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March 2012 issue

Samachar Lehar
(A monthly update of Banking News)

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
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42.

Topic/ Sub-Topic
Our Bank in News Monetary Policy 2011-12 Contextual Significance ofThird Quarter Review Khas Baat Agriculture and Other Priority Basel Bonds & Money Market . Plastic Money Credit Growth Economy Financial Inclusion & MFI Minsitry of Finance Forex Inflows Housing Worries Human Resources Inflation Infrastructure Insurance Liquidity Mutual Funds & Capital Market NPA Other Banking News Overseas Aspirations RBI Directives & Guidelines ` Movement Technology Indian Banking - Journey into the Future Price Stability, Financial Stability and Sovereign Debt Sustainability Policy Challenges from the New Trilemma Monetary Policy, Sovereign Debt and Financial Stability : The New Trilemma Empowering MSMEs for Financial Inclusion and Growth- Role of Banks and Industry Associations Understanding Psychology for Responsible Financial Behaviour The Reserve Bank of India : Pulling every lever Indian Banking Sector : Towards the Next Orbit Moving towards Technology Led Excellence in Banking Governance Deficit and Financial Crisis Report of the Nair Committee on Priority Sector Lending Interview of RBI Governor, Dr. D Subbarao by Alex Frangos of The Wall Street Journal Agriculture Agenda for Odisha - Issues & Challenges BCSBI, Customer Service and Consumer Protection-Issues and Challenges Nabard encourages banks for warehousing finance RBI may consider paring 40% priority sector target for commercial banks RBI asks Banks to Closely Monitor unhedged Forex Exposures of Cos Finance ministry opposes RBI's view to stretch priority sectors lending list

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Canara Bank Samachar Lehar March 2012


43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 42. Micro branches to cater to rural areas RBI to meet banks soon on issue of rising bad loans Banks told to give Subsidised Post-harvest Loans to Farmers FinMin asks PSBs not to overstate profit FinMin asks PSBs not to overstate profit Capital support assured for public sector banks Finmin may Dilute RBI Panel's Proposed Harsh NBFC Rules Banks must exercise strict norms while giving education loans under mgmt quota : banking body IBA Foreign Banks Should Step Up Priority Lending DGFT for nominated agency status to gold refiners Government mulls PSU banks to cut loan rates by March E-Payment for social schemes : Finance Ministry asks Banks to Change Fund transfer process to check Fraud Key Banking Indicators 184 185 186 186 187 188 190 190 191 192 193 194

Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar March 2012

OUR BANK IN NEWS


Canara Bank hopes to improve credit growth, NIM next fiscal: Wit h early signs of improvement in t he market sent iment s and t alks of a likely cut in the Cash Reserve Rat io (CRR), public sect or lender Canara Bank is now hoping t o get back to a Credit Deposit Rat io (CDR) of around 72 per cent from t he present 69 per cent . This apart , t he bank is ant icipat ing a rise in net int erest margin (NIM) t o 2.9 per cent in t he next fiscal from t he current 2.6 per cent . In t he given condit ions, we were deliberat ely going slow and t here was hardly any capex t his year. Market sent iment has suddenly improved and logically one or t wo CRR cut s would come. Credit demand would be much more higher next year, Sri S Raman, C& MD of Canara Bank, said. At tribut ing t he sudden rise in NPAs t o migrat ion t o syst em generat ed mode, Sri S Raman said t he bank was in full cont rol of t he credit port folio including NPAs and had almost zero exposure t o MFIs and a very minimal exposure t o t he aviat ion sect or. Especially, we have no exposure t o t he companies t hat are in t he news, he said referring t o Kingfisher Airlines. St at ing t hat t here was an improvement even in t he rest ruct ured credit port folio, he said t he bank would be collect ing ` 3,000 crore from t he NPA port folio t his year as compared with ` 2,000 crore in t he previous year. (BS dt 23.02.2012 p.5) (Relat ed news also appears wit h phot o in p. 12 of t odays DC, p. 12 of NIE, p. 6 of BL. News it em 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 int erest rat e on Canara Tax Saver Deposit Scheme (t ax Saving Deposit ) from February 11, 2012. The bank offers an int erest rat e of 9.25% for five years Tax Saving Deposit wit h an effect ive yield of 17.17%. It has also revised upwards int erest rat es on domest ic t erm deposit s. (BS dt 11.02.2012 p.5) (For Det ails refer Cir 43/ 2012 & 44/ 2012) All India Faculty Conference 2011-12: All India Faculty Conference 2011-2012 was inaugurat ed by our ED Sri A K Gupta, at RSTC Gurgaon on 27.02.2012 in t he presence of Sri V K Shukla, GM& Principal, STC and Sri T Sreekanthan, GM, CO, Delhi. During the funct ion, Training Compendium for t he year 2012-13 and a pocket booklet on Ret ail Lending product s were released by ED. Awards for best performing Regional St aff Training colleges were dist ribut ed.RSTC Gurgaon was adjudged as t he 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 12t h Jan t o 1st Feb 2012 for Minorit y Muslim Women, at Jame-UlUloom Tailoring Cent re, Jamia Masjid, Bangalore. Sri K S Prabhakara Rao, GM, PC Wing, HO, Bangalore presided over t he valedict ory funct ion. Smt M M Bindu, Joint Direct or, Women & Child Welfare Depart ment , Govt of Karnat aka was t he chief guest . 33 Women were benefit ed by t he said t raining programme. (PC Wing, HO, Bangalore)

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Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon

Canara Bank Samachar Lehar March 2012 Vigilance Study Circle: 4t h Anniversary of Vigilance St udy Circle was celebrat ed on 6t h Feb 2012 at Bangalore. Vigilance St udy Circle comprises of Execut ives from various public sect or undert aking, nat ionalised banks and ot her government organisat ions. Speaking at t he event , Canara Bank C& MD Sri S Raman, urged t he VSC-Bangalore, t o focus more on underst anding t he reasons and cont ribut ing fact ors behind wrongdoings in companies and t o come up wit h procedures and syst ems t o prevent t hem. He also suggest ed t hat measures should be t aken t o ensure t hat people who work wit h honest y, be prot ect ed. The Chief Guest s were Sri Pradeep Kumar, CVC, New Delhi and Sri R Srikumar, Vigilance Commissioner, New Delhi. Padmashri Dr S Subramanian also graced t he occasion. Canara Bank co-ordinat ed t he event . (Vigilance Wing, HO & DH p. 15) Canara Bank face RWF in final clash: Canara Bank will lock horns wit h Rail Wheel Fact ory Sport s Associat ion in t he day-night final of t he Dell-KSCA Group II Division I Super League t ournament at t he Chinnaswamy st adium on Wednesday. In t heir final league mat ches, Canara Bank defeat ed Cent ral Excise and Cust oms by t en wicket s, while RWF overpowered DTDC Sport s Club by 144 runs. Canara Bank, whose only loss in t he six-t eam league came at t he hands of DTDC, finished on t op wit h eight point s, while RWF were involved in a three-way t ie for t he second spot wit h St at e Bank of Mysore and Vijaya Bank. RWF made it t hrough t o t he final by virt ue of having a superior net run rat e. (DH dt .08.02.2012 p8) CRICKET: Vet eran Sunil B Joshi dished out an all round show t o guide Canara Bank t o a vict ory over Rail Wheel Fact ory in t he final of t he Dell -KSCA Group II, Division I Super League at t he M Chinnaswamy St adium on Wednesday. In t he day/ night t it le clash, Canara bat t ed first and post ed 267/ 6 in t he st ipulat ed 50 overs wit h sout hpaw Joshi t op-scoring wit h a fiery 34 ball 61 laced wit h five fours and t hree maximums. Bharat h Chipli (45), C. Ragh (42) t oo made vit al contribut ions with t he willow t o prop up t he Bank men's t ot al. (DC dt 10.02.2012 p.14) Mega Rural Outreach Programme: In a glit t ering funct ion at Kolar, 32 branches of Pragat hi Gramin Bank and 3 Ult ra Small Branches of Canara Bank were declared open by the Honourable Union Minist er of St at e for Finance, Shri Namo Narain Meena in t he presence of Shri K H Muniyappa, Honourable Union Minist er of St at e for Railways and Smt . Archna S Bhargava, Execut ive Direct or, Canara Bank. A host of ot her activit ies included dist ribut 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 eproduct s ATM cards and NEFT facilit y by t he Gramin Bank. Nearly 2000 people part icipat ed in t he programme. Canara Bank has opened nearly 200 financial inclusion branches and about 300 rural branches all over India. The Bank is planning t o open 100 such ult ra-small branches during 2012. With t he opening of 32 new branches, t he Pragat hi Gramin Bank has achieved the milest one mark of 400 Branches (News it em appears in BS dt 13.02.2012 p.5) (SP& D Wing, HO, Bangalore)

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Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon

Canara Bank Samachar Lehar March 2012 PRCI Awards: Our Bank has won 5 Awards inst it ut ed by t he Public Relat ions Council of India (PRCI). PRCI held t he 6th Global PR Conclave 2012 at Mumbai, where, the Corporat e Collat eral Awards for 2012 were announced. Our bank was awarded t he following five awards in recognit ion of it s out st anding services and key cont ribut ions made t o the profession, indust ry and societ y at large :SILVER : Corporat e Advert isement Single Language. BRONZE : Shreyas In-House Magazine English Annual Report Corporat e Brochure on CSR activities Corporat e Advert isement Single These awards were given away in a glit t ering funct ion by Mr.Iqbal Haider, Ex-Law Minist er of Pakist an. Dr.S T Ramachandra, AGM, SP& D Wing, HO, received t he awards on behalf of our Bank. Furt her, t he PRCI announced t he induct ion of Dr.S T Ramachandra, AGM, int o t he 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 Sport s Council has been conducting Sport s Compet ition for t he employees working at Head Office and Cit y branches/ offices at Bangalore. At hlet ic event is being held on 19.02.2012 at Kant eerava St adium at 8.30.AM. Our C& MD Sri S Raman will grace t he occasion. (PM Section, HR Wing, HO) Free dental checkup camp for head office staff: Social Banking Cell, HO has arranged for a free Dent al Checkup Camp for t he benefit of HO staff on Sat urday, t he 25t h February 2012. M/ S Narayana Hrudayalaya Dent al Clinic, Indias largest Dent al Care Cent re, would be co-ordinat ing t he checkup camp. They would render free Dent al Checkup and free Oral Hygiene counselling. (Soicial Banking Cell, PC Wing, HO) Harbinger of positive sentiments: Tuesdays monet ary policy could well be t he harbinger of posit ive sent iment s, bankers t old Business Line. The policys focus is on liquidity management , said Mr S. Raman, Chairman and Managing Director, Canara Bank. The RBI has project ed inflat ion levels t o be around 7 per cent by March t his year.If it s not close t o the zone of comfort , and liquidit y cont inuing t o be t ight , t here could be more act ion on t he CRR front , he said. If t he t arget rat e is achieved, t hey could fleet ingly consider act ion on repo rat es, he explained. The reduct ion in CRR and t he result ant infusion of ` 32,000 crore int o t he syst em 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 port al in partnership wit h t he minist ry of Human Recourse Development for implement ing t he Nat ional Scheme of Incent ive t o Girls for Secondary Education (NSIGSE). The programme will be launched t oday in New Delhi by t he Minist er of St at e for Human Recourse Development , Ms. D Purandeshwari. An amount of `. 3,000 is deposit ed by t he Minist ry in t he name of t he eligible st udent s at t he
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Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon

Canara Bank Samachar Lehar March 2012 t ime of enrolment t o Class IX. Aft er successful complet ion of Class X and at t aining 18 years of age, t he amount along wit h accrued int erest will be aut omat ically credit ed t o t he account s of t he st udent s t hrough t he Web Port al developed by Canara Bank. (BL, dt . 28.02.2012, p6) RBI shifts focus to growth, cash management: "RBI prefers syst emat ic liquidit y t o be in deficit mode for bet t er and more effect ive monet ary t ransmission; liquidity deficit of such a high order is clearly beyond t he comfort zone of RBI. Hence, t he infusion of ` 32,000 crore int o t he banking syst em. This would induce banks t o cut rat es, part icularly in int erest -sensit ive segment s, such as, housing and aut o." (Excerpt from t he article which appears in p. 9 of 31st Jan 2012 Financial Chronicle writt en by Dr Manoranjan Sharma, DGM & Chief Economist of our bank, SP& D Wing, HO)

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Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon

Canara Bank Samachar Lehar March 2012

Monetary Policy 2011-12


Contextual Significance of Third Quarter Review
Dr Manoranjan Sharma The broad object ives of monet ary policy in India relat e t o maint enance of a reasonable degree of price st ability andadequat e expansion of credit t o fost er fast er growt h. But t he relat ive emphasis on these object ives differs because of varying socio-economic requirement s and priorit ies, level of development , et c. On an analysis of various macroeconomic paramet ers, such as, inflat ion, liquidit y, economic growt h, industrial growt h, banking development , fund inflows, t he RBI adapt s it s key policy levers - repo rat e, reverse repo rat e, cash reserve rat io (CRR) t o achieve the cent ral banking object ives. Hist orically, some of t he basic concerns of monet ary policy in India relat e t o price st ability, adequacy, t imelinessand cost of credit , liquidit y and t he ext ernal sect or. Ult imat ely, monet ary policy must be evaluat ed in anintegrat ed framework in t erms of t he int errelat ionship among money, credit , out put and prices. Monet ary policy is the process by which t he government , central bank, or monet ary aut horit y of a count ry cont rols the supply of money, availability of money, and cost of money or rat e of int erest , t o att ain pre-det ermined object ives of growt h and st ability. Monet ary policy is generally referred t o as eit her being an expansionary or a cont ractionary policy. While an expansionary policy increases t he t ot al supply of money in t he economy, a cont ract ionary policy decreases t he t ot al money supply.Expansionary policy is t radit ionally used t o combat unemployment in a recession by lowering int erest rat es, while cont ractionary policy has t he goal of raising int erest rat es t o combat inflat ion (or cool an otherwise overheat ed economy). Despit e several variat ions, monet ary policy is essent ially aimed at st rengt hening t he financial syst em, st reamlining t he credit delivery mechanism and inst it ut ional improvement s t o support growt h consist ent wit h st ability in a medium-t erm perspective. Further, the issue of financial st abilit y in the cont ext of st ronger linkages bet ween various segment s of t he financial market s including money, Government securit ies and forex market s has also now emerged as an import ant concern of monet ary policy. Macro-economic growth While slashing CRR by 50 bps t o 5.50 percent wit h effect from January 28, 2011, t he RBI left t he repo and t he reverse repo rat es unchanged at 8.5 percent and 7.5 percent , respect ively. Boost ing domest ic growt h and reducing huge syst emic liquidit y deficit emerged as key policy concerns.

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Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon

Canara Bank Samachar Lehar March 2012 According t o CSO's est imat es of nat ional income, India's economy grew by 6.9 percent in t he second quart er of FY12. While t here has been a st eady decelerat ion for 6 quart ers because of t he combined impact of t he uncert ain global environment , t he cumulat ive impact of 13 policy Quarterly GDP Growth (%)

hikes bet ween March 2010 and Oct ober 2011 and domest ic policy uncert aint y, t his is t he lowest growt h since March 2010 in Asia's t hird-largest economy. Cumulat ive GDP growt h in t he first half of 2011-12 moderat ed t o 7.3 percent because of slowdown in manufact uring (2.7 percent ) and const ruction (4.3 percent ) sect ors and cont ract ion in mining (-2.9 percent ) sect or. It is, however, necessary t o have a sense of balance and proport ion because Joseph St iglit z characterised 7 percent growth t his year an achievement in a global downturn. Despite it s socioeconomic and fiscal problems, Professor Nouriel Roubini st ressed t hat India is bet t er placed t han ot her BRIC countries. Growt h of eight infrast ruct ure indust ries (coal, crude oil, nat ural gas, refinery product s, fert ilisers, st eel, cement and elect ricit y) also slowed down t o 0.1 percent in Oct ober 2011 from 7.2 percent growth in t he same period last year. The growt h, however, improved t o 6.8 percent in November. Global economic recovery is t hreat ened by int ensifying st rains in t he euro area and fragilit ies elsewhere. As t he Int ernat ional Monet ary Fund (IMF) stressed Financial condit ions have det eriorat ed, growt h prospect s have dimmed and downside risks have escalat ed leading t o reduct ion in world economic growth from 4 percent project ed earlier t o 3.8 percent in 2011. Furt her, t here are disconcert ing global development s wit h fragile growt h in t he US and t he spread of the Euro crisis from Greece, Port ugal and Ireland t o larger economies like It aly, Spain and possibly France also leading t o t he persist ing threat of a global financial shock similar in magnit ude t o the Lehman crisis. Indias t rade linkages wit h t he advanced economies are cert ainly smaller t han t hose of ot her emerging economies. But a percept ible slowdown in global t rade will debilit at e manufact uring and service sect ors t hrough t he usual export s, financing and confidence channels. Since Euro Zone account s for nearly 15 percent of Indias

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Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon

Canara Bank Samachar Lehar March 2012 merchandise export s, t his worrisome concern would significant ly widen t rade deficit beyond $150 billion and foreign invest ment s to India would also be hit . The policy st ance, which has now shift ed t o growt h, is bjust ified because of t he globally synchronised moderat ion in growt h, increased st ress on financial market s and reinforcing of domest ic fact ors, eg, slackening industrial growt h and in some of the services sect or, high fiscal deficit because of higher subsidies and lower t ax collect ions, widening current account deficit , fall in invest ment s, moderat ion in capit al flows and t he change in t he nat ure of capit al flows in favour of debt by global linkages. Inflation While Indias inflat ion is t he fast est among t he BRICs, WPI inflat ion eased t o a t wo year low of 7.47 percent for December 2011 (inflat ion dropping below t he 9 percent level first t ime in 13 mont hs) 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 it ems increased at a lower rat e of 0.74 percent in December 2011, compared t o 8.54 percent increase in December 2010. Inflat ion in overall primary art icles st ood at 3.07 percent in December 2011 compared t o 8.53 percent in November 2011. However, inflat ionary pressure cont inued in manufact ured it ems wit h a weight of 64.97 percent . Prices of manufact ured product s rose by 7.41 percent year-on-year in December 2011. Inflat ion in t he fuel and power segment st ood at 14.91 percent in December 2011 compared t o 15.48 percent in November 2011. Food Inflation

WPI inflat ion for Oct ober 2011 was revised upwards from 9.73 percent t o 9.87 percent . Food inflat ion rat e, which cont inued t o be in t he negat ive t errit ory for t he t hird consecut ive week, st ood at -0.42 percent for the week ended January 7, 2011 because of downt rend in prices of essent ial it ems, such as veget ables and wheat . The moderat ion in food inflat ion is expect ed t o reduce overall inflat ion rat e for t he mont h of January 2011. But downward st ickiness in inflat ion is likely t o persist for some more t ime because of inadequat e pass-t hrough effect s of global commodit y prices, especially oil. Overall
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Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon

Canara Bank Samachar Lehar March 2012 inflat ion could reach only about RBIs project ion of 7 percent by March 2012 st ill well above t he comfort zone of 5-5.5 percent . While t he Sukhmoy Chakravart y Committ ee (1985) gave 4 percent definit ion of inflat ion rat e as t olerable for India, recent st at ement s by Dr C Rangarajan, Chairman, Prime Minist ers Economic Advisory Council suggest t hat 56 percent inflat ion could be accept ed. Deposit growth Outpaced Credit Growth for the third consecutive week

Industrial growth The Index of Industrial Product ion (IIP) for November 2011 st ood at 5.9 percent (negat ive growt h of 5.1 percent in Oct ober 2011) because of improved performance of manufact uring, consumer durables and consumer nondurables segment s. Manufact uring out put , which const it ut es 76 percent of overall indust rial product ion, grew by 6.6 percent in November 2011. However, capit al goods sect or and mining index cont inued t o be negat ive. Capit al goods growt h st ood at -4.6 percent in November 2011 as against a growt h of 25.7 percent in November 2010; mining grew by -4.4 percent against 6.9 percent y-o-y. The growt h rat es in November 2011 over November 2010 were 6.3 percent in Basic goods and 0.2 percent in int ermediat e goods. The cumulat ive growt h in IIP for April- November 2011 was 3.8 percent as against 8.4 percent for t he corresponding period last year. Despit e t he high degree of volat ilit y in mont hly figures and t he quality of dat a, part icularly in t he capit al goods sect or, t he cont ract ion in capit al goods sect or bot h in November 2011 and cumulat ively for April-November 2011 causes concern. Deposit and credit growth in the banking system Deposit growth Out paced Credit Growt h for the t hird consecut ive week. As on December 30, 2011, bank credit grew by 15.9 percent (24.5 percent last year) and deposit s grew by 16.9 percent (16.8 percent last year).

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Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon

Canara Bank Samachar Lehar March 2012 On t op of lowering of non-food bank credit growt h project ion from 19 percent t o 18 percent in t he First Quart er Review, t he RBI now slashed credit growt h t o 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 maint ain t he kind of syst emat ic liquidity t hat would ensure adequat e credit t o the product ive sect ors wit hout exacerbat ing t he price spiral. Credit growt h t his year will be powered by agricult ure and allied act ivities, MSMEs, ret ail and an accent on infrast ruct ure. However, due diligence needs t o be made on prudent pricing and exposure level in credit st reams. Banks need t o make continued effort s t o rebalance credit port folio, ensure ut ilisat ion of un-availed credit limit s, be prudent in exposure t o sensit ive segment s, adopt effect ive and market -led credit pricing and st rengt hen credit market ing funct ions. Bond yield The benchmark 10 year yield is t racking the development s on t he inflat ion front and the int erest rat e movement s. Indias 10-year bonds gained t he most in six mont hs aft er RBI refrained from raising int erest rat es for t he first t ime in eight meet ings as economic growt h moderat es. On January 20, 2012, t he yield on t he 10-year benchmark bond closed at 8.17 percent .

Rupee The rupee has been falling since August 2011 on sust ained dollar demand from banks and import ers. The rupee depreciat ed nearly 17 percent from July 2011. Rupee is depreciat ing on worries of European debt crisis, flow of funds t o safe-havens, higher dollar demand from oil import ers and a slide in equity market s. Rupee closed at 50.23 per dollar as on January 20, 2012. Liquidity scenario

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Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon

Canara Bank Samachar Lehar March 2012 Liquidity const raint s persist in t he banking syst em as overnight borrowings from RBI exceeded t o INR 1 lac crore on several days. RBIs aggressive buying in Open Market Operat ion (OMO) auct ions wort h INR 71,878 crore failed t o alleviat e liquidit y concerns. As t he pre-policy release ment ioned The OMOs have been an inst rument of first preference for t he purpose, but additional instrument s could be considered as and when required. Syst emic liquidity cont inues t o be largely in huge deficit as reflect ed 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 consist ent ly breached INR 1.5 lac crore mark in t he last few days. Liquidity deficit of t his order is well above t he RBIs comfort zone of 1 percent of net demand and t ime liabilit ies (NDTL), which works out t o INR 60,000 crore. Liquidit y is expect ed t o remain tight in t he 4t h quart er because of pressure on banks t o shore up t heir balance-sheet s and advance t ax-flows in March necessit at ing RBIs continued accent on monet ary cont rol measures. While t he RBI prefers syst emat ic liquidity t o be in deficit mode for bet t er and more effect ive monet ary transmission, liquidit y deficit of such a high order is clearly beyond t he comfort zone of t he RBI. As an RBI st at ement maint ained In reducing t he CRR, t he RBI has at t empt ed t o address t he st ruct ural liquidity pressures in a way t hat is not inconsist ent wit h t he prevailing (anti-inflat ionary) monet ary policy st ance. The large st ruct ural deficit in t he syst em present ed a strong case for inject ing permanent liquidity int o t he syst em. This case was reinforced by Brazils reducing it s benchmark rat e on January 18 by half a point for a fourt h st raight policy review, Russias reduct ion of it s benchmark rat e in December and Chinas reduct ion of t he reserve rat io for banks for t he first t ime since 2008 in November 2011. Hence, t he CRR cut of 50 bps, which would infuse liquidit y in the syst em of INR 32,000 crore, is an ext remely judicious and well t hought -out policy. The policy would also induce banks t o cut rat es, part icularly in int erest -sensit ive segment s, such as, housing and aut o. Government liabilit ies in India, bot h Centre and st at es, rose a litt le over 12 percent t o INR 56.09 lac crore in FY11 from INR 50.05 lac crore in FY10. The liabilit ies, bot h ext ernal and int ernal, const it ut ed 71.2 percent of Indias GDP in FY11. There are ot her areas of concern, such as, significant t ight ening of money market liquidit y, decelerat ion in credit growt h, cumulat ive impact of 525 bps rise in policy rat es and 100 bps rise in CRR, st ress on t he rupee and t he equit y market s. In conformit y wit h general expect at ions, t he RBI lowered GDP growt h from 7.6 percent t o 7 percent and non-food credit growt h from 18 percent t o 16 percent because of t he double whammy of decelerat ing growt h and increasing risk aversion by banks because of spike in NPAs. Similarly t he IMF also reduced it s economic growt h project ion for India t o 7.4 percent in 2011 from t he earlier 7.8 percent and by 0.5 percent t o 7 percent for 2012. However, M3 growt h project ion for 2011-12 at 15.5 percent and baseline project ion for WPI inflat ion at 7 percent were ret ained by RBI. Given t he overarching macro-economic scenario, t he case for t he CRR cut was based on several fact ors t o overcome t he challenge. These fact ors included regular fall in quart erly Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 GDP growt h figures, discernible slowdown in indust rial growt h (even negat ive growt h of over 5 percent in Oct ober 2011), significant fall in food inflat ion and the clear indicat ion given by the RBI Governor in t he December 2011 Policy t hat from t his point on, monet ary policy act ions are likely t o reverse the cycle, responding t o t he risks t o growt h. There were, however, significant differences in percept ion about t he t iming and t he instrument t o be adopt ed for t he rat e cut . Concerns of the banking sector The concerns relat e t o pressure on Net Int erest Margin (NIM) and consequent ial squeeze on profit s; hikes in int erest rat es leading to higher delinquency in cert ain sect ors, especially in ret ail; recourse t o high cost preferent ial deposit s and slow growt h in CASA exacerbat ing pressure on cost s; re-pricing risk of liabilit ies in a rising int erest rat e scenario and t he at t endant effect on cost of resources; lack of dept h in hedging mechanism for int erest rat e risks; subst ant ial Held Till Mat urit y (HTM) invest ment s only provide regulat ory forbearance and do not prot ect banks from diminut ion in t he t rue value of banks invest ment s; t ime required t o rebalance credit port folio; higher provisioning requirement s and the impact on banksprofit ability. In view of t he spike in NPAs across banks, t here has t o be a renewed t hrust on rest ruct uring and recovery though frequent recovery meet s, effect ive monit oring mechanism for monit oring warning signals, t aking possession and disposal of t he asset s t hrough Sarfaesi Act t o accelerat e t he process of realisat ion of securit ies and set t lement of small value NPA account s with clear delegation at various levels for set t lement and power for writ ing off. Tracking growth stimulants Thrust on volume-led growt h t o compet it ive balance sheet size, migrat ion from int erest income t o non-int erest income and capit al adequacy t o capit al efficiency is needed t o maint ain benchmarks of ret urn on asset s (>1 percent ), return on owned funds (>18 percent ), net non-performing loans (<1 percent ), capit al adequacy (12 percent ), cost t o income rat io (<40 percent ), net int erest margin (>3.5 percent ) and int ermediat ion cost (<1 percent ). In bracing for t omorrow, a paradigm shift in bank financing t hrough mechanisms, such as, t emplat es for assessing cust omer risk and pricing product offerings, credit scoring, availability and use of informat ion is manifest ly needed. Ret ail banking requires product development and different iat ion, innovat ion and business process reengineering, micro planning, market ing, prudent pricing, cust omisat ion, t echnological upgradat ion, home/ elect ronic/ mobile banking, cost reduct ion and crossselling. Banks are implement ing st rat egies t o immune t heir balance sheet s from int erest rat e fluct uat ion by great er att ent ion on cross-selling and non-int erest income segment s. Growing services sect or and financial market have creat ed new avenues for fee-based income.

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Profits and profitability Sust enance of profit moment um, in a rising int erest rat e environment , has been challenging for banks. Rising cost of funds, compet it ion and new prudential requirement s impact t he profit ability st rat egy of banks. Key profit abilit y rat ios, such as, NIM and Ret urn On Asset s (ROA) need t o be prot ect ed wit h effect ive management of cost and yield, rebalancing of bot h t he deposit s and credit port folios, prudent asset -liabilit y management , opt imal IT applicat ion, cross-selling and augment ing the fee income and st eady improvement in asset quality t o minimise accret ion t o NPAs and the debilit at ing impact of provisioning. There has also t o be a st ress on t imely re-pricing of asset s, increasing t he percent age of performing branches, volume led approach t o offset possible erosion in margins and segment s undergoing cyclical upswings. Performance met ric, risk-adjust ed cust omer profit abilit y requires an int egrat ed, ent erprise-wide profit abilit y and performance management syst em and int egrat ion of import ant element s of profit abilit y, eg, micro management , risk management , fact oring ABC dat a int o t he decision making mat rix because of inexorable pressures t o maint ain growt h with dissipat ed t reasury profit s and const rict ed NIM. Att empt s also need be made t o ident ify possible and pot ent ial avenues for augment ing Net Int erest Income eit her by maximising yield or by cont aining cost and reducing burden eit her by improving ot her income or curt ailing overheads. There has t o be a sharper focus on effect ive MIS t o const ant ly t rack cost & yield drivers and provisions, monit oring, mid t erm evaluat ion and corrective act ion in t he light of the rapidly evolving situat ion. Concert ed at t empt s at enhancing income and reducing expendit ure are needed simult aneously wit h each unit working as a profit cent re. St rengt hening of core competencies and exploring new businesses t o achieve long-t erm sust ainable growt h requires enhanced growt h, part icularly in income, profit s, net wort h and qualit y of asset s and a paradigm shift in t he business mix wit h an accent on rebalancing exist ing port folio by eliminat ing unremunerat ive business, repricing, leveraging addit ional business from exist ing client s and new business wit h higher yield, eg, SMEs, ret ail lending wit h due diligence and housing. Concluding observations Going forward, growth and improved business confidence will have great er priority in RBIs policy formulat ion. As Kaushik Basu, t he finance minist rys chief economic adviser maint ains we have seen t he worst of t he (rat e) rises. Despit e t rending down of inflat ion, t he decline in inflat ion is likely t o be t ransient and upside risks t o inflat ion persist from insufficient supply responses, exchange rat e pass-t hrough, suppressed inflat ion and an expansionary fiscal st ance.

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Canara Bank Samachar Lehar March 2012 In view of evolving growt h-inflat ion dynamics and t he huge syst emic liquidit y deficit , t he Governor has t aken t he right call in t hese uneasy t imes by slashing CRR by 50 bps. Gazing int o t he cryst al ball and predicting t he shape of t hings likely t o come is fraught wit h dangers and uncert aint ies. While t he monet ary policy regulat es t he supply of money and t he cost and availabilit y of credit in t he economy in an at t empt t o maint ain price st ability, full employment and economic growt h, fiscal policy is a much broader government inst rument t o influence t he level of nat ional out put and prices t hrough deliberat e changes in government revenue, borrowing and expendit ure. The policy st ance of reducing CRR can also be viewed as a reinforcement of t he guidance t hat fut ure rat e act ions will be t owards lowering t hem. Lack of credible fiscal consolidat ion and height ened uncert ainty of policy reforms (IMF) will, however, hamper t he pursuit of an accommodat ive monet ary st ance t o support the growt h expect at ions caused by peaking of int erest rat es. Hence the space for fut ure rat e cut s in response t o decelerat ing privat e consumpt ion and invest ment spending could be const rained. Accordingly, t he IMF caut ioned India on January 24, 2012 India on monet ary and fiscal easing because of high levels of inflat ion and public debt . About t he Aut hor

Dr Manoranjan Sharma is Chief Economist and Deput y General Manager in our Bank. A doct orat e in economics, Sharma also possesses post graduat e diploma in business management . Wit h publicat ion of 3 import ant edit ed books besides manypapers, including some papers at global conferences t o his credit , he is an influent ial t hinker in development st udies t oday. An expert in t he field of rural finance, he was ident ified byt he Bankers Inst it ut e of Rural Development (BIRD), Lucknow t o review a research project of t he Swiss agency for int ernat ional cooperat ion. Not e- 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 t he Corporat ion Bank t o pay ` 75,000/ - t o one of it s daily wagers for sacking him wit hout giving st at ut ory not ice despit e t he fact he had worked for over 240 days. Just ice P K Bhasin ordered t he compensat ion, besides a lit igat ion cost of ` 10,000/ - t o sacked worker. (BS dt . 31.01.2012 p. 6) Finance Ministry plans to create Study loan Trust: The finance minist ry is t alking t o banks t o set up a credit guarant ee t rust for educat ion loans up t o ` 7.5 lakh, a senior minist ry official said. The proposal aims t o ensure loans are available t o st udent s at a t ime when employment out look looks bleak and even t op Bschools are bracing t hemselves for fewer jobs and lower salaries. Over 2.2 million student s have educat ion loans wort h ` 43,074 crore out st anding with public sect or banks. "Many st udent s are unable t o find jobs and, hence, default ." Two percent of t he bank's education loans of ` 2,700 crore are non-performing asset s. "If you analyse t he bad loans in t he sect or, a maximum of t hose are under ` 4 lakh, where no collat eral is required," a senior St at e Bank of India official said. "Banks have suggest ed a guarant ee on t he pat t ern of Credit Guarant ee Trust for Micro and Small Enterprises (CGTMSE)," said a finance minist ry official.(ET dt .01.02.2012 p1) Fitch gives stable' outlook for banking sector: The out look for t he Indian banking sect or is st able, said Fit ch in it s Out look of Asia Pacific banks'. However, t he challenges faced by t he Indian banks would be more severe t han what was faced in t he 2008 crisis, it said. Fitch's conclusion is based on t he premise of India's domest ic economy recovering in 2012 and t he government 's commit ment t o maint ain a minimum Tier-1 capit al of eight per cent in PSU banks. The rat ing agency, however, caut ioned that weakening asset qualit y and credit concentrat ion build up were put t ing pressure on t he downside.(BL dt .02.02.2012 p10) Postal Department applies to RBI for banking licence: The Post al Depart ment has applied t o t he Reserve Bank of India for a banking licence, the Communicat ions Minist er, Mr Kapil Sibal, said here on Wednesday. Mr Sibal said he had writt en t o t he Finance Minist er, Mr Pranab Mukherjee, t o expedit e the granting of licence. India current ly has 1.55 lakh post offices, 95 per cent of which are locat ed in rural areas.(BL dt .02.02.2012 p15) Judgment will not impact us, say bankers: Loans given by banks t o t he t elecom companies whose 2G licences have been cancelled by t he Supreme Court are unlikely t o t urn sour, say bankers. Bankers confidence in t his regard st ems from t he fact t hat these licences will be auct ioned off in t he next few mont hs and t he debt t hat t elecom companies owe t o banks will be set t led. The St at e Bank of India has a fund-based exposure of ` 1,100 crore t o t he t elecom companies whose 2G licences have been cancelled. Punjab Nat ional Bank has a funded exposure of ` 508 crore t o t elecom companies for 2G rollout . Though IDBI Bank has an exposure (fund and nonSamachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 fund based) of ` 11,000 crore t o t he t elecom sect or, it s exposure t o t he t elecom companies whose 2G licences were cancelled is under ` 500 crore, said Mr B.K. Bat ra, Deput y Managing Direct or. (BL dt .03.02.2012 p1) Banks can absorb loan-losses from 2G licence cancellation: Fitch: The Indian banking sect or should be able to absorb loan-losses st emming from t he cancellat ion of t he second-generat ion mobile licences, t hough annual profit s will st ill t ake a hit , said global credit rat ing agency Fit ch. Assuming a conservat ive level of writ e-offs on t hese loans, t he agency is of t he view t hat banks credit qualit y will not be mat erially weakened, but annual profit s could fall by up t o 10 per cent . While the impact is limit ed, t he cancellat ion of t he 2G licences highlights t he Indian banking sect ors exposure t o infrast ruct ure - a sect or t hat cont inues t o face high regulat ory and execut ion risks, said a Fit ch st at ement . Indian banks exposure t o the t elecom companies t hat are losing 2G licences is around 0.6 per cent of t ot al loans. However, around half of t he exposure is in t he form of financial guarant ees t owards fut ure payment s of licence fees. St at e Bank of India has confirmed t hat , once t he licences are cancelled, t hose guarant ees should no longer be in force, Fit ch said. (BL dt .04.02.2012 p6) RBI seeks details of banks exposure: The count rys central bank swung int o act ion t o t ake st ock of banks exposure t o the t elecom firms affect ed by t he Supreme Court order that cancelled 122 licenses grant ed s in 2008 during t he regime of Mr A Raja as t elecom minist er. The RBI has asked t he banks t o furnish det ails of t heir exposure in the t elecom companies t hat are hit by cancellat ions of 2G licenses. As on August , banks commit ment t o t hose companies were ` 20,000 crore of which t hey have already ext ended around ` 15,000 crore. Out of t he ` 15,000 crore, about ` 6,000 crore was t owards acquiring the licenses. Now, t he regulat or has asked banks t o furnish det ails of t heir 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 bet ween an urgent need for capital and t he fund-st arved government, small st at e-run banks will knock on t he doors of t he LIC as t hey prepare t o raise funds, said t hree people familiar with t he plans. Dena Bank and Bangalore-based Syndicat e Bank may be t he first among nearly a dozen small public sect or banks which will sell shares in t he next few mont hs t o raise a few t housand crores, t hey said. LIC, t he biggest inst itut ional invest or in t he country wit h annual equit y invest ment s of about ` 40,000 crore, will help t hese banks which are facing rising bad loans and rest ruct uring of loans. (BS dt . 06.02.2012 p.1) Weak rupee saves the day for banks with foreign presence: The sharp decline in t he rupee in t he second half of 2011 has aided domest ic banks wit h large foreign presence t o report st rong growt h in credit port folio, even as t he demand for loans has been dwindling locally, due t o high int erest rat es and an uncert ain macroeconomic environment .This is because when t he rupee was at 45, every dollar lent by a bank would have added ` 45 t o it s loan book. But as t he rupee depreciat ed t o 54, every dollar lent result ed in addition of ` 54 t o it s credit port folio and reflect ed higher growt h in advances. ICICI Bank, t he largest privat e sect or lender in t he count ry, saw t ot al advances Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 expanding 19 per cent from a year ago t o ` 246,157 crore as of December-end. The indust ry credit growt h during t his period was 16 per cent , t he lowest so far t his 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 t o t hose t elecom operat ors whose 2G spectrum licences were cancelled last week by Supreme Court order. However, most of t hese loans were secured and t his would not hurt the banks profit abilit y.The cancellat ion of licences will not have any mat erial impact on banks. The exposure is, by and large, secured in t he form of various t angible and ot her securit ies. Moreover, t he cancelled licences represent only cert ain (t elecom) circles and many of t hose are remot e areas. So, it is not a major cause of worry, a minist ry official t old. The SC had cancelled all 122 licences awarded t o nine t elecom companies aft er January 2008. The t ot al exposure of public sector banks in all t hese cases is ` 14,400 crore, wit h St at e Bank of India and Canara Bank t he major lenders. Punjab Nat ional Bank and IDBI Bank also have some exposure t o t hese t elecom 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 wit h t he Reserve Bank of India as percent age of deposit s) is observed t o be high at 8.2 per cent as at end-March 2011. The rat io ranges bet ween 6.9 per cent (old privat e sect or banks) and 9.2 per cent (new generat ion privat e sect or banks). This includes t he Cash Reserve Rat io of 6 per cent st atut orily required t o be maint ained wit h t he Reserve Bank, which has since been brought down t o 5.5 per cent in t he recent Credit Policy review held in January. The need for such a high C-D rat io in t hese days when plastic cards, Int ernet payment s, elect ronic funds t ransfer, and so on, are on t he increase is surprising and needs t o be viewed in t he cont ext of efficiency and profit ability of banks. (BL dt .07.02.2012 p6) Govt seeks higher dividend from PSU banks: Hard pressed for funds, t he government , on Tuesday, met t he heads of several PSU banks t o seek larger dividend payout s but did not get any firm commit ment from t hem.We discussed what are t he dividends t hat are being paid by banks. We were not given any t arget . We will look at profit and t hen give dividend, Punjab Nat ional Bank C& MD K R Kamat h t old report ers aft er t he meet ing. The meet ing was chaired by Depart ment of Economic Secret ary Mr R Gopalan, who had met PSU chiefs earlier t o persuade t hem t o increase dividend payout t o t he government . Aft er the meet ing, Bank of India C& MD Mr Alok Mishra said t he finance minist ry want ed t o know what is t he profit t he bankers are looking at in t he current fiscal. (DH dt.08.02.2012 p17) Fraudster Challenge to banks with estimated `.200 Cr Loss: Wit h an average of `.10 lakh lost in every financials fraud incident in India, it seems conmen are laughing all t he way away from banks. And it is not a chump change at st ake here; an est imat ed ` 200 crore is writt en off by various banks and financial inst it ut ions, each year. Banks in India on an average are losing ` 10 lakh per fraud incident . Worse, t he t rend shows t hat incident s of fraud and t he amount are likely t o increase. Result ing in low recoveries, t hereby direct ly affect ing t heir bott om-line, says a survey by Deloit t e. (NIE Dt 09.02.2012 p.13) Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 D K Mittal on RBI central board: The Government has nominat ed Depart ment of Financial Services secret ary Mr D K Mitt al on t he board of direct ors of t he RBI t aking t he number of government nominees on t he board t o two. Depart ment of Economic Affairs Secret ary Mr. R Gopalan is already on t he 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 t he t wo weeks t o January 27, while deposit s were up 15.7%, t he RBI's weekly st atist ical supplement showed. Bank deposit s fell `.30,600 crore t o `.57.7 lakh crore in the t wo weeks t o January 27, t he supplement showed. Out st anding loans fell `.3,150 crore($636.40 million) t o `.43.50 lakh crore during t he t wo-week period. Non-Food credit rose t o `.160 crore t o `.42.70 lakh crore during t he t wo-week period, while food credit fell `.3,310 crore t o `.83,090 crore during t he period. (ET dt 11.02.2012 p.7) Foreign investors press sell button on Indian banks: Overseas invest ors seem t o be on a selling spree when it comes t o t he Indian banking st ocks, as t hey have pared t heir holdings in at least 28 public and privat e sect or banks of t he country in t he past few mont hs. Various foreign invest ors have t oget her sold banking st ocks wort h an est imat ed ` 10,000 crore (over USD 2 billion) in about four-and-a-half mont hs since Oct ober 2011. While foreign invest ors have sold shares of at least 28 Indian banks, t hey have purchased fresh shares of only nine banking st ocks during t his 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 patt ern and open-market t ransact ion dat a available wit h st ock exchanges. The banks where foreign invest ors have pared t heir holdings include privat e players like ICICI Bank, Axis Bank, Kot ak Mahindra Bank, Yes Bank and DCB, as also public sect or giant s like St at e Bank of India and Punjab Nat ional Bank. (ET dt 13.02.2012 p.11) SBI to scrap super Circle of Excellence: It is almost curt ains t o the "Super Circle of Excellence", once a high-profile ret ail initiat ive at t he St at e Bank of India. The count ry's largest lender met wit h limit ed success t o obt ain business growt h, improve cust omer service and efficiency from t his experiment at ion spanning four years. The bank had carved out 703 branches from 14 business circles across t he count ry for t he circle. This included 592 branches from met ros and 111 from rural and semi urban areas. This t ook place during t he t enure of Mr O P Bhat t as Chairman, on t he advice of consult ant s t o scale up t he share of ret ail business. A t op SBI official said t he circle was becoming a bank wit hin a bank; it not being a useful concept. The exist ence of a circle result s in adding one t ier t o decision making. (BS dt 13.02.2012 p.4) Private banks steal a march over public sector peers: The divide bet ween privat e sect or banks and their st at e-owned peers cont inued t o widen in t he lat est December quart er. While net profit s of public sect ors banks grew only marginally over a year ago, t he profit s of privat e sect or banks rose 27.5 per cent . A higher proport ion of bad loans from rest ruct ured asset s and exposure t o st ressed sect ors led t o a Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 dismal quart er for PSBs, wit h a fall in asset qualit y. The gross non-performing asset s for PSBs , rose from 2.3 per cent of advances in December 2010 t o 3 per cent in December 2011. In cont rast , privat e banks reduced their gross NPA rat io from 2.5 per cent t o 2.1 per cent over t he year. (BL dt .16.02.2012 p6) Mallya to meet bank chiefs for additional funds for KFA: Mr Vijay Mallya, promot er of Kingfisher Airlines, will make a case for addit ional funds t o t he chiefs of large commercial banks and also appraise t hem of t he viability report prepared by SBI Capit al Market . The meet ing wit h banks comes at a t ime when most lenders have st opped lending t o t he ailing company aft er they declared t he airlines as non-performing loan - an account which has failed t o make payment t o lenders wit hin 90 days of due dat e. Banks have lent around ` 7,000 crore t o Kingfisher and t hey own around 24% st ake in the company. (ET dt . 16.02.2012 p. 6) Tax rebate on 3-year bank FDs likely: Following concert ed pressure from banks, t he Finance Minist ry has agreed t o consider a proposal t o reduce t he lock-in period for bank deposit eligible for t ax rebat e t o t hree years from five years, even t hough it goes against t he spirit of t he Direct Tax Code. If t his proposal finds it way int o next mont hs budget , it will make bank fixed deposit s, which current ly fet ch an annual ret urn more t han 9%, an at t ract ive savings opt ion for individuals, and bring t hem on par wit h equit y-linked t ax saving schemes of mut ual funds and t ax-free bonds.Among t he list of demands submit t ed by t he banks and financial inst it ut ions in t heir pre-budget meet ing wit h t he Finance Minist er, some proposals have been short list ed for furt her deliberat ions, this is one of t hem, said a senior finance minist ry. (ET dt .17.02.2012 p11) SBI uses sunscreen to block Maldives heat: The SBI has decided not t o ext end any fresh loans or make new invest ment s in t he Maldives unt il t he polit ical sit uat ion improves t here. SBIs t hree branches enjoy a dominant posit ion in t he island nat ion, holding quart er of it s deposit s and 42% loans. We will not t ake any fresh exposure t ill June t his year, said a bank official. Maldives plunged int o a polit ical t urmoil last mont h aft er prot esters, backed by police, t oppled Mr Mohamed Nasheed, Maldives first democrat ically elected leader. An e-mail sent t o t he banks int ernat 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 t he appeals of major banks in Kerala and dismissed t he appeals by t he Income Tax depart ment in a disput e over t he calculat ion of t ax. The bench headed by Chief Just ice S H Kapadia has asked t he t ax aut horit ies t o comput e t ax according t o t he principles laid down in the judgment . The quest ion involved in t he case was whet her t he assessee banks were eligible for deduct ion of bad and doubt ful debt s act ually writt en off in view of Sect ion 36(1)(vii), which limit s t he deduct ion allowable under t he proviso, t o t he excess over t he credit balance made under clause (viia) of Sect ion 36(1) of Income Tax Act . The issue was answered in favour of t he banks, which have made rural advances. (BS dt. 21.02.2012 p. 9)

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Canara Bank Samachar Lehar March 2012 Forex limit for imports sans documentation raised to $5,000: The RBI has upped t he limit for release of foreign exchange for import s by persons, firms and companies without any document at ion formalit ies from $500 or it s equivalent t o $5,000 or it s equivalent , wit h immediat e 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 t he wake of suggest ions received by t he RBI from various st akeholders. (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 t o help it s rural borrowers implement green solut ions and earn carbon credit s. The bank has signed an agreement wit h Micro Energy Credit Corporat ion for developing, buying and selling volunt ary emission-reduct ion carbon credit s. (BS dt 22.02.2012 p.6) Bank of Baroda, CARE ink pact for rating small units: Public sect or lender Bank of Baroda signed a memorandum of underst anding wit h rat ing agency CARE. This is for rat ing of micro small and medium ent erprises which are eit her prospect ive or exist ing cust omers of t he bank. "We believe t hat t his MoU is an endorsment of our pursuit t o ret ain and furt her gain t he confidence of t he financial services and MSME frat ernity. "We are commit t ed t o support all of Bank of Baroda's effort s in t he MSME sect or and assist t hem t hrough t heir journey of exponent ial growth," CARE MSME head, Mr R Suryanarayana, said in a st at ement . (BL dt . 23.02.2012 p. 6) Outlook for banks stable: Fitch rating: The out look for Indian banks remains st able in 2012 provided t he domest ic economy recovers and t he government infuses capit al in public sect or banks in order t o maint ain a minimum Tier rat io of 8%. However, t here could be downside pressures from a build up in credit concentrat ion and weakening asset qualit y, said rat ing agency Fit ch, in a report . Part of the credit problem is cyclical and may ease wit h a lag if GDP growt h picks up from mid 2012 on t he back of lower int erest rat es. The RBI may look t o loosen monet ary policy if core inflat ion eases. However if t he economy cont inues t o slowdown during most of t he current calendar year, t he result ing problems t o asset qualit y could hurt banks st and alone credit profile, t he 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 soft er int erest rates from banks has got a bit longer as t he Reserve Bank of India on Tuesday refrained from cut t ing key policy rat es in it s t hird quart er review of t he monet ary policy. Even as it maint ained st at us quo on int erest rat es, t he RBI, in a bid t o ease liquidit y pressures in t he banking syst em, cut the Cash Reserve Rat io, t he amount of cash t hat banks have t o mandat orily park with it , by 50 basis point s from 6 per cent t o 5.50 per cent of deposit s. The RBI Governor, Dr D. Subbarao, emphasised t hat t he cut in CRR was a reversal of t he cent ral banks (t ight ) monet ary policy st ance. If you t reat bot h the policy int erest rat e and t he CRR as monet ary policy inst rument s, you could draw one int erpret ation t hat this is a reversal of our monet ary policy st ance. In RBIs view, t he CRR is a monet ary policy instrument wit h liquidit y dimensions. Aft er all, t he reduct ion in CRR will bring down t he cost of money for banks. It will have a bearing on t heir ability t o reduce t he lending rat es, said the Governor. The CRR Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 cut is expect ed t o inject around ` 32,000 crore of primary liquidity int o t he banking syst em, which has been reeling under a liquidity crunch. (BL dt .25.01.2012 p1) CRR cut offers a little more comfort, says Subir Gokarn: Market s were primed t o expect a st at us quo announcement during t he run-up t o t he policy. There was some speculat ion about a cash reserve rat io (CRR) cut although not widely expect ed. Every cut in CRR at t his junct ure might have sent t he wrong signals on it s inflat ion fight ing credent ials or so was t he received wisdom. But t he Reserve Bank of India chose t o bit e t he bullet and effect a 50 bps cut in CRR. The RBI Deput y Governor, Dr Subir Gokarn, provided the cent ral banks logic t o t he decision. The change change in CRR does gives t hem a much large cushion when it comes t o accessing t he repo window. When t he deficit is around ` 1.3 lakh crore a day, some banks are pushing against t heir holdings of SLR securit ies. (BL dt .25.01.2012 p6) A pleasant surprise for most private bank chiefs: The Reserve Banks move at infusing liquidity by reducing t he CRR by 50 basis point s seems t o have t aken most of t he chiefs of smaller bank by surprise. It is a posit ive surprise, said Dr N. Kamakodi, Managing Direct or of Cit y Union Bank, while t he MD and Chief Execut ive of Karnat aka Bank, Mr P. Jayarama Bhat , t ermed it as a defensive policy. Karur Vysya Banks Chief Execut ive, Mr Venkataraman, conceded t hat t his reduct ion of 50 bps in CRR was not fully expect ed though t here were lot s of expect at ions in t he market. , A majority of bankers t hat Business Line spoke t o did not seem t o have expect ed t his move. Be it Karur Vysya Bank or Lakshmi Vilas Bank, Cit y Union Bank or Cat holic Syrian Bank, most of t hem have in recent quart ers maint ained t hat there was not much pressure on liquidity. High int erest cost s and t he concern over rising NPAs were forcing t hem t o t ake a more caut ious st ance on t he 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-maint enance of minimum balance st ipulat ions with respect t o savings accounts. A circular addressed t o Chief General Managers of all circles said t hat t he waiver is being looked upon as a major st ep forward t owards cust omer ret ent ion and acquisit ion. You will appreciat e t hat t his benefit / waiver is a st rong selling point for our savings bank product , t he circular said. (BL dt .27.02.2012 p14)

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Canara Bank Samachar Lehar March 2012

Agriculture & Other Priority..


Finance Ministry opposes RBIs view to stretch priority sectors lending list: The Finance Ministry is opposing a Reserve Bank of India suggest ion t o widen t he list of sect ors eligible for priorit y sect or lending. The Reserve Banks draft report submit t ed t o t he Ministry for it s comment s last week has also recommended t hat some infrast ruct ure segment s should be classified as priorit y. But a Finance Minist ry official said t here is no point in dilut ing t he exist ing list of priorit y sect ors. And if banks are t oo keen t hen we should also raise t he limit from current 40% t o 50% or above. (ET dt .08.02.2012 p19) YES Bank ties up with Buldana society for doorstep service: YES Bank, which is keen t o enhance it s priorit y sect or lending, has t ied up wit h t he Buldana Urban Cooperat ive Credit Societ y t o help t he Society wit h it s new cust omer service init iat ive ent ailing door-st ep para-banking services. The Societ y has launched a new doorst ep service, called Nano Teller, where t he credit societ y employee visit ing t he cust omers house can help him make a deposit or allow withdrawal up t o ` 10,000 from his savings account . The cash handling would be done by the societ ys 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 priorit y sect or lending has recommended doing away wit h t he sub-t arget s for direct and indirect agricult ural advances. Inst ead, t he group, headed by Mr M.V. Nair, CM& D, Union Bank of India, is underst ood t o have pushed for fixing sub-limit s only for lending t o farmers in t he small and marginal cat egory. Furt her, it want s loans given for set t ing up rural infrast ructure t o be classified as priority sect or lending. These suggest ions come as more t han half of t he public sect or banks and nearly half of t he privat e sect or ones have not achieved t he agricult ural advances t arget in t he last financial year. (BL dt .09.02.2012 p6) NABARD launches post-harvest loan scheme for farmers: Farmers always wonder how t he price of produce shoot s up t he moment it leaves t heir hands. The crop in t heir hands is quot ed below t he MSP (minimum support price). A week or t wo lat er, prices in t he secondary and t ertiary market s skyrocket , leaving fruit s of their labour somewhere else. Farmers who sell t heir produce very cheap soon aft er harvest due t o lack of working capit al and for repaying crop loans can now aspire for low-cost loans. They need not sell t heir produce for low prices just t o meet small t ime needs. NABARD has launched a new scheme t hat encourages banks t o give post -harvest loans, t aking warehouse receipt s as receipt s. About 10.62 crore farmers in t he count ry holding Kisan Credit Cards (KCC) will be eligible for t hese loans. (BL dt .09.02.2012 p20) Farm loan defaults rise as crops fail, prices crash: Banks have been wit nessing a rise in default s on agricult ural loans on account of crop failures t his year. Banks, on t heir part, are t rying t o ext end gold loans t o farmers t o help meet cult ivat ion expenses. Apart from crop loans we are also giving gold loans as t his provides addit ional security, said Mr T. M. Bhasin, Chairman & Managing Direct or, Indian Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 Bank. Close t o 1.5 per cent of t he banks t ot al agri advances have slipped int o t he NPA cat egory. (BL dt.18.02.2012 p8) Turn loans for vocational courses into small unit advances: Bankers: Torn between t he Government s keenness t hat the yout h should get loans for pursuing vocat ional courses under t he bank-wide model educat ional loan scheme and rising bad loans, bankers have come up wit h a via media which will not only sat isfy the aut horit ies but also t ake care of t heir concerns on loans t urning sour. They have suggest ed t o t he Finance Minist ry t hat loans for vocat ional courses for skill development should be classified as loans t o t he micro and small ent erprises (MSE) segment . Once loans for vocat ional courses are classified as MSE loans, banks will draw comfort from t he fact t hat t hey will have recourse t o t he Credit Guarant ee Fund Trust for Small and Medium Ent erprises (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 t he inability of many banks t o achieve t he direct lending t arget in t he agricult ure segment , a Reserve Bank of India commit t ee has recommended doing away wit h t he direct and indirect lending dist inction. Inst ead, it has suggest ed a composit e t arget for agricult ure and allied act ivit ies. However, t he commit t ee, headed by Mr M.V. Nair, C& MD, Union Bank of India, kept t he priorit y sect or lending t arget at 40 per cent of adjust ed net bank credit (ANBC) unchanged. The committ ee has suggest ed revising t he priorit y sect or lending t arget for foreign banks t o 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 t ee has recommended rest orat ion of t he priorit y sect or t ag t o t he loans given by banks t o non-bank int ermediaries for on-lending t o ident ified segment s such as agricult ure, micro and small ent erprises, micro credit and weaker sect ions, subject t o a cap. However, non-banking finance companies (NBFCs) in t he gold loans business will be disappoint ed. The Commit t ee on Priorit y Sect or Lending, headed by Mr M. V. Nair, Chairman and Managing Direct or, Union Bank of India, suggest ed t hat loans ext ended against gold jewelleries by NBFCs and ot her int ermediaries should cont inue t o be excluded from priorit y sect or classificat ion. (BL dt .22.02.2012 p6) Set up credit risk guarantee scheme for small, marginal farmers: To address t he risk in lending t o t he agricult ure sect or, an RBI committ ee has recommended t he est ablishment of Agriculture Credit Risk Guarant ee Scheme for small and marginal farmers.The scheme, t o be on the lines of t he Credit Guarant ee Fund Trust for Small and Medium Ent erprises, has been envisaged as t here is perceived risk in bank lending t o small and marginal farmers. These farmers operat e in small fragment ed holdings and are unable t o meet adequat e collat eral 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 count rys second largest foreign lender by branch net work, HSBC, has welcomed M V Nair committ ees report on priority sect or lending (PSL), saying t hat it seeks t o bring in a level playing field. We welcome t he report as it calls for a level playing field for all, Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 because t he proposed increase is not just for one part icular sect or but is flexible, HSBC India Count ry Manager Mr Naina Lal Kidwai said.She point ed out t hat t hough t he report seeks t o increase t he PSL t arget for foreign banks t o 40 per cent of t he overall advances, it also calls for creat ing special cat egories wit hin t he exist ing sect ors such as small and marginal farmers, micro ent erprises, et c, and seeks t hat minimum levels be achieved in every sub-cat egory. (FE dt .27.02.2012 p15) Karnataka banks achieve 90% of priority sector credit target: Banks in Karnat aka have achieved 90 per cent of t heir priorit y sect or credit t arget for t he fiscal up t o December 2011, t he chairman of t he St at e-level bankers commit t ee said at t he 120t h SLBC Karnat aka meet ing here on Monday. Mr Basant Set h, also t he chairman and managing direct or of Syndicat e Bank, said in a press release t hat banks have disbursed Rs 41,412 crore under Priority Sect or Credit up t o December 2011 against t he revised annual t arget of Rs 46,027 crore, t hereby recording an achievement level of 90 per cent . (BL dt .28.02.2012 p19)

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Canara Bank Samachar Lehar March 2012

BASEL..
Centre approves Rs 7,900-cr capital infusion in SBI: The Centre has approved capit al infusion of Rs 7,900 crore (including premium) int o St at e Bank of India by way of preferent ial allot ment of shares. This was conveyed t o SBI t hrough a Finance Minist ry lett er dat ed January 30, t he countrys largest commercial bank informed t he Mumbai st ock exchange on Monday. Wit h t his, the Cent res st ake in SBI would go up t o 65 per cent . Currently, t he Cent re has 59.4 per cent st ake in t he bank. The capit al infusion would also help raise t he Tier-I capit al of t he bank t o 8 per cent . (BL dt .31.01.2012 p1) SBI needs more, says JP Morgan: A report by JP Morgan says t hat t he government 's move t o inject Rs 7,900 crore int o SBI may not be enough t o sust ain t he bank's capital base, and could lead t o another round of fund-raising wit hin 12 mont hs. It argues that while t he Tier-I rat io will now increase by 70 bps t o 8.17%, just above t he 8% t arget set by t he government , it may not be sust ainable considering SBI's "modest profit ability", nearly 20% loan growt h, and st eep rise in NPAs.(ET dt .01.02.2012 p11) United Bank of India seeks Rs 305-cr capital infusion: Unit ed Bank of India has approached t he Cent ral Government for capit al infusion of Rs 305 crore under t he Government 's recapit alizat ion scheme. The bank had recent ly raised Tier II capit al of Rs 100 crore by issuing non-convert ible bonds. We have asked for Rs 305 crore from t he Government and we are hopeful of gett ing t he funds soon, said Mr S. L. Bansal, Execut ive Direct or, Unit ed Bank of India. The bank's capit al-adequacy rat io st ood at 12.63 per cent as on December 31, 2011 and it s Tier I capit al was at 8.37 per cent .(BL dt .01.02.2012 p6) Govt to infuse `.18K Cr in 12 PSU banks: The Finance Minist ry will infuse Rupees 18,000 crore in t he current financial year in 12 banks, including St at e Bank of India (SBI), and will be seeking supplement ary grant s from parliament in t he Budget session.This includes Rupees 7, 900 crore for St at e Bank of India according t o sources. Besides SBI, ot her lenders t hat would be given capit al support , in t his financial year include Punjab Nat ional Bank, Cent ral 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 t ee headed by Finance secret ary Mr. RS Gujral has recommended t hat t he government should pump in `.35,000 crore of addit ional capit al in pure equity int o banks every year for t he next 10 years. The Commit t ee on Capit al Requirement s of Financial Inst it ut ions, set up t o outline a road map for capit al infusion over t he next 10 years, said in it s report t here should be no use of any innovat ive st ruct ures t o augment t he capit al base of t he public sect or financial inst it utions. The sum is more t han double what t he Finance Ministry has been st ruggling t o put t oget her t his year t o recapit alise banks including t he SBI. (FE dt .09.02.2012 p 1)

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Canara Bank Samachar Lehar March 2012 Strong case for higher govt stake: SBI Chairman: The St at e Bank of India Chairman, Mr Prat ip Chaudhuri, on Monday said t here is a st rong case for t he government t o infuse capit al in his bank. The reason: t he 18.12 per cent postt ax ret urn t hat t he capit al invest ment will fet ch will be far in excess of t he cost of t he government s borrowing. The cost of government borrowing is in the 8-9.5 per cent range. But infusing capit al in SBI will give t he government a post -t ax ret urn of 18.12 per cent , explained t he SBI chief, at a press meet . (BL dt 14.02.2012 p.6) Capital support assured for PSBs: The Finance Minist er, Mr Pranab Mukherjee, said t hat the Government is ready t o infuse more capit al in PSBs t o help t hem comply wit h t he Basel III capit al regulat ions, which envisage more st ringent norms for capit al adequacy. The ext ra provisions, or buffers, required under Basel III will also be t aken care of, said Mr Mukherjee, at an event t o mark t he 70t h Foundat ion Day of Orient al Bank of Commerce (OBC), a public-sect or lender. The Basel III capit al regulat ions are t o be implement ed from January 1, 2013 and will be fully phased in by January 1, 2019. A Government -appoint ed commit t ee is working out t he capit al requirement s of PSBs under t he Basel-III regime. St at e-owned banks had been asked t o submit t heir business plans for t he next few years t o help est imat e t he capit al requirement . (BL dt .20.02.2012 p6) South Indian Bank plans to raise Rs 1,000-cr capital this fiscal: Sout h Indian Bank is all set t o revive it s capital raising plan. The Thrissur-headquart ered bank had in July-August 2011 proposed t o raise Rs 1,000-crore of capit al by t aking t he QIP (Qualified Inst it ut ional Placement ) rout e. The plan was subsequent ly put on hold as t he market condit ions were not conducive. It is now learnt t hat t his proposal is being revived and t he bank is planning t o complet e t he process before t he end of t his fiscal. (BL dt .22.02.2012 p6)

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Canara Bank Samachar Lehar March 2012

Bonds Money Market .


CRR cut to weigh on bond yield: The increase in liquidity by t he 50 bps cut in t he CRR and signals on fut ure OMOs will shape t he movement on bond yields next week. Dealers said t he CRR reduction would bring in about `.32,000 crore int o syst em, almost equal t o amount pumped in t hrough t hree OMOs. The RBI had cut t he CRR t o 5.5%, effect ive January 28. On friday, t he 10-year benchmark bond yield set t led at 8.35%, up three basis point s over Wednesdays closing. For t he week, yield on 10 year government bonds rose 18 basis point s over t he last weeks close of 8.17%. During t he week, t he bonds traded around 8.17-8.35%. RBI has released over `.70,000 crore int o t he syst em by buying bonds t hrough OMOs since November, t o support t he government s enhanced borrowing programme. (BS dt 30.01.2012 p.6) Call rate slips: The call rat e fell back on surfeit of liquidit y in t he banking syst em. The rat e react ed downwards t o conclude at 8.75% from 8.90% on Wednesday. It moved in a range bet ween 9.05% and 8.50%. The RBI, under t he Liquidity Adjust ment Facility, purchased securit ies wort h `. 1,20,300 crore from 52 bids at t he one-day repo auct ion at a fixed rat e of 8.50% and sold securit ies wort h Rs 10 crore from one bid at t he one-day reverse repo auct ion at a fixed rat e 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 t hrough an open market operat ion, slight ly lower than the scheduled Rs 10,000 cr. The central bank bought t he 8.07% bonds maturing in 2017 at Rs 99.32, for a yield of 8.2382%, higher t han t he forecast of 8.2180% in a Reut ers poll. It bought t he 9.15% bonds mat uring in 2024 at Rs 106.77, yielding 8.2768%, higher than t he poll forecast of 8.2547%. (FE dt . 18.02.2012 p. 18)

Plastic Money..
Kotak Mahindra Bank buys Barclays' stressed credit card portfolio: Kot ak Mahindra Bank has acquired t he non-performing port folio of Barclays Banks credit card business in India. The deal, expert s said, gives moment um t o t he sale of st ressed loan market in t he count ry which has been having a dry run following st ringent regulat ory norms int roduced in 2007.The port folio acquired by Kot ak is est imat ed t o be around Rs 250-300 crore and comprise nearly 200,000 cards. The privat e sect or lenders in-house asset reconst ruct ion t eam will be responsible for recovering t he dues from these account s. Last mont h, St andard Chart ered Bank bought t he performing port folio of Barclays credit cards business in India. Barclays has decided t o exit ret ail asset s business in India and is also looking for buyers for it s Rs 3,000 crore ret ail loan port folio.(BS dt .01.02.2012 p7)

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Canara Bank Samachar Lehar March 2012 Credit cards deals' value up 53%: Credit card t ransact ions wort h Rs 8421 crore were carried out in december, up 53 per cent as compared t o t he same mont h in 2010. The number of credit cards in circulat ion has, however, declined by 14.4 per cent t o 1.76 crore as December 31, 2011, according t o t he Reserve Bank dat a. (BS dt 14.02.2012 p.6) KVB targets 2 million customers for co-branded SBI credit cards: Tamil Nadu based old generat ion privat e sector lender Karur Vysya Bank (KVB) has set a t arget of 2 million cust omers for it s newly launched co-branded SBI credit cards. Mr. K Venkat araman, Managing Direct or & CEO of KVB said, out of t he t ot al 4 million cust omers of KVB, we are t arget ing a 2 million mop up t hat is 50% of t he t ot al cust omer base. We have t ied-up with SBI card as it adopt s st ringent norms and sophist icat ion in prevent ion of fraud and handling of risk management , he said at t he 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 t he way t hat banks want . Banks, especially from t he public sect or, are discovering t hat t heir cust omers prefer using debit cards mainly for wit hdrawing cash from ATMs. For shopping or eat ing out , cust omers prefer using cash, even t hough most ret ail st ores and rest aurant s now accept card payment s.According t o Visas lat est Global Payment Tracking Survey, even t hough awareness about debit cards is high, the rat e 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 t odays t echnologically driven banking, complaint s of skimming of credit cards are on t he rise, banking officials said in a seminar on secure banking pract ices organized by HDFC Bank. Skimming is t he t heft of credit card informat ion used in a legit imat e transact ion. For inst ance, t he fraudst er can put a device over t he card slot of an ATM, which reads t he magnet ic st rip as t he user unknowingly passes his/ her card t hrough it . A miniat ure camera at t ached t o t he ATM inconspicuously is used t o read t he users PIN (Personal ident ificat ion number) (BL dt 29.02.2012 p.6) TATA capital launches travel card with Axis Bank: TATA capit al and Axis Bank have joint ly launched a t ravel card, which is available in nine currencies, on t he VISA plat form. The card can be used at more t han 26 million out let s and 1.9 million VISA ATMs and on all overseas e-commerce Web Sit es, said a press release. Ot her feat ures include chip-enabled security, lost card liability insurance of up t o Rs 2 lakh, and 24/ 7 call cent re from ot her Tat a Card part ners. (BL dt 29.02.2012 p.6)

Credit Growth..
Growth in personal loans slows to 12.3%: Sect oral credit dat a from the Reserve Bank of India (RBI) shows t hat t he growt h in personal loans has slowed t o 12.3% y-o-y in December from 13.4% y-o-y growt h post ed in November. Since April, 2011, when loans t o t his cat egory had increased by over 18% y-o-y, Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 t he increase has been smaller wit h each passing mont hBank credit t o indust ries declined t o 19.8% y-o-y in December from 20.9% y-o-y in November, while lending t o t he services sect or in December was at 14.9%, compared wit h 16.9% in November, shows the dat a released RBI on Tuesday. (FE dt .01.02.2012 p18) SBI may cut interest rates to boost credit expansion: The count rys largest lender St at e Bank of India (SBI) is keen t o cut int erest rat es t o boost credit expansion.All sentiment is building t owards it (an int erest rat e cut )...we are keen t o do it , t he Chief Financial Officer (CFO), Mr Diwakar Gupt a, t old report ers t oday on the sidelines of an Int ernat ional Research Conference organised by t he RBI.Wit hout indicat ing t he t imeline for the rat e cut, he said t he bank would t ake a call on t he issue aft er t aking int o account t he spreads and profit ability.(BL dt .02.02.2012 p6) Export credit: Interest subvention may be extended by a year: The int erest subvent ion scheme on rupee export credit may be ext ended t ill March 31 next year. Also, more sect ors may be included in t he scheme, which is scheduled t o end on March 31 this year. At present , t he scheme covers four sect ors, handicraft s, handloom, carpet and MSME. The export ers get int erest subvent ion, also known as int erest subsidy at 2%. A person familiar wit h t he development said, Wit h global market s st ill uncert ain, a need is being felt t o ext end t he scheme for one more year. We may see some announcement in the Budget . The ext ended scheme, if announced, will be effect ive from April 1. The view in t he Government is t o include some more labour-int ensive indust ries in t he scheme. (BL dt .06.02.12 p18) MSME Ministry seeks lower borrowing rates: The MSME Minist ry has writ t en t o t he Finance Minist ry t o lower t he rat e of int erest on credit for t he sect or. In a pre-budget demand, MSME Minist er Mr Virbhadra Singh has asked t he government t o look int o opt ions t o reduce t he cost of funds for small scale indust ry. Int ernationally, credit is available at around 4-6% int erest rat e. In India, t he MSMEs are paying as high as up t o 16%. We have request ed t he Finance Minist ry t o bring it at par wit h int ernat ional rat es for MSMEs, Mr Amrendra Sinha, addit ional secret ary, MSME Ministry t old. (FE dt .07.02.2012 p26) Bank loans to microfinance, telecom, jute & tea firms shrink in Apr-Dec: Banks credit t o t he microfinance, t elecom, jute and t ea sect ors shrank in April-December 2011, as lenders t urned caut ious wit h economic slowdown and regulat ory challenges. Micro credit dues fell t o Rs 21,000 crore in December from Rs 26,900 crore in March 2011, according t o Reserve Bank of India dat a. In April-December 2010, micro-credit had grown 32.2 per cent . Banks have been reluct ant t o lend t o t he segment aft er t he latt er came under a regulat ory and legal cloud. Their profitability had been under st rain, said a senior official wit h a large public sect or bank. Loans to t he t elecom segment were also down 9.4 per cent , against a credit growt h of 59.3 per cent in t he same period of 2010. (BS dt .08.02.2012 p6) Credit growth dips further in January: The effect of economic slowdown cont inues t o weigh negat ively on credit demand. Bank disbursement of loans shrunk for t he second fort night in a row, in January.The Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 out st anding loans of commercial banks declined by Rs 3,148 crore t o Rs 43,513 crore in t he fort night ended January 27, according to t he RBI dat a. In t he previous fort night (January 13, 2012) it had shrunk by Rs 11,167 crore. The year-on-year growt h t ill end of January was 15.65 per cent , below t he revised credit growt h est imat e of 16% for 2011-12. The cent ral bank in it s t hird quart er review of policy had cut est imat e from 18 per cent .A senior Punjab Nat ional Bank official said, t he credit pick up remained dull and not much change was expect ed t ill March. (BS dt .09.02.2012 p7) SIDBIs credit growth likely to dip to 21% this fiscal: The Small Indust ries Development Bank of India(SIDBI) might witness a dip in credit growt h 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 growt h is however, marginally higher t han t he t arget ed growt h of 20 per cent for t his fiscal, said Mr N. Raman, Execut ive Direct or, SIDBI. We had achieved more t han 25 per cent growt h in credit last fiscal. This year, however, t he growt h is slight ly subdued. We might be able t o post a credit growt h of about 21 per cent t his year, Mr Raman t old newspersons on t he sidelines of a conference organised by t he CII on Friday. There were some issues wit h loan repayment , part icularly in t he MSME sect or, and SIDBI was looking at t he possibilit y of rest ruct uring of account s, he said. (BL dt .11.02.2012 p6) SBI education loans set to get cheaper: The count rys largest lender St at e Bank of India plans t o cut int erest rat es on educat ion loans. The bank is expect ing a good growth in t his segment wit h t he government promot ing a fund t o guarant ee educat ion loans. We may not reduce our base rat e since it is at 10%, which is t he lowest in t he indust ry . We also do not want t o change our home loan rat es because t hese are at 10.5% which is very close t o t he base rat e, said St at e Bank of India Chairman Mr.Prat ip Chaudhuri (TOI dt .14.02.2012) Home, auto and personal loans see sharp fall in growth: Besides t he power, t elecom, t ext iles and manufact uring sect ors, bankers are also seeing a st eep fall in t he flow of money int o segments such as personal loans, mort gages, aut o loans and even educat ion loans a sure sign of t he st ress in Asias t hird largest economy, hit by persist ently high inflat ion and int erest rat es. The year-on-year loan growt h t o capit al-int ensive industries slowed t o 19.8% bet ween December 2010 and December 2011 from 31.6% in t he year-ago period, according t o Reserve Bank of India (RBI) dat a. Growt h of credit t o agricult ure and relat ed activit ies fell t o 5.6% from 25.4% in t he same period. The fall is most severe in t elecom, micro-credit and t he so-called priorit y sect or t hat comprises loans t o weaker sect ions and export s, among ot hers. (Mint 15.02.2012 p.1) Home, study loans become cheaper: Aft er rising for t wo years, int erest rat es have finally st art ed soft ening, providing t he much-needed relief t o ret ail cust omers. St at e Bank of India (SBI) count rys largest lender has reduced int erest rat es on education loans by 25-100 bps across various mat urit ies. The new rat es would be effect ive from Monday. For a loan of Rs 4 lakh, t he int erest rat e has been reduced by 25 bps t o 11.75 per cent , while for loans bet ween Rs 4 lakh and 7.5 lakh, t he rat e reduct ion is 100 bps t o 12.50 per cent . And, for the loans of above Rs 7.5 Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 lakh, rat es have been cut 25 bps t o 12.25 per cent. SBI also offers a concession of 50 bps on int erest rat es for loans given t o female st udents. (BS dt . 19.02.2012 p. 1) Credit slows on risk aversion by banks: RBI: The overall slowdown in economic act ivit y, risk aversion by banks and monet ary policy act ions t aken so far have led t o a general decelerat ion in credit growt h, said t he RBI, in t he Macroeconomic and Monet ary Development s: Third Quart er Review 2011-12.The out st anding credit flow from scheduled commercial banks as on December 31, 2011 was Rs 43,65,600 crore - a growt h of 16 per cent over t he year-ago period. Against this, in December 2010, t he year-on-year growt h in credit was 24 per cent . The decelerat ion in credit growt h of t he public sect or banks was part icularly sharp, said t he RBI. This reflect ed a rising aversion of banks t hat is leading t o a port folio swit ch t o invest ment s in risk-free government securit ies on t he back of large government borrowing. The credit growt h of foreign banks which had witnessed sharp decline during Oct ober 2008-Oct ober 2009 period, has wit nessed a rebound since t hen. (BL dt .24.01.2012 p6) Lending rates in some segments could come down, say bankers: Lending rat es in some segment s could come down, as t he 50 basis point s reduction in Cash Reserve Rat ion by the Reserve Bank of India will bring down cost of funds. But reduct ion in deposit rat es may not happen immediat ely, given t he rat es of compet ing small savings product s, said bankers. Speaking t o report ers aft er t he announcement of t he Third Quart er Review Monet ary Policy, bankers said t he indicat ion is t hat int erest rat es would soft en lat er. Mr Prat ip Chaudhuri, Chairman, St at e Bank of India, said t hat a cut in deposit rat es will depend on t he rat es offered by compet ing inst rument s, such as t ax free bonds, t ax saving bonds and so on. Wit h so many t ax saving instrument s offering int erest rat es in t he 8.3-8.5 per cent range, one has t o be really circumspect about cut t ing deposit rat es,he said. (BL dt .25.01.2012 p6) SBI hikes income floor for car loans to Rs 2.5 lakh: St at e Bank of India (SBI) has more t han doubled t he minimum income requirement s for availing it s car loans, worried it s aggressive plan t o t ap t he bot t om of t he car-buyers pyramid could saddle it wit h dodgy asset s. The count rys biggest bank will now offer car loans only t o t hose who earn at least Rs 2.5 lakh a year - or about Rs 21,000 a mont h. The bank had been aggressively pushing a seven-year car loan product with a mont hly inst allment (EMI) of Rs 1,765 per lakh. The bank is wary of the scheme at tract ing borrowers who may not be able t o afford a car. SBI recent ly increased it s int erest rat es on car loans by 75 basis point s t o 12%. (ET dt .25.01.2012 p13) SBI to lower interest on edu-loans by 100 bps: The count rys largest lender SBI has t aken in-principle decision t o slash int erest on educat ion loans by up t o 1 percent age point (100 basis point s).The bank has t aken inprinciple decision t o cut (int erest on) educat ion loan, SBI Managing Direct or and Chief Finance Officer Mr Diwakar Gupt a t old. Announcement would be made soon. The bank will issue t he not ificat ion short ly, he added. Wit hout giving det ails of quant um of rat e cut , he said, it may be up t o 100 basis point s.Interest rat es on educat ion loans range from 12.25 per cent t o 14.50 per cent , depending on t heir quant um and the durat ion. (DH dt .27.02.2012 p15) Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 SBI cuts education loan rates by 25-100 basis points: St at e Bank of India has cut t he int erest rat es on educat ion loans by 25-100 basis point s, alt hough it has ret ained it s Base Rat e at 10 per cent . The bank has reduced t he margin above t he Base Rat e for t he loan. As on December end, SBIs educat ion loan port folio was t o t he tune of Rs 12,402 crore.Earlier t his mont h, Cent ral Bank of India had cut rat es on home loans for a period of one mont h and also waived off t he processing fees on home loans. (BL dt .28.02.2012 p6)

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Canara Bank Samachar Lehar March 2012

Deposits...
Rangarajan calls for review of subsidies to check deficit: The Chairman of the Economic Advisory Council t o the Prime Minist er, Dr C Rangarajan, has emphasized t he need for a relook at subsidies, part icularly t hose on pet roleum product s and review of ot her policy aspect s t o keep t he fiscal deficit under cont rol. Speaking t o report ers aft er delivering t he second foundat ion day lect ure of t he ICFAI Foundation, Dr Rangarajan said, It is difficult t o keep the deficit at 4.6 per cent as est imat ed in t he Budget . It is sure t o exceed. The roadmap t o check it is t o phase out subsidies. Referring t o t he st ress on rupee, Dr Rangarajan said t here was some squeeze on it during November-December 2011 due to mismat ch between t he current account deficit and capit al inflows. The process t o ease it was on. Open market operat ions would improve liquidit y, but the CRR cut could be considered for bridging large liquidit y gap. (BL dt . 29.01.2012 p. 5) 8% growth projection likely for next year: The Finance Minist ry is likely t o project economic growt h of around 8% for t he next financial year, compared t o a litt le over 7% expect ed in t he current year. Toget her wit h t he assumpt ion of average inflat ion easing t o around 6% next year, t hat would give a nominal GDP expansion of around 14%. On t he basis of t hat , t ax collections, fiscal deficit and ot her t arget s would be fixed in t he budget . We are looking at around 8% economic growt h for t he next fiscal and inflat ion at 6%, a key minist ry official t old. (BS dt 30.01.2012 p1) Growth, euro zone fears weigh on RBI: Indias cent ral bank is worried about t he slowing economy and fears t hat a recession in t he euro area will furt her drag down domest ic growt h, but it doesnt seem t o be in a hurry t o cut int erest rat es because inflat ion, which fell t o a t wo-year low in December, could flare up again. Yet anot her pressure point t he RBI will t ake int o considerat ion while announcing it s t hird-quart er review of monet ary policy on Tuesday is t he movement of Asias worst -performing currency last year, t he rupee, against t he dollar.In it s macroeconomic and monet ary development s report published on t he eve of t he policy, RBI said despit e concerns about growt h, t he crit ical fact or for deciding what should happen t o int erest rat es will be core inflat ion and exchange rat e pass-t hrough. But it admit t ed t hat it faces a t ough t ask. The growt h slowdown, high inflation and currency pressures complicat e policy choices. Monet ary act ions will need t o st rike a balance bet ween risks t o growt h and inflat ion, it said. (Mint dt .24.01.2012 p1)

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Canara Bank Samachar Lehar March 2012

Financial Inclusion & MFI..


Banks raise loan costs for MFIs: Public sect or banks have raised t he effect ive int erest rat e at which t hey lend money t o microfinance inst it ut ions (MFIs) t o bet ween 15% and 18%, cit ing higher risks in t he sect or.MFIs are companies t hat issue small loans t o poor borrowers. They source around 80% of t heir funds from banks.According t o microfinance indust ry executives and some bankers, t he cost of loans has gone up following a rise in t he premium banks charge in excess of t heir minimum lending rat e. Besides, banks are also charging a processing fee and ask for cash collat eral as securit y. This means banks do not disburse t he ent ire loan amount even t hough t hey charge int erest on it .Punjab National Bank (PNB), Corporat ion Bank, Indian Bank and Syndicat e Bank, among ot hers, have loaned money at an effect ive rat e of 15-18% t o some large microlenders, according t o t he execut ives. (Mint dt .10.02.2012 p1) KVG Bank women form Vanitha Spoorti: The Karnat aka Vikas Grameena Bank (KVG Bank), in an effort t o expand the reach of financial inclusion by involving lady st aff of t he bank, has st art ed a scheme ent itled Vanit ha Spoort i. The scheme was launched by t he bank on Thursday at Dharwad. Addressing t he bank employees, Mr C Sambasiva Reddy, chairman of t he bank, said Women are joining the banking indust ry in large numbers t oday, t heir cont ribut ion in t he progress cannot be denied. In t his changing scenario, t he role of women employees in any organisat ion is also vit al especially in t he business development as well as involvement in day t o day operat ions. (BL dt .11.02.2012 p23) Small MFIs back in favour with banks: Microfinance companies in t he count ry finally have somet hing t o cheer about . Banks have st art ed offering loans t o micro-lenders. Lending has been picking up in t he last one mont h, according t o indust ry players and bankers.Even smaller firms such as Sonat a Finance, Disha India Micro Credit and Arohan Financial Services have got loans or sold some credit port folios t o banks. However, indust ry sources say banks have been sanct ioning credit proposals of micro-lenders locat ed out side Andhra Pradesh, where t he crisis st ill persist s. Sonat a, based in upcount ry Allahabad, has sold a part of it s loan port folio t o Axis Bank. Banks have become support ive, says Anup Singh, chief executive of Sonat a Finance. Quit e a few are considering our loan proposals. We are confident of get t ing credit from t hese lenders in t he coming mont hs. The micro-lender has a loan port folio of around Rs 100 crore, while it has borrowed about Rs 45 crore from banks. Last mont h, Punjab National Bank sanct ioned a loan applicat ion of Disha India, headquart ered in Saharanpur, UP. We have received funding from PNB, says K N Tiwari, chief execut ive officer of Disha. We expect ot her banks will also approve our loan request s. Our business was not affect ed by t he crisis in Andhra Pradesh. Banks have realised t hat and are willing t o lend t o us. (BS dt . 15.02.2012 p. 6) Old private banks asked to step up coverage in areas of operation: Old generat ion privat e sect or banks, while focusing on t heir t errit ories and niche business, should enhance t heir coverage in t heir areas of operat ions t o source more cust omers Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 wit hout increasing cost and risk, according t o Ms Usha Thorat , former Deputy Governor of t he Reserve Bank of India and Direct or of t he Cent re for Advanced Financial Research and Learning. Speaking on t he t heme Old privat e sect or banks in India: Challenges and opport unit ies at t he 88t h Founders Day celebrat ion of Karnat aka Bank Lt d, she said t here has been a fairly st eady growt h in deposit s and advances for old privat e sect or banks but t heir market share has gone down, especially aft er 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 t o sell Rs 500 crore wort h of farm loans t o IDBI Bank in what would be t he biggest securit isat ion deal t his year. Selling loans releases capit al for MFIs and helps t hem deploy fresh loans t o t he poor wit hout borrowing direct ly from banks. In securit isat ion, t he port folio goes off t he sellers advances book and t he risk get s t ransferred t o t he buyer. This, in turn, helps banks meet t heir annual priority sect or and agricult ure lending t arget s. We are commit t ed t o st rike a Rs 500-crore securit isat ion deal wit h IDBI Bank. The t ransact ion will be through within a week, Bandhan C& MD Mr Chandra Shekhar Ghosh t old. (ET dt .27.02.2012 p12) Banks achieve 100% financial inclusion in state: Commercial banks in Karnat aka have achieved 100 per cent financial inclusion ahead of t he March 2012 deadline set by t he Reserve Bank of India (RBI). The banks have set up banking out let s in all t he ident ified 3,395 unbanked villages of over 2,000 populat ion.Announcing t his Basant Set h, chairman, SLBC said t he first phase of financial inclusion has been complet ed wit h t he coverage of villages wit h a populat ion of over 2,000 persons. It is expect ed t hat the banks will be able t o provide basic banking services like savings-cum-overdraft account s, simple savings product like recurring deposit , credit product s like General Credit Card and Kisan Credit Cards and remitt ance t hrough t hese out let s, Set h said. (BS dt .28.02.2012 p5)

Minsitry of Finance
Pranab pitches for foreign investment in infrastructure: Pit ching for foreign invest ment in t he infrast ruct ure sect or which needs $1 trillion in the 12t h plan, the Finance Minist er, Mr Pranab Mukherjee asked t he US invest ors t o access t he Indian debt market t hrough a mechanism of regulat ed ent it ies wit h a sust ained longt erm int erest rat e. Meet ing leaders of Fort une 500 companies, he assured t hem t hat India has evolved a t ransparent and st able regulat ory regime in sect ors such as elect ricit y, t elecommunicat ions, port s, airport s, pet roleum and nat ural gas, and a regulat or for t he coal sect or is on t he anvil. He t old t hem that India has recent ly liberalized foreign part icipat ion in t he debt -equity market by allowing foreign invest ors t o invest in t he Indian equit y direct ly. The ext ent of foreign part icipat ion bot h t hrough debt and equit y in t he financing of Indias infrast ruct ure has been of t he order of around 8 t o 10% in t he recent past . (BL dt . 30.01.2012 p. 3)

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Canara Bank Samachar Lehar March 2012 FinMin urges PSU banks not to overstate profit: The Finance Minist ry has writ t en t o all public sect or banks asking t hem t o ensure profit s are not overst at ed and t o make appropriat e provisions for bad loans.In a let t er t o heads of public sect or banks, t he Finance Minist ry said inst ances of over-report ing of profit have been cont inuing year aft er year and no correct ive act ion seems t o have been t aken t o st op t he recurrence.The let t er assumes significance in t he light of rising bad debt s in t he banking sect or.According t o a senior official of a public sect or bank, t he lett er has been issued recent ly by t he Finance Minist ry. (BS dt .17.02.2012 p7) FinMin prods PSBs to cut loan rates before March-end: The Finance Minist ry is nudging st at e owned banks t o cut lending rat es before end March t hough most lenders had init ially t aken a st and t o review int erest rat es only next financial year. This has not been communicat ed in writ ing, but at a recent meet ing, senior minist ry officials asked bank chiefs t o consider lowering int erest rat es. Even aft er t he RBI in January cut t he CRR t hat banks have t o maint ain, signaling a reversal in t he monet ary policy st ance, bankers had said t hat it would t ake a while for lending rt at es t o soft en. Since CRR is t he slice of cust omer deposit s t hat banks have t o keep as cash wit h t he RBI, a cut in t he rat io following repeat ed rat e hikes was perceived as t he onset of a dovish monet ary policy. (ET dt 27.02.2012 p.1)

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Canara Bank Samachar Lehar March 2012

Forex Inflows..
Banks get leeway on rupee vostro accounts: The RBI dispensed wit h t he rule under which banks were required t o seek it s approval for opening and maint aining vost ro account s by non-resident exchange houses for each new client .Vostro is an account t hat one party holds for anot her. Wit h a view t o give more operat ional leeway t o t he AD Cat egory-I banks, it has been decided t o dispense wit h t he requirement of prior approval of t he RBI for opening and maint aining each Rupee Vost ro account in India of non-resident Exchange Houses in connect ion wit h t he Rupee Drawing Arrangement s (RDAs) t hat banks ent er int o wit h t hem, 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 t o $293.930 billion as of January 27, from $293.257 billion in t he previous week, t he cent ral bank said in it s WSS. Changes in foreign currency asset s, expressed in dollar t erms, include t he effect of appreciat ion or depreciat ion of ot her currencies held in it s reserves, t he RBI said. Foreign exchange reserves include India's Reserve t ranche posit ion in the Int ernat ional Monet ary Fund. (BL dt . 04.02.2012 p. 6) RBI partly lifts curbs on banks forex deals: The RBI has part ially lift ed t he clampdown imposed on banks foreign exchange t ransact ions when t he rupee came under at t ack from currency speculat ors in December. While the exchange market may not be ent irely out of t he woods and t he rupee can again come under pressure if Indian companies fail t o roll over t heir dollar borrowings, t he regulat or has given some headroom t o banks who were finding it difficult t o meet client demands. Several banks, including large lenders like SBI, ICICI, HDFC Bank, Axis Bank and some public sect or inst it ut ions have been allowed t o run higher net overnight open posit ions (NOP) in foreign exchange. Banks use t he open position limit s which differ from lender t o lender depending on t he size and level of t reasury act ivity t o eit her carry our propriet ary t rades or buy and sell dollars t o meet t he requirement s of corporat e client s. (ET dt . 06.02.2012 p. 1) RBI eases cap on banks forex positions: The Reserve Bank of India said it has relaxed t he limit s on foreign exchange posit ions of banks imposed in t he aft ermat h of a st eep fall of t he rupee in December. Some limit s based on t heir (banks) merchant posit ions have been relaxed. If t hey have a requirement , t hey can come and approach us t hrough t he Foreign Exchange Dealers Associat ion of India (Fedai), Reserve Bank of India Deput y Governor Mr H R Khan t old report ers. Khan said banks will have t o approach Reserve Bank of India wit h permission from t heir chairmen and managing direct ors and explain why and by how much t hey need t he relaxat ions. (FE dt .07.02.2012 p18) Forex reserves decline $177 m to touch $294 b: India's foreign exchange reserves fell t o $293.75 billion as of February 3 from $293.93 billion in t he previous week, t he cent ral bank said in it s weekly st at ist ical supplement on Friday. Changes in foreign currency asset s, expressed in dollar t erms, include t he effect of Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 appreciat ion or depreciat ion of ot her currencies held in it s reserves, t he Reserve Bank of India said. Foreign exchange reserves include India's reserve t ranche posit ion in t he Int ernational Monet ary Fund (IMF) (ET dt 11.02.2012 p.7) NRE deposits surge on high interest, weak rupee: Despit e t he rupee t aking a U-t urn and appreciat ing against t he dollar, t he lure of highint erest income seems t o be at t ract ing Indians st aying abroad t o park huge sums in India. According t o Reserve Bank of India (RBI) dat a, in t he first nine mont hs of t his financial year, non-resident ext ernal (NRE) deposit flows t o India are est imat ed at $3,500 million. Indust ry analyst s and market part icipant s, however, said in t he past seven weeks, around $4-5 billion NRE deposit s 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 t o $293.383 billion for t he week ended February 10, according t o t he Reserve Bank of Indias weekly St at ist ical Supplement . The decrease in reserves was mainly on account of currency revaluat ion. This is t he second week in a row t hat foreign exchange reserves have declined. In t he earlier week ended February 3, forex reserves had dipped by $177 million t o $293.753 billion. In t he week under considerat ion, t he foreign currency asset s fell by $370.6 million t o $259.446 billion. (BL dt .18.02.2012 p8)

Housing Worries..
Banks must fix realistic EMI ratio for housing loans: Non-performing asset s are perhaps t he major fact or of most banks in India leading t o higher provisions, reduced int erest income and locking up of huge funds affect ing ret urn on asset s, net int erest income and consequent ly profit ability. According t o st at ist ics, NPAs as percent age of t ot al advances has come down from 23.2 per cent in 1993 t o 2.2 per cent in 2011. This, no doubt , is a commendable achievement . But t his should not make one t oo complacent about NPA management . One factor responsible for the reduct ion in NPAs in percent age t erms, is t he massive growt h in advances during t he period from Rs 1,69,340 crore in 1993 t o Rs 33,05,632 crore in 2011. During t he same period, NPAs have grown from Rs 39,253 crore t o Rs 71,047 crore in 2011. The percent age increase in NPAs is much smaller compared t o t he percent age growt h in advances. (BL dt . 30.01.2012 p. 6) SBI to sell UK home loans: SBI, is set t o ent er t he UK resident ial mort gage market in August following the banks expansion of it s int ernat ional business last year. SBI came under scrut iny for offering t easer home loan rat es, which are init ially low but t hen escalat e, t o domest ic cust omers in 2011, leading t he Indian regulat or t o fear t he count ry might experience a repeat of t he US sub prime loan crisis. The bank said t hat it planned t o t ake a conservat ive approach t o lending overseas. Aft er nearly 90 years in t he UK, SBI increased it s range of services last year, increasing it s branch net work from 7 t o 10. (FE dt 30.01.2012 p.1)
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Canara Bank Samachar Lehar March 2012 RBI: Housing Finance may come under priority lending: The RBI said it is considering cat egorising housing finance for weaker sect ions as priorit y sect or lending by early next mont h t o ensure adequat e flow of credit . We are t rying t o put housing finance for weaker sect ion as a part of priorit y sect or. There is a commit t ee which is looking int o it . Hopefully, by t he first week of February t his report will come, RBI Deput y Governor Mr H R Khan said. The commit t ee 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 t o our not ice t hat banks adopt different pract ices for deciding t he value of t he house propert y while sanctioning housing loans. Some banks include st amp dut y, regist rat ion and ot her document ation charges in t he cost of t he house property, Reserve Bank of India said. It said t his leads t o overst at ing of t he realisable value of t he propert y as st amp duty, regist ration and ot her document ation charges are not realisable and consequent ly t he margin st ipulat ed get s dilut ed.Accordingly, banks should not include t hese charges in t he cost of t he housing propert y t hey finance so t hat t he effect iveness of Loan t o Value (LTV) norms is not dilut ed, t he apex bank said.Concerned over excessive flow of banking funds t o t he real est at e sect or, RBI had, in 2010, issued guidelines directing t he lenders t o provide loans only up t o 80 per cent of t he cost of propert y. (DH dt .04.02.2012 p17) Home loans norms may hurt sales: The RBIs lat est not ificat ion t o banks t o exclude st amp dut y, regist rat ion and such like charges while calculat ing t he value of a propert y t hey int end t o finance could lead t o a furt her decline in housing sales in t he lower and medium segment s, say developers and consult ant s. The not ificat ion effect ively means housing buyers would have t o arrange more funds on t heir 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 t er t erms, wit h the concept of mort gage guarant ee set t o t ake off in t he coming weeks. Mort gage guarant ees will ensure soft ening of int erest rat es as well as more credit availability for ret ail home loan borrowers, Mr R. V. Verma, Nat ional Housing Bank Chairman, said. Wit h this product, lenders will get new cust omers who have not been part of t he financial syst em. Exist ing cust omers will also benefit t hrough bet t er t erms, he said. Mr Verma said t hat Indias first mort gage guarant ee 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 t o waive repayment charges on housing loans reflect s t he bank's concern for it s client ele desirous of repaying housing loans before repayment schedule," Chairman and Managing Direct or D P Singh said (BS dt 09.02.2012 p.6)

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Canara Bank Samachar Lehar March 2012 CBI, BoM cut home loan rates by 0.25%: To prop up t he sagging home loan market , st at e-run lenders Cent ral Bank of India (CBI) and Bank of Maharasht ra (BoM) have announced slashing of int erest rat es by up t o 0.25 per cent , and also decided t o waive t he processing fees. Pune-headquart ered BoM has decided t o give housing loans under Rs 25 lakh for a five-year t enor at t he reduced base rat e (below which it cannot lend) of 10.60 per cent , it said. Similarly, CBI has cut home loan rat es by up t o 0.25 percent , it said. A home loan of up t o 25 years and under Rs 30 lakh will be available at 10.75 per cent . Bot h t he 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 it s int erest rat es on housing loans for bot h it s short and long t enure varying from 100 bps t o 200 bps and claims t o offer t he lowest int erest rat e. The revised rat es came int o effect from December 10. Wit h t his reduct ion from 10% t o 8.75% in it s fixed rat e and a cut of 200 bps on float ing rat e from 10.5% t o 8.5% for t he 60-mont h t enure. (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 t o it s Chairman and Managing Direct or, Mr M. D. Mallya. This will cat er t o our major branch expansion plan during the next financial year and replacement of ret ired st aff, Mr Mallya t old. The bank has plans t o open over 500 branches in t he next one year which would need manpower, he added. The recruit ment will be conduct ed on the basis on a common writt en exam being conduct ed by t he Inst it ute of Banking Personnel Select ion as part of an agreement it ent ered int o wit h 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 t he Inst it ut e for Banking Personal Select ions (IBPS) will develop an online t est ing t ool t o enable t hem t o t ake t he t est wit hout scribes, for t he first t ime. The biggest t est ing and skill-building organisat ion has joined hands wit h Int ernat ional Inst it ut e of Informat ion Technology Bangalore (IIITB) and t he Nat ional Associat ion for t he Blind Karnat aka (NABK), t o develop hra Sarat hy, t he t est ing t ool, in about eight mont hs. The t ool will be Net deployed nat ionally for all visually challenged candidat es t aking t he t est by t he end of 2012, IBPS Direct or Balachandran t old Deccan Herald over t he phone, from Mumbai. There are nearly 1.45 million visually challenged persons aged bet ween 20 and 29 in t he count ry 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 Dault ani assumed charge as t he ED of Corporat ion Bank wit h effect from February 3. Before t aking over t his assignment , Mr Dault ani held t he posit ion of t he Field Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 General Manager (Sout h) of Allahabad Bank at Chennai, and handled t he business development of sout hern St at es. A Corporat ion Bank press release st at es t hat Mr Dault ani, a post graduat e in Economics from Agra Universit y, st art ed 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 Amit abh Chat urvedi, called it quit s on Monday. His resignat ion comes, report edly, on account of differences of opinion wit h t he board of direct ors. Mr P. G. Jayakumar, Execut ive Direct or, has been given t he charge as MD and CEO of t he bank, subject t o t he Reserve Bank of Indias approval. Mr Kumar has been wit h t he bank for 34 years. Mr Chat urvedi had been at t he helm of t he old generat ion privat e sect or bank since Oct ober 2008. In Oct ober 2011, the Reserve Bank of India had conveyed it s approval for re-appoint ment of Mr Chat urvedi as MD and CEO of Dhanlaxmi Bank for a furt her 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 St at e Bank officers federat ion have demanded implement at ion of five-day work week for t he banking indust ry. In view of alt ernat e channels available t o cust omers such as ATM, int ernet banking, mobile banking et c, a 5-day week may be implement ed in the banking indust ry, Mr G D Nadaf, t he General Secret ary of All-India Bank officers confederat ion and All-India St at e Bank officersfederat ion said. (FE dt .07.02.2012 p18) Central Bank plans to hire 2,700 personnel this year: One of t he oldest st at e-run banks, Cent ral Bank of India is on a massive recruit ment exercise, a senior official of t he bank said. The bank plans t o recruit 2,700 people t his year t o add t o t he 3,200 recruit ed last year.Ms Vijayalakshmi R. Iyer, Execut ive Direct or, Central Bank of India, said t hat t his number would be exclusive of t he addit ion in specialised segment s such as t reasury operat ions, legal, and so on. The recruit ment exercise was t riggered by large number of ret irement s. Around 1,500 t o 1,800 are ret iring every year, over t he last t wo years and in t he next t hree years. (BL dt .09.02.2012 p6) Federal Bank to hire 3,000 over two years: Old generat ion privat e sect or bank Federal Bank is looking t o hire about 3,000 personnel over t he next t wo years. This recruit ment is aimed at support ing t he subst ant ial branch expansion plan as well as t o replace t he large ret iring workforce, said Mr Shyam Srinivasan, MD& CEO. The plan is t o increase the branch net work from t he current 833 t o 940 by March and t o 1,000 by June. Also, about 800-900 people are expect ed t o ret ire in 2012, thereby making it necessary t o hire more st aff, 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 aft er he t ook charge of Dhanlaxmi Bank, Mr.PG Jayakumar decided t o cut cost s t o st rengt hen t he financial posit ion of t he Thrissur-based privat e lender. The aust erity drive would include salary cut s, reduct ion in t ravel expenses and decrease in discret ionary spends.There is an imperat ive need t o exercise ext reme rest raint on cost . "My earnest Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 appeal t o all my bret hren is t o promot e austerit y in t he bank. Wherever possible, avoid spending.In t his regard we need t o be prepared t o make sacrifices for our beloved inst it ut ion in agreeing t o salary cut s, economy class t ravel, et c. Mr.Jayakumar, t he newlyappoint ed 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 sect or organisat ions coming t o t he rescue of t he Indian Inst it ut es of Management (IIMs). This placement season may not paint a similar pict ure. For inst ance, St at e Bank of India (SBI) and IDBI Bank have decided not t o go t o t he IIMs t his year. Union Bank of India and Bank of India are not sure about t he number of st udent s t hey will get t o recruit . We will visit all ot her management inst it ut es except the IIMs, as we have had a bad experience wit h t hem, says Mr T R Bajalia, Execut ive Direct or (HR) (BS dt .14.02.2012 p2) MD of TMB announces decision to quit: Mr A K Jagannat han, MD of Tamilnadu Mercant ile Bank, has announced his decision t o resign. This follows anot her recent high profile exit - that of Dhanlaxmi Bank's Chief Execut ive, Mr Amit abh Chat urvedi. Mr Jagannat han, has been at t he helm of TMB for t he last one - and - a- half years. Cit ing personal reasons for quit t ing office Mr Jagannat han maint ained t hat he had cert ain urgent pressures on t he personal front . "I am hoping t o remain act ive t hough," he said, adding: "I am happy t o exit when t he bank is doing well. I will cont inue in Office for anot her t hree mont hs, finalise t he 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 t he junior management grade/ Scale I) t o fill up about 600 vacancies across the count ry. The bank has specified t hat candidat es wit h a t ot al weight ed st andard score of 125 in t he common writ t en examinat ion conduct ed by Inst it ut e of Banking Personnel Select ion (IBPS) and fulfill ot her crit eria will be eligible t o apply. The bank will specify t hese crit eria and ot her det ails on it s Web sit e aft er February 21. (BL Dt .16.02.2012 p6) CMD-designate for Oriental Bank: Orient al Bank of Commerce said t hat Mr S.L.Bansal has joined t he bank as Chairman and Managing Direct or designat e. He will t ake full charge of his new role wit h effect from March 1. Mr Bansal will come in t he 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 it s demands for regulat ed working hours, pay parity wit h SBI officers, st oppage of cross mergers of regional rural banks, and five-day working week, t he AllIndia Bank Officers Associat ion (AIBOA) has called for an all-India bank st rike on February 28. The Associat ions move coincides wit h t he st rike call by cent ral t rade unions on t he same day. Though clerical and sub-st aff in banks have fixed working hours of 6.5 hours and 7 hours respect ively, the officers dont have regulat ed working hours. Despit e core banking syst em being in place, t hey end up putt ing in almost 12 hours every day at

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Canara Bank Samachar Lehar March 2012 branches, said Mr Vishwas Ut agi, General Secret ary, Maharashtra St at e Bank Employees Federat ion. (BL dt .27.02.2012 p14) SBI texts alert to branches on strike: The St at e Bank of India management chose t o t ext it s branch managers all over t he count ry wit h regard t o conduct of business on Tuesday in view of t he general st rike called by t rade unions of all party affiliat ions. It want ed branch managers t o creat e evidence t hrough video recording against strikers who were seen obst ructing t he normal conduct of business. The evidence would be used against t hem 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 Lt d, aft er t he cont roversial exit of Chief Execut ive Officer Mr Amit abh Chat urvedi, is set t o reverse some of his st rat egies. The lender plans t o cut t he st aff st rengt h t o 2,500-3,000 from around 4,600 now; rat ionalize t he salaries of senior executives and remove t he vert ical business st ruct ures, t wo execut ives of t he Kerala-based bank said. The management will seek t he boards approval for t he st rat egy change next month. The bank want s t o bring down it s wage bill t o 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 Direct or, Mr K R Kamat h, while responding t o a quest ion on recruit ment s he said t hat t he bank had recruit ed about 6400 clerical st aff last year. This was done t o make up for t he short fall t hat had accumulat ed over some years because of no recruit ment . Punjab Nat ional Bank is also hiring close t o 1,000 probat ionary officers and speacialist officers t his year. Punjab Nat ional Bank added 400 branches last year t o t ake it s net work t o about 5,400 branches current ly. So t he challenge is not so much about recruit ment as about ret aining t hem. (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 growt h will negat ively impact Indias sovereign rat ing, rat ing agency St andard and Poors said. Many developing count ries, including India, have managed t o maint ain relat ive st ability and cont inued growt h despit e sovereign debt concerns and weak economic performance in Europe and t he US. But , t hese nat ions do face challenges of t heir own. S& Ps unsolicit ed rat ing for India is BBB-/ St able/ A-3Rat ings Services said t he balance of risk fact ors (for Indias sovereign rat ing) may be shift ing slight ly t oward t he negat ive. (BS dt .07.02.2012 p6)

Infrastructure..
IDBI bank to launch Indias first infrastructure fund: St at e-run IDBI Bank will launch t he countrys first infrast ruct ure debt fund (IDF) t o raise $5 billion for building roads, port s and airport s. Such debt funds, announced in the budget 2011-12, can be float ed t hrough non-banking finance companies (NBFC) or as t rust s. They were proposed two years ago by a panel led by HDFC chairman Mr.Deepak Parekh, which had suggest ed an init ial corpus of 50,000 crore. IDBI Bank has sought Reserve Bank of Indias approval for an NBFC, which will have a capit al base of 1,000 crore. The bank will hold 30% st ake in t he NBFC and t he rest will be held by some st at e-run banks and Life Insurance Corporat ion of India, said a t op 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 asset s in t he infrast ruct ure and power sect ors, said Mr Naresh Takkar, Managing Direct or and CEO, ICRA. Speaking at India Infolines Ent erprising India 2012 Global Invest ors Conference, Mr Takkar said 75 per cent of banks exposure t o elect ricit y boards are t owards weak ut ilit ies. So, out of t he Rs 1.2-1.3 lakh crore exposures t o elect ricity boards, about Rs 1 lakh crore wort h of loans are subject t o uncert aint y and require policy int ervent ion such as t ariff hikes. Some St at es are working on aggressive t ariff hikes, he added. Wit h regard t o road project s, Mr Takkar said t hat t he underlying profit ability of project s is very low and these have high proport ion of debt . So, it is t he banking sect or which is at risk and not t he developers. (BL dt .16.02.2012 p6)

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Insurance..
IndusInd Bank to pick up 3-5% stake in Aviva Life: Privat e sect or lender IndusInd Bank is set t o pick up t hree-five per cent st ake in privat e sect or life insurer Aviva Life Insurance. According t o sources privy t o t he development , as part of t he deal, apart from offering shares, Aviva Life would also pay an advance commission, t aking t he t ot al valuat ion of t he deal t o around Rs 1,000 crore.The final modalit ies are being worked out . IndusInd Bank would have a board meet ing lat er t his week, aft er which t he deal would be announced, a source said. The privat e sect or lender is already a corporat e agent for Aviva Life, a joint vent ure bet ween fast -moving consumer goods major Dabur Group and UKs Aviva, wit h t he lat t er holding 26 per cent st ake. (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 equit y in favour of Life Insurance Corporation by way of allot ment of preferent ial shares. Based on t he current market prices, LIC may have t o invest close t o Rs 125 crore for t he stake and t he exercise would be over by t he end of t his fiscal, Chairman and Managing Direct or Mr Nupur Mit ra said. The preferent ial issue t o LIC will result in t he government s st ake in t he bank falling below 58% - t he t hreshold limit t he government desires t o maint ain in public sect or banks. Government holding will fall t o 55% wit h LIC coming in. Therefore, t he government may have to infuse more capit al int o the bank t o ret ain 58% st ake. We have asked for Rs 500-crore capit al over t he next t wo-three years, Mr Mit ra said. (ET dt .07.02.2012 p13) Bank of M aharashtra to raise capital from LIC, second after Dena Bank: The Bank of Maharahst ra will be t he second bank aft er Dena Bank t o raise capit al from Life Insurance Corporat ion (LIC), in a move aimed at boost ing t heir capit al. The board of t he bank will meet on February 10 t o consider issuing shares on preferent ial basis t o government or LIC, according t o a st at ement issued t o t he st ock exchange. Widening fiscal deficit has prompt ed government t o approach LIC t o invest in government owned banks a move which will help government t o trim expenses and yet ret ain control over banks. (ET dt .09.02.2012 p11) BOM to allot 5% on preference basis to LIC: The board of Bank of Maharast ra (BoM) has decided t o dilut e a 5% st ake in favour of Life Insurance Corporat ion (LIC), which will help t he bank shore it s capit al adequacy rat io (CAR). The government owned bank has decided t o issue shares on a preferent ial basis t o LIC before t he end of t his fiscal. The insurance company is expect ed t o invest a lit t le t han `.100 crore t o gain addit ional st ake in t he bank. Following t his, LIC st ake in t he bank will increase t o a lit t le over 11%. Sources from Bank of Maharast ra said t hat t he bank's t ier I capit al reserves and equit y st ood at 7.6% now and following infusion of capit al by LIC it will cross 8% - t he basic minimum t hat government desires in PSU banks. "we also expect t he Government t o infuse `.860 crore in t he bank somet imes soon," said a senior bank official who did not want t o be quot ed.Last year t he government had infused `.1000 crore in t he bank. Shares of BoM closed 2% higher over previous day's close at `.56 at t he Bombay St ock Exchange.(BSE). (ET dt 11.02.2012 p.7) Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 Banks oppose IRDA norms on retailing policies: Concerned about possible dual regulat ory supervision and resist ance from foreign part ners in t heir insurance joint vent ures (JVs), Indian banks have opposed t he proposed revision in guidelines for dist ribut ion t ie-ups bet ween insurance companies and banks for t he sale of insurance policies. The Insurance Regulat ory and Development Aut horit y (Irda) had, in a bid t o creat e a level playing field, proposed a st at e-wise arrangement for such dist ribut ion t ie-ups, known as bancassurance. Wit h t heir ext ensive nat ional networks, commercial banks provide an ideal plat form for insurance companies t o sell t heir product s. Wit h many banks st arting t heir own insurance vent ures, newer, non-bank promot ed insurers have been finding it difficult t o find dist ribut ion part ners wit h a wide net work. This is because exist ing regulat ions deem t hat one bank can t ie up with only one life and one non-life insurance company across t he 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 t o go for a preferent ial issue of shares t o anot her st at e-run firm, LIC. Money realised t hrough t his issue will help t he bank t o st rengt hen CR AR.With t he government being in a t ight spot on the fiscal front , Indias largest life insurance company is coming t o t he rescue of public sect or banks t o pump in funds t o boost t heir Tier-I (core) capit al. Aft er t he government , LIC is t he single biggest shareholder in majority of t he public sect or banks. (BL dt .17.02.2012 p6) Life insurers discover a low-cost distribution option: Life insurance companies are discovering t hat , compared wit h ot her dist ribut ion channels, bancassurance is a lower-cost opt ion t hey can leverage t o expand t heir dist ribut ion net work, according t o a st udy commissioned by the Confederat ion of Indian Industry. The st udy, t it led Addressing Dist ribut ion Challenges in Insurance, said t he increased t ie-ups of banks wit h insurance companies indicat ed the lat t er are making use of t he opport unit y t o leverage t he ext ensive branch net work. The st udy was carried out by Ernst & Young Pvt Lt d for t he CII. Bank-based insurers are bet ter posit ioned due t o t heir relat ively lower development cost s, it said. (BL dt .17.02.2012 p6) UCO Bank to issue 3.13 cr equity shares to LIC on preferential basis: Kolkat a-based UCO Bank proposed an issue of 3.13 crore equity shares t o Life Insurance Corporat ion of India on preferent ial basis. The decision was t aken by t he board of direct ors at a meet ing in Kolkat a. The issue of 3.13-crore equit y shares t o LIC on preferent ial basis will be done at a price as det ermined in accordance wit h Securit ies Exchange Board of India (ICDR) Regulat ions 2009. It will be subject t o approval of the Union Government , RBI and t he banks shareholders, t he bank said in a not ificat ion t o t he BSE. (BL dt .22.02.2012 p6) LIC set to buy stakes in six PSBs to lend a hand to cash-strapped govt: Wit h t he government st rapped for cash, t he count rys largest domest ic inst it ut ional invest or, LIC, has st art ed subscribing t o a slew of preferent ial allot ment s. At least half a dozen PSBs have decided t o allot a large chunks of shares t o t he insurance sect or behemot h. In t he last few days, Bank of India (BoI), Punjab Nat ional Bank (PNB), Dena Bank, UCO Bank, Indian Overseas Bank (IOB) and Allahabad Bank have eit her approved t he

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Canara Bank Samachar Lehar March 2012 allot ment of shares on a preferent ial basis t o LIC or have called a board meet t o get the final approvals. (FE dt 23.02.2012 p.13) PNB awaits IRDA nod on Metlife deal: Await ing regulat ory approval for it s proposed acquisit ion of a 30 per cent st ake in insurance company Metlife, Punjab National Bank has said it would not disclose t he rat ionale behind t he move or t he financial det ails unt il IRDA gives it s nod. Chairman & Managing Direct or Mr K R Kamat h said Punjab Nat ional Bank did not foresee any hurdles for t he deal, announced five mont hs earlier, and would unveil t he t ransact ion det ails aft er t he approvals were secured. If t he proposed deal mat erialized, t he bank would become t he largest shareholder in t he insurance company. (BS dt . 24.01.2012 p. 6) Indian Bank drops plans for standalone life insurance venture: Indian Bank, a Public Sect or lender, has shelved plans t o float a separat e subsidiary for t aking up life insurance business. Inst ead, t he bank will focus on building a mult ipleagency relat ionship syst em t o augment business, it s Chairman & Managing Direct or, Mr T M Bhasin, said. It would also go in for whit e-labeling of product s so that Indian Banks name appears on product s being offered by various agency part ners, Mr Bhasin said. The move t o abandon plans for set t ing up a separat e life insurance vent ure comes in t he wake of t he banks decision t o conserve capit al and use it more propit iously for it s 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 indicat ed t hat it could go in for anot her cut in t he cash reserve rat io (CRR) t o unlock banking funds in view of persist ent liquidity pressure. "We are wat ching t he liquidity sit uat ion... I t hink t hat decision (anot her CRR cut ) will be t aken when we do our mid-quart er review... Having done one, I t hink t he possibilit y of anot her is always on the t able," said RBI deput y governor Subir Gokarn on t he 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 t hat conduct ing open market operat ions buying and selling of government paper for liquidit y management could end up hurt ing price st abilit y. If t he mot ivat ion for cent ral banks t o conduct OMOs is t o help out a fiscally vulnerable sovereign or reduce t he cost of borrowing for t he sovereign, t hen t hey could end up holding price st abilit y host age t o sovereign debt concerns, said t he Governor at t he Second Int ernat ional Research Conference. In financial year 2012 so far, t he RBI has conduct ed 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 t o cut rat es aggressively even as economic growt h appears t o have slowed and inflat ion has st art ed moderat ing.That sort of room for very Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 aggressive and very rapid rat e cut s simply does not exist in t odays sit uat ion. The behaviour of commodit y prices is and remains a risk t o our inflat ion and growth out look. Let s wait and wat ch and see how t he sit uat ion st abilises, Reserve Bank of India Deputy Governor Dr Subir Gokarn t old. Wit h economic growt h dwindling, t he cent ral bank had kept key policy rat es unchanged for t he second consecut ive mont h in January 2012. However, it refrained from reducing t he rat es amid upside risks t o inflat ion from global crude oil prices and t he lingering impact of rupee depreciat ion. (BS dt .04.02.2012 p1) RBI buys Rs 8,819.52 crore bonds under OM O: The Reserve Bank of India bought Rs 8,819.52 crore bonds t hrough open market operat ions, against a t arget of Rs 10,000 crore, as part of it s st rat egy t o infuse liquidity int o t he syst em. Four securities were on offer and RBI subscribed t o all of t hem, t he central bank said in a st at ement. (Mint dt . 04.02.2012 p. 9) No decision yet, to stop bond purchases through OMO:Gokarn The RBI assured market part icipant s t hat bond purchases under open market operat ions (OMOs) have not been discont inued and are very much on t he t able.We have not put a st op over OMOs by any means, t hey are st ill on t he t able, Deput y Governor Dr Subir Gokarn t old report ers on t he sidelines of an invest or meet . The cent ral banks purchases of government bonds t hrough OMO auct ions would depend on liquidit y conditions, Mr. Gokarn said.Bond t raders feared t hat t he absence of bond purchases by t he RBI t his week meant an end of it s bond-buying programme for t he financial year.(BS dt .09.02.2012 p7) Chorus for CRR cut as Liquidity remains tight: Calls for a cut in t he cash reserve rat io (CRR) to boost liquidity are gaining moment um as cash payment s during st at e elect ions, int ervent ion t o st abilise t he rupee, and slowing loan repayment s by companies drain money out of banks. The RBI, which succeeded in keeping t he government s cost of borrowing in check wit h t he so-called open market operat ions (OMO), hasnt succeeded in easing liquidity pressure on t he banking syst em. In OMOs, t he RBI buys bonds, increasing cash in t he syst em.Banks borrowing from t he Reserve Bank of Indias repo window, an indicat or of liquidity, rose t o Rs 1.70 lakh crore on Tuesday, compared wit h August 2010 when banks were deposit ing excess funds wit h it . This deficit is more t han t hree t imes t he approximat e Rs 55,000 crore t he RBI has said it is comfort able with.We expect a CRR cut of anot her 50 basis point s that would release about Rs 27,000 crore int o t he syst em, 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 Deput y Governor, Dr Subir Gokarn, said that t he Reserve Bank of India will consider a furt her cut in t he cash reserve ratio (CRR) if t he syst emic liquidity condit ions cont inue t o be t ight . To t he ext ent that an opport unit y is available for CRR (which is t he percent age of deposit s banks have t o keep with t he central bank,) cut furt her, we will also consider t hat , Dr Gokarn, who oversees t he monet ary policy function at t he apex bank, t old. (BL dt . 22.02.2012 p. 6)

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Canara Bank Samachar Lehar March 2012 Banks to maintain higher liquidity:RBI: The Reserve Bank of India said t hat banks need t o maint ain addit ional liquid asset s as part of Basel III guidelines, over and above previously mandat ed levels. Banks will need t o adhere t o t hese norms from t he mont h or quart er ending June 2012, t he RBI said in it s draft guidelines on Liquidity Risk Management and Basel III Framework on Liquidit y St andards. Indian banks current ly need t o meet RBI-set requirement s of cash reserve rat io (CRR), and st at ut ory liquidit y rat io (SLR). The CRR, or t he share of deposit s t hat banks must set aside in cash wit h t he RBI, is 5.5 per cent , and SLR, or t he minimum amount of invest ment s t hat banks need t o 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, t he capit al market regulat or, lift ed rest rict ions on board-based inst itut ions, such as insurance companies and mut ual funds, subscribing t o preferent ial issues of companies. The decision was t aken at it s board meet ing in New Delhi. According t o earlier regulat ions, t hese inst it ut ions were not allowed t o part icipat e in preferent ial allot ment s if t hey had sold holdings in t he issuer companies in t he preceding six mont hs. Furt her, on allot ment , t hey were required t o lock in t heir ent ire pre-preferent ial holdings in such companies for a period of six mont hs from t he dat e of preferent ial allot ment . Bot h these rest rict ions have now been lift ed. It has been decided t o exempt insurance companies and mut ual funds, which are board-based invest ment vehicles represent ing public at large, from regulat ions relat ed t o sale and lock-in of t heir pre-preferent ial shareholding in issuer companies, Sebi said in a release. However, t he lock-in on shares allot t ed in t he 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 t o hedge t heir risks in t he commodit y futures market . According t o government sources, t he finance ministry has writt en t o RBI t o explore ways t o allow entry of banks in commodity hedging. RBI is act ively considering t he mat t er. Banks give finance against commodit y as collat eral and hence t hey t ake risk on t he price of t hat collateral commodit y. The sources said t he move would help improve real hedging and different kinds of risk-t akers would come on board. A commit t ee set up by t he central bank had recommended six years ago t hat banks should be allowed t o hedge such risks and should also be allowed t o aggregat ors who aggregat e ot hers risks and hedge on t heir behalf in commodity fut ures. (BS 30.01.2012 p.6) Auditors holding back key info, I-bankers tell Sebi: Invest ment banks carrying out prelist ing due diligence in many companies have t old capit al market regulat or SEBI t hat audit ors of t hese firms are holding back key informat ion from t hem. Several audit ors have refused t o provide t ax benefit st at ement s, document s support ing end-use of IPO proceeds, and project funding det ails on t he Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 grounds t hat sharing such informat ion is beyond t heir scope of assignment . Since such crucial dat a can significant ly influence invest ment decisions, t he mat t er was discussed at a recent meet ing of t he SEBI Commit t ee on Disclosures and Account ing St andards. According t o regulat ions, a merchant banker is responsible for t he informat ion published in an IPO offer document even t hough t he issuer also hires t he services of legal advisors and audit ors. (ET dt . 31.01.2012 p. 1) Punjab National Bank plans pref issue to Govt: Punjab Nat ional Bank plans t o issue shares t o t he Government on a preferent ial basis aggregat ing t o Rs 1,285 crore. This plan was approved at a meet ing of t he board of direct ors of t he bank. An ext rodinary general meet ing of t he shareholders of t he bank has been convened for March 20 t o approve t he t erms of t he preferent ial allot ment, PNB said in a filing t o t he Mumbai St ock Exchange. Current ly, t he cent re has 58 per cent st ake 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 capit al infusion from t he Cent ral Government under the recapit alisat ion scheme by t he end of t his fiscal. The fund infusion would be done primarily t hrough t he equit y rout e, said Mr D. Sarkar, Execut ive Direct or, Allahabad Bank. The banks capit al-adequacy rat io st ood at 12.75 per cent as on December 31, 2011. We had asked for Rs 1,000 crore from t he Government and we are hopeful of get t ing t he funds wit hin t he next one week. The infusion will be t hrough direct equity, Mr Sarkar said. The banks Tier I capit al 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 t o rigorously evaluat e t he risks arising out of un-hedged foreign currency exposure of t he corporat es and price t hem in t he credit risk premium while ext ending fund-based and non-fund-based credit facilities t o corporat es. Furt her, banks could also consider st ipulat ing a limit on un-hedged posit ion of corporat es on t he basis of banks board-approved policy. The RBI has issued t he aforement ioned direct ives as recent event s relat ing t o derivat ive t rades showed t hat excessive risk - t aking by corporat es could lead t o severe dist ress t o t hem and large pot ent ial credit loss t o t heir bankers in t he event of sharp adverse movement s in currencies. (BL dt 03.02.2012 p.6) Deutsche Bank exits Lodha investment: Deut sche Bank has logged a major gain before it exit ed a four-year-old invest ment 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 Sept ember 2007 t hat the German bank invest ed Rs 1,640 crore by subscribing t o t he compulsorily Convertible Debent ures (CCDs) of Lodhas subsidiary, Cowt own Land Development Lt d. The bank has now fully exit ed t he invest ment it had made in t he company, by selling t he st ake t o t he propert y developer. The Lodhas funded t he buyback part ly through int ernal accruals wort h Rs 1,720 crore and via fresh fundraising of Rs 825 crore, according t o Mr Abhisheck Lodha, Managing Direct or of t he company. Aft er t his repayment , t he debt has come down by Rs 1,700 crore, from a high of Rs 4,000 crore. (BS dt .10.02.2012 p.2) Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 Union Bank looks to raise Rs 955 cr through preferential issue: Union Bank of India is looking t o raise up t o Rs 955 crore t hrough preferent ial allot ment of shares. The banks Board on Wednesday approved a proposal issue up t o 2.6 lakh crore shares t o LIC on a preferent ial allot ment basis. This works t o 5 per cent of t he banks equit y share capit al and is expect ed t o raise up t o Rs 600 crore. The bank will also raise up t o Rs 355 crore by issuing shares t o t he government , the BSE announcement said. (BL Dt .16.02.2012 p6) Banking stocks rally may continue: There may be some more st eam left in t he beat en down banking st ocks rally since valuat ions are at tract ive amid improving earnings out look due t o prospect s of lower int erest rat es t hrough worries about bad asset s linger. The BSE banks index has gained 36% t his year, out performing t he benchmark sensexs 17.8% gain. The bank index fell 32% last year. Even as signs of monet ary easing have led t o t he rally, most public sect or banks are t rading at t heir book values, said Mr Gaurav Dua, head of research at Sharekhan, an int erent brokerage. Privat e banks are t rading at discount s, but these are just ified due t o asset qualit y 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 equit y shares wort h 12.8 per cent of it s exist ing capit al t o t he Government of India and t o LIC. The bank informed st ock exchanges t hat it s board of direct ors has approved a proposal t o raise capit al t hrough allot ment of up t o 7 crore shares t o it s promot er and LIC. The Bank has convened an ext raordinary general meet ing of shareholders on March 24, 2012 for obt aining approval. (BL dt .22.02.2012 p10) PNB board nod for preferential allotment of shares to LIC, Centre: Punjab Nat ional Bank (PNB) plans t o issue equit y shares t o Life Insurance Corporat ion on a preferent ial basis. The board of direct ors of t he bank approved issuance of up t o 1,58,40,607 equit y shares of Rs 10 each at a premium of Rs 993.69 a share t o LIC of India. The bank also plans t o issue up t o 1,28,02,757 equit y shares t o t he 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 t he price of t he equit y shares it would allot t o t he government and Life Insurance Corporat ion of India for t heir capit al cont ribut ion t o t he bank. The commit t ee of direct ors for t he preferent ial issue of shares has fixed t he price at Rs 97.82 per equit y share. (BS dt . 23.02.2012 p. 6) Indian Bank may tap capital market next fiscal: Indian Bank said it may come out wit h follow-on public offer (FPO) next fiscal if market condit ions are conducive. We do not require capit al immediat ely...we may go in for FPO in t he next fiscal (2012-13) if t he market condit ions improve, Indian Bank C& MD Mr. T M Bhasin said. The board has already given approval for t he equity dilut ion t o t he ext ent of 10 per cent , he said. At present t he government holds 80 per cent st ake in t he Chennai headquart ered bank. (FE dt .28.02.2012 p18)

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NPA.
Banks check Cibil ratings of promoters for corporate loans: St rong credit rating is no longer sufficient for banks t o advance loans t o corporat e. Worried over t he rise in bad loans, lenders are combing individual financial report s of promot ers and board official t o look for clues or pat t erns that could ring an alarm. Indias leading credit informat ion agency CIBIL says banks are act ively seeking such report s t o t ake informed decision. The bankers want t o know t he financial discipline of t heir borrowers. Such dat a provides crit ical informat ion on t he people who are involved in running t he company on a daily basis, CIBILs MD Mr Arun Thukral t old. A senior official wit h t he count rys largest lender, SBI, confirmed t hat oft en banks seeks such informat ion in order t o ascert ain if t he promot ers personal fort une is linked t o t he companys growt h. (ET dt 30.01.2012 p.15) Rising non-performing assets pulls down bank stocks: Bank st ocks suffered a mauling in market s wit h privat e sect or banks t oo being singed by t he sust ained selling. The sent iment was not only affect ed by t he overall weakness in t he market but also apparent ly by t he Q3 result s by some of t he banks t hat revealed higher net NPAs, raising t he spect re of bad loans ballooning for t he sect or as a whole. Three bank st ocks - Union Bank of India, HDFC Bank and IDBI Bank - escaped any serious erosion in value. The banks t hat came out wit h Q3 numbers - Orient al Bank of Commerce, Indian Bank, Punjab & Sind Bank and Allahabad Bank - showed t hat theirs net NPAs had zoomed, in some cases by 100 per cent compared t o t he corresponding period last year, which spooked t he bank count ers. (BL dt .31.01.2012 p13) Central Bank to recast Rs 7,000-cr discom loans: Cent ral Bank of India may rest ructure loans wort h over Rs 7,000 crore of t he st at e government owned power dist ribut ion companies in t he fourt h quart er.The loans t hat would be recast will const it ut e t o more t han 60 per cent of t he t ot al loan exposure t o st at e dist ribut ion companies or discoms. The bank has lent as much as Rs 12,000 crore t o many of such ent it ies. He, however, declined to name t he ut ilit ies, which would come up for rest ruct uring in t he fourth quart er. However, t wo such discoms, i,e Ut t ar Haryana Bijli Vit aran Nigam and t he dist ribut ion company of Rajast han have already kicked off a rest ruct uring exercise of t heir loans.Central Bank of Indias t ot al exposure t o power sect or is about Rs 18,995 crore at end of December 2011. It forms about 14.24 per cent of t ot al 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, t he countrys largest privat e sect or lender, is likely t o rest ruct ure Rs 1,300 crore of loans in t he current January-March quart er. Key account s expect ed t o be part of t he exercise include t hose of GTL and 3i Infot ech.The banks net rest ruct ured loan port folio was est imat ed at Rs 3,070 crore as of December 31. With respect t o GTL, while we underst and that some banks have done t he rest ruct uring in the t hird quart er, t he arrangement and execution in our case will take place in t he fourt h quart er, a senior execut ive of t he bank said, aft er t he lender announced it s t hird quart er earnings yest erday.Adding: Furt her, some small exposure could be restruct ured out side t he CDR
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Canara Bank Samachar Lehar March 2012 (corporat e debt rest ruct uring) mechanism. The rest ruct ured port folio, as a consequence, is expect ed t o increase from t he current levels.(BS dt .02.02.2012 p6) SBM moves court against Sterling Bio: St at e Bank of Mysore (SBM) has filed a criminal complaint against St erling Biot ech and six direct ors of t he company for allegedly default ing on repayment s on credit facilities provided by t he public sect or lender.In it s complaint , t he bank has said that cheques wort h `.58 crore submit t ed by t he company have bounced. The cheques were drawn on Andhra Bank. C& MD Mr. Nit in Sandesara, Joint MD Mr.Chet an Sandesara have been named wit h some of t he ot her direct ors in t he complaint filed at 23rd Esplanade Court , Mumbai. St erling Biot ech is the flagship company of t he Gujarat -based Sandesara group. (ET 03.02.2012 p.8) Corporation Bank treats Kingfisher loan as NPA in Q3: Corporat ion Bank has t reat ed loans t o ailing privat e carrier Kingfisher Airlines as a nonperforming asset (NPA) in t he t hird quart er ended December 2011. It s loan exposure t o Kingfisher was just a lit t le more t han Rs 155 crore. The bank made provision of around Rs 35 crore in the t hird quart er, said a senior bank official. SBI, Bank of India and Punjab Nat ional bank have also declared loans t o t he Vijay Mallya-promot ed privat e airlines as an NPA, for t he default on payment of dues. The official said t his airline is a commercially viable ent ity and come out of t he crisis wit h t he infusion of capit al. Corporat ion bank saidit willalsorest ruct ureit sRs1,300-crloant oRajast hanst at epowercompany. (BS, dt . 03.02.2012, p4) UCO Bank, UBI and Allahabad Bank stare at rising NPAs: Even as t he RBI ruled out any special provisioning norms for debt recast in t he wake of increasing NPAs in t he banking indust ry, t hree Kolkat a based banks have report ed a significant rise in bad asset s during t he t hird quart er of t he current fiscal. The banking regulat or will soon meet 10 large banks t o take st ock of t heir non-performing asset s. While UCO Bank, t he largest among t he Kolkat a-based banks, has been burdened wit h huge non-performing asset s for several consecut ive quart ers, ot her two public sect or lenders, Allahabad bank and Unit ed Bank of India, have seen a significant increase in NPAs during t he period under review. (FE dt. 04.02.2012 p. 18) Bad loans rise at a faster clip: Bad asset s of Indias banks are expanding at a fast pace at a t ime when growt h in Asias t hird largest economy is slowing. The gross NPAs of 34 list ed banks t hat have announced December quart er earnings escalat ed t o `.76,644 crore, posting a growt h of 30.51% yearon-year. What is part icularly worrying is t hat the pace of growt h is increasing wit h every successive quart er. For inst ance, in t he Sept ember quart er, t he growt h in gross NPAs for t his set of banks was 28.28%; in t he June quart er it was 19.14%, and March quart er, 17.81%. Net NPAs as a percent age of loans may not be a good yardst ick t o judge a banks healt h as it can always make heft y provisions to bring it down. But even t he gross NPAs of individual banks show a divergent t rend. For inst ance, gross NPAs as a percent age of loans have declined for ICICI Bank, Kot ak Mahindra Bank Lt d., Bank of India, Union Bank, Andhra Bank, Syndicat e Bank, UCO Bank, Unit ed Bank of India and t wo SBI associat es, but has

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Canara Bank Samachar Lehar March 2012 risen for many, including Punjab Nat ional Bank, Bank of Baroda, Canara Bank, IDBI Bank Lt d., Allahabad Bank, Corporat ion Bank and a few ot hers. (Mint dt.06.02.2012 p1) Banks ask borrowers to cover their personal loans, overdraft facilities: The banking sect or, reeling under a rise in non-performing asset s (NPAs) from t he corporat e sect or, is seeking t o hedge loans t o individual borrowers. Increasingly, borrowers are being asked t o buy insurance policies t o cover t heir loans. Covers with personal loans and overdraft facilit ies have gained tract ion in recent t imes. Bot h public and privat e sect or banks are aggressively pushing t hese product s t o ret ail cust omers, said a senior St at e Bank of India (SBI) official. According t o Reserve Bank of India dat a, out st anding personal loans, wit hout housing, consumer durables, credit cards, et c, st ood at Rs 12,817 crore at t he end of December. Since personal loans are for a period of t hreefive years, t he premium is not very high. Also, if t he borrower purchases a group insurance policy, t he 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-muhurt ham day in a kalyana mant apam or marriage hall? For Corporat ion Banks T-30 (a special recovery t eam of 30 bank officials) in Tamil Nadu, t he non-muhurt ham days of December 2 and 3 last year assumed significance. The bank booked t he kalyana mant apams in Villupuram and Kallakurchi t owns and provided lunch for all t hose who came t here. The occasion was a loan recovery camp conduct ed by T-30. Mr Ajai Kumar, Chairman and Managing Direct or of Corporat ion Bank, t old Business Line t hat nearly 3,000 borrowers t urned up for t hese t wo recovery camps. These are all small loans. Most of t he borrowers, who are not educat ed about repaying t he loans, are scared t o come t o t he bank. We want ed t o inst il confidence t hat t he bank is wit h t hem and it is willing t o set t le dues at t hese 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 post ed a 72% plunge in net profit t o `.113.24 crore (from `.404 crore) for t he t hird quart er of 2011-12, following a sharp rise in non-performing asset s (NPAs), says it would bring down it s NPAs t o 2.5% in 2012-13. Talking t o report ers, Cent ral bank of India, CMD Mr. M V Tanksale said t he Bank's gross NPAs at t he end of December 2011 st ood at 3.69% while NPAs were 2.04%. According t o t he CMD, t he shift t o syst em - based calculat ion of NPAs was normally expect ed t o have a "big impact in the initial six mont hs". (FE dt 11.02.2012 p. 18) Banks see a rise in restructured assets: When St at e Bank of India (SBI) announces its result s t oday, most eyes will be on t he lenders asset qualit y numbers and loan-loss provisioning rat her t han t he profit figure. As t he countrys largest bank, it is a bellwet her of t he financial sect or and a proxy for t he economy. But SBIs numbers could possibly be only a reflect ion of t he gloom t hat has encompassed t he banking syst em, a glimpse of which can be viewed in t he accompanying t able. Sure, about 10 out of t he 23 banks for which dat a is available have shown an improvement in their gross non-performing asset s (NPAs) posit ion at t he end of December from a quart er ago. (Mint dt 13.02.2012 p.16)

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Canara Bank Samachar Lehar March 2012 We are on an aggressive drive to recover bad loans: Central Bank ED: Cent ral Bank of India has been relat ively slow (as compared wit h ot her banks) in imbibing new t echnology. But it has now caught up, says t he banks ED, Ms V.R. Iyer. The bank complet ed net working of all it s branches, numbering close t o 4,000 about a year ago. It is now aggressively expanding it s ATM net work. We have around 1,494 ATMs at present . We want t o increase it t o 2,000 in t he next six mont hs, and add anot her 1,000 before t he end of 2013 and we are on an aggresive recovery drive, have revisit ed OTS and all other schemes". She t old.(BL dt 13.02.2012 p.6) RBI to meet Banks soon on bad loans: Worried over rising bad loans in cert ain sect ors, t he RBI on Monday said it will discuss t he issue wit h bank soon. "St ress sect ors are well known, t he issues which are t here. But we don't t hink t here is a great concern as of now," RBI Deput y Governor Dr. K C Chakrabarty said in Mumbai (BS dt 14.02.2012 p.6) SBIs asset quality worrying as bad loans double in Q3: St at e Bank of India report ed a net profit of Rs 3,263 crore for t he quart er ended December 2011, up 15 per cent from Rs 2,828 crore in t he corresponding year-ago quart er. The increase in profit was on account of a robust rise in net int erest income, which t ouched an all-t ime high and improvement in net int erest margins. Profit s grew despit e an increase of over Rs 1,300 crore in loan loss provision and an over Rs 800-crore depreciat ion in invest ment on account of losses in t he equit y port folio, said Mr Prat ip Chaudhuri, Chairman, SBI. The bank is back on a consist ent growt h pat h, he said.The bank increased loan loss provisions by 84 per cent t o Rs 3,006 crore (Rs 1,632 crore). However, asset quality for t he count rys biggest bank st ill remains a concern, wit h gross non-performing asset s t ouching Rs 40,098 crore as on end December, from Rs 23,438 crore in t he yearagoperiod. (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 capit al requirement s because of st rict er Basel III norms and great er pressure on domest ic liquidit y as European banks may reduce t heir exposure t o t he count ry if the crisis t here persist s. Warning not e: RBI deput y governor Anand Sinha says t he problem of bad loans has arisen because t here was aggressive lending by banks in t he pre-crisis boom period coupled wit h laxity in monit oring and proper due diligence. The sit uat ion is under cont rol, but t here is an underlying realit y t hat it is not very comfort able, he said. (Mint 15.02.2012 p.1) Banking on staff for recovery: Every day, between 7.30 pm and 11 pm, a t op official of a public sect or bank get s t ext messages from 46 zonal managers. The messages cont ain det ails on recovery figures of respect ive zones, wit h addit ional informat ion on ranking of centres, based on recoveries. The zonal managers have t o send these numbers daily. Failure t o do so will see an email from t he chairmans office seeking t he det ails. The official says he has been doing t his chore daily for t he last one year. This helps keep a t ab on t he account s which have slipped int o t he NPA cat egory. This is not a one-off incident . Banks reeling under asset quality pressure have beefed up recovery effort s. And, it has percolat ed t o t he ground level. Branch level st aff are also being deployed for collect ion of dues. However, t he sit uat ion is Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 different t his year. Wit h t he slackening of credit demand due t o high int erest rat es, hect ic act ivity is being seen on meet ing recovery t arget s. Lenders are also resort ing t o referring bad account s backed wit h securit ies t o SARFAESI processes. (BS dt 15.02.2012 p.6) SBI rating unaffected by weakening loan quality: Global rating agency S& P said t hat it s rat ing on SBI is not affect ed by t he significant slippage in it s loan qualit y. "We ant icipat e t he SBI's credit provisioning cost s for t he fiscal year ending March 31, 2012, will not be significant ly higher than t he project ed credit losses based on our risk adjust ed capit al framework" S& P said. (Det ails in ET dt . 15.02.2012 p. 13) NPAs, loan recast spoils banks show: A jump in bad loans and rest ruct ured loans marred t he December quart er performance of banks, wit h rest ruct uring jumping 19% from t he previous quart er as t ext iles, st eel and infrast ruct ure companies bleed due t o lower out put and higher cost of funds. Tot al rest ruct ured loans for t he December quart er were at least 23,400 crore, calculations by ET show. This adds t o 1.21 lakh crore as of Sept ember regist ered for rest ruct uring wit h the Corporat e Debt Rest ruct uring Forum. The sit uat ion is under cont rol, but there is an underlying reality t hat it is not very comfort able, RBI Deput y Governor Mr.Anand Sinha was quot ed as saying. From 15% in 1995, NPAs came down t ill 2008, but t hey have risen sharply by 91% in 2006- 2011. We could see some more recast for one more quart er, t hen it might st art t apering off, said S Raman, C& MD, Canara Bank. (ET dt .16.02.2012 p12) SBI for policy support to enable loan recovery: St at e Bank of India want s policy support and regulat ory int ervention in t he agricult ure sect or so t hat bad loans from t his sect or could be t ackled effect ively, said a t op official. For Indias largest bank, bad loans from t he agricult ure sect or rose t o 19 per cent (or Rs 7610 crore) of t he t ot al NPAs (Rs 40,098 crore) in t he quart er ended December 31, 2011, against 16 per cent (Rs 4524 crore) in t he corresponding year ago period. Besides calling for policy support and regulat ory int ervent ion, Mr Diwakar Gupt a, Managing Direct or, SBI, flagged t he issue of moral hazard whereby some borrowers in t he agricult ure sect or don pay t banks despit e being in a posit ion t o do so on expect at ion of loan waiver being announced by the government . Policy int ervent ion is required, at t he pre-harvest and post -harvest st ages, as t he current size of land holding as well as t echnology used makes farming unsust ainable. (BL dt .16.02.2012 p6) RBI meet discusses NPA: Cent ral Board of Direct ors of RBI met t o provide an overall direct ion t o t he banks affairs in light of present economic scenario. The meet ing chaired by RBI Governor Dr D Subbarao discussed t he present financial sit uat ion in the count ry and t he impact of global economy on India, RBI sources said. Amongst ot hers the issue relat ing t o t he NPAs with t he banks was also t aken up, while t he quest ion of int erest rat e revision was also examined in t he backdrop of declining inflat ion, t hey said. Besides, t he government also discussed on financing of micro, small and medium ent erprises, SHG Bank linkage programme, recovery climat e and organizat ional aspect s of rural self employment t raining inst it ut es and

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Canara Bank Samachar Lehar March 2012 financial lit eracy 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 t urning bad is becoming a problem for banks of lat e, said Mr K. Ramakrishnan, Chief Execut ive, IBA, at an int eract ion bet ween Karnat aka-based banks and heads of educat ional inst it ut ions in Bangalore, organised by Canara Bank. Mr S. Raman, C& MD, Canara Bank, said t hat t here was a mismat ch bet ween t he higher cost of educat ion and t he pot ential income levels of st udent s aft er complet ion of educat ion in some professional courses, which had t o be addressed. The government s proposal for a credit guarant ee scheme for educat ional loans would help make int erest rat es finer, he added. Mr Raman admit t ed t hat his bank was wit nessing signs of st ress in t he educat ional loan segment of lat e, which was not t he 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 t o come out wit h a policy on hedging of foreign exchange exposure by t heir corporat e borrowers. Addressing a press conference on t he quart erly monet ary policy review, t he Reserve Bank of India Governor, Dr D. Subbarao, said, Banks must have a board decided policy on hedging t o foreign exposure. It cannot be left t o t he corporat es t o decide. We would be issuing guidelines in t he next 10 days, asking banks to get a policy approved by their boards on hedging. Banks are in t he process of report ing t o us on whet her all their loans of over $25 billion are hedged or not , he added. According t o Dr Subbarao, $60 billion is t he Indian exposure t o banks in Euro zone. The European sit uat ion is dist urbing, but not explosive as it seemed during Christ mas. We are cont inually monit oring the exposure of banks and corporat es t o European debt . (BL dt .25.01.2012 p6) RBI asks banks to be humane with borrowers: The RBI has said banks should ensure t hat loan default ers are not put t o embarrassment while debt s are recovered. Part icipat ing in a t wo-day workshop on Securit isat ion and Reconst ruct ion of Financial Asset s and Enforcement of Securit y Int erest Act 2002 , RBIs Principal Legal Adviser Mr G S Hegde said t he Act allowed banks t o auct ion propert ies when borrowers failed t o repay t he loan. It helped t hem reduce Non-Performing asset s.However banks should engage t rained agent s t o recover t he money, he said, adding it was import ant t o deal wit h debt ors wit h humaneness. (DH dt .27.02.2012 p15) Banks to lose about R10k crore on 2G loans: Moodys: Global rat ing agency Moodys invest ors Service said on Monday t hat Indian Banks will find it t ough t o recover roughly `.10,000 crore lent t o mobile t elephony companies whose licenses were cancelled by t he Supreme Court . The apex court on February 2 cancelled 122 second generat ion (2G) licenses of eight companies aft er t hey were issued on a first come-first -serve scheme in 2008 and asked t he government t o auct ion spect rum or airwaves t hat carry radio signals. The agency said at least `.10,000 crore out of `.90,000 crore lent specifically t o companies, which won licenses in 2008, was risky. (FE, dt. 28.02.2012, p3)

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Canara Bank Samachar Lehar March 2012 RBI to meet bankers today on bad loans: The Reserve Bank of India Deputy Governor, Mr K C Chakrabarthy, will be meet ing t op bankers t o discuss t he rising non-performing asset s (NPAs) in t he syst em. The RBI Governor Dr D Subbarao, had announced t hat the regulat or would be meet ing bank chiefs t o t ake st ock of t he rising NPAs which had hit banks bot t omlines in t he third quart er. The RBI has since maint ained t hat t he sit uat ion was manageable and it was not syst emic issue. (BL dt 29.02.2012 p.6) Private, foreign banks log lower NPAs than PSU peers: At a t ime when slow economic growt h has raised concern over t he asset qualit y of banks and prompt ed t he Reserve Bank of India t o t ake st ock of bad loans in t he syst em, dat a from banks showed since t he global financial crisis of 2008, foreign and privat e sect or lenders have managed non-performing asset s bet t er t han t heir st at e-run rivals. Based on t heir int eract ion wit h bankers, Reserve Bank of India Deput y Governors Dr K C Chakrabart y (in charge of banking supervision) and Mr Anand Sinha (in charge of banking operat ions and development ) would prepare a report assessing t he magnit ude of non-performing asset s. (BS dt . 29.02.2012 p. 7)

Other Banking News..


Andhra Bank Q3 profit dips 8.5% on higher provisioning Andhra Bank report ed a 8.5 per cent dip in net profit at Rs 303 crore in t he t hird quart er ended December 31, 2011, compared wit h Rs 331 cr in t he year-ago period. The decrease in net profit was due t o increase in provisions because of rest ruct uring of some account s, Mr B. A. Prabhakar, Chairman and Managing Direct or, Andhra Bank t old newspersons here on Thursday. A bulk of rest ruct uring was done in t he t elecom sect or.( BL, dt. 03.02.2012, p 6) BoI to revamp 350 large city branches: Public sect or lender Bank of India will revamp up t o 350 key branches in met ro and large cit ies t o project these as Branch of the Fut ure over the next 18 months t o scale up t he ret ail business.Execut ive Direct or, Mr N Sheshadri said it s first pilot branch is already operat ional at Chembur, a Mumbai suburb. The bank will remodel 200 such branches in t he next six t o eight mont hs. The focus is on upgrading cust omer services t o ret ail client s. At tract ing t he young by providing t he lat est communicat ion devices at branches for t ransact ions will t op t he agenda. (BS dt .09.02.2012 p6) Bank of M aharashtra cuts base rate: In a bid t o push credit in t he run-up t o t he close of t he financial year, Bank of Maharasht ra has decided t o pare it s base rat e by 10 basis point s t o 10.60 per cent wit h effect from February 21. The public sect or bank has also said it will offer housing loans up t o Rs 30 lakh at t he Base Rat e for a repayment period of five years under t he float ing rat e opt ion.Home loans above Rs 30 lakh and less t han Rs 75 lakh, and Rs 75 lakh and above will be charged 11.10 per cent (Base Rat e + 0.50 per cent ) and 11.35 per cent (Base Rat e + 0.75 per cent ) int erest respect ively for repayment period of five years under floating rat e Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 opt ion. The bank has waived processing charges, which range from Rs 4,000 t o Rs 12,500, for housing loans up t o 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 rest ruct ured asset s pulled down Cent ral Bank of India's net profit by 72 per cent t o Rs 113 crore in t he Oct ober-December 2011 period, against Rs 404 crore in t he corresponding year-ago period. The public sect or bank's increment al bad loans increased by 28 per cent (or Rs 1,082 crore) t o Rs 4,922 crore in t he reporting period. There was an increment al increase of Rs 3,616 crore in rest ruct ured asset s in Oct oberDecember 2011, against Rs 1,408 crore in July-Sept ember 2011 (BL dt .01.02.2012 p6) Corp Bank net up 5% in Q3: Higher cost of deposit s, and provisions for loans and invest ment depreciat ion t empered Corporat ion Banks net profit in the Oct ober-December 2011.The public sect or banks net profit nudged up by 5 per cent t o Rs 402 crore, against Rs 382 crore in t he corresponding year-ago period.In t he report ing period, cost of deposit s increased t o 7.64 per cent (5.72 per cent in t he Oct ober-December 2010 period). While provisions for bad and doubt ful debt s increased by 22 per cent t o Rs 440 crore (Rs 360 crore), t hat for invest ment depreciat ion jumped by 460 per cent t o 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 growt h in core non-int erest income, Dena Bank report ed a 20 per cent increase in net profit at Rs 187 crore in t he Oct ober-December 2011 period, against Rs 155 crore in t he corresponding year-ago period. The bank recorded a 27 per cent increase in core non-int erest income of Rs 109 crore (Rs 86 crore in t he Oct ober-December 2010 period). Net int erest income (t he difference bet ween int erest earned and expended) increased by 16 per cent t o Rs 541 crore (Rs 466 crore in t he Oct ober-December 2010 period). On t he back of increased lending t o t he agricult ure, micro, small and medium ent erprises, and ret ail segment s, t he bank is expect ing t o end t he financial year with a year-on-year credit growth of 20 per cent , Ms Nupur Mit ra, Chairperson and Managing Direct or, Dena Bank said. (BL dt .07.02.2012 p6) Dena Bank's deposit mobilisation drive: The ent ire workforce of Dena Bank, including it s Chief Ms Nupur Mitra, will embark on a mass deposit mobilisat ion drive on February 12 t o garner low-cost savings bank and current account deposit s. The Public Sect or bank, in a st at ement said, irrespect ive of t he cadre, t he bank's 10,000 st aff members across t he count ry, will reach out t o t he people door t o door, by visit ing housing societ ies, malls and parks t o explain t o t hem about product s and services offered by t he bank. (BL dt 10.02.2012 p.6) Fitch cuts Dhanlaxmi Bank rating: Rat ing agency Fit ch downgraded Dhanlaxmi Banks subordinat ed debt (Rs 17 crore) t o BBB- from BBB as t he old-generat ion privat e lender post ed a net loss in t he t hird quart er.The Kerala-based bank could post further losses due t o an elevat ed cost-base and revenue pressures from it s rapid expansion of net work, Fit ch said in st at ement . Fit ch also put t he rat ing under wat ch, wit h negat ive implicat ions. (BS dt .22.02.2012 p7) Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 Federal Bank bets on heavy organic expansion: Federal Bank is bet t ing on organic growt h and st rengt hening of it s core t o grow it s business and is not act ively scout ing for acquisit ions, said Mr Shyam Srinivasan, Managing Direct or & CEO. The old generation, Kerala-based privat e sect or bank want s t o be a 1,000branch bank by June. Current ly, it has 835 branches. Besides it s home t urf of Kerala, t he five focus market s where it is planning t o increase it s foot print are Tamil Nadu, Gujarat , Punjab, Maharasht ra and Karnat aka. These five St at es have a big cat chment of SME and NRI cust omers and t hese lines of business are t he st rengt h of Federal Bank. Our focus is really t o serve t hese segment s, said t he Federal Bank chief. (BL dt .10.02.2012 p6) Federal Bank net jumps 41%; NRI deposits up: The net profit of Federal Bank spurt ed by 41 per cent t o Rs 202 crore for t he quart er ending December 31. The bank delivered subst ant ial t opline and bott omline growt h despit e a challenging macro environment , both in t he domest ic and global market , a press release said. The bank, which had been working on it s t ransformat ion t o a truly pan-India st at us while adopt ing cont emporary management t echniques, has report ed excellent numbers which not only reflect rapid growth but also asset qualit y. The t ot al business grew by 22.7 per cent t o t ouch Rs 79,948 crore. Tot al deposit s increased 26.6 per cent t o Rs 46,742 crore. While ret ail deposit s expanded 27.2 per cent t o Rs 38,678 crore, NonResident Indian deposit s grew fast er at 35.4 per cent t o Rs 10,546 crore. The fall in t he rupee value and spurt in int erest rat es for Non-Resident Indian deposit s seem t o have helped accelerat e t he volume of Non-Resident Indian deposit s. The low-cost CASA deposit s grew by 21.9 per cent t o Rs 13,186 crore.(BL dt .24.01.2012 p6) HSBC India profit up 20% on strong growth in commercial biz : HSBCs India operat ions report ed a profit before t ax of $813 million for t he year ended 2011 20 per cent higher t han t he $679 million in t he previous year. The growt h in profit was on account of t he improved performance of t he ret ail banking segment where losses declined subst ant ially and st rong growt h 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 report ed a net profit of Rs 526 crore for t he quart er ended December 2011, a growt h of 7 per cent over t he Rs 491 crore recorded in t he corresponding year-ago quart er. For the nine-mont h period, net profit st ands at Rs 1,402 crore (Rs 1,275 crore). Net int erest income rose by 12.8 per cent t o Rs 1,170 crore during t he quart er under considerat ion from Rs 1,038 crore. The banks gross NPA (non-performing asset s) 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 t ot al of Rs 366 crore during t he nine-mont h period. (BL dt .31.01.2012 p6) Indian Bank to get Rs 63.03 crore: Indian Bank has got it s Boards approval for the proposed Scheme of Amalgamat ion of Indfund Management Limit ed, a wholly-owned subsidiary of t he bank. Through t his merger, t he bank would get around Rs 63.03 crore as Tier I capit al int o t he bank. The bank also said, it is looking at merging housing subsidiary and a decision on t his will be t aken in a weeks t ime. (BS dt . 04.02.2012 p. 5) Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 Higher interest income lifts ICICI Bank Q3 net 20%: ICICI Bank report ed a 20 per cent increase in its net profit at Rs 1,728 crore in the quart er ended December 31, 2011, on t he back of an increase in int erest income and lower provisions on account of a decrease in non-performing asset s. In t he corresponding yearago period, it had recorded a net profit of Rs 1,437 crore. The bank's profit ability in the report ing quart er was also boost ed by dividend income of Rs 150 crore from it s subsidiary, ICICI Prudent ial Life Insurance Company, which post ed a net profit for t he first t ime since incept ion. (BL dt .01.02.2012 p6) Kotak Mahindra Bank net up 47% on loan book growth: St rong growt h in advances and ot her income, and lower provisions helped Kot ak Mahindra Banks profit s rise by 47 per cent t o R 276 crore, in t he quart er ended December s 31, 2011, from Rs 188 crore in t he corresponding quart er last year. The growth in advances has come mainly from segment s like corporat e, commercial vehicles, const ruct ion equipment and mort gages. There is no slowdown in t he segment s t hat we are present in. We have a large share of ret ail loans and short t erm working capit al loans in t he corporat e segment . The slowdown is in longer t erm loans like infrast ructure loans and capex loans. There is st ill st rong demand for credit out side t he main met ro cit ies, said Mr Dipak Gupt a, Joint Managing Direct or, Kot ak Mahindra Bank. (BL dt .24.01.2012 p6) Lakshmi Vilas Bank net rises 10.35% in Q3: Lakshmi Vilas Bank has regist ered a 10.35 per cent increase in net profit in t he quart er ended December 2011 compared t o t he corresponding year-ago period. The banks net profit rose t o Rs 28.35 crore (Rs 25.69 crore) and it s t ot al income was up 49 per cent at Rs 429.49 crore (Rs 287.57 crore). However, compared t o t he 49 per cent growt h in it s t ot al income, t he t ot al expendit ure swelled 66.4 per cent t o Rs 381.38 crore (Rs 229.09 crore). Explaining t he reason for t he significant increase on t he expendit ure side, LVBs Chief Execut ive, Mr P. R. Somasundaram, t old t hat 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 report ed a 5.5 per cent increase in net profit for t he quart er ended December 31, 2011, at Rs 1,150 crore (Rs 1,090 crore) on Tuesday. This is despit e a sharp rise in cost of funds coupled wit h higher marked-t o-market provisioning in G-secs, which pulled down third quart er profit growt h. The bank's bot t om-line performance was lower t han t he net profit of Rs 1,205 crore recorded in second quart er this fiscal. For t he ninemont h period ended December 2011, PNB report ed 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 count rys second-largest public sect or lender PNB would open 10 more branches in Ut t arakhand by March-end. Wit h t his, t ot al number of branches of t he bank in t he st at e would go up t o 200, PNB ED, Ms Usha Ananthasubramanian, t old report ers. Of t he 190 exist ing branches in t he st at e, 100 are in rural areas, 47 in semi-urban areas and 43 branches are in t he urban areas, she said. As many as 193 ATMs have already been Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 inst alled in the hill st at e. Ms Anant ha-subramanian said t he bank has int roduced new schemes like Kalyani credit card scheme especially cat ering t o women in rural areas. A loan of Rs 50,000 is given t o women for special purposes under t he scheme. (BL dt .18.02.2012 p8) SBBJ profit up 24% in Q3: St at e Bank of Bikaner and Jaipur has report ed a 24 per cent increase in net profit at Rs 164 crore in t he Oct ober-December 2011 period, against Rs 132 crore in t he corresponding period last year.A 37 per cent increase in net int erest income t o Rs 630 crore (Rs 430 crore in t he Oct ober-December 2010 period) boost ed t he bank's profit abilit y despit e provisions t owards bad loans jumping t o Rs 142 crore (Rs 76.50 crore).Mr Shiva Kumar, Managing Direct or, SBBJ, at tribut ed t he profit abilit y t o bet t er funds management and acquisition of high-yielding asset s.(BL dt .02.02.2012 p6) SBH net up 20.4% in Q3: St at e Bank of Hyderabads net profit increased 20.4 per cent at Rs 301 crore in t he t hird quart er ended December 31, 2011, compared wit h Rs 250 crore in t he corresponding quart er of t he previous year. This was driven by 14 per cent increase in net int erest income at Rs 845 crore (Rs 740 crore). The t ot al business expanded by 22 per cent t o reach Rs 1,67,300 crore. SBH would add 50 more branches t o it s exist ing network of 1,407 branches before end-March 2012, according t o a release. (BL dt .03.02.2012 p6) SBI sets sights on absorbing SBM: Aft er t aking over t wo associat e banks - St at e Bank of Saurasht ra in 2008 and St at e Bank of Indore in 2010 - SBI has set it s sight s on assimilat ing t he nearly cent ury old SBM t his year.As part of it s consolidat ion st rat egy, Indias largest bank want s t o first merge t he smaller associat e banks before at t empt ing t o take over relat ively bigger associat es such as SBH and SBT. We will t ake over smaller associat e banks first as it is easier t o int egrat e t hem. We have gained valuable experience through t he acquisit ion and int egrat ion of St at e Bank of Saurasht ra and St at e Bank of Indore, said a senior bank official. However, in t he case of bigger associat e banks, t he official observed t hat t he issue is t hat their branch net work in t heir home St at e is as big as SBIs branch network in that St at e. (BL dt 15.02.2012 p.6) SBM net profit down 15.98% in third quarter: St at e Bank of Mysore regist ered a net profit of Rs 110.94 crore in t he t hird quart er of 2011-12 against Rs 132.04 crore in the corresponding period of t he previous fiscal, recording a decline of 15.98 per cent . The net profit for t he first nine mont hs of t he current financial year st ood at Rs 253 crore as against Rs 336.79 crore in t he corresponding period of t he previous fiscal. The net int erest income of t he bank during t he t hird quart er st ood at Rs 413.42 crore (Rs 443.79 crore).However, other income of t he bank regist ered a growt h, at Rs 106.88 crore (Rs 97.17 crore). (BL dt .03.02.2012 p6)

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Canara Bank Samachar Lehar March 2012 SBT revises interest rates: St at e Bank of Travancore (SBT) has rat ionalised t ime bucket s and revised upward int erest rat es for domest ic and NRO t erm deposit s. Announcing this, an official banks spokesman said t hat t he time bucket s of 15-46 days; 46-90; and 91-179 days have been consolidat ed t o one bucket of 46-179 days. (Det ails in BL dt . 27.02.2012 p. 17) Union Bank of India may cut rates next month: A day aft er St at e Bank of India reduced rat es on educat ion loans, Union Bank of India said it may cut int erest rat es on home and educat ion loans next mont h. If net int erest margin cont inues t o hold st rong, we may reduce rat es especially on t he ret ail sides like home and educat ion loan, Unit ed Bank of India Chairman and Managing Direct or Mr M V Nair said. (Mint dt . 29.02.2012 p. 11) UCO Bank net profit rises 11% in Q3: Kolkat a-based UCO Bank post ed a 11 per cent rise in net profit t o Rs 333 crore for t he quart er ended December 31, 2011, against R 301 crore in t he corresponding year-ago s period. Net int erest income, however, dipped by t hree per cent t o Rs 103 crore during t he period under review. The bank wit nessed fresh slippages t o t he t une of Rs 537 crore, of which, Rs 291 crore is due t o it s exposure t o Kingfisher Airlines. We st art ed t he cleaning up of our balance-sheet last year. There are legacy issues which we are facing, said Mr Arun Kaul, Chairman and Managing Direct or, UCO Bank.(BL dt .02.02.2012 p6) YES Bank Q3 net surges 33% at Rs 254 cr: YES Bank on Tuesday report ed a 32.94 per cent jump in net profit t o Rs 254.09 crore for t he t hird quart er ended December 31, 2011.The bank had post ed a net profit of Rs 191.12 crore for t he corresponding year-ago period.Tot al income of t he lender rose t o Rs 1,895.49 crore during t he current quart er from Rs 1,287.82 crore in t he same period last fiscal, YES Bank said in a filing t o t he BSE.Im pleased t o report that YES Bank has delivered anot her sust ained quart er of financial performance in t he backdrop of a challenging economic environment . The increase in savings account s rat e t o 7 per cent, coupled wit h alignment of fixed deposit rat es for NRIs wit h domest ic fixed deposit rat es, are clear compet it ive different iat ors, said Mr Rana Kapoor, Managing Direct or & CEO, YES Bank. (BL dt .25.01.2012 p1)

Overseas Aspirations..
Bank of Baroda to expand overseas network: Public sect or Bank of Baroda will expand its overseas net work by increasing up it s presence in Africa, Middle East and ent ering New Zealand for the first time, a t op company official said. We want t o increase our presence in t he overseas market . We are present in 87 count ries, which will go up t o 100 by June 2012, BoBs Chairman and Managing Direct or Mr. M D Mallya said. The bank would increase it s presence in Africa and t he Middle East , while it would ent er New Zealand for t he first t ime. (BL dt 13.02.2012 P.6) Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 Banks see good growth in Mauritius operations: Indian and foreign banks operat ing in Maurit ius are seeing good growt h in business as Indian companies look t o expand operat ions in Africa. In fact , Mauritius is fast cat ching up wit h larger int ernational financial cent res such as London and Singapore, given it s posit ion as a gat eway t o Africa. According t o St andard Chart ered Bank dat a, over t he last t wo years, t rade bet ween India and Africa has t ouched $40 billion and is expect ed t o grow t o $70 billion by 2015. For Bank of Baroda, business growt h in it s Mauritius operat ions has been around 25 per cent , said t he official. The bank has seven branches and will add one more before t he end of t he current financial year. It also has an Offshore Banking Unit . (BL dt .18.02.2012 p8) National Australia Bank opens branch in India: Nat ional Aust ralia Bank officially opened it s branch in India, in Mumbai. The branch will support existing inst it ut ional corporat e and business banking cust omers operat ing or t rading wit h India, said a press release issued by t he bank. (Det ails in BL dt 23.02.2012 p. 6) Indian Bank to set up three more branches in Sri Lanka: Bhasin Indian Bank has applied t o t he Reserve Bank of India t o open t hree more branches in Sri Lanka. The bank plans t o open a branch each in Bat t icaloa, Trincomalee and Hambant ot a, it s Chairman and Managing Direct or, Mr T. M. Bhasin, said. The Cent ral Bank of Sri Lanka has already given the green signal for t hese branches, he said aft er 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 privat e sect or banks will now be eligible t o handle Cent ral and St at e government business as agent s of t he cent ral bank, at par with Public Sect or banks. So far, t he facility was limit ed t o only t hree Privat e Sect or ICICI Bank, HDFC Bank and Axis bank. "It has been decided t hat all privat e sect or banks will now be considered eligible t o handle any Central/ St at e Government business (Where RBI pays agency commission) at par wit h Public Sect or 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 st art issuing banknot es of `.1,000 denominat ion in non-sequent ial numbering. The packet s of banknot es in nonsequent ial number will have hundred not es, RBI said. In June last year, RBI had st art ed issuing `.500 denomination not es in non-sequent ial numbering.(BS dt .02.02.2012 p6)

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Canara Bank Samachar Lehar March 2012 RBI: Loans to bank directors kin must be on commercial terms: The Reserve Bank of India on Friday said the rest rict ions pert aining t o advances t o bank direct ors as cont ained in t he Banking Regulation Act would apply t o grant of loans and advances t o t heir spouse and minor/ dependent children. However, banks may grant loan or advance t o or on behalf of spouses of t heir direct ors in cases where t he spouse has his/ her own independent source of income arising out of his/ her employment or profession. The loan so grant ed should be based on st andard procedures and norms for assessing t he credit worthiness of t he borrower. Such facilit y should be ext ended on commercial t erms. (BL dt .04.02.2012 p6) Sick MSMEs: RBI for change in definition: The RBI want s t he definit ion t hat classifies indust rial unit s in t he micro, small and medium ent erprise cat egory as sick changed as barely 2 per cent of such unit s have got rehabilit at ed in the last few years. The proposal t o revise t he definit ion is aimed at det ect ing signs of incipient sickness among MSME unit s so t hat prevent ive measures could be t aken by all st akeholders, including banks, t o nurse t hem back t o healt h. As per t he current definit ion, a unit is classified as sick when there is erosion in t he net wort h due t o accumulat ed cash losses t o t he ext ent of 50%. By t he t ime t he unit s reach t his st age t hey are nearly dead. So, t he definit ion of sick unit s needs t o be changed, said Mr K. C. Chakrabart y, Deput y Governor, RBI. A Government st anding advisory commit t ee is looking int o t he possibilit y of making t his change, he said at a seminar organised by t he 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 t o display t he list of unclaimed deposit s/ inoperat ive account s which have been inact ive/ inoperat ive for t en years or more on t heir respect ive Web sit es. The list so displayed must cont ain only the names of t he account holder(s) and his/ her address in respect of unclaimed deposit s/ inoperat ive account s, t he RBI said in a not ificat ion. In case such account s are not in t he names of individuals, t he names of individuals aut horised t o operat e t he account s should also be indicat ed. The RBI has inst ruct ed t hat t he account number, it s t ype and t he name of t he branch should not be disclosed on t he banks Web sit e. (BL dt .08.02.2012 p1) RBI on foreign contribution: The RBI on Thursday issued guidelines which st ipulat e t hat ent ities have t o get t hemselves regist ered wit h t he cent ral government before accept ing any foreign cont ribut ion and banks will have t o forward t he report of receipt s of such t ransfers t o t he government (BS dt 10.02.2012 p.4) RBI raises bank rate to 9.5%: The Reserve Bank of India (RBI) raised it s bank rat e t o 9.5% from 6% wit h immediat e effect , t o align it wit h t he marginal st anding facilit y (MSF) rat e, t he cent ral bank said.The rat e at t he MSF, which is an addit ional liquidit y window for banks, is 100 basis point s above t he RBIs repo rat e and now st ands at 9.5%.This [rat e change] should be viewed and underst ood as one-t ime t echnical adjust ment ... rat her than a change in t he monet ary policy st ance, t he RBI said in a release.Hencefort h, whenever t here is an adjust ment of Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 t he MSF rat e, t he RBI will consider and align the bank rat e wit h t he revised MSF rat e.(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 propert y in t he count ry. The central bank has made changes in t he IPI form for great er clarit y on t he matt er. (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 t he monet ary policy by st icking t o a pause on int erest rat es when a majorit y of his advisory commit t ee were for a cut in rat es. The governor, who was appreciat ed by t he commit t ee for t he way he handled t he currency depreciat ion, overruled t he suggest ions of at least four of t he seven independent members who were for a cut in t he repo, t he rat e at which t he cent ral bank lends t o banks. While three were for 25 bps, one suggest ed 50. But t here was unanimit y in t heir concerns over t he det eriorat ing fiscal condit ion of t he government which has raised t he borrowing target by nearly a quart er from it s budget ed level in February last. (ET dt .18.02.2012 p7) RBI to wait for Budget proposals before rate-cut: The inflat ion and int erest rat e cycles have peaked and have t o come down and for t hat t he RBI will look at event s like t he budget (2012-13), int ernat ional crude oil prices and ot her variable fact ors t o calibrat e it s policies, RBI Governor Dr D Subbarao said. Finance Minist er Mr Pranab Mukherjee will present t he Budget for 2012-13 fiscal in t he Lok Sabha on March 16 during which, he is expect ed t o announce st eps t o arrest slowdown in economic growt h. The GDP growt h rat e in 2011-12 is expect ed t o moderat e t o 6.9 per cent from 8.4 per cent a year ago. Defending RBIs decision t o hike int erest rat es (Repo) 13 t imes since March 2010, Dr Subbarao said t he measures were required t o t ame inflat ion which had significant ly crossed t he t hreshold 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 wort h Rs 12,000 crore through open market operations (OMOs) t o ease t he current liquidity crisis. The RBI will conduct the auction at it s Mumbai office. The Reserve Bank of India will conduct t he auct ion will be in four price met hods - government securit ies (G-Sec) mat uring in 2017 wit h a coupon of 8.07%, G-Secs mat uring in 2021 wit h a coupon rat e of 8.79%, G-Secs mat uring in 2027 wit h a 8.28% coupon rat e and G-Secs mat uring in 2032 wit h a coupon rat e 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 t o issue new banknot es of `.1000 denomination. The Reserve Bank of India will short ly issue Rs 1,000 denominat ion banknot es wit h inset let t er R, in t he Mahat ma Gandhi Series bearing the signat ure of Dr D Subbarao, Governor, Reserve Bank of India, and t he year of print ing on t he reverse of t he banknot e, t he cent ral bank said. (BS dt . 23.02.2012 p. 6)

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Canara Bank Samachar Lehar March 2012 RBI mulls norms for bankers dealings with loan arrangers: The RBI is believed t o be examining t he possibility of laying down guidelines for banks when dealing with loan arrangers. This move has t o be seen in t he cont ext of t he Cent ral Bureau of Invest igat ion bust ing a bribe-for-loans scam in November 2010. Bankers say it would be bet t er if t he cent ral bank evolves dos and dont s when it comes t o dealings wit h loan arrangers. Based on t hese guidelines, banks could come up wit h appropriat e risk mit igat ion mechanisms t o break t he banker-loan-arranger-borrower nexus. Though t he engaging of professional loan arrangers, such as chart ered account ant s, by ent erprises, especially t hose in t he MSME cat egory, is a legit imat e act ivity, t here are lingering concerns t hat loans are being sanct ioned by some t op 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 t he American currency t oday on fresh dollar demand from banks and import ers, despit e weakness of t he dollar abroad. At t he Int erbank Foreign Exchange (Forex) market, t he rupee resumed st eady at 49.15/ 16 per dollar and t raded in t he 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 it s previous close. Fresh dollar demand from banks and import ers in view of uncert aint y in t he currency market mainly affect ed t he rupee value against t he 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 t o close at 49.29/ 30 against t he US dollar amid sust ained capit al inflows. Forex dealers said fresh selling of t he American currency by export ers on hopes of furt her fall in it s value overseas aided t he rupee's value. The dollar index, consist ing of six major currencies, was down by over 0.2% in t he European market . (Bl dt . 16.02.2012 p. 6) Rupee at two-month high: The rupee jumped 21 paise t o a t wo and a half mont h high of Rs 50.10/ 11 against t he US dollar on t he back of sust ained capit al inflows and weakness in t he American currency overseas. At t he Int erbank Foreign Exchange (Forex) market , t he rupee opened st ronger at 50.30/ 31 a dollar and immediat ely hit a low of 50.40 on invest or caut ion in st ock market s and mont h end dollar demand from import ers, mainly oil refine. However, capit al inflows and sluggish dollar in t he global market s helped t he rupee t o bounce back t o 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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Canara Bank Samachar Lehar March 2012

Technology..
BoI to open 200 branches of the future: Bank of India plans t o creat e 200 branches of t he fut ure in t he next one year. Such branches will have spacious cust omer lobby, pleasing ambience, self-service kiosks and separat e area for high net -wort h individuals wit h dedicat ed relat ionship managers, said Mr Alok K Misra, Chairman and Managing Direct or, Bank of India. According t o Mr N. Seshadri, Execut ive Direct or, t he new branch initiat ive will provide superior cust omer service t o t he banks cust omers. (BL dt .11.02.2012 p6) Now ATMs can advertise financial products: Banks wit h large net work of aut omat ed t eller machines (ATM) will now be able t o generat e addit ioanl revenue by advertising financial product s offered by ot her inst it ut ions. With an eye on financial inclusion and t o incent ivise banks for opening ATMs in remot e areas, the Finance Minist ry has allowed bank owned as well as out sourced ATMs t o display advert isement s of ot her financial product s. Reserve Bank of India will soon issue guidelines in t his regard. (BS dt 11.02.2012 p.14) White label ATMs may not hit banks rollout plans too much: Banks do not plan t o ease up on t heir ATM expansion drive despit e t he Reserve Bank of Indias plans t o allow non-banks t o set up whit e label ATMs (WLAs), say bankers. ATMs are an import ant part of banks alt ernat ive channel st rat egy t o reach cust omers, t o showcase t heir product s and services, and creat e brand awareness. This is reflect ed in t he increase in t he number of ATMs in t he April 2011-January 2012 period, during which banks added 14,477 ATMs. At end January 2012, t he count ry had 89,655 ATMs, according t o t he Nat ional Payment s Corporat ion of India.Banks will deploy t heir own ATMs because it helps t o ret ain cust omer loyalt y. If WLAs becomes a realit y, t hey may tweak t heir st rat egy by focussing on put t ing t heir own ATMs in areas where t hey have a high cust omer densit y. (BL dt .17.02.2012 p6) Mobile banking seeks boost: Wit h Int erbank Mobile Payment Service (IMPS) in place, banks are now leveraging t heir exist ing corporat e client ele t o replace day-t o-day cash dealings at t he ground level wit h mobile t ransact ions. So far, 34 banks have regist ered with Nat ional Payment s Corporat ion of India (NPCI) t o enable mobile fund t ransfers bet ween banks for t heir cust omers. While most of t hese banks have launched mobile banking services for t heir ret ail cust omers, some are busy laying t he plat form for inst it utional client s as well. (BS dt. 21.02.2012 p. 9) HDFC Bank launches mobile payment service: HDFC Bank and Movida, a joint vent ure between Visa and Monit ise, have launched a mobile payment service t hat allows cust omers t o make payment s t hrough t heir mobile phones using t heir debit / credit card regist ered wit h t he bank. Movida provides t echnology t hat enables using mobile handset s as t he core device for making elect ronic payment s. These include bill payment s (insurance premium, elect ricit y bills), mobile t op-ups and movie t icket s. Payment s t o all companies t hat accept elect ronic payment s can be done using t his service. (BL dt 23.02.2012 p.6) Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 IDBI Bank arm working on portal for study loans: St udent s may not have t o sweat it out t o get educat ion loans from banks if t he port al t hat IDBI Int ech is currently working on t urns into realit y. The IT subsidiary of IDBI Bank is envisaging a port al t hat will provide st udent s an online int erface wit h banks and professional colleges/ inst it ut ions so t hat t hey could, among ot hers, glean informat ion on t he various recognised professional courses available across t he count ry, t he fees charged, and t he educat ion loan schemes on offer. The port al will capt ure informat ion from crucial st akeholders - professional colleges and banks - in t he higher educat ion ecosyst em, said Mr Sanjay Sharma, MD and CEO, IDBI Int ech. (BL dt .27.02.2012 p14) Technology makes bank strikes irrelevant in urban India: While trade unions were on a days st rike on Tuesday prot est ing against what t hey said were t he government s anti-labour policies and banking sect or reforms among ot hers, bank cust omers couldnt have cared less, t hanks t o ATMs and elect ronic payment modes of t ransferring funds. Union leaders admit t hat t echnology has changed t he game. These are all new handicaps, said Mr C H Venkat achalam, General Secret ary of t he All India Bank Employees Associat ion. He was, however, quick t o add t hat t he unions never int ended t o inconvenience the general public. If t here was any ot her way t o show my unhappiness t o t he government , I would have t aken t hose measures, Mr Venkat achalam 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 t o help int roduce core banking solut ions (CBS) t o four dist rict cent ral co-operat ive banks in Karnat aka. The four dist rict s ident ified are Kodagu, Kanara, Chikmagalur and Bijapur. Tat a Consult ancy Services is t he t echnology provider in Karnat aka. The four banks signed agreement s wit h TCS. According t o Mr S.N.A. Jinnah, Chief General Manager, Nabard, We are t o play t he role of an advisor and facilit at or in t he process and ext end project management support during t he roll out of t he CBS. (BL dt .08.02.2012 p21) RBI to permit non-banking entities to set up ATMs: In a bid t o accelerat e t he growt h and penet rat ion of ATMs in t he count ry, t he Reserve Bank of India said it plans t o permit non-banking ent it ies t o set up, own and operat e ATMs. ATMs rolled out by non-banks will be like Whit e Label ATMs (WLA) and will provide ATM services t o cust omers of all banks, t he RBI said in it s Draft Guidelines for WLAs. Nonbank ent it ies proposing t o set up WLAs have t o apply t o t he RBI seeking aut horisat ion under t he Payment and Sett lement Syst ems Act 2007. Such ent it ies should have a minimum net wort h of `. 100 crore at t he t ime of making t he applicat ion and on a cont inuing basis aft er issue of t he requisit e aut horisat ion. Being non-bank owned ATMs, t he guidelines on five free t ransact ions in a mont h for using ot her bank ATMs will not be applicable for t ransact ions made on t he WLAs. The charges for t he t ransact ions have t o be displayed on the screen before t he cust omer init iat es the t ransact ion. (BL dt 15.02.2012 p.6)

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Canara Bank Samachar Lehar March 2012 HDFC Bank loan kiosks in offices soon: You can now apply for a personal loan during your lunch break, wit hout st epping out of t he office. If t he paperwork is proper, you can also receive t he money before you reach home at t he end of t he day.HDFC Bank, Indias second-largest privat e sect or lender, is set t ing up kiosks in corporat e offices t hat would allow employees t o submit a loan request , get it processed, and receive t he money in 24 hours. Init ially, we are t arget ing companies t hat already have a banking relationship wit h us. We plan t o set up 1,500 priority desks across 500 companies in nine cit ies in t he next six mont hs, Mr Sai Giridhar, senior vice-president and business manager (unsecured loans), HDFC Bank, t old. The mobile kiosks would offer det ails of t he banks personal loan product s, including int erest rat es, t enure, and eligibility crit eria. All t he rat es and fees would be similar t o t hose 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, t he joint organizers of t his mega event of t he Indian banking indust ry and ot her delegat es. A very good evening! It is an honour for me t o be here t oday t o deliver t he valedict ory address of t his Conference which has come t o signify an annual confluence of banking minds for serious deliberat ions. These conferences give us all an opport unit y t o reflect on t he lat est development s in t he banking space and chart t he fut ure course of act ion. In t he current phase following t he crisis, t he environment has become so fluid and dynamic t hat bankers need t o be in a const ant st at e of awareness and preparedness t o face t he new challenges and also t o adjust t o t he fast changing regulat ory landscape. The Conference, over t he span of t hree days, as I see from t he program schedule, has covered a wide range of import ant issues such as financial inclusion, wholesale banking, t echnology, consumer experience, et c. I am sure t hese discussions have t riggered new t hought processes and opened new vist as for us t o go back and chalk out t he implement at ion st rat egy for making Indian banking more efficient , resilient and socially more relevant . As per t he IBA-FICCI-BCG Report (August 2011), "India's Gross Domest ic Product (GDP) growt h will make the Indian banking industry the t hird largest in asset size in t he world by 2025". However, being largest is not enough - being efficient is what we have t o st rive for. The Indian economy has been growing fast and t he GDP growt h rat e had averaged 8.8 per cent in t he last 5 years preceding t he crisis. Despit e a subsequent slowdown, India's GDP is st ill growing at a reasonably fast pace. The Indian banking sect or will, as such, need t o mat ch up t o t he requirement s of a fast growing economy including t he likely accelerat ion in t he Credit t o GDP rat io. Added t o t his is the demographic dividend with it s myriad challenges and opport unit ies. There is t hus a huge responsibilit y on, and opportunity for, t he Indian banking sect or going ahead.
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Canara Bank Samachar Lehar March 2012 Being responsible is no longer a choice for banks. Commercially profit is a laudable object ive but we have t o remember t hat balancing the int erest of all st akeholders, included and yet t o be included, is t he only socially opt imal choice which will ensure long t erm survival and growt h. Casino banking has no fut ure. In t his cont ext , let me quot e from t he review by Financial Times of Sat yajit 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 weat hering t he financial crisis relat ively unscat hed. Much of it hinged on t he sound and resilient banking syst em in t he count ry. The foundat ion for t he banking sect or resilience was laid wit h t he int roduct ion of t he financial sect or reforms in 1991 with focus on prudent ial regulat ion and increased compet it ion. These reforms result ed in a comprehensive t ransformat ion of t he banking sect or. The reforms had a major impact on t he overall efficiency and st abilit y of t he banking syst em. The out reach of banks increased in terms of branch / ATM presence. The balance sheet s and overall banking business also grew in size. The financial performance and efficiency of Indian banks improved wit h increased compet it ion, as reflect ed in t heir profit abilit y, net int erest margins, ROA and ROE. The capit al posit ion improved significant ly, and banks were able t o bring down t heir non-performing asset s sharply. This reform phase also wit nessed increased use of t echnology which in t urn, helped improve cust omer service. While financial st ability is not an explicitly st at ed object ive under t he Reserve Bank's st at ut e (RBI Act , 1934), various measures were undert aken from t ime t o t ime t o st rengt hen financial st ability in t he syst em which covered a wide arena. The approach has evolved from past experiences and a const ant int eract ion bet ween t he micro level supervisory processes and macroeconomic assessment s. In t he Indian cont ext, the mult iple indicat or approach t o monet ary policy as well as prudent financial sect or management t oget her wit h a synerget ic approach t hrough close coordinat ion bet ween RBI and ot her financial sect or regulat ors has ensured financial st ability. Some of t he ot her policy measures include Capit al Account management , management of syst emic int erconnect edness, st rengt hening prudent ial framework, init iat ives for improving t he financial market infrast ruct ure, et c. Syst emic issues arising out of int erconnect edness among banks and between banks and Non Banking Financial Companies (NBFCs - our shadow banks) and from common exposures were addressed by, among ot her measures, put t ing prudent ial limit s on aggregat e int erbank liabilit ies as a proport ion of banks' Net Wort h, rest rict ing access t o uncollat eralized funding market t o banks and Primary Dealers wit h caps on bot h borrowing and lending, increasingly subject ing NBFCs t o more st ringent prudent ial regulat ions as also rest rict ing banks' exposure t o NBFCs t o cont ain regulat ory arbit rage. The ot her not iceable aspect regarding policy measures has been t he innovat ive use of count ercyclical policies t o address t he pro-cyclicalit y issues. The count ercyclical policies were int roduced as early as 2004 by using t ime varying sect oral risk weight s and provisioning, t hough RBI had used t hem sporadically even earlier. These unconvent ional measures t aken in response t o emerging risks are now widely acknowledged t o have played a significant role in prot ect ing t he Indian financial syst em from key vulnerabilit ies. Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 We have, t hus, much t o be sat isfied about, as we have come a long way since t he 1991 reforms. Even as we rejoice in our achievement s and success, we must have t he humilit y t o acknowledge that much more needs t o be achieved in our pursuit of excellence. So let us look at t he road ahead. III. Indian Banking - The Road Ahead Fut ure is always uncert ain but coming times look more uncert ain t han ever. I am reminded of a quip "The trouble wit h our t imes is t hat t he fut ure is not what it used t o be". There are plent y of 'Known Unknowns and Unknown Unknowns'. The fut ure holds a lot of opportunities as well as challenges for all of us. The Conference would have already focused on t he opportunit ies and how t o make most of t hem. Let me list out a few challenges t hat await us in t he future. For elaborat ing on t he challenges t hat lie ahead of us. I would cat egorise t hem int o t hree broad cat egories viz. A. Challenges in coping up wit h the emerging regulat ory and supervisory framework B. Challenges in meet ing t he specific needs of t he economy and C. Challenges in fixing t he fault lines in t he syst em. A. Challenges in coping up with the Emerging Regulatory and Supervisory Framework (i) Implementation of advanced approaches under Basel II The implement at ion of t he advanced approaches under Basel II poses several challenges for banks and t he Reserve Bank of India alike. The st andardized approaches have already been implement ed in India and all t he commercial banks have migrat ed t o t he st andardized approach under Basel II framework as of March 2009. Migrat ion t o t he Advanced Approaches is import ant for larger banks because it involves adopt ion of more sophist icat ed risk management syst ems. Moreover, t here are reput at ional issues t oo if large banks cont inue wit h st andardized approaches. However, t he implement at ion of t he advanced approaches raises several issues relat ing t o development of human resource skills, t echnology upgradation, branch int erconnect ivity, availabilit y and management of hist orical dat a, robustness of risk management syst ems, et c. Though RBI has set an indicat ive t ime schedule for implement at ion of t he Advanced Approaches, banks' response has not been encouraging so far. It is high t ime for larger banks t o seriously upgrade t heir syst ems and skill set s and migrate t o t he Advanced Approaches. (ii) Migration to Basel III (a) Capital Basel II was designed because it s predecessor i.e. Basel I was considered risk insensit ive and t oo preliminary t o cope up wit h the rapid development s in t he financial sect or result ing in subst antial regulat ory arbit rage. The basic purpose of Basel II was t o leverage on t he risk management syst ems of int ernat ionally act ive banks and use t hat for enhanced risk management archit ect ure and, in t he process, have bet t er measurement of capit al requirement s. It is ironical that when the crisis t ook place, Basel II was eit her not implement ed or just implement ed in t he jurisdict ions. And yet we have had t o leapfrog and go in for enhancement s under Basel II.5 and Basel III. Under Basel III, an assessment of Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 Indian banks in t erms of capit al requirement s has revealed t hat, notwithst anding some issues wit h a few individual banks, t he syst em, as a whole, is very well capit alized and t he t ransit ion t o t he revised capit al norms of overall capit al adequacy, Tier I component or equit y component would be smoot h. The st ress point , however, would be t hat banks will be required t o adjust t he unamort ized port ion of Pension and Grat uit y liabilit ies in the opening balance sheet on April 1, 2013 on t ransit ion t o IFRS. Going forward, the capit al requirement on account of increased coverage of risks would not be so mat erial for Indian banks as eit her t hose act ivit ies are not allowed (i.e. resecurit isat ion) or t heir magnit ude is quit e small (i.e. t rading book). However, capit al requirement s, including equit y, would be subst antial for support ing t he high GDP growt h and t he fact t hat Credit t o GDP rat io, which is current ly quit e modest at about 55 per cent , is bound t o increase subst ant ially on account of st ruct ural changes in t he economy i.e. Financial Inclusion program, increase in loan requirement s from more credit int ensive sect ors such as manufact uring, infrast ructure, et c. The large equit y needs, t hough over an extended t ime frame, would put downward pressure on t he banks' RoE. While t he higher capit al requirement s would bring down risks in t he banking sect or and event ually invest ors would recognize t he lower risks and be willing t o set t le for a lower ROE, in t he short t erm, t he only answer is raising product ivity. RBI and banks would be est imat ing t he capit al requirement s under Basel III once our guidelines for implement ation of Basel III are finalized. While implement ing Basel III, our dilemma is (a) where our capit al regulat ions are more st ringent , should we cont inue wit h t he more st ringent norms? and (b) should we adhere t o t he ext ended t imet able or st ep up t he implement at ion schedule, given t he fact t hat t he banking syst em would be comfort able at t he st art ing point i.e. at t ransit ion? Ot her areas that need st rengt hening include securit izat ion relat ed regulat ion, market risk management t ools and improvement t o t he Supervisory Review and Evaluation Process of Pillar II of Basel II as per t he Basel III enhancement s. (b) Liquidity Management The Financial St ability Report (FSR) of t he Reserve Bank of India for t he half year ended June 2011 has expressed concerns over growing reliance of banks on wholesale funding / market borrowing t o fund asset s. One reason for such reliance could be t he low growth of deposit s not commensurat e wit h t he credit growt h. Such reliance, however, could prove disast rous as evidenced during t he crisis as t he wholesale funding sources can dry up quickly. Banks, t herefore, have t o fact or t his in t heir liquidity management . There, however, remains an issue under Basel III about t he ext ent t o which SLR holdings can be t aken int o consideration for t he purpose of calculat ing t he liquidity rat ios. As t he SLR holdings are required t o be maint ained on an ongoing basis, t hese would t echnically not be reckoned for liquidit y purposes. However, it may be reasonable t o reckon, under st ress condit ions, at least a part of t he SLR holdings in calculat ing t he liquidit y rat io, as t he SLR holdings are primarily government bonds against which t he Reserve Bank provides liquidit y. Furt her, t he major challenge for Indian banks in implement ing t he liquidit y st andards is t o develop t he capabilit y t o collect t he relevant dat a accurat ely and Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 granularly and also t o formulat e and predict the liquidity st ress scenarios wit h reasonable accuracy and consist ency. Given t hat Indian market s have not experienced t he levels of st ress t hat global market s were subject ed to, predicting stress scenarios is going t o require a qualit at ive judgement al call. (iii) Shadow Banking System - Greater consistency in regulation Anot her import ant regulat ory challenge is ensuring "great er consist ency in regulat ion of similar inst rument s and inst it ut ions performing similar act ivit y" t o prevent or cont ain regulat ory arbit rage. In t he case of syst emically import ant non-deposit t aking NBFCs (NBFCs-ND-SI), a gradually calibrat ed regulat ory framework in t he form of capit al requirement s, exposure norms, liquidit y management , asset liabilit y management and report ing requirement s has been ext ended, which has limit ed t he space for regulat ory arbit rage as also t heir capacit y t o leverage. Given t he increasing significance of t he sect or, t he supervisory regime for t he syst emically import ant NBFCs will need t o be st rengthened furt her for a more robust assessment of t he underlying risks. A Working Group under t he former Deput y Governor, Ms. Usha Thorat on NBFCs has, int er alia, examined t he issues relat ed t o t he regulat ory gaps and arbit rage opport unit ies t hat exist in t he syst em, and has given recommendat ions for addressing t hese issues as well as for enhanced disclosure requirement s and improved supervisory pract ices, et c. (iv) Other Issues The Indian banking syst em has a modest leverage which provides comfort . The RBI has also been enhancing and fine-t uning it s supervisory processes on an ongoing basis and based on t he evolving financial scenario. A revised framework for monit oring of financial conglomerat es has been rolled out since 2009. The Financial St ability and Development Council (FSDC) has also been act ivat ed under t he aegis of t he Government of India for syst em level monit oring of build-up of risks and inst abilit y, specifically, risks emanat ing from t he Syst emically Import ant Financial Inst it ut ions (SIFIs) including t he financial conglomerat es. This is also expect ed t o enhance coordination among t he financial regulat ors. However, ent erprise wise risk management processes need t o be implement ed / st rengt hened in t he financial conglomerat es and SIFIs. (v) Structural Changes (a) Financial Innovation The crisis has also raised t he issue of financial st ability vis-a-vis financial innovat ion - in ot her words, t he quest ion of t he 'social opt imalit y' of financial innovat ions. One of t he main reasons why India escaped t he adverse impact of t he crisis was a calibrat ed approach t o financial innovat ion. However, we as regulat ors and supervisors need t o guard against st ifling financial innovat ion while at the same t ime remain caut ious about t he object ive and purpose behind t he new and complex financial product s t hat are proposed or introduced by t he indust ry. This is part icularly relevant for a country like India as it s resilience in t he face of heavy financial t urbulence can be quit e limit ed and as no social safet y net s are available. These concerns shape RBI's approach t o financial innovat ion. Banks have t o be caut ious about t he 'social usefulness' of new product s and should have appropriat e cont rols in place t o ensure against mis-selling t hrough robust 'suit abilit y and appropriat eness' checks. Several far-reaching measures have been t aken recent ly in t erms of allowing new product s such as Int erest Rat e Fut ures, Currency Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 Fut ures, and Repo in corporat e bonds, et c. Such product s are new for t he Indian market and an assessment of t heir impact on ot her market s, inst it ut ional behaviour and syst em as a whole is crit ical. Going forward, a key focus area must be designing of robust market infrast ruct ure and st rengt hening t he syst emic monit oring framework for t hese new market s. (b) Financial Holding Companies During t he last decade, India has wit nessed growt h and evolut ion of financial inst it utions int o large financial conglomerat es expanding t heir presence in mult iple non-banking financial act ivit ies. In t his backdrop, t he issue of t he nat ure of corporat e form adopt ed by financial groups in India has acquired relevance from t wo dist inct , t hough int er-relat ed, perspect ives - one, efficient corporat e management wit hin t he groups addressing t he issues of growt h, risk management and capit al requirement s of t he Group; and t wo, t he degree of regulat ory comfort wit h different models, part icularly in regard t o t he concerns relat ing t o cont agion risks. A Working Group set up by t he Reserve Bank in t his connect ion has recommended pursuing Financial Holding Company (FHC) model as t he preferred model, as it enables, int er alia, de-risking t he banks t o a cert ain ext ent from t he perspect ive of 'holding out ' risks of t he Group and freeing t he bank management from t he responsibility of managing t he subsidiaries and ot her affiliat es. This st ruct ure also facilit at es bet t er regulat ory oversight and neat er resolut ion. There are, however, numerous challenges in implement ing t he FHC model in India. The implement at ion of t his model would require a new legislat ive framework, providing t he right incent ives t o t he exist ing financial conglomerat es t hrough appropriat e t ax treatment and resolut ion of st rat egic and public policy issues in t he case of public sect or banks. (c) Changing banking landscape : Subsidiarisation of banks One of t he key t akeaways of t he global crisis is t he appreciat ion and acknowledgement of t he benefit s of subsidiarisat ion vis-a-vis branch presence of foreign banks. Reserve Bank has already t aken st eps in t he direct ion of encouraging foreign bank presence in subsidiary form. The draft paper put out in t his regard has suggest ed making t he subsidiary rout e more at tract ive by providing near nat ional t reat ment t o t he wholly owned subsidiaries of foreign banks. Presence of foreign banks in subsidiary form will generat e great er compet it ion for t he Indian banks as t his rout e will open up nearly equal opport unit y t o foreign banks in business expansion wit hin India. (d) Adoption of IFRS There are cert ain issues t hat need t o be addressed in implement ing t he convergence wit h t he IFRSs. First , t he very crucial IFRS 9 relat ing to Financial Inst rument s is st ill evolving and t he final st andard is unlikely t o be available soon. Thereaft er, t he Inst it ut e for Chart ered Account ant s (ICAI) will need t o promulgat e t he converged st andard for India. This present s a moving t arget given t he short time available for convergence with IFRS. Converging t o t he st andards would require considerable skill upgradation and modificat ion in t he IT syst ems of banks. The Reserve Bank has const it ut ed a Working Group t o address t he implement at ion issues and facilit at e formulat ion of operat ional guidelines for t he convergence. Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 (e) Revamping financial legislation Evolut ion of legislat ive framework is an int erest ing area. Laws are made keeping in mind t he prevailing circumst ances. However, if t he circumst ances change, t he legal framework can become inadequat e. This is more so in t he financial world because t he pace of change is very fast . Currently in t he financial sect or, we have about 60 Act s and mult iple rules and regulat ions. The increment al changes made to t hese Act s over a period have made t he laws ambiguous and complex. Government has t aken an init iat ive by set ting up a Financial Sect or Legislat ive Reforms Commission (FSLRC) which seeks t o rewrit e and st reamline t he financial sect or laws, rules and regulat ions t o bring them in harmony wit h India's fast growing financial sect or. B. Challenges in meeting the specific needs of the economy Indian economy is one of t he fast est growing economies of t he world. The economy wit h it s varied geography and demography has specific requirement s in order t o t raverse t o t he next orbit and att ain it s full pot ent ial. Banks have t o gear up t o meet such requirement s by redesigning t heir business st rat egies. A few of t he most import ant requirement s of t he economy are (i) Financial Inclusion (FI), (ii) Infrast ructure Financing and (iii) Financing of housing and real est at e. (i) Financial Inclusion (FI) It is est imat ed t hat despit e t he widespread expansion of t he banking sect or, about 40% Indians st ill lack access t o even t he simplest kind of formal financial services. Such an ext ent of financial exclusion can severely ret ard t he Indian growt h st ory, bot h by blocking a major port ion of t he Indian populat ion from part icipat ing in t he economic mainst ream and by, possibly, generat ing social t ensions. As such, moving t owards Universal Financial Inclusion is bot h a nat ional commit ment and a policy priorit y. RBI and t he Government of India have t aken several init iatives in this direct ion such as mandat ing opening of 'no frills' account s coupled wit h provision of small overdraft facilit y, int roduct ion of a General Credit Card (GCC), relaxat ion of KYC norms for small value account s, allowing general permission for opening branches in Tier 2 t o Tier 6 cent res with populat ion of less t han 1,00,000, allowing use of Business Facilit ator (BF) and Business Correspondent (BC) models, et c. in providing financial and banking services. Despit e some improvement as a result of t hese init iat ives in recent years, real financial inclusion st ill eludes us and major challenges remain. First of all, in t he absence of a proper assessment of t he ext ent of financial exclusion, init iat ion of appropriate policy responses is difficult . There is, t herefore, a need t o conduct specific survey or expand t he scope of t he decadal census for gat hering information relat ing t o financial inclusion / exclusion. Then, t here is t he issue of high operat ing cost of small t ransact ions and difficult ies in reaching out t o far flung areas. Most import ant ly, banks need t o perceive Financial Inclusion as a profit able, commercially viable business and not as an obligat ion. This can be at t ained t hrough product innovat ion, use of t echnology for lowering cost of t ransact ion and cross selling of product s and services aft er t horoughly underst anding the rural market s. Mobile banking has t remendous pot ent ial in t his respect . Effect ive leverage of Informat ion and Communicat ions Technology (ICT) solut ions, duly simplified, and use of product s such as smart cards, biomet ric handheld devices, mobile and basic level ATMs, et c. can aid cost reduct ion. Cultural and at t it udinal changes at grassroot s, especially at t he level of Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 branches are needed t o impart organizat ional resilience and flexibilit y. Financial lit eracy and credit counselling will creat e t he right condit ions for financial inclusion. There is also a need t o improve t he absorpt ive capacit y of financial services by providing basic infrast ruct ure such as healt h, wat er, sanit at ion and educat ion which can lead t o fast er income growth and increase in non-farm based act ivit ies in rural areas and lead t o increase in demand for credit . Syst ems of reward and recognit ion for t he personnel init iat ing, ideat ing, innovat ing and successfully execut ing new product s and services in t he rural areas would also give financial inclusion t he 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 product s and remitt ance facilit ies. Hence banks bear very large responsibilit y in making the financial inclusion programme a success. (ii) Infrastructure Financing India's infrastruct ural financing needs are not only huge but also vit al. The t arget ed annual spend on infrast ruct ure during 2007-12 is about USD 500 bn which is est imat ed t o double in t he next five year plan (USD 1 t rillion during 2012-17). Short fall in infrast ruct ure financing, according t o an est imat e, would cost about 4% of GDP every year which is t oo cost ly for a growing count ry like India. Banks, tradit ionally, have been t he major source of infrast ruct ure financing and t heir exposure t o infrast ruct ure is already high at 17 per cent . Infrast ruct ure project s involving long t erm funding plans have, however, severe implicat ions for t he asset liabilit y management at banks. There are some alt ernat ives t o bank financing such as development of corporat e bond market s, Infrast ructure Debt Funds et c. The challenge before banks in t he fast evolving landscape is t o realign t heir posit ion in meet ing t he infrast ruct ure finance needs, at t he same t ime, however, not significant ly increasing t heir risks. Take-out financing could be one opt ion in achieving t his balancing act . Government and RBI have recent ly come out wit h a st ruct ure for Infrast ruct ure Debt Funds (IDFs) which would facilit at e t ake-out financing, development of t he corporat e bond market et c. (iii) Financing of housing and real estate Financing of housing and real est at e is anot her challenging area for banks. Wit h a high rat e of populat ion growt h, coupled wit h increased urbanizat ion and growing incomes, t here is a t remendous business opport unit y for banks t o part icipat e in t his segment . The emergence of demand for housing finance is expect ed t o be the key driver of bank credit in fut ure. However, real est at e, owing t o it s imperfect ion in t erms of informat ion asymmet ry and opacity, poses great challenges and banks need t o tread wit h ut most caut ion and should avoid falling prey t o irrat ional exuberance. Real est at e is highly sensit ive and prone t o easy build up of bubbles, which could be mist aken for growt h moment um. The global crisis bears a st riking t est imony t o t he disast rous impact t he excesses in real est at e sect or could pose t o t he financial syst em and banks have t o resist t he lure of quick but risky ret urns.

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Canara Bank Samachar Lehar March 2012 C. Challenges in correcting the Fault Lines (i) Asset Quality Non-performing Asset s (NPA) have caused some concerns. While t he rise in NPAs could part ially be att ribut ed t o t he adverse impact of t he global financial crisis, the aggressive lending st ance of banks during t he preceding boom period as also inadequat e due diligence and laxity in monit oring of t he loan account s are also responsible for det eriorat ion in t he asset qualit y. This has been so, especially in case of ret ail loans. While t he gross NPA rat io declined from 3.30% at end March 2006 t o 2.25% at end March 2011 , mainly due t o a commensurat e increase in gross advances; t he absolut e amount of gross NPAs increased by `.46,669 crore (an increase of 91%) during FY 2005-06 t o FY 2010-11. As such, t he NPA st ock has risen consist ent ly. Slippage rat io of t he banking syst em, defined as fresh accret ion t o gross NPAs t o opening balance of gross st andard advances, which had shown a declining t rend from FY 2005-06 (1.9%) t o FY 2007-08 (1.8%), abrupt ly increased t o 2.18% in FY 2008-09 and 2.21% in FY 2009-10. At syst em level, new accret ion t o NPAs has been much fast er t han t he reduction in exist ing NPAs due t o lower levels of upgradat ion and recoveries. Also, despit e writ e-offs, gross NPAs have cont inued t o rise significant ly. The t able below tracks t he movement of st ock of gross and net NPAs of t he banking syst em during the period March 2006 through March 2011.

NPAs of SCBs (Amount s in `. Crore) Total Gross Advances % Change At end over Amount Previous March Mar-06 15,50,630 30.46 Mar-07 20,12,665 29.80 Mar-08 25,07,885 24.61 Mar-09 30,37,606 21.12 Mar-10 35,45,000 16.70 Mar-11 43,58,628 22.95 Source : Reserve Bank of India Total Gross NPAs Total Net NPAs As % of As % of Gross Net Amount Amount Adva Adva nces nces 51,199 3.30 18,532 1.22 50,513 2.51 19,956 1.01 56,525 2.25 24,675 1.00 69,292 2.28 31,680 1.06 84,648 2.39 37,719 1.08 97,868 2.25 41,813 0.97

It may be comfort ing t o t ake refuge under net NPA figures but t he comfort is misplaced. Banks need t o, not only ut ilize effect ively, t he various measures such as CDR mechanism, One Time Set t lement schemes, Debt Recovery Tribunals, provisions of t he SARFAESI ACT et c. put in place by RBI and t he Government of India for resolut ion and recovery of bad loans but also have t o st rengt hen t heir due diligence, credit appraisal and post sanction loan monit oring syst ems t o minimize and mit igat e t he problem of increasing NPAs. Overall economic growt h in t he last decade or so, coupled with higher disposable incomes have led t o an exponent ial growt h in ret ail spending. As t he effort s direct ed t owards Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 financial inclusion t ake off, t he bankable populat ion will see further rise. This would require that delinquency risks and quality of port folio are carefully managed by banks. Adherence t o t he provisioning requirement , building count ercyclical provisions and holding count ercyclical capit al buffers in good t imes can, t o some ext ent , insulat e banks from excessive default st ress during crisis sit uat ions. (ii) Consolidation Mergers and acquisit ions (M& A) as a means of inorganic growt h are increasingly being used t he world over t o undert ake rest ruct uring of leading business ent erprises. It is followed as a part of t he st rat egy t o achieve a larger size and fast er growt h in market share and reach, and t o become more compet it ive t hrough economies of scale and scope. India does not have larger banks t o finance it s huge infrast ruct ural needs and large indust rial project s. The st ruct ure of t he banking syst em as recommended by t he Narasimham Commit t ee II consist ing, along wit h medium sized and smaller banks, of a few large int ernat ional banks, would not only meet t he financing needs of infrast ruct ure and large project s and provide t he economies of scale and scope but also leverage t he count ry's image as a financial dest inat ion and enable Indian banks t o compet e globally in t erms of fund mobilisat ion, credit disbursal, invest ment and rendering of financial services. This could be att ained t hrough consolidat ion. However, while encouraging / promot ing t he consolidation rout e, the need for compet it ion wit hin t he domest ic banking sect or should not be overlooked nor the risks and challenges t hat emanat e from t he presence and operat ions of large syst emically import ant financial instit ut ions be ignored. While nobody knows what t he opt imum size in t erms of largeness is, one t hing which is very clear is t hat banks should refrain from, and regulat ory dispensat ion should not permit , building complex struct ures. (iii) Corporate Governance Deficit Several st udies have highlight ed t he direct relat ionship between good governance st andards and t he performance and efficiency of an ent it y. This is all t he more t rue in respect of banks, which, in t heir fiduciary capacit y deal wit h public money on one hand and on t he ot her, enjoy government / cent ral bank support due t o t heir centrality in the overall financial syst em. The recent crisis has also amply demonst rat ed how weak governance framework contribut ed t o t he build up t o t he crisis through excessive risk t aking. Transactions in risky and complex product s which were barely underst ood, neit her by the financial ent it ies nor t he cust omers, was anot her cont ribut ing fact or. While over t he last one decade, t he governance requirement s have been considerably enhanced in India, good governance has t o be a cont inuous and ongoing process. In India we had t he "derivatives" episode recent ly which was a case of inadequat e applicat ion of "suit abilit y and appropriat eness" requirement s and, consequent ly, was a case of governance deficit . As such t he Board of Direct ors and t he senior management have a great oversight responsibilit y in ensuring t hat t he respect ive banks lay down robust compliance cult ure and corporat e governance framework which is reviewed periodically for it s efficacy and efficiency. (iv) Information Asymmetry Informat ion asymmet ry 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 t o Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 enable banks t o st reamline t heir credit appraisal framework and also t o inst il discipline among t he default ing borrowers. The ut ilit y of such dat a, however, hinges inexorably, on it s int egrit y and t imeliness. Lapses in sharing of informat ion defeat s t he very purpose of such arrangement s. Unfortunat ely this arrangement has not worked. Banks should st rive t o make t his work. Hopefully wit h licenses grant ed for addit ional Credit Informat ion Companies, we expect t he syst em t o evolve a robust informat ion sharing arrangement and furt her t he development of t he banking syst em. (v) Product Pricing Cost ing of banking product s is an issue which has largely been escaping serious debat e. Proper and fair pricing of risks and of banking product s is essent ial from risk management and cust omer service perspect ives. It can also enhance compet it ion result ing in passing of t he benefit s of such increased compet it ion in t erms of lower cost s t o t he ult imat e cust omer. The challenge before banks is t o make t he best use of t echnology and innovat ion t o bring down t he int ermediat ion cost s while prot ect ing t heir bot t om lines. The issue of fairness t o all classes of cust omers is also a very import ant issue. Today, there are a lot of complaint s from cust omers about lack of fairness in floating rat e product s. Banks need t o be sensit ive t o t hat . To deal wit h t his issue, RBI would be sett ing up a Working Group as announced in t he recent Monet ary Policy t o look int o t he appropriat e met hodology for pricing of credit . (vi) Customer Service Banking is predominant ly a cust omer orient ed business and good cust omer service is t he key t o banks' growt h and st abilit y. Wit h enhanced compet it ion amongst banks, cust omer service becomes t he sole different iat ing factor t o be leveraged t o st ay relevant and t o forge ahead in t he business. However, in pursuit of ret urns and profit s, cust omer service is oft en ignored if not t ot ally forgot t en. As t he cust omer awareness grows, banks would be required t o gear up for providing more efficient and at t he same t ime, cost effect ive services leveraging t he t echnological capabilities. Cust omer ret ent ion is going t o be t he key fact or for banks, going ahead. Recognising t he need for revisit ing t he issue of cust omer service in banks, a Commit t ee (Chairman : Shri M. Damodaran) was const it ut ed by t he Reserve Bank in May 2010. The Commit t ee looked int o t he banking services rendered t o ret ail and small cust omers and pensioners, st ruct ure and efficacy of t he exist ing grievance redressal mechanism, t he funct ioning of Banking Ombudsman Scheme, and possibilit y of leveraging t echnology for bet t er cust omer service and has recommended st eps for improvement . The recommendat ions and t he public comment s received t hereon are being examined by RBI for implement at ion. Meanwhile, in the recently concluded Ombudsman Conference, 10 act ion point s were identified, which are essent ial t o prot ect the right s of t he cust omers. (vii) Know Your Customer (KYC) Money laundering is a growing menace and it not only poses serious t hreat t o t he st abilit y and int egrit y of t he financial syst em but also t o t he sovereignt y and safet y of nat ions worldwide. In t he coming days, challenges before banks would primarily lie in saving t hemselves from t he growing t hreat of money laundering. In India, PMLA was passed in 2002 and it has been aligned with the FATF recommendat ions in 2009. Furt her, India has Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 become a member of FATF in 2010. Banks are being ext ensively sensit ized about money laundering and KYC norms. KYC discipline assumes crit ical import ance especially in t he light of our concert ed effort s t o widen t he reach of banking as part of financial inclusion init iat ives. Banks have t o ensure a very high degree of KYC compliance and a very robust AML regime. Once t hese st andards are achieved, a unified KYC for banking syst em could be t hought of. (viii) Risk Management, Technology and HR Development In view of t he current dynamic business scenario of increasing financial sophist icat ion and innovat ive financial t ools, banks are faced wit h complex risks. Thus, robust ent erprise wide risk management s syst ems are the fundament al requirement for banks t o be able t o survive in t he long run. Banks with proper risk management syst ems would not only gain compet it ive advant age but would also add value t o t he shareholders and ot her st akeholders. Banks, t herefore, have t o endeavor for int egrat ed risk management syst ems, bot h within t he bank and also across t he group. Such an int egrat ed risk management archit ecture would be current ly difficult due to t he disconnect bet ween businesses, risk managers and IT syst ems across t he organizat ions in t heir exist ing set -up. Indian banks have achieved most of t he comput erizat ion under t he Core Banking Solut ion (CBS). This may not , however, prepare them adequat ely for t he necessary MIS and analyt ical t ools for risk management . In order t o upgrade t he risk management syst ems, banks need t o upgrade t heir t echnology proport ionat ely so that t he MIS and t he analyt ical t ools for risk management are available. This will ent ail large invest ment s in t echnology part icularly for t hose banks who have t o migrat e t o t he advanced approaches under Basel II. Further, with t he explosive growt h of t he int ernet , mobile and wireless t ools, t he way bot h t he economy and business are conduct ed t oday has been revolut ionized and as such, t he t echnological needs of banks are not confined t o only risk management requirement s. The need for t echnological innovat ion in t he cont ext of financial inclusion is of high priority. Technology has evolved as t he int egrat or and holds t he key t o t he fut ure success of any corporat e ent it y and more so for t he banks. Speed, accuracy and quality in operat ions and delivery mechanism as also cost efficiency are some of t he known benefit s t hat would accrue t o bot h : banks and t heir cust omers. However, enhanced usage of t echnology also poses severe challenges for banks bot h, in t erms of keeping pace wit h t he fast growing / changing t echnological demands so as t o maint ain an edge on t he profit abilit y, delivery and quality front s as also wit h regard t o t he recognit ion, underst anding, management and mit igat ion of risks inherent in t he use of t echnology. The Reserve Bank of India, on it s part , has t aken several init iat ives in t his direct ion which include formulat ion of t he IT Vision document 2011-17 which set s t he priorit ies for commercial banks for moving forward from t he core banking solut ions t o enhanced use of IT in areas like MIS, regulat ory report ing, overall risk management , financial inclusion, cust omer relat ionship management and enhancing aut omat ed dat a flow within banks and t o RBI wit hout any manual int ervent ion, et c. Measures are afoot t o set up Next Generat ion RTGS (NG-RTGS) syst em t aking int o account the lat est development s in t he areas of t echnology, messaging and net working, et c.

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Canara Bank Samachar Lehar March 2012 On t he part of banks, t here is an imperat ive need for a t hree-pronged act ion agenda, viz., first , t echnology upgradat ion coupled wit h it s int egrat ion with t he overall business st rat egy t o achieve an edge in respect of services provided t o their const it uent s, bett er housekeeping, opt imizing t he use of funds and building up of MIS for decision making, bet t er management of asset s & liabilit ies and t he risks assumed which in t urn have a direct impact on t he balance sheet s. Second, a more dynamic and challenging work cult ure t o meet t he demands of cust omer relat ionships, product different iation, brand values, reput at ion, corporat e governance and regulat ory prescript ions. Third, focus on int ernal controls, risk mit igat ion syst ems and business cont inuit y plans t o effect ively mit igat e possible operat ional risks arising out of adopt ion of t echnology which could have a pot ent ial bearing on t he overall financial st abilit y. Conclusion : Let me conclude by quot ing "Tomorrow belongs t o people who prepare for it t oday". I am sure t hat we all draw lessons from our past and prepare ourselves for t he challenges t hat t he fut ure holds for us. I once again t hank t he Bancon for t his wonderful opport unit y for sharing my thought s wit h you. I wish you all t he very best for t he int erest ing t imes in fut ure. -------------------------* Expanded version of t he valedict ory remarks by Shri Anand Sinha, Deput y Governor, Reserve Bank of India at t he Bancon-2011 at Chennai on November 6, 2011. Input s provided by Ms. Anupam Sonal are grat efully acknowledged. 1 Indian Infrast ruct ure- going beyond sound bit es- Cit y 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 t he Reserve Bank's Second Int ernat ional Research Conference (SIRC). We held our first int ernational conference two years ago, in February 2010, as a flagship event of our Plat inum Jubilee celebrat ions. Many of you who had at t ended t hat conference compliment ed us for it s qualit y and urged us t o repeat it . As much as we were flat t ered by t hose compliment s, I also suspect t hat t he urging for a repeat was at least part ly mot ivat ed by t he prospect of escaping from t he bit t er cold of some of your home count ries at t his t ime of t he year. So, here's welcoming all of you t o warm and sunny Mumbai. Conference Theme Let me st art by explaining t he mot ivat ion for t he conference t heme : "Price St ability, Financial St ability and Sovereign Debt Sust ainability : Policy Challenges from t he New Trilemma".

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Canara Bank Samachar Lehar March 2012 The global financial crisis followed by t he euro zone debt crisis has changed t he t heology of cent ral banking in a fundament al way. The ort hodoxy of cent ral banking before t he 2008 crisis was : single object ive - price st abilit y; single inst rument - short -t erm int erest rat e. Alt hough most cent ral banks deviat ed t o different ext ent s from t his minimalist model, t his came increasingly t o be considered t he holy grail. The crisis came as a powerful rebuke t o cent ral banks for having neglect ed financial st ability in t heir single-minded pursuit of price st ability. By t he t ime of our first conference t wo years ago, a consensus was developing around t he view t hat financial st abilit y has t o be wit hin the explicit policy calculus of cent ral banks, alt hough opinion was divided on t he precise nat ure of inst it ut ional arrangements for maint aining financial st abilit y. Fast forward t o 2011/ 12. Even as central banks are grappling wit h balancing the demands of price st abilit y and financial st abilit y, there is now yet anot her powerful assault on cent ral bank ort hodoxy arising from t he big elephant in t he room - t he euro zone sovereign debt crisis. The European Cent ral Bank (ECB) is being called upon t o bend and st ret ch it s mandat e t o bail out sovereigns who have forfeit ed t he confidence of market s. Act ually t hat is an underst at ement . In realit y, t he ECB is being challenged on why it is, t o use an Indian word, being so brahminical about it s mandat e when t he world around it is collapsing. The argument , in it s essence, is t hat if a cent ral bank is committ ed t o financial st ability, it cannot ignore t he feedback loop bet ween financial st abilit y and sovereign debt sust ainability, and by ext ension t herefore, it has t o be mindful of sovereign debt sust ainability concerns. What do t hese t rends engendered by the crisis indicat e? In particular, is it t he case t hat t he mandat e of cent ral banks is set t o expand from t he single object ive of price st abilit y t o mult iple object ives of price st ability, financial st ability and sovereign debt sust ainability? Can cent ral banks simult aneously support all these t hree object ives and do so efficient ly? That in essence is t he new trilemma. The new t rilemma triggers several quest ions. How do t he t hree object ives underlying t he t rilemma reinforce each ot her, and in what ways do t hey conflict wit h each ot her? What is t heir impact on growt h? Is t he t rilemma an exclusive phenomenon of crisis t imes, or does it manifest in normal t imes as well? What is t he nat ure and ext ent of t he responsibilit y of cent ral banks for each of t hese object ives? Are cent ral banks equipped t o handle t hese addit ional responsibilit ies? And finally, what does t his expanded mandat e mean for t he effect iveness and aut onomy of cent ral banks? That indeed is a long list of quest ions. The purpose of t his conference is t o t hink t hrough t hese weight y quest ions cent red around t his new t rilemma. Is This Indeed a Trilemma? We deliberat ed int ernally on whet her t his evolving challenge for cent ral banks would indeed qualify as a t rilemma. One view was t hat t his is not st rict ly a t rilemma as t here is no t heory which says t hat we cannot simult aneously obt ain price st abilit y, financial st ability and sovereign debt sust ainability. The opposing view was t hat what cent ral banks have at hand is indeed a t rilemma in as much as t here can be clear t ensions Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 bet ween t he object ives underlying t he new trilemma, and cent ral banks may not be able t o det ermine, wit h any degree of exact it ude, what int er se priority must be accorded t o each of t he t hree object ives under different sets of circumst ances. So, is this a t rilemma or not ? To compound t he search for an answer, t he word 't rilemma' has not made it t o all st andard dict ionaries yet . So, permit me a litt le indulgence int o t he world of t rilemmas. The World of Trilemmas Epicurus, t he Greek Philosopher who lived around 300 BCE, was possibly the first t o use t he concept of a t rilemma t o reject t he idea of an omnipot ent God. The dist inct ion of being t he first t o act ually use t he word 'trilemma' goes perhaps t o t he 17t h century English non-conformist clergyman, Philip Henry, who recorded in his diary, "We are put hereby t o a Trilemma, t o t urn flat Independents, or t o st rike in wit h t he conformist s, or t o sit down in former silence." Art hur C. Clarke, t he British science fict ion writ er, cit ed a t rilemma in t rying t o achieve product ion quickly and cheaply while also maint aining high quality, leading t o the quip : "Quick, Cheap, Good : Pick t wo". In public choice t heory, t here is t he t rilemma of juggling t hree priorities - coverage, cost and choice - when offering a public service. If we t urn t o economics, we will see t hat t rilemmas have indeed proliferat ed. Dani Rodrik (2007) argued that if a count ry want s more of globalizat ion, it must eit her give up some democracy or some nat ional sovereignt y. Niall Ferguson (2009) highlight ed t he t rilemma of a choice bet ween commit ment t o globalizat ion, t o social order and t o a small st at e (meaning limit ed st at e int ervent ion). In one of his FT columns, Mart in Wolf spoke about t he US Republican Part y's fiscal policy trilemma : the belief t hat large budget deficit s are ruinous; a cont inued eagerness t o cut t axes; and an ut t er lack of int erest in spending cut s on a large enough scale. Then we have the Eart h Trilemma (EEE), which posit s that for economic development (E), we need increased energy expendit ure (E), but t his raises t he environment al issue (E). The t rilemma more direct ly relevant t o t his conference t heme is a financial st abilit y t rilemma put forward by Dirk Schoenmaker (2008), explaining the incompat ibilit y wit hin t he euro zone of a st able financial syst em, an int egrat ed financial syst em, and nat ional financial st abilit y policies. By far t he most high profile current t rilemma, as per some analyst s, is t he euro-zone t rilemma : t he seeming irreconcilability bet ween it s t hree wishes : a single currency, minimal fiscal cont ribut ion t o bail out s, and t he ECB's commit ment t o low inflat ion. The Old Trilemma Even as I have spoken about more recent t rilemmas in economics, t he prima donna of all of t hem is Mundell's 'impossible t rinit y'. This old t rilemma assert s t hat a count ry cannot simult aneously maint ain all t hree policy goals of free capit al flows, a fixed exchange rat e and an independent monet ary policy. The impossible t rinity, as student s of economics have learnt for over a half cent ury, has a st rong t heoret ical foundation in t he MundellFleming model developed in the 1960s.

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The choices t he world made under t he impossible t rinit y varied over t ime. Under t he gold st andard, exchange rat es were fixed and capit al could move around, but cent ral banks were forced t o adjust int erest rat es t o ensure t hey did not run out of reserves. This could lead t o pressure on t he real economy, and a lot of booms and bust s. Under Bret t on Woods, we had fixed exchange rat es (wit h occasional adjust ment s) and independent monet ary policy, but capit al mobilit y was highly rest rict ed; when I first went abroad over 30 years ago, Indians couldn't t ake out more t han $20, no mat t er t he purpose of t he t rip. The Brett on Woods syst em broke down under t he weight of fixed exchange rat es, and t he world moved t o largely float ing exchange rat es. Capit al has flowed freely round t he world. In t he post -Brett on Woods era, count ries have made different choices. The most common case, t ypical across advanced economies, is t o give up on a fixed exchange rat e so as t o run an open economy wit h an independent monet ary policy. On t he ot her hand, economies t hat adopt a hard peg give up on independence of monet ary policy. Examples include t he currency boards set up by Hong Kong and, for a t ime, Argent ina. More recent ly, responding t o a rapid appreciat ion of t he Swiss Franc as a result of t he safe haven effect , Swit zerland declared it s commitment t o defend a pre-announced exchange rat e. Hist ory is replet e also wit h examples of countries aiming t o achieve all t hree goals at t he same t ime, and failing t o do so, oft en in a disorderly way. Thailand's decision t o abandon t he hard peg against t he US dollar in July 1997 is a classic example. Not wit hst anding it s real life validat ion, it is not as if Mundell's 'Impossible Trinit y' is inviolable. Many of t he assumpt ions underlying t his model do not oft en hold; indeed t he new open economy macroeconomy models t hat build in price rigidit ies and monopolist ic compet it ion demonst rat e policy dynamics quite different from t hose built in t he MundellFleming t radit ion. It is also not t he case t hat count ries are forced int o corner solut ions at t he nodes of t he impossible t rinity t riangle. As it happens, reflect ing t he forces of globalizat ion and their asymmet ric impact, many emerging economies have opt ed for middle solut ions.

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Canara Bank Samachar Lehar March 2012 Impossible Trinity to Holy Trinity In t he cont ext of t his conference, is t he new t rilemma - t he simult aneous pursuit of price st ability, financial st abilit y and sovereign debt sust ainability - a new impossible t rinity? Possibly not . There is no t heory which says t hat t hese object ives are inconsist ent wit h one anot her. It can even be argued t hat t he t hree object ives reinforce each ot her, and t hat t oget her they sust ain growt h, t hereby const itut ing not an impossible t rinit y, but act ually a holy trinit y of object ives.

That does not by any means imply t hat t he holy t rinity of object ives can always be achieved simult aneously, or once achieved, can be maint ained as such indefinit ely. There would be t ensions and t rade-offs, especially in t he short -t erm. In part icular, t he t ensions mat erialize wit h brut al force in a st at e of disequilibrium - when inflation is off t arget , t he financial syst em is fragile and public debt is ballooning. To t he ext ent we have t o manage t hese t ensions, t he policy problem qualifies as a t rilemma. The Many Ways in Which the New Trilemma Plays Out Policies in pursuit of t he t hree object ives under t he t rilemma int eract in complex, and oft en unint ended ways. Somet imes t hey are support ive of each ot her; at ot her t imes, t hey may run count er t o each ot her. More perplexingly, t he t ensions and t rade-offs may be different in crisis t imes from normal t imes.

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Let me at t empt t o illust rat e this by cit ing some examples from global experience, including recent experience. Given t he t hree object ives underlying t he new trilemma, and t he two-way direct ions in which t hey can int eract , we have a t ot al of six 'cause and impact ' bilat eral int eract ions. I will consider t hem one by one. (i) Price Stability -> Financial Stability Before t he global financial crisis, t he st ereot ype view was t hat price st abilit y and financial st ability complement each ot her i.e. monet ary policy and policies for financial st abilit y are mut ually reinforcing. The crisis has proved that wrong. Not e t hat we saw t he global financial sect or come t o t he brink of collapse in t he midst of a period of ext raordinary price st abilit y. Indeed t he experience of t he crisis has prompted an even st ronger assert ion - t hat t here is a t rade-off bet ween price st abilit y and financial st abilit y. In other words, the more successful a cent ral bank is wit h price st ability, t he more likely it is t o imperil financial st ability. The argument goes as follows. The ext ended period of st eady growt h and low and st able inflat ion during t he Great Moderation lulled cent ral banks int o complacency. Only wit h t he benefit of hindsight is it now clear t hat t he prolonged period of price st ability blindsided policy makers t o t he cancer of financial inst abilit y growing in the underbelly. An even more recent example of a conflict bet ween policies for financial st abilit y and price st abilit y is of t he ECB reversing it s crisis driven expansionary st ance by raising int erest rat es t wice during April-July 2011. The ECB just ified t his on t he argument of st emming t he underlying inflat ionary pressures, but many crit icized t his move as being premat ure and as clearly unhelpful t o rest oring financial st abilit y. Of course, we all know t hat t he ECB reversed t hese hikes during November-December 2011 in response t o t he euro zone slow down. (ii) Financial Stability -> Price Stability Let us now see t he int eract ion in t he reverse direct ion. Whether policies aimed at financial st ability can affect price st abilit y is a debat e t hat has st ayed wit h us all t hrough t he period of management of t he crisis. Many analyst s have argued t hat t he extraordinary monet ary expansion, especially by the Fed, t o bring int erest rat es t o t he Zero Lower Bound (ZLB) and following it up wit h t wo rounds of 'Quant itat ive Easing' (QE), all aimed at rest oring financial st abilit y, may actually be sowing t he seeds of inflat ion. The argument goes t hat Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 since t he inflat ionary impact of easy monet ary policies is difficult t o see real t ime, t he Fed risks going overboard wit h monet ary easing thereby jeopardizing fut ure price st abilit y. 28. We also have an illust rat ion from emerging economies of policies for financial st ability affect ing price st ability. During t he crisis, EME central banks eased monet ary policy t o provide relief t o t he financial sect or, but this also saw inflat ion quickly resurging when recovery st art ed. (iii) Financial Stability -> Sovereign Debt Sustainability 29. The management of t he crisis offered an import ant lesson on how policies aimed at rest oring financial st ability could impair sovereign debt sust ainability. By far t he most obvious illust rat ion of this link is t he cost of bail out s of failing financial inst it ut ions, accompanied by 'fiscal st imulus', t o prevent the financial sect or problems from causing overall economic act ivity t o collapse. The fiscal act ion was unquest ionably necessary t o rest ore financial st ability. But the net impact need not always be benign. There are circumst ances under which fiscal expansion in support of financial st abilit y can t hreat en sovereign debt sust ainability. That will happen if t he sovereign is already highly indebt ed, and t he recovery is not quick enough or robust enough. Government s will t hen see t heir revenues falling, will need t o borrow t o bridge t he fiscal gap, and can pot ent ially get t rapped in a self-reinforcing adverse fiscal feedback loop event ually jeopardizing t heir sovereign debt sust ainabilit y. (iv) Sovereign Debt Sustainability -> Financial Stability For transmission of shocks from t he sovereign t o t he banking syst em, t he evolving sit uat ion in t he euro zone is clearly t he most glaring example. Consider Greece, where banks are being asked t o share t he burden of bailing out t he government , the so called privat e sect or involvement - PSI, so t hat sovereign debt could be brought down t o sust ainable levels. But t his will affect t heir collect ive viabilit y and pot ent ially t hreat en broader financial st abilit y. There has been acrimony over whet her t he PSI is volunt ary or involunt ary. For t he purpose of t his issue, t hat debat e is a t echnicality; it does not alt er t he basic cont ours of cont agion from sovereign debt t o financial st abilit y. The ECB's new t erm repo (LTRO) window offers anot her example of how sovereign debt sust ainability concerns can affect financial st ability. This new window offers banks t hreeyear money at t he repo rat e t o encourage t hem t o use t hat money t o lend t o sovereigns, t aking advant age of t he arbit rage opport unit y. But t his financial engineering is a fragile and pot entially problemat ic arrangement . Banks will need t o post addit ional collat eral wit h ECB if t he bonds t hey offered fall in value or suffer a credit downgrade. For precisely t he same reasons - fall in value and credit downgrade - banks will need t o provide addit ional capit al against monies t hey have lent t o sovereigns. This could put banks on a collat eral spiral and erode overall financial st abilit y. (v) Sovereign Debt Sustainability -> Price Stability The most obvious rout e for sovereign debt concerns impinging on price st abilit y is t hrough t he monet ization of government debt . Cent ral banks do, of course, resort t o open market operat ions (OMOs) - buying and selling government paper - for purposes of liquidit y management . But if t he mot ivat ion for t he OMO is t o help out a fiscally

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Canara Bank Samachar Lehar March 2012 vulnerable sovereign or t o reduce t he cost of borrowing for t he sovereign, cent ral banks could end up holding price st ability host age t o sovereign debt concerns. Fiscal concerns can dominat e monet ary policy in ot her less dramat ic ways. In t he years before t he crisis, an increasing number of government s were volunt arily adopt ing fiscal responsibilit y rules, t hereby allowing room for aut onomous monet ary policy. These rulebased fiscal regimes unravelled during t he crisis as bot h government s and cent ral banks implement ed expansionary policies in close coordinat ion. While such coordinat ion during t he crisis was not quest ioned except by extreme purist s, now in t he recovery period, several fundament al concerns are resurfacing. At the heart of t hese concerns is whet her monet ary policy is once again becoming host age t o fiscal compulsions. The specifics of t he debat e vary but t he basic issues are similar. In t he US, t he debat e is over the t rade-off bet ween short -t erm fiscal st imulus and long-t erm fiscal consolidat ion. In t he euro area, t he quest ion is about t he shared benefit s of a monet ary union wit hout t he shared responsibilit ies of a fiscal union. In India, t he quest ion has been whet her t he OMOs conducted by t he Reserve Bank t o manage syst emic liquidit y are act ing as a disincent ive for fiscal discipline. The quest ions all around are : are cent ral banks being forced beyond t heir comfort zone t o subordinat e t heir monet ary policy st ance t o t he government's fiscal st ance? Aren't t he so called unconvent ional measures, in realit y, quasi-fiscal measures? Are cent ral banks, in t he process, compromising t heir basic commit ment t o price st ability? (vi) Price Stability -> Sovereign Debt Sustainability There are several ways in which policies aimed at price st abilit y can influence sovereign debt sust ainability. Higher int erest rat es, necessit at ed t o combat inflat ion, raise t he cost s of debt t o t he government . Also, if t he government has large subsidies on it s budget , as do many emerging and developing economies, inflat ion could raise t he cost of subsidies t hereby raising t he borrowing need of t he government . On t he ot her hand, government s wit h large debt s may not act ually mind a bit of inflat ion as it affords t hem an opport unit y t o inflat e away some of t he debt . I have spoken about the t ensions and trade-offs bet ween t he t hree object ives underlying t he new trilemma. The examples t hat I have given are by no means exhaust ive but are int ended t o illust rat e t he complex policy challenges t hey pose t o cent ral banks. Four Questions Underlying the New Trilemma Now let me t urn t o some import ant quest ions t hat central banks will confront in managing t he new t rilemma. In particular, I will raise four quest ions.

Question 1 : Are We Seeing a Return of Fiscal Dominance of M onetary Policy? This quest ion has surfaced wit h vigour in t he cont ext of t he euro zone crisis. The ECB claims t hat it s bond purchase programme is aimed at rest oring liquidity and improving monet ary t ransmission. But many analyst s believe t hat t his is a t hinly veiled at t empt t o shore up sovereign borrowing and t hat the ECB is act ually acquiescing in fiscal dominance.

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Canara Bank Samachar Lehar March 2012 Alt hough t his t ension bet ween t he cent ral bank mandat e and sovereign debt sust ainability is present ly being played out in Europe, it is not new; nor is it unique t o Europe. The sevent y odd years since the Great Depression saw a famous rivalry bet ween fiscal and monet ary policies for influence. Hist orically central banks suffered from fiscal dominance since t hey had t o acquiesce in government s 'borrowing as much as required at as low a cost as possible'. This st at e of affairs st art ed changing in t he 1980s, wit h a wave of support for cent ral bank independence arising largely in response t o the damage inflict ed by the st agflat ion of t he 1970s and the clear lesson t hat high inflat ion is detriment al t o sust ainable growt h. So, fiscal dominance gradually yielded t o independent cent ral banks, free of short -t erm compulsions, t argett ing largely, and in some cases exclusively, price st abilit y. Now it seems we are seeing a reversal of t hat t rend wit h central banks being called upon t o mind sovereign debt sust ainabilit y concerns. Fiscal dominance manifest s t hrough t he cent ral bank acquiescing in t he fiscal st ance of t he government . This usually happens t hrough monet izat ion of debt t hrough the cent ral bank's bond buying programme. Cent ral banks t ypically conduct OMOs more as reverse t ransact ions (repos) for liquidity management purposes in line wit h t heir monet ary policy st ance and int ermediat e t arget s. In t hat case, t hey should be seen as pure monet ary policy operat ions. But at t imes, OMOs could be mot ivat ed by t he object ive of providing liquidity t o support government borrowing or of reducing t he yield on t reasury bonds t o enhance debt sust ainability. It t hen becomes a case of acquiescence in fiscal dominance. There is oft en only a t hin line, and the int erpret at ion of t he mot ivation for out right OMOs could vary depending on t he circumst ances. In t he presence of large sovereign borrowing t hat makes t he government 's fiscal st ance unsust ainable, central banks typically have little choice. If t hey do not conduct OMOs t o bring syst emic liquidit y within reasonable limit s, t hey risk losing cont rol over financial st ability. If t hey do conduct OMOs, they risk losing cont rol over price st ability. What t his really says is that fiscal responsibilit y is much more t han a quest ion of whet her monet ary policy is independent or not . It is a quest ion of sust aining macroeconomic st abilit y.

Question 2 : Will the M anagement of the New Trilemma Erode the Autonomy and Accountability of Central Banks?
The much prized aut onomy of cent ral banks has come under assault post -crisis wit h an influent ial view gaining ground that one of t he principal causes of t he crisis was t he unbridled aut onomy of cent ral banks. The st andard argument for cent ral bank aut onomy is t hat aut onomy enhances t he credibilit y of t he cent ral bank's inflat ion management credent ials. Monet ary policy typically act s with a lag, and price st abilit y t herefore has t o be viewed in a medium t erm perspect ive. Having aut onomy frees t he cent ral bank from t he pressure of responding t o short-t erm development s, deviat ing from it s inflat ion t arget and t hereby compromising it s medium t erm inflat ion goals. Now t hat t he import ance of cent ral bank autonomy in monet ary policy has come t o be largely accept ed, t he quest ion is : will additional responsibilit ies underlying t he new Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 t rilemma affect that aut onomy? And how will this new sit uation also affect t he account abilit y structures of t he cent ral banks? It may be useful t o t ake st ock of t he apprehensions in t his regard. For overseeing syst emic st abilit y, new governance st ruct ures have emerged aft er t he global crisis. These include t he Financial Services Oversight Council (FSOC) in t he US, t he Financial Policy Commit t ee (FPC) in the UK and t he European Syst emic Risk Board (ESRB) in t he EU. Here in India, we have t he Financial St ability and Development Council (FSDC). The precise inst it ut ional arrangement s vary, but across all of t hem, cent ral banks have a lead responsibilit y. Wit h t hese new inst it utional arrangement s for financial st ability in place, t he aut onomy quest ion has acquired an addit ional dimension. Not e t hat cent ral bank aut onomy has worked because t hey could keep at arms lengt h from t he government s. But once a coordinat ion mechanism is in place, t hese barriers may melt away. Also, even if t hat is what the book says, it may be difficult t o st rait jacket t he discussion at t he coordinat ion forum t o financial st ability. As we have seen, there are no 'pure' financial st ability issues; t hey are all int er-connect ed. A discussion on financial st abilit y could very well lead t o a discussion on monet ary policy. What t hen of t he aut onomy of t he central bank? This apprehension, as all of you will appreciat e, is non-t rivial. If we now add responsibility for sovereign debt sust ainabilit y t o t his already complex sit uat ion, t he reason for apprehension about the t hreat t o the aut onomy of central banks becomes more obvious. Sovereign debt is a quint essent ially polit ical subject , and as we not ed earlier, t he very foundat ion of cent ral bank aut onomy is just ified on t he need t o free monet ary policy from fiscal dominance. By requiring cent ral banks t o be mindful of sovereign debt sust ainability concerns as part of t he 'new t rilemma', is t he hard won gain of freedom from fiscal compulsions being compromised? But look at it also from t he opposit e perspect ive. Given that invest or trust in public debt is part of the foundat ion of a nat ion-st at e, is it realist ic for a cent ral bank t o remain indifferent t o sovereign debt sust ainability? The new t rilemma also poses quest ions for cent ral banks on t he account ability front . Wit h a single object ive of price st abilit y, t he deliverable could be precisely defined, t he out come accurat ely measured, and account abilit y clearly ext ract ed. Mult iple object ives, and as we have seen, wit h t ensions and trade-offs bet ween them, can diffuse and erode t his account abilit y mechanism. The cent ral bank can always explain away any failure on one front as a result of policies t o defend anot her front . There are no easy answers t o t hese apprehensions about t he impact of t he new t rilemma on cent ral bank aut onomy and account ability. Government s and cent ral banks in each jurisdict ion will have t o define t he nat ure and ext ent of t he lat t er's responsibility for financial st ability and sovereign debt sust ainabilit y. I can only lay down cert ain t enet s t hat must inform t his process. First , t he fundament al responsibilit y of central banks for price st ability should not be compromised. Second, cent ral banks should have a lead, but not exclusive, responsibilit y, for financial st ability. Third, t he boundaries of cent ral bank responsibilit y for sovereign debt sust ainability should be clearly defined. Fourt h, in t he Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 mat t er of ensuring financial st abilit y, t he government must normally leave the responsibilit y t o t he regulat ors, 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 t o t his quest ion is 'no'. Let me elaborat e. It is possible t hat in t he short t erm, policies aimed at price st ability, financial st ability and sovereign debt sust ainabilit y could, at t imes, run count er t o policies required for promot ing growt h. But growt h achieved at t he cost of t he object ives of t he new t rilemma cannot be sust ained. What can be sust ained is only growth that is consist ent wit h t hese object ives. So, some sacrifice rat io may be operat ive in t he short -t erm, but in t he medium t erm, t here is no t rade off bet ween sust ainable growt h and maint aining the object ives of t he new t rilemma.
Let me illust rat e this wit h reference t o t he debat e t hat played out quit e act ively in India all of last year around t he growt h-inflat ion t rade-off. We had inflat ion ruling all t hrough t he year in t he range of 9-10 per cent . To combat t his, t he Reserve Bank has had t o t ight en monet ary policy - raising rat es, as all our crit ics are fond of saying repeat edly - a record t ot al of 13 t imes. While inflat ion did not show any downward t rend t ill lat e in t he calendar year 2011, growt h has cert ainly moderat ed. The Reserve Bank's lat est project ion for growt h for FY12 is 7 per cent, down from 8.4 per cent last year. The crit icism has been t hat we could not bring inflat ion down but only ended up hurt ing growt h. This is not t he occasion t o ent er a defence of our posit ion. But in t he cont ext of this conference, the crit icism t hrows up an import ant issue on t he growt h-inflation trade-off. Evidence from empirical research suggest s t hat t he relat ionship bet ween growt h and inflat ion is non-linear. At low inflation and st able inflat ion expect ations, t here is a t radeoff bet ween growth and inflat ion. But above a cert ain threshold level of inflat ion, t he t rade-off disappears, t his relat ionship reverses, and high inflat ion act ually st art s t aking a t oll on growt h. Est imat es by t he Reserve Bank using different methodologies put t he t hreshold level of inflat ion in t he range of 4% - 6%. With WPI inflat ion ruling above 9 per cent t ill recent ly, we were way past t his t hreshold. At t his high level, inflat ion is unambiguously inimical t o growt h; it saps invest or confidence and erodes medium t erm growt h prospect s. The Reserve Bank's monet ary t ight ening all t hrough last year was accordingly geared t owards safeguarding medium t erm growt h even if it meant some sacrifice in near-t erm growt h. The debat e on t he t rade-off bet ween financial st ability and growt h runs along roughly similar lines. Post -crisis, regulat ion of financial inst it ut ions is being t ight ened. In part icular, under t he Basel III package, banks will be required t o hold higher capit al, bet t er quality capit al and also build up capit al and liquidity buffers. What does t his mean for growt h? A BIS st udy, undert aken by a group led by St ephen Ceccheti, est imat es t hat a one percent age point increase in t he t arget rat io of t angible common equit y (TCE) t o riskweight ed asset s (RWA) phased in over a nine year period reduces out put by close t o 0.2 per cent . The st udy argues t hough t hat as t he financial syst em makes t he required adjust ment , t hese cost s will dissipat e and t hen reverse aft er t he adjust ment period, and t he growt h pat h will ret urn t o it s original traject ory. A Basel Commit t ee st udy est imat es Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 t hat there will be net posit ive benefit s from Basel III because of t he reduced probabilit y of a crisis and reduced volat ilit y in output in response t o a shock. An IIF st udy, however, est imat es a higher sacrifice rat io - t hat t he G3 (US, Euro Area and Japan) will lose 0.3 percent age point s from t heir annual growt h rat es over t he full t en-year period 2011-2020. What are the implicat ions of t hese numbers relat ing t o growt h sacrifice for emerging market economies (EMEs)? Let me t ake t he example of India. Admitt edly, t he capit al t o risk weight ed asset rat io (CRAR) of our banks, at t he aggregat e level, is above t he Basel III requirement alt hough a few individual banks may fall short and may have t o raise capit al. But capit al adequacy t oday does not necessarily mean capit al adequacy going forward. As t he economy grows, so t oo will t he credit demand, requiring banks t o expand t heir balance sheet s, and in order t o be able t o do so, t hey will have t o augment t heir capit al. In a struct urally transforming economy with rapid upward mobility like India, credit demand will expand fast er t han GDP for several reasons. First, India will shift increasingly from services t o manufact ures whose credit int ensit y is higher per unit of GDP. Second, we need t o at least double our invest ment in infrast ruct ure which will place enormous demands on credit . Finally, financial inclusion, which bot h t he Government and t he Reserve Bank are driving, will bring millions of low income households int o t he formal financial syst em with almost all of t hem needing credit . What all this means is t hat we are going t o have t o impose higher capit al requirement s on banks as per Basel III at a t ime when t he economy's credit demand is going to expand rapidly. How best can we resolve t his t ension bet ween t he demands of growt h and t he demands of financial st abilit y is a quest ion t hat we in India and several ot her EMEs will have t o address. I have gone at some lengt h on t his not t o argue t hat t he cost s of financial st abilit y out weigh t he benefit s, but t o argue t hat t he cost -benefit calculus will vary from count ry t o count ry, and will vary for a given count ry over t ime. So, t he challenge for every count ry, advanced, emerging and developing, is t o t ailor it s financial st abilit y policies t o maximize t he benefit cost rat io on a dynamic scale. Now let me come t o t he t hird leg of t he equat ion - t he link bet ween growt h and sovereign debt sust ainabilit y. Like wit h t he other two legs of t he new t rilemma, even in t he case of sovereign debt , t here is an inflexion point beyond which fiscal deficit s milit at e against growt h. Government borrowing is not bad per se, but excessive borrowing is. There is t herefore a need t o cap t ot al public debt as a proport ion of GDP. What is equally import ant in respect of fiscal management is t he qualit y of public expendit ure. If t he government borrows and squanders that money away on unproductive current expendit ure, bot h fiscal sust ainability and growt h would be jeopardized. Government s need t o spend on merit goods and public goods, in particular on improving human and social capit al and on physical infrast ruct ure. So, aft er all t his discussion, what is t he answer t o t he quest ion : does t he pursuit of t he new t rilemma milit at e against growt h? No. It does not . But t here could be some t rade-offs and government s will have t o t ailor t heir policies t o ensure t hat t he benefit - cost calculus is always maximised. Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Question 4 : What are the Limits to Unconventional Policy Measures? As t he crisis exploded wit h brut al int ensity and dept h, cent ral banks around t he world act ed wit h an unusual show of policy force, ferociously cut t ing policy rat es t o near zero or even zero. Realizing soon t hat t his was not sufficient t o rest ore calm and confidence t o t he market s, t hey had t o follow up t he convent ional measures wit h a slew of unconvent ional measures variously described as quant it at ive and credit easing.
The first wave of unconvent ional measures was aimed at providing liquidit y t o t he syst em eit her by way of collat eralized loans t hrough t he repo window or out right purchase of bonds. Liquidity management is of course st andard monet ary policy procedure. What made t his unconvent ional were mainly t wo t hings. The first was t he quant um of operat ions. The volumes were large, and were aimed at flooding t he market wit h liquidity, much beyond what is expect ed in normal t imes. The second charact erist ic t hat made liquidity infusion unconvent ional was t he relaxat ion of st andards regarding t he t ype of bonds bought under t he OMOs. In this regard, different cent ral banks relaxed regulat ions t o different ext ent s. While t he Bank of England st uck t o t reasuries, t he Fed bought federally backed mort gage bonds in addit ion t o t reasuries. The Bank of Japan went furt her buying also corporat e bonds, commercial paper, exchange t raded funds and real est at e invest ment t rust s. The second wave of unconvent ional measures went beyond repo operat ions and OMOs. The Bank of Japan ext ended t arget ed loans to banks t o spur long t erm invest ment . The Fed supplement ed t wo rounds of QE wit h 'operat ion t wist' - of purchasing longer t erm t reasuries against sale of short -t erm t reasuries in an effort t o depress t he ent ire yield curve rather than just it s short end. Last week, it also began publishing t he expect ed int erest rat e pat h for t he coming years. The ECB, as not ed earlier, is providing t hree-year loans t o banks. What of emerging economy central banks? They t oo had resort ed t o unconvent ional measures alt hough t heir policy rat es did not hit t he zero lower bound. In t he Reserve Bank, for example, at t he height of the crisis, we operat ed a t erm repo window t o enable banks t o meet t he liquidity requirement of mut ual funds and non-bank finance companies (NBFCs). We relaxed t he st at ut ory liquidity rat io (SLR) prescript ion for banks by upt o 1.5 percent age point s of t heir net demand and t ime liabilit ies (NDTL) for t his purpose. The risk weight on banks' exposure t o NBFCs, which was raised earlier, was rolled back. The rest rict ion on commercial banks in buying back t he CDs held by mutual funds was lift ed. We also inst it ut ed a foreign currency swap facility for banks. Unconvent ional measures have been cont ent ious. Cent ral banks have largely maint ained t hat the unconvent ional measures t hey deployed are a part of t he monet ary policy arsenal, and t hat t he int ent behind t hem is t o improve monet ary t ransmission. Their crit ics have argued t hat cent ral banks have act ually st epped beyond t heir mandat es t o accommodat e ext raneous compulsions.

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Canara Bank Samachar Lehar March 2012 All in all, t he global financial crisis and t he ongoing Eurozone crisis have raised import ant quest ions about t he unconventional measures t hat cent ral banks can resort t o - t heir range, int ent and t he way t he int ent should be communicat ed t o t he market s. I am sure t his conference will visit t his debat e in much great er det ail over t he next two days. Conclusion Let me now conclude by summarizing what I have said. I explained t he rat ionale for t he conference t heme : "Price St ability, Financial St abilit y and Sovereign Debt Sust ainabilit y : Policy Challenges from t he New Trilemma". I then illust rat ed how the t hree legs under t he new t rilemma int eract wit h one anot her. Thereaft er I raised t he following four quest ions t hat cent ral banks need t o address in t he cont ext of t he new t rilemma : (i) Are we seeing a return of fiscal dominance of monet ary policy? (ii) Will t he management of t he new t rilemma erode t he aut onomy and account abilit y of cent ral banks? (iii) Does t he pursuit of t he new t rilemma milit at e against growt h? (iv) What are t he limit s t o unconvent ional policy measures? To what ext ent are t he old and new t rilemmas similar? Under t he old t rilemma - t he impossible t rinity - countries had t o sacrifice one of t he t hree object ives - fixed exchange rat e, independent monet ary policy and free capit al flows. Under t he new t rilemma - t he holy t rinity - no country can afford t o sacrifice any of t he object ives as t he feedback loops can quickly shift t he economy from an equilibrium t o a disequilibrium. The issue really is of managing t he int er se priorit ization among t he object ives and of det ermining t he role of t he cent ral bank in t his management . So, how best can we manage t he new t rilemma? The crisis has given us valuable lessons from pract ice. We also have assort ed bit s of t heory. The t ask ahead is t o put t hem t oget her int o a coherent , workable t heory of t he new t rilemma. I hope t his conference will t ake us closer t o t hat . A final t hought, which is act ually an ext ension of what I said at our last conference. In his best -selling book, 'The Ascent of Money', Niall Ferguson says t hat somet imes t he most import ant hist orical event s are t he non-event s : t he t hings t hat did not happen. From t hat perspect ive, t hat the Great Recession did not t urn int o t he second Great Depression, as we had feared, will count as a major non-event , not withst anding t he dept h and duration of t his recession. If t he euro survives t he sovereign debt crisis, as we hope, it will be anot her spect acular non-event . Non-event s t hey may be, but t hey have changed our t hinking on cent ral bank mandat es in a powerful way. How influent ial t hat t hinking will be on t he way forward will depend on how firmly cent ral banks embrace t he new t rilemma. -------------------------1 Inaugural speech by Dr. Duvvuri Subbarao, Governor, Reserve Bank of India, at t he Second Int ernat ional Research Conference of t he 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 t he cent ral banking frat ernity, part icipant s from t he financial, academic and media communit ies, ot her dist inguished guest s : on behalf of t he Reserve Bank of India, let me welcome you all t o t his Second Int ernational Research Conference. Genesis of the Conference The Reserve Bank of India's First Int ernat ional Research Conference was held in 2010. In t hat year, The Reserve Bank, which commenced operat ions on April 1, 1935, ent ered it s 75t h year. A series of knowledge-sharing event s such as seminars, special memorial lect ures, out reach programmes were organised on t his occasion, culminat ing in t he First Int ernational Research Conference. The First Conference focussed on "Challenges t o Cent ral Banking in t he Cont ext of Financial Crisis." At t he Conference, t wo broad t hemes were covered. The first was the conduct of monet ary policy during crisis, including financial st ability as an object ive and t he second relat ed t o t he challenges posed t o t he central banking, including t hat t o regulat ion and supervision, by globalisat ion and market failures. Five specific challenges were discussed, namely : (a) managing nat ional monet ary policy decisions in a globalizing environment , given the growing complexity in t he int eract ions between ext ernal development s and domest ic variables, (b) redefining t he mandat e of cent ral banks, given t he pre-crisis at t ract ion of inflat ion t arget ing and t he post -crisis debat e on t he role of cent ral banks in relat ion t o asset prices, (c) responsibilit y of central banks t owards financial st ability, part icularly beyond t he convent ional Lender of t he Last Resort (LOLR) funct ion, (d) managing t he cost s and benefit s of regulat ion, in view of t he difficult y in drawing a fine balance between regulat ion and financial innovations, and (e) t he aut onomy and account abilit y of central banks, particularly during exit from the crisis. The Conference had brought t oget her central bankers, academicians, policy makers, financial regulat ors and supervisors and privat e sect or expert s t o a common plat form. There were very import ant lessons t o t ake from t hat Conference and t hat is why we are here t o repeat it as a biennial event . In dealing wit h t he crisis of 2008, while we deliberat ed on t he pros and cons of each pot ent ial response at lengt h, t he uncert aint y was large and risks were inherent in each of t he act ions we t ook. Oft en, our judgment s left us wit h a feeling that we were at t imes act ing subconsciously. This reinforced our view t hat it was necessary t o enhance t he role of research for policy making. This Conference series was one st ep in t hat direct ion. Through t his Conference, t he Reserve Bank int ends t o bring t oget her central bankers, academicians, policy makers, financial regulat ors and supervisors and privat e sect or expert s t o a common plat form t o share their t hought s and t o evolve solut ions. The Conference will hopefully provide a useful forum for t he economist s across t he globe t o exchange t heir views and research findings on issues relevant from a central bank's perspect ive, which will, in turn, provide valuable insight s for policymakers.

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Canara Bank Samachar Lehar March 2012 Motivation behind the Second International Research Conference The world has moved a great deal since t he First Conference, but wit hout resolving it s financial problems. As a result, t he sust ainabilit y of t he recovery is in doubt . At t he t ime of t he First Conference, we were seeing green shoot s of revival and were hoping t hat recovery may well st rengt hen in due course. Since t hen, growt h in emerging market s rebounded but inflat ion surged. By cont rast , recovery in advanced economies was relat ively subdued. Inflat ion remained largely benign, but nevertheless did climb up from ext remely low levels, posing some difficult ies. Financial fragilit ies st ayed unresolved. In spit e of some deleveraging, risks abounded and were compounded as public sect or balance sheet s weakened wit h weaker growth and privat e sect or bailout s. Clearly, new dimensions of financial crisis have emerged since t he first Conference. The nat ure of t he crisis has changed wit h fragilit ies of t he privat e sect or balance sheet s t ransmitt ing t o the fragilit ies of t he sovereign balance sheet s. There appears t o be no solut ion t ill t he burden sharing problem amongst various st at e and non-st at e act ors are resolved. Sovereign debt sust ainabilit y poses t he biggest threat t o sust ainabilit y of t he recovery, while coming int o pot ent ial conflict wit h t he cent ral banking object ives of price st ability and financial st abilit y. Any crisis resolut ion st rat egy needs t o accord priorit y t o resolut ion of sovereign debt problems, but there is a lack of clarit y on what roles central banks can perform in this. A case could be made t hat it would be bet t er that cent ral banks focus on t heir main jobs, while let Government s handle t heir debt problems. However, at t he present juncture there are significant spillovers. Monet ary aut horit ies' act ions impinge on market s' abilit y t o refinance debt and fiscal aut horit ies' act ions const raint s monet ary responses. Cent ral banks were seen as part ly responsible for t he current crisis, but t hey were also at t he forefront of unprecedent ed public policy response t hat was put in place swiftly, using a combinat ion of convent ional and unconvent ional measures, t o cont ain the severit y of t he crisis and st imulat e recovery t owards resumpt ion of normal growth. While responding t o t he crisis, the RBI recognised t hat learning right lessons from t he global crisis t o st rengt hen it s crisis prevent ion and management frameworks was crit ically import ant for t he RBI t o be able t o perform more effect ively t he mult iple roles it plays, including in t he realm of financial st ability. In t he decades before t he crisis, financial st abilit y st eadily lost it s import ance as an explicit cent ral bank policy object ive. The quest ion, t herefore, was how t o focus on financial st ability along wit h monet ary policy. What was it that t he central banks needed t o do different ly? Move away from hard inflat ion t arget ing t o a more diverse role? Accordingly, t he t heme of t he first conference was "Challenges t o Cent ral Banking in t he Cont ext of t he Financial Crisis". Since t he FIR t he challenges for cent ral banks have only increased. C, Apart from t he cent ral banks needing t o consider price st abilit y and financial st abilit y, t hey now had t o grapple wit h sovereign debt sust ainabilit y - somet hing t hey do not have core compet ency in, but need t o get involved wit h so as t o preserve financial and macroeconomic st abilit y. In essence, t he cent ral banks of advanced economies now face a new t rilemma, i.e. t he need t o simult aneously ensure price st abilit y, financial st abilit y and sust ainable sovereign Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 debt , which may not be possible if monet ary policy accommodat es on a sust ained basis t he needs of t he financial syst ems and sovereigns. This t rilemma is also faced in many emerging market economies, albeit in a somewhat different way. These economies confront a much st ronger inflat ionary environment and, t herefore, t he conflict bet ween price st abilit y and t he other two object ives are much sharper. Theme of the Second International Research Conference (SIRC) and its Relevance The pre-crisis policy environment was charact erized by growing preference for separat ion of price st ability centric monet ary policy from financial st abilit y and debt management , even t hough count ry pract ices varied. In response t o t he financial crisis, cent ral banks went beyond t he convent ional "lender of last resort " role, and also recognised t hat price st ability does not guarant ee financial st abilit y. Wit h t he ret urn of financial st abilit y object ive t o central banks, along wit h additional t ools in t he form of eit her microprudent ial regulat ion / supervision or macro-prudent ial regulat ion, or bot h, cent ral banks have t o deal wit h any apparent conflict s bet ween price st abilit y and financial st abilit y object ives, while aiming generally t o maximize t he complement arit ies and synergies bet ween t he t wo. Besides t he monet ary policy response t o the crisis, t he fiscal st imulus used across count ries t o bailout t he financial syst ems and t o support economic growt h has led t o large build up of sovereign debt , and in some count ries t he levels look unsust ainable. In several count ries, sust ained slowdown in growt h has also magnified fiscal pressures, arising from bot h weak revenue realizat ion and t he need for more st imulus. Sovereign risk concerns have impact ed financial market condit ions adversely, and central banks are increasingly being seen as "sovereign lenders of last resort ", even when t hey resort t o OMOs aimed at improving t he liquidit y and financial market condit ions necessary for bet t er monet ary policy transmission. In some count ries, t he debt levels are so large t hat ret urn t o sust ainable levels may t ake decades, and wit hout t he t acit backing of cent ral back accommodat ion, financing of government deficit s and addressing t he debt st ock concerns may become increasingly difficult . As a result , even if cent ral banks do not perform t he debt management funct ion, t hey will have a major role in t he resolut ion of t he sovereign debt problem. Previous episodes of large debt overhang suggest that inflat ion has oft en been the saviour. The risk of sacrificing "price st ability" goal wit h great er responsibility on financial st ability and sovereign debt provides a set t ing, which could be charact erised as t ypical of a t rilemma for a cent ral bank. Accordingly, t he t heme of t he SIRC is "Monet ary Policy, Financial St abilit y and Sust ainable Sovereign Debt - The New Trilemma". We have t hree t echnical sessions at t he Conference t o deal wit h each of t he t hree goals - price st ability, financial st ability and sovereign debt sust ainability - and see how t hey conflict with ot her goals. The first session deals wit h 'Conduct ing Monet ary Policy Post -Crisis : Challenges t o Transmission Mechanism and Operat ing Framework'. The second covers the 'Impact of Crisis on Sovereign Debt : Implicat ions for Macro-economy and Int er-linkages wit h ot her Policies'. The t hird focuses on 'Financial St abilit y : Evolving Issues and Challenges in t he cont ext of Post -Crisis Macroeconomic and Financial Development s.' Each of t hese t hree t opics is import ant in underst anding t he New Trilemma. Following t hese, we also would have t wo Governor's

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Canara Bank Samachar Lehar March 2012 panels discussing specific policy quest ions relat ing t o t he new t rilemma and t he int eractions bet ween t he new and old t rilemmas. The Papers at the Conference Let me now briefly t ouch upon t he papers t hat we have received at t he Conference. We have nine very good papers spread equally over t he t hree sessions. Many of t hem will find a place in t he front ier lit erat ure. All of t hem address some very import ant policy quest ions and will surely enhance our underst anding from a cent ral banking policy point of view. Import ant ly, in discussing t he new t rilemma, t hese papers have not neglect ed t he quest ion of growt h t hat is cent ral t o cent ral bank object ives. It needs t o be emphasized t hat the cent ral banks pursuit of price st abilit y is not devoid of t he growt h object ive, but is t he very basis of achieving sust ainable long-t erm growt h. Some papers at t he Conference direct ly address quest ions such as t he link bet ween finance and growt h or t he link bet ween debt overhang and growt h. There are ot hers t hat invest igat e aspect s of t he t hree pillars of macroeconomic policies that define t he New Trilemma by dealing wit h one or more of t hese pillars. Most of t hese have also gone int o t he impact of policy choices on growt h. Polit ical economy quest ions relat ing to policy-making and policy implement at ion have also been raised in some papers, making t hem that much more appealing from a pract ioners' viewpoint . The choice of t echniques used in t hese papers is quit e varied. Some of t hem use panel regressions sift ing t hrough cross-count ry dat a, while ot hers t ime series t echniques such as vect or aut oregression and impulse response funct ions. There are some t hat have been developed in t he framework of overlapping generat ions (OLG) models wit h st icky prices and solved analyt ically. However, t he richness in all t he papers lies more in raising policy quest ions and addressing t hem in a meaningful way. So t he proceedings of t his conference could be expect ed t o provide us useful guidance on t he post -crisis policy framework in t he cont ext of t he new t rilemma, and t he challenges new t rilemma may pose for managing t he old trilemma. Some questions for the Conference The t hree nodes of t he new t rilemma represent t hree pillars of a sound macroeconomic environment . Price st ability, financial st abilit y and sust ainable sovereign debt are necessary for sust ainable high growt h. You will hear about t he policy conflict s relat ing t o t he pursuit of t hese t hree pillars at the same t ime from Governor Subbarao, who will be delivering his key not e address short ly. But before t hat I would raise some specific quest ions in t he cont ext of t he Conference t heme.

Should pre-crisis monetary policy be held responsible for the crisis? Some have argued t hat policy rat es in advanced economies were kept at levels lower t han what would have been necessary had the central bank followed a rule-based policy, such as, t he Taylor rule. Ot her, however, would suggest t hat monet ary policy was not t he reason for t he crisis as t he "forecast of inflat ion as well as inflat ion expect at ions" were low, indicat ing t hat t he t hreat t o price st abilit y from development s in macro economy and financial market s were largely absent .

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Canara Bank Samachar Lehar March 2012

Has the response of monetary policy to the crisis been appropriate? Use of bot h convent ional and unconvent ional policy was unprecedent ed in recent hist ory. Have t hese measures been effect ive? Some would say but for these measures, anot her Great Depression would have become unavoidable. Ot hers, however, sust ained weak growt h 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 st ability does not ensure financial st abilit y, and t he cost s of cleaning up aft er a financial crisis are very high. Asset price bubbles pot ent ially could be more risky t han thought earlier, but direct monet ary policy response may st ill have t o be avoided. Macro-prudential t ools may be more suit able for t hat . Imbalances grow in good t imes, as during t he great moderat ion, and prevent ing t he 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 const rained by t he process of int ense deleveraging in t he advanced economies. Deflat ionary headwinds and zero lower bound (ZLB) for nominal rates are harder t o deal wit h than demand induced inflationary pressures. The surfeit of liquidity in t he global syst em has result ed in sharp increases in global commodit y prices as well as capit al flows induced asset prices in EMEs, exert ing t hereby inflat ionary pressures. EMEs face a different t ransmission challenge, when the inflat ion process is driven by supply shocks, t o which int erest rat e act ions may not be most appropriat e.
I hope I have provided you wit h the broad cont ext behind t he t heme of t his Conference. Governor Subbarao will now t ake you t hrough some specifics, laying out what is meant by t rilemma, how it differs from t he Old t rilemma, t he various conflict s t hat might arise and how best we can at t empt t o manage t hese.

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 Direct or, 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 Lt d, Shri Chandrakant Salunkhe, President, SME Chamber of India, SME Ent repreneurs, ot her dist inguished guest s, members of t he print and elect ronic media, ladies and gent lemen. It is a mat t er of great pleasure for me t o be present here t oday at t he "SME Banking Conclave 2012 and share some of my t hought s and experiences on t he development of MSMEs which is a vit al sect or of our economy. This Conclave gains import ance in t he cont ext of globalization when t he Small and Medium Ent erprises (SME) face challenges and t ake advant age of opport unit ies creat ed. Such a forum helps in garnering and shaping public opinion, building consensus, cryst allizing policy input s and giving us Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 feedback on our policy init iat ives. I congrat ulate SME Chamber of India for organizing t he SME Banking Conclave 2012. The SME Chambers has succeeded in bringing a large number of MSMEs under a single umbrella, t hereby, making it a pot ent and act ive forum for dialogue wit h t he pot ential partners in t he development of t he MSME sect or in t he count ry, which includes the indust ry, t he financial sect or and t he Government . Importance of the MSME sector As all of you are associat ed in some ways wit h t he MSME sect or, it s crit ical role and place in t he Indian economy is very well known t o all of you in t erms of employment generat ion, export s and economic empowerment of a vast sect ion of the populat ion and I do not want t o spend a lot of t ime overemphasizing it . But let me quote just a couple of st at ist ics. As per available st at ist ics (4t h Census of MSME Sect or), t his sect or employs an est imat ed 59.7 million persons spread over 26.1 million ent erprises. It is est imat ed t hat in t erms of value, MSME sect or account s for about 45% of t he manufact uring out put and around 40% of t he t ot al export of t he count ry which is next only t o t he agricult ural sect or. It is, t herefore, only appropriat e t hat public policy has accorded high priorit y t o t his sect or in order t o achieve balanced, sust ainable, more equit able and inclusive growt h in t he count ry. The MSMEs primarily rely on bank finance for their operat ions and as such ensuring t imely and adequat e flow of credit t o t he sect or has been an overriding public policy objective. Over t he years t here has been a significant increase in credit ext ended t o t his sect or by t he banks. As at the end of March 2011, t he t ot al out st anding credit provided by all Scheduled Commercial Banks (SCBs) t o t he MSE sect or st ood at `.4785.27 billion as against `.3622.90 billion in March 2010 regist ering an increase of 32%. The out st anding credit for t he last four years t o t he MSE sect or 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) Public Private Year Foreign Banks Sector Banks Sector Banks Last No of Amt O/ s No of Amt No of Amt Friday A/ Cs A/ Cs O/ s A/ Cs O/ s of March 3.967 1511.374 0.819 469.118 0.065 154.892 2008* March 4.115 1914.083 0.678 2009 (3.73%) (26.64%) (17.21%) March 7.217 2763.189 1.131 2010# (75.38%) (44.36%) (66.81%)

All Scheduled Commercial Banks No of Amt O/ s A/ Cs 4.851 2135.386

466.563 0.058 180.634 4.851 (0.54%) (-10.78%) (16.61%) (No change) 648.247 0.157 211.470 8.505 (38.94%) (170.69%) (17.07%) (75.32%)

2561.280 (19.94%) 3622.907 (41.44%)

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Canara Bank Samachar Lehar March 2012 March 7.398 3694.30 1.718 881.16 0.186 209.81 9.302 4785.27 2011 (2.51%) (33.70%) (51.90%) (35.93%) (18.47%) (-0.78%) (9.37%) (32.08%) * change in definit ion of t he sect or as per t he MSMED Act 2006 advised t o banks in 2007 # Ret ail trade included in service sect or Source : Scheduled Commercial Banks Note : Figs. In parent heses indicat es Y-o-Y % growt h / decline The t ot al MSE Credit as percent age of Adjust ed Net Bank Credit (ANBC) has been increasing since 2007 as shown below in Chart 1.1. In March 2011, it st ood at 14.8% for t he Public Sect or Banks (PSBs). Chart 1.1Credit to the MSE by PSBs (as % to ANBC)

Despit e t he increase in credit out st anding t o t he sect or, the MSME borrowers feel t hat t he lenders are not doing enough for t he MSMEs and are cat ering more t o t he needs of t he large corporat es. This gap in percept ion needs to be bridged. SMEs face a number of problems, such as, absence of adequat e and t imely banking finance, limit ed capit al and knowledge, non-availability of suit able t echnology, low product ion capacity, ineffect ive market ing st rat egy, identificat ion of new market s, const raint s on modernisat ion & expansion, non availability of highly skilled labour at affordable cost , follow up with various government agencies t o resolve problems, et c. More recent ly, t he MSME Associat ion/ Chambers feel t hat t he global recession, inflat ion and depreciat ion of t he rupee is affect ing t hem adversely. I would now like t o highlight some of t he major const raint s faced by t he MSME sect or and t he import ant measures t aken by Government of India and Reserve Bank of India t o address t hem :
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Canara Bank Samachar Lehar March 2012 (i) Access to Credit Access t o t imely and adequat e credit is crit ical for MSMEs growt h and development . To ensure enhanced credit flow t o t he sect or, and more so t o t he micro unit s, in t erms of t he recommendat ions of t he Prime Minist ers Task Force on MSMEs (Chairman : Shri T.K.A.Nair, Principal Secret ary, Government of India) constit ut ed by the Government of India, banks have been advised t o achieve a 20 per cent year-on-year growt h in credit t o micro and small ent erprises; t he allocat ion of 60% of t he MSE advances t o the micro ent erprises is t o be achieved in st ages viz. 50% in t he year 2010-11, 55% in t he year 201112 and 60% in the year 2012-13 and achieve a 10% annual growt h in number of micro ent erprise account s. The Reserve Bank is closely monit oring t he achievement of t arget s by banks on a quart erly basis. The mat t er is followed up wit h t he laggard banks t o know t heir const raint s and impress upon t hem t he need t o devise st rat egies t o gear up t he credit mechanism for t he sect or. While t he banks have achieved t he t arget of 20% y-o-y growt h in credit t o t he sect or t he t arget for t he micro unit s is st ill an area of concern. The banks have been advised t o device st rat egies t o st ep up t heir lending t o micro unit s. I would, however, like t o clarify t o t he MSME unit s, t he difference bet ween credit and money which should be clearly underst ood. Unlike money, credit has t o be self-liquidat ing on a viable project and has a cost . It is t o be appreciat ed t hat banks are highly leveraged bodies t hat lend money placed by deposit ors wit h t hem and t herefore, have t o pract ice prudent lending and be caut ious and sure of t he safet y of t he money of t heir deposit ors. On t he cost of credit , while int erest rat es have been deregulat ed by Reserve Bank of India, my message t o t he MSME sect or is t hat as int erest cost s are a very small fract ion of t heir operat ing cost s, only approximat ely 4%, do not ask for low int erest rat es from t he banking sect or, and inst ead ask for credit at compet it ive rat es.Furt her, t he ext ent of financial exclusion in t he sect or is very high as shown in Chart-1.2 below. The st at ist ics compiled in t he Fourt h Census of MSME sect or Sept ember 2009 revealed t hat only 5.18% of t he unit s (bot h regist ered and unregist ered) had availed of finance t hrough inst it ut ional sources, 2.05% had finance from non-inst it ut ional sources t he majorit y of unit s i.e. 92.77% had no finance or depended on self finance. Chart-1.2 Financial Exclusion in MSME Sector

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Canara Bank Samachar Lehar March 2012 There is, t herefore, a need t o ensure access of banking facilities in t he remot e unbanked / under banked areas. Financial inclusion, including MSME finance and t he drive t o universal access is t he nat ional mandat e. Financial inclusion makes growth broad based and sust ainable by progressively encompassing t he hithert o excluded populat ion. Wit h an object ive of ensuring uniform progress in provision of banking services in all part s of t he count ry, banks were advised t o draw up a roadmap t o provide banking services t hrough a banking out let in every unbanked village having a populat ion of over 2,000 by March 2012. The Reserve Bank advised banks t hat such banking services need not necessarily be ext ended t hrough a brick and mort ar branch but could be provided also t hrough any of t he various forms of Informat ion and Communicat ion Technology (ICT) based models, including Banking Correspondent s (BCs). About 74,000 such unbanked villages have been ident ified and allott ed t o various banks t hrough St at e Level Bankers Commit t ees (SLBCs). As at t he end of Sept ember 2011, as report ed by t he St at e Level Bankers' Commit t ees of various st at es / Union Territ ories, banking out let s have been opened in 42,079 villages across t he various Stat es in t he count ry. This comprises of 1127 branches, 39998 business correspondent s and 954 ot her modes like rural ATMs, mobile vans et c. In addit ion, t he Reserve Bank of India has advised banks t o roll out t he Financial Inclusion Plans (FIP) for drawing up an act ion plan t o provide banking facilities in villages wit h populat ion less t han 2000 t hrough mult iple channels. (ii) Need for Venture / Risk Capital Vent ure / Risk capit al is oft en a more appropriat e financing inst rument for high-growt hpot ent ial and st art -up SMEs. Alt hough MSMEs commonly use t radit ional debt , t his type of financing is oft en not accessible for fast -growt h and st art -up firms. During t heir init ial phase, firms need finance t o st udy, assess and develop an init ial concept (seed phase) or for product development and init ial market ing (st art -up phase). At t his st age, firms may be in t he process of being set up or may exist , but have yet t o sell t heir product or service commercially. High-growt h firms usually develop an idea, concept or product t hat requires an incubat ion period before generat ing revenues and profit s. Firms, t ypically, look for vent ure capit al t o provide t hem with t he financing t hey need t o expand or break int o new market s and grow fast er. Thus, t he abilit y of MSMEs (especially t hose involving innovat ions and new t echnologies) t o access alt ernat ive sources of capit al like angel funds/ risk capit al needs t o be enhanced considerably. For t his purpose, removing fiscal / regulat ory impediment s t o t he use of such funds by t he MSMEs should be considered on priority. The Government of India, in t erms of t he recommendat ions of t he PMs Task Force on MSMEs, is looking int o the area. (iii) Access to Equity Capital Access t o Equit y capit al is a genuine problem. At present , t here is almost negligible flow of equit y capit al int o t his sect or. Absence of equit y capit al may pose a serious challenge t o development of knowledge-based indust ries, part icularly t hose t hat are sought t o be promot ed by t he first -generat ion entrepreneurs wit h t he requisit e expert ise and knowledge. There is a demand for a dedicat ed Exchange for MSMEs and SEBI has permit t ed BSE and NSE t o set up an Exchange for MSMEs in t erms of t he recommendat ions of t he PMs Task Force on MSMEs.

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Canara Bank Samachar Lehar March 2012 (iv) Need for Skilled Labour The sect or oft en feels t he const raint of non-availability of skilled labour. It is indeed ironic t hat in a nat ion of more t han a billion individuals, skilled labour is cit ed as scarce. In t his regard, I feel t hat we are a very young nat ion - just over 64 years since independence set t ing out on a pat h of sust ained economic growt h, for decades t o come. As per t he Nat ional Commission on Populat ion, t he age-wise dist ribut ion of t he populat ion of India is going t o change significant ly in t he coming years. By 2016, approximat ely 50 per cent of t he t ot al population will be in t he age group of 15 - 25 years. Thus, t here would be a t remendous increase in t he number of yout h ent ering t he educat ion and job market in t he ensuing years. On an average, it is est imat ed t hat around 1.5 crore persons per annum would ent er t he employment market during the next 30 years. Each person, in this bold new generat ion, will be in t he prime of his or her life, st riving for a bet t er t omorrow creat ing, in the process, new growt h opportunit ies, for budding ent repreneurs! We need t o capit alize on t his unique demographic advant age. At present , t here are various organizat ions at t he nat ional and St at e levels offering support t o ent repreneurs in various ways. The Government of India and various St at e government s have been implement ing a number of schemes and programs over t he years. The Rural Self Employment Training Inst it ut es (RSETIs) are working in t his direct ion. There is, however, a need t o examine t he impact of RSETIs. (v) Factoring to Tackle Delayed Realization of Receivables Considerable delay in set t lement of dues / payment of bills by t he large-scale buyers t o t he MSMEs unit s adversely affect s t he recycling of funds and business operat ion of MSME unit s. Though t he Government has enact ed t he Delayed Payment s Act , 1998 many of t he MSME unit s are reluct ant t o pursue cases against major buyers. Aft er t he enact ment of t he Micro, Small and Medium Ent erprises Development (MSMED), Act 2006, t he exist ing provisions of t he Int erest on Delayed Payment Act , 1998 t o Small Scale and Ancillary Indust rial Undert akings, have been st rengt hened. The banks have been advised by Reserve Bank of India t o sanct ion separat e sub-limit s wit hin t he overall limit s sanct ioned t o t he corporat e borrowers for meet ing payment obligat ions in respect of purchases from MSME sect or. In pract ice, however, t he legislat ion did not improve t he posit ion of MSEs because of t heir dependence on large businesses for cont inued business. This problem has t o be inst it ut ionally t ackled by fact oring and banks should provide such services part icularly for MSMEs. To facilit at e fact oring services t he Government has recent ly passed t he Fact oring Regulat ion Bill t hat would address delays in payment and liquidity problems of micro and small ent erprises. Fact oring provides liquidit y t o small and medium ent erprises against t heir receivables from cust omers and is regarded as a cash management t ool. Besides, fact ors would be ent it led t o t ake legal recourse for recovering assigned debt and receivables from buyers of goods and services. The Fact oring Bill creat es t he legislat ive environment for fact oring and makes t he process easier. (vi) Sickness Growing incidence of sickness of SSIs is yet anot her area of concern. When t he sickness prolongs it leads t o t he closure of unit s and unemployment . The mort alit y of t he SSI unit s is high. This has wider implicat ions including locking of funds of t he lending inst it ut ions, loss of scarce mat erial resources and loss of employment . The dat a showing t he posit ion of sick small and micro ent erprises as at t he end of March 2010 & 11 is given below : Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 (Amount in `. crore) Total No. End of Sick Units of Potentially Viable Units put Viability yet under to be decided nursing Units O/ S Units O/ S Units O/ S 64403 3891.33 4160 377.03 2360 478.84 Non-Viable

Units O/ S Units O/ S March 77723 5233.15 9160 964.75 2010 March 90141 5211.25 7118 1112.98 76518 3589.12 6505 509.15 4698 518.30 2011

The number of unit s ident ified as pot ent ially viable as a percent age t o t ot al sick MSE unit s is around 8% whereas the number of sick unit s found unviable was as high as 85%. The unit s placed under nursing as a proport ion to t he t ot al number of sick unit s st ood at 5.22%. I would like t o emphasize t hat t imely det ect ion of sickness is crit ical as any delays in t his regard makes t he possibilit ies of it s revival of pot ent ially viable sick unit s recede. As any ot her sickness, t he need for t imely t reatment aft er ident ificat ion of sickness cannot be overemphasized in MSMEs. In order t o hast en t he process of ident ificat ion of a unit as sick, a proposal for modifying t he ext ant definit ion of sickness, in line wit h t he recommendat ions of t he Working Group on Rehabilit ation of sick SMEs, is under considerat ion of t he Reserve Bank of India. For viable unit s, t imely and effect ive rehabilit at ion by way of renegotiat ions of t erms of loans, induct ion of fresh dose of funds, business rest ruct uring, change of management et c. may become necessary. The process should not only be quick, efficient , cheap and fair t o all st akeholders but also accept able t o and implement able by all, wit h necessary monit oring arrangement s for implement at ion of t he same. In case t he unit is not found viable, recovery of t he dues of lenders t hrough a fair, efficient and swift legal mechanism should be t he focus. As it is observed t hat rehabilit at ion of sick micro, small and medium ent erprises could not be t aken up due t o non-availabilit y of promot erscont ribut ion in a large number of cases, we have recommended t o t he GOI t o set up a Rehabilit at ion Fund for rehabilit ation of sick MSMEs. All Scheduled Commercial Banks have also been advised on May 4, 2009, t o review and put in place MSE Loan policy, Rest ruct uring / rehabilit at ion policy and Non-discretionary One Time set t lement scheme for recovery of non-performing loans, duly approved by t heir Board of Direct ors. Banks were advised in December 2009 t o give wide publicit y t o t he Non-discret ionary One Time Set t lement scheme for recovery of non-performing loans for t he MSE sect or by placing it on t heir bank's web-sit e and t hrough ot her possible modes of disseminat ion. (vii) Exit policy for MSMEs An exit rout e for non-viable unit s is necessary to manage sickness. Worldwide, MSMEs are credit ed wit h high level of innovat ion and creat ivity, which also leads t o higher level of failures. Keeping t his in view, most of t he count ries have put in place mechanisms t o handle insolvencies and bankrupt cies. The present mechanism available in India for MSMEs is archaic. Business failure in India is viewed as a st igma, which adversely impact s
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Canara Bank Samachar Lehar March 2012 individual creat ivit y and development in t he count ry. The exist ing legislat ions may have t o be t oned up so as t o provide for efficient liquidat ion of non-viable businesses. (viii) Infrastructure To ensure compet it iveness of t he MSEs, it is essent ial t hat t he availabilit y of infrast ruct ure, t echnology and skilled manpower are in t une wit h t he global t rends. MSEs are eit her locat ed in industrial est at es set up many decades ago, or have come up in an unorganized manner in rural areas. The st at e of infrast ruct ure, including power, wat er, roads, et c. in such areas is inadequat e and unreliable. Furt her, t he MSE sect or in India, wit h some except ions, is charact erized by low t echnology levels, which act s as a handicap in t he emerging global market . Technological upgradat ion of t he unit s would help in enhancing capacity and increase supplies which would also help t o combat inflat ion. Need for market ing, research et c. is also crit ical. The Prime Minist ers Task Force on MSMEs recommended several measures having a bearing on t he funct ioning of MSMEs, viz., credit , market ing, labour, exit policy, infrast ruct ure / t echnology / skill development and t axat ion. The comprehensive recommendat ions cover measures t hat need immediat e act ion as well as medium t erm inst it utional measures along wit h legal and regulat ory st ruct ures and recommendat ions for Nort h-East ern St at es and Jammu & Kashmir. The implement at ion of t he recommendat ions, in a t ime bound manner, is being monit ored by Government of India at t he highest level. 8. Global slowdown and MSMEs The recent past has been a challenging t ime for bot h t he bankers and t he MSME sect or due t o recession in many count ries of t he globe and depreciat ion of t he rupee. The recession has led t o slowing down of t he global demand for goods and services. But I would urge upon t he ent repreneurs t o t ap t he huge demand in t he local market s. MSMEs are t he best vehicle t o creat e local demand and consumpt ion and also t o fight wit h t he global melt down. The depreciat ion of t he rupee has made t he price of t he product s of export ing firms in t he sect or more compet it ive. 9. Role of Banks Banks have a vit al role t o play in addressing several problems faced by t he sect or t oday. Banks have t o view t hemselves not just as providers of credit but as partners in t he growt h of t hese ent erprises, t hrough a process of hand holding of first generat ion ent repreneurs, while they find t heir feet in t he business. In financial management MSE ent erprises do not have t he size t o support t he compet ence t hey need. Operat ional skills, including accounting and finance, business planning, market ing and human resource management , et c. can oft en pose a challenge and necessit at e support for the MSE borrowers. Typically, for inst ance, t hey operat e wit h a woefully low product ivity of capit al and have eit her t oo litt le or t oo much cash. The t ools for doing t his work are fully developed e.g. cash-flow forecast and cash flow management . The financial management needs of t hese businesses are predict able. And worldwide t hey fall int o a small number of cat egories, well-known t o any experienced banker. The rewards for building a firm providing t hese small businesses wit h financial management might be enormous. Banks should t herefore, provide financial consult ancy / financial management services t o t heir MSE borrowers t o give t hem holist ic guidance and support and nurt uring t hem. Banks
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Canara Bank Samachar Lehar March 2012 could set up special indust rial and management consult ancy depart ment s t o address funct ional inadequacies and market gaps. Bank branches need t o ensure great er part icipat ion in t he affairs of t heir MSME client s by convergence of credit services and non credit services. But for t his, bank st aff should be t rained t hrough cust omised training programmes t o meet t he specific needs of MSEs such as knowledge of market s, bot h domest ic and global, use of t echnology, et c. Banks need t o innovat e t o creat e product s specifically suit ed t o t he requirement s of MSMEs and should t ake a longer t erm view of it s relationship wit h such ent it ies while pricing such product s. As t he availabilit y of t imely and adequat e credit is a key requirement for this sect or, banks should int roduce single window facility for providing loans t o MSMEs. For t his purpose, t hey can set up Cent ralized Processing Cent res specifically t o cat er t o such client s, which will handle t he appraisal, sanct ion, document at ion, monit oring, renewal and enhancement act ivit ies. As in any area, t here would be a higher failure rat e for st art -up MSMEs. However, despit e t he risk, t he financing of t hese ent erprises is a must for ensuring inclusive growt h. Banks will, t herefore, be required t o build up t heir risk assessment and risk management capabilit ies and provide for any inst ances of failures as a part of their risk mit igat ion process. I would also urge upon t he Top Management of banks t o put in place a credible, proact ive and a funct ional monit oring mechanism t o review t he progress in act ual concret e out comes. Bank st aff has t o be sensit ive t o t he need t o nurt ure these ent erprises and t o ensure t hat t hey get t he necessary support during t he init ial phase. The performance of branch managers in dealing with the sect or should be included as a crit erion for evaluat ion of t heir performance. 10. Role of MSME Associations / Chambers The MSME Associat ions and Chambers have an import ant role t o play in st epping up credit t o this segment . They need t o proact ively engage t hemselves in organising workshops and t raining programs for t heir members t o enlight en t hem about cash flow cycles, various financial product s, account ing pract ices, et c. In t his regard, t he MSME Associat ions, Chambers of Commerce, et c. may like t o collaborat e wit h banks, NIBM or any ot her t raining instit ut e in t he area of banking and finance, basic account ancy and informat ion t echnology for MSEs. I appreciat e t he effort of t he SME Chambers in organizing this Conclave. I would, however, urge upon t he Indust ry Associat ions t o play a more proact ive role and bring forward specific cases where t he MSME ent repreneurs are facing problems in accessing credit t hrough the banking channels. Such issues could be discussed and resolved in such a forum. Even if we can resolve t en percent of t he cases of genuine problems being faced by a MSME entrepreneur, I would feel t hat such conclaves have been successful. By doing so, t he indust ry associat ions can bridge t he gap bet ween banks and individual firms in reaching of object ives such as addressing problems common t o all members, st imulat ing cooperat ive action among manufact urers and providing access t o resources aimed at assist ing manufact urers. MSMEs should underst and t hat banks are responsible t o t heir deposit ors and shareholders and, t herefore, they, i.e. t he MSEs, as cust omers of bank credit , have cert ain obligat ions t o fulfill by way of repaying bank loans, maint aining proper books of account s, Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 submit t ing informat ion correct ly and more import ant ly, sharing informat ion about financial problems when t hese arise so t hat t hey can work t oget her wit h the bank in resolving t hese. It is in t he int erest of MSEs, t o get t hemselves rat ed by independent rating agencies, as it could enable t hem t o negot iat e wit h t heir bankers for int erest rat e reduct ion, larger loan size or even obt ain fast er processing of t heir loan applicat ions et c. MSEs need t o be aware t hat if t hey default and t heir credit hist ory is poor t hey will find it difficult t o access bank finance, as banks have been mandat ed by RBI t o pass on all credit hist ory of t heir client s t o CIBIL or any ot her credit bureau regist ered wit h RBI. Further, senior-level represent at ives of SME / SSI Associat ions in each St at e are members of t he Empowered Commit t ee set up by RBI at each of it s regional offices, wit h t he SLBC Convenor, represent at ives of banks having predominant share in SME financing in t he St at e, SIDBI, Direct or of Indust ries of t he St ate Government et c., are also members. MSE Associat ions need t o use t his Forum not only for removing bot t lenecks in t he smoot h flow of credit t o t he sect or and for reviewing t he accessibilit y of bank finance t o more and more MSEs, but also highlight gaps if any in t he att itude and skills at the bank branch level. I would urge upon t he Indust ry Associat ions / Chambers t o t ake up region-specific issues relat ing t o MSEs wit h t he concerned Regional Direct or of Reserve Bank of India and t he SLBC convener banks. Such issues t hat cannot be resolved at regional office level could be brought t o t he not ice of cent ral office of RBI. They could also spread awareness of t he Government Schemes and Code of Banks Commit ment t o MSEs among t heir members. Last ly, t he success st ories of micro and small ent erprises may be widely disseminat ed as it would inspire ot hers t o st rive for excellence and t hus cont ribut e t owards achieving great er height s in building a st rong and prosperous India. The new ent repreneurs could also t ake a cue from t he mist akes of t heir experienced count erpart s and ensure not t o repeat t he same. A Piece of Advice While I have sought t o highlight t he expect at ions from various st akeholders in support ing t he growth of MSMEs, it is import ant t o remember t hat individual MSMEs, t hemselves, have t o const ant ly seek t o t ransform t hemselves, in line wit h changing environment al fact ors, t o ensure t hat t hey end up among the success st ories inst ead of t he failures. I have, in t he past also, drawn from t he famed management t hinker Pet er F. Druckers writings t o highlight four t ypical mist akes that entrepreneurs need t o avoid as t hey develop t heir businesses. These are, part icularly relevant for MSMEs during t he growt h phase. These include t he need t o be open to pot ent ial new / unint ended market s or applicat ions for product s developed by companies; t he need t o focus on cash flows inst ead of focusing only on profits as t hese are t he lifeline t hat keeps t he company going; creat ing a management t eam as t he business develops; and last ly, t he need t o const ant ly ask t he quest ion t hat what t he business needs at t his st age and whet her one is concent rat ing on the right t hings. Conclusion Let me conclude by rest at ing t he fact t hat MSMEs will cont inue t o play a very import ant and vit al role in our economy where t he twin problems of unemployment and povert y Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 const it ut e a major development al challenge. In fact , if India were t o have a growt h rat e of 8-10 percent for the next couple of decades, it needs a strong micro, small and medium sect or. MSMEs are the best vehicle for inclusive growt h, t o creat e local demand and consumpt ion. The MSMEs of yest erday are the large corporat es of t oday and could be MNCs of t omorrow. Thus, t he banks and ot her agencies should t ake pride while servicing t he MSMEs as t hey are playing an inst rument al role in t he format ion of MNCs of t omorrow. MSMEs t hemselves have t o be on t heir t oes, in t his rapidly changing business environment , and keep evolving t o st ay clear of all t he pot ent ial pit falls t hat confront t hem in t heir progress from small ent erprises to large corporations. I look forward t o your feedback in creat ing an enabling environment for the promot ion of MSMEs in t he count ry. Thank You. 1. Address by Dr. K. C. Chakrabart y, Deputy Governor, Reserve Bank of India at t he 'SME Banking Conclave 2012' organized by SME Chamber of India on February 4, 2012 at Mumbai. Assist ance provided by Smt Lily Vadera in preparat ion of t his address is grat efully acknowledged.

Understanding Psychology for Responsible Financial Behaviour


Shri. Harun R. Khan I t hank t he organizers of t he Golden Jubilee celebrat ions of t he Maharishi Dayanand College of Art s, Science & Commerce, Mumbai for invit ing me t o deliver t he inaugural address at t his import ant seminar. The Interdisciplinary Seminar on Psychonomics : Underst anding t he Psychology behind Financial Behaviour is indeed a very t opical subject and especially when the world is realizing t he significance of t he import of human psychology in t he economic behaviour of t he market s. It is not oft en t hat one get s an opport unit y t o share t hought s wit h an ent husiast ic group of st udent s and facult y wit h diverse educat ional backgrounds and put forth views on psychology in order t o explain economics. Today, part icularly in t he cont ex of recent financial crisis, it is well-accept ed t hat psychology does influence many economic decisions which defy pure economic t heories. As we all know, during t he classical period, economics had an est ablished link wit h psychology. For example, Adam Smit h, who is considered as fat her of economics, in his work on The Theory of Moral Sent iment s, had described psychological principles of individual behaviour. Jeremy Bent ham, founding fat her of modern ut ilit arism ideas, wrot e ext ensively on t he psychological aspect s of ut ilit y. Overtime, economist s, however, began t o dist ance t hemselves from psychology as t hey sought t o reshape t he discipline as a nat ural science. By mid-20t h cent ury, psychology lost it s linkages wit h economics. In t he 1950s, Herbert Simons challenged some of t he t rait s of st andard economic model of human behaviour, i.e., unbounded rationality, unbounded will-power and unbounded selfishness. He quest ioned t he idea t hat people have unlimit ed information processing capabilit ies. Rat her he propounded t he idea of 'bounded rat ionality' t o suggest a more realist ic concept ion of problem solving abilit y of human beings. It was also suggest ed t hat human beings st ruggle t o analyse problems object ively as t hey view t hem t hrough a 'frame' of personal experience oft en shaped by social and cult ural bias. In mid 1960s, Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 Ward Edwards, Amos Tversky and Daniel Kahneman began t o compare t heir cognit ive models of decision making under risk and uncert aint y t o economic models of rat ional behaviour and t his led t o resurgence of psychology in economics. The recent global financial crisis caused severe damages t o many economies across t he globe. Government s and Cent ral Banks had t o st ep in t o bailout many financial inst it ut ions t o prot ect t he syst emic st abilit y. Greed and fear played a big role in t he way market s behaved much against t he lines predict ed by t he mat hemat ical models. The behavioural economics do succeed in explaining t he recent market dist ort ions driven by t hese t wo human t rait s. The greed for huge gains drove financial engineers t o innovat e and sell complex financial product s t o unsophist icat ed invest ors. As t he crisis unfolded st ock market react ed sharply and st opped rallying. Fear t hen t ook over and accent uat ed t he sell-off inst ead of encouraging invest ment s at lower prices. I do not int end t o dwell on t hese areas in det ail but what I int end t o highlight during my brief present ation is t o focus on some of t he facet s of int erconnect edness of psychology with economics and how human behaviour and emot ions impact economic decisions. I would also at t empt t o put fort h some of t he findings of behavioral finance t alking along t he cont ours of mainst ream and behavioural economics. Sociology and Psychology underpin Economics As we know, in t he field of behavioural economics, insight s are drawn from psychology and sociology t o arrive at explanat ions for economic phenomena. The main departure of behavioral economics from it s mainst ream count erpart is that behavioral economics quest ions t he basic t enet s of mainst ream economics, i.e., t he assumpt ion of fully rat ional agent s wit h purely self-cent ered preferences. Once t hese assumpt ions are relaxed, we are able t o answer a lot many quest ions t hat do not have clear cut answers in mainst ream economics. Behavioral economics is a t ruly fascinat ing field and it has been increasingly incorporat ed within the mainst ream framework. Shifts in Behaviour of Economic Agents A large part of t he thinking in finance during t he 1970s was dominat ed by t he efficient market hypot hesis which st at ed t hat market s are always right , decisions of millions of rat ional invest ors make t he market s t he best judge of value of financial product s and t hat price of financial product s cont ains t he best possible informat ion about t he fundament als. In t his connect ion, one can refer t o Just in Fox, who, in his book t it led The Myth of t he Rat ional Market : A Hist ory of Risk, Reward, and Delusion on Wall St reet has eloquent ly t raced t he origins of the irrat ionalit y of efficient market hypothesis and has explained t he event s leading t o t he crumbling of t he myt h of efficient market s. As we know, wit h passage of t ime, anomalies in financial market s and in t he behavior economic agent s began t o crop up. Wit h this t here was a growing disquiet over models being used t o capt ure real world event s. This gave rise t o the search for newer paradigms of t hinking so as t o explain t he behavior of economic agent s which differed from what was predict ed by st andard economic or finance t heory. This alt ernat ive paradigm explores the psychological models of decision making in cont rast t o mat hematical models and t he irrat ionality of t he market s. The new ideas focus on how invest ors over-react or underreact and end up making irrat ional decisions based on imperfect dat a. One such anomaly Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 was t he increased and persist ent volat ilit y in t he st ock market s in t he developed world. Much of t his volat ilit y was unaccount ed for. Some observers have, hence, concluded t hat prices do not necessarily change due t o changes in fundament als but due t o "animal spirit s" and mass psychology as well. Understanding Speculative Build up Price-price feedback loop Anot her anomaly t hat caught t he att ent ion of academics was t he bout s of speculat ive increase in price of st ocks. Speculat ive build-up of prices could lead t o expect at ion of furt her increase in prices and t his in t urn may cause furt her price increase which is a depart ure from st andard t heory. Of course, high prices not support ed by fundament als cannot st ay high forever. Once t he euphoria dies down, prices fall. This phenomenon has come t o be called t he price-price feedback loop. These feedback loops have long exist ed and were, for example, experienced during t he Tulip mania in Holland during t he 1600s, the st ock market boom in t he early part of 2000s and t he housing bubble in t he US which mainly cont ribut ed t o t he recent global financial crisis. A negat ive feedback loop, i.e., one causing prices t o fall could also operat e in a similar manner. Professor Robert Shiller point s out t hat even with t he feedback loop working it is difficult t o find discussions in st andard t ext books. It is possible t hat people may mat ch increase in price of st ocks wit h previous event s leading t o a dynamic feedback loop even t hough fundament als may not warrant any significant change in prices.

Biased Self-attribution Feedback loops can be explained wit h yet anot her principle of psychology called "biased self-at t ribut ion". Individuals may att ribut e, oft en misplaced, good happenings t o t heir own ability while bad happenings are passed off as out comes of bad luck or sabot age. In t radit ional finance theory, it is possible t o argue t hat large number of sophist icat ed invest ors offset t he effect s of behavior of t he nonsophist icat ed invest ors, t hereby making market s efficient . For inst ance, when irrat ional opt imist invest ors buy st ocks t he sophist icat ed invest or sells st ocks and viceversa. However, t his behavior of sophist icat ed invest ors need not always lead t o efficient market s. It is possible t hat sophist icat ed invest ors increase t he effect s of t he act ions of irrat ional invest ors, for inst ance, by buying st ock ahead of irrat ional invest ors in ant icipat ion of price increases. This leads t o prices of st ock being away from t heir fundament al value, i.e., mispricing. Arbitrage of Asymmetric Information It is seen t hat mispricing happens in securit ies for which informat ion is sparse or comes t oo slowly. St ocks may be mispriced for long periods of t ime due t o a number of reasons and invest ors t rade on informat ion which t hey believe is superior t o informat ion available wit h anyone else. These could be forecast s or st ock specific news. However, it is possible t hat somet imes even t he sophist icat ed invest ors int erpret t he informat ion incorrect ly. It is also possible t hat overconfident invest ors are able t o t ake advant age of liquidity traders before rat ional invest ors, t hereby earning higher ret urns t han rat ional invest ors. Mispricing can also persist for long periods of time due t o ot her happenings. For inst ance, if an invest or ident ifies a ret urn pat t ern st at ist ically, it is difficult for him t o know whet her ot her invest ors have ident ified and act ed upon t hat pat t ern or not . Therefore, uncert aint y
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Canara Bank Samachar Lehar March 2012 can lead t he prices t o be away from t he t rue value for long periods of t ime. In a relat ed point , it is also possible t o see why t here may be limit s t o arbit rage due t o risks and cost s associat ed wit h exploit ing t he arbit rage opportunit y. Let us t hink of a sit uat ion in which irrat ional invest ors are bearish on a cert ain st ock. This will cause t he price of t hat st ock t o fall. St andard t heory will have us believe t hat rat ional invest ors will sense an opportunity and buy t he st ock at t he lower price short ing a similar st ock t o hedge t he posit ion. Thus, buying of t he st ock will t ake the price back t o it s fundament al value. This exposit ion of t he dynamics of price change is based on t he assumpt ion t hat every mispricing creat es an immediat e opport unity t o make riskless profit s. This may, however, not be t he case. There may be risks and cost s t hat dissuade t aking advant age of arbitrage opport unit ies. Illust ratively, even when t he st ock price is down due t o unwarrant ed pessimism, rat ional invest ors may still face more downside risks t o price due t o adverse news about t he company. Risks t o st ock prices also arise due t o t he presence of noise t raders who could compel rat ional t raders t o liquidat e t heir posit ions t oo quickly. In addit ion, t here are transact ion cost s involved in t he process of t aking advant age of arbitrage opport unit ies. These cost s could be prohibit ively high somet imes and, hence, could det er arbit rage. Impact of level of Knowledge on the Decision Making Process In t he cont ext of how level of knowledge influences t he decision making process, let us examine t he quest ion whet her we always include all fact ors affect ing t he happening of an event int o account before making a decision. St andard economic theory predict s t hat all fact ors are considered and t hat decision is opt imal. In pract ice, however, it appears t hat we do not . Evidence from psychology suggest s t hat due t o t he lack of t ime and cognit ive resources, t he brain develops rules of t humb to analyze t he problems, i.e., people depend on heurist ics. This works well when applied in appropriat e set tings; however, applying t hem in scenarios different from what was init ially int ended creat es biases. One assumpt ion of mainst ream economics is t hat errors are independent across individuals in t he sense t hat the errors of one individual are not affect ed by or affect t he errors of anot her individual. In t he modern world, humans are faced wit h many decisions at t he same t ime and wit h cognit ive power being limit ed, heurist ics are used t o decide. There is obviously no guarantee t hat t hese decisions will be opt imal even t hough one could spend more energy t o make t he opt imal decision.

The Halo Effect Very oft en in our lives we t end t o appreciat e one t rait of another person so much t hat we overlook t he ot her, somet imes, undesirable t rait s. This is because of what has come t o be called t he "halo effect ". This effect can be used t o analyze t he mispricing of st ocks. Admitt edly, in market s t hat are efficient , st ocks could be good in t erms of growt h prospect s; however, this t rait of t he st ock says not hing about t he fut ure risk adjust ed ret urns. Similarly, at t imes invest ors are unduly influenced by t he halo effect of "eminent " people or people wit h "st ar value" induct ed int o t he boards of companies. Thus, if t his is t he case, it is possible t hat st ocks of cert ain companies t hat are growing could be consist ent ly mispriced.

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The Mental Accounts Let me now briefly t urn t o t he concept of ment al account ing. It is a process of coding, cat egorizing and evaluat ing economic out comes. For inst ance, people are known t o make not ional ment al account s, i.e., account s for educat ion of children or savings, et c. Even wit hin invest ment account s, t here is a safe account designed t o provide for t he "rainy days" and one account t hat is typically t he risk t aking account designed t o make money grow fast er. However, t heoretically, speaking money should be fungible across account s because money in one account is as good as money in some ot her account . In pract ice, however, money is not found t o be fungible across account s. For inst ance, fall in value of invest ment from t he safe account causes more pain than an equivalent fall in value in t he ot her risk t aking account s. Anot her int erest ing example popularly quot ed is t hat due t o risk aversion t rait , people t end t o hold on t o loss making st ocks and sell profit making st ocks. In effect , people t ry t o reduce loss and hence end up keeping loss making st ocks for longer. Bracketing Anot her issue of ment al account ing is t he concept of broad and narrow bracket ing. Many of us here may have not iced t he get t ing a t axi on a rainy day is part icularly difficult . One would think t hat t here would be more people willing t o t ravel by t axis on a rainy day t han on a non-rainy day, t hereby giving t axi drivers incent ive t o work more and, hence, earn more. However, it is possible t hat t axi drivers focus on t he income from a day, i.e., the concept of narrow bracket ing but not on t he income over a longer period of t ime, i.e., t he concept of broad bracket ing. On rainy days, t he income for t he narrow bracket ing is achieved more easily as t he t arget ed earnings are achieved for t he day early. Hence, many t axi drives t ake rest earlier than usual, t hereby aggravat ing t he problem of finding t axis on rainy days and also depriving them of higher earnings on such days.
Emotions and Expectations in Economic Decision Making Most t heories in economics focus on debat es wit hout t he involvement of any emot ions. I am sure you will agree wit h me t hat many of t he decisions t hat we t ake are based on or influenced by our emot ions. Besides, t here is also evidence t o prove t hat people are influenced by t heir current t ast es and habit s when predict ing fut ures t ast es. Individuals in t he framework of mainst ream economics are said t o know t he ent ire t ime pat h of t he cost s and benefit s of t heir act ions. In t he event t hat when t hey do somet hing t hat may not be complet ely rational, say addict ion t o alcohol, t hey are treat ed as t aking rat ional decisions. We know one reason why people below poverty line never move up t he ladder is t hat oft en t hey spend large port ion of t heir meagre incomes on wast eful habit s of consuming alcohol / t obacco or spending on social event s alt hough t hey know such habit s would only aggravat e t heir current economic problems. Behavioural economics explains why such addict ions happen. It is t hus possible t hat people underest imat e t he effect of current consumpt ion on future consumpt ion and may under appreciat e t he format ion of a habit . Behavioral economics also t hrows useful insight s for policy makers. Researchers at t he Federal Reserve Bank of Bost on are engaged in st udying t he implicat ions of behavioral economics for economic policy. Papers present ed at t he 2007 conference on behavioral economics at t he Bost on Fed shed light on t he role of emot ions and t he idea of fairness on Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 economic decisions. Evidence on how emot ions like anger and regret affect t he price set t ing decision of firms and t he purchasing decisions of firms. The idea of fairness also has implicat ions for labour market out comes. Evidence also suggest ed t hat it was difficult for US consumers t o formulat e and execut ive saving plans. This obviously has immense implicat ions for policy makers and policy making. Many comment at ors were of t he opinion t hat complex sub-prime asset s were sold t o unsophist icat ed borrowers who did not underst and t he cont ract s fully. Findings present ed at t he conference also suggest ed t hat less t han fully rat ional invest ors could affect housing prices. If prices are always expect ed t o cont inue t heir past t rend among t he irrat ional invest ors then house price bubbles were more likely t o form and macroeconomic st abilizat ion could be more difficult . This in fact act ually happened in t he US. Insight s were given on how behavioral economics could help cent ral banks communicat e economic policies. Anot her import ant aspect from t he point of view of cent ral banks is t hat expect at ions, not rational but adapt ive, play an import ant role in influencing t he act ual inflat ion pat h. For inst ance, if workers believe t hat inflat ion will be higher in t he fut ure period t hen t hey may demand higher wages which could in t urn feed int o t he headline inflat ion through wage push effect . This has been evident in India in recent years as not only inflat ion expect ations have been high in double digit s, even t he ext ent of increases in wages in bot h rural and urban areas has been higher t han t he act ual inflat ion levels. Generally, in a weak growt h environment or a condit ion of moderat ing demand, wage push spiral may not be sust ained for long. Ant iinflat ionary monetary policy, t hat remains commit t ed t o cont ainment of inflat ion t ill t he impact of moderat ing demand on inflation and wage demand becomes visible, could work in cont aining inflat ion expect ations. For anchoring inflat ion expect at ions, t herefore, balancing the growt h-inflation mix, t iming of policy act ions, and clear communicat ion from cent ral bank on it s int ent and commit ment t o inflat ion becomes crit ical. Beyond t his what furt her needs t o be done t o anchor t he inflat ion expect at ions could be an int erest ing subject for furt her explorat ion. Concluding Thoughts In t he mainst ream framework, all of us would be individuals maximizing ut ility t o one's self irrespect ive of t he ut ility of ot hers around us. We do, however, care about t he welfare and consumpt ion of people around us, i.e., our family and friends. Even when we move away from t he close circle of family and friends, we do not necessarily always act in self cent ered ways. In cont rast , as was evident during t he recent crisis in t he financial market s, finance and economics were being pract ised by set of people who had a t ot ally different mind-set , oft en condit ioned for self-int erest and greed. They were more mechanical in nature, probably due t o t he fact t hey specialized in science and t echnology and with less or no input s from humanit ies during t heir course of educat ion. They had t hus no compunct ion in mis-selling t he product s t o unsophist icated invest ors / borrowers, t hereby sowing seeds of disast er for t he households and t he economy. This, however, does not absolve t hem of t he unet hical behaviour leading t o selfish gains at t he cost of deeper struct ural damages t o t he syst em and harmful social consequences arising out of irresponsible financial behaviour as we have seen in t he recent financial crisis. Hence, t here could be a case for condit ioning of all t hose who join finance professions by way of value based educat ion and socially relevant experiences during t heir college days. Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 To sum up, all of us could use t he findings of behavioral economics in our daily lives as well as in policy making. The import ant lesson of life is t hat we should not evolve int o insensit ive individuals who care only for short t erm monet ary gains by putt ing at st ake et hics and moral values, t hereby disrupt ing t he financial syst em and causing huge social and economic damages. Hence, educat ional inst it ut ions like yours should play an import ant role in creat ing human capabilities which are conditioned by individual moralit y and social et hics aimed at responsible financial behaviour. With t his I int end t o conclude and hope t hat t his import ant seminar will highlight and t hrow up int erest 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 contribution of Shri. Anand Shankar, Shri Sittikantha Pattanaik and Shri. Surajit Bose in preparation of the address.

The Reserve Bank of India : Pulling every lever


(Art icle published in The Economist , February 4t h-10t h) India's central bank is one of its best institutions. It is also complicit in a Government-borrowing binge One of t he perks of being governor of t he Reserve Bank of India (RBI) is t he use of a colonial bungalow on Carmichael Road, a posh st reet t hat weaves along a ridge in sout h Mumbai. On one side live some of India's richest indust rialist s, modern-day pharaohs wit h flashy archit ect ural t ast es. On t he other, a stone's t hrow down a cliff, is a small slum-a monument t o desperat ion and government failure. Bot h set s of neighbours are part of t he 1.2 billion populat ion t hat India's central bank must look out for. In normal t imes t his is a t ask t hat would furrow t he brow; now t hat t he count ry's boom is falt ering, it risks causing a blinding headache. Judging by t he numbers, t he RBI is among t he world's best cent ral banks. It s record on balancing growt h and inflation is decent enough (see chart 1). Since 1995 wholesale prices have risen by an average of 6% a year, not t oo far from t he RBI's comfort zone of about 5%. Growt h has averaged 7% a year. The RBI is also in charge of t he safet y of t he financial syst em, t o which end it yanks more levers t han Willy Wonka in a chocolat e fact ory. It s record here is excellent . Despit e a current -account deficit t hat leaves India vulnerable t o global jitt ers, t he count ry sidest epped t he 1997 Asian crisis ("nobody gave us a chance," recalls a former governor) and the West 's banking crisis in 2008. The RBI also coped wit h big and pot ent ially dest abilising capit al inflows in t he euphoric years before Wall St reet began t o t ott er, and has avoided a domest ic financial crisis despit e fast growt h in banks' asset s for many years.

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Some fancy t he RBI is a model for t he kind of full-service cent ral bank t hat is back in fashion worldwide-bot h t he Federal Reserve and t he Bank of England, among ot hers, are now in charge of financial st ability as well as int erest rat es. In t rut h, it would be hard t o run a rich economy t he way t he RBI does India, wit h it s financial syst em only part ly liberalised. But t he cent ral bank has new clout abroad and at home it s st ock is high. Under t he present governor, Duvvuri Subbarao, a soft ly spoken figure, it has made a t ough series of rat e rises in t he past t wo years t o t ry t o curb a st ubborn spell of inflat ion (a bat t le t hat may not be over). And alt hough t he bank finds it hard t o t empt st ar graduat es t o work in it s t ower overlooking Mumbai harbour-"if you look at it s people and t hose of t he Fed, t here's no comparison," lament s one bigwig-relat ive t o most Indian st at e bodies t he RBI has more brains, muscle and int egrit y. It is about t he only inst it ut ion in t he country you never hear accused of graft . That 's a big t urnaround for a body t hat became a polit icians' playt hing aft er India nat ionalised it s banks in 1969. For t wo decades t he st at e cont rolled lending and also fixed as many as 200 separat e int erest rat es. It used t he RBI as a piggy bank, forcing it t o print money t o finance it s short -t erm needs. Aft er 1991, when a balance-of-payment s crisis led India t o deregulat e, the cent ral bank rediscovered it s spine. Agreement s fully enact ed in 1997 and 2006 st opped t he st at e using it as an ATM, and as int erest rat es were liberalised and t he bond market developed, t he RBI began t o look more like a normal cent ral bank, set t ing short -t erm policy rat es t o t ry t o balance inflat ion and growt h. This journey never reached t he dest inat ion t hat was unt il recent ly in vogue in t he West t hat of a st at ut orily independent cent ral bank narrowly focused on set t ing int erest rat es and t arget ing inflation. The RBI's independence is not enshrined in law, alt hough none of t he four cent ral-bank governors since 1992, int erviewed by The Economist for t his art icle, raised t his as a big concern. The RBI consult s t he government but it has enough breat hingspace t o set rat es as it pleases, t hey say.

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Canara Bank Samachar Lehar March 2012 And like a t riumphant wearer of flares t hat have at last come back in fashion, the RBI's wide remit -mint ing coins, managing t he exchange rat e, act ing as banker for t he government , and supervising banks and t he bond market -is now seen as a t emplat e. These responsibilit ies helped it deal wit h t he 2008 crisis : in short order it defended t he currency, loaned money t o cash-st rapped banks, gave forbearance on t roubled loans, soot hed t he bond market and eased banks' capit al requirement s. Today a process of const ant tweaking cont inues. In December, aft er a panicky fall in t he rupee, t he RBI int roduced several obscure measures t o bolst er it , such as making it more at t ract ive for Indians resident abroad t o deposit money in t he homeland. Such fiddling has a cost . In 2007 an official report on making Mumbai a global financial cent re-a work of great imaginat ion-ident ified nit picking and suspicion of foreign financiers (who are welcome t o buy shares in India but not t o play in debt market s) as a big problem. In 2009 an official review of finance chaired by Raghuram Rajan, a former chief economist of t he IMF, worried t hat conservat ive regulat ion was inhibit ing India's pot ent ial. One local bank boss says t he RBI "runs a repressed financial syst em which is int olerant t owards innovat ion. If t he US was at 90 out of 100 in t erms of complexity and sophist icat ion, we are at 10 I somet imes get t he impression it [t he RBI] is rest ing on it s laurels, not realising t hat more financial innovat ion could help India's development ." St ill, aft er years of financial convulsions abroad it is hard t o say t hat t he RBI has got t he balance bet ween safet y and t hrills wildly wrong. Indeed, t he t hing t hat endangers India t oday is not it s financial market s but it s government . Heady t alk of 9-10% as India's new nat ural rate of growt h is long gone. Many blame t he government , which has not passed a significant reform for years while running a fiscal deficit of almost a t ent h of GDP, including the st at es and off-balance-sheet it ems (see chart 2). The deficit -which began as an elect oral giveaway in 2007, morphed int o 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 t he privat e sect or, which has t o live wit h higher int erest rat es t han might ot herwise be t he case. Because t he st at e is less likely than privat e business t o spend t he cash on invest ment , it does less t o boost t he economy's pot ent ial. At t he RBI t he boom of 2003-07, when growt h was near double-digit s and inflat ion comfort able, 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 t he bag and t he st at e was product ively solving day-t oday problems. Those condit ions do not exist t oday. The cent ral bank's rule of t humb for t he non-inflat ionary rat e of growt h has fallen t o 8%, but that seems t o bake in an assumpt ion t hat the polit ical class will recover it s wit s. If, hypot het ically, that does not happen, insiders at t he RBI accept t hat t rend growt h could be significant ly lower. Bears out side t he cent ral bank t alk of 6%. The uncomfort able quest ion for t he RBI is whet her it is part ly responsible for t he slowdown, albeit indirect ly. If you have a cent ral bank t hat always get s you home safely at t he end of t he night t he t empt ation for polit icians may be t o go crazy. The RBI's posit ion is especially delicat e on t he fiscal deficit . The cent ral bank oversees a financial syst em t hat is a conduit for funnelling savings int o government bonds, 70% of which are owned eit her Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 by t he cent ral bank or by t he banking syst em, which remains dominat ed by st at e-owned lenders. Alt hough t he rat io has come down, t he RBI st ill forces banks t o invest 24% of t heir core deposit s in government bonds, far above what is needed t o give banks a safet y buffer of liquid asset s. This creat es capt ive demand for public borrowing (alt hough during an economic soft pat ch such as t oday's, caut ious banks may volunt arily hold more t han t he minimum). The RBI also buys government bonds in t he market . It argues t his makes market s work smoot hly, but most out siders t hink t he aim is t o 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 t hus in t he weird posit ion of publicly rebuking t he government about it s deficit s while being t he guarant or t hat t hey are financed. An ext reme remedy would be for it t o st op buying nearly so many bonds and t o ease t he rules on banks' bond holdings. Without capt ive buyers int erest rat es would rise, perhaps by a percent age point or t wo. Some doubt whet her the polit icians would pay any at t ention- t heir appet it es are insensit ive t o t he government 's borrowing cost s, it is argued. But t he RBI would st ill probably like t o t ry; in December 2010 it cut the liquidit y requirement from 25% t o 24%. The t rouble is, anyt hing more dramat ic might be seen as meddling in polit ics and could prompt a bondmarket rout t hat endangers st abilit y. Prop trading In t his respect , as wit h it s st rong supervisory record, t he RBI may have lessons for t he world. Other cent ral banks, including t he euro zone's, are propping up sovereign-bond market s. Mr. Rajan t alks of "t he conceit that cent ral banks are independent . When t hey find t hat t he government s are not going t o budge [on cut t ing t heir deficit s] few feel able t o just walk away." In a speech on February 1st , Mr. Subbarao, t he RBI's governor, worried t hat "in t he presence of large sovereign borrowing central banks t ypically have litt le choice." One possibilit y is t hat slower growt h, high borrowing and lack of reform might event ually prompt a fiscal or balance-of-payment s scare t hat even t he RBI, wit h it s impressive array of t ools, st ruggles t o keep a lid on. That might fright en t he polit ical class enough t o act. The more benign scenario is t hat polit icians will ant icipat e this risk and act spont aneously t o get India's public finances back on t rack. But polit ics is one t hing India's cent ral bank cannot control. As he set t les down at his villa to wat ch the sun set over t he met ropolis of Mumbai, all t he governor of t he RBI can do is cross his fingers. -----------------------

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Indian Banking Sector : Towards the Next Orbit


Dr. K. C. Chakrabarty Dr. Prit am Singh, Direct or General, Int ernat ional Management Instit ut e, Dr. Ahindra Chakrabart i, Programme Direct or, part icipant s from Reserve Bank of India and t he commercial banks. It gives me great pleasure t o be before you t oday as you embark on t his journey of learning here at IMI and lat er across Paris, Berlin and Milan t o imbibe t he culture of t hese count ries and t he best pract ices. The Advanced Management Programme is t he nint h in t he series and includes st udy visit s t o cent ral bank / leading commercial banks of t hese count ries and int eracting wit h t heir senior management , t he object ive being t o enable the part icipant s t o see world class banking syst ems, underst and the st rengths and weaknesses of t he European banking syst em and develop awareness and appreciat ion of t he emerging business environment . Lect ures and int eract ions wit h some leading academicians and management expert s of t he European business schools will give rare insight s t o t he part icipant s on present st atus of t he Eurozone economies. Apart from t he st ruct ured classroom learning, t hese kind of programmes offer a unique opport unit y t o t he part icipant s for learning from each ot her and also underst and t he best management pract ices across organizations. It is expect ed t hat the part icipant s will try t o develop furt her on t hese best pract ices and implement t hem in t heir organizat ions in t heir own way. All t hese and more are required as each one of you have a role t o play in t aking Indian banking t o the next orbit . Having said t hat , I have been asked t o speak on 'The Indian Banking Sect or : Towards the Next Orbit ". I would like t o begin wit h an analogy. A spacecraft needs t o achieve a cert ain moment um before it breaks free from t he eart h's gravit at ional pull, leaves behind t he familiar and comfort able and ent ers int o t he unchart ered vast ness of a new orbit . The success of t he mission and cert aint y of reaching it s goals would lie in how effect ively it has made it s preparat ion, the skills of it s crew and it s ability t o manage t he risk of t urbulence and overcome t he snags and obst acles in it s flight pat h. The banking syst em is no different . To move int o t he next orbit, it is vit al t o underst and t he environment we are in, t he inefficiencies, t he pit falls t hat limit growt h and build on synergies and innovat ion for cat apult ing it int o t he fut ure. The out look for t he global economy remains uncert ain wit h green shoot s of opt imism in t he US as fresh jobs were added, but t he Eurozone remains embroiled in uncert ainty of decision making and lack of consensus wit h t he bat t ered economies unwilling t o commit bailout funds t o t he t roubled nat ions. India has been more fort unat e in that it has emerged virt ually unscat hed from t he global crisis. A combinat ion of strong regulat ion and supervision and a will t o evolve policies t hat lean against t he wind helped insulat e t he Indian financial syst em from t he crisis. It helped t oo t hat t he Indian banks were not very sophist icat ed and excessively leveraged. However, in a world where financial syst ems recognize no boundaries and t he fort unes of nat ions are int ert wined, no nat ion can consider it self an island and remain immune t o t he changes in t he t ides of t he world economy for a prolonged period. If t he envisaged growt h rat e of 9 per cent per annum
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Canara Bank Samachar Lehar March 2012 during t he Twelft h Plan is t o be achieved and banks have t o remain compet it ive and cont inue t o improve t heir margins, they would need t o look at t he new drivers of growt h. I. Key drivers for propelling Indian banking sector A recent IBA-FICCI-BCG report , t it led "Being five-st ar in product ivity-Roadmap for excellence in Indian banking" has project ed t hat t he domest ic banking industry is set for an exponent ial growt h in t he coming years with it s asset size poised t o t ouch USD 28,500 billion by t he t urn of t he 2025 from t he current asset size of USD 1,350 billion (2010). It is fairly obvious t o presume t hat scope for such growt h rat es would inevit ably usher in more compet it ion for t he Indian banks aided in part by regulat ory impulses and increased openness of t he Indian economy. Simult aneously, t he reach and penet rat ion of banking is going t o increase t remendously due t o t he policy spot light on inclusive growt h and financial inclusion. Aiding the t ransit ion would be anot her fort uit ous transformat ion in human resources area. Public sect or banks which account for nearly t hree fourt hs of t he one million people working in Indian banks face t he prospect of ret irement of nearly 55 per cent of t heir people in t he next decade. Thus, if ever t here was a t ime for right sizing t he organisat ion, hire t he right t alent , t he right skilling of t he workforce and bring about a cult ural t ransformat ion, t he t ime is now. We are, t herefore, on t he cusp of a defining decade in banking hist ory. What are t he key drivers t hat would propel t he Indian banking sect or int o t he next orbit ? To answer t his, I would draw upon ext ensively from an address I delivered at BANCON 2011 where I have ident ified t hree set s of drivers- ext ernal, regulat ory and int ernal which will define banking in t he next decade. i. External Drivers A. Financial Inclusion The overriding and most t ransformat ive driver would be t he policy imperat ive t o ext end t he reach of banking services and t o provide fair, t ransparent and affordable product s and services. To borrow from t he spacecraft analogy given previously, the moment um t o escape t o t he next orbit will come from universal financial access. Apart from t he pot ent ial t o expand banks' business manifold besides acquiring new cust omers for ot her value added services, t hey would have t he sat isfact ion of cont ribut ing immensely t o higher inclusive growt h. This is an opport unity which will not present it self again. With t he Government of India and t he Reserve Bank priorit ising financial inclusion, banks have been encouraged t o expand the net work t hrough set t ing up of new branches and also t hrough t he Business Correspondent Model. Result ant ly, the populat ion per bank branch improved from 14000 in 2009-10 t o 13466 in 2010-11 while populat ion per ATM from 19,700 t o 16243 during t he same period. In June 2011, banks were advised t o allocat e at least 25 per cent of t he t ot al new branches to un-banked rural centres. The number of branches opened in hithert o un-banked cent res has increased from 281 in 2009-10 t o 470 in 2010-11, but t he populat ion per bank branch is significant ly higher t han t he national average in t he Nort h East, East ern and Cent ral Regions. To st rengt hen the out reach of banking services, banks were advised t o cover all villages wit h more t han 2000 populat ion wit h at least one banking out let by March 2012 and also encouraged t o cover peripheral villages wit h population less t han 2000. Banks were also required t o put in place Board approved Financial Inclusion Plan (FIP) and t he Reserve Bank is monit oring t he Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 implement at ion of t hese plans. Significant ly, t he number of villages covered by at least one banking out let grew by 82 per cent in 2010-11 over t he previous year, besides 47 per cent of t he villages covered under FIPs were villages with populat ion less t han 2000. Almost 77 per cent of t he villages covered were t hrough business correspondent model. The number of no frills account s also grew by 50 per cent . While considerable progress has been made, a lot more needs t o be done t o garner t he savings of households. The moderat ing of financial savings of households from 12.1 per cent of GDP in 2009-10 t o 9.7 per cent in 20010-11 is an area of concern. Banks need t o t ap int o t he unt apped business opport unit ies for resources t o power t he growt h engine. A GDP growt h t arget of 9 per cent requires harnessing resources and fort une at t he bot t om of t he pyramid. The small cust omers are t he key t o big business opport unit ies wait ing t o be t apped. Improving the quality of life of t he people of our count ry by enabling t hem t o have access t o banking services could be t he next big game changer as it could unlock t he vast pot ent ial of rural India. B. Competition, Consolidation and Globalisation The past decade has virt ually been a sellers' market in so far as the Indian banking sect or is concerned. The ability of t he cust omers t o choose t he banking product s and services were severely rest rict ed since they could hardly different iat e bet ween t he product and service offerings of banks. The design of product s and services was more bank-cent ric t han cust omer-cent ric. A bank would now need t o convince a cust omer as t o why he should bank wit h t hem rat her t han anot her bank. While t he lack of innovat ions by t he banks could part ially be att ribut ed t o the extant regulat ory regime, t he banks on t heir part have also remained largely unimaginative and lacked inspirat ion t o experiment even aft er freeing of int erest rat es. The recent regulat ory init iat ives like deregulat ion of savings bank int erest rat es, opening of government business t o more banks, et c. and some imminent st eps such as licensing of new banks and subsidiarisat ion of t he foreign bank branches, on t he one hand, and t he changing profile and simult aneously rising aspirat ions and expect at ions of t he cust omers on t he ot her, should make t he t urf more compet it ive and increasingly, a buyers' market . In view of t he impending compet it ion, banks would be forced t o t ake a hard look at t heir exist ing bouquet of product and service offerings and cust omer base so t hat t hey may reposit ion t hemselves as 'different iat ed and niche' players. The increased compet it ion could also drive a spat e of mergers among exist ing players and lead t o consequent consolidat ion wit hin t he sect or. The ent ry of new players will also spur efficiency and product ivit y in t he syst em. While, at t he moment , financial inclusion t akes precedence, once financial inclusion is subst ant ially achieved, t he banks may focus on consolidat ion. As t he Indian banking sect or is propelled forward t o a higher orbit , t he banks would have t o st rive t o remain 'relevant ' in t he changed economic environment by reworking t heir business st rat egy, designing product s wit h t he cust omer in mind, focussing on improving t he efficiency of t heir services and having global ambit ions. The mant ra would be t o 'Innovat e or perish'. Globalisat ion of Indian banks could be a consequence of t heir cust omers becoming global once increased compet it ion and consolidat ion set in. Apart from banks' own global ambit ions, as Indian businesses t urn global, t heir need for financial product s and services Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 would be reason enough for banks t o go global t o service t hem. However, banking is a business of size and more so for t hose t hat harbour global aspirat ions. Hence, consolidat ion is one way t o achieve the needed scale. Thus, the second set of ext ernal drivers t hat could propel t he Indian banking t o t he 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 ext ernal in nat ure would be t hose provided by t he regulat or. Across t he globe t here is an increased convergence and realisat ion t hat regulat ions would become more st ringent especially in the areas of providing fair t reat ment t o cust omers, KYC norms and risk management . A. Fair Treatment to Customers In recent t imes, t he provision of fair t reat ment t o cust omers has gained prominence globally. The writ ing is firmly on the wall t hat regulat ions in t his area are likely t o become st rict er in years t o come. Banking / financial services indust ry being a highly regulat ed indust ry wit h st iff entry norms, regulat ors have a crit ical role in ensuring fair t reat ment t o cust omers and it cannot be left t o t he market forces alone. Banks need t o price t heir product s and services fairly and compet it ively and ensure higher t ransparency in t heir product s and pricing. Lack of t ransparency in designing and pricing of product s and services and selling t hem t o inappropriat e cust omers could expose banks t o lit igat ion, reput at ional risks besides making t hem liable for supervisory action. There should be no unreasonable post sale barriers if t he cust omers wish t o change product or bank. Cust omer educat ion is also crit ical t o providing appropriat e and need based product s and services and Indian Banks' Associat ion may have a crit ical role t o play in t his regard. The banking business would t hus have t o turn customer cent ric in all it s t rue dimensions. B. Knowing Your Customer A cust omer-cent ric business needs t o know its cust omer, t he nat ure of his business and t he inflows / out flows int o t he account s, if it is t o provide cust omised business product s and solut ions. But , banks need t o underst and t he risks associat ed wit h cust omer's business t o manage risks arising from pot ent ial delinquency, fraud and consequent losses as also legal and reput at ional risks arising from exposure t o cust omers having links t o Mult i level Market ing (MLM) business / t errorist act ivit ies / hawala t ransact ions, et c. Know Your Cust omer (KYC), Know Your Cust omers' Business (KYB) and Know Your Cust omers' Business Risks (KYCBR) should be ingrained in t he DNA of t he bank's business. It should be underst ood t hat it is not just procedural compliance, but t hat good KYC and KYCBR compliance are good for t he bank's business. The banking syst em runs on informat ion and dat a. Alt hough financial dat a are made up of innumerable complex component s, one of t he fundament al building blocks is reference dat a about companies, organizat ions, firms and individuals cust omer. Reference dat a might include a number of t hings, but an essent ial component is a syst emat ic st ruct ure or code t hat uniquely ident ifies each ent it y. Essent ially a bank should have a Unique Cust omer Ident ificat ion (UCI) Code which helps it t o ident ify a cust omer, track facilit ies availed, monit or financial transact ions in various account s for compliance wit h KYC / AML regulat ions. A key fact or in ensuring KYC compliance is having a Unique Cust omer Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 Ident ificat ion Code which may serve as a lynchpin for financial dat a and assist in improving regulation, risk management and business processes. It would help t he bank ident ify the cust omer, t rack facilit ies availed, monit or financial t ransact ions across account s for compliance wit h KYC / AML regulat ions. The UCI should event ually graduat e t o a Legal Entit y Identifier (LEI) which is a unique ID associat ed with a single corporat e ent ity which assist s in easy identificat ion of t he same part y across mult iple financial market ut ilit ies and aids in tracking set t lement act ivity and exposures. The financial crisis clearly demonst rat ed t he ext reme "complexity of int errelat ionships" and dependencies t hat exist between part ies, count erpart ies, issuers, guarant ees, and guarant ors and the domino effect t hat t akes place should one or more of t he nodes wit hin t hese horizont al or vert ical relat ionships come under pressure. Unique ident ificat ion of each and every ent ity would be crit ical t o unravelling these linkages and (int er)relat ionships. Some of t he Indian banks have developed UCI numbers which enables t hem t o t rack t he t ransact ions of cust omers across t he bank and monit or cust omer wise exposure limit s, account st at us and generat e AML alert s / report s for FIU-IND filings et c. However, t here is no unique number t o ident ify a single cust omer across t he banking syst em based on a shared dat abase which provides an avenue for t he cust omers t o circumvent t he risk profiling guidelines and obt ain mult iple facilit ies across banks by opening several account s. Even for banks t hat have some form of unique cust omer ident ificat ion, t here is no guarant ee that a single cust omer does not hold mult iple IDs. The principles behind t he Legal Ent it y Ident ifier (one ent it y-one ident ifier) could be borrowed for shaping the KYC / AML framework for t he Indian banks. Towards t his end, t he UIDAI init iat ive, Aadhaar, launched by t he Government of India, which is envisaged t o issue a unique ident ificat ion number t o individuals t hat can be verified and aut hent icat ed in an online, cost -effect ive manner for eliminat ing duplicat e and fake ident ities, could be leveraged upon by t he banking syst em. It is heart ening t o not e t hat UIDAI uses a st at e of t he art biomet ric t echnology (combining bot h - 10 Finger Print s and 2 Iris) and has achieved a high degree of accuracy (99.96 per cent ) in duplicat ion det ect ion. Present ly t he Reserve Bank guidelines permit t he use of Aadhaar as a KYC document for small account s. Since t he coverage of t he ent ire set of bank cust omers / pot ent ial cust omers under Aadhaar would t ake t ime, in t he int erim, the banks should consider put t ing in place unique ident ificat ion numbers for each of t heir cust omers and filt er out mult iple banking facilit ies availed by t hem t hrough a de-duplication exercise. The banks could also work joint ly t o set up a shared dat abase which would enable t hem t o securely see informat ion on a cust omer (KYC informat ion and facilit ies availed from various banks et c.) based on a unique ident ifier i.e. his Aadhaar ID. In t he process, banks would be able t o leverage upon t he KYC exercise already carried out by t he previous bank and also benefit from consequent lower cust omer acquisit ion cost s, simplified account opening processes wit hout repeat ed burdensome procedures for t he cust omers and also promot e financial inclusion. C. Risk Management The road ahead demands t hat banks furt her refine t heir risk management skills for ent erprise wide risk management . Globally, there is an inexorable move t owards more Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 advanced approaches t o risk management . However, we are st ill at a very rudiment ary st age. As capit al comes always at a cost , banks need t o have in place a fair and different iat ed risk pricing of product s and services. This involves cost ing, a quant it at ive assessment of revenue st reams from each product and service and an efficient Transfer Pricing Mechanism which would det ermine capit al allocation. Each business unit in t he ent erprise would have t o aim at being a profit cent re wit hin t he overall risk -ret urn framework. In essence, it would mean accountability for profit t empered by t he discipline of risk-ret urn within a deeply embedded cult ure of good governance, t he t one of which is set by t he bank's Top Management . As an illustrat ion, t he base rat e is int ended t o serve as a benchmark for int erest rat es. Our past experience has been of poor cust omers subsidising t he rich borrowers. Also, t here are incidences of rampant mis-pricing of risks. From a business perspect ive, pricing of asset s should be non-discriminat ory and in line wit h risk rat ing of t he cust omer. A lower rat ed cust omer should not get a bet t er price t han a higher rat ed cust omer. Once t hese basic issues are addressed, ot her issues such as migrat ion t o advanced approaches et c. would gain import ance.

Migration to advanced approaches under Basel II All t he Indian banks have adopt ed t he st andardised approaches under t he Basel II framework in 2009, however, the pace of migrat ion t o t he advanced approaches has nat urally been very slow. Though t he Reserve Bank has set an indicat ive t ime schedule for implement at ion of t he Advanced Approaches, banks' response has been less t han encouraging so far. Migrat ion t o t he Advanced Approaches is import ant for larger banks because it involves adopt ion of more sophist icat ed risk management syst ems. Moreover, t here are reput ational issues t oo if large banks cont inue wit h st andardised approaches. Apart from the fundament al issues ment ioned above, much of t his sluggishness could be at t ribut ed t o issues relat ing t o development of human resource skills, t echnology upgradat ion, branch int erconnect ivit y, availability and management of hist orical dat a, robust ness of risk management syst ems, et c. wit hin t he banks. Even wit hin t he Reserve Bank, t he supervisors would have t o make rapid st rides t o be able t o appreciat e t he nuances associat ed wit h t he quantit at ive t echniques and modelling. Journey to Basel III Regime (a) Capit al An assessment of Indian banks' capit al requirement s under Basel III has revealed t hat , not wit hst anding some issues wit h a few individual banks, t he syst em as a whole, is very well capit alised and t he transit ion t o t he revised capit al norms of overall capit al adequacy, Tier I component or equity component would be smoot h. The st ress, however, could however arise from a need for t he banks t o adjust t he unamortized port ion of Pension and Grat uity liabilit ies in t he opening balance sheet on April 1, 2013 on t ransit ion t o IFRS.
(b) Addressing Too-Big t o Fail The negat ive ext ernalit ies associat ed wit h t he large and complex financial inst it utions forced t he Cent ral Banks / Government s t he world over t o bail t hem out during t he financial crisis by committ ing t axpayers' money. Wit h an eye on reducing t he probabilit y and impact of failure of such global syst emically import ant banks (G-SIBs) as also t o reduce t he inherent compet it ive advant ages t hey enjoy in t he funding market s, t he st andard sett ers have agreed on a combinat ion of capit al surcharges, bett er resolution Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 regimes, living wills, more robust financial market infrast ruct ures and a more int ense supervision for t hese syst emically import ant financial inst itut ions since t hen. Large size, excessive int erconnect edness, reliance on a single or few firms for t he provision of key financial infrast ruct ure, and complexity of operat ions and cross-border act ivity have been ident ified as key indicat ors of syst emic importance of int ernat ionally act ive banks by t he Basel Commit t ee on Banking Supervision (BCBS). Financial St ability Board (FSB) has since released t he names of t he 29 banks which have been reckoned as G-SIBs based on t he crit eria laid down by BCBS. While none of t he Indian banks feat ure in t his list of 29 G-SIBs, t he BCBS and FSB are already working t owards laying down a crit erion for ident ificat ion of domest ic SIBs which would need t o be subject ed t o addit ional capital and liquidit y requirement s on t he lines of t hat applicable t o the G-SIBs. The indust ry may argue t hat t he Indian banks are very well capit alised and no addit ional capit al may be necessary on account of t he SIFI-ness of t he banks. As part of t he superequivalence t o Basel III banking reforms, under which t he nat ional regulat ors prescribe a much higher regulat ory capit al rat ios as compared t o t he Basel norms,, t he Swiss banking regulat or has already set much more st ringent capit al requirement s for t he largest Swiss banks and t he Unit ed Kingdom is expect ed t o follow suit based on t he report of t he Independent Banking Commission. The readiness of banks t o t hese evolving regulat ory requirement s would very crit ically det ermine whether t hey can successfully t ransit t o t he next orbit . iii. Internal Drivers A. Managing Human Resources An organisat ion can only be as good as it s people. They are t he force behind innovat ion, business process re-engineering and making t he difference bet ween success and failure. A commit t ed and highly mot ivat ed work force can make the difference in winning and ret aining cust omers as banking is a people orient ed business. Banks have t o be knowledge organisat ions, able t o att ract and ret ain t alent. HR policies should look at right size, right fit and career growt h wit h market relat ed compensat ion. Increasingly, t here is a going t o be an int ense compet it ion for t he right kind of t alent as t hey are likely t o be in short supply. The demand will not only st em from domest ic inst it utions but it will also be from foreign inst it ut ions and count ries. The challenge before Indian banks is t herefore t o revit alise t hemselves by hiring t he right t alent , invest ing in t raining and bringing about a vibrant transformat ion in t heir DNA, in effect doing what Sumant ra Ghoshal, t he management guru and Founding Dean of t he Indian School of Business, called changing t he 'Smell of t he Workplace'. Successful organizat ions, he felt, exude a vibrancy which uniquely defines t he 'Smell of t he Workplace'. Ghoshal describes t he smell of t he air in t he forest of Font ainebleau, 40 miles sout h of Paris, t he vibrancy which spurs t he casual walker t o run, jog or do somet hing, and is in essence revit alising. He compares it t o downt own Kolkat a in summer which is hot and drains energy and vit alit y. Most large companies in India and abroad, he felt end up creat ing downt own Kolkat a in summer inside t hemselves. The smell of t he workplace t hen becomes encapsulat ed in an environment of const raint s, where jobs / relat ionships are only cont ract s and act ions are defined by cont rol and compliance. As opposed t o it , successful companies promot e st ret ch, which means doing more wit h self discipline, as opposed t o cont rol t here is support and enhancing collaborat ion across t he organisat ion t hrough combinat ion of Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 support on the one hand and t rust on t he ot her. The real source of compet it ive advant age in organizat ions is not merely in t echnology but in t he behaviour of individuals in t he organisat ion where each one of t hem t akes init iative, collaborat es, has self confidence, has commit ment t o himself, t o t heir t eams, to t heir unit s, and t o t heir organisat ion. The challenge before management is t o use t he vast unused pot ent ial in people and make ordinary people produce ext raordinary result s t hereby changing t he smell of t he workplace. B. Leveraging Technology A recent art icle in t he Economic Times dat ed December 27, 2011 det ailed how egovernance init iat ive helped check grass root pension fraud. In Keregodu village in Karnat aka's Mandya dist rict , senior citizens, all 65-plus, face an endless wait in front of t he local post office for t heir pension money orders. Hours lat er they are t old by a post office official - 't he money had already been collect ed by someone'. In this sout h-east ern dist rict of Karnat aka, t housands of pensioners haven't received t heir pension and ent it lement s for mont hs --it is siphoned off in t ransit . Even worse, out of t he 2,95,525 pensioners in t he dist rict --whose allowances get released from t he st at e t reasury every mont h - names of 37,000 are missing - causing a mont hly loss of nearly Rs 1.48 crore t o t he exchequer (or Rs 17.76 crore a year). The st at e also suffers on account of dist ribut ion and delivery losses for pensioners whose name exist s but st ill do not get t heir money. But t he sit uat ion in Mandya, a t hriving agricultural t own till t he lat e 1980s, is set t o change wit h t he st at e government along wit h an IT services firm digit ising t he ent ire pension records and issuing smart cards t o pensioners t o plug t he leakage. It is perhaps one of t he biggest financial inclusion project s where t echnology can come t o t he aid of t housands of old and poor farmers, widows and ot her rural pensioners. But t hat's only the first part. For t he last -mile aut hent icat ion and financial t ransact ion, t he st at e government has t ied up wit h a Karnat aka-based bank. A bank correspondent will now be sent t o each pensioner's house wit h a card-reader where t he pensioner would swipe his smart card and give his t humb impression. Once t he bank receives t he dat a at it s cent ral server, t he amount would be credit ed t o the pensioner's bank account . The syst em is expect ed t o fight ground-level corruption by cross-checking the pensioner's ident it y against multiple dat abases, making it difficult for any single agency or person t o log false informat ion. This would make a huge difference t o t he lives of t he pensioners. Technology, t he will and desire t o make a difference t o t he lives of t he rural poor living on t he fringes of financial exclusion are t he change agent s. Most banks are already on Core Banking Syst ems (CBS) which covers banking operat ions pert aining t o deposit s, wit hdrawals, credit delivery, back-office operat ions et c. Banks need t o look beyond Core Banking t o harness t he benefit s of t echnology. CBS could provide input s for developing cust omised product s based on cust omer dat a base. It would help in planning product delivery and service at mult iple / select ed delivery point s and bett er Cust omer Relat ionship Management and building last ing cust omer relat ionships which will t ranslat e int o higher revenues. Technology needs t o be more cust omer focussed t han employee or vendor focussed. The cost s of banking t ransact ions need t o be dramat ically reduced just as in so many ot her fields such as t elecom aft er t he advent of t echnology. In case of glit ches, t he rect ificat ion must be swift t o inst il faith and confidence in t he syst em. It is only t he more agile and innovat ive players who will st ay ahead in the game. Along Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 wit h IT solut ions arise allied issues such as IT securit y, governance and audit s. Gaps in IT securit y could make banks vulnerable t o dat a piracy, fraud and operat ional risk leading t o reput at ion risk and erosion of cust omer confidence. C. Improving Managing Information Systems MIS is an inseparable part of bank's decision making process. The int egrity and t imeliness of dat a is crit ical in formulat ing t he bank's capit al planning, business st rat egies, reviewing achievement s vis-a-vis t arget s, formulat ing course correct ion exercises where required, feeding dat a int o st ress t est s and import ant ly t aking act ion on t he out comes. This brings us t o t echnology support for decision making. Banks have made huge invest ment s in t echnology, which should be translat ed int o bet t er MIS as decision support syst ems and yield ret urns on invest ment by providing economical, affordable and cust omised cust omer cent ric banking solut ions. The use of t echnology should not be seen as an end in it self but as a means t o an end. D. Business Plan, Strategy and Vision The role of banks' Boards would become increasingly crucial in t he next decade in view of t he looming compet it ion. The Board would need t o have a clear vision for t he bank, a st rat egy t o achieve it s object ives, bot h medium and long-t erm and a well laid out longt erm plan. The banks would need t o look beyond t heir exist ing cust omer base and large corporat es and reach out t o rope in t he vast number of small, ret ail and t he SME client s which are present ly deprived of bank credit. Alongside ext ending t he reach of t heir banking services t here would be a need t o improve t he product s offered t o cust omers and t he qualit y of services. They need t o have proper business model and delivery model. II. Managing Change in the Emerging Regulatory and Supervisory Landscape It has become fashionable t o at t ribut e any adverse feat ure t o t he economic downturn. Perhaps, we need t o draw t he right lessons, learn from it and move ahead so as not t o repeat it in future. As an example, t he 2011 financial result s of most banks show a growing increase in NPAs. While some slippage in an economic downt urn is inevit able ,it does not absolve banks from quick mort alit y / slippage due t o adverse credit select ion, lack of crit ical credit appraisal and due diligence, laxit y in monit oring end use of funds and performance of t he account . I am reminded of a st ory in t he t imes of t he Great Depression. A man st ood at t he st reet corner every day selling hamburgers. He was cheerful and whist led a t une as he sold his t ast y hamburgers. His cheerful demeanour and modest ly priced hamburgers had a brisk sale. He had t hrough his t rade managed not only t o do well but also put his son t hrough University. One day when t he son came home on a holiday and saw his fat her plying his t rade as usual he was surprised. 'Dad', he said, 'You shouldn't be making so many hamburgers as we are going t hrough the Great Depression'. And t hen t he boy proceeded t o educat e his fat her on t he finer det ails of t he Depression. The fat her t hought over what his son said and made fewer hamburgers. At work he was preoccupied and less cheerful each day. Soon sales dwindled. Ret urning home one day wit h his product s unsold, he said t o his son : 'Son, you were right about t he Great Depression. That 's t he advant age of a universit y educat ion!'
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Canara Bank Samachar Lehar March 2012 The st able funding profile of commercial banks - st rong ret ail franchise and relat ively less dependence on wholesale funding is a comfort ing fact or. Even under a worst case scenario wherein t he quart erly growt h rat e of Sept ember 2011 in gross NPAs and gross advances cont inues for t he next two quart ers and GNPA rat io reaches 3.74 per cent ; t he syst em would remain resilient as per t he result s of t he credit risk t est s ment ioned in t he lat est Financial St abilit y Report (FSR). The report goes on t o predict that even under a worse case scenario when NPAs are assumed t o grow by 150 per cent and t he NPA rat io reaches 7 per cent, t he syst em as a whole would remain resilient inasmuch as it s CRAR would remain at 11 per cent , t hough some of t he banks may come under duress. But , pressures are building up in cert ain infrast ructure sect ors especially power sect or, aviat ion, t elecom, which could furt her increase t he NPAs. Increase in int erest rat e and slowing economic growt h may adversely impinge on repayment capacity of all cat egories of borrowers especially those from SSI, MSE, et c. There could be renewed request s for furt her rest ruct uring from several sect ors. Banks, however, need t o strengt hen t heir credit appraisal and monit oring syst em as also recovery effort s. Recovery t hrough compromise set t lement s / under OTS should be a transparent and analyt ical process aft er assessing all t he options and ensuring t hat the net present value of t he set t lement amount is not less t han the net present value of t he realisable value of t he available securit ies. The idea behind t his digression was t o illust rat e t hat for banks t o move t o t he next orbit , t hey have t o realise t heir t rue st rengt hs and weaknesses. They need t o build on t heir st rengt hs and rect ify t heir weaknesses t o prepare and adapt t hemselves for t he challenges which t hese ext ernal, regulat ory and int ernal drivers are going t o ent ail. In t his, a very relevant and crit ical issue which emerges is whet her t he regulat ory and supervisory processes are also geared up for t he next orbit . III. How equipped are the Supervisors? The exist ing supervisory framework for commercial banks in India has fared rat her well over t he years and drawn praise from peer supervisory agencies, global st andard set t ers and t he FSAP assessors for t he regulat ory and supervisory regime as t he Indian banking syst em remained largely st able during t he global financial crisis. However, as supervisors, we face challenges. The growing complexit ies of the banking business coupled wit h significant cross-border and cross-sect or expansion has rendered t he syst em increasingly vulnerable t o t he t hreat of 'cont agion'. The paradigm shift in t he banks' business processes, product s and syst ems wit h an ever-growing reliance on ICT, as delivery channels pose immense challenges before t he banking supervisor. While on t he one hand, the banking landscape has wit nessed considerable changes, t he supervisory processes wit hin t he Reserve Bank have remained more or less st at ic. This has necessit at ed a review of the supervisory processes and rat ionalisat ion of t he organisat ional st ructure for bank supervision. Addit ionally, lessons from t he financial crisis which have manifest ed in form of new regulat ory and supervisory benchmarks like Basel III, revisions t o t he Core Principles for Effect ive Bank Supervision, increased focus on syst emically import ant banks also have t o be fact ored in for making t he supervisory processes and mechanism at t he Reserve Bank more robust and capable of addressing emerging issues.
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Canara Bank Samachar Lehar March 2012 The present supervisory processes followed by t he Reserve Bank are focused on elaborat e t ransact ion t est ing and compliance monit oring and do not provide a forward looking measure of risk t hat t he supervised ent it ies pose t o t he supervisory object ives. We need t o move away from t ransact ion based t o risk based and from incidence based t o t heme based supervision. The on-sit e assessment and t he off-sit e surveillance processes also need rat ionalizat ion so t hat effort s made by t he ext ernal / int ernal audit ors of banks could be effect ively ut ilised and duplicat ion avoided. Supervision has t o be int rusive and decisive. The basic underlying t heme should be t hat supervision must facilit at e good business and must obst ruct bad business. Anot her issue wort h pondering is whet her t he Reserve Bank's supervision adds value for t he supervised ent ity or is it an 'unnecessary evil' t hat t hey have t o endure. Wit h a view t o addressing some of t he above ment ioned short comings, t he Board for Financial Supervision has const it ut ed a High Level St eering Commit t ee which is conducting a thorough assessment of t he adequacy of t he Reserve Bank's supervisory policies, procedures and processes and would recommend measures t o make t he Reserve Bank's supervisory policies comparable t o t he global st andards and be more value-adding t o the supervised ent it ies. The approach t o supervision world over is undergoing a change wit h t he financial syst em under increased public scrut iny and movement s such as t he Occupy Wall St reet movement gaining tract ion. Bot h t he Cent ral Bank and supervised ent it ies are increasingly account able for t heir act ions. The challenge for t he supervisors is t o be nimble foot ed and att uned t o the changes and nuances in t he way banks do their business, ident ify emerging areas of risk for t he bank and t he banking syst em and int ervene swift ly where required. Financial st abilit y is on t op of every Central Bank's agenda and t he Reserve Bank is no except ion. Besides changes in t he way it supervises and inspect s banks, it is looking at closer collaborat ion with ot her supervisors bot h at home and overseas. MoUs wit h ot her supervisors overseas is part of our ongoing effort for sharing supervisory informat ion. The Bank is also working t o bring in legislat ive changes in t he st at ues t o give it great er aut onomy in ent ering int o MoUs, collaborat ing wit h overseas / ot her supervisors and st rengt hen powers of supervision over ent it ies in a conglomerat e, among ot hers. The changes in t he way banks do business, increased sophist icat ion of product s and services calls for capacit y building not only in banks but also for t he supervisor. t he Reserve Bank is invest ing in human resources t hrough focused skill building and collaborat ive effort s wit h ot her supervisory agencies, t he World Bank and t op training inst it ut es bot h at home and abroad t o be on t op of t he learning curve.

Conclusion : Prepare to move into the Next Orbit We are at t he cusp of a defining decade in t he banking syst em. The Indian banking syst em has come a long way in t erms of t echnology, business syst ems and processes. It has weat hered t he global economic crisis, but going forward it needs t o focus on t he key drivers of growt h t o be globally compet it ive. The lodest one of ext ernal impulses would be financial inclusion and t he ot her key st ones would be compet it ion, consolidat ion and globalisat ion. The regulat ory drivers would be more st ringent regulat ions, essent ially in fair t reat ment t o cust omers, know your cust omer norms and risk management . The int ernal impet us would be provided by the unique human resources opport unit ies creat ed
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Canara Bank Samachar Lehar March 2012 by impending ret irement s, leveraging t echnology t o increase reach, lower cost s and provide improved cust omer service and t o re-orient t he organisat ion t o be cust omer cent ric in all it s manifest at ion. It would require t he complet e involvement of t he t op management and board of banks. Each one of you has a role t o play in t his agenda and st ret ch t o achieve t he object ives t hat would make your organisat ions from good t o great and t ake it t o the next orbit . I wish you all success in t his 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. Assist ance provided by Smt . Theresa Karunakaran and Shri Sanjeev Prakash in preparat ion of t his address is grat efully acknowledged

Moving towards Technology Led Excellence in Banking


Shri Anand Sinha Shri Sambamurt hy, Direct or IDRBT, Execut ive Direct ors of banks, members of facult y from IDRBT, ladies and gent lemen. It gives me immense pleasure t o be delivering t he keynot e address in t oday's workshop 'Beyond Core Banking' and I t hank IDRBT for giving me t he opport unit y. In t oday's t echnologically advanced environment , Core Banking Solut ion (CBS), does not remain an edge anymore, but has become t he basic prerequisit e for any bank. Building on t his, banks need t o move on t o adapt ing higher t echnology in order t o provide bett er product s and upgrade t heir risk management syst ems. As we become global, banks would need t o become t echnologically more sophist icat ed in diverse areas, whet her it is moving t owards adopt ing advanced approaches in Basle II or in upgrading t heir delivery channels for providing bett er cust omer service. Whet her 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-t erm success require simult aneous focus on oft en conflict ing priorit ies: reducing operat ing cost s, driving new sources of revenue and building capit al. Growt h can be achieved t hrough innovat ive cust omer friendly st rat egies t o st em t he reduct ion of t he cust omer base and t o grow deposit s. This all must be accomplished in t he market which is get t ing extremely compet it ive. While t he competit ion is a fact of life and banks need t o be geared up for t he same, t he compet it ion is going t o int ensify in t he coming days, bot h from t radit ional compet it ors (banks) and also from non-bank ent it ies. Though the regulat ory focus is on reducing t he arbit rage, t he current crisis has t aught us t hat t he shadow banking syst em is increasingly becoming an import ant const it uent of t he financial syst em. Banks need t o innovat e and improve t heir efficiency t o remain compet it ive and t he role of t echnology in t his regard is very crit ical. Indian banking indust ry, t oday, is in t he midst of an IT revolution. The Indian Banking frat ernity is adopt ing t he lat est t echnological advances t o address t he t hreat of compet it ion and t o meet cust omer expect ations. A combinat ion of regulat ory and market Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 forces has support ed t he implement at ion of t echnology and aut omat ion in the Indian banking industry. IDRBT has been facilit at ing and cat alyzing t echnological development s in t he banking sect or and I must compliment Shri Sambamurt hy and his t eam at IDRBT for organising t his workshop on t he t heme of 'Beyond Core Banking', which is very t imely. I am sure t he part icipant s of t his workshop would ret urn wit h enriched knowledge of t he various t echnological opport unit ies available t o banks. In my remarks t oday, I would like t o highlight how banks can make concert ed effort s t o enhance t he use of t echnology in t heir init iatives t o ensure efficiency, st abilit y, compet it ion and above all deliver on cust omer service. Before I go t o my main t alk, let me briefly t ouch upon the funct ions performed by IDRBT. Standing tall - contribution of IDRBT The funct ions t hat have been performed by IDRBT in research and product development are commendable. Since it s format ion, IDRBT has played the dual role of a service provider as well as a research facilit at or providing an enabling environment for t est ing the t echnologies t hat have been useful for t he banking indust ry. You may be aware t hat based on the recommendat ions of Ext ernal Expert Review Commit t ee headed by Dr. Rangarajan; t here has been a shift of focus of t he Inst it ut e, t owards conduct ing applied research and experiment al development in t he area of banking t echnology. During the last one year, t he Inst it ut e has released frameworks and handbooks on issues relat ing t o IT Governance, IS Governance and Analyt ical CRM. I am sure, banks would immensely benefit from t hese publicat ions. 'Beyond Core Banking' Beyond Core Banking is the main t heme for t his workshop. At t his juncture, let me pose a few quest ions on t his issue : * Why are we t alking about 'Beyond Core Banking'? * Why now? and * What 's t he way forward? I would att empt t o answer t he second quest ion first , as it is easier. The t ime is now ripe for banks t o look at init iat ives beyond t heir core banking. Banks have adopt ed Core Banking Solut ions which are comprehensive, int egrat ed yet modular, t hat effect ively address t he st rat egic and day-t o-day challenges faced by banks. They provide muchneeded flexibilit y t o innovat e and adapt t o a dynamic environment . So t o speak, banks have reached a cert ain level of mat urit y as far as adopt ion of Core Banking Solut ions is concerned. Isn't it t ime for t hem t o look for st rat egies t hat would assist t hem in moving t o t he next level? Coming to the first question, let us look at why 'Beyond Core Banking'? Core Banking Solut ions are comprehensive in nat ure as far as t ransact ional banking is concerned. But banks would need t o look beyond core banking in order t o st and out from t heir compet it ors, work efficient ly and manage t heir risks bet t er. Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 Banks would need t o look t o avenues 'Beyond Core Banking' t o serve t heir cust omers, devise an appropriat e strat egy t o deal with t he IT t hreat landscape, utilise t he t echnology plat form provided by CRM, analyt ics & big dat a. They may also look t o manage t heir informat ion in an effect ive manner, enhance Cust omer Lifet ime Value (CLV). They need t o innovat e appropriat ely in t erms of product s, services and st rat egies so as t o st and out from t he compet it ion t hat is prevalent t oday. Banks will also need t o align t heir IT and business perspect ives t o fully leverage on t he benefit s of t echnology. Coming to the third question: What's the way forward for the banking sector? The way forward for banks would be t o focus on enhancing their profit abilit y, lowering operat ion cost s, and/ or creat ing great er cust omer loyalt y. In t his cont ext , I would briefly speak on t he areas t hat are engaging t he at t ent ion of banks and banking researchers alike and t hese could be areas t hat t he banks can focus on, in t he next few years. Let me present a few of t hese in t he following paragraphs. Excellence in providing Customer service Good cust omer service is t he heart of banking. The current crisis has brought cust omer cent ralit y t o a sharp focus. While it may not be t he direct lesson from t he crisis, t he import ance of cust omer service in ret aining t he cust omer base wit h a view t o maint aining a st able source of funding is a lesson t hat can be deduced from t he crisis. The wisdom is t hat banks may look t owards adopt ing a 4'C' approach as a guiding principle for evaluat ing their fut ure strat egies t o address the dynamics of cust omer demands. The 4 'C's are - Consolidat ion of services offered by banks, Cust omisat ion of product s and services for cust omers, Convenience of transact ing and Concern for cust omers. Banks may look at bringing about a balance among t he 4 'C's. IT threat landscape - Taking Stock There are hundreds of new online threat s every mont h and they are highly organized and financially mot ivat ed. Threat s have also become more difficult t o det ect and remove, t han ever before. As t echnology has evolved, so t oo has t he nat ure of t he t hreat , and t oday malware forms t he backbone of t he global cybercrime epidemic. The t hreat landscape has evolved dramat ically since t he emergence of t he first virus, and IT securit y is now challenged by thousands of different malicious t ools, wit h malware and spam now driven by self-propagat ing bot net s. The malware t rade t oo, has evolved from somet hing of a prank when it first began, t o a business conduct ed by cybercrime net works expressly for t he purposes of financial gain. The growt h of t he Int ernet and increasing connect ivity has fuelled t he expanding complexit y and reach of t hreat s. From malware t hat first at t acked individual comput ers and t hen individual net works, t o t hreat s t hat t arget ed mult iple and regional net works, t he t hreat landscape now encompasses t he global infrast ruct ure and at t acks are increasingly t arget ed. Zero day t hreat s are a realit y, as cybercriminals are using viruses t o t arget financial inst itut ions through spear phishing and 'denial of service' at t acks amongst ot hers.

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Canara Bank Samachar Lehar March 2012 Count ering t he array of t hreat s in t he modern IT landscape requires a t wo-fold approach. While anti-virus, ant i-spam, int rusion prevention, firewalls and ot her securit y soft ware have a vit al part t o play; t his t echnology simply is no longer enough on it s own. Awareness and educat ion are key in prevent ing users and organisat ions from falling vict im t o cybercrime. We must also underst and t hat t he t hreat landscape now encompasses not only comput ers and networks but also an array of port able devices such as t ablet s and smart phones which increases t he complexity. The more connect ed users become, t he more vulnerable t hey are t o at t acks t hat can affect t he ent ire home or business net work. The realit y is t hat t he Int ernet is not a privat e space anymore and users need t o educat e t hemselves and be more vigilant t o prevent malware and cybercriminals from causing serious reput at ional and financial damage. Mapping the future- CRM and analytics, big data, channel innovation etc. CRM (Customer Relationship Management) Wit h t he growt h of fee-based income and increasing focus on advisory services, t he role of CRM in banks is now more critical and pivot al t han before. Given t he compet itive nat ure of t he banking business t oday, wit h it s int ricat e and diverse demands, nurt uring and deepening cust omer relat ionships is int egral t o any bank's success. Aft er all, sat isfied cust omers are loyal cust omers and t heir ret ent ion is very import ant for any bank. Banks would need t o focus on creat ing a customer cent ric cult ure right from t he ground level st aff t o t he senior execut ives. While t his is oft en easier said t han done, cust omer cent ricit y can be achieved t hrough a strong t op management focus, comprehensive communicat ion and t raining programs t hat t each employees on how t o use CRM applicat ions and the benefit s of doing so, along wit h appropriat e incent ive policies. For a CRM st rat egy t o succeed it must involve cult ural and business changes and it needs t o be a business st rat egy and not a t echnology solut ion. CRM is a cont inuous process - it is a journey, not a dest inat ion. To be successful in t his arena, banks need t o embrace CRM as a philosophy and adopt a st rat egy for managing cust omer relat ionships t hat effect ively address t hree key areas: people, processes and t echnology. Even in t he cont ext of financial st ability, CRM is import ant .

Power of predictive analytics- an untapped potential Anot her issue t hat is evoking int erest among bankers is t he power of analytics. This can enable banks t o get an edge over compet it ors. A few quest ions t hat banks can ask before embarking on using t his t ool could be t he following : * Can consumer behaviour be forecast ? * Can banks predict what t heir cust omers want , how t hey want it , before t hey raise a demand on it ?
Banks can leverage t he power of predict ive analyt ics t o forecast t heir cust omers' behaviour and fost er demand generat ion. Many banks offer similar delivery channels, product s and services t o the market . In t his process, cust omer relat ionships have lost t he
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Canara Bank Samachar Lehar March 2012 "personal t ouch" despit e t he breadt h of "t ouch point s" available t o cust omers from t he t radit ional branch t o "mobile" phone banking. Predict ive analyt ics can bring in competit ive advant age in banking and analyt ics can be t he core t echnology t hat helps banks move from product cent ric t o cust omer cent ric operat ions. It would also enable banks t o leverage and increase t heir Ret urn on Invest ment from subst ant ial invest ment s already made in operat ional, dat a warehouse and business int elligence syst ems. If t hese are all t he advant ages of using predict ive analyt ics then why hasn't it been applied more broadly t o personalize banking operat ions? May be t he dat a is not available or collect ed, for analysis. The component s and models of predict ive analyt ics can easily be embedded in current business and soft ware processes for bank operat ions, risk management and market ing. This new breed of aut omat ed and advanced predict ive and descript ive analyt ical t ools is suit ed for t oday's fast paced business and can be embedded in ent erprise applicat ions. Cust omer int elligence can now be delivered to t he cust omer at t he t ime he is act ually int eracting wit h the bank, t hrough t he delivery channel of choice, wit h consist ent advice based on predict ions derived from ent erprise dat a. Banks may t ap t he granular dat a and use t hese t ools t o price t heir product s appropriat ely.

Channel Innovation This is one area which act s as t he different iat or among compet ing banks. Times cont inue t o be t ough for banks as t hey grapple with low consumer confidence and int ense compet it ion. Moreover, cust omers are flexing t heir muscles by demanding bet t er service and experience from t heir banks and leaving them for anot her when t hey do not measure up t o expect at ions.
The onus of delivery of service rest s almost ent irely wit h t he banking channel. Which is why, channel innovat ion will play a crucial role in the fut ure of banking. It could t ake many forms - a high-t ech branch, a more int elligent ATM, a social media channel, cloud banking or a mobile phone t hat replaces bot h cards and currency, t o name a few. Some of t hese may succeed more t han ot hers, but collect ively t hey will reinvent t he business of ret ail banking. The fut ure of ret ail banking lies wit hin it s channels. Talking about innovat ion, I am reminded of a quot e by Albert Einst ein who said : "I am enough of an art ist t o draw freely upon my imagination. Imaginat ion is more import ant t han knowledge. Knowledge is limit ed. Imaginat ion encircles t he world." To t his, I would add t hat it is imaginat ion t hat drives innovat ion. Big Data-big power These days everyone is t alking about 'Big dat a'. What does big dat a act ually mean, and how does it differ from dat a management ? In an age where informat ion is st ored on many different syst ems, some of which do not "t alk" t o one anot her, t echnology solut ions for Big Dat a must int egrat e different t echnologies, dat a format s and coding st ruct ures including except ion management , error report ing and audit trails. Banks would need Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 sophist icat ed t echnologies t hat can perform business t ransact ion-level logic such as cost allocat ion, revenue dist ribut ion and payments. The best solut ions should be capable of adjust ing t hese business processes rapidly and wit h minimal cost . Information Management Informat ion, as we know it t oday, includes bot h electronic and physical informat ion. The organizat ional st ruct ure of any bank must be capable of managing t his informat ion t hroughout it s lifecycle, regardless of source or format (dat a, paper document s, elect ronic document s, audio, video, et c.) for delivery t hrough multiple channels t hat may include cell phones and web int erfaces. Informat ion management is a corporat e responsibilit y t hat needs t o be addressed and followed from t he t op management t o t he front line workers in any organisat ion. Part of that responsibilit y lies in t raining t he organizat ion t o become familiar wit h t he policies, processes, t echnologies and best pract ices in Informat ion Management . Customer Lifetime Value (CLV) We must underst and t hat t he key t o cult ivating long t erm, highly profit able cust omer relat ionships is in underst anding t he concept of Cust omer Lifet ime Value (CLV). Technically speaking, CLV is defined as t he net present value of fut ure cash flows of t he long-t erm cust omer relationship. The CLV focuses on t he cust omer as t he influencer of bank's profit abilit y. The CLV gives t he measurement ability t o evaluat e t he new cust omers, not exist ing cust omers, who are to be t arget ed and t o be at tract ed t hrough market ing campaigns. It also gives t he limit up t o which t he bank can spend for acquiring t he new cust omers based on t heir CLV. There is a huge opport unit y for banks t o capt ure and enhance t he CLV. Making the right moves IT and Business Alignment- Shall the twain ever meet? The concern wit h all indust ries including banks is t he "alignment of IT with t he business." Over t he past quart er cent ury, much has changed t echnologically. Yet , in t erms of t he gap bet ween IT and t he business, precious lit t le is any different t oday. How can we change t his? Before comment ing on t his aspect , let us underst and what is t he alignment t hat we are t alking about ? Successful IT and business alignment ent ails more t han execut ive level communicat ion and st rat egy t ranslat ion. Banks need t o achieve alignment by est ablishing a set of well-planned process improvement programs t hat syst emat ically address obst acles and go beyond execut ive level conversat ion t o permeat e t he ent ire IT organizat ion and it s cult ure. IT must be agile t o support t he business needs. But t he business side has a responsibilit y t oo. There needs t o be a balance in t he relationship bet ween business and IT. IT must shake off t he view t hat it is an end in it self and business must realise t hat it is not best placed t o t ake t echnology based decisions on it s own. When t here is alignment, business relies on IT, t he enabler, inst ead of facing off against IT, t he resource drainer. In such circumst ances, t he relat ionship bet ween IT and business will be a st rong driver of innovat ion. Banks would also require personnel wit h good insight s in IT and domain Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 knowledge so as t o st rike t his balance. And t his is where you as part of t he management of banks can play a cat alyt ic role bet ween depart ment s. Here I am reminded of Bill Gat es who had once said "The advance of t echnology is based on making it fit in so t hat you don't really even not ice it , so it 's part of everyday life." Before I conclude, I would like t o briefly t ouch upon t hree IT init iat ives t aken by t he Reserve Bank in t he last one year which have a significant impact on t he IT arena of banks. Report of the RBI Working Group on Cyber Security The Working Group on Informat ion Securit y, Elect ronic Banking, Technology Risk Management and Cyber Frauds ( Chair: Shri G. Gopalakrishna, Execut ive Direct or, RBI) has examined various issues arising out of t he use of Informat ion Technology in banks and made it s recommendat ions in nine broad areas of IT Governance, Informat ion Securit y, IS Audit, IT Operat ions, IT Services Out sourcing, Cyber Fraud, Business Cont inuity Planning, Cust omer Awareness programmes and Legal aspect s. The final guidelines in t he areas as ment ioned above have been issued and banks have been advised t o implement t he same in a t ime bound manner based on cert ain crit eria. Given t he fact t he guidelines are expect ed to fundament ally enhance safet y, securit y, efficiency in banking processes, t he progress in implement at ion of t he recommendat ions is required t o be monit ored by t he t op management of banks on an ongoing basis and a review of t he implement at ion st at us may be put up t o t he Board of Direct ors of t he Bank at quart erly int ervals. Automated data flow (ADF) Reserve Bank collect s various Ret urns from t he ent it ies regulat ed by it . Reserve Bank has already put in place an online ret urns filing syst em t hrough which the banks can submit t heir ret urns. XBRL t axonomies have been adopt ed for some of t he ret urns. Wit h the increased need of informat ion for decision making, t he quality of dat a submit t ed by t he banks requires improvement which can be achieved if t hese ret urns are compiled by t he banks direct ly from t heir IT syst ems. Towards t his, Reserve Bank is aiming for complet e aut omat ion of t he ret urns by banks. This would ensure t hat t he dat a submission is done in a timely manner and accurat ely wit hout any manual int ervent ion. Banks would need t o t ake a consolidat ed view of t he XBRL and ADF project s as t hey are meant t o complement each ot her. IT Vision for RBI and banks IT Vision Document of RBI 2011-2017, set s priorities for commercial banks t o move forward from t heir core banking solut ions t o enhanced use of IT in areas like MIS, regulat ory report ing, overall risk management , financial inclusion and cust omer relat ionship management. It also dwells on possible operat ional risks arising out of adopt ing t echnology in t he banking sect or which could affect financial st abilit y and emphasises t he need for int ernal controls, risk mit igat ion syst ems, fraud det ect ion / prevent ion and business cont inuit y plans. Although banks have deployed t echnology for t ransact ion processing, analyt ical processing by banks is st ill in a nascent st age. The Vision document urges banks t o work t owards reaping benefit s of t echnology in t erms of cost reduct ion of small value t ransact ions, improved cust omer services and effect ive flow of Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 informat ion wit hin t he banks and t o t he regulat or. The Vision Document also focuses on t he leveraging of benefit s of adopt ing more energy efficient devices and archit ect ure for t angible savings in energy cost s and helping t o build 'green' credentials t o IT. Scripting Success-Getting started To conclude, I would like t o say t hat cert ain principles t oget her wit h st rong commit t ed leadership, can deliver st ep-change business out comes and measurable economic benefit for banks and help banks 'get st art ed'. Broadly t hese would encompass creat ing a commit t ed t ransformat ion program wit h Board level account abilit y, having a unified vision for a component driven business and preparat ion of suit able operat ing models, managing risk mit igat ion t echniques using proven approaches and met hodology, creating a roadmap by business and IT leadership with incent ives for shared success, opt imising t he infrast ruct ure that leverages modernized archit ecture and applicat ions and ensure professional project management ; and delivering capabilit ies based on a scalable engagement model. Not wit hst anding what has been said in t he preceding paragraphs, I would say t hat t echnology alone will not solve issues or creat e advant ages. Execut ives need t o underst and t hat t rue t ransformat ion is not solely driven by t echnology, but by business st rat egies and decisions. Technology needs t o be complet ely int egrat ed wit hin t he organisat ion in order t o secure t he acceptance of t he final users. In t his manner, t echnology can lead t he way t owards excellence in banking. I wish t o close by quot ing St ewart Brand, the famous writ er who said "Once a new t echnology rolls over you, if you're not part of the st eamroller, you're part of t he road." I wish successful deliberat ions in t his workshop. Thank you. -------------------------------------* Inaugural Address by Mr. Anand Sinha, Deput y Governor, Reserve Bank of India at t he IDRBT workshop for Execut ive Direct ors of Commercial Banks on February 14, 2012 at Mumbai. Input s provided by Ms. Nikhila Koduri are grat efully acknowledged.

Governance Deficit and Financial Crisis


Shri G. Padmanabhan It is always a pleasure t o ret urn t o one's home st at e, t hat t oo if t he st at e is God's own count ry. Thank you for invit ing me t o address t his august gat hering of t he cream of professionals and management expert s of t he st at e under t he common banner of Kerala Management Associat ion. I was however slight ly apprehensive of what I should t alk at a gat hering like t his. This apprehension st art ed bordering worry when I saw t he list of illust rious speakers who have addressed t his forum in t he past . We are living in int erest ing t imes. These days, if any official from t he financial sect or arrives on any forum like t his, t he audience expect s nat urally t o hear about t he present st at us of t he global financial crisis t hat is yet t o run it s full course. So I t oo chose t o speak on t his subject . But wit h so much having been said and writt en about the crisis, my dilemma was t o select issues relevant t o a group of management professionals. To me t he most virt uous meaning of management is good governance. Good governance more oft en than not , Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 reduces t he risks from an uncert ain environment around us. If one is t o review t he event s relat ed t o t he financial crisis, what emerges encompasses import ant management and governance principles. These are also import ant lessons t hat we perhaps need t o keep in mind as t he st at e discusses t he "Kerala 2030" or "Emerging Kerala" t hemes. The Global Financial Crisis t hat began in 2008 has caused large erosion in asset value, failure of financial firms, cont ract ion of out put and slowdown in growt h, unemployment , and fiscal burden on count ries, world-wide. Even as t he world was hesit at ingly recovering from t he crisis t hrough coordinat ed act ions of government s around t he world, t he sovereign debt problem in t he peripheral eurozone count ries surfaced and now threat ens t o derail t he recovery and has t he pot ent ial t o plunge t he world int o a fresh crisis. Amidst t he sufferings brought on by t he crisis, t he only posit ive feat ure is t hat it provides all of us wit h an opport unit y t o draw the necessary lessons t o be wiser and t o put in place inst it ut ional mechanisms t hat can avert t he possibilit y of a similar crisis in future. A crisis aft er all is a laborat ory for policy making where t he received wisdom are put t o t est , old paradigms assessed and new paradigms shaped. Thus, as has been said, a crisis is not wast ed if it leaves us wiser. Post t he Global Financial crisis, policy makers, regulat ors and academics have put t heir heads t oget her t o mull on t he fault lines t hat precipit at ed t he crisis and what remedial st eps need t o be t aken. The ext ensive reports from official inst it utions and influent ial t hink-t anks as well as t he legislat ive and regulat ory reforms t hat are in various st ages of concept ion and implement at ion in different jurisdict ions are well known and it is not necessary for me t o repeat t hem here. What I int end t o discuss is somet hing more fundament al - t he issue of governance, which provides t he framework for all forms of human organizat ions and infirmit ies which in t urn can lead t o disast rous consequences. Specifically, analysis of recent crises, as also of t hose fresh in memory such as t he Lat in American crisis or t he East Asian crisis, invariably point t o governance failures eit her at a macro level or a micro level. In a great deal of academic and policy discourse, good governance has been generally linked t o economic growth and development . The growt h and product ivit y in developed nat ions have oft en been said t o have had t heir root s in instit ut ions and legal syst ems of good governance. And as a corollary, t he lack of development and crises of t he emerging market count ries have oft en been ascribed t o t he prevalence of oligarchies, crony capit alism, corruption and generally t he absence of good governance. Thus good governance has not only been advocat ed as a necessary condit ion for economic development but for t he developing count ries, it has been promot ed as following t he inst it ut ional pract ices of t he developed countries. But t he crisis clearly shows t hat even t he rich developed count ries, wit h t heir much covet ed inst it ut ions can have governance failures t hat result in crisis of much graver proport ion t han the failure of a corporat ion here or t here, and bring on great misery on t heir own people and t o t he rest of t he world. What is governance all about ? The subject has spawned report s, legislat ions and a large volume of research papers. A google search on 'corporat e governance' yielded 33, 700, 000 result s and Google scholar, 8,99,000 art icles! You will find complex legal-sounding definit ions t o mat hemat ical equation ridden research papers discussing corporat e Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 governance. But what is t he cent ral idea behind corporat e or any ot her type of governance? I would put it in one word - 'confidence'. Governance is about commanding confidence of all t hose we do business wit h, all t hose upon whom we depend. Confidence t hat promises shall be kept , contract s honoured and assurances delivered upon. If your shareholders have confidence in you, t hey will not be shy of put t ing money in your vent ure. If you enjoy t he confidence of your lenders, you will not be st arved of capit al. If your employees have confidence in you, you can at t ract t alent and perhaps would not face at t rit ion. We can go on. What creat es confidence, t hen? If it is an individual, charact er evokes confidence. If it is an organizat ion - a corporat ion, a st at e or even an NGO - good governance is what creat es, and sust ains t hat confidence. If it is about creat ing and sust aining confidence, we can list three cornerst ones for confidence in t he edifice of good governance. First , t here must be t ot al t ransparency. Informat ion asymmet ry is at t he root of all governance problems and t herefore, access t o complet e informat ion for all st akeholders is a sine qua non. If a company you have put your money in declares a loss, you will be disappoint ed; but if it fudges it s account t o mislead you int o believing everyt hing was fine, you will surely lose your confidence in t hat company when you discover t he t rut h, as you ult imat ely will. Second, t he t ension bet ween t empt at ion of immediat e gain and long-t erm survival must be resolved. Last ly, t here must be a set of checks and balances t o achieve t he first t wo. The salient feat ures of any good governance would t herefore require cert ain basic element s of checks and cont rols t o be enshrined and followed met iculously in t he day-t o-day funct ioning of any financial firm or for t hat mat t er by any ent ity which is answerable t o a number of st akeholders. These element s are not complex or esot eric by any stret ch of imagination. They are governed by, pure and simple common sense, easy t o underst and, but require a good bit of persuasion, perseverance and pat ience t o be followed meticulously. But oft en t he sheer simplicity of t hese principles makes t he implement er quest ion t heir very need and dilut es t he essence of implement at ion. Financial Crisis Let me now t urn t o t he recent crises, and recount some of t he most common and rat her obvious element s of governance t hat unfortunat ely have received scant att ent ion. The seeds of t he 2008 financial crisis were sown by t he easy and super-accommodat ive monet ary policy pract iced by the US for a prot ract ed period of t ime in t he early part of the last decade, which in conjunct ion wit h cert ain ot her fact ors led t o a desperat e search for yields and gave rise t o t he problem of adverse select ion. The adverse select ion problem is not hing new in t he lending industry and is usually resolved by careful screening and appraisal of t he credit proposal. There is possibly no financial firm in t he world which does not swear by tight lending st andards in order t o prot ect t he qualit y of it s balance sheet asset s. But t his element ary principle was given a syst emat ic go-by by t he US mort gage lenders in pursuit of easy ret urns. It is not t hat t he lenders were unaware of t he borrowers' credit wort hiness. Indeed, t hese loans were labelled 'sub-prime'. All of you are aware of t he onerous document at ion process t hat precedes a loan sanct ion. The US mort gage indust ry had even devised a class of loans called 'Alt-A' loans, where in disregard of all norms of lending, t he document at ion requirement was dilut ed. This aggravat ed t he Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 adverse select ion problem, because not having t o produce any proof and document at ion, t he borrowers were inclined t o misrepresent or skew their incomes and asset s t o obt ain a larger loan than merit ed. How could such a folly be commit t ed? The ent ire mort gage act ivity was based on t he housing sect or boom and bubble in house prices. Rising house prices appeared lucrat ive t o t he lenders and t he borrowers alike. Those rising house prices creat ed posit ive home equit y for t he early ent rant s who merrily drew upon it , not for adding t o t he asset value but t o indulge in consumpt ion expendit ure as if t he house propert y was an ATM machine! But t here have been bubbles in real est at e prices in US and elsewhere in t he past which ult imat ely burst . Neit her the lenders nor t he borrowers reckoned t hat t he housing boom of t he early half of t he last decade could also end one day and behaved as if t he t here is only one way for t he housing prices t o go. This reflect s t he t riumph of obsession wit h immediat e gains and an ut t er disregard for long run sust ainability! The problem was compounded by t he fact that t he originat ors of t he mort gages were t aking t hem out of t heir books and selling it t o not gullible, but extremely knowledgeable invest ors on t he st rengt h of rat ings accorded by the rat ing agencies. Now, t ake t he case of credit rat ing agencies. Any issuer of a debt inst rument cannot access t he market wit hout first obt aining a rating from an agency. The rating is supposed t o serve t he invest or but is obt ained and paid for by issuer. Is t his not a clear conflict of int erest ? What is t here t o prevent an agency from issuing an unfairly favourable rat ing against a suit able payment by t he issuer? The argument in favour of t he arrangement traditionally has been t hat t he agency has considerable reput at ional capit al at st ake and t herefore would not sell pernicious rat ings. But t his argument has limit at ions. Reput at ional risk will act as a det errent if t he invest ors have some way of punishing poor rat ing agency performance or if t he long run downside due t o loss of reput ation out weighs t he short-t erm gains. Yet as t he crisis has shown, t here was universal reliance on credit rat ings wit hout any mechanism t o address t he associat ed infirmit ies. RBI has always been st ressing t he need for due diligence and met iculous appraisal mechanisms (even if rat ings are available) for t he banks. That the US mort gage invest ors were solely led by t he rat ings in their invest ment decisions was a major reason for t he accumulat ion of t oxic asset s, which event ually paved the way for crisis. The governance failure in t his case is nothing but t he failure of simple due diligence mechanism in asset book build up. Credit Default Swaps (CDS) played a significant role in proliferat ion of t he crisis. CDS, in economic essence, is an insurance against credit risk. The CDS seller buys t he credit risk of any single or pool of credit inst rument and compensat es t he CDS buyer for any credit event t hat reduces t he value of t he inst rument . The beaut y of t he CDS market is t hat t he prot ect ion seller could be anybody! As you are aware, banks have elaborat e processes pre-sanct ion screening and appraisal, post sanct ion monit oring, document at ion et c. - t o prot ect themselves against credit event . What processes does a CDS seller have? The CDS is supposed work on t he act uarial principle. But what dat a goes int o comput at ion of t he act uarial t able? Knowing t hat credit event s depend upon the business cycle, would it not be necessary t o exercise care if you are on t he ascending phase? Now, if a CDS has been bought for a credit exposure t o an ent ity, it is t ransformed t o a credit exposure on CDS seller and not t he ent it y. If the CDS seller happens t o be an inst it ut ion like t he AIG, rat ed Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 AAA by an approved credit rat ing agency, t here is lit t le residual credit risk on the books of t he CDS buyer. This frees t he amount of capit al held against pot ent ial losses due t o credit event s, which can t hen be leveraged t o acquire more lucrat ive (and risky) asset s-Ad infinit um. The Federal Reserve, in 1996, permit t ed banks t o use CDS t o reduce capit al reserves. Following t his decision, t he CDS market boomed and by 2007 t he overall CDS market reached a not ional value of $ 62 t rillion. However, problem arises here because given t he act ive t rading in CDS it was somet imes difficult t o ident ify t he act ual count erpart y when t he credit event occurs. Also some count erpart ies like AIG developed massive exposures t o CDS which raised concerns about t heir abilit y t o meet t heir obligat ions in t imes of crisis. The run up t o t he financial crisis saw a hey-day for financial innovat ion t hat saw the creat ion and exuberant trading of a large number of complex inst rument s support ed by opaque inst it ut ions. The transact ions were most ly bilat eral, over-t he-count er wit h no common knowledge of who is having how much of which asset . All financial inst rument s bear risk and when t hey are ripped and parceled int o new product s. Hence, it is import ant t o underst and what happens t o t he underlying risk and where it may be residing at any t ime. Financial market s cannot funct ion unless part icipant s know each ot her's risk profile. When complex instrument s are traded in an opaque market , t he problem is furt her aggravat ed. Financial dist resses require regulat ory int ervent ion; the least t hat the regulat or needs t o know t o int ervene effect ively is who is affect ed by how much. Yet , t he crisis revealed t hat not only t he market part icipant s had no knowledge about t heir count erpart y's exposure t o t he t oxic asset s, even t he regulat or did not ! Fortuit ously, DTCC which had creat ed a plat form for informat ion on CDS for providing post t rade services t o it s report ing client s could provide t he informat ion t o t he regulat ors and save t he day. The Dealing Rooms have been t he epicent er of several governance disast ers across t he world. Surprise of surprises, t his possibilit y has always been recognized and t he pract ices t hat govern t he dealing room are codified, audit -t railed and audit ed wit h unfailing regularity. Yet t hey remain t he most vulnerable t o deviat ions. It has been said that t he small derivat ive t rading unit of AIG in London wit h just 400 employees, virt ually brought down t his mammot h inst it ution of over 100,000 employees in 130 count ries. Besides, rogue dealers of financial inst it ut ions have virt ually ripped t he balance sheet s apart and yet , t he senior managers and t he heads of t reasuries pay only lip service t o t he separat ion of front office from ot her sequent ial funct ions, mandat ory leave requirement s, broker limit s for each dealers, and what not. Even in t he post crisis period, when banks and inst it ut ions would have been in a st at e of high alert, a rogue t rader brought on a 2.3 billion loss t o UBS t hat cost t he CEO his job. If we sit back and analyze why t hese governance syst ems fail, we will come across only a few major issues: t he perfunct ory nat ure of compliance, an incredible build-up of t rust amongst individuals and oft en, t heir act ivities. If t he financial crisis of 2008 could spread it s t ent acles so easily across t he world, t he major issue t hat cryst allizes is t he impunit y wit h which the treasuries of even major financial inst itut ions functioned and t he amazing level of complacency t hat set in over a period of t ime. This nat urally leads me t o t he issue of compensat ion. It has been alleged t hat t he nonlinear compensat ion arrangement s in vogue in most hedge funds, merchant banks, and Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 ot her asset managers, where a fund manager's rat e of bonus increases wit h t he ret urn he earns was a harbinger of t he crisis because it incent ivized t hem t o t ake on more risk. There was an adage in t he good old days that lawyers, bankers and doct ors should not be solicit ing client s. There is a lot of sense in it , because of t he perverse social incent ives such an arrangement would creat e. The blogosphere is full of dismay and const ernat ion at t he exponent ial rise in t he share of financial sect or and t he out sized compensat ions. There is also a view t hat imposit ion of rest rict ions on compensat ion may have unint ended consequences such as migrat ion of financial act ivities t o offshore cent ers. While t he issue is unresolved, t he adverse incent ives and long run implicat ions of compensat ion packages need t o be kept in view. Anot her fert ile ground for t he governance failure has been t he complex and somet imes, creat ive account ing pract ices employed t o hide simple misdemeanors. Financial report ing is at t he heart of corporat e governance - It is t he most import ant communicat ion bet ween t he corporat ion and it s st akeholders. Yet , errant corporat ions have used, oft en wit h act ive support of audit ors and account ant s, various st rat agems t o misrepresent t he act ual financial condit ion of t he company, t hus st alling t he st akeholders from t aking t imely act ion. Maxwell Communicat ions in UK and Enron in US are cases in point . The Sat yam debacle back home is a classic case where an individual-cent ric t op management could hide it s misdemeanors for an ext ended period of t ime, t aking a few audit firms as t heir accomplices paying a suit able price t o buy t heir honest y. The European Debt Problem No discussion of crises or governance t oday can exclude t he sovereign debt problem of t he peripheral Eurozone countries. If we t ake a careful look at t he present sovereign debt crisis roiling t he Eurozone, it should not t ake us t oo long t o realize t hat t his crisis also owes it s origins t o governance failures. The only point of difference bet ween t his and t he 2008 crisis is t hat t he ent it ies which are at the root of t he present crisis are Sovereign Government s and not the usual suspect s which are 'profit -seeking' corporat ions. How did Greece manage t o get int o t he Eurozone? Was t here any fudging of figures? How did t he ot hers permit t his? Again, t here was a clear element of acquiescence on t he part of core euro members t o enlarge t he circle of Eurozone at t he cost of non-compliance wit h t he t enet s of Maast richt Treaty. How did t he crisis surface? By admission of t he Greek Government t hat t he fiscal st at istics it had earlier present ed may not be t rue and t he true posit ion could be significant ly worse. The European debt crisis has prompt ed an int erest ing discussion on governance and sovereign debt . There seems t o be int erplay bet ween governance performance and t he debt level. Bet t er governed count ries can afford higher levels of debt . Conversely, badly governed count ries can t olerat e only lower levels of debt . This hypot hesis also helps t o part ly explain t he ost ensible paradox of why count ries wit h higher debt levels can carry t he burden and why count ries wit h lower debt levels may face a market reluct ant t o invest in it s liabilit y. This view seems t o suggest t hat mere financial and economic measures may not be sufficient t o address t he problems count ries like Greece face, if not accompanied by governance reforms. This is also why even aft er t he Greek parliament passed t he aust erit y Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 measures as a precondit ion for furt her assist ance, t he market is reluct ant t o accept it as a wat ershed and displays a great deal of skept icism. Governance and regulations Regulat ions are a necessary adjunct t o corporat e governance. The processes associat ed wit h corporat e governance are int ernal t o t he organizat ion. Regulat ions are designed t o serve t he same end, but are ext ernal t o t he organizat ion and seek t o provide a nudge t o enforce t he governance process. While regulat ion of non-financial firms is st ruct ured around t he basic t hemes of disclosure, invest or prot ect ion and management of bankrupt cy, regulat ion of financial inst it utions, part icularly banks, are usually much more st ringent because of t he grave consequences of t heir failure. Prior t o t he onset of the crisis, t here was a crit ical int olerance for regulat ion by t he proponent s of market -based economic syst ems. This was reflect ed in t he lax regulat ory framework governing t he financial market s and inst it ut ions. It is now widely acknowledged that , weak regulat ions were responsible for t he sub-prime crisis and effort s are under way t o make regulat ions and supervision more comprehensive and robust . Merely having a st rong regulat ory and supervisory framework is not enough. It is also equally import ant as t o how t he rules and regulat ions are enforced. Manipulat ion of t he due process by incumbent oligarchs or crony capit alist s t o t heir advant age has been a recurrent t heme in t he cont ext of developing or emerging market economies. But t he financial crisis has shown t hat t his can happen even in t he US. It is well known t hat t he five major invest ment banks - Goldman Sachs, Lehman Brot hers, Merrill Lynch, Bear St erns and Morgan St anley - commanded t remendous clout wit h t he policy makers, but t hey are also suspect ed of t weaking t he regulat ory apparat us t o their advant age. As report ed in New York Times, t hese five "big guys"- led by Hank Paulson Jr of Goldman Sachs, who would t ake over as t he Treasury Secret ary t wo years lat er - met t he five commissioners of t he SEC in t he aft ernoon of April 28, 2004 in t he basement hearing room of t he SEC office in New York t o discuss t he issue of freeing of capit al from t heir brokerage arms t hat could be leveraged t o buy even more complex inst rument s. Aft er 55 minut es of discussions t he demand was acceded t o. As Dani Kaufmann lament s, it is a case of 'legal corrupt ion'. No bribe has been paid, no laws broken, yet t he effect is the same. An Indian perspective Now, let us look at t he Indian perspect ive. The Indian financial sect or may not be as sophist icat ed as t hose of t he developed count ries. There are barriers t o ent ry t o several market segment s imposed by t he compulsions of capit al account rest rict ions. The range of product s is narrow and t heir liquidit y limit ed. Our approach t o further development of t he market s is marked by caut ious gradualism. But as far as governance and regulat ion are concerned, we can perhaps boast of a resilient syst em alive t o t he pot ent ial problems we have discussed. Let me recount some of t he measures t hat we have t aken in support. a. Wit h a view t o promoting transparency in t he OTC derivat ives market , we had mandat ed, as early as in 2007, a t ransact ion based report ing syst em for the only active class of int erest rat e derivat ives, t he int erest rat e swaps and disseminat ion of informat ion based on such report ing. We are in t he process of t aking t he init iat ive furt her by ext ending t he report ing requirement s t o all foreign exchange and int erest rat e derivat ives. Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 b. To ensure t hat t here is no laxit y in credit appraisal in case of securit isat ion, we have mandat ed t hat t he originat or of a loan asset has t o hold it in it s books for at least one year before securit isat ion and t hat he has t o ret ain t he equit y t ranche of t he securities creat ed. c. We have int roduced not only anonymous, order mat ching t rading syst em for t rading in government securit ies t o improve t ransparency, we have also int roduced central count erpart y based guarant eed set t lement for government securit ies and foreign exchange t ransact ions. d. We have st ipulat ed t hat rat ings of ext ernal agencies can complement and not subst it ut e t he int ernal appraisal processes for sanct ion of loans by banks. e. Int roduct ion of credit default swaps has been subject ed t o purchase of prot ect ion only by t he holders of t he reference obligat ion and sale only by regulat ed ent ities. f. As early as 2005, we have used risk weight s and provisioning norms for influencing t he flow of funds t o t he housing sect or and moderat ing excessive growt h. Conclusion In conclusion, let me summarize what we have discussed. Good governance is a necessary condit ion for not only economic growt h and development but for an easy and comfort able societ y where we can go about our business - confident and unruffled. Good governance is of ut most import ance for t he financial sect or but needs t o be complement ed by alert and efficacious regulat ion and supervision so as t o build and maint ain confidence of t he savers and t he invest ors. We, as a nation, have begun our journey and t he t ryst wit h our dest iny and we need cont inued confidence of all our st akeholders t o reach our dest inat ion. Our responsibilit y t owards good governance cannot be overemphasized. In t his endeavour needless t o ment ion t hat members of t his august audience are t he principal act ors. Thank you for your patience. --------------------------------Address by G. Padmanabhan, Execut ive Direct or, at t he Conference of t he Kerala Management Associat ion at Kochi on February 17, 2012. The assist ance provided by G. Mahalingam and Himansu Mohanty is grat efully acknowledged.

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Report of the Nair Committee on Priority Sector Lending


Constitution of the Committee The Reserve Bank had const it ut ed t he Commit t ee under t he chairmanship of Shri. M. V. Nair on August 25, 2011 pursuant t o t he announcement made in t he Monet ary Policy St at ement 2011-12. The Commit t ee was t o re-examine t he exist ing classificat ion and suggest revised guidelines wit h regard t o priorit y sect or lending and relat ed issues. The Commit t ee had 10 Members from diverse fields and Dr. Deepali Pant Joshi, CGM-inCharge, Rural Planning and Credit Depart ment , Reserve Bank of India was it s Member Secret ary. The Commit t ee was given a broad-based t erms of reference. Major Recommendations of the Committee are By adopt ing a wide and exhaustive consult ation process, t he Commit t ee ident ified key issues facing diverse segment s and sect ions of societ y; examined t hem t horoughly and made recommendat ions t hat would support achieving t he object ives of direct ed lending. 1. The t arget of domest ic scheduled commercial banks for lending t o priorit y sect or may be ret ained at 40 per cent of adjust ed net bank credit (ANBC) or credit equivalent of off-balance sheet exposure (CEOBE), whichever is higher. 2. The sect or 'agricult ure and allied act ivit ies' may be a composit e sect or wit hin priorit y sect or, by doing away wit h dist inct ion bet ween direct and indirect agricult ure. The t arget s for agricult ure and allied act ivit ies may be 18 per cent of ANBC or CEOBE, whichever is higher. 3. A sub t arget for small and marginal farmers wit hin agricult ure and allied act ivit ies is recommended, equivalent t o 9 per cent of ANBC or CEOBE, whichever is higher t o be achieved in st ages by 2015-16. 4. The MSE sect or may cont inue t o be under priorit y sect or. Wit hin MSE sect or, a sub t arget for micro ent erprises is recommended equivalent t o 7 per cent of ANBC or CEOBE, whichever is higher, t o be achieved in st ages by 2013-14. 5. Banks may be encouraged t o ensure t hat the number of out st anding beneficiary account s under 'small and marginal farmers' and micro ent erprises' each regist er a minimum annual growt h rat e of 15 per cent. 6. The loans t o housing and educat ion may cont inue t o be under priority sect or. Loans for const ruct ion / purchase of one dwelling unit per individual up t o `.25 lakh; loans up t o `.2 lakh in rural and semi urban areas and up t o `.5 lakh in ot her cent res for repair of damaged dwelling unit s may be grant ed under priorit y sect or. 7. In order t o encourage const ruct ion of dwelling unit s for Economically Weaker Sect ions (EWS) and Low Income Groups (LIG), housing loans grant ed t o t hese individuals may be included in Weaker Sect ions Cat egory. 8. All loans t o women under priority sect or may also be count ed under loans t o weaker sect ions. 9. Limit under priority sect or for loans for st udies in India may be increased t o `.15 lakh and `.25 lakh in case of st udies abroad, from exist ing limit of `.10 lakh and `.20 lakh, respect ively. 10. The priority sect or t arget for foreign banks may be increased t o 40 per cent of ANBC or CEOBE, whichever is higher wit h sub-t arget s of 15 per cent for export s and 15 per cent for MSE sect or, within which 7 per cent may be earmarked for micro ent erprises. Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 11. The commit t ee recommends allowing non-t radable priorit y sect or lending certificat es (PSLCs) on pilot basis wit h domest ic scheduled commercial banks, foreign banks and regional rural banks as market players. 12. Bank loans t o non-bank financial int ermediaries for on-lending t o specified segment s may be allowed t o be reckoned for classificat ion under priorit y sect or, up t o a maximum of 5 per cent of ANBC or CEOBE, whichever is higher, subject t o cert ain due diligence and document at ion st andards. 13. The present syst em of report -based reporting has cert ain limit at ions and it may be improved t hrough dat a-based report ing. There is a need t o address t he issues in dat a report ing like pre-defined paramet ers, reference dat e, periodicit y, unit of report ing, et c. The recommendat ions of t he Committ ee are expect ed t o have significant impact in addressing issue of direct ing lending t o t hose who have lack of access t o credit and t o t hose sect ors which generat e large employment . It is hoped t hat t hese recommendat ions would promot e count ry's development al and inclusive goals.

Interview of RBI Governor, Dr. D Subbarao by Alex Frangos of The Wall Street J ournal
(Originally published on WSJ Online on February 13, 2012) Reserve Bank of India Gov. Duvvuri Subbarao sat down wit h The Wall St reet Journal t o t alk about his effort s t o rest art India's growt h engine and t o fight persist ent inflat ion. Speaking from t he 18t h floor of t he Reserve Bank headquart ers overlooking Mumbai, Mr. Subbaro t ouched on a range of issues, including t he RBI's effort s t o st abilize t he plunging rupee in lat e 2011, his calls for cut s t o government spending, and how it was difficult t o increase int erest rat es several t imes over t he object ion of a panel of advisors. Follows is an edit ed t ranscript of t he conversat ion : WSJ : What is your monet ary policy st ance right now, are you easing credit condit ions or are you in neut ral? SUBBARAO : It 's difficult t o say what is neutral. But we give guidance in our quart erly policy st at ement s in Oct ober and again in January, which is t o say t hat t he t ight ening has peaked, and from here onwards, it 's t hat we've got t o come down, t hat we have t o st art easing. There was some quest ion as whet her the CRR (cash reserve rat io) cut we had done in t he January policy was a signal of easing. It depends on how you int erpret t hat . But hist orically t he Reserve Bank has viewed t he CRR as a monet ary policy inst rument wit h of course liquidity dimensions. So it was bot h t o signal t hat t he int erest rat e cycle has peaked and also t o infuse liquidit y. WSJ : So was it easing or not ? SUBBARAO : I would say it was easing t o t he ext ent we had eased t he liquidit y sit uat ion and we viewed t he CRR as a monet ary policy inst rument . WSJ : You got applause for holding t he government 's feet t o fire on t he growt h in t he fiscal deficit in your January policy st at ement , saying such spending is fueling inflat ion.
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Canara Bank Samachar Lehar March 2012 You have t alked about t his issue in t he past , but never so point edly. Crit ics say you should have done so earlier. What 's your response? SUBBARAO : If you see our monet ary policy st at ement s over t he past two years, we've consist ent ly drawn at t ent ion t o t he fiscal deficit concerns having recognized t hat some st imulus was of course necessary as part of t he crisis management . However we t hought t hat t his was an appropriat e t ime t his t ime around t o call a more point ed at t ent ion t o t his, because t his year, the current fiscal year, t he fiscal deficit has breached t he init ial budget est imat e and t here area lot of expendit ure demands piling up as we see from t he newspapers. So we t hought it import ant t o call at t ent ion t o t he inflat ionary dimensions of fiscal deficit , inasmuch as we have combat ing inflat ion over t he past two years. To summarize, we did call at t ention t o our concerns t o fiscal deficit but did so more point edly t his t ime around because it was a more appropriat e and more opport une t ime t o do t hat . WSJ : Government s generally are not known t o be disciplined on spending in elect ion years and t here are several large st at e elect ions in India t his year. What if t hey don't heed your advice on spending because of elect ion year pressures. SUBBARAO : Not just me, t here are lot s of ot her people t alking about t he negat ive repercussions of fiscal deficit s. And I t hink t hese negat ive repercussions will show up more point edly if t he government does not make credible and sizeable fiscal adjust ment . For one, t he bat tle against inflation will become that more difficult . Second privat e credit will get crowded out . There are lot s of people who say fiscal deficit s in India have not crowded out privat e credit in t he past . That may well be t rue t o some ext ent because fiscal deficit s have ballooned wit h privat e credit demand was low. But now is t ime when we want privat e credit demand t o pick up and supply t o flow. So t hat would be hurt . And t hird, t he t win deficit s of current account and fiscal deficit s feed on each ot her. The maneuverabilit y or t he room for not making fiscal adjust ment s is very limit ed if not nonexist ent . WSJ : What specific t hings would do t hink are advisable adjust ment s t o make. Readers see t he t erm fiscal consolidat ion, but what does t hat mean exact ly? SUBBARAO : The only discret ionary expendit ure t hey can make in t he short t erm is on subsidies. And t here is I believe quit e a st rong case for making adjust ment s on subsidies even from t he ant i-poverty perspect ive. That said, I'd like t o comment on some principles apart from specifics. The finance minist er will of course come out wit h a budget est imat e for fiscal deficit for next year in t he budget . Beyond t hat I t hink he should indicat e a roadmap, a medium t erm roadmap for fiscal deficit , which t hey've done in t he past and t here's a big probability he will do t hat . I think he should back t hat up wit h a credible plan of how it 's going t o be achieved. Second, I t hink we also must rely also on expendit ure compression in addit ion t o t ax increases t o build t he fiscal adjust ment . And third, t here must be some focus on t he qualit y of fiscal adjust ment , because if you are chasing just t he number, it 's possible t hat you would prune out product ive expendit ure and ret ain unproductive expenditure. WSJ : You ment ioned some subsidy cut s would be good for ant i-povert y programs. Which ones? SUBBARAO : If t here is subsidy in LPG (liquefied pet roleum gas), it 's a subsidy t hat 's not going t o t he poor. It 's a subsidy t hat 's going t o people who can afford LPG, which is cert ainly not the poor. Power subsidies are given by st at e government s according t o Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 people who have land, whereas the landless, who are poorer, don't get any subsidy at all. There's got t o be some at t ent ion paid t o the povert y impact of subsidies and t arget ing subsidies wit h an ant i-poverty focus. WSJ : It seems all t he part ies in t he st at e elect ion in Ut t ar Pradesh are campaigning t o give away free power. That sort of t hing would seem t o make it hard t o cut spending in t he coming year. SUBBARAO : Yes. Somet imes t here is concern of how much of a democracy t ax we are paying. WSJ : You said in last policy st at ement you would be const rained from lowering rat es unless t here's credible fiscal consolidat ion. The budget is present ed March 16, whereas your meet ing is March 15. For a March 15 meet ing, is a rat e cut st ill an opt ion given any plan for fiscal consolidat ion would be present ed a day lat er. SUBBARAO : We didn't have a precise dat e when we said that . But I can't really speculat e on what t his off t he t able on t he t able for t he next policy review. Theoret ically all opt ions are on t he t able. WSJ : Some crit ics say you weren't aggressive enough wit h rat e increases in t he beginning of t he cycle and some say you were t oo aggressive in t he end and some say bot h. Which crit icism are you more comfort able wit h? SUBBARAO : Crit icism is part of t he game when you are making public policy. It's legit imat e t hat people crit icize. And I'm comfort able t hat t he crit icism comes from bot h sides, which must mean we are at least part ly right , t hat some people think we are right . But I must ent er some explanat ion of our unrolling of our tight ening over t he past t wo years. One crit icism as you ment ioned t hat it was back loaded, t hat we were sleeping at t he wheel and t hen woke up. That 's not t he case. The baby st ep approach t hat it 's come t o be called, was just ified on t hree grounds. First , inflat ion was st emming at t hat t ime from supply shocks. There were demand pressures but t hey were very insipient at t hat t ime. Second, we had t o support recovery. Around t he world t here was st ill t he dept h of recession and here at home we had t o support recovery. And rat es had come t o hist orically low levels as part of t he crisis management and we couldn't raise t hem abrupt ly, so it had t o be a calibrat ed process. So even wit h t he benefit of hindsight, I believe we calibrat ed t he policy st ance quit e well. The last point I want t o make is t here's no count erfact ual. It 's not clear t hat inflat ion would not have been much higher if we had not act ed. I'd say we are quit e comfort able wit h our crit icism, but I believe t hat our baby st ep approach for much of 2010 was just ified. WSJ : Wasn't it your responsibilit y t o raise rat es earlier in order for t he government t o realize spending was a problem earlier? Your job is price st ability and it doesn't mat t er what t he cause is, you need t o t ackle it. SUBBARAO : You cert ainly need t o t ackle it but you can't do public policy t o t each a lesson or t o spit e someone. You've got t o coordinat e wit h t he government and t here was a fiscal st imulus as part of t he crisis and it cert ainly would t ake t ime t o wind that down. We were quit e sensit ive t o t hat. I don't t hink it would have been appropriat e for t he Reserve Bank t o raise rat es regardless of what government was doing just t o t ell them t hat t he ball was in t heir court . I don't think that would have been appropriat e. Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 WSJ : People in market are saying measures to maint ain liquidit y in t he financial syst em such as your OMO (open market operat ions) and CRR (cash reserve rat io) cut are t he only t hing support ing government bond yields at t hese levels. SUBBARAO : That 's one perspect ive. But you must also recognize t hat we had said t hat we'd like liquidit y t o be wit hin one 1% of NDTL (A measure of liquidit y). The last few mont hs, it 's been way above t hat . From a purely liquidit y management perspect ive, we were act ing by t he guidelines we had given t o t he market . The quest ion is whet her t his is support ing government borrowing. When we int roduced liquidit y for it t o be within our t arget ed range, no dest inat ion for t hat money is indicat ed. It's for t he banks t o choose t o lend t o t he government or t he privat e sect or. It's not as if we were t elling banks t o lend t o t he government . WSJ : India even at 7% has GDP growt h is a very good number globally. But t here's a lot of disillusionment in t he last year or t wo from companies. How do you see India port rayed and does it feel different from 2007-2008. Has t here been cooling of ent husiasm for t he India economic st ory? SUBBARAO : Cert ainly there is a feeling t hat the economy has slowed down and t hat it was a slowdown t hat could have been avoided t hat we need not have come down t o 7% if bot h t he ext ernal world as well as domest ic policy sit uat ion had been bett er. First , of course is t he monet ary t ight ening and t he high int erest rat es, but t hat's just one fact or. There's been a lot of uncert aint y about policy in Delhi and get t ing project s going at t he field level in t erms of land, power, all t he permissions, all t he clearances you need t o get , which are not so much Delhi focused but at t he field level and cert ainly about the slowdown in second generation reforms. WSJ : Any change in economic out look given the reduced jitt ers from Europe, t he aust erity plan passed in Greece overnight , more hope about t he U.S. economy? SUBBARAO : Somet hing happened as we t urned t he calendar from 2011 t o 2012. The fears of imminent collapse t wo mont hs before Christ mas have cert ainly waned. In Europe t he LTRO performed bet t er even t han t he ECB hoped, I t hink. Then t here is t he fiscal compact . There is st ill concerns about short t erm funding and st ill concern about whet her t he banks will be able t o raise the capit al. There's less of a concern about an event shock, but st ill concern about process shocks as we go along and Greece and ot her count ries have t o roll over t heir debt . And t he firewalls t hey want ed t o build have t o some ext ent succeeded in showing t hat Greece is different from ot her 'PIIGS' count ries. That's cert ainly had a posit ive impact on invest or sent iment here. Alt hough our exposure t o Europe is not dominant , it 's cert ainly significant . To t he extent t hat Europe seems t o be less unst able t oday, it does help domest ic invest or sent iment here t oo and we've seen t hat on all t he market indices. WSJ : What makes India so vulnerable t o global financial market s, as we saw last fall wit h rupee falling during the worst of t he euro mess. What can you do and what can India do t o make sure t he next t ime t he effect is less severe? SUBBARAO : All emerging economy currencies have depreciat ed in t he pre-Christ mas mont hs, but Indian rupee depreciat ed more t han ot her currencies. All of you wrot e and as we know t he rupee was worst performing currency in t he world or what ever. What Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 explains t hat is t hat we are a current account deficit economy. Sout h Africa t oo is current account deficit . Those emerging economies t hat had a surplus or a small deficit were less hit t han countries t hat have a sizeable deficit like India, and t hat deficit was growing. So t he rupee depreciat ion was a result of ext ernal flows pract ically t hinning out and driven by t he dynamics of t he current account deficit . What can t he reserve bank do, we've in fact done what we could do which was t o curb speculat ion in t he market and t o encourage capit al flows of a more st able nat ure but t here are limit s t o t hat . All t he t hings we've done t o raise deregulat e int erest rat es on NRI (non-resident Indian) rupee deposit s, on raising t he limit s on FII (foreign invest or) exposure t o equity and debt market s and curbing speculat ion. But event ually we need t o make t he balance of payment s more robust to inspire confidence. There it's quit e clear. We need t o diversify our export dest inat ions and product mix. As far as import s are concerned, we need t o reduce t he dependence on oil import s and one way t o do t hat is t o deregulat e pet roleum product prices. Gold import s of course have increased part ly as a reflect ion of a safe haven. We need t o provide ot her safe havens. We need t o at t ract more st able flows. FDI for example and finally we must wit hin t he RBI encourage, if not pressurize our corporat es t o hedge t heir foreign exchange exposures. They don't do t hat adequat ely. They do cost benefit calculat ions, if t he rupee is not moving rapidly, t hey calculat e t he cost of hedging is higher t han t he risk t hey t ake by not t aking. But as happened in t he pre-Christ mas mont hs, it can cert ainly overshoot , so we'd like corproat es t o hedge more. But not proscribe t hat , we want t o leave it t o t he banks and t he corporat es. WSJ : When you lift ed foreign invest or quot as and non-resident deposit rat es last year, it brought in capit al and helped t he rupee. Was it somet hing you were going t o do anyway? At your core, do you want India's market s t o be more open or do you like t he prot ect ion t hat exist s? SUBBARAO : I'd like our capit al account t o be more open and t hese are measures we should be t aken. Of course we t ook t hem under some sort of pressure so t he int erpret at ion t hat you made is quit e appropriat e that maybe t hese are crisis driven measures, but cert ainly t hey were on our road map of liberalizing furt her. WSJ : So were you t aking advant age of a crisis? SUBBARAO : In a way it was t imed as such, but even ot herwise we would have done t hem somet ime. WSJ : Do you see currency volat ilit y cont inuing? SUBBARAO : I cannot really speculat e on how the currency will move. That 's dependant on a number of fact ors. But cert ainly I'd like t o see less volat ility in t he market in t he currency movement and less of a need for t he reserve bank t o int ervene so t hat t he exchange rat e is det ermined by forces of supply and demand. And yes, when we are a stronger economy, when capit al flows are of a st able nat ure are coming, t he exchange rat e will be subject t o less volat ilit y. And again, t hat will be an appropriat e plat form for t aking furt her capit al account reforms.
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Canara Bank Samachar Lehar March 2012 WSJ : Wit h t he rupee a bit more st able around 49, is now a good time t o build reserves? SUBBARAO, I can't speculat e t hat but we had used some reserves cert ainly. WSJ : Given t he t hirst globally for emerging market debt , why not open India even more t o foreign invest ors. SUBBARAO : Cert ainly we would like more FII (foreign inst it utional invest ors) in corporat e debt but you must recognize t hat even t he exist ing limit is not used up. There is somet hing out t here we have t o fix about t he appet it e for t he corporat e bond market . It's not a restrict ion placed on t he capit al account front . As far as FII on government debt , yes cert ainly, we have expanded t hat quit e rapidly in t he last t hree or four years, but there is need for going a bit more caut iously, because as we've seen during t he crisis, count ries wit h large sovereign debt exposure t o foreigners suffered dest abilizing volat ility. So we need t o balance t he concerns of st abilit y wit h concerns of less expensive foreign flows. WSJ : When you t ake over in 2008 did you make a conscious decision t o t ake a more hand's off approach when it comes t o foreign exchange int ervent ions? SUBBARAO : That 's a judgment out siders will have t o make. By inclinat ion, I believe t hat market s should be allowed t o funct ion and t hat we should minimize our int ervent ion and t hat's good for building t he resilience of t he economy. WSJ : But it does help on t he monet ary policy side, as a flexible exchange rat e makes your int erest rat e policy more pot ent ? SUBBARAO : Cert ainly. That 's very fresh in my mind. I gave a speech last week on t he impossible t rinit y, so t o t he ext ent you have a freely float ing exchange rat e you have great er, more independent monet ary policy. WSJ : Are you sat isfied wit h t he int ervent ion you undert ook last year on the foreign exchange market ? SUBBARAO : Yes. I would t hink so, especially on speculat ion. If you don't int ervene, t he speculat ive forces could be self reinforcing which is t hat export ers would defer bringing t heir receipt s in and import ers would buy forwards. That's a self-reinforcing feedback loop. To t he ext ent t hat we curbed speculat ion and showed t hat det erminat ion, it cert ainly helped. WSJ : So 54 rupees t o t he dollar was a level you weren't comfort able? SUBBARAO : I can't really comment on a specific exchange rat e. We were looking at t he first derivat ive, not t he st ock figure, but the rate at which it was going. WSJ : Are t hese foreign exchange measures t emporary, do t hey fit in you capit al account liberalizat ion t raject ory? SUBBARAO : Some of t hem do fit in with our capit al account t hinking. Some of t he measures t o curb speculat ion, t hey are permanent unt il removed, but t hat 's not saying much. We'd have t o t ake a view on speculat ive t endencies and if we believe we are robust enough and t here's no scope for speculat ion we will roll t hem back, but t hat 's no indicat ion t hat rollback is on t he radar screen.

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Canara Bank Samachar Lehar March 2012 WSJ : Oil prices remain elevat ed, a major concern for you, as ment ioned in t he lat est policy st at ement . How will you deal wit h t hat if t hey persist ? SUBBARAO : Oil prices are a big fact or and largely beyond our cont rol and are very complex economic and geopolit ical fact ors t hat drive oil prices. Just looking at t he world sit uat ion, t he U.S. growth sit uation is quit e 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 t oday. Evident ly t here is somet hing going on t here that is keeping pressures up. Part ly it 's liquidit y. Even t he LTRO [t he European Cent ral Bank's long-t erm 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 t hen t here are t he polit ical fact ors, which is Iran. If Iran is out side t he world pool t here could be price pressures. If Saudi Arabia because of fiscal concerns, it s commit ment t o ext end fiscal support s t o other Arab count ries, t o meet t hat commit ment they might want t o keep oil prices at a cert ain level. There's economic fact ors, t here's polit ical fact ors t here are market fact ors, all of t hem t hat det ermine oil prices which are largely out of cont rol. Inasmuch as we import 80% of our oil and more t han a t hird of our import s, so oil prices are a big fact or for inflat ion management , for t he fiscal deficit and for macroeconomic st abilit y for t he count ry. WSJ : Does t hat make India's relat ionship wit h Iran and t his deal t o pay for oil with rupees, how crit ical is t hat ? Do you t alk about the cent ral government about t his? SUBBARAO : We are conforming t o t he U.N. sanct ions as far as dealings wit h 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 t o find a way t o pay for it and our effort has been t o cont inue t o make our payment s. WSJ : How do you see growth for t he 2013 fiscal year, st art ing in March 2012? SUBBARAO : We expect growt h t o be higher in 2013 t han in 2012, part ly because at some point in time we might st art easing the int erest rat e cycle. Part ly because t he ext ernal sit uat ion will be more st able. The world recovery will pick up. And I'm hoping t hat a confluence of fact ors, including t he sent iment fact or t hat is inhibit ing invest ment will have run out , and t hat posit ive sent iment will revive. Animal spirit s will come back int o play. WSJ : What about inflat ion. Why do you feel confident enough t o t alk so openly about cut t ing rat es? SUBBARAO : I t hink inflat ion should st art coming down. The decline we've seen in November and December is largely t o food prices, wit hin food t o veget able prices. But we've also seen demand pressures easing. We've seen a decline in non-food manufact ured product inflation, which is our measure of core inflat ion, which I believe peaked some mont hs ago. We've seen pricing power of corporat es coming down. And growth it self, if it moderat es t o 7%, which means bot h invest ment 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 rat e your performance as cent ral bank governor? SUBBARAO : I t hink it 's inappropriat e for me t o make a mid-career judgment on my career but it 's for ot hers t o make a judgment . I've had enormous challenges, very difficult sit uat ions, but t he reserve bank is a great inst it ut ions, I've had t remendous int ellect ual support and advice which I hope has st eered t he count ry t hrough challenges. Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 WSJ : Speaking of t hat advice, t he t echnical advisory commit t ee, you haven't seen eye-t oeye wit h t hem on the pace of rat e increases, why are you not agreeing? SUBBARAO : We have enormous respect for what t he TAC has t o say and for t he last , let 's say t he second half of calendar 2011, when we cont inued t o raise rat es, many of our TAC members had expressed concerns about inflat ion, but had advised that we must pause but wit hout any explanat ion about how inflat ion would come down unless we had act ed. We weight ed t heir advice against our own judgment and act ed as we did. I do hope we get some credit for putt ing it out in t he public domain. WSJ : How difficult was it t o make t hose decisions wit h t he commit t ee so close t o you disagreeing? SUBBARAO : It 's difficult . It 's cert ainly somet hing you don't do lightheart edly. You do think t wice before going against t heir advice. WSJ : You've ment ioned being more open, t alking t o t he press and analyst s and publishing minut es. What 's your inspirat ion for t hat and why do you t hink it 's bet t er for t he deliberat ions t o be more open rat her t han guarded? SUBBARAO : I was wondering whet her it 's more t o do wit h my leadership or my personalit y style. Communicat ing with t he market and communicating openly does help get t he appropriat e feedback and get t ing a realit y check on what you are doing. There are of course cert ain t imes and cert ain t hings you have t o keep confident ial and be unpredict able, but we try t o minimize t hat . I expect t hat you'll be roughly right as Keynes said, and precisely wrong. WSJ : Can you t alk about the healt h of t he banking syst em. Some see a deleveraging process going on, higher non-performing loans and t he fiscal sit uat ion on t he government side makes it difficult t o recapit alize t he st at e owned banks. How concerned are you about t he banks? SUBBARAO : NPLs (Non-performing loans) have grown and have grown quit e rapidly in the second half of 2011 calendar year, and t hat 's part ly t o be expect ed when the economy is not growing that fast and when rest ructuring had been done during t he crisis. The incidence of impaired asset s out of rest ructuring would cert ainly be higher than the overall sample. But we've done st ress t est s, and t hey show t hat our banks will remain profit able and will have no capit al concerns even under fairly significant st ress in t erms of t he some of t he rest ruct ured asset s t urning int o non performing asset s. St ill t hat 's a concern, and it 's part of our regulat ion and supervision process and looking int o t hat and advising banks t o improve on t heir port folio situat ion. WSJ : People get very worked up about growt h being as low as 6.9%. Hist orically t hat 's high, but on flipside, t hat level is such an elast ic economy t here's so much cat ching up t o do, anyt hing less t han 5% is practically recessionary. Where's your level? How good a number is 7%? SUBBARAO : For India t o come down from 9% t o 7% is as difficult an adjust ment t o make as for t he U.S. t o come down from 2% t o 0%, when your growth rat e falls rapidly. What is our pot ential growt h rat e, non-inflat ionary st able growt h rat e? We said before t he crisis it was 8.5%. Aft er t he crisis, some st udies showed it was about 8%. But now we've seen inflat ion, even when the economy was growing at 7.5%, indicat ing t he non-inflat ionary growt h rat e is about 7% or so. But t hat is not dest iny and t hat we are not locked int o a 7% growt h rat e. We should cert ainly accelerat e t hat , and it 's cert ainly possible t o do t hat , but for t hat , supply responses must come. Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 WSJ : If you could wave your magic wand on t he Indian economy, what st ruct ural impediment in t he Indian economy would you want fixed, improved FDI, balance of payment s, invest ment growth? SUBBARAO : I t hink public finance reform. All t he t hings you ment ioned are equally import ant and unlikely t o work in isolat ion. But I'd t hink public finance reform at bot h the cent ral and st at e government s would go a long way in providing a plat form for all t he ot her reforms t o t ake off. WSJ : What about reforming t he RBI. It's a very big organizat ion. You manage int erest rat e policy and are in charge of issuing government debt, which some see as a conflict of int erest as your incent ives might be t o keep borrowing cost s low for t he government when inflat ion argues for higher rat es. Should that change? SUBBARAO : I believe not . The RBI has a much wider mandat e than most ot her cent ral banks. We are t he monet ary aut horit y and issuer of currency, but we are t he regulat or and supervisor of banks, financial market s and nonbanks, t he ext ernal sect or we are responsible for, and we have a huge development mandat e. That's served t he count ry quit e well. In part icular about t he debt management , as to whet her t hat should be hived off from t he RBI. The case for t hat was t o made on t he ground that t here was a conflict of int erest for t he Reserve Bank t o do debt management , because it int erferes wit h monet ary policy. Second, t hat the fiscal deficit was on t he way down, t herefore t here is possibilit y for an independent debt management office. I t hink bot h t hose argument s have lost part or most of t heir validit y. I believe t here is a quit e a bit of synergy for t he RBI t o be doing t he debt management , because raising resources of t he size t he government does in India, is not just a mat t er or raising resources, it has implicat ions for int erest rat es, for liquidit y for credit flow and for t he macro economic sit uat ion. Given t hat fiscal deficit s and government borrowing are so high, I t hink t here is quit e a bit of synergy bet ween a cent ral policy which is charge of monet ary policy which is also doing debt management ? WSJ : What 's t he synergy, t hat you not issue debt ? SUBBARAO : No. That 's not an opt ion. That we can ensure, t hat as much as t he government has t o borrow, t hat t here is sufficient liquidit y so t he privat e sect or crowding out is minimized. We can ensure t hat the int erest rat es are st ill manageable and compet it ive for t he privat e sect or. And also recognize t hat t he conflict of int erest angle is somewhat overplayed. When 70% of t he banking sect or is wit h t he government , t here is a conflict of int erest if debt management is done by an office t hat has some affiliat ion wit h t he government . I don't think we will use our funct ion as t he debt manager t o put pressure on t he government about t he fiscal deficit . There are ot her avenues t o pressure and t o argue our case. As far as debt management is concerned, we want t o be efficient debt managers. WSJ : How much does China, as India's largest trading partner, weigh on your economic analysis? SUBBARAO : Perhaps we reckon wit h t hat possibly less t han we should be doing. Our trade wit h China is growing, our links wit h China are growing and we've allowed corporat es t o
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Canara Bank Samachar Lehar March 2012 raise debt in yuan. I t hink Chinese economic management , part icularly t heir economic policies should be part of our reckoning more than it is now. WSJ : You were recent ly reappoint ed for anot her t wo year t erm, running out in Sept ember 2013. Would you like t o serve aft er t hat ? SUBBARAO : No. --------------------The Transcript can also be viewed at http:/ / online.wsj.com/ article/ SB10001424052970204795304577221253451295374.html

Agriculture Agenda for Odisha - Issues & Challenges


Shri. Harun R. Khan It is a mat t er of great pleasure t o participat e in t his very import ant Agriculture Conclave organized by t he Reserve Bank of India wit h act ive support from t he Odisha University of Agricult ure & Technology (OUAT), t he National Bank for Agricult ure & Rural Development (NABARD) and t he Government of Odisha. As you would be aware, bot h the Reserve Bank of India, Bhubaneswar Office and t he OUAT are celebrat ing t heir Golden Jubilee year - fift y years of commit ment t o t he development of t he economy of t he St at e, in general, and agricult ure, in part icular. Commit ment of t he Reserve Bank t owards providing impet us t o t he agriculture sect or of t he St at e can be judged from t he fact t hat way back in 1962, we st art ed our operat ions in Bhubaneswar wit h the lone depart ment - t he Agriculture Credit Depart ment . The same year also saw t he birt h of OUAT at Bhubaneswar following t he recommendat ions of t he Planning Commission which had suggest ed set t ing up of dedicat ed educat ion cent res for agriculture in t he country. Two great instit ut ions are working t owards t he same goal wit h able support of t he NABARD and t he St at e Government . This conclave is a great example of coming t oget her of all t he st akeholders, such as, farmers, farmers' organizat ions, researchers, banks, Reserve Bank, NABARD, NGOs and government depart ment s / agencies for t he common cause of agricult ure development of Odisha. It is perhaps t ime t o reassess our st rat egies, policies and perspect ives for cont inuing t he moment um of growt h in agricult ure in t he St at e and I am sure t his Conclave will provide us t he requisit e plat form t o deliberat e on issues and challenges and also draw concret e act ion plan for t he fut ure. There is no doubt t hat rural India has t o be an int egral part of t he development and t he t ransformat ion process. Consequent ly, agriculture policy formulat ion has t o remain at the cent re of t he development al agenda and inclusive growt h st rat egy of t he count ry. In my present at ion t oday, I int end t o highlight the role of Reserve Bank of India in t he agricult ure sect or, t he concerns on development of agricult ure, recent t rends in economic growt h and development of agricult ure in Odisha, out line some of t he issues and challenges of t he agricult ure sect or in t he St ate in a framework of SWOT analysis and end wit h some t hought s on challenges t hat lie ahead. A. Role of Reserve Bank in agriculture sector for inclusive growth As t he central bank of t he count ry, t he concerns of Reserve Bank has always been t o maint ain price st ability and ensuring availabilit y of credit for t he product ive requirement s of t he economy. Unlike many ot her Cent ral Banks, since it s incept ion, provision of credit Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 and facilit ies t o t he agricult ure sect or has been one of t he major object ives of t he Reserve Bank of India. This was very apt ly echoed by our first Prime Minist er Pt. Jawahar Lal Nehru who had emphasized t he cent rality of agricult ure in our economy when he said everyt hing else can wait but not agriculture. In pursuit of t he object ive of inclusive growt h st rat egy, the Reserve Bank has st epped up it s effort s t o promot e financial inclusion in recent years by increasing t he penetrat ion of t he formal financial sect or. It is crit ical t o increase t he coverage of formal finance in rural sect or, part icularly in agricult ure, in order t o ward off t he financial vulnerabilit ies and risks arising from t he sourcing finance t hough informal means from money lenders and ot her similar ent it ies. The Reserve Bank has been t aking special init iat ives for ext ending t he outreach of banking facilit ies through branch banking and also t hrough host of alt ernat e models. Thus, t he financial inclusion drive is part icularly significant for t he St at e like Odisha for achieving inclusive growt h object ives as more t han 60 per cent of t he t ot al work force direct ly or indirect ly engaged in agricult ure where it s cont ribut ion t o growt h is declining due t o various reasons. Credit availabilit y should be t imely and adequat e. It is import ant t o not e that finance is a crit ical input which can command all ot her resources required for farming. Therefore, t he convent ional approach of grant ing crop loans wherein farmers approach t he banks will not suffice. Bankers will have t o play an act ive role in support ing t he farmers in several ways, just like t hey did during the heydays of t he Green Revolut ion. In fact , one of t he major object ives of nat ionalisat ion of banks in 1969 was channelising t he productive credit t o agricult ure sect or. It is not merely the rat e of int erest t hat matt ers but equally import ant is t he issue of number of t imes a farmer is required t o come t o t he bank and t he complexit ies of document at ion. While branch banking will continue, Business Facilit at ors (BFs) and Business Correspondent s (BCs) have t o be ut ilized increasingly t o generat e increment al business. Reserve Bank has been emphasizing t hat t he banks need t o increasingly use ICT t ools t o increase t heir out reach reduces t ransact ion cost s and provides built -in safeguards in regard t o t he KYC and t he due diligence relat ed issues. Simplificat ion of t he document at ion / procedure and relat ed public services like digit ization of land records, elect ronic search and lien facilit y would cont ribut e t o hasslefree delivery of rural financial services. Credit Bureaus will also have t o come up t o provide credit hist ory of t he borrowers and, t hereby, facilit at e efficient due diligence of t he client s. In fact providing holistic financial services covering credit , savings, insurance and remit t ance on a sust ainable basis by t he formal as well as semi-formal financial inst it ut ions has assumed crit ical import ance for business growt h and profit ability of t hese inst it ut ions and economic advancement of t he t arget client ele. In short , rural banking is likely t o see a lot of act ion and change in t he days t o come. It is also import ant t o not e t hat besides financial services, host of compliment ary policies and resources are necessary for sust ainable development of t he agricult ural sect or and t he farmers under Credit Plus approach. B. Recent Trends in Growth of Odisha All India Perspective Given t he large scale dependence of t he populat ion on t he agricult ure sect or, Odisha remains primarily an agrarian economy. The Net St at e Domest ic Product (NSDP) of Odisha account ed for around 2.3 per cent of t he all-India net domest ic product (NDP) during 2010-112. Over t he five year period 2005-06 t o 2009-10, t he NSDP growt h in Odisha Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 increased t o 7.9 per cent vis-a-vis 6.1 per cent in t he preceding five years. The growt h was mainly led by st rong services sect or growth along wit h support from agricult ure sect or. During 2010-11, NSDP growt h declined sharply t o 2.2 per cent , recording t he lowest growt h amongst all t he St at es in t hat year, and was in cont rast t o t he t rend in t he allIndia NDP growt h (Table 1). Unlike at t he all-India level, in t he case of Odisha, t he share of agricult ure sect or is higher t han t hat of t he indust rial sect or in NSDP. Table 1 Economic Growth - Odisha vis-a-vis India Growth Rates Share in NSDP 200520052000-01 2000-01 06 to 06 to Sector to 2009- 2010- to 2009- 2010200920092004-05 10 11 2004-05 10 11 10 10 (Avg)* (Avg)* (Avg) (Avg) Agricult ure 3.5 3.9 9.7 0.1 29.7 22.4 21.1 20.6 and Allied (1.3) (2.9) (0.4) (6.5) (21.8) (17.3) (15.2) (15.0) Indust ry 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 Not e : Figures in bracket s denot e growt h & shares of different sect ors in NDP at t he all India level. * : Dat a for Odisha for 2000-01 t o 2004-05 is old base (1999-2000). Source : Cent ral St at ist ics Office.

Regional perspective From t he regional perspect ive, t he NSDP of Odisha grew at fast er pace t han t hat of t he ot her East ern St at es as a whole in 2009-10 mainly on account of accelerat ed growth in agricult ure and services sect ors. In t erms of share t o NSDP, t he posit ion of t he Odisha as compared t o the East ern St at es as a whole and all-India level was higher in t he case of agricult ure and indust ry, while it was lower in the case of services sect or (Table 2). Table 2 Sectoral Growth and Shares in 2009-10 (per cent ) Growth Rate of NSDP Share in NSDP Agriculture Agriculture & Allied Industry Services NSDP & Allied Industry Services Activities Activities Odisha 9.7 -2.6 11.6 8.5 21.1 17.3 61.7
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Canara Bank Samachar Lehar March 2012 East ern 2.7 1.2 11.8 8.4 20.4 12.5 St at es* All India 0.4 7.7 10.0 8.1 15.2 16.5 - NDP Source : Cent ral St at ist ics Office. *The East ern St at es consist of Odisha, Bihar, West Bengal & Jharkhand. 67.1 68.3

C. Concerns on development of agriculture Global context Today, agricult ure is a cause of global concern in t he cont ext of (a) price volat ilit y wit h a rising trend, especially of agricult ural commodit ies, (b) growing concerns for food securit y and result ant t rade rest rict ions, (c) global economic condit ions in t he recent past , (d) t he forecast ed rat e of reduct ion of growt h of agricult ural land over t he next two decades, (e) increasing mismat ches bet ween supply of agricult ural product s for food, feed & fuel in relat ion t o growing demand and (f) t he climat ic changes which are exert ing pressures on agricult ural product ion. Thus, enhancing agricult ure product ion and product ivit y have emerged as a global challenge and t his is more severe for low income and developing count ries.

Indian context India, wit h 2.4 per cent of t he world's geographical area, is t he largest producer of pulses, t ea, and milk and second largest producer of fruit s, veget ables, wheat , rice, groundnut and sugarcane in t he world but support s about 16.2 per cent of t he world's populat ion. Coupled wit h small scale land holdings and deep root ed poverty in rural areas, t he magnit ude and dimensions of challenges for agricult ure policy-makers have increased manifold. In t he cont ext of 2 - 3 per cent growt h in t he agricult ure sect or in t he last 15 years (2.5 per cent in the 9t h Five Year Plan, 2.4 percent in t he 10t h Five Year Plan and around 3.2 per cent in t he 11t h Five Year Plan), t he t arget of 4 per cent growt h in agricult ure set for t he 12t h Five Year Plan underscores t he import ance of agricult ure t o t he economy of t he country.
Our Prime Minist er Dr. Manmohan Singh had very apt ly ident ified four key deficit s afflict ing Indian agricult ure, namely, Knowledge Deficit , Infrast ruct ure Deficit , Public Invest ment and Credit Deficit and Market Economy Deficit . The declining contribut ion of Indian agricult ure has been at t ribut ed t o various fact ors including st agnat ion in yield levels, limit ed introduction of new variet ies of seeds and crops, lack of t echnological breakt hrough for product ivit y increase in t he rain-fed areas, absence of effect ive risk mit igant s for price, product ion and personal risks for t he agricult ural sect or, et c. Another plausible reason is t he decelerat ion in public and privat e sect or invest ment part icularly in agricult ure alt hough in recent t ime, gross capit al format ion in t he sect or has increased. This decline is one of t he main fact ors for st agnat ion in agricult ural product ion, and t hereby poverty in rural areas. Low level of value addit ion and insufficient focus on agroprocessing t oget her wit h inadequat e marketing linkages, particularly for the small and marginal farmers, have also cont ribut ed t o t he declining cont ribut ion. Many st udies have also highlight ed t hat fragment ation of land, low t echnological input s, unsust ainable wat er management and resource utilizat ion, rising pressure of population on land, land Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 degradat ion alongwith low level of mechanizat ion, fert ilizer consumption, et c. are some of t he crit ical causes of concern for t he agriculture sect or of India.

Agriculture in Odisha Though t he agricult ure sect or of Odisha cont ribut es only around 20 percent t owards St at e Gross Domest ic Product (GSDP), it provides employment and sust enance, direct ly or indirect ly, t o more t han 60 percent of t he t ot al workforce of t he St at e. In t his sense, t he agricult ure sect or is st ill t he mainst ay of the economy of Odisha. According t o t he Economic Survey 2010-11 of Odisha, despit e wide annual variat ions in it s growt h, t he agricult ure sect or has grown at an average annual rat e of 4.8 per cent in t he first t hree years of t he 11t h Five Year Plan.
The real per capit a income of Odisha was 24,356 in 2010-11 which was around 68 per cent of All-India real per capit a income of 35,917. According t o t he 64t h round of NSSO, t he mont hly per capit a consumer expenditure (MPCE)3 for rural and urban Odisha is below t he respect ive nat ional averages. The Engel's rat io (which measures t he share of food expendit ure in t ot al expendit ure and has been widely used as an indicat or of t he st andard of living) for Odisha, bot h in rural and urban areas, is generally higher t han t he all-India level. In t he food and non-food consumpt ion behaviour, an average Indian spends more t han an average person in Odisha. According t o t he lat est India Human Development report , t he ranking of Odisha remained as t he second lowest among all t he Indian St at es for a period 1999-00 t o 2007-08. In short , t he above paramet ers pinpoint t hat the St at e of Odisha has been lagging behind t he nat ional economy and highlight s t he necessit y of achieving higher growt h on a sust ainable manner across t he sect ors part icularly t he agriculture sect or in order t o uplift t he societ y from underdevelopment and povert y. Though t he contribution of agriculture t o NSDP has declined, t he percent age of workforce engaged in agricult ure has remained somewhat unchanged. This implies t hat (a) t here has been an overcrowding in agriculture wit hout any percept ible increase in product ion and (b) t here has been an increase in disguised unemployment or underemployment in t he agriculture sect or wit h zero or near zero marginal product ivit y of agricult ural labour.

Agriculture production in Odisha Odisha is an agrarian st at e with 70 per cent of t he populat ion of t he St at e dependent on agricult ure. The St at e has about 64.09 lakh hect ares of cult ivable area out of a t ot al geographical area of 155.71 lakh hect ares, of which 60.18 lakh hect ares is t he net area sown. As ment ioned earlier, agricult ure cont ribut es about 20 per cent of t he Net St at e Domest ic Product of t he St at e (Table 3). Table 3 Percentage Share of Agriculture NSDP of Odisha vis-a-vis all India NDP 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Items / Sectors Odisha Agricult ure & allied 25.5 25.2 22.8 22.0 20.8 21.1 20.6 act ivities
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Canara Bank Samachar Lehar March 2012 of which : Agricult ure Forest ry & logging Fishing

79.5 79.5 79.2 79.8 79.2 81.4 15.0 14.9 15.1 14.6 14.9 13.4 5.6 5.6 5.6 5.6 5.9 5.2 India Agricult ure & allied 19.9 19.1 18.1 17.5 16.4 15.2 act ivities of which : Agricult ure 84.0 84.3 84.3 84.8 84.4 84.2 Forest ry & logging 11.5 11.2 11.1 10.6 10.9 11.2 Fishing 4.5 4.5 4.6 4.6 4.7 4.6 Sources : 1. Central St at ist ical Organisat ion, Government of India 2. Economic Survey 2010-11, Government of Odisha The performance of t wo major crops of t he St at e are briefly summarized below.

81.3 13.3 5.5 15.0

84.7 10.8 4.5

Rice Wit h 6.9 million t onnes of rice, t he St at e st ood fift h in rice product ion during 2011-12. This const it ut ed 6.7 per cent of t he t ot al product ion of 102.7 million t onnes in t he 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 t he St at e showed t hat though product ion of t he crop has increased in absolut e t erms over the years, it s share at all-India level has declined in recent years. This can be possibly att ribut ed t o higher growt h of product ion of rice in ot her part s of t he count ry. In recent years, area and yield of rice in t he St at e has lagged behind t he allIndia 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 M ajor Crops : India and Odisha (per cent ) Share in All India Growth Rate 2011-12 State / India 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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Canara Bank Samachar Lehar March 2012 All India 100 100 100 100 100 Oilseeds Odisha 1.2 0.6 1.1 0.7 1.2 All India 100 100 100 100 100 Sugarcane Odisha 0.4 0.2 0.4 0.4 0.2 All India 100 100 100 100 100 Cotton Odisha 0.5 0.5 0.5 0.7 0.8 All India 100 100 100 100 100 Jute & mesta Odisha 0.5 0.4 0.3 0.4 2.0 All India 100 100 100 100 100 A : Area; P : Product ion; Y : Yield. Source : Minist ry of Agricult ure, Government of India. 100 0.6 100 0.2 100 1.0 100 0.9 100 -3.2 7.0 0.6 -4.3 2.8 37.8 9.3 -5.2 5.0 -0.3 8.1 -1.8 -19.5 2.6 30.0 2.0 -6.3 9.7 2.9 1.0 -2.4 -15.8 -0.2 -5.6 -6.7 -1.0 -89.6

Pulse In recent years, product ion of pulses have picked up more significant ly t han other crops in t he St at e. The St at e produced 0.4 million t onnes of pulses during 2011-12 const it ut ing 2.5 per cent of all India product ion of pulses during t he year. The St at e produced around 0.2 million t onnes of pulses during 2000-01 and 2004-05, constit ut ing around 2.0 per cent of all India pulses product ion for t he respect ive years. During 2010-11 and 2011-12, area under pulses cult ivat ion in t he St at es had declined while yield has marginally increased.
D. Issues & challenges of agriculture sector in Odisha Let me now highlight some of t he macro and micro fact ors posing challenges t o t he sect or in t he St at e. The macro fact ors include lack of sust ained growt h in t he primary sect or, inst ability of t he food grain market s in t erms of access & price and lack of basic infrast ruct ure. The micro fact ors include lack of access t o and cont rol over resources such as land and common propert y resources like wat er, forest and public lands, degenerat ion and degradat ion of land and forest resources, lack of capacit y development and st ruct ural support for ent repreneurship. Despit e several policy measures, Odisha remains one of t he most agricult urally backward st at es of India. Agricultural product ivit y in Odisha remains quit e low due t o t radit ional farming pract ices, low use of high yielding variet y seeds, chemical fert iliser, organic manure; uneconomic size of operat ional holding, incidence of high t enancy, low capit al format ion and invest ment in agricult ure, inadequat e rural infrast ruct ure and services and inappropriat e policy environment . The low applicat ion of t wo import ant yield enhancing
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Canara Bank Samachar Lehar March 2012 input s like irrigat ion and fert iliser are considered t o be t he most immediat e and import ant det ermining fact ors responsible for low agricult ural productivity in Odisha. In brief, agricult ural development of Odisha is faced wit h several challenges which are more or less common wit h issues being faced at t he nat ional level except in cert ain areas. Thus, t he SWOT analysis of agricult ure in Odisha would reveal bot h common and idiosyncratic feat ures (Exhibit 1). I would briefly dwell on a few of t he feat ures relat ing t o weaknesses and t hreat s. Exhibit 1 SWOT Analysis of Agriculture in Odisha Strengths Weaknesses a) Ten agro-climat ic zones a) Poor land utilizat ion and soil qualit y b) Abundant inland wat er b) Preponderance of small / marginal size of land holdings c) Wide net work of KVKs and RSETIs c) Low level of crop diversit y d) Favourable t errain for wat er reservoirs d) Low levels of mechanizat ion and power generat ion e) Large coverage of KCCs e) Low level of irrigat ion f) Diverse forest wealt h f) Low fert ilizer usage g) Low cost of living g) Low seed replacement rat io h) Act ive involvement of t he St at e h) Low product ivity Government i) Long coast line i) Low capit al format ion j) Preponderance of rural branches of j) Inadequat e ext ension support commercial banks k) Inadequat e agricult ure financing l) Low usage of power for agricult ure m) Poor post-harvest management n) Poor market ing, t ransport and physical infrast ruct ure facilit ies o) Exploit at ion by middlemen in market chain p) Poor qualit y livest ock - inadequat e 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 groundwat er a) Recurrence of nat ural calamit ies exploit at ion as only 18 per cent of t he pot ent ial has been exploit ed
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Canara Bank Samachar Lehar March 2012 b) c) Scope for mixed / int egrat ed farming b) Varied agro-climat ic condit ions and c) abundant highlands conducive for hort icult ure Scope for crop diversificat ion d) Special schemes like Bringing Green e) Revolut ion in East ern India, Nat ional Hort icult ure Mission, Rasht riya Krishi Vikas Yojana (RKVY), MGNRES, Int egrat ed Scheme for Oilseeds, et c. Farm mechanizat ion is on t he rise as f) labour availability is const rained Agro-based indust ries g) Leveraging large number of KCCs h) Improper wat er management syst ems Reducing area under cult ivat ion

d) e)

Absence of suit able cropping patt erns for various agro-climat ic zones Poor disseminat ion of agri-t echnology

f) g) h) i)

Scope for organic cult ivation due t o low i) usage of chemical fert ilizers j) Scope for set t ing up organic wast e j) based compost ing unit s and green fert ilizers k) Clust er approach for dairy k) development ent erprises l) Encouraging PACS (who are showing l) signs of improvement ) and farmers' organizat ions m) Pro-act ive inst it utional arrangement s - m) SLBC / DCCs n) Financial inclusion plans of t he banks o) Development of inward, brackish wat er and marine fisheries p) Abundant wat er resources for fisheries and irrigat ion

Changing food habit s and preference for wheat and corn based eat eries Climat ic changes and it s impact on agricult ure Uncert aint y about market st ability and non-remunerat ive prices for farmers Exploit at ion by middlemen in market chain Increasing degradat ion of soil

Increasing labour short age Excessive focus on credit rat her t han credit plus approach Concerns relat ing t o credit cult ure

Poor land utilization pattern and soil quality Over t he period of 10 years bet ween 1999-2000 and 2009-10, t he t ot al cultivable area has report edly gone down from about 72 lakh hect are t o 68 lakh hect are, wit h net sown area reducing from 61 lakh ha t o 56 lakh ha. The current fallow lands, however, have grown from 6.8 lakh ha t o 8.35 lakh ha during t his period. About two t hirds of t he cultivable land is acidic wit h varying degree of acidit y. Furt her, about seven per cent of t he cult ivable land is affect ed wit h salinity. Despit e 117 per cent growt h in area under irrigation during the same period and average cropping int ensity having gone up from 137 per cent t o 163 per
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Canara Bank Samachar Lehar March 2012 cent , there is overall st agnancy in gross cropped area as also t he agricult ural product ion and product ivity in t he St at e. Present infrast ruct ure for soil t est ing is grossly inadequat e and farmers do not have a cult ure for undert aking soil t est ing. The process of det eriorat ion of t he quality of soil is furt her hast ened by unscientific usage of fert ilizers. This clearly underlines t he need for one-st op solut ions for soil t est ing, diagnosis and ameliorat ion advice t o farmers. There is a st rong case for encouraging set t ing up of agri-clinic & agri-business cent res by privat e ent repreneurs. Also, organic and green manures have t o be encouraged t o make up t he st agnant supply of chemical fert ilizers. Various project s t o encourage compost ing and linkages for product ion of green manures, bio-fert ilizers and bio-pest icides have t o be support ed by various agencies of t he government s and banks.

Preponderance of small / marginal size of land holdings The agricult ure sect or in t he St at e is charact erized by the preponderance of small / marginal farmers / agricult ural labourers with more t han 86 per cent farmers holding land less t han 2 hect ares and 60 per cent of t he farmers having less t han 1 hect ares land or no land at all. As per t he lat est available figures of Agricult ural Census, about 26 lakh marginal farmers (const it ut ing 60 per cent of farmers) are holding 33.50 lakh acre land (const it uting 27 per cent of t ot al land) wit h an average of around 1.3 acre land per holding. Similarly, 11.60 lakh farmers in t he small farmers cat egory hold about 40 lakh acre land (const it ut ing 31 per cent of t ot al land). Thus, 58 per cent of t he land is held by 86 per cent farmers while t he rest about 6 lakh farmers (const it ut ing 14 per cent of t ot al number of farmers) hold about 52 lakh acre land (const it ut ing 42 per cent of t ot al land) wit h an average of about 8.67 acres. This indicat es t owards t he skewed asset s dist ribut ion of land and calls for appropriat e st rat egies in favour of t he small and marginal farmers.
The sit uat ion is furt her aggravat ed by t he rising land fragment at ion on account of disint egrat ing family syst ems in rural Odisha and cont inuing dependence of large populat ion on t he sect or. Thisis a point er t owards t he need for legislat ion t o check large scale land fragment at ion in near fut ure. The small land holdings also lead t o low levels of risk t aking capacit y, t echnology adopt ion, farm mechanizat ion and fertilizer applicat ion, result ing in low levels of invest ment as also t he low farm product ivit y.

Low level of crop diversity The crop diversit y is very minimal in t he St at e t hough some effort s have been init iat ed in some part s of t he St at e. Some farmers are adopt ing floricult ure, onion, t urmeric and mushroom cult ivat ion as a diversificat ion away from t radit ional crops. The diversificat ion in crops, however, is suffering from inappropriat e market linkages, lack of infrast ruct ure like cold st orages / onion st orages / rural godowns, et c. despit e t he Government of India Scheme for support ing Agricult ural Market ing Infrast ruct ure. As on dat e t here are only around 300 rural godowns / st orages set up under t his scheme in Odisha wit h limit ed st orage capacit y wit h no accredit at ions (only one st orage of Central Warehousing Corporat ion in Rayagada is having accredit at ion in t he whole St at e of Odisha).

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Low farm mechanisation - insignificant use of power Mechanized agricult ure is t he process of using agricult ural machinery t o mechanize t he work of agricult ure in order t o increase farm out put and farm worker product ivity. The product ivit y measures warrant int ensive farm mechanisat ion which needs t o be support ed wit h adequat e supply of power and ot her infrastruct ures. In t his cont ext , t he low level of consumpt ion of power which is crit ical for mechanisat ion of agriculture indicat es t he lack of modernisat ion of t he agricult ure sect or in t he St at e (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 bracket s are percent age t o t he t ot al consumpt ion of power in Odisha Source : Economic Survey 2010-11, Government of Odishaa As maybe seen power consumpt ion for agricult ure has been less t han two per cent against all-India figure of about 30 per cent. Low level of irrigation The ext ent of usage of fert ilizers, rainfall, per cent gross cropped area irrigat ed and size of operat ional holding have a posit ive bearing on t he yield of crops. Compared with all India averages, progress in ext ending areas under irrigat ion in t he St at e has been fast er. During 1999-2000, 29.5 per cent of areas under all crops in t he St at e were irrigat ed which increased t o 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 irrigat ed area for rice product ion increased from 40.7 per cent t o 46.8 per cent during t his period as against 53.9 per cent t o 58.7 per cent at all-India level (Table 6). Table 6 Irrigated Area India and Odisha (per cent ) 1999-2000 2008-09 Crops 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 Cot t on 3.6 35.2 Not available 35.3 All Crops 29.5 40.8 35.0 45.3 Source : Minist ry of Agricult ure, Government of India
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Low usage of fertilizers Fert ilizer consumpt ion in t he St at e, in t erms of kilogram per hect are 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 hect are consumpt ion of fert ilizer is less t han 50 percent of all India consumpt ion. Similarly, pest icide consumpt ion in t he St at e is much lower t han t he all-India levels. Table 7 Fertilizer Consumption : India and Odisha (Kilogram per hect ares) 2007-08 2008-09 State / Fertiliser India 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 Rat io 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 Rat io 5.5 2.1 1.0 4.6 2.0 1.0 N : Nit rogen P : Phosphorus K : Pot assium Source : Minist ry of Agricult ure, Government of India Low productivity Though some of t he district s of the St at e have achieved much higher product ivit y levels, t he agricult ural product ivity remains a matt er of concern as t he product ivit y of some of t he major crops in Odisha vis-a-vis some neighbouring st at es is relat ively low (Table 8). Table 8 Comparative crop productivity during 2009-10 (kg per hect are) State Paddy Wheat Pulses Foodgrains Oilseeds Vegetable West Bengal 2611 2650 760 2561 989 17153 Andhra 3056 900 722 2441 760 16230 Pradesh Bihar 1138 2078 801 1570 1036 16188 Jharkhand 1505 1550 734 1320 480 15023 Odisha 1609 1561 460 1258 776 12910 All India 2130 2830 625 1798 955 16177 Average Source : NABARD

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Low capital formation It may not ed t hat t he share of capit al out lay on agricult ure in t he t ot al capit al outlay declined at t he consolidat ed St at es level and, more sharply, in Odisha during t he second half of 2000s as compared t o first half of t he decade. The declining trend in t he share of capit al out lay on agricult ure in Odisha as well as for t he consolidat ed St at es cont inued during 2010-11 (RE). The capit al format ion in agricult ure remains at around 12 per cent in t he St at e as against nat ional figure of around 20 per cent . However, t he share of capit al out lay on agricult ure in t ot al capit al out lay is budget ed t o increase 2011-12 both for Odisha and for t he consolidat ed St at es (Table 9). Table 9 Share of Capital Outlay on Agriculture in Total Capital Outlay (per cent ) 2000-05 2005-10 2010-11 2011-12 (Average) (Average) (RE) (BE) Odisha 6.0 3.1 1.7 2.7 All St at es consolidat ed 5.1 4.3 2.4 2.8 BE : Budget Est imat es.
E. Inadequate agriculture financing Banking network As at end-June 2011, t here were 46 scheduled commercial banks operat ing in Odisha including 25 public sect or banks, 14 privat e sect or banks, five regional rural banks (RRBs) and t wo foreign banks. The t ot al number of branches of scheduled commercial banks (excluding RRBs) in t he St at e was 2,136 at end-June 2011. The populat ion group-wise dist ribut ion of these branches indicat es that rural branches account ed for 45.5 per cent of t he t ot al number of branches in t he St at e, as against t heir share of 29.2 per cent at t he allIndia 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 25,116 44,379 6,355 5,967 Per capit a deposit ( ) 12,469 33,369 3,303 3,571 Per capit a credit ( ) Source : Quart erly St atist 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 st ood at 49.2 per cent , at end-June 2011 which was lower t han at end-June 2010 level and was lower t han t he all-India level posit ion of 75.6 per cent . Furt her, urban branches account ed for t he maximum share of 65.6 per cent in out st anding bank credit of scheduled commercial banks in Odisha, followed by semi-urban branches (17.6 per cent ) reflect ing skewed credit flow t o t he agricult ure sect or in t he St at e despit e preponderance of rural branches. Agriculture credit As per t he lat est available dat a in Odisha, t he share of agricult ure in t he t ot al credit deployed recorded an increase t o 16.5 per cent from 14.8 per cent as at end-March 2010 while t he share of indust ry st ood highest at 32.7 per cent followed by personal loans (23.8 per cent ) during t he same period. The flow of credit t o t he agriculture sect or during the last decade, however, remained highly volat ile vis-a-vis t he t rend exhibit ed at t he nat ional level. This part ly reflect s t he unst able agricultural product ion in Odisha and can be partly explained by recurrence of nat ural calamit ies like drought s and floods and insufficient and inadequat e support syst em (Chart 1). Chart 1 Trends in Agriculture Credit by Scheduled Commercial Banks

At end-March 2011, t he share of priority sect or advances in t ot al bank credit in t he St at e was 49.2 per cent as compared wit h 32.8 per cent at t he all-India level. Wit hin t he priorit y sect or advances in Odisha, t he share of advances t o agricult ure was highest (41.6 per cent ), followed by small ent erprises (37.3 per cent ) and housing loans (15.3 per cent ). Recovery performance for advances t o agricult ure in t he St at e was lower as compared wit h the all-India posit ion during 2009-10. The percent age of recovery t o t ot al demand for direct advances t o agricult ure by all scheduled commercial banks in Odisha decreased t o 56.5 per cent at end-June 2010 from 63.7 per cent at end-June 2009. It needs t o be emphasized t hat st eady and sust ainable flow of credit t o t he sect or would critically depend on a healt hy credit cult ure. Recovery performance needs and can be improved, among ot hers, if (a) banks t ake proactive st eps for cont inuous and meaningful engagement wit h t he borrowers, (b) St at e machinery plays a proact ive role, (c) necessary amendment s are effect ed in Odisha Public Debt Recovery Act (OPDR Act ), and (e) est ablishment of agri-risk fund. It would be essent ial for t he banks t o provide finance for t he ent ire cash flow requirement of t he farmer family - bot h short t erm and long t erm purposes and for purposes such as debt swap and for ot her personal and business requirement s. It is also necessary t hat banks look at opportunit ies for financing agri-business ent it ies, niche agriculture, allied Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 sect ors and supply chains for st rengt hening forward and backward linkages. Here a crit ical fact or would be t he availability of t rained and commit t ed manpower wit h t he financing inst it ut ions and visible t hrust and commit ment of senior management of t hese inst it ut ions rather t han mere st ress on achievement of t he t arget s. 34. Anot her aspect of urgent relevance in t he St at e is t he lack of access of t he bank credit t o the t enant farmers and oral lesses. Andhra Pradesh and West Bengal have t aken init iat ives for making t he t enant farmers / oral lessees eligible for bank credit t hrough joint liability group (JLG) mode and Licensing Mode. Though t he JLG movement has picked up in t he St at e yet it is observed t hat t he off-t ake of credit by such JLGs is st ill not subst ant ial enough and t he JLG farmers are able t o access small amount of loans only and t he landless people are being given loans on no-farm act ivit ies rather than in proport ion of t he land they cult ivat e on account of t he fact t hat t heir land cult ivation is not being recognised in absence of any records of t heir tillage. F. Way forward Having highlight ed some of t he major issues and challenges facing the St at e for developing t he sect or, let me t ry and suggest a broad framework which may form t he way forward for enhancing agricult ure product ion and product ivit y in t he St at e and income level of farmers and make t he sect or viable and sust ainable. The st rat egy should, among ot her things, focus on improving upon t he exist ing crop syst em, diversificat ion of crop pat t ern and curing t he less fert ile lands. The strat egy should also be aim at addressing t he issues relat ed t o supply management of crit ical input s like seeds and fert ilisers, appropriat e cost effect ive farm mechanizat ion, appropriat ed post -harvest arrangement s t o t ackle incidence of dist ress sale and ensuring adequat e flow of credit . We may also consider adopt ing models for synergizing t he effort s 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 t he small and marginal farmers, who do not have individual capacit ies by way of producer companies / co-operat ives / JLGs. For providing t he much needed moment um t o a new Green Revolut ion in t he St at e, a framework based on t he acronym F.A.R.M.E.R. could be considered. Each let t er of t he word has a linkage, direct or indirect , t o the livelihood of t he farmers and development of agricult ure (Exhibit 2). Exhibit 2 Framework based on F.A.R.M.E.R. F Credit availabilit y should be t imely and adequat e. It is not only Finance credit but also a holist ic package of financial services including credit (product ion and post -product ion), savings and insurance t hat needs t o be kept in view. It is import ant t o not e t hat finance is a crit ical input which can command all ot her resources required for farming. Besides crop loan, invest ment credit would be very crit ical for long t erm sust ainabilit y of agriculture. A It is t hrough increased income of t he farm families t hrough Allied diversificat ion (for example, a milch cow provides a daily cash flow act ivities t o t he household which can sust ain them in t he periods of dist ress arising out of crop loss). Allied act ivit ies act as a hedge against t he Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 downsides in agricult ure. It is also imperat ive t o encourage mixed / int egrat ed farming. R Risk mit igat ion measures against price, product ion and personal Risk risks like crop and weat her insurance, healt h insurance, et c. are Mit igat ion very critical for maint aining t he healt h of t he rural financial syst em and ensuring t he viabilit y of t he agricult ural sect or. Some of t hese can be bundled and provided as a package t o t he farmers as micro insurance. Contract farming, corporat e farming and producer companies are some of t he models of congregat ion, int egration and linkages which should be explored t o safeguard t he int erest of small and marginal farmers. Crop diversificat ion / mixed / int egrat e farming and effect ive ext ension support are also essent ial for risk mit igat ion. M Efficient market ing which would include innovat ive approaches, Market ing such as, t he Producer Companies, Cont ract Farming, Value Chain Access Agro Processing and Agri-Business are part icularly import ant for t he small and marginal farmers. Price support syst em would also play a crit ical role in ensuring remunerat ive return t o t he farmers. E Research and ext ension linkages should comprise of all t he four Ext ension crit ical pairs of L's Lab t o Land, Land t o Lab, Land t o Land and Lab t o & research Lab. It needs t o be appreciat ed t hat t he qualit y ext ension and research services in a cost effect ive manner is a sine qua non for product ivit y enhancement and risk mit igat ion. There is a great scope t o bring about convergence among t he schemes / effort s of several agencies, bot h public and privat e, banks and NGOs and using ICT based solut ions for meaningful ext ension act ivit ies. R Timely and adequat e availability of ot her crit ical resources ot her Resources t han finance, i.e., input s like wat er, seed, healt hy soil, fertilizer, ot her than pest icides, farm implement s, st orage and warehousing facilit ies finance and skilled and product ive human resources, efficient supply chains, et c. are very import ant t o ensure t hat agricult ure remains a remunerat ive and at tract ive vocat ion. As t his Conclave has st akeholders from Government , government agencies, financial inst it ut ions and research inst it ut e, I shall be highlighting t he crit icalit y of one of t he component s, i.e., 'R' which pert ains t o resources ot her t han finance. This component broadly encompasses seed relat ed issues, ext ension syst ems, soil healt h, farm mechanisat ion, et c. In t his cont ext let me highlight a few import ant issues.

Extension system The St at e of Odisha has several premier instit ut ions for undert aking research but t he Agricult ural Ext ension Syst em in t he St at e remains in almost a dormant st age. Krishi Vigyan Kendra (KVKs) and the Rural Self Employment Training Inst it ut es (RSETIs) are est ablished and in exist ence in almost all dist rict s. Yet t he effect ive t echnology ext ension and adopt ion is rat her limit ed. The exist ing syst em of St at e Ext ension Machinery has it s limit at ions of out reach and financial resources and not many effort s have been made for creat ion of local skills for t echnology disseminat ion. Hence it is import ant that t he
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Canara Bank Samachar Lehar March 2012 alt ernative / supplement ary ext ension syst ems are encouraged. The digit al / elect ronic / space t echnology / mobile t elephone syst ems of providing t echnology and periodic advisories t o farmers have t o be examined for cost effect ive adopt ion. I would urge t he sub-commit t ee of t he SLBC set up in t his regard should come out early wit h a monit orable act ion plan for holist ic ext ension support t o t he farmers.

Seed related issues There is an urgent need t o design a seed availability program which will include adequat e seed replacement st rat egies, ensuring t imely availabilit y of seeds of desired variet y in required quant ity and finance t o seed producers. In order t o encourage decent ralized product ion of seeds, aut horit ies may consider set t ing up of local exchanges and enabling NGOs t o play a great er role. Commercial banks should provide higher scales of finance t o t he seed growers owing t o larger cost involved. They should also consider working capit al / t erm loans for seeds processing and market ing societ ies of farmers or t he NGOs promot ing such seed product ion / processing / market ing. Soil health and nutrition It is a fact t hat t he present infrast ruct ure for soil t est ing is grossly inadequat e and farmers do not have a cult ure for undert aking soil t esting. The consumpt ion of fertilizers is oft en low and not backed by findings of scient ific soil t est ing report s. To incentivise development of such a cult ure use of Kishan Credit Cards could be linked t o Soil Healt h Cards. Thus, there is a need for one-st op solut ions for soil t est ing, diagnosis and ameliorat ion advice t o farmers. There is a need for t he PACS t o play an import ant role in t his regard apart from encouraging privat e agri-clinics & agri-business cent res. Organic manures and green manures have t o be encouraged t o make up t he st agnant supply of chemical fert ilizers. Various project s t o encourage compost ing and linkages for product ion of green manures, bio-fert ilizers and bio-pest icides have t o be support ed by t he St at e Government and t he financial inst it utions. Farm mechanisation The dat a on farm-hands availabilit y indicat es declining availability of farm labour. The product ivit y measures also require ext ensive farm mechanisat ion bot h for t he small implement s as also capit al int ensive big farm machines. As small farmers may not be able t o afford individual ownership of farm machines, group models or t he cust om-hiring models need t o be considered. PACS can be considered and developed as Farm Mechanisat ion Hubs t o provide farm machines t o it s members on hiring basis. The Farmers' Clubs, Village Wat ershed Commit tees / Wadi Commit t ees should also be encouraged for creat ing t heir own farm machines hubs. Aft er-sales services for farmmachines are abysmally poor in most of the part s of t he St at e. Individual trained ent repreneurs have t o be encouraged t o t ake up farm-machines servicing ent erprises. Banks need t o encourage financing of various small farm machines rat her than rest rict ing financing t o big farmers for tract ors and power-t illers. Irrigation Irrigation is largely a St at e init iative in Odisha and very lit t le financing is being done by t he commercial banks. The St at e Government has been providing huge amount of subsidy and t ubewells are being est ablished t hrough the st at e agencies. In some of t he schemes
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Canara Bank Samachar Lehar March 2012 t he subsidy is as high as 80 per cent . Hence, banks may find it profit able t o enhance invest ment credit by financing such irrigat ion project s. There is also a need t o look beyond t he t ubewells. Drip and Sprinkler syst ems is one such alt ernat e which has t remendous pot ent ial.

Storage & marketing Short age of st orage space oft en leads t o subst ant ial post -harvest losses yet t here are a very few init iat ives for set t ing up large st orage st ruct ures. Terminal market s are almost non-exist ent and organized mandis / APMCs are also not very act ive despit e amendment s in APMC Act . Cold Chain arrangement s for veget ables and fruit s remain non-exist ent in t he St at e. Therefore, it is import ant t hat t he part icipat ion of privat e sect or is encouraged in large proport ion.
G. Concluding Thoughts In t he last 50 years, Odisha has lost nearly a decade by way of nat ural calamit ies. This has severely affect ed t he development of t he St at e and part icularly t he agricult ure sect or. Many st udies have empirically proved that agricult ural growt h is more povert y reducing t han growt h in non-agricult ural sect ors implying t hat rural poverty reduct ion has been associat ed wit h growt h in agricult ure and product ivit y. A st udy by Ligon et al (2007) concluded t hat GDP growth originat ing in agricult ure is at least twice as effect ive in reducing poverty as GDP growt h originat ing in ot her sect ors of economy. Given t he incidence of povert y in Odisha which st ood at 46.4 per cent as against t he all-India level of 27.5 per cent , t he import ance of agricult ure growt h in t he St at e cannot be underst at ed. Here it will be import ant t o st ress t he proact ive role t hat can be played by exist ing inst it ut ional arrangement s like SLBC for cont inuous evaluat ion and monit oring of t he development s in t he sect or in a holist ic manner. I feel ext remely happy t o be here t o share my t hought s on t he issues and challenges for t he sect or in t he st at e wit h such a learned and knowledgeable audience. It is fair t o set high expect at ions from such a conclave for set t ing an exact ing yet achievable agenda wit h concret e act ion plans which will lead t o significant and rapid t ransformat ion of t he sect or in t he st at e in t he next few years. I am sure t his conclave will provide a st imulat ing plat form for all t he st akeholders int erest ed in t he development of t he agricult ure of t he St at e t o int eract and enable convergence of views. This conclave should pave way for t he development of t he agricult ure sect or in Odisha t owards great er product ion and product ivit y, higher income levels for t he farmer and profit able business opport unit ies for t he financing inst it ut ions. The consequent rapid t ransformat ion of t he agricult ural sect or should enable all t he st akeholders t o reap t he benefit s on a sust ainable basis in Odisha which has t o play a key role in t he scheme of Bringing Green Revolut ion t o East ern India. I will like t o end, rat her st art , with great expectat ions about t he out come of t he 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 contributions 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 Statistics 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. Chit ale, Shri H. N. Sinor, Shri C. Krishnan, members of t he Governing Council of BCSBI, Shri N Raja CEO, BCSBI, delegat es t o t he Conference, Ladies and Gent lemen, it gives me great pleasure t o be in your midst t oday and share wit h you some of my t hought s concerning qualit y of cust omer care and service in our banking industry. The BCSBI has been in exist ence for six years now and has done a commendable job in t his short span of t ime. Two codes have already been put out and have been / will be reviewed from t ime t o t ime. The quest ion t hat has always cropped up in my mind is about t he st andards of cust omer service. If we were t o go by t he spirit of t he Codes issued by t he BCSBI, adherence t o t he Codes is t he minimum accept able benchmark for qualit y of cust omer care. If t hat is so how far are we from achieving excellence in t his area? As we expect our children t o do bett er in every exam and are absolut ely rut hless or unhappy if t he child has secured t he minimum marks required t o be declared successful, in t he same analogy mere adherence t o t he Code does not mean we are doing everyt hing right t o make t he grade. The quest ion therefore is what is it t hat we need t o do going beyond t he Code, especially t his being a volunt ary effort which many banks have willingly decided t o undert ake. The BCSBI codes do have a requirement for banks t o act "fairly and reasonably" t owards cust omers, but in a majorit y of t he cases it appears t o amount t o lit t le more t han st icking t o t he cont ract s and agreement s customers effect ively sign up t o when opening account s or t aking a loan. There are cert ain areas where a t ougher more explicit code would be wort h considering. I will be t ouching on some of t hese areas as we go ahead. The first and foremost issue t hat springs t o my mind is t hat of at t it ude. The key t o a prompt , effect ive and court eous cust omer service emanat es from having t he right at t it ude. There are many inst it ut ions t hat declare t he famous quot e by Mahat ma Gandhi t hat cust omer is king and t he very reason for t he exist ence of t he ent erprise. But is it reflect ed in employee behaviour at t he ground level. Does t he Board / Top Management have t he right at t it ude t owards cust omers. Do t he banks have a policy of assigning a unique identity t o all cust omers? If not , can we accurat ely say how many cust omers a bank has? Most of t he t ime, t he figures given are t hat of t he number of account s. But by doing so, essent ially we are not different iating bet ween a ledger page and a cust omer. So, in my opinion, a radical t ransformat ion of at t itude right from Top Management t o ground level employees is t he first st ep towards improving cust omer service. The challenge for all of us in t he banking indust ry is t o develop t he right kind of at t itude t o render service. Can we define t he st andards of behaviour? Perhaps it may be easier t o ident ify the element s of unaccept able behaviour and try t o redress and improve t he Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 sit uat ion. The behaviour st andards especially of t he front -line managers are implicit in t he accept ance of t he codes by t he banks. Communicat ion is at the root of effect ive cust omer care in a service indust ry especially like banking, where t he document s, t erms and condit ions, practices & precedent s are all heavily loaded against t he cust omer. How do you communicat e with t he cust omers 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 cust omer grievance redressal syst em? Do you have a syst em of analysing t he average t ime t aken t o resolve complaint s and monit or t he consumer complaint s? In an arrangement t hat is based on t erms of agreement t hat are unequal, enforceability of cont ract s poses a major challenge. Int roduct ion of Most Import ant Terms and Condit ions (MITC) for all major product s and services offered by banks is expect ed t o help t he consumers analyze t he suit ability of a product from their perspect ive. Many bank cust omers walk int o a branch wit h a rough sket ch of what t hey want . We must underst and t he cust omer's needs and sell him what he / she needs. The MITCs must be dist inguishable from market ing or promot ional mat erial. Web based informat ion is becoming an ext ensive source of communicat ion wit h bank cust omers. How many banks can give a commit ment t hat t hey will prompt ly updat e t heir web sit es t o reflect any and every change in pricing of t heir product s / services, MITCs governing import ant product s / services, change in working hours, change in key personnel et c.? Compensat ion policies - The banks have framed and placed in public domain t heir compensat ion policies for cust omers for any lapses or loss t hat may be caused by a mist ake on t he bank's part . The quest ion t hat arises is, in how many cases have t he banks paid such compensat ion on realizing t heir mist ake and wit hout t he cust omer begging for it ? An example in point can be t he case of cheques vanishing from t he drop boxes in which t hey have been deposit ed by t he customers. Can t he banks come forward and commit t hat it is t heir responsibility t o ensure safet y of inst rument s in t he drop boxes? When a cust omer complains about such t hings he / she is made t o run from pillar t o post t o gat her evidence t o est ablish the fact t hat t he cheque was indeed dropped by him / her in t he box meant for t he purpose. Should t he banks not compensat e him / her on t he principle of reciprocit y? In many fields and in different count ries regulat ors det ermine t he price. But , t he financial sect or regulat or in India does not do so. Therefore what ever charges are levied it is expect ed t hat t hey are reasonable. And t hat t he pricing must be fair, transparent and nondiscriminat ory. Globally, regulat ors are expected t o usher in much st rict er regulat ions in t he area of fair t reat ment t o cust omers. Coverage of special cat egory cust omers - As we move t owards int roducing global best pract ices in banking, an import ant element in t he area of cust omer care is t he special focus which st udent s, senior cit izens, physically challenged persons, vulnerable sect ions of t he populat ion must get from t he financial services indust ry. These init iat ives t oo need t o be codified and t heir implement at ion monit ored by the code compliance officers.

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Canara Bank Samachar Lehar March 2012 Lending responsibilit y - At a t ime when all banks are in a hurry t o be one up on t he ot her, at least in t he mat t er of advert ising speedier sanct ion of loans, responsible lending is wort h considering. I agree t hat people should t ake responsibilit y for t heir borrowing and anyt hing that could limit people's economic freedom should be considered wit h caut ion. But t he code current ly side-st eps t he issue by leaving t he t est for responsible lending as what ever t he banks "believe" t he borrower can pay back. To err is human, t o confess is divine - I would be happy t o see t he banks revisit ing t he cases of cust omers who had been wronged but there was no rest it ut ion in t heir favour because t hey did not complain eit her t o t he bank or t o t he Banking Ombudsman. Why is it t hat t he regulat or should be forced t o look at class act ion? The BCSBI may like t o examine t he possibilit y of incorporat ing such a provision in t he Bank's Code of Commit ment t o Cust omers. Disclosures - Bank st aff do not t ell cust omers when t hey are t rying t o sell a credit card or an insurance policy or a mut ual fund that t hey may be incent ivized t hrough some compensat ion schemes. At t he very least set t ing out t he t erms of incent ive schemes in a cust omer brochure may be accept able. There are inst ances where t he pricing and operat ional freedom conferred on banks is by means of general guidelines t hat may become a subject mat t er of int erpret at ion. How many banks are willing t o go an extra mile and int erpret t he guidelines in favour of cust omers? The discriminat ory pract ices t hat banks adopt while sanct ioning loans on a float ing int erest rat e basis t o new borrowers is possibly the best example in this regard. A fact or which impedes easy comparison of rat es among banks is differences in processing charges / document at ion fee / renewal fee / compounding periods, et c. One of t he measures which is globally adopt ed is t o announce an Annualised Effect ive Rat e t aking int o account all types of charges over and above the int erest rat e. The same can be done wit h deposit rat e. This will be great enabler for easy comparison. Family law proceedings / succession issues - No mat t er what t he t erms and condit ions of a joint account or nominat ion facilit y are, bankers st ill get fixat ed on t he legal provisions t hat were never a part of t he account opening process, while set t ling claims of deceased deposit ors or t ransferring t he amount s t o t he nominees. The pract ices in t his regards not only differ from one bank t o anot her but within t he same bank t here are diametrically opposit e view point s at t wo different branches on such mat t ers. Nobody is keen on following t he model policy evolved by t he IBA for t he purpose. Can t he BCSBI's codes be made more effect ive t o address t hese issues faced by the common persons? There are problems faced by couples busy in divorce proceedings, when it comes t o transfer of t itle deeds of immoveable propert ies where a home loan may have been joint ly t aken in t he name of t he husband and wife. These are t he new realit ies of a fast changing world and we must address t hese as a part of our commitment t o t he bank cust omers. There are a couple of areas which deserves our at t ent ion from a cust omer prot ect ion point of view. The first is t hat of elect ronic banking / card banking. Elect ronic funds t ransfers, int ernet based banking transact ions, card banking are on t he rise and are t hrowing up issues / challenges one might not have ant icipat ed. The banking agreement is so worded as t o afford no right t o t he cust omer and is ext remely lopsided. Banks are not Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 responsible for any unaut horized t ransact ions even if by t heir employees. In fact , given an inst it ut ions resources, t he onus should be on banks t o prove t hat the individual cust omer has compromised his userid / password. Making networks safe and sound is t he responsibilit y of banks, t here must be in place a code of conduct for addressing issues in t he non-face - t o - face t ransact ions domain. This code could help evaluat e t he preparedness of individual banks t hat are willing t o offer such services. This code could cover net working arrangement s, audit t rails, complaint invest igat ion and resolut ion procedure, liabilit y in case of syst em or equipment malfunct ion, liabilit y for unauthorized t ransact ions et c. The second is when t he cust omer is in distress- rehabilit at ion of sick unit s, or when small borrowers / farmers are in dist ress. While banks do advert ise t hat t hey have good framework for rehabilit at ion of sick unit s, but a look at t he percent of sick unit s being nursed back t ells a different st ory. There is a need t o improve the number of unit s t hat are successfully nursed back. Last ly, I would like t o ment ion t he issue of selling t hird part y product s such as insurance, capit al market s et c. which is becoming increasingly relevant from a cust omer prot ection point of view. Whet her t he cust omers especially t hose small and poor underst and what is being sold t o t hem Elect ronic funds t ransfers, int ernet based banking t ransact ions are on t he rise and are t hrowing up issues / challenges one might not have ant icipat ed. Making net works safe and sound is t he responsibilit y of banks, t here must be in place a code of conduct for addressing issues in t he non-face - t o - face t ransact ions domain. This code could help evaluat e t he preparedness of individual banks t hat are willing t o offer such services. This code could cover net working arrangement s, audit trails, complaint invest igat ion and resolut ion procedure, liabilit y in case of syst em or equipment malfunct ion, liability for unaut horized t ransact ions et c. Review of t he Codes - The BCSBI has reviewed one of t he t wo codes issued by it and the ot her one is in t he process of being updat ed. Do we have a mechanism of an independent review of t he codes wit h feedback from all the st akeholders who are int erest ed in the subject ? Aust ralia, for example, mandat orily undert akes a review of it s Code of Banking Pract ices every three years. Can we have some such arrangement in place? The t wo set s of codes having been issued by t he BCSBI and t aken up for implement at ion by banks, t here is a case for examining t he need for lengt hy document s t hat banks st ill insist on gett ing execut ed especially in relation t o loan product s. Can we really and seriously make an effort t o rat ionalize and simplify t he document s and document at ion process and publish it as our commit ment t o the cust omers? There are new avenues of t aking banking t o the people. One import ant challenge in t his area is t he success of t he BC led banking / financial inclusion model. The code of bank's commit ment s t o cust omers' needs t o art iculate t he act ions t o be t aken by t he bank while select ing a BC and t he t raining t hat he / she will be provided t o undert ake or execut e financial t ransact ions on behalf of t he bank. "Financial Inclusion" is high on t he agenda of t he Government and t he Reserve Bank of India. Can we evolve a code for development and implement at ion of financial inclusion plans and place t hem in t he public domain as a part of our corporat e social responsibilit y?
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Canara Bank Samachar Lehar March 2012 Credit informat ion bureaus are of very recent origin in India. Many individuals are not aware of t he exist ence of such inst it utions and are shocked t o find t heir names appearing in t he default ers list making it difficult for t hem t o access t he banking syst em for t heir credit needs. The banks need t o t ake up cust omer educat ion in t his regard as a part of t heir code of commit ment s. The report ing met hodology, implicat ions of report ing, rect ificat ion mechanism, and remedy for wrong reporting must be properly communicat ed t o all t he cust omers. Financial lit eracy and educat ion are becoming increasingly import ant . The input s in t his regard could be made available in different format s including large print , Braille, DVD, audio et c. The RBI had set up a Commit t ee, under t he Chairmanship of former SEBI Chairman Shri M Damodaran, t o look int o t he ent ire gamut of cust omer service relat ed issues in t he banking indust ry including a review of t he Banking Ombudsman Scheme. The t ot al number of recommendat ions made by t he Commit t ee in it s report was 232. Of t hese t ot al recommendat ions, 22 are t o be examined by t he RBI / Government . The remaining 210 recommendat ions have t o be examined for accept ance and implement at ion by the banking industry. The IBA has already issued operat ional guidelines in respect of 88 recommendat ions. In respect of 38 ot her recommendat ions t he IBA init ially had said no comment s. "No comment s" according t o me is an accept ance of t hese recommendat ions and it should not be difficult for the IBA t o issue clear guidelines in regard t o t hese recommendat ions. There remain a few ot her recommendat ions on which t he banks and t he IBA had earlier expressed st rong reservat ions. At a meet ing held wit h t he leading bankers on December 16, 201, I have urged my banker friends t o revisit t he import ant issues in t he light of int ernat ional best pract ices, t he need for prot ect ing our consumers against fraud, t he availability of insurance product s t o prot ect individuals from such frauds and finally a clearly spelt out compensat ion policy t hat is communicat ed t o t he cust omers upfront . The major areas of concern are int ernet banking relat ed misuse / abuse, ATM relat ed service deficiencies, loss of credit / debit cards and ext ent of card holders' liabilit y in such an event , penalt y for not adhering t o t he AQB discipline et c. An import ant recommendat ion made by t he Damodaran Committ ee was about banks appoint ing an Int ernal Ombudsman. This idea needs t o be followed up and implement ed proact ively in the int erest of consumer prot ect ion and impartial / t ransparent dealings. The common problems faced by cust omers very frequent ly pert ain t o ATM issues, pensions, levy of service charges wit hout prior int imat ion, credit card relat ed issues, loans and advances et c. It puzzles me t hat t he t ot al number of credit card users is less t han 10% of t he t ot al bank cust omers' base but st ill t his area account ed for 24% of t he t ot al number of complaint s handled by t he B O Offices during 2010-11. Similarly, a proper enforcement of t he BCSBI Codes should necessarily result in t he banks int imat ing t heir cust omers about changes in int erest rat es and service charges at least 30 days in advance. Here again t he number of complaint s highlight t he gaps in implement at ion of t he Codes at t he branch level. Pensioners are senior or very senior citizens and in a majorit y of t he cases t his is t heir only source of livelihood. We need t o be empat het ic and humane while dealing wit h pensioners. The best way t o minimize t he incidence of t hese complaint s is t o educat e t he cust omers and bank st aff alike. Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 Global initiatives in consumer protection The global financial crisis brought t o t he fore gaps in consumer prot ect ion measures in t he financial services indust ry worldwide. Many count ries t hat were affect ed by t he crisis have st andards and codes in place t o set the minimum benchmarks for cust omer care. The failure of volunt ary / indust ry led init iat ives t o prot ect t he financial sect or consumers and t he backlash creat ed by a public resent ment against bankers and banking has forced many government s t o come up wit h st atut ory measures aimed at financial consumer care and prot ection. When service st andards are defined as a part of t he st atut e any breach or violat ion of law at t ract s penalty. Are we moving in t hat direction? This may not happen in t he near future but even in t he Indian cont ext t he day may not be far when we may have a proper legislat ion specifically t o look at issues affect ing t he financial sect or consumers. Once t his init iat ive becomes a st at ut e, t he volunt ary opt ion would cease t o exist . The fair pract ices code adopt ed by banks / financial inst it ut ions is most ly unilat eral in nat ure. Hence, t he enforceabilit y of fair pract ices is more in breach t han in pract ice. Wit h growing complexities of t he financial t ransact ions and financial market s, t here is need t o clearly define t he role and responsibilit y of financial services providers, especially in relat ion t o consumer prot ect ion. To promot e consumer awareness of t he obligat ions of banks / financial inst it ut ions and t o fost er consumer underst anding of financial services and relat ed issues, it is felt t hat , t he Financial Consumer Prot ect ion Law should be enact ed t o cover : * * * * * * * * * Grievance Redressal Schemes, Compensat ion Schemes, Financial Ombudsman Schemes, Consumer educat ion and awareness init iat ives, Consult ation wit h consumer bodies before evolving policies, Responsible lending and market ing pract ices, Card product s, Consumer privacy and dat a prot ect ion, Defining mis-selling and cross selling.

This suggest ion is in t he backdrop of global development s. Countries like t he USA and UK have enact ed legislat ions specifically providing for financial consumers' prot ect ion. Once every act ion of a bank vis-a-vis it s cust omers is codified as a st at ut e, the lapses if any would also be punishable as an offence. This may most ly come as a monet ary penalt y on t he employee at fault . Hence, I urge all of you t o sensit ize your st aff on effect ive implement at ion of BCSBI codes. The ment al block many bank employees have is in owning up t heir mist akes leading t o clash of egos and escalat ion of complaint s right up t o t he level of President of India. All of us must be cost and t ime conscious when it comes t o Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 grievances redressal. Based on dat a published in t he annual report on the Banking Ombudsman Scheme for t he year 2010-11 t he RBI is incurring a cost of `.3619/ - for every complaint handled by it t hrough t he Banking Ombudsman Scheme. If you add t o t his t he cost involved at t he banks' end, t he t ot al cost for t he banking syst em of handling a single grievance may roughly work out as high as `.15000/ -. Can we not do a cost - benefit analysis in t erms of compensat ing t he customer for any loss / lapses, t han merely spending our t ime and resources on defending act ions t hat were pat ent ly wrong? The Bureau of Indian St andards has evolved ISO 10002:2004 st andard for reviewing t he effect iveness and efficiency of t he complaint s handling process. Adherence t o t his part icular st andard focuses on conferring t he following benefit s viz., * * * * * * Management syst em Cust omer sat isfact ion, Management focus, Brand improvement , Credibilit y, Cust omer confidence * * * * * * Improved Efficiency Bet t er relat ionship Cont inual improvement Transparent syst em Audit able syst em Synchronisat ion

The st andards has eight clauses, t he first t hree are scope, normat ive reference and t erms and definit ions. The other five are : * * * * * Guiding principles Complaint s Handling framework Planning and design Operat ions of t he handling process complaint s

Maint enance and improvement

It is gat hered from t he Bureau of Indian St andards t hat only t wo banks in t he count ry (privat e sect or banks) have so far adopt ed t his st andard. I urge t he governing council of BCSBI t o examine if adopt ion of an ISO standard for grievance redressal could be considered for inclusion in t he Code of Bank's Commit ment t o cust omers. The banks may on t heir own explore t he possibilit y of adopt ing t he ISO st andards. The Office of Fair Trading, Unit ed Kingdom has carried out several case st udies t o evaluat e consumer credit int ervent ion st rat egies. The case st udies highlight t he fact t hat vulnerable groups are part icularly exposed t o t he risks of being misled by advert ising.
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Canara Bank Samachar Lehar March 2012 Such act ion is t reat ed as "non-compliance" with st at ut ory provisions. We also need t o look at some such robust provisions in our codes / st at ut es. The global financial crisis of 2008 had demonst rat ed t hat credit market s are fragile and not only because of t he risk of polit ical meddling; borrowers also have t ended t o exhibit syst emat ic vulnerabilit ies which compromise t heir financial decision - making capabilit y. For many government s round t he globe, t he quest ion is no longer "t o prot ect or not t o prot ect t he financial sect or consumer?" it is 'when and how". The global pract ices / regulat ory measures for borrowers prot ect ion fall int o t hree convent ional cat egories; disclosures, product based and provider based regulat ion. The current global t rend is t owards making disclosure regulat ion more stringent and robust . In part icular, these regulat ions focus on prescribing t he manner in which t he int erest rat e and ot her charges must be calculat ed and disclosed. It may be t he Annual Percent age Rat e (APR) as is favoured in t he USA, which may also be easy t o underst and, or it may be t he Tot al Cost of Credit (TCC), t he concept that is widely used in Sout h Africa. The product based regulat ion focuses on common element s such as right t o cancel, prohibit ed behaviour and right of grievances redressal. We need t o pick up t he good aspect s of t hese emerging global t rends t o st rengt hen our own codes and commit ment s t o t he cust omers. Consumers' lack of financial lit eracy - Financial lit eracy includes knowledge of financial concept s and sound pract ices such as budget ing, but also t he cont ract ual right s and recourse procedures open t o consumers. Int ernat ionally, financial educat ion, awareness and financial lit eracy are being accorded t he highest priority in t he scheme of financial consumer prot ect ion. Where are we placed in t his regard? The effort s like set t ing up of FLCCs are only a small measure considering t he gigant ic t ask we have at hand. Whet her or not ment ioned in t he BCSBI's codes, can we bankers not make a commit ment t o put financial educat ion and awareness on a mission mode and promise t o deliver on our commit ment s? Conclusion As we go forward, a major challenge is how t o st rike a balance bet ween t he t win object ives of increasing financial access / banking penet rat ion vis-a-vis improving the quality of cust omer service and cust omer prot ect ion. While in t he long run it will converge, in t he short run, t he dilemma and the t radeoff underlying t he debat e between financial access and financial consumer prot ect ion may be very real t o the Government s and policy makers. Aft er all, developed count ries have bot h high levels of access to formal financial sect or, and relat ively elaborat e financial consumer prot ection measures aft er four decades of evolut ion. The financial consumer prot ect ion regimes in countries like India are st ill evolving. BCSBI needs t o persuade banks t o achieve convergence in an effect ive manner by adopt ing a volunt ary and self-regulat ory approach. It will be a great service t o t he societ y if BCSBI, banks and all of us collect ively are able t o achieve this. Thank you, Ladies and Gent lemen. ------------------------------------------------

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Canara Bank Samachar Lehar March 2012

Nabard encourages banks for warehousing finance


February 3, 2012 Nat ional Bank for Agricult ure and Rural Development (NABARD) has newly int roduced a refinance product for warehousing. The refinance scheme incent ivises banks t o accelerat e t he pace of creat ion of quality warehousing facilit ies for agricult ural commodit ies, part icularly for reducing post -harvest losses.The scheme was concept ualised out of a dedicat ed Fund of `.2,000 crore allocat ed in the union budget . The scheme will help in creat ion of around 9 million t onne of addit ional st orage capacity in t he country. Nat ional Bank for Agricult ure and Rural Development Gujarat 's CGM, H.R Dave said t hat Nabard will ext end financial assist ance, by way of refinance, t o commercial banks, regional rural banks and cooperat ive banks against t he loans ext ended by t hem for const ruct ion of warehousing infrast ruct ure for agricult ural commodit ies.NABARD shall charge int erest on refinance at 8% per annum, while int erest on t he loans t o t he borrowers would be decided by t he banks as per t heir exist ing policies. NABARD will ext end an int erest rebat e of 1.5% t o t hose borrowers, who repay t heir loans, alongwit h int erest , as per t he repayment schedule prescribed by t he financing bank. Int erest rat e rebat e will be provided by NABAR once t he bank certifies t imely repayment D by the borrower.NABARD will assist t he financing banks t o undert ake int ensive on sit e and off sit e monit oring of the project s t o ensure t imely completion and availabilit y of t he addit ional warehousing facilit y t o farmers. Mr Dave said t hat t he creat ion of warehouses would be t he infrast ruct ure required for t he growt h of agricult ure sect or. "The budgetary allocation for funding through t his mechanism is going t o mult iply in years t o come t o meet t he st orage requirement s for food securit y as well as t o include cold st orages and cold chain requirement s," he said while st ressing the need for encouraging accredit ed warehouses as st ipulat ed by Warehousing Development Regulat ory Aut horit y (WDRA) so as t o make farmers eligible t o benefit from int erest subvent ion scheme of GoI for pledge loans. As per t he recent ly announced Govt of India scheme, KCC holder small and marginal farmers can get loans at 7% rat e of int erest for a period of maximum six mont hs for st orage of t heir produce.One of t he condit ion of availing t he benefit of t he subvent ed market ing loan is t hat t he produce is t o be stored in "accredit ed warehouses" and banks can finance t hese farmers against t he negot iable warehouse receipt issued by such accredit ed warehouses. While highlight ing t he expect at ion of policy makers, he said t hat t his is a business proposit ion for bankers and sought t heir support t o encourage hub and spoke model t o benefit farmers t o st ore t heir produce at village level besides get t ing bet t er price realizat ion. Source:ht t p:/ / economict imes.indiat imes.com/ news/ news-by indust ry/ banking/ finance/ banking/ nabard-incent ivises-banks-t o-boost -invest ment -inwarehousing/ art icleshow/ 11729422.cms RBI may consider paring 40% priority sector target for commercial banks Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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RBI may consider paring 40% priority sector target for commercial banks
February 3, 2012 The RBI may consider paring t he 40% priorit y sect or t arget for commercial banks. However, banks may have t o lend more t o t he micro, small and medium ent erprises and weaker sect ions. These could be some of t he recommendat ions of t he commit t ee headed by t he Union Bank of India chairman and managing direct or MV Nair, which was set up by t he cent ral bank t o review issues relat ed t o priorit y-sect or lending. Based on t he feedback from various st akeholders, t he RBI could also consider cat egorising housing finance t o t he weaker sect ions under priorit y lending. However, bankers have expressed concern about lending t o t hese segment s due t o rising non-performing loans. "The RBI want s banks t o lend direct ly t o t he farmer. The t one of the draft paper is largely t owards banks increasing t heir lending t o small and marginal farmers and micro, small and medium ent erprises wit h plant and machinery of below `.5 lakh," said t he agricult ure head of a privat e sect or bank. "If t hey set a t arget for t his, t he default s will increase." The commit t ee may also propose st rict penalt y on banks t hat do not meet t hese t arget s. Agricult ural sect or account ed for 44% of t he t ot al increment al NPAs of domest ic banks in 2010-11.Similarly, PSBs and privat e sect or banks saw an increase in weaker sect ion NPAs as a percent age of advances t o t he sect ion. According t o RBI dat a, t he growt h in priority sect or lending has slowed down from 29.2% in 2009-10 t o just 5% in 2010-11 despit e banks having t o mandat orily lend t o t he sect or. The RBI has become st rict about inclusive banking on all paramet ers, be it branch opening or priorit y sect or credit or opening of no-frill account s. "I t hink in t he new guidelines, focus will be more on redefining what const itut es 'priority sect or'. Bankers have also t old t he regulat or t hat part of infrastruct ure lending could also be included within t he ambit of priorit y sect or lending," said a senior official from a large Mumbai-based public sect or bank. Banks have put across t heir own dilemmas t o t he regulat or and said t he limit ed reach of banks is an issue."To rat ionalise t he cost st ruct ure, banks have request ed t hat t hey be permit t ed t o lend t o non-banking finance companies like gold loan companies," he said. The cent ral bank on July 2011 had announced t hat banks were no longer allowed t o classify cert ain loans as agricult ure loans, such as loans t o sugar co-operat ives. Following t his, banks like Bank of India and Bank of Baroda failed t o meet t heir priority sect or t arget s in t he quart er ending December 2011."The problem wit h farm loans is not slow growt h, but rising NPLs as farmers expect one more debt waiver," said a recent St andard Chart ered report ."The cent ral bank want s banks t o follow priority sect or norms in principle and not just in t heory. To ensure that banks do not circumvent priorit y sect or norms and t he credit is indeed going t o genuine farmers, t he Reserve Bank of India issued t he above clarification," t he report said.
Source:htt p:/ / economict imes.indiat imes.com/ news/ news-by-indust ry/ banking/ finance/ rbi-may-considerparing-40-priorit y-sect or-t arget-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 sect or regulat or Reserve Bank of India (RBI) has asked banks t o closely monit or risks emanat ing from unhedged foreign currency exposure of corporat es, and price t hem in t he credit risk premium while ext ending fund-based and non-fund-based credit facilities t o corporat es.The central bank's move is aimed t o prevent impact of volat ile forex market movement on corporat es and t heir lenders. "Recent event s relat ing t o derivative t rades have shown t hat excessive risk t aking by corporat es could lead t o severe dist ress t o t hem and large pot ent ial credit loss t o t heir bankers in t he event of sharp adverse movement s in currencies," t he RBI said.The RBI has also direct ed banks t o set a limit on unhedged exposure of corporat es on t he basis of bank's board approved policy. The cent ral bank had caut ioned banks against unhedged forex exposure of corporat es in it s second quart er monet ary policy review held in Oct ober as well."Unhedged forex exposure of corporat es is a source of risk t o corporat es and a source of credit risk t o financing banks. If t he unhedged posit ion is large, it can have serious consequences for t he solvency of corporat es in t he event of large depreciat ion of t he home currency and can result in large credit losses t o t he financing banks," t he RBI had said. In 2011, t he rupee fell over 16% dropping t o an all-t ime low of 54.32 per US dollar on December 15, which hit profit abilit y of companies borrowing heavily from overseas market s t hrough ext ernal commercial borrowings (ECBs) even as export -driven Indian informat ion t echnology (IT) firms gained. Source:ht t p:/ / banking.contify.com/ st ory/ rbi-asks-banks-t o-closely-monit or-unhedgedforex-exposures-of-cos-339315

Finance ministry opposes RBI's view to stretch priority sectors lending list
February 8, 2012 The finance minist ry is opposing a Reserve Bank of India suggest ion t o widen t he list of sect ors eligible for priority sect or lending. The Reserve Bank's draft report submit t ed t o the minist ry for it s comment s last week has also recommended t hat some infrast ruct ure segment s should be classified as priorit y. But a finance minist ry official said t here is no point in dilut ing t he exist ing list of priority sect ors. "And if banks are t oo keen t hen we should also raise t he limit from current 40% t o 50% or above."
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Canara Bank Samachar Lehar March 2012 RBI guidelines require banks t o lend 40% of t heir adjust ed net credit t o t he priorit y sect or, which includes agriculture, small-scale indust ries and ot her weaker sect ions. If banks fail t o meet the priority sect or lending t arget they can buy loans of regional rural banks or micro-finance inst it utions. The finance minist ry will now send it s comment s t o RBI before t he draft report is finalised. "If required, cert ain sect ors can be added. We will also hold discussions with st at e-run banks as it has been observed t hat it is most ly privat e banks t hat fail t o meet t he set t arget s," t he official said. Last year, RBI had set up a 10-member commit t ee t o examine t he exist ing classificat ion and suggest new guidelines. The committ ee, headed by Union Bank of India chairman MV Nair, reviewed t he eligibility crit eria for priorit y sect or loans in relat ion t o t he nat ure of act ivities, t ypes of borrowers, limit s on loan amount s and controls on end-use of funds. RBI Deput y Governor H R Khan said last week t hat t he bank is considering classifying housing finance for weaker sect ions as priority lending. Public sect or banks, however, feel t hat adding more sect ors will only add t o t he burden. "In t his fiscal we are finding it difficult t o meet t he t arget s because of t he low credit growt h. But it remains t o be seen what new sect ors are we t alking about," said a senior official wit h Cent ral Bank of India. Lending t o t he priorit y sect or grew by just 5% on an annualised basis in December because of lower offt ake of agricult ure and MSME loans. Credit offt ake by t he priority sect or had grown by as much as 29.2% during the same mont h of 2010.

Micro branches to cater to rural areas


February 14, 2012 The Union finance minist ry has direct ed banks t o set up 'ultra small' branches in all villages under t he financial inclusion scheme by March 31. The plan is t o 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 correspondent s. Such a branch, spread over just 100-200 sq ft , will be served by such correspondent s, wit h regular follow-up visit s by bank officials. A designat ed officer will visit t he village in his area on a pre-fixed dat e and t ime every week, wit h t he periodicit y enhanced if t he business volume just ifies it . Most banks are scept ical of opening branches in remot e and rural areas, fearing t he invest ment in t hese areas would not be commercially viable. Banks have been asked t o request local bodies in t hese villages t o provide t he place t o t hem free of cost , t ill t he business grows t o a viable level. The officer will visit the branch wit h a lapt op, providing connect ivity t o t he core banking syst em of the bank, so t hat various services such as verificat ion of account balance can be provided. The officer will also collect applicat ions for opening account s, give loans of all types and do recovery follow-up. The officer will not deal wit h cash t ransact ions, t hese being handled by banking correspondent s. This will enable people t o avail a wide range of banking services, while also reducing t he cost t o t he bank, said a finance minist ry official. Samachar Lehar March 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar March 2012 Banks have already been advised t o strengt hen t heir rural branches so t hat adequat e manpower is available. Earlier the finance ministry had said while opening a regular brick and mort ar branch in rural areas, aft er select ing t he locat ion, a branch manager must be post ed at least six mont hs in advance, t o enable business development . It said t he business plan of t he rural branch must envisage profit ability wit hin t wo years. Source:ht t p:/ / www.business-st andard.com/ india/ news/ micro-branches-t o-cat er-t orural-areas/ 464643/

RBI to meet banks soon on issue of rising bad loans


February 14, 2012 Worried over rising bad loans in cert ain sect ors, RBI t oday said it will discuss t he issue wit h banks soon. "St ress sect ors are well known, t he issues which are t here. But we don't t hink t here is a great concern as of now," Reserve Bank of India (RBI) Deput y Governor K C Chakrabart y said on t he sidelines of an event here. "But any how we are going t o discuss ( NPA issue) wit h t he banks in t he coming day. We are going t o meet banks during this mont h or first week of March," he said. Banking sect or, however, has some difficult y wit h regard t o loans t o aviat ion sect or. Banks are st ruggling t o recover `.19,000 crore from t he ailing nat ional carrier Air India. One of t he t hree proposals float ed t o restruct ure t he airline includes converting t he out st anding debt int o Government bonds which could be t ransfered t o t he banks' SLR port folio. Loan given t o privat e carrier Kingfisher has also t urned NPA. Talking about review of t he supervisory policies, procedures and processes by a RBI panel, Chakrabart y said t he report is expect ed t o be submit t ed by July. "By July it will submit t he report. It is about how t o st rengthen the supervisory syst em," he said. The commit t ee headed by Chakrabarty is reviewing t he exist ing supervisory processes in respect t o commercial banks in India. The t erms of reference of t he commit t ee include review of t he approach t o supervision, review of t he ext ant onsit e supervisory examinat ion and offsit e supervisory met hods besides review of t he adequacy of prudent ial supervisory guidelines and supervisory review process. Besides, it is also examining t he ext ant met hods for consolidat ed supervision and assessing t he adequacy of t he instit ut ional struct ure for carrying out supervisory funct ion. Source:ht t p:/ / economict imes.indiat imes.com/ news/ economy/ finance/ rbi-t o-meet banks-soon-on-issue-of-rising-bad-loans/ art icleshow/ 11874721.cms

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Canara Bank Samachar Lehar March 2012

Banks told to give Subsidised Post-harvest Loans to Farmers


February 16, 2012 The UPA government at t he Centre has t old banks t o provide post -harvest loans t o farmers at a subsidised 7% rat e t o discourage dist ress foodgrain sales. The government will also offer anot her 3% concession on int erest rat e if t he loan is repaid on t ime.The benefit will be available t o farmers against negot iable warehouse receipt s. Senior bankers said t he scheme will encourage farmers t o st ore t heir produce in warehouses. Banks have been t old t o kick off the scheme immediat ely for farmers carrying Kisan Credit Cards and for loans up t o 3 lakh. Banks have been providing post -harvest loans t o farmers at about 9% int erest rat e. The government will now offer a 2% int erest subvent ion t o t hem for ext ending t he subsidised post -harvest loans. This is an ext ension of t he exist ing subsidised pre-harvest crop loan facilit y, which has been in place for t he last several years. The government raised t he subvent ion t o 2% for 2011-12 from 1.5% for t he preceding fiscal.Banks have advised t heir regional offices and branches t o st art ext ending t he benefit t o farmers. Regional rural banks and cooperat ive credit bodies will also get int erest subvent ion for ext ending t his new facilit y t o farmers. "This move is expect ed t o encourage farmers t o keep t heir produces in warehouses, regulat ed by t he Warehousing Development and Regulat ory Aut horit y," said S. Padmanabhan, chief general manager wit h Nat ional Bank for Agricult ure and Rural Development , or Nabard.Earlier, cold st orage owners used t o provide financial assist ance t o farmers against farm produces st ored wit h t hem. Wit h t he new scheme in place, farmers are expect ed t o shun t he prevalent syst em and seek bank loans. The government introduced negot iable warehouse receipt s syst em in April 2011 t o help farmers gain access t o bank loans and avoid dist ress sale of farm produces. Negot iable warehouse receipt s also allow t ransfer of ownership of t he commodit y st ored in a warehouse wit hout having t o deliver t he commodit y physically. The negot iable receipt s are eligible as collat eral for loans under the Warehouse (Development and Regulat ion) Act , 2007. Source : ht t p:/ / economict imes.indiat imes.com/ news/ economy/ policy/ banks-t old-t o-givesubsidised-post -harvest -loans-t o-farmers/ art icleshow/ 11905388.cms

FinMin asks PSBs not to overstate profit


February 17, 2012 The finance minist ry has writt en t o all public sect or banks (PSBs) asking t hem t o ensure profit s are not overst at ed and t o make appropriat e provisions for bad loans.In a lett er t o heads of public sect or banks, t he minist ry said, "Inst ances of over-report ing of profit have been cont inuing year aft er year and no correct ive act ion seems t o have been t aken t o st op t he recurrence."
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Canara Bank Samachar Lehar March 2012 The let t er assumes significance in t he light of rising bad debt s in t he banking sect or.According t o a senior official of a public sect or bank, somet imes t here could be a difference of opinion about t he classificat ion of non-performing asset (NPA) which get s sort ed out at t he t ime of ext ernal audit or Annual Financial Inspect ion (AFI) by t he Reserve Bank of India (RBI). If t he bank is unable t o convince t he RBI for not classifying some loans as NPA and subsequent ly not making provisions, t hen t he bank has t o make provision aft er AFI, t he official said.To t hat ext ent t he profit is depressed lat er, an official said.Banks have been t rying t o follow prudent ial guidelines of RBI on NPA in let t er and spirit, but t here could be differences of opinion which get s resolved after AFI and reconciliat ion of account s t akes place, t he official added. During t he t hird quart er of t his financial year banks profit ability was hit due t o jump in bad loans and rest ruct ured loans.There has been about 19 per cent rise in rest ruct ured loan against the previous quart er as t ext iles, st eel and infrast ruct ure companies have suffered due t o lower out put and higher cost of funds. Besides, t here is NPA pressure for banks from t he aviat ion and power sect ors. They are st ruggling t o recover `.19,000 crore from t he ailing nat ional carrier Air India. Worried over rising bad loans in cert ain sect ors, RBI is expect ed t o meet banks t o t ake st ock of t he NPA sit uat ion soon."St ress sect ors are well known, t he issues which are there. But we don't think t here is a great concern as of now," RBI Deput y Governor K C Chakrabart y had said earlier t his week."But any how we are going t o discuss it (NPA issue) wit h t he banks in t he coming days. We are going t o meet banks during t his mont h or first week of March," he had said. Source:ht t p:/ / www.business-st andard.com/ india/ news/ finmin-asks-psbs-not -t ooverst at e-profit / 464963/

Capital support assured for public sector banks


February 20, 2012 The Finance Minist er, Mr Pranab Mukherjee, today said t hat t he Government is ready t o infuse more capit al in public sect or banks (PSBs) t o help t hem comply wit h t he Basel III capit al regulat ions, which envisage more st ringent norms for capit al adequacy.The extra provisions, or buffers, required under Basel-III will also be t aken care of, said Mr Mukherjee, at an event t o mark t he 70{+t }{+h} Foundat ion Day of Orient al Bank of Commerce (OBC), a public-sect or lender. The Basel III capit al regulat ions are t o be implement ed from January 1, 2013 and will be fully phased in by January 1, 2019.A Government-appoint ed commit t ee is working out the capit al requirement s of PSBs under t he Basel-III regime. St at e-owned banks had been asked t o submit t heir business plans for t he next few years t o help est imat e t he capit al requirement .

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Canara Bank Samachar Lehar March 2012 Tier-1 capital The Finance Minist er point ed out that Government has committ ed t o maint ain a minimum of 8 per cent Tier-I capit al in all t he PSBs; t his is over and above t he regulat ory requirement of 6 per cent .Even for 2012-13, t he Government is t aking t he st eps needed t o keep all t he PSBs adequat ely capit alised, Mr Mukherjee added."I can assure you t hat we are commit t ed t o bringing our banks at par wit h their global peers while cat ering t o the needs of our economy".Lat er, he t old report ers t hat all t he required capit al support cannot be achieved in one year and t hat it would t ake t ime. "As per the Basel III norms, we will provide capit al adequacy t o all t he public sect or banks". On t he occasion, Mr Mukherjee inaugurat ed OBC's corporat e office building at Gurgaon. This is t he first corporat e office of a PSB t o be locat ed in Haryana.Wit h reference t o financial inclusion, Mr Mukherjee indicat ed t hat t he Government may expand t he coverage of t he financial inclusion programme t o all habit at ions having populat ion of over 1,000 persons. Clarifying his st and on subsidy, t he Finance Minist er maint ained t hat he was losing sleep over t he subsidy leakage and not t he huge quant um of subsidy per se. Financial inclusion Mr Nagesh Pydah, Chairman & Managing Direct or of OBC, said t hat t he bank has already achieved t he t arget of providing banking facilit ies t o t he 574 villages allot t ed t o it under t he financial inclusion programme. OBC was required t o meet t his t arget by end-March 2012.Under t he financial inclusion programme, PSBs are required t o ext end banking facilit ies t o all habit at ions wit h 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 t his programme. On OBC's capit al requirement s, Mr S.C.Sinha, Execut ive Direct or of OBC, said t he bank was not looking for any capit al support from t he Government during 2012-13. Last year, t he Cent re had infused `.1,740 crore of capit al in OBC.Mr V. Kannan, Execut ive Direct or, OBC, said t he bank would, however, cert ainly require more capit al when t he Basel-III regulat ions come int o force in 2013.
Source:htt p:/ / www.t hehindubusinessline.com/ indust ry-and economy/ banking/ art icle2910570.ece

Finmin may Dilute RBI Panel's Proposed Harsh NBFC Rules


February 20, 2012 Amid int ense lobbying by finance companies, t he government has st epped in t o wat er down t he harsh, new rules prescribed by a Reserve Bank of India commit t ee. A group, const it ut ed by t he finance ministry, has suggest ed t hat since non-banking finance companies (NBFCs) play a significant role in asset creat ion and reach out t o borrowers t hat high-st reet banks can't deal wit h, t hey should be given adequat e t ime t o raise capit al and fulfil st rict er provisioning st andards.While t he RBI panel, headed by former deput y governor Usha Thorat , has given it s recommendat ions for quit e some mont hs now, the regulat or is yet t o come out wit h t he guidelines. Meanwhile, the key advisory group formed by t he government , comprising senior bureaucrat s, indust ry represent at ives,
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Canara Bank Samachar Lehar March 2012 professionals, and even cent ral bank officials, has finalised a parallel set of recommendat ions submit t ed t o t he ministry less t han a fort night ago. The advisory group's report , which has the backing of t he government as well as t he indust ry, may hold back the central bank from int roducing t he st erner norms recommended by t he panel. Among ot her t hings, t he commit t ee had recommended t hat NBFCs should have t ier-I capit al adequacy level of 12%. At present , NBFCs have t he flexibilit y of maint aining a minimum capit al adequacy rat io of 12-15% (depending on cat egories) on t he st rengt h of it s t ier-I (or capital and free reserves) and t ier-II (long-dat ed bonds) capit al. Thus, if t he RBI panel recommendat ion is implement ed, t hen NBFCs will have t o raise enough equit y t o avoid any disrupt ion in business act ivit y - a condit ion t hat most firms will find t ough t o meet . According t o members of t he group, t he governmentconst it ut ed panel has suggest ed t hat all NBFCs should get at least t hree years t o reach the prescribed capit al adequacy st andard and during t hat period, t hey should be allowed t o grow t heir business. The advisory group also felt t he RBI commit t ee's recommendat ion t hat there should be provisioning on loans wit h past dues of 90 days or more, could significant ly impact profit abilit y and capit al of many NBFCs. (At present , a loan is t reat ed as non-performing by an NBFC if t he borrower fails t o service t he int erest or EMI for 180 days). The advisory group is in favour of giving NBFCs t hree years t o migrat e t o a new provisioning st andard. The group t hinks t hat there should be a new cat egory of priorit y sect or NBFCs, and t here should be provisions for NBFCs t o have access t o debt recovery t ribunals and securit y 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 t o follow less st ringent rules t han banks on risk weight age and provisioning). The regulat or want s t o end t he pract ice where banks use NBFC arms t o pursue businesses which would be t ougher in banks. Thus, if NBFCs (like banks) have a 90-day provisioning and same risk weight age for act ivit ies like loan against shares, t here will be very litt le incent ive for banks t o float NBFCs. "Since about 64% of the NBFC funding comes from banks, t he RBI panel t hinks, and right fully so, t hat banks should have more capit al and the large ones pose syst emic risk But , it's felt that under t he present circumst ances, imposing rules that business finds t oo difficult t o follow could adversely affect t he business environment ," said a person familiar wit h t he deliberat ions. The advisory group, however, has endorsed t he RBI panel recommendat ion t hat only NBFCs wit h asset book of 50 crore and above should be regist ered wit h t he regulat or, which will enable t he latt er t o focus on medium and large firms. Of t he 12,400 NBFCs, only about 1,800 have asset s of over 50 crore. "It was broadly felt t hat NBFCs reach out t o segment s t hat banks can't and have a more cost -efficient st ruct ure with no elaborat e organisat ional set up. Besides, t he regulat or should not paint all NBFCs wit h t he same brush," said a group member. Source ht t p:/ / 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), t he nat ional lobby of lenders, has asked banks t o impose st ringent condit ions on loans sanct ioned t o st udent s get t ing admission under t he management quot a amid rising concerns over default s on repayment of educat ion loans. "Any loan considered by banks for st udent s get t ing admission under t he management quot a would be out side t he model scheme. Banks may fix appropriat e t erms and condit ions for such loans," IBA said in a guidance not e. Loans given t o such st udent s under t he model educat ion loan scheme is more at risk as t heir employment pot ential is relat ively less, it said. Under t he model scheme, banks are not permit t ed t o look at t he financial strengt h of parent s while evaluat ing loan t o a merit orious st udent . Management seat s or management quot a refers t o t he seat s in privat e educat ion inst it ut ions for which t he management has the discret ion t o give admission on fact ors ot her t han merit . Not ably, t he Government of India is mulling t o form a credit guarant ee t rust t o reduce non performing asset s (NPA), or bad loans, in educat ion loan. Banks' NPA in educat ion sect or is as high as 6%. Source: ht t p:/ / banking.contify.com/ st ory/ banks-must -exercise-st rict -norms-while-givingeducat ion-loans-under-mgmt -quot a-banking-body-iba-511289

Foreign Banks Should Step Up Priority Lending


February 22, 2012 Foreign banks in India should set aside 40% of t heir t ot al loan port folio for priority sect or, bringing t hem at par wit h t he mandat ory requirement of domest ic lenders, according t o t he recommendat ions of Nair Committ ee report . The panel, headed by Union Bank CMD MV Nair, also suggest ed t hat loans t o women should be classified as lending t o t he weaker sect ion. Current ly, foreign banks need t o lend 32% of t heir loans t o priorit y sect or, including loans t o farmers, small businessmen, st udent s, weaker sect ions of societ y. Indian banks, on t he ot her hand, have t o lend at least 40% of t heir t ot al loan kitt y t o the priorit y segment . "As per t he reciprocit y agreement under WTO, there is no dist inct ion made by ot her count ries for Indian banks. And, t herefore, it is only fair t hat t hey (foreign banks) also meet t he 40% t arget ," said Nair. Also, foreign lenders should mandat orily lend 15% t o export ers and micro and small ent erprises (MSE), same as t heir local count erpart s, t he commit t ee suggest ed. Current ly, foreign banks lend 12% of t heir t ot al loan port folio t o export ers and 10% t o MSEs. The panel has proposed classifying loans t o financial int ermediaries, such as finance companies t hat are used for lending t o t he specified segment , as priorit y sect or loan, but wit h a sub-limit of 5%. Current ly, only loans t o microfinance inst it ut ions are reckoned as priority sect or lending.
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Canara Bank Samachar Lehar March 2012 It has also suggest ed t hat while banks should meet t he 18% loan t arget in agricult ure, sub-t arget s of direct and indirect credit t o agricult ure should be scrapped. Inst ead, 50% of agricult ure loans should be direct ed t o small and marginal farmers. The commit t ee has recommended t hat up t o 15 lakh loan amount per st udent in India be t reat ed as priority lending, higher t han t he current limit of 10 lakh.
Source:http:/ / epaper.timesofindia.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 'nominat ed agency' st at us from t he Direct orat e General of Foreign Trade (DGFT) t o import gold dore bars. Officials explained t his may happen if t he Reserve Bank of India (RBI) does not agree t o allow free gold dore import . Sources say based on a proposal by t he commerce minist ry, t he Depart ment of Economic Affairs (DEA) under t he Minist ry of Finance, has already initiat ed discussions wit h RBI. A gold dore bar is a semi-pure alloy of gold and silver, usually creat ed at t he sit e of a mine. It is t hen t ransport ed t o a refinery for furt her purificat ion. Aft er gold ore is mined, t he first st age of purificat ion produces a cast bar (gold dore) t hat is approximat ely 90 per cent gold. The ot her 10 per cent is met als like silver and copper. RBI governs t he import of the yellow met al, since gold is considered dual currency for reserve purposes, explained an official. Gold dore, said t he official, is primarily a raw mat erial. As a result , t here are no exchange-relat ed worries if it is import ed and used for making gold jewellery. "Wit h t he number of refineries growing in India, availability of raw mat erial is an issue. Alt e-rnatively, gold refiners depend only on scrap, which is not available readily for use. People hold on t o scrap in ant icipat ion of benefit ing from rising gold prices," said an indust ry source. Source:ht t p:/ / smart invest or.business-st andard.com/ common/ srchout det -106531-gold% 20refiners%20-DGFT_for_nominat ed_agency_st at us_t o_gold_refiners.ht m

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Government mulls PSU banks to cut loan rates by March


February 27, 2012 The finance minist ry is nudging st at e-owned banks t o cut lending rat es before March-end, t hough most lenders had init ially t aken a st and t o review int erest rat es only next financial year.This has not been communicat ed in writ ing, but at a recent meet ing, senior minist ry officials asked bank chiefs t o consider lowering int erest rat es. Even aft er t he Reserve Bank of India cut banks' cash reserve ratio (CRR) in January, signalling a reversal in it s monet ary policy st ance, bankers had said it would t ake a while for lending rat es t o soft en.Since CRR is t he slice of cust omer deposit s t hat banks have t o keep as cash wit h t he RBI, a cut in the rat io following repeat ed rat e hikes was perceived as t he onset of a dovish monet ary policy. But since no bank has lowered ret urns on deposit s since t he RBI act ion, t heir cost of fund cont inues t o be high. Banks are reluct ant t o lower deposit rat es in February and March because t hey do not want t o miss t heir annual deposit mobilisat ion t arget s."It 's a Cat ch-22 sit uat ion...Cost of resources has act ually gone up for banks," said t he chairman of a large commercial bank. Senior bankers declined t o go on record on the mat t er. However, DK Mitt al, secret ary, depart ment of financial services, said: "We have suggest ed banks t o bring down rat es in whichever sect or and t o what ever ext ent possible, and as quickly."The int ent ion, he t old ET, "is t o creat e a posit ive environment and not t o int erfere wit h banks' operat ions". Ministry officials expressed t heir views t o bankers about a fort night ago. Following t his, Bank of Maharasht ra cut it s base rat e - t he minimum rat e charged from best cust omers - by 10 basis point s t o 10.60% and Cent ral Bank of India lowered home loan rat es by 25 basis point s across various mat urities.Last week, Union Bank Chairman MV Nair t old ET t hat t he bank is exploring if t here is a scope t o lower rat es in cert ain cat egories. Amonth before t he RBI cut CRR, Union Bank had announced a t oken rat e cut of 10 bps t o 10.65%. Sending a Message to Industry According t o Mitt al, some rat e cut s by banks may help t o send across a message t o indust ry and borrowers in general t hat t he "invest ment environment will t urn conducive sooner t han expect ed". While banks may lower rat es in some segment s, more meaningful rat e cut s can happen once bulk money becomes less expensive. Int erest rat es on cert ificat e of deposit - an inst rument banks sell t o raise bulk deposit s - have risen in t he last one mont h. For inst ance, int erest rat es on oneyear CDs are up to 10.15% from 9.80% a mont h ago. Source : ht t p:/ / economict imes.indiat imes.com/ news/ economy/ policy/ goverment -mullspsu-banks-t o-cut -loan-rat es-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 minist ry has ordered an overhauling of t he elect ronic payment syst em for t he Cent re's flagship social welfare schemes t o check fraud and cut down t ransact ion cost s. The minist ry has asked st at e-run banks t o ensure t hat elect ronic payment s t o beneficiaries of such schemes are made only t hrough the banks in which t hey hold an account . The ministry feels that t he move would bring down t he cost of fund t ransfer t o almost half besides guarant eeing an audit trail of t he payment . As of now, if a beneficiary of a scheme such as t he Mahat ma Gandhi Nat ional Rural Employment Guarant ee Act holds an account in t he St at e Bank of India, but t he payment delivery syst em in his area is being handled by Punjab Nat ional Bank, t he payment is credit ed t o t he beneficiary's account t hrough PNB. This makes government pay NEFT charges t wice--first t o PNB and t hen t o SBI-on a single t ransact ion. The Nat ional Elect ronic Funds Transfer is a nat ion-wide payment syst em t hat facilit at es one-t o-one t ransfer of funds. Under t he scheme, a remit t er has t o pay Rs5 plus service t ax on every t ransact ion up t o Rs1 lakh."There are t wo primary issues wit h t his," a finance minist ry official said. "First , t he administ rat ive minist ry of t he scheme has t o pay NEFT charges t wice. Second, if t he t ransact ion fails, it s record is lost among several such t ransact ions." The official said t he proposed mechanism would not only reduce t he pressure on t he NEFT syst em, it would also guarant ee a proper record of t he payment as all subsequent t ransact ions would be t hrough t he parent bank. The finance minist ry has already launched a pilot project in Bulandshahr dist rict of Ut t ar Pradesh t o t est t he viability of t he mechanism.St at e-run banks say t he proposed plan will not increase t heir work load as t hey have t o anyhow make payment s individually. "It's just a mat t er of clubbing all singular account s, 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, t he government aims t o provide banking services t o 73,000 villages wit h populat ion of 2,000 over t he next t hree months. Last week, a panel headed by Unique Identificat ion Aut horit y of India chairman Nandan Nilekani had proposed t hat all government payment s over `.1,000 should be made electronically. The panel said a last mile t ransact ion fee of 3.14% wit h a cap of Rs20 per t ransact ion should be paid by t he government for such payment s. It also recommended t hat a net work of 1 million int er-operable micro ATMs, operat ed by business correspondent s, be set up across t he count ry. Source : ht t p:/ / economict imes.indiat imes.com/ news/ news-by-indust ry/ banking/ finance/ e-payment -for-social-schemes-finance-minist ry-asks-banks-t o-change-fund-t ransferprocess-t o-check-fraud/ art icleshow/ 12063638.cms
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Canara Bank Samachar Lehar March 2012

KEY BANKING INDICATORS


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

Compiled by Regional Staff Training College, Gurgaon Sector- 18, Plot no- 80, Near IFFCO Chowk Gurgaon. Email:rstccodel@canarabank.com PH: 0124-2341589 FAX: 2341588

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