For Rajan, clean up in banks more important than growth

Jun 22, 2016 0

Bengaluru– Clean up of a bank’s balance sheet was more important than growth, as evident from the lesson every other country that had faced financial stress has learnt, Reserve Bank of India (RBI) Governor Raghuram Rajan said on Wednesday.

“To the question of what comes first, clean up or growth, I think the answer is unambiguously clean up!” Indeed, this is the lesson from every other country that has faced financial stress,” Rajan said at an interactive session with captains of industry and trade here.

Raghuram Ranjan

Raghuram Ranjan

Terming the slower credit growth as a silver lining message, Rajan said banks have not been lending indiscriminately in an attempt to reduce the size of stressed assets in an expanded overall balance sheet, which bodes well for future slippages.

“It is important that the clean-up proceeds to its conclusion, without any resort to regulatory forbearance once again, Rajan said addressing about 300 members of Assocham trade body on ‘Resolving Stress in the Banking System’.

Asserting that the regulator (RBI) cannot substitute for the banker’s commercial decisions or micro-manage them or even investigate them when they (decisions) are being made, the governor said in most situations, the regulator could at best warn about poor lending practices when they were being undertaken and demand that banks hold adequate risk buffers.

“The important duty of the regulator is to force timely recognition of NPAs (non-performing assets) and their disclosure when they happen. Forbearance may be a reasonable but risky regulatory strategy when there is some hope that growth will pick up soon and the system will recover on its own,” Rajan reiterated.

Regretting that bankers sometimes turn around and accuse regulators of creating the bad loan problem, the governor said the truth was bankers, promoters and circumstances created it (bad loan problem).

“Everyone – banker, promoter, investors, and government officials – often urge such (risk) a strategy because it kicks the problem down the road, hopefully for someone else to deal with. The downside is that when growth does not pick up, the bad loan problem is bigger, and dealing with it is more difficult,” the governor noted.

As a regulator, the RBI has the difficult task of bringing the system back on track when a bad loan is allowed to accumulate through forbearance or non-recognition.

Clarifying that the slowdown in public sector bank lending in certain sectors since early 2014 was a consequence of the past build-up of stressed loans, the governor asserted that the cessation of the regulator forbearance and the asset quality review in mid-2015 were not responsible for it (slowdown).

“High distressed exposures in certain sectors were already occupying PSB (public sector banks) management attention and holding them back. The only way for them to supply the economy’s need for credit, which is essential for higher economic growth, was to clean up and recapitalize,” Rajan affirmed.

Referring to the proposal for easier monetary policy to reduce the bad debt problem, the regulator said such a policy would bring no relief to a heavily indebted promoter.

Sometimes, easier monetary policy is proposed as an answer to reducing the bad debt problem. For the heavily indebted promoter, however, easier monetary policy will typically bring no relief.

Even with lower policy rates, the bank has no incentive to reduce the interest rate the borrower can pay. And few banks are competing for that borrower’s business, so there is no competition to force down loan rates. The bottom line is that easier monetary policy is no answer to serious distress, contrary to widespread belief,” Rajan added. (IANS)

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Absence of collateral with startups results in bank funding denial: Rajan

Jun 22, 2016 0

Bengaluru–Reserve Bank of India Governor Raghuram Rajan on Wednesday said startups lacking collateral is the main reason for not being able to get funded by banks.

“Across the world startups don’t have collateral. The banker wants to see what he can take as a collateral which is non-existent for the startups,” said Rajan at an interactive session organised by industry body Assocham.

Rajan said those who want to start a taxi service can go take a loan against the fleet of cars they have as security but for startups that is not the case.

He said a bank will lend to a kirana shop owner or an auto repair shop owner but shy away from startups for the reason they do not have assets or collateral.

The governor said a software programme written by a startup hanging around somewhere in the cloud might be hard for a bank to readily understand its value and thereby lead to backing off from funding.

However, Rajan highlighted that startup funding in India exploded 30 to 40 times through a variety of sources like venture capital and angel funding among others. (IANS)

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Text of Raghuram Rajan’s letter to RBI colleagues on 2nd term

Jun 18, 2016 0

Following is the text of the letter written by Reserve Bank of India Governor Raghuram Rajan in which he has made it clear that he is not interested in a second term, and that he will return to academia when his term ends in September:

Dear Colleagues,

I took office in September 2013 as the 23rd Governor of the Reserve Bank of India. At that time, the currency was plunging daily, inflation was high, and growth was weak. India was then deemed one of the “Fragile Five”. In my opening statement as Governor, I laid out an agenda for action that I had discussed with you, including a new monetary framework that focused on bringing inflation down, raising of Foreign Currency Non-Resident (B)

Raghuram Ranjan

Raghuram Ranjan

deposits to bolster our foreign exchange reserves, transparent licensing of new universal and niche banks by committees of unimpeachable integrity, creating new institutions such as the Bharat Bill Payment System and the Trade Receivables Exchange, expanding payments to all via mobile phones, and developing a large loan data base to better map and resolve the extent of system-wide distress. By implementing these measures, I said we would “build a bridge to the future, over the stormy waves produced by global financial markets”.

Today, I feel proud that we at the Reserve Bank have delivered on all these proposals. A new inflation-focused framework is in place that has helped halve inflation and allowed savers to earn positive real interest rates on deposits after a long time. We have also been able to cut interest rates by 150 basis points after raising them initially. This has reduced the nominal interest rate the government has to pay even while lengthening maturities it can issue – the government has been able to issue a 40 year bond for the first time. Finally, the currency stabilized after our actions, and our foreign exchange reserves are at a record high, even after we have fully provided for the outflow of foreign currency deposits we secured in 2013. Today, we are the fastest growing large economy in the world, having long exited the ranks of the Fragile Five.

We have done far more than was laid out in that initial statement, including helping the government reform the process of appointing Public Sector Bank management through the creation of the Bank Board Bureau (based on the recommendation of the RBI-appointed Nayak Committee), creating a whole set of new structures to allow banks to recover payments from failing projects, and forcing timely bank recognition of their unacknowledged bad debts and provisioning under the Asset Quality Review (AQR). We have worked on an enabling framework for National Payments Corporation of India to roll out the Universal Payment Interface, which will soon revolutionize mobile to mobile payments in the country. Internally, the RBI has gone through a restructuring and streamlining, designed and driven by our own senior staff. We are strengthening the specialization and skills of our employees so that they are second to none in the world. In everything we have done, we have been guided by the eminent public citizens on our Board such as Padma Vibhushan Dr. Anil Kakodkar, former Chairman of the Atomic Energy Commission and Padma Bhushan and Magsaysay award winner Ela Bhatt of the Self Employed Women’s Association. The integrity and capability of our people, and the transparency of our actions, is unparalleled, and I am proud to be a part of such a fine organization.

I am an academic and I have always made it clear that my ultimate home is in the realm of ideas. The approaching end of my three year term, and of my leave at the University of Chicago, was therefore a good time to reflect on how much we had accomplished. While all of what we laid out on that first day is done, two subsequent developments are yet to be completed. Inflation is in the target zone, but the monetary policy committee that will set policy has yet to be formed. Moreover, the bank clean up initiated under the Asset Quality Review, having already brought more credibility to bank balance sheets, is still ongoing. International developments also pose some risks in the short term.

While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016. I will, of course, always be available to serve my country when needed.

Colleagues, we have worked with the government over the last three years to create a platform of macroeconomic and institutional stability. I am sure the work we have done will enable us to ride out imminent sources of market volatility like the threat of Brexit. We have made adequate preparations for the repayment of Foreign Currency Non-Resident (B) deposits and their outflow, managed properly, should largely be a non-event. Morale at the Bank is high because of your accomplishments. I am sure the reforms the government is undertaking, together with what will be done by you and other regulators, will build on this platform and reflect in greater job growth and prosperity for our people in the years to come. I am confident my successor will take us to new heights with your help. I will still be working with you for the next couple of months, but let me thank all of you in the RBI family in advance for your dedicated work and unflinching support. It has been a fantastic journey together!

With gratitude

Yours sincerely

Raghuram G. Rajan

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Nod to merger of six banks with SBI

Jun 15, 2016 0

New Delhi/Chennai– With the government on Wednesday giving its in-principle approval to the mega merger proposal in the banking sector – the merger of six banks with SBI, State Bank of India chairperson Arundhati Bhattacharya hailed the move as a “win-win” for all.

The nod was given at a cabinet meeting chaired by Prime Minister Narendra Modi, the Union Finance Ministry spokesman told IANS though there was no mention of the mega merger proposal at the media briefing of the cabinet decisions.

Arundhati Bhattacharya

Arundhati Bhattacharya

The six banks are SBI’s five associate banks – State Bank of Bikaner and Jaipur (SBJJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT) – as well as the Bharatiya Mahila Bank Limited (BMB).

In a statement issued by SBI, Bhattacharya said: “The merger of SBI and its associate banks is a win-win for both. While the network of SBI would stand to increase, its reach would multiply.

“One can expect efficiencies to be created from rationalisation of branches, common treasury pooling and proper deployment of a large skilled resource base. Currently, no Indian bank features in the top 50 banks of the world. With this merger, some visibility at global level is likely to increase.”

On the talks of approval by the government to the merger, share prices of SBI, SBM, SBJJ and SBT flared up.

“The merger of six banks with SBI is the gateway for consolidation to happen in the banking sector. The decision shows that the government is serious about consolidation in the sector. In fact merger of banks is one of the aspects of Indradanush plan for the sector,” Saswata Guha, director, Financial Institutions at global credit rating agency Fitch Ratings, told IANS.

Indradanush is a seven-pronged plan to revamp the public sector banks announced by the central government last year.

According to Guha, the benefits of the merger will take around 18 months to accrue to SBI as integration of human resources and other aspects have to happen and going by the past mergers – of the State Bank of Saurashtra and State Bank of Indore.

“Post merger SBI will be around 24,000 branch strong and will have a market share of around 25 per cent. I am interested in seeing how the huge scale would benefit SBI,” he added.

The merger will create a banking giant with assets worth around Rs.37 lakh crore.

On May 17, SBI had informed the bourses that it is seeking “in principle sanction” of the central government to enter into negotiation with the six banks to acquire their businesses including assets and liabilities.

Global credit rating agency, Moody’s Investors Service had estimated it would cost SBI around Rs.16.6 billion ($250 million) for the merger and will have limited impact on its credit metrics, including its asset quality and capitalisation level.

It also said the opposition to the merger by the employee unions also poses considerable risk that potential synergies of the merger may not materialise.

Currently, the five associate banks operate as standalone banks with their own financials, board and management team, with oversight from SBI.

In addition, SBJJ, SBM and SBP are also listed with the presence of minority shareholders.

According to SBI, the net profit of the merged entity (SBI and five associate banks) for the year end March 31, 2016 would be Rs.11,590 crore, capital adequacy ratio 12.66, gross NPA Rs.121,969 crore, net NPA Rs.68,894 crore and restructured advances Rs.94,569 crore.

However the unions in the five SBI associate banks are opposed to the merger in this form.

The All India Bank Employees’ Association (AIBEA) has demanded the merger of five associate banks of SBI into one entity.

“It is unfortunate that despite opposition by unions and even political parties, the government has taken the decision to go ahead with the decision to close down the five associate banks and hand their business to SBI,” its general secretary C.H.Venkatachalam told IANS, adding that India needs banking expansion and not consolidation.

“Tomorrow (on Thursday) AIBEA office bearers are meeting in Chennai to take decisions in this regard,” he added.

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Securities Exchange Board for changes in infrastructure investment trusts regulations

May 19, 2016 0

Mumbai–The Securities Exchange Board of India (SEBI) on Thursday decided to publish a consultation paper, proposing changes and clarification in the Infrastructure Investment Trusts (InvIT) Regulations.

“The paper will propose changes and provide clarification on InvIT process to invest in two-level special purpose structure,” the market regulator said in a statement here.

At a meeting earlier in the day here, the board also decided to consider reducing to 10 percent from 25 percent on mandatory sponsor holding in InvIT norms.

“The consultation paper will also consider increasing sponsors to five from three and other operational needs in line with the provisions of Companies Act, 2013 and filing of project implementation agreement with other documents.

“The paper will be placed on the official website for public comments,” the statement added.

The board also approved to set up two SEBI chairs at its National Institute of Securities Markets by contributing some corpus to it.

“The chairs will provide research-based policy inputs and help in increasing academic interest and awareness about the regulator’s activities,” the statement noted.

Selection of chairs will be with academic council of NISM. (IANS)

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Indian microfinance loans grew 36 percent in 2015-16

May 18, 2016 0

New Delhi–Total loans disbursed by India’s microfinance industry grew 36 percent in the last fiscal as compared to 2014-15, the Microfinance Institutions Network (MFIN) said on Wednesday.

“Growth of 36 percent in total number of loans disbursed by MFIs in FY15-16 when compared to FY14-15 shows the rapid pace of expansion of the industry,” MFIN — the self-regulatory body of the Reserve Bank-regulated non-banking finance companies (NBFCs) and microfinance institutions (MFIs) — said in a release here.

“Average loan amount disbursed for each beneficiary has also witnessed a growth in FY15-16 and stands at Rs.17,805 as compared to Rs.14,731 in FY14-15,” MFIN said, releasing its 17th Micrometer report of the industry.

According to the report, the aggregate Gross Loan Portfolio (GLP) of MFIs grew 84 percent in the last quarter of 2015-16 as compared to the corresponding quarter of the previous fiscal.

“There was an overall increase of 24 percent over the Q3 FY15-16 and aggregate GLP stood at Rs.53,233 crore as of 31st March 2016,” it said.

“South India leads the way with 35 percent share in GLP followed by North and West which stand at 25 percent and East contributing 15 percent.

“The industry also witnessed the year-on-year increase of 44 percent in client base where MFIs provided microcredit to 3.25 crore clients.

“Over the previous year, MFIs have been bringing down their rates of interest and today one of the largest MFIs, SKS Microfinance, is offering products at sub-20 percent. The industry is maturing and the growth is an indicator of this.” Ratna Vishwanathan, chief executive MFIN, said in a statement.

The Micrometer analysis is based on data collected from 56 NBFC-MFIs, all of whom have either received or applied for NBFC-MFI registration from the Reserve Bank of India, it said.

Meanwhile, credit-rating agency Crisil said on Wednesday that MFIs have securitised Rs.11,500 crore loan receivables in the last fiscal compared with Rs.5,075 crore in fiscal 2015.

Crisil Ratings said “a clutch of factors contributed to the more-than-doubling in volume”.

Firstly, banks are increasingly using this route to achieve their priority sector lending target. Moreover, negligible delinquencies and higher yields have made transactions attractive, and helped expand the investor base.

Besides, in the last 12-15 months, MFIs have seen a spurt in assets undermanagement and so have used securitisation to fund the growth. (IANS)

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India’s forex increased marginally to $361 billion

Apr 30, 2016 0

Chennai– India’s foreign exchange reserves increased marginally to $361.60 billion as on April 22, 2016, the Reserve Bank of India (RBI) said.

According to RBI’s forex data the reserves stood at $361.60 billion as on April 22 against $360.25 billion for the week ended April 15, 2016.

As an April 22, foreign currency assets stood at $337.53 billion, gold $20.11 billion, special drawing rights $1.49 billion and the reserve position with International Monetary Fund (IMF) stood at $2.45 billion.

On the other hand, the forex reserves for the week ended April 15, 2016, consisted of foreign currency assets of $336.18 billion, gold reserves of $20.11 billion, special drawing rights of $1.49 billion and the reserve position with IMF of $2.45 billion. (IANS)

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Reserve Bank proposes match-making platform for loans

Apr 28, 2016 0

Mumbai–The Reserve Bank of India (RBI) wants to allow peer-to-peer lending, a popular concept in developed countries where the borrower and the credit-seeker are matched on a platform for negotiating unsecured loans.

Peer-to-peer lending is a form of crowd-funding where an online platform matches the lenders with the borrowers for unsecured loans. Both the borrower and the lender can either be an individual or corporate entity. The platform gets a fee for its services from both parties.

“The Reserve Bank of India has today (Thursday) placed on its website the consultation paper on peer-to-peer lending, for seeking comments, views from all interested parties and general public,” the central bank said in a statement on Thursday, calling for responses by May 31.

“There are many variants of peer-to-peer lending platforms in terms of the nature and extent of services provided by them. Global regulatory practices also vary. At present, there is no clear regulatory framework in India governing the functioning of the peer-to-peer lending platforms.”

The paper outlines the pros and cons of regulating the sector and proposes a suitable framework for regulating this activity, which includes minimum capital, permitted activity, governance requirements, fair practices code for customer dealing and data security. (IANS)

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India’s Banking loopholes being studied to curb money laundering

Apr 28, 2016 0

By Nirendra Dev

New Delhi– The government has asked its agencies dealing with economic offences to study the loopholes in the country’s banking laws to prevent ill-gotten money from leaving the country’s shores and facilitate the return of black money stashed away abroad, well informed sources said.

With the quantum of black money held by Indians abroad variously estimated at between $466 billion and $1.4 trillion, the idea is to get a fix on how the network operates so that the government is able to crack the nexus and deliver on its promise of getting back such ill-gotten assets.

“Pervading secrecy, cut-throat competition among private and international banks, along with the organised crime models, have all resulted in giving a boost to money laundering both in India and abroad,” said a government source, requesting anonymity.

“There is also competition. A large number of foreign and private banks operate in secrecy. Then in jurisdictions like Switzerland and Cyprus, dirty money is often pumped in their financial system via organised channels — or even wire-transferred now,” the source told IANS.

“What we also understand is that multiple layers of secrecy in the system helps clients to mask their accounts and transactions. So directives have been issued by the home ministry and the finance ministry to various agencies to study how the system is aiding such offences.”

Among the agencies roped in are the Enforcement Directorate, Serious Fraud Investigation Office, and the related wings of customs and the Reserve Bank of India. Also being studied is: To what extent the secrecy in the banking system is contributing to money laundering, sources said.

Sources explained that such an exercise also became necessary after preliminary reports from the agencies and departments under the finance ministry reported that private banks in large numbers failed to present case studies by themselves about the modus operandi.

“Privacy is at the core of the functioning of private banks. So the government is left with few options when it wants to crack down on leads — also because money laundering involves multiple transactions to disguise the source of funds,” said the source.

Officials said a comprehensive study can also help in understanding how the flow of such money can be curbed, while also equipping banks to themselves have strong anti-money laundering rules for clients, backed by law.

During the latest US visit of Finance Minister Arun Jaitley, coordination and cooperation among various countries to curb money laundering was at the core of his itinerary. Even at the special session of the US on drugs, he dwelt on the nexus between illicit money, drugs and terrorism.

India also wants to give inputs to the Organisation of Economic Cooperation and Development to be able to come up with objective criteria soon to identify jurisdictions that did not cooperate towards a transparent financial system. “Defensive” steps are being considered against them.

The move also comes against the backdrop of the recent global expose of International Consortium of Investigative Journalists (ICIJ) and over 100 global media organisations on off-shore funds of some powerful people globally, based on millions of leaked documents of a Panama law firm.

The team of officers from the Central Board of Direct Taxes’ Financial Intelligence Unit, the board’s Tax Research Unit, and the Reserve Bank of India, is probing the expose about the “Panama Papers” . (IANS)

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India’s Forex reserves rise by $2.53 billion to $355.94 billion

Mar 25, 2016 0

Mumbai– India’s foreign exchange (Forex) reserves increased by $2.53 billion during the week ended March 18, official data showed on Friday.

According to the Reserve Bank of India’s (RBI) weekly statistical supplement, the overall Forex reserves swelled by $2.53 billion to $355.94 billion.

The overall foreign exchange reserves had risen by $2.54 billion to touch $353.40 billion for the week ended March 11.

The foreign currency assets (FCA), which is the largest component of India’s Forex reserves, increased by $2.50 billion to $332.50 billion during the week under review.

During the week ended March 11, the FCA had augmented by $2.52 billion to $329.99 billion.

Apart from the US dollar, the FCA consists of nearly 20-30 percent of other non-US dollar major global currencies, securities and bonds.

The individual movements of these currencies against the US dollar impacts the overall foreign reserves value.

The country’s gold reserves remained stagnant at $19.32 billion.

However, the special drawing rights (SDRs) gained by $12.1 million to $1.49 billion.

For the week ended March 11, the SDRs inched up by $7.2 million to $1.48 billion.

Similarly, the country’s reserve position with the IMF (International Monetary Fund) edged higher by $21.1 million to $2.61 billion.

The reserve position with IMF had gained $12.7 million to $2.59 billion for the week ended March 11.

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