Indian Banks

The Reserve Bank of India (RBI) is set to have a new deputy governor in November, when the present term of Usha Thorat comes to an end. Thorat, 60, will complete her five-year tenure in November and may not be reappointed.

According to RBI sources, the government — which appoints deputy governors — is of the view that it will do away with the practice of reappointment to important posts like chairman of the Securities and Exchange Board of India, RBI, National Bank for Agriculture and Rural Development.

However, there is no rethinking on allowing extensions of term. According to RBI rules, a deputy governor is appointed for five years or until he or she attains the age of 62, whichever is earlier. The retirement age of RBI governor is also 62.

Though there was no norm on how many deputy governors can be chosen from RBI internally, the practice usually followed is to have at least two from within the central bank. The third deputy governor is usually a public sector bank chief, while the fourth is an economist. Apart from Thorat, Shyamala Gopinath is from RBI while Subir Gokarn is an economist and K C Chakrabarty is a commercial banker.

Technically, Thorat was also eligible for re-appointment as she will still have two years before the retirement age kicks in. But for Thorat to continue, mere extension will not do and the government has to form a search committee and shortlist at least three candidates for the deputy governor’s post.

In September last year, the government had allowed the reappointment of Shyamala Gopinath, who had completed her five-year term. She was reappointed for two years up to June 2011. It was the first occasion when a deputy governor was reappointed.

Thorat oversees the department of banking operations and development, banking supervision, currency management, rural planning and credit department, among others.

Among the internal candidates that could replace Thorat are V K Sharma, the senior-most executive director, and Anand Sinha, another ED.

Gopinath’s reappointment followed observations made by the Delhi High Court in 2007 on the need for proper norms and criteria for the appointment of a deputy governor.

The court made those observations in a case filed by P K Biswas — an executive director of RBI — who challenged the appointment of Thorat as deputy governor. Biswas challenged the appointment on the grounds that despite being senior to Thorat, his case was ignored. The court had dismissed Biswas’ plea.

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The government is likely to appoint State Bank of India as the clearing bank for the proposed Goods and Services Tax (GST) and National Securities and Depositories Ltd (NSDL) as the clearing corporation for implementing the infrastructure required for inter-state tax administration.

A special purpose vehicle (SPV) would be set up for information technology infrastructure in GST. Called ‘GST N’ (Network), it would have the Union government, state governments and technology partner NSDL as stakeholders. Sources say the government is likely to make these appointments official to prepare ground for quicker implementation of GST.

NSDL and SBI will have to ensure the tax, especially in inter-state transactions, is collected and processed without procedural delay and distributed to states on a set schedule.

P Chidambaram, former Union finance minister, aimed to get GST rolling by April 1, but the deadline was re-set to April 1, 2011. The appointment of the two lead organisations would help them prepare and test their systems much in advance, an official said.

Introduction of GST will probably be India’s most ambitious tax reform to bring all states on a par and ensure higher and more transparent collection of taxes by the government. It is hoped that the system can check tax evasion at any level.

Central sales tax will be replaced by the consumption-based GST. In case of inter-state transactions, NSDL might be given special powers to distribute taxes to the states concerned after making a collection in any other state, said an official with knowledge of the matter. The IT network of NSDL and the vast branch network of SBI made them natural choices to ensure that all states get the taxes due to them fairly and quickly, the official said.

NSDL has the experience, as it had set up the tax information network for the income tax department, which is running well.

In 2004, the Task Force on Implementation of the FRBM Act, chaired by Vijay Kelkar, had also said that the existing systems should be used for GST implementation, both at the Centre and at the state level. As the tax information network was set up by NSDL, it seemed a natural choice for GST.

Tax experts believe this is a step in the right direction, but the challenge will be implementation. “At some stage, the system would need to have the ability to process, verify and reconcile the dealer/invoice details uploaded by inter-state suppliers. The other big challenge would be to expand the coverage to states where IT penetration is relatively low, to facilitate online registrations/filings/payments for all taxpayers,” said Pratik Jain, executive director, KPMG.

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SBM to raise over Rs 583 crore through a rights issue

After completing the amalgamation of state Bank of Saurashtra and State Bank of Indore with itself, State Bank of India (SBI) plans to discuss the issue of merging the remaining five associate banks with the government.

SBI Chairman O P Bhatt said the bank would discuss with the government whether it should go ahead with the consolidation of some more associates. There would be consultations with the five associate banks as well to make the process relatively faster and easier.

He was speaking to reporters on the sidelines of a seminar on funding to solar power project organised by the Confederation of Indian Industry.

The government has already given a nod for merging State Bank of Indore with SBI. Its branch would work as SBI branches from August 26. SBI had already amalgamated State Bank of Saurashtra last year.

Referring to the choice of banks for merger, he said it didn’t matter whether it was listed or unlisted. What mattered was how smoothly it could be done, as SBI had an experience in terms of modalities.

The shares of the three associate banks – State Bank of Mysore (SBM), State Bank of Travancore (SBT) and State Bank of Bikaner and Jaipur (SBBJ) – surged by over 35 per cent in last two trading sessions on buzz about further consolidation.

However, the three stocks fell today. SBM was down by 1.92 per cent to Rs 1,301.6; SBT was down by 8.9 per cent to Rs 959.45 and SBBJ was down by 5.94 per cent to Rs 773.95 on the Bombay Stock Exchange (BSE).

Meanwhile SBM today informed BSE that it was planning to raise over Rs 583 crore through rights issue. The capital raising process is expected to be completed before the end of the year.

The board of SBM has fixed Rs 540 a share price for its rights issue of 10.8 million shares. The ratio for the rights issue is set at 3:10, which means investors who apply for the issue will receive three shares for every 10 shares.

Bhatt said associates were raising extra funds, since the capital requirements for banks were rising or had already risen. SBI wants all associates to be well capitalised just as their parent, which wants to raise about Rs 20,000 crore this year. SBI may raise the funds through a rights issue but has not ruled out looking at other options like follow-on offer.

Six associates, including State Bank of Indore, together posted a 0.54 per cent drop in its net profit at Rs 682.96 crore at the end of June. Their profits dipped due to higher provisioning for non-performing assets (NPAs). Their net interest income grew by 52.22 per cent (year-on year basis ) to Rs 2,565.57 crore at the quarter ended June.

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Economists say RBI likely to raise rates by 25 bps in mid-September.Even as the Reserve Bank of India sounded caution on inflation in its annual report, dealers and economists say by the next review on September 16, the central bank will have more data and clarity to decide on how to combat inflation, while ensuring it doesn’t hurt growth.

RBI’s annual report yesterday maintained its July policy stance, that inflation remains a concern and monetary policy action would continue. Economists surveyed said RBI is likely to raise rates by about 25 basis points in mid-September to cool excessive demand. It could also narrow the corridor between the rate at which it lends to banks and borrows from them, they said.

“The RBI is not yet done with increasing its rates,’’ said Shubhada Rao, chief economist with YES Bank. “We are expecting tightening to be front-loaded, as the real economy responds with a lag.’’

Rao says RBI may raise the repo rate by up to 50 basis points by March. The central bank on July 27 raised the rate by 25 basis points, the fourth quarter-percent point increase in it since January 1, and the reverse repo rate by 50 basis points. It had then raised the inflation forecast for March to 6 per cent, from its earlier projection of 5.5 per cent made in April.

The central bank has voiced anxiety over rising asset prices and said demand has played a role in influencing these, said Rupa Rege-Nitsure, chief economist at Bank of Baroda in Mumbai. She expects RBI would raise rates by up to 75 basis points by the financial year-end in March.

Before the mid-September policy review, data from first quarter GDP numbers, wholesale price index, index of industrial production and the global trend of prices of commodities, including crude oil, the global economic uncertainty and outlook will all help the central bank decide which instrument will be most suitable, bankers say.

By then, the status of the monsoon over the country will be clearer. A widespread monsoon could help keep food prices under check. In its July policy, RBI had mentioned the monsoon as one of the key factors influencing inflation, apart from a good kharif harvest, global energy and commodity prices.

“The RBI has to do a balancing act,’’ said Krishnamurthy Harihar, treasurer at FirstRand Bank in Mumbai. “While it needs to control inflation, it also has to help keep GDP high, as any sharp increase in rates could have wider implications.”

Yield on the 7.8 per cent bonds maturing in 2020 rose about six basis points today to 8.07 per cent, the highest in about six months.

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The Reserve Bank of India (RBI) on Tuesday said the supervisory regime of non-banking finance companies (NBFCs) needed to be strengthened for a more robust assessment of the underlying risks.

“The key underpinnings while developing (new) products and markets will be to ensure that the process of disintermediation away from banks is genuine and the risks are clearly and transparently captured in a prudential framework in areas where both banks and NBFCs are involved,” RBI said in its annual report for 2009-10 released on Tuesday.

It added that inter-connected flows between NBFCs and other financial sector entities also needed close monitoring.

RBI has been taking efforts to tighten control over NBFCs, which are more loosely regulated than banks.

Any takeover or merger involving deposit-taking NBFCs now requires the prior approval of RBI. In addition, the management of the merged entity must comply with the ‘fit and proper’ criteria of RBI.

In its annual report, RBI also chided NBFCs involved in micro-finance for charging high rates while accessing cheaper funds from banks.

According to the banking regulator, there are 12 systematically important non-deposit NBFCs that are lenders with an asset size of at least Rs 100 crore engaged in micro-finance lending.

Many of them have agreements with private sector and foreign banks for outright buy-outs and direct assignments of loans for priority sector requirements that banks are subject to.

However, the end-borrowers do not get the benefit of low interest rates, as NBFCs are assigned the responsibility of managing the loans. Consequently, the borrower continues to pay the same rate of interest, which is as high as 23.6-30 per cent.

“The main sources of funds for these NBFCs are borrowings from banks and financial institutions. Most of them have received large amounts as foreign direct investment and many of them are now largely foreign-owned,” RBI added.

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The Reserve Bank of India’s (RBI’s) income for 2009-10 fell 45.85 per cent to Rs 32,884.14 crore, from Rs 60,731.98 crore a year ago, due to low interest income from foreign currency assets.

The surplus transferable to the government dipped to Rs 18,759 crore from Rs 25,009 crore last year. The earnings from foreign currency assets and gold declined 50.58 per cent to Rs 25,102.55 crore from Rs 50,796.21 crore in 2008-09.

The dip in earnings was due to lower yield on foreign securities and interest on balances held abroad, due to a low interest rate environment. RBI Deputy Governor Shyamala Gopinath said returns had been low due to near-zero interest rates in the international market. The rate of earning on foreign sources plummeted to 2.09 per cent from 4.16 per cent in the previous year.

RBI parks foreign exchange reserves in high-rated bonds and deposits. It follows three principles — safety, liquidity and returns while deploying reserves abroad. The safety got first priority, Gopinath said.

RBI changed its accounting policy for valuation of securities. Under the revised policy, the change in value (due to appreciation or depreciation) of securities is booked as a balance-sheet item. Earlier, depreciation was booked to the profit and loss account, while appreciation was ignored.

RBI’s earnings from domestic sources also took a blow. They declined from Rs 9,935.77 crore to Rs 7,781.59 crore due to an increase in the coupon income from a larger portfolio of government securities and a decrease in the depreciation on securities.

An increase in net interest outgo under the liquidity adjustment facility, a drop in interest earnings on loans and profits from sale of securities also put pressure on the domestic income of the bank. The central bank’s expenditure, comprising establishment costs, agency charges and security printing charges (arising from performing statutory function), rose 2.25 per cent from Rs 8,217.88 crore in 2008-09 to Rs 8,403.12 crore.

Its establishment expenditure was down due to lower provision for long-term employee benefits. These benefits are calculated on the basis of actuarial valuation.

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The Reserve Bank of India (RBI) plans to review the guidelines for issuing commercial papers (CPs). CP issuances are expected to rise under the base rate regime.

Corporate houses issue CPs to raise funds from banks as CP rates are lower than the prevailing lending rates. This is because the instrument is tradable. CP issuances have surged since the advent of the new loan pricing regime, base rate, from July 1. Banks have been barred from lending below their base rates.

Speaking at a press conference to discuss the central bank’s annual report for 2009-10, RBI Deputy Governor Shyamala Gopinath said: “We are in the process of reviewing the guidelines in consultation with market participants.”

With the base rate system, CPs have became the flavour of the day for banks, as they found an avenue to deploy funds for returns that are lower than their base rates Most banks’ base rates are between seven per cent and 8.25 per cent. According to RBI data, companies have reported Rs 11,680 crore worth of issuances in the first two weeks of July, while between April 15 and June 30, the issuances had risen by Rs 16,627 crore.

According to Gopinath, CP issuances are going to rise in the future, mainly because of the base rate regime. The norms needed to be reviewed as the existing ones were issued at least a couple of years ago. However, she said RBI was not averse to more CP issuances.

“Our concern is not so much the existing guidelines on ratings but that these guidelines were framed a couple of years ago. In the changed situation, when the base rate has come, there is a possibility of more such issues,” said Gopinath.

On whether RBI was concerned about the end use of CP funds, Gopinath said: “This issue did come up in an earlier meeting. For all issuances of longer-term instruments, the companies have to disclose the reasons for which the funds are used. The issue which came up is that whether some form of disclosure should be there. That is yet to be discussed with the market participants.”

Bankers said the scrutiny of the background and the prospective use of funds by companies raising money through CPs was less stringent when compared to the strict checks banks did while giving loans.

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The proceeds from the issue will be used for expansion plans.

Government-owned Punjab & Sind Bank is planning to raise Rs 500-600 crore through an initial public offer (IPO) by diluting 17-18 per cent of the government stake. The bank is likely to hit the capital market by this year. The proceeds from the issue would be utilised in funding the expansion plans.

The government owns 100 per cent stake in the bank. Speaking to Business Standard, Executive Director of the Bank, P K Anand, said, “We would be filing DRHP(Draft Red Hearing Prospectus) document to Sebi by this month. We would be diluting 17-18 per cent of the government stake or in other words, the bank would offer 40 million shares to the public. If everything goes well, we would be able to hit the capital market by this financial year.”

In FY10, the bank did a business of Rs 82,000 crore and is likely to touch Rs 95,000 crore this year. The deposit was Rs 49,500 crore last year while advances stood at Rs 32, 500 crore. In FY10, the bank posted an 18 per cent jump in net profit at Rs 508.8 crore compared to Rs 431.1 crore in the previous year.

When asked about the projected growth, he added, “This year we are consolidating and expecting the same growth of 20-23 per cent as projected by the Reserve Bank of India.” The bank has a capital adequacy ratio (CAR) of 12.73 per cent, while the CD ratio stood at 67 per cent.

At present, the bank has 920 branches across India, with 450 in Punjab alone. Meanwhile, he mentioned the bank is planning to open 100 branches and 180 ATM’s across India by the end of this financial year. Out of the total branches and ATMs, 40 branches and 35 ATMs would be in Punjab.

Punjab constitutes 23-25 per cent of the bank’s total business. Besides Punjab, the bank is planning to open branches in Haryana, Uttar Pradesh, Gujarat, Tamil Nadu, among others.

The bank is also in process of hiring 2,000 clerks and officers this financial year to cater to the expansion plans. He also mentioned that the bank has hired the services of Wipro for making their branches CBS enabled. Initially Satyam was given the contract but after Satyam fiasco, the contract was terminated and handed over to Wipro.

He added, “Our pilot project is already operational with 15 branches under CBS compliance and by 2012 all the branches would be CBS enabled.”

The bank also announced attractive rate of interest of 10.5 per cent for financing rural godowns of any storage capacity according to the requirement of borrower in Punjab and Haryana.

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