358th Issue BOM Banking News 21st To 26th April 2014 by Vasant Ponkshe Secretary AIBOA

358th Issue Banking News 21st to 26th April 2014 By Vasant Ponkshe, Secretary AIBOA
Pune
Year 7. Issue 45
Page | 1
SINCE 20.06.07 ISSUE NO-
358
BANK OF MAHARASHTRA OFFICERS ASSOCIATION

(AFFILIATED TO AIBOA)
Mumbai Office: Jiva Devashi Niwas, Ranade Rd, Dadar, Mumbai 029.
Pune Office: 1501, Lokmangal, Shivajinagar, Pune 005.
BY VASANT PONKSHE
SECRETARY AIBOA
CHAIRMAN BOMOA
BANKING NEWS
21st to 26th April 2014
Raghuram Rajans Wars: Rift among freemasons, tension at home
For the past hundred years, central bankers - men and women with the magical power to
create and extinguish money - have been perceived as a club of freemasons. Among them,
they even shared a few secrets that they held back from the rulers who put them in office.
Disagreements, which couldn't be sorted out over a glass of wine, rarely found their way to
the Press. It had been left to authors of financial history to discover subtle clefts years later
while rummaging through archival papers and yellowing documents; some differences, had
these been ironed out in time, could have cushioned busts and minimized miseries.
Kept in the Dark So, when a closely tracked central banker, flags off his differences with
counterparts elsewhere, possibly for the media to lap it up, it, in a way, marks the start of an
era. Last week, when Raghuram Rajan forcefully argued that monetary authorities across
continents should consult each other, make a mental note of the turbulence their policies
could cause on emerging markets, he made news. First, it came from an economist of the
stature of Rajan; second, the RBI governor chose Washington to make his point at a time
diplomatic relations between India and US have worsened. At the meeting of central
bankers, the governor met with surprising resistance. His counterparts reacted the way
ministers do on trade barriers and subsidies at WTO summits. Rajan's advice may be
ignored for years to come, but his statement, besides bringing out into the open differences
between central banks, would carry a brewing debate beyond the confines of academia. Five
years ago, the same central banks which were willing to spell out their woes, discuss and
seek support from peers (or inferiors) all over the world for a co-ordinated action to bail out
America and Europe, are today unwilling to share information, or even give a sense of what
they have in mind. When there was an urgency to save basket economies through stimulus,
everyone mattered; today, when things are beginning to look up and windows of easy money
are being shut gradually, the distant central banks of emerging economies (EMs) - which
had to deal with the inflow and outflow of hot money and trail of destruction such flows leave
behind - are being kept in the dark. It's a valid argument and Rajan's views would certainly
find takers among central bankers of some of other EMs who are hesitant to voice similar
concerns. A possible sharing of information on tapering and views on interest rate cycle by
Fed with other central banks is not exactly insider information or parting with a state secret. It
would reflect a certain maturity that central bankers have displayed in the past. The
Pune
meltdown of 2008, after all, was an outcome of inept monetary policy feeding the greed of
foolish bankers.
But while Rajan's may not be a voice in the wilderness, he may not find support from
countries that are less affected by sudden cross-border money flows. Information of what
Fed's and ECB's plans are is more crucial for India which needs more dollars for imports
Page | 2 than what it earns through exports. China, for instance , will be less bothered. Even India,
which looked more helpless a year ago when it had to grapple with news of tapering and
high current account deficit, was largely unruffled by the crises in Argentina, Turkey and
Ukraine , thanks to a dramatic improvement in the deficit number.
Battle at Home?As a central banker in an interconnected world, Rajan strongly feels what
he said at Washington. His remarks bring to the fore arguments economists like Helene Rey
of the London Business School had made in the past. It's a polemic that would play out in
the ethereal world of central banking, and occasionally find mention in newspapers. But at
home, with a new government a month away, Rajan will have to deal with another question
that is more immediate and lot more noisy. It's "inflation targeting" -- a subject that's core to
Rajan's thinking. He was quick to dismiss reports of his differences with the BJP as mere
speculation. Faced with a pointed question, there is little else that he could have said. But it
would be naive to think that BJP's stance on interest rates was a surprise to Rajan. By the
time he took charge at RBI, it was fairly certain that UPA was afading force. He wasted no
time to put down his thinking on inflation and interest rates in black and white. Now,
irrespective of whether a crop failure or demand recovery pushes up inflation, chances are
he would display a streak of stubbornness if the next FM nudges him to cut rates.
RBI Governor Raghuram Rajan gets Ben Bernanke's support for inflation targeting
MUMBAI: Raghuram Rajan's efforts to make 'inflation targeting' the corner stone of Indian
monetary policy drew support from former Federal Reserve chairman Ben Bernanke, though
with the caveat that a focus on inflation does not mean the central bank ignores everything
else. Bernanke, credited with saving the global financial system from collapse with
unconventional monetary policy, said that in a high inflation economy even a relatively high
target is helpful since it anchors expectations. "I have been very supportive of inflation
targeting," Bernanke told the audience at Kotak Presidium, a thought leadership series from
Kotak Mahindra Bank. "Monetary policy benefits from clarity and transparency. It really
helps people know what you are trying to achieve. Particularly in a country where inflation
has been high, setting a target, even if higher...it tells markets what to expect." Inflation
targeting has become a contentious issue in India ever since the a committee headed by
Urjit Patel, a deputy governor, recommended that the RBI target consumer price inflation
rate of 4% with a two percentage point band. Although, Rajan has not formally accepted the
report, he is said to be inclined to formally adopt inflation-targeting. Critics have argued that
targeting consumer price rise would kill growth in an emerging market. On Tuesday,
Bernanke balanced his general support of inflation-targeting with the caveat that a single
minded pursuit of a price target may not always be helpful. "Being in favour of inflation
targeting is not as saying ignore everything else," said Bernanke. "Central banks, even
paying single minded attention, do pay some attention to growth." Amid the rising debate in
India about the future of Rajan as a central banker if the Bharatiya Janata Party is voted to
power, Bernanke said a mature economy needs an independent central bank, though he did
not comment directly on the matter. "I do think that a mature economy, which India is
becoming, a modern financially oriented economy.... an independent and responsible central
bank is really central," said Bernanke. Countering Rajan's charge that central bankers in the
developed did not pay enough attention to what their actions mean to developing markets,
Bernanke said the US Federal Reserve had always dome so. Bernanke who said he goes
'back a long way' in his relationship with Rajan, said the Indian central banker may be
barking up the wrong tree by claiming that central banks in the developed world were turning
Pune
Nelson's eye to the impact of their decisions in emerging markets. "There is a perception in
some quarters that US does not pay attention to the situation," said Bernanke. "Nothing
could be farther from the truth. We meet at least 8 or 10 times a year with emerging markets
and central bankers all around the world explaining the state of the US economy and
listening to their comments. We have always heard. While the mandate of the Fed is to focus
on US employment and inflation, we always recognised the US is part of a global system.
Page | 3 That certainly feeds into monetary policy makers." Bernanke said the US economy is
recovering and that it could help all the emerging markets to benefit from it as well.
Rajan went with panel view on status quo
RBI has been placing the main points of discussions of the meetings of TAC on monetary
policy in the public domain with a lag of roughly four weeks after the meeting
For the Reserve Bank of India (RBI)s first bi-weekly monetary policy held on April 1,
governor Raghuram Rajan decided to go with the recommendations of all the members of
the technical advisory committee (TAC) and maintain status quo on policy rates. The TAC
meeting was held on March 26. RBI has been placing the main points of discussions of TAC
meetings on monetary policy in the public domain with a lag of about four weeks. These
meetings are chaired by the RBI governor and attendees include senior RBI officials and
external members, with expertise in various fields. To manage the risks from capital
outflows, most members recommended RBI focus on building foreign exchange reserves.
One member suggested to improve transmission of monetary policy signals, the statutory
liquidity ratio be lowered to 22 per cent of net demand and time liabilities. The TAC members
emphasised the framing of the forward guidance (estimate) was important. Forward
guidance should aim at maintaining interest rate stability, while recognising the challenges of
dealing with capital outflows and supply shocks in the process of negotiating the disinflation
path set out for January 2016, read the minutes. At the March 26 meeting, one member felt
while forward guidance was important for anchoring inflation expectations, it should indicate
the policy would turn growth-supportive if inflation adjusted for base-effect declines. Another
member recommended RBI give forward guidance of a decline in the repo rate. Members
expressed concern on inflation being persistently higher than in other countries. On the
inflation outlook, most noted moderation in vegetable prices drove the recent dip in headline
inflation, adding this was unlikely to be sustained. The members felt growth in real gross
domestic product would be muted. As exports and imports were declining, the manufacturing
outlook was also weak, they said. Some TAC members said risks on the current account
deficit front couldnt be ignored, considering the sluggish financial savings. In the near term,
external sector risks might have eased because of a rise in forex reserves through the last
six months. In the medium term, however, the risk of capital outflows remained and might be
accentuated if the US Federal Reserve raised interest rates earlier than anticipated, they
said. Other members expected a surge in foreign currency inflows, which would put upside
pressure on the rupee. The members cautioned against a policy of allowing the real
exchange rate to appreciate. While exchange rate appreciation might help lower inflation, it
wasnt good for the economy, as some categories of exports were highly sensitive to real
appreciation and due to the current account deficit, they said. One member felt an exchange
rate below 60/dollar could hurt manufacturing growth due to severe import competition.
Some members were of the view that RBI must actively intervene in the foreign exchange
market to prevent excessive exchange rate appreciation, while some questioned the need
for intervention when capital inflows were high. They felt when inflows were high, companies
should be allowed to adjust their balance sheets; RBI shouldnt intervene in the market.
Reserves should be used to manage volatility alone, not the exchange rate, they said.
Finmin widens monitoring of NPAs at public sector banks to top 50 accounts
Pune
Stepping up pressure on public sector banks (PSBs) to bring down bad loans, the finance
ministry has widened its monitoring of non-performing assets (NPA) from top 30 NPA
accounts to top 50 for all state-owned lenders. The ministry has also asked lenders to
submit an action-taken report on recovery for the top 50 NPA accounts as on Decemberend 2013.In a communication to PSB chiefs, the new secretary of department of financial
services (DFS), GS Sandhu, also sought a list of willful defaulters and findings of prima facie
Page | 4 diversion of funds by such borrowers. The scope of supervision has been extended to the
top 50 NPA accounts to get a better picture of the bad loan problem, official sources said. At
June-end 2013, gross NPAs with the top 30 accounts of 26 PSBs were worth Rs. 63,671 Cr.,
which is around 35% of their total gross NPAs of Rs. 1,82,829Cr. Incidentally, the CBI is also
scrutinising the top 30 cases of NPAs for the entire banking system as part of its efforts to
find out any instances of criminality, including fund diversion. In the last quarterly meeting to
review the performance of PSBs and financial institutions, finance minister P Chidambaram
had expressed concerns over high NPAs in two segments large corporates and small
industries. The seriousness of the NPA problem was also captured by ratings agency Fitch.
In a report released on Thursday, Fitch Ratings expressed concerns over stressed assets in
India compared to other Asian emerging markets. Fitch said it expects Indian banks asset
quality to weaken further, with stressed assets (NPAs and restructured loans) to rise from
10% (at mid-2013) to around 15% during FY15 (by March 2015). State banks are most
affected and may need R3.8 lakh Cr. of new equity by 2019 to achieve full compliance with
Basel rules, although delayed implementation has reduced near-term capital pressure, it
added.
In addition to bad loan recovery efforts on top 50 NPAs and the list of willful defaulters, the
DFS secretary also sought details of monitoring of projects by state-owned lenders in
corporate credit after loan disbursement. He also wanted to know if the PSBs were
maintaining a database of assets to which lending has been done and, if so, the details of it.
This will form part of the ministrys performance review of PSBs, following its concerns over
rising NPAs and deteriorating asset quality, sources told FE. The ministry had in October last
year asked PSBs to set up a separate vertical headed by an officer of the rank of general
manager for recovering money from bad loans. Gross NPAs of PSBs had surged to 5.17%
of their advances in December-end 2013 from 3.84% at March-end 2013 (and 4.18% in endDecember 2012) while their restructured assets increased to 7.44% from 7.18% during the
period. A harder look at the NPA data reveals that at December-end 2013, maximum NPAs
were in the small and medium enterprises loan segment with 7.21% of advances while
agriculture loan NPAs were at 5.99%. NPAs in the corporate loan segment were 5.28%. In
retail loans, NPAs were 2.74% and, in real estate, they were 1.83%. Data for last fiscals
December quarter show that PSBs were able to bring down NPAs by just Rs. 60,426 Cr., of
which recoveries were only Rs. 18,933 Cr. while upgrades were to the tune of Rs. 21,988 Cr.
Write-offs stood at Rs. 19,505 Cr.
RBI governor Rajan urges global crisis 'safety net'
MUMBAI (Reuters) - Reserve Bank of India (RBI) Governor Raghuram Rajan on Thursday
proposed the creation of a global "safety net" administered by a multilateral body such as the
International Monetary Fund (IMF) that could provide funds for countries in case of economic
emergency. Providing such cash would ease pressures on countries to build up currency
reserves as defences against any sudden outflows, said Rajan, endorsing a scheme that
has previously been proposed by the IMF and discussed by policymakers. Rajan, a former
chief economist at the IMF, repeated his call for central banks to be mindful of the impact of
their policies on other countries. The RBI governor went on to propose the appointment of
"an impartial international assessor" who could examine the effects of unconventional central
bank monetary policies on the global economy, although he did call this recommendation "a
little too idealistic."Rajan's reflections were contained in a prepared speech the prominent
Pune
economist was due to deliver at the Brookings Institution in Washington on Thursday."We
have to design a better multilateral liquidity safety net so that countries do not feel they are
on their own in managing market turmoil, and so that they do not build enormous stockpiles
of reserves," the text of the speech read. Rajan, who took the helm of the RBI in early
September, has previously criticised the U.S. Federal Reserve for not taking into account the
impact of its easy monetary policy on emerging economies. The Fed's policies, adopted
Page | 5 gradually in the aftermath of the 2008 global financial crisis, had propped up emerging
market assets, but hit India hard last year when investors feared the U.S. central bank would
start unwinding its programme. The rupee slumped to a record low in late August as
investors feared outflows in a country that depends on foreign capital to bridge its current
account deficit. Although the actual start of the Fed's withdrawal of its monetary stimulus in
December had little impact on India after the country took steps to narrow its current account
deficit, the RBI has started buying dollars and bolstering its foreign exchange reserves since
last month to curb volatility in the rupee after a recent rally. Rajan said a global safety net
would be good policy that could help limit the need to build up reserves, offering little credit
risk against what he called "extreme balance sheet policies," without specifying whose
policies he was referring to."Multilateral arrangements are tried and tested, and are available
more widely, and without some of the possible political pressures that could arise from
bilateral and regional arrangements," Rajan said."Indeed swap arrangements can be
channelled through multilateral institutions like the IMF instead of being conducted on a
bilateral basis."
UBI issue points to lack of corporate governance in PSBs: RBI
RBI has raised issue of enhancing corporate governance norms in PSBS with govt
and called for action on priority basis
The recent fiasco in United Bank of India (UBI) is not an isolated example and points to the
larger issue of corporate governance in public sectorbanks, Reserve Bank of Indias (RBI)
deputy governor K C Chakrabarty said on Tuesday. RBI has raised the issue of enhancing
corporate governance norms in public-sector banks with the government and called for
action on a priority basis. Kolkata-based UBI reported doubling of net losses in the third
quarter, following which its chairperson and managing director Archana Bhargava took
voluntary retirement. RBI had asked an external agency to conduct a forensic inquiry in the
bank, upon Bhargavas request, which is also seen as unprecedented. With respect to UBI,
it is neither shock nor surprise to RBI. Bank chairperson wrote to RBI and finance minister is
saying that in the bank, accounts are not classified as NPA (non-performing assets), and
requested for forensic audit. So we started forensic audit and the conclusions are found to
be valid that bank accounts are not classified as NPA, because of technology or other
reasons. This is nothing new that bank chiefs say NPAs gone up due to system-generated
NPAs, said Chakrabarty. He also highlighted that the bank has suffered losses because of
higher provisioning to pension (Rs 625 Cr.), which was not provided earlier. It is not only
UBI, but many banks have been found to have deferred provision on this regard, he said.
These issues point towards issues of corporate governance. We have written to the
government of India to take steps and this is not for UBI but for banking system as a whole,
said the outgoing deputy governor. It is not a question of one or two banks. We are
definitely worried about how the overall system is functioning. We are in dialogue with the
government to improve the situation, said Chakrabarty. On whether the central bank has
asked the government to reduce its stake in public-sector banks in order to provide greater
autonomy, which is seen as key for better efficiency, Chakrabarty said while bank
performance is ownership-neutral and if government ownership can ensure autonomy in
banks, if the management quality can be maintained, there is no need for such a step. It is a
question of quality of management and autonomy. If government ownership can ensure the
autonomy in banks, if the management quality can be maintained, (then) there is no need.
Pune
But if there is a constraint on that, the government may look forward. Second, there is an
issue of budgetary constraint. So, if the government has some limitations, they may think of
other options, he added.
Page | 6
Reserve Bank of India's executive director G. Gopalakrishna takes VRS, joins as

CAFRAL director
MUMBAI: G. Gopalakrishna, Reserve Bank of India's executive director, who was
superseded for deputy governor's post, has voluntarily retired from his post. He has taken
charge as the director of the Centre for Advanced Financial Research and Learning
( CAFRAL), a fledgling research body, from April 21, according to a statement from the
central bank. His term was to end in a few months. In January, the finance ministry had
expressed its displeasure when the RBI search committee headed by RBI governor,
Raghuram Rajan, had ignored G. Gopalakrishna, the senior most RBI executive director,
from the shortlist for the post of deputy governor. RBI had shortlisted three of its executive
directors to succeed Anand Sinha who retired recently. R. Gandhi and P. Vijaya Bhaskar
were the other two executive directors named in the list to succeed Sinha. Finally, the
government appointed R Gandhi as the deputy governor. To resolve the conflict, the RBI
had offered Gopalakrishna the position as the director of the research body, which would
have given him a deputy governor rank.
Domestic banks well-positioned to cope with tapering: Moody's
MUMBAI: The country's banking system is well-positioned to cope with the financial impact
of the reduction in monetary stimulus by the US Federal Reserve and the resultant rise in
interest rates, according to global rating agency Moody's Investors Service. "The strengths
of the banking systems in India and also in the Asean region are currently underpinned by
their relatively strong capital buffers, modest levels of problem loans, high recurrent
profitability and low reliance on foreign funding," Moody's vice-president and senior credit
officer Eugene Tarzimanov said in a note. The US Fed had on May 24 hinted at withdrawing
its third round of quantitative easing, or bond buying programme, worth $85 billion each
month, which began in the wake of the worst credit crisis in September 2008. However, the
Fed started trimming its programme in January. The Moody's report, titled 'Asean and Indian
Banks Resilient to US Tapering and Higher Interest Rates,' noted that compared with other
emerging markets, Asean and Indian banks are more resilient to the potential adverse
impacts associated with tapering, mostly due to the high economic growth rates in the
region, relatively large reserves at the sovereign level, rising income levels and their own
good credit fundamentals. The report painted a good picture of Asean banks and said they
will continue to benefit from a supportive economic environment in the region, characterised
by growing trade flows between Asia and the recovering US and European economies.
At the same time, the report warned that banks will see higher stressed loans on their
corporate and retail books, especially on foreign currency loans, if their domestic currencies
fall substantially. That apart, negative financial market adjustments would also lead to markto-market losses on their bond investments. However, the report stated that higher interest
rates will support banks' net interest margins, which, to some extent, will mitigate their higher
credit costs.
Shares of govt banks rise on reports of capital infusion
Despite the negative market sentiment, shares of state-owned government banks rallied on
Friday on reports of additional capital infusion by the government. Shares of most PSBs
gained, even as the overall market ended weak due to disappointment fourth-quarter results
posted by many companies, including private sector lender ICICI Bank. Major gainers were
mid-sized government banks, including Oriental Bank of Commerce, Indian Overseas Bank
and Allahabad Bank, which gained about three per cent each. The Sensex and the BSE
Pune
Bankex closed with a loss of 0.82 per cent and 0.68 per cent, respectively. Quoting finance
ministry officials, a Press Trust of India report said the Centre was planning to infuse up to
Rs. 7,000 Cr. into public sector banks (PSB) this financial year. In the interim Budget, the
government had provided Rs. 11,200 Cr. for public sector banks. There could additional
provision of Rs. 7,000 Cr. for these banks when the government tables the regular Budget
for 2014-15 in June-July, a senior finance ministry official was quoted as saying. In 2013-14,
Page | 7 the government had infused about Rs. 14,000 Cr. into PSBs. Besides capital infusion by the
government, state-owned banks also tap the equities market for capital. In the recent past,
however, many banks, including State Bank of India (SBI), have found it challenging to raise
capital from the market. In January, SBIs qualified institutional placement had to be bailed
out by state-owned insurer Life Insurance Corporation. Earlier, investors had turned wary
towards state-owned banks, owing to their weak financial and credit profiles. Also, their
profitability had been under pressure due to higher provisioning towards non-performing
assets. In recent months, investor sentiment towards PSBs has improved due to cheap
valuations. So far this year, most state-owned banks have outperformed the market.
Bandhan to appoint consultants for banking foray soon
KOLKATA: Bandhan Financial Services, the city-based micro-finance institution which got
the in-principle banking licence from Reserve Bank of India, will shortly appoint consultants
for facilitating its transformation into a bank. "We are talking to various consultancy firms like
KPMG, BCG, McKinsey and Ernst & Young, among others, for appointing a consultant. We
will shortly give a mandate to one of them," CMD of Bandhan Financial Services, Chandra
Sekhar Ghosh told PTI. The mandate to the consultancy firm would be on how to transform
the MFI into a full-fledged bank. "The consultancy firms have a huge experience in these
matters. So it is necessary to seek outside help for smooth transition", Ghosh said. Besides
this, the MFI is also in the process of hiring IT consultants for putting in place the required
infrastructure needed for running a bank. He said the appointed IT consultants would,
among other things, assist in providing the necessary software and hardware for connecting
the branches of the proposed bank online. On getting the suggestions from the consultants,
Bandhan Financial Services would go for hiring specialists to fill the gaps in the existing
manpower strength."We hope that we will be able to start the operations within the stipulated
18 months given to us by the RBI," he said. In reply to a query, Ghosh said there was no
immediate need for capital. "The regulatory capital requirement to start a bank was Rs. 500
Cr. and our networth is Rs. 1,100 Cr.. The bank will be promoted by Bandhan Financial
Services," he said. Out of the present 2016 branches of Bandhan, 70 per cent are in the
rural belt, Ghosh said adding some of them would be restructured. Presently, Bandhan is
serving 55 lakh borrowers and has 13,000 employees on its rolls.
RBI curbs banks from extending guarantees, letters of comfort to overseas arms of
firms
The Reserve Bank of India on Tuesday imposed restrictions on non-fund based credit
facilities guarantees, stand-by letters of credit, letters of comfort, and so on extended
by banks to Indian companies overseas arms. Further, the central bank disallowed
repayment of rupee loans taken from the domestic banking system through external
commercial borrowings (ECBs) extended by overseas branches/subsidiaries of Indian
banks. The overseas arms of India companies include joint ventures, wholly-owned
subsidiaries, and wholly-owned step-down subsidiaries. The RBI directed banks, including
their overseas branches/subsidiaries, not to issue non-fund based credit facilities on behalf
of overseas arms of Indian companies for the purpose of raising loans/advances of any kind
from other entities except in connection with the ordinary course of overseas business.
Non-fund based credit
Pune
This directive has been issued as the RBI has found that banks were extending non-fund
based credit on behalf of Indian companies overseas arms for purposes which are not
connected with their business. Rather, in certain cases, the credit was used to get foreign
currency loans for repaying rupee loans. About a year back, a clutch of Indian banks found
themselves in a soup when the stand-by letters of credit extended by them on behalf of a big
gem and jewellery company was invoked by a couple of foreign banks. Since the risk
Page | 8 remains within the Indian banking system where the ECB is from overseas
branches/subsidiaries of Indian banks, the RBI said repayment of rupee loans taken from
the domestic banking system through ECBs extended by overseas branches/subsidiaries of
Indian banks will, henceforth, not be permitted.
Exporters
The RBI asked exporter-borrowers to desist from the practice of using export advances,
received on the strength of guarantees issued by Indian banks, for repayment of loans taken
from Indian banks. This practice is a clear violation of RBIs instructions except in cases
where banks have received approvals under the Foreign Exchange Management Act.
RBI likely to be in pause mode till Dec: BofA-ML
Financial services company says inflation pressures are likely to remain as a possible El
Nino could affect the monsoon, which in turn would push up food prices
The Reserve Bank of India is likely to be in a "pause" mode till December, as rising El Nino
risks threaten the monsoon, a Bank of America Merrill Lynch report said. According to the
global financial services major, inflation pressures are likely to remain as a possible El Nino
could affect the monsoon, which in turn would push up food prices. "On balance, we expect
the RBI to pause till December, with rising El Nino risks threatening the monsoon," the report
said, adding that a "5% swing in food prices impacts CPI inflation by 250 basis points". The
RBI's target is to ease retail inflation, as measured by the Consumer Price Index, to 8% by
January 2015 and 6% by January 2016.Both retail and wholesale price inflation accelerated
in March due to rising food prices. While wholesale inflation rose to a three-month high of
5.7%, retail inflation inched up to 8.31%, after softening for three straight months since
December. The RBI had increased the key policy repo rate three times since Raghuram
Rajan took over as Governor in September. El Nino refers to the warmer-than-average sea
surface temperature in the central and eastern tropical Pacific Ocean. This condition occurs
every 4-12 years and had last impacted India's monsoon in 2009, leading to the worst
drought in almost four decades. If El Nino occurs by summer, it will drive rain clouds away
and impact the June-September monsoon. If it stretches to the fall, India will mercifully
escape, it added.
YES Bank, L&T Finance Holdings' deal: Will RBI give a nod?
MUMBAI: YES Bank and L&T Finance Holdings are independently testing the regulatory
waters on what the Reserve Bank of India's stance could be on a possible merger or a stake
purchase by one of the two in the other, said two people familiar with the development. YES
Bank chairman Mr. Srinivasan, who used to be with the RBI, met some officials of the
banking regulator to get a sense of how it would react to a stake sale or a bank merging with
a non-banking finance company (NBFC), said the people cited above, requesting anonymity.
The queries were said to be general in nature with no names mentioned. An L&T Finance
representative is also said to have met officials at the regulator to find out whether the
company could buy a stake of more than 5% in a bank."I have no information on this," said
Rajat Monga, chief financial officer at YES Bank."As a policy we do not comment on
speculation," said N Sivaraman, president and wholetime director, L&T Finance. L&T
Pune
Finance didn't get a bank licence in the latest round that saw just two successful applicants
and is keen to convert itself into a bank as that could lower its cost of funds. The company
has been positioning itself in the past few years as a full-fledged financial services firm and
includes a mutual fund and mortgage lending among its divisions. YES Bank, which has
been caught up in a legal row between two founders, may be looking for ways to put that
behind it. The dispute is between Rana Kapoor and the widow of Ashok Kapur on the rights
Page | 9 of the late Kapur's family to nominate a director on the board. There is no precedent of an
NBFC acquiring a bank and any such deal will have to pass strict RBI scrutiny. In 2004, RBI
had approved the merger of Ashok Leyland Finance or ALF with IndusInd Bank both
promoted by the Hindujas. Following this, the central bank made it mandatory for banks to
take prior approval before acquiring an NBFC.
PSU banks may get additional capital infusion of Rs. 7,000 Cr.
NEW DELHI: To further enhance capital base, the government is planning to make
additional infusion of up to Rs. 7,000 Cr. in the public sector banks during the current fiscal.
"In the interim budget, the government provided Rs. 11,200 Cr. for the public sector banks.
There could be additional provision of Rs. 7,000 Cr. for these banks when government
tables regular budget for 2014-15 in June-July," a senior Finance Ministry official said. The
Department of Financial Services would request for additional funds in regular budget as
banks require more capital than what has been allocated in the interim budget, the official
said. Even Finance Minister P Chidambaram after interim budget had indicated that the
government will provide more funds if it mobilises higher resources. "What we have provided
is what we have budgeted now. This is an Interim Budget. In regular budget you will get a full
picture what government can provide as additional capital," he had said. "As you know,
government has provided Rs. 11,200 Cr. for next year. This is not adequate, but that's the
budget estimate... As we find more money, we should infuse more into the public sector
banks," he had said. The government infused Rs. 14,000 Cr. in public sector banks during
the current financial year ending March 31. Of this, the State Bank of India got Rs. 2,000 Cr.
while Indian Overseas Bank received Rs. 1,200 Cr.. In view of the Basel III, or global
prudential banking norms, all banks have been planning to shore up their Tier 1 capital.
According to RBI Indian banks will require an additional capital of Rs. 5 lakh Cr. to meet the
new global banking norms, Basel III. The government, which owns 70 per cent of the
banking system, alone will have to pump in Rs. 90,000 Cr. equity to retain its shareholding in
the Public Sector Banks (PSBs) at the current level to meet the norms. Of the total Rs. 5
lakh Cr., equity capital will be of the order of Rs. 1.75 lakh Cr. and Rs. 3.25 lakh Cr. as nonequity. RBI recently extended the deadline for Basel III implementation in a phased manner
by banks by one year March 2019.
Local boutique firms target HNIs; offer competition to Barclays, Kotak
MUMBAI: India may be going through an economic slump but there's been a surge over the
past few years in the number of wealth creators leading to an increase in the ranks of the
ultra high net worth (UHNW) and high net worth (HNW) segments. That in turn has fuelled
the emergence of new age boutique firms that provide family-office services, business
succession planning and estate planning. These desi firms, promoted by top finance and
legal professionals, have stormed the wealth management market in the last few months,
offering competition to big-league rivals such as Barclays, Kotak and IL&FS. Meanwhile
there is talk that a leading global private bank is tying up with an old business group in India
to start a boutique family office management firm. The boutique firms sense a windfall in the
changing economic scenario. HNIs want to protect the wealth they've created and hold in the
form of securities, jewellery, real estate, intellectual property rights (IPR), giving rise to the
renewed popularity of proper trust structures.
RBI appoints 3 new executive directors
Pune
The Reserve Bank of India (RBI) appointed three new executive directors to fill up the posts
that were vacated earlier. NS Vishwanathan, who was a principal chief general manager
looking after department of non-banking supervision and the senior most among the 14
candidates who were interviewed, has been promoted as ED. The other two EDs are
Chandan Sinha, principal CGM of banking operations and development and US Paliwal,
principal CGM of human resources. Sources in the central bank indicate, both seniority and
Page | 10 merit was considered by making the appointments. The central bank has nine executive
directors, and one of them S Karuppasamy, retired recently. R Gandhi, who was executive
director, has now been promoted to deputy governor. Also, G Gopalakrishna, one of the
executive directors will now become the director of Centre for Advanced Financial Research
and Learning (CAFRAL). CAFRAL is a research institution, is promoted by RBI. Separately,
the central bank has also re-allocated the departments of the deputy governors following
retirement of KC Chakrabarty. Among others, one of the deputy governor HR Khan, has
been made in-charge of banking supervision. The process to find Chakrabarty's successor is
on and the government has interviewed nine chief executives of various public sector banks.
Sources indicate, SS Mundra, the chairman and managing director of Bank of Baroda, is
tipped to become the next deputy governor. Traditionally, among the four deputy governors,
two are promoted from within the ranks of RBI while one is an economist and the fourth one
is a commercial banker. Apart from Chakrabarty - who was a commercial banker -- the other
deputy governors are HR Khan and Urjit Patel. A deputy governor can be appointed for a
maximum of five years or till the age of 62 while a candidate has to be below 60 years to
become eligible for the post. However, there are instances when the criterions were relaxed.
How RBI Governor Raghuram Rajan will build an equation with the new Finance
Minister if NDA comes to power
With indications that NDA may come to power, there is speculation over conflict between the
central bank governor and the new govt. But much will depend on the equation Rajan can
build with the new FM, the way some of his predecessors did. The Reserve Bank of India
Governor, Raghuram Rajan, passed the banking licence litmus test by leaning on Bimal
Jalan. The former Chicago University Professor can take a leaf out of the same elder
statesman of Indian bureaucracy on how to navigate the rough seas after May. Soon after
the Atal Bihari Vajpayee-led National Democratic Alliance, or NDA, Government came to
power in May 1998, Jalan, the then RBI governor, reached out first to finance minister
Yashwant Sinha and principal secretary to the prime minister, Brajesh Mishra. That was not
to save his job, but to save the economy. So convincing was Jalan that not only did he
manage to end the cacophony of voices from the party that called for a stronger rupee, he
also got rewarded with another term at the RBI, and a nomination to the Rajya Sabha.
Sorting out such politically tricky issues is inevitable for any central bank governor globally.
At that time, it didn't matter to the alliance that Jalan had been appointed by the previous
United Front Government led by IK Gujral with P Chidambaram as Finance Minister. Similar
challenges await Raghuram Rajan, with a new government set to assume office one
which is widely perceived to be a non-Congress political formation. Doom sayers, among
them, shockingly, government officials, are already at work claiming how his approach may
not be in consonance with a Modi-led sarkar.
Allahabad Bank registers 7 pc growth last fiscal
KOLKATA: State-owned Allahabad Bank has registered a growth of 7 per cent in the last
financial year. "In the fiscal 2013-14, the bank's business stood at Rs. 3.31 lakh Cr., with
deposits at Rs. 1.90 lakh Cr. and advances at Rs. 1.41 lakh Cr.," bank's chairman and
managing director Rakesh Sethi told reporters here today. He said that in the absence of
takers of any corporate credit, the bank was now focusing on farm credit, retail and the
MSME sector. The newly-appointed CMD said that the bank would target arresting of
slippages as well as maintaining asset quality. Although the bank had obtained the RBI
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approval for qualified institutional placement (QIP), Sethi said the government nod was yet to
come. He said that the bank would raise Rs. 320 Cr. from the market through QIP once the
government approval was accorded to it. The bank would celebrate its 150th year of
existence tomorrow. It would open 150 units of branches, ATMs and e-lobbies tomorrow.
He said that the bank was eyeing the semi-urban and rural areas for growth.
Page | 11 PSU lenders crack the whip on defaulters, sell off assets
MUMBAI: Banks have been showing never-before urgency in getting rid of bad loans. They
have been selling stressed assets to asset reconstruction companies (ARCs) as soon as
they realise that restructuring the debt won't work, say banking sector executives. Banks
have put at least three large corporate loans - of Electrotherm, Deccan Chronicle and KS Oil
- on the block in recent months. The corporate debt restructuring (CDR) cell, a forum of
lenders and borrowers which decides on restructuring programmes, doesn't allow lenders to
sell any loans when the restructuring process is ongoing. However, they can offload a loan if
the CDR has failed or soon after the lender and debtor sign a master restructuring
agreement. According to a recent report from ratings firm Moody's, high interest rates and
delays in industrial projects are driving up bad loans at Indian banks. Gross non-performing
assets - bad loans prior to making provisions - in the sector totalled more than Rs. 2.43 lakh
Cr. in 2013, up 35% from the previous year. Meanwhile, new regulations requiring banks to
set aside more money against bad and restructured loans are putting pressure on lenders to
get such assets out of their books. During the fiscal year ended on March 31, 2014, lenders
sold close to Rs. 50,000 Cr. of outstanding loans to ARCs, which buy stressed assets at
deep discounts, help the creditors in restructuring operations and then collect the loans from
them. The CDR cell had approved a plan to recast Gujarat-based manufacturing company
Electrotherm's Rs. 3,200 Cr. loans two months ago. Its consortium of 17 lenders led by Bank
of India had asked the company to demerge its business into four independent units - steel,
pipe, engineering and auto. But the programme failed to take off. Senior bank officials who
did not want to be named said a large public sector bank had sold its loan to Electrotherm to
JM Financial ARC through an auction. Similarly, IndusInd Bank sold its Deccan Chronicle
loan to Pegasus ARC as soon as the bank realised that lenders had rejected a proposal to
revive it at the CDR cell.
Money laundering cases against firms
The Enforcement Directorate (ED) has decided to register money laundering cases against
firms, including Jindal Steel and Power Ltd (JSPL) and Rathi Steel and Power, which are
under the CBI scanner. ED officials said the agency has issued directions to its various zonal
offices across the country to initiate investigations under the Prevention of Money
Laundering Act (PMLA) in the financial dealings of the firms which have also been booked
by CBI in this case. The agency, according to sources, has taken cognisance of the over 17
FIRs filed by the CBI and will investigate if these firms laundered illegal money and
generated proceeds of crime in the entire process of coal allocation. The probe by both the
agencies is being monitored by the Supreme Court.
Banks shouldnt charge varying spreads from borrowers, says RBI committee
If the Reserve Bank of Indias latest proposals become prudential guidelines, banks will not
be able to arbitrarily charge different spreads for different borrowers and will have to follow a
board-approved system for the same. An RBI committee, under the chairmanship of former
deputy governor Anand Sinha, has made a series of recommendations for transparent
pricing of loans by banks in its draft report on pricing of credit released on Thursday. The
central bank has also recommended setting up a benchmark base rate by the Indian Banks'
Association called Indian Banks' Base Rate, which banks can use to price floating rate
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products. RBI said banks should have a board-approved policy delineating the factors
behind the pricing of a loan, which may include operating cost, credit risk premium and tenor
premium and broad factors like competition, business strategy and customer relationship.
Banks should be able to demonstrate to the Reserve Bank of India the rationale of the
pricing policy, the RBI said. Noting that arbitrary changes in spreads has led to many
complaints from customers, the RBI said that banks internal policy must spell out the
Page | 12 rationale for, and range of, the spread and the delegation of powers in respect of loan
pricing. Further, the RBI said that changes in the base rate should not immediately result in a
change in the interest rate of the loan, but the pricing must alter only on the next reset date
as per the loan covenant. Also, the borrower must be given an option of exiting the loan at
the beginning itself. The loan can be priced accordingly in case of such a exit clause or
without it, the RBI said. Further, the benefit of interest reduction on the principal on account
of pre-payments should be given on the day the money is received by bank without waiting
for the next equated monthly installment cycle date to effect the credit, the RBI said.
Punjab National Bank sells its stake in India Factoring for Rs. 108 cr
State-owned Punjab National Bank (PNB) has sold its entire 30 per cent stake in India
Factoring & Financial Solutions Ltd (IFFSL) for Rs. 107.83 Cr. The bank has offloaded its
stake in IFFSL to parent promoter FIM Bank Malta last month, a senior official of PNB said.
The decision to offload stake was taken after board approval, the official added. With the
acquisition of PNB's stake, FIMBank's share in IFFSL increased to 79 per cent. The other
shareholders include Italy's Banca IFIS (10 per cent), Employees Trust (10 per cent) and
Mumbai-based Blend Financial Services (1 per cent). The company started its business in
October 2010 with Rs. 100 Cr. initial capital. India Factoring provides financial solutions to
over 200 SMEs and SSIs in Delhi, Mumbai, Chennai, Bangalore, Kolkata, Ahmedabad and
Hyderabad.
Finance Ministry detects over Rs. 1800 Cr. excise duty evasion in 2013-14
NEW DELHI: Increased efforts in checking revenue leakage have resulted in detection of
over Rs. 1,800 Cr. central excise duty evasion across the country during 2013-14. As many
as 379 cases of central excise duty evasion were registered by the Directorate General of
Central Excise Intelligence (DGCEI) during the last fiscal. These cases involved central
excise duty evasion of Rs. 1,879.69 Cr., Finance Ministry officials said. Various private
entities were evading the central levy through misrepresenting the quantity of goods being
produced by them and misuse of government incentives or abatements among others, they
said. However, DGCEI officials could realise only Rs. 362.80 Cr. from these detections, the
officials said. In 2012-13, as many as 458 cases involving evasion of about Rs. 2,940 Cr.
were detected by the excise intelligence officials. The realisation was about Rs. 1,018 Cr. An
excise duty is applicable at the rate of 12.36 per cent on the total quantity of goods produced
by a company. The detection of excise duty evasion cases was excluding of such cases
registered by various central excise Commissionerates spread across the country.
Manufacturers of pan masala, cigarettes, iron and steel, vehicles parts and accessories,
malted foods and chocolates are most prone to evade excise duty, the official said.
SBI launches scheme for women boutique owners
KOLKATA: The country's largest lender State Bank of India (SBI) has launched a financing
scheme for women fashion boutique owners. Labelled 'boutique financing', the scheme is
designed to offer working capital expenses as well as term loan to boutique owners. Chief
General Manager of SBI (Bengal Circle) Sunil Srivastava said the bank has identified the
growth potential of the segment. He said the bank would give loans at concessional interest
rates and the maximum loan to be made available would be Rs. 50 lakh for a period of
seven years. The owners would also get overdraft facilities, he added.
Pune
FIIs bullish on ICICI Bank; stake hits 6-year high
During quarter ended March, the stock gains 13.3% compared with the Bankex's 12%
rise
Page | 13 The recent rally in banking stocks has been aided by hope that a stable government at the
Centre will help boost the economy. This year, the BSE banking index, or the Bankex, has
risen 12 per cent, compared with a rise of seven per cent in the benchmark S&P BSE
Sensex and CNX Nifty. In the banking pack, foreign institutional investors (FIIs) have been
aggressively buying into ICICI Bank; their holdings in the leading private sector lender
touched a six-year high of 39.85 per cent in the quarter ended March. During this period, the
stock gained 13.3 per cent, compared with the Bankexs 12 per cent rise. FII holding in ICICI
Bank stood at 46.4 per cent in the December 2004 quarter and 40.3 per cent in the March
2008 quarter. According to latest data available with exchanges, FIIs bought additional stake
of 1.46 percentage points in ICICI Bank in quarter ended March this year; in the quarter
ended December 2013, they held 38.39 per cent stake, while in the September 2013
quarter, their stake stood at 37.54 per cent. In the March 2014 quarter, FIIs bought 17 million
shares, worth Rs. 1,838 Cr., in ICICI Bank; in the December 2013 quarter, they had bought
9.8 million shares, worth Rs. 1,033 Cr. An analyst at Angel Broking says: From a cyclical
perspective, an improvement in the macro environment is likely to benefit all banks, including
ICICI Bank. We have a buy recommendation on ICICI Bank, with a target price of
Rs.1,606.
For the quarter ended March 2014, Dhananjay Sinha, strategist and head of research at
Emkay Global, expects 16.5 per cent year-on-year growth in ICICI Banks net interest
income, led by 19 per cent growth in the loan portfolio and a stable margin of 2.9 per cent.
With 13 per cent growth in other income, operating profit is likely to grow 16.9 per cent yearon-year, he says. Meanwhile, Life Insurance Corporation of India reduced its holdings in
ICICI Bank to 8.74 per cent in the March quarter from 9.7 per cent in the December 2013
quarter. In the September 2013 quarter, the insurer held 10.46 per cent stake in the bank.
Aalok Shah, analyst with Centrum Broking, believes considering the healthy capital position
and profitable subsidiaries, the upside for the bank seems capped The guidance over
higher levels of slippages/credit cost has raised apprehension over further re-rating. While
we derive comfort in the banks ability to provide for this, valuations are near historic
averages, limiting further upsides. We have rolled our price target to FY16 ABV (adjusted
book value), valued the bank on an SOTP (sum-of-the-parts)-based valuation methodology
and arrived at a target price of Rs. 1,350, he says. Currently, ICICI Bank is being traded at
Rs. 1,252 on BSE, having rallied 38 per cent from Rs. 884 on September 30, 2013, when
FIIs began increasing their stake. The benchmark S&P BSE Sensex has gained 15.9 per
cent during the same period.
10-15 pc cards used only for online transactions: RBI report
MUMBAI: Of the 369 million debit and credit cards in the country, 10-15 per cent are used
only for online transactions, the Reserve Bank said. India is one of the fastest-growing
countries in the plastic money segment, with close to 350 million debit cards and 19 million
credit cards in circulation."Credit cards have a higher share in the discretionary category
whereas debit cards dominate in routine expenses like utility payments. About 30 per cent of
credit card spends are being done online. At least 10-15 per cent of customers use their
cards only online, many from smaller cities," the central bank said in a report. The RBI
quoted studies of two major payment networks -- MasterCard and Visa. According to
MasterCard, 75 per cent of all card payments are concentrated in top 20 cities with Delhi,
Mumbai and their suburbs alone accounting for 43 per cent. A Visa study reveals that people
in the monthly income band of Rs. 75,000-100,000 are the most prolific users of electronic
cards. The RBI said electronic payments dominate their expenses: rail/airfare (71 per cent),
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durable goods (61 per cent), rent (49 per cent), tele/mobile (47 per cent), medical institutions
(46 per cent), clothing/footwear (44 per cent), beverages and refreshments (35 per cent).
"Card payments form an integral part of e-payments in India because customers make many
payments on their card -- paying their bills, transferring funds and shopping," said the RBI
report on 'Enabling Public Key Infrastructure (PKI) in Payment System Applications'. Debit
cards entered India in 1998 and they currently account for almost 95 per cent of the total
Page | 14 number of cards in circulation. Credit cards have shown relatively slower growth even
though they entered the market one decade before debit cards. A majority of credit card
purchases come from expenses on jewellery, dining and shopping, the RBI added.
United India eyes Rs. 11,000 Cr. premium in 2014-15
CHENNAI: State-run United India Insurance Company has set a target of reaching Rs.
11,000 Cr. premium during the current financial year, a top official said today.
"We will keep the momentum with the industry growth. We are looking at completing
premium of Rs. 11,000 Cr. this financial year, 2014-15...", United India Insurance Chairman
and Managing Director Milind Kharat told reporters here while declaring the company's
annual results. The Chennai-based company clocked total premium of Rs. 9,709 Cr. in
2013-14, an increase of Rs. 443 Cr. compared to the previous financial year's Rs. 9,266 Cr.,
he said. "What we have targeted is not a modest growth (on total collection of premium). It is
an aggressive growth. The insurance industry has been growing 10-12 per cent and we are
looking at an aggressive growth this year (2014-15)..," Kharat told PTI later. The profit after
tax in 2013-14 remained flat at Rs. 527.60 Cr. as against Rs. 527.33 in 2012-13. Asked
about this, he said it was reflection of the increase in the underwriting loss while the
management expenses remaining still high. "Underwriting loss has slightly gone up
compared to last year. Management expenses also remaining high," he said. The company
will give thrust to retail, motor and rural insurance portfolio, Kharat said, adding: "the
company has filed two The company will give thrust to retail, motor and rural insurance
portfolio, Kharat said, adding: "the company has filed two motor insurance products with the
market regulator IRDA seeking its approval". "We are also planning to launch a new health
insurance policy for High Networth Individuals in which the sum insured will be up to Rs. 50
lakh. We are also looking at another health insurance product in which the sum insured will
be Rs. one to Rs. five lakh", United India Insurance, General Manager, Asha Nair said. On
the exposure to Tamil Nadu Chief Minister's Health Insurance scheme, Kharat said so far
the company had collected premium of Rs. 1,252 Cr. covering 1.30 Cr. families. It is also
planning to introduce insurance policies through online, he said.
Non-banking finance companies to be hit by tough reserve rules
CHENNAI: Non-Banking Finance companies (NBFCs) have been stumped by a provision in
the new Companies Act. It mandates all such players that raise funds by issuing debentures
to create a debenture-redemption reserve (DRR) and maintain 15% of the monies in lowinterest securities or SLR-backed instruments. SLR or the statutory liquidity ratio is the
percentage of deposits banks need to maintain in liquid form cash, gold or government
bonds. The Companies Act appears stricter for NBFCs, particularly on two counts: creation
of a DRR equivalent to 50% of debentures or bonds over the repayment term, and building
liquidity support at the start of fiscal for debentures maturing during the year (at least 15% of
the value maturing). "This is a retrograde step. Cost of funds could increase 80 to 90 basis
points (100 bps = 1%). The move is sure to impact profitability of those companies which
raise debt through bond issues," said G S Sundararajan, group director, Shriram Group, and
MD, Shriram City Union Finance an NBFC that is active in the bond market. While one RBI's
Nachiket Mor Committee wants SLR requirements for NBFCs to be abolished, another arm
of the government the ministry of corporate affairs (MCA) wants increased investments
in SLR-backed securities, he said. Though market players are not clear whether the norms
are prospective or retrospective, Sundararajan said, "Our legal interpretation suggests it is
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prospective." The Act has not only increased reserve requirement for debentures raised
through public source (from 25% to 50%), it has also introduced requirements for privately
placed debentures (to 50%).
'No entry age limit for govt staff under NPS'
Page | 15
The pension sector regulator has said all eligible government employees (central & state) on
the rolls of the government can be enrolled into the National Pension System (NPS),
irrespective of age at the time of entry. However, this is subject to the condition that the total
period of contribution to NPS account shall not be more than 42 years. NPS is the
contributory pension scheme launched by the Union government in January 2004. It was
made compulsory for all new government employees.
INTERVIEW OF THE WEEK

Granting licences to corporate sector is tricky: K C Chakrabarty
K C Chakrabarty, the outgoing Reserve Bank of India (RBI) deputy governor (Friday will be
his last day in office), believes non-banking financial companies (NBFCs) cant bring about
financial inclusion; that job is best left to mainstream regulated financial institutions. In an
interview with Manojit Saha, Chakrabarty, who became RBI deputy governor on June 15,
2009, and sought a slightly earlier departure from the central bank, says a deputy
governors job is less challenging than that of a banks chairman and managing director.
Edited
excerpts:
What has been the progress on financial inclusion since you took charge as deputy
governor? Which are the areas that need improvement?
Financial inclusion has two aspects access and use of banking services. In the first phase,
we have been reasonably successful in increasing access to banking. The total number of
villages with access to banking services has risen to about 300,000 from 67,000 at the end
of March 2010, when we started the planned approach to financial inclusion and banks were
asked to prepare plans in this regard. The number of basic savings bank accounts has
increased by about 200 million. The number of rural branches, which fell by 4,000 between
1990 and 2007, has increased by 10,000 since then.The number of transactions has also
increased. It will increase further when a proper ecosystem is in place, for instance, when
state governments start to transfer all benefits through bank accounts, if banks streamline
the operations of business correspondents, etc. Of the new accounts opened, transactions
are taking place in 25 per cent. Our objective is by 2016, everyone in the country should
have access to banking services.The use of banking services is a continuous process. This,
too, is showing signs of improvement. Earlier, we had 2.5 million transactions a year; now,
that number is recorded in a month.
Has the business correspondent (BC) model worked?
The total number of bank branches isnt more than 110,000. Whatever progress has been
made is because of the BC model, without which we could not have reached 300,000
villages.
Should banks be allowed to have a subsidiary exclusively for financial inclusion?
If a bank can do business through a subsidiary route, why cannot they do it departmentally?
Pune
What is financial inclusion? It is providing banking services. So, are you saying a bank will
provide banking services by creating a subsidiary? Creating an institution for the poor has
never been successful on a commercial basis.
Page | 16
One of the recommendations of the Nachiket Mor committee on financial inclusion is

NBFCs should have a key role in financial inclusion. Whats your view?
According to RBIs definition of financial inclusion, NBFCs cannot bring about it. Our
definition says such financial inclusion should be brought about by mainstream regulated
financial institutions. NBFCs can play the role of a facilitator, as penetration is an issue for
banks. I dont think NBFCs have a great business model to succeed. Also, globally, shadow
banks are under criticism. My view is NBFCs can become BCs.
Why do you say financial inclusion can only be carried out by mainstream entities?
Financial inclusion will not happen without an element of cross-subsidisation, and that
should be provided by banks that have the ability to do that. Second, financial inclusion
demands access to banking services at reasonable costs, which can be done by regulated
entities alone. If you charge Rs. 25 for transferring Rs. 500, that is not financial inclusion.
In terms of currency management, what are the key challenges in delivery?
Last-mile delivery is a big issue. Distribution of currency/coins is a big issue. This is because
we have left it to RBI and banks. RBI focuses more on distribution; as a result, it is unable to
monitor whether banks are doing it or not. The view of the government-constituted high level
committee on currency management, which I chaired, is we must use private parties (the
franchise model) for distribution. We have already done it for foreign exchange and that has
worked
well.
In the wake of rising non-performing assets (NPAs), is there a need for a re-look at
governance issues in banks?
It is not only NPAs; banks arent able to carry out financial inclusion and priority sector
lending and offer better customer service-all these are governance issues. Banks are not
able to carry out efficient financial intermediation; that, too, is a governance issue. Banks are
not able to manage, not able to govern. They have not made people accountable, including
boards. Those who dont deliver must be held accountable.To make people accountable, we
first have to create the proper ecosystem. We have to select fit and proper persons to head
banks and give them adequate time, autonomy and flexibility. Unless we create this system,
governance will not improve. We also need to redefine the role of the board, the banks
chairman, its chief executive, etc.
But
public
sector
banks
say
their
remuneration
is
not
market-driven.
I am all for market-related remuneration. But selection should also be market-driven. For the
selection of the chief executive, there should be advertisements. It cannot happen under the
present disposition. For example, a promotion to the top post in State Bank of India (SBI) is
from within the bank. Nowhere in the world will you get market-related remuneration if the
selection is limited to that domain.
Are you indicating the SBI chairmanship should be thrown open to candidates from
other banks, too?
Pune
All I am saying is look at global best practices. Globally, vertical movement in the same
organisation is disappearing. If you have to move vertically, you have to criss-cross the path.
For the appointment to the post of SBI chairman, let there be newspaper advertisements, so
that candidates from other banks can also apply.Before becoming the deputy governor of
Page | 17 RBI, you headed two public sector banks. Which of the jobs was more challenging?
Both were challenging assignments. But I would say the deputy governors job is less
challenging. In our system, the Number 1 has all the responsibilities. So, if I faced any
problem in RBI, I could push the paper to the governor, whereas as a chief executive, I
couldnt do so. But in terms of learning, it was a great experience as deputy governor. I
would not have learnt how the central bank functioned and I would not have got global
exposure. Also, I have met some great minds such as Mario Draghi and Ben Bernanke. I
have learnt how the international financial system works.
Industrial houses were not given licences this time. Why is the corporate sector still
ineligible to enter the banking business?
Policy-wise, we have said the corporate sector is eligible.
But corporate houses werent given licences.
At this stage, they are not fit and proper, according to our criteria. Granting licences to the
corporate sector is a tricky affair anywhere in the world. But we have taken the step; we are
open. But they must stand the test of fit and proper.
INTERVIEW II
We plan to raise Rs. 2,500 Cr. this fiscal: Indian Overseas Bank CMD
Having just weathered a tough year, Chennai-based Indian Overseas Bank (IOB) is sparing
no effort to get back on the growth path. In an interview with Sajan C Kumar, IOB CMD M
Narendra shares his views on the banks performance and overall prospects of the
economy.
How did the bank fare in FY14, considering the tough external conditions?
IOBs gross NPAs rose to 5.27% in December 2013 against 4.13% in the year-ago period.
We expect a possible decline in the NPA levels for Q4FY14. However, as fas as return on
assets (ROA) are concerned, the major constraints are incremental NPAs and interest
reversal on restructured advances. Our total provisions were very high at 85.15% of the total
operating profit during FY13, which limited our ROA to 0.24% despite all-out efforts to cut
NPAs.
What steps are you taking to contain NPAs?
The problem of NPAs is related to several internal and external factors. The internal factors
include diversion of funds for expansion, diversification, promoting associate concerns,
cost/time over-runs during project implementation, inefficient management, strained labour
relations and technical problems, among others. External factors include global recession,
power shortage, natural calamities, and so on. The asset quality of PSBs, in general, is
impaired due to significant exposure to troubled sectors like power, steel, aviation, real
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estate and telecom. It is our objective to keep NPAs as low as possible. For that, NPAs are
monitored at all levels, including the top management of the bank and ministry of finance.
Are you satisfied with the current rate of growth? What are your network expansion
plans?
Page | 18
In FY14, the bank opened 363 branches. The overall Casa percentage of all new branches
is well above 40%. The bank has opened around 37 lakh Casa accounts through intensive
campaigns held throughout the year. We can expect an increase in Casa deposits only over
a period of time, say, 2-3 years. Hence, our Casa rate is expected to increase uniformly. We
plan to open 400 new branches covering more rural and semi urban areas this fiscal.
Accordingly, new recruitment would be made to meet the requirements.
Will there be any capital-raising in FY15?
During FY14, we raised R1,200Cr. from the government, which holds 73.80% in the bank,
and R396.04 Cr. from LIC, which now holds a 14.77% stake. As far as medium-term notes
(MTNs) are concerned, there are a host of regulatory
NEWS OF THE WEEK

Whether it is 'PM' Narendra Modi, or Rahul Gandhi, India's economic growth
prospects dim
Prospects for a strong economic growth rebound in India are dim as industry remains weak,
and although a business-friendly opposition party, led by Narendra Modi looks likely to form
a new government, its ability to pass sweeping reforms is in doubt, a poll showed. An
anticipated victory for the Bharatiya Janata Party (BJP), against the incumbent Congress led
by Rahul Gandhi, at the conclusion next month of the Lok Sabha elections in the world's
largest democracy has pushed India's stock market to a record high. But many worry that its
power to drive change will be muted if it has to form a coalition with other parties, which in
the past have held policy hostage to local agendas. The latest poll of over 20 analysts taken
this week showed Asia's third-largest economy likely grew 4.7 percent in the fiscal year that
ended this March, with growth seen picking up to 5.5 percent in the current fiscal year.
Economic growth slumped to a decade-low of 4.5 percent in 2012/13 - less than half the
almost double-digit rates in 2010. Anubhuti Sahay, senior economist at Standard Chartered
Bank, said that against that backdrop, and with chances of even higher inflation, a strong
government with the ability to legislate change is needed to put the economy back on track.
"If we get into a situation where again the government, because of coalition politics, is not
able to implement good policies, that is the biggest risk. We have seen such situations since
2010," she added. India's economic gloom deepened in the first quarter of this year.
Industrial output shrank and exports fell, underscoring the enormous challenges awaiting
whatever new government takes over in May. The current government has been heavily
criticized for not implementing economic reforms and for being unable to control persistently
high inflation -- both leading to reduced foreign investment and low consumer demand. The
Reserve Bank of India (RBI), which recently shifted its focus to retail price inflation, aims to
bring that down from 8.31 percent at present to 6 percent by January 2016. But the poll
shows inflation only coming down to 7.5 percent by then. That would leave a 1.5 percentage
point gap to close. The RBI is expected to keep its key repo rate steady for another year
before a modest cut in the second half of 2015, the poll also showed. A weak economic
outlook for China and the euro zone, India's two biggest trading partners, does not help the
outlook for exports, either.
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Supreme Court order marks a crucial turn in Sree Padmanabhaswamy temple history
The interim order of the Supreme Court in the Sree Padmanabhaswamy temple case that
virtually de-controlled the shrine from the erstwhile Travancore royal family marks clean
break from the past. The apex court, while agreeing with the report of the amicus curiae
Gopal Subramaniam, had yesterday ordered the creation of a five-member administrative
Page | 19
set-up under the district judge which will not have any direct representation of the royal
family. The decision also signalled a critical turn in the long-drawn litigation for transparency
in administration and proper audit of the huge treasures of the temple, started years back as
a private petition in a local court. Lord Padmanambha is the family deity of Travancore royal
house and since 18th century the princes of the lineage had ruled most of south Kerala and
adjoining parts of Tamil Nadu as "Padmanabhadasa" (servants of Padmanabha). After the
integration of the princely state in 1947, the royal rule came to an end and most major
temples of Travancore were brought under a Devaswom Board. But as a special case,
control over the Padmanabhaswamy temple was left in the hands of the royal family.
Interestingly, the elected governments that came to power in the state since then, including
those led by the Left, have bothered a little about the temple or the priceless treasures
hidden in its vaults. Though old-timers used to say about the 'maha nidhi' (fabulous treasure)
in the underground chambers, the public at large had for long taken such claims as
exaggerated. Things started changing when two devotees approached a sub-court here in
2007 seeking to restrain the temple authorities from opening the chambers and
photographing the treasures for making an album. Considering the plea, the court appointed
a two-member lawyers' commission vesting them with the authority to open a particular
chamber to take out jewels and utensils required for festivals and other important occasions.
The court also suggested creation of an administrative body on the lines of the Guruvayur
temple, which was challenged in the High Court by the temple authorities. It was at this
juncture that T. P. Sunarrajan, a former IPS officer, stepped in with the argument that the
temple is no longer a private property and there should be accountability and transparency in
its management. Sundararajan's stand was endorsed by the High Court and suggested that
temple administration be brought under a trust or a separate body formed for it.
INTERESTING TO KNOW THIS WEEK

The challenge: a bank account for everyone
The Reserve Bank of India's (RBI) decision to grant 'in-principle' approval for banking licence
to two new players - Bandhan and IDFC - out of a list of 25 applicants surprised many.New
banking licences were being offered for the first time in a decade with the objective of
expanding the reach of financial services to masses and the decision to grant only a couple
of licences appeared to fall short of expectations. The applications of large corporate houses
such as Anil Ambani's Reliance Group, Kumar Mangalam Birla-led Aditya Birla Group and
the Bajaj Group were ignored even though industry analysts felt that their deep pockets
would have accelerated the progress of financial inclusion."One of the challenges with the
existing licencing regime is that regulatory opportunity determines market entry rather than
business need and preparedness of applicants. One would hope that licensing of these two
banks is just the start," says Shinjini Kumar, leader-banking and capital markets at
Pricewaterhouse-Coopers (PwC) India. Financial inclusion is certainly not a new
dispensation that Indian policymakers are craving. The nationalisation of banks in 1969 and
the thrust on branch building that followed were attempts at including the financially
excluded. Even in the previous round of bank licensing (in 2003-04) new players were
directed to open branches in rural and semi-urban geographies. In recent years, RBI has
adopted a planned and structured approach to improve financial inclusion. In January 2010,
it directed all public and private sector banks to submit a board-approved, three-year
financial inclusion plan starting in April 2010. Lenders were advised to devise plans
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congruent with their business strategy and make them an integral part of their corporate
objectives. Banks were asked to prepare self-set targets in respect of opening rural brick and
mortar branches, hiring business correspondents, covering un-banked villages and offering
financial products like basic savings bank deposit (BSBD) accounts, kisan credit cards
(KCC) and general credit cards (GCC). The implementation of financial inclusion plans was
closely monitored by the regulator on a monthly basis through quantitative reporting format.
Page | 20 The qualitative aspects were reviewed through quarterly reports submitted by banks.
The progress has been encouraging in the first three years (April 2010 to March 2013).
Banking outlets in villages had increased to 268,454 from 67,694, close to 7,400 rural
branches were opened and nearly 109 million BSBD accounts were added. Also, around
9.48 million farm sector households and 2.24 million non-farm sector households were
included leading to higher disbursement of small entrepreneurial loans.To continue the
process of ensuring access to banking services to the excluded, lenders were asked to
sketch another three-year financial inclusion plan for the period 2013-16.Technology played
a key role in expanding the reach of formal banking services. "If this (financial inclusion) is
something we have been working on since 1969 what is the difference now? Critically it is
technology, which enables undreamt of outreach. For financial inclusion to succeed and an
effective business delivery model to be in place it is essential that servicing costs are
brought down and large numbers covered rapidly. This exponential growth is a possible
dream with the use of technology," said Deepali Pant Joshi, executive director at RBI, at a
seminar in Kolkata in October, 2013.Banks, including regional rural banks, have migrated to
core banking system and developed in-built capability to provide remittances using electronic
payment systems such as the real time gross settlement system (RTGS), national electronic
funds transfer (NEFT), national electronic clearing service, immediate payments service and
Aadhaar enabled payment systems. Lenders are increasingly using alternate channels of
delivery (such as ATMs, net banking and phone banking) and depending on information and
communication technologies (ICT) to expand their reach. Nearly 490 million transactions
were carried out in ICT-based accounts through business correspondents between April,
2010 and March, 2013.But despite these efforts a large section of India's population still
does not have access to formal banking services. The numbers are mind-numbing.
According to the government's population census 2011, only 58.7 per cent of households
were availing banking services in the country. While compared to the previous census 2001
there is a significant improvement in the access to banking services, it indicates that still over
40 per cent of India's 1.2 billion people continue to remain financially excluded. Also, a
survey on financial access in 2011 revealed that India had 10.6 branches and 8.9 ATMs per
0.1 million population. Compared to this China had 23.8 branches and 49.6 ATMs, while
Brazil had 46.2 branches and 119.6 ATMs per 0.1 million people. This is probably the reason
why the government wanted more banks in the country. That new players will be offered
banking licence was revealed for the first time by former finance minister (and now
president) Pranab Mukherjee during his budget speech in February, 2010.While RBI
reluctantly agreed to invite applications from industrial groups, ultimately it stopped short of
granting approval to any of the corporate houses. The central bank admitted that its decision
to offer only two new licences may be categorised as 'conservative', but it justified its stance
as appropriate because of the public concern on governance.Globally, it is fairly common to
permit industrial houses in the banking business. Only 12 per cent of countries restrict the
mixing of banking and commerce, according to RBI's discussion paper on new bank
licensing (released in August, 2010).It is believed that the regulator's dilemma in allowing
industrial houses in banking stems from the fact that these groups, if permitted, could
undermine the independence of banks."There is no contradiction in the principle of financial
inclusion and fit and proper criterion. It is a scrutinised criterion to make sure that other
people's money, which is what banks deal with, are disbursed and allocated in a manner
which is appropriate and fit and proper," Bimal Jalan, former governor of RBI, said earlier
this week while responding to queries on why only two new banking licences were offered.
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Jalan also headed the high-level advisory committee that scrutinised the applications for new
banking licences.
However, there is still hope for industrial groups in getting a permit to set up a bank. RBI has
kept the door open saying that it intends to use the learning from this round's licensing
exercise to revise the guidelines appropriately and move to give licences more regularly,
Page | 21
almost on tap. The central bank also indicated that it plans to frame categories of
differentiated bank licences, building on its prior discussion paper. RBI felt that some of the
entities who did not qualify in this round for a full-fledged banking licence could apply in
future. In October, 2007 RBI had prepared a discussion paper on differentiated bank
licensing, wherein it stated that the case for such licensing may be reviewed after a certain
degree of success in financial inclusion is achieved and the central bank is satisfied with the
quality and robustness of the risk management systems of the entire banking sector. The
banking regulator, in a discussion paper on banking structure in India (released in August
2013), said that banks have shown significant progress in financial inclusion and in
improving the quality of risk management but added that a "lot more needs to be done". The
universal banking model still remains the dominant model, but there are countries like the
United States, Australia, Singapore, Hong Kong and Indonesia that grants differentiated
banking licence. "While RBI has been conservative in granting in-principle approval to only
two applicants in this round based on the eligibility criteria defined and other quantitative and
qualitative aspects, what is very heartening to note is the stated outlook to review the
guidelines and make this a regular process moving towards an on-tap policy including
differentiated licences," says Shashwat Sharma, partner-financial services at KPMG in India.
This, along with RBI's own assessment that a lot remains to be done, means there can be
no ambiguity about speeding up the task of financial inclusion.
Rollout of Rs 10 plastic notes hits technical hurdle: RBIs Chakrabarty
Introduction of plastic banknotes of 10 denomination has been delayed due to failure of the
selected bidders in meeting the technical specifications, said KC Chakrabarty, Deputy
Governor, RBI. The Deputy Governor observed that the quality of lower denomination notes,
especially 10, continues to be a cause for concern, possibly due to reluctance/constraints
on the part of banks to mop up such notes from circulation. In its annual report for 2012-13,
the central bank had said that it has decided to introduce one billion pieces of 10
banknotes on plastic substrate for field trials in five cities Jaipur, Bhubaneswar, Kochi,
Shimla and Mysore which have been identified because of their geographic and climatic
diversity. One of the advantages of plastic over paper is less soilage, thanks to the smoother
surface. The RBI reasoned that plastic banknotes are cost-effective because they last
longer; they create minimal dust and no bres during printing and handling. They can
contain certain security features that are difcult and expensive to counterfeit. Globally, the
cash in circulation to GDP ratio has ranged from 2.5 to 8 per cent whereas in India it has
been around 13 per cent due to the predominant usage of cash by a majority of the
population As at March-end 2013, 10 notes accounted for about 34 per cent of the total
banknotes aggregating 7351.70 Cr. in circulation. In value terms, 10 denomination notes
accounted for about 2 per cent of total 11,64,800 Cr. worth of banknotes in circulation.
Distribution
To improve last mile connectivity, the RBI has decided to involve private entrepreneurs in the
distribution function. The cash-in-transit companies/ business correspondents have been
allowed to process coins and banknotes, including packaging, sorting and delivery to banks
customers and for retrieval. Banks, including urban co-operative banks and regional rural
banks, are also being involved to ensure that last mile delivery of cash-related services
penetrates throughout the country. Chakrabarty said the RBI has also initiated a pilot
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exercise under the lead bank scheme for currency management and it intend to upscale it
going forward, based on the experience gained. As at December-end 2013, the notes in
circulation was 7,647 Cr. pieces valued at Rs. 12, 46,800 Cr., while the coins in circulation
were around 8,991 Cr. pieces valued at Rs.16,800 Cr..
Page | 22
INTERNATIONAL NEWS THIS WEEK

Poor rains may hurt growth by 50-75 bps: BoA
Bank of America Merrill Lynchs Economist, Indranil Sen Gupta, has warned investors about
rising El Nino risks, after the India Meteorological Department forecast a below-normal
monsoon, at 95 per cent of long-run average for the June-September south-west monsoon,
with 60 per cent chance of an El Nino. In a report, he said that the Australian weather bureau
also sees a strong possibility of El Nino by July, on the anvil of the key sowing months of
July-August. If the rains are normal, growth should climb to 5.4 per cent from 4.7 per cent
last year. BoAML estimates that poor rains will hurt by 50-75 basis points. With a normal
monsoon, CPI inflation will likely soften to 7 per cent levels by March 2015 opening the
possibility of RBI rate cuts by December. An El Nino will stick it up at 8-10 per cent, pushing
RBI rate cuts to 2015.
China Q1 growth falls to 7.4 %
Chinas economy registered 7.4 per cent growth in the first quarter of the year a figure
that most emerging economies would perhaps deem robust, but the slowest growth in China
over the past five quarters, underlining renewed concerns here over falling investment, a
cooling real estate market and a slump in foreign trade. Growth in the first three months fell
from 7.7 per cent in the last quarter of 2013. Chinese officials said the figures reflected the
economy entering a new period of lower growth where the focus would be on structural
adjustment away from investment-driven growth to boosting domestic demand and high
technology industries rather than on achieving double-digit growth rates. After high
speed double-digit growth rate of over 30 years, we have now entered a new stage of
transformation and transition, said Sheng Laiyun, Director-General at the National Bureau
of Statistics. This is still around our set target of 7.5 per cent so it is within our expected
range, he said. If you look at the world, a growth rate of 7.4 per cent is still a high speed
growth rate. Nevertheless, the slowing down economy has concerned analysts, with growth
this year, if below 7.6 per cent, likely to be the slowest since 1990. Growth has continued to
decline since 2010, when the economy grew 10.4 per cent propelled by a massive $586
billion stimulus plan put in place after the financial crisis by a leadership worried about job
losses. A subsequent surge in fixed asset investment has, however, worsened imbalances,
and created bubbles in sectors such as real estate and steel where a boom also helped
fuel record imports of ores from countries like India prompting the government to put in
place a rebalancing plan. This is like driving a car uphill, Mr. Sheng said, If you slow down,
it is a bit easier to drive more steadily. We are now in a crucial period of shifting gear. Yet,
the government has found it hard to hit the brakes: this quarter, despite the overcapacity
fears, fixed asset investment grew 17.6 per cent, although 3.3 percentage points lower than
last year. Investment in real estate grew 16.8 per cent. However, sales of commercial
buildings and residential buildings were down by 5.2 per cent and 7.7 per cent, respectively.
Mr. Sheng said the brightest spot was signs of readjustment. Domestic demand was
making a greater contribution to growth, with retail sales up 12 per cent and consumption
accounting for 65 per cent of GDP, he said.
Moderate to strong recovery in the U.S., says Bernanke
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The United States has begun looking at moderate to strong economic growth and the
impact of the financial crisis in the country was fading, former U.S. Federal Reserve
chairman Ben Bernanke said here on Tuesday.Addressing a Kotak Mahindra Bank event,
Dr. Bernanke took the view that slow recoveries follow financial crises and the U.S. was in
one of them. The housing sector was doing better and both activity and sales were up. Dr.
Bernanke said he was also seeing some improvement in Europe and Japan. Also, emerging
Page | 23 markets performed better when the U.S. itself was growing, he argued. Talking about how
he dealt with the financial crisis, he said that orthodoxy may not be the approach when the
crisis was severe. According to him, the most intense phase of the financial crisis is behind
the U.S., but unemployment is still too high. However, the financial system is much safer.
Describing the events of 2008, Dr. Bernanke claimed that all efforts were made to save
Lehmann Brothers, but in the end no buyer could be found. He told a huge gathering at the
Jamshed Bhabha Theatre at Nariman Point that handling the crisis was a team effort and
somebody had to be the face of the institution at such a time. On whether the Chinese
economy faced a hard landing, Dr. Bernanke said a transition was taking place there and the
leadership was trying to encourage domestic demand and consumption. China, he said, was
also trying to liberalise some bits of its financial sector. They are still on a growth path and
thats good for the world economy. Though China had eased off on the purchase of U.S.
treasury bonds, the financial crisis had shown that the dollar was still an attractive currency.
To a question on the future of gold and oil, he said gold was a very volatile and hard
commodity to predict. Oil, too, was very volatile. Referring to the growing extraction of shale
oil through the use of new fracking technology, Dr. Bernanke pointed out that the U.S. was
becoming self-sufficient in oil. According to him, given that oil is also very sensitive to geopolitical risks, the world will have to watch out for issues in the Middle East and Russia. On
whether banks and capital flows would become more national in nature, Dr. Bernanke
quipped, quoting a fellow economist as saying: Banks live globally, but die locally.
US calls for more investment-friendly Indian government
WASHINGTON: The United States on Wednesday urged the Indian government that
emerges from ongoing elections to follow economic policies that encourage investment,
saying Washington would like to see bilateral trade grow to $500 billion a year. NishaBiswal,
US assistant secretary of state for South and Central Asia, said future economic growth in
South Asia hinged on India as the region's growth engine. However, Biswal said that while
Indian leaders had targeted $1 trillion in infrastructure investment over five years to close
gaps preventing growth in manufacturing, policies still inhibited foreign investment. She said
India ranked a poor 134 out of 189 countries as a place to invest and start a business.
"India, the world's largest democracy, must decide its own path to the future," Biswal said in
a speech at Harvard University's Kennedy School of Government. "Will it make the reforms
necessary to attract investment? Will it capitalize on the opportunities that lie in front of it?
"Those are the questions that India's voters are asking as they cast their ballots and those
are the questions that we want to see answered," she said. Growth in Asia's third-largest
economy, has almost halved to below 5 per cent in the past two years on weak investment
and consumer demand, the worst slowdown since the 1980s. Polls show the nationalist
Bharatiya Janata Party (BJP), the main opposition party, is on course to win most seats in
the election that began on April 7. In its election manifesto, the BJP said it would welcome
foreign direct investment in all sectors that create local jobs, except for supermarkets, a
setback to global chains such as Wal-Mart Stores Inc and Carrefour It remains unclear
though whether the BJP will follow through on the supermarket ban or whether its
announcement was just pre-election rhetoric.
BJP policy caution: BJP insiders remain cautious about laying out specific plans because
the party may need to adjust its policies after the election to win over allies and form a
coalition government if it falls short of the parliamentary majority required to rule. Biswalsaid
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India had the potential to exceed all expectations economically, but needed to adopt
investment and tax policies designed to lure, not deter, capital flows and a system of timely
regulatory approvals and contract enforcement. It also needed to protect intellectual
property rights, she said. "The more integrated India is into global markets and into the
economic architecture of Asia, the more India's economy will grow and benefit the entire
global economic system," she said. Biswal said the United States wanted to see bilateral
Page | 24 trade grow to $500 billion a year. It is about $100 billion currently. ArunJaitley, the senior
BJP leader tipped to be finance minister in the new government, said in an interview this
weekend that the party should give direction in five broad areas: infrastructure, building
suburban and new urban townships, massive skill development programmes, tourism, and
lowering costs for business. Capital investment contributes nearly 35 per cent to India's $1.8
trillion economy, but it barely grew in the fiscal year that ended in March as delays in
clearances from various ministries and funding issues grounded many major projects. In its
manifesto, the BJP said it would seek friendly relations with neighbours, but in an apparent
reference to the historical troubles India has experienced with its rival Pakistan, vowed to
"deal with cross-border terrorism with a firm hand" and take a "strong stand and steps" when
required. Biswal said an improved climate between Indian and Pakistan could "pay
enormous economic dividends." "India-Pakistan trade in 2013 was still a paltry $2.5 billion,"
she said. "There's no reason that number can't quadruple in a few years' time to $10 billion."
"We have heard some positive murmurings in Islamabad and Delhi that both governments
are moving in this direction and we are hopeful that they will make progress after the Indian
election."
Finance officials confident of global growth
WASHINGTON: Finance officials from the world's major economies believe an ambitious
goal to boost global growth by $2 trillion in the next five years is within reach despite a
variety of threats, including rising tensions over Russia's actions in Ukraine. In a statement
Friday, finance ministers and central bankers from the Group of 20 wealthy and developing
nations avoided substantial differences in areas such as interest rate policies and tougher
penalties against Russia. Their talks were to resume Saturday with meetings of the
policymaking committees of the International Monetary Fund and the World Bank. In the G20's statement, officials pledged to keep working on economic reforms that could increase
growth by 2 percent over the next five years. But they acknowledged the political difficulty in
the changes needed to reach that goal. "We remain vigilant in the face of important global
risks and vulnerabilities," the statement said. "We are determined to manage these risks and
take action to further strengthen the recovery, create jobs and improve medium-term growth
prospects." Australia's treasurer, Joe Hockey, said officials know that hard decisions await
regarding overhauling labour market policies and dealing with budget deficits. "It is hard but
that is the only way we are going to grow the economy," Hockey, the G-20 chairman this
year, told reporters after the group's two days of discussions. Next up is a September
meeting in Australia, ahead of a G-20 summit Nov. 15-16 in Brisbane that President Barack
Obama and other world leaders will attend. The G-20 includes Russia, which helps explain
why the group's statement did not mention the Obama administration's threat of "additional
significant sanctions" if Moscow were to escalate its actions toward Ukraine. Instead,
finance officials said they were monitoring the situation in Ukraine and were "mindful of any
risks to economic and financial stability." But at a news conference late Friday, US Treasury
Secretary Jacob Lew insisted there was strong support for harsher penalties, saying that
Western allies "stand together in asking Russia to step back." The G-20 endorsed the $14
billion to $18 billion loan package that the IMF has developed to help Ukraine avoid a
financial collapse. IMF officials have said its board probably will approve the assistance plan
by early May.
The US and various European nations have imposed an initial round of penalties aimed at
punishing Russia for its annexation of the Crimean Peninsula. The US is raising the
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prospect of tougher sanctions if Russia attempts to annex parts of Eastern Ukraine.
European officials have been hesitant to go further, worried about possible economic
retaliation by Russia. Also missing in the G-20 statement: a lengthy section from its
February statement concerning the need for continued low interest rate policies by central
banks. Britain's chancellor of the exchequer, George Osborne, said, "I wouldn't read too
much into that." He joked, "We're trying to keep the communique much shorter." He noted
Page | 25 that the Federal Reserve and the Bank of England were moving cautiously to reduce
stimulus efforts as the US and British economies improve. Some critics have expressed
concerns that there is a danger that central banks could move too quickly to reduce support
before labour markets improve. The US came in for criticism in the G-20 statement for the
failure of Congress to approve funding for the IMF that's needed to put in place a reform
program that the 188-nation lending agency adopted in 2010. That program would give the
IMF more resources to help countries in economic distress and provide greater voting rights
to developing economies such as China. The measure has stalled in Congress for years.
The G-20 officials said the IMF should explore other options, which weren't specified, if US
approval doesn't come by year's end.
RBI THIS WEEK

D. Shri G. Gopalakrishna, takes voluntary retirement from RBI to take charge as
Director, CAFRAL
Shri G. Gopalakrishna, Executive Director, Reserve Bank of India (RBI) voluntarily retired
from the service of the Reserve Bank on April 20, 2014 to take over charge as Director,
Centre for Advanced Financial Research and Learning (CAFRAL) with effect from April 21,
2014. A career central banker, Shri Gopalakrishna joined the Reserve Bank in August 1980
and in a distinguished career spanning more than 33 years has worked in the areas of
regulation and supervision of the banking sector, foreign exchange management,
supervision of non-banking finance companies sector, payments systems, etc. He was
appointed as Executive Director on October 26, 2007 and has been in charge of areas
relating to banking supervision, financial stability and communication before seeking
retirement from the Reserve Bank. He also had a stint as the Executive Director of the
Deposit Insurance & Credit Guarantee Corporation. Shri Gopalakrishna has been Chairman
and Member of several working groups set up by the Reserve Bank/Government of India.
Some of these are: Working Group on Information Security, Electronic Banking Technology,
Risk Management and Cyber Frauds, Technical Group to Review Supervisory Rating
Framework for banks in India, etc. He was the Regional Director, Kerala from April 2001 to
March 2004 and Vice-Principal/Member of Faculty in the Reserve Bank Staff College during
1989-1995. Shri Gopalakrishna has served the Reserve Bank with great distinction and
dedication, and the Reserve Bank looks forward to his continued success as Director of
CAFRAL.
RBI releases Final Report on Enabling PKI in Payment System Applications
The Reserve Bank of India has today released, on its website, the final Report of the
Technical Committee on Enabling Public Key Infrastructure (PKI) in Payment System
Applications. It had released the draft report for public comment on February-March 2014.
Cognisant of the fact that non-PKI enabled payment systems, such as, clearing (Magnetic
Ink Character Recognition (MICR/Non MICR), electronic credit system, credit card and debit
cards contributed 75 per cent in volume terms but only 6.3 per cent in value terms in the
year 2012-13, the Group has suggested that in order to ensure a safe, secure payment
system in the country and to ensure legal compliance, digital technology, such as, PKI may
be used. Based on the feedback received, the Group has also included a detailed study of
cloud-Hosted Digital Signature Certificate (DSC), Trusted Execution Environment, Hardened
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Soft Signatures, Mobile PKI, Portable Security Transaction Protocol and Hybrid PKI
Solution by Institute for Development and Research in Banking Technology (IDRBT) as
alternative strategies keeping in view the Indian context (para 19 in the executive summary
of the report). The report also highlights, among other things, security features in existing
payment system applications and feasibility in implementing PKI in all payments system
applications. All banks internet banking applications should mandatorily create
Page | 26 authentication environment for password-based two-factor authentication as well as PKIbased system for authentication and transaction verification in online banking transaction. In
online banking transactions, banks should provide the option to its customers for enabling
PKI for its online banking transactions as optional feature for all customers. The Group has
also recommended that banks may carry out in phases PKI implementation for
authentication and transaction verification.
Background
Payment systems are subjected to various financial risks, such as, credit risk, liquidity risk,
systemic risk, operational risk, legal risk. As customers continue to increasingly adopt
electronic payment products and delivery channels for their transactional needs, it is
necessary to recognise that security and safety have to be robust. Any security related
issues resulting in fraud have the potential to undermine public confidence in the use of
electronic payment products which will impact their usage. Necessary measures to
strengthen security have to be taken as such attacks are growing in scale and sophistication.
Against this background, the Reserve Bank of India had, in September 2013, constituted a
group to prepare an approach paper for enabling PKI for Payment System Applications in
India comprising members from banks (State Bank of India and ICICI bank), Institute for
Development and Research in Banking Technology-Certifying Authority (IDRBT-CA),
Controller of Certifying Authority (CCA), New Delhi and Reserve Bank of India [(Department
of Technology (DIT), Department of Payment and Settlement Systems (DPSS), Department
of Government and Bank Accounts (DGBA) - Core Banking Solution (CBS) and Chief
Information Security Officer (CISO)]. The Group had also interacted with Indian Banks
Association (IBA) and other banks which have given their suggestions/feedback on earlier
version of the Report.
RBI releases Report of the GIRO Advisory Group
The Reserve Bank of India has today released, on its website for public comments,
the Report of the GIRO Advisory Group. The comments may be e-mailed or sent by post to
the Chief General Manager, Department of Payment and Settlement Systems, Reserve
Bank of India, Central Office, 14th Floor, Shahid Bhagat Singh Marg, Mumbai 400 001 on
or before May 25, 2014. The Reserve Bank of India had announced the constitution of a
GIRO Advisory Group (GAG) under the chairmanship of Prof. Umesh Bellur, Indian Institute
of Technology, Bombay to implement a national GIRO-based Indian Bill Payment System.
The
details
are
availabl
at http://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPR849RB1013.pdf.
The
GAG
submitted its report on March 20, 2014 to the Reserve Bank of India. The GAG has
observed that bill payments landscape in the country are mostly biller-specific and thus do
not provide an environment to customers to make bill payments through an inter operable
system in a seamless and efficient manner at many of the agent / customer service points
that exist today. These gaps in delivery of services in large parts of the country thus present
an opportunity, as well as potential, for the creation of a centralised bills payment system in
the country.The GAG had interacted with various stakeholders / institutions from the bill
payments industry and many organisations with experience and expertise in the area of bill
payments. Based on these deliberations, the GAG examined multiple options that are
available to establish and run such a system in the country and recommended a tiered
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structure where the Bharat Bill Payment Services (BBPS) will be the authorised standard
setting body (also handling settlement functions) while the Bharat Bill Payment Operating
Units (BBPOUs) will be the authorised operational units, working in adherence to the
standards set by the BBPS. The BBPS will function as a not-for-profit organisation which
has necessary experience in the payment systems space, while the BBPOUs may be
operated on commercial lines by existing entities in the bill payments space as well as new
Page | 27 entities interested in this segment. The BBPS will also handle the settlement responsibilities
arising out of the transactions in the system. All the entities in this tiered structure will
operate under the uniform and single brand of the BBPS. This will also ensure a uniform
dispute resolution and customer grievance redressal mechanism, thereby building trust and
confidence in such a centralised bill payment system. Reserve Bank proposes to issue
further detailed guidelines after taking into account comments if any received on the
approach suggested in the report.
Minutes of the March 26, 2014 Meeting of the Technical Advisory Committee on
Monetary Policy
The thirty sixth meeting of the Technical Advisory Committee (TAC) on monetary policy was
held on March 26, 2014 in the run up to the First Bi-monthly Monetary Policy Review of
2014-15 on April 1, 2014.The main points of discussion in the meeting are set out below.
1. Most of the Members were of the view that global growth is likely to be better than
anticipated, led by advanced economies, especially the US, while growth impulses are still
relatively weak in the emerging market economies. In the US, of the two targets indicated by
the Federal Reserve inflation at 2 per cent and unemployment at 6.5 per cent the
unemployment target may be hit earlier, leading to wage pressures, and hence inflation. As
a result, the Fed may raise interest rates earlier than is being anticipated. Some Members
were of the view that global recovery may be weaker than expected.
2. On the domestic front, Members outlook was that real GDP growth will be muted. The
manufacturing sector is stagnant. Since exports and imports are declining, the
manufacturing outlook is also weak. Members sensed that investment may pick up as stalled
projects take off after the election results. This could raise the output-capital ratio as well as
potential output and savings. If revival in growth is driven by a pick-up in investment, without
matching revival in savings, there could be larger imbalances. The composition of growth,
therefore, becomes important.
3. Members expressed concern on inflation in India being persistently higher than in other
countries. On the inflation outlook, most of the Members noted that moderation in vegetable
prices drove the recent softening of headline inflation and this is unlikely to be sustained.
There are clear upside risks, such as suppressed pricing in electricity, LPG and diesel;
impact of hailstorms on potato prices, if not on onion; increase in NREGA employment
guarantee by 50 days; and decline in female labour force participation. Inflation excluding
food and fuel is sticky since inflation in housing, education and medical care is still elevated.
As the economy picks up, there will be an increase in these components and inflation may
surge again after October/November 2014. Members cautioned that the Reserve Bank
needs to be watchful of the decline in CPI to ascertain if the decline is likely to be on a
sustained basis. One Member was of the view that consumer price inflation may soften to 7
per cent or even less, with the rate of growth in wages also likely to decline. According to this
Member, inflation persistence factors could be food inflation and the fiscal deficit. High food
inflation influencing nominal wage growth but not vice versa, implies that autonomous factors
drive food prices. The shift in land utilisation by as much as 10 per cent of total cultivable
area away from traditional agriculture and in favour of vegetables should help soften the
inflation momentum, but for short-run blips, like hailstorms/unseasonal rains.
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4. On the external sector, some Members noted that current account deficit risks, given
sluggish financial savings, cannot be ignored. In the near-term, external sector risks might
have eased because of the increase in forex reserves over the last six months. In the
medium-term, however, the risk of capital outflows remains and may materialise if the US
Fed raises interest rates earlier than is currently anticipated. Other Members expected a
surge in foreign currency inflows going forward, which would put upside pressure on the
Page | 28 rupee. They cautioned against a policy of allowing the real exchange rate to appreciate.
While exchange rate appreciation may help in lowering inflation, it is not good for the
economy in general as some categories of exports are highly sensitive to real appreciation,
and there is a current account deficit. One Member was of the view than an exchange rate
below ` 60 per US$ could hurt manufacturing growth because of severe import competition.
Some Members were of the view that the Reserve Bank must actively intervene in the
foreign exchange market to prevent excessive exchange rate appreciation. On the other
hand, some other Members questioned the need for intervention when capital inflows are
large. They were of the opinion that when inflows are good, firms should be allowed to adjust
their balance sheets rather than the Reserve Bank intervening in the market. Reserves
should only be used to manage volatility and not the level of the exchange rate.
5. On policy action, all Members unanimously recommended that status quo be maintained
in the policy. Members listed upside risks to headline inflation in the near term which provide
the rationale for a pause: high order of political and economic uncertainty engendered by the
forthcoming national elections; the policy stance not being tight enough as the real policy
rate is still negative; anchoring inflation expectations; sticky core CPI; and the large fiscal
deficit. To manage the risks associated with capital outflows, most of the Members
recommended that the Reserve Bank should focus on building up foreign exchange
reserves. One Member recommended that the SLR be lowered to 22 per cent of net demand
and time liabilities (NDTL) to improve transmission of monetary policy signals.
6. Members emphasised that the nuancing of forward guidance is important. Forward
guidance should aim at maintaining interest rate stability, while recognising the challenges of
dealing with capital outflows and supply shocks in the process of negotiating the disinflation
path set out for January 2016. One Member was of the view that while forward guidance is
important for anchoring inflation expectations, guidance should indicate that policy will turn
growth supportive if inflation adjusted for base effects declines. Another Member
recommended that the Reserve Bank should give forward guidance of a decline in the policy
repo rate.
7. The meeting was chaired by Dr. Raghuram G. Rajan, Governor. Internal Members: Dr.
Urjit R. Patel (Vice-Chairman), Dr. K.C. Chakrabarty and Shri Harun R. Khan, Deputy
Governors; and external Members: Prof. Indira Rajaraman, Dr. Arvind Virmani, Prof. Ashima
Goyal, Prof. Errol DSouza and Dr. Chetan Ghate were present in the meeting. Shri Y.H.
Malegam and Dr. Shankar Acharya could not attend the meeting. Dr. Acharya submitted his
written views. Officials of the Reserve Bank Shri Deepak Mohanty, Dr. Michael D. Patra, Shri
B. M. Misra and Dr. B.K. Bhoi were in attendance.
Since February 2011, the Reserve Bank has been placing the main points of discussions of
the meetings of TAC on Monetary Policy in the public domain with a lag of roughly four
weeks after the meeting.
Financial Benchmarks- Governance Framework for Benchmark Submitters
As you are aware, the Committee on Financial Benchmarks (Chairman: Shri P. Vijaya
Bhaskar, Executive Director) had submitted its Report on February 7, 2014 recommending
several measures/principles to be adopted in respect of major Indian Rupee interest rate
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and Foreign exchange benchmarks to strengthen their quality, setting methodology and the
governance framework. The Reserve Bank has accepted the recommendations of the
Committee and as per the announcements made in theFirst Bi-monthly Monetary Policy
Statement 2014-15 on April 1, 2014, the Bank has set in motion the process to implement
the recommendations of the Committee in consultation with the Fixed Income Money Market
and Derivatives Association of India (FIMMDA) and Foreign Exchange Dealers Association
Page | 29 of India (FEDAI). 2. The Bank has since advised the FIMMDA and FEDAI to act as the
Administrator of the Indian Rupee interest rate and Foreign exchange benchmarks
respectively and to take necessary steps to implement the recommendations of the
Committee. In order to overcome the possible conflicts of interest in the benchmark setting
process arising out of the current governance structure of the FIMMDA and FEDAI, an
independent body, either separately or jointly, may be formed by the FIMMDA and FEDAI for
administration of the benchmarks. In case of benchmarks determined based on polled
submissions, the FIMMDA and FEDAI may select the Benchmark Submitters on the basis of
their standing, market-share in the benchmark/instrument linked to the benchmark and
representative character and may put in place a Code of Conduct specifying various
provisions including hierarchy of data inputs for submissions as recommended by the
Committee. The Benchmark Submitters thus selected by the respective Administrator, have
to necessarily participate in the polling process and comply with the various provisions
specified in the Code of Conduct. The Benchmark Submitters may extend necessary support
and cooperation to the respective Benchmark Administrator in strengthening the benchmark
determination process. 3. In order to strengthen the governance framework for benchmark
submission, the Benchmark Submitters are advised to implement the following measures:
i.
ii.
The Benchmark Submitters may put in place an internal Board approved policy on
governance of the benchmark submission process. The policy may ensure that
clearly accountable personnel at appropriate senior positions with requisite
knowledge and expertise are responsible for benchmark submissions.
They may put in place an effective conflicts of interest policy which facilitates
identification of potential and actual conflicts of interest with respect to benchmark
submissions and lays down procedures to be followed for management, mitigation or
avoidance of such conflicts.
iii.
They may establish a maker-checker system to ensure integrity of the submissions.

The submissions may be periodically reviewed by appropriate senior level officials in
terms of minimum variance threshold 1 with respect to the published benchmark
levels.
iv.
They may establish appropriate internal controls to secure compliance with the
benchmark submission procedures. The transactions which are taken as the basis
for submission may be recorded so as to verify that they represent bonafide arms
length commercial transactions, and are not undertaken solely for the purpose of
benchmark submission. The personnel involved in benchmark submissions may
document the verifiable basis for their qualitative assessment in absence of actual
transaction data.
v.
They may establish an effective whistleblowing policy to facilitate early detection of

any potential misconduct or irregularities in the benchmark data submissions.
vi.
They may retain all records relating to benchmark submissions including those
containing procedures and methodologies governing the submissions; names and
roles of personnel responsible for submissions and oversight of submissions;
declaration of conflicts of interest by the related personnel; relevant communications
between submitting parties; interactions with Benchmark Administrator; exposure of
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individual traders as well as the aggregate exposures of the Benchmark Submitters
to the instruments referenced to the benchmark; findings of internal and external
audits and remedial actions taken thereof for a minimum period of eight years.
vii.
They may subject the benchmark submissions to periodic internal audit, and where
appropriate, to external audit.
viii.
They may undertake submissions by way of written communications or through

robust contribution devices which leave an audit trail to eliminate possibilities of
errors.
ix.
They may conduct a reality self-check of their existing governance framework vis-vis the above guidelines and report the status to the respective Benchmark
Administrator by May 31, 2014.
x.
They may periodically (periodicity to be specified by the respective Benchmark

Administrator) submit a confirmation to the Benchmark Administrator for having
complied with the regulatory guidelines as well as the provisions of the Code of
Conduct to be issued by the respective Benchmark Administrator.
Page | 30
Reporting of information / data relating to Cash and Suspicious Transactions to the

Director, Financial Intelligence Unit-India (FIU-IND)
Please refer to the circular DNBS.(PD).CC.No.339/03.10.42/2013-14 dated July 1, 2013
[ para III (17)] on the above subject. 2. In terms of the extant instructions, NBFCs are
required to report information / data relating to Cash and Suspicious Transactions to the
Director, Financial Intelligence Unit-India (FIU-IND) on the FINnet Gateway in Test Mode to
test their ability to upload the reports electronically till the time NBFCs are informed about
go-live of the project. The project has since gone live' and henceforth NBFCs may
discontinue submission of reports in CD, using only FINnet gateway for uploading of reports
in the new XML reporting format. Any report in CD will not be treated as a valid submission
by FIU-IND. For any clarification / assistance regarding submission of reports, you may
contact FIU-IND help desk at email or telephone numbers 011-24109792 / 93.
Scaling up of the Business Correspondent (BC) Model Issues in Cash Management
Please refer to Para 26 (Part B) of Governor's bi-monthly policy statement dated April 1,
2014 on the above subject. 2. In this connection, we advise that, after opening of large
number of banking outlets in the last three years in hitherto unbanked areas of the country
through the BC-ICT model, the time has come to monitor the usage in terms of transactions
per BC so as to ensure sustainability of the BC model. One of the critical issues identified in
this regard has been of Cash Management of BCs. 3. The insistence by banks on BCs to
fully prefund their accounts even after considerably long business relationship has become a
major impediment in scaling up operations of BCs. Similarly, low/delayed payment of
remuneration of BCs and passing on the responsibility of insuring cash to BCs have also
been proving to be irritants in increasing the usage in large number of bank accounts
opened. It is, therefore, important for banks to recognize that cash handled by BCs, while
doing banking business on behalf of the Bank, is Bank's Cash. In view of the above and with
a view to scale up the BC model it has been decided that:i.
The Boards of the Banks must review the operations of BCs at least once every six
months with a view to ensuring that requirement of prefunding of Corporate BCs and
BC Agents should progressively taper down with the passage of time. Ideally in all
normal cases the prefunding should progressively come down in such a manner so
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ii.
Page | 31
iii.
as to reach around 15% of the limits fixed for each BC/CSP in case of deposits and
30% in case of Bank Guarantees, etc. in say 2 years from the time a BC starts
operations.
The Board should also review the position of payment of remuneration of BCs and
should also lay down a system of monitoring by the top management of the Bank.
The issue of allowing BCs to handle deposit and payment transactions of various
credits, remittance, overdraft and other products of banks must also be examined by
the Board from time to time. Complaints redressal system in this regard should also
be laid down by the Board.
As the cash handled by BCs is Banks cash, the responsibility for insuring this cash
should rest with the banks.
Uniform Accounting Standards at ARCs

Please refer to "The Securitisation Companies and Reconstruction Companies (Reserve
Bank) Guidelines and Directions, 2003" dated April 23, 2003 (herein after called Guidelines).
2. Pursuant to the recommendations of the Key Advisory Group (KAG) constituted by the
Government of India on the Asset Reconstruction Companies (ARCs), Reserve Bank of
India advises the guidelines on uniform accounting standard for ARCs as under:
a. Acquisition cost (Pre and post acquisition)
Expenses incurred at pre acquisition stage for performing due diligence etc. for acquiring
financial assets from banks/ Fls should be expensed immediately by recognizing the same in
the statement of profit and loss for the period in which such costs are incurred.Expenses
incurred after acquisition of assets on the formation of the trusts, stamp duty, registration,
etc. which are recoverable from the trusts, should be reversed, if these expenses are not
realised within 180 days from the planning period [In terms of RBI Notification
No.DNBS.2/CGM(CSM)-2003, dated April 23, 2003 planning period means a period not
exceeding twelve months allowed for formulating a plan for realization of nonperforming
assets (in the books of originator) acquired for the purpose of reconstruction] or downgrading
of Security receipts (SRs) (i.e. Net Asset Value(NAV) is less than 50% of the face value of
SRs ) whichever is earlier.
b. Revenue Recognition(i) Yield should be recognised only after the full redemption of the entire principal amount of
Security Receipts.
(ii) Upside income should be recognized only after full redemption of Security Receipts.
(iii) Management fees may be recognized on accrual basis. Management fees
recognized during the planning period must be realized within 180 days from the date of
expiry of the planning period. Management fees recognized after the planning period should
be realized within 180 days from the date of recognition. Unrealised Management fees
should be reversed thereafter. Further any unrealized Management fees will be reversed if
before the prescribed time for realisation, NAV of the SRs fall below 50% of face value. [In
terms of RBI Notification No.DNBS.2/CGM(CSM)-2003, dated April 23, 2003 planning period
means a period not exceeding twelve months allowed for formulating a plan for realization of
non-performing assets (in the books of originator) acquired for the purpose of
reconstruction.]
c. Valuation of Security Receipts (SRs)
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Page | 32
Considering nature of investment in SRs where underlying cash flows are dependent on
realization from non performing assets, it can be classified as available for sale. Hence
investments in SRs may be aggregated for the purpose of arriving at net depreciation/
appreciation of investments under the category. Net depreciation, if any shall be provided
for. Net Appreciation, if any should be ignored. Net depreciation required to be provided for
should not be reduced on account of net appreciation.
d. Applicability of 'Operating Cycle Concept' under Schedule VI
SC/ RCs are advised in their balance sheet to classify all the liabilities due within one year
as "current liabilities" and assets maturing within one year along with cash and bank
balances as "current assets". Capital and Reserves will be treated as liabilities on liability
side while investment in SRs and Long term deposits with banks will be treated as fixed
assets on the assets side.
3. The accounting guidelines will be effective from the accounting year 2014-15.
Reporting of Cross Border Wire Transfer Report on FINnet Gateway
Please refer to our circular RPCD.CO.RRB.RCB.AML.BC.No.36/03.05.33(E)/2012-13 dated
October 15, 2012 on Uploading of Reports on FINnet Gateway wherein Regional Rural
Banks (RRBs) and State/Central Cooperative Banks (StCBs/CCBs) and financial institutions
were advised to upload reports as required by FIU-IND using only FINnet gateway.2. With
the amendments to Prevention of Money Laundering (PML) Rules, notified by the
Government of India vide Notification No. 12 of 2013 dated August 27, 2013 and in terms of
amended Rule 3, every reporting entity is required to maintain the record of all transactions
including the record of all cross border wire transfers of more than Rs.. 5 lakh or its
equivalent in foreign currency, where either the origin or destination of the fund is in India.
FIU-IND has advised that the information of all such transactions may be furnished to
Director, FIU-IND by 15th of the succeeding month.3. In this regard, it is advised that the
Transaction Based Reporting Format (TRF) already developed by FIU-IND and being used
for reporting Cash Transaction Reports (CTRs), Suspicious Transaction Reports (STRs) and
Non-Profit Organizations Transaction Reports (NTRs) may be used for reporting the Cross
Border Wire Transfers. The information may be furnished electronically in the FINnet module
developed by FIU-IND. All RRBs and StCBs/CCBs are accordingly advised to take action as
required by FIU-IND and ensure that reports are submitted in time as per the schedule.4.
The format along with sample data filled in as an illustration is available in the Downloads
section of the FIU-IND website (http://fiuindia.gov.in).5. The Compliance Officer / Principal
Officer may acknowledge receipt of this circular to our Regional Office concerned.
Financial Benchmarks- Governance Framework for Benchmark Submitters
As you are aware, the Committee on Financial Benchmarks (Chairman: Shri P. Vijaya
Bhaskar, Executive Director) had submitted its Report on February 7, 2014 recommending
several measures/principles to be adopted in respect of major Indian Rupee interest rate
and Foreign exchange benchmarks to strengthen their quality, setting methodology and the
governance framework. The Reserve Bank has accepted the recommendations of the
Committee and as per the announcements made in the First Bi-monthly Monetary Policy
Statement 2014-15 on April 1, 2014, the Bank has set in motion the process to implement
the recommendations of the Committee in consultation with the Fixed Income Money Market
and Derivatives Association of India (FIMMDA) and Foreign Exchange Dealers Association
of India (FEDAI).
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2. The Bank has since advised the FIMMDA and FEDAI to act as the Administrator of the
Indian Rupee interest rate and Foreign exchange benchmarks respectively and to take
necessary steps to implement the recommendations of the Committee. In order to overcome
the possible conflicts of interest in the benchmark setting process arising out of the current
governance structure of the FIMMDA and FEDAI, an independent body, either separately or
jointly, may be formed by the FIMMDA and FEDAI for administration of the benchmarks. In
Page | 33 case of benchmarks determined based on polled submissions, the FIMMDA and FEDAI may
select the Benchmark Submitters on the basis of their standing, market-share in the
benchmark/instrument linked to the benchmark and representative character and may put in
place a Code of Conduct specifying various provisions including hierarchy of data inputs for
submissions as recommended by the Committee. The Benchmark Submitters thus selected
by the respective Administrator, have to necessarily participate in the polling process and
comply with the various provisions specified in the Code of Conduct. The Benchmark
Submitters may extend necessary support and cooperation to the respective Benchmark
Administrator in strengthening the benchmark determination process. 3. In order to
strengthen the governance framework for benchmark submission, the Benchmark
Submitters are advised to implement the following measures:
i.
ii.
The Benchmark Submitters may put in place an internal Board approved policy on
governance of the benchmark submission process. The policy may ensure that
clearly accountable personnel at appropriate senior positions with requisite
knowledge and expertise are responsible for benchmark submissions.
They may put in place an effective conflicts of interest policy which facilitates
identification of potential and actual conflicts of interest with respect to benchmark
submissions and lays down procedures to be followed for management, mitigation or
avoidance of such conflicts.
iii.
They may establish a maker-checker system to ensure integrity of the submissions.

The submissions may be periodically reviewed by appropriate senior level officials in
terms of minimum variance threshold 1 with respect to the published benchmark
levels.
iv.
They may establish appropriate internal controls to secure compliance with the
benchmark submission procedures. The transactions which are taken as the basis
for submission may be recorded so as to verify that they represent bonafide arms
length commercial transactions, and are not undertaken solely for the purpose of
benchmark submission. The personnel involved in benchmark submissions may
document the verifiable basis for their qualitative assessment in absence of actual
transaction data.
v.
They may establish an effective whistleblowing policy to facilitate early detection of

any potential misconduct or irregularities in the benchmark data submissions.
vi.
They may retain all records relating to benchmark submissions including those
containing procedures and methodologies governing the submissions; names and
roles of personnel responsible for submissions and oversight of submissions;
declaration of conflicts of interest by the related personnel; relevant communications
between submitting parties; interactions with Benchmark Administrator; exposure of
individual traders as well as the aggregate exposures of the Benchmark Submitters
to the instruments referenced to the benchmark; findings of internal and external
audits and remedial actions taken thereof for a minimum period of eight years.
vii.
They may subject the benchmark submissions to periodic internal audit, and where
appropriate, to external audit.
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viii.
They may undertake submissions by way of written communications or through

robust contribution devices which leave an audit trail to eliminate possibilities of
errors.
ix.
They may conduct a reality self-check of their existing governance framework vis-vis the above guidelines and report the status to the respective Benchmark
Administrator by May 31, 2014.
x.
They may periodically (periodicity to be specified by the respective Benchmark

Administrator) submit a confirmation to the Benchmark Administrator for having
complied with the regulatory guidelines as well as the provisions of the Code of
Conduct to be issued by the respective Benchmark Administrator.
Page | 34
FINMIN THIS WEEK

CBDT SIGNS THE FIRST BATCH OF FIVE (5) UNILATERAL ADVANCE PRICING
AGREEMENTS (APA); AGREEMENTS COVER A PERIOD OF FIVE (5) YEARS FROM AY
2014-15 TO AY 2018-19 AND SPECIFY THE ARMS LENGTH PRICE FOR THE
COVERED INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE TAXPAYERS
The Central Board of Direct Taxes (CBDT) has signed the first batch of five (5) unilateral
Advance Pricing Agreements (APA) here today. The agreements cover a period of five (5)
years from AY 2014-15 to AY 2018-19 and specify the arms length price for the covered
international transactions entered into by the taxpayers. These agreements cover a range of
international transactions, including interest payments, corporate guarantees, non -binding
investment advisory services and contract manufacturing. The agreements pertain to
different industrial sectors including pharmaceuticals, telecom, exploration and financial
services. The agreements provide a complete certainty to the taxpayers for five (5) years
with regard to the covered international transactions. The APA programme came into effect
on 1st July 2012 and the first batch of 146 APA applications was received in March
2013.The CBDT has been able to conclude the first set of agreements within a period of one
(1) year as against the internationally accepted norm of at least 2 years. The whole scheme
of APA has been designed with the intention of creating a taxpayer friendly environment in
transfer pricing matters and to minimise the transfer pricing disputes. Before filing the APA
applications, taxpayers are given the opportunity to share their expectations from the APA
process during the pre-filing consultations and the APA team shares a broader
understanding of the forthcoming APA procedure. Having received an APA application, the
APA team works towards establishing the appropriate economic analysis of the covered
international transactions which also involves a site visit i.e. physical verification of the
business of the applicant with regard to the said transactions. It is this detailed fact finding
exercise which lends credibility to the determination of arms length price under the APA.
The APA team furnishes a report incorporating functions, assets and risk (FAR) analysis
which is further examined at length by the CBDT before its submission for the final approval
of the Central Government.
FinMin appoints Ila Patnaik aseconomic adviser
Noted economist Ila Patnaik has been appointed Principal Economic Adviser in the Ministry
of Finance. The Appointments Committee of the Cabinet has cleared her name, a senior
Finance Ministry official said.
WORLD BANK THIS WEEK

6,700-cr World Bank loan for freight corridor link
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he World Bank has approved $1.1 billion (about 6,700 Cr.) as the second tranche of its
loan for construction of the 393-km-long electrified double line between Mughalsarai and
Bhaupur sections of the eastern dedicated rail freight corridor. The loan agreement for the
second phase is expected to be signed in June, an official release said. As a preparatory
step, the Dedicated Freight Corridor Corporation Ltd (DFCCIL), the special purpose vehicle
responsible for implementing the rail freight corridor project, has already shortlisted bidders
Page | 35 for the civil construction contract of this segment. The value of the contract is expected to be
3,500-4,000 Cr.. The bidders include Isolux Corsan-Sadbhav Engineering, GammonYuksel, Posco-PNC Infratech and Continental Engineering Corporation Taiwan-JMCBrahmaputra Infrastructure, among othersThe World Bank had agreed, in principle, to part
finance the eastern corridor project from Mughalsarai to Ludhiana, which has been divided in
three phases. The total in-principle loan commitment is $2.725 billion, of which $975 million
for the first phase was sanctioned in May 2011. The loan agreement was signed in October
2011.
IMF/World Bank Spring Meetings 2014: Development Committee Communique
1. The Development Committee met today, April 12, 2014, in Washington DC.
2. Economic recovery in high-income countries shows signs of strengthening and growth
continues in many emerging market economies. However risks remain. Fostering strong,
inclusive and sustainable growth in todays interconnected global economy will require policy
adjustments and appropriate coordination and communication. We encourage the World
Bank Group (WBG) and the International Monetary Fund (IMF) to work jointly and with all
member countries in pursuing sound and responsive economic policies; addressing
underlying macroeconomic vulnerabilities; rebuilding macroeconomic buffers; and
strengthening prudential management of the financial system.
3. The ability of the WBG to assist countries in achieving the goals of ending extreme
poverty and promoting shared prosperity in a sustainable manner, and to support member
countries in addressing their development needs, should be enhanced by the
implementation of the WBG Strategy that we endorsed at our last meeting. We welcome the
progress made in implementing the change agenda, and call on the WBG to work effectively
to complete the reforms. The WBG should build on its country engagement model as a
platform for selectivity based on client demand and the new corporate goals, to deliver
better, faster and evidence based solutions that result in transformative outcomes for the
benefit of low and middle income countries alike. We expect the new WBG structure should
lead to better global knowledge sharing to benefit all client countries, and to strengthening its
role in support of south-south and regional cooperation. We welcome the WBG scorecard
and look forward to regular updates on the implementation of the WBG strategy.
4. Strengthening the foundations for strong, inclusive and sustainable growth calls for
macroeconomic stability, good governance, promoting public investment, improving the
enabling environment for private investment, boosting quality investment in resilient
infrastructure and improving access to finance. Social inclusion and policies that broaden
income opportunities and the full participation of all groups, including women and the
marginalized and vulnerable, are essential. Raising skills, productivity, and innovation
capabilities are also key elements. An open business climate that fosters competition, more
inclusive human capital development and well-targeted social protection programs are good
both for growth and for shared prosperity. Private investment flows complement
development finance and are a vital factor in achieving our goals. In this context, we
emphasize the importance of the roles of the International Finance Corporation and the
Multilateral Investment Guarantee Agency, working as part of one WBG, in catalyzing private
financial flows and promoting the development of a dynamic private sector that can help
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support sustainable growth, shared prosperity and real opportunities for all citizens in all
client countries. Environmental considerations need to be integrated into policymaking:
climate-smart policies are necessary for environmental sustainability and resilience, and
could also generate side benefits for growth and jobs.
Page | 36
5. The level of ambition of the WBG Strategy demands better utilization of existing resources
as well as strengthening the WBGs financial capacity. We are encouraged by and we
welcome the conclusion of a successful IDA 17 replenishment, which included strong
support from traditional and new donors, and innovative financing mechanisms. The record
US$52 billion approved by shareholders puts IDA in a strong position to maximize impact in
supporting our poorest and most vulnerable member countries, including many fragile and
conflict-affected situations (FCS) as well as small states, which face particular development
challenges. We welcome IDA 17s commitment to maximize development impact with its
special focus on inclusive growth; gender equality; climate change, including disaster risk
management (DRM); and FCS. We are also encouraged that the subsidy resources needed
to ensure the sustainability of subsidized IMF lending to low income economies have been
largely secured. We value the IMFs work on how countries can use fiscal policy to address
inequality in an efficient manner.
6. The measures taken to grow revenues, reduce costs, and make more efficient use of
capital within a prudent risk framework will increase the WBGs financial capacity to serve its
clients, both by supporting them with their specific development objectives and by providing
countercyclical support in times of crisis. We look forward to continued progress in achieving
a leaner cost base via improved organizational and operational efficiencies, as well as
ongoing efforts to develop innovative approaches and mechanisms to mobilize additional
financing. We encourage increasing the level and quality of investment in infrastructure,
which is critical for growth, job creation, prosperity and poverty reduction in countries of all
income levels. We call on the WBG to remain actively engaged with middle income countries
to help them address their development needs. We also encourage the WBG to explore
extending IBRD loans to well performing IDA-only countries while ensuring their debt
sustainability.
7. We urge the WBG and the IMF to continue to strengthen their engagement with SubSaharan Africa and ensure that their financial, analytical, and capacity-building support is
geared toward fostering country-driven structural transformation, reducing extreme poverty,
boosting job creation, and making economic growth more inclusive and resilient. We
especially welcome the WBGs stepped up engagement in addressing the regional drivers of
fragility and conflict, most recently through the Sahel Initiative and continued implementation
of the Great Lakes Initiative. The WBG should learn from these initiatives and apply lessons
to the Horn of Africa, Central Africa and the Gulf of Guinea. We also commend the role of
the WBG in helping to close the infrastructure gap of Sub-Saharan Africa, by attracting new
investments and financing sustainable energy supply and distribution. We call on the WBG
to assist clients to further develop nutrition-sensitive agriculture production, including through
support to smallholders and cooperatives, and to broaden support for sustainable
agriculture. We are encouraged that the IMF has now completed its program of establishing
five technical assistance centers to meet needs across the entire region. We welcome the
forthcoming IMF high-level conference in Mozambique that will bring together economic
policy makers from Africa and beyond to discuss some of the key challenges facing the
continent. We call for enhanced focus and attention to the Middle East and North Africa
region, and emphasize the importance of WBG support to Arab countries in transition.
8. We remain deeply concerned about the continuously deteriorating humanitarian situation
in the Central African Republic, South Sudan and Syria. We commend the generosity of
governments and families in neighbouring countries who are hosting those displaced at
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Page | 37
significant economic and social cost. The WBGs work in FCS is fundamental to delivering
on its goal to end extreme poverty, and active IMF engagement in FCS is key to achieving
macroeconomic stability under what are often very difficult circumstances. We urge the WBG
and the IMF to remain closely engaged in these as well as other FCS and countries in
transition, in coordination with other development partners. We welcome the continuous
support of the WBG and IMF to Ukraine given the challenges the country is facing.
9. We encourage the WBG to maintain strong collaboration with the UN system in the
definition of the Post-2015 Millennium Development Goals.
10. We welcome the WTO Bali Ministerial Declaration on Trade Facilitation. We believe the
agreement will increase competitiveness for developing countries by improving border
management and reducing transaction costs and we call on the WBG to support countries in
its implementation.
11. We are encouraged by progress made by the WBG in mainstreaming DRM in its
operations and recognize the need to further intensify these efforts in country partnership
frameworks. We recognize the challenges faced by small states vulnerable to the effects of
climate change and natural disasters. We would welcome a further update on progress two
years from now.
12. We remain committed to completing the implementation of the 2010 WBG shareholding
realignment. We urge all members who are yet to subscribe to their allocated IBRD and IFC
shares to do so without delay, and look forward to the next review of Voice by 2015.
13. We thank Jorge Familiar for his excellent services to the Development Committee over
the past four years and wish him well in his future role as the World Banks Vice President
for Latin America and the Caribbean. The next meeting of the Development Committee will
be held on October 11, 2014, in Washington, DC.
IMF/World Bank Spring Meetings 2014: Development Committee Communique
2. Economic recovery in high-income countries shows signs of strengthening and growth
continues in many emerging market economies. However risks remain. Fostering strong,
inclusive and sustainable growth in todays interconnected global economy will require policy
adjustments and appropriate coordination and communication. We encourage the World
Bank Group (WBG) and the International Monetary Fund (IMF) to work jointly and with all
member countries in pursuing sound and responsive economic policies; addressing
underlying macroeconomic vulnerabilities; rebuilding macroeconomic buffers; and
strengthening prudential management of the financial system. 3. The ability of the WBG to
assist countries in achieving the goals of ending extreme poverty and promoting shared
prosperity in a sustainable manner, and to support member countries in addressing their
development needs, should be enhanced by the implementation of the WBG Strategy that
we endorsed at our last meeting. We welcome the progress made in implementing the
change agenda, and call on the WBG to work effectively to complete the reforms. The WBG
should build on its country engagement model as a platform for selectivity based on client
demand and the new corporate goals, to deliver better, faster and evidence based solutions
that result in transformative outcomes for the benefit of low and middle income countries
alike. We expect the new WBG structure should lead to better global knowledge sharing to
benefit all client countries, and to strengthening its role in support of south-south and
regional cooperation. We welcome the WBG scorecard and look forward to regular updates
on the implementation of the WBG strategy. 4. Strengthening the foundations for strong,
inclusive and sustainable growth calls for macroeconomic stability, good governance,
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promoting public investment, improving the enabling environment for private investment,
boosting quality investment in resilient infrastructure and improving access to finance.
Social inclusion and policies that broaden income opportunities and the full participation of
all groups, including women and the marginalized and vulnerable, are essential. Raising
skills, productivity, and innovation capabilities are also key elements. An open business
climate that fosters competition, more inclusive human capital development and wellPage | 38 targeted social protection programs are good both for growth and for shared prosperity.
Private investment flows complement development finance and are a vital factor in achieving
our goals. In this context, we emphasize the importance of the roles of the International
Finance Corporation and the Multilateral Investment Guarantee Agency, working as part of
one WBG, in catalyzing private financial flows and promoting the development of a dynamic
private sector that can help support sustainable growth, shared prosperity and real
opportunities for all citizens in all client countries. Environmental considerations need to be
integrated into policymaking: climate-smart policies are necessary for environmental
sustainability and resilience, and could also generate side benefits for growth and jobs.
5. The level of ambition of the WBG Strategy demands better utilization of existing resources
as well as strengthening the WBGs financial capacity. We are encouraged by and we
welcome the conclusion of a successful IDA 17 replenishment, which included strong
support from traditional and new donors, and innovative financing mechanisms. The record
US$52 billion approved by shareholders puts IDA in a strong position to maximize impact in
supporting our poorest and most vulnerable member countries, including many fragile and
conflict-affected situations (FCS) as well as small states, which face particular development
challenges. We welcome IDA 17s commitment to maximize development impact with its
special focus on inclusive growth; gender equality; climate change, including disaster risk
management (DRM); and FCS. We are also encouraged that the subsidy resources needed
to ensure the sustainability of subsidized IMF lending to low income economies have been
largely secured. We value the IMFs work on how countries can use fiscal policy to address
inequality in an efficient manner. 6. The measures taken to grow revenues, reduce costs,
and make more efficient use of capital within a prudent risk framework will increase the
WBGs financial capacity to serve its clients, both by supporting them with their specific
development objectives and by providing countercyclical support in times of crisis. We look
forward to continued progress in achieving a leaner cost base via improved organizational
and operational efficiencies, as well as ongoing efforts to develop innovative approaches
and mechanisms to mobilize additional financing. We encourage increasing the level and
quality of investment in infrastructure, which is critical for growth, job creation, prosperity and
poverty reduction in countries of all income levels. We call on the WBG to remain actively
engaged with middle income countries to help them address their development needs. We
also encourage the WBG to explore extending IBRD loans to well performing IDA-only
countries while ensuring their debt sustainability. 7. We urge the WBG and the IMF to
continue to strengthen their engagement with Sub-Saharan Africa and ensure that their
financial, analytical, and capacity-building support is geared toward fostering country-driven
structural transformation, reducing extreme poverty, boosting job creation, and making
economic growth more inclusive and resilient. We especially welcome the WBGs stepped
up engagement in addressing the regional drivers of fragility and conflict, most recently
through the Sahel Initiative and continued implementation of the Great Lakes Initiative. The
WBG should learn from these initiatives and apply lessons to the Horn of Africa, Central
Africa and the Gulf of Guinea. We also commend the role of the WBG in helping to close the
infrastructure gap of Sub-Saharan Africa, by attracting new investments and financing
sustainable energy supply and distribution. We call on the WBG to assist clients to further
develop nutrition-sensitive agriculture production, including through support to smallholders
and cooperatives, and to broaden support for sustainable agriculture. We are encouraged
that the IMF has now completed its program of establishing five technical assistance centers
to meet needs across the entire region. We welcome the forthcoming IMF high-level
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conference in Mozambique that will bring together economic policy makers from Africa and
beyond to discuss some of the key challenges facing the continent. We call for enhanced
focus and attention to the Middle East and North Africa region, and emphasize the
importance of WBG support to Arab countries in transition. 8. We remain deeply concerned
about the continuously deteriorating humanitarian situation in the Central African Republic,
South Sudan and Syria. We commend the generosity of governments and families in
Page | 39 neighbouring countries who are hosting those displaced at significant economic and social
cost. The WBGs work in FCS is fundamental to delivering on its goal to end extreme
poverty, and active IMF engagement in FCS is key to achieving macroeconomic stability
under what are often very difficult circumstances. We urge the WBG and the IMF to remain
closely engaged in these as well as other FCS and countries in transition, in coordination
with other development partners. We welcome the continuous support of the WBG and IMF
to Ukraine given the challenges the country is facing. 9. We encourage the WBG to maintain
strong collaboration with the UN system in the definition of the Post-2015 Millennium
Development Goals.10. We welcome the WTO Bali Ministerial Declaration on Trade
Facilitation. We believe the agreement will increase competitiveness for developing
countries by improving border management and reducing transaction costs and we call on
the WBG to support countries in its implementation.
11. We are encouraged by progress made by the WBG in mainstreaming DRM in its
operations and recognize the need to further intensify these efforts in country partnership
frameworks. We recognize the challenges faced by small states vulnerable to the effects of
climate change and natural disasters. We would welcome a further update on progress two
years from now.12. We remain committed to completing the implementation of the 2010
WBG shareholding realignment. We urge all members who are yet to subscribe to their
allocated IBRD and IFC shares to do so without delay, and look forward to the next review of
Voice by 2015. 13. We thank Jorge Familiar for his excellent services to the Development
Committee over the past four years and wish him well in his future role as the World Banks
Vice President for Latin America and the Caribbean.The next meeting of the Development
Committee will be held on October 11, 2014, in Washington, DC.
Release of World Development Indicators 2014
The 2014 edition of World Development Indicators (WDI) has just been released. WDI
2014 provides high-quality cross-country comparable statistics about development and
peoples lives around the globe. The WDI suite of products can be accessed from
data.worldbank.org/wdi, and include:
An update to the WDI database including notes and metadata explaining the
relevance of the indicators for development, their source, and their methodology.
Visit databank.worldbank.org.
Online tables: Over 90 tables presenting country and aggregate data organized into
six main topics (world view, people, environment, economy, states and markets, and
global links) providing both data and comprehensive About the Data explanations.
These tables are automatically updated when the database is updated four times a
year, and can be accessed and downloaded from wdi.worldbank.org/tables.
The WDI DataFinder application available in English, Spanish, French and

Chinese, in tablet and mobile phone editions for both Android and iOS. The full text
of the printed book is also included.
The WDI publication, containing highlight stories and other related information, will
be available in May. Some of the changes for 2014 include new indicators for severe
wasting, disaggregated by sex; national estimates for labor force participation; ratios
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of employment to population; and unemployment. All revisions to indicators and
related metadata are documented here. For the full set of WDI products, visit
data.worldbank.org/wdi, or contact the Development Data Group by sending an email to data@worldbank.org.
Page | 40
World Bank Group Hones Poverty Strategy as Meetings Wrap

A year ago, the World Bank Group won support for the audacious goal of ending extreme
poverty. Today, as the 2014 International Monetary Fund-World Bank Spring Meetings wrap
up, the Bank Group is close to implementing its strategy to tackle the goal. The Development
Committee, the body that advises the Bank Group and the IMF on development issues, said
in its communiqu that it welcomed progress made in implementing the change agenda,
since it was endorsed six months ago, and called on the Bank Group to work effectively to
complete the reforms. Literally everyone from the advanced countries, from the low-income
countries, from emerging countries, all the participants, all the attendees, expressed
admiration" for the change process, said Development Committee Chairman Marek Belka,
adding that change "is never easy, but has a potential to release a lot more from the
excellent group of people that we have in the World Bank Group."
Today, I was very humbled to receive such a strong endorsement of the change agenda
weve put forward, said World Bank Group President Jim Yong Kim. We have made a lot of
progress and we will continue to focus all of our efforts on improving our ability to serve
clients. At the 2013 Spring Meetings, the committee backed two goals proposed by the
Bank Group: reducing extreme poverty to no more than 3% by 2030, and boosting the
incomes of the bottom 40% of the population. The poverty goal will entail lifting 50 million
people a year out of extreme poverty defined as living on less than $1.25 a day. Kim said
this week achieving the goal will require a laser-like focus on making growth more inclusive
and targeting more programs to assist the poor directly. While extraordinarily difficult, the
goal can be met, he said. This can be the generation that ends extreme poverty.
A new paper, Prosperity for All, released April 10 says economic growth is vital to
achieving the goals, but must be complemented by policies that allocate more resources to
the extreme poor, such as cash transfer programs. In the last several months, the Bank
Group has begun to implement a strategy to improve its effectiveness as a development
institution and align its work to the goals. Changes under way include cutting costs,
realigning personnel, streamlining some processes, and encouraging closer collaboration
among teams and among the various arms of the Bank Group. Starting in July, the Bank
Group will have communities of experts focusing on bringing global solutions to local
problems, said Kim at his Spring Meetings opening press conference. The Bank Group will
retain a strong presence in the countries where it works. The Development Committee said it
expects the Bank Groups new structure should lead to better global knowledge sharing to
benefit all client countries, and to strengthening its role in support of South-South and
regional cooperation. It also welcomed the Bank Groups plans to increase financing
capacity from $45 billion to $50 billion a year today to more than $70 billion within a decade.
We look forward to continued progress in achieving a leaner cost base via improved
organizational and operational efficiencies, as well as ongoing efforts to develop innovative
approaches and mechanisms to mobilize additional financing. We encourage increasing the
level and quality of investment in infrastructure, the communiqu said. The Development
Committee praised the Bank Groups stepped-up engagement in addressing the regional
drivers of fragility and conflict through initiatives in Africas Sahel and Great Lakes regions,
as well as its role in helping to close infrastructure gaps in Africa. The committee called for
enhanced focus on the Middle East and North Africa and support for Arab countries in
transition. We remain deeply concerned about the continuously deteriorating humanitarian
situation in the Central African Republic, South Sudan, and Syria, the committee said. We
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commend the generosity of governments and families in neighbouring countries who are
hosting those displaced at significant economic and social cost.
IMF THIS WEEK

Page | 41 IMF-World Bank Publish Revised Guidelines for Public Debt Management
International Monetary Fund (IMF) and World Bank staffs have prepared and issued to the
Executive Boards of both institutions the Revised Guidelines for Public Debt
Management for information on April 1, 2014. Application of these guidelines should
strengthen the international financial architecture, promote policies and practices that
contribute to financial stability and transparency, and reduce member countries external
vulnerabilities. The revision of the original 2001 Guidelines and their 2003 Amendments was
requested by the G-20 Finance Ministers and Central Bank Governors at their meeting in
Moscow on February 1516, 2013. The request was triggered by structural changes in many
countries debt portfolios in terms of both size and compositionover the last decade, as
a result of financial sector and macroeconomic policy developments, especially in response
to the recent financial crisis. The 2014 revision of the Guidelines was carried out by the IMF
and World Bank staffs, supported by a working group of debt management offices and
central bank authorities from Argentina, Bangladesh, Belgium, Brazil, the Comoros,
Denmark, the Gambia, Germany, India, Italy, Jamaica, Korea, the Peoples Republic of
China, Russia, Sierra Leone, Spain, Sudan, Sweden, Turkey, the United States, Uruguay,
and Vietnam. Lars Hrngren, Chief Economist at the Swedish National Debt Office, chaired
this working group. The OECD provided inputs during the review process. The revisions to
the Guidelines mainly concentrate on: (i) management objectives and coordination, including
clarifying the roles and accountabilities of fiscal authorities and debt managers to the debt
sustainability analysis process; (ii) transparency and accountability by enhancing
communication with investors, especially during periods of crisis; (iii) institutional framework
with the use of collective action clauses (CACs) in bond contracts as necessary for the
efficient resolution of sovereign debt restructuring; (iv) debt management strategy, including
debt portfolio risk mitigation strategies and contingency plans; (v) risk management
framework, with emphasis on stress testing of the public debt portfolio and the use of
derivatives in managing portfolio risk; and (vi) development and maintenance of efficient
markets for government securities, as an integral part of developing a robust debt
management strategy. The revised Guidelines will be used by IMF and World Bank staffs to
provide a framework for technical assistance and will serve as background for discussions in
the context of IMF surveillance. It may also be used as reference material by third party
consultants and experts dealing with public debt management issues.
Transcript of a Press Briefing: G-24 Ministers
Ashraf El Araby, Chairman: Egypt and Minister of Planning and International Cooperation
Alain Bifani, First Vice Chairman: Lebanon and Director General, Ministry of Finance
Luis Fernando Meja, Second Vice Chairman: Columbia and Politica Macroeconmica,
Ministerio de Hacienda y Crdito Pblico
Amar Bhattacharya, G-24 Secretariat and Director
Silvia Zucchini, Senior Communications Officer, IMF
Ms. Zucchini - Good evening and welcome to the Spring Meetings of the IMF and the World
Bank. Welcome to the G-24 press conference. I'm Silvia Zucchini from the Communications
Department of the IMF.
The G-24 ministers just met. On the podium with me for the press conference we have
Minister Ashraf El Araby, representing the G-24 chair, Minister of Planning and International
Cooperation of Egypt; representing the First Vice-Chair, Mr.. Alain Bifani, Director General of
the Ministry of Finance of Lebanon; representing the Second Vice-Chair, Luis Fernando
Meja, Macroeconomic Policy Director, Ministry of Finance and Public Credit of Colombia.
And, in addition, we have Amar Bhattacharya, the Director of the G-24 Secretariat.
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So, let's start giving the floor to the G-24 Chairman, and then we will take questions.
Mr. El Araby - Let me welcome you all once again to this press conference. You will have
received our communiqu, so I will be very brief.
The central focus of our meeting was the global economy and the implications for emerging
market and developing countries. We also discussed the role and reform of both the IMF and
Page | 42 World Bank Group. First, our ministers agreed that despite recent improvements, the global
economy is not yet firmly on the path of strong, sustainable growth. The slowdown in growth
in emerging markets and developing countries (EMDCs) is not unexpected, given their
exceptional performance in the years leading up to and following the crisis. At the same
time, it also reflects the adverse impact of cumulative uncertainties and difficulties in the
external environment, together with the recent turbulence in financial markets.
There has been a lot of focus on fundamentals in EMDCs, but our members emphasized
that they are generally strong and that developing countries continue to drive the bulk of
global growth. Our immediate concerns revolve around the potential for disruptive capital
flows and exchange rate volatility arising from the normalization of monetary policy in major
advanced economies. In order to avoid harmful spillovers and spillbacks, we urge advanced
economies to take steps to coordinate and more clearly communicate their policies, and
satisfies also have a crucial role to play in facilitating multilateral dialogue and policy
coherence. We also called on the international financial institutions and wider international
community to provide increased support for the Arab countries in transition.
Looking ahead, we recognize that the growth outlook for developing countries will be less
favorable as a result of a variety of factors, including tighter financing conditions, lower
growth potential, and full growth in some advanced and emerging market economies and
slower trade growth. We thus affirm our commitments to continue supporting domestic as
well as global growth. To this end, we agreed that job creation and increased productivity is
critical for the long-term sustained growth and development of our members. We also agree
to pursue measures to reduce poverty and inequality and increase social inclusion.
With regard to the IMF, our discussion today revolved around the absolute imperative of
coming to a closure on IMF quota and governance reforms. We are deeply disappointed that
the already agreed 2010 package of reforms had not been implemented. This impacts the
credibility, legitimacy, and effectiveness of the IMF, and prevents us from undertaking further
necessary reforms and meeting forward-looking commitments. We believe all options to
sustain voice and governance reforms need to be considered, keeping in mind that the goal
of any reforms must be to recognize the growing role of emerging markets and developing
countries in the global economy, while enhancing the voice of the poor and small, low, and
middle income countries.
The third issue we discussed was the role and reform of the World Bank Group. Ministers
expressed support for the change initiative under way at the Bank, but stressed the
importance of ensuring that it does not become disruptive. We believe the overarching focus
of reforms must be on supporting clients and ensuring that enough capital is available to
meet their financial, technical and advisory needs in a more cost effective, timely and less
bureaucratic manner.
We see the repositioning of the organization as one World Bank Group as a positive
development and call for this to be implemented in a timely fashion. We also support the
design of a new country engagement model and stress that this must enhance and not
undermine country ownership. We believe that the global infrastructure facility represents a
constructive step toward meeting the enormous infrastructure investment and projected
development requirements in developing countries.
With that, I will open the floor to questions.
QUESTIONER: I have two questions. One is on the IMF. In your communiqu you say all
options to sustain voice, etcetera, should be considered. Are you thinking of something in
particular to go beyond the 2010 Quota and Governance reforms, given that is seems hard
that it will come into effect swiftly? And my second question is concerning the Global
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Infrastructure Facility the World Bank is considering. Can you elaborate on any progress
being made? Are countries interested in contributing to this fund?
Mr. Bhattacharya: Let me begin with the global infrastructure facility. What we have on the
table is a proposal from the World Bank, and there was an initial discussion yesterday
basically outlining it. As none of the elements of design or detail have been agreed upon, it
would be premature for us to comment on it. Let's say we have a wish list. We have huge
Page | 43 needs and would like to see those needs met. We support very much the fact that it is
focused on trying to catalyze private sector investment. We think that is very important. But,
we also want to make sure it is as inclusive as needed, and that it must meet the needs of all
our countries. That is on the global infrastructure facility.With regard to the IMF, as the
minister just said, we believe it is absolutely imperative to follow through on the 2010 Quota
and Governance reforms. Those reforms had some forward-looking commitments, namely
undertaking a comprehensive review of the quota formula by January, 2013, and to
complete the 15th quota review by January, 2014. Those, of course, have not been met.
But, we need to make sure that we can not only deliver on the 2010 reforms, but we keep
the momentum for future reform, because the 2010 was only a step, but only a step toward
what is needed.
QUESTIONER: Just to follow-up, so it is important to deliver. The U.S. congress is not open
to it. So are you ready to be stuck in this situation for another at least six months to a year?
Do you see any possibility that the U.S. would ratify this?
Mr. Bhattacharya: That is why the language in the communiqu, which our ministers
discussed, states that all options need to be considered. We know that the U.S. authorities
are committed to the ratification of the reform. But, nobody knows exactly when this will
happen. And in that context, we need to think about the adequacy of the Fund's resources,
we need to think about the Funds governancethat is the shifts of representation in favor of
EMDCs, and we need to think about delivering on the fundamental changes that were
agreed upon.
So, of course, this is not a discussion the G-24 can have just by itself. It includes all
members of the Fund. Indeed, this will be discussed in the G-20 and in the IMFC. And, we
are basically putting pressure that we get the results we are looking for.
QUESTION: I know the IMF, World Bank, G-20 and G-24 meetings are just getting started,
but I'm wondering if you could describe anything about the mood in Washington, are there
concerns about Russia and Ukraine, are they souring any parts of the talks particularly?
Thank you.
Ms. Zucchini: I don't think this is actually an issue that we can address in this press
conference. The G-24 covers different issues.
QUESTIONER: In 2010 there were initial contributions made in the form of bilateral loans to
the IMF that were contingent on the quota reform. Has there been any talk of withdrawing
those or reconsidering, or is that a done deal that stays on the table?
Mr. Bhattacharya: Youre right that the bilateral loans are temporary and they have to be
renewed. And they were indeed provided on the assumption that the 2010 reforms would go
through. And, that there would be the augmentation of quotas as a result. If that doesnt
happen in time, then the membership has to consider how to deal with that issue. That issue
is very much alive and under discussion.
Ms. Zucchini: If there are no more questions, we will draw this press conference to a close.
Thank you very much for attending the G-24 press conference today, and have a nice stay in
Washington D.C.
Intergovernmental Group of Twenty-Four on International Monetary Affairs and
Development
1. We, the Intergovernmental Group of Twenty-Four on International Monetary Affairs and
Development, held our ninety-first meeting in Washington, D.C. on April 10, 2014 with
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H.E. Dr. Ashraf El Araby, Minister of Planning and International Cooperation of Egypt in the
Chair; Mr... Alain Bifani, Director General of the Ministry of Finance of Lebanon as First ViceChair; and Luis Fernando Meja, Director General of Macroeconomic Policy of the Ministry of
Finance of Colombia as Second Vice-Chair.
Global Economy and Implications for Developing Countries
Page | 44 2. We are encouraged by the strengthening recovery in major advanced economies (AEs),
but note that growth remains tepid and subject to considerable risk. We underscore that
emerging market and developing country (EMDC) fundamentals remain generally strong and
that EMDCs will continue to account for the bulk of global growth. Nevertheless, they have
been impacted by the adverse cumulative effects of the difficult external environment and
recent turbulence in financial markets. Despite this challenging environment, many lowincome countries (LICs), notably in Sub Saharan Africa (SSA), have been able to maintain
high growth momentum supported by generally sound policies. We are concerned by the
challenges facing small developing states and fragile and conflict-affected countries, some of
which remain highly indebted and vulnerable and face limited prospects for growth.
3. We remain highly concerned about the adverse impact of disruptive capital flow and
exchange rate volatility resulting from the potentially abrupt changes in monetary policy in a
few major AEs. We urge policymakers, especially in countries that issue reserve currencies,
to pursue multilaterally coordinated actions to mitigate adverse spillover effects of monetary
policy, including through effective communication. At the same time, AEs must do more to
stimulate global demand and facilitate rebalancing. We believe that the IMF has a role to
play in facilitating policy coordination and coherence at the multilateral level to navigate
policy challenges. We also emphasize the necessity of ensuring that EMDCs have adequate
access to financial safety nets, including from the international financial institutions (IFIs).
We are particularly concerned about the unique challenges facing Arab countries in
transition that have yet to receive the full support of the international community, and call for
flexibility by the IFIs in dealing with these countries, in view of their political and socioeconomic challenges. We call for additional resources to neighboring countries, in particular,
Lebanon, which is facing a disproportionate impact from the influx of Syrian refugees.
4. We note that the economic outlook for EMDCs will be less favorable than in the past
because of tighter financing conditions, geopolitical tensions, slower actual and lower
potential growth than before the crisis in AEs, more moderate growth in trade and less
buoyant commodity prices. Against this backdrop, we are committed to boosting domestic
sources of growth and tapping opportunities for trade and investment amongst ourselves. In
order to ensure that our countries are on a robust long-term growth path, we will pursue
measures to boost productivity and accelerate structural transformation. We are also
committed to taking a broad range of actions over the medium term to reduce poverty and
inequality and increase social inclusion. We will focus, in particular, on creating more and
better jobs by investing in skills and education and facilitating labor mobility.
Role and Reform of the IMF
5. We are deeply disappointed that the IMF quota and governance reforms agreed to
in 2010 have not yet come into effect due to non-ratification by its major shareholder. This
represents a significant impediment to the credibility, legitimacy and effectiveness of the
Fund and inhibits the ability to undertake further, necessary reforms and meet forwardlooking commitments. We strongly believe that the IMF must remain a quota-based
institution with adequate quota resources to play its systemic role on a sustainable basis. To
this end, we feel that all options to sustain voice, representation and governance reforms
should be considered. We continue to believe that the fundamental goal of quota and
governance reform must be to reflect the underlying shifts in the global economy and
enhance the voice and representation of EMDCs, including poor and small low- and middleincome countries. We reiterate our longstanding call for a third chair for SSA on the IMF
Executive Board, provided it does not come at the expense of other EMDC chairs, and ask
that all available options be explored.
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6. We are concerned about the delayed completion of the review of the IMFs policy on debt
limits. We urge the IMF to complete the review, with the aim of having in place a structured
and unified debt limit framework for all countries, anchored in existing debt sustainability
assessments. Given the large and critical financing needs in LICs, particularly for
infrastructure, we emphasize the importance of adopting a flexible and non-intrusive
operational framework. We are also closely following the litigation in U.S. courts between
Page | 45 NML and Argentina and believe it has systemic relevance and potentially profound
implications for all countries. Any resolution that incentivizes predatory holdout behaviour
would undermine the basic architecture for sovereign lending and debt resolution. Given the
limited progress towards a comprehensive sovereign debt workout mechanism, EMDCs may
have to take leadership in facilitating dialogue.
Role and Reform of the World Bank Group
7. We take note of the major change initiatives and reforms underway in the World Bank
Group (WBG). We strongly support the change agenda and repositioning of the organization
as One World Bank Group, respecting the different nature of each institution. We call for an
effective, timely approach to implementing this shift. As the reform process progresses, we
stress the importance of ensuring continuity in the Banks ongoing programs and avoiding
disruptive change. We trust that these reforms are strongly anchored in and guided by the
ultimate objective of supporting clients by delivering customized development solutions
backed by finance, knowledge and convening services. In order to attain this goal, the WBG
must meet the financing, technical and advisory needs of clients in a more cost-effective,
timely and less bureaucratic manner. We take note of the design of a new country
engagement model, including the Country Partnership Framework and Systematic Country
Diagnostic and stress that this must reinforce country ownership. In that regard, we welcome
the strengthening of statistical capacity of client countries as one of the priorities of the
WBG. We are concerned about the stalemate in the engagement of the WBG with some
members and reiterate the importance of the WBG engaging with and providing support to
all its members on the basis of its development mandate and without political considerations.
8. We are thankful for the timely replenishment of IDA in order to meet the immense needs
of the poor and vulnerable. We note the efforts to improve the WBGs lending capacity
through better utilization of the balance sheet and measures to improve efficiency, as
outlined in the expenditure review. We believe it will be important to monitor the impact of
these proposals for unintended consequences, including on demand. If necessary, the
proposals should be adjusted in order to ensure affordability and fair burden-sharing. We
feel that a further capital increase should be considered in the long-run as a measure to
ensure the balance of demand and supply in IBRD lending and the financial sustainability of
the institution.
9. We also take note of the proposal to establish the Global Infrastructure Facility as a
constructive contribution to overcoming the gaps and constraints in infrastructure financing
and project development. The ultimate proposal must ensure adequate and broader
participation of recipient countries and the availability of additional resources, together with
sufficient flexibility to meet diverse infrastructure finance needs.
10. We underscore the need to remain committed to the implementation of the 2010 WBG
shareholding reform as well as to the conclusion of the next shareholding review by no later
than October 2015, as previously agreed.
11. We note the adverse effects of climate change and environmental degradation,
particularly for poor, fragile and vulnerable countries, and recognize the importance of
addressing shared global challenges. We welcome the progress on incorporating disaster
and climate risk management into the WBGs development priorities and operations. We call
for continued efforts to implement the recommendations of the Sendai report. We also call
for an ambitious replenishment of the Global Environment Facility (GEF) in order to ensure it
has adequate resources to meet its mandate.
Other Matters
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12. We reiterate the importance of staff diversity at all levels in enhancing the legitimacy and
effectiveness of the IFIs, and call for further efforts to increase the share of staff from
underrepresented regions, building on diversity initiatives.
13. The next meeting of the G-24 Ministers is expected to take place on October 9, 2014 in
Washington, D.C.
Page | 46
LIST OF PARTICIPANTS 1
Ministers of the Intergovernmental Group of Twenty-Four on International Monetary Affairs
and Development held their ninety-first meeting in Washington, D.C. on April 10, 2014 with
H.E. Dr. Ashraf El Araby, Minister of Planning and International Cooperation of Egypt in the
Chair; Mr... Alain Bifani, Director General of Finance of Lebanon, as First Vice-Chair; and
Luis Fernando Meja, Director PoliticaMacroeconmica of Colombia, as Second Vice-Chair
The meeting of the Ministers was preceded on April 9, 2014 by the one hundred and third
meeting of the Deputies of the Group of Twenty-Four, with Mr... Karim Wissa, Alternate
Executive Director at the World Bank, as Chair.
African Group: FaridTiaiba, Algeria; NialKaba, Cte dIvoire; MutomboMwanaNyembo,
Democratic Republic of Congo; A. ShakourShaalan, Egypt; Sufian Ahmed Beker, Ethiopia;
Christophe Akagha-Mba, Gabon; Seth E. Terkper, Ghana; NgoziOkonjo-Iweala, Nigeria;
Pravin Gordhan, South Africa.
Asian Group: Arvind Mayaram, India; Ali Taiebnia, Islamic Republic of Iran; Nada Mufarrij,
Lebanon; Ma. CyoTuao-Amador, Philippines; Sarath Amunugama, Sri Lanka; Maya
Choueiri, Syrian Arab Republic.
Latin American Group: Axel Kicillof, Argentina; Carlos Cozendey, Brazil; Maria A.
Arbelaez, Colombia; Johnny GramajoMaroqun, Guatemala; Fernando AportelaRodrgues,
Mexico; Julio Velarde, Peru; Larry Howai, Trinidad and Tobago; Jos Rojas, Venezuela.
Observers:AbdulrahmanAlhamidi, Arab Monetary Fund; Ping Sun, China; Ins Bstillo,
ECLAC; Alvaro Hernandez, Ecuador; Shamshad Akhtar, ESCAP; Steven Ciobo, G-20; LuisAlberto Arce, G-77; MetellusAlfredfis, Haiti; Stephen Pursey, ILO; Mohamed Taamouti,
Morocco; Suleiman Alherbish, OFID; Omar Abdul-Hamid, OPEC; Sulaiman Al-Turki,
Saudi Arabia; Manuel F. Montes, South Centre; Sultan Alsuwaidi, United Arab Emirates;
PetkoDraganon, UNCTAD; Alexander Trepelkov, UNDESA.
To Build Resilience in Growth, Focus Must Turn to Structural Reforms
IMF Survey
Mix of policies has to change with focus on growth and jobs

Need to find a practical way forward on quota reforms
Key to addressing inequality is redistribution of productivity
At the IMF-World Bank Spring Meetings in Washington D.C., policymakers concerns shifted
from crisis recovery to achieving durable and high-quality growth. In an interview, Tharman
ShanmugaratnamDeputy Prime Minister of Singapore and Chair of the IMFs International
Monetary and Financial Committee (IMFC)says that the focus must now turn to structural
reforms to build resilience in growth and jobs. He also highlights that steps to address
income inequality should focus on raising skills and productive potential across the
workforce.
IMF Survey: As Chairman of the IMF's policysetting body, can you give us a sense of
the key themes from the meetings today?-setting body, can you give us a sense of the
key themes from the meetings today?
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Tharman: The overarching theme is that we are in a new phase of the recovery. Its most
clear in the U.S., but Europe is past the worst although there's still some downside risk.
Globally we are now four to five years out of the crisis. It requires a new balance in
policymaking, focused on the medium term, and building resilience in growth and jobs. The
second important theme in our discussions had to do with financial stability. I'm not talking
here about the legacy of the last crisis, which is still with us, such as the impaired bank
Page | 47 balance sheets in Europe and elsewhere; but about new risks. With the recovery, we also
see new risks. Yields are compressed in a whole range of risk assets. Some people think
that is a positive because it is cheaper to borrow now, but we have to ask whether it is
because risk has gone down or risk is being mispriced. Eventually rates will correct, and we
get new instabilities. Another risk is the rapid growth of corporate leverage, as several of my
colleagues pointed out, both in the developing countries as well as in some of the advanced
countriesnot in Europe as much. Leverage has gone up, much more than investment has.
These are new risks that we've got to keep a very close watch on. And for emerging market
economies, there's continuing risk of volatility in capital flows. It's not, in my opinion, a shortterm phenomenon, it's not episodic. It's going to be with us for a while.
IMF Survey: We seem to have moved away from talking about recovery to talking
about strengthening growth and, in fact, high-quality, durable growth. How can we
achieve that?
Tharman: The mix of policies has to change. The basic macroeconomic measures to keep
demand afloat remain important. But increasingly, our focus has to be on structural reforms
because our aim should be to build not just quarter-to-quarter, year-to-year growth, but selfsustaining resilience in growth. And that can only come from structural reforms. The world is
operating at below potential outputeverywhere in the advanced world, in the U.S., the
U.K., Europe and Japan; many emerging countries too are still below potential output levels.
There is by definition a shortage of demand. But the question is, how do we bridge that
shortage for demand? If we rely solely on demand management, macroeconomic policy
stimulus basically, it wont do the trick. The key at this stage of the recovery is to build longterm confidence into our economies. And that long-term confidence is going to come much
less from macroeconomic policy than from better education, stronger institutions, a better
and more predictable investment environment, matters that give long-term investors
confidence in our economies. That's why the supply side featured a lot more in our
discussions this time.
Demand-oriented policies still play a role, but it's the supply side that brings confidence at
this stage of the recovery, confidence that can last.
IMF Survey:The IMFC expressed deep disappointment in the delay in passing the 2010
quota reform. How do we move forward?
Tharman: Well, we're not in an ideal situation. We never wanted to be here, but we have to
find a practical way forward. First, full focus on the United States. Theyve got to ratify the
reforms, and I believe they will. It's in their interest, and I believe they will eventually do the
responsible thing. But more fundamentally these reforms, including the 14th Review of
Quotas, are part of the evolution of a critical international institution.
The IMF is about multilateralism. It's about global solutions to global problems. If the IMF
doesn't reform, if it doesn't get the resources it needspermanent resources, not just
temporary borrowingsthen what we are going to see is a rise of regionalism, and
bilateralism. We are going to see a more fragmented world. And that's not a world that will
be safer. It's not a world that will be better for anyone, including the United States.
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IMF Survey: We've heard a lot during these Meetings on income inequality. Any
reflections on the priorities to address this issue?
Tharman: Well, it's an issue that's increasingly occupying our minds. The IMF is not just
about macroeconomic and financial matters. It's ultimately about the well being of people.
And when we talk about well being, we are talking about inclusivity, about people across a
Page | 48
whole spread of occupations and sectors of our society doing better in their lives.
Poverty, itself, quite apart from inequality, is still a major challenge. When we talk about selfsustaining growth, it is the quality of growth that matters. It's not just a GDP growth number;
it is about the quality of growth that can uplift lives across the whole spectrum of people in a
society. But how do we do it? How do we tackle a challenge that's not just a result of this
crisis, but a whole new phase in the global economy where technology is doing some things
that jobs used to do and where globalization itself, particularly for countries that are more
advanced or middle income, is taking away jobs because they're redistributed elsewhere?
I think the key to it is what my Mexican colleague mentioned, which they call the
redistribution of productivity. It's about raising skills and the productive potential of everyone,
not just those in the most modern and advanced sectors, not just the professionals or the
knowledge-based workers; but raising skills and productive potential of everyone so they can
earn a better wage and earn their own success. That's the most sustainable way of
improving inequality. It means biasing our policies towards the broad base of people in our
society, and thinking of this not just from the point of view of traditional redistribution, but in
terms of their productive potential, their ability to contribute. It's a challenging task. There's
no one model that works superbly in the world today. We've got to listen to each other and
learn from each other.
Transcript of a Press Briefing on the Fiscal Monitor Report
SPEAKERS:
Sanjeev Gupta
Acting Director, Fiscal Affairs Department
Martine Guerguil
Deputy Director, Fiscal Affairs Department
Julio Escolano
Division Chief, Fiscal Affairs Department
Wafa Amr
Senior Communications Officer, Communications Department
MS. AMR: Good morning, everybody. Thank you for joining us. I would like to welcome you
to the Press Conference on the Fiscal Monitor. I would like to remind journalists online to
send their questions. Mr... Sanjeev Gupta, Acting Director of the Fiscal Affairs Department,
will make a short presentation. We also have with us Martine Guerguil, Deputy Director, and
Julio Escolano, Division Chief. After the presentation, we will open the floor for questions.
MR. GUPTA: Thank you, Wafa, and thank you to all for coming to this Press Conference.
Since the publication of the previous Fiscal Monitor, fiscal risks are abating somewhat, but
remain elevated in advanced economies. In emerging economies and low-income countries,
fiscal vulnerabilities are rising, although from moderate levels. Let me elaborate briefly on
these trends. I will start with advanced economies, and here I will make two points. First, the
average fiscal deficit in advanced economies has nearly halved since the crisis peaked and
now stands at 3.5 percent of GDP. Fiscal consolidation will continue in 2014 but at a more
gradual pace, with a lesser drag on growth. The exception to this picture is Japan, where
fiscal consolidation is starting this year, notably with the first stage of [collection?] tax
increase that took place last week. However, despite advanced countries progress in
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narrowing in fiscal deficits, the average debt-to-GDP ratio remains stubbornly high and will
exceed a hundred percent of GDP even by 2019, as you can see in this accompanying slide.
The second point I want to make on advanced economies is that the composition of fiscal
consolidation is shifting from revenue to expenditure measures by end-2013. Close to half of
the consolidation has come from the revenue side, quite more than originally intended, but
Page | 49 the share is expected to decline in the coming years as spending cuts take hold. The blue
part of the bar reflects the revenue measures. There is, however, heterogeneity across
countries, with the U.S. relying on revenue measures more than the euro area, where the
scope to raise additional taxes is very limited, as was discussed in the previous issue of the
Fiscal Monitor.
Passing now to emerging market economies, these countries have overall stronger fiscal
positions. They initially weathered the crisis well, in large part by running down the fiscal
buffers. While there is significant heterogeneity among emerging economies, deficits and
debt ratios remain significantly above pre-crisis levels.
The environment faced by emerging economies has turned more challenging. In some
economies, financial vulnerabilities and changes in market sentiment will likely compound
fiscal challenges. For example, those economies with higher non resident holdings may see
sharper increases in interest rates as liquidity conditions in advanced countries tighten. On
average, non resident holdings amount to about one third of emerging market debt, and
local currency debt has more than doubled in several emerging market economies since
2009. While this is a welcome development for domestic market deepening and overall
financial development, it does come with some risks.
Let me now turn to low-income economies. Fiscal space has also declined in those
economies, as revenue mobilization has lagged fast-spending growth. As a result, the
average fiscal deficit remains almost 3 percentage points of GDP above pre-crisis levels. As
a result, in about half of the low-income country sample, debt ratios are projected to keep
increasing through 2019 and the increase in debt is expected to be sizable in some of the
so-called frontier markets, such as Honduras, Senegal and Zambia.
Debt build up has had adverse consequences for LICs in the past because it was not used
for growth-enhancing investments, so it seems warranted to wonder whether the story will be
different this time. In other words, has the new borrowing been used to increase productive
spending? The evidence here is mixed. In many countries, large increases in debt have not
been associated with higher capital spending, for example, in Honduras, Sudan and Zambia.
This raises concerns about the quality of spending in some low-income countries and point
to the need to strengthen institutional capacity to raise the efficiency of spending.
So, what is our policy advice against this backdrop? Our policy advice for advanced
countries has not changed. Fiscal consolidation must continue at a steady and gradual pace
to lower debt ratios to prudent levels. The design and implementation of well-articulated,
credible, medium-term consolidation plans can help in this regard, but these plans are still
lacking in some countries, most notably in the United States and Japan.
Those emerging market economies with large debt and deficits and most vulnerable to
market volatility should start to rein in deficits now. In other emerging market economies,
fiscal reforms are still needed, even with less urgency. In low-income countries, stepped-up
revenue mobilization and higher expenditure efficiency are needed to restore fiscal buffers
and to create room for much-needed public services.
Let me now turn to the second chapter of the Fiscal Monitor which is focused on public
expenditure reform, a topic which we believe is both timely and politically challenging.
Expenditure reforms have a key role to play in country strategies to strengthen their fiscal
positions. In advanced economies, expenditure reforms can support fiscal consolidation
efforts, as there is now greater reliance on expenditure measures in advanced economies. In
emerging economies and low-income countries, expenditure reforms can help respond to
growing demands for better delivery of public services.
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The challenge for policymakers around the globe is to ensure the sustainability of
expenditure programs, maximize the efficiency of public spending, and foster equitable
access to public services. Reaching these goals is not easy, but will require mobilizing
political and social support. I do not think I have the time to walk through all the details of the
analysis in the chapter, but let me pick up a few important conclusions.
Page | 50 First, any spending reform must ensure the sustainability of major budget items, particularly
the government wage bill and social benefits. In advanced economies, these two items
together account for 30 percent of GDP and about 80 percent of non-interest government
spending. In emerging markets and low-income countries, these two items constitute 60
percent of total spending.
Second, expenditure reforms should seek to achieve efficiency gains while preserving
equity. These reforms should be designed and sequenced taking into account countryspecific circumstances. The reforms could be achieved through better targeting of social
programs and promoting greater competition in the healthcare and education sectors.
My final slide is focused on capital spending. What it shows is that there is a secular decline
in public capital stock in relation to GDP in advanced and emerging market economies. In
order to arrest this decline, either more productive public investment or higher involvement of
the private sector would be needed. Thank you very much.
MS. AMR: We will open the floor for questions now. We will take a couple of questions
before we give them a chance to answer. Please identify yourself and the organization you
work for.
QUESTIONER: Many central banks around the world are targeting/battling inflation that is
below the target. U.S. inflation is below 2 percent and the U.S. has already normalized
monetary policy. Do you think the time is right? With inflation below 2 percent, what do you
think is an appropriate simulative package for the U.S. at this moment and its implication for
emerging markets?
QUESTIONER: I was wondering if you can throw some light onyou already talked about
expenditure reforms. In particular, we have seen expenditure controls through cutting down
public sector development programs and slower disbursements through income support
programs. What do you think is the right direction?
MR. GUPTA: - I will take up this question on the U.S. and the general question on
expenditure reforms. Then my colleague will talk about Saudi Arabia. In the case of the U.S.,
as you know, the budget deficit has been reduced quite substantially in the last few years.
The major issue for them is really to put their medium-term debt trajectory on a downward
path by dealing with age-related spending, so they need to focus more on implementing
these reforms so that the debt is on a more sustainable path over the medium term. As I
said earlier in my remarks, we do not have a credible medium-term consolidation plan for
both the U.S. and Japan.
On the general sort of issue of cutting expenditure programs, one of the things that we
discussed in our Fiscal Monitor is that countries should avoid across-the-board cuts in
spending, and they should look at efficiency and equity when sort of restructuring their
expenditure programs, whether it is employment, government employment, whether it is
social transfers, because in all those programs one has to find ways to improve the spending
quality and that is possible in those countries. So, what we have to avoid is that in reforming
these programs there are no across-the-board cuts which may penalize both efficiency and
equity.
QUESTIONER: I wanted to ask about pension reform. Could you explain why you think it is
acceptable to increase retirement ages when blue collar workers are the least able to cope
with higher retirement ages? Could you also comment on the U.K. governments decision to
ring-fence health and education spending and cut other departments? Do you think that is a
good way to go about dealing with public spending?
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QUESTIONER: You mentioned in the report the fiscal risks associated with elections in
Brazil this year. I would like you to elaborate a little bit more of what would be the concerns.
The second question would be what kind of fiscal reforms do you recommend or are most
needed in Brazil right now.
MR. GUPTA: - Thank you for these questions. These are all very relevant questions. The
Page | 51 reason why we recommend raising the retirement age is because, if you look at the life
expectancy going forward, that is rising quite a bit. What it means is that people are going to
live longer and the pension system will have to provide pensions to people who may not
have contributed enough to be able to recover these amounts.
However, I also understand your concern, which is that some of the low-income workers
may not live that long. So, what we are suggesting, if you look at the Fiscal Monitor, is that
for those people, there would have to be some other social assistance provisions, whether it
is done in the context of disability payments, whether it is in the context of increasing the
years that they contribute, and that is taken into account in determining the pension
payments.
But the fact remains that when you compare the life expectancy now against the statutory
pension age in most countries, the life expectancy is much higher and that could be a major
fiscal challenge for many of the countries unless something is done about it. The choices the
countries face is either to raise the retirement age or to raise payroll taxes, which again is
not going to be very beneficial to the economies, or cut the benefits. These are the tradeoffs.
We feel that against all these tradeoffs, perhaps raising the retirement age is a better option.
The second issue that you raised was on why do we need to ring-fence health and education
spending. During an adjustment process or fiscal consolidation, you want to make sure that
access of the population to critical social services is maintained. So, I think it is a good idea
to protect that spending. In fact, if you look at Fund-supported programs, this is one of the
key elements of those programs. We have told countries that they ought to protect or
increase such spending during the period when fiscal consolidation is taking place.
MR. ESCOLANO: Brazil is indeed facing elections soon. However, you know that recently it
has been announced that the outcome for the primary surplus in Brazil has been 1.9 for
2013. The government has announced the target for 2014 as also 1.9. So, at this point, the
government has expressed intentions to maintain fiscal discipline through to 2014. We think
that this is important, something that we have supported, and we think is appropriate to do
so in this coming year.
The Fiscal Responsibility Law, which underpins the fiscal policy framework in Brazil, has so
far provided good guidance and we have encouraged the government to maintain this fiscal
framework and stick to it this year and the following.
Over the medium term, however, we think that Brazil should set itself a bit more ambitious
targets, including going back to the 3 percent primary surplus that they had before. Another
challenge is to address specific challenges that exist in the fiscal framework in Brazil, such
as, for example, the discipline of sub-national governments, which so far is an important
point of pressure on public finances; curtail policy lending, which is also an important point of
pressure in the budget; and not to rely on exceptional items of financing. Those are tasks
that over the medium term should be tackled.
MS. AMR: Thank you all for coming and thank you, Sanjeev, Martine, and Julio.
G20 gives US year-end deadline for IMF reforms
WASHINGTON: Finance chiefs from around the globe on Friday gave the United States until
year-end to ratify long-delayed reforms to the International Monetary Fund and threatened to
move forward without it if it fails to do so. The inability to proceed with giving emerging
markets a more powerful voice at the IMF and shoring up the lender's resources appeared
the most contentious issue for officials from the Group of 20 leading economies and the
representatives for all IMF member nations who met with them. In a final communique, G20
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finance ministers and central bankers said they were "deeply disappointed" with the delay. "I
take this opportunity to urge the United States to implement these reforms as a matter of
urgency," Australian treasurer Joe Hockey told reporters on the sidelines of the IMF-World
Bank spring meetings. The reforms would double the Fund's resources and hand more IMF
voting power to countries like the so-called BRICS - Brazil, Russia, India, China and South
Africa. The US Congress has refused to sign off on the overhaul, which was agreed to in
Page | 52 2010, and the failure overshadowed even the crisis in Ukraine and the spillover effects of
ultra easy monetary policies in advanced economies in the discussions. Some Republicans
have complained the changes would cost too much at a time Washington was running big
budget deficits. The reforms also ran afoul of a growing isolationist trend among the party's
influential Tea Party wing. If Washington does not ratify the reforms this year, the G20
advanced and emerging economies said they would ask the IMF to develop possible next
steps. A source said Brazil had pushed for a harder line. It wanted to require the Fund to
begin work now to determine options to be implemented if the United States failed to act, a
notion that was floated in an early draft of the communique. "The end of the year for me is
the final limit," Guido Mantega, the Brazilian finance minister, said later through a translator.
"Four years waiting for me is just too much."
US elections loom: There are a handful of ad hoc measures officials can take to achieve at
least some of the governance overhaul for the global lender without formal USapproval. But
Singaporean finance minister Tharman Shanmugaratnam, who is head of the IMF's policy
committee, said it was too early to talk about alternatives. "We have every reason to think
the 2010 reforms will be passed by the US," he said, adding that a failure to pass them
would affect the Fund's credibility and effectiveness because, for now, it was relying on
borrowed resources. Earlier on Friday, Russian finance minister Anton Siluanov said
developing nations may demand changes to the IMF's emergency borrowing mechanism if
the United States does not approve the overhaul. Still, giving the Americans until year-end
puts the deadline beyond US midterm elections in November, and some officials said the US
Congress would find it easier acting then. US treasury secretary Jack Lew said the Obama
administration would do its best to push IMF quota reforms through the US Congress this
year. "We will keep taking steps to get this done," he said at a news conference.
Ukraine, Russia; monetary policy: The G20, which is careful to focus on economics and
not politics, said it was monitoring the crisis in Ukraine for any risks to economic and
financial stability. Ukraine's economy was thrown into chaos after popular protests in Kiev
ousted pro-Russian president Viktor Yanukovich, and Russia seized Ukraine's Crimea and
annexed it, causing the worst standoff between Moscow and the West since the Cold War.
Despite the simmering international standoff, Australia's Hockey said there were "no
tensions at all" on the issue and "goodwill" in the G20 meeting room. "There was just
recognition in the general discussion about geopolitical risks around the globe; there wasn't
a specific discussion of Ukraine," said Hockey, who coordinated the meetings under
Australia's G20 presidency. Russia, a G20 member, was not specifically mentioned in the
communique. The G20 source said there were no discussions of sanctions on the country,
which has already been hit with US and European Union sanctions. German finance minister
Wolfgang Schaeuble said top finance officials from the Group of Seven developed nations,
who met on Thursday, were resolved to work together to defuse the crisis, and that Russia
must be a part of the solution. "We were all agreed that we must solve this problem
together," he told reporters, adding that Russia must be part of the solution. "We don't want
to make this difficult for Russia," he said. Hockey said he expected Russia would attend
G20 leaders summit in November. The G20 communique did not explicitly mention
monetary policy, and it dropped a reference from the group's February statement that
stressed central banks should be careful in withdrawing stimulus. Nevertheless, the nations
pledged to provide "clear and timely communication" of their actions, with an eye on the
global fallout as policies are "recalibrated." The gradual withdrawal of the US Federal
Reserve's aggressive monetary accommodation has rocked the currencies of emerging
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economies like India and Argentina, as investors en masse have sought out higher-yielding
markets.
IMF study on economic change amid transition
Page | 53 To support governments efforts, the IMF released last week a new paper titled Toward New
HorizonsArab Economic Transformation amid Political Transitions. The paper makes the
case for the urgency of launching economic policy reforms, beyond short-term
macroeconomic management, to support economic stability and stronger, job-creating
economic growth in the Arab Countries in Transition. It looks at key structural reform areas
that are likely to generate faster and more inclusive growth. The main elements of the
reforms suggested in the paper include fiscal and monetary policies that support stability and
growth, deepening trade integration, strengthening access to finance, improving the
business environment to support entrepreneurship and address corruption, and reforming
the labor market and educational systems to reduce the mismatch between the skill set of
people coming out of universities and schools and the skills that the private sector requires.
The paper also looks at how to gradually replace the current system of untargeted price
subsidiesproved to be inefficient and unfair as it benefits the rich more than the poorwith
more targeted social safety nets to cover vulnerable groups. The study argues that countries
need to stay in the drivers seat and plan their policy programs through wide national
consultation to ensure broad support for these reforms. However, there is a need for the
international community to support policy efforts through financing, access to trade, technical
assistance, or policy advice, the paper says.
Seminar on reforms and consensus-building
To encourage debate about the policy agenda articulated in the study, the IMF hosted a
high-level panel discussion on the sidelines of the Spring Meetings, bringing together
policymakers from within the region as well as experts from other parts of the world.
Panelists agreed on the key areas for reforms, noted above, and stressed that countries
need to ensure that reforms benefit the population widely. An increase in economic growth
has to go hand in hand with an equal increase in opportunity and poverty reduction.
They also cited the value of learning from other country experiences.
We are not going to reinvent the wheelcountries have diagnosed their economic problems
and they know the solutions and the measures that need to be taken, said HanyDimian,
Egypts Finance Minister. The safest way to do economic reforms is to implement what has
been tested elsewhere, he added. Eric Berglf, Chief Economist at the European Bank for
Reconstruction and Development, noted that Eastern European countries that managed to
seize windows of opportunities by implementing economic reforms early on in their transition
had much easier political paths. But how to build a consensus for reforms? Here panelists
had mixed views on the definition of consensus, and the way to achieve it. Reforms that
can be framed in the context of a project can move relatively fast. Things that are framed as
policy choices and reforms are much harder to implement, said HomiKharas, Senior Fellow
and Deputy Director, Development Assistance and Governance Initiative.
Others
recognized that this was a challenge, citing that more must be done to communicate with
influential stakeholders in the society. Its very important to talk with actors like the private
sector, labor unions, and whoever would lose when reforms are done, said Nizar Baraka,
President of the Economic, Social, and Environmental Council in Morocco, and added that,
according to the Moroccan constitution now, the civil society has the opportunity to propose
laws to the parliament.
Upcoming conferences in the region
Pune
The IMF study will serve as an important input to the upcoming regional conference
organized by the IMF, in collaboration with the Jordanian government and the Arab Fund for
Economic and Social Development, in Amman, Jordan titled Building the Future: Jobs,
Growth, and Fairness in the Arab World, during May 1112. The IMF will also co-host with
the Government of Kuwait a conference in the oil-rich country during April 30May 1. This
high-level conference on Economic Development, Diversification, and the Role of the State
Page | 54 will look at the global experiences of economic diversification in oil exporting countries, a
critical policy issue for all the Gulf Cooperation Council countries.
To Build Resilience in Growth, Focus Must Turn to Structural Reforms
Mix of policies has to change with focus on growth and jobs
Need to find a practical way forward on quota reforms
Key to addressing inequality is redistribution of productivity
At the IMF-World Bank Spring Meetings in Washington D.C., policymakers concerns shifted
from crisis recovery to achieving durable and high-quality growth. In an interview, Tharman
ShanmugaratnamDeputy Prime Minister of Singapore and Chair of the IMFs International
Monetary and Financial Committee (IMFC)says that the focus must now turn to structural
reforms to build resilience in growth and jobs. He also highlights that steps to address
income inequality should focus on raising skills and productive potential across the
workforce.
BASLE THIS WEEK

Frequently Asked Questions on Basel III's January 2013 Liquidity Coverage Ratio
The Basel Committee on Banking Supervision today issued frequently asked questions
(FAQs) on Basel III's liquidity coverage ratio (LCR). To promote consistent global
implementation of those requirements, the Committee has agreed to periodically review
frequently asked questions and publish answers along with any technical elaboration of the
rules text and interpretative guidance that may be necessary.The Committee has received a
number of interpretation questions related to the January 2013 publication of the LCR
standard. The FAQs published today correspond to the text set out in that standard.
International banking statistics at end-December 2013
The Bank for International Settlements (BIS) today released international banking statistics
at end-December 2013. The cross-border claims of BIS reporting banks contracted by $93
billion (0.3%) between end-September and end-December 2013. Claims on banking offices
as well as non-bank entities fell. While this was the seventh consecutive quarterly reduction
in cross-border claims, the pace of decline was slower than in the preceding two quarters.
Euro-denominated claims contracted by $325 billion (3.3%) between end-September and
end-December 2013. By contrast, claims in US dollars and in Japanese yen grew by $49
billion (0.4%) and by $62 billion (5.3%), respectively. Cross-border lending to emerging
market economies rose by $95 billion (2.7%) in Q4 2013. The expansion was mainly
concentrated in emerging Asia, and China in particular ($85 billion or 11%) Developments in
the latest international banking statistics, including breaks in series arising from
methodological changes, are summarised in the Statistical release. Data are available on
the BIS website, via the BISWebStats query tool, or as tables in PDF. Data are subject to
change; revised data will be released in conjunction with the forthcoming BIS Quarterly
Review on 2 June 2014. Data at end-March 2014 will be released on or before 24 July 2014.
Pune
Capital requirements for bank exposures to central counterparties - final standard
April 2014
The Basel Committee completed its work on the capital treatment of bank exposures to
Page | 55 central counterparties, following a collaborative effort between the BCBS, the Committee on
Payment and Settlement Systems (CPSS), and the International Organization of Securities
Commissions (IOSCO) to improve upon the interim capital requirements that were published
in July 2012. The final standard will take effect on 1 January 2017. The interim requirements
will continue to apply until that time. When developing the final standard, the Basel
Committee sought to simplify the interim policy framework and to complement relevant
initiatives undertaken by other supervisory bodies, including the CPSS-IOSCO Principles for
financial market infrastructures. The Committee also aimed to support broader policy efforts
advanced by the G20 leaders and the Financial Stability Board, particularly those relating to
central clearing of standardised OTC derivative contracts.
The final standard differs from the interim requirements by:
including a single approach for calculating capital requirements for a bank's exposure that
arises from its contributions to the mutualised default fund of a qualifying CCP (QCCP);
employing the standardised approach for counterparty credit risk (as opposed to the Current
Exposure Method) to measure the hypothetical capital requirement of a CCP;
including an explicit cap on the capital charges applicable to a bank's exposures to a QCCP;
specifying how to treat multi-level client structures whereby an institution clears its trades
through intermediaries linked to a CCP; and
incorporating responses to frequently asked questions posed to the Basel Committee in the
course of its work on the final standard.
A related consultative document was published in June 2013, which was followed by a joint
quantitative impact study (QIS) that was designed to assess the capital impact of proposed
revisions to the interim requirements, inform the calibration of the revised policy framework,
and to obtain feedback on implementation issues and operational burden. The Committee
wishes to thank those institutions that responded to the consultative document and
participated in the joint QIS exercise.
One currency, two markets: the renminbi's growing influence in Asia-Pacific
byChang Shu, Dong He and Xiaoqiang Cheng
Working Papers No 446
April 2014
Large-scale forex intervention in emerging market economies (EMEs) aimed at resisting
currency appreciation has major implications for the composition of banking system balance
sheets. The domestic monetary consequences depend on the nature of central bank
liabilities that are the counterpart of forex reserves. Even if the immediate change in bank
reserves due to FX intervention is offset by the sale of securities, bank lending may still be
stimulated, running counter to the aims of the monetary authority. In this paper, we
empirically investigate the impact of banks' holdings of liquid government securities,
generated by such intervention, on bank credit in a panel of EMEs. We find that, for well
Pune
capitalised banking systems, holdings of government and central bank paper over time lead
to an expansion in their credit to the private sector. This result is confirmed at both country
and bank level. The balance sheet effects of large-scale FX intervention therefore require
close attention.
Page | 56
26.04.2014
COMPILED AND EDITED BY
VASANT PONKSHE
SECRETARY AIBOA
CHAIRMAN BOMOA
9422319827

358th Issue BOM Banking News 21st To 26th April 2014 by Vasant Ponkshe Secretary AIBOA

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