Tides of 25.04.2007

RBI Governor announces Annual Policy Statement for the year 2007-08
Dr. Y. Venugopal Reddy, Governor, in a meeting with Chief Executives of
major commercial banks today presented the Annual Policy Statement for the Year
2007-08. This Statement consists of two parts: Part I. Annual Statement on Monetary
Policy for the Year 2007-08; and Part II. Annual Statement on Developmental and
Regulatory Policies for the Year 2007-08.
Highlights
 Greater emphasis on price stability and well-anchored inflation expectations while
ensuring a monetary and interest rate environment that supports growth
momentum.
 Swift response with all appropriate measures to all situations impinging on
inflation expectations and the growth momentum
 Renewed focus on credit quality and orderly financial markets conditions in
securing macroeconomic, in particular, financial stability.
 Bank Rate, Reverse Repo Rate and Repo Rate kept unchanged.
 Scheduled banks required to maintain CRR of 6.5 per cent with effect from the
fortnight beginning April 28, 2007.
 GDP growth projection for 2007-08 at around 8.5 per cent.
 Inflation to be contained close to 5.0 per cent during 2007-08. Going forward, the
resolve is to condition policy and perceptions for inflation in the range of 4.0-4.5
per cent over the medium term.
 M3 expansion to be contained at around 17.0-17.5 per cent during 2007-08.
 Deposits projected to increase by around Rs.4,90,000 crore during 2007-08.
 Adjusted non-food credit projected to increase by around 24.0-25.0 per cent
during 2007-08, implying a graduated deceleration from the average of 29.8 per
cent over 2004-07.
 Appropriate liquidity to be maintained to meet legitimate credit requirements,
consistent with price and financial stability.
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 Ceiling interest rate on FCNR (B) deposits reduced by 50 basis points to LIBOR
minus 75 basis points.
 Ceiling interest rate on NR(E)RA deposits reduced by 50 basis points to
LIBOR/SWAP rates.
 Average cut-off yield on 182-day Treasury Bills to be used as a benchmark rate
for floating rate bonds.
 Working Group to be set up to go into all the relevant issues and suggest
measures to facilitate the development of interest rate futures market.
 Overseas investment limit (total financial commitments) for Indian companies
enhanced to 300 per cent of their net worth.
 Listed Indian companies limit for portfolio investment abroad in listed overseas
companies enhanced to 35 per cent of net worth.
 Aggregate ceiling on overseas investment by mutual funds enhanced to US $ 4
billion.
 Prepayment of external commercial borrowings (ECBs) without prior Reseve
Bank approval increased to US $ 400 million.
 Present limit for individuals for any permitted current or capital account
transaction increased from US $ 50,000 to US $ 100,000 per financial year in the
liberalised remittance scheme.
 A Working Group on Currency Futures to be set up to suggest a suitable
framework to operationalise the proposal in line with the current legal and
regulatory framework.
 Risk weight on loans up to Rs.1 lakh against gold and silver ornaments for all
categories of banks reduced to 50 per cent.
 Introduction of a credit guarantee scheme for distressed farmers.
 Indian banks permitted to extend credit and non-credit facilities to step-down
subsidiaries within the existing prudential limits and some additional safeguards.
 Banks and primary dealers permitted to begin transactions in single-entity credit
default swaps.
 Risk weight on residential housing loans to individuals for loans up to Rs.20 lakh
reduced to 50 per cent as a temporary measure.
 Existing relaxed prudential norms applicable to Tier I and Tier II urban
cooperative banks extended by one year.
 Ceiling rate of interest payable by NBFCs (other than RNBCs) on deposits raised
by 150 basis points.
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Details
Domestic Developments
 The advance estimates of the Central Statistical Organisation (CSO) placed real
GDP growth at 9.2 per cent for 2006-07, over and above 9.0 per cent in 2005-06.
 The year-on-year wholesale price index (WPI) inflation was 5.7 per cent in end-
March and 6.1 per cent on April 7, 2007, after moderating from an intra-year peak
of 6.7 per cent in end-January 2007, but higher than 4.1 per cent at end-March,
2006.
 The average price of the Indian basket of international crude oil increased to a
peak of US $ 71.1 per barrel in July 2006, but declined to US $ 53.0 per barrel in
January 2007 before increasing to US $ 64.0 per barrel as on April 20, 2007.
 Money Supply (M3) growth, on a year-on-year basis, increased by 20.8 per cent
(Rs.5,67,372 crore) in 2006-07 as compared with 17.0 per cent (Rs.3,96,881
crore) in 2005-06.
 Reserve money increased by 23.7 per cent (Rs.1,35,892 crore) during 2006-07,
higher than the increase of 17.2 per cent (Rs.83,922 crore) in the previous year.
 Aggregate deposits of scheduled commercial banks (SCBs) increased by 23.0
per cent (Rs.4,85,210 crore) during 2006-07 as against 18.1 per cent
(Rs.3,23,913 crore) in 2005-06.
 Non-food credit extended by SCBs increased by 28.0 per cent (Rs.4,10,285
crore) on top of 31.8 per cent (Rs.3,54,193 crore) in the previous year, exhibiting
some moderation from the sustained growth during 2003-06.
 Incremental non-food credit-deposit ratio edged down to 84.6 per cent during
2006-07 from 109.3 per cent in the previous year.
 During 2006-07, financial markets shifted from conditions of easy liquidity to
occasional spells of tightness necessitating injection of liquidity through the LAF.
The build-up of cash balances of the Government and shortage of collateral as a
consequence of steady draw-down of excess SLR holdings exacerbated the
tightening of liquidity.
 The total overhang of liquidity under the LAF, the Market Stabilisation Scheme
(MSS) and surplus cash balances of the Central Government taken together
increased from an average of Rs.74,334 crore in March 2006 to Rs.97,449 crore
in March 2007.
 Financial markets experienced generally stable conditions during the greater part
of 2006-07, albeit with some volatility in the second half amidst heightened
activity as volumes increased steadily and interest rates firmed up in all
segments, particularly in the uncollateralised call/notice money market during the
last quarter of the year.
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 Scheduled commercial banks’ appetite for Government paper revived during
2006-07 as their investment in Government and other approved securities
increased by Rs.74,706 crore in contrast to a decline of Rs.22,809 crore in 2005-
06.
 Commercial banks’ holdings of Government and other approved securities
declined from 31.4 per cent of the banking system’s net demand and time
liabilities (NDTL) in March 2006 to 28.0 per cent in March 2007.
 Interest rates on deposits of over one year maturity of public sector banks (PSBs)
moved up from 5.75-7.25 per cent in April 2006 to 7.25-9.50 per cent in March
2007.
 The benchmark prime lending rates (BPLRs) of PSBs and private sector banks
increased from 10.25-11.25 per cent and 11.00-14.00 per cent to a range of
12.25-12.75 per cent and 12.00-16.50 per cent, respectively, during the same
period.
 The BSE Sensex declined from 11,280 at end-March 2006 to a intra-year trough
of 8,929 on June 14, 2006 but thereafter rallied to the peak of 14,652 on
February 8, 2007 but subsequently moderated to 13,072 by end-March 2007.
 During 2006-07, the Central Government’s net market borrowing at Rs.1,11,275
crore was 97.7 per cent of the budgeted amount and gross market borrowing of
Rs.1,79,373 crore was 98.6 per cent of the budgeted amount.
 The weighted average yield on primary issuance of the Central Government’s
dated securities rose by 55 basis points to 7.89 per cent in 2006-07 from 7.34 per
cent in the previous year.
 The Reserve Bank of India (Amendment) Act, 2006 gives discretion to the
Reserve Bank to decide the percentage of scheduled banks’ demand and time
liabilities to be maintained as CRR without any ceiling or floor. Consequent to the
amendment, no interest will be paid on CRR balances so as to enhance the
efficacy of the CRR, as payment of interest attenuates its effectiveness as an
instrument of monetary policy. The revised definition of “repo” and “reverse repo”
provided under the amendment would facilitate transactions of market
participants/banks in these instruments. The amendment also provides the
Reserve Bank with the statutory backing for regulating the money market and
also for regulating trading ofover-the-counter derivatives.
 The Reserve Bank of India reconstituted the TAC in January 2007 with a view to
obtaining continued benefit of expert opinion from the external experts with a
tenure up to January 31, 2009. The reconstituted TAC has five external members
and two members of the Central Board of the Reserve Bank. The Committee is
chaired by the Governor, with the Deputy Governor in charge of monetary policy
as
vice-chairman and other Deputy Governors as members.
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External Developments
 In US dollar terms, merchandise exports increased by 19.3 per cent during 2006-
07 (April-February) as compared with 26.3 per cent in the corresponding period
of the previous year. Imports showed an increase of 27.8 per cent as compared
with 32.7 per cent in the corresponding period of the previous year.
 While the increase in oil imports was lower at 32.6 per cent during 2006-07 (April-
February) as compared with 49.7 per cent in the corresponding period of the
previous year, non-oil import growth at 25.7 per cent was comparable to 26.4 per
cent for the same period.
 India’s foreign exchange reserves, including valuation changes, recorded an
increase of US $ 25.6 billion during April-December 2006 and rose to reach a
level of US $ 199.2 billion by end-March 2007.
 The Indian foreign exchange market witnessed generally orderly conditions
during 2006-07 with the exchange rate exhibiting two-way movements. The rupee
appreciated by 2.3 per cent against the US dollar and 2.7 per cent against the
Japanese yen, but depreciated by 6.8 per cent against the euro and by 9.0 per
cent against the pound sterling during 2006-07.
Global Developments
 The world economy expanded strongly in 2006 and achieved a four-year run of
sustained growth that began in 2003.
 According to the World Economic Outlook of the International Monetary Fund,
global real GDP growth, on a purchasing power parity basis, is expected to
decelerate from 5.4 per cent in 2006 to 4.9 per cent in 2007 and 2008.
 International foodgrains prices, in particular, wheat and maize, scaled record
levels in 2006 as global cereal output fell by 2.7 per cent from the previous year.
 Globally, headline inflation has picked up in the wake of increase in commodity
prices, and core inflation has also generally remained firm, which is likely to pose
risks to inflation expectations as international crude prices have started rising
again.
 Globally, financial risks have increased notably emanating from the behaviour of
oil prices, adverse developments in the US housing market, persistence of global
imbalances, large leveraged positions in financial markets, and possible
emergence of inflationary pressures.
 Monetary policy authorities the world over are vigilant about threats to inflation
expectations and are watchful about the emergence of excessive volatility in
asset prices, underpricing of risks and disorderly conditions in currency markets.
 Some central banks have recently paused in their policy cycles viz., the US; the
Bank of Canada; Bank Negara Malaysia; and the Banco de Mexico. Some other
central banks have cut back their policy rates in recent months, usually on the
back of earlier strong actions to contain inflation. These include Bank Indonesia
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(BI); the Banco Central doBrasil; the Banco Central de Chile and the Bank of
Thailand. The central banks that have tightened their policy rates include the
ECB; the Bank of England, the Bank of Japan; the Reserve Bank of Australia; the
Reserve Bank of New Zealand; the People’s Bank of China; and the Bank of
Korea.
Overall Assessment
 While there is evidence of structural changes underlying the recent Indian growth
experience, there are also indications that the upsurge of demand pressures may
contain a cyclical component. The structural changes include a step up in the
investment rate supported by a sizeable increase in the rate of gross domestic
saving, the growing linkages of the Indian economy with the global economy and
the indications of improvements in productivity in industry and services.
 Among the cyclical factors, first, robust global GDP growth has been supportive
of high growth in India. Second, the persistence of high growth in bank credit and
money supply, the pick-up in non-oil import growth and the widening of the trade
deficit together indicate pressures on aggregate demand. Third, cyclical forces
are also evident in the steady increase in prices of manufactures, resurgence of
pricing power among corporates, indications of wage pressures in some sectors,
strained capacity utilisation and elevated asset prices.
 A significant worrisome feature of domestic developments in 2006-07 is the
firming up of inflation, which represents the key downside risk to the evolving
macroeconomic outlook. The recent hardening of international crude prices has
heightened the uncertainty surrounding the inflation outlook.
 A careful assessment of the manner in which inflation is evolving in India reveals
that primary food articles have contributed significantly to inflation during 2006-
07. At the same time, prices of manufactured products account for well above 50
per cent of headline inflation.
 Indian financial markets have experienced some volatility in the fourth quarter of
2006-07 alongside sizeable swings in liquidity and a hardening of interest rates
across the spectrum. During episodes of tightness, contrasting conditions were
often observed when short-term interest rates had firmed up but long-term rates
had declined in the Government securities market.
 While capital flows to emerging market economies and, in particular, to Asia in
2006 have reflected the improvement in macroeconomic performance, they were
also driven by a search for yields and a stronger appetite for risk. Consequently,
reversals of capital flows can pose challenges to emerging economies,
particularly in the context of withdrawal of monetary accommodation in developed
economies.
 In the event of demand pressures building up, increases in interest rates may be
advocated to preserve and sustain growth in a non-inflationary manner. Such
monetary policy responses, however, increase the possibility of further capital
inflows, apart from the associated costs for growth and potential risks to financial
stability. Thus, foreign exchange inflows can potentially reduce the efficacy of
monetary policy tightening by expanding liquidity.
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Stance of Monetary Policy for 2007-08
 Real GDP growth in 2007-08 may be placed at around 8.5 per cent, assuming
no further escalation in international crude prices and barring domestic or
external shocks.
 In view of the lagged and cumulative effects of monetary policy on aggregate
demand and assuming the absence of domestic and external shocks, the policy
endeavour would be to contain inflation close to 5.0 per cent in 2007-08.
 Given the monetary overhang of 2005-07, it is important to contain M3 in 2007-08
at around 17.0-17.5 per cent in consonance with the outlook on growth and
inflation.
 Consistent with the projections of money supply growth, the growth in aggregate
deposits in 2007-08 is placed at around Rs.4,90,000 crore.
 Based on an overall assessment of the sources of funding, adjusted non-food
credit is projected to increase in the range of 24.0-25.0 per cent in 2007-08, a
graduated deceleration from the average of 29.8 per cent over 2004-07.
 The stance of monetary policy in 2007-08 would be conditioned by the global
and, more particularly, domestic developments. Monetary policy, while
contributing to growth, is strongly in favour of reinforcing the emphasis on price
stability and anchoring inflation expectations for the period ahead.
 The Reserve Bank will ensure that appropriate liquidity is maintained in the
system so that all legitimate requirements of credit are met, particularly for
productive purposes, consistent with the objective of price and financial stability.
Towards this end, the Reserve Bank will continue with its policy of active
demand management of liquidity through open market operations (OMO)
including the MSS, LAF and CRR, and using all the policy instruments at its
disposal flexibly, as and when the situation warrants.
 Barring the emergence of any adverse and unexpected developments in various
sectors of the economy and keeping in view the current assessment of the
economy including the outlook for inflation, the overall stance of monetary policy
in the period ahead will continue to be :
• to reinforce the emphasis on price stability and well-anchored inflation
expectations while ensuring a monetary and interest rate environment that
supports export and investment demand in the economy so as to enable
continuation of the growth momentum.
• to re-emphasise credit quality and orderly conditions in financial markets for
securing macroeconomic and, in particular, financial stability while
simultaneously pursuing greater credit penetration and financial inclusion.
• to respond swiftly with all possible measures as appropriate to the evolving
global and domestic situation impinging on inflation expectations and the
growth momentum.
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Monetary Measures
 Bank Rate kept unchanged at 6.0 per cent.
 Reverse Repo Rate and Repo Rate kept unchanged at 6.00 per cent and 7.75
per cent, respectively.
 The Reserve Bank retains the option to conduct overnight repo or longer term
repo under the LAF depending on market conditions and other relevant factors.
The Reserve Bank will continue to use this flexibility including the right to accept
or reject tender(s) under the LAF, wholly or partially, if deemed fit, so as to make
efficient use of the LAF in daily liquidity management.
 Cash reserve ratio (CRR) of scheduled banks at 6.5 per cent with effect from the
fortnight beginning April 28, 2007, as announced on March 30, 2007.
Developmental and Regulatory Policies
Interest Rate Prescriptions
 The interest rate ceiling on FCNR (B) deposits reduced by 50 basis points to
LIBOR minus 75 basis points with immediate effect.
 The interest rate ceiling on NR(E)RA deposits reduced by 50 basis points to
LIBOR/SWAP rates with immediate effect.
Financial Markets
 A ‘Non-Competitive Bidding Scheme’ in the auctions of State Development Loans
(SDLs) to be introduced in the financial year 2007-08.
 The base rate for new floating rate bonds (FRBs) is proposed to be the average
implicit cut-off yield emerging in the last three auctions of 182-day Treasury Bills
held before the coupon reset date.
 The reporting platforms for corporate bonds have already been established by
stock exchanges as per the Securities and Exchange Board of India (SEBI)
guidelines. The Fixed Income Money Market and Derivatives Association
(FIMMDA) is also in the process of setting up a reporting platform for over-thecounter
(OTC) trades in corporate bonds and providing a consolidated ticker
service for reporting all trades in corporate bonds. Widening of the repo market to
include corporate bonds will be considered after the proposed trading platforms
stabilise and robust clearing and settlement systems (Delivery versus Payment
system) are established.
 The CCIL is being advised to start a trade reporting platform for Rupee Interest
Rate Swaps (IRS).
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 A Working Group is being set up to go into all the relevant issues relating to
interest rate derivatives and to suggest measures to facilitate the development of
interest rate futures market.
 The overseas investment limit (total financial commitments) for Indian companies
investments in joint ventures (JVs)/ wholly owned subsidiaries (WOS) abroad to
be enhanced from the existing 200 per cent of net worth to 300 per cent of net
worth, as per the last audited balance sheet.
 It has been decided to introduce a revised reporting framework on overseas
investments for monitoring capital flows.
 The limit for portfolio investment abroad in listed overseas companies by listed
Indian companies enhanced from 25 per cent of net worth to 35 per cent of net
worth.
 The aggregate ceiling on overseas investment by mutual funds to be increased
from US $ 3 billion to US $ 4 billion.
 Prepayment of external commercial borrowings (ECBs) up to US $ 400 million to
be allowed as against the existing limit of US $ 300 million by authorised dealer
banks without prior approval of the Reserve Bank, subject to compliance with
stipulated minimum average maturity period as applicable to loans.
 The present remittance limit of US $ 50,000 to be enhanced to US $ 100,000 per
financial year for any permitted current or capital account transaction or a
combination of both by individuals.
 The range of hedging tools available to the market participants to be expanded.
 Authorised dealer Category-I banks to be allowed to permit domestic
producers/users to hedge their price risk on aluminium, copper, lead, nickel and
zinc in international commodity exchanges, based on their underlying economic
exposures and to permit actual users of aviation turbine fuel (ATF) to hedge their
economic exposures in the international commodity exchanges based on their
domestic purchases.
 At present, forward contracts booked by importers and exporters of goods and
services in excess of 50 per cent of the eligible limits have to be on deliverable
basis and cannot be cancelled. This limit is to be enhanced to 75 per cent.
 The forward contracts entered by residents for hedging overseas direct
investments to be allowed to be cancelled and rebooked.
 Small and medium enterprises (SMEs) to be permitted to book forward contracts
without underlying exposures or past records of exports and imports through
authorised dealers with whom the SMEs have credit facilities. The SMEs are also
to be permitted to freely cancel and rebook the contracts.
 Resident individuals to be permitted to book forward contracts without production
of underlying documents up to an annual limit of US $ 100,000 which can be
freely cancelled and rebooked.
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 A Working Group to be set up on Currency Futures to study the international
experience and suggest a suitable framework to operationalise the proposal, in
line with the current legal and regulatory framework.
 In respect of resident corporates, authorised dealers be allowed to:
o Permit remittances on account of donations by corporates for specified
purposes, subject to a limit of 1 per cent of their foreign exchange earnings
during the previous three financial years or US $ 5 million, whichever is lower.
o Permit Indian companies to remit up to US $ 10 million as against the current
limit of US $ 1 million for consultancy services for executing infrastructure
projects.
o Allow remittance of foreign exchange towards reimbursement of preincorporation
expenses incurred in India where the remittance does not
exceed 5 per cent of the investment brought into India or US $ 100,000
whichever is higher, on the basis of certification from statutory auditors.
o Permit remittances on account of cash calls for the purpose of oil exploration,
provided the operator/ consortium member in India submits documents to the
satisfaction of the authorised dealer.
o Allow remittances on account of requests from Business Process Outsourcing
(BPO) companies towards payment of the cost of equipment to be installed at
overseas sites in connection with setting up of International Call Centres,
subject to specified terms and conditions.
o Open foreign currency accounts in India for ship manning/ crew managing
agencies that are rendering services to shipping companies incorporated
outside India.
o Remit winding up proceeds of companies under liquidation, subject to orders
issued by the official liquidator or a court in India or under any scheme framed
by the Government of India and also subject to tax compliance.
 A uniform period of 6 months for surrender of received/ unspent/ unused foreign
exchange from the date of receipt/ purchase/ acquisition/ date of return of the
resident individual traveller.
 Authorised dealers to be allowed to open escrow/ special accounts on behalf of
non-residents corporates, subject to specific conditions where such accounts are
required to be opened in terms of the SEBI regulations for open offers/delisting
offers/exit offers and the like.
 The facility of operation of accounts by power of attorney holder is to be extended
to NRO account holders.
 At the request of the depositor, authorised dealers to be allowed to permit
remittance of the maturity proceeds of FCNR (B) deposits to third parties outside
India, provided the authorised dealer is satisfied about the bonafides of the
transaction.
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Credit Delivery Mechanisms and Other Banking Services
 Revised guidelines on lending to the priority sector by all SCBs are being issued
shortly.
 The requirement of “no due” certificate to be dispensed with for small loans up to
Rs.50,000 to small and marginal farmers, share-croppers and the like and
instead, obtain self-declaration from the borrower.
 Proposed to accept certificates provided by local administration/ panchayati raj
institutions regarding the cultivation of crops in case of loans to landless
labourers, share-croppers and oral lessees.
 The risk weight on loans up to Rs.1 lakh against gold and silver ornaments to be
reduced to 50 per cent from the existing level of 125 per cent.
 RRBs to be allowed to take up corporate agency business, without risk
participation, for distribution of all insurance products, including health insurance
and animal insurance.
 A credit guarantee scheme for distressed farmers to be introduced.
 Proposed to undertake an evaluation of the progress made in the districts
achieved 100 per cent financial inclusion by an independent external agency to
draw lessons for further action in this regard.
 A Working Group to be constituted for the Union Territory (UT) of Lakshadweep
to recommend measures for enhancing the outreach of banking services in the
UT.
 State Level Bankers’ Committee convenor banks to be advised to set up, on a
pilot basis, a financial literacy-cum-counselling centre in any one district, and
based on the experience gained, to ask the concerned lead banks to set up such
centres in other districts.
 Banks are urged to scale up IT initiatives for financial inclusion speedily while
ensuring that solutions are highly secure, amenable to audit, and follow widelyaccepted
open standards to ensure eventual inter-operability among the different
systems.
 An evaluation of the bank – self help group (SHG) linkage programme to be
conducted through the regional offices of the Reserve Bank with a view to
ascertaining the degree of transparency in maintaining the accounts by the SHGs
and their adherence to well-accepted best practices.
 The boards of banks are advised to lay down internal principles and procedures
so that usurious interest, processing and other charges are not charged.
 Proposed to extend the appeal option under the Banking Ombudsman (BO)
Scheme, 2006 to decisions of the BO rejecting complaints relating to matters
falling within the grounds of complaint specified under the Scheme.
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 The Reserve Bank of India Note (Refund) Rules (as amended up to 1980) to be
modified in order to make it easier for the public to obtain the refund value in
respect of mutilated notes.
Prudential Measures
 Indian banks to be permitted to extend credit and non-credit facilities to stepdown
subsidiaries which are wholly owned by the overseas subsidiaries of the
Indian corporates, within the existing prudential limits and some additional
safeguards.
 Introduction of credit derivatives in a calibrated manner. To begin with, banks and
primary dealers to be permitted to begin transacting in single-entity credit default
swaps (CDS).
 Disclosure of segment reporting under Accounting Standard 17 enhanced to
include more categories of corporate/ wholesale banking, retail banking and other
banking business.
 The risk weight on the residential housing loans to individuals to be reduced from
the existing 75 per cent to 50 per cent as a temporary measure. This
dispensation will be applicable for loans up to Rs.20 lakh and will be reviewed
after one year, keeping in view the default experience and other relevant factors.
Institutional Developments
 The Indian Financial Network (INFINET) system to be operationalised as a Multi-
Protocol Label Switching (MPLS) network by the Institute for Development and
Research in Banking Technology (IDRBT).
 Centralised Public Accounts Department (CPAD) System to improve
management of Central and State Governments’ accounting transactions to be
extended to cover all the Reserve Bank offices during the year 2007-08.
 Processing fees waived for transactions relating to RTGS, ECS, EFT and NEFT
up to March 31, 2008.
 Proposed to prepare comprehensive draft guidelines on minimum eligibility
criteria to become direct members of the clearing houses and to place these
guidelines on the Reserve Bank’s website for comments/feedback by May 31,
2007. The eligibility criteria will also cover membership in RTGS, NEFT, ECS and
INFINET connectivity.
 Annual review of payment and settlement systems to be introduced with effect
from the year ending March 31, 2007.
 Granting of branch licenses to be considered to well-managed and financially
sound Urban Co-operative banks (UCBs) in States that have signed Memoranda
of Understanding (MoUs), subject to fulfillment of certain parameters.
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 Guidelines to UCBs on the various options for raising capital to be issued by May
31, 2007.
 The existing relaxed prudential norms applicable to Tier I and Tier II UCBs to be
extended by one year.
 All UCBs in Grade I and II with a net worth of Rs.10 crore and registered in a
State that has signed the MoU with the Reserve Bank or under the Multi-State
Co-operative Societies Act to be allowed to undertake insurance business as
corporate agents, without risk participation.
 For claims payable by DICGC to depositors, it is proposed to treat Joint deposits
held in the names of ‘A & B’ and ‘B & A’ to be two separate accounts eligible for
maximum claim of Rs.1 lakh each.
 The ceiling on the rate of interest payable by NBFCs (other than RNBCs) on
deposits to be increased by 150 basis points to 12.5 per cent per annum and
such interest would be paid or compounded at rests which should not be shorter
than monthly rests.
 The Government and the Reserve Bank of India constituted a Committee on
Financial Sector Assessment to undertake a comprehensive self-assessment of
the Indian financial sector using the Handbook brought out by the World Bank
and the IMF as the base. The Committee is expected to lay out a road-map for
further reforms in a medium-term perspective.
 An Internal Working Group to be constituted to examine the report of the High-
Powered Expert Committee (HPEC) on Making Mumbai an International
Financial Centre and implement the recommendations as appropriate.

Tides of 24.04.2007

1. Corporation Bank has brought all its branches under the core banking solution (CBS). Corporation Bank is the first public sector bank to bring the entire bank under CBS. Simultaneously, the bank also launched `SMS Banking Service'. A new `talking-biometric ATM' was opened. Smart cards were issued to select customers.

2. Bank of India has registered a 76 % growth in net profit at Rs 447 crs for the quarter ended March 31, 2007, against Rs 254 crs in the previous year. The net profit grew by 60% at Rs 1,123 crs (Rs 701 crs) for the year ended March 31, 2007. Net interest income rose in the fourth quarter to Rs 968 crs against Rs 838 crs in the previous year. Other income rose to Rs 576 crs against Rs 324 crs in the year-ago period.

3. A 34% increase in gross credit, aided by a higher net interest margin, saw Indian Overseas Bank post its highest-ever net profit of Rs 1,008 crs for 2006-07, also the first time across the Rs 1,000-crs mark. Yet, the little bit that helped the bank cross the mark came from a Rs 50-crore net profit from the erstwhile Bharat Overseas Bank, since merged with IOB. After coming under IOB's control last year, BhOB's performance soared close to ten times, its net profit in the previous year was Rs 5.5 crs. This was due to buoyant recoveries. The bank's board has recommended a dividend of Rs 3 per share (30%).

4. Strong growth in net interest income and operating profits helped Indian Bank post a 69.09 % rise in net profit at Rs 235.31 crs in the fourth quarter ending March 31, 2007 against Rs 139.16 crs in the corresponding quarter the previous year. In 2006-07, the net profit grew by 50.6 % to Rs 759.77 crs against over Rs 504.48 crs last year. Total income increased to Rs 1563.61 crs (Rs 1092 crs) and operating profits to Rs 541.6 crs (Rs 333 crs). Total income for the year has crossed the Rs 5,000 crs mark and rose to Rs 5,017.86 crs, registering a growth of 31.09%.

5. The net profit of South Indian Bank has gone up by 105 % to Rs 104.12 crs (Rs 50.90 crs) for the year 2005-06. The board of directors has recommended a dividend of 25%, up from 18% of last year. The net NPA to net advances plunged to 0.98%, down from 1.86% of last year. The total business touched Rs 20,549 crs (Rs 16,324 crs). Of this, Rs 12,239 crs (Rs 9,579 crs) came as deposits and Rs 8,308 (Rs 6,745 crs) as advances.

6. Bank of Baroda has opened Gen-Next, its first youth-oriented, branch in the country. Based on this pilot, the model will be taken to other cities. The youth preferred to bank with private sector banks because of the technological advantage. The new bank was more of a "concept than a branch, and aimed at stemming the exodus of youth to private banks." Apart from regular banking services, Gen-Next has a special area called the Yo! Zone where customers can watch their favourite movies, sports or video channels. A reading lounge has also been created where customers can browse through books and magazines, and also surf the Net. The bank has launched four new products for the youth segment - Gen-Next Lifestyle, Gen-Next Power, Gen-Next Suvidha and Gen-Next Junior - which will be available only at these branches.

7. The Bank of India Chairman, Mr M. Balachandran, has stressed the need for scaling up operations in banks. He said, "Large size is essential for cost-effective operations, for capital augmentation and for competing on a global platform." "This can happen through organic growth and the inorganic route. In the former, banks cannot take it beyond 20% per annum, but in the latter, which obviously can happen only through mergers and acquisitions, there has to be synergy between the entities that come together."

8. Central Bank of India plans to hit the domestic capital market with an initial public offering by June this year. The bank will issue 80 million shares with a face value of Rs 10 each. The Government holding after the IPO will come down to about 80 % from 100%. The lead bank managers for the issue will be ICICI Securities, IDBI Capital Market Services and Enam Securities among others. Premium will be decided by lead bank managers. The bank will soon file its red herring prospectus with the SEBI. The bank has posted a 93.77% growth in net profit to Rs 498 crs for the year ended March 31, 2007 against Rs 257 crs for the corresponding period last year. The bank has recorded a 28.94% growth in total business as on March 31, 2007 from Rs 1,05,678 crs last year to Rs 1,36,265 crs.

Tides of 23.04.2007

1. SBI proposes to raise up to Rs 10,000 crs of debt in tranches during the current financial year. The bank will raise capital by way of unsecured and rated rupee innovative perpetual debt instruments, upper Tier II, lower Tier II subordinated debt by way of bonds and any other capital instrument permitted by RBI, said a BSE notice. The bank will also utilise the balance Rs 1,285 crore available out of the Rs 5,000 crore approved in 2006-07 for rais0ing upper and lower Tier II subordinated debt.

2. Bank of Baroda will set up a subsidiary in Malaysia in alliance with PNB and Andhra Bank, instead of the earlier joint venture partners, Bank of Maharashtra and Oriental Bank of Commerce. The necessary permissions for change of partners had been acquired from the RBI and an application would soon be filed with the Malaysian regulator for the proposed venture. The new subsidiary, which will be a 40:35:25 partnership between Bank of Baroda, PNB and Andhra Bank, will entail an investment of Rs 360 crs.

3. If you are looking to buy a second home or want a home loan of over Rs 20 lakh, get ready to pay more. Taking the cue from FM P Chidambaram’s directive to curb retail loans growth, including home loans, public sector banks are considering pricing home loans depending on the size of the loan or whether the property being purchased is for self use. Banks to also charge 50-100 bps more for Rs 20 lakh-plus loans.

4. Millions of banking customers who have not operated their lockers for more than a year will soon receive notices from their banks to either surrender their lockers or operate them at least once a year. The banks will issue notices to the locker hirers in pursuance of the recent Reserve Bank of India (RBI) guidelines, which have empowered the banks to break open a locker in case it remains unoperated for one year.

5. Indian retail, with the coming in of conglomerates like Bharti Enterprises, Reliance and some foreign players, is set to generate business worth $430 billion by 2010, says a report by a leading industry lobby. The share of organised retail is estimated to go up to 20-22 percent to become a $90 billion industry while the unorganised sector is set to touch $340 billion in the next three years, according to the Federation of India Chambers of Commerce and Industry (FICCI). This exponential growth is expected to generate 18 million jobs, thereby becoming the second largest employment-generating sector after agriculture.

6. Corporate India seems to be in jitters as the Reserve Bank of India (RBI) gears itself to formulate the annual monetary policy in the backdrop of rising inflation and interest rates, says a leading industry group. According to a survey by the Associated Chambers of Commerce and Industry (ASSOCHAM), CEOs, chairmen and managing directors, especially from sectors such as real estate, automobiles, housing finance, banking and financial services, are edgy over what anti-inflationary measures would RBI take to further tighten monetary inflow. As many as 60% of the Indian honchos feel that bankers and economists are not sure whether the RBI would be tempted further to resort to credit squeezing. Around 74% of CEOs feel that a tight monetary policy would affect the medium and small enterprises more than the large business houses.

Tides of 22.04.2007

1. With BASEL-II implementation around 2009, and globalisation changing the way banking has been done, there is a greater need for sophistication in the banking industry, and specialised courses catering to this changing scenario are significant, said Mr M.B.N. Rao, CMD,Canara Bank, here. He said this at a function to mark the signing of memorandum of understanding (MoU) between Manipal Education Group and the Indian Institute of Banking and Finance (IIBF) for offering vocational courses in banking."Concepts such as risk management, treasury management, human resource management and asset and liability management need sophisticated skills. Today's bankers need to know marketing too," Mr Rao said. "Banking is not an art anymore, but a well-defined skill that needs specialised education."This collaboration will result in a new Diploma in Banking and Finance to be awarded by IIBF.While the IIBF will design the course content, the Manipal Education Group will provide the infrastructure for online and offline testing through its existing network. The first tests for this course, which will be launched in May, will be conducted in November or December, said Mr R. Bhaskaran, CEO, IIBF. The course would cost around Rs 5,000.
2. Big money can get huge returns even if it is parked in a no-risk deposit with a public sector bank. According to statistics available with the Ministry of Finance, the desperate fiscal year-end lunge for deposits resulted in interest rate offer by state-owned banks for bulk deposits going as high as 13.20%.While the highest offer of 13.20% during the fiscal ended March 31, 2007, was made by PNB, all other state-owned banks paid above 11% for these deposits.The sole exception was Indian Bank, which raised such high-cost deposits at an interest rate of 10.8%.
3. Cheques and drafts may soon attract a fee, if the recommendations of a RBI study group are accepted. The move would encourage the migration from paper-based funds movement to electronic funds transfer. "Currently, the service charges for Magnetic Ink Character Recognition processing are borne by banks. Banks may have to educate their customers on the need to migrate to electronic processing and in case the paper-based cheques are continued, the service charges relating to the processing of such cheques may be passed on to them," said the RBI study.The working group also suggested that paper-based demand drafts, pay orders and bankers' cheques issued by banks could be priced higher than electronic transactions.
4. Slapped with a string of dos and don’ts, public sector banks now want their side of the bargain. They have asked the government to ask all public sector enterprises to compulsorily park their surplus cash as bulk deposits with them, instead of fishing around for the best interest rates with private banks.
5. RBI, in its notification on compliance functions in banks, has stated that banks senior management would be responsible for establishing a written compliance policy.
The policy would contain the basic principles to be followed by the management and staff, and would also explain the process by which compliance risk would be identified and managed through all levels of the organisation, the notification said. Further, the onus is now on the senior management to ensure that appropriate action is taken if breaches are identified, said the notification.
6. BankMuscat SAOG, Oman will acquire 43 per cent stake in the holding company of the Mangal Keshav Group. The latter is a member of BSE, NSE and MCDX. With this acquisition, BankMuscat has become the first bank from across the Gulf Cooperation Council region to take stake in the Indian securities sector.
7. enStage, a provider of e-commerce security solutions and electronic card security products in India, has announced the deployment of its Accosa 3-D secure solution by ICICI Bank. The bank's Visa cardholders are now assured that their cards cannot be used without authorisation. ICICI Bank has enabled security for both its online merchants and cardholders through the enStage platform.
8. ICICI Bank and UTI Bank have begun increasing by as much as 50 per cent the charges for services like ATM cash withdrawal and cheque returns if customers fail to maintain a minimum balance of Rs. 5,000 in their accounts. "The revision is only in certain categories and has been benchmarked with the industry,'' said an ICICI Bank spokesperson, adding that the new rates would be applicable from July 1.
9. Commercial banks are seeking the RBI's permission to issue long-term infrastructure bonds with tax benefits.To facilitate the flow of bank credit to the core sector, S S Kohli, chairman and managing director, India Infrastructure Finance Company (IIFCL), on behalf of the bankers, has urged the finance minister to consider granting cash reserve ratio (CRR) and statutory liquidity ratio (SLR) exemptions to banks on deposits used to finance infrastructure projects.
10. Loans extended to minority communities would soon qualify for priority sector lending. The finance ministry has asked the Reserve Bank of India (RBI) to amend the priority sector norms to include minority communities under “lending to weaker sections”.

Tides of 21.04.2007

1. UCO Bank has made an interim dividend payment of Rs 59.93 crs to the Centre for the financial year 2006-07. UCO Bank's total business for 2006-07 touched Rs 1,12,400 crs, which represents a 21.47 % growth over the previous year. For 2006-07, It declared a 10% interim dividend, which has now been paid to shareholders including the Union Government. Currently, the bank's paid-up capital stands at Rs 799.36 crs.

2. Forex reserves have increased by over $2.7 bn for the week ended April 13 on the back of FII inflows and strengthening of non-dollar currencies against the greenback. The country's forex reserves grew by $2.772 bn to $203.092 bn. India's forex kitty had crossed $200 bn the previous week. It had increased by $1.141 bn to touch $200.320 bn for the week ended April 6.

3. IDBI Bank plans to raise over $1 bn through overseas debt for expanding its business. It has registered a growth of 6% in net profit at Rs 213 crs for the quarter ended March 31, 2007, against Rs 201 crs in the corresponding quarter of the previous year. The rise in the Bank's net profit was mainly due to an increase in interest income. The bank's results cannot, however, be effectively compared to the year ago period owing to the merger of United Western Bank with IDBI Bank, effective October 3, 2006.

4. RBI has permitted commercial banks (excluding regional rural banks) and primary dealers to sell derivative products. According to the revised guidelines on derivatives by the RBI, banks and primary dealers should develop sufficient understanding and expertise about derivative products in terms of staff and systems to undertake derivative business as market makers. RBI has identified business entities with identified underlying risk exposure as users. RBI has allowed banks and primary dealers to trade in rupee interest rate derivatives, which includes Interest Rate Swap (IRS), Forward Rate Agreement (FRAs) and Interest Rate Futures, Foreign Currency derivatives and Foreign Currency Forward, which includes Currency Swap and Currency Option. The RBI defines derivative as an instrument, settled at a future date, whose value is derived from a change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called "underlying"), or a combination of more than one of them.

5. PNB has opened a new branch at nearby Thrikkakara. it is the bank's 131st branch in Kerala. The branch comes under with core banking solution (CBS) system, providing anywhere anytime banking facility to customers. PNB recorded "tremendous growth" in business in the State last fiscal. The bank is planning more developmental activities.

6. ABN-Amro has expanded its retail banking operations by opening a branch at Salem in Tamil Nadu. It is the first branch established by an international bank in Salem. This would take its branch tally to 28 across 21 cities. The branch would offer doorstep banking, its suite of financial products and services and extended banking hours up to 7 p.m. It would also offer retail broking services under the aegis of ABN AMRO Asia Equities (India), wealth management solutions and insurance and mutual fund products.

7. IDBI Bank sold its entire stock of loans given to Southern Petrochemical Industries Corporation to the Asset Reconstruction Company (India) Ltd (Arcil). It is not clear as to how much IDBI Bank got for Rs 294.24 crs of the loans. It is not clear as to whether IDBI would have got more than the `48% repayment' offer made by SPIC last year. IDBI's loans to SPIC were disbursed between 1992 and 2001. In March 1999, the bank lent Rs 124 crs to SPIC. In the same month two years later, it gave another loan of Rs 127 crs to the company. It is also learnt that ICICI Bank has also sold its SPIC loans, worth about Rs 170 crs to Arcil.

8. Tamilnad Mercantile Bank (TMB) has increased interest rates for its domestic term deposits with effect from April 17, across all time buckets, up to the maximum of 175 bps . After the revision, the bank offers the maximum interest rate at 10.75% to senior citizens and 10.50% to other general public for its newly introduced `55 months deposit'. The bank offers special rate of interest for deposits `above Rs 25 lakh' as against the earlier `Rs 55 lakh and above' and the maximum interest rate offered is 10.50% in `55 months' period of deposits.

9. The National Housing Bank, the apex body for promoting and regulating HFCs, has directed its constituents to create a trustee to monitor public deposits. HFCs, in any case, necessarily need to maintain 12.5% of their deposits in approved securities and FDs of scheduled banks. Out of this stipulation, a minimum 6% is being maintained under the head of approved securities. As per the latest instructions, the trustee will now maintain the minimum statutory requirement, and HFCs will have no access to it.

10. Banks have requested the RBI to allow them to prepay high-cost deposits, to avoid liquidity and interest rate risks. At present, banks do not have the freedom to prepay deposits that carry higher interest rates, even though depositors have the option of withdrawing their deposits. Bankers made this demand at a meeting with RBI Governor Y V Reddy, ahead of the 2007-8 monetary policy announcement on April 24. The delegation included the heads of ICICI Bank, IDBI Bank, Bank of Baroda,UTI Bank, and Citigroup.

11. Commercial banks have urged the RBI to raise the cap on individual home loans for the purpose of classification under priority sector lending in the backdrop of the overall rise in property prices. The banks want the central bank to raise the ceiling to Rs 20 lakh from Rs 15 lakh for classification under priority sector. This demand comes in the light of the overall rise in property prices. The bankers have also asked the central bank to reduce the risk weight on staff housing loans to 35% from the existing 75%, to align it with Basel II norms.

Tides of 20.04.2007

1. RBI is seriously considering the option of clamping down on overseas financing for real estate in a bid to contain inflation.The clampdown will be part of a package from the central bank to make end-use norms for external commercial borrowing (ECB) funds more stringent for various sectors.Real estate prices have almost doubled in the past year, which has contributed to inflation. However, rising domestic interest rates have encouraged real estate companies to opt for ECBs. The difference in the rates offered by local banks and international lenders is as high as 3 to 4 per cent excluding the forward cover cost.

2. The National Bank for Agricultural and Rural Development (Nabard) has decided to extend the moratorium period for recovering loans taken by sugar cooperatives and private mills by another three years to March 2010.

3. Lending institutions will now be in a position to make more informed decisions with respect to advances and provisions on existing advances. IBA has decided to float an independent company, which will collate credit information and help banks compute the extent of operational risk which they may be exposed to.Computing operational risk gains significance in light of the implementation of Basel II norms for large banks, which requires them to set aside additional capital for operational risk.The entity would assume the structure of a Section 25 company, which would be jointly promoted by a group of banks. The company would facilitate collection and pooling of data on corporate defaulters and events leading to such defaults. This, in turn, would help banks understand the percentage of defaults prevailing in the system and simultaneously also give them an insight into the nature of events which could lead to potential defaults. Thus, the data compiled will help banks calculate the proportion of funds which they might require to keep aside for operational risk purposes.

4. The future of ATMs and self service terminals lies in multitasking - going from dispensing only cash to selling theatre tickets, renewing driver’s licenses and offering other services. The ATM is still going strong. But it is changing. The ATM is becoming more of a customer-experience portal. Market research has shown that consumers between 18 and 35 prefer self-service to clerkassisted service. This is the internet generation.

5. Taking repeated recourse to CRR hikes to tackle inflation only skews further the asymmetric treatment of market players, putting commercial banks at a disadvantage and placing a greater burden on borrowers. Yet, the RBI has no other option. Tthe central bank will have to increasingly rely on the CRR, given the limited scope for deploying other instruments.

6. The Union Cabinet has agreed to grant greater autonomy to the boards of the seven subsidiary banks of the SBI and bring them on a par with other nationalised banks for issuance of preference shares. The decisions were taken in accordance with the suggestions of the Standing Committee of Parliament on Finance that had suggested several changes in the State Bank of India (Subsidiary Banks Laws) Amendment Bill, 2006. The Bill was introduced in the Lok Sabha in May 2006 while the Standing Committee had submitted its report in December 2006.

7. The Finance Minister, Mr P. Chidambaram, has once again asked public sector banks to slow down credit flow to risk-prone sectors such as `commercial real estate', capital market and `systemically important NBFCs'. This advice comes less than three months after he had asked the PSBs to rebalance their lending to provide more credit for productive sectors as against the RBI identified risk-prone sectors.

8. The aggregate credit exposure of PSBs grew 30% from Rs 11,10,014 crs as on March 2006 to Rs 14,39,582 crs as on March 2007. While credit to commercial real estate sector saw a 59% increase from Rs 25,429 crs as on March 2006 to Rs 40,427 crs as on March 2007, the PSBs exposure to capital market grew to Rs 9,067 crs as on March 2007 from Rs 5,451 crs on March 2006. PSBs exposure to systemically important NBFCs increased from Rs 20,087 crs as on March 2006 to Rs 26,286 crs as on March 2007.

9. FM Mr Chidambaram has cautioned PSBs against raising bulk deposits at high costs. The bulk deposits of PSBs surged 38% during 2006-07 from Rs 3,36,354 crs to Rs 4,36,852 crs, reflecting an increase of Rs 1,20,518 crs. The total bulk deposits mobilised at interest rates of 11% and above during 2006-07 stood at Rs 86,264 crs. The aggregate deposits of PSBs grew 23% during 2006-07.

10. Canara Bank has announced the increase in its benchmark prime lending rate by 75 bps to 13.25%. The new rate is effective April 17.

11. Urban co-operative banks' funding of medium enterprises will not form a part of priority sector lending, says the Reserve Bank of India. According to an RBI notification, the central bank has modified the definitions for micro, small and medium enterprises such as small road and water transport operators (owning a fleet not exceeding 10 vehicles), retail trade (with credit limits not exceeding Rs 10 lakh), among many others. It has defined these micro enterprises as an enterprise where the investment in equipment does not exceed Rs 10 lakh; a small enterprise is one where the investment in equipment is more than Rs 10 lakh but does not exceed Rs 2 crore; a medium enterprise is that where the investment in equipment is more than Rs 2 crore but does not exceed Rs 5 crore. While for enterprises engaged in the manufacture or production, processing or preservation of goods, a micro enterprise is one where investment in plant and machinery does not exceed Rs 25 lakh. In a medium enterprise, the investment in plant and machinery can be more than Rs 5 crore but does not exceed Rs 10 crore.

12. The Government has urged the RBI to direct scheduled commercial banks to earmark at least 50 per cent of the export credit finance for small and medium exporters. This is expected to come as some relief for small and medium exporters, who are now faced with lower export realisation on account of strengthening of rupee against the dollar.

13. SBI, the country's largest lender, expects its advances growth to slow down to 25 % this fiscal as against the 28% growth recorded in 2006-07.

Tides of 19.04.2007

1. Several banks including HSBC and Bendigo have announced corporate initiatives to reduce carbon emissions or go totally carbon neutral by purchasing carbon offsets. Bendigo even allows customers to buy carbon offsets in its branches or through the mail via a downloadable form.

2. Banking industry will continue to be a public utility service for another six months from Tuesday, which among other things mean that employees cannot go on strike without giving notice six weeks in advance.According to a notification issued by the Ministry of Labour and Employment, the step has been taken in public interest. The notice is required so that conciliatory proceedings could be started. During the conciliatory proceedings and seven days after their completion, the employees cannot go on strike, the notification said.

3. Small-scale industries registered with the National Small Industries Corporation (NSIC) are eligible for subsidy on the amount they spend on acquiring credit rating. The NSIC has entered into a memorandum of understanding with the Union Government in this regard.

4. RBI has allowed banks to obtain from the clients who operate their safe deposit lockers with the bank, a fixed deposit, which would cover three years rent and the charges for breaking open the locker in the case of an eventuality, at the time of allotment. However, banks should not insist on such fixed deposit from the existing locker-hirers. The Committee on Procedures and Performance Audit of Public Services (CPPAPS) of the RBI observed that linking the lockers facility with placement of fixed or any other deposit beyond what is specifically permitted is a restrictive practice and should be prohibited forthwith.

5. While the four metros and big cities like Bangalore may still make up a major chunk of bank deposits, smaller cities are also contributing a significant amount to the kitty of cash-starved commercial banks. Cities, other than Delhi, Mumbai, Kolkata, Chennai, Pune, Hyderabad and Bangalore, have contributed 54.71% of bank deposits in the third quarter of 2006-07, according to data available with the Reserve Bank of India (RBI).
Scheduled commercial banks collected over Rs 12,95,000 crs from tier-II and tier-III centres alone in the third quarter of 2006-07 out of the all India mobilisation of Rs 23,67,000 crs. Bankers attribute the growth to emergence of new industries in smaller towns and higher income base.

6. Export Import Bank of India (EXIM) has extended two lines of credit worth USD 40 million to Mali and Dijibouti, taking the aggregate credit commitments by the bank to USD 2.30 billion. The bank has now 75 lines of credit in place covering over 80 countries available for financing India's exports to countries in Africa, Asia, Latin America, Europe and CIS.

7. National Bank for Agriculture and Rural Development plans to raise about Rs. 23,000 crs, almost double that raised last year, to fund the farm and non-farm sectors. Market borrowings of Nabard in 2006-07 were Rs 10,899 crs around 8.69% as against about Rs 8,194 crs at about 5.6%in 2005-06. The Nabard's balance sheet grew by about 20% to Rs 81,000 crs during 2006-07 against 8-10% annually while the net profit was marginally down on high cost market borrowings.

8. RBI had sent a proposal to the Government for allowing PSBs to undertake buying and selling of stamps/stamp papers as a "permissible activity" under the Banking Regulations Act. It had requested for notification by the Government. The RBI had noted that even though there are no statutory provisions prohibiting PSBs from selling or buying stamp papers, there are no specific provisions permitting such an activity by these banks.

9. Akshaya Trithi, falling this year on April 20th, is considered an auspicious day for Hindus. It certainly will be one for banks. HDFC Bank expects to see a huge jump in sales of gold coins being marketed by the bank. HDFC Bank, which sold 200 kg of gold last year on the Akshaya Trithi day, expects to sell 400 kg this year. One factor that will help HDFC Bank double its sales volume is the expansion of branch network, which has grown by 30% compared with last year.

10. IDBI has raised its Retail Reference Rate (RRR), the benchmark for pricing its floating home loans, by 75 basis points to 11.25 per cent effective April 10. For all the existing home loan customers, the floating interest rates have moved up by 75 bps to between 11-11.25% pa depending on the category of the borrowers. The fixed rate of interest on 3-year home loans will rule between 13.5% and 14 % pa while that for 5-year loans will range between 13.75% and 14.25% pa.

11. SBI Life Insurance proposes to utilise more of the banking network other than SBI 's own as part of its strategy to double the size of business. Only 40% of the total network of 14,000 branches of SBI and its associate banks has been used so far. In 2006-07, the co-operative banks gave a paltry business of Rs 20 crs or so, which is likely to go up to Rs 100 crs in the current fiscal. The arrangements with the RRBs, however, are yet to firm up as these banks are going through the process of consolidation.

12. Leading public and private sector banks would have to increase their Tier-I capital by about Rs 51,255 crs within March 31, 2009, including raising Rs 45,521 crs from the capital market to meet the Basel-II requirements on minimum capital adequacy of 9%. RBI has conveyed this to the Government after conducting a simulation study of 50 public and private sector banks. The banks include the entire lot of 19 nationalised banks, SBI and its 7 associate banks, 7 new private sector banks and 16 old private sector banks. The issue of the enhanced capital requirement of the banking system, especially the State-owned banks, would figure prominently in the meeting of the CEOs of PSBs with the Union Finance Minister, Mr P. Chidambaram, on 19.04.2007.

13. RBI has rejected the request of public sector banks to phase out the increased provisioning requirement on standard assets with respect to exposure to real estate, capital market, NBFCs and personal loans. It had, in the third quarter review of the Annual Credit and Monetary Policy, raised the provisioning requirement from 1% to 2% for standard assets in these sectors. Indications are that this issue may come up for discussion during the Finance Minister, Mr P. Chidambaram's meeting with chief executives of PSBs on 19.04.2007.

14. RBI has invited applications for registration from companies interested in entering the business of credit information. The completed applications should reach the RBI by close of business on July 31.

15. Punjab National Bank has launched the PNB Floating Rate Fixed Deposit Scheme, where the interest payable on the fixed deposit would automatically change with the changes in the fixed-deposit card rates made available by the bank from time to time. A PNB release also said the scheme would be valid in Core Banking Solution branches only.

16. All branches of Sangli Bank will function as branches of ICICI Bank from April 19. RBI has sanctioned the scheme of amalgamation of Sangli Bank with ICICI Bank. Shareholders of ICICI Bank had approved the merger in January this year. With the merger, ICICI Bank gets to add 192 branches to its existing network of more than 700 branches.

Tides of 18.04.2007

1. PSBs enjoy a unique legal status by virtue of an Act of Parliament, The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and 1980.Banks are neither incorporated nor registered under the Companies Act, 1956 as they are corresponding new entities of banks that were registered under the Companies Act, before nationalisation. The Banking Companies Act provides for a mechanism through which a bank's board of directors is appointed, nominated and elected from various constituents of shareholders.Section 9(3) of the Banking Companies Act, amended in 1994, provides for:
(a) not more than two whole-time directors, to be appointed by the Central Government after consultation with the RBI ,
(b) one director who is an official of the Central Government,
(c) one director who is an officer of the RBI, to be nominated by the Centre on the recommendations of the RBI,
(d) not more than two directors to be nominated by the Centre from SEBI, Nabard or public financial institutions specified from time to time under Section 4-A of the Companies Act and other institutions established or constituted by or under any Central Act or incorporated under the Companies Act and having not less than 51% paid-up share capital held or controlled by the Central Government,
(e) one director from among the workmen,
(f) one director from among the non-workmen,
(g) one director who is a chartered accountant with not less than 15 years' experience,
(h) not more than six directors to be nominated by the Centre, subject to Section 9(3). Clause (i), which says that where the capital issued by the bank is (1) not more than 20 per cent of the total paid-up capital, there need be not more than two directors, (2) more than 20 per cent but not more than 40 per cent of the total paid-up capital, not more than four directors, and (3) more than 40% of the total paid-up capital, not more than six directors to be elected by the shareholders, other than the Central Government from among themselves.
2. Buoyed by strong growth in fee income and improvement in net interest margin, UTI Bank has posted a 39.65% growth in net profit to Rs 211.89 crs for the fourth quarter ending March 31, 2007, against Rs 151.73 crs for the corresponding quarter of the previous year.The rise in net profit was mainly because it could increase the share of demand deposits by 40%, which helped it to maintain the cost of rising interest rates and pass on the burden of rising interest rates to the customers. This helped it to maintain its net interest margin.
3. In a bid to de-centralise operations further, the South Indian Bank opened its 12th regional office at Palakkad in Kerala. The need for the new regional office emerged from the phenomenal growth of the bank as well as the need to provide faster service to its increasing clients. With the support of the valued clients and cooperation of over 4,000 members of staff, the bank could achieve what was planned at the beginning of the last fiscal - Rs 20,000 crs in total business, 475 branches in 23 states and union territories, 175 ATMs and implementation of 100% core banking solutions in all its branches and offices.
4. Indian Overseas Bank has secured the RBI's approval for starting a financial services subsidiary. IOB would invest Rs 50 crs in IOB Financial Services Ltd, the company that will be set up to provide services such as stock broking, depository participant, wealth management, distribution of third-party financial products and, at a later stage, investment banking.
5. Corporation Bank is foraying into the sale of 20 gm gold coin (plain make) on the occasion of this Akshaya Tritya. The pricing of the coins is on a daily basis. At present, the bank is selling gold coins of 2 gm, 5 gm, 8 gm and 50 gm.The 2 gm and 5 gm coins are basically positioned as personal gift items to family and friends, and the 8 gm coins are sought to be marketed as milestone mark amongst corporates and also as a business achievement incentive.The 50 gm gold coins, along with newly launched 20 gm gold coins, are positioned as an investment option to HNIs (50 gm) and upper middle class (20 gm).
6. Oriental Bank of Commerce has signed an MoU with India Post to extend rural credit in Chandrapur and Warora districts in Maharashtra; and Mapusa, Vasco and Vadgaon districts in Goa.In the pilot project, the bank will provide short-term consumption credit worth Rs 20,000 per beneficiary. The loans will be collateral-free and not require a guarantee. The repayment period will be up to two years. Post-offices will identify prospective borrowers, assist in the filling up of loan application forms and forward them to the bank branch concerned for disbursement. The bank will pay a commission of Rs 600 per loan to India Post and also decide on the status of the loans.
7. Thiruvananthapuram district has recorded a credit-deposit (C-D) ratio of 76% at the end of the calendar year 2006, which is much high above the State average.
8. The Ministry of Finance has ruled out any immediate plans for a merger of four associate banks of the State Bank of India with the parent bank.There was no such proposal pending before the Government or SBI at present. Speculation of a possible merger of the banks has met with stiff resistance from the SBI staff.
9. To facilitate easy exchange of coins, the RBI is organising coin melas in Hyderabad. The exchange of coins facility will be available to the general public at Rythu Bazars in Yerragadda on April 17, in Alwal on April 18 and in Dilsukhnagar on April 19, between 11 a.m. and 3.30 p.m. The RBI is also making arrangements to distribute coins through select branches of commercial banks.
10. UTI Bank's board has not decided on a new chairman and managing director for the bank.The RBI had denied approval for the re-appointment of Dr P.J. Nayak, CMD, whose term ends on July 31.RBI has proposed a split in the office of Chairman and Managing Director in line with the recommendations of the Dr Ganguly Group Report on Corporate Governance. The RBI has sought a revised proposal from the bank on whether Mr Nayak should be reappointed either as Chairman or as Managing Director.
Mr Nayak has informed the RBI and the Remuneration and Nomination Committee of the board of the bank that it would not be possible for him to function in a "different and lesser capacity" and, therefore, cease to be associated with the bank after his current term with the bank expires.
11. Finance minister P Chidambaram will discuss with chiefs of state-owned banks how they propose to raise capital, given the fact that implementation of the new Basel II norms are round the corner and that credit continues to grow at faster pace. The meeting between the FM and bank chiefs is schedule on April 19 in New Delhi.
12. UTI Bank has decided to go in for a fresh equity issue in the current financial year. The bank is looking at raising around Rs 2,000 crs either through a domestic issue or global depository receipts in order to spruce up its tier-I capital base.
13. Issuing fresh guidelines to tackle the security threat, the RBI has permitted banks to break open a locker if it remains unoperated for over one year.In case the locker remains unoperated for more than one year, the bank would have the right to cancel the allotment of the locker and open it, even if the rent is paid regularly. Banks, however, will have to give notice to the customer asking the reason for the inoperation of the locker before opening it. The RBI has asked banks to insert a clause with this note in the locker agreement.
14. Bank of Baroda's (BoB) international business grew by 71% in the financial year 2006-07 while its total business grew by more than 30%.The bank had least exposure to capital market and real estate, sectors that would be affected by the recent interest rate hike. Interest rate hike on home loans is at the bottom of the bank's priorities. The bank had recently raised home loan rates by only 0.50% as compared to its PLR being raised by 0.75%.BoB's home loan grew at 41% last financial year.
15. Banks are considering setting up a domestic card payment settlement company, called India Pay, that would rival global payment systems Visa and MasterCard.At present, all card-based transactions are settled through the global payment network of Visa and MasterCard. The plan, taken up under the aegis of the IBA, comes amid estimates that payments through cards would increase three-fold over the next five years.In 2005-06, the total spends at point-of-sale (POS) terminals crossed Rs 55,000 crs. As many as 18 million credit cards and more than 60 million debit cards were issued in that year.Every transaction involves payment of an interchange charge to MasterCard or Visa for settlement, which amounted to about $50 million during the year. A domestic card payment settlement company would save the outgo on commission paid to Visa and MasterCard.
16. Nearly 4,000 clerical cadre and staff have sought early retirement from State Bank of India, under the exit scheme for reasons ranging from lack of future career prospects to difficulty in coping with intense work pressures.At present, the total staff strength of the bank is about 1,60,000 and about 4,000 employees have already put in applications for separation. The scheme closed in March 31, 2007 coinciding with the end of financial year 2006-07.The maximum response (approximately 700) to the scheme came from officers from the Maharashtra and Goa circles, which have the largest share in SBI’s business, and corporate office. The employee (clerical and other staff) strength in the circle and head office is about 15,000.

Tides of 17.04.2007

1. Know Your Customer is the mantra banks are chanting, but what of the ways of the banks? Does the average customer know the intricacies of banking operations? Banking has gone hi-tech, but that has not made bank operations transparent. Indeed, many of the creative practices are conveniently blamed on the nameless, voiceless computer.
2. The Government of Singapore holds 2.55% of Indian bank's shares. The Monetary Authority of Singapore (MAS), Singapore's central bank, holds another 1.4%. Together, they hold close to 4%stake in Indian Bank, or roughly 20% of the bank's floating stock.The Singaporeans are in good company, for the FII holding in the bank has been rising. On February 23, the day the public-issued shares were allotted, FII holding in the bank was 6.83%. As on April 13, FII holding stood at 11.68%, which is more than half the floating stock of the bank.
3. Public sector banks' move to raise bulk deposits at higher interest rates in March may come under Government scanner.A number of PSBs had gone in for such a strategy to tide over their fund crunch in the last quarter of the fiscal 2007-08.The Finance Minister, Mr P. Chidambaram, is likely to take up the `bulk deposits' matter during his meeting with Chief Executives of PSBs here on April 19.Indications are that the impact on profitability due to this move would be discussed. Bulk deposits had to a large extent helped the banking industry in accelerating its deposit growth during the fourth quarter of 2006-07.
4. SEBI has capped mutual funds' exposure to short-term bank deposits at 15% in order to ensure that the money they have collected are deployed in line with investment objectives.The regulator, which has referred to clause 8 of Schedule VII of SEBI (Mutual Funds) Regulations, 1996 (pertaining to investment in short-term deposits of scheduled commercial banks, pending deployment), has issued a set of guidelines for parking funds in such deposits."Short term" will be treated as a period not exceeding 91 days, SEBI has stated, adding that no fund can put more than 15 per cent of its net assets in deposits of all scheduled commercial banks put together.This, however, may be increased to 20%, provided the trustees give prior approval.
5. Banks with a pan-India branch network are leveraging their distribution strength and wrangling out hefty premiums from the second-rung insurance multinationals which are eager to break into the Indian market.Earlier, it was the Allahabad Bank-led non-life insurance venture, where Japanese insurer Sompo paid a premium Rs 22 per equity share of Rs 10 each for its 26% stake. E&Y had acted as consultant for the Allahabad Bank-led consortium. Allahabad Bank was followed by Bangalore-based Canara Bank, which is understood to have got an one-time payment of around Rs 120 crore from HSBC for its proposed life insurance joint venture.More recently, it was Bank of Baroda, which partnered UK Insurer Legal & General for life insurance. Although, the figures are not public, the market speculation has it that BoB has got around Rs 220 crore for partnering L&G.With other PSU banks setting the trend, it is now the turn of Bank of India and Union Bank of India to seek a premium. Dai Ichi Mutual Life Insurance of Japan is likely to pay a premium per equity share for its 26% stake in the proposed life insurance JV with Bank of India (BoI) and Union Bank of India.
6. A weak dollar may not be a good news for the central bank. For the RBI, which holds a bulk of its foreign currency assets in US dollars, a weak dollar or a strong rupee also poses an additional challenge in treasury management since the returns are not attractive in a depreciating currency.With the rupee making one of its fastest gains against the dollar, the returns on reserves could come under pressure, if the central bank continues with its current mix of currency reserves which is known to be very dollar-centric. A senior treasury official with a private sector bank said, “The trend in the currency markets indicates that the dollar is no longer a preferred currency, and it is right time to sell dollars and move to more stronger currencies.”
7. Dena Gujarat Gramin Bank (DGGB) has managed to bring down its present gross non performing assets (NPAs) by 1.40 % compared to previous year through an enhanced focus on debt recovery.

Tides of 16.04.2007

1. India's foreign exchange (forex) reserves have crossed $200 billion, from a near-zero position less than two decades ago. Though our current reserves are just about a sixth of what China holds.
2. TMB has revised upwards its prime lending rate from 12 %to 13 %pa with effect from April 9, resulting in a hike of 1% in all categories of advances uniformly across the board. The bank now offers home loans at 10%(for loans up to 60 month instalments) and car loans at 10.50% up to Rs 15 lakh. Two-wheeler loans are offered at 10.50%.
3. The growing economy, skyrocketing salaries and mushrooming professional courses have made Indian students a bankable lot. Banks report that around 80 per cent of education loans sanctioned for professional courses are within the country while the rest is for overseas education.SBI, one of the biggest players in education loans, has registered a 30% growth in its education loan portfolio in 2006-07 at Rs 3,220 crs, a jump of Rs 800 crs.
4. When the definitive history of money and banking in India is written, 2006-07 would easily rank among its most eventful years. For, the fiscal just ended has witnessed a credit and monetary expansion binge that is unprecedented in both absolute as well as relative magnitudes.During 2006-07, banks lent out an additional Rs 410,285 crs, which is an all-time record. Further, their outstanding fiscal-end credit as a proportion of deposits (C-D ratio) touched 74.13%, the highest since the 74.99% level of 1976-77. Significantly, the C-D ratio had, only in 1998-99, plunged to an all-time-low of 51.66%!
5. Just before every credit policy announcement, there is always some speculation about a possible increase in savings bank interest rates.Another policy is just a few days away and there is hope of slight relief in the offing for over 300 mn savings bank (SB) account holders in the country. Currently, they get 3.5% pa for their money. These rates are a vestige of the administered interest rate regime. It's stayed that way for a while now, even as every other form of money has earned more for lenders.Although the SB rates are at 3.5%, the actual yield is lower at about 2.8 %, given that banks pay interest on the lowest balance maintained by account holders between the 10th and last day of a month.
6. PNB plans to enter into more partnerships to offer online share trading facility to over 3.5 crore customers. It wants to enter into more such tie-ups and looking at atleast 5-6 more.The idea is to provide more choices to its customers. It does not want to restrict their choice to one or two online trading service providers.
7. In its bid to become a global face of Indian banking, Bank of Baroda plans to expand its international operations.It is opening 10 new overseas branches in the next three months at Johannesburg, UK, Ghana, Bahrain, Australia, Qatar, Tanzania, Botswana and Port of Spain.It will establish subsidiary firms in Ghana, Port of Spain and Botswana to undertake banking operations there, while it will have full-fledged branches or representative offices in Australia, Qatar and Johannesburg.
8. SBI has purchased a one-fifth equity ownership in start-up warehouse manager National Bulk Handling Corporation Ltd (NBHC), until now a wholly owned subsidiary of Financial Technologies which makes software that help brokers, traders and exchanges in online trading of equity, debt and commodities.

Tides of 15.04.2007

1. SBI Funds Management Pvt Ltd - investment managers for SBI Mutual Fund has tied-up with Citibank, to increase the reach of investors across the country. In the initial phase, the SBI MF - Citibank tie-up, shall offer an opportunity to invest in two of SBI Mutual Fund's equity funds, MSFU Contra Fund and Magnum Global Fund and its fixed maturity plans - liquid funds.
2. RBI has said that consistent with the Reserve Bank of India (Amendment Act), 2006, no interest will be payable on CRR balances of banks with effect from the fortnight beginning March 31, 2007.
3. The merger of Lord Krishna Bank with the Centurion Bank of Punjab is in doldrums, as the case pending with the Kerala High Court is likely to prolong further.Umesh Pai, a shareholder of LKB and the original petitioner, had challenged the resolutions and proceedings of the bank’s AGM before the High Court. Justice M N Krishnan has posted the case for further hearing on 25th May.Meanwhile, the scheme of amalgamation approved by the boards of both the banks and the AGM will expire by 30th April, 2007. The boards recently extended the scheme for a further period of 3 months effective from 1st May, 2007.Legal sources have opined that the extension would not be valid unless approved by a fresh AGM. But sources at the bank said that the last AGM had given prior approval to extend the scheme unless it were not to be in effect by the deadline.
4. The activists of the Republican Party of India have threatened to launch agitation against various branches of the ICICI Bank in western Maharashtra in protest against the bank’s policy to deny loans to politicians, journalists, advocates and police.The ICICI Bank’s policy to deny loans to the four constituents came to light when a loan proposal of one Sanjay Gaikwad of Satara was duly forwarded with the requirements and papers but was rejected by the concerned bank manager who clarified that the proposal is rejected on the ground that he being brother of the RPI’s Satara district chief Ashok Gaikwad belongs to the political class and according to the bank’s policy loans are not to be given to politicians along with the other three constituents.After the clarification, the RPI activists entered the Satara branch of the bank and smashed computers, glass windows and furniture on Saturday. While the bank's officials did not lodge complaint to the police, the latter took note of the incident and have lodged the case under the charges of unlawful assembly and smashing of the material.Satara police confirmed they have recorded the offence and have started further inquiry with statements of the banks’ officials in the branch which is attacked by the RPI activists.The RPI chief of the Satara unit Ashok Gaikwad has reiterated that the aggressive action was a reaction against the bank’s policy to deny loans to politicians, journalists, advocates and police who are vital organs of the democracy.
5. Plastic money is catching the fancy of the Indian consumers. Payments through credit and debit cards have increased by 24 % to Rs 44,819 crs up to February this year compared with Rs 36,133 crs in February 2006, according to data from the RBI. Customer payments through electronic channels have increased by 57 % to Rs 2,10,473 crs. Electronic fund transfer has increased by about 24%to Rs 68,832 crs. Customers are increasingly using plastic money to purchase air tickets, wine and dine and also for other leisure needs. Spends on fashion and lifestyle products comes next.
6. Banking transactions executed at a branch will cost a bank around Rs 40. In metros, this cost goes up to Rs 70 as the real estate cost is very high. While if the transaction is routed through an ATM, the cost comes down to Rs 18. Usage of a credit or debit card at a point of sale terminal brings down the cost further to Rs 1.Bank customers now pay their utility bills and other monthly obligations such as equated monthly installments on loans, life insurance premiums through electronic clearing system (ECS). ECS is an electronic channel for retail payments.
7. A mid-sized new private sector bank is hiring around 1,400 sales personnel on a temporary basis to expand its reach to 250 new cities and towns.Temporary staffing (temping in the staffing parlance) has become the catch-phrase among new private sector banks, foreign banks and general insurance companies as they seek to tap the expanding market outside the metros. It is estimated about one lakh temporary sales personnel would be hired by banks and general insurers by the end of 2007.
8. Banks will now have to insist on complete information about customers wishing to transfer funds both locally and overseas. In its latest notification on wire transfers, RBI has stated that this move would help prevent criminals and terrorists from having access to wire transfer services.RBI has mandated that all cross-border wire transfers must be accompanied by accurate and meaningful originator information. Also, information accompanying such transfers must contain the name and address of the originator and the corresponding account number. In the absence of an account, a unique reference number, as prevalent in the country concerned, must be included.
For domestic wire transfers, RBI requires all transfers of Rs 50,000 and above to be accompanied by complete originator information. However, if a bank has reason to believe that a customer is intentionally structuring wire transfers to below Rs 50,000 in order to avoid reporting or monitoring, the bank must insist on complete customer identification before effecting the transfer.However, settlements where both the originator and beneficiary are banks or financial institutions, they are exempted from these requirements.
9. The rush for depositing dividend cheques by investors in Mumbai, has led to a staggering of clearing operations of the RBI. The system has been reeling under the pressure of heavy cheque volumes since the onset of the new fiscal. This has been largely aggravated by the huge dividend issuances by companies, apart from a spate of public holidays. On an average, sources at RBI said that the month of March saw an average of 6,75,000 cheques being processed on a daily basis. Now, as against this, the month of April has already seen average daily volumes rising to nearly 12 lakh cheques.
10. Even as Banks try to keep interest in stocks alive and make money amid hardening interest rates, a new capital rule proposed by the regulator could force them to hit the equity market in a big way.A RBI draft note circulated among banks suggests that the banking sector may be required to raise at least Rs 25,000 crs from the stocks and bond markets to fulfil the proposed capital condition. It could also slow down the fierce loan growth since most banks will be left with lesser resources to finance companies.The key change indicated by RBI involves a significant increase in risk weightage on a big chunk of unrated loans in banks’ books. Current rules say for every Rs 100 a bank lends, it must have a capital of at least Rs 9, which means a risk weightage of 100%. As against this, the note has now proposed a weightage of 150%, which would mean a capital requirement of Rs 13.5 for every Rs 100 loan. This would apply to all unrated loans above Rs 10 crs.
11. Commercial banks have increased international liabilities to almost double the level of their international assets, according to the latest RBI figures.As of the end September 2006, while international assets amounted to $35,491 mn, international liabilities amounted to $72,945 mn. RBI attributed this mismatch to `deployment of the funds mobilised from abroad, in the domestic market in domestic currency. In rupee terms, international liabilities of banks increased by Rs 14,236 crs (4.4%) and Rs 46,127 crs (16%) at end-September 2006 over the position in the previous quarter and a year ago, respectively.