Samachar Lehar

January 2012

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Samacher Lehar- January 2012 Issue

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Our Bank in News Ten Commandments for a Successful Banking Career FAQs on Speed Clearing KHAS BAAT Agriculture & Other Priority BASEL .. Bonds & Money Market Credit Card Credit Growth Deposits Economy Financial Inclusion & MFI Forex Inflows Housing Worries Human Resources Inflation Infrastructure Insurance Liquidity Mutual Funds & Capital Market NPA Other Banking News Overseas Aspirations RBI Directives & Guidelines ` Movement Technology FAQs on Micro, Small and Medium Enterprises Changing Contours of Monetary Policy in India Financial Inclusion in NER and Other An Assessment of Recent Macroeconomic Developments Microenterprise Development-Path to Creating MNCs of Tomorrow FAQs on Senior Citizens Savings Scheme, 20 Food Inflation : This Time it's Different 'Gross Financial Flows, Global Imbalances, and Crises Gross Financial Flows, Global Imbalances, and Crises Challenges to the Accounting Profession Some Reflections Empowering MSMEs for Financial Inclusion and Growth - Issues and Strategies Economic and Financial Developments in Andaman and Nicobar Islands Short Term Cooperative-Credit Structure and Financial Inclusion Legislative Reforms - Strengthening Banking Financial Reporting in the context of Financial Stability : A Regulator's view on Some Accounting Issues Finmin tells RRBs to use sponsor banks infrastructure to become NEFTenabled Nabard planning interest-free loan

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Canara Bank Samachar Lehar January 2012

43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. Small borrowers to get working capital loans Compliance with Basel III norms will entail additional costs for banks : Subbarao Parliament panel gives conditional nod to Banking Laws Amendment Bill 2011 Govt Plans Merger of more Regional Rural Banks Banks' stakes in non-financial entities capped at 10% Sinha Panel Backs Non-Voting Shares for Bank Capitalisation Says RBI should put in place riders before granting 26% voting rights to shareholders in Banks Parliamentary Panel Pitches for Integrated Banking Law RBI panel to discuss raising of capital by urban co-op banks Banks must support land development to conserve arable lands : NABARD RBI steps in to arrest rupee depreciation Global Regulators prepare Supervisory Framework to prevent Lehman-like collapses Tighter Rules may give Fillip to Shadow Banks RBI cuts Currency open Position for Banks by up to 75% Call Rates Harden on Tight Liquidity Financial inclusion necessary for Banking Growth : FM Global headwinds to impact banking sector stability Losses in non-life insurance a worry RBI Financial Stability Report State-run Banks told to Discard Fast-track Promotion Policies Reforms commission looking at uniform legislation for banks Financial inclusion to soon fetch tax benefits for banks, institutions Banks Can't Charge for Account Closure RBI pushes for consolidation in banking 164 165 166 167 168 169 170 172 173 174 176 177 178 179 180 181 181 182 184 184 185 187 188

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Canara Bank Samachar Lehar January 2012

OUR BANK IN NEWS

Corporate Social Responsibility Award 2010-11 to Canara Bank: In recognition of the valuable cont ribut ion made by Canara Bank for Corporat e Social Responsibilit y, t he Inst it ut e of Public Ent erprises and Subir Raha Cent re for Corporat e Governance, Hyderabad conferred t he bank wit h t he Corporat e Social Responsibilit y Award for t he year 2010-11. The covet ed award consist ing of a St at ut e and a cit at ion was received by Smt Archna S Bhargava, ED from Sri R K Mishra, Inst it ut e of Public Ent reprises in a glit t ering funct ion held at Hyderabad on 10.12.2011. (FI Wing, HO) (ED's phot o appears in p. 2 of t oday's(11.12.2011) Udayavani and news it em appears in p. 5 of Business St andard) Canara Bank aims to become numero uno: Execut ive Direct or of Canara Bank, Mr Ashok Kumar Gupta inaugurat ed t he 4t h nat ionallevel conference and general body meet ing of Canara Bank SC/ ST Employees Welfare Associat ion on Sat urday and said, In t he ent ire banking industry, we are at t he second posit ion in the domest ic business wit h a figure of `.5.3 lakh crore and are aiming t o secure t he first place by crossing `. 6 lakh crore by next March. Canara Bank has all t he schemes what ot her leading privat e sect or banks have. (TNE dt 11.12.2011 p.4) Social Action: Canara Bank sponsored washing machines and a grinder t o M/ s. Prerana Resource Cent re, Bangalore, a charit able Trust working for t he welfare of t he dest it ut e, Blind and challenged sect ion of t he societ y. At a glit t ering funct ion on 12t h Dec. 2011 Sri M C Gauba, General Manager, Prime Corporat e Credit Wing handed over t he Washing Machines and Grinder. Everyone lauded t he Banks noble gest ure at t he funct ion. (Social Banking Cell, PC Wing, HO) Cricket: Canman Mr K B Pawan complet ed his second cent ury of t he season as Karnat aka consolidat ed t heir posit ion on Day-2 of t heir Ranji Trophy mat ch against Saurasht ra at t he Chinnaswamy St adium, Bangalore. Pawan, who had scored an unbeat en 251 in karnat aka's season opener against Rajast han, made 118 runs as t he host s ended t he day of 369 for t he loss of four wicket s. Another Canman Mr Bharat h Chipli was on unbeat en 66 when t he mat ch st opped due to bad light . (News it em wit h phot o appears in DNA dt. 01.12.2011 p. 18) Social Action: To commemorat e t he Int ernat ional Day of t he Disabled Persons, which falls on 3rd December every year, Social Banking Cell, HO cosponsored sport ing and ot her cult ural event s for t he challenged sect ion of t he societ y in co-ordinat ion wit h Women and Child Development Depart ment , Government of Karnat aka on 1st December 2011. Sri S S Bhat, GM, F I Wing was one of t he Chief Guest s who dist ribut ed trophies t o t he winners. The

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Canara Bank Samachar Lehar January 2012 Principal Secret ary, Government of Karnat aka and Women and Child Development Officer Smt . Pali profusely t hanked t he Bank for support ing t he event . (Social Banking Cell, HO) Cricket: If Wednesday's second day belonged t o cent urion Canman K B Pawan, t he next day was largely about anot her Canman Chipli, who warmed up nicely wit h a relat ively caut ious 66 t he previous day, t he st ylish right -hander unleashed his full repert oire of st rokes en rout e t o t hird Ranji t on, helping t he home t eam declare before lunch. Bharat h Chipli made his comeback a memorable one by not ching up his career best score of unbeat en 159. (News it em wit h phot o appears in t oday's(2.12.2011) Deccan Herald p. 20, DNA p. 18 and Deccan Chronicle p. 15) Kannada Nadu-Nudi-Nityotsava: Canara Bank Kannada Sangha celebrat ed Kannada Nadu-Nudi-Nityot sava at Head Office Audit orium, Bangalore on 13.12.2011. The funct ion was presided by Sri S Raman, C& MD. On t his occasion, t he Chief Guest Jnana Peetha Awardee Sri Chandrashekar Kambara was honoured by t he Sangha. Sri P V Maiya, Direct or of Canara Bank and Sri D S Ananda Murthy, GM, FM& S Wing graced the occasion. (CC& PR Sect ion, SP& D Wing) The Annual Governing Body meeting: The Annual Governing Body meet ing 2011 was held on 13.12.2011 at HO, Bangalore. The meet ing was chaired and inaugurat ed by t he ED, Sri A K Gupta. Sri Denis Rodrigues, GM & Principal, STC, Bangalore welcomed the gat hering. The ED released t wo publicat ions viz., 'Compendium on Training Programmes' and t he maiden issue of a publicat ion Deeksha brought out by STC, Bangalore. (STC, HO) Two days RSETI conclave: Two days conclave of Canara Bank RSETI Direct ors was conduct ed from 19-12-2011 t o 2012-2011 at HO Bangalore. Smt Archna S Bhargava, ED inaugurat ed t he conclave. The curt ains were drawn for t he programme on 20Th December, 2011 by Sri S Raman, C& MD in t he gracious presence of Dr D Veerendra Heggade, Dharmadhikari Dharmast hala. Sri T Vijay Kumar, IAS, Joint Secret ary, MoRD Govt . of India, int eract ed with t he Direct ors. The ot her dignit aries who graced t he conclave were - Smt Renuka Kumar, Dy Secy, MoRD, Sri A K Bhattacharya, GM RBI, Dr R N Hegde, Co-ordinat or, NIRD. 30 Direct ors from Canara Bank Inst it ut es part icipat ed in t he conclave. (R ural Development Sect ion, PC Wing, HO) Social Action: At a funct ion on 21st December 2011, Smt S Aparna DGM, Credit Administ ration Wing, HO handed over Bunker Cot s t o Society Of Mary Immaculat e a Missionary organisat ion running a semi resident ial school at Begur, Bangalore where they provide free educat ion t o t he children of t he economically backward sect ion of t he societ y in and around that region. Programme was organised by Social Banking Cell, HO (Social Banking Cell, HO) Review Meet: A review meet was conduct ed on 23.12.2011 at Bangalore by Sri K B Krishnamurthy, ExMP & Honble Member, Nat ional Commission for Safai Karmcharis regarding various issues relat ed t o t he service condit ions and amenit ies ext ended t o Safai Karamchari and Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 ot her Group D Part Time Employees in Canara Bank. Our Execut ive Direct or Sri Ashok Kumar Gupta, GM, PC Wing Sri K S Prabhakar Rao, DGM, PW Sri A V Hebbar and ot her execut ives from HO were present during t he meet ing. The Hon'ble Commission also met t he leaders of Safai Karamchari and ot her Group D Part Time Employees in t his regard. (PM Sect ion, HO)

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Canara Bank Samachar Lehar January 2012

Ten Commandments for a Successful Banking Career

Dr. K. C. Chakrabarty Ms Chanda Kochhar, MD and CEO, ICICI Bank, Shri T. V. Mohandas Pai, Chairman, Manipal Global Educat ion Services, Dr K. Ramnarayan, Vice Chancellor, Manipal Universit y, Shri Rajiv Sabharwal, Execut ive Direct or, ICICI Bank, ot her dist inguished guest s, ladies and gent lemen, and my young friends. It is indeed a pleasure t o be here in your midst t oday. Young people infuse energy and vigour int o any gat hering but bright , young bankers like you also make it a learning experience. Convocat ions are always a very special occasion as t hey signify bot h an end and a beginning. An end - t o a formal learning process and, hence, a moment of great sat isfact ion and joy for everyone involved. And a beginning - as it marks t he t hreshold of t he next st age for applying practically t he knowledge and skills acquired t hrough t he formal learning process, t hereby, acquiring real world learning and experience. I congrat ulat e all t he graduat es of t he nint h t o elevent h bat ch of t he ICICI Manipal Academy and especially t hank Ms. Chanda Kochhar for giving me t he opport unity t o address t hese young budding bankers. The ICICI Bank Probat ionary Officer Programme, I am sure, is an effort t o 'Cat ch Them Young' and creat e t he bankers of t omorrow - a set of new generat ion managers for banking in newer t imes. Nowadays, when t he financial sect or t he world over is undergoing a period of most rapid acceleration and change, t he great est challenge before all organizat ions in t his sect or is t o build up an inst it ut ional archit ecture that enables and sust ains int ellect ual capit al. This is especially import ant as in t imes of 'creat ive dest ruct ion' - t o use Joseph Schumpet er's classic phrase in his t heory of economic innovat ion- new ideas, new const ruct s and new expect at ions emerge. And t his, in t urn, makes t he role of new generat ion managers in t hese inst it ut ions more demanding t han t hat of bankers of yest eryears. The t erm 'generat ion' refers t o a common ident ity arising from common experience. Thus, t he ident it y of Gen Y Managers, t hat all of you perhaps are, would also arise from t he common experience of a changing world around us, a product of t he wider hist orical cont ext . As you know, financial sect or reforms since t he year 1991 have heralded a dramat ic shift in t he way banks funct ion and operat e in India. The changed environment and the int ernal compulsions arising from great er compet it ion and the need t o improve t heir market share and profit abilit y have given rise t o t he quest for great er efficiency and t he need t o reposit ion t hemselves given t he realit ies of t he environment and t heir int ernal st rengt hs and weaknesses. But at t he same t ime, the compulsions of business must not t ake away from t he basic t enet s of good banking. Underst anding and inculcat ing cert ain qualit ies will help ensure each one of you becomes a successful banker in t he years ahead and t his, incident ally, would be t he t heme of my address t oday. But , before I delve int o t hat , and knowing fully well t hat you would have st udied about it during your graduat ion, let me st art by explaining banking and it s import ance t o t he societ y.

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Canara Bank Samachar Lehar January 2012 What is banking? Banking, convent ionally, is defined as t he accept ance of deposit s of money from t he public for t he purpose of lending or invest ment . These deposit s are repayable on demand or ot herwise and wit hdrawable by cheque, draft , order or ot herwise. Deposit s are accept ed from individuals as well as from firms. In sum, t he nat ure of banking business can be summarised in t wo words, i.e., 'financial int ermediat ion', which needs t o be carried out efficient ly (bot h operat ional and allocational) for st imulat ing the real sect ors of t he economy. Another essent ial charact erist ic of Banks is t hat t hey are highly leveraged and, hence, special and need t o be regulat ed for prot ect ing t he int erest of deposit ors. As banks are inst it ut ions with legal backing and as t here is a banking regulat or t o oversee t heir financial solvency and soundness, it enables t he banks t o earn t he t rust and confidence of t he public. You are also aware t hat banking in India, as elsewhere, t akes diverse forms viz., banks formed under special st at ut es, companies regist ered under t he Companies Act , 1956 or foreign companies and co-operat ive societ ies regist ered under t he Co-operat ive Societ ies Act . Banks are classified based on t heir ownership pat t ern such as public sect or banks, privat e sect or banks and foreign banks. Some specialized inst it ut ions such as ICICI have morphed t o banks. Yet ot her inst it utions such as EXIM bank, SIDBI and NABARD specialize in trade, small indust ries and agricult ure, respect ively. Apart from basic banking business, banks also undert ake ot her services such as safe cust ody of valuables, grant ing and issuance of let t ers of credit t o facilit at e int ernational t rade, buying and selling in foreign exchange and collect ions of bills, among ot hers. Banks also act as agent of t he Government and ot her ent it ies t o undert ake agency business. Ext ending loans and advances t o t he needy sect ors of t he economy on a priorit y basis is a very crucial funct ion of t he banking sect or. Keeping in view needs of t he Indian economy, banks are mandat ed t o ext end 40 per cent of t heir Net Bank Credit t o t he priorit y sect ors of t he economy. The priority sect ors of t he economy include, int er alia, agricult ure, weaker sect ions, small scale indust ries, educat ion and micro finance. These norms ensure adequat e flow of funds t o t he most import ant and needy sect ors of t he economy. But as you are also aware, over t he years, banking has t ransformed. It is no longer t he "36-3" banking. Banking sect or has become more liberalized, more compet it ive, more st able, more cust omer orient ed, more t echnologically advanced and also more profit able. The prudent ial norms were implement ed, int erest rat es were deregulat ed, asset quality improved, entry barriers were liberat ed, new product s were introduced, capit al was infused and risk management was improved. There was also a decline in t he concent rat ion of t he banking business in a few banks. Financial indust ry is moving t owards expanded act ivit ies driven by cust omer needs, financial innovat ions, t echnological change, consolidat ion, convergence, global compet it ion and financial inclusion. Many challenges lie ahead such as st iff compet it ion, st ringent regulat ory norms, shareholders demanding higher ret urns, and also challenges of globalizat ion and financial inclusion. Thus, as prospect ive successful bankers of fut ure, each one of you should have a fairly good underst anding of t hese opport unit ies and challenges t o accomplish your job in an efficient way.

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Canara Bank Samachar Lehar January 2012 Importance of Banking In t he older days when banking was not prevalent , people were forced t o borrow money from money lenders at very high int erest rat es. Even t oday, in t he rural unbanked areas of t he country, people are dependent on money lenders for credit . Moreover, when people had t o save, they used t o hoard money in their houses despit e t he risk of robbery. The exist ence of a bank, wit h it s legal sanct it y, was a solut ion t o bot h t hese issues. Banks ext ended loans and advances at affordable int erest rat es for product ive as well as consumpt ion purposes and st art ed accept ing deposit s from t he public. The provision of loans at affordable int erest rat es helped people smoot hen t heir income and expendit ure fluct uat ions on t he one hand and st art remunerat ive economic activity on t he ot her. Apart from t he safet y provided by banks t o t he money deposit ed by t he public, t he int erest offered by banks on deposit s of t he public act ed as an additional incentive for deposit ing money with t he banking sect or. This inculcat ed saving habit s among t he public. The savings of t he people become a product ive part of t he economy. This is one of t he import ant reasons why t he Reserve Bank encourages or nudges banks t o expand t he banking net work t o all unbanked villages in t he count ry. While from a social point of view, dist ribut ion of credit at affordable int erest rat es is the most import ant argument for t he exist ence of banks, from an economic point of view, it is t he channelisation of savings int o invest ment s. Higher savings and invest ment s are import ant in st imulating economic growth. Banks are import ant conduit s for monet ary policy transmission and play an import ant role in t he payment and sett lement syst ems. The recent t echnological advancement s in t he banking sect or t hrough ATMs, debit cards, credit cards and elect ronic transact ions furt her made t he t ransfer of money across the financial syst em easy and convenient for t he public. The electronic cards and point -of-sale t erminals facilit at ed day t o day financial needs of cust omers wit hout the need for carrying paper money. The int ernet banking facility offered by banks also help cust omers t o manage t heir personal financial t ransact ions wit hout visit ing t heir bank branch. Along wit h t he t echnological advancement s, t he opening of specialised account s designed for non-resident Indians furt her facilit at ed t ransfer of money from abroad, i.e., remit t ances. Thus, in sum, banking affect s all of us. Our lives are dependent on t he banking sect or in one way or anot her, direct ly or indirect ly. It is t he life-blood of t he economy, a cont aminat ion of the same can affect any sect or or region of t he economy. Thus, as employees of t he banking syst em, each one of you is t aking up a big responsibility, not only t owards t he inst it ut ion for which you are working but also t owards t he ent ire societ y. Having set out t he cont ext , what are the qualities t hat each one of you should inculcat e t o become a successful banker? Let me explain t he Ten Commandment s for a successful banking career : Thou shalt manage the people with empathy Banking is essent ially an art of managing people, be it cust omers or st aff. In a compet it ive environment , cust omers have t o be t reat ed as kings. Thus, delivering financial services t o t he sat isfact ion of cust omer, and prompt redressal of complaint s of cust omers, if any, are very import ant . The complaint s of cust omers should be heard wit h passion and remedial Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 act ion should be t aken prompt ly. The bankers should also t ake pro-act ive act ions t o increase cust omer awareness wit h regard t o charges applicable t o t he financial services and t he available redressal mechanisms. Managing st aff by providing t hem wit h a comfort able work environment is also germane t o ensure t he qualit y of banking services. Thou shalt strive to become a knowledge worker A knowledge worker is one who apart from knowing how t o do a work and what he is doing also knows why is he doing what he is doing. We are t ransit ing from an agrarian societ y, t hrough an indust rial societ y t o a knowledge societ y. In the knowledge societ y, it is t he knowledge inst it utions and knowledge workers who would t hrive. Just because you have complet ed your st udies and got int o a job, you should not st op learning. Your career in t he banking sect or should be a learning experience. Now, while accomplishing your desk work in t he bank, definit ely you will go t hrough a learning process. But t hat is not enough. You should develop and maint ain reading habit t o updat e your knowledge base. Because knowledge is t he power of an employee and once you lose it , you are nowhere. Thus, t here has t o be a conscious effort from your side t o keep your learning curve alive and be bet t er than t he rest . And do not rest rict your knowledge base t o development s in t he banking sect or only; rather all of you should develop a fairly good underst anding of t he economy over a period of t ime. Then only you can become a sensit ive banker, i.e., a banker who is sensit ive t o t he needs of a growing economy. Thou shalt be accountable for all your work This is t he most import ant quality which a banker should have. There should be account abilit y t owards t he societ y because you are working in a public inst it ution and dealing with public money. And what ever you do in t he bank as part of accomplishing your responsibilit ies are subject t o scrut iny. Many of t he financial frauds have t aken place wit h t he help of bank employees in t he past . Thus, if t he employees of a bank are sincere and commit t ed t o t heir inst it ut ion and t o t he societ y as a whole, chances of financial frauds can be minimized. Furt her, try t o know more about your cust omers and t heir occupat ions. This will also help in reducing financial frauds as well as financing of t errorism using bank funds. Thus, a vigilant and account able bank employee is an asset t o t he banking sect or. So, t ry t o become an asset rat her t han a liability. Thou shalt do hard work All of you should remember always t hat hard work is t he 'mant ra' of success. Not hing can subst it ut e your hard work. And t hose who do hard work during t he init ial years of t heir career, will be t he ult imat e winners in t he syst em. Thus, try t o have a posit ive at t it ude t owards work and t ry t o have a good underst anding about t he challenges ahead. Prepare yourself for meet ing t hose challenges and meet ing t he expect at ions of your inst it ution. At t he end of t he day you will be rewarded in one way or anot her. So, do not hesit at e t o t ake more responsibilit ies in t he init ial part of your career. Be pro-act ive and do more work; t his will improve your underst anding of t he subject. Thou shalt develop the right attitude At t imes, t he att it ude of t he bank st aff also keeps rural illit erat e cust omers away from t he banking syst em. So, as new ent rant s t o t he banking indust ry, try t o build up friendly cust omer relat ionships. Do not discriminate cust omers based on their cast e, sex, Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 educat ion and also by financial background. Try t o ext end fair services t o all cust omers of t he bank irrespect ive of t heir background. You all should t ake extra effort s t o bring financially illit erat e cust omers t o t he bank. This is because a good bank should not confine it 's operat ions t o met ropolit an areas, it should be willing and innovat ive enough t o expand it s services t o under banked rural and semi-urban areas. Thus, as employees of t he banking sect or you have an import ant role t o play in furt hering financial inclusion, dealing wit h underprivileged sect ions of societ y and ensuring adequat e flow of credit t o act ivit ies associat ed wit h such people. Thou shalt attempt to become a pioneer Globalizat ion opens up lot of opport unit ies for t he banking sect or from across t he globe. However, t o t ake advant age of t hese opportunit ies, banks have t o prepare t hemselves. Banks will have t o work in a mult i-cult ural and mult i-linguist ic environment t o compet e wit h t he globally act ive banks. A group of efficient , young and well educat ed employees is a sine qua non for achieving t his compet it iveness. So, as employees of t he banking sect or, t ry t o improve your communicat ion skills, try t o learn about t he development s in t he global banking sect or and t ry t o learn about the emerging opport unit ies. Be innovat ive in t aking advant age of the emerging opport unit ies. Because, a pioneer has always an advant age over followers. So, t ry t o be pioneers rat her t han followers in your career. Thou shalt develop a professional approach Do your job wit h your brain, not your heart . You can be passionat e about t he needs and grievances of cust omers, but do not compromise on your logic. During t he course of your careers, you might , at t imes, be faced with various pressures which seek t o influence your decisions. Develop t he abilit y t o object ively evaluat e sit uat ions, regardless of ext ernal pressures, and t ake t he right decision - always. Do not allow your personal problems and relat ionships t o influence your decision making process. Be object ive and be efficient . One cannot become a true professional in any area unless he / she remains commit t ed t o t he core principles of t he profession even under t he most adverse circumst ances. Though shalt be analytical Banking business, essent ially, involves managing risk. This job of managing risk cannot be done efficient ly wit hout having sharp analyt ical capabilit y. As employees of t he banking sect or you have an import ant role t o play in shaping t he financial soundness of t he banking sect or. While doing t he banking business, t ry t o analyse t he financial background and economic act ivity of t he cust omer thoroughly. This will help in limit ing t he growth of non-performing loans, efficient ut ilizat ion of capit al and higher profit abilit y. Financial soundness is an import ant aspect of a good bank, especially because banking business involves public money. Furt her, failure of one banking inst it ution may also t rigger cont agion effect across t he banking sect or as financial instit utions are highly int er-linked. Thou shalt be information literate Technological advancement s have t ransformed class banking int o mass banking. Wit h cost effect ive t echnologies banks were able t o change t he face of banking. ATMs, debit cards, credit cards, int ernet banking and phone banking have enabled cust omers t o do banking without visit ing the bank branch. Further, t he Business correspondent model and mobile banking also depend on t he lat est t echnology t o expand t he banking network. The Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 elect ronic t ransact ions t hrough NEFT, ECS and RTGS have increased t he speed of fund t ransfer considerably. A good banker should continuously innovat e and updat e t hemselves wit h t he lat est t echnological advancement s t o make banking further easier and convenient t o cust omers. Thus, t ry t o develop a good underst anding of the lat est t echnological development s. A bank can implement lat est t echnology safely only wit h a st rong in-house t echnical expert ise. In t his mileu, you must "be informat ion lit erat e", i.e. t hird generat ion lit erat e. It is not enough t o be a first generat ion lit erat e, i.e. you know how t o read and writ e, or t o be second generation lit erat e, i.e. t o be comput er lit erat e, but t o achieve informat ion lit eracy. When t ransit ing t o a knowledge societ y and t o be a successful banker, it is crit ical t o be informat ion lit erat e. Thou shalt avoid complacency during good times and not lose hope during bad times This is a very import ant commandment of a good banker because complacency hampers progress and may lead t o sharp downfall and loss. Complacency can affect anybody but is all t he more relevant t o t he financial sect or. We cannot afford t o be complacent even for a moment . You are part icularly advised t o avoid complacency during good t imes as ot herwise downt urn may come any t ime. It is always advisable t o conserve your energies during good t imes t o be used during bad times. You should not only be satisfied wit h your vict ories but also t ry t o achieve somet hing bet t er t han what ever you have already achieved. Last ly, life is not easy; it is difficult , whet her of an individual or an inst it ut ion. Bad t imes somet imes will come, and somet imes, all bad t hings may come t oget her. In such t imes, do not become desperat e. Wait and Hope. Do not lose hope, but lie low and pray t o God because good t imes will ret urn soon. This is my last commandment not only for banking but for any career. Concluding Thoughts All of you are growing up in an age of unprecedent ed opport unit y. But wit h opport unit y comes responsibilit y. To do t hings well and be responsible, one needs t o cult ivat e a deep underst anding of oneself - not only t he strengt hs and weaknesses but also how one learns, how one works wit h ot hers, what his or her values are and where he or she can make t he great est cont ribut ion. You can achieve excellence only if you underst and, work on and operat e from your areas of st rengt h. As you pick up t he t rait s of modern t rade like leadership skills, t he abilit y t o mult i-t ask and manage compet ing imperat ives, please do not let go of t he age-old and t ime-t est ed qualit ies of a desire t o learn, a st rong sense of professional et hics, an enquiring mind, a st rat egic view, the qualit ies of humilit y and empat hy, a willingness t o embrace pract ical experience and an eagerness t o adapt t o evolving experiences. These are excit ing t imes and as you st and on t he t hreshold of a new life and a career in banking, I t rust you will cont inue t o cherish t he ideals and dreams of yout h, aft er all t hey are what make life wort hwhile. I wish all of you - t omorrow's t it ans - every success in all your fut ure endeavours. Let me conclude by wishing each one of you a very bright , promising and challenging career in t he banking sect or. --------------------------------------

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Canara Bank Samachar Lehar January 2012

FAQs on Speed Clearing

Updat ed on 30-11-2011 Q.1What is Speed Clearing? Speed Clearing refers t o collect ion of out st at ion cheques (a cheque drawn on non-local bank branch) t hrough t he local clearing. It facilit at es collect ion of cheques drawn on out st at ion core-banking-enabled branches of banks, if t hey have a net -worked branch locally. Q.2Why Speed Clearing? The collect ion of out st at ion cheques, t ill now, required movement of cheques from t he Present at ion cent re (cit y where t he cheque is present ed) t o Drawee cent re (city where t he cheque is payable) which increases t he realisat ion t ime for cheques. Speed Clearing aims t o reduce t he t ime t aken for realisation of out st at ion cheques. Q.3What was the process followed by banks for collection of outstation cheques before the introduction of Speed Clearing ? A person who has an out st at ion cheque wit h him deposit s it wit h his bank branch. This bank branch is called t he Present ing branch. The cheque is sent for collect ion t o t he cit y where it is payable / drawn called Dest inat ion cent re or Drawee cent re. The branch providing t he collect ion service at t he Dest inat ion cent re is called t he Collecting branch. On receipt of t he cheque, t he Collecting branch present s it in local clearing t o the Drawee branch or t he Dest inat ion branch. Once t he cheque is paid t he Collect ing branch remit s t he proceeds t o t he Present ing branch. On receipt of realisat ion advice of t he cheque from t he Collect ing branch, t he cust omer's account is credit ed. This, in short , is t he process of Collect ion. When a cheque is accept ed on a collect ion basis by a bank, it credit s t he cust omer's account only aft er realisation of it s proceeds. Alt ernat ively, in t he absence of a collect ion arrangement at t he Dest inat ion cent re, the Present ing branch will send the cheque directly t o t he Dest inat ion branch for payment . On receiving t he proceeds from Dest inat ion branch, Present ing branch credit s the cust omer's account . Q.4How long does it take for getting credit of an outstation cheque sent on Collection basis? Generally, it t akes around a week t o t hree weeks t ime depending on t he drawee cent re and collect ion arrangement s t o get out st at ion cheques realised on a Collect ion basis Q.5How does the Local Cheque Clearing work? In Local Cheque Clearing in 66 major cent res, cheques are processed at t he Clearing Houses on mechanised sort ers, using Magnet ic Ink Charact er Recognit ion (MICR) t echnology. Local Clearing handles only t hose cheques t hat are drawn on branches wit hin the jurisdict ion of t he local Clearing House. Generally, t he dist ance bet ween t he Clearing House and t he part icipat ing branches is defined, t aking int o account t he local t ransport at ion and communicat ion facilit ies as t he cheques have t o physically move t o Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 and from t he Clearing House. For example, for a cheque t o be processed in Local Clearing in Mumbai, bot h t he present ing and drawee branches should be sit uat ed wit hin t he jurisdict ion of t he Clearing House in Mumbai. Q.6How does the Speed Clearing work? Banks have net worked t heir branches by implement ing Core Banking Solut ions (CBS). In CBS environment , cheques can be paid at any location obviat ing t he need for t heir physical movement t o the Drawee branch. The concept of Speed Clearing combines t he advant ages of MICR clearing with t hat of CBS. Cheques drawn on out st at ion CBS branches of a Drawee bank can be processed in t he Local Clearing under the Speed Clearing arrangement if t he Drawee bank has a branch presence at t he local centre. Q.7When will the beneficiary get funds under Speed Clearing? As on dat e, t he local cheques are processed on T+1 working day basis and cust omers get t he benefit of wit hdrawal of funds on a T+1 or 2 basis. 'T' denot es t ransact ion day viz. dat e of present at ion of cheque at t he Clearing House. So, t he out st at ion cheques under Speed Clearing will also be paid on T+1 or 2 basis. Q.8Which are the centres where Speed Clearing is presently available? List of Speed Clearing cent res is available at ht t p:/ / rbidocs.rbi.org.in/ rdocs/ cont ent / Docs/ 10002_LSCC.xls. t he link

Q.9What are the charges for cheques cleared through Speed Clearing? Present ing branches are currently permit t ed t o levy charges at a rat e not exceeding Rs.150 per cheque (inclusive of all charges ot her t han Service Tax) for cheques of above Rs.1 lakh present ed t hrough Speed Clearing. No charges are payable for cheques of value up t o Rs.1 lakh. Wit h effect from April 1, 2011, no charges will be payable for cheques of value up t o and including Rs.1 lakh from Savings a/ c cust omers. Banks would be free t o fix charges for collect ion of ot her t ypes of account s for all values and also from Savings a/ c cust omers for cheque of value above Rs.1 lakh. Charges fixed should be reasonable and comput ed on a cost -plus-basis and not as an arbit rary percentage of t he value of t he inst rument . Q.10How is Speed Clearing an improvement over collection basis? Out st at ion cheque collect ion through collect ion basis t akes around one t o t hree weeks t ime depending on t he drawee cent re. Under Speed Clearing, it would be realised on T+1 or 2 basis viz. wit hin 48 hours. Furt her cust omers need not incur any service charge for collect ion of out st at ion cheques (value up t o Rs. 1 lakh) in Speed Clearing which t hey may have t o incur if such cheque is collect ed under collect ion basis. Q.11How will a customer know whether a cheque can be cleared in Speed Clearing? For facilit at ing cust omers t o know CBS st at us of a branch, some of t he banks st amp / print 'CBS' on t he cheque leaves. Account numbers (if lengt h of account number is more t han 10 digit s) print ed on the cheque leaves may give a broad indicat ion regarding CBS st at us of t he branch. Furt her cust omers may refer t o t he list of Speed Clearing-enabled bank

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Canara Bank Samachar Lehar January 2012 branches host ed on t he websit e of t he Reserve Bank of India under t he link ht t p:/ / www.rbi.org.in/ Script s/ bs_viewcont ent.aspx?Id=2016. Q.12What type of cheques can be presented in Speed Clearing? Inst rument s of all t ransact ion codes (except Government cheques) which are drawn on CBS-enabled bank branches are eligible for being present ed in Speed Clearing.

KHAS BAAT..
Fed, 5 Central Banks cut rate on $ swaps: The Federal Reserve cut t he cost of emergency dollar funding for European banks as a part of globally coordinat ed central-bank response t o t he cont inent s sovereign-debt crisis. The int erest rat e has been reduce t o t he dollar overnight index swap rat e plus 50 basis point s, or half a percent age point , from 100 basis point s, and t he programme was ext ended t o February 1, 2013, t he Fed said in a st at ement in Washingt on. The Fed will coordinat e wit h t he European Cent ral Bank in t he programme, which was also joined by Bank of Canada, Bank of England, Bank of Japan, and Swiss Nat ional Bank. The move is aimed at easing st rains in market s and boost ing t he cent ral banks capacit y t o support t he global financial syst em, t he st at ement said. The cost for European banks t o fund in dollars rose t o t he highest levels in t hree years on Wednesday as concerns about a possible breakup of t he euro area increased aft er leaders said t hey had failed t o boost t he regions bailout fund as much as planned.(ET dt 01.12.2011 p.1) S&P downgrades top US, European banks: In a major blow t o t he already-st ruggling banking sect or in a weak global economic scenario, rat ing agency major S& P has downgraded as many as 15 large banks globally, including some big American names such as Bank of America, Cit igroup and Goldman Sachs. St andard and Poors has also cut rat ings for US-based banking giant s such as JP Morgan, Morgan St anley, Wells Fargo, while some European banking t it ans like Barclays, HSBC, Lloyds Banking Group, RBS (Royal Bank of Scot land) and Rabobank have also been downgraded. In a major rat ing act ion review of as many as 37 banks globally, S& P has incident ally upgraded t wo Chinese banks-Bank of China and China Const ruct ion Bank. The review did not include any Indian banks. (BL dt 01.12.2011 p.6) RBI agreeable to asset sale to HSBC:RBS: Brit ish lender RBS India claimed t hat t he Reserve Bank of India (RBI) has agreed t o clear it s proposal t o sell commercial and ret ail asset s t o HSBC India.We can confirm t hat t he RBI is agreeable t o t he t ransfer of our ret ail and commercial businesses in India t o HSBC, an RBS st at ement said. Wit hout offering more det ails, t he bank said, We cont inue t o work closely wit h HSBC and t he regulat ors t o complet e t he transfer in a manner t hat is in t he best int erest s of our client s and employees. (BL dt . 02.12.2011 p. 6) Net interest margins could fall by 15-20 bps in H2: CARE ratings: Banks could see t heir Net Int erest Margins (NIMs) fall by 15-20 basis point s due t o low credit demand. There could also be a marginal increase in gross non performing asset s t o Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 2.86-2.9%, by t he end of t he current financial year, on account of slippages due t o weak economic condit ions and rest ruct ured asset s, said credit rat ing agency, CARE rat ings. According t o t he report released on Thursday, NIMs have already seen some compression in t he first half of t he current financial year due t o fall in t he credit -deposit rat io as well as hardening of int erest rat es. For t he second half, liquidity is likely t o remain tight owing t o higher government borrowings coupled wit h the cont inued depreciat ion of t he rupee. (BL dt 02.12.2011 p.6) Crisis management group for financial markets on cards: Wit h high volat ility in t he equit y and currency market s, t he Government aims t o set up an empowered Crisis Management Group for t he financial market s. This group is likely t o t ake shape on December 8, when t he sub-commit t ee of t he Financial St abilit y and Development Council (FSDC) will meet . It is proposed t o nominat e a Deput y Governor of t he Reserve Bank of India as t he Chairman, along wit h senior officials from market regulat or SEBI, insurance regulat or IRDA, pension regulat or PFRDA and t he Minist ry of Finance as members. A senior Government official familiar wit h the development says, The effort is t o bring sufficient ly high level of represent at ion, so t hat prompt decisions could be t aken for effect ive crisis management . He said t hat t hough every segment of t he financial sect or has crisis prevent ion syst ems in place, an int egrat ed syst em was needed t o avoid sudden shocks which can quickly spread across market segment s and inst it ut ions. The genesis of t he crisis may be different from time t o t ime, but t he manifest at ion is similar. Timely management of t he crisis requires early det ect ion of fault lines based on informat ion on diverse inst it ut ions and market s, he added. (BL dt 05.12.2011 p.3) Govt may cut EPF rate by 1.25%: About six crore employees could be in for a rude shock wit h the government considering a 1.25% cut in t he Employees' Provident Fund (EPF) rat e for t his year. The first t ime in a decade t hat t he ret urns on t hese ret irement savings would be slashed by more t han a percent age point . Labour Minist er Mr Mallikarjuna Kharge had promised workers t hat t he Cent re would try t o raise t he EPF rat e for 2011-12 beyond t he 9.5% paid last year. But now, a rat e of 8.25% is on the cards. An official close t o t he development t old ET t hat t he primary reason for t he proposed reduct ion in t he EPF rat e is t he decision t o pay 9.5% t o members last year. Though t he scheme's income for 2010-11 support ed a payout of 8.5% t o workers, t he government decided t o raise t he rat e t o 9.5% aft er it found 'hidden' reserves of around `. 1,700 crore t hat had accumulat ed in it s coffers over t he years. (ET dt . 07.12.2011 p. 1) Interest rate futures market set to see regulatory changes: In a bid t o give a boost t o t he int erest rat e futures (IRF) market , which has failed t o t ake off despit e a number of measures t aken by the RBI and SEBI over t he past t hree years, financial regulat ors plan t o int roduce some changes in t he product feat ures and delivery process. "In cont rast t o t he currency fut ures market , t he IRF segment has not t aken off at all. We are examining t his in consult ation wit h t he SEBI and will be int roducing some changes in t he product feat ures and delivery process," a senior RBI official said. The cent ral bank may int roduce more of cash-set t led fut ures, and derivat ives wit h varying mat urities, t he official said. The RBI in March int roduced a short t erm t enure fut ures cont ract on 91Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 day t reasury bills in t he market , but t he market is st ill wit nessing merger volumes. (FE dt . 07.12.2011 p. 2) Finmin panel gets 3,000 responses on black money: The high-level Finance Ministry commit t ee on curbing t he menace of black-money has received more t han 3,000 comment s from general public suggest ing ways t o curb t he generat ion of illicit funds. The commit t ee, headed by Chairman of t he Cent ral Board of Direct Taxes (CBDT), has received close t o 3,300 suggest ions t hrough e-mail and t he panel is now select ing t he most appropriat e ones for circulat ion among various agencies like t he ED, DRI and Law Minist ry. (FE dt . 07.12.2011 p. 2) CDS will catalyse growth of bond markets: The recent announcement of credit default swaps (CDS) guidelines by t he RBI augurs well for t he development of India's bond markets. The int roduct ion of CDS will lead t o a gradual deepening of t he corporat e debt market . At t he same t ime, it is believed t hat RBI has set adequat e safeguards in place in the regulat ory framework t o ensure syst emic st ability and safet y. CDS are instrument s t hat provide buyers wit h prot ect ion against credit losses, just as insurance product s do. Int roduct ion of CDS can cat alyse t he Indian corporat e bond market in t hree ways. CDS can expand t he bond market invest ors' appet it e for lower-rat ed issuers, as against t heir current preference for higher-rat ed securit ies. Since invest ors are now prot ect ed against any change in t he credit qualit y of t heir invest ment s, t hey will be more open t o invest in inst rument s rat ed below AA cat egory. (ET dt . 06.12.2011 p. 12) Govt overruled on key changes in banking, insurance Bills: Crucial financial sect or reforms are again stuck, despit e Finance Minist er Mr Pranab Mukherjees appealing t o polit ical part ies t o help pass t he legislat ions in t his regard. Parliament s st anding commit t ee on finance on Thursday reject ed a clause in t he insurance Bill t o raise t he foreign direct invest ment (FDI) cap in privat e insurance from t he exist ing 26 per cent t o 49 per cent . The panel also t urned down a key clause in t he banking Bill, t o raise the cap on vot ing right s of a single shareholder in government -run banks t o 10 per cent from the exist ing one per cent , and in ot her banks from t he exist ing 10 per cent t o a level proport ionat e t o t he st ake. We want ed t o ret ain t he exist ing caps on vot ing right s in banks, a member of t he commit t ee t old Business St andard. The commit t ee also refused t o accept the government s proposal t o bring down t he minimum paid-up capit al in healt h insurance t o `.50 crore from t he current `.100 crore. It recommended ret aining the exist ing norms. (BS dt . 09.12.2011 p. 4) TN Banks deposit rise 9.7%: The t ot al deposit s of t he banks in Tamil Nadu regist ered an year-on-year increase of 9.7% by Sept ember 2011, t ouching `. 3,32,820.79 crore. The gross credit in t he st at e regist ered an increase of 17.66% during t he same period and reached `. 3,88,170.42 crore, according t o t he Tamil Nadu st at e-level bankers commit t ee. The st at e has maint ained a credit deposit rat io of 116.63%, one of t he highest in t he count ry. The banks have achieved t he annual t arget for out st anding priority-sect or advances and t he share of t he advances have increased t o 42.29% as against the nat ional norm of 40%. (FE dt 09.12.2011 p.3)

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Canara Bank Samachar Lehar January 2012 To improve service, Finance Ministry asks banks to organise customer contact week: Cust omer is king. This is what t he Finance Minist ry want s all public sect or banks t o let t heir cust omers know. It has asked t hese banks t o organise cust omer cont act week in mid-December.If you have a deposit wit h, or have t aken a loan from, one of t he 26 public sect or banks (includes t he five associat e banks of St at e Bank of India), t hen dont be surprised if branch st aff seek your feedback on improving services and make effort s t o address your grievances. Bankers say t his is t he first t ime t hat t he Minist ry has issued a communicat ion asking t hem t o observe a cust omer cont act week. This is t o improve cust omer service, sensit ise st aff about at t ending t o cust omers in a court eous manner, underst and t he grievances of st aff, and mot ivat e t hem. Furt her, banks have t o ensure t hat branches, regional offices and zonal offices are kept clean and aest het ically att ractive wit hout incurring any major expendit ure.During t he cust omer cont act week, zonal managers, regional managers and ot her senior funct ionaries are required t o visit various branches for at least t wo days. The purpose of t he visit should be t o gauge t he cust omers (big and small) impression about t he banks service and get feedback on areas of improvement . (BL dt .10.12.11 p6) RBI may opt for status quo with a dovish tone: Though the buzz of a cut in t he cash reserve rat io is doing t he rounds among dealers, economist s expect t he Reserve Bank of India t o hold the policy rat es as well as t he CRR during t he mid-quart er review of t he monet ary policy scheduled for Friday, December 16. Expert s say t he cent ral bank will refrain from using t he CRR as a liquidit y t ool, as a reduct ion in t he rat e will go against it s current ant i-inflat ionary st ance. CRR is t he proport ion of deposit s banks need t o set aside wit h t he cent ral bank as cash. It is current ly six per cent of t he net demand and t ime liabilit ies. Lat est comment s from t he Reserve Bank of India indicat e t he CRR is also a monet ary policy t ool, and reducing it would signal a reversal of it s monet ary policy st ance. To avoid sending such a signal but support banking syst em liquidit y, t he Reserve Bank of India is likely t o cont inue t o employ t act ical t ools, such as buying government securit ies via open market operat ions, said Mr. Anubhut i Sahay and Mr. Nagaraj Kulkarni, economist s at St andard Chart ered Bank. (BS Dt 12.12.2011 P.1) Banks may be allowed to accept immovable property to settle claims: Banks and financial inst it ut ions may soon be allowed t o accept immovable propert y in full or part ial sat isfact ion of claims against default ing borrowers. A proposal t o t his effect has been made in a new Bill introduced in Lok Sabha on Monday t o amend t he exist ing SARFAESI law. Current ly, banks are not empowered t o accept immovable propert y in full or part ial sat isfact ion of t he claim against t he default ing borrower, if no bidder comes t o bid or banks are unable t o find a buyer for such asset s. Banks, as secured credit ors, are, however, permitt ed t o sell t he securit ies t o realise t he default ed loans.(BL dt .13.12.11 p4) Parliament panel for 26% voting right cap in private sector banks: A Parliament ary panel has suggest ed raising t he cap on shareholders vot ing right s in privat e sect or banks t o 26 per cent from t he current 10 per cent . This recommendat ion of t he St anding Commit t ee on Finance, headed by Mr Yashwant Sinha, is in sharp cont rast t o t he Government s proposal in the Banking Laws (Amendment ) Bill 2011. This Bill proposes t hat vot ing right s in privat e sect or banks be proport ionat e t o t he shareholding, while Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 removing t he exist ing 10 per cent ceiling. Allowing vot ing right s t o be proport ionat e t o t he shareholding would enable privat e sector banks t o access capit al for business development , t he Finance Minist ry had cont ended. However, t he panel is not in favour of any such move by t he Government. The vot ing right cap should be increased t o 26 per cent in order t o maint ain a balance bet ween concent rat ion of economic power/ cont rol and promot ion of corporat e democracy, t he Commit t ee said in it s report t abled in Lok Sabha. The report is, however, silent on t he Government s proposal t o raise t he vot ing right s cap in public sect or banks t o 10 percent , on par wit h St at e Bank of India. (BL dt .14.12.11 p 13) Parliamentary panel pitches for integrated banking law: The parliament ary st anding commit t ee on finance has suggest ed inst ead of bringing piecemeal amendment s t ime t o t ime, t he government should consider t he formulation of an int egrat ed modern banking law, consolidat ing t he provisions of ot her st at ut es t hat cover various aspect s of banking.Such an int egrat ed and holist ic law would also be in line wit h t he proposed legislat ion in ot her areas like t he Direct Taxes Code and t he Companies Bill, t he panel out lined in it s report on t he Banking Laws (Amendment ) Bill, 2011, t abled in Parliament on Tuesday. The commit t ee st ressed on employee-friendly measures in t he int egrat ed banking law. These include the int roduct ion of employee st ock opt ions, det errent safeguards against willful default by a borrower in repaying loans and other forward-looking proposals t hat reflect emerging realit ies. (BS dt .14.12.11 p7) Bank mergers must be kept outside competition panels purview: Chawla: The Chairman of t he Compet ition Commission of India, Mr Ashok Chawlas view t hat bank mergers should be kept out side t he purview of t he compet it ion commission, aligns wit h t hat of t he St anding Commit t ee of Finance. We had given our opinion earlier. Our opinion at t hat t ime was and it cont inues t o be t hat may be t here is a case for keeping bank mergers out side.... where some weak bank or failing bank is going t o be acquired by a healt hy bank, he t old Business Line. The Commit t ees report on the Banking Laws (Amendment ) Bill, 2011, which was t abled in t he Lok Sabha recent ly, proposed keeping bank mergers out of t he purview of t he CCI. But it st at es t hat this exempt ion should be considered as a special case and revisit ed aft er t he regulat ors gain a litt le experience. (BL dt .15.12.2011 p.6) RBI to deal with multi headed dragon: Any Generals night mare is a bat t le on multiple front s simult aneously. That is what RBI Governor, Dr D Subbarao faces now. When he sit s down for t he mid-quart er review of t he monet ary policy on Friday, he not only has t o ensure t hat he is close t o winning t he two year bat t le on inflation, but also be prepared t o fight t he sinking rupee, dwindling invest ment s and soaring government borrowing. He also has t o ensure t hat economic growt h does not collapse. And all t his, without leaving the inflat ion front open again. The burden has fallen on cent ral bank t o provide relief for every ill. Some of t he t ools Dr Subbarao is left wit h are - cut t ing policy rat e, reducing t he cash reserve requirement and t hrowing a port ion of t he $300 billion, but decept ive foreign exchange, reserves, at t he market .(ET dt 16.12.2011 p.1)

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Canara Bank Samachar Lehar January 2012 Worried over slowing growth, RBI hits the pause button: The Reserve Bank of India, facing flak from indust ry for st ifling growt h t hrough it s t ight monet ary policy in an att empt t o curb inflat ion, act ed on expect ed lines and left key rat es unchanged.The st ock market s, however, were not t oo happy, wit h t he benchmark BSE Sensex falling 345 point s, or a lit t le over 2 per cent , t o 15,491.35 point s, it s lowest in almost t wo years, on a day when t he rupee recovered smart ly against t he dollar. In it s mid-quart er monet ary policy review, t he RBI indicat ed t hat it may now shift gears and cut rat es, responding t o t he risks t o growt h. Growth is back on cent re-st age as inflat ion shows signs of moderat ion. The repo rat e remains at 8.50 per cent and t he cash reserve rat io at 6 per cent . Banks are unlikely t o change t heir deposit and lending rat es. (BL dt .17.12.11 p 1) Fitch affirms investment grade to SBI: Global rat ing agency Fit ch affirmed BBB- or invest ment grade wit h st able out look t o t he count rys largest lender St at e Bank of India. The agency has also affirmed SBIs Viability Rat ing (VR) at BBB-. The rat ings of SBI are driven by a high probabilit y of support from t he government , given it s syst emic import ance as t he largest bank in India, as the sole banker in many economically backward regions and as a banker t o various government ent it ies, Fit ch said in a st at ement . As a result t he long-t erm rat ings are linked t o the sovereign rat ing and will move in t andem wit h t he lat ter, it said. However, it said, some of SBIs credit fundament als are under pressure. (FE dt. 17.12.2011 p. 3) Karnataka Bank offers 5% interest on SB deposit: Karnat aka Bank Lt d has increased t he int erest rat e on SB deposit from 4 per cent t o 5 per cent with immediat e effect . Quot ing Mr P. Jayarama Bhat , Managing Direct or of t he bank, a bank release said t hat t he enhancement of int erest rat e on SB deposit s, coupled wit h credit ing of int erest on quart erly basis, will increase t he yield on SB deposit s of all t he cust omers. (BL dt . 19.12.2011 p. 4) RBI offers new branch licences to StanChart, Deutsche Bank: Aft er more t han a year, t he Reserve Bank of India has st art ed offering new branch licences t o foreign banks t hat have a large net work of branches. Indust ry players say t his indicat es furt her delay in framing guidelines for t he wholly-owned subsidiary model for foreign lenders in India. The t op seven foreign lenders in t he count ry, which account for over 70 per cent of foreign bank branches, have not added a single branch t o their network this year, t hough t hey had applied t o Reserve Bank of India for new branch licences.According t o bankers, in the last few weeks, Reserve Bank of India offered new licences t o St andard Chart ered Bank and Deut sche Bank. Wit h 94 branches, St andard Chart ered has t he largest net work among foreign banks in India. The bank received t hree new licences and plans t o open t he branches next year. Deut sche Bank, which has 15 branches, has secured licences t o open branches in Ahmedabad and Surat . (BS dt .20.12.2011 p6) Euro zone weakness may affect Asia-Pacific banks: S&P: Non-performing loans and credit provisioning are likely t o increase, especially in banking syst ems exposed t o high inflat ion, such as in India and Viet nam, as Euro zone weakness dampens global and regional growt h, said credit rat ing agency S& Ps in a report . This observat ion also holds good for t he banking syst ems of China and Hong Kong t oo, which wit nessed high credit growth. The report, A slowdown in Europe and China, and sluggish Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 export s moderat e Asia-Pacific credit out look in 2012, has assessed t hat t he banking sect ors earnings are likely t o weaken t o reflect a dip in business volumes associat ed wit h slower economic act ivity. Cont agion from Europe could unleash more anxiet y in t he already jit t ery credit market s in Asia-Pacific. Banks and ot her lenders in t he region are already paying more t o insure t heir debt financing, as reflect ed in t he widening credit spreads, t he report said.(BL dt . 21.12.2011 p. 6) RBI penalises 19 banks for flouting derivative norms: Meena: The RBI has imposed penalt ies on 19 commercial banks, including SBI, HDFC Bank, ICICI Bank and Cit ibank, for violat ing norms on derivat ives, t he Parliament was informed. The RBI has informed t hat t hey had imposed penalt ies on 19 commercial banks on April 26, 2011, for cont ravention of various inst ruct ions issued by RBI in respect of derivat ives such as failure t o carryout due diligence in regard t o suit abilit y of product s and selling derivat ives product s t o users not having risk management policies, Minist er of St at e for Finance Mr Namo Narain Meena said in a writt en reply in t he Rajya Sabha.(BS dt . 21.12.2011 p. 6) To grow, banks need capital infusion of `. 10,000cr a year: Public sect or banks need capit al infusion of `. 10,000 crore a year if t hey were t o grow t heir credit port folio and also t heir market share. Wit h credit growt h bet ween 15 and 20 per cent , t hen capit al base also should be growing at 15-20 per cent, Dr C. Rangarajan, Chairman, Prime Minist ers Economic Advisory Council, said at t he India Finance Conference 2011, organised by the Indian Inst it ut e of Management - Bangalore, and IIM Calcutt a, on Wednesday. There is a need for t he Government t o cont inuously inject capit al int o PSU banks t o t he order of `. 10,000 crore a year or more, he said. Wit h credit port folio of banks growing, t here is a need for addit ional capit al, some of which could be met t hrough t he banksint ernal resources. (BL dt .22.12.2011 p.6) Lok Sabha approves Bill to raise capital of Exim Bank: The Lok Sabha has given it s nod for a Bill t o enhance t he aut horised capit al of Exim Bank of India from t he exist ing `. 2,000 crore t o `. 10,000 crore. This Bill - Export Import Bank of India (Amendment ) Bill, 2011 - was passed aft er Mr Namo Narain Meena, Minist er of St at e for Finance, assured t he Lower House t hat supremacy of Parliament was not being dilut ed and t hat Members of Parliament would have a say in fut ure capit al enhancement s of Exim Bank. Capit al infusion is made t hrough Budget provision. It will have t o come t o you for approval, Mr Meena said, responding t o opposit ion members concern over an open-ended provision in t he Bill. The Bill seeks t o empower t he Cent re t o raise t he amount of aut horised capit al of Exim Bank from t ime t o t ime t hrough execut ive orders. (BL dt 22.12.2011 p6) Banks safe, can handle shocks: RBI: Indias banking syst em is strong, alt hough the rising volume of bad loans poses a minor concern, said a report by t he Reserve Bank of India (RBI) on t he healt h of Indias financial sect or, which juxt aposes t hat largely cheery pict ure wit h gloomy ones about t he economic environment and t he market s. In it s fourt h Financial St abilit y Report published, t he cent ral bank said Indias banks can handle shocks t o t he syst em - even when bad debt s rise 150% from current levels. The banking sect or remained resilient even under severe Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 credit risk st ress scenarios, t hough a few individual banks could come under duress, t he biannual report said. The cent ral bank ident ified agricult ure, power, real est at e and t elecom as t he sect ors responsible for most bad loans. (Mint dt .23.12.2011 p1) Invest without waiting for rates to dip: Subbarao: St at ing t hat it was very hard t o spell out when t he RBI will be in a posit ion t o reduce int erest rat es, t he cent ral bank Governor, Dr D. Subbarao, has asked indust rialist s and ot hers t o go ahead wit h their project s. Addressing members of t he Andhra Chamber of Commerce and Indust ry, Dr Subbarao said t hat t he best t ime t o make invest ment s is now. Saying t hat fort une favoured t hose who t ake risks, he advised invest ors t o be ready t o bat tle t he uncert aint ies.He said t he crit icism RBI is facing t oday is t hat t he raised int erest rat es were moderat ing growt h. But t he RBI also had a responsibilit y t o discharge t o t he 80% of t he people in t he count ry who do not have a voice and are affect ed by rising inflat ion. (BL dt .23.12.2011 p6) Banks borrow `. 1.73 trillion: Banks borrowed record money from t he cent ral bank more t han `. 1.73 trillion, as advance t ax out flow cont inued t o weigh on t he liquidit y of the banking syst em and in addit ion banks had t o maint ain t heir mandat ory cash balance wit h t he cent ral bank. Last year around t his t ime banks had borrowed about `. 1.72 trillion from t he cent ral bank for similar reasons. Reserve Bank of India lends banks at it s repo rat e, present ly at 8.5%. Banksborrowing from RBI generally goes up on Fridays as t he daily liquidity support is not available for t hem on weekends and also because banks have t o maint ain a cert ain amount of t heir deposit s in cash wit h t he cent ral bank. They pledge t heir bonds or borrow from t he market t o maint ain these cash balances known as cash reserve rat io. (Mint dt . 24.12.2011 p. 10) SBBJs Ready Money deposit scheme: The St at e Bank of Bikaner and Jaipur launched a new-t erm deposit , Ready Money, which carries 8.50 per cent int erest for any period between seven and 180 days. The new deposit scheme is meant t o at t ract high-value liquid funds from various segment s including individuals and companies, Mr Shiva Kumar, Managing Direct or, St at e Bank of Bikaner and Jaipur, said in a release. Apart from providing high ret urn for short period, it also gives high liquidity, since t he penalty for prepayment has been waived for t his product , Mr Shiva Kumar said. Under t his product , t he minimum deposit required is `. 50 lakh. The bank also increased it s one-year deposit rat e from 9.25 per cent t o 9.50 per cent wit h effect from 23.12.2011. (BL dt . 24.12.2011 p. 6) ICAI for branch-level audit of private sector banks: Banking and account ing regulat ors dont see eye t o eye, as Reserve Bank of India want s t he pract ice relaxed even for public sect or banks. Privat e sect or banks may have t heir branches st at ut orily audit ed by an Reserve Bank of India-approved panel, on t he pat t ern of public sect or bank audit s, if t he cent ral bank accept s a suggest ion by t he Inst it ut e of Chart ered Account ant s of India (ICAI). The ICAI fears a high incidence of corporat e debt rest ruct uring may affect banks financial healt h, t he level of which cannot always be det ect ed at the aggregat ed level. The account ing regulat or has asked t he Reserve Bank of India t o introduce a mandat ory audit of privat e sect or bank branches by people chosen Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 from a cent ral bank-approved panel. Though mandat ory for all public sect or banks, such independent audit s at t he branch level are not required for privat e banks. Current ly, the st at ut ory audit or of privat e banks conduct s branch audit s, only if a need is felt t o do so. Ironically, t he suggest ion comes at a t ime when t he RBI is t alking of relaxing audit norms for public sect or banks. At the ICAIs recent west ern region conference, Reserve Bank of India Governor Dr D Subbarao had said, Wit h concept s like core banking and cent ralised record keeping, t he relevance of t he audit of branches of public sect or banks has significant ly declined. He had said t hese banks had represent ed t o t he RBI t hat branch audit s should be reduced. (BS dt .26.12.2011 p1) RBI likely to go for rate cut in Q2 2012: Nomura: Inflat ion in India is likely t o moderat e as per t he Reserve Banks project ion while t he growt h is expect ed t o fall, prompt ing t he apex bank t o st art int erest rat e cut s from t he second quart er of 2012, global credit rat ing and research firm Nomura has said. We share t he view on t he near-t erm inflation t raject ory wit h t he Reserve Bank of India and believe t hat t he rat e-hiking cycle is over, Nomura said in it s lat est issue of Asia Economic Alert . Falling economic growt h numbers may also prompt Reserve Bank of India t o go for rat e cut s, it added. We expect t he Reserve Bank of India t o st art cutt ing policy rat es in Q-2 2012, as growt h is likely t o det eriorat e in the next few quart ers, Nomura said. (ET dt .26.12.2011 p) Reforms commission looking at uniform legislation for banks: The Financial Sect or Legislat ive Reforms Commission (FSLRC) is considering a single, harmonised and uniform legislat ion applicable t o all banks and giving t he central bank t he power t o sanct ion t akeover of a co-operat ive bank by commercial banks, said Mr Anand Sinha, Deputy Governor, RBI. The fact t hat different banks are governed by different laws has result ed in an uneven playing field and t his need t o be addressed. The Commission was set up by t he Government earlier t his year t o recommend radical overhaul of laws governing t he financial sector. For example, while amendment s were carried out t o enable St at e Bank of India, SBI subsidiary banks and nat ionalised banks t o issue preference shares, t hough at different point s of t ime, banks in t he privat e sect or cannot issue preference shares as t he amendment s t o t he Banking Regulat ion Act is st ill t o be carried out . (BL dt .27.12.2011 p6) RBI to issue `. 500 notes with rupee symbol: The Reserve Bank will short ly issue `. 500 not es which will have t he rupee symbol. The `. 500 not es will be of t he Mahat ma Gandhi-2005 Series bearing t he signat ure of t he RBI Governor Dr D Subbarao and wit h t he year of print ing ment ioned on t he back of t he banknot e, t he apex bank said in a st at ement . The design of t he not es t o be issued is similar in all respect s t o t he exist ing `. 500 in Mahat ma Gandhi Series-2005 issued earlier, except for t he rupee symbol. (BL dt.27.12.2011 p6)

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Canara Bank Samachar Lehar January 2012

Agriculture & Other Priority..

Improve credit delivery in rural areas: RBI to pvt banks: At a t ime when t he government and regulat ors are emphasizing inclusion and increase in credit delivery t o t hose wit hout access t o formal sources of finance, privat e sect or banks are found t o have low credit -deposit rat ios in rural areas as compared t o public sect or count erpart s. In a recent int eract ion at t he SLBC meet ing, in which RBI Governor Dr D Subbarao was present , bankers brought t his to t he regulat ors notice. According t o bank execut ives present , RBI asked privat e sect or banks t o boost credit expansion in rural areas. The credit -deposit (C/ D) rat io indicat es t he amount banks ext end as loans for every `. 100 of deposit . (BS dt . 01.12.2011 p. 6) Govt plans merger of more regional rural banks: Following a move by the Cent ral Government to furt her amalgamat e regional rural banks in t he count ry, employee unions are demanding t he format ion of a Nat ional Rural Bank of India (NRBI), by amalgamat ing all regional rural banks and de-linking of regional rural banks from t he sponsor banks. In a let t er dat ed November 28 t o t he chairmen of sponsor banks of regional rural banks, t he Depart ment of Financial Services, Minist ry of Finance, said t hat current ly t here are a large number of regional rural banks, sponsored by different banks, funct ioning in a St at e. It said t hat many of t he regional rural banks are very small, with network of less t han 100 branches. The let t er suggest s t hat geographically cont iguous regional rural banks sponsored by different banks wit hin a St at e could be amalgamat ed wit h single sponsor bank. It has also sought no-object ion cert ificat es from t he banks for t his move. (BL dt 12.12.2011 p.13) Release `. 200 cr for rural banks: FM to east CMs: Finance Minist er Mr Pranab Mukherjee met chief minist ers and bank heads of t he east ern region on Saturday and said he had asked t he chief minist ers t o release about `. 200 crore as part of t heir share t o revit alise Regional Rural Banks. Talking about agricult ural credit t arget s for t he count ry, he said t he credit t arget for t he year is `. 4.75 lakh crore, of which `. 2.23 lakh crore had already been disbursed. He said 73,000 villages are t o be covered under financial inclusion in 2011-12, of which 23,000 villages are in t he east , and 50 per cent of t he t arget had been met . I have asked t he 10 chief minist ers of t he east t o release `. 198.50 crore for recapit alisat ion of 18 regional rural banks. I would request t hem t o release t heir shares expedit iously, Mr Mukherjee said. (FE dt 12.12.2011 p.11) Govt mulls `. 1 k-Cr risk guarantee fund: The government is considering set t ing up a `.1000 crore credit risk guarant ee fund t o encourage banks t o give loan t o t he poor, Prime Minist er Dr Manmohan Singh said, even as he assert ed policies could not have a one-size-fit s-all approach t owards big and small cit ies. To encourage banks t o lend in significant volumes t o t he economically weaker sect ions and low-income groups, we are considering t he est ablishment of a credit risk guarant ee fund wit h a corpus of `. 1,000 crore t his year, Dr Singh said. (BS dt 14.12.2011 p.6)

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Canara Bank Samachar Lehar January 2012 KVG Bank rolls out phase II plan for intensifying rural lending: Karnat aka Vikas Grameena Bank (KVG Bank), Dharwad-based regional rural bank, has rolled out second phase of rapid act ion plan for int ensifying lending in rural areas. Addressing t he Grama Sabha at Hulikatt i Village, Mr C. Sambasiva Reddy, Chairman, KVG Bank, said Grama Sabhas are helpful in giving disseminat ing information relat ing t o Kisan Credit Cards (KCC) and General Credit Cards (GCC) and ot her specific product s designed by t he banks t o cat er t o t he financially excluded segment s especially small and marginal farmers. (BL dt .15.12.2011 p19) Bankers unhappy with Govts special rural credit drive: The Finance Minist rys direct ive t o all public sect or banks t o organise a special credit campaign t o give loans t o all eligible borrowers in rural areas in t he fort night beginning December 1 has not gone down well wit h key st akeholders in t he banking syst em. Bankers and t rade union represent at ives say t he Minist rys rapid act ion plan asking public sect or banks t o ext end credit facilit ies t o all eligible agricult ural and non-agricult ural borrowers - by issuing Kisan Credit Card (t o farmers) and General-purpose Credit Card (t o non-farmers) - in rural areas in 15 days flat was a major challenge. The t arget set by Nort h Block for t he 26 public sect or banks (including five associat e banks of St at e Bank of India) was daunt ing given t hat even aft er 42 years of bank nat ionalisat ion just about 40 per cent of t he count rys cit izens have banking facilit ies. (BL dt .20.12.2011 p 6) Subbarao asks bankers to reach out to rural masses : The import ance of financial inclusion cannot be overemphasised as t he count ry has ent ered t he second phase of economic reforms, said t he RBI Governor, Dr D. Subbarao, on Wednesday. Banks, he said, have t o play a crucial role by reaching out t o rural as well as remot e areas. Dr Subbarao addressed t he local bank officials and said t hat most of t he 6 lakh villages in t he count ry were beyond t he pale of banking and earnest effort s should be made t o make banking services available t o rural people. Cit ing t he example of Ernakulam in Kerala, he exhort ed bankers in East Godavari t o emulat e t heir Kerala count erpart s and achieve 100 per cent financial inclusion. (BL dt .22.12.2011 p.6) Nabard projects `. 52,168 cr credit potential for state: The Nat ional Bank for Agriculture and Rural Development (Nabard) has est imat ed a credit flow pot ent ial of `. 52,168.11 crore under t he priority sect or in Karnat aka for 2012-13, an increase of 26.9 per cent over 2011-12. The share of crop loan formed 46.6 per cent of the est imat ed pot ential, followed by other priority sect or at 27.3 per cent , agricult ural t erm loan at 18.8 per cent and non-farm sect or at 7.3 per cent .The St at e Focus Paper for 201213 has been prepared keeping in view t he approach of t he 12t h Five Year Plan t hat envisages fast er, more inclusive and sust ainable growt h. The SFP prepared by Nabard cont ains t he aggregat ion of exploit able credit pot ent ial est imat ed for all dist rict s of t he st at e for t he ensuing year. The document cont ains int ervent ions required at various levels, in policy, infrast ruct ure and credit for harnessing t he pot ent ials identified. The est imat es have been brought out by Nabard in it s St ate Focus Paper (SFP) 2012-13 which will be discussed by at t he St at e Credit Seminar being held on December 27, 2011. Mr B S Shekhawat , Executive Direct or, Nabard, would be making a present at ion on t he SFP at t he seminar. Karnat akas chief secret ary, Mr S V Ranganat h would release t he focus paper. (BS dt .26.12.2011 p5) Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 Mixed response to amalgamation of RRBs: The Cent ral Government s proposal for anot her round of consolidat ion among Regional Rural Banks has received mixed response from a couple of workers unions in t he Regional Rural Banks. While some sought t he format ion of a Nat ional Rural Bank of India (NRBI) by amalgamat ing all Regional Rural Banks and de-linking Regional Rural Banks from t he sponsor banks, ot hers sought t he merger of Regional Rural Banks wit h t heir sponsor banks. Mr Vasant h Bannigol, Joint Secret ary of t he All-India Regional Rural Bank Employees Associat ion, said t hat at t he nat ional level t here should be an NRBI, and each St at e should have a St at e-level Regional Rural Bank. However, All-India RRB Officers Federat ion, affiliat ed t o AIBOC, said t hat it is demanding t he merger of RRBs wit h t heir sponsor banks. (BL dt .27.12.2011 p6)

BASEL..
Compliance with Basel III norms will entail additional costs for banks: Subbarao: The RBI Governor, Dr D. Subbarao, on Wednesday said t hat Indian banks will have t o incur addit ional cost s t o build capit al buffers t o comply with Basel III rules. Though t he Indian banking sect or was comfort ably placed t o implement Basel III regulat ions, some banks might need addit ional capit al, Dr Subbarao said at a meet ing wit h bankers. On aggregat e, banks are comfort ably placed in t erms of capit al adequacy, but a few individual banks may fall short due t o implement at ion of Basel III. The Basel III rules, formulat ed by t he Basel Commit t ee on Banking Supervision following t he financial crisis of 2008-09, require banks t o shore up t heir capit al and liquidit y buffers, and will be implement ed in phases from 2013. The implement at ion of Basel III will lead t o an increased cost of borrowing for Indian companies bot h in t he domest ic and overseas market s, Dr Subbarao said. Banks should look at t rimming t he int erest rat es on advances and hiking t hose on deposit s in order t o achieve a double-digit growt h. For double digit growt h we need more deposit s, and t his (more deposit s will come in) happen if banks provide att ractive int erest rat es on deposit s, he point ed out .(BL dt .08.12.11 p6) Basel Weighing Changes in rules: Global financial regulat ors meet ing t his week will seek t o eradicat e unint ended consequences from t heir draft bank-liquidit y st andards t o avert a t hreat t o lending. The Basel Commit t ee on Banking Supervision will weigh changes t o it s proposed liquidit ycoverage rat io, amid crit icisms t hat it may st ymie lending. Banks have argued t hat requiring t hem t o hold enough easy t o sell asset s t o survive a 30-day credit squeeze may curt ail loans by forcing t hem t o hoard cash and buy up government bonds. Theres a complet e disconnect ion bet ween t he economic realit y of what is highly liquid and what is allowed t o count under t he LCR, Monika Mars, a Pricewat erhouseCoopers AG direct or in Zurich, said in an int erview. (BS dt 13.12.2011p.6)

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Canara Bank Samachar Lehar January 2012

Bonds Money Market .

CDS will help develop bond market: Crisil: Rat ing agency Crisil has said t hat int roduct ion of credit default swaps (CDS) will give a much-needed liquidity boost t o Indias bond market . It says t he instrument will help in gradual deepening of t he corporat e bond market as it will increase invest ors appet it e for lower-rat ed issuers as t hey will look beyond t he t radit ional high-safet y securit ies. It believes t hat CDS has t he pot ent ial t o provide a thrust t o infrast ruct ure financing. Increased use of CDS has t he pot ent ial t o impart addit ional liquidity t o t he bond market s, which have so far been predominant ly illiquid, t he rat ing agency said. Coordinat ed act ion by t he ot her regulat ors can allow insurance companies, pension funds and provident funds t o part icipat e through t he CDS rout e. It will allow lower-rat ed borrowers diversify t heir funding sources by accessing t he bond market s, it added. (FE dt . 09.12.2011 p. 18) Call rates drop: Call rat es eased at t he overnight call money market due t o lack of demand from borrowing banks. The overnight rat e ended lower at 9.50% from Friday's closing level of 10%. It moved in a range of 9.70% and 8.90%. The RBI, under t he LAF, purchased securit ies wort h `. 1,66,055 crore from 64 bids at t he one-day repo auct ion at a fixed rat e of 8.50%. (BL dt . 20.12.2011 p. 6) Moodys upgrades Indian govt bonds: Credit rat ing agency Moodys upgraded it s rat ings on Indian long and short -t erm government bonds t o invest ment grade from speculat ive, holding that t he countrys diverse sources of economic growt h have enhanced it s resilience t o global shocks.The move is expect ed t o lead t o higher fund flows int o t he count ry and reduce t he cost of overseas borrowing for Indian companies. (Mint dt .22.12.2011 p3) Call gains: Call rat es firmed up further at t he overnight money market owing t o sust ained buying support from borrowing banks amid scarcit y of liquidit y in t he banking syst em. The rat e ended higher at 9.85% from Thursday's close of 9.75%. It moved in a range of 9.85% and 9.80%. The RBI, under t he Liquidity Adjust ment Facility, purchased securit ies wort h `. 1,73,330 crore from 76 bids at t he three-day repo auct ion at a fixed rat e of 8.50%. (BL dt . 24.12.2011 p. 6)

Credit Card..
Credit card spending on the rise: While most sect ors of t he economy are seeing a sluggish loan demand due t o high int erest rat es, credit card spending seems t o have bucked t he t rend. Credit card out st anding in t he first seven mont hs of t he current financial year has increased 7.2 per cent , as compared t o 8.3 per cent decline during t he year-ago period. According t o lat est dat a released by the Reserve Bank of India, t he growt h, on a year-on-year basis, was five Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 per cent t ill Oct ober 21, as compared t o a 22 per cent decline in t he previous year. Credit card out st anding st ood at `. 19,401 crore as on Oct ober 21, which is higher by `. 1,300 crore since March 25 and by `. 923 crore over the past one year. This Sept ember even saw a rise in t he number of out st anding credit cards, for t he first t ime in 17 mont hs. The number increased t o 17.63 million from 17.59 million in t he previous mont h, according t o RBI dat a. It said, Personal loans increased by 14.5 per cent (y-o-y) in Oct ober 2011, higher t han t he growt h of 12.0 per cent in t he previous year, wit h it s component s such as housing, advances against fixed deposit s and credit card out st anding regist ered accelerat ed growt h. (BS dt . 01.12.2011 p. 7) HDFC Banks Solitare range of premium cards for women: HDFC Bank has launched a premium bouquet of credit cards for women. Called Solit are Premium and Solit are, t he t wo cards offer a unique combinat ion of lifest yle and wellness benefit s t hat are t ailor-made for women. Solit are Premium is being billed as t he first premium womens card in t he count ry. Ms Renu Sud Karnad, Direct or, HDFC Bank, unveiled t he card on Wednesday. We felt t here was a vacuum in the premium credit card segment for women. We are sure t hat Solit are will fulfil a long-st anding need for women who are pursuing a successful career, t ravelling t he world and are at t he forefront of t he global consumpt ion st ory. We want t o make sure t hat every professional woman has a Solit are in her purse, Mr Prolay Mondal, Count ry Head, Ret ail Asset s and Credit Cards, HDFC Bank, said. (BL dt . 01.12.2011 p. 6) Banks upbeat on credit card biz: Aft er a gap of nearly t hree years, banks are once again planning t o aggressively expand t heir credit card port folios in India. Foreign and privat e sect or banks have announced a slew of init iat ives and are exploring inorganic opport unit ies t o ramp up their card businesses. Bankers are confident t hat unlike the last t ime, t here would not be significant erosion in asset qualit y, since their expansion st rat egies are backed by rich informat ion on borrowers credit hist ories. In t he last couple of years, the one fact or t hat has changed t he whole approach of banks in unsecured lending, especially in credit cards, is t he ability t o underwrit e cust omers far more int elligent ly t han ever before. The quality of t he credit bureau in India has improved significant ly. Also, banks are not going for unbridled expansion. The growt h is measured and researched, wit hout compromising t he credit quality, said a senior official of a foreign bank in India.(BS dt .08.12.11 p6) Value of credit card transactions up 33% in October: Credit card t ransactions carried out in Oct ober were wort h `. 8,997.63 crore, up 33.1% from t hat in t he corresponding period last year, signifying that people are shift ing t o elect ronic means of payment . The number of credit cards in circulat ion has, however, declined by 3.3% t o 1.76 crore as of Oct ober 31, 2011 according t o t he Reserve Bank of India. Credit card t ransact ions during t he April-Oct ober period were wort h `. 54,369.69 crore, up 30.1 per cent over t he corresponding period of 2010-11. Debit card transact ions were up by 50.5% in Oct ober t o `. 5,591.06 crore. (BL dt 13.12.2011 p.6)

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Canara Bank Samachar Lehar January 2012 SBI Cards to customise offers around spending patterns: Credit -card issuers are increasingly turning int o financial counsellors. Come January quart er, SBI Cards, a st andalone credit -card company co-promot ed by Indias largest st at eowned bank, plans t o launch cust omised st at ement s t o help it s cust omers know their spending pat t ern, say over a year. Based on t he analysed spending pat t ern, which will be shared in t he credit -card st at ement s, SBI Cards will provide offers t hat would help it s cust omers save on t heir spends. Our new cust omised st at ement will t ell you where your `. 100 is going. X per cent in grocery, Y per cent in jewellery, and so on, We want t o help cust omers know how are t hey spending where t heir money is going and we have offers which are going t o help t hem make smart savings on t heir spends, Mr Sanjeev Jain, Chief Execut ive Officer, GE Capit al Business Processes Management Services (GECBP), said. (BL dt . 19.12.2011 p. 13) ICICI Bank launches 2-in-1 platinum credit-cards: ICICI Bank has launched a product under which t wo credit-cards are linked t o a single card account wit h a single st at ement and single fee. Card members will receive t wo cards -ICICI Bank Rubyx American Express Plat inum Credit Card and the ICICI Bank Rubyx Mast erCard Plat inum Chip Credit Card. The cards provide access t o a host of privileges from American Express and Mast erCard, said a press release from t he bank. Card members can choose bet ween three reward plans and earn bonus point s across merchant cat egories where t hey normally spend more. (BL dt . 21.12.2011 p. 6)

Credit Growth..
Credit growth slows; moves closer to RBIs projection of 18%: The persist ent rat e hikes by t he RBI seem t o be t aking effect . The non-food bank credit increased by 18.2% for Oct ober 2011, as compared wit h 20.8% in t he previous year, according t o t he sect oral deployment of credit dat a, released by t he RBI. The RBIs project ion for credit growt h is 18% in t he current fiscal. According t o RBI dat a a slowdown in t he pace of credit growt h is visible across sect ors. Credit t o agriculture on a year-on-year basis, increased by 7.1% down from 20.4% in t he previous year. Credit t o indust ry increased by 23.1% (24.8% in t he previous year). Credit t o services sect or increased by 18.2%, (21.5%) and credit t o commercial real est at e increased by 12.%, (1.76%). (BL dt 01.12.2011 p.6) Credit growth will start picking up next year, says Axis Bank MD: Credit growt h, which has been moderat ing over t he last t wo years, will st art picking up next year, said Ms Shikha Sharma, Managing Direct or and Chief Execut ive Officer, Axis Bank. Credit growt h is direct ly linked t o what is happening in t he economy. Our belief is in t he long t erm growt h of t he economy so we expect credit t o pick up, Ms Sharma t old newspersons on t he sidelines of a CII leadership summit on Friday. The slowdown in credit offt ake was primarily on account of a dip in demand from large corporat es. The indust ry was on a t ight ening mode, t hey were looking at leveraging t heir exist ing invest ment s rat her t han pumping in fresh invest ment s, she said. Growt h in credit would be fuelled by a moderat ion in int erest rat es on t he back of easing inflat ion. The annual wholesale price
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Canara Bank Samachar Lehar January 2012 index-based inflat ion rat e in Oct ober rose 9.73 per cent compared t o 9.72 per cent in Sept ember. (BL dt .10.12.11 p.6) Banks unlikely to achieve RBIs 18% loan growth target: Loan growt h, which has slowed significant ly in t he current financial year due t o high int erest rat es, may result in banks falling short of t he Reserve Bank of Indias loan growt h project ion of 18 per cent for 2011-12. Annual growt h in bank advances slowed t o 17.7 per cent as on November 30, compared wit h 21.4 per cent in March. Banks had given loans wort h `. 2.5 lakh crore t ill November and would need t o disburse an addit ional `. 4.5 lakh crore t o achieve 18 per cent growt h for 2011-12. Credit growt h t his financial year has only been about six per cent so far. So, maint aining t he original 18 per cent would be difficult , given we have only four mont hs left , said Mr B A Prabhakar, Execut ive Direct or, Bank of India. In t he last four mont hs of t he previous financial year, banks had disbursed `. 3.6 lakh crore. (BS dt 13.12.2011 p.6) Loan growth may not pick up yet as downside risks remain: Bankers dont see a pick-up in loan growt h just yet despit e t he cent ral bank signalling an end t o t he int erest rat e t ight ening cycle. Mr B A Prabhakar, execut ive direct or, Bank of India, said: Just t he pause in t he t ight ening cycle alone may not help revive credit growt h. The indust ry is looking at visibilit y on t he policy and several ot her front s. (FE dt . 17.12.2011 p. 18)

Deposits...
Deposit growth stays ahead of credit expansion: Growt h in bank deposit s cont inued t o out pace t he credit disbursal t empo in December, reflect ing t he economic slowdown and the moderat ion in demand for loans.According t o dat a by t he Reserve Bank of India (RBI), t he year-on-year growt h in deposit s was 17.86 per cent at t he end of t he week (December 2). Deposit s st ood at `. 5710,061 crore. Banks report ed a growt h of 17.7 per cent in loan disbursals, while out st anding loans st ood at `. 4,235,420 crore. In November, deposit s rose 18 per cent , compared t o t he year-ago period. Credit growt h was capped at 17.6 per cent.RBI has project ed a deposit growt h of 17 per cent and a credit growt h of 18 per cent by March-end. However, t rends suggest ot herwise. Bankers said beside a slowdown in t he economy, t he high-int erest rat e regime made borrowers put invest ment plans on hold. Thus, credit pick-up has moderat ed in the current financial year. Banks are also caut ious in credit disbursement t o avoid a rise in risks of default s. Sect ors like st eel and t ext iles are showing signs of st ress and nonperforming asset s have grown in t he first t wo quart ers, said a senior public sect or bank execut ive. (BS dt .15.12.2011 p.6) More banks hike NRE deposit rates: More banks have ent ered int o t he race t o at t ract overseas Indians aft er a dollar st arved Reserve Bank of India freed t he rat es on nonresident ext ernal (NRE) account s, offering int erest as high as 9.6% per annum. Three more banks have announced hikes in t heir NRE Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 deposit offerings - Yes Bank and Dena Bank are now offering 9.6%, while IndusInd Bank has raised it s offer t o 9.25%. (Mint dt .26.12.2011 p7) Co-op banks: Interest on savings a/ c freed: The RBI deregulat ed int erest rat e on savings account s in all st at e and cent ral co-operat ive banks, a move t hat would fet ch bet t er ret urns for deposit ors. RBI had freed t hese rat es for scheduled commercial banks in Oct ober. In a not ificat ion addressed t o all st at e and cent ral co-operat ive banks, RBI said t hese were free t o det ermine t heir savings bank deposit int erest rat e subject t o t wo condit ions. On t he first , t he not ificat ion said, Each bank will have t o offer a uniform int erest rate on savings bank deposit s up t o `. 1 lakh, irrespect ive of t he amount in t he account within t his limit The ot her st at es for savings bank deposit s over `. 1 lakh, a bank may provide different ial rat es of int erest , if it so chooses. This would, however, be subject t o the condit ion t hat banks would not discriminat e over the int erest paid on such deposit s, bet ween one deposit and anot her of similar amount accept ed on t he same dat e, at any of it s offices, it said. (BS dt .27.12.2011 p6) Four banks raise interest rates on forex deposits: Four more banks have now upped int erest rat es on foreign exchange deposit s since RBI deregulat ed rat es. Orient al Bank of Commerce, Central Bank of India and Karur Vysya Bank upped t heir NRE t erm deposit s, while Federal Bank revised it s rat es second t ime wit hin a week. The increase in t he NRE t erm deposit s rat es range bet ween 8% t o 9.25% across mat urit ies. On December 16, t he cent ral bank freed int erest rat es on NRE rupee account s t o encourage Indians abroad t o park more of t heir savings in Indian banks. Inflows of foreign exchange would help st em the depreciat ion of t he rupee which has lost 18% t o t he dollar t his year. (FE dt .27.12.2011 p16)

Economy..
Moderating GDP may prompt RBI to halt rate hike: Moderat ing economic growt h and easing inflat ion may prompt t he Reserve Bank t o halt int erest rat e hike in t he upcoming mid-quarterly credit policy review lat er t his mont h, according t o analyst s. Wit h act ual growt h coming in well below t he pot ent ial, there are dis-inflat ionary pressures in t he economy, Goldman Sachs economist Mr Tushar Poddar said. We t herefore expect inflat ion t o fall t o 6% by March 2012. We expect t he Reserve Bank of India t o continue t o ease liquidit y, first t hrough open market operat ions, and t hen by cutt ing t he reserve requirement s of banks, he said. (BS dt 02.12.2011 p.6) Finance Minister may turn to RBI for reviving economy: Finance Minist er Mr. Pranab Mukherjee, st opped in his t racks on economy boost ing policy measures by polit ical opposit ion, is hint ing t hat t he RBI may have t o pick up t he slack t o revive t he flagging economic growt h, less t han 48 hours before a monet ary policy review. We must t urn our at t ention now t o reviving growt h as quickly as possible, said Mr Mukherjee at t he Delhi Economics Conclave organized by his Minist ry and Nat ional Inst it ut e for Public Finance and Policy. Our mont hly indust rial growt h has slowed down
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Canara Bank Samachar Lehar January 2012 sharply. This is part ly a reflect ion of global t rends, but our own fight against inflat ion has also t aken a t oll on invest ment s by our corporat ions. (ET dt 15.12.2011 p.19) RBI to auction g-secs worth `. 15k cr on Friday: The government will sell bonds wort h `.15,000 crore on December 30, t he RBI said. It was an unscheduled announcement aimed at spelling out how t he bank plans t o meet it s cash requirement s. Government sources said Mondays announcement did not amount t o any addit ional borrowing, but is wit hin t he overall second half borrowing plan. The auct ion will be conduct ed due t o t he cancellat ion of t he November 11 auct ion of 7.99% 2017 bonds. Nevertheless, t he government s move displayed t he urgency of cash requirement and underscored t he view that it would be really t ough for t he government t o meet it s fiscal deficit t arget of 4.6% of t he GDP for t his fiscal. (FE dt .27.12.2011 p2)

Financial Inclusion & MFI..

Private banks in Northeast come in for flak: Privat e sect or banks t hat have branches in t he Nort heast faced criticism from t he indust ry for t heir alleged reluct ance t o lend t o businesses in t he region. Besides "engaging in ret ail act ivity," the indust ry alleged t he role of privat e sect or banks was "negligible" in t he Nort heast . The Federation of Indust ry and Commerce of Nort h East ern Region (FINER), t he premier t rade and indust ry body of t he Nort heast , has request ed t he Reserve Bank of India t o ensure privat e sect or banks shed their conservat ive at t it ude in t he region. "These banks have plush branches, which are engaged in retail act ivit y or raising deposit s. Eit her no, or negligible, credit work is done in t he branches. These banks include ICICI, HDFC Bank and Axis Bank, which are highly compet it ive in ot her part s of t he country, but are reluct ant t o credit business in t he nort heast ern region," FINER Chairman Mr R S Joshi t old RBI Governor Dr D Subbarao. (BS dt 02.12.2011 p.7) NBFC-MFIs: RBIs new norms seen as a booster: The new norms for non-banking finance company-microfinance inst it ut ions announced by t he Reserve Bank of India will be beneficial for t he business, feel several micro-lenders. The Reserve Bank on Friday released new norms for classificat ion of NBFC-MFIs and brought t hem under it s regulat ory purview. The cap on int erest and margin at 26 and 12 per cent respect ively, pricing t ransparency and safeguards against harassment of client s by field st aff are some of t he import ant aspect s of t he new norms. It is a very posit ive st ep and auger well for growth of microfinance companies and client s, Mr Dilli Raj, Chief Financial Officer, SKS Microfinance Lt d, t old Business Line. Now, one should go wit h t he sole regulat ory approach adopt ed by t he apex bank, he said. Mr Suresh K. Krishna, Managing Direct or of Bangalore-based Grameen Koot a, said t he exact definit ion of what const it ut es microfinance is t he single-most merit of t he guidelines. (BL dt 05.12.2011 p.13) RBI tells banks to draw roadmap on financial inclusion: To ensure uniform services across t he country, banks have been advised t o draw a roadmap on set t ing up banking outlet s in every unbanked village wit h a population of Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 more t han 2,000 by March 2012. Underscoring t he import ance of ent repreneurship, RBI Deput y Governor Mr KC Chakrabarty said at an awards ceremony t hat about 74,000 unbanked villages have been identified and allot t ed t o various banks through st at e-level bankers commit t ees (SLBCs).As at t he end of Sept ember 2011, as report ed by t he st at elevel bankers commit t ees of various st at es/ Union Territ ories, banking out let s have been opened in 42,079 villages across t he various st at es in t he count ry. This comprises 1,127 branches, 39,998 business correspondent s and 954 ot her modes like rural ATM mobile vans, he added. The RBI has also advised banks t o roll out financial inclusion plans (FIP), encouraging mult iple channels of lending and enhancing t he scope of t he business correspondent model, improving credit delivery procedures in micro and small ent erprise (MSE) sect ors and encouraging adopt ion of ICT solut ions in villages wit h a population of less t han 2,000, he said.(FE dt .08.12.11 p16) FinMin to review credit flow to East zone states : Union Finance Minist er Mr Pranab Mukherjee will meet chief minist ers of east zone st at es, including West Bengal and Orissa, in Kolkat a t o discuss st at e-wise flow of credit t o farming, small and micro unit s. He will also t ake st ock of work on financial inclusion, progress on cent rally sponsored schemes, performance of regional rural banks and credit t o infrast ruct ure project s in t he zone, senior public sect or bank official said.The meet ing will be att ended by heads of Kolkat a-based public sect or banks, financial inst it ut ions, as well as senior bank and st at e government officials. The review is happening in t he backdrop of slowdown in t he economy. (BS dt.10.12.11 p7) SBI donates vehicles under Banks on Wheels model: To furt her t he goal of financial inclusion in Karnat aka, t he SBI donat ed t wo Banks on Wheels t o t he Shri Kshet ra Dharmasthala Rural Development Project (SKDRDP) on Sunday. Mr Prat ip Chaudhuri, Chairman, SBI, handed over t he vehicles t o t he Managing Direct or of SKDRDP, Dr H.L. Manjunat h. Speaking at t he event , Mr A. Krishna-kumar, Managing Direct or, SBI, said t hat t he bank has over 100 Banks on Wheels across t he count ry. Each of t hese vehicles covers 5-6 villages every week. Dr Manjunat h said SKDRP, which act s as t he business correspondent (BC) of SBI in t hree under-served dist rict s in Karnat aka - Gadag, Haveri and Dharwad, has opened over 35,000 self-help groups in t he t hree dist rict s. (BL dt . 19.12.2011 p. 4) Pranab asks banks to focus on financial inclusion: The Finance Minist er, Mr Pranab Mukherjee, has urged banks t o speed up t heir financial inclusion effort s, st at ing t hat t his was important for achieving higher economic growt h. We shall have t o go a long way in achieving financial inclusion in t he count ry. This (financial inclusion) is import ant for sust ained high economic growt h rat e and t o address t he chronic problem of povert y, deprivat ion and disparity, Mr Mukherjee said at t he cent enary celebration of Cent ral Bank of India . The Government has already st ipulat ed t hat habit at ions wit h populat ion in excess of 2,000 should have banking facilit ies by March 2012. It has permit t ed use of innovat ive models such as branchless banking t hrough business correspondent s. (BL dt .23.12.2011 p6)

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Canara Bank Samachar Lehar January 2012 Financial inclusion to soon fetch tax benefits for banks, institutions: Banks and financial inst it ut ions may get t ax benefit s on profit s made t hrough act ivit ies leading t o financial inclusion. Furt her, any losses t hese inst it ut ions incur, as a result , may also be allowed t o be carried over for a longer period. At present under Sect ion 72 of t he Income Tax Act , 1961, losses from any non-speculat ive business act ivity are allowed t o be carried over for up t o eight subsequent assessment years. A senior Government official t old, A proposal t o t his effect is being act ively considered by t he Depart ment of Revenue. However, anot her senior official said, Segregat ing income from t he financial inclusion is not an easy t ask. (BL dt .27.12.2011 p1)

Forex Inflows..
India set to lead in foreign remittances: Despit e t he economic downt urn cast ing it s shadow over t he employment prospect s in some high-income count ries, t he remit t ances worldwide are project ed t o reach $406 billion in 2011 calendar year, post ing an eight per cent growt h over t he previous year. Of t his, t he developing countries account for the lion's share of $351 billion with India t opping the list ($58 billion), followed by China ($57 billion), Mexico ($24 billion) and t he Philippines ($23 billion), according t o t he lat est World Bank updat e on remit t ances. (BL dt . 05.12.2011 p. 3) Forex reserves up $2.48 billion to $306.8 billion: The count rys foreign exchange reserves rose by $2.479 billion t o $306.844 on t he back of a sharp increase in t he value of gold reserves and foreign currency asset s, according t o t he Reserve Bank of Indias Weekly St at ist ical Supplement . In t he previous week ended November 26, t he reserves had fallen by a whopping $4.259 billion t o $304.365 billion. The foreign exchange reserves have risen for t he first t ime aft er four weeks of decline. (BL dt .10.12.11 p6) RBI prefers long-term equity flows: The RBI prefers long-t erm equit y flows, like foreign direct invest ment , t o short -t erm debt inflows, Deput y Governor Dr. Subir Gokarn said. Wit h growing int egrat ion wit h global economy arbit rage, opportunities had increased for invest ors. However, t he Indian financial syst em is robust t o face challenges, Gokarn said. Gokarn said t he current account deficit was not much of a concern, adding t he concern was how it was financed. (BS dt 14.12.2011 p.6) RBI imposes curbs on forward contracts as Re hits low of 54.30: As t he rupee plunged t o a lifet ime low of 54.305 t o t he dollar on Thursday, t he Reserve Bank of India imposed wide-ranging curbs on t he forwards currency market and sold dollars aggressively. The dollar sales t ook t he rupee up t o 53.65 at close. Among t he measures announced by t he Reserve Bank of India aft er market hours was the reduct ion of t he overnight open dollar positions for banks across t he board. It has also curbed t he ext ent t o which export ers and import ers can cancel and rebook t heir hedges or forward cont ract s. Under cont ract ed exposures, forward cont ract s t hat are t aken t o hedge current Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 account or capit al account transact ions, falling due wit hin one year, can no longer be cancelled and rebooked. But according t o Mr Jamal Mecklai, CEO, Mecklai Financial, disallowing export ers from cancelling and rebooking may not help ease t he pressure on t he rupee t o a significant ext ent .(FE dt 16.12.2011 p.1) Rates on non-resident deposits freed: To improve inflow of foreign currency, t he RBI deregulat ed t he int erest rat es t hat banks would pay on Non-Resident (Ext ernal) Rupee (NRE) Deposit s and Ordinary Non-Resident (NRO) account s. RBI said t his would provide great er flexibilit y t o banks in mobilising nonresident deposit s in t he prevailing market condit ions. Banks are free t o det ermine t heir int erest rat es on bot h savings deposit s and t erm deposit s of a mat urity of one year and above under NRE deposit account s and savings deposit s under NRO account s wit h immediat e effect , it said. The revised deposit rat es will apply only t o new deposit s and on renewal of t hose t hat have mat ured. However, int erest rat es offered by banks on NRE and NRO deposit s cannot be higher t han rates offered on comparable domest ic rupee deposit s. Also, at any point of t ime, an individual bank should offer uniform rat es at all it s branches. Current ly, banks offer 3.51% on NRE deposit s for t wo-t hree years and 3.64% for deposit s above t hree years.(BS dt . 17.12.2011 p. 4) Forex Reserves fall $69 Million: Indias foreign exchange reserves fell by $69 million t o $306.775 billion in t he week ended December 9, cent ral bank dat a showed. According t o t he RBIs weekly st at ist ical supplement , t he reserves fell mainly due t o a decline of $56 million in t he banks foreign currency asset s. The RBI doesnt provide any reasons for t he changes in foreign currency asset s, but says t he asset s expressed in dollar t erms capt ure fluct uat ions in t he value of non-U.S. currencies, such as t he euro, st erling and t he yen, held in reserves. (BL dt . 17.12.2011 p. 6) Freeing up NRI deposit rates will boost forex inflows, say bankers: The freeing up of int erest rat es on NRI deposit s by t he RBI will at t ract more foreign currency, which in t urn will st rengthen t he rupee, said bankers. The RBI deregulat ed t he int erest rat es on Non-Resident (Ext ernal) rupee (NRE) deposit s and Ordinary Non-Resident (NRO) Account s. The rat es on t hese deposit s should now be comparable t hose offered on domest ic rupee deposit s, said t he RBI. As per RBI guidelines, banks can now det ermine t heir int erest rat es on bot h savings deposit s and t erm deposit s of one year and above mat urity under NRE account s and savings deposit s under NRO account s.(BL dt . 18.12.2011 p. 3) Mid-size private banks hike rates to increase NRI deposit base: Mid-sized privat e banks are looking t o st rengt hen their non-resident deposit bases by offering higher rat es. This follows t he Reserve Bank of India deregulat ing int erest rat es on t hese deposit s. Federal Bank and Sout h Indian Bank have already announced 268-324 basis point s rises in t heir non-resident (ext ernal) rupee (NRE) t erm deposit s, and many ot her privat e banks are expect ed t o follow. However, st at e-run lenders are yet t o decide whet her t o increase non-resident deposit rat es aggressively or not . Bank of India, which has significant foreign presence, said it would wait for ot her players before revising t heir rat es. No firm view has been t aken so far. I cannot give a t imeline as t o when t hese rat es Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 will be revised, a senior official of Bank of Baroda said. St at e Bank of India officials said t here could be a rise of 200-300 basis point s in t he banks non-resident deposit rat es, but added t he bank was yet t o decide when t he rat e rise would be effect ive. St at e Bank of Travancore may increase it s non-resident deposit rat es before it s parent , St at e Bank of India, revises t he rat e, as t he associat e bank faces compet it ion from mid-sized privat e banks in Kerala. (BS dt .20.12.2011 p6) Three South-based banks hike NRE deposit rates: Karnat aka Bank Lt d has increased int erest rat es on NRE deposit s wit h effect from December 19. A bank release said here t hat t he bank has increased t he int erest rat es on NRE deposit s from 3.82 per cent t o 9.75 per cent for one year t o less t han t wo years; from 3.51 per cent t o 9.50 per cent for t wo years to less t han three years; and from 3.64 per cent t o 9.50 per cent for three years t o five years. Sout h Indian Bank has also hiked it s NRE t erm deposit rat e for all mat urit ies from 3.82 per cent t o 6.75 per cent . This revision was effect ed from December 19. Lakshmi Vilas Bank has also decided t o hike t he int erest rat e on NRE deposit s bringing t he rat e closer t o resident deposit s.The new rat es would come int o effect from December 22. (BL dt .22.12.2011 p6) Banks may limit unhedged forex exposure of cos: Banks may consider st ipulat ing a limit on unhedged posit ion of corporat es on t he basis of t heir boards approved policy, the Reserve Bank of India (RBI) said. Furt her, since t he rupee has depreciat ed sharply in recent mont hs, t hus raising t he cost of redempt ion of FCCBs, proposals for rest ruct uring of FCCBs not involving change in conversion price are being considered under t he approval rout e. At t he same t ime, report ing of dat a by banks in respect of unhedged exposures is being st rengt hened, the cent ral bank observed in it s fourt h Financial st ability Report . The cent ral bank says banks should rigorously evaluat e t he risks arising out of unhedged foreign currency exposure of t hecorporat es and price t hem in t he credit risk premium while ext ending fund based and non-fund based credit facilit ies t o corporat es. (FE dt .23.12.2012 p18) HDFC Bank among four to raise interest on forex deposits up to 9%: Indian banks have scaled up t heir rat e of interest on foreign exchange deposit s hugely wit hin a week of t he RBI deregulat ing t he rat es. Four banks, including HDFC Bank, upped t heir int erest rat es on such deposit s, going up t o 9%. But t ill lat e at night t he bank had not issued any writ t en communicat ion. Interest rates on NRE term deposits: HDFC Bank offers up t o 9% for 1 t o 2 years; up t o 8.5% for 2 t o 3 years; up t o 8.25% for 3 t o 5 years. Yes Bank offers 6% for amount s less t han `. 1 lakh and 7% for above `. 1 lakh. Federal Bank offers 6.5% for one-year bucket . Sout h Indian Bank offers 6.75% for all mat urities. Laxmi Vilas Bank offers 10% for 1 t o 2 years; 8% for 2 t o 3 years and 7% for 3 years and above. Karnat aka Bank offers 9.75% for 1 t o 2 years; 9.50% for 2 years and above. Dhanalakshmi Bank offers 8% for 1 t o 3 years; 7.75% for 3 years and above.

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Canara Bank Samachar Lehar January 2012 Allahabad bank offers 7.50% for 1 t o 2 years; 7% for 2 t o 3 years; 6.75% for 3 years and above. (FE dt . 23.12.2011 p. 1) Banks scramble to attract NRE deposits: Banks are t rying t o out bid each ot her in t he race t o garner NRI deposit s. A number of banks have eit her doubled or t rebled t he rat es t hey were offering just a few days ago on NRI deposit s. This follows t he deregulat ion of rat es by t he Reserve Bank of India.This out bidding t o cont ract remit t ance money is a funct ion of regulat ory and government al overbearing, says t he regional head of a leading public sect or bank.He said rat es are being kept up, t hanks t o t he t remendous peer pressure t o corner t he precious funds.Karnat aka Bank has quot ed 9 per cent -plus for one year. St at e Bank of Travancore upped t he ant e by offering over 8 per cent for t he same t enor. IndusInd Bank has increased it s rat es on NRE deposit s t o 9.25 per cent from 3.82 per cent . Karur Vysya Bank has increased it s rat e t o 10 per cent .Officials said, banks are looking t o ret ain t he increasingly fleet -foot ed cust omers by offering what t hey t hink are unbeat able rat es. The remit t ance inflow would last only for such t ime as t he exchange arbit rage holds. (BL dt .24.12.2011 p6) Forex reserves fall by $4.6 b to $302 billion: Foreign exchange reserves declined by $4.675 billion t o $302.100 billion for the week ended December 16, according t o the Reserve Bank of Indias Weekly St at ist ical Supplement . This is t he second week in a row t hat foreign exchange reserves have declined. In t he earlier week ended December 9, forex reserves had dipped by $69 million t o $306.775 billion. The decline in reserves was mainly on account of currency revaluation. The foreign currency asset s fell by $4.668 billion t o $266.968 billion. Foreign currency asset s expressed in US dollar t erms include the effect of appreciat ion/ depreciat ion of nonUS currencies such as t he euro, st erling and yen held in reserves. (BL dt . 24.12.2011 p. 6) India & Japan to go for $10-bn currency swap: The Reserve Bank of India will ent er int o a $10-billion currency swap arrangement wit h it s Japanese count erpart , Bank of Japan (BoJ), t his week. The move would st rengt hen the Indian cent ral banks armoury t o t ackle any liquidity crisis and volat ility in t he currency market . Under t he deal, t he t wo cent ral banks will supply each ot her wit h up t o $5 billion from t heir foreign currency reserves for possible market int ervent ion, in t he event of a financial turmoil. For India, t he swap arrangement is all t he more import ant and it might act ually draw int o t he facility, given t he sit uat ion of net capit al out flows, an exacerbat ing current account deficit (which could climb t o a t roublesome 4.9% of GDP for t he Oct -Dec quart er) and t he weak composit ion of reserves. India is st ruggling t o meet t he project ed level ($72 billion) of capit al inflows for t his fiscal and even t he most opt imist ic forecast s dont put the figure above $60-65 billion. (FE dt.26.12.2011 p1)

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Canara Bank Samachar Lehar January 2012

Housing Worries..
LIC Housing Finance to launch fixed rate loans next month : LIC Housing Finance Lt d will roll out a complet ely fixed int erest rat e home loan product next mont h, according t o Mr V. K. Sharma, t he companys Direct or and Chief Execut ive. The product is ready. There is a possibilit y of int erest rat es going down. We plan t o fix int erest rat e aft er t he Reserve Bank of Indias policy review on December 16, Mr Sharma t old newspersons aft er inaugurat ing a three-day propert y show on Friday. The product would be first of it s kind in t he home-loan market as all exist ing product s are combinat ion product s wit h varying periods of fixed and float ing rat es. We st rongly feel t hat there are cust omers who prefer fixed rat e product s, Mr Sharma said. The proposed `. 500-crore real est at e vent ure capit al fund would be launched in January with an init ial fund size of `. 200 crore. (BL dt.10.12.11 p6) Banks agree to ease norms for customers: In a move t hat will cheer millions of small borrowers, banks have agreed t o abolish penalt ies for prepayment of home loans t aken on float ing rat es of int erest . They will also st op penalizing savers who fail t o maint ain a minimum balance in t heir bank savings account s.The decisions were t aken at a meet ing bet ween t he RBI and t he bankers lobby IBA, hours aft er t he cent ral bank signalled an end t o t he cycle of rising int erest rat es that st art ed in March 2010, according t o bankers who part icipat ed in t he meet ing and spoke on condit ion of anonymit y. Banks charge 2-4% of t he loan amount out st anding as a prepayment charge from home loan cust omers. At least 95% of home loans carry a float ing rat e of int erest , according t o RBI, which effect ed 13 rat e hikes before applying t he brakes by leaving policy rat es unchanged amid concerns over slowing economic growt h. (Mint dt .19.12.2011 p.1) Bank of India waives pre-payment charges on home loans: The st at e-owned Bank of India joined the club of banks t hat has waived pre-payment charges on home loans. Bank of India has decided t o abolish prepayment charges on home loans for bot h fixed and float ing rat e loans across all t enures, for exist ing as well as new borrowers, said a banks release. Earlier, t he count rys largest lender SBI and ICICI Bank, t he largest privat e sect or bank, and Cent ral Bank had abolished pre-payment penalt y on home loans. SBI had done away wit h pre-payment charges for loans on fixed and float ing int erest rat es, ICICI Bank will cont inue t o charge 2% on t he out st anding amount of fixed-int erest loans. ICICI Bank waived off pre-payment charges on float ingrat e home loans effect ive from November 23, 2011 for bot h new and exist ing cust omers. (FE dt . 21.12.2011 p. 18)

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Human Resources..
PSBs to hire 5 lakh over next few years: St at e-run banks led by Union Bank of India and Punjab National Bank are picking up t he slack in recruit ment in financial services wit h plans t o hire as many as 5 lakh in t he next few years even as BNP Paribas, Nomura, Barclays and ot hers cut jobs in India. A whopping 44 lakh candidat es will appear for a common recruit ment t est for clerks in public sect or banks up t o December 11 for about 50,000 jobs in t he next four months, bank execut ives said. This is above t he 10.5 lakh who t ook t he examinat ion for officers post s recent ly. St at e Bank of India and Bank of Baroda have cut t housands of posit ions in t he last decade t o improve efficiency by not filling up t hose left vacant due t o ret irement s and t hrough early volunt ary ret irement plans. That led t o improvement in business per employee, which surged t o `. 10 crore in 2011, from `. 3.8 crore in 2005, RBI dat a shows. (ET dt . 09.12.2011 p. 1) Federal Bank on recruitment drive: Kerala-based Federal Bank Lt d will recruit close t o 1,500 probat ionary officers over t he next one-t wo years t o make good t he retirement s t hat are likely t o t ake place and t o creat e resource t o meet it s expansion t arget s. Close t o 1,000 employees of t he bank are set t o ret ire in the next two years, Mr Abraham Chacko, Execut ive Direct or, Federal Bank, said. The banking indust ry had witnessed massive recruit ment s during t he post nat ionalisat ion period. A majorit y of t hese employees are due for ret irement over the next t wo-three years. This is a huge challenge for t he indust ry, Mr Chacko said at a banking event organised by t he Calcutt a Chamber of Commerce. Federal Bank has already recruit ed about 1,500 probationary officers over t he last one-and-a-half years. Recruit ment s have t o happen t o creat e adequat e resources and achieve t he banks ambit ious growt h t arget over t he next few years, he point ed out . (BL dt . 09.12.2011 p. 6) Government clears creation of new ED slot in public sector banks: Large st at e-run lenders like BoB and PNB will get a third ED on t heir board from next April, while smaller banks like Dena or Unit ed Bank will get t heir second ED. The government has cleared t he Khandelwal Commit t ees recommendat ion, t wo chief execut ives at st at erun banks said. Banks wit h more t han `. 3 lakh crore business are considered as large ent it ies. The government has creat ed t he new slot in six large banks and said t he 3rd EDs will be responsible for human resource development and t echnology. BoI, Canara Bank, Cent ral Bank of India and Union Bank of India are dubbed as large banks and will benefit from t his move. (ET dt .14.12.11 p11) 1.11 lakh candidates pass bank officers exam: About 1,11,993 candidat es have passed t he first common writ t en exam (CWE) for probat ionary officers in 19 nat ionalised banks. The exams were conduct ed by t he Inst it ut e of Banking Personnel Select ion (IBPS) in Sept ember t his year. A lit tle over 10 lakh candidat es had appeared for t he exam. Of t hem, 36 per cent of t he successful candidat es were women, while a similar number of candidat es were from t he rural areas. The CWE for clerical post s has been held across t he count ry over t he past t hree Sundays. Nearly 43
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Canara Bank Samachar Lehar January 2012 lakh candidat es have appeared for t he exam. The result s would be available in February, said Prof Konar, senior facult y of t he inst it ut e. (BL dt .15.12.2011 p.6) Attempting bank exams with tech as scribe: Visually impaired candidat es aspiring for a bank job may now find it a bit easier t o compet e in t he writ t en select ion t est s conduct ed by t he Inst it ut e of Banking Personnel Select ion (IBPS). Alt hough t hey can current ly use a scribe, t he pract ical difficult ies include availabilit y, difference in accent , cost among ot hers. Out of an est imat ed 1.45 million visually impaired people aged 20 t o 29 (according t o census dat a), who are pot ent ial candidat es, only 9,000 applied for t he IBPSs first common writ t en exam for t he clerical cadre. Now, IBPS has t oget her wit h the Nat ional Associat ion for t he Blind (NAB) Bangalore and t he Int ernat ional Inst itut e of Informat ion Technology Bangalore (IIIT-B) launched t he NETRA SARATHY project t o enable visually impaired candidat es at t empt banking services exams.(BL dt 16.12.2011 p.6) 5 common exams every year for bank jobs: IBPS proposes t o conduct five exams every year for t he banking sect ors recruit ment needs, it s Direct or, Mr M. Balachandran said. There will be two exams for probationary officers, t wo for clerical levels and one for specialist officers (agricult ural, law, t echnical). The scores provided by IBPS for t he common writt en exam will be valid for a year and successful candidat es can apply t o any bank of t heir choices based on t hese scores. Earlier, candidat es had t o writ e mult iple exams conduct ed by each bank for t heir vacancies. The first such common t est for probat ionary officers was conduct ed in Sept ember while t he first set of clerical exams just got over on December 11. The first common t est for specialised officers will be conduct ed in March 2012. Last year, IBPS screened 13 million candidat es for employment while this year it is expect ed t o screen 15 million candidat es. Urging t he inst it ut e t o expand it s act ivit ies, Mr Narayana Murthy compliment ed it for providing hope of gainful employment t o 1.5 crore Indians, of whom about a t hird were women. (BL dt 16.12.2011 p.6) Probationary officer candidates may get offers from private banks too: Successful candidat es in t he first probat ionary officers common writ t en t est (conduct ed in Sept ember) may have some good news coming t heir way. They may be get t ing some more job opport unit ies not only from the 19 nat ionalised banks for which t he recruit ment t est was conduct ed but also from a couple of privat e banks. About 1.12 lakh candidat es passed t he probationary officers common writt en t est conduct ed in Sept ember (result s just announced) for vacancies in 19 nat ionalised banks. At the moment , rough est imat es indicat e t hat t here would be about 20,000 vacancies coming up in t he next six mont hs. (BL dt. 19.12.2011 p. 1) HSBC to cut jobs in India: Hongkong and Shanghai Banking Corporat ion (HSBC) is likely t o cut jobs in India, as part of it s plan t o lay off 30,000 employees globally, according t o sources. The move is aimed at reducing cost s and improving efficiency. While t he exact number of people who would be asked t o leave is not known yet , as t he rest ruct uring would begin in January, sources said most of t he layoffs are likely t o t ake place in the commercial banking business. An HSBC spokesperson confirmed t here could be some impact in India because of rest ruct uring of Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 t he banks global operations. HSBC is going through an efficiency programme globally, as was set out by t he HSBC Group chief execut ive, Mr St uart Gulliver, at t he Invest ors Day in May. All businesses across t he world are undergoing a st rat egic review, and India would not be left out of t his, t he spokesperson said. (BS dt . 20.12.2011 p. 6) AP leads in number of applicants for bank probationary officers exam: Successful candidat es in t he probat ionary officers exam conduct ed by Inst it ut e of Banking Personnel Select ion (IBPS) will get t heir scorecards short ly. The despat ch of scorecards commenced last week and was done by Speed Post , IBPS direct or, Mr M. Balachandran, said. It will also be possible for candidat es t o see t heir scores on t he IBPS Websit e by using relevant passwords. Asked what t he disaggregat ed st at istics on applicant s revealed, Prof. Dut t said, In the officer cadre, t he maximum number of applicant s were from Andhra Pradesh while for t he clerical cadre t he highest number of applicant s were from Utt ar Pradesh. (BL dt . 21.12.2011 p. 6) PSBs directed to do away with seperate promotion policies: The Finance Ministry has direct ed st at e-run banks t o do away wit h t heir separat e promot ion policies, a move st rongly opposed by t he officers' unions. The fresh guidelines aim at removing t he anomalies across public sect or banks and addressing severe manpower short age by creat ing a common pool of managers. This spells t he end of fast t rack and super fast t rack promot ions at managerial levels in some public sect or banks, including t he count ry's largest lender, St at e Bank of India. The new guidelines will allow lat eral movement across banks wit hout any remunerat ion issues, a finance minist ry official said. "The guidelines will also ensure t hat t here are eligible candidat es across all vert icals in all 21 st at e-run banks, which is a big advant age when it comes t o succession planning," said a human resources head at a Mumbai-based bank. (ET dt . 26.12.2011 p. 11)

Inflation..
Exchange rate is always on our radar: Subbarao: Dr D. Subbarao, Governor, Reserve Bank of India, said t hat some amount of rupee depreciat ion and oil prices have already been fact ored in RBIs assessment of seven per cent WPI (wholesale price index) inflat ion for March 2012. However, t he apex bank will int ervene in t he forex market if t here is a sharp movement in exchange rat e which is likely t o impair macroeconomic st ability. Rupee depreciat ion over t he last t hree months is a result of development s out side India, part icularly Europe. Exchange rat e is always on our radar, Dr Subbarao said at a press briefing aft er t he RBI board meet ing. The rupee has depreciat ed against t he dollar by about 14 per cent since August t his year. Rupees depreciat ion is adding t o inflat ionary pressures, Dr Subbarao said. The apex bank will come out wit h a definit ive st at ement on t he local currency at it s fort hcoming policy meet ing on December 16. (BL dt . 09.12.2011 p. 6) Inflation would have been higher if not for monetary tightening: RBI chief: The RBI Governor, Dr D. Subbarao, on Friday said t hat maint aining the right balance bet ween growt h and bringing down inflation wit hin accept able limit s will be a Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 challenging t ask for t he cent ral bank. There are several challenges, first is st riking t he right balance bet ween growt h and price st abilit y, Dr Subbarao said while speaking at t he 3rd Nat ional Conference on Leadership organised by t he CII-Suresh Neot ia Centre of Excellence on Friday. Defending the RBIs aggressive monet ary t ight ening, which has drawn crit icism for it s impact on growt h, Dr Subbarao said, It is a legit imat e concern t hat inflat ion has not come down appreciably despit e hikes in int erest rat e 13 t imes since March 2010, but it has t o be not ed t hat the rate of price rise would have been even higher had monet ary t ight ening st eps not been t aken. Inflat ion rat e could have been higher at 12-13 per cent, unlike 9.7 per cent at present .(BL dt .10.12.11 p6)

Infrastructure..
Delay in nod for projects raises default risk for banks: The Finance Minist ry has flagged t he issue of delay in giving clearances by st at e government s t o infrast ruct ure project s increasing risks of default s and bad loans for banks. In t he east ern region, five infrastruct ure project s, wit h a t ot al invest ment of `. 16,686 crore, are await ing various approvals. The banking sect or, in general, and public sect or banks, in part icular, have sanct ioned a significant amount of loans for large project s. In a number of project s, implement at ion is held up because of pending approvals at the cent ral/ st at e levels, banks said in communicat ion t o st at e government s in the east ern region. Lending by banks t o infrast ructure project s, including t elecom, power and roads, increased 21.7 per cent t o `. 5,74,569 crore in Oct ober, compared wit h `. 4,72,142 crore in Oct ober 2010, according t o Reserve Bank of India dat a. (BS dt 13.12.2011p.6)

Insurance..
Bank of India to have 51% stake in J with AXA: V Bank of India said it would have a majorit y st ake of 51% in it s proposed asset management joint vent ure with AXA Invest ment Managers. French financial services firm AXA current ly has 74% st ake in an asset management joint vent ure, Bhart i Axa Invest ment Managers, wit h Indian t elecom major Bhart i. According t o senior bank officials, AXA would acquire Bhartis 26% st ake in t he firm and t hen transfer 51% of it s holdings t o t he bank. AXA will hold t he remaining 49% st ake in t he joint vent ure. Bhart i Axa Invest ment Managers is current ly the asset management company t o Bhart i AXA Mut ual Fund. (BS dt 04.12.2011 p.3) State Bank of India to launch mediclaim facility: India's largest lender, St at e Bank of India, will soon launch mediclaim and accident al insurance facilit ies for it s savings bank account holders. The scheme is likely t o be launched in January or February, SBI Chairman Mr Pratip Chaudhuri said. "We are holding a meet ing of St at e Bank of India general managers in Lucknow, in which the cont ours of t he insurance scheme would be given t he final shape before it is launched in t he new Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 year," he said. Mr Chaudhuri also said t he lower credit t o deposit s (CD) rat io in Utt ar Pradesh would appear much higher if anot her dimension was considered. "When we t alk about t he CD rat io, we generally refer t o t he ret ail, agricult ure and small loans," he said. (BS dt . 21.12.2011 p. 6)

Liquidity..
Pressure mounts on RBI to cut CRR: The RBI, buffet ed by st ubbornly high inflat ion and t ight ening liquidit y, is under increasing pressure t o cut t he CRR, t he portion of deposit s t hat banks keep in cash wit h central bank, t o ease t he st rain in money market s. The central bank commit t ed t o an ant i-inflationary st ance, may find it just ifiable t o release as much as `. 60,000 crore int o t he syst em t hrough a one percent age point CRR cut , rather t han reducing policy rat es which will signal a shift in st ance when inflat ion is st ill above t arget , say economist s. Many count ries such as Aust ralia and Thailand have cut int erest rat es t o bolst er growt h when European sovereign crisis t hreat ens growt h, but India may not be able t o mat ch since price rise is not easing despit e t hirt een rat e rises. China on Wednesday cut banks reserve requirement s 50 basis point s. A basis point is 0.01 percent age point . (ET dt 01.12.2011 p.1) OMO draws poor response, but bond yields lowest in 2 months: The Reserve Bank of India conduct ed it s second open-market operation (OMO) wort h `. 10,000 crore, of which it purchased only `. 5,783 crore wort h of bonds. Bonds rallied yet anot her day, sending t he yield on t he 10-year benchmark gilt s on Thursday t o 8.697%, t heir lowest level since Oct ober 7. Demand for bonds perked up aft er t he st rong demand at the auct ion of quot as for gilt s t o foreign inst it utional invest ors (FII). The auct ion saw FIIs bid about 40% more t han t he $10-billion debt on offer. Market expert s said t he OMO was not as successful as expect ed because t he cent ral bank offered lower yields, adding t hat t he st rong FII demand, liquidit y-boost ing measures like OMO and improvement in t he global sent iment have fuelled opt imism. (FE dt 02.12.2011 P.18) Pressure for CRR cut mounts on RBI: Liquidity woes cont inue t o haunt bankers, as overnight borrowings from t he Reserve Bank of India (RBI) hover close t o `. 1 lakh crore for more t han a week. Bankers expect RBI t o address t he issue by cutt ing t he cash reserve rat io (CRR) by 50 basis point s in t he midquart er policy review on December 16. However, t he absence of st rong signs of moderat ion in inflat ion raises doubt s on whether such a st ep would be t aken. Current ly, t he CRR is six per cent . Since November 24, banks have been drawing an average of `. 1 lakh crore daily from RBI, at a repo rat e of 8.5 per cent under t he liquidity adjust ment facilit y. This is well above t he cent ral banks comfort zone of one per cent of net demand and t ime liabilit ies, which works out t o `.50,000-60,000 crore. RBI has bought government bonds wort h about `.15,000 crore t hrough open market operat ions (OMOs) in t wo consecut ive weeks, and has announced anot her round for t his week as well. There are rumours of a CRR cut , but t hat would depend on t he acut eness of t he liquidity short age. As of now, it is less acut e t han in t he t hird week of November, said Mr Joydeep Sen,

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Canara Bank Samachar Lehar January 2012 Senior Vice-President (advisory desk - fixed income), BNP Paribas Wealt h Management . (BS dt . 06.12.2011 p. 6) There is adequate liquidity in banking system: Chakrabarty: At a time when t he RBI has been conduct ing open market bond purchases t o relieve st ress on liquidity, t he Deputy Governor, Dr K C Chakrabarty, said on Monday t hat t here is "sufficient " availabilit y of funds in t he banking syst em. Dr Chakrabart y was speaking on t he sidelines of an event organised by Cit i Bank. The cent ral bank typically undert akes bond purchases t hrough open market operat ions t o manage liquidity deficit in t he syst em. In t he previous fort night , t he cent ral bank infused `. 15,218 crore in the banking syst em t hrough purchase of government securit ies. In t he last fortnight, banks have borrowed `. 1.02 lakh crore on an average from t he RBI's repo auct ion. (BL dt . 06.12.2011 p. 6) CRR is a monetary policy signal: Subir Gokarn: The cash reserve rat io is not just a liquidity t ool but a monet ary policy signal, Deputy Governor of t he Reserve Bank of India (RBI) said on Wednesday amid market speculat ion it may lower t he rat io in order t o ease t ight liquidit y in t he banking syst em. CRR is not just a liquidit y t ool but is also a monet ary policy signal and we are as of now st ill in a sit uat ion where inflat ionary pressures are high, Mr. Subir Gokarn said. Whet her using an inst rument t hat is part of monet ary t oolkit t o address liquidity issue is cert ainly a debat e which we have t o engage in, he said in an address t o bankers. Cash reserve ratio is the proport ion of deposit s t hat banks need t o set aside wit h the cent ral bank as cash. The rat io now st ands at 6%.(Mint dt .08.12.11 p9) RBI to conduct additional repo auction: The Reserve Bank of India will conduct addit ional repo operat ions (by which banks can borrow money from t he RBI) under t he Liquidit y Adjust ment Facility, on Friday(16.12.2011), December 16, bet ween 4.30 and 5 pm. The RBI has decided t o conduct t he addit ional repo operat ion keeping in view t he prevailing liquidit y condit ions and wit h a view t o providing flexibility t o scheduled commercial banks in t heir liquidit y management , said a press release issued on Thursday. (BL dt 16.12.2011 p.6) RBI to ensure enough liquidity in the system: The Reserve Bank of India Governor, Dr D. Subbarao, said he cannot speculat e on when he will st art cutt ing policy rat es, but assured t hat the cent ral bank will ensure that t here is enough liquidity in t he syst em by conduct ing open market operat ions.We have t aken int o account the inflat ion sit uat ion and also growt h moderat ion. For t he moment , we have kept t he policy rat es st eady. However, we will manage liquidit y t hrough market operat ions (but ) I cannot speculat e when we might st art cutt ing rat es, he said while speaking t o report ers at an ICAI funct ion. In its mid-quart erly review of monet ary policy, Reserve Bank of India maint ained reverse repo (rat e at which t he Reserve Bank of India borrows from banks) at 7.5 per cent . (BL dt .17.12.11 p6) RBI allows banks to tap marginal standing facility without seeking waiver: To help banks t ide over t he prevailing t ight liquidity condit ions in t he call money market , t he Reserve Bank of India on Wednesday did away t he obligat ion t hat requires t hem t o Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 seek a specific waiver for default in compliance of minimum holding of government securit ies when t hey borrow under t he marginal st anding facility. In May 2011, banks were allowed t o borrow overnight from it s marginal st anding facility (currently at an int erest rat e of 9.50 per cent ) against t heir excess government securit ies holdings as an addit ional liquidit y enhancement measure. They could also dip a percent age point below t he st atut ory requirement of holding government at 24 per cent of deposit s, provided t hey sought a specific waiver for default in compliance of t he limit . The lat est RBI measure on MSF comes at a t ime when call money rat es shot up t o t rade in 9.45-9.75 per cent range. (BL dt .22.12.2011 p.6)

Mutual Funds & Capital Market ..

BoI to re-enter MF industry with Bharti-AXA buy: Bank of India (BoI) is all set t o re-ent er t he mut ual fund industry wit h it s buyout of a 51% st ake in Bhart i AXA Mut ual Fund. The bank is underst ood t o have paid an amount of bet ween `. 50-`. 75 crore for AXA Invest ment Managers' st ake of 26% and Bhart i's st ake of 25%. Bhart i Axa's asset s under management (AUM) as on Sept ember were `. 176 crore. Typically, mut ual funds are valued as a share of t he AUM; t here have been several t ransact ions over t he past few years wit h t he valuat ions ranging anywhere bet ween 2.4% and 11% of t he AUM. However, since Bharti Axa's AUM is a very small at `. 176 crore, t he price would not have been worked out on the basis of t he asset s. "BoI is simply looking t o short en t he t ime t o market ," explained a fund manager, who point ed out t hat it t ypically t akes close t o t wo years t o get a licence from Sebi. Moreover, indust ry expert s point out t hat it would also t ake six mont hs t o put t oget her t he t eam and set up t he network. (FE dt . 06.12.2011 p. 11) Big banks face the heat as investors short futures: Fut ures prices of select ed bank st ocks crashed as fears of rising non-performing loans and high int erest rat es t urned sent iment against t he sect or. While bank st ocks in t he cash market have been t ouching record lows over t he past week, invest ors offloaded long posit ions and went short on cont ract s of large banks like St at e Bank of India, ICICI Bank, Axis Bank and Punjab Nat ional Bank. At t he end of t rading hours on Monday, Axis Bank st ock fut ures closed at `. 835.55 at a significant discount of `. 15 t o t he underlying cash price, which hit a 52-week low of `. 850.65. Axis has been hit by heavy short selling since Friday, when a record 20% addit ion in open int erest posit ions was accompanied by widening discount s. (ET dt . 20.12.2011 p. 9) PSBs to raise capital through preferential placement of equity: The Finance Ministry has decided t o inject capit al int o st at e-run banks t hrough equit y, shelving for new plans t o replenish t heir capit al base t hrough innovat ive inst rument s. The minist ry will go in for preferent ial placement of equit y, t he quickest mode of raising funds for cash-st arved banks, a senior official said. Any of t he new innovative met hods would have required legislat ive changes, which are difficult in t he current polit ical environment , t he official said request ing anonymity. The ministry has commit t ed t o maint ain a Tier-I capit al adequacy rat io of 8% in st at e-run banks and a holding of at least 58%. (ET dt . 24.12.2011 p. 9) Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012

NPA.
Net interest margin rises, asset quality falls: The Indian economy, at t he present junct ure, finds it self in a t ight spot . Bot h domest ic and global fact ors have cont ribut ed t o t he slowdown of t he economy. How have banks performed in t his macro environment ? Recently, t he banks announced t heir business and financial performance in t he second quart er of 2011-12. Among ot her t hings, an elevat ed int erest rat e environment and t he move t owards syst em-based recognit ion of NPAs are t he t wo major fact ors which have a direct bearing on t he performance of t he banks. In t his backdrop, how t he macro and bank-specific fact ors have played out in influencing t he performance of banks in t he second quart er would be of int erest . " We consider t he nat ionalised banks (NBs) which account for almost half of t he asset s of t he banking syst em. We find t hat t he business mix of t he NBs has improved significant ly in t he second quart er on a sequent ial basis - in t he Sept ember quart er over t he June quart er (3.2%) as compared t o in t he June quart er over the quart er ending March 2011 (0.5%). We also observe t hat asset quality represent ed through bot h t he gross and net NPAs in absolut e as well as in percent age t erms have det eriorat ed for NBs in t he Sept ember quart er on a sequent ial basis. While t he gross NPA percentage increased by 17 bps (100 bps equal one percent age point ) in t he June quart er, it increased by 26 bps in t he Sept ember quart er. However, t he RoA (ret urn on asset s) and cost-t o-income rat io for NBs have improved in t he Sept ember quart er" said Mr Biswa Swarup Mishra, Xavier Inst it ut e of Management . (BL dt 05.12.2011 p.13) Govt Seeks PSU banks aviation credit data, banks hope for help: The government has asked PSU banks for dat a on loans given t o airlines indust ry, a move which has sparked some hopes among banks t hat t he Cent re may st ep in t o prot ect t heir int erest . There are fears t hat banks may have t o set aside cash as a provision against t he loans t urning bad. Banks have t o provide dat a on t he loans given t o different airlines and t he nat ure of exposures-working capit al, t erm loan, guarant ees, let t er of credit , equit y and any ot her instrument . Banks highest exposure is t o Air India where t hey have lent close t o `.43,000 crore-which is undergoing debt rest ruct uring. But lenders are more concerned about t heir `.7000 crore loan out st anding wit h Kingfisher Airlines.(ET dt 09.12.2011 p.11) KVG Bank prepares roadmap to reduce bad loans: Karnat aka Vikas Grameena Bank (KVG Bank) has prepared a roadmap t o reduce non performing asset s (NPAs) and has set a t arget of achieving a level of 1 per cent (NPAs) t o t ot al advances by the end of t his financial year. According t o Mr C. Sambasiva Reddy, Chairman, KVG Bank, We plan t o focus on bad debt management for reducing t he NPAs. The bank has t aken t he init iat ive based on recommendat ions relat ing t o reforms in banking sect or made by t he Bost on Consulting Group (BCG), in a report Being Five St ar in Product ivit y: Roadmap t o Excellence in Indian Banking. The bank, at it s regional/ senior managers meet held at Dharwad on Thursday reviewed t he import ant areas relat ing t o business growt h, cust omer services, bad debt management , and operational excellence. (BL dt .10.12.11 p.17) Banks told to fast-track bad laon recovery: The Finance Minist ry is driving capit al-st rapped public sect or banks t o hast en bad laons recovery t o improve their healt h and has promised t o fill vacancies at debt recovery Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 t ribunals across t he nat ion which has been part ly responsible for inordinat e delays in ending disput es. "Needless t o say t hat `. 2 lakh crore (of bad loans) is a drag on t he capit al of banks," a bureaucrat from t he Finance Minist ry wrot e t o bank chairmen recent ly. "All cases should be reviewed and ensured t hat all cases pending above t wo years should be cleared by March 2012." (ET dt . 12.12.2011 p. 1) Banks nervous about telecom exposure: Wit h mut ed 3G upt ake and new 2G players hit by deepening losses, Indian banks seem t o be heading for a rough ride due t o t heir perceived huge exposure in t he sect or. St at e Bank of India, for inst ance, has a t ot al exposure of `. 23,000 crore in t he t elecom segment , of which, `. 15,000 crore is direct funding and the balance is non-fund based (guarant ees, and so on). Guarant ees may be given when operat ors go in for overseas borrowing t o buy net work equipment . This is a cause of worry because t he t elecom sect or is going t hrough a t ough phase wit h all t he operat ors report ing declining profit s and slowing growt h in subscriber base. The operat ors paid nearly `. 1-lakh crore t o t he Government last year t o acquire 3G and broadband spectrum. (BL dt 16.12.2011 p.1) Finance Ministry seeks data on loans to four stressed sectors: The Finance Ministry has sought from st at e-run banks company-wise exposure t o loans in four st ress sect ors - aviat ion, t elecom, commercial real est at e and power ut ilit ies worried t hat a spike in bad loans could derail t heir lending. The t ot al banking exposure t o t elecom, commercial real est at e and power sect ors at t he end of Sept ember 2011 was over `. 5 lakh crore. "There are report s of st ress in t hese sect ors. We want t o evaluat e if need t o t ake some pre-empt ive act ion t o support banks in making such account s st andard," said a finance minist ry official. A spike in bad loans will mean banks will need t o set aside capit al t o cover t heir pot ential losses, which will curb t heir credit growt h and increase capit al needs t hat a cash-st rapped government will find difficult t o meet . (ET dt . 17.12.2011 p. 9)) Credit quality still an issue: Bankers: Bankers believe t hat t he RBIs signal t hat int erest rat es have peaked will be good for bot h cust omers as well as banks as it would result in t heir st abilisat ion. However, t hey do not see a rat e cut immediat ely and credit qualit y, t oo, is not expect ed t o improve overrnight . Mr M D Mallya, C& MD, Bank of Baroda, said: Banks have been maint aining t heir loan rat es even t hough t he RBI had persist ed wit h policy rat e hikes in Sept ember and Oct ober. Mr Mallya point s out t hat t here are st ress point s in t he syst em and, so, credit quality may not improve immediat ely. Just because t he RBI has paused doesnt mean t hat t hings will change right away. But t he pause will cert ainly boost t he sent iment , he added. Added Mr M V Nair, C& MD, Union Bank: While t he pause signalled by RBI will help, credit qualit y depends on t he environment and t here are issues in sect ors like t ext iles or power. (FE dt . 17.12.2011 p. 18) Audited bank books understate bad loans: RBI: Point ing t o short comings in t he quality of bank audit s, t he RBI has said financial st at ement s cert ified by account ant s show lower non-performing asset s than is act ually t he case. There is a difference bet ween t he levels of non-performing asset s (NPAs) found during t he course of supervisions (by RBI) and t hose in audit ed books of banks. Bad loans Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 in cert ified st at ement s are less, RBI Governor, Dr D Subbarao, said. Seeking an improvement on this front , he said, We must ident ify where t he syst emic difference is coming from. He was addressing a conference organised by t he Inst it ut e of Chart ered Account ant s of India (ICAI). Dr Subbarao said account ant s who sign bank books were RBIs eyes and ears. He added t he regulat or expect ed t hem t o send out early warning signals t o assist t he regulat or in t he supervisory process. A t rue and fair pict ure must be shown t o shareholders, he said. (BS dt . 18.12.2011 p. 6) RBI flags deteriorating loan portfolios of banks: Risks are rising for t he banking sect or even as credit growt h slowed and slippages out paced credit growt h, said t he RBIs Financial St ability Report (FSR) covering t he last six mont hs.The risks t o banking sect or have increased since t he previous FSR in June. The banking sect or faced profit ability pressures due t o higher funding cost s and asset quality pressures due t o a slowing economy. Even though t he Capit al To Risk Weight ed Asset s Rat io (CRAR) and NPA of Indian banks compared favourably wit h t he major advanced count ries as well as peer Emerging Market Economies, t here has been a cont inuous decline in t hese paramet ers, said t he report released by t he RBI. The Syst emic Risk Survey conduct ed by t he RBI for t he first t ime has ident ified det eriorat ion of asset qualit y as t he highest risk. (BL dt .23.12.2011 p1) Poor financial health swells tally of debt recast cases: Debt s referred for CDR rose t o `. 47,304 cr in Apr-Dec, compared wit h `. 9,953 cr in yearago period.As 2011 draws t o a close, t he det eriorat ing qualit y of corporat e debt is becoming a concern for lenders. The number of t roubled loans referred t o t he corporat e debt rest ruct uring (CDR) mechanism increased five-fold in t he first nine mont hs of FY12.A St at e Bank of India execut ive said t he rise was on expect ed lines. The slowdown in growt h and pressure from rising int erest cost s may subst ant ially increase t he number of cases referred t o t he CDR forum in FY12, he said. (BS dt .27.12.2011 p6)

Other Banking News..

New CMD for Andhra Bank: Mr B. A. Prabhakar, Executive Direct or, Bank of India, has been appoint ed as Chairman and Managing Direct or of Andhra Bank. Mr Prabhakar would assume charge on or before January 1, 2012, and would cont inue in t he post t ill August 31, 2013. (BL dt . 21.12.2011 p. 6) Bank of Baroda to get `. 775 cr infusion: The Union government has agreed t o infuse `. 775 crore int o st at e-owned lender Bank of Baroda, C& MD Mr M.D. Mallya said. "As part of increasing it s st ake t o t he mandat ed 58%, t he government has agreed t o pump in `. 775 crore int o our bank. The fund infusion will happen before t he end of t he fiscal," Mr Mallya said. This could be done by a preferent ial allot ment , he added. (Mint dt .27.12.2011 p9)

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Canara Bank Samachar Lehar January 2012 Central Bank of India eyes expansion in Karnataka: As part of it s cent enary year celebrat ions on December 21, 2011, public sect or lender Cent ral Bank of India, announced it s expansion plans in Karnat aka. Chief General Manager Mr K A Somayajulu said t he Bank has 103 branches in t he St at e and is planning t o add 37 branches more wit hin t he current financial year. We are aggressively persuing credit disbursal and expanding our branches t o 4,000 from t he current 3,849 spread across India, giving primacy t o RBI st ipulat ion on financial inclusion and priority lending t arget , said Mr Somayajulu. (DH dt. 20.12.2011 p. 15) Dena Bank to grow balance-sheet to thwart takeover bids: Nupur Mitra The mid-size public sect or lender Dena Bank seeks t o grow it s balance sheet t o ensure t hat it is not gobbled up by bigger banks, a top bank official said. The biggest challenge for Dena Bank is t hat we are one of t he smallest . So, in t he present environment , we have t o go beyond a point t o ensure t hat we are t here in the fut ure also, t he newly-appoint ed Dena Bank chairman and managing direct or Smt Nupur Mit ra said on t he sidelines of an IBA meet on innovat ion, risk and regulat ion.She also said t he banks presence in Gujarat is making it more vulnerable for a possible t akeover.(ET dt .08.12.11 p11) Exim Bank: Bill to enhance authorised capital introduced in Lok Sabha: A Bill t o enhance t he aut horised capit al of Exim Bank from t he exist ing `. 2,000 crore t o `. 10,000 crore was int roduced in t he Lok Sabha on Thursday. Also, it has been proposed t o empower t he Centre t o raise t he amount of aut horised capit al from t ime t o t ime through execut ive orders. This would imply t hat Parliament s nod would not be required if t he Cent re decides t o increase t he aut horised capit al beyond `. 10,000 crore. The Bill - Export Import Bank of India (Amendment ) Bill, 2011 - was int roduced in t he Lower House by Mr Namo Narain Meena, Minist er of St at e for Finance. The proposed amendment s would enable Exim Bank, which provides financial assist ance t o export ers and import ers, undert ake fresh borrowing, borrow t o fund commit ment s under export line of credit s, st rengt hen t he capit al base, and enhance single/ group borrowers exposure limit s. (BL dt . 09.12.2011 p. 6) Pay more to close your HDFC Bank savings account: HDFC Bank, t he lender wit h the highest proport ion of low-cost deposit s t o t ot al, has raised charges on closure of savings bank account s and ot her services as it att empt s t o ring fence cust omers from flocking t o rivals who offer higher rat es on t hese deposit s. It is t he first lender t o raise such charges probably t o save it s profit abilit y.For closure of SB account , an HDFC Bank cust omer, depending on the nat ure and t enure of t he account , will have t o pay a fee of `. 500 and if t he average mont hly balance falls below `. 20,000 in nonurban cent res, it will charge `. 500 a mont h, according t o it s websit e list ing various charges effect ive January 2012.(ET dt .08.12.11 p11) Indian Overseas Bank may raise $500 mn next year: St at e-run Indian Overseas Bank may look at borrowing $500 million in t he overseas market next year t o meet dollar demand from Indian companies, it s chief M. Narendra t old Reut ers. We may, at an appropriat e t ime, look at medium-t erm not es for $500 million next year, when t he market is right , he said over t he t elephone. This is t o meet credit growt h in int ernat ional market , corporat es who want ECBs. There are ot her Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 market s like Chinese, Japanese where we can also raise money. So, all opt ions can be looked at . Not immediat ely, but next year, he added. (BS dt .15.12.2011 p 6) KVG Bank to open 9th regional office, more branches in Mangalore: The Dharwad-headquart ered Karnat aka Vikas Gramina Bank (KVGB), a regional rural bank sponsored by Syndicat e Bank, is planning t o expand it s net work of branches, ATMs and business correspondent s during t he current financial year. Speaking on t he sidelines of t he inaugurat ion of 9t h regional office of t he bank in Mangalore, Mr C Sambashive Reddy, Chairman of KVGB, said t hat t he bank has 482 branches. Of t hem, 57 were opened during t he current financial year. The bank will open anot her 19 branches by the end of t his fiscal. As of now, t he bank has only one ATM at Dharwad. Plans are t here t o open 50 more ATMs during t he current fiscal. (BL dt. 20.12.2011 p. 19) SBI to boost capital ratio: St at e Bank of India Chairman Mr Prat ip Chaudhuri said t he nat ions largest lender will cancel unt apped lines of credit and reorganise it s balance sheet t o boost capit al while it wait s for an infusion of government funds. The lender has set up a panel t o review ways t o conserve capit al, Mr Chaudhuri said in an int erview in Mumbai. The measures, which will include adjust ing t he risk weighings on loans t o companies, may help free up 30 basis point s t o 100 basis point s of capit al by March.(FE dt 13.12.2011 p.16) SBI acquires loans worth $500 million from foreign banks: The SBI has acquired loans wort h around $500 million from overseas banks. SBI chairman Prat ip Chaudhuri said t he bank has acquired qualit y asset s of Indian corporat es from overseas banks at a 4-5% discount . The bank is doing brisk business in short -t erm t rade finance as it has been able t o raise enough ret ail deposit s at LIBOR plus 60 or 80 basis point s, he said. There is a long list of cust omers willing t o borrow at LIBOR plus 350 basis point s and, so, t he net int erest margin should go up by about 200 basis point s, he added. On an $11-billion t rade finance book, SBI hopes t o make an additional $200 million by way of int erest . Wit h t he euro zone in t urmoil, European banks have been keen on shedding asset s and Indian banks have been quick t o grab t he opport unit y. (FE dt .15.12.2011 p16) SBI expects `..4000 crore capital infusion in FY12: The count rys largest lender SBI expressed hope it would get capit al infusion of `..30004000 crore from t he government this fiscal. It (infusion) is round t he corner. It could happen any day now. I t hink (t he mode) is not decided, but what ever we are get t ing we will be get t ing in cash. We are expect ing `..3000-4000 crore eit her in December or by March, SBI Chairman Mr Prat ip Chaudhuri said. Talking t o report ers on t he sidelines of Delhi Economic Conclave, he said t hat if t hey (government ) put in `.3000 crore (in SBI), so t his will mean anot her 3% increase in government holding. At present , t he Government of India holds 59.4% in t he bank. The government has earmarked `.6000 crore for t he fiscal for capit al infusion in public sect or banks t o ensure t hat t hey meet t he regulat ory requirement s. (ET dt 15.12.2011 p.10) SBI sees credit growth of 16-18% this fiscal: St at e Bank of India would st ick t o it s credit growt h guidance of 16-18 per cent for t he fiscal. We are seeing some increase and some upsurge in credit growt h in Oct ober and Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 November and hopefully t hat should cont inue, Mr Pratip Chaudhuri, Chairman of t he bank, said. On asset qualit y, he said t hat t he banks net NPA had peaked at 2.05 per cent. We don t hink it will go up sharply or go up at all. There was some st ress in t he t agricult ural sect or, he said, adding t hat wit h t he new harvest coming in, recoveries in agricult ure have also improved. According t o him, several sect ors of t he economy are under st ress: aviation, dist ribut ion companies of t he elect ricit y boards, and t o some ext ent t ext ile sect or - because t hese companies had procured cott on at higher prices and t he cot t on prices have come down, and some st eel companies in t he int ermediat e sect or. (BL dt . 19.12.2011 p. 13) SBI may defer raising $5 bn to next fiscal: The count rys largest lender, SBI, is unlikely t o go ahead wit h a plan t o raise $5 billion by selling dollar bonds in global market s t his financial year because companies are no longer shopping around for high-value loans a reflect ion of bot h t he high int erest rat es and the poor invest ment climat e in t he country. The bank may revisit it s plan in 2012-13.The money was expect ed t o fund t he invest ment plans of Indian firms and mult inat ionals wit h significant business int erest s in India. SBI had init ially planned t o raise as much as $5 billion by December t hrough the issue of medium-t erm not es (MTNs). SBI chairman Pratip Chaudhuri was quot ed by news agency Press Trust of India on 8 July, st at ing ...we hope t o raise $5 billion by December by means of foreign debt t hrough MTNs.The bank has decided not t o go ahead wit h it s capit al-raising programme at least t ill March. (Mint dt .22.12.2011 p1) SBI, BoB set to raise NRE deposit rates: Aft er privat e banks, it is now t he t urn of large public sect or banks t o raise int erest rat es on non-resident (ext ernal) rupee (NRE) deposit s aft er t he cent ral bank lift ed the cap on rat es for t hese deposit s. St at e Bank of India (SBI) and Bank of Baroda are set t o raise NRE deposit s rat es. A senior SBI official said, We are planning t o revise t he rat es on NRE deposit s t o bring t hem on a par wit h domest ic rat es. Till lat e evening, t he bank had not announced t he revised int erest rat e. The bank current ly offers 9.25 per cent for domest ic t erm deposit s mat uring bet ween one and 10 years. (BS dt . 24.12.2011 p. 7) Standard Chartered to Increase Takeover Financing in India: St andard Chart ered Plc (STAN) plans t o increase t akeover financing for Indian companies as it seeks t o gain ground in mergers advisory in emerging market s on rivals weakened by Europes credit crisis. As t he world goes t hrough t his t urmoil, banks like ours which do have t he capabilit y and a st rong balance sheet see t hat as an opport unity, t o lend for acquisit ions, Mr Neeraj Swaroop, t he U.K. banks out going chief execut ive officer for India and Sout h Asia, said in an int erview in Mumbai. St andard Chart ered funded deals including Adit ya Birla Groups $875 million acquisit ion of Columbian Chemicals Co. in January t o help defend it s No. 3 posit ion in Indian mergers advisory t his year, dat a compiled by Bloomberg show. The London-based bank ranks 43rd globally among arrangers of t akeovers. Banks t hat offer financing t o gain advisory credit dist ort t he rankings among t akeover arrangers, said Uday Kot ak, the billionaire owner of rival Kot ak Mahindra Bank Lt d. Kot ak did not specifically name St andard Chart ered. (BL dt 16.12.2011 p.6)

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Canara Bank Samachar Lehar January 2012 United Bank plans `.100-cr bond issue: Unit ed Bank of India plans t o raise about `.100 crore t hrough non-convert ible bonds t o augment it s lower Tier-II capit al, according t o a company notificat ion t o the BSE. The bank proposes t o issue unsecured, subordinat ed, redeemable, non-convert ible bonds in t he form of promissory not es of `. 10 lakh each, for `. 100 crore. The issue has been rat ed AA+ by Care and AA+/ St able by Crisil. The bond issue will have green-shoe opt ions t o raise addit ional `. 100 crore on privat e placement basis. The bank will int imat e t he coupon rat e and t he dat e of opening of t he issue in due course. (BL dt .22.12.2011 p7) YES Bank ups savings rate to 7% for deposits over `.1 lakh: YES Bank has hiked int erest rat e by 100 bps t o 7% on SB deposit s wit h balances of over `. 1 lakh. For t hose wit h balances below `.1 lakh, t he rat e cont inues t o be 6%, said a press release issued by t he bank. This is t he second t ime t hat YES bank is hiking int erest rat e on SB deposit s aft er t he RBI deregulat ed t he int erest rat es. (BL dt .23.12.2011 p 6)

Overseas Aspirations..
SBI opens branch in Saudi Arabia: St at e Bank of India st art ed operat ions in Saudi Arabia wit h t he opening of a branch in Jeddah. The branch was inaugurat ed on December 14 by His Excellency Dr Abdulrahaman Al kalaf, Deputy Governor for Technical Affairs, Saudi Arabian Monet ary Agency. SBIs Managing Direct ors, Mr Hemant Cont ract or and Mr A. Krishna Kumar were also present on t he occasion, said a press release issued by the bank. The Jeddah branch is a full commercial branch t hat offers a bouquet of banking services t o t he around t wo million Indian resident s of Saudi Arabia. It also offers remit t ance facilit y for Indians resident s in Saudi Arabia, added the press release. (BL dt 16.12.2011 p.6)

RBI Directives. & Guidelines.

RBI norms on CDS become operational: RBI on Thursday operationalised t he new guidelines on credit default swap (CDS), direct ing market part icipant s t o report such t rades wit hin 30 minut es t o t he Clearing Corporat ions online reposit ory. It is advised that all market makers shall report t heir CDS t rades in corporat e bonds wit hin 30 minut es of t he trade t o the Clearing Corporat ion of India Lt d (CCIL) t rade reposit ory CCIL Online Report ing Engine (CORE) beginning December 1, 2011, t he Reserve Bank said in a circular. (BL dt . 02.12.2011 p. 6) RBIs Dec 16 policy review to take note of forex volatility: The Reserve Bank of India is hopeful t hat there would be some improvement in t he foreign exchange volat ilit y in coming days. In view of t he European Union Summit we are expect ing t hat t here would be some correct ions in t he value of rupee, said Reserve Bank of India Deput y Governor Mr Harun Rashid Khan. He said t hat t he out come of t he summit would bring some comfort t o t he world economy. Reserve Bank of India policy review on Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 December 16 would t ake not e of t he foreign exchange volat ilit y besides t he problem of inflat ion and t he non-performing asset s of banks, Mr Khan said on t he sidelines of a regional seminar on securit ies market , organised by Bhubaneswar St ock Exchange, on Sat urday. The deputy governor said t hat t he euro zone crisis has it s impact on t he Indian economy.(FE dt 11.12.2011 P.11) RBI issues guidelines for banks investments in non-finance cos: Equit y invest ment by a bank in a non-financial service company would be subject t o a limit of 10 per cent of t he companys paid-up capit al or 10 per cent of t he banks paid-up capit al and reserves, whichever is less, according t o the Reserve Bank of India. In new guidelines for banks invest ment s in companies which are not subsidiaries and are not financial services companies, t he Reserve Bank of India said t hat for arriving at t his 10 per cent limit , equit y invest ment s held under Held for Trading cat egory would also be reckoned. Invest ment s wit hin t he 10 per cent limit , irrespect ive of whet her they are in t he Held for Trading cat egory or ot herwise, would, however, not require t he cent ral banks prior approval. The Reserve Bank of India issued t he guidelines as it felt t hat it is possible for banks, direct ly or indirect ly t hrough their holdings in other ent it ies, t o exercise cont rol on financial service companies or have significant influence over such companies and t hus, engage in activities direct ly or indirect ly not permitt ed t o banks. (BL dt .13.12.11 p6) RBI panel to discuss raising of capital by urban co-op banks: The issue of get t ing a level-playing field for urban co-oerat ive.banks vis--vis commercial banks wit h regard t o raising capit al and lowering t he t hreshold for st at ut ory invest ment s will be t aken up at a meet ing of t he Reserve bank of Indias st anding advisory commit t ee next week. Current ly, growt h prospect s for the 1,600-odd UCBs are hamst rung due t o limit ed opt ions for raising capit al.Though Urban Co-operat ive Banks, which as of Marchend 2011 collect ively had deposit s and advances aggregat ing `. 2,12,031 crore and `. 1,36,341 crore, respect ively, have been allowed t o issue preference shares and long-t erm deposit s t o augment t heir capit al, bot h t hese opt ions are not preferred. (BL dt .14.12.11 p.6)

` Movement .
RBI will use all available tools if rupee fall escalates: Gokarn: To prevent t he rupee from spiralling downwards, t he RBI will resort t o appropriat e measures, including increasing t he supply of foreign exchange by expanding market part icipat ion and int ervening in excessively volat ile market condit ions, said Dr Subir Gokarn, Deput y Governor. Underscoring t he import ance of resist ing currency depreciation by increasing t he supply of foreign currency by expanding market part icipat ion, t he Deput y Governor said t he RBI has done t his by increasing t he limit on invest ment in t he Government and corporat e debt inst rument s by foreign invest ors. Furt her, t he cent ral bank has also raised t he ceilings on int erest rat es payable on non-resident deposit s and t he all-in-cost ceiling of ext ernal commercial borrowings has been enhanced. Dr Gokarns observat ions come at a t ime when t he rupee has weakened nearly 17% against t he dollar since April 2011, making it the worst performing currency in Asia. Referring t o t he recent sharp depreciat ion in the rupee, which led t o an assessment in some quart ers of helplessness in dealing wit h t he kind of global t urbulence t hat is being wit nessed, t he Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 Deput y Governor said our strat egic behaviour should not be misconst rued as an inabilit y t o lean against the wind. If we do see t he short-t erm risk of a downward spiral escalat ing, we will not hesit at e t o use all available inst rument s. (BL dt 04.12.2011 p.1) Rupee hits a fresh trough, breaches 53-a-dollar mark: The rupee on Tuesday breached t he 53-per dollar mark, with invest ors cont inuing t o shift t heir preference t owards t he dollar, as t he count ry heads for an economic slowdown. The rupee on Tuesday ended at 53.23 against t he dollar, down 0.7 per cent from Mondays close of 52.84, aft er t ouching a record low of 53.52. The currency has lost 4.8 per cent against t he dollar in t he last four weeks and 16 per cent so far t his year. According t o dealers, t he rupee is likely t o remain under pressure, as not much int ervent ion is expect ed from t he Reserve Bank of India. (BS dt 14.12.2011 p.6) Rupee surges after RBIs measures to curb speculation: The rupee ended almost 100 paise higher from it s previous close on t he back of Reserve Bank of Indias measures t o curb speculat ion in t he forex market . On Friday, the domest ic currency opened higher at 52.70 and t ouched a high of 52.21. It closed st ronger at 52.68, against t he previous close of 53.66. In int ra-day t rades, dollar demand from oil companies saw t he rupee weaken t o 53.02. As part of it s st eps t o curb speculat ion in t he forex market , t he RBI on Thursday evening wit hdrew t he facilit y t o cancel and rebook forward cont ract s by resident and foreign inst it utional invest ors as t he rupee hit an all time low of 54.2925. (BL dt . 17.12.2011 p. 1) RBI needs to do more and decisively to propel growth: Considering t he foreign exchange volat alit y and inflat ionary pressure, t he RBI has been guarded in it s approach t o leave all rat es unchanged wit h t he basic object ive t o st em Rupee depreciat ion and hopefully manage inflat ionary trend. Mr N Venkat akrishnan, Chairman of t he Expert Committ ee on banking and Finance, Bangalore Chamber of Indust ry and Commerce (BCIC), while appreciating t he RBI for not t ampering wit h CRR and Repo rat es, said: "The 20 per cent depreciat ion of t he Rupee in 2011 is not warrant ed given India's st rong economic fundament als and RBI should have act ed more pro-act ively when t he Rupee was t ending t owards `. 48-49 per cent US Dollar. By delaying t he act ion, RBI has allowed speculat ors t o t est it s resolve." It can be const rued the RBI would probably act in course t ime once it is uncomfort able wit h the level of exchange rat e, he furt her added. (BS dt . 19.12.2011 p. 4) Rupee fall due to a combination of factors, says RBI's Chakrabarty: India's inflat ion is largely due t o supply side pressures and t hese can be addressed by increasing product ivit y, t he RBI Deput y Governor, Dr K C Chakrabarty, said. Dr Chakrabarty said micro, small and medium ent erprises must increase t heir product ivit y t o alleviat e such pressures. He was speaking at a conference host ed by Central Bank of India. In t he quest ion and answer session following his speech, Dr Chakrabart y said inflat ion has t o be brought down quickly and t his is not just t he RBI's responsibilit y. "Inflat ion has t o be brought down quickly and t he societ y must co-operat e," he said. (BL dt. 21.12.2011 p. 6)

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Technology..
Equip ATMs to accept cash directly, suggests panel: A year down t he line government -owned bank ATMs in urban as well as rural areas may st art accept ing cash (not in an envelope but direct ly), have solar powered back-up, and 24x7 surveillance. The aforement ioned are some of t he recommendat ions of a government -appoint ed commit t ee on ATMs headed by Dr Ashok Jhunjhunwala, Professor, IIT-Madras. These come at a t ime when t he Government has direct ed t he 21 banks in which it owns majority st ake t o go in for joint procurement of ATMs. Besides dispensing not es, which are soiled but can be issued, and ret ract ing not es left behind by cust omers, t he ATMs t o be deployed by PSBs will come equipped wit h a cash accept or.(BL dt 02.12.2011 p.6) RBI removes cap on mobile banking transactions: The RBI has removed t he cap of `. 50,000 per day per t ransact ion t hrough mobile banking. It has now been decided t hat individual banks can place t ransact ion limit s based on t heir own risk percept ion and wit h approval of their respect ive boards. The RBI said t hat banks are increasingly ext ending mobile banking facilit ies t o t heir cust omers. Int er-bank Mobile Payment Service (IMPS) developed and operat ed by t he Nat ional Payment Corporation of India (NPCI) has also enabled real-t ime t ransfer of funds t hrough t he medium of t he mobile phone bet ween account s in different banks. The volume and value of mobile banking t ransact ions are also showing an upt rend, said t he RBI. (BL dt .23.12.2011 p6) RBI selects Thinksoft for CBS: Financial soft ware t est ing company Thinksoft Global Services has been select ed by t he RBI t o t est t he cent ral banks cent ralised CBS. As part of t he `. 5-crore deal, Thinksoft will be responsible for t he aut omat ion and int egrat ion of t he banking operat ions in all regional offices of t he Bank. This deal will also cover depart ment s such as Deposit Account s Depart ment , Public Account s Depart ment and Pubic Debt Office, RTGS, Cent ral Account ing Scheme, Nat ional Small Savings Fund, Market St abilisat ion Scheme, Open Market Operat ion and Liquidit y Adjust ment Facilit y among ot hers. (BL dt . 23.12.2011 p. 7) Mobile banking grows 300 per cent in 2010-11: Indicat ing t hat mobile banking is fast cat ching up in t he count ry, the Reserve Bank of India has said t hat t he t ot al number of transact ions effect ed t hrough mobile banking in 201011 was 9.60 million (value of `. 780.648 crore) compared t o 2.32 million in 2009-10 (value of `. 191.578 crore), showing an increase of more t han 300 per cent in t erms of volume and value. The RBI has given approvals t o 52 banks for providing t he service. The Int erbank Mobile Payment Service (IMPS) developed and operat ed by t he Nat ional Payment s Corporat ion of India (NPCI) has also enabled real-t ime t ransfer of funds t hrough mobile phones bet ween account s in different banks. (FE dt . 24.12.2011 p. 16)

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FAQs on Micro, Small and Medium Enterprises

Updat ed as of 21-12-2011 Q.1What is the definition of MSME? The Government of India has enact ed t he Micro, Small and Medium Ent erprises Development (MSMED) Act , 2006 in t erms of which t he definit ion of micro, small and medium ent erprises is as under : a. Ent erprises engaged in t he manufact ure or product ion, processing or preservat ion of goods as specified below : i. A micro ent erprise is an ent erprise where invest ment in plant and machinery does not exceed Rs.25 lakh; ii. A small ent erprise is an ent erprise where the invest ment in plant and machinery is more t han Rs.25 lakh but does not exceed Rs.5 crore; and iii. A medium ent erprise is an ent erprise where t he invest ment in plant and machinery is more t han Rs.5 crore but does not exceed Rs.10 crore. iv. In case of t he above ent erprises, invest ment in plant and machinery is t he original cost excluding land and building and t he it ems specified by t he Minist ry of Small Scale Indust ries vide it s not ificat ion No.S.O.1722(E) dat ed Oct ober 5, 2006 (Annex I). b. Ent erprises engaged in providing or rendering of services and whose invest ment in equipment (original cost excluding land and building and furnit ure, fit t ings and other it ems not direct ly relat ed t o the service rendered or as may be notified under t he MSMED Act , 2006 are specified below. i. A micro ent erprise is an ent erprise where t he invest ment in equipment does not exceed Rs.10 lakh; ii. A small ent erprise is an ent erprise where t he invest ment in equipment is more t han Rs.10 lakh but does not exceed Rs.2 crore; and iii. A medium ent erprise is an ent erprise where t he invest ment in equipment is more t han Rs.2 crore but does not exceed Rs.5 crore Q.2What is the status of lending by banks to this sector? Bank's lending t o t he Micro and Small Ent erprises is reckoned for priorit y sect or advances. Lending t o Medium ent erprises is not eligible t o be included for t he purpose of comput at ion of priority sect or lending. Det ailed guidelines on lending t o t he Micro, Small and Medium ent erprises sect or are available in our Mast er Circular no. RPCD.SME& NFS.BC.No.09/ 06.02.31/ 2011-12 dat ed July 1, 2011. The Mast er circulars issued by RBI, t o banks, on various mat t ers are available on our websit e www.rbi.org.in and updat ed in July each year. Q.3What is meant by Priority Sector Lending? Priority sect or lending include only t hose sect ors as part of t he priorit y sect or, t hat impact large sect ions of t he populat ion, t he weaker sect ions and the sect ors which are employment -int ensive such as agricult ure, and t iny and small ent erprises. Det ailed guidelines on Priority sect or lending are available in our Mast er Circular on Priorit y sect or lending no. RPCD.CO.Plan.BC.10/ 04.09.01/ 2011-12 dat ed July 1, 2011. The Mast er

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Canara Bank Samachar Lehar January 2012 circulars issued by RBI, t o banks, on various mat t ers are available on our websit e www.rbi.org.in and updat ed in July each year. Q.4What is the status of loans granted to Khadi and Village Industries Sector (KVI)? All advances grant ed t o unit s in t he KVI sector, irrespect ive of t heir size of operat ions, locat ion and amount of original invest ment in plant and machinery will be treat ed as loans t o t he micro ent erprises segment wit hin t he MSE Sect or and covered under priority sect or advances. Q.5Are there any targets prescribed for lending by banks to MSMEs? As per ext ant policy, cert ain t arget s have been prescribed for banks for lending t o t he Micro and Small ent erprise (MSE) sect or. The t arget s for domest ic banks and foreign banks are slight ly different keeping in mind t he limit ed presence of t he foreign banks. The domest ic commercial banks are expect ed t o enlarge credit t o priority sect or and ensure t hat priorit y sect or advances (which include t he micro and small ent erprises sect or) const it ut e 40 per cent of Adjust ed Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. A Prime Minist er's Task Force was set up in 2009 by Government of India (Chairman : Shri T. K. A. Nair, Principal Secret ary) t o look int o the various issues pert aining t o MSMEs. In t erms of t he recommendat ions of t he Task Force banks have been advised t o achieve a 20 per cent year-on-year growt h in credit t o micro and small ent erprises and a 10 per cent annual growt h in the number of micro ent erprise account s (Refer circular RPCD.SME& NFS.No.BC.90/ 06.02.31/ 2009-10 dat ed June 29, 2010). In order t o ensure t hat sufficient credit is available t o micro ent erprises wit hin t he MSE sect or, banks should ensure t hat : a)40 per cent of t he t ot al advances t o MSE sect or should go t o micro (manufact uring) ent erprises having invest ment in plant and machinery up t o Rs.5 lakh and micro (service) ent erprises having invest ment in equipment up t o Rs.2 lakh ; b)20 per cent of t he t ot al advances t o MSE sect or should go t o micro (manufact uring) ent erprises wit h invest ment in plant and machinery above Rs.5 lakh and up t o Rs.25 lakh, and micro (service) ent erprises wit h invest ment in equipment above Rs.2 lakh and up t o Rs.10 lakh. Thus, 60 per cent of MSE advances should go t o t he micro ent erprises. c)While banks are advised t o achieve t he 60% target as above, t he allocat ion of 60% of the MSE advances t o t he micro ent erprises is t o be achieved in st ages viz. 50% in t he year 2010-11, 55% in t he year 2011-12 and 60% in the year 2012-13 (Refer circular RPCD.SME& NFS.No.BC.90/ 06.02.31/ 2009-10 dat ed June 29, 2010). For Foreign banks t he t arget s are t he same except t hat Foreign banks are expect ed t o enlarge credit t o priority sect or and ensure t hat priority sect or advances (which includes t he MSE sect or) const it ut e 32 per cent of Adjust ed Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. Within t he overall t arget of 32 per cent t o be achieved by foreign banks, t he advances t o MSE sect or should Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 not be less t han 10 per cent of t he adjust ed net bank credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. For det ails, the Mast er Circular RPCD.SME& NFS.BC.No.09/ 06.02.31/ 2011-12 dat ed July 1, 2011 on 'Lending t o Micro, Small and Medium Ent erprises (MSME) Sect or, may please be seen. Q.6Are there specialized bank branches for lending to the MSMEs? Public sect or banks have been advised t o open at least one specialized branch in each dist rict. The banks have been permitt ed to cat egorize t heir MSMEgeneral banking branches having 60% or more of t heir advances t o MSME sect or, as specialized MSME branches for providing bett er service t o t his sect or as a whole. As per t he policy package announced by the Government of India for st epping up credit t o MSME sect or, t he public sect or banks will ensure specialized MSME branches in ident ified clust ers / cent res wit h preponderance of small ent erprises t o enable t he ent repreneurs t o have easy access t o t he bank credit and t o equip bank personnel t o develop requisit e expertise. Though their core compet ence will be ut ilized for ext ending finance and ot her services t o MSME sect or, t hey will have operational flexibilit y t o ext end finance / render ot her services t o ot her sect ors / borrowers. Q.7How many such specialized branches for lending to MSMEs are there? As on March 2011 t here are 1220 specialized MSME branches. Q.8How do banks assess the working capital requirements of borrowers? The banks have been advised t o put in place loan policies governing ext ension of credit facilit ies for t he MSE sect or duly approved by t heir Board of Direct ors (Refer circular RPCD.SME& NFS.BC.No.102/ 06.04.01/ 2008-09 dat ed May 4, 2009). Banks have, however, been advised t o sanction limit s aft er proper appraisal of t he genuine working capit al requirement s of t he borrowers keeping in mind t heir business cycle and short t erm credit requirement . As per Nayak Commit t ee Report , working capit al limit s t o SSI unit s is comput ed on t he basis of minimum 20% of t heir est imat ed t urnover up t o credit limit of Rs.5crore. For more det ails paragraph 4.12.2 of t he Mast er Circular on lending t o the MSME sect or dat ed July 1, 2010 may please be seen. Q.9Is there any provision for grant of composite loans by banks? A composit e loan limit of Rs.1crore can be sanct ioned by banks t o enable t he MSME ent repreneurs t o avail of t heir working capit al and t erm loan requirement t hrough Single Window in t erms of our Mast er Circular on lending t o t he MSME sect or dat ed July 1, 2010. All scheduled commercial banks were advised by our circular RPCD.SME& NFS.BC.No.102/ 06.04.01/ 2008-09 on May 4, 2009 t hat the banks which have sanct ioned t erm loan singly or joint ly must also sanct ion working capit al (WC) limit singly (or joint ly, in t he rat io of t erm loan) t o avoid delay in commencement of commercial product ion t hereby ensuring t hat there are no cases where t erm loan has been sanct ioned and working capit al facilities are yet t o be sanct ioned. These inst ruct ions have been reit erat ed t o scheduled commercial banks on March 11, 2010. Q.10What is Cluster financing? Clust er based approach t o lending is int ended t o provide a full-service approach t o cat er t o the diverse needs of the MSE sect or which may be achieved t hrough ext ending banking Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 services t o recognized MSE clust ers. A clust er based approach may be more beneficial (a) in dealing wit h well-defined and recognized groups (b) availabilit y of appropriat e informat ion for risk assessment (c) monit oring by the lending inst it ut ions and (d) reduct ion in cost s. The banks have, t herefore, been advised t o t reat it as a t hrust area and increasingly adopt t he same for SME financing. Unit ed Nat ions Indust rial Development Organisat ion (UNIDO) has ident ified 388 clust ers spread over 21 st at es in various part s of t he count ry. The Minist ry of Micro, Small and Medium Enterprises has also approved a list of clust ers under t he Scheme of Fund for Regenerat ion of Tradit ional Industries (SFURTI) and Micro and Small Ent erprises Clust er Development Programme (MSE-CDP) locat ed in 121 Minorit y Concent rat ion Dist rict s. Accordingly, banks have been advised t o t ake appropriat e measures t o improve t he credit flow t o t he ident ified clust ers of micro and small ent repreneurs from t he Minorit ies Communities residing in the minorit y concent rat ed dist rict s of t he country. Banks have also been advised t hat t hey should open more MSE focussed branch offices at different MSE clust ers which can also act as counselling cent res for MSEs. Each lead bank of t he dist rict may adopt at least one clust er (Refer circular RPCD.SME& NFS.No.BC.90/ 06.02.31/ 2009-10 dat ed June 29, 2010) Q.11Is there a time frame for disposal of loan applications made by the micro small enterprises? Banks have been advised t o dispose of all loan applicat ions for MSE borrowers up t o a credit limit of Rs.25,000/ -, wit hin 2 weeks and t hose up t o Rs.5 lakh within 4 weeks provided t he loan applicat ions are complet e in all respect s and accompanied by a 'check list ' (Refer Mast er Circular RPCD.SME& NFS.BC.No.09/ 06.02.31/ 2011-12 dat ed July 1, 2011 on 'Lending t o Micro, Small and Medium Ent erprises (MSME) Sect or). Q.12What are the RBI guidelines on interest rates for loans disbursed by the commercial banks? As part of the financial sect or liberalisat ion, all credit relat ed matt ers of banks including charging of int erest have been deregulat ed by RBI and are governed by t he banks' own lending policies. Wit h a view t o enhancing t ransparency in lending rat es of banks and enabling bet t er assessment of t ransmission of monet ary policy, all scheduled commercial banks had been advised in t erms of our circular DBOD.No.Dir.BC.88/ 13.03.00/ 2009-10 on April 9, 2010 t o introduce t he Base Rat e syst em w.e.f. July 1, 2010. Accordingly, t he Base Rat e Syst em has replaced t he BPLR syst em with effect from July 1, 2010. All cat egories of loans should hencefort h be priced only wit h reference t o t he Base Rat e. It is expect ed t hat t he above deregulation of lending rat e will increase t he credit flow t o small borrowers at reasonable rat e. Q.13Can the MSE borrowers get collateral free loans from banks? In t erms of guidelines cont ained in circular RPCD.SME& NFS.BC.No.16/ 06.02.31(P)/ 200910 dat ed August 24, 2009 issued by Reserve Bank of India, banks have been mandat ed t o grant collat eral free loans upt o Rs.5 lakh t o all MSE borrowers. Banks have been furt her advised vide our circular RPCD/ PLNFS/ BC.No.39/ 06.02.80/ 2003-04 dat ed November 3, Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 2003 t hat they may, on t he basis of good t rack record and financial posit ion of t he SSI (Now MSE) unit s, increase t he limit of dispensat ion of collat eral requirement for loans from t he exist ing level of Rs.15 lakh t o Rs.25 lakh wit h t he approval of t he appropriat e aut horit y. In t erms of our circular RPCD.SME& NFS.BC.No.79/ 06.02.31/ 2009-10 dat ed May 6, 2010, t he limit of collat eral free loans t o MSE borrowers has been increased from Rs.5 lakh t o Rs.10 lakh based on t he recommendat ions of t he Working Group t o review t he Credit Guarant ee Scheme of t he Credit Guarant ee Fund Trust for Micro and Small Ent erprises (Chairman : Shri V. K. Sharma, Execut ive Director, Reserve Bank of India) Q.14What is the Credit Guarantee Fund Trust Scheme for MSEs? The Ministry of MSME, Government of India and SIDBI set up t he Credit Guarant ee Fund Trust for Micro and Small Ent erprises ( CGTMSE) wit h a view t o facilit at e flow of credit t o t he MSE sect or wit hout t he need for collaterals / t hird part y guarant ees. The main object ive of t he scheme is t hat t he lender should give import ance t o project viability and secure t he credit facilit y purely on t he primary securit y of t he asset s financed. The Credit Guarant ee scheme (CGS) seeks t o reassure t he lender t hat , in t he event of a MSE unit , which availed collat eral- free credit facilities, fails t o discharge it s liabilit ies t o the lender, t he Guarant ee Trust would make good t he loss incurred by t he lender up t o 85 per cent of t he out st anding amount in default . The CGTMSE would provide cover for credit facilit y up t o Rs.100 lakh which have been ext ended by lending inst it utions wit hout any collat eral securit y and / or t hird part y guarant ees. A guarant ee and annual service fee is charged by the CGTMSE t o avail of t he guarant ee cover. Present ly t he guarant ee fee and annual service charges are t o be borne by t he borrower. Q.15Why is credit rating of the micro small borrowers necessary? Wit h a view t o facilit at ing credit flow t o the MSME sect or and enhancing t he comfort level of t he lending inst itut ions t he MSME units credit rat ing done by reput ed credit rating agencies should be encouraged. Banks are advised t o consider t hese rat ings as per availability and wherever appropriat e st ruct ure t heir rat es of int erest depending on t he rat ings assigned t o the borrowing SME unit s. Q.16Is credit rating mandatory for the MSE borrowers? Credit rat ing is not mandat ory but it is in t he int erest of t he MSE borrowers t o get t heir credit rat ing done as it would help in credit pricing of t he loans t aken by t hem from banks. Q.17What are the guidelines for delayed payment of dues to the MSE borrowers? Wit h t he enact ment of the Micro, Small and Medium Ent erprises Development (MSMED), Act 2006, for t he goods and services supplied by t he MSEME unit s payment s have t o be made by t he buyers as under : i)The buyer t o make payment on or before the dat e agreed on bet ween him and t he supplier in writ ing or, in case of no agreement before t he appoint ed day. The agreement bet ween seller and buyer shall not exceed more t han 45 days. Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 ii)The buyer fails t o make payment of t he amount t o t he supplier, he shall be liable t o pay compound int erest wit h mont hly rest s t o the supplier on t he amount from t he appoint ed day or, on t he dat e agreed on, at t hree t imes of t he Bank Rat e not ified by Reserve Bank. iii)For any goods supplied or services rendered by t he supplier, t he buyer shall be liable t o pay t he int erest as advised at (ii) above. iv)In case of disput e wit h regard t o any amount due, a reference shall be made t o t he Micro and Small Ent erprises Facilit at ion Council, const it ut ed by t he respect ive St at e Government . To t ake care of t he payment obligat ions of large corporat e borrowers t o MSEs, banks have been advised t hat while sanct ioning / renewing credit limit s t o t heir large corporat e borrowers (i.e. borrowers enjoying working capit al limit s of Rs. 10 crore and above from t he banking syst em), t o fix separat e sub-limits, wit hin t he overall limit s, specifically for meet ing payment obligat ions in respect of purchases from MSEs eit her on cash basis or on bill basis. Banks were also advised t o closely monit or t he operat ions in t he sub-limit s, part icularly wit h reference t o t heir corporat e borrowers' dues t o MSE unit s by ascert aining periodically from t heir corporat e borrowers, t he ext ent of t heir dues t o MSE suppliers and ensuring t hat t he corporat es pay off such dues before t he 'appoint ed day' / agreed dat e by using t he balance available in t he sub-limit so creat ed. In t his regard t he relevant circular is circular IECD/ 5/ 08.12.01/ 2000-01 dat ed Oct ober 16, 2000 (reit erat ed on May 30, 2003, vide circular No. IECD.No.20/ 08.12.01/ 2002-03) available on our websit e. Q.18What is debt restructuring of advances? A viable / pot ent ially viable unit may apply for a debt rest ructuring if it shows early st age of st ickiness. In such cases t he banks may consider t o reschedule t he debt for repayment , consider addit ional funds et c. A debt restructuring mechanism for unit s in MSME sect or has been formulat ed and advised t o all commercial banks .The det ailed guidelines have been issued t o ensure rest ruct uring of debt of all eligible small and medium ent erprises. Prudent ial guidelines on rest ructuring of advances have also been issued which harmonises t he prudent ial norms over all categories of debt rest ruct uring mechanisms (ot her than t hose rest ruct ured on account of nat ural calamit ies). The relevant circulars in t his regard are circular DBOD.BP.BC.No.34/ 21.04.132/ 2005-06 dat ed Sept ember 8, 2005 and circular DBOD.No.BP.BC.37/ 21.04.132/ 2008-09 dat ed August 27, 2008 which are available on our websit e www.rbi.org.in. Q.19On restructuring of advances does the asset classification by the bank change? The principles and prudent ial norms for asset classificat ion on rest ruct uring of advances are prescribed in Part B of t he Mast er Circular DBOD.No.BP.BC.12/ 21.04.048/ 2011-12 dat ed July 1, 2011 on 'Prudential Norms on Income Recognit ion, Asset Classificat ion and Provisioning pert aining t o Advances'.

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Canara Bank Samachar Lehar January 2012 The special regulat ory t reat ment for asset classificat ion, under which t he asset classificat ion would not change upon rest ruct uring, will be available t o t he borrowers engaged in import ant business act ivit ies, subject t o t he compliance wit h cert ain condit ions as specified in para 14 of t he above circular. Q.20What is the definition of a sick unit? As per t he ext ant guidelines, a unit is considered as sick when any of t he borrowal account of t he unit remains subst andard for more t han 6 mont hs or t here is erosion in t he net wort h due t o accumulat ed cash losses t o t he ext ent of 50% of it s net wort h during t he previous account ing year and t he unit has been in commercial product ion for at least t wo years. The crit eria will enable banks t o det ect sickness at an early st age and facilit at e correct ive action for revival of the unit. Q.21Is there a time frame within which the banks are required to implement the rehabilitation package? Viable / pot ent ially viable MSE unit s / ent erprises, which t urn sick in spit e of debt rest ruct uring would need t o be rehabilit at ed and put under nursing. It will be for t he banks / financial inst it utions t o decide whet her a sick SSI unit is pot ent ially viable or not . Viability of a unit ident ified as sick, should be decided quickly and made known t o t he unit and ot hers concerned at t he earliest . The rehabilitat ion package should be fully implement ed wit hin six mont hs from t he dat e t he unit is declared as 'pot ent ially viable' / 'viable'. The rehabilit at ion package should be fully implement ed by banks wit hin six mont hs from t he dat e t he unit is declared as pot entially viable / viable. During t his six mont hs period of ident ifying and implementing rehabilit at ion package banks / FIs are required t o do "holding operation" which will allow the sick unit t o draw funds from t he cash credit account at least t o t he ext ent of deposit of sale proceeds. The relevant circular on rehabilit at ion of sick unit s is RPCD.NO.PLNFS.BC.57/ 06.04.01/ 2001-2002 dat ed January 16, 2002 available on our websit e. Q.22What are the RBI guidelines on One Time Settlement scheme(OTS) for MSEs for settlement of their NPAs? Scheduled commercial banks have been advised in t erms of our circular RPCD.SME& NFS.BC.No.102/ 06.04.01/ 2008-09 dat ed May 4, 2009 t o put in place a non discret ionary One t ime Set tlement scheme duly approved by their Boards. The banks have also been advised t o give adequat e publicit y t o t heir OTS policies. (Refer circular RPCD.SME& NFS.BC.No.102/ 06.04.01/ 2008-09 dat ed May 4, 2009) Q.23What is the Banking Codes and Standard Board of India (BCSBI) and its role for MSEs? The Banking Codes and St andard Board of India (BCSBI) const it ut ed a Working Group comprising members from select banks, Indian Banks Associat ion, Rural Planning & Credit Depart ment of Reserve Bank of India t o formulat e a Banking Code for SME Cust omers. On t he basis of discussions wit h Industry Associat ions, banks, SIDBI and Government agencies, The Banking Codes and St andard Board of India (BCSBI) has formulat ed a Code of Bank's Commit ment t o Micro and Small Ent erprises. This is a volunt ary Code, which set s minimum st andards of banking pract ices for banks t o follow when t hey are dealing wit h Micro and Small Ent erprises (MSEs) as defined in t he Micro Small and Medium Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 Ent erprises Development (MSMED) Act , 2006. The Code may be accessed on t he websit e of BCSBI www.bcsbi.org.in

Changing Contours of Monetary Policy in India

Mr. Deepak Mohanty I t hank t he Royal Monet ary Aut hority of Bhut an and Governor H. E. Daw Tenzin for invit ing me t o address such a dist inguished gat hering. I t hought of speaking on monet ary policy in India for four reasons. First , t he currencies of Bhut an and India, i.e., Ngultrum and Rupee are closely linked. Hence, monet ary policy development s in India have implications for monet ary policy in Bhut an. Second, in Oct ober 2011, the Reserve Bank deregulat ed savings deposit int erest rat e of banks dismant ling t he last vest ige of int erest rat e regulat ion. Earlier we complet ed t he process of deregulat ion of lending rat es of banks wit h t he introduction of the base rat e syst em in July 2010. Third, in May 2011 we also modified our monet ary operat ing procedure wit h a move t o a single policy repo rat e t o unambiguously signal t he st ance of monet ary policy. Fourt h, we are also addressing t he challenge of near double-digit inflat ion for almost t wo years now. These development s obviously are of some int erest in Bhut an given t he close int erlinkages of our currencies. I will begin my present at ion by briefly describing t he object ives and framework of monet ary policy before coming t o various aspect s of implement at ion and formulat ion process in India. I will t hen briefly t ouch upon on our recent growt h-inflation performance. I will conclude by drawing att ent ion t o some of t he lessons t hat can be drawn from the recent global crisis for t he process of monet ary policy formulat ion. Objectives of Monetary Policy Monet ary policy is an arm of public policy. It , thus, has set object ives and priorit ies, which are derived from t he respect ive mandat es of cent ral banks. It ranges from a single object ive of price st abilit y, considered t o be t he dominant object ive of monet ary policy, t o mult iple object ives t hat also include growth and financial st abilit y. In t he Indian cont ext , the preamble t o the Reserve Bank of India Act , 1934 delineat es t he basic funct ions of t he Reserve Bank as, "t o regulat e t he issue of Bank not es and keeping of reserves wit h a view t o securing monet ary st ability in India and generally t o operat e t he currency and credit syst em of t he count ry t o it s advant age." The object ives of monet ary policy evolved from t his broad guideline as maint aining of price st abilit y and ensuring adequat e flow of credit t o t he product ive sect ors of t he economy. Monet ary st ability cannot be ensured wit hout safeguarding the purchasing power of t he currency. Similarly, t he credit syst em helps fost er growt h which could reinforce monet ary st abilit y. Hence, st abilisat ion of inflat ion at a low level and st abilisat ion of out put around it s pot ent ial level remain t he quint essent ial object ives of monet ary policy in most count ries. In pract ice, monet ary policy in India endeavoured t o maint ain a judicious balance bet ween economic growt h and price st ability. Price st abilit y does not necessarily mean a const ant price level, but a low and st able inflat ion. This is because bot h high inflat ion and deflat ion impose cost s on t he economy Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 by way of loss of out put and misallocat ion of resources. However, it is difficult t o define t he precise level of low and st able inflat ion. In pract ice, inflation t arget s range from 2 per cent for developed count ries t o 3.5 per cent for developing count ries which have come t o be underst ood as price st abilit y.1 For India, t he Chakravart y Committ ee (1985) had defined an annual inflat ion rat e of 4 per cent as t he t olerable level. In t his cont ext, t he not ion of t hreshold level of inflat ion, which is t he inflexion point in t he growt h-inflation t rade-off, becomes import ant . Beyond t he t hreshold, inflation by it self becomes inimical t o growt h. Recent st udies on India suggest t hat the t hreshold inflat ion could be in t he range of 4-6 per cent .2 However, inflat ion t hreshold need not necessarily be t he t arget of monet ary policy. In fact , the inflat ion object ive or t he t arget level of inflat ion for monet ary policy should be lower t han t he inflat ion t hreshold, considering t he exist ence of significant lags in the transmission of monet ary policy measures and t he cost s of inflat ion. Hist orically, India has been a moderat e inflat ion count ry in t he cont ext of EMEs and ot her developing economies. The long-t erm average inflat ion rat e since 1970-71 till t he end of 2000s had remained in a single digit of about 7.5 per cent. In fact , t he average inflat ion during t he 2000s was even lower at 5.5 per cent . However, near double-digit inflation persist ing since t he beginning of 2010-11 has been posing a challenge for monet ary policy in India. Not wit hst anding t his recent inflat ion upsurge, monet ary policy cont inues t o be conduct ed t o condition and cont ain percept ion of inflat ion in t he range of 4.0-4.5 per cent . This is in line wit h t he medium-t erm object ive of 3.0 per cent inflat ion consist ent wit h India's broader int egrat ion int o t he global economy. Recent global financial crisis has, however, shown t hat low levels of inflat ion and high levels of growt h do not guarant ee financial st abilit y. Accordingly, t here is an increasing emphasis t hat financial st abilit y should also be an explicit object ive of cent ral banks besides price st ability and growt h. In India, however, financial st abilit y was recognised as anot her import ant objective of monet ary policy much before t he crisis. Thus, monet ary policy in India has evolved t o have mult iple objectives of price st abilit y, growt h and financial st ability. These object ives are not inherent ly contradict ory, but rat her t hey are mut ually reinforcing. This is so as price and financial st abilit y are import ant for sust aining a high level of growth, which is t he ult imat e object ive of public policy. Monetary Policy Framework Achieving t he monet ary policy object ives requires art iculat ion of a consist ent monet ary policy framework. This becomes necessary as cent ral banks strive t o achieve t hese object ives only indirect ly t hrough instruments which are under t heir direct cont rol. For inst ance, under t he monet ary t arget ing framework, cent ral banks, through t he inst rument s under t heir direct cont rol such as cash reserve rat io (CRR), t ried t o influence an int ermediat e t arget such as money supply which had a st able relat ionship wit h t he final object ives of price and out put . Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 Monet ary policy framework, however, has been a cont inuously evolving process cont ingent upon t he level of development of financial market s and inst it ut ions as also t he degree of global int egrat ion. In India as in ot her count ries, monet ary policy framework has undergone significant t ransformat ion over t ime. India followed a monet ary t arget ing framework wit h feedback during t he mid-1980s t o 1997-98 under which broad money was used as an int ermediat e t arget for monet ary policy. This framework was, however, rendered increasingly inadequat e by t he mid-1990s due t o several development s t hat t ook place wit h economic and financial sect or reforms. First , on account of measures undert aken during t he 1990s t o develop t he various segment s of t he financial market , t here was discernible deepening of t he financial sect or (Chart 1). This significant ly improved t he effect iveness in t he t ransmission of policy signals t hrough indirect inst rument s such as int erest rat es. Chart 1 Indicators of Financial Sector Depth

Second, wit h t he opening up of Indian economy, increase in liquidity emanat ing from capit al inflows raised t he rat io of net foreign asset s t o reserve money. This rendered t he cont rol of monet ary aggregat es more difficult . Third, t here was also increasing evidence of changes in t he underlying t ransmission mechanism of monet ary policy wit h int erest rat e and t he exchange rat e gaining import ance vis-a-vis quant it y variables. Due t o t hese financial innovat ions in t he economy during t he 1990s, t he st abilit y of t he demand funct ion for money came under quest ion. Recognising t he challenges posed by financial liberalisat ion and t he growing complexit ies of monet ary management , t he Reserve Bank swit ched t o a mult iple indicat or approach in 1998-99. Under the multiple indicat or approach, while broad money cont inued t o remain an informat ion variable, great er emphasis was placed on rat e channels for monet ary policy formulat ion. A host of macroeconomic indicat ors including int erest rat es or rat es of ret urn in different segment s of financial market s, along with ot her indicat ors on currency, credit by banks and financial inst it ut ions, fiscal posit ion, t rade, capit al flows, inflat ion rat e, exchange rat e, refinancing and transact ions in foreign exchange available on high frequency basis are juxt aposed wit h out put dat a for drawing implicat ions for monet ary policy formulat ion. As a result , monet ary policy operation became more broad-based on a diverse set of informat ion and provided flexibilit y in t he conduct of monet ary management .
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Canara Bank Samachar Lehar January 2012 The mult iple indicat or approach it self, however, cont inued t o evolve and was furt her augment ed by forward-looking indicat ors and a panel of parsimonious t ime series models. The forward-looking indicat ors are drawn from t he Reserve Bank's indust rial out look survey, capacit y ut ilisat ion survey, professional forecast ers' survey and inflation expect at ions survey. The assessment from these indicat ors and models feed int o t he project ion of growt h and inflat ion. Simult aneously, t he Reserve Bank also gives t he project ion for broad money (M 3), which serves as an import ant informat ion variable, so as t o make t he resource balance in t he economy consist ent wit h t he credit needs of t he government and t he privat e sect or. Thus, t he current framework of monet ary policy can be t ermed as an augment ed multiple indicat or approach as illust rat ed in Chart 2. Chart 2 Augmented Multiple Indicator Approach

Implementation of Monetary Policy For effect ive implement at ion of monet ary policy, monet ary policy framework needs a support ing operat ing procedure. An operating procedure is defined as day-t o-day management of monet ary condit ions consist ent wit h t he overall st ance of monet ary policy. Generally, it involves : (i) defining an operat ional t arget, generally an int erest rat e; (ii) set t ing a policy rat e which could influence t he operat ional t arget ; (iii) set t ing t he widt h of corridor for short -t erm market int erest rates; (iv) conduct ing liquidity operat ions t o keep t he operat ional t arget int erest rat e st able wit hin t he corridor; and (v) signalling of policy int ent ions. As wit h monet ary policy framework, t he corresponding operat ing procedure has also been an evolving process in India. Applicat ion of CRR on banks' liabilit ies and open market operat ions (OMO) have t raditionally been the inst rument s of monet ary policy. But , wit h t he int roduct ion of liquidity adjust ment facility (LAF) in 2004, overnight management of syst emic liquidit y at desired int erest rat e emerged as t he most act ive inst rument of monet ary policy. The LAF was operat ed t hrough overnight fixed rat e repo (cent ral bank liquidit y inject ion rat e) and reverse repo (cent ral bank liquidit y absorption rat e) t o provide necessary guidance t o market int erest rat e. However, t his procedure had two major drawbacks. First was t he lack of a single policy rat e. Consequent ly, t he operat ing policy rat e alt ernat ed between repo and reverse repo rat es depending upon t he prevailing Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 liquidit y condit ion. Second was t he lack of a firm corridor which oft en led t he implicit t arget rat e (call rat e) breaching t he upper and lower limit s under liquidit y st ress condit ions. Recognising t hese short comings, a new operat ing procedure was put in place in May 2011.

New Operating Procedure The new operat ing procedure ret ained t he essent ial feat ures of t he earlier LAF framework wit h t he following key modificat ions. First , the weight ed average overnight call money rat e was explicit ly recognised as t he operat ing t arget of monet ary policy. Second, t he repo rat e was made t he only one independent ly varying policy rat e. Third, a new Marginal St anding Facility (MSF) was instit ut ed under which scheduled commercial banks (SCBs) could borrow overnight at t heir discretion up t o one per cent of t heir respect ive net demand and t ime liabilit ies (NDTL) at 100 basis point s above t he repo rat e. Fourt h, the revised corridor was defined wit h a fixed widt h of 200 basis point s. The repo rat e was placed in t he middle of t he corridor, wit h t he reverse repo rat e 100 basis point s below it and t he MSF rat e 100 basis point s above it. The current operat ing framework is illust rat ed in Chart 3.

The new operat ing procedure, by removing some of t he major drawbacks in t he earlier LAF framework, was expect ed t o improve t he implement at ion and transmission of monet ary policy. First , explicit announcement of an operat ing t arget makes market participant s clear about t he desired policy impact . Second, a single policy rat e removes t he confusion arising out of policy rat e alt ernat ing between t he repo and the reverse repo rat es. It also improves t he accuracy of signalling monet ary policy st ance. Third, the inst it ut ion of MSF provides a safet y valve against unant icipat ed liquidity shocks. Fourt h, a fixed int erest rat e corridor set by MSF rat e and reverse repo rat e, by reducing uncert aint y and avoiding communicat ion difficult ies associat ed wit h a variable corridor, will help keep t he overnight average call money rat e close t o t he repo rat e.

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Improvement in Monetary Policy Transmission As t he new operat ing procedure was implement ed just six mont hs ago, it may be t oo early t o draw conclusions regarding it s efficacy. However, t he experience so far suggest s t hat overnight int erest rat e has been more st able since it s implement at ion (Chart 4). Chart 4

Canara Bank Samachar Lehar January 2012 Stabililty of Call Rate improves under new procedure

The new operat ing framework presupposes t he dominance of t he int erest rat e channel of monet ary t ransmission, which is found t o be more effect ive under deficit liquidit y condit ion. Since it s implement ation, we have been able t o maint ain t he syst emic liquidity in deficit mode. Consequent ly, t he t ransmission of monet ary policy in t erms of movement in call money market int erest rat e has shown improvement (Chart 5). Chart 5 Monetary Transmission Stronger under Liquidity Deficit

It has also been observed t hat money market int erest rat es are bet t er aligned aft er t he implement at ion of new operat ing framework (Chart 6).

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Canara Bank Samachar Lehar January 2012 Further, bett er transmission t o debt market segment is also evident from closer alignment bet ween rat es on debt market instrument s and call rat e (Chart 7). Chart 7 Monetary Transmission to Debt Market improves-as Call Rates rise from a low level

The t ransmission t o t he credit market is much more complex and occurs t hrough t he cost channel. Banks respond t o policy changes by alt ering deposit rat es depending on liquidit y condit ions and credit demand. As t he cost of deposit s rises alongside money market rat es, lending rat es respond t o policy rat e changes wit h a lag (Chart 8). Chart 8 Transmission to Bank Deposit and Lending Rates

Policy Formulation Processes Given t he monet ary policy framework and t he corresponding operat ing procedure, t here is also a process in policy formulat ion. The process of monet ary policy formulat ion in India had tradit ionally been largely int ernal wit h only t he end-product of act ions being made public. The process has, over t ime, become more consult at ive and part icipat ive wit h an ext ernal orient at ion. The process leading t o monet ary policy act ions ent ails a wide range of input s involving t he int ernal st aff, market participant s, academics, financial market expert s and t he Reserve Bank Board (Chart 9).

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Canara Bank Samachar Lehar January 2012 Chart 9 Processes of Monetary Policy Formulation

Wit hin t he Reserve Bank, t he work process has been re-orient ed t o focus on t echnical analysis, co-ordinat ion, horizont al management and more market orient at ion. The t hree concerned research depart ment s - Monet ary Policy Depart ment (MPD), Depart ment of Economic and Policy Research (DEPR) and Depart ment of St at ist ics and Informat ion Management (DSIM) - provide independent t echnical input s and assessment in the monet ary policy st rat egy meet ing chaired by t he Governor and at t ended by t he t op management . Given t he inherent complexity of macroeconomic management , diversit y of viewpoint s helps avoid the pit falls of groupthink. Since banks are the major count erpart of the Reserve Bank, pre-policy consult at ions t hrough resource management discussions are held wit h 20 large commercial banks which t oget her account for more t han t hree-fourt hs of banking business. In addition, in t he financial sect or, consult at ions are held with t he Indian Banks Associat ion (IBA), urban and rural cooperat ive bank / credit associat ions and associat ion of non-banking financial companies. In t he real sect or, consult at ions are held wit h nat ional level t rade associat ions. Consult ations are also held wit h select economist s and senior economic journalist s t o ascert ain t heir reading of the economic sit uat ion and policy recommendat ion. Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 In keeping wit h int ernat ional best pract ice, t he Reserve Bank has const it ut ed a t echnical advisory committ ee (TAC) on monet ary policy wit h out side expert s, t hough it s role remains advisory. In order t o enhance t ransparency, t he deliberations of t he TAC and policy recommendat ions are released t o t he public wit hin four weeks of such meet ings. However, t he Governor of t he Reserve Bank is t he ult imat e aut horit y t o t ake decisions on monet ary policy matt ers. There are several ot her st anding and ad hoc commit t ees or groups which play a crit ical role with regard t o policy advice. An int erdepart ment al Financial Market s Commit t ee (FMC) focuses on day-t o-day market operat ions and t act ics on an ongoing basis. The whole range of consult at ions and t echnical analysis enable t he Governor t o make t he best possible decision under t he circumst ances besides enhancing t he t ransparency of t he policymaking process. In addit ion, t he Governor and t he t op management of t he bank set out t he rat ionale of policy decisions, t hrough quart erly policy st at ement s, mid-quart er reviews, press int erviews and speeches. While monet ary policy formulat ion is a t echnical process, it has evolved t o be a highly consult at ive and part icipat ive process. This not only enhances t he t ransparency of monet ary policy but policy decisions become informed wit h t he analysis and viewpoint s of t he concerned st akeholders. As many out comes in modern market -based economies are guided by expect at ions, a consult ative process also helps in managing expect at ions. Growth-Inflation Performance As I ment ioned, monet ary policy framework in India shift ed from a monet ary t argeting regime t o a mult iple indicat or regime. Such a t ransit ion was condit ioned by the development s of financial market s, increasing int egrat ion of t he Indian economy wit h t he global economy and changing t ransmission of monet ary policy. A pert inent quest ion is how did t his t ransition impact economic out comes, in part icular t he growt h-inflation performance? Table 1 Select Macroeconomic Indicators
Indicator 1 GDP Growth (%) 2 Inflation (%) WPI 3 8.1 (3.0) 5.3 (1.6) 9.6 9.6# CPI 4 9.1 (2.1) 6.3 (3.5) 10.4 9.0* Call Rate (%) 5 11.7 (4.0) 6.4 (1.8) 5.8 7.6#

Monet ary Target ing Period 5.5 1985-86 to1997-98 (2.2) Mult iple Indicat ors Period 1998-99 to 2009-10 2010-11 2011-12 (So far) 7.0 (1.9) 8.5 7.3*

Note : Figures in bracket s represent st andard deviation implying volat ilit y in respect ive indicat ors CPI : Consumer Price Index-Indust rial Workers * Apr-Sept ember 2011,

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# : April-Oct ober 2011

Canara Bank Samachar Lehar January 2012 From Table 1, two broad t rends can be gleaned. First , real GDP growt h, on an average, improved over t he period and became less volat ile. Second, inflation performance had improved significant ly in t he last decade coinciding wit h t he adopt ion of mult iple indicat or approach. However, inflat ion performance det eriorat ed in t he years 2010-11 and 2011-12 so far. In t his cont ext , it is import ant t o recognise t hat t he recent inflat ion surge has followed t he global financial crisis. Managing inflat ion in an economy which is recovering from a downt urn is much more complex because of associat ed uncert aint ies t han managing inflat ion under normal condit ions. In t he init ial phase of t he crisis in 2007, it appeared t hat emerging market economies (EMEs) were bet t er posit ioned t o weather the st orm creat ed by t he global financial melt down on the back of t heir subst ant ial foreign exchange reserve cushion, improved policy frameworks and generally robust banking sect or and corporat e balance sheet s. However, any hope about EMEs escaping unscat hed could not be sust ained aft er t he failure of Lehman Brot hers in Sept ember 2008 which triggered global deleveraging and height ened risk aversion. Event ually, EMEs were also adversely affect ed by t he spillover effect s : first t hrough cont ract ion in world t rade and t hen from reversal in capit al flows. India, t hough init ially somewhat insulat ed from t he global development s, was event ually impact ed significant ly by the global shocks t hrough all t he channels - t rade, finance and expect at ions channels. In response, t he Reserve Bank swift ly int roduced a comprehensive range of measures t o limit t he impact of t he adverse global development s on t he domest ic financial syst em and t he economy. The Reserve Bank, like most cent ral banks, t ook a number of convent ional and unconvent ional measures t o augment domest ic and foreign currency liquidity, and sharply reduced the policy rat es. In a span of seven mont hs bet ween Oct ober 2008 and April 2009, t here was unprecedent ed policy act ivism. For example : (i) t he repo rat e was reduced by 425 basis point s t o 4.75 per cent , (ii) t he reverse repo rat e was reduced by 275 basis point s t o 3.25 per cent , (iii) t he cash reserve rat io (CRR) of banks was reduced by a cumulat ive 400 basis point s of t heir net demand and t ime liabilities (NDTL) t o 5.0 per cent , and (iv) t he t ot al amount of primary liquidity pot ent ially made available t o t he financial syst em was over 5.6 t rillion or over 10 per cent of GDP. The Government also came up wit h various fiscal st imulus measures. As t here was increasing signs of recovery in growt h and build up of inflat ionary pressures emanat ing from drought and spikes in global commodit y prices, exit from the excessively accommodat ive monet ary policy st ance began in Oct ober 2009 in ant icipat ion of the likely pat h of t he inflat ion traject ory as also on considerat ion of it s source and composit ion. The init ial rounds of monet ary policy response were in t he nat ure of normalisat ion from an excessively st imulat ive st ance in a non-disrupt ive manner. The policy response was calibrat ed t o t he domest ic growt h-inflat ion dynamics. As growt h t ook hold and inflat ion became more generalised, monet ary policy response was st rengt hened. Init ially, monet ary t ransmission was weak as syst emic liquidit y was in surplus. But once liquidit y t urned int o deficit in July 2010, monet ary t ransmission improved.

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Canara Bank Samachar Lehar January 2012 Since Oct ober 2009, t he CRR has been raised by 100 basis point s. The policy repo rat e has been raised by a cumulat ive 375 basis point s. As t he liquidit y in t he syst em t ransit ed from surplus t o deficit , t he effect ive t ight ening has been of t he order of 525 basis point s. Thus, t he cumulat ive monet ary policy act ion would have t he desired impact on inflation. It is expect ed t hat inflat ion would moderat e t owards t he lat er part of 2011-12 and come down t o around 7 per cent by t he end of t he year. The current monet ary st ance remains ant iinflationary. Lessons from the Global Financial Crisis As I ment ioned earlier, monet ary policy evolution is influenced not only by t he changing paradigm in monet ary economics but also by t he development s in t he financial market and macroeconomic out comes. In t he event of adverse development s, adequacy of ext ant economic policies is put t o t est as was during t he recent global financial crisis. Crises are not desirable but t hey seem unavoidable. They do, however, provide us t he opport unit y t o assess various t enet s of ext ant policy framework. Against t his backdrop, let me highlight a few import ant monet ary policy lessons t hat emerged from t he recent crisis. First , t he recent crisis has demonst rat ed t hat a monet ary policy solely aimed at finet uning of short -t erm object ives can pose risks. Before t he crisis, monet ary policy focused more on short -t erm demand management while inflation was firmly under control, part icularly in t he advanced economies. It was felt t hat fine-t uning of monet ary policy on t he basis of indicat ors, such as out put gaps and measures of core inflat ion, led cent ral banks t owards excessive 'short -t ermism'. This in t urn cont ribut ed t o build up of risks. Thus, policies focused on short -t erm object ives may not deliver desired economic out comes in medium t o long t erm. Second, t he experience of recent crisis has changed t he percept ion as t o how cent ral banks should go about achieving t heir macroeconomic st abilisat ion object ives. It has become clear t hat mandat e of monet ary policy should encompass macro-financial st ability and not just price st abilit y. This has drawn att ention t o the impract icability of Tinbergen's rule of assigning one inst rument for one object ive. In pract ice, int erest rat e changes affect financial st abilit y. Similarly, macroprudential t ools impact credit growt h and hence monet ary t ransmission. Recognit ion of int eract ion bet ween int erest rat e and macroprudent ial t ools becomes crit ical for t he appropriat e design of monet ary policy. This underscores t he import ance of close monit oring and analysis of financial syst em development s so t hat possible risks can be bet t er int egrat ed int o t he formulat ion and implement at ion of monet ary policy. Third, inadequacy of monet ary policy inst rument s in central banks' operat ional frameworks was also evident during t he crisis. As was seen during init ial phase of t he crisis, monet ary policy framed and implement ed via inst rument of policy int erest rat e remained ineffect ive. Consequent ly, cent ral banks had t o resort t o a number ot her unconvent ional quant it y-based measures t o ease financial condit ions. Thus, t here is a need t o broaden the t oolkit of monet ary inst rument s. Fourth, t hough financial frictions play an import ant role in business cycles, t hey were not explicit part of t he models used for policy analysis by cent ral banks (Mishkin, 2011).3 In Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 most crises, including t he recent one, it has been seen t hat shocks t o financial syst em accent uat e information asymmet ry and affect policy t ransmission. Therefore, not only must financial frict ions be properly underst ood, but t hey should also be built int o macroeconomet ric models t hat cent ral banks use for forecast ing and policy formulat ion. Fift h, aft er t he crisis, it has been increasingly felt t hat cent ral banks could bett er discharge lender of last resort (LOLR) funct ion if t hey are also vest ed wit h micro-prudent ial regulat ion and supervision of banks. It could reinforce macroprudent ial act ion by elicit ing regulat ory and supervisory inst rument s t o dampen pro-cyclicalit y. Sixt h, t he operat ing procedures of monet ary policy in fut ure would have t o t ake int o account t he implicat ions of build-up of sovereign debt during t he crisis. In t his cont ext , Cecchet t i (2011) caut ions t hat central bank operat ing procedures in t he fut ure are likely t o be more complicat ed wit h more t ools and more opt ions.4 Monet ary and fiscal coordinat ion, t herefore, assumes furt her import ance in t he implement at ion of monet ary policy. Conclusion Major crises do influence monet ary policy formulat ion as t hey quest ion t he adequacy of t he ext ant pract ices and belief. In t his regard, t he issues t hat I have ment ioned are already being widely debat ed, t hough a consensus eludes. But one t hing is clear : cent ral banks will have t o increasingly grapple wit h t he challenge of a broader set of object ives wit hout dilut ing t he object ive of price st ability. Monet ary policy formulat ion is an ever evolving process bot h in response t o and as a consequence of changes in t he financial market s and t he real economy. This is a phenomenon we have observed in India in our monet ary policy formulat ion over t he years. In t he process, monet ary policy in India has become increasingly transparent wit h great er involvement of all t he st akeholders for bet t er policy out come. ----------------------------

Financial Inclusion in NER and Other

Dr. Duvvuri Subbarao RBI has int roduced financial inclusion programme t o cover more and more people under t he banking syst em. Though most of the banks have been carrying out t his programme, t he progress is st ill slow. Are you happy wit h t he progress of t he financial inclusion programme in t he region and what is your best possible advice t o t he banks? Please allow me t o give you t he cont ext before answering your specific quest ions. For t he last several years, t he Reserve Bank has been aggressively pursuing financial inclusion on t he belief and underst anding that financial inclusion is a necessary precondit ion for inclusive growt h. Development experience over the last sixt y years from around t he world clearly evidences t hat what the poor want is not doles, but opportunity t o improve t heir incomes and t hereby t heir qualit y of life. Financial inclusion is a necessary condit ion for providing such an opport unit y t o t he poor not only t o raise t heir incomes but

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Canara Bank Samachar Lehar January 2012 also t o insulat e t heir families against income shocks and meet emergencies such as loss of job, illness or deat h in t he family. Bot h t he Government and t he Reserve Bank have t aken several init iat ives t o furt her financial inclusion. We have liberalized branch licencing - domest ic commercial banks are now free t o open branches anywhere t hey like in t owns and villages of upt o 100,000 populat ion. Banks are also required t o ensure t hat at least a quart er of t he branches t hey open are in villages wit h a maximum populat ion of 10,000. To provide an incent ive t o banks, t he Reserve Bank has also advised t hem t hat t heir performance in financial penet rat ion will be a crit erion in giving t hem aut horizat ion for branches in met ros and ot her large urban areas. There is a road map for providing banking access t o all villages in t he count ry with populat ion of over 2000 by March 2012. Across t he count ry, about 74,000 villages have been ident ified as falling wit hin t his cat egory. Banking access will be provided eit her by opening a 'brick and mort ar' branch or t hrough t he business correspondent model alt hough we are encouraging banks t o set up as many 'brick and mort ar' branches as possible. There are 3250 villages in t he nort h-east ern region (NER) falling int o this cat egory of over 2000 populat ion with as yet no banking facilit y. Of t hese, only about 1031 villages were covered by end Sept ember 2011. There may have been furt her progress since, but admit t edly, the performance in NER is inferior to t hat in t he rest of t he country. The nort h-east poses a more complex challenge for financial inclusion because of difficult t errain, lower populat ion densit ies, poor infrast ruct ure, inadequat e communicat ion facilit ies and law and order disrupt ions. Regardless, we want t o ensure t hat financial inclusion in NER is at par wit h t hat in t he rest of t he count ry. Towards t his end, we have a Special Dispensat ion Scheme for opening bank branches in NER. Under t he Scheme, t he Reserve Bank provides one-t ime capit al cost and recurring cost s for five years for support ing a bank branch. The St at e Government is required t o provide t he required premises, resident ial accommodat ion for t he st aff and securit y for t he bank branch. The scheme is operat ed by calling for bids from banks for opening branches in agreed cent res. Meghalaya was t he first st at e t o get off t he block, but ot her NE st at es are now eager t o t ake advant age of t he scheme. Wit h t hat background, let me now answer your specific quest ions. First , t he progress in financial inclusion, as you say, has been slow, but it has cert ainly picked up pace over t he last several mont hs. Banks across t he count ry, including in t he NER, are more ent husiast ic about financial inclusion t han before. You also asked about my 'best possible advice' t o t he banks. In fact , I have t hree bit s of advice. First, remember t hat financial inclusion is more t han chasing and meet ing a t arget . To cover every household wit h a bank account is necessary, but not sufficient . Banks must also ensure t hat t he bank account is act ive - which means t hat the household is using t hat account for saving, for remit t ance and is also get t ing credit and where necessary micro insurance. In ot her words, make sure t hat financial inclusion is 'meaningful'. Second, look Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 upon financial inclusion not as an obligation, but as an opportunity. There is enormous 'banking pot ent ial' at t he bot t om of t he pyramid, and first mover banks will be able t o exploit t hat pot ent ial. So, go on. Move forward boldly and ent husiast ically. Third, focus on t he nort h-east . This is relat ively virgin t errit ory as far as banking is concerned. Those banks which pursue financial inclusion in t he north-east will be rewarded not only by business opport unit ies but by a fulfilling experience. Agricult ure is t he lifeline of t he people in t he Nort h East . But as far as credit flow is concerned, t he farmers don't get credit . The Government of India has asked t he banks t o increase t heir credit t o t he agriculture sect or in order t o boost product ivit y. Are you going t o review t he performance of t he banks in t his regard? Agricult ure is surely t he life line of a majorit y of t he people in t he count ry including in the Nort h East . Agricult ure is one of t he key priorit y sect ors for lending by banks; under t he priority sect or lending sect or, banks are required t o ensure t hat at least 18% of t heir advances goes t o agriculture. Even so, we are aware t hat millions of small farmers, many of t hem farming at subsist ence levels, do not get access t o credit for a variet y of reasons. Simplified Know Your Cust omer guidelines, 'no frill' account s, Kisan Credit Cards, General Credit Cards and overdraft facilities have all been designed keeping t he rural borrower in mind. The Reserve Bank also mandat es t hat banks prepare Annual Credit Plans whose roll out which we closely monit or t hrough t he St at e Level Bankers' Commit t ee (SLBC). The SLBC, comprising banks, t he st at e government , central government agencies, t he Reserve Bank, NABARD and SIDBI meet s every quart er t o review t he progress of inst it ut ional credit flow in t he St at e. Progress under the Annual Credit Plan is one of t he key issues on t he agenda of every SLBC meet ing. Where t here is slippage, SLBC init iat es prompt corrective act ion. Similar commit t ees funct ion also at t he Dist rict and t he Block Levels. These meet ings are also held at quart erly int ervals and t he Reserve Bank plays a pro-act ive role in t hese meet ings. Many st eps have been t aken in t he NER t o increase credit flow t o agricult ure. Since Assam is one of t he st at es select ed under t he scheme of 'Bringing Green Revolution in East ern India' implement ed by the Government of India, t he annual credit plan for agriculture for Assam has been revised upwards. We want banks t o sanct ion KCCs t o all eligible farmers in t he St at e. In Assam, block-wise weekly credit camps are being organised t o bring more and more farmers under t he KCC. The loan applicat ion format has been simplified and wherever land document s are not available, t he Village Panchayat 's cert ificat ion is considered sufficient for grant of a loan. The exercise is being replicat ed in other NER st at es as well. Credit, however, is only one among several input s needed for boost ing agricult ural product ion. Experience shows t hat the quality and reach of ext ension services is crucial. Clearly, t here is need for great er effort at bringing ext ension services in NER at par with t hose in ot her St at es. Furt hermore, t he stat e government s have t o ensure t imely availability of fert ilisers, procurement of food grains at t he Minimum Support Price, st orage and t ransport at ion facility, et c. Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 Nort h East India has very close border wit h foreign count ries. Taking advant age of porous border, fake currencies are coming t o t he region. Considering t he gravity of t he sit uat ion, what is t he plan of RBI? The role of Reserve Bank in addressing t he menace of count erfeit not es lies in t he following areas : * Ensuring int egrit y of banknot es, * Put t ing in place proper syst ems for prompt det ect ion and removal of count erfeit not es from t he banking syst em, and * Educat ing the public t hrough educat ion campaigns in mass media and t hrough out reach programmes about the feat ures of genuine currency not es t o help t hem easily dist inguish genuine not es from count erfeit ones. Towards t his end, we have init iat ed several measures : * The challenge for us is always t o remain one st ep ahead of t he count erfeit ers. Towards t hat end, we periodically enhance securit y features of Indian banknot es. * We have made it mandat ory for t he banks t o issue only clean and genuine banknot es bot h over t heir count ers and t hrough ATMs. They also need t o have mechanised processing capabilit ies for branches having daily receipt of 50 lakh and above. * We released a 60-second film, "Paisa Bolt a Hai" made in Hindi and 11 ot her regional languages, including Assamese on Doordarshan and it s regional channels. This film is int ended t o spread awareness about how t o t ell a genuine not e from a fake one. * On our websit e (www.rbi.org.in), we hosted a sect ion called Paisa Bolt a hai which explains, among ot her t hings, feat ures of all genuine Indian banknot es. * We have also t aken measures t o improve int er-agency co-ordinat ion (Police, CBI, RAW, NCRB, MHA) t o t ackle t he problem in a concerted manner. 4. CD rat io in t he Nort h East is poor compared t o other st at es in t he count ry. How t o improve t he CD rat io and what is your suggest ion t o t he banks? It is t rue t hat t he rat io in t he NER is lower t han t hat in t he rest of the count ry. Bridging this gap is crit ical t o mainst reaming t he nort h-east ern economy int o t he nat ional economy. Our const ant and consist ent advice t o banks has been t hat t hey should achieve a CDR of at least 60 per cent in respect of t heir rural and semi-urban branches and also t hat disparit ies across regions and st at es should be narrowed, if not eliminat ed. The St at e Level Bankers Commit t ee (SLBC) which I referred t o earlier is mandat ed t o review t he flow of credit in each district wit h reference t o t he CDR and draw up a special, monit orable action plan for dist rict s wit h CDRof less t han 40%. If t he CDR of NER is low, what it means is t hat savings of people in t he region are going out side t o finance invest ment elsewhere. This is unfair and st rict ly inadvisable. The savings in t he NER should be used t o finance invest ment here in t he region. This requires responses bot h from supply and demand sides. Our effort s have so far largely focused on t he supply side. We must do much more to generat e demand for credit . The st at e government s and t he banks should work in part nership in t his regard. The Reserve Bank will be happy and willing t o promot e t his part nership for raising t he absorpt ive capacity of st at es for inst it ut ional credit .

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Canara Bank Samachar Lehar January 2012 Indian Government is now encouraging t rade wit h ASEAN. But unfort unat ely t here are very limit ed bank branches along border. The exist ing branches are not sufficient t o meet t he demand of t he cust omers. Will RBI t ake any st ep? As I have already point ed out earlier, at t he policy level, we have been encouraging expansion of bank branches in the NER. If the st at e government s come forward wit h infrast ruct ure development and ot her facilit ies along t he border, t he Reserve Bank will be happy t o work wit h them t o improve t he presence of banks along t he border. Perhaps, t he NE Council should come up wit h a viable plan in t his regard. Cust omers oft en complain about poor ATM service. Exist ing ATMs are inadequat e t o meet t he demand as volume of business is increasing day by day. What is your advice t o the banks? Scheduled commercial banks are no longer required t o t ake Reserve Bank's permission t o inst all off-sit e / mobile ATMs. As at end March 2011, t here were close t o 75,000 ATMs across t he count ry. But you are right . Wit h just about 1800 ATMs, t he share of t he NER in t he t ot al number of ATMs is low. You must , however, appreciat e t hat Nort h-East is a difficult t errain. There are frequent power failures, and problem of digit al connect ivit y and securit y. Lack of infrast ruct ural facilit ies is a major problem rest rict ing t he spread of banking, including ATMs in t he area. Nevert heless, at the policy level, we have t aken some measures t o enhance access of banking services as a whole t o Nort h East region. These include : * To improve branch net work in t he region, domest ic scheduled commercial banks (ot her t han RRBs) are free t o open branches / mobile branches / administ rat ive offices / cent ral processing cent res (CPCs) / service branches in rural, semi-urban and urban centres in Nort h-East ern St at es and Sikkim wit hout permission from Reserve Bank of India. * While preparing t heir Annual Branch Expansion Plan (ABEP), banks are required t o allocat e at least 25 per cent of t he t ot al number of branches proposed t o be opened during a year t o unbanked rural (Tier 5 and Tier 6) cent res. An unbanked rural cent re would mean a rural (Tier 5 and Tier 6) cent re t hat does not have a brick and mort ar st ruct ure of any scheduled commercial bank for cust omer based banking transact ions. * The Committ ee on Cust omer Services in Banks (Damodaran Committ ee) const it ut ed by t he Reserve Bank, has made several recommendat ions for improving banking services in t he Nort h East ern region. (Recommendat ions are given in t he Annex for your use). An import ant one among t hem is t o explore using t he back up of alt ernat e sources of energy for ATMs t o ensure t heir cont inuous and unint errupt ed availability in t he Nort h East region. Despit e st rict guidelines, a sect ion of fake microfinance companies have st art ed their operat ion in t he Nort h East . Hundreds of people are t he vict ims of t hese microfinance companies. As t he sit uat ion is very alarming are you going t o set up any committ ee t o monit or t he operat ion of these microfinance companies?

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Canara Bank Samachar Lehar January 2012 No such inst ance of any fake Microfinance Company cheat ing the public of t he Nort h East has come t o our not ice. However, we are aware t hat many invest ors in t his region have been vict ims of pyramid schemes operat ed by some Non-Banking Financial Companies (NBFCs) / Mult i Level Market ing Companies (MLM) and Unincorporat ed Bodies (UIBs). We are sensit ising t he police and are creat ing awareness among t he public about t he nefarious act ivit ies of t hese companies. Having said t hat , I must add that it is import ant for t he public t o be discret e in invest ing t heir savings. The public should verify whet her t he company is regist ered wit h t he Reserve Bank or any ot her regulat ory body. The public must also be aware t hat high ret urns are oft en associat ed wit h high risk and t hey should part icularly look askance at promise of excessively high ret urns. ----------------------------------* Text of int erview of Dr. D Subbarao, Governor, Reserve Bank of India, wit h Assam Tribune published on November 29, 2011.

An Assessment of Recent Macroeconomic Developments

Dr. Subir Gokarn Introduction Thank you for invit ing me t o share my t hought s at t he Annual CII CFO Summit . In recent weeks, t he macroeconomic environment has become part icularly t urbulent. Global condit ions have cont ribut ed t o a significant rebalancing of port folios as a result of rapidly changing risk percept ions and appet it es. This has led t o increased inst abilit y and volat ility in financial market s, part icularly currency market s. On t he domest ic front , growt h is decelerat ing while inflat ion remains high, wit h upside pressures persist ing from t he sharp depreciat ion in t he rupee. While overall macroeconomic condit ions may cause concern, we need t o t ake an int egrat ed and forward-looking view of posit ive and negat ive indicat ors and future risks while t hinking about appropriat e policy responses. This is what I propose t o do during t he course of t his t alk. The Global Scenario Let me first speak about t he global scenario. Over t he past t wo years, t he performance of t he major advanced economies has raised significant concerns about t he sust ainabilit y of t he global recovery. By contrast , emerging market economies (EMEs) have generally shown reasonable growt h, suggest ing t hat t heir domest ic drivers and increasing linkages wit h each other have provided some offset t o t he slower growt h in advanced economies. However, periodically, eit her sovereign debt pressures in Europe or growth volatility in t he US, have height ened t hose concerns. The European debt problem has unquest ionably been t he dominant global fact or over the past few mont hs, which, in t urn, has been a source of volat ilit y in asset and currency market s all over t he world. As prospect s of enduring solutions t o t he problem have ebbed and flowed, so have asset prices and exchange rat es. , Aft er several weeks of ant icipat ion, matt ers appear t o be coming t o a head. The prospect s of a solut ion crit ically hinge on t he Euro summit scheduled for December 9t h, where arrangement s t hat will help st abilize global market s are expect ed t o be announced. Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 Impact on India and Policy Responses The impact of t his recent global inst abilit y on India has been enormous. India is a st ruct urally current account deficit economy. This deficit is, in t urn, financed by capit al inflows, which over t he past several years, had been large and st able enough t o more t han offset t he current account deficit. For a few mont hs during t he 2008-09 financial crisis, t he posit ion was reversed and, when t hat happened, t he Rupee behaved much like it did over t he past several weeks (Chart 1). Bet ween July 2008 and February 2009, t he Rupee depreciat ed by nearly 17 per cent . Essent ially, when capit al st ops coming in, t he current account drives t he exchange rat e and, nat urally, the pressure is t o depreciat e in t he face of t he deficit . Wit h t he kind of volat ility we have seen in global capit al flows over t his period, virtually all EME currencies faced pressure t o depreciat e. However, t he eventual magnit ude of change reflect ed differences bet ween count ries in current account condit ions as well as policy responses. Chart 1 Exchange Rate of Indian Rupee

For t he past few years, t he exchange rat e regime in India has been what might be best described as a "bounded float". There are virt ually no rest rictions on Foreign Direct Invest ment (FDI), except for limit s on specific sect ors, and port folio invest ment in equit ies. However, t here are rest rict ions on debt inflows, driven by considerat ions of ext ernal st ability. These limit s relat e t o quant ity, t enor and pricing. Short -t erm debt is t he least preferred, because it is seen as most vulnerable t o sudden reversals, while long-t erm debt , despit e risk concerns, is seen as cont ribut ing to t he resource flow int o infrast ruct ure, so is viewed more favourably. These cont rols on debt might be viewed as "st ructural" or "st rat egic" capit al cont rols; t hey are alt ered relat ively infrequent ly in response t o changing macroeconomic condit ions and not wit h a view t o impact ing t he daily movement of t he exchange rat e. While we do not t arget the level of exchange rat e, nor do we have a fixed band for nominal or real exchange rat es t o guide int ervent ions, the capit al account management framework helps in t he bounded float . If volat ilit y increases, appropriat e t ools, including t hose in t he realm of capit al account management are used. Wit hin t hese overall Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 boundaries, t he exchange rat e is det ermined by daily variations in demand and supply. In t he recent episode of depreciation, as I indicated earlier, a sharp fall in capit al inflows led t o a drying up of supply, while demand on account of t he current account deficit cont inued unabat ed, leading t o t he out come we saw. There has been a long-st anding debat e on t he merit s and de-merit s of t his exchange rat e policy, which has ret urned t o centre-st age in the wake of recent development s. Time does not permit me t o go int o it here, but it is import ant t o point out t hat t he different policy responses we saw across EMEs t o t he volat ility in capit al inflows were largely t he out come of t heir exchange rat e policy framework. Count ries t hat orient t heir exchange rat e regimes t o export compet it iveness t ypically have current account surpluses. This is a charact erist ic of t he Asian EMEs and, in t his sense, India is a significant except ion t o t he Asian rule. These surpluses are reflect ed in a build-up of foreign exchange reserves, which may be furt her enhanced by large inflows of capit al and the furt her accumulat ion of reserves t o prevent currency appreciat ion, which undermines compet it iveness in t he short run. In t he current global cont ext , when capit al inflows st op, reserves built up from current account surpluses provide t he capacity t o manage exchange rat es in t he face of ext ernal pressure. India has large reserves, of course, over $300 billion, but because we have a current account deficit , the reserves are essent ially count erbalanced against our ext ernal liabilit y posit ion. In an ext reme scenario, if there is a large out flow of capit al, t he adequacy of reserves will be judged by t he economy's ability t o finance t he current account deficit and, over and above t hat , meet short -t erm claims wit hout any disrupt ion or loss of confidence. In light of t his, t he value and use of reserves in t he Indian cont ext must be viewed somewhat different ly t han in t he cont ext of a st ruct urally current account surplus economy. Reserves essent ially provide comfort t o ext ernal count erpart ies t hat we have t he capacity t o meet our obligat ions. While t he recent sharp depreciat ion has in cert ain quart ers led t o an assessment of "helplessness" in dealing wit h t he kind of global t urbulence we are seeing t oday, our st rat egic behavior should not be misconst rued as an inability t o lean against t he wind. Consider t he following alt ernatives. Not using reserves t o prevent currency depreciat ion poses t he risk t hat t he exchange rat e will spiral out of cont rol, reinforced by self-fulfilling expect at ions. On t he ot her hand, using them up in large quant it ies t o prevent depreciat ion may result in a det eriorat ion of confidence in t he economy's abilit y t o meet even it s short -t erm ext ernal obligations. Since bot h out comes are undesirable, t he appropriat e policy response is t o find a balance t hat avoids eit her. That balance can be found in precisely t he struct ural capit al cont rols t hat I referred t o earlier. Resist ing currency depreciat ion is best done by increasing t he supply of foreign currency by expanding market part icipat ion. This, in essence, has been our response. We increased t he limit on invest ment in government and corporat e debt inst rument s by foreign invest ors. We raised t he ceilings on int erest rat es payable on non-resident deposit s. The all-in-cost ceiling for Ext ernal Commercial Borrowings has been enhanced. All t hese channels will help t o expand t he inflow of foreign exchange. These capit al cont rol measures have been support ed by a series of administ rat ive measures, which are Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 aimed at curbing t he capacity (or t empt at ion) of market part icipant s t o t ake posit ions against t he Rupee, which may further aggravate t he pressures t o depreciat e. For example, ent it ies t hat borrow abroad were liberally allowed t o ret ain those funds overseas, which in t his environment , would fet ch t hem some windfall gains. They are now required t o bring t he proport ion of t hose funds t o be used for domest ic expendit ure int o t he count ry immediat ely. In sum, within t he broad paramet ers of our "bounded float " approach t o exchange rat e management , we do have t he instrument s and t he capacity t o enhance supplies of foreign exchange int o t he market and, as has been demonst rat ed by t hese recent act ions, will use t hem as appropriat e. Wit hin t his overall framework, let me address t he issue of direct int ervent ion. As we have said, our policy approach does not involve st rong int ervention in t he currency market t o achieve a specific rat e t arget . The risks of doing t his have already been point ed out . However, in excessively volat ile market condit ions, "smoot hing" int ervent ions t hat help t o keep market s orderly and prevent large jumps t hat can induce furt her spirals, are entirely just ified and have been carried out . To sum up my t hought s on t his issue, let me re-emphasize t hat our broad object ive. It is t o ensure t hat we find a balance bet ween t he short -t erm risk of t he Rupee spiralling downwards and t he medium-t erm risk of a loss of confidence in our ability t o meet our ext ernal obligat ions. We do have t he instrument s t o do t his in t he form of st rat egic capit al cont rols, which can be used t o enhance t he supply of foreign exchange. These will be used as appropriat e, wit h t he goal of ensuring t hat t he availabilit y of foreign exchange does not become a de-st abilizing const raint. However, we must accept t he likelihood of global t urbulence persist ing for some t ime, wit h the consequent impact on asset price and currency volat ilit y. This is a risky environment and everybody would be well advised t o mit igat e t heir risks t o t he ext ent possible. Over t ime, t he hedging opt ions for various st akeholders, including banks, corporat es and small export ers have increased. Accordingly these st akeholders are advised t o be vigilant and well-prepared wit h appropriat e risk mitigat ion st rat egies, even while cent ral bank act s t o smoot h excessive volat ilit y. But , beyond t his, if we do see t he short-t erm risk of a downward spiral escalating, we will not hesit at e t o use all available inst ruments. Not withst anding our preference for a st rat egic approach t o manage our ext ernal exposures, we would like t o reit erat e t hat t o safeguard macroeconomic st abilit y, use of int ervent ion t o mit igat e t he impact of sharp and large movement s in t he exchange rat e would remains an inst rument in our armoury. The Domestic Scenario Liquidity Let me first address t he immediat e concern about Rupee liquidity, which, in some ways, is relat ed t o t he ext ernal sit uat ion. For several weeks now, t he tight ness of domest ic liquidit y conditions has been highlight ed by the fact t hat borrowing under t he Liquidit y Adjust ment Facilit y (LAF) have been significant ly above our comfort t hreshold of one per cent of Net Demand and Time Liabilit ies (NDTL). Recent development s in our liquidity management approach have involved making a dist inct ion bet ween t he monet ary st ance Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 and t he liquidit y st ance (Chart 2). In December 2010, we exploit ed t his dist inct ion by carrying out Open Market Operat ions (OMOs) t o inject liquidit y int o the syst em, despit e maint aining an ant i-inflat ionary monet ary st ance. Chart 2 Exchange Rate of Indian Rupee

We appear t o be in a somewhat similar sit uat ion now. Some of t he tightness is at t ribut able t o the smoot hing int ervent ions t hat were carried out in the foreign exchange market . But , t hat apart , given t he overall condit ions and t he addit ional pressure, even if t ransit ory, t hat will be exert ed by t he advance t ax payment s in mid-December, domest ic liquidit y condit ions are expect ed t o remain stret ched for some t ime. Here again, t he broad object ive is t o ensure t hat these condit ions do not hamper t he smoot h funct ioning of financial market s and disrupt flows t o t he real economy. We have been inject ing liquidity int o t he market t hrough LAF and OMOs and will cont inue t o do so as condit ions warrant . Of course, we must guard against t he risk of excessive accommodat ion, since t his will conflict wit h our current monet ary policy st ance. But , having made a dist inct ion bet ween t he two, we will t ry and ensure t hat liquidit y remains adequat e wit hout t hreat ening the inflat ionary sit uat ion. In short, t he endeavour will be t o keep it within t he paramet ers consist ent wit h our comfort levels for a liquidit y deficit . We do have a range of inst rument s t o help us achieve t his object ive. Current ly, t he banking syst em as a whole holds government securities t o t he t une of 29 per cent of NDTL, which is five per cent above t he st at ut ory requirement of 24 per cent . This reflect s a relat ively large capacity for liquidity infusions, about 2,74,000 crores, as and when t he need arises. It is called t he St at ut ory Liquidit y Rat io (SLR) for a good reason. OMOs are our first preference for liquidity inject ion, since t hey are t act ical in nat ure and do not require a change in any policy st ance, real or perceived. Furt her, alt hough , OMOs are current ly Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 being used t o make t hose infusions, t he LAF window is always available t o t he syst em t o t he ext ent of t his surplus capacit y. In addit ion, t he recent ly est ablished Marginal St anding Facility (MSF) allows banks t o use a furt her one per cent of t heir SLR holdings, which, given t he int erest rat e st ruct ure, t hey will only do in sit uat ions of ext reme st ress. In recent weeks, t here has been no recourse t o t his window, which could mean t hat t he there isn't t oo much st ress in t he syst em. In a sense, t his window serves as an early warning indicat or and we wat ch it very closely. Beyond t his set of inst rument s, t here are ot hers, like t he SLR it self and, ult imat ely, t he CRR. But , in t hinking about t hese inst rument s, we must keep in mind t hat t hey st raddle t he divide bet ween liquidity and monet ary management , which, at t he current juncture, we are int ent on maint aining. To summarize t he broad object ive on t his front , it is t o ensure t hat domest ic liquidit y condit ions do not de-st abilize financial market s or flows t o t he real sect or, wit hin t he overall confines of t he current monet ary policy st ance. Import ant ly, we must realize t hat large fiscal deficit s cannot be accommodat ed fully by OMOs. Fiscal consolidat ion is a high priority. Inadequat e progress on t his front will weaken monet ary cont rol and impact medium t erm inflat ion expect at ions. Growth and Inflation Dynamics Finally, let me say a few words on domest ic growt h and inflat ion dynamics, which t ake us from t he immediat e t o somewhat furt her int o t he fut ure. Here, I am t reading on familiar ground, since it is just about a mont h since our last quart erly policy review. Of course, some t hings have changed since t hen, most not ably, t he ext ent of depreciat ion of t he Rupee since t hat announcement . In and of it self, t his clearly height ens inflat ion risks. These risks are perhaps aggravat ed by t he fact t hat , amidst all t he global t urbulence, crude oil prices have remained quit e firm. While t he relat ive st ability of oil prices in dollar t erms would have provided a st rong favourable base effect for domest ic inflat ion beginning in December, t his will be offset somewhat by t he depreciat ion of t he Rupee. However, our project ions suggest t hat t he impact will not change t he anticipat ed downward t raject ory of inflat ion. If a sust ainable solut ion t o t he European sovereign debt problem emerges over t he next few weeks, global port folio rebalancing could reverse t he movement in t he Rupee, which in t urn will help moderat e t he inflat ion risk. Import ant ly, apart from oil, prices of some ot her commodit ies have shown some signs of soft ening, which is obviously posit ive for t he inflat ion outlook. On t he growth front, t he recently published est imat es for Q2 of 2011-12 subst antiat e t he general expect at ion of a moderat ion in growth during t he current year. Some of t his is at t ribut able t o the cumulat ive impact of int erest rat e hikes. In t his sense, it is an expect ed out come of monet ary policy act ions, which, as is well-known, work t o curb inflat ion by moderat ing demand. Typically, a growt h decelerat ion precedes an inflat ion decelerat ion, so t he pat t ern playing out now is consist ent wit h t he expect at ion t hat inflat ion will begin t o moderat e over t he next few mont hs. This has been t he basis of our project ions and guidance on future policy actions. Of course, t here have been ot her fact ors t hat have impact ed aggregat e demand, especially t he invest ment component . However, just as wit h t he exchange rat e and inflat ion, there are growt h risks as well. Persist ent global t urbulence is always going t o adversely impact the invest ment climat e, which may be furt her aggravat ed by domest ic condit ions. Apart from int erest rat es, invest ment activity, Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 which is crit ical t o sust aining high growt h wit h low inflat ion, is also sensit ive t o a number of ot her fact ors. Policy act ions, bot h on t he fiscal and regulat ory front s, t hat can favourably impact t he invest ment climat e will be crit ical t o mitigat ing the risks t o growt h. These run t he gamut from t ax reform t o land acquisit ion t o skill development . A number of init iat ives on each of t hese front s are visible, but quick resolut ion and implement at ion is t he key. An import ant risk fact or t hat we have been consist ent ly highlight ing is food. Alt hough dat a from t he most recent weeks point s t o a st eady decline in food inflat ion , t he likelihood is t hat food prices will remain a persist ent source of inflat ionary pressure unless t here are significant improvement s in product ivity, bot h at t he cult ivat ion st age and in t he dist ribut ion process. Many forces need t o be brought int o play quickly t o achieve t his infrast ruct ure, t echnology and ext ension services, reform of market inst it ut ions and realignment of price incent ives and financial services t hat can support them. However, t o come back t o t he growt h and inflat ion view over t he next year, in a scenario in which global t urbulence reduces, we should see inflat ion moderat ing, which would t hen help t he growt h cycle reverse. Even in t his scenario, reforms t hat improve t he invest ment climat e are crit ical. If global uncert ainty persist s, making us even more dependent on domest ic drivers t o sust ain growt h, t hese reforms become absolut ely essent ial Concluding Remarks Let me conclude by summarizing t he main point s t hat I want ed t o make in t his address. First , in dealing wit h global t urbulence and its short -t erm impact on India, we need t o balance bet ween t he risk of a rupee spiral and t hat of a loss of confidence. Our capit al account management framework gives us t he capacit y t o do this and we will cont inue t o use t hat capacity as appropriat e. We have t o recognize t hat volat ility may be with us for a while and we have t o deal wit h it . However, if t he risk of a spiral escalat es, reflect ed in sharp movement s in t he exchange rat e, we will t ake swift act ion as and when necessary. Second, domest ic liquidit y may be showing signs of st ress. Here again, we have t he inst rument s and the willingness t o use t hem, in t he cont ext of our dist inct ion bet ween liquidit y management and monet ary policy. Third, while t here are many challenges t o managing t he growt h-inflat ion dynamics, bot h ext ernal and domest ic, t hey are manageable. Moderat ing growth will help ease inflat ionary pressures, which in t urn will help growt h st abilize. Of course, accelerat ing growt h over the longer t erm wit hout provoking inflat ion requires many st ruct ural changes, on which t he policy est ablishment must put t he highest priorit y. Let me end by thanking t he organizers once again for invit ing me t o speak at t his event and for accommodat ing my scheduling const raint s t hrough the use of t his video recording. I trust that my remarks have served as a useful input t o your discussions. My best wishes for a product ive day. -------------------------------------

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Canara Bank Samachar Lehar January 2012

Microenterprise Development Path to Creating MNCs of Tomorrow

Dr. K. C. Chakrabarty Mr. Pramit Jhaveri, CEO, Citi Bank, India, Dr Isher Judge Ahluwalia, Chairperson, ICRIER, Mr. Haresh Shah, Chairman of Confederat ion for t he promot ion of Khadi and Village Indust ries, Mr Anami Roy, ex-DGP (Maharasht ra) and Chairman Vandana Foundat ion, Ms Radhika Haribhakti, Chairperson, Swadhaar Fin Access, dist inguished guest s and winners, ladies and gent lemen. I am ext remely happy t o be here for t he annual Citi Micro Ent repreneur Awards Ceremony. First of all, I would like t o congratulat e all the awardees who have come from various part s of t he count ry. These awards recognize and celebrat e t he superior performance of t he recipient s. Coming as it does from an eminent jury, t hey fully deserve our wholesome applause and accolades. We hope t heir performance and achievement will serve as a beacon t o ot hers t o emulat e and perhaps even exceed. I would also like t o compliment t he organizers of Cit i Micro Ent repreneur Awards, i.e. Cit i Bank especially Mr Pramit Jhaveri and ot her members of his t eam for recognizing and honouring exemplary micro ent repreneurs who have overcome all challenges t o successfully build self-sust aining micro ent erprises, creat ing employment and cont ribut ing meaningfully t o t he economic growt h of the country. The conferring of these awards also ent it les micro entrepreneurs an opport unit y t o receive t raining in business development in order t o develop and grow in t o 'st at e of t he art' micro ent erprises. It is universally acknowledged t hat great opport unit ies open up if one is well trained and skilled. Ent repreneurs need not necessarily be born, but can be developed t hrough wellconceived and well-direct ed act ivit ies. Spearheading entrepreneurship movement t hroughout t he nat ion is the need of t he hour and I compliment Cit i Bank for t heir commendable init iat ive in providing support to skill and knowledge building of t he micro ent erprises. Moreover, t oday's winners will serve as role models who could inspire and ment or fut ure generat ions of ent repreneurs. Importance of Micro and Small Enterprises In a developing nation's economy, it's t he small and micro ent erprises which play a vit al role. If India has t o have a growth rat e of 8-10 percent for t he next couple of decades, it needs a st rong micro and small sect or and micro ent repreneurs need t o be nurt ured. They not only give employment t o a large number of people but also support bigger indust ries by supplying raw mat erial, basic goods, finished part s and component s, et c. The felicit at ion of micro entrepreneurs t oday, is not t o be mist aken as t he ult imat e goal of t he ent erprise. It is in fact , only t he beginning of it s process in achieving great er height s. A small ent erprise t oday will be a big ent erprise t omorrow, and might well become a mult inational ent erprise event ually, if given t he support , among others, t o build t heir skills and knowledge levels. In MSME sect or, t he failure rat e may perhaps be relatively higher - t he reasons for which range from delayed / inadequat e availabilit y of credit t o non-availability of backward and forward support syst em. Despit e the risk, financing of first t ime ent repreneurs is a must for financial inclusion and growt h. Thus, t he banks and ot her agencies should t ake pride while servicing t he micro ent repreneurs as t hey are playing an inst rument al role in t he format ion of MNCs of t omorrow. There is a need for Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 sensit izat ion of t he bank's st aff t owards t he needs of small ent repreneurs. The banks should develop syst ems such t hat t he field staff is regularly updat ed and is equipped t o appraise t he financial requirement s of small ent erprises. The banks may use t he plat form provided by t he t echnical inst it utions and send t heir st aff t o such inst it ut ions on a regular basis. Training is also required t o be impart ed t o t he branch managers and t heir loan officers for change in t heir mindset away from t he perceived risk in financing micro and small ent erprises. Need for Microenterprise Development It is increasingly recognized that microent erprise development forms an essent ial element in t he promotion of broad based, inclusive growt h and improvement in t he well-being of t he poor by providing significant income - and employment -generat ing opportunities, and encouraging indigenous invest ment . Microenterprise development project s can serve four major object ives : (i) povert y reduct ion; (ii) t he empowerment of women; (iii) employment generat ion; and (iv) ent erprise development as an end in it self. Microent erprise development cont ribut es t o widening t he pool of ent repreneurship available t o t he societ y. Thus, t here is a need t o st rengt hen t he linkages bet ween policy environment and ent repreneurship. The 21st cent ury has been acknowledged worldwide as t he 'knowledge cent ury' and 'knowledge societ y' can play a great er role in t aking India forward. In count ries where t he number of medium and large-scale ent erprises is sparse, t he import ance of microent erprises as an incubat or of new ent erprises becomes even more import ant. In fact, development of microent erprises is a fert ile source of ent repreneurship for t he fut ure, a sort of seedbed for t he universe of ent erprises. We are a very young nat ion - just over 60 years since independence - set t ing out on a pat h of sust ained economic growt h, for decades t o come.We already have over a billion fellow Indians. As per t he Nat ional Commission on Populat ion, t he age-wise dist ribut ion of t he populat ion of India is going t o change significant ly in t he coming years. By 2016, approximat ely 50 per cent of t he t ot al populat ion will be in the age group of 15 - 25 years. Thus, t here would be a t remendous increase in t he number of yout h ent ering t he educat ion and job market in t he ensuing years, which will result in increase in demand for skill development . On an average, it is est imat ed t hat around 1.5 crore persons per annum would ent er t he employment market during the next 30 years. Each person, in this bold new generat ion, will be in t he prime of his or her life, st riving for a bet t er t omorrow creat ing, in t he process, new growt h opport unit ies, for budding ent repreneurs! This burst of ent repreneurship across t he country, spanning rural, semi-urban and urban areas has t o be nurt ured and financed. It is only t hrough growt h of ent erprises across all sizes t hat compet it ion will be fost ered. Thus, ent repreneur development should be seen as an invest ment for economic development and prosperit y, since knowledge and informat ion would be t he principal driving force for economic growt h in the coming years. Much of t he vast and growing populat ion of the count ry forms part of t he economy t hat lies in what is known as t he unorganized sect or. It is generally agreed t hat t he unorganized sect or, whet her rural or urban, comprises small scale and microent erprises producing and distribut ing goods and services. These ent erprises are generally independent , largely family owned, employ low levels of skills and t echnology, and are highly labor int ensive. It is imperat ive t hat we nurt ure and develop microent erprises in Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 view of t heir significant contribut ion t o achieving equity as well as economic growt h, and effort s t o address gender and povert y reduction issues. Wit h economic reforms in t he count ry, and wit h t he virt ual removal of all trade barriers, the world is now our market and our opport unit y! The pursuit of these opport unit ies requires an indomit able spirit aimed at nurt uring ent repreneurship. In India, t here is a deart h of skilled people in micro small ent erprises, which demands ent repreneurship development programmes throughout t he count ry for t he growt h of Indian economy. At present , t here are various organizat ions at t he nat ional and St at e levels offering support t o ent repreneurs in various ways. The Government of India and various St at e government s have been implement ing a number of schemes and programmes over t he years. A cont inuous effort from t he societ y is also needed, where cit izens are encouraged t o come up with their ent repreneurial init iat ives. Going forward, we must develop an att itude t hat views innovat ion posit ively. Lessons from Emerging Countries We should learn from t he experience of Korea which has now become a leader of many globally import ant brands. However, barely fort y years ago, Korea had no indust ry at all. The Japanese, who ruled Korea for decades, did not allow any. They also did not allow any higher educat ion, so t here were pract ically no educat ed people in Korea. By t he end of t he Korean War, Sout h Korea had been dest royed. Today Korea is world -class in two dozen indust ries and t he world's largest in ship building and ot her areas. Not far behind Korea is Taiwan, which like Korea was preindust rial in 1950. Today, Taiwan is a world leader in a number of high- t ech areas, including microchips. Ent repreneurship and innovat ion are t he key drivers of success in t hese t wo count ies and t urned t hem int o world class manufact urers and indust ry leaders. The Koreans have set up small groups of t heir bright est people t o syst emat ically apply t he discipline of innovat ion t o identify and develop new businesses. Innovat ion requires us t o syst emat ically ident ify changes t hat have already occurred in t he business - in demographics, in values, in t echnology or science - and t hen look at them as opport unit ies. Four Pitfalls to Avoid Many new businesses st art out wit h high promise but suddenly run int o t rouble aft er a year or t wo. There are four t ypical mist akes ent repreneurs make and all four are foreseeable and avoidable. Here, I draw ext ensively from what Pet er F. Drucker has very right ly point ed in one of his books. He said t hat t here are four typical mist akes ent repreneurs make. First ly, majorit y of successful new invent ions or product s do not succeed in t he market for which t hey were originally designed. To illustrat e t he point , I would like t o t ell you of a man by t he name of John Wesley Hyatt who invent ed t he roller bearing for t he axles of railroad freight cars. The railroads, however, were not ready for radical change; and Mr. Hyat t went bankrupt . Then Alfred Sloan, t he man who lat er built General Mot ors, asked his fat her t o buy Hyatt 's bankrupt business. Unlike Hyat t, Sloan was willing t o broaden his vision of t he product . It turned out t hat t he roller bearing was ideal for t he aut omobile, which was just coming t o t he market . In t wo years Sloan had a flourishing business; for t wenty years Henry Ford was his biggest cust omer. Similarly, very few would know t hat Novocaine was invent ed by a German chemist , Alfred Einhorn for use as general anest het ic in major surgery but it was not found suit able and ult imat ely it Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 was used successfully by dent ist s. In fact , Pet er Drucker had said t hat majorit y of successful new invent ions or product s do not succeed in t he market for which t hey were originally designed. Secondly, ent repreneurs believe t hat profit is what matt ers most in a new ent erprise. But profit is secondary. It is t he cash flow t hat mat t ers. A business t hat grows fast devours cash. Const ant invest ment s have t o be made to just keep even. Thirdly, when a business grows, t he person who founded it get s t oo busy. Rapid growt h put s an enormous st rain on t he business. It out grows it s product ion facilit ies and management facilit ies. The qualit y falls, cust omers do not pay and deliveries are missed. The best way avoid a crisis is t o creat e a management t eam. Young entrepreneurs cannot pay t o bring in a management t eam. So it is necessary t o ident ify t he core compet encies of t he people working wit h you. One may be good at market ing, t he other, say in, cust omer service. They have t o be ut ilized for t heir respect ive compet encies t o be able t o deliver t heir optimum. This planning should t ake place well in advance. Last ly, when t he business is a success t he entrepreneur needs t o ask what t he business needs at this st age and whet her he is concent rat ing on t he right t hings. While ent repreneurship st art s by putt ing himself before business and quest ions t hat are at t he forefront is "What do I want t o do?" or "What is my role?" , but when it succeeds t he right quest ions t o ask is "What does t he business need?" and "Do I have t hese qualit ies?". As successful ent repreneurs, having gained experience and wisdom from past mist akes, going forward, it is necessary t o ensure t hat t he same mist akes are not repeat ed. First generat ion entrepreneurs can also t ake a lesson from t he successful ent repreneurs t o avoid commit t ing t he same mist akes. Support from all Stakeholders There are ample opport unit ies in small businesses in India and such opport unit ies will t ransform t he count ry in t he coming fut ure. For such t ransformat ion t o happen there needs t o be support from all st akeholders, government , banks, corporat e, regulat ors, civic societ y, et c. Technology universities may be set up and the government can tie up with t he best in t he world t o help in research. We need t o harness ent repreneurship and look at skill building. A scheme for ut ilizing NGOs to provide training services t o t iny micro ent erprises could be encouraged. Ent repreneurship development is import ant in view of it s visible impact on wealt h creat ion and employment generat ion. To facilit at e and encourage t his, skill building has been impressed upon by t he Prime Minist er's Task Force for MSMEs. Ent erprise Development Cent res (EDC) should be set up by t he Cent ral / St at e Government s wit h incubat ors t o provide t raining not just for set t ing up of new unit s but also t o provide cont inuing educat ion on different aspect s like product design, packaging, t echnology upgradat ion, financial management and market ing. Ent repreneurship development is t he key fact or t o fight against unemployment , povert y and t o prepare ourselves for globalizat ion in order t o achieve overall economic progress. Initiatives by Government of India / Reserve Bank of India As t he level of financial exclusion is very high in t he sect or, Government and Reserve Bank of India are t aking t he lead in facilit at ing access t o finance by increasing t he out reach of Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 banking facilit ies t o unbanked cent ers. Financial access is crit ical for MSMEs growt h and development . Wit h an object ive of ensuring uniform progress in provision of banking services in all part s of t he count ry, banks have been advised t o draw up a roadmap t o provide banking services t hrough a banking out let in every unbanked village having a populat ion of over 2,000 by March 2012. Such banking services need not necessarily be ext ended t hrough a brick and mort ar branch but could be provided t hrough any of t he various forms of Informat ion and Communicat ion Technology (ICT)- based models, including Banking Correspondent s (BCs). About 74,000 such unbanked villages have been ident ified and allot t ed t o various banks t hrough St at e Level Bankers Commit t ees (SLBCs). As at t he end of Sept ember 2011, as report ed by t he St at e Level Bankers' Committ ees of various st at es / Union Territ ories, banking out let s have been opened in 42,079 villages across t he various St at es in t he count ry. This comprises of 1127 branches, 39,998 BCs and 954 ot her modes like rural ATM, mobile van et c. Further, t he Reserve Bank of India has also advised banks t o roll out t he Financial Inclusion Plans (FIP), encouraging mult iple channels of lending and enhancing t he scope of t he Business Correspondent model, improving credit delivery procedures in micro and small ent erprises (MSE) sect ors and encouraging adopt ion of ICT solutions in villages wit h populat ion less t han 2000. Bot h at t he district and St at e level, Reserve Bank has advised t he St at e Level Banker's Commit t ee meet ing and t he Lead banks t o monit or init iat ives for providing 'credit plus' services by banks and St at e Government s. Given t he import ance of capacity building, Reserve Bank of India has impressed upon banks on t he need for financial education t o enable small and marginal borrowers t o avail of t he ent ire suit e of financial product s and services i.e., savings, remitt ance, insurance and pension from the banking sect or, in addit ion t o credit . The banks have been advised t o set up Financial Lit eracy cum Credit Counselling (FLCC) centres in all district s. As on March 2011, 252 FLCCs were set up in various st at es of t he count ry. The Ministry of Rural Development (Government of India) embarked upon a major init iat ive t o set up one Rural Self Employment Training Inst it ut e (RSETI) in each dist rict of t he count ry t o provide t raining t o t he rural Below Poverty Line (BPL) persons and ensure wage employment / self-employment t o t hem. Ministry of Rural Development would provide assist ance t o est ablishment of 200 RSETIs. Public Sect or Banks have been advised by Reserve Bank of India t o associat e wit h t he Scheme t o ensure credit linkage t o t he people who are trained by t he RSETIs. The banks have also been advised t he SLBC convenor banks, in consult at ion wit h St at e Government s, t o formulat e a scheme for ut ilising specified NGOs for providing t raining and ot her services t o t iny micro ent erprises, To leverage bank credit for inclusive growt h bank's have been advised t o develop linkages wit h such NGOs / Corporat e houses operat ing in t he area t o ensure t hat t he NGOs / Corporat es provide t he necessary 'credit plus' services. In fact , success st ories could be present ed in DCC / SLBC meet ings t o serve as models t hat could be replicat ed. Each SLBC has been advised t o have a dedicated Financial Lit eracy Division t o propagat e t he various inst ructions and use t he local media t o frequent ly int eract wit h t he Financial Lit eracy Division and t ake their help t o reach out t o t he common persons. Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 To ensure enhanced credit flow t o t he sect or, in t erms of t he recommendat ions of t he Prime Minist er's Task Force on Micro, Small and Medium Ent erprises (MSMEs) (Chairman : Shri T. K. A.Nair, Principal Secret ary, Government of India) const itut ed by t he Government of India, banks were advised t o achieve a 20 per cent year-on-year growt h in credit t o micro and small ent erprises; t he allocat ion of 60% of t he MSE advances t o the micro ent erprises is t o be achieved in st ages viz. 50% in t he year 2010-11, 55% in t he year 201112 and 60% in the year 2012-13 and achieve a 10% annual growt h in number of micro ent erprise account s. The Reserve Bank is closely monit oring t he achievement of t arget s by banks on a quart erly basis. Further, based on t he recommendat ions of t he Working Group (Chairman : Shri V. K. Sharma, Execut ive Direct or, RBI) const it ut ed by t he Reserve Bank of India t o review t he Credit Guarant ee Scheme (CGS) of t he Credit Guarant ee Fund Trust for Micro and Small Ent erprises (CGTMSE), t he limit for collat eral free loans t o t he MSE has been increased from t he present level of Rs.5 lakh t o Rs.10 lakh and it has been made mandat ory for banks. On t he issue of alt ernat e sources of credit and infrast ruct ure t he PM's Task Force has examined t he issues and has made several recommendat ions t o address t he bott lenecks. The implement at ion of t he recommendat ions in a t ime bound manner is being monit ored by t he GOI. In t erms of t he recommendat ions of t he Prime Minist er's Task Force t he proposal for set t ing up vent ure capit al / risk capit al Funds are being examined by t he Government of India and a dedicat ed exchange for MSMEs would be Conclusion Let me end by once again congrat ulat ing the recipient s of this award funct ion and wishing all of you all t he very best . I hope t hat t he award ceremony will inspire all t o st rive for excellence and t hus cont ribut e t owards achieving great er height s in building a st rong and prosperous India. I would also like t o congrat ulat e Cit i Micro Ent repreneur Awards for salut ing exemplary micro ent erprises and wish t hem great er successes in days t o come in ident ifying more and more such ent repreneurs t hroughout the lengt h and breadt h of our count ry. Thank You. --------------------------------------------

FAQs on Senior Citizens Savings Scheme, 2004

Updat ed as of 22-12-2011 1.What are the salient features of the Senior Citizens Savings Scheme, 2004? The salient feat ures of t he Senior Cit izens Savings Scheme, 2004 are given below. Tenure of t he deposit account 5 years, which can be ext ended by 3 years. Rat e of int erest 9 per cent per annum Frequency of computing int erest Quart erly Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 Taxability Int erest is fully t axable. Whet her TDS is applicable Yes. Tax will be deduct ed at source. Invest ment t o be in mult iples of Rs.1000/ Maximum invest ment limit Rs.15 lakh Minimum eligible age for invest ment 60 years (55 years for t hose who have ret ired on superannuat ion or under a volunt ary or special volunt ary scheme). The ret ired personnel of Defence Services (excluding Civilian Defence Employees) will be eligible t o invest irrespect ive of t he age limit s subject t o t he fulfillment of ot her specified condit ions Premat ure closure / wit hdrawal facility Permitt ed aft er one year of opening t he account but wit h penalt y. Transferabilit y Not t ransferable Tradabilit y Not t radable Nominat ion facilit y Nomination facility is available. Modes of holding Account s can be held bot h in single and joint holding modes. Joint holding is allowed only wit h spouse. Application forms available wit h Post Offices and designat ed branches of 24 Nat ionalised banks and one privat e sect or bank Applicabilit y t o NRI, PIO and HUFs Non Resident Indians (NRIs), Persons of Indian Origin (PIO) and Hindu Undivided Family (HUF) are not eligible t o open an account under t he Scheme. Transfer from one deposit office t o anot her Transfer of account from one deposit office t o anot her is permitt ed. 2.Can a joint account be opened under the scheme with any person? Joint account under the SCSS, 2004 can be opened only wit h t he spouse. [Rule 3 (3)] 3.What should be the age of the spouse in case of a joint account? In case of a joint account , t he age of t he first applicant / deposit or is t he only fact or t o decide t he eligibility t o invest under t he scheme. There is no age bar / limit for t he second applicant / joint holder (i.e. spouse). [Rule 3 (3)] 4.What will be the share of the joint account holder in the deposit in an account? The whole amount of invest ment in an account under t he scheme is at t ribut ed t o t he first applicant / deposit or only. As such, t he quest ion of any share of t he second applicant / joint account holder (i.e. spouse) in t he deposit account does not arise. [Rule 3 (3)] 5.Whether both the spouses can open separate accounts in their individual capacity with separate limit of Rs.15 lakh for each of them? Bot h t he spouses can open individual and / or joint account s wit h each other wit h t he maximum deposit s up t o Rs.15 lakh each, provided bot h are individually eligible t o invest under relevant provisions of t he Rules governing t he Scheme. (Rules 3 and 4)

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Canara Bank Samachar Lehar January 2012 6.Whether any income tax rebate / exemption is admissible? No income t ax / wealt h t ax rebat e is admissible under t he Scheme. The prevailing Income Tax provisions shall apply. (GOI let t er F.No.2/ 8/ 2004/ NS-II dat ed Oct ober 13, 2004) 7.Is TDS applicable to the scheme? Yes, TDS is applicable t o t he Scheme as int erest payment s have not been exempt ed from deduct ion of t ax at source. (GOI lett er F. No.2/ 8/ 2004/ NS-II dat ed March 28, 2006) 8.Whether any minimum limit has been prescribed for deduction of tax at source? Tax is t o be deduct ed at source as per the minimum limit prescribed by t he Government. 9.What is the rate at which TDS is to be deducted from the account holder? The rat e for TDS for a financial year is specified in Part II of Schedule I of t he Finance Act for t hat year. (GOI let t er F.No.2/ 8/ 2004/ NS-II dat ed June 06, 2006) 10.Whether TDS should also be recovered from the undrawn interest payable to the legal heirs of the deceased depositors? Tax shall be deduct ed at source even from any int erest paid / payable t o t he legal heir of t he account holder. (GOI lett er F.No.2/ 8/ 2004/ NS-II dat ed June 06, 2006) 11.Whether TDS on interest payments will be applicable with retrospective effect or prospective basis? TDS is applicable from t he very first day when SCSS, 2004 was made operat ional regardless of t he fact t hat t he Cent ral Government or Reserve Bank of India or any aut horit y might have issued any Notificat ion / circular / clarificat ion at a lat er st age. (GOI let t er F.No.2/ 8/ 2004/ NS-II dat ed June 06, 2006) 12.Whether only one person or number of persons can be nominated in the accounts opened under the Scheme? The deposit or may, at t he time of opening of t he account , nominat e a person or persons who, in the event of deat h of t he deposit or, will be ent it led t o payment due on t he account . [Rule 6 (1)] 13.Can a nomination be made after the account has already been opened? Yes, nominat ion may be made by t he deposit or at any t ime aft er opening of t he account but before it s closure, by an applicat ion in Form C accompanied by t he Pass book t o t he deposit office. [Rule 6 (2)] 14.Can a nomination be cancelled or changed? Yes, t he nominat ion made by t he deposit or may be cancelled or varied by submitt ing a fresh nominat ion in Form C t o t he deposit office where t he account is being maint ained. [Rule 6 (3)]

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Canara Bank Samachar Lehar January 2012 15.Can nomination be made in joint account also? Nominat ion can be made in joint account also. In such a case, the joint holder will be t he first person ent it led t o receive the amount payable in the event of deat h of the deposit or. The nominee's claim will arise only aft er t he deat h of bot h t he joint holders. [Rule 6 (4)] 16.Can a person holding a Power of Attorney sign for the nominee in the nomination form ? No, a person holding a Power of Att orney cannot sign for t he nominee in t he nominat ion form. (GOI let t er No. F.15/ 8/ 2005/ NS-II dat ed March 02, 2006) 17.In case of a joint account, if the first holder / depositor expires before maturity, can the account be continued? In case of a joint account , if t he first holder / deposit or expires before t he mat urit y of t he account , t he spouse may cont inue the account on t he same t erms and conditions as specified under t he SCSS Rules. However, if t he second holder i.e. spouse has his / her own individual account , t he aggregat e of his / her individual account and t he deposit amount in t he joint account of t he deceased spouse should not be more t han t he prescribed maximum limit . In case t he maximum limit is breached, t hen the remaining amount shall be refunded, so t hat t he aggregat e of t he individual account and deceased spouse's joint account is maint ained at t he maximum limit . [Rules 6 (4) and 8 (3)] 18.What happens to the accounts if both the spouses are maintaining individual accounts and not any joint account and one of them expires? If bot h t he spouses have opened separat e account s under t he scheme and eit her of t he spouses dies during t he currency of t he account (s), t he account (s) st anding in t he name of t he deceased deposit or / spouse shall not be cont inued and such account (s) shall be closed. The account can be closed by making an applicat ion in Form 'F'. Annexures II & III t o Form 'F' can be att est ed by t he Oat h Commissioner or Not ary Public [Rule 8]. 19.Whether any fee has been prescribed for nomination and / or change / cancellation of nomination? No fee has been prescribed for nominat ion and / or change / cancellat ion of nominat ion(s) in t he account s under t he SCSS, 2004. (GOI let t er F.No.2/ 8/ 2004/ NS-II dat ed Oct ober 13, 2004) 20.What is the age limit in the case of retired Defence Personnel for investment in the scheme? The ret ired personnel of Defence Services (excluding Civilian Defence Employees) will be eligible t o subscribe under t he scheme irrespect ive of t he age limit of 60 years subject t o t he fulfillment of ot her specified condit ions. (The Senior Cit izens Savings Scheme (Amendment ) Rules, 2004 not ified on Oct ober 27, 2004) 21.What is the meaning of 'retirement benefits' for the purpose of SCSS, 2004? "Ret irement benefit s" for t he purpose of SCSS Rules have been defined as 'any payment due t o t he deposit or on account of ret irement whet her on superannuat ion or otherwise and includes Provident Fund dues, ret irement / superannuation grat uit y, commut ed value Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 of pension, cash equivalent of leave, savings element of Group Savings linked Insurance scheme payable by employer t o t he employee on ret irement , ret irement -cum-wit hdrawal benefit under the Employees' Family Pension Scheme and ex-grat ia payment s under a volunt ary ret irement scheme'. (Rule 2 (a) of t he Senior Cit izens Savings Scheme (Amendment ) Rules, 2004 not ified on Oct ober 27, 2004) 22.Can deposits under the SCSS scheme be made only from amounts received as retirements benefits? In case an invest or has att ained the age of 60 years and above, t he source of amount being invest ed is immat erial [Rule 2 (d)(i)]. However, if t he invest or is 55 years or above but below 60 years and has ret ired under a volunt ary scheme or a special volunt ary scheme or has ret ired from t he Defence services, only t he retirement benefit s can be invest ed in t he SCSS. [Rule 2(d) (ii)]. 23.Is there a period prescribed for opening deposit account under the SCSS scheme, by the senior citizen, from the retirement benefits? If t he invest or is 60 years and above, t here is no t ime period prescribed for opening t he SCSS account (s). However for t hose below 60 years, following t ime limit s have been prescribed. a)t he persons who have at t ained the age of 55 years or more but less t han 60 years and who ret ired under a volunt ary ret irement scheme or a special volunt ary ret irement scheme on t he dat e of opening of an account under t hese rules, subject t o t he condit ion t hat t he account is opened by such individual within three mont hs of t he dat e of ret irement . b)t he persons who have ret ired at any t ime before t he commencement of these rules and at t ained t he age of 55 years or more on t he dat e of opening of an account under t hese rules, will also be eligible t o subscribe under t he scheme wit hin a period of one mont h of t he dat e of t he not ificat ion of t he SCSS, 2004 i.e. 27th Oct ober 2004, subject t o fulfillment of ot her condit ions. [Rule 2 of t he Senior Cit izens Savings Scheme (Amendment ) Rules, 2004] c)t he ret ired personnel of Defence Services (excluding Civilian Defence Employees) will be eligible t o subscribe under t he scheme irrespect ive of t he above age limit s subject t o t he fulfillment of ot her specified condit ions. [Rule 2 of t he Senior Cit izens Savings Scheme (Amendment ) Rules, 2004] 24.Can an account holder obtain loan by pledging the deposit / account under the SCSS, 2004? The facilit y of pledging t he deposit / account under t he SCSS, 2004 for obt aining loans, is not permitt ed since the account holder will not be able t o wit hdraw the int erest amount periodically, defeat ing t he very purpose of t he scheme. (GOI let t er F.No.2/ 8/ 2004/ NS-II dat ed May 31, 2005)

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Canara Bank Samachar Lehar January 2012 25.Is premature withdrawal of the deposits from the accounts under the SCSS, 2004 permitted? Premat ure wit hdrawal / closure of t he deposits from t he account s under the SCSS, 2004 has been permit t ed aft er completion of one year from t he dat e of opening of t he account aft er deduct ing t he penalt y amount as given below. i)If t he account is closed aft er one year but before expiry of two years from t he dat e of opening of t he account , an amount equal t o one and half per cent of t he deposit shall be deduct ed. ii)If t he account is closed on or aft er t he expiry of two years from t he dat e of opening of t he account , an amount equal t o one per cent of t he deposit shall be deduct ed. However, if the deposit or is availing the facility of ext ension of account under Rule 4 (3), t hen he / she can wit hdraw t he deposit and close t he account at any t ime aft er t he expiry of one year from t he dat e of ext ension of t he account wit hout any deduct ion. [Rule 9 (1) (a) (b) and (2)] 26.Are Non-resident Indians, Persons of Indian Origin and Hindu Undivided Family eligible to invest in the SCSS, 2004? Non resident Indians (NRIs), Persons of Indian Origin (PIO) and Hindu Undivided Family (HUF) are not eligible t o invest in t he account s under t he SCSS, 2004. If a deposit or becomes a Non-resident Indian subsequent t o his/ her opening t he account and during t he currency of t he account under t he SCSS Rules, t he account may be allowed t o cont inue t ill maturit y, on a non-repatriat ion basis and t he account will be marked as a NonResident account . [Rule 13 and GOI lett er F.No.2/ 8/ 2004/ NS-II dat ed June 19, 2006) 27.Can an account be transferred from one deposit office to another? A deposit or may apply in Form G, enclosing t he Pass Book t heret o, for t ransfer of his account from one deposit office t o anot her. If t he deposit amount is rupees one lakh or above, a t ransfer fee of rupees five per lakh of deposit for t he first t ransfer and rupees t en per lakh of deposit for t he second and subsequent t ransfers shall be payable. [Rule 11 and GOI Not ificat ion GSR.(E) dat ed March 23, 2006) 28.Can an SCSS account be extended? A deposit or may ext end t he account for a furt her period of t hree years by making an applicat ion t o the deposit office wit hin a period of one year aft er mat urity. 29.Does an account, which is not extended on maturity, earn any interest? In case a deposit or does not close t he account on mat urity and also does not ext end the account , t he account will be t reat ed as mat ured and t he deposit or will be entit led t o close t he account at any t ime subject t o t he condit ion t hat t he post mat urity int erest at t he rat e as applicable t o t he deposit s under t he Post office Savings Account s from t ime t o t ime will Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 be payable on such mat ured deposit s upt o t he end of t he mont h preceding t he mont h of t he closure of t he account. 30.What happens if an account is opened in contravention of the SCSS Rules? If an account has been opened in cont ravention of t he SCSS Rules, t he account shall be closed immediat ely and t he deposit in t he account , aft er deduct ion of t he int erest , if any, paid on such deposit , shall be refunded t o the deposit or. (Rule 12) 31.Whether commission is payable to the agents under the Scheme? Payment of commission on t he Scheme has been discont inued w.e.f. December 1, 2011 (Government of India Not ificat ion dat ed November 25, 2011). 32.Which are the banks authorized to open an account under the SCSS, 2004? At present , 24 Nat ionalized banks and one privat e sect or bank(ICICI Bank), are aut horized t o handle the SCSS, 2004. It may be not ed that only designat ed branches of t hese banks have been aut horized t o handle SCSS, 2004.

Food Inflation : This Time it's Different

Dr. Subir Gokarn (Kale Memorial Lect ure delivered by Dr. Subir Gokarn, Deput y Governor, Reserve Bank of India at t he Gokhale Inst itut e of Polit ics and Economics, Pune on December 9, 2011) I would like t o t hank Prof. Parchure for invit ing me t o deliver this year's Kale Memorial Lect ure. The lect ure has been inst it ut ed t o honour Rao Saheb R. R. Kale, who was inst rument al in set t ing up this great inst it ut ion, t he Gokhale Inst it ut e of Economics and Polit ics. Despit e his professional achievement s as a lawyer, he was apparent ly a rat her modest and humble person. Given his financial cont ribut ion t o t he est ablishment of t he inst it ut ion, it would have seemed perfect ly appropriat e for it t o have been named aft er him. But , he demurred and it was named aft er Gopalkrishna Gokhale, a somewhat more recognizable name for readers of Indian hist ory. While Rao Saheb Kale's name may not adorn t he inst it ut ion, the att ribut es t hat he is given credit for are t he foundat ions for any act ivity t o be sust ainable and effect ive. I feel very honoured and privileged t o be delivering t his lect ure in his memory. I am also very pleased t o be speaking at t he Gokhale Inst it ut e it self. Many of my colleagues over t he years are alumni of t he Inst it ut e and I always enjoyed my int eractions and collaborations wit h t hem and appreciat ed and valued t heir underst anding and insight s. Besides, t he Inst it ut e has a Reserve Bank of India Chair, which we are very glad t o have Prof. Parchure occupying at a t ime when we are st rat egically increasing our level of engagement and t wo-way knowledge t ransfer wit h t he Chair Professors across t he count ry. Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 Turning t o t he t opic of t oday's lect ure, t he t it le is admit t edly borrowed from a recent book, t he very influent ial hist orical work on financial crisis by Carmen Reinhart and Kenneth Rogoff. Besides being a very cat chy t it le, which is always very t empt ing t o borrow, I felt t hat t here was some similarit y bet ween t he hist orical dynamic described in t he book and t he sit uat ion we are facing wit h food inflat ion in India t oday. Crises recur because t here are just enough differences bet ween the circumst ances t hat cause them for people t o be able t o deny t heir inevit ability. However, t he underlying drivers of virtually every crisis are essent ially similar. In t he st ory of financial crises t hat t he book t ells, unsust ainable buildups of exposures, underest imat ion of risks and an erosion or inadequacy of regulat ory capacit y are t he common element s of all crises. When I joined t he RBI, food inflat ion had been a headline issue for almost t wo years, beginning lat e 2007 and consolidat ing very sharply in t he first half of 2008. There was definit ely a global dimension t o t his during that period, but what was st riking was t hat even aft er global food inflat ion moderat ed, Indian food inflat ion persist ed. The weak monsoon of 2009 was, of course, blamed and we all believed that soft ening was only one good monsoon away. Well, 2010 was a good monsoon but , as it t urned out , t here was lit t le respit e in food inflat ion. Let's wait for 2011, we t hought . 2011 was also a relatively good monsoon year, but in t he immediat e aft ermat h of t he monsoon, t here wasn't much respit e. Fort unat ely for policymakers, dat a from recent weeks suggest s a soft ening in food inflat ion, but the level is st ill rat her high. During t he two years I have been wit h t he RBI, persist ent food inflat ion has been one of t he crit ical challenges t o monet ary policy formulat ion. There is a view, entirely legit imat e, t hat monet ary policy has no role in dealing wit h food inflat ion. Policy act ions should, inst ead, be t riggered by some measure of core inflat ion. However, t his argument weakens somewhat when we move from a scenario where food inflat ion episodes are t ransit ory, or short -lived, t o one in which t hey are persist ent , as has been t he case in recent years. In t he face of persist ent food inflat ion, just as wit h any persist ent supply shock, t he appropriat e response is seen t o be t o use monet ary policy to prevent the spill-over from t he shock int o more broad-based or generalized inflat ionary pressures. In ot her words, in order t o keep inflat ion under check, relative prices across cat egories of commodit ies have t o change in favour of t he ones facing t he supply shock. I want t o get away from the monet ary policy perspect ive for now and focus on t he issue of relat ive prices. When we bring t hese int o t he discussion, we immediat ely ent er t he realm of microeconomics, i.e., t he basic forces of demand and supply. From t his perspect ive, the simple quest ion "why are food prices rising so persist ent ly" get s a simple answer "because demand persist ent ly exceeds supply". The next simple quest ion "how do we bring food inflat ion down?" again get s t he simple answer "by increasing supply as quickly as possible". In t he cont ext of t he t it le of my address, let me emphasize t he point t hat t he food inflat ion per se is not a new phenomenon for India. On Slide 1, beginning in t he early 1950s, we can see a relat ively large number of episodes in which food prices spiked. In some of t hese episodes, t he spikes were significant ly sharper t han in ot hers and many of Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon
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Canara Bank Samachar Lehar January 2012 t hem, part icularly during t he more recent decades, were relat ively short -lived. Of course, t he most vivid ones were t he two that followed closely in t he lat e 1960s and t he early 1970s. We have apparently had not hing comparable since then in t erms of t he peak rat es of inflat ion. In t he most recent episode, however, t he pat t ern is somewhat different ; t here is a clear indicat ion of a prolonged upward t rend beginning somet ime in 2003 and showing persist ence, albeit wit h a brief int errupt ion. Slide 1 Food Inflation in India : A Long View

This is, of course, very noisy dat a. We have t ried t o syst emat ize it t o be able t o draw some more subst ant ial inferences. In Slide 2, specific episodes during t he six decades have been ident ified on t he crit erion t hat the average food inflat ion rat e during each episode was 10 per cent or higher. The slide displays t he average and peak rat es during t hese episodes. The episodes during t he lat e 1960s and early 1970s clearly st and out , while t he more recent episodes are relat ively more moderat e in t erms of bot h average and peak rat es. However, t he most recent episode does suggest somet hing of a hardening. Slide 2 Persistence of Food Inflation

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Canara Bank Samachar Lehar January 2012 Slide 3 Persistence of Food Inflation 2

But , this is as far as magnit udes go. A more worrying att ribut e of food inflat ion is persist ence. Slide 3 displays an ext remely significant pat t ern, which is really t he foundat ion for t he t it le of t his lect ure. We had t wo episodes of high persist ence in t he early 1970s and t he lat e1970s-early 1980s, during which food inflat ion was on t he average above t he 10 per cent mark for 35 mont hs and 32 mont hs, respect ively. Since t hen, as t he graph clearly indicat es, episodes were relat ively short -lived, wit h t he longest one last ing 27 mont hs in t he early 1990s. Even in t he severe drought condit ions of 1987, t he high food inflat ion episode last ed only 18 mont hs. But , st rikingly, t he most recent one, which runs from Sept ember 2008 unt il Oct ober 2011, was 38 months long and, in a sense, st ill running. Further, if we are t o overlook t he brief int erruption t hat was visible in Slide 1, t he last two episodes could be count ed as one even more prolonged st ret ch. Is t his kind of persist ence a ret urn t o t he condit ions t hat prevailed before t he 1980s? Are we now ent ering a phase in our economic development in which food supply const raint s can once again t hreat en growt h and macroeconomic st ability? To answer t hese quest ions, we need t o look at what drove food inflat ion in t he past and whet her t he same forces are at work now. We t ry t o do t his in t he next t hree slides. All t hree graphs provide, for different periods, t he cont ribut ion of different cat egories of food it ems t o overall food inflat ion. Slide 4 shows t he pict ure for t he 1960s and 1970s, Slide 5 for t he 1980s and 1990s and Slide 6 for t he first decade of t he 2000s. A number of import ant inferences can be drawn from this hist orical comparison. In t he 1960s and 1970s, as seen in Slide 4, t he main cont ribut ions t o food inflat ion in t he years t hat have been select ed for display came from cereals and sugar. In t he graph for t he t hree-year period 1972-1975, which was one of t he prolonged episodes t hat were ident ified in t he earlier discussion, what is st riking is that t hese t wo cat egories vied wit h each ot her t o drive food inflat ion. While sugar was t he dominant cont ribut or in t he first year, cereals t ook on t hat role in t he next t wo years. Bet ween t he t wo, t hey account ed for a very high proport ion of t ot al food inflat ion.

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Canara Bank Samachar Lehar January 2012 Slide 4 Drivers of Food Inflation

Slide 5 Drivers of Food Inflation 1980s & 1990s

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Canara Bank Samachar Lehar January 2012 Slide 6 Drivers of Food Inflation 2000s

In t he next two decades, the pict ure did not change dramatically, alt hough ot her cat egories of food clearly began t o contribute more significant ly. In t he decade of t he 1980s, in the years select ed for display in Slide 5, sugar was t he predominant contribut or and cereals played a relat ively modest role. In 1981-82, however, prot eins (which include pulses, milk and eggs, meat and fish) made an appearance, as did fruit s and veget ables. In t he 1990s, t he contribut ion of sugar subsided, while t hat of cereals made a comeback, support ed t o an ext ent by fruit s and veget ables and prot eins. Overall, t hough, if we were t o charact erize t hese four decades in t erms of t he drivers of food inflat ion, it would be reasonable t o argue t hat it was dominat ed by cereals and sugar, wit h a support ing role being played by prot eins and fruit s and veget ables in t he second half of t he period. Let us now look at t he cont ributions t o food inflat ion over the past decade. In t he years select ed for display, cereals and sugar have clearly receded int o t he background, while prot eins and fruit s and veget ables have begun t o play a more import ant role. In t he earlier part of t he decade, prot eins and fruit s and veget ables swapped roles, much like cereals and sugar did in t he previous decades. However, in t he last four years, which roughly correspond t o t he most recent episode of persist ent high inflat ion, the cont ribut ions of prot eins and fruit s and veget ables, in bot h absolut e and relat ive t erms, have clearly been t he dominant drivers of food inflat ion. Cereals and sugar have made some cont ribut ions, but they have been of a one-off nat ure, not sust aining over t he entire period. Let me place t his significant shift in t he drivers of food inflat ion, which was clearly accent uat ed in t he most recent episode, in t he cont ext of t he not ion of "t his t ime it 's different ". There are obvious similarit ies bet ween t he earlier prolonged episodes - early 1970s and early 1980s - and t he most recent one. In bot h these, t wo major food cat egories bot h saw sharp increases in t heir prices, presumably because of a combinat ion of st eadily increasing demand and a sharp fall in supply, usually because of an inadequat e monsoon. In t he most recent episode, 2009 was a bad monsoon year and t his many have been the Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 t rigger for prices of pulses t o rise sharply, adding t heir own burden t o t he st eady pressure from demand. In t he following year, fruit s and veget ables added t heir cont ribut ion, reinforcing and prolonging t he inflat ion trajectory, despit e 2010 being a decent monsoon year. While t he cont ribution from prot eins has gone down somewhat in 2011-12, t he pressure from fruit s and veget ables have sust ained. Given t he significance of prot eins and fruit s and veget ables in food inflat ion in the recent episode, let us look at t he contribut ion of some major it ems in t he prot ein cat egory. Slides 7 and 8 show the cont ribut ions of t he major prot ein it ems - pulses, milk and eggs, meat and fish - over a five-year period. In Slide 7, we see t he sharp increase in t he prices of pulses in t he first year, but t his did not persist for very long. However, milk was a significant cont ribut or t hroughout t he period, as is seen on Slide 8. In t he lat er part of t he period, eggs, meat and fish gained in significance, more or less mat ching t he cont ribut ion of milk. The cont ribut ion from pulses virtually disappeared in t hese years. Beyond prot eins, fruit s and veget ables were a significant , though somewhat volat ile cont ribut or. Slide 7 Proteins and Fruits & Vegs

Slide 8 Proteins and Fruits & Vegs 2

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Canara Bank Samachar Lehar January 2012 In t he cont ext of t he t it le of t his lect ure, t he similarity bet ween t his lat est episode of high food inflat ion and earlier ones of comparable durat ion clearly lies in t he fact t hat it needed t wo major cat egories of food t o drive these high rat es of inflat ion. The difference lies in what t hose it ems were. It is also significant t hat bet ween t he relat ively prolonged episodes, t here were a series of relat ively shorter ones, t ypically also wit h lower peak rat es of inflat ion. This pat t ern has import ant policy implicat ions, which I will come t o in t he concluding part of t he lect ure. Let us now explore t he drivers of t he recent pat t ern of food inflat ion. When prices of individual commodities increase, it is always because of a gap bet ween demand and supply. In t he current scenario, I believe that bot h demand and supply forces are cont ribut ing t o t he persist ence and possibly even t he widening of t hat gap. To examine t he demand side of t he equat ion, let me first provide a backdrop in Slide 9. Generally speaking, as households grow more affluent , t he proport ion of t heir income t hat t hey spend on food declines. This is a universal pat t ern and India is no different . Over t he decade and a half depict ed in t he slide, bot h urban and rural consumers show a decline in t heir relat ive Mont hly Per Capit a Expendit ure (MPCE) on food. For now, t he main observat ion is t hat , while t here may be a decline in food expendit ures in relat ive t erms, what mat t ers for demand is the absolute levels of consumpt ion. Slide 9 Changing Consumption Patterns

Source : NSSO surveys, Various rounds One way t o depict t his is by an Engel Curve, which shows t he relat ionship bet ween income and expendit ure on a part icular commodit y. Slides 10 and 11 show t he Engel Curves for four food cat egories. Three of t hem are from t he set t hat I have been t alking about throughout t he lect ure, while t he fourth capt ures expendit ure on processed foods and beverages. There are a number of ways t o int erpret an Engel Curve, but a simple one in which relat ive changes in demand can be measured is in t erms of t he income elast icit y. This essent ially measures how much consumpt ion increases for every unit increase in income (proxied here by t ot al MPCE). The st eeper t he curve, the higher is t he elast icit y. Let me illust rat e t his wit h a simple comparison.

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Canara Bank Samachar Lehar January 2012 Slide 10 Urban Engel Curves

In t he graphs displayed in Slide 10, t he rat io of expendit ure on cereals by t he t op income decile t o t hat by t he bott om decile is about 1.8. For prot eins, it is about 4.5. By t his simple calculat ion, as household incomes increase, the increment al expenditure on prot eins is more t han double t hat on cereals. The same st ory goes for fruit s and veget ables and, quit e obviously, for processed foods and beverages. Rural households, for whom t he Engel Curves are displayed on Slide 11, reveal a similar slope for cereals but an even st eeper slope for prot eins as compared wit h t heir urban count erpart s. Slide 11 Rural Engel Curves

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Canara Bank Samachar Lehar January 2012 Alt hough t hese curves are drawn from cross-sect ional dat a, which reflect a point in t ime, t hey can clearly be used t o make inferences about consumer behaviour over t ime. The simple conclusion from t hese pat t erns is t hat , as households move up t he income ladder, t heir expendit ure on food shift s relat ively t owards prot eins, fruit s and veget ables and so on, which exacerbat es demand pressures.2 Nobody would disput e t his simple assert ion. People eat bet t er (as reflect ed in a more diversified and balanced diet ) as t hey grow richer. But , even if t he demand side of t he equat ion is inevit able, t hat it translat es int o a persist ent pressure on prices is not . One common and consist ent feat ure of economic development is t hat it has been able t o accommodat e t hese changes in diet s by increasing t he supply of t he food it ems involved. This is where we seem t o have a problem. Let us look at t he supply side of t he pict ure, using pulses and milk as examples, t hough I believe t hat t hey do illust rat e t he broader issue. Slide 12 displays t he t rend in product ivit y of pulses in India over a long period of t ime. It increased st eadily unt il about the mid1990s, when it crossed t he 600 kg / hect are. Aft er t hat , for t he last decade and a half, it has oscillat ed around t his mark, but not shown any t endency for sust ained increase. From an aggregat e supply perspective, this means that t he only way t o increase product ion is by increasing t he area under cult ivat ion, causing land available for ot her crops t o decline. Slide 12 Stagnant Productivity in Pulses

Are t here any opport unities t o increase product ion by way of higher product ivit y, which is t he best way t o do it ? Slide 13 displays t he variat ion in productivity in pulses across st at es. Of course, t his depict ion does not dist inguish bet ween different kinds of pulses, which is an import ant issue. But , at t he aggregat e level, t he pat t ern suggest s t hat t here are several large st at es, in which pulses may const it ut e an import ant part of t he t ypical diet, whose product ivit y is significant ly below t he national average. If overall product ivit y is t o be improved, a st rat egy which focuses on t he specific bot t lenecks in t hese st at es is probably t he best way t o go about it .

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Canara Bank Samachar Lehar January 2012 Slide 13 Productivity Differentials

Source : Minist ry of Agriculture, GOI I have not gone down t o t he next level of disaggregat ion, looking at productivity pat t erns across different kinds of pulses. Some of t he int er-st at e variat ion is because t he crop mix is different across st at es. The dist inct ion is import ant because of st rong int er-regional variat ions in preferences. Specifically, consumers in t he west ern and sout hern regions have a preference for t ur (or arhar) dal, while chana and urad are more popular in t he nort h. Masur comes int o t he mix in t he east . Because of t he relat ive lack of subst it ut abilit y bet ween t hese varieties, st rat egies t o increase product ivity need t o t ake int o account t he supply-demand imbalances in each of t hese it ems. A large increase in a pulse variety t hat is not universally consumed will not be of much help in addressing t he demand-supply imbalance. Going back briefly t o Slides 7 and 8, in which t he relat ive cont ribut ion of pulses t o inflat ion was displayed, one reason why it has been mut ed at t he aggregat e level is t hat not all pulses face t he same demand-supply imbalance. For example, chana, which is a significant Rabi crop in t he nort hern region, has been relat ively st able in it s yields and t his in t urn has result ed in relat ively st able prices. On t he ot her hand, t ur, which is grown largely in t he sout hern half of t he count ry, has shown much more volat ilit y in product ivit y and has, as a result , shown much sharper increases in prices over t he past few years. Let me come t o t he sit uat ion in milk. As we saw in Slides 7 and 8, in contrast t o pulses, milk has been a significant cont ribut or t o food inflat ion t hroughout t he period under considerat ion. And, of course, unlike pulses, milk is a homogeneous product . Wit h the kind of demographic pat t ern t he country has, as well as t he growing demand for processed food product s, in which milk has a significant role, demand for milk has been growing and will cont inue t o grow rapidly. However, as Slide 14 shows, t he growt h rat e of milk yields has declined quit e significant ly during the past decade. Again, t his means t hat t he only way in which milk product ion can be increased is by increasing t he size of t he cat tle herd. The invest ment and maint enance expendit ures involved will come at t he expense of ot her t hings. There may be lessons t o be drawn from t he experience of t he previous decade, during which product ivity increased quit e significant ly. Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 Slide 14 Slowing Growth in Milk Yields

Product ivit y gains can be a significant contribut or t o moderat ing food inflat ion. However, for given levels of product ivit y, it is t he cost of major input s t hat det ermines t he prices of t he product s. What is driving cost s of product ion? In discussing t his, alt hough I have been t alking about prot eins and fruit s and veget ables all along, I will use paddy as an illust rat ion, for two reasons. The first reason is t hat paddy is cult ivat ed across a wide range of st at es and it s cost st ruct ure t herefore reflect s nat ional t rends. The relat ive share of different input s in t he cost of paddy cult ivat ion is shown on Slide 15. In t erms of cost share, t he dominant input clearly is labour. It 's cont ribut ion varies across st at es, but it is by far t he largest component of cost s in all t he st at es displayed. Consequent ly, t he cost of production across t he country will depend on how the wages of agricult ural labour have been moving. Slide 15 Cost Structure of Paddy Cultivation

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Canara Bank Samachar Lehar January 2012 The movement in t his crit ical variable is shown in Slide 16. The longer bars reflect t he increase in nominal wages of rural unskilled workers over t he past year. The short er bars reflect t he change in t he Consumer Price Index for t his cat egory of workers. In virt ually all t he st at es, t he rise in nominal wages far out st rips t he increase in consumer prices. Labour cost s are clearly rising sharply, which for commodit ies like food usually mean a high degree of pass-t hrough int o t he selling price. The broader point here is t hat , if wages are rising at current rat es, for what ever reason, t hey will exert st rong pressure on t he prices of all agricult ural commodities for which wage cost s are a dominant component of the cost st ruct ure. Slide 16 Rising Wages

I must point out t hat, from a larger development perspect ive, rising wage cost s are act ually a good t hing. Aft er all, a primary object ive of development is t o raise st andards of living t hrough higher incomes. However, t he sust ainability of t he process depends ent irely on whet her wage increases are t he consequence of productivity increases. Wages rising fast er t han product ivit y can only result in rising prices, if producers cannot substit ut e ot her input s for labour. The cost st ruct ure for paddy reflect s t he crit icality of labour. There may be subst itut ion possibilit ies for other crops, but t hese depend on many fact ors, such as t he scale of cult ivat ion, the qualit y of infrast ruct ure services and so on. In many commodit ies, rising wages combined wit h st agnant product ivit y are a recipe for persist ent price increases. The second reason why I used paddy as an example here is t o highlight an import ant relat ionship bet ween price dynamics and st ocks. As is well known, t he government holds subst ant ial st ocks of rice and wheat . While t hey are meant t o be released int o t he market in sit uat ions of short age, t hus ensuring availability at reasonable prices, t here is some evidence t o suggest t hat their mere presence act s as a dampener on price volat ilit y. Slide 17 shows t he relat ionship between cereal price movement s and t heir st ock levels over t he past decade and a half. The relat ionship is very clear and cont emporaneous. As st ocks Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 decline, t he rat e of increase in cereal prices accelerat es. Conversely, periods in which st ocks have been high show relat ively low rat es of price increase. Slide 17 Cereal Stocks and Prices

There has been much public discussion on the rat her inefficient way in which the st ocks are being maint ained and some concerns expressed about t heir abilit y t o actually meet food securit y requirement s should t he need arise. That is an import ant debat e but I don't want t o get int o it here. From t he perspect ive of price st abilizat ion, evidence from cereals support s t he case t hat a credible level of st ocks can act ually dampen price volat ility. Of course, not every commodit y is amenable t o st ocking, part icularly over long periods of t ime. So, this part icular st rat egy might not be applicable t o t he commodit ies t hat we have been focussing on in t his discussion. But , perhaps t he lesson from t he experience wit h cereals is t hat , wherever and however possible, t he ability t o count er supply disrupt ions wit h short notice infusions int o the market may be a useful t ool t o have. I want t o address one final issue on t he supply side before I conclude. This has t o do wit h t he performance of the monsoon over a long period of t ime. We are used t o t hinking of "normal" or "deficient " monsoons in t erms of a deviat ion from a benchmark labelled t he "Long Period Average" (LPA). The LPA for a specific decade is t he average of t he rainfall over t he 50 years before t hat decade. It is, t herefore, updat ed every t en years, aft er the complet ion of a decade, which t hen get s added int o the average. However, if t he benchmark it self is changing, t he not ions of normalit y and deficiency do not fully capt ure t he absolut e amount of rainfall in any given year. A normal monsoon in one year may act ually deliver less rainfall than a normal monsoon in anot her. Slide 18 displays t he LPA for t he South-west monsoon across t he count ry. It clearly shows a declining t rend. This means t hat normal monsoons are act ually delivering less wat er t han in the past . This may not be of great significance for regions t hat are subject t o heavy rainfall, but in part s of t he country, part icularly in t he cent ral regions, t his kind of decline may be cont ributing t o wat er scarcity and, consequent ly, keeping product ivity st agnant . Not ably, pulses comprise a significant crop in t hese regions. In short , t o add t o all the Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 ot her hindrances t o product ivit y growt h, long-t erm wat er availabilit y will also pot ent ially play a role. Slide 18 South-West Monsoon Rainfall 50 Year moving average

Let me now wrap up t he lect ure by highlight ing t wo key point s made in t he lect ure and t hen drawing out some policy implicat ions. First , we seem t o be current ly in a sit uat ion t hat resembles t he food inflat ion episodes of t he early and lat e 1970s in t erms of magnit ude and duration. In all t hree comparable episodes, including t he most recent one, t wo import ant cat egories of food made significant cont ribut ions t o inflat ionary pressures and t heir persist ence. However, t he key difference bet ween t he earlier episodes and t he recent one is t he pair of commodit ies involved. Earlier, it was cereals and sugar, now it is prot eins and fruit s and veget ables. Second, when prices are rising because demand is growing st rongly while supply st agnat es or fails t o keep up, t here is no alt ernat ive t o curbing food inflat ion t han raising supply rapidly. The current pressure on t he prices of prot eins and fruit s and veget ables is clearly t he out come of t his combinat ion of circumst ances. However, raising product ivit y quickly is it self a serious challenge, given t he pressures emanat ing from bot h labour cost s and, over longer horizon, what appears t o be a st ruct ural reduct ion in t he absolut e amount of rainfall. I draw t hree policy implicat ions from t his analysis. First , t he t ransit ion from an environment of persist ent food inflat ion up unt il t he 1970s t o a series of more short -lived and less int ense episodes in t he 1980s and 1990s was t he direct result of a set of policy int erventions, which we collect ively labelled the "Green Revolut ion". These int ervent ions, which combined price incent ives, input subsidies, t echnological input s and infrastructure invest ment s, particularly in irrigat ion and, very import ant ly, buffer st ocks, helped t o raise and st abilize t he product ivit y of cereal cult ivat ion, as well as some ot her crops. Over t he years, cereals st opped cont ribut ing significant ly t o food inflat ion and, perhaps, t his led t o t he belief t hat t he food inflat ion problem had been solved for good.

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Canara Bank Samachar Lehar January 2012 However, as we all, or should all, know, the st ory of development is a cont inuously evolving one. Demands, for food as well as ot her product s and services, change as consumers become more prosperous. Sust aining t he development moment um involves creat ing t he capacity in t he economy t o respond t o t hese changing demands. Throughout hist ory, increasing affluence has been associat ed wit h changing food habit s. The t ransit ion from a cereal-dominat ed diet t o a more balanced one wit h a great er appetit e for prot eins and fruit s and veget ables is somet hing that all count ries have seen and we are no except ion. It is in full swing t oday and t he absence of a st rong supply response means t hat many aspiring consumers will act ually be denied t he opport unity t o make t hat t ransition. Second, while the broad object ives of a supply enhancement policy remain t he same, i.e., increasing and st abilizing product ion, predominant ly t hrough product ivit y increases, t he element s of t he st rat egy need t o fit t he requirement s of bot h the commodit ies t hemselves and be consist ent wit h t he overall economic and inst it ut ional environment . A mere replicat ion of t he kinds of int ervent ions we saw in t he 1960s and 1970s may not t urn out t o be effect ive, because t he nat ure of t he commodit ies is so different . Also, in hindsight , these int ervent ions imposed a significant fiscal cost , somet hing which is rat her difficult t o absorb in t oday's circumst ances. In short , an effect ive st rat egy must be compat ible wit h bot h the nat ure of t he commodit ies and the st at e of t he economy. I have no doubt t hat such a st rat egy can be devised from exist ing knowledge and t he right kinds of resources being brought t ogether. Co-ordinat ion will be t he key. Third, coming back t o t he monet ary policy cont ext , t he implications of persist ent supply pressures on t he economy, whet her t hey are from food, energy, labour or any ot her crit ical input , are clearly not very good for maint aining t he balance bet ween fast growt h and low inflat ion. A permanent supply shock leads t o lower growth and higher inflat ion, which could furt her fuel inflat ionary pressures t hrough expect at ions. In t his sit uat ion, central banks have t o choose bet ween t he risk of inflat ion spiralling t hrough expect at ions and t he burden of slowing growt h even furt her by ant i-inflat ion policy measures. In ot her words, while t ransit ory episodes of food inflat ion do not warrant a monet ary policy response, t here are st rong just ificat ions for act ing in t he face of more persist ent ones, if t he object ive is t o keep overall inflat ion in check. In short , quickly increasing t he product ivit y of prot eins and fruit s and veget ables is t he highest priorit y, bot h from t he perspect ive of development and st andards of living and from t he viewpoint of monet ary policy. Let me conclude by t hanking t he Gokhale Inst it ut e and Prof. Parchure once again for invit ing me t o deliver t he Kale Memorial Lect ure for 2011. My best wishes for t he fut ure t o t he st udent s graduat ing t oday. ------------------------

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Canara Bank Samachar Lehar January 2012

'Gross Financial Flows, Global Imbalances, and Crises'

Professor Maurice Obstfeld, University of California, Berkeley, delivered the 12th L. K. Jha Memorial Lecture on Professor Maurice Obst feld, Universit y of California, Berkeley, delivered t he t welft h L. K. Jha Memorial Lect ure organised by t he Reserve Bank on December 13, 2011 in Mumbai. The t opic of his lect ure was 'Gross Financial Flows, Global Imbalances, and Crises'. Governor Dr. D. Subbarao in his welcome address not ed that Prof. Obst feld, who is present ly t he 'Class of 1958 Professor of Economics' and Direct or of t he Cent er for Int ernational and Development Economic Research (CIDER) at University of California, Berkeley, has a truly enviable reput ation as an academic in the area of int ernational t rade and finance, and as an adviser on economic policy making and practices. He is act ive as a Research Fellow of Cent re for Economic Policy Research, a Research Associat e at Nat ional Bureau of Economic Research and an Int ernat ional Research Fellow at t he Kiel Inst it ut e of World Economics. 1. Introduction In his speech, Prof. Obst feld present ed some useful lessons from current phase of prolonged global crisis t hat most ly emanat ed from t he progress of financial globalisat ion. He point ed out that t he global economic crisis of 2007-09 and t he European sovereign debt crisis t hat followed have unleashed market forces t hat even policymakers in t he mat ure economies were ill-prepared t o count eract . 2. The Growth of Pure Asset-for-Asset International Trade He document ed t he proliferat ion of gross int ernat ional asset and liability posit ions and discussed some of t he consequences for individual count ries' ext ernal adjust ment processes and for global financial st abilit y. He point ed out t hat , if a country has maximally hedged it s idiosyncrat ic risk in world asset market s, it s net int ernat ional invest ment posit ion (NIIP) will respond t o shocks (including shocks t o current and fut ure world prices) in ways that cushion domest ic consumpt ion possibilit ies. He ment ioned t hat , in mid-1970s, t he gross financial flows were considerably smaller t han t rade flows, but t he former have grown over t ime and on average now are of comparable magnit ude t o t rade flows. In the real world of financial t rades, one agent viewing them as personally advant ageous can work t o t he det riment of ot hers implying t hat t he sheer volume of financial t rade can be posit ively correlat ed wit h financial inst ability risks. 3. Balance Sheet Vulnerabilities Once a cert ain level of financial int egration has been reached, gross posit ion build-ups likely t o imply a proliferat ion of count er-part y obligat ions t hat may be default ed and t hus carry t he risk of cont agious financial inst ability t hrough chains of leverage. In cont rast , a count ry's port folio equit y or FDI liabilit ies can fall quickly t hrough t he price mechanism wit hout creat ing default s. But t here is only so much domest ic capit al for foreigners t o hold, so beyond a point, increasing gross asset posit ions imply increasing associat ed default possibilit ies, wit h adverse implicat ions for financial st abilit y.

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Canara Bank Samachar Lehar January 2012 In t he Indian cont ext , ext ernal liabilit ies are heavily weight ed t oward equity, whereas ext ernal asset s are heavily weight ed t oward debt -like asset s (in no small measure consist ing of non-gold official reserves). In t he crisis year 2008, the values of ext ernallyheld Indian equit ies collapse, improving t he NIIP sharply, but t hey recover in 2009-2010. These asset -price development s provide some nat ural insurance against economic shocks rat her t han provoking an ext ernal debt crisis. 4. Does the Current Account Matter Anymore? Wit h invest ment, t he current account 's role is t o allow invest ors t o maint ain globally diversified port folios of equit y claims t hrough purchases of newly issued shares in t he profit s of capit al. The foreign gross asset and liabilit y posit ions offer t he best pict ure of pot ent ial st abilit y risks, and t hat hazardous gross posit ions can build up even in the absence of any net int ernat ional capit al flows. Low int erest rat es due t o global saving and invest ment patt erns, along wit h accommodat ive monet ary policy responses and ot her government policies, promot ed credit and housing booms t hat t hemselves led t o a further widening of t he global imbalances. Financial compet it ion, innovat ion, and arbit rage, proliferat ing wit hin a lax regulat ory environment , built a financially fragile superst ruct ure of gross liabilities and claims on t he back of t hose unsust ainable booms. The big U.S. ext ernal deficit was a sympt om of underlying dest abilizing forces, and indeed enabled t hose forces t o play out over an ext ended period. A purely macroeconomic perspect ive also argues for t he cont inuing import ance of t he current account as a component of aggregat e demand. The emergence of a current account surplus in one region may depress aggregat e demand globally, affect ing global financial market s and elicit ing policy responses in t rade part ners. 5. Conclusion For several reasons, t he current account st ill mat t ers. The gross int ernat ional asset and liability posit ions furnish t he key conduit t hrough which financial melt down is t ransmitt ed and amplified. The nat ional divergences bet ween saving and invest ment not only remain key macro variables, t hey may well reflect financial development s wit h direct syst emic implicat ions. The evolving world of financial globalizat ion needs policy coordinat ion assembling consolidat ed global informat ion on financial act ivity, for regulating against macro risks, for providing liquidity support , and for resolving insolvent global financial inst it ut ions and government s. Dr. Subir Gokarn, Deput y Governor, Reserve Bank of India highlight ed t he main messages of Prof. Obst feld's lect ure and offered a vot e of t hanks.
Background Shri Lakshmi Kant Jha was a many-sided personality who excelled in several walks of life. He was an eminent economist, a distinguished administrator, an able diplomat and a sage counsellor. He was Governor of the Reserve Bank of India during July 1, 1967 to May 3, 1970. In recognition of his invaluable services to the nation and the Reserve Bank, the Reserve Bank of India has instituted a lecture series entitled as the L. K. Jha Memorial Lectures.

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Canara Bank Samachar Lehar January 2012

Gross Financial Flows, Global Imbalances, and Crises

Dr. Duvvuri Subbarao Good evening. On behalf of t he Reserve Bank of India, I have great pleasure in welcoming Prof. Maurice Obst feld, who will short ly be delivering t he L.K. Jha Memorial Lect ure. Warm welcome also t o Mrs. Jeniffer Obst feld. I also have pleasure in acknowledging t he presence here of members of t he family of late Dr. L.K. Jha - Smt . Dipika Maharaj Singh, Smt . Sharika Glover and Mast er Kiran Glover. Your presence here means a lot t o us. Thank you very much. Of course, a warm welcome t o all our dist inguished invit ees who have made t ime t o be here for t his lect ure. Dr. L. K. Jha Dr. L.K. Jha was by far one of India's most dist inguished civil servant s. Wit h a remarkable career as an economic administ rat or and several impressive accomplishment s t o his credit , he has been a role model for generat ions of civil servant s. Aft er graduat ing from t he Banaras Hindu University, 'LK', as he was popularly known, went on t o st udy at Trinity College, Cambridge where he was a st udent of legendary economist s such as A.C. Pigou, J.M. Keynes and D.H. Robert son. He joined t he Indian Civil Service in 1936. Aft er an early career in Bihar, he was seconded t o Government of India in 1942 where he served in several import ant posit ions, and ended up in t he pivot al job of Secret ary t o Prime Minist er. Dr. Jha was Governor of t he Reserve Bank from July 1967 t o May 1970, at a t ime when t he economy was going t hrough one of India's most challenging phases. The count ry was shaken by food securit y concerns, and init iatives t o redress t his result ed in t he much celebrat ed 'Green Revolution'. The Reserve Bank, under Governor Jha, was an influential force in shaping t hese init iat ives. The dist ress suffered by t he poor because of t he overall scarcit y sit uat ion result ed in poverty reduct ion becoming t he overarching considerat ion of all policy. The Reserve Bank, under Dr. Jha's st ewardship, cont ribut ed t o designing and implement ing many of t hese policies. Aft er his t enure in t he Reserve Bank, Dr. Jha served as India's Ambassador t o the Unit ed St at es and as Governor of Jammu and Kashmir. He was also a member of t he widely acclaimed Brandt Commission which made a persuasive case for Nort h-Sout h cooperat ion. That some of t he issues raised in t he Brandt Commission are relevant even t oday is a t est imonial t o t he foresight and wisdom of t he Commission's members such as Dr. Jha. This lect ure series in his name honours Dr. Jha's out st anding service t o t he nat ion and his leadership of t he Reserve Bank during a very crit ical period. So far, t here have been 11 lect ures. The last one was given by Prof. John Taylor in February 2010, t wo years ago, on 'Lessons from t he Financial Crisis for Monet ary Policy in Emerging Market s'. The lect ure by Prof. Obst feld t his evening will be t he 12th in the series.

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Canara Bank Samachar Lehar January 2012 The Distinguished Speaker - Prof. Maurice Obstfeld It is perhaps presumpt uous t o int roduce Prof. Maurise Obst feld, who is a dist inguished academic and int ernat ionally renowned economist . Regardless, I will indulge in t he pleasure of doing so because t he occasion demands it . Prof. Obst feld is current ly the Class of 1958 Professor of Economics and Direct or of t he Cent er for Int ernat ional and Development Economic Research (CIDER) at the Universit y of California in Berkeley. He got his Doct orat e from t he Massachuset t s Inst it ut e of Technology (MIT) in 1979 under the supervision of t he legendary Professor Rudiger Dornbusch of t he t ext book fame. Thereaft er, Prof. Obst feld t aught at Columbia, Universit y of Pennsylvania and Harvard before moving t o UC, Berkeley in 1989. Publishing papers is part of plying t he t rade of being an academic. A few of t hem also writ e t ext books. But far fewer of t hem writ e t ext books t hat become st andard t eaching mat erial cut t ing across universit y and nat ional barriers. Prof. Obst feld belongs t o that select cat egory. Many among t he audience here must have learnt economics from his seminal t ext book on Int ernat ional Economics, co-aut hored wit h Prof. Paul Krugman. Economist s have been cat egorized in several ways - classical and neo-classical, macro and micro, Keynesian and monet arist , free market and left ist . It is fashionable t hese days t o cat egorize economist s as salt wat er or fresh wat er t o classify t heir academic persuasion which, curiously, seems t o be correlat ed wit h whet her t heir universit y is locat ed inland or on t he coast . Prof. Obst feld has largely been in coast al schools, and it will be int erest ing to find out if his academic persuasion fit s in wit h t his salt wat er - fresh wat er dichot omy. Prof. Obst feld's earliest research was focused on port folio models of exchange rat e and capit al flows, and t he effect s of st erilizat ion policies, including foreign exchange int ervention. Lat er, he t urned t o models of monet ary and real int ernat ional adjust ment based on dynamic opt imizat ion, an approach t hat has since become st andard in int ernat ional economics. In t he mid-1980s, Prof. Obst feld began t o pursue t he insight t hat speculat ive at t acks on exchange-rat e regimes could be self-fulfilling. Subsequent development s, not ably t he Asian crisis of t he lat e 90s, validat ed t his t heory. Prof. Obst feld will be speaking t oday on 'Gross Financial Flows, Global Imbalances and Crises', unexcept ionably a t opic of great relevance in t he current cont ext . Global imbalances need to be redressed for the sake of global stability No crisis as complex as t he one we are going t hrough has a simple or a single cause. In popular perception, t he collapse of Lehman Brot hers in mid-Sept ember 2008 will remain marked as t he t rigger of t he crisis. At one level t hat may well be true. Indeed, I can visualize fut ure t ext books in finance dividing t he world int o 'before Lehman' and 'aft er Lehman'. But if we probe deeper, we will learn t hat at t he heart of t he crisis were t wo root causes - t he build up of global imbalances and development s in t he financial market s over t he last t wo decades. And received wisdom t oday is t hat t hese t wo root causes are int erconnect ed, and t hat financial market development s were in a sense driven by t he global imbalances.

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Canara Bank Samachar Lehar January 2012 Global macro imbalances got built up because of t he large savings and current account surpluses in China and much of Asia in t he wake of t he Asian Crisis in t he 1990s. These were mirrored by large increases in leveraged consumpt ion and current account deficit s in t he US. In short , Asia produced and America consumed. And why did t hese imbalances get built up? The answer lies in globalizat ion globalizat ion of trade, of labour and of finance. The world wit nessed a phenomenal expansion in global t rade over t he last t hree decades; global t rade as a proport ion of global GDP increased from 37 per cent in 1980 t o 53 per cent in 2008, just before t he crisis hit us.1 Globalizat ion of finance was even more prolific, especially over t he last decade. For t he world t aken t oget her, the rat io of foreign asset s and foreign liabilit ies t o GDP rose from 133 per cent in 1994 t o over 300 per cent in 2008.2 The impact of globalizat ion of labour was by far more st riking. Emerging Asia added nearly t hree billion t o t he world's pool of labour as it int egrat ed wit h t he rest of t he world over t he last t wo decades t hus hugely improving it s comparat ive advant age. Together, t he t hree dimensions of globalizat ion - t rade, finance and labour - helped emerging Asia mult iply by a fact or it s export s t o t he advanced economies. The result was large and persist ent current account surpluses in t he Asian economies and corresponding current account deficit s in t he import ing advanced economies. These global imbalances combined wit h development s in t he financial sect or t o brew t he crisis t o it s explosive dimensions. So, where do we go from here? The G-20 is now act ively engaged in t he challenging t ask of redressing st ruct ural imbalances in the global economy. At t heir Pit t sburgh Summit in Sept ember 2009, t he G-20 leaders agreed on a 'Framework for St rong, Sust ainable and Balanced Growt h' and commit t ed t o a 'Mut ual Assessment Process' (MAP) which is a peer review of each count ry's progress t owards meet ing the shared object ives underlying t he framework. Recognizing t hat global imbalances, which had narrowed during the crisis, st art ed widening again in the exit phase, the G-20 resolved that promot ing ext ernal sust ainability should be t he focus of t he next st age of t he MAP and ent rust ed t his t ask t o a Framework Working Group (FWG). India is privileged in co-chairing, t oget her wit h Canada, t he Framework Working Group for managing t he t ask of developing t he indicat ive guidelines for assessing and addressing persist ent global imbalances. The success of t his init iat ive is crit ical for redressing t he problem of global imbalances. In moving forward on finding a sust ainable solut ion t o global imbalances, we will be guided, individually at t he count ry level and collect ively at t he G-20 level, by insight s from academic research. It is in t his cont ext t hat work of insight ful economist s like Prof. Obst feld will be import ant . Ladies and gent lemen, please join me in welcoming Prof. Maurice Obst feld t o deliver t he 12t h L.K. Jha Memorial Lect ure.
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Canara Bank Samachar Lehar January 2012

Challenges to the Accounting Profession Some Reflections

Dr. Duvvuri Subbarao Thank you for invit ing me t o speak at this conference of t he West ern India Regional Council of t he Inst it ut e of Chart ered Account ant s of India (ICAI). When I got invit ed t o speak at t his conference, at first I was a bit surprised. I wondered why you might be wast ing valuable conference t ime list ening t o t he Reserve Bank when t here is not much in common between t he Reserve Bank and t he account ing profession, except possibly t he fact that we bot h lose sleep when numbers go wrong. I t hen spoke t o my st aff and realized how wrong I was. We share considerable professional space and have several mut ual concerns. I will address some of t hose shared concerns. Before doing so t hough, I must acknowledge anot her link bet ween the Reserve Bank and t he account ing profession t hrough Shri Y.H. Malegam, who has been a Direct or on t he Cent ral Board of t he Reserve Bank almost cont inuously since 1994 except for a brief int erlude of a few days. Shri Malegam is, by wide acknowledgement , one of t he foremost Chart ered Account ant s in India who has set very exact ing st andards of professional compet ence, and more import ant ly, of professional conduct . The Reserve Bank has benefit ed enormously from his vast knowledge of account ing, his underst anding of t he financial sect or and his judgement of t he larger public int erest . As a profession, you can all be proud of colleagues like Shri Malegam who enhance public respect for t he account ing profession. The Accounting Profession The development of the accounting profession owes it s origin t o t he emergence of t he joint st ock company and the consequent separat ion of ownership from management . This arrangement t riggered t he need for an independent and informed opinion on t he account ing of t he owners' funds ent rust ed t o t he management for t heir st ewardship. The "raison d'etre" of t he profession is consequent ly based on t he confidence which t he profession enjoys wit h t he invest ing public, and it s cont inued relevance is essent ially t ied up wit h ret aining t his confidence. While init ially t he profession provided t his confidence only t o the shareholders of joint st ock companies, t oday it provides t his assurance t o a wider base of st akeholders including t he government , t he banking syst em, regulat ors and societ y it self. At t he Reserve Bank, we depend on t he account ing profession for at least t wo reasons. You audit t he Reserve Bank's balance sheet of course, and you also audit t he balance sheet s of commercial banks which we regulat e and supervise. Reserve Bank's Balance Sheets Let me make a brief comment here on t he Reserve Bank's balance sheet . The balance sheet of t he Reserve Bank is different from t hat of commercial organizat ions in some import ant respect s. Uniquely, t he Reserve Bank is st at ut orily mandat ed t o have t wo balance sheet s - one for t he Issue Depart ment and t he ot her for t he Banking Depart ment . Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 The Issue Depart ment handles t he t ask of issue, exchange and wit hdrawal of currency not es. The Banking Depart ment maint ains t he deposit account s of banks and of government s. The rat ionale for building a firewall around t he balance sheet of t he Issue Depart ment is t o maint ain t he int egrit y of t he asset backing for t he currency t hat we issue. The firewall ensures t hat t he explicit promise t hat every currency not e carries, which is t o pay t he bearer t he sum ment ioned t herein, is honoured in t he full account ing sense. Our ot her balance sheet , t hat of t he Banking Depart ment , reflect s t he transact ions we perform in our role as banker t o banks and to t he Central and st at e government s. In t he Reserve Bank, we are deeply conscious of our responsibilit y for maint aining t he int egrit y of our balance sheet s. The Reserve Bank's balance sheet s are analyzed by a wide array of st akeholders t o st udy the underlying monet ary and macro economic t rends so as t o make informed decisions. We have an obligat ion, therefore, t o maint ain t he highest st andards of clarity, t ransparency and disclosure, and we t ry our best t o meet this obligat ion. RBI and the Accounting Profession While t he financial st at ement s of t he Reserve Bank are subject t o audit by your profession, as t he regulat or and supervisor of t he banking syst em, t he Reserve Bank is a major st akeholder in commercial banks whose financial st at ement s are audit ed by you. In our view, audit ors are t he "eyes and ears" of RBI, and we t rust t hem t o alert us t o early warning signals t o assist us in our supervisory process. We also encourage audit ors t o discuss any regulat ory issues wit h RBI before finalizing t he account s. Furt her, during t he process of 'Annual Financial Inspect ion' of banks, t he inspect ion t eam int eract s wit h t he audit ors t o discuss issues of regulat ory concern. Challenges for the Accounting Profession As several st akeholders depend upon t he account ing profession, t he profession t oo has t o recognize t hat it has t o cont inue t o inspire t he t rust and confidence of the st akeholders if it has t o remain relevant and value adding. In recent years, several challenges have emerged, bot h at domest ic and global levels which, if not effect ively addressed, could erode t hat confidence. Let me address what , in my view, are some of t he key challenges. Competence First , t he challenge of compet ence. Wit h the growing complexit y of t he financial sect or and t he emergence of new and sophist icat ed financial inst rument s, the knowledge base of t he profession needs t o keep pace wit h t hese emerging pract ices and innovat ions. This requires, not just a cont inual review of it s curriculum, but more import antly, an act ive, well diversified and const ant ly updat ed programme of cont inuing professional educat ion for it s members. Cont inuing professional educat ion cannot be a mere 't ick in t he box' or det ermined by participation in number of hours of educat ion or t raining, but should be evaluat ed by way of out comes - upgradat ion of relevant knowledge and skill set s. Towards improving the skill set of t he accounting profession, with part icular reference t o audit ing banks, the Reserve Bank has t aken some init iat ives. We have est ablished a pract ice of an annual St at ut ory Audit ors' Conference t o apprise t he st at ut ory audit ors of banks on t he crit ical issues in t he area of banking regulat ion and supervision. The Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 conference also provides a forum for audit ors t o give us t heir feedback on current concerns and t o suggest any changes t o our supervisory and regulat ory policies. We have found t his t o be an effect ive forum for mut ual exchange of views, and I hope you likewise have found it t o be value adding. I am open t o suggest ions on improving t his engagement . I am also happy t o not e in t his cont ext t hat as a result of your Inst it ut e's init iat ive, India is embarking on convergence wit h Int ernat ional Financial Report ing St andards (IFRS), which would t hen result in our financial account ing and report ing get ting t o be world class. As you are no doubt aware, IFRSs are largely broad principles rat her t han det ailed rules. Their applicat ion requires judgment and possibly even lat eral t hinking, especially in t he area of det ermining the fair value of financial asset s and liabilit ies. The auditing profession needs t o improve it s skill endowment t o facilit at e a smoot h and efficient convergence wit h IFRS. Globalization The second challenge t he profession needs t o reckon wit h is globalizat ion. Globalizat ion implies t hat count ries can no longer afford t o remain isolat ed in so far as t heir operat ing and legal syst ems are concerned. For t he profession, t his get s reflect ed not merely in int ernat ional account ing and audit ing st andards but also in a number of ot her areas like educat ion, et hics, et c. I gather t he ICAI, wit h it s 180,000 members, is t he second largest account ing inst it ution in t he world. It is not sufficient t hat t he Inst it ut e merely responds t o and adopt s global st andards. It should, in fact , go furt her and act ively part icipat e in the formulat ion of t hese st andards. I am happy t o learn t hat t he President of ICAI has recent ly been elect ed as a member of t he board of t he Int ernat ional Federat ion of Account ant s (IFAC) and t hat t here is an Indian member on t he IASB. I also want t o commend t he Inst it ut e for it s act ive part icipat ion and involvement in several int ernat ional commit t ees and project s aimed at improving account ing syst ems and processes. I would only urge t hat going forward, ICAI should proact ively t ake t he lead in t he formulat ion of account ing st andards in areas where we have specific concerns as an Emerging Market Economy (EME). Anot her t ask t he profession needs t o address in regard t o managing globalizat ion is how it will select , from wit hin it s membership, persons of t he requisit e compet ence t o part icipat e in t he global forums, and how it will provide t hem bot h financial and professional support t o make t his part icipat ion rewarding t o them individually and t o t he profession more broadly. Needless t o say, t he process of select ion of persons for represent ing t he Inst itut e in int ernat ional forums should be st rictly merit ocratic and t ransparent. Information Technology (IT) Next on my list is t he challenge of Informat ion Technology. In t he past , one of t he main object ives of audit was ensuring t he arit hmetical accuracy of financial st at ement s. Wit h t he advent of IT, t his t ask has now been t aken over by machines. This has bot h nudged and facilit at ed t he profession t o move up t he value chain. The main t ask of t he profession has now shift ed t o judgment s of value, and t o discharge t his t ask, audit ors have t o demonst rat e much higher levels of mat urity, int egrit y, independence and balanced judgment . The development of t hese qualities will be a major challenge in t he future. Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 Let me make a comment wit h regard t o IT in banking. Over t he past decade, most commercial banks have successfully implement ed core banking solut ions. This has creat ed bot h opportunities and challenges for audit ors. Challenges come by way of lack of visible evidence, risk of undet ect ed syst em errors and bugs and frauds hidden in a labyrint h of dat a. Ret rieving informat ion in t he comput erized environment and assessing t he implement at ion of comput er relat ed processes will also be crit ical t o t he audit process. Opport unit ies come by way of increasing use of Comput er Assist ed Audit Tools (CAATs) t o access dat abases beneat h the account ing soft ware t o creat e queries, writ e report s and develop audit t rails. While t he profession has risen t o t he challenge of audit ing banks in an IT environment , we need t o explore furt her on how audit can overcome t he challenges and exploit t he opport unit ies of t he IT environment t o make audit of banks more effect ive and meaningful. Opportunities I am t old one of the issues agit at ing all of you is expansion of opport unit ies for t he account ing profession especially in view of the growing membership of t he Inst it ut e. So far, you have enjoyed a monopoly posit ion in respect of cert ain areas of work, for example, t he audit of financial st at ement s. The easy way out t o seek and expand opport unit ies would be t o agit at e for cont inuat ion of this monopoly posit ion. I believe this will be a mist ake. Rat her, t he profession needs t o ident ify emerging opportunities in t he market place and develop t he skill needed t o exploit t hem. Let me cit e an example. Wit h concept s like core banking and cent ralized record keeping, t he relevance of t he audit of branches of Public Sect or Banks (PSBs) has significant ly declined. These banks have represent ed t o RBI t hat t he audit of bank's branches should be reduced. There is merit in t his suggest ion, since currently t he cost of audit of PSBs is significant ly higher t han t he cost of audit of comparable privat e sect or banks. However, t he Inst it ut e has been resist ing t his because it would mean a reduction in work for it s members. I believe t he Inst itut e's effort s in t his regard are ill advised. In fact , it makes much more sense for t he profession t o sharpen it s skills in t he area of concurrent audit for which a need exist s t han t o agit at e for ret ent ion of work which does not add value. Similarly, t he profession has shied away from t he responsibility for prevent ion and early det ect ion of fraud. The need for such a service exist s and if t he profession does not fulfill t hat need, ot her agencies which can provide t his service will displace audit ors and deprive them of a pot ent ially expanding opport unit y. Independence Let me now t urn t o t he challenge of 'independence'. The growth of large int ernat ional firms of account ant s has creat ed an opport unit y for the provision of a mult iplicit y of services. Client s benefit from such umbrella services and att ach value t o it . However, t his also raises t he vexed quest ion of t he ext ent t o which provision of t hese mult iple services erodes t he concept of independence.

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The case of Enron, which t ook down along with it the audit firm Arthur Andersen, comes t o mind in t his cont ext . The sudden collapse of Enron, an energy t rading and dist ribut ing

Canara Bank Samachar Lehar January 2012 company, ranked sevent h in t he Fort une 500, raised a number of quest ions about t he account ing and auditing pract ices followed by t he company. The company used creat ive account ing t o shift losses and debt s off t he company's balance sheet int o special purpose ent it ies (SPEs) t hereby concealing t he ext ent of it s indebt edness. The company was also report ed t o have withheld informat ion about SPEs which could have led audit ors t o insist on t heir consolidat ion in t he balance sheet . Enron's account ing t ransgressions misled invest ors t o believe t hat t he company was more profit able and less leveraged t han it really was. Andersen audit ed Enron for all sixt een years since t he company's format ion. On t op of pure audit , it also sold int ernal-audit and consult ing services. Despit e t his privileged insight , Andersen did not discover that Enron was publishing incorrect financial st at ement s leading t o t he t erm "Enronisat ion of financial st at ement s". This raises an import ant quest ion of conflict of int erest . Is it t he case t hat t he ext ensive consult ancy work done by Art hur Andersen for Enron compromised it s independence leading t o it s failure t o det ect erosion of account ing st andards? It also subsequent ly came t o light t hat some members of t he Audit Commit t ee faced financial conflict s of int erest , generat ed in part by t he company's donat ions t o charit ies t o which they were connect ed. Could t his conflict have been prevent ed? Account ing and audit ing pract ices were also called int o quest ion in t he collapse of Parmalat , t he largest dairy company in Europe, in one of t he biggest account ing frauds in corporat e hist ory. Like Enron, Parmalat t oo undert ook elaborat e derivat ive deals, oft en using complex offshore st ruct ures t hat involved some of it s many subsidiaries. Invest ors and bankers st ruggled t o underst and t he balance sheet or gauge t he t rue ext ent of it s liabilities. By t he t ime it collapsed, Parmalat had est ablished dozens of arrangement s involving offshore companies, which did not form part of t he company's consolidat ed financial st at ement s. Inst ances such as t hese reaffirm t he need for syst emic reforms in t wo areas. The first is t he regulat ion of audit ors. The profession has argued for years t hat self-regulat ion and peer review are t he right way t o maint ain st andards. But t he conduct of Enron, Parmalat et c. under t he very nose of audit ors has raised quest ion about t he effect iveness of soft regulat ion. The profession has t o find a way of remedying t his if it want s t o prevent t he imposit ion of an ext ernal regulat or. The second reform is t he need t o eliminat e conflict of int erest in accounting firms. Should t here be a ban on audit ors selling consult ing services t o t hose t hey audit ? One view is t hat t here is no real conflict of int erest and t hat bett er audit s would be t he best way t o assure regulat ors t hat such a ban is unnecessary. Yet if confidence in audit ing is t o be regained, percept ion is equally import ant . Regulat ors are likely t o demand some meaningful change on t he issue of such conflict of int erest . Overall, t his is a complex issue which needs t o be addressed dispassionat ely. Inter-disciplinary Approach Int er-disciplinary approach is t he next challenge on my list . In a complex world, no single profession can meet all t he requirement s of market part icipant s. Neit her is it possible for Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 individual professions t o operat e in silos cat ering t o specialized needs. Int er-disciplinary int eraction is t herefore not only unavoidable, but in fact desirable. But t his creat es it s own problems, part icularly in t he area of disciplinary jurisdict ion as professional st andards in different governing bodies - if such a body exist s - may be different and members of such bodies may be different ly regulat ed. The recent global financial crisis illust rat es t he problems t hat can arise from divergence of views across disciplines - in t his case bet ween t he account ing profession and prudent ial banking regulat ors. There is widespread crit icism t hat t he account ing st andards, more so fair value account ing insist ed on by account ant s, failed t o reckon wit h illiquid market s and dist ressed sales, and t hereby contribut ed to t he crisis, or at t he very least exacerbat ed t he severit y of the crisis. Post -crisis, t here is convergence in t he views of prudent ial regulat ors and account ing st andard set t ers on t he desirabilit y of forward looking expect ed loss approach t o loan loss provisioning. The IASB, FASB as well as t he Basel Commit t ee on Banking Supervision (BCBS) are act ively engaged in finding a commonly agreed solution t o t his complex problem. While discussing t he issue of loan loss provisioning, I would like t o highlight the Reserve Bank's concern on t he issue of divergence in ident ificat ion of Non Performing Asset s (NPAs) and provisioning as cert ified by st at ut ory audit ors vis-a-vis t he findings of t he supervisory inspect ion conduct ed by RBI. In t he Reserve Bank's view, in cert ain cases, t he st at ut ory audit ors have underest imat ed t he ext ent of NPAs and t he required provisioning. Since RBI, as t he supervisor of t he banking syst em, relies and leverages on t he work done by audit ors, t he profession should effect ively address t his issue. Ult imat ely, it is t he st at ut ory audit ors' cert ificat ion t hat is t aken as t he 't rue and fair' st at ement of t he account s of a bank and is disclosed t o all st akeholders. It is t herefore of prime import ance t hat t here is no underest imat ion of provisioning requirement s while finalising financial st at ement s of banks. Value Systems Finally, let me t urn t o t he sensit ive and important issue of a value syst em. Recent mont hs have wit nessed an agit at ion across t he count ry about erosion of values in t he public domain. The norms of a societ y are det ermined by t he dominant sect ions of t hat society, and t he account ing profession is cert ainly a dominant sect ion of societ y. The value syst em you pract ise in your professional conduct influences t he value syst em of t he societ y. Sadly, we see several t ransgressions. Take t he case of Worldcom. Worldcom indulged in major account ing misst at ement s which hid t he precarious financial posit ion of t he company. Invest igat ions revealed t hat more t han t hree billion dollars wort h of cost s were wrongly classified as capit al expenses over a five quart er period. This boost ed the report ed profit s, which were in fact fict it ious. The case of Sat yam Comput er Services here in India was similar. The company's chairman confessed t o more t han a billion dollar fraud on it s balance sheet which was hidden from t he company's board, it s senior managers and of course t he audit ors for several years. The Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 t ruth followed a now familiar pat t ern - overst at ing profit s, underst at ing liabilit ies, and overst at ing cash causing a big hole in t he balance sheet . Wit h so much account ing misconduct in big corporat ions, st akeholders wonder why books are not being reviewed on the default assumpt ion t hat t here could be fraud afoot . Account ing expert s explain t hat t he kind of forensic audit ing that reconst ruct s fraud is so t ime-consuming and expensive t hat it could bring an honest business t o it s knees. However, I st rongly believe t hat a robust system of audit s, a corporat e cult ure in which et hical conduct is encouraged and exemplified and an act ive and independent Board of Direct ors can make such frauds harder t o perpet rat e, easier t o det ect and help rest ore public confidence in published result s. What has been RBI's cont ribut ion in t his regard? Recognising t he import ance of t he int ernal audit and inspect ion funct ion as an effect ive management t ool, in April 1994, t he Reserve Bank advised all banks t o set up an Audit Committ ee of t he Board (ACB) of Direct ors. Needless t o say, we need t o have skilled and qualified persons on t he ACBs t o make t hem t ruly effect ive. Accordingly, in Sept ember 1995, we advised banks t o ensure t hat t here is at least one non-execut ive direct or who should be a Chart ered Account ant on t he ACB. ACBs have since been cont ribut ing immensely by providing direct ion and also by overseeing t he int ernal control funct ion in t he bank. We have kept t he CEO of t he bank out side t he ACB t o keep it independent . However, t he second in command, t he Execut ive Direct or concerned is a member of t he ACB t o bring t he insider perspect ive t o bear on t he Commit t ee's deliberat ions. However, t he presence of an execut ive direct or may be seen on compromising t he independence of t he ACB. I will be int erest ed in your views on t his. Ret urning t o t he larger issue of a value syst em, t he challenge before t he profession is t herefore t o demonst rat e by it s own conduct , it s concern for upholding a value syst em wit hin it self and consequent ly wit hin it s client ele as also t o init iat e programmes which creat e sensit ivit y t o t he need for great er et hical conduct . In this cont ext I would only like t o reit erat e t hat you have a significant role as t he conscience-keeper of t he business world. Conclusion Let me now sum up. I have start ed wit h briefly ident ifying t he shared professional domain of t he auditing profession and t he Reserve Bank. I have alluded t o t he uniqueness of t he Reserve Bank's balance sheet , or indeed balance sheet s. I t hen went on t o indicat e, what in my view, are some of t he key challenges t hat t he profession has t o address in order t o remain effect ive and t o add value t o t he real sect or. Where relevant , I have given cont ext ual references and illust rations from t he Reserve Bank, part icularly st emming from it s role as t he regulat or and supervisor of t he banking syst em. I wish your deliberations over t he next two days all success. ---------------------------------------

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Canara Bank Samachar Lehar January 2012

Empowering MSMEs for Financial Inclusion and Growth - Issues and Strategies
Dr. K. C .Chakrabarty Shri M. V. Tanksale, Chairman and Managing Direct or, Cent ral Bank of India (CBI), Smt V. R. Iyer, Executive Direct or, Cent ral Bank of India, Shri Chadrakant Salunkhe , President SME Chamber of India, Shri A. Ramesh Kumar, MD & CEO - Asia Pragat i Capfin Pvt Lt d, SME ent repreneurs, st aff members of CBI, dist inguished guest s, members of t he print and elect ronic media, ladies and gent lemen. It is my pleasure t o be here at t his Conclave on t he eve of t he conclusion of Cent enary Year Celebrat ions of Cent ral Bank of India. As you all may be aware, Cent ral Bank of India, which was est ablished way back in 1911, has a glorious past and would be celebrating it s Foundation Day on December 21, 2011. I take t his opportunity t o congrat ulat e Shri Tanksale, CMD, Smt Iyer, ED, all employees and cust omers of t he bank and all t he ot her st akeholders on complet ing a remarkable hundred years of exemplary service t o t he nat ion. The bank was t he realizat ion of t he dream of Shri Sorabji Pochkhanawala, a visionary, a philant hropist and a rare breed of people who richly deserve our tribut es. It was t he first commercial bank which was wholly owned and managed by Indians. Cent ral Bank of India, over t he years, has won t he t rust and confidence of it s client s and it comes as no surprise t hen t hat it has become one of t he most prominent banks in India. But more import ant ly, the bank had a rich t radit ion of promot ing small and medium ent repreneurship and played a st erling role in t he indust rial development of t he Bombay Presidency region. However, over a period of t ime, t his zeal of promot ing ent repreneurship development appeared t o have dimmed a bit and, t herefore, I am ext remely happy that as t heir Cent enary Year draws t o a close, Cent ral Bank of India is bringing t he limelight back t o SMEs and rededicat ing t hemselves t o t he cause. I congrat ulat e Shri Tanksale for organizing this Conclave on "Empowering SMEs for Inclusive Growt h- Strat egies and Init iat ives" in collaborat ion wit h a predominant indust ry associat ion- t he Small and Medium Business Development Chamber of India. A. Importance of the MSME sector Now, t here is no need for me t o overemphasize t he role and import ance of t he micro, small and medium ent erprises You are all aware t hat in a developing economy, t he MSMEs play a vit al role and if India were t o have a growt h rat e of 8-10 percent for t he next couple of decades, it needs a st rong micro, small and medium sect or and for t hat micro ent repreneurs need t o be nurt ured. As per available st at istics (4t h Census of MSME Sect or), t his sect or employs an est imat ed 59.7 million persons spread over 26.1 million ent erprises. It is est imat ed t hat in t erms of value, MSME sect or account s for about 45% of t he manufact uring out put and around 40% of t he t ot al export of t he count ry. The MSMEs are t he best vehicle for inclusive growt h, t o creat e local demand and consumption and also t o fight wit h t he global melt down. Public policy has right ly accorded high priority t o t his sect or in order t o achieve balanced, sust ainable, more equit able and inclusive growth in t he count ry. A micro ent erprise of t oday will be a big ent erprise of t omorrow, and might well become a mult inat ional ent erprise event ually, if given t he support in finance and capacit y building. It is also an opport une t ime for put t ing more emphasis on MSMEs due Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 t o recession in many count ries of t he globe and rupee depreciat ion. The recession, while slowing down t he global demand for goods and services, should not impact t he sect or, so adversely, as there is a huge demand in t he local market s which could be t apped and the depreciat ion of t he rupee has improved their price compet it iveness of export ing firms in t he sect or. Sizeable growth in credit - yet MSMEs feel not enough is being done The MSMEs primarily rely on bank finance for their operat ions and as such ensuring t imely and adequat e flow of credit t o t he sect or has been an overriding public policy objective. Advances ext ended t o t he micro and small enterprises sect or are t reat ed as priorit y sect or advances. Over t he years there has been a significant increase in credit ext ended t o t his sect or by t he banks. As at t he end of March 2011, t he t ot al out st anding credit provided by all Scheduled Commercial Banks (SCBs) t o t he MSE sect or st ood at Rs.4,575 billion as against Rs.3,622 billion in March 2010 regist ering an increase of 26.3%. Despit e t he increase in credit out st anding t o t he sect or, t he MSME borrowers feel t hat t he lenders are not doing enough for t he MSMEs and are cat ering more t o t he needs of t he large corporat e. Let me now focus on t he major problems / challenges / issues faced by t he MSMEs and, more specifically, the Micro and Small sect or. B. Major Problems / Challenges / Issues faced by the Sector Access to credit Not wit hst anding t he increase in credit out st anding t o t he sect or, access t o adequat e and t imely credit at a reasonable cost is a crit ical problem faced by t his sect or. The st atist ics compiled in t he Fourt h Census of MSME sect or Sept ember 2009, revealed that only 5.18% of t he unit s (bot h regist ered and unregist ered) had availed of finance t hrough inst it ut ional sources, 2.05% had finance from non-inst it ut ional sources; t he majority of unit s i.e. 92.77% had no finance or depended on self-finance. Thus, t he ext ent of financial exclusion in t he sect or is very high. But , t his is not ent irely unexpect ed because if one looks at t he financial exclusion in our country in general, t hen MSMEs cannot remain unaffect ed by it . But t here is a need t o bridge t his gap t hrough enabling policies and t he Government of India (GoI) needs t o play a cat alyt ic role t o cat er t o t he needs of t his sect or. First time entrepreneurs The MSE borrowers, especially new generat ion ent repreneurs, do not have collat erals t o offer t o avail of bank finance. It is generally observed t hat collat eral securit y provides comfort t o t he lenders as it ensures commit ment of t he borrower t o t he project and is also available t o t hem for recovery in t he event of failure of t he ent erprise. Infrastructure In t he present global environment , t he MSMEs and more specifically t he micro and small ent erprises (MSEs) have t o be compet it ive t o survive and t hrive. To ensure compet it iveness of t he MSEs, it is essent ial t hat t he availabilit y of infrast ruct ure, t echnology and skilled manpower are in t une wit h t he global t rends. MSEs are eit her locat ed in industrial est at es set up many decades ago, or have come up in an unorganized manner in rural areas. The st at e of infrast ruct ure including power, wat er, roads, et c. in such areas is inadequat e and unreliable. Furt her, t he MSE sect or in India, wit h some except ions, is charact erized by low t echnology levels, which act s as a handicap in t he Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 emerging global market . Alt hough India has t he advant age of a large pool of human resources, t he industry cont inues t o face deficit in manpower with the right skill set s for specific areas like, manufact uring, service, market ing, et c. The HR problem is furt her exacerbat ed by t he low ret ention rat e. Access to alternate sources of capital The ability of MSMEs (especially t hose involving innovat ions and new t echnologies) t o access alt ernat ive sources of capit al like angel funds / risk capit al needs t o be enhanced considerably. For t his purpose, removing fiscal / regulat ory impediment s t o use such funds by t he MSMEs should be considered on priority. Access t o equit y capit al is a genuine problem. At present , t here is almost negligible flow of equit y capit al int o t his sect or. Absence of equit y capit al may pose a serious challenge t o development of knowledgebased indust ries, part icularly those t hat are sought t o be promot ed by the first -generat ion ent repreneurs wit h t he requisit e expert ise and knowledge. There is a demand for a dedicat ed Exchange for MSMEs. Delayed realization of receivables Considerable delay in set t lement of dues / payment of bills by t he large-scale buyers t o t he MSMEs unit s adversely affect ed t he recycling of funds and business operat ion of MSME unit s. Though t he Government has enact ed the Delayed Payment s Act , 1998 many of t he MSME unit s are reluct ant t o pursue cases against major buyers. Aft er t he enact ment of t he Micro, Small and Medium Ent erprises Development (MSMED) Act 2006, t he exist ing provisions of t he Int erest on Delayed Payment Act , 1998 t o Small Scale and Ancillary Industrial Undert akings, have been st rengt hened. The banks have been advised t o sanct ion separat e sub-limit s within t he overall limit s sanct ioned t o t he corporat e borrowers for meet ing payment obligat ions in respect of purchases from MSME sect or. Necessary inst ruct ions have been issued by banks t o t heir branches t o monit or t he posit ion of payment by corporat es t o MSME and wherever found necessary, persuade t he corporat e t o release t he same on priority basis. Sickness of units Growing incidence of sickness of t he sect or is yet anot her area of concern. When t he sickness prolongs it leads t o t he closure of unit s and unemployment . The mort alit y of t he MSE unit s is high. This has wider implicat ions including locking of funds of t he lending inst it ut ions, loss of scarce mat erial resources and loss of employment . As on March 2011, t he number of unit s ident ified as pot entially viable as a percent age t o t ot al sick MSE unit s is around 8. The unit s placed under nursing as a proport ion t o the t ot al number of sick unit s st ood at 5.22%.The causes of sickness are bot h int ernal and ext ernal. The major causes are limit ed financial resources, lack of organisat ional, financial and management skills and expert ise, non-availability of power supply short age of raw mat erials, market ing difficult ies, delayed and inadequat e credit , obsolet e t echnology, inadequat e infrast ruct ure, et c. Exit policy for MSMEs An exit rout e for non-viable unit s is necessary to manage sickness. Worldwide, MSMEs are credit ed wit h high level of innovat ion and creat ivity, which also leads t o higher level of failures. Keeping t his in view, most of t he count ries have put in place mechanisms t o Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 handle insolvencies and bankrupt cies. The present mechanism available in India for MSMEs is archaic. Business failure in India is viewed as a st igma, which adversely impact s individual creat ivit y and development in t he count ry. The exist ing legislat ions may have t o be t oned up so as t o provide for efficient liquidat ion of non-viable businesses. C. Initiatives by Government of India / Reserve Bank of India Recognizing t he import ant role played by MSMEs in economic development and it s sizeable cont ribut ion t o employment and GDP, and realizing t hat financial access is crit ical for MSMEs growth and development , Government and Reserve Bank of India are t aking the lead in support ing initiat ives that improve access t o finance. While at the broader level, financial inclusion makes growt h broad based and sust ainable by progressively encompassing t he hit hert o excluded populat ion, and has become a nat ional priority, at t he more narrower level, since t he level of financial exclusion is very high in t his sect or, drive t o universal financial access, including SME finance, is no longer a policy choice but a compulsion. The Reserve Bank of India has int ensified a number of measures and endorsed quant it at ive access t arget s over t he last year t o furt her financial inclusion. Let me very briefly t ouch upon a few of them. Wit h an object ive of ensuring uniform progress in provision of banking services in all part s of t he count ry, banks were advised t o draw up a roadmap t o provide banking services t hrough a banking out let in every unbanked village having a populat ion of over 2,000 by March 2012. The Reserve Bank advised banks t hat such banking services need not necessarily be ext ended t hrough a brick and mort ar branch but could be provided also t hrough any of t he various forms of Informat ion and Communicat ion Technology (ICT) based models, including Business Correspondent s (BCs). A t ot al of about 74,000 such unbanked villages have been ident ified and allot t ed t o various banks t hrough St at e Level Bankers Commit t ees (SLBCs). As at t he end of Sept ember 2011, as report ed by t he St at e Level Bankers' Commit t ees of various st at es / Union Territ ories, banking out let s have been opened in 42,079 villages across t he various Stat es in t he count ry. This comprises of 1127 branches, 39998 business correspondent s and 954 ot her modes like rural ATMs, mobile vans et c. To ensure enhanced credit flow t o t he sect or, in t erms of t he recommendat ions of t he Prime Minist er's Task Force on Micro, Small and Medium Ent erprises (MSMEs) (Chairman : Shri T. K. A. Nair, Principal Secret ary, Government of India) const itut ed by t he Government of India, banks were advised t o achieve a 20 per cent year-on-year growt h in credit t o micro and small ent erprises; t he allocat ion of 60% of t he MSE advances t o the micro ent erprises is t o be achieved in st ages viz. 50% in t he year 2010-11, 55% in t he year 201112 and 60% in the year 2012-13 and achieve a 10% annual growt h in number of micro ent erprise account s. The Reserve Bank is closely monit oring t he achievement of t arget s by banks on a quart erly basis. The mat t er is followed up wit h t he laggard banks t o know t heir const raint s and impress upon t hem t he need t o devise st rat egies t o gear up t he credit mechanism for t he sect or. Further, based on t he Recommendat ions of the Working Group (Chairman : Shri V. K. Sharma, Execut ive Direct or, RBI) const it ut ed by t he Reserve Bank of India t o review t he Credit Guarant ee Scheme (CGS) of t he Credit Guarant ee Fund Trust for Micro and Small Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 Ent erprises (CGTMSE), t he limit for collat eral free loans t o t he MSE has been increased from t he present level of Rs.5 lakh t o Rs.10 lakh and it has been made mandat ory for banks. The Working Group has also made recommendat ions regarding increase in t he ext ent of guarant ee cover, absorpt ion of guarant ee fees for t he collat eral free loans by CGTMSE subject t o cert ain condit ions, simplificat ion of procedure for filing claims with CGTMSE and increasing awareness about t he scheme. CGTMSE, which is implement ing agency for Credit Guarant ee Scheme, has been advised t o expedit e implement at ion of t he recommendat ions. The implement at ion of t he Recommendat ions of t he Working Group should result in enhanced usage of t he Guarant ee Scheme and facilit at e increase in quality and quant it y of credit t o t he present ly included, as well as excluded, MSEs, leading event ually t o sust ainable inclusive growt h. All Scheduled Commercial Banks have also been advised on May 4, 2009, t o review and put in place MSE Loan policy, Rest ruct uring / rehabilit at ion policy and Non-discretionary One Time Set t lement Scheme for recovery of non-performing loans duly approved by t heir Board of Direct ors. Banks were advised in December 2009 t o give wide publicit y t o t he Non-discret ionary One Time Set t lement Scheme for recovery of non-performing loans for t he MSE sect or by placing it on t heir bank's web-sit e and t hrough ot her possible modes of disseminat ion. On t he issue of alt ernat e sources of credit , dedicat ed Exchange for MSMEs, market ing, t echnology up-gradat ion and infrast ruct ure, t he PM's Task Force has examined t he issues and has made several recommendat ions t o address t he bot tlenecks. The implement at ion of t he recommendat ions in a t ime bound manner are being monit ored by t he GOI. D. Role of Banks and Industry Associations in empowering MSMEs Role of banks There has been a burst of entrepreneurship across t he country, spanning rural, semiurban and urban areas. This has t o be nurt ured and financed. It is only t hrough growt h of ent erprises across all sizes t hat compet ition will be fost ered. As I ment ioned in t he beginning, a micro ent repreneur of t oday will become a small ent repreneur and t hen a big ent repreneur of t omorrow, and might event ually well become a mult inational ent erprise if given the comfort of financial support and capacit y building. There will be failures and successes. Despit e t he risk, financing of first t ime ent repreneurs is a must for financial inclusion and growt h. Banks will t herefore, have t o t one up t heir risk assessment and risk management capacit ies and provide for t hese failures as part of t heir risk management . Banks have t o recognise t he vast pot ent ial t hat exist s in responsible lending t o t he MSE segment . The banks must deliver on t heir volunt ary commit ment s enshrined in t heir Code of Commit ment t o t heir MSE borrowers. Banks have, no doubt , t hrough t he Code of Bank's Commit ment t o MSEs, volunt arily commit t ed t o t heir MSE cust omers t o provide easy, speedy and t ransparent access t o banking services in t heir day-t o-day operat ion. In t he last St anding Advisory Commit t ee meet ing held on July 5, 2011, it was decided t hat t he SCBs should underst and the problem of t he sect or and devise st rat egies t o gear up t heir credit mechanism st ruct ure so as t o achieve t he prescribed t arget of lending t o t he sect or by the PM's Task Force. Sensit ivity on t he issue t o be developed at various hierarchical levels, such as, discussion of t he issue in t he Board meet ings, management level meet ings Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 once in t hree mont hs. Branch manager's conference on financing t o t he micro sect or t o be held and t he local NGOs, KVIC could be involved so as t o appreciat e t he problems of t he sect or and flagging major issues t o remove const raint s / bot tlenecks in financing. The performance of branch managers in dealing wit h the sect or should be made a crit erion in t heir performance appraisal. Wit h increasing compet it ion, introduction of new product s and st ringent regulat ory environment , t he role of banks needs t o change from mere lenders t o partners in business. There is a need for great er part icipat ion of banks in t he affairs of t heir const it uent s by convergence of credit services and non credit services. The bank's st aff should be t rained and sensit ised t hrough cust omised t raining programmes t o meet t he diverse needs of MSEs such as knowledge of market s, bot h domest ic and global, use of t echnology, et c. Banks should be act ively providing advisory and planning services and in fact hand-holding t heir client s t hrough t he set t ing-up st age and such services should be ext ended t o all regardless of t he size of t heir t urnover. The banks should not only provide different iat ed product s for MSMEs, but also provide counseling & guidance t o new and est ablished businesses, market ing support etc. In short , all banks, in fact , may develop innovat ive mechanism t o provide not only finance and banking services t o t heir MSME cust omers but also non credit relat ed services t o t hem under one roof at reasonable charges. For creat ing t ransparency and wider disseminat ion of services provided by banks for t heir MSME client s, it was decided in the 12t h St anding Advisory Committ ee on MSMEs t hat all SCBs should set up a SME Port al on t heir websit e, where t hey could put in all informat ion/ product s of t heir bank for t heir MSE client s, as well as informat ion on awareness programs et c organized by t hem. I am sure Cent ral Bank of India and ot her banks would have t aken a st ep in that direct ion. In order t o expedit e sanct ion and disbursement of loan t o MSMEs a single window concept could be provided by Central Bank of India, if not already done. Loan facilit y t o small unit s, say Micro ent erprises, should be sanct ioned at t he level of t he branch. A Cent ralised Credit Processing Cell (CPC) for MSMEs could be int roduced. These Cells may be ut ilized for single point appraisal, sanct ion, document at ion, renewal and enhancement . The arrangement is expect ed to help in reduct ion in delay and mult iple queries, ut ilizat ion of t he available t alent in an opt imal fashion besides building reliable MIS, developing fair pract ices and easier t racking. Init ially, t he CPCs may be set up at each Regional Office of t he banks and subsequent ly in t he recognized clust ers. In case of micro and small ent erprises simplified procedure of loan applicat ion / sanct ion should be followed, score based lending be done up t o Rs.2 crores, working capit al limit s be given by project ed t urnover met hod, and t erm loans be sanct ioned as recommended above t o prevent t he burden of dat a collect ion, project report / project ions preparation for MSMEs. The disposal of applicat ions should be done in a t ime bound manner, which should be wit hin t he overall time limit prescribed by RBI. All banks should t ap the available t echnology and set up Central Regist rat ion of Loan Applicat ions. The same set up can be used by the borrower for t racking of t he st at us of applicat ion on t he int ernet on t he basis of t he receipt issued t o him. The borrower may also be provided opt ion of t racking his applicat ion over t elephone on t he t oll-free helpline. The same t echnological set up may Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 also be used for making online applications. Online applicat ions may be popularized and publicized by all branches. Lack of adequat e capacit y is the key feat ure, as regards micro, small and medium ent erprises are concerned. In order t o equip t he MSMEs wit h t he capacit y t o manage t heir businesses effect ively and efficient ly comprehensive guidance and t raining on set t ing up new unit s as well as providing continuous educat ion on different aspect s of successful management of exist ing business ent erprises must be provided. While t he Rural Self Employment Training Inst it ut es (RSETIs) are working in t his direct ion t here is a need t o examine t he impact of RSETIs. A scheme for ut ilizing NGOs t o provide t raining services t o t iny micro ent erprises could be encouraged. Ent repreneurship development is import ant in view of it s visible impact on wealt h creat ion and employment generation. To facilit at e and encourage t his, skill building has been impressed upon by t he Prime Minist er's Task Force for MSMEs. Ent erprise Development Cent res (EDC) should be set up by t he Cent ral / St at e Government s wit h incubat ors t o provide t raining not just for set ting up of new unit s but also t o provide cont inuing educat ion on different aspect s like product design, packaging, t echnology upgradat ion, financial management and market ing. Role of Associations All SLBC Convenor banks have been t o review t heir inst it ut ional arrangement s for delivering credit t o t he MSME sect or, especially in 388 clust ers identified by Unit ed Nat ions Indust rial Development Organisat ion (UNIDO) spread over 21 st at es in various part s of t he country. The Cent ral Bank of India has presence in 47 clust ers identified by UNIDO and t hese branches have been designat ed as Specialised MSME Branch. The MSME Associat ions / Chambers may bring t o t he not ice of SLBC Convenor banks clust ers were banking facilit ies are not available so t hat t he same could be addressed. Specific issues concerning t he sect or were banks could play a role should also be brought t o the not ice of t he SLBC Convenor bank and t he Empowered Commit t ee on MSMEs by t he Indust ry Associat ions for appropriat e measures t o be t aken t o solve t he issues. As any ot her sickness, t he need for t imely t reatment aft er ident ificat ion of sickness cannot be overemphasized in MSMEs. For viable unit s, t imely and effect ive rehabilit at ion by way of renegot iat ions of t erms of loans, induct ion of fresh dose of funds, business rest ruct uring, change of management et c. may become necessary. The process should not only be quick, efficient , cheap and fair t o all st akeholders but also accept able t o and implement able by all, wit h necessary monit oring arrangement s for implement at ion of t he same. In case t he unit is not found viable, recovery of t he dues of lenders through a fair, efficient and swift legal mechanism should be t he focus. The senior-level represent at ives of MSME Associat ions in each St at e are members of t he Empowered Commit t ee set up by RBI at each of it s Regional Offices, of which t he SLBC convenor, represent at ives of banks having predominant share in SME financing in t he St at e, SIDBI, Direct or of Indust ries of the St at e Government et c. are also members. MSME Associat ions need t o use t his Forum not only for removing bot t lenecks in t he smoot h flow of credit t o t he sect or but also for reviewing t he accessibility of bank finance t o more and more MSMEs but also highlight gaps if any in t he at tit ude and skills at t he bank branch level. As it is observed t hat rehabilit at ion of sick micro, small and medium ent erprises could not be t aken up due t o non-availability of promot ers' cont ribut ion in a large number of cases, we Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 have recommended t o t he GOI t o set up a Rehabilit at ion Fund for rehabilit ation of sick MSME ent erprises. The Indust ry Associat ions have oft en been often represent ing on the delayed payment s from large corporat es. While banks have been advised t o allocat e a sub-limit in respect of large borrower account s, for making payment s t o t he MSE unit s against purchases from t hem but it is not possible for banks t o force t he large buyers t o ut ilize t he limit for making payment s. This problem could be inst itut ionally t ackled by fact oring. In t he recent meet ing of t he St anding Advisory Committ ee t o review credit flow t o t his sect or, it was urged upon t he Industry Associat ions t o bring forward exemplary cases where big corporat es have default ed in making payment s t o MSE suppliers so t hat appropriat e act ion, under t he Act , could be t aken by the Government of India. The MSME Associat ions and Chambers of Commerce have an import ant role t o play in st epping up credit t o t his segment . Asymmetry of informat ion and lack of t ransparency and reliabilit y of dat a has been a major concern for organizat ions dealing wit h MSMEs world over. The Associat ion need t o t herefore, proact ively engage themselves in organising workshops and training programmes for t heir members t o enlight en t hem about cash flow cycles, various financial product s, account ing pract ices, et c. In t his regard, I would urge upon t he ot her MSME Associat ions, Chambers of Commerce et c. t o collaborat e, in t he same manner wit h banks, NIBM or any ot her t raining inst it ut e in t he area of banking and finance, basic account ancy and informat ion t echnology for MSMEs. Role of MSMEs MSEs t oo, on their part , should underst and that banks are responsible t o t heir deposit ors and shareholders and, t herefore, t hey, i.e. t he MSEs, as cust omers of bank credit , have cert ain obligat ions t o fulfill by way of repaying bank loans, maint aining proper books of account s, submit t ing informat ion correct ly and more import antly sharing informat ion about financial problems when t hese arise so t hat t hey can work t oget her wit h t he bank in resolving t hese. On t he cost of credit , while int erest rat es have been deregulat ed by Reserve Bank of India, my message t o t he MSME sect or is t hat as int erest cost s are a very small fract ion of t heir operat ing cost s, only approximat ely 4%, do not ask for low int erest rat es from t he banking sect or, and inst ead ask for credit at compet it ive rat es. Credit has t o be self-liquidat ing on a viable project and has a cost . In fact , what t he small ent repreneurs need t o focus on are four t ypical mist akes ent repreneurs make as right ly point ed out by Pet er F. Drucker in his book Managing in t he Next Society'. Many new businesses st art out wit h high promise but suddenly run int o t rouble aft er a year or t wo. There are t ypical mist akes ent repreneurs make and all are foreseeable and avoidable. First ly, majorit y of successful new invent ions or product s do not succeed in t he market for which t hey were originally designed. So one has t o keep opt ions open and not be dogmat ic about pushing a product in a market for which init ially designed or t arget ed. Success may lie elsewhere. Secondly, ent repreneurs believe t hat profit is what mat t ers most in a new ent erprise. But profit is secondary. It is t he cash flow t hat matt ers. A business t hat grows fast devours cash. Const ant invest ment s have t o be made t o just keep even. Thirdly, when a business grows, it is necessary t o creat e a management t eam. Young ent repreneurs oft en cannot afford t o bring in an ext ernal Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 management t eam. So, it is necessary t o ident ify t he core compet encies of t he people working with you. This planning should t ake place well in advance. Last ly, when t he business is a success t he ent repreneur needs to ask what the business needs at t his st age and whet her he is concent rat ing on t he right t hings. As successful ent repreneurs, t hey have gained experience and wisdom from t heir mist akes and going forward, it is necessary t o ensure t hat t he same mist akes are not repeat ed. E. Need for financial Infrastructure Est ablishing a solid financial infrastruct ure (credit regist ries / bureaus, collat eral, and insolvency regimes) should be a priority in t he financial development agenda, as it can lower the cost s and risks t o financial inst it ut ions of serving MSMEs. Bankrupt cy regimes regulat e t he efficient exit ing of t he market , and make t he resolut ion of mult iple credit ors' conflict ing claims more orderly, result ing in more ext ensive opport unities for recovery by bot h t he bankrupt ent it y and it s credit ors. St ronger credit or right s improve access t o finance. St ronger credit or right s t end t o have a higher number of loan account s per adult populat ion and also higher rat es of privat e credit t o GDP. There is a need for adequat e and reliable credit informat ion mechanism, such as an MSME credit bureau, that serves t he needs of both t he MSMEs' and the pot ential lenders'. Transparency shall facilit at e t hem in obt aining finances, get t ing favourable contract s and improving t heir business prospect s. A World Bank report st at ed t hat a good credit informat ion infrastruct ure can cont ribut e significant ly t owards assist ing MSMEs' access t o capit al. The report furt her highlight ed t hat small firms wit h access t o credit bureaus have a 40% chance of obt aining a loan, whereas firms wit hout access t o credit bureaus have only a 28% chance of receiving a loan. Therefore, significant opport unit ies exist t o increase lending act ivit ies t o MSMEs wit h t he est ablishment of MSME credit bureaus. A sound financial informat ion infrast ruct ure should improve t ransparency and disclosure for MSMEs in a cost -effect ive way, and help MSMEs build a credit hist ory, which is crit ical in helping t o address bot h challenges of informat ion asymmet ry and cost t o serve. Set ting of Credit Information Companies has already been approved by Reserve Bank of India. F. Conclusion The recent past has been a challenging t ime for t he banking sect or in India. You, along wit h t he ent repreneurs, have coped well wit h t hese challenges and have emerged st ronger from a difficult phase. While t he banking sect or has responded well so far, t here are several challenges t hat lie ahead. Our banking syst em needs t o equip it self t o deal wit h emerging challenges and be prepared t o cash in on t he opport unit ies unleashed by higher growt h. In dealing wit h t he needs of small and medium ent erprises, banks have t o look for new delivery mechanisms. They must economise on t ransact ion cost s and provide bet t er access t o the current ly under-served. To serve new rural credit needs, innovative channels for credit delivery will have t o be found. The proud hist ory of your bank should inspire you t o seek great er height s of professional glory. In t he end, I once again congrat ulat e Central Bank of India and the SME Chamber in joint ly organizing t his Conclave. I also convey my best wishes t o every employee and ent repreneur cust omer of your bank on the eve of t he conclusion of your Cent enary Year, t o your cust omers and well-wishers, and wish you a great fut ure of growt h and development . You have had a

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Canara Bank Samachar Lehar January 2012 glorious hundred years. You now have a great opport unit y. May t he next hundred be even bet t er! ----------------------------------------

Economic and Financial Developments in Andaman and Nicobar Islands

Mr. Deepak Mohanty I t hank t he Andaman Chamber of Commerce and Indust ry for invit ing me t o address t his dist inguished gat hering. This pict uresque Union Territ ory (UT) of Andaman & Nicobar Islands (ANI) in t he Bay of Bengal covers 0.25 per cent of t he national geographical area but account s for only a fract ional share of 0.03 per cent of national populat ion. This explains why ANI has the lowest populat ion densit y of 46 per square kilomet re as against 382 at t he all-India level. The high lit eracy rat e and per capit a income make ANI as one of t he leading UTs in India in t erms of socio-economic development s. Furt her, the lushness of it s landscape wit h bio-diversit y and att ractive spot s for eco-t ourism make it a prime t ourist att raction. Notwit hst anding t hese social and geographical advant ages, ANI faces several development al challenges, especially in t he aft ermat h of t sunami t hat wreaked large-scale damage in December 2004. Apart from nat ural and rich human resources, it is import ant t o have a wellfunct ioning financial syst em for sust ainable economic development . In recognit ion of t his, t he Reserve Bank has st epped up it s effort s in recent years t o enhance t he penetrat ion of t he formal financial sect or and promot e financial inclusion wit h a view t o improving t he wellbeing of our societ y. In t his regards, t he Reserve Bank has been undert aking special init iat ives for ext ending t he outreach of banking facilit ies in st at es and union t errit ories. Against this backdrop, I propose t o briefly out line t he economic and financial st ruct ure of t he UT of ANI as well as highlight various financial inclusion init iatives t aken by t he Reserve Bank. In conclusion, I shall flag some issues t hat need policy att ent ion. Background Andaman & Nicobar Islands, a Union Territ ory of India since 1956, is an archipelago of 572 islands (306 islands and 266 rocks) and has a geographic area of 8,249 square kilomet re. Of t hese islands, only 38 have human habitat ion. The UT is best owed wit h abundant green veget at ion and marine wealt h besides huge pot ent ial for cult ure fisheries. It covers t he Indian subcont inent 's richest rain-forest and houses indigenous t ribes of Negroid and Mongoloid origins. The diversified mangroves have been included in t he World Wildlife Fund (WWF) Global 200 list of t he world's highest priorit y biodiversit y 'hot spot s'. Furthermore, t hese islands are included in t he UNESCO-designat ed Biosphere Reserve / Zone (Indo-Malayan Bio-geographic Zone). According t o t he Forest Survey of India (2005), 87 per cent of t he t ot al geographical area of ANI is under forest cover and only about 50,000 hect are is available for cult ivat ion and Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 allied act ivit ies dist ribut ed among various islands. At present , the major crops being grown are paddy, coconut , arecanut , veget ables and fruit s. ANI has an aggregat e coast line of 1,912 kilometres, which is about one-fourt h of t he t ot al coast line of India. The Exclusive Economic Zone (EEZ) around t he islands encompasses around 0.6 million square kilomet re which is 30 per cent of t he EEZ of India. This provides a great opport unit y for development of fisheries and ot her marine resources. Social Indicators As per t he Census 2011, the t ot al populat ion of ANI regist ered a decennial growt h of 6.7 per cent with a t ot al populat ion of about 3.80 lakh. ANI consist s of t hree dist rict s, viz., Sout h Andaman dist rict , Nort h and Middle Andaman dist rict and Nicobar district . Over 88 per cent population of the UT lives in t he first two dist rict s of which 37 per cent live in urban areas. Nicobar dist rict does not have any urban area. While t he sex rat io in Nort h and Middle Andaman and Sout h Andaman dist rict s has increased t o 925 and 874, respect ively, in 2011 from 884 and 824 in 2001, the sex ratio of Nicobar dist rict has decreased t o 778 in 2011 from 857 in 2001. The populat ion density in ANI has increased from 43 per square kilomet re in 2001 t o 46 per square kilomet re in 2011. The lit eracy rat e in t he Islands was high at 86.3 per cent in 2011 as compared wit h 74.0 per cent at the allIndia level (Table 1). Table 1 Andaman and Nicobar Islands : Select Socio-Economic Indicators Andaman & Nicobar All-India Items Unit Islands 1 2 Geographical Area Sq. kms. 8,249 32,87,263 Populat ion In Lakh 3.8 12,102 Per Capit a Income (in 2009-10 at 2004-05 Rupees 54,830 33,731 prices) Densit y of Populat ion Per sq. km. 46 382 Decennial Growt h Rat e of Populat ion (2001Per cent 6.7 17.6 2011) Females per Sex Rat io 878 940 1000 Males Lit eracy Rat e Per cent 86.3 74.0 Source : Census of India, 2011. Macroeconomic Structure The UT of ANI has significant pot ent ial for growt h given it s nat ural resource endowment . However, t he comparat ive isolat ion of the islands from t he mainland, scatt ered islands, difficult communicat ion syst em, and heavy reliance on t he government for supply of input s and smaller base of local market are t he major const raint s in achieving rapid growt h.

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Canara Bank Samachar Lehar January 2012 In line with t he nat ional economy, during the last decade, t he economy of ANI has undergone significant st ruct ural t ransformat ion. The dominance of primary sect or has declined and the share of t he t ert iary sect or has increased. The reduct ion in the share of primary sect or could part ly be att ribut able t o reduct ion in cut t ing of forest t imber as per t he decision of t he Supreme Court . Furt her, there was reduction of agricult ural produce due t o submerging of land in t he wake of the t sunami. The increase in t he share of services sect or is at t ribut able t o enhanced const ruct ion act ivities due t o rehabilit at ion measures and increased government expenditure in t he post -t sunami period. The share of indust rial sect or, however, remained more or less st agnant . As per the available informat ion from t he Cent ral St at istical Office (CSO), in 2009-10 t he per capit a income (NSDP) of ANI was over 62 per cent higher t han all-India per capit a income. However, during 2009-10, t he growth in NSDP of ANI decelerat ed t o 2.7 per cent mainly due t o t he sharp decline in t he growth of t he indust rial and agriculture sect ors. Not wit hst anding t his decelerat ion in growt h, t he average annual growt h rat e improved during t he second half of t he 2000s t o almost 10 per cent from 6 per cent in t he first half. The average growt h of NSDP of ANI generally remained higher t han t hat of t he all-India NDP during t he period 2005-10 (Chart 1). Chart 1

The increase in t he average growt h of NSDP of ANI during 2005-10 was mainly driven by indust rial and services sect or. The indust rial sect or made a sharp recovery from a low growt h rat e of 1.5 per cent during t he first half of t he 2000s t o 12.4 per cent in t he second half of t he decade. However, it is observed t hat t he growt h rat e in t his sect or has remained highly volat ile during t he ent ire decade. The agricult ure sect or wit nessed a t urnaround from negat ive growt h during 2000-05 t o a growt h rat e of 3.7 per cent during 2005-10 (Table 2).

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Canara Bank Samachar Lehar January 2012 Table 2 Sectoral Net Domestic Product (At 2004-05 Prices) (In per cent ) Growth Rate Sectors Average Average 20092000-05 2005-10 10 I. Agriculture and Allied -3.2 Activities of which : Agricult ure 2.2 II. Industry 1.5 of which : (i) Mining & quarrying (ii) Manufact uring (iii) Elect ricity, gas and wat er supply III. Services 3.7 -6.3

Share to NSDP Average Average 20092000-05 2005-10 10 22.6 11.8 11.0 (15.2) 16.2 2.5 8.3 2.7 7.2 2.6 (16.5) 0.5 1.0 1.1 86.4 (68.3) 33.2 13.7 8.3 100.0

-0.4 12.4

-11.6 -7.4

-24.9 -2.0 30.9 9.4

35.0 12.2 20.4 11.1

-7.7 39.3 -29.9 4.3

1.1 1.2 0.8 74.8

0.6 0.8 1.3 85.5

of which : (i) Const ruct ion 38.5 19.4 40.8 (ii) Transport , st orage 2.7 7.9 -13.0 & communicat ion (iii) Trade, hot els and 5.0 11.5 33.2 rest aurant s IV. State Domestic 6.2 9.9 2.7 Product Memo Item : All India NDP Growt h (%) 7.6 54,830 St at e per capit a Income ( ) 33,731 All India Per Capit a NNI ( ) Note : Figure in bracket s denot e shares of t he different level. Source : Cent ral St at ist ics Office.

14 17.2 10.0 100.0

31.7 14.7 7.6 100.0

sect ors in NDP at t he all-India

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Drivers of Growth Keeping wit h t he overall trend in t he count ry, t he economic act ivity in t he UT is dominat ed by t he t ertiary sect or and it s share has been cont inuously rising. The share of t he primary sect or has been declining and the share of t he secondary sect or in NSDP is

Canara Bank Samachar Lehar January 2012 st at ic at around 3 per cent . There is hardly any manufact uring act ivit y in the UT which is most ly concent rat ed in wood processing, and wit h t he present restrict ions on t he exploit at ion of forest s has led t his act ivit y t o st agnat e. Wit hin the t ert iary sect or, const ruct ion act ivit ies, t ransport, st orage and communicat ion and public administ rat ion have been t he major drivers of growt h. Agriculture The average rainfall in t he islands is very high and spread over eight mont hs during AprilNovember each year which produces a humid tropical climat e. The agro-climat ic condit ion in t hese islands is suit able for cult ivat ion of plant at ion crops like coconut, arecanut , fruit s like banana, mango, pineapple, guava, jackfruit and spice like clove, nut meg and pepper. The soil has low wat er ret ent ion capacit y. Out of a t ot al report ed geographical area of 8,24,900 hect ares in 2009-10, t he t ot al cropped area in t he Islands st ood at 16,535 hect ares (Table 3). Table 3 Land Utilisation Pattern during 2009-10 Type of Land Area in Hectares Tot al Geographical Area 8,24,900 Forest Area 7,17,069 Tot al Cropped area 16,535 Net area sown 14,710 Source : Economic Survey of A & N Islands, Direct orat e of Economics and St at ist ics Among t he major crops, while t he product ion of paddy has increased, t he yield has gone down. The product ion of coconut , which covers maximum area under product ion, remained st agnant . Performances of ot her plant at ion crops were mixed. According t o Agricult ure Census 2005-06, t he number of operat ional holdings as well as area have increased primarily for t he holding size-class of less t han 1 hect are and t o a lesser ext ent for holding size 1 t o 2 hect ares. Mainly inst it ut ional land falls in t he 10 plus holding class. The average size of operat ional holdings has also decreased from 2 hect are in 2000-01 t o 1.88 hect are in 2005-06 which indicat e t he increasing fragment at ion of land holdings in t he UT (Table 4). Table 4 Number, Area and Size of Operational Holdings in ANI Agricultural Census 2000-01 Agricultural Census 2005-06 Size Class No. of Area of Average No. of Area of Average (Ha.) Holding Holding Size Holding Holding Size Marginal 3656 1431 0.39 4823 2140.64 0.44 (Below 1.0) (32.2) (6.3) (41.6) (9.8) Small 2686 3694 1.38 2118 3200.94 1.51 (1.0-2.0) (23.7) (16.3) (18.3) (14.7) Semi3254 8224 2.53 2953 7793.21 2.64 Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 Medium (2.0-4.0) (28.7) (36.2) (25.5) (35.7) Medium 1711 7374 4.31 1656 7199.58 4.35 (4.0-10.0) (15.1) (32.5) (14.3) (33.0) Large 42 1965 46.79 40 1511.4 37.79 (10.0 & (0.4) (8.7) (0.3) (6.9) Above) Total (All 11349 22688 2.00 11590 21845.77 1.88 Sizes) Note : Figures in bracket s indicat e percent age share. Industry The absence of a sizeable local market for manufact ured goods and t he need t o bring much of t he raw mat erials from t he mainland are considered t he main impediment s in t he development of indust ries. Therefore, large and medium scale indust rial act ivit y is absent in ANI. The indust rial base of ANI consist s mainly of small and t iny indust ries. The indust ries in t he region are mainly t imber and agro-based. The recent years have seen a decline in indust rial out put owing t o closure of wood-based indust rial unit s. There are 1,961 regist ered small-scale indust rial (SSI) unit s in t he Union Territ ory as at end-March 2010 (Table 5). Table 5 Industrial Scenario of Andaman and Nicobar Islands Type / Item Large / Medium-Scale Indust ries Small-Scale Indust ries Indust rial Centres Indust rial Est at e Employment Invest ment (in lakhs) Product ion (in lakhs) Source : Depart ment of Indust ries, A& N Islands.

March 2010 1,961 14 8 9,106 2,345 18,067

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Tourism The Andaman & Nicobar Islands have an unique combinat ion of sprawling beaches, rising hint erland and dense equat orial forest s. More t han 50 per cent of t he forest area is Tribal Reserves, Nat ional Parks and Wildlife sanct uaries. Any development act ivity in t he islands including t ourism has t o be sensit ive t o ecological fragilit y. The key challenge facing t he growt h of t ourism in ANI is connect ivit y and the commensurat e infrast ruct ure t o ensure bet t er accessibilit y. In t his cont ext, t here is considerable scope for public-privat e part nership in sust ainable development of tourism in t he region. In recent years, t he privat e sect or has increased it s role in providing t ransport services, theat res, rest aurant s

Canara Bank Samachar Lehar January 2012 and shops. The number of unit s as well as employment provided by t he privat e sect or has increased over t ime. This trend needs t o be reinforced. Infrastructure Given t he geographical and t opographical peculiarities of t hese islands, including separat ion by sea over great dist ances, t here is no single power-grid for all t he elect rified islands but several diesel generat or set s cat er independent ly t o t he power requirement s of an area / island. At present , ANI faces significant power short age. Due t o a st eady rise in populat ion t he demand for int er-island ferrying of goods and movement of people has become import ant . Lack of adequat e t ransport facilit ies is a serious bot t leneck in t he economic development of t he islands. Furt her opening up of air traffic could give a boost t o t rade and t ourism. Fiscal Scenario As Andaman and Nicobar Islands is a Union Territ ory (UT) wit hout legislat ure, all allocat ions for receipt s and expendit ure are made from t he Union Budget . The UT's primary source of revenue emanat es from non-t ax receipt s, which constit ut es more t han 80 per cent of revenue receipt s. Non-t ax revenues have been st eadily increasing in recent years. On an average, t ot al revenue receipt s t o GSDP rat io was around 4.7 per cent during 2007-12. The t ax t o GSDP rat io in ANI was less t han 1 per cent which was far below t he all-India average of 5 per cent for all st at es. Revenue expendit ure t o GSDP rat io increased mainly on account of t he Sixt h Pay Commission award. However, capit al out lay t o GSDP rat io has declined (Table 6). Table 6 Receipts and Expenditure
( Crore) Item Tax Revenue Non-Tax Revenue Total Revenue Revenue Expendit ure Capital Expendit ure Total Expenditure Note : 1. Figures in parent heses are percentages t o GSDP. 2. GSDP for 2010-11 and 2011-12 are est imat ed as per past t rends. Source : 1. Budget Documents of Union Government . 2. CSO for GSDP dat a upt o 2009-10. 2007-08 (RE) 2008-09 (RE) 2009-10 (RE) 21.4 (0.7) 118.6 (4.0) 140.0 (4.7) 1141.0 (38.2) 814.0 (27.2) 1955.0 (65.4) 26.0 (0.7) 138.0 (4.0) 164.0 (4.7) 1480.0 (42.5) 1136.0 (32.7) 2616.0 (75.2) 27.0 (0.7) 146.0 (3.8) 173.0 (4.5 ) 1799.0 (46.8) 921.0 (24.0) 20721.0 (70.8) 2010-11 (RE) 2011-12 (BE) 36.0 (0.8) 179.0 (4.1) 215.0 (4.9) 1783.0 (40.4) 368.0 (8.3) 2151.0 (48.8) 38.0 (0.8) 197.0 (3.9) 235.0 (4.7) 2009.0 (40.0) 599.0 (11.9) 2609.0 (51.9)

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Canara Bank Samachar Lehar January 2012 Financial Developments It is import ant t o have a well-funct ioning financial syst em for sust ainable economic development . While t he Reserve Bank has been act ively engaged in t he development of t he financial sect or, it has st epped up it s effort s in recent years t o enhance t he penet rat ion of t he formal financial sect or and promot e financial inclusion wit h a view t o improving t he wellbeing of our societ y. Let me first broadly out line t he financial fabric of ANI. There was a gradual improvement of banking penet rat ion in ANI in recent years. This is evident from the fact t hat t he average population per bank branch improved t o 11,000 at end-June 2010 from 13,000 at end-June 2002. The banking net work is largely dominat ed t o public sect or banks. The recent t rend in t he growt h rat e of deposit s in ANI was lower t han t he corresponding growt h rat e recorded at all-India level. The credit deposit (C-D) rat io in ANI at 37.6 per cent at end-December 2010 was significant ly lower t han t he rat io of 76.7 per cent at t he allIndia level (Chart 2 and Table 7). Chart 2 Historical Trends in CD Ratio

Table 7 C-D Ratio by Population Group Dec-02 Dec-06 Dec-09 Dec-10 Dec-02 Dec-06 Dec-09 Dec-10 Population Group Andaman and Nicobar India Rural 23.1 26.0 40.2 39.7 41.5 58.0 57.3 58.5 Semi-urban 20.0 28.3 33.1 36.9 34.1 52.0 50.5 52.3 Urban 42.4 59.8 58.0 60.8 Met ropolit an 80.0 89.6 83.1 90.7 Total 20.7 27.8 34.7 37.6 58.3 75.6 71.5 76.7 As at end-March 2010, almost 58.3 per cent of t ot al priority sect or advances were absorbed by small ent erprises. Agricult ure account ed for only 8.3 per cent of t ot al priorit y sect or advances during t he same period. The occupat ional credit st ructure is dominat ed by personal loans, followed by advances t o t rade and indust ry (Chart 3).

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Canara Bank Samachar Lehar January 2012 Chart 3 Occupational Credit

Financial Inclusion In t he cont ext of financial inclusion initiat ive t aken by t he Reserve Bank, t he banks are being sensit ised t o pursue t he inclusive drive. It may be observed t hat t he progress of banking in t erms of t he branch expansion was st agnant during t he period 2007 t o 2010 t hough t here was an improvement in t erms of deposit s and credit expansion. Due t o t he recent init iatives t aken by t he Reserve Bank, the number of branches has increased from 37 in 2010 t o 42 in 2011 (Chart 4).
Chart 4 Progress of Banking in Andaman & Nicobar

Source : BSR, RBI. Further, in pursuance of t he overall financial inclusion st rat egy, a t ot al of 47 villages wit h populat ion over 1,000 were ident ified in t he t hree dist rict s of ANI. Of t hese, 17 villages have been ident ified in Sout h Andaman, 21 in Nort h and Middle Andaman and 9 in Nicobar. A t ot al of 37,370 no-frill account s have been opened up t o end-June 2011 in ANI. As at end-March 2010, t he t ot al number of Kisan Credit Card (KCC) issued in ANI was 7,000 and the amount of loan sanct ioned under t he scheme was 158 crore. As at endJune 2011 a t ot al of 9.5 crore was disbursed t o 1260 SHGs. Financial Inclusion Measures Financial inclusion is import ant for bringing the poor and under-privileged sect ions of t he societ y within the banking fold and t hereby generat ing and sust aining equit able growt h. Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 Let me now t urn t o t he various measures init iat ed by t he Reserve Bank for promot ing financial inclusion. First , the Reserve Bank for long has inst it ut ed a mechanism called 'priorit y sect or lending' t hrough which credit is channelised t o cert ain preferred sect ors, which, int er alia, include small-scale indust ry, small businesses and agricult ure. In t he post -reform period, t he priority sect or group has been expanded t o include advances t o ret ail t rade, educat ional loans, micro-finance and low-cost housing. This has helped in furthering t he cause of financial inclusion. Second, t he Union Finance Minist er announced in t he Budget 2010-11 t hat every village in t he country wit h over 2000 populat ion must have access t o banking services by March 2012. In order t o operat ionalise t his process, commercial banks have prepared financial inclusion plans which have been submit t ed t o t he Reserve Bank. As brick-andmort ar branches will not be viable in very small centres, t he approach is t o meet this challenge t hrough t he business correspondent (BC) model and by leveraging communicat ion t echnology. Under t his model, banks appoint agent s who provide basic banking services at t he door-st ep of a client on behalf of t he bank. Third, t he Reserve Bank has asked banks t o open no-frills account s. These account s have no or very low minimum balance requirement and have provisions for small loans by way of overdraft s. This is a very convenient account for small deposit ors, especially in rural areas. Fourth, a major impediment for a common person t o open bank account is t he 'Know Your Cust omer' (KYC) norm. The norm has been relaxed for small account s, viz., deposit s up t o 50,000 and credit up t o 1 lakh. A simple int roduct ion by an exist ing account-holder in a bank should be adequat e t o open an account . In t his regard, Aadhar, t he Unique Ident ificat ion Number (UID) Project of t he Cent ral Government , which aims at providing a unique ID number for everyone in t he count ry, will help t he poor t o est ablish t heir ident ity t o meet t he banks' KYC norms. Fift h, farmers can get credit from banks convenient ly t hrough Kisan Credit Cards (KCCs) and General Purpose Credit Cards (GCCs). Sixt h, financial lit eracy becomes crit ically import ant. While several banking facilities are available, a common person may not be aware of t hem. Hence, t he Reserve Bank has init iat ed a 'Project Financial Lit eracy' wit h the object ive of disseminat ing informat ion regarding the cent ral bank and general banking concept s t o various t arget groups. Our 'Financial Educat ion' websit e link offers basics of banking, finance and cent ral banking for children of all ages. Our websit e is also available in 13 languages. Finally, t his is also a learning process for t he Reserve Bank. We recognise t hat being responsible for banking, we must be sensitive t o t he needs of a common person. Accordingly, our Governor, Dr. Subbarao init iated t he out reach programme as a part of our Plat inum Jubilee celebrat ions. Under t he out reach programme, t he t op management of t he Reserve Bank visit s at least one village in every st at e and union t errit ory wit h st at e Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 government officials and commercial banks t o give focused at t ent ion on financial inclusion. This has been highly enriching experience for us t o underst and t he ground realit ies. Accordingly, we have decided t o continue t hese programmes. Policy Challenges First , t he development al activities pursued so far have been propelled by direct involvement of government in all areas of economic act ivit ies. However, t here is a need for broad-based economic st rat egy wit h great er involvement of t he privat e sect or. Second, t he limit ed size of t he local market is a major const raint t o growt h. The UT should focus on a out ward-looking policy of export s t o t he mainland in areas in which it has a nat ural advant age such as marine product s, hort icult ure and floriculture. Third, the islands have an exclusive economic zone (EEZ) which is about 30 per cent of t he count ry's EEZ and endowed wit h unique marine habit at and coral diversit y. However, t his resource is not adequat ely t apped. There is a need t o develop fishery for export t o t he mainland. This will not only boost t he income of t he UT but also significant ly reduce t ransport cost as current ly ships ferrying goods t o t he islands ret urn empt y t o t he mainland. Fourth, t here is a need for renewed t hrust on agricult ure. Hort icult ure, floricult ure, plant ation crops, medicinal plant s and dye plant s offer a lot of opport unit ies for t he pot ent ial invest ors. Fift h, given t he high level of lit eracy and st rat egic locat ion t here is strong pot ent ial for development of informat ion t echnology. Sixt h, t ourism pot ent ial of t he islands can be promot ed t hrough high-value lowvolume eco-t ourism. This will need great er invest ment in t ourism infrastruct ure. Sevent h, t he Great Nicobar Island is locat ed cent rally bet ween Singapore / Colombo and just nort h of t he sea t raffic rout e t o Sout h East Asia and beyond. This is an extremely busy rout e and subst ant ial part of t he world's commercial t raffic flows t hrough t his area. Development of Sout h East ern t ip of Nicobar as a t rans-shipment port for cont ainer handling, bunkering and refuelling of int ernational / nat ional ships passing t hrough this rout e has great economic and st rat egic pot ential. Eight h, wit h t he st ep-up in economic act ivit y, t he invest ment demand can be enhanced. The banks need t o be more proact ive in support ing privat e invest ment and ent erprise. This will help in improving t he current low level of C-D rat io t hrough great er penet rat ion of banking. Conclusion The comparat ive isolat ion of t he Andaman and Nicobar islands from t he mainland, scat t ered landscape, difficult communicat ion syst em, heavy reliance on government depart ment s for supply of input s and smaller base of local market are t he main impediment s t o the rapid growt h of t he economy. However, t he UT of ANI has immense Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 pot ent ial for achieving higher growth aided mainly by ext ensive marine resources, high lit eracy rat e, conducive work environment and st rat egic locat ion. In achieving t his goal, government effort s need t o be supplement ed by privat e init iat ives where t he banking sect or has an import ant role t o play. This will help in furt her improving t he well-being of masses in t he islands. -----------------1 Speech by Deepak Mohant y, Execut ive Direct or, Reserve Bank of India, delivered at Andaman Chamber of Commerce and Indust ry in Port Blair, on 22nd December 2011. The assist ance provided by Dr. P. K. Nayak and Shri Suraj. S is acknowledged.

Short Term Cooperative Credit Structure and Financial Inclusion

Mr. V. K. Sharma Shri Charan Das Mahant , Hon'ble Minist er of St at e for Agriculture & Food Processing, Government of India, Shri Gouri Shanker Bisen, Hon'ble Minist er for Co-operat ion, Government of Madhya Pradesh, Shri Chandra Sekhar Sahu, Hon'ble Minist er for Agricult ure, Government of Chhatt isgarh, Dr. Chandra Pal Singh Yadav, President, Nat ional Cooperat ive Union of India, dist inguished invit ees and guest s, ladies and gent lemen. I indeed deem it an honour and a privilege t o be addressing t oday t his very august and dist inguished audience on issues, concerns and challenges t hat t he rural cooperat ive credit st ruct ure faces at it s current st age of evolut ion. As you may perhaps be aware, t he Unit ed Nat ions has declared t he year 2012 as t he Int ernational Year of Cooperat ives and, t o my mind, t his is precisely what makes t oday's Cent ral Zone Cooperat ive Conference, bot h cont ext ually and t opically, very relevant and it will culminat e, I am sure, in most desired out comes going forward ! And it will be no exaggerat ion t o say t hat India has been among t he pioneering nat ions in t he mat t er of genesis, and democrat ic evolution, of agricult ural and rural co-operatives, t ruly informed, and inspired, by t he t enet s and principles of cooperat ion. Given t he ext ensive and widespread financial exclusion in t he count ry, bot h t he Government of India and t he Reserve Bank, decided t o put financial inclusion on t he t op of t heir policy and st rat egy agenda. As part of t his verit able wat ershed policy and st rat egy init iative, the Government and t he Reserve Bank enjoined upon Scheduled Commercial Banks and Regional Rural Banks t o roll out, in a t ime-bound manner, Board-approved, Top-Management -owned, business-plan-int egrat ed, mission-mode-driven and Government & RBI-monit ored, BCICT-CBS (Business Correspondent - Informat ion & Communicat ion Technology - Core Banking Solut ion)-leveraged Financial Inclusion Plans for door-st ep delivery of a bouquet of basic financial services in t he hit hert o financially-excluded rural areas. But I must hast en here t o add t hat t he idea is not t o compet e wit h, but complement , rural and Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 agricult ural cooperatives in t heir ever crit ical and cent ral 'niche' role in delivering on financial inclusion ! I hardly need t o belabour, before t his learned and dist inguished audience, t he point t hat , along it s sojourn t hrough t ime, t he cooperat ive movement came t o be bedevilled by some unfort unat e development s undermining it s vibrancy. To my mind, at t he margin, t his explains t he imperative of a complement ary role for commercial banks. But having said t hat , as regards t he nat ional challenge of delivering, credibly and effect ively, on financial inclusion agenda, it would be very instruct ive t o put in perspect ive t he relative pot ent ial of t he rural cooperat ive credit structure. Specifically, considering t hat compared t o Commercial Banks and Regional Rural Banks (RRBs), which, bet ween t hem, current ly account for 33000 rural branches, 33 St at e Cooperat ive Banks wit h 953 branches, 371 Dist rict Central Cooperat ive Banks (DCCBs) wit h 12858 branches and 1,09,000 Primary Agricult ural Credit Societ ies (PACS), bet ween t hem, account for a t ot al of 1,22,590 service out let s, t he penetrat ive outreach of t he command area of t he rural cooperat ive st ructure is simply formidable ! Indeed, it is precisely because of t his formidable penet rat ive out reach of t he rural cooperat ive st ructure t hat t he Reserve Bank of India has not only allowed PACS t o act as Business Correspondent s of commercial banks but also allowed t reat ment of loans by commercial banks t o farmers t hrough PACS, Farmers' Service Societ ies (FSS) and Large-sized Adivasi Multipurpose Societ ies (LAMPS) as priority sect or lending in t he indirect finance cat egory. Alt hough under t he Financial Inclusion Plan init iat ives, Commercial Banks and RRBs will, t hrough bot h brick and mort ar branches and business correspondent s, provide banking out let s in around 3,50,000 villages by 2013, it is because of t he huge pot ent ial and promise that t he rural cooperat ive credit structure represent s for financial inclusion t hat t he Government and t he Reserve Bank of India t hought it fit t o revive t he financially haemorrhaged Short Term Cooperat ive Credit St ruct ure (STCCS) by set t ing up t he Vaidyanathan Committ ee and accept ing it s comprehensive recommendat ions for implement at ion in a business like manner. Based on t he recommendat ions of t he Vaidyanat han Commit t ee and aft er reaching consensus wit h Chief Minist ers, Finance Minist ers and Cooperat ion Minist ers of St at es, Government of India decided t o provide massive financial assist ance (since revised t o Rs.19,330 crores (Rs.193 Billion) from t he originally est imat ed Rs.13,596 crores Rs.136 Billion) t o t he financially haemorrhaged Short Term Cooperat ive Credit St ructure but also, only appropriat ely, made it condit ional upon rigorous and st ringent compliance wit h, and progress on, pre-specified crit ical paramet ers like facilit at ing regulat ory powers of t he RBI, limit ing equity participation of St at e Government s in cooperat ive banks t o 25%, limit ing t he powers of St at e Government s t o supersede t he boards, removing St at e Government int ervention in all financial and int ernal administ rat ive mat t ers, special audit s of PACS, Dist rict Cent ral Cooperat ive Banks (DCCBs), and St at e Cooperat ive Banks (SCBs), conduct of St at ut ory Audit by Chart ered Account ant s (CAs), t imely elect ion of Board of Direct ors, appoint ment / co-opt ion of professionally qualified Direct ors and appoint ment of Chief Execut ive Officers (CEOs) in accordance wit h t he RBI-prescribed fit -and-proper crit eria, t raining and Human Resources Development , comput erizat ion, Common Accounting

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Canara Bank Samachar Lehar January 2012 Syst em (CAS) and Management Information Syst em (MIS), by amendment of St at e Cooperat ive Societ ies Act s and amendment of Rules and adopt ion of appropriat e Bye-Laws. In t his cont ext , it is encouraging t o not e that 25 St at es have since signed t he MoUs for implement at ion of t he Revival Package. These are Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Chat tisgarh, Gujarat , Haryana, Jammu & Kashmir, Jharkhand, Karnat aka, Madhya Pradesh, Maharasht ra, Manipur, Meghalaya, Mizoram, Nagaland, Orissa, Punjab, Rajast han, Sikkim, Tamil Nadu, Tripura, Utt arakhand, Ut t ar Pradesh and West Bengal. Bet ween t hem, t hey cover more t han 96% of the STCCS unit s in t he count ry. The financial assist ance under t he Package is released only on t he implement at ion of legal and inst it ut ional reforms. NABARD has, as on 31 Oct ober, 2011, has already released an amount of Rs.9002.98 crore (Rs.90 Billion) towards Government of India's share for recapit alisat ion of PACS in sevent een St at es while St at e Government s have released Rs.855.53 (Rs.8.5 Billion) crore as t heir share. It is also very encouraging t o not e that 21 Stat es have amended t heir respect ive St at e Cooperat ive Societ ies Act s and these are Andhra Pradesh, Arunachal Pradesh, Bihar, Gujarat , Haryana, Karnat aka, Jammu & Kashmir, Jharkhand, Madhya Pradesh, Maharasht ra, Manipur, Mizoram, Meghalaya, Nagaland, Orissa, Rajast han, Sikkim, Tamil Nadu, Tripura, Utt ar Pradesh and West Bengal. The corner-st one of t his realignment exercise was t o overhaul and re-engineer governance and management in t he rural co-operat ive credit structure wit h a view t o prevent ing recurrence of such financial haemorrhaging. And, significant ly, t o reinforce, and sust ain, overhauled and re-engineered governance in such financially rejuvenat ed and renewed co-operat ive credit st ruct ure, effect ive and credible supervision and regulat ion is a sine qua non. As t he dist inguished audience is aware, while NABARD supervises t he co-operat ive credit inst it ut ions, Reserve Bank regulat es t hem. This supervisory and regulat ory framework involves RBI framing and issuing regulat ory inst ructions and guidelines and NABARD examining t heir act ual compliance during inspect ion. Currently, t hese regulat ory inst ructions and guidelines are scat t ered across individual circulars cont aining t hem. The imperat ive of consolidat ing all t he existing regulat ory guidelines and instructions has long been felt bot h by NABARD and t he supervised co-operat ive credit inst it utions. Accordingly, t he Reserve Bank is in t he process of consolidat ing all such instructions and guidelines in t he form of a Mast er Circular and which, I assure t his audience, will be in t he public domain very soon. It will serve as a ready recokner for t he rural co-operat ive inst it ut ions facilit at ing t heir compliance wit h the regulat ory inst ruct ions and guidelines in force. I would also t ake t he present opport unit y t o share wit h you t he recent decision t o waive t he signing of MoU as a pre-condit ion for opening of branches by St at e Co-operat ive Banks in t he St at es which do not need t he re-capit alisat ion assist ance under t he Revival Package, provided t hey comply wit h all ot her condit ions. The Committ ee on Financial Sect or Assessment (Chairman : Dr. Rakesh Mohan and CoChairman : Shri Ashok Chawla) had recommended t hat rural co-operat ive banks, which fail t o obt ain licence by March 2012, should not be allowed t o operat e. Accordingly, it was Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 proposed in t he Annual Policy St at ement of April 2009 t o work out a roadmap for licensing of unlicensed st at e and central co-operat ive banks. For t his purpose, in consult at ion wit h Nat ional Bank for Agricult ure and Rural Development (NABARD), revised guidelines on licensing of t hese banks were issued. All Regional Offices of RBI were advised t o issue licences t o banks, which meet t he prescribed crit eria. It is expect ed t hat a large number of co-operat ive banks will be licensed by 2012. The Revival Package based on Vaidyanat han Committ ee is under implement at ion which would also help the St CBs / CCBs t o improve t heir financials and be eligible for licensing. In t his cont ext , it is import ant t o not e t hat as on 30t h November 2011, out of 31 St at e Cooperat ive Banks (SCBs) and 371 Dist rict Cent ral Co-operat ive Banks (DCCBs) in t he count ry, 6 SCBs and 117 DCCBs were unlicensed compared t o 17 SCBs, and 296 DCCBs, as on 31st March 2009. I t ake t he present opport unity t o share wit h this dist inguished audience t he lat est st at us of licensed and unlicensed St CBs and DCCBs in t he four St at es of Chhat t isgarh, Madhya Pradesh, Ut t arkhand and Utt ar Pradesh which is as under : Licensing position of District Central CoLicensing operative Banks Sl. position of Name of the State of No. of No. State Co-op Total No. No. licensed unlicensed Bank of DCCBs DCCBs DCCBs 1 Chhat isgarh Licensed 06 06 --2 Madhya Pradesh Licensed 38 27 11 3 Ut t arakhand Unlicensed 10 09 01 4 Ut t ar Pradesh Licensed 50 20 30 Thus, while in Ut t arakhand, t he SCB is yet t o be licensed, in t he st at es of Chhat isgarh, Madhya Pradesh, Utt arakhand and Utt ar Pradesh, out of 104 DCCBs, 42 DCCBs are yet t o be licensed. As announced in t he Annual Policy St at ement of April, 2010, a st udy on well-run rural cooperat ives including Primary Agricult ural Credit Co-operative Societ ies (PACS), Large Adivasi Multipurpose Co-operat ive Societ ies (LAMPS), Farmers Service Societ ies (FSS) and Thrift and Credit Co-operat ives was undert aken by t he Reserve Bank in collaborat ion wit h NABARD and St at e Government s as part of it s undivided policy focus on t he 'niche' role of rural credit co-operat ives in financial inclusion. For t he st udy, 208 well-run co-operat ives operat ing in 21 St at es were select ed. Of t hese, 71 were operat ing under Parallel SelfReliant Co-operat ive Societ ies Act s wit h t he rest under respect ive St at e Co-operat ive Societ ies Act s. The broad object ives of t he st udy as set out by t he Reserve Bank were : a) To st udy t he funct ioning of well-run t hrift and rural credit co-operat ives, including PACS, LAMPS, FSS and ot her new financial co-operat ives, set up under t he Parallel SelfReliant Co-operat ive Societ ies Act s t o assess t heir pot ent ial t o cont ribut e t o financial inclusion and the local economy; Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 b) To st udy t he member, borrower and deposit or profiles, saving mobilizat ion and credit ext ended t o t enant farmers, oral lessees and agricult ural labourers; c) To st udy t he quality of act ual management and governance and ext ernal impediment s t hat come in t he way of good governance / management ; d) To st udy and analyse t he impact of funct ioning of such co-operat ives on t he local economy / populace; e) To suggest measures necessary t o effect ively encourage t he emergence of many more such inst itut ions across t he count ry, if t he study indicat ed t hat t hey have a significant cont ribut ion t o make t o financial inclusion. The st udy was complet ed in November 2011 and aft er it s due examinat ion, the Reserve Bank will t ake t he findings and recommendat ions forward. We are at t he t hreshold of t he Second Green Revolut ion which envisages, and will ent ail, shift in focus and att ent ion t o pulses, fruit s, veget able, live-st ock, fisheries, poult ry and hort icult ure and raising t heir product ion and product ivit y wit h a view t o ensuring nat ional food securit y and sust ainable high levels of growt h. Wit h t hese words, I conclude my address and wish t oday's Conference all success t hat it so very much deserves ! Thank you all so very much indeed. -----------------------

Legislative Reforms - Strengthening Banking

Shri Anand Sinha Just ice (Ret d.) Shri B.N. Srikrishna, Chairman, Financial Sect or Legislat ive Reforms Commission (FSLRC), Shri Swarup and Shri Malegam (members of FSLRC), Shri Yogesh Agarwal, Chairman, Pension Fund Regulat ory and Development Aut hority (PFRDA), Shri Mudholkar and Shri Chikermane, and ot her delegat es. It is an honour and privilege for me t o address you t oday, on some of t he key issues wit h regard t o "Reforms in t he Banking Sect or" and I t hank Financial Planning St andards Board of India for t his opport unity. This Financial Planning Congress comes at a very opport une t ime when the far reaching exercise of rewrit ing financial laws is being undert aken by t he FSLRC and I commend t he organisers for t heir effort s in putt ing t oget her this Congress. I. Introduction Empirical research shows t hat bet t er developed financial syst ems accelerat e economic growt h and shrink income inequalit y by disproport ionat ely increasing t he earnings of lower income families2 i.e. enabling growt h with equit y, which is so vit al for our count ry. A well developed financial syst em will require sound legislat ive framework because, legislat ion is t he foundation on which inst itut ional frameworks st and. To be effect ive, legislat ion not only needs t o be unambiguous and fair but also should be robust enough t o address all t he exist ing concerns while, at t he same t ime, being flexible enough t o accommodat e t he new needs on account of evolving environment.

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Role of legislat ion in t he cont ext of economic development in general and t he financial sect or in part icular, is an int erest ing area of st udy. It has been argued that strong legal

Canara Bank Samachar Lehar January 2012 syst ems fost er development of sophist icat ed financial market s and int ermediaries3, which enhances t he economy's abilit y t o manage risk and event ually lead t o economic growt h. Measures such as robust cont ract enforcement and disclosure discipline go a long way in st rengt hening t he financial syst ems. Every legislat ion has a t ime dimension and it s relevance has t o be seen vis-a-vis t his dimension. With t he changing environment , pract ices and processes change, necessit at ing a review of extant legislat ions. This holds all t he more t rue for an area like financial syst em where changes are rapid and frequent . The dynamic nat ure of legislat ion was well art iculat ed when Arist ot le said "Even when laws have been writ t en down, t hey ought not always t o remain unalt ered". India is said t o be one t he most over-legislated count ries. We have numerous Act s and regulat ions, some of which dat e back decades. As t imes have changed quit e significant ly since t hey were enact ed, t here is an emphat ic need t o updat e and fine t une t hem so as t o enhance t heir relevance for t he rapidly changing financial landscape. It is a welcome st ep t hat FSLRC has been const it ut ed t o look int o and revise t he exist ing financial legislat ion. In t his cont ext , the role of t his Congress is very import ant in facilit at ing deliberations. Financial sect or policies comprise a set of policies, such as : - Prudent ial policies t o ensure safet y and soundness of t he financial syst em (financial st ability) - Regulat ory and Supervisory policies - Deposit or and Consumer prot ect ion policies - Financial Inclusion policies - Ot her policies for ensuring adequat e supply of credit t o economically import ant sect ors i.e. SMEs, Infrast ruct ure, et c. and - Market st ruct ure and Competit ion Prudent ial policies comprise macro prudent ial and micro prudent ial policies aimed at ensuring t he safet y and soundness of t he financial syst em. Collectively, bot h macro and micro prudent ial policies ensure t he st abilit y of t he financial syst em which would facilit at e efficient allocat ion of resources t o the real economy. While financial st ability is a necessary condit ion t o ensure ot her object ives of financial sect or policies as well as for growt h and macroeconomic st abilit y, it is not a sufficient condit ion t o at t ain these object ives. Ot her financial sect or policies will have t o be implement ed for balancing numerous considerat ions such as growt h imperat ives, flow of credit t o disadvant aged and preferred sect ors, consumer prot ection, financial inclusion and equit y, et c. At t imes, it becomes ext remely challenging t o balance t hese considerat ions and, if adequat e care is not t aken in designing and implement ing t he ot her financial sect or policies, financial st ability may be adversely affect ed. Therefore, it is import ant that a set of sound financial sect or policies (including prudent ial policies) backed by sound legislat ion must be adopt ed t o deliver the various object ives - growth wit h equit y in t he backdrop of financial st abilit y.

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Canara Bank Samachar Lehar January 2012 II. Recent Amendments carried to various financial sector laws Before I delve int o some of t he key issues requiring legislat ive review, I list some of t he enact ment s and amendment s t hat have been made t o t he various Act s during t he last decade t o highlight t he dynamic nat ure of legislat ion. i. Reserve Bank of India Act , 1934 was amended in 2006 t o provide legalit y t o cert ain OTC derivat ive t ransact ions and also t o give explicit regulat ory powers t o Reserve Bank over derivat ives and money market inst rument s. ii. The Banking Regulat ion Act , 1949 was amended in 2007 for removing t he lower limit prescribed in maint enance of St atut ory Liquidit y Ratio (SLR) by banks and conferring wide powers on RBI in st ipulat ing t he SLR requirement s for banks and t o cont rol liquidity in t he market . iii. The St at e Bank of India Act, 1955 was amended in 2007 for enabling t ransfer of ownership from RBI t o Government of India and again in 2010 t o provide for enhancement of capit al, issue of preference shares, raise capit al by public issue or preferent ial allot ment or privat e placement or right s issue; and t o issue bonus shares t o t he exist ing shareholders, et c. iv. The St at e Bank of India (Subsidiary Banks) Act , 1959 was amended in 2007 t o facilit at e enhancement of capit al, raise resources from t he market and raise capit al t hrough right s issue. v. The Banking Companies (Acquisit ion and Transfer of Undert akings) Act s, 1970 and 1980 were amended in 2006 t o enable nat ionalised banks t o issue preference shares in accordance with t he guidelines framed by the Reserve Bank and t o raise capit al by preferent ial allot ment or privat e placement or public issue, wit h t he approval of t he Reserve Bank. vi. The Negot iable Instrument s Act , 1881 was amended in 2002 t o int roduce t he concept s of 'elect ronic cheque' and 'cheque truncat ion' by expanding t he definit ion of 'cheque'. vii. The Securit ies Contract s (Regulat ion) Amendment Act , 2007 was passed wit h a view t o providing a legal framework for enabling list ing and t rading of securitised debt inst rument s, including mort gage backed debt . viii. The Government Securit ies Act, 2006 was enact ed t o consolidat e and amend t he laws relating t o Government securit ies and it s management by t he RBI. The Act simplifies t he procedure for set t lement of claims of legal represent at ives, provides for admissibilit y of comput erised informat ion as evidence, cont ains provisions for effect ively dealing wit h misuse of St at ut ory General Ledger (SGL) account s and facilit at es pledging and hypot hecat ion of Government securit ies. ix. The Payment and Set t lement Syst ems Act , 2007 was enact ed empowering t he Reserve Bank t o regulat e and supervise payment and sett lement syst ems of the country and provides a legal basis for mult ilat eral net t ing and set t lement finalit y. x. The Prevent ion of Money- Laundering Act , 2002 was enact ed as a follow up t o UN General Assembly resolut ion in 1998, calling for adopt ion of nat ional ant i-money laundering legislat ions and programmes by member st at es. The Act provides for prevent ing money laundering and connect ed act ivities, enables confiscat ion of proceeds of crime, set t ing up of agencies and mechanisms for co-ordinat ing measures for combat ing money laundering, et c. xi. The Foreign Cont ribut ion (Regulat ion) Act (FCRA), 2010 was enact ed by repealing t he erst while Foreign Cont ribut ion Regulation Act , 1976 mainly t o rectify several deficiencies Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 found in t he previous Act . The new Act covers t he elect ronic media and organizat ions, ot her t han political part ies, apart from ent ities in t he prohibit ed list in FCRA, 1976. xii. The Credit Informat ion Companies (Regulat ion) Act, 2005 empowers t he Reserve Bank t o regulat e the Credit Informat ion Companies (CIC) and t o facilit at e efficient dist ribut ion of credit and matt ers concerned or incident al t o it . III. The Road Ahead : Legislative Reforms in the Banking Sector Multiple Acts- Need for Consolidation Banks are regulat ed and supervised under t he Banking Regulat ion Act , 1949. Public Sect or Banks viz., St at e Bank of India, St at e Bank of India subsidiary banks and Nat ionalized Banks which are const itut ed under different st at ut es are governed by t heir respect ive st at ut es and by some of t he provisions of the Banking Regulat ion Act . The provisions relat ing t o t he ownership and management of banking companies as cont ained in t he Banking Regulat ion Act are not applicable t o the public sect or banks. Co-operat ive Banks are const it ut ed by t he respect ive St at e Co-operat ive Societ ies Act s or by t he Mult i-St at e Co-operat ive Societ ies Act and t he provisions of Banking Regulat ion Act are made applicable t o t hem wit h cert ain modificat ions. Since t he origins of t he banks have been hist orically different , t hey cont inue t o be governed by the respect ive st at ut es as well as ot her general laws. Each of t he st at ut es was craft ed in a cont emporaneous set t ing, reflect ing t he needs and concerns of t he t ime. Therefore, almost all t he st at ut es were amended from t ime t o time t o reflect changes in circumst ances and cont ext prevailing at t hat t ime. There is a st rong case for reviewing t hese legislat ions and recast ing t hem for a number of reasons. First , prudent ial regulat ions are ownership neut ral. However, t he fact t hat different banks are governed by different laws has result ed in an uneven playing field which needs t o be addressed. For example, while amendment s were carried out t o enable SBI, SBI subsidiary banks and nat ionalised banks t o issue preference shares, t hough at different point s of t ime, banks in privat e sect or cannot issue preference shares as t he amendment s t o t he BR Act is st ill t o be carried out . Similarly, while bilat eral net ting in t he event of liquidat ion is admissible for privat e sect or banks governed by t he Companies Act and t he normal bankrupt cy laws, t he posit ion in t his regard for public sect or banks, SBI and it s subsidiaries is not clear in law, as liquidat ion, if at all, of such banks would be as per t he Not ificat ion t o be issued by t he Government in t his regard. Second, a single, harmonized and uniform legislat ion applicable t o all banks will provide transparency, comprehensiveness and clarit y and provide ease of regulat ion and supervision t o t he Reserve Bank. Third, t here is also a need t o sort out t he conflict s and overlaps bet ween t he primary laws governing t he banking sect or and ot her applicable laws. For example, t he Compet it ion Act , 2002 (as amended by t he Compet it ion (Amendment ) Act , 2007) is in conflict wit h t he provisions of the Banking R egulat ion Act , SBI Act and ot her st at ut es dealing wit h t he amalgamat ion of banks. Consolidat ion of banking sect or laws and laying down of common regulat ory framework for commercial banks are issues requiring serious considerat ion.

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Management of Banks Management of banking instit ut ions by fit and proper persons plays an import ant role in securing t he safet y of banks. While RBI has power, under cert ain circumst ances, t o remove t he managerial and other persons from t he banks and appoint addit ional direct ors, et c., t hese powers may not be effect ive in handling a sit uat ion where supersession of t he Board is warrant ed. RBI, current ly, does not have t he power t o supersede t he Board of Direct ors of a banking company. In t he Banking Laws Amendment Bill, 2011 amendment s are being proposed for conferring such a power on RBI, for being used wit h appropriat e safeguards. Wit h respect t o public sect or banks, by way of amendment s, similar powers have been vest ed in t he Cent ral Government , which has t he majority shareholding in t hose banks.
The shareholding pat t ern also plays a vit al role with respect t o t he management of banks and, t herefore, it is necessary t hat shareholders having sizeable holding should also be fit and proper. RBI has, by way of regulat ory prescript ions, implement ed an acknowledgement procedure. In t he 2011 Bill, st at ut ory provisions are being proposed for obt aining prior permission of RBI for acquiring 5% or more of t he equit y shares or vot ing right s in a banking company. At present , a deadlock sit uat ion arises if a group of persons acquires sizeable equit y or vot ing rights in a bank wit hout following t he acknowledgement procedure. There is no st at ut ory power for directing disgorgement of shares and as such, if any such acquisit ion t akes place, it may result only in cont ravent ion in provisions of BR Act . The main object of prevent ing t he management of a bank from being capt ured by persons who are not fit and proper for holding such sizeable int erest will not be achieved. RBI should, t herefore, have t he power t o direct , by order, at any t ime t hat persons who are not fit and proper t o hold such equit y or vot ing power in cont ravention of t hese provisions, shall not have vot ing power. The 2011 Bill proposes t o confer such power on RBI. This will help prevent unscrupulous persons from exercising cont rol over banks.

Deposit Collection Activity Current ly, collect ion of deposit s from members / shareholders is not t reat ed as accept ance of public deposit s. This is a mat t er of serious concern, part icularly, wit h respect t o Co-operative Societ ies. Deposit s are accept ed by enrolling members on t ap and by collect ing nominal amount s from t hem, exposing such deposit ors t o serious risks. Banking Regulat ion Act does not apply t o such co-operat ive societ ies and t hey are out side t he regulat ory purview of t he Reserve Bank. It is necessary t o plug t his import ant loophole. Unless deposit s are received from members who have vot ing right s, t he deposit s have t o be t reat ed as public deposit s and t he exempt ion from t he provisions of Banking Regulat ion Act should not be made applicable. Every ent ity that accept s deposit s from persons having no vot ing right s has t o be t reat ed as deposit accept ing ent it y and should be regulat ed as such by RBI. RBI should have t he discret ion t o det ermine t he level and int ensit y of regulat ion and supervision depending upon t he risk t o t he syst em from such ent it ies. Financial Conglomerates In India, banks are ent it led t o carry on cert ain financial act ivit ies under t he bank subsidiary model. Some banks have formed subsidiaries t o carry on securit ies and
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Canara Bank Samachar Lehar January 2012 insurance business. The performance of t he subsidiaries affect s t he balance sheet of t he bank. On account of varied act ivit ies carried on by t he ent it ies in t he group which fall wit hin t he regulat ory jurisdict ion of mult iple regulat ors, the risk t o t he syst em as a whole posed by such financial conglomerat es is difficult t o assess. These raise syst emic issues and RBI as t he regulat or of banks needs t o be empowered t o obt ain informat ion, wit h respect t o each of t he ent it ies funct ioning under t he umbrella of a bank. The 2011 Bill proposes t o confer such powers on RBI t o get informat ion wit h respect t o such ent it ies. This ought t o be pursued in t he new legislative framework also.

Non-operative Bank Holding Company The t raditional t heories of economies of scale and scope support bigger ent it ies. In India, we need bigger banks t o finance our very large infrast ruct ure needs and also large indust rial project s. Thus, while t here are advant ages in growing big and handling mult iple act ivities, nobody knows where exact ly t he t ipping point is, when the bigness of size st art s becoming a disadvant age. The crisis has highlight ed t he downside of having 'Too Big t o Fail' ent it ies. Very big and complex ent it ies pose supervisory issues t o t he regulat ors and pose serious syst emic risks. So we need t o ensure t hat structures are not complex and t hat t here are effect ive resolut ion mechanisms t o ensure orderly winding up of t hese syst emically import ant ent ities, in case of crisis.
It has been suggest ed t hat a non-operative bank holding company st ructure may be useful t o deal wit h financial conglomerat es as t his great ly mitigat es t he risks spilling over from ot her ent it ies in t he Group. While t he funct ional regulat or of each subsidiary of t he non-operat ive holding company may regulat e and supervise t he business of t he subsidiary concerned, t he non-operat ive holding company needs t o be regulat ed on t he lines of a bank and needs t o be placed under t he regulat ory and supervisory control of RBI. Appropriat e legislat ive measures are necessary for operat ionalising t his model. Apart from t he regulat ory issues in t he above model, t here are ot her challenges t o be addressed. One of t hem is relat ed t o placing public sect or banks under such holding companies. Anot her is the impact of t axat ion on t he t ransfer of shares of t he subsidiaries t o t he holding company. Unless adequat e t ax relief is grant ed, it will be difficult for exist ing banks t o come under t he holding company st ruct ure.

Stamp duty Issues In India, t here are cert ain issues with respect t o st amp duty on document s. One of the major hurdles facing t he development of t he securit isat ion market is t he st amp dut y st ruct ure. It can add up t o a subst ant ial cost as t here are different iat ed duty st ruct ures in different st at es. While some st at es have recognised t he special nat ure of securit izat ion t ransact ions and reduced t he st amp dut ies, ot her st at es st ill operat e at st amp dut ies as high as 5% t o 12% for transfer of secured receivables.
Concerns about st amp dut ies have also been raised in t he cont ext of t he proposed subsidiarisat ion of foreign banks. The broader object ive of proposed subsidiarisat ion of foreign banks is t o promot e financial st ability in India and t his requires harmonisat ion and simplificat ion of st amp dut y st ruct ure across t he count ry.

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Minimum Capital Requirements The minimum capit al prescribed in t he Banking Regulat ion Act for banks is t oo low and Reserve Bank is prescribing t he minimum capit al requirement in case of privat e sect or banks from t ime t o t ime (current ly banks should have a minimum networth of Rs.300 crores). Minimum capit al requirement s prescribed under t he "Ownership and Governance" guidelines and that prescribed / being prescribed for new banks in privat e sect or are way above the current provisions of t he Act . It would, t herefore, be more appropriat e t o empower Reserve Bank t o st ipulat e t he capit al requirement s and ot her quant it at ive paramet ers from t ime t o t ime, inst ead of prescribing quant it at ive limit s in t he respect ive Act s. Migration to IFRS As part of the effort s t o ensure convergence of t he Indian Account ing St andards (IAS) wit h t he Int ernat ional Financial Report ing St andards (IFRS), t he format s of financial st at ement s will undergo changes consequent t o the int roduct ion of IFRS. Furt her, whenever banks int roduce new t ypes of capit al inst rument s, et c. t hese will have t o be appropriat ely incorporat ed in t he format. Therefore, Reserve Bank should be empowered t o prescribe t he format of t he balance sheet , profit and loss account , et c. given in Third Schedule of t he B. R. Act . Bilateral Netting Issues Various banks had request ed RBI t o allow bilat eral net ting of count erparty credit exposure, in respect of int erest rat e and foreign exchange derivat ives, and gold. The legal posit ion regarding bilat eral net t ing is not unambiguously clear in case of banks est ablished by special st at ut es [like SBI Act , Banking Companies (Acquisit ion and Transfer of Undert akings) Act , et c.]. Amendment s t o a large number of enact ment s part icularly in a synchronised manner may be pract ically difficult . Enact ing a single legislat ion which covers all aspect s of banks' funct ioning, while possibly providing different ial legislative framework for corporat e governance issues on account of ownership differences may make t he legislat ive framework more efficient . Bank Resolution The significance of effect ive resolut ion mechanism for promot ing financial st abilit y as well as consumer prot ect ion cannot be underest imat ed. The legal framework should address t he resolut ion mechanism from a pract ical point of view and must have at least t he following charact eristics : * Early int ervent ion before insolvency * Speed of int ervent ion / resolut ion * Ability t o t ransfer or merge operat ions * Effect ive writ e-down of shareholders' right s * Prot ect ion of on-going business
In addit ion t o banks, t he resolut ion mechanism should address resolut ion of ot her Syst emically Import ant Financial Inst it utions (SIFIs) also. Post crisis, globally, t here have been init iat ives t o st rengthen t he resolut ion framework of Financial Market Infrast ruct ures (FMIs) and ot her ent ities in t he financial sect or. The resolut ion mechanism should also include a framework for resolut ion of NBFCs and ent ities operat ing payment Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 syst ems. Swift and simple procedure for quick resolut ion, part icularly, t hat of syst emically import ant ent it ies - global and domest ic, is necessary. Under t he evolving int ernational framework it would be required of jurisdict ions, t o have adequat e resolut ion framework as per int ernat ional st andards. The key att ribut es of Effect ive Resolut ion Regimes were adopt ed by t he Financial St ability Board (FSB) Plenary and endorsed by G-20 leaders at t he Cannes Summit and t hese are an essent ial component of t he package of policies t o reduce t he risks of moral hazard and t he pot ent ial for syst emic disrupt ion associat ed wit h Syst emically Import ant Financial Inst it utions (SIFIs). This will require legislat ive changes and administ rat ive actions. The powers of RBI for effect ive resolut ion of regulat ed ent it ies from t his perspect ive need enhancement .

Mergers Volunt ary mergers and t ransfers help consolidat ion in financial sect or and pave t he way for st ronger financial inst it ut ions t o rescue t he weaker ones. Such volunt ary measures, while saving t he const it uent s of weaker inst itut ions, provide business opport unit y t o t he st ronger ones t o spread t heir presence in different geographies. The BR Act empowers RBI t o sanct ion a scheme for volunt ary amalgamation of banking companies. However, such a power is not available wit h respect t o cooperative banks. Considering t he challenges faced in quick resolut ion of failed cooperat ive banks, cert ain enabling provisions in t he BR Act facilit at ing RBI t o sanct ion a scheme for t akeover of banking asset s and liabilit ies of a cooperat ive bank by commercial banks would be desirable. Part ial merger of cert ain businesses or asset s and liabilit ies of banks also may need t o be examined.
One of t he issues t hat could complicat e t he resolut ion of banks t hrough mergers and t ransfers due t o t he sensit ivit y of t he process is t he applicability of compet it ion law. An ent erprise proposing t o ent er int o a combinat ion via a merger or an amalgamat ion is required t o not ify t he Compet it ion Commission, and t he Commission has been allowed up t o 210 days t o decide on it before t he default clause kicks in. The 2011 Bill t ries t o address t his issue. Consumer Protection and Globally Compatible Secrecy Laws For speedy redressal of consumer grievances, RBI has framed t he Banking Ombudsman Scheme by st at ut ory direct ions under t he BR Act . The Scheme is working sat isfact orily. Secrecy of cust omer informat ion is a principle of common law which is pract iced in India also by banks, and recognized by court s. St atut ory basis for t his has t o be provided, by clearly sett ing fort h t he except ions relevant t o t he present requirement of prevent ing money laundering and cross border financing of undesirable act ivit ies. The law should st rike a balance bet ween t he privacy right s of t he cust omer and t he need t o share crucial informat ion wit h law enforcement agencies and ot her regulat ors, bot h domest ic and foreign. In mat t ers of crime and proceeds of crime, t he larger public int erest would out weigh t he privat e int erest s of individuals. Appropriat e amendment s may have t o be carried out in t he BR Act t o provide a st at ut ory backing for t he banking secrecy laws and t he limit s on t he privacy of cust omers should be laid down.

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Canara Bank Samachar Lehar January 2012 Prot ect ion is required in the law t o t he regulat ors wit h respect t o t he informat ion collect ed from t he regulat ed ent it ies including it s assessment and analysis made by t he regulat ors or supervisors and t he correspondence relat ed t o such informat ion. In larger public int erest , the law should enable sharing of informat ion wit h ot her regulat ors, bot h domest ic and overseas, for mut ual benefit . The recent crisis has demonst rat ed t he need for such cooperat ion. The absence of specific prot ect ion t o t he informat ion held by t he regulat ors whet her collect ed from t he regulat ed ent it ies or from ot her regulat ors impedes sharing of informat ion. Our laws have t o be globally compat ible and specific exempt ion from disclosure needs t o be provided in t his regard. Disclosure of sensit ive informat ion could compromise t he effect iveness of regulat ion and supervision. Further, unless t he secrecy laws in our jurisdict ion are compat ible wit h global st andards, it will not be possible t o receive from, or share informat ion wit h, overseas regulat ors. Appropriat e provisions may have t o be insert ed in t he RBI Act and t he BR Act in t his regard. IV. Conclusion Financial sect or is a very import ant segment of t he economy and has direct bearing on growt h and prosperity. St rong financial syst ems need st rong legal syst ems which provide unambiguous and fair legislat ion. The financial syst em in India including banking, insurance, capit al, t axat ion, et c. has many regulat ors, each having a separat e mandat e. This blend raises pert inent concerns. First , financial syst em is st ill charact erised by considerable fragment at ion of legislat ion, regulat ion and enforcement . Second, policy relat ed frictions might arise from t he diversit y of different legislat ions and t he overlapping of t he regulat ory jurisdict ions. Third, t here might be a risk of legal arbitrage among financial jurisdict ions. A need has been cont inuously felt t o rewrit e and st reamline t he financial sect or laws, rules and regulat ions and t o bring t hem in harmony wit h t he requirement s of India's fast growing financial sect or. The current legislat ions were draft ed in t he cont emporaneous set t ing and have had t o be amended from t ime t o t ime t o incorporat e changes in t he milieu. Enact ing new law or amending old law is a cont inuous process t o remain aligned t o changing circumst ances. In t he emerging scenario, the t ask of prevent ing financial risks has become more import ant and challenging. Amid global economic worries, t his is an enormous t ask which, on completion, would immensely benefit t he financial sect or in India and economy at large. A sound legal framework may help det er imprudent riskt aking by financial inst it ut ions and reduce systemic risks. Revision of banking sect or laws should also be mot ivat ed by t he recognit ion t hat t he banking sect or has been and remains a crit ical fact or not only for accelerat ing India's growt h but also for making it inclusive. Harmonising of financial sect or legislat ions, rules and regulations has, t herefore, become imperat ive. I have t ried t o give my views from regulat ory and financial st abilit y perspect ive. I hope you all will benefit from t oday's discussions. Thank you. -----------------------------------

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Financial Reporting in the context of Financial Stability : A Regulator's view on Some Accounting Issues
Mr. Anand Sinha Dr. Ashraf Nabhan Al Nabhani, Dean, College of Banking and Financial St udies, Mr. Kishore Rabi, Chairman, ICAI Muscat Chapt er and other delegat es. It gives me great pleasure t o address t his august gathering organised by t he Muscat Chapt er of t he Inst it ut e of Chart ered Account ant s of India (ICAI). I am given t o underst and t hat t he Muscat Chapt er, t he 19t h overseas chapt er of t he ICAI is amongst t he most active chapt ers of the ICAI and has been engaging in capacit y building for Omani account ant s and impart ing professional educat ion in t he Sult anat e. A key initiat ive is it s t ie up wit h t he College of Banking and Financial St udies (CBFS) in assist ing t hem wit h t heir account ing curriculum. This Chapt er's engagement with t he College of Banking and Financial St udies is just one of t he many ways in which t he banking community and regulat ors can benefit from t he t echnical knowledge base of t he account ing communit y. The hist ory of t he Indian account ing profession can be t raced back t o t he enact ment of t he Companies Act in 1857 that introduced for t he first t ime t he concept of preparing balance sheet on a volunt ary basis by companies. We have come a long way since t hen and t he ICAI, est ablished in 1949 by an act of Parliament , is t oday t he world's second largest professional account ing body aft er t he American Inst it ut e of Cert ified Public Account ant s (AICPA), with over 180,000 members. Over t he six decades of it s exist ence, it has played a vit al role in nat ion building t hrough it s services. In line wit h it s mot t o of "Ya Aeshu Supt aeshu Jagrut i" (a person who is awake amongst t hose t hat sleep) and it s emblem of t he Garuda, t he "vahana" of Lord Vishnu, t he Inst it ut e is playing a key role in keeping a wat chful eye on financial st at ement s, ensuring t hat t hey represent a t rue and fair view of the st at e of affairs. As regulat ors and supervisors of India's banking syst em, t he Reserve Bank of India (RBI) places a significant amount of reliance on input s provided t o us by your profession t hrough t he st at ut ory audit and long form audit report s of banks as well as our annual int eractions with t he st at ut ory audit ors of commercial banks. We also have periodic int eractions wit h senior members of t he Inst itut e at various fora and t ake a keen int erest in t he lat est development s in t his field. RBI has closely worked wit h t he Inst it ut e on account ing issues in t he banking sect or. In Oct ober 2001, t he RBI set up a Working Group under the Chairmanship of Shri N. D. Gupt a t he t hen President of t he Instit ut e t o ident ify gaps in compliance wit h account ing st andards issued by ICAI and also recommend st eps t o eliminat e such gaps. Based on t he recommendat ions of t he commit t ee, landmark guidelines on compliance wit h account ing st andards were issued t o banks in March 2003 t o ensure st rict compliance with account ing st andards and avoid qualifications in financial st at ement s. RBI had formed a commit t ee in 2000 t o st udy t he observance of int ernat ional st andards and codes in India in various individual areas of t he overall financial syst em. Wit h respect Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 t o Indian account ing and audit ing st andards, it was found t hat t here were several gaps when compared t o t he int ernat ional st andards and recommendat ions were made t o reduce t his gap. I am happy t o not e t hat t he ICAI has since issued many account ing st andards, which have subst antially reduced this gap. While on t he subject of RBI's insist ence on adherence wit h int ernat ional best pract ices and our ongoing benchmarking against t hese st andards, I would like t o draw your at t ention t o t he Report on Observance of St andards and Codes (ROSC), a joint init iat ive bet ween t he IMF and World Bank in 2004 which among ot hers, reviewed t he st rengt hs and weaknesses of t he corporat e accounting and audit ing pract ices in India. Some of t he major recommendat ions were t o bridge the gaps bet ween Int ernat ional Financial Report ing St andards (IFRSs) and Indian account ing st andards, st rengt hening t he monit oring and enforcement mechanism, int roducing pract ices t o ensure compliance wit h code of et hics by audit ors of public int erest ent it ies and t aking st eps for improving professional educat ion and t raining arrangement s. India also part icipat ed in t he Financial Sect or Self Assessment Programme (FSAP), a joint init iat ive of t he Int ernat ional Monet ary Fund and t he World Bank t hat att empt s t o assess t he st ability and resilience of financial syst ems in member count ries. Based on India's experience in t he FSAP and subsequent self-assessment s, t he Government of India, in consult at ion wit h the Reserve Bank, const itut ed t he Committ ee on Financial Sect or Assessment (CFSA) t o undert ake a comprehensive self assessment of India's financial sect or, t he report of which was submit t ed in 2009. The CFSA made an assessment of Indian account ing and auditing st andards and came up wit h some key recommendat ions t hat proved crit ical for t he Inst it ut e. The report , int eralia, suggest ed convergence wit h IFRS at t he earliest and creat ing awareness among audit ors and ot hers involved in the process t o ensure t hat syst ems and procedures are in place t o comply wit h the IFRSs. Anot her import ant recommendat ion is t hat India should cont ribut e significantly in the agenda sett ing of t he IASB and it s t echnical out put . The challenge before t he Inst it ut e is t o t ake t his up in right earnest by ident ifying persons wit h requisit e compet ence t o part icipat e in global forums, t he benefit s of which will flow t o t he profession at large. Accounting issues in the context of the Financial Crisis The global financial crisis and t he consequences t hereof exposed some weaknesses in t he account ing and audit ing aspect s. During t he course of my present at ion here I would like t o place before you some issues relat ing t o financial report ing in t he cont ext of financial st ability. There was widespread crit icism t hat cert ain account ing pract ices either contribut ed t o or at the very least , exacerbat ed t he severit y of the crisis, in view of it s failure t o deal wit h illiquid market s and dist ressed sales. The G20 Working Group on "Enhancing Sound Regulat ion and St rengt hening Transparency", in which I had an occasion t o work act ively, recommended t hat account ing st andard set t ers should st rengt hen accounting recognit ion of loan loss provisions by considering alt ernat ive approaches for recognizing and measuring loan losses t hat incorporat e a broader range of available credit Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 informat ion. Accounting st andards set t ers and prudent ial supervisors were advised t o work t oget her t o ident ify solut ions t hat are consist ent wit h t he complement ary object ives of promot ing t he st abilit y of t he financial sect or and of providing t ransparency of economic result s in financial report s. G 20 report also recommended t hat t he IASB should enhance it s effort s t o facilit at e t he global convergence t owards a single set of high-qualit y account ing st andards and also opined t hat account ing st andard set t ers should accelerat e effort s t o reduce t he complexit y of account ing st andards for financial inst rument s and enhance present at ion st andards. These recommendat ions t oget her wit h t he recognition wit hin t he account ing and audit profession t hat t here were cert ain drawbacks in t he current st andards has necessit at ed large scale revision of various standards especially t hose relat ing t o financial inst rument s and Fair Value Account ing. During t he global financial crisis, t he Int ernat ional Account ing St andards Board (IASB) and t he US Financial Account ing St andards Board (FASB) est ablished a Financial Crisis Advisory Group comprising senior leaders wit h broad int ernat ional experience t o address account ing issues emerging from t he global crisis. The key issues ident ified by t he FCAG involved : * t he difficult y of applying fair value ("mark t o-market ") account ing in illiquid market s; * t he delayed recognit ion of losses associat ed wit h loans, st ruct ured credit product s, and ot her financial inst rument s by banks, insurance companies and ot her financial inst it ut ions; * issues surrounding the broad range of off-balance sheet financing st ructures, especially in t he US; and * t he ext raordinary complexit y of accounting st andards for financial inst rument s, including mult iple approaches t o recognizing asset impairment . Some of t hese weaknesses also highlight ed areas in which IFRS and US generally accept ed account ing principles (US GAAP) diverged. While t hese aspect s were ident ified by account ing professionals, regulat ors expressed concerns on syst emic risk arising out of procyclicality in account ing st andards. Procyclicalit y in policy making refers t o financial development s and policies t hat add moment um t o t he economic cycle and have an amplifying effect on economic fluct uat ions. The procyclicality embodied in capit al regulat ion and accounting st andards was among t he ident ified causes underlying t he global financial crisis. The in-built procyclicalit y amplified business cycles, affect ing bot h t he degree of credit expansion in benign conditions and t he degree of credit contract ion in t he downt urn. The requirement t o use fair value account ing for asset s and liabilit ies in illiquid market s has serious disadvant ages from t he point of view of regulat ors, and of syst emic financial risk. A mark-t o-market approach i.e. fair value account ing cont ribut es t o excessive leverage during boom periods and leads t o excessive writ e-downs in bust s. Under such account ing irrat ional exuberance in asset prices can feed t hrough t o high published profit s and perhaps bonuses, encouraging more irrat ional exuberance in a self-reinforcing fashion : when market s t urn down, it can equally drive irrat ional despair. If all market part icipant s at t empt simult aneously t o liquidat e posit ions, market s which were previously reasonably liquid will also become illiquid, and realisable values may, for all banks, be significant ly lower than t he published account s suggest ed. Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 Volat ilit y in financial st at ement s is also a concern for t he regulat or. Fair value account ing int roduces volatility int o financial st at ement s through t he following channels: * Volat ility on account of changes in underlying economic paramet ers. For inst ance if int erest rat es increase, t he fair value of bonds reduces and vice versa. * Volat ilit y produced due t o measurement errors and / or changing views regarding t he economic prospect s t hrough t he business cycle. Fair value measures generally represent t he present value of a st ream of expect ed cash flows. Very oft en t he det erminat ion of expect ed cash flows involves st at ist ical t echniques which may have some amount of est imat ion errors as well as ot her errors. * Volat ility arising on account of using a mixed measurement model i.e. one t hat uses fair value for some cat egories of asset s and liabilit ies and amort ised cost for ot hers t hereby reducing t he nett ing effect s t hat a full fair valuat ion of asset s and liabilit ies would produce. Anot her area which has received focus is t he delayed recognit ion of impaired asset s. Account ing st andards t oday rely more on an "incurred loss" model t o recognise losses where an event such as non-payment of dues for 90 days t riggers t he provisioning. Consequent ly, there is an overst at ement of int erest income in t he early life of loan. When a series of default s during a downt urn t rigger provisioning requirement s, t here is no st ock of provisions available t o absorb credit losses. These losses direct ly impact t he income st at ement of t he bank and constrain further bank lending, t hus exacerbat ing t he procyclicalit y. This cycle-neut ral approach to provisioning failed t o account for t he excessive det eriorat ion in loan port folio associat ed with excessive credit growt h. There is broad int ernational agreement on the need t o have provisioning based inst ead on an "expect ed loss" basis where life t ime losses are recognised early, i.e. provisions are increased in good t imes for t he possibilit y t hat t he environment may det eriorat e in fut ure. However, t he implement at ion of such a model has it s own difficult ies wit h regard t o t he est imat ion of expect ed losses and t he Int ernat ional Account ing St andards Board (IASB) and t he US Federal Account ing St andards Board (FASB) are st ill engaged in deliberat ions on t he modalities of implement ing such a model. The IASB has issued exposure draft s wit h an expect ed loss model which at t empt s t o mit igat e t hese short comings by recognizing losses and making provisions t hereof earlier during t he life of t he loan. However, present ly, IASB and FASB's deliberat ions revolve around a t hree bucket approach t o capt ure the pat t ern of det eriorat ion in credit quality. Under this model, loans are classified int o t hree cat egories depending upon t he possibilit y of expect ed losses. Loans, where t here are no event s wit h a direct relat ion t o possible fut ure default s, are placed in t he first bucket . The second and t hird bucket s are used for loans affect ed by event s t hat have a relat ionship t o possible fut ure default s such as a drop in housing prices i.e. a t rigger event t o which the default possibilit y of a loan / port folio of loans is sensit ive t o has occurred. In t he second bucket , expect ed credit losses are not ident ifiable for individual loans whereas in the t hird bucket expect ed credit losses are individually ident ifiable. The provisioning requirement s also differ according t o t he bucket . Whereas entit ies are expect ed t o provide expect ed life t ime losses for t he second and t hird bucket s t he proposed approach for the first bucket is t o make provision for 12 mont h of expect ed losses t hough t his is yet to be agreed upon. Since t here is no direct Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 relat ionship t o possible fut ure default s, lifet ime expect ed losses are not required t o be recognised for loans placed in the first bucket . Furt her, t he crit eria and guidelines for t ransfer bet ween cat egories are st ill at t he discussion st age. Let me dwell upon some of t he proactive measures init iat ed by RBI t o mit igat e t he effect of procylicality in t he Indian cont ext . Recognising t he procylicalit y caused by provisioning norms, t he RBI has t ried t o build buffers t hrough provisioning requirement s. * First ly, banks are required t o maint ain provisions on asset s t hat are classified as st andard and are not showing signs of impairment . Sect or specific provisions requiring banks t o provide more for st andard asset s in cert ain sensit ive sect ors have also been prescribed. * Secondly, banks are required t o classify account s as NPA where t here are inherent weaknesses observed in t he account even if t here are few credit s recorded before balance sheet dat e t o avoid NPA classificat ion. Banks are also required t o put in place appropriat e int ernal syst ems t o eliminat e t he t endency to delay or post pone t he ident ificat ion of NPAs, especially in respect of high value account s. * Thirdly, in 2009, observing t he trend in profit s being made by banks, t he Provisioning Coverage Rat io (PCR) requirement for banks was int roduced t o address apprehensions about asset quality due t o exuberant lending during t he boom phase. Banks were required t o build up a PCR of 70% of gross NPAs by Sept ember 2010. PCR was int ended t o be an int erim measure and it was hoped t hat it would be replaced by a forward-looking count er-cyclical provisioning methodology being developed by t he Basel Commit t ee on Banking Supervision (BCBS) and IASB. Since t his is t aking t ime, RBI is working on a met hodology similar t o Spanish dynamic provisioning framework as an int erim measure. As regards PCR, it was decided t o freeze the PCR wit h reference t o t he gross NPA posit ion in banks as on Sept ember 30, 2010, since in t he absence of a calibrat ed met hodology it would be difficult t o allow banks t o use t he count ercyclical provisions built up under PCR freely and t here were cert ain design issues t oo,. The buffer (surplus of provisions over specific provisions) will be allowed t o be used by banks for making specific provisions for NPAs during periods of syst em wide downt urn, wit h t he prior approval of RBI. The financial crisis also led t o heavy crit icism of account ing rules t hat permit t ed cert ain st ruct ured / special purpose ent it ies and exposure t o remain off-balance sheet . A key concern wit h such instrument s and vehicles is t hat t hey have a t endency t o veil the risks off-balance sheet and a robust account ing framework t hat provides for t he recognit ion and disclosure of t hese risks is a prerequisit e t o t heir int roduct ion. The IASB has t ried t o rect ify t he sit uat ion by int roducing IFRS 10 on Consolidat ed Financial St at ement s while t he FASB has also worked t owards t oughening off-balance sheet account ing rules. In India, t he RBI has always followed a caut ious and gradualist approach t owards complex exot ic financial product s and has t aken st eps t o reduce and cont ain t he regulat ory arbit rage bet ween the banking and t he shadow banking sect ors (mainly the Non Banking Financial Companies i.e. NBFCs) by considerably upgrading t he prudential rules for NBFCs.

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Overall account ing for financial inst rument s had become highly complex and rules based in t he period leading up t o t he crisis and IASB's project t o replace IAS 39 wit h IFRS 9 is a

Canara Bank Samachar Lehar January 2012 welcome init iat ive. However, delays in finalising proposals relat ing t o impairment and hedge account ing coupled wit h recent proposals t o reopen classificat ion and measurement of financial asset s are a cause of concern. IASB's classificat ion requirement s for asset s revolve around t he business model approach whereas FASB's approach is based more on t he charact erist ics of t he instrument. Furt her, FASB's approach may also ent ail more it ems in t he balance sheet being carried at fair value. Implementation of IFRS in India The convergence t o IFRS in India is a work-in-progress and I would like t o dwell upon t he implement at ion issues and challenges wit h part icular reference t o t he Indian banking syst em. As part of the G 20's effort s t o evolve a single set of global high qualit y st andards, t he Minist ry of Corporat e Affairs (MCA), Government of India released a roadmap t hat provided for a gradual convergence t o IFRS in a phased manner commencing from April 1, 2011. In t erms of t he road map, commercial banks in India are required t o converge wit h IFRS wit h effect from account ing periods beginning April 1, 2013. While t he MCA placed on it s websit e t hirty five IFRS converged Indian Account ing St andards (Ind AS) in 2011, it st at ed t hat t he st andards will be implement ed aft er various issues including t axat ion are resolved. In order t o address t he implement at ion issues and facilit at e formulat ion of operat ional guidelines t o facilit at e t he IFRS convergence for t he Indian banking syst em t he RBI has formed a Working Group. Specific issues relat ing t o (i) classificat ion and measurement of financial asset s, (ii) classificat ion and measurement of financial liabilit ies and hedge account ing, (iii) amort ised cost and impairment , (iv)fair value measurement , (v) present at ion, disclosure and balance sheet format s and (vi) derecognit ion, consolidat ion and residuary issues are being dealt wit h by t he Working Group. Wit h respect t o t he financial sect or in India, t here are special issues and challenges in view of t he large scale revision of st andards pert aining t o financial inst rument s (IAS 39) which are of cent ral import ance t o t he banking syst em. IASB had indicat ed t hat t he period 2009 t o 2011 will be kept as a st able plat form by t hem t o facilit at e convergence by many count ries during t his period. However, t he global financial t urmoil and t he consequences t hereof in t he account ing scenario necessit at ed large scale revision of various st andards especially t hose relat ing t o financial inst rument s and fair value account ing. As India at t empt s t o t ransit ion t o IFRS, t he biggest challenge t o t he banking sect or which is of equal concern t o us as regulat ors, is t he lack of clarit y and uncert aint y regarding t he finalisat ion of IFRS 9 : Financial Inst rument s (scheduled t o replace IAS 39) and it s convergence wit h US GAAP. One of t he int ent ions behind scheduling banks for a lat er convergence was t o avoid having t hem first apply IAS 39 and immediat ely t ransition t hereaft er t o it s replacement viz. IFRS 9. Count ries like Canada which have recently converged t o IFRS found it easier on account of pre-exist ing st andards being fairly well aligned wit h IAS 39, which is not t he case in India. With the delay and uncert aint y in finalisat ion of IFRS 9, t he convergence process has become almost equal t o chasing a fast moving t arget. Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 The finalisat ion of impairment provisions of IFRS 9 at an early dat e is a crit ical issue which needs t o be addressed by t he IASB and FASB. Our apprehensions are t hat t he current proposals cont ained in t he exposure draft or t he t hree bucket model for provisioning are difficult t o implement and operat ionalise. Further, in countries like India, t here may not be enough dat a available t o apply t he highly quant it at ive and st at ist ical t echniques t o implement a robust expect ed loss model t o recognise impairment losses. Therefore, t he Working Group has suggest ed through it s comment let t er t o t he IASB, t he need for a pract ical expedient t hat allows for a simpler rule based model specified by t he regulat or at least in t he init ial years. We hope t hat t he IASB will consider t his while finalising t he requirement s on impairment. In a count ry like India, where financial market s are st ill developing and are not as deep and liquid as in developed count ries t here are specific concerns regarding t he implement at ion of fair value accounting in t he absence of quot ed prices and illiquid market s for several inst rument s. Consequent ly, t he implement at ion of fair value account ing would necessit at e a dependence on valuat ion t echniques using unobservable input s which would also bring in a fair share of est imat ion errors. There are also some major t echnical issues arising for Indian banks in t he course of convergence. Differences bet ween t he IFR and current regulat ory guidelines on S classificat ion and measurement of financial asset s, focus in t he st andard on t he business model followed by banks and t he challenges for management in t his area, lack of adequat e number of skilled st aff and modificat ions t o IT syst ems and processes are some of t he ot her challenges t hat may need t o be t ackled in due course. Apart from being preparers of financial st at ement s, banks are also significant users of financial st at ement s and base their lending and invest ment decisions on the financial st at ement s of t heir cust omers. This aspect makes skill building all t he more import ant for Indian banks as IFRS implement at ion will not only impact t heir account s and finance t eams but will pervade t o t heir credit and invest ment analyst s and decision makers. The RBI has been proact ive in facilit at ing skill building by conduct ing seminars and t raining programmes as well as providing facult y support t o some inst it ut ions. I am glad t o learn t hat t he ICAI t oo has incorporat ed IFRS in it s curriculum for st udent s and has int roduced a cert ificat e course on IFRS for it s members. There is also scope for t he RBI, banking syst em and t he ICAI t o work t oget her t o build skills in this area. Let me conclude by st at ing that there are several areas of common int erest bet ween regulat ors, bankers and account ant s and frequent int eract ion and int erface bet ween t hese groups would be of mut ual benefit t o all. I t hank you for t his opport unit y t o share a regulat or's perspect ive on some current account ing issues.

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Finmin tells RRBs to use sponsor banks infrastructure to become NEFT-enabled

December 1, 2011 KOLKATA : The Minist ry of Finance has direct ed regional rural banks t o use sponsor banks IT archit ect ure t o become part of t he Nat ional Elect ronic Funds Transfer (NEFT) syst em for offering one-t o-one elect ronic payment facility t o cust omers. RRBs have received a not e from t he government earlier t his week t o t his end. RRBs will have t o open set t lement account s wit h sponsor banks for t his purpose, an RRB chairman said. Under NEFT, individuals, firms and corporat es can elect ronically t ransfer funds from any bank branch t o any individual, firm or corporat e having an account wit h any ot her bank branch in the count ry participating in the scheme. All bank branches need t o be NEFTenabled for offering t his service. Earlier, t he government had t old RRBs t o t ake t he direct rout e for becoming NEFT-enabled. But , it proved t o be difficult for weak RRBs t o do it as many of t hem are not eligible t o become t he member of cent ralised payment syst em, a must for NEFT syst em. Source:ht t p:/ / economict imes.indiat imes.com/ news/ news-by-indust ry/ banking / finance/ banking/ finmin-t ells-rrbs-t o-use-sponsor-banks-infrast ruct ure-t o-become-neft enabled/ art icleshow/ 10929764.cms

Nabard planning interest-free loan

December 5, 2011 The Nat ional Bank for Agricult ure and Rural Development is bracing up t o give a big push t o develop primary agricult ure cooperat ive societ ies (PACSs) as mult i-service cent res, by providing t hem low- or zero-int erest loans in place of grant s. PACSs are expect ed t o use such loans - or even grant - t o support t he set t ing up of knowledge disseminat ion centres, provide training t o farmers and bear t he init ial administ rat ive cost t o st art a new business. Only that t he societ ies cannot use t hem t owards t he capit al cost of a project . The source for such financial aid would be a producer organisat ion development fund formed by t he st at e-run Nabard, headquart ered in t his met ropolis. The corpus is envisaged t o be of help t o about 77,000 agri coops across t he count ry. Nabard also plans t o provide loan t o dist rict cent ral cooperat ive banks (DCCBs) t o support PACs. Such banks would be allowed t o charge a maximum of 1 per cent addit ional int erest over and above t he Nabard-charged int erest rat e. If DCCBs get loans sanct ioned at 10 per cent int erest , t hey are not expect ed t o charge more t han 11 per cent from PACSs.

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Canara Bank Samachar Lehar January 2012 Loans can be rout ed t hrough regional rural banks, where DCCBs is not in good healt h. In t he case of loans rout ed t hrough DCCBs and RRBs, Nabard would cont inue t o be involved in identifying PACSs, appraising proposals and monit oring project implement at ion and loan recovery. These init iat ives are part of broad guidelines t hat t he 1982-founded Nabard has issued for developing PACSs int o mult i-services cent res. A Nabard official said on Sat urday t hat PACSs could play a crucial role in providing input facilit ies t o members - in t he form of cash of kind component . They can also help in providing agricult ure implement s on hiring basis, besides st orage facilit y, he t old Business St andard. "However, t o increase t he business port folio of PACSs and make it a self-sust ainable ent ity, it is essent ial t hat t hey should provide addit ional services. These include t he enabling of collective purchase of input s and qualit y st orage capacit y as per t he negot iable warehouse receipt syst em," he noted. Also, PACSs can help curb incident s or avert sit uat ions t hat force farmers t o go for dist ress sale of t he produce in t he wake of immediat e credit . The official said t he PACSs could also go for upgradat ion of exist ing st orage capacit y or const ruct ion of a godown, along wit h sort ing and grading unit s - t o enable t hem t o issue warehouse receipt s. Based on t hese receipt s, t he farmers can get loan against t he crop st ored - and can cultivat e t he next crop. This would help t hem earn bett er price. For, the crops are held wit hout affect ing t he fund flow posit ion. Moreover, PACSs can also t ake up t he purchase of hi-t ech agri implement s like power t iller, land leveller, paddy t ransplant er and combine harvest er depending upon t he requirement s of members. The earning would be from t he rent al of t hese equipment . The Nabard official said PACSs could also support t he est ablishment of agro-processing and agri information cent res. The societ ies can also help in t he sett ing up of t est ing laborat ories for soil and wat er and creat e a panel of expert s for providing services on payment basis. Bot h lab and guidance would be available t o farmers at a cost . The PACSs, which are eit her in t he area of market ing or int end t o undert ake t his act ivity, may creat e t his channel t o facilit at e t he farmers in market ing, he added. Source:ht t p:/ / www.business-st andard.com/ india/ news/ nabard-planning-int erest -freeloans/ 457488/

Small borrowers to get working capital loans

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December 6, 2011 The finance minist ry has asked st at e-owned banks t o lend money t o small borrowers in t he form of working capit al, where t he borrower pays int erest only on t he fund drawn from t he bank inst ead of t he ent ire loan amount . The move aims t o provide more

Canara Bank Samachar Lehar January 2012 flexibilit y t o small borrowers and reduce t heir cost of funds. The minist ry has direct ed all st at eowned banks t o convert t erm loans given t o self-help groups (SHG) t o working capit al loans by December 31. "The current pract ice of giving loans t hrough t erm loans t akes away t ime of bank st aff due t o t he enormous amount of paperwork involved," t he minist ry had earlier said in a st at ement . Bankers said t he move will boost loan books of banks as in working capit al loan t he principal amount is rolled over every year unless t he loan is recalled. Also, monit oring working capit al loans is easier for banks as t hey have access t o borrowers' t ransact ions. However, some bankers feel t he move will spoil the loan cult ure and impact recoveries. Since loan is rolled over each year, the borrower only has t o service t he int erest wit hout worrying about repaying t he principal component . Most loans t o SHGs are clean loans wit hout any security. Lenders said in case of non-payment of dues, banks may find it difficult t o recover t he money. Term loans are t he ones where a bank lends t he ent ire sanct ioned amount t o t he borrower, who in t urn has t o repay t he loan wit h int erest every mont h t ill the end of prepayment period. Working capit al loans are t he ones where an amount is sanct ioned and t he borrower pays int erest only on t he amount drawn. It gives flexibilit y t o t he borrower t o deposit any surplus cash back in t he bank and reduce t heir debt . Currently, a huge port ion of loan availed by SHGs is in t he form t erm loans. According t o t he lat est available dat a, as on March 31, 2010, out st anding bank loans st ood at . 28,038 crore t o 48.51 lakh SHGs. Source:ht t p:/ / economict imes.indiat imes.com/ news/ news-by-indust ry/ banking / finance/ banking/ small-borrowers-t o-get -working-capit al-loans/ art icleshow / 11001761.cms

Compliance with Basel III norms will entail additional costs for banks: Subbarao
December 8, 2011 The RBI Governor, Dr D. Subbarao, on Wednesday said t hat Indian banks will have t o incur addit ional cost s t o build capit al buffers t o comply wit h Basel III rules. Though t he Indian banking sect or was comfort ably placed t o implement Basel III regulat ions, some banks might need addit ional capit al, Dr Subbarao said at a meet ing wit h bankers here. "On aggregat e, banks are comfort ably placed in t erms of capit al adequacy, but a few individual banks may fall short due t o implement at ion of Basel III." The Basel III rules, formulat ed by t he Basel Commit t ee on Banking Supervision following t he financial crisis of 2008-09, require banks t o shore up t heir capit al and liquidity buffers, and will be implement ed in phases from 2013. The implement at ion of Basel III will lead t o an increased cost of borrowing for Indian companies bot h in t he domest ic and overseas market s, Dr Subbarao said. Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 Banks should look at trimming t he int erest rat es on advances and hiking those on deposit s in order t o achieve a double-digit growt h. "For double digit growt h we need more deposit s, and this (more deposit s will come in) happen if banks provide att ract ive int erest rat es on deposit s," he point ed out . The demand for credit is set t o rise, he added. Managing liquidity Dr Subir Gokarn, Deput y Governor, Reserve Bank of India, said t hat the apex bank would not want t o compromise it s monet ary st ance t o manage liquidit y in t he syst em, t hereby hint ing t hat t here could be lit t le possibility of a cut in t he cash reserve rat io of banks. "The cash reserve rat io is not just a liquidit y tool, but also a monet ary signal and t he RBI will do "what ever possible" t o manage liquidity, but wit hin t he confines of it s monet ary policy," Dr Gokarn said at t he bankers' meet ing. Talking about t he rupee volatility, Dr Gokarn said, "The RBI's st eps t o increase inflows have helped cap t he rupee movement ." The cent ral bank did not have a view on t he value of rupee, he said. The RBI has not used large amount of reserves t o manage currency depreciat ion. "Our approach has been nonint erventionist ," he added. Source:ht t p:/ / www.t hehindubusinessline.com/ indust ry-and-economy/ banking/ art icle2695663.ece

Parliament panel gives conditional nod to Banking Laws Amendment Bill 2011
December 10, 2011 India's Parliament ary St anding Commit t ee on Finance has given a condit ional nod for int roduct ion of Banking Laws Amendment Bill 2011, proposing t he vot ing right s for invest ors be capped at 26% inst ead of in proport ion t o equity holding, media report s said cit ing unident ified officials. Current ly, voting right of shareholders in public sect or banks is rest rict ed t o 1%, whereas in privat e sect or banks it is capped at 10% irrespect ive of equit y holding. Privat e sect or banks like Kot ak Mahindra Bank, Yes Bank and IndusInd Bank have high promot er shareholding. The Bill also seeks t o give addit ional powers to t he Reserve Bank of India (RBI) t o inspect books of financial conglomerat es and vet mergers and acquisit ions in t he banking sect or. The RBI had also suggest ed t hat it should be given power t o supersede t he board of a bank in t he event of self-dealing by company promot ers.

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Canara Bank Samachar Lehar January 2012 Earlier August , RBI issued draft guidelines for awarding new banking licenses t o privat e sect or companies, pegging t he minimum capit al requirement t o set up a commercial bank at Rs.5 billion. In February, Finance Minist er Pranab Mukherjee had said t hat banking laws amendment legislat ion along wit h six ot her bills t argeting t he financial sect or reforms will be int roduced by t his fiscal year ending March 31, 2012. However, t he commit t ee, headed by Yashwant Sinha, a senior member of t he opposit ion part y Bharat iya Janat a Part y (BJP), has already reject ed t he much await ed Insurance Amendment Bill t hat seeks t o raise foreign direct invest ment (FDI) limit in t he sect or t o 49% from t he current 26%. Source:ht t p:/ / banking.contify.com/ st ory/ st anding-commit t ee-condit ionally-approvesbanking-laws-amendment -bill-2011-12-09

Govt Plans Merger of more Regional Rural Banks

December 12, 2011 Following a move by t he Cent ral Government to furt her amalgamat e regional rural banks (RRBs) in t he count ry, employee unions are demanding t he format ion of a Nat ional Rural Bank of India (NRBI), by amalgamating all RRBs and de-linking of RRBs from t he sponsor banks. Ministry view In a lett er dat ed November 28 t o t he chairmen of sponsor banks of RRBs, t he Depart ment of Financial Services, Minist ry of Finance, said t hat current ly t here are a large number of RRBs, sponsored by different banks, funct ioning in a St at e. It said t hat many of t he RRBs are very small, wit h net work of less t han 100 branches. Unions' take The let t er suggest s t hat geographically cont iguous RRBs sponsored by different banks wit hin a St at e could be amalgamat ed wit h single sponsor bank. It has also sought noobject ion cert ificat es from t he banks for t his move. However, t he employees unions want a t wo-t ier st ructure, such as t he one exist ing in St at e Bank of India (SBI), and are demanding an NRBI as well. Explaining t his, Mr. Vasant h Bannigol, Joint Secret ary of t he All-India Regional Rural Bank Employees' Associat ion, t old Business Line t hat SBI has a corporat e office in Mumbai, and each St at e has got a local head-office. National and state levels "This two-t ier syst em should be implement ed in RRBs also. At t he nat ional level t here should be NRBI, and each St at e t hey should have a St at e-level RRB," he said. Subst ant iating this, he said t he RRBs have already grown and have become st ronger. Let t he cont rol be t here at t he nat ional apex organisat ion. St at ing t hat t here are conflict ing int erest s bet ween t he RRBs and sponsor banks, Mr. Bannigol said in some places bot h of t hem have t heir branches. Somet imes it becomes difficult t o compet e in such a sit uation. Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 Independent entity "If at all we are independent , t hen we can t ake independent decisions and become st ill st ronger. In Karnat aka alone, t he business of RRBs is more t han Rs.26,000 crore. That being t he case we must have independent ident it y and ent it y," he said. He suggest ed t hat t he St at e and t he Cent ral Government s be t he owners, and the share capit al owned by sponsor banks be t aken by Nabard. Credit delivery Endorsing t hese views, Mr. K. S. Bhat, All-India Secret ary, Syndicat e Bank St aff Associat ion, said t hat NRBI will help t he Government achieve it s agricult ure growt h and financial inclusion t arget s, and st rengt hen the credit delivery syst em of t he count ry. Mr. Bhat said t hat MVS Chalapat hi Rao Working Group, Vyas Commit t ee, and t he St anding Commit t ee on Finance (Thirt eent h Lok Sabha) in it s 55t h report present ed t o bot h Houses of Parliament on December 22, 2003, had also recommended set t ing up an NRBI. Source:ht t p:/ / www.t hehindubusinessline.com/ indust ry-and-economy/ banking/ art icle2706913.ece

Banks' stakes in non-financial entities capped at 10%

December 13, 2011 The Reserve Bank of India (RBI) t oday capped commercial banks' invest ment s in non financial companies at 10 per cent t o ensure t hey do not engage in act ivit ies barred by t he Banking Regulat ion Act . Banks do not need t he regulat or's prior approval for invest ment s in non financial services companies. Banks could, t hrough t heir direct and indirect holdings in ot her ent it ies, exercise cont rol or have a significant influence over such companies. As a result , t hey may be engaging direct ly or indirect ly in activit ies t hat are not permit t ed. Hence, it was necessary t o limit such invest ment s, RBI said. Equit y invest ment would be subject t o a limit of 10 per cent of t he company's capit al, or 10 per cent of t he bank's capit al and reserves, whichever was less. The equit y invest ment s held under t he 'held for t rading' cat egory would be count ed for calculat ing t he limit . The combined equit y invest ment s in non-financial ent it ies by banks, t heir subsidiaries, associat es or joint vent ures, and asset management companies should not exceed 20 per cent of t he company's capit al. RBI said request s by banks request t o hold a st ake of over 10 per cent and less t han 30 per cent would be considered if t he company was engaged in act ivit ies permit t ed by t he Banking Regulat ion Act . Banks are also permit t ed t o set up subsidiaries for undert aking act ivities conducive t o t he spread of banking in India or are useful and necessary in public int erest .

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Canara Bank Samachar Lehar January 2012 A st ake of over 10 per cent , wit hout RBI's prior approval, would be allowed if t he addit ional acquisit ion was t hrough rest ruct uring, including corporat e debt rest ruct uring. The same norms would apply for a st ake acquired t o prot ect it s int erest on loans / invest ment s made in a company. Source:ht t p:/ / www.business-st andard.com/ india/ news/ banks-st akes-in-non-financialent it ies-capped-at -10/ 458400/

Sinha Panel Backs Non-Voting Shares for Bank Capitalisation Says RBI should put in place riders before granting 26% voting rights to shareholders in Banks
December 13, 2011 A parliament ary commit t ee has favoured allowing st at e-run banks t o issue non-vot ing shares t o help t hem access capit al from t he market s wit hout dilut ing t he government s cont rol over t hem. The suggest ion of t he st anding commit t ee on finance comes at a t ime when a cash-st rapped government is exploring opt ions t o shore up t he capit al base of public sect or banks. This may fast t rack t he process and will bring a major change in t he current form of capit alisat ion support , a senior government official said, request ing anonymit y. A nonvot ing share for a bank will be a share where t he holder has no vot ing right . Banks are finding it t ough t o raise funds t hrough issue of fresh shares as it will lead t o a dilut ion of t he government s st ake t o below the mandat ory 51%. The commit t ee, headed by BJP leader and former finance minist er Yashwant Sinha, has also recommended in it s report that t he Reserve Bank of India (RBI) should put in place st rict riders before grant ing 26% vot ing right s to shareholders in banking inst it ut ions. The panel has only given condit ional nod for t he vot ing right s provision and said t hat vot ing right s for invest ors should be capped at 26%, inst ead of it being in proport ion t o equity holding. The commit t ee, however, has said t hat t he government should look at t he merit s of issuing non-vot ing shares, as it will allow it t o expand t he capit al base of banks wit hout t he risk of management cont rol falling int o a few hands. In 2010-11, t he government infused . 20,157 crore in st at e-run banks t o help t hem achieve a t ier-I capit al adequacy rat io at 8%. For t he current fiscal, t he Planning Commission has approved an addit ional capit alisation demand of 14,000 crore. Earlier t his fiscal, t he finance minist ry allocat ed . 6,000 crore t owards bank capit alisat ion, of which half is expect ed t o go t o St at e Bank of India, the count rys largest lender.

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Canara Bank Samachar Lehar January 2012 On vot ing right s, t he committ ee has said t hat t he RBI should t ake sufficient safeguards while st ipulat ing condit ions such as credent ials, source of funds, t rack record and financial inclusion, before grant ing approval. The panel has also said t hat mergers and acquisit ions in t he sect or should not be kept out of t he compet ition regulat ors purview forever. This should be considered as a special case and an expedient measure t o be revisit ed aft er bot h t he RBI and t he Compet it ion Commission of India gain some experience, it has said. On Deposit or Educat ion and Awareness Fund, t he commit t ee has said t hat it should be creat ed wit hout compromising t he right s and claims of deposit ors or t heir legal heirs. Deposit ors legal heirs should be informed before t ransfer of money t o t he prot ect ion fund, it added. The government has said t hat money from an account t hat has not been in operat ion for t he last 10 years should be transferred t o t his fund for promot ion of deposit orsint erest . Source:ht t p:/ / epaper.t imesofindia.com/ Default / Script ing/ Art icleWin.asp?From=Archive& Source=Page& Skin=ETNEW& BaseHref=ETM/ 2011/ 12/ 13& PageLabel=15& Ent ityId= Ar01500& ViewMode=HTML

Parliamentary Panel Pitches for Integrated Banking Law

December 14, 2011 The parliament ary st anding commit t ee on finance has suggest ed inst ead of bringing piecemeal amendment s t ime t o t ime, t he government should consider t he formulation of an int egrat ed modern banking law, consolidat ing t he provisions of ot her st at ut es t hat cover various aspect s of banking. "Such an int egrat ed and holist ic law would also be in line wit h t he proposed legislat ion in ot her areas like t he Direct Taxes Code and t he Companies Bill," t he panel outlined in it s report on t he Banking Laws (Amendment ) Bill, 2011, t abled in Parliament on Tuesday. The commit t ee st ressed on employee-friendly measures in t he int egrat ed banking law. These include t he int roduct ion of employee st ock opt ions, det errent safeguards against 'wilful default ' by a borrower in repaying loans and ot her forward-looking proposals t hat reflect emerging realit ies. On t he proposal t o make vot ing right s in privat e sect or banks proport ionat e t o shareholding, t he panel said t he finance minist ry may consider increasing the limit from t he current 10 per cent t o 26 per cent t o keep a balance bet ween conflict ing fact ors concent rat ion of economic power and cont rol and promot ion of corporat e democracy. The finance minist ry had, in the Banking Laws (Amendment ) Bill 2011, proposed t hat vot ing right s in privat e sect or banks be proport ionat e t o t he shareholding, while removing t he exist ing 10 per cent ceiling.

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Canara Bank Samachar Lehar January 2012 Market part icipant s said t he move was in t he direct ion t owards financial sect or reforms. "It is a posit ive move, a move in t he right direct ion. However, invest ors would want t o have vot ing right s in line wit h t heir shareholding patt ern. So, t hat goal has not been achieved. But t he positive t hing is t he government is t rying t o push reforms, may be in small st eps," said Manek Fit t er, part ner (financial services), Ernst & Young. The commit t ee also emphasised on recent failures of major global privat e banks and said lessons learnt from t hese should not be lost sight of, while formulat ing t he new policy on banking licences. "Key issues and concerns such as banking penet rat ion, coverage and financial inclusion should remain paramount and t he ent ire banking indust ry, including banks in t he privat e sect or, should be clearly mandat ed t o achieve the desired object ive in t his regard," it said. While support ing t he government 's proposal to keep bank mergers out side t he purview of THE Compet it ion Commission of India (CCI) as of now, t he panel said this exempt ion should be considered a special case and an expedient measure t o be revisit ed in the light of t he experience gained by bot h t he Reserve Bank of India (RBI) and t he CCI. "This, however, does not, in any manner, convey the commit t ee's view on t he mergers and acquisit ion policy in t he banking sect or, which is an issue merit ing a separat e discourse," it said. "As RBI has been ent rust ed wit h t he mandat e to grant approvals for acquisit ions, transfers and mergers in t he banking sect or, t he committ ee would expect RBI conduct due diligence of 'fit and proper' persons / ent it ies and t ake sufficient safeguards while st ipulat ing condit ions as t o credent ials, source of funds, t rack record and financial inclusion before grant ing approvals under t his clause, "t he report said. The commit t ee also st ressed it would like the government t o consider the merit s of issuing non-vot ing shares as an avenue t o expand the capit al base of banks wit hout allowing concent rat ion of management cont rol in a few hands, as t his would also enable banks t o grow fast er. "Considering t he wide scope and amplit ude proposed in t he definit ion of 'associat ed ent erprises' of a banking company, t he commit t ee would expect RBI's regulat ory machinery be adequat ely beefed up in view of it s expanding role and augment ed funct ions as proposed in t he Bill," t he panel said in it s report . The commit t ee said no serving or ret ired officer of t he cent ral government or a st at e government should be considered for appoint ment as administ rat or on suppression of t he board of direct ors of a banking company. Source:ht t p:/ / www.business-st andard.com/ india/ news/ parliament ary-panel-pit ches-forint egrat ed-banking-law/ 458496/

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RBI panel to discuss raising of capital by urban co-op banks

December 15, 2011 The issue of get t ing a level-playing field for urban co-operat ive banks vis-D-vis commercial banks wit h regard t o raising capit al and lowering t he t hreshold for st at ut ory invest ment s will be t aken up at a meet ing of t he Reserve Bank of India's st anding advisory committ ee next week. Current ly, growt h prospect s for t he 1,600-odd UCBs are hamst rung due t o limit ed opt ions for raising capit al. These banks primarily depend on plough back of profit s and borrowers' subscript ion t o share capit al at the t ime of loan disbursement , t o shore up t heir capit al. Though UCBs, which as of March-end 2011 collect ively had deposit s and advances aggregat ing Rs 2,12,031 crore and Rs 1,36,341 crore, respect ively, have been allowed t o issue preference shares and long-t erm deposit s t o augment t heir capit al, bot h t hese opt ions are not preferred. Investors' interest The const raint for UCBs in issuing preference shares is t hat t hey can be issued only at face value. Invest ment in t hese shares is unat tract ive as no exit mechanism is available for invest ors want ing t o liquidat e t hem. In t he case of long-t erm deposit s, t he RBI's approval is required t o pay back deposit ors even if a bank is financially sound. This is proving t o be a det errent for prospect ive invest ors. "We should be allowed t o issue shares at book value. Also, t o impart liquidity t o cooperat ive bank shares, a market -making mechanism in t he form of a t rust can be jointly put in place by all banks so t hat invest ors have an exit opport unit y," said Mr B.V.R. Sarma, CEO, Great er Bombay Co-operative Bank. Review SLR requirement Current ly, commercial banks have t o invest a minimum 24 per cent of t heir deposit s in Government Securit ies. These invest ment s are required t o fulfil t he st at ut ory liquidity rat io (SLR) norm. However, in t he case of UCBs, t his limit is set higher at 25 per cent . UCBs want at par t reat ment with commercial banks in this case. Further, t hey want t he SLR limit t o be suit ably split int o two - invest ment in government securit ies, and cash holding, invest ment in gold and deposit s wit h t he apex bank of a St at e. They are also seeking RBI's permission t o t ap it s liquidity adjust ment facilit y t o t ide over t emporary liquidit y mismat ches.

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Canara Bank Samachar Lehar January 2012 "Many small banks do not have t he expert ise to t rade in Government Securit ies. In a rising int erest rat e regime, these banks end up booking losses or making market -t o-market provisioning on t he balance sheet dat e. "To overcome t his, t hey should be permitt ed t o hold a port ion of t heir deposit s in cash, invest in gold and park deposit s wit h t he apex bank of a St at e," said Mr Sarma. Allow repo transactions To overcome short -t erm liquidity mismat ches, UCBs want t o leverage t heir non-SLR invest ment s (or invest ment in corporat e bonds) by offering t hem as collat eral in repo t ransact ions wit h commercial banks. Current ly, every branch t hat a co-operat ive bank opens has t o be backed up by a net wort h of `.2 crore each. The UCBs want the RBI t o do away wit h t his stringent norm and t ake int o account t heir overall financial healt h in grant ing future branch licences. Other demands Current ly, UCBs cannot lend more t han `. 10 lakh against t he pledge of shares. They want t his limit t o be doubled. These banks want RBI t o clearly define bill discount ing under let t er of credit as a permissible banking act ivit y. "There is some confusion on bill discount ing under lett er of credit as some RBI inspect ion officials allow it while ot hers don't ," said a senior UCB official. Source:ht t p:/ / www.t hehindubusinessline.com/ indust ry-andeconomy/ banking/ art icle2712314.ece

Banks must support land development to conserve arable lands : NABARD

December 15, 2011 Credit t o land development for agricult ure has t o be st epped up t o prot ect cult ivable lands, said Mr S.N. Misra, Convenor, St at e Level Bankers Commit t ee. Mr Misra, who is also t he General Manager, Indian Overseas Bank, said banks have t he responsibilit y t o support land development to conserve arable lands which are being unut ilised every year. But t his has largely been ignored by t he banks t hough t he Reserve Bank of India classifies funding for purchase of agricult ure land as priority sect or lending. The call from SLBC, an int er-inst it utional forum t o coordinat e bet ween Government and banks, t o support land development gains significance against t he backdrop of t he decrease in gross cropped area every year in Tamil Nadu. The Nat ional Bank for Agricult ure and Rural Development est imat es that t he area is going down by about 1 lakh Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 hect ares annually. The gross cropped area was 55.72 lakh ha in 2009-10 against 60.32 lakh ha in 2005-06. Addressing t he St at e-level credit seminar organised by Nabard, he said land redist ribut ion has t o be encouraged t o ensure t hat surplus, uncult ivat ed land are brought int o product ion. The annual event in which Nabard present s the St at e focus paper, is t he foundat ion for planning t he credit flow t o agricult ure and allied act ivit ies. For 2012-13, t he refinance inst it ut ion has pegged bank credit pot ent ial for t he St at e at Rs.77,803.49 crore, a growt h of 34.53 per cent over t hat est imat ed for 2011-12. Crop loan account s for Rs.31,574.15 crore (40.58 per cent ); t erm loan Rs.17,010.05 crore (21.86 per cent ); non-farm sect or Rs.14,032.35 crore (18.04 per cent ); and ot her priorit y sect or Rs.15,186 crore (19.42 per cent ). The share of crop loans t o aggregat e pot ent ial has dropped from 42.94 per cent in 201112 t o 40.58 per cent in 2012-13. The ground level credit flow t o crop loans in 2011-12 is t arget ed at Rs.24,124 crore against Rs.29,047 crore in 2010-11. The Tamil Nadu Finance Secret ary, Mr K. Shanmugam, said t he Government is keen on support ing t he primary sect or. It is implement ing measures t o increase product ion and product ivit y wit h t echnology int ervent ion at the farm level by support ing mechanisat ion, micro irrigat ion and value-addit ion. It is also focussing on allied sect ors such as hort icult ure, animal husbandry and fisheries. The Government is t o implement an Rs.122crore project t o strengt hen t he ext ension infrast ructure in animal husbandry. Source:ht t p:/ / www.t hehindubusinessline.com/ indust ry-and-economy/ banking/ art icle2714880.ece

RBI steps in to arrest rupee depreciation

December 16, 2011 The Reserve Bank of India (RBI) on Thursday abandoned it s hands-off approach t o t he rupee, which on Thursday ended off an all-t ime low hit earlier in t he day. In a move t o t emper speculat ion-led volat ility, the cent ral bank t ook t wo measures. First , it curbed trading in rupee forwards. Once cancelled, forward cont ract s could not be bought again, the RBI said. The new rule applies t o domest ic as well as foreign invest ors and t akes effect immediat ely. Forwards are agreement s t o buy or sell asset s at a set price and dat e. The RBI also said forward cont ract s booked by foreign inst it ut ional invest ors, once cancelled, could not be rebooked. "Export ers were booking a forwards cont ract, cancelling it and t hen rebooking at a bet t er rat e, which was cont ribut ing t o t he free fall of t he rupee," said J Moses Harding, execut ive vice-president at IndusInd Bank. Second, the RBI reduced t he amount of open posit ions dealers can maint ain overnight. At present , a company's board is permit t ed t o fix suit able Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 limit s for various t reasury funct ions wit h net overnight open exchange posit ions and aggregat e gap limit s. Dealers said t he impact of lowering t he t rading limit s would be huge because banks would not be able t o keep speculat ive posit ions open for a long t ime. "The broad message t he RBI is trying t o give is t hat speculat ive tendencies have t o be curbed and genuine demand and supply should be allowed t o move the currency rat e," dealers said. In anot her move t o defend t he rupee, t he cent ral bank sold dollars on Thursday. Traders said t he RBI's int ervention sparked a slew of st op-losses on long dollar posit ions by market players who had expect ed t he currency, which had plunged t o a record low of 54.30 against t he dollar, t o hit 55 a dollar. The rupee ended near t he day's highs of 53.64/ 65 per dollar, marginally st ronger t han Wednesday's close but well above t he record low plumbed in early deals. At present , the RBI permit s hedging of currency risks on t he basis of past performance (export s or import ) for average t hree years. The company or unit could also t ake a hedge based on act ual performance in t he last financial year. Now, for import ers using the past performance facilit y, t he facility st ands reduced t o 25 per cent of t he limit . Import ers, who have used t he facilit y in excess of t he revised or reduced limit , are barred from making furt her bookings. The RBI said forward cont ract s booked under t he facilit y would be on a fully deliverable basis. The exchange gains emerging from t he cancelling of cont ract s should not be passed on t o t he cust omers. All cash and spot t ransact ions by banks for client s will be done for act ual remit t ances / delivery only. They cannot be cancelled or cash-set t led. In an effort t o cont rol t he effect of currency derivat ive deals by FIIs, t he RBI banned rebooking of cancelled cont ract s by overseas port folio invest ors. They can, however, roll over cont ract s on or before mat urit y. At present , FIIs are allowed t o hedge currency risk on t he market value of the ent ire invest ment in equit y and / or debt in India. The RBI also said t he int ra-day open posit ion / daylight limit of dealers should not exceed t he exist ing approved limit s. At present , a company's board is permit t ed t o fix suit able limit s for various t reasury funct ions wit h net overnight open exchange posit ions and aggregat e gap limit s. The react ion from indust ry and dealers was mixed. Most said t hey expect ed the rupee t o "set t le down" on Friday but a lot depended on ot her fact ors beyond t he cent ral bank's cont rol.

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Canara Bank Samachar Lehar January 2012 Moses Harding, head, global market group, IndusInd Bank, said t he rest rict ions would t ake out a big chunk of demand from export ers for dollars. As a consequence, t he rupee, which has seen volat ile movement s, could set t le bet ween 53 and 54 against the dollar. Isaac George, chief financial officer, GVK, said t hough he would like t o wait and wat ch, it would be good if t he RBI was proved right on Friday. "We believe these kind of moves should have happened much earlier," he said. JSW Group CFO Sheshagiri Rao welcomed t he move, saying it was t he correct way t o curb speculat ion. "What ever arbitrat ion opport unit y exist ed bet ween t he non-deliverable forward cont ract market overseas and India -- current ly 60 paise t o every dollar -- will now go away," Rao said. Durgesh Meht a, CFO, Bombay Dyeing, said it was a welcome move for players like his company who did not believe in t aking a posit ion and did direct t rade. The guidelines would affect companies t hat tended t o supplement t heir business profit s wit h speculative gains in t he foreign exchange market , he said. But , he wasn't sure whet her these measures alone would solve t he problem. "I believe t he RBI's move will provide some relief and arrest furt her decline in t he rupee in t he next few days. But, t hese measures alone cannot prevent rupee depreciat ion in t he medium t erm," Meht a said. His count erpart in Infosys, V Balakrishnan, said t hough t he guidelines would not affect Infosys, it was a good st ep t o reduce volat ility and speculat ion in t he market . Abhishek Goenka, CEO, India Forex Advisors, said he expect ed the rupee t o open st ronger on Friday at 53.10-53.20 a dollar. Source:ht t p:/ / www.business-st andard.com/ india/ news/ rbi-st eps-in-t o-arrest -rupeedepreciat ion/ 458715/

Global Regulators prepare Supervisory Framework to prevent Lehman-like collapses

December 21, 2011 Global banking, securit ies and insurance regulat ors have proposed a framework for supervising financial conglomerat es t o ward off a Lehman-like crisis. For example, t he framework discusses t echniques for t he det ect ion and correct ion of double or mult iple gearing, where t he same capit al is used as a risk buffer for two or more legal ent it ies wit hin t he conglomerat e. The principles out line t he import ance of prudent management and report ing of group wide risk posit ions and int ra group exposures so t hat a cont agion does not occur.

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Canara Bank Samachar Lehar January 2012 The consult at ive report has been joint ly aut hored by t he Bank of Int ernat ional Set t lement s (BIS), Int ernat ional Organisat ion of Securit ies Commissions (IOSCO) and Int ernational Associat ion of Insurance Supervisors (IAIS). These are t he apex associat ions of banking, insurance and securit ies regulat ors. The object ive of t he framework is t o close regulat ory gaps, eliminat e confusion on ent it ies t hat fall in t he int erface of t wo or more regulat ors and effect ively supervise unregulat ed ent it ies in a financial conglomerat e. The principles out lined are supplement ary and do not replace, banking, insurance or securit ies supervisory frameworks. It calls for great er exchange of informat ion and coordinat ion among supervisors (regulat ors), said t he report . Individuals who exert a mat erial influence over t he conglomerat e or any of it s companies should be financially sound. In addit ion, t hey should have int egrity and be compet ent in t erms of experience and qualificat ions. Such an individual should be paid remunerat ion in line wit h int ernat ional st andards and t he risk profile. The remunerat ion policy should also account for mat erial risks t hat an organisat ion is exposed t o, including t hose from it s employees' act ivities. The principles place great er emphasis on t he conglomerat e's abilit y t o measure, manage and report all mat erial risks t o which t he financial conglomerat e is exposed, including t hose st emming from unregulat ed ent it ies and act ivit ies t hat could be a cause of regulat ory arbit rage. Supervisors have been asked t o assay t he impact of t hese unregulat ed ent it ies on regulat ed entit ies, in t erms of influence, int erconnect edness, risk t ransfer, risk concent rat ion and exposure, int ra-group t ransact ions, st rat egic and reput at ion risk. Source:ht t p:/ / www.t hehindubusinessline.com/ indust ry-and-economy/ banking/ art icle2732575.ece

Tighter Rules may give Fillip to Shadow Banks

December 21, 2011 Int ernational regulat ors' effort s t o st rengt hen t he financial syst em by t ight ening bank rules may inadvert ent ly serve t o boost opport unit ies for unregulat ed or "shadow" financial players. That is because it is t he shadow players, primarily hedge funds and privat e equit y firms, who are expect ed t o buy t he billions of euros wort h of asset s t hat banks will be selling in t he coming mont hs as t hey slim down t heir balance sheet s t o comply wit h the new rules. "The growt h of the shadow banking syst em is a logical consequence," said Merck Finck analyst Konrad Becker.

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Canara Bank Samachar Lehar January 2012 Analyst s worry t hat t his raises risks for t he financial syst em, as t hese invest ors borrow money t o buy t he asset s for sale, pot entially leading t o a fresh credit bubble t hat could ult imat ely t hreat en the economy. "There will be some people who will wish for a ret urn t o t he good old days when banks were relat ively harmless," said one management consult ant t o a range of financial firms, adding t hat t his was part icularly t rue of t he Brit ish and US banking sect ors, where invest ors were already act ive. Financial leaders in t he G20 group of developed and emerging economies had int ended t o draw a lesson from t he financial crisis by rat chet ing up t heir surveillance of banking product s, players and transact ions. While regulat ors have announced t hat t hey will t urn their at t ent ion in due course t o t he $60-t rillion shadow banking sect or, including money market funds, special invest ment vehicles, securit isat ion and securit ies lending, t here has been lit t le in t he way of concret e act ion so far. Invest ment bankers say shadow banking players, oft en based in t ax havens, will not run out of financial ammunit ion anyt ime soon. "Shadow banks cannot print t heir own money but inst ead need t o have t heir own invest ors lined up," said Carst en Dent ler, a member of t he board of UBS's German unit . "However, t hose funds will cont inue t o flow t o t hem in t he fut ure. Of t hat I am sure." As dark as t hey are oft en port rayed, shadow banks may now play t he role of whit e knight s for lenders t rying t o offload risky asset s t o comply with European regulat ory capit al t arget s by t he middle of 2012. The European Banking Aut horit y has identified a capit al short fall of 115 billion euros (96 billion) if t he region's lenders are t o raise their core Tier-1 capit al rat io t o 9 per cent of risk-weight ed asset s by the end of June as required. Source:ht t p:/ / www.business-st andard.com/ india/ news/ t ight er-rules-may-give-fillip-t oshadow-banks/ 459190/

RBI cuts Currency open Position for Banks by up to 75%

December 21, 2011 The Reserve Bank of India has cut banks' net open posit ion limit s in currency t rading by as much as 75% for some, and at least by half for most of t he t op t raders, in it s at t empt t o end speculat ion on the rupee, said t hree people familiar wit h t he matt er. Aft er robbing bank boards off t he powers to det ermine the overnight posit ions, it is monit oring day t ransactions where it is liberal in int ra-day t rading positions which banks are not keen, said t hose people who did not want t o be ident ified.

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Canara Bank Samachar Lehar January 2012 "It is quit e drast ic," said one of t he bankers who have been direct ed t o reduce posit ions wit hout disclosing how much his bank's posit ion has been reduced t o. "For some of us, it is almost as good as not hing at all," he said. RBI on December 15 unleashed a series of measures t o arrest t he fall of t he rupee, including t aking powers from the board t o det ermine t he overnight posit ion, the net overnight dollar posit ion a bank can hold, t o save t he rupee from falling st eeply. It also t ook off t he flexibilit y t o cancel or rebook t he forward cont ract s. Hedging based on past t hree-year average import s was cut t o 25%, from 75% making t hem deliverable. The domest ic currency which has fallen about 20% t his year, recovered from it s lows of 54.20 aft er t hese measures, but has since st art ed sliding again. It ended at 52.87/ 88 on Tuesday. While t he cent ral bank's move has halt ed t he sharp slide in t he currency value, it could dry up liquidity in t he currency market and reduce t he earnings of many banks t hat have been benefit ing from rupee volat ilit y. "Opport unity has been curt ailed," says Moses Harding, head of economic research and asset and liabilit y committ ee at IndusInd Bank. "Banks running propriet ary positions will obviously t ake a hit on t heir ot her income. To that ext ent , banks' trading income will come down. Also, int er bank-volumes will st art t hinning," he added. But t he hedging activities of t he corporat ions may not be hurt since t he cent ral bank has said t he overnight posit ions could be breached, if it is for a client . "We are t rying t o cope wit h the fresh rest rict ion," said anot her banker. "The open posit ions for some large banks which was about Rs.100 crore has been slashed t o about Rs.50 crore," said t he t reasury head of a privat e sect or bank. "But t he central bank has clarified t hat a bank could exceed NOOPLs if it is on account of a part icular cust omer transact ion." Source:ht t p:/ / economict imes.indiat imes.com/ news/ news-by-indust ry/ banking/ finance/ banking/ rbi-cut s-currency-open-posit ion-for-banks-by-up-t o75/ articleshow/ 11186802.cms

Call Rates Harden on Tight Liquidity

December 22, 2011 Call rat es in t he int erbank overnight borrowing market hardened, reflect ing t he pressure on liquidit y, as advance t ax funds went out of the syst em. The Reserve Bank of India (RBI) had, lat e in t he evening, said it would purchase government bonds worth Rs.10,000 crore t hrough an auct ion on December 22. RBI is conduct ing open market operat ions (OMOs) t o infuse resources in t he syst em and ensure government borrowings sail t hrough.

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Canara Bank Samachar Lehar January 2012 According t o Clearing Corporat ion of India data, call rat es t ouched a peak of 8.65 per cent during t he day, before soft ening t o close at 9.40 per cent . The average rat e for t he day was 9.56 per cent, against 9.19 per cent yest erday. Earlier in the day, RBI deputy governor Subir Gokarn said t he immediat e pressure on liquidit y was from advance t ax collect ions, which st ood at about Rs.69,000 crore. Since t hat amount would be spent over a period of t ime, the current pressure is clearly for t he short t erm. However, t he quantity is reflect ive of a mismat ch, and RBI does not expect t his t o remain. Things would normalise over t he next few days, Gokarn said. RBI has maint ained OMOs would be inst rument s of choice t o ensure adequat e liquidit y in t he syst em. The st rain on resources has been evident from t he huge borrowings under t he cent ral bank's liquidit y adjust ment facilit y. Banks borrowed about Rs.165,000 crore yest erday under t he window, and t he demand for funds remained t he same on Tuesday, according t o RBI dat a. Source:ht t p:/ / www.business-st andard.com/ india/ news/ call-rat es-hardent ight liquidit y/ 459196/

Financial inclusion necessary for Banking Growth : FM

December 22, 2011 Finance Minist er Pranab Mukherjee on Wednesday called upon banks t o promot e financial inclusion for sust aining high growt h of t he banking sect or. "Financial inclusion is an import ant policy of t he government not as an import ant inst rument of socio-economic development but if you want t o sust ain a high growt h rat e and t o address t his chronic problem of povert y, deprivat ion and disparit y," Mukherjee said at Cent ral Bank of India cent enary celebrat ion. He said banks have been advised t o issue Kisan Credit Cards t o all eligible farmers. "I have request ed t he st at e government s t o t ake up t his t ask on a campaign basis," he said. As on May 31, 2011, t he banking syst em have issued 10.42 crore KCCs. During 2011-12 (April t o May 2011), 4.09 lakh KCCs were issued by Commercial Banks, cooperat ive Banks and Regional Rural Banks wit h a loan amount of Rs.2,616 crore. For t he current financial year, t he t arget for agricult ure credit flow has been fixed at Rs.4,75,000 crore against which t he banking syst em has already ext ended credit of Rs.2,23,380 crore as on Sept ember 30, 2011. Kisan Credit Cards are t he prime vehicle for t he flow of agricult ural credit. As on May 31, 2011, t he banking syst em have issued 10.42 crore KCCs. Source:ht t p:/ / economict imes.indiat imes.com/ news/ economy/ finance/ financialinclusion-necessary-for-banking-growt h-fm/ art icleshow/ 11200184.cms

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Global headwinds to impact banking sector stability

December 23, 2011 Higher funding cost s and asset qualit y pressures t ake a t oll on t he sect or's healt h. The slowing domest ic economy and strong global headwinds may furt her increase loan default s and funding cost s of t he Indian banking sect or, according t o t he Reserve Bank of India (RBI)'s Financial St abilit y Report. However, t he report said despit e t he det erioration, t he healt h of t he sect or was robust . The banking sect or faced profit ability issues due t o higher funding cost s and asset qualit y pressure, owing t o a slowing economy. A forecast by t he banking st ability indicat or for t he next two quart ers shows a cont inuing a marginal det eriorat ion in st abilit y. Credit growt h decelerat ed from 22.6 per cent as of end-March t o 19.2 per cent as of endSept ember. The gross non-performing asset s (NPAs) rat io of 2.8 per cent is broadly in line wit h t he average in peer count ries. The growth of NPAs at 30.5 per cent and t hat of slippages at 92.8 per cent outpaced the credit growt h of 19.2 per cent end-September. The priorit y sect or, real est at e, infrast ruct ure and ret ail sect ors contribut ed significant ly t o t he rise in NPAs. The power and t elecom sect ors t oget her account ed for 77 per cent of infrast ruct ure credit and saw a rise in impairment s and restruct uring. Capit al adequacy, though well above t he regulat ory requirement , cont inued t o decline, falling from 14.5 per cent as on end-March 2010 t o 13.5 per cent as of end-Sept ember. Banks' profit ability has come under pressure, as rising int erest rat es result ed in t he growt h of int erest expenses out pacing t hat of int erest income, and a consequent decelerat ion in net int erest income and earnings. The t urmoil in t he euro zone has fanned fears of deleveraging by t he European banks. Indian banks are not expect ed t o see any direct impact , on account of negligible exposure t o t he t roubled area. However, some indirect impact due t o funding pressures could be seen. Source:ht t p:/ / www.business-st andard.com/ india/ news/ global-headwinds-t o-impact banking-sect or-st abilit y-/ 459470/

Losses in non-life insurance a worry

December 23, 2011 The Reserve Bank of India (RBI) has expressed concern on the rising t hird-part y mot or pool losses in t he non-life insurance sect or, as t his may hurt the st ability of banks, which have subst ant ial exposure t o t he sect or.

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Canara Bank Samachar Lehar January 2012 This assumes import ance, as t he Insurance Regulat ory and Development Authority (Irda) had recent ly said it may increase t he provisioning requirement for t he t hird-part y commercial mot or port folio of general insurance companies from 153 per cent t o 175-205 per cent . If implement ed, t he indust ry may need addit ional capit al of Rs.3,500-6,000 crore, which may impact banks that have general insurance subsidiaries. Current ly, St at e Bank of India, ICICI Bank and HFDC Lt d are t he major lenders who have general insurance subsidiaries. "The Indian insurance sect or is well-capit alised, as t he solvency rat io exceeds t he regulat ory requirement s in all t he cases, with respect t o life insurers. Recent ly, however, t his has become a matt er of concern for non-life insurers, as t he liabilit y requirement and t he associat ed capit al requirement for t he mandat ory t hird-party mot or pool has increased, and so have underwrit ing losses in t he non-life sect or," RBI said in t he halfyearly Financial St abilit y Report released on Thursday. "Int er-linkages bet ween insurance and t he banking sect or are a mat t er of concern, wit h many insurance companies being part of financial conglomerat es. Any financial st ability issue regarding the bank in the conglomerat e may have an amplifying effect on t he insurer," RBI said. Most insurers in India have a foreign part ner wit h 26 per cent st ake, t he maximum permissible foreign direct invest ment limit in t he sect or. Source:ht t p:/ / www.business-st andard.com/ india/ news/ losses-in-non-lifeinsuranceworry/ 459471/

RBI Financial Stability Report

December 23, 2011 First , t he bad news. The Reserve Bank of India, or RBI, has hint ed that foreign inst it ut ional invest ment (FII) in st ocks may dip due t o uncert aint ies in t he US and Europe; banks may have t o grapple wit h more bad loans; and current account deficit can widen. The saving grace is t hat Indian banks and financial inst itut ions are strong enough t o withst and t he t urmoil. In it s Financial St ability Report released on Thursday, t he cent ral bank said a 'stress t est ' carried out on banks shows t hat local lenders are "reasonably resilient ", t hough capit al adequacy of some individual banks may be affect ed under severe credit risk st ress scenarios. Co-operat ive banks are on a more tricky t errain. According t o t he t est result s, t hese banks can wit hst and a rise in bad loans rat io by 50%, but will come under pressure if t he t ot al loans t o st icky loans rat io doubles. Even as t he RBI point ed t o t he lack of disclosures in financial market s, shift s in t rading patt erns and risks from int er-linkages bet ween banks and ot her instit ut ions, t he regulat or's predominant concerns relat e t o t he macro indicat ors. For inst ance, current account deficit (CAD), which captures t he gap bet ween import and export of goods and services and has increased during Q1 of 2011-12, is expect ed t o "widen furt her", it said. "Larger CAD would necessit at e higher capit al inflows."

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Canara Bank Samachar Lehar January 2012 The Sore Points Refinancing of ECB, FCCB will be necessary Privat e pledging by promot ers for family-run cos should be disclosed Inflation and inflat ionary expect at ions st ill high More loans t o builders, ret ail, farmers & infra t urning badBank margins face pressure Export s will dip if slowdown cont inues in developed economies Int er-linkages among banks, insurers & NBFCs a concern Derivat ives t rading and propriet ary t rading need t o be monit ored Bank Margins under Pressure In t his cont ext , t he impact of risk aversion due t o downward risk t o economic and financial condit ions in t he US and Euro area would be crit ical, part icularly for FII flows t o India," t he RBI said. In t his cont ext , t he RBI report said foreign loans and foreign currency bonds of Indian companies, which have become cost lier due t o a rise in dollar, may have t o be refinanced. Bonds float ed by more t han 100 firms are maturing next year. According t o t he cent ral bank (which will announce it s next monet ary policy on January 24), "low and st able inflat ion alone is not sufficient t o promot e macro-economic and financial st abilit y". An inflat ion of 9.11% is well above t he regulat or's comfort level. Point ing out that bank margins could come under pressure, t he RBI said servicing of loans have come under st ress due t o rise in input prices, int erest rat es, and slackening demand and infrast ruct ure const raint s. The year-on-year growt h in bad loans at 30.5% at t he end of Sept ember 2011 has out paced credit growt h of 19.2% while new bad loans grew at 92.8%. "Among all sect ors, priority sect or, real est at e, infrast ruct ure and ret ail sect ors have cont ribut ed significant ly t o t he rise in NPAs," it said. The regulat or has warned t hat banks' linkage with non-life insurance companies is a mat t er of concern due t o increasing capit al requirement t owards t hirdpart y mot or pool and mount ing underwrit ing losses. Calling for more t ransparency in t he st ock market , t he RBI has recommended complet e disclosure of privat e pledging of shares by promot ers, especially in family-run businesses. The average promot er holding in list ed companies is around 48%. The report point ed out t hat equit y prices of companies where promot ers have pledged significant port ions of t heir shares fell fast er t han t he broader market on account of speculat ion. The report also emphasised t he need t o monit or t he rise in derivat ives propriet ary t rades t o minimise syst emic risk. The report said t he growing int erconnect edness of finance companies wit h banks and t heir relat ively less st ringent regulat ions have raised t he pot ent ial of arbit rage opport unit ies. In 2010-11, borrowings of finance companies from banks rose 54.7% while loans t o t hem grew 30.4%. Source:ht t p:/ / epaper.t imesofindia.com/ Default / Script ing/ Art icleWin.asp?From=Archive& Source=Page& Skin=ETNEW& BaseHref=ETM/ 2011/ 12/ 23& PageLabel= 1& Ent it yId=Ar00103& ViewMode=HTML

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State-run Banks told to Discard Fast-track Promotion Policies

December 26, 2011 The finance minist ry has direct ed st at e-run banks t o do away wit h t heir separat e promot ion policies, a move st rongly opposed by t he officers' unions. The fresh guidelines aim at removing t he anomalies across public sect or banks and addressing severe manpower short age by creat ing a common pool of managers. This spells t he end of fast t rack and super fast -t rack promot ions at managerial levels in some public sect or banks, including the country's largest lender, St at e Bank of India. The new guidelines will allow lat eral movement across banks wit hout any remunerat ion issues, a finance minist ry official said. "The guidelines will also ensure t hat t here are eligible candidat es across all vert icals in all 21 st at e-run banks, which is a big advant age when it comes t o succession planning," said a human resources head at a Mumbai-based bank. The 2.5 lakh st rong All India Bank Officers' Confederat ion has, however, slammed t he revised guidelines. "The government should realise t he situat ion is different in each bank and it cannot force it s policies," said TN Goel, senior vice-president of t he confederat ion. As per t he guidelines, an employee will have t o work in all vert icals of a bank before being promot ed t o t he middle management level. "Specialist s recruit ed in banks will however have t o spend at least five years in t heir area before being moved t o ot her funct ions," t he finance minist ry official said. Furt her, in a case where a relaxation has been provided on t he basis of merit , t he same officer will not be eligible again, the official said. The guidelines run cont rary t o t he recommendat ions of a panel, set up t o look int o human resource issues at st at e-run banks, which had recommended t hat t he banks should develop mechanisms for ident ifying st ar performers and t o t rack t heir performance for fast -t rack growt h. Headed by former Bank of Baroda chairman AK Khandelwal, the panel had suggest ed t hat such a move will act as a mot ivat ional and ret ent ion t ool, besides creat ing a leadership pipeline. Source:ht t p:/ / economict imes.indiat imes.com/ news/ news-by-indust ry/ banking / finance/ banking/ st at e-run-banks-t old-t o-discard-fast -t rack-promot ionpolicies/ art icleshow/ 11248127.cms

Reforms commission looking at uniform legislation for banks

December 27, 2011 The Financial Sect or Legislat ive Reforms Commission (FSLRC) is considering a single, harmonised and uniform legislat ion applicable t o all banks and giving t he central bank t he power t o sanct ion t akeover of a co-operat ive bank by commercial banks, said Mr Anand Sinha, Deput y Governor, Reserve Bank of India. Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 The fact t hat different banks are governed by different laws has result ed in an uneven playing field and t his need t o be addressed. The Commission was set up by t he Government earlier t his year t o recommend radical overhaul of laws governing the financial sect or. For example, while amendment s were carried out t o enable St at e Bank of India, SBI subsidiary banks and nat ionalised banks t o issue preference shares, t hough at different point s of t ime, banks in t he privat e sect or cannot issue preference shares as t he amendment s t o t he Banking Regulat ion Act is st ill t o be carried out . Similarly, while bilat eral net t ing (t he amount t hat is due t o or from t he insolvent count erpart y) in the event of liquidat ion is admissible for privat e sect or banks (which are governed by t he Companies Act and t he normal bankrupt cy laws), t he posit ion in t his regard for public sect or banks, SBI and it s subsidiaries is not clear, explained Mr Sinha in his address at t he Financial Planning Congress. "A single, harmonized and uniform legislation applicable t o all banks will provide t ransparency, comprehensiveness and clarit y and provide ease of regulat ion and supervision t o t he RBI," said t he Deputy Governor. He observed t hat t here is also a need t o sort out t he conflict s and overlaps bet ween t he primary laws governing t he banking sect or and ot her applicable laws. For example, t he Compet it ion Act , 2002 is in conflict wit h t he provisions of t he BR Act , SBI Act and ot her st at ut es dealing wit h t he amalgamation of banks. Considering t he challenges faced in quick resolut ion of failed cooperat ive banks, cert ain enabling provisions in t he BR Act facilit at ing RBI t o sanct ion a scheme for t akeover of banking asset s and liabilities of a cooperat ive bank by commercial banks would be desirable. Part ial merger of cert ain businesses or asset s and liabilities of banks also may need t o be examined, said Mr Sinha. Volunt ary mergers and t ransfers help consolidat ion in financial sect or and pave t he way for st ronger financial instit ut ions t o rescue t he weaker ones, he emphasised. Appropriat e amendment s may have t o be carried out in the BR Act t o provide a st at ut ory backing for t he banking secrecy laws and t he limit s on t he privacy of cust omers should be laid down. Source:ht t p:/ / www.t hehindubusinessline.com/ indust ry-and-economy/ banking/ art icle2750008.ece

Financial inclusion to soon fetch tax benefits for banks, institutions

December 27, 2011 Banks and financial inst it ut ions may get t ax benefit s on profit s made t hrough act ivit ies leading t o financial inclusion.

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Canara Bank Samachar Lehar January 2012 Further, any losses t hese inst it ut ions incur, as a result , may also be allowed t o be carried over for a longer period. At present under Sect ion 72 of t he Income Tax Act , 1961, losses from any non-speculat ive business act ivit y are allowed t o be carried over for up t o eight subsequent assessment years. A senior Government official t old Business Line, "A proposal t o t his effect is being act ively considered by t he Depart ment of Revenue." However, anot her senior official said, "This is not an easy t ask as segregat ing income from t he financial inclusion is not easy". On behalf of t he sub-commit t ee on financial inclusion of t he Prime Minist er's Council for Trade and Indust ry, t he CEO of ICICI Bank, Ms Chanda Kochhar, made a present ation before t he Prime Minist er, senior Cabinet Minist ers and ot her members of t rade and indust ry councils on March 31. This sub-commit t ee also includes Mr Sunil Bhart i Mit t al, Chairman, Bhart i Ent reprises, among ot hers. Banks say t hat at a t ime when profit margins are under pressure, t ax breaks or carrying over losses for a longer period would be a big boost er for incurring new expendit ure, especially in areas where earnings are very low. Financial inclusion t alks about expanding banking services in un-banked areas and opening no-frills account s, among ot hers. Key recommendations The sub-commit t ee made 13 key recommendat ions. An Act ion Taken Report prepared by t he Government said some of t hese have already been fulfilled. For example, t he sub-commit t ee suggest ed permit t ing 'for profit ' ent it ies t o act as Business Correspondent s. Barring NBFCs and microfinance inst it ut ions, all 'for profit ' organisat ions have been allowed by the RBI t o act as Business Correspondent s. Anot her recommendat ion is about sharing common infrast ruct ure t o leverage benefit s of economies of scale. Here, t he Government said t hat t wo pilot project s are being implement ed in Bulandshahar, Ut t ar Pradesh (Punjab Nat ional Bank) and Mewat , Haryana (Syndicat e Bank). The recommendat ions also include allowing basic but essent ial services such as low-value remit t ances by non-banking players. While not hing has been said about non-banking players, t he Act ion Taken Report said out of t he 46 mobile banking licences issued, 33 have already commenced operat ions. Source:ht t p:/ / www.t hehindubusinessline.com/ indust ry-and-economy/ government -andpolicy/ art icle2750037.ece

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Banks Can't Charge for Account Closure

December 27, 2011 Banks have been t old not t o charge fees from cust omers who are closing t heir account s as RBI moves t o make modern banking accessible t o millions of ordinary people, including pensioners and t he poor. In a recent meet ing bet ween t he banking regulat or and heads of various banks, t he cent ral bank has t old t he banks not t o charge any fee if a cust omer desires t o opt out of a bank eit her due t o a change in employment or a t ransfer t o anot her city. "How can you penalise a cust omer for not offering a service. Secondly, how can a bank have t he aut hority t o debit money from t heir cust omers account and credit it t o t heir own P& L?" RBI deput y governor KC Chakrabart y t old bankers who resist ed t he move t o waive t he fee, a banker present in t he meet ing said on condit ion of anonymity. Coming just weeks aft er freeing savings rat es, t his dikt at by RBI is likely t o increase cost s for all banks. But t he worst -affect ed are likely t o be t he t he privat e sect or and foreign banks who charge high fees for account closures. The savings rat e deregulat ion has already kicked off a rat e war in t he indust ry wit h aggressive new banks such as YES Bank and Kot ak Mahindra increasing t heir rat es t o 7% and 6%, respect ively. Account closures by people t empt ed by t hese high rat es are likely t o increase and banks are unlikely t o have the freedom t o impose any cost s on such cust omers. But cust omers are likely t o feel happy as it would make it easier for t hem when t hey move jobs or cit ies. "Waiver of fee for closing a deposit account is a nat ural corollary t o waiver of pre-payment fee on float ing rat e home loans. The cust omer should have right t o freely exit from t heir loan or deposit account and t his should not at t ract any charge," is t he message from RBI, a banker present in t he meet ing t old ET. The cent ral bank recent ly persuaded most banks t o waive prepayment penalt y for cust omers who wish t o prepay t heir home loans. Fees on closure of account s is now on t op of it s agenda, especially aft er t he Damodaran Committ ee report on improving cust omer service advocat ed t hat t he cust omer should have a right t o a basic savings account wit h cheque book and ATM card facilities. The commit t ee was formed t o look int o banking services rendered t o ret ail and small cust omers and pensioners. The commit t ee was also mandat ed t o look int o t he grievance redressed mechanism pract iced by banks and suggest measures for expedit ious resolut ion of complaint s. It submit t ed it s report in August t his year. All banks charge cust omers for closing t heir account s. In some cases, it is as low . 100, but privat e sect or and foreign banks are known t o charge anywhere bet ween . 500 and 1,000. Recent ly, HDFC Bank quadrupled it s fee t o 500 from January 1, 2012.

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Canara Bank Samachar Lehar January 2012 The meet ing wit h RBI was at t ended by CMDs of some PSU banks and t he CEOs of ICICI Bank, Chanda Kochhar, and HDFC Bank's Aditya Puri. Officials said t he privat e and foreign banks conveyed t o RBI t hat there is cost involved in close an account which is being levied on t he cust omers. Source:Ht t p:/ / epaper.t imesofindia.com/ Default / Script ing/ Art icleWin.asp?From=Archive & Source=Page& Skin=ETNEW& BaseHref=ETM/ 2011/ 12/ 27& PageLabel=12& Ent it yId= Ar01203& ViewMode=HTML

RBI pushes for consolidation in banking

December 27, 2011 RBI has said t hat consolidation in t he banking sect or would pave t he way for stronger financial inst it utions wit h t he capacit y t o meet corporat e and infrastructure funding needs, and t o rescue dist ressed lenders. However, it has prescribed a non-operat ive bank holding company' st ruct ure t o avoid creat ion of complex inst it ut ions. "Volunt ary mergers and t ransfers help consolidat ion in t he financial sect or and pave t he way for st ronger financial inst it ut ions t o rescue t he weaker ones. Such volunt ary measures, while saving t he const it uent s of weaker inst it ut ions, provide business opport unit y t o t he st ronger ones t o spread t heir presence in different geographies," said Anand Sinha, deputy governor, RBI. Sinha was speaking at t he Financial Planning Congress 2011, organised by t he Financial Planning Standards Board of India here last week. He added t hat India needs bigger banks t o meet its infrast ruct ure needs and t o finance large indust rial project s. However, t he Compet it ion Act , 2002 (as amended by t he Compet it ion (Amendment ) Act , 2007) could come in the way of consolidat ion. One of it s provisions requires an ent erprise proposing t o ent er int o a combinat ion via a merger or an amalgamat ion t o not ify t he Compet it ion Commission. The commission has been allowed up t o 210 days t o decide on it before t he default clause kicks in. RBI's comment s come at a t ime when many in t he Indian indust ry feel t hat Indian banking has not kept pace wit h India Inc's funding requirement s. In t he t wo years preceding t he out break of t he 2008 global financial crisis, most business houses acquired multinat ionals t hrough leveraged finance, wit h t he support of int ernat ional borrowers. "Given the crisis in t he West , it would be difficult for Indian corporat es t o acquire int ernat ional asset s as none of t he large lenders are in a posit ion t o ext end funds for acquisition," said t he head of a large consult ancy firm. At t he same t ime Indian banks do not have t he balance sheet size t o fund large corporat es. One of t he lessons of t he crisis, according t o Sinha, was the downside of having oo big t o t fail' ent it ies. Very big and complex ent it ies pose supervisory issues t o t he regulat ors and pose serious syst emic risks. He emphasised t he need t o ensure t hat st ruct ures are not Samachar Lehar January 2012 issue- Compiled by RSTC Gurgaon

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Canara Bank Samachar Lehar January 2012 complex and t hat t here are effect ive resolut ion mechanisms t o ensure orderly winding up of t hese syst emically import ant ent it ies, in case of crisis. According t o RBI, a non-operat ive bank holding company st ruct ure may be useful t o deal wit h financial conglomerat es as t his great ly reduces risks spilling over from ot her ent it ies in t he group. Source:ht t p:/ / epaper.t imesofindia.com/ Default / Script ing/ Art icleWin.asp?From=Archive& Source=Page& Skin=TOINEW& BaseHref=TOIM/ 2011/ 12/ 27& PageLabel=20& Ent it yId= Ar02001& ViewMode=HTML

KEY BANKING INDICATORS

BANK RATE CRR SLR REPO RATE REVERSE REPO LIBOR US $ month 6.00% 6.00% 24% 8.50% 7.50% 6 0.8025% Base Rate of major Banks BPLR of major Banks FOREX RESERVES US $ Billion SCB Total Deposits - `. Cr. SCB Total Credit - `. Cr CREDIT- DEPOSIT RATIO 9.50-11.00% 14.00-17.50% 310.562 54,17,244 40,14,556 74.11%

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

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