overall inflat ion rate for the month of January 2011. But downward ‘st ickiness’ in inflat ion is likely to persist for some more t ime because of inadequate ‘pass-through’ effects of global commodity prices, especially oil. Overall



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inflat ion could reach only about RBI’s project ion of 7 percent by March 2012 – st ill well above the comfort zone of 5-5.5 percent. While the Sukhmoy Chakravarty Committee (1985) gave 4 percent definit ion of inflat ion rate as tolerable for India, recent statements by Dr C Rangarajan, Chairman, Prime Minister’s Economic Advisory Council suggest that 5-6 percent inflat ion could be accepted. Deposit growth Outpaced Credit Growth for the third consecutive week

Industrial growth The Index of Industrial Product ion (IIP) for November 2011 stood at 5.9 percent (negat ive growth of 5.1 percent in October 2011) because of improved performance of manufacturing, consumer durables and consumer nondurables segments. Manufacturing output , which const itutes 76 percent of overall industrial product ion, grew by 6.6 percent in November 2011. However, capital goods sector and mining index cont inued to be negat ive. Capital goods growth stood at -4.6 percent in November 2011 as against a growth of 25.7 percent in November 2010; mining grew by -4.4 percent against 6.9 percent y-o-y. The growth rates in November 2011 over November 2010 were 6.3 percent in Basic goods and 0.2 percent in intermediate goods. The cumulat ive growth in IIP for April- November 2011 was 3.8 percent as against 8.4 percent for the corresponding period last year. Despite the high degree of volat ility in monthly figures and the quality of data, part icularly in the capital goods sector, the contract ion in capital goods sector both in November 2011 and cumulat ively for April-November 2011 causes concern. Deposit and credit growth in the banking system Deposit growth Outpaced Credit Growth for the third consecut ive week. As on December 30, 2011, bank credit grew by 15.9 percent (24.5 percent last year) and deposits grew by 16.9 percent (16.8 percent last year).



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On top of lowering of non-food bank credit growth project ion from 19 percent to 18 percent in the First Quarter Review, the RBI now slashed credit growth to 16 percent because of slowing demand for credit and increased risk aversion caused by spike in bad loans and squeeze on profit margins. The RBI will maintain the kind of systemat ic liquidity that would ensure adequate credit to the product ive sectors without exacerbat ing the price spiral. Credit growth this year will be powered by agriculture and allied act ivit ies, MSMEs, retail and an accent on infrastructure. However, due diligence needs to be made on prudent pricing and exposure level in credit st reams. Banks need to make continued efforts to rebalance credit port folio, ensure ut ilisat ion of un-availed credit limits, be prudent in exposure to sensit ive segments, adopt effect ive and market -led credit pricing and strengthen credit market ing funct ions. Bond yield The benchmark 10 year yield is t racking the developments on the inflat ion front and the interest rate movements. India’s 10-year bonds gained the most in six months after RBI refrained from raising interest rates for the first t ime in eight meet ings as economic growth moderates. On January 20, 2012, the yield on the 10-year benchmark bond closed at 8.17 percent.

Rupee The rupee has been falling since August 2011 on sustained dollar demand from banks and importers. The rupee depreciated nearly 17 percent from July 2011. Rupee is depreciat ing on worries of European debt crisis, flow of funds to safe-havens, higher dollar demand from oil importers and a slide in equity markets. Rupee closed at 50.23 per dollar as on January 20, 2012. Liquidity scenario



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Liquidity constraints persist in the banking system as overnight borrowings from RBI exceeded to INR 1 lac crore on several days. RBI’s aggressive buying in Open Market Operat ion (OMO) auct ions worth INR 71,878 crore failed to alleviate liquidity concerns. As the pre-policy release ment ioned ‘The OMOs have been an instrument of first preference for the purpose, but additional instruments could be considered as and when required’. Systemic liquidity cont inues to be largely in huge deficit as reflected in repo t ransact ions of INR 155135 crore on January 17, 2012, INR 1,56,650 crore on January 18, 2012, INR 1,51,580 crore on January 20, 2012. In January 2012, the average liquidity deficit has been around INR 1.18 lac crore and has consistent ly breached INR 1.5 lac crore mark in the last few days. Liquidity deficit of this order is well above the RBI’s comfort zone of 1 percent of net demand and t ime liabilit ies (NDTL), which works out to INR 60,000 crore. Liquidity is expected to remain tight in the 4th quarter because of pressure on banks to shore up their balance-sheets and advance tax-flows in March necessitat ing RBI’s continued accent on monetary control measures. While the RBI prefers systemat ic liquidity to be in deficit mode for bet ter and more effect ive monetary transmission, liquidity deficit of such a high order is clearly beyond the comfort zone of the RBI. As an RBI statement maintained ‘In reducing the CRR, the RBI has at tempted to address the structural liquidity pressures in a way that is not inconsistent with the prevailing (anti-inflat ionary) monetary policy stance. The large structural deficit in the system presented a strong case for inject ing permanent liquidity into the system’. This case was reinforced by Brazil’s reducing its benchmark rate on January 18 by half a point for a fourth straight policy review, Russia’s reduct ion of its benchmark rate in December and China’s reduct ion of the reserve rat io for banks for the first t ime since 2008 in November 2011. Hence, the CRR cut of 50 bps, which would infuse liquidity in the system of INR 32,000 crore, is an extremely judicious and well thought-out policy. The policy would also induce banks to cut rates, part icularly in interest -sensit ive segments, such as, housing and auto. Government liabilit ies in India, both Centre and states, rose a litt le over 12 percent to INR 56.09 lac crore in FY11 from INR 50.05 lac crore in FY10. The liabilit ies, both external and internal, const ituted 71.2 percent of India’s GDP in FY11. There are other areas of concern, such as, significant t ightening of money market liquidity, decelerat ion in credit growth, cumulat ive impact of 525 bps rise in policy rates and 100 bps rise in CRR, stress on the rupee and the equity markets. In conformity with general expectat ions, the RBI lowered GDP growth from 7.6 percent to 7 percent and non-food credit growth from 18 percent to 16 percent because of the double whammy of decelerat ing growth and increasing risk aversion by banks because of spike in NPAs. Similarly the IMF also reduced its economic growth project ion for India to 7.4 percent in 2011 from the earlier 7.8 percent and by 0.5 percent to 7 percent for 2012. However, M3 growth project ion for 2011-12 at 15.5 percent and baseline project ion for WPI inflat ion at 7 percent were retained by RBI. Given the overarching macro-economic scenario, the case for the CRR cut was based on several factors to overcome the challenge. These factors included regular fall in quarterly



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GDP growth figures, discernible slowdown in industrial growth (even negat ive growth of over 5 percent in October 2011), significant fall in food inflat ion and the clear indicat ion given by the RBI Governor in the December 2011 Policy that ‘from this point on, monetary policy act ions are likely to reverse the cycle, responding to the risks to growth’. There were, however, significant differences in percept ion about the t iming and the instrument to be adopted for the rate cut . Concerns of the banking sector The concerns relate to pressure on Net Interest Margin (NIM) and consequent ial squeeze on profits; hikes in interest rates leading to higher delinquency in certain sectors, especially in retail; recourse to high cost preferent ial deposits and slow growth in CASA exacerbat ing pressure on costs; re-pricing risk of liabilit ies in a rising interest rate scenario and the at tendant effect on cost of resources; lack of depth in hedging mechanism for interest rate risks; substant ial Held Till Maturity (HTM) investments only provide regulatory forbearance and do not protect banks from diminut ion in the t rue value of banks’ investments; t ime required to rebalance credit port folio; higher provisioning requirements and the impact on banks’ profitability. In view of the spike in NPAs across banks, there has to be a renewed thrust on restructuring and recovery though frequent recovery meets, effect ive monitoring mechanism for monitoring warning signals, taking possession and disposal of the assets through Sarfaesi Act to accelerate the process of realisat ion of securit ies and set t lement of small value NPA accounts with clear delegation at various levels for set t lement and power for writ ing off. Tracking growth stimulants Thrust on volume-led growth to compet it ive balance sheet size, migrat ion from interest income to non-interest income and capital adequacy to capital efficiency is needed to maintain benchmarks of return on assets (>1 percent), return on owned funds (>18 percent), net non-performing loans (<1 percent), capital adequacy (12 percent), cost to income rat io (<40 percent), net interest margin (>3.5 percent) and intermediat ion cost (<1 percent). In bracing for tomorrow, a paradigm shift in bank financing through mechanisms, such as, templates for assessing customer risk and pricing product offerings, credit scoring, availability and use of informat ion is manifest ly needed. Retail banking requires product development and different iat ion, innovat ion and business process reengineering, micro planning, market ing, prudent pricing, customisat ion, technological upgradat ion, home/ electronic/ mobile banking, cost reduct ion and crossselling. Banks are implement ing strategies to immune their balance sheets from interest rate fluctuat ion by greater attent ion on cross-selling and non-interest income segments. Growing services sector and financial market have created new avenues for fee-based income.



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Profits and profitability Sustenance of profit momentum, in a rising interest rate environment, has been challenging for banks. Rising cost of funds, compet it ion and new prudent ial requirements impact the profitability st rategy of banks. Key profitability rat ios, such as, NIM and Return On Assets (ROA) need to be protected with effect ive management of cost and yield, rebalancing of both the deposits and credit port folios, prudent asset-liability management, opt imal IT applicat ion, cross-selling and augment ing the fee income and steady improvement in asset quality to minimise accret ion to NPAs and the debilitat ing impact of provisioning. There has also to be a stress on t imely re-pricing of assets, increasing the percentage of performing branches, volume led approach to offset possible erosion in margins and segments undergoing cyclical upswings. Performance metric, risk-adjusted customer profitability requires an integrated, enterprise-wide profitability and performance management system and integrat ion of important elements of profitability, eg, micro management, risk management, factoring ABC data into the decision making matrix because of inexorable pressures to maintain growth with dissipated t reasury profits and constricted NIM. Attempts also need be made to ident ify possible and potent ial avenues for augment ing Net Interest Income either by maximising yield or by containing cost and reducing burden either by improving other income or curtailing overheads. There has to be a sharper focus on effect ive MIS to constant ly t rack cost & yield drivers and provisions, monitoring, mid term evaluat ion and corrective act ion in the light of the rapidly evolving situat ion. Concerted at tempts at enhancing income and reducing expenditure are needed simultaneously with each unit working as a profit centre. Strengthening of core competencies and exploring new businesses to achieve long-term sustainable growth requires enhanced growth, part icularly in income, profits, networth and quality of assets and a paradigm shift in the business mix with an accent on rebalancing exist ing port folio by eliminat ing unremunerat ive business, repricing, leveraging addit ional business from exist ing clients and new business with higher yield, eg, SMEs, retail lending with due diligence and housing. Concluding observations Going forward, growth and improved business confidence will have greater priority in RBI’s policy formulat ion. As Kaushik Basu, the finance ministry’s chief economic adviser maintains ‘we have seen the worst of the (rate) rises’. Despite t rending down of inflat ion, the decline in inflat ion is likely to be t ransient and upside risks to inflat ion persist from insufficient supply responses, exchange rate pass-through, suppressed inflat ion and an expansionary fiscal stance.



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In view of evolving growth-inflat ion dynamics and the huge systemic liquidity deficit , the Governor has taken the right call in these uneasy t imes by slashing CRR by 50 bps. Gazing into the crystal ball and predicting the shape of things likely to come is fraught with dangers and uncertaint ies. While the monetary policy regulates the supply of money and the cost and availability of credit in the economy in an at tempt to maintain price stability, full employment and economic growth, fiscal policy is a much broader government instrument to influence the level of nat ional output and prices through deliberate changes in government revenue, borrowing and expenditure. The policy stance of reducing CRR ‘can also be viewed as a reinforcement of the guidance that future rate act ions will be towards lowering them’. Lack of credible fiscal consolidat ion and ‘heightened uncertainty of policy reforms’ (IMF) will, however, hamper the pursuit of an accommodat ive monetary stance to support the growth expectat ions caused by peaking of interest rates. Hence the space for future rate cuts in response to decelerat ing private consumpt ion and investment spending could be constrained. Accordingly, the IMF caut ioned India on January 24, 2012 India on monetary and fiscal easing because of high levels of inflat ion and public debt. About the Author

Dr Manoranjan Sharma is Chief Economist and Deputy General Manager in our Bank. A doctorate in economics, Sharma also possesses postgraduate diploma in business management. With publicat ion of 3 important edited books besides manypapers, including some papers at global conferences to his credit , he is an influent ial thinker in development studies today. An expert in the field of rural finance, he was ident ified bythe Bankers Inst itute of Rural Development (BIRD), Lucknow to review a research project of the Swiss agency for internat ional cooperat ion. Note- This art icle was originally published in the March 2011 issue of The Indian Banker.



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KHAS BAAT…..

Corp Bank to compensate worker: The Delhi High Court has ordered the Corporat ion Bank to pay ̀ 75,000/ - to one of its daily wagers for sacking him without giving statutory not ice despite the fact he had worked for over 240 days. Just ice P K Bhasin ordered the compensat ion, besides a lit igat ion cost of ` 10,000/ - to sacked worker. (BS dt . 31.01.2012 p. 6) Finance Ministry plans to create Study loan Trust: The finance ministry is talking to banks to set up a credit guarantee t rust for educat ion loans up to ` 7.5 lakh, a senior ministry official said. The proposal aims to ensure loans are available to students at a t ime when employment out look looks bleak and even top B-schools are bracing themselves for fewer jobs and lower salaries. Over 2.2 million students have educat ion loans worth ` 43,074 crore outstanding with public sector banks. "Many students are unable to find jobs and, hence, default ." Two percent of the bank's education loans of ` 2,700 crore are non-performing assets. "If you analyse the bad loans in the sector, a maximum of those are under ` 4 lakh, where no collateral is required," a senior State Bank of India official said. "Banks have suggested a guarantee on the pat tern of Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE)," said a finance ministry official.(ET dt .01.02.2012 p1) Fitch gives ‘stable' outlook for banking sector: The out look for the Indian banking sector is stable, said Fitch in its ‘Out look of Asia Pacific banks'. However, the challenges faced by the Indian banks would be more severe than what was faced in the 2008 crisis, it said. Fitch's conclusion is based on the premise of India's domest ic economy recovering in 2012 and the government 's commitment to maintain a minimum Tier-1 capital of eight per cent in PSU banks. The rat ing agency, however, caut ioned that weakening asset quality and credit concentrat ion build up were put t ing pressure on the downside.(BL dt .02.02.2012 p10) Postal Department applies to RBI for banking licence: The Postal Department has applied to the Reserve Bank of India for a banking licence, the Communicat ions Minister, Mr Kapil Sibal, said here on Wednesday. Mr Sibal said he had written to the Finance Minister, Mr Pranab Mukherjee, to expedite the granting of licence. India current ly has 1.55 lakh post offices, 95 per cent of which are located in rural areas.(BL dt .02.02.2012 p15) Judgment will not impact us, say bankers: Loans given by banks to the telecom companies whose 2G licences have been cancelled by the Supreme Court are unlikely to turn sour, say bankers. Bankers’ confidence in this regard stems from the fact that these licences will be auct ioned off in the next few months and the debt that telecom companies owe to banks will be set t led. The State Bank of India has a fund-based exposure of ` 1,100 crore to the telecom companies whose 2G licences have been cancelled. Punjab Nat ional Bank has a funded exposure of ` 508 crore to telecom companies for 2G rollout . Though IDBI Bank has an exposure (fund and non-



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fund based) of ̀ 11,000 crore to the telecom sector, its exposure to the telecom companies whose 2G licences were cancelled is under ` 500 crore, said Mr B.K. Batra, Deputy Managing Director. (BL dt .03.02.2012 p1) Banks can absorb loan-losses from 2G licence cancellation: Fitch: The Indian banking sector should be able to absorb loan-losses stemming from the cancellat ion of the second-generat ion mobile licences, though annual profits will st ill take a hit , said global credit rat ing agency Fitch. Assuming a conservat ive level of write-offs on these loans, the agency is of the view that banks’ credit quality will not be materially weakened, but annual profits could fall by up to 10 per cent . While the impact is limited, the cancellat ion of the 2G licences highlights the Indian banking sector’s exposure to infrastructure - a sector that cont inues to face high regulatory and execut ion risks, said a Fitch statement. Indian banks’ exposure to the telecom companies that are losing 2G licences is around 0.6 per cent of total loans. However, around half of the exposure is in the form of financial guarantees towards future payments of licence fees. State Bank of India has confirmed that , once the licences are cancelled, those guarantees should no longer be in force, Fitch said. (BL dt .04.02.2012 p6) RBI seeks details of banks’ exposure: The country’s central bank swung into act ion to take stock of banks’ exposure to the telecom firms affected by the Supreme Court’s order that cancelled 122 licenses granted in 2008 during the regime of Mr A Raja as telecom minister. The RBI has asked the banks to furnish details of their exposure in the telecom companies that are hit by cancellat ions of 2G licenses. As on August, banks’ commitment to those companies were ` 20,000 crore of which they have already extended around ` 15,000 crore. Out of the ` 15,000 crore, about ` 6,000 crore was towards acquiring the licenses. Now, the regulator has asked banks to furnish details of their exposure as on December 31, 2011. (BS dt . 04.02.2012 p. 7) Small banks may turn to LIC for fund dose via share sale: Sandwiched between an urgent need for capital and the fund-starved government, small state-run banks will knock on the doors of the LIC as they prepare to raise funds, said three people familiar with the plans. Dena Bank and Bangalore-based Syndicate Bank may be the first among nearly a dozen small public sector banks which will sell shares in the next few months to raise a few thousand crores, they said. LIC, the biggest inst itut ional investor in the country with annual equity investments of about ` 40,000 crore, will help these banks which are facing rising bad loans and restructuring of loans. (BS dt . 06.02.2012 p.1) Weak rupee saves the day for banks with foreign presence: The sharp decline in the rupee in the second half of 2011 has aided domest ic banks with large foreign presence to report st rong growth in credit port folio, even as the demand for loans has been dwindling locally, due to high interest rates and an uncertain macro-economic environment.This is because when the rupee was at 45, every dollar lent by a bank would have added ` 45 to its loan book. But as the rupee depreciated to 54, every dollar lent resulted in addition of ` 54 to its credit port folio and reflected higher growth in advances. ICICI Bank, the largest private sector lender in the country, saw total advances



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expanding 19 per cent from a year ago to ` 246,157 crore as of December-end. The industry credit growth during this period was 16 per cent , the lowest so far this financial year. (BS dt .06.02.2012 p3) Banks have ̀ 16k-cr exposure to telecom players in 2G case: The Union Finance Ministry said banks have an exposure of about ` 15,800 crore to those telecom operators whose 2G spectrum licences were cancelled last week by Supreme Court order. However, most of these loans were secured and this would not hurt the banks’ profitability.”The cancellat ion of licences will not have any material impact on banks. The exposure is, by and large, secured in the form of various tangible and other securit ies. Moreover, the cancelled licences represent only certain (telecom) circles and many of those are remote areas. So, it is not a major cause of worry,” a ministry official told. The SC had cancelled all 122 licences awarded to nine telecom companies after January 2008. The total exposure of public sector banks in all these cases is ̀ 14,400 crore, with State Bank of India and Canara Bank the major lenders. Punjab Nat ional Bank and IDBI Bank also have some exposure to these telecom companies. (BS dt .07.02.2012 p6) Cash-deposit ratio of banks still too high: The cash-deposit rat io of scheduled commercial banks in India (cash in hand and balances with the Reserve Bank of India as percentage of deposits) is observed to be high at 8.2 per cent as at end-March 2011. The rat io ranges between 6.9 per cent (old private sector banks) and 9.2 per cent (new generat ion private sector banks). This includes the Cash Reserve Rat io of 6 per cent statutorily required to be maintained with the Reserve Bank, which has since been brought down to 5.5 per cent in the recent Credit Policy review held in January. The need for such a high C-D rat io in these days when plastic cards, Internet payments, electronic funds t ransfer, and so on, are on the increase is surprising and needs to be viewed in the context of efficiency and profitability of banks. (BL dt .07.02.2012 p6) Govt seeks higher dividend from PSU banks: Hard pressed for funds, the government, on Tuesday, met the heads of several PSU banks to seek larger dividend payouts but did not get any firm commitment from them.”We discussed what are the dividends that are being paid by banks. We were not given any target . We will look at profit and then give dividend,” Punjab Nat ional Bank C&MD K R Kamath told reporters after the meet ing. The meet ing was chaired by Department of Economic Secretary Mr R Gopalan, who had met PSU chiefs earlier to persuade them to increase dividend payout to the government. After the meet ing, Bank of India C&MD Mr Alok Mishra said the finance ministry wanted to know what is the profit the bankers are looking at in the current fiscal. (DH dt.08.02.2012 p17) Fraudster Challenge to banks with estimated ̀ .200 Cr Loss: With an average of `.10 lakh lost in every financials fraud incident in India, it seems conmen are laughing all the way away from banks. And it is not a chump change at stake here; an est imated ` 200 crore is written off by various banks and financial inst itut ions, each year. Banks in India on an average are losing ` 10 lakh per fraud incident. Worse, the t rend shows that incidents of fraud and the amount are likely to increase. Result ing in low recoveries, thereby direct ly affect ing their bottom-line, says a survey by Deloit te. (NIE Dt 09.02.2012 p.13)



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D K Mittal on RBI central board: The Government has nominated Department of Financial Services secretary Mr D K Mittal on the board of directors of the RBI taking the number of government nominees on the board to two. Department of Economic Affairs Secretary Mr. R Gopalan is already on the board. (BS dt 09.02.2012 p.6) Bank credit jumps 16.4% Deposits too climb 15%: Indian bank loans rose 16.4% from a year earlier in the two weeks to January 27, while deposits were up 15.7%, the RBI's weekly statist ical supplement showed. Bank deposits fell `.30,600 crore to `.57.7 lakh crore in the two weeks to January 27, the supplement showed. Outstanding loans fell `.3,150 crore($636.40 million) to `.43.50 lakh crore during the two-week period. Non-Food credit rose to `.160 crore to `.42.70 lakh crore during the two-week period, while food credit fell `.3,310 crore to `.83,090 crore during the period. (ET dt 11.02.2012 p.7) Foreign investors press ‘sell’ button on Indian banks: Overseas investors seem to be on a selling spree when it comes to the Indian banking stocks, as they have pared their holdings in at least 28 public and private sector banks of the country in the past few months. Various foreign investors have together sold banking stocks worth an est imated ` 10,000 crore (over USD 2 billion) in about four-and-a-half months since October 2011. While foreign investors have sold shares of at least 28 Indian banks, they have purchased fresh shares of only nine banking stocks during this period. The value of fresh banking shares purchased during this period is also much less at just about ̀ 600 crore, as per an analysis of shareholding pattern and open-market t ransact ion data available with stock exchanges. The banks where foreign investors have pared their holdings include private players like ICICI Bank, Axis Bank, Kotak Mahindra Bank, Yes Bank and DCB, as also public sector giants like State Bank of India and Punjab Nat ional Bank. (ET dt13.02.2012 p.11) SBI to scrap super Circle of Excellence: It is almost curtains to the "Super Circle of Excellence", once a high-profile retail init iat ive at the State Bank of India. The country's largest lender met with limited success to obtain business growth, improve customer service and efficiency from this experimentat ion spanning four years. The bank had carved out 703 branches from 14 business circles across the country for the circle. This included 592 branches from metros and 111 from rural and semi urban areas. This took place during the tenure of Mr O P Bhatt as Chairman, on the advice of consultants to scale up the share of retail business. A top SBI official said the circle was becoming a bank within a bank; it not being a useful concept. The existence of a circle results in adding one t ier to decision making. (BS dt 13.02.2012 p.4) Private banks steal a march over public sector peers: The divide between private sector banks and their state-owned peers cont inued to widen in the latest December quarter. While net profits of public sectors banks grew only marginally over a year ago, the profits of private sector banks rose 27.5 per cent . A higher proport ion of bad loans from restructured assets and exposure to stressed sectors led to a



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dismal quarter for PSBs, with a fall in asset quality. The gross non-performing assets for PSBs , rose from 2.3 per cent of advances in December 2010 to 3 per cent in December 2011. In contrast , private banks reduced their gross NPA rat io from 2.5 per cent to 2.1 per cent over the year. (BL dt .16.02.2012 p6) Mallya to meet bank chiefs for additional funds for KFA: Mr Vijay Mallya, promoter of Kingfisher Airlines, will make a case for addit ional funds to the chiefs of large commercial banks and also appraise them of the viability report prepared by SBI Capital Market . The meet ing with banks comes at a t ime when most lenders have stopped lending to the ailing company after they declared the airlines as non-performing loan - an account which has failed to make payment to lenders within 90 days of due date. Banks have lent around ` 7,000 crore to Kingfisher and they own around 24% stake in the company. (ET dt . 16.02.2012 p. 6) Tax rebate on 3-year bank FDs likely: Following concerted pressure from banks, the Finance Ministry has agreed to consider a proposal to reduce the lock-in period for bank deposit eligible for tax rebate to three years from five years, even though it goes against the spirit of the Direct Tax Code. If this proposal finds it way into next month’s budget, it will make bank fixed deposits, which current ly fetch an annual return more than 9%, an at t ract ive savings opt ion for individuals, and bring them on par with equity-linked tax saving schemes of mutual funds and tax-free bonds.”Among the list of demands submit ted by the banks and financial inst itut ions in their pre-budget meet ing with the Finance Minister, some proposals have been short listed for further deliberat ions, this is one of them,” said a senior finance ministry. (ET dt .17.02.2012 p11) SBI uses sunscreen to block Maldives heat: The SBI has decided not to extend any fresh loans or make new investments in the Maldives unt il the polit ical situat ion improves there. SBI’s three branches enjoy a dominant posit ion in the island nat ion, holding quarter of its deposits and 42% loans. “We will not take any fresh exposure t ill June this year,” said a bank official. Maldives plunged into a polit ical turmoil last month after protesters, backed by police, toppled Mr Mohamed Nasheed, Maldives’ first democrat ically elected leader. An e-mail sent to the bank’s internat ional banking division drew no response. (ET dt . 18.02.2012 p. 9) SC breather to banks on tax dispute: The Supreme Court has allowed the appeals of major banks in Kerala and dismissed the appeals by the Income Tax department in a dispute over the calculat ion of tax. The bench headed by Chief Just ice S H Kapadia has asked the tax authorit ies to compute tax according to the principles laid down in the judgment. The quest ion involved in the case was whether the assessee banks were eligible for deduct ion of bad and doubtful debts actually written off in view of Sect ion 36(1)(vii), which limits the deduct ion allowable under the proviso, to the excess over the credit balance made under clause (viia) of Sect ion 36(1) of Income Tax Act . The issue was answered in favour of the banks, which have made rural advances. (BS dt. 21.02.2012 p. 9)



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Forex limit for imports sans documentation raised to $5,000: The RBI has upped the limit for release of foreign exchange for imports by persons, firms and companies without any documentat ion formalit ies from $500 or its equivalent to $5,000 or its equivalent , with immediate effect .Payment for such t ransact ion should be made by cheque drawn on the applicant’s bank account or by a Demand Draft.This liberalisat ion measure comes in the wake of suggest ions received by the RBI from various stakeholders. (BL dt .22.02.2012 p6) BoI to help earn carbon credits: Bank of India said it had an agreement with a US-based company to help its rural borrowers implement green solut ions and earn carbon credits. The bank has signed an agreement with Micro Energy Credit Corporat ion for developing, buying and selling voluntary emission-reduct ion carbon credits. (BS dt 22.02.2012 p.6) Bank of Baroda, CARE ink pact for rating small units: Public sector lender Bank of Baroda signed a memorandum of understanding with rat ing agency CARE. This is for rat ing of micro small and medium enterprises which are either prospect ive or exist ing customers of the bank. "We believe that this MoU is an endorsment of our pursuit to retain and further gain the confidence of the financial services and MSME fraternity. "We are commit ted to support all of Bank of Baroda's efforts in the MSME sector and assist them through their journey of exponent ial growth," CARE MSME head, Mr R Suryanarayana, said in a statement. (BL dt . 23.02.2012 p. 6) Outlook for banks stable: Fitch rating: The out look for Indian banks remains stable in 2012 provided the domest ic economy recovers and the government infuses capital in public sector banks in order to maintain a minimum Tier rat io of 8%. However, there could be downside pressures from a build up in credit concentrat ion and weakening asset quality, said rat ing agency Fitch, in a report . Part of the credit problem is cyclical and may ease with a lag if GDP growth picks up from mid – 2012 on the back of lower interest rates. The RBI may look to loosen monetary policy if core inflat ion eases. However if the economy cont inues to slowdown during most of the current calendar year, the result ing problems to asset quality could hurt bank’s stand alone credit profile, the report said. (BL dt 24.01.2012 p.4) RBI cuts cash reserve ratio by 50 bps; stays hand on key rates: Your wait for borrowing at softer interest rates from banks has got a bit longer as the Reserve Bank of India on Tuesday refrained from cut t ing key policy rates in its third quarter review of the monetary policy. Even as it maintained status quo on interest rates, the RBI, in a bid to ease liquidity pressures in the banking system, cut the Cash Reserve Rat io, the amount of cash that banks have to mandatorily park with it , by 50 basis points from 6 per cent to 5.50 per cent of deposits. The RBI Governor, Dr D. Subbarao, emphasised that the cut in CRR was a reversal of the central bank’s (t ight) monetary policy stance. “If you t reat both the policy interest rate and the CRR as monetary policy instruments, you could draw one interpretation — that this is a reversal of our monetary policy stance. “In RBI’s view, the CRR is a monetary policy instrument with liquidity dimensions. After all, the reduct ion in CRR will bring down the cost of money for banks. It will have a bearing on their ability to reduce the lending rates,” said the Governor. The CRR



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cut is expected to inject around ` 32,000 crore of primary liquidity into the banking system, which has been reeling under a liquidity crunch. (BL dt .25.01.2012 p1) CRR cut offers a little more comfort, says Subir Gokarn: Markets were primed to expect a status quo announcement during the run-up to the policy. There was some speculat ion about a cash reserve rat io (CRR) cut – although not widely expected. Every cut in CRR at this juncture might have sent the wrong signals on its inflat ion fight ing credent ials – or so was the received wisdom. But the Reserve Bank of India chose to bite the bullet and effect a 50 bps cut in CRR. The RBI Deputy Governor, Dr Subir Gokarn, provided the central bank’s logic to the decision. The change change in CRR does gives them a much large cushion when it comes to accessing the repo window. When the deficit is around ` 1.3 lakh crore a day, some banks are pushing against their holdings of SLR securit ies. (BL dt .25.01.2012 p6) A pleasant surprise for most private bank chiefs: The Reserve Bank’s move at infusing liquidity by reducing the CRR by 50 basis points seems to have taken most of the chiefs of smaller bank by surprise. “It is a posit ive surprise”, said Dr N. Kamakodi, Managing Director of City Union Bank, while the MD and Chief Execut ive of Karnataka Bank, Mr P. Jayarama Bhat, termed it as a defensive policy. Karur Vysya Bank’s Chief Execut ive, Mr Venkataraman, conceded that this reduct ion of 50 bps in CRR was not ‘fully expected’, though there were lots of expectat ions in the market. A majority of bankers that Business Line spoke to did not seem to have expected this move. Be it Karur Vysya Bank or Lakshmi Vilas Bank, City Union Bank or Catholic Syrian Bank, most of them have in recent quarters maintained that there was not much pressure on liquidity. High interest costs and the concern over rising NPAs were forcing them to take a more caut ious stance on the lending front . (BL dt .25.01.2012 p6) SBI waives levy on savings bank accounts without minimum balance: SBI has announced waiver of service charge for non-maintenance of minimum balance st ipulat ions with respect to savings accounts. A circular addressed to Chief General Managers of all circles said that the waiver is being looked upon as a ‘major step forward towards customer retent ion and acquisit ion.’ You will appreciate that this benefit / waiver is a strong selling point for our savings bank product , the circular said. (BL dt .27.02.2012 p14)



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Agriculture & Other Priority….. Finance Ministry opposes RBI’s view to stretch priority sectors lending list: The Finance Ministry is opposing a Reserve Bank of India suggest ion to widen the list of sectors eligible for priority sector lending. The Reserve Bank’s draft report submit ted to the Ministry for its comments last week has also recommended that some infrastructure segments should be classified as priority. But a Finance Ministry official said there is no point in dilut ing the exist ing list of priority sectors. “And if banks are too keen then we should also raise the limit from current 40% to 50% or above.” (ET dt .08.02.2012 p19) YES Bank ties up with Buldana society for doorstep service: YES Bank, which is keen to enhance its priority sector lending, has t ied up with the Buldana Urban Cooperat ive Credit Society to help the Society with its new customer service init iat ive entailing door-step para-banking services. The Society has launched a new doorstep service, called Nano Teller, where the credit society employee visit ing the customer’s house can help him make a deposit or allow withdrawal up to ` 10,000 from his savings account. The cash handling would be done by the society’s employee using a small swipe card machine and a cell phone. (BL dt .08.02.2012 p16) Agricultural lending: RBI panel for doing away with sub-targets: A Reserve Bank of India working group on priority sector lending has recommended doing away with the sub-targets for direct and indirect agricultural advances. Instead, the group, headed by Mr M.V. Nair, CM&D, Union Bank of India, is understood to have pushed for fixing sub-limits only for lending to farmers in the small and marginal category. Further, it wants loans given for set t ing up rural infrastructure to be classified as priority sector lending. These suggest ions come as more than half of the public sector banks and nearly half of the private sector ones have not achieved the agricultural advances target in the last financial year. (BL dt .09.02.2012 p6) NABARD launches post-harvest loan scheme for farmers: Farmers always wonder how the price of produce shoots up the moment it leaves their hands. The crop in their hands is quoted below the MSP (minimum support price). A week or two later, prices in the secondary and tertiary markets skyrocket , leaving fruits of their labour somewhere else. Farmers who sell their produce very cheap soon after harvest due to lack of working capital and for repaying crop loans can now aspire for low-cost loans. They need not sell their produce for low prices just to meet small t ime needs. NABARD has launched a new scheme that encourages banks to give post-harvest loans, taking warehouse receipts as receipts. About 10.62 crore farmers in the country holding Kisan Credit Cards (KCC) will be eligible for these loans. (BL dt .09.02.2012 p20) Farm loan defaults rise as crops fail, prices crash: Banks have been witnessing a rise in defaults on agricultural loans on account of crop failures this year. Banks, on their part, are t rying to extend gold loans to farmers to help meet cult ivat ion expenses. “Apart from crop loans we are also giving gold loans as this provides addit ional security, said Mr T. M. Bhasin, Chairman & Managing Director, Indian



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Bank. Close to 1.5 per cent of the bank’s total agri advances have slipped into the NPA category. (BL dt.18.02.2012 p8) Turn loans for vocational courses into small unit advances: Bankers: Torn between the Government’s keenness that the youth should get loans for pursuing vocat ional courses under the bank-wide model educat ional loan scheme and rising bad loans, bankers’ have come up with a via media which will not only sat isfy the authorit ies but also take care of their concerns on loans turning sour. They have suggested to the Finance Ministry that loans for vocat ional courses for skill development should be classified as loans to the micro and small enterprises (MSE) segment. Once loans for vocat ional courses are classified as MSE loans, banks will draw comfort from the fact that they will have recourse to the Credit Guarantee Fund Trust for Small and Medium Enterprises (CGTMSE) should a borrower default . (BL dt .21.02.2012 p6) RBI panel for raising priority sector lending target for foreign banks to 40%: Given the inability of many banks to achieve the direct lending target in the agriculture segment, a Reserve Bank of India commit tee has recommended doing away with the ‘direct and indirect’ lending dist inction. Instead, it has suggested a composite target for agriculture and allied act ivit ies. However, the commit tee, headed by Mr M.V. Nair, C&MD, Union Bank of India, kept the priority sector lending target at 40 per cent of adjusted net bank credit (ANBC) unchanged. The committee has suggested revising the priority sector lending target for foreign banks to 40 per cent from 32 per cent at present. (BL dt .22.02.2012 p1) Restore priority sector tag for indirect loans to farm, allied activities: A Reserve Bank of India commit tee has recommended restorat ion of the priority sector tag to the loans given by banks to non-bank intermediaries for on-lending to ident ified segments such as agriculture, micro and small enterprises, micro credit and weaker sect ions, subject to a cap. However, non-banking finance companies (NBFCs) in the gold loans business will be disappointed. The Commit tee on Priority Sector Lending, headed by Mr M. V. Nair, Chairman and Managing Director, Union Bank of India, suggested that loans extended against gold jewelleries by NBFCs and other intermediaries should cont inue to be excluded from priority sector classificat ion. (BL dt .22.02.2012 p6) Set up credit risk guarantee scheme for small, marginal farmers: To address the risk in lending to the agriculture sector, an RBI committee has recommended the establishment of Agriculture Credit Risk Guarantee Scheme for small and marginal farmers.The scheme, to be on the lines of the Credit Guarantee Fund Trust for Small and Medium Enterprises, has been envisaged as there is perceived risk in bank lending to small and marginal farmers. These farmers operate in small fragmented holdings and are unable to meet adequate collateral requirement of domest ic commercial banks. (BL dt .22.02.2012 p6) HSBC welcomes M V Nair panel report on higher priority sector lending target: The country’s second largest foreign lender by branch network, HSBC, has welcomed M V Nair committee’s report on priority sector lending (PSL), saying that it seeks to bring in a level playing field. “We welcome the report as it calls for a level playing field for all,



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because the proposed increase is not just for one part icular sector but is flexible,” HSBC India Country Manager Mr Naina Lal Kidwai said.She pointed out that though the report seeks to increase the PSL target for foreign banks to 40 per cent of the overall advances, it also calls for creat ing special categories within the exist ing sectors such as small and marginal farmers, micro enterprises, etc, and seeks that minimum levels be achieved in every sub-category. (FE dt .27.02.2012 p15) Karnataka banks achieve 90% of priority sector credit target: Banks in Karnataka have achieved 90 per cent of their priority sector credit target for the fiscal up to December 2011, the chairman of the State-level bankers’ commit tee said at the 120th SLBC – Karnataka meet ing here on Monday. Mr Basant Seth, also the chairman and managing director of Syndicate Bank, said in a press release that banks have disbursed Rs 41,412 crore under Priority Sector Credit up to December 2011 against the revised annual target of Rs 46,027 crore, thereby recording an achievement level of 90 per cent . (BL dt .28.02.2012 p19)



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BASEL….. Centre approves Rs 7,900-cr capital infusion in SBI: The Centre has approved capital infusion of Rs 7,900 crore (including premium) into State Bank of India by way of preferent ial allotment of shares. This was conveyed to SBI through a Finance Ministry letter dated January 30, the country’s largest commercial bank informed the Mumbai stock exchange on Monday. With this, the Centre’s stake in SBI would go up to 65 per cent . Currently, the Centre has 59.4 per cent stake in the bank. The capital infusion would also help raise the Tier-I capital of the bank to 8 per cent . (BL dt .31.01.2012 p1) SBI needs more, says JP Morgan: A report by JP Morgan says that the government 's move to inject Rs 7,900 crore into SBI may not be enough to sustain the bank's capital base, and could lead to another round of fund-raising within 12 months. It argues that while the Tier-I rat io will now increase by 70 bps to 8.17%, just above the 8% target set by the government, it may not be sustainable considering SBI's "modest profitability", nearly 20% loan growth, and steep rise in NPAs.(ET dt .01.02.2012 p11) United Bank of India seeks Rs 305-cr capital infusion: United Bank of India has approached the Central Government for capital infusion of Rs 305 crore under the Government 's recapitalizat ion scheme. The bank had recent ly raised Tier II capital of Rs 100 crore by issuing non-convert ible bonds. “We have asked for Rs 305 crore from the Government and we are hopeful of gett ing the funds soon,” said Mr S. L. Bansal, Execut ive Director, United Bank of India. The bank's capital-adequacy rat io stood at 12.63 per cent as on December 31, 2011 and its Tier I capital was at 8.37 per cent .(BL dt .01.02.2012 p6) Govt to infuse `.18K Cr in 12 PSU banks: The Finance Ministry will infuse Rupees 18,000 crore in the current financial year in 12 banks, including State Bank of India (SBI), and will be seeking supplementary grants from parliament in the Budget session.This includes Rupees 7, 900 crore for State Bank of India according to sources. Besides SBI, other lenders that would be given capital support , in this financial year include Punjab Nat ional Bank, Central bank of India and Bank of Baroda. (BS dt 03.02.2012 p.18) Panel proposes Rs 35k-crore capital for PSBs every year: A commit tee headed by Finance secretary Mr. RS Gujral has recommended that the government should pump in `.35,000 crore of addit ional capital in pure equity into banks every year for the next 10 years. The Commit tee on Capital Requirements of Financial Inst itut ions, set up to outline a road map for capital infusion over the next 10 years, said in its report there should be no use of any “innovat ive” structures to augment the capital base of the public sector financial inst itutions. The sum is more than double what the Finance Ministry has been struggling to put together this year to recapitalise banks including the SBI. (FE dt .09.02.2012 p 1)



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Strong case for higher govt stake: SBI Chairman: The State Bank of India Chairman, Mr Prat ip Chaudhuri, on Monday said there is a strong case for the government to infuse capital in his bank. The reason: the 18.12 per cent post-tax return that the capital investment will fetch will be far in excess of the cost of the government’s borrowing. “The cost of government borrowing is in the 8-9.5 per cent range. But infusing capital in SBI will give the government a post -tax return of 18.12 per cent ,” explained the SBI chief, at a press meet. (BL dt 14.02.2012 p.6) Capital support assured for PSBs: The Finance Minister, Mr Pranab Mukherjee, said that the Government is ready to infuse more capital in PSBs to help them comply with the Basel III capital regulat ions, which envisage more stringent norms for capital adequacy. The extra provisions, or buffers, required under Basel III will also be taken care of, said Mr Mukherjee, at an event to mark the 70th Foundat ion Day of Oriental Bank of Commerce (OBC), a public-sector lender. The Basel III capital regulat ions are to be implemented from January 1, 2013 and will be fully phased in by January 1, 2019. A Government-appointed commit tee is working out the capital requirements of PSBs under the Basel-III regime. State-owned banks had been asked to submit their business plans for the next few years to help est imate the capital requirement. (BL dt .20.02.2012 p6) South Indian Bank plans to raise Rs 1,000-cr capital this fiscal: South Indian Bank is all set to revive its capital raising plan. The Thrissur-headquartered bank had in July-August 2011 proposed to raise Rs 1,000-crore of capital by taking the QIP (Qualified Inst itut ional Placement) route. The plan was subsequent ly put on hold as the market condit ions were not conducive. It is now learnt that this proposal is being revived and the bank is planning to complete the process before the end of this fiscal. (BL dt .22.02.2012 p6)



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Bonds… Money Market…. CRR cut to weigh on bond yield: The increase in liquidity by the 50 bps cut in the CRR and signals on future OMOs will shape the movement on bond yields next week. Dealers said the CRR reduction would bring in about `.32,000 crore into system, almost equal to amount pumped in through three OMOs. The RBI had cut the CRR to 5.5%, effect ive January 28. On friday, the 10-year benchmark bond yield set t led at 8.35%, up three basis points over Wednesday’s closing. For the week, yield on 10 year government bonds rose 18 basis points over the last week’s close of 8.17%. During the week, the bonds traded around 8.17-8.35%. RBI has released over `.70,000 crore into the system by buying bonds through OMOs since November, to support the government’s enhanced borrowing programme. (BS dt 30.01.2012 p.6) Call rate slips: The call rate fell back on surfeit of liquidity in the banking system. The rate reacted downwards to conclude at 8.75% from 8.90% on Wednesday. It moved in a range between 9.05% and 8.50%. The RBI, under the Liquidity Adjustment Facility, purchased securit ies worth `. 1,20,300 crore from 52 bids at the one-day repo auct ion at a fixed rate of 8.50% and sold securit ies worth Rs 10 crore from one bid at the one-day reverse repo auct ion at a fixed rate of 7.50%.(BL dt 03.02.2012 p.6) RBI buys Rs 9,857 cr bonds via OMO: The Reserve Bank of India bought Rs 9,857 crore of government bonds through an open market operat ion, slight ly lower than the scheduled Rs 10,000 cr. The central bank bought the 8.07% bonds maturing in 2017 at Rs 99.32, for a yield of 8.2382%, higher than the forecast of 8.2180% in a Reuters poll. It bought the 9.15% bonds maturing in 2024 at Rs 106.77, yielding 8.2768%, higher than the poll forecast of 8.2547%. (FE dt . 18.02.2012 p. 18)

Plastic Money….. Kotak Mahindra Bank buys Barclays' stressed credit card portfolio: Kotak Mahindra Bank has acquired the non-performing port folio of Barclays Bank’s credit card business in India. The deal, experts said, gives momentum to the sale of st ressed loan market in the country which has been having a dry run following stringent regulatory norms introduced in 2007.The port folio acquired by Kotak is est imated to be around Rs 250-300 crore and comprise nearly 200,000 cards. The private sector lender’s in-house asset reconstruct ion team will be responsible for recovering the dues from these accounts. Last month, Standard Chartered Bank bought the performing port folio of Barclays’ credit cards business in India. Barclays has decided to exit retail assets business in India and is also looking for buyers for its Rs 3,000 crore retail loan port folio.(BS dt .01.02.2012 p7)



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Credit cards deals' value up 53%: Credit card t ransact ions worth Rs 8421 crore were carried out in december, up 53 per cent as compared to the same month in 2010. The number of credit cards in circulat ion has, however, declined by 14.4 per cent to 1.76 crore as December 31, 2011, according to the Reserve Bank data. (BS dt 14.02.2012 p.6) KVB targets 2 million customers for co-branded SBI credit cards: Tamil Nadu based old generat ion private sector lender Karur Vysya Bank (KVB) has set a target of 2 million customers for its newly launched co-branded SBI credit cards. Mr. K Venkataraman, Managing Director &CEO of KVB said, “out of the total 4 million customers of KVB, we are target ing a 2 million mop up that is 50% of the total customer base. We have t ied-up with SBI card as it adopts stringent norms and sophist icat ion in prevent ion of fraud and handling of risk management”, he said at the launch of credit card. (FE dt 27.02.2012 p.16) Debit card usage on the rise, but mainly at ATMs: The use of debit cards in India has caught on, but not in the way that banks want. Banks, especially from the public sector, are discovering that their customers prefer using debit cards mainly for withdrawing cash from ATMs. For shopping or eat ing out , customers prefer using cash, even though most retail stores and restaurants now accept card payments.According to Visa’s latest Global Payment Tracking Survey, even though awareness about debit cards is high, the rate of usage is st ill relat ively low in India (BL dt .28.02.2012 p6) ‘Skimming’ of credit cards largely at unguarded ATMs: In today’s technologically driven banking, complaints of ‘skimming’ of credit cards are on the rise, banking officials said in a seminar on secure banking pract ices organized by HDFC Bank. Skimming is the theft of credit card informat ion used in a legit imate transact ion. For instance, the fraudster can put a device over the card slot of an ATM, which reads the magnet ic strip as the user unknowingly passes his/ her card through it . A miniature camera at tached to the ATM inconspicuously is used to read the user’s PIN (Personal ident ificat ion number) (BL dt 29.02.2012 p.6) TATA capital launches travel card with Axis Bank: TATA capital and Axis Bank have joint ly launched a t ravel card, which is available in nine currencies, on the VISA plat form. The card can be used at more than 26 million out lets and 1.9 million VISA ATMs and on all overseas e-commerce Web Sites, said a press release. Other features include chip-enabled security, lost card liability insurance of up to Rs 2 lakh, and 24/ 7 call centre from other Tata Card partners. (BL dt 29.02.2012 p.6)

Credit Growth….. Growth in personal loans slows to 12.3%: Sectoral credit data from the Reserve Bank of India (RBI) shows that the growth in personal loans has slowed to 12.3% y-o-y in December from 13.4% y-o-y growth posted in November. Since April, 2011, when loans to this category had increased by over 18% y-o-y,



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the increase has been smaller with each passing monthBank credit to industries declined to 19.8% y-o-y in December from 20.9% y-o-y in November, while lending to the services sector in December was at 14.9%, compared with 16.9% in November, shows the data released RBI on Tuesday. (FE dt .01.02.2012 p18) SBI may cut interest rates to boost credit expansion: The country’s largest lender State Bank of India (SBI) is “keen” to cut interest rates to boost credit expansion.“All sentiment is building towards it (an interest rate cut)...we are keen to do it ,” the Chief Financial Officer (CFO), Mr Diwakar Gupta, told reporters today on the sidelines of an Internat ional Research Conference organised by the RBI.Without indicat ing the t imeline for the rate cut, he said the bank would take a call on the issue after taking into account the “spreads and profitability’’.(BL dt .02.02.2012 p6) Export credit: Interest subvention may be extended by a year: The interest subvent ion scheme on rupee export credit may be extended t ill March 31 next year. Also, more sectors may be included in the scheme, which is scheduled to end on March 31 this year. At present, the scheme covers four sectors, handicrafts, handloom, carpet and MSME. The exporters get interest subvent ion, also known as interest subsidy at 2%. A person familiar with the development said, “With global markets st ill uncertain, a need is being felt to extend the scheme for one more year. We may see some announcement in the Budget.” The extended scheme, if announced, will be effect ive from April 1. The view in the Government is to include some more labour-intensive industries in the scheme. (BL dt .06.02.12 p18) MSME Ministry seeks lower borrowing rates: The MSME Ministry has writ ten to the Finance Ministry to lower the rate of interest on credit for the sector. In a pre-budget demand, MSME Minister Mr Virbhadra Singh has asked the government to look into opt ions to reduce the cost of funds for small scale industry. ‘‘Internationally, credit is available at around 4-6% interest rate. In India, the MSMEs are paying as high as up to 16%. We have requested the Finance Ministry to bring it at par with internat ional rates for MSMEs,’’ Mr Amrendra Sinha, addit ional secretary, MSME Ministry told. (FE dt .07.02.2012 p26) Bank loans to microfinance, telecom, jute & tea firms shrink in Apr-Dec: Banks’ credit to the microfinance, telecom, jute and tea sectors shrank in April-December 2011, as lenders turned caut ious with economic slowdown and regulatory challenges. Micro credit dues fell to Rs 21,000 crore in December from Rs 26,900 crore in March 2011, according to Reserve Bank of India data. In April-December 2010, micro-credit had grown 32.2 per cent . Banks have been reluctant to lend to the segment after the latter came under a regulatory and legal cloud. Their profitability had been under strain, said a senior official with a large public sector bank. Loans to the telecom segment were also down 9.4 per cent , against a credit growth of 59.3 per cent in the same period of 2010. (BS dt .08.02.2012 p6) Credit growth dips further in January: The effect of economic slowdown cont inues to weigh negat ively on credit demand. Bank disbursement of loans shrunk for the second fortnight in a row, in January.The



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outstanding loans of commercial banks declined by Rs 3,148 crore to Rs 43,513 crore in the fortnight ended January 27, according to the RBI data. In the previous fortnight (January 13, 2012) it had shrunk by Rs 11,167 crore. The year-on-year growth t ill end of January was 15.65 per cent , below the revised credit growth est imate of 16% for 2011-12. The central bank in its third quarter review of policy had cut est imate from 18 per cent .A senior Punjab Nat ional Bank official said, the credit pick up remained dull and not much change was expected t ill March. (BS dt .09.02.2012 p7) SIDBI’s credit growth likely to dip to 21% this fiscal: The Small Industries Development Bank of India(SIDBI) might witness a dip in credit growth on a year-on-year basis at 21 per cent this fiscal, as against 25 per cent during year ago period. The 21 per cent growth is however, marginally higher than the targeted growth of 20 per cent for this fiscal, said Mr N. Raman, Execut ive Director, SIDBI. “We had achieved more than 25 per cent growth in credit last fiscal. This year, however, the growth is slight ly subdued. We might be able to post a credit growth of about 21 per cent this year,” Mr Raman told newspersons on the sidelines of a conference organised by the CII on Friday. There were some issues with loan repayment, part icularly in the MSME sector, and SIDBI was looking at the possibility of restructuring of accounts, he said. (BL dt .11.02.2012 p6) SBI education loans set to get cheaper: The country’s largest lender State Bank of India plans to cut interest rates on educat ion loans. The bank is expect ing a good growth in this segment with the government promot ing a fund to guarantee educat ion loans. “We may not reduce our base rate since it is at 10%, which is the lowest in the industry . We also do not want to change our home loan rates because these are at 10.5% which is very close to the base rate,” said State Bank of India Chairman Mr.Prat ip Chaudhuri (TOI dt .14.02.2012) Home, auto and personal loans see sharp fall in growth: Besides the power, telecom, text iles and manufacturing sectors, bankers are also seeing a steep fall in the flow of money into segments such as personal loans, mortgages, auto loans and even educat ion loans— a sure sign of the stress in Asia’s third largest economy, hit by persistently high inflat ion and interest rates. The year-on-year loan growth to capital-intensive industries slowed to 19.8% between December 2010 and December 2011 from 31.6% in the year-ago period, according to Reserve Bank of India (RBI) data. Growth of credit to agriculture and related activit ies fell to 5.6% from 25.4% in the same period. The fall is most severe in telecom, micro-credit and the so-called priority sector that comprises loans to weaker sect ions and exports, among others. (Mint 15.02.2012 p.1) Home, study loans become cheaper: After rising for two years, interest rates have finally started softening, providing the much-needed relief to retail customers. State Bank of India (SBI) – country’s largest lender – has reduced interest rates on education loans by 25-100 bps across various maturit ies. The new rates would be effect ive from Monday. For a loan of Rs 4 lakh, the interest rate has been reduced by 25 bps to 11.75 per cent , while for loans between Rs 4 lakh and 7.5 lakh, the rate reduct ion is 100 bps to 12.50 per cent . And, for the loans of above Rs 7.5



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lakh, rates have been cut 25 bps to 12.25 per cent. SBI also offers a concession of 50 bps on interest rates for loans given to female students. (BS dt . 19.02.2012 p. 1) Credit slows on risk aversion by banks: RBI: The overall slowdown in economic act ivity, risk aversion by banks and monetary policy act ions taken so far have led to a general decelerat ion in credit growth, said the RBI, in the “Macroeconomic and Monetary Developments: Third Quarter Review 2011-12”.The outstanding credit flow from scheduled commercial banks as on December 31, 2011 was Rs 43,65,600 crore - a growth of 16 per cent over the year-ago period. Against this, in December 2010, the year-on-year growth in credit was 24 per cent . The decelerat ion in credit growth of the public sector banks was part icularly sharp, said the RBI. This reflected a rising aversion of banks that is leading to a port folio switch to investments in risk-free government securit ies on the back of large government borrowing. The credit growth of foreign banks which had witnessed sharp decline during October 2008-October 2009 period, has witnessed a rebound since then. (BL dt .24.01.2012 p6) Lending rates in some segments could come down, say bankers: Lending rates in some segments could come down, as the 50 basis points reduction in Cash Reserve Rat ion by the Reserve Bank of India will bring down cost of funds. But reduct ion in deposit rates may not happen immediately, given the rates of compet ing small savings products, said bankers. Speaking to reporters after the announcement of the Third Quarter Review Monetary Policy, bankers said the indicat ion is that interest rates would soften later. Mr Prat ip Chaudhuri, Chairman, State Bank of India, said that a cut in deposit rates will depend on the rates offered by compet ing instruments, such as tax free bonds, tax saving bonds and so on. “With so many tax saving instruments offering interest rates in the 8.3-8.5 per cent range, one has to be really circumspect about cut t ing deposit rates,’’ he said. (BL dt .25.01.2012 p6) SBI hikes income floor for car loans to Rs 2.5 lakh: State Bank of India (SBI) has more than doubled the minimum income requirements for availing its car loans, worried its aggressive plan to tap the bot tom of the car-buyers pyramid could saddle it with dodgy assets. The country’s biggest bank will now offer car loans only to those who earn at least Rs 2.5 lakh a year - or about Rs 21,000 a month. The bank had been aggressively pushing a seven-year car loan product with a monthly installment (EMI) of Rs 1,765 per lakh. The bank is wary of the scheme at tract ing borrowers who may not be able to afford a car. SBI recent ly increased its interest rates on car loans by 75 basis points to 12%. (ET dt .25.01.2012 p13) SBI to lower interest on edu-loans by 100 bps: The country’s largest lender SBI has taken in-principle decision to slash interest on educat ion loans by up to 1 percentage point (100 basis points).“The bank has taken in-principle decision to cut (interest on) educat ion loan, SBI Managing Director and Chief Finance Officer Mr Diwakar Gupta told. “Announcement would be made soon. The bank will issue the not ificat ion short ly, he added. Without giving details of quantum of rate cut , he said, it may be up to 100 basis points.Interest rates on educat ion loans range from 12.25 per cent to 14.50 per cent , depending on their quantum and the durat ion. (DH dt .27.02.2012 p15)



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SBI cuts education loan rates by 25-100 basis points: State Bank of India has cut the interest rates on educat ion loans by 25-100 basis points, although it has retained its Base Rate at 10 per cent . The bank has reduced the margin above the Base Rate for the loan. As on December end, SBI’s educat ion loan port folio was to the tune of Rs 12,402 crore.Earlier this month, Central Bank of India had cut rates on home loans for a period of one month and also waived off the processing fees on home loans. (BL dt .28.02.2012 p6)



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Deposits…... Rangarajan calls for review of subsidies to check deficit: The Chairman of the Economic Advisory Council to the Prime Minister, Dr C Rangarajan, has emphasized the need for a relook at subsidies, part icularly those on petroleum products and review of other policy aspects to keep the fiscal deficit under control. Speaking to reporters after delivering the second foundat ion day lecture of the ICFAI Foundation, Dr Rangarajan said, “It is difficult to keep the deficit at 4.6 per cent as est imated in the Budget. It is sure to exceed. The roadmap to check it is to phase out subsidies.” Referring to the stress on rupee, Dr Rangarajan said there was some squeeze on it during November-December 2011 due to mismatch between the current account deficit and capital inflows. The process to ease it was on. Open market operat ions would improve liquidity, but the CRR cut could be considered for bridging large liquidity gap. (BL dt . 29.01.2012 p. 5) 8% growth projection likely for next year: The Finance Ministry is likely to project economic growth of around 8% for the next financial year, compared to a lit t le over 7% expected in the current year. Together with the assumpt ion of average inflat ion easing to around 6% next year, that would give a nominal GDP expansion of around 14%. On the basis of that , tax collections, fiscal deficit and other targets would be fixed in the budget. “We are looking at around 8% economic growth for the next fiscal and inflat ion at 6%,” a key ministry official told. (BS dt 30.01.2012 p1) Growth, euro zone fears weigh on RBI: India’s central bank is worried about the slowing economy and fears that a recession in the euro area will further drag down domest ic growth, but it doesn’t seem to be in a hurry to cut interest rates because inflat ion, which fell to a two-year low in December, could flare up again. Yet another pressure point the RBI will take into considerat ion while announcing its third-quarter review of monetary policy on Tuesday is the movement of Asia’s worst-performing currency last year, the rupee, against the dollar.In its macroeconomic and monetary developments report published on the eve of the policy, RBI said despite concerns about growth, the crit ical factor for deciding what should happen to interest rates will be “core inflat ion and exchange rate pass-through”. But it admit ted that it faces a tough task. “The growth slowdown, high inflation and currency pressures complicate policy choices. Monetary act ions will need to strike a balance between risks to growth and inflat ion,” it said. (Mint dt .24.01.2012 p1)



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Financial Inclusion & MFI….. Banks raise loan costs for MFIs: Public sector banks have raised the effect ive interest rate at which they lend money to microfinance inst itut ions (MFIs) to between 15% and 18%, cit ing higher risks in the sector.MFIs are companies that issue small loans to poor borrowers. They source around 80% of their funds from banks.According to microfinance industry executives and some bankers, the cost of loans has gone up following a rise in the premium banks charge in excess of their minimum lending rate. Besides, banks are also charging a processing fee and ask for cash collateral as security. This means banks do not disburse the ent ire loan amount even though they charge interest on it .Punjab National Bank (PNB), Corporat ion Bank, Indian Bank and Syndicate Bank, among others, have loaned money at an effect ive rate of 15-18% to some large microlenders, according to the execut ives. (Mint dt .10.02.2012 p1) KVG Bank women form “Vanitha Spoorti”: The Karnataka Vikas Grameena Bank (KVG Bank), in an effort to expand the reach of financial inclusion by involving lady staff of the bank, has started a scheme ent it led “Vanitha Spoort i.” The scheme was launched by the bank on Thursday at Dharwad. Addressing the bank employees, Mr C Sambasiva Reddy, chairman of the bank, said “Women are joining the banking industry in large numbers today, their contribut ion in the progress cannot be denied. In this changing scenario, the role of women employees in any organisat ion is also vital especially in the business development as well as involvement in day to day operat ions.” (BL dt .11.02.2012 p23) Small MFIs back in favour with banks: Microfinance companies in the country finally have something to cheer about. Banks have started offering loans to micro-lenders. Lending has been picking up in the last one month, according to industry players and bankers.Even smaller firms such as Sonata Finance, Disha India Micro Credit and Arohan Financial Services have got loans or sold some credit port folios to banks. However, industry sources say banks have been sanct ioning credit proposals of micro-lenders located outside Andhra Pradesh, where the crisis st ill persists. Sonata, based in upcountry Allahabad, has sold a part of its loan port folio to Axis Bank. “Banks have become support ive,” says Anup Singh, chief executive of Sonata Finance. “Quite a few are considering our loan proposals. We are confident of get t ing credit from these lenders in the coming months.” The micro-lender has a loan port folio of around Rs 100 crore, while it has borrowed about Rs 45 crore from banks. Last month, Punjab National Bank sanct ioned a loan applicat ion of Disha India, headquartered in Saharanpur, UP. “We have received funding from PNB,” says K N Tiwari, chief execut ive officer of Disha. “We expect other banks will also approve our loan requests. Our business was not affected by the crisis in Andhra Pradesh. Banks have realised that and are willing to lend to us.” (BS dt . 15.02.2012 p. 6) Old private banks asked to step up coverage in areas of operation: Old generat ion private sector banks, while focusing on their territories and niche business, should enhance their coverage in their areas of operat ions to source more customers



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without increasing cost and risk, according to Ms Usha Thorat , former Deputy Governor of the Reserve Bank of India and Director of the Centre for Advanced Financial Research and Learning. Speaking on the theme ‘Old private sector banks in India: Challenges and opportunit ies’ at the 88th Founders’ Day celebrat ion of Karnataka Bank Ltd, she said there has been a fairly steady growth in deposits and advances for old private sector banks but their market share has gone down, especially after 2005. (BL dt .19.02.2012 p3) Microfinance firm Bandhan Financial Services to sell Rs 500-cr farm loans to IDBI: Microfinance company Bandhan Financial Services plans to sell Rs 500 crore worth of farm loans to IDBI Bank in what would be the biggest securit isat ion deal this year. Selling loans releases capital for MFIs and helps them deploy fresh loans to the poor without borrowing direct ly from banks. In securit isat ion, the port folio goes off the seller’s advances book and the risk gets t ransferred to the buyer. This, in turn, helps banks meet their annual priority sector and agriculture lending targets. “We are commit ted to strike a Rs 500-crore securit isat ion deal with IDBI Bank. The t ransact ion will be through within a week,” Bandhan C&MD Mr Chandra Shekhar Ghosh told. (ET dt .27.02.2012 p12) Banks achieve 100% financial inclusion in state: Commercial banks in Karnataka have achieved 100 per cent financial inclusion ahead of the March 2012 deadline set by the Reserve Bank of India (RBI). The banks have set up banking out lets in all the ident ified 3,395 unbanked villages of over 2,000 populat ion.Announcing this Basant Seth, chairman, SLBC said the first phase of financial inclusion has been completed with the coverage of villages with a populat ion of over 2,000 persons. “It is expected that the banks will be able to provide basic banking services like savings-cum-overdraft accounts, simple savings product like recurring deposit , credit products like General Credit Card and Kisan Credit Cards and remittance through these out lets,” Seth said. (BS dt .28.02.2012 p5)

Minsitry of Finance Pranab pitches for foreign investment in infrastructure: Pitching for foreign investment in the infrastructure sector which needs $1 trillion in the 12th plan, the Finance Minister, Mr Pranab Mukherjee asked the US investors to access the Indian debt market through a mechanism of regulated ent it ies with a sustained long-term interest rate. Meet ing leaders of Fortune 500 companies, he assured them that India has evolved a t ransparent and stable regulatory regime in sectors such as electricity, telecommunicat ions, ports, airports, petroleum and natural gas, and a regulator for the coal sector is on the anvil. He told them that India has recent ly liberalized foreign part icipat ion in the debt-equity market by allowing foreign investors to invest in the Indian equity direct ly. The extent of foreign part icipat ion both through debt and equity in the financing of India’s infrastructure has been of the order of around 8 to 10% in the recent past . (BL dt . 30.01.2012 p. 3)



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FinMin urges PSU banks not to overstate profit: The Finance Ministry has writ ten to all public sector banks asking them to ensure profits are not overstated and to make appropriate provisions for bad loans.In a let ter to heads of public sector banks, the Finance Ministry said instances of over-report ing of profit have been cont inuing year after year and no correct ive act ion seems to have been taken to stop the recurrence.The let ter assumes significance in the light of rising bad debts in the banking sector.According to a senior official of a public sector bank, the letter has been issued recent ly by the Finance Ministry. (BS dt .17.02.2012 p7) FinMin prods PSBs to cut loan rates before March-end: The Finance Ministry is nudging state owned banks to cut lending rates before end March though most lenders had init ially taken a stand to review interest rates only next financial year. This has not been communicated in writ ing, but at a recent meet ing, senior ministry officials asked bank chiefs to consider lowering interest rates. Even after the RBI in January cut the CRR that banks have to maintain, signaling a reversal in the monetary policy stance, bankers had said that it would take a while for lending rtates to soften. Since CRR is the slice of customer deposits that banks have to keep as cash with the RBI, a cut in the rat io following repeated rate hikes was perceived as the onset of a dovish monetary policy. (ET dt 27.02.2012 p.1)



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Forex Inflows….. Banks get leeway on rupee vostro accounts: The RBI dispensed with the rule under which banks were required to seek its approval for opening and maintaining vostro accounts by non-resident exchange houses for each new client .Vostro is an account that one party holds for another. “With a view to give more operat ional leeway to the AD Category-I banks, it has been decided to dispense with the requirement of prior approval of the RBI for opening and maintaining each Rupee Vostro account in India of non-resident Exchange Houses in connect ion with the Rupee Drawing Arrangements (RDAs) that banks enter into with them,” the apex bank said in a circular. (FE dt .31.01.2012 p18) Forex reserves rise to $293.93 billion: India's foreign exchange reserves rose to $293.930 billion as of January 27, from $293.257 billion in the previous week, the central bank said in its WSS. Changes in foreign currency assets, expressed in dollar terms, include the effect of appreciat ion or depreciat ion of other currencies held in its reserves, the RBI said. Foreign exchange reserves include India's Reserve t ranche posit ion in the Internat ional Monetary Fund. (BL dt . 04.02.2012 p. 6) RBI partly lifts curbs on banks’ forex deals: The RBI has part ially lifted the clampdown imposed on banks’ foreign exchange transact ions when the rupee came under at tack from currency speculators in December. While the exchange market may not be ent irely out of the woods and the rupee can again come under pressure if Indian companies fail to roll over their dollar borrowings, the regulator has given some headroom to banks who were finding it difficult to meet client demands. Several banks, including large lenders like SBI, ICICI, HDFC Bank, Axis Bank and some public sector inst itut ions have been allowed to run higher net overnight open posit ions (NOP) in foreign exchange. Banks use the open posit ion limits which differ from lender to lender depending on the size and level of t reasury act ivity to either carry our proprietary t rades or buy and sell dollars to meet the requirements of corporate clients. (ET dt . 06.02.2012 p. 1) RBI eases cap on banks’ forex positions: The Reserve Bank of India said it has relaxed the limits on foreign exchange posit ions of banks imposed in the aftermath of a steep fall of the rupee in December. “Some limits based on their (banks’) merchant posit ions have been relaxed. If they have a requirement, they can come and approach us through the Foreign Exchange Dealer’s Associat ion of India (Fedai),” Reserve Bank of India Deputy Governor Mr H R Khan told reporters. Khan said banks will have to approach Reserve Bank of India with permission from their chairmen and managing directors and explain why and by how much they need the relaxat ions. (FE dt .07.02.2012 p18) Forex reserves decline $177 m to touch $294 b: India's foreign exchange reserves fell to $293.75 billion as of February 3 from $293.93 billion in the previous week, the central bank said in its weekly stat ist ical supplement on Friday. Changes in foreign currency assets, expressed in dollar terms, include the effect of



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appreciat ion or depreciat ion of other currencies held in its reserves, the Reserve Bank of India said. Foreign exchange reserves include India's reserve t ranche posit ion in the International Monetary Fund (IMF) (ET dt 11.02.2012 p.7) NRE deposits surge on high interest, weak rupee: Despite the rupee taking a U-turn and appreciat ing against the dollar, the lure of high-interest income seems to be at t ract ing Indians staying abroad to park huge sums in India. According to Reserve Bank of India (RBI) data, in the first nine months of this financial year, non-resident external (NRE) deposit flows to India are est imated at $3,500 million. Industry analysts and market part icipants, however, said in the past seven weeks, around $4-5 billion NRE deposits have been parked in domest ic banks by non-resident Indians. (BS dt .17.02.2012 p6) Forex reserves decline by $369 million: Foreign exchange reserves dipped by $369.2 million to $293.383 billion for the week ended February 10, according to the Reserve Bank of India’s weekly Stat ist ical Supplement. The decrease in reserves was mainly on account of currency revaluat ion. This is the second week in a row that foreign exchange reserves have declined. In the earlier week ended February 3, forex reserves had dipped by $177 million to $293.753 billion. In the week under considerat ion, the foreign currency assets fell by $370.6 million to $259.446 billion. (BL dt .18.02.2012 p8)

Housing Worries….. Banks must fix realistic EMI ratio for housing loans: Non-performing assets are perhaps the major factor of most banks in India leading to higher provisions, reduced interest income and locking up of huge funds affect ing return on assets, net interest income and consequent ly profitability. According to stat ist ics, NPAs as percentage of total advances has come down from 23.2 per cent in 1993 to 2.2 per cent in 2011. This, no doubt, is a commendable achievement. But this should not make one too complacent about NPA management. One factor responsible for the reduct ion in NPAs in percentage terms, is the massive growth in advances during the period from Rs 1,69,340 crore in 1993 to Rs 33,05,632 crore in 2011. During the same period, NPAs have grown from Rs 39,253 crore to Rs 71,047 crore in 2011. The percentage increase in NPAs is much smaller compared to the percentage growth in advances. (BL dt . 30.01.2012 p. 6) SBI to sell UK home loans: SBI, is set to enter the UK resident ial mortgage market in August following the bank’s expansion of its internat ional business last year. SBI came under scrut iny for offering “teaser” home loan rates, which are init ially low but then escalate, to domest ic customers in 2011, leading the Indian regulator to fear the country might experience a repeat of the US sub prime loan crisis. The bank said that it planned to take a conservat ive approach to lending overseas. After nearly 90 years in the UK, SBI increased its range of services last year, increasing its branch network from 7 to 10. (FE dt 30.01.2012 p.1)



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RBI: Housing Finance may come under priority lending: The RBI said it is considering categorising housing finance for weaker sect ions as priority sector lending by early next month to ensure adequate flow of credit . “We are t rying to put housing finance for weaker sect ion as a part of priority sector. There is a commit tee which is looking into it . Hopefully, by the first week of February this report will come,” RBI Deputy Governor Mr H R Khan said. The commit tee is headed by Union Bank of India C&MD M V Nair. (FE dt .31.01.2012 p18) Banks should not overvalue houses for loan, warns RBI: “It has been brought to our not ice that banks adopt different pract ices for deciding the value of the house property while sanctioning housing loans. Some banks include stamp duty, registrat ion and other documentation charges in the cost of the house property,” Reserve Bank of India said. It said this leads to overstat ing of the realisable value of the property as stamp duty, registration and other documentation charges are not realisable and consequent ly the margin st ipulated gets diluted.”Accordingly, banks should not include these charges in the cost of the housing property they finance so that the effect iveness of Loan to Value (LTV) norms is not diluted,” the apex bank said.Concerned over excessive flow of banking funds to the real estate sector, RBI had, in 2010, issued guidelines directing the lenders to provide loans only up to 80 per cent of the cost of property. (DH dt .04.02.2012 p17) Home loans norms may hurt sales: The RBI’s latest not ificat ion to banks to exclude stamp duty, registrat ion and such like charges while calculat ing the value of a property they intend to finance could lead to a further decline in housing sales in the lower and medium segments, say developers and consultants. The not ificat ion effect ively means housing buyers would have to arrange more funds on their own. (BS dt . 06.02.2012 p. 1) Home loans may get cheaper with new mortgage guarantee company: Home loans may soon come at bet ter terms, with the concept of mortgage guarantee set to take off in the coming weeks. Mortgage guarantees will ensure softening of interest rates as well as more credit availability for retail home loan borrowers, Mr R. V. Verma, Nat ional Housing Bank Chairman, said. With this product, lenders will get new customers who have not been part of the financial system. Exist ing customers will also benefit through bet ter terms, he said. Mr Verma said that India’s first mortgage guarantee company will soon go operat ional. (BL dt .08.02.2012 p1) P&S Bank on housing loan fines: Punjab & Sind Bank on Wednesday said it had abolished pre-payment penalt ies on housing loans for all types of borrowers. "The decision to waive repayment charges on housing loans reflects the bank's concern for its clientele desirous of repaying housing loans before repayment schedule," Chairman and Managing Director D P Singh said (BS dt 09.02.2012 p.6)



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CBI, BoM cut home loan rates by 0.25%: To prop up the sagging home loan market , state-run lenders Central Bank of India (CBI) and Bank of Maharashtra (BoM) have announced slashing of interest rates by up to 0.25 per cent , and also decided to waive the processing fees. Pune-headquartered BoM has decided to give housing loans under Rs 25 lakh for a five-year tenor at the reduced base rate (below which it cannot lend) of 10.60 per cent , it said. Similarly, CBI has cut home loan rates by up to 0.25 percent, it said. A home loan of up to 25 years and under Rs 30 lakh will be available at 10.75 per cent . Both the lenders have also announced waiver of processing charges. (DH dt . 20.02.2012 p. 15) Vijaya Bank cuts home loan rates: Vijaya Bank has slashed its interest rates on housing loans for both its short and long tenure varying from 100 bps to 200 bps and claims to offer the lowest interest rate. The revised rates came into effect from December 10. With this reduct ion from 10% to 8.75% in its fixed rate and a cut of 200 bps on float ing rate from 10.5% to 8.5% for the 60-month tenure. (BL dt .22.02.2012 p19)

Human Resources….. Bank of Baroda to hire 4,000 officers, clerks: Bank of Baroda will be hiring about 4,000 officers and clerks soon, according to its Chairman and Managing Director, Mr M. D. Mallya. “This will cater to our major branch expansion plan during the next financial year and replacement of ret ired staff,” Mr Mallya told. The bank has plans to open over 500 branches in the next one year which would need manpower, he added. The recruitment will be conducted on the basis on a common written exam being conducted by the Inst itute of Banking Personnel Select ion as part of an agreement it entered into with 19 banks. (BL dt .31.01.2012 p6) Blind can soon do away with scribes for bank exams: In what could be a major boost for visually challenged persons - applying for bank jobs - the Inst itute for Banking Personal Select ions (IBPS) will develop an online test ing tool to enable them to take the test without scribes, for the first t ime. The biggest test ing and skill-building organisat ion has joined hands with Internat ional Inst itute of Informat ion Technology Bangalore (IIITB) and the Nat ional Associat ion for the Blind Karnataka (NABK), to develop ‘Nethra Sarathy,’ the test ing tool, in about eight months. The tool will be deployed nat ionally for all visually challenged candidates taking the test by the end of 2012, IBPS Director Balachandran told Deccan Herald over the phone, from Mumbai. “There are nearly 1.45 million visually challenged persons aged between 20 and 29 in the country and 50 per cent of them apply for bank jobs,” Balachandran said.(DH dt .02.02.2012 p4) Corporation Bank gets new Executive Director: Mr Amar Lal Daultani assumed charge as the ED of Corporat ion Bank with effect from February 3. Before taking over this assignment , Mr Daultani held the posit ion of the Field



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General Manager (South) of Allahabad Bank at Chennai, and handled the business development of southern States. A Corporat ion Bank press release states that Mr Daultani, a postgraduate in Economics from Agra University, started his banking career as a management t rainee in 1978. (BL dt .06.02.2012 p6) Dhanlaxmi Bank chief quits on differences with the board: The MD and CEO of Dhanlaxmi Bank, Mr Amitabh Chaturvedi, called it quits on Monday. His resignat ion comes, reportedly, on account of differences of opinion with the board of directors. Mr P. G. Jayakumar, Execut ive Director, has been given the charge as MD and CEO of the bank, subject to the Reserve Bank of India’s approval. Mr Kumar has been with the bank for 34 years. Mr Chaturvedi had been at the helm of the old generat ion private sector bank since October 2008. In October 2011, the Reserve Bank of India had conveyed its approval for re-appointment of Mr Chaturvedi as MD and CEO of Dhanlaxmi Bank for a further period of three years. (BL dt .07.02.2012 p6) Banks employee federations demands 5-day work week: All-India Bank officers’ confederat ion and All-India State Bank officers’ federat ion have demanded implementat ion of five-day work week for the banking industry. “In view of alternate channels available to customers such as ATM, internet banking, mobile banking etc, a 5-day week may be implemented in the banking industry,” Mr G D Nadaf, the General Secretary of All-India Bank officers’ confederat ion and All-India State Bank officers’ federat ion said. (FE dt .07.02.2012 p18) Central Bank plans to hire 2,700 personnel this year: One of the oldest state-run banks, Central Bank of India is on a massive recruitment exercise, a senior official of the bank said. The bank plans to recruit 2,700 people this year to add to the 3,200 recruited last year.Ms Vijayalakshmi R. Iyer, Execut ive Director, Central Bank of India, said that this number would be exclusive of the addit ion in specialised segments such as t reasury operat ions, legal, and so on. “The recruitment exercise was t riggered by large number of ret irements. Around 1,500 to 1,800 are ret iring every year, over the last two years and in the next three years.” (BL dt .09.02.2012 p6) Federal Bank to hire 3,000 over two years: Old generat ion private sector bank Federal Bank is looking to hire about 3,000 personnel over the next two years. This recruitment is aimed at support ing the substant ial branch expansion plan as well as to replace the large ret iring workforce, said Mr Shyam Srinivasan, MD&CEO. The plan is to increase the branch network from the current 833 to 940 by March and to 1,000 by June. Also, about 800-900 people are expected to ret ire in 2012, thereby making it necessary to hire more staff, Mr Srinivasan said. “Assuming an average of five personnel a branch, our recruitment will be huge,’’ Mr Srinivasan said. (BL dt 13.02.2012 p.6) Dhanlaxmi Bank on austerity drive, to cut staff salary: A week after he took charge of Dhanlaxmi Bank, Mr.PG Jayakumar decided to cut costs to strengthen the financial posit ion of the Thrissur-based private lender. The austerity drive would include salary cuts, reduct ion in t ravel expenses and decrease in discret ionary spends.There is an imperat ive need to exercise extreme restraint on cost . "My earnest



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appeal to all my brethren is to promote austerity in the bank. Wherever possible, avoid spending.In this regard we need to be prepared to make sacrifices for our beloved inst itut ion in agreeing to salary cuts, economy class t ravel, etc.” Mr.Jayakumar, the newly-appointed MD&CEO, said in an email (BS dt 13.02.2012 p.4) Public sector banks may not flock to IIMs: The slowdown in 2009 saw many public sector organisat ions coming to the rescue of the Indian Inst itutes of Management (IIMs). This placement season may not paint a similar picture. For instance, State Bank of India (SBI) and IDBI Bank have decided not to go to the IIMs this year. Union Bank of India and Bank of India are not sure about the number of students they will get to recruit . “We will visit all other management inst itutes except the IIMs, as we have had a bad experience with them,” says Mr T R Bajalia, Execut ive Director (HR) (BS dt .14.02.2012 p2) MD of TMB announces decision to quit: Mr A K Jagannathan, MD of Tamilnadu Mercant ile Bank, has announced his decision to resign. This follows another recent high profile exit - that of Dhanlaxmi Bank's Chief Execut ive, Mr Amitabh Chaturvedi. Mr Jagannathan, has been at the helm of TMB for the last one - and - a- half years. Cit ing personal reasons for quit t ing office Mr Jagannathan maintained that he had certain urgent pressures on the personal front . "I am hoping to remain act ive though," he said, adding: "I am happy to exit when the bank is doing well. I will cont inue in Office for another three months, finalise the balance sheet." (BL dt 14.02.2012 p.6) Bank of Baroda to hire 600 probationary officers: Bank of Baroda is recruit ing probat ionary officers (in the junior management grade/ Scale I) to fill up about 600 vacancies across the country. The bank has specified that candidates with a total weighted standard score of 125 in the common writ ten examinat ion conducted by Inst itute of Banking Personnel Select ion (IBPS) and fulfill other criteria will be eligible to apply. The bank will specify these criteria and other details on its Web site after February 21. (BL Dt.16.02.2012 p6) CMD-designate for Oriental Bank: Oriental Bank of Commerce said that Mr S.L.Bansal has joined the bank as Chairman and Managing Director designate. He will take full charge of his new role with effect from March 1. Mr Bansal will come in the place of Mr Nagesh Pydah, who will ret ire on February 29. (BL dt.18.02.2012 p8) Bank officers’ body calls for all-India strike tomorrow: To press for its demands for regulated working hours, pay parity with SBI officers, stoppage of cross mergers of regional rural banks, and five-day working week, the All-India Bank Officers’ Associat ion (AIBOA) has called for an all-India bank strike on February 28. The Associat ion’s move coincides with the strike call by central t rade unions on the same day. Though clerical and sub-staff in banks have fixed working hours of 6.5 hours and 7 hours respect ively, the officers don’t have regulated working hours. Despite core banking system being in place, they end up putt ing in almost 12 hours every day at



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branches, said Mr Vishwas Utagi, General Secretary, Maharashtra State Bank Employees Federat ion. (BL dt .27.02.2012 p14) SBI ‘texts’ alert to branches on strike: The State Bank of India management chose to ‘text’ its branch managers all over the country with regard to conduct of business on Tuesday in view of the general st rike called by t rade unions of all party affiliat ions. It wanted branch managers to ‘create evidence’ through video recording against strikers who were seen obstructing the normal conduct of business. The evidence would be used against them while init iat ing action. (BL dt 29.02.2012 p.6) Dhanalakshmi to seek board nod to cut staff, change business model: The new management of Dhanalakshmi Bank Ltd, after the controversial exit of Chief Execut ive Officer Mr Amitabh Chaturvedi, is set to reverse some of his strategies. The lender plans to cut the staff st rength to 2,500-3,000 from around 4,600 now; rat ionalize the salaries of senior executives and remove the vert ical business structures, two execut ives of the Kerala-based bank said. The management will seek the board’s approval for the strategy change next month. The bank wants to bring down its wage bill to Rs 150 crore from over Rs 240 crore now. (Mint dt . 29.02.2012 p. 8) Managers need ‘seasoning’ time, says PNB chief: Punjab Nat ional Bank Chairman & Managing Director, Mr K R Kamath, while responding to a quest ion on recruitments he said that the bank had recruited about 6400 clerical staff last year. This was done to make up for the short fall that had accumulated over some years because of no recruitment. Punjab Nat ional Bank is also hiring close to 1,000 probat ionary officers and speacialist officers this year. Punjab Nat ional Bank added 400 branches last year to take its network to about 5,400 branches current ly. So the challenge is not so much about recruitment as about retaining them. (BL dt 29.02.2012 p.6)



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Inflation….. High inflation, weak fiscal weaken India rating: S&P: High inflat ion, a weak government fiscal posit ion and slower economic growth will negat ively impact India’s sovereign rat ing, rat ing agency Standard and Poor’s said. Many developing countries, including India, have managed to maintain relat ive stability and cont inued growth despite sovereign debt concerns and weak economic performance in Europe and the US. But, these nat ions do face challenges of their own. S&P’s unsolicited rat ing for India is “BBB-/ Stable/ A-3”Rat ings Services said the balance of risk factors (for India’s sovereign rat ing) may be shift ing slight ly toward the negat ive. (BS dt .07.02.2012 p6)

Infrastructure….. IDBI bank to launch India’s first infrastructure fund: State-run IDBI Bank will launch the country’s first infrastructure debt fund (IDF) to raise $5 billion for building roads, ports and airports. Such debt funds, announced in the budget 2011-12, can be floated through non-banking finance companies (NBFC) or as t rusts. They were proposed two years ago by a panel led by HDFC chairman Mr.Deepak Parekh, which had suggested an init ial corpus of 50,000 crore. IDBI Bank has sought Reserve Bank of India’s approval for an NBFC, which will have a capital base of 1,000 crore. The bank will hold 30% stake in the NBFC and the rest will be held by some state-run banks and Life Insurance Corporat ion of India, said a top banker involved in the process. (ET dt .10.02.2012 p9) Bankers fear build-up of NPAs in power, infrastructure sectors: Banks could see a build up of non-performing assets in the infrastructure and power sectors, said Mr Naresh Takkar, Managing Director and CEO, ICRA. Speaking at India Infoline’s ‘Enterprising India 2012 Global Investors’ Conference’, Mr Takkar said 75 per cent of banks’ exposure to electricity boards are towards weak ut ilit ies. So, out of the Rs 1.2-1.3 lakh crore exposures to electricity boards, about Rs 1 lakh crore worth of loans are subject to uncertainty and require policy intervent ion such as tariff hikes. Some States are working on aggressive tariff hikes, he added. With regard to road projects, Mr Takkar said that the underlying profitability of projects is very low and these have high proport ion of debt. So, it is the banking sector which is at risk and not the developers. (BL dt .16.02.2012 p6)



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Insurance….. IndusInd Bank to pick up 3-5% stake in Aviva Life: Private sector lender IndusInd Bank is set to pick up three-five per cent stake in private sector life insurer Aviva Life Insurance. According to sources privy to the development, as part of the deal, apart from offering shares, Aviva Life would also pay an advance commission, taking the total valuat ion of the deal to around Rs 1,000 crore.“The final modalit ies are being worked out . IndusInd Bank would have a board meet ing later this week, after which the deal would be announced, a source said. The private sector lender is already a corporate agent for Aviva Life, a joint venture between fast -moving consumer goods major Dabur Group and UK’s Aviva, with the lat ter holding 26 per cent stake. (BS dt .17.02.2012 p6) LIC to acquire 5% stake in Dena Bank by preferential shares allotment: Dena Bank has announced a 5% dilut ion of equity in favour of Life Insurance Corporation by way of allotment of preferent ial shares. Based on the current market prices, LIC may have to invest close to Rs 125 crore for the stake and the exercise would be over by the end of this fiscal, Chairman and Managing Director Mr Nupur Mit ra said. The preferent ial issue to LIC will result in the government’s stake in the bank falling below 58% - the threshold limit the government desires to maintain in public sector banks. “Government holding will fall to 55% with LIC coming in. Therefore, the government may have to infuse more capital into the bank to retain 58% stake. We have asked for Rs 500-crore capital over the next two-three years,” Mr Mit ra said. (ET dt .07.02.2012 p13) Bank of Maharashtra to raise capital from LIC, second after Dena Bank: The Bank of Maharahstra will be the second bank after Dena Bank to raise capital from Life Insurance Corporat ion (LIC), in a move aimed at boost ing their capital. The board of the bank will meet on February 10 to consider issuing shares on preferent ial basis to government or LIC, according to a statement issued to the stock exchange. Widening fiscal deficit has prompted government to approach LIC to invest in government owned banks a move which will help government to trim expenses and yet retain control over banks. (ET dt .09.02.2012 p11) BOM to allot 5% on preference basis to LIC: The board of Bank of Maharastra (BoM) has decided to dilute a 5% stake in favour of Life Insurance Corporat ion (LIC), which will help the bank shore its capital adequacy rat io (CAR). The government owned bank has decided to issue shares on a preferent ial basis to LIC before the end of this fiscal. The insurance company is expected to invest a lit t le than `.100 crore to gain addit ional stake in the bank. Following this, LIC stake in the bank will increase to a lit t le over 11%. Sources from Bank of Maharastra said that the bank's t ier I capital reserves and equity stood at 7.6% now and following infusion of capital by LIC it will cross 8% - the basic minimum that government desires in PSU banks. "we also expect the Government to infuse `.860 crore in the bank somet imes soon," said a senior bank official who did not want to be quoted.Last year the government had infused `.1000 crore in the bank. Shares of BoM closed 2% higher over previous day's close at `.56 at the Bombay Stock Exchange.(BSE). (ET dt 11.02.2012 p.7)



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Banks oppose IRDA norms on retailing policies: Concerned about possible dual regulatory supervision and resistance from foreign partners in their insurance joint ventures (JVs), Indian banks have opposed the proposed revision in guidelines for distribut ion t ie-ups between insurance companies and banks for the sale of insurance policies. The Insurance Regulatory and Development Authority (Irda) had, in a bid to create a level playing field, proposed a state-wise arrangement for such distribut ion t ie-ups, known as bancassurance. With their extensive nat ional networks, commercial banks provide an ideal plat form for insurance companies to sell their products. With many banks starting their own insurance ventures, newer, non-bank promoted insurers have been finding it difficult to find distribut ion partners with a wide network. This is because exist ing regulat ions deem that one bank can t ie up with only one life and one non-life insurance company across the country. (Mint 15.02.2012 p.1) LIC may take up to 5% stake in Punjab & Sind Bank: The Government-owned Punjab and Sind Bank has decided to go for a preferent ial issue of shares to another state-run firm, LIC. Money realised through this issue will help the bank to strengthen CRAR.With the government being in a t ight spot on the fiscal front , India’s largest life insurance company is coming to the rescue of public sector banks to pump in funds to boost their Tier-I (core) capital. After the government, LIC is the single biggest shareholder in majority of the public sector banks. (BL dt .17.02.2012 p6) Life insurers discover a low-cost distribution option: Life insurance companies are discovering that , compared with other distribut ion channels, bancassurance is a lower-cost opt ion they can leverage to expand their dist ribut ion network, according to a study commissioned by the Confederat ion of Indian Industry. The study, t it led “Addressing Distribut ion Challenges in Insurance, said the increased t ie-ups of banks with insurance companies indicated the lat ter are making use of the opportunity to leverage the extensive branch network. The study was carried out by Ernst & Young Pvt Ltd for the CII. Bank-based insurers are bet ter posit ioned due to their relat ively lower development costs, it said. (BL dt .17.02.2012 p6) UCO Bank to issue 3.13 cr equity shares to LIC on preferential basis: Kolkata-based UCO Bank proposed an issue of 3.13 crore equity shares to Life Insurance Corporat ion of India on preferent ial basis. The decision was taken by the board of directors at a meet ing in Kolkata. The issue of 3.13-crore equity shares to LIC on preferent ial basis will be done at a price as determined in accordance with Securit ies Exchange Board of India (ICDR) Regulat ions 2009. It will be subject to approval of the Union Government, RBI and the bank’s shareholders, the bank said in a not ificat ion to the BSE. (BL dt .22.02.2012 p6) LIC set to buy stakes in six PSBs to lend a hand to cash-strapped govt: With the government strapped for cash, the country’s largest domest ic inst itut ional investor, LIC, has started subscribing to a slew of preferent ial allotments. At least half a dozen PSBs have decided to allot a large chunks of shares to the insurance sector behemoth. In the last few days, Bank of India (BoI), Punjab Nat ional Bank (PNB), Dena Bank, UCO Bank, Indian Overseas Bank (IOB) and Allahabad Bank have either approved the



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allotment of shares on a preferent ial basis to LIC or have called a board meet to get the final approvals. (FE dt 23.02.2012 p.13) PNB awaits IRDA nod on Metlife deal: Await ing regulatory approval for its proposed acquisit ion of a 30 per cent stake in insurance company Metlife, Punjab National Bank has said it would not disclose the rat ionale behind the move or the financial details unt il IRDA gives its nod. Chairman & Managing Director Mr K R Kamath said Punjab Nat ional Bank did not foresee any hurdles for the deal, announced five months earlier, and would unveil the t ransact ion details after the approvals were secured. If the proposed deal materialized, the bank would become the largest shareholder in the insurance company. (BS dt . 24.01.2012 p. 6) Indian Bank drops plans for standalone life insurance venture: Indian Bank, a Public Sector lender, has shelved plans to float a separate subsidiary for taking up life insurance business. Instead, the bank will focus on building a mult iple-agency relat ionship system to augment business, its Chairman & Managing Director, Mr T M Bhasin, said. It would also go in for white-labeling of products so that Indian Bank’s name appears on products being offered by various agency partners, Mr Bhasin said. The move to abandon plans for set t ing up a separate life insurance venture comes in the wake of the bank’s decision to conserve capital and use it more propit iously for its core business. (BL dt 29.02.2012 p.6)

Liquidity….. RBI may cut CRR again to ease liquidity pressure: The Reserve Bank of India (RBI) on Tuesday indicated that it could go in for another cut in the cash reserve rat io (CRR) to unlock banking funds in view of persistent liquidity pressure. "We are watching the liquidity situat ion... I think that decision (another CRR cut) will be taken when we do our mid-quarter review... Having done one, I think the possibility of another is always on the table," said RBI deputy governor Subir Gokarn on the sidelines of a NHB funct ion. (FE dt .01.02.2012 p18) Open market operations can hurt price stability: Subbarao The Reserve Bank of India Governor, Dr D. Subbarao, on Wednesday caut ioned that conduct ing open market operat ions — buying and selling of government paper — for liquidity management could end up hurt ing price stability. If the mot ivat ion for central banks to conduct OMOs is to help out a fiscally vulnerable sovereign or reduce the cost of borrowing for the sovereign, then they could end up holding price stability hostage to sovereign debt concerns, said the Governor at the Second Internat ional Research Conference. In financial year 2012 so far, the RBI has conducted OMOs aggregat ing Rs 71,878 crore. (BL dt.02.02.2012 p1) No aggressive rate cut, open market operations will continue: Gokarn: The Reserve Bank of India is unlikely to cut rates aggressively even as economic growth appears to have slowed and inflat ion has started moderat ing.”That sort of room for very



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aggressive and very rapid rate cuts simply does not exist in today’s situat ion. The behaviour of commodity prices is and remains a risk to our inflat ion and growth out look. Let’s wait and watch and see how the situat ion stabilises,” Reserve Bank of India Deputy Governor Dr Subir Gokarn told. With economic growth dwindling, the central bank had kept key policy rates unchanged for the second consecut ive month in January 2012. However, it refrained from reducing the rates amid upside risks to inflat ion from global crude oil prices and the lingering impact of rupee depreciat ion. (BS dt .04.02.2012 p1) RBI buys Rs 8,819.52 crore bonds under OMO: The Reserve Bank of India bought Rs 8,819.52 crore bonds through open market operat ions, against a target of Rs 10,000 crore, as part of its strategy to infuse liquidity into the system. Four securit ies were on offer and RBI subscribed to all of them, the central bank said in a statement. (Mint dt . 04.02.2012 p. 9) ‘No decision yet, to stop bond purchases through OMO:Gokarn The RBI assured market part icipants that bond purchases under open market operat ions (OMOs) have not been discont inued and are very much on the table.”We have not put a stop over OMOs by any means, they are st ill on the table,” Deputy Governor Dr Subir Gokarn told reporters on the sidelines of an investor meet. The central bank’s purchases of government bonds through OMO auct ions would depend on liquidity conditions, Mr. Gokarn said.Bond t raders feared that the absence of bond purchases by the RBI this week meant an end of its bond-buying programme for the financial year.(BS dt .09.02.2012 p7) Chorus for CRR cut as Liquidity remains tight: Calls for a cut in the cash reserve rat io (CRR) to boost liquidity are gaining momentum as cash payments during state elect ions, intervent ion to stabilise the rupee, and slowing loan repayments by companies drain money out of banks. The RBI, which succeeded in keeping the government’s cost of borrowing in check with the so-called open market operat ions (OMO), hasn’t succeeded in easing liquidity pressure on the banking system. In OMOs, the RBI buys bonds, increasing cash in the system.Banks’ borrowing from the Reserve Bank of India’s repo window, an indicator of liquidity, rose to Rs 1.70 lakh crore on Tuesday, compared with August 2010 when banks were deposit ing excess funds with it . This deficit is more than three t imes the approximate Rs 55,000 crore the RBI has said it is comfortable with.”We expect a CRR cut of another 50 basis points that would release about Rs 27,000 crore into the system,” said Mr Pawan Bajaj, head of t reasury at Bank of India. (ET dt .17.02.2012 p1) As liquidity remains tight, RBI hints at further cut in CRR: The RBI Deputy Governor, Dr Subir Gokarn, said that the Reserve Bank of India will “consider” a further cut in the cash reserve ratio (CRR) if the systemic liquidity condit ions cont inue to be t ight . “To the extent that an opportunity is available for CRR (which is the percentage of deposits banks have to keep with the central bank,) cut further, we will also consider that ,” Dr Gokarn, who oversees the monetary policy function at the apex bank, told. (BL dt . 22.02.2012 p. 6)



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Banks to maintain higher liquidity:RBI: The Reserve Bank of India said that banks need to maintain addit ional liquid assets as part of Basel III guidelines, over and above previously mandated levels. Banks will need to adhere to these norms from the month or quarter ending June 2012, the RBI said in its draft guidelines on “Liquidity Risk Management and Basel III Framework on Liquidity Standards.” Indian banks current ly need to meet RBI-set requirements of cash reserve rat io (CRR), and statutory liquidity rat io (SLR). The CRR, or the share of deposits that banks must set aside in cash with the RBI, is 5.5 per cent , and SLR, or the minimum amount of investments that banks need to make most ly in government securit ies, is 24 per cent . (BS dt .22.02.2012 p7)

Mutual Funds & Capital Market….. Sebi eases preferential allotment norms: The Sebi, the capital market regulator, lifted restrict ions on board-based inst itut ions, such as insurance companies and mutual funds, subscribing to preferent ial issues of companies. The decision was taken at its board meet ing in New Delhi. According to earlier regulat ions, these inst itut ions were not allowed to part icipate in preferent ial allotments if they had sold holdings in the issuer companies in the preceding six months. Further, on allotment, they were required to lock in their ent ire pre-preferent ial holdings in such companies for a period of six months from the date of preferent ial allotment. Both these restrict ions have now been lifted. “It has been decided to exempt insurance companies and mutual funds, which are board-based investment vehicles represent ing public at large, from regulat ions related to sale and lock-in of their pre-preferent ial shareholding in issuer companies,” Sebi said in a release. However, the lock-in on shares allot ted in the preferent ial issue, will remain unchanged. (BS dt . 29.01.2012 p. 1) Banks may be allowed to hedge in commodity futures: In what could be a game changing move, banks may be allowed to hedge their risks in the commodity futures market . According to government sources, the finance ministry has written to RBI to explore ways to allow entry of banks in commodity hedging. RBI is act ively considering the matter. Banks give finance against commodity as collateral and hence they take risk on the price of that collateral commodity. The sources said the move would help improve real hedging and different kinds of risk-takers would come on board. A commit tee set up by the central bank had recommended six years ago that banks should be allowed to hedge such risks and should also be allowed to aggregators who aggregate others’ risks and hedge on their behalf in commodity futures. (BS 30.01.2012 p.6) Auditors holding back key info, I-bankers tell Sebi: Investment banks carrying out prelist ing due diligence in many companies have told capital market regulator SEBI that auditors of these firms are holding back key informat ion from them. Several auditors have refused to provide tax benefit statements, documents support ing end-use of IPO proceeds, and project funding details on the



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grounds that sharing such informat ion is beyond their scope of assignment. Since such crucial data can significant ly influence investment decisions, the matter was discussed at a recent meet ing of the SEBI Commit tee on Disclosures and Account ing Standards. According to regulat ions, a merchant banker is responsible for the informat ion published in an IPO offer document even though the issuer also hires the services of legal advisors and auditors. (ET dt . 31.01.2012 p. 1) Punjab National Bank plans pref issue to Govt: Punjab Nat ional Bank plans to issue shares to the Government on a preferent ial basis aggregat ing to Rs 1,285 crore. This plan was approved at a meet ing of the board of directors of the bank. An extrodinary general meet ing of the shareholders of the bank has been convened for March 20 to approve the terms of the preferent ial allotment, PNB said in a filing to the Mumbai Stock Exchange. Current ly, the centre has 58 per cent stake in PNB. (BL dt . 31.01.2012 p. 12) Allahabad bank hopes to get Rs 1000 cr capital infusion: Allahabad Bank is hopeful of receiving Rs 1,000 crore capital infusion from the Central Government under the recapitalisat ion scheme by the end of this fiscal. The fund infusion would be done primarily through the equity route, said Mr D. Sarkar, Execut ive Director, Allahabad Bank. The bank’s capital-adequacy rat io stood at 12.75 per cent as on December 31, 2011. “We had asked for Rs 1,000 crore from the Government and we are hopeful of get t ing the funds within the next one week. The infusion will be through direct equity,” Mr Sarkar said. The bank’s Tier I capital was at 8.91 per cent as on December 2011. (BL dt .31.01.2012 p6) Banks must closely monitor un-hedged forex exposures of cos: RBI The Reserve Bank of India on Thursday asked banks to rigorously evaluate the risks arising out of un-hedged foreign currency exposure of the corporates and price them in the credit risk premium while extending fund-based and non-fund-based credit facilit ies to corporates. Further, banks could also consider st ipulat ing a limit on un-hedged posit ion of corporates on the basis of banks’ board-approved policy. The RBI has issued the aforement ioned direct ives as recent events relat ing to derivat ive t rades showed that excessive risk - taking by corporates could lead to severe distress to them and large potent ial credit loss to their bankers in the event of sharp adverse movements in currencies. (BL dt 03.02.2012 p.6) Deutsche Bank exits Lodha investment: Deutsche Bank has logged a major gain before it exited a four-year-old investment in a Lodha group firm for Rs 2,542 crore, by making a neat profit of 55 per cent or Rs 902 crore ($180 million).It was in September 2007 that the German bank invested Rs 1,640 crore by subscribing to the compulsorily Convertible Debentures (CCDs) of Lodha’s subsidiary, Cowtown Land Development Ltd. The bank has now fully exited the investment it had made in the company, by selling the stake to the property developer. The Lodhas funded the buyback part ly through internal accruals worth Rs 1,720 crore and via fresh fundraising of Rs 825 crore, according to Mr Abhisheck Lodha, Managing Director of the company. After this repayment, the debt has come down by Rs 1,700 crore, from a high of Rs 4,000 crore. (BS dt .10.02.2012 p.2)



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Union Bank looks to raise Rs 955 cr through preferential issue: Union Bank of India is looking to raise up to Rs 955 crore through preferent ial allotment of shares. The bank’s Board on Wednesday approved a proposal issue up to 2.6 lakh crore shares to LIC on a preferent ial allotment basis. This works to 5 per cent of the bank’s equity share capital and is expected to raise up to Rs 600 crore. The bank will also raise up to Rs 355 crore by issuing shares to the government, the BSE announcement said. (BL Dt.16.02.2012 p6) Banking stocks rally may continue: There may be some more steam left in the beaten down banking stocks rally since valuat ions are at tract ive amid improving earnings out look due to prospects of lower interest rates through worries about bad assets linger. The BSE banks index has gained 36% this year, outperforming the benchmark sensex’s 17.8% gain. The bank index fell 32% last year. “Even as signs of monetary easing have led to the rally, most public sector banks are t rading at their book values,” said Mr Gaurav Dua, head of research at Sharekhan, an interent brokerage. “Private banks are t rading at discounts, but these are just ified due to asset quality issues.” (ET dt . 18.02.2012 p. 7) Govt, LIC to buy stake in Bank of India: Bank of India will make a preferent ial issue of fresh equity shares worth 12.8 per cent of its exist ing capital to the Government of India and to LIC. The bank informed stock exchanges that its board of directors has approved a proposal to raise capital through allotment of up to 7 crore shares to its promoter and LIC. The Bank has convened an extraordinary general meet ing of shareholders on March 24, 2012 for obtaining approval. (BL dt .22.02.2012 p10) PNB board nod for preferential allotment of shares to LIC, Centre: Punjab Nat ional Bank (PNB) plans to issue equity shares to Life Insurance Corporat ion on a preferent ial basis. The board of directors of the bank approved issuance of up to 1,58,40,607 equity shares of Rs 10 each at a premium of Rs 993.69 a share to LIC of India. The bank also plans to issue up to 1,28,02,757 equity shares to the Central Government on a preferent ial basis at the same price (premium of Rs 993.69). (BL dt 23.02.2012 p.6) Indian Overseas bank fixes price of equity shares: Indian Overseas bank has fixed the price of the equity shares it would allot to the government and Life Insurance Corporat ion of India for their capital contribut ion to the bank. The commit tee of directors for the preferent ial issue of shares has fixed the price at Rs 97.82 per equity share. (BS dt . 23.02.2012 p. 6) Indian Bank may tap capital market next fiscal: Indian Bank said it may come out with follow-on public offer (FPO) next fiscal if market condit ions are conducive. “We do not require capital immediately...we may go in for FPO in the next fiscal (2012-13) if the market condit ions improve,” Indian Bank C&MD Mr. T M Bhasin said. The board has already given approval for the equity dilut ion to the extent of 10 per cent , he said. At present the government holds 80 per cent stake in the Chennai headquartered bank. (FE dt .28.02.2012 p18)



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NPA….

Banks check Cibil ratings of promoters for corporate loans: Strong credit rating is no longer sufficient for banks to advance loans to corporate. Worried over the rise in bad loans, lenders are combing individual financial reports of promoters and board official to look for clues or pat terns that could ring an alarm. India’s leading credit informat ion agency CIBIL says banks are act ively seeking such reports to take informed decision. “The bankers want to know the financial discipline of their borrowers. Such data provides crit ical informat ion on the people who are involved in running the company on a daily basis, “CIBIL’s MD Mr Arun Thukral told. A senior official with the country’s largest lender, SBI, confirmed that often banks seeks such informat ion in order to ascertain if the promoter’s personal fortune is linked to the company’s growth. (ET dt 30.01.2012 p.15) Rising non-performing assets pulls down bank stocks: Bank stocks suffered a mauling in markets with private sector banks too being singed by the sustained selling. The sent iment was not only affected by the overall weakness in the market but also apparent ly by the Q3 results by some of the banks that revealed higher net NPAs, raising the spectre of bad loans ballooning for the sector as a whole. Three bank stocks - Union Bank of India, HDFC Bank and IDBI Bank - escaped any serious erosion in value. The banks that came out with Q3 numbers - Oriental Bank of Commerce, Indian Bank, Punjab & Sind Bank and Allahabad Bank - showed that theirs net NPAs had zoomed, in some cases by 100 per cent compared to the corresponding period last year, which spooked the bank counters. (BL dt .31.01.2012 p13) Central Bank to recast Rs 7,000-cr discom loans: Central Bank of India may restructure loans worth over Rs 7,000 crore of the state government owned power distribut ion companies in the fourth quarter.The loans that would be recast will const itute to more than 60 per cent of the total loan exposure to state distribut ion companies or discoms. The bank has lent as much as Rs 12,000 crore to many of such ent it ies. He, however, declined to name the ut ilit ies, which would come up for restructuring in the fourth quarter. However, two such discoms, i,e Uttar Haryana Bijli Vitaran Nigam and the distribut ion company of Rajasthan have already kicked off a restructuring exercise of their loans.Central Bank of India’s total exposure to power sector is about Rs 18,995 crore at end of December 2011. It forms about 14.24 per cent of total loan book.(BS dt .02.02.2012 p6) ICICI to recast Rs 1,300-cr loans this quarter to cover GTL, 3i Infotech debt: ICICI Bank, the country’s largest private sector lender, is likely to restructure Rs 1,300 crore of loans in the current January-March quarter. Key accounts expected to be part of the exercise include those of GTL and 3i Infotech.The bank’s net restructured loan port folio was est imated at Rs 3,070 crore as of December 31. “With respect to GTL, while we understand that some banks have done the restructuring in the third quarter, the arrangement and execution in our case will take place in the fourth quarter,” a senior execut ive of the bank said, after the lender announced its third quarter earnings yesterday.Adding: “Further, some small exposure could be restructured outside the CDR



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(corporate debt restructuring) mechanism. The restructured port folio, as a consequence, is expected to increase from the current levels.”(BS dt .02.02.2012 p6) SBM moves court against Sterling Bio: State Bank of Mysore (SBM) has filed a criminal complaint against Sterling Biotech and six directors of the company for allegedly default ing on repayments on credit facilit ies provided by the public sector lender.In its complaint , the bank has said that cheques worth `.58 crore submit ted by the company have bounced. The cheques were drawn on Andhra Bank. C&MD Mr. Nit in Sandesara, Joint MD Mr.Chetan Sandesara have been named with some of the other directors in the complaint filed at 23rd Esplanade Court , Mumbai. Sterling Biotech is the flagship company of the Gujarat -based Sandesara group. (ET 03.02.2012 p.8) Corporation Bank treats Kingfisher loan as NPA in Q3: Corporat ion Bank has t reated loans to ailing private carrier Kingfisher Airlines as a non-performing asset (NPA) in the third quarter ended December 2011. Its loan exposure to Kingfisher was just a lit t le more than Rs 155 crore. The bank made provision of around Rs 35 crore in the third quarter, said a senior bank official. SBI, Bank of India and Punjab Nat ional bank have also declared loans to the Vijay Mallya-promoted private airlines as an NPA, for the default on payment of dues. The official said this airline is a commercially viable ent ity and come out of the crisis with the infusion of capital. Corporat ion bank saiditwillalsorestructureitsRs1,300-crloantoRajasthanstatepowercompany. (BS, dt . 03.02.2012, p4) UCO Bank, UBI and Allahabad Bank stare at rising NPAs: Even as the RBI ruled out any special provisioning norms for debt recast in the wake of increasing NPAs in the banking industry, three Kolkata based banks have reported a significant rise in bad assets during the third quarter of the current fiscal. The banking regulator will soon meet 10 large banks to take stock of their non-performing assets. While UCO Bank, the largest among the Kolkata-based banks, has been burdened with huge non-performing assets for several consecut ive quarters, other two public sector lenders, Allahabad bank and United Bank of India, have seen a significant increase in NPAs during the period under review. (FE dt. 04.02.2012 p. 18) Bad loans rise at a faster clip: Bad assets of India’s banks are expanding at a fast pace at a t ime when growth in Asia’s third largest economy is slowing. The gross NPAs of 34 listed banks that have announced December quarter earnings escalated to `.76,644 crore, posting a growth of 30.51% year-on-year. What is part icularly worrying is that the pace of growth is increasing with every successive quarter. For instance, in the September quarter, the growth in gross NPAs for this set of banks was 28.28%; in the June quarter it was 19.14%, and March quarter, 17.81%. Net NPAs as a percentage of loans may not be a good yardst ick to judge a bank’s health as it can always make hefty provisions to bring it down. But even the gross NPAs of individual banks show a divergent t rend. For instance, gross NPAs as a percentage of loans have declined for ICICI Bank, Kotak Mahindra Bank Ltd., Bank of India, Union Bank, Andhra Bank, Syndicate Bank, UCO Bank, United Bank of India and two SBI associates, but has



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risen for many, including Punjab Nat ional Bank, Bank of Baroda, Canara Bank, IDBI Bank Ltd., Allahabad Bank, Corporat ion Bank and a few others. (Mint dt.06.02.2012 p1) Banks ask borrowers to cover their personal loans, overdraft facilities: The banking sector, reeling under a rise in non-performing assets (NPAs) from the corporate sector, is seeking to hedge loans to individual borrowers. Increasingly, borrowers are being asked to buy insurance policies to cover their loans. “Covers with personal loans and overdraft facilit ies have gained tract ion in recent t imes. Both public and private sector banks are aggressively pushing these products to retail customers,” said a senior State Bank of India (SBI) official. According to Reserve Bank of India data, outstanding personal loans, without housing, consumer durables, credit cards, etc, stood at Rs 12,817 crore at the end of December. Since personal loans are for a period of three-five years, the premium is not very high. Also, if the borrower purchases a group insurance policy, the premium is even cheaper. (BS dt .06.02.2012 p1) When ‘non-muhurtham’ days turn fruitful for Corporation Bank: What are bankers doing on a ‘non-muhurtham’ day in a kalyana mantapam or marriage hall? For Corporat ion Bank’s T-30 (a special recovery team of 30 bank officials) in Tamil Nadu, the ‘non-muhurtham’ days of December 2 and 3 last year assumed significance. The bank booked the kalyana mantapams in Villupuram and Kallakurchi towns and provided lunch for all those who came there. The occasion was a loan recovery camp conducted by T-30. Mr Ajai Kumar, Chairman and Managing Director of Corporat ion Bank, told Business Line that nearly 3,000 borrowers turned up for these two recovery camps. “These are all small loans. Most of the borrowers, who are not educated about repaying the loans, are scared to come to the bank. We wanted to inst il confidence that the bank is with them and it is willing to set t le dues at these recovery camps,” he said. (BL dt .10.02.2012 p6) Central Bank of India aims to lower NPAs: The Central Bank of India, which had recent ly posted a 72% plunge in net profit to `.113.24 crore (from ̀ .404 crore) for the third quarter of 2011-12, following a sharp rise in non-performing assets (NPAs), says it would bring down its NPAs to 2.5% in 2012-13. Talking to reporters, Central bank of India, CMD Mr. M V Tanksale said the Bank's gross NPAs at the end of December 2011 stood at 3.69% while NPAs were 2.04%. According to the CMD, the shift to system - based calculat ion of NPAs was normally expected to have a "big impact in the init ial six months". (FE dt 11.02.2012 p. 18) Banks see a rise in restructured assets: When State Bank of India (SBI) announces its results today, most eyes will be on the lender’s asset quality numbers and loan-loss provisioning rather than the profit figure. As the country’s largest bank, it is a bellwether of the financial sector and a proxy for the economy. But SBI’s numbers could possibly be only a reflect ion of the gloom that has encompassed the banking system, a glimpse of which can be viewed in the accompanying table. Sure, about 10 out of the 23 banks for which data is available have shown an improvement in their gross non-performing assets (NPAs) posit ion at the end of December from a quarter ago. (Mint dt 13.02.2012 p.16)



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We are on an aggressive drive to recover bad loans: Central Bank ED: Central Bank of India has been relat ively slow (as compared with other banks) in imbibing new technology. But it has now caught up, says the bank’s ED, Ms V.R. Iyer. The bank completed networking of all its branches, numbering close to 4,000 about a year ago. It is now aggressively expanding its ATM network. “We have around 1,494 ATMs at present. We want to increase it to 2,000 in the next six months, and add another 1,000 before the end of 2013 and we are on an aggresive recovery drive, have revisited OTS and all other schemes". She told.(BL dt 13.02.2012 p.6) RBI to meet Banks soon on bad loans: Worried over rising bad loans in certain sectors, the RBI on Monday said it will discuss the issue with bank soon. "Stress sectors are well known, the issues which are there. But we don't think there is a great concern as of now," RBI Deputy Governor Dr. K C Chakrabarty said in Mumbai (BS dt 14.02.2012 p.6) SBI’s asset quality worrying as bad loans double in Q3: State Bank of India reported a net profit of Rs 3,263 crore for the quarter ended December 2011, up 15 per cent from Rs 2,828 crore in the corresponding year-ago quarter. The increase in profit was on account of a robust rise in net interest income, which touched an all-t ime high and improvement in net interest margins. Profits grew despite an increase of over Rs 1,300 crore in loan loss provision and an over Rs 800-crore depreciat ion in investment on account of losses in the equity port folio, said Mr Prat ip Chaudhuri, Chairman, SBI. “The bank is back on a consistent growth path,” he said.The bank increased loan loss provisions by 84 per cent to Rs 3,006 crore (Rs 1,632 crore). However, asset quality for the country’s biggest bank st ill remains a concern, with gross non-performing assets touching Rs 40,098 crore as on end December, from Rs 23,438 crore in the ‘year-ago’ period. (BL dt 14.02.2012 p.6) RBI warns on bad loans, but says situation not alarming: The RBI caut ioned Indian banks about rising non-performing loans, increased capital requirements because of st ricter Basel III norms and greater pressure on domest ic liquidity as European banks may reduce their exposure to the country if the crisis there persists. Warning note: RBI deputy governor Anand Sinha says the problem of bad loans has arisen because there was aggressive lending by banks in the pre-crisis boom period coupled with laxity in monitoring and proper due diligence. “The situat ion is under control, but there is an underlying reality that it is not very comfortable,” he said. (Mint 15.02.2012 p.1) Banking on staff for recovery: Every day, between 7.30 pm and 11 pm, a top official of a public sector bank gets text messages from 46 zonal managers. The messages contain details on recovery figures of respect ive zones, with addit ional informat ion on ranking of centres, based on recoveries. The zonal managers have to send these numbers daily. Failure to do so will see an email from the chairman’s office seeking the details. The official says he has been doing this chore daily for the last one year. This helps keep a tab on the accounts which have slipped into the NPA category. This is not a one-off incident. Banks reeling under asset quality pressure have beefed up recovery efforts. And, it has percolated to the ground level. Branch level staff are also being deployed for collect ion of dues. However, the situat ion is



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different this year. With the slackening of credit demand due to high interest rates, hect ic act ivity is being seen on meet ing recovery targets. Lenders are also resort ing to referring bad accounts backed with securit ies to SARFAESI processes. (BS dt15.02.2012 p.6) SBI rating unaffected by weakening loan quality: Global rating agency S&P said that its rat ing on SBI is not affected by the significant slippage in its loan quality. "We ant icipate the SBI's credit provisioning costs for the fiscal year ending March 31, 2012, will not be significant ly higher than the projected credit losses based on our risk adjusted capital framework" S&P said. (Details in ET dt . 15.02.2012 p. 13) NPAs, loan recast spoils banks’ show: A jump in bad loans and restructured loans marred the December quarter performance of banks, with restructuring jumping 19% from the previous quarter as text iles, steel and infrastructure companies bleed due to lower output and higher cost of funds. Total restructured loans for the December quarter were at least 23,400 crore, calculations by ET show. This adds to 1.21 lakh crore as of September registered for restructuring with the Corporate Debt Restructuring Forum. “The situat ion is under control, but there is an underlying reality that it is not very comfortable,” RBI Deputy Governor Mr.Anand Sinha was quoted as saying. “From 15% in 1995, NPAs came down t ill 2008, but they have risen sharply by 91% in 2006- 2011.” “We could see some more recast for one more quarter, then it might start tapering off,” said S Raman, C&MD, Canara Bank. (ET dt .16.02.2012 p12) SBI for policy support to enable loan recovery: State Bank of India wants policy support and regulatory intervention in the agriculture sector so that bad loans from this sector could be tackled effect ively, said a top official. For India’s largest bank, bad loans from the agriculture sector rose to 19 per cent (or Rs 7610 crore) of the total NPAs (Rs 40,098 crore) in the quarter ended December 31, 2011, against 16 per cent (Rs 4524 crore) in the corresponding year ago period. Besides calling for policy support and regulatory intervent ion, Mr Diwakar Gupta, Managing Director, SBI, flagged the issue of moral hazard whereby some borrowers in the agriculture sector don’t pay banks despite being in a posit ion to do so on expectat ion of loan waiver being announced by the government. Policy intervent ion is required, at the pre-harvest and post-harvest stages, as the current size of land holding as well as technology used makes farming unsustainable. (BL dt .16.02.2012 p6) RBI meet discusses NPA: Central Board of Directors of RBI met to provide an overall direct ion to the bank’s affairs in light of present economic scenario. The meet ing chaired by RBI Governor Dr D Subbarao discussed the present financial situat ion in the country and the impact of global economy on India, RBI sources said. Amongst others the issue relat ing to the NPAs with the banks was also taken up, while the quest ion of interest rate revision was also examined in the backdrop of declining inflat ion, they said. Besides, the government also discussed on financing of micro, small and medium enterprises, SHG Bank linkage programme, recovery climate and organizat ional aspects of rural self employment t raining inst itutes and



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financial literacy and credit counseling centres and licensing of dist rict co-operat ive banks. (FE dt . 17.02.2012 p. 18) Education loan defaults becoming a problem: The issue of loans turning bad is becoming a problem for banks of late, said Mr K. Ramakrishnan, Chief Execut ive, IBA, at an interact ion between Karnataka-based banks and heads of educat ional inst itut ions in Bangalore, organised by Canara Bank. Mr S. Raman, C&MD, Canara Bank, said that there was a mismatch between the higher cost of educat ion and the potential income levels of students after complet ion of educat ion in some professional courses, which had to be addressed. The government’s proposal for a credit guarantee scheme for educat ional loans would help make interest rates finer, he added. Mr Raman admit ted that his bank was witnessing signs of st ress in the educat ional loan segment of late, which was not the case earlier. (BL dt.20.02.2012 p6) Guidelines on hedging, NPAs soon: The Reserve Bank of India would soon be releasing guidelines for banks to come out with a policy on hedging of foreign exchange exposure by their corporate borrowers. Addressing a press conference on the quarterly monetary policy review, the Reserve Bank of India Governor, Dr D. Subbarao, said, “Banks must have a board decided policy on hedging to foreign exposure. It cannot be left to the corporates to decide. We would be issuing guidelines in the next 10 days, asking banks to get a policy approved by their boards on hedging.” “Banks are in the process of report ing to us on whether all their loans of over $25 billion are hedged or not ,” he added. According to Dr Subbarao, $60 billion is the Indian exposure to banks in Euro zone. “The European situat ion is disturbing, but not explosive as it seemed during Christmas. We are cont inually monitoring the exposure of banks and corporates to European debt.” (BL dt .25.01.2012 p6) RBI asks banks to be humane with borrowers: The RBI has said banks should ensure that loan defaulters are not put to embarrassment while debts are recovered. Part icipat ing in a two-day workshop on ‘Securit isat ion and Reconstruct ion of Financial Assets and Enforcement of Security Interest Act 2002’ , RBI’s Principal Legal Adviser Mr G S Hegde said the Act allowed banks to auct ion propert ies when borrowers failed to repay the loan. It helped them reduce Non-Performing assets.However banks should engage t rained agents to recover the money, he said, adding it was important to deal with debtors with ‘humaneness.’ (DH dt .27.02.2012 p15) Banks to lose about R10k crore on 2G loans: Moody’s: Global rat ing agency Moody’s investors Service said on Monday that Indian Banks will find it tough to recover roughly `.10,000 crore lent to mobile telephony companies whose licenses were cancelled by the Supreme Court . The apex court on February 2 cancelled 122 second generat ion (2G) licenses of eight companies after they were issued on a first -come-first -serve scheme in 2008 and asked the government to auct ion spectrum or airwaves that carry radio signals. The agency said at least `.10,000 crore out of `.90,000 crore lent specifically to companies, which won licenses in 2008, was risky. (FE, dt. 28.02.2012, p3)



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RBI to meet bankers today on bad loans: The Reserve Bank of India Deputy Governor, Mr K C Chakrabarthy, will be meet ing top bankers to discuss the rising non-performing assets (NPAs) in the system. The RBI Governor Dr D Subbarao, had announced that the regulator would be meet ing bank chiefs to take stock of the rising NPAs which had hit bank’s bot tomlines in the third quarter. The RBI has since maintained that the situat ion was manageable and it was not systemic issue. (BL dt 29.02.2012 p.6) Private, foreign banks log lower NPAs than PSU peers: At a t ime when slow economic growth has raised concern over the asset quality of banks and prompted the Reserve Bank of India to take stock of bad loans in the system, data from banks showed since the global financial crisis of 2008, foreign and private sector lenders have managed non-performing assets bet ter than their state-run rivals. Based on their interact ion with bankers, Reserve Bank of India Deputy Governors Dr K C Chakrabarty (in charge of banking supervision) and Mr Anand Sinha (in charge of banking operat ions and development) would prepare a report assessing the magnitude of non-performing assets. (BS dt . 29.02.2012 p. 7)

Other Banking News….. Andhra Bank Q3 profit dips 8.5% on higher provisioning Andhra Bank reported a 8.5 per cent dip in net profit at Rs 303 crore in the third quarter ended December 31, 2011, compared with Rs 331 cr in the year-ago period. “The decrease in net profit was due to increase in provisions because of restructuring of some accounts,” Mr B. A. Prabhakar, Chairman and Managing Director, Andhra Bank told newspersons here on Thursday. A bulk of restructuring was done in the telecom sector.( BL, dt. 03.02.2012, p 6) BoI to revamp 350 large city branches: Public sector lender Bank of India will revamp up to 350 key branches in metro and large cit ies to project these as “Branch of the Future” over the next 18 months to scale up the retail business.Execut ive Director, Mr N Sheshadri said its first pilot branch is already operat ional at Chembur, a Mumbai suburb. The bank will remodel 200 such branches in the next six to eight months. The focus is on upgrading customer services to retail clients. At tract ing the young by providing the latest communicat ion devices at branches for t ransact ions will top the agenda. (BS dt .09.02.2012 p6) Bank of Maharashtra cuts base rate: In a bid to push credit in the run-up to the close of the financial year, Bank of Maharashtra has decided to pare its base rate by 10 basis points to 10.60 per cent with effect from February 21. The public sector bank has also said it will offer housing loans up to Rs 30 lakh at the Base Rate for a repayment period of five years under the float ing rate opt ion.Home loans above Rs 30 lakh and less than Rs 75 lakh, and Rs 75 lakh and above will be charged 11.10 per cent (Base Rate + 0.50 per cent) and 11.35 per cent (Base Rate + 0.75 per cent) interest respect ively for repayment period of five years under floating rate



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opt ion. The bank has waived processing charges, which range from Rs 4,000 to Rs 12,500, for housing loans up to Rs 25 lakh. (BL dt .18.02.2012 p8) Central Bank Q3 net slumps 72% on higher provisioning, asset restructuring: Higher provision for bad loans and restructured assets pulled down Central Bank of India's net profit by 72 per cent to Rs 113 crore in the October-December 2011 period, against Rs 404 crore in the corresponding year-ago period. The public sector bank's incremental bad loans increased by 28 per cent (or Rs 1,082 crore) to Rs 4,922 crore in the reporting period. There was an incremental increase of Rs 3,616 crore in restructured assets in October-December 2011, against Rs 1,408 crore in July-September 2011 (BL dt .01.02.2012 p6) Corp Bank net up 5% in Q3: Higher cost of deposits, and provisions for loans and investment depreciat ion tempered Corporat ion Bank’s net profit in the October-December 2011.The public sector bank’s net profit nudged up by 5 per cent to Rs 402 crore, against Rs 382 crore in the corresponding year-ago period.In the report ing period, cost of deposits increased to 7.64 per cent (5.72 per cent in the October-December 2010 period). While provisions for bad and doubtful debts increased by 22 per cent to Rs 440 crore (Rs 360 crore), that for investment depreciat ion jumped by 460 per cent to Rs 140 crore (Rs 25 crore). (BL dt .03.02.2012 p6) Non-interest income lifts Dena Bank net 20% in third quarter : Helped by a decent growth in core non-interest income, Dena Bank reported a 20 per cent increase in net profit at Rs 187 crore in the October-December 2011 period, against Rs 155 crore in the corresponding year-ago period. The bank recorded a 27 per cent increase in core non-interest income of Rs 109 crore (Rs 86 crore in the October-December 2010 period). Net interest income (the difference between interest earned and expended) increased by 16 per cent to Rs 541 crore (Rs 466 crore in the October-December 2010 period). On the back of increased lending to the agriculture, micro, small and medium enterprises, and retail segments, the bank is expect ing to end the financial year with a year-on-year credit growth of 20 per cent , Ms Nupur Mit ra, Chairperson and Managing Director, Dena Bank said. (BL dt .07.02.2012 p6) Dena Bank's deposit mobilisation drive: The ent ire workforce of Dena Bank, including its Chief Ms Nupur Mitra, will embark on a mass deposit mobilisat ion drive on February 12 to garner low-cost savings bank and current account deposits. The Public Sector bank, in a statement said, irrespect ive of the cadre, the bank's 10,000 staff members across the country, will reach out to the people door to door, by visit ing housing societ ies, malls and parks to explain to them about products and services offered by the bank. (BL dt 10.02.2012 p.6) Fitch cuts Dhanlaxmi Bank rating: Rating agency Fitch downgraded Dhanlaxmi Bank’s subordinated debt (Rs 17 crore) to ‘BBB-’ from ‘BBB’ as the old-generat ion private lender posted a net loss in the third quarter.The Kerala-based bank could post further losses due to an elevated cost-base and revenue pressures from its rapid expansion of network, Fitch said in statement. Fitch also put the rat ing under watch, with negat ive implicat ions. (BS dt .22.02.2012 p7)



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Federal Bank bets on ‘heavy’ organic expansion: Federal Bank is bet t ing on organic growth and strengthening of its core to grow its business and is not act ively scout ing for acquisit ions, said Mr Shyam Srinivasan, Managing Director & CEO. The old generation, Kerala-based private sector bank wants to be a 1,000-branch bank by June. Current ly, it has 835 branches. Besides its home turf of Kerala, the five focus markets where it is planning to increase its footprint are Tamil Nadu, Gujarat , Punjab, Maharashtra and Karnataka. “These five States have a big catchment of SME and NRI customers and these lines of business are the strength of Federal Bank. Our focus is really to serve these segments,” said the Federal Bank chief. (BL dt .10.02.2012 p6) Federal Bank net jumps 41%; NRI deposits up: The net profit of Federal Bank spurted by 41 per cent to Rs 202 crore for the quarter ending December 31. The bank delivered substant ial topline and bottomline growth despite a challenging macro environment, both in the domest ic and global market , a press release said. The bank, which had been working on its t ransformat ion to a truly pan-India status while adopt ing contemporary management techniques, has reported excellent numbers which not only reflect rapid growth but also asset quality. The total business grew by 22.7 per cent to touch Rs 79,948 crore. Total deposits increased 26.6 per cent to Rs 46,742 crore. While retail deposits expanded 27.2 per cent to Rs 38,678 crore, Non-Resident Indian deposits grew faster at 35.4 per cent to Rs 10,546 crore. The fall in the rupee value and spurt in interest rates for Non-Resident Indian deposits seem to have helped accelerate the volume of Non-Resident Indian deposits. The low-cost CASA deposits grew by 21.9 per cent to Rs 13,186 crore.(BL dt .24.01.2012 p6) HSBC India profit up 20% on strong growth in commercial biz : HSBC’s India operat ions reported a profit before tax of $813 million for the year ended 2011 — 20 per cent higher than the $679 million in the previous year. The growth in profit was on account of the improved performance of the retail banking segment where losses declined substant ially and strong growth in commercial banking, said Mr Stuart Davis, Chief Execut ive Officer, India, HSBC. (BL dt.28.02.2012 p6) Indian Bank Q3 net up 7%: Indian Bank has reported a net profit of Rs 526 crore for the quarter ended December 2011, a growth of 7 per cent over the Rs 491 crore recorded in the corresponding year-ago quarter. For the nine-month period, net profit stands at Rs 1,402 crore (Rs 1,275 crore). Net interest income rose by 12.8 per cent to Rs 1,170 crore during the quarter under considerat ion from Rs 1,038 crore. The bank’s gross NPA (non-performing assets) was at Rs 1,190 crore (1.35 per cent) and net NPA was Rs 695 crore (0.8 per cent). The bank has recovered a total of Rs 366 crore during the nine-month period. (BL dt .31.01.2012 p6) Indian Bank to get Rs 63.03 crore: Indian Bank has got its Board’s approval for the proposed Scheme of Amalgamat ion of Indfund Management Limited, a wholly-owned subsidiary of the bank. Through this merger, the bank would get around Rs 63.03 crore as Tier I capital into the bank. The bank also said, it is looking at merging housing subsidiary and a decision on this will be taken in a week’s t ime. (BS dt . 04.02.2012 p. 5)



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Higher interest income lifts ICICI Bank Q3 net 20%: ICICI Bank reported a 20 per cent increase in its net profit at Rs 1,728 crore in the quarter ended December 31, 2011, on the back of an increase in interest income and lower provisions on account of a decrease in non-performing assets. In the corresponding year-ago period, it had recorded a net profit of Rs 1,437 crore. The bank's profitability in the report ing quarter was also boosted by dividend income of Rs 150 crore from its subsidiary, ICICI Prudent ial Life Insurance Company, which posted a net profit for the first t ime since incept ion. (BL dt .01.02.2012 p6) Kotak Mahindra Bank net up 47% on loan book growth: Strong growth in advances and other income, and lower provisions helped Kotak Mahindra Bank’s profits rise by 47 per cent to Rs 276 crore, in the quarter ended December 31, 2011, from Rs 188 crore in the corresponding quarter last year. The growth in advances has come mainly from segments like corporate, commercial vehicles, construct ion equipment and mortgages. “There is no slowdown in the segments that we are present in. We have a large share of retail loans and short term working capital loans in the corporate segment. The slowdown is in longer term loans like infrastructure loans and capex loans. There is st ill st rong demand for credit outside the main metro cit ies,’’ said Mr Dipak Gupta, Joint Managing Director, Kotak Mahindra Bank. (BL dt .24.01.2012 p6) Lakshmi Vilas Bank net rises 10.35% in Q3: Lakshmi Vilas Bank has registered a 10.35 per cent increase in net profit in the quarter ended December 2011 compared to the corresponding year-ago period. The bank’s net profit rose to Rs 28.35 crore (Rs 25.69 crore) and its total income was up 49 per cent at Rs 429.49 crore (Rs 287.57 crore). However, compared to the 49 per cent growth in its total income, the total expenditure swelled 66.4 per cent to Rs 381.38 crore (Rs 229.09 crore). Explaining the reason for the significant increase on the expenditure side, LVB’s Chief Execut ive, Mr P. R. Somasundaram, told that it was on account of increased spending on ATM network and manpower. (BL dt.04.02.2012 p6) PNB profits up 5.5% in third quarter: Punjab Nat ional Bank reported a 5.5 per cent increase in net profit for the quarter ended December 31, 2011, at Rs 1,150 crore (Rs 1,090 crore) on Tuesday. This is despite a sharp rise in cost of funds coupled with higher marked-to-market provisioning in G-secs, which pulled down third quarter profit growth. The bank's bot tom-line performance was lower than the net profit of Rs 1,205 crore recorded in second quarter this fiscal. For the nine-month period ended December 2011, PNB reported a 7 per cent increase in net profit at Rs 3,460 crore (Rs 3,233 crore). It recorded a net profit of Rs 4,433 crore in fiscal 2010-11.(BL dt .01.02.2012 p7) PNB to open 10 more branches in Uttarakhand: The country’s second-largest public sector lender PNB would open 10 more branches in Uttarakhand by March-end. With this, total number of branches of the bank in the state would go up to 200, PNB ED, Ms Usha Ananthasubramanian, told reporters. Of the 190 exist ing branches in the state, 100 are in rural areas, 47 in semi-urban areas and 43 branches are in the urban areas, she said. As many as 193 ATMs have already been



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installed in the hill state. Ms Anantha-subramanian said the bank has introduced new schemes like ‘Kalyani credit card’ scheme especially catering to women in rural areas. A loan of Rs 50,000 is given to women for special purposes under the scheme. (BL dt .18.02.2012 p8) SBBJ profit up 24% in Q3: State Bank of Bikaner and Jaipur has reported a 24 per cent increase in net profit at Rs 164 crore in the October-December 2011 period, against Rs 132 crore in the corresponding period last year.A 37 per cent increase in net interest income to Rs 630 crore (Rs 430 crore in the October-December 2010 period) boosted the bank's profitability despite provisions towards bad loans jumping to Rs 142 crore (Rs 76.50 crore).Mr Shiva Kumar, Managing Director, SBBJ, at tributed the profitability to bet ter funds management and acquisit ion of high-yielding assets.(BL dt .02.02.2012 p6) SBH net up 20.4% in Q3: State Bank of Hyderabad’s net profit increased 20.4 per cent at Rs 301 crore in the third quarter ended December 31, 2011, compared with Rs 250 crore in the corresponding quarter of the previous year. This was driven by 14 per cent increase in net interest income at Rs 845 crore (Rs 740 crore). The total business expanded by 22 per cent to reach Rs 1,67,300 crore. SBH would add 50 more branches to its exist ing network of 1,407 branches before end-March 2012, according to a release. (BL dt .03.02.2012 p6) SBI sets sights on absorbing SBM: After taking over two associate banks - State Bank of Saurashtra in 2008 and State Bank of Indore in 2010 - SBI has set its sights on assimilat ing the nearly century old SBM this year.As part of its consolidat ion strategy, India’s largest bank wants to first merge the smaller associate banks before at tempt ing to take over relat ively bigger associates such as SBH and SBT. “We will take over smaller associate banks first as it is easier to integrate them. We have gained valuable experience through the acquisit ion and integrat ion of State Bank of Saurashtra and State Bank of Indore,” said a senior bank official. However, in the case of bigger associate banks, the official observed that the issue is that their branch network in their home State is as big as SBI’s branch network in that State. (BL dt 15.02.2012 p.6) SBM net profit down 15.98% in third quarter: State Bank of Mysore registered a net profit of Rs 110.94 crore in the third quarter of 2011-12 against Rs 132.04 crore in the corresponding period of the previous fiscal, recording a decline of 15.98 per cent . The net profit for the first nine months of the current financial year stood at Rs 253 crore as against Rs 336.79 crore in the corresponding period of the previous fiscal. The net interest income of the bank during the third quarter stood at Rs 413.42 crore (Rs 443.79 crore).However, ‘other income’ of the bank registered a growth, at Rs 106.88 crore (Rs 97.17 crore). (BL dt .03.02.2012 p6)



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SBT revises interest rates: State Bank of Travancore (SBT) has rat ionalised t ime buckets and revised upward interest rates for domest ic and NRO term deposits. Announcing this, an official banks spokesman said that the time buckets of 15-46 days; 46-90; and 91-179 days have been consolidated to one bucket of 46-179 days. (Details in BL dt . 27.02.2012 p. 17) Union Bank of India may cut rates next month: A day after State Bank of India reduced rates on educat ion loans, Union Bank of India said it may cut interest rates on home and educat ion loans next month. If net interest margin cont inues to hold strong, we may reduce rates especially on the retail sides like home and educat ion loan,” United Bank of India Chairman and Managing Director Mr M V Nair said. (Mint dt . 29.02.2012 p. 11) UCO Bank net profit rises 11% in Q3: Kolkata-based UCO Bank posted a 11 per cent rise in net profit to Rs 333 crore for the quarter ended December 31, 2011, against Rs 301 crore in the corresponding year-ago period. Net interest income, however, dipped by three per cent to Rs 103 crore during the period under review. The bank witnessed fresh slippages to the tune of Rs 537 crore, of which, Rs 291 crore is due to its exposure to Kingfisher Airlines. “We started the cleaning up of our balance-sheet last year. There are legacy issues which we are facing,” said Mr Arun Kaul, Chairman and Managing Director, UCO Bank.(BL dt .02.02.2012 p6) YES Bank Q3 net surges 33% at Rs 254 cr: YES Bank on Tuesday reported a 32.94 per cent jump in net profit to Rs 254.09 crore for the third quarter ended December 31, 2011.The bank had posted a net profit of Rs 191.12 crore for the corresponding year-ago period.Total income of the lender rose to Rs 1,895.49 crore during the current quarter from Rs 1,287.82 crore in the same period last fiscal, YES Bank said in a filing to the BSE.”I’m pleased to report that YES Bank has delivered another sustained quarter of financial performance in the backdrop of a challenging economic environment. The increase in savings accounts rate to 7 per cent, coupled with alignment of fixed deposit rates for NRIs with domest ic fixed deposit rates, are clear compet it ive different iators,” said Mr Rana Kapoor, Managing Director & CEO, YES Bank. (BL dt .25.01.2012 p1)

Overseas Aspirations….. Bank of Baroda to expand overseas network: Public sector Bank of Baroda will expand its overseas network by increasing up its presence in Africa, Middle East and entering New Zealand for the first t ime, a top company official said. “We want to increase our presence in the overseas market . We are present in 87 countries, which will go up to 100 by June 2012,” BoB’s Chairman and Managing Director Mr. M D Mallya said. The bank would increase its presence in Africa and the Middle East , while it would enter New Zealand for the first t ime. (BL dt 13.02.2012 P.6)



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Banks see good growth in Mauritius operations: Indian and foreign banks operat ing in Maurit ius are seeing good growth in business as Indian companies look to expand operat ions in Africa. In fact , Maurit ius is fast catching up with larger international financial centres such as London and Singapore, given its posit ion as a gateway to Africa. According to Standard Chartered Bank data, over the last two years, t rade between India and Africa has touched $40 billion and is expected to grow to $70 billion by 2015. For Bank of Baroda, business growth in its Maurit ius operat ions has been around 25 per cent , said the official. The bank has seven branches and will add one more before the end of the current financial year. It also has an Offshore Banking Unit . (BL dt .18.02.2012 p8) National Australia Bank opens branch in India: National Australia Bank officially opened its branch in India, in Mumbai. The branch will support existing inst itut ional corporate and business banking customers operat ing or t rading with India, said a press release issued by the bank. (Details in BL dt 23.02.2012 p. 6) Indian Bank to set up three more branches in Sri Lanka: Bhasin Indian Bank has applied to the Reserve Bank of India to open three more branches in Sri Lanka. The bank plans to open a branch each in Batt icaloa, Trincomalee and Hambantota, it’s Chairman and Managing Director, Mr T. M. Bhasin, said. The Central Bank of Sri Lanka has already given the green signal for these branches, he said after inaugurat ing a specialised SME branch on Monday. This is the first SME branch opened by Indian Bank in New Delhi. (BL dt .28.02.2012 p6)

RBI Directives…. & Guidelines…. All private banks can handle Govt Biz as agents: RBI The RBi said all private sector banks will now be eligible to handle Central and State government business as agents of the central bank, at par with Public Sector banks. So far, the facility was limited to only three Private Sector – ICICI Bank, HDFC Bank and Axis bank. "It has been decided that all private sector banks will now be considered eligible to handle any Central/ State Government business (Where RBI pays agency commission) at par with Public Sector banks," RBI said in a circular.(BL dt 01.02.2012 p.7) RBI on `.1,000 denomination notes: The Reserve Bank of India on Wednesday said it would soon start issuing banknotes of `.1,000 denominat ion in non-sequent ial numbering. The packets of banknotes in non-sequent ial number will have hundred notes, RBI said. In June last year, RBI had started issuing ̀ .500 denomination notes in non-sequent ial numbering.(BS dt .02.02.2012 p6)



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RBI: Loans to bank directors’ kin must be on commercial terms: The Reserve Bank of India on Friday said the restrict ions pertaining to advances to bank directors as contained in the Banking Regulation Act would apply to grant of loans and advances to their spouse and minor/ dependent children. However, banks may grant loan or advance to or on behalf of spouses of their directors in cases where the spouse has his/ her own independent source of income arising out of his/ her employment or profession. The loan so granted should be based on standard procedures and norms for assessing the creditworthiness of the borrower. Such facility should be extended on commercial terms. (BL dt .04.02.2012 p6) Sick’ MSMEs: RBI for change in definition: The RBI wants the definit ion that classifies industrial units in the micro, small and medium enterprise category as ‘sick’ changed as barely 2 per cent of such units have got rehabilitated in the last few years. The proposal to revise the definit ion is aimed at detect ing signs of incipient sickness among MSME units so that prevent ive measures could be taken by all stakeholders, including banks, to nurse them back to health. “As per the current definit ion, a unit is classified as sick when there is erosion in the net worth due to accumulated cash losses to the extent of 50%. By the t ime the units reach this stage they are nearly dead. So, the definit ion of sick units needs to be changed,” said Mr K. C. Chakrabarty, Deputy Governor, RBI. A Government standing advisory commit tee is looking into the possibility of making this change, he said at a seminar organised by the Small & Medium Business Development Chamber of India. (BL dt .05.02.2012 p2) RBI asks banks to put up list of unclaimed deposits, inoperative a/ cs on Web site: The RBI asked banks to display the list of unclaimed deposits/ inoperat ive accounts which have been inact ive/ inoperat ive for ten years or more on their respect ive Web sites. The list so displayed must contain only the names of the account holder(s) and his/ her address in respect of unclaimed deposits/ inoperat ive accounts, the RBI said in a not ificat ion. In case such accounts are not in the names of individuals, the names of individuals authorised to operate the accounts should also be indicated. The RBI has instructed that the account number, its type and the name of the branch should not be disclosed on the bank’s Web site. (BL dt .08.02.2012 p1) RBI on foreign contribution: The RBI on Thursday issued guidelines which st ipulate that ent it ies have to get themselves registered with the central government before accept ing any foreign contribut ion and banks will have to forward the report of receipts of such t ransfers to the government (BS dt 10.02.2012 p.4) RBI raises bank rate to 9.5%: The Reserve Bank of India (RBI) raised its bank rate to 9.5% from 6% with immediate effect , to align it with the marginal standing facility (MSF) rate, the central bank said.The rate at the MSF, which is an addit ional liquidity window for banks, is 100 basis points above the RBI’s repo rate and now stands at 9.5%.”This [rate change] should be viewed and understood as one-t ime technical adjustment... rather than a change in the monetary policy stance,” the RBI said in a release.”Henceforth, whenever there is an adjustment of



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the MSF rate, the RBI will consider and align the bank rate with the revised MSF rate.”(BS dt .14.02.2012 p7) RBI on immovable property buys: The Reserve Bank of India said Indians residing abroad need not report the acquisit ion of immovable property in the country. The central bank has made changes in the IPI form for greater clarity on the matter. (BS dt . 16.02.2012 p.6) Majority of external panel members wanted rate cut: Reserve Bank of India Governor Dr D Subbarao cont inued with his independent view on the monetary policy by st icking to a pause on interest rates when a majority of his advisory commit tee were for a cut in rates. The governor, who was appreciated by the commit tee for the way he handled the currency depreciat ion, overruled the suggest ions of at least four of the seven independent members who were for a cut in the repo, the rate at which the central bank lends to banks. While three were for 25 bps, one suggested 50. But there was unanimity in their concerns over the deteriorat ing fiscal condit ion of the government which has raised the borrowing target by nearly a quarter from its budgeted level in February last. (ET dt .18.02.2012 p7) RBI to wait for Budget proposals before rate-cut: “The inflat ion and interest rate cycles have peaked and have to come down and for that the RBI will look at events like the budget (2012-13), internat ional crude oil prices and other variable factors to calibrate its policies,” RBI Governor Dr D Subbarao said. Finance Minister Mr Pranab Mukherjee will present the Budget for 2012-13 fiscal in the Lok Sabha on March 16 during which, he is expected to announce steps to arrest slowdown in economic growth. The GDP growth rate in 2011-12 is expected to moderate to 6.9 per cent from 8.4 per cent a year ago. Defending RBI’s decision to hike interest rates (Repo) 13 t imes since March 2010, Dr Subbarao said the measures were required to tame inflat ion which had significant ly crossed the threshold levels. (DH dt . 19.02.2012 p. 13) RBI to buy govt securities worth Rs 12,000 cr: The Reserve Bank of India announced that it would purchase government securit ies worth Rs 12,000 crore through open market operations (OMOs) to ease the current liquidity crisis. The RBI will conduct the auction at its Mumbai office. The Reserve Bank of India will conduct the auct ion will be in four price methods - government securit ies (G-Sec) maturing in 2017 with a coupon of 8.07%, G-Secs maturing in 2021 with a coupon rate of 8.79%, G-Secs maturing in 2027 with a 8.28% coupon rate and G-Secs maturing in 2032 with a coupon rate of 8.28%. (BL dt 23.02.2012 p.6) Reserve Bank of India to issue Rs 1,000 notes: The Reserve Bank of India is set to issue new banknotes of `.1000 denomination. “The Reserve Bank of India will short ly issue Rs 1,000 denominat ion banknotes with inset let ter ‘R’, in the Mahatma Gandhi Series bearing the signature of Dr D Subbarao, Governor, Reserve Bank of India, and the year of print ing on the reverse of the banknote,” the central bank said. (BS dt . 23.02.2012 p. 6)



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RBI mulls norms for bankers’ dealings with loan arrangers: The RBI is believed to be examining the possibility of laying down guidelines for banks when dealing with loan arrangers. This move has to be seen in the context of the Central Bureau of Invest igat ion bust ing a bribe-for-loans scam in November 2010. Bankers say it would be bet ter if the central bank evolves ‘do’s and don’ts’ when it comes to dealings with loan arrangers. Based on these guidelines, banks could come up with appropriate risk mit igat ion mechanisms to break the banker-loan-arranger-borrower nexus. Though the engaging of professional loan arrangers, such as chartered accountants, by enterprises, especially those in the MSME category, is a legit imate act ivity, there are lingering concerns that loans are being sanct ioned by some top bank officials for a considerat ion, even when loan proposals are not bankable. (BL dt .24.01.2012 p6)

` Movement…. Rupee falls 35 paise on dollar demand: The rupee ended lower by 35 paise at 49.50/51 against the American currency today on fresh dollar demand from banks and importers, despite weakness of the dollar abroad. At the Interbank Foreign Exchange (Forex) market, the rupee resumed steady at 49.15/ 16 per dollar and t raded in the range of 49.15 and 49.52 before set t ling at 49.50/51, a loss of 0.71 percent or 35 paise from its previous close. Fresh dollar demand from banks and importers in view of uncertainty in the currency market mainly affected the rupee value against the dollar, a forex dealer said (BS dt 10.02.2012 p4) Rupee up 7 paise amid steady inflows: The rupee recovered marginally by seven pasie to close at 49.29/ 30 against the US dollar amid sustained capital inflows. Forex dealers said fresh selling of the American currency by exporters on hopes of further fall in its value overseas aided the rupee's value. The dollar index, consist ing of six major currencies, was down by over 0.2% in the European market . (Bl dt . 16.02.2012 p. 6) Rupee at two-month high: The rupee jumped 21 paise to a two and a half month high of Rs 50.10/ 11 against the US dollar on the back of sustained capital inflows and weakness in the American currency overseas. At the Interbank Foreign Exchange (Forex) market , the rupee opened stronger at 50.30/ 31 a dollar and immediately hit a low of 50.40 on investor caut ion in stock markets and month – end dollar demand from importers, mainly oil refine. However, capital inflows and sluggish dollar in the global markets helped the rupee to bounce back to close at 50.10/ 11, a net rise of 0.42 %. It had ended at 49.97/ 48 on November 8, 2011. (BL dt 24.01.2012 p.6)



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Technology….. BoI to open 200 ‘branches of the future’: Bank of India plans to create 200 ‘branches of the future’ in the next one year. Such branches will have spacious customer lobby, pleasing ambience, self-service kiosks and separate area for high net-worth individuals with dedicated relat ionship managers, said Mr Alok K Misra, Chairman and Managing Director, Bank of India. According to Mr N. Seshadri, Execut ive Director, the new branch init iat ive will provide superior customer service to the bank’s customers. (BL dt .11.02.2012 p6) Now ATMs can advertise financial products: Banks with large network of automated teller machines (ATM) will now be able to generate addit ioanl revenue by advertising financial products offered by other inst itut ions. With an eye on financial inclusion and to incent ivise banks for opening ATMs in remote areas, the Finance Ministry has allowed bank owned as well as outsourced ATMs to display advert isements of other financial products. Reserve Bank of India will soon issue guidelines in this regard. (BS dt 11.02.2012 p.14) White label ATMs may not hit banks’ rollout plans too much: Banks do not plan to ease up on their ATM expansion drive despite the Reserve Bank of India’s plans to allow non-banks to set up white label ATMs (WLAs), say bankers. ATMs are an important part of banks’ alternat ive channel strategy to reach customers, to showcase their products and services, and create brand awareness. This is reflected in the increase in the number of ATMs in the April 2011-January 2012 period, during which banks added 14,477 ATMs. At end January 2012, the country had 89,655 ATMs, according to the Nat ional Payments Corporat ion of India.Banks will deploy their own ATMs because it helps to retain customer loyalty. If WLAs becomes a reality, they may tweak their st rategy by focussing on put t ing their own ATMs in areas where they have a high customer density. (BL dt .17.02.2012 p6) Mobile banking seeks boost: With Interbank Mobile Payment Service (IMPS) in place, banks are now leveraging their exist ing corporate clientele to replace day-to-day cash dealings at the ground level with mobile t ransact ions. So far, 34 banks have registered with Nat ional Payments Corporat ion of India (NPCI) to enable mobile fund t ransfers between banks for their customers. While most of these banks have launched mobile banking services for their retail customers, some are busy laying the plat form for inst itutional clients as well. (BS dt. 21.02.2012 p. 9) HDFC Bank launches mobile payment service: HDFC Bank and Movida, a joint venture between Visa and Monit ise, have launched a mobile payment service that allows customers to make payments through their mobile phones using their debit / credit card registered with the bank. Movida provides technology that enables using mobile handsets as the core device for making electronic payments. These include bill payments (insurance premium, electricity bills), mobile top-ups and movie t ickets. Payments to all companies that accept electronic payments can be done using this service. (BL dt 23.02.2012 p.6)



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IDBI Bank arm working on portal for study loans: Students may not have to sweat it out to get educat ion loans from banks if the portal that IDBI Intech is currently working on turns into reality. The IT subsidiary of IDBI Bank is envisaging a portal that will provide students an online interface with banks and professional colleges/ inst itut ions so that they could, among others, glean informat ion on the various recognised professional courses available across the country, the fees charged, and the educat ion loan schemes on offer. The portal will capture informat ion from crucial stakeholders - professional colleges and banks - in the higher educat ion ecosystem, said Mr Sanjay Sharma, MD and CEO, IDBI Intech. (BL dt .27.02.2012 p14) Technology makes bank strikes irrelevant in urban India: While trade unions were on a day’s strike on Tuesday protest ing against what they said were the government’s anti-labour policies and banking sector reforms among others, bank customers couldn’t have cared less, thanks to ATMs and electronic payment modes of t ransferring funds. Union leaders admit that technology has changed the game. “These are all new handicaps,” said Mr C H Venkatachalam, General Secretary of the All India Bank Employees’ Associat ion. He was, however, quick to add that the unions never intended to inconvenience the general public. “If there was any other way to show my unhappiness to the government, I would have taken those measures,” Mr Venkatachalam said. (Mint dt . 29.02.2012 p. 6) Nabard to help introduce CBS in 4 district co-op banks : To face compet it ion from regional rural banks and scheduled commercial banks, Nabard plans to help introduce core banking solut ions (CBS) to four district central co-operat ive banks in Karnataka. The four districts ident ified are Kodagu, Kanara, Chikmagalur and Bijapur. Tata Consultancy Services is the technology provider in Karnataka. The four banks signed agreements with TCS. According to Mr S.N.A. Jinnah, Chief General Manager, Nabard, “We are to play the role of an advisor and facilitator in the process and extend project management support during the roll out of the CBS.” (BL dt .08.02.2012 p21) RBI to permit non-banking entities to set up ATMs: In a bid to accelerate the growth and penetrat ion of ATMs in the country, the Reserve Bank of India said it plans to permit non-banking ent it ies to set up, own and operate ATMs. ATMs rolled out by non-banks will be like White Label ATMs (WLA) and will provide ATM services to customers of all banks, the RBI said in its Draft Guidelines for WLAs. Non-bank ent it ies proposing to set up WLAs have to apply to the RBI seeking authorisat ion under the Payment and Sett lement Systems Act 2007. Such ent it ies should have a minimum net worth of `. 100 crore at the t ime of making the applicat ion and on a cont inuing basis after issue of the requisite authorisat ion. Being non-bank owned ATMs, the guidelines on five free t ransact ions in a month for using other bank ATMs will not be applicable for t ransact ions made on the WLAs. The charges for the t ransact ions have to be displayed on the screen before the customer init iates the t ransact ion. (BL dt 15.02.2012 p.6)



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HDFC Bank loan kiosks in offices soon: You can now apply for a personal loan during your lunch break, without stepping out of the office. If the paperwork is proper, you can also receive the money before you reach home at the end of the day.HDFC Bank, India’s second-largest private sector lender, is set t ing up kiosks in corporate offices that would allow employees to submit a loan request , get it processed, and receive the money in 24 hours. Init ially, we are target ing companies that already have a banking relationship with us. We plan to set up 1,500 priority desks across 500 companies in nine cit ies in the next six months, Mr Sai Giridhar, senior vice-president and business manager (unsecured loans), HDFC Bank, told. The mobile kiosks would offer details of the bank’s personal loan products, including interest rates, tenure, and eligibility criteria. All the rates and fees would be similar to those of loans from bank branch. (BS dt .16.02.2012 p6)

Indian Banking - Journey into the Future Shri Anand Sinha

Shri M. D. Mallya, Chairman, Indian Banks' Associat ion and Shri M. Narendra, Chairman, Indian Overseas Bank, the joint organizers of this mega event of the Indian banking industry and other delegates. A very good evening! It is an honour for me to be here today to deliver the valedictory address of this Conference which has come to signify an annual confluence of banking minds for serious deliberat ions. These conferences give us all an opportunity to reflect on the latest developments in the banking space and chart the future course of act ion. In the current phase following the crisis, the environment has become so fluid and dynamic that bankers need to be in a constant state of awareness and preparedness to face the new challenges and also to adjust to the fast changing regulatory landscape. The Conference, over the span of three days, as I see from the program schedule, has covered a wide range of important issues such as financial inclusion, wholesale banking, technology, consumer experience, etc. I am sure these discussions have t riggered new thought processes and opened new vistas for us to go back and chalk out the implementat ion strategy for making Indian banking more efficient , resilient and socially more relevant. As per the IBA-FICCI-BCG Report (August 2011), "India's Gross Domest ic Product (GDP) growth will make the Indian banking industry the third largest in asset size in the world by 2025". However, being largest is not enough - being efficient is what we have to strive for. The Indian economy has been growing fast and the GDP growth rate had averaged 8.8 per cent in the last 5 years preceding the crisis. Despite a subsequent slowdown, India's GDP is st ill growing at a reasonably fast pace. The Indian banking sector will, as such, need to match up to the requirements of a fast growing economy including the likely accelerat ion in the Credit to GDP rat io. Added to this is the demographic dividend with its myriad challenges and opportunit ies. There is thus a huge responsibility on, and opportunity for, the Indian banking sector going ahead.



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Being responsible is no longer a choice for banks. Commercially profit is a laudable object ive but we have to remember that balancing the interest of all stakeholders, included and yet to be included, is the only socially opt imal choice which will ensure long term survival and growth. Casino banking has no future. In this context , let me quote from the review by Financial Times of Satyajit Das's book 'Traders, Guns and Money' - "This makes fascinat ing reading old fashioned financiers will read it and weep … ". II. Achievements of the Indian Banking System There has been appreciat ion for India for weathering the financial crisis relat ively unscathed. Much of it hinged on the sound and resilient banking system in the country. The foundat ion for the banking sector resilience was laid with the introduct ion of the financial sector reforms in 1991 with focus on prudent ial regulat ion and increased compet it ion. These reforms resulted in a comprehensive t ransformat ion of the banking sector. The reforms had a major impact on the overall efficiency and stability of the banking system. The outreach of banks increased in terms of branch / ATM presence. The balance sheets and overall banking business also grew in size. The financial performance and efficiency of Indian banks improved with increased compet it ion, as reflected in their profitability, net interest margins, ROA and ROE. The capital posit ion improved significant ly, and banks were able to bring down their non-performing assets sharply. This reform phase also witnessed increased use of technology which in turn, helped improve customer service. While financial stability is not an explicit ly stated object ive under the Reserve Bank's statute (RBI Act , 1934), various measures were undertaken from t ime to t ime to strengthen financial stability in the system which covered a wide arena. The approach has evolved from past experiences and a constant interact ion between the micro level supervisory processes and macroeconomic assessments. In the Indian context, the mult iple indicator approach to monetary policy as well as prudent financial sector management together with a synerget ic approach through close coordinat ion between RBI and other financial sector regulators has ensured financial stability. Some of the other policy measures include Capital Account management, management of systemic interconnectedness, strengthening prudent ial framework, init iat ives for improving the financial market infrastructure, etc. Systemic issues arising out of interconnectedness among banks and between banks and Non Banking Financial Companies (NBFCs - our shadow banks) and from common exposures were addressed by, among other measures, put t ing prudent ial limits on aggregate interbank liabilit ies as a proport ion of banks' Net Worth, restrict ing access to uncollateralized funding market to banks and Primary Dealers with caps on both borrowing and lending, increasingly subject ing NBFCs to more stringent prudent ial regulat ions as also restrict ing banks' exposure to NBFCs to contain regulatory arbit rage. The other not iceable aspect regarding policy measures has been the innovat ive use of countercyclical policies to address the pro-cyclicality issues. The countercyclical policies were introduced as early as 2004 by using t ime varying sectoral risk weights and provisioning, though RBI had used them sporadically even earlier. These unconvent ional measures taken in response to emerging risks are now widely acknowledged to have played a significant role in protect ing the Indian financial system from key vulnerabilit ies.



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We have, thus, much to be sat isfied about, as we have come a long way since the 1991 reforms. Even as we rejoice in our achievements and success, we must have the humility to acknowledge that much more needs to be achieved in our pursuit of excellence. So let us look at the road ahead. III. Indian Banking - The Road Ahead Future is always uncertain but coming times look more uncertain than ever. I am reminded of a quip "The trouble with our t imes is that the future is not what it used to be". There are plenty of 'Known Unknowns and Unknown Unknowns'. The future holds a lot of opportunit ies as well as challenges for all of us. The Conference would have already focused on the opportunit ies and how to make most of them. Let me list out a few challenges that await us in the future. For elaborat ing on the challenges that lie ahead of us. I would categorise them into three broad categories viz. A. Challenges in coping up with the emerging regulatory and supervisory framework B. Challenges in meet ing the specific needs of the economy and C. Challenges in fixing the fault lines in the system. A. Challenges in coping up with the Emerging Regulatory and Supervisory Framework (i) Implementation of advanced approaches under Basel II The implementat ion of the advanced approaches under Basel II poses several challenges for banks and the Reserve Bank of India alike. The standardized approaches have already been implemented in India and all the commercial banks have migrated to the standardized approach under Basel II framework as of March 2009. Migrat ion to the Advanced Approaches is important for larger banks because it involves adopt ion of more sophist icated risk management systems. Moreover, there are reputat ional issues too if large banks cont inue with standardized approaches. However, the implementat ion of the advanced approaches raises several issues relat ing to development of human resource skills, technology upgradation, branch interconnect ivity, availability and management of historical data, robustness of risk management systems, etc. Though RBI has set an indicat ive t ime schedule for implementat ion of the Advanced Approaches, banks' response has not been encouraging so far. It is high t ime for larger banks to seriously upgrade their systems and skill sets and migrate to the Advanced Approaches. (ii) Migration to Basel III (a) Capital Basel II was designed because its predecessor i.e. Basel I was considered risk insensit ive and too preliminary to cope up with the rapid developments in the financial sector result ing in substantial regulatory arbit rage. The basic purpose of Basel II was to leverage on the risk management systems of internat ionally act ive banks and use that for enhanced risk management architecture and, in the process, have bet ter measurement of capital requirements. It is ironical that when the crisis took place, Basel II was either not implemented or just implemented in the jurisdict ions. And yet we have had to leapfrog and go in for enhancements under Basel II.5 and Basel III. Under Basel III, an assessment of



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Indian banks in terms of capital requirements has revealed that, notwithstanding some issues with a few individual banks, the system, as a whole, is very well capitalized and the t ransit ion to the revised capital norms of overall capital adequacy, Tier I component or equity component would be smooth. The stress point , however, would be that banks will be required to adjust the unamort ized port ion of Pension and Gratuity liabilit ies in the opening balance sheet on April 1, 2013 on t ransit ion to IFRS. Going forward, the capital requirement on account of increased coverage of risks would not be so material for Indian banks as either those act ivit ies are not allowed (i.e. re-securit isat ion) or their magnitude is quite small (i.e. t rading book). However, capital requirements, including equity, would be substantial for support ing the high GDP growth and the fact that Credit to GDP rat io, which is current ly quite modest at about 55 per cent , is bound to increase substant ially on account of st ructural changes in the economy i.e. Financial Inclusion program, increase in loan requirements from more credit intensive sectors such as manufacturing, infrastructure, etc. The large equity needs, though over an extended t ime frame, would put downward pressure on the banks' RoE. While the higher capital requirements would bring down risks in the banking sector and eventually investors would recognize the lower risks and be willing to set t le for a lower ROE, in the short term, the only answer is raising product ivity. RBI and banks would be est imat ing the capital requirements under Basel III once our guidelines for implementation of Basel III are finalized. While implement ing Basel III, our dilemma is (a) where our capital regulat ions are more stringent, should we cont inue with the more stringent norms? and (b) should we adhere to the extended t imetable or step up the implementat ion schedule, given the fact that the banking system would be comfortable at the start ing point i.e. at t ransit ion? Other areas that need strengthening include securit izat ion related regulat ion, market risk management tools and improvement to the Supervisory Review and Evaluation Process of Pillar II of Basel II as per the Basel III enhancements. (b) Liquidity Management The Financial Stability Report (FSR) of the Reserve Bank of India for the half year ended June 2011 has expressed concerns over growing reliance of banks on wholesale funding / market borrowing to fund assets. One reason for such reliance could be the low growth of deposits not commensurate with the credit growth. Such reliance, however, could prove disastrous as evidenced during the crisis as the wholesale funding sources can dry up quickly. Banks, therefore, have to factor this in their liquidity management. There, however, remains an issue under Basel III about the extent to which SLR holdings can be taken into consideration for the purpose of calculat ing the liquidity rat ios. As the SLR holdings are required to be maintained on an ongoing basis, these would technically not be reckoned for liquidity purposes. However, it may be reasonable to reckon, under stress condit ions, at least a part of the SLR holdings in calculat ing the liquidity rat io, as the SLR holdings are primarily government bonds against which the Reserve Bank provides liquidity. Further, the major challenge for Indian banks in implement ing the liquidity standards is to develop the capability to collect the relevant data accurately and



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granularly and also to formulate and predict the liquidity stress scenarios with reasonable accuracy and consistency. Given that Indian markets have not experienced the levels of st ress that global markets were subjected to, predicting stress scenarios is going to require a qualitat ive judgemental call. (iii) Shadow Banking System - Greater consistency in regulation Another important regulatory challenge is ensuring "greater consistency in regulat ion of similar instruments and inst itut ions performing similar act ivity" to prevent or contain regulatory arbit rage. In the case of systemically important non-deposit taking NBFCs (NBFCs-ND-SI), a gradually calibrated regulatory framework in the form of capital requirements, exposure norms, liquidity management, asset liability management and report ing requirements has been extended, which has limited the space for regulatory arbit rage as also their capacity to leverage. Given the increasing significance of the sector, the supervisory regime for the systemically important NBFCs will need to be strengthened further for a more robust assessment of the underlying risks. A Working Group under the former Deputy Governor, Ms. Usha Thorat on NBFCs has, inter alia, examined the issues related to the regulatory gaps and arbit rage opportunit ies that exist in the system, and has given recommendat ions for addressing these issues as well as for enhanced disclosure requirements and improved supervisory pract ices, etc. (iv) Other Issues The Indian banking system has a modest leverage which provides comfort . The RBI has also been enhancing and fine-tuning its supervisory processes on an ongoing basis and based on the evolving financial scenario. A revised framework for monitoring of financial conglomerates has been rolled out since 2009. The Financial Stability and Development Council (FSDC) has also been act ivated under the aegis of the Government of India for system level monitoring of build-up of risks and instability, specifically, risks emanat ing from the Systemically Important Financial Inst itut ions (SIFIs) including the financial conglomerates. This is also expected to enhance coordination among the financial regulators. However, enterprise wise risk management processes need to be implemented / st rengthened in the financial conglomerates and SIFIs. (v) Structural Changes (a) Financial Innovation The crisis has also raised the issue of financial stability vis-a-vis financial innovat ion - in other words, the quest ion of the 'social opt imality' of financial innovat ions. One of the main reasons why India escaped the adverse impact of the crisis was a calibrated approach to financial innovat ion. However, we as regulators and supervisors need to guard against st ifling financial innovat ion while at the same t ime remain caut ious about the object ive and purpose behind the new and complex financial products that are proposed or introduced by the industry. This is part icularly relevant for a country like India as its resilience in the face of heavy financial turbulence can be quite limited and as no social safety nets are available. These concerns shape RBI's approach to financial innovat ion. Banks have to be caut ious about the 'social usefulness' of new products and should have appropriate controls in place to ensure against mis-selling through robust 'suitability and appropriateness' checks. Several far-reaching measures have been taken recent ly in terms of allowing new products such as Interest Rate Futures, Currency



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Futures, and Repo in corporate bonds, etc. Such products are new for the Indian market and an assessment of their impact on other markets, inst itut ional behaviour and system as a whole is crit ical. Going forward, a key focus area must be designing of robust market infrastructure and strengthening the systemic monitoring framework for these new markets. (b) Financial Holding Companies During the last decade, India has witnessed growth and evolut ion of financial inst itutions into large financial conglomerates expanding their presence in mult iple non-banking financial act ivit ies. In this backdrop, the issue of the nature of corporate form adopted by financial groups in India has acquired relevance from two dist inct , though inter-related, perspect ives - one, efficient corporate management within the groups addressing the issues of growth, risk management and capital requirements of the Group; and two, the degree of regulatory comfort with different models, part icularly in regard to the concerns relat ing to contagion risks. A Working Group set up by the Reserve Bank in this connect ion has recommended pursuing Financial Holding Company (FHC) model as the preferred model, as it enables, inter alia, de-risking the banks to a certain extent from the perspect ive of 'holding out ' risks of the Group and freeing the bank management from the responsibility of managing the subsidiaries and other affiliates. This structure also facilitates bet ter regulatory oversight and neater resolut ion. There are, however, numerous challenges in implement ing the FHC model in India. The implementat ion of this model would require a new legislat ive framework, providing the right incent ives to the exist ing financial conglomerates through appropriate tax treatment and resolut ion of st rategic and public policy issues in the case of public sector banks. (c) Changing banking landscape : Subsidiarisation of banks One of the key takeaways of the global crisis is the appreciat ion and acknowledgement of the benefits of subsidiarisat ion vis-a-vis branch presence of foreign banks. Reserve Bank has already taken steps in the direct ion of encouraging foreign bank presence in subsidiary form. The draft paper put out in this regard has suggested making the subsidiary route more at tract ive by providing near nat ional t reatment to the wholly owned subsidiaries of foreign banks. Presence of foreign banks in subsidiary form will generate greater compet it ion for the Indian banks as this route will open up nearly equal opportunity to foreign banks in business expansion within India. (d) Adoption of IFRS There are certain issues that need to be addressed in implement ing the convergence with the IFRSs. First , the very crucial IFRS 9 relat ing to Financial Instruments is st ill evolving and the final standard is unlikely to be available soon. Thereafter, the Inst itute for Chartered Accountants (ICAI) will need to promulgate the converged standard for India. This presents a moving target given the short t ime available for convergence with IFRS. Converging to the standards would require considerable skill upgradation and modificat ion in the IT systems of banks. The Reserve Bank has const ituted a Working Group to address the implementat ion issues and facilitate formulat ion of operat ional guidelines for the convergence.



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(e) Revamping financial legislation Evolut ion of legislat ive framework is an interest ing area. Laws are made keeping in mind the prevailing circumstances. However, if the circumstances change, the legal framework can become inadequate. This is more so in the financial world because the pace of change is very fast . Currently in the financial sector, we have about 60 Acts and mult iple rules and regulat ions. The incremental changes made to these Acts over a period have made the laws ambiguous and complex. Government has taken an init iat ive by set ting up a Financial Sector Legislat ive Reforms Commission (FSLRC) which seeks to rewrite and streamline the financial sector laws, rules and regulat ions to bring them in harmony with India's fast growing financial sector. B. Challenges in meeting the specific needs of the economy Indian economy is one of the fastest growing economies of the world. The economy with its varied geography and demography has specific requirements in order to t raverse to the next orbit and attain its full potent ial. Banks have to gear up to meet such requirements by redesigning their business strategies. A few of the most important requirements of the economy are (i) Financial Inclusion (FI), (ii) Infrastructure Financing and (iii) Financing of housing and real estate. (i) Financial Inclusion (FI) It is est imated that despite the widespread expansion of the banking sector, about 40% Indians st ill lack access to even the simplest kind of formal financial services. Such an extent of financial exclusion can severely retard the Indian growth story, both by blocking a major port ion of the Indian populat ion from part icipat ing in the economic mainstream and by, possibly, generat ing social tensions. As such, moving towards Universal Financial Inclusion is both a nat ional commitment and a policy priority. RBI and the Government of India have taken several init iatives in this direct ion such as mandat ing opening of 'no frills' accounts coupled with provision of small overdraft facility, int roduct ion of a General Credit Card (GCC), relaxat ion of KYC norms for small value accounts, allowing general permission for opening branches in Tier 2 to Tier 6 centres with populat ion of less than 1,00,000, allowing use of Business Facilitator (BF) and Business Correspondent (BC) models, etc. in providing financial and banking services. Despite some improvement as a result of these init iat ives in recent years, real financial inclusion st ill eludes us and major challenges remain. First of all, in the absence of a proper assessment of the extent of financial exclusion, init iat ion of appropriate policy responses is difficult . There is, therefore, a need to conduct specific survey or expand the scope of the decadal census for gathering information relat ing to financial inclusion / exclusion. Then, there is the issue of high operat ing cost of small t ransact ions and difficult ies in reaching out to far flung areas. Most important ly, banks need to perceive Financial Inclusion as a profitable, commercially viable business and not as an obligat ion. This can be at tained through product innovat ion, use of technology for lowering cost of t ransact ion and cross selling of products and services after thoroughly understanding the rural markets. Mobile banking has t remendous potent ial in this respect . Effect ive leverage of Informat ion and Communicat ions Technology (ICT) solut ions, duly simplified, and use of products such as smart cards, biometric handheld devices, mobile and basic level ATMs, etc. can aid cost reduct ion. Cultural and at t itudinal changes at grassroots, especially at the level of



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branches are needed to impart organizat ional resilience and flexibility. Financial literacy and credit counselling will create the right condit ions for financial inclusion. There is also a need to improve the absorpt ive capacity of financial services by providing basic infrastructure such as health, water, sanitat ion and educat ion which can lead to faster income growth and increase in non-farm based act ivit ies in rural areas and lead to increase in demand for credit . Systems of reward and recognit ion for the personnel init iat ing, ideat ing, innovat ing and successfully execut ing new products and services in the rural areas would also give financial inclusion the much desired fillip. Ours is a bank led model for financial inclusion because in our view only banks can provide a comprehensive inclusion programme - deposit and loan products and remittance facilit ies. Hence banks bear very large responsibility in making the financial inclusion programme a success. (ii) Infrastructure Financing India's infrastructural financing needs are not only huge but also vital. The targeted annual spend on infrastructure during 2007-12 is about USD 500 bn which is est imated to double in the next five year plan (USD 1 t rillion during 2012-17). Short fall in infrastructure financing, according to an est imate, would cost about 4% of GDP every year which is too cost ly for a growing country like India. Banks, tradit ionally, have been the major source of infrastructure financing and their exposure to infrastructure is already high at 17 per cent . Infrastructure projects involving long term funding plans have, however, severe implicat ions for the asset liability management at banks. There are some alternat ives to bank financing such as development of corporate bond markets, Infrastructure Debt Funds etc. The challenge before banks in the fast evolving landscape is to realign their posit ion in meet ing the infrast ructure finance needs, at the same t ime, however, not significant ly increasing their risks. Take-out financing could be one opt ion in achieving this balancing act . Government and RBI have recent ly come out with a structure for Infrastructure Debt Funds (IDFs) which would facilitate take-out financing, development of the corporate bond market etc. (iii) Financing of housing and real estate Financing of housing and real estate is another challenging area for banks. With a high rate of populat ion growth, coupled with increased urbanizat ion and growing incomes, there is a t remendous business opportunity for banks to part icipate in this segment. The emergence of demand for housing finance is expected to be the key driver of bank credit in future. However, real estate, owing to its imperfect ion in terms of informat ion asymmetry and opacity, poses great challenges and banks need to tread with utmost caut ion and should avoid falling prey to irrat ional exuberance. Real estate is highly sensit ive and prone to easy build up of bubbles, which could be mistaken for growth momentum. The global crisis bears a striking test imony to the disastrous impact the excesses in real estate sector could pose to the financial system and banks have to resist the lure of quick but risky returns.



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C. Challenges in correcting the Fault Lines (i) Asset Quality Non-performing Assets (NPA) have caused some concerns. While the rise in NPAs could part ially be att ributed to the adverse impact of the global financial crisis, the aggressive lending stance of banks during the preceding boom period as also inadequate due diligence and laxity in monitoring of the loan accounts are also responsible for deteriorat ion in the asset quality. This has been so, especially in case of retail loans. While the gross NPA rat io declined from 3.30% at end March 2006 to 2.25% at end March 2011 , mainly due to a commensurate increase in gross advances; the absolute amount of gross NPAs increased by ̀ .46,669 crore (an increase of 91%) during FY 2005-06 to FY 2010-11. As such, the NPA stock has risen consistent ly. Slippage rat io of the banking system, defined as fresh accret ion to gross NPAs to opening balance of gross standard advances, which had shown a declining t rend from FY 2005-06 (1.9%) to FY 2007-08 (1.8%), abrupt ly increased to 2.18% in FY 2008-09 and 2.21% in FY 2009-10. At system level, new accret ion to NPAs has been much faster than the reduction in exist ing NPAs due to lower levels of upgradat ion and recoveries. Also, despite write-offs, gross NPAs have cont inued to rise significant ly. The table below tracks the movement of stock of gross and net NPAs of the banking system during the period March 2006 through March 2011. NPAs of SCBs

(Amounts in ̀ . Crore)

At end

Total Gross Advances Total Gross NPAs Total Net NPAs

Amount

% Change over Previous March

Amount

As % of Gross Adva nces

Amount

As % of Net Adva nces

Mar-06 15,50,630 30.46 51,199 3.30 18,532 1.22

Mar-07 20,12,665 29.80 50,513 2.51 19,956 1.01

Mar-08 25,07,885 24.61 56,525 2.25 24,675 1.00

Mar-09 30,37,606 21.12 69,292 2.28 31,680 1.06

Mar-10 35,45,000 16.70 84,648 2.39 37,719 1.08

Mar-11 43,58,628 22.95 97,868 2.25 41,813 0.97

Source : Reserve Bank of India It may be comfort ing to take refuge under net NPA figures but the comfort is misplaced. Banks need to, not only ut ilize effect ively, the various measures such as CDR mechanism, One Time Sett lement schemes, Debt Recovery Tribunals, provisions of the SARFAESI ACT etc. put in place by RBI and the Government of India for resolut ion and recovery of bad loans but also have to strengthen their due diligence, credit appraisal and post sanction loan monitoring systems to minimize and mit igate the problem of increasing NPAs. Overall economic growth in the last decade or so, coupled with higher disposable incomes have led to an exponent ial growth in retail spending. As the efforts directed towards



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financial inclusion take off, the bankable populat ion will see further rise. This would require that delinquency risks and quality of port folio are carefully managed by banks. Adherence to the provisioning requirement, building countercyclical provisions and holding countercyclical capital buffers in good t imes can, to some extent , insulate banks from excessive default st ress during crisis situat ions. (ii) Consolidation Mergers and acquisit ions (M&A) as a means of inorganic growth are increasingly being used the world over to undertake restructuring of leading business enterprises. It is followed as a part of the strategy to achieve a larger size and faster growth in market share and reach, and to become more compet it ive through economies of scale and scope. India does not have larger banks to finance its huge infrastructural needs and large industrial projects. The structure of the banking system as recommended by the Narasimham Commit tee II consist ing, along with medium sized and smaller banks, of a few large internat ional banks, would not only meet the financing needs of infrastructure and large projects and provide the economies of scale and scope but also leverage the country's image as a financial dest inat ion and enable Indian banks to compete globally in terms of fund mobilisat ion, credit disbursal, investment and rendering of financial services. This could be attained through consolidat ion. However, while encouraging / promot ing the consolidation route, the need for compet it ion within the domest ic banking sector should not be overlooked nor the risks and challenges that emanate from the presence and operat ions of large systemically important financial institut ions be ignored. While nobody knows what the opt imum size in terms of largeness is, one thing which is very clear is that banks should refrain from, and regulatory dispensat ion should not permit , building complex structures. (iii) Corporate Governance Deficit Several studies have highlighted the direct relat ionship between good governance standards and the performance and efficiency of an ent ity. This is all the more t rue in respect of banks, which, in their fiduciary capacity deal with public money on one hand and on the other, enjoy government / central bank support due to their centrality in the overall financial system. The recent crisis has also amply demonstrated how weak governance framework contributed to the build up to the crisis through excessive risk taking. Transactions in risky and complex products which were barely understood, neither by the financial ent it ies nor the customers, was another contribut ing factor. While over the last one decade, the governance requirements have been considerably enhanced in India, good governance has to be a cont inuous and ongoing process. In India we had the "derivatives" episode recent ly which was a case of inadequate applicat ion of "suitability and appropriateness" requirements and, consequent ly, was a case of governance deficit . As such the Board of Directors and the senior management have a great oversight responsibility in ensuring that the respect ive banks lay down robust compliance culture and corporate governance framework which is reviewed periodically for its efficacy and efficiency. (iv) Information Asymmetry Informat ion asymmetry in a mult iple banking scenario is a serious issue. A framework for pooling and sharing of credit informat ion amongst banks had been put in place so as to



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enable banks to streamline their credit appraisal framework and also to inst il discipline among the default ing borrowers. The ut ility of such data, however, hinges inexorably, on its integrity and t imeliness. Lapses in sharing of informat ion defeats the very purpose of such arrangements. Unfortunately this arrangement has not worked. Banks should strive to make this work. Hopefully with licenses granted for addit ional Credit Informat ion Companies, we expect the system to evolve a robust informat ion sharing arrangement and further the development of the banking system. (v) Product Pricing Cost ing of banking products is an issue which has largely been escaping serious debate. Proper and fair pricing of risks and of banking products is essent ial from risk management and customer service perspect ives. It can also enhance compet it ion result ing in passing of the benefits of such increased compet it ion in terms of lower costs to the ult imate customer. The challenge before banks is to make the best use of technology and innovat ion to bring down the intermediat ion costs while protect ing their bot tom lines. The issue of fairness to all classes of customers is also a very important issue. Today, there are a lot of complaints from customers about lack of fairness in floating rate products. Banks need to be sensit ive to that . To deal with this issue, RBI would be sett ing up a Working Group as announced in the recent Monetary Policy to look into the appropriate methodology for pricing of credit . (vi) Customer Service Banking is predominant ly a customer oriented business and good customer service is the key to banks' growth and stability. With enhanced compet it ion amongst banks, customer service becomes the sole different iat ing factor to be leveraged to stay relevant and to forge ahead in the business. However, in pursuit of returns and profits, customer service is often ignored if not totally forgot ten. As the customer awareness grows, banks would be required to gear up for providing more efficient and at the same t ime, cost effect ive services leveraging the technological capabilit ies. Customer retent ion is going to be the key factor for banks, going ahead. Recognising the need for revisit ing the issue of customer service in banks, a Commit tee (Chairman : Shri M. Damodaran) was const ituted by the Reserve Bank in May 2010. The Commit tee looked into the banking services rendered to retail and small customers and pensioners, st ructure and efficacy of the exist ing grievance redressal mechanism, the funct ioning of Banking Ombudsman Scheme, and possibility of leveraging technology for bet ter customer service and has recommended steps for improvement. The recommendat ions and the public comments received thereon are being examined by RBI for implementat ion. Meanwhile, in the recently concluded Ombudsman Conference, 10 act ion points were identified, which are essent ial to protect the rights of the customers. (vii) Know Your Customer (KYC) Money laundering is a growing menace and it not only poses serious threat to the stability and integrity of the financial system but also to the sovereignty and safety of nat ions worldwide. In the coming days, challenges before banks would primarily lie in saving themselves from the growing threat of money laundering. In India, PMLA was passed in 2002 and it has been aligned with the FATF recommendat ions in 2009. Further, India has



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become a member of FATF in 2010. Banks are being extensively sensit ized about money laundering and KYC norms. KYC discipline assumes crit ical importance especially in the light of our concerted efforts to widen the reach of banking as part of financial inclusion init iat ives. Banks have to ensure a very high degree of KYC compliance and a very robust AML regime. Once these standards are achieved, a unified KYC for banking system could be thought of. (viii) Risk Management, Technology and HR Development In view of the current dynamic business scenario of increasing financial sophist icat ion and innovat ive financial tools, banks are faced with complex risks. Thus, robust enterprise wide risk managements systems are the fundamental requirement for banks to be able to survive in the long run. Banks with proper risk management systems would not only gain compet it ive advantage but would also add value to the shareholders and other stakeholders. Banks, therefore, have to endeavor for integrated risk management systems, both within the bank and also across the group. Such an integrated risk management architecture would be current ly difficult due to the disconnect between businesses, risk managers and IT systems across the organizat ions in their exist ing set -up. Indian banks have achieved most of the computerizat ion under the Core Banking Solut ion (CBS). This may not , however, prepare them adequately for the necessary MIS and analyt ical tools for risk management. In order to upgrade the risk management systems, banks need to upgrade their technology proport ionately so that the MIS and the analyt ical tools for risk management are available. This will entail large investments in technology part icularly for those banks who have to migrate to the advanced approaches under Basel II. Further, with the explosive growth of the internet , mobile and wireless tools, the way both the economy and business are conducted today has been revolut ionized and as such, the technological needs of banks are not confined to only risk management requirements. The need for technological innovat ion in the context of financial inclusion is of high priority. Technology has evolved as the integrator and holds the key to the future success of any corporate ent ity and more so for the banks. Speed, accuracy and quality in operat ions and delivery mechanism as also cost efficiency are some of the known benefits that would accrue to both : banks and their customers. However, enhanced usage of technology also poses severe challenges for banks both, in terms of keeping pace with the fast growing / changing technological demands so as to maintain an edge on the profitability, delivery and quality fronts as also with regard to the recognit ion, understanding, management and mit igat ion of risks inherent in the use of technology. The Reserve Bank of India, on its part , has taken several init iat ives in this direct ion which include formulat ion of the IT Vision document 2011-17 which sets the priorit ies for commercial banks for moving forward from the core banking solut ions to enhanced use of IT in areas like MIS, regulatory report ing, overall risk management, financial inclusion, customer relat ionship management and enhancing automated data flow within banks and to RBI without any manual intervent ion, etc. Measures are afoot to setup Next Generat ion RTGS (NG-RTGS) system taking into account the latest developments in the areas of technology, messaging and networking, etc.



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On the part of banks, there is an imperat ive need for a three-pronged act ion agenda, viz., first , technology upgradat ion coupled with its integrat ion with the overall business strategy to achieve an edge in respect of services provided to their const ituents, better housekeeping, opt imizing the use of funds and building up of MIS for decision making, bet ter management of assets & liabilit ies and the risks assumed which in turn have a direct impact on the balance sheets. Second, a more dynamic and challenging work culture to meet the demands of customer relat ionships, product different iation, brand values, reputat ion, corporate governance and regulatory prescript ions. Third, focus on internal controls, risk mit igat ion systems and business cont inuity plans to effect ively mit igate possible operat ional risks arising out of adopt ion of technology which could have a potent ial bearing on the overall financial stability. Conclusion : Let me conclude by quot ing "Tomorrow belongs to people who prepare for it today". I am sure that we all draw lessons from our past and prepare ourselves for the challenges that the future holds for us. I once again thank the Bancon for this wonderful opportunity for sharing my thoughts with you. I wish you all the very best for the interest ing t imes in future. -------------------------- * Expanded version of the valedictory remarks by Shri Anand Sinha, Deputy Governor, Reserve Bank of India at the Bancon-2011 at Chennai on November 6, 2011. Inputs provided by Ms. Anupam Sonal are gratefully acknowledged. 1 Indian Infrastructure- going beyond sound bites- City of London (2010)

Price Stability, Financial Stability and Sovereign Debt Sustainability Policy Challenges from the New Trilemma

Dr. Duvvuri Subbarao I have great pleasure in welcoming you all to the Reserve Bank's Second Internat ional Research Conference (SIRC). We held our first international conference two years ago, in February 2010, as a flagship event of our Plat inum Jubilee celebrat ions. Many of you who had at tended that conference complimented us for its quality and urged us to repeat it . As much as we were flat tered by those compliments, I also suspect that the urging for a repeat was at least part ly mot ivated by the prospect of escaping from the bit ter cold of some of your home countries at this t ime of the year. So, here's welcoming all of you to warm and sunny Mumbai. Conference Theme Let me start by explaining the mot ivat ion for the conference theme : "Price Stability, Financial Stability and Sovereign Debt Sustainability : Policy Challenges from the New Trilemma".



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The global financial crisis followed by the euro zone debt crisis has changed the theology of central banking in a fundamental way. The orthodoxy of central banking before the 2008 crisis was : single object ive - price stability; single instrument - short-term interest rate. Although most central banks deviated to different extents from this minimalist model, this came increasingly to be considered the holy grail. The crisis came as a powerful rebuke to central banks for having neglected financial stability in their single-minded pursuit of price stability. By the t ime of our first conference two years ago, a consensus was developing around the view that financial stability has to be within the explicit policy calculus of central banks, although opinion was divided on the precise nature of inst itut ional arrangements for maintaining financial stability. Fast forward to 2011/ 12. Even as central banks are grappling with balancing the demands of price stability and financial stability, there is now yet another powerful assault on central bank orthodoxy arising from the big elephant in the room - the euro zone sovereign debt crisis. The European Central Bank (ECB) is being called upon to bend and stretch its mandate to bail out sovereigns who have forfeited the confidence of markets. Actually that is an understatement. In reality, the ECB is being challenged on why it is, to use an Indian word, being so brahminical about its mandate when the world around it is collapsing. The argument, in its essence, is that if a central bank is committed to financial stability, it cannot ignore the feedback loop between financial stability and sovereign debt sustainability, and by extension therefore, it has to be mindful of sovereign debt sustainability concerns. What do these t rends engendered by the crisis indicate? In particular, is it the case that the mandate of central banks is set to expand from the single object ive of price stability to mult iple object ives of price stability, financial stability and sovereign debt sustainability? Can central banks simultaneously support all these three object ives and do so efficient ly? That in essence is the new trilemma. The new trilemma triggers several quest ions. How do the three object ives underlying the t rilemma reinforce each other, and in what ways do they conflict with each other? What is their impact on growth? Is the t rilemma an exclusive phenomenon of crisis t imes, or does it manifest in normal t imes as well? What is the nature and extent of the responsibility of central banks for each of these object ives? Are central banks equipped to handle these addit ional responsibilit ies? And finally, what does this expanded mandate mean for the effect iveness and autonomy of central banks? That indeed is a long list of quest ions. The purpose of this conference is to think through these weighty quest ions centred around this new trilemma. Is This Indeed a Trilemma? We deliberated internally on whether this evolving challenge for central banks would indeed qualify as a t rilemma. One view was that this is not strict ly a t rilemma as there is no theory which says that we cannot simultaneously obtain price stability, financial stability and sovereign debt sustainability. The opposing view was that what central banks have at hand is indeed a t rilemma in as much as there can be clear tensions



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between the object ives underlying the new trilemma, and central banks may not be able to determine, with any degree of exact itude, what inter se priority must be accorded to each of the three object ives under different sets of circumstances. So, is this a t rilemma or not? To compound the search for an answer, the word 't rilemma' has not made it to all standard dict ionaries yet . So, permit me a litt le indulgence into the world of t rilemmas. The World of Trilemmas Epicurus, the Greek Philosopher who lived around 300 BCE, was possibly the first to use the concept of a t rilemma to reject the idea of an omnipotent God. The dist inct ion of being the first to actually use the word 'trilemma' goes perhaps to the 17th century English non-conformist clergyman, Philip Henry, who recorded in his diary, "We are put hereby to a Trilemma, to turn flat Independents, or to strike in with the conformists, or to sit down in former silence." Arthur C. Clarke, the Brit ish science fict ion writer, cited a t rilemma in t rying to achieve product ion quickly and cheaply while also maintaining high quality, leading to the quip : "Quick, Cheap, Good : Pick two". In public choice theory, there is the t rilemma of juggling three priorit ies - coverage, cost and choice - when offering a public service. If we turn to economics, we will see that t rilemmas have indeed proliferated. Dani Rodrik (2007) argued that if a country wants more of globalizat ion, it must either give up some democracy or some nat ional sovereignty. Niall Ferguson (2009) highlighted the t rilemma of a choice between commitment to globalizat ion, to social order and to a small state (meaning limited state intervent ion). In one of his FT columns, Mart in Wolf spoke about the US Republican Party's fiscal policy trilemma : the belief that large budget deficits are ruinous; a cont inued eagerness to cut taxes; and an ut ter lack of interest in spending cuts on a large enough scale. Then we have the Earth Trilemma (EEE), which posits that for economic development (E), we need increased energy expenditure (E), but this raises the environmental issue (E). The t rilemma more direct ly relevant to this conference theme is a financial stability t rilemma put forward by Dirk Schoenmaker (2008), explaining the incompat ibility within the euro zone of a stable financial system, an integrated financial system, and nat ional financial stability policies. By far the most high profile current t rilemma, as per some analysts, is the euro-zone t rilemma : the seeming irreconcilability between its three wishes : a single currency, minimal fiscal contribut ion to bail outs, and the ECB's commitment to low inflat ion. The Old Trilemma Even as I have spoken about more recent t rilemmas in economics, the prima donna of all of them is Mundell's 'impossible t rinity'. This old t rilemma asserts that a country cannot simultaneously maintain all three policy goals of free capital flows, a fixed exchange rate and an independent monetary policy. The impossible t rinity, as students of economics have learnt for over a half century, has a strong theoret ical foundation in the Mundell-Fleming model developed in the 1960s.



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The choices the world made under the impossible t rinity varied over t ime. Under the gold standard, exchange rates were fixed and capital could move around, but central banks were forced to adjust interest rates to ensure they did not run out of reserves. This could lead to pressure on the real economy, and a lot of booms and busts. Under Bret ton Woods, we had fixed exchange rates (with occasional adjustments) and independent monetary policy, but capital mobility was highly restricted; when I first went abroad over 30 years ago, Indians couldn't take out more than $20, no matter the purpose of the t rip. The Bretton Woods system broke down under the weight of fixed exchange rates, and the world moved to largely float ing exchange rates. Capital has flowed freely round the world. In the post-Bretton Woods era, countries have made different choices. The most common case, typical across advanced economies, is to give up on a fixed exchange rate so as to run an open economy with an independent monetary policy. On the other hand, economies that adopt a hard peg give up on independence of monetary policy. Examples include the currency boards set up by Hong Kong and, for a t ime, Argent ina. More recent ly, responding to a rapid appreciat ion of the Swiss Franc as a result of the safe haven effect , Switzerland declared its commitment to defend a pre-announced exchange rate. History is replete also with examples of countries aiming to achieve all three goals at the same t ime, and failing to do so, often in a disorderly way. Thailand's decision to abandon the hard peg against the US dollar in July 1997 is a classic example. Notwithstanding its real life validat ion, it is not as if Mundell's 'Impossible Trinity' is inviolable. Many of the assumpt ions underlying this model do not often hold; indeed the new open economy macroeconomy models that build in price rigidit ies and monopolist ic compet it ion demonstrate policy dynamics quite different from those built in the Mundell-Fleming t radit ion. It is also not the case that countries are forced into corner solut ions at the nodes of the impossible t rinity t riangle. As it happens, reflect ing the forces of globalizat ion and their asymmetric impact, many emerging economies have opted for middle solut ions.



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Impossible Trinity to Holy Trinity In the context of this conference, is the new trilemma - the simultaneous pursuit of price stability, financial stability and sovereign debt sustainability - a new impossible t rinity? Possibly not . There is no theory which says that these object ives are inconsistent with one another. It can even be argued that the three object ives reinforce each other, and that together they sustain growth, thereby const itut ing not an impossible t rinity, but actually a holy trinity of object ives.

That does not by any means imply that the holy t rinity of object ives can always be achieved simultaneously, or once achieved, can be maintained as such indefinitely. There would be tensions and t rade-offs, especially in the short -term. In part icular, the tensions materialize with brutal force in a state of disequilibrium - when inflation is off target , the financial system is fragile and public debt is ballooning. To the extent we have to manage these tensions, the policy problem qualifies as a t rilemma. The Many Ways in Which the New Trilemma Plays Out Policies in pursuit of the three object ives under the t rilemma interact in complex, and often unintended ways. Somet imes they are support ive of each other; at other t imes, they may run counter to each other. More perplexingly, the tensions and t rade-offs may be different in crisis t imes from normal t imes.



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Let me at tempt to illustrate this by cit ing some examples from global experience, including recent experience. Given the three object ives underlying the new trilemma, and the two-way direct ions in which they can interact , we have a total of six 'cause and impact ' bilateral interact ions. I will consider them one by one. (i) Price Stability -> Financial Stability Before the global financial crisis, the stereotype view was that price stability and financial stability complement each other i.e. monetary policy and policies for financial stability are mutually reinforcing. The crisis has proved that wrong. Note that we saw the global financial sector come to the brink of collapse in the midst of a period of extraordinary price stability. Indeed the experience of the crisis has prompted an even stronger assert ion - that there is a t rade-off between price stability and financial stability. In other words, the more successful a central bank is with price stability, the more likely it is to imperil financial stability. The argument goes as follows. The extended period of steady growth and low and stable inflat ion during the Great Moderation lulled central banks into complacency. Only with the benefit of hindsight is it now clear that the prolonged period of price stability blindsided policy makers to the cancer of financial instability growing in the underbelly. An even more recent example of a conflict between policies for financial stability and price stability is of the ECB reversing its crisis driven expansionary stance by raising interest rates twice during April-July 2011. The ECB just ified this on the argument of stemming the underlying inflat ionary pressures, but many crit icized this move as being premature and as clearly unhelpful to restoring financial stability. Of course, we all know that the ECB reversed these hikes during November-December 2011 in response to the euro zone slow down. (ii) Financial Stability -> Price Stability Let us now see the interact ion in the reverse direct ion. Whether policies aimed at financial stability can affect price stability is a debate that has stayed with us all through the period of management of the crisis. Many analysts have argued that the extraordinary monetary expansion, especially by the Fed, to bring interest rates to the Zero Lower Bound (ZLB) and following it up with two rounds of 'Quant itat ive Easing' (QE), all aimed at restoring financial stability, may actually be sowing the seeds of inflat ion. The argument goes that



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since the inflat ionary impact of easy monetary policies is difficult to see real t ime, the Fed risks going overboard with monetary easing thereby jeopardizing future price stability. 28. We also have an illustrat ion from emerging economies of policies for financial stability affect ing price stability. During the crisis, EME central banks eased monetary policy to provide relief to the financial sector, but this also saw inflat ion quickly resurging when recovery started. (iii) Financial Stability -> Sovereign Debt Sustainability 29. The management of the crisis offered an important lesson on how policies aimed at restoring financial stability could impair sovereign debt sustainability. By far the most obvious illustrat ion of this link is the cost of bail outs of failing financial inst itut ions, accompanied by 'fiscal st imulus', to prevent the financial sector problems from causing overall economic act ivity to collapse. The fiscal act ion was unquest ionably necessary to restore financial stability. But the net impact need not always be benign. There are circumstances under which fiscal expansion in support of financial stability can threaten sovereign debt sustainability. That will happen if the sovereign is already highly indebted, and the recovery is not quick enough or robust enough. Governments will then see their revenues falling, will need to borrow to bridge the fiscal gap, and can potent ially get t rapped in a self-reinforcing adverse fiscal feedback loop eventually jeopardizing their sovereign debt sustainability. (iv) Sovereign Debt Sustainability -> Financial Stability For transmission of shocks from the sovereign to the banking system, the evolving situat ion in the euro zone is clearly the most glaring example. Consider Greece, where banks are being asked to share the burden of bailing out the government, the so called private sector involvement - PSI, so that sovereign debt could be brought down to sustainable levels. But this will affect their collect ive viability and potent ially threaten broader financial stability. There has been acrimony over whether the PSI is voluntary or involuntary. For the purpose of this issue, that debate is a technicality; it does not alter the basic contours of contagion from sovereign debt to financial stability. The ECB's new term repo (LTRO) window offers another example of how sovereign debt sustainability concerns can affect financial stability. This new window offers banks three-year money at the repo rate to encourage them to use that money to lend to sovereigns, taking advantage of the arbit rage opportunity. But this financial engineering is a fragile and potentially problemat ic arrangement. Banks will need to post addit ional collateral with ECB if the bonds they offered fall in value or suffer a credit downgrade. For precisely the same reasons - fall in value and credit downgrade - banks will need to provide addit ional capital against monies they have lent to sovereigns. This could put banks on a collateral spiral and erode overall financial stability. (v) Sovereign Debt Sustainability -> Price Stability The most obvious route for sovereign debt concerns impinging on price stability is through the monet ization of government debt. Central banks do, of course, resort to open market operat ions (OMOs) - buying and selling government paper - for purposes of liquidity management. But if the mot ivat ion for the OMO is to help out a fiscally



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vulnerable sovereign or to reduce the cost of borrowing for the sovereign, central banks could end up holding price stability hostage to sovereign debt concerns. Fiscal concerns can dominate monetary policy in other less dramat ic ways. In the years before the crisis, an increasing number of governments were voluntarily adopt ing fiscal responsibility rules, thereby allowing room for autonomous monetary policy. These rule-based fiscal regimes unravelled during the crisis as both governments and central banks implemented expansionary policies in close coordinat ion. While such coordinat ion during the crisis was not quest ioned except by extreme purists, now in the recovery period, several fundamental concerns are resurfacing. At the heart of these concerns is whether monetary policy is once again becoming hostage to fiscal compulsions. The specifics of the debate vary but the basic issues are similar. In the US, the debate is over the t rade-off between short-term fiscal st imulus and long-term fiscal consolidat ion. In the euro area, the quest ion is about the shared benefits of a monetary union without the shared responsibilit ies of a fiscal union. In India, the quest ion has been whether the OMOs conducted by the Reserve Bank to manage systemic liquidity are act ing as a disincent ive for fiscal discipline. The quest ions all around are : are central banks being forced beyond their comfort zone to subordinate their monetary policy stance to the government's fiscal stance? Aren't the so called unconvent ional measures, in reality, quasi-fiscal measures? Are central banks, in the process, compromising their basic commitment to price stability? (vi) Price Stability -> Sovereign Debt Sustainability There are several ways in which policies aimed at price stability can influence sovereign debt sustainability. Higher interest rates, necessitated to combat inflat ion, raise the costs of debt to the government. Also, if the government has large subsidies on its budget, as do many emerging and developing economies, inflat ion could raise the cost of subsidies thereby raising the borrowing need of the government. On the other hand, governments with large debts may not actually mind a bit of inflat ion as it affords them an opportunity to inflate away some of the debt. I have spoken about the tensions and trade-offs between the three object ives underlying the new trilemma. The examples that I have given are by no means exhaust ive but are intended to illustrate the complex policy challenges they pose to central banks. Four Questions Underlying the New Trilemma Now let me turn to some important quest ions that central banks will confront in managing the new trilemma. In particular, I will raise four quest ions. Question 1 : Are We Seeing a Return of Fiscal Dominance of Monetary Policy? This quest ion has surfaced with vigour in the context of the euro zone crisis. The ECB claims that its bond purchase programme is aimed at restoring liquidity and improving monetary t ransmission. But many analysts believe that this is a thinly veiled at tempt to shore up sovereign borrowing and that the ECB is actually acquiescing in fiscal dominance.



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Although this tension between the central bank mandate and sovereign debt sustainability is present ly being played out in Europe, it is not new; nor is it unique to Europe. The seventy odd years since the Great Depression saw a famous rivalry between fiscal and monetary policies for influence. Historically central banks suffered from fiscal dominance since they had to acquiesce in governments 'borrowing as much as required at as low a cost as possible'. This state of affairs started changing in the 1980s, with a wave of support for central bank independence arising largely in response to the damage inflicted by the stagflat ion of the 1970s and the clear lesson that high inflat ion is detrimental to sustainable growth. So, fiscal dominance gradually yielded to independent central banks, free of short-term compulsions, targett ing largely, and in some cases exclusively, price stability. Now it seems we are seeing a reversal of that t rend with central banks being called upon to mind sovereign debt sustainability concerns. Fiscal dominance manifests through the central bank acquiescing in the fiscal stance of the government. This usually happens through monet izat ion of debt through the central bank's bond buying programme. Central banks typically conduct OMOs more as reverse t ransact ions (repos) for liquidity management purposes in line with their monetary policy stance and intermediate targets. In that case, they should be seen as pure monetary policy operat ions. But at t imes, OMOs could be mot ivated by the object ive of providing liquidity to support government borrowing or of reducing the yield on t reasury bonds to enhance debt sustainability. It then becomes a case of acquiescence in fiscal dominance. There is often only a thin line, and the interpretat ion of the mot ivation for outright OMOs could vary depending on the circumstances. In the presence of large sovereign borrowing that makes the government 's fiscal stance unsustainable, central banks typically have litt le choice. If they do not conduct OMOs to bring systemic liquidity within reasonable limits, they risk losing control over financial stability. If they do conduct OMOs, they risk losing control over price stability. What this really says is that fiscal responsibility is much more than a quest ion of whether monetary policy is independent or not . It is a quest ion of sustaining macroeconomic stability. Question 2 : Will the Management of the New Trilemma Erode the Autonomy and Accountability of Central Banks? The much prized autonomy of central banks has come under assault post -crisis with an influent ial view gaining ground that one of the principal causes of the crisis was the unbridled autonomy of central banks. The standard argument for central bank autonomy is that autonomy enhances the credibility of the central bank's inflat ion management credent ials. Monetary policy typically acts with a lag, and price stability therefore has to be viewed in a medium term perspect ive. Having autonomy frees the central bank from the pressure of responding to short-term developments, deviat ing from its inflat ion target and thereby compromising its medium term inflat ion goals. Now that the importance of central bank autonomy in monetary policy has come to be largely accepted, the quest ion is : will addit ional responsibilit ies underlying the new



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t rilemma affect that autonomy? And how will this new situation also affect the accountability structures of the central banks? It may be useful to take stock of the apprehensions in this regard. For overseeing systemic stability, new governance structures have emerged after the global crisis. These include the Financial Services Oversight Council (FSOC) in the US, the Financial Policy Commit tee (FPC) in the UK and the European Systemic Risk Board (ESRB) in the EU. Here in India, we have the Financial Stability and Development Council (FSDC). The precise inst itut ional arrangements vary, but across all of them, central banks have a lead responsibility. With these new inst itutional arrangements for financial stability in place, the autonomy quest ion has acquired an addit ional dimension. Note that central bank autonomy has worked because they could keep at arms length from the governments. But once a coordinat ion mechanism is in place, these barriers may melt away. Also, even if that is what the book says, it may be difficult to strait jacket the discussion at the coordinat ion forum to financial stability. As we have seen, there are no 'pure' financial stability issues; they are all inter-connected. A discussion on financial stability could very well lead to a discussion on monetary policy. What then of the autonomy of the central bank? This apprehension, as all of you will appreciate, is non-trivial. If we now add responsibility for sovereign debt sustainability to this already complex situat ion, the reason for apprehension about the threat to the autonomy of central banks becomes more obvious. Sovereign debt is a quintessent ially polit ical subject , and as we noted earlier, the very foundat ion of central bank autonomy is just ified on the need to free monetary policy from fiscal dominance. By requiring central banks to be mindful of sovereign debt sustainability concerns as part of the 'new trilemma', is the hard won gain of freedom from fiscal compulsions being compromised? But look at it also from the opposite perspect ive. Given that investor trust in public debt is part of the foundat ion of a nat ion-state, is it realist ic for a central bank to remain indifferent to sovereign debt sustainability? The new trilemma also poses quest ions for central banks on the accountability front . With a single object ive of price stability, the deliverable could be precisely defined, the outcome accurately measured, and accountability clearly extracted. Mult iple object ives, and as we have seen, with tensions and trade-offs between them, can diffuse and erode this accountability mechanism. The central bank can always explain away any failure on one front as a result of policies to defend another front . There are no easy answers to these apprehensions about the impact of the new trilemma on central bank autonomy and accountability. Governments and central banks in each jurisdict ion will have to define the nature and extent of the lat ter's responsibility for financial stability and sovereign debt sustainability. I can only lay down certain tenets that must inform this process. First , the fundamental responsibility of central banks for price stability should not be compromised. Second, central banks should have a lead, but not exclusive, responsibility, for financial stability. Third, the boundaries of central bank responsibility for sovereign debt sustainability should be clearly defined. Fourth, in the



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matter of ensuring financial stability, the government must normally leave the responsibility to the regulators, assuming an act ivist role only in t imes of crisis. Question 3 : Does the Pursuit of the New Trilemma Militate Against Growth? My short answer to this quest ion is 'no'. Let me elaborate. It is possible that in the short -term, policies aimed at price stability, financial stability and sovereign debt sustainability could, at t imes, run counter to policies required for promot ing growth. But growth achieved at the cost of the object ives of the new trilemma cannot be sustained. What can be sustained is only growth that is consistent with these object ives. So, some sacrifice rat io may be operat ive in the short -term, but in the medium term, there is no t rade off between sustainable growth and maintaining the object ives of the new trilemma. Let me illustrate this with reference to the debate that played out quite act ively in India all of last year around the growth-inflat ion t rade-off. We had inflat ion ruling all through the year in the range of 9-10 per cent . To combat this, the Reserve Bank has had to t ighten monetary policy - raising rates, as all our crit ics are fond of saying repeatedly - a record total of 13 t imes. While inflat ion did not show any downward t rend t ill late in the calendar year 2011, growth has certainly moderated. The Reserve Bank's latest project ion for growth for FY12 is 7 per cent, down from 8.4 per cent last year. The crit icism has been that we could not bring inflat ion down but only ended up hurt ing growth. This is not the occasion to enter a defence of our posit ion. But in the context of this conference, the crit icism throws up an important issue on the growth-inflation trade-off. Evidence from empirical research suggests that the relat ionship between growth and inflat ion is non-linear. At low inflation and stable inflat ion expectations, there is a t rade-off between growth and inflat ion. But above a certain threshold level of inflat ion, the t rade-off disappears, this relat ionship reverses, and high inflat ion actually starts taking a toll on growth. Est imates by the Reserve Bank using different methodologies put the threshold level of inflat ion in the range of 4% - 6%. With WPI inflat ion ruling above 9 per cent t ill recent ly, we were way past this threshold. At this high level, inflat ion is unambiguously inimical to growth; it saps investor confidence and erodes medium term growth prospects. The Reserve Bank's monetary t ightening all through last year was accordingly geared towards safeguarding medium term growth even if it meant some sacrifice in near-term growth. The debate on the t rade-off between financial stability and growth runs along roughly similar lines. Post-crisis, regulat ion of financial inst itut ions is being t ightened. In part icular, under the Basel III package, banks will be required to hold higher capital, bet ter quality capital and also build up capital and liquidity buffers. What does this mean for growth? A BIS study, undertaken by a group led by Stephen Ceccheti, est imates that a one percentage point increase in the target rat io of tangible common equity (TCE) to risk-weighted assets (RWA) phased in over a nine year period reduces output by close to 0.2 per cent . The study argues though that as the financial system makes the required adjustment, these costs will dissipate and then reverse after the adjustment period, and the growth path will return to its original trajectory. A Basel Commit tee study est imates



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that there will be net posit ive benefits from Basel III because of the reduced probability of a crisis and reduced volat ility in output in response to a shock. An IIF study, however, est imates a higher sacrifice rat io - that the G3 (US, Euro Area and Japan) will lose 0.3 percentage points from their annual growth rates over the full ten-year period 2011-2020. What are the implicat ions of these numbers relat ing to growth sacrifice for emerging market economies (EMEs)? Let me take the example of India. Admittedly, the capital to risk weighted asset rat io (CRAR) of our banks, at the aggregate level, is above the Basel III requirement although a few individual banks may fall short and may have to raise capital. But capital adequacy today does not necessarily mean capital adequacy going forward. As the economy grows, so too will the credit demand, requiring banks to expand their balance sheets, and in order to be able to do so, they will have to augment their capital. In a structurally transforming economy with rapid upward mobility like India, credit demand will expand faster than GDP for several reasons. First, India will shift increasingly from services to manufactures whose credit intensity is higher per unit of GDP. Second, we need to at least double our investment in infrastructure which will place enormous demands on credit . Finally, financial inclusion, which both the Government and the Reserve Bank are driving, will bring millions of low income households into the formal financial system with almost all of them needing credit . What all this means is that we are going to have to impose higher capital requirements on banks as per Basel III at a t ime when the economy's credit demand is going to expand rapidly. How best can we resolve this tension between the demands of growth and the demands of financial stability is a quest ion that we in India and several other EMEs will have to address. I have gone at some length on this not to argue that the costs of financial stability outweigh the benefits, but to argue that the cost -benefit calculus will vary from country to country, and will vary for a given country over t ime. So, the challenge for every country, advanced, emerging and developing, is to tailor its financial stability policies to maximize the benefit cost rat io on a dynamic scale. Now let me come to the third leg of the equat ion - the link between growth and sovereign debt sustainability. Like with the other two legs of the new trilemma, even in the case of sovereign debt, there is an inflexion point beyond which fiscal deficits militate against growth. Government borrowing is not bad per se, but excessive borrowing is. There is therefore a need to cap total public debt as a proport ion of GDP. What is equally important in respect of fiscal management is the quality of public expenditure. If the government borrows and squanders that money away on unproductive current expenditure, both fiscal sustainability and growth would be jeopardized. Governments need to spend on merit goods and public goods, in particular on improving human and social capital and on physical infrastructure. So, after all this discussion, what is the answer to the quest ion : does the pursuit of the new trilemma militate against growth? No. It does not . But there could be some trade-offs and governments will have to tailor their policies to ensure that the benefit - cost calculus is always maximised.



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Question 4 : What are the Limits to Unconventional Policy Measures? As the crisis exploded with brutal intensity and depth, central banks around the world acted with an unusual show of policy force, ferociously cut t ing policy rates to near zero or even zero. Realizing soon that this was not sufficient to restore calm and confidence to the markets, they had to follow up the convent ional measures with a slew of unconvent ional measures variously described as quant itat ive and credit easing. The first wave of unconvent ional measures was aimed at providing liquidity to the system either by way of collateralized loans through the repo window or outright purchase of bonds. Liquidity management is of course standard monetary policy procedure. What made this unconvent ional were mainly two things. The first was the quantum of operat ions. The volumes were large, and were aimed at flooding the market with liquidity, much beyond what is expected in normal t imes. The second characterist ic that made liquidity infusion unconvent ional was the relaxat ion of standards regarding the type of bonds bought under the OMOs. In this regard, different central banks relaxed regulat ions to different extents. While the Bank of England stuck to t reasuries, the Fed bought federally backed mortgage bonds in addit ion to t reasuries. The Bank of Japan went further buying also corporate bonds, commercial paper, exchange t raded funds and real estate investment t rusts. The second wave of unconvent ional measures went beyond repo operat ions and OMOs. The Bank of Japan extended targeted loans to banks to spur long term investment. The Fed supplemented two rounds of QE with 'operat ion twist' - of purchasing longer term treasuries against sale of short -term treasuries in an effort to depress the ent ire yield curve rather than just its short end. Last week, it also began publishing the expected interest rate path for the coming years. The ECB, as noted earlier, is providing three-year loans to banks. What of emerging economy central banks? They too had resorted to unconvent ional measures although their policy rates did not hit the zero lower bound. In the Reserve Bank, for example, at the height of the crisis, we operated a term repo window to enable banks to meet the liquidity requirement of mutual funds and non-bank finance companies (NBFCs). We relaxed the statutory liquidity rat io (SLR) prescript ion for banks by upto 1.5 percentage points of their net demand and t ime liabilit ies (NDTL) for this purpose. The risk weight on banks' exposure to NBFCs, which was raised earlier, was rolled back. The restrict ion on commercial banks in buying back the CDs held by mutual funds was lifted. We also inst ituted a foreign currency swap facility for banks. Unconvent ional measures have been content ious. Central banks have largely maintained that the unconvent ional measures they deployed are a part of the monetary policy arsenal, and that the intent behind them is to improve monetary t ransmission. Their crit ics have argued that central banks have actually stepped beyond their mandates to accommodate extraneous compulsions.



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All in all, the global financial crisis and the ongoing Eurozone crisis have raised important quest ions about the unconventional measures that central banks can resort to - their range, intent and the way the intent should be communicated to the markets. I am sure this conference will visit this debate in much greater detail over the next two days. Conclusion Let me now conclude by summarizing what I have said. I explained the rat ionale for the conference theme : "Price Stability, Financial Stability and Sovereign Debt Sustainability : Policy Challenges from the New Trilemma". I then illustrated how the three legs under the new trilemma interact with one another. Thereafter I raised the following four quest ions that central banks need to address in the context of the new trilemma : (i) Are we seeing a return of fiscal dominance of monetary policy? (ii) Will the management of the new trilemma erode the autonomy and accountability of central banks? (iii) Does the pursuit of the new trilemma militate against growth? (iv) What are the limits to unconvent ional policy measures? To what extent are the old and new trilemmas similar? Under the old t rilemma - the impossible t rinity - countries had to sacrifice one of the three object ives - fixed exchange rate, independent monetary policy and free capital flows. Under the new trilemma - the holy t rinity - no country can afford to sacrifice any of the object ives as the feedback loops can quickly shift the economy from an equilibrium to a disequilibrium. The issue really is of managing the inter se priorit ization among the object ives and of determining the role of the central bank in this management. So, how best can we manage the new trilemma? The crisis has given us valuable lessons from pract ice. We also have assorted bits of theory. The task ahead is to put them together into a coherent, workable theory of the new trilemma. I hope this conference will take us closer to that . A final thought, which is actually an extension of what I said at our last conference. In his best-selling book, 'The Ascent of Money', Niall Ferguson says that somet imes the most important historical events are the non-events : the things that did not happen. From that perspect ive, that the Great Recession did not turn into the second Great Depression, as we had feared, will count as a major non-event, notwithstanding the depth and duration of this recession. If the euro survives the sovereign debt crisis, as we hope, it will be another spectacular non-event. Non-events they may be, but they have changed our thinking on central bank mandates in a powerful way. How influent ial that thinking will be on the way forward will depend on how firmly central banks embrace the new trilemma. -------------------------- 1 Inaugural speech by Dr. Duvvuri Subbarao, Governor, Reserve Bank of India, at the Second Internat ional Research Conference of the Reserve Bank of India at Mumbai on February 1, 2012.



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Monetary Policy, Sovereign Debt and Financial Stability : The New Trilemma

Dr. Subir Gokarn Members of the central banking fraternity, part icipants from the financial, academic and media communit ies, other dist inguished guests : on behalf of the Reserve Bank of India, let me welcome you all to this Second International Research Conference. Genesis of the Conference The Reserve Bank of India's First Internat ional Research Conference was held in 2010. In that year, The Reserve Bank, which commenced operat ions on April 1, 1935, entered its 75th year. A series of knowledge-sharing events such as seminars, special memorial lectures, outreach programmes were organised on this occasion, culminat ing in the First International Research Conference. The First Conference focussed on "Challenges to Central Banking in the Context of Financial Crisis." At the Conference, two broad themes were covered. The first was the conduct of monetary policy during crisis, including financial stability as an object ive and the second related to the challenges posed to the central banking, including that to regulat ion and supervision, by globalisat ion and market failures. Five specific challenges were discussed, namely : (a) managing nat ional monetary policy decisions in a globalizing environment, given the growing complexity in the interact ions between external developments and domest ic variables, (b) redefining the mandate of central banks, given the pre-crisis at t ract ion of inflat ion target ing and the post -crisis debate on the role of central banks in relat ion to asset prices, (c) responsibility of central banks towards financial stability, part icularly beyond the convent ional Lender of the Last Resort (LOLR) funct ion, (d) managing the costs and benefits of regulat ion, in view of the difficulty in drawing a fine balance between regulat ion and financial innovations, and (e) the autonomy and accountability of central banks, particularly during exit from the crisis. The Conference had brought together central bankers, academicians, policy makers, financial regulators and supervisors and private sector experts to a common plat form. There were very important lessons to take from that Conference and that is why we are here to repeat it as a biennial event. In dealing with the crisis of 2008, while we deliberated on the pros and cons of each potent ial response at length, the uncertainty was large and risks were inherent in each of the act ions we took. Often, our judgments left us with a feeling that we were at t imes act ing subconsciously. This reinforced our view that it was necessary to enhance the role of research for policy making. This Conference series was one step in that direct ion. Through this Conference, the Reserve Bank intends to bring together central bankers, academicians, policy makers, financial regulators and supervisors and private sector experts to a common plat form to share their thoughts and to evolve solut ions. The Conference will hopefully provide a useful forum for the economists across the globe to exchange their views and research findings on issues relevant from a central bank's perspect ive, which will, in turn, provide valuable insights for policymakers.



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Motivation behind the Second International Research Conference The world has moved a great deal since the First Conference, but without resolving its financial problems. As a result, the sustainability of the recovery is in doubt. At the t ime of the First Conference, we were seeing green shoots of revival and were hoping that recovery may well st rengthen in due course. Since then, growth in emerging markets rebounded but inflat ion surged. By contrast , recovery in advanced economies was relat ively subdued. Inflat ion remained largely benign, but nevertheless did climb up from extremely low levels, posing some difficult ies. Financial fragilit ies stayed unresolved. In spite of some deleveraging, risks abounded and were compounded as public sector balance sheets weakened with weaker growth and private sector bailouts. Clearly, new dimensions of financial crisis have emerged since the first Conference. The nature of the crisis has changed with fragilit ies of the private sector balance sheets t ransmitt ing to the fragilit ies of the sovereign balance sheets. There appears to be no solut ion t ill the burden sharing problem amongst various state and non-state actors are resolved. Sovereign debt sustainability poses the biggest threat to sustainability of the recovery, while coming into potent ial conflict with the central banking object ives of price stability and financial stability. Any crisis resolut ion strategy needs to accord priority to resolut ion of sovereign debt problems, but there is a lack of clarity on what roles central banks can perform in this. A case could be made that it would be bet ter that central banks focus on their main jobs, while let Governments handle their debt problems. However, at the present juncture there are significant spillovers. Monetary authorit ies' act ions impinge on markets' ability to refinance debt and fiscal authorit ies' act ions constraints monetary responses. Central banks were seen as part ly responsible for the current crisis, but they were also at the forefront of unprecedented public policy response that was put in place swift ly, using a combinat ion of convent ional and unconvent ional measures, to contain the severity of the crisis and st imulate recovery towards resumpt ion of normal growth. While responding to the crisis, the RBI recognised that learning right lessons from the global crisis to strengthen its crisis prevent ion and management frameworks was crit ically important for the RBI to be able to perform more effect ively the mult iple roles it plays, including in the realm of financial stability. In the decades before the crisis, financial stability steadily lost its importance as an explicit central bank policy object ive. The quest ion, therefore, was how to focus on financial stability along with monetary policy. What was it that the central banks needed to do different ly? Move away from hard inflat ion target ing to a more diverse role? Accordingly, the theme of the first conference was "Challenges to Central Banking in the Context of the Financial Crisis". Since the FIRC, the challenges for central banks have only increased. Apart from the central banks needing to consider price stability and financial stability, they now had to grapple with sovereign debt sustainability - something they do not have core competency in, but need to get involved with so as to preserve financial and macroeconomic stability. In essence, the central banks of advanced economies now face a new trilemma, i.e. the need to simultaneously ensure price stability, financial stability and sustainable sovereign



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debt, which may not be possible if monetary policy accommodates on a sustained basis the needs of the financial systems and sovereigns. This t rilemma is also faced in many emerging market economies, albeit in a somewhat different way. These economies confront a much stronger inflat ionary environment and, therefore, the conflict between price stability and the other two object ives are much sharper. Theme of the Second International Research Conference (SIRC) and its Relevance The pre-crisis policy environment was characterized by growing preference for separat ion of price stability centric monetary policy from financial stability and debt management, even though country pract ices varied. In response to the financial crisis, central banks went beyond the convent ional "lender of last resort" role, and also recognised that price stability does not guarantee financial stability. With the return of financial stability object ive to central banks, along with additional tools in the form of either micro-prudent ial regulat ion / supervision or macro-prudent ial regulat ion, or both, central banks have to deal with any apparent conflicts between price stability and financial stability object ives, while aiming generally to maximize the complementarit ies and synergies between the two. Besides the monetary policy response to the crisis, the fiscal st imulus used across countries to bailout the financial systems and to support economic growth has led to large build up of sovereign debt, and in some countries the levels look unsustainable. In several countries, sustained slowdown in growth has also magnified fiscal pressures, arising from both weak revenue realizat ion and the need for more st imulus. Sovereign risk concerns have impacted financial market condit ions adversely, and central banks are increasingly being seen as "sovereign lenders of last resort", even when they resort to OMOs aimed at improving the liquidity and financial market condit ions necessary for bet ter monetary policy transmission. In some countries, the debt levels are so large that return to sustainable levels may take decades, and without the tacit backing of central back accommodat ion, financing of government deficits and addressing the debt stock concerns may become increasingly difficult . As a result , even if central banks do not perform the debt management funct ion, they will have a major role in the resolut ion of the sovereign debt problem. Previous episodes of large debt overhang suggest that inflat ion has often been the saviour. The risk of sacrificing "price stability" goal with greater responsibility on financial stability and sovereign debt provides a set t ing, which could be characterised as typical of a t rilemma for a central bank. Accordingly, the theme of the SIRC is "Monetary Policy, Financial Stability and Sustainable Sovereign Debt - The New Trilemma". We have three technical sessions at the Conference to deal with each of the three goals - price stability, financial stability and sovereign debt sustainability - and see how they conflict with other goals. The first session deals with 'Conduct ing Monetary Policy Post-Crisis : Challenges to Transmission Mechanism and Operat ing Framework'. The second covers the 'Impact of Crisis on Sovereign Debt : Implicat ions for Macro-economy and Inter-linkages with other Policies'. The third focuses on 'Financial Stability : Evolving Issues and Challenges in the context of Post -Crisis Macroeconomic and Financial Developments.' Each of these three topics is important in understanding the New Trilemma. Following these, we also would have two Governor's



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panels discussing specific policy quest ions relat ing to the new trilemma and the interactions between the new and old t rilemmas. The Papers at the Conference Let me now briefly touch upon the papers that we have received at the Conference. We have nine very good papers spread equally over the three sessions. Many of them will find a place in the front ier literature. All of them address some very important policy quest ions and will surely enhance our understanding from a central banking policy point of view. Important ly, in discussing the new trilemma, these papers have not neglected the quest ion of growth that is central to central bank object ives. It needs to be emphasized that the central banks pursuit of price stability is not devoid of the growth object ive, but is the very basis of achieving sustainable long-term growth. Some papers at the Conference direct ly address quest ions such as the link between finance and growth or the link between debt overhang and growth. There are others that invest igate aspects of the three pillars of macroeconomic policies that define the New Trilemma by dealing with one or more of these pillars. Most of these have also gone into the impact of policy choices on growth. Polit ical economy quest ions relat ing to policy-making and policy implementat ion have also been raised in some papers, making them that much more appealing from a pract ioners' viewpoint . The choice of techniques used in these papers is quite varied. Some of them use panel regressions sift ing through cross-country data, while others t ime series techniques such as vector autoregression and impulse response funct ions. There are some that have been developed in the framework of overlapping generat ions (OLG) models with st icky prices and solved analyt ically. However, the richness in all the papers lies more in raising policy quest ions and addressing them in a meaningful way. So the proceedings of this conference could be expected to provide us useful guidance on the post-crisis policy framework in the context of the new trilemma, and the challenges new trilemma may pose for managing the old trilemma. Some questions for the Conference The three nodes of the new trilemma represent three pillars of a sound macroeconomic environment. Price stability, financial stability and sustainable sovereign debt are necessary for sustainable high growth. You will hear about the policy conflicts relat ing to the pursuit of these three pillars at the same t ime from Governor Subbarao, who will be delivering his key note address short ly. But before that I would raise some specific quest ions in the context of the Conference theme. Should pre-crisis monetary policy be held responsible for the crisis? Some have argued that policy rates in advanced economies were kept at levels lower than what would have been necessary had the central bank followed a rule-based policy, such as, the Taylor rule. Other, however, would suggest that monetary policy was not the reason for the crisis as the "forecast of inflat ion as well as inflat ion expectat ions" were low, indicat ing that the threat to price stability from developments in macro economy and financial markets were largely absent.



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Has the response of monetary policy to the crisis been appropriate? Use of both convent ional and unconvent ional policy was unprecedented in recent history. Have these measures been effect ive? Some would say but for these measures, another Great Depression would have become unavoidable. Others, however, sustained weak growth and employment condit ions as evidence of policy measures not paying off as yet . What are the Lessons from the Crisis for Monetary Policy Framework? They are many. Price stability does not ensure financial stability, and the costs of cleaning up after a financial crisis are very high. Asset price bubbles potent ially could be more risky than thought earlier, but direct monetary policy response may st ill have to be avoided. Macro-prudential tools may be more suitable for that . Imbalances grow in good t imes, as during the great moderat ion, and prevent ing the build-up of imbalances in good t imes would require unpleasant t imely policy act ions. What Constrains Effective Transmission of Monetary Policy? The effect iveness of convent ional and unconvent ional measures has been constrained by the process of intense deleveraging in the advanced economies. Deflat ionary headwinds and zero lower bound (ZLB) for nominal rates are harder to deal with than demand induced inflationary pressures. The surfeit of liquidity in the global system has resulted in sharp increases in global commodity prices as well as capital flows induced asset prices in EMEs, exert ing thereby inflat ionary pressures. EMEs face a different t ransmission challenge, when the inflat ion process is driven by supply shocks, to which interest rate act ions may not be most appropriate. I hope I have provided you with the broad context behind the theme of this Conference. Governor Subbarao will now take you through some specifics, laying out what is meant by t rilemma, how it differs from the Old t rilemma, the various conflicts that might arise and how best we can at tempt to manage these.

Empowering MSMEs for Financial Inclusion and Growth- Role of Banks and Industry Associations

Dr. K. C. Chakrabarty Shri G. N. Bajpai, Former Chairman, SEBI & Chairman, Indian SME Knowledge Forum, Shri M. Narendra, Chairman & Managing Director, Indian Overseas Bank, Shri N. Shankar, CMD, ECGC, Shri A. Krishna Kumar, MD, SBI, Shri R. K. Dubey, ED, CBI, Dr K. Ramakrishnan, CEO, Indian Banks’ Associat ion, Shri K V Srinivasan, CEO, Reliance Commercial Finance Ltd, Shri Chandrakant Salunkhe, President, SME Chamber of India, SME Entrepreneurs, other dist inguished guests, members of the print and electronic media, ladies and gent lemen. It is a matter of great pleasure for me to be present here today at the "SME Banking Conclave 2012’ and share some of my thoughts and experiences on the development of MSMEs which is a vital sector of our economy. This Conclave gains importance in the context of globalization when the Small and Medium Enterprises (SME) face challenges and take advantage of opportunit ies created. Such a forum helps in garnering and shaping public opinion, building consensus, crystallizing policy inputs and giving us



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feedback on our policy init iat ives. I congratulate SME Chamber of India for organizing the ‘SME Banking Conclave 2012’. The SME Chambers has succeeded in bringing a large number of MSMEs under a single umbrella, thereby, making it a potent and act ive forum for dialogue with the potential partners in the development of the MSME sector in the country, which includes the industry, the financial sector and the Government. Importance of the MSME sector As all of you are associated in some ways with the MSME sector, its crit ical role and place in the Indian economy is very well known to all of you in terms of employment generat ion, exports and economic empowerment of a vast sect ion of the populat ion and I do not want to spend a lot of t ime overemphasizing it . But let me quote just a couple of stat ist ics. As per available stat ist ics (4th Census of MSME Sector), this sector employs an est imated 59.7 million persons spread over 26.1 million enterprises. It is est imated that in terms of value, MSME sector accounts for about 45% of the manufacturing output and around 40% of the total export of the country which is next only to the agricultural sector. It is, therefore, only appropriate that public policy has accorded high priority to this sector in order to achieve balanced, sustainable, more equitable and inclusive growth in the country. The MSMEs primarily rely on bank finance for their operat ions and as such ensuring t imely and adequate flow of credit to the sector has been an overriding public policy objective. Over the years there has been a significant increase in credit extended to this sector by the banks. As at the end of March 2011, the total outstanding credit provided by all Scheduled Commercial Banks (SCBs) to the MSE sector stood at ̀ .4785.27 billion as against ̀ .3622.90 billion in March 2010 registering an increase of 32%. The outstanding credit for the last four years to the MSE sector is given in Table 1.1 below : Table1.1 Outstanding credit to the MSE sector by SCBs

(No. of A/ Cs- in million) (Amount - ̀ . in billion)

Year Public Sector Banks

Private Sector Banks

Foreign Banks All Scheduled Commercial Banks

Last Friday of

No of A/ Cs

Amt O/ s No of A/ Cs

Amt O/ s

No of A/ Cs

Amt O/ s

No of A/ Cs

Amt O/ s

March 2008*

3.967 1511.374 0.819 469.118 0.065 154.892 4.851 2135.386

March 2009

4.115 (3.73%)

1914.083 (26.64%)

0.678 (-17.21%)

466.563 (0.54%)

0.058 (-10.78%)

180.634 (16.61%)

4.851 (No change)

2561.280 (19.94%)

March 2010#

7.217 (75.38%)

2763.189 (44.36%)

1.131 (66.81%)

648.247 (38.94%)

0.157 (170.69%)

211.470 (17.07%)

8.505 (75.32%)

3622.907 (41.44%)



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March 2011

7.398 (2.51%)

3694.30 (33.70%)

1.718 (51.90%)

881.16 (35.93%)

0.186 (18.47%)

209.81 (-0.78%)

9.302 (9.37%)

4785.27 (32.08%)

* change in definit ion of the sector as per the MSMED Act 2006 advised to banks in 2007

# Retail trade included in service sector

Source : Scheduled Commercial Banks

Note : Figs. In parentheses indicates Y-o-Y % growth / decline The total MSE Credit as percentage of Adjusted Net Bank Credit (ANBC) has been increasing since 2007 as shown below in Chart 1.1. In March 2011, it stood at 14.8% for the Public Sector Banks (PSBs). Chart 1.1Credit to the MSE by PSBs (as % to ANBC)

Despite the increase in credit outstanding to the sector, the MSME borrowers feel that the lenders are not doing enough for the MSMEs and are catering more to the needs of the large corporates. This gap in percept ion needs to be bridged. SMEs face a number of problems, such as, absence of adequate and t imely banking finance, limited capital and knowledge, non-availability of suitable technology, low product ion capacity, ineffect ive market ing strategy, identificat ion of new markets, constraints on modernisat ion & expansion, non availability of highly skilled labour at affordable cost , follow up with various government agencies to resolve problems, etc. More recent ly, the MSME Associat ion/ Chambers feel that the global recession, inflat ion and depreciat ion of the rupee is affect ing them adversely. I would now like to highlight some of the major constraints faced by the MSME sector and the important measures taken by Government of India and Reserve Bank of India to address them :



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(i) Access to Credit Access to t imely and adequate credit is crit ical for MSMEs growth and development. To ensure enhanced credit flow to the sector, and more so to the micro units, in terms of the recommendat ions of the Prime Minister’s Task Force on MSMEs (Chairman : Shri T.K.A.Nair, Principal Secretary, Government of India) constituted by the Government of India, banks have been advised to achieve a 20 per cent year-on-year growth in credit to micro and small enterprises; the allocat ion of 60% of the MSE advances to the micro enterprises is to be achieved in stages viz. 50% in the year 2010-11, 55% in the year 2011-12 and 60% in the year 2012-13 and achieve a 10% annual growth in number of micro enterprise accounts. The Reserve Bank is closely monitoring the achievement of targets by banks on a quarterly basis. The matter is followed up with the laggard banks to know their constraints and impress upon them the need to devise strategies to gear up the credit mechanism for the sector. While the banks have achieved the target of 20% y-o-y growth in credit to the sector the target for the micro units is st ill an area of concern. The banks have been advised to device strategies to step up their lending to micro units. I would, however, like to clarify to the MSME units, the difference between credit and money which should be clearly understood. Unlike money, credit has to be self-liquidat ing on a viable project and has a cost . It is to be appreciated that banks are highly leveraged bodies that lend money placed by depositors with them and therefore, have to pract ice prudent lending and be caut ious and sure of the safety of the money of their depositors. On the cost of credit , while interest rates have been deregulated by Reserve Bank of India, my message to the MSME sector is that as interest costs are a very small fract ion of their operat ing costs, only approximately 4%, do not ask for low interest rates from the banking sector, and instead ask for credit at compet it ive rates.Further, the extent of financial exclusion in the sector is very high as shown in Chart-1.2 below. The stat ist ics compiled in the Fourth Census of MSME sector September 2009 revealed that only 5.18% of the units (both registered and unregistered) had availed of finance through inst itut ional sources, 2.05% had finance from non-inst itut ional sources the majority of units i.e. 92.77% had no finance or depended on self finance. Chart-1.2 Financial Exclusion in MSME Sector



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There is, therefore, a need to ensure access of banking facilit ies in the remote unbanked / under banked areas. Financial inclusion, including MSME finance and the drive to universal access is the nat ional mandate. Financial inclusion makes growth broad based and sustainable by progressively encompassing the hitherto excluded populat ion. With an object ive of ensuring uniform progress in provision of banking services in all parts of the country, banks were advised to draw up a roadmap to provide banking services through a banking out let in every unbanked village having a populat ion of over 2,000 by March 2012. The Reserve Bank advised banks that such banking services need not necessarily be extended through a brick and mortar branch but could be provided also through any of the various forms of Informat ion and Communicat ion Technology (ICT) - based models, including Banking Correspondents (BCs). About 74,000 such unbanked villages have been ident ified and allotted to various banks through State Level Bankers Commit tees (SLBCs). As at the end of September 2011, as reported by the State Level Bankers' Commit tees of various states / Union Territories, banking out lets have been opened in 42,079 villages across the various States in the country. This comprises of 1127 branches, 39998 business correspondents and 954 other modes like rural ATMs, mobile vans etc. In addit ion, the Reserve Bank of India has advised banks to roll out the Financial Inclusion Plans (FIP) for drawing up an act ion plan to provide banking facilit ies in villages with populat ion less than 2000 through mult iple channels. (ii) Need for Venture / Risk Capital Venture / Risk capital is often a more appropriate financing instrument for high-growth-potent ial and start -up SMEs. Although MSMEs commonly use t radit ional debt, this type of financing is often not accessible for fast -growth and start -up firms. During their init ial phase, firms need finance to study, assess and develop an init ial concept (seed phase) or for product development and init ial market ing (start -up phase). At this stage, firms may be in the process of being set up or may exist , but have yet to sell their product or service commercially. High-growth firms usually develop an idea, concept or product that requires an incubat ion period before generat ing revenues and profits. Firms, typically, look for venture capital to provide them with the financing they need to expand or break into new markets and grow faster. Thus, the ability of MSMEs (especially those involving innovat ions and new technologies) to access alternat ive sources of capital like angel funds/ risk capital needs to be enhanced considerably. For this purpose, removing fiscal / regulatory impediments to the use of such funds by the MSMEs should be considered on priority. The Government of India, in terms of the recommendat ions of the PM’s Task Force on MSMEs, is looking into the area. (iii) Access to Equity Capital Access to Equity capital is a genuine problem. At present, there is almost negligible flow of equity capital into this sector. Absence of equity capital may pose a serious challenge to development of knowledge-based industries, part icularly those that are sought to be promoted by the first -generat ion entrepreneurs with the requisite expert ise and knowledge. There is a demand for a dedicated Exchange for MSMEs and SEBI has permit ted BSE and NSE to set up an Exchange for MSMEs in terms of the recommendat ions of the PM’s Task Force on MSMEs.



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(iv) Need for Skilled Labour The sector often feels the constraint of non-availability of skilled labour. It is indeed ironic that in a nat ion of more than a billion individuals, skilled labour is cited as scarce. In this regard, I feel that we are a very young nat ion - just over 64 years since independence - set t ing out on a path of sustained economic growth, for decades to come. As per the Nat ional Commission on Populat ion, the age-wise distribut ion of the populat ion of India is going to change significant ly in the coming years. By 2016, approximately 50 per cent of the total population will be in the age group of 15 - 25 years. Thus, there would be a t remendous increase in the number of youth entering the educat ion and job market in the ensuing years. On an average, it is est imated that around 1.5 crore persons per annum would enter the employment market during the next 30 years. Each person, in this bold new generat ion, will be in the prime of his or her life, st riving for a bet ter tomorrow - creat ing, in the process, new growth opportunit ies, for budding entrepreneurs! We need to capitalize on this unique demographic advantage. At present, there are various organizat ions at the nat ional and State levels offering support to entrepreneurs in various ways. The Government of India and various State governments have been implement ing a number of schemes and programs over the years. The Rural Self Employment Training Inst itutes (RSETIs) are working in this direct ion. There is, however, a need to examine the impact of RSETIs. (v) Factoring to Tackle Delayed Realization of Receivables Considerable delay in set t lement of dues / payment of bills by the large-scale buyers to the MSMEs units adversely affects the recycling of funds and business operat ion of MSME units. Though the Government has enacted the Delayed Payments Act , 1998 many of the MSME units are reluctant to pursue cases against major buyers. After the enactment of the Micro, Small and Medium Enterprises Development (MSMED), Act 2006, the exist ing provisions of the Interest on Delayed Payment Act , 1998 to Small Scale and Ancillary Industrial Undertakings, have been strengthened. The banks have been advised by Reserve Bank of India to sanct ion separate sub-limits within the overall limits sanct ioned to the corporate borrowers for meet ing payment obligat ions in respect of purchases from MSME sector. In pract ice, however, the legislat ion did not improve the posit ion of MSEs because of their dependence on large businesses for cont inued business. This problem has to be inst itut ionally tackled by factoring and banks should provide such services part icularly for MSMEs. To facilitate factoring services the Government has recent ly passed the Factoring Regulat ion Bill that would address delays in payment and liquidity problems of micro and small enterprises. Factoring provides liquidity to small and medium enterprises against their receivables from customers and is regarded as a cash management tool. Besides, factors would be ent it led to take legal recourse for recovering assigned debt and receivables from buyers of goods and services. The Factoring Bill creates the legislat ive environment for factoring and makes the process easier. (vi) Sickness Growing incidence of sickness of SSIs is yet another area of concern. When the sickness prolongs it leads to the closure of units and unemployment. The mortality of the SSI units is high. This has wider implicat ions including locking of funds of the lending inst itut ions, loss of scarce material resources and loss of employment. The data showing the posit ion of sick small and micro enterprises as at the end of March 2010 & 11 is given below :



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(Amount in ̀ . crore)

End of Total No. of Sick Units

Potentially Viable

Non-Viable Viability yet to be decided

Units put under nursing

Units O/ S Units O/ S Units O/ S Units O/ S Units O/ S

March 2010

77723 5233.15 9160 964.75 64403 3891.33 4160 377.03 2360 478.84

March 2011

90141 5211.25 7118 1112.98 76518 3589.12 6505 509.15 4698 518.30

The number of units ident ified as potent ially viable as a percentage to total sick MSE units is around 8% whereas the number of sick units found unviable was as high as 85%. The units placed under nursing as a proport ion to the total number of sick units stood at 5.22%. I would like to emphasize that t imely detect ion of sickness is crit ical as any delays in this regard makes the possibilit ies of its revival of potent ially viable sick units recede. As any other sickness, the need for t imely t reatment after ident ificat ion of sickness cannot be overemphasized in MSMEs. In order to hasten the process of ident ificat ion of a unit as sick, a proposal for modifying the extant definit ion of sickness, in line with the recommendat ions of the Working Group on Rehabilitation of sick SMEs, is under considerat ion of the Reserve Bank of India. For viable units, t imely and effect ive rehabilitat ion by way of renegotiat ions of terms of loans, induct ion of fresh dose of funds, business restructuring, change of management etc. may become necessary. The process should not only be quick, efficient , cheap and fair to all stakeholders but also acceptable to and implementable by all, with necessary monitoring arrangements for implementat ion of the same. In case the unit is not found viable, recovery of the dues of lenders through a fair, efficient and swift legal mechanism should be the focus. As it is observed that rehabilitat ion of sick micro, small and medium enterprises could not be taken up due to non-availability of promoters’ contribut ion in a large number of cases, we have recommended to the GOI to set up a Rehabilitat ion Fund for rehabilitation of sick MSMEs. All Scheduled Commercial Banks have also been advised on May 4, 2009, to review and put in place MSE Loan policy, Restructuring / rehabilitat ion policy and Non-discretionary One Time set t lement scheme for recovery of non-performing loans, duly approved by their Board of Directors. Banks were advised in December 2009 to give wide publicity to the Non-discret ionary One Time Sett lement scheme for recovery of non-performing loans for the MSE sector by placing it on their bank's web-site and through other possible modes of disseminat ion. (vii) Exit policy for MSMEs An exit route for non-viable units is necessary to manage sickness. Worldwide, MSMEs are credited with high level of innovat ion and creat ivity, which also leads to higher level of failures. Keeping this in view, most of the countries have put in place mechanisms to handle insolvencies and bankruptcies. The present mechanism available in India for MSMEs is archaic. Business failure in India is viewed as a st igma, which adversely impacts



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individual creat ivity and development in the country. The exist ing legislat ions may have to be toned up so as to provide for efficient liquidat ion of non-viable businesses. (viii) Infrastructure To ensure compet it iveness of the MSEs, it is essent ial that the availability of infrastructure, technology and skilled manpower are in tune with the global t rends. MSEs are either located in industrial estates set up many decades ago, or have come up in an unorganized manner in rural areas. The state of infrastructure, including power, water, roads, etc. in such areas is inadequate and unreliable. Further, the MSE sector in India, with some except ions, is characterized by low technology levels, which acts as a handicap in the emerging global market . Technological upgradat ion of the units would help in enhancing capacity and increase supplies which would also help to combat inflat ion. Need for market ing, research etc. is also crit ical. The Prime Minister’s Task Force on MSMEs recommended several measures having a bearing on the funct ioning of MSMEs, viz., credit , market ing, labour, exit policy, infrastructure / technology / skill development and taxat ion. The comprehensive recommendat ions cover measures that need immediate act ion as well as medium term inst itutional measures along with legal and regulatory structures and recommendat ions for North-Eastern States and Jammu & Kashmir. The implementat ion of the recommendat ions, in a t ime bound manner, is being monitored by Government of India at the highest level. 8. Global slowdown and MSMEs The recent past has been a challenging t ime for both the bankers and the MSME sector due to recession in many countries of the globe and depreciat ion of the rupee. The recession has led to slowing down of the global demand for goods and services. But I would urge upon the entrepreneurs to tap the huge demand in the local markets. MSMEs are the best vehicle to create local demand and consumpt ion and also to fight with the global meltdown. The depreciat ion of the rupee has made the price of the products of export ing firms in the sector more compet it ive. 9. Role of Banks Banks have a vital role to play in addressing several problems faced by the sector today. Banks have to view themselves not just as providers of credit but as partners in the growth of these enterprises, through a process of hand holding of first generat ion entrepreneurs, while they find their feet in the business. In financial management MSE enterprises do not have the size to support the competence they need. Operat ional skills, including accounting and finance, business planning, market ing and human resource management, etc. can often pose a challenge and necessitate support for the MSE borrowers. Typically, for instance, they operate with a woefully low product ivity of capital and have either too litt le or too much cash. The tools for doing this work are fully developed e.g. cash-flow forecast and cash flow management. The financial management needs of these businesses are predictable. And worldwide they fall into a small number of categories, well-known to any experienced banker. The rewards for building a firm providing these small businesses with financial management might be enormous. Banks should therefore, provide financial consultancy / financial management services to their MSE borrowers to give them holist ic guidance and support and nurturing them. Banks



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could set up special industrial and management consultancy departments to address funct ional inadequacies and market gaps. Bank branches need to ensure greater part icipat ion in the affairs of their MSME clients by convergence of credit services and non credit services. But for this, bank staff should be t rained through customised training programmes to meet the specific needs of MSEs such as knowledge of markets, both domest ic and global, use of technology, etc. Banks need to innovate to create products specifically suited to the requirements of MSMEs and should take a longer term view of its relationship with such ent it ies while pricing such products. As the availability of t imely and adequate credit is a key requirement for this sector, banks should introduce single window facility for providing loans to MSMEs. For this purpose, they can set up Centralized Processing Centres specifically to cater to such clients, which will handle the appraisal, sanct ion, documentat ion, monitoring, renewal and enhancement act ivit ies. As in any area, there would be a higher failure rate for start -up MSMEs. However, despite the risk, the financing of these enterprises is a must for ensuring inclusive growth. Banks will, therefore, be required to build up their risk assessment and risk management capabilit ies and provide for any instances of failures as a part of their risk mit igat ion process. I would also urge upon the Top Management of banks to put in place a credible, proact ive and a funct ional monitoring mechanism to review the progress in actual concrete outcomes. Bank staff has to be sensit ive to the need to nurture these enterprises and to ensure that they get the necessary support during the init ial phase. The performance of branch managers in dealing with the sector should be included as a criterion for evaluat ion of their performance. 10. Role of MSME Associations / Chambers The MSME Associat ions and Chambers have an important role to play in stepping up credit to this segment. They need to proact ively engage themselves in organising workshops and t raining programs for their members to enlighten them about cash flow cycles, various financial products, account ing pract ices, etc. In this regard, the MSME Associat ions, Chambers of Commerce, etc. may like to collaborate with banks, NIBM or any other t raining institute in the area of banking and finance, basic accountancy and informat ion technology for MSEs. I appreciate the effort of the SME Chambers in organizing this Conclave. I would, however, urge upon the Industry Associat ions to play a more proact ive role and bring forward specific cases where the MSME entrepreneurs are facing problems in accessing credit through the banking channels. Such issues could be discussed and resolved in such a forum. Even if we can resolve ten percent of the cases of genuine problems being faced by a MSME entrepreneur, I would feel that such conclaves have been successful. By doing so, the industry associat ions can bridge the gap between banks and individual firms in reaching of object ives such as addressing problems common to all members, st imulat ing cooperat ive action among manufacturers and providing access to resources aimed at assist ing manufacturers. MSMEs should understand that banks are responsible to their depositors and shareholders and, therefore, they, i.e. the MSEs, as customers of bank credit , have certain obligat ions to fulfill by way of repaying bank loans, maintaining proper books of accounts,



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submit t ing informat ion correct ly and more important ly, sharing informat ion about financial problems when these arise so that they can work together with the bank in resolving these. It is in the interest of MSEs, to get themselves rated by independent rating agencies, as it could enable them to negot iate with their bankers for interest rate reduct ion, larger loan size or even obtain faster processing of their loan applicat ions etc. MSEs need to be aware that if they default and their credit history is poor they will find it difficult to access bank finance, as banks have been mandated by RBI to pass on all credit history of their clients to CIBIL or any other credit bureau registered with RBI. Further, senior-level representat ives of SME / SSI Associat ions in each State are members of the Empowered Commit tee set up by RBI at each of its regional offices, with the SLBC Convenor, representat ives of banks having predominant share in SME financing in the State, SIDBI, Director of Industries of the State Government etc., are also members. MSE Associat ions need to use this Forum not only for removing bot t lenecks in the smooth flow of credit to the sector and for reviewing the accessibility of bank finance to more and more MSEs, but also highlight gaps if any in the att itude and skills at the bank branch level. I would urge upon the Industry Associat ions / Chambers to take up region-specific issues relat ing to MSEs with the concerned Regional Director of Reserve Bank of India and the SLBC convener banks. Such issues that cannot be resolved at regional office level could be brought to the not ice of central office of RBI. They could also spread awareness of the Government Schemes and Code of Bank’s Commitment to MSEs among their members. Last ly, the success stories of micro and small enterprises may be widely disseminated as it would inspire others to strive for excellence and thus contribute towards achieving greater heights in building a strong and prosperous India. The new entrepreneurs could also take a cue from the mistakes of their experienced counterparts and ensure not to repeat the same. A Piece of Advice While I have sought to highlight the expectat ions from various stakeholders in support ing the growth of MSMEs, it is important to remember that individual MSMEs, themselves, have to constant ly seek to t ransform themselves, in line with changing environmental factors, to ensure that they end up among the success stories instead of the failures. I have, in the past also, drawn from the famed management thinker Peter F. Drucker’s writ ings to highlight four typical mistakes that entrepreneurs need to avoid as they develop their businesses. These are, part icularly relevant for MSMEs during the growth phase. These include the need to be open to potent ial new / unintended markets or applicat ions for products developed by companies; the need to focus on cash flows instead of focusing only on profits as these are the lifeline that keeps the company going; creat ing a management team as the business develops; and last ly, the need to constant ly ask the quest ion that what the business needs at this stage and whether one is concentrat ing on the right things. Conclusion Let me conclude by restat ing the fact that MSMEs will cont inue to play a very important and vital role in our economy where the twin problems of unemployment and poverty



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const itute a major developmental challenge. In fact , if India were to have a growth rate of 8-10 percent for the next couple of decades, it needs a strong micro, small and medium sector. MSMEs are the best vehicle for inclusive growth, to create local demand and consumpt ion. The MSMEs of yesterday are the large corporates of today and could be MNCs of tomorrow. Thus, the banks and other agencies should take pride while servicing the MSMEs as they are playing an instrumental role in the format ion of MNCs of tomorrow. MSMEs themselves have to be on their toes, in this rapidly changing business environment, and keep evolving to stay clear of all the potent ial pit falls that confront them in their progress from small enterprises to large corporations. I look forward to your feedback in creat ing an enabling environment for the promot ion of MSMEs in the country. Thank You. 1. Address by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India at the 'SME Banking Conclave 2012' organized by SME Chamber of India on February 4, 2012 at Mumbai. Assistance provided by Smt Lily Vadera in preparat ion of this address is gratefully acknowledged.

Understanding Psychology for Responsible Financial Behaviour Shri. Harun R. Khan

I thank the organizers of the Golden Jubilee celebrat ions of the Maharishi Dayanand College of Arts, Science & Commerce, Mumbai for invit ing me to deliver the inaugural address at this important seminar. The Interdisciplinary Seminar on Psychonomics : Understanding the Psychology behind Financial Behaviour is indeed a very topical subject and especially when the world is realizing the significance of the import of human psychology in the economic behaviour of the markets. It is not often that one gets an opportunity to share thoughts with an enthusiast ic group of students and faculty with diverse educat ional backgrounds and put forth views on psychology in order to explain economics. Today, part icularly in the contex of recent financial crisis, it is well-accepted that psychology does influence many economic decisions which defy pure economic theories. As we all know, during the classical period, economics had an established link with psychology. For example, Adam Smith, who is considered as father of economics, in his work on The Theory of Moral Sent iments, had described psychological principles of individual behaviour. Jeremy Bentham, founding father of modern ut ilitarism ideas, wrote extensively on the psychological aspects of ut ility. Overtime, economists, however, began to distance themselves from psychology as they sought to reshape the discipline as a natural science. By mid-20th century, psychology lost its linkages with economics. In the 1950s, Herbert Simons challenged some of the t raits of standard economic model of human behaviour, i.e., unbounded rationality, unbounded will-power and unbounded selfishness. He quest ioned the idea that people have unlimited information processing capabilit ies. Rather he propounded the idea of 'bounded rat ionality' to suggest a more realist ic concept ion of problem solving ability of human beings. It was also suggested that human beings struggle to analyse problems object ively as they view them through a 'frame' of personal experience often shaped by social and cultural bias. In mid 1960s,



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Ward Edwards, Amos Tversky and Daniel Kahneman began to compare their cognit ive models of decision making under risk and uncertainty to economic models of rat ional behaviour and this led to resurgence of psychology in economics. The recent global financial crisis caused severe damages to many economies across the globe. Governments and Central Banks had to step in to bailout many financial inst itut ions to protect the systemic stability. Greed and fear played a big role in the way markets behaved much against the lines predicted by the mathemat ical models. The behavioural economics do succeed in explaining the recent market distort ions driven by these two human traits. The greed for huge gains drove financial engineers to innovate and sell complex financial products to unsophist icated investors. As the crisis unfolded stock market reacted sharply and stopped rallying. Fear then took over and accentuated the sell-off instead of encouraging investments at lower prices. I do not intend to dwell on these areas in detail but what I intend to highlight during my brief presentation is to focus on some of the facets of interconnectedness of psychology with economics and how human behaviour and emot ions impact economic decisions. I would also at tempt to put forth some of the findings of behavioral finance talking along the contours of mainstream and behavioural economics. Sociology and Psychology underpin Economics As we know, in the field of behavioural economics, insights are drawn from psychology and sociology to arrive at explanat ions for economic phenomena. The main departure of behavioral economics from its mainstream counterpart is that behavioral economics quest ions the basic tenets of mainstream economics, i.e., the assumpt ion of fully rat ional agents with purely self-centered preferences. Once these assumpt ions are relaxed, we are able to answer a lot many quest ions that do not have clear cut answers in mainstream economics. Behavioral economics is a t ruly fascinat ing field and it has been increasingly incorporated within the mainstream framework. Shifts in Behaviour of Economic Agents A large part of the thinking in finance during the 1970s was dominated by the efficient market hypothesis which stated that markets are always right , decisions of millions of rat ional investors make the markets the best judge of value of financial products and that price of financial products contains the best possible informat ion about the fundamentals. In this connect ion, one can refer to Just in Fox, who, in his book t it led The Myth of the Rat ional Market : A History of Risk, Reward, and Delusion on Wall Street has eloquent ly t raced the origins of the irrat ionality of efficient market hypothesis and has explained the events leading to the crumbling of the myth of efficient markets. As we know, with passage of t ime, anomalies in financial markets and in the behavior economic agents began to crop up. With this there was a growing disquiet over models being used to capture real world events. This gave rise to the search for newer paradigms of thinking so as to explain the behavior of economic agents which differed from what was predicted by standard economic or finance theory. This alternat ive paradigm explores the psychological models of decision making in contrast to mathematical models and the irrat ionality of the markets. The new ideas focus on how investors over-react or under-react and end up making irrat ional decisions based on imperfect data. One such anomaly



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was the increased and persistent volat ility in the stock markets in the developed world. Much of this volat ility was unaccounted for. Some observers have, hence, concluded that prices do not necessarily change due to changes in fundamentals but due to "animal spirits" and mass psychology as well. Understanding Speculative Build up Price-price feedback loop Another anomaly that caught the attent ion of academics was the bouts of speculat ive increase in price of stocks. Speculat ive build-up of prices could lead to expectat ion of further increase in prices and this in turn may cause further price increase which is a departure from standard theory. Of course, high prices not supported by fundamentals cannot stay high forever. Once the euphoria dies down, prices fall. This phenomenon has come to be called the price-price feedback loop. These feedback loops have long existed and were, for example, experienced during the Tulip mania in Holland during the 1600s, the stock market boom in the early part of 2000s and the housing bubble in the US which mainly contributed to the recent global financial crisis. A negat ive feedback loop, i.e., one causing prices to fall could also operate in a similar manner. Professor Robert Shiller points out that even with the feedback loop working it is difficult to find discussions in standard text books. It is possible that people may match increase in price of stocks with previous events leading to a dynamic feedback loop even though fundamentals may not warrant any significant change in prices. Biased Self-attribution Feedback loops can be explained with yet another principle of psychology called "biased self-at t ribut ion". Individuals may att ribute, often misplaced, good happenings to their own ability while bad happenings are passed off as outcomes of bad luck or sabotage. In t radit ional finance theory, it is possible to argue that large number of sophist icated investors offset the effects of behavior of the nonsophist icated investors, thereby making markets efficient . For instance, when irrat ional opt imist investors buy stocks the sophist icated investor sells stocks and viceversa. However, this behavior of sophist icated investors need not always lead to efficient markets. It is possible that sophist icated investors increase the effects of the act ions of irrat ional investors, for instance, by buying stock ahead of irrat ional investors in ant icipat ion of price increases. This leads to prices of stock being away from their fundamental value, i.e., mispricing. Arbitrage of Asymmetric Information It is seen that mispricing happens in securit ies for which informat ion is sparse or comes too slowly. Stocks may be mispriced for long periods of t ime due to a number of reasons and investors t rade on informat ion which they believe is superior to informat ion available with anyone else. These could be forecasts or stock specific news. However, it is possible that somet imes even the sophist icated investors interpret the informat ion incorrect ly. It is also possible that overconfident investors are able to take advantage of liquidity traders before rat ional investors, thereby earning higher returns than rat ional investors. Mispricing can also persist for long periods of t ime due to other happenings. For instance, if an investor ident ifies a return pat tern stat ist ically, it is difficult for him to know whether other investors have ident ified and acted upon that pat tern or not . Therefore, uncertainty



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can lead the prices to be away from the t rue value for long periods of t ime. In a related point , it is also possible to see why there may be limits to arbit rage due to risks and costs associated with exploit ing the arbit rage opportunity. Let us think of a situat ion in which irrat ional investors are bearish on a certain stock. This will cause the price of that stock to fall. Standard theory will have us believe that rat ional investors will sense an opportunity and buy the stock at the lower price short ing a similar stock to hedge the posit ion. Thus, buying of the stock will take the price back to its fundamental value. This exposit ion of the dynamics of price change is based on the assumpt ion that every mispricing creates an immediate opportunity to make riskless profits. This may, however, not be the case. There may be risks and costs that dissuade taking advantage of arbitrage opportunit ies. Illustratively, even when the stock price is down due to unwarranted pessimism, rat ional investors may still face more downside risks to price due to adverse news about the company. Risks to stock prices also arise due to the presence of noise t raders who could compel rat ional t raders to liquidate their posit ions too quickly. In addit ion, there are transact ion costs involved in the process of taking advantage of arbitrage opportunit ies. These costs could be prohibit ively high somet imes and, hence, could deter arbit rage. Impact of level of Knowledge on the Decision Making Process In the context of how level of knowledge influences the decision making process, let us examine the quest ion whether we always include all factors affect ing the happening of an event into account before making a decision. Standard economic theory predicts that all factors are considered and that decision is opt imal. In pract ice, however, it appears that we do not . Evidence from psychology suggests that due to the lack of t ime and cognit ive resources, the brain develops rules of thumb to analyze the problems, i.e., people depend on heurist ics. This works well when applied in appropriate set tings; however, applying them in scenarios different from what was init ially intended creates biases. One assumpt ion of mainstream economics is that errors are independent across individuals in the sense that the errors of one individual are not affected by or affect the errors of another individual. In the modern world, humans are faced with many decisions at the same t ime and with cognit ive power being limited, heurist ics are used to decide. There is obviously no guarantee that these decisions will be opt imal even though one could spend more energy to make the opt imal decision. The Halo Effect Very often in our lives we tend to appreciate one t rait of another person so much that we overlook the other, somet imes, undesirable t raits. This is because of what has come to be called the "halo effect". This effect can be used to analyze the mispricing of stocks. Admittedly, in markets that are efficient , stocks could be good in terms of growth prospects; however, this t rait of the stock says nothing about the future risk adjusted returns. Similarly, at t imes investors are unduly influenced by the halo effect of "eminent" people or people with "star value" inducted into the boards of companies. Thus, if this is the case, it is possible that stocks of certain companies that are growing could be consistent ly mispriced.



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The Mental Accounts Let me now briefly turn to the concept of mental account ing. It is a process of coding, categorizing and evaluat ing economic outcomes. For instance, people are known to make not ional mental accounts, i.e., accounts for educat ion of children or savings, etc. Even within investment accounts, there is a safe account designed to provide for the "rainy days" and one account that is typically the risk taking account designed to make money grow faster. However, theoretically, speaking money should be fungible across accounts because money in one account is as good as money in some other account. In pract ice, however, money is not found to be fungible across accounts. For instance, fall in value of investment from the safe account causes more pain than an equivalent fall in value in the other risk taking accounts. Another interest ing example popularly quoted is that due to risk aversion t rait , people tend to hold on to loss making stocks and sell profit making stocks. In effect , people t ry to reduce loss and hence end up keeping loss making stocks for longer. Bracketing Another issue of mental account ing is the concept of broad and narrow bracket ing. Many of us here may have not iced the get t ing a taxi on a rainy day is part icularly difficult . One would think that there would be more people willing to t ravel by taxis on a rainy day than on a non-rainy day, thereby giving taxi drivers incent ive to work more and, hence, earn more. However, it is possible that taxi drivers focus on the income from a day, i.e., the concept of narrow bracket ing but not on the income over a longer period of t ime, i.e., the concept of broad bracket ing. On rainy days, the income for the narrow bracket ing is achieved more easily as the targeted earnings are achieved for the day early. Hence, many taxi drives take rest earlier than usual, thereby aggravat ing the problem of finding taxis on rainy days and also depriving them of higher earnings on such days. Emotions and Expectations in Economic Decision Making Most theories in economics focus on debates without the involvement of any emot ions. I am sure you will agree with me that many of the decisions that we take are based on or influenced by our emot ions. Besides, there is also evidence to prove that people are influenced by their current tastes and habits when predict ing futures tastes. Individuals in the framework of mainstream economics are said to know the ent ire t ime path of the costs and benefits of their act ions. In the event that when they do something that may not be completely rational, say addict ion to alcohol, they are treated as taking rat ional decisions. We know one reason why people below poverty line never move up the ladder is that often they spend large port ion of their meagre incomes on wasteful habits of consuming alcohol / tobacco or spending on social events although they know such habits would only aggravate their current economic problems. Behavioural economics explains why such addict ions happen. It is thus possible that people underest imate the effect of current consumpt ion on future consumpt ion and may under appreciate the format ion of a habit . Behavioral economics also throws useful insights for policy makers. Researchers at the Federal Reserve Bank of Boston are engaged in studying the implicat ions of behavioral economics for economic policy. Papers presented at the 2007 conference on behavioral economics at the Boston Fed shed light on the role of emot ions and the idea of fairness on



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economic decisions. Evidence on how emot ions like anger and regret affect the price set t ing decision of firms and the purchasing decisions of firms. The idea of fairness also has implicat ions for labour market outcomes. Evidence also suggested that it was difficult for US consumers to formulate and execut ive saving plans. This obviously has immense implicat ions for policy makers and policy making. Many commentators were of the opinion that complex sub-prime assets were sold to unsophist icated borrowers who did not understand the contracts fully. Findings presented at the conference also suggested that less than fully rat ional investors could affect housing prices. If prices are always expected to cont inue their past t rend among the irrat ional investors then house price bubbles were more likely to form and macroeconomic stabilizat ion could be more difficult . This in fact actually happened in the US. Insights were given on how behavioral economics could help central banks communicate economic policies. Another important aspect from the point of view of central banks is that expectat ions, not rational but adapt ive, play an important role in influencing the actual inflat ion path. For instance, if workers believe that inflat ion will be higher in the future period then they may demand higher wages which could in turn feed into the headline inflat ion through wage push effect . This has been evident in India in recent years as not only inflat ion expectations have been high in double digits, even the extent of increases in wages in both rural and urban areas has been higher than the actual inflat ion levels. Generally, in a weak growth environment or a condit ion of moderat ing demand, wage push spiral may not be sustained for long. Ant iinflat ionary monetary policy, that remains commit ted to containment of inflat ion t ill the impact of moderat ing demand on inflation and wage demand becomes visible, could work in containing inflat ion expectations. For anchoring inflat ion expectat ions, therefore, balancing the growth-inflation mix, t iming of policy act ions, and clear communicat ion from central bank on its intent and commitment to inflat ion becomes crit ical. Beyond this what further needs to be done to anchor the inflat ion expectat ions could be an interest ing subject for further explorat ion. Concluding Thoughts In the mainstream framework, all of us would be individuals maximizing ut ility to one's self irrespect ive of the ut ility of others around us. We do, however, care about the welfare and consumpt ion of people around us, i.e., our family and friends. Even when we move away from the close circle of family and friends, we do not necessarily always act in self centered ways. In contrast , as was evident during the recent crisis in the financial markets, finance and economics were being pract ised by set of people who had a totally different mind-set , often condit ioned for self-interest and greed. They were more mechanical in nature, probably due to the fact they specialized in science and technology and with less or no inputs from humanit ies during their course of educat ion. They had thus no compunct ion in mis-selling the products to unsophist icated investors / borrowers, thereby sowing seeds of disaster for the households and the economy. This, however, does not absolve them of the unethical behaviour leading to selfish gains at the cost of deeper structural damages to the system and harmful social consequences arising out of irresponsible financial behaviour as we have seen in the recent financial crisis. Hence, there could be a case for condit ioning of all those who join finance professions by way of value based educat ion and socially relevant experiences during their college days.



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To sum up, all of us could use the findings of behavioral economics in our daily lives as well as in policy making. The important lesson of life is that we should not evolve into insensit ive individuals who care only for short term monetary gains by putt ing at stake ethics and moral values, thereby disrupt ing the financial system and causing huge social and economic damages. Hence, educat ional inst itut ions like yours should play an important role in creat ing human capabilit ies which are conditioned by individual morality and social ethics aimed at responsible financial behaviour. With this I intend to conclude and hope that this important seminar will highlight and throw up interest ing ideas for policy makers and practioners. ----------------------------- * Inaugural address by Harun R Khan, Deputy Governor, Reserve Bank of India at the Interdisciplinary Seminar on Psychonomics - Understanding the Psychology of Financial Behavior organized by Maharishi Dayanand College of Arts, Science & Commerce on February 6, 2012 in Mumbai. The speaker acknowledges the contribut ion of Shri. Anand Shankar, Shri Sit t ikantha Pattanaik and Shri. Surajit Bose in preparat ion of the address.

The Reserve Bank of India : Pulling every lever (Art icle published in The Economist , February 4th-10th)

India's central bank is one of its best institutions. It is also complicit in a Government-borrowing binge One of the perks of being governor of the Reserve Bank of India (RBI) is the use of a colonial bungalow on Carmichael Road, a posh street that weaves along a ridge in south Mumbai. On one side live some of India's richest industrialists, modern-day pharaohs with flashy architectural tastes. On the other, a stone's throw down a cliff, is a small slum-a monument to desperat ion and government failure. Both sets of neighbours are part of the 1.2 billion populat ion that India's central bank must look out for. In normal t imes this is a task that would furrow the brow; now that the country's boom is faltering, it risks causing a blinding headache. Judging by the numbers, the RBI is among the world's best central banks. Its record on balancing growth and inflation is decent enough (see chart 1). Since 1995 wholesale prices have risen by an average of 6% a year, not too far from the RBI's comfort zone of about 5%. Growth has averaged 7% a year. The RBI is also in charge of the safety of the financial system, to which end it yanks more levers than Willy Wonka in a chocolate factory. Its record here is excellent . Despite a current -account deficit that leaves India vulnerable to global jit ters, the country sidestepped the 1997 Asian crisis ("nobody gave us a chance," recalls a former governor) and the West 's banking crisis in 2008. The RBI also coped with big and potent ially destabilising capital inflows in the euphoric years before Wall Street began to totter, and has avoided a domest ic financial crisis despite fast growth in banks' assets for many years.



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Some fancy the RBI is a model for the kind of full-service central bank that is back in fashion worldwide-both the Federal Reserve and the Bank of England, among others, are now in charge of financial stability as well as interest rates. In t ruth, it would be hard to run a rich economy the way the RBI does India, with its financial system only part ly liberalised. But the central bank has new clout abroad and at home its stock is high. Under the present governor, Duvvuri Subbarao, a soft ly spoken figure, it has made a tough series of rate rises in the past two years to t ry to curb a stubborn spell of inflat ion (a bat t le that may not be over). And although the bank finds it hard to tempt star graduates to work in its tower overlooking Mumbai harbour-"if you look at its people and those of the Fed, there's no comparison," laments one bigwig-relat ive to most Indian state bodies the RBI has more brains, muscle and integrity. It is about the only inst itut ion in the country you never hear accused of graft . That 's a big turnaround for a body that became a polit icians' plaything after India nat ionalised its banks in 1969. For two decades the state controlled lending and also fixed as many as 200 separate interest rates. It used the RBI as a piggy bank, forcing it to print money to finance its short-term needs. After 1991, when a balance-of-payments crisis led India to deregulate, the central bank rediscovered its spine. Agreements fully enacted in 1997 and 2006 stopped the state using it as an ATM, and as interest rates were liberalised and the bond market developed, the RBI began to look more like a normal central bank, set t ing short-term policy rates to t ry to balance inflat ion and growth. This journey never reached the dest inat ion that was unt il recent ly in vogue in the West -that of a statutorily independent central bank narrowly focused on set t ing interest rates and target ing inflation. The RBI's independence is not enshrined in law, although none of the four central-bank governors since 1992, interviewed by The Economist for this art icle, raised this as a big concern. The RBI consults the government but it has enough breathing-space to set rates as it pleases, they say.



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And like a t riumphant wearer of flares that have at last come back in fashion, the RBI's wide remit -mint ing coins, managing the exchange rate, act ing as banker for the government, and supervising banks and the bond market -is now seen as a template. These responsibilit ies helped it deal with the 2008 crisis : in short order it defended the currency, loaned money to cash-strapped banks, gave forbearance on t roubled loans, soothed the bond market and eased banks' capital requirements. Today a process of constant tweaking cont inues. In December, after a panicky fall in the rupee, the RBI introduced several obscure measures to bolster it , such as making it more at t ract ive for Indians resident abroad to deposit money in the homeland. Such fiddling has a cost . In 2007 an official report on making Mumbai a global financial centre-a work of great imaginat ion-ident ified nitpicking and suspicion of foreign financiers (who are welcome to buy shares in India but not to play in debt markets) as a big problem. In 2009 an official review of finance chaired by Raghuram Rajan, a former chief economist of the IMF, worried that conservat ive regulat ion was inhibit ing India's potent ial. One local bank boss says the RBI "runs a repressed financial system which is intolerant towards innovat ion. If the US was at 90 out of 100 in terms of complexity and sophist icat ion, we are at 10… I somet imes get the impression it [the RBI] is rest ing on its laurels, not realising that more financial innovat ion could help India's development." St ill, after years of financial convulsions abroad it is hard to say that the RBI has got the balance between safety and thrills wildly wrong. Indeed, the thing that endangers India today is not its financial markets but its government. Heady talk of 9-10% as India's new natural rate of growth is long gone. Many blame the government, which has not passed a significant reform for years while running a fiscal deficit of almost a tenth of GDP, including the states and off-balance-sheet items (see chart 2). The deficit -which began as an electoral giveaway in 2007, morphed into a st imulus package and is now just a product of indiscipline and populist polit ics-is widely seen as bad for India. Government borrowing crowds out the private sector, which has to live with higher interest rates than might otherwise be the case. Because the state is less likely than private business to spend the cash on investment, it does less to boost the economy's potent ial. At the RBI the boom of 2003-07, when growth was near double-digits and inflat ion comfortable, is now seen as a dist inct era during which the deficit was falling, bullish firms were invest ing freely, a crit ical mass of reforms were in the bag and the state was product ively solving day-today problems. Those condit ions do not exist today. The central bank's rule of thumb for the non-inflat ionary rate of growth has fallen to 8%, but that seems to bake in an assumpt ion that the polit ical class will recover its wits. If, hypothet ically, that does not happen, insiders at the RBI accept that t rend growth could be significant ly lower. Bears outside the central bank talk of 6%. The uncomfortable quest ion for the RBI is whether it is part ly responsible for the slowdown, albeit indirect ly. If you have a central bank that always gets you home safely at the end of the night the temptation for polit icians may be to go crazy. The RBI's posit ion is especially delicate on the fiscal deficit . The central bank oversees a financial system that is a conduit for funnelling savings into government bonds, 70% of which are owned either



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by the central bank or by the banking system, which remains dominated by state-owned lenders. Although the rat io has come down, the RBI st ill forces banks to invest 24% of their core deposits in government bonds, far above what is needed to give banks a safety buffer of liquid assets. This creates capt ive demand for public borrowing (although during an economic soft patch such as today's, caut ious banks may voluntarily hold more than the minimum). The RBI also buys government bonds in the market . It argues this makes markets work smoothly, but most outsiders think the aim is to put a lid on government -bond yields. A spike in yields in November has been followed by a big, $14 billion RBI bond-purchase programme. The RBI is thus in the weird posit ion of publicly rebuking the government about its deficits while being the guarantor that they are financed. An extreme remedy would be for it to stop buying nearly so many bonds and to ease the rules on banks' bond holdings. Without capt ive buyers interest rates would rise, perhaps by a percentage point or two. Some doubt whether the polit icians would pay any at tention- their appet ites are insensit ive to the government 's borrowing costs, it is argued. But the RBI would st ill probably like to t ry; in December 2010 it cut the liquidity requirement from 25% to 24%. The t rouble is, anything more dramat ic might be seen as meddling in polit ics and could prompt a bond-market rout that endangers stability. Prop trading In this respect , as with its strong supervisory record, the RBI may have lessons for the world. Other central banks, including the euro zone's, are propping up sovereign-bond markets. Mr. Rajan talks of "the conceit that central banks are independent. When they find that the governments are not going to budge [on cut t ing their deficits] few feel able to just walk away." In a speech on February 1st , Mr. Subbarao, the RBI's governor, worried that "in the presence of large sovereign borrowing… central banks typically have litt le choice." One possibility is that slower growth, high borrowing and lack of reform might eventually prompt a fiscal or balance-of-payments scare that even the RBI, with its impressive array of tools, st ruggles to keep a lid on. That might frighten the polit ical class enough to act. The more benign scenario is that polit icians will ant icipate this risk and act spontaneously to get India's public finances back on t rack. But polit ics is one thing India's central bank cannot control. As he set t les down at his villa to watch the sun set over the metropolis of Mumbai, all the governor of the RBI can do is cross his fingers. -----------------------



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Indian Banking Sector : Towards the Next Orbit Dr. K. C. Chakrabarty

Dr. Pritam Singh, Director General, Internat ional Management Institute, Dr. Ahindra Chakrabart i, Programme Director, part icipants from Reserve Bank of India and the commercial banks. It gives me great pleasure to be before you today as you embark on this journey of learning here at IMI and later across Paris, Berlin and Milan to imbibe the culture of these countries and the best pract ices. The Advanced Management Programme is the ninth in the series and includes study visits to central bank / leading commercial banks of these countries and interacting with their senior management, the object ive being to enable the part icipants to see world class banking systems, understand the strengths and weaknesses of the European banking system and develop awareness and appreciat ion of the emerging business environment. Lectures and interact ions with some leading academicians and management experts of the European business schools will give rare insights to the part icipants on present status of the Eurozone economies. Apart from the structured classroom learning, these kind of programmes offer a unique opportunity to the part icipants for learning from each other and also understand the best management pract ices across organizations. It is expected that the part icipants will try to develop further on these best pract ices and implement them in their organizat ions in their own way. All these and more are required as each one of you have a role to play in taking Indian banking to the next orbit . Having said that , I have been asked to speak on 'The Indian Banking Sector : Towards the Next Orbit ". I would like to begin with an analogy. A spacecraft needs to achieve a certain momentum before it breaks free from the earth's gravitat ional pull, leaves behind the familiar and comfortable and enters into the unchartered vastness of a new orbit . The success of the mission and certainty of reaching its goals would lie in how effect ively it has made its preparat ion, the skills of its crew and its ability to manage the risk of turbulence and overcome the snags and obstacles in its flight path. The banking system is no different . To move into the next orbit, it is vital to understand the environment we are in, the inefficiencies, the pit falls that limit growth and build on synergies and innovat ion for catapult ing it into the future. The out look for the global economy remains uncertain with green shoots of opt imism in the US as fresh jobs were added, but the Eurozone remains embroiled in uncertainty of decision making and lack of consensus with the bat tered economies unwilling to commit bailout funds to the t roubled nat ions. India has been more fortunate in that it has emerged virtually unscathed from the global crisis. A combinat ion of strong regulat ion and supervision and a will to evolve policies that lean against the wind helped insulate the Indian financial system from the crisis. It helped too that the Indian banks were not very sophist icated and excessively leveraged. However, in a world where financial systems recognize no boundaries and the fortunes of nat ions are intertwined, no nat ion can consider itself an island and remain immune to the changes in the t ides of the world economy for a prolonged period. If the envisaged growth rate of 9 per cent per annum



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during the Twelfth Plan is to be achieved and banks have to remain compet it ive and cont inue to improve their margins, they would need to look at the new drivers of growth. I. Key drivers for propelling Indian banking sector A recent IBA-FICCI-BCG report , t it led "Being five-star in product ivity-Roadmap for excellence in Indian banking" has projected that the domest ic banking industry is set for an exponent ial growth in the coming years with its asset size poised to touch USD 28,500 billion by the turn of the 2025 from the current asset size of USD 1,350 billion (2010). It is fairly obvious to presume that scope for such growth rates would inevitably usher in more compet it ion for the Indian banks aided in part by regulatory impulses and increased openness of the Indian economy. Simultaneously, the reach and penetrat ion of banking is going to increase t remendously due to the policy spot light on inclusive growth and financial inclusion. Aiding the t ransit ion would be another fortuitous transformat ion in human resources area. Public sector banks which account for nearly three fourths of the one million people working in Indian banks face the prospect of ret irement of nearly 55 per cent of their people in the next decade. Thus, if ever there was a t ime for right sizing the organisat ion, hire the right talent , the right skilling of the workforce and bring about a cultural t ransformat ion, the t ime is now. We are, therefore, on the cusp of a defining decade in banking history. What are the key drivers that would propel the Indian banking sector into the next orbit? To answer this, I would draw upon extensively from an address I delivered at BANCON 2011 where I have ident ified three sets of drivers- external, regulatory and internal which will define banking in the next decade. i. External Drivers A. Financial Inclusion The overriding and most t ransformat ive driver would be the policy imperat ive to extend the reach of banking services and to provide fair, t ransparent and affordable products and services. To borrow from the spacecraft analogy given previously, the momentum to escape to the next orbit will come from universal financial access. Apart from the potent ial to expand banks' business manifold besides acquiring new customers for other value added services, they would have the sat isfact ion of contribut ing immensely to higher inclusive growth. This is an opportunity which will not present itself again. With the Government of India and the Reserve Bank priorit ising financial inclusion, banks have been encouraged to expand the network through set t ing up of new branches and also through the Business Correspondent Model. Resultant ly, the populat ion per bank branch improved from 14000 in 2009-10 to 13466 in 2010-11 while populat ion per ATM from 19,700 to 16243 during the same period. In June 2011, banks were advised to allocate at least 25 per cent of the total new branches to un-banked rural centres. The number of branches opened in hitherto un-banked centres has increased from 281 in 2009-10 to 470 in 2010-11, but the populat ion per bank branch is significant ly higher than the national average in the North East, Eastern and Central Regions. To strengthen the outreach of banking services, banks were advised to cover all villages with more than 2000 populat ion with at least one banking out let by March 2012 and also encouraged to cover peripheral villages with population less than 2000. Banks were also required to put in place Board approved Financial Inclusion Plan (FIP) and the Reserve Bank is monitoring the



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implementat ion of these plans. Significant ly, the number of villages covered by at least one banking out let grew by 82 per cent in 2010-11 over the previous year, besides 47 per cent of the villages covered under FIPs were villages with populat ion less than 2000. Almost 77 per cent of the villages covered were through business correspondent model. The number of no frills accounts also grew by 50 per cent . While considerable progress has been made, a lot more needs to be done to garner the savings of households. The moderat ing of financial savings of households from 12.1 per cent of GDP in 2009-10 to 9.7 per cent in 20010-11 is an area of concern. Banks need to tap into the untapped business opportunit ies for resources to power the growth engine. A GDP growth target of 9 per cent requires harnessing resources and fortune at the bot tom of the pyramid. The small customers are the key to big business opportunit ies wait ing to be tapped. Improving the quality of life of the people of our country by enabling them to have access to banking services could be the next big game changer as it could unlock the vast potent ial of rural India. B. Competition, Consolidation and Globalisation The past decade has virtually been a sellers' market in so far as the Indian banking sector is concerned. The ability of the customers to choose the banking products and services were severely restricted since they could hardly different iate between the product and service offerings of banks. The design of products and services was more bank-centric than customer-centric. A bank would now need to convince a customer as to why he should bank with them rather than another bank. While the lack of innovat ions by the banks could part ially be att ributed to the extant regulatory regime, the banks on their part have also remained largely unimaginative and lacked inspirat ion to experiment even after freeing of interest rates. The recent regulatory init iat ives like deregulat ion of savings bank interest rates, opening of government business to more banks, etc. and some imminent steps such as licensing of new banks and subsidiarisat ion of the foreign bank branches, on the one hand, and the changing profile and simultaneously rising aspirat ions and expectat ions of the customers on the other, should make the turf more compet it ive and increasingly, a buyers' market . In view of the impending compet it ion, banks would be forced to take a hard look at their exist ing bouquet of product and service offerings and customer base so that they may reposit ion themselves as 'different iated and niche' players. The increased compet it ion could also drive a spate of mergers among exist ing players and lead to consequent consolidat ion within the sector. The entry of new players will also spur efficiency and product ivity in the system. While, at the moment, financial inclusion takes precedence, once financial inclusion is substant ially achieved, the banks may focus on consolidat ion. As the Indian banking sector is propelled forward to a higher orbit , the banks would have to strive to remain 'relevant ' in the changed economic environment by reworking their business strategy, designing products with the customer in mind, focussing on improving the efficiency of their services and having global ambit ions. The mantra would be to 'Innovate or perish'. Globalisat ion of Indian banks could be a consequence of their customers becoming global once increased compet it ion and consolidat ion set in. Apart from banks' own global ambit ions, as Indian businesses turn global, their need for financial products and services



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would be reason enough for banks to go global to service them. However, banking is a business of size and more so for those that harbour global aspirat ions. Hence, consolidat ion is one way to achieve the needed scale. Thus, the second set of external drivers that could propel the Indian banking to the next orbit would be increased compet it ion, consolidat ion and globalisat ion. ii. Regulatory Drivers The next set of drivers which would also be essent ially external in nature would be those provided by the regulator. Across the globe there is an increased convergence and realisat ion that regulat ions would become more stringent especially in the areas of providing fair t reatment to customers, KYC norms and risk management. A. Fair Treatment to Customers In recent t imes, the provision of fair t reatment to customers has gained prominence globally. The writ ing is firmly on the wall that regulat ions in this area are likely to become stricter in years to come. Banking / financial services industry being a highly regulated industry with st iff entry norms, regulators have a crit ical role in ensuring fair t reatment to customers and it cannot be left to the market forces alone. Banks need to price their products and services fairly and compet it ively and ensure higher t ransparency in their products and pricing. Lack of t ransparency in designing and pricing of products and services and selling them to inappropriate customers could expose banks to lit igat ion, reputat ional risks besides making them liable for supervisory action. There should be no unreasonable post sale barriers if the customers wish to change product or bank. Customer educat ion is also crit ical to providing appropriate and need based products and services and Indian Banks' Associat ion may have a crit ical role to play in this regard. The banking business would thus have to turn customer centric in all its t rue dimensions. B. Knowing Your Customer A customer-centric business needs to know its customer, the nature of his business and the inflows / out flows into the accounts, if it is to provide customised business products and solut ions. But, banks need to understand the risks associated with customer's business to manage risks arising from potent ial delinquency, fraud and consequent losses as also legal and reputat ional risks arising from exposure to customers having links to Mult i level Market ing (MLM) business / terrorist act ivit ies / hawala t ransact ions, etc. Know Your Customer (KYC), Know Your Customers' Business (KYB) and Know Your Customers' Business Risks (KYCBR) should be ingrained in the DNA of the bank's business. It should be understood that it is not just procedural compliance, but that good KYC and KYCBR compliance are good for the bank's business. The banking system runs on informat ion and data. Although financial data are made up of innumerable complex components, one of the fundamental building blocks is reference data about companies, organizat ions, firms and individuals customer. Reference data might include a number of things, but an essent ial component is a systemat ic structure or code that uniquely ident ifies each ent ity. Essent ially a bank should have a Unique Customer Ident ificat ion (UCI) Code which helps it to ident ify a customer, track facilit ies availed, monitor financial transact ions in various accounts for compliance with KYC / AML regulat ions. A key factor in ensuring KYC compliance is having a Unique Customer



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Ident ificat ion Code which may serve as a lynchpin for financial data and assist in improving regulation, risk management and business processes. It would help the bank ident ify the customer, t rack facilit ies availed, monitor financial t ransact ions across accounts for compliance with KYC / AML regulat ions. The UCI should eventually graduate to a Legal Entity Identifier (LEI) which is a unique ID associated with a single corporate ent ity which assists in easy identificat ion of the same party across mult iple financial market ut ilit ies and aids in tracking set t lement act ivity and exposures. The financial crisis clearly demonstrated the extreme "complexity of interrelat ionships" and dependencies that exist between part ies, counterpart ies, issuers, guarantees, and guarantors and the domino effect that takes place should one or more of the nodes within these horizontal or vert ical relat ionships come under pressure. Unique ident ificat ion of each and every ent ity would be crit ical to unravelling these linkages and (inter)relat ionships. Some of the Indian banks have developed UCI numbers which enables them to t rack the t ransact ions of customers across the bank and monitor customer wise exposure limits, account status and generate AML alerts / reports for FIU-IND filings etc. However, there is no unique number to ident ify a single customer across the banking system based on a shared database which provides an avenue for the customers to circumvent the risk profiling guidelines and obtain mult iple facilit ies across banks by opening several accounts. Even for banks that have some form of unique customer ident ificat ion, there is no guarantee that a single customer does not hold mult iple IDs. The principles behind the Legal Ent ity Ident ifier (one ent ity-one ident ifier) could be borrowed for shaping the KYC / AML framework for the Indian banks. Towards this end, the UIDAI init iat ive, Aadhaar, launched by the Government of India, which is envisaged to issue a unique ident ificat ion number to individuals that can be verified and authent icated in an online, cost-effect ive manner for eliminat ing duplicate and fake ident it ies, could be leveraged upon by the banking system. It is heartening to note that UIDAI uses a state of the art biometric technology (combining both - 10 Finger Prints and 2 Iris) and has achieved a high degree of accuracy (99.96 per cent) in duplicat ion detect ion. Present ly the Reserve Bank guidelines permit the use of Aadhaar as a KYC document for small accounts. Since the coverage of the ent ire set of bank customers / potent ial customers under Aadhaar would take t ime, in the interim, the banks should consider put t ing in place unique ident ificat ion numbers for each of their customers and filter out mult iple banking facilit ies availed by them through a de-duplication exercise. The banks could also work joint ly to set up a shared database which would enable them to securely see informat ion on a customer (KYC informat ion and facilit ies availed from various banks etc.) based on a unique ident ifier i.e. his Aadhaar ID. In the process, banks would be able to leverage upon the KYC exercise already carried out by the previous bank and also benefit from consequent lower customer acquisit ion costs, simplified account opening processes without repeated burdensome procedures for the customers and also promote financial inclusion. C. Risk Management The road ahead demands that banks further refine their risk management skills for enterprise wide risk management. Globally, there is an inexorable move towards more



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advanced approaches to risk management. However, we are st ill at a very rudimentary stage. As capital comes always at a cost , banks need to have in place a fair and different iated risk pricing of products and services. This involves cost ing, a quant itat ive assessment of revenue streams from each product and service and an efficient Transfer Pricing Mechanism which would determine capital allocation. Each business unit in the enterprise would have to aim at being a profit centre within the overall risk -return framework. In essence, it would mean accountability for profit tempered by the discipline of risk-return within a deeply embedded culture of good governance, the tone of which is set by the bank's Top Management. As an illustrat ion, the base rate is intended to serve as a benchmark for interest rates. Our past experience has been of poor customers subsidising the rich borrowers. Also, there are incidences of rampant mis-pricing of risks. From a business perspect ive, pricing of assets should be non-discriminatory and in line with risk rat ing of the customer. A lower rated customer should not get a bet ter price than a higher rated customer. Once these basic issues are addressed, other issues such as migrat ion to advanced approaches etc. would gain importance. Migration to advanced approaches under Basel II All the Indian banks have adopted the standardised approaches under the Basel II framework in 2009, however, the pace of migrat ion to the advanced approaches has naturally been very slow. Though the Reserve Bank has set an indicat ive t ime schedule for implementat ion of the Advanced Approaches, banks' response has been less than encouraging so far. Migrat ion to the Advanced Approaches is important for larger banks because it involves adopt ion of more sophist icated risk management systems. Moreover, there are reputational issues too if large banks cont inue with standardised approaches. Apart from the fundamental issues ment ioned above, much of this sluggishness could be at t ributed to issues relat ing to development of human resource skills, technology upgradat ion, branch interconnect ivity, availability and management of historical data, robustness of risk management systems, etc. within the banks. Even within the Reserve Bank, the supervisors would have to make rapid strides to be able to appreciate the nuances associated with the quantitat ive techniques and modelling. Journey to Basel III Regime (a) Capital An assessment of Indian banks' capital requirements under Basel III has revealed that , notwithstanding some issues with a few individual banks, the system as a whole, is very well capitalised and the transit ion to the revised capital norms of overall capital adequacy, Tier I component or equity component would be smooth. The stress, however, could however arise from a need for the banks to adjust the unamortized port ion of Pension and Gratuity liabilit ies in the opening balance sheet on April 1, 2013 on t ransit ion to IFRS. (b) Addressing Too-Big to Fail The negat ive externalit ies associated with the large and complex financial inst itutions forced the Central Banks / Governments the world over to bail them out during the financial crisis by committ ing taxpayers' money. With an eye on reducing the probability and impact of failure of such global systemically important banks (G-SIBs) as also to reduce the inherent compet it ive advantages they enjoy in the funding markets, the standard setters have agreed on a combinat ion of capital surcharges, better resolution



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regimes, living wills, more robust financial market infrastructures and a more intense supervision for these systemically important financial inst itut ions since then. Large size, excessive interconnectedness, reliance on a single or few firms for the provision of key financial infrastructure, and complexity of operat ions and cross-border act ivity have been ident ified as key indicators of systemic importance of internat ionally act ive banks by the Basel Commit tee on Banking Supervision (BCBS). Financial Stability Board (FSB) has since released the names of the 29 banks which have been reckoned as G-SIBs based on the criteria laid down by BCBS. While none of the Indian banks feature in this list of 29 G-SIBs, the BCBS and FSB are already working towards laying down a criterion for ident ificat ion of domest ic SIBs which would need to be subjected to addit ional capital and liquidity requirements on the lines of that applicable to the G-SIBs. The industry may argue that the Indian banks are very well capitalised and no addit ional capital may be necessary on account of the SIFI-ness of the banks. As part of the superequivalence to Basel III banking reforms, under which the nat ional regulators prescribe a much higher regulatory capital rat ios as compared to the Basel norms,, the Swiss banking regulator has already set much more stringent capital requirements for the largest Swiss banks and the United Kingdom is expected to follow suit based on the report of the Independent Banking Commission. The readiness of banks to these evolving regulatory requirements would very crit ically determine whether they can successfully t ransit to the next orbit . iii. Internal Drivers A. Managing Human Resources An organisat ion can only be as good as its people. They are the force behind innovat ion, business process re-engineering and making the difference between success and failure. A commit ted and highly mot ivated work force can make the difference in winning and retaining customers as banking is a people oriented business. Banks have to be knowledge organisat ions, able to att ract and retain talent. HR policies should look at right size, right fit and career growth with market related compensat ion. Increasingly, there is a going to be an intense compet it ion for the right kind of talent as they are likely to be in short supply. The demand will not only stem from domest ic inst itutions but it will also be from foreign inst itut ions and countries. The challenge before Indian banks is therefore to revitalise themselves by hiring the right talent , invest ing in t raining and bringing about a vibrant transformat ion in their DNA, in effect doing what Sumantra Ghoshal, the management guru and Founding Dean of the Indian School of Business, called changing the 'Smell of the Workplace'. Successful organizat ions, he felt, exude a vibrancy which uniquely defines the 'Smell of the Workplace'. Ghoshal describes the smell of the air in the forest of Fontainebleau, 40 miles south of Paris, the vibrancy which spurs the casual walker to run, jog or do something, and is in essence revitalising. He compares it to downtown Kolkata in summer which is hot and drains energy and vitality. Most large companies in India and abroad, he felt end up creat ing downtown Kolkata in summer inside themselves. The smell of the workplace then becomes encapsulated in an environment of constraints, where jobs / relat ionships are only contracts and act ions are defined by control and compliance. As opposed to it , successful companies promote stretch, which means doing more with self discipline, as opposed to control there is support and enhancing collaborat ion across the organisat ion through combinat ion of



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support on the one hand and t rust on the other. The real source of compet it ive advantage in organizat ions is not merely in technology but in the behaviour of individuals in the organisat ion where each one of them takes init iative, collaborates, has self confidence, has commitment to himself, to their teams, to their units, and to their organisat ion. The challenge before management is to use the vast unused potent ial in people and make ordinary people produce extraordinary results thereby changing the smell of the workplace. B. Leveraging Technology A recent art icle in the Economic Times dated December 27, 2011 detailed how e-governance init iat ive helped check grass root pension fraud. In Keregodu village in Karnataka's Mandya district , senior cit izens, all 65-plus, face an endless wait in front of the local post office for their pension money orders. Hours later they are told by a post office official - 'the money had already been collected by someone'. In this south-eastern district of Karnataka, thousands of pensioners haven't received their pension and ent it lements for months --it is siphoned off in t ransit . Even worse, out of the 2,95,525 pensioners in the district --whose allowances get released from the state t reasury every month - names of 37,000 are missing - causing a monthly loss of nearly Rs 1.48 crore to the exchequer (or Rs 17.76 crore a year). The state also suffers on account of dist ribut ion and delivery losses for pensioners whose name exists but st ill do not get their money. But the situat ion in Mandya, a thriving agricultural town till the late 1980s, is set to change with the state government along with an IT services firm digit ising the ent ire pension records and issuing smart cards to pensioners to plug the leakage. It is perhaps one of the biggest financial inclusion projects where technology can come to the aid of thousands of old and poor farmers, widows and other rural pensioners. But that's only the first part. For the last-mile authent icat ion and financial t ransact ion, the state government has t ied up with a Karnataka-based bank. A bank correspondent will now be sent to each pensioner's house with a card-reader where the pensioner would swipe his smart card and give his thumb impression. Once the bank receives the data at its central server, the amount would be credited to the pensioner's bank account. The system is expected to fight ground-level corruption by cross-checking the pensioner's ident ity against multiple databases, making it difficult for any single agency or person to log false informat ion. This would make a huge difference to the lives of the pensioners. Technology, the will and desire to make a difference to the lives of the rural poor living on the fringes of financial exclusion are the change agents. Most banks are already on Core Banking Systems (CBS) which covers banking operat ions pertaining to deposits, withdrawals, credit delivery, back-office operat ions etc. Banks need to look beyond Core Banking to harness the benefits of technology. CBS could provide inputs for developing customised products based on customer data base. It would help in planning product delivery and service at mult iple / selected delivery points and better Customer Relat ionship Management and building last ing customer relat ionships which will t ranslate into higher revenues. Technology needs to be more customer focussed than employee or vendor focussed. The costs of banking t ransact ions need to be dramat ically reduced just as in so many other fields such as telecom after the advent of technology. In case of glitches, the rect ificat ion must be swift to inst il faith and confidence in the system. It is only the more agile and innovat ive players who will stay ahead in the game. Along



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with IT solut ions arise allied issues such as IT security, governance and audits. Gaps in IT security could make banks vulnerable to data piracy, fraud and operat ional risk leading to reputat ion risk and erosion of customer confidence. C. Improving Managing Information Systems MIS is an inseparable part of bank's decision making process. The integrity and t imeliness of data is crit ical in formulat ing the bank's capital planning, business strategies, reviewing achievements vis-a-vis targets, formulat ing course correct ion exercises where required, feeding data into stress tests and important ly taking act ion on the outcomes. This brings us to technology support for decision making. Banks have made huge investments in technology, which should be translated into bet ter MIS as decision support systems and yield returns on investment by providing economical, affordable and customised customer centric banking solut ions. The use of technology should not be seen as an end in itself but as a means to an end. D. Business Plan, Strategy and Vision The role of banks' Boards would become increasingly crucial in the next decade in view of the looming compet it ion. The Board would need to have a clear vision for the bank, a strategy to achieve its object ives, both medium and long-term and a well laid out long-term plan. The banks would need to look beyond their exist ing customer base and large corporates and reach out to rope in the vast number of small, retail and the SME clients which are present ly deprived of bank credit. Alongside extending the reach of their banking services there would be a need to improve the products offered to customers and the quality of services. They need to have proper business model and delivery model. II. Managing Change in the Emerging Regulatory and Supervisory Landscape It has become fashionable to at t ribute any adverse feature to the economic downturn. Perhaps, we need to draw the right lessons, learn from it and move ahead so as not to repeat it in future. As an example, the 2011 financial results of most banks show a growing increase in NPAs. While some slippage in an economic downturn is inevitable ,it does not absolve banks from quick mortality / slippage due to adverse credit select ion, lack of crit ical credit appraisal and due diligence, laxity in monitoring end use of funds and performance of the account. I am reminded of a story in the t imes of the Great Depression. A man stood at the street corner every day selling hamburgers. He was cheerful and whist led a tune as he sold his tasty hamburgers. His cheerful demeanour and modest ly priced hamburgers had a brisk sale. He had through his t rade managed not only to do well but also put his son through University. One day when the son came home on a holiday and saw his father plying his t rade as usual he was surprised. 'Dad', he said, 'You shouldn't be making so many hamburgers as we are going through the Great Depression'. And then the boy proceeded to educate his father on the finer details of the Depression. The father thought over what his son said and made fewer hamburgers. At work he was preoccupied and less cheerful each day. Soon sales dwindled. Returning home one day with his products unsold, he said to his son : 'Son, you were right about the Great Depression. That 's the advantage of a university educat ion!'



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The stable funding profile of commercial banks - st rong retail franchise and relat ively less dependence on wholesale funding is a comfort ing factor. Even under a worst case scenario wherein the quarterly growth rate of September 2011 in gross NPAs and gross advances cont inues for the next two quarters and GNPA rat io reaches 3.74 per cent ; the system would remain resilient as per the results of the credit risk tests ment ioned in the latest Financial Stability Report (FSR). The report goes on to predict that even under a worse case scenario when NPAs are assumed to grow by 150 per cent and the NPA rat io reaches 7 per cent, the system as a whole would remain resilient inasmuch as its CRAR would remain at 11 per cent , though some of the banks may come under duress. But, pressures are building up in certain infrastructure sectors especially power sector, aviat ion, telecom, which could further increase the NPAs. Increase in interest rate and slowing economic growth may adversely impinge on repayment capacity of all categories of borrowers especially those from SSI, MSE, etc. There could be renewed requests for further restructuring from several sectors. Banks, however, need to strengthen their credit appraisal and monitoring system as also recovery efforts. Recovery through compromise set t lements / under OTS should be a transparent and analyt ical process after assessing all the options and ensuring that the net present value of the set t lement amount is not less than the net present value of the realisable value of the available securit ies. The idea behind this digression was to illustrate that for banks to move to the next orbit , they have to realise their t rue strengths and weaknesses. They need to build on their st rengths and rect ify their weaknesses to prepare and adapt themselves for the challenges which these external, regulatory and internal drivers are going to entail. In this, a very relevant and crit ical issue which emerges is whether the regulatory and supervisory processes are also geared up for the next orbit . III. How equipped are the Supervisors? The exist ing supervisory framework for commercial banks in India has fared rather well over the years and drawn praise from peer supervisory agencies, global standard set ters and the FSAP assessors for the regulatory and supervisory regime as the Indian banking system remained largely stable during the global financial crisis. However, as supervisors, we face challenges. The growing complexit ies of the banking business coupled with significant cross-border and cross-sector expansion has rendered the system increasingly vulnerable to the threat of 'contagion'. The paradigm shift in the banks' business processes, products and systems with an ever-growing reliance on ICT, as delivery channels pose immense challenges before the banking supervisor. While on the one hand, the banking landscape has witnessed considerable changes, the supervisory processes within the Reserve Bank have remained more or less stat ic. This has necessitated a review of the supervisory processes and rat ionalisat ion of the organisat ional st ructure for bank supervision. Addit ionally, lessons from the financial crisis which have manifested in form of new regulatory and supervisory benchmarks like Basel III, revisions to the Core Principles for Effect ive Bank Supervision, increased focus on systemically important banks also have to be factored in for making the supervisory processes and mechanism at the Reserve Bank more robust and capable of addressing emerging issues.



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The present supervisory processes followed by the Reserve Bank are focused on elaborate t ransact ion test ing and compliance monitoring and do not provide a forward looking measure of risk that the supervised ent it ies pose to the supervisory object ives. We need to move away from transact ion based to risk based and from incidence based to theme based supervision. The on-site assessment and the off-site surveillance processes also need rat ionalizat ion so that efforts made by the external / internal auditors of banks could be effect ively ut ilised and duplicat ion avoided. Supervision has to be intrusive and decisive. The basic underlying theme should be that supervision must facilitate good business and must obstruct bad business. Another issue worth pondering is whether the Reserve Bank's supervision adds value for the supervised ent ity or is it an 'unnecessary evil' that they have to endure. With a view to addressing some of the above ment ioned shortcomings, the Board for Financial Supervision has const ituted a High Level Steering Commit tee which is conducting a thorough assessment of the adequacy of the Reserve Bank's supervisory policies, procedures and processes and would recommend measures to make the Reserve Bank's supervisory policies comparable to the global standards and be more value-adding to the supervised ent it ies. The approach to supervision world over is undergoing a change with the financial system under increased public scrut iny and movements such as the Occupy Wall Street movement gaining tract ion. Both the Central Bank and supervised ent it ies are increasingly accountable for their act ions. The challenge for the supervisors is to be nimble footed and attuned to the changes and nuances in the way banks do their business, ident ify emerging areas of risk for the bank and the banking system and intervene swift ly where required. Financial stability is on top of every Central Bank's agenda and the Reserve Bank is no except ion. Besides changes in the way it supervises and inspects banks, it is looking at closer collaborat ion with other supervisors both at home and overseas. MoUs with other supervisors overseas is part of our ongoing effort for sharing supervisory informat ion. The Bank is also working to bring in legislat ive changes in the statues to give it greater autonomy in entering into MoUs, collaborat ing with overseas / other supervisors and strengthen powers of supervision over ent it ies in a conglomerate, among others. The changes in the way banks do business, increased sophist icat ion of products and services calls for capacity building not only in banks but also for the supervisor. the Reserve Bank is invest ing in human resources through focused skill building and collaborat ive efforts with other supervisory agencies, the World Bank and top training inst itutes both at home and abroad to be on top of the learning curve. Conclusion : Prepare to move into the Next Orbit We are at the cusp of a defining decade in the banking system. The Indian banking system has come a long way in terms of technology, business systems and processes. It has weathered the global economic crisis, but going forward it needs to focus on the key drivers of growth to be globally compet it ive. The lodestone of external impulses would be financial inclusion and the other key stones would be compet it ion, consolidat ion and globalisat ion. The regulatory drivers would be more stringent regulat ions, essent ially in fair t reatment to customers, know your customer norms and risk management. The internal impetus would be provided by the unique human resources opportunit ies created



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by impending ret irements, leveraging technology to increase reach, lower costs and provide improved customer service and to re-orient the organisat ion to be customer centric in all its manifestat ion. It would require the complete involvement of the top management and board of banks. Each one of you has a role to play in this agenda and stretch to achieve the object ives that would make your organisat ions from good to great and take it to the next orbit . I wish you all success in this endeavour. -------------------------------- 1 Inaugural address delivered by Dr K. C. Chakrabarty, Deputy Governor, Reserve Bank of India at 9th Advanced Management Programme at IMI, Delhi on Feb 13, 2012. Assistance provided by Smt. Theresa Karunakaran and Shri Sanjeev Prakash in preparat ion of this address is gratefully acknowledged

Moving towards Technology Led Excellence in Banking Shri Anand Sinha

Shri Sambamurthy, Director IDRBT, Execut ive Directors of banks, members of faculty from IDRBT, ladies and gent lemen. It gives me immense pleasure to be delivering the keynote address in today's workshop 'Beyond Core Banking' and I thank IDRBT for giving me the opportunity. In today's technologically advanced environment, Core Banking Solut ion (CBS), does not remain an edge anymore, but has become the basic prerequisite for any bank. Building on this, banks need to move on to adapt ing higher technology in order to provide better products and upgrade their risk management systems. As we become global, banks would need to become technologically more sophist icated in diverse areas, whether it is moving towards adopt ing advanced approaches in Basle II or in upgrading their delivery channels for providing better customer service. Whether large or small, t radit ional or non-tradit ional, regional or global, all banks now face a similar compet it ive imperat ive. Short -term survival and long-term success require simultaneous focus on often conflict ing priorit ies: reducing operat ing costs, driving new sources of revenue and building capital. Growth can be achieved through innovat ive customer friendly strategies to stem the reduct ion of the customer base and to grow deposits. This all must be accomplished in the market which is get t ing extremely compet it ive. While the competit ion is a fact of life and banks need to be geared up for the same, the compet it ion is going to intensify in the coming days, both from tradit ional compet itors (banks) and also from non-bank ent it ies. Though the regulatory focus is on reducing the arbit rage, the current crisis has taught us that the shadow banking system is increasingly becoming an important const ituent of the financial system. Banks need to innovate and improve their efficiency to remain compet it ive and the role of technology in this regard is very crit ical. Indian banking industry, today, is in the midst of an IT revolution. The Indian Banking fraternity is adopt ing the latest technological advances to address the threat of compet it ion and to meet customer expectations. A combinat ion of regulatory and market



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forces has supported the implementat ion of technology and automat ion in the Indian banking industry. IDRBT has been facilitat ing and catalyzing technological developments in the banking sector and I must compliment Shri Sambamurthy and his team at IDRBT for organising this workshop on the theme of 'Beyond Core Banking', which is very t imely. I am sure the part icipants of this workshop would return with enriched knowledge of the various technological opportunit ies available to banks. In my remarks today, I would like to highlight how banks can make concerted efforts to enhance the use of technology in their init iatives to ensure efficiency, stability, compet it ion and above all deliver on customer service. Before I go to my main talk, let me briefly touch upon the funct ions performed by IDRBT. Standing tall - contribution of IDRBT The funct ions that have been performed by IDRBT in research and product development are commendable. Since its format ion, IDRBT has played the dual role of a service provider as well as a research facilitator providing an enabling environment for test ing the technologies that have been useful for the banking industry. You may be aware that based on the recommendat ions of External Expert Review Commit tee headed by Dr. Rangarajan; there has been a shift of focus of the Inst itute, towards conduct ing applied research and experimental development in the area of banking technology. During the last one year, the Inst itute has released frameworks and handbooks on issues relat ing to IT Governance, IS Governance and Analyt ical CRM. I am sure, banks would immensely benefit from these publicat ions. 'Beyond Core Banking' Beyond Core Banking is the main theme for this workshop. At this juncture, let me pose a few quest ions on this issue : * Why are we talking about 'Beyond Core Banking'? * Why now? and * What 's the way forward? I would attempt to answer the second quest ion first , as it is easier. The t ime is now ripe for banks to look at init iat ives beyond their core banking. Banks have adopted Core Banking Solut ions which are comprehensive, integrated yet modular, that effect ively address the strategic and day-to-day challenges faced by banks. They provide much-needed flexibility to innovate and adapt to a dynamic environment. So to speak, banks have reached a certain level of maturity as far as adopt ion of Core Banking Solut ions is concerned. Isn't it t ime for them to look for strategies that would assist them in moving to the next level? Coming to the first question, let us look at why 'Beyond Core Banking'? Core Banking Solut ions are comprehensive in nature as far as t ransact ional banking is concerned. But banks would need to look beyond core banking in order to stand out from their compet itors, work efficient ly and manage their risks bet ter.



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Banks would need to look to avenues 'Beyond Core Banking' to serve their customers, devise an appropriate strategy to deal with the IT threat landscape, utilise the technology plat form provided by CRM, analyt ics & big data. They may also look to manage their informat ion in an effect ive manner, enhance Customer Lifet ime Value (CLV). They need to innovate appropriately in terms of products, services and strategies so as to stand out from the compet it ion that is prevalent today. Banks will also need to align their IT and business perspect ives to fully leverage on the benefits of technology. Coming to the third question: What's the way forward for the banking sector? The way forward for banks would be to focus on enhancing their profitability, lowering operat ion costs, and/ or creat ing greater customer loyalty. In this context , I would briefly speak on the areas that are engaging the at tent ion of banks and banking researchers alike and these could be areas that the banks can focus on, in the next few years. Let me present a few of these in the following paragraphs. Excellence in providing Customer service Good customer service is the heart of banking. The current crisis has brought customer centrality to a sharp focus. While it may not be the direct lesson from the crisis, the importance of customer service in retaining the customer base with a view to maintaining a stable source of funding is a lesson that can be deduced from the crisis. The wisdom is that banks may look towards adopt ing a 4'C' approach as a guiding principle for evaluat ing their future strategies to address the dynamics of customer demands. The 4 'C's are - Consolidat ion of services offered by banks, Customisat ion of products and services for customers, Convenience of transact ing and Concern for customers. Banks may look at bringing about a balance among the 4 'C's. IT threat landscape - Taking Stock There are hundreds of new online threats every month and they are highly organized and financially mot ivated. Threats have also become more difficult to detect and remove, than ever before. As technology has evolved, so too has the nature of the threat , and today malware forms the backbone of the global cybercrime epidemic. The threat landscape has evolved dramat ically since the emergence of the first virus, and IT security is now challenged by thousands of different malicious tools, with malware and spam now driven by self-propagat ing botnets. The malware t rade too, has evolved from something of a prank when it first began, to a business conducted by cybercrime networks expressly for the purposes of financial gain. The growth of the Internet and increasing connect ivity has fuelled the expanding complexity and reach of threats. From malware that first at tacked individual computers and then individual networks, to threats that targeted mult iple and regional networks, the threat landscape now encompasses the global infrastructure and at tacks are increasingly targeted. Zero day threats are a reality, as cybercriminals are using viruses to target financial inst itut ions through spear phishing and 'denial of service' at tacks amongst others.



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Countering the array of threats in the modern IT landscape requires a two-fold approach. While anti-virus, ant i-spam, intrusion prevention, firewalls and other security software have a vital part to play; this technology simply is no longer enough on its own. Awareness and educat ion are key in prevent ing users and organisat ions from falling vict im to cybercrime. We must also understand that the threat landscape now encompasses not only computers and networks but also an array of portable devices such as tablets and smart phones which increases the complexity. The more connected users become, the more vulnerable they are to at tacks that can affect the ent ire home or business network. The reality is that the Internet is not a private space anymore and users need to educate themselves and be more vigilant to prevent malware and cybercriminals from causing serious reputat ional and financial damage. Mapping the future- CRM and analytics, big data, channel innovation etc. CRM (Customer Relationship Management) With the growth of fee-based income and increasing focus on advisory services, the role of CRM in banks is now more crit ical and pivotal than before. Given the compet it ive nature of the banking business today, with its intricate and diverse demands, nurturing and deepening customer relat ionships is integral to any bank's success. After all, sat isfied customers are loyal customers and their retent ion is very important for any bank. Banks would need to focus on creat ing a customer centric culture right from the ground level staff to the senior execut ives. While this is often easier said than done, customer centricity can be achieved through a strong top management focus, comprehensive communicat ion and t raining programs that teach employees on how to use CRM applicat ions and the benefits of doing so, along with appropriate incent ive policies. For a CRM strategy to succeed it must involve cultural and business changes and it needs to be a business strategy and not a technology solut ion. CRM is a cont inuous process - it is a journey, not a dest inat ion. To be successful in this arena, banks need to embrace CRM as a philosophy and adopt a strategy for managing customer relat ionships that effect ively address three key areas: people, processes and technology. Even in the context of financial stability, CRM is important . Power of predictive analytics- an untapped potential Another issue that is evoking interest among bankers is the power of analytics. This can enable banks to get an edge over compet itors. A few quest ions that banks can ask before embarking on using this tool could be the following : * Can consumer behaviour be forecast? * Can banks predict what their customers want, how they want it , before they raise a demand on it? Banks can leverage the power of predict ive analyt ics to forecast their customers' behaviour and foster demand generat ion. Many banks offer similar delivery channels, products and services to the market . In this process, customer relat ionships have lost the



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"personal touch" despite the breadth of "touch points" available to customers from the t radit ional branch to "mobile" phone banking. Predict ive analyt ics can bring in competit ive advantage in banking and analyt ics can be the core technology that helps banks move from product centric to customer centric operat ions. It would also enable banks to leverage and increase their Return on Investment from substant ial investments already made in operat ional, data warehouse and business intelligence systems. If these are all the advantages of using predict ive analyt ics then why hasn't it been applied more broadly to personalize banking operat ions? May be the data is not available or collected, for analysis. The components and models of predict ive analyt ics can easily be embedded in current business and software processes for bank operat ions, risk management and market ing. This new breed of automated and advanced predict ive and descript ive analyt ical tools is suited for today's fast paced business and can be embedded in enterprise applicat ions. Customer intelligence can now be delivered to the customer at the t ime he is actually interacting with the bank, through the delivery channel of choice, with consistent advice based on predict ions derived from enterprise data. Banks may tap the granular data and use these tools to price their products appropriately. Channel Innovation This is one area which acts as the different iator among compet ing banks. Times cont inue to be tough for banks as they grapple with low consumer confidence and intense compet it ion. Moreover, customers are flexing their muscles by demanding bet ter service and experience from their banks and leaving them for another when they do not measure up to expectat ions. The onus of delivery of service rests almost ent irely with the banking channel. Which is why, channel innovat ion will play a crucial role in the future of banking. It could take many forms - a high-tech branch, a more intelligent ATM, a social media channel, cloud banking or a mobile phone that replaces both cards and currency, to name a few. Some of these may succeed more than others, but collect ively they will reinvent the business of retail banking. The future of retail banking lies within its channels. Talking about innovat ion, I am reminded of a quote by Albert Einstein who said : "I am enough of an art ist to draw freely upon my imagination. Imaginat ion is more important than knowledge. Knowledge is limited. Imaginat ion encircles the world." To this, I would add that it is imaginat ion that drives innovat ion. Big Data-big power These days everyone is talking about 'Big data'. What does big data actually mean, and how does it differ from data management? In an age where informat ion is stored on many different systems, some of which do not "talk" to one another, technology solut ions for Big Data must integrate different technologies, data formats and coding structures including except ion management, error report ing and audit trails. Banks would need



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sophist icated technologies that can perform business t ransact ion-level logic such as cost allocat ion, revenue distribut ion and payments. The best solut ions should be capable of adjust ing these business processes rapidly and with minimal cost . Information Management Informat ion, as we know it today, includes both electronic and physical informat ion. The organizat ional st ructure of any bank must be capable of managing this informat ion throughout its lifecycle, regardless of source or format (data, paper documents, electronic documents, audio, video, etc.) for delivery through multiple channels that may include cell phones and web interfaces. Informat ion management is a corporate responsibility that needs to be addressed and followed from the top management to the front line workers in any organisat ion. Part of that responsibility lies in t raining the organizat ion to become familiar with the policies, processes, technologies and best pract ices in Informat ion Management. Customer Lifetime Value (CLV) We must understand that the key to cult ivating long term, highly profitable customer relat ionships is in understanding the concept of Customer Lifet ime Value (CLV). Technically speaking, CLV is defined as the net present value of future cash flows of the long-term customer relationship. The CLV focuses on the customer as the influencer of bank's profitability. The CLV gives the measurement ability to evaluate the new customers, not exist ing customers, who are to be targeted and to be at tracted through market ing campaigns. It also gives the limit up to which the bank can spend for acquiring the new customers based on their CLV. There is a huge opportunity for banks to capture and enhance the CLV. Making the right moves IT and Business Alignment- Shall the twain ever meet? The concern with all industries including banks is the "alignment of IT with the business." Over the past quarter century, much has changed technologically. Yet , in terms of the gap between IT and the business, precious lit t le is any different today. How can we change this? Before comment ing on this aspect , let us understand what is the alignment that we are talking about? Successful IT and business alignment entails more than execut ive level communicat ion and strategy t ranslat ion. Banks need to achieve alignment by establishing a set of well-planned process improvement programs that systemat ically address obstacles and go beyond execut ive level conversat ion to permeate the ent ire IT organizat ion and its culture. IT must be agile to support the business needs. But the business side has a responsibility too. There needs to be a balance in the relationship between business and IT. IT must shake off the view that it is an end in itself and business must realise that it is not best placed to take technology based decisions on its own. When there is alignment, business relies on IT, the enabler, instead of facing off against IT, the resource drainer. In such circumstances, the relat ionship between IT and business will be a strong driver of innovat ion. Banks would also require personnel with good insights in IT and domain



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knowledge so as to strike this balance. And this is where you as part of the management of banks can play a catalyt ic role between departments. Here I am reminded of Bill Gates who had once said "The advance of technology is based on making it fit in so that you don't really even not ice it , so it 's part of everyday life." Before I conclude, I would like to briefly touch upon three IT init iat ives taken by the Reserve Bank in the last one year which have a significant impact on the IT arena of banks. Report of the RBI Working Group on Cyber Security The Working Group on Informat ion Security, Electronic Banking, Technology Risk Management and Cyber Frauds ( Chair: Shri G. Gopalakrishna, Execut ive Director, RBI) has examined various issues arising out of the use of Informat ion Technology in banks and made its recommendat ions in nine broad areas of IT Governance, Informat ion Security, IS Audit, IT Operat ions, IT Services Outsourcing, Cyber Fraud, Business Cont inuity Planning, Customer Awareness programmes and Legal aspects. The final guidelines in the areas as ment ioned above have been issued and banks have been advised to implement the same in a t ime bound manner based on certain criteria. Given the fact the guidelines are expected to fundamentally enhance safety, security, efficiency in banking processes, the progress in implementat ion of the recommendat ions is required to be monitored by the top management of banks on an ongoing basis and a review of the implementat ion status may be put up to the Board of Directors of the Bank at quarterly intervals. Automated data flow (ADF) Reserve Bank collects various Returns from the ent it ies regulated by it . Reserve Bank has already put in place an online returns filing system through which the banks can submit their returns. XBRL taxonomies have been adopted for some of the returns. With the increased need of informat ion for decision making, the quality of data submit ted by the banks requires improvement which can be achieved if these returns are compiled by the banks direct ly from their IT systems. Towards this, Reserve Bank is aiming for complete automat ion of the returns by banks. This would ensure that the data submission is done in a t imely manner and accurately without any manual intervent ion. Banks would need to take a consolidated view of the XBRL and ADF projects as they are meant to complement each other. IT Vision for RBI and banks IT Vision Document of RBI 2011-2017, sets priorit ies for commercial banks to move forward from their core banking solut ions to enhanced use of IT in areas like MIS, regulatory report ing, overall risk management, financial inclusion and customer relat ionship management. It also dwells on possible operat ional risks arising out of adopt ing technology in the banking sector which could affect financial stability and emphasises the need for internal controls, risk mit igat ion systems, fraud detect ion / prevent ion and business cont inuity plans. Although banks have deployed technology for t ransact ion processing, analyt ical processing by banks is st ill in a nascent stage. The Vision document urges banks to work towards reaping benefits of technology in terms of cost reduct ion of small value t ransact ions, improved customer services and effect ive flow of



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informat ion within the banks and to the regulator. The Vision Document also focuses on the leveraging of benefits of adopt ing more energy efficient devices and architecture for tangible savings in energy costs and helping to build 'green' credentials to IT. Scripting Success-Getting started To conclude, I would like to say that certain principles together with strong commit ted leadership, can deliver step-change business outcomes and measurable economic benefit for banks and help banks 'get started'. Broadly these would encompass creat ing a commit ted t ransformat ion program with Board level accountability, having a unified vision for a component driven business and preparat ion of suitable operat ing models, managing risk mit igat ion techniques using proven approaches and methodology, creating a roadmap by business and IT leadership with incent ives for shared success, opt imising the infrastructure that leverages modernized architecture and applicat ions and ensure professional project management; and delivering capabilit ies based on a scalable engagement model. Notwithstanding what has been said in the preceding paragraphs, I would say that technology alone will not solve issues or create advantages. Execut ives need to understand that t rue t ransformat ion is not solely driven by technology, but by business strategies and decisions. Technology needs to be completely integrated within the organisat ion in order to secure the acceptance of the final users. In this manner, technology can lead the way towards excellence in banking. I wish to close by quot ing Stewart Brand, the famous writer who said "Once a new technology rolls over you, if you're not part of the steamroller, you're part of the road." I wish successful deliberat ions in this workshop. Thank you. -------------------------------------- * Inaugural Address by Mr. Anand Sinha, Deputy Governor, Reserve Bank of India at the IDRBT workshop for Execut ive Directors of Commercial Banks on February 14, 2012 at Mumbai. Inputs provided by Ms. Nikhila Koduri are gratefully acknowledged.

Governance Deficit and Financial Crisis Shri G. Padmanabhan

It is always a pleasure to return to one's home state, that too if the state is God's own country. Thank you for invit ing me to address this august gathering of the cream of professionals and management experts of the state under the common banner of Kerala Management Associat ion. I was however slight ly apprehensive of what I should talk at a gathering like this. This apprehension started bordering worry when I saw the list of illustrious speakers who have addressed this forum in the past . We are living in interest ing t imes. These days, if any official from the financial sector arrives on any forum like this, the audience expects naturally to hear about the present status of the global financial crisis that is yet to run its full course. So I too chose to speak on this subject . But with so much having been said and written about the crisis, my dilemma was to select issues relevant to a group of management professionals. To me the most virtuous meaning of management is good governance. Good governance more often than not ,



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reduces the risks from an uncertain environment around us. If one is to review the events related to the financial crisis, what emerges encompasses important management and governance principles. These are also important lessons that we perhaps need to keep in mind as the state discusses the "Kerala 2030" or "Emerging Kerala" themes. The Global Financial Crisis that began in 2008 has caused large erosion in asset value, failure of financial firms, contract ion of output and slowdown in growth, unemployment, and fiscal burden on countries, world-wide. Even as the world was hesitat ingly recovering from the crisis through coordinated act ions of governments around the world, the sovereign debt problem in the peripheral eurozone countries surfaced and now threatens to derail the recovery and has the potent ial to plunge the world into a fresh crisis. Amidst the sufferings brought on by the crisis, the only posit ive feature is that it provides all of us with an opportunity to draw the necessary lessons to be wiser and to put in place inst itut ional mechanisms that can avert the possibility of a similar crisis in future. A crisis after all is a laboratory for policy making where the received wisdom are put to test , old paradigms assessed and new paradigms shaped. Thus, as has been said, a crisis is not wasted if it leaves us wiser. Post the Global Financial crisis, policy makers, regulators and academics have put their heads together to mull on the fault lines that precipitated the crisis and what remedial steps need to be taken. The extensive reports from official inst itutions and influent ial think-tanks as well as the legislat ive and regulatory reforms that are in various stages of concept ion and implementat ion in different jurisdict ions are well known and it is not necessary for me to repeat them here. What I intend to discuss is something more fundamental - the issue of governance, which provides the framework for all forms of human organizat ions and infirmit ies which in turn can lead to disastrous consequences. Specifically, analysis of recent crises, as also of those fresh in memory such as the Lat in American crisis or the East Asian crisis, invariably point to governance failures either at a macro level or a micro level. In a great deal of academic and policy discourse, good governance has been generally linked to economic growth and development. The growth and product ivity in developed nat ions have often been said to have had their roots in institut ions and legal systems of good governance. And as a corollary, the lack of development and crises of the emerging market countries have often been ascribed to the prevalence of oligarchies, crony capitalism, corruption and generally the absence of good governance. Thus good governance has not only been advocated as a necessary condit ion for economic development but for the developing countries, it has been promoted as following the inst itut ional pract ices of the developed countries. But the crisis clearly shows that even the rich developed countries, with their much coveted inst itut ions can have governance failures that result in crisis of much graver proport ion than the failure of a corporat ion here or there, and bring on great misery on their own people and to the rest of the world. What is governance all about? The subject has spawned reports, legislat ions and a large volume of research papers. A google search on 'corporate governance' yielded 33, 700, 000 results and Google scholar, 8,99,000 art icles! You will find complex legal-sounding definit ions to mathemat ical equation ridden research papers discussing corporate



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governance. But what is the central idea behind corporate or any other type of governance? I would put it in one word - 'confidence'. Governance is about commanding confidence of all those we do business with, all those upon whom we depend. Confidence that promises shall be kept, contracts honoured and assurances delivered upon. If your shareholders have confidence in you, they will not be shy of put t ing money in your venture. If you enjoy the confidence of your lenders, you will not be starved of capital. If your employees have confidence in you, you can at t ract talent and perhaps would not face at t rit ion. We can go on. What creates confidence, then? If it is an individual, character evokes confidence. If it is an organizat ion - a corporat ion, a state or even an NGO - good governance is what creates, and sustains that confidence. If it is about creat ing and sustaining confidence, we can list three cornerstones for confidence in the edifice of good governance. First , there must be total t ransparency. Informat ion asymmetry is at the root of all governance problems and therefore, access to complete informat ion for all stakeholders is a sine qua non. If a company you have put your money in declares a loss, you will be disappointed; but if it fudges its account to mislead you into believing everything was fine, you will surely lose your confidence in that company when you discover the t ruth, as you ult imately will. Second, the tension between temptat ion of immediate gain and long-term survival must be resolved. Last ly, there must be a set of checks and balances to achieve the first two. The salient features of any good governance would therefore require certain basic elements of checks and controls to be enshrined and followed met iculously in the day-to-day funct ioning of any financial firm or for that matter by any ent ity which is answerable to a number of stakeholders. These elements are not complex or esoteric by any stretch of imagination. They are governed by, pure and simple common sense, easy to understand, but require a good bit of persuasion, perseverance and pat ience to be followed meticulously. But often the sheer simplicity of these principles makes the implementer quest ion their very need and dilutes the essence of implementat ion. Financial Crisis Let me now turn to the recent crises, and recount some of the most common and rather obvious elements of governance that unfortunately have received scant attent ion. The seeds of the 2008 financial crisis were sown by the easy and super-accommodat ive monetary policy pract iced by the US for a protracted period of t ime in the early part of the last decade, which in conjunct ion with certain other factors led to a desperate search for yields and gave rise to the problem of adverse select ion. The adverse select ion problem is nothing new in the lending industry and is usually resolved by careful screening and appraisal of the credit proposal. There is possibly no financial firm in the world which does not swear by tight lending standards in order to protect the quality of its balance sheet assets. But this elementary principle was given a systemat ic go-by by the US mortgage lenders in pursuit of easy returns. It is not that the lenders were unaware of the borrowers' creditworthiness. Indeed, these loans were labelled 'sub-prime'. All of you are aware of the onerous documentat ion process that precedes a loan sanct ion. The US mortgage industry had even devised a class of loans called 'Alt -A' loans, where in disregard of all norms of lending, the documentat ion requirement was diluted. This aggravated the



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adverse select ion problem, because not having to produce any proof and documentat ion, the borrowers were inclined to misrepresent or skew their incomes and assets to obtain a larger loan than merited. How could such a folly be commit ted? The ent ire mortgage act ivity was based on the housing sector boom and bubble in house prices. Rising house prices appeared lucrat ive to the lenders and the borrowers alike. Those rising house prices created posit ive home equity for the early entrants who merrily drew upon it , not for adding to the asset value but to indulge in consumpt ion expenditure as if the house property was an ATM machine! But there have been bubbles in real estate prices in US and elsewhere in the past which ult imately burst . Neither the lenders nor the borrowers reckoned that the housing boom of the early half of the last decade could also end one day and behaved as if the there is only one way for the housing prices to go. This reflects the t riumph of obsession with immediate gains and an ut ter disregard for long run sustainability! The problem was compounded by the fact that the originators of the mortgages were taking them out of their books and selling it to not gullible, but extremely knowledgeable investors on the strength of rat ings accorded by the rat ing agencies. Now, take the case of credit rat ing agencies. Any issuer of a debt instrument cannot access the market without first obtaining a rating from an agency. The rating is supposed to serve the investor but is obtained and paid for by issuer. Is this not a clear conflict of interest? What is there to prevent an agency from issuing an unfairly favourable rat ing against a suitable payment by the issuer? The argument in favour of the arrangement tradit ionally has been that the agency has considerable reputat ional capital at stake and therefore would not sell pernicious rat ings. But this argument has limitat ions. Reputat ional risk will act as a deterrent if the investors have some way of punishing poor rat ing agency performance or if the long run downside due to loss of reputation outweighs the short-term gains. Yet as the crisis has shown, there was universal reliance on credit rat ings without any mechanism to address the associated infirmit ies. RBI has always been stressing the need for due diligence and met iculous appraisal mechanisms (even if rat ings are available) for the banks. That the US mortgage investors were solely led by the rat ings in their investment decisions was a major reason for the accumulat ion of toxic assets, which eventually paved the way for crisis. The governance failure in this case is nothing but the failure of simple due diligence mechanism in asset book build up. Credit Default Swaps (CDS) played a significant role in proliferat ion of the crisis. CDS, in economic essence, is an insurance against credit risk. The CDS seller buys the credit risk of any single or pool of credit instrument and compensates the CDS buyer for any credit event that reduces the value of the instrument. The beauty of the CDS market is that the protect ion seller could be anybody! As you are aware, banks have elaborate processes - pre-sanct ion screening and appraisal, post sanct ion monitoring, documentat ion etc. - to protect themselves against credit event. What processes does a CDS seller have? The CDS is supposed work on the actuarial principle. But what data goes into computat ion of the actuarial table? Knowing that credit events depend upon the business cycle, would it not be necessary to exercise care if you are on the ascending phase? Now, if a CDS has been bought for a credit exposure to an ent ity, it is t ransformed to a credit exposure on CDS seller and not the ent ity. If the CDS seller happens to be an inst itut ion like the AIG, rated



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AAA by an approved credit rat ing agency, there is lit t le residual credit risk on the books of the CDS buyer. This frees the amount of capital held against potent ial losses due to credit events, which can then be leveraged to acquire more lucrat ive (and risky) assets-Ad infinitum. The Federal Reserve, in 1996, permit ted banks to use CDS to reduce capital reserves. Following this decision, the CDS market boomed and by 2007 the overall CDS market reached a not ional value of $ 62 t rillion. However, problem arises here because given the act ive t rading in CDS it was somet imes difficult to ident ify the actual counterparty when the credit event occurs. Also some counterpart ies like AIG developed massive exposures to CDS which raised concerns about their ability to meet their obligat ions in t imes of crisis. The run up to the financial crisis saw a hey-day for financial innovat ion that saw the creat ion and exuberant trading of a large number of complex instruments supported by opaque inst itut ions. The transact ions were most ly bilateral, over-the-counter with no common knowledge of who is having how much of which asset . All financial instruments bear risk and when they are ripped and parceled into new products. Hence, it is important to understand what happens to the underlying risk and where it may be residing at any t ime. Financial markets cannot funct ion unless part icipants know each other's risk profile. When complex instruments are traded in an opaque market , the problem is further aggravated. Financial dist resses require regulatory intervent ion; the least that the regulator needs to know to intervene effect ively is who is affected by how much. Yet, the crisis revealed that not only the market part icipants had no knowledge about their counterparty's exposure to the toxic assets, even the regulator did not ! Fortuitously, DTCC which had created a plat form for informat ion on CDS for providing post t rade services to its report ing clients could provide the informat ion to the regulators and save the day. The Dealing Rooms have been the epicenter of several governance disasters across the world. Surprise of surprises, this possibility has always been recognized and the pract ices that govern the dealing room are codified, audit -t railed and audited with unfailing regularity. Yet they remain the most vulnerable to deviat ions. It has been said that the small derivat ive t rading unit of AIG in London with just 400 employees, virtually brought down this mammoth inst itution of over 100,000 employees in 130 countries. Besides, rogue dealers of financial inst itut ions have virtually ripped the balance sheets apart and yet , the senior managers and the heads of t reasuries pay only lip service to the separat ion of front office from other sequent ial funct ions, mandatory leave requirements, broker limits for each dealers, and what not. Even in the post crisis period, when banks and inst itut ions would have been in a state of high alert, a rogue t rader brought on a 2.3 billion loss to UBS that cost the CEO his job. If we sit back and analyze why these governance systems fail, we will come across only a few major issues: the perfunctory nature of compliance, an incredible build-up of t rust amongst individuals and often, their act ivit ies. If the financial crisis of 2008 could spread its tentacles so easily across the world, the major issue that crystallizes is the impunity with which the treasuries of even major financial inst itut ions functioned and the amazing level of complacency that set in over a period of t ime. This naturally leads me to the issue of compensat ion. It has been alleged that the non-linear compensat ion arrangements in vogue in most hedge funds, merchant banks, and



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other asset managers, where a fund manager's rate of bonus increases with the return he earns was a harbinger of the crisis because it incent ivized them to take on more risk. There was an adage in the good old days that lawyers, bankers and doctors should not be solicit ing clients. There is a lot of sense in it , because of the perverse social incent ives such an arrangement would create. The blogosphere is full of dismay and consternat ion at the exponent ial rise in the share of financial sector and the outsized compensat ions. There is also a view that imposit ion of restrict ions on compensat ion may have unintended consequences such as migrat ion of financial act ivit ies to offshore centers. While the issue is unresolved, the adverse incent ives and long run implicat ions of compensat ion packages need to be kept in view. Another fert ile ground for the governance failure has been the complex and somet imes, creat ive account ing pract ices employed to hide simple misdemeanors. Financial report ing is at the heart of corporate governance - It is the most important communicat ion between the corporat ion and its stakeholders. Yet , errant corporat ions have used, often with act ive support of auditors and accountants, various stratagems to misrepresent the actual financial condit ion of the company, thus stalling the stakeholders from taking t imely act ion. Maxwell Communicat ions in UK and Enron in US are cases in point . The Satyam debacle back home is a classic case where an individual-centric top management could hide its misdemeanors for an extended period of t ime, taking a few audit firms as their accomplices paying a suitable price to buy their honesty. The European Debt Problem No discussion of crises or governance today can exclude the sovereign debt problem of the peripheral Eurozone countries. If we take a careful look at the present sovereign debt crisis roiling the Eurozone, it should not take us too long to realize that this crisis also owes its origins to governance failures. The only point of difference between this and the 2008 crisis is that the ent it ies which are at the root of the present crisis are Sovereign Governments and not the usual suspects which are 'profit -seeking' corporat ions. How did Greece manage to get into the Eurozone? Was there any fudging of figures? How did the others permit this? Again, there was a clear element of acquiescence on the part of core euro members to enlarge the circle of Eurozone at the cost of non-compliance with the tenets of Maastricht Treaty. How did the crisis surface? By admission of the Greek Government that the fiscal stat istics it had earlier presented may not be t rue and the true posit ion could be significant ly worse. The European debt crisis has prompted an interest ing discussion on governance and sovereign debt. There seems to be interplay between governance performance and the debt level. Bet ter governed countries can afford higher levels of debt. Conversely, badly governed countries can tolerate only lower levels of debt. This hypothesis also helps to part ly explain the ostensible paradox of why countries with higher debt levels can carry the burden and why countries with lower debt levels may face a market reluctant to invest in its liability. This view seems to suggest that mere financial and economic measures may not be sufficient to address the problems countries like Greece face, if not accompanied by governance reforms. This is also why even after the Greek parliament passed the austerity



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measures as a precondit ion for further assistance, the market is reluctant to accept it as a watershed and displays a great deal of skept icism. Governance and regulations Regulat ions are a necessary adjunct to corporate governance. The processes associated with corporate governance are internal to the organizat ion. Regulat ions are designed to serve the same end, but are external to the organizat ion and seek to provide a nudge to enforce the governance process. While regulat ion of non-financial firms is structured around the basic themes of disclosure, investor protect ion and management of bankruptcy, regulat ion of financial inst itutions, part icularly banks, are usually much more stringent because of the grave consequences of their failure. Prior to the onset of the crisis, there was a crit ical intolerance for regulat ion by the proponents of market -based economic systems. This was reflected in the lax regulatory framework governing the financial markets and inst itut ions. It is now widely acknowledged that , weak regulat ions were responsible for the sub-prime crisis and efforts are under way to make regulat ions and supervision more comprehensive and robust . Merely having a strong regulatory and supervisory framework is not enough. It is also equally important as to how the rules and regulat ions are enforced. Manipulat ion of the due process by incumbent oligarchs or crony capitalists to their advantage has been a recurrent theme in the context of developing or emerging market economies. But the financial crisis has shown that this can happen even in the US. It is well known that the five major investment banks - Goldman Sachs, Lehman Brothers, Merrill Lynch, Bear Sterns and Morgan Stanley - commanded tremendous clout with the policy makers, but they are also suspected of tweaking the regulatory apparatus to their advantage. As reported in New York Times, these five "big guys"- led by Hank Paulson Jr of Goldman Sachs, who would take over as the Treasury Secretary two years later - met the five commissioners of the SEC in the afternoon of April 28, 2004 in the basement hearing room of the SEC office in New York to discuss the issue of freeing of capital from their brokerage arms that could be leveraged to buy even more complex instruments. After 55 minutes of discussions the demand was acceded to. As Dani Kaufmann laments, it is a case of 'legal corrupt ion'. No bribe has been paid, no laws broken, yet the effect is the same. An Indian perspective Now, let us look at the Indian perspect ive. The Indian financial sector may not be as sophist icated as those of the developed countries. There are barriers to entry to several market segments imposed by the compulsions of capital account restrict ions. The range of products is narrow and their liquidity limited. Our approach to further development of the markets is marked by caut ious gradualism. But as far as governance and regulat ion are concerned, we can perhaps boast of a resilient system alive to the potent ial problems we have discussed. Let me recount some of the measures that we have taken in support. a. With a view to promoting transparency in the OTC derivat ives market , we had

mandated, as early as in 2007, a t ransact ion based report ing system for the only active class of interest rate derivat ives, the interest rate swaps and disseminat ion of informat ion based on such report ing. We are in the process of taking the init iat ive further by extending the report ing requirements to all foreign exchange and interest rate derivat ives.



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b. To ensure that there is no laxity in credit appraisal in case of securit isat ion, we have mandated that the originator of a loan asset has to hold it in its books for at least one year before securit isat ion and that he has to retain the equity t ranche of the securit ies created.

c. We have introduced not only anonymous, order matching t rading system for t rading in government securit ies to improve t ransparency, we have also introduced central counterparty based guaranteed set t lement for government securit ies and foreign exchange transact ions.

d. We have st ipulated that rat ings of external agencies can complement and not subst itute the internal appraisal processes for sanct ion of loans by banks.

e. Introduct ion of credit default swaps has been subjected to purchase of protect ion only by the holders of the reference obligat ion and sale only by regulated ent it ies.

f. As early as 2005, we have used risk weights and provisioning norms for influencing the flow of funds to the housing sector and moderat ing excessive growth.

Conclusion In conclusion, let me summarize what we have discussed. Good governance is a necessary condit ion for not only economic growth and development but for an easy and comfortable society where we can go about our business - confident and unruffled. Good governance is of utmost importance for the financial sector but needs to be complemented by alert and efficacious regulat ion and supervision so as to build and maintain confidence of the savers and the investors. We, as a nation, have begun our journey and the t ryst with our dest iny and we need cont inued confidence of all our stakeholders to reach our dest inat ion. Our responsibility towards good governance cannot be overemphasized. In this endeavour needless to ment ion that members of this august audience are the principal actors. Thank you for your patience. --------------------------------- Address by G. Padmanabhan, Execut ive Director, at the Conference of the Kerala Management Associat ion at Kochi on February 17, 2012. The assistance provided by G. Mahalingam and Himansu Mohanty is gratefully acknowledged.



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Report of the Nair Committee on Priority Sector Lending Constitution of the Committee The Reserve Bank had const ituted the Commit tee under the chairmanship of Shri. M. V. Nair on August 25, 2011 pursuant to the announcement made in the Monetary Policy Statement 2011-12. The Commit tee was to re-examine the exist ing classificat ion and suggest revised guidelines with regard to priority sector lending and related issues. The Commit tee had 10 Members from diverse fields and Dr. Deepali Pant Joshi, CGM-in-Charge, Rural Planning and Credit Department, Reserve Bank of India was its Member Secretary. The Commit tee was given a broad-based terms of reference. Major Recommendations of the Committee are By adopt ing a wide and exhaustive consultation process, the Commit tee ident ified key issues facing diverse segments and sect ions of society; examined them thoroughly and made recommendat ions that would support achieving the object ives of directed lending. 1. The target of domest ic scheduled commercial banks for lending to priority sector may

be retained at 40 per cent of adjusted net bank credit (ANBC) or credit equivalent of off-balance sheet exposure (CEOBE), whichever is higher.

2. The sector 'agriculture and allied act ivit ies' may be a composite sector within priority sector, by doing away with dist inct ion between direct and indirect agriculture. The targets for agriculture and allied act ivit ies may be 18 per cent of ANBC or CEOBE, whichever is higher.

3. A sub target for small and marginal farmers within agriculture and allied act ivit ies is recommended, equivalent to 9 per cent of ANBC or CEOBE, whichever is higher to be achieved in stages by 2015-16.

4. The MSE sector may cont inue to be under priority sector. Within MSE sector, a sub target for micro enterprises is recommended equivalent to 7 per cent of ANBC or CEOBE, whichever is higher, to be achieved in stages by 2013-14.

5. Banks may be encouraged to ensure that the number of outstanding beneficiary accounts under 'small and marginal farmers' and micro enterprises' each register a minimum annual growth rate of 15 per cent.

6. The loans to housing and educat ion may cont inue to be under priority sector. Loans for construct ion / purchase of one dwelling unit per individual up to ̀ .25 lakh; loans up to `.2 lakh in rural and semi urban areas and up to `.5 lakh in other centres for repair of damaged dwelling units may be granted under priority sector.

7. In order to encourage construct ion of dwelling units for Economically Weaker Sect ions (EWS) and Low Income Groups (LIG), housing loans granted to these individuals may be included in Weaker Sect ions Category.

8. All loans to women under priority sector may also be counted under loans to weaker sect ions.

9. Limit under priority sector for loans for studies in India may be increased to `.15 lakh and `.25 lakh in case of studies abroad, from exist ing limit of `.10 lakh and `.20 lakh, respect ively.

10. The priority sector target for foreign banks may be increased to 40 per cent of ANBC or CEOBE, whichever is higher with sub-targets of 15 per cent for exports and 15 per cent for MSE sector, within which 7 per cent may be earmarked for micro enterprises.



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11. The commit tee recommends allowing non-tradable priority sector lending certificates (PSLCs) on pilot basis with domest ic scheduled commercial banks, foreign banks and regional rural banks as market players.

12. Bank loans to non-bank financial intermediaries for on-lending to specified segments may be allowed to be reckoned for classificat ion under priority sector, up to a maximum of 5 per cent of ANBC or CEOBE, whichever is higher, subject to certain due diligence and documentat ion standards.

13. The present system of report -based reporting has certain limitat ions and it may be improved through data-based report ing. There is a need to address the issues in data report ing like pre-defined parameters, reference date, periodicity, unit of report ing, etc.

The recommendat ions of the Committee are expected to have significant impact in addressing issue of direct ing lending to those who have lack of access to credit and to those sectors which generate large employment. It is hoped that these recommendat ions would promote country's developmental and inclusive goals.

Interview of RBI Governor, Dr. D Subbarao by Alex Frangos of The Wall Street Journal

(Originally published on WSJ Online on February 13, 2012) Reserve Bank of India Gov. Duvvuri Subbarao sat down with The Wall Street Journal to talk about his efforts to restart India's growth engine and to fight persistent inflat ion. Speaking from the 18th floor of the Reserve Bank headquarters overlooking Mumbai, Mr. Subbaro touched on a range of issues, including the RBI's efforts to stabilize the plunging rupee in late 2011, his calls for cuts to government spending, and how it was difficult to increase interest rates several t imes over the object ion of a panel of advisors. Follows is an edited t ranscript of the conversat ion : WSJ : What is your monetary policy stance right now, are you easing credit condit ions or are you in neutral? SUBBARAO : It 's difficult to say what is neutral. But we give guidance in our quarterly policy statements in October and again in January, which is to say that the t ightening has peaked, and from here onwards, it 's that we've got to come down, that we have to start easing. There was some quest ion as whether the CRR (cash reserve rat io) cut we had done in the January policy was a signal of easing. It depends on how you interpret that . But historically the Reserve Bank has viewed the CRR as a monetary policy instrument with of course liquidity dimensions. So it was both to signal that the interest rate cycle has peaked and also to infuse liquidity. WSJ : So was it easing or not? SUBBARAO : I would say it was easing to the extent we had eased the liquidity situat ion and we viewed the CRR as a monetary policy instrument. WSJ : You got applause for holding the government 's feet to fire on the growth in the fiscal deficit in your January policy statement, saying such spending is fueling inflat ion.



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You have talked about this issue in the past , but never so pointedly. Crit ics say you should have done so earlier. What 's your response? SUBBARAO : If you see our monetary policy statements over the past two years, we've consistent ly drawn at tent ion to the fiscal deficit concerns having recognized that some st imulus was of course necessary as part of the crisis management. However we thought that this was an appropriate t ime this t ime around to call a more pointed at tent ion to this, because this year, the current fiscal year, the fiscal deficit has breached the init ial budget est imate and there area lot of expenditure demands piling up as we see from the newspapers. So we thought it important to call at tent ion to the inflat ionary dimensions of fiscal deficit , inasmuch as we have combat ing inflat ion over the past two years. To summarize, we did call at tention to our concerns to fiscal deficit but did so more pointedly this t ime around because it was a more appropriate and more opportune t ime to do that . WSJ : Governments generally are not known to be disciplined on spending in elect ion years and there are several large state elect ions in India this year. What if they don't heed your advice on spending because of elect ion year pressures. SUBBARAO : Not just me, there are lots of other people talking about the negat ive repercussions of fiscal deficits. And I think these negat ive repercussions will show up more pointedly if the government does not make credible and sizeable fiscal adjustment. For one, the bat tle against inflation will become that more difficult . Second private credit will get crowded out . There are lots of people who say fiscal deficits in India have not crowded out private credit in the past . That may well be t rue to some extent because fiscal deficits have ballooned with private credit demand was low. But now is t ime when we want private credit demand to pick up and supply to flow. So that would be hurt . And third, the twin deficits of current account and fiscal deficits feed on each other. The maneuverability or the room for not making fiscal adjustments is very limited if not nonexistent . WSJ : What specific things would do think are advisable adjustments to make. Readers see the term fiscal consolidat ion, but what does that mean exact ly? SUBBARAO : The only discret ionary expenditure they can make in the short term is on subsidies. And there is I believe quite a strong case for making adjustments on subsidies even from the ant i-poverty perspect ive. That said, I'd like to comment on some principles apart from specifics. The finance minister will of course come out with a budget est imate for fiscal deficit for next year in the budget. Beyond that I think he should indicate a roadmap, a medium term roadmap for fiscal deficit , which they've done in the past and there's a big probability he will do that . I think he should back that up with a credible plan of how it 's going to be achieved. Second, I think we also must rely also on expenditure compression in addit ion to tax increases to build the fiscal adjustment. And third, there must be some focus on the quality of fiscal adjustment, because if you are chasing just the number, it 's possible that you would prune out product ive expenditure and retain unproductive expenditure. WSJ : You ment ioned some subsidy cuts would be good for ant i-poverty programs. Which ones? SUBBARAO : If there is subsidy in LPG (liquefied petroleum gas), it 's a subsidy that 's not going to the poor. It 's a subsidy that 's going to people who can afford LPG, which is certainly not the poor. Power subsidies are given by state governments according to



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people who have land, whereas the landless, who are poorer, don't get any subsidy at all. There's got to be some at tent ion paid to the poverty impact of subsidies and target ing subsidies with an ant i-poverty focus. WSJ : It seems all the part ies in the state elect ion in Uttar Pradesh are campaigning to give away free power. That sort of thing would seem to make it hard to cut spending in the coming year. SUBBARAO : Yes. Somet imes there is concern of how much of a democracy tax we are paying. WSJ : You said in last policy statement you would be constrained from lowering rates unless there's credible fiscal consolidat ion. The budget is presented March 16, whereas your meet ing is March 15. For a March 15 meet ing, is a rate cut st ill an opt ion given any plan for fiscal consolidat ion would be presented a day later. SUBBARAO : We didn't have a precise date when we said that . But I can't really speculate on what this off the table on the table for the next policy review. Theoret ically all opt ions are on the table. WSJ : Some crit ics say you weren't aggressive enough with rate increases in the beginning of the cycle and some say you were too aggressive in the end and some say both. Which crit icism are you more comfortable with? SUBBARAO : Crit icism is part of the game when you are making public policy. It 's legit imate that people crit icize. And I'm comfortable that the crit icism comes from both sides, which must mean we are at least part ly right , that some people think we are right . But I must enter some explanat ion of our unrolling of our t ightening over the past two years. One crit icism as you ment ioned that it was back loaded, that we were sleeping at the wheel and then woke up. That 's not the case. The baby step approach that it 's come to be called, was just ified on three grounds. First , inflat ion was stemming at that t ime from supply shocks. There were demand pressures but they were very insipient at that t ime. Second, we had to support recovery. Around the world there was st ill the depth of recession and here at home we had to support recovery. And rates had come to historically low levels as part of the crisis management and we couldn't raise them abrupt ly, so it had to be a calibrated process. So even with the benefit of hindsight, I believe we calibrated the policy stance quite well. The last point I want to make is there's no counterfactual. It 's not clear that inflat ion would not have been much higher if we had not acted. I'd say we are quite comfortable with our crit icism, but I believe that our baby step approach for much of 2010 was just ified. WSJ : Wasn't it your responsibility to raise rates earlier in order for the government to realize spending was a problem earlier? Your job is price stability and it doesn't matter what the cause is, you need to tackle it. SUBBARAO : You certainly need to tackle it but you can't do public policy to teach a lesson or to spite someone. You've got to coordinate with the government and there was a fiscal st imulus as part of the crisis and it certainly would take t ime to wind that down. We were quite sensit ive to that. I don't think it would have been appropriate for the Reserve Bank to raise rates regardless of what government was doing just to tell them that the ball was in their court . I don't think that would have been appropriate.



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WSJ : People in market are saying measures to maintain liquidity in the financial system such as your OMO (open market operat ions) and CRR (cash reserve rat io) cut are the only thing support ing government bond yields at these levels. SUBBARAO : That 's one perspect ive. But you must also recognize that we had said that we'd like liquidity to be within one 1% of NDTL (A measure of liquidity). The last few months, it 's been way above that . From a purely liquidity management perspect ive, we were act ing by the guidelines we had given to the market . The quest ion is whether this is support ing government borrowing. When we introduced liquidity for it to be within our targeted range, no dest inat ion for that money is indicated. It 's for the banks to choose to lend to the government or the private sector. It 's not as if we were telling banks to lend to the government. WSJ : India even at 7% has GDP growth is a very good number globally. But there's a lot of disillusionment in the last year or two from companies. How do you see India portrayed and does it feel different from 2007-2008. Has there been cooling of enthusiasm for the India economic story? SUBBARAO : Certainly there is a feeling that the economy has slowed down and that it was a slowdown that could have been avoided that we need not have come down to 7% if both the external world as well as domest ic policy situat ion had been better. First , of course is the monetary t ightening and the high interest rates, but that's just one factor. There's been a lot of uncertainty about policy in Delhi and get t ing projects going at the field level in terms of land, power, all the permissions, all the clearances you need to get , which are not so much Delhi focused but at the field level and certainly about the slowdown in second generation reforms. WSJ : Any change in economic out look given the reduced jitters from Europe, the austerity plan passed in Greece overnight , more hope about the U.S. economy? SUBBARAO : Something happened as we turned the calendar from 2011 to 2012. The fears of imminent collapse two months before Christmas have certainly waned. In Europe the LTRO performed bet ter even than the ECB hoped, I think. Then there is the fiscal compact. There is st ill concerns about short term funding and st ill concern about whether the banks will be able to raise the capital. There's less of a concern about an event shock, but st ill concern about process shocks as we go along and Greece and other countries have to roll over their debt . And the firewalls they wanted to build have to some extent succeeded in showing that Greece is different from other 'PIIGS' countries. That's certainly had a posit ive impact on investor sent iment here. Although our exposure to Europe is not dominant, it 's certainly significant . To the extent that Europe seems to be less unstable today, it does help domest ic investor sent iment here too and we've seen that on all the market indices. WSJ : What makes India so vulnerable to global financial markets, as we saw last fall with rupee falling during the worst of the euro mess. What can you do and what can India do to make sure the next t ime the effect is less severe? SUBBARAO : All emerging economy currencies have depreciated in the pre-Christmas months, but Indian rupee depreciated more than other currencies. All of you wrote and as we know the rupee was worst performing currency in the world or whatever. What



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explains that is that we are a current account deficit economy. South Africa too is current account deficit . Those emerging economies that had a surplus or a small deficit were less hit than countries that have a sizeable deficit like India, and that deficit was growing. So the rupee depreciat ion was a result of external flows pract ically thinning out and driven by the dynamics of the current account deficit . What can the reserve bank do, we've in fact done what we could do which was to curb speculat ion in the market and to encourage capital flows of a more stable nature but there are limits to that . All the things we've done to raise deregulate interest rates on NRI (non-resident Indian) rupee deposits, on raising the limits on FII (foreign investor) exposure to equity and debt markets and curbing speculat ion. But eventually we need to make the balance of payments more robust to inspire confidence. There it 's quite clear. We need to diversify our export dest inat ions and product mix. As far as imports are concerned, we need to reduce the dependence on oil imports and one way to do that is to deregulate petroleum product prices. Gold imports of course have increased part ly as a reflect ion of a safe haven. We need to provide other safe havens. We need to at t ract more stable flows. FDI for example and finally we must within the RBI encourage, if not pressurize our corporates to hedge their foreign exchange exposures. They don't do that adequately. They do cost benefit calculat ions, if the rupee is not moving rapidly, they calculate the cost of hedging is higher than the risk they take by not taking. But as happened in the pre-Christmas months, it can certainly overshoot, so we'd like corproates to hedge more. But not proscribe that , we want to leave it to the banks and the corporates. WSJ : When you lifted foreign investor quotas and non-resident deposit rates last year, it brought in capital and helped the rupee. Was it something you were going to do anyway? At your core, do you want India's markets to be more open or do you like the protect ion that exists? SUBBARAO : I'd like our capital account to be more open and these are measures we should be taken. Of course we took them under some sort of pressure so the interpretat ion that you made is quite appropriate that maybe these are crisis driven measures, but certainly they were on our road map of liberalizing further. WSJ : So were you taking advantage of a crisis? SUBBARAO : In a way it was t imed as such, but even otherwise we would have done them somet ime. WSJ : Do you see currency volat ility cont inuing? SUBBARAO : I cannot really speculate on how the currency will move. That 's dependant on a number of factors. But certainly I'd like to see less volat ility in the market in the currency movement and less of a need for the reserve bank to intervene so that the exchange rate is determined by forces of supply and demand. And yes, when we are a stronger economy, when capital flows are of a stable nature are coming, the exchange rate will be subject to less volat ility. And again, that will be an appropriate plat form for taking further capital account reforms.



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WSJ : With the rupee a bit more stable around 49, is now a good time to build reserves? SUBBARAO, I can't speculate that but we had used some reserves certainly. WSJ : Given the thirst globally for emerging market debt, why not open India even more to foreign investors. SUBBARAO : Certainly we would like more FII (foreign inst itutional investors) in corporate debt but you must recognize that even the exist ing limit is not used up. There is something out there we have to fix about the appet ite for the corporate bond market . It 's not a restrict ion placed on the capital account front . As far as FII on government debt, yes certainly, we have expanded that quite rapidly in the last three or four years, but there is need for going a bit more caut iously, because as we've seen during the crisis, countries with large sovereign debt exposure to foreigners suffered destabilizing volat ility. So we need to balance the concerns of stability with concerns of less expensive foreign flows. WSJ : When you take over in 2008 did you make a conscious decision to take a more hand's off approach when it comes to foreign exchange intervent ions? SUBBARAO : That 's a judgment outsiders will have to make. By inclinat ion, I believe that markets should be allowed to funct ion and that we should minimize our intervent ion and that's good for building the resilience of the economy. WSJ : But it does help on the monetary policy side, as a flexible exchange rate makes your interest rate policy more potent? SUBBARAO : Certainly. That 's very fresh in my mind. I gave a speech last week on the impossible t rinity, so to the extent you have a freely float ing exchange rate you have greater, more independent monetary policy. WSJ : Are you sat isfied with the intervent ion you undertook last year on the foreign exchange market? SUBBARAO : Yes. I would think so, especially on speculat ion. If you don't intervene, the speculat ive forces could be self reinforcing which is that exporters would defer bringing their receipts in and importers would buy forwards. That's a self-reinforcing feedback loop. To the extent that we curbed speculat ion and showed that determinat ion, it certainly helped. WSJ : So 54 rupees to the dollar was a level you weren't comfortable? SUBBARAO : I can't really comment on a specific exchange rate. We were looking at the first derivat ive, not the stock figure, but the rate at which it was going. WSJ : Are these foreign exchange measures temporary, do they fit in you capital account liberalizat ion t rajectory? SUBBARAO : Some of them do fit in with our capital account thinking. Some of the measures to curb speculat ion, they are permanent unt il removed, but that 's not saying much. We'd have to take a view on speculat ive tendencies and if we believe we are robust enough and there's no scope for speculat ion we will roll them back, but that 's no indicat ion that rollback is on the radar screen.



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WSJ : Oil prices remain elevated, a major concern for you, as ment ioned in the latest policy statement. How will you deal with that if they persist? SUBBARAO : Oil prices are a big factor and largely beyond our control and are very complex economic and geopolit ical factors that drive oil prices. Just looking at the world situat ion, the U.S. growth situation is quite modest and Europe is probably in a recession and Japan is growing but you know. Oil prices should have come down or should have been much lower than they are today. Evident ly there is something going on there that is keeping pressures up. Part ly it 's liquidity. Even the LTRO [the European Central Bank's long-term refinancing operat ion] money, it 's not clear it 's being used all in Europe and some of it is being used in speculat ion. And then there are the polit ical factors, which is Iran. If Iran is outside the world pool there could be price pressures. If Saudi Arabia because of fiscal concerns, its commitment to extend fiscal supports to other Arab countries, to meet that commitment they might want to keep oil prices at a certain level. There's economic factors, there's polit ical factors there are market factors, all of them that determine oil prices which are largely out of control. Inasmuch as we import 80% of our oil and more than a third of our imports, so oil prices are a big factor for inflat ion management, for the fiscal deficit and for macroeconomic stability for the country. WSJ : Does that make India's relat ionship with Iran and this deal to pay for oil with rupees, how crit ical is that? Do you talk about the central government about this? SUBBARAO : We are conforming to the U.N. sanct ions as far as dealings with Iran are concerned. And U.N. sanct ions do not prohibit purchases of oil from Iran. As much as we purchase oil from Iran, we've got to find a way to pay for it and our effort has been to cont inue to make our payments. WSJ : How do you see growth for the 2013 fiscal year, start ing in March 2012? SUBBARAO : We expect growth to be higher in 2013 than in 2012, part ly because at some point in t ime we might start easing the interest rate cycle. Part ly because the external situat ion will be more stable. The world recovery will pick up. And I'm hoping that a confluence of factors, including the sent iment factor that is inhibit ing investment will have run out , and that posit ive sent iment will revive. Animal spirits will come back into play. WSJ : What about inflat ion. Why do you feel confident enough to talk so openly about cut t ing rates? SUBBARAO : I think inflat ion should start coming down. The decline we've seen in November and December is largely to food prices, within food to vegetable prices. But we've also seen demand pressures easing. We've seen a decline in non-food manufactured product inflation, which is our measure of core inflat ion, which I believe peaked some months ago. We've seen pricing power of corporates coming down. And growth itself, if it moderates to 7%, which means both investment and consumpt ion pressures are lower. I believe it will come down through fiscal year 2013, but at a gradual pace. WSJ : How would you rate your performance as central bank governor? SUBBARAO : I think it 's inappropriate for me to make a mid-career judgment on my career but it 's for others to make a judgment. I've had enormous challenges, very difficult situat ions, but the reserve bank is a great inst itut ions, I've had t remendous intellectual support and advice which I hope has steered the country through challenges.



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WSJ : Speaking of that advice, the technical advisory commit tee, you haven't seen eye-to-eye with them on the pace of rate increases, why are you not agreeing? SUBBARAO : We have enormous respect for what the TAC has to say and for the last , let 's say the second half of calendar 2011, when we cont inued to raise rates, many of our TAC members had expressed concerns about inflat ion, but had advised that we must pause but without any explanat ion about how inflat ion would come down unless we had acted. We weighted their advice against our own judgment and acted as we did. I do hope we get some credit for putt ing it out in the public domain. WSJ : How difficult was it to make those decisions with the commit tee so close to you disagreeing? SUBBARAO : It 's difficult . It 's certainly something you don't do lightheartedly. You do think twice before going against their advice. WSJ : You've ment ioned being more open, talking to the press and analysts and publishing minutes. What 's your inspirat ion for that and why do you think it 's bet ter for the deliberat ions to be more open rather than guarded? SUBBARAO : I was wondering whether it 's more to do with my leadership or my personality style. Communicat ing with the market and communicating openly does help get the appropriate feedback and get t ing a reality check on what you are doing. There are of course certain t imes and certain things you have to keep confident ial and be unpredictable, but we try to minimize that . I expect that you'll be roughly right as Keynes said, and precisely wrong. WSJ : Can you talk about the health of the banking system. Some see a deleveraging process going on, higher non-performing loans and the fiscal situat ion on the government side makes it difficult to recapitalize the state owned banks. How concerned are you about the banks? SUBBARAO : NPLs (Non-performing loans) have grown and have grown quite rapidly in the second half of 2011 calendar year, and that 's part ly to be expected when the economy is not growing that fast and when restructuring had been done during the crisis. The incidence of impaired assets out of restructuring would certainly be higher than the overall sample. But we've done stress tests, and they show that our banks will remain profitable and will have no capital concerns even under fairly significant stress in terms of the some of the restructured assets turning into non performing assets. St ill that 's a concern, and it 's part of our regulat ion and supervision process and looking into that and advising banks to improve on their port folio situat ion. WSJ : People get very worked up about growth being as low as 6.9%. Historically that 's high, but on flipside, that level is such an elast ic economy there's so much catching up to do, anything less than 5% is practically recessionary. Where's your level? How good a number is 7%? SUBBARAO : For India to come down from 9% to 7% is as difficult an adjustment to make as for the U.S. to come down from 2% to 0%, when your growth rate falls rapidly. What is our potential growth rate, non-inflat ionary stable growth rate? We said before the crisis it was 8.5%. After the crisis, some studies showed it was about 8%. But now we've seen inflat ion, even when the economy was growing at 7.5%, indicat ing the non-inflat ionary growth rate is about 7% or so. But that is not dest iny and that we are not locked into a 7% growth rate. We should certainly accelerate that , and it 's certainly possible to do that , but for that , supply responses must come.



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WSJ : If you could wave your magic wand on the Indian economy, what structural impediment in the Indian economy would you want fixed, improved FDI, balance of payments, investment growth? SUBBARAO : I think public finance reform. All the things you ment ioned are equally important and unlikely to work in isolat ion. But I'd think public finance reform at both the central and state governments would go a long way in providing a plat form for all the other reforms to take off. WSJ : What about reforming the RBI. It 's a very big organizat ion. You manage interest rate policy and are in charge of issuing government debt, which some see as a conflict of interest as your incent ives might be to keep borrowing costs low for the government when inflat ion argues for higher rates. Should that change? SUBBARAO : I believe not . The RBI has a much wider mandate than most other central banks. We are the monetary authority and issuer of currency, but we are the regulator and supervisor of banks, financial markets and nonbanks, the external sector we are responsible for, and we have a huge development mandate. That's served the country quite well. In part icular about the debt management, as to whether that should be hived off from the RBI. The case for that was to made on the ground that there was a conflict of interest for the Reserve Bank to do debt management, because it interferes with monetary policy. Second, that the fiscal deficit was on the way down, therefore there is possibility for an independent debt management office. I think both those arguments have lost part or most of their validity. I believe there is a quite a bit of synergy for the RBI to be doing the debt management, because raising resources of the size the government does in India, is not just a matter or raising resources, it has implicat ions for interest rates, for liquidity for credit flow and for the macro economic situat ion. Given that fiscal deficits and government borrowing are so high, I think there is quite a bit of synergy between a central policy which is charge of monetary policy which is also doing debt management? WSJ : What 's the synergy, that you not issue debt? SUBBARAO : No. That 's not an opt ion. That we can ensure, that as much as the government has to borrow, that there is sufficient liquidity so the private sector crowding out is minimized. We can ensure that the interest rates are st ill manageable and compet it ive for the private sector. And also recognize that the conflict of interest angle is somewhat overplayed. When 70% of the banking sector is with the government, there is a conflict of interest if debt management is done by an office that has some affiliat ion with the government. I don't think we will use our funct ion as the debt manager to put pressure on the government about the fiscal deficit . There are other avenues to pressure and to argue our case. As far as debt management is concerned, we want to be efficient debt managers. WSJ : How much does China, as India's largest trading partner, weigh on your economic analysis? SUBBARAO : Perhaps we reckon with that possibly less than we should be doing. Our trade with China is growing, our links with China are growing and we've allowed corporates to



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raise debt in yuan. I think Chinese economic management, part icularly their economic policies should be part of our reckoning more than it is now. WSJ : You were recent ly reappointed for another two year term, running out in September 2013. Would you like to serve after that? SUBBARAO : No. --------------------- The Transcript can also be viewed at http:/ /online.wsj.com/art icle/ SB10001424052970204795304577221253451295374.html

Agriculture Agenda for Odisha - Issues & Challenges Shri. Harun R. Khan

It is a matter of great pleasure to participate in this very important Agriculture Conclave organized by the Reserve Bank of India with act ive support from the Odisha University of Agriculture & Technology (OUAT), the National Bank for Agriculture & Rural Development (NABARD) and the Government of Odisha. As you would be aware, both the Reserve Bank of India, Bhubaneswar Office and the OUAT are celebrat ing their Golden Jubilee year - fifty years of commitment to the development of the economy of the State, in general, and agriculture, in part icular. Commitment of the Reserve Bank towards providing impetus to the agriculture sector of the State can be judged from the fact that way back in 1962, we started our operat ions in Bhubaneswar with the lone department - the Agriculture Credit Department. The same year also saw the birth of OUAT at Bhubaneswar following the recommendat ions of the Planning Commission which had suggested set t ing up of dedicated educat ion centres for agriculture in the country. Two great institut ions are working towards the same goal with able support of the NABARD and the State Government. This conclave is a great example of coming together of all the stakeholders, such as, farmers, farmers' organizat ions, researchers, banks, Reserve Bank, NABARD, NGOs and government departments / agencies for the common cause of agriculture development of Odisha. It is perhaps t ime to reassess our strategies, policies and perspect ives for cont inuing the momentum of growth in agriculture in the State and I am sure this Conclave will provide us the requisite plat form to deliberate on issues and challenges and also draw concrete act ion plan for the future. There is no doubt that rural India has to be an integral part of the development and the t ransformat ion process. Consequent ly, agriculture policy formulat ion has to remain at the centre of the developmental agenda and inclusive growth strategy of the country. In my presentat ion today, I intend to highlight the role of Reserve Bank of India in the agriculture sector, the concerns on development of agriculture, recent t rends in economic growth and development of agriculture in Odisha, out line some of the issues and challenges of the agriculture sector in the State in a framework of SWOT analysis and end with some thoughts on challenges that lie ahead. A. Role of Reserve Bank in agriculture sector for inclusive growth As the central bank of the country, the concerns of Reserve Bank has always been to maintain price stability and ensuring availability of credit for the product ive requirements of the economy. Unlike many other Central Banks, since its incept ion, provision of credit



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and facilit ies to the agriculture sector has been one of the major object ives of the Reserve Bank of India. This was very apt ly echoed by our first Prime Minister Pt. Jawahar Lal Nehru who had emphasized the centrality of agriculture in our economy when he said everything else can wait but not agriculture. In pursuit of the object ive of inclusive growth strategy, the Reserve Bank has stepped up its efforts to promote financial inclusion in recent years by increasing the penetrat ion of the formal financial sector. It is crit ical to increase the coverage of formal finance in rural sector, part icularly in agriculture, in order to ward off the financial vulnerabilit ies and risks arising from the sourcing finance though informal means from money lenders and other similar ent it ies. The Reserve Bank has been taking special init iat ives for extending the outreach of banking facilit ies through branch banking and also through host of alternate models. Thus, the financial inclusion drive is part icularly significant for the State like Odisha for achieving inclusive growth object ives as more than 60 per cent of the total work force direct ly or indirect ly engaged in agriculture where its contribut ion to growth is declining due to various reasons. Credit availability should be t imely and adequate. It is important to note that finance is a crit ical input which can command all other resources required for farming. Therefore, the convent ional approach of grant ing crop loans wherein farmers approach the banks will not suffice. Bankers will have to play an act ive role in support ing the farmers in several ways, just like they did during the heydays of the Green Revolut ion. In fact , one of the major object ives of nat ionalisat ion of banks in 1969 was channelising the productive credit to agriculture sector. It is not merely the rate of interest that matters but equally important is the issue of number of t imes a farmer is required to come to the bank and the complexit ies of documentat ion. While branch banking will continue, Business Facilitators (BFs) and Business Correspondents (BCs) have to be ut ilized increasingly to generate incremental business. Reserve Bank has been emphasizing that the banks need to increasingly use ICT tools to increase their outreach reduces t ransact ion costs and provides built -in safeguards in regard to the KYC and the due diligence related issues. Simplificat ion of the documentat ion / procedure and related public services like digit ization of land records, electronic search and lien facility would contribute to hassle-free delivery of rural financial services. Credit Bureaus will also have to come up to provide credit history of the borrowers and, thereby, facilitate efficient due diligence of the clients. In fact providing holistic financial services covering credit , savings, insurance and remit tance on a sustainable basis by the formal as well as semi-formal financial inst itut ions has assumed crit ical importance for business growth and profitability of these inst itut ions and economic advancement of the target clientele. In short , rural banking is likely to see a lot of act ion and change in the days to come. It is also important to note that besides financial services, host of complimentary policies and resources are necessary for sustainable development of the agricultural sector and the farmers under Credit Plus approach. B. Recent Trends in Growth of Odisha All India Perspective Given the large scale dependence of the populat ion on the agriculture sector, Odisha remains primarily an agrarian economy. The Net State Domest ic Product (NSDP) of Odisha accounted for around 2.3 per cent of the all-India net domest ic product (NDP) during 2010-112. Over the five year period 2005-06 to 2009-10, the NSDP growth in Odisha



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increased to 7.9 per cent vis-a-vis 6.1 per cent in the preceding five years. The growth was mainly led by strong services sector growth along with support from agriculture sector. During 2010-11, NSDP growth declined sharply to 2.2 per cent , recording the lowest growth amongst all the States in that year, and was in contrast to the t rend in the all-India NDP growth (Table 1). Unlike at the all-India level, in the case of Odisha, the share of agriculture sector is higher than that of the industrial sector in NSDP. Table 1

Economic Growth - Odisha vis-a-vis India

Sector

Growth Rates Share in NSDP

2000-01 to 2004-05 (Avg)*

2005-06 to 2009-10 (Avg)

2009-10

2010-11

2000-01 to 2004-05 (Avg)*

2005-06 to 2009-10 (Avg)

2009-10

2010-11

Agriculture and Allied

3.5 3.9 9.7 0.1 29.7 22.4 21.1 20.6

(1.3) (2.9) (0.4) (6.5) (21.8) (17.3) (15.2) (15.0)

Industry 12.6 6.3 -2.6 -10.8 15.0 18.9 17.3 15.1

(4.2) (8.1) (7.7) (6.4) (17.4) (16.9) (16.6) (16.3)

Services 6.3 10.3 11.6 6.6 55.3 58.7 61.7 64.3

(6.8) (10.2) (10.0) (9.3) (60.8) (65.8) (68.1) (68.7)

NSDP 6.1 7.9 8.5 2.2 100 100 100 100

All -India NDP 5.1 8.5 8.1 8.4

Note : Figures in brackets denote growth & shares of different sectors in NDP at the all India level.

* : Data for Odisha for 2000-01 to 2004-05 is old base (1999-2000).

Source : Central Stat ist ics Office. Regional perspective From the regional perspect ive, the NSDP of Odisha grew at faster pace than that of the other Eastern States as a whole in 2009-10 mainly on account of accelerated growth in agriculture and services sectors. In terms of share to NSDP, the posit ion of the Odisha as compared to the Eastern States as a whole and all-India level was higher in the case of agriculture and industry, while it was lower in the case of services sector (Table 2). Table 2

Sectoral Growth and Shares in 2009-10

(per cent)

Growth Rate of NSDP Share in NSDP

Agriculture & Allied Activities

Industry Services NSDP Agriculture & Allied Activities

Industry Services

Odisha 9.7 -2.6 11.6 8.5 21.1 17.3 61.7



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Eastern States*

2.7 1.2 11.8 8.4 20.4 12.5 67.1

All India - NDP

0.4 7.7 10.0 8.1 15.2 16.5 68.3

Source : Central Stat ist ics Office.

*The Eastern States consist of Odisha, Bihar, West Bengal & Jharkhand. C. Concerns on development of agriculture Global context Today, agriculture is a cause of global concern in the context of (a) price volat ility with a rising trend, especially of agricultural commodit ies, (b) growing concerns for food security and resultant t rade restrict ions, (c) global economic condit ions in the recent past , (d) the forecasted rate of reduct ion of growth of agricultural land over the next two decades, (e) increasing mismatches between supply of agricultural products for food, feed & fuel in relat ion to growing demand and (f) the climat ic changes which are exert ing pressures on agricultural product ion. Thus, enhancing agriculture product ion and product ivity have emerged as a global challenge and this is more severe for low income and developing countries. Indian context India, with 2.4 per cent of the world's geographical area, is the largest producer of pulses, tea, and milk and second largest producer of fruits, vegetables, wheat, rice, groundnut and sugarcane in the world but supports about 16.2 per cent of the world's populat ion. Coupled with small scale land holdings and deep rooted poverty in rural areas, the magnitude and dimensions of challenges for agriculture policy-makers have increased manifold. In the context of 2 - 3 per cent growth in the agriculture sector in the last 15 years (2.5 per cent in the 9th Five Year Plan, 2.4 percent in the 10th Five Year Plan and around 3.2 per cent in the 11th Five Year Plan), the target of 4 per cent growth in agriculture set for the 12th Five Year Plan underscores the importance of agriculture to the economy of the country. Our Prime Minister Dr. Manmohan Singh had very apt ly ident ified four key deficits afflict ing Indian agriculture, namely, Knowledge Deficit , Infrastructure Deficit , Public Investment and Credit Deficit and Market Economy Deficit . The declining contribut ion of Indian agriculture has been at t ributed to various factors including stagnat ion in yield levels, limited introduction of new variet ies of seeds and crops, lack of technological breakthrough for product ivity increase in the rain-fed areas, absence of effect ive risk mit igants for price, product ion and personal risks for the agricultural sector, etc. Another plausible reason is the decelerat ion in public and private sector investment part icularly in agriculture although in recent t ime, gross capital format ion in the sector has increased. This decline is one of the main factors for stagnat ion in agricultural product ion, and thereby poverty in rural areas. Low level of value addit ion and insufficient focus on agro-processing together with inadequate marketing linkages, particularly for the small and marginal farmers, have also contributed to the declining contribut ion. Many studies have also highlighted that fragmentation of land, low technological inputs, unsustainable water management and resource utilizat ion, rising pressure of population on land, land



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degradat ion alongwith low level of mechanizat ion, fert ilizer consumption, etc. are some of the crit ical causes of concern for the agriculture sector of India. Agriculture in Odisha Though the agriculture sector of Odisha contributes only around 20 percent towards State Gross Domest ic Product (GSDP), it provides employment and sustenance, direct ly or indirect ly, to more than 60 percent of the total workforce of the State. In this sense, the agriculture sector is st ill the mainstay of the economy of Odisha. According to the Economic Survey 2010-11 of Odisha, despite wide annual variat ions in its growth, the agriculture sector has grown at an average annual rate of 4.8 per cent in the first three years of the 11th Five Year Plan. The real per capita income of Odisha was 24,356 in 2010-11 which was around 68 per cent of All-India real per capita income of 35,917. According to the 64th round of NSSO, the monthly per capita consumer expenditure (MPCE)3 for rural and urban Odisha is below the respect ive nat ional averages. The Engel's rat io (which measures the share of food expenditure in total expenditure and has been widely used as an indicator of the standard of living) for Odisha, both in rural and urban areas, is generally higher than the all-India level. In the food and non-food consumpt ion behaviour, an average Indian spends more than an average person in Odisha. According to the latest India Human Development report , the ranking of Odisha remained as the second lowest among all the Indian States for a period 1999-00 to 2007-08. In short , the above parameters pinpoint that the State of Odisha has been lagging behind the nat ional economy and highlights the necessity of achieving higher growth on a sustainable manner across the sectors part icularly the agriculture sector in order to uplift the society from underdevelopment and poverty. Though the contribution of agriculture to NSDP has declined, the percentage of workforce engaged in agriculture has remained somewhat unchanged. This implies that (a) there has been an overcrowding in agriculture without any percept ible increase in product ion and (b) there has been an increase in disguised unemployment or underemployment in the agriculture sector with zero or near zero marginal product ivity of agricultural labour. Agriculture production in Odisha Odisha is an agrarian state with 70 per cent of the populat ion of the State dependent on agriculture. The State has about 64.09 lakh hectares of cult ivable area out of a total geographical area of 155.71 lakh hectares, of which 60.18 lakh hectares is the net area sown. As ment ioned earlier, agriculture contributes about 20 per cent of the Net State Domest ic Product of the State (Table 3). Table 3

Percentage Share of Agriculture NSDP of Odisha vis-a-vis all India NDP

Items / Sectors 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Odisha

Agriculture & allied act ivit ies

25.5 25.2 22.8 22.0 20.8 21.1 20.6



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of which :

Agriculture 79.5 79.5 79.2 79.8 79.2 81.4 81.3

Forestry & logging 15.0 14.9 15.1 14.6 14.9 13.4 13.3

Fishing 5.6 5.6 5.6 5.6 5.9 5.2 5.5

India

Agriculture & allied act ivit ies

19.9 19.1 18.1 17.5 16.4 15.2 15.0

of which :

Agriculture 84.0 84.3 84.3 84.8 84.4 84.2 84.7

Forestry & logging 11.5 11.2 11.1 10.6 10.9 11.2 10.8

Fishing 4.5 4.5 4.6 4.6 4.7 4.6 4.5

Sources : 1. Central Stat ist ical Organisat ion, Government of India

2. Economic Survey 2010-11, Government of Odisha The performance of two major crops of the State are briefly summarized below. Rice With 6.9 million tonnes of rice, the State stood fifth in rice product ion during 2011-12. This const ituted 6.7 per cent of the total product ion of 102.7 million tonnes in the country as against 5.4 per cent and 7.8 per cent during 2000-01 and 2004-05 respect ively (Table 4). The t rend in rice product ion in the State showed that though product ion of the crop has increased in absolute terms over the years, its share at all-India level has declined in recent years. This can be possibly att ributed to higher growth of product ion of rice in other parts of the country. In recent years, area and yield of rice in the State has lagged behind the all-India levels. Area under rice declined by 3.0 per cent during 2010-11 and yield by 2.2 per cent during 2011-12. Table 4

Area, Production and Yield of Major Crops : India and Odisha

(per cent)

State / India

Share in All India Growth Rate 2011-12 2000-01 2004-05 2011-12

A P A P A P A P Y

Rice

Odisha 9.9 5.4 10.7 7.8 9.7 6.7 2.3 0.0 -2.2

All India 100 100 100 100 100 100 4.3 7.8 3.3

Pulses

Odisha 3.0 1.9 2.8 1.9 3.3 2.5 -1.7 3.7 5.5

All India 100 100 100 100 100 100 -3.2 -4.5 -1.4

Coarse Cereals

Odisha 0.7 0.5 0.6 0.5 0.7 0.6 -11.7 -29.3 -19.9



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All India 100 100 100 100 100 100 -3.2 -0.3 2.9

Oilseeds

Odisha 1.2 0.6 1.1 0.7 1.2 0.6 7.0 8.1 1.0

All India 100 100 100 100 100 100 0.6 -1.8 -2.4

Sugarcane

Odisha 0.4 0.2 0.4 0.4 0.2 0.2 -4.3 -19.5 -15.8

All India 100 100 100 100 100 100 2.8 2.6 -0.2

Cotton

Odisha 0.5 0.5 0.5 0.7 0.8 1.0 37.8 30.0 -5.6

All India 100 100 100 100 100 100 9.3 2.0 -6.7

Jute & mesta

Odisha 0.5 0.4 0.3 0.4 2.0 0.9 -5.2 -6.3 -1.0

All India 100 100 100 100 100 100 5.0 9.7 -89.6

A : Area;

P : Product ion;

Y : Yield.

Source : Ministry of Agriculture, Government of India. Pulse In recent years, product ion of pulses have picked up more significant ly than other crops in the State. The State produced 0.4 million tonnes of pulses during 2011-12 const itut ing 2.5 per cent of all India product ion of pulses during the year. The State produced around 0.2 million tonnes of pulses during 2000-01 and 2004-05, constitut ing around 2.0 per cent of all India pulses product ion for the respect ive years. During 2010-11 and 2011-12, area under pulses cult ivat ion in the States had declined while yield has marginally increased. D. Issues & challenges of agriculture sector in Odisha Let me now highlight some of the macro and micro factors posing challenges to the sector in the State. The macro factors include lack of sustained growth in the primary sector, instability of the food grain markets in terms of access & price and lack of basic infrastructure. The micro factors include lack of access to and control over resources such as land and common property resources like water, forest and public lands, degenerat ion and degradat ion of land and forest resources, lack of capacity development and structural support for entrepreneurship. Despite several policy measures, Odisha remains one of the most agriculturally backward states of India. Agricultural product ivity in Odisha remains quite low due to t radit ional farming pract ices, low use of high yielding variety seeds, chemical fert iliser, organic manure; uneconomic size of operat ional holding, incidence of high tenancy, low capital format ion and investment in agriculture, inadequate rural infrastructure and services and inappropriate policy environment. The low applicat ion of two important yield enhancing



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inputs like irrigat ion and fert iliser are considered to be the most immediate and important determining factors responsible for low agricultural productivity in Odisha. In brief, agricultural development of Odisha is faced with several challenges which are more or less common with issues being faced at the nat ional level except in certain areas. Thus, the SWOT analysis of agriculture in Odisha would reveal both common and idiosyncratic features (Exhibit 1). I would briefly dwell on a few of the features relat ing to weaknesses and threats. Exhibit 1

SWOT Analysis of Agriculture in Odisha

Strengths Weaknesses

a) Ten agro-climat ic zones a) Poor land utilizat ion and soil quality

b) Abundant inland water b) Preponderance of small / marginal size of land holdings

c) Wide network of KVKs and RSETIs c) Low level of crop diversity

d) Favourable terrain for water reservoirs and power generat ion

d) Low levels of mechanizat ion

e) Large coverage of KCCs e) Low level of irrigat ion

f) Diverse forest wealth f) Low fert ilizer usage

g) Low cost of living g) Low seed replacement rat io

h) Act ive involvement of the State Government

h) Low product ivity

i) Long coast line i) Low capital format ion

j) Preponderance of rural branches of commercial banks

j) Inadequate extension support

k) Inadequate agriculture financing

l) Low usage of power for agriculture

m) Poor post-harvest management

n) Poor market ing, t ransport and physical infrastructure facilit ies

o) Exploitat ion by middlemen in market chain

p) Poor quality livestock - inadequate coverage of art ificial inseminat ion (AI)

q) Poor risk management and insurance coverage

r) Absence of agripreneurs

Opportunities Threats / Challenges

a) Huge scope for groundwater exploitat ion as only 18 per cent of the potent ial has been exploited

a) Recurrence of natural calamit ies



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b) Scope for mixed / integrated farming b) Improper water management systems

c) Varied agro-climat ic condit ions and abundant highlands conducive for hort iculture

c) Reducing area under cult ivat ion

d) Scope for crop diversificat ion d) Absence of suitable cropping patterns for various agro-climat ic zones

e) Special schemes like Bringing Green Revolut ion in Eastern India, Nat ional Hort iculture Mission, Rashtriya Krishi Vikas Yojana (RKVY), MGNRES, Integrated Scheme for Oilseeds, etc.

e) Poor disseminat ion of agri-technology

f) Farm mechanizat ion is on the rise as labour availability is constrained

f) Changing food habits and preference for wheat and corn based eateries

g) Agro-based industries g) Climat ic changes and its impact on agriculture

h) Leveraging large number of KCCs h) Uncertainty about market stability and non-remunerat ive prices for farmers

i) Scope for organic cult ivation due to low usage of chemical fert ilizers

i) Exploitat ion by middlemen in market chain

j) Scope for set t ing up organic waste based compost ing units and green fert ilizers

j) Increasing degradat ion of soil

k) Cluster approach for dairy development enterprises

k) Increasing labour shortage

l) Encouraging PACS (who are showing signs of improvement) and farmers' organizat ions

l) Excessive focus on credit rather than credit plus approach

m) Pro-act ive inst itutional arrangements - SLBC / DCCs

m) Concerns relat ing to credit culture

n) Financial inclusion plans of the banks

o) Development of inward, brackish water and marine fisheries

p) Abundant water resources for fisheries and irrigat ion

Poor land utilization pattern and soil quality Over the period of 10 years between 1999-2000 and 2009-10, the total cult ivable area has reportedly gone down from about 72 lakh hectare to 68 lakh hectare, with net sown area reducing from 61 lakh ha to 56 lakh ha. The current fallow lands, however, have grown from 6.8 lakh ha to 8.35 lakh ha during this period. About two thirds of the cult ivable land is acidic with varying degree of acidity. Further, about seven per cent of the cult ivable land is affected with salinity. Despite 117 per cent growth in area under irrigation during the same period and average cropping intensity having gone up from 137 per cent to 163 per



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cent, there is overall stagnancy in gross cropped area as also the agricultural product ion and product ivity in the State. Present infrastructure for soil test ing is grossly inadequate and farmers do not have a culture for undertaking soil test ing. The process of deteriorat ion of the quality of soil is further hastened by unscientific usage of fert ilizers. This clearly underlines the need for one-stop solut ions for soil test ing, diagnosis and ameliorat ion advice to farmers. There is a strong case for encouraging set t ing up of agri-clinic & agri-business centres by private entrepreneurs. Also, organic and green manures have to be encouraged to make up the stagnant supply of chemical fert ilizers. Various projects to encourage compost ing and linkages for product ion of green manures, bio-fert ilizers and bio-pest icides have to be supported by various agencies of the governments and banks. Preponderance of small / marginal size of land holdings The agriculture sector in the State is characterized by the preponderance of small / marginal farmers / agricultural labourers with more than 86 per cent farmers holding land less than 2 hectares and 60 per cent of the farmers having less than 1 hectares land or no land at all. As per the latest available figures of Agricultural Census, about 26 lakh marginal farmers (const itut ing 60 per cent of farmers) are holding 33.50 lakh acre land (const ituting 27 per cent of total land) with an average of around 1.3 acre land per holding. Similarly, 11.60 lakh farmers in the small farmers category hold about 40 lakh acre land (const itut ing 31 per cent of total land). Thus, 58 per cent of the land is held by 86 per cent farmers while the rest about 6 lakh farmers (const itut ing 14 per cent of total number of farmers) hold about 52 lakh acre land (const itut ing 42 per cent of total land) with an average of about 8.67 acres. This indicates towards the skewed assets distribut ion of land and calls for appropriate strategies in favour of the small and marginal farmers. The situat ion is further aggravated by the rising land fragmentat ion on account of disintegrat ing family systems in rural Odisha and cont inuing dependence of large populat ion on the sector. Thisis a pointer towards the need for legislat ion to check large scale land fragmentat ion in near future. The small land holdings also lead to low levels of risk taking capacity, technology adopt ion, farm mechanizat ion and fertilizer applicat ion, result ing in low levels of investment as also the low farm product ivity. Low level of crop diversity The crop diversity is very minimal in the State though some efforts have been init iated in some parts of the State. Some farmers are adopt ing floriculture, onion, turmeric and mushroom cult ivat ion as a diversificat ion away from tradit ional crops. The diversificat ion in crops, however, is suffering from inappropriate market linkages, lack of infrastructure like cold storages / onion storages / rural godowns, etc. despite the Government of India Scheme for support ing Agricultural Market ing Infrastructure. As on date there are only around 300 rural godowns / storages set up under this scheme in Odisha with limited storage capacity with no accreditat ions (only one storage of Central Warehousing Corporat ion in Rayagada is having accreditat ion in the whole State of Odisha).



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Low farm mechanisation - insignificant use of power Mechanized agriculture is the process of using agricultural machinery to mechanize the work of agriculture in order to increase farm output and farm worker product ivity. The product ivity measures warrant intensive farm mechanisat ion which needs to be supported with adequate supply of power and other infrastructures. In this context , the low level of consumpt ion of power which is crit ical for mechanisat ion of agriculture indicates the lack of modernisat ion of the agriculture sector in the State (Table 5). Table 5

Sectoral power consumption in Odisha

(in million unit )

Year Industry Irrigation & Agriculture

2000-01 2622(43.06) 186(3.05)

2004-05 3742(49.25) 147(1.93)

2009-10 6114(50.02) 153(1.25)

Figures in brackets are percentage to the total consumpt ion of power in Odisha

Source : Economic Survey 2010-11, Government of Odishaa As maybe seen power consumpt ion for agriculture has been less than two per cent against all-India figure of about 30 per cent. Low level of irrigation The extent of usage of fert ilizers, rainfall, per cent gross cropped area irrigated and size of operat ional holding have a posit ive bearing on the yield of crops. Compared with all India averages, progress in extending areas under irrigat ion in the State has been faster. During 1999-2000, 29.5 per cent of areas under all crops in the State were irrigated which increased to 35.0 per cent by 2008-09. The respect ive all-India levels were, however, much higher at 40.8 per cent and 45.3 per cent . As regard irrigated area for rice product ion increased from 40.7 per cent to 46.8 per cent during this period as against 53.9 per cent to 58.7 per cent at all-India level (Table 6). Table 6

Irrigated Area India and Odisha

(per cent)

Crops 1999-2000 2008-09

Odisha India Odisha India

Rice 40.7 53.9 46.8 58.7

Wheat 100.0 87.2 Not available 91.3

Pulses 6.6 16.1 7.7 16.0

Oilseeds 12.9 25.2 18.7 27.1

Sugarcane 100.0 92.0 100.0 93.7

Cotton 3.6 35.2 Not available 35.3

All Crops 29.5 40.8 35.0 45.3

Source : Ministry of Agriculture, Government of India



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Low usage of fertilizers Fert ilizer consumpt ion in the State, in terms of kilogram per hectare during 2008-09 was very low 61.6 kg as against 128.6 kgs at all-India level (Table 7) i.e. Odisha's per hectare consumpt ion of fert ilizer is less than 50 percent of all India consumpt ion. Similarly, pest icide consumpt ion in the State is much lower than the all-India levels. Table 7

Fertilizer Consumption : India and Odisha

(Kilogram per hectares)

State / India Fertiliser

2007-08 2008-09

N P K Total N P K Total

Odisha kg / Hec 31.22 13.40 7.23 51.85 34.32 17.05 10.28 61.64

Ratio 4.3 1.9 1.0 3.3 1.7 1.0

All India kg / Hec 74.79 28.60 13.67 117.07 77.90 33.69 17.10 128.58

Ratio 5.5 2.1 1.0 4.6 2.0 1.0

N : Nit rogen

P : Phosphorus

K : Potassium

Source : Ministry of Agriculture, Government of India Low productivity Though some of the districts of the State have achieved much higher product ivity levels, the agricultural product ivity remains a matter of concern as the product ivity of some of the major crops in Odisha vis-a-vis some neighbouring states is relat ively low (Table 8). Table 8

Comparative crop productivity during 2009-10

(kg per hectare)

State Paddy Wheat Pulses Foodgrains Oilseeds Vegetable

West Bengal 2611 2650 760 2561 989 17153

Andhra Pradesh

3056 900 722 2441 760 16230

Bihar 1138 2078 801 1570 1036 16188

Jharkhand 1505 1550 734 1320 480 15023

Odisha 1609 1561 460 1258 776 12910

All India Average

2130 2830 625 1798 955 16177

Source : NABARD



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Low capital formation It may noted that the share of capital out lay on agriculture in the total capital outlay declined at the consolidated States level and, more sharply, in Odisha during the second half of 2000s as compared to first half of the decade. The declining trend in the share of capital out lay on agriculture in Odisha as well as for the consolidated States cont inued during 2010-11 (RE). The capital format ion in agriculture remains at around 12 per cent in the State as against nat ional figure of around 20 per cent . However, the share of capital out lay on agriculture in total capital out lay is budgeted to increase 2011-12 both for Odisha and for the consolidated States (Table 9). Table 9

Share of Capital Outlay on Agriculture in Total Capital Outlay

(per cent)

2000-05 (Average)

2005-10 (Average)

2010-11 (RE)

2011-12 (BE)

Odisha 6.0 3.1 1.7 2.7

All States consolidated 5.1 4.3 2.4 2.8

BE : Budget Est imates. E. Inadequate agriculture financing Banking network As at end-June 2011, there were 46 scheduled commercial banks operat ing in Odisha including 25 public sector banks, 14 private sector banks, five regional rural banks (RRBs) and two foreign banks. The total number of branches of scheduled commercial banks (excluding RRBs) in the State was 2,136 at end-June 2011. The populat ion group-wise distribut ion of these branches indicates that rural branches accounted for 45.5 per cent of the total number of branches in the State, as against their share of 29.2 per cent at the all-India level (Table 10). Table 10

Banking outreach in Odisha

(amount in Rupees billion)

Total Rural

Odisha India Odisha India

Business / Branch 0.52 1.04 0.19 0.24

Deposit / Office 0.35 0.60 0.13 0.15

Credit / Office 0.17 0.45 0.07 0.09

Populat ion / Branch 13936 13425 20168 24859

Per capita deposit ( ) 25,116 44,379 6,355 5,967

Per capita credit ( ) 12,469 33,369 3,303 3,571

Source : Quarterly Statist ics on Deposit and Credit of Scheduled Commercial Banks



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CD ratio and credit profile The credit -deposit (C-D) rat io of scheduled commercial banks (excluding RRBs) in Odisha stood at 49.2 per cent , at end-June 2011 which was lower than at end-June 2010 level and was lower than the all-India level posit ion of 75.6 per cent . Further, urban branches accounted for the maximum share of 65.6 per cent in outstanding bank credit of scheduled commercial banks in Odisha, followed by semi-urban branches (17.6 per cent) reflect ing skewed credit flow to the agriculture sector in the State despite preponderance of rural branches. Agriculture credit As per the latest available data in Odisha, the share of agriculture in the total credit deployed recorded an increase to 16.5 per cent from 14.8 per cent as at end-March 2010 while the share of industry stood highest at 32.7 per cent followed by personal loans (23.8 per cent) during the same period. The flow of credit to the agriculture sector during the last decade, however, remained highly volat ile vis-a-vis the t rend exhibited at the nat ional level. This part ly reflects the unstable agricultural product ion in Odisha and can be partly explained by recurrence of natural calamit ies like droughts and floods and insufficient and inadequate support system (Chart 1). Chart 1 Trends in Agriculture Credit by Scheduled Commercial Banks

At end-March 2011, the share of priority sector advances in total bank credit in the State was 49.2 per cent as compared with 32.8 per cent at the all-India level. Within the priority sector advances in Odisha, the share of advances to agriculture was highest (41.6 per cent), followed by small enterprises (37.3 per cent) and housing loans (15.3 per cent). Recovery performance for advances to agriculture in the State was lower as compared with the all-India posit ion during 2009-10. The percentage of recovery to total demand for direct advances to agriculture by all scheduled commercial banks in Odisha decreased to 56.5 per cent at end-June 2010 from 63.7 per cent at end-June 2009. It needs to be emphasized that steady and sustainable flow of credit to the sector would crit ically depend on a healthy credit culture. Recovery performance needs and can be improved, among others, if (a) banks take proactive steps for cont inuous and meaningful engagement with the borrowers, (b) State machinery plays a proact ive role, (c) necessary amendments are effected in Odisha Public Debt Recovery Act (OPDR Act), and (e) establishment of agri-risk fund. It would be essent ial for the banks to provide finance for the ent ire cash flow requirement of the farmer family - both short term and long term purposes and for purposes such as debt swap and for other personal and business requirements. It is also necessary that banks look at opportunit ies for financing agri-business ent it ies, niche agriculture, allied



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sectors and supply chains for strengthening forward and backward linkages. Here a crit ical factor would be the availability of t rained and commit ted manpower with the financing inst itut ions and visible thrust and commitment of senior management of these inst itut ions rather than mere stress on achievement of the targets. 34. Another aspect of urgent relevance in the State is the lack of access of the bank credit to the tenant farmers and oral lesses. Andhra Pradesh and West Bengal have taken init iat ives for making the tenant farmers / oral lessees eligible for bank credit through joint liability group (JLG) mode and Licensing Mode. Though the JLG movement has picked up in the State yet it is observed that the off-take of credit by such JLGs is st ill not substant ial enough and the JLG farmers are able to access small amount of loans only and the landless people are being given loans on no-farm act ivit ies rather than in proport ion of the land they cult ivate on account of the fact that their land cult ivation is not being recognised in absence of any records of their t illage. F. Way forward Having highlighted some of the major issues and challenges facing the State for developing the sector, let me try and suggest a broad framework which may form the way forward for enhancing agriculture product ion and product ivity in the State and income level of farmers and make the sector viable and sustainable. The strategy should, among other things, focus on improving upon the exist ing crop system, diversificat ion of crop pat tern and curing the less fert ile lands. The strategy should also be aim at addressing the issues related to supply management of crit ical inputs like seeds and fert ilisers, appropriate cost effect ive farm mechanizat ion, appropriated post -harvest arrangements to tackle incidence of distress sale and ensuring adequate flow of credit . We may also consider adopt ing models for synergizing the efforts of farmers, more part icularly small and marginal farmers. One such approach could be a congregat ion model which ensures grouping of farmers, part icularly the small and marginal farmers, who do not have individual capacit ies by way of producer companies / co-operat ives / JLGs. For providing the much needed momentum to a new Green Revolut ion in the State, a framework based on the acronym F.A.R.M.E.R. could be considered. Each let ter of the word has a linkage, direct or indirect , to the livelihood of the farmers and development of agriculture (Exhibit 2).

Exhibit 2

Framework based on F.A.R.M.E.R.

F Finance

Credit availability should be t imely and adequate. It is not only credit but also a holist ic package of financial services including credit (product ion and post-product ion), savings and insurance that needs to be kept in view. It is important to note that finance is a crit ical input which can command all other resources required for farming. Besides crop loan, investment credit would be very crit ical for long term sustainability of agriculture.

A Allied act ivit ies

It is through increased income of the farm families through diversificat ion (for example, a milch cow provides a daily cash flow to the household which can sustain them in the periods of dist ress arising out of crop loss). Allied act ivit ies act as a hedge against the



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downsides in agriculture. It is also imperat ive to encourage mixed / integrated farming.

R Risk Mit igat ion

Risk mit igat ion measures against price, product ion and personal risks like crop and weather insurance, health insurance, etc. are very crit ical for maintaining the health of the rural financial system and ensuring the viability of the agricultural sector. Some of these can be bundled and provided as a package to the farmers as micro insurance. Contract farming, corporate farming and producer companies are some of the models of congregat ion, integration and linkages which should be explored to safeguard the interest of small and marginal farmers. Crop diversificat ion / mixed / integrate farming and effect ive extension support are also essent ial for risk mit igat ion.

M Market ing Access

Efficient market ing which would include innovat ive approaches, such as, the Producer Companies, Contract Farming, Value Chain Agro Processing and Agri-Business are part icularly important for the small and marginal farmers. Price support system would also play a crit ical role in ensuring remunerat ive return to the farmers.

E Extension & research

Research and extension linkages should comprise of all the four crit ical pairs of L's Lab to Land, Land to Lab, Land to Land and Lab to Lab. It needs to be appreciated that the quality extension and research services in a cost effect ive manner is a sine qua non for product ivity enhancement and risk mit igat ion. There is a great scope to bring about convergence among the schemes / efforts of several agencies, both public and private, banks and NGOs and using ICT based solut ions for meaningful extension act ivit ies.

R Resources other than finance

Timely and adequate availability of other crit ical resources other than finance, i.e., inputs like water, seed, healthy soil, fertilizer, pest icides, farm implements, storage and warehousing facilit ies and skilled and product ive human resources, efficient supply chains, etc. are very important to ensure that agriculture remains a remunerat ive and at tract ive vocat ion.

As this Conclave has stakeholders from Government, government agencies, financial inst itut ions and research inst itute, I shall be highlighting the crit icality of one of the components, i.e., 'R' which pertains to resources other than finance. This component broadly encompasses seed related issues, extension systems, soil health, farm mechanisat ion, etc. In this context let me highlight a few important issues. Extension system The State of Odisha has several premier institut ions for undertaking research but the Agricultural Extension System in the State remains in almost a dormant stage. Krishi Vigyan Kendra (KVKs) and the Rural Self Employment Training Inst itutes (RSETIs) are established and in existence in almost all dist ricts. Yet the effect ive technology extension and adopt ion is rather limited. The exist ing system of State Extension Machinery has its limitat ions of outreach and financial resources and not many efforts have been made for creat ion of local skills for technology disseminat ion. Hence it is important that the



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alternative / supplementary extension systems are encouraged. The digital / electronic / space technology / mobile telephone systems of providing technology and periodic advisories to farmers have to be examined for cost effect ive adopt ion. I would urge the sub-commit tee of the SLBC set up in this regard should come out early with a monitorable act ion plan for holist ic extension support to the farmers. Seed related issues There is an urgent need to design a seed availability program which will include adequate seed replacement strategies, ensuring t imely availability of seeds of desired variety in required quant ity and finance to seed producers. In order to encourage decentralized product ion of seeds, authorit ies may consider set t ing up of local exchanges and enabling NGOs to play a greater role. Commercial banks should provide higher scales of finance to the seed growers owing to larger cost involved. They should also consider working capital / term loans for seeds processing and market ing societ ies of farmers or the NGOs promot ing such seed product ion / processing / market ing. Soil health and nutrition It is a fact that the present infrastructure for soil test ing is grossly inadequate and farmers do not have a culture for undertaking soil testing. The consumpt ion of fertilizers is often low and not backed by findings of scient ific soil test ing reports. To incentivise development of such a culture use of Kishan Credit Cards could be linked to Soil Health Cards. Thus, there is a need for one-stop solut ions for soil test ing, diagnosis and ameliorat ion advice to farmers. There is a need for the PACS to play an important role in this regard apart from encouraging private agri-clinics & agri-business centres. Organic manures and green manures have to be encouraged to make up the stagnant supply of chemical fert ilizers. Various projects to encourage compost ing and linkages for product ion of green manures, bio-fert ilizers and bio-pest icides have to be supported by the State Government and the financial inst itutions. Farm mechanisation The data on farm-hands availability indicates declining availability of farm labour. The product ivity measures also require extensive farm mechanisat ion both for the small implements as also capital intensive big farm machines. As small farmers may not be able to afford individual ownership of farm machines, group models or the custom-hiring models need to be considered. PACS can be considered and developed as Farm Mechanisat ion Hubs to provide farm machines to its members on hiring basis. The Farmers' Clubs, Village Watershed Commit tees / Wadi Commit tees should also be encouraged for creat ing their own farm machines hubs. After-sales services for farm-machines are abysmally poor in most of the parts of the State. Individual trained entrepreneurs have to be encouraged to take up farm-machines servicing enterprises. Banks need to encourage financing of various small farm machines rather than restrict ing financing to big farmers for tractors and power-t illers. Irrigation Irrigation is largely a State init iative in Odisha and very lit t le financing is being done by the commercial banks. The State Government has been providing huge amount of subsidy and tubewells are being established through the state agencies. In some of the schemes



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the subsidy is as high as 80 per cent . Hence, banks may find it profitable to enhance investment credit by financing such irrigat ion projects. There is also a need to look beyond the tubewells. Drip and Sprinkler systems is one such alternate which has t remendous potent ial. Storage & marketing Shortage of storage space often leads to substant ial post-harvest losses yet there are a very few init iat ives for set t ing up large storage structures. Terminal markets are almost non-existent and organized mandis / APMCs are also not very act ive despite amendments in APMC Act. Cold Chain arrangements for vegetables and fruits remain non-existent in the State. Therefore, it is important that the part icipat ion of private sector is encouraged in large proport ion. G. Concluding Thoughts In the last 50 years, Odisha has lost nearly a decade by way of natural calamit ies. This has severely affected the development of the State and part icularly the agriculture sector. Many studies have empirically proved that agricultural growth is more poverty reducing than growth in non-agricultural sectors implying that rural poverty reduct ion has been associated with growth in agriculture and product ivity. A study by Ligon et al (2007) concluded that GDP growth originat ing in agriculture is at least twice as effect ive in reducing poverty as GDP growth originat ing in other sectors of economy. Given the incidence of poverty in Odisha which stood at 46.4 per cent as against the all-India level of 27.5 per cent , the importance of agriculture growth in the State cannot be understated. Here it will be important to stress the proact ive role that can be played by exist ing inst itut ional arrangements like SLBC for cont inuous evaluat ion and monitoring of the developments in the sector in a holist ic manner. I feel extremely happy to be here to share my thoughts on the issues and challenges for the sector in the state with such a learned and knowledgeable audience. It is fair to set high expectat ions from such a conclave for set t ing an exact ing yet achievable agenda with concrete act ion plans which will lead to significant and rapid t ransformat ion of the sector in the state in the next few years. I am sure this conclave will provide a st imulat ing plat form for all the stakeholders interested in the development of the agriculture of the State to interact and enable convergence of views. This conclave should pave way for the development of the agriculture sector in Odisha towards greater product ion and product ivity, higher income levels for the farmer and profitable business opportunit ies for the financing inst itut ions. The consequent rapid t ransformat ion of the agricultural sector should enable all the stakeholders to reap the benefits on a sustainable basis in Odisha which has to play a key role in the scheme of Bringing Green Revolut ion to Eastern India. I will like to end, rather start , with great expectat ions about the outcome of the conclave. Thank you all. --------------------------------------- 1 Keynote address by Shri Harun R Khan, Deputy Governor, Reserve Bank of India delivered at the

Conclave on 'Agriculture Agenda for Odisha' on February 24, 2012 at Bhubaneswar. The speaker acknowledges the contribut ions of Shri. K. K. Gupta, NABARD, Bhubaneswar, Shri. B. S.



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Choudhary, Reserve Bank of India, Bhubaneswar, Shri. Suraj. S and Shri Surajit Bose, Reserve Bank of India, Mumbai.

2 Disaggregated data on Net State Domestic Product (NSDP) at 2004-05 prices for the State of Odisha are available up to 2010-11 from Central Stat ist ics Office (CSO).

3 The monthly per capita consumer expenditure is an important socio-economic indicator and is used to compare the standard of living and calculate the extent of poverty.

BCSBI, Customer Service and Consumer Protection-Issues and Challenges

Dr. K. C. Chakrabarty Shri A.C. Mahajan, Chairman BCSBI, Shri M. M. Chitale, Shri H. N. Sinor, Shri C. Krishnan, members of the Governing Council of BCSBI, Shri N Raja CEO, BCSBI, delegates to the Conference, Ladies and Gent lemen, it gives me great pleasure to be in your midst today and share with you some of my thoughts concerning quality of customer care and service in our banking industry. The BCSBI has been in existence for six years now and has done a commendable job in this short span of t ime. Two codes have already been put out and have been / will be reviewed from t ime to t ime. The quest ion that has always cropped up in my mind is about the standards of customer service. If we were to go by the spirit of the Codes issued by the BCSBI, adherence to the Codes is the minimum acceptable benchmark for quality of customer care. If that is so how far are we from achieving excellence in this area? As we expect our children to do better in every exam and are absolutely ruthless or unhappy if the child has secured the minimum marks required to be declared successful, in the same analogy mere adherence to the Code does not mean we are doing everything right to make the grade. The quest ion therefore is what is it that we need to do going beyond the Code, especially this being a voluntary effort which many banks have willingly decided to undertake. The BCSBI codes do have a requirement for banks to act "fairly and reasonably" towards customers, but in a majority of the cases it appears to amount to lit t le more than st icking to the contracts and agreements customers effect ively sign up to when opening accounts or taking a loan. There are certain areas where a tougher more explicit code would be worth considering. I will be touching on some of these areas as we go ahead. The first and foremost issue that springs to my mind is that of at t itude. The key to a prompt, effect ive and courteous customer service emanates from having the right at t itude. There are many inst itut ions that declare the famous quote by Mahatma Gandhi that customer is king and the very reason for the existence of the enterprise. But is it reflected in employee behaviour at the ground level. Does the Board / Top Management have the right at t itude towards customers. Do the banks have a policy of assigning a unique identity to all customers? If not , can we accurately say how many customers a bank has? Most of the t ime, the figures given are that of the number of accounts. But by doing so, essent ially we are not different iating between a ledger page and a customer. So, in my opinion, a radical t ransformat ion of at t itude right from Top Management to ground level employees is the first step towards improving customer service. The challenge for all of us in the banking industry is to develop the right kind of at t itude to render service. Can we define the standards of behaviour? Perhaps it may be easier to ident ify the elements of unacceptable behaviour and try to redress and improve the



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situat ion. The behaviour standards especially of the front-line managers are implicit in the acceptance of the codes by the banks. Communicat ion is at the root of effect ive customer care in a service industry especially like banking, where the documents, terms and condit ions, practices & precedents are all heavily loaded against the customer. How do you communicate with the customers when a complaint is lodged? Do you inform him how soon it will be resolved and give him a complaint number? How effect ive and t imely is your customer grievance redressal system? Do you have a system of analysing the average t ime taken to resolve complaints and monitor the consumer complaints? In an arrangement that is based on terms of agreement that are unequal, enforceability of contracts poses a major challenge. Introduct ion of Most Important Terms and Condit ions (MITC) for all major products and services offered by banks is expected to help the consumers analyze the suitability of a product from their perspect ive. Many bank customers walk into a branch with a rough sketch of what they want. We must understand the customer's needs and sell him what he / she needs. The MITCs must be dist inguishable from market ing or promot ional material. Web based informat ion is becoming an extensive source of communicat ion with bank customers. How many banks can give a commitment that they will prompt ly update their web sites to reflect any and every change in pricing of their products / services, MITCs governing important products / services, change in working hours, change in key personnel etc.? Compensat ion policies - The banks have framed and placed in public domain their compensat ion policies for customers for any lapses or loss that may be caused by a mistake on the bank's part . The quest ion that arises is, in how many cases have the banks paid such compensat ion on realizing their mistake and without the customer begging for it? An example in point can be the case of cheques vanishing from the drop boxes in which they have been deposited by the customers. Can the banks come forward and commit that it is their responsibility to ensure safety of instruments in the drop boxes? When a customer complains about such things he / she is made to run from pillar to post to gather evidence to establish the fact that the cheque was indeed dropped by him / her in the box meant for the purpose. Should the banks not compensate him / her on the principle of reciprocity? In many fields and in different countries regulators determine the price. But, the financial sector regulator in India does not do so. Therefore whatever charges are levied it is expected that they are reasonable. And that the pricing must be fair, transparent and non-discriminatory. Globally, regulators are expected to usher in much stricter regulat ions in the area of fair t reatment to customers. Coverage of special category customers - As we move towards introducing global best pract ices in banking, an important element in the area of customer care is the special focus which students, senior cit izens, physically challenged persons, vulnerable sect ions of the populat ion must get from the financial services industry. These init iat ives too need to be codified and their implementat ion monitored by the code compliance officers.



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Lending responsibility - At a t ime when all banks are in a hurry to be one up on the other, at least in the matter of advert ising speedier sanct ion of loans, responsible lending is worth considering. I agree that people should take responsibility for their borrowing and anything that could limit people's economic freedom should be considered with caut ion. But the code current ly side-steps the issue by leaving the test for responsible lending as whatever the banks "believe" the borrower can pay back. To err is human, to confess is divine - I would be happy to see the banks revisit ing the cases of customers who had been wronged but there was no rest itut ion in their favour because they did not complain either to the bank or to the Banking Ombudsman. Why is it that the regulator should be forced to look at class act ion? The BCSBI may like to examine the possibility of incorporat ing such a provision in the Bank's Code of Commitment to Customers. Disclosures - Bank staff do not tell customers when they are t rying to sell a credit card or an insurance policy or a mutual fund that they may be incent ivized through some compensat ion schemes. At the very least set t ing out the terms of incent ive schemes in a customer brochure may be acceptable. There are instances where the pricing and operat ional freedom conferred on banks is by means of general guidelines that may become a subject matter of interpretat ion. How many banks are willing to go an extra mile and interpret the guidelines in favour of customers? The discriminatory pract ices that banks adopt while sanct ioning loans on a float ing interest rate basis to new borrowers is possibly the best example in this regard. A factor which impedes easy comparison of rates among banks is differences in processing charges / documentat ion fee / renewal fee / compounding periods, etc. One of the measures which is globally adopted is to announce an Annualised Effect ive Rate taking into account all types of charges over and above the interest rate. The same can be done with deposit rate. This will be great enabler for easy comparison. Family law proceedings / succession issues - No matter what the terms and condit ions of a joint account or nominat ion facility are, bankers st ill get fixated on the legal provisions that were never a part of the account opening process, while set t ling claims of deceased depositors or t ransferring the amounts to the nominees. The pract ices in this regards not only differ from one bank to another but within the same bank there are diametrically opposite view points at two different branches on such matters. Nobody is keen on following the model policy evolved by the IBA for the purpose. Can the BCSBI's codes be made more effect ive to address these issues faced by the common persons? There are problems faced by couples busy in divorce proceedings, when it comes to transfer of t it le deeds of immoveable propert ies where a home loan may have been joint ly taken in the name of the husband and wife. These are the new realit ies of a fast changing world and we must address these as a part of our commitment to the bank customers. There are a couple of areas which deserves our at tent ion from a customer protect ion point of view. The first is that of electronic banking / card banking. Electronic funds t ransfers, internet based banking transact ions, card banking are on the rise and are throwing up issues / challenges one might not have ant icipated. The banking agreement is so worded as to afford no right to the customer and is extremely lopsided. Banks are not



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responsible for any unauthorized t ransact ions even if by their employees. In fact , given an inst itut ions resources, the onus should be on banks to prove that the individual customer has compromised his userid / password. Making networks safe and sound is the responsibility of banks, there must be in place a code of conduct for addressing issues in the non-face - to - face t ransact ions domain. This code could help evaluate the preparedness of individual banks that are willing to offer such services. This code could cover networking arrangements, audit t rails, complaint invest igat ion and resolut ion procedure, liability in case of system or equipment malfunct ion, liability for unauthorized t ransact ions etc. The second is when the customer is in distress- rehabilitat ion of sick units, or when small borrowers / farmers are in distress. While banks do advert ise that they have good framework for rehabilitat ion of sick units, but a look at the percent of sick units being nursed back tells a different story. There is a need to improve the number of units that are successfully nursed back. Last ly, I would like to ment ion the issue of selling third party products such as insurance, capital markets etc. which is becoming increasingly relevant from a customer protection point of view. Whether the customers especially those small and poor understand what is being sold to them Electronic funds t ransfers, internet based banking t ransact ions are on the rise and are throwing up issues / challenges one might not have ant icipated. Making networks safe and sound is the responsibility of banks, there must be in place a code of conduct for addressing issues in the non-face - to - face t ransact ions domain. This code could help evaluate the preparedness of individual banks that are willing to offer such services. This code could cover networking arrangements, audit trails, complaint invest igat ion and resolut ion procedure, liability in case of system or equipment malfunct ion, liability for unauthorized t ransact ions etc. Review of the Codes - The BCSBI has reviewed one of the two codes issued by it and the other one is in the process of being updated. Do we have a mechanism of an independent review of the codes with feedback from all the stakeholders who are interested in the subject? Australia, for example, mandatorily undertakes a review of its Code of Banking Pract ices every three years. Can we have some such arrangement in place? The two sets of codes having been issued by the BCSBI and taken up for implementat ion by banks, there is a case for examining the need for lengthy documents that banks st ill insist on gett ing executed especially in relation to loan products. Can we really and seriously make an effort to rat ionalize and simplify the documents and documentat ion process and publish it as our commitment to the customers? There are new avenues of taking banking to the people. One important challenge in this area is the success of the BC led banking / financial inclusion model. The code of bank's commitments to customers' needs to art iculate the act ions to be taken by the bank while select ing a BC and the t raining that he / she will be provided to undertake or execute financial t ransact ions on behalf of the bank. "Financial Inclusion" is high on the agenda of the Government and the Reserve Bank of India. Can we evolve a code for development and implementat ion of financial inclusion plans and place them in the public domain as a part of our corporate social responsibility?



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Credit informat ion bureaus are of very recent origin in India. Many individuals are not aware of the existence of such inst itutions and are shocked to find their names appearing in the defaulters list making it difficult for them to access the banking system for their credit needs. The banks need to take up customer educat ion in this regard as a part of their code of commitments. The report ing methodology, implicat ions of report ing, rect ificat ion mechanism, and remedy for wrong reporting must be properly communicated to all the customers. Financial literacy and educat ion are becoming increasingly important . The inputs in this regard could be made available in different formats including large print , Braille, DVD, audio etc. The RBI had set up a Commit tee, under the Chairmanship of former SEBI Chairman Shri M Damodaran, to look into the ent ire gamut of customer service related issues in the banking industry including a review of the Banking Ombudsman Scheme. The total number of recommendat ions made by the Commit tee in its report was 232. Of these total recommendat ions, 22 are to be examined by the RBI / Government. The remaining 210 recommendat ions have to be examined for acceptance and implementat ion by the banking industry. The IBA has already issued operat ional guidelines in respect of 88 recommendat ions. In respect of 38 other recommendat ions the IBA init ially had said no comments. "No comments" according to me is an acceptance of these recommendat ions and it should not be difficult for the IBA to issue clear guidelines in regard to these recommendat ions. There remain a few other recommendat ions on which the banks and the IBA had earlier expressed strong reservat ions. At a meet ing held with the leading bankers on December 16, 201, I have urged my banker friends to revisit the important issues in the light of internat ional best pract ices, the need for protect ing our consumers against fraud, the availability of insurance products to protect individuals from such frauds and finally a clearly spelt out compensat ion policy that is communicated to the customers upfront . The major areas of concern are internet banking related misuse / abuse, ATM related service deficiencies, loss of credit / debit cards and extent of card holders' liability in such an event, penalty for not adhering to the AQB discipline etc. An important recommendat ion made by the Damodaran Committee was about banks appoint ing an Internal Ombudsman. This idea needs to be followed up and implemented proact ively in the interest of consumer protect ion and impartial / t ransparent dealings. The common problems faced by customers very frequent ly pertain to ATM issues, pensions, levy of service charges without prior int imat ion, credit card related issues, loans and advances etc. It puzzles me that the total number of credit card users is less than 10% of the total bank customers' base but st ill this area accounted for 24% of the total number of complaints handled by the B O Offices during 2010-11. Similarly, a proper enforcement of the BCSBI Codes should necessarily result in the banks int imat ing their customers about changes in interest rates and service charges at least 30 days in advance. Here again the number of complaints highlight the gaps in implementat ion of the Codes at the branch level. Pensioners are senior or very senior cit izens and in a majority of the cases this is their only source of livelihood. We need to be empathet ic and humane while dealing with pensioners. The best way to minimize the incidence of these complaints is to educate the customers and bank staff alike.



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Global initiatives in consumer protection The global financial crisis brought to the fore gaps in consumer protect ion measures in the financial services industry worldwide. Many countries that were affected by the crisis have standards and codes in place to set the minimum benchmarks for customer care. The failure of voluntary / industry led init iat ives to protect the financial sector consumers and the backlash created by a public resentment against bankers and banking has forced many governments to come up with statutory measures aimed at financial consumer care and protection. When service standards are defined as a part of the statute any breach or violat ion of law at t racts penalty. Are we moving in that direction? This may not happen in the near future but even in the Indian context the day may not be far when we may have a proper legislat ion specifically to look at issues affect ing the financial sector consumers. Once this init iat ive becomes a statute, the voluntary opt ion would cease to exist . The fair pract ices code adopted by banks / financial inst itut ions is most ly unilateral in nature. Hence, the enforceability of fair pract ices is more in breach than in pract ice. With growing complexit ies of the financial t ransact ions and financial markets, there is need to clearly define the role and responsibility of financial services providers, especially in relat ion to consumer protect ion. To promote consumer awareness of the obligat ions of banks / financial inst itut ions and to foster consumer understanding of financial services and related issues, it is felt that , the Financial Consumer Protect ion Law should be enacted to cover :

* Grievance Redressal Schemes,

* Compensat ion Schemes,

* Financial Ombudsman Schemes,

* Consumer educat ion and awareness init iat ives,

* Consultation with consumer bodies before evolving policies,

* Responsible lending and market ing pract ices,

* Card products,

* Consumer privacy and data protect ion,

* Defining mis-selling and cross selling.

This suggest ion is in the backdrop of global developments. Countries like the USA and UK have enacted legislat ions specifically providing for financial consumers' protect ion. Once every act ion of a bank vis-a-vis its customers is codified as a statute, the lapses if any would also be punishable as an offence. This may most ly come as a monetary penalty on the employee at fault . Hence, I urge all of you to sensit ize your staff on effect ive implementat ion of BCSBI codes. The mental block many bank employees have is in owning up their mistakes leading to clash of egos and escalat ion of complaints right up to the level of President of India. All of us must be cost and t ime conscious when it comes to



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grievances redressal. Based on data published in the annual report on the Banking Ombudsman Scheme for the year 2010-11 the RBI is incurring a cost of ̀ .3619/ - for every complaint handled by it through the Banking Ombudsman Scheme. If you add to this the cost involved at the banks' end, the total cost for the banking system of handling a single grievance may roughly work out as high as `.15000/ -. Can we not do a cost - benefit analysis in terms of compensat ing the customer for any loss / lapses, than merely spending our t ime and resources on defending act ions that were patent ly wrong? The Bureau of Indian Standards has evolved ISO 10002:2004 standard for reviewing the effect iveness and efficiency of the complaints handling process. Adherence to this part icular standard focuses on conferring the following benefits viz.,

* Management system

* Improved Efficiency

* Customer sat isfact ion, * Bet ter

relat ionship

* Management focus,

* Cont inual improvement

* Brand improvement, * Transparent

system

* Credibility, * Auditable system

* Customer confidence * Synchronisat ion

The standards has eight clauses, the first three are scope, normat ive reference and terms and definit ions. The other five are :

* Guiding principles

* Complaints Handling framework

* Planning and design

* Operat ions of the complaints handling process

* Maintenance and improvement

It is gathered from the Bureau of Indian Standards that only two banks in the country (private sector banks) have so far adopted this standard. I urge the governing council of BCSBI to examine if adopt ion of an ISO standard for grievance redressal could be considered for inclusion in the Code of Bank's Commitment to customers. The banks may on their own explore the possibility of adopt ing the ISO standards. The Office of Fair Trading, United Kingdom has carried out several case studies to evaluate consumer credit intervent ion strategies. The case studies highlight the fact that vulnerable groups are part icularly exposed to the risks of being misled by advert ising.



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Such act ion is t reated as "non-compliance" with statutory provisions. We also need to look at some such robust provisions in our codes / statutes. The global financial crisis of 2008 had demonstrated that credit markets are fragile and not only because of the risk of polit ical meddling; borrowers also have tended to exhibit systemat ic vulnerabilit ies which compromise their financial decision - making capability. For many governments round the globe, the quest ion is no longer "to protect or not to protect the financial sector consumer?" it is 'when and how". The global pract ices / regulatory measures for borrowers protect ion fall into three convent ional categories; disclosures, product based and provider based regulat ion. The current global t rend is towards making disclosure regulat ion more stringent and robust . In part icular, these regulat ions focus on prescribing the manner in which the interest rate and other charges must be calculated and disclosed. It may be the Annual Percentage Rate (APR) as is favoured in the USA, which may also be easy to understand, or it may be the Total Cost of Credit (TCC), the concept that is widely used in South Africa. The product based regulat ion focuses on common elements such as right to cancel, prohibited behaviour and right of grievances redressal. We need to pick up the good aspects of these emerging global t rends to strengthen our own codes and commitments to the customers. Consumers' lack of financial literacy - Financial literacy includes knowledge of financial concepts and sound pract ices such as budget ing, but also the contractual rights and recourse procedures open to consumers. Internat ionally, financial educat ion, awareness and financial literacy are being accorded the highest priority in the scheme of financial consumer protect ion. Where are we placed in this regard? The efforts like set t ing up of FLCCs are only a small measure considering the gigant ic task we have at hand. Whether or not ment ioned in the BCSBI's codes, can we bankers not make a commitment to put financial educat ion and awareness on a mission mode and promise to deliver on our commitments? Conclusion As we go forward, a major challenge is how to strike a balance between the twin object ives of increasing financial access / banking penetrat ion vis-a-vis improving the quality of customer service and customer protect ion. While in the long run it will converge, in the short run, the dilemma and the t radeoff underlying the debate between financial access and financial consumer protect ion may be very real to the Governments and policy makers. After all, developed countries have both high levels of access to formal financial sector, and relat ively elaborate financial consumer protection measures after four decades of evolut ion. The financial consumer protect ion regimes in countries like India are st ill evolving. BCSBI needs to persuade banks to achieve convergence in an effect ive manner by adopt ing a voluntary and self-regulatory approach. It will be a great service to the society if BCSBI, banks and all of us collect ively are able to achieve this. Thank you, Ladies and Gent lemen. ------------------------------------------------



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Nabard encourages banks for warehousing finance February 3, 2012

Nat ional Bank for Agriculture and Rural Development (NABARD) has newly introduced a refinance product for warehousing. The refinance scheme incent ivises banks to accelerate the pace of creat ion of quality warehousing facilit ies for agricultural commodit ies, part icularly for reducing post-harvest losses.The scheme was conceptualised out of a dedicated Fund of `.2,000 crore allocated in the union budget. The scheme will help in creat ion of around 9 million tonne of addit ional storage capacity in the country. Nat ional Bank for Agriculture and Rural Development Gujarat 's CGM, H.R Dave said that Nabard will extend financial assistance, by way of refinance, to commercial banks, regional rural banks and cooperat ive banks against the loans extended by them for construct ion of warehousing infrastructure for agricultural commodit ies.NABARD shall charge interest on refinance at 8% per annum, while interest on the loans to the borrowers would be decided by the banks as per their exist ing policies. NABARD will extend an interest rebate of 1.5% to those borrowers, who repay their loans, alongwith interest , as per the repayment schedule prescribed by the financing bank. Interest rate rebate will be provided by NABARD once the bank certifies t imely repayment by the borrower.NABARD will assist the financing banks to undertake intensive on site and off site monitoring of the projects to ensure t imely completion and availability of the addit ional warehousing facility to farmers. Mr Dave said that the creat ion of warehouses would be the infrastructure required for the growth of agriculture sector. "The budgetary allocation for funding through this mechanism is going to mult iply in years to come to meet the storage requirements for food security as well as to include cold storages and cold chain requirements," he said while stressing the need for encouraging accredited warehouses as st ipulated by Warehousing Development Regulatory Authority (WDRA) so as to make farmers eligible to benefit from interest subvent ion scheme of GoI for pledge loans. As per the recent ly announced Govt of India scheme, KCC holder small and marginal farmers can get loans at 7% rate of interest for a period of maximum six months for storage of their produce.One of the condit ion of availing the benefit of the subvented market ing loan is that the produce is to be stored in "accredited warehouses" and banks can finance these farmers against the negot iable warehouse receipt issued by such accredited warehouses. While highlight ing the expectat ion of policy makers, he said that this is a business proposit ion for bankers and sought their support to encourage hub and spoke model to benefit farmers to store their produce at village level besides get t ing bet ter price realizat ion. Source:ht tp:/ / economict imes.indiat imes.com/ news/ news-by industry/ banking/ finance/ banking/ nabard-incent ivises-banks-to-boost-investment-in-warehousing/ art icleshow/ 11729422.cms RBI may consider paring 40% priority sector target for commercial banks



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RBI may consider paring 40% priority sector target for commercial banks

February 3, 2012 The RBI may consider paring the 40% priority sector target for commercial banks. However, banks may have to lend more to the micro, small and medium enterprises and weaker sect ions. These could be some of the recommendat ions of the commit tee headed by the Union Bank of India chairman and managing director MV Nair, which was set up by the central bank to review issues related to priority-sector lending. Based on the feedback from various stakeholders, the RBI could also consider categorising housing finance to the weaker sect ions under priority lending. However, bankers have expressed concern about lending to these segments due to rising non-performing loans. "The RBI wants banks to lend direct ly to the farmer. The tone of the draft paper is largely towards banks increasing their lending to small and marginal farmers and micro, small and medium enterprises with plant and machinery of below ̀ .5 lakh," said the agriculture head of a private sector bank. "If they set a target for this, the defaults will increase." The commit tee may also propose strict penalty on banks that do not meet these targets. Agricultural sector accounted for 44% of the total incremental NPAs of domest ic banks in 2010-11.Similarly, PSBs and private sector banks saw an increase in weaker sect ion NPAs as a percentage of advances to the sect ion. According to RBI data, the growth in priority sector lending has slowed down from 29.2% in 2009-10 to just 5% in 2010-11 despite banks having to mandatorily lend to the sector. The RBI has become strict about inclusive banking on all parameters, be it branch opening or priority sector credit or opening of no-frill accounts. "I think in the new guidelines, focus will be more on redefining what const itutes 'priority sector'. Bankers have also told the regulator that part of infrastructure lending could also be included within the ambit of priority sector lending," said a senior official from a large Mumbai-based public sector bank. Banks have put across their own dilemmas to the regulator and said the limited reach of banks is an issue."To rat ionalise the cost structure, banks have requested that they be permit ted to lend to non-banking finance companies like gold loan companies," he said. The central bank on July 2011 had announced that banks were no longer allowed to classify certain loans as agriculture loans, such as loans to sugar co-operat ives. Following this, banks like Bank of India and Bank of Baroda failed to meet their priority sector targets in the quarter ending December 2011."The problem with farm loans is not slow growth, but rising NPLs as farmers expect one more debt waiver," said a recent Standard Chartered report ."The central bank wants banks to follow priority sector norms in principle and not just in theory. To ensure that banks do not circumvent priority sector norms and the credit is indeed going to genuine farmers, the Reserve Bank of India issued the above clarification," the report said. Source:http:/ / economict imes.indiat imes.com/ news/ news-by-industry/ banking/ finance/ rbi-may-consider-paring-40-priority-sector-target-for-commercial-banks/ art icleshow/ 11735332.cms



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RBI asks Banks to Closely Monitor unhedged Forex Exposures of Cos

February 6, 2012 The banking sector regulator Reserve Bank of India (RBI) has asked banks to closely monitor risks emanat ing from unhedged foreign currency exposure of corporates, and price them in the credit risk premium while extending fund-based and non-fund-based credit facilit ies to corporates.The central bank's move is aimed to prevent impact of volat ile forex market movement on corporates and their lenders. "Recent events relat ing to derivative t rades have shown that excessive risk taking by corporates could lead to severe distress to them and large potent ial credit loss to their bankers in the event of sharp adverse movements in currencies," the RBI said.The RBI has also directed banks to set a limit on unhedged exposure of corporates on the basis of bank's board approved policy. The central bank had caut ioned banks against unhedged forex exposure of corporates in its second quarter monetary policy review held in October as well."Unhedged forex exposure of corporates is a source of risk to corporates and a source of credit risk to financing banks. If the unhedged posit ion is large, it can have serious consequences for the solvency of corporates in the event of large depreciat ion of the home currency and can result in large credit losses to the financing banks," the RBI had said. In 2011, the rupee fell over 16% dropping to an all-t ime low of 54.32 per US dollar on December 15, which hit profitability of companies borrowing heavily from overseas markets through external commercial borrowings (ECBs) even as export -driven Indian informat ion technology (IT) firms gained. Source:ht tp:/ / banking.contify.com/ story/ rbi-asks-banks-to-closely-monitor-unhedged-forex-exposures-of-cos-339315

Finance ministry opposes RBI's view to stretch priority sectors lending list February 8, 2012

The finance ministry is opposing a Reserve Bank of India suggest ion to widen the list of sectors eligible for priority sector lending. The Reserve Bank's draft report submit ted to the ministry for its comments last week has also recommended that some infrastructure segments should be classified as priority. But a finance ministry official said there is no point in dilut ing the exist ing list of priority sectors. "And if banks are too keen then we should also raise the limit from current 40% to 50% or above."



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RBI guidelines require banks to lend 40% of their adjusted net credit to the priority sector, which includes agriculture, small-scale industries and other weaker sect ions. If banks fail to meet the priority sector lending target they can buy loans of regional rural banks or micro-finance inst itutions. The finance ministry will now send its comments to RBI before the draft report is finalised. "If required, certain sectors can be added. We will also hold discussions with state-run banks as it has been observed that it is most ly private banks that fail to meet the set targets," the official said. Last year, RBI had set up a 10-member commit tee to examine the exist ing classificat ion and suggest new guidelines. The committee, headed by Union Bank of India chairman MV Nair, reviewed the eligibility criteria for priority sector loans in relat ion to the nature of act ivit ies, types of borrowers, limits on loan amounts and controls on end-use of funds. RBI Deputy Governor H R Khan said last week that the bank is considering classifying housing finance for weaker sect ions as priority lending. Public sector banks, however, feel that adding more sectors will only add to the burden. "In this fiscal we are finding it difficult to meet the targets because of the low credit growth. But it remains to be seen what new sectors are we talking about," said a senior official with Central Bank of India. Lending to the priority sector grew by just 5% on an annualised basis in December because of lower offtake of agriculture and MSME loans. Credit offtake by the priority sector had grown by as much as 29.2% during the same month of 2010.

Micro branches to cater to rural areas February 14, 2012

The Union finance ministry has directed banks to set up 'ultra small' branches in all villages under the financial inclusion scheme by March 31. The plan is to provide a wide range of banking services, including credit t ransact ions, in villages where only cash t ransact ions are being provided by banking correspondents. Such a branch, spread over just 100-200 sq ft , will be served by such correspondents, with regular follow-up visits by bank officials. A designated officer will visit the village in his area on a pre-fixed date and t ime every week, with the periodicity enhanced if the business volume just ifies it . Most banks are scept ical of opening branches in remote and rural areas, fearing the investment in these areas would not be commercially viable. Banks have been asked to request local bodies in these villages to provide the place to them free of cost , t ill the business grows to a viable level. The officer will visit the branch with a laptop, providing connect ivity to the core banking system of the bank, so that various services such as verificat ion of account balance can be provided. The officer will also collect applicat ions for opening accounts, give loans of all types and do recovery follow-up. The officer will not deal with cash t ransact ions, these being handled by banking correspondents. This will enable people to avail a wide range of banking services, while also reducing the cost to the bank, said a finance ministry official.



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Banks have already been advised to strengthen their rural branches so that adequate manpower is available. Earlier the finance ministry had said while opening a regular brick and mortar branch in rural areas, after select ing the locat ion, a branch manager must be posted at least six months in advance, to enable business development. It said the business plan of the rural branch must envisage profitability within two years. Source:ht tp:/ / www.business-standard.com/ india/ news/ micro-branches-to-cater-to-rural-areas/ 464643/

RBI to meet banks soon on issue of rising bad loans February 14, 2012

Worried over rising bad loans in certain sectors, RBI today said it will discuss the issue with banks soon. "Stress sectors are well known, the issues which are there. But we don't think there is a great concern as of now," Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty said on the sidelines of an event here. "But any how we are going to discuss ( NPA issue) with the banks in the coming day. We are going to meet banks during this month or first week of March," he said. Banking sector, however, has some difficulty with regard to loans to aviat ion sector. Banks are struggling to recover ̀ .19,000 crore from the ailing nat ional carrier Air India. One of the three proposals floated to restructure the airline includes converting the outstanding debt into Government bonds which could be t ransfered to the banks' SLR port folio. Loan given to private carrier Kingfisher has also turned NPA. Talking about review of the supervisory policies, procedures and processes by a RBI panel, Chakrabarty said the report is expected to be submit ted by July. "By July it will submit the report. It is about how to strengthen the supervisory system," he said. The commit tee headed by Chakrabarty is reviewing the exist ing supervisory processes in respect to commercial banks in India. The terms of reference of the commit tee include review of the approach to supervision, review of the extant onsite supervisory examinat ion and offsite supervisory methods besides review of the adequacy of prudent ial supervisory guidelines and supervisory review process. Besides, it is also examining the extant methods for consolidated supervision and assessing the adequacy of the institut ional structure for carrying out supervisory funct ion. Source:ht tp:/ / economict imes.indiat imes.com/ news/ economy/ finance/ rbi-to-meet-banks-soon-on-issue-of-rising-bad-loans/ art icleshow/ 11874721.cms



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Banks told to give Subsidised Post-harvest Loans to Farmers February 16, 2012

The UPA government at the Centre has told banks to provide post -harvest loans to farmers at a subsidised 7% rate to discourage distress foodgrain sales. The government will also offer another 3% concession on interest rate if the loan is repaid on t ime.The benefit will be available to farmers against negot iable warehouse receipts. Senior bankers said the scheme will encourage farmers to store their produce in warehouses. Banks have been told to kick off the scheme immediately for farmers carrying Kisan Credit Cards and for loans up to 3 lakh. Banks have been providing post-harvest loans to farmers at about 9% interest rate. The government will now offer a 2% interest subvent ion to them for extending the subsidised post-harvest loans. This is an extension of the exist ing subsidised pre-harvest crop loan facility, which has been in place for the last several years. The government raised the subvent ion to 2% for 2011-12 from 1.5% for the preceding fiscal.Banks have advised their regional offices and branches to start extending the benefit to farmers. Regional rural banks and cooperat ive credit bodies will also get interest subvent ion for extending this new facility to farmers. "This move is expected to encourage farmers to keep their produces in warehouses, regulated by the Warehousing Development and Regulatory Authority," said S. Padmanabhan, chief general manager with Nat ional Bank for Agriculture and Rural Development, or Nabard.Earlier, cold storage owners used to provide financial assistance to farmers against farm produces stored with them. With the new scheme in place, farmers are expected to shun the prevalent system and seek bank loans. The government introduced negot iable warehouse receipts system in April 2011 to help farmers gain access to bank loans and avoid distress sale of farm produces. Negot iable warehouse receipts also allow transfer of ownership of the commodity stored in a warehouse without having to deliver the commodity physically. The negot iable receipts are eligible as collateral for loans under the Warehouse (Development and Regulat ion) Act , 2007. Source : ht tp:/ / economict imes.indiat imes.com/ news/ economy/ policy/ banks-told-to-give- subsidised-post-harvest-loans-to-farmers/ art icleshow/ 11905388.cms

FinMin asks PSBs not to overstate profit February 17, 2012

The finance ministry has written to all public sector banks (PSBs) asking them to ensure profits are not overstated and to make appropriate provisions for bad loans.In a letter to heads of public sector banks, the ministry said, "Instances of over-report ing of profit have been cont inuing year after year and no correct ive act ion seems to have been taken to stop the recurrence."



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The let ter assumes significance in the light of rising bad debts in the banking sector.According to a senior official of a public sector bank, somet imes there could be a difference of opinion about the classificat ion of non-performing asset (NPA) which gets sorted out at the t ime of external audit or Annual Financial Inspect ion (AFI) by the Reserve Bank of India (RBI). If the bank is unable to convince the RBI for not classifying some loans as NPA and subsequent ly not making provisions, then the bank has to make provision after AFI, the official said.To that extent the profit is depressed later, an official said.Banks have been t rying to follow prudent ial guidelines of RBI on NPA in let ter and spirit, but there could be differences of opinion which gets resolved after AFI and reconciliat ion of accounts takes place, the official added. During the third quarter of this financial year banks profitability was hit due to jump in bad loans and restructured loans.There has been about 19 per cent rise in restructured loan against the previous quarter as text iles, steel and infrastructure companies have suffered due to lower output and higher cost of funds. Besides, there is NPA pressure for banks from the aviat ion and power sectors. They are struggling to recover `.19,000 crore from the ailing nat ional carrier Air India. Worried over rising bad loans in certain sectors, RBI is expected to meet banks to take stock of the NPA situat ion soon."Stress sectors are well known, the issues which are there. But we don't think there is a great concern as of now," RBI Deputy Governor K C Chakrabarty had said earlier this week."But any how we are going to discuss it (NPA issue) with the banks in the coming days. We are going to meet banks during this month or first week of March," he had said. Source:ht tp:/ / www.business-standard.com/ india/ news/ finmin-asks-psbs-not-to-overstate-profit / 464963/

Capital support assured for public sector banks February 20, 2012

The Finance Minister, Mr Pranab Mukherjee, today said that the Government is ready to infuse more capital in public sector banks (PSBs) to help them comply with the Basel III capital regulat ions, which envisage more stringent norms for capital adequacy.The extra provisions, or buffers, required under Basel-III will also be taken care of, said Mr Mukherjee, at an event to mark the 70{+t}{+h} Foundat ion Day of Oriental Bank of Commerce (OBC), a public-sector lender. The Basel III capital regulat ions are to be implemented from January 1, 2013 and will be fully phased in by January 1, 2019.A Government-appointed commit tee is working out the capital requirements of PSBs under the Basel-III regime. State-owned banks had been asked to submit their business plans for the next few years to help est imate the capital requirement.



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Tier-1 capital The Finance Minister pointed out that Government has committed to maintain a minimum of 8 per cent Tier-I capital in all the PSBs; this is over and above the regulatory requirement of 6 per cent .Even for 2012-13, the Government is taking the steps needed to keep all the PSBs adequately capitalised, Mr Mukherjee added."I can assure you that we are commit ted to bringing our banks at par with their global peers while catering to the needs of our economy".Later, he told reporters that all the required capital support cannot be achieved in one year and that it would take t ime. "As per the Basel III norms, we will provide capital adequacy to all the public sector banks". On the occasion, Mr Mukherjee inaugurated OBC's corporate office building at Gurgaon. This is the first corporate office of a PSB to be located in Haryana.With reference to financial inclusion, Mr Mukherjee indicated that the Government may expand the coverage of the financial inclusion programme to all habitat ions having populat ion of over 1,000 persons. Clarifying his stand on subsidy, the Finance Minister maintained that he was losing sleep over the subsidy leakage and not the huge quantum of subsidy per se. Financial inclusion Mr Nagesh Pydah, Chairman & Managing Director of OBC, said that the bank has already achieved the target of providing banking facilit ies to the 574 villages allot ted to it under the financial inclusion programme. OBC was required to meet this target by end-March 2012.Under the financial inclusion programme, PSBs are required to extend banking facilit ies to all habitat ions with a populat ion of over 2,000 persons by end-March 2012. In all, about 73,000 villages had been ident ified for coverage under this programme. On OBC's capital requirements, Mr S.C.Sinha, Execut ive Director of OBC, said the bank was not looking for any capital support from the Government during 2012-13. Last year, the Centre had infused `.1,740 crore of capital in OBC.Mr V. Kannan, Execut ive Director, OBC, said the bank would, however, certainly require more capital when the Basel-III regulat ions come into force in 2013. Source:http:/ / www.thehindubusinessline.com/ industry-and economy/ banking/art icle2910570.ece

Finmin may Dilute RBI Panel's Proposed Harsh NBFC Rules February 20, 2012

Amid intense lobbying by finance companies, the government has stepped in to water down the harsh, new rules prescribed by a Reserve Bank of India commit tee. A group, const ituted by the finance ministry, has suggested that since non-banking finance companies (NBFCs) play a significant role in asset creat ion and reach out to borrowers that high-street banks can't deal with, they should be given adequate t ime to raise capital and fulfil st ricter provisioning standards.While the RBI panel, headed by former deputy governor Usha Thorat , has given its recommendat ions for quite some months now, the regulator is yet to come out with the guidelines. Meanwhile, the key advisory group formed by the government, comprising senior bureaucrats, industry representat ives,



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professionals, and even central bank officials, has finalised a parallel set of recommendat ions submit ted to the ministry less than a fortnight ago. The advisory group's report , which has the backing of the government as well as the industry, may hold back the central bank from introducing the sterner norms recommended by the panel. Among other things, the commit tee had recommended that NBFCs should have t ier-I capital adequacy level of 12%. At present, NBFCs have the flexibility of maintaining a minimum capital adequacy rat io of 12-15% (depending on categories) on the strength of its t ier-I (or capital and free reserves) and t ier-II (long-dated bonds) capital. Thus, if the RBI panel recommendat ion is implemented, then NBFCs will have to raise enough equity to avoid any disrupt ion in business act ivity - a condit ion that most firms will find tough to meet. According to members of the group, the government-const ituted panel has suggested that all NBFCs should get at least three years to reach the prescribed capital adequacy standard and during that period, they should be allowed to grow their business. The advisory group also felt the RBI commit tee's recommendat ion that there should be provisioning on loans with past dues of 90 days or more, could significant ly impact profitability and capital of many NBFCs. (At present, a loan is t reated as non-performing by an NBFC if the borrower fails to service the interest or EMI for 180 days). The advisory group is in favour of giving NBFCs three years to migrate to a new provisioning standard. The group thinks that there should be a new category of priority sector NBFCs, and there should be provisions for NBFCs to have access to debt recovery t ribunals and security enforcement law for quicker recovery of dues. The RBI panel recommendat ions are aimed at discouraging banks from promot ing NBFCs (which current ly have to follow less stringent rules than banks on risk weightage and provisioning). The regulator wants to end the pract ice where banks use NBFC arms to pursue businesses which would be tougher in banks. Thus, if NBFCs (like banks) have a 90-day provisioning and same risk weightage for act ivit ies like loan against shares, there will be very lit t le incent ive for banks to float NBFCs. "Since about 64% of the NBFC funding comes from banks, the RBI panel thinks, and right fully so, that banks should have more capital and the large ones pose systemic risk… But, it 's felt that under the present circumstances, imposing rules that business finds too difficult to follow could adversely affect the business environment," said a person familiar with the deliberat ions. The advisory group, however, has endorsed the RBI panel recommendat ion that only NBFCs with asset book of 50 crore and above should be registered with the regulator, which will enable the latter to focus on medium and large firms. Of the 12,400 NBFCs, only about 1,800 have assets of over 50 crore. "It was broadly felt that NBFCs reach out to segments that banks can't and have a more cost-efficient st ructure with no elaborate organisat ional set up. Besides, the regulator should not paint all NBFCs with the same brush," said a group member. Source ht tp:/ / epaper.t imesofindia.com/ Default / Script ing/ Art icleWin.asp?From=Archive& Source=Page&Skin=ETNEW&BaseHref=ETM/ 2012/ 02/ 20&PageLabel=12& Ent ityId=Ar01200&ViewMode=HTML



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Banks must exercise strict norms while giving education loans under mgmt quota : banking body IBA

February 21, 2012 The Indian Banks’ Associat ion (IBA), the nat ional lobby of lenders, has asked banks to impose stringent condit ions on loans sanct ioned to students get t ing admission under the management quota amid rising concerns over defaults on repayment of educat ion loans. "Any loan considered by banks for students get t ing admission under the management quota would be outside the model scheme. Banks may fix appropriate terms and condit ions for such loans," IBA said in a guidance note. Loans given to such students under the model educat ion loan scheme is more at risk as their employment potential is relat ively less, it said. Under the model scheme, banks are not permit ted to look at the financial strength of parents while evaluat ing loan to a meritorious student. Management seats or management quota refers to the seats in private educat ion inst itut ions for which the management has the discret ion to give admission on factors other than merit . Notably, the Government of India is mulling to form a credit guarantee t rust to reduce non performing assets (NPA), or bad loans, in educat ion loan. Banks' NPA in educat ion sector is as high as 6%. Source: ht tp:/ / banking.contify.com/ story/ banks-must-exercise-strict -norms-while-giving- educat ion-loans-under-mgmt-quota-banking-body-iba-511289

Foreign Banks Should Step Up Priority Lending February 22, 2012

Foreign banks in India should set aside 40% of their total loan port folio for priority sector, bringing them at par with the mandatory requirement of domest ic lenders, according to the recommendat ions of Nair Committee report . The panel, headed by Union Bank CMD MV Nair, also suggested that loans to women should be classified as lending to the weaker sect ion. Current ly, foreign banks need to lend 32% of their loans to priority sector, including loans to farmers, small businessmen, students, weaker sect ions of society. Indian banks, on the other hand, have to lend at least 40% of their total loan kitty to the priority segment. "As per the reciprocity agreement under WTO, there is no dist inct ion made by other countries for Indian banks. And, therefore, it is only fair that they (foreign banks) also meet the 40% target ," said Nair. Also, foreign lenders should mandatorily lend 15% to exporters and micro and small enterprises (MSE), same as their local counterparts, the commit tee suggested. Current ly, foreign banks lend 12% of their total loan port folio to exporters and 10% to MSEs. The panel has proposed classifying loans to financial intermediaries, such as finance companies that are used for lending to the specified segment, as priority sector loan, but with a sub-limit of 5%. Current ly, only loans to microfinance inst itut ions are reckoned as priority sector lending.



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It has also suggested that while banks should meet the 18% loan target in agriculture, sub-targets of direct and indirect credit to agriculture should be scrapped. Instead, 50% of agriculture loans should be directed to small and marginal farmers. The commit tee has recommended that up to 15 lakh loan amount per student in India be t reated as priority lending, higher than the current limit of 10 lakh. Source:http:/ / epaper.t imesofindia.com/ Default/ Script ing/ ArticleWin.asp?From=Archive&Source=Page&Skin=ETNEW&BaseHref=ETM/ 2012/ 02/ 22&PageLabel=12&EntityId=Ar01202& ViewMode=HTML

DGFT for nominated agency status to gold refiners February 27, 2012

Gold refiners in India may get 'nominated agency' status from the Directorate General of Foreign Trade (DGFT) to import gold dore bars. Officials explained this may happen if the Reserve Bank of India (RBI) does not agree to allow free gold dore import . Sources say based on a proposal by the commerce ministry, the Department of Economic Affairs (DEA) under the Ministry of Finance, has already init iated discussions with RBI. A gold dore bar is a semi-pure alloy of gold and silver, usually created at the site of a mine. It is then t ransported to a refinery for further purificat ion. After gold ore is mined, the first stage of purificat ion produces a cast bar (gold dore) that is approximately 90 per cent gold. The other 10 per cent is metals like silver and copper. RBI governs the import of the yellow metal, since gold is considered dual currency for reserve purposes, explained an official. Gold dore, said the official, is primarily a raw material. As a result , there are no exchange-related worries if it is imported and used for making gold jewellery. "With the number of refineries growing in India, availability of raw material is an issue. Alte-rnatively, gold refiners depend only on scrap, which is not available readily for use. People hold on to scrap in ant icipat ion of benefit ing from rising gold prices," said an industry source. Source:ht tp:/ / smart investor.business-standard.com/ common/ srchoutdet-106531-gold% 20refiners%20-DGFT_for_nominated_agency_status_to_gold_refiners.htm



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Government mulls PSU banks to cut loan rates by March February 27, 2012

The finance ministry is nudging state-owned banks to cut lending rates before March-end, though most lenders had init ially taken a stand to review interest rates only next financial year.This has not been communicated in writ ing, but at a recent meet ing, senior ministry officials asked bank chiefs to consider lowering interest rates. Even after the Reserve Bank of India cut banks' cash reserve ratio (CRR) in January, signalling a reversal in its monetary policy stance, bankers had said it would take a while for lending rates to soften.Since CRR is the slice of customer deposits that banks have to keep as cash with the RBI, a cut in the rat io following repeated rate hikes was perceived as the onset of a dovish monetary policy. But since no bank has lowered returns on deposits since the RBI act ion, their cost of fund cont inues to be high. Banks are reluctant to lower deposit rates in February and March because they do not want to miss their annual deposit mobilisat ion targets."It 's a Catch-22 situat ion...Cost of resources has actually gone up for banks," said the chairman of a large commercial bank. Senior bankers declined to go on record on the matter. However, DK Mittal, secretary, department of financial services, said: "We have suggested banks to bring down rates in whichever sector and to whatever extent possible, and as quickly."The intent ion, he told ET, "is to create a posit ive environment and not to interfere with banks' operat ions". Ministry officials expressed their views to bankers about a fortnight ago. Following this, Bank of Maharashtra cut its base rate - the minimum rate charged from best customers - by 10 basis points to 10.60% and Central Bank of India lowered home loan rates by 25 basis points across various maturit ies.Last week, Union Bank Chairman MV Nair told ET that the bank is exploring if there is a scope to lower rates in certain categories. Amonth before the RBI cut CRR, Union Bank had announced a token rate cut of 10 bps to 10.65%. Sending a Message to Industry According to Mittal, some rate cuts by banks may help to send across a message to industry and borrowers in general that the "investment environment will turn conducive sooner than expected". While banks may lower rates in some segments, more meaningful rate cuts can happen once bulk money becomes less expensive. Interest rates on cert ificate of deposit - an instrument banks sell to raise bulk deposits - have risen in the last one month. For instance, interest rates on oneyear CDs are up to 10.15% from 9.80% a month ago. Source : ht tp:/ / economict imes.indiat imes.com/ news/ economy/ policy/ goverment-mulls- psu-banks-to-cut-loan-rates-by-march/ art icleshow/ 12048653.cms



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E-Payment for social schemes : Finance Ministry asks Banks to Change Fund transfer process to check Fraud

The finance ministry has ordered an overhauling of the electronic payment system for the Centre's flagship social welfare schemes to check fraud and cut down transact ion costs. The ministry has asked state-run banks to ensure that electronic payments to beneficiaries of such schemes are made only through the banks in which they hold an account. The ministry feels that the move would bring down the cost of fund t ransfer to almost half besides guaranteeing an audit trail of the payment. As of now, if a beneficiary of a scheme such as the Mahatma Gandhi Nat ional Rural Employment Guarantee Act holds an account in the State Bank of India, but the payment delivery system in his area is being handled by Punjab Nat ional Bank, the payment is credited to the beneficiary's account through PNB. This makes government pay NEFT charges twice--first to PNB and then to SBI-on a single t ransact ion. The Nat ional Electronic Funds Transfer is a nat ion-wide payment system that facilitates one-to-one t ransfer of funds. Under the scheme, a remit ter has to pay Rs5 plus service tax on every t ransact ion up to Rs1 lakh."There are two primary issues with this," a finance ministry official said. "First , the administrat ive ministry of the scheme has to pay NEFT charges twice. Second, if the t ransact ion fails, its record is lost among several such t ransact ions." The official said the proposed mechanism would not only reduce the pressure on the NEFT system, it would also guarantee a proper record of the payment as all subsequent t ransact ions would be through the parent bank. The finance ministry has already launched a pilot project in Bulandshahr district of Ut tar Pradesh to test the viability of the mechanism.State-run banks say the proposed plan will not increase their work load as they have to anyhow make payments individually. "It 's just a matter of clubbing all singular accounts, which should not be an issue," a senior official at a bank said. Only about 5% of India's 6 lakh villages have bank branches. Under the financial inclusion plan, the government aims to provide banking services to 73,000 villages with populat ion of 2,000 over the next three months. Last week, a panel headed by Unique Identificat ion Authority of India chairman Nandan Nilekani had proposed that all government payments over ̀ .1,000 should be made electronically. The panel said a last mile t ransact ion fee of 3.14% with a cap of Rs20 per t ransact ion should be paid by the government for such payments. It also recommended that a network of 1 million inter-operable micro ATMs, operated by business correspondents, be set up across the country. Source : ht tp:/ / economict imes.indiat imes.com/ news/ news-by-industry/ banking/ finance/ e-payment-for-social-schemes-finance-ministry-asks-banks-to-change-fund-transfer- process-to-check-fraud/ art icleshow/ 12063638.cms



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KEY BANKING INDICATORS BANK RATE 9.50% Base Rate of major Banks 9.50-11.00% CRR 5.50% BPLR of major Banks 14.00-17.50% SLR 24% FOREX RESERVES US $ Billion 310.562 REPO RATE 8.50% SCB Total Deposits - `. Cr. 54,17,244 REVERSE REPO 7.50% SCB Total Credit - `. Cr 40,14,556 LIBOR US $ 6 month 0.4275% CREDIT- DEPOSIT RATIO 74.11%

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samachar lehar march 2012 issue

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